Chinas Corporate Social Credit System (SCS)

Statement by the German Chamber of Commerce in China

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Beijing/Guangzhou/Shanghai, August 28, 2019 – A current survey, conducted by the German Chamber of Commerce among its members in China, shows that about a year ahead of the planned introduction of a comprehensive national scoring system for companies, almost seven out of ten German companies in China are not familiar with the system, its mode of operation and its objectives in the business context. There is a lack of substantial information on the system’s functionality and its processes in general as well as on preliminary preparatory measures to be taken by companies. It remains uncertain which actual impact can be expected on daily business.

The topic is of high relevance to the future, because control mechanisms of the market and the legal system are being transferred by means of a comprehensive corporate scoring system for companies into an unprecedented meta-system, which is based on a non-transparent algorithm. From the viewpoint of the German business community, sticking to principles of the rule of law as well as to transparent and comprehensible rules are a prerequisite for such a rating system. Furthermore, the data collection should be limited to a minimum. Such a system could lead to a confidence-building effect on companies in their day-to-day business. For example, it might help to better assess potential business partners before entering or deepening a business relationship with them. Yet only if market participants are aware of how ratings are determined and what the subsequent consequences would be. If this cannot be ensured, the scoring system leaves room for further market entry barriers, besides existing market entry restrictions and regulations. This generates additional uncertainties.

For the time being we are expecting the Chinese government to inform as soon as possible and comprehensively about the mechanisms of the scoring system, its implementation strategy and consequences in order to mitigate the information gap and thus the uncertainties regarding the Corporate Social Credit System among German companies in China.

 

From the point of view of the German Chamber of Commerce in China (based on the report published by the European Union Chamber of Commerce in China and research institute Sinolytics) following measures could help to mitigate the information gap and reduce uncertainties:

1. Creation of information transparency for the scoring calculation: The calculation methodology of individual scores remains unclear. This makes an improvement of score neither comprehensible, nor manageable with entrepreneurial tools. Especially in the case of financial scorings, the application of transparent algorithms with a clear calculation method are necessary.

2. Clarification of the Meta-Score: There is a need to clarify whether a "meta-score" will actually be introduced for every company, enabling an interconnected monitoring of all ratings or if (as previously) numerous parallel credit ratings will continue to be used.

3. Clarification of the redlists and blacklists: Comprehensible criteria for the process of redlisting and blacklisting, as well as for the removal process are crucial.

4. Avoidance of cross-sectoral sanction measures: Non-compliance with regulations in one sector shall not have any effects on other sectors (in case of rule compliance in these sectors).

5. Separation of private and corporate scoring: So far, the “credit record” of an enterprise’s “responsible personnel” is intended to influence the corporate score. And the "credit record" of these persons should have a direct influence on the company’s rating and vice versa. This should be reconsidered. So far, there is no distinct definition of "responsible personnel".

6. Independence of business partners in the scoring: According to the current available information, scoring results of business partners are projected to affect the scoring result of one’s own company. This should be reconsidered. A distinct definition of the framework of a company’s business partner is missing to date.

7. Transparency for dealing with negative assessments: Until now, the reevaluation of negative assessments is only possible for companies that have been classified as severely "untrustworthy". It should be specified which mechanisms can be employed in case of a “sub optimal” rating.

8. Creation and communication of transition periods: Foreign companies need clearly defined transition periods to prepare for the SCS. During this period, we would appreciate if Chinese authorities could indicate existing problems and impending consequences.

9. Clear communication channels: In order to prevent uncertainty for companies, a transparent communication including a permanent point of contact and clear communication channels for foreign enterprises in China who want to gather information about the respective regulations, should be established (especially for SMEs it is difficult to get an overview).

 

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