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Chinese conglomerate HNA’s announcement that it is transferring Hong Kong-registered stakes in its parent group to a US non-profit has created — on paper at least — a charitable foundation with the potential to rank among the world’s largest.
The New York-registered Hainan Cihang Charity Foundation will hold 29 per cent of a company that has $146bn in worldwide gross assets and has led the pack of Chinese corporations investing overseas.
The transfer comes at a time when the conglomerate is facing intensified regulatory scrutiny back home in China.
“The US government is going to help us supervise the fund. Everything goes to that, nothing comes back,” Adam Tan, chief executive, told the FT in an interview in London on Monday. “All the money will be invested in future charity things — poverty relief, education, maybe some innovative things.”
US tax authorities have not yet ruled on the new foundation’s application for 501(c)(3) status which would make it tax-exempt and allow donors to claim tax deductions. Mr Tan said the foundation would operate “according to the tax exempt policy”.
A locally registered Chinese foundation already holds 23 per cent of the shares of HNA, which combines the country’s fourth-largest airline with a sprawling collection of banks, private financing networks, hotels, and transport companies. The rest of the company is held by its two founders and a handful of other executives, including Mr Tan.
The New York non-profit’s 29 per cent of the company is a stake previously held by Chinese investor Guan Jun and, before him, by aviation industry investor Bharat Bhise.
An HNA spokesman said the company considers the two non-profits as “domestic and international arms” of a single foundation, which in theory controls 52 per cent of the company. However, the American and Chinese Cihang are separate entities under both US and Chinese law.
Because much of HNA’s $146bn in assets is encumbered by debt and held through complex crossholdings, the combined charities’ net assets would likely be dwarfed by the Gates Foundation, which manages $44bn.
HNA has highlighted its charitable pedigree. Last month, the company hosted a splashy gala at the Petit Palais, a Parisian art museum. Guests were treated to lobster, Peking Opera and a pledge from HNA founder Chen Feng to donate $35m over the next five years, mostly to health and education in Africa.
The Chinese foundation, known as Hainan Province Cihang Foundation, has made a donation to Harvard, where Mr Tan earned his MBA, the American university announced last month.
The US foundation reported the initial value of its assets as $0. The midtown Manhattan address on its application to the New York corporations division is the same as the China-focused WK law firm, which has represented HNA in previous business in the US. A later filing to the IRS gives the address of HNA’s newly purchased headquarters building just up the street on Third Avenue.
Charitable foundations in China are different from their American counterparts; they are taxed like corporations and most are not allowed to raise donations from outsiders.
That is partly because of the Communist party’s uneasy relationship with private companies. Before private business became legal, entrepreneurs built companies but left formal ownership with the state, a process known as “wearing a red hat”. Some placed shareholding control into a workers’ union to put it out of the reach of local bureaucrats.
China outlawed such union shareholdings in 2000, calling them a type of “stealth privatisation”. HNA founded the Chinese Cihang in 2010 and transferred shares previously held by a union to the foundation.
Chinese Cihang’s official filings suggest it is much smaller than its ownership of 22 per cent of HNA Group would imply. The foundation controlled Rmb890.29m in assets as at the end of 2015, or less than 1 per cent of the value of HNA’s $96bn in global assets at that time, according to the most recent annual report for Cihang filed with the provincial civil affairs bureau in Hainan.
Other than its HNA shares, Cihang has two direct holdings: a corporate laundry, which employs about a dozen disabled people, and a shell company based in Hunan province.
“The fact that assets of Cihang Foundation do not seem to include any HNA Group or company assets indicates that Cihang Foundation does not have actual control over HNA or its companies because their financials have not been consolidated into Cihang,” a Chinese accounting expert said.
At the Paris gala, HNA said that it had made $1.5bn in charitable contributions since its founding, or an average of $58m per year. By contrast, the Gates Foundation committed $21bn between 2009 and 2015.
Cihang’s annual report for 2015 shows that it received income of Rmb74.3m, including Rmb6.98m in donations, and it disbursed Rmb80m ($12m). The filing does not say where the money went. In 2012 and 2014, it disbursed a total of Rmb93.29m ($13.9m). Its 2013 filing was not available online.
Both the Cihang foundations are linked to people with connections to HNA. The Chinese Cihang foundation is headed by a former Hainan government official and run by a board appointed by HNA. The American unit’s only listed director is Guang Yang, chief investment officer of HNA Capital, the group’s investment arm. Mr Tan said he plans to serve as chairman of the board.
“We control the foundation,” Mr Tan said. “But we don’t control the interest, we only control the voting power.”
“The foundation” would decide how its money would be spent, he added. “If I get some money in my pocket the US government will deal with that. They will chase us.”
Additional reporting by Cynthia O’Murchu in London