By Ren, Xingzhou

Against the background of China's entry into the important Tenth Five-Year-Plan period and the WTO, its poor social credit system and a general credit disequilibrium have become major obstacles to the sustainable and healthy economic development and the improvement in the socialist market economic system. The society at large has responded strongly to credit disorder and repeatedly called for accelerating the establishment of the social credit system. Why is the establishment of a credit system so important in the beginning of the new century? To answer this question, it is necessary to analyze the broad domestic and international economic development background.

I. Importance and Urgency of Accelerating the Establishment of the Social Credit System
The importance of establishing the social credit system is determined by the requirements of completing the socialist market economic system. In fact, during decades of the planned economic system in China, credit relations among social entities are insignificant. Everything was arranged by plan, such as what to produce, what to sell, how to settle current capital account and how to obtain capital for production. Strictly speaking, the relations between banks and enterprises are not credit relations, but that of a cashier to complete financial appropriations. With over 20 years of reform and opening up, China’s economy has basically taken the path of the socialist market economy. More and more market transactions and trading acts now reflect credit relations. While bank credit relations expands, the scale of commercial credit among industrial and commercial enterprises also grows. As a result, the operational mechanism of social credit that is closely related to the credit relations of the market economy also begins to play important role and has become the vital link of economic relations among all entities of the market economy. In fact, the modern market economy may be regarded as a credit economy -- the higher the level of market development, the higher the demand for the development of the social credit system.

However, with a poor credit system, China suffers from chaotic credit disorder and an extensive lacking of credibility. For example, with a large amount of long overdue bank loans turning into bad accounts, non-performing assets of commercial banks continue to increase; debt default among enterprise has created broad chain-debts; and cheating, fake products and shoddy goods have never disappeared. Based on relevant data, chain-debts among enterprises in 1998 reached RMB1100 billion, which is RMB1000 billion more than what it was ten years ago. The lacking and the insufficiency in enterprise credibility have seriously affected the market order, largely increased the costs of market transaction, reduced the transaction efficiency, directly affected the healthy development of the market system, and thus hampered the market mechanism to play its basic role in resource allocation. Therefore, a social credit system must be established as soon as possible so as to standardize the market economic order and complete the socialist market economic system.

The rapid establishment of the social credit system is necessary for expanding the domestic demand, maintaining economic growth and stabilizing growth. Since 1998, the central government has swiftly changed its focus of macro adjustment and control to the expansion of domestic demand, and adopted a series of relevant policies. However, the expansion of domestic demand places more requirements on the establishment of the social credit system. On the one hand, this is because pulling up economic growth under the conditions of a buyer’s market via expansion of overall domestic credit transaction is a successful experience of many developed countries. Under a sound market credit environment, the scale of a country's market will multiply as a result of credit transactions, leading to growths in the economy and employment. To promote the development of credit transaction, many countries have made continuous efforts to improve their credit management system, developed new credit instruments and extensively adopted various credit cards and commercial bills. For example, in the mid-1980s, annual settlements of commercial bills in the United States were already 3300 times of the outstanding year-end current deposits of enterprises. Meanwhile, under the conditions of a buyer's market, credit sales among enterprises have increased significantly, leading to a higher demand on enterprise credibility. However, there is only a small amount of total credit transactions in China at present, which often suffers from contract-breaching acts. On the other hand, to expand domestic demand and adjust production structure and product mix, enterprises need a large amount of capital input. They need to raise large funds for production expansion and technical renovation through bank loans, securities market operations and bond issuance. However, due to extensive lack of credit, commercial banks would not make loans easily. With continuous exposure of massive regulation-breaching acts, false publicity and deceiving auditing reports, the securities market has run into a credit crisis, affecting the normal channels of enterprises to obtain production development capital. In addition, to expand market demand for consumption and pull up economic growth, there should be more credit-based consumption. In particular, the consumption structure of China's urban residents at present has shown significant upgrading trend, with household consumption priorities shifting gradually to housing, automobile and education. Obviously, it will take a long time to reach such a consumption level only with the accumulation of household cash savings, so increase in credit-based consumption is necessary in reality. However, with the absence of a relatively complete personal credit system in China, the scale of credit-based consumption remains small. The long-term credit-based consumption of housing and automobiles has just started. It still suffers from many constraining factors and only takes a tiny proportion in the overall credit scale of commercial banks. In terms of credit instrument, there are only charge cards that absorb savings instead of real credit cards. The functions of the former are very limited in terms of providing consumer credit. The scale of consumer credit provided to consumers by commercial institutions is even more insignificant. With regard to the credit system, all these factors affect the level and scale of the expansion of domestic demand. Therefore, to expand domestic demand, pull up economic growth and achieve the third stage strategic objectives of modernization, it is necessary to speed up the establishment of the social credit system.

The economic globalisation and China's entry into the WTO have determined the importance of rapid establishment of the social credit system. At the turn of the centuries, economic globalisation has speeded up. Its key function is to reallocate resources all over the world. What is the role of the Chinese economy in the global economic activity? How much market will it take? And how should China participate in international competition with more advantages after its entry into WTO? These questions are directly related to the construction of China's credit system. The poor credit environment and low level of enterprise credibility will seriously hamper the competitiveness of Chinese enterprises in the international market, resulting in smaller market shares, deteriorated credibility, and a very passive status in international competition. Meanwhile, the credit disorder in China will also worsen China's investment environment for foreign capital, directly affect the increase of investment demand, and hence influence economic development.

The rectification and standardisation of the market economic order require the rapid establishment of the social credit system. Under the market economic system, the normal operation of the social economic activities depends on standardised market economic order. However, China's present market order is apparently unable to meet the demand of market economic development and must be standardised and completed. In fact, standardisation of market order cannot be achieved simply through occasional sudden inspections or severe cracking-down actions implemented one after another. It must be realised with standardised market economic rules and corresponding institutional construction. The standardised social credit system is one of the most basic market rules and institutions, as well as the fundamental policy to standardise and rectify the market economic order.

II. Major Factors Constraining the Establishment of China's Social Credit System

Credit is divided into broad credit and narrow credit. The broad credit refers to the contract-keeping ability of the parties concerned in economic activities based on honesty and credibility. It is what is generally referred to as "living up to credibility", "maintaining reputation" and "keeping promises". The narrow credit in the modern market economy refers to the ability to honour the promise of the accredited party to the accrediting party regarding payment or repayment made in a specified timeframe (also including the ability to honour various economic contracts). Based on the nature of a accredited party, credit may be divided into public credit, business credit and consumer credit, or personal credit. In the relatively mature market economies, most transactions take the form of credit transaction. During China's transition to the market economy, the scale of credit transaction continues to expand, and credit has become a necessary factor of modern market transaction. Smooth credit transaction and sound economic operation all depend on extensive credibility. Meanwhile, compared with the traditional cash transaction, credit transaction is more risky by nature. Apart from the uncontrollable political and war risks, there is credit risk when the accrediting party (creditor) makes inappropriate credit or the accredited party (debtor) shines away from its repayment obligations. In order to avoid such risks, all modern societies need to have a strict credit management system. Only by setting up a stable and reliable credit relation based on such a system, can modern economy exist.
The establishment of the social credit system is a huge social system-engineering project, which covers extensive areas. The establishment of social credit system naturally includes the broad credit, which is the basis and necessary condition for the establishment of the entire social credit system. It is unimaginable that a complete credit system can be set up in a country where credibility has not become the basic rule of moral standards and code of conduct of enterprises and people. However, social credit system cannot be set up only on honesty, credibility and moral standards. The most important is to set up a complete set of legal, statutory, and criterion system and an effective model of credit market that govern credit relations of market entities. Experiences of developed countries reveal that they have basically all set up a relatively complete credit management system. In fact, this management system is a social mechanism. It incorporates all social forces with credit relation into the system to promote, through their concerted effort, the completion and development of credit and restrict and punish contract-breaching acts, so as to protect the social order and the normal operation and development of the market economy. These countries normally have a social credit management system composed of sound credit education and high credit awareness among the general public, complete credit legislation system, contract-breaching restrictions and punishment mechanisms, developed credit intermediate service agencies, socialized operation and self-disciplined trade management organizations. These, however, are rather lacking in China at present. The establishment of the social credit management system in China faces many restrictive factors, which mainly include the following:

1. General lacking of credit awareness and credit moral standards for a modern market economy
In China, honesty and credibility are part of the mainstreams of the several-thousand-year-old traditional culture, as well as the virtues of high esteem. However, the real social credit relation is very weak due to insufficient development of the modern market economy, the late development of credit economy, the underdeveloped credit transaction in market, and the long-term adoption of the planned economic system after the founding of the people's republic. Therefore, both enterprises and individual consumers generally lack credit awareness and credit moral standards of modern market economy. In addition, as a result of incomplete state credit management system and defective laws, regulations and punishment mechanism for contract-breaching acts, there is extensive contract-breaching practice in society. Many enterprises do not have sufficient understanding and knowledge of the importance between credit relations and their survival. As enterprises with no credibility can still exit and develop, cheating and fraud also find their way in the market, debt default, debt evasion and chain-debt defaults have become general practice of enterprises. With the absence of a credit moral assessment and restrictive system that upholds credibility and denounces discredit, credit disequilibrium generally exists in the society.

2. General lacking of basic credit management system within enterprises

As essential "cells" of the national economy, Chinese enterprises in general lack an internal credit management system. Although they have never missed to set up administrative offices, personnel departments and sales departments, few of them have special departments, agencies or personnel particularly in charge of internal credit management. As a result, contracts are frequently unable to be implemented due to inappropriate accrediting or breach by accrediting party due to insufficient contract implementation management. Numerous economic disputes also emerge as many enterprises are deceived due to insufficient knowledge of the credibility of their cooperative customers. At present, around four billion economic contracts are established each year in China, but contract implementation rate is only 60%. There is an extensive chain-debt problem among enterprises. According to statistics, economic disputes and civil disputes among creditors and debtors received by courts in China in 1998 reached 2.89 million, which was 51% of all cases received by the courts. Credit management within enterprises is a special component of their financial management, which includes management on account receivables and commodity sales. Investigation in the credit standing of all major customers that have business relations with the enterprises and the inspection and management of their credit standing are the bridge between financial accounting departments and all other departments of the enterprises. It is also a linkage through which enterprises filter their customers and maintain long-term relations with the credible ones. The general lacking of this important management linkage inevitably leads to extensive defaults in society.

3. As a "non-credit" country, China suffers from the low marketisation level of credit intermediate service.

Credit countries refer to countries with relatively complete state credit management system, popular practice of decent and fair credit intermediate services, relatively high development of the credit management sector, and fast access to authentic background information on the credit standings of most enterprises and individual consumers in the capital and commercial markets during market transaction. In general, credit countries have an intermediate service sector with relatively high marketitsation and socialisation levels, as well as a highly developed credit sector. Major business areas of credit services include investigation in the credit standing of financial institutions, listed companies, medium- and small-sized enterprises and domestic citizens and foreigners, as well as credit assessment and rating, factoring and commercial debt recovery, as entrusted by customers. Entirely under the governance of the state laws and regulations and government supervision, these credit services provide standard commercial and socialised management for the risks of various customers in commercial activities. Integrated with the functions of state laws and government supervision, the credit services have established effective credit information channels and contract-breaching punishment mechanisms in the whole country. By listing the names of companies and individuals with bad credit records into the "blacklist" through market credit means and disseminate their bad records via normal channels, the credit service institutions can influence the ability these of companies and people in market transactions and credit borrowing within the legal timelines, while stopping them from registering new enterprises. As these punishments do not simply expire with bankruptcy and business suspension of individuals and companies, it is impossible for the latter to continue existing in various markets. Thus, the objectives of standardising credit order in the market, cleaning the market environment and reducing crimes are achieved. At present, credit sector in developed countries is not only an important service sector, but also a state business rule adopted by increasing countries and regions. In credit countries, credit investigation consultancy sector and credit rating sector are developing rapidly. In the United States, there are many credit intermediate service agencies specifically engaged in credit gathering, credit rating, business debt recovery and credit management. Through long-term competition, there are already a few large multi-national credit management corporations with large scale, extensive business coverage and complete credit databases. Take the enterprise credit gathering for example. Dun & Bradstreet is the largest, oldest and most influential company in the world. It has offices or affiliation agencies in many countries. In the credit rating area, major companies in the United States include Moody Investors Service Company, Standard and Poor's, Fitch and Duff & Phelps. They have generally dominated the credit rating market in the United States. In setting up domestic credit rating systems and agencies, many countries have been influenced by Moody and Standard and Poor's, due to their strong capital strength and excellent international reputation.

At present, China is still a non-credit country. The development of its social credit intermediate service sector is backward. Regardless of the market operation agencies (such as credit gathering companies, credit rating agencies and credit investigation agencies) that provide credit services and credit products to enterprises, such as credit investigation reports and credit rating reports, the market scale is small, the operation is dispersed and the overall development level of the sector is low. Market competition is generally in disorder and there is no complete scientific credit investigation and rating system. As a result, enterprises cannot receive scientific and reasonable assessment for their credit standing, the market cannot play its role in rewarding and punishing credit related performance, and enterprises have no initiative to strengthen their credit management. China's credit intermediate service market still suffers from serious insufficiency in both demand and supply. On the one hand, social demand for credit service sector is insufficient, the society and enterprises have very limited demand for credit products, and enterprises generally lack the awareness in utilising credit products. Other social entities have never used credit products to protect their own interests in economic activities. Credit demand from relevant state departments is insufficient as well, and for many government and enterprise bonds, the government failed to require fair credit rating agencies to carry out credit rating when they were issued. On the other hand, in terms of credit service supply, there are few agencies and enterprises capable enough to provide high quality credit products. Meanwhile, the market environment for the healthy development of the entire credit intermediate service sector in China is still lacking. The opening of relevant credit data in society is insufficient. Large amount of credit data and information are still beyond the reach of credit intermediate agencies and enterprises. Therefore, there is no way to provide correct credit information based on commercialised, socialised, objective and independent credit investigation, credit information gathering, credit rating and specialised credit services, resulting in more serious contract-breaching acts. The individual consumer credit investigation market is an area with more strict control and less openness. The piloting Shanghai Credit Co., Ltd. represents an experiment and a breakthrough in the individual credit management. However, it is only a small-scale experiment at present and has not created any credit resource to be shared in the market.

4. Low level of openness of the credit data market and insufficient channels to access enterprise and individual data by normal means

In credit countries, the opening up of enterprise and individual credit information data and market operation are part and parcel of the credit management system. Many countries have formulated specific stipulations on the opening up of credit data by promulgating the corresponding laws or rules. In general, information collected and shared includes bank lending information and open records of relevant government agencies. Credit inspection service agencies may access open information as stipulated by law through open and normal channels. However, there is no specific legal stipulation regarding the opening and utilisation of credit data in China. Enterprise information held by government departments and special agencies that may be opened has not been released to public. For example, data resources of large enterprises held by the public security, industry and commerce, personnel, taxation and statistical departments have not been opened, thus increasing the difficulty in obtaining enterprise information during the credit gathering process. For credit countries, databases with complete functions are necessary infrastructure for the establishment of the social credit system, and credit gathering intermediate agencies generally have their own credit databases that record relevant credit information of enterprises or individuals. The database of Dun & Bradstreet of the United States covers information of over 57 million enterprises in the world. At present, some of the credit intermediate agencies in China do not have credit information database, and some have very small ones with incomplete credit information. Thus, they are unable to make fair, objective and factual assessment on enterprise credit standing.

5. Incomplete state credit management system and absence of an effective punishment mechanism for default

Most of the credit countries have relatively complete state credit management system. This system includes credit legislation and law enforcement (including legislation on bank credit and non-bank credit, and default punishment mechanism), government supervision over the credit sector, government sponsored credit education for the whole society and credit management research and development. At present, China lags far behind in these areas. In terms of legislation, China has legal stipulations on honesty and credibility in General Principles of Civil Law, Contract Law and Law Against Competition by Inappropriate Means, and punishment stipulations in the Criminal Law for criminal acts such as fraud. However, they are not sufficient to form strong legal regulation and restrictions on various contract-breaching acts, and legislation in terms of credit still lags behind. Meanwhile, the problem that laws are not fully observed or enforced is quite serious. The trial of contract-breaching and fraud cases reveals a strong tendency of local protection. With influence of local enterprises and governments, some local law enforcement departments deliberately favour local enterprises and harm the interests of creditors. Moreover, there is an absence of strict contract-breaching punishment mechanism. Contract-breaching acts not serious enough to be crimes have not received relevant punishment, the legal persons of contract-breaching enterprise and individuals are not denounced and scorned by society. The government has weak supervision and control over the credit market and no supervision and control are executed over intermediate agencies engaged in enterprise information service (including accounting, audit, legal service, credit gathering and credit rating), leading to widespread false information and strong social response.

III. Proposals on Speeding up the Establishment of China’s Social Credit System

As a non-credit country, China still has a very weak base to set up the credit system. The establishment and completion of the social credit system is a difficult task, much remains to be done. However, the healthy and steady development of China's economy and the changing pattern of international competition urgently require rapid establishment of the credit system and stronger state management over social credit activities. To this effect, the following proposals have been made:

Firstly, credit concept and credit awareness of market entities should be strengthened through various means. Naturally, legal system and institutional arrangements are necessary for the establishment of the social credit system, but credit basis largely depends on the trust and credibility among social entities, as well as the credit moral standards in the market economy. Credibility should become a basic social virtue in social and economic life. Under the market economic environment, the utmost norms of conduct of market entities should be credibility. No matter they are legal subjects or individual citizens, they should set up an image of credibility in public, honour honesty and disdain dishonesty. A common understanding and concept should be established to regard high credibility as a wealth. Such understanding and concept should be established through various publicity, education and model demonstration activities, as well as through strengthened credit education, scientific research and training in the whole society. Promotion and education of credit concept, credit awareness and credit ethics should be carried out from primary education to higher education. In fact, credit management itself is a comprehensive discipline, covering extensive special subjects and is highly technical. Therefore, it should be well studied and developed, and more importantly, a large number of special personnel should be trained.

Secondly, the legal system of credit management should be set up as soon as possible, and credit legislation and law enforcement should be strengthened. Based on the experience of developed countries, the establishment of the social credibility system must start with formation of laws and regulations to standardise actions. Even before the legislation conditions become mature, relevant laws or department regulations should be formulated to standardise the market. Currently, the imperative issues include the stipulation of the Equal Information Utilisation Law and amendments to relevant laws, such as the Commercial Bank Law and the Law Against Competition by Inappropriate Means. Legislation in some European and American countries and some developing countries may be taken as reference. The objective of the legislation is to create an environment with open credit information and equal information sharing and utilisation rights. The legislation covers various aspects, such as bank credit, non-bank areas, standardisation of commercial and consumer credit actions, standardisation of commercial credit award actions, and standardisation of actions of credit intermediate service sector. In particular, the punishment mechanism for contract-breaching acts should be set up and completed as soon as possible, so as to define the legal boundaries of contract-breaching in the market economy, as well as the specific levels and methods of punishment for contract-breaching acts. Such contract-breaching act punishment mechanism should be established to punish those who "rush in spite of the red light", raise the costs of enterprises and individuals for their contract-breaching acts, compel them to keep promises and make credibility the passports of the credible.

Thirdly, the market-oriented development of the credit intermediate service sector should be promoted. Marketisation of credit information is the objective development basis of the credit service sector and the only way for the establishment of the credit system. Therefore, the imperative issue at present is to open up credit data and promote faster development of the credit management sector. To meet the requirements of the WTO on opening up credit information and the establishment of the credit management system, it is necessary to open up public information and credit data to the entire society and standardise the access and utilisation procedures. Even for the information that should not be publicised to the entire society, the government should also stipulate a set of standards and effective channels for credit management and information access. Legislation in these aspects should be accelerated. Legislation in China on opening up the information data should include two areas. On the one hand, the level of opening should be defined. The various data that can be opened or obtained by normal means and through normal channels should be opened up via certain channels and approaches as soon as possible, so as to enhance the transparency of social credit information. On the other hand, there should be relevant legal restrictions on the access and sharing of the information on individual consumers. Based on the experience of some countries, relatively prudent principles should be adopted with regard to access and opening up of credit information on individual consumers. Legislation in these two aspects should be included into the agenda as soon as possible. Meanwhile, as credit assessments are mainly based on the historical credit records of enterprises and individuals, the credit intermediate agencies should be encouraged to focus on the establishment of their own databases, and sectoral or department databases should be set up by relevant departments. When conditions become mature, part of the content of sectoral or departmental databases may be opened to the credit intermediate agencies or shared with them, so as to support the development of China's credit sector. Indeed, the credit intermediate service sector should be developed under effective government supervision and management. The government should standardise their entry and qualifications and make them the social credit management service institutions that really reflect the principles and quality of equality, openness and fairness.

Fourthly, the government credit supervision and management system should be established and completed gradually. The government should make vigorous effort to set up the restrictive and punishment mechanism for contract-breaching acts and supervise the standardised development of the credit sector. However, it should not participate in the establishment of credit management service institutions, otherwise it shall affect the neutrality and fairness of credit management services. It is necessary for the government to vigorously support and supervise the development of the credit service sector, actively promote legislation in this regard and guarantee the opening of the public information of various government departments for equal access and utilisation by the public. Meanwhile, in order to protect fair competition, it should supervise the mar.