China’s Social Credit System

By: Daksh Sharma

If it is fully realized, the SCS would be one of the most ambitious and consequential government programs in the world

China’s Social Credit System (SCS) is a heavily debated topic. To Westerners, it looks like a dystopia come true. To the Chinese Communist Party and most Chinese citizens, it looks like a step towards a better society. If it is fully realized, the SCS would be one of the most ambitious and consequential government programs in the world. This article will explain how and why the SCS came about, how it impacts both domestic and international life, and the challenges it faces in implementation.

China has seen tremendous growth in the past few decades. But the growth came with a trust problem. As of 2017, 225 million Chinese are unbanked with no financial credit to speak of. Economic reforms in the 90s required banks to lend to individuals and private enterprises in addition to state-owned enterprises. The household and private sectors were finally integrated into the financial sector, but it was a messy marriage. There was lots of excess borrowing and fraud because a borrower’s creditworthiness was either not readily shared or nonexistent altogether. Banks were giving out loans to people who might have had multiple defaults with other banks.

The first attempts at creating credit systems came in 1999. The term “social credit” came about in 2003, but the idea was similar to regular credit systems used in the U.S. and elsewhere. From 2003 to 2007, local pilot programs for financial credit registries were created and eventually combined to form a system called the Credit Reference Center of the People’s Bank of China. Finally, lenders could share and access credit reports to evaluate their borrowers.

However, the trust issue persisted. For example, say a borrower refused to pay back her debt. The lender then would take the borrower to court and win, but the borrower still would not pay back the loan. In fact, if her credit history was practically nonexistent, then she could have gone out and got another loan from someone else! Thus, little enforcement led to too many people getting away with this criminal behavior.

The trust issue was not limited to individuals but extended to enterprises and to problems beyond simple creditworthiness. Companies that were also at fault for tax evasions, factory accidents due to poor management, and food safety issues were able to receive financing. For example, during the 2008 Chinese milk scandal, the Sanlu brand of infant formula was found to have been contaminated with melamine, causing kidney failures among hundreds of babies.

In response to these trust issues, the government came up with the 2014 plan for the SCS. If borrowers did not have a sufficient or documented financial history, they reasoned, the SCS could take note of other types of behavior and extrapolate “trustworthiness” from those actions. It is touted by the government as a tool to reduce transaction costs, help gain competitive advantages in the market, and increase globalization. It has two main parts. Firstly, it has a large dataset. The plan is to create an “interconnection and interactivity of… credit information systems and… networks that cover all information subjects, all credit information categories, and all regions nationwide.” They will collect data on individuals (including government officials), government departments, NGOs, and private businesses. Secondly, it uses a system of rewards and punishments to shape the behavior of people. The goal is to use this automated system of law enforcement and economic regulation to incentivize citizens to take positive actions.

While the SCS appears similar to other credit systems, it differs drastically in a few ways. First, SCS is implemented and controlled by the National Development and Reform Commission, a macroeconomic government agency. Its goal, as stated above, is to collect data on the creditworthiness of individuals and businesses in order to build trust and morality in the financial markets and in Chinese society. On the other side, Alibaba uses a program called Sesame Credit, whose goal is to expand consumer credit and create more demand for goods for its partner companies.

Second, corporate credit systems’ analyses, in contrast with SCS’ methods, of the data they collect, aim to relate the consumers to the products. In 2015, the government gave licenses to private enterprises such as Ant Financial, the creator of Sesame Credit, and the Tencent, a conglomerate which specializes in internet service, entertainment AI, and technology, to set up credit evaluation businesses. For instance, consumers who shop at Alibaba can opt-in to have a Sesame Credit score based on their purchasing habits. Having a higher score could mean easier loans from Ant Financial. These scores are very heavily biased, however. If a person buys diapers, their Sesame Credit score goes up because the company sees that as evidence of a responsible person. If they buy video games, however, their score goes down because that is evidence of laziness. It is because of this bias that the government allows the licenses to “expire.” However, it is also indefinitely allowing and regulating these massive company systems. This is perhaps because one day, they might combine these data sources with the ones in the SCS.

The SCS is not yet implemented nationwide, but there are three dozen pilot programs being testing in various cities. Each of them has a different method. In the city of Rongcheng, for example, citizens start out with 1000 points and a rating from A+++ to D. Getting a traffic ticket deducts 5 points. Helping your family in unusually tough circumstances rewards 30 points. (How could the government possible obtain this sort of information? They employ citizens to be watchdogs in their neighborhoods, effectively snooping and reporting on their community). Drunk driving automatically brings the rating down to a C. Citizens get rewarded for having good scores, from getting free public bike rentals to getting a heating bill subsidy from the government. The rewards and punishments vary from city to city. Some punishments are quite severe. For instance, a low enough score could ban parents’ kids from attending private schools or universities. Employees could also face indirect punishment because they will be prevented from being promoted at their jobs.

The only punishment that appears nationwide is the dreaded blacklist. If a person has not paid back a loan or accuses the government of corruption, she is banned from purchasing airplane or high-speed train tickets, and she may not take out loans. That person is put on the “Dishonest Persons” or “Untrustworthy Persons” list. If the person calls someone, the recipient will hear a siren along with a message warning the recipient that the caller is untrustworthy. The faces of blacklisted people can even be posted on massive billboards in public! To get off the blacklist, the person must either pay back the loan or appeal to the court and pay a fine.

The SCS has effects that spread beyond China’s borders. For example, in April 2018, the Civil Aviation Administration of China demanded that international airlines show Taiwan as part of China and threatened to take disciplinary actions against the companies who did not comply. They used a pilot credit system to back up their threats. In another example, companies who want to do business in China need a business ID, which is used to score companies. These scores may have a large impact on the company’s presence in China.

The 2014 SCS plan is supposed to be fully implemented by 2020, but that is unlikely to happen. This is because it faces political, societal, and international challenges. Firstly, establishing a shared data repository between government agencies is tough. Data is political capital, and some departments are not willing to provide information that may give up that capital. This is the same situation between the federal government and the local governments. Another issue is privacy. Chinese citizens, although less privacy-minded that the U.S. for example, will oppose data collection without user consent. According to recent studies, citizens do not yet fully grasp the implications of the SCS. A third issue comes from the EU: the General Data Protection Regulation (GDPR). Chinese companies that serve in the European market have to meet this privacy standard to sell to countries in the EU. Companies are worried that the GDPR and the SCS simply cannot coexist, therefore shutting off access to the EU market.

So although the SCS is an impressive creation, it may be some time before China and the rest of the world sees its true potential.

Works Cited:

Image Source: https://commons.wikimedia.org/wiki/File:Pinball_Dot_Matrix_Display_-_Demolition_Man.JPG

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