China will reform social credit for tighter discipline

Analysis

Since the publication of comprehensive plans for its construction in 2014, the SCS has become seen as the poster child of the increasingly authoritarian bent of President Xi Jinping's leadership and the dystopian purposes to which digital technologies and data can be put. The reality has always been more prosaic.

Concept

The notion of social credit emerged around the turn of the century in response to a number of perceived ills.

The market economy, still relatively young at that point, was beset by rule-breaking, and a relatively weak state could not provide an effective deterrent. This resulted in a deep deficit of trust. Social credit would remedy this through the comprehensive integration of government information, and imposing stronger sanctions against dishonest and non-compliant conduct.

In other words, the SCS would serve as an amplification device for the enforcement of existing laws and regulations.

Later on, information was also seen as useful in building up a consumer credit industry. A significant portion of the economy and population were unbanked, relying on hard cash for most transactions. Without previous financial information, building up a consumer credit industry required other data to assess creditworthiness.

Credit mechanisms were also proposed for internal government oversight.

Roll-out

It took over a decade for the central government to create a comprehensive plan.

As so often in Chinese policy, local governments moved first. As a result, a great variety of local social credit systems emerged. Some included quantitative scoring methods, others did not. Most were based on existing government information. Some local officials sought to use the SCS to ban behaviour they saw as undesirable rather than actually unlawful. One mayor attempted to sanction frequent job-hopping, for instance.

Action at the central level consisted mostly of binary blacklist systems, where individuals or businesses found guilty of particular infractions with designated aggravating circumstances would face a range of expanded punishments. The most well-known blacklist punishes non-implementation of court verdicts, and includes, among other things, a prohibition on air travel and luxury purchases, and ineligibility for certain jobs.

The SCS also had a reputational element: much of the information in it is available publicly, enabling due diligence of potential employees, borrowers or business partners. In some locations, telecommunications operators even cooperated with authorities so that those receiving a call from a blacklisted number would receive notification to that effect.

Credit ratings

On the financial front, the People's Bank of China (PBoC) allowed eight private businesses to experiment with credit rating models in order to develop China's credit scoring industry.

Alibaba developed Sesame Credit, a quantified scoring mechanism combining elements of a loyalty scheme with the sort of user assessment system present on many Western websites.

Sesame Credit used big data and algorithmic scoring. It was far more sophisticated than the crude governmental systems, none of which involve private sector data or artificial intelligence-based ratings. However, the systems became confused in international media reports, leading to perceptions that the Alibaba model was a pilot scheme for governmental ambitions (see CHINA: Social credit fears will taint Sesame Credit - February 27, 2019). A policy document from late 2020 shows this not to be the case.

Lessons learned

The policy document outlines the lessons Beijing has drawn from the SCS thus far, and how it wishes to proceed next.

First, the number of blacklists should be controlled. Facing criticisms that the SCS was growing out of hand, the central government is cracking down on the establishment of new blacklists and has ordered a review of existing ones. Blacklists should only be based on central laws, regulations and policies. All others will be abolished.

Second, considerable attention is now being directed to notification, appeal and credit recovery options. In a number of well-publicised early cases, individuals or businesses were not informed they had been blacklisted, and it was often unclear how one could leave a blacklist. These problems are to be remedied with a new policy to encourage credit recovery as soon as possible.

Third, there are greater protections on which information can be entered into the SCS, with a core catalogue at a national level. Local governments can formulate supplementary catalogues, but these must still be based on government-held information or personal information authorised by the individual in question.

Fourth, the new policy requires greater protection of personal and corporate data, and greater restrictions on which data will be made public.

Financial credit

None of the eight businesses allowed to run pilot programmes was allowed a permanent licence to issue credit scores. Instead, the PBoC established a credit scoring company, Baihang Credit, with participation from all eight companies, avoiding the conflict-of-interest issues and perceived shortcomings in all the pilot systems.

However, reports suggest that large online platforms Tencent and Alibaba have been reluctant to submit their data to this company. To a certain degree, recent political scrutiny of these companies could be seen as an attempt to counter their data monopoly in the financial area (see CHINA: Tech giants will face tighter regulation - January 4, 2021).

Outlook

The SCS has never been an integrated centralised system. Rather, it is an ecosystem with hundreds of discrete components, sharing the central notion that the conduct of individuals and businesses should be rewarded or punished and that information could help in doing so.

Over the next few years, the consolidation of the SCS will mean greater centralisation of a hitherto highly diverse phenomenon, with stricter limits on what individual departments and local governments can do. An upcoming Social Credit Law, likely to emerge within the next years, will confirm these trends.

The SCS may also play an increasingly useful role in fostering greater transparency over corporate conduct in China, something the government still seems to encourage (see CHINA: Social credit will affect foreign firms - September 2, 2019).

Social credit will probably be a permanent part of daily life, but not an Orwellian panopticon.