- China’s Social Credit System introduces a novel big data-enabled toolkit for monitoring, rating, and steering the behavior of market participants in a more comprehensive manner than existing credit rating mechanisms. If implemented successfully, the system will strengthen the Chinese government’s capacity to enforce and fine-tune market regulations and industrial policies in a sophisticated manner.
- As a showcase of “top-level design” under central coordination, implementation of the Social Credit System is progressing fast. Over the past two years, major hubs have been established for data collection and sharing. Various government entities and commercial credit rating services have begun processing and evaluating the data provided. In spite of many bureaucratic and technological barriers, the basic structures of the system are planned to be in place by 2020.
- The ultimate goal is to build self-enforcing mechanisms for business regulation: Based on 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 their business opportunities. Intervention by government bodies can thus be reduced to setting the rules, standards, and, eventually, algorithms for the system. This will minimize their constant supervision of and visible interference in market processes.
- The system will create strong incentives for companies to make their business decisions and operations comply not just with laws and regulations but also with the industrial and technological policy targets laid down by the Chinese government. Foreign companies active on the Chinese market are planned to be integrated into the system and treated the same way as their Chinese competitors. Foreign companies will also be subjected to the full extent of industrial policy guidance.
- At the heart of the Social Credit System lies massive data collection on company activities by government agencies and authorized rating entities. The system has the potential to strengthen transparency and trustworthiness in market exchanges as well as the socially and environmentally responsible behavior of companies. On the other hand, it will be prone to failing technologies, data manipulation, and the politically induced, unidirectional allocation of investments. It will thus reduce the capacity for autonomous business decisions or non-standard disruptive business models and pose a constant risk to the protection of proprietary company data.
- Companies should take the accelerating implementation of the system and its impact on doing business in and with China very seriously. Companies need to proactively examine the specific plans and their foreseeable impact on their respective business sectors. Economic diplomacy and business associations will have to consider how they can try to co-shape the implementation of the new rating system and contain its potential risks.