Friday, May 14, 2021

Blacklist or ‘redlist’: what to know about China’s new corporate social credit rating

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China’s Business Social Credit System (CSCS), a national regulatory framework designed to audit the country’s industries and hold individual actors to account, is nearing completion – and it could pose a new challenge for companies. foreign companies operating in China.

CSCS, first proposed in 1999 by then-Prime Minister Zhu Rongji, is a centralized database that gives Chinese authorities greater oversight of companies operating in China – both foreign and domestic – and provides a system for blacklisting those judged offline.

Improved regulations could help China crack down on rebel companies – by tackling pollution and tax evasion issues, for example. But some Western observers fear the system may be used to restrict market access to foreign companies.

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“[The CSCS is] a new source of risk for foreign companies operating in China [that] could magnify the impact of arbitrary enforcement or regulatory bias against foreign companies, ”the US-China Economic and Security Review Commission – a government advisory committee established by Congress said Tuesday. in 2000.

The Commission was summarize a report written by Beijing-based consulting firm Trivium China. (Trivium wrote the report for the Commission.) The 95-page document is the most comprehensive assessment yet of what China’s impending regulatory system means for US businesses and interests.

But the report itself is arguably more conservative than the Commission’s summary. Trivium notes that while the CSCS “may evolve to disadvantage US businesses” as US-China relations collapse, the company appears to be downplaying – at least for now – the chances of a worst-case scenario in the future. which Beijing uses the CSCS as a weapon against foreign companies that fall from grace.

Business credit

The notion of social credit scores generally arouses the ire of Western commentators, many of whom consider the idea Orwellian: an authoritarian government leveraging big data and mass surveillance to crack down on social freedoms.

China has already implemented a “social credit rating” system for individuals and issues small penalties for certain transgressions, such as defaulting on debt. Prevent bad debtors boarding trains is a common discipline. But social credit, and the CSCS in particular, is much more bureaucratic and technologically less advanced than the fears of a moralistic panopticon suggest.

“The term ‘corporate social credit system’ is somewhat of a misnomer, and the use of the word ‘system’ is misleading, as it implies that the CSCS is a unique, holistic, and techno-regulatory apparatus. that each policy falling under the Social Credit Banner is a node in an integrated regulatory framework, ”says the Trivium report.

At present, the CSCS remains largely disjointed. Beijing officially proposed to create the system in 2000 and released an implementation plan in 2014, scheduling the system to be completed by the end of 2020.

But China might miss this deadline. A number of provinces have published documents on how they will apply the CSAS standards, but other provincial authorities have not. With the end of the year, the full system might not be live until 2023, Trivium says.

Black and red

Basically, the CSCS is a database of all companies operating in China, with lists of the various regulatory failures of each company. The system compiles data gleaned from at least 44 state agencies and their branches in every province of China to create a centralized list.

“The magnitude of this data aggregation system cannot be overstated,” says Trivium. According to Trivium, the scope of interagency operations is equivalent to that of the IRS, FBI, Environmental Protection Agency, Food and Drug Administration, Department of Agriculture, Department of Health, the Ministry of Housing and Urban Development, the Ministry of Energy. , the Ministry of Education and all courthouses, police stations and state agencies sharing files on a single platform.

Regulators and authorities can then access CSCS databases and use the information either to “blacklist” businesses that often do well – by marking businesses for incentives and priority treatment – or to put on a list. blacklist companies that frequently violate regulations – opening the company to penalties and scrutiny. .

In theory, companies cannot be arbitrarily blacklisted under the CSCS. Authorities must first prove that the company has violated a specific rule, which usually involves legal proceedings. For example, the blacklist for defaulting debtors is overseen by China’s highest judicial authority, the Supreme People’s Court.

However, Trivium notes that regulatory bias and corruption can lead to abuse of the system, especially when it comes to foreign companies.

“In the event of heightened trade tensions, regulatory bias could lead regulators to apply tougher sanctions on US companies,” the report says, noting that there are “avenues through which the system could be politicized,” as in trade wars.

Comply

The US-China Economic and Security Review Commission is not the first foreign body to sound the alarm bells about the CSCS. In a report published in August of last year, the European Chamber of Commerce in China warned that the CSCS should be a “wake-up call” for European companies in China.

“China’s corporate social credit system is any government’s most concerted attempt to impose a self-regulated market, and it could mean the life or death of individual businesses,” said Jörg Wuttke, Speaker of the Chamber of Commerce. European trade in China, urging businesses to adapt to the new system.

But this adaptation does not necessarily mean implementing a radical overhaul of corporate ethics, as the term “social credit” seems to suggest. The risk for foreign companies – excluding corruption and abuse of the system – is rather that of compliance.

“It is a complicated and time-consuming endeavor to detect, distill and keep track of the concrete details of CSCS,” the Chamber wrote in its report. “Since the system remains a ‘work in progress’, with adjustments made almost daily, keeping a continuous eye on these developments remains a necessary task.”

As China’s presence on the international stage continues to grow, there is also a risk that the CSCS may one day surpass international credit rating standards set by the United States and led by companies like Moody’s and Fitch. . China’s foreign investment programs, such as the Belt and Road Initiative, could be used to convince developing countries to adopt CSCS as well.

According to Trivium, the potential of the CSCS to “erode” the US lead in financial services such as credit rating is a “more immediate geopolitical risk” than the CSCS used against US companies.

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