CHINA IS forging ahead with an ambitious social credit system that seeks to reward what the government considers good business practice and punish companies circumventing the law.
The rewards include faster clearances, better facilities and fewer inspections, while “discredited” companies will face punitive measures. For instance, management executives can be barred from purchasing air and high-speed rail tickets, have to pay heavy fines and their photographs will be displayed in public.
Since the system was rolled out in 2013, the Chinese government has listed 6.73 million individuals as discredited — 6.15 million were restricted from buying air tickets and 2.2 million from buying high-speed rail tickets, according to data from China’s National Development and Reform Commission (NDRC).
Another 555,000 were restricted from securing loans and credit cards to the tune of RMB 7 billion — approximately Rs 6,500 crore.
In the latest in a series of upgrades to the system, China’s General Administration of Customs (GAC) last week said 33 government authorities, including the People’s Bank of China, provincial governments and municipalities, had jointly signed a memorandum of cooperation to this effect.
GAC Vice Minister Li Guo said his agency and 33 other government departments will punish companies for violations, including smuggling, tax evasion, fraudulent company registration information and fake trade data.
“In order to combat false trade data, these joint disciplinary measures will be applied to companies that report fake trade data, which leads to statistical distortions. Based on the national credit information sharing platform, data exchange about discredited enterprises can be realised,” Li said.
He said that companies considered “discredited” would be subjected to more stringent inspections when applying for government tax rebates.
Li said that the top management and legal representatives would also be harshly dealt with. “Company representatives may be restricted from air travel and even purchasing high-speed rail tickets. Only when discredited enterprises pay a high economic cost and operating cost can this system act as a deterrent,” he said.
The GAC had announced the rewards system last November and released the set of punitive measures this week. Officials say the system has had an effect already, with 735 entities having paid taxes to the tune of RMB 4.8 billion or Rs 4,500 crore since 2013.
The system is monitored and run by the Inter-ministerial Joint Conference of the National Social Credit System that comprises the NDRC, the Supreme People’s Procuratorate and the People’s Bank of China.
Luo Yanjun from the NDRC said the system will include key departments like industry and commerce, taxation, quality inspection, finance, environmental protection and justice. “The measures are highly practical and operational. Thirteen such memorandums were in effect and with the GAC we will have 14 memorandums of cooperation,” she said.
Asked if such measures would impact trade, Li said, “China’s export and import trade grew by 20.2 per cent last year and tax revenue increased as well. We do understand that there are uncertainties in business, but the GAC is working hard and considering many factors.”
A social credit system was first mooted in 2000, said Han Jiaping, director, Institute of Credit and E-Commerce in the Chinese Academy of International Trade and Economic Cooperation. “We realised that the economy was opening up, but without formal regulations or legislation. A need was felt to maintain discipline and quality in finance, tax and trading,” he said.
According to Han, fake products, fake advertisements, copyright violations and little consumer protection were rife across China, so the government turned to countries like the US and Japan, where advanced credit ratings had evolved. He pointed to a 2002 report, which estimated each year, RMB 60 billion (Rs 56,500 crore) was lost due to delayed payments and back tax, which meant “bad currency in the market driving good currency away”.
According to Han, the system is like respecting traffic rules. “People obey traffic rules because they know there is a strong supervision system and stringent punishments. This will be applied to all sections in the social credit system,” he said.
Companies are categorised three ways in the social credit system — advanced certified enterprises, general and discredited. According to Li, advanced certified enterprises, which complied with all rules and regulations, accounted for more than 30 per cent of the total GAC revenue but included less than one per cent of all companies.
“Good companies deserve better facilities, lower inspection rates and convenient clearances. This will enhance competition and send a signal to others that good credit is conducive to business,” Li said.
“Punishment should be severe enough to feel the pain and deter them from doing it again. They will have to comply with strict standards to erase the label,” he said.
The credit system is expected to go fully online by 2020, when the social credit scores may be published for public use. “Going forward, the system will evolve a lot over the next ten years. All credit information will be fed into one unified database, which will be available online,” said Han.