European companies operating in China have been urged to step up their preparations for the introduction of the country’s social credit system after a report warned that it may cause “substantial and wide-ranging” disruption to their operations.

The report by the EU Chamber of Commerce in China said the system would have an impact beyond the Chinese market and could affect countries involved in Beijing’s flagship Belt and Road Initiative.

Chamber president Joerg Wuttke said the report was an urgent attempt to “knock the blinkers off” about the “impending, all-encompassing technological regulatory system.”

“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 the Corporate Social Credit System could mean life or death for individual companies,” he said.

Facial recognition is just one of the ways social credit schemes in China are already identifying people for things jaywalking or running a red light. The EU Chamber of Commerce now warns aggressive monitoring schemes could impact businesses, as well. (Picture: Thomas Peter/Reuters)

China first announced the plans in 2013 and has a target of fully implementing the social credit system by the end of 2020.

It aims to use advanced data-collection and sharing technology to reward or punish people’s behavior depending on their overall social credit score in an effort to ensure people and business will abide by the rules.

The report said much had been discussed about the system’s implications for individuals, but there had been “far less discussion” about the impact on business.

Wuttke warned “the overwhelming absence of preparation by the European business community is deeply concerning.”

For companies, higher scores meant lower tax rates, better credit conditions, easier market access and more public procurement opportunities, while lower scores led to the opposite and negative ratings could possibly result in sanctions and blacklisting, the report said.

The system covers all aspects of a company’s business in China, regardless of its ownership structure, and is part of a fundamental shift in China’s market access regime.

The report said it would assess companies’ activities through specific regulatory ratings such as tax, customs, environmental protection and product quality.

There will also be a parallel set of compliance records, such as anti-monopoly cases, data transfers, pricing and licensing.

As a result, a multinational company in China will be expected to deal with 30 different ratings and compliance records based on up to 300 requirements.

“A more comprehensive, non-financial credit rating, like the Corporate Social Credit System, is envisaged to counter the current dominance of Western credit-rating companies,” the report said.

According to a report released by the government-backed National Public Credit Information Centre, nearly 3.6 million Chinese enterprises were added to the official creditworthiness blacklist in 2018 and were banned from bidding on projects, accessing security markets, taking part in land auctions and issuing bonds.

The EU chamber report said the corporate social credit system could “in principle” create a more level playing field, since automated data processing and impartial algorithm-based ratings could largely eliminate arbitrary decision-making and regulatory grey areas.

For instance, Wuttke said, it could mean an end to blanket enforcement in areas like environmental protection.

But the report warned that the system had the potential to be used to discriminate against international companies.

It also said the system was far from being fully implemented, data-sharing remained a weakness, the use of big data was yet to reach its full potential and the execution of the sanctioning mechanism was still incomplete.

It said this offered business a short window of opportunity to assess compliance and prepare before the government started a test run of the new regime – something that could happen as early as next month.

Propaganda slogans promote the social credit system in Shandong province. (Picture: Nectar Gan/SCMP)

The report urged companies to identify risks and work with the regulatory authorities to ensure no information about sensitive technology or personal information leaked during the data flow to the authorities.

It also called on the Chinese authorities to set up communication channels with foreign companies to enable them to raise questions and concerns, and suggested there should be a transition period if a company faced sanctions for non-compliance.

The report also noted that the system had already started monitoring the behavior of Chinese companies abroad – particularly those involved in the Belt and Road Initiative – in an attempt to safeguard the country’s interests and reputation.

“Monitoring of European companies’ behavior in other markets, including their cooperation and business relationships with Chinese companies even if they are not present in China, is possible in the future,” it said.

The chamber also called for EU institutions and member states to establish a formal process to improve understanding of the system’s international implications and build a “clear and strong” position on this issue.