Towards a Legal Framework for Supporting Social Enterprise in China

Miguel Vera-Cruz University of New South Wales

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Towards a Legal Framework for Supporting Social Enterprise in China

Social enterprise has been booming over the latter 20th and early 21st centuries as a bridge between

the realms of non-profit civil society organisations and business, a marriage of symbiosis between

profits and social impact. While social enterprise develops in the Developed World to cover several

areas of social welfare including aging, disability and human rights, it remains a relatively nascent

concept in emerging markets, where social enterprises have traditionally emulated the microfinance

concepts pioneered by the same experienced Developing World entrepreneurs, or been founded by

Western entrepreneurs operating in developing nations.

Despite China’s rapid economic growth, it, like other emerging markets, face several unique legal,

social and political challenges in social enterprise. Support from the government, at all levels of the

Party administration, is hotly debated but has largely proven effective. This brief explores the unique

problems and potential solutions available to China to enable its social enterprise sector to flourish.

The Increasing Importance of Social Enterprise in Human Rights and Social Justice in China

The business sector is a constantly overlooked stakeholder in the acknowledgement and protection

of human rights worldwide. In China, its importance is particularly understated, due to the concept

and terminology of ‘social enterprise’ being seen as a Western construct, and the perceptions from

such proponents of the term in the West of a complex relationship between the Party and private

enterprise.


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However, based upon the definitions, goals and impact of entities which fall under the terminology

of ‘social enterprise’, China actually has a remarkable history of such entities, and ‘social enterprise’

as it is understood in the West has been particularly important in the achievement of social justice in

many fields throughout China’s modern socioeconomic history, including aging, disability, internal

migration, rural poverty, employment and long-term post-natural disaster recovery. Furthermore, as

the concept of ‘socialism with Chinese characteristics’ continues to develop and mature, there has

been an increasing trend of the Party either outsourcing its social policies to the private sector, or

corporatizing the government bureaux and agencies responsible for them. The role of social

enterprise in society thus looks to become increasingly relevant, and it is both opportune and

important for authorities to use the law to take advantage of the potential social enterprises can

deliver in tackling many of the issues China faces in its growth.

The rise of social enterprise in China will be particularly important to the legal profession, and to

public interest lawyers in particular, not only due to the role of social enterprises and NGOs in

remedying the issues that public lawyers advise and advocate for, but also due to the need for such

NGOs to navigate the complexities of adapting to this evolution, and economic sense in such

organisations achieving financial scalability.

History of social enterprise law in China

As social enterprises can roughly be categorised as a hybrid between conventional, for-profit

businesses and non-governmental organisations (NGOs), it is important to contextualise social

enterprise in China by analysing the history of the government’s relationship with both.

Although private enterprise was prohibited during Mao Zedong’s era, Mao nonetheless introduced

the concept of ‘welfare enterprises’; state-owned institutions which resembled social welfare or


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social security, providing support for individuals with disabilities, injured revolutionaries and their

families, the poor and other beneficiaries.1 Welfare enterprises expanded rapidly in number and in

scope after the Mao era, peaking during Jiang Zemin’s administration, but nonetheless remain a key

element of Mao’s legacy.

During the Reform and Opening Up era, Deng Xiaoping’s policy of ‘socialism with Chinese

characteristics’ enabled small private enterprises up to a certain quota in size to be established.

Deng’s administration introduced reforms incrementally in the first five years of the Reform and

Opening Up, initially covering only state-owned enterprises. These began with restoring enterprise

autonomy, then trials of a ‘profit retention system’ in factories in major cities, followed by

‘incremental accounting’.2 As Naughton notes, the Communist Party Congress only endorsed the

free market as a strategy in 1992 in accordance with a broader philosophy of ‘crossing the river with

stepping stones’ (摸石头过河), which ultimately proved to make the system more robust.3

Conversely, NGOs have had a chequered history in China, amidst gradually liberalising legal and

economic conditions and changes in Party policy and attitudes, including attitudes towards foreign

influence.

Currently, NGOs, including foreign NGOs, are only allowed to operate in China with affiliation with

the Party. This includes international NGOs, including the Red Cross, whose offices in China must be

operated jointly with the Party. This affiliation has its benefits: the Party can support NGOs

financially and legally in their operations and outreach; however, especially from a Western

1 China Social Enterprise Research Center 2013, 12.

2 Lee 1986, 50-53.

3 Naughton 1993, 510.


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perspective, it is seen as compromising the independence of such NGOs from political agendas,

despite the policy existing mostly to uphold the Party’s integrity in governance.

Six key issues about the current state of social enterprise in China

The Government has not established distinct legal or taxation definition of social enterprise, although separate categories have entered the vernacular.

The Party does not have a specific definition of ‘social enterprise’. The closest entity to a ‘social

enterprise’ that the Party legally recognises and supports is the ‘welfare enterprise’ (which will be

discussed further below). Currently, this lack of clarity has the potential to cause confusion among

entrepreneurs.

Furthermore, the lack of a legal category of social enterprises hinders the ability for many potential

supporters and investors in social enterprise to lawfully support its growth. As previously mentioned,

the relatively recent introduction of the concept of social enterprise makes it necessary to look at

laws pertaining to both NGOs and privately run businesses in China and their development.

Presently, the Companies Law of the People’s Republic of China (hereafter referred to as the

Companies law) is the country’s official legislation pertaining to businesses, while the Law of the

People’s Republic of China on Donations for Public Welfare (hereafter referred to as the Donations

law) governs many of the relationships between potential donors and beneficiaries who operate for

the public interest. Article 2 of the Donations Law applies the Donations Law ‘where any natural

person, legal person or organisation, for the benefit of public welfare, voluntarily donates property

gratis to any legally formed community public welfare organisation or non-profit public welfare


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institution’.4 As Article 3 of the Companies Law codifies corporate legal personalty in China,5 any

transfer of funding or capital between a company and an aspiring social enterprise, especially one

which has not reached scalability, can be subject to the Donations Law. Article 4 of the Donations

Law prohibits any ‘profit-making activity’ from being made under the auspices of donation, while

Articles 28-30 of the Donations Law stipulates penalties, both civil and criminal, for the

misappropriation of donations, including ‘selling, assigning or using for other purposes in China

donated goods or materials’ which are subject to import tax breaks.6

The prohibition on donations for profit-making purposes can, from a legalistic standpoint, also

prohibit the ability for private corporations, or for that matter, any entity potentially including those

run by the Party, from giving grants to social enterprises, and potentially even any NGO wishing to

monetise their operations. Conversely, the giving of such grants has been critical to the development

of robust social enterprise sectors in other jurisdictions in the Developed World.

Different organisations have proposed their own definitions of ‘social enterprise’ to apply to China.

FYSE, in its 2012 report on Chinese social enterprise, covered organisations which ‘have a primary

purpose of achieving a social, cultural or environmental mission’ and ‘derive a substantial portion of

their income from revenue-generating activities’.7 Zhao notes that the term ‘social enterprise’

cannot be translated literally into Chinese, as due to the prevalence of the State in the socialist

system, ‘social enterprise’ would be translated literally (社会企业) as ‘an enterprise of society’, or

4 Law of the People’s Republic of China on Donations for Public Welfare, accessed July 27, 2015 at

http://www.npc.gov.cn/englishnpc/Law/2007-12/11/content_1383559.htm 5

Corporations Law of the People’s Republic of China, accessed July 27, 2015 at http://www.npc.gov.cn/englishnpc/Law/2007-12/13/content_1384124.htm 6 Law of the People’s Republic of China on Donations for Public Welfare, accessed July 27, 2015 at

http://www.npc.gov.cn/englishnpc/Law/2007-12/11/content_1383559.htm 7 FYSE 2012, 6.


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any enterprise not run by the government.8 A closer translation to the globalised definition of social

enterprise would be ‘social startup’ (社会创业) which has startup connotations, or the more explicit

‘public interest company’ (公益创业).9 At this stage, such institutions were state-owned and strictly

providers of social welfare; however would eventually evolve into enterprise-like bodies which

overall were more comprehensive but individually became specialised.

The China Social Enterprise Research Centre proposes three categories of social enterprise:

‘businesses with the core mission of social benefit’; ‘businesses whose primary goal is to benefit

society and the majority of whose profits are reinvested towards the realisation of that goal’; and

Ministry of Civil Affairs-sponsored ‘civil non-enterprise units’. 10 A clear classification of enterprises

will be a vital first step in encouraging the development of social enterprise in China.

The social enterprise concept that is known in the West came to China from the UK and thus many models will seek British models and definitions.

An article in The Guardian from May 2015 cites an example of a Chinese social enterprise operating

in partnership with the British Council, which sponsors an ‘international social enterprise hub’.11

While The Guardian is a British paper, several British ties remain. The first organisation to promote

Chinese social enterprises was founded in the UK in 2004; it invited social entrepreneurs to China in

that year and hosted China’s first social enterprise forum in 2006; the Skoll Foundation, of which

several Chinese scholars attended its forum for the first time that year, has also been a pivotal

influence in organising social enterprise forums in China.12 Due to the aforementioned complexities

8 Zhao, Meng (2012), ‘The Social Enterprise Emerges in China’, Stanford Social Innovation Review

9 Ibid.

10 China Social Enterprise Research Centre 2013, 3.

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12 Zhao 2012, 33.


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in translating ‘social enterprise’ into Chinese, this history means that China is more likely to import

the idea of ‘social enterprise’ from Britain.

In a legal context, as Australia has inherited much of its law from the United Kingdom, the Australian

history of social enterprise will thus be of great potential use to China, and as a result, social

enterprise can form a key bridge in Australia-China relations.

Economics- and finance-related problems are not unique to China

Many hurdles that Chinese social entrepreneurs face are also faced by social entrepreneurs around

the world. Key among these is the lack of available funding. The FYSE report identified that 71% of

social enterprises generate less than CNY 500,000 in annual revenue,13 and that in 2012, only 48%

were financially sustainable.14

In Australia and the UK, extensive research has enabled social entrepreneurs to identify society

stakeholders who could make the biggest potential contributions, both financial and experiential, to

support social enterprise growth. This has led to the development of a sizeable ethical and

responsible investment industry, much of which includes the area of funding for social enterprises.

Responsible investment associations regularly identify banks and pension funds as key sources of

social enterprise venture capital.15

13 FYSE 2012, 5

14 FYSE 2012, in Elliott 2013 (New Global Citizen) http://newglobalcitizen.com/story/socentinchina

15 See, eg, Responsible Investment Australasia, Who Is Certified? Find an NGO

<http://www.responsibleinvestment.org/certification-program/who-is-certified/find-an-ngo/>.


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China will benefit greatly from undertaking similar research on this matter. Much social enterprise

research has focused upon capacity building internally. FYSE’s report concludes that many new

donors are not adequately equipped with experience and the right mindset to support social

entrepreneurs.16 Yet, social entrepreneurs are not deterred. A 2011 joint study between UBS and

INSEAD identified social enterprise as the most important trend in Chinese business.17 Identifying

key stakeholders will enable China to develop the best relationships for social enterprise.

China-unique problems include distrust between government and enterprise (whether the Party helps or interferes with the private sector)

In the UK, gaps and lack of connections between social entrepreneurs and potential investors were

identified as the largest challenge facing social enterprise. Though, as discussed above, this problem

is also persistent in China and elsewhere, China’s history has also given it unique social and cultural

challenges.

The Party’s involvement in enterprise ever since the Reform and Opening Up has been hotly debated

among scholars, politicians and businesspeople. While there is a general sentiment of suspicion and

mistrust between the Party and business, the Party has made significant contributions to developing

social enterprise from its experience, becoming directly involved in many of them.

The state is the largest organisation allocating charitable donations, at one point receiving almost 90%

of all donations in China, as donations are generally handled by the Ministry of Civil Affairs. However,

uproar over misallocation of funding, and questions over conflicts of interest, are major sources of

16 FYSE 2012, 24.

17 Liu 2012 (BBC). http://www.bbc.com/news/business-19652712


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mistrust.18 Laws which prevent philanthropists donating to organisations other than NGOs are a

significant legal barrier to the development of social enterprises and their ability to undertake

capacity building measures towards scalability.19

There is an acknowledgement that Party association is beneficial for organisations as a whole in

terms of educational, economic and staffing benefits, however there is still some suspicion over the

type of management used and how it may cause conflict of interest with the encroachment of the

party’s agenda. It is too early to call, whether this will be the case, or whether it will legitimately

develop civil society.20 Nonetheless, the Party appears to be becoming increasingly involved in such

organisations as part of a broader intention to step back from intervention in civil affairs and

outsource its social welfare to the private sector.21 This new stance appears to reflect the opening up

trends among the Party.

This stance gives social entrepreneurs, and entrepreneurs as a whole, a choice regarding their

relationship with the Party, between accessing Party support (‘alliance’) and avoiding it altogether

(‘avoidance’). Hsu and Jiang note how state alliance enables social entrepreneurs to access a far

greater amount of resources and markets within China and thus achieve greater impact, although

this would inevitably result in the need for compliance with the Party’s rules, both spoken and

unspoken.22 In contrast, avoiding the state enables greater flexibility at the cost of access to a

significantly large portion of the market.23 Most social enterprises nonetheless find it inevitable or

necessary for sustainability and survival to choose the former to achieve prominence in China.

18 Liu 2012 (BBC). http://www.bbc.com/news/business-19652712

19 FYSE 2012, 25.

20 See Thornton 2012, 15.

21 Ibid 9; Zhao 2012, 31.

22 Hsu and Jiang 2015, 110.

23 Ibid 113.


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Most social enterprises and their missions do not have explicit conflicts with Party policy and thus do

not necessarily find their position and integrity compromised by Party affiliation. Consequently,

although the Party has a distinct agenda, this agenda and the missions of social enterprises are often

in harmony with each other. Nonetheless, suspicion of moulding an agenda into private businesses’

operations remains among many entrepreneurs and challenges the development of relationships

between the two.

Solutions unique to China include the existence of the ‘welfare enterprise’ before the Western concept arrived, a foundation to build upon.

The ‘welfare enterprise’ is a uniquely Chinese concept and remnant of the Mao era that is, in

practice, the closest Chinese equivalent to the globalised understanding of social enterprise. In

exchange for employing a set quota of disabled individuals, an enterprise could be classified as a

‘welfare enterprise’ by the government and receive special tax breaks from the government.

Conceived during the Mao era, the number of welfare enterprises grew steadily during the gaige

kaifang to a national peak of over 60,000 in 1995 before suffering a severe decline in the wake of the

Asian Financial Crisis.24 Welfare enterprises have been officially registered under the Ministry of Civil

Affairs since 2007.

The welfare enterprise is a significant core strength of Chinese government-business relations, and a

foundation to build upon. They could be the subjects for a trial of Chinese social enterprise policy

reforms, including broader government support and capacity building initiatives.

24 China Social Enterprise Research Centre 2013, 14.


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The most innovative areas of government involvement have been in the major centres, especially in Shanghai and at the municipal level

The aging and disabled are, however, far from the only beneficiaries of Party involvement in social

enterprise. At the municipal level, the Party has affiliated itself with several thousand NGOs and

other organisations. Over 50% of eligible organisations have official Party branches. However, the

rate of Party penetration of eligible organisations in Shanghai is almost 100%. Shanghai has also seen

the rise of entire government projects and visions funnelled through government-affiliated civil

society organisations, and even a union of social organisations.25 Although this can be seen as a case

of government intrusion into private enterprise, it cannot be denied that Shanghai has become the

environment most conducive and supportive of social enterprise development. The socioeconomic

advancement of Shanghai makes it fertile ground for experimenting with reforming the relationship

between the Party and civil society.

Case Studies

Shanghai Narada

The Shanghai Narada Foundation is one particular example seeking to pioneer philanthropy in the

area of social enterprise. It is a wholly owned subsidiary of the Narada Group, a conglomerate which

has been operating since 1991 and whose portfolio includes electricity and chemicals manufacturer

Narada Power, infrastructure including expressways, and real estate, including a chain of 5-star

hotels.26

25 Thornton 2013

26 Narada Power, Narada Holding, accessed July 29, 2015 at

http://en.naradapower.com/Company/Group.html


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With a startup capital of CNY100 million, it delivers seed capital and grants, focusing mainly on the

social issues associated with rural-urban migration, including education and the environment.27 Its

flagship project is the New Citizen Program, designed to assist migrant workers and their children

through offering grants to selected NGOs through a bidding process, as well as building schools for

migrant children directly. Although the use of bidding for funding introduces a concept similar to

venture capital competition among NGOs, the program must still operate under the auspices of

providing such services solely to non-profit entities. It is also important to note the huge amount of

startup capital which the Foundation was established with, and the networks they would have been

able to use with such as diverse portfolio. Such philanthropic organisations, with greater amounts of

capital, could both serve as a model and a source of funds for social enterprises in China; however

are still faced with the challenges of making the leap from pure corporate social responsibility (CSR)

and donations.

Canyou Group

Comparatively, the Canyou Group more closely fits the definition of a ‘social enterprise’, appears to

emulate some conditions of the original ‘welfare enterprises’, and is of a more organic, grassroots

origin. Its founder, Zheng Weining, is a haemophiliac from Wuhan who in 1997 moved to Shenzhen

to satisfy his health requirement of weekly blood transfusions,28 and dedicated his life savings into

the founding of a social enterprise with four of his friends, focused on training other disabled

individuals with software and IT skills. Its rapid expansion in the IT sector includes software, e-

commerce and web design. In 2013, it encompasses 32 companies in 11 provinces, and employed

over 3,700 individuals, the vast majority of whom have disabilities.29 Its subsidiaries include one

27 Shanghai Narada Foundation website.

28 Huang Yuli, ‘Brave New World’, China Daily, updated September 6, 2012,

http://usa.chinadaily.com.cn/epaper/2012-09/06/content_15739342.htm 29

China Social Enterprise Report 2013, 27.


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located in Kashgar in Xinjiang Uyghur Autonomous Region, the furthest in China from its Shenzhen

headquarters, which was established in 2011 and now employs 200 people.30

In response to the deteriorating health of one of its long-term employees in the mid-2000s, who

could no longer work as a result of their condition, Zheng implemented a policy guaranteeing

lifetime pensions for all employees. It also provides free meals and counselling to its employees.

When Zheng faced a serious health issue in 2009, he stepped down and donated 90% of his shares in

the Group to the founding of a charitable foundation, which incubates new social enterprises and

supports existing non-profits.31

Like many other social enterprises, funding remains a serious challenge for the Canyou Group. The

generous benefits provided to employees exemplify how it trades upon social impact, but

nonetheless prove challenging to its financial sustainability. From a legal perspective, the structure

of Canyou Group has cautiously treaded the line between an NGO and enterprise: since Zheng’s

donation, the Group is effectively an enterprise owned by an NGO. However, although the NGO is

meant to be charitable, it also funds start-up enterprises in exchange for equity, effectively making

its support a form of investment as opposed to a donation.

Consequently, from the angle of the law, the Canyou Group is just an ordinary, privately owned

enterprise, social not in name but in nature only. Its only legal distinction as a ‘social enterprise’

would come from a taxation perspective, where, by logical deduction, it can avail of tax breaks the

Party, through the Ministry of Civil Affairs, affords to enterprises which hire a percentage of workers

with disabilities above a specific threshold. Nonetheless, its ability to remain financially sustainable

30 http://usa.chinadaily.com.cn/epaper/2012-09/06/content_15739342.htm

31 China Social Enterprise Report 2013, 28.


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enough to survive and expand nationwide for over fifteen years is truly remarkable and

extraordinary, a testament to Zheng’s success.

Thus, it is recommended that Canyou Group, its experiences and challenges, many of which it still

has to face in the present day, be used as a model and case study in research on legal reforms to

support social enterprises in China. It is also noteworthy that Canyou Group’s headquarters in

Shenzhen enables it to avail of more liberalised market conditions, as Shenzhen, as a Special

Economic Zone, has itself been a guinea pig for market liberalisation and economic reforms in the

Chinese economy since the 1970s. Due to the maturity of both Canyou and the Shenzhen Special

Economic Zone, the Party could thus also use Canyou Group as a model to trial any legislative

reforms before extending legal recognition to the social enterprise concept as a whole.

Recommendations

The combination of endemic and internationally common factors affecting China’s laws regarding

social enterprise makes it highly beneficial for China to undertake similar measures to those which

other nations have implemented. These recommendations can be implemented across several areas,

including among the legal profession, legislatively and from a research and business perspective.

Legislative clarifications

As discussed above, gaps in legislative frameworks create potential loopholes for social

entrepreneurs; especially the lack of clarification regarding whether they are NGOs or private

enterprises. This adds a new degree of risk, as misinterpretation, either on the part of authorities or

the enterprises, could result in costly and complicated run-ins with the law.


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The legal profession has much to contribute in catalysing this evolution and realising the potential of

legislative change. In my previous work in Australia, I was part of a team that was responsible for

providing advice on potential areas for legal reform that could support social enterprise

development. This included the establishment of a special taxation category for social enterprise,

and/or the provision of tax breaks for enterprises that fulfil certain criteria consistent with

established industry definitions of social enterprise. Some of these findings were submitted to an

April 2014 Australian Government inquiry, the Joint Standing Committee on Foreign Affairs, Defence

and Trade, which was tasked with investigating the potential for the private sector, and public-

private partnerships, to stimulate long-term sustainable economic growth.

On 14 October 2014, the Australian Government launched the Industry Innovation and

Competitiveness Agenda, which featured changes on employee share ownership. The Government

claims that this will ‘encourage start-ups to attract and retain employees and commercialise good

ideas in Australia.’32 These included tax breaks on employee shares, where companies meet certain

criteria, including a turnover of less than A$50 million per year, the company being based in

Australia, and incorporated less than 10 years ago, and that shares subject to the tax concession are

retained for three years.33

However, an attempt to apply the products of a British or Australian experience in social enterprise

legislation in China as though it were a one-size-fits-all template will not be constructive. The

primary cultural consideration is the differing interactions between individuals and the law in China

as opposed to the West. Chief among these concerns is the relevance of the codified law in the first

place and the degree to which individuals and corporations are inclined to follow it. The tumultuous

32 http://www.liberal.org.au/latest-news/2014/10/14/action-plan-australias-future

33https://www.ato.gov.au/General/New-legislation/In-detail/Direct-taxes/Income-tax-for-

businesses/Employee-Share-Scheme---Encouraging-employee-share-ownership-and-entrepreneurship/


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history of Chinese corporate law, dating as far back to Qing dynasty and evolving through the Sun

Yat-sen, Mao and Deng eras, has resulted in a complex relationship between privately enterprising

individuals and public authorities characterised not only by mistrust and perceptions of agendas and

intrusiveness as discussed above, but also by reluctances in drafting, implementing or following

reforms that would codify, clarify and entrench consistent standards in laws pertaining to NGOs,

businesses and social enterprises.

Although Chinese corporate law dates back to 1904, and flourished particularly during the Sun Yat-

sen era in the 1910s and 1920s, it was only followed loosely, with the majority of registered

companies comprising small businesses, mainly due to the mistrust caused by the relative

inexperience of the Chinese judiciary in a concept recently imported from abroad.34 The rise of

nationalism and state control of business activities in the following decades during the Mao era

complicated corporate law even further, such that many hurdles present in 1904 still exist,

sometimes even to a greater degree, today, chief among these being the legacy of an uneasy

relationship between government and private enterprise, and the mistrust originating from

misunderstandings of the law. As Chan, Ho and Young note, much Chinese company law is a

‘transplantation’ of similar systems in the Western world without question regarding their fit in a

Chinese cultural context, and as such, it is dubious to assume that Chinese businesspeople are

inclined to follow them, let alone understand them.35 Furthermore, this makes it pleasantly

surprising that China so readily embraced the concept of social enterprise handed down from the UK;

although in fairness, as this paper demonstrates in the history of social enterprise in Chinese law,

34 Kirby, William C. (1995), ‘China Unincorporated: Company Law and Business Enterprise in Twentieth-Century

China’, The Journal of Asian Studies, 54(1), February, pp. 43-63, 48. 35

Chan, Raymond Siu Yeung, Ho, Daniel, and Young, Angus (2014), ‘Rethinking the Relevance or Irrelevance of Directors’ Duties in China: The Intersection between Culture and Laws’, Asian Journal of Law and Society, 1(1), 183-203, 187.


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this acceptance and understanding has been far from universal, and is especially yet to be accepted

by China’s most important stakeholder – the Party.

As the Canyou Group example demonstrates, a robust history of legislative support for particular

industries to achieve equity or social impact is immensely influential. An important point of note

from the Canyou experience is how the lack of legislative support made incorporation as a for-profit

business its only viable option at the time of its incorporation, an immensely challenging scenario for

other social entrepreneurs. As such, the taxation benefits Canyou availed of regarding the

employment of disabled persons, a legacy of the ‘welfare enterprise’, were crucial to its survival in

its earliest years, and therefore, to its eventual success.

One particularly interesting point of note in existing Chinese law is that several key pieces of

legislation appear to address key issues where social enterprises can generate impact. Examples of

this include specific laws on mine safety, mitigating air and water pollution, renewable energy,

maternal health, promoting employment and ‘rehabilitation through labour’.36 The specificity of

such laws empowers the Party to enact social enterprise legislation in an incremental manner by

industry and thus choose particular issues which the Party wishes to address by outsourcing its

operations to the private sector.

Lawyers and legal researchers can catalyse the requisite legislative reforms for supporting social

enterprises through recommendations in reports and consultations, as well as through their

relationships with the Party. The Party and the dynamics of its relationships remain the most

significant differences between Australia (and other Western markets) and China in this regard. For

36 National People’s Congress, accessed July 29, 2015 at http://www.npc.gov.cn/englishnpc/Law/Frameset-

index.html


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this reason, further insight into the development of social enterprises is recommended, and

legislative reforms ought to consider the Party’s overall vision for the development of both private

enterprise and civil society.

In particular, one primary hindrance to the ability for social enterprises to operate, the technical

prohibition under the Donations Law, is an important area to start in the area of clarification. It must

be acknowledged that despite the hindrance of Article 5 of the Donations Law upon social

enterprises, recent scandals involving the culture of giving in China have highlighted the importance

of such a law to remain. Consequently, it would be simplistic and not constructive to assume that a

striking down or amendment of this provision is a sound or preferable option. Instead, it is

recommended that new laws covering social enterprises be drafter altogether and/or amalgamated

into existing laws on NGOs and enterprises. This would enhance other necessary and recommended

reforms, such as clarifying differences between the legal status of private enterprise and civil society

organisation in their operations, status and purpose, and the options for social enterprises in how

they wish to be incorporated according to the law. These incremental, holistically-minded changes

would also be consistent with the摸石头过河 approach the Party has favoured in its journey

towards liberalisation and realisation of ‘socialism with Chinese characteristics’ ever since the

Reform and Opening Up.

Enhancing Chinese Corporate Law

Chinese corporate conduct is governed by the Companies Law. Article 5 of the Companies Law binds

companies to certain standards of integrity, and to ‘assume social responsibility’.37 It is unclear what

this ‘responsibility’ explicitly entails or how public authorities are to enforce it. Nonetheless, there

are opportunities for governments at the municipal level to specify corporate social responsibility

37 Article 5, Companies Law of the People’s Republic of China


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(CSR) guidelines based upon their individual situations and progress. A municipal level clarification

would be a robust means of gradually introducing social enterprise legislation in China in a manner

tailored to the different issues that regions face.

The UK Model

As mentioned above, the Chinese interpretation of the ‘social enterprise’ concept mostly originates

from the United Kingdom. Fortunately, the UK also has a dedicated organisation and associated

website for social entrepreneurs, 38 as well as a social enterprise-exclusive legal structure.

Interestingly, the legal structure exclusive to social enterprises is named as a ‘community interest

company’ (CIC)39 – an almost identical translation of the Chinese ‘public interest company’. Legal

frameworks ensuring the intentions of the CIC include ‘community interest statements’ to

demonstrate a social enterprise’s proposed impact and an ‘asset lock’ to guarantee that company

assets would be dedicated to such objectives.40 Over 5,500 CICs were registered as of 2011.41

The Party and Ministry of Civil Affairs can amalgamate the UK model of CIC with the concept of

welfare enterprises when introducing support structures, and use a form comparative to

‘community interest statements’ to ensure that social enterprises fall in line with their claimed

objectives.

38 Social Enterprise UK, http://www.socialenterprise.org.uk/

39 Office of the Regulator of Community Interest Companies (UK)

https://www.gov.uk/government/organisations/office-of-the-regulator-of-community-interest-companies 40

UK Government, Setting up a social enterprise¸ last updated 24 July 2015, accessed 3 August 2015, https://www.gov.uk/set-up-a-social-enterprise 41

UK Government Department for Business Innovation and Skills, A Guide to Legal Forms for Social Enterprise, November 2011, accessed August 3, 2015, https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/31677/11-1400-guide-legal-forms-for-social-enterprise.pdf


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Training lawyers to assist social enterprises

In the meantime, lawyers will face the burden and challenge of legal interpretation for social

enterprises while social enterprise law remains undeveloped. In overseas markets, lawyers with

experience in contracts, competition (antitrust) and corporate law have set up practices offering

services and advice to startups, including free-of-charge consultations. These practices in themselves

can be considered startups by nature.

Due to the Chinese experience of law relevant to social enterprises, both corporate and public

interest lawyers can fill in this void. It is important to be able to provide services at heavily

discounted rates, or free of charge, due to the challenging financial situations many social

enterprises face. Public interest lawyers can contribute their experience and expertise in NGOs while

corporate lawyers can assist in the formulation of contracts and registration.

The Party can accelerate this process by filling the funding shortfall for such enterprises. This will

provide a robust interim solution, as lawyers affiliated with the Party can assist the harmonisation of

Party policy and social enterprise goals, and advise the Party with feedback on the obfuscations and

legal complexities from social enterprises’ perspective.

Alternatively, both corporate and public interest lawyers can compensate for the funding shortfall by

promoting CSR and social business on multiple levels. If the Government clarifies and improves the

enforceability of CSR principles, public interest lawyers can offer services to large corporations at a

fee to ensure that such corporations conform to CSR regulations, which would enable them to

simultaneously consult social enterprises in a more pro bono context.


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Commissioning reports into funding and new taxation structures

Much of the research and investment in social enterprise which the UK has implemented in China is

either based upon, or eventually implemented in, a UK domestic context. Following the

establishment of a Social Investment Task Force in 2000,42 the UK government has embarked upon

building a progressively sophisticated framework for establishing and supporting the growth of

social enterprises in the country. This framework has matured over a series of milestones generally

following a pattern alternating between the establishments of funds to provide grants, and reports

on their effectiveness,43 culminating in the establishment of a Fund in 2012 which provided capacity

building and investment readiness assistance in addition to more traditional forms of funding such as

venture capital and grants. This Fund has been widely seen as a success, assisting social enterprises

generate, on average, capital 43 times the amount of government funding.44 The author has

conducted similar research on the viability of similar social enterprise investment readiness and

capacity building funds in Australia in 2014, having identified banks, pension funds and investment

bodies as potential sources of funding. From a legal perspective, it made recommendations to

modify taxation structures and include special breaks for startups and social enterprises, based upon

similar schemes in the UK and US. Similar regulations were passed in Australia in October of that

year.

China would greatly benefit from similar research into this issue. Several studies on social enterprise

exist, such as the FYSE and Social Enterprise Research Centre reports cited earlier in this report.

Further enhancing these reports with suggestions on sources of funding or tax concessions based

42 Ronald Cohen, Submission to Chancellor of the Exchequer, Enterprising Communities: Wealth Beyond

Welfare, 18 October 2000, 4. 43

Cabinet Office – UK Government, Growing the Social Investment Market: A vision and strategy, <https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/61185/404970_SocialInvestmentMarket_acc.pdf> 44

Adrian Brown and Katie McAllister, ‘Ready, Willing and Able – An interim review of the Investment and Contract Readiness Fund’ (Research Report, Boston Consulting Group, April 2014), 1.


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upon models such as those the UK and Australia would provide the Party and local governments

with comprehensive resources for implementing a robust social enterprise development agenda to

boost the economy in the most equitable way possible.

Conclusion

Social enterprises are an opportunity to remedy several critical social and economic issues facing

China. The Party, especially through its experience of ‘welfare enterprises’ and civil society,

recognises this potential and is maturing in its relationships with such organisations.

If historical behaviour is to be relied upon as an indicator of how the Party, and governing bodies as

a whole, are likely to respond to the increasing trend of social enterprises, it would be to proceed

conservatively and gradually. As evident during the Deng administration’s policy during the Reform

and Opening Up, the Party prefers to implement reforms incrementally, adopting a ‘wait-and-see’

approach following each step, in contrast to perceptions of rapid growth. In fact, such rapid growth

can reflect how even seemingly minor policy amendments can greatly accelerate economic progress

and change. Doing so in this regard would mitigate much disequilibrium caused by radical reforms

and enable stakeholders to come to terms with this evolution in policy and economic climate.

Further research towards legislative reform would greatly accelerate the process through tapping

into sources of funds and experience. In the interim, equipping lawyers with the relevant skills and

knowledge in both corporate and public interest laws will give aspiring social enterprises greater

peace of mind in navigating a complex legal landscape in their incorporation. The findings and

experiences gained from these will be valuable in advising the Party, and other stakeholders with the


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relevant power, towards developing a legal framework supporting Chinese social enterprise

development.

Documents

Towards a Legal Framework for Supporting Social Enterprise in China