> Posted by Jeffrey Riecke, Communications Specialist, CFI

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Does a speeding ticket help predict whether you will pay back a loan? While this might seem like a stretch, it may not be as farfetched as it sounds, at least in China.

China’s government is piloting a new ‘social credit’ scoring system that takes into account a diversity of financial and nonfinancial factors and behaviors. The financial ones are familiar – being delinquent on payments for insurance or social security. The nonfinancial ones are potentially troubling, and include, to name a few, traffic violations, jaywalking, dodging metro fares, violating the country’s family planning rules, criticizing the ruling party, and neglecting your elderly parents.

The social credit system may be used to affect financial opportunities, like securing loans, as well as non-financial ones, like job offers, your child’s admission to schools, faster treatment at government offices, access to luxury hotels, and being able to buy transit tickets.

As one would suspect from its name and design, the system has aims far beyond extending financial services. (Only 320 million of China’s 1,400 million citizens have a traditional credit score.) The system aims to assess citizens’ overall trustworthiness. According to planning documents, the initiative’s objective is “to allow the trustworthy to roam everywhere under heaven while making it hard for the discredited to take a single step.” A high-level policy document released in September writes: “If trust is broken in one place, restrictions are imposed everywhere.” Indeed, in October President Xi Jinping called for innovation in “social governance” that would “heighten the capacity to forecast and prevent all manner of risks.” Reportedly, those who are well-behaved will gain privileged access, while those who break social trust will not only be subject to restrictions, they’ll face expanded supervision and random inspections.

The social credit system is being piloting across a handful of cities across the country and is slated for a nationwide roll-out by 2020. The system is driven by the State Council (which is the Government’s cabinet) and the Central National Planning Agency.

The new social credit system would tie into the country’s existing blacklisting system, which is part of its judiciary system and affects citizens’ abilities to partake in certain services. In a comprehensive investigation of the new social credit system, The Wall Street Journal shares an anecdote of how under the existing blacklist system, a travel company executive can’t buy tickets for planes or high-speed trains because a Hangzhou court put him on a blacklist after he lost a dispute with a landlord. The social credit system’s blueprints, released by the Government in 2014, indicate that the blacklisting mechanism will expose offenders, enforce restrictions, and embolden well-behaved citizens.

In the neighborhood of Yangjing, as part of the social credit system pilot, a “red list” of exemplary residents is already being published. However, it hasn’t yet been decided if the corresponding “gray list” of residents who have behaved badly will be publicized. Yangjing has roughly 170,000 residents but only 120 have made the red list. Limited data sharing has been cited as limiting the system’s ability to rate residents.

The social credit system will extend beyond citizens to rating companies too, in an attempt to hold organizations accountable for malfeasances like paying bribes, polluting, or health infractions.

More than three-dozen local governments across China are participating in this pilot phase, compiling digital records of social and financial behaviors. The system incorporates data produced by central government departments and local governments, such as court records, and loan and tax data. It is not clear whether governments are tapping private sector data. The 2014 system blueprint designates internet data as a “strategic national resource” but it remains to be seen whether private and public systems will be combined. As it stands, e-commerce companies like Alibaba are only obligated to provide the government with non-anonymous data revealing individuals’ identities in special cases like lawsuits.

However, the government has greenlighted eight companies to experiment via their own social credit scores pilots. For example, e-commerce giant Alibaba has droves of data pertaining to the everyday habits of its users. Alibaba’s Ant Financial and Sesame Credit are assigning users ratings based on behavior and partnering with other entities to offer perks. A good rating, which might come from behaviors like buying “productive” goods like diapers as compared to videogames, can enable express security screening at the Beijing airport, renting cars without deposits, or a prominent listing on the Baihe matchmaking site.

In its current form, China’s social credit system is dangerously suspect: it can be interpreted as a veiled attempt from the regime to dictate morality and more closely track and control a populace that already lacks basic rights like freedom of speech, particularly given that political activity is one of the elements observed and recorded in the score.

It is not surprising that a country with a strong tradition of heavy social control would devise a system that monitors and leverages so many aspects of a person’s behavior. But is it equally farfetched to think that elements of a social score could find their way into countries that prize and attempt to protect individual freedom? Consider the possible slippery slope. Today, use of data from multiple facets of a person’s life are used to tailor advertising and are increasingly incorporated into credit scoring algorithms. It is not inconceivable that such data could eventually be used to determine access to health insurance, preferential treatment by many industries, targeting by political parties, and ultimately, by government agencies.

Instilling incentives to improve citizens’ and organizations’ behaviors sounds like a socially positive aim. Who wouldn’t want our countries to be safer or our fellow citizens to pay their fair share? But contemporary systems whose punishments are siloed within their respective systems – e.g. traffic violations resulting in fines or revoking ones drivers license – are undoubtedly more appropriate.

Have you read?

Insights into an Evolving Peer-to-Peer Lending Industry in China

Financial Education in China: Challenges and Lessons in an Embedded Education Model

Improving Access and Usage of Financial Products and Services in China