China’s banker pay crackdown risks Pyrrhic victory
The author is a Reuters Breakingviews columnist. The opinions expressed are his own. Updates to add graphics.
By Hudson Lockett
HONG KONG, July 8 (Reuters Breakingviews) -“To get rich is glorious,” goes the famous slogan attributed to Deng Xiaoping, the architect of China’s decades-long run of economic liberalization and breakneck growth. Under current President Xi Jinping's "common prosperity" push to address the country's yawning wealth gap, doing so via a career in finance looks increasingly unlikely.
On Thursday, the South China Morning Post reported authorities are planning to cap salaries at state-backed financial institutions at 3 million yuan ($413,000), possibly applied retroactively. That would amount to an about-face on sweeping reforms launched more than two decades ago that have helped tie pay to performance for the employees of companies that answer to China’s central government.
Going after banker pay is hardly the preserve of a state-directed economy. A mix of public pressure, taxpayer-funded bailouts and government edicts forced investment banks in the UK and the U.S. to slash pay in the wake of the 2008 financial crisis. Some of it has stuck: current Goldman Sachs GS.N CEO David Solomon last year earned less than half what his predecessor Lloyd Blankfein did in 2007 - but still bagged $31 million.
Chinese financial-markets executives have already taken a hit to their wallets as a result of a dealmaking slump that slashed annual fees paid by Chinese clients to investment banks by almost 50% between 2021 and 2023, according to data from Dealogic. Previously, base pay for many at the largest state-backed investment banks and brokers frequently surpassed 10 million yuan, per publicly disclosed figures compiled by data provider Wind. Since 2019, though, the average pay for the top three executives across a dozen of the country’s largest investment banks and brokers had dropped 48% as of the end of 2023.
The new restrictions Beijing has in mind look permanent and counterproductive. For one, they're likely to kill off what was admittedly a far-fetched dream of the People's Republic: as recently as late October there was talk in official circles of creating "top class" investment banks to compete with the likes of Goldman, Morgan Stanley MS.N and UBS. Under the new rules it will be largely impossible to compete to hire the best bankers, for example, especially outside of mainland China. Citic Securities 600030.SS, the country’s biggest investment bank by revenue, ordered cuts to base pay for more than 100 bankers at its Hong Kong-based subsidiary CLSA, Reuters reported on June 5.
The measures also risk prompting current employees to consider taking their skills elsewhere. If some become engineers, teachers and the like, there's at least some benefit to society; not so much if they decamp to hedge funds.
Salary caps at state-run firms can stymie innovation and ambition. That could reduce unnecessary risk-taking, at least, but it can also foster stodgier, more bureaucratic institutions. Worse, aside from some short-term kudos for attacking rich bankers, there seems to be few other benefits. Had the pay ceiling been in place last year for top management, it would have saved Citic just 57 million yuan - or just 0.3% of its compensation bill.
Easy targets though they may be, punishing Chinese financiers for doing their job is apt to do more harm than good.
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CONTEXT NEWS
Chinese authorities plan to cap annual salary in the financial sector to 3 million yuan for all state-backed brokerages, mutual fund managers and banks, the South China Morning Post reported on July 4 citing unnamed sources.
The cap will be applied retroactively, the paper reported, potentially forcing executives who earned more than 3 million yuan in recent years to pay any excess amount back to their employers.
Top Chinese financiers' pay is well below pre-pandemic levels Top Chinese financiers' pay is well below pre-pandemic levels https://www.reuters.com/graphics/BRV-BRV/lgvdojxonpo/chart.png
Editing by Antony Currie and Aditya Srivastav
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