Corporate social credit system presents new challenges to firms operating in China

While China’s development of a social credit system (SCS) for individuals has received wide press, the fast-approaching inauguration of China’s Corporate SCS has obtained much less attention. Last week, the European Union Chamber of Commerce in China, in cooperation with the German consulting firm Sinolytics, released a report entitled The Digital Hand: How China’s Corporate Social Credit System Conditions Market Actors. Its main message is that China’s Corporate SCS poses large challenges for companies operating in China.

Building on unprecedented computer power in gathering, integrating and processing data, the government hopes to use the Corporate SCS as a sophisticated rating and governance tool. A good score may reward a firm with preferential treatment such as lower tax rates, cheaper financing, easy access to markets and opportunities to participate in government procurements. A low score exposes the firm to increased official scrutiny, exclusion from government procurements or public blaming and shaming. If the proposed scheme is enacted in its present form, firms might even face black-listing.

The EU Chamber wants firms to prepare themselves in three areas. First, they should be ready for compliance challenges as Corporate SCS places strong emphasis on compliance with laws and regulations. While such compliance should not be a problem for most firms, the system’s rigidity, comprehensiveness and cross-cutting interdependence may create compliance gaps caused by even minor mistakes. The monitoring burden is relatively greater for small firms than large ones. Second, the rating system creates strategic challenges relating to the trustworthiness of suppliers and business partners as their SCS ratings may affect scores of the firm. The system also provides a loose framework for sanctioning foreign firms, e.g. as part of a bilateral trade policy dispute. Third, officials mandate that firms surrender massive amounts of data, i.e. even more than the large quantities required at present. The integration and manipulation of otherwise mundane firm data, as well as sensitive information on personnel and proprietary technologies, permits to develop a concise picture of corporate operations that may threaten the firm’s competitive position.

The report notes that the Corporate SCS is part of China’s efforts at opening up its economy to the world. In the new system, formal barriers to market access such as domestic partner requirements will be replaced with an automated approach in which officials still retain control over a firm’s activities. The Corporate SCS already exists to some extent. In the next phase, the government will work with domestic tech giants (Taiji Computer, Huawei, Alibaba, Tencent, VisionVera) in building a massive database (the National “Internet+Monitoring” System) which integrates information from public and private sources. The database should be rolled out by the end of this year. The EU Chamber notes that firms need to prepare for a rapid launch of Corporate SCS next year. 

Wider issues extend beyond the practical implementation challenges of the Corporate SCS. While the system nominally claims to treat all firms equitably, the SCS in China’s opaque and authoritarian regime offers authorities a lot of possibilities to treat firms as they see fit, making the system vulnerable to e.g. corruption. It could even aggravate trade tensions in coming years.