Asia Catalyst

[COMMENTARY] China's New Nonprofit Regulations: Season of Instability

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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.

(Though rumor has it that it may be possible to get the contract notarized at your local Chinese consulate office overseas. We haven't heard yet if anyone has been successful in getting this done. If you or someone you know has done so, please share the news with an email or a comment.)

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.  (A quick flashback: In 1992, while studying Chinese language in Tianjin, I remember going to the Bank of China to change a traveler's check. The procedure required the check to be stamped by 10 different tellers, and when it got halfway around the row of desks, lunch break commenced and all the bank tellers immediately plopped their heads down on their desks and went to sleep. Things have progressed quite a bit with Chinese banking since then, but there are moments when it still feels a little like 1992...if not 1984.)

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.

Meanwhile, foreign NGOs are facing an even tougher assault by the new regulations in Yunnan. These have so far largely been ignored by foreign media -- but they do merit a quick look.

 Yunnan: Shape of Things to Come?

Yunnan Province has long been a haven for innovation, experimentation, and some would say, plain old borderland weirdness. It's an impoverished province on China's borders with Burma, Laos and Vietnam, home to towering mountains, lumbering elephants, diverse ethnic minorities, heroin, sex, weapons, human trafficking, and a lot of foreign NGOs.

For years, foreign NGOs have been drawn like magnets to Yunnan, where the weather is fine, the food delightful, the expat bars copious, and where the government takes a relatively tolerant, hands-off view of foreign groups. The national government has also apparently regarded Yunnan as a kind of policy laboratory, where new and experimental approaches to social issues could be tried out, before deciding whether or not to "scale up" to other parts of the country.

Those halcyon days of experimentation may be over, however - or alternatively, we may be seeing a new kind of experimentation by Beijing in tighter regulation of foreign NGOs, with the promulgation of sweeping new provincial regulations on INGO governance. According to these new rules, any foreign NGO aiming to "enter the province" (presumably "enter" means to open an office) will now need to apply for approval by the Civil Affairs Department.

In other words - foreign NGOs are now required to become GONGOs in Yunnan. If this approach is fully implemented in Yunnan, and then scaled up to other parts of China, the result will be the end of independent foreign NGOs in China. Will INGOs, the UN and international donors cry out in protest before that happens?

Or will they put their heads in the sand and wait until the disaster reaches them?

Why Now?

Many people ask why China is tightening its monitoring and control of independent NGOs now. Given the lack of transparency at the policy-making level, that's hard to answer definitively. But looking back at the recent past, we can remember the nationwide clampdown by authorities on the NGO sector in preparation for the 2008 Beijing Olympics. The international response to this crackdown was muted, and the Olympics went off without a hitch. The UN didn't take a strong stand, Bush went to the Olympics, international donors didn't pull out, and there was really no cost. So really, why not continue the restrictions?

Growing internal social pressures, and the leadership role played by foreign-funded NGOs in the color revolutions, are no doubt making some authorities anxious about what might happen if NGOs get stronger in China. Unfortunately, cracking down on NGOs is not the solution to preserving social stability.

If China limits the growth and functionality of NGOs while also cracking down on rural petitioners and keeping the legal system weak, the state will leave unhappy rural people with no safe outlet for their frustrations. Cracking down on NGOs, weakening civil society, and eliminating "loyal opposition" organizations such as Aizhixing, Gongmeng and Yirenping, will only speed and widen the cycle of instability in China.

Bringing NGOs into the fold, soliciting their policy recommendations, and strengthening their ability to self-govern, could help to shield the Communist Party leadership from further unrest. International experience shows that the best way to render grassroots, independent NGOs toothless is to fund them and put them on the government payroll...but that seems unlikely to happen in this season of instability.

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

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