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Being able to move in a market with legal certainty is essential for companies and investors. This applies to domestic markets and is even more important when it comes to commitments in countries with a high degree of political influence on the market.
For some time now, Beijing has been establishing a so-called Social Credit System that makes the behavior of companies the subject of public evaluation. Nico Beckert asked academics about the dangers of this regulatory instrument for foreign companies and affected companies about their experiences. And although the instrument itself is still in its formative stages, it is already becoming clear that anyone who wants to do business in China must deal with the regulations at an early stage.
The abrupt cancellation of the IPO of Alibaba’s financial subsidiary has been the subject of much speculation since last year. While at first, it seemed to be about questions of financial market regulation and also the curtailing of the influence of a politically disliked company boss Ma, there are now increasing indications that the Chinese government also wants to access the group’s media holdings. Jörn Petring and Gregor Koppenburg analyze the background.
China’s Social Credit System still lacks transparency and legal certainty
Adidas is accused of violating fire safety regulations and blocking escape routes and safety exits. A BMW subsidiary allegedly used terms such as “national”, “highest”, and “best” in its advertising, violating China’s advertising law, according to the Beijing Municipal Administration of Industry and Commerce. And a subsidiary of SAP is alleged to have violated China’s Work Safety Law. These allegations come from one of China’s Social Credit System databases. It does not list many violations by German companies, and the number of positive reports far exceeds the number of alleged violations. And yet: The Social Credit System is a sensitive issue.
With the social credit system, China is currently building a regulatory system that is fundamentally different from Western law enforcement mechanisms. It is based on the publication of misconduct and aims to encourage compliance with rules and laws through public exposure. “Although foreign companies have had to abide by legal rules in the past, the system with its public exposure mechanisms increases the risks that misconduct without intent can pose,” says sinologist Doris Fischer, who is leading a research project on the social credit system. In addition to reputational risks, the system includes sanctions for more severe offenses. In addition to regulation, the system serves to collect data “that enables an assessment of the creditworthiness and trustworthiness of small companies in particular,” Fischer says.
The social credit system is set to become a defining feature of Beijing’s data-driven governance in the coming decades, according to a recent analysis by Merics. But the system is not primarily intended to monitor individual behavior, according to Merics. There are plenty of other systems for that, he says.