What to make of China’s Social Credit System?

In recent weeks, a very well-researched paper on China’s rapidly evolving Social Credit System (SCS) was published by the University of Leiden’s Rogier Creemers. We believe analysis of China’s SCS provides insight into the philosophies of China’s leadership as well as their evolving and innovative methods of effecting control. China’s SCS will ultimately affect just about every Chinese citizen, rendering it an important topic for all global investors to consider.

According to Creemers, early experiments by Chinese counties with an SCS commenced around 2010. One of the most well-reported trials was in the county of Suining in Jiangsu province. Here’s how Creemers describes it:

  • In 2010, Suining introduced a “mass credit” (dazhong xinyong) programme, which measured and scored individual conduct. Citizens were given 1000 credit points to start with. Points could be deducted for infringement of specific legal, administrative and moral norms. For instance, a conviction for drunk driving cost 50 points, having a child without family planning permission cost 35 points, and non-repayment of loans 30 to 50 points. Lost points could be recovered after a period of two to five years, depending on the rule broken and the gravity of the infraction. On the basis of the resulting scores, citizens were categorized from A to D. While A-class citizens would be granted preferential access to employment opportunities, lower-ranked citizens were to face increasing levels of scrutiny when undergoing particular examination requirements.

Interestingly, this system – particularly the A to D categorization – was even criticized by State media at the time. But a seed was clearly planted in the minds of Chinese policymakers.

Around the same time and with the rapidly-increasing adoption of smartphones, Chinese leaders were experiencing something they had not experienced before: numerous rumours and scandals that would rapidly go viral on China’s online social networks. These events started to call into question the trustworthiness of China’s leadership and, in this sense, represented a new form of threat to the Party itself.

In response, China dedicated the 6thPlenum of the 17thParty Congress in 2011 to “culture and ideology”. According to Creemers:

  • The Decision emanating from this plenum called for the construction of a credit system to foster sincerity in society, not only in commercial affairs, but also in matters of social and political morality.

Now, many readers might baulk at the notion of the State monitoring and influencing the “social and political morality” of its citizens. But in China, as Creemers points out: “The close linkage between morality and authority lies at the heart of China’s political tradition.” Indeed, in China, the law is merely a tool to influence the moral sentiments of citizens to maximize social harmony.

The challenge for China’s leadership has always been one of enforcement and compliance. Indeed as the Chinese proverb goes: “The mountains are high and the Emperor is far away.”  But with new forms of technology come new ideas for Party-State enforcement.

In 2014, a blueprint for a comprehensive SCS was published by China’s policymakers. According to Creemers: “This new plan combined the economic aspects of credit, both concerning financial creditworthiness and trust in the market, with the broader initiative to enhance social harmony and discipline government.”

The document did not, however, propose quantitative scoring as an evaluation method; or the use of big data analytics to achieve State objectives. Instead, the “blacklist” concept was effected. In effect: “If trust was broken in one place, restrictions are imposed everywhere.” Examples of blacklist penalties that have since emerged include: restrictions on establishing businesses; on acquiring real estate; on obtaining senior positions at SOEs, in the military and in the Party; and on “conspicuous consumption”. The latter includes restrictions on first class travel on trains and planes, luxury hotels and golf clubs, etcetera. Even Alibaba’s Taoboa and Tmall block blacklisted individuals from making luxury purchases.

Since then, according to Creemers, the Chinese leadership has started to use information technology to: “Transform the manner in which Chinese government authorities manage both state and society, by horizontal and vertical information sharing…” The Chinese government has reportedly started to supplement government data sources with other sources, such as public facial recognition cameras. Furthermore, private sector companies have also started to share certain data with the government, such as the number of blacklisted customers that use ride-sharing app Did Chuxing.

From here, it does not require much imagination to project how powerful such a nationalised SCS could become. And, as Creemers points out, in China: “The Party-State also faces no meaningful legal constraints against its actions per se.” That said, the Chinese leadership does fear national outrage by its citizens. How this plays out is anyone’s guess. But in our digital age of big data and increasingly sophisticated artificial-intelligence, the extent of China’s SCS is something worth monitoring.

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Andrew Macken is Chief Investment Officer with Montaka Global Investments. To learn more about Montaka, please call +612 7202 0100.

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