Start of the enforcement of the “Social Credit System”

The National Development and Reform Commission (NDRC) recently announced 169 names of people who will be banned from purchasing train or flight tickets for the upcoming year. According to statements made on the Credit China website which is backed by the NDRC, citizens of the People’s Republic of China were banned because of perpetrating criminal offenses or misdemeanors. This poses the first time that Chinese authorities publish a nationwide list of names, which will be further updated every month. As reported by the Associated Press, in 2018 alone China´s social rating system prevented the purchase of plane tickets 17.5 million times and another 5.5 million times the purchase of train tickets.

Plans for the controversial “Social Credit System” were published by Chinese authorities in 2014

At this time, trial implementations in several provinces started and a roadmap expected the full implementation of the system by 2020. The system aims to create a “culture of sincerity” and thereby strengthen social structures. Proponents argue that it will help eliminate problems such as cheating, counterfeit goods, and food safety issues. However, it remains unclear whether the so-called “social credit system” can be implemented nationwide by 2020. The current situation is that in some provinces the system is run by councils or even private tech platforms which obtain access to personal data. Chinese authorities have announced the first test phase of the “Personal Credit Score” recently. Once implemented, the system will manage the rewards or punishments of citizens on the basis of their economic and personal behavior.

How the algorithm precisely works remain also unclear. Unpaid bills, smoking in high-speed trains or crossing a red traffic light could lead to a deterioration of the rating. Possible consequences besides the travel ban could be a reduced internet connection or difficulties in the labor market. Furthermore, critical voices will find it even more difficult to get heard or to leave China. In 2018, Chinese authorities stopped 138 individuals who had intentions to leave the country but were due to unpaid taxes, not entitled to do that. Experts assume that this figure could soar in the next few years.

Opinions about the upcoming mass monitoring system are widely diverse. Especially educated and wealthy urban Chinese have an overwhelmingly positive viewpoint about the new mass monitoring system. It’s perceived more like a rating for trustworthiness rather than perceived as an instrument of surveillance. The new rating system could have several advantages, particularly in the food industry and in the catering business. Information asymmetries to the detriment of end consumers could be eliminated or reduced and lead to higher competition in the long term.

Further effects could also be seen in the financial sector. Households with a certain score will possibly be able to obtain loans on better terms and conditions, while others could be denied credit altogether.

The international press reacts with divided opinions to the upcoming mass surveillance

Many Western observers describe the total surveillance program as a dismal dystopia. At first glance, the Chinese government wants to use this system to prevent illegal and immoral behavior among citizens and entrepreneurs in order to increase stability and security, but in fact Beijing is also concerned with identifying potential social and political troublemakers at an early stage and setting incentives for compliant behavior. But where does all the surveillance technology suddenly come from? Human right watch reported, that the United States of America supplied a considerable part of surveillance technology to Chinese authorities last year. The same surveillance technology which is also used to suppress ethnic minorities in western china. A company called “Thermo Fisher Scientific”, based in Massachusetts, has supplied the Chinese government with DNA sequencers that it is now using to collect the DNA of ethnic minorities in Xinjiang. According to statements from experts do not all these companies realize for what their technology could be used. A lot of people wanted very much to believe that once China had exposure to the outside world, political liberalization would come with economic liberalization,” said Sophie Richardson, China director at Human Rights Watch.

The system can be seen as an example of China’s “top-level design” approach and is coordinated by the Central Leading Group for Comprehensively Deepening Reforms. The Leading Group’s main task lies in the determination of policy guidelines for different areas of society with the aim of addressing long-term reform issues and supervise the implementation of reform plans such as the “social credit system”.

Whether the new rating system will be successful or not, will largely depend on the fairness and transparency of the rating. Points of criticism are clearly the algorithm’s unknown calculation and its potential for mass population monitoring. It will lead to the question of what kind of society digital mass spying leads to and what can be done about it. Data means power, a power that cannot be perceived haptically and whose dangers are difficult to comprehend. Therefore, it is time to investigate its effects and ultimately decide whether we want to be passive users or active participants.

Richard Hoffmann

Richard Hoffmann is a partner at Ecovis Beijing China. Richard obtained an honors degree in law and worked in Germany, the United States, and China for various prestigious law firms prior to joining Ecovis. In addition to being a member of the board of Ecovis International, he is Supervisor for the China business of several respected German companies and shares his extensive knowledge to students by teaching commercial law in China at SRH Hochschule Heidelberg. He has published more than fifty articles in international magazines, frequently speaks at high profile events in China and abroad and is often invited as a legal expert by international TV stations.
Contact: richard.hoffmann@ecovis-beijing.com

Ecovis Beijing

Ecovis Beijing is the trusted tax and legal advisor to several embassies and official institutions in China. It specializes in mid-sized international companies and is focused on tax & legal advisory, accounting and auditing. If you’re interested in finding out more about tax and legal, don’t hesitate to sign up for our Newsletter, give us a call +86 10-65616609 or contact us directly via service@ecovis-beijing.com.