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Social Credit System explained

by Tom Pattinson
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China has launched a national Social Credit System that takes data from multiple points to create a financial and social rating profile of individuals and companies. Tom Pattinson explains what it is and how it works: 

What is China’s Social Credit System?

Back in 2014, the government of China announced a plan to implement a social credit rating system and started rolling out pilot programmes across the country with aims for national implementation by 2020.

Since that launch there have been many articles, reports and even entire books written about the Orwellian nature of this pervasive system that it is claimed, would be monitoring resident’s social activities, human interactions and online behaviour, as well as their economic habits and spending power.

The basic concept is that data will be collected from multiple public and government sources to create a social profile of an individual citizen. Each individual start with 1,000 points, with points added for being a positive member of society and deducted if they do not contribute as positively.

Why is it needed?

The SCS is a way to show how trustworthy an individual is (or business but more on that later). This will benefit mortgage brokers, insurers and banks who might be looking to loan money or provide credit. It might also show whether a person is a suitable employee, a valuable addition to a team or even a suitable partner for marriage. For many individuals who have lived outside the traditional financial system, it will be a way to access credit, insurance and loans that previously inaccessible to them.

Punishment and reward

The purpose of the SCS is to be able to provide those who contribute positively (for example, pay their bills on time) with rewards, such as better mortgage or insurance rates. Their children might be more readily accepted to better schools and they might be offered better housing. Those with low results might find borrowing money very difficult and could even be restricted from buying air and train tickets. It has been reported that 9 million people have already been barred from buying air tickets due to having a poor social credit rating. Those with higher scores will be able to bypass a lot of the red tape or fees that a person with a lower score might encounter when applying for a loan for example.

Tracking 4 streams

The SCS comprises of four main components that cover ‘administrative affairs, commercial activities, social behaviour and the judicial system.’ There are 30 different ratings, over 300 rating requirements that cover corporate compliance (for businesses) and individual behaviour (for individuals).

1. Administrative affairs

Existing government records (including individual personal records called Dangan that the government holds on individuals, and residency permits known as Hukou) have been traditionally held on paper. As these digitise they allow information on individuals to be found more efficiently.

China’s network of an estimated 170 million CCTV cameras fitted with facial recognition software means that people can be found in minutes and their movements documented.

Hospital and health records, as well as military, employment and information regarding tax payments and social insurances can also be found in this section.

2. Commercial activities

Private companies, especially e-commerce sites have vast amounts of big data and personal data on their customers and shoppers. These enterprises can not only monitor the type of products people buy but their credit ratings or ratings by other buyers and sellers. Chinese companies collect this data in the same way eBay ranks sellers based on their shipping or payment speeds. Western sites like Amazon also have ratings of their customers based on how often they return items.

The Sesame Credit Loyalty System, owned by Ant Financial is a private business owned by Alibaba Group that tracks information on individuals such as their credit card payments, loan repayments and other financial information to create a credit rating in a similar way to companies such as Experian in the UK. Ant Financial has stated that they do not share information with the government without the consent of their customers.

3. Social behaviour

Social behaviour is based on how often they might donate to charity (good) or how often they play computer games online (bad). It is thought that points can be gained from being patriotic online or lost for being critical of the state on social media, chat rooms or other public forums.

It is unclear how much data is being collected but activists say histories of web searches, private messages and even dating history could all be hoovered up in the future.

4. The judicial system

Social behaviour is based on how often they might donate to charity (good) or how often they play computer games online (bad). It is thought that points can be gained from being patriotic online or lost for being critical of the state on social media, chat rooms or other public forums.

It is unclear how much data is being collected but activists say histories of web searches, private messages and even dating history could all be hoovered up in the future.


The data is all joined up
In theory, data collection is easier to access in China than in the West. Mark Tanner of China Skinny says that Chinese people tend to value convenience over privacy. With fewer data privacy laws in China than Europe, it has been easier in the past for organisations and businesses to access and share data. However, the concept of open data is less established in China than the UK, with data sharing between government departments far less common than is generally assumed by many media commentators.

Ant Financial, who currently own Sesame Credit Loyalty System and have 400 million users – the most comprehensive financial and commercial rating system – claim they do not share their data with the government. Whether true or not, without a history of high-street banking that includes direct debits, private credit cards and myriad other financial data that is held by Western financial institutes, there simply isn’t that much data out there. Companies like Ant Financial say that they are ‘consent only’ and won’t share information with third parties.

CBBC’s Mark Hedley also explains that creating a single unified national database represents a massive technical and administrative challenge for the Chinese government. It is far more likely that databases will exist at a provincial, city or event district level. There are also questions as to how willing different departments will be to sharing of sensitive with other government agencies, which is likely to slow the development of a comprehensive SCS system.

The people doesn’t care about privacy

Facial recognition software has been helpful in catching criminals in China but that doesn’t mean the people of China are comfortable with their data being captured and shared. The Ministry of Education recently said it plans to curb the use of facial recognition in schools and universities for monitoring student attention and real-time concentration levels,. “We need to be very careful when it comes to students’ personal information,” said Lei Chaozi, director of science and technology at China’s Ministry of Education. “Don’t collect it if it’s not necessary. And try to collect as little as possible if we have to.”

How this affects businesses

Businesses. as well as individuals, are being given credit scores, which will also have punishments and rewards. Information including court decisions, payroll data, environmental records, copyright violations, even how many employees are members of the Communist Party will grade companies from 1 for excellent to 4 for poor. Lower scores would lead to investigations, the possibility of frozen bank accounts, limitations on local employees’ movement and other punishments.

China’s central economic planning agency announced in September that it had completed a first evaluation of 33 million businesses.

According to a recent EU report, China recently announced the creation of an ‘unreliable entity list’, causing companies to worry that the SCS might be used as a retaliatory tool in international trade disputes. In addition, businesses are also concerned about the vast amount of data demanded of foreign companies, particularly regarding technical details and IP-related information.

And, although as previously mentioned, a unified database does not currently exist, by the end of this year it is expected that the databases will start to join up.

The report states that the Chinese government is currently working together with a consortium of private companies, including Taiji Computer, Huawei, Alibaba, and Tencent, on a national database, which will enable integration of the various local databases. The platform, called Internet+ Monitoring System, is scheduled to go online in the last quarter of 2019. Companies will also receive a Uniform Social Credit Code, which will serve as a unique identifier for businesses and individuals.

Companies will be ranked on every aspect of corporate activity including IP protection and R&D through tax compliance, to public relations and public statements by key managers. Possible penalties for companies with a low credit score include higher inspection rates, targeted audits, a negative impact on approvals, licensing, and government tenders, as well as public shaming and travel restrictions for key personnel.

For companies that commit serious offenses they will be blacklisted, whilst those who have outstanding ratings will be put on a red list. For example, in the first half of 2019 blacklisted companies in China, had a 98.12 percent inspection rate compared to just 0.5 percent of entities on the Red List.

“Foreign businesses are indeed concerned about the reach and impact of the Social Credit System and confusing reports have often exacerbated rather than allayed worries. More importantly, recent changes to data security rules in both China and the EU have led to Catch-22 situation of contradicting regulations and overlapping jurisdictions. Here better coordination and more transparency is urgently needed,” explains CBBC’s Torsten Weller.

Although the positives are expected to outweigh the negatives for companies complying with national laws. Having more joined up databases will reduce red tape throughout the system and also speed up delays causes when trying to operate from province to province.

China has struggled to get companies to follow the law, it has been report that competing government departments have previously allowed violations of various environmental and labour laws in a bid to meet economic targets. It is thought that the business SCS will mean more companies will be forced to adhere to the existing laws that previously have been flouted leading to more positive social and environmental business practices.

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