China’s social credit system: A scoring system with far-reaching effects

Since 2014, preparations have been ongoing in China for a national social credit system that will be compulsory for all citizens and businesses. The nationwide roll-out, originally planned for 2020, will very likely be delayed. However, many local Chinese companies and foreign companies registered in China are already under close surveillance and tracked in ratings lists and databases. For this reason, companies that trade in China or that are planning to move to the Chinese market must make sure they understand the effects of China’s social scoring system well in advance.

A social credit system (SCS) is a system of data-based digital surveillance, tracking and scoring that grades and rates individuals, government officials, companies, organizations, and associations. Bad behavior is disciplined and punished. Good behavior is rewarded with certain benefits. The scoring system goes back to the “Planning Outline for the Construction of a Social credit system (2014–2020)” adopted by Chinese authorities on June 14, 2014.

The original intention was for it to be the first state-wide and universally compulsory social credit system across China as of 2020. So far, however, there have only been individual testing and pilot projects that sometimes employ different approaches for social scoring in China. Little is known about many of these test projects, which number around 70 across the country according to western estimations. The emphasis is on large cities and densely populated regions – if the system will be rolled out to rural regions is still up in the air.

State-organized pilot projects are not the only large-scale social scoring tests in China. Private Chinese major corporations have been gathering experience and generating extensive databases for years. Media reports claim that the data collected through these test and pilot projects will be collated and centralized for the state-wide social credit system in China. Digital surveillance technology, such as video surveillance and facial recognition, is also likely to be a part of this social credit system. This is already the case in some individual projects.

The national social credit system under construction should help meet several goals. The Chinese regime wants to track the behavior of citizens, companies, authorities, and organizations from a political, moral, and social point of view. According to its own communications, the Chinese state is particularly focused on the educational aspect of the social credit system. Ideally, it should set up preventive self-control measures that can nip negatively evaluated behavior in the bud.

Citizens should behave for the common good and set good examples for society by volunteering to perform tasks that benefit the community. The system should also lead to more honesty and trust in the community if citizens and companies are guided by a compulsory and universal scoring system. From an economic standpoint, the Chinese government will rely on the driving and piloting effects of the rating system. If possible, the State will track almost all economic and business activities through comprehensive market regulation based in IT and big data (Corporate SCS).

Further goals include avoiding food scandals, fighting pervasive corruption, and increasing security, as citizens will be encouraged to follow the rules and laws. The State would like to improve the Chinese people's management of debt and finances, and to establish a credit score for the millions of citizens without a bank account. Government services should also be optimized through the data-based system. Even environmental protection should benefit from increased control and surveillance. The government also hopes that computer analyses of enormous databases will allow predictions of future social behavior.

As the national system is still under construction and there is no consistent explanation from the Chinese government, there are currently many different views of how the social credit system will work and exactly what it will involve.

We can assume that it will build upon already existing and widespread listing systems. These listings are based on a “rap sheet”, a type of behavior certificate. State authorities will blacklist individuals and companies that have broken existing laws, rules, and local regulations. Conversely, people and businesses who behave particularly well within the system will be put on red lists. Databases with these lists are already publicly available in China today.

For an insight into the current blacklists and social scoring system, consult the National Credit Information Sharing Platform and the National Enterprise Credit Information Publicity System. On this second site, you can look up your own company’s rating by searching for the company’s name or Unified Social Credit Identifier (an 18-digit number) (the site is available in Chinese only). To find out how to look for your company and more, you can browse the Practical Guide to China’s Corporate Social credit system, provided by the German Außenhandelskammer (chamber of foreign trade).

Many media reports assume that these listing practices are closely related to a points system. Points-based scoring systems are already being tested in various projects. For example, since 2015, there has been the Sesame Credit System from Ant Financial, an affiliate of the Alibaba group. Chinese citizens can participate in this system on a voluntary basis. Its first purpose is to assess creditworthiness and calculate a personal credit score based on a points system.

When collecting data, which is also linked to the B2B platform Alibaba.com and the company’s own online auction house Taobao, information about place of residence and work, family status, payment behavior with bills and credit card use is also saved. Political expression and purchasing habits on social media are also recorded.

While the Alibaba group is often compared with Amazon, the Chinese equivalent to Facebook is called Tencent. This company set up its own credit system called Tencent Credit years ago, which is the same as Alibaba’s Sesame credit system. It populates its databases primarily using WeChat, originally a chatting service (like WhatsApp) that was expanded with further services (e.g., the mobile payment system WeChat Pay, comparable to Apple and Google Pay).

A points-based system is also the basis used by the Chinese coastal city of Rongcheng in its social credit system tested since 2014. 670,000 residents already have a social score in their everyday lives, which must be given for loan applications or for potential promotions at work.

Given this and other pilot projects, many experts assume that planned national social credit system roll-out will also be points-based, although this has not yet been officially confirmed by Chinese authorities. The concept would be that all actors begin with an initial score (1000 points). Good behavior raises the score (up to a maximum of 1300 points). Bad behavior will lose points (to a minimum of 600 points). Exemplary actors can hope to be rewarded. People who don’t behave as the State would want them to can, in the worst cases, be blacklisted and recorded on the official “heavily distrusted entities list”.

The social credit systems in place in China so far are based on predefined evaluation criteria that will very likely also play a role in the national system.

Important evaluation factors for individuals are currently credit scores and purchasing habits (online and offline). Activities and rule-breaking, both on social media and in everyday and social life, will be reflected in a person’s score. People who protect public property, campaign for family values or look after their parents or sick family members can expect positive effects on their score. Criminal records and behavior in public transport (e.g., riding without a ticket, smoking in trains, etc.) are also considered in China’s social scoring. In addition, eating habits and evaluations from superiors and landlords will impact the rating.

Special evaluation criteria for businesses include product quality, environmental protection (following/breaking rules on emissions), pricing, licensing, and use of data and data transfers. The level of tax paid and adherence to payment deadlines are also included in the evaluations. Company reviews by social media users are also considered. Even the behavior of employees can affect the rating of the whole company. If there are several branches of a company in China, the evaluation of one of its locations can influence the rest of the company.

However, it remains unclear how these evaluation criteria will be weighted in a national scoring system and whether every infraction will automatically have a negative impact. According to experts on China, such as Jeremy Daum, it is more likely that a serious, relevant, and criminal incident must occur first (fraud, theft, tax evasion), and only then will the negative profile be expanded with more bad behavior.

It also remains unclear for now as to when ratings and blacklists would be updated under the national system. Currently, a blacklist entry for a serious misdemeanor may be kept on record for longer than 5 years, or it could be deleted after 6 months at the earliest. The process can be accelerated if a solution to the underlying problem is quickly sought. Businesses can counter a poor ranking by signing a Credit Rescue Commitment Letter and providing suitable evidence in their defense, which could allow the negative evaluation to be canceled. Furthermore, legal and administrative aid is available.

According to media reports, the technology behind China’s social credit system will involve database networks, digital image, and sound recordings, big data and data mining analyses, and artificial intelligence. The technical analyses will be able to pull data from pre-existing projects and systems, as well as new databases, such as the national digital/electronic surveillance system, Skynet, which should also be able to provide further data. It currently consists of almost 600 million surveillance cameras that, among other abilities, work with facial recognition and, as of recently, partial gait recognition.

The consequences of China’s social scoring system are largely unforeseeable at present, as the national roll-out is only just beginning and many details are not yet known. The often-quoted advantages that exemplary behavior patterns would bring include:

• Preferential treatment for school admissions
• Advantages when allocating work positions
• Easier access to credit (including for companies)
• Preferential treatment for public contracts (for certain companies)
• Better health care (e.g., shorter wait times in hospitals, free access to gyms)
• Discounts for public transport or when renting cars or bikes
• Quicker promotions
• Shorter wait times for living spaces in social housing
• Tax advantages or reductions (including for companies)

Citizens and companies that behave appropriately and follow the rules of the regime can therefore get many benefits from the system. Conversely, people who act against the values and norms of the state social credit system can expect some of the following consequences:

• Denial of licenses and approvals (including for companies)
• Denial of stock issuing for companies
• Denial of business activities in certain market sectors (e.g., the security market)
• Penalties when issuing manufacturing, export or import licenses
• No public contracts for companies
• More difficult access to credit (including for companies)
• Higher inspection rates for goods imports (for companies)
• Fines (for companies)
• More and unplanned site inspections (for companies)
• Penalties when traveling (no flight or high-speed train bookings, including for companies)
• More difficult access to welfare
• Only limited use of public services
• No work in public services
• No access to private schools

If citizens or businesses end up on a blacklist due to their “slip up”, they can be singled out and shamed online or on public displays even today. Concrete cases of restrictions have already occurred. In 2018, 15 million bans barred people with a low score from long-distance travel by plane or train.

Criticism of the social credit system is limited within China. The overall feeling is general acceptance, as many citizens place hope in the roll-out and believe the government’s promises (more security, less corruption, etc.). From a technical point of view, the focus is more on the advantages of widespread digitalization, as data protection plays a limited role in China. Of course, the lack of opposition could also be related to the fear of sanctions, as the Chinese government does not generally tolerate open criticism.

Western critics find that China’s social credit system is a big step towards turning it into a Big Brother state. The government wants to secure its power and have full control over all aspects of its citizens’ lives. Centralized data collection has been done by the State for several years and is criticized as being too far-reaching and in-depth. In addition, political actors in China can have access to very centralized data with no restrictions. In terms of mass surveillance, the Chinese are also evaluated and monitored digitally, which allows extensive linking of data. The credit system adds to pre-existing surveillance and censuring mechanisms as China, just like North Korea, also controls the internet and internet access. Critics consistently draw parallels with known examples of dystopia, such as those from George Orwell (1984) or Aldous Huxley (Brave New World).

Critics also worry it could lead to social pariahs, whereby individualist, controversial, and free-thinking people will be shunned and disadvantaged. This can ultimately lead to second-class citizens and companies that struggle to break free from the downward spiral of blacklisting and negative scores.

Such a controlled and surveilled market has little in common with a free market economy. This kind of strongly regulated environment can also be bad for innovation. Companies will be required to choose their trade partners very carefully in terms of state rules and norms. A negative evaluation, or worse, blacklisting, runs the risk of losing business partners or not even being accepted as the business partner of a Chinese company to begin with.

If a company is publicly dragged through the mud, the tarnish on its image will be long-lasting. Scores and blacklists can have a particularly nasty effect if the evaluation or slander is unjustified, such as with denunciation, mutual espionage, or misjudgments. There is also a risk that a centrally controlled system with no transparency could turn into misuse and corruption. Whether the promised security is even possible is doubted by some of the Chinese population, even within the country.

In the eyes of critics, such an opaque system contravenes European data protection principles guaranteed under the General Data Protection Regulation (GDPR). The same critics find that there is a particular risk of cross-linking information and data – if citizens or companies lose points in one sector, this could lead to sanctions in other areas.

However, some voices call for perspective. Some press articles and China experts suggest that premature criticism simply reflects western fears of a Big Brother state. They emphasize that the system is still in its infancy and that it is not yet clear whether it will be realistically rolled out nationwide and affect all citizens equally or whether it will even work as an all-encompassing system of control. Furthermore, and particularly for businesses (Corporate SCS), it could be more of an incentive system than a control system. As part of their self-regulating activities, businesses can take concrete and self-motivated steps to help get positive social credit.

Jeremy Daum, a China expert and researcher at the Paul Tsai China Center of Yale Law School, suggests that the social credit system is a propaganda tool more than anything else, one that primarily serves to discipline citizens via the threat of sanctions and encourages them to be honest. He also points out that the high-tech surveillance feared by the West is excessively overestimated. According to Daum, many surveillance cameras don’t even work, and “super algorithms” and AI technology have been barely or not at all used thus far.

Calming voices suggest that there is a global trend towards data-hungry credit and evaluation systems that goes beyond China’s borders. In Germany, for example, the Schufa system allows credit checks using databases, while in the United States, your credit score – or FICO score, for the Fair Isaac Corporation that developed it – is calculated using an unreleased formula that gathers and weighs several different aspects of your credit history and behavior. Unlike China, however, social scoring elsewhere is not held in state hands, but rather private companies such as social media. Whether databases containing personal data are better off there is often doubted. Open access to confidential social media data from Facebook during the US elections caused long-term damage to the trust in private data protection practices. Western critics should support a view of data protection that finds that data is safer in the hands of the State than in for-profit companies.

A balanced opinion should also look more closely at the positive effects of the system. Companies could benefit from an optimized fight against corruption, efficient market regulation and business partners that have been demonstrated to be clean and that don’t turn to dubious business practices.

It’s hard to come to a definite conclusion about the Chinese national social credit system due to all the unclear details and wildly varying opinions of China experts. However, businesses need to implement strategies as to how they will act in the future in an increasingly regulated market and how they want to work specifically towards getting a positive rating.

Companies also need to promptly look into what to do if they are blacklisted and the measures they can take to remove a bad rating. It should also be noted that companies in China are already being extensively assessed, and even employees are under close supervision.

Furthermore, internal processes and current, and future business partners could be checked in terms of the conditions of a national social credit system. Flexibility and speed in trading will be required in the future, as permanent and short-term changes in the evaluation system cannot be ruled out. As for the current situation, we should keep a close eye on how the social credit system in China develops.