China’s consumer credit rating culture is evolving fast - probably too fast?

10 April 2017

Ratings are a big deal; school ratings, restaurant ratings and movie ratings to name but a few. There is now at least one more rating that matters to people in mainland China - online credit ratings.

Online credit ratings are distinct from credit ratings used when obtaining finance from traditional banks. Instead they affect your ability to obtain interest-free credit on several e-commerce platforms in China and your entitlement to perks (including express airport security checkpoints and car rental deposit waivers).

Online credit scores are now being used in a much wider social context. The prevalence of these is apparent on dating sites and mobile games where individuals can now show off their credit ratings to their friends and families - and possibly even potential dates. There exists a peculiar social phenomenon in China that seems to align credit-worthiness with personal trustworthiness.

Advent of Huabei

At the heart of the Chinese culture is a ritual to save rather than spend. This has indirectly dictated consumer spending in China for centuries. Whilst consumer credit has traditionally been an unfamiliar or unpopular concept to many in China, this is beginning to change with the advent of Huabei (loosely translated as ‘Just-Spend’) which is a form of virtual online credit granted based on your online credit profile. When it comes to virtual online consumer credit, Alibaba has led the way in the Chinese market. And, given the enormous potential in the consumer spending market in China, this is a clever move.

Calculating your online credit rating

However, unorthodox methods are being used to generate these online credit profiles.

Amongst other things, buyers’ purchase histories on Taobao (China's largest online retail platform and which is owned by Alibaba) are being analysed and then used to create a credit score by Alibaba's in-house credit-rating system, Sesame Credit. According to a director of Sesame Credit, a person who frequently buys nappies will be deemed more worthy of credit than someone playing video games for ten hours a day. Another example comes from China Rapid Finance which calculates an individual’s credit score based on their WeChat contacts and payment patterns.

In light of this, there is a question to be asked: do these criteria allow for an adequate and fair assessment of a person’s creditworthiness or, more importantly, trustworthiness?

A step too far?

Currently China does not have in place a sophisticated personal credit history reporting regime. At the end of 2015, the only official state-controlled credit bureau, the Credit Reference Center, held banking data of more than 300 million citizens (out of 1.3 billion Chinese citizens), but there are about 500 million potential bank customers who do not have a formal credit record. The Chinese government may therefore have had good intentions in awarding credit-rating licences to private companies with the goal of improving the country's credit scoring system; however the unconventional algorithms may need to be refined.

While the Chinese tech giants, and even the regulatory bodies, seem comfortable about using such algorithms, arguably data such as WeChat contacts and Taobao purchase histories only represent a small cross-section of a person’s creditworthiness, if anything at all. Linking a person's creditworthiness with his or her trustworthiness might also appear a concept too forward-thinking.

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