BEIJING (Reuters) - The rollout of China’s controversial corporate “social credit system” is well under way and accelerating, a European business lobby in the country said on Wednesday, warning that foreign governments need to wake up to the plan’s potential risks.

FILE PHOTO: A Chinese national flag flaps in the wind outside the Great Hall of the People, in Beijing, July 5, 2013. REUTERS/Jason Lee

Beijing has been developing a globally unprecedented plan to give companies and individual people “social credit” scores, a goal that has drawn international concerns that it could heighten to Orwellian levels the already strict control that the ruling Communist Party has over society and the economy.

In a roadmap plan released in 2014, China said it would by 2020 create the system to reward or punish individuals and corporations using technology to record various measures of financial credit, personal behavior and corporate misdeeds.

Some experts say that the system remains nascent and could help tackle social problems like fraud or food security, while reducing government discretion in regulating companies.

But one of the authors of a new European Union Chamber of Commerce in China report on the system’s implications for companies said that it could become a “surgical instrument” for compelling companies to meet China’s political aims.

“It is a very, very potent instrument of regulating, controlling and steering companies in a targeted way,” Bjoern Conrad, chief executive officer of Sinolytics, a consulting firm that helped draft the report, told reporters.

Companies “cannot decide between legal and illegal anymore. You have to decide where you want to be on the good and bad scale,” Conrad said.

“MAJOR SHIFT”

Foreign companies operating in China have long griped about restricted access to its massive market, and more recently have begun sounding alarms about the growing state role in the economy under President Xi Jinping.

Those complaints are at the core of the United States’ criticisms of China’s trade practices that have plunged the two countries into a bitter trade war.

The chamber said the corporate social credit system is part of a “major shift” in China’s market access limits for foreign companies as the government enhances its ability to control firms’ behavior even as it pledges to scale back on traditional constraints, such as joint venture requirements and restricted sectors for investment.

According to the chamber, China will assess all companies using about 30 ratings, many of which have already been implemented, on nearly all aspects of their businesses, including tax and customs records, environmental protection, product quality, data transfers, pricing, licenses, and regulatory compliance.

Negative ratings on a forthcoming punishment mechanism could mean penalties ranging from potentially small fees and exclusion from subsidies and tax rebates, to blacklisting.

“Being a legal representative of a company in China means that your individual rating of the social credit system is directly related to the company and vice versa,” Conrad said.

A company could also be rated, and punished or rewarded, based on the record of its suppliers and partners, the report said.

There is no guarantee that the ratings cannot be applied in a “biased way”, and foreign firms might be caught between Beijing’s prerogative and requirements back home, it said.

Chamber President Joerg Wuttke said it appeared the Chinese government was currently focused on enforcement in its own market and not yet on shaping the behavior of companies in international markets, but that it was a concern.

“It is definitely a wake-up call to western governments, and OECD governments to take this up with China,” Wuttke said of the report.