Explaining the Impact of China’s Social Credit System (SCS) on Foreign Companies

The Chinese government has started social credit system (SCS) to companies operating in China. Numerous rumors are hovering around regarding SCS’s system. So, we thought it is a good idea to explain this system and how it may impact the foreign companies operating in China. Beijing is suggesting that drafting SCS would also open up more sectors for foreign investment and strive, in broad strokes to protect the “legitimate rights and interests” of foreign firms.

Social Credit System (SCS) of China
The corporate social credit system would cover all aspects of a company’s business in China. This sweeping new system is designed to reward and punish companies for their corporate behavior and how the companies approach anti-corruption compliance with the government’s requirements. A good rating will lead to rewards and a negative performance will mean sanctions. When the system is fully implemented, a large global company with a significant presence in China has to deal with about 30 different ratings and compliance records based on about 300 requirements. The SCS will take into account the following aspects of a foreign company-

  • Tax
  • Customs
  • Environmental Protection
  • Product Quality

Foreign businesses worry that because of the growing trade tension between Washington and Beijing, Chinese authorities may try to glosses over details social credit system (SCS) and that vague language leaves room for broad interpretation. While the impending step-up in scrutiny is likely to catch some companies off guard, it is not necessarily a surprising development, given that, when China published the road map for the social credit system in 2014, it made clear that corporations would be part of it.

Government documents show that a variety of Chinese regulators, covering areas from work safety to ecommerce and cybersecurity, are compiling ratings of companies operating in China. “It is a very, very potent instrument of regulating, controlling and steering companies in a targeted way,” Bjoern Conrad, chief executive officer of Sinolytics, a consulting firm that helped draft the report, told reporters.

Companies’ behavior will be continually monitored, with scores being adjusted accordingly. If businesses fail to clearly grasp all aspects of the System and what they need to do to comply, they risk serious repercussions like sanctions or even blacklisting.

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