China’s social credit system ‘could be used against companies in international trade disputes’
- EU Chamber of Commerce report says data collected could be used to compile blacklist of ‘unreliable entities’
- Companies will be subject to series of rewards and punishments and they have been told ‘no one should be naive about this’
Foreign companies have been warned that China’s social credit system could become a weapon to be used against them in international trade disputes.
A report from the EU Chamber of Commerce in China published on Wednesday warned that data collected under the system could be used to compile a blacklist of companies, with one contributor to the research adding that companies should not “be naive” about its possible uses.
The system, which is due to be fully implemented by the end of next year, will use technology to monitor and assess the behaviour of both businesses and individuals using a system of rewards and punishments to incentivise them.
The report warned the corporate social credit system would cover all aspects of a company’s business in China. Their behaviour in a number of fields – such as tax, customs, environmental protection and product quality – will be rated as will their compliance with the government’s requirements.
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For companies, higher scores will mean lower tax rates, better credit conditions, easier market access and more public procurement opportunities, but lower scores could lead to sanctions and blacklisting.
The Chinese authorities are taking a number of other steps to strengthen their control over foreign companies.
The Ministry of Commerce has said it will publish a list of “unreliable foreign entities” deemed to have damaged Chinese interests – a move that is likely to further ratchet up tensions in the country’s intensifying trade conflict with the US.
Separately, the State Administration for Market Regulation is preparing a similar list of “heavily distrusted” organisations, a draft version of which has already been sent to companies for comment ahead of its likely publication next month.
The chamber of commerce said these blacklists will use data collected as part of the social credit system and will give the government additional leverage over businesses.
“The blacklisting mechanism for heavily distrusted entities will also turn the corporate social credit system [into a tool] for trade conflicts,” the report said.
It warned that companies could be blacklisted for many reasons – some of them unrelated to trade. These include “carrying out fraud, coercion, malicious collaboration or compulsory trading and other methods”, “endangering the national or public interest” or “infringing the legitimate rights and interests of customers”.
Björn Conrad, chief executive and co-founder of Sinolytics, an independent research firm that worked on the report, told a press conference following the publication of the report that the credit system would be a powerful weapon if used against individual companies.
Is it is system designed to target specific companies? No. Is it possible to use it as such? Sure
He said that while there was currently no evidence that China was using the data it collects from foreign firms to punish them, “no one should be naive about this”.
He was asked if the system could be “weaponised” against foreign companies, and said: “Is it a system designed to target specific companies? No. Is it possible to use it as such? Sure.
“It’s a very powerful regulatory tool. If the government decides to do so, it can also be used in that manner. We don’t have evidence on that yet. But it is obviously not unthinkable.”
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The report cited the case of the US courier FedEx, which is under investigation over a case where a gun was found in a parcel sent from the US to China.
Mirjam Meissner, a director at Sinolytics, said references to endangering national security, or hurting the rights of Chinese customs, were among the criteria that would see foreign firms being put on the blacklist.
“This is what FedEx has been accused of recently, [it’s] exactly the same wording,” she said.
She said it was likely that the Ministry of Commerce and the State Administration for Market Regulation will coordinate when it comes to blacklisting foreign firms using data collected under the social credit system, according to Meissner.
“We actually interpret the unreliable entities list will not be a separate list, but part of this new mechanism or this extended list produced by the State Administration for Market Regulation.
“The Ministry of Commerce may come up with its own list at some point, and you can be blacklisted by two government authorities.” she said.
However, she argued:“I wouldn’t think [that there will be two separate lists] because they do coordinate pretty well.”
Multinational companies in China are already subject to roughly 30 different regulatory ratings and compliance records, most of which have already been implemented.
In total, multinationals can expect to be rated against around 300 requirements under the new system. “A more comprehensive, non-financial credit rating, like the corporate social credit system, is envisaged to counter the current dominance of Western credit-rating companies,” the report said.
Jörg Wuttke, president of European Union Chamber of Commerce in China, said the social credit system had some advantages for foreign companies but there were concerns about the submission of sensitive data.
Speaking ahead of the report’s publication he warned that it was the “most comprehensive system created by any government to impose a self-regulating marketplace, nor is it inconceivable that the Corporate Social Credit System could mean life or death for individual companies”.
On Wednesday he said that it could also mean that the Chinese government would ask firms “to do something that our laws back home, our corporate ethnics do not permit us to do”.
At this stage we think it is not discriminatory. It actually levels the playing field
“For example, particularly with banks, insurance and health care companies – to what extent can you disclose information to the local government?”
Conrad said that “97 to 99 per cent” of the data the Chinese government wanted was not sensitive and companies would not have a problem with handing it over.
“This means the missing 2 or 3 per cent is even more important,” he said. “We always find single data points that are sensitive that the company has a problem transferring to, that’s on the list for the dialogue with the government.”
Wuttke also said the requirement to hand over data could put firms’ intellectual property at risk – a long-standing grievance for both US and European business.
But he said: “At this stage we think [the system is] not discriminatory. It actually levels the playing field. It enforces Chinese law, the way it is more driven by technology and artificial intelligence and can be less fiddled around by local officials.”
The report urged EU companies to identify risks and work with the regulatory authorities to ensure no information about sensitive technology or personal information leaked during the data flow to the authorities.
It also called on the Chinese authorities to set up communication channels with foreign companies to enable them to raise questions and concerns, and suggested there should be a transition period if a company was facing sanctions for non-compliance.
The report also noted that the system has already started monitoring the behaviour of Chinese companies abroad – particularly those involved in the Belt and Road Initiative – in an attempt to safeguard the country’s interests and reputation.
“Monitoring of European companies’ behaviour in other markets, including their cooperation and business relationships with Chinese companies even if they are not present in China, is possible in the future,” it continued.
The chamber also called on EU institutions and member states to establish a formal process to enhance understanding of the system’s international implications and build a “clear and strong” position on this issue.
