China’s Tech Giants Are Giving Away Their Cash To Keep away from Beijing’s Wrath

Colin Huang Zheng, founder and CEO of Pinduoduo, speaks during the company’s listing on … [+] Shanghai Tower on July 26, 2018 in Shanghai, China.

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Chinese tech companies donate tens of billions of dollars to social initiatives as they strive to achieve President Xi Jinping’s national goal of common prosperity. But all this newfound generosity begs an important question: who now has ultimate control over the profits and assets of these companies?

From e-commerce platform Pinduoduo to gaming and social media giant Tencent, a number of companies and their multi-billion dollar co-founders recently unveiled plans to fund education, agro-tech and poverty alleviation projects. As worthwhile as the initiatives are, many are funded from profits intended to go to shareholders, and they come at a time when stricter regulations are already holding back growth.

For example, Nasdaq-listed Pinduoduo said Tuesday that it would donate its second quarter earnings and all future earnings to support China’s agricultural development until the donations are at least 10 billion yuan ($ 1.5 billion) reach. Earlier this month, Hong Kong-listed Tencent announced it would allocate an additional 50 billion yuan to welfare programs like building medical facilities and helping low-income communities, bringing this year’s total philanthropic pledge to a whopping 100 billion yuan.

Analysts say the sudden display of generosity underscores the growing risks of investing in China, where the government has brought the tech sector to its knees through new regulations in areas from antimonopoly 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 wealthy individuals and high-income corporations.

“Do PDDs owe investors constant profitability before donating future profits? Did investors plan billions in social spending when they took up a Tencent position? ”Asks Brock Silvers, Hong Kong-based chief investment officer at Kaiyuan Capital. “Beijing risks highlighting the idea that it will ultimately have the first claim to Listco assets and that shareholders can only be placeholders.”

Tencent and Pinduoduo did not respond to requests for comment. In an online statement, Pinduoduo said his agriculture initiative “will clearly affect short-term earnings per share for shareholders,” and the company will hold a meeting to seek their support.

Corporate donations are now accompanied by personal donations from the richest tech billionaires in the country. Pinduoduo founder Colin Huang, co-founder of smartphone maker Xiaomi Lei Jun, and grocery supplier Meituan founder Wang Xing have each donated billions of dollars of their corporate shares to philanthropic foundations that are committed to donating the proceeds to education , Poverty alleviation and scientific purposes to use research.

Investors appear to have mixed views on the matter for now. Meituan, which is the subject of an ongoing antitrust investigation, has fallen nearly a third in Hong Kong after Wang’s philanthropic donation was announced in early June. Pinduodo, on the other hand, rose nearly 20% on the day it announced its philanthropic intentions, despite the company reporting less-than-expected sales growth.

Michael Witt, Senior Associate Professor of Strategy and International Business at INSEAD in Singapore, says it might be better to give away the profits now than to keep them and be subject to even more restrictions. “Given that tech companies have come under pressure, it’s possible investors thought that giving away some of the profits would improve PDD’s future prospects,” he says.

However, Witt and Kaiyuan Capital’s Silvers also point to long-term risk as investors ponder next government action and its potential impact. In July, for example, Beijing ordered private tutoring companies teaching school subjects to convert into nonprofits, triggering a market sell-off that rendered hundreds of billions of dollars worthless.

“Ironically, the social plans could create temporary upward pressure as investors rally behind companies believed to have lower regulatory risk due to their charitable endeavors,” says Silvers. “In the longer term, however, the plans are likely to exacerbate newly flared concerns about China’s fundamental investment ability.”

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