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Economy

China Extends Social Credit System to Firms

Aug 15 , 2019
  • Sara Hsu

    CEO, China Rising Capital Forecast

China’s social credit system has received much criticism in the Western media for taking a “Big Brother” approach to rating credit. Certainly, the approach is different than in other nations, as credit rating in China has tended to incorporate non-financial information as well as financial information into a social credit score, with a view to judging individuals’ trustworthiness. However, that idea, extended to firms and organizations that people interact with on a regular basis, makes a lot of sense in the effort to improve transparency in China’s economy. To that end, China’s State Council recently released opinions about expanding its social credit system to firms and other market entities. These guidelines subject such organizations to increased scrutiny over legal and financial activities in order to improve the integrity of the economy.

Aim of guidelines

The aim of the new guidelines is to create a voluntary registration system for firms, inducing firms to provide their own credit-related information. The guidelines promise to raise supervision on enterprises with poor credit, doling out punishment to those which are considered “untrustworthy.” This will allow regulators to focus attention on riskier firms and industry players. Such organizations may potentially be blacklisted, but they can also be rehabilitated if they improve their credit. The guidelines also promise to reduce costs and supervisory pressures on trusted market players.

The result will be to expand the credit system. Industries that are required to implement the closer supervision measures include areas related to safety, including the food and drug, ecological environment, engineering quality, elder care, and urban safety industries. Localities are called upon to set up pilot demonstrations for credit supervision; local departments are individually responsible for industry self-discipline. The ultimate goal is to create a society in which creditworthiness is easily traceable and consumer protection is enhanced.

The guidelines are expected to give rise to a credit service industry, which will provide credit information, credit guarantees, and credit consulting. Although China currently has a number of credit guarantee companies, the quality of these firms need improvement. The new requirements will help to make these firms more efficient, as they will operate with more credit data.

Impact of guidelines

These opinions will take time to effectively implement, but are likely to improve the quality of China’s market participants. China has experienced issues with fraud and poor business practices, which will be reduced as firms are more consistently monitored. In addition, the regulation may help smaller firms gain better access to credit by providing them with a credit record. Small and medium sized firms in China have often struggled to secure loans from banks, since they may lack a formal credit record. After registration, they will have a record in the system based on information they provide. This can increase their chances of obtaining bank loans.

Since the intent of the guidelines is to strengthen trustworthy companies and weaken or eliminate untrustworthy companies, the result will be that consumers are protected. Trust is the basis for a strong market economy, and strengthening this trust is likely to improve consumer confidence. In addition, the new measures will help the nation move away from a system of informal ties, in which one must establish a relationship with others in order to become trustworthy, to a system of formal ties, in which customers can simply look up a firm’s credit record to understand whether they are trustworthy, rather than relying on firms they have done business with in the past.

Contrast with social credit for individuals

The system of social credit for individuals has been criticized for aiming to collect too much information, which many Westerns consider an invasion of privacy. In the United States, credit companies collect information on individuals’ credit histories, and not information on good or bad non-financial behavior as in China. Individual credit collection differences between China and the West may remain a point of contention, but there is likely to be less debate about the collection of firms’ credit and non-credit data, as firms are meant to serve the public.

That being said, the market entity credit system needs to be implemented in a balanced way, without excessively increasing the costs of doing business. Excessive punishment may lead to increased costs for both firms as well as regulators. Analysis must be carried out by local regulators to ensure that the benefits of the local credit system are equal to the costs.

In sum, the extension of China’s social credit system is likely to improve market activity. It is a step forward in the nation’s attempt to reduce reliance on informal controls and boost the reliability of the economy as a whole.

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