China is in the process of rolling out its so-called social credit system, which will mobilize a vast system of omnipresent data collection to form rating system of businesses and individuals covering a wide variety of areas of interest to the Chinese authorities. While China will soon require companies to hand over a great deal of commercial data to the authorities, the authorities are currently using taxation data to build the foundation of the social credit system. Though foreign businesses may be unhappy with this decision, given the sheer size of the Chinese market and comparatively dismal growth opportunities elsewhere, the Chinese authorities feel they are in a position to comfortably make such demands. The system will likely be in full operation by 2020.

Social Credit Score

The social credit score for businesses will be partially based on fairly straightforward variables like environmental compliance, worker treatment, and taxation. However, it will likely also be based on more controversial variables such the company’s value to China’s industrial policy, national investment priorities, and the company’s profile against the government’s perception of national stability.

Companies with low social credit scores may be penalized in a variety of ways including higher interest rates, higher taxes, more onerous administrative requirement, investment proposals denied, etc. There is some evidence to suggest that a company’s low social credit score could be used to deny train and flight tickets to senior managers. Nefarious business activities like corruption could be disastrous for a business’s social credit score.

Implementation of Social Credit System

The social credit system is currently in the implementation phase. Authorities are following through with the Planning Outline of the Social Credit System Construction issued by the State Council. At this point, tax credit data is central to the implementation of the program. The tax system will become more scientific and technology-driven to penalize offenders and reward rule-abiding businesses and individuals.

While taxation is a fairly straightforward and uncontroversial area for such a program, it represents a critical foundation in this program. This is due to the fact that this current tax-focused phase involves the development of a reward and punishment mechanism, which can then be transferred to other issue areas. Once it is fairly clear how an individual or business could be punished or rewarded for their speed filing taxes, it will be much easier to use the program to reward or punish citizens for online behavior or foreign companies for their importance in China’s industrial policy.

Government Use of Data

Given that the program has not been implemented and that the government has not made many details public, the authorities’ use of business data remains unclear. For instance, will the government credibly guarantee that it will not share the information? A conflict arises when considering the fact that the government has a very heavy hand in industrial policy and promotion of Chinese businesses, combined with the reality that there is significant coordination between government bodies to meet larger, often economically nationalistic goals. At this point, it is not clear what data the Chinese government will require. Will the government require some of the businesses’ foreign data to get a more accurate reading of their ‘trustworthiness’?

Foreign Business Concerns

The main concern from a business perspective, at this point in time, is that the Chinese government will employ its social credit system to undermine non-Chinese companies, either in China or abroad, and promote Chinese national champions. The severity of this risk depends on two major factors. The first is the extent and nature of data collection. If data collection is fairly narrow and involves less propriety business data collection, it may be less of risk for businesses. A caveat to this is that predictive analytics may become so robust that even relatively limited data collection on companies may provide powerful insights into them, which can be used against them. The second major factor in determining the risk is the transparency and oversight of this program. Will businesses and individuals be able to know very clearly what the purposes of the program will be? If the program is relatively transparent and there is a tractable oversight, businesses will face less uncertainty over the program and the risks it poses to their business.

There are also more basic concerns such as the risk that vague credit score criteria will adversely impact a business’s ability to do business in China, such as slower approval of investments (or no approval at all), more complex bureaucratic procedures (such as getting a visa, approval of facilities, and customs). While we have yet to acquire much information about these variables, businesses should keep an eye out for this information as it slowly comes out.

The long-term business consequences of this program are likely to be significant and the effects are unable to be predicted at this point. There is some evidence to suggest that the new system will impact the consumer-business relationship. A low credit score may negatively impact consumer brands.

Moving Forward

China’s social credit system may very well not create any problems for businesses but it should be treated simply as a business risk. Implementation is in the early stages and even once implantation is complete, it will be a few years before any significant trends can be observed. Moreover, this program will likely be continuous work in progress and authorities will change and adapt the program.

Businesses are in a natural position to wonder whether Chinese authorities will use this program for the benefit of Chinese companies at the expense of foreign competitors. The main risks here are the scope (and the knowability and consistency of that scope), transparency, and oversight of the program.