The State Council published the Guiding Opinions on Accelerating Social Credit System Establishment by Further Developing Joint Incentives for Honest Market Participants and Joint Penalties for Dishonest Market Participants (国务院关于建立完善守信联合激励和失信联合惩戒制度加快推进社会诚信建设的指导意见, Guofa [2016] No. 33) (the “Opinions”) on June 12, 2016.

According to the Opinions, incentives and penalties for honest and dishonest market participants, respectively, will be set up to maintain a market supervision and regulation system based on credibility. The Opinions states that relevant laws and regulations are required to be  further developed to better implement the following incentives and penalties.

Incentives

1. Green Passage

When applying for administrative approvals, the honest participant, especially the market participant without dishonest records in the last three successive years, may be granted “Green Passage” or “Acceptance Without Sufficient Application Materials” (容缺受理), which means that the relevant government authorities should accept such application in which the applicants have not submitted sufficient materials (excluding the mandatory documents provided by laws) but promise to provide such materials in certain periods, to shorten the review and approval period.

2. Public Service Convenience

Financial funds and favorable policies will be given to honest market participants, especially in education and social insurance sectors.

3. Administrative Supervision

Relevant government authorities may reduce the frequency of routine or special inspections of honest market participants.

4. Lower Transaction Cost

Relevant government authorities may encourage and lead local financial institutions or sellers to provide convenience and discounts to honest market participants based on their respective credit information, such as credit loans.

Penalties

In the Opinions, the State Council requires that relevant government authorities and social organizations share credit information of market participants and jointly penalize the dishonest behaviors related to the following issues:

1. Severe Harm to People’s Health and Safety

Any dishonest behavior which cause severe harm to people’s health and safety, including without limitation to drugs and food, ecological environment, construction quality, production safety, fire safety, and mandatory product certification shall be penalized.

2. Severe Damages to Fair Market Competition and Social Order

Corruption, tax evasion, tax fraud, debt evasion, illegal capital gathering, contract fraud, pyramid selling, unlicensed business activity, counterfeits, IPR infringement, illegal tender, false advertisement, infringement of consumers’ interest, etc.

3. Refusal to Fulfill Obligations

Refusal to perform the obligations under any judgement or decision made by judicial or administrative organizations, such as evading enforcement.

4. Refusal to Perform Obligations of National Defense

Refuse or evade to provide military service; refuse, delay or impede the expropriation of civilian resources; harm national defense interest; or destroy defense facilities.

To strengthen the constraint on the market participants who have the dishonest activities mentioned above, the Opinions provide that relevant authorities are entitled to impose limitations on such market participants, including without limitation to, strict review for administrative approval, conditions on new project approval, limitations on establishing or investing in financial institutions, and prohibition from applying for projects supported by financial funds. Additionally, the legal representative or responsible staff of the dishonest companies may be blocked from entering certain industries.

According to the Opinions, governments above county level are required to publish information related to administrative approvals or penalties on their official websites within seven business days upon issuance, and send such information to a website named “Credit China” which provides a comprehensive inquiry service to public.

The Opinions also propose that honesty education and the business integrity culture should be consolidated, and relevant implementation and supervision efforts should be strengthened.

China has focused on the establishment of a social credit system in the passing years and several regulations were promulgated to facilitate such goal, including Interim Regulation on Enterprise Information Disclosure, Regulation on the Administration of Credit Investigation Industry and Outline of the Plan of Establishing Social Credit System (2014-2020). Foreign investors who contemplate entering or have entered the Chinese market, should keep flawless credit records if they want to obtain more convenience when doing business in China.