China’s social credit poses rising risk to CEOs

HONG KONG (Reuters Breakingviews) - China’s “social credit” system is another worry for executives, as tensions spike over the arrest of a Huawei executive at U.S. behest. The government’s plan to blacklist people and companies for misbehaviour is widely misunderstood. But its implications for business should raise eyebrows. By holding executives accountable for their company’s misdeeds, it blurs the already fuzzy Chinese line between corporate and personal interests.

Security agents guard the entrance of the Great Hall of the People where sessions of the National People's Congress (NPC) are taking place, in Beijing, China March 6, 2016. REUTERS/Damir Sagolj

Unlike financial credit reports, the central government does not plan to assign a numeric score to individuals or companies – although some local governments have experimented with them. Nor is it a tool targeting political dissent per se. The social credit system is better understood as a loose collection of initiatives, in part aimed at improving the enforcement of existing laws. Yet the punishments proposed, in particular the use of blacklists, are cause for concern.

Most of the blacklists apply only to specific industries. Trying to open the emergency door on a plane, for instance, could get offenders excluded from air travel. Select circumstances, however – such as defying a court order for payment – entails wider blackballs extending to children of violators, who might be barred from attending private schools. When the offending entity is a company, some executives and legal representatives could be blacklisted personally. Jia Yueting, the high-profile founder of troubled tech startup LeEco, was publicly banned from planes after he defied an order to return from the United States to China to settle debt problems.

The social credit system poses additional risks to foreign companies. Take the tiff between U.S. airlines and China’s civil aviation agency earlier this year over their labelling of Taiwan as a “country” in ticket-booking systems; Beijing considers the island a breakaway province. If a court had fined the airlines and they refused to budge, it’s conceivable their China-based managers might have been placed on a do-not-fly list, or seen their children kicked out of private school.

The new regime, fairly enforced, could encourage compliance: a good thing. But too strong a link between Chinese executives’ personal liability and that of their corporations might also discourage them from taking otherwise acceptable business risks, or delegating authority. In the long run that won’t fly.

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- An official Chinese news site said Michael Spavor, a Canadian businessman, has since Dec. 10 been under investigation on suspicion of harming the country’s national security. It follows news that a former Canadian diplomat now working for the International Crisis Group is being held on the same grounds.

- Huawei’s Chief Financial Officer Meng Wanzhou was granted bail on Dec. 11, following her arrest in Vancouver on Dec. 1 at the request of U.S. authorities. Meng is currently facing possible extradition to the United States. China warned Ottawa of severe consequences if she is not released.

- China’s social credit system is a collection of initiatives to enhance financial credit scoring, better enforce existing rules and regulations in some industries and improve societal trust. The central government outlined the initiative in 2014.

- The Beijing municipal government will assign individuals and companies “personal trustworthiness points” by 2020, state media said on Nov. 20. The plan did not detail how the points system would work. It is one of several local-level “social credit” schemes either currently in place or under development.

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