Over the last two years, the Chinese government has allowed private companies and city-level governments to conduct pilot testing of a replacement for traditional credit ratings. At Foreign Policy this week, Amy Hawkins provided an overview of the scheme’s potential benefits and hazards. Those familiar with China’s social credit system, in which citizens receive scores based on their behavioral and financial data, have perhaps heard less about the current application of similar principles to Chinese companies. A recent report by Mirjam Meissner of the Mercator Institute for China Studies (MERICS) in Berlin sheds light on the inner workings of enterprise social credit.
The report extensively cites state planning and other policy documents to trace how enterprise social credit monitors both traditional economic and alternative indicators about companies’ performance. The system will rely on a complex data-sharing configuration between credit assessment companies and various government bureaus. Scores will come from companies’ financial records as well as data gathered about their operations from digital sensors and other Internet of Things devices integrated into production and evaluation. Non-compliance with workplace safety standards, emissions regulations, and loan repayment schedules are all grounds for deducting points from a firm’s score. As a reward for good behavior, companies may have preferential access to credit, state subsidies, and other benefits. Punishments range from raised barriers for investment approvals to higher taxes and even blacklisting.
This new development may improve corporate social responsibility in China. Possible benefits include greater transparency about companies once their scores are made public, and reduction of illegal business practices that are harmful to citizens and the environment. Additionally, the report raises other positive turns enterprise social credit could take:
Making comprehensive information on companies and their social credit records accessible for everyone on centralized online platforms can increase transparency on companies’ activities.
[…] Concurrently to the implementation of the system, China will try to significantly enhance the quality of collected data. This can have a positive impact on the reliability of existing economic statistics, if used accordingly. [Source]
Yet an entirely different outcome may be that firms will become fixated on improving their social credit scores, avoiding the risks that may lead to innovation. Furthermore, the amount of data-sharing such a system would require could place companies’ proprietary data (along with their customers’ personal information) at risk of theft. At worst, widespread failure to adhere to the system’s standards could wreak havoc within entire industries. Additional downsides may take a toll on smaller companies:
A considerable number of companies might not be able to carry the costs of compliance with the government’s regulations. For example, in the case of adhering to environmental standards during production. Since non-compliance will not be an option with the Social Credit System at work, some might be forced to close their business or restrict investments.
[…] Compared to other countries, the Chinese government has much more leeway in collecting and using data. A fundamental problem of the system could be the misuse of proprietary data by Chinese government entities, which could be highly damaging to companies’ business. [Source]
Both Chinese and foreign companies operating in China will be subjected to enterprise social credit scoring. Andrew Browne of the Wall Street Journal has contextualized the MERICS report’s findings within the consequences enterprise social credit may have for non-Chinese companies and for the global economy:
Invoking security concerns, authorities are squeezing foreign technology suppliers out of critical infrastructure projects, such as banking networks. A “Made in China 2025” industrial blueprint aims to replace foreign technologies with Chinese ones in areas from artificial intelligence to robotics and semiconductors. A firewall shuts out U.S. media giants.
If Deng Xiaoping’s economic “open door” is indeed clanging shut, behind it lies an increasingly hostile environment for multinationals. They are now on notice to actively support Mr. Xi’s grand statist project to turn China into a “manufacturing superpower.”
[…] And how will the ratings be compiled? The suspicion of antiforeign bias will be hard to dispel. The National Development and Reform Commission, the main body overseeing the project, declined to comment.
It’s unclear what the West can offer as a defense. The best hope of dealing with state capitalism is the Trans-Pacific Partnership, which the Trump administration has abandoned. The giant free-trade deal is intended to set new regulatory benchmarks in areas like the digital economy and the role of state-owned enterprises—domains not properly covered by the World Trade Organization. (The remaining 11 countries in the pact are struggling to keep TPP alive.) [Source]