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 “l(fā)iving 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.

...

If you need the full context, please leave a message on the website.