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China's Social Credit System: Why the EU Must Engage now

By Bart Broer

17 December 2018

Bart Broer is a Research Fellow at the EU-Asia Centre

There have been increasing media reports of what is portrayed as China’s latest authoritarian crackdown on its citizens: the development of a ‘social credit system’. By accumulating and concentrating all known data of its population in one central database, Beijing would be able to monitor the behavior of its citizens in real-time. Conduct deemed disadvantageous to social stability could be punished through the imposition of constraints on social and economic mobility. Jumping the lights occasionally? No more high-speed trains. Caught using a private network to circumvent the Great Firewall? No more hotel stays free of deposit. 

Those familiar with the dystopian Netflix series Black Mirror will aptly point out such a system’s parallels with the show. U.S. Vice President Mike Pence described the system as “Orwellian, premised on controlling virtually every facet of human life.” However, a national system producing aggregate ratings for every individual citizen is far from real, nor foreseen. Barring a small number of local pilot programmes which provoked widespread outrage on Chinese social media, President Xi’s social credit strategy is considerably less pervasive than commonly understood. 

The strategy should be understood from a historic perspective. 91% of adult Americans have a credit rating. Due to China’s weak consumer credit infrastructure, only a quarter of adult Chinese have a credit rating. This, combined with the predominant usage of cash, has inhibited the ability of financial institutions to judge whether an individual may default on a loan. The Chinese Ministry of Commerce has estimated that the annual economic loss caused by the lack of credit information amounts to over EUR 77 billion. 

Under Xi’s plans to establish a social credit system, the social and economic mobility of individuals and enterprises can be limited only if they defaulted on a court order issued to repay outstanding commitments. As such, from the perspective of Beijing, the predominant aim of this system is to strengthen nation-wide creditworthiness as well as trust in financial institutions and the Chinese economy at large. It is important to understand that as of today, no single national rating system has been established. Instead, an ‘ecosystem’ of rating systems has appeared in both the public and private sector – some of which have indeed prevented millions of people from riding a bike free of deposit, from taking flights, or from applying for government jobs.

However, as some critics have rightfully pointed out, financial creditworthiness is not the credit system’s sole aim.  The  credit system is a policy tool to achieve an array of normative objectives. The algorithm used in Alibaba’s chief social credit system Sesame Credit rates its customers not only on their contractual and credit history, but also on the type of websites visited, the type of products acquired, and the respective ratings of their inner-circle contacts. Beijing obliged all entities operating in China to apply for a ‘social credit number’ in July this year, after which it has forced a number of foreign airlines to discontinue listing Taiwan as a territory, rather than as a Chinese province. Failure to comply would negatively affect these airlines’ social credit. Indeed, the system is used as a vehicle to impose the regime’s values on foreign entities. Some argue that this amounts to a direct interference in the sovereignty of other states. 

Luxembourg

In 2015, aiming to increase tourist flows and allegedly in an effort to lobby Alibaba to establish its European branch in Luxembourg, the Luxembourgish consulate in Shanghai agreed to fast-track Schengen visa applications for applicants presenting a personal Sesame Credit report. By agreeing to use Sesame Credit scores as a substitute for conventionally required proof of financial liquidity, Luxembourg, although uninformed of the social, economic and normative variables used to construct the applicant’s score, is accelerating visa procedures of those Chinese citizens whose conduct is deemed appropriate by a Chinese state-owned enterprise. Should a Member State of the EU implicitly endorse a system that rates its citizens on the basis of a Chinese perception of ‘rightful’ personal characteristics and of ‘rightful’ behavior? 

Regardless of whether one all-encompassing social credit system will be developed at the national level, China’s social credit plans will form an increasingly serious component of China’s foreign policy, as illustrated by the Taiwan case. Will Beijing, under a shroud of social credit, start inhibiting NGOs, think tanks, universities and businesses in China China from articulating themselves on other sensitive issues? Could Beijing even start rating foreigners, applying the same yardsticks and standards applied to Chinese citizens? 

credit system

The Chinese government is still undecided on the exact implementation of the system. For now, participation in credit systems remains voluntary; there is no single agency managing the entire body of data generated; and no individual aggregate scores are assigned. Therefore, as the European Parliament pointed out in its latest report on EU-China relations, the EU must engage with Beijing now. Whilst acknowledging that social credit systems are unprecedentedly inclusive and provide credibility to China’s overall credit infrastructure, the EU must ensure that European businesses and NGOs active in China are safeguarded from the nefarious impact of Beijing’s ambitions in this sensitive field. 

A number of MEPs have proposed that the EU should consider measures to strengthen democratic resilience to counter Chinese attempts to influence Europe under the veil of social credit. The EU might also consider limiting the export of European technologies used in the construction of social credit systems. The Council’s recent agreement to initiate formal discussions on the establishment of an EU-wide human rights sanctions regime is a welcome first step towards holding European or Chinese entities accountable for complicity to human rights violations by facilitating the construction of social credit systems. Through economic diplomacy and other means, the EU and its Member States must undertake to shape Xi’s milestone social credit strategy, ensuring that algorithms used are as transparent as possible. 

In order to preserve the EU’s credibility, it ought to address the right points of criticism on the right issues. China is not turning into a Black Mirror episode – at least not yet – but the EU has many reasons to be concerned with Xi’s latest master plan. Now is the time to act on these concerns by engaging with China.

An edited version of this article was published on EurActiv on 3 January.