9 septembre 2019

Enterprise credit ratings and blacklisting in mainland China - an update

IN-DEPTH ANALYSIS

Key points you need to know:

Data for China’s National Enterprise Credit Information Publicity System ("NECIPS") and the web portal of the National Credit Information Sharing Platform creditchina.com.cn ("CREDITCHINA") is collected automatically and certain data is publicly available. Based on an announcement by the State Administration for Market Regulation (国家市场监督管理总局, "SAMR") in July 2019, the NECIPS is designated as a key national network for market supervision, in a "fundamental shift in China’s market access regime" (see EUCCC Study, p7).
The most important aspect potentially affecting a company’s credit rating are (in) compliance records.
Regarding NECIPS, each enterprise in China can decide that certain information from its annual report is not published. The enterprise may also challenge discovered incorrect information. Related compliance and parallel credit monitoring and management processes are highly recommendable.
Besides NECIPS and CREDITCHINA, currently numerous other credit rating systems exist in China to facilitate ratings for banks, local governments, in specific industry sectors, or by commercial information suppliers; participation in these credit rating systems is generally voluntary, but might be required for business reasons in specific sectors, or as stipulated under other regulations.
The overall credit rating system in mainland China is still under intensive development, and may see significant changes and increasing data collection in 2019, 2020 and beyond.

In recent years, the discussion on mainland China‘s credit rating, both of individual citizens and enterprises, has increased. The various pilot projects on local levels with social credit databases for its citizens have been widely reported also in Western media. Focus of the reports was often on the imposed sanctions. In case an individual’s rating drops below a defined threshold, the person can be restricted from certain services (eg prohibition to take airplanes or high speed trains). In recent years, the discussion on mainland China‘s credit rating, both of individual citizens and enterprises, has increased.

The various pilot projects on local levels with social credit databases for its citizens have been widely reported also in Western media. Focus of the reports was often on the imposed sanctions. In case an individual’s rating drops below a defined threshold, the person can be restricted from certain services (eg prohibition to take airplanes or high speed trains). Various private companies also offer ratings for individuals, eg the "Zhima Credit" (sesame) rating contained in Alibaba’s Alipay account, as well as ratings offered by respectively licensed companies like Tencent, Didi Chuxing etc.

Of increasing practical importance when doing business in China, is the credit rating of enterprises. On July 19, 2019, SAMR published a notice on further optimizing NECIPS. Goal is the realization of a unified collection and disclosure of information on enterprises at all levels. The local branches of SAMR need to record the required information to achieve "one national network" for information disclosure of enterprises covering all aspects of market supervision. Public awareness increased, among others, due to the widely discussed detailed study "The Digital Hand – How China’s Corporate Social Credit System Conditions Market Actors" published by the European Chamber of Commerce in China (EUCCC) and sinolytics at the end of August 2019 ("EUCCC Study").

NECIPS (全国企业信用信息公示系统)

The NECIPS is managed by SAMR, which among others also manages company registrations. The Interim Regulations on Enterprise Information Publicity published by the State Council effective October 1, 2014 ("Interim Regulations") are the main legal basis for NECIPS. This is in line with the general plan of the State Council issued in 2014 to establish a corporate social credit system, to ultimately integrate the data in a "National Internet+ Monitoring System" (see EUCCC Study, pp28 ff).

On the Chinese NECIPS website, enterprises can be searched either under their Chinese name or the unified social credit code (found e.g. on a company’s business license). Besides corporate data, SAMR collects data from various other governmental sources, including other regulators on special industry safety aspects (eg food, drugs) or more horizontal aspects like taxation, customs, employment or environmental related (in) compliance, and court proceedings. Examples:

Similar to various other corporate laws and regulations, also the Foreign Investment Law effective January 1, 2020 requires foreign investors and foreign-invested enterprises to submit information "through the enterprise registration system and the enterprise credit information publicity system".
The Individual Income Tax Law in the revised version effective January 1, 2019, obliges authorities to include the "information on compliance with this law by taxpayers and withholding agents [= employer companies] in the credit information system, and carry out joint actions of incentives or sanctions accordingly" (see also the EUCCC Study, pp21 ff).
The Measures of the Customs for the Administration of Enterprise Credit effective May 1, 2018 classifies enterprises as (i) advanced authorized enterprises, (ii) general authorized enterprises, (iii) general credit enterprises and (iv) dishonest enterprises, and expressly also allow sanctions on "related persons" which include the legal representative and various other staff (see also the EUCCC Study, pp24 ff).
The Law on the Prevention and Control of Soil Pollution effective January 1, 2019 authorizes the collection and entering of various information and violations into NECIPS to make them public.
The Measures for the Credit Rating of Enterprises in Labor and Social Security Law Abidance effective January 1, 2017 mention eg the following evaluation factors: signing of written labor contracts; compliance with prohibition on child labor, special labor protection for female and underage staff; compliance with rules on working hours, rest and leave; salary payment and minimum wage compliance; and social insurance compliance.
The Circular of the China Food and Drug Administration on Issuing the Administrative Measures for the Credit Information on Food Safety effective August 22, 2016 mentions the "basic information of food producers and marketers, information on administrative licensing, examination, supervision and spot checks of food, administrative penalties" as relevant credit information.

The current public search results from NECIPS include:

Basic registered or filed information: company type, registration authority, names of individuals appointed in corporate functions as director, supervisor, general manager, legal representative; business scope, registered capital; legal address; shareholders (but sometimes not all of the above information may be available online)
Registrations of movable property mortgages, and of equity pledges
Records of imposed administrative penalties
Annual reports, where each enterprise has the right to decide whether certain information may be published (optional is currently here the publication of the number of employees, total assets, total liabilities, externally provided guarantee/warranty, total owners' equity, total operating revenues, primary business revenue, total profit, net profit and total tax amount of the enterprise)
If other authorities so chose, the information on special administrative licenses held by the enterprise may optionally also be shown in the NECIPS (alternatively in another system)
The enterprise itself is also obliged to publish information via the NECIPS on capital contributions, equity changes, administrative licenses, pledge of intellectual property rights and administrative penalties
A further data source are governmental inspections. Credit information expressly includes "information generated in the course of the administrative organs' performance of duties" (see eg Administrative Measures of Tianjin Municipality for Credit Information of Market Entities, effective January 1, 2016).

The obtaining of unpublished data of an enterprise requires the consent of the enterprise.

But in the future, already existing topic specific ratings (eg tax, customs, environmental protection, anti-monopoly, data protection, pricing, special licenses) are all expected to be used as additional factors influencing the overall corporate rating (see EUCCC Study, pp10 f, which also explains the underlying logic and extent of certain ratings). Ratings can also be affected by external aspects beyond corporate compliance, eg by the behavior of a company’s business partners (see EUCCC Study, pp13, 20).

Incorrect data

According to the Interim Regulations, if a citizen, legal person or organization has evidence to prove that publicized information is incorrect, such person or organization has the right to require the government department to correct such information, including via a formal administrative review.

Given the widespread effect the credit information has during business operations in China, company management should enact sufficient monitoring processes to make sure all data shown to the public is correct. In case of any incorrect data, respectvice action should be initiated immediately.

Blacklisting

The enterprise may revocably be designated as "operating abnormally" in case certain statutory reports have not been filed in time, or enterprise have concealed facts / practiced fraud during reporting;
In case the enterprise does not correct the found mistakes, it may revocably be designated as "seriously violating" enterprise. In such case, legal representative and responsible persons are prohibited from serving as legal representatives or responsible persons for 3 years. In order to strengthen credit supervision, on July 10, 2019, the SAMR released a revised daft of the Administrative Measures for Lists of Parties with Seriously Unlawful and Dishonest Acts, in which the scope of the parties which might be subjected to the blacklist mechanism has been extensively expanded. We expect that these Measures will be promulgated in the near future, and will then, if necessary, update this article.
The EUCCC Study points out that the more negative ratings a company has, the more restrictions to its business activities it will experience (see EUCCC Study, p8).

CREDITCHINA (信用中国)

CREDITCHINA is managed by the National Public Credit Information Center ("NPCIC") under guidance by the National Development and Reform Commission ("NDRC") and the People's Bank of China ("PBoC"). On their Chinese website, enterprises can be searched either by their Chinese name or under the unified social credit code. The data is also collected from various regulators and courts. The public information shown is similar to the one of NECIPS, but additionally the status regarding special lists are shown:

Red listing as "trustworthy" (eg as "Class A tax payer")
Listing in key focus list (eg as "operating obnormally")

Regulators and their sanctions are interlinked. As an example, a rating as "distrusted taxpayer" can also affect in completely different areas, and the NDRC currently leading the development of a standardized credit restoration mechanism (see EUCCC Study, pp15 f, 18 f).

Other credit systems

These include:

Credit Reference Center of the PBoC providing enterprise credit reports based on voluntarily filings made by companies at local PBoC branches and data obtained from financial institutions and other regulators; with a focus on financial creditworthiness (debts, repayments, tax arrears, social insurance compliance, etc)
Industrial or special regulatory ratings, eg regarding locally regulated business activities, special sectors like international trade, construction, food and drugs, agriculture and environment, or horizontally relevant aspects like customs track records, based on data obtained from regulators and companies.
Ratings provided by associations, eg ratings for SMEs, based on data voluntarily provided by the associated enterprises
Ratings provided by various commercial credit reporting companies, like Experian, Qichacha etc. Status as of September 5, 2019 (as update to the initial article published July 24, 2019).