In late July, a clout-chasing intern at China Securities, a major State-owned securities firm, caused a stir on social media and within the financial sector.
On July 26, his Douyin short video titled “A Day in the Life of a [top university] Freshman at an Investment Bank,” showcased his morning commute in a Porsche to an office in Beijing’s central business district and his afternoon golf session.
The video also revealed confidential information about three companies preparing for IPOs. The intern, surnamed Wang from Huazhong University of Science and Technology, inadvertently leaked this sensitive information.
The following day, China Securities announced the termination of Wang’s internship and the demotion of the employee who arranged it. The company pledged to minimize the impact on its clients.
Although Wang’s Porsche and golf outings were probably not funded by the company, his flaunting of wealth fueled public and investor discontent with the financial industry’s perceived high salaries and luxurious lifestyles, especially amid the economic slowdown.
Prior to this incident, the sector was already under pressure from regulatory tightening. In March, the China Securities Regulatory Commission (CSRC) demanded the correction of misconduct such as extravagant lifestyles, short-termism and flaunting wealth.
Policies to cap paychecks and implement compensation clawbacks have already spread to mutual fund managers in China, following similar actions by banks and securities firms.
The financial sector has long been one of China’s most lucrative industries. According to the National Bureau of Statistics of China (NBS), financial professionals working in the non-private sector (mainly State-owned and foreign-funded companies) have raked in the second-highest annual average salary since 2020, when it was 133,390 yuan (US$18,700), just behind those in the information service and software industries at 177,544 yuan (US$24,800).
The annual average salary for financial employees in the private sector was 82,930 yuan (US$11,598) in 2020, the second-highest, much higher than the average annual salary of 57,727 yuan (US$8,073) for urban private sector employees.
Public sentiment toward the financial sector is mixed. Jobs and internships are highly coveted, equated with good working conditions and high social status. However, criticism persists of the sector’s high profits compared to the real economy it is supposed to support.
This negative attitude has intensified as economic growth slowed and job markets became tougher for graduates, highlighting the income gap with the financial sector.
In July 2022, a young woman posted to Xiaohongshu (RED) a photo of her husband’s monthly paystub from China International Capital Corporation (CICC), where he worked as a securities broker, for 82,500 yuan (US$12,000).
“This is my husband’s monthly income. He was born in 1993. Does this count as a marital asset?” she humble-bragged in her post, which went viral.
The post led to her husband being fired and investigated by CICC, financial news outlet Cls.cn reported. The incident only confirmed public suspicions of the sector’s high pay levels, as data from Choice, a financial information platform, revealed that his income was average for CICC brokers.
Fund managers have also faced growing criticism as investor losses mount, despite their high salaries. Many question whether management fees match the poor performance of mutual funds.
“Fund companies and managers made money from management fees paid by investors. Should they apologize to investors for heavy losses?” asked Chen Miao (pseudonym), an investor who has lost 40 percent of her mutual fund investments since 2019, in an interview with NewsChina.
While fund managers’ salaries skyrocketed into the tens of millions, mutual funds saw significant losses – 1.45 trillion yuan (US$200.8b) in 2022 and 434.7 billion yuan (US$60.2b) in 2023, according to Beijing-based TX Investment Consulting Company. Two consecutive years of losses in mutual funds is unprecedented in China.
Some funds may perform well in the short term, but long-term performance remains poor. In an interview with the Economic Daily following the release of the new guidelines, Deng Haiqing, chief economist at Avic Fund Management,said fund managers often take excessive risks and neglect long-term stable returns. It is their investors who suffer the consequences.
Authorities have acted. In 2022, the CSRC issued regulations for fund managers, and the Asset Management Association of China (AMAC) released guidelines on performance evaluation and compensation management. These regulations promote long-term incentive systems and strict accountability measures, including salary suspensions, clawbacks and deferred bonuses.
The AMAC guideline requires fund companies to defer at least 40 percent of bonuses to senior executives and fund managers, who must also invest a portion of their bonuses in their own company’s products to better align their interests with investors.
In July 2023, China reformed management and custodial fees to reduce investment costs, sparking competition among companies.
Just days before the young woman’s viral post to Xiaohongshu about her husband’s CICC salary, the Ministry of Finance introduced rules capping the base salaries of executives and other employees who wield direct and major influence on their company’s business risk. The cap was set at 35 percent of total salary, which includes performance-based pay and subsidies, with at least 40 percent of their performance-based pay subject to a minimum three-year deferral to match the risk exposure period of the investment.
The rules include controls on expensed activities, such as business trips.
The Securities Association of China also issued guidance in May 2022, promoting stable and sound compensation systems. It puts securities firms on the hook for creating accountability systems, such as implementing suspension and clawback mechanisms.
The clawback mechanism was first introduced by the former China Banking Regulatory Commission (CBRC) in 2010.
Later, the CBRC issued guidelines to enhance this mechanism, stating that compensation for senior managerial staff and employees in key positions should be clawed back in cases of legal and regulatory violations.
In August 2022, the institution, by then renamed the China Banking and Insurance Regulatory Commission (CBIRC), reinforced these measures, mandating that financial companies establish a performance-based compensation clawback system. This policy applies to departing and retiring employees as well.
These social and regulatory pressures are impacting the sector. Some State-owned mutual fund managers have begun requiring employees to return the portion of pre-2022 salaries that exceeds around 3 million yuan (US$413,700).
Other fund companies have cut salaries and delayed bonuses due to industry-wide revenue declines. Several fund managers told newspaper China Times that their companies had reduced salaries and delayed last year’s bonuses. “With the decrease of revenue industry-wide, salary or bonus reduction is probably a trend,” said one interviewed fund manager.
Some small- and medium-sized companies told NewsChina that few employees reach that pay level due to their business scale. Additionally, since the policy mainly targets senior executives and high-performing managers, ordinary employees would not be eligible for such policies even if one existed.
Since 2022, financial institutions have implemented compensation control proposals, with many banks and securities firms adopting clawback mechanisms as the government tightens its grip on the sector to ensure accountability and promote financial stability.
In 2023, nearly half the 42 listed banks saw compensation declines, with 27 out of 51 listed securities firms reducing employee compensation, according to financial data platform Choice.
Among them, China Merchants Bank took back a combined 43.29 million yuan (US$5.97m) from 4,415 employees in 2022, while Bohai Bank reclaimed 23.44 million yuan (US$3.23m) from 499 employees the following year.
Over 95 percent of banking and insurance institutions have established deferred payment and compensation clawback policies as of March 2023, the former CBIRC reported. Later that same year, the CBIRC was merged and renamed the National Financial Regulatory Administration.
In January, Dongxing Securities announced that its board had approved a decision to implement performance-based compensation clawbacks. Both Everbright Securities and Capital Securities said in their 2022 annual reports that they had established similar mechanisms. Citic Securities also passed relevant rules in 2022.
Several leading companies in the industry have consistently cut pay for two or three years. According to Shanghai Securities News, a division of the Xinhua News Agency, half the 22 listed securities firms that released their annual reports by March 31 reported a decline in per capita average income in 2023, with CICC seeing a reduction of about 30 percent.
“The compensation clawback policy is seen as crucial for holding senior executives accountable and recovering losses, particularly in high-risk institutions,” the former CBIRC pointed out in an article published on its official website in March 2023.
“Pay cuts or compensation clawbacks are tools, not the goal,” noted Wang Tieniu from rating agency Jian FinTech Corporation in an interview with Nanfang Metropolis Daily in June. The reform aims to align the interests of fund companies and managers with those of investors, enhancing investors’ sense of gain instead of feelings that “fund companies make money while investors do not,” Wang said.
By June 30, the scale of mutual funds in China reached 31 trillion yuan (US$4.3t), while the number of mutual fund institutions totaled 163, according to the Asset Management Association of China.
Sun Jing, a lawyer with Jiangsu Manxiu Law Firm based in Wuxi, Jiangsu Province, clarified that clawbacks target illegal or irregular behaviors causing losses to financial institutions, consumers and investors.
Some call for a more rational view of fund managers.
“Fund losses are partly due to market conditions,” a fund manager told NewsChina on condition of anonymity. Some top-performing managers have quit, changed jobs or resigned from some projects since June.
An anonymous industry insider warned that sweeping clawback policies might demoralize fund managers and raise fairness concerns.
“There is a view that finance has no value, as it is seen as dispensable transaction costs rather than hard technology,” said Li Feng, a professor and co-director of the Shanghai Advanced Institute of Finance at Shanghai Jiao Tong University during his speech at his school’s graduation ceremony on July 6.
“This has led to a sense of shame among financial professionals for their careers, including some of our alumni,” Li said. He stressed that finance is crucial to the nation’s economy and international competitiveness and encouraged financial professionals to take pride in their careers.
“Pay cuts might have some impact on employee morale and mobility in the industry, but it’s part of the long-term adjustment and optimization of the industry. It will help improve the overall efficiency and competitiveness,” Zhu Keli, standing director of China Information Industry Association, told Red Star News in a July interview.
A screen on a high-rise shows the Shanghai Composite Index has dropped by 0.52 percent, Shanghai, July 25, 2024. To the right, the screen displays the daily transaction volume of 273.3 billion yuan (US$38.1b), 15.4 billion yuan (US$2.1b) less than the previous day, while transaction volumes for ffnance, transportation, securities, non-metal ores and public facilities sectors all rose (Photo by VCG)
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