Insights | Why Chinese tech giants are becoming very generous

Philanthropy is shifting from a “nice to have” initiative to a “must have” commitment for Chinese tech giants.

Chinese internet firms ramped up their donations for the public good over the past few months, giving away billions of dollars to causes ranging from technology innovation to bridging income inequality. The move is widely viewed as an effort to placate a state that lately seems to be scrutinizing their every move.

Bottom line: Under intensifying regulatory pressure, Chinese tech companies are scrambling to show their willingness to operate and invest in compliance with the state’s broad goal of “common prosperity.” The change forced these tech titans, many already suffering selloff pressure due to tighter state reins, to seek a balance between shareholder interests and the higher operating costs due to huge donations.

Brief timeline: Tech giants such as Alibaba and Tencent are already active donors through their corporate funds. The companies’ billionaire founders are also writing large checks for charity from their personal foundations. Alibaba’s Jack Ma topped Forbes annual China charity list with nearly $500 million in donations in 2020. Tencent’s Pony Ma came in third with about $402 million, and ByteDance’s Zhang Yiming was fifth with $189 million. Pinduoduo’s Colin Huan topped the Hurun China Philanthropy List 2021 with donations totaling $1.9 billion.

Unlike previous donations that tended to be sporadic initiatives by individual companies, there’s a newfound generosity from nearly every major tech company over the past few months. 

• Tencent invested RMB 50 billion ($7.7 billion) in “sustainable societal innovation” projects in April. The gaming titan later doubled the sum, giving an additional RMB 50 billion to the company’s “common prosperity fund” in August.
• Alibaba announced in August an investment of RMB 100 billion across ten key initiatives to promote common prosperity in China. The company will establish the Alibaba Group Common Prosperity Advancement Working Committee, chaired by chief executive Daniel Zhang, as a permanent mechanism dedicated to delivering on the key initiatives by 2025. The committee will focus on technology innovation, economic development, high-quality employment creation, care for vulnerable groups, and the establishment of a common prosperity development fund.
• Pinduoduo rolled out in mid-August a RMB 10 billion agriculture initiative to address critical needs in the agricultural sector and rural areas such as food security and agricultural technology. In March, Pinduoduo founder Colin Huang stepped down as chairman after giving away 2.37% of his shares, worth $1.85 billion, to charity last year.
• Meituan’s founder and CEO Wang Xing in June donated $2.3 billion worth of Meituan shares; his company is still undergoing an antitrust probe by regulators following his controversial comments hinting of discontent with the government, wiped tens of billions of dollars off Meituan’s market value.
• Xiaomi founder and CEO Lei Jun transferred $2.2 billion worth of shares in the company to the corporate Xiaomi Foundation and the personal Lei Jun Foundation in July. This is in addition to the nearly $1 billion that Lei announced in April he would donate to charity.
• Zhang Yiming, founder of TikTok developer ByteDance, is giving RMB 500 million of his own money to establish an education fund. 

Compared with previous donations, tech firms’ burst of generosity over the past months was mainly directed towards the goal of public welfare and reducing inequality, a goal made explicit in the company’s five-year plan released this March.

The donations are mainly directed to fields like technology innovation, poverty alleviation, welfare of low-income groups, agricultural/rural development, education, basic science/research, healthcare, and small- and medium-sized enterprise (SME) support.

READ MORE: INSIGHTS | Tech in the five-year plan

A change in priorities for economic growth

When former Chinese leader Deng Xiaoping ended the country’s planned economy and embraced a free market in the 1980s, he said allowing some people and regions to get rich first would speed up economic growth and achieve the ultimate goal of common prosperity. Now, the priority seems to be shifting to the latter.

• On Aug. 17, Chinese President Xi Jinping called for the nation to achieve “common prosperity” in a speech, asking to rationally “adjust” excessive incomes and for wealthy individuals and companies to return more to society.
• Xi’s call came as Chinese authorities stepped up regulation of tech companies in multiple areas, including antitrust, data security, and privacy, ending the country’s long-standing laissez-faire regulatory approach towards the tech sector.

The changes also came as income inequality becomes an increasingly pressing problem in Chinese society.

• China’s top 1% own nearly 31% of the nation’s wealth, according to a study by Credit Suisse.
• Chinese Premier Li Keqiang said in May 2020 that 600 million people, or roughly 42.9% of China’s population, have a monthly income of RMB 1,000.
• China received a score of 0.465 on the Gini index of the World Bank, which measures economic inequality. The score ranges from zero to one, with one meaning complete income inequality. A score of 0.4 or above is considered at a “warning level.”
• “Alibaba is a beneficiary of the strong social and economic progress in China over the past 22 years. We firmly believe that if society is doing well and the economy is doing well, then Alibaba will do well,” said Daniel Zhang, chairman and chief executive of Alibaba Group, in a company statement on Sept. 3.
• Resentment toward tech companies is growing in China. Whether restaurant owners on food delivery platforms or startups in crowded verticals, small businesses feel they are squeezed by the digital behemoths.

Investor sentiments

While donating tens of billions of dollars for social initiatives out of their profits, the Chinese tech companies, mostly listed, face the double pressure of convincing investors that they are making the right decision to sacrifice short-term profits for long-term growth prospects.

• Chinese tech stocks have experienced a stunning sell-off since the beginning of this year as Beijing widened its crackdown. Intensified regulations over monopolistic behaviors, overseas listings, and data security, coupled with massive fines, wiped out hundreds of billions of dollars in market value of Chinese tech companies.
• “As platforms grapple with increased regulatory scrutiny inside and outside of China, investors will need to come to grips with the impact of regulatory burden and compliance costs on EPS (earnings per share) and ROIC (return on invested capital),” said Michael Norris, head of research and strategy at AgencyChina.

How effective philanthropic displays will be? 

But the efforts raise other questions: Will these philanthropic displays be enough to ease the wrath of regulators? Norris thinks there’s little chance internet platforms can avoid regulation through their social impact investments. 

• “However, these investments can signal internet platforms are responsible market participants. This hits the right notes with regulators who’ve been tasked with curbing exploitative practices and market irregularities,” Norris said. 
• “Think of it as stakeholder capitalism, with Chinese characteristics,” he added.

New opportunities under the disguise of donation?

The government’s attention to areas like tech innovation, agriculture, education, and basic science means opportunity for tech companies. By entering these strategic areas, they could expect returns from those donations, or investments, if they have aligned their business with the broader strategic goals properly. But the time for such returns may be long.

• Started as a social ecommerce platform, Pinduoduo has become laser-focused on “digitizing agriculture”, an initiative that aligns with the government’s drive to modernize agriculture and boost development for rural areas.
• Pinduoduo said in a statement that the company will be able to “get back” because the users “have placed their trust” in the platform.
• “I observed that both Tencent and Alibaba pledged to support SMEs. This might mean that some of the investment is applied to existing subsidies or retains discounted take rates,” said Norris. 

A lasting change?

China has lagged when it comes to charitable efforts, partly due to China’s tradition of passing fortunes through a family line. Back in 2010 when Microsoft co-founder Bill Gates and billionaire investor Warren Buffett invited Chinese moguls to a dinner to discuss philanthropy, lots of them turned down the invitation for fear of being asked to make a donation.

However, there’s been a significant change in charitable giving, especially since 2008, when donations struck a chord with larger groups due to the Sichuan earthquake. Donations for fighting the COVID-19 outbreak and helping victims of the recent flood in Henan peaked as tech firms tried to fulfill their social responsibilities, a concept specified in the country’s corporate law.

Chinese tech billionaires still have a long way to go to be on track with philanthropic models comparable to western counterparts like Gates.