China’s corporate social credit system (SCS) is
expected to be fully implemented by the end of 2019. It is a
comprehensive system that represents a fundamental rethink of
how compliance will be governed.
IFLR's latest primer looks at the system, the potential
problems it faces and complications with implementation.
What is the social credit system and what does it
Under the system, the behaviour of companies and individuals
will be monitored. A system of rewards and punishments is used
to incentivise positive behaviour in areas ranging from product
quality and tax to respect for intellectual property (IP) and
compliance with laws. Those with low ratings could be
blacklisted and sanctioned, making it more difficult for them
to access loans and expand their markets.
According to Vivian Wu, counsel at FenXun Partners, since
2014, 30 pilot projects have been rolled out to establish
credit information sharing platforms and to test awards and
sanctions mechanisms. "There remain complexity and challenges
in information sharing among different Chinese regulators,
defining and unifying the scope, criteria and procedures of the
blacklists and red lists, as well as uneven enforcement by
different regulators in different localities," said Wu.
Blacklists will outline non-compliant firms while red lists
will feature firms that are compliant.
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What are the areas that businesses are finding most
There are two main issues that are creating uncertainty and
confusion for businesses: unclear implementation timelines and
ambiguous definitions of key concepts that could impact
Concerns over unclear implementation timelines mainly relate
to the implementation of the meta-database which will bring all
of the different sectoral ratings, including customs, tax and
emissions, into a single, unified system.
"The implications of such a database drives uncertainty for
companies that worry about the potential massive change in the
way they manage compliance," said a spokesperson at the
European Union Chamber of Commerce in China (EUCCC).
"Additionally, there is uncertainty related to the sanctions
mechanism in cases of non-compliance, specifically how
non-compliance in one field could lead to sanctions in other
Even though many stipulations of the social credit systems
are explicit and clearly stated, the need for clarification of
details and definitions remain. According to a source at one
European company, two examples are the exact definition of
"responsible personnel" which refers to the linkage between
individual and corporate ratings, and the scope of "business
partners" which refers to the responsibility of monitoring the
behaviour of business partners. Both individual and business
partner ratings are expected to impact the rating of a
business, however it is still unclear what exactly is meant by
these concepts and to what extent they will impact ratings.
What will be the implementation
While idealistic in principle, the implementation of the
social credit system is what worries businesses. "The
transparency of the system will be a key factor to look at,"
said William Genovese, co-chair, China Greater Bay committee at
Fintech Association of Hong Kong and vice president, corporate
strategy research and planning for banking, financial markets
and IT services at Huawei Technologies. "There is a perception
in the West that information can be misused in China against
multinational companies for sabotage or other nefarious
reasons." However, he sees the system as a positive development
The system aims to set a standard at a global level for
overall improvement in a variety of areas. "But it needs to fit
in to the framework of global standards," said Genovese.
What can be expected for the social credit system is the
need for constant refining. "I think China will go about it
cautiously, a bit of two steps forward and one step back," said
Genovese. He said that for it to be successful, the social
credit system needs to have more focus on the carrots, not just
the sticks. Examples of rewards could include funding and tax
breaks for businesses.
What do businesses need to do to
The system of regulatory ratings requires the collection of
massive amounts of company data, mostly through mandatory data
transfers to government authorities. Businesses will need to
consider how best to organise existing data in the event they
are asked for it by government authorities. Some may have to
start collecting new types of data. Information could range
from emissions to taxes.
"In recent years, the quantity, depth and quality of data
required by government agencies has increased significantly,"
said the EUCCC spokesperson. "Most of the transferred data
points are neither sensitive nor problematic in isolation. In
combination, however, they create an increasingly complete
disclosure of a company’s profile."
Considering the government’s improving ability
to consolidate data streams, companies will need to decide at
which point the disclosure of business operations becomes an
What are the data concerns businesses have for the
social credit system?
There are concerns that the scope of required data might
include critical IP, which then raises concerns about data
security and the potential for leaked IP. "Additionally, data
regarding "responsible personnel" will potentially require
companies to consider monitoring the individual behaviour of
employees outside of work," said the EUCCC spokesperson. "This
is seen as a taboo by many European companies."
Wu added that in addition, many businesses are concerned
that if the blacklist data, including non-compliance records
and credit rating, is inaccurate or the relevant conclusion is
drawn without going through due process, it is unclear what
resorts the companies would have to take to escalate and
rectify the issue.
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