Private Economy and China’s Credit System for Enterprises†
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China is seeking public comments on a draft law aimed at promoting the development of the country’s private enterprises. A provision of the draft law requires Chinese authorities to timely update a private enterprise’s records publicized on official “credit information platforms” after the enterprise no longer has irregularities undermining its credibility.
Having a clean record on credit information platforms—no matter whether they are official or unofficial—is of utmost importance to a private enterprise in China, as its current and potential business partners and clients inside and outside China are increasingly relying on these platforms to assess where the enterprise stands. However, both official and unofficial platforms have limitations, which, if not addressed properly, could compromise the development of Chinese private enterprises and, thereby, the country’s private economy.
The Draft Law
In early October, China’s Ministry of Justice, together with the National Development and Reform Commission, released the Law of the People’s Republic of China on the Promotion of the Private Economy (Draft) (“Draft Law”) to welcome the public to share their comments on the proposed legislation by November 8, 2024. Among the 77 articles of the Draft Law, Article 10 stands out because it sets forth a fundamental principle: fair competition. The article provides:
The State implements a unified national negative list system for market access. All types of economic organizations, including private economic organizations, may equally enter, in accordance with law, areas outside the negative list for market access.
Specifically, Article 14 states that “public resource transactions” such as bidding and government procurement must not restrict or exclude private economic organizations, unless provided otherwise by law.
“These safeguards for fair competition will lead to more opportunities for private enterprises.”
These safeguards for fair competition will lead to more opportunities for private enterprises. To present itself well for these opportunities, a private enterprise needs to ensure that its public records do not suggest any irregular operation of the enterprise. With this in mind, Article 53 of the Draft Law carries exceptional weight. After emphasizing that appropriate measures shall be taken to punish a private enterprise for its dishonest behavior, Article 53 continues to state:
A private economic organization and its business operator that have corrected [the organization’s] dishonest behavior, eliminated adverse effects, and met conditions for credit restoration may apply for credit restoration. Relevant state organs should, in accordance with law, timely lift disciplinary measures, remove or terminate the publicity of information regarding [the organization’s] dishonest behavior, and achieve coordinated restoration [of the organization’s credit records] on relevant public credit information platforms.
[emphasis added]
A key “public credit information platform” in China is the National Enterprise Credit Information Publicity System (“NECIP platform”) overseen by the State Administration for Market Regulation. The significant role played by the platform, as discussed below, cannot be overstated.
China’s NECIP Platform and Its Limitations
The operation of the NECIP platform is based on the Interim Regulation on the Publicity of Enterprise Information (“Interim Regulation”). The legislation requires market regulation authorities to publicize on the NECIP platform a wide range of information about an enterprise, including the enterprise’s incorporation and registered mortgages of movable property as well as administrative penalties imposed on the enterprise. Each required item of information must be publicized within 20 working days from the date of generation of the information.
The Interim Regulation also requires an enterprise to publicize on the NECIP platform certain information about itself. The information includes, for example, administrative licenses obtained by the enterprise, pledges of the enterprise’s intellectual property, and, if the enterprise is a limited liability company, the amount of capital subscribed and paid by shareholders. The information must also be publicized within 20 working days from the date of generation of the information.
In addition, every enterprise must submit its annual report to market regulation authorities through the NECIP platform. Certain categories of information included in an annual report—for example, the enterprise’s purchase of equity and, if the enterprise is a limited liability company, shareholders’ transfers of equity—are disclosed to the public.
Given the nature of information disclosed and the fact that government authorities and enterprises are held accountable for the “authenticity and timeliness” of the information that they provide, the NECIP platform has become a valuable tool widely used inside and outside China.
“Such reliance on the platform means that it is necessary for Chinese authorities to achieve timely restoration of an enterprise’s credit records kept on the platform, or the enterprise cannot effectively compete for business opportunities.”
Such reliance on the platform means that it is necessary for Chinese authorities to achieve timely restoration of an enterprise’s credit records kept on the platform, or the enterprise cannot effectively compete for business opportunities. Unfortunately, delays in credit restoration seem to be quite common (see, e.g., complaints made by Chinese sellers on Amazon’s website) and, in response, local authorities such as those in Sichuan have rolled out remedial measures.
More concerning is that the NECIP platform has another major limitation. The platform is frequently crashed by excessive website traffic (see, e.g., concerns expressed by Chinese companies), essentially rendering much of the effort contributed by the authorities and enterprises to build up the platform less effective.
Commercial Databases and Their Limitations
The limitations of the NECIP platform have led to the rapid growth of commercial databases providing similar information about Chinese companies to meet strong demands in the market. These databases are easily accessible to clients paying for the services. However, as illustrated by a case recently highlighted by the High People’s Court of Guangdong Province, these databases have their own limitations.
The case concerns a company alleging that a commercial database failed, despite the company’s request, to include in the database the company’s certain equity information registered with the Shenzhen United Equity Exchange, among other mistakes. The company claimed that, as a result, its rights and interests had been adversely affected. The Intermediate People’s Court of Shenzhen City, Guangdong Province, ruled in favor of the company, stating that the commercial database had the obligation to consider the company’s request, verify the information at issue, and correct its records about the company accordingly.
The Shenzhen court’s ruling shows how commercial databases present a major challenge to private enterprises. It is unrealistic to expect that every private enterprise in China has adequate resources to monitor all commercial databases and, if necessary, bring lawsuits against them to ensure that the enterprise’s public records in all databases are accurate.
A more realistic approach is to improve the NECIP platform by, for example, charging reasonable fees for services provided so as to stop this official platform from being abused. This should help reduce the traffic of the website, making sure that the platform is readily accessible by serious users. The fees collected can also help recruit personnel committed to keeping the database accurate and up to date. Many official company registries and similar databases in the world are not free of charge. Perhaps, these countries have learned from experience that charging reasonable fees to make public databases priceless is better than letting free databases be abused and become worthless.
- The citation of this article is: Dr. Mei Gechlik, Private Economy and China’s Credit System for Enterprises, SINOTALKS.COM®, In Brief No. 49, Oct. 30, 2024, https://sinotalks.com/inbrief/202410-english-private-economy-credit-enterprises.
The original, English version of this article was edited by Nathan Harpainter. The information and views set out in this article are the responsibility of the author and do not necessarily reflect the work or views of SINOTALKS®. ↩︎
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