China’s Financial Sector Faces Major Overhaul
Crackdown on Excess Income
In a move to address social and income inequality, China is set to impose a strict cap on the annual income of staff at central government-owned financial institutions. The new rule, aimed at promoting “common prosperity,” will limit salaries to 1 million yuan ($137,309) per year, with those already exceeding this threshold facing significant pay cuts.
Sweeping Changes Ahead
The overhaul, expected to begin as early as next month, will affect 27 major financial institutions, including the “Big Five” banks, leading insurers, and bad debt managers. Middle and senior managers will be hit hardest, with their income potentially halved. Bonuses will bear the brunt of the cuts, according to sources familiar with the plan.
A Shift in Compensation Structure
The move marks a significant shift in the compensation structure of China’s $67 trillion finance sector. State-owned and private financial firms have already begun to proactively reduce salaries and bonuses, discouraging displays of wealth among staff. However, the new cap may make it challenging for state-owned institutions to retain top talent, as private-sector rivals offer more competitive packages.
Executive Income Caps
Subsidiaries of targeted firms, including investment banks and asset managers, will also face an executive income cap of 3 million yuan. Currently, some senior executives at these subsidiaries earn up to 5 million yuan, according to stock exchange filings.
Pay Disparity in the Financial Sector
The move to slash pay at the central bank and two financial regulators, begun in 2023, aims to bring executive income more in line with that of other civil servants. However, this move may seem at odds with government efforts to boost consumption and revive economic growth. Just this month, millions of government workers received a surprise monthly increase of about 500 yuan on average.
Impact on Department Heads
Department heads, who earn premium salaries for managing front-office operations and driving growth, will be most affected by the new cap. Their income often exceeds that of chairs and presidents, who are already subject to compensation caps. To address this anomaly, a new rule will prohibit subordinates from receiving higher compensation than superiors at target firms.
A New Era for China’s Financial Sector
As China’s economy continues to slow, the government’s “common prosperity” drive is gaining momentum. The new income cap is a significant step towards addressing social and income inequality, but its impact on the financial sector remains to be seen. One thing is certain – the face of China’s financial industry is about to change dramatically.
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