China Uses ‘Social Credit System’ to Control Domestic, Foreign Companies

Security guards patrol below surveillance cameras on a corner of Tiananmen Square in Beijing on September 6, 2019. - Some Beijing karaoke bars are closing, toy bombs are banned and every delivery package is being scanned: the capital is taking no chances weeks ahead of a massive military parade to …
GREG BAKER/AFP via Getty Images

A Bloomberg News report on Sunday described how Communist China uses its “social credit system” to control not just citizens but corporations – and not just domestic companies, but foreign companies seeking to do business in China as well.

Nervous foreign businessmen are forking over thousands of dollars an hour for training in how to avoid being flagged as miscreants by the most pervasive surveillance system in history.

The social credit system is a vast database that monitors Chinese citizens for “good behavior” and aggressively punishes those who fall short. Anything from poor spending habits to ideological impurity can produce a low social credit score, with consequences that might include the unfortunate citizen suddenly discovering he is no longer allowed to board airplanes or trains.

The social credit system has a business component as well, monitoring corporate behavior in much the same way it keeps tabs on individual citizens. Companies with poor social credit scores can face heavier regulatory scrutiny, higher taxes, reduced access to business loans, or an outright ban on doing business in China.

Bloomberg News provided the example of China Railway Construction Corporation, a company that covered up some fatalities on a railroad project in Mongolia, got caught, and was banned from doing business for a year as well as being “subject to more inspections, limits on bidding for public projects and restrictions on issuing bonds and shares.” And those were only the immediate consequences – there is no telling how long the demerits fed into the social credit system will haunt the company and its managers across every province of China.

“The system will be widely used in China to oversee domestic and foreign companies, and firms have to assign resources to keep a real eye on making sure their records are clean,” noted Andrew Polk of the Trivium China consulting firm. 

Trivium is currently charging corporate clients $2,500 an hour to consult on the social credit system and $50,000 for a complete audit. Bloomberg News suggested other U.S. and European firms are offering similar services.

Other expert observers pointed out that the rules governing the social credit system are notoriously vague and clearly subject to political tweaking from Beijing, making it quite easy for the Chinese Communist Party (CCP) to punish or blackball foreign corporations unless the foreigners bend over backwards to maintain good relations with CCP officials. 

The Chinese government is not shy about warning that American companies could be blacklisted as part of the trade war, or in retaliation for U.S. criticism of Chinese policies such as the internment of Uyghur Muslims in concentration camps. Publishing the CCP’s thus-far secretive blacklist, as Chinese state media has threatened to do, could cause big problems for American firms in other countries, and would almost certainly produce immediate black marks in the social credit system for every listed entity.

A report published in November by Dezan Shira & Associates warned that one of the “most potentially problematic” aspects of the social credit system is that it makes companies responsible for their business partners and suppliers. If one company is blacklisted, bad marks can swiftly propagate to other corporations it has business relations with. Conversely, the preferences given to “red-listed” companies with high social credit scores provide a tremendous competitive advantage.

Although the social credit system is still being rolled out, Dezan Shira & Associates observed that “at least 33 million businesses have already been assigned a score and many have been put on various punitive blacklists,” in addition to local and regional programs that have been in place for years.

The report concluded by advising companies doing business in China to “undertake a supply chain audit and conduct due diligence on business partners given the inclusion of partners in social credit assessments.” 

“Businesses should also not forget to assess their IT and data security strength since they will need to transmit data to the government more frequently and in greater numbers,” the authors added.

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