by Meg Davis

Since March 2010, we’ve received a flurry of calls and emails from reporters, donors and lawyers asking about the new regulations on NGOs in China. Here’s our take on the regulations that have been causing trans-Pacific headaches, and a few thoughts on what this means for Chinese NGOs in the future.

First, a review of some of the basics in regards to nonprofits in China (for more details, see our report on restrictions on AIDS NGOs in Asia or the HRW report, which I actually wrote also, on NGOs in China). China permits NGOs to register as nonprofits only with the sponsorship of a government agency. This gives the government agency control over the activities of the NGO, which is why many outside observers call these registered NGOs “Government-organized NGOs” or GONGOs. Because of the restrictions, many small and independent NGOs in China use a legal loophole to register as commercial enterprises, meaning that they are required to pay taxes.

The new regulations have hit these little grassroots groups, and foreign organizations working in China, especially hard. Here’s why.

The Wire Transfer Regs

In March and April 2010, news hit the wires about new regulations on foreign wire transfers to Chinese “domestic enterprises”. Since it’s the flurry of new little grassroots nonprofits that receive overseas funding lack the capacity to meet these new requirements, the regs have hit them especially hard.

The regulations, actually just a circular published by the State Administration of Foreign Exchange (SAFE), has the following requirements for domestic enterprises that receive donations from overseas institutions:

- Chinese organizations have to open up new, special bank accounts

purely for the purpose of receiving foreign donations;

- In order to open up these bank accounts, organizations need to

provide an application, a copy of their business license, a notarized contract with the overseas donor explaining the purpose of the donation, documents proving that the overseas donor is legally registered in its home country, and (possibly) “other required materials” if the notary deems the above documents to be insufficient;

- Religious organizations receiving more than 1 million RMB in

donations need to have documents showing the approval of the State Religious Affairs Bureau — and in some cases, also the approval of the local government; and

- Banks are required to report “suspicious donations” to SAFE.

On the face of it, this is not too tough. Chinese organizations already had to show banks a copy of their contract with the overseas donor in order to receive wire transfers from foreign donors. But in practice, weak implementation of the new regs has caused the whole system of foreign support for Chinese NGOs to break down in many areas. It’s not clear when, if ever, things will be fixed; before they are, some small groups may suffer so much from the months without funds that they have to shut down entirely.

What Could Possibly Go Wrong?

The first problem has been understandable, from a certain perspective.

Banks are by nature conservative institutions, and no bank wants to be the first to implement the new rules; as the saying goes, the nail that sticks up gets hammered down. Thus, the Global Times reports, “Two months since the regulation came into effect, banks, notary service providers and non-profit outfits are in the dark about how to get a donation agreement ‘notarized’” – and even if they know how to do it, they may be reluctant to follow through.

This leads directly to the second problem: the outlandish process of getting contracts notarized. The circular does not explain this, but in order to obtain the notarization of the contract between donor and grantee, both the donor and the grantee are required to have representatives physically present at the notarization office in person.

How many international donors have representatives in China, ready and able to show up at a notarization office at any time? Let alone staff poised to visit multiple notarization offices around the country, in every town where the donor funds local NGOs? Very few. Not to mention that the notarization offices, we have heard, are often not exactly models of Confucian bureaucracy, and so NGOs have to go back and forth on multiple visits to the notary office, which may be located in another town from the NGO.

This notarization morass leads us to the third problem: requiring this many bureaucrats to stamp this many documents in China simply provides endless opportunity for lethargy, incompetence, red tape, corruption, and plain old meanness if you’re unlucky enough to run into the wrong person across the desk.

To sum up, the wire transfer regs are onerous, but they’re not a sweeping shutdown of all NGOs. The fact that most independent NGOs can only register as commercial enterprises and pay taxes has long left them vulnerable: if the government was serious about conducting a clean sweep of NGOs, they could probably use those regulations to shut the whole sector down in about a week. But that, of course, might actually result in an international outcry.

Creating a chill that shuts some NGOs down, allows others NGOs to survive but limits the overall growth of the sector — and without sparking an international outcry — is a more complex maneuver, and the new foreign exchange regulations accomplish this delicate feat quite neatly. All they do is to create a few minimal bureaucratic hurdles, and then let nature — or in this case, the world’s oldest and grandest bureaucracy — take its due course. The end result is likely to be that a few NGOs will collapse, a few with good government connections will manage to get the new foreign exchange accounts set up, a few donors will throw up their hands and quit funding Chinese NGOs, and a lot of new organizations will never get off the ground…

Meg Davis is the founder and executive director of Asia Catalyst.

Also see post “Chinese Government Promulgated Regulation Regarding Donations from and to Overseas.”

Is a lack of transparency driving a wedge between charities and donors, and undermining the charitable spirit? Zhang Yuchen in Beijing reports.

Do you know where your money goes when you donate to charity?

Studies show that many people who support worthy causes in China admit they have absolutely no idea how or where the money is being spent.

As the country has no law requiring aid groups to publish monthly or even annual accounts, experts say the vast majority of donors are in the dark about where funds go due to basic lack of transparency in the sector.

“Charitable organizations seldom respond to donors’ requests for information about financial reports so few donors have a clear understanding of what their money is used for and what effects it brings about,” said Deng Guosheng, an associate professor at Tsinghua University’s school of public policy and management.

The situation has resulted in serious problems when it comes to supervising grassroots charities and non-governmental organizations (NGOs), and threatens to undermine the growing charitable spirit among the Chinese, he said.

Following the 2008 earthquake in Sichuan province, the nation raised record amounts of money to help survivors. Those records have since been broken following the disaster in Qinghai province in April. So amazing was the response that media analysts suggest the disaster triggered an explosion in compassion, which has continued to spread throughout the country.

The amounts being donated have also steadily increased year on year over the last decade, official figures show.

China received 107 billion yuan in donations from home and abroad in 2008, more than three times the amount in 2007, according to the Blue Book on Charity Donation Development in China (2003-07), an independent report sponsored by China Philanthropy Times. For the first time, the money given by individuals on the mainland surpassed donations from corporations – 54 billion yuan ($7.9 billion) given by individuals, compared to 34 billion yuan by corporations.

However, in a recent survey of people who donated to the Sichuan relief efforts, Deng found that less than 5 percent of the 1,684 who responded know exactly how the money is being spent, while more than 60 percent had little or no idea. (Authorities have published financial accounts during the ongoing reconstruction of Sichuan.)

The trend is also typical among people who give regularly to many Chinese charities, said the professor, who added that although the public is growing more aware of how they work, the overall disclosure of information is far from sufficient.

Trust is fundamental to how most charities are run in other nations but “getting all charities in China to be 100-percent transparent has proved virtually impossible”, said Deng, who also works in the university’s NGO Research Center.

About 410,000 charitable organizations were registered to operate by the end of 2008, while another 760,000 were running but still waiting for official documentation, said a report in the Blue Book of Philanthropy 2009, an independent academic evaluation of China’s charity sector.

Very few publish any kind of annual progress or spending reports, and donors rarely think to ask for them, say analysts.

“A lack of professional management, transparency and trust are major problems facing the charity sector in China,” said Yang Tuan, a professor at the Chinese Academy of Social Sciences’ institute of sociology, who co-authored the Blue Book of Philanthropy 2009. “The fact that there is no charity association is the biggest problem, though. There is simply no co-operation that allows these groups to confront and overcome common obstacles, as well as provide mutual supervision.”

Fund-raising problems

China’s first and, as yet, only regulations for charitable NGOs were implemented in 2004 and apply just to the administration of foundations. A draft of the new Charity Law, which is expected to contain stricter legislation over fund management, was submitted to the State Council last year.

Under the current rules, NGOs have to be affiliated with a government department before they can register with the Ministry of Civil Affairs.

Finding one is no easy task, however, and there are some 250,000 grassroots groups that are instead being run illegally with business licenses, the Blue Book of Philanthropy 2009 says.

“Also, only foundations that are affiliated with a government department or have ties with an authority enjoy the luxury of being allowed to raise money in public,” said Deng. “Grassroots organizations always suffer a chronic shortage in donations.”

Of the 943 foundations registered in China that can legally raise funds in public, 83 are government-owned NGOs (otherwise known as GONGOs), said the professor.

Collecting money from the public without the proper authority is illegal and can lead to serious consequences for charity organizers, and the groups will automatically be shut down.

“This is a concern for many of my friends who work for grassroots NGOs,” said Guang Pu, the 30-year-old director of One Heart, a legally registered non-profit orphanage in Xiamen, Fujian province, that publishes monthly financial reports for donors. “The rules effectively stop a lot of grassroots charities from raising awareness of their cause and soliciting public donations.”

The lack of clear governance has led to conflicts between charity organizers and donors.

Sun Village, one of China’s first charities for children of convicts in Beijing, has been well supported for many years, including by several multinational companies.

However, complaints in recent years by donors over its opaque spending habits have cast doubts over its reputation.

The village director, Zhang Shuqin, denied the claims and feels she was unfairly criticized in press. She blamed the charity’s difficulties on the fact that it lost its affiliation with the government in 2003.

When Sun Village lost its link to the local authority, “I begged more than 10 other departments to help us”, said Zhang, who launched Beijing Sun Village Children Education Consultancy in 2003. As none agreed, she opted to register the organization as a business with the capital’s administration for industry and commerce – make it illegal for the village to raise funds publicly.

“My company got involved (with Sun Village) years ago but we’ve started to feel more and more uncomfortable (about its management) in recent years,” said a Beijing-based communications director for a multinational corporation who did not want to be identified. “We’ve usually helped by donating food for the children but recently we’ve continually received calls asking the cash donations, without any explanation of how the money will be used.”

However, the school’s director argues that her critics do not understand how hard it is to run a charity in China.

“Why do (the people criticizing me) not recognize the hardship I’ve been through?” said Zhang, a fast-talking woman who has also been accused of being too aggressive. “I don’t think they have any right to say anything about me or Sun Village.

“We cannot get (affiliated), so why do (donors) think I should publicize our financial records?” she added, before offering to show China Daily the charity’s accounts. “The privacy of the convicts’ children is the only reason why I am reluctant to make my financial report transparent to the public. Issues related to people in jail is very sensitive in China and I don’t want the children to be hurt to any extent.”

Most charities do not offer detailed information about donations and spending unless donors specifically ask to see some, say analysts. The Beijing communications director admitted her company had never formally requested any financial reports from Sun Village.

Regularly publishing accounts can actually be a heavy financial burden for charity minnows.

Dandelion School, a charitable education project targeting the children of migrant workers in Beijing, is consistently praised for its transparency. Yet due to the extra cost of distributing its accounts, the group can only keep donors updated on the specific projects they contribute to.

“That costs less than posting the whole package, such as how the money was spent and what kind of effects it has had,” said Clare Pearson, chief editor of Charitarian, the only English-language philanthropy magazine published in China.

The accounting can also be complicated by the fact charitable NGOs also rely on donations to cover running costs. This can be difficult to break down for people not working in the charity sector, explained Deng.

“The public in China isn’t really familiar with how NGOs are managed and often don’t recognize that the costs of running a charity – people’s wages, transport, etc – often comes from donations,” said the professor. He estimated that, depending on the size of the charity, about 5 to 20 percent of the money raised goes towards administrative costs.

However, grassroots NGOs often do not allocate enough funds towards its management, which can also contribute to the slow disclosure of information to donors, said Li Dajun, program manager for the China Social Research Center affiliated with Peking University.

“They are so busy looking for fund-raising opportunities (to support their cause) that they leave little room for their own development as a charity,” said Li, who worked with several NGOs between 2003 and 2007.

“Ultimately, if trust is built (between a charity and its donors), few will doubt how the money is spent,” added Pearson, who is also a corporate social responsibility manager for the international law firm DLA Piper.

Selection process

Carefully selecting a charity that is run by professionals is key to ensuring any donation will be spent correctly and efficiently.

“Sometimes, when people decide to find a charity to support, their eyes are always caught by the famous or popular ones, although neither of these qualities guarantee professionalism or qualifications,” said Deng at Tsinghua University.

As the charity sector continues to develop, so too does the experience of those working in it. However, the current demand for human resources at NGOs far outweighs supply.

“The first generation of China’s NGO founders knows less about managing charities, so they have stuck to the tradition of being family run and giving relatives jobs in the organization, which creates more suspicion,” said a publicity expert who has studied the development of NGOs in China for more than a decade ago but did not want to be identified.

Sun Village is one of those organizations that have been accused of being “family run” and media reports claimed Zhang employs two daughters and a son-in-law to manage the school.

However, the under-fire director fiercely rejected the allegation, saying: “I have hired professional personnel to work at the village.”

To increase the level of trust in charities, many experts argue they should be made independent of government departments.

“Charity should be independent from authority, while transparency should be realized through social supervision, not regulations,” said Deng, who added that many of the problems charitable NGOs face are caused by the complex registration process.

“The easiest way (to boost the sector and ensure transparency) is to allow more room for these organizations to register. Only by doing this can more charities get the chance to impact society.”

(From http://www.chinadaily.com.cn/cndy/2010-05/27/content_9897275.htm )

This partial delegation of government functions to social organizations is key to the guideline of Shenzhen’s current administrative reform. In line with previous statement, the government is to resolutely quit its roles unnecessarily presumed before. Even if the market is experiencing temporary downturns, the government will leave the leading role to social organizations and enterprises, and provide only necessary support.

The overall reform is to cancel, alter, and delegate over 300 administrative ratification items governmental functions in total, including the 100 functions being delegated this time.

But the Shenzhen government can only succeed if social organizations are capable to shoulder up the delegated responsibilities, and only if relevant laws and regulations can provide adequate support. Another potential concern is how to prevent social organizations from becoming “government branches” as they adapt to their new roles.

If government administrative system reform only aims to change the internal distribution of administrative power but does not weaken the disproportionally strong administrative branch, its effect can only be increased administrative efficiency, but not increased social justice. Neither can the reform be effective if it does not extend to the governance of social organizations but simply shifts the administrative power from the government to de facto government branches.

The current system has been repressive to the growth of social organizations. Citizens who would like to establish social organizations have to register through bureaus of Civil Affairs. To register, the organization needs to be affiliated with a governmental branch. Without such affiliation, an association can only acquire legitimate legal standing by registering through the Administration for Industry and Commerce as a corporate without tax exemption or the legal status as a non-profit. As a result, many Government-Operated Non-Governmental Organizations (GONGOs) have become the dominant “non-governmental organizations”. Such GONGOs, not surprisingly, resemble government branches more than real non-governmental organizations that should be open, rigorous, and autonomous.

However, the GONGOs that closely connected to government—in history, in terms of structure, in personnel make-up or even in directly affiliating with government branches—have been selected as the major undertakers for government to delegate its functions during the reform. They have gained an edge over real non-governmental organizations through a de facto unfair competition. Additionally, the GONGOs that have long been under protection of the government are often severely handicapped in their capabilities, operational mechanisms, professionalism in service and creativity, which make them bad candidates for undertaking the reform that focuses on innovation.

The government also needs to change its mentality regarding its relationship with social organizations. Instead of regarding itself as the “sponsor” of all social organizations, it should establish mutual respect with them and cooperate with them as equals, in accordance with the goal of achieving a balance of “government, market and society”.

Hence, the emphasis of the reform should be placed on removing administrative barriers that impede the growth of social organizations. As the government still takes the dominant position in policy reform, its mentality and decisions are vital to the success of the reform.

Columnist Li Jianhua sees this reform as one greatly benefiting the growth of social organizations. He notes that many of these delegated governmental functions involve “training and qualification of professional personnel” such as qualification assessment of accountants and tour guides, and quality evaluation such as hotel star classification, tourist attraction star classification, and travel agency qualification assessment.

Li notes that Chinese social organizations are relatively backward and are yet to acquire substantial influence, partially due to the overly imposing government restrictions. By taking up too many functions that could have been delegated to social organizations, the government left little space for the growth of social organizations. The reform, then, will be in line with both the governmental function reform and the need to strengthen social organizations.

To Li, Social organizations are autonomous non-profit organizations that represent certain public interests, and therefore competitive in nature: they compete with each other for “social recognition”, “social praise” “member satisfaction”, “social impact” and so on. Hence, for any event – an environmental cause, a charity event, or a hotel star classification assessment – there will very likely be several social organizations competing for the chance to undertake. Reasonable competition among social organizations can promote their growth, vigor, and make social organizations more useful in helping the society function and grow. Hence, the government should promote competition and avoid monopolizing when delegating its functions out to social organizations.

Li notes that trustworthiness of a social organization comes from its performance in organizing activities. Li suggests that China should take faith in the public’s judgment, in the capability of autonomous organization of the society, and in social organizations’ self-discipline and administration, all of which are core to the idea of an autonomous society with sufficient self-government.

(Translated by Yichen Chen and proofread by Hong Liu of Harvard University. Original abridged from  http://gd.news.sina.com.cn/news/2009/09/21/665724.html and http://www.chinanpo.gov.cn/web/showBulltetin.do?id=39801&dictionid=1940)