Updating the credit system

Since 2013, the new leadership of the Chinese government has initiated a reform with respect to the registration and administration system for enterprises in order to reduce their excessive regulatory burdens and stimulate business start-ups and competition in the market.

Among all the reform initiatives, an important step includes the amendments to the PRC Company Law (中华人民共和国公司法) in December 2013 which changed the capital registration system of Chinese companies from an actual paid-in system (where the registered capital of a company must be paid within a statutory period of time after its establishment) to a subscription system (where the registered capital of a company may be paid gradually after establishment as the shareholders may determine), and converted a number of pre-establishment administrative approvals into approvals that a company may apply for after its establishment.

These reforms illustrate the government's intention to change its role from a pre-entry gate-keeper to a post-entry supervisor and allow capital to enter the market. Ensuring businesses operate in a compliant manner in a less regulated environment is a big challenge that the government needs to address. Among all the solutions, establishing a nationwide credit system so that major compliance track records are accessible to the public would obviously play a powerful role and motivate enterprises to be self-disciplinary.

In June 2014, the State Council issued the Outline of the Plan for the Establishment of the Social Integrity System (2014-2020) (社会信用体系建设规划纲要（2014－2020年）) (Six-year Plan), of which a key objective is to establish a nationwide social credit system by 2020 on the basis of credit information sharing mechanisms. The system will focus on credit information in four areas: administrative affairs, commercial activities, social behaviour and the judicial system. Transparency is a key term in the Six-year Plan. The system's establishment will definitely be a long process and comprise many steps in different stages. One step was the promulgation of the Tentative Regulations for the Publication of the Information of Enterprises (企业信息公示暂行条例) (Tentative Regulations) by the State Council on August 7 2014.

The Tentative Regulations became effective on October 1 2014 and are meant to set up a regulatory regime for the disclosure of business information of all enterprises in uniform standards at the national level. The core component of the regime is an online information disclosure platform managed by the State Administration for Industry and Commerce and its local counterparts (AICs).

Under the new business registration regime, enterprises registered with AICs and government authorities are obligated to disclose certain types of information.

Implications for enterprises

The effects of the new enterprise information disclosure regime under the Tentative Regulations are varied. On the one hand, enterprises no longer need to comply with the requirements of various government authorities under the previous annual inspection regime, which, to a certain extent, reduces burdens for enterprises. On the other hand, their obligations under the new regime are almost just as demanding, as the enterprises are responsible for ensuring timely and accurate disclosure of all required information. Small and medium-sized enterprises may find it difficult to fulfil these obligations.

It is worth noting that the AIC will verify the information disclosed by enterprises on a random basis and that anybody may alert the AIC of any false information discovered on the online platform. An enterprise found to be non-compliant with the disclosure obligations, e.g. concealing facts or making false statements, may be blacklisted as an abnormal business operator and a list of such enterprises will be published on the platform. Any enterprise that has been blacklisted and has failed to comply with the disclosure requirements for three years will be further downgraded to be on the list of severe law-breaching enterprises. The legal representative or person-in-charge of an enterprise on this list will be prohibited from serving as the legal representative or person-in-charge of other enterprises. Moreover, any enterprise appearing on either list will be restricted or prohibited from participating in any government procurement, project tendering and state-owned land grant processes.

Challenges to the new regime

Although the Tentative Regulations have established the basic framework of the enterprise information disclosure regime, there remain areas for improvement.

No standard system

The online platform, which is the online facility for the disclosure, will be administered by the AIC. Other authorities (e.g. tax, customs and foreign exchange) should also publish the information either through the online disclosure platform or, more realistically in practice, through other publicly accessible platforms (e.g. their own websites). Until then, this means that a one-stop searching platform connecting credit information of enterprises disclosed by all relevant government authorities will not be available to the public and may still be the case in the next few years. Huge efforts will be needed in putting necessary IT infrastructure and facilities in place and coordinating with different government departments to establish a functional information sharing system. At the early stages of implementing the Tentative Regulations and the Six-year Plan, the information available through the online disclosure platform may be limited.

Inconsistent deadlines

Timely disclosure of information by different levels of the AIC and other authorities would also be very challenging. Although the Tentative Regulations provide for a time limit of 20 working days for the AIC and the enterprises to disclose information, there is no equivalent statutory time limit for other government authorities to fulfil their disclosure obligations. Presumably, other authorities may promulgate implementation rules setting out working procedures and timelines in response to the broad-brush requirements under the Tentative Regulations in due course, but this remains to be seen.

Weak penalties

Even for AICs, failure to fulfil the disclosure obligations does not seem to mean anything serious as the consequences would primarily include receiving orders from a higher level of authorities to rectify the non-compliance and, in the worst case, the person in charge and other responsible personnel receiving unidentified disciplinary penalties.

It is uncertain to what extent AICs can fulfil the disclosure obligations in a timely manner given the light touch on penalties applicable to government authorities and the significant workload likely to be involved. In fact, the enterprise registration and filing information maintained by the AIC has been available on the online disclosure platform since March 1 2014. However, the enterprise registration information on the platform is not always up to date and the time lag (from the events taking place to relevant information appearing online) in some instances is quite substantial.

Potential market confusion

Failure to disclose information by the AIC may cause confusion in the market. There is some overlap between the information needed to be disclosed by enterprises and that by the AIC (e.g. registration information of a change of shareholders as a result of an equity transfer). If the AIC fails to upload the information on to the platform in time while the enterprise concerned has done so, a third party interested in the shareholding structure of this enterprise would have trouble figuring out whether the change of shareholders has already been duly completed.

Kicking off the Six-year Plan

The Tentative Regulations have set up the framework for the new company information disclosure regime. As a substantial part of the overall registration and administration system reform and an important move under the Six-year Plan, the regime is new to all market participants as well as to the authorities. Compliance by both the enterprises and the government with the disclosure requirements under the Tentative Regulations is imperative to the success of the new regime. Establishing a nationwide social credit system as mapped out in the Six-year Plan is a huge project demanding tremendous effort by the regulatory authorities from both legislative and IT infrastructure perspectives. The Tentative Regulations represent a positive starting point to implement the Six-year Plan and to get the ball rolling. Given both the Six-year Plan and the Tentative Regulations were promulgated by the State Council, it is expected that the relevant departments may make moves to implement the requirements very soon.


Sun Hong and Tony Zhong, Norton Rose Fulbright, Shanghai


More from CLP:
Tentative Regulations for the Publication of the Information of Enterprises
Freeing private capital
PRC Company Law
Provisions for the Administration of the Registration of Foreign-invested Partnerships (Revised)
State Council, Plan for Reforming the Registered Capital Registration System