Financial applications

With all the focus placed on the behavioral aspects of social credit, it can be easy to forget that the system was originally designed primarily as a tool to better assess bread-and-butter credit risk. Given the lack of a credit history for the majority of companies and individuals in China, a basic system to assess creditworthiness is a tool that China’s financial institutions desperately need.

China’s banking system doesn’t allocate loans very efficiently. That’s partially because banks lack the credit records they need to reliably determine creditworthiness, especially for small and medium enterprises. The practical outcome of that deficiency is that bank loans perpetually get funnelled to inefficient state-owned enterprises (SOEs), since they’re able to provide an abundance of collateral in the form of land and big buildings.

In contrast, SMEs rarely have many hard assets that they can offer to banks in order to secure loans, and since the banks are not good at assessing credit risk on the basis of revenues, profits, business outlook, and credit history, those SMEs are hard pressed to get financing.

Similar dynamics make it difficult for individual households, and the family micro-businesses they operate, to obtain loans: though the People’s Bank of China has been collecting credit data on individuals for nearly a decade, only 35% of Chinese citizens have a credit record.1 That stands in stark contrast to countries like the USA, where about 80% of citizens have a trackable credit history. 2

This inability to obtain bank loans leads to a vicious cycle: individuals borrow from friends and relatives instead of banks, those loans don’t show up on any credit record, and no credit history is built, leaving everyone right where they started. So how do banks get the seed data they need to make informed lending decisions in the absence of collateral or credit history?

The think pieces from the early days of social credit show us that when China’s thought leaders sat down to tackle this issue, they came to a few basic conclusions:

  • Financial credit is a measure of both the practical ability to repay loans (i.e. having enough money), and a desire and willingness to do so (i.e. having a sense of responsibility).
  • You can get a partial picture of both of these by looking at loan repayment history.
  • But you can get a much more complete picture, particularly of the second element, by gathering data from a broader set of sources.
  • Where there isn’t enough financial data to make an assessment due to a lack of borrowing history, this supplementary data can stand in as a risk assessment, providing a wider pool of information from which to build credit reports on the 65% of the population who are still “credit invisible”.

So, in this sense, social credit and financial credit are two halves of the same coin.

Chinese regulators hope that supplementing financial data with behavioral data might one day serve yet another purpose: combined with predictive algorithms, this behavioral info may allow lenders to not only get a solid picture of how one has paid their bills in the past, but to have an early warning system that signals when they might be at risk for not doing so in the future.

Of course, China’s a long way from achieving that goal, but the work on it got started in earnest around 2016, when major state-owned banks, like ICBC, China Construction Bank, and National Development Bank, as well as titans of fintech and credit reporting agencies, began to sign credit data-sharing agreements with the central government.3 4 5

The exact details of these agreements are a little murky. But it looks like financial institutions are participating in the SCS by:

  • Using social credit data as a key metric in lending and credit assessment. In other words, if a person or company has been blacklisted by the State, banks and lenders may refuse to issue loans or credit cards, or they may offer unfavorable loan conditions6
  • Freezing accounts or restricting access to service: Banks may agree to freeze assets of Unified Punishment targets.
  • Passing financial information, such as user repayment history, back to the social credit system.
  • Including blacklist and other social credit information on credit reports.

Credit reporting

Since the early 2000’s, the PBoC has issued China’s most authoritative financial credit reports on individuals and enterprises. Credit reports are issued through the bank’s Credit Reference Center, and they’re based on information stored in the PBoC’s own National Financial Credit Information Foundational Database (金融信用信息基础数据库), which consolidates data submitted by financial institutions and other parties.

Up until now, individual credit reports primarily contain financial data, but in May 2019, the PBoC announced the impending release of a second-generation personal credit report, which will close loopholes (which had previously allowed borrowers to manipulate lending outcomes), and to help lenders paint a better picture of a borrower’s financial situation. The biggest changes in the new report are:7

  • Longer record of mobile phone number history: New reports will display the person’s last 5 registered phone numbers, the idea being that someone who often changes their primary mobile number may be in a potentially unstable living situation, or may be committing fraud.
  • Spousal credit is more interconnected: This is likely intended to clamp down on couples who get fake divorces in order to take out more loans, then remarry.
  • Non-payment records stick around longer: A history of unpaid debts used to stay on credit reports for two years after the debt is cleared, now they stick around for five.
  • Most interestingly for our purposes here, though, is that the expanded report will also include some new data on individuals:

    • Detailed history of telecom and utility payment arrears
    • Unpaid taxes
    • Civil and criminal case records
    • Administrative punishments (which might include being blacklisted by a state agency)
    • Welfare history
    • Professional qualifications
    • Awards & honors

    Where will the PBoC suddenly get all that new data? Well, we don’t know for sure, but we do know that’s exactly the type of information stored in the central social credit database. So while we don’t have a definitive source connecting personal credit records to the National Credit Information Sharing Platform (if you do, by all means get in touch), we strongly suspect a link.

    We also don’t know if the new PBoC credit reports will include credit scores or grades.

    According to an August 1, 2019 circular issued by the State Council, all of these questions should be answered by the end 2020, when the credit reporting mechanism is scheduled to be standardized. 8

    New credit rating agencies

    The fintech explosion has changed the world of finance. Chinese regulators have recognized the need for new credit reporting mechanisms to serve online micro-lenders, P2P finance platforms, and other lending innovators.

    After a few abortive fits and starts, in 2018, the PBoC oversaw the formation of a new credit rating bureau called Baihang Credit.9 Baihang is the only commercial credit rating agency licensed to issue credit reports on individuals, and its shareholders primarily consist of China’s online lending giants.

    Baihang Credit Shareholders
    Shareholder Stake Notes
    National Internet Finance Association (NIFA) 36% NIFA is controlled by the PBoC and other financial regulators
    Tencent Credit
    8% Owned by internet giant Tencent
    Sesame Credit
    8% Owned by Ant Financial, parent company Alibaba
    Qianhai Credit
    Pengyuan Credit
    Huadao Credit
    Zhongzhicheng Credit
    Zhongcheng Credit
    Kaola Credit

    Baihang will operate in parallel with the PBoC’s Credit Reference Center. While this is a vast oversimplification, it basically looks like the PBoC will handle credit reports for traditional loans (mortgages, auto loans, and business loans), while Baihang will tackle non-traditional lending.

    The company is off to a rolling start. After its formation, Baihang began signing data-sharing agreements with a whole host of consumer financial service providers, who will access Baihang data to make credit checks. Recent counts put the number of signers at over 700.10

    The PBoC has been less restrictive issuing licenses to enterprise credit agencies. As of June 2019, over 130 agencies had received approval to operate.11 It remains to be seen if one of more of these agencies will come to dominate this space, like Equifax and TransUnion have done in the West.

    1. 新版个人征信报告三大焦点解析
    2. PDF: Credit Invisibles
    3. 国家发改委与中国工商银行签署备忘录
    4. 国家信息中心与中国建设银行签署信用信息共享合作备忘录
    5. 发改委与国家开发银行签署信用信息共享合作备忘录推动联合奖惩措施
    6. 国家信息中心与京东金融在京签署《关于加强信用信息共享的合作备忘录》
    7. 新版个人征信报告三大焦点解析
    8. 全国深化“放管服”改革优化营商环境 电视电话会议重点任务分工方案
    9. PDF: China’s Social Credit System: An Evolving Practice of Control
    10. 百行征信已与700余家机构合作 计划近期启动个人征信报告产品查询服务试点
    11. 全国企业征信机构备案数量130家名单