Fighting slowdown, China imposes pay limits on bankers

Amid economic challenges, China is instituting a cap on annual salaries for executives in the state-owned financial sector, a significant move given the dominance of these institutions in the country’s banking industry.  

The proposed salary ceiling of 3 million yuan or $413,000 comes at a time when financiers’ pay has already dwindled due to the economic slowdown triggered by the Covid-19 pandemic and a struggling stock market.  

Additionally, widespread corruption investigations have led to the arrest of over 30 senior regulators and bankers this year, further destabilising the sector. Major banks have already enforced pay cuts of 10 percent or more across the board.

Pay inequality and Xi’s ‘common prosperity’ push

Pay inequality has become a prominent issue on Chinese social media, fuelling discontent that aligns ideologically with the Chinese Communist Party’s (CCP) promotion of “common prosperity.” President Xi Jinping’s endorsement of this principle makes it challenging for censors to suppress grievances about the nation’s stark wealth disparity.

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However, critics argue that these pay restrictions could drive away top talent, undermining China’s ambitions to develop globally competitive banks. This issue has already manifested among financial regulators, where significant pay cuts last year led to a mass exodus of highly skilled personnel.  

A ‘shift of talent’ risk

Talented professionals may shift from state banks to non-state firms, such as hedge funds and private equity, although these sectors also face declining investment. Alternatively, some may choose to leave China entirely, joining the ranks of the country’s ultra-wealthy expatriates.

The effectiveness of the pay limits remains uncertain. The proposed cap of 3 million yuan ($413,000) recalls similar measures introduced in 2009, when the government capped executive pay at 2.8 million yuan ($385,000) following the global financial crisis. These regulations were largely ignored, with executive compensation soon surpassing the limit. Officially, the 2.8 million yuan cap was never rescinded.

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Opaque regulations, a legacy issue

The slight increase in the official pay cap—just 7 per cent—against a backdrop of a tripling GDP since 2009 suggests that the limit is either unrealistically low or not intended to be strictly enforced. Executive compensation in Chinese firms, particularly state-owned ones, is notoriously opaque, often supplemented through indirect methods.  

According to 2010 regulations by the China Banking Regulatory Commission, executives’ base salaries should constitute at least 35 percent of their total compensation, but this rule has proven as unenforceable as others.

The lack of transparency in compensation for state-owned enterprise executives mirrors a broader issue within the government. Official salaries for government workers are both inadequately low and highly opaque.  

A comparison with Xi’s pay cheque

On paper, President Xi earns only $1,833 per month, while many officials make around $1,000 monthly, comparable to the lower end of the urban middle class. In reality, officials receive generous government benefits, including housing, subsidised meals, and annual bonuses.

Corruption further complicates the picture. High-ranking officials convicted of corruption were found to earn between eight and 14 times their annual income through illicit means. At the top, Xi’s family has amassed a significant fortune, a subject rarely reported in China.

Transparent and fair compensation for officials might be beneficial for all. However, the CCP fears public resentment towards well-paid government officials.  

The last announced pay raise was in 2015, which increased salaries by at least 31 percent for most officials and doubled or tripled those of some lower-ranked rural staff. Before that, the previous pay raise was in 2006.

Given this timeline, another pay raise for officials might be expected this year or next. Yet, local governments are facing severe financial constraints due to the pandemic-induced economic downturn, with some struggling to meet payroll obligations and cutting benefits. Temporary staff are being hired for as little as $2,300 a year.

While a $400,000 annual salary might seem burdensome for bankers if compared with their counterparts in the West, it is a luxury compared to the remuneration of most other government workers in China.