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The aim:

Introducing novel tools for monitoring and regulating market behavior

Under the catchphrase "Social Credit System", China is currently implementing a new and highly innovative approach to monitoring, rating, and regulating the behavior of market participants. The Social Credit System will have significant impact on the behavior of individuals, companies, and other institutions, such as NGOs. Despite much international attention on the impact of the system for individuals, the core motivation behind the Social Credit System is to more effectively steer the behavior of market participants.1

The Social Credit System goes far beyond credit rating systems in Europe or the U.S.: it expands the use of credit ratings to the social, environmental, and political realm. Under China’s Social Credit System, a company will get a lower credit rating if it does not pay its loans back in time. It will, however, also get a lower rating if it does not comply with emissions targets, work safety standards, or government investment requirements, or if it fails to deliver products ordered via e-commerce platforms on time. Possible punishments as a result of bad ratings include:

  • unfavorable conditions for a new loan
  • higher taxes than compliant competitors
  • no permission to issue any bonds or invest in companies listed on the stock market
  • decreased chances to participate in publicly-funded projects
  • mandatory government approval for investments, even in sectors where market access is not usually regulated

In severe cases, the company’s e-commerce accounts could be shut down and even its high-level management’s individual credit ratings could be affected. A company’s manager could be denied tickets for high-speed trains or for international business flights. On the other hand, a fully compliant company can benefit from:

  • a largely open Chinese market with manifold investment opportunities
  • low tax burdens
  • good credit conditions
  • gentle support from government incentive mechanisms

 

3.1 The core concept: self-restriction of companies

If the Chinese government succeeds in implementing the Social Credit System and its related mechanisms, companies’ market activities will be regulated in a self-enforcing manner: Enabled by advanced big data technologies, the system is designed to constantly monitor and evaluate companies’ economic as well as non-economic behavior. Automatically generated and updated rating scores will have an immediate impact on companies’ business opportunities. This creates a strong incentive for companies to make their business decisions and operations comply not just with laws and regulations but also with the government’s industrial and technological policy targets. Beijing terms this the “self-restriction of companies” (企业自我约束).2

 

3.2 The essence: massive data collection

The essence of the Social Credit System is to amass a huge collection of data on companies which will be used to generate ratings for each company. The government’s aim is to include general information on companies, information on their compliance with government regulations and, wherever practical, real-time data on their behavior. Eventually, the Social Credit System is supposed to integrate central and local government data, data from industry associations as well as data from commercial rating services. The data will be collected on a platform overseen by the central government.

Considering the extraordinary speed of digitization in China, the future potential for data collection via real-time monitoring is almost unlimited: E-commerce platforms could provide the Social Credit System with data on companies’ reliability during online business activities, for example, with regard to payments, delivery, product quality, and customer satisfaction. Particularly for companies active in the automobile, transportation, and logistics industries, real-time monitoring of cars via traffic systems and on-board units will provide the basis for their future social credit ratings. This could include not only data on the behavior of professional drivers, but also data on emissions and the technical performance of a car.

For polluting industries, the government’s goal is to measure environmental compliance with real-time emissions data, from sensor systems in chimney stacks, and real-time energy consumption, with the help of smart meters.

A considerable number of pilot projects have already been launched to test the employment of real-time monitoring systems. If they are successfully put into practice, the Social Credit System will allow for immediate and automated responses to misbehavior of companies: A lower social credit rating and related punishments could follow within seconds after a major payment default in e-commerce trade, a sudden increase of energy use beyond a permitted level, or after a certain number of traffic fines for the drivers of a transport company.

 

3.3 The generation of social credit scores: a decentralized process

As it stands, the Social Credit System will not generate one single score for every company. Instead, the government plans suggest a rather diversified and decentralized market for social credit ratings. This includes central government credit records focusing on major offenses, sectoral social credit ratings, commercial credit rating services as well as the People’s Bank of China’s credit rating center. However, many questions remain open with regard to the exact future shape of the system’s rating mechanisms. A centralization of social credit ratings, as soon as the necessary technical solutions are sufficiently developed, cannot be ruled out.

 

3.4 The impact of social credit scores: influencing business opportunities

The central government plans and the implementation guidelines by ministries provide detailed lists on the possible impact of social credit ratings on businesses. Adding to the examples described above, the right-hand side of the infographic table on page 2 provides a more extensive overview of exemplary effects.

Eventually, the move of the Chinese government towards more open markets and less intrusive state intervention is counterbalanced by the Social Credit System. One prominent example is the introduction of negative lists which will replace China’s investment catalogues and reduce the number of industries where government approval is required for foreign investments. However, only companies with clean social credit records are to benefit from this reduction of state regulation. The Social Credit System is to make sure that companies not fully complying with government rules have significantly lower investment opportunities on the Chinese market and cannot freely conduct their business in unrestricted sectors. Some of the recently established free trade zones (FTZ) will serve as testing grounds for linking investment opportunities and social credit ratings.3

 

3.5 The scope: covering the whole economy

From an international perspective, it is important to note that government documents referring to the Social Credit System do not discriminate between Chinese and foreign businesses. The same is true for private and state-owned enterprises. Implementation will show whether this principle will remain unchanged. It is, however, likely that foreign businesses active on the Chinese market will be fully integrated into the system and treated the same way as their Chinese competitors. Simultaneously, foreign companies will be subjected to the full extent of industrial policy guidance.

Generally, China’s Social Credit System is designed to cover the whole economy. At this initial stage, though, released government plans focus on key sectors that are either identified as industries of strategic importance for future economic development (e.g. the automobile industry) or for the stable provision of infrastructure and basic services, including the telecommunications, energy, and food industries. A particularly strong focus is on e-commerce. All these key industries will feel the impact of the system soon. An expansion to other industries is to be expected in the foreseeable future.