Chinese technology companies are donating tens of billions of dollars for social initiatives as they scramble to fall in line with President Xi Jinping’s national goal of common prosperity. But all this newfound generosity raises an important question: Who now has the ultimate control of these companies’ profits and assets?
From e-commerce platform Pinduoduo to gaming and social media giant Tencent, a slew of companies and their billionaire cofounders recently unveiled plans to bankroll projects for education, agritech and poverty alleviation. Worthwhile as the initiatives are, many are being funded out of profits that are supposed to go to shareholders, and they come at a time when tightening regulations are already crimping growth.
Nasdaq-listed Pinduoduo, for example, said on Tuesday that it would donate its second-quarter profit and all future earnings to help with China’s agricultural development until the donations reach at least 10 billion yuan ($1.5 billion). Earlier this month, Hong Kong-listed Tencent announced that it would set aside another 50 billion yuan for social programs, such as building medical facilities and supporting low-income communities, bringing this year’s total philanthropic pledge to a whopping 100 billion yuan.
Analysts say the sudden display of largess highlights the growing risks of investing in China, where the government has brought the tech sector to its knees through new regulations in areas ranging from anti-monopoly to safeguarding financial stability. The government is now calling on them to give back to society as part of President Xi’s goal of achieving common prosperity by adjusting excessive incomes and encouraging philanthropic donations from rich individuals and high-income corporates.
“Does PDD owe investors consistent profitability before it donates future profits? Did any investors model billions of dollars in social spending when taking a Tencent position?” asks Brock Silvers, the Hong Kong-based chief investment officer at Kaiyuan Capital. “Beijing risks highlighting the idea that it ultimately has first claim on listco assets and that shareholders may just be placeholders.”
Tencent and Pinduoduo didn’t respond to requests for comment. In an online statement, Pinduoduo said its agriculture initiative “will clearly impact the short-term earnings per share for shareholders,” and the company would convene a meeting to seek their support.
The corporate giving, in the meantime, is accompanied by personal donations from the country’s richest tech billionaires. Pinduoduo founder Colin Huang, smartphone maker Xiaomi’s cofounder Lei Jun and food-delivery giant Meituan’s founder Wang Xing have each transferred blocks of their companies shares worth billions of dollars to philanthropic foundations, which have pledged to use the proceeds for education, poverty alleviation and scientific research.
Investors, for now, seem to be taking mixed views on the matter. Meituan, subject of an ongoing anti-trust probe, has fallen almost one-third in Hong Kong after Wang’s philanthropic donation was announced in early June. Pinduodo, on the other hand, soared almost 20% the day it announced its philanthropic intentions, although the company reported less-than-expected revenue growth.
Michael Witt, senior affiliate professor of strategy and international business at INSEAD in Singapore, says it might be better to give away the profits now, rather than holding onto them and face even more restrictions. “Given that tech companies have been under pressure, it is possible that investors felt that giving away part of the profits would improve future prospects for PDD,” he says.
But Witt and Kaiyuan Capital’s Silvers also point to long-term risks, as investors ponder the government’s next action and its potential impact. In July, for example, Beijing ordered private tutoring companies that teach school subjects to convert to non-profits, igniting a market sell-off that wiped out hundreds of billions of dollars in value.
“Ironically, the social plans could create temporary upward pressure as investors rally behind companies which are believed to have lower regulatory risk as a result of their charitable efforts,” Silvers says. “Longer-term, however, the plans are likely to exacerbate newly energized worries over China’s fundamental investability.”