China is banning charity groups from investing directly in a range of assets including stocks, loans, commodities and financial derivatives and instead wants them to use external managers because of their lack of investment expertise.

With the country's relatively young philanthropic sector set to grow as it continues churning out billionaire families and as a different 'socialism with Chinese characteristics' takes root, the Ministry of Civil Affairs released its first set of provisional rules to regulate charity investments.

The new rules published on October 30 become effective on the first day of 2019. They limit charity groups to making indirect investments in most assets except for private equity, and should encourage them to delegate more of their assets to third-party managers.

Although benevolence is a cornerstone of both Confucianist and Buddhist thinking stretching back thousands of years, charitable organisations in Communist China do not have a long history.

So they tend to have limited investment resources with a low appetite for investment risks and mostly focus on fixed income or banking deposits, Tan Ying, China wealth business leader at Mercer, told AsianInvestor.

So the new rules are pre-emptive in some respects, even if the young sector is growing fast off a low base. 

According to a Harvard University/UBS study published last year, donations from the top 100 philanthropists in mainland China more than tripled to $4.6 billion between 2010 and 2016. Other broader estimates put the country's total charitable assets about four times higher. 

As their assets grow, so too will the pressure on charitable organisations to broaden out investments to enhance returns, in line with their super-long investment horizons. 

However, they have to tread carefully because of who they are, so delegating the work to external managers will help to alleviate the burden of asset management on what are, typically, small in-house teams, Tan said.

“Foundations [and other charity groups] enjoy some tax benefits and have a mission of public good. [The authorities] are encouraging the managers of the assets not to engage in risky and speculative behaviour,” Ruth Shapiro, Hong Kong-based chief executive of the Centre for Asian Philanthropy and Society, told AsianInvestor.

The new rules are an extension to the first charity law in China adopted in 2016, she said. The charity law sets out tax incentives for qualifying organisations, new registration procedures, and the rules for donation and volunteer management. 

Charitable group investments are limited to asset management products issued by licensed financial institutions, direct equity investments in entities that are related to the charities' own missions and operations, and qualified asset managers, according to the rules. 

In addition to direct investments in stocks, commodities and derivatives, they cannot invest in life insurance products, provide loans to individuals and corporates under the guise of investments, nor invest in industries not supported by national policies.

INCREASED ASSETS

Against that backdrop, the investable assets of Chinese charitable groups are widely expected to continue growing in proportion to the the wider benevolent sector's continued expansion. 

Total assets held by both public and private foundations rose by a third to $20 billion in China between 2013 and 2017, but of that total the amount available for investment is probably no more than about $2 billion, Shapiro said, citing data from the United Nations Development Programme (UNDP) and China Foundation Center.

That's because most of the money, naturally, has to be put aside for the actual charity programmes and projects. Some monies also cannot be used for investment due to stipulations made in donation agreements, she said, 

Charitable organisations include non-profit organisations, social enterprises, and foundations. The latter tend to have the most money available for investment, she said.

In the proposed new rules, the Ministry of Civil Affairs said charity groups should efficiently manage the assets under their care and engage in investment activities only after ensuring that they can meet expenses for charitable activities and donations are made on time.

All investment returns should be used for philanthropic purposes, it said, and charity groups should prudently choose and buy asset management products that best match their ability to take risks.

They should also specify the kinds of assets they do not want to be invested in and the conditions under which they would exit investments, and have appropriate risk-control measures in place, the rules indicate.

Significant investment plans should be approved by a two-thirds majority by the relevant decision-making body of a charity group, which should also set up a risk reserve system, according to the new rules.

The ministry's aim is to increase transparency and accountability within the philanthropic sector, and essentially increases its oversight of the funds, Shapiro said.

The rules are designed to ensure charity groups do not park money or use it for other purposes, and spend it on things that are consistent with an organisation's stated goals, so should make for a healthier sector, she said.