In 2014, the Chinese government initiated the plan to establish a comprehensive digital social credit system by 2020. The goal of the social credit system is to build a database that keeps track of individual, corporate, and government behavior across the country in real time.
The corporate social system uses big data and cloud technology to build a high-trust society where individuals and organizations will be given social credit scores based on their behaviors in the society. The social credit system is not only for businesses, but also for individuals and government agencies. A higher credit score means rewards while a lower score can link to penalties or sanctions.
How does the corporate social credit system work?
The China social credit system assigns a score after collecting, aggregating, and analyzing data. Companies collect information on their own operations and are required to submit this information to local and national authorities. The information is then consolidated in a centralized database. Government authorities also collect companies’ data through the standard annual inspection process and consolidate the data to become a part of the credit score.
There are several factors can be used to calculate the credit score
- Customs import-export records
- Tax filling dates and payments
- Company financials on the audit report
- Environmental protection fulfillments
- Records at the labor bureau
- Industry specific records and compliance requirements
What might be the impact on companies with high or low scores?
Although the reward for a positive rating have so far been less clear than the penalties. Possible rewards are:
- Eligible for government promotion incentive programs
- Easier bank loans
- Better credit terms with suppliers
- Less frequent inspections and audits
- Fast-tracked government approvals
There are a number of negative effects that a business can face due to poor social credit score.
- Negative impact on clients and supplier’s relationship
- Higher inspection rates and targeted audits
- Delay or restrict issuance of government approvals
- Exclusion from government subsidies
- Excluded from government procurement projects
- Publicly named and shamed
Companies can boost their scores through correcting their wrong doings in the past, and can take positive actions like corporate social responsibility activities, which may relate to participating in government initiatives such as environmental protection and poverty alleviation.
What should companies do in China?
The corporate social credit system is expected to be fully in effect at the end of 2020. Meanwhile several reginal corporate ranking pilot programs making the national credit system somewhat fragmented. For instance, pilot regions differ in what data they collect, how they assess and rate that data, and how they dole out the resulting rewards and penalties.
This is not to tell our readers to currently take eyes off the matter; instead early and detailed preparation is the key for companies to overcome the challenges of the credit system. To prepare for the full implementation of the corporate credit system, companies should undergo an internal audit process, to make sure they comply with all relevant laws and regulations. We also recommend companies to conduct a review on supply chain, tax matters, and employee policies; as these are the most important areas to form the credit system.