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.
The China social credit system promotes the establishment of a unified record system for people, businesses, and the government. This seeks to track and evaluate standards of trustworthiness and merit.
China’s social credit system is considered to be an ambitious initiative that has far-reaching implications on Chinese society. It is designed to construct a platform that monitors individual, corporate, and government behavior across the nation in real-time.
Business owners who operate in China need to maintain a thorough understanding of this system and how it can impact their business.
By understanding the rules and regulations that govern the China social credit system, business owners are best positioned to meet standards of compliance that pertain to their industry.
At present, taking part in both the private and government versions of the China social credit system is technically 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.
Pre-cursors 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 (221-206BC). 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.
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.
The proposed benefits of the new unified social credit system are that, instead of relying on a paper record to manage society, the electronically-integrated system will expedite the analysis process and give 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 been given a score, and many companies have already been blacklisted.
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.
The China social credit 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?
The China 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 China social credit 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 China 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 China 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:
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 within China.
Potential Negative Effects of a Bad Score
Some of the possible negative effects of a bad score 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 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.
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:
Because of the nature of these offenses and the rigid penalties handed out, there have been questions raised as to whether these actions are egregious enough to merit a loss of a citizen’s civil rights. The government rationalizes this behavior as a means to hold its citizens accountable to the macro goals for China society.
In order to appeal their scores, businesses and individual citizens are able to utilize the country’s court system to begin the process for making a formal appeal.
The China 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.
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 hoped to start being proactive in China’s search to identify signs of potentially harmful behavior before it occurs. While this goal has potential to make positive use of the system, it is still yet to be implemented.
Potential Rewards of a Good Score
On the other end of the spectrum, there are positives of the social credit system for people 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.
Current Misconceptions Surrounding the China Social Credit System
Due to the China social credit system currently existing as a number of localized programs – as opposed to a coordinated national system – there are a host of misconceptions that need to be addressed.
Business owners should understand that different regions vary in the type of data collected. There are also variances in the way that data is collated and assessed, and the manner in which rewards and punishments are handed out.
Some detractors of the China social credit system mistakenly believe that ratings given to individuals are the same as those given to businesses. This is largely incorrect and can be evidenced by the varying levels of scoring and assessment protocols that are utilized by different Chinese cities.
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.
The idea behind having such a large volume of surveillance measures is that it gives Chinese officials the ability to track their citizens in every facet of everyday life. This gives the government an unprecedented amount of data to use in circumstances where an act worthy of being blacklisted has occurred.
Along with these AI capabilities, the Chinese government will also continue to enhance its internet tracking practices to closely monitor the online behaviors of its citizens. There are a plethora of violations Chinese officials will be looking for, including evidence of writing and sharing anti-government ideologies. Through its partnerships with many of the internet’s most popular websites, China’s government is able to collect data on essentially every action taken by a Chinese resident on their desktop, tablet, or mobile phone.
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.
Whilst Alibaba was involved in constructing infrastructure mechanisms for the social credit system, Sesame Credit is an optional platform that exists on its own. It is distinguished by its use for individuals, as opposed to businesses.
The China social credit system remains, in some respects, the result of China’s goal to streamline its business landscape and remove bureaucratic limitations. Chinese authorities are driven by the long-standing belief that streamlining business environments has the potential to grow its economy.
At the same time, authorities are motivated to maintain oversight over companies and other entities.
The China social credit system allows authorities to produce a self-regulating market, complete with stringent oversight and a structured process of administration. Whilst it is undoubtedly strict in its application, it can also offer tangible benefits for foreign companies.
Preparing for the Implementation of the China Social Credit System
Foreign companies looking to extend or establish their operations in China will benefit through a greater leveling of the playing field with their domestic competitors. The social credit system will enforce more sustainable business regulations that are standardized across different Chinese regions.
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.
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.
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.