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Social credit: the next China risk for business

As China recovers from the Covid-19 crisis, the apparatus of the state is about to be devoted to a new form of social control. By the end of 2020, China plans to introduce its national social credit system. For some, this evokes dystopian visions of a surveillance state, monitoring more than one billion people and millions of firms. For others, it promises to harness the latest tech to address China’s massive legal, ethical and business compliance problem. After the Chinese state’s relative success in containing the coronavirus outbreak, it will be emboldened to make its policing of behaviour more permanent. The social credit system’s rewards and punishments seek to enforce “correct” behaviour in people’s everyday lives. For businesses - including thousands of international businesses integrated into Chinese supply chains - compliance within China is about to be monitored in a much more comprehensive way, which generates new risks.

Despite the country’s remarkable economic rise, one of China’s notorious problems has been the massive corruptionthat has accompanied its hybrid state-market model of development. Xi Jinping’s supposed clampdown on corruption has proved popular domestically, but it remains difficult for external observers to measure its success, given China’s opaque legal system. Even if China’s social credit system for business is welcomed domestically to tackle corruption, it will likely be perceived internationally as yet another example of China’s deepening authoritarianism. For critics in the West, it will provide another reason for the world to be afraid.

Indeed, one of the purposes of the new system appears to be to make us afraid. The social credit system is envisaged as a giant reward and punishment system to reward better behaviour, by individuals and by companies. It creates a new binary concept of “trustworthy” versus “untrustworthy”, based on compliance with the law but which could easily be extended to guilt by association or, for that matter, could be undermined by manipulation, human or technical error. It is based on China’s enthusiastic embrace of new tech, from facial recognition to artificial intelligence, but in the absence of transparent checks and balances.

The new national social credit system introduces real-time, online collection of data from multiple sources, all channelled into one giant compliance system to be implemented by the end of 2020. It bundles together data on all the regulations with which businesses must comply, matched against big data collected across the country, and joined into a single, algorithm-generated social credit score. Of course, if a business is fully compliant with every single regulation at all times, there should be no problem, in theory.

Risks arise if a business is found non-compliant and placed on a blacklist. Punishments can include restrictions on trade for the firm, or restrictions on travel or luxury consumption by senior personnel. A significant part of the plan is to “name and shame” firms that are persistently non-compliant with the law. Further, with the new joined-up data, non-compliance in one area can lead to punishments across the firm’s operations. A firm can even theoretically be punished for non-compliance by its business partners or key personnel. Given the challenges of getting businesses in China to abide by even basic rules and regulations, perhaps it will appear to local observers to be reasonable to punish a firm that has consistently flouted, say, food safety or customs regulations. But what if the non-compliance is through no fault of the firm itself, but further along the supply chain? Or what if errors are made in the reporting system, or deliberate falsification of data?

The social credit system could evolve quite quickly and in unexpected ways. For example, during the recovery from the Covid-19 epidemic, firms have suffered social credit penalties for overcrowded workplaces and for not temperature-checking employees, while others have been rewarded for donating or shifting production towards virus prevention efforts. An obvious risk is how foreign firms might be treated if there were a continuing downward spiral in international cooperation or more severe bilateral tensions. For Australia and China, for example, that seems a likely possibility.

Businesses operating in China urgently need to review their management of compliance and reporting, including regularly scanning government sites for errors or problems with data integrity. The system is still in its early days, and there will no doubt be teething problems. Shifting from human relationships with inspectors (which, to be sure, encouraged corruption) to continuous, online monitoring introduces new technical variables that could bring unforeseen consequences. Whether the system will adequately protect confidential information, for example, is yet to be seen. The only recourse will be within the opaque Chinese legal system. It will pay to be alert and keep up to date with how the system evolves.

Ultimately, foreign businesses must abide by the law and all regulations when they operate in foreign countries. But in China, the entire process for how that compliance is measured - and the consequences for infractions - are all about to change. This new technological surveillance system strengthens the hand of the Chinese state. The real issue will be trust in the system of governance and the use, or abuse, of power.

Originally published in The Interpreter, Lowy Institute, July 20, 2020

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