Orwellian characterizations of China’s future social credit system (SCS) grabbed the headlines in large part because several defining details were left to the imagination. Should we prepare for the worst? Not exactly.
What is known is that the SCS for companies (“Corporate Social Credit System”) will be used more widely to regulate the commerce sector. In June, the State Council released a guidance document that calls for the establishment of three elements – a credit commitment system, a credit reporting mechanism, and a classified credit regulation – as the basis for l inspection of companies, but little is known beyond the fact that these mechanisms will eventually exist. While we can’t predict how credit scores will be calculated liberally or conservatively, here’s how the publicly available information adds up so far:
What we know
China has already established credit profiles for 33 million businesses and organizations, including foreign companies.
Under the current system, businesses are identified by a unique 18-digit code called “uniform social credit code. “Most of the data collected on companies, including whether they have good or bad social credit, is publicly available on the National Enterprise Credit Information Publicity System and on the Credit China website. The data that feeds into the SCS business come primarily from company self-reporting, government inspections, and online or digital inspections (for example, real-time monitoring of car carbon emissions). Foreign investment law States that foreign invested enterprises (FIEs) will be investigated for misconduct and the findings will be recorded in the credit reporting system.
Companies will be assessed based on their compliance with regulations specific to their industry.
There is no set of general standards guiding how companies will be assessed. Instead, China’s central and local governments have released a total of 1,500 documents defining more than 300 rating requirements for companies in different industries, but several have yet to be released. Understanding exactly what types of criteria businesses will be assessed on will be crucial to maintaining a healthy score.
Companies can be on both a blacklist and a “red list”.
So far, China has compiled a total of 51 blacklists for non-compliance with laws and regulations. Conversely, companies can be recognized on a redlist by exhibiting exceptionally good behavior, but ministries and local governments appear to have placed more emphasis on blacklisting. Getting blacklisted usually means fewer business opportunities or tighter regulatory oversight in the future. The blacklist for the commercial sector has been divided into two parts: the Common List of Credit Sanctions for Dishonest Entities, which restricts a company’s direct sales and product quotas, and the Special Attention List, of which not much is known other than which companies find themselves on the list will face “tighter regulations”.
What we don’t know
What will the scoring system look like?
The National Development Reform Commission (NDRC) announced in September that Chinese companies would be awarded one of four ratings nationally: excellent, good, average and poor. However, it is unclear how the rating system at the national level will match with the different rating systems developed by local governments and industry regulators, whose ratings will also be factored into a company’s overall assessment. Will there be a meta-score based on all available ratings for each business? What about a standardized system for the types of treatments that companies will receive based on the results of their assessments? How will the algorithm calculate the score? Will it be free from prejudices against foreign companies? Strategic industries? The PRC’s Social Credit Bill could answer some of these questions, although the timing of this legislation is unclear.
Can businesses (and how quickly will they be able) to get out of a blacklist?
To improve bad credit, businesses must first correct their unwanted behavior on time. Then they will have to overcome a series of hurdles, such as submitting “pledge of credit” notes, taking special training or participating in charitable activities. Removal from a blacklist depends on the specific conditions set by the regulator in charge of managing the blacklist for this industry, so the process will not be standardized. In addition, new measures show that the conditions for credit repair in the trade sector may become more stringent. For example, they limit the frequency of credit pairs over a three-year period, which makes it all the more important for businesses to avoid being blacklisted in the first place. Businesses can appeal negative credit or a designation by a government entity, but the burden of proof is high.
Will the MCS be WTO Compliant?
In a 2003 editorial In its state media, China has expressed the importance of ensuring that the SCS complies with World Trade Organization (WTO) standards. However, China’s MCS could run counter to WTO transparency requirements. The WTO requires that a country’s policies and regulations affecting foreign trade are clearly communicated to its trading partners. The lack of clarity on how the large amounts of collected corporate data is shared between different government entities, as well as on the use of a blacklist system as a compliance and enforcement tool, raises concerns that the SCS only gives Chinese government officials significant discretion to apply pressure on companies in an opaque and discriminatory manner. Businesses would welcome a move by China to release the standards for SCS to the public, but it is uncertain whether China will.