New credit-rating system gives China big carrot but even bigger stick, report warns

The roll-out of China’s new data-driven credit system could present serious challenges for foreign companies operating in the country, as they navigate concerns about state overreach, data security and transparency, a recent report finds.

Companies will be forced to contend with automatically generated ratings under the developing “social credit system”, the full effects of which may come into play by 2020, according to an analysis published on Wednesday by the Meractor Institute for China Studies (Merics), a Berlin-based independent research non-profit. China currently does not have a national credit system, which Beijing says leads to hundreds of billions of yuan in losses annually.

The system presents a far-reaching carrot and stick approach to credit rating for both individuals institutions, companies and non-governmental organisations.

Under the system, companies can be given lower scores if they do not pay loans back in a timely manner, or fail to comply with work safety standards, emissions targets, guidelines for government investment, or punctual delivery of goods online.

Bad scores could negatively effect their ability to secure loans, their tax obligations or chances to take part in publicly funding projects, even leading to mandatory government approval for company investments.

In severe cases, companies could find their e-commerce accounts shut down or individuals in management penalised, including being denied rail or airline tickets, according to the report.