China’s New Social Credit System

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Last summer, China released an outline of its new social credit system, which would rate citizens and firms on financial, legal, and civic terms. There has been much hoopla in recent Western media outlets about the system, with some viewing it as a return to the dang’an system, which was highly opaque and inaccessible to the individuals and firms being rated. The interpretation of the new policy as an imposition of a “Big Brother” type of invasive tracking system may be largely exaggerated, and how this understanding was arrived at is unclear.

The policy itself states that “records of sincerity,” including reports on credit, legal violations, and performance will be kept, although the document, like most state documents is quite vague. The document is extensive, discussing credit in administrative areas, commercial activities, social behavior, and the judicial system. Individuals will hold identification cards associated with credit information, based on financial, industrial and commercial registration, taxes and social security payments, and traffic violations, according to Xinhua. This leaves its implementation open to interpretation.

Already, the policy has been implemented by China Customs to rate enterprises as “Certified Enterprise,” the “General Enterprise,” and the “Discredited Enterprise,” based on compliance with anti-smuggling and other legal rules. The China Association of Construction Enterprise Management also announced its launch of an online credit system.

The social credit system includes financial credit scoring information, which has been lacking in China, to help individuals and institutions more easily obtain financing. The financial system currently relies on credit information history provided internally by banks or other financial institutions that obtain financial records from past transactions as well as some basic financial information about individuals. While credit ratings for some institutions are available through companies like Dagong Global Credit Rating, a widespread credit ratings system is limited in scope and not used in many daily financial transactions.

The social credit system also includes information on legal compliance, which acts as a proxy for an underdeveloped legal system. If legal compliance is not fully enforced by traditional institutions, a proxy for legal compliance, such as a social credit score that contains information about fraudulent activities, may act help to fill in this gap. Information about legal activities helps consumers and firms to make rational decisions in the marketplace. For example, if the tainted food and lead-paint toy scandals that rocked China in 2007-2008 could have been averted through a social credit system, this would have helped to maintain stability in market activity within these industries.

The question is, to what extent will individuals be rated based on opaque information that they cannot access, and to what extent will information used be relevant? The foreign media has stated that China will mine big data to rate citizens based on marketplace transactions and websites visited. So far, this assertion cannot be confirmed by actual official policies. Information on individuals such as legal violations may, again, act as a proxy for a weak legal system. However, since it is up to individual institutions to carry out their own ratings, it appears that there will be a variation in the types of information gathered.

Some have argued that individuals will be rated based on purchases. Since many Chinese still use cash in marketplace transactions, the interpretation that grocery store and other daily transactions will be evaluated for credit scoring does not ring true.A small percentage of individuals currently shops on the internet, so internet purchases cannot be used for a national social credit program. It is possible for individuals to be rated based on Communist party membership or other political affiliations since that information is available, but it is not clear how and whether this will be used. For this policy, the devil is in the details, but it is obvious that when it comes to this new system the foreign media has jumped to conclusions that have little factual basis.

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