While China-journalists were all preoccupied with the Constitutional amendment, a major change occurred in the realm of the social credit system – which potentially might turn the existing order of politics and (constitutional) law upside down.
The system has been widely discussed in the media and the few who observed it carefully saw beyond the “Orwellian dystopia” cited in nearly every article. Those few saw a major obstacle in the system to be fully implemented any time soon: the giant discrepancy between what the state perceives as creditworthiness and what the widely-covered credit rating companies, such as Sesame Credit, regard as creditworthy. This problem seemed to have been swept aside in a single move in January 2018: the Central People’s Bank announced to found a company named Baihang Zhengxin, which may become the one central commercial credit rating service in the PRC, replacing or at least dominating the existing ones by making all of them shareholders. The definitions of creditworthiness used by commercial credit services currently will thus eventually make space for a notion of creditworthiness designed by the central government. The Chinese government changes the rules of the game by joining it.
Some background first: When trying to push forward the social credit system, the government realized that it needs the country’s commercial big data giants on board. In its Planning Outline for the Construction of a Social Credit System, the State Council included “having a relatively perfect credit service market system” as a central goal. The idea was to encourage the growth of commercial credit rating services, in order to develop necessary technology for a social credit system and to aggregate relevant data on “credit subjects”. The government would be highly reliant on such commercial services if it really were to establish the vast and complex system it describes.
Adhering to this 2014 Planning Outline, the Central People’s Bank granted permissions to eight companies to create experimental credit rating services in 2015. Unlike most developed countries, no such services existed in the People’s Republic before. All eight companies are well-known big-data driven actors, among them Alibaba and Tencent. Alibaba’s daughter Ant Financial, seemingly already waiting in the wings, immediately rolled out its version called “Sesame Credit”, rating users according to their credit history, fulfilment capacity, and personal characteristics. While these criteria are similar to credit services outside of China, Sesame Credit added other categories that are somewhat more puzzling: under “behaviour and preferences”, a person’s shopping habits are rated. Technology director Li Yingyun enthusiastically explained to the BBC: “Someone who plays video games for 10 hours a day, for example, would be considered an idle person, and someone who frequently buys diapers would be considered as probably a parent, who on balance is more likely to have a sense of responsibility.” The exact algorithm of calculating the score remains non-transparent: Alibaba claims it is and has to be a “commercial secret”. However, the popular online guide Baidu Zhidao suggests users wishing to increase their score to shop more on Alibaba’s online platforms, to avoid seizing cheap offers, and rather focus on top-end kitchen equipment or workout appliances. Finally, the score is also influenced by what is termed “social connections” – to the annoyance of high scoring users who complain online that they have been receiving a bulk of friend requests from strangers seeking to raise their score.
Alibaba’s Sesame Credit, with more than 500 million users to date, is complementing its very own commercial universe. It incentivises user behaviour it can profit from, rather than creditworthy behaviour as the central government understands it. There was and is little incentive for the commercial credit service providers to reward political correctness or even legal compliance.
Blinded by the magnificent story about China as the future dystopian surveillance state, journalists outside of China mostly failed to see that Sesame Credit’s rating is neither conducted by the state, nor by criteria the state indulges. It seeks to make profit just as FICO in the USA and Schufa in Germany, and it does not use criteria of measurement encouraged by the state, simply because it cannot profit from it. Similarly, none of the commercial services intend to share their valuable user data with competitors – further impeding the creation of a central system with full access to all data accumulated. Effectively, by granting the licenses in the first place, the government has created a number of social credit systems which are not only competing among each other but also competing against pilot projects of the state’s social credit system.
This conflict undermines every effort to create a fully functional social credit system. By nature, and by definition in government documents, such a system requires as much information as possible, with the full access to all information accumulated as the final goal. Only with full access can the system itself become “trustworthy”, as only with full access can it possibly calculate credit scores for citizens that reflect their real behaviour. Indeed, any pre-mature social credit system is doomed to drown in errors and inadequate evaluations, as the failure of the social credit system experiment in Suining County demonstrates. In addition, the fragmentation of credit ratings and the different definitions of creditworthiness they adopt is a major obstacle in achieving a central credit score calculation mechanism. If the drafters of the 2014 Planning Outline had seen these conflicts of interests coming, they successfully ignored it – or had it planned all along. Policy experiments as a tool for developing long-term strategies are a typical pattern found in Chinese governance ever since country’s reform and opening policy in the 70s.
Whether planned or not – it arguably posed the most significant challenge to the enforcement of a central social credit system. The Central People’s Bank cited such “conflicts of interest” as reasons when in 2017, two years after it first allowed the experiments, it did not grant businesses licenses to the respective pilots. Uncertainty ensued, with Sesame Credit continuing to operate and Tencent Credit being shut down for ominous reasons only a day after it was launched.
On February 22nd, things abruptly changed: the Central People’s Bank simply joined the game, granting a three year business license to the new credit rating company Baihang Zhengxin which was founded by the Bank itself – via its National Internet Finance Association. The working title of the company, Xinlian, translates to Credit Union and sums up its purpose: To unify the existing commercial credit rating services. While holding the majority of the shares, 36%, themselves, Baihang Zhengxin divided the remaining shares equally among eight companies – exactly those who had been designated credit rating pilots in 2015 and were denied their own business licenses in 2017. Each of them hold 8% of Baihang Zhengxin, which has a starting capital of one billion RMB at its disposal.
The implications are massive. The credit ratings of China’s top eight big data giants are now all part of an enterprise that lies in the hands of the state. Not only will all of the eight companies be obliged to share their most valuable resource – user data – with the government and their market competitors. Most likely, they will also have to subject the centre part of their credit rating services, the calculation of the score, to the will of the state: The government’s definition of what is creditworthy and what is not will prevail, whatever it may look like.
According to Chinese media voices, the main achievement is to prevent multi-lending at different agencies who have no chance to know about previous loans. Some are outspokenly excited: they illustrate Baihang Zhengxin’s creation as a kind of unification of superheroes (e.g. the eight big-data giants), each with their own particular powers (e.g. own particular sources and kinds of data), fighting for a rule of trust, Guardians of the Galaxy-style. Additionally, and perhaps paradoxically, the removal of the so-called rule of “big-data oligarchs” is acclaimed. Even though he has to pass on some user data, an article goes, “Jack Ma cheered to tears, because finally his long-standing dream to put trustworthiness over wealth and have sincere people become rich first came true”.
As mentioned above, the unification of credit rating services under the eyes of the state also implies that a score can be calculated with an unprecedented precision. Being able to draw on the vast amount of data Alipay accumulates about payments and shopping behaviour with Tencents data about social behaviour – not to mention the valuable data the other six former pilots provide – will give rise to a comprehensive credit profile of legal and natural persons, which is hardly contestable because of the massive power that lies in the pooling of information, with several sources complementing and confirming each other. Although concrete plans of the cooperation are not yet published, at this point it can be asserted that the so far largest obstacle on the path to a central social credit system has been successfully overcome, with the next one waiting around the corner: How exactly is trustworthiness to be measured?
Further reading:
央行下了铁命令：马云正式被“收编”! 25.2.2018, http://cj.sina.com.cn/articles/view/5617133798/14ecea8e6001003fgx?cre=sinapc&mod=g&loc=2&r=0&doct=0&rfunc=84&tj=none
Mareike Ohlberg; Bertram Lang, Shazeda Ahmed: Central Planning, Local Experiments: The Complex Implementation of China’s Social Credit System, 12.12.2017, Mercator Institute for China Studies, available at: https://www.merics.org/sites/default/files/2017-12/171212_China_Monitor_43_Social_Credit_System_Implementation.pdf
The State Council: Planning Outline for the Establishment of a Social Credit System, 2014, English translation available at: http://www.chinalawtranslate.com/socialcreditsystem/?lang=en
Yale Law School’s Jeremy Daum: China through a glass, darkly, available at: http://www.chinalawtranslate.com/seeing-chinese-social-credit-through-a-glass-darkly/?lang=en
China to launch first unified personal credit platform for online lending, available at:
http://www.chinadaily.com.cn/a/201801/05/WS5a4ef1aba31008cf16da54b4.html
Tracey Xiang: China Fintech — Didi Begins Extending Credit to Drivers; First Consumer Credit Reporting License Granted, available at: https://chinatechnewsletter.com/2018/02/24/china-fintech-didi-begins-extending-credit-to-drivers-first-consumer-credit-reporting-license-granted/
Interesting different point of view, not at all regarding the government as Initiator:
Felix Yang: Baihang Credit finally receives its license, although the future remains bleak, available at: https://www.kapronasia.com/china-banking-research-category/item/935-baihang-credit-finally-receives-its-license-although-the-future-remains-bleak.html
Felix Yang, Is Xinlian the answer to the Individual Credit Checking System in China? Available at: https://www.kapronasia.com/china-banking-research-category/item/886-is-xinlian-the-answer-to-the-individual-credit-checking-system-in-china.html