China cutting financial regulators' pay in push for common prosperity
One highlight of the recent report from China's Two Sessions is the proposed reforms to the financial regulatory system. Among the changes is to place regulators under the civil service system, which would mean salary cuts of 50% or more, along with stricter regulations on staff resignations. Will China's reforms for common prosperity work?
"The greatest tragedy for the head of a state-owned enterprise (SOE) is becoming a bureaucrat."
This week, plans for State Council institutional reforms were announced at the Two Sessions (两会, Lianghui), or annual meetings of the National People's Congress (NPC) and the Chinese People's Political Consultative Council. A friend from Beijing wryly noted that many staff at China's financial regulators will face major pay cuts, just as how heads of Chinese SOEs have their salaries and benefits slashed after they are appointed to official positions.
New supervisory body
To strengthen regulation and solve the "long-standing conflicts and issues in the financial area", China is set to implement a fresh round of reforms in the financial regulatory system, and the proposal has been submitted to the NPC for deliberation as part of State Council reforms.
Overall, the institutional reforms of the State Council are not drastic. The deeper, broader reforms - reorganisation of state and Chinese Communist Party entities - are expected to be announced after the Two Sessions.
For now, the financial system will undergo the more major adjustments. The authorities will set up the National Financial Regulatory Administration (NFRA), to supervise all financial sectors except the securities industry.
However, the current staff of the CSRC and CBIRC would most likely see the direct impact on their salaries, along with stricter restrictions on immediate resignations to join the private sector.
China's financial system has traditionally been jointly overseen by the People's Bank of China, the China Banking and Insurance Regulatory Commission (CBIRC) and the China Securities Regulatory Commission (CSRC).
Now, the CSRC will remain but will be upgraded from a "public institution" to a "government organisation" operating directly under the State Council, with the same civil servant structure and salary system as the NFRA. Meanwhile, the CBIRC will be dissolved.
The authorities stated that the reforms are aimed to improve risk management, streamline functions and increase efficiency. However, the current staff of the CSRC and CBIRC would most likely see the direct impact on their salaries, along with stricter restrictions on immediate resignations to join the private sector.
Narrowing the income gap
Like in many countries, while the staff at China's financial regulators are civil servants, their salaries are highly flexible. Added to that are performance incentives, and so they earn significantly more than other civil servants of the same grade, with even higher salaries for returning overseas Chinese and senior levels.
The day the reform plan was announced, Bloomberg quoted Chen Zhiwu, a professor of finance at the University of Hong Kong Business School, saying, "With this new definition for their positions, some of them may have to accept a pay cut of 50% or more. They will not be happy."
The report also quoted an informed source saying that some junior CSRC staff currently make about 20,000 RMB (US$2,870) a month, which will most likely drop to below 10,000 RMB after the proposed revamp.
In addition, while China ruled in 2009 that CSRC staff had to serve a one- to three-year "freeze period" before they are allowed to work for regulatory targets such as securities or fund companies; some have managed to evade this freeze period. Following this reform, the staff at financial regulators could face stricter scrutiny when switching jobs.
From a broader perspective, this is actually another step in China's year-long multi-pronged effort to overhaul the salaries of the financial sector, reduce the sector's income gap and curb high incomes. Indeed, a deeper pay adjustment in China's financial sector is underway.
Prior to the Two Sessions, the Central Commission for Discipline Inspection (CCDI) published a work report on 23 February. This strongly worded report pledges to "dismiss wrong theories about financial elites, that only money matters and that we should align with the West", sounding the alarm on high salaries in the financial sector and triggering discussions about pay cuts once again.
China's message is clear: it wants to assert that financial officials are neither "exempt" from party edicts nor are they "special" or "superior".
In the report on resolutely winning the protracted war against corruption, the CCDI also stressed the need to reject any claims that these officials are "exempt" from party edicts or that they are "special" or "superior". It also vowed to crack down on "hedonism and extravagance, such as the excessive pursuit of luxuries and sophistication", and to see these pursuits as corrupt practices.
In 2022, China's securities industry, fund industry and the Department of Finance of the Ministry of Finance have already placed limits on the base salaries and bonuses of senior staff. In August 2022, the Department of Finance of the Ministry of Finance even ordered that the salaries of state-owned financial firms be brought closer in line with those of frontline employees to narrow the internal pay gap.
Now that the State Council institutional reform directly brings supervision of the financial sector directly under the State Council, China's message is clear: it wants to assert that financial officials are neither "exempt" from party edicts nor are they "special" or "superior".
Risk of talent bleed
So, are the financial sector staff in China earning an unreasonably high salary?
Compared with the employees of other industries, financial sector staff indeed draw a high salary, with employees in the securities industry bringing home the highest pay in the financial sector.
... as the massive pay cuts in China's financial sector appear to be part of the country's push towards common prosperity, these measures are set to stay.
China Economic Weekly reported last year that the average salary of employees in the financial industry is 2.35 times that of the manufacturing industry, while the average salary of executives in the securities industry is nearly three times that of executives in the manufacturing industry. Meanwhile, the salary of employees in Chinese securities firms and that of employees in foreign or joint venture securities firms also have a significant gap.
Some people are worried that the numerous rounds of pay cuts could see an outflow of financial regulation talents to financial enterprises, and that of Chinese financial talents to foreign enterprises. This could lead to a lack of competitiveness in China's financial sector and insufficient financial regulatory talent to prevent various financial risks.
However, as the massive pay cuts in China's financial sector appear to be part of the country's push towards common prosperity, these measures are set to stay. Besides, the competitiveness of the financial industry is not the most crucial issue - China's decision makers have stressed that the focus of the country's economic development is on the real economy. They believe that the real economy is the foundation of a country's economy, and the manufacturing sector is in turn the foundation of the real economy.
At the same time, self-reliance and self-improvement in science and technology is the key to whether China can build a modern socialist country in all respects in a timely manner.
In comparison, the task of the financial industry is to serve the real economy and prevent internal and external risks. Thus, the development trend of China's financial industry in the years to come becomes clear.
This article was first published in Lianhe Zaobao as "中国金融监管人员大减薪".
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