China’s social credit system: Get ready for its adoption

Dear Members and friends,

CICC is glad to share with you a news of our member Hawksford about the new Chinese National Credit System.

In 2014, the Chinese government officially announced the adoption of a national credit system that is now entering the final stage before being fully implemented by the end of 2020. The system will not only affect individuals but business entities and government organisations too, with the aim of building a trustworthy society and a transparent business environment.

What is the Corporate Social Credit System?

The Chinese Corporate Social Credit System (CSCS) covers all areas, aiming to track and record entities and individuals’ performance and business information. The mechanism of the system relies on the development of Internet and technology, specifically Internet and Supervision.

 With its implementation, local governments will be able to transfer and gather information through one platform in an attempt to establish a National Financial Credit Information Basic Database by the end of 2020, integrated with the Credit Information System for micro and small enterprises and rural areas.

The system should encourage honest behaviour among individuals and organisations and reduce, as a consequence, administrative interventions while preventing economic risks.

Elements of the CSCS

Ratings

Despite the attempt to build a national credit database, the system is still largely fragmented into regions and local districts. This leads to the standards and boundaries potentially varying from region to region and from industry to industry.

However, common elements can be still determined through two main categories of ratings, namely ‘trustworthiness (or honesty)’ and ‘dishonesty’. Businesses rated as ‘trustworthy’ will be given rewards from different perspectives and levels. Meanwhile, punishments will be applied to ‘dishonest’ businesses. Businesses considered to be severely dishonest will be listed on a blacklist, which will be published online.

Timeliness

The credit records for a certain period can be checked upon request, generally from a minimum of six months to a maximum of five years. However, exceptions apply if otherwise stated in specific regulations or laws. For example, in Shanghai, the maximum publicity period is five years.

Publicity periods may vary depending on the level of dishonesty but for any business that is believed to be severely dishonest and is on the blacklist, the information about its dishonesty can only be deleted when it is removed from said blacklist.

Data collection conditions

Authorities can check credit records typically for administrative purposes, for example when implementing inspections or penalties, immigration and visa controls and foreign exchange management.

The information is generally divided into three categories: basic information, dishonest information and other. Information such as honoured commendations, awards received, volunteer or CSR (Corporate Social Responsibility) participation will all lead to positive credit rating scores, while records such as refusals to perform effective judicial rulings, failures to comply with laws and regulations, tax evasion or late tax payment, and abnormal operations will cause deductions for credit scores.

Rewards and punishments

Trustworthy businesses may receive different rewards such as being prioritised or receiving simplified administrative procedures, optimised monitoring frequencies, prioritised opportunities in fiscal and project support, and lower bank fees.

Similar rules apply to businesses of the opposite nature as dishonest businesses will receive different levels of punishments. What business operators need to be extra aware of is that there is a blacklist that goes beyond the dishonesty list for severely dishonest businesses. Moreover, the credit record of businesses will impact the personal credit records of individuals working in senior management positions such as legal representatives, directors and financially responsible persons.

Blacklists

Typical punishments include limitations on market or industry entry, the use of relevant financial services and taking advantage of preferential public policies. Blacklists will be made public and will be updated regularly.

Legal representatives and other senior managers need to be aware that their credit records will be directly affected as they are linked with the records of the company. They may not just be subject to punishments from the relevant authorities as restrictions may also occur when they use financial products for which personal credit records need to be consulted, such as loans, mortgages, and applying for credit cards or credit increases. In addition, there may also be restrictions on being nominated as responsible personnel for other entities.

Foreigners working in China should be aware that their credit records may affect their future work and resident permit applications.

Cooperation with a blacklisted business will also lead to risks and uncertainties. In some cases, businesses may be monitored and visited by authorities more frequently or receive few or no governmental discounts.

Joint disciplinary actions

One key term in the CSCS is joint disciplinary actions. This mechanism allows different authorities to apply penalties and administrative actions to blacklisted businesses based not only on the credit records in their own areas of responsibility but also in all credit-rated areas. Thus, punishments will no longer be vertical only. They will, instead, be expanded horizontally through the alliance of different government authorities using shared credit information.

Although there are still technical gaps that limit the national sharing of information through one platform, local governments have overseen the establishment of provincial and regional databases. For example, provinces (Anhui, Jiangsu and Zhejiang) and a city (Shanghai) in the Yangtze River Delta area are already able to access data interprovincially. This enables authorities to track the credit data of any interprovincial businesses, making the monitoring of their market behaviours simpler and more measurable.

In Shanghai, for example, current regulations state that rewards and punishments will not only be issued by the administrative authorities, but also by market entities, industrial associations and financial institutions, which can apply risk pricing methods according to credit records.

Conclusion

The aim of implementing the social credit system is to improve the fairness, openness and efficiency of the supervision system, as well as to enhance the competitiveness and transparency of the business environment.

Compliance, therefore, is becoming and will become more and more important. Failure to obey laws and regulations will not only lead to monetary penalties but also stricter monitoring from an administrative perspective, or even worse: being blacklisted.

From a financial perspective, the better the credit level you have, the lower the fees you pay.

Other unstated consequences may also affect Chinese nationals and foreigners in applying for residency in some cities or for work or resident permits in China, or in being appointed in senior managerial roles in business organisations.

While the Chinese market is preparing to be more open to the world and more accessible to business entities, the social credit system enables government authorities to monitor and regulate market behaviours in a more straightforward and intuitive manner. Compliance and cooperation with the system will no doubt lead to benefits while violation of rules could lead to inconvenience and even worse.

Now more than ever, it’s crucial for individuals, entrepreneurs and managers doing business in China to run their daily operations consciously and in compliance with the rules and regulations.

How can Hawksford help?

Hawksford is an established provider of company registration and outsourced corporate services in China.

Hawksford has more than a decade’s worth of on-the-ground expertise guiding foreign investors in their China market access decisions. With 100 multilingual professionals based in Shanghai, Beijing, Suzhou, Guangzhou and Shenzhen, we are able to offer the very best local knowledge to our international clients.

By engaging with Hawksford professionals, foreign companies have been able to reduce the hassle and complexity regarding their business plans in China, including choosing the right type of corporate entity to make companies’ plans a reality.

Kind Regards

CICC Team