By Walker Upchurch

 

The Chinese government has been widely criticized for its social policy of providing a social credit score to its citizens. The thought of a score based on a person’s morality and conformity to overreaching government regulation is terrifying. Our country was founded on personal freedoms. We pride ourselves on our ideology that everyone is free from government surveillance and unjust treatment. Thus, the thought of an Orwellian system in which “Big Brother Is Watching” and counting our moral missteps on a scoreboard is abhorrent. However, the ideology that the government in China is scoring every individual may be slightly more of a mythological scare tactic than fact.[1] According to the Mercator Institute for China Studies (MERICS), the Chinese Social Credit System (CSCS) is less a social boogeyman and more of an accounting system. [2] The system judges businesses based on their social and financial credit history.[3] The study states that under the social credit system, only violations of law and regulations are ground for a CSCS reduction and that the CSCS should be considered more of a loyalty rewards program than a score that determines citizens’ place in society.[4]

Additionally, according to the China News Service “Personal credit points can be combined with trustworthiness incentives, but they cannot be used as Punishment.”[5] Likewise, the Chinese government laid out that better administrative services, financing, and lower transaction costs were critical factors for a company to raise its CSCS.[6] However, this does not mean that the CSCS not a significant threat to international companies and private citizens. This has led to significant increases in the surveillance of a population and companies, leading to further corruption.[7]

According to a study out of Stanford, the CSCS is out of a total possible score of 1,000.[8] The required data submitted to the Chinese government are Basic Data, Finance and Taxation, Governance, Compliance, and social responsibility.[9] Basic Data is the information collected by the government on high-ranking corporate members and the business that they perform. This data set is collected to decipher whether they have engaged in dishonest acts or “abnormal’ operations.[10] Additionally, the catchall “compliance” indicator, which accounts for nearly half of all the points given, considers the company’s compliance record with several agencies and judicial authorities.[11] The system could allow for significant manipulation of a company’s credit due to “not complying.” As it seems, there is an extremely high level of deference given to the government actor to determine whether a company should be considered highly trustworthy or untrustworthy. [12]

This creates a system where government actors are enabled to determine whether a company will prosper or fail, and the company will do whatever possible to appease them. The system is highly likely for corruption as government actors could be incentivized to give high compliance scores because of unsavory dealings. As written in a wired article, “For the Chinese Communist Party, Social credit is an attempt at softer, more invisible authoritarianism. The goal is to nudge people toward behaviors ranging from energy conservation to obedience to the party.”[13] When asked for a quote in the same article Samantha Hoffman with the International Institute for Strategic Studies in London stated that “Social credit ideally requires both coercive aspects and nicer aspects, like providing social services and solving real problems. It’s all under the same Orwellian umbrella.”[14]

According to the U.S.-China Economic And Security Review Commission, the origin of the document was founded not to subject its citizens to harsher regulations but instead to crack down on corporate misconduct.[15] Additionally, the USCC has laid out 14 significant points which overview the Chinese Social Credit System (CSCS):

  1. The CSCS was created to address domestic concerns regarding their domestic market entities.[16]
  2. The CSCS is a mechanism to strengthen the enforcement of China’s existing laws.[17]
  3. The CSCS is operational, but the degree of implementation is divergent across sectors.[18]
  4. The CSCS files have been established on most registered entities in China, including U.S. companies.[19]
  5. The files are primarily aggregated government records relating to corporate compliance.[20]
  6. In popular discourse, the ability of these systems is massively overstated, and the sophistication of the technologies is not high.[21] However, the scale of the government centralization effort, of which the CSCS is massive.[22]
  7. Government bodies and state regulators control Blacklists relevant to their jurisdictional mandate. Likewise, government bodies may determine which companies are added to the list.[23]
  8. The CSCS aims to improve “trustworthiness” by creating a dragnet under which these companies Blacklisted by one regulator are subject to sanctions from multiple regulators, and companies red-listed by one regulator are subsequently granted incentives.[24]
  9. The CSCS creates a more significant amount of vulnerability to regulatory corruption.
  10. The CSCS likely could be politicized as a trade weapon.[25]
  11. Under the CSCS system, the social credit files are kept on file for a company’s legal representative, key personnel, and actual controllers.[26]
  12. Companies with more extensive business experience are likely to be more exposed.[27]
  13. CSCS data is being used to supplement financial credit data in the assessment of lending.[28]
  14. As the platforms gain insights from social credit data become more sophisticated, “algorithmic accountability” or the inherent difficulty in verifying the fairness or accuracy of machine-generated recommendations is a crucial concern.[29]

There are two categories in which the CSCS’s policies are scored.[30] First, the CSC looks at public credit information or PCI, which is data or information that has been collected by the government or legally authorized administrators.[31] The second is market credit information or MCI, which is information that has been generated by businesses organizations and credit services such as investigative bodies.[32] The PCI is the information collected regarding a company during its interactions with the government. The MCI is directly tied to corporation’s business dealings.[33] As stated by the USCC, the PCI is the critical set of records on which the CSCS is based.[34] With this being considered, interactions these companies have with the Chinese government are crucial to their success.

While this system may be built on the ideology of social amicability, it is a system that is rife with corruption. While, in theory, as Fortune magazine notes, these companies could not be arbitrarily Blacklisted, regulatory bias and corruption could result in an abuse of the system.[35]

Additionally, one of the surprising things is the sheer amount of information that the CSCS holds. According to Trivium, the operation is equal to that of the IRS, the FBI, the EPA, the FDA, the Department of Agriculture, the health department, HUD, the Department of Energy, the Department of Education, and the State Agency sharing records on one single platform.[36] Likewise, these regulators can access the databanks and use the information to provide benefits to corporations that are performing ideally.[37] The predominant issue is that the CSCS could hypothetically surpass the international credit scoring that is currently in place.[38] This could lead to a problem for the U.S. economy as the CSCS could be used negatively against American companies in China and across countries that adopt the CSCS.[39]

 

[1] Vincent Brussee, China’s social credit score – untangling myth from reality, MERICS (Feb. 22, 2022), https://merics.org/en/opinion/chinas-social-credit-score-untangling-myth-reality.

[2] Id.

[3] Id.

[4] Id.

[5] Development and Reform Commission: Personal credit points can be combined with trustworthy incentives but cannot be used for punishment, China News Service (Jul. 18, 2019), https://new.qq.com/omn/20190718/20190718A0W6MO00.html.

[6] Id.

[7] Brussee, supra note 1.

[8] Lauren Yu-Hsin Lin & Curtis J. Millhaupt, China’s Corporate Social Credit System and the Dawn of Surveillance State Capitalism, Stan. L. School (Mar. 30, 2022), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3933134.

[9] Id. at 9.

[10] Id.

[11] Id.

[12] Id.

[13] Mara Hvistendahl, Inside China’s Vast New Experiment in Social Ranking, Wired (Dec. 14, 2017), https://www.wired.com/story/age-of-social-credit/.

[14] Id.

[15] Kendra Schaefer, China’s Corporate Social Credit System, U.S.-China Economic and Security Review Commission & Trivium (Nov. 16, 2020), https://www.uscc.gov/sites/default/files/2020-12/Chinas_Corporate_Social_Credit_System.pdf.

[16] Id. at 6.

[17] Id.

[18] Id.

[19] Id.

[20] Id.

[21] Id. at 6-7.

[22] Id.

[23] Id. at 7.

[24] Id.

[25] Id.

[26] Id. at 7-8.

[27] Id. at 8.

[28] Id.

[29] Id.

[30] Id. at 19.

[31] Id.

[32] Id.

[33] Id.

[34] Id.

[35] Eamon Barrett, Blacklist vs.‘redlist’: What to know about China’s new corporate social credit score, Fortune (Dec. 10, 2020), https://fortune.com/2020/12/10/china-corporate-social-credit-system-cscs-blacklist-redlist/.

[36] Id.

[37] Id.

[38] Id.

[39] Id.

Image source: https://home.kpmg/cn/en/home/insights/2017/12/china-looking-ahead-edition-7.html

 

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