Caixin
Dec 31, 2019 08:10 PM
OPINION

Editorial: China Urgently Needs Standardized Punishments for Credit Violations

Employees of the Ministry of Ecology and Environment check out the work quality of environmental monitoring institutions. Photo: Zhou Chen/Caixin
Employees of the Ministry of Ecology and Environment check out the work quality of environmental monitoring institutions. Photo: Zhou Chen/Caixin

Governments in China have recently taken heat for abusing punishment systems for those who violate credit regulations. Fortunately, there are now signs that this worrying trend might be taking a turn for the better.

In recent days, the Communist Party’s Central Committee and the State Council have co-published the so-called 28 Articles in a bid to support private enterprises. The articles call on lawmakers to standardize credit checks, further regulate standards and processes for punishing credit violations, and establish comprehensive credit repair mechanisms and appeal systems.

Most observers have noted the 28 Articles only insofar as they pertain to market entry, fair competition and financial support. In fact, standardizing punishments for credit violations may be urgent for private enterprises. We look forward to the central government detailing and implementing the articles as soon as possible.

Market economies are credit economies. China’s socialist market economy therefore stands to gain plenty from a comprehensive credit system. In 2014, the State Council — China’s cabinet — outlined its plan to set up a so-called social credit system by 2020. A certain amount of progress has been made since then, with society gradually becoming more aware of credit-related issues.

However, the credit system has also displayed a tendency to develop faster than regulations can keep up. Localities have developed their own credit systems with little oversight from the central government, with the result being that punishments for credit violations have become larger and larger in scope.

At its root, credit is an economic and financial concept. So-called social credit is more nebulous, especially when it comes to the extension of the idea of “losing credit.” In the last few years, a variety of credit systems have been trialed at the local level. Big-ticket projects usually deal with activities that threaten public health, like food and drug regulation or environmental management, while smaller projects dealing with minor violations like traveling on public transport without a ticket, smoking in a nonsmoking area or running a red light.

In each case, rule-breakers can expect to see their social credit scores reduced, a move that may bring penalties or inconveniences from numerous government departments. Such punishments can range from daily surveillance to restrictions on market access. Sometimes, they impact individual investment, employment, assessment or consumption.

Because they affect the reputation, credentials and freedoms of individuals or organizations, low credit scores can seriously impact citizens’ lives and their ability to do business. Ever-expanding penalty systems for credit violations not only blur the line between losing credit and breaking the law, but also risk becoming a moral record of everyone’s behavior, ignoring their right to individual privacy. In this sense, it resembles the ancient practice of branding criminals for their offenses.

The most worrying aspect of these punishments is the assumption of guilt by association. Take, for instance, the case of a high school student who may not be able to attend university due to his father’s low credit score. Such incidents raise the question of what, exactly, is the purpose of the credit system in certain areas? Is it to raise public awareness of the need for honesty and credit ratings, or is it a means of controlling every aspect of society?

Setting up China’s credit system must not depart from the need for the rule of law. All credit-related policies should be drawn up in the spirit of treating rights and interests with the care they deserve. But penalty systems are being abused largely because China’s system of governance devolves significant powers to local governments, allowing them too much freedom to interpret social credit as they see fit. State actors are competing with one another to draw up credit regulations, with penalty systems a preferred topic.

Those penalties often have overlapping and contradictory standards, scopes and procedures, making their enforcement lopsided. Some local government officials have caused both surprise and consternation by viewing privacy rights as something that can be freely impinged so long as the law doesn’t explicitly prohibit doing so.

Everyone has witnessed the damage that the lack of a credit system has done to China’s market economic order in the past 30 years. Nobody is arguing that people or companies that violate credit rules don’t deserve punishment. Yet the standards, means, and procedures for such punishments must be in line with the rule of law. At the same time, it is imperative to ensure that the punishment fits the deed and does not unduly damage parties’ interests.

As soon as possible, the National Congress ought to establish a high-level legal basis that makes it difficult for local-level authorities to arbitrarily meddle in citizens’ rights and interests. It is precisely because of the absence of such a law that all kinds of different credit systems have been established at the local level, with the inclusion of various optional exercises that harm the rule of law.

One of the main principles of the original plan for the social credit system is “a healthy legal system with standardized development.” It requires “the improvement of a legal and regulatory system” for credit and “the development of credit legislation” to provide a reliable legal basis for the collection of credit information, its examination and application, its interconnectivity, its security, and the protection of concerned entities’ rights and interests. Unified legislation at the national level ought to refocus on clearly defining the boundaries between the government’s implementation of credit-related penalties and that of other organizations, with the intention of guarding against abuses of power.

Key to the establishment of the credit system is the need to take honest governance as a model. Governments should ensure they deliver on their commitments and fulfill all contractual agreements. When policy changes frequently, incoming officials ignore longstanding issues, or local governments default on debt to private firms, that also constitutes credit-losing behavior.

A classic example is the issue of local government debt, which is already threatening the vital organs of the Chinese economy. The original plan for the credit system expressly requires that governments raise loans in ways that are legal, transparent, moderate in scope, and keep risks under control. However, it is necessary to reflect on the extent to which those requirements are actually met.

Government credit is also closely bound up with that of civil servants. Regrettably, standards for penalizing credit losses in many localities either pay the merest lip service to punishments for civil servants, or don’t mention them at all. That’s extremely unfair for normal citizens, who may suffer a one-off loss of credit and see their lives severely restricted.

Punishments relating to credit losses should also place particular emphasis on the prevention of rent-seeking. Credit-review organizations have an almost monopolistic level of control over credit information. As long as insiders are willing to collaborate, the potential for rent-seeking is always there, no matter whether it involves docking a couple points off a driving license or angling for a credit reward. The harsher the punishments for credit violations and the greater the scope for governments to operate independently, the stronger the motivation for rent-seeking.

Conversely, good credit ratings lead to rewards. This means that the beneficiaries of good credit scores might be given preferential treatment, for example via reductions in credit checks or via policies that allow them greater convenience in the spheres of education, employment or social security. Evidently, if the standards and processes aren’t strict enough, the space for exploiting them becomes greater. In many places where current projects allow personal credit scores to rise as well as fall, civil servants have far higher scores than the average citizen. This is not because civil servants are naturally more creditworthy, but because, as everyone in China knows, people in higher positions tend to benefit from certain privileges.

The establishment of a credit system goes hand in hand with the development of the market. At times when both the market and the credit system lack comprehensiveness, credit ratings are bound to be premature. Setting up a credit system demands both a sense of urgency and recognition of the need not to proceed recklessly or extend the system to things it shouldn’t include.

A credit system is not a basket into which anything can be thrown; it’s necessary to return to its original economic and financial definition. Most of all, governments shouldn’t willfully distort the system to punish credit violators for momentary lapses.

Contact translator Matthew Walsh (matthewwalsh@caixin.com)

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