Unpacking China’s Social Credit System

The Chinese social credit system has to contend with many challenges and has implications far beyond social control.

Ever since it was formally announced in 2014, China’s proposed Social Credit System (SCS) has attracted much media attention. Reports have frequently ranged from painting it as an Orwellian nightmare to a dystopian fantasy, with most commentaries viewing the policy purely from the prism of social control.

While the SCS can indeed be located as an initiative in the tradition of Chinese government efforts at maintaining social order and ensuring public compliance of policies, reducing it to merely a surveillance tool doesn’t do justice to the ambitious scope of this initiative.

The SCS is about much more than surveillance and loyalty. It is, in fact, fundamentally linked to the Chinese economy and its transformation to being more market driven. So while nudging persons to adopt desirable behaviour and actions and enhancing social control are all part of the story, there are larger drivers of this policy. Moreover, the implications of the SCS are not just limited to Chinese citizens or within China’s territorial boundaries.

But before we explore each of these aspects, let’s begin by looking at the origin story, as it were, of the SCS.

What is the Social Credit System?

It is important to appreciate that the Chinese SCS isn’t a policy that came to be in 2014. In fact, it has been under discussion and gradual construction for nearly two decades. Early high-level discussions on the SCS date back to the late 1990s.

With the Chinese economy entering a phase of rapid and unprecedented growth, there was a growing realisation of the need to increase credit-based transactions. However, at the time, China lagged behind in terms of formal financial inclusion and lacked basic credit infrastructure, such as ratings agencies, research capacities, record-keeping systems, skilled manpower to assess credit histories, etc.

In order to devise a roadmap to build such structures, the Chinese government, under the instruction of, then Premier, Zhu Rongji, constituted a special research team. Leading the unit was the man who is widely regarded as the father of China’s credit industry: Lin Junyue. In subsequent accounts, he recalls that their assessments led them to conclude that China needed to build a credit system that “serves both the market and government supervision.” “The effect and impact of the social credit system” he further adds “should not be confined to the economic sphere…it also holds major and far-reaching significance for restoring social morality and accelerating the formation of social capital in China.”

It is clear from the above statement that in Chinese official thought processes, the idea of morality and faith-keeping has long been intrinsically linked to the development of the financial credit system.

While work on the country’s financial credit infrastructure gathered pace after 1999, this broad vision was eventually crystalised in the 2014 guidelines on building a Social Credit System, which provided a roadmap until 2020. As per the 2014 plan, one can summarize that the SCS aims to build a network of credit records of members of society – natural and legal persons – and credit infrastructure, raise credit levels in the economy, build legal and regulatory frameworks, innovate social governance, and promote a culture of sincerity, i.e. sincerity in government affairs, commercial activity, social sincerity and judicial action.

The marriage of the social, the economic and the political is evident from the above. Creditworthiness is, therefore, assessed based on a combination financial parameters, compliance of laws and policies,  along with other soft data covering, behaviour, social standing, attitudes and networks.

What drives this policy?

By examining official documents, policy briefs and media reports, one can identify six key drivers of the SCS:

1. Financial Inclusion and Credit Promotion

Financial inclusion essentially implies bringing those at the margins, like rural households and migrant labourers, into the formal banking structure and expand availability.

World Bank data  shows that while roughly 80% of Chinese people have a bank account, credit usage level is extremely low. Chinese consumers and even enterprises have predominantly had a preference for cash transactions. For example, it is estimated that only 10% of all of consumer transactions are done using non-cash methods. Moreover, credit card penetration in the country is around 0.33 per capita – compared to figures from the US where 76 percent of people own at least one credit card. In fact, China’s formal credit use is the lowest among the five BRICS economies.

Apart from individuals/consumers, the goal is to expand the use of formal credit services by Chinese enterprises, particularly small scale and rural enterprises. The SCS through the use of technology, by putting in place systems, reducing risks and making banking accessible wants provide a platform for expanding financial inclusion.

2. Quality Credit

‘Quality’ and ‘formal’ are two crucial adjectives in the larger scheme of things and this begins with good data. But before we bring up good, the primary requirement is sufficient data. In China, the state-controlled Credit Reference Center reportedly has data for roughly 300 million bank account owners, with data for 60 million of these believed to be incomplete. That leaves around 500 million potential bank customers that have no formal credit record. Therefore, one of the goals of the SCS to bring to the table better data. In fact, the State Council itself admits that a “Credit investigation system that covers all of society has not yet been formed and credit records of the members of society are gravely flawed.”

Another important objective is to curb the growth of the shadow banking sector. For years, shadow lending in China has grown faster than formal lending. In November 2017, Moody’s  estimated that China’s shadow banking assets at 82.6% of GDP, i.e. well over $9 trillion, poses a serious threat to the country’s financial stability.

In addition, there is a desire to do a better job at regulating the online lending and payments industry. China has some 770 million internet users, with smartphone penetration of over 90%. This has led to a booming online lending industry, estimated to be over one trillion yuan, which is poorly regulated leading to frequent reports of exploitation and abuse.

3. Boosting Consumption

One of the key structural goals of China’s economic transformation over the past decade has been to boost domestic consumption. The idea is that, as economies in the West slow down, China must rely less on large quantities of exports and more on domestic demand to sustain growth. In order to do that, consumer credit growth is crucial. And the social credit system by building frameworks and updating laws, regulations and enhancing supervision is expected to lead to behavioral changes among consumers who will prefer credit transactions.

4. Commercial Sincerity

Commercial sincerity is among the four cornerstones of the social credit system. This is seen as among the most important elements of building a socialist market economy, where the market decides rewards and punishments for organizations based on how they are functioning. The concept of commercial sincerity touches on a range of issues such as production efficiency, quality failures, compliance with tax policies, environmental regulations, pricing strategies, monopolistic practices, unfair competition, false advertising, violation of contracts and so on. The idea is that the social credit score, i.e. a number that is available openly, will potentially lead to public shaming/blacklisting of companies. This in turn, will impose tangible and reputational costs, weeding out the bad apples, improving compliance and making for a more competitive yet trustworthy marketplace.

5. Enhancing Government Accountability

This is a key pillar of the SCS that differentiates it from previous social control programs. To begin with, It is important to view government accountability in a holistic manner, inclusive of the bureaucracy, police, urban management officials and the judiciary. The aim of the SCS in this context, is to improve governance efficiency and enhance the legitimacy of the Communist Party’s rule. Governance efficiency implies smoother flow of data among ministries and departments, improved oversight over local governments, breaking down networks of local patronage – whether commercial and judicial, better assessment of cadres for promotion, tackling corruption, etc. The seemingly transparent nature of this process, or at least the public blacklisting/targeting of officials along with assessments of their responsiveness to people’s needs is hoped will address public discontent and involve people in governance, challenging the democratic deficit argument and boosting support for the Party.

6. Sculpting Individual Behaviour

This has probably been the most discussed aspect of the system, at least in the international press. Essentially, the goal of the government here is to ensure public compliance with laws and regulations, while inculcating a state-mandated morality. This is to be done by punishing what is seen as bad behaviour through the imposition of tangible and reputational costs while rewarding what is seen as good behaviour by offering fast-tracks, upgrades and such rewards. For instance, an individual can be publicly shamed in blacklists or on giant TV screens in the streets for tax avoidance or violating a judicial order. One can be denied travel services, such as the high-speed train and flights. But if one exhibits desirable behaviour, such as respecting public order offline and online, adhering to court judgments, pay bills in time and so on, they are likely to be rewarded by better commercial offers, faster service at hospitals, smoother bureaucratic processes, etc.

Implementation Progress

Since the issue of the 2014 guideline, there has been steady progress towards building the SCS. However, there is no one path that has been adopted towards constructing a national system. The implementation methodology has been extremely varied and diffused. For instance, an individual’s social credit score is assessed based on his/her legal standing, social, economic, and political attitudes and behaviour. But defining and identifying what behaviour is to be rewarded and what is to be punished requires legal frameworks and regulations to be upgraded constantly. This is an ongoing process, independent yet interconnected to the larger idea of the SCS.

In contrast, pilot projects have a more direct bearing on what would be the final nationwide SCS. These are being done at government, private and sectoral levels, and all of these are, so far, based on voluntary participation. At the government level, around 37 cities from 11 provinces and the municipalities of Shanghai and Beijing are implementing pilot projects. But there isn’t any uniformity or even synchronization in what each of these local governments are doing. Most of them have issued their own guidelines, which define parameters for data collection and assessing credit and outline implementation plans. Each pilot project also has its own points and rewards and punishments systems. For instance, under the Shanghai model people are not yet punished for poor credit scores, whereas under the Rongcheng model everyone’s awarded a fixed set of points to begin with and deductions/additions are made based on an individual’s social actions and compliance with basic laws.

Apart from the government, private players are also likely to play a key role in the final SCS. In 2015, the Chinese government gave approvals to eight private companies, including Tencent Holdings and Alibaba’s Ant Financial, to test systems. These companies essentially recorded and assessed data of all users accessing their platforms and created rewards and punishments programs. Once again, there was no uniform vision in terms of what these programs were to amount to, and each organisation followed its own path. Moreover, the experiment threw up new issues of data privacy, conflicts of interest, quality of data. These concerns led to the People’s Bank of China dropping plans to turn that initial approval into official licenses.

The final set of pilot projects are sector specific. These are essentially priority areas – like healthcare, finance, travel, food safety, polluting industries, tax evasion – where the Chinese government deems it urgent to address issues of reporting and trust to improve resource allocation and address consumer sentiment and ensure legal compliance.

A few other key advancements that have been made are the setting up of a Unified Social Credit Number System to ensure smoother transmission of information among government departments. In the past, different bureaucracies used different schemes to identify legal entities. There has been an effort to harmonize some of these differences, with a shift towards unified standards for red and black lists and even unified numbers to identify natural and legal persons across different bureaucracies.. To facilitate the publicity efforts, two platforms – Credit China and National Enterprise Credit Information Publicity System – have also been set up.

Key Concerns and Challenges

Despite this progress, there is still a lot more to be done before the 2020 deadline, although there is a certain fuzziness about the implications of that deadline. Moreover, before such a plan can be implemented across the country and made mandatory, there are some specific and significant challenges that the government needs to address.

  1. Transparency, privacy and consent: While the currently operational social credit programs are voluntary, the central government eventually does plan make it mandatory. So there isn’t an opt out for individuals or enterprises. This is particularly troubling when private players are involved in collecting all sort of data. Also, there is a lack of transparency in terms of the nature of information being collected and how it’s being evaluated. Individuals don’t necessarily consent to the different kinds of data being gathered and neither do they have control over what information is shared with whom. In addition, the punishments being imposed so far are rather arbitrary and potentially violate basic rights, such as delays in or denial of medical and education services. Lastly, it goes without saying that imposing tangible and reputational costs on individuals for their opinions and associations essentially amounts to building a thought police and deepening surveillance, which is deeply troubling.
  2. Data security and manipulation: Over the course of the past few years, media reports, including in the Chinese press, have discussed the data security threat that SCS faces. In fact, some Chinese reports indicate that there has emerged a black market for data manipulation, whereby hackers claim to have broken into private systems and altered scores. Similarly, there have been reports of hackers accessing and selling data illegally. In this context, it is also important to consider the implications of such actions in smaller towns or rural areas, where local competition and personal vendettas can lead to unfair practices.
  3. Conflict of interest: This is something that has been acknowledged by the government. Most private players who were previously approved to run credit systems are continuing to maintain the systems they’ve built. Alibaba’s Ant Financial recently, was under fire by users for auto-checking users of its app as Sesame Credit members. It remains to be seen how the government plans to leverage private firms, while keeping their clout in check, and mitigates issues of abuse and conflicts of interests.
  4. Fragmented authoritarianism: Can technological advancements allow the central government to address issues of red-tape, lack of trust, bureaucratic fiefdoms and official inertia? This will be among the biggest implementation challenges the SCS will face, particularly considering that it is targeting officials and their networks. There are a range of possibilities that could come to be – from local leaders increasingly at odds with the central government over a loss of autonomy, greater caution weakening decision-making capacity of bureaucrats, deepening of the existing problem of misreporting from local governments – all of which could impede economic activity.
  5. More market or less market: In theory, the SCS aims to improve efficiency of resource allocation by assessing enterprises through data as opposed to arbitrary state influence. While algorithms, on the surface, might reduce government intervention and public rewards and punishments can make companies more efficient in operations and respectful of their social and environmental responsibilities, questions remain about the impact that the system could have on innovative and disruptive businesses. This is key, given that big data is likely to be used to make enterprises compliant of government goals and industrial policy. Moreover, it remains to be seen how foreign companies respond to being asked to comply with the social credit policy.
  6. Relevance of scores: One of the biggest challenges in assessing the SCS is the lack of transparency in terms of the information that goes into calculating scores. For instance, Sesame Credit rates individuals from 350 to 950 points, while the Honest Shanghai APP has ratings of very good, good and bad. It’s unclear what information is used to arrive at these ratings and whether the information used is actually a good indicator of an individual’s creditworthiness or sincerity. For instance, littering or jaywalking is irrelevant to one’s financial stability, as is a failure to live up to norms of filial piety. There are already concerns among banking sector officials in China about the mixing of economic and non-economic criteria while assessing financial credit risks.
  7. Enforcing uniform morality: Adding to the above, context, economic status, age, education, individual personality, among other factors are key determinants of people’s actions. Therefore, an imposition of uniform social norms in a country as large and diverse as China appears to be a counterproductive move. Moreover, state dictated social straitjackets will only curb creativity, vibrancy and innovative thought, while breeding resentment.
  8. New exclusions: One of the goals of the SCS policy is to expand financial inclusion and ensure social harmony. In contrast, the rewards and punishments system has the potential of creating new islands of exclusion. While the punishments might coerce some to check or alter their actions, public shaming, denial of basic rights and essential services and most importantly the lack of an appeals mechanism for deductions in scores could breed deep resentment and threaten social order.

The above analysis offers a window into the progress that has been made in building a nationwide SCS. Clearly, much water needs to flow before such a system can be implemented. Yet there is an assumption in many circles that the government has identified 2020 as the deadline for rolling out a nationwide system. This, in part, can be attributed to the opacity of the Chinese system and in part to a limited reading of the 2014 guideline.

In fact, if one were to examine the guideline, it is clear that the 2020 target is a rather vague one. Consider the following excerpt from the target,

Basically establishing fundamental laws, regulations and standard systems for social credit, basically having completed a credit investigation system covering the entire society with credit information and resource sharing at the basis, basically having completed credit supervision and management systems, having a relatively perfect credit service market system, and giving complete rein to mechanisms to encourage keeping trust and punish breaking trust.

In all likelihood, what we will see by 2020, is a revised plan outlining achievements, a future roadmap harmonising existing systems and possibly a timeline for nationwide implementation.

Before that, however, the government will need to outline ground rules for private players involved in this space. The SCS will be a government-driven but not government-only initiative. Private players bring capital, expertise, infrastructure and capacities, which the state needs to leverage. Moreover, with the expanding reach of Chinese payments systems, e-commerce platforms and social media platforms globally, there is potential overseas influence that private players offer for the Chinese government.

Once implemented nationwide, China is likely to seek to export its SCS in one way or another. Chinese President Xi Jinping has, since the 19th Party Congress, indicated that he is keen to push the China model, which places China to the center of global affairs and expands its role in global and cyber governance. The SCS is likely to be one such Chinese innovation that Beijing will look to export. This, moreover, is not a novel idea or desire. Writing in 2009, Lin Junyue had argued that “The social credit system developed by China should be suitable for application in other developing countries.” The system once built, he added, “should be popularized to the whole world,” benefiting “China’s soft power.”

About the author

Manoj Kewalramani

Manoj Kewalramani is a multimedia journalist based in New Delhi. Over the past 11 years, he has worked with prominent news networks in India and China. His news and editorial work includes field reporting, commissioning and managing assignments and producing shows and documentaries along with formulating and executing digital news strategies. Manoj is an alumnus of Takshashila’s Graduate Certificate in Public Policy. At Takshashila, he curates a weekly brief, Eye on China, which tracks developments in China from an Indian perspective.