More SCS features for enterprises

There are five ancillary aspects of the SCS that only apply to companies and organizations, not individuals. These are a little boring and technical, so unless you’re doing business in China, you can safely skip this bit.

This section will cover:

  1. Unified social credit numbers
  2. Enterprise grading systems
  3. Industry associations and the SCS
  4. The new random inspection system
  5. Credit commitment letters

Unified Social Credit Numbers

In 2015, as a preliminary stepping stone to implementing the enterprise social credit system, the central government began assigning a new code – the Unified Social Credit Number (统一社会信用代码) – to each domestic company and organization.

This new 18-digit identifier is a combination of three ID numbers that used to be issued separately:

  • business license number
  • tax registration number
  • organizational code

The USCN has now replaced traditional business license numbers on business registration certificates as the primary code by which an enterprise is identified. A USCN can be used to search for information on any China-registered company the National Enterprise Credit Information Publicity System, the public-facing portal for enterprise social credit records.

Enterprise grading systems

Some state agencies are developing their own credit grading systems for the enterprises within their jurisdiction. As we mentioned earlier, these grades could be likened to the sanitation grades a restaurant in the United States might get from the health inspector.

State agency grading systems primarily evaluate a company’s level of regulatory compliance, in other words, whether or not the company operates in accordance with relevant laws.

Many of these grading systems are new, and have been released in conjunction with the social credit system, but some state agencies, like the General Administration of Customs, already had grading systems in place, which are now being rolled into the SCS.

Grading systems are very much still a work in progress, and only a smattering of agencies have published the details of their grades or the exact metrics being used to evaluate grades. But though nothing has been finalized, there are some small hints floating around that a company’s enterprise grade, if they have one, will be recorded in their social credit file.

Like the newer blacklists, grading systems are often only applicable to a specific industry or location. For example, the Department of Transport in Jiangsu has a grading system that only applies to companies who are building highway and waterway infrastructure within that province.

All the grading systems we’ve seen so far are a little different, but on the whole, they gradecompanies on a letter-based scale, like AAA-D or AA-C.

Examples of enterprise grading systems
Managing industry association or government department Industry affected Location Points scale
Department of Transportation 1 Highway and waterway transport construction industry Jiangsu AA
Department of Transportation 2 Urban passenger transportation, cargo transportation, transport stations, transportation vehicle inspection and maintenance, driver training, and related service organizations Danzhou AAA – Excellent
AA – Qualified
A – Basically qualified
B – Unqualified
Ministry of Industry and Information Technology 3 All industries Jiangmen 100 points or more: AAA
90-99: AA
80-89: A
60-79: B
Below 60: C
General Administration of Customs (special case – this grading system has been in place since 2008, but is now being rolled into the SCS) 4 All industries National AA

From what we can tell, grading is loosely associated with blacklisting and redlisting. In other words, highly-graded companies are eligible for redlist inclusion, and the lowest-rated companies risk blacklisting, but it’s unclear if, in all cases, a high grade automatically leads to redlisting, or if low grades automatically mean blacklisting.

Trivium will be monitoring grading systems as they develop (get in touch for SCS monitoring services).

Industry Associations

In 2013, China’s minister of civil affairs explicitly called upon industry associations to participate in the SCS: 5

“Trade associations should explore the establishment of credit management systems by such methods as social evaluation, punishment for dishonesty and blacklisting, taking into account the characteristics of the industry.”

Industry associations and chambers of commerce play a vital role in the Chinese market. Though these bodies aren’t technically government entities, state agencies often ask their advice when creating new policies relevant to the industry. State agencies also often task industry associations with oversight and discipline for companies within their sector.

Participation in trade associations is voluntary; companies and industry professionals are members because they want to be, not because they have to be. But there are big benefits to participation. Member companies have a chance to influence policymaking in their sector, so most of the big players in any industry are members of one association or another.

It’s still unclear how, or if, industry association data integrates with the NCISP database, and with the SCS as a whole. While SCS policymakers have urged industry associations to create blacklists and grading systems, at the moment, associations don’t seem to be directly plugged into the NCISP.

That means that, unlike city governments and state agencies, they can’t really lift data directly out of the central database, or send data directly to it, but would base any blacklisting on their own data collection, and on any SCS information publicly available via the National Enterprise Credit Information Publicity System. In other words, if a company or professional was blacklisted by a state agency, that information would go online, where industry associations could see it and take that into account when conducting their own evaluations on members.

It also means that getting blacklisted by an industry association doesn’t trigger a cascade of Unified Rewards and Punishments penalties.

However, city governments like Shanghai are setting up special funds to support the development of credit grading systems within industry associations:

“[The funds will] support industry associations, enterprises and institutions to carry out credit classification and evaluation research, formulate credit standards, build various supporting applications, formalize credit application in their respective industries.”

Industry association grading systems

Industry association grading systems could be compared to grades issued by the Better Business Bureau in the United States. They primarily look at the company’s overall soundness and product or service quality.

Examples of industry association grading systems
Industry association Points scale
China Petroleum & Petrochemical Equipment Industry Association (CPEIA) 6 在中国石油和石油化工设备工业协会 80-100 points: AAA
70-80 points: AA
60-70 points: A
50-60 points: B
40-50 points: C
China Education Equipment Industry Association 7 中国教育装备行业协会 80-100 points: AAA
70-80 points: AA
60-70 points: A
50-60 points: B
40-50 points: C
The Plastic Processing Industry Association 8 中国塑料加工工业协会 AAA – Excellent
AA – Qualified
A – Basically qualified
B – Unqualified

Industry associations decide which data points to look at when issuing grades, and what the evaluation criteria will be. The below example comes from the China Petroleum & Petrochemical Equipment Industry Association (CPEIA), and it’s fairly representative of the metrics we’ve seen so far:

CPEIA grading evaluation criteria
Evaluation number Evaluation standard Criteria
Comprehensive Standards
I-1 Basic information Length of time in business, shareholder strength and credit status, and rationality of institutional setup
I-2 Systems construction Construction and implementation of customer management, credit management and contract management systems
I-3 Information management Information construction and management level, website construction
I-4 Human resources The quality and credit status of the leadership and the quality of the employees
I-5 Qualifications and awards Required management system certifications, product certifications, and awards at the provincial or ministerial level in the past 3 years
I-6 Brand building Brand value, brand-building concepts
Production management
II-1 Technological research and development The proportion of R&D expenditure, the proportion of sales of new products, and the technical level of major products
II-2 Production status Advanced production and operation sites and production equipment
II-3 Safety management Safety of production systems, level of safety management
II-4 Supply and market situation Product sales rate, market share, stable customer ratio, annual new customer ratio, stable supplier ratio, procurement method
II-5 Contract fulfillment Contract fulfillment rate, customer satisfaction
Financial indicators
III-1 Solvency Current ratio, quick ratio, asset-liability ratio, net cash flow liability ratio
III-2 Profitability Net asset interest rate, return on net assets, operating profit margin, sales profit margin
III-3 Operational effectiveness Total assets turnover rate, accounts receivable turnover rate, inventory turnover rate, current assets turnover rate
III-4 Growth potential Total asset growth rate, net asset growth rate, net profit growth rate, sales growth rate
III-5 Asset structure Annual turnover, ratio of monetary assets to current assets, ratio of current assets and ratio of net fixed assets
Credit record
IV-1 Solvency Credit history of business, industry, customs, banking, taxation, quality, etc.
IV-1 Social record Social responsibility, litigation history, and media reports
IV-1 Industry evaluation Records of industry status, visibility, participation in association activities, etc.

Most of that data can be gathered by the association itself via voluntary submissions by the member companies, without relying on the central SCS database, but a few of those metrics would depend on blacklist data and other information available through the National Enterprise Credit Information Publicity System.

Industry association blacklists

Not all industry associations are jumping on the blacklist bandwagon, but a couple are. Here are a few examples:

Examples of industry association blacklists
Industry association Blacklist target
China Securities Association 9 中国证券业协会 Websites containing illegal information published by counterfeit securities or fraudulent investment companies
China Advertising Association 10 中国广告协会 Illegal ad sales and product endorsements
Chinese Medical Doctor Association 11 中国医师协会 Physicians who engage in malpractice

All of this leads us to believe that industry associations aren’t currently a core component of the SCS, but they are getting swept into the general trend towards market regulation via scoring, blacklisting, and reputational credit management.

Implications for companies doing business in China

This means that companies not only need to maintain awareness of the blacklists and state agency grading systems related to their sector, but must also understand the grading systems developed by relevant Industry Associations.

New inspection system

In 2015, Chinese regulators took a step towards cracking down on corruption by implementing a new safety and production inspection system called “Double Random, One Open” (双随机,一公开), wherein both the company to be inspected and the inspector are randomly selected (hence “double random”), and the inspection results are openly published (“one open”). 12

The government’s goal here was to standardize the timing of inspections so that inspectors can’t excessively target one company while ignoring another, and to standardize the inspection process so that inspectors don’t have as much discretionary decision-making power.

While random inspections aren’t a core component of the SCS per se, the results of these inspections are publicized on the National Enterprise Credit Information Publicity System website, and are included in a company’s social credit file.

Credit commitment letters

One of the most recent additions to the SCS is something called the “credit commitment system”, which was introduced in a national policy released in July, 2019.13 The system encourages companies to sign standardized letters promising to operate in good faith and to honor social credit regulations.

Signed credit commitment letters are openly published on the National Enterprise Credit Information Publicity System website and are included in the company’s social credit file.

Companies with good credit who have signed credit commitment letters may have various bureaucratic applications pre-approved on the strength of their promise, with the actual inspection or application review conducted after the company has been fast-tracked through the procedural process.

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