Corporate Social Credit System (CSCS) is an all-encompassing regulatory system introduced by China to monitor, guide and control market participants. This mechanism’s core aim is to bolster enforcement of Chinese law. The 2014 Planning Outline for the Construction of a Social Credit System treatise stated that the framework would have been operational by the end of 2020. However, despite a number of the projects being operational, in 2021 the CSCS remains far from completion. Nevertheless, the impact of the CSCS on the foreign companies is already significant and will become even greater with time as the mechanism develops, centralizes and standardizes. The concept of Social Credit System (SCS) raised tremendous interest across western media, receiving overwhelmingly negative view. Most of the debate is dedicated to the individual, instead of the corporate component of the Social Credit System. Insufficient coverage of the CSCS by the media and an inadequate policy preparation for its consequences by the US policymakers and companies is deeply concerning and requires us to shed more light on the subject to prompt immediate reaction. This short essay explains the motivation behind the introduction of the CSCS, its development, perception by the west and its impact on the foreign businesses based in China.

The concept of CSCS

Initially, in the 1990s CSCS was only a financial project to throttle on corporate malfeasance and contract fraud. At the time China faced two significant challenges, namely untrustworthy market behavior in China’s post-opening market economy and an ill-equipped judicial system incapable of enforcing law. CSCS was envisioned as a mechanism to bring the non-compliant companies in line by collecting data and penalizing the wrongdoers. Incompliant companies were penalized by reducing their access to the market and subjecting them to public censure and ostracism via “blacklists”, while rewarding consistently-compliant companies with economic incentives and public praise via “redlists.” The need to form a system with a multi-pronged solution to the perceived lack of trustworthiness had an additional push coming from the international community at the time of China’s intensified efforts to join WTO in 2001. The then CSCS was based on American credit rating financial system and did not significantly differ from the way credit rating worked in the western world.

2014 brought a fundamental change when China proposed a much more comprehensive idea of Social Credit system extending vertically and horizontally from heretofore corporate focus to include all individuals in China as well as rating entities’ behavior beyond financial complacency. When fully operational, it would rank all Chinese citizens and legal entities based on every monitored behavior from the online and offline worlds. Such developments were facilitated thanks to the development of monitoring and processing technology which allowed for big-data collection and analysis in real-time. The companies are to be rated on a 1000-point scale or a 4-letter system from AAAA to DDDD.

The CSCS assesses the behavior of companies through topic-specific regulatory ratings (e.g., tax, customs, environmental protection and product quality) and a parallel set of compliance records (e.g., on anti-monopoly cases, data transfers, pricing and licenses). The system covers virtually all aspects of a company’s business in China. A multinational company (MNC) in China is subject to approximately 30 different regulatory ratings and compliance records, most of which have already been implemented. Each rating is computed based on a set of rating requirements. In total, an MNC can expect to be rated against approximately 300 such requirements. The data will be recorded in the corporate social credit files, that already have been established on the majority of the entities in China, including the registered in China branches of the US companies. These files constitute the central axis around which CSCS revolves.

Sanctions and rewards

For every negative rating a set of sanctions is already in place. In case of a blacklisting, a comprehensive list of joint sanctions applies. These sanctions are based on Memoranda of Understanding (MoUs) between government authorities. More than 50 MoUs have already been signed. Some of them also define rewards for good rating results but, for the time being, reward mechanisms are less developed than sanctions. Sanctions are not limited to penalty fees or court orders. They also include higher inspection rates and targeted audits, restricted issuance of government approvals (e.g., land-use rights and investment permits), exclusion from preferential policies (e.g., subsidies and tax rebates), restrictions from public procurement, as well as public blaming and shaming. Sanctions can even personally affect the legal representative and key personnel of a company. Conversely, a poor rating of a managerial level employee can influence rating of the whole company. This way pressure could be indirectly applied to a US company via the unfair targeting of its personnel. Another peculiarity of the self-regulating principle of the CSCS is the fact that a company may be penalized for trading with the blacklisted suppliers.

Reception of the CSCS in the media.

The discourse on the Social Credit is not centered around the potential consequences CSCS may bring, but rather on the threats the individual citizens rating carries infringing on personal freedoms. Paradoxically, as the analysis of all the SCS related documents produced by the Chinese governmental institutions, CSCS attracts over 70% of the target policies and guidelines. Many western journalists and academics were disconcerted with the next-generation technology used in the SCS data collection context, including CCTV, drone footage, face scanning and interception of electronically transmitted data. In many people’s eyes China is using the pretext of trustworthiness to collect the maximum amount of information on every citizen and company to detect and quell any dissent. However, the hidden political agenda behind the new system has far greater consequences than the infringement on people’s freedoms. This program is seen as a tool to re-establish the cultural and moral fabric of the whole nation through operant conditioning. It is unprecedented that the government arbitrarily defines which values should be sought after and rewarded and which actions should be ostracized, eradicated and penalized. This way, it has a potential not only to monitor, predict and control citizen’s behavior, but also redesign the very fabric that underpins Chinese culture. Some of the key debated questions related to the morality of surveillance are: who should be subject to surveillance, under what circumstances and how the data should be collected and processed, where should it be stored, who designs the AI algorithms, what logic drives the AI and who is held accountable in case of a breach.

Where is CSCS today?

SCS is the most comprehensive project created by a government and its sheer scale is hard to imagine. That is why the national government is not capable of overseeing the whole operation by itself. It sets the ambitious targets and proposes guidelines, but the implementation is left in discretion of the provincial and municipal institutions making it a very broad enterprise. The framework involves over forty-four state agencies (not mentioning the private sector). In the US that is an equivalent of 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. The systemic fragmentation and a disjointed policy environment are the core two reasons why SCSC is not yet in control of a single, holistic, techno-regulatory, centralized apparatus with an integrated regulatory framework. Multiple governmental institutions are in charge of black- and red lists corresponding with their jurisdictional mandate. China is working on standardizing these procedures expanding incrementally across state governments, agencies and private sector. The overarching idea behind a blacklist is that once a company gets on this honorable list under one authority it is then supposed to be sanctioned by other institutions as well. There have been attempts to start a collaboration with well-established credit rating agencies such as Ant.

Ultimately, once the system is in place, the results are to be sent to the headquarters, the Taiji Computer Corporation conglomerate, centralizing state institutions and private companies such as Huawei, Alibaba, Tencent and VisionVera, where the final standardized rankings are planned to be generated.

Challenges foreign companies may face.

As of 2021, the data aggregation is increasingly more centralized, many of the programs are already institutionalized or are in a pilot stage, but there is no single institution or a unified policy a foreign company can adhere or appeal to. The system’s broad scope, technical and legal perplexing intricacies, combined with a lack of English-language primary sources on the project present significant barriers to understanding the realities of the system’s aims and functions. Without a clear understanding of the CSCS meaning, the motivation behind it, targets and incorporated technologies, the US and EU governments and companies operating in China will struggle to conform with the new norms. The disadvantageous position of these governments does not allow to take the regulators a more pro-active position to respond with a comprehensive defensive mechanism.

In light of the 14^th year plan, SCSC heralds a new episode in relations between the Chinese government and foreign companies. The existing mechanisms limiting foreign companies’ access to the Chinese market will be relaxed. The new law starts an era where foreign companies will begin to be treated much more like Chinese companies. Both foreign and Chinese companies will have to meet similar requirements introduced by the Chinese government. It, however, comes at a cost. The first and foremost goal behind such a move is to increase the Chinese government’s ability to induce foreign companies to comply with the law. The old mechanisms will be replaced with instruments under the CSCS aimed at gaining full control over these companies. It will allow China to gain access to the intellectual property and business secrets. Many of the laws and regulations China aims to enforce do not correspond with the Western values, including One China Policy (already amended to Three Children Policy in May 2021), Cybersecurity Law or the online censorship. The American and European companies will be required to adhere to regulations, which directly contradict their core corporate and personal values or those of the overseas customers, US and EU member states governmental policies or even their raison d’être.

As for now, CSCS was conceptualized to address domestic market concerns and domestic market entities. The documents available to the public do not explicitly disfavor foreign companies with China operations. There are discussions whether the algorithms will perpetuate the prejudices or will treat all companies equally according to a bias-free premise. Despite fierce debates over the level of implementation of the next-generation technology in the CSCS, data automation and digitalization are far from the levels presented by the Chinese authorities and western analysts. There is no known instance in which automated data collection leads to the automated application of sanctions without the intervention of human regulators. However, the fact that human factor still plays a significant role in the process means that a rating may still be subject to corruption or bias. Although it has not been recorded yet, it is possible that at times of exacerbated diplomatic ties with the US, the CSCS mechanisms could be politicized and utilized against the US companies by applying more stringent sanctions resulting in limited market access.

Conclusion

This short article shows that the CSCS should draw more attention from the policymakers and the company decision-makers. It is far from completion, but it is far more developed that the individual component of the Social Credit System. That is why for now CSCS poses greater threat to the US companies. The challenges US companies face are not as advanced as they are presented by some analysts, but if left unchecked they could be detrimental to a company.