The system keep the score: social credit system in China
European companies are woefully underprepared for the imminent rollout of a corporate social credit system that will have far-reaching consequences for their business in China.
European companies need to prepare for the final rollout of China’s corporate social credit system (Corporate SCS), set to come fully online by the end of 2020. Once fully implemented, the Corporate SCS will cover virtually all aspects of a company’s business in China. Yet too many European companies are still unaware of the far-reaching implications the Corporate SCS will have on their China operations, leaving them at risk of being blindsided by the effects of the system.
While there have been many stories written about China’s social credit systems as it pertains to individuals—for example, that discarding cigarette buds in the street or jaywalking will be picked up on camera and decrease your social credit score—, much less has been written on how the system will affect business, even though the potential disruptions are substantial and wide-reaching. As a result, the overwhelming majority of European businesses are underprepared to a troublesome degree.
The Corporate SCS uses Big Data technologies to collect and interpret data from companies, often through real-time monitoring, as they go about their daily business. This ensures that non-compliant behaviour is detected quickly, and sometimes immediately, which then automatically raises or decreases a company’s ‘ratings’ across areas as diverse as customs, taxes and emissions. All in all, for a large MNC, this amounts to about 30 different regulatory ratings and compliance records, most of which have already been implemented. Each rating in turn is calculated based on a set of requirements. In total, a large European MNC can expect to be rated against approximately 300 such requirements.
Higher ratings could translate into lower tax rates, better credit conditions, easier market access and more public procurement opportunities. [JG1] Likewise, there are corresponding sanctions in place for every negative rating. These are not simply limited to penalty fees or court orders. Such sanctions may 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), as well as public naming and shaming. Sanctions can even personally affect the legal representative and senior executives of a company. To use just one example, a company with the highest possible rating in the customs category can expect goods being moved across the border to be inspected around 0.5 per cent of the time, while one with the lowest possible rating would see inspection rates rise to over 90 per cent.
All companies will need to make adjustments to their operations, but the burden will vary from firm to firm. Big multinationals will feel the impact of more ratings due to their size and scope, and internal communication channels will need to be stronger than ever to stay on top of the Corporate SCS. However, SMEs that often lack the large legal, government affairs, and compliance departments of bigger firms, will be seriously challenged by the system and are likely to struggle to track the Corporate SCS and make the necessary changes on an ongoing basis.
On the positive side, automatisation of ratings decreases leeway for case-by-case solutions and regulatory arbitrariness, as numbers are crunched by impartial algorithms. This could actually create a more level playing field for European companies and their Chinese competitors, as algorithmic decision-making based on metrics that apply equally to all actors would preclude bias. This would be good news for European companies, which generally abide by strict internal compliance standards already.
While the imminent rollout of the Corporate SCS should be a top concern for European companies, they should also understand that thankfully there is still time to prepare. At the moment, implementation of the Corporate SCS is still piecemeal and incomplete. For example, sanctioning mechanisms are still not fully executed, and there are also still weaknesses when it comes to sharing data between different parts of the system. Resolving these issues will go beyond the initial 2020 deadline. Ultimately, the Corporate SCS is designed to be an evolving mechanism that will be continuously improved as it builds capacity for years to come.
European companies need to start preparing for the rollout of the Corporate SCS as soon as possible, but also need to stay up to date as the system will be adjusted over the years. That means strengthening communication with the government while also improving internal communication, as the entire business needs to be on the same page regarding the company’s compliance as a whole.
Carlo Diego D’Andrea is a vice president of the European Union Chamber of Commerce in China and chairman of its Shanghai chapter.
Article published in the Italian language by Milano Finanza on August 29th, 2019.
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