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Home Business Etiquette

How Can Individuals, Companies be Limited by  Bad Social Credit in China?

USCBC by USCBC
February 3, 2017

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By Jake Laband

A new government system that evaluates and tracks “untrustworthy” individuals and companies could limit eligibility for financing, employment, and Party membership, as well restrict real estate transactions and travel. The Chinese government intends to fully implement this nationwide social credit system by 2018.

Although credit systems based on financial information exist in other countries, China’s system seeks to use big data to evaluate non-financial information as a means of promoting sincerity, trust, and traditional values. Based on the information collected, government authorities could withhold administrative approvals, make project approvals conditional, limit access to financial institutions, or prevent legal representatives from conducting business for those with poor social credit scores.

In addition to illegal actions, the system will evaluate an individual’s credit score based on a range of social criteria, including breaches of contract. The exact criteria remains unclear, but existing laws and regulations that reference a social credit or trustworthiness score suggest it can be influenced by poor product quality, timeliness of payments to tax authorities, the completeness or accuracy of filings for foreign investors, and traffic violations.

Some of the pilot systems have a method to protest or correct poor credit scores as well as whistleblower provisions. However, certain whistleblower provisions could encourage corporate competitors to report one another in bad faith, as seen in recent food safety cases. Litigation or bankruptcy proceedings in China could negatively affect companies’ credit scores, thereby disincentivizing the use of these mechanisms to deal with overcapacity and bad debt in certain sectors.

While authorities aim to have one unified system by next year, the concept of social credit has appeared in the draft Foreign Investment Law, the Online Advertising Law, and the Cybersecurity Law. Regulators also announced in 2016 multiple credit systems that target foreign investors, which could affect data privacy, judicial processes, and non-commercial activities. How these systems relate to the unified system is not yet clear.

The amount of data being collected and analyzed by the government raises data privacy concerns for many companies. The draft ecommerce law, for example, includes provisions that require third-party ecommerce platforms to save all transaction records for at least three years. Some companies are concerned about requirements to make this information available to government upon request, and the impact it may have on consumers’ personal data privacy.

The US-China Business Council (USCBC) has compiled a list of publicly available rules and regulations that use social credit. Some establish an industry-specific system, such as food safety, while others provide mechanisms that will integrate with the unified system, such as associating business licenses with a unified social credit code. Some of these systems also include a “blacklist” that further restricts individuals or companies. Two recent announcements are of particular relevance to foreign companies and investors:

  • Amendments to Foreign Investment Laws   Measures announced by MOFCOM and NDRC to simplify foreign investment reference an “integrity filing system,” which seems to be related to but separate from the social credit system. The concept was implemented in the pilot Free Trade Zones. How the integrity filing system relates to the unified system is unclear.
  • Beijing Foreign Enterprise Credit Filing   Beijing announced a “dual points” system  that monitors foreign investors’ credit with positive and negative points. Based on the points, the system will categorize companies and provide “green pass” benefits to companies with good credit. The system will be built on an existing information platform used by ministries, as well as information about a foreign company’s international industry quality, credit rating, product quality, and other “international credit information.” Although this system was announced in media, no formal regulations are available.

A number of private enterprises have also begun personal credit evaluations. Sesame Credit, an offshoot of Alibaba, reportedly monitors the types of products individuals buy online as one measure of “responsibility.” While these systems do not yet feed into a unified system, good credit scores on these platforms can entitle users to certain benefits, like reserving a hotel room without a deposit.  

About the author:  Jake Laband is the deputy director of the Beijing office of the US-China Business Council, a private, nonpartisan, nonprofit organization of more than 200 American companies that do business with China.

USCBC

USCBC

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