How to Invest in the China Social Credit Score

About a year ago or so, we noticed how emerging technologies and investment opportunities in China are becoming increasingly important for technology investors to stay on top of. There are about 1.3 billion reasons for that, but we’ll list a few here outside of the 10 ways the communist-cum-capitalist country is already beating the United States in technology: China has the world’s second-largest economy, with a middle class so big that it would count as the world’s third most populous country. Party leaders plan to make China No. 1 in the artificial intelligence race, with the public and private sectors investing billions of dollars into startups. It’s already the leader in the electric vehicle market. The biggest fintech company in the world, Ant Financial, is a homegrown product spun off from tech giant Alibaba (NYSE:BABA) that is worth about $150 billion following a $14 billion Series C in June. In comparison, U.S. rival PayPal (NASDAQ:PYPL) has a market cap of about $100 billion.

Of course, there is a dark, dystopian side to all this that even goes beyond using AI and facial recognition technologies by Chinese unicorn SenseTime and others to keep China’s 1.3 billion citizens under constant surveillance safe. By 2020, the so-called China Social Credit Score will go nationwide, a new type of credit rating where George Orwell meets Mastercard. Most of us in the United States are probably familiar with FICO credit scores, which lenders use to gauge a person’s creditworthiness based on things like payment history, number of accounts, and length of credit history. The China Social Credit Score will account for credit history but will also include stuff like online transactional habits, personal information, ability to honor an agreement and social network affiliations, according to the Brookings Institute. It’s the “new credit score” we’ve talked about before, but worse.

China Social Credit Score

In other words, the China Social Credit Score weighs your value to society. Those with good scores (with ranges similar to FICO scores) get perks better than double points for airline miles. Rule followers can get discounts on energy bills, rent stuff without deposits, and enjoy better banking interest rates, according to Business Insider. Citizens who don’t follow the rules—outstanding loans, jaywalking, smoking in public places—can expect a ding to their Social Credit Score. A low enough score can get you banned from buying train tickets, getting into certain hotels and attending Chinese operas (which actually counts as a perk).

Social Credit Score: credit scoring
Credit: Brookings Insitute

If that’s not enough to get you to become a law-abiding citizen, there’s also a bit of peer pressure involved, as those with poor scores can affect the social credit ratings of others in their social media circles. Can you imagine this system in the United States? How many soap parties would it take before your buddy Rich stops throwing his cigarette butts in the street? You’re going to stop smoking now, aren’t you, Rich? Whack, whack, whack. On the plus side, New York City would be cleaner than Singapore. Or, more likely, society would devolve into a bartering system using subway rats and day-old slices of cheese pizza.

Marriage Between Life Score and Credit Score

But we digress. In an extract from Rachel Botsman’s book, Who Can You Trust? How Technology Brought Us Together and Why It Might Drive Us Apart, she notes that this marriage of “credit scoring into life scoring” isn’t limited to China. In 2015, the nosey folks at the U.S. Transportation Security Administration proposed expanding the PreCheck background checks to include social media records, location data and purchase history. We know companies are already mining big data with AI for finding actionable trends in the news and creating credit scores for hipsters with little credit.

However, China is a bit more unique. Its most recent Great Leap Forward in the 21st century found many skipping the transition from cash to plastic and jumping straight into the mobile digital economy. That has created a tech-savvy population of more than 750 million people, more than 95 percent of whom access the web via a mobile device, according to the Brookings Institute. And the majority of those people use payment and social media platforms created by two tech companies, Alibaba and Tencent (the Facebook of China).

Social Credit Score: mobile internet users
Credit: Brookings Institute

In the Alibaba corner is a company called Sesame Credit (not to be confused with Credit Sesame, a Silicon Valley fintech startup that also automates consumer credit decisions, raising $77.5 million over the last eight years) that is actually run by the aforementioned Ant Financial. It has teamed up with major tech players including China’s biggest ridesharing (Didi Chuxing) and dating (Baihe) startups. The latter, for instance, lets users with high social credit scores match up with those of similar social standing. Some social credit losers might not even be cool enough to date a robot.

In the other corner is China Rapid Finance, a partner of Tencent, which developed the ubiquitous messaging app WeChat. China Rapid Finance is one of a handful of Chinese fintech companies that recently went public on major U.S. stock exchanges. Let’s take a closer look at the nearly 20-year-old company and see if it’s worth investing in one of these emerging social credit scoring systems.

Investing in the China Social Credit Score System

The idea behind China’s Social Credit Score is so scary and bad that the only logical thing left to do may be to try and profit off of it. Founded way back in 2001, China Rapid Finance (NYSE:XRF) out of Shanghai had raised about $173 million in funding before going public in April 2017. At one point, the company had reportedly been valued at about $1 billion but hit the open market at a $350 million valuation. Today, CRF is barely treading above a $100 million market cap, losing investors about -75% over the last year.

Social Credit Score: stock graph

The company’s 2018 first quarter results reflect a change in overall strategy, focusing on the company’s “most established long-term borrowers during a period of market uncertainty.” That means CRF added much fewer borrowers—31,000 versus 544,000 during the previous year’s quarter. These borrowers are what CRF calls Emerging Middle-Class Mobile Active, referring to the rising tide of Chinese middle class who participate in China’s mobile digital economy, 75 percent of whom have no credit history.

The company finds “quality borrowers” through various avenues, including social networks, online travel agencies, e-commerce platforms and payment service providers. Predictive models “powered by machine learning, big data algorithms, and unique scoring technologies” assess creditworthiness based on behavioral and transactional data. (That sounds similar to what other AI fintech companies are doing to create credit scores out of our online data exhaust.) CRF’s algorithms continue to improve as they analyze repayment history and revisit thousands of other data points.

Social Credit Score: loans

The loans are pretty small. In the most recent quarter, the average loan size was $195, up more than 60 percent from a year ago. Also on the upside, total revenue grew 60 percent year-on-year to $16.7 million, with gross billings (various service and transaction fees, the lifeblood of any lender) nearly double from a year ago. But the company’s net loss was $30.2 million, more than double from the first quarter of 2017 at $14.9 million. Still, the company said its new focus, loan products and reorganization will significantly improve performance in the second half of 2018, promising profitability toward the end of the year.


While the emergence of a China Social Credit Score is certainly worrisome from a privacy (and apparently dating) standpoint, a bigger danger to the retail investor might be the rising tide of Chinese fintech online lenders going public on U.S. stock exchanges, proliferating almost as quickly as marijuana stocks. In addition to China Rapid Finance, there’s Qudian Inc (NYSE:QD; -75% since October 2017 IPO), Hexindai Inc (NASDAQ: HX; -25% since November 2017 IPO), Jianpu Technology (NYSE:JT; -66% since November 2017 IPO) and PPDAI Group Inc (NYSE:PPDF-83% since November 2017 IPO). All of these companies saw an IPO late last year and have performed pretty abysmally since. The key takeaway here seems to be that Chinese fintech IPOs – like China’s Social Credit Score – are things we’d rather not participate in.

There’s been plenty of news in recent months about a slowdown in China’s economy, especially against the backdrop of the trade war with the United States, so one could see these online fintech lenders as one barometer of that deceleration. Still, China’s overall growth is robust against most measurements, and a little cooling off may not explain the downturn in the online credit sector. Investors hot to get into the China market should check out our article on investing in Chinese stocks or look to an established player like Alibaba, which has returned +100% since its U.S. IPO in September 2014 (compared to a NASDAQ return of around +75%). That’s the sort of investment that will bump up anyone’s social credit score.


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