The China social credit system is a broad regulatory framework, intended to report on the ‘trustworthiness’ of individuals, corporations, and governmental entities across China. In this introduction we explain what the China social credit system is, how it differs from financial credit ratings in other countries, and how it impacts on individuals and companies operating within China.
1. The goal of the China social credit system is to provide a holistic assessment of an individual or a company’s trustworthiness
2. The China social credit system, while still in development, is arguably an extension of existing social rankings and ratings in China which have existed for milennia
3. The consequences of a poor social credit score could be serious. It may affect travel prospects, employment, access to finance, and the ability to enter into contracts. On the other hand, a positive credit score could make a range of business transactions for individuals and corporations much easier
4. It is essential that any foreign business consolidating or establishing their presence in China seek professional advice for managing a social credit score. This applies both to individual scores, and the corporate social credit score.
2021 is the beginning of a new phase in the development and implementation of China’s social credit system (sometimes known as ‘SoCS’, or the ‘SCS’). Up until now, development has been guided by a national policy document known as the ‘Planning Outline for the Construction of a Social Credit System (2014-2020)’.
This has seen the deployment of the social credit system widely throughout China, with an estimated 80 percent of provinces, regions and cities having introducing some version of the system, or being about to do so.
The implementation of the system for corporations, known as the ‘corporate social credit rating’ is especially advanced: More than 33 million businesses in China have already been given a score under some version of the corporate social credit system.
As of mid-2021, it is China’s latest five-year plan for the ‘rule of law’ within China, recent guidance from the State Council, and a draft Social Credit Law which demonstrates the direction of the social credit system.
So what is the, China social credit system? If commentary in the western media is anything to go by, it is a somewhat mysterious and scary rating system.
In 2018, former US Vice-President, Mike Pence, sounded the alarm bells about China’s social credit system, stating “China’s rulers aim to implement an Orwellian system premised on controlling virtually every facet of human life – the so-called “social credit score.”
Is there any truth to such rhetoric, and what does all this mean for businesses expanding into China?
In this article, we break down the China social credit system, as it has been developed to date, and aim to separate the myth from reality.
What is the China Social Credit System?
The term ‘social credit’ (社会信用体 in Chinese and shèhuì xìnyòng tǐxì in pinyin) doesn’t have a precise meaning — rather, it is an intentionally broad and vague term allowing for maximal policy flexibility. This makes the terminology useful for a concept so diverse in application.
Plugged into a regulatory framework, the ‘China social credit system ‘(also knows as ‘China’s Ranking System’) refers to a diverse network of initiatives aimed at enhancing the amount of ‘trust’ within Chinese society.
The goal is for the social credit system to make it easier for people and businesses to make fully-informed business decisions. A high social credit score will be an indicator that the other party can be trusted in a business context.
The system began with a focus on financial creditworthiness, similar to credit scores used in western countries, and moved on to include compliance and legal violations.
The eventual ‘end-state’ of the system is a unified record for people, businesses, and the government, which can be monitored in real-time.
In more recent years, policy development for the social credit system has moved beyond considerations of financial creditworthiness and compliance to encompass a broader notion of ‘trust’.
A common theme in the policy documents establishing the social credit system is the term ‘Chengxin‘, variously translated as ‘trustworthiness’, ‘honesty’, ‘integrity’, ‘sincerity’ or ‘morality’, depending on the context.
More specifically, through facilitating trust, the China social credit system supports the following goals¹:
The high-level goals are to be achieved via three key practical mechanisms:
The elements of the social credit system outlined above are put into place by a variety of actors:
Historical Background to the China Social Credit System
While the introduction of a unified China social credit system was formally announced in 2014, precursors to the proposed social credit system have operated within China for centuries — arguably millennia. The idea, or philosophy, behind social credit, might be traced back to the ‘warring states’ period of Chinese history. At that time, various schools of thought competed for dominance
Though arguably ‘legalism’ won out, all three of these schools influenced the first imperial ‘Qin’ dynasty (221-206 BC). It is within this dynasty that a meritocratic assessment and promotion system was applied across the imperial bureaucracy in order to achieve a well-functioning Chinese state. Arguably, this was a rudimentary ‘social credit system’, albeit one applied only to civil servants, and without a precise ‘score’.
In the 20th century, public record systems have been developed to record the behavior and actions of ordinary individuals. For example, the hukou system, in place in its modern incarnation since 1958, registers households, controls internal movement within China, and assigns benefits to households depending on their rural or urban location.
The dàng’àn is a set of records related to an individual within China, recording that individual’s “performance and attitudes”. This file contains a range of information such as physical characteristics, photographs, employment records, academic records, workplace appraisals, convictions and administrative penalties. This file follows an individual for life, and two copies are held: One is kept by the Public Security Bureau and the other by the individual’s work unit.
This file has been used (and still is) for a range of decisions affecting an individual, such as promotions and access to passports.
A key proposed benefit of the new unified social credit system is that, instead of relying on a paper record to manage society, the electronically-integrated system would expedite the analysis process and make oversight easier.
Timeline of the Development of the China Social Credit System
In 1978-1979, the reforms of Deng Xiaoping opened up the Chinese economy in various key ways, including the “Open Door” policy that permitted foreign investment in China once more. From that point on the lack of traditional credit rating systems, as well as significant corruption scandals, have been as a limitation on economic prosperity.
By contrast, developed western economies like the United States already had computerized credit analysis by the 1960s (though scoring systems, such as the FICO, did not rise to prominence until the late 1980s).
We set out the development timeline for the social credit system below.
How Does the China Social Credit Work?
The China social credit system rates individuals based on the aggregation and analysis of data. In some trials, this has involved a single numerical score (usually between 1 and 1000, like a FICO score), or a letter grade (usually from A-D).
This information is acquired from a range of sources including individual businesses (including ‘big tech’) and government entities. Some of the information is ‘siloed’, and accessible only by the individual regional or central government authority. But in many cases the information is shared with other regulators through a centralized database, such as NCISP.
For example, some of the factors that can be considered in giving a corporate social credit rating include:
It is important to note is that businesses’ scores may decrease based on the behavior of their partners. This means enterprises need to think very carefully about who they do business within China.
Potential Negative Effects of a Bad Score
As the China social credit system is still in a state of evolution, it is impossible to say with certainty what exactly the negative consequences are. That said, based on those elements that are currently in place, as well as existing regional pilots, potential negative effects of a bad score once fully implemented include:
In addition, businesses of individuals need to consider the negative effects that the actions of a person or business can create for others due to a poor social credit score.
For example, engaging with companies that have a low social credit score (such as those that are ‘blacklisted’) can reduce one’s own social credit score. In addition, if an individual with a poor social credit rating opens a business, the business may automatically begin with a low social credit score.
The majority of megacities and mid-sized cities in China have already implemented a trial-period of the social credit system. There are many ways to lose points and lower one’s social credit score, depending on the city where the offense takes place. Some of the more trivial score-lowering actions include:
Some have questioned whether some of these activities and behaviors are bad enough to merit the penalties that result from a low social credit score.
It should be noted that the court system is available for individual’s or corporations to appeal their score.
The China Social Credit System and the Blacklist
So far we have made several references to the ‘blacklists’ and ‘redlists’ associated with the China social credit system. So what exactly is a blacklist?
China currently has a number of national and regional blacklists based on various types of violations. It is expected that over time, the system of blacklists will be fully integrated with the social credit score.
Businesses can be placed on a blacklist due to a particular violation or because of a poor social credit score. A government notice released in 2016 encourages businesses to consult the blacklist before they hire someone or assign them a contract.
Please note that companies will not be blacklisted automatically for compliance failures. The corporate social credit system also maintains an Irregularity list. This list deals with significant (but not yet ‘blacklist’ level) non-compliance.
Presence on this list means the business is in danger of being blacklisted and should quickly take steps to improve its reputation.
The Chinese government utilizes the blacklist in multiple ways. The list itself is frequently being analyzed, with the available information on both its citizens and companies listed in their Master Database working as a template for assigning each person a score.
While the China Blacklisting system is still in its early stages, it is already the most prominent system of its kind worldwide. China has already put this system into action, and has barred thousands of Chinese resident’s rights to buy plane tickets and travel either domestically or abroad. However, most of the blacklisting that has occurred to date has been as a result of violations or misbehaviour of companies and the individuals working for them.
In its current iteration, the blacklisting system is highly complex. Instead of having a single blacklist used by the federal government, there are currently hundreds of blacklists being controlled by various state agencies around China. Every agency has their own jurisdiction in which they operate, giving these localized organizations the ability to blacklist individual citizens and companies that operate within their area of authority.
It’s important to note that being blacklisted under one agency’s jurisdiction may leave the affected party subject to blacklisting from the remaining agencies across the country (the level of integration of blacklists differs across the country and between different government departments.
It typically takes 2 to 5 years to be successfully removed from a blacklist, which often has a negative impact on the privileges afforded to those individuals and businesses in society. Early removal from the list is a possibility for some, depending on the severity of the offense and whether the offending party has done enough to rectify the situation in the eyes of the relevant governing body.
In addition to being used as a metric for punishing citizens and companies for violating the country’s guidelines, the social credit system is also intended to be useful in China’s search for signs of potentially harmful behavior before it occurs.
What are the Potential Rewards of a Good Score?
On the other end of the spectrum, there are positives of the social credit system for people and corporations who are determined to be outstanding members of Chinese society. In this context, the opposite being blacklisted is to be “red-listed.” Red-listing allows citizens and companies to gain access to improved privileges that will impact their day to day lives.
Companies with a high score are placed on a “redlist”. There is a range of rewards to businesses that do well in this regard, including:
- Streamlined administrative procedures. For example, companies that are classified as an ‘Advanced Certificate Enterprise’ may receive faster customs clearance. A-rated tax-payers may have their tax returns processed more quickly
- Fewer inspections and audits
- Fast-tracked approvals.
To What Extent is Technology Integrated within the Social Credit System?
New innovations in technology are poised to play a large role in the country’s social credit system. Artificial Intelligence (AI) facial recognition software is said to be currently utilized in tandem with over 200 million surveillance cameras in China.
Some argue that the purposes of large-scale surveillance measures is to give Chinese officials the ability to track their citizens in every facet of everyday life: In turn providing masses of data to determine whether an act worthy of being blacklisted has occurred.
Along with these physical surveillance measures, the Chinese government continues to track the online behaviors of its citizens. There are a plethora of violations Chinese officials may be looking for, including evidence of writing and sharing anti-government ideologies.
The AI software is able to do the majority of this work on behalf of the government and alert officials when a violation has occurred. The technology has advanced to a place where the AI can identify videos of anti-government protests and block users from viewing them.
Businesses must be cautious when navigating China’s compliance laws as well, as their internet data may be used against them in the event of a violation. Data that reveals a company’s lack of compliance in regards to contractual obligations are factored into and can play a significant role in determining the company’s social credit score.
It is worth noting that, generally speaking, China’s public security system and social credit system are distinct. Currently, blacklists and redlists are created via the manual inputs of officials and there is not yet any full-scale integration between the state’s security apparatus and the social credit system.
What is the Corporate Social Credit Score?
While the social credit system in China is universal in application, the policy focus to date has been on its application to companies. According to one analysis, 73 percent of policy documents released to date have been focused on the application of social credit in the corporate sector.
The goal of the corporate social credit rating is to combine data from many different sources to provide a public searchable database of companies, and to evaluate and score those companies against a list of compliance criteria.
While the corporate social credit rating is still in a development phase, the goal is to work towards a ‘Comprehensive Public Credit Rating’, which will provide an overall score for companies operating in China.
In the meantime, companies need to use a range of existing databases providing information and evaluations of companies, based on overlapping, yet distinct datasets. The databases can be national, regional, local and based on particular industries.
Businesses are assessed based on compliance, financial and audit records: More than 33 million businesses in China have been assessed to date.
Important concepts in the corporate social credit system include:
- Grades and ratings. Scores are currently in the development phase (these will be similar to the three-digit credit scores you may already be familiar with in other countries). However, there are four basic letter categories used: A= Excellent; B=Good; C=Average; D=Not sufficient;
- Red-List/Red-listing. This is a mechanism to reward companies that are performing well. For example, an export or import business may be identified as an ‘Advanced Certificate Enterprise’ and be granted special privileges, such as faster customs clearance. Similarly, privileges may be applied to A-rated taxpayers;
- Irregularity list. This lists companies with significant non-compliance. If a company is on this list, the authorities are paying attention to it;
- Black-listing. Black-listed companies are classified as heavily distrusted. This categorization can result in your business license being revoked;
- Unified Social Credit Code. This is your company’s unique business identifier across the different databases.
Below we look at how to check your status using a key national databases, CreditChina.
How to Check the Status or Rating of your Company using CreditChina
CreditChina is a search tool (only available from a Chinese IP Address), providing a range of information on companies and individuals. Information incorporated into its assessments includes:
- Basic identifying information for the company, including the company’s Unified Social Credit Code and permits held;
- Any applicable administrative penalties;
- Any payment defaults recognized by the Courts;
- Any instances of tax evasion and fraud;
- Instances of illegal importing or exporting;
- Unpaid wages
There are several sub-databases provided, including one relating to red-listed companies, one for black-listed companies and one for companies with irregularities.
To proceed with checking your rating or score in CreditChina go to the CreditChina homepage as shown below:
Then, take the following steps:
Click on the ‘Credit’ tab (first item in the list)
Search for the company either by name, or by Unified Social Credit Code;
The record that you see, will show:
- Any administrative permits held by the company;
- Any administrative penalties applied to the company;
- The presence of the company on red-lists;
- The presence of the company on black-lists;
- The presence of the company on any irregularity list.
If you find ‘negative entries’ (presence on a black-list or irregularity list), you should seek advice on how to improve your situation. Or, if you think there has been an error, you can make a complaint seeking directly to the authorities seeking a correction of your record.
How to Check the Status or Rating of your Company Using Other Databases
NECIPS is another national database, arguably not as user-friendly as CreditChina. It has the most comprehensive set of information on social credit system records, as it collects data from the most government sources. In addition, NECIPS:
- Provides more comprehensive identification data relating to the company;
- Allows for reporting on social credit system issues directly to the authorities.
In addition, companies should check local databases in the areas that they are located, as well as any subject matter-specific databases. These databases include:
- The tax database that lists when companies have excellent tax-filing and payment practices;
- The environmental regulatory database;
- A customs database;
- A procurement database.
Why Is the Corporate Social Credit System Important For Your Company?
The corporate social credit system is important for two reasons. First, you need to know who you are doing business with in China. The corporate social credit rating lets you look up potential business partners and collaborators and check their reliability. Second, understanding the corporate social credit system is essential for your own business. In order for other companies and the government to be willing to engage with you, you need to continually demonstrate that you are a compliant entity.
Looking up your corporate credit rating on the available databases is essential in order to check that you are on track. We recommend that you seek professional advice and assistance to ensure that your company can increase its ‘positive’ credit entries and decrease the number of ‘negative’ entries.
What Is the Difference Between Alibaba-Affiliated ‘Sesame Credit’ and the China Social Credit Rating?
The China social credit system is often confused with existing credit ratings provided by private credit providers. It is commonly likened to Sesame (Zhima) Credit, which is operated by Alibaba’s Ant Financial.
Note, Sesame Credit has no connection to ‘Credit Sesame’, a US-based credit and loan company.
Whilst Alibaba was involved in constructing infrastructure mechanisms for the social credit system (Alongside other Chinese ‘big tech’ firms such as Tencent and Baihe), Sesame Credit is an optional platform. It exists for the use of Alibaba group customers. Rewards include streamlined access to loans from Ant Financial, and an enhanced profile for operating on other Alibaba Group sites. It is distinguished also by its use for individuals, as opposed to businesses.
The Sesame Credit model takes into account a range of information including the individual’s payment history and debt, their ability to fulfil contractual obligations and their personal characteristics. In this respect, Sesame Credit works in a similar way to some credit systems in the United States. For example, while the most common form of credit score in the US, the FICO score, does not take into account personal characteristics, lenders often take those factors into account when implementing those scores.
What Can You do to Prepare for the Implementation of the China Social Credit System?
While some valid concerns have been expressed about the trials of the social credit system so far, the potential benefits for foreign companies looking to extend or establish their operations in China cannot be underestimated. If it works as intended, the social credit system will mean:
- A leveled playing field against domestic companies. Through publicly accessible databases, foreign companies will be able to know that they are doing business with a reliable partner. To date, this information was primarily known by local Chinese companies ‘in the know’
- Standardized credit ratings across China. Foreign companies will be able to have confidence that a rating given to a company in Shanghai will be based on the same factors as a credit rating given in Shenzhen.
In preparation for the implementation of the China social credit system, it is imperative that businesses both foreign and domestic understand which information they need to provide to authorities. Once this information is identified, businesses should conduct an internal audit which will allow full compliance with the necessary regulations.
In addition to these measures, businesses should prepare a supply chain audit and confirm that any business partners meet social credit guidelines. Businesses should also analyze their IT and data security, as the transmission of this data to government bodies will need to be undertaken.
While not mandatory, businesses should assess whether their operations are conducive to the advancement of government policies. This can include measures of corporate social responsibility that align with government priorities and wider policy initiatives.
What Is the Public Perception of the Social Credit System?
As the social credit system is relatively new and unfamiliar to individuals and businesses from other countries, it may seem ‘scary’. However, a significant degree of reporting in English-language media has been based on linguistic confusions and policy proposals that have not yet been implemented. For example, businesses do not currently get penalized for ‘frivolous spending’, as has been widely reported.
In many respects, a credit score in the United States, for example, can have just as serious consequences for individuals and businesses, as China’s social credit system: For example, access to transport can be seriously curtailed in the US due to a poor credit rating through higher insurance premiums and limited access to car loans.
In 2017, CNBC looked at the similarities between the China social credit system and FICO scores in the US. One commentator quoted there, Forrest Zhang, Professor of Sociology and Singapore Management University, commented: “From what has been outlined in the official sources, there is noting more intrusive than what is commonly done in the West”.
Although there has been substantial resistance to the social credit system from a global perspective, it appears that most Chinese citizens approve of the system. In addition, those most familiar with the social credit system and how it is being implemented, citizens and businesses in China, are widely supportive of the system.
In one peer-reviewed study, 80% of respondents either somewhat approved or strongly approved of social credit scores. Just 1% of participants reported either strong or some degree of disapproval in the system.
While not all studies have shown such a high level of support for the system within China, all show a broad degree of support. See, for example, the study below.
It is important to note that this survey only represents Chinese internet users that participated in the survey and is not necessarily a representation of how the country feels as a whole.
Are There Overseas Equivalents to the Social Credit System?
As noted above, it has been suggested that the social credit system is not so different from forms of citizen evaluation in other countries, such as the United States. Is this true? Below we consider some of the wide-scale ‘trust’ and big data programs in other countries, and consider how they compare with elements of the China Social Credit System:
As is evident from the examples given above, many elements of the China social credit score are already implemented in other countries.
What is distinct about China’s system is its sheer size and breadth, as well as an overall Government strategy and direction around the collection and use of big data.
Progress on the China Social Credit System in 2021
2020 was the original target year for implementation of the China Social Credit System. However, a range of factors, including the impact of Covid-19, has delayed the full establishment of the system.
Throughout the course of 2020, there were four significant variations to the social credit system in response to the pandemic. Note, these changes were not applied nationally, but regionally and by municipal governments, depending on how they were impacted by the Pandemic. These included:
January 2021 saw the National Development and Reform Commission release a national guiding document for credit information reporting. This is designed to encourage the standardization of credit information reporting between provinces.
In addition, the latest 5 year “Plan on Building the Rule of Law in China (2020–2025)” sets out a vision for the connection between technology and law, as well as an intention to progress social credit legislation. As of mid-2021, this legislation is still in draft form, being considered by government departments.
The China social credit system aims to be an all-encompassing system for assessing the trustworthiness of individuals, corporations and government actors within China.
To date, there is no one, unified, ‘social credit score’ held on each individual assessing their trustworthiness. Rather, there are a range of different ratings held by government departments, and individual municipal and provincial governments.
However, there is an increasing level of cohesion across China with social credit ratings due to centralized information platforms. This is especially the case for corporate social credit ratings and the blacklists that relate to those ratings.
By working with a local expert like New Horizons Global Partners, you can identify the type of information that you will need to provide to authorities, receive an internal audit to ensure compliance and access due diligence on potential business partners.
¹For an in depth discussion of the concepts underlying China social credit see Zhang, Chenchen (2020). “Governing (through) trustworthiness: technologies of power and subjectification in China’s social credit system. Critical Asian Studies. See also Blomberg, Marianne von (2020). The Social Credit System and China’s Rule of Law. 10.1007/978-3-658-29653-7_6.
² Yu Jingming, Lin Junyue, Sun Jie (2000). National Credit Management System. Beijing: Social Sciences Academic Press.
³ Innovation Centre Denmark, Shanghai. (2018). ‘Social credit & big data trends IN CHINA’.
⁴ For an extensive discussion of the Suining trial see Mac Sithigh, Daithi and Siems, Mathias. (2019). ‘The Chinese Social Credit System: A Model for Other Countries?’. EUI Department of Law Research Paper No. 2019/01, Available at SSRN: https://ssrn.com/abstract=331008.
⁵ For further discussion see Mo Chen and Jens Grossklags (2020). ‘An Analysis of the Current State of the Consumer Credit Reporting System in China‘. Proceedings on Privacy Enhancing Technologies. (4):89–110.
⁶ For an in depth discussion of the Rongchen and Suzhou trials see Innovation Centre Denmark, Shanghai. (2018). ‘Social credit & big data trends IN CHINA’.