By Esther Slater McDonald, Seth J. Fortin, Wan Li, Rhea Yu, and Craig B. Simonsen
Seyfarth Synopsis: The People’s Republic of China is making progress in implementing its mandatory “social credit system.” Multinational businesses in China should be watchful of this system, and ready for it when it rolls out – if it hasn’t already.
In June 2014 China’s State Council issued a notice regarding the establishment of a “social credit system”–essentially, a national credit score for each citizen and business, but one reflecting more than just creditworthiness: the notice states that the goal of the system is to “[c]omprehensively move forward the construction of social sincerity” in order to “create harmonious and amicable interpersonal relationships” and “stimulate the progress of society and civilization.” “State Council Notice concerning Issuance of the Planning Outline for the Construction of a Social Credit System (2014-2020),” GF No. (2014)21 (Jun. 14, 2014).
While the system is voluntary during an initial pilot stage, and run by nominally private entities like Alibaba, the Chinese government has indicated that by 2020 it will have “established fundamental laws, regulations and standard systems for social credit” and will “giv[e] complete rein to mechanisms to encourage keeping trust and punish breaking trust.” Media sources have indicated that the government will at that point officially control the system, which will then be mandatory. Local governments are also presently working to set up their own social credit systems. Information collected in the systems of local governments, government agencies, and private entities will eventually be funneled into a national database.
According to a recent article in Wired, the score will ultimately be based on a multitude of factors, including the following:
- Credit history — Does an individual or business pay its debts?
- Personal habits — Does an individual engage in productive activity? Buying baby products reflects a sense of personal responsibility while playing video games reflects an idle nature.
- Treatment of others — Does an individual respect others?
- Civic obedience — Does an individual or business adhere to local and national laws?
- Loyalty to party and country — Does an individual or business support the Communist Party and Chinese government? Does an individual or business purchase Chinese brands or partner with Chinese companies?
- Network — With whom does an individual or business associate? Who are their partners, friends, and acquaintances, and what are their ratings?
Rachel Botsman, “Big Data Meets Big Brother as China Moves to Rate its Citizens,” Wired (Oct. 21, 2017).
A government official with the National Development and Reform Commission, which is charged with implementing the national system, noted that a “nation-wide information sharing platform” has been set up “to connect 37 government departments[,] and it has collected more than 640 million pieces of information on credit.” Zhao Yusha, “4.9m People with Poor Credit Record Barred from Taking Planes,” Global Times (Nov. 2, 2016). According to the Chinese government, the goal of this program is for “the whole society to pursue the common value[s] and code of conduct, and actively create a ‘trustworthy glor[ious], dishonesty shameful’ good social atmosphere.” “State Council General Office on Strengthening Guiding Opinions on Building a System of Personal Integrity” (Guidance Opinion), No. 98 (Dec. 30, 2016). Our translation. Other observers have a different view, believing the system is more about social control than credit in the ordinary sense. Asan Institute for Policy Studies, “Orwell’s Nightmare: China’s Social Credit System” (Feb. 28, 2017).
At the moment, pilot-stage credit systems like Alibaba’s Sesame Credit do not “directly penalise people for being ‘untrustworthy.’” Botsman, supra. But the system provides incentives to fall in line with the values the government seeks to inculcate: A “good” score makes it easier to find a job, rent a car, check in at the airport, or obtain a travel visa; the corollary is that it is harder to do such things with a “bad” score. Once the system is mandatory, though, those with low ratings may have “slower internet speeds; restricted access to restaurants, nightclubs or golf courses; and the removal of the right to travel freely abroad.” Id.
At present, however, the social credit system cannot by itself inflict such penalties; rather, the judiciary can place companies or individuals who fail to meet their obligations on the official “List of Dishonest Persons Subject to Enforcement”, published by the Supreme People’s Court. “Several Provisions of the Supreme People’s Court on Announcement of the List of Dishonest Persons subject to Enforcement,” Interpretation No. 17 (2013). Those on the list are subject to various restrictions, including limitations on travel, employment, financing and credit, market access, and government support. Chinese news sources report that, by late 2016, nearly 5 million citizens were barred from air travel, and over a million were barred from train travel based on the information already in the system. Zhao, supra.
And because the system looks at more than just debt payment history, one’s score can go down if one associates with the wrong people or, potentially, even just ends up in the wrong physical place. As the country turns more toward app-based commerce, there will be a significant amount of data available on nearly every aspect of a citizen’s life. One locality included “not visiting your parents often” as a negative factor in computing credit scores. Asan Institute, supra. Even expressing the wrong thoughts could bring your score down; as a Chinese professor working with the government to develop the system explains: “The behaviour of the majority is determined by their world of thoughts. A person who believes in socialist core values is behaving more decently.” Botsman, supra.
For businesses, the same system of rewards and punishments applies. A corporation may be rewarded with a higher credit score for having reduced energy consumption, promoting local or national government projects, or partnering with Chinese businesses. In contrast, a company that lacks a robust safety program, refuses to support a local government’s pet project, or balks at disclosing big data to the Chinese government may be downgraded.
The Mercator Institute for China Studies writes that, as to businesses, the system is designed “to constantly monitor and evaluate companies’ economic as well as non-economic behavior” and to create incentives for companies to comply “not just with laws and regulations but also with the industrial and technological policy targets laid down by the Chinese government.” “MERICS China Monitor: China’s Social Credit System” (May 24, 2017). Although the system will purportedly treat Chinese and foreign companies the same, there is a concern that foreign companies will be disadvantaged.
If all that sounds Orwellian, the flip side is that the new credit system might also make credit easier to obtain and business less costly in China. Unlike the U.S., with its well-established credit bureau system, China has never had a comprehensive, national credit reporting scheme. Moreover, the system goes beyond mere borrowing and lending and, according to the Chinese government, aims to promote a global concept of “trustworthiness.” So, for example, one of the goals is to punish and isolate not only individuals and businesses who don’t pay their bills but also those who sell counterfeit or shoddy goods, breach contracts, or who otherwise fail to make good on their consumer or business obligations.
Making Chinese business trustworthy and attractive to foreign investment is an explicit goal of the credit system plan: as the State Council recognized in its “Planning Outline,” “[p]erfecting the social credit system is a necessary condition to deepen[ing] international cooperation and exchange, establishing international brands and reputations, reducing foreign-related transaction costs, and improving the country’s soft power and international influence . . . .” Supra. However, investment freedom will be linked to businesses’ social credit scores; only companies with high credit scores will benefit from reduced regulation and greater investment opportunities.
What are the takeaways for multinationals in China? At a minimum, companies will likely want to consider some of the following:
- The BBC reports that “each citizen and Chinese organisation will be rated.” “China ‘Social Credit’: Beijing Sets Up Huge System” (Oct. 26, 2016). This raises the question of whether the credit scoring system will also apply to foreign businesses operating in China. To the extent that it does, will there be required disclosures or reporting that a business will need to make to the system? Compliance may raise unique legal issues for foreign companies, and the cost of compliance may be prohibitive for some.
- Will foreign companies or their affiliates operating in China have to disclose information about employees in China? If yes, will that include non-citizens working in China or only Chinese nationals? What about non-citizens working temporarily in China (e.g., an foreign executive who regularly travels to China for extended business trips)?
- If foreign employers have to disclose information about individuals working in China, does such conduct violate other law, such as federal or state privacy laws in the United States? Does furnishing information to or obtaining information from the Chinese social credit system expose foreign companies to liability in other jurisdictions? For example, can companies participating in the social credit system be sued in the United States for violations of the Fair Credit Reporting Act?
- Will foreign employers operating in China be required to obtain social credit scores on job applicants or current employees? Even if not required to do so, will it be to a company’s advantage to avoid hiring employees with low scores, not only because of whatever the scores actually reveal about the recruits’ trustworthiness and diligence, but also because an employee with a low score could bring the company’s own score down?
- To the extent that the social credit system scrapes social media for data about people and companies, will that include social media worldwide? If so, do multinational companies have to worry about their political or other media positions in other countries affecting their social credit score in China?
Finally, companies should pay attention to the social credit system as a source of useful business information. It remains to be seen whether the system will be reliable enough to provide useful information about potential employees or business partners (separate from the question of how any potential associations affect the company’s own score). Will this system actually be helpful in sorting the wheat from the chaff–the diligent employees from the layabouts, the solid businesses from the scam artists? That remains to be seen, but if American and other multinational companies can actually benefit from the transparency that the social credit system promises, it might remove some of the sting from the added level of regulatory hassle that it otherwise seems to portend.
For more information on this or any related topic please contact the authors, your Seyfarth attorney, or any member of the International Employment Law Team or the Background Screening Compliance & Litigation Team.