China’s Social Credit System – A Revolution in the Market Regulation?

China’s Social Credit System is a big data-enabled toolkit for constant monitoring of all market participants in respect to compliance with laws and rules. Its core concept is the self-restriction of economic actors. Based on massive data collection, ratings are generated for each market participant. These ratings are publicly available and can result in rewards or penalties from the government. This system is expected to be fully functioning by 2020.

Is this system going to contribute to the evolution of a competitive economic pattern in China? The answer to this question remains unclear. Firstly, proprietary data might be misused by the Chinese government entities. Furthermore, the system could be vulnerable to errors due to the immature technology. As a result, compliant and ethically responsible companies might accidentally receive low ratings. Some other potential threats increase the risks of economic damages, such as the highly intransparent credit rating process. However, if the system succeeds, it has a potential of becoming the most sophisticated model for IT-fueled and big data-enabled market regulation.

To foreign companies, this new development poses completely new challenges as international entities will also be fully integrated into China’s social credit system. International companies have to be aware of the risk to be forced into making economically unreasonable investments – with the sole purpose of “looking good” in the rating database. Furthermore, the system might turn out to become an additional tool for discrimination of foreign companies in favor of domestic firms. Last but not least, foreign companies in China raise concerns regarding data security, including the risk of data theft and the pressure to disclose sensitive data.

International companies have to take the implementation of the Social Credit System very seriously. It is advisable to develop a deep understanding of its conception and mechanisms, as well as to analyze the foreseeable impact on the operations in China.


Picture: Reuters

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