A wake-up call for European business

The European Chamber, in cooperation with the consultancy Sinolytics, released The Digital Hand: How China’s Corporate Social Credit System Conditions Market Actors, a comprehensive study on the far-reaching implications of China’s Corporate Social Credit System (SCS or System). With many of the System’s mechanisms already operational, China is decisively moving forward to the roll-out of a fully integrated SCS in 2020. This also means that the window of opportunity for business to reach full compliance is quickly closing. What is the goal of the Corporate SCS? Why is preparing now of immense importance? What can companies do to prepare? Tom Groot Haar, Policy and Communications Coordinator with the European Chamber, outlines some key findings of the report.

In essence, the SCS is a comprehensive plan by the Chinese Government to use technology to monitor and guide participants’ behaviour. Regulatory ratings (e.g. tax, customs, environmental protection and product quality) and compliance records (e.g. on anti-monopoly cases, data transfers, pricing and licences) are at the basis of how the Corporate SCS assesses this behaviour. The System works as follows: government authorities define the requirements companies need to comply with in order to receive a good rating or avoid a non-compliance record. With the use of new technologies, the authorities collect information on companies’ activities and monitor their behaviour. The collected data is then processed and rated against the defined requirements. A good rating leads to rewards, while a negative performance results in sanctions or even blacklisting.

Sanctions can stretch from penalty fees or court orders to increased inspection rates, restricted issuance of government approvals or barring from public procurement bids. Through approximately 50 Memoranda of Understandings between government organisations, low scores for specific ratings could result in sanctions in operating areas that, on paper, are totally unrelated to the respective rating. This is, in part, what makes this System unparalleled by any government endeavour to date, either in China or internationally. Several ratings are already applied to all companies active in China, and the System already collects large amounts of data, rates performance and impacts companies’ business operations.

For companies, the consequences of the rating system are widespread and could lead to challenges relating to, for instance, compliance and strategic decision-making. Most rating requirements are concerned with strict compliance with market regulations. International companies with strong internal compliance systems will generally be well placed to maximise rating results, but need to have a complete and precise understanding of what needs to be done. However, SMEs may struggle to keep pace with the system, especially due to the additional resources required. Additionally, as the System will include partner and supplier ratings in determining a company’s own scores, strategically choosing the right partners and suppliers—and then regularly monitoring them—will become a part of operating a business in the Chinese market.

The System is part of a major shift in China’s market access regime. China continues to open its market to international players, moving away from hard market access constraints like joint venture requirements and investment catalogues, but at the same time, the Corporate SCS is emerging in the background to enhance the government’s ability to control companies’ behaviour. The lifting of hard market barriers can therefore be explained, at least in part, by the government’s growing confidence in its ability to influence companies, both foreign and Chinese, in a more nuanced way.

As most of the Corporate SCS is already in place and companies are already being rated, one might ask where the window of opportunity lies. This is due to the System not being fully implemented yet. The execution of the sanctioning mechanisms is still incomplete and data-sharing between different parts of the System remains a weakness. However, this is about to change.

In the coming months, the introduction of an important additional building-block is expected: a meta-monitoring database, the National ‘Internet+ Monitoring’ System, built by Taiji Computer Corporation in cooperation with Huawei, Alibaba, Tencent and video surveillance provider VisionVera. This supports the major push towards full data integration and systematically utilising the System’s blacklisting mechanisms. From then on, companies need to expect that heavy non-compliance will immediately lead to a listing as a distrusted entity.

Moving forward, the European Chamber will continue to seek dialogue with the Chinese Government, especially to clarify and potentially modify the Corporate SCS for the benefit of foreign and domestic business alike. Clarification is still necessary on details, even though many stipulations of the Corporate SCS are explicit and clearly stated. For example, individual credit scores of ‘responsible personnel’ will impact the company rating, but the definition of ‘responsible personnel’ has not been made clear. Modification is also needed as several components of the system are potentially sensitive for European companies. For instance, extensive data reporting from companies to government databases is required, but there are fears the required data might include sensitive information related to, for example, intellectual property (IP), which in turn raises concerns about data security and the potential for leaked IP.

Dialogue with the Chinese Government is necessary. However, it is equally essential for businesses to start preparing in order to avoid sanctions. Firstly, they should understand exactly what the system requires from their company. Secondly, they should assess their current rating and identify their gaps. Thirdly, they should design and implement effective internal adjustments to ensure compliance. Lastly, as the System will be evolving constantly, it is important to continuously monitor further developments. For better or worse, the Corporate SCS is here to stay and businesses in China need to be ready for the consequences.

To download the report, please go to: https://www.europeanchamber.com.cn/en/publications-corporate-social-credit-system