The Social Credit Shadow Looming Behind the Trade War

Orwellian characterizations of China’s forthcoming Social Credit System (SCS) have captured the headlines largely because several defining details have been left to the imagination. Should we prepare for the worst? Not exactly.

What we do know is that the SCS for corporations (“Corporate Social Credit System”) will be used more broadly to regulate the commerce sector. In June, the State Council released a guidance document that calls for establishing three components—a credit commitment system, a credit report mechanism, and a classified credit regulation—as the basis for inspecting businesses, but little is known beyond that these mechanisms will eventually exist. While we cannot predict how liberally or conservatively credit ratings will be calculated, here is how the publicly available information adds up so far:

What we know

China has already built credit profiles for 33 million enterprises and organizations, including foreign companies.

Under the current system, companies are identified by a unique 18-digit code called the “uniform social credit code.” Most of the data collected on companies, including whether they have good or bad social credit, are publicly available on the National Enterprise Credit Information Publicity System and Credit China website. The data feeding into corporate SCS primarily come from company self-reporting, government inspections, and web-based or digital inspections (for example, real-time monitoring of cars’ carbon emissions). The Foreign Investment Law states that foreign-invested enterprises (FIEs) will be investigated for misconduct and the findings will be recorded in the credit information system. 

Companies will be evaluated based on compliance with their specific industry regulations.

There is no set of blanket standards guiding how companies will be evaluated. Instead, China’s central and local governments have published a total of 1,500 documents defining over 300 rating requirements for companies in different industries, but several have yet to be released. Understanding exactly which types of criteria companies will be evaluated on will be crucial to maintaining a healthy score.

Companies can land themselves on both a blacklist and a “red list.”

So far, China has compiled a total of 51 blacklists for non-compliance with laws and regulations. Conversely, companies can be recognized on a red list by showing exceptionally good behavior, but ministries and local governments appear to have put more emphasis on building blacklists. Being blacklisted usually means fewer business opportunities or stricter regulatory scrutiny moving forward. The blacklist for the commercial sector has been divided in two parts: the joint credit punishment list for dishonest entities, which restricts a company’s direct sales and commodity quotas, and the special attention list, about which not much is known other than companies that find themselves on the list will face “stricter regulations.”

What we don’t know

What will the rating system look like?

The National Development Reform Commission (NDRC) announced in September that companies in China will be assigned one of four ratings at the national-level: excellent, good, medium, and poor. However, it is unclear how the national-level rating system will square with the various rating systems developed by local governments and industry regulators, whose ratings will also be taken into account in the comprehensive evaluation of a company. Will there be a meta-score based on all the available ratings for every company? What about a standardized system for the types of treatment companies will receive based on the results of their evaluations? How will the algorithm calculate the score? Will it be immune to biases against foreign companies? Strategic industries? The draft PRC Social Credit Law might answer some of these questions, though the timeline for this legislation is unclear. 

Can (and how fast will companies be able to) get off of a blacklist?

To improve bad credit, companies first have to correct their unwanted behavior within the prescribed time limits. Then, they will have to jump through a series of hoops, like submitting “credit promise” notes, going through special training, or participating in charitable activities. Removal from a blacklist depends on the specific conditions set by the regulator in charge of managing the blacklist for that industry, so the process will not be standardized. In addition, new measures show that the conditions for credit repair in the commerce sector may become more stringent. For instance, they limit the frequency of credit pairs over a three-year period, making it all the more important for companies to avoid being blacklisted in the first place. Companies can appeal negative credit or designation by a government entity, but the burden of proof is high.

Will the SCS be WTO-compliant?

In a 2003 editorial in its state media, China expressed the importance of ensuring that the SCS is compliant with World Trade Organization (WTO) standards. However, China’s SCS might run afoul of WTO requirements on transparency. The WTO requires that a country’s policies and regulations affecting foreign trade be clearly communicated to its trading partners. Lack of clarity about how the vast amounts of company data collected are shared between different government entities, as well as the utilization of a blacklist system as a compliance and enforcement tool, is raising concern that the SCS could provide Chinese government officials significant discretion to apply pressure on companies in an opaque and discriminatory manner. Businesses would welcome a move by China to make public the standards governing the SCS, but it is uncertain whether China will do so.