China races toward plan to blacklist companies for their behaviour

China is making swift advances with a system for measuring the social creditworthiness of companies, a sweeping data-collection effort that could solidify Beijing’s control over foreign and domestic enterprises and possibly challenge the dominance of US credit-rating companies.

The corporate social credit system was originally dreamed up two decades ago, but it has since expanded into an ambitious national project that is now taking shape, according to a new, 95-page report from the consulting firm Trivium China for the US China Economic & Security Review Commission. The CSCS effort gathers information on companies from at least 44 state agencies and their branch offices in every province across the country.

“The scale of this data aggregation scheme cannot be overstated,” the report said. “In a US context, this would be roughly equivalent to the IRS, FBI, EPA, USDA, FDA, HHS, HUD, Department of Energy, Department of Education, and every courthouse, police station, and state agency sharing records across a single platform.”

A Chinese flag flying in Beijing's CBD: China is making swift advances with an elaborate system for measuring the social creditworthiness of companies.
A Chinese flag flying in Beijing’s CBD: China is making swift advances with an elaborate system for measuring the social creditworthiness of companies.Credit:Bloomberg

Compiling this information is aimed at allowing government officials, banks, suppliers and consumers to check on a company’s behaviour, helping advance a broader push to clean up business in China. Corporate actions could be analysed, potentially leading to rewards like lower taxes and government contracts or punishments like fines and prohibitions on activities.

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The CSCS would “penalise companies with poor compliance records by reducing their access to the market and subjecting them to public censure via ‘blacklists,’ while rewarding consistently-compliant companies with economic incentives and public praise via ‘redlists,'” the report said.

The system could enhance China’s ability to craft effective policy, possible giving it a geopolitical edge globally.

“China’s push towards the rapid, large-scale consolidation of government data, of which the CSCS is a part, has the potential to enhance the bureaucratic efficiency, predictive capacity, and regulatory responsiveness of the Chinese state, which could in turn enhance Party legitimacy and control in China and in other countries,” the report said.

In a US context, this would be roughly equivalent to the IRS, FBI, EPA, USDA, FDA, HHS, HUD, Department of Energy, Department of Education, and every courthouse, police station, and state agency sharing records across a single platform.

Trivium China’s US China Economic & Security Review Commission

Though there’s been a lot of attention focused on whether China’s system could be used to target or punish foreign companies in China, or become a trade war weapon, the report’s authors said they didn’t find any evidence that social credit is currently being used this way.

“It’s possible that corporate social credit is one day leveraged as a trade war weapon, either in an unsanctioned capacity by local regulators, or in a tacitly sanctioned capacity by the central government,” said Kendra Schaefer, head of digital research at the Trivium China in Beijing and the report’s main author. “But it’s not what the designers say the system was initially designed to do.”

A new five-year strategic plan for the project is expected by year’s end, as the previous plan expires.

With firms facing the chance of getting caught in its cross hairs — including the prospect of penalties on their executives — it’s an opportune time for international business and government stakeholders to deepen their understanding of the system’s purpose, functions and dangers, the report said. Among the key findings:

  • CSCS uses Public Credit Information (PCI) that’s generated or collected by government bodies or legally-authorised administrative bodies in the performance of their duties. It includes information from across around 20 categories including basic company registration, tax records, what administrative penalties a company has had to pay and whether the company appears on any blacklist or redlist.
  • These records are shared between government agencies and brought together in the National Credit Information Sharing Platform. The majority of CSCS files are searchable by the general public.
  • Chinese regulators are looking to supplement this with another data type — so-called market credit information — that’s generated when a company interacts with consumers, industry associations and credit service companies.
  • The CSCS could form the basis for a new Chinese-led credit-rating model, presenting over the long-term a challenge to US ratings agencies such as S&P and Moody’s.
  • The deployment of PCI database is highly decentralised, and each state agency and local government is responsible for the development, installation, and maintenance of their own hardware and software. Social credit platform contracts are farmed out to third-party tech companies via government procurement processes, and procurement records indicate that at least 100 government bodies have undertaken such projects.
  • Deployment costs vary from platform to platform, with district- and city-level builds typically costing approximately 3 million yuan (around $610,000), while the State Administration for Market Regulation has spent upward of 400 million yuan on a national rollout for one of its information systems.

The report said technological sophistication of the system has been overstated, both in China and abroad. “The degree to which the CSCS currently automates data collection and regulatory processes is low,” the authors said.

“Although China is piloting technologies designed to remotely detect operational violations — such as when a factory exceeds emissions quotas — there is no known instance in which automated data collection leads to the automated application of sanctions without the intervention of human regulators.”

While some of China’s largest tech giants like Baidu and Tencent Holdings have won bids for certain platforms, overall contracts have been awarded to more than 50 companies for national-level projects. Hundreds have participated in projects awarded on the provincial, urban and district level, the report found.

While US enterprise technologies, including Oracle databases, Windows Server operating systems, and physical servers running on Intel processors were used in some cases, domestic technology is favoured, according to the preferences of the commissioning departments, the report said.

Bloomberg

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