By CARA ANNA (AP) , March 12, 2010

BEIJING — China has surprised thousands of aid groups by stepping in to regulate overseas donations for the first time, complicating efforts to get money from supporters in the United States and elsewhere. Some groups warned that losing the support could force many to shut down.

China’s leaders have only recently realized that outside help is needed on deep social welfare problems, but they worry the work of independent activist groups could turn political. Groups must find a government partner to register as a nonprofit. Many that want to stay independent have set up as a tax-paying business instead.

“I think the new rules will regulate us to death,” said AIDS activist Wan Yanhai, who runs a Beijing-based aid group.

As of this month, China-based aid groups — but not those connected with the government — must show proof that overseas nonprofit donor groups are registered in their home countries. The groups, also known as nongovernmental organizations or NGOs, must strictly follow detailed agreements with foreign donors and not use the money in other ways.

Religious groups also need approval from the State Religious Affairs Bureau for any donation that exceeds 1 million yuan ($146,000).

“I think it’s inevitable that they were going to start tightening the noose on NGOs,” said Meg Davis, executive director of New York-based Asia Catalyst, which works with a number of grassroots groups in China on AIDS-related projects. “There’s a sense at the top that they’re suspicious of NGO powers.”

She spoke by phone from the southern province of Yunnan, where her group works with 90 women with HIV. The new rules are complicating efforts to wire the group money from overseas, she said. Asia Catalyst has been told a representative must be present on a specific day this month to get key paperwork notarized — a day when the group says none of its people will be in China.

“Stopping work is not an option. These women are working with a population that is sick and dying,” Davis said. “The only thing we can attempt to do is comply as best as we can.”

The rules were issued by the State Administration of Foreign Exchange, which normally has little to do with NGOs. They were posted on the administration’s Web site and came into effect March 1.

Phones at the administration rang unanswered Friday.

China never really regulated foreign donations until now, said Deng Guosheng, a lecturer with the NGO Research Center at Tsinghua University in Beijing. “I think most will not face a problem, but for those sensitive NGOs, it will become hard for them to get foreign donations.”

China has struggled to keep up with the growth of aid groups in recent years. The Ministry of Civil Affairs says about 400,000 groups are registered and many more are not. A report published by the Chinese Academy of Social Sciences has estimated the total number could be 3 million.

“No government official knows how to regulate them,” and they don’t know what most aid groups are doing, said Wang Liwei, the CEO of China Charity Media Group, which publishes Charitarian magazine.

His fellow editor, British lawyer Clare Pearson, said other countries long ago made similar moves to watch where money for aid groups comes from.

“Look at this way,” she said. “If I’m in the UK and a bunch of Chinese people come over, build a school and set up a curriculum to start teaching children, I’d be asking a lot of questions.”

But some groups worry that China is checking more for possible political challenges.

Last month, China told schools to sever all ties with the international relief agency Oxfam and bar its campus recruitment efforts, accusing the group’s Hong Kong branch of having a hidden political agenda. Oxfam has operated in mainland China for 20 years and denied that its activities were political.

Associated Press researcher Xi Yue contributed to this report.

Copyright © 2010 The Associated Press. All rights reserved.

Also see post “On the Impacts of China’s SAFE Regulation Regarding Overseas Donations“.

In light of China’s encounter with the current global economic crisis, the types of services that international nonprofit organizations (INPOs) offer are now more vital than ever. INPOs-defined broadly as foreign charitable organizations, private foundations, trade and industry associations, business leagues, and educational organizations-contribute to the needs of the rapidly developing country in disaster prevention and relief, education, environmental protection, HIV/AIDS, labor and migration, rural development, and animal welfare but have also encountered many bureaucratic hurdles. There is a growing need for INPOs-whether charitable organizations that wish to provide aid, or INPOs set up by corporations to extend their corporate social responsibility (CSR) efforts-to have a greater presence in China, yet their efforts are often hampered by a system that lacks efficient mechanisms for charity because of the limitations on the establishment of transparent, independently registered charities and nonprofit organizations. As China develops, INPOs can help China foster greater public awareness on issues that are fundamental to a developing society, such as environmental protection. Trade and industry associations give Chinese industries a platform to connect with other global industry players, and other INPOs can help multinational investors establish effective CSR activities in China.

Quick Glance

• China has a growing need for the services that nonprofits provide, such as those that focus on environmental protection and emergency response.
• Companies can establish international nonprofit organizations (INPOs) to achieve their corporate social responsibility goals in China.
• INPOs must register with the government to lease space, hire employees, or open bank accounts in China, but many obstacles and bureaucratic hurdles to registration remain.

The absence of mechanisms that would allow nonprofits to work effectively in China was felt in the aftermath of the 2008 Sichuan earthquake. Though the PRC Ministry of Civil Affairs reported on November 10, 2008 that total donations from domestic and overseas sources for earthquake relief following the 2008 Sichuan earthquake reached ¥59.5 billion ($8.7 billion), some overseas donors reported difficulty sending donations to China. The tragedy exposed existing problems in the framework of PRC laws that regulate charitable donations and nonprofit work more generally. In the aftermath of the earthquake, entrepreneurs and international businesses have called for reforms of the system that governs donations, charity, and non-profit organizations in China. Such businesses seek new ways of accomplishing their CSR goals in China, and some have found means through alternative structures that have allowed them to establish their own INPOs in China.

Nonprofits in China

Nonprofit organizations are relatively new to China. In the 1950s, several types of social service organizations supplemented government administration. Most of these organizations maintained close ties to the government and served as a model for the later, so-called “government-organized nongovernmental organizations” (GONGOs). That the most recent wave of nonprofits has primarily consisted of private entities explains, in part, their lack of status under PRC law. It was not until the 1990s that nonprofits became the subject of public discourse by the media and intellectuals. The first domestic nonprofit, Friends of Nature, began operating in 1994. Apart from a 1993 PRC Law on the Red Cross Society of China, the first regulations on nonprofits were not issued until the late 1990s (see China’s INPO-Related Laws and Regulations). These regulations covered only domestic organizations and only partly regulated the forms under which non-profits were organized in China.

The PRC Ministry of Civil Affairs (MCA), one of the most conservative ministries in China in terms of approval procedures, regulates and approves the establishment of foreign and domestic nonprofits in China. According to MCA, there were 386,916 registered nonprofits in China in 2007, though many of these were still organized as GONGOs and operated only semi-autonomously. The number of INPOs in China is harder to assess as many are unregistered. Unofficial reports put the number at around 200 in 2007. MCA currently categorizes nonprofits into three groups that range from state-controlled entities that have top-down management and use public funds to grass-roots-based organizations that rely on private capital.

• Popular non-enterprise work units  (minban feiqiye danwei) are organizations that carry out social service activities of a nonprofit nature and are run by enterprise and institutional work units, social groups, and individual citizens using nonstate assets. The ThinkTank Research Center for Health Development (Xin Tan Jiankang Fazhan Yanjiu Zhongxin), which focuses on healthcare system reform, is one example.
• Social organizations  (shehui tuanti) are voluntary groups formed by Chinese citizens to achieve a shared objective-according to the social organization’s rules-and to develop nonprofit activities. The China Medical Information Association (Zhongguo Yiyao Xinxi Xuehui), which was established in the 1980s and conducts research on using information science in the field of medicine, is one such example.
• Foundations  (jijinhui) are corporate bodies limited to domestic and foreign associations, nongovernmental and non-profit institutions, and other organizations that are funded by donations from individuals. The Narada Foundation (Nandu Gongyi Jijinhui), created by Nandu Group, a property developer in Zhejiang, is one example of a successful foundation that provides quality education to children of migrant laborers. These PRC legal categories differ significantly from those in the United States, where the tax code provides a typology of tax-exempt organizations. These include 501(c)(3) charitable organizations, 501(c)(4) civic organizations, 501(c)(5) labor organizations, and 501(c)(6) business leagues. In some cases, US nonprofits obtain government funding but, in contrast to their PRC counterparts, are otherwise relatively autonomous.

The PRC official designations warrant several observations. First, the regulations that establish popular non-enterprise work units and social organizations are now more than a decade old. They have failed to keep up with the social and economic needs of a quickly modernizing China in areas related to the environment, labor, natural resources, and disaster relief. Second, the 2004 regulation that allows for the establishment of foundations is the only one that mentions foreign associations. By law, only PRC nationals or entities may establish popular non-enterprise work units and social organizations.

For this reason, only INPOs that are foreign foundations may establish a legal presence in China-through the establishment of a representative office of that foreign foundation. To do so, foreign foundations are required to meet several conditions, including, among others, obtaining the sponsorship of a “leading professional unit” (yewu zhuguan danwei). Registering as a foundation has been difficult, however, and only a limited number of high-profile international foundations, such as the Bill & Melinda Gates Foundation, William J. Clinton Foundation, and World Wildlife Fund, have successfully done so to date.

The registration process

INPOs have encountered difficulty registering under the existing PRC regulations. Not only does the registration process pose significant barriers, but INPOs that register successfully face subsequent restrictions on their operations. For example, a representative office of a foreign foundation may not raise funds or receive donations in China. Several aspects of the registration system also run counter to INPO interests. Domestic nonprofits must register under a dual-management system that includes strict approval procedures and investigation, supervision, and periodic review. INPOs are also subject to these restrictions, which are generally much more stringent than most business approval procedures.

Subject to rules and scrutiny of MCA and its sponsor, nonprofits face double approval, double supervision, and double liability.

The two main entities responsible for nonprofits are MCA and the leading professional unit, which is often a ministry whose jurisdiction includes the activity in which the nonprofit engages. The leading professional unit is the sponsoring institution and is known colloquially as the “mother-in-law” by nonprofit workers. Article 35 of the 2004 regulation outlines three primary duties for the leading professional unit of a foundation:

• Provide guidance and monitor the activities of the foundation to ensure that it benefits the public and follows the foundation charter and the law;
• Grant preliminary approval of annual inspections conducted by MCA. The annual report of a foundation must first be submitted to its leading professional unit for review and approval before the report can be submitted to MCA. In addition, any change in the registered details of a foundation, such as changes to location, charter, or council members, must be approved by its leading professional unit before submitting the change for MCA approval; and
• Coordinate with the agency in charge of foundation registration and other law enforcement agencies to investigate illegal activities.

The nonprofit may apply for formal registration with MCA only after the leading professional unit agrees to serve as its sponsor. Because the leading professional unit is liable for the nonprofit but does not necessarily benefit from its partnership, the system creates disincentives for the leading professional unit to agree to sponsor a nonprofit. (Though there are no legal provisions that subject a sponsor to fines and other punishments, the sponsoring organization vouches for the nonprofit’s credibility and is responsible for the actions and activities of the nonprofit.) In fact, it is understood that certain PRC ministries are not interested in serving as a sponsor because they view this task as carrying only risk and no reward. As some ministries have jurisdiction over more sensitive areas than others, nonprofits also exercise some “forum shopping” in their selection of sponsoring units. Subject to rules and scrutiny of MCA and its sponsor, the nonprofit faces double approval, double supervision, and double liability.

The nonprofit must also meet capitalization requirements to be approved. For example, a nationwide public foundation must have a minimum capital of ¥8 million ($1.2 million), paid in cash, to receive registration approval. Currently, however, China has not released a threshold for the registration of a representative office of a foreign foundation, except that such an office must conduct activities in line with public welfare and for the benefit of Chinese society.

Why register?

Given China’s complicated regulatory regime and lack of registration mechanisms, some INPOs have postponed or abandoned their efforts to operate there. Meanwhile, other INPOs have resorted to entering China without an established PRC legal entity, which effectively limits their scope and ability to carry out their intended purpose.

Even the basics of operation-opening bank accounts, employing personnel, obtaining tax benefits, entering into cooperative arrangements, and establishing contracts enforceable in PRC courts-are beyond an INPO’s reach in the absence of registered status. Most INPOs are dependent on funding from bilateral donors, development banks, and governmental agencies such as the US Department of State, as well as supragovernmental organizations such as the United Nations and European Union. Many of these organizations fund only nonprofits that are registered in the country in which they operate. Without registration, INPOs must depend on personal bank accounts. In 2007, the consequences of non-registration intensified when the People’s Bank of China and the State Administration of Foreign Exchange issued a regulation that limited the amount of foreign currency an individual can exchange for renminbi to the equivalent of $50,000 annually. Such caps severely limit the daily functions of INPOs.

A registered INPO has greater cash flow and fund management security.

In contrast, a registered INPO has greater security in terms of both cash flow and fund management. Registration enables nonprofits to open a corporate bank account, which allows unlimited transfer, conversion, and withdrawal of funds. The ability to enter into employment contracts and offer employment benefits is essential to the daily operation of any organization. Without an on-the-ground presence in the PRC, INPOs are severely limited in carrying out their operations in China. Registration also gives INPOs formal legal status, allowing them to retain local staff and network in China more effectively. For example, within one year of its registration approval, one North American INPO garnered more corporate members in China than it has in North America.

Difficulties in obtaining the necessary approvals from ministries responsible for nonprofit organizations have prompted some INPOs to consider new avenues and entity structures. The entity structure needs to be tailored to meet INPO tax, employment requirements, funding, organizational structure, and activity needs. Establishing a representative office of a foreign foundation might not be the ideal route for an organization that is not a foundation or does not focus on grantmaking-including nonprofit educational institutions, trade associations, or registered charities-because it could limit the nonprofit’s scope.

For an entity that needs to be able to lease its own space, hire its own employees (directly or indirectly), and open its own bank accounts, there may be no single perfect solution to setting up in China. Depending on its institutional identity in its home country (such as range of activities and tax status) and its requirements for its China entity, existing PRC entity forms may be able to facilitate the INPO’s entry into China.

Future developments

Recent events in China have caused domestic and foreign businesses to call for a more transparent and supportive system for charity and donation within the PRC. Members of the Chinese business community have been particularly vocal about shortcomings in the charity system and their inability to achieve CSR objectives. For example, when official charities were found to lack transparency, the co-founders of the popular Chinese website Bull Blog collected ¥1 million ($146,340) for donations to victims of the Sichuan earthquake. Zhang Xin, chief executive of Soho China (a Beijing-based real estate developer), and Michael Yu, chair of New Oriental Language School, have also called for reform of the existing charity system. Even before the earthquake, the Chinese business community had joined efforts with foreign businesses at high-level international symposia on charity reform.

Whether the PRC government and lawmakers will relax current regulations on nonprofit organizations or take other steps in the nonprofit sector is unclear. Since 2004, China has been considering revising its social organization laws to allow foreign social organizations to register in China. The Draft Law on the Promotion of Charities was finished in 2006 and was expected to be presented to the National People’s Congress for approval in 2007. It was postponed because of disagreement among different government departments on the degree to which charitable organizations will be autonomous. After the December 2008 China Charity Conference, officials said that the draft law would soon be promulgated. Though there was no timetable for the draft law’s release as CBR went to press, MCA released a statement in late March 2009 noting that it had solicited feedback from certain individuals and charities.

Discussions among public interest-minded businesspeople, academics, legal experts, and nonprofits suggest that the new charity law will fill in the gaps in China’s charity system, but many experts expect that China will have to reform its nonprofit regulatory regime before INPOs can register en masse.

Matthew Erie is law clerk, David Livdahl is partner, Jacelyn Khoo is China associate, and Henry Li is China associate at Paul, Hastings, Janofsky & Walker LLP, an international law firm. They are members of the firm’s Beijing office international nonprofit organization practice team.

(From China Business Review, May-June 2009)

Below are notes of his talk.

Given the shortage of time, I will focus my remarks on the subset of US foundations that make grants directly to grantees in China, whether or not they have resident staff in China. Not included are US foundations that grant funds to international intermediaries (such as Oxfam or World Resources Council), which in turn fund activities in China, or support the study of or exchanges with China (such as Luce and Freeman).  In excluding these groups as well as those in other countries (such as Volkswagen, Adenauer and Ebert in Germany or Toyota, Nippon and Sasakawa in Japan) I do not mean to denigrate in anyway their important contributions.

Direct Grantmaking by US Foundations in China has evolved over the past 100 or so years – 3 broad periods

(1) Pre-1950 – Rockefeller Foundation (public health and higher education – physics bldg at Nankai University), China Medical Board (Peking Union Medical College), Harvard Yanching Insitute (six Christian universities during 1930’s and 40’s )

(2) 1950-1978 – support to  major centers of  Chinese studies in US, UK, Australia, HK, India, Taiwan + library collections, pre- and post-doc research.  In mid 1970s efforts toward normalization of relations (National Committee on US-China Relations, CSCPR (initial exchanges)

(3) 1979-2009 – As China began to reform and opening to the non-communist world, US foundations began tentative explorations to see what they might do.  Ford Foundation (FF) and The Asia Foundation were among the first to put their toe in the water or, like Deng Xiaoping, to search for the stones to cross the stream.  Others followed and the field has continued to evolve.

Since 1979, 3 successive stages using Ford Foundation (FF) as an example:

- 1979 special appropriation of $200k. Mutual access and understanding (China Academy of Social Sciences, The Committee on Scholarly Communication with The People’s Republic of China, US-China Arts Exchange Center, Winrock International) visits, conferences, workshops

- Early 1980s, shift from exchanges to capacity building in three fields – economics education and research (Harvard Professor Dwight Perkins was involved), law and legal reform (Harvard Professor Bill Alford was involved), and international relations including area studies. These fields were ones that were important to China’s reform and opening, in which FF had experience elsewhere, and could be managed by a part-time program officer working from NY and using joint committees for decision making.

Enabled FF to broadened institutional connections beyond CASS and CAAS to include leading universities, State Council and/or ministry related research institutes. Also enabled FF, the case of area studies, to expand its geographic reach beyond US to include Africa, Middle East, LA.

- 1988 with the opening of the office in Beijing, three Program Officers plus the Rep on the ground – new programs in poor area development, RHP, and higher education &community colleges; greater outreach within China; broader range of institutions GONGOs and NGOs. Direct Grantmaking by US Foundations in China has grown significantly in recent years.

Statistics: Indebted to Foundation Center – Interactive map of direct grants by US grantmakers to non-US recipients (2003-09). During the period 2003-9 US foundations grants to Chinese recipients increased from $26m in 2003 to a peak of $58m in 2007, then declined to $40m in 2008 and to only $5m so far in 2009 (presumably reflecting primarily the state of the US economy). The number of grants has ranged from a low of 176 in 2004 to a high of 364 in2006. The number of recipients has ranged from 161 in 2003 to 260 in 2004 and to some 200 in each of the past three years. Unfortunately, for our purposes, the IFC data does not total the number of US  grantors.)

Y            $        G       R

2003 26m 286 161

2004 30m 176 260

2005 36m 252 137

2006 40m 364 202

2007 58m 322 192

2008 40m 322 192

2009 5m 33 24

Nature of Grantmaking since 1979 (as indicated earlier) has changed in 3 significant ways:

   1. Increasingly diverse range of recipients: National to provincial, urban/rural, ministries, research institutes, universities, ministries, GONGOs and NGOs
   2. Growing number of grantors: private foundations (FF, TAF plus Trace, Energy, Gates, Clinton + diaspora Cyrus Tang); corporate (Intel, Caterpillar, Eastman Kodak, Merck, Agilent Technology, GE, UPS, BP)
   3. Broader range of issues: environment, poverty alleviation, children’s and women’s rights, legal aid, RHP

Why the Changes?

In US

    * Growth in US economy, increased foundation endowments and in wealth of diaspora
    * Major new foundations
    * Energy, Gates and Clinton- Greater societal engagement with China – governmental, academic, commercial, nonprofits
    * Increasing appreciation of China’s growing international importance

In China

    * Reform and opening. Shift from all embracing party-state. Disaggregation
    * Changing roles and responsibilities vertically and among different sectors of society. Big Government, small Society to big Society, small Government. Greater space for NGOs. Tensions: reform vs. control. Relaxation vs. restriction. Cyclical vs. secular
    * Evolution in fiscal and regulatory framework governing nonprofits and foreign foundations 1999, 2004 regs
    * Growth in local NGOs, emergence of intermediary organizations, and now private foundations.Looking ahead

Six Challenges Facing US Grantmakers in China (half full vs. half empty)

(1) Still undeveloped legal and regulatory framework for the NPOs including foundations. Framework continues to evolve, with the timing and specific outcomes difficult to predict. Various laws and regulations beginning with 1989 Law on Registration of Civil Organizations, with primary objective of restriction and control. More are in the works.  Ministry of Civil Affairs (MOCA) is promoting a Charity Law. Others prefer a foundation law for public welfare, and still others argue for a basic NPO law.   Latest estimate is that draft Charity Law will go from the drafting committee to MOCA in June, from MOCA to SC LAO in July, and to NPCs sometime in the indefinite future. Lack of clarity makes both outside funders and local NGOs uneasy and less active than they might otherwise be.

(2) Achieving scale – linking local with national – is as difficult in China as it is elsewhere. National government has limited ability to assure its policies are implemented at provincial level and below. Challenge for those seeking national impact is embody local experimentation locally within an institutional framework capable of extending the lessons learned.

(3) Local civil society still relatively weak, but the number of registered and non-registered NPOs continues to grow rapidly. Up to 400,000 civil organizations (independent social organizations, foundations, and private nonprofit enterprises) are now said to be registered with MOCA, others with bureaus of commerce and industry, and with some 2 million still unregistered.

Growth reflects increasing recognition that government no longer has all the resources – human and financial – to meet China’s rapidly changing needs. Growth also reflects the lessons learned from crises such as SARS and AIDS. The combination has markedly increased the space of nongovernmental activity.  Has also led MOCA to be active in encouraging growth in the NPOs.  Local NPOs are finding it easier to register and some are now receiving government support for local service delivery in fields such as AIDS and poverty alleviation.

A part of this environment is the recent and rapid growth in the number of Chinese private foundations. Since the 2004 foundation law was passed, some 1531 are said to have registered including some 500 at the national level.  Increased wealth generally and the Sichuan Earthquake in particular help to explain the increase.  Potential for further growth in private foundations is huge; only 1-2% of private individuals who could afford to do so have set up private foundations.  The 2004 law also permitted foreign foundations to register and several of the largest, Gates and Clinton, have recently opened offices in Beijing, and other such as MacArthur have been exploring that possibility.

(4) Coordination among funding bodies (foreign and domestic) is generally lacking; more information exchange is needed as is greater transparency and accountability. Also need to foster ties between groups in China and counterparts elsewhere in Asia and the West.

(5) More attention is needed to developing indigenous support for the NPOs. The future of the sector will increasingly depend – not on foreign governments or foundations – but on funding from within China. This argues for more attention to the generic needs of the sector (a more supportive fiscal and regulatory framework, accounting of contribution of the sector by Center Statistical Office, encouraging public interest and attention, support for intermediaries – training, representation in policy making circles, facilitating exchange of experience – and greater transparency and accountability).  These activities have received relatively little attention from US grantmakers, which prefer to focus on particular sectors or problems.

(6)Finally, need for humility. Grantmakers may sometimes be a necessary but rarely, if even, a sufficient condition for something of significance happening.  Foundations are fortunate if given the opportunity to be associated with activities that improve human welfare, but the outcome – and the credit –belongs primarily to the grantees. Foundations need to be modest about successes as well as failures.