The Mahayana Buddhism that emerged in China was not a mere conversion to Indian Buddhism, but a creative reinterpretation of Buddhist ideas in terms of distinctly Chinese ideas. This is especially true of Hua-yen Buddhism, whose fundamental idea of dharmadhātu-pratītyasamutpāda, found in the Avatamasaks sutra, involves interpreting Buddha-nature in terms of the Chinese categories of li and shih. Fundamental to the Hua-yen Buddhist understanding of emptiness involves understanding it in terms of universal interpenetration of everything with everything else, rather than the process-based nominalism of earlier Indian Buddhism.
During the period of Neo-Daoism, many Chinese Buddhists used daoist terminology to explain Buddhist ideas, resulting in unsurprising influence of the substance of Daoist thought upon Buddhism. The concept of hsüan, roughly meaning “mystery,” also reflects the influence of Daoist thought upon the Hua-yen system. The term is used in the Avatamsaka sutra, just as in the very chapter of Lao Tzu’s Tao-te-ching. The term is consistently employed by many other Chinese Buddhists as well, although they apply it to the dharmadhātu rather than the Dao.
Of course, the Hua-yen understanding of dharmadhātu as a Source to which we return, is itself fundamentally Daoist in inclination. Indeed, many Daoists have been struck by the similarity of Zen Buddhism’s preoccupation with returning to one’s original nature to the Daoist emphasis upon ziran as reflective of the nature of the Dao within the cultivated sage. These ideas can be found in earlier departures from Theravada Buddhism as well, such as the Yogacara concept of alāyavijñāna or tathagatāgarbha.
Finally, the use of the Daoist distinction between t’i (essence) and yung (function) is reflective of Daoist influence upon Hua-yen Buddhism. The distinction is employed by the Neo-Daoist Wang Pi, who used it to describe a metaphysical reality he purports to have found in the 38th chapter of the Tao-te-ching, by which he distinguishes between something’s fundamental reality vs. its manifestation. The substance (t’i) is the nature of a thing and a function (yung) is its various applications. There is some difference between the Hua-yen application of this idea and the Daoist usage, nevertheless, as the Hua-yen specifically used it to elaborate their concept of interpenetration, while Neo-Daoists used it to explain the concept of non-being.
The attempt to grasp dharmadhatu in terms of the distinction between li and shih also calls to mind the attempt to grasp the Dao in terms of non-being (wu) and being (yu). The Dao is understood in terms of “li,” or “principle,” namely, the necessary or ultimate principles. Following the Buddhist Wang Pi, the dharmadhatu as “li” or ultimate principle contradicts Madhyamaka and Theravada understandings of universal emptiness in that it asserts an ultimate principle upon which all of reality is founded.