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China's social credit system: what companies need to know
China's social credit system: what companies need to know
New technology offers new opportunities. Also for the Chinese government, which uses technology to analyse data to make sure that companies and individuals abide by the Chinese laws and regulations.
This through the Chinese social credit system, which rates companies and individuals. The outcome of the rating will decide whether or not successful business in China is possible. Companies that perform well, will be rewarded. Companies that rate below par, will be punished.
This social credit system is already in use, and the prediction is that a more advanced system that the government is working on will be online as early as 2020.
Therefore, it is essential that companies and employees operating in China are aware of the system and on how to get a good rating, in order to be successful in China.
This article will outline a plan of action for companies to deal with this system.
How does the system work?
It is important to realise that the social credit system is a system that will be constantly improved and updated. The goal seems to be to create a platform that constantly rates companies and gives an up to date overview of their ratings, including rewards and punishments.
Currently there are various Chinese databases that are rating companies on their market behaviour regarding compliance with laws and regulations in China.
The government is working on a National Internet Plus Monitoring System which will encompass both governmental data and data from private databases.
The current system works in the following ways
The government uses physical and technological ways to obtain data regarding whether or not companies are compliant with current Chinese laws and regulations, and digitalises this information;
Data is being analysed by a technological system and, as a result, a rating comes out;
Based upon the rating, the company will be rewarded or punished.
The necessary information is obtained through audits, information requests and public available data.
What are the chances and threats for companies?
The system seems to be made under the idea that if you have nothing to hide you have no reason not to disclose information, and you will not be punished. To most Western companies, this is a different concept from their privacy protective countries.
Underestimating the social credit system in China, will turn out to be an immense mistake for companies.
The reason for this is that companies that rate low can be blacklisted and can be stopped from doing successful business in China.
Examples of punishments can include:
l not being able to obtain necessary permits from government, not being able to bid for public tenders,
l having to pay a higher tax, public naming and shaming and
l more governmental audits.
Moreover, it might be difficult to switch a low rating into a high rating, and this might well take a long time.
On the other hand, obtaining a high rating, might result in lower taxes, less government audits etc.
When faced with an unfair low rating, it is important to contact the government to start discussion regarding the rating or to contact a lawyer to start an administrative action in order to have the unfair rating adjusted.
What are the consequences for employees?
Negative ratings of companies can affect employees of a company.
For example, the legal representative can be limited in his/her travels. Also, the purchase of real estate and insurances can be blocked.
It could well be expected that in the future, the rating of an employee and the rating of a company could affect each other further and vice versa.
Furthermore, it is important to note that the social credit system also looks at media, including social media.
The individual actions of managers in a company, could lead to punishments and bad ratings for the company.
Recently, the Houston Rockets (the most popular NBA team in China as Yao Ming has played there) find themselves in a position where their games are no longer broadcasted in China, and the company seems to be limited in doing business in China.
This after an individual tweet of the GM of the company regarding the situation in Hong Kong.
Therefore, a clear China strategy is necessary for your company and employees regarding China.
How can companies prepare themselves?
A first plan of action would at least need to contain the following steps:
1. Name a person/persons within or outside of the company that is tasked with compliance of the company with Chinese laws and regulations and the rules regarding the Chinese social credit system.
2. Check which laws and regulations your company needs to be in compliance with;
3. Make sure that there is communication between the person/persons under 1 and the rest of the company. After all, the behaviour of individual employees can result in punishments to the company and a low rating.
4. Check with which laws and regulations your company is not in compliance with;
5. Adjust the company processes so that the company acts in accordance with Chinese laws and regulations;
6. In case the government asks for data, check if the data contains trade secrets. Trade secrets are no longer protected in accordance with Chinese laws if they are published.
Therefore, check and see whether or not trade secrets can be legally let out of the data transfer.
7. Check the companies with which you cooperate. If a business partner has a bad rating this could affect the rating of your company.
8. In case your company obtains an unfair low rating, start immediate communication with government, or ask a lawyer to start an administrative action.
Conclusion
The Chinese social credit system is the administrative hand of the government. Comply with Chinese laws and regulations and your company can do successful business in China.
Do not comply with this and the Chinese government can make your business difficult to impossible in China.
The social credit system is a system that will constantly be updated, and which will arguable become more overarching. Seriously taking this system into account is a must for doing successful business in China.
HFG Law&Intellectual Property
