China's Social Credit Tool to Monitor Companies Sparks Alarm

(Bloomberg) -- China’s new tool to monitor companies will be the most comprehensive system created by any government and could put some companies out of business, according to the European Union Chamber of Commerce in China.

The so-called corporate social credit system for companies will use real-time monitoring and processing to collect and interpret data, helping to immediately detect actions that raise or lower a company’s score, the EU Chamber of Commerce said in a report on Wednesday. Keeping on its good side will raise compliance costs and could impact companies’ earnings, it said.

“It is no exaggeration to say that the Corporate SCS will be the most comprehensive system created by any government to impose a self-regulating marketplace,” said Jörg Wuttke, president of the European Union Chamber of Commerce in China. “Nor is it inconceivable that the Corporate SCS could mean life or death for individual companies.”

Under the system, the behavior of companies will be assessed through topic-specific regulatory ratings. A good rating will lead to rewards and a negative performance will mean sanctions. China is also piloting a parallel social credit system for individuals, which critics say is heavy-handed and intrusive and supporters say will make for a more considerate and law-abiding society.

When the system is fully implemented, a large global company with a significant presence in China has to deal with about 30 different ratings and compliance records based on about 300 requirements, the report said.

Ratings cover areas including tax, customs authentication, environmental protection, product quality, work safety, e-commerce and cybersecurity. For the most part, the current system is an instrument for implementing and enforcing market regulation, the report said.

There is no guarantee, however, that the ratings won’t be used at some point to target specific companies with greater scrutiny, the chamber said. The system that China wants to fully implement by next year is seen by some as a way to keep an eye on foreign firms as the country eases investment restrictions in some industries.

“The vision of the Corporate SCS as an automated regulatory system does not lend itself to discriminatory practices against foreign companies,” the report said. “However, this may be an overly optimistic interpretation, as the system does have the potential for discriminatory use towards international companies.”

The ongoing U.S.-China trade war has raised questions about the system’s application with the People’s Daily saying Tuesday that U.S. shouldn’t misjudge China’s will to retaliate. The country has already launched an investigation of U.S. delivery company FedEx Corp. rebuffing its claims that it mistakenly rerouted some Huawei Technologies Co. packages to the U.S.

The case has stoked concerns that Beijing is starting to crack down on U.S. companies -- a Ford Motor Co. venture was recently fined -- in retaliation for Washington placing curbs on Huawei.

“Overall, targeting specific companies is not what the system is designed for. The envisioned level of automation makes it in principle more fair for foreign companies,” said Björn Conrad, one of the lead authors of the report and the chief executive officer of Sinolytics -- a Berlin-based consultancy specialized on China. “However, it is still possible to use the system against them.”

©2019 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.