China's Social Credit System

Under the catchphrase “Social Credit System” China is in the process of implementing a new and highly ambitious scheme to monitor, rate, and regulate the behavior of both, Chinese citizens and companies. Although international discussion has focused mainly on the impact of the system on individuals, the core motivation behind the Social Credit System is to more effectively steer the behavior of market participants.

In the MERICS China Monitor “China’s Social Credit System”, MERICS expert Mirjam Meissner argues that big data technology is key to the system. Given the extraordinary speed of digitization in China, she says, the potential for data collection via real-time monitoring is almost unlimited.

The Social Credit System goes far beyond credit rating systems in Europe or the U.S.: The Chinese scheme expands the use of credit ratings to social, environmental, and political areas. Once the system is implemented, probably by 2020, a company will get a lower credit rating if it does not pay back loans on time or does not comply with emissions targets or other government requirements. Possible punishments include unfavorable conditions for new loans, higher taxes, or restrictions to bid for publicly-funded projects.

For international companies operating in China, the Social Credit System poses significant challenges: They will probably be fully integrated into the system’s mechanisms and could see their freedom of decision-making in China significantly constrained. At the same time, the rating system could create a more level playing field, since both domestic and international companies would be subject to the same rating mechanisms.