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Sunday, 27 October 2019

China to impose ‘social credit’ system on foreign companies (FT)

Financial Times title: China to impose ‘social credit’ system on foreign companies

FT subtitle: EU chamber of commerce warns over risks from emerging rating framework

Date of publication: 28 August 2019

"Foreign companies operating in China are unprepared for tougher sanctions under a corporate “social credit” system imposed by Beijing, a European business group has warned. 

Chinese regulators from tax officials to customs agents are increasingly rating companies according to compliance with regulations, and sharing “blacklists” of corporations found to have violated rules. 

Beijing plans to combine those ratings into a single database that could be operational by next year, the EU chamber of commerce in China said in a report.  

“The corporate social credit system could mean life or death for individual companies,” said Jörg Wuttke, the chamber’s president. “The overwhelming absence of preparation by the European business community is deeply concerning.”  

Beijing has recently encouraged regulators to jointly sanction companies as it attempts to improve enforcement. For example, a company blacklisted by China’s drug regulator could see an application to operate a securities company rejected by financial officials. 

Government documents show that a variety of Chinese regulators, covering areas from work safety to ecommerce and cyber security, are compiling ratings of companies against up to 300 specific rules, the chamber said.  

Sanctions that can be imposed by regulators depending on compliance include fines, targeted audits, restricted issuance of government approvals and exclusion from preferential policies and public procurement contracts, it added.  

The system primarily aims to improve the enforcement of existing regulations, and in many cases foreign companies could benefit as they often have better compliance in areas such as pollution, the chamber added.  

“European companies that have until now been routinely shut down alongside non-compliant competitors on heavily polluted days should be able to continue production while polluters will see their scores plummet,” it said.  

But in some cases a company could be blacklisted for the actions of a local supplier. In at least one case, a foreign company was informed that its partner’s rating by customs authorities would affect its rating, the chamber said.  

The chamber also highlighted a plan by China’s market regulator, announced last month, to create a list of “heavily distrusted entities” that could be sanctioned for violating sometimes broad criteria such as “endangering national security”. 

The measure could give Beijing more leverage over companies perceived to have violated China’s stance on politically sensitive issues, said Mr Wuttke. “It has the toolbox in the future to being us into line politically,” he said.  

While Beijing has since 2015 assigned new companies a unique code for recording credit scores, and has enlisted tech companies to create a central database of ratings, some analysts say such a system will be slow to emerge.  

“The social credit system is still in its infancy and is unlikely to develop into the fully functional, unified, centrally run system many envision by 2020,” said Michael Cunningham of corporate consultancy Control Risks.  

But the threat of being blacklisted “increases the compliance cost for multinationals in China,” he said, adding that “companies should first strengthen their compliance regimes”. 

Some analysts cautioned that the distrusted entities list was not clearly related to the social credit scheme, which does not currently impose any new burdens on companies  

“The regulatory component of social credit aims to improve enforcement by keeping and sharing records of violations of laws . . . but doesn’t really impose new requirements for business,” said Jeremy Daum, an expert on the system at Yale University."

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