The Chinese Communist Party’s system of mass surveillance is like something out of a dystopian sci-fi novel, destroying any semblance of privacy in the country for both individuals and businesses.

In a recent international incident, popular job networking site LinkedIn shut down operations in China after the strain of working with the authoritarian government became too much. According to Riley Walters, LinkedIn was being forced to share data with the Chinese Communist Party. Amid privacy concerns, the company left the country.

Walters, deputy director of the Hudson Institute Japan Chair, warns that the surveillance state can have real consequences for both Chinese citizens and the international community.

“If you happen to be one of the few people left in the United States who has a Huawei phone, or if you live in Europe and you have some Chinese telecommunications device, is that information being transported back to China? If it’s out in China, you’re out of luck. It’s there,” he says.

Walters joins the show to discuss the implications of China’s surveillance state on Chinese domestic life, as well as the world at large.

We also cover these stories:

  • Attorney General Merrick Garland testifies before the Senate Judiciary Committee about the ongoing fallout surrounding his Justice Department memo asking the FBI to address alleged violence and harassment aimed at local school officials.
  • Sen. Joe Manchin, D-W.Va., says he does not like the idea of a billionaire tax.
  • Consumers’ Research launches a new ad campaign targeting investment management company BlackRock’s ties to the Chinese Communist Party.

Listen to the podcast below or read the lightly edited transcript.

Doug Blair: Our guest today is Riley Walters, deputy director of the Hudson Institute Japan Chair. Riley, thank you so much for joining us.

Riley Walters: Yeah, thanks for having me.

Blair: Of course. I wanted to have you on the show to talk about a troubling issue that is coming out of Asia, which is the Chinese Communist Party has begun ranking its citizens based on what it’s calling social credit. Actions that the party likes will raise your score and actions that the party dislikes will lower your score. So let’s begin with, how did this system end up getting into place?

Walters: Well, in all bureaucracy, new rules take time. And so it’s sort of this social credit system that they’re toying. You think of financial credit, right? Everyone has financial credit or you’ve got really good credit, you’ve got really bad credit. And so it’s sort of expanded from that. The banking sector has an idea of what kind of score people have. They’re trying to encourage more people to actually invest in the banking sector, to build off of that.

So that little nugget right there of an idea has kind of expanded, as you’ve said, into other ideas. Thinking of ways that if you’re a model citizen, for example, you might get some benefit out of it. If you are a not ideal citizen or a company, for example, who does really poorly, you get a negative score.

I want to say, though, it’s not really one score at this time. I think some cities perhaps have been toying with this idea of a single score, but it’s a little bit more obscure than that because it touches many different aspects of the society. There’s the financial aspect of it. There’s this societal aspect of it. There’s, like, a business side of it. It’s a lot more complicated than, say, Doug has a score of 1,000. And you spit on the street, you minus 50 points. You help an old lady cross the road, you get 100 points. It’s not exactly that simple.

Blair: OK. So given that there are a multitude of different scores that we might be seeing here, it’s not as simple as one score in particular. What are some of the consequences of having a series of lower scores or what happens if you have a particularly high set of scores? What are some of the implications for your everyday life?

Walters: Well, I think they haven’t really rolled out. I think there’s actually more implications for business in this right now. For people, for individuals, essentially what it has meant, and really we’ve seen this happening over quite some time in China, is just the elimination of anonymity, right? So your privacy. There’s hardly anything. Privacy is becoming a scarce resource in China, and this is tied into that program. If you want to get a cellphone, if you want to get on the internet, you have to have your national citizen ID. And then this has implications for feeding into that score.

Anyways, going back to sort of, I think where we really see the effect is on businesses. Now, the positive side, there’s not a whole lot on the positive side just yet. Right? Communism isn’t really known for really helping its citizens. But if you do bad things, you’re going to get punished. Right? And so what we see is things like blacklisting. If your company does bad things and usually actually legitimately bad things, like if you use really terrible products or if you cheat or if you steal, things like that, you can be blacklisted. …

Again, the definition of the severity and the consequences varies. But what it could mean is you have more inspectors coming to look at your business. Maybe you’re not first in line for certain projects. Really, it just means more bureaucracy, which means more government intervention, which means, if you’re not in favor of the government, you’re going to have a hard time doing business.

Blair: You mentioned some of these things that would affect the score of both a business and an individual. I do want to focus a little more on the individual. You’ve mentioned that it’s not as relevant to individuals, but what are some of the things that citizens are graded on in terms of these social credit scores?

Walters: It could be a multitude of things. Again, I think various cities are still playing with this. We haven’t seen this credit system, I think, in its full involvement. Right? Again, it’s a relatively new government program. And if you think about within the United States, we have federal and state programs. In China, you have cities, major cities, provinces as well, rolling out their own version of this. Again, like I was saying, looking more toward the positive side, like, how do you encourage more people to do this? How do you encourage more people to do less of another thing?

But to the actual grading of it, what influences it, again, finance could be a big part of that—if you are known for taking loans and not paying them. Think of things that affect your own credit score at home. If you have a lot of credit cards. If you have a lot of debt. That can negatively impact it.

Again, I think for people, it hasn’t really hit a lot of the negative aspects yet. So as far as this scoring system is involved—I mean, we could talk about other things in China that if you do bad things, they’ll come and get you. But as far as this credit scoring system is involved, it’s pretty benign I think at this point, in relative sense. As long as you’re not ethnically weaker, living in western China, you’re generally OK, as long as you don’t have a lot of outstanding debt.

Blair: Interesting. So, are there any examples that we can point to of Chinese businesses or citizens who have gotten punished for having problematic scores or something that’s cropped up in that way?

Walters: Yeah. You can go online. Usually, I would think it’s pretty hard to find in English, given that a lot of this isn’t necessarily covered in Western media. Usually there’s some good websites that’ll translate Chinese news or Chinese local, like provincial, court documents, things like that. But I think there’s a few.

I can’t think of any names. And even if I did, I’m not sure many listeners would recognize their business because it’d probably be a smaller, medium enterprise, where if you haven’t been really interacting well with the local government, if you haven’t really been abiding by some of the local laws and you’ve been doing questionable business practices, whatever that means, depending on the set of regulations that they’ve laid out—yeah, I think there’s a few who have been blacklisted already. I don’t have a concrete number, of course, of how many [are] on this list.

One of the things I think this whole system is actually established to design is a self-regulating mechanism, right? So it’s essentially, you hear about it, right? And so you’re worried. You yourself as an individual or a business, you hear about this system and worried that you could potentially be on the wrong side of this list one day. … It’s sort of a self-, not self-censoring, but sort of in that same manner of self-regulating mechanism to make sure that you do better without the government actually having to get involved.

Blair: That does kind of bring up the question of enforcement. So, when I imagine this kind of Chinese Communist Party surveillance state, I imagine something out of like “Minority Report,” where it’s like they just have these government bureaucrats that are sitting there and just watching you before you do something wrong. Is that kind of how this is being enforced at the moment? Or is there a sense of maybe citizen-on-citizen reporting or citizen-on-business reporting?

Walters: For our cyberpunk friends who understand these dystopic films in the future where, like “Minority Report,” where people are surveilling, there is a big data aspect to this, where I mentioned the different aspects, like credit scores and business information and financial regulations. There is an attempt right now to sort of aggregate all that data into a way that’s easily monitorable—I don’t know if that’s the right word, but a way to look at it. And so, as a path to enforcement.

Now, the actual enforcement I think [is] a little bit more bureaucratic than that. It’s, do you have regulators go out to businesses and what do banks do with this information? Can you get a loan in the future? It’s a little bit more disaggregated, I think, at that point.

But before that, again, going back, it goes back to the fact that all this information, they’re attempting to collect all this into one or several places to analyze it, collect it, analyze it, and use it however they see fit, eventually. Whatever that means.

Blair: How do Chinese businesses or Chinese people feel about these systems of surveillance and social credit? Do they have a view on this? Do we have any information about how they feel about this?

Walters: I haven’t looked into that. I’m sure there is some dissent, but I’m sure it’s also not publicly available. Again, I think what we’re seeing is a China that is being less open, right? Its citizens are going to have fewer opportunities to voice an opinion that is an opposition to what the government is doing, right? Now, they can voice an opinion so long as it doesn’t complicate or contradict what sort of the initial push is. But I think we’re seeing a more closed off China, politically, socially, economically, in all degrees. And it’s certainly worrying.

And I hope that a lot of Chinese people can see this, but we see, to sort of go the extreme of this, I think of North Korea. North Korea is closed off to the world, except for China. China has an in. But the people there, it’s much more of the extreme of I think what you’re sort of suggesting, right? It’s where people police each other, like, you can’t say your true thoughts around your own friends out of fear of being tattled on and what that can mean for you and your family.

I don’t think we’re there yet in China, but it’s definitely, it’s the extreme of where China could potentially go one day. I don’t think they would get there because North Korea is such an extreme example, but it is worrying to see them slide on this, on so many different aspects. And it’s not going to get better. It’s not going to get better, at least in the near term. Maybe by the time we’re old, by the time we’re as old as [Chinese President] Xi Jinping, maybe once he’s died and whoever replaces him comes along, maybe it’ll change.

Blair: You’ve mentioned a little bit of the domestic possible implications for this. You’ve said that it looks like we’re sliding toward North Korea, but we don’t think we’re going to get there. What are some of the international implications of this type of surveillance structure existing in China?

Walters: Well, it’s definitely worrying in the aspect of data collection. We’ve been talking about this for years in that China has these national security and cybersecurity laws, which effectively means Beijing can access any information within its country at any time. And it’s questionable what Chinese telecommunications and IT companies abroad are doing to, if asked, basically, if asked for information outside of China, right?

So, if you happen to be one of the few people left in the United States who has a Huawei phone, or if you live in Europe and you have some Chinese telecommunications device, is that information being transported back to China?

Now, if it’s out in China, you’re out of luck. It’s there. If it’s not and it’s in the United States, if it’s in Europe, if it’s in Asia, somewhere else, like Japan or Korea, you might be fine. But again, it’s hard to have some of that insight and whether it’s going back. But once it is back, it’s there. And the Chinese are very adamant that this is necessary for their national security, to have access to any information, anywhere, at any time.

And sometimes companies, they try and say things like, “No, we don’t give them our information domestically,” but honestly, that’s not true. It’s probably something in the language that they’re saying, right? It’s a little bit different. They’re saying, “We’re not actively giving it to them,” but if asked, they would give it to them.

If I can just sort of give … a recent example of what’s happening—you heard about LinkedIn in China?

Blair: Yes.

Walters: I don’t know if that was on your list.

Blair: No, go, please. Yeah, yeah.

Walters: So LinkedIn, we’re all sort of familiar with it. If you’re looking for a job in the United States, usually it’s a good resource. It’s much better than USA Jobs—maybe, I don’t know. But LinkedIn is in China. It’s one of the few American Western websites to have full access in China, full access with a large asterisk there. But anyways, they just recently announced that they can’t do business in China anymore. Not with their model.

So they’re effectively going to have to pull out of China because of many of these laws that China has about information collecting and policing what’s allowed on their website. Basically free speech, right? You’re not allowed to say certain things. There’s some very famous and well-known reporters, I think in town here, who have a dual American LinkedIn website, which they can’t effectively use because of that different system that China has.

And so, LinkedIn’s having to pull out. They’re actually going to create a whole separate entity for the Chinese market, which is purely jobs. It’s basically benign, like, “This job is available.” But if you think about what LinkedIn is in the United States, you can comment about anything. I actually posted recently about this, about how poorly LinkedIn is managing this. I can say on LinkedIn how bad LinkedIn is doing, but in China, that doesn’t really work anymore.

Blair: Right. So given that this is something that has international implications, what has been the response from international bodies, including the U.N. or the [World Trade Organization], and other countries, the United States obviously included in that, but maybe Western Europe. What are some of the responses from the international community?

Walters: I think on the censorship side, there’s definitely a concern about the viability or the future of free speech in China. It’s concerning to see any country walk back on the ability for its citizens to share their thoughts and not be punished. Right? So there’s a societal aspect to that.

There is a security concern, I think, if we’re thinking about Chinese businesses abroad and what it can mean for the protection of your personal information. You would expect local businesses to do their due diligence and make sure that your proprietary information is protected, but there’s a question now of whether that’s true with dealing with Chinese companies.

And I think for international businesses, they’re looking at the business environment in China and really questioning … I give businesses a bit of a break. I think they understand, a lot of them understand that China was never an ideal market, and so they see the environment there and they’ve always sort of expected things to deteriorate, but probably not as quickly as they have over the past five years.

So I think a lot of companies are sort of pushing up their timeline of questioning how much longer they should be in China. And it’s not an easy question. I feel bad for a lot of investors. But at the same time, there are other places to invest as well, which are probably just as thriving of a market.

Blair: One of the things that we do hear sometimes about businesses in China is this concept of decoupling, right? Where you kind of are [like], “We’re not going to sell in China anymore,” or I’ve even heard there’s sort of the three-prong solution, right? It’s either you go full-in on China and abandon other markets, you go full-in on exterior markets and abandon China, or you try to make it work. And the third seems to be the least likely, because … it’s like oil and water. I mean, what are your thoughts on that concept?

Walters: There’s no one solution. As the Japan Chair, H.R. McMaster, at Hudson says, decoupling is a red herring. It’s not a viable strategy. It’s an intent. An intent isn’t strategy, right? It’s, you might not want people to deal with China, but that’s not a strategy.

For businesses and even people, there’s no one solution. We mentioned LinkedIn. Basically, LinkedIn’s going to have to split off an entire new entity to deal within China. Some companies, they are a little bit more flexible. They’re willing to stay there. I’m trying to remember all the companies, but like, Microsoft I think still has some businesses in China. Apple, of course. Starbucks. Deere, I think, like farm equipment. Yeah. There’s a lot of well-known Western companies that rely on the manufacturing within China.

Some have decided that they’re looking around, they’re looking at alternative markets. Usually Southeast Asia, it’s a growing market, and so they’ll usually look there. And then others who have been in China for as long as they have say, “We know what we’re doing. We’ve been here for long enough. And we’re not going to go anywhere else because China is, as much as their economy seems to be deteriorating, it’s still growing faster than many of the other alternatives and we’re willing to take the risk at the potential gains.” Because that’s what business is. It’s gains versus risk. And so they’re willing to make that bet.

Blair: As we wrap-up this interview, if you could just point our listeners in a direction if they want to learn more about these data questions or questions about the Chinese sort of approach to how they interact with their own businesses and businesses from the exterior, the social credit system as a whole, where would you point them and where can they go?

Walters: Oh, where do I start? Just one really useful resource that I find is the State Department actually has this annual paper that they’ll publish called … “Investment Climate Report.” I think that’s what it’s called. And they do a report for every country. And it’s basically reports written by State Department personnel within those countries who interact with local businesses. … Basically, it provides resources, so alternative links that people can click on if they want to do more. But it gives a good summary of the investment environment. So people looking to invest there or elsewhere.

So, you can read China’s page. I’m sure it’s lengthy. I’m sure there’s a lot of concern. But you can look at other alternatives as well, like Japan, South Korea, Vietnam, and see how people are thinking about these different environments. That’s one I would point people to.

Blair: Thank you so much, Riley, for joining us. That was Riley Walters, deputy director of the Hudson Institute’s Japan Chair. Again, thank you so much for your time.

Walters: Thanks. It’s good to be back. Thanks.

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