Corporate Social Credit System
What impact does the Social Credit System have on companies?
While in recent times China’s trade conflict with the USA has been the main focus of attention, the ruling Communist Party’s domestic political plans have mostly receded into the background. But comprehensive change is also emerging within China. In 2014, the Chinese government published a plan to establish a comprehensive digital social credit system (SCS) by 2020.
What is the Social Credit System?
With the SCS, the Chinese government is pursuing a vision of using the latest technologies to collect data from companies and individuals in order to monitor the behaviour and performance of all market participants.
The Corporate SCS is a system of several topic-specific ratings (e.g. taxes, customs and environmental protection) as well as compliance reports (e.g. antitrust cases, data transfers, prices and licenses). This system affects all areas and business activities of a company in China. The responsibility for implementing these ratings lies with more than 30 government agencies coordinated by the National Development and Reform Commission (NDRC) and the People’s Bank of China (PBOC).
Rating results and non-compliance records are then published via topic-specific rating platforms and shared with the local Corporate SCS databases at the same time. The names of companies that are blacklisted or untrusted are identified in the National Enterprise Credit Information Publicity System. The respective lists of all untrusted market participants are published on the CreditChina.gov.cn website. To learn more about the social credit system and the blacklist, click
here.
What is the aim of the system?
The official goal is to encourage companies to adhere to the laws and regulations of the Chinese state through “self-regulation”.
Who’s being rated?
Every company in China (national and international), regardless of size and ownership structure, must assume that all its activities in the Chinese market are tracked and recorded through the mechanisms of the SCS. No aspect of a company’s business operations is entirely unaffected.
How does the Corporate Social Credit System work?
- Government definition of rating requirements
Government authorities define the requirements that companies need to comply with in order to receive a good rating. - Monitoring of companies’ behavior
With the use of new technologies, government authorities collect information about the activities of companies and monitor their behaviour. - Algorithm-based ratings of companies and direct consequences
The collected data is processed and evaluated according to the defined requirements. A good rating leads to rewards and a negative performance is sanctioned.
Sanctions and rewards:
A low rating result can lead to a blacklisting. For negative ratings, there are already a number of sanctions for companies, and these sanctions are not limited to fines or court orders.
Further sanction possibilities
- Higher inspection rates and targeted audits
- Restricted issuance of government approvals (e.g. land-use rights and investment permits)
- Exclusion from subsidies and tax rebates
- Restrictions from public procurement
- Public blaming and shaming
- Sanctions for legal representative and key personnel of a company (e.g. travel restrictions)
The rewards for a positive rating have so far been less developed than the sanctions.
Possible rewards
- Lower tax rates
- Better credit terms
- Easier market access
- More public contracts for the company
What should companies do in China?
Early and detailed preparation as a company is the key to overcoming the challenges of the SCS. Companies should use the time remaining to implement the SCS to become familiar with the system and the requirements. They can also adapt their processes and structures to the requirements of the SCS to ensure a good rating for the future. Good preparation can save companies from being blacklisted, negative entries and sanctions. Also, increased communication and exchange with the Chinese government is an important step to successfully manage future requirements and changes.