China’s Social Credit System: Scope, Punishments Amended

China has amended its controversial social credit system, offering clearer guidelines about how the system should be implemented and what punishments it can mete out.

The updates come amid uncertainty and misunderstandings about the social credit system’s purpose, scope, and regional variations.

The changes are included in the National Social Credit Information Basic Catalog (2021 Edition) and the National Basic List of Punishment Measures for Untrustworthiness (2021 Edition). These two draft documents were jointly released by the National Development and Reform Commission, the People’s Bank of China, and other departments on July 13, 2021 to seek comments from the public.

China’s social credit system aims to leverage big data to assess the trustworthiness of entities in the country, to avoid issues like non-compliance and tax evasion. There is one system for businesses, one for individuals, and one for government officials, as well as innumerable regional variations in interpretation and application.

Authorities developed the latest updates to promote greater national standardization and set clearer boundaries for local interpretations. As the social credit system becomes more mature, uniform, and standardized, foreign businesses and individuals face greater urgency in ensuring compliance with laws and regulations to avoid sanctions and other punishments.

Clarifying The Scope Of China’s Social Credit System

The National Social Credit Information Basic Catalog more clearly defines the scope of the social credit system, namely regarding what information should be collected, the legal basis for doing so, and which agency should be responsible for collection.

These clarifications come in light of vague and general directions in the original social credit system’s roll-out, along with significant regional disparities in how the system is interpreted and implemented.

The catalog instructs relevant departments to clearly define what information they are collecting, including the item’s corresponding behavior, its collection source, frequency of updating, and more.

It lists 11 items of information that governments should collect:

1. Registration information
2. Information on the execution of judicial adjudication and arbitration
3. Administrative licensing, administrative penalties, administrative compulsions, administrative confirmations, administrative expropriations, administrative payments, administrative rulings, administrative compensation, administrative rewards, and administrative supervision and inspection information
4. Professional title and professional qualification information
5. Information on the abnormal list of business activity
6. Information on the list of seriously untrustworthy subjects
7. Information on the performance of contracts
8. Information on credit commitments and their fulfillment status
9. Information on credit evaluation results
10. Honor information related to honesty and trustworthiness
11. Credit information independently provided by market entities

While the catalog lists these 11 items as information that can be collected, it also states that local governments can release supplementary catalogs to describe other information collected, within certain bounds.

The catalog further outlines four categories of sensitive information that should only be collected with a higher level of prudence and/or if expressly directed to be collected in accordance with relevant laws. They are:

1. Information involving state secrets, business secrets, and personal privacy, as well as information regarding minors and other persons who do not have full civil capacity.
2. Personal information involving letters and visits, garbage classification, uncivilized dog breeding, unpaid blood donation, management of veterans, religious beliefs, etc. Letters and visits pertain to requests to seek help from governmental authorities by presenting complaints and/or making petitions.
3. Personal information involving property service fee arrears, public transportation fare evasion, running red lights, illegal construction, etc.
4. If other authorities impose penalties on bribers, the opinion of relevant discipline inspection and supervision authorities should be sought for collection for social credit purposes.

Further, the catalog calls for strengthening information collection in a number of areas. These include government affairs, taxation, investment, finance, intellectual property, healthcare, education, and several others.

Defining Rewards And Punishments

The National Basic List of Punishment Measures for Untrustworthiness is designed to standardize and define punishments for “dishonest” behavior.

The list contains three categories of sanctions, and a total of 14 items. The three categories are:

1. Measures implemented by state agencies to reduce the rights and interests of credit entities or increase their obligations. Examples include restrictions on market or industry access, employment, consumption, education, and ability to leave the country.
2. Measures implemented by state agencies that do not reduce the rights and interests of credit entities or increase their obligations. Examples include restrictions on applications for fiscal funds, restrictions on enjoying preferential policies, sharing of untrustworthy information, and regulatory inspections.
3. Measures implemented by organizations other than state agencies. Examples include inclusion in market-based credit investigation or rating reports, and strict credit granting requirements.

The list describes the 14 punishment items within the three categories, their legal basis, and how they should be carried out.

Among others, Item 10 of the 14 punishment items targets “seriously dishonest” entities. According to the Guidance of The General Office of the State Council on Further Improving the Restraint System for Dishonesty and Building a Long-term Mechanism for the Construction of Integrity (Guo Ban Fa [2020] No. 49), the identification criteria for the list of “seriously dishonest” entities should be determined in the form of laws, administrative regulations, or policy documents of the Party Central Committee and the State Council. For fields where such forms of documents are not yet available, the competent (supervisory) department of the field can develop relevant standards in the form of departmental regulations, and the identification standards and procedures of the relevant list will be updated and carried out by the end of 2021. Following this, on July 30, 2021, the State Administration for Market Regulation (SAMR) finalized two documents to update its social credit procedures, covering how companies get on – and off – SAMR’s list of “seriously dishonest” entities.

Besides, like with the catalog, the list allows local governments to create supplementary lists for special punishment measures. However, it also emphasizes that they need to be in accordance with the laws and local authorities need to gain approval to implement them.

Establishing Consistency And Uniformity

The social credit system is commonly misunderstood by foreign observers, who often misinterpret its aims, exaggerate its capabilities, or conflate it with other credit rating systems by private agencies or fintech platforms etc., such as Zhima Credit managed by Ant Finance, the company which runs Alipay.

Nevertheless, even those acquainted with the system are often uncertain about its scope and real-world use. A major reason for this is the significant regional variations in its implementation, not just from province to province, but even from city to city.

Besides addressing the issue of inconsistency, the latest updates reflect a willingness from authorities to adapt the system in response to criticisms from foreign businesses and governments, as well as domestic stakeholders.

Foreign governments and advocacy groups, for example, have criticized the system for its potential to be used for rights abuses. Foreign businesses, meanwhile, have expressed concerns about intrusive data access, data security, and arbitrary punishments.

In response to such concerns, in December 2020, the government released guidelines stating their intent to apply international best practices to the system. Earlier, in March 2020, the government also adapted the system to the unique circumstances of the COVID-19 pandemic.

The latest updates to the social credit system are further evidence of Chinese authorities’ willingness to adapt and optimize the program, which is still in its relative infancy.

The increasing uniformity of the system and clearer directions on how it should be implemented means that foreign businesses and individuals are now able to develop more detailed strategies on how to respond to and comply with the system. As the social credit system becomes more comprehensive and widely used, legal and regulatory compliance will be more important than ever.