China is a great choice for any business looking to expand its influence. The country’s rapidly growing economy and large number of opportunities make it so that many different businesses can thrive there.
Before expanding, though, businesses need to learn the ins and outs of China’s social credit system (SCS). The social credit system was designed to make sure individuals and businesses in China comply with the country’s laws and regulations.
To help businesses learn more about this system, we’ve put together a guide to the SCS and what it means for businesses.
Key Takeaways:
- China’s social credit system gives individuals, businesses, and government entities a credit score based on their trustworthiness.
- A bad credit score will have penalties like reduced access to credit and fewer business opportunities.
- Corporations looking to fix a bad credit score will have to submit an application to do so.
China’s Social Credit System Explained
The People’s Republic of China created the social credit system to function as a unified record system that measures businesses, individuals, and government entities to evaluate their trustworthiness.
The goal of the social credit system is to regulate social behavior and ensure that those being documented remain “trustworthy” through actions like paying bills on time, abiding by the law, and reporting financial data accurately.
How Does the Social Credit System Work?
The People’s Bank of China and the Chinese government compile data about individuals and businesses through various mediums, including financial and government records and online credit platforms. This data is then analyzed, and each individual, business, and government entity is given a social credit score.
Those with a good social credit score are considered trustworthy and are given perks such as waived rent deposits, tax breaks, work promotions, or cheaper fares for public transportation. Those with a bad social credit score are penalized with things like loan denials, restricted travel, or public shaming.
For citizens, “good” actions could be things like donating blood or donating to charity, while “bad” actions could be things like drunk driving.
For businesses, “good” actions could include timely payments, donating to charity, or getting good reviews from customers and business partners; bad actions would include missed payments, employee disputes, or labor law violations.
Social Credit System Pros and Cons
The SCS has been scrutinized worldwide, with critics saying it is Orwellian or too reminiscent of a science fiction novel. However, others praise the system as a way to maintain fairness and social order.
Pros of the social credit system:
- Holds citizens and companies accountable
- Could increase safety in China
- Motivates people and businesses to do good deeds
Cons of the social credit system:
- Some may consider video monitoring and surveillance an invasive practice
- Algorithm miscalculations or scoring mistakes could see people unfairly penalized
Are Foreigners Impacted by the Social Credit System?
As far as ranking individuals, the SCS is only concerned with Chinese citizens. That means that those visiting the country won’t need to worry about their social credit score while they’re visiting. You’ll only need to pay attention to your score if you arrive with a visa and intent to work.
For corporations, though, just doing business in China gets you a social credit score. Businesses that are based in or operate in China (no matter where they’re based) will have a corporate social credit score based on factors like tax payments, debt payments, customer reviews, and reviews from business partners.
What Is the Purpose of the Chinese Social Credit System?
To put it simply: The SCS aims to make sure the people and businesses living or operating in China are compliant with the rules and regulations that are in place there. By imposing rewards for compliance and penalties for noncompliance, the system aims to stretch beyond suggested codes of conduct and enforce actual rules with consequences.
How Does the Social Credit System Impact Businesses?
Businesses that operate under the social credit system — including permanent establishments — are held to a high standard. Companies that are late on or miss tax or loan payments, have employment disputes, don’t meet product quality standards, or don’t have proper licensing will have a poor social credit score.
Businesses are also responsible for who they conduct business with. For example, a company in good standing will still be penalized if it conducts business with a business that has been penalized.
What To Know if You’re Expanding into China
Related: Hiring Employees in China: 3 Options for Global Employers
Businesses expanding into China need to be prepared to meet the country’s compliance regulations before hiring or operating. Those who don’t will face penalties for any infractions. So before you expand, you’ll want to read up on tax laws, employment laws, labor laws, and other legal requirements. A compliance partner can help you navigate these legal requirements and keep your social credit score high.
Find more information on employment, payroll, and taxes in China here.
How To Check Your Corporate Social Credit Score
Companies can check their corporate credit scores using the National Enterprise Credit Information Publicity System (NECIPS) or CreditChina.
Using CreditChina to Check Your Score:
CreditChina is a more user-friendly database where you can see your business’s basic information and any administrative penalties, tax hiccups, unpaid wages, or payment defaults you’re being faulted for.
- Step 1: Navigate to the CreditChina homepage.
- Step 2: Navigate to the “Credit” tab (the first one).
- Step 3: Input your business name or code.
Using the NECIPS to Check Your Score:
The NECIPS provides a more comprehensive overview of your company’s score but is less user-friendly than CreditChina.
- Step 1: Navigate to the NECIPS homepage.
- Step 2: Input your business name or code.
How To Fix Your Social Credit Score
Fixing your credit score isn’t as easy as rectifying the problem and having your score automatically rise — which is why it’s best to have a compliance partner on your side. Some more serious infractions like threats to public safety or serious crimes can’t be erased from your record.
Others, though, can. Once you’ve rectified the problem through actions like cutting off a supplier that is in bad standing or making up for any lost payments, you can apply to have your credit score fixed. Less serious infractions will be easier to fix, while more serious ones will require a lengthier process.
Don’t Get Caught Unawares
Most likely, you won’t purposefully get penalized. But you might violate regulations without even realizing it. That’s just another reason why having a globalization partner on your side can help keep your business in good standing. If you’re expanding into China, let Velocity Global help take care of the logistics. Contact us to learn how we can help you build your team in China.
