China to set salary cap in financial sector to promote equality

China plans to cap annual salaries for financial sector workers at around 3 million yuan ($412,460) as the government steps up its drive to stamp out extravagance and hedonism in the sector and reduce wealth disparity amid a continued slowdown in economic growth, according to sources familiar with the matter.

The cap will apply to all state-owned brokerages, mutual fund companies and banks, excluding financial institutions backed by private investors, the sources said, noting that such information should not be made public.

The measure will be applied retroactively, meaning those who earned more than 3 million yuan in recent years will likely have to return the excess amount to their companies, the sources said.

The move is the latest in a series of measures aligned with President Xi Jinping’s common prosperity initiative, which emphasizes a more equitable distribution of wealth at a time when the country is facing economic challenges.

China’s elite financial sector has been a target for top policymakers since a young trader at China International Capital Corp. flaunted his salary on social media in 2022, sparking public outrage. That was quickly followed by a series of corruption investigations involving regulators and senior executives.

“The financial sector has not contributed much to the real economy in recent years, and the image of the sector is not so positive among the public,” said Dai Ming, a fund manager at Huichen Asset Management in Shanghai.

The salary cap could also be linked to fiscal stress facing the government as it seeks to diversify its revenue sources amid declining tax collections and land sales, Dai added. Last month, a group of listed Chinese companies said they may need to make tax payments dating back three decades, but the state tax bureau later denied it was taking retroactive measures.

Some big financial firms, including major mutual fund companies, have increased scrutiny over expense reimbursements, which have been used as a secret form of salary payment to skirt regulatory oversight, according to a source.

Some major brokerages have already drawn up measures to implement the salary cap, while others do not yet have plans in place, another source said.

While Xi has highlighted the importance of the financial industry, which he wants to transform into a global powerhouse, the sector has come under increased regulatory scrutiny in recent years as part of the Communist Party’s anti-corruption campaign.

More than 30 industry officials have been placed under investigation this year, with the head of the stock market regulator’s Jiangsu province branch the latest. In 2023, at least 101 officials have been investigated, including Liu Liange, former governor of the Bank of China, and Li Xiaopeng, former chairman of China Everbright Group.

In addition to government crackdowns, declining profitability in the financial industry, which has been hit by a three-year bear market and a slumping housing market, has also led companies to tighten their budgets and avoid big pay raises and bonuses.

The brokerage industry endured a second straight year of pay cuts in 2023, with those reductions at the top 10 companies ranging from 1.2% to 27%, according to data compiled by the Post and Wind Information.

Average salaries at Citic Securities, China’s largest brokerage, fell 5.3 percent to 792,000 yuan last year, while compensation for its chairman, Zhang Youjun, fell to 5.05 million yuan from 5.6 million yuan a year earlier, according to data compiled by Wind and the company’s annual reports.

First-quarter profits at 51 listed Chinese brokerages fell an average of 23 percent from a year earlier as revenue from investment banking business declined, while net profits at 37 listed banks fell 0.7 percent due to narrowing net interest margins, according to brokerage reports.

The outlook for the financial industry may not improve immediately as the yuan stock market rally falters and the fall in home prices continues amid an uneven economic recovery.

The latest official data showed China’s manufacturing industry shrank for a second straight month in June, highlighting that more easing measures will be needed to revive growth.

“From the public’s perspective, the salary cut and cap are justified and reasonable,” said Wang Chen, a partner at Xufunds Investment Management in Shanghai. “We have seen a steady decline in profit margins in the financial industry in recent years, so the sector’s salary should also return to the average level of society, emphasizing equality in society.”

Via South China Morning Post.