By Megha Rajagopalan
BEIJING (Reuters) - China is set to pass its first law regulating charities to shore up public confidence in a scandal-hit sector, though critics say it is unlikely to offer any protection to rights groups whose work is deemed politically sensitive.
The law, expected to be passed during the current parliamentary session, would relax rules on fund-raising and cut red tape, while adding transparency measures for donors in the world's second-largest economy.
It is expected to provide a boost for China's sluggish non-profit sector that has trailed a growing middle class and expanding league of wealthy entrepreneurs.
But some analysts cautioned that the law is unlikely to protect groups that deal with human rights and related issues, which have been subject to a broad crackdown under President Xi Jinping.
A specific mention of national security in the law could give authorities greater latitude in taking action against groups deemed a threat.
According to a recent draft of the legislation, groups will be banned from sponsoring activities "endangering national security", though what that constituted was not spelt out.
Groups found to be undermining national security will face punishment or have their registrations revoked in serious cases, the official Xinhua news agency reported.
Western governments and non-profit groups have pressured China to revise a second proposed law that would regulate foreign non-governmental organizations. That law would give police broad powers to regulate their activities and funding.
But the new legislation could help charities struggling to win back public trust after a series of scandals in recent years.
Private foundations will be allowed to raise funds publicly after operating for two years.
Now, only foundations with close government ties, which experts said make up about half of all Chinese foundations, are allowed to advertise in public places and online seeking donors.
Their private counterparts can only seek donors through private contacts.
"The law is sure to speed up the development of the charity sector in China," said Xu Yongguang, chairman of the private Narada Foundation.
"It's a major breakthrough for foundations when it comes to fund-raising."
Xu said his foundation would also benefit from tax advantages given to charities under the new law.
The law will also impose tougher transparency requirements in a bid to restore confidence.
In a 2015 survey of countries ranked by generosity of the public, the London-based Charitable Aid Foundation placed China second from bottom. A lack of trust is seen as the main factor for that.
In one prominent case that dented confidence, a celebrity linked to a charity was jailed for running a casino after pictures of her driving a Maserati sports car and flaunting designer handbags appeared on social media.
In another case, a provincial branch of a foundation used donor funds to invest in real estate, according to media.
"There was very little public accountability," said Rupert Hoogewerf, founder of the Hurun China Rich List. "When there's fund-raising from the public, you have the right to know how that money is being used."
The law comes against a backdrop of a broad crackdown on civil society groups since 2012, with authorities citing the need to buttress national security and stability, and groups seen as posing a challenge are unlikely to see any relief.
"Organizations that are rights organizations just don't survive," said Karla Simon, an American expert on civil society in China who advised drafters of the law.
"If you're an organization that is good, and you get state funding, then you're happy. If you're not, if you don't do that, you're going to be shut down."
(Editing by Robert Birsel)