China’s Social Credit System: COVID-19 Triggers Some Exemptions, Obligations for Businesses
The social credit system is designed to leverage big data to ensure that individuals and organizations follow the law by monitoring and scoring each entity’s compliance with laws, regulations, and other directives. Following guidelines first released in 2014, government planners aimed to put the ambitious initiative into practice nationwide by the end of this year.
The coronavirus, however, has disrupted business as usual in China, thereby also disrupting the standard rules of the social credit system. For example, businesses that have had to temporarily close down may be exempted from the consequences of missing loan payments, which, under normal circumstances, would result in social credit punishments.
In the face of this situation, the Chinese government has instituted special provisions to amend the standards of the social credit system. As before, the social credit system uses a combination of rewards and punishments to influence individual and organizational behavior, but now tailored to the circumstances of the coronavirus outbreak.
Social credit exemptions and incentives
The Chinese government has instituted some accommodations for individuals and businesses who have been affected by the coronavirus. These mostly consist of exemptions on penalties that would be inflicted under normal circumstances, providing that the adverse behavior was caused by the coronavirus outbreak.
For example, the Human Resources and Social Security Bureau and the Tax Bureau have been given authority to refrain from deducting the social credit score of firms that fail to pay social insurance or taxes, respectively, due to the coronavirus.
Similarly, individuals and businesses that have temporarily lost their source of income and are unable to meet loan payments may be able to readjust their repayment arrangements without penalty. Other acts of “untrustworthy behavior”, such as delays in shipments, contract signing, and reporting, may also be exempted from penalties.
In addition to exemptions, the government offers incentives for some firms to aid containment of the coronavirus. Many local governments, for instance, have established fast-track credit restoration processes for firms deemed untrustworthy that are involved in products and services relating to epidemic prevention and control.
Further, in Shanghai, individuals and firms that contribute to research and development of products and services that can be applied to epidemic prevention and control can add to their credit record and earn preferential treatment for project funding. In Yinchuan, those who make similar contributions will be put on the “redlist”, which offers preferential treatment for highly trustworthy individuals. Likewise, in Rongcheng, donations in support of efforts relating to epidemic alleviation can improve credit scores.
Amendments to the social credit system not only consist of exemptions and incentives, but also new obligations for individuals and businesses.
For example, the Beijing and Shanghai governments require enterprises to refrain from price gouging in the sale of medical products. Firms that overcharge for such products will be punished within the social credit system. The same holds true of the sale of counterfeit medical products or products that do not meet regulatory standards.
The government has also integrated the social credit system in its strategy of quarantining and managing the spread of the virus. Individuals who hide their travel or medical history – and thus their potential exposure to the coronavirus – can have their personal social credit scores deducted or be put on a blacklist. Some cities have also included behaviors such as the spreading of rumors and hoarding products as social credit infringements.
Given that the coronavirus is theorized to have come from a livestock market, the government has made the consumption of animals posing health risks punishable within the social credit system. For example, both individuals who eat and restaurants that serve animals such as dogs, snakes, and turtles in Shenzhen are subject to fines and social credit demerits.
Besides these coronavirus-specific measures, business operators should take note of other temporary legal and regulatory measures that have been instituted during the outbreak, since their violation in most cases would have social credit consequences. For example, employees’ labor contracts have automatically been extended as a result of the coronavirus; contravening this measure could result in a labor dispute and social credit penalties.
Relaxation of obligations
The coronavirus outbreak has caused widespread business disruptions, necessitating the government to alter the standard procedures of the social credit system.
For the most part, the Chinese government has taken a conciliatory approach, withholding punishments of firms adversely impacted by the outbreak. In some cases, local governments have offered incentives to encourage individuals and firms to contribute to the epidemic alleviation efforts.
Businesses should note, however, that they are still exposed to social credit punishments during the coronavirus outbreak. The exceptions only apply to cases where the underlying cause was business disruptions owing to the outbreak, and do not mean firms have a green light to forego their obligations. In some areas, the government has introduced new measures with which firms must comply.
While the standard working procedures of the social credit system have been altered with the outbreak, the underlying logic remains the same: individuals and businesses are rewarded for good behavior, and punished for bad behavior.
- China After COVID-19: How Foreign Companies Can Leverage Key IT Solutions
- New Export Tax Rebates, Customs Duty Exemptions for China-Based Trading Companies
- 3 Reasons Foreign Investors Should Stick with China amid the Coronavirus
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at firstname.lastname@example.org.
We also maintain offices assisting foreign investors in Vietnam, Indonesia, Singapore, The Philippines, Malaysia, and Thailand in addition to our practices in India and Russia and our trade research facilities along the Belt & Road Initiative.