Dec 26, 2019 04:30 PM

Opinion: China’s Credit Evaluation System Will Be Good for Business

China’s original intention in establishing a social credit system (including a corporate credit system) is to create a better business environment and improve the efficiency of supervision. Efficient supervision is a necessary feature of any market economy. If China wants its economy to achieve high-quality development, it must also establish such a supervision system.

At the same time, China has its particularities. The number of market entities in China is very high, and trading activities are very frequent, yet the regulatory resources of the government are relatively few and limited. In particular, the Chinese government is pushing for deregulation of the private sector. How can China maintain a good market order and improve supervision while simultaneously relaxing market access?

It is necessary to focus regulatory resources precisely on the market subjects with a high risk of rule violations. Corporate credit can play as the scientific basis of trustworthiness, making it a logical choice to determine which market subjects are at high risk.

According to personal observations, there is no way to say which step of this system has already been established. There has always been supervision over enterprises, but now more emphasis is placed on the role of credit, which is now commonly known as credit supervision. As for which elements will be included, it depends on the industry. For example, the tax credit rating evaluation of the tax department mainly includes the historical information of the taxpayer’s credit, internal information such as tax declarations and payments, tax assessments and audits, as well as external information such as credit records from relevant departments. In my personal understanding, credit supervision is just a transformation of the current supervision system, which will make things more efficient, but it does not add new compliance requirements due to the introduction of credit means.

Among those unfamiliar with China’s planning processes, there have been misunderstandings that China’s corporate social credit system would be implemented by the end of 2020. Some officials have already clarified this on many different occasions. The Planning Outline for the Construction of a Social Credit System (2014-2020), issued by the Chinese government in 2014, is only a plan for phases, which does not mean that the social credit system will have to be completed in 2020. In fact, the construction of a social credit system requires gradual and continuous work.

In the process of building a social credit system, China has also fully learned from the experiences of developed countries. For example, they are committed to establishing a credit investigation and information sharing system that covers the entire society, which was reiterated in documents from the Fourth Plenum of the Communist Party of China (CPC). For example, both attached importance to the cultivation and development of market-oriented credit service institutions, but objectively speaking, there is still a gap between China’s institutions and Moody’s, S&P and other internationally recognized companies. Another example is the implementation of a “blacklist” system. Some countries stipulate that after committing the crimes of theft, corruption, contract fraud or violations of environmental protection or other laws, an individual or an entity is prohibited from participating in government procurement, in addition to punishment in accordance with the law. Generally speaking, the basic concepts and specific practices between foreign and Chinese practices are interlinked.

Of course, in reference to international practices, China has also innovated to suit national conditions, especially because the government has a strong ability to integrate resources. For example, China has established a unified social credit code system. At present, this code has achieved full coverage of market subjects, providing good supports for recording, collecting, and sharing credit information — which may not be possible in western countries. For example, in order to help small- and midsize enterprises obtain loans, some places integrate relevant resources and actively promote the new credit financing mode of “credit agency + bank + guarantee” for such enterprises, which may not be realized in a western country. Similar innovations have been well-promoted in places like Suzhou, East China’s Jiangsu province, and reports about them can be found in the media.

At the same time, if we distinguish the credit status of enterprises, but do not follow up with corresponding reward and punishment measures, then the distinctions are meaningless. Adopting appropriate ways to encourage honesty and condemn dishonesty can make enterprises work toward becoming more trustworthy, which improves the efficiency of credit supervision.

However, the interpretation of the reward and punishment mechanism requires careful consideration. In July 2019, the State Council released guidelines on accelerating the construction of the social credit system and building a new, credit-based regulatory mechanism. The guidelines proposed that market subjects with better credit and lower risk should reasonably have a lower proportion and frequency of spot checks, reducing the impact on normal production and operation. Market subjects with average credit risk should be proportionally hit with spot checks. Market subjects that violate the law and have high risk should experience a higher proportion and frequency of spot checks, with appropriate legal punishment and strict controls applied.

In my opinion, it is important for trustworthy enterprises to be rewarded with conveniences and reduced operational disturbances; dishonest enterprises should be subjected to stricter supervision, which is the main form of punishment. Only the worst illegal dishonesty will be subjected to severe measures such as blacklisting.

For example, the credit supervision measures in the field of import and export have been ahead of their time, and the AOE system has been internationally accepted. For example, all import-export enterprises have to accept goods inspections. In the first half of 2019, the inspection rate at customs for dishonest enterprises was close to 100%, while the inspection rate of enterprises with the highest credit ratings was less than 1%.

There are also voices that worry that China’s corporate credit system will treat domestic enterprises differently from foreign ones, which I do not believe. President Xi Jinping has repeatedly stressed that China’s door will only open more in the future. The Chinese government is trying to create an international business environment governed by law; any discriminatory policies go against this goal. In the recent negative list and in other policies, it can also be seen that the Chinese government has adhered to the principle of national treatment when formulating relevant policies.

Reform and opening-up is the unshakeable, basic state policy. China is a firm supporter of multilateralism. It is not in China’s fundamental interests to crack down on foreign enterprises. Moreover, due to the overall good performance of foreign enterprises in abiding the law and compliance, most foreign enterprises would benefit from a credit supervision system. This is acknowledged in a report by the European Union Chamber of Commerce in China. From this point of view, it doesn’t make logical sense to establish a system in order to hurt — but in effect benefit — foreign enterprises.

As for the construction of the social credit system, which started many years earlier than the entity list system, there is no connection between the two. The Ministry of Commerce and other departments have clarified this point.

At present, foreign enterprises pay great attention to the construction of China’s social credit system, which I think is understandable. After all, the social and cultural background of China and western countries is quite different. The construction of the social credit system is a new thing, and is directly related to the interests of enterprises. The sensitivity is a normal response.

From the perspective of researchers’ suggestions, I think the government can strengthen its work in the following aspects: first, strengthen publicity and interpretation, and make clear to the business community the purpose and steps for carrying out this work. Any misunderstandings require timely communication. Second, relevant measures should be more open and transparent, such as listening to opinions and suggestions of relevant chambers of commerce and enterprises when drafting documents. Third, strengthen the evaluation measures that have been put in place. If there are any imperfections, adjust them in time.

Li Qingbin is an associate research fellow at Chinese Academy of Macroeconomic Research. This commentary is a part of a point-counterpoint discussion of China’s corporate social credit system. You can read the opposing view here.

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