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Home > Compliance
Demystify Corporate Social Credit System in China
By Henry Chen | 2020/5/18 0:40:11

I.What is the Corporate Social Credit System


The Corporate Social Credit System guides the behavior of market subjects through modern scientific and technological means. It includes a series of different credit rating standards, so as to build the basis for calculating the credit regulatory rating of all market entities. The corporate's behavior will be continuously monitored, and the scores will be adjusted accordingly. If the corporates do not know the areas covered by the credit system or the measures to be taken to meet the credit standards, the corporates may suffer from the risk of punishment, or even be blacklisted.


II.The reasons for establishing the Corporate Social Credit System


Since the reform and opening up, China's economy has developed rapidly and made remarkable achievements, but the lack of credit and integrity is still one of the main problems in China's economic operation, which is not conducive to creating a good market environment for fair competition.


As we all know, the market supervision mode of the Chinese government is undergoing a transformation from "pre supervision" to "post supervision", and the Corporate Social Credit System is an important part of the transformation of the market supervision mode in China. The purpose of the Corporate Social Credit System is to support corporates with good credit, weaken or eliminate corporates with poor credit. Credit is the foundation of a strong market economy and strengthening credit will increase consumer confidence. In recent years, the Chinese government attaches great importance to the construction of Corporate Social Credit System, and actively promotes relevant legislation and industry standards.


III.How to implement the Corporate Social Credit System


The first step of the evaluation mechanism of the Corporate Social Credit System is the establishment and publication of the evaluation indexes and methods of the government to the credit evaluation system. According to different fields, relevant government departments formulate credit evaluation rules, clarify the basic concept of credit evaluation, and provide guidance on how to improve the credit rating of corporate and how to avoid dishonesty.


After establishing the credit evaluation mechanism, the government supervises the corporate activities and collects the corporate behavior data by using the rating system and related technologies. For example, through the "National Corporate Credit Big Data Public Service Platform", the use of big data to collect and analyze corporate finance, management, technology, social responsibility, and other data to comprehensively evaluate corporate credit.


After the establishment of evaluation criteria and the collection of corporate behavior data, the government database can automatically calculate the corresponding credit evaluation of corporates according to the evaluation criteria and the collected data.  For example, corporates will be divided into A, B, C, and D levels according to the tax credit, and corporates will be divided into integrity, good, warning, bad levels based on environmental credit. However, in the areas where no specific rating or scoring standards have been formulated, "credit records" are usually adopted that the dishonesty of corporates will be recorded in such credit records, while the serious illegal dishonesty will be included in the "serious dishonesty list" and get the penalty of breaking faith by multiple government departments.


After obtaining the credit evaluation of corporates, the government will implement different supervision on different corporates according to the credit evaluation, encourage the trustworthy behavior and punish the dishonest behavior.


IV.The effect of Corporate Social Credit System


Credit has been widely developed in the modern market economy because it has the function of financing funds and promoting the smooth flow of goods. It plays the role of adjusting the surplus and shortage of funds and saving costs, greatly improving the efficiency of commodity circulation and the efficiency of using funds. A perfect corporate credit system can improve the efficiency of economic activities, reduce transaction costs. At the same time, the government can also use it to regulate the operation of macro-economy.


For corporates, a high score can mean a range of different things, such as lower tax rates, better credit conditions, easier market access, rapid approval, more public procurement opportunities, and lower inspection rates or targeted audits.


Similarly, corporates may be blacklisted and punished due to poor scores or specific violations. There are various forms of punishment, such as fines, high inspection rate and targeted audits, exclusion from preferential policies, restrictions on public procurement.


V.Compliance advice


Through the above analysis, the Corporate Social Credit System has a profound impact on the development of corporates. Therefore, in the era of the gradual improvement and implementation of the Corporate Social Credit System, it is particularly important for corporate to understand and comply with the system.


Corporate should accurately position the requirements of the Corporate Social Credit System, that is, what level and field of credit rating laws and regulations will be applicable to the daily business activities of corporate and establish the applicable credit rating catalog of corporate.


The Corporate Social Credit System is still under construction and needs to be adjusted, expanded and improved continuously. Therefore, the corporate should pay continuous attention to and accurately grasp the future development of the social credit system, closely observe the changes of the administrative department’s credit rating system and rating requirements, and carry out internal monitoring on the daily operation of the corporate to ensure that the corporate's behavior meets the credit rating requirements.


Based on the relevant laws and regulations, the corporates shall communicate and exchange directly with the administrative departments in a timely manner on the problems in the credit rating process.



_________

The author, Henry Chen, licensed to practice law in China and New York, is a senior partner of Dentons Shanghai Office.  Before joining Dentons, Henry was AP Compliance Director of Ford.  Henry's practice areas include FCPA, anti-bribery and fraud investigation, cyber security and data integrity, compliance management system, corporate matters and dispute resolutions.  Henry's email is Henry.Chen@dentons.cn.  Henry is the author of the book Risk Management on Commercial Bribery in China and the book Compliance Risks of Enterprises in Globalization: Outbreak and Control



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