China’s social credit system is a government initiative that aims to construct a database that monitors the behavior of individuals, corporations. and governmental entities across China in a contemporaneous manner. The social credit system is very complicated, and business owners who operate in the country need a solid foundation in their understanding of this system and how it can potentially impact their business.
Below, we explain what the social credit system is, how it works, and what its potential implications for businesses are.
Quick Facts About China’s Social Credit System
China’s social credit system was formally announced in 2014. China’s aims for the system to be fully functional – enabling the ranking of all Chinese citizens – by 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 uses big data to monitor and assess trustworthiness in order 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 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 Western 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 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 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 int 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.
Negative Effects of a Bad Score
There are a number of negative effects that a person or business can create for another person or business due to their poor social credit score. This is because many systems interact with each other.
For example, if an individual with a poor social credit rating opens a business, the business will automatically have a low social credit score.
Some of the 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.
China’s Social Credit System and the Blacklist
China currently has a number of national and regional blacklists based on various types of violations. 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.
Rewards of a Good Score
Companies with a high score are placed on a “red list.” They may be subject to fewer inspections and audits. They may also receive fast-tracked approvals and benefit from streamlined administrative procedures.
Business Tips to Prepare for China’s Social Credit System
Because the potential consequences of your social credit score are so significant, it is even more important that you fully comply with all labor and employment laws.
By working with a local expert like New Horizons, you can identify the type of information that you will need to provide to authorities, conduct an internal audit to ensure compliance, and conduct due diligence on potential business partners.
Additionally, you can transfer employer responsibilities to New Horizons through our PEO platform to benefit from our in-house legal and tax teams who ensure full compliance with local laws.