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April 30, 2019

Business, Charity, or Something Else?

How Do Social Enterprise Models Fit into Legal and Social Conceptions of ‘Charity’ in China?

Around the world, the concept of “social enterprise” has blurred the line between doing business and doing good. Social enterprise seeks to combine traditional for-profit business practices with products or services that primarily aim to benefit the public. In many countries, these social enterprise organizations occupy a legal gray area, not fitting neatly into binary non-profit or for-profit regulatory categories. In China, given the Chinese Communist Party’s increasingly tight controls over all aspects of society, this gray area is all the more noticeable. This raises the question: As China’s philanthropic sector continues its rapid growth—and as Chinese society continues to develop new expectations regarding what services the government should or shouldn’t provide—how will such hybrid organizations fit into the People’s Republic of China’s (P.R.C.’s) regulatory landscape?

Social Enterprise in the Global and Chinese Contexts

Social enterprise is a challenge for legal frameworks throughout the world because these hybrid organizations are not clearly either for-profit or nonprofit, confounding the tax regulations, management structures, and funding restrictions that are typically based on this distinction. (In this article, “social enterprise” is used as a descriptive, rather than a legal, term.) Furthermore, the rise of social enterprise is strongly linked to technological innovation, which law has historically lagged behind.

In free markets with open civil societies, the designation or claim of being a social enterprise inserts a transparency and accountability function into a business and allows more freedom and creativity to the social benefit aspects of the organization. But in China, where the Chinese Communist Party seeks obedience and loyalty from all sectors—including civil society and business—it is hard to imagine that government regulation would not temper the freedom and creativity that social enterprise enjoys elsewhere.

The social enterprise environment is also different in China because of uncertainty surrounding fundamental concepts related to public interest work. The P.R.C. passed its landmark Charity Law in 2016, yet the law failed to clearly define several key terms, such as “public interest” and “charitable.” This has created a potential disconnect between what kinds of organizations may register under the law as charities and what activities society considers “charitable,” leaving individuals to carve out their own understandings of these terms. Some legal scholars even insist that “public interest” and “charity” are synonymous in the law. In the social enterprise context, this ambiguity is exacerbated. For example, some municipalities, including Beijing, have begun offering certification methods and incentives to encourage social enterprise, and these standards use the same unclear and ill-defined terms as the Charity Law, or even broader terms that do not require a per se “charitable” purpose, but only one that benefits the “social good,” “social welfare,” or “public interest.”

Yet, despite all the legal uncertainty, social enterprises are already solving social problems in China. To better understand how this novel service delivery model might function in the Chinese context going forward, this article analyzes one type of social enterprise known as a “mutual aid health community,” looking at how it fits into existing legal structures and citizens’ concepts of business or charity work. Might the Chinese government consider requiring particular social enterprises to register under the Charity Law, allowing for more formal government regulation and oversight? Will the model survive under ordinary business regulations? Or might a separate oversight framework be more apropos?

This research is based on a series of conversations, interviews, surveys, and discussions conducted between June 2017 and July 2018 among the author and Chinese lawyers, law students, and nonprofit practitioners.

Case Study: “Huzhu” Mutual-Aid Health Communities

China has a system of universal healthcare, but rising healthcare costs, lack of physical access, and unaffordable insurance plans mean that many citizens do not have functional access to adequate care. Into this void have stepped mutual-aid health communities, which are based on a crowdsourced membership model to help those facing unaffordable medical costs. In Chinese, this model is called “huzhu,” from the Chinese words “huxiang bangzhu” (互相帮助) meaning “to help each other” and often translated as “mutual aid.” Since late 2016, the huzhu model has developed as an alternative or a supplement to health insurance. With monthly membership fees as low as 9 renminbi (about U.S.$1.40), huzhu membership is accessible to almost anyone.

The huzhu model, as a class of organization, could be considered a social enterprise under even the strictest theories created to define this category. One narrow definition of social enterprise limits the customers and beneficiaries to the same class of disadvantaged people who transact directly with the organization. The huzhu model qualifies, as the model’s core purpose is to provide a commercial service to a class of people who are shut out of the ordinary channels (in this case, the insurance market and the ability to afford medical care), and the beneficiaries are transacting directly with the huzhu platform to achieve that aim. Therefore, the social benefit and the commercial enterprise have a symbiotic relationship. Of course, other definitions of social enterprise are much broader: the model must have a public benefit as its primary aim. The huzhu model can readily qualify under such a broad definition.

It is important to note that, though this article analyzes huzhu organizations as social enterprises, many of these organizations themselves do not necessarily self-identify as such. In many jurisdictions, organizations that do self-identify do so largely to take advantage of a particular legal framework, or to cater to a public accustomed to such labels. Instead, most huzhu platforms identify as businesses, largely through listing investors online. At the same time, however, they also tout the social benefits and actual outcomes of disbursing often millions of dollars of funds as reasons to trust the crowdsourcing model as well as the particular platform.

(Screenshot of Water Droplet Huzhu’s homepage)

Water Droplet Mutual Aid (水滴互助) is credited with starting the huzhu trend. Other major platforms include Cancer Fighting Commune, Quark Huzhu Foundation, and Sesame Huzhu. Ant Financial’s Xianghu Bao (相互保) huzhu has recently made headlines for its prerequisite of a good sesame credit score.

Initially, various government actors praised huzhu platforms for providing a practical solution to lack of access to healthcare and plugging the gap in government services. In recognition of the platforms’ rapid development and establishment, the heads of nine major huzhu organizations, government officials, and legal experts met in December 2016 to begin the process of standardizing the market and to implement “self-discipline.”

At that meeting, the huzhu model was described this way:

Mutual aid is not insurance, but rather is a mutual protection mechanism established between homogeneous risk groups. Its main purpose is to use the insurance principle of dispersing risk, and distribute individual risk to thousands of people, and then help each ordinary person receive risk protection from serious illness. Mutual aid programs are not donations. In contrast to the one-way nature of donations, mutual aid emphasizes the equivalence and fairness between the rights and obligations of recipients and donors.

Yet the government later indicated that regulating the huzhu model under China’s Charity Law might be a viable solution, rather than creating new regulations. Furthermore, in the United States, platforms similar to these Chinese models readily qualify as tax-exempt nonprofit organizations, including public charities, under the U.S. tax code. But China’s Charity Law is not designed as a voluntary, opt-in tax law to promote civil society activities with charitable motivation. Rather, the law closely regulates organizations operating in the civil society space and defines their permissible activities.

Is the Huzhu Model a Charity?

To comply with the Charity Law, the huzhu model’s activities must fall under a list of permissible activities.

Under China’s Charity Law

Article 3 of the Charity Law describes public interest activities that qualify as charitable. Under this framework, the huzhu model is a “near miss” in several of the categories, not neatly fitting into one of them:

  1. The first category is “helping the poor and the needy.” The huzhu model does not help only the financially poor, as middle-class citizens also benefit from the platform. As for needy individuals, this term is likely nearly synonymous with “poor,” referring to segments of society that have a particular need, monetary or otherwise, that society can fulfill. The huzhu model might have difficulty being classified as a charity that helps the poor and needy.

  2. The next category is “assisting the elderly, orphans, the ill, the disabled, and providing special care.” The huzhu model does assist the ill, and others listed in this category. The problem is that people register with the platform before they become ill or before they become part of one of these categories. The real beneficiaries of the platform are arguably “ordinary” people, not a particular class of disadvantaged people.

  3. The third category is “alleviating losses incurred by natural disasters, accidents, public health incidents, and other emergencies.” This category may be a viable option for the huzhu model, because it helps those who have incurred losses as the result of accidents and emergencies. Yet, this provision seems to be designed for widespread disaster relief. The huzhu model is not relief from a widespread and public disaster, but rather is relief from more private and personal emergencies. The model covers a broader range of conditions than those listed in this third category.

  4. The fourth category in the Charity Law is for promotion of educational and other causes, which does not apply to the huzhu model.

  5. The fifth category is for environmental hazards, also inapplicable.

  6. There is a sixth catch-all category for “other public interest activities in accordance with this law.” If the government required the huzhu model to register under the Charity Law, the government would have to accept its activities as falling under this category. The government has full discretion to deem the huzhu model a charity under this provision, and it is likely that it might justify the model as a charity under this rationale.

Though the huzhu model does not clearly fit into any one of the Charity Law’s “public interest activities” as outlined above, the government could still classify it as charity and require such organizations to register with the Ministry of Civil Affairs.

If registered under the Charity Law, many of the law’s core provisions would simply be inapplicable to the huzhu model, or expressly conforming would render the model non-viable. For example, the Charity Law focuses on regulating solicitation of donations and registering volunteers. The funding of the huzhu model does not legally qualify as a “donation,” which must be made voluntarily and with no expectation of return. In fact, expectation of return is a main reason for joining the huzhu community. Under the law, the huzhu model would either have to be exempted from the donation restrictions—putting it at a huge regulatory advantage compared to other registered charities—or the membership model would need to be modified so that donors have no expectation of benefitting. Obviously, the model would collapse if that were the case. Legally, regulating social enterprises under the Charity Law seems to cause more problems than it solves.

Societal Notions of Charity

Even if the model were to qualify as a charity under the Charity Law and the regulatory problems were solved, societal acceptance is key to the model’s performance. Based on surveys conducted in July 2017 and 2018, the public has incredibly high standards for what is expected of charities, and is also quite skeptical of nonprofit organizations and their use of funds. In the context of the huzhu model, public acceptance is particularly key to its success. But if operated as charities, would the public be so keen to sign up? It is likely that they would not. This is for several reasons.

First, Chinese citizens generally do not conceptualize health and medical services as charity, outside of their provision during natural disasters and when directed at a particular group with special needs. For example, research and treatment of medical conditions that are widespread and do not target specific classes of people—such as cancer—are not generally viewed as charitable. But research and treatment for rare medical conditions or affecting discrete populations, such as HIV and AIDS, are more accepted as charitable.

Second, the public highly scrutinizes nonprofit organizations, looking for even a hint of profit motive. Whether this is reasonable or fair, or whether it comes from lack of contemplation of how charities might raise funds, it is the reality of public opinion in China. Likewise, the public is skeptical of crowdsourcing platforms because of the likelihood that the funds raised are held for investment and used to create “profit.” Although it is true that these surplus funds may then be used to help those with medical expenses, the public is skeptical of this lack of transparency and infers a profit motive.

As for the huzhu model more specifically, the public views access to medical services as operating very much like for-profit businesses. Even if healthcare was generally conceived of as charitable, the huzhu model does not actually provide healthcare, but rather provides a method for people to obtain funds for healthcare. In addition, the huzhu model is not filling an absolutely essential role. China has a functioning health insurance market, and the huzhu platform fills a gap beyond existing insurance coverage, providing an extra layer of protection.

Third is a more fundamental reason that the huzhu model is likely not accepted as a charity by the public: its membership model. People must join the platform as members and pay a fee in order to participate. A foundational notion of charity—both under the Charity Law and in society—is that the services and donations are freely and voluntarily given with no expectation of return or personal benefit. The huzhu model thus violates that basic concept of charity.

In the end, much of the huzhu model’s current success is due to the trust it has built among its network of members. The transactional nature of the model—“I will help you since you are guaranteed to help me”—leads to a level of trust and transparency. Operated as a charity, however, the platform may cause the public to become skeptical and mistrust it, inferring profit motives. If people opt not to participate, the crowdsourcing model would fail.

What Does This Mean for the Charity Space in China?

The huzhu model is arguably beneficial to society and could easily be considered in the public interest. The authorities have had mixed reactions to it, but they ultimately signaled a modicum of acceptance by continuing to allow it to operate for almost three years, since the rise of huzhu platforms in late 2016. The success of this particular model, however, does not mean that the government will necessarily look favorably upon social enterprises more generally. In fact, fear of mismanagement of assets, pyramid schemes, and outright fraud—especially in light of perceived social benefit—has recently led to regulations on illegal fundraising to more generally curb misuse of online platforms and other models operating in this hybrid space.

The government has shown signs of testing regulation of this field, as seen in the Beijing certification method and mentions of draft regulations in Chengdu, for example. Shanghai, Guangzhou, and Shenzhen are other municipalities ripe for social enterprise governance. It is clear that the government will have much difficulty using the Charity Law to rein in businesses that fill social needs, but it is not clear that separate legal regulations are necessary.

This difficulty mirrors the global experience with social enterprise. A number of legal frameworks are in place in the United States, the United Kingdom, and Belgium, for example, but they vary considerably in name, function, and purpose. Furthermore, these attempted legal solutions are subject to criticism, even by proponents of the social enterprise concept, for creating a legal environment inadequate to foster development while at the same time failing to curb abuses. In China, social enterprise not only exists in an undefined, liminal space between business and charity, but also must navigate a governance system that regulates social activity and civil society in a highly restrictive manner. This makes it even harder to gauge how social enterprises will eventually integrate into China’s public interest landscape.

Will Chinese citizens embrace social enterprise as a trustworthy way to achieve public interest goals through for-profit models? The success of the huzhu model suggests that they will, as long as the organizations are not billed as charities. The public’s general notions of “charity” don’t readily align with social enterprise models, so any attempts to force social enterprises under the Charity Law rubric may lead to greater public disillusionment with charities more generally. Yet, if the sector is left to its own devices, it is quite possible that social enterprises might expand societal notions of “public interest” and “charitable” work. The huzhu model and others are thriving in China, with the potential to help reshape the philanthropic and charity sector—if they are allowed to do so.

Michael Collins provided research assistance.

Portions of this project were originally prepared and presented at the Fifth Annual International Student Public Interest Law Conference in July 2017 at the China University of Politics and Law in Beijing, in collaboration with Zhicheng Public Interest Lawyers, and at the First Chinese Journal of Comparative Law Conference at Xi’an Jiaotong University in June 2018.

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Caitlin E. Schultz is a lawyer and China researcher. She held the 2017 Robert L. Bernstein Fellowship from New York University School of Law, where she earned an L.L.M. in International Legal Studies...