China’s Internet of Everything, Everybody, and Every Business

What’s behind China’s Social Credit System? — Report Squared

China’s government is built on planning. Despite having undergone “reform and opening” for the past thirty plus years, government ministries still release five-year plans, industry plans, and provincial plans that are all geared at molding markets, allocating resources, and dictating policies. One feature of these plans, however, is that there is often a gap between what plans promise, and what is achieved. China’s social credit system aims to close this gap.

The May issue of MERICS China Monitor describes the components of a proposed all-encompassing system, a social credit system, that will determine everyday decisions in society and business. Here the Western notion of “credit” has been morphed into something entirely different. For individuals, the social credit system means creating and tracking digital footprints using online monitoring, facial recognition software, financial records, on and on. This has evoked notions of a future Orwellian society.

For business, as the MERICS report lays out, the social credit system becomes a sort of cyber-planning. Data gleaned from industry and government sources will be used to formulate various ratings that feed into an adaptive system governing businesses. This would include compiling investment approvals, annual reports, compliance with government regulations, and beyond. In essence, the social credit system is imagined as a more accurate, more effective, and more timely way to achieving Chinese government goals.

The idea of the social credit system may scratch the government’s obsessive compulsive disorder itch. But getting this system off the ground will be messy, if not impossible.

Goal #1: Tech

By now it is well known that China aims to upgrade its economy into a new growth model driven by technology, innovation, and entrepreneurship. The main tools to achieve this include an indigenous innovation campaign, state-backed funds targeting strategic industries, government-motivated M&A, and market restrictions based on security rationales. Is the social credit system next on deck?

As MERICS explains, foreign investment approvals and public procurement opportunities could be dependent upon a company’s clean social credit record. But what if the government decides to use the “secure and controllability” of a product or service, or source code review, or adoption of domestic algorithms or standards, or willingness to share or sell technology to Chinese companies, as metrics? What if an MNC is left out of the social credit system altogether because of the risks involved?

This is not a far stretch given the ambitions of the Chinese government that are laid clear in initiatives like China Manufacturing 2025 and the Strategy for Innovation-Driven development. The social credit system is the next page of a well-worn play book. But this time, the government expects results fueled by the magic of interconnectivity.

Goal #2: Trust

Many in China, including the government, bemoan a widespread lack of trust in Chinese business and society. The MERICS report lists the problems the social credit system seeks to address: traffic violations, food safety concerns, environmental woes, and online retail fraud, to name a few. Some of these issues are longstanding, and have become intractable. With the social credit system, the Chinese government has settled upon a vision of total monitoring as a stepping stone to accountability. But, the social credit system is clearly a parent that mandates curfews, tracking movements through cellphone GPS monitoring, rather than trusting the kid.

As result, when it comes to regulating company behavior, it is doubtful the social credit system can provide the structural shift needed for change. Rather than relying upon industry standards and market incentives, the social credit system overcompensates in a painfully prescriptive way. This might be the point. There are other examples of Chinese policies that, from the point of view of a multinational company unnecessarily interfere, but mandate common best practices that are lacking among domestic companies.

On the one hand, multinational companies are well-positioned to meet compliance requirements and align with government priorities. On the other hand, they are likely to get tripped up in this increasingly draconian web.

An Industrial Frankenstein?

Creating a dynamic platform that integrates a multitude of data sources as the world shifts and changes will take incredible flexible and fleet footed ingenuity. These are not words one usually associates with state-led projects.

There are already some basic uneasy outcomes. For example, MERICS states that one aspect of the social credit system is to supplement company due diligence efforts. In other markets, this is a job done by corporate credit companies who for decades have maintained commercial databases and issued company credit reports. China’s domesticcorporate credit reporting industry is fragmented and lacks the analytical expertise that is built up with time and resources. Does the government expect to replace this industry itself?

Then there are the technical components to consider. Big data does not mean simply having a lot of data. Data analysis, such as that involved in producing a credit rating, depends upon asking the right questions and using proper techniques. Without clear principles guiding the use of data analytic technologies, and the ability to quickly adopt and utilize new technologies, this system is a catastrophe in the making. It is also a backward-looking system that may be able to analyze data from the past, but only provide marginal foresight.

Finally, bureaucratic barriers abound, and there is certain to be an acute political element to implementation. Data is the new oil. Whoever controls the data, has the control. Chinese government ministries are stove-piped, prone to turf battles and rivalries. A feature of China’s experimental approach to policy, different provinces and localities often maintain different positions on similar issues. This dynamic will be ubiquitous in the establishment and implementation of a system of this scale.

The MERICS report provides a comprehensive look into the inner workings of this system to date, and the focus on the impact to business is a refreshing one. A helpful next step would be to track the progress of the pilot projects already in operation, and to develop a rubric to evaluate China’s technical capabilities in delivering on this project.

The social credit system seeks to transform Party planners into puppet masters with technology-driven prowess. But in the course of establishing the system, state planners may find themselves choking on data and stuck with an industrial machine bolted too tightly together. It will take an Einstein to prevent this from turning into an industrial Frankenstein.

Frankenstein and his bride. Wikipedia Commons.

Report Squared: In this series, I pick an interesting report to read and write up my thoughts. Kind of like a book report, but on a report. So, a report report…or Report Squared. Things I find interesting include the intersection of technology and business, China’s political and regulatory landscape, and our obsession with innovation. All opinions my own! Follow me on Twitter.