China’s Corporate Social Credit System: 10 Q&A
The Corporate Social Credit System (CSCS) is envisioned as a big-data-enabled framework to track, rate, and reward/penalise the behaviour of all businesses in China.
With its full implementation officially scheduled for the end of 2020, businesses in China are worried about its possible implications. They’re also anxious about the confusion that still clouds its parameters and methodology.
Are these fears justified? Read our take on this and other questions raised by our clients.
1. What is new about the CSCS?
FIEs in China are already closely supervised by tax, environmental, customs, and other authorities – so what’s new? Mainly, three things: (a) records collected by private and public entities will be shared into a single national meta-database, and sometimes made publicly available, (b) companies will face more wide-ranging punishments/rewards, and (c) new scoring parameters might be introduced (e.g. a draft regulation to blacklist companies for spreading ‘dishonest‘ information online).
2. Who will be affected?
The corporate SCS will apply to all registered commercial entities in China: large, small, domestic, and foreign-invested – an estimated 33 million businesses in total.
3. When will it be implemented?
Although officially scheduled for full implementation by the end of 2020, it is misleading to set a fixed “roll-out” date. The system’s mechanisms, some of which are already active, are being built up gradually. A pilot run is currently being tested in Zhejiang province.
4. Should FIEs be worried?
Some of our clients feel that the negative impact of the CSCS is sometimes exaggerated, while others fear that the system could be used to justify the unfair treatment of FIEs for political or other reasons. Only time will tell, but what is certain is that the CSCS represents an intensification of China’s compliance requirements. From our experience, FIEs are generally at an advantage thanks to their stronger compliance culture and already higher scrutiny by Chinese authorities. Of the 600,000 companies that have been blacklisted until now, a large majority are domestic.
5. Is there anything positive about the CSCS?
Designed as a self-regulating mechanism, the CSCS could theoretically create a better-functioning and more transparent market with more trustworthy players. Companies that score well can expect to enjoy several benefits, ranging from lower taxes and better credit conditions, to less frequent inspections and audits and greater access to public procurement opportunities.
6. Where can companies find their scores?
Currently, firms must check several databases (ran by governmental and private entities) to check how they are doing on different parameters. Two key platforms are the National Enterprise Credit Information Publicity System (NECIPS), which collects data from various authorities (e.g. regarding taxes, environmental compliance, and court proceedings), and CreditChina, which publishes individual and corporate blacklists and “redlists” (lists of high-scorers).
7. What actions should you be taking now?
We are helping our clients implement several measures to make sure the CSCS doesn’t catch them off guard. These include: checking your current performance (e.g. identifying any negative records and compliance risks), making internal adjustments, screening your business partners and personnel, and making sure everyone in your organisation (especially key stakeholders) have a detailed understanding of the CSCS and its implications.
8. Will the personal scores of employees affect the company’s score, and vice-versa?
A company’s social credit score can affect (and be affected by) the individual score of its legal representatives and “responsible personnel”. The latter is loosely defined, so, to be on the safe side, companies should look closely at the integrity and track-record of employees on key positions.
9. Is there any way to fix a bad score?
Yes. Apart from making internal adjustments to strengthen compliance, companies can object against a bad rating by submitting a “credit restoration letter” supported by additional materials that will depend on the case at hand.
10. Where can we find official, up-to-date information on the CSCS?
The CSCS is confusing, which is one reason why it’s causing so much anxiety among the international business community. The detailed workings of the system are not yet pinned down. Official announcements made by different government bodies are gradually bringing some clarity, but they are usually published only in Chinese. At Fiducia, we are helping decision-makers stay informed by offering seminars, workshops, and monthly CSCS newsletters.
If you have further questions regarding the CSCS, feel free to reach out to our experts, who will be happy to share more about how we are helping companies like yours prepare for it.