When people talk about the social credit system, I often raise the question - if local governments at different levels should be put under stringent credit constraints. Government credibility is an important part of establishing a social credit system, which should supervise government activities and debt risks.
A fully developed mechanism needs to be adopted for local governments, which are easily exposed to credit risks. This should be the priority in the ongoing efforts to prevent and control credit risk.
A company's credit is another concern of China's social credit system. Many people either didn't know or had little understanding of what credit actually means. More people enjoying the benefits from the development of credit, but no one is willing to suffer the consequences of credit risk.
For example, some will invest in peer-to-peer services. They were happy making more money that way, but when a risk occurs they couldn't get their reserves back and didn't want to take a loss, so they turned to the government for help.
Authorities are facing great pressure to cope with the problems that have occurred in peer-to-peer services. This has revealed that credit is in a fragile position when constraining commercial and social activities. And it's a fundamental problem that has yet to be resolved.
Credit has a dual nature. One side refers to the concept by which people and companies regulate activities, otherwise known as "invisible credit." The other involves claims and debts generated during exchange of goods and through capital loans, which can be referred to as "visible credit."
Invisible credit is hard to measure or trace so we can only rely on education to make people value their credibility. However, a manifestation of invisible credit is visible credit, and constraints can be placed on those activities according to contracts and laws. Credit problems surge without an effective system in place.
A vicious chain will be created when some apply for a loan but fail to give it back and are proud of avoiding such obligations.
In other cases, deals were made but contracts were not followed. These problems are civil affairs, which should be the main objective of our social credit system.
Meanwhile, public rights must not be mixed in with private rights when authorities address the problems of the social credit system.
Public rights should never be used to facilitate governmental departments to harm an individual or corporate interests, and jobbery in the name of ensuring private rights must also be prevented. Otherwise, China's rule of law and modern governance system would be violated.
The establishment of a social credit system includes educating people to maintain solid credibility. A credit reference system should be introduced to strengthen punishment against credit default and to promote self-discipline and give defaulters an opportunity to fix their misconducts. Credit crime must be dealt with, and there should also be a comprehensive mechanism that provides legal aid.
Along with the social credit system, China should initiate a law on credit bankruptcy, which would allow anyone to apply for bankruptcy protection.
In other words, if bankruptcy protection is approved by relevant courts, a person or company wouldn't need to pay their debt, but simultaneously, they wouldn't qualify for more loans. Any further moves would be restrained by law, except when necessary to make a living. Some irrational financial activities would be controlled because lenders would be more cautious as their creditor's rights could be revoked if a borrower is bankrupt.
Such a comprehensive system would help prevent financial risks from turning into social and even political risks.
The author is head of Credit Information System Bureau of the People's Bank of China. The article was an abstract of a speech by Wan Cunzhi at China Credit Summit Forum organized by Peking University.