China should have established and refined a social credit system compatible with the development of its market economy in about 20 years, a report by the Development Research Center under the State Council has suggested.

The State should focus its efforts on setting up a social credit system framework that encompasses moral and cultural bases, an information-sharing mechanism, related laws and a credit regulation system before 2012, said the report which was originally published by the China Economic Times.

And then the system can be improved to create a sound credit environment by 2020.

After more than two decades of reform and opening-up, the Chinese economy has basically completed its transition from central planning to market competition.

Market rules now play a fundamental role in the allocation of resources and credit transactions have become a major business model.

In recent years, various credit methods such as loans by banks,sales on credit by enterprises and individual consumption on credit have been used to boost domestic demand.

However, as the use of credit expands, problems relating to credit have become a heavy drag on the country's economic development, the report said.

A large number of bad loans have added to the banking sector's systematic risks, some firms have gone broke due to extending too much credit, fraud has been rife in business, there have been fake information disclosures and excessive speculation, which have marred the development of the capital market.Credit chaos not only distorts market order and increases transaction costs but also affects the market's role in allocating resources, undermining the government's efforts to stimulate investment and domestic demand, the report noted.

Bad credit, which ruins the normal contract-based trust between market players, also results in moral degeneration.

Since China's entry into the World Trade Organization, such malpractice could hurt the country's image in the international credit markets.

To address this issue, first, the report suggested that the State should make more efforts to create a social atmosphere to try and stamp out bad credit.

Although the public has understood the market economy much better than two decades ago, a credit culture has not yet taken root in this country.

The State should enhance credit education through organizations like schools, enterprises, communities and industrial associations.

Such educational campaigns will increase the public's awareness of the issue and encourage it to resist dishonesty in business.

Second, enterprises should be directed to strengthen internal credit management.

The lack of a sound credit risk management system has made many domestic enterprises vulnerable to the granting of improper credit, which can result in the failure to fulfill contracts.

And administrative interference has also made it difficult for State-owned enterprises to carry out strict internal credit controls.

The establishment of a sound internal credit management system is crucial to corporate governance.

Therefore, the government can organize related experts and company managers to study foreign enterprises' credit systems and credit management experience to provide consultative services to domestic enterprises.

Third, an open and transparent information system is a prerequisite to setting up a social credit system, the report said.

To throw open basic social credit data, the State should begin with drawing up laws and regulations to standardize disclosure, dissemination and the use of public information and credit investigation data.

In particular, such rules should specify what sort of data the government and enterprises must release and to whom it should be made available.

Meanwhile, key industries should be encouraged to set up information-sharing platforms. Industrial associations have a big role to play in creating such market-oriented information data banks.

It is high time to promote the development of the credit intermediary service, the report added.

While advocating strict requirements for institutions charged with investigating credit and to try to ensure the correct use of individuals' credit histories, the report stressed that the government, in principle, should not invest in or run such agencies.

In view of the country's conditions, it is better to develop the intermediary service sector through a market-oriented approach.

Finally, the State should strengthen credit-related legislation and the enforcement of concerned laws and regulations, the report said.

In the short run, legislative priority should be put on making laws related to government information disclosure and credit investigations on individuals and enterprises.

But on the other hand, efforts are also needed to amend existing laws and regulations which are incompatible with the establishment of a social credit system.

(China Daily August 27, 2003)