China: Effects of the “Social Credit System” on foreign companies
Function and purpose
The Chinese “Social Credit System” (SCS) is an autonomous credit rating system based on “Big Data” with the purpose of regulating economy and society. It is to be introduced nationwide by the end of 2020 as a centralised control instrument.
Not only individuals but also domestic and foreign companies will be affected by this system. The declared aim of the SCS is to persuade all market participants to behave in accordance with the law and regulations through self-regulation.
For this end, data of companies is recorded in a central database, the “National Credit Information Sharing Platform”. The data processing is carried out with the help of artificial intelligence; based on various ratings, an “overall score” is determined for the company, which is then publicly available as a “confidence index”. The better the rating, the easier it is for a company to capitalise on the positive rating. On the other hand, companies with a poor rating face negative consequences, such as poor credit conditions, difficult access to the market, denial of public aid, exclusion from participation in public tenders and blacklisting.
The SCS affects almost all areas of the company, such as taxes, customs, finance, social security, occupational health and safety, environmental protection, product safety, data protection and intellectual property. Some of these are already subject to independent official ratings. In future, the ratings of the individual divisions will be combined and subjected to an overall assessment. This results in the “overall score” of the company.
By the end of 2020, all relevant data from up to 30 corporate divisions will be collected centrally. They form the basis for assessing whether a company complies with the law or regulations. Companies with sales branches or subsidiaries in China must ensure that the branches and/or subsidiaries do not achieve a bad rating in order not to lose out themselves.
Regional headquarters as well as companies with an extensive sales network in China are thus faced with the enormous challenge of implementing effective controlling instruments in order to avoid the risk of a bad “score”.
Preparation is everything
The SCS is a complex and challenging system. Every company should therefore carry out a compliance analysis promptly in order to identify various risk areas. The most important thing here is to know your own company, its internal processes and business structure. Internal processes must be adapted to the legal framework and continuously monitored.
At first glance, the Chinese market could become more difficult for foreign companies. However, it is to be expected that the successful implementation of the SCS will lead to significantly more transparency. This could reduce transaction costs, e.g. because a comprehensive due diligence of the contractual partner in the context of initiating business is not necessary.
Author: Raymond Kok