Ren Xingzhou

I. Chaos in Credit System Has Become a Critical Factor Hampering China’s Economic Development.

Most transactions of modern market economy are based on credit, and the economic relation among social members is also mainly based on credit. Through more than two decades of reform and opening up, China’s economy has by and large stepped onto the track of socialist market economy, the mechanism of market has started to play a basic role in distribution of resources, and the trade based on credit has become the dominant method in the country’s economy. In recent years, a "buyers market" has initially come into being in China. In order to stimulate market demand, various transaction methods based on credit have been carried out. Credit offered by banks, credit offered by enterprise for purchase and sales and individual consumption with credit loans have been on the rise.

Under the circumstance of increasing trade on credit, however, the disorder of credit system has become a critical issue hampering China’s economic development. The phenomenon Breach of credit has become pervasive and serious. Large amounts of overdue bank loans cannot be retrieved, and become bad debts,increasing non-performing loans of commercial banks and intensifying the risk against the banking system. The debt chain among enterprises can not be solved and the situation has been delayed for a long time, resulting in the bankruptcy of some enterprises. A lot of acts such as fraud, counterfeit and infringement upon intellectual property right in trade can not be banned completely. The acts such as fraud, concealing, and vicious manipulation in capital market have occurred again and again. Vicious defaults on household loans have also come up continuously.

The chaos in credit system has caused serious damage to the social economic life. It not only seriously disrupted the market order greatly, increased the transaction costs and decreased the economic operation efficiency, but also directly affected and hampered the market mechanism from playing a normal role in the distribution of resources, and reduced the effect of government’s policy for stimulating investment and internal market demand to a large extent. Large amounts of defaults also destroyed the normal credit relation based on contracts among economic entities, resulting in social demoralization and other social problems. After China’s entryinto the WTO, the chaos in credit system also seriously tarnished the country’s international credit image, affecting the quality and process of opening up.

II. Cultural Backgroundand System Origin forCredit Disorder

1. Chinese society lacks credit cultural environment demanded by market economy.

As China’s modern market economy had not grown enough, the economy based on credit appeared late, and trade on credit is not developed.The country had long been under the system of planned economy after the founding of New China in 1949. And as a result, people know very little about credit. As a universal phenomenon, social economic entities lack the concept of honoring promises and credit ideology demanded by market economy. Since the reform and opening up, although the concept of market economy for urban and rural residents and enterprises have been strengthened, the cultural environment for credit demanded by modern market economy has not yet come into being. The whole society has not truly set up an assessment criterion and restraint mechanism for assessing credit morality based on which, trustworthiness are honored while untrustworthiness are shunned at.

2. There is a universal lack of a basic credit risk-control and management system within enterprises.

Credit management is an important component part of financial management within an enterprise, which includes management of receivables and product sales, and survey and management of credit status of main clients of enterprises.It serves as a bridge linking the finance department with business departments. Credit management is also an effective mechanism, through which enterprises may screen clients and keep long-term contacts with trustworthy clients. But there is a universalabsent of complete credit risk management system within China’s enterprises. As a result, improper offering of credit always lead to failure in performing the contract, and credit-offering enterprises frequently break the contract due to lack of management in performing the contract. Many enterprises were often defrauded due to lack of knowledge of the credit status of clients, resulting in a lot of economic disputes and losses. At the same time, as the property right system of state-owned enterprises is not complete, their internal administration structure is not standardized, and the situation of being dependent on governments has not been ended completely, the credit management system can hardly be genuinely set up in enterprises.

3. There is lack of a social mechanism for sharing the credit information.

The unsymmetric share of information provided the objective basis, upon which the vulnerable party with less information will be defrauded, and the party who lose credibility will be successful. The problem of unsymmetry in information is very obvious in China’s society: on the one hand, the data of credit information is opened in low degree; there is lack of a channel to standardize the distribution and collection of information; there is no specific law provisions on publicity and use of collected information; information about enterprises and individuals in the hands of government departments and specialized institutions which can be publicized has not been publicized legally. This has made it harder for enterprises and specialized institutions to obtain information. On the other hand, the credit intermediary service industry came up late. Although there are some agencieswhich provide credit service, market operation and credit products to some enterprises, their market is limited and is operated at a dispersed state, the overall industrial level is not high and the competition is not standard. In addition, the databases of China’s credit intermediary agencies are currently small-scaled and cannot be updated in time. Asa result, credit information lacks integrality and effectiveness.

4. The punishment mechanism against breach of credit is in-complete, which leads to low costs of breach of faith.

As China’s related laws are not complete and the punishment mechanism against breach of faith is not complete, a great number of defaults which have not reached the degree of criminal offence escape due punishment. Thus the costs of breach of faith are too low. As there is no systematic, effective credit joint mechanism and the credit information is unsymmetric, the "black records" of the party who lose credibility cannot be collected and publicized legally. As a result, breach of faith activities occurs from time to time. The lack of a punishment mechanism against breach offaith emboldens the party who lose credibility andindirectly breaks the confidence of those honoring credits and mess up the criterion of assessing social credit morality.

5. There is no effective credit supervision and management system.

In most of those countries with complete credit system, there is a complete credit supervision and management system of the state, including legislation and enforcement relating to credit, as well as governmental supervision and management over credit industry. At present, China is seriously inadequate in these fields. In legislation, although there is a principle of honoring credit in China’s General Principles of Civil Law, Contract Law, and Law against Competition by Inappropriate Means, and there are some regulations concerning punishment on frauds and similar crimes in the Criminal Law, this still does not constitute powerful restriction and fetter on various discreditable conducts. The legislation concerning credit still lags behind. Meanwhile, there are serious cases of non-enforcement and law enforcement of law.And there is serious local protectionism in hearing cases of frauds and breach of faith. Governmental supervision and management over credit market is also relatively weak.

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