China's Corporate Social Credit System: How businesses can prepare

As part of China's push towards data-driven governance, the Corporate Social Credit System (CSCS) is to be a single, standardized reputation-based scheme for both local and foreign firms doing business in China, ensuring their regulatory compliance and improving their corporate behaviour. Although delayed due to slow regional implementation, standardizing best practices and evaluation criteria, and shifted priorities from the Covid-19 pandemic, China seeks to speed up completion of its ambitious credit monitoring system with the recent release of numerous regulations and policies.

While the CSCS has, the potential to level-the-playing-field for local and foreign firms alike, compliance for foreign firms may be more complex and costly. Resultantly, businesses must be prepared to navigate inconsistent regulatory systems with caution, as China can easily change their regulatory and compliance postures towards specific industries with limited notice.

On December 21, 2020, China's State Council issued the Guiding Opinions on Further Improving the System of Breach of Trust and Constructing a Long-term Mechanism for Building Integrity, which sought to integrate the experience of pilot corporate social credit programs and set standards nationally. Subsequently, relevant Chinese government agencies issued or revised their own regulatory policies - 147 in total - including:

• National Development and Reform Commission (NRDC) and People's Bank of China (PBOC)jointly issued National Basic Catalogue of Public Credit Information (2021 Edition) (Draft for Comments) and National Basic List of Disciplinary Measures for Default (2021 Edition) (Draft for Comments)
• State Administration for Market Regulation's (SMAR) Credit Repair Management Measures and its revised Measures for the Management of the List of Enterprises in Serious Violation of Law and Breach of Trust

Furthermore, effective January 1, 2022, the Administrative Measures for Credit Information Operations will standardize regulatory issues - namely, definitions for credit information and the scope and processes of credit reporting - covering all types of business transactions, including cross-border trade and financial activities. This measure will also be one of the first operationally to apply China's Personal Information Protection Law.

While these directives remedied some issues of the early CSCS - particularly addressing national-level standards for credit information collection and inclusion, determination of criteria for the blacklist, setting untrustworthiness penalties, and introducing credit repair standards - moving forward, companies should continue to be aware of ongoing inconsistences in adoption and regulatory shortfalls, including:

• the persisting fragmentation of regional policies and regulations, uneven data collection mechanisms, and diverse credit rating and management programs throughout the country
• no clear definition for 'social credit'
• the slow rollout and full implementation of the national enterprise identification code
• the high degree of flexibility authorized by the Chinese government, which may complicate compliance requirements for businesses

The CSCS touches on virtually all aspects of a company's business operations, assessing the performance and demeanor of companies by analyzing topic-specific ratings (i.e. tax, customs and environmental protection) and compliance records (i.e. on anti-monopoly cases, data transfers, pricing and licenses). In addition to the credit score of the business' operations itself, the behaviour of the company's employees, such as a company's legal representative or senior management, as well as suppliers and customers within those operations are also taken into account, as part of the company's overall CSCS score.

Companies should expect at any point of implementation that the automated system will, in theory, collect and process data, and then assign companies a score against a set of defined requirements. Based on their rating, Chinese authorities will reward businesses operating within the compliance regime a 'good' score and sanction badly behaved companies whose operations fall out of compliance.

Complying with the system's regulatory requirements may be challenging for companies. This is mainly due to the expected strictness, comprehensiveness, intricacy, and crosscutting interdependence of the ratings. The self-enforcing nature of the CSCS will also create strategic challenges. For example, the system makes firms accountable to the behaviour of business partners along the supply chain. This will expose them to risk of non-compliance due to actions of third parties. This might be challenging for Small and medium-sized enterprises that lack a robust corporate compliance infrastructure.

The new regulatory measures directed by the December, 2020 Guiding Opinions ultimately preserved flexibility for relevant Chinese local agencies and ministries, causing uneven regional implementation. In addition, an expected independent and unified 'credit information publicity platform' (i.e. Credit China, National Enterprise Credit Information Publicity System (in Simplified Chinese only), and varying local pilot city platforms) has not yet been established, which hinders the system's transparency.

While the CSCS has come a relatively long way since it was proposed in 2014, the end of 2020 marked not a conclusion of implementation but a commencement of its expansion, despite no new updates to the original 2014 Guidelines. Moving forward, companies will need to balance protecting their legal interests and privacy while complying with varying regulations, likely under intensified scrutiny and a more hostile business environment. Businesses should:

• understand what the system requires from them
• assess where they stand with respect to requirements
• identify gaps in the supply chain due diligence
• implement internal compliance
• monitor the thirty party credit status

Businesses should also communicate openly with both central and local authorities, raising questions and problems on their specific compliance requirements. Businesses should have on-the-ground compliance experts in the regions of China in which they are operating which would allow the company to remain informed of and abide by the local compliance requirements in real time. Compliance experts could also leverage their pre-existing relationships to assist companies to develop a two-way information flow with the central government and local authorities.

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• Doing business in China
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• Contact the Canadian Trade Commissioner Service in China

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