Ever since the Chinese government announced the introduction of a national social credit system (SCS) in 2014, this topic has been stirring international debate. In the broadest sense, the SCS is a data-based and technology-supported assessment system that evaluates financial reliability on the one hand, and general social behavior on the other. All natural individuals, government institutions as well as companies are subjected to this assessment. International attention is generally focused on the evaluation of individual behavior based on a scoring system, which is used to derive rewards and disadvantages.
Less attention is paid to the part of the system that rates companies. As with individual behavior, the SCS also aims to reward compliant behavior and punish non-compliant behavior of companies. But unlike with individuals, this is not usually done using a scoring system, but by red and black lists which can be accessed online and show who has behaved particularly well and who has behaved particularly badly. To assess the reliability of individual players, the system collects financial and behavioral data.
Firstly, the financial and credit behavior of companies is collected in order to use it for assessing their credit risk. In particular, credit overdrafts, fraudulent behavior and embezzlement have a negative impact. In this respect, the SCS is similar to credit rating systems like Schufa or Equifax.
On the other side, data on (social) behavior is collected to “educate” companies to comply with regulations and to “behave well”. Here, rule violations such as delayed tax payments or the improper use of donations can become just as much a malus as the failure to fulfill government contracts.
The SCS has one primary goal concerning companies. It is intended to promote China’s economic development by creating trust in business partners through transparency, and thus making the Chinese market more attractive for investment. In this way, it is intended to contribute to the legitimization of the Chinese Communist Party, as it is based primarily on economic success.
German companies are rarely found on the blacklists
The company-specific SCS also applies to foreign companies, including the approximately 8,000 local German companies, and thus has an indirect effect beyond China’s borders. However, German companies have rarely appeared on blacklists so far. This may be due to the fact that German companies in China feel compelled to comply with the law for reasons of compliance alone.
Still, according to the AHK Business Confidence Survey 2021, the SCS continues to cause concern and speculation. This is because the precise implications for (German) companies are still difficult to assess. On the one hand, there is concern that the government could instrumentalize the SCS to enforce political and/or economic goals. Closely linked to this point is the fear that the SCS could lead to selective discrimination against foreign companies. Furthermore, the SCS generates additional costs, because companies have to strategically select partner companies, suppliers and employees and continuously monitor their behavior to ensure that their own rating is not damaged by possible misconduct of their partners. Since the SCS also dictates that the misconduct of companies in one area also has an impact on other areas of the company (joint rewards and punishment mechanism), the SCS can quickly create a downward spiral – which could be fatal for the companies.
In the longer term, the question arises whether the SCS will remain a Chinese phenomenon because it is only designed to compensate for systemic deficits in China that do not exist in this form in developed industrialized countries with a rule of law. Or will the SCS spread from China to the rest of the world? One argument for the latter would be that the control and educational aspect of the SCS could be attractive to other developing countries and authoritarian nations. And even some foreign companies might welcome the transparency and global spread of the SCS. The idea that alternative data and digital scoring systems should be a viable supplement for assessing the credit risk of individuals and companies is already prevalent, and not just in China. And last but not least, various digital business models are already emerging around the SCS, which are likely to meet international demand sooner or later.
Prof. Dr. Doris Fischer holds the Chair of China Business and Economics at the Julius-Maximilian University of Wuerzburg. Lena Wassermann is a doctoral student at the Chair of China Business and Economics at the Julius-Maximilian University of Wuerzburg. The authors conduct research as part of the research project “Learning from the ‘frontrunner’? A multidisciplinary analysis of the Chinese Social Credit System and its impact on Germany”, funded by the Bavarian Research Institute for Digital Transformation (bidt), on the impact of the social credit system on German companies.
This guest article is published as part of the Global China Conversations event series of the Kiel Institute for the World Economy. On Thursday (28.04.), the topic will be: “China’s Social Credit System: How does it impact German companies?”. China.Table is a media partner of the event series.