Reading the Tea Leaves

The Economics of the China Applicant

As many of you know—and perhaps even experienced yourself—we just completed our fall China tour with 30+ colleges and universities. This is the third time we’ve done this, and each time we get to see first-hand how China has changed. Now that we’ve all returned to our respective offices with our souvenir tea sets and miniature Terra Cotta Warriors, I figured I’d share some observations about how the economy in China is impacting Chinese applications to U.S. colleges. 

China Ten Years Ago

Let’s start with the “good ole’ days”. A decade ago China applicant numbers were through the roof. It seemed that the numbers just kept going up, and Chinese families were delightfully and dependably in the “full-pay” category. While fraud might have been rampant (and of course it was: the U.S. application system had merely been superimposed on a society with none of the history/culture/infrastructure surrounding college applications), the ease of students from China who paid the sticker price was too difficult to resist. 

This was a good deal for Chinese families as well, given the limitations they were facing. One of their best ways to invest in the future was to send their child—and typically their only child—abroad for college. They were in an economy that was growing fast but that still restricted their ability to invest in the global economy. College options within China were determined by results on a national exam, and even the best colleges in China did not contain the resources—or level of fun—offered by hundreds of colleges in the U.S. The U.S. sat at the top of the study abroad pyramid, with a long history of providing opportunity to the best students in China, many of whom converted a successful period of study into a job, a green card and then ultimately citizenship. Information in China might be restricted, but not so restricted that individuals in China couldn’t see the fun and freedom that friends and friends of friends had when they moved to America. 

Since the 1970s, the economy in China had grown at a breakneck speed, bolstered by liberalization of the economy (but not politics), the migration of its massive population from the countryside to the cities, and the mastery of manufacturing processes and the global supply chain. This economic growth supported an incredible building spree, with families all over China viewing investment in real estate—single-family apartments—as the best place to park their nest egg. Since real estate prices kept going up, the conventional wisdom in China was that apartments were the safe, tangible investment, particularly when contrasted with China’s volatile stock market. And it wasn’t hard to turn paper gains into cold, hard RMB: One could cash out of real estate relatively easily by selling into a frothy real estate market. At its peak, the real estate market in China made up 30% of China’s economy (it only makes up about 16% of the economy in the U.S.). 

This appreciation of real estate values meant that parents in China would often fund overseas study by selling an apartment and then using the proceeds for their child’s tuition and living expenses. This windfall would often be combined with the collective savings of two parents and four grandparents. It is not an exaggeration that a large portion of full-pay Chinese students in U.S. higher ed was supported by China’s booming property market.  

Now

While there was hope that post-COVID China would return to its pre-COVID bustling self, the government has instead found itself in a situation where its citizens are tightening their purse strings. This is caused by multiple issues, which were only exacerbated by COVID. For one, the government had already been cracking down on private enterprise through well-publicized actions against prominent entrepreneurs and venture-backed technology companies. Even though the government continues to talk about the importance of entrepreneurship, the go-go days of flowing investment, high growth, and light regulatory touch seem a distant memory. The US has also looked for ways to “decouple” from China, in particular in high-tech areas like semiconductor technology, where restrictions from the Biden administration have hampered both the growth of high-tech manufacturing and the expansion of technical infrastructure needed for AI advancement. But perhaps most importantly, the housing market has been in trouble since 2020, with the value of apartments declining all over China. This causes families to feel less wealthy and in turn restrain their spending. Students still have dreams of studying in the U.S., but this desire often faces a grim reality: the family’s primary source of wealth—their apartment(s)—has declined in value and only appears poised to drop more. 

This means that the days of endless full-pay students from China are over. Of course, the impact will be felt unevenly. Fortunately for selective universities, Chinese families continue to see an overseas education for their children as the best way to spend their savings. However, less selective U.S. colleges are going to continue to see a decline in full-pay students, particularly when the options for going abroad might include Hong Kong or Singapore, thereby allowing a family to “save” resources by staying closer to home for college and then going to the U.S. for graduate school (graduate schools continue to be hungry for students from China, and one-year programs are seen as better “deals” than four years of undergrad plus graduate school). 

The periodically recycled articles about Chinese students studying in the U.S. tend to ascribe multiple reasons to any decline in students from China: geopolitical friction between the U.S. and China; better, more cost-effective alternatives in other countries, concerns about safety, etc. And it’s true that some people in China will say those are concerns. But the primary factor limiting Chinese students isn’t any of those; it’s China’s slumping property market. The financial health of colleges in the U.S. might not have anything to do with the price of tea in China, but it does have a surprising connection to the price of Chinese apartments.