2016-08-24 Insert wall street journal artice FThe article below was published by the Wall Street Journal on August 1st, 2016.  We are publishing the full text for the benefit of the BIIA membership (blue text):

“If you ask Americans and Europeans to name the biggest threats to their personal privacy, many might say Google or the U.S. National Security Agency. But as Western societies debate the legal limits for collecting and sharing data post-Edward Snowden, and as international companies work on encryption technologies to keep the state at bay and users at ease, a whole new surveillance game is under way in China.

These plans aren’t widely understood in the West, but their contours are already clear. The government will try to link a large amount of public and private data, with the goal of building the world’s first all-encompassing system of cyber-surveillance. The consequences of this big-data-enabled, information-technology-backed authoritarianism will be far-reaching, not only for Chinese citizens and businesses but for anyone connected to a person or entity in China.

Already, we can see this in the creation of a so-called Social Credit System, the goal of which is to monitor individuals and companies based on a mix of information from financial institutions and law-enforcement agencies. Citizens now can expect that information from a diverse range of sources, such as employer evaluations, online shopping preferences or opinions expressed on social media, will be part of their social-credit score. The ratings will be made public and accessible online [BIIA notation A].

This isn’t entirely unlike Western financial-credit scoring systems, where a low score makes it more difficult to rent a house or to obtain a loan. But surveillance systems in democratic countries usually focus on one set of data, and ownership of data is highly fragmented. China’s system would link data used to evaluate financial activities with others that inform assessments of rule compliance and “socially responsible” behavior as defined by the Chinese leadership [BIIA notation B].

The system rewards “good behavior” and punishes “bad behavior.” Rule breakers can be blacklisted and excluded from economic activities or denied access to public services. Reckless driving might lower their chances for a good job.  And they might be unfriended on social media for fear of guilt by association [BIIA Notation C].

Already Chinese authorities have started test runs to evaluate the driving habits of professional drivers. And some online portals are reportedly awarding good social-credit scores with premium access, while denying services to those with inadequate scores [BIIA Notation D].

This all-encompassing surveillance system will exist in a digital environment that feels familiar to many users, since it is operated by the same companies who run China’s most famous internet platforms for shopping, social media, dating and gaming. The first apps for checking one’s social-credit score are already on the market, and they fit seamlessly into China’s common digital world.

But the social-credit system extends beyond Chinese citizens and companies. The leadership’s intention is to strengthen political control over all economic and social activities in China. Our analysis of more than 40 government documents released since 2014 revealed that the system is meant to include every individual and institution doing business in and with China [BIIA Notation E].

If you have an office or a factory in China, for example, the Chinese government will collect and evaluate vast amounts of data on your company and your employees. Since the social-credit system for companies is already fairly advanced in sectors such as electricity and transportation, corporate social responsibility as defined by Beijing might soon no longer be voluntary. And if your future business with China depends on your Chinese social-credit score, you may have no choice but to accept state scrutiny of all your business activities [BIIA Notation F].

The challenges to implementing this system are significant, but not insurmountable. At least for now, China’s leaders can count on popular support. Many Chinese worry about a loss of moral accountability due to their country’s hasty economic and societal transformation. They see this system as part of a paternalistic effort to create a “civilized society.” The inclusion of businesses adds to its acceptance among ordinary Chinese, who see it as an opportunity to expose corporate corruption and violations of labor and environmental standards.

Our research also shows that China’s government-friendly technology companies, such as Alibaba, Baidu and Tencent, are willing to help solve the technological problems. It may seem ironic that these private companies, which once unleashed an information revolution in China, are now willing to share their cutting-edge technology and data analytics systems for political purposes. But in today’s repressive political climate, they would otherwise risk losing business opportunities or becoming targets for political retribution.

China’s tech companies, however, have yet another political task: they are expected to expand their activities to other countries. These companies are privately run, but their close connections to Beijing and its broader political goals should raise warning flags whenever they approach foreign markets.

Western entrepreneurs should be aware of the risks before they agree to strategic investments by Chinese entities and technology transfers to China in sensitive fields such as big data and credit scoring, and should at least limit them with the help of contractual safeguards. Western governments should make every effort possible to integrate China into international data-security agreements and standardization efforts [BIIA Notation G].

Yet no amount of Western scrutiny will prevent Chinese tech companies from accessing many other markets around the world. They will be more than welcome by many authoritarian regimes, especially in Asia and in the Arab world. For leaders of such regimes, China’s surveillance system isn’t only acceptable, but highly attractive for strengthening social and economic control. Soon big-data authoritarianism won’t be limited to just China.”   Source: Wall Street Journal

BIIA Editorial Comments: 

Notation A:  To have a Social Credit System should not be given the negative connotation which the article portrays.  Not long ago the Chinese society depended mostly on cash.  Credit, or borrowing, was a matter between two persons.   With the arrival of the two tier banking system in China, the decision who could receive credit or not, was moved to intermediaries, such as the bank manager and or a credit bureau credit score.  To explain this new concept, and to make it acceptable to the population, the Chinese coined the term Social Credit System.

Credit and credit scoring concepts are relatively new.  To manage the aspect of credit and credibility, the People’s Bank of China developed a Central Credit Register (CCRC).   The CCRC collects a comprehensive array of credit information about enterprises and individuals.  As of the end of 2013, the system covered over 840 million consumers and 19 million enterprises and other organizations.  In essence it is the largest credit information system in the world.  Many Central Banks throughout the world operate similar credit registers. The main motive is to safeguard the financial system and not the surveillance of social behavior of individuals as the Wall Street Journal article opines.

The author of the Wall Street Journal article uses the terms credit score and credit rating in the same sentence:  A credit score is a mathematical derived measurement of the creditworthiness of a borrower.  A credit rating is based on data and opinions of experts and relates to companies rather than individuals.  One should not be confused with the other.  

Notation B:  The author states that in Western countries one set of data is being used to generate credit scores.  That is not completely correct.  Most credit bureaus use every available historical credit data from the financial system, retail industry and utilities.  FinTechs are using social media data to arrive at a credit score. 

Notation C:  Interpretations about rewards and punishment are grossly overblown.  One should remind the author that in Western systems, requirements like ‘Know Your Customer’, ‘Anti-money laundering’, ‘vetting of government employee’ are common practices.  The Chinese authorities use the same tools. 

To create an innovative credit and credit information environment, the authorities of China encouraged eight corporations (insurance and e-commerce companies) to create credit information systems similar to those operated by Western peers.  Since the emphasis was placed on innovation, and taking into account current regulations, some of the new entities in China started to experiment with social data from e-commerce transactions, such as buyer behavior.  Naturally, experimentation can lead to excesses, such as rewarding consumers, who have exceptionally good credit scores, with preferential treatment for services, such as the use of fast track lanes at airport security, access to EU visas when travelling to the Grand Duchy of Luxemburg and lower cost for holidays, etc. etc.  Nevertheless the author of the article ignored the fact that some of the exuberance on promotions was tempered by the regulator, the People’s Bank of China, who criticized Sesame Credit for going too far. 

Notation D:  The comment about recording reckless driving of individuals in the credit systems, thus preventing someone not getting a job, is totally misplaced.  Many countries have databases where ‘reckless driving’ of traffic violations are documented.  This can have some impact on employment in the public and private transportation sector in the interest of safety of the general public.  In many countries governments are required to have new applicants vetted.

In the US, good driving behavior is rewarded with lower insurance rates.  Insurance companies monitor driving behavior through telematics [ https://2018.biia.com/lexisnexis-risk-solutions-launches-first-contextual-telematics-insurance-model-in-u-s ].

Notation E:   Today we are working in an information based society.  Governments, the world over, collect data on businesses, individuals for political and economic reasons.  Interactions between societies have become highly complex and IT helps to manage data.  We may venture to say, that in market economies, our names are probably in more than 40 databases.

Notation F:  Registering businesses and individuals which own and manage such enterprises is a requirement the world over and not unique to China.  We call this concept transparency.

Notation G:  China participates in many international forums on credit information and is well aware of international credit and credit information practices.  It is actively engaged in adapting Western practices to Chinese culture, being full aware of WTO requirements.  Chinese are very concerned about privacy and data security.  Credit information is highly regulated and the law is quite explicit about what type of data can be collected or not.  China does not permit credit databases containing information of individuals and businesses to be maintained outside its borders.  In essence China is just as concerned about data security as Western nations are.

Links to articles on file at www.biia.com: