China’s citizens are no strangers to being monitored by, well, strangers. Since the Mao era, the government has maintained the dang’an system in which each citizen’s dang’an, or personal file, served as a womb-to-tomb dossier — comprised of school grades, job evaluations, political leanings, and much more — meant to help the Communist Party maintain control over each individual. But with the rise of China’s market economy and the increased mobility of Chinese citizens, the dang’an’s influence has waned to the point that today 74 percent of Chinese citizens believe dang’an has no influence over their lives. However, dang’an is not dead; it’s just been digitized.
In its place, China is developing a score that individually ranks citizens based on their moral fiber. The score, part of China’s Social Credit System (SCS), is the government’s attempt to evaluate each of its 1.4 billion citizens, FICO-style. When SCS becomes mandatory in 2020, it will construct scores for every citizen based on not only credit risk, but also sincerity. To do this, the government is pulling data from four key areas — “administrative affairs, commercial activity, social behavior, and the judicial system” — and building a robust private industry of competing social scores. If the scope of this system seems gargantuan, that’s because it is. The State Council, China’s cabinet, stated in a planning document that SCS’s “objective is raising the honest mentality and credit levels of the entire society.” Yet the need for some sort of credit score in China is real. In an odd twist of fate, a fundamental free-market need — the ability to assess individual credit risk — has driven China to a system that seems more interested in serving as a loyalty program for the country’s “socialist core values” than aiding its burgeoning consumer finance industry.
The State Council’s planning document suggests that SCS will combine government, bank, e-commerce, criminal, and health data. It even goes so far as to claim that SCS will “strengthen credit construction in the area of population and birth control.” According to Premier Li Keqiang, this comprehensive system will “give sufficient incentives to whistle-blowers” of antiregime behavior and have “an integrated punishment and black list mechanism so that one dishonest behavior will result in restrictions at every turn.” Yet despite the Orwellian nature of the new system, some Chinese citizens are welcoming the return of totalitarian data collection. Vendor Chen Chao, 34, claims that “an electronic file will be more convenient for [him],” and state-owned sports company employee Yolanda Liu, 30, practically demands SCS, stating, “China needs a credit system so that people like me who are responsible can get more benefits.”
Yolanda is right: China needs a nationwide credit rating system so that responsible borrowers have access to a line of credit. Three out of every four Chinese citizens lack publically available credit histories. By comparison, only one out of ten US citizens fall into this creditless camp. The People’s Bank of China, the country’s central bank, maintains credit histories for only 320 million citizens out of the 1.4 billion population. The Chinese consumer credit market isn’t wide enough to construct scores from scratch — debit cards trounce credit cards in popularity — and there’s no obvious way for the government to divine creditworthiness through its records. As a result of the dearth of consumer credit data, only 15 percent of loans offered by traditional Chinese banks go to consumers, compared to over half of all loans offered by US banks. This lack of credit information doesn’t just stifle Chinese bankers, but also has serious effects on the economic realities of families and the whole Chinese economy.
Without traditional banks to lend consumers money, the average Chinese household saves 40 percent of its annual income, eight times more than its US counterpart. And while this abundant saving may seem fiscally responsible, it has detrimental effects on the relatively sluggish Chinese economy. A lack of credit makes it harder to purchase houses and start businesses, both of which fuel economic well-being. The country’s manufacturing sector may be slowing down, but its consumer spending has room to grow with levels of consumption far below the rates of comparable nations. If Chinese consumers were able to free up more disposable income from their savings through greater access to credit, they could jumpstart consumer spending and reinvigorate the Chinese economy.
Anticipating this need for credit scores and the country’s economic growing pains, the government has a plan. Within the past year, China has granted eight companies licenses to sell credit rating services. Among the licensed companies are Internet giants Tencent and Alibaba — two companies with enormous databases of consumer data. By giving the private sector the go-ahead to develop credit rating systems, the Chinese government can monitor the market demand for credit scores while also benefiting from the failures and triumphs of these companies. This is especially useful given the limited data on past financial behavior; the government needs innovative methods to predict each consumer’s likelihood of default. In this way, the private program is already working. For instance, China Rapid Finance, which uses Tencent data to calculate credit ratings, has found that people who purchase curtains or scuba gear are more creditworthy, while those who buy photography equipment are less likely to pay their debts. Although this isn’t how US credit bureaus typically calculate credit scores, China’s nontraditional approach to credit scores could help the consumer financial industry better service customers and the government more effectively develop SCS. Yet it also foreshadows a warping of consumer data.
The highest profile entry into the consumer credit rating space is Alibaba’s Sesame Credit. Each user’s Sesame score ranges from 350 to 950, with scores of 700 and above considered excellent. The company encourages users to compare their scores to those of others, a practice uncommon in countries with more established credit rating systems. Alibaba integrates Sesame Credit with Baihe — China’s biggest matchmaking service — and encourages 30 million college students to download a smartphone game that pits the player’s Sesame score against that of friends, classmates, and other schools in return for cash prizes. By doing so, the company seems to imply that a credit score is not only public, but also a measuring stick to compare oneself with friends, family, and even potential soul mates. This move to publicize scores may very well be an overt attempt to grow the Sesame Credit user base through social pressure or an attempt to create a culture around credit scores that allows for easier rewarding and shaming of users. Sesame Credit seems especially concerned with the latter, enthusiastically rewarding users with high scores. Scores of 600 or above can rent cars without a cash deposit; 650 and above can check-out of hotels faster; and 700 and above can get you out of doing some paperwork for visas to Singapore. In order to provide this service, Sesame Credit coordinates with the Ministry of Public Security, the Supreme People’s Court, the Ministry of Education, and the State Administration for Industry and Commerce — it’s practically a miniature SCS.
However, neither SCS nor Sesame Credit is singularly focused on creating a predictive credit score. Alibaba seems more interested in using Sesame Credit to shill its payment service than create a reliable measure of credit. A spokesperson for the company claimed that, “It’s basically the frequency [with which you use Alipay] that matters; it’s not what you buy that matters.” Unlike China Rapid Finance, Sesame Credit does not care whether the user purchases curtains or cameras; it simply wants to sell products through Alipay. Similarly, Sesame Credit offers higher scores for having more friends signed up for the service, encouraging users to pressure their friends into joining. With all these gimmicks, Sesame Credit is more of a loyalty program than a credit score.
Fortunately, the People’s Bank of China is cracking down on Sesame Credit’s aggressive marketing tactics, cutting short some of its most powerful promotions and wagging its finger at the mobile game aimed at college students. The concern with SCS is that there’s no guarantee that the People’s Bank of China will step in if it also starts looking more like a loyalty program than a credit score. China’s history of totalitarian data collection paired with vast access to public and private data makes it possible that SCS could turn into a program that doesn’t solve China’s credit rating need but rather becomes Big Data supporting Big Brother. China needs a credit score, no doubt about it. But the potential that the Chinese government’s political goals supplant the country’s genuine need for reliable consumer finance information threatens not only China’s position in the global economy but also its citizens’ rights. Big Brother may appear to be letting the free market rule, but don’t let the window dressing fool you: New curtains can’t change an old regime.