Are you ready for a social credit system?

Central government authorities recently issued a series of policies and draft amendments to push forward the establishment of the social credit system (SCS). Multinational companies are particularly concerned at how the SCS could affect the business operations of their Chinese subsidiaries. The following are selected developments released by various key government authorities:

• 9 July 2019: The State Council (SC) issued the Guiding Opinion on Accelerating the Establishment of the Social Credit System and Building a Credit-based Monitoring System;
• 10 July 2019: The State Administration for Market Regulation issued an amended draft of the Measure for List of Entities and Individuals With Serious Illegal or Untrustworthy Conduct (amendment for public comments); and
• 1 September 2019: The National Development and Reform Commission (NDRC), the key regulator mandated by the State Council to lead the establishment of the credit record platform and co-ordinate with other relevant regulators in this regard, issued a notice regarding Furthering and Applying Market Actors’ Public Credit Comprehensive Evaluation Results, which mentioned that about 33 million companies have been evaluated and rated, and such results would be shared on provincial-level information sharing platforms.

This overview of the SCS discusses its working mechanism and potential implications, as well as some general observations and recommendations.

Background

The proposal to establish a comprehensive SCS is not new. The State Council published the Outline Plan for the Establishment of a Social Credit System in 2014. The outline plan envisages that a comprehensive SCS will be largely in place by the end of 2020. It clarifies that the goal of the SCS is to promote the integrity and credibility of the whole society by establishing a credit record infrastructure network in accordance with laws, regulations, standards and contracts. The outline plan states that, due to the lack of a well-established SCS, various issues have recurred such as serious production safety accidents, food safety accidents, commercial fraud and tax evasion. The outline plan thus aims to establish the SCS’ legal and standardized systems, build the SCS infrastructure, and make incentives and penalty systems fully functional by 2020.

On 30 May 2016, the State Council issued the Guiding Opinions of the State Council on Establishing and Improving the System of Offering Joint Incentives to Acts in Good Faith and Imposing Joint Punishments against Acts in Bad Faith to Accelerate the Construction of Social Integrity, which lay out the general regulatory framework for the incentives and penalties in association with the SCS system.

In practice, some Chinese regulators such as the market regulation administration, and customs and tax bureaus, have already implemented their respective credit systems in the course of supervising the operation of business partners (including domestic entities and foreign-invested enterprises). The National Credit Information Sharing Platform has also been launched as the central database for the SCS since October 2015. The platform is run by the NDRC and the State Information Centre, and is expected to integrate all local and central-level government data sources across various regulators.

The central government considers the SCS as an important step in the further development of the Chinese economy in an orderly manner. The outline plan makes it clear that the SCS is applicable to all sectors: government departments, business entities, social organizations, and even the judiciary. With respect to business sectors, the SCS is to promote positive business conduct and penalize serious illegal and untrustworthy conduct by effective and efficient monitoring of companies. To this end, information technology will be deployed to collect and collate data from various Chinese regulators and courts.

To sum up, the SCS intends to establish an information sharing platform covering all the credit and rating information administered by various Chinese regulators. The SCS does not replace the credit and rating systems administered by various Chinese regulators. Instead, it operates in parallel with those information systems and relies upon the credit and rating information shared by these regulators.