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The Corporate Social Credit System in China: Everything you need to know

by | October 15, 2019

The Corporate Social Credit System in China: Everything you need to know

October 15, 2019

Throughout the past few years, there has been a lot of news about China’s Social Credit System (SCS). The SCS is planned to be fully implemented by the end of 2020. Through the system, people will be given credibility scores based on their credit behavior and obedience to the law. Based on these scores, people will then be given certain privileges or have restrictions imposed on them. The SCS, however, will not solely be implemented on an individual level. It will also have implications for businesses operating in China. Here’s what you need to know in order to keep an eye on the Corporate Social Credit System.

 

What is the Corporate Social Credit System?

The main goal of the market-focused part of China’s Social Credit System, often referred to as the Corporate SCS, is to level the playing field and create more transparency for both foreign and Chinese businesses. This will be done by using algorithms to rate all different aspects of each company’s performance and giving companies scores accordingly. The majority of these ratings will be regulatory ratings related to compliance with Chinese market regulations, such as tax regulations, customs regulations, environmental laws etc. Furthermore, other aspects such as compliance records related to pricing and licenses will also be taken into consideration. Depending on whether a company receives good ratings or bad ratings, they then will be rewarded or have sanctions imposed on them. Specific sanctions and rewards are stipulated in Memoranda of Understanding (MoUs) between government authorities.

When it comes to receiving bad ratings, there are three things one should be aware of. Firstly, receiving bad ratings in one field will be communicated to all government institutions. All are permitted to impose sanctions based on these ratings. For example, failing to comply with tax regulations might lead to having permit applications declined by a different government organization. Secondly, ratings given are interdependent on each other, meaning that receiving bad ratings in one field might lead to receiving lower ratings in other fields as well. Finally, a company’s score is not only influenced by its own compliance, but also by compliance and ratings of business partners (e.g. suppliers). Furthermore, the individual ratings of high-ranking management will also impact the company score. Therefore, it is becoming more and more important for companies in China to be aware of regulations and to take measures to ensure compliance.

 

How to prepare?

The Corporate Social Credit System has been under development for several years and is now moving into its final stages. Currently, the legal base for implementation of the system has largely been established and many parts are already up and running. Several ratings are already fully applied to companies that are active in the Chinese market. However, mechanisms for the execution of sanctions are momentarily still incomplete, offering room for enterprises to assess their current situation and potential risks, and make the necessary adjustments before potential sanctions will affect their performance.

In order to get a desirable rating from the Corporate SCS, companies will have to make sure they are aware and stay aware of market regulations that are relevant to their business. This is especially important for Small-Medium Enterprises (SMEs). Unlike large international companies who with their own internal compliance systems will most likely score well in the system, SMEs might have a harder time keeping track of every departments’ adherence to changing regulations. Furthermore, monitoring of business partners, while something that potentially may be beneficial to companies’ ratings, might be something that international companies, due to ethical reasons, are hesitant to do. As such, it is necessary to put thought in how to deal with these regulations in a way that is acceptable according to internal standards.

 

Other implications of the Corporate Social Credit System

As illustrated above, implementation of China’s Corporate Social Credit System requires companies to allocate more resources to monitoring compliance and analyzing the effect of regulatory ratings on their respective operations. Non-compliance can lead to punitive measures, ranging from higher tax rates and denied licenses to even blacklisting in severe cases. Moreover, apart from regulatory punishments, low ratings might also impact a business’ competitiveness by negatively influencing its reputation.

To gather data and compute the Corporate SCS ratings, large databases have been set up, such as the National Credit Information Sharing Platform. These databases contain information that is being collected about companies in several ways. Sources of information for example include: reporting processes, both scheduled and random government inspections and third-party data inputs. These databases then divide information into publicly accessible information, partly published information, and information that is only accessible by the government, increasing also the transparency of companies towards consumers. This also creates additional risks. If a company, due to heavy non-compliance, is deemed untrustworthy by the system, disclosure of this information might directly influence that company’s current and future performance in China.

 

To conclude, implementation of the Corporate SCS will lead to challenges for all companies operating in China. It is important for companies to look into what the implementation of this system means for them specifically and in what ways this will affect their business in China. Preparation is key, and with most of the regulations being clearly posted, now is the time to start.

 

This article was written by Lodewijk Tjioe, who contributed as an Intern at our Beijing Office.

What happened in the year 1421?

From 1421 to 1423, during the Ming Dynasty of China under Emperor Zhu Di (朱棣) the fleets of Admiral Zheng He (鄭和), commanded by the Chinese captains, discovered Australia, New Zealand, the Americas, Antarctica, the Northeast Passage; and circumnavigated Greenland.

Due to this endeavour we can conclude that “1421 is the year that the Chinese discover the world”.