Practical Guide to China's Corporate Social Credit System

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Practical Guide to China's Corporate Social Credit System Practical Guide to China’s Corporate Social Credit System December 2019 Contents Part I: What is the rationale behind the Corporate SCS? ............................................................................ 3 What do we know about the ‘master database’ so far? .......................................................................... 4 What data is already being collected? ..................................................................................................... 5 What data will be collected in the future? ............................................................................................... 6 Too many unclear terms? - Check out this glossary! .............................................................................. 6 Part II: Case Study – How can I check my existing credit record? .............................................................. 7 Step 1: Self-assessment of data flows to government agencies ............................................................ 7 Step 2: Self-research and verification in national databases ................................................................. 8 Step 3: Self-research and verification in local databases ..................................................................... 10 Part III: To Dos for Companies ................................................................................................................... 13 How should I prepare for the Corporate SCS? ...................................................................................... 13 Frequently Asked Questions (FAQs) ...................................................................................................... 13 The following guide is intended to show where companies can find official information on their current credit records. The document does not claim to represent an official position. We will gradually expand and update this guide and be glad to answer any further questions that you may have on this topic. 2 Part I: What is the rationale behind the Corporate SCS? In 2014 the Chinese government drew up a more or less specific plan to use digital technologies like Big Data and online platforms to guide the behavior and enhance compliance of all market participants in the country. Following local test phases, China intends to implement the so-called "Social Credit System" (SCS) nationwide, scheduled by the end of 2020. Companies (domestic and foreign) located in China will have to adapt to new regulatory measures and public credit rating platforms Fig.1: Basic structure of the Social Credit System. such as the National Enterprise Credit Information Publicity System and CreditChina. currently largely left to local authorities, implying a lack of nationwide uniform Once the SCS is fully operative, the National standards. Development and Reform Commission (NDRC) According to a report released by the European will hold a credit record for each company. All Chamber of Commerce in China in cooperation areas of the operative business, but also with Sinolytics, a private consultancy, there are possibly strategic decisions and social behavior around 30 parallel credit rating policies that of a company could be affected. In case of high could affect both domestic and foreign compliance, incentive measures, e.g. companies in China. administrative express procedures or Chinese authorities currently use a mix of preferential tax measures might come into redlists, blacklists, irregularity lists and ratings effect. In case of a breach of regulations, fines to assess an enterprise’s behavior. In the long or other disciplinary measures, e.g. restrictions run, NDRC intends to grade companies on their on the issue of shares or public tenders could be compliance based on self-reported and imposed (depending on the severity of the government-collected information. breach). Ultimately, joint punishments could be applied across different sectors, e.g. breaches What is crucial: The new company ratings will of customs legislation could lead to extra tax be built on previously existing regulatory rebate audits at the same time. structures. For companies operating in China it is therefore important, to allocate resources for Although the central government plans to credit data monitoring and obtain an regulate local standards, responsibility for overview of the already existing credit maintaining corporate credit records is information. Every company in China needs to keep a close eye on changes within the system. 3 What do we know about the ‘master We understand, that the Corporate Social Credit System will cover three interconnected database’ so far? parts: In 2015, the government launched a digital platform called National Credit Information Sharing Platform. It is controlled by the central government and not open to the public. The platform contains all the information and data of companies and individuals collected so far. The aim is to share data between different government agencies. If this platform is regularly fed with data and the transfer of data works in real time, it could become a kind of ‘master database’. But what we know by now is, that this database does not issue any scores, yet. Fig. 2: Components of the Corporate SCS. Fig. 3: Existing databases to date. 4 For the time being, there are two national What data is already being collected? databases with mostly overlapping information open for public access: At the current stage, both the underlying National Enterprise Credit Information databases and rating systems are highly Publicity System (also a reporting fragmented. channel to the government) CreditChina (only for inquiry and more We did research in national as well as the local user-friendly) databases and compared the information we found there with official regulations. Besides the national platforms, companies According to our research the following data is should also pay attention to local databases already being collected: (more information in the Case Study below). Local authorities keep comprehensive records Basic corporate information for companies doing business in China. Administrative permits/penalties Irregularity records Updated blacklists and redlists will be Unified social credit No. published on the above-mentioned databases Registered office for a certain time period that is still needed to Legal representative name be further clarified by government authorities. Incorporation date Affected companies can accelerate the Business type expiration of such entries by repairing their credits or submitting complaints in Chinese language only (more details in the case study on p. 9). Registration authority Fig. 4: Sources for data collection to date. 5 What data will be collected in the future? The plan is to collect data from all operational fields of companies doing business in China (see fig. 5). NDRC calls it ‘Public Credit Comprehensive Evaluation’ and aims to compile integrated scores for companies based on the publicly available corporate credit records. To achieve this, it would be necessary to enable a digital system that can collect and evaluate all the different data flows coming from one Fig. 5: Planned data collection - ‘Public Credit company. Comprehensive Evaluation’. Too many unclear terms? - Check out this glossary! Irregularity list: This list includes companies with insignificant compliance issues in annual Blacklist: Mechanism of public shaming; report disclosures (sometimes also called blacklisting covers companies with major “watchlist”). Being added on this list implies compliance issues, like environmental law companies have drawn special attention from violation or tax evasion. Also called ‘heavily authorities. Repeated offenders may be distrusted companies’, these companies could automatically enrolled on a blacklist. see their business license revoked as the ultimate consequence. Joint rewards & punishments: Mechanism to multiply the costs and benefits of integrity Grades & ratings: The two ways for authorities based on joint memoranda signed by several to distinguish companies with different track government agencies. Different authorities will records. Although officials intend to assign decide on various lists based on the companies with scores of a few digits memoranda applicable (see also fig. 6). eventually, right now there are four basic categories, that some authorities already Redlist: Mechanism of public praising; started to use: companies with records of outstanding compliance in specific fields might be redlisted. A 优 - excellent In export/import business, for example, the B 良 - good customs authority has a list of “ Advanced C 中 - average Certificate Enterprises” to grant privileges like D 差 - not sufficient fast track customs clearance. In taxation, privileges are targeted at A rated taxpayers. 6 Part II: Case Study – How can I check my existing credit record? We recommend, that you analyze the credit record of your enterprise, summarize weak points and make timely improvements and corrections if needed. To achieve this, there are several steps you can take: first, do a self-assessment of all data flows that your company transfers to government agencies; second, start a self-research and verification in the national databases; third, compare the data you found in the national databases with data collected by local authorities. In the following case study, we will guide you through all these steps. Step 1: Self-assessment of data flows to government agencies Fill in the Excel-file that we provided
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