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Why Chinese Education Stocks Collapsed Today

What happened

In a curious development, shares of three of China's best-known publicly traded education stocks -- TAL Education Group (NYSE: TAL), New Oriental Education (NYSE: EDU), and GSX Techedu (NYSE: GSX) -- are in freefall today. As of noon EDT on Friday, TAL stock is down 17.7%, New Oriental has fallen 20.4%, and GSX is down worst of all -- 21.4%.

The question is: Why?

Chinese flag superimposed on a stock market chart

Image source: Getty Images.

So what

To find the answer you have to go back in time by a couple of weeks when news began filtering out on Bloomberg regarding Chinese authorities conducting snap inspections of after-school tutoring institutions.

In a non-denial denial, New Oriental issued a statement at the time telling Bloomberg that it had "no comments on the recent media report," noted TheFly.com. But earlier this week Citigroup analysts caught wind of the story and they downgraded New Oriental peer TAL Education, removing its "buy" rating and cutting its target price by $20 on that stock to $72 a share.

There's been little new news on the subject since then, with none of the three companies issuing statements, nor much in the way of media reporting on what's happening. And shares have held up pretty well in the absence of new rumors. For example, New Oriental Education stock lost only about 5% of its value since the story began breaking two weeks ago through yesterday's close.

Now what

That all changed today, however, when investment bank Jefferies reported that China may ban the use of online education for students below seven years of age, and may also ban online education companies from advertising in Chinese state-owned media.

In the absence of greater detail on the new regulations -- or even an explanation of why they may be put in place -- it's hard to say quite how serious this situation will get. For what it's worth, Jefferies itself says it sees little likely impact on the companies' operations.

Regardless, in the present atmosphere of confusion and lack of access to accurate information (an all-too-common problem when investing in international stocks), investors are taking a "shoot first, ask questions later" approach to Chinese education stocks -- and selling them en masse.

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Citigroup is an advertising partner of The Ascent, a Motley Fool company. Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Jefferies Financial Group Inc.. The Motley Fool recommends New Oriental Education & Technology Group and TAL Education Group. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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