Why Has Philanthropy Failed to Take off in China?

Last month, when Bill Gates challenged China’s rich to embrace philanthropy rather than just spend money on luxury goods, he implied a philanthropy gap existed between China and the United States. In 2013,  China’s top 100 philanthropists gave away a mere $890 million, which is less than what Mark Zuckerberg and his wife donated last year. Total charitable donations in China were $13.2 billion in 2012, or 4 percent of all U.S. donations.  The gap has also manifested itself in the number of philanthropic foundations. China had only 2,961 such foundations in 2012, which is less than 3 percent of the U.S. total.

This does not necessarily mean that Chinese lacks basic generosity. In response to the devastating Sichuan earthquake in 2008, total charitable donations that year reached over 100 billion RMB, a 380 percent increase over the previous year. A major natural disaster could trigger a groundswell of support from tens of millions of Chinese people from all walks of life. But compared to such reactive, spontaneous efforts, conscious, voluntary action for the public good has not yet become integral part of people’s lives. Unlike gambling, giving does not seem to be in Chinese genes. A government official told me last week that a billionaire in his locality refused to donate 50,000 RMB ($8,100) a year to the local charity fund but had no problem of losing the same amount in a night-long gambling.

The languid growth of China’s philanthropic sector also points to growing pains in China’s civil society building, which continues to suffer from lack of transparency and accountability.  According to an official report, only 30 percent of registered charities in China meet basic international standards for transparency and disclosure. This is compounded by the society’s discrimination against charity work. When charity icon Yao Li launched the country’s first charity vocational school for the children of migrant workers in 2004, she was viewed as a swindler. People not only questioned her motives, but also could not understand why charities should operate with any overhead and why volunteers should be offered any stipend (however small) for doing charity work. The Chinese public overall does not support foundations outsourcing service implementation to NGOs—a nationwide survey in 2013 found that only 1.5 percent of the Chinese foundations had funded grassroots NGOs. Beginning in 2011, a string of scandals among recipients of charitable funds further undermined the credibility of Chinese charitable organizations.  Charitable donations in that year nose-dived to 84.5 billion RMB and have never returned to the 2010 level.  Not surprisingly, China’s philanthropic sector continues to face a social capital (i.e., trust) deficit.

Philanthropy in China has also stagnated over the years because of an unfriendly political and policy environment. In order to register as a not-for-profit organization (NPOs), an NGO (or a “social organization” as it is known in China) has to be affiliated with a professional agency that has jurisdiction over the former’s sphere of activity.  This is by no means easy—in fact, a Beijing based NGO focusing on providing support to Leukemia patients did not find an agency willing to oversee it until after the intervention of a Politburo member. Those who cannot find a host agency have to register as a for-profit organization and thus have to pay enterprise income tax. But those who do find one will lose their autonomy in fund management. When Jet Li’s One Foundation was affiliated with Red Cross Society of China, for example, the latter not only managed the funds raised by the Foundation, but could also extract overhead from its expense.

In addition, a two million RMB initial fund ($330,000) is required for the establishment of a local private foundation (20 million RMB for a national private foundation), which disqualifies a large number of NGOs that cannot meet the requirements. Unlike public foundations, private foundations are not allowed to engage in public fundraising. While, in theory, donations to foundations are tax exempt, in reality, it is the government taxation, fiscal and civil authorities that determine whether a legal NPO is exempt from income tax. The lack of interagency coordination means that few private foundations have tax exempt status, which only dampens the enthusiasm of potential donors. In short, the government policy on registration and taxation has seriously constrained the growth of China’s philanthropic sector.

In recognition of the need for policy change, the National People’s Congress is reviewing several versions of a new charity law. Stalled for years, the new law, if passed, will clarify charities’ legal status and finally address tax deductions for donations, thus pave the way for a takeoff in Chinese philanthropy.