Tencent and other tech giants have begun pledging a large number of donations since President Xi’s call for common prosperity at the Central Committee for Financial and Economic Affairs held on 17 Aug 2021.
What Is Common Prosperity?
Since the Fifth Plenary Session of the 19th Central Committee of the Communist Party of China held in Oct 2020, five shifts have taken place in China’s mid-and long-term development philosophy:
- From growth rate to security
- From efficiency to fairness
- From early prosperity for some to common prosperity
- From capital to labor
- From real estate and finance to science, technology and manufacturing
This change in development philosophy is reflected in its recent policies to school district houses, after-school tutoring, property tax pilot programs, anti-trust and reckless capital expansion, as well as a demonstration zone for achieving common prosperity in Zhejiang province.
The concept of “common prosperity” is rooted in China’s top-level design and guiding policies. Since the launch of reform and opening-up in the late 70s, China has fulfilled the first part of Deng Xiaoping’s idea of letting some get rich first so they could stimulate others, and thus realizing common prosperity in China.
However, since the reform, the income inequality gap widened in China and it has one of the highest income inequality in the world.
Efficiency Versus Fairness
Looking back at China’s recent history, we can observe a change of focus between efficiency and fairness.
The absolute fairness system in China prior to Deng Xiaoping resulted in low efficiency and underdevelopment. Since Deng took over, efficiency became the priority and efficiency is based on incentives. Those who make the pie bigger will get a larger share.
However, during this process rural-urban, regional, and industrial gaps widened. The Gini coefficient, a measurement of income inequality hit a record high.
After years of hard work, China’s mission of poverty alleviation successfully lifted more than 100 million out of poverty, building a solid foundation for moving to the next target — achieving common prosperity and social equity.
Since Xi’s speech on 17 Aug 2021, big techs are automatically stepping up and announcing large donations.
Putting On My Socialist Hat
I view this as a good move by China, as we have seen in Japan and South Korea where the fruits of economic development are excessively concentrated in a small number of people, the masses, who can only get a small piece of the pie, will lose the incentive to keep on striving for a better life.
If left on its own, economic development will slow and the momentum of innovation will be weakened, resulting in a “low-desire” society like in Japan.
Putting Back On My Investor Hat
For companies like Tencent and JD, they’re extremely compliant with the Government—being proactive rather than reactive.
The benefit is evident from the recent anti-trust crackdown, while Alibaba was fined a record $2.8 billion, Tencent and JD were only fined $75,000!
Since Tencent announced the “social aid” of $15.4B, Western media has blown it out of proportion again. After all, traditional media are in the business of competing for eyeballs, there is an incentive to oversensationalize headlines.
Firstly, the amount of $15.4B is not an annual amount. Tencent did not specify the number of years. Great PR move by Tencent to announce a huge headline number without specifying the timing.
Secondly, half of the amount will be used for “sustainable societal innovations” and the other half will be used for “co-prosperity” initiatives.
For “sustainable societal innovations”, focuses on the future, specifically foundational science, education innovation, carbon neutrality, food, environment and water, technology to support the elderly, and public sector digitization.
Nowhere in the original text issued by Tencent suggests philanthropy, donation, or charity. It’s likely Tencent’s pivot into commercial businesses that are more aligned with what the Government is trying to achieve.
Tencent’s central message was to support China’s national initiative with technology. In my opinion, it will likely be a combination of charity and commercial arrangements, rather than what most media portray to be—100% “donations” as the cost of doing business.
Regulations are not confined to China.
If we compare this with the big tech in the United States, where Google and Facebook have been fined close to $20B collectively.
In fact, as long as a company is huge, it will carry a gigantic target board on its back. As investors, we have to evaluate whether these regulations will cripple the businesses or will regulations make the industry better off as a whole.