China to Introduce Ranking System for all Companies in China

A report published by the Mercator Institute for China Studies (MERICS) in late May provides a detailed look at China’s upcoming “Enterprise Social Credit” policy. The report claims that while this new system will help the Chinese government address many legitimate issues, it will also “facilitate an IT-backed authoritarianism. 

By this point, most people with only a passing interest in China have been astounded by eye-catching headlines like “China wants to give all of its citizens a score.” This policy – which has already been rolled out in several trial cities, assigns citizens a credit score. Good actions, like volunteering in the community or winning a scholastic award, will earn you positive points. Bad actions, like playing video games or running a red light, will lose you points. A better credit rating leads to all kinds of perks, like a fast track visa for Singapore. A negative score could prevent you from traveling abroad or sending your child to certain schools.

The current plan is for a similar social credit system, “Enterprise Social Credit,” to be rolled out for companies by 2020. Using advanced data collection techniques everything, from financial records to adherence to government regulations, will be fed into a processing system, and a score will come out the other side (it is unclear how the processing system will make these calculations). While the policy is still being developed, speculation on rewards include subsidies and preferential access to credit, while punishments could be higher taxes or even being denied access to certain markets.

This new policy will correspond with China’s ambitious industrial plan, “Made in China 2025.”  A major part of “China 2025” is replacing foreign-made technology, especially in key industries, with indigenous Chinese technology. Companies that work in accordance with this, and the Chinese government’s other industrial plans, will be rewarded. Those who fail to follow will be punished.

What does this mean for foreign corporations?

This is particularly significant for foreign firms. As Andrew Browne of the Wall Street Journal explains, certain industries will face increased scrutiny when competing with domestic Chinese firms. The “Enterprise Social Credit” policy will be another way for the Chinese government to promote compliance with its long-term industrial plans.

Since the system requires massive amounts of data, companies may be forced to hand over sensitive data to the government. For foreign companies, there is the fear that the government could, intentionally or unintentionally, leak this technology to their domestic competitors.

Various tinkering and changes to the policy will occur before its eventual rollout. It is still too early to begin developing a response to this other than wait for additional information to be shared by the government.

 

 Grace 150x225   Grace Shi

Grace Shi is a partner at ECOVIS Beijing China. She has over 12 years of experience in accounting, auditing, and tax advisory services in both international accounting firms and large Chinese corporations. She has an international MBA and a US Global Finance Master’s degree. Since 2001, she is a Chinese Certified Public Accountant (CPA) and, since 2002, a Chinese Certified Taxation Agent (CTA). Mrs. Shi is one of the founders of ECOVIS R&G Consulting Ltd. (Beijing). She has perfect skills in written and spoken English and Chinese. For more information, please contact:  grace.shi@ecovis-beijing.com

 

 

 

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