Why is China cracking down on it's own tech businesses?

Derek Scissors from the American Enterprise Institute joins The Exchange with Kelly Evans to discuss China's regulatory crackdowns on tech and education. There's going to be a booming tech sector in China, Scissor says, but under their own rules. For access to live and exclusive video from CNBC subscribe to CNBC PRO: https://cnb.cx/2NGeIvi

Two U.S.-listed Chinese education stocks plunged Friday after reports of a government crackdown on the sector that included bans on foreign investment.

TAL Education shares tumbled 70.8%. New Oriental Education and Technology shares dropped by 54.2%.

The reports come as Chinese authorities stepped up restrictions in recent months on the private education industry, and increased scrutiny on domestic companies listing overseas in the U.S.

Caixin, a major Chinese financial news site, reported Friday that new Chinese government restrictions on the education sector were starting to be implemented in Beijing and other cities nationwide.

Copies of the policy document were circulating online Friday afternoon.

Educational training institutions are banned from raising money through stock listings, while foreign capital cannot invest, according to a copy of the Chinese-language document seen and translated by CNBC. It was dated July 19 as issued from the top executive body — the State Council — and the Chinese Communist Party’s central committee.

One of the bans on foreign investment included variable interest entities, a common structure by which Chinese companies use to list in the U.S. Existing violations of the capital bans must be addressed, the document said.

CNBC has not independently verified the document. The Ministry of Education did not immediately respond to a faxed request for comment outside of Beijing business hours.

A policy document of the same name — referring to lowering costs for after-school tutoring — was among five approved at a May 21 meeting chaired by Chinese President Xi Jinping. The version circulating Friday banned after-school tutoring businesses from advertising, and said they could not operate during public holidays, weekends and winter and summer vacations.

New Oriental Education declined to comment to CNBC, and TAL did not immediately respond to a request for comment.

The stock plunges followed sharp declines for education stocks traded in Hong Kong, which began to drop in the afternoon.

Shares of New Oriental’s Hong Kong-listed subsidiary Koolearn fell 28% on Friday.

UBS analyst Felix Liu said in a note Friday the firm was putting its ratings on TAL, New Oriental and Koolearn under review “given the potential substantial impacts to fundamentals and the reported regulation pending official confirmation.”

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