by Susan Ning    Wu Han

  1. Background

On July 9, 2019, the General Office of the State Council issued the Guiding Opinions on Accelerating the Construction of a Social Credit System and Building up a New Credit-Based Regulatory Mechanism (the “Guiding Opinions “), for the purposes of strengthening regulatory capabilities, improving the market order, optimizing the business environment and promoting high-quality development[1]. The Guiding Opinions establishes a new regulatory mechanism, linking up all ex ante, interim and ex post regulatory stages. It also strengthens a new regulatory mechanism supported by “Internet + Regulation” model for the development of credit-based supervision. Specifically, the new credit-based regulatory mechanism includes:

Link Regulatory Mechanism Responsible Authorities
Ex ante Establishing and improving the credit commitment system. Carried out by local authorities according to their respective duties.
Exploring to carry out pre-access integrity education for operators. Carried out by local authorities according to their respective duties.
Expanding the application of credit reports. Led by the National Development and Reform Commission (“NDRC”) and the People’s Bank of China, with local authorities taking their respective responsibilities.
Interim Establishing credit records for market players in all respects. All authorities of each region should, ex officio, be respectively in charge of; NDRC and the State Administration for Market Regulation (“SAMR”) shall take charge thereof.
Establishing and improving the mechanism for voluntary registration of credit information. Led by NDRC, with all authorities taking their respective responsibilities
Carrying out comprehensive evaluation of public credit. Led by NDRC, with all authorities taking their respective responsibilities
Promoting graded and categorized regulation of credit. Carried out by local authorities according to their respective duties.
Ex post Improving the mechanism for identifying dishonest persons subject to joint punishments. Undertaken by local authorities based on their respective responsibilities.
Urging dishonest market players to make rectification within a prescribed time limit. Undertaken by local authorities based on their respective responsibilities.
Carrying out the joint punishment against dishonesty. Led by NDRC, with all authorities taking their respective responsibilities
Implementing market and industry access prohibition measures in accordance with laws and regulations. Led by NDRC, with all authorities taking their respective responsibilities
Pursuing liability for illegal acts and dishonest acts pursuant to the law. Carried out by local authorities according to their respective duties.
Exploring the establishment of a credit repair mechanism. Led by NDRC, with all authorities taking their respective responsibilities

 

Many sectors are engaged in the social credit system, and the establishments of the regulatory mechanism for industries and regions are ongoing.

We have selected several key systems that may have significant impacts on enterprises (marked above by “*”), i.e. the system of comprehensive evaluation of public credit, the system of graded and categorized regulation of credit, the system of dishonesty list, and the “Internet + Regulation”Model which provides important support for credit-based regulation.

This article will try to analyze how these systems may operate in the future, assess the impact they may have on business operations, and provide suggestions for enterprises to guard against compliance risks under the credit-based regulatory system.

  1. General Introduction

 

  • Which institutions would be mainly responsible for the social credit system?

According to the Guiding Opinions, credit regulators include relevant regulatory authorities in various sectors of the central and regional governments. In relation to some key systems and issues, the NDRC, the SAMR and the People’s Bank of China may take the lead.

  • Do all enterprises need to consider the provisions of new credit-based regulation?

We kindly suggest that all enterprises consider and evaluate the requirements of the new credit-based regulation.

Firstly, the new credit-based regulatory mechanism involves a wide range of industries, sectors and regions. Some key systems of the mechanism may cover all market entities. For example, according to the Guiding Opinions, related government agencies should accurately and comprehensively record the credit-related acts of all market players, and file records of dishonest behaviors. Moreover, the Guiding Opinions also requires the NDRC to lead a comprehensive evaluation of public credit covering all market players. For these systems, an opt-out choice may not be available for enterprises.

Secondly, the new credit-based regulatory mechanism may have an extensive influence on enterprises. The credit records and evaluation results would lead to a cross-region, cross-industry, and cross-sector influence through the comprehensive credit record, the sharing and publicity of credit evaluation, and expanded application of credit report in market activities, etc.

Finally, the new credit-based regulatory mechanism strengthens credibility incentive, increases the cost of dishonesty through the systems of graded and categorized regulation of credit, credit commitment and identifies dishonest persons subject to joint punishments, etc. Enterprises with good credit records and those with illegal or dishonest conduct may be faced with significant differences in regulatory intensity and market conditions.

Therefore, we kindly suggest that all enterprises evaluate and consider the requirements of the new credit-based regulation, and actively participate in and take advantage of the mechanism.

  1. The System of Comprehensive Evaluation of Public Credit.

The comprehensive evaluation of public credit is a system that conducts credit rating through the integration of all kinds of information[2]. It is one of the key systems in the Guiding Opinions, and the evaluation results serve as the important basis for graded and categorized regulation of credit.

  • What information would be collected by regulators for comprehensive evaluation of public credit?

For the purpose of carrying out comprehensive public credit evaluation, regulators may collect credit information, including judicial complaints and other judicial litigation-related information, default and dishonest acts in market activities, illegal or irregular operation, qualification and permit of enterprises, honor and reward of enterprises, social responsibility performance, credit ratings by regulatory authorities and by third parties[3].

The above information may be collected from[4]:

  • Public credit information collected by the national credit information sharing platform;
  • Credit information publicized by government departments and industry associations;
  • Major discredit information disclosed on the Internet and intervened by the authorities.

It should be noted that the credit information disclosed on Credit China[5] is only part of the information collected by the National Credit Information Sharing Platform (the “Platform”). The public credit information that has not been publicized but already been integrated into the Platform may also be considered in the comprehensive evaluation of public credit.

  • What are the results of the comprehensive evaluation of public credits and how would they be calculated?

Enterprises will be rated as “Excellent,” “Good,” “Medium” or “Bad.” However, the details of the evaluation are not clear yet.

By the end of July, the NDRC had organized the National Public Credit Information Center and third-party institutions to conduct comprehensive evaluation of public credit over 33 million enterprises. An enterprise would be more likely rated as “Bad” if it has conducted a serious dishonest act, serious tax-related offence, serious dishonest act in statistics or other fields, or if it has multiple administrative penalty records, illegal or irregular records, or negative or dishonest credit records in the past one year[6].

It is worth noting that several issues that enterprises may concern more about, such as the quantification of credit information, the weight of different categories of credit information, and the calculation of the final ratings, are still ambiguous.

  • How will the results of comprehensive evaluation of public credit be used?

The comprehensive evaluation results of public credit may be disclosed to the public or be used for further inquiries. It may also provide reference for the governments to implement graded and categorized regulations, and affect enterprises’ market activities, such as loan and financing.

Firstly, some public credit evaluation results would be disclosed on Credit China. Currently, Credit China would publicize the list of enterprises who were rated as “Excellent” and who were rated as “Bad” consecutively twice. Other rating results will be gradually opened up for self-query[7].

Secondly, the evaluation results would provide reference for the governments to implement graded and categorized regulation. The lists of enterprises who were rated as “Good,” “Medium,” or “Bad” once, though were not made public to the society on Credit China, would be shared within the governments[8] to provide reference for implementing graded and categorized regulation.

Thirdly, the results would also be provided for financial institutions, industry associations and chambers of commerce[9], thus may affect enterprises’ market activities. For example, when enterprises apply for loan or financing, the financial institutions may take the evaluation results into account in deciding credit lines.

  1. The System of Graded and Categorized Regulation of Credit

The graded and categorized regulation of credit is an important system to strengthen the interim credit regulation. In accordance with the system, the authorities would carry out hierarchical classification of the regulated enterprises on the basis of public credit-related comprehensive evaluation results and industry credit-related evaluation results, etc., and take differentiated regulatory measures on the basis of the credit ratings[10].

  • Is the result of comprehensive evaluation of public credit the only basis for graded and categorized regulation of credit?

Although public credit comprehensive evaluation provides an important basis for graded and categorized regulation, it is not the only one.

In addition to the comprehensive evaluation of public credit, the results of industry credit evaluation and third-party credit evaluation (including credit service agencies, and industry associations and chambers of commerce)[11] would also be considered in implementing graded and categorized regulation of credit. For example, the tax-related credit rating conducted by the State Administration of Taxation is also part of the industry credit evaluations. The third-party credit evaluations include the credit evaluation conducted by the industry association and chamber of commerce, and by the authorized credit service agencies[12]. Different from comprehensive evaluation of public credit, third-party credit evaluation is a market-oriented credit service[13], and enterprises may have more autonomy in choosing whether to carry out relevant credit evaluation.

  • Will the graded and categorized regulation of credit increase the burden on enterprises?

Although the graded and categorized regulation of credit may further burden dishonest enterprises, it would also help reduce the operating costs of those enterprises with good credit standing.

The system is not a pure punishment guideline for dishonesty, but a differentiated supervision based on credit evaluation results. For example, regulatory authorities would use the credit rating as a reference for the proportion and frequency of random inspection[14], i.e. for market players with good credit records, the proportion and frequency of random inspections may be reasonably reduced, while for market players who have committed illegal or dishonest conducts, the proportion and frequency of random inspections may be increased appropriately. Taking customs credit supervision as an example, in 2018, the customs inspection rate of import and export goods of advanced certified enterprises was about 0.52%, which was 80% lower than that of general credit enterprises, while the inspection rate of dishonest enterprises was nearly 100%[15].

  1. Dishonesty List System

 

Dishonesty lists mainly include the list of targets with seriously illegal and dishonest acts, and the list of targets subject to joint punishments for dishonesty. The lists of targets with seriously illegal and dishonest acts[16] are publicized by the SAMR in the National Enterprise Credit Information Publicity System[17]. While the lists of targets subject to joint punishments for dishonesty are composed of enterprises that are not only subject to the punishments in certain sector, but also subject to the joint punishment measures stipulated in the Memorandum of Cooperation on Implementing Joint Punishment for Dishonesty[18], due to their serious dishonest acts. Several lists of targets have been announced on Credit China monthly[19].

  • What consequences will enterprises be faced with if they are included in the dishonesty list?

The inclusion of enterprises in the dishonesty lists not only will expose enterprises to dishonesty punishments, but also may subject their legal representatives and/or the key person-in-charge to dishonesty punishments.

Specifically, enterprises listed in the relevant dishonesty list may be faced with:

  • restricted or prohibited access to the market or the industry;
  • special supervision and increased governmental inspections;
  • deprivation of the honorary title already granted, and disqualification for prospective preferential policies;
  • disqualification for certain product certificate[20];
  • restricted access to government-supplied land[21];
  • restricted participation in government procurement within a certain period of time[22];
  • Suspension of examination and approval of science and technology projects[23];
  • Restriction in obtaining a product permit or qualification for franchise[24].

Moreover, the legal representatives or key person-in-charge of the enterprises may be subject to punishments for dishonesty, such as having the licensed pharmacist registration certificate revoked[25], being disqualified as legal representatives or person-in-charge of other enterprises, or being prohibited from engaging in the production operation activities of relevant industries during the statutory period[26].

  • How should enterprises respond to the inclusion of the dishonest list(s)?

Provided that an enterprise is included in the dishonest list(s), it is recommended to take corresponding credit repair measures immediately, including making a credit commitment, completing credit rectification, passing a credit check, accepting special trainings, submitting a credit report, participating in public welfare activities or otherwise. If the credit repair system is inapplicable, the enterprise is also recommended to improve compliance of the company and avoid the same mistakes after the removal of joint disciplinary measures.

Nowadays, the SAMR has stipulated the credit repair system in Chapter VI of the Administrative Measures for the List of Targets with Seriously Illegal and Dishonest Acts (Exposure Draft for Revision). The Guidelines and some other relevant information may also be found on Credit China[27]. However, a further exploration and clearer guidance on credit repair system are still in need.

It is also worth noting that the credit repair system might be inapplicable if enterprises have committed a particular serious illegal or dishonest act, i.e., they could not be removed from the dishonesty lists, exempted from joint punishment measures, or deleted from the public dishonest records within the statutory period[28].

  1. “Internet + Regulation” as One of the Supporting Guarantees for Credit-Based Regulation.

 

  • How will the “Internet + Regulation” system affect the credit supervision of enterprises?

The increased proportion of non-contact supervision under the “Internet + Regulation” system would help establish the early warning mechanism, and enable regulatory authorities to identify the signs and clues of risks in advance.

The Guiding Opinions has encouraged regulatory authorities to improve the efficiency of law enforcement and supervision through the Internet of Things, Video Internet and other non-contact supervision methods[29]. On the one hand, increasing proportion of non-contact supervision and decreasing onsite supervision would help reduce disturbance to enterprises. On the other hand, perfunctorily creating a compliant illusion during inspections would be no longer feasible since enterprises would be less sensitive to non-contact supervision. Therefore, enterprises are forced to enhance their compliances in daily operations.

Moreover, compared with the traditional inspecting measures, the adoption of big data enhances authorities’ abilities in predicting future risks through information monitoring, online evidence preservation, online identification, source tracing, etc. Regulatory authorities not only would punish enterprises for their illegal behaviors that have already occurred, but also provide warnings to enterprises about their future risks of illegal or irregular behaviors. In other words, in addition to meeting the minimal legality and compliance requirements, enterprises need to further improve compliance and decrease risks of illegality.

  1. Compliance Suggestions for Enterprises

The emerging of new credit-based regulatory mechanism is an opportunity as well as a challenge for enterprises. We hereby provide compliance suggestions for enterprise as the following:

  • Firstly, the new credit-based regulatory mechanism is still developing and it is expected that a large number of laws and regulations would be issued and come into effect in the near future. Therefore, it would be necessary and beneficial for enterprises to establish a dynamic law library which includes comprehensive laws and regulations, and pay close attention to the latest development.
  • Secondly, the new credit-based regulatory mechanism emphasizes the sharing and publicity of credit information. Enterprises may need to balance between protecting their information and complying with regulatory requirements. Therefore, enterprises may need to pay close attention to their information in the public area, and timely correct or delete error information. Meanwhile, enterprise may liaise with competent authorities if they believe certain information is inappropriately publicized.
  • Thirdly, enterprise may need to prevent risks of dishonesty in advance considering the significantly increasing cost of dishonesty under the new credit-based regulatory mechanism. If any dishonest act has been committed, it would be better to rectify dishonest or illegal act via credit repair system timely and accordingly.
  • Fourthly, enterprises may need to conduct lawful and compliant routine operations in the face of “Internet + Regulation,” which would substantially increase the regulatory efficiencies and accuracies of the competent authorities.

[1] Chapter I of the Guiding Opinions.

[2] Chapter III, Article 6 of the Guiding Opinions.

[3]  Please see https://www.creditchina.gov.cn/xinxigongshi/strqqy/201901/t20190107_142922.html

[4]  Please see, https://www.creditchina.gov.cn/xinxigongshi/strqqy/201901/t20190107_142922.html

[5] CREDITCHINA.GOV.CN, the portal website of the National Credit Information Sharing Platform, mainly functions as a platform to make credit information public to the society under the Social Credit System.

[6]  Please see, https://www.creditchina.gov.cn/xinxigongshi/strqqy/201906/t20190620_159295.html

[7]  Please see, https://www.creditchina.gov.cn/xinxigongshi/strqqy/201906/t20190620_159295.html

[8] Chapter III, Article 6 and Article 7 of the Guiding Opinions.

[9] Chapter III, Article 6 of the Guiding Opinions.

[10] Chapter III, Article 7 of the Guiding Opinions.

[11] Chapter III, Article 7 of the Guiding Opinions.

[12] The Opinions on Further Implementing and Improving the Industry Credit Evaluation.

[13] The Notice of the General Office of the National Development and Reform Commission on Optimizing the Role of Credit Service Agencies, and Accelerating the Construction of Social Credit System.。

[14] Chapter III, Article 7 of the Guiding Opinions.

[15]  Establishing the Credit-Based Regulatory Mechanism, Improving the Efficiency of Custom Regulation. Credit China, https://mp.weixin.qq.com/s?src=11&timestamp=1570788140&ver=1906&signature=GV0tMtjje0kdGUNdBzMn53P7JzYX330UIhNiUkilowf9QMsH2eu07R7DFC9sTkZwB03DUV1LJv3b0BV6IJ4e7mBL69sChsspuzyLMorsvSf4SlFQ645v90LY30MaxhcA&new=1.

[16] Hereinafter, we would focus on the national lists of targets with seriously illegal and dishonest acts.

[17] Enterprises falling under any of the 36 circumstances stipulated in the Article 6 of the Notice of the State Administration for Market Regulation on Seeking Public Comments on the Administrative Measures for Lists of Targets with Seriously Illegal and Dishonest Acts (Exposure Draft for Revision) shall be included in the list of targets with seriously illegal and dishonest acts.

[18] By the end of August 2019, 51 National Memoranda on Cooperative on Implementing Joint Incentives for Honesty and/or Joint Punishment for Dishonest has been signed by the competent authorities.

[19] Please see, https://www.creditchina.gov.cn/xinxigongshi/liuyuexinzeng/201909/t20190903_167476.html.

[20] Article 14 of the Administrative Measures for Lists of Targets with Seriously Illegal and Dishonest Acts (Exposure Draft for Revision).

[21] The Memorandum of Cooperation in Imposing Joint Punishments against the Parties to Major Tax-related Cases (2016)

[22] The Cooperation Memorandum on the Implementation of Joint Disciplinary Measures against Dishonest Enterprises Identified by Customs.

[23] The Cooperation Memorandum on the Implementation of Joint Disciplinary Measures against Dishonest Enterprises Identified by Customs.

[24] The Memorandum of Understanding on Jointly Punishing the Producers and Distributors with Serious Illegal and Unfaithful Acts and Their Relevant Personnel in the Field of Work Safety.

[25] Article 14(10) and Article 17 of the Administrative Measures for Lists of Subjects with Seriously Illegal and Dishonest Acts (Exposure Draft for Revision).

[26] The Memorandum of Understanding on the Coordinative Supervision and Joint Discipline of Enterprises with Dishonest Acts

[27] Please see https://www.creditchina.gov.cn/xyxf/lczy/; https://www.creditchina.gov.cn/toutiaoxinwen/201907/t20190702_160567.html; https://www.creditchina.gov.cn/toutiaoxinwen/201907/t20190702_160566.html

[28] A Briefing on the Guiding Opinions on Accelerating the Construction of a Social Credit System and Building up a New Credit-Based Regulatory Mechanism, please see http://www.scio.gov.cn/32344/32345/39620/41042/tw41044/Document/1659716/1659716.htm

[29] Chapter V, Article 16 of the Guiding Opinions.