Building a High-Trust Society Through the Social Credit System
A new set of official opinions clarify how the government plans to use the Chinese corporate social credit system to improve societal trust and grow the economy. Better accountability for bad actions by corporate and social entities, the thinking goes, will boost consumer and investor confidence in corporate and governmental institutions. The new document outlines 23 policies for improving transparency and accountability in the business environment, covering a broad range of industries, including consumer goods and services, government contracts, foreign trade, and more.
On March 29, 2022, the General Office of the Central Committee of the Communist Party of China (CCCPC) and the General Office of the State Council released a document titled Opinions on Promoting the Construction of a Social Credit System with High-Quality Development and Promoting the Formation of a New Development Pattern (the opinions”).
China’s social credit system (SCS), first proposed in 2014, is a national credit rating system and blacklist system that rewards and punishes individual, corporate, and government behavior. The SCS is broadly split into three categories targeting different pillars of society: one for citizens, one for businesses and other organizations, and one for government officials.
For businesses, the system focuses on ensuring that they follow laws and regulations and pay taxes in an appropriate and timely manner, though product and service quality are also be measured. The goal, according to the government, is to create a fair, transparent, and predictable business environment.
Whereas previous policy documents on the SCS have focused on clarifying the scope of responsibilities of businesses and explaining punishments for bad behavior and non-compliance, this latest document seeks to use the SCS as a tool to boost consumption and economic activity. A higher trust society, the thinking goes, will make consumers, investors, and businesses feel more confident and secure in spending their money. Furthermore, the new opinions serve to clarify the function of the SCS as a force for positive change and growth in specific areas of the economy and society, rather than simply as a means of keeping record of individuals’ and companies’ actions.
The opinions provide 23 policy measures for improving trust in society across a wide range of fields and industries. They aim to enhance areas such as consumer and investor confidence, foreign trade, guiding the financial industry to provide better support for market entities, improving the overall business environment by reducing by streamlining bureaucratic procedures, and even helping China reach its carbon reduction targets, among other goals.
Building trust for consumers, investors, and other stakeholders
Improving consumer trust
One of the main ways the SCS can help improve consumer confidence and trust is ensuring product and service quality. The main ways the opinions suggest achieving this is by enhancing transparency of markets and supply chain holding companies that violate consumer trust and rights to account.
To this end, the opinions offer a few different mechanisms to ensure consumer trust:
- Building a product traceability system for online and offline consumption.
- Exploring the implementation of the SCS in areas such as healthcare, elderly care, family affairs, tourism, and shopping.
- Combating the production and sale of counterfeit goods, illegal advertisement, and the spread of false information and strengthening the supervision of prepayments.
- Punishing illegal acts that infringe on consumers’ rights and interests and imposing market bans on entities that have repeated violations despite receiving multiple punishments and fines.
Ensuring labor rights and social security duties
The SCS will also be used as a means of ensuring companies fulfill their obligations to the state and to their employees, by meting out punishments and keeping track of companies that renege on their tax obligations or violate the rights of their employees. Among other things, the opinions propose:
- Implementing a credit commitment system for tax declarations to enhance taxpayers’ awareness of creditworthiness.
- Cracking down on fraud in minimum living security funds, social insurance benefits, and affordable housing in accordance with the law.
In addition, the opinions propose the creation of a list of “seriously untrustworthy entities in the social insurance field”, to punish and keep track of companies that fail on the social security obligations for their employees. Moreover, companies that engage in “untrustworthy” behavior such as going into arrears of wages to migrant workers and failing to safeguard the rights and interests of migrant workers will be punished.
Enhancing investor confidence
To improve investor confidence, the opinions outline measures for improving government accountability and protecting investors against unfair prosecution. The measures include:
- Establishing and improving the accountability system for the government in cases where it fails to fulfill responsibilities and improving long-term mechanisms for dealing with arrears and other behavior.
- Promoting the notification and commitment system for enterprise-related approval.
- Strengthening judicial credibility, increasing efforts to promote the active fulfillment of obligations by persons that are subject to enforcement, and punishing false lawsuits.
Enhancing environmental protection
The opinions also seek to help China improve environmental protection and even help it achieve its carbon reduction targets – reaching peak carbon emissions by 2030 and carbon neutrality by 2060.
To this end, the opinions propose:
- Implementing credit evaluation for environmental protection and soil and water conservation, and strengthening the sharing and application of credit evaluation results
- Deepening reform of the legal disclosure system for environmental information, and promoting relevant enterprises and institutions to disclose environmental information in accordance with the law
China recently also issued new measures for ESG reporting for major polluters to ensure they comply with environmental regulations.
Moreover, to help reach China’s carbon targets, the opinions call for:
- Improving the national carbon emissions trading system (ETS), and strengthen credit supervision for each step of the process, including registration, trading, settlement, and verification.
- Establishing and improving effective management and restraint mechanisms for violations of laws and regulations such as falsification by emission units and false reports issued by intermediaries.
In the past, false or incorrect reporting of environmental statistics has been a significant obstacle to reducing environmental damage and ensuring compliance with environmental regulations. Ensuring that companies report accurate and reliable environmental information will be crucial to ensuring that the country is on track to meet its climate goals, while also building trust among stakeholders.
Creating a trustworthy environment for foreign trade
The opinions seek to use the SCS to enhance foreign trade by improving mechanisms that facilitate foreign trade and for keeping track of companies that engaged in untrustworthy behavior.
The measures include:
- Promoting the mutual recognition of the authorized economic operator (AEO) system. Under this system, traders or related companies will be recognized as having met certain supply chain standards under the World Customs Organization (WCO) or other equivalent standards.
- Establishing a system for companies to restore credit and establish a list of seriously untrustworthy entities in the import and export customs supervision field.
- Fully leveraging export tax rebates, export credit insurance, and other foreign trade policy tools, and relaxing the conditions for underwriting and claim settlement.
Furthermore, the opinions seek to improve cooperation with overseas traders. This will be achieved by strengthening the credit system for bilateral investment and foreign cooperation by ensuring the rights and interests of foreign investors and companies in import/export fields, as protected under the Foreign Investment Law and related regulations.
The measures include:
- Improving the pre-entry national treatment plus negative list management system for foreign investment
- Increasing international cooperation in intellectual property protection.
- Building a credit system for foreign investment, foreign contracted projects, foreign aid, and other fields, and strengthening the collection, sharing, and application of credit information
Several measures also aim to improve the business environment by streamlining procedures in the SCS. These include:
- Promoting the use of electronic licenses
- Improving the overseas investment filing approval system, optimizing the authenticity and compliance review
- Improving the foreign investment reporting system
- Improving filing and reporting management of foreign contracted engineering projects and the management of specific project approvals
Helping the financial system better serve the “real economy”
Under the SCS, the government will seek to enhance the use of financial tools to better help market entities, while also improving oversight of financial institutions’ behavior.
Financial tools for boosting market confidence
To better assist market entities, financial institutions will be encouraged to innovate and create new financial products and services. These include:
- Developing inclusive finance, expanding the scale of credit loans, and solving financing problems for micro, small, and medium-sized enterprises (MSMEs), as well as self-employed people.
- Create new credit products in fields such as service manufacturing, strategic emerging industries (such as tech and digital industries), agricultural and rural industries, ecological and environmental protection, and foreign trade.
- Develop orders, warehouse receipts, insurance policies, inventory, accounts receivable financing, and intellectual property pledge financing.
Detecting and mitigating financial risks
The opinions also call for better oversight over financial companies and ensuring bad actors are held to account. The SCS will play a key role in this by unleashing its capabilities to identify, monitor, manage, and dispose of financial risks. Moreover, the opinions propose the establishment of an “early detection, early warning, and early disposal” risk prevention and resolution mechanism for financial issues.
Financial institutions, as well as credit reporting, rating, and other related institutions, will be encouraged to use big data and other technologies to strengthen tracking, monitoring and early warning, and improve market-based risk sharing, mitigation, and compensation mechanisms.
Preventing financial fraud and debt evasion
The opinions also tackle issues of financial fraud and debt defaults to improve compliance and hedge against financial risks that could spill out to harm the rest of the economy. Specifically, the opinions state promote:
- Adhering to a “strict supervision and zero tolerance” policy for financial violations and thoroughly investigating major illegal cases of fraudulent issuance of stocks, false statements, market manipulation, and insider trading, and intensifying crackdowns on misappropriation of funds.
- Improving mechanisms for dealing with debt defaults, and severely punishing evasion and abandonment of debts.
- Strengthening punishment for dishonesty in online lending.
The opinions also call for companies to have better market exit options should they be unable to pay off their debts. Specifically, they call for:
- Improving market exit mechanisms so that insolvent and indebted enterprises can go bankrupt, reorganize or liquidate.
- Exploring the establishment of a compulsory enterprise exit system.
Implementation and oversight
The opinions also provide some insight into how the government plans to implement the SCS. According to the opinions, the system will adopt a top-down structure where the central government’s requirements are overseen by provincial-level governments and are implemented by municipal and county-level governments.
The opinions also encourage local governments to formulate local laws and regulations to enhance the effectiveness of the SCS and adjust it to the needs of their localities. They will also be encouraged to establish systems for evaluation, classification, and supervision of credit, and rolling out incentives and punishments as well as mechanisms for restoring credit. This suggests more guidance and regulations for the SCS will be released at the local level.
Moreover, the opinions call for better transparency in how the SCS works and what the consequences are for entities that fall foul of the system. First of all, this will require the creation of a basic set of standards for the information that will be gathered on market entities, and what the disciplinary measures for dishonesty will be.
Specifically, this will involve a “national unified catalog of public credit information” and a “basic list of disciplinary measures for dishonesty”. The scope of credit information recording, collection, sharing, disclosure, and the scope of application of disciplinary measures for dishonesty should also be accurately and clearly defined. Finally, the measures state that the disciplinary measures must be proportionate to the nature and severity of the dishonest behavior to ensure the punishments are not excessive or too light.
Finally, the opinions also highlight the need for strict data protection of the information shared through the SCS. In particular, the SCS must be protected from leaking state or corporate secrets and ensure that both personal data and sensitive data that could harm national security is not leaked, tampered with, or illegally transferred overseas.
These requirements fall in line with China’s existing cybersecurity and data security regulations, underpinned by the Personal Information Protection Law (PIPL), the Data Security Law, and Cybersecurity Laws as well as regulations categorizing data into different levels of sensitivity. The opinions therefore extend the scope of these pieces of legislation to data and information shared through the SCS, as a means of protecting national security, corporate secrets, and individual data protection and privacy rights.
The SCS as a driver of growth and change
Perhaps the main goal of the opinions is to further clarify the objectives and development trajectory of the SCS in the coming years. The focus on building trust among all members of society solidifies the government’s stance that the SCS will be used as a tool for boosting the economy and enacting positive social change, rather than simply a way of expanding supervision and punishing bad behavior. By using the SCS to improve transparency, ensure compliance, reduce bureaucratic barriers, and hold all entities accountable regardless of their position in society, the government is hoping to build a system that all stakeholders can trust in and benefit from.
Moreover, it is important to consider the timing of this release. 2022 is a pivotal year for the Chinese government, with the 20th National Congress of the CCP set to be held in the latter half of the year. It is this meeting that will see the election and re-election of top CCP officials, including President Xi Jinping, who is expected to be appointed for a third five-year term. In the run-up to this important event, the government will be keen to ensure economic and social stability. Regardless of whether the SCS will be enough to counter other factors holding back economic growth in 2022, the government will continue to use every tool at its disposal to achieve stability, including the SCS.
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