The China social credit system is a set of databases that keep up-to-date information on the behavior of individuals, corporations, and governmental entities across China.
The social credit system has some similarities with the credit ratings provided for individuals and corporations in other countries, but captures information on a wider variety of behaviors.
1. The goal of the China social credit system is to provide a holistic assessment of an individual or a company’s trustworthiness, based on a numerical score
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.
The China social credit system establishes a unified record system for people, businesses, and the government. It does this by seeking to track and evaluate standards of trustworthiness and merit. The result is a social credit score built on individual, corporate, and government behavior monitored in real-time.
Business owners who operate in China, or seek to do so, need to maintain a thorough understanding of this system and how it can impact their business.
At present, taking part in both the private and government versions of the China social credit system is still voluntary. However, in the future, the official social credit system will become mandatory. That being said, there is already significant pressure to take part in the system now.
Below, we explain what the Chinese social credit system is, how it works, and what its potential implications for businesses may be.
View the infographic “The China’s Social Credit System Explained“
Quick Facts About The China Social Credit System
The introduction of a unified China social credit system was formally announced in 2014, but preliminary versions of the system have existed on a regional level since 2009.
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 more recent times, public record systems have been developed to record the behavior and actions of ordinary individuals. For example, the dàng’àn and hukou provide paper records of both individual citizens and households in China that allow the government to manage society in a way the government deems beneficial.
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 will expedite the analysis process and make oversight easier.
While many elements of the social credit system are already operational, the goal was to provide a fully functional system – enabling the ranking of all Chinese citizens and businesses – by the end of 2020. Full implementation has been delayed due to the impact of Covid-19.
Currently, businesses are being categorized based on their compliance standards, as well as their audit and financial records. More than 33 million businesses in China have already been given a score under some version of the corporate social credit system.
Because the China social credit system is still in the process of being implemented, there are regional variations. Some city councils run the system in certain regions while other areas base scores on data held by private technology platforms.
What is the China Social Credit System?
The China social credit system also knows as ‘China’s Ranking System’, uses so-called ‘big data’ to monitor and assess trustworthiness. The goal is to construct a high-trust society which rewards individuals and companies for following the law. As well as regional variations, there are distinct social credit systems for citizens, businesses, and government officials. There are also voluntary trial versions being run by private companies.
The goal is for social credit scores 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.
Officials hope that the China social credit system to work similarly to the system of credit scores dominant in English-speaking countries. Many consider that a lack of easily available credit information in China has made it more difficult for banks and other creditors to assess creditworthiness.
To date, the corporates social credit system is focused on legal compliance and legal violations (including tax matters) and credit information. However, it is expected that in the future the social credit system will capture additional information, including product and service quality.
The corporate social credit system focuses on whether businesses comply with laws and regulations and pay their taxes when assigning a score to businesses. Product and service quality is also likely to be factored into a business’ score soon.
How Does the China Social Credit System Work?
The China social credit system assigns a score based on the aggregation and analysis of data. This information is acquired from a range of sources including individual businesses (including ‘big tech’) and government entities. This information is then kept in a centralized database.
Factors that can be considered in calculating the score may 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 yet to be fully implemented in China, it is impossible to say at this stage what exactly the negative consequences might be. That said, based on pilots of the social credit system, and existing regional versions, 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. In these trials, the government tracks as much of a resident’s day-to-day actions as possible. 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
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. People who are known to act poorly in terms of China’s standards are subject to being blacklisted and losing personal rights, depending on the severity of their offense.
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 has been as a result of social credit score deductions to 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 does in fact leave the affected party subject to blacklisting from the remaining agencies across the country.
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.
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.
Integrated Technology and 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. These government activities are supported by access to big data from China’s biggest internet companies.
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 can 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.
Distinctions Between Alibaba’s 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.
Preparing 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.
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. There has also been speculation as to whether the participants living in China and accessing the survey on Chinese internet servers felt comfortable voicing any critiques they have for the system. However, the survey did provide a glimpse into the opinions of the local people regarding one of the world’s most controversial social programs, which is a valuable insight for foreign businesses looking to potentially hire professionals currently living in China.
Progress on the China Social Credit System in 2021
2020 was the original target year for implementation of the China Social Credit System. However, as mentioned, 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.
The potential consequences of your social credit score are significant. Therefore, it is essential that you can demonstrate full compliance with all labor and employment laws in China. Note, that this is not just about avoiding the blacklist: It is also about getting credit for your strong compliance record.
By working with a local expert like New Horizons, 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.
Additionally, you can transfer employer responsibilities to New Horizons through our China PEO & Employer of Record platform to benefit from our in-house legal and China payroll teams who ensure full compliance with local laws.