“Franken-Law”: Initial thoughts on the Draft Social Credit Law

I am hesitant to write anything about the new Draft Social Credit Law because, frankly, the draft is a mess and adds little to previous authority. Even its title (the Law on Establishing the Social Credit System) suggests that the drafters are aware that social credit is still very much a work in progress – which raises the question of whether a law is even appropriate at this time.

Rather than focusing solely on “credit regulation” (信用监管) as the provincial regulations have done, the draft also attempts to also address the relatively independent social credit concepts of “creditworthiness” (also called “integrity”) and financial credit reporting (征信).  As each of these topics has distinct content and goals, the result is something of a ‘franken-law’ with chapters on each aspect sewn roughly together, rather than a definitive integration of the diverse elements. Ultimately, in seeking to address the wide variety of projects under the ‘social credit’ umbrella, the draft overextends itself, doing justice to none of them. Hopefully, the draft will undergo serious revisions before it ever becomes law, meriting more in-depth analysis.

Creditworthiness:          

Nearly half of the draft’s articles (articles 12-56) are concerned with ‘creditworthiness’ in various contexts. Creditworthiness is the vaguest piece of the social credit puzzle, and essentially amounts to a propaganda and morality campaign to instill concepts of honesty and trustworthiness in all areas of governance, business, and public life. It has typically proceeded through education and publicity campaigns, rather than any type of enforcement mechanism – unlike the more technical areas of credit regulation and financial credit reporting- as legal authority has consistently required that punishments are only appropriate for violations of law.

The draft’s creditworthiness section is long, not because of its detail, but because it individually addresses creditworthiness in specific areas of government, commerce, the judiciary, and social affairs. This includes areas as distinct as scientific research, the courts, medicine, telecommunications, and environmental protection, to name a few, and because each is allotted a single article, and the concept of ‘creditworthiness’ is fuzzy to begin with, the content is often little more than sweeping aphorisms of little value. The problem is only amplified by stylistic differences between the many articles, making it feel as if the various government departments separately drafted the sections related to their jurisdiction, rather than working for consistency.

Consider for example, this typical line from the section on courts: “Judges shall abide by professional ethics and perform their duties in accordance with law.”  This adds nothing to the understanding of social credit or to judicial practice, and would clearly be a better fit in laws specifically addressing judges and the courts. Almost all of the content on creditworthiness would more naturally belong in laws and regulations on the specific subject areas rather than in a social credit law.

 The entire section should either be removed entirely or reworked to emphasize how the overall requirements for government actors to foster creditworthiness should play out in practice and to explain how creditworthiness is integrated into other elements of social credit. Specific subject area authority can then build on those requirements.

Credit Regulation

Credit regulation has been the core of social credit and the primary focus of various provincial social credit regulations to date. It essentially refers to using entities’ (primarily businesses’) history of compliance with laws and legal obligations to determine the level of regulatory scrutiny they will be subjected to in the future. The idea seems simple: those who have good records of compliance will be inspected less rigorously, and those who have records of violations will be more intensely inspected, but raises a host of technical challenges in its implementation. Issues include what information should be considered, how long it should be kept, how data should be protected and shared between departments, transparency in decision-making, the consequences of “bad credit”, remedial measures etc. Most of the development of social credit has involved crafting legal rules to address these issues, such as recent national-level lists of both the acceptable inputs for credit records and the permissible types of penalties that might result.

The draft law largely incorporates the progress to date, adding a few new wrinkles, but not really additional clarity.  For example, the draft allows that entities may request a “hearing“ when they are to be entered into a list of serious violators, but no detail is given on what such a hearing would look like, when it should take place, or what the outcomes might be. Another example is the rules on credit restoration- meaning the removal of records of misconduct from credit files after the problem is corrected- which are substantially simplified from existing departmental authority rather than having the procedures authoritatively unified. In other areas, such as article 90’s listing of consequences for bad credit, penalty items from the still valid national list of 12 basic penalty types seem arbitrarily regrouped, confusing their relationship and contradicting existing unifying authority.

I have long advocated that instead of a “Social Credit Law”, China would benefit more from a “Law on the Collection and Use of Administrative Regulatory Information”, which would address the core questions of credit regulation. Such a singular focus would allow those familiar with the technical legal challenges to dive deeply into procedural questions of a data-based regulatory regime, and give all questions the attention they deserve. If the law, like this draft, does not provide additional clarity and unification of diverse standards, it might be better to keep progressing piecemeal through lower-level authority.

Credit Reporting

The development of a ‘credit reporting’ industry has been another key project of the social credit system. Private credit service establishments are envisioned as providing a variety of services, most related to traditional financial credit. Many in China are unbanked or under-banked, having never held a mortgage or borrowed money, and social credit has sought new ways to extend the credit economy to them. Previously established law has addressed this, but social credit increasingly attempts to integrate ideas of credit regulation’s compliance and even creditworthiness into assessments of whether individuals pose a loan risk. Beyond these individual financial credit ratings, the idea is that the market would also provide products helping market actors analyze other types of risks to investments, partnerships, etc. ; often by relying on the ‘public credit information’ created or controlled by state actors and used for credit regulation. In turn, state actors might also consider the findings of credit service establishments in their regulatory work.

The draft is stronger in its section on credit reporting, perhaps because it is based on a longer history of established law. The real question again is whether it needs to be included in the same law as the information on ‘credit regulation’ at all, or would be better served by having its own related but separate authority- as it has in the past. Again, to the extent that a Social Credit Law is needed, it should be working to show how these various elements relate to each other, rather than trying to comprehensively legislate each of them individually.