Q&A on the new regulations on capital appreciation for philanthropic organizations

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The “Temporary Regulations on Capital Preservation for the Investment Activities of Philanthropic Organizations” was released on the 25th of October, and it will go into effect in January. The WeChat account 中国社会组织动态 (Chinese social organizations’ trends), which is managed by the Ministry of Civil Affairs’ office for the management of social organizations and provides information on related policies, posted an article with five questions and answers regarding the new policy. We have summarized them below.


  1. What is the significance of the regulation?


Out of the three current regulations related to social organizations, only the Regulations on the Management of Foundations clearly states the concept of capital preservation, but it does not included detailed provisions on how foundations can carry out such activities. In recent years, social organizations, and especially foundations, have faced more demands for capital preservation due to their increasing assets, and the returns on investment due to value preservation and appreciation have become an important source of income. In view of this, the 2016 Charity Law prescribed the basic principles and requirements for social organizations’ capital preservation. This new regulation is meant to follow up on the basic principles of the Charity Law. It specifies the scope and requirements for capital appreciation.


  1. What areas can philanthropic organizations invest in, and what areas are banned?


Philanthropic organizations can invest in three ways. The first way is to purchase asset management products directly from financial institution, which involves banks, trusts, securities, funds and futures. The second way is to make equity investments directly, which includes establishment, mergers and participations. The third way is to entrust property and investment to organizations which are supervised by the financial supervision and regulation department. In addition, there are eight fields in which investment is banned, including buying and selling shares directly, purchasing financial products directly and investing in life insurance products.


  1. How can philanthropic organizations control investment risks? And what kind of liabilities should be accepted?


The investment purposes of philanthropic organizations are different from those of private enterprises, which pursue the highest profits. For such organizations it is most important to minimize investment risks, so they must first of all consider the type of investments and the security of the investment scope. Besides, the regulations require philanthropic organizations to establish a decision-making mechanism when they carry out investments, in order to further control the risks. As for the accepted liabilities, only when investments break the law should the philanthropic organizations accept liabilities.


  1. When conducting investment activities, what are the responsibilities of the staff of philanthropic organizations?


When philanthropic organizations carry out investments, the decision-making body, the actuating body and the supervisory body all have their different responsibilities. The staff of philanthropic organizations are also not allowed to work concurrently in businesses in which their organization invests, or to accept remuneration from them.


  1. What is the specific scope of the “organizations supervised by the financial supervision and regulation departments”?


The regulations state that philanthropic organizations can entrust “organizations that are supervised by the financial supervision and regulation departments” to invest their property. The major domestic financial supervision and regulation departments are the People’s Bank of China, the China Bank Insurance Regulatory Commission and the China Securities Regulatory Commission.