China’s Social Credit System: What Businesses Need to Know
The 2023 Government Work Report proposed to further “improve the social credit system”. This is the 10th consecutive time that the social credit system has been included in the government work report since 2014. Over the past few years, government bodies have worked to fill gaps in its implementation, answering important questions about the scope of information that will be collected and monitored, the penalties and rewards for bad or good credit scores, and mechanisms for restoring bad credit. Foreign investors should have an up-to-date understanding of China’s social credit system to better maintain their competitive edge and remain compliant.
China’s social credit system was first officially proposed to the public in 2014 with the release of the Outline for the Construction and Planning of the Social Credit System. Often misconstrued as a surveillance system for monitoring the behavior of private citizens, the system is actually an attempt to build a credit rating system targeting four different pillars of society: one for citizens, one for businesses and other organizations, one for government officials, and one for the judiciary.
In the years since the system was first proposed, the government has released a wide array of guidelines and regulations for the implementation of the SCS. This includes the release of a draft law, the Social Credit Construction Law of the People’s Republic of China (the “draft SCS Construction Law”), which provides a legal basis for the construction of the SCS, clarifies legal terms, and sets the scope of the information collected under the system, among other parameters and requirements.
In this article, we provide a comprehensive overview of the SCS in its current form with a focus on its application for businesses, based on the most recent legislation, regulations, and guidelines.
What is China’s social credit system and how does it work?
China’s SCS has widely been misunderstood as a mass surveillance scheme, a way of snooping on private citizens and punishing them for perceived social transgressions. In reality, it is not dissimilar to credit rating systems in other countries, only that it doesn’t exclusively look at financial history and activity, but also factors like legal violations and unethical behavior. The scope and type of information collected under the SCS also differ between the four different target categories.
In the case of corporations, the information that is collected includes anything that could make a company be deemed “trustworthy” or “untrustworthy”. For instance, engaging in anti-competitive or monopolistic activity, engaging in illegal or unethical tax practices, damaging the environment, or engaging in deceptive consumer practices, could all be included on a company’s credit record, with negative consequences.
Conversely, positive contributions to society, such as setting up social programs, donating to charitable causes, or other corporate social responsibility (CSR) activities, could have a positive impact on a company’s credit score.
The stated purpose of the SCS is to create a higher-trust and more transparent society by holding various entities to account for harmful activity or behavior and rewarding them for good and beneficial behavior. In March 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 the 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”). These opinions outline 23 measures for how the SCS can improve trust in society across a wide range of fields and industries. This includes improving consumer and investor confidence, foreign trade, guiding the financial industry to provide better support for market entities, improving the overall business environment by streamlining bureaucratic procedures, and even helping China reach its carbon reduction targets.
For more information on how the government proposes improving social trust and transparency through the SCS, see our article on Building a High-Trust Society Through the Social Credit System.
The “credit information” collected from companies
Under China’s social credit system, “credit information” will be collected from the four target groups – government officials, companies, social organizations, and judicial bodies. For companies, this credit information is stored in a database, called the National Enterprise Credit Information Publicity System (国家企业信用信息公示系统), and will be used to assess the trustworthiness of a given organization.
“Credit information” is defined in the draft version of the SCS Construction Law as “information that can be used to identify the identity and credit status of natural persons, legal persons, and unincorporated organizations with full capacity for civil conduct”.
For businesses, the responsibilities focus on maintaining a healthy competitive market environment, preventing anti-competitive and monopolistic behavior, ensuring compliance with market standards and regulations, and upholding commitments to clients, consumers, and other stakeholders. The draft law mentions 14 “key fields” for the construction of China’s corporate social credit system. This includes the monitoring of various types of fraud or illegal behavior, such as illegal or false marketing and advertising, statistical, accounting, financial, tax, or price fraud, as well as adherence to safety standards, such as production, construction, and engineering safety.
Note that the above has been proposed in the draft SCS Construction Law that was issued for public comment in November 2022. The National Development and Reform Commission (NDRC), the government body that issued the document, stated on December 28, 2022 that it had received 146 suggestions for amendments from the public, which it will be studying over the next few months. An updated version has not yet been released at the time of writing.
For a full overview, see our discussion of the contents of the draft SCS Construction Law: China Social Credit System – Draft Law Clarifies Rules for Companies.
Catalog of credit information
The scope of information that is collected on companies (and other entities and individuals) under China’s social credit system is also maintained in the National Basic Catalog of Public Credit Information, which is updated annually by the NDRC and People’s Bank of China (PBOC). The 2022 version of this catalog was released at the end of 2022, and is in effect until December 31, 2023. This catalog standardizes and defines the scope of credit information that can be collected, and prohibits government organs from collecting information that is outside the scope of the catalog.
The 2022 version of the catalog lists 12 different types of information that can be collected – one item more than the 2021 version.
Corporate credit risk classification system
In January 2022, the State Administration of Market Regulation (SAMR), China’s market regulator, published the Opinions on Promoting the Classified Management of Enterprise Credit Risk and Further Improving the Efficiency of Supervision (the “credit risk classification opinions”).
These opinions detail plans to create a corporate credit risk classification system, which classifies companies operating in China into four different levels of risk – from low risk to high risk. This classification is based on information collected, such as the basic attributes of the company or industry, regulatory factors, and social evaluation, which will be stored in the local National Enterprise Credit Information Publicity System.
This classification system was piloted in 2019 in 11 different regions, which was called “successful” by the SAMR and formed the basis of the opinions.
Their assigned category will then decide how much regulatory supervision they will receive from local market supervision departments, which, it is hoped, will help local market regulators increase efficiency and better allocate time and resources.
The opinions stated the relevant departments should fully implement the entire system within three years. More specifically, they state that a general-use corporate credit risk classification mechanism should be established by the end of 2022 and a profession-specific system should be established by 2023.
However, at present, the government has not provided any updates on the development of the program’s rollout or whether the targets. For more information on the corporate credit risk classification system, see our article on China’s Corporate Credit Risk Classification System.
Consequences for bad credit scores
The draft SCS Construction Law enables state organs and organizations with the requisite authority to punish “untrustworthy” actors. The draft law defines untrustworthy activities as “acts carried out by the targets of credit information subjects that have been legally recognized and confirmed by state organs to have lost their integrity”. The law also stipulates measures for punishing untrustworthy behavior.
These are, generally:
- Publicizing the companies’ infractions, increasing supervisory obligations, and restrictions on access to markets and preferential policies and procedures.
- Enabling other organizations and individuals to limit or restrict companies from engaging in activities such as credit services, financing and credit grants, bidding, business cooperation, and so on, as befits their own responsibilities and needs.
The “seriously untrustworthy” entities list
Companies that are found to have committed serious violations or engaged in particularly “untrustworthy” behavior may be added to the “Seriously Illegal and Dishonest Entities List” (严重违法失信名单) and be subject to certain penalties.
In July 2021, SAMR released the Administrative Measures for Market Regulation of the Seriously Illegal and Dishonest Entities List (the “dishonest entities list measures”). These measures, which went into effect on September 1, 2021, clarify the types of violations that can land a company on the Seriously Illegal and Dishonest Entities List. These are generally serious legal violations or fraudulent or anti-competitive behavior that have harmful consequences for the wider society or markets.
The types of behavior or violations that could land a company on this list vary depending on the industry that it is operating in but includes penalization for infractions such as:
- Receiving a “relatively severe” punishment for violations of laws or administrative regulations (such as a heavy fine or revoking of a business license);
- Engaging in food production and operations without the requisite licenses;
- Manufacturing or sale of counterfeit or substandard drugs;
- Infringing on consumers’ personal dignity and information; and
- Submitting false materials for administrative procedures.
The common denominator in this behavior is that these violations carry the potential to cause serious harm to consumers or wider society, or severely undermine administrative or market integrity.
For a more thorough overview of the “seriously untrustworthy” entities list, see our article on Violations and Restoring Bad Credit.
Abnormal entities list
Companies that have not been found to have committed serious violations but who have incomplete, or “abnormal”, information records are added to the “List of Companies with Abnormal Operations” (经营异常名录).
This list has been in implementation since 2014, when SAMR released the Interim Measures for the Administration of the List of Abnormal Business Operations. The types of behavior that could land a company on this list include:
- Failing to publish the requisite annual report or relevant enterprise information within the time limit stipulated in the Interim Regulations on Enterprise Information Disclosure (the “disclosure regulations”), a set of regulations released in 2014 to standardize enterprise information disclosure obligations;
- Publishing corporate information in order to conceal the real situation or resort to fraud; and
- Being uncontactable through the registered domicile or place of business.
Companies that are added to the List of Companies with Abnormal Operations may face a variety of consequences, including being restricted or prohibited from participating in government procurement, project bidding, state-owned land transfers, and being awarded honorary titles.
In addition, inclusion on the list could hinder companies from accessing financial and banking services, as banks and financial institutions may look at these lists when vetting corporations for the provision of services, such as loans, guarantees, and insurance.
The companies’ inclusion on this list will also be publicized through the National Enterprise Credit Information Publicity System, which means that potential partners, suppliers, and clients can see the company’s abnormal status, which could affect the company’s business opportunities.
It’s also important to note that if a company does not fulfill its obligations or rectify the problems that landed it on the list within three years, then they will be added to the “Seriously Illegal and Dishonest Entities List”, which bears more serious consequences.
List of punishment measures for untrustworthy entities
In addition to the catalog of credit information, the NDRC and PBOC also maintain the National Basic List of Punishment Measures for Untrustworthiness. This list, which is also updated annually, is designed to standardize and define punishments for “dishonest” behavior.
The 2022 version of the list, which was released in December, includes 14 penalty items across three categories of punishments. For companies, these are, broadly:
- Reduction of rights or an increase in obligations, such as restrictions on market or industry access;
- Restrictions on applications for fiscal funds, restrictions on participation in evaluations, restrictions on preferential policies and facilitation measures, and being the targets of additional supervisory measures; and
- Inclusion in market-based credit investigation or rating reports, strict and prudent credit granting, and so on.
Benefits of good credit scores
The draft SCS Construction Law authorizes government bodies to implement market-based incentives for companies with good credit status. The law outlines two incentive measures for good conduct, which broadly are:
- Providing simplified and priority procedures for companies when accessing public services, financial funds and project support, and public resource transactions, and honoring them with awards or honors.
- Reducing the frequency of inspections or reducing the proportion of random inspections.
In addition to state agencies, enabling other organizations and individuals to provide companies and individuals with added convenience and preferential measures for credit services, financing and credit grants, bidding, business cooperation, and so on, as befits their own responsibilities and needs.
Measures for restoring bad credit
Companies that have received bad credit scores or have been placed on any of the administrative blacklists have a few different courses of action for restoring their status.
In January 2023, the NDRC released a set of trial administrative measures, called the Measures for the Administration of Restoration of Credit Information after Correction of Untrustworthy Behavior (the “credit correction measures”). These measures, which will come into effect on May 1, 2023, explicitly state that companies that meet certain requirements have the right to restore credit information and standardize the procedures for doing this.
Measures for restoring credit information outlined in these measures include:
- Removal from the list of seriously untrustworthy entities list;
- Termination of publicity of administrative punishment information (that is, removal of information pertaining to past punishments for violations from the public credit information databases); and
- Restoration of other untrustworthy information.
The credit correction measures also put limits on the types of penalties that should be publicized through the database and stipulates expiry dates for the publication of various types of penalties, which range from three months to three years.
Specific procedures for the removal of a company from the administrative blacklists are outlined in the Administrative Measures for Market Regulation of Credit Restoration, which were released in 2021. These measures provide a detailed description of the procedures that companies need to take to restore their social credit and be removed both from the seriously dishonest entities list and the list of enterprises with abnormal operations.
Companies that find themselves on either of these lists can apply for their early removal after one year from the date of the listing. To be eligible for early removal, a company must have:
- Proactively fulfilled the obligations of the administrative punishment;
- Actively eliminated the harmful consequences of its violations; and
- Not received any other relatively serious punishments from the relevant authorities.
To be eligible for removal from the list of enterprises with abnormal operations, a company must have:
- Submitted and publicized the missing annual report;
- Fulfilled its obligations of information disclosure;
- Corrected any falsified or obscured public information; and
- Updated the registered address to the current address or re-established means of contact at the existing address.
For the “seriously dishonest” entities list, companies can only be removed after three years from the date of the initial listing. Companies that wish to apply for their early removal from the entities list must submit the following documentation to the market regulation authorities:
- Application form for removal/credit restoration;
- Letter of commitment;
- Materials evidencing the fulfillment of obligations or correction of illegal activities; and
- Other materials required by the SAMR.
The company will be informed of whether the case has been accepted for consideration within two days of the submission and on the decision on whether or not to remove the company from the list within 15 days.
Compliance considerations for foreign companies
China’s social credit system has matured significantly since it was first proposed in 2014. Government bodies have worked to fill gaps in its implementation over the last few years, answering important questions on the scope of information that will be collected and monitored, the penalties and rewards for bad or good credit scores, and mechanisms for restoring bad credit.
What this means for companies is a higher risk of consequences for non-compliance, and the potential for longer-term economic and market access penalties beyond administrative fines. It is important for anyone conducting business in China to have an understanding of the workings of the social credit system, as foreign companies are subject to the same standards as domestic ones.
However, for the most part, China’s social credit system does not place a higher burden of compliance on companies than there already was; rather, it is another way of punishing companies for violations of China’s laws and regulations. The main challenge for businesses operating in China is therefore to remain up-to-date and compliant with a plethora of regulations s – tax and accounting, consumer protection, data privacy, advertising, environmental protection, and information disclosure, among others – many of which are amended regularly. Failing to adequately comply with these laws and regulations can cause a company to get a bad credit score, not failing to comply with the SCS.
Maintaining a good credit score therefore should be seen as an extension of overall compliance and risk management strategies. For help with compliance across a wide range of administrative fields, due diligence, and assessment of compliance risks, contact our professionals at China@dezshira.com.
This article was first published on November 5, 2019, and last updated on March 24, 2023.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so 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 email@example.com.
Dezan Shira & Associates has offices in Vietnam, Indonesia, Singapore, United States, Germany, Italy, India, and Russia, in addition to our trade research facilities along the Belt & Road Initiative. We also have partner firms assisting foreign investors in The Philippines, Malaysia, Thailand, Bangladesh.
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