China’s social credit system is a database or 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 provide for individuals and corporations in other countries, but captures information on a wider variety of behaviors.
Business owners who operate in the country need a thorough understanding of this system and how it can impact their business.
Below, we explain what the social credit system is, how it works, and what its potential implications for businesses might be.
Quick Facts About China’s Social Credit System
China’s social credit system was formally announced in 2014, but has existed on a regional level since 2009. While many elements of the social credit system are operational already, the aim is to provide a fully functional system – enabling the ranking of all Chinese citizens and businesses – by the end of 2020.
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 been given a score, and many companies have already been blacklisted.
Because the 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.
The system has the capability to carefully monitor and control individual behavior. People are rewarded or punished based on their scores, and people’s scores can increase or decrease based on their individual behavior. Foreign companies are advised to seek assistance from a local expert who can ensure full compliance, and provide advice that can help increase their score and prevent them from being blacklisted.
What is the China Social Credit System?
China’s social credit system also knows as China’s ‘Ranking System’ uses big data to monitor and assess trustworthiness. The goal is to construct a high-trust society that is based on individuals and companies following the law. There are distinct social credit systems for citizens, businesses, and government officials.
By assigning social credit scores to individuals and entities, people and businesses can make more informed decisions about those with whom they choose to do business. Social credit scores can mean rewards or punishments for those being scored.
For citizens, the system works similarly to obtaining a credit score in english-speaking countries. Because there is limited credit information on each citizen in China, banks and other creditors sometimes have difficulty assessing whether the individual will repay a loan.
The social credit system helps provide more information about the trustworthiness of a person. The system tracks compliance with laws and legal violations. In the future, it may track additional information.
The social credit score system focuses on whether businesses comply with laws and regulations and pay their taxes when assigning a score to businesses. Product and service quality will also be factored into a business’ score.
How Does the Social Credit System Work?
The China social credit system assigns a score after collecting, aggregating, and analyzing data. Businesses collect information on their own operations and are required to submit this information to local and national authorities. This information is consolidated in a centralized database.
Additionally, the government submits data on businesses that is obtained through standard government inspections. Data is integrated into the monitoring system, which calculates a social credit rating for each business.
Factors that can be considered in calculating the score may include:
- Whether the business has paid taxes on time
- Whether the business maintains necessary licenses
- Whether the business fulfills environmental-protection requirements
- Whether the business meets product quality standards
- Whether the business meets requirements specific to their industry
Important to note is the fact that businesses’ scores may decrease based on the behaviors of their partners. This means enterprises need to think very carefully about who they do business with in China.
Potential Negative Effects of a Bad Score
Some of the possible negative effects of a bad score include:
- Travel bans – Individuals may be banned from flying or getting on a train, or from purchasing business-class tickets. Some hotels have also banned people with low scores
- School bans – People with bad scores, or their children, may be barred from enrolling in higher education or applying for high school
- Job prohibitions – A bad score can mean that a person may be denied the ability to perform work in a big bank, executive job, or at a state-owned firm. Businesses may be excluded from public procurement projects
- Increased scrutiny – Businesses with poor scores may be subject to more audits or government inspections
- Decreased internet speeds – Your internet speeds may be decreased based on your behavior
- Public shaming – The government keeps a public list of individuals and businesses with a poor score. This can make it difficult for businesses with low scores to build relationships with local partners who can be negatively impacted by their partnership.
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 your 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.
China’s Social Credit System and the Blacklist
China currently has a number of national and regional blacklists based on various types of violation. These systems will be integrated with the social credit system.
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 their reputation.
Potential Rewards of a Good Score
Companies with a high score are placed on a “red list”. There are 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.
Evaluating 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 the 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 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.
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 platform to benefit from our in-house legal and tax teams who ensure full compliance with local laws.