In 2014, the Chinese government announced the adoption of a national credit system that will be fully implemented by the end of 2020. The system will not only affect individuals but business entities and government organisations too, with the aim of building a trustworthy society and a transparent business environment.
What is the Corporate Social Credit System?
The Chinese Corporate Social Credit System (CSCS) covers all areas, aiming to track and record entities and individuals’ performance and business information. The mechanism of the system relies on the development of Internet and technology, specifically Internet and Supervision. With its implementation, local governments will be able to transfer and gather information through one platform in an attempt to establish a National Financial Credit Information Basic Database by the end of 2020, integrated with the Credit Information System for micro and small enterprises and rural areas. The system should encourage honest behaviour among individuals and organisations and reduce administrative interventions.
Elements of the CSCS
Despite the attempt to build a national credit database, the system is still largely fragmented into regions and local districts. This leads to the standards and boundaries potentially varying from region to region and from industry to industry. However, common elements can be still determined through two main categories of ratings, namely ‘trustworthiness (or honesty)’ and ‘dishonesty’. Businesses rated as ‘trustworthy’ will be given rewards, meanwhile, punishments will be applied to ‘dishonest’ businesses. Businesses considered to be severely dishonest will be listed on a blacklist, which will be published online.
Credit records for a certain period can be checked upon request up to a maximum of five years. However, exceptions apply if otherwise stated in specific regulations or laws. For example, in Shanghai, the maximum publicity period is five years. Publicity periods may vary depending on the level of dishonesty but for any business that is believed to be severely dishonest and is on the blacklist, the information about its dishonesty can only be deleted when it is removed from the blacklist.
Data collection conditions
Authorities can check credit records typically for administrative purposes, for example when implementing inspections or penalties, immigration or visa controls.
The information is generally divided into three categories: basic information, dishonest information and other. Information such as honoured commendations, awards and volunteer participation will lead to positive credit rating scores. Records such as refusals to perform effective judicial rulings, failures to comply with laws and regulations, late tax payment and abnormal operations will cause deductions for credit scores.
Rewards and punishments
Trustworthy businesses may receive different rewards such as being prioritised or receiving simplified administrative procedures, optimised monitoring frequencies, prioritised opportunities in fiscal and project support, and lower bank fees. Similar rules apply to businesses of the opposite nature as dishonest businesses will receive different levels of punishments. What business operators need to be aware of is that there is a blacklist that goes beyond the dishonesty list for severely dishonest businesses. Moreover, the credit record of businesses will impact the personal credit records of individuals working in senior management positions (legal representatives, directors, and financially responsible persons).
Typical punishments include limitations on market or industry entry, use of relevant financial services and taking advantage of preferential public policies. Blacklists will be made public and will be updated regularly. Legal representatives and other senior managers need to be aware that their credit records will be directly affected as they are linked with the records of the company. They may not just be subject to punishments from the relevant authorities as restrictions may also occur when they use financial products for which personal credit records need to be consulted, such as loans, mortgages, and applying for credit cards or credit increases. In addition, there may also be restrictions on being nominated as responsible personnel for other entities. Foreign workers’ credit records may affect their future work and resident permit applications. Cooperation with a blacklisted business will also lead to risks and uncertainties. In some cases, businesses may be monitored and visited by authorities more frequently or receive few or no governmental discounts.
Joint disciplinary actions
One key term in the CSCS is joint disciplinary actions. This allows different authorities to apply penalties and administrative actions to blacklisted businesses based not only on the credit records in their own areas of responsibility but also in all credit-rated areas. Thus, punishments will no longer be vertical only. They will, instead, be expanded horizontally through the alliance of different government authorities using shared credit information.
Although there are still technical gaps that limit the national sharing of information through one platform, local governments have overseen the establishment of provincial and regional databases. For example, provinces (Anhui, Jiangsu and Zhejiang) and a city (Shanghai) in the Yangtze River Delta area are already able to access data interprovincially. This enables authorities to track the credit data of any interprovincial businesses, making the monitoring of their market behaviours more measurable.
The social credit system’s aim is to improve fairness, openness and efficiency of the supervision system and enhance the competitiveness and transparency of the business environment. Failure to obey laws and regulations will not only lead to monetary penalties but also stricter monitoring from an administrative perspective, or even worse: being blacklisted. Other unstated consequences may also affect Chinese nationals and foreigners in applying for residency in some cities or for work/resident permits in China.
While the Chinese market is preparing to be more open to the world and more accessible to business entities, the social credit system enables government authorities to monitor and regulate market behaviours in a more straightforward and intuitive manner. Compliance and cooperation with the system will no doubt lead to benefits while violation of rules could lead to inconveniences. Now more than ever, it’s crucial for individuals, entrepreneurs and managers doing business in China to run their daily operations consciously and in compliance with the rules and regulations.