China’s Corporate Social Credit System

China’s Corporate Social Credit System

Updated January 17, 2020
China’s Corporate Social Credit System
China’s construction of a nationwide social credit system
Data Aggregation. A firm’s social credit profile is the
has been identified as a major concern by both the
aggregate of potentially hundreds of data points compiled
executive branch and some Members of Congress, because
by dozens of government entities. In October 2015, the
of the broad controls such a system is likely to give the
National Development and Reform Commission (NDRC),
Chinese government over U.S. citizens and companies
China’s powerful economic planning agency, launched the
operating in China. Recent reports of Chinese officials
National Credit Information Sharing Platform (NCISP).
invoking the social credit system to pressure U.S. firms to
The NCISP, operated by the NDRC in cooperation with 45
take positions that align with Beijing’s interests raise
other government ministries, serves as the data “backbone”
questions for Congress about how to respond to the
of the Corporate SCS, integrating all national and local-
potential threat the system may pose to U.S. firms operating
level corporate regulatory data. To structure the database,
in China.
all companies registered in China have been assigned a
After several pilot programs, China began constructing a
Unified Social Credit Code—a common identifier used
nationwide social credit system in 2014, guided by a
across all datasets linked to the Corporate SCS.
document issued by China’s cabinet, the State Council,
Evaluation. As government departments collect
Planning Outline for the Construction of a Social Credit
information on firms, they create “blacklists” of firms that
System (2014-2020). The plan describes the system as
are found to have violated regulations repeatedly or
necessary to build “trust” in the marketplace and broader
engaged in illicit financial behavior. National and local
society, and establishes a 2020 implementation deadline.
government departments have a wide mandate to create
Since the plan was published, the social credit system has
blacklists for violations that fall under their jurisdiction.
developed into two connected but distinct systems: a system
Consequently, there are hundreds of official blacklists
for monitoring individual behavior, still in early pilot
covering everything from severe offenses, such as tax
stages, and a more robust system for monitoring corporate
evasion and falsifying emissions data, to minor offenses
behavior: the Corporate Social Credit System (SCS).
such as failing to file a change of address. Some
Table 1. Expanded Scope of China’s Corporate SCS,
departments also publish laudatory “redlists” of firms with
Side-by-Side with U.S. Credit Bureaus
exemplary records, such as the State Taxation
Administration (STA) “Grade A Taxpayer List.” The
China’s Corporate
Credit Bureaus in
National Enterprise Credit Information Publicity System

Social Credit System
the United States
(NECIPS), a public online database run by the State
Objective
Strengthen regulatory
Evaluate credit risk
Administration for Market Regulation (SAMR), records
enforcement
each time a firm is added to a blacklist or redlist and
identifies “businesses with irregularities.” Firms placed on
Institutions
NDRC, SAMR, local
Equifax, TransUnion,
multiple blacklists or that commit particularly serious
government entities; some
Experian, Innovis
offenses can be added to SAMR’s forthcoming “heavily
third-party private firms
distrusted entities list”—the closest analogue to a national
Targets
Firms, local governments, and
Individuals and some
blacklist.
individuals
firms
Joint System of Punishments and Rewards. The primary
Data
Data col ected from firms and
Public records and
enforcement mechanism of the Corporate SCS is a “joint
Collection
stored central y
financial information
system of punishments and rewards,” a set of legal
cooperation agreements by which government agencies
Rating
Various nonstandardized
Single standardized
enforce each other’s blacklists. Under this framework, a
ratings; al ratings made public
score (FICO); score
firm blacklisted by the STA for tax offenses can be subject
not public
to customs penalties and more frequent financial audits
Outcomes
Blacklisting; joint system of
Limited access to
based on cooperation agreements between the STA and
punishments and rewards
credit
China’s customs and financial authorities. Firms on the
Source: CRS, based on State Council and NDRC Social Credit
STA’s “Grade A Taxpayer” redlist, on the other hand, are
Documents; U.S. Consumer Financial Protection Bureau.
not only eligible for expedited and less costly tax filings,
but are also eligible for other benefits, such as customs fee
What is China’s Corporate Social Credit
waivers and low-interest loans. The system is designed, in
System?
the words of President Xi Jinping, “to make everything
The Corporate SCS is currently a network of initiatives
convenient for the trustworthy, and ensure the
operated by state and private actors at the national and local
untrustworthy cannot move a single step.”
levels, connected by shared data platforms and the common
goal of regulating corporate behavior in China. The
How is the System Being Implemented?
network’s overarching structure consists of three
Although much remains to be done and data sharing gaps
components:
persist, reports indicate that China’s Corporate SCS is
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China’s Corporate Social Credit System
moving beyond its pilot stages and is on track for at least
nominally more transparent regulatory regime. Certain
partial implementation in 2020. Many laws passed and
provisions and rating criteria, however, could be used to
regulations issued since 2014 include clauses stating that
discriminate against multinational firms, including for
non-compliance with certain provisions will be recorded in
political purposes. For example, the Civil Aviation
the Corporate SCS. In July 2019, the State Council issued
Administration of China pressured multiple international
Guiding Opinions on Accelerating the Building of the
airlines in early 2018 to change their websites’ descriptions
Social Credit System, which urges government agencies to
of Taiwan, stating that failure to comply would be recorded
“fully employ next-generation information technologies
in each airline’s social credit records. Additionally,
such as big data and artificial intelligence to achieve
SAMR’s “heavily distrusted entities list” includes
comprehensive credit monitoring.”
provisions that might be used to target U.S. firms. The list
is to include, for example, firms that “threaten national and
China’s central government has issued only general
public interest” or “infringe on the rights and interests of
guidelines for the buildout of the Corporate SCS.
customers.” Two U.S. companies—FedEx and Flex Ltd.—
Consequently, no single standardized national social credit
were accused of the latter following supply disputes with
score is currently assigned to companies. Instead, various
Chinese telecommunications firm Huawei in mid-2019. The
national and local government entities, as well as some
NCISP also includes political data that tracks the number of
third-party companies, are issuing their own social credit
Communist Party members employed by firms; firms that
ratings to firms based on NCISP and NECIPS records
hire fewer Party members or avoid Party-building activities
(Table 1). In September 2019, the NDRC announced it had
may be penalized under the Corporate SCS framework.
completed its first “social credit evaluation” of 33 million
domestic Chinese firms and assigned each of them a
The Corporate SCS may also lead to a more opaque market
“Comprehensive Public Credit Rating.” This NDRC rating
access regime and increase compliance costs for U.S. firms
is the closest analogue to a national corporate social credit
operating in China. A recent report published by the EU
rating, but government documents indicate that it will only
Chamber of Commerce estimates that multinational firms in
serve as a baseline for corporate social credit evaluation and
China will be subject to approximately 30 different ratings
will not take precedence over local or sector-specific
under the Corporate SCS, the requirements of which will be
ratings.
dispersed across numerous government documents. Firms
are also required to disclose to the Chinese government
Multinational firms are already subject to the system’s data
detailed data and other information about their operations
reporting requirements, according to the U.S.-China
and capabilities, which may include proprietary information
Business Council and the EU Chamber of Commerce.
or sensitive intellectual property.
Some are already being rated by third-party companies
authorized to issue corporate social credit reports: one such
Expansion of China’s Economic Influence. The State
company, Xinhua Credit, launched an English-language
Council’s 2014 Planning Outline explicitly identifies the
version of its web portal in September 2019, providing one
Corporate SCS as a means of “enhancing China’s soft
of the first platforms for non-Chinese firms to access
power and international influence.” To that end, Beijing has
corporate social credit data.
framed “credit cooperation” as a central component of its
Belt and Road Initiative (BRI) and is working to export the
Table 2. Examples of Corporate Social Credit Ratings
Corporate SCS more broadly. Several countries in Asia and
the Middle East participating in the BRI have engaged in
Rating Entity
Jurisdiction
Rating
credit cooperation initiatives organized by the NDRC.
NDRC
National, All
Excellent (优), Good
Saudi Arabia, a strategic U.S. partner, is constructing its
Industries
(良), Medium (中),
own Corporate SCS as part of its BRI cooperation with
Poor (差)
China. If the Corporate SCS is exported more broadly along
the BRI, the Chinese government could potentially monitor
Jiangmen Ministry
Municipal,
AAA (100 Points)-C
and influence the behavior of U.S. firms and their
of Industry and
“Large-Scale”
(Below 60 Points)
interactions with Chinese companies in global markets,
Information
Firms
even if they are not directly operating in China.
Technology
Select Legislation in the 116th Congress
General
National
AA-D
Administration of
Importers &
In the 116th Congress, the Hong Kong Human Rights and
Customs
Exporters
Democracy Act of 2019 (P.L. 116-76) requires the
Department of Commerce to conduct an assessment of
Xinhua Credit
Private, All
A-E
whether dual-use items subject to U.S. export control laws
Industries
are being used to develop China’s social credit system.
Source: Trivium China Social Credit Watch; China Economic
Additionally, the UIGHUR Act of 2019 (H.R. 1025)
Information Service (
includes a provision that would require the Department of
中国经济信息社).
State to submit a report to Congress detailing the social
Policy Implications
credit system’s potential impact on the geopolitical and
economic interests of the United States.
New Government Market Access Controls. Chinese
officials and some international observers contend that the
Corporate SCS may create a more level playing field by
Michael D. Sutherland, Analyst in International Trade and
merging domestic and multinational firms into a single,
Finance
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China’s Corporate Social Credit System

IF11342

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