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China grapples with charity

For the Chinese, giving wealth away is a hot-button issue

By Bill Powell, editor-at-large

Bill Gates and Warren Buffett in China in September 2010

FORTUNE — Last year Warren Buffett and Bill Gates visited Beijing for what they thought would be the least controversial of reasons. They had arranged to have a private dinner with a group of rich, successful Chinese businessmen, and to talk with them about a subject that seems innocuous: philanthropy. The Chinese blogosphere caught wind of the dinner and erupted in chatter. “And not all of it,” acknowledges Peter Buffett, “was positive.”

That’s putting it mildly. The subject of rich folks giving away their money to charity might be uncontroversial in the U.S., but in China it’s not. In fact, Peter says, when he comes to China to perform and speak to groups of students and young professionals, “the subject of second-generation wealth always comes up. They always want to talk about it.”

There are two reasons philanthropy gets people riled up in China. First, a fair number of rich folks there believe giving it away is antithetical to Chinese values — which stress family above all. It’s why some Chinese were upset when they heard (mistakenly) that Buffett and Gates were coming to tell rich Chinese how to give away their wealth. Many young Chinese were stunned when Buffett said he was giving most of his wealth to the Gates Foundation.

Peter Buffett rocks Beijing

But the second reason wealthy Chinese haven’t been racing to donate more of their money, particularly this year, is less obvious: Charitable foundations in China are dogged by the whiff — and sometimes more than that — of corruption. Management fees for charities in China are often up to 10% of donations collected, compared with around 3% in the West. Earlier this year, the mere photograph on the web of a young woman identified as a manager of the Red Cross in China sent the blogosphere into a frenzy. The reason? The photo showed her driving a fancy car and carrying a Hermès purse.

The agency insisted that the woman in question did not, in fact, work for the Red Cross in China. (She was the girlfriend of what the agency murkily called a “business partner.”) The denials didn’t matter. Donations to RCIC in the first half of 2011 plummeted and, according to some Chinese press reports, slowed considerably to the charitable sector as a whole.

That pointed to the lack of trust that exists in the charitable sector in China. Several prominent Chinese businessmen and philanthropists — led by Cao Dewang, owner of one of the largest glassmaking companies in China — have now publicly insisted that the domestic charities they donate to have to become more transparent and costeffective. “This doesn’t have anything to do with values, Western or Chinese,” Cao has said. “To increase charity now in China is a matter of trust.”

This article is from the October 17, 2011 issue of Fortune.