Luxury goods, private jets and first class tickets, posh hotel suites, outings to buzzy nightclubs, and tee-times at China’s top-hole golf courses are off the table for Wang Sicong, the son of Wang Jianlin, the Chinese real estate tycoon and formerly the country’s richest man. Thanks to a recent decision from a district court in Shanghai, 31-year old Mr. Wang has been banned from splurging on luxury products and activities after failing to make good on $21.6 million in personal debts, which has landed him on the government’s notorious Social Credit System blacklist, where he is deemed an “untrustworthy person.”
First introduced in 2014 under the watch of China’s government, the budding Social Credit System – which is scheduled for a formal roll out in 2020 – is currently being pilot tested in 54 municipalities each with different operators (Alibaba-owned Sesame Credit is one; tech giant Tencent is another) and varying types of grading systems. It is something like a credit score, but unlike a traditional credit score, it extends beyond considerations of spending limits and black marks for a poor payment history, as the Chinese system has a much more expansive aim.
Instead of merely standardizing the potential lending risk of each individual, China’s far-reaching Social Credit System endeavors to also promote socially responsible behavior and crack down on everything else – whether that be littering, jay-walking, excessive spending on non-essential items, frequent gambling, or speaking out against the government on social media, among other things.
The court-ordered sanctions that come along with Mr. Wang’s failure to pay the tens of millions of dollars in debt he owes are precisely the type of currency that the Chinese government’s initiative will reportedly deal in when implemented to its full nation-wide capacity. Punishments for bad behavior could (and to date, have) come in the form of travel restrictions, denial of entry into elite educational institutions, and absolute limits on luxury shopping and accommodations. On the other hand, rewards can include preferential interest rates on loans and lower taxes.
While Beijing has characterized the system as aiming to create a “fair, transparent and predictable” society and business environment, the government’s system – which writer Bing Song described in the Washington Post as stemming from “China’s governance tradition of promoting good moral behavior [that] goes back thousands of years” – has been significantly criticized across the globe. Last year, for example, U.S. Vice President Mike Pence called it “an Orwellian system premised on controlling virtually every facet of human life.” Others have called it a “dystopian horror story;” some have likened it to an episode of techno-paranoia satire television show “Black Mirror” or the constant surveillance-centric program “Big Brother.” Human Rights Watch has denounced the scheme as rife with “abuses.”
One characterization that has not been attached quite as readily to China’s credit system is the sheer element of business risk, particularly for luxury entities, nearly all of which depend significantly on the $285 billion-plus luxury spending power in China for sizable swathes of their annual revenues. Given that by 2025, Chinese consumers are expected to be behind nearly 50 percent of all personal luxury goods purchases in the world, a figure that outshines that of sales in North American, Europe, Asian and the Japan taken together, says Vogue Business, luxury brands stand to be impacted in a big way when the country formally unveils the system to its 1.4 billion population and begins sanctioning wrong-doers by way of punishments, such as strict shopping limits.
The scope and applicability of the Chinese initiative stands to go beyond individuals, though. “Chinese regulators from tax officials to customs agents are increasingly rating companies according to compliance with regulations, and sharing ‘blacklists’ of corporations found to have violated rules,” according to the Financial Times’ Tom Hancock noted this summer, and that is where the bigger threat might lie.
“Government documents show that a variety of Chinese regulators, covering areas from work safety to e-commerce and cyber security, are compiling ratings of companies against up to 300 specific rules,” the FT stated, citing a report from the European Union Chamber of Commerce in China. While it is still somewhat unclear what exact factors companies operating in China will be judged on, South China Morning Post, citing the same EU Chamber of Commerce in China report, revealed that the corporate social credit system will likely extend to “all aspects of a company’s business in China – from taxes and customs [dealings] to environmental protection and product quality.”
That very well might include “[political] party support by both management and employees,” as well as the “moral codes of corporations, and the individuals that run them,” David Jacobson, a global business strategy professor at the SMU Cox School of Business, told Forbes.
Experts insist that the potential business implications of such a scoring system are not to be taken lightly. “A good corporate social score could lead to lower tax rates, access to critical materials and supply chains, and ability to sell to local and provincial entities, as well as state-owned enterprises,” per Forbes, while an “unreliable foreign entity” rating might result in sanctions, such as “fines, targeted audits, restricted issuance of government approvals and exclusion from preferential policies and public procurement contracts.”
Looking beyond the fall out from obvious infractions like tax disputes and impropriety when it comes to the environmental impact of business operations, it is relatively easy to see how foreign brands might land on the wrong side of China’s Social Credit System.
This summer, for instance, a handful of fashion brands – ranging from Coach to Versace – failed to appropriately label Hong Kong and Macau as regions belonging to the People’s Republic of China, resulting in the issuing of public-facing apologies from the companies. Before that, in early 2018, Zara and a group of other companies were ordered by the Shanghai Cyberspace Authority to remove “illegal content” – i.e., labels that identified Taiwan as a separate “country” on their websites – from their sites and were forced to make public apologies by a certain date and time … or else.
Given the strong reaction that came out of Beijing in each of those instances, it would not be surprising if such cases earned companies a strike in connection with the social ranking system.
The same could likely be said for the growing number of companies that cause offense by way of their marketing efforts. This time last year, for instance, Dolce & Gabbana faced marked scrutiny and widespread protest after launching an ad campaign featuring a Chinese model struggling to eat pizza and other Italian food with chopsticks ahead of the brand’s scheduled runway show in Shanghai. Following the release of the campaign and in light of the dissemination of racist remarks from co-founder Stefano Gabbana’s Instagram account, the Chinese government reportedly put an end to the brand’s over-the-top fashion show before it even began. Certainly a situation like that would tank Milan-based Dolce & Gabbana’s Social Credit score.
Regardless of the many reasons why brands might end up on China’s impending black list, and the proactive steps that non-native companies, in particular, will need to take in part because they “will bear the burden of tracking whether their business partners, such as suppliers, and [even their] employees, are adhering to government rules,” per CNBC, Michael Cunningham of corporate consultancy Control Risks, says one thing generally remains the same: “The threat of being blacklisted significantly “increases the compliance cost for multinational companies in China.”
Even more than that, though, the EU Chamber of Commerce in China’s president Jörg Wuttke says that it is “not inconceivable” that the system – one that he calls “the most concerted attempt by any government to impose a self-regulating marketplace” – “could spell life or death for individual companies,” including luxury goods brands, if not navigated properly.