Introduction

Given that the concept of trusts originated in the UK and is not widely known in China, charitable trusts (a particular kind of trust) are unfamiliar to many Chinese inhabitants – though awareness has grown in recent years.

Before Alibaba Group went public on the New York Stock Exchange in 2014, its two co-founders – Jack Ma and Joe Tsai – decided to establish private charitable trusts funded by their share options (about 2% of the company’s equity). The total value of these trust funds was around $3bn at the end of 2014.

Unfortunately, because of the lack of a blueprint for charitable trusts in mainland China, Jack Ma arranged this fund as an offshore trust and as a result was accused of trying to hide his money overseas. However, there is hope that such problems could become a thing of the past. On 8 April, a discussion among scholars and experts was organised by Professor Jin from the law school at Peking University with the aim of drafting the ‘Shenzhen Interim Regulation of Charitable Trust Management’. Although this is just one step towards local legislation, it is an important one in the development of charitable trust legislation in China.

Advantages of charitable trusts

Advantages of charitable trusts

The charitable trust was written into national law as far back as 2001 with the ‘Trust Law of the People's Republic of China’. Within this, trusts were defined according to three distinct types: civil, commercial and charitable. But while the trust law received much praise, it did not result in significant development of domestic charitable trusts.

According to a report on the development of the China trust industry, at the end of 2013 the total value of the 39 existing charitable trusts was RMB12.9bn, accounting for only 1% of domestic trust assets[1].

Apart from the relative lack of trust law (see below), a further factor hindering the development of charitable trusts is the belief among some that the existing foundation set-up is sufficient to develop charity in China, making the introduction of charitable trusts superfluous.

However, charitable trusts have unquestionable advantages over foundations. First, charitable trusts have a lower capital and legal threshold. In China, starting funds for national and local foundations are required to be in excess of RMB8m and RMB4m respectively. But there is no minimum funding requirement for charitable trusts.

Second, there is no restriction on the percentage of funds in a charitable trust that may be used for fundraising purposes and to ensure sustainability. Yet for public foundations Chinese law requires that annual expenditure on charity should be no less than 70% of last year’s total income and no less than 8% of last year’s fund value for private foundations. Such requirements mean that foundations have to add funds continuously to prevent shortages. Without such limits, charitable trusts can not only expand the funding pool continuously, but can also make use of funds to run charitable projects flexibly.

Third, charitable trusts can offer relatively low administrative costs, flexible operating mechanisms, transparent governance, professional management, and the separation of capital management and charitable projects. Moreover, the stability and safety of the charitable trust model means they are less likely to fold due to unforeseen circumstances.

Because of these advantages, charitable trusts have long been a dominant structure in philanthropy in foreign countries. In establishing his private charitable trust, Jack Ma referenced examples such as those set up by Bill Gates, Warren Buffett and Michael Bloomberg.

Challenges of trust law in China

Challenges of trust law in China

Although charitable trusts were provided with a legal framework 14 years ago, practices have evolved slowly because of a lack of infrastructure and basic legislative framework.

Besides a general lack of awareness, the development of charitable trusts in China faces three main hurdles under current trust law.

1. The regulatory agency of a charitable trust is ambiguous. China trust law currently requires that charitable trusts with different areas of focus come under the regulatory remit of different government departments, such as the Ministry of Civil Affairs, Ministry of Environmental Protection, Ministry of Forestry and Ministry of Education. That makes approval and regulation complicated (and creates inefficiencies) for charitable trusts involved in more than one area of philanthropy.

2. Current trust law in China lacks relevant tax law to support it. According to foundation regulations in China, donating to foundations is tax deductible, with foundation’s donation income free from income tax. By contrast, charitable trusts have no preferential tax treatment. Moreover, there is a problem of double taxation among the principal, trustee and beneficiary. In countries where trust law is more developed, there are tax deductions and exemptions relating to the assets and income of charitable trusts.

3. The starting assets of charitable trusts must be cash, with no allowance in current legislation for placing bonds or stocks into trust. Yet there are many entrepreneurs for whom the creation of a charitable trust funded by stocks as starting assets would be beneficial. Current law requires them to sell the stocks and place the resulting cash into trust.

Without some revision of current trust law, charitable trusts in China may struggle to gain traction.

History

History of philanthropy in China

Informal philanthropy in China has existed for centuries within communities where extended families would care for the poor within their own clans. Organised philanthropy in China can be traced back to 400 BC, when the nobility began to set up funds specifically to support local students in their education. 

From that point until the Han dynasty (206 BC-220 AD), a major period of philanthropic activity unfolded, with an emphasis on disaster relief in the aftermath of frequent natural disasters, such as famines and floods[2].

Religious giving increased with the popularity of Buddhism during the late Western Han dynasty (206 BC-9AD). People donated money and goods to temples, which provided disaster relief and health care. During the Tang and Song dynasties (618-1279 AD), private philanthropy grew independently of Buddhism, and the elite class provided relief for the poor on a large scale.

During the Ming and Qing dynasties (136-1912 AD), Chinese philanthropy experienced a period of dramatic growth. Charitable activities were carried out not just by the elite but also by other classes such as merchants. These activities were no longer limited to disaster relief and health care, but expanded into almost every field of social welfare.

In the first half of the 20th century, the number of relief agencies grew quickly, influenced by foreign ideas of philanthropy. By 1948, over 4,000 relief agencies were in operation across China, nearly half of them privately funded.

However, during the period of the Communist Party’s centrally planned system, private philanthropy virtually disappeared as the government took over and reformed most private charities. After key reforms in 1978, the environment for private philanthropy became more hospitable. In the past two decades, the government has encouraged private philanthropic support for social needs, and expressed support for philanthropy as an important part of the social security system. 

Today, government support for non-governmental organisations (NGOs) is primarily devoted to education and public & societal benefit organisations, including poverty relief. In 2004, the government passed regulation allowing individuals and corporations to establish foundations. As a result, the number of private foundations in China has risen rapidly from a few hundred prior to 2005 to over 1,700 by 2013[3].

The Chinese government is directly involved in many charitable ventures at all levels, and often directs philanthropy towards specific areas. More than 200 local governments have established their own charity federations, which raise funds for philanthropic purposes. Sometimes referred to as government-organised NGOs (GONGOs), these organisations are affiliated with the national China Charity Federation. This organisational structure is similar to that of the Red Cross, which has a national headquarters as well as affiliated organisations in various provinces and cities.

Chinese donors are motivated by a variety of factors. Clan philanthropy is still prevalent, particularly in rural areas. If a wealthy person was raised in a small village, their first priority when giving to charity will naturally be their home community. As a result, many donors fund infrastructure or school-related projects in these areas.

 

[2]  L. Meng and X. Wang, ‘Introduction to Philanthropic Efforts in China’, 2008, from Peking University Press.

[3] X. Feng, ‘China’s Charitable Foundations: Development and Policy-related Issues’, October 2013, Stanford Centre for International Development