Commentary on Political Economy

Thursday, 6 August 2020

China Tells Banks, Wealth Fund to Cut Pay as Economy Slumps

Updated on 
  • CIC, ICBC, Citic told to lower salaries across the board
  • Finance ministry ties pay cuts to boosting performance
Chinese authorities are doubling down on pressure to get the nation’s biggest state-owned financial groups to reduce salaries in a bid to boost returns as the virus-hit economy faces its slowest expansion in four decades.
Plans for limiting pay have gone out to entities including China’s massive sovereign wealth fund, its biggest bank and investment conglomerate, according to people familiar with the move who asked not to be named revealing private deliberations. The reductions will vary among firms based on a formula, but could reach an average of 30% at some companies, the people said.
Financial firms were first notified of the need to reduce pay last year and given details on how to make those cuts in early 2020, according to the people. Implemented, however, hasn’t been uniform with some institution acting more quickly than others, the people said. More recently, the ministry has begun pushing laggards to act, they said.
The decision could mean more money in government coffers for stimulus and marks another step in forcing its $41 trillion banking system to support the economic recovery even as the pandemic eases. Lenders including Industrial & Commercial Bank of China Ltd. have earlier been asked to cap profit growth to single digits, forgoing 1.5 trillion yuan ($200 billion) in earnings this year by offering cheap loans and cutting fees. They have also been told to roll over and defer payments on trillions of yuan in troubled loans to small- and medium-sized businesses.
Among institutions being instructed to adjust salaries are China Investment Corp., the $940 billion sovereign wealth fund, China Development Bank, ICBC, China’s biggest bank, as well as Citic Group, which controls the biggest brokerage, Citic Securities Co., the people said.
China Asks Banks to Forgo $211 Billion to Help Boost Economy (1)
China Extends Relief for Trillions of Yuan in Bank Loans (1)
China’s Massive Banks Are Facing a $42 Billion Dividend Trap (1)
The Finance Ministry has devised a formula tied to a number of performance indicators to cut the total amount entities pay to employees, the people said. Those that don’t meet government return expectations would need make deeper cuts to salaries. It would affect employees at all levels to varying degrees, with the firms in charge of devising the cuts to achieve an overall average reduction, they said.
The firms though are being encouraged to continue hiring while keeping the compensation pool unchanged, one of the people said.
The ministry, CIC, Citic Group, and CDB didn’t immediately reply to requests for a comment. ICBC declined to comment to Bloomberg.
In a statement to the Xinhua news agency, ICBC said total salaries are linked to overall operations, and that it “so far” has no “uniform pay reduction arrangement.”
Unlike some banks in other parts of the world, big Chinese lenders so far have stuck to their dividends plans for the year, with the government keen on maintaining that cash flow amid a tight budget. But speculation has grown that the banks could eventually be forced to lower payouts as their bottom line comes under pressure.
The demands to lower pay could accelerate an exodus of top-level talent in China’s financial industry, where professionals have long groused over low compensation levels compared with global peers. It comes at an opportune time for global giants such as Goldman Sachs Group Inc., who are seeking to hoover up talent as they push into China after the country opened up its financial markets fully to foreign competition this year.
CIC, the world’s second-biggest sovereign wealth fund, is already being hampered by a brain drain, with three of its top executives resigning since April. Managing directors and department heads at CIC typically earn 1 million yuan to 2 million yuan a year depending on performance. While that tops the pay of some government officials, it’s a drop in the bucket versus compensation on Wall Street.
Foreign banks have made a number of recent key profile hires. UBS Group AG snapped up Fan Yang from China Merchants Securities International as chairman of global banking for Asia in April, while Credit Suisse Group AG recently poached rainmaker Wang Jing from China Merchants Bank Co. to develop its wealth management business.
The plan could also spell another blow to bankers working at state-controlled banks in Hong Kong, who were recently told they would need to start paying mainland taxes which can be as high as 45%, compared with the city’s 15% rate.

No comments:

Post a Comment