The 2023 Government Work Report, released earlier this month of March 2023, has proposed to further “improve the social credit system”, bridging gaps in its implementation, the scope of data collected, and adjusting penalties for ‘good’ and ‘bad’ credit ratings.
This may come with a higher risk of consequences for non-compliant business-owners and stakeholders, with the potential for longer-term economic and market access penalties beyond administrative fines, cited below.
Foreign firms are subject to the same standards as Chinese firms, making it crucial for those conducting business in China or looking to prospectively expand to have a current and informed understanding of the credit system. Maintained compliance will allow for a smoother business path in China, and the ability to create a sustainable competitive edge.
What is China’s corporate social credit system?
First implemented in 2014, China’s social credit system (SCS) is a national credit rating system and regulatory framework to assess the ‘trustworthiness’ of citizens, corporations, government entities and the judiciary across China. Specific for businesses, the corporate social credit system (CSCS) aims to ensure corporate compliance, reporting businesses’ adherence to Chinese laws and regulations.
The system employs an online database to obtain a nationwide collection of information, or “credit information”, on every company registered in the state. Credit information in this sense is defined in the SCS Construction Law as the “information that can be used to identify the identity and credit status of unincorporated organisations with full capacity for civil conduct”. The system’s stated goal is to create a fair, transparent, and predictable business environment – but what could this mean for your business in China?
Doing successful business in China is no easy feat, and the CSCS system is just another challenge or risk that your company may face.
How and what information is collected?
The credit information collected includes anything that could deem a firm to be ‘trustworthy’ or ‘untrustworthy’.
This includes two overarching types of information that is collected from each company:
- Public credit information and;
- Market credit information
This information is gathered from a wide range of government bodies and sources, including regulatory agencies, central and local governments, the judiciary to monitor fines, industry associations and third-party credit rating agencies. Your enterprise itself will also be considered a source, looking at your firm’s financial, management and contract performances.
This aims to foster the maintenance of a healthy competitive market environment, ensuring compliance with market standards and regulations, preventing anti-competitive and monopolistic behaviour, and upholding commitments to clients, consumers, and other stakeholders. Defined in the CSCS law are also 14 ‘key fields’ to monitor non-compliant business practices, including false marketing and advertising, statistical, accounting, financial, tax, or price fraud, and negligence in regards to safety standards within operational production, construction, and engineering sectors.
The National Enterprise Credit Information Publicity System (国家企业信用信息公示系统), is responsible for storing companies’ data and credit information, accessible to the public HERE.
Why is this important to my business?
Understanding the corporate social credit system, while intimidating, is a crucial step to success in the Chinese business environment.
Engaging with your own corporate rating on the database is necessary to recognise your business’s position in the Chinese business environment, a form of risk-assessment that can help lower the prospect of coming into legislative hot water.
A good rating is also imperative to successfully engage with local firms and government entities, an essential aspect to conduct business in China. The system also allows you to look up prospective business partners and collaborators, providing a strong indication of their position and reliability, and allowing you to gauge if they would be an adequate fit for your business.
Defined in the draft SCS law, non-compliance is seen as “acts carried out by the targets of credit information subjects that have been legally recognised and confirmed by state organs to have lost their integrity”. Potential punishments for non-compliance can include:
- Publication of the companies’ infractions to the wider public
- Restrictions on applications for fiscal funds, participation in evaluations, financing and credit grants, credit services, bidding
- Reduction of rights and restrictions on market or industry access
- Being the targets of additional supervisory measures
While the findings and outcomes of the 2023 Government Work Report are yet to be implemented, the report indicates a more scrutinised business environment moving forward, thus presenting the potential for higher risk penalties.
How can I best minimise these risks?
An increasingly strict and inspected Chinese business environment only furthers the role and significance of understanding the CSCS even more. Therefore, it is vital for companies to balance the protection of their own interests and privacy, while ensuring consistent compliance with varying and dynamic regulations.
To best minimise punishments and damages, business should:
- Have a strong understanding of the laws and regulations on a general, macro scale, but also the specifics within your targeted industry
- Understand what the system requires from you; documentation, reports etc.
- Assess where you stand with regards to these requirements
- Identify possible gaps hindering compliance
- Monitor your third-party credit status
We recommend maintaining open and consistent communication with both central and local authorities, raising questions and potential problems regarding specific compliance requirements. If necessary, on-the-ground compliance experts in China allow your company to remain informed of and abide by local requirements in real time. Experts can also leverage pre-existing relationships to assist your company in developing a two-way information flow with the central government and local authorities.