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 )

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“.

Nongovernmental organizations (NGOs) committed to fighting HIV/AIDS in China will soon get legal status to operate, as the government is considering legally recognizing these organizations, experts close to the situation said.

These efforts will help the fight against AIDS, said Shen Jie, secretary general of the government-backed Chinese Association of AIDS and STD Prevention and Control, on the eve of World AIDS Day.

“If realized, that will not only facilitate the work of these organizations but also give a long-term boost to China’s anti-HIV/AIDS efforts,” Shen said.

China has 740,000 people living with HIV, with another 50 million facing high risk, she told China Daily yesterday.

Currently, more than 400 NGOs are working in this field nationwide. The majority operates unregistered, which makes fund-raising and operations more difficult, experts say.

“But they actually play an important role in fighting AIDS and have an advantage over the government in reaching out to vulnerable groups like sex workers and men having sex with men,” said Michel Sidibe, executive director of UNAIDS.

Sun Weilin, director of the Social Organization Registration Bureau of the Ministry of Civil Affairs, said the ministry is revising the current law on social organization registration, issued in the late 1990s, to adapt to the changing landscape and the new development of China’s civic groups and NGOs. He conceded the current law is outdated.

With legal status, these organizations would have a better work environment and the ability to develop in a sustainable way, she said.

Administrative expenses would also be saved by the health departments and other organizations like the Centers for Disease Control, she noted.

Currently, NGOs have to be a subsidiary of legal groups like the CDC to have a bank account and operate.

“Working as a subsidiary, we NGOs feel inferior and always at the beck and call of others,” said Bailaoshi, who heads an NGO based in Beijing supporting HIV/AIDS sufferers.

However, to better work with the government in the fight against AIDS, NGOs need to constantly enhance their working capacity, Shen said.

The government’s work with the NGOs would also include constant financial support and policies that give benefits to NGOs and training, she said.

Yesterday, President Hu Jintao visited anti-HIV/AIDS volunteers in Beijing, one day before the annual World AIDS Day.

President Hu said China is still facing a tough task in HIV/AIDS prevention and control and called for constant efforts against that.

The last official estimation puts China’s HIV positive population at 740,000. But another 50 million are at high risk from the disease.

Li Xinzhu contributed to the story

(China Daily 12/01/2009 page5)

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)

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.)

The birth of Friends of Nature mirrored the then policy environment for China grassroots organizations. Ministry of Civil Affairs registers civil organizations, which have a government agency acting as the sponsor. When Liang Congjie, the founder, came to the Ministry of Environment Protection with the drafted charter and regulation for an organization called “Friends of the Nature”, to ask for a sponsorship, he was told that the group’s name has to be called an association or society, and each ministry can only sponsor one association or society in each field. Since the Ministry has already sponsored the China Environmental Science Society, it could not provide sponsorship to another organization.

Then Liang and his friends tried the Environment Protection Bureau of the Beijing Municipal Government, the China Association of Science and Technology or even the Chinese People’s Political Consultation Committee, but without any results.

Finally they learned that the social groups that have been sponsor by the government can host subsidiary organization. Liang was working at the China Culture Academy sponsored by the Ministry of Cultural Affairs (MCA). He in the end came to the MCA asking to establish a “Green Culture” subsidiary of the China Culture Academy. His request was approved. Then with the approval of the MCA, he registered his organization as the “Green Culture”, a subsidiary of China Culture Academy.

Another grassroots organization, the Maple Women’s Psychological Counseling Center Beijing was not as lucky. Because it could not find a government sponsor, it had to register as a business. It is estimated that grassroots organizations like this are up to 800,000 to one million in China.

After setting up, the organizations then have the challenges of lacking talents, lacking funding, and lacking resources. At the beginning, there was very little government service procurement, very little recognition from the corporate world. The only resources are funding from foreign philanthropy and agencies.

Today, with the evolution of China’s philanthropy, the funding for grassroots organization is getting diversified. There were increasing number of foundations, public and private, seeking bids for projects; the government and corporations are procuring more services. International support is no longer the sole source of funding.

In addition, with the development the civil society in China, the public philanthropic awareness is getting enhanced. One of the symbol is volunteerism. The snow disaster in early 2008, the May 12 earth quake, and Olympic Games in Beijing have stimulated the spirit of giving as volunteers among the Chinese people. Volunteers for the Olympics exceeded 1 million, and volunteers for the earth quake relief exceed 3 million.

Statistics

By June 2008, there are 386,000 registered social organizations, among which social groups are 211,000, grassroots non-business organization 174,000, foundations over 1400, with the annual growth rate of 40% since 1998. Organizations at the county level and below account for 60% of the total. In terms of geographic distribution, over 45% concentrated in the nine eastern provinces and municipalities.

(Translated and edited by Xing according to an article by Song Yang at
http://www.gongyishibao.com/csdh/gongminshehui.html )