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China’s Potential New Trade Weapon: Corporate Social Credits (#GotBitcoin)

Program will reward or punish companies for their behavior, but foreigners worry Beijing will use it to impose political orthodoxy on international firms. China’s Potential New Trade Weapon: Corporate Social Credits (#GotBitcoin)

After five years, China is putting the finishing touches on a sweeping new system to punish and reward companies for their corporate behavior. But foreigners worry that, amid the continuing U.S.-China trade dispute, Beijing will use its new corporate “social credit” system as a weapon against international businesses.

While Beijing’s better-known plans for a social-credit system for individuals have stirred privacy concerns, a parallel effort to monitor corporate behavior would similarly consolidate data on credit ratings and other characteristics, collected by various central and local government agencies, into one central database, according to China’s State Council. The system is set to fully debut next year.

An algorithm would then determine to what degree companies are complying with the country’s various laws and regulations. In some cases, companies could be punished by losing access to preferential policies or facing stricter levels of administrative punishment, a State Council document showed. Analysts said that other punishments could include denial of access to land purchases, certain loans and procurement bidding.

The imminent nationwide implementation of Beijing’s corporate social-credit system is unnerving foreign businesses, which have been bracing for further countermeasures from Beijing as the trade war continues to take unexpected twists and turns.

Beijing said in late May that it is drawing up a blacklist of entities it deems unreliable in apparent retaliation against Washington’s campaign targeting Chinese telecommunications giant Huawei Technologies Co.

“It makes the instruments of the social-credit system usable as a tool in the trade conflict,” said Björn Conrad, chief executive and co-founder of Sinolytics, a China-focused consulting firm that is publishing a report Wednesday on Beijing’s new social-credit system, together with the European Union Chamber of Commerce in China.

Mr. Conrad said some of the language used in recently released draft rules for a blacklist of heavily distrusted entities—which is a part of the corporate social-credit system—echoed the Beijing authorities’ warnings about their planned unreliable foreign-entities blacklist, suggesting that the two efforts are intertwined.

A company’s social credit could affect the individual credit score of the company’s key personnel and vice versa, according to the EU Chamber report—a point of particular concern for executives. A company’s social credit could also be influenced by the conduct of its suppliers, the report said, and getting removed from a blacklist could take years.

A separate report released Tuesday on the corporate social-credit system by Beijing-based consulting firm Trivium China, whose clients include foreign companies, doesn’t link it to the U.S.-China trade war but said the system “will provide the government with vast amounts of systematized data,” and warned about the possibility of Beijing “co-opting technology to enforce political orthodoxy.”

Beijing’s social-credit system is set to add to the complexities of doing business in China, a tantalizing but frustrating market.

The amount of data collected by authorities administering the corporate social-credit system would give them “a massive X-ray of the Chinese economic landscape,” said Jörg Wuttke, president of the EU Chamber in China. The chamber’s report said that a foreign company blacklisted by tax authorities in, say, Hubei province could find that information used by other government agencies in other provinces to punish the company.

While some analysts are hopeful that the system could also allow for more objective standards to be applied to foreign and domestic companies, the new regulations will likely mean higher compliance costs and more uncertainty for foreign businesses.

Some of China’s biggest and best-known corporate giants are deeply involved in the rollout of the new corporate social-credit system: Huawei, e-commerce and cloud services operator Alibaba Group Holding Ltd. and mobile services giant Tencent Holdings Ltd. are all named as members of a consortium developing one of the system’s key databases, according to a Chinese government procurement notice.

These companies, as well as the government agencies leading the implementation of the corporate social-credit system—the State Council, State Administration for Market Regulation, the National Development and Reform Commission and the Ministry of Commerce—didn’t immediately respond to requests for comments.

Besides credit ratings, the system incorporates various blacklists of companies caught doing something illegal or undesirable, such as spreading information deemed inappropriate online or violating safety standards, according to the separate reports by Trivium and the EU Chamber. The system also includes lists of companies with great credit scores. Some of the credit information would be publicly accessible online.

China’s social-credit system has been under development since 2014, well before the U.S.-China trade war. The State Council published a blueprint for the program, which it said would “build sincerity” in economic, social and political activity.

Updated: 12-2-2019

Chinese Citizens Must Scan Their Faces to Register for New Mobile-Phone Service

New requirement will further increase the government’s scrutiny of its people.

Chinese citizens registering for new mobile-phone services will now have to scan their faces to verify their identities, a move that will further increase the government’s scrutiny of its people.

The requirement, which came into effect Sunday, is aimed at minimizing telephone fraud and preventing the reselling and illegal transfer of mobile phone cards, the Ministry of Industry and Information Technology said in a notice in September. In the past, Chinese citizens applying for a new mobile phone number had to personally present an identity card.

Concerns have grown as facial recognition becomes more and more prevalent in China, with authorities applying artificial intelligence to sift through reams of data collected in a bid to boost the economy and centralize oversight of the population.

China is home to some of the world’s most prominent facial recognition startups, and citizens can make payments, board planes and enter office buildings with a quick scan of the face. Still, its use has been controversial, most notably in Xinjiang, a region in the country’s northwest where authorities have used the technology to surveil its Uighur Muslim minority.

Analysts say the implementation of facial recognition for identity verification by Chinese telecom providers and the lack of any alternative for anyone looking to get mobile services raise fresh worries about security and privacy.

The ministry had given telecom companies until the end of November to put into place measures in their physical outlets that use “artificial intelligence or other technological means” to ensure the identity of new applicants can be verified with their facial data. The law doesn’t make any reference to a user’s nationality and doesn’t address mobile virtual network operators, which resell services like roaming and text messaging from conventional operators. It also doesn’t address existing mobile service customers.

The three carriers, China Mobile Ltd., China Telecom Corp. and China United Network Communications Group Co., known as China Unicom, didn’t immediately respond to requests for comment.

The new regulation gives the Chinese state, which backs the country’s three main telecom providers, the ability to better track people based on ethnicity and other factors, said Ben Cavender, Shanghai-based managing director at China Market Research Group.

“From the individual standpoint, it is a little scary because it feels like you don’t have a lot of privacy,” Mr. Cavender said. “There is a pervasive sense of someone knowing what you’re doing at all times.”

As concerns have mounted, so has a pushback against facial-recognition technology and other perceived intrusions into personal privacy. Last month, a Chinese law professor in eastern China raised a rare legal challenge over the way facial-recognition was being deployed commercially.

The lawyer, Guo Bing, sued a wildlife park and zoo in Hangzhou for violating his consumer rights by making it mandatory for park members with annual passes to share their facial data as part of a new entrance system. Mr. Guo declined to comment on the status of the case.

On Nov. 20, a group of more than two dozen companies led by Chinese artificial-intelligence startup SenseTime Group was created to develop a national standard for facial-recognition technology, the Hong Kong-based company wrote in a social media post last week. The standards will help regulate and improve how facial recognition is used in China, SenseTime said.

Updated: 6-25-2021

Jack Ma’s Ant In Talks To Share Data Trove With State Firms

The fintech giant is in discussions to start a new credit-scoring business with Chinese state-owned enterprises.

Ant Group Co. is in talks with Chinese state-owned enterprises to create a credit-scoring company that will put the fintech giant’s proprietary consumer data under regulators’ purview, according to people familiar with the matter.

The new entity, which could be established as soon as the third quarter of this year, could result in Ant ceding some control over the voluminous data it has on the financial habits of Chinese citizens. More than one billion individuals use Ant’s Alipay app to spend, borrow or invest their money, and the information that Ant has collected and used has been the secret sauce behind the company’s success in recent years.

The talks between Ant, which is controlled by billionaire Jack Ma, and Chinese state-owned companies are likely to result in the formation of a joint venture that would be licensed as a credit-scoring company. Ant and regulators have also been discussing whether the firm should be run and controlled by Ant or state-owned companies, according to people familiar with the matter.

The regulators are pushing for prospective state-owned shareholders to play a greater role in the new entity in order to have a bigger say in how it operates, according to some of the people familiar with the negotiations. Potential shareholders include a Shanghai-based financial conglomerate.

There have also been talks about what sort of data would be collected by the new firm, and how the credit scores it produces would fit into China’s broader plans to build a nationwide database, the people added.

The discussions are continuing and final decisions haven’t been made, the people said.

An Ant spokesman declined to comment on plans for the credit-scoring business. The People’s Bank of China, which is overseeing a broader overhaul of Ant, didn’t respond to requests for comment.

The new venture with state-backed investors would override Ant’s previous attempts to spearhead a national credit-scoring system under its own brand, Zhima Credit, which it started six years ago. Ant once had ambitions of using Zhima—previously known as Sesame Credit—to provide credit scores for most of China’s population, but those hopes were dashed, reducing the division to what is in essence a loyalty program for Alipay users.

For all of China’s world-beating advances in mobile payments and financial technology, the country has lacked a robust national credit-scoring system akin to America’s FICO, whose scores are used by many lenders and are based on individuals’ borrowing and repayment histories from a variety of sources.

The PBOC runs a Credit Reference Center that collects credit information about individuals and companies from banks and other financial institutions. But it lacks data on many people who don’t qualify for traditional bank loans.

Over the last decade, Ant and other fintech companies ramped up lending to much of China’s population, but the information they gathered on individuals was largely kept within their own systems.

Until recently, Ant had resisted pressure from financial regulators to share its data or feed it into a central repository accessible by other financial institutions, saying that it didn’t have its users’ consent to do so.

The tables have now turned, following the cancellation of Ant’s initial public offering and a broader regulatory crackdown on China’s technology giants. By strengthening its grip over Ant, Beijing is also trying to put a stop to what it considers excessive data collection and lax consumer-privacy protection.

Ant in April said it would restructure into a financial-holding company overseen by China’s central bank. It pledged to get its payments, lending, wealth-management and other operations fully regulated, and said it would set up a company that will apply for a personal-credit reporting license.

Earlier this month, Ant started a consumer-finance company that also counts state-owned and private enterprises as shareholders. That firm will change the way Ant funds and makes some of its short-term loans.

Ant, whose Alipay platform handled the equivalent of more than $17 trillion worth of payment transactions and originated loans to more than a third of China’s population in the year to June 2020, has collected troves of consumer data for years.

The company in 2015 launched Sesame Credit, then changed the name to Zhima, the Mandarin word for Sesame. Ant said its aim was “to help the hundreds of millions of Chinese consumers and businesses who have little or no formal credit history establish their trustworthiness in a commercial setting.”

Mr. Ma, who founded Alipay’s original parent Alibaba Group Holding Ltd., had high hopes for the division, whose name was similarly inspired by the folk tale “Ali Baba and the Forty Thieves.” In it, the magical phrase “Open Sesame” revealed the entrance to a cave where thieves had hidden a treasure.

Around that time, the PBOC invited eight private companies, including Zhima and Ant’s rival Tencent Holdings Ltd. , to pilot their own credit-scoring systems. That set off a race by the companies to build what they hoped would eventually be adopted as the country’s premier credit-monitoring database.

Zhima expanded aggressively, hiring people from companies like Equifax to build a risk-assessment and scoring system that could be connected to thousands of financial institutions such as banks, consumer-finance companies and online lenders.

Zhima’s credit-scoring metrics incorporated more than people’s borrowing and payment histories into its assessments. It also analyzed alternative data such as individuals’ online social networks and purchasing habits, which are considered complementary to information about car loans and mortgage debt.

In early 2016, Mr. Ma made Zhima his first stop during a post-Lunar New Year visit to Ant’s Hangzhou headquarters. In a pep talk to staffers, he proclaimed that “Zhima shall be adopted in every household,” according to a person who was there.

Inspired, the Zhima team accelerated the rollout. Between June and September that year, it connected to more than 300 nonbank financial institutions such as peer-to-peer lending platforms that were mushrooming across China, according to people familiar with the matter. It also supplied its credit scores to dozens of commercial banks and in return, some of them provided it with loan data and default information, the people said.

The industry expected the PBOC to hand out credit-scoring licenses after the pilot program ran its course.

That never happened. In 2017, regulators stepped up a crackdown on peer-to-peer lending platforms after some of them turned out to be scams or lacked proper risk controls.

The PBOC also decided it no longer wanted a nationwide credit-scoring system run by private companies with profit motives. A central-bank official told a state-owned media outlet at the time that the firms weren’t willing to share information and had conflicts of interest as well as a poor understanding of how to do credit scoring.

Instead, the central bank in early 2018 issued a three-year license to a new government-led company called Baihang Credit Scoring. The eight companies that were previously asked to build their own systems were told to suspend those efforts and were each given an 8% stake in Baihang, with the remaining 36% held by a government-affiliated entity. They were all asked to feed data into Baihang to help build a national credit-scoring database.

It was another failed effort, because some of the companies didn’t want to contribute data that their rivals could benefit from.

“There was no way Ant was going to share all this with a company in which it had only an 8% stake, so that most of the benefits of the data would potentially go to other companies,” said Eswar Prasad, a former China head of the International Monetary Fund and a professor at Cornell University.

With its ambitions curtailed, Zhima’s relevance began to fade. Ant changed its mission and made it more akin to a loyalty program for Alipay users. People with high Zhima scores could enjoy perks such as deposit-free hotel bookings and rentals of cars, bicycles and mobile power banks. The Zhima team shrank, becoming a shadow of its former self, according to people familiar with the matter.

In January this year, the central bank put out a draft rule to “strengthen the supervision and management of credit-scoring businesses.” It said such firms would require licenses to operate legally.

Zhima won’t be part of the new credit-scoring company that Ant is likely to set up with state-owned firms, according to people familiar with the matter. The new entity would have access to the same data used by Zhima, and after it is formed Ant would exit its position as a shareholder in Baihang, the people added. Baihang’s credit-scoring license expired in January, according to a regulatory filing. Baihang didn’t respond to a request for comment.

At the end of the day, Ant will have to share some of its consumer data with other institutions because “it’s a matter of public interest,” said He Zhiguo, a professor of finance at the University of Chicago.

Updated: 1-31-2022

China’s Communist Party Creates “New Era Civilization Practice Centers”

China’s Potential New Trade Weapon: Corporate Social Credits (#GotBitcoin)

A sprawling propaganda campaign that has gone virtually unnoticed outside the country is taking place in ‘civilization’ centers, new report finds.

At a new Communist Party-built facility in Shanghai designed to cultivate civilized thought and behavior, a recent schedule of events led off with a speech about the city’s role as site of the party’s first official meeting in 1921.

From there, the offerings grew more eclectic: yoga classes, a cappella singing and, listed under a section called residents’ education, a free Wednesday afternoon showing of Christopher Nolan’s 2008 action film “Batman: The Dark Knight.”

The facility is one of more than 100,000 rolled out nationwide in the past four years as part of a sprawling propaganda effort that casts new light on the party’s drive to reinsert itself into the daily lives of Chinese people.

Virtually unnoticed outside China, the campaign to build what the party calls New Era Civilization Practice Centers was quietly launched in 2018 and has since spread to some 500 urban and rural counties across the country, according to a report published Monday by ChinaFile, an online magazine run by the New York-based nonprofit Asia Society.

The centers combine instruction on party ideology with a hodgepodge of cultural activities and volunteer work, which vary widely depending on where they are located, according to state-media reports and government documents collected by ChinaFile and verified by The Wall Street Journal.

In the wealthy southern metropolis of Guangzhou, the centers offer visitors a chance to learn cooking from a master Cantonese chef, be introduced to the latest drone technology or take a virtual tour of a state-of-the-art wastewater-treatment facility, according to local state-media reports.

In the impoverished mountains of southwestern China’s Guizhou province, centers organize volunteers to go house-to-house teaching villagers thrifty spending habits.

By building the centers, the Communist Party is trying to both convince people of its generosity—and to mold them into model citizens, ChinaFile’s researchers write, thus “restoring an intimacy between ‘the masses’ and their rulers that decades of economic liberalization have worn thin.”

Survey-based research suggests that Chinese people are growing less interested in politics in general, according to Dimitar Gueorguiev, an assistant professor of political science at Syracuse University who studies political participation in China. In one sense, it’s a sign that China’s leaders have succeeded in building a stable society that gives people the luxury of worrying about other issues.

“But at the same time it can also diminish the role for the party, and I think that’s been a serious concern,” Mr. Gueorguiev said. “The problem is you can’t really will people into being engaged.”

In line with the rise of the mobile internet, Chinese leader Xi Jinping and his officials have expanded their efforts to disseminate his ideological vision for the country using short political videos that can go viral and bolster feelings of nationalism.

The New Era Civilization Practice Centers represent a softer version of the same campaign, carried out in the real world, according to ChinaFile and state media articles examined by the Journal.

The first centers were built in 50 counties as part of a small pilot program launched in 2018. The program expanded roughly 10-fold the following year, when party agencies in charge of propaganda and moral education issued an implementation plan that hailed the centers as helping to “truly open up the ‘last mile’ in terms of ‘propagandizing to the masses, educating the masses, leading the masses, serving the masses.’ ”

China’s Potential New Trade Weapon: Corporate Social Credits (#GotBitcoin)

Guangzhou is now home to nearly 3,000 of the centers. Branches also exist in most neighborhoods in Shanghai, as well as in most districts in Beijing, the port city of Tianjin and the southwestern city of Chengdu.

Local governments and institutions spent as much as 700 million yuan, equivalent to $110 million, on projects related to the centers between August 2018 and September 2021, ChinaFile estimated, based on government procurement documents.

One center in Shanghai recently held a daylong event in which volunteers from the neighborhood offered to repair umbrellas and watches free of charge. A bulletin board nearby encouraged staffers and volunteers to “transmit new thinking and model new behavior.” On another occasion, the same center offered bottles of cooking oil and laundry detergent to encourage area residents to get their Covid-19 booster shots.

Jessica Batke, a senior editor at ChinaFile, likened the centers to Mao-era work units, which were once responsible for both propaganda and social services. But where work units had a captive audience, the party no longer has the same leverage over individual behavior and thus has to work indirectly, she said.

“It’s like when missionaries go and set up a school,” Ms. Batke said. “Maybe they’re not explicitly teaching about religion, but the goal is for people to think: ‘This benefit is coming to me from someone associated with that religion, and maybe I should take more of an interest in it.’ ”

China’s cabinet, the State Council, didn’t respond to a request for comment about the centers.

The centers in Shanghai appeared to attract mostly elderly residents, some with grandchildren in tow. Visitors seemed to gravitate to the free movies and take advantage of the free medical advice, but they showed little interest in lectures on Mr. Xi’s ideology.

The popularity of the centers elsewhere is difficult to determine. According to state media, one center in Guangzhou’s Panyu district had by November 2020 held more that 1,000 activities, attracted more than one million visits and organized 90 volunteer teams comprising 3,200 people.

China’s Potential New Trade Weapon: Corporate Social Credits (#GotBitcoin)

Another center in the suburban Beijing district of Huairou was virtually empty when the Journal visited late last year. Pictures of previous gatherings at the center adorned posters arranged under Chinese characters reading: “The Last Mile.” A staff member said that many activities had been canceled due to Covid-19 restrictions, but that it was still arranging volunteers for outside events.

One outside event listed on the Huairou center’s website was a children’s workshop about the discovery of gunpowder—celebrated in China as one of the country’s great inventions—run by the Candy Bookstore, a local bookshop. Staff at the shop said they had never heard of the New Era Civilization Practice Center and didn’t know why the event was listed on its website.

Mr. Gueorguiev of Syracuse University said elements of the campaign were likely for show—a way for local officials to demonstrate to Mr. Xi that they are answering his call to expand the party’s influence at a grass-roots level.

But the centers could also come into play as Mr. Xi tries to recalibrate China’s economy away from the capitalist excesses of the past few decades to a new phase of development based on “common prosperity,” he said. That shift has prompted some of the country’s wealthiest entrepreneurs to vastly expand their philanthropic efforts.

“That’s going to be a big part of everyone’s status. It’s going to be measured,” Mr. Gueorguiev said, referring to volunteer work. “I’m curious to what extent these centers will be tied into social evaluation, and that might be really meaningful.”

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