A credit rating system for China's import-export traders is being established to fill in the blanks in this field.

The Ministry of Commerce has authorized the Foreign Trade Enterprises Association and the Beijing Guoshang International Credit Service Ltd. to set up the system.

The two bodies have mapped out rating rules and set up the Credit System Expert Committee. Ratings will be based on information the ministry provides about international traders.

Association Chairman Zhang Xiaoli said there will be four grades -- A, B, C and D -- with the initial ratings being published in the press for public comment.

Companies will be rated according to 18 standards, including brand recognition, quality certifications, license and quota records, tax payments, adherence to intellectual property right laws, total trade and financial strength.

This is the first concrete step toward establishing a credit system for international traders. China is giving increasing attention to the establishment of a credit-based business environment.

The country has become the world's fourth largest trader, but its trade credit system fails to match this standing, said Zhang. The misbehavior of some traders, who are seldom punished, has had a negative impact on China's reputation.

"The credit rating and archive we are providing can help foreign companies better distinguish the bad from the good," Zhang said.

The revision of nation's Foreign Trade Law that lowers the threshold for foreign firms' involvement increases the need for a comprehensive credit system for foreign trade, said Li Ling, vice director of the ministry's Treaty and Law Department.

The revision, which will come into effect on July 1, allows individuals to be the operators of export-import businesses and removes some of the restrictive qualifications for international traders.

The revised law includes articles for setting up a rating system, such as establishing a statistics mechanism and publicizing illegal operations.

The revision also strengthens sanctions against illegal operations by adopting more severe punishments for violators, including criminal and administrative penalties and cancellation of traders' operating licenses.

The existing law allows only one penalty: withdrawal of operational credit.

Li said the ministry will create regulations specifically governing the credit system for international traders based on these articles.

A company official from the Guangzhou Hongtai Industrial Co. said the system will be very effective. Foreign companies often encounter difficulties in assessing Chinese companies' credit, which has sometimes caused them retreat. For example, he said, one Japanese company signed an agreement with Guangzhou Hongtai only after nine months of investigation.

"If there is an official credit-rating system, doing business will be easier for those with good records," he said.

But analysts warn that while a credit system is badly needed, the credibility of the system is even more vital. There is no specific government department governing the establishment of a credit system.

A number of government agencies, including the State Development and Reform Commission, the Ministry of Commerce, the Ministry of Public Security and the State Administration for Industry and Commerce, are reportedly each drafting their own social credit system plans.

For example, the People's Bank of China, the nation's central bank, is building a huge Enterprise and Individual Credit Management System that covers all of the bank records of the nation's corporate and consumer borrowers.

As a result, many companies and organizations began to seek a rating just to make a profit, and more than a few have a "give-me-a-good-rating-and-tell-me-how-much-you-want" attitude towards credit rating firms.

China's credit management industry is growing fast alongside the rapid development of the market economy, but the estimated 500 credit management firms have been frustrated by the long absence of an industry watchdog and related legislation.

(China Daily May 31, 2004)