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)

Nonprofit Law Prof Blog commented on this report saying that  ”the increasing assertiveness of advocacy groups in pushing China’s government to follow its own rules and account to the public for its actions. Such confrontations may become more common as China seeks to expand its cooperation with NGOs in alleviating poverty, stemming the spread of AIDS and halting environmental degradation.”

In one of Beijing’s oldest neighborhoods, a citizen-activist group with five full-time employees is challenging China’s powerful Ministry of Foreign Affairs over its plans for a historic residence the government owns.

Beijing Cultural Heritage Protection Center says the ministry may be violating national preservation regulations by renovating parts of the 19th century property – about 2.5 acres, of courtyards and classical gardens of bamboo groves, rock formations, ponds and pavilions. In November, the Foreign Ministry said it would restore the property to remove “safety threats” and eventually open it for public visits. The Ministry has not submitted its plans to preservation authorities for approval yet, and the center has received conflicting responses from other government departments, so it has continued its campaign.

“NGOs help the government solve a lot of problems,” said Kang Xiaoguang, head of a research center at Renmin University in Beijing dedicated to the study of nonprofit groups in China. The groups also “have begun to challenge government policies and its administrative processes more and more.”

The shift is part of China’s transition from a socialist system centered on an all-powerful state to a market economy in which even the government must obey the law. Now, citizens have far more personal freedom and choice, and the government no longer provides many social guarantees such as lifetime employment and universal health care, leaving gaps that private groups can help fill.

The China Statistical Yearbook counted 386,916 NGOs at the end of 2007, without defining what the category encompasses. Kang said most are small, underfunded or dependent on the government for money. So far, they are much more prominent in service roles that support official policy aims than as gadflies or checks on power.

Chris Spohr, an economist based in Beijing for the Asian Development Bank, helped pilot the first program in China that allowed NGOs to bid competitively to run poverty-alleviation programs for the state. He says some people in government want to expand the initiative, because partnering with nonprofits produces better results and greater participation by the intended recipients – and also saves money.

While this has encouraged officials to support the expansion of citizens’ organizations, they have not welcomed groups that delve into what they deem sensitive topics or that they feel are too critical or otherwise threaten their legitimacy. “We know the government likes our services but not our advocacy, so it’s a contradiction,” said Wan Yanhai, director of Aizhixing Institute, a nonprofit AIDS and human rights organization in Beijing. He was detained for three days in 2006 and forced to cancel a forum on blood safety that touched on compensation for people infected with AIDS through transfusions. He said many citizen groups do not push the government, for fear of having their funding or projects shut down.

Aizhixing, which had a program budget of 6 million yuan, or $878,000, last year, provides health training and education and is introducing rapid testing of people at risk for AIDS. The institute also offers legal services that challenge the government, such as protesting abusive police treatment of drug users. Its push for greater privacy of health information for job applicants was reflected in a labor-contract law that went into effect last year. It also issued requests for release of policy information from five agencies – and got responses from all of them. “That’s a big change,” Wan said. He said activist groups like his are preparing the way for a different kind of government – based on law – that is more transparent and responsive.

“NGOs will eventually push democratic change,” he said. “Whatever the Chinese government thinks about that, it will happen eventually.”

(Original link: http://www.nytimes.com/2009/01/13/world/asia/13iht-letter.1.19312617.html)

Creating an environment for China’s civil society organizations (“CSOs”)2 that will be more empowering has never been unimportant, but is especially so now—after the Paralympic Games in September, the Olympic Games in August, and the Sichuan Earthquake in May.3   The questions of what legal/regulatory changes would be beneficial for such organizations, those who volunteer for them, and those who donate to them are especially significant after the Sichuan Earthquake of May 12, 2008.   Problems with the harnessing of human and financial resources for disaster relief once again attracted the attention of millions of Chinese citizens and its increasingly aware “netizens” at the time of the earthquake.4    Issues about volunteers and the regulations that govern them also have resonance in  connection with the Olympics and Paralympics, which brought thousands of volunteers from all over China to Beijing.  Legal questions around the status of CSOs and their relationship with the party-state must be dealt with if China is going to be able to address the social and economic needs of its people in the twenty-first Century.  While the state has increasingly viewed CSOs as important partners in meeting societal needs since the reforms to modernize and downsize government in the 1990s, the relationship must mature in order to achieve more successful outcomes.   This Article proposes an integrated approach to creating more space for civil society in China.  It thus addresses the legal changes that will be necessary to attain Yan Mingfu’s vision of a more cooperative state-civil society relationship within a foreseeable time frame.
…
This Article will address the following topics with regard to the regulation of civil society in China:
•    Making the existing regulations for social organizations (shehui tuanti, “SOs”), nonprofit non- commercial entities (minban fei qiye danwe, “NCEs”), 12   and foundations (jijin hui)13   more user-friendly, including making it possible for de facto networks that provide and coordinate disaster relief to be recognized, perhaps as semi-legal entities for a short period of time.14  …
•    Making public fund-raising easier for small and medium-sized CSOs.  Although the amount donated to charity increased in 2007,16  the new tax rule permitting all certified charities to receive  donations  has  not  been  implemented. 17    In  addition,  the  provision  giving  the government a leading role in fundraising for national emergencies should be removed from the Public Welfare Donations Law (“PWDL”).18
•    Passing the Charity (cishan) Law to coordinate the development of the law governing public benefit organizations and begin the process of privatizing charity in China.   …
•    Relaxing the controls on volunteering. While the current municipal rules may work well with regard to a planned event such as the Olympics, they impede the development of volunteer networks at times of national disasters.

(For the complete paper, please click the link below. See page 60-89.

This essay is from INTERNATIONAL JOURNAL OF CIVIL SOCIETY LAW,  Vol VII Issue II, April 2009.)

This workshop is right in time in China, as the need for micro-finance services in China’s vast rural areas is ever greater during the current economic situation, and the recent promulgation of relevant policies has boosted the number of businesses and organizations in the micro-finance field.

The recent policy changes opened up new space for micro-finance services in China. At the end of 2007, the China Banking Regulatory Commission (CBRC) lowered the threshold for financial institutions to do business in the rural areas, allowing investments to go into village and town level banks, loan institutions, and village co-operatives. Later, the government unveiled a policy to encourage experimenting with micro-finance services in a number of regions in China.

Microcredit organizations offer a new path for securing credit for China’s vast low-income rural populations, breaking through the funds bottleneck that small and medium enterprises have encountered, especially in the current economic situation.

With the support and encouragement of local governments, various micro-credit institutions are sprouting up across China. According to an interview with Liu Kegu, a member of the Chinese People’s Political Consultative Conference (CPPCC) and former vice president of the China Development Bank, China’s micro-finance falls into four categories:

1. Rural community micro-credit projects that have been initiatives and supported by China Foundation for Poverty Alleviation since 1996. The program covered 26 poverty-struck counties in 11 provinces, serving over 28,000 families in rural China with up to 300 million RMB of investment.

2. A Indonesian farmer+merchant model implemented by China Postal Service Bank piloted since 2007 with over 37 billion RMB’s investment.

3. A European “capital+technology” model piloted by China National Development Bank since end of 2005 in 12 mid-level cities, with a total investment of over 4.6 billion RMB.

4. Micro-credit companies supported by China’s People’s Bank and capital-cooperatives piloted by CBRC since two years ago, with a total investment of over four billion RMB.

China’s microcredit organizations face a series of problems, including controlling risk, technology to manage loans, securing follow up funds, and regulation.

The Second Grassroots Finance Forum and Microcredit Organizations Training Workshop is designed to increase the overall quality and professional skills of microcredit organization employees, aid microcredit organizations to steadily operate in credit markets and achieve sustainable development.

(Translated and edited by Peiting Li and Xing based on the following Chinese-language articles http://www.cgjr.org/Article/2009-04-18/20090418234503_1024.shtml and http://www.cgjr.org/Article/2009-04-10/20090410120959_1013.shtml).