China’s social credit system for business creates new and complex headaches for EU trade officials

Ryan Swift

On his maiden trip to China as the incoming European Commission’s trade commissioner this week, Phil Hogan has prioritised advancing talks on a bilateral investment treaty that have dragged on for six years. However, those familiar with the negotiations say that a major sticking point has emerged that did not exist in 2013: China’s corporate social credit system.

An offshoot of the much-discussed social credit system for individuals, the loosely defined and poorly understood scorecard for businesses in China – according to a recent report by the European Union Chamber of Commerce in China – is now a major irritant for international business and trade officials, as it nears implementation.

Of concern to businesses is that the system could potentially be used to penalise foreign firms or their staff who have spoken out on issues deemed off limits in China, such as the protests in Hong Kong or the persecution of Uygurs in Xinjiang.

And Wolfgang Niedermark of the German Chamber of Commerce in Hong Kong and Dr Martin Wansleben, chief executive of the Association of German Chambers of Commerce and Industry, both agreed that the incoming corporate social credit system is creating problems for the proposed bilateral investment treaty.

We are really not happy with the situation because we are somehow lost. The Chinese authorities cannot simply expose it to us and not explain [it], and we don’t have a basis for planning

Wolfgang Niedermark

“We are really not happy with the situation because we are somehow lost,” said Niedermark. “The Chinese authorities cannot simply expose it to us and not explain [it], and we don’t have a basis for planning. What we want to see, at least, is that there is no discrimination between Chinese companies, private companies and foreign companies.”

The corporate version, which will require companies to report enormous amounts of data to Chinese officials including information on their business partners, has largely flown below the radar with most of the attention focused on the social credit system for Chinese individuals.

But according to the European Union Chamber of Commerce, China may be just replacing its “hard market access constraints” such as joint venture requirements, with the corporate social credit system, which is “emerging in the background to enhance the government's ability to control companies' behaviour”.

The social credit system could allow the Chinese government to act using “extraterritoriality” in pushing for compliance with Beijing’s rules on communications outside China’s borders, said Jason Wright, founder of Hong Kong-based intelligence firm Argo Associates, who has been fielding a growing number of queries from clients worried about the system and its potential effect on freedom of expression.

“The scope of the system is highly complex – it’s hard to find out how many documents actually govern the system. There is no social credit law [and so] it’s highly elusive to Western actors in China,” said Katja Drinhausen, who researches Chinese law and policy for the Mercator Institute for China Studies in Berlin.

It is no exaggeration to say that the corporate social credit system will be the most comprehensive system created by any government to impose a self-regulating marketplace, nor is it inconceivable that it could mean life or death for individual companies

Joerg Wuttke

The European Union and China entered into negotiations over investment as Chinese purchases of German hi-tech firms raised concerns among German business groups over the lack of access to the Chinese market. Wansleben said the German government wanted progress on the stalled talks by September 2020, when the European Union and China are due to hold a summit in Leipzig, during Germany’s turn as president of the world's largest trading bloc.

Some of Germany’s biggest companies, including Volkswagen, BASF and Siemens, are heavily invested in China, and China is Germany’s largest trading partner, with US$221.5 billion in goods traded, according to the German Federal Statistical Office.

Set for full implementation by the end of 2020, the corporate social credit system will use real-time monitoring and processing systems to collect and interpret big data, according to the European Union Chamber of Commerce report. Companies with good scores can expect to enjoy lower tax rates, better credit conditions, easier market access and more procurement opportunities.

“Lower scores lead to the opposite, and can even result in blacklisting,” warned the report.

European Chamber of Commerce in China president Joerg Wuttke. Photo: EPA

Chamber president Joerg Wuttke wrote that “it is no exaggeration to say that the corporate social credit system will be the most comprehensive system created by any government to impose a self-regulating marketplace, nor is it inconceivable that it could mean life or death for individual companies”.

Anne Ruth Herkes, a former state secretary who led German global trade policy, described the system as “something that is totally in contravention to the principle of individual freedom, freedom of movement, and protection of your privacy – there's no way to take the demon out of that dimension”.

Asked about the ongoing bilateral investment treaty discussions between the European Union and China, Herkes said “it is a true issue … a true problem”.

Just because it’s data [that is being gathered], it does not mean the system is immune to corruption or manipulation. A lot of decisions will still be human

Katja Drinhausen

A spokesman for the European Union’s Beijing mission said it “welcomed the recent work” of the chamber on the corporate social credit system “in identifying matters of business concern related to this issue and understand that it was also news for many foreign companies”.

Of concern to businesses is that the system could potentially be used to penalise foreign firms or their staff who have spoken out on issues deemed off limits in China.

“Where it becomes more complex is the social behavioural aspect of the social credit system, because companies are also expected to be what the Chinese would define as ‘model corporate citizens’,” added Wright.

“The situation in Hong Kong shows where that can be problematic for foreign companies because if they have a certain commitment to human rights, or at least allowing employees to voice their opinions – even outside of China – then they could be marked down on their credit score in China, which does seem to be discriminatory against foreign as opposed to domestic companies.”

It comes at a time when China is increasingly prickly about how it is viewed on the international stage, as demonstrated by the National Basketball Association (NBA) crisis in October, when Houston Rockets general manager Daryl Morey tweeted in support of Hong Kong’s protesters.

The resulting backlash in China, the NBA’s leading growth market, forced players and team owners to distance themselves from Morey’s tweet, in turn earning rebukes from US fans and politicians accusing the league of kowtowing to China.

“Just because it’s data [that is being gathered], it does not mean the system is immune to corruption or manipulation. A lot of decisions will still be human,” said Drinhausen of the Mercator Institute.

Clete Willems, who was deputy director of the US National Economic Council until April, said that the social credit system is unlikely to be raised in the current US-China trade talks, but is “something that the US and China and the international community are going to have to confront” over the longer term.

There's a lot of misunderstanding of the system. For example, I think it will help China's business to avoid losses

Wang Huiyao

“I think there's a growing concern in the US with China's social credit rating for corporations, that US companies are really going to have to toe the party line if they want to do business in China. And that's a big problem,” said Willems, who was a key negotiator in early trade-war talks with China.

He noted that the system could require US companies to adhere to Chinese Communist Party policy, which he said is “incompatible” with international trade norms.

The Chinese government is reported to be establishing a database to integrate private and government data on companies, in collaboration with technology companies including Taiji Computer, Huawei, Alibaba, Tencent and VisionVera. The plan is to replace the foreign investment law, due to be implemented in January 2020, with this overarching system. Alibaba is the owner of the South China Morning Post.

As it develops, trade and investment deals may only become harder to achieve, as China’s ruling Communist Party tries to fulfil a key part in its policy of mass social engineering.

The system may escape unchallenged at the World Trade Organisation (WTO), which has a general exceptions clause for member countries to take action for “public morals” reasons. Indeed, in a 2001 case, the WTO essentially upheld China’s right to censor, provided it did so in an indiscriminate fashion.

“China has successfully invoked the clause in some cases, including the publications and audiovisual products case in which even the US conceded that they would not challenge China's censorship regime,” said Henry Gao, associate professor of trade law at Singapore Management University.

However, it will certainly add a layer of complexity to bilateral and regional talks, drawing modern negotiations even further from conventional issues like tariffs.

“The corporate social credit system is emblematic of an emerging wave of new issues which are significantly complicating trade policy because they force negotiators to address a range of issues which are far beyond the traditional purview of trade,” said Stephen Olson, research fellow at the Hinrich Foundation and a former trade negotiator for the US government.

Olson also cited the growth of dual business and military use goods due to technological advancements as modern complications to trade talks.

More sympathetic analysts of the social credit system see it as a way for China to bypass the ratings agency models of the West, comparable to the societal leapfrogging of fixed landline telephones by mobile phones or of the credit card by digital payments.

“There's a lot of misunderstanding of the system. For example, I think it will help China's business to avoid losses,” said Wang Huiyao, president of the Centre for China and Globalisation think tank in Beijing. “If China has a better system of managing its society, I don't see how that has become a target of criticism from Western countries.”

However, in a detailed report for the Australian Strategic Policy Institute, Dr Samantha Hoffman cited China’s censoring of dozens of airlines for “serious dishonesty” after they listed Hong Kong, Macau and Taiwan as separate countries on their websites as an example of how the system could be deployed.

Foreign airlines have been ordered to respect China’s territorial claims and not give the impression that Taiwan, Hong Kong and Macau are independent territories, with the airlines quickly changing the designations on their websites to protect their business in China.

“The goals aren’t credit ratings like those done by Standard & Poor’s or Moody’s, but are instead about ensuring state security,” Hoffman wrote. “State security here, though, is not the simple protection of domestic and foreign security. It’s also about protecting the Chinese Communist Party and securing the ideological space both inside and outside the party. That task transcends geographical borders.”

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