| Publications | Analyses & Studies | Technoregulation in China: Bavarian Companies in the Social Credit System

Technoregulation in China: Bavarian Companies in the Social Credit System

Prof. Dr. Omar Ramon Serrano Oswald Institute for Marketing & Global Management | Bern University of Applied Sciences
Benjamin Lee Cheng Han Chair of European and Global Governance | TUM School of Governance

The study is part of the bidt-funded consortium project “Learning from the ‘pioneer’? A multidisciplinary analysis of the Chinese Social Credit system and its impact on Germany”. The findings and recommendations for action obtained are intended to provide immediate practical benefits for Bavarian business and politics.

The authors of the study examine the influence of the Chinese Social Credit System (SCS) on Bavarian enterprises. The SCS is part of a comprehensive push by the Chinese government under Xi Jinping to enforce rules and regulations. The research team analyses how large, medium, small, and micro Bavarian enterprises active in China are classified and evaluated in the SCS.

The main categorisation mechanism of the system consists of entries in registers and lists that reward (redlisting) or punish (blacklisting and so-called administrative penalties) the behaviour of companies and individuals. The analysis of 170 Bavarian companies in China shows that these investors are mostly registered on red (positive) lists. However, almost nine per cent of the companies have a negative system entry in the form of an administrative penalty, which can lead to an entry on a blacklist under certain circumstances.

Furthermore, there are significant differences in the implementation of the SCS by individual local authorities. In Shanghai and Jiangsu, two provinces where many Bavarian companies are located, the authorities are particularly active in the areas of environmental protection, labour and occupational health and safety. This is not the case in Beijing and Guangdong, where many Bavarian companies are also located.

The most important facts in brief

The analysis is complemented by ten semi-structured in-depth interviews with leading employees from companies of different sizes operating in different sectors and regions in China, including a Beijing-based consulting firm. The interviews provide insight into the experiences with and perspectives on the SCS from the perspective of the Bavarian companies based there.

The results show, among other things, that larger firms tend to be better prepared and have more in-depth knowledge of the system than smaller firms; however, firms from both classes of firms received negative SCS entries. The findings are incorporated into recommendations that focus on potential support measures from the public sector for Bavarian firms with Chinese subsidiaries.

Key findings:

  • There are significant differences in the implementation of the system between the different provinces (i.e. provinces and municipalities at the provincial level) where Bavarian companies are located. Regulators are more active in some provinces than in others.
  • The current nature of the SCS indicates that it is part of a comprehensive measure by the Chinese government to enforce rules and regulations. Positive impacts of the SCS include less corruption and potentially a more level playing field because the system also applies to Chinese companies.
  • However, some impacts are also perceived as negative, such as the introduction of another layer of bureaucracy and a lack of information about the system and its constant evolution.
  • The introduction of the system is a challenge because companies are not informed about it — and about possible consequences — by the Chinese authorities and have to obtain all information about it themselves.
  • 80 per cent (136 out of 170) of the Bavarian companies analysed are on a red, i.e. positive, list. These are mainly lists of the tax authorities; a few companies also have positive entries with the customs authorities.
  • Just under nine per cent (15 out of 170) have a negative entry in the system in the form of an administrative fine. None of these companies have been blacklisted yet; such an entry is more serious than an administrative fine. Some companies have negative entries and are also listed on positive lists at the same time.
  • Administrative penalties are most often imposed by environmental protection and labour law and occupational health and safety authorities.
  • Deleting negative entries (administrative penalties) is not easy, even though companies implement requirements quickly once they have received an administrative penalty In principle, a negative entry should be removed from the system as soon as a specific violation has been remedied. In fact, however, this does not seem to be the case, or at least not yet.

Further considerations and recommendations for action

System under development

The Chinese Social Credit System is still largely under construction. Contrary to the fears and concerns expressed in Western media, the analysis reveals a less highly technical and centralised SCS — at least with regard to the commercial sector — than is typically assumed.

Moreover, according to Bavarian investors, the application of the SKS is largely focused on the implementation of rules and regulations. However, there is also a case where a large Bavarian company was fined administratively for advertising with terms such as “excellent” or “national”, which have a more political connotation and thus seem to be reserved for the state party. Moreover, the implementation of the system is still patchy.

Tech regulation

The SKS is a still evolving but serious form of tech regulation. Foreign companies based in China need to be prepared for it. Following the tradition of Chinese experimental governance, pilot projects in provinces such as Sichuan are already experimenting with new technologies such as Big Data and algorithmic machine learning to prevent data manipulation, ensure data security and support and facilitate market transactions.

AI-driven tech regulation is thus gradually becoming a reality. With the SKS, China is creating a new kind of regulatory state that relies less on autonomous, non-governmental regulators (like the current model of the United States and the European Union) and more on comprehensive data collection by the state and new tech-savvy actors. In some areas, such as the environment and occupational safety, the SKS can facilitate interactions between China’s regulatory model and those of the EU and the US, as regulations converge, which in turn allows for smoother trade.

However, this new type of regulatory model also creates friction with US and European regulations in areas where values and mechanisms are less compatible — such as data protection. Therefore, a deeper understanding of this model is needed to avoid foreign companies — like the Bavarian companies in the study — being stuck in a potentially incompatible or, at best, partially compatible regulatory framework.

Recommendations for Bavarian authorities and business associations to support companies based in China

  • Continuous monitoring of the SKS, including all constantly changing developments with regard to the classification of companies, particularly active Chinese authorities and the essential aspects of relevant regulations. External monitoring of the SKS alone could already prevent abuse of the system by Chinese authorities.
  • Special support for Bavarian companies with negative entries in the SKS (blacklisting or administrative penalties) to reduce possible restrictions on entrepreneurial competitiveness caused by such entries. This seems to be particularly important for smaller companies that have limited knowledge of the system and, thus, are sometimes not even aware of negative entries.
  • Identify potential incompatibilities of the evolving Chinese regulatory model under the SKS with German or European regulations in order to identify problem areas for Bavarian companies operating under both regulatory systems.
  • Organise exchanges between Bavarian (and other German) companies on common SKS experiences, best practices, good practices, etc.
  • Support for the development of independent China expertise in Bavaria, which will become more essential given the growing importance of China for Bavarian (and German) companies as well as the rapid development of the novel regulatory model Social Credit System.