1 Financial sector salary cuts and caps signal rising financial risks in China
PRC sets annual salary cap on financial sector
July 4
The South China Morning Post reported that the PRC authorities plan to cap the annual salaries of financial workers at around 3 million yuan, citing people familiar with the matter.
The people said that the cap would be applied to all state-backed brokerages, mutual fund firms, and banks, but will not include financial institutions backed by private investors. The measure will be applied retroactively, which means that those who earned more than 3 million yuan in the recent few years would likely have to return the excess money to their companies.
The people said that the information was not meant to be public.
Salary cuts come into focus after CICC employee’s suicide
July 1
Mainland media reported that Zheng Wenlu, a 30-year-old female employee at the leading partial state-owned financial institution China International Capital Corporation (CICC), committed suicide by jumping off a building in Shanghai after her salary was reduced. The incident attracted significant attention and trended on Weibo.
According to information circulating on mainland media and Chinese social media, Zheng had an impressive academic and professional background, and was a standout financial elite. She previously worked in the FICC (fixed income, currencies, and commodities) department at CICC in Shanghai.
Zheng and her husband reportedly had a combined annual salary of over 1.2 million yuan. In October 2023, they reportedly bought a property worth nearly 16 million yuan and financed it with a loan of 11.77 million yuan, a down payment of over 4 million yuan, and a monthly mortgage payment of 56,800 yuan. Recently, the property’s value dropped by more than 5 million yuan, while the couple’s annual income fell to just over 800,000 yuan after salary cuts. This left them with less than 7,000 yuan for living expenses each month after mortgage payments.
The average annual salary of CICC employees in 2023 was 700,400 yuan, a drop of 14.5 percent from 2022 (819,600 yuan) and down 39.8 percent from 2021 (about 1.164 million yuan), according to publicly available data. Estimates from Wind showed that the average annual salary per CICC employee in the first quarter of 2024 was about 105,200 yuan, compared to 166,400 yuan in the same period in 2023 (down 36.78 percent year-on-year).
July 3
CICC issued a statement about the death of an employee in Shanghai that appeared to be a reference to Zheng Wenlu. CICC said, “Regarding the rumors circulating online about our employee who jumped off a building, we hope everyone will respect the deceased’s privacy and refrain from believing or spreading rumors.”
In response to an inquiry by Hong Kong media Phoenix News about the veracity of reports that one of their employees had committed suicide due to excessive mortgage pressure resulting from salary cuts, CICC confirmed the suicide but said that the direct reason for the suicide was “multifaceted,” including but not limited to “postpartum depression” and “marital disputes.” CICC added that since the employee’s suicide was not solely due to the worsening of the family situation from the mortgage, there should be “no malicious association” linking salary cuts to “excessive mortgage pressure and the fatal fall.”
Backdrop
China A-shares slump persists
During the week of July 1, 2024, the Shanghai Composite Index hovered between 2,900 points and 3,000 points.
Publicly offered funds suffered staggering losses
Mainland publicly offered funds collectively lost 434.774 billion yuan in 2023, according to publicly available information. Combined with a total loss of 1.45 trillion yuan in 2022, the cumulative loss of mainland publicly offered funds over the past two years amounted to nearly 1.9 trillion yuan.
In 2023, the 198 fund managers of mainland publicly offered funds collected 135.657 billion yuan in management fees, a drop of over 10 billion yuan compared to the 145.887 billion yuan collected in the same period in 2022.
Financial institution defaults and protests against them
1. On July 1, hundreds of local residents from Mengyin County in Shandong Province gathered in front of the Mengyin local government building to protest after a local financial institution defaulted, according to overseas Chinese language media. The protesters demanded that the local government help them retrieve their deposits, but they were eventually suppressed by local police.
“Dongmeng Huizhong” Cooperative (東蒙匯眾 合作社), the local financial institution in question, defaulted in May 2024. The cooperative was established by Dongmeng Group in Mengyin County and was supported by the local government. The cooperative had dozens of branches in various towns in the county and the deposits of many local farmers.
2. Overseas Chinese media and social media reported that Jiangxi Bank recently defaulted due to its entanglement with China Evergrande, which involved sums as high as several billion yuan. The news led many depositors to withdraw money from the bank and protest. Videos circulating online showed large crowds protesting at Jiangxi Bank’s main branch and shouting slogans like “give us our money.” The local authorities subsequently dispatched the police and some protesters were arrested.
On July 4, the local financial management bureau of Nanchang City in Jiangxi Province issued a notice stating that “a small number of people gathered in front of the Jiangxi Bank’s main branch” and “posted false information online,” which “disrupted the work order of the financial institution.” The notice also warned that those involved would face “severe legal punishment.”
Mainland media earlier reported that a financial institution in Nanchang City that defaulted in May 2024 had its account with Jiangxi Bank, but the bank was not involved with the defaulting financial institution.
Our take
1. The CCP authorities’ plan to cap the salaries for financial workers at state-owned institutions and reclaim“excess pay” from past years appear to be in line with the Xi leadership’s move to strengthen the Party’s control over the financial sector, shift the Chinese financial sector away from the relentless pursuit of profits that the CCP believes is characteristic of Western financial sectors, and promote “common prosperity” to reduce social grievances caused by the growing wealth gap in China.
The salary cap plan has been in the works as early as 2022. In May 2022, the Securities Association of China (an organization under the guidance and supervision of the China Securities Regulatory Commission) issued guidelines for securities companies to establish a “prudent compensation system” (證券公司建立穩健薪酬制度指引). In August 2022, the PRC Ministry of Finance issued a “salary cap order” for state-owned financial institutions.
2. Salary cuts and caps at state-owned financial institutions are a sign that the era of prosperous financial elites has ended in China, financial risks are steadily increasing, and China’s economy is performing poorly. These phenomena can be glimpsed from a review CICC’s performance in recent years.
CICC is one of China’s leading investment banks and has a near monopoly on the business of assisting large Chinese enterprises to go public. The bank maintains a leading market position in equity financing, debt financing, asset securitization, and financial advisory services. However, CICC’s financial reports show that its revenue and net profit have continuously declined since 2022:
- 2022: CICC’s revenue decreased by 13.42 percent year-on-year to 26.087 billion yuan, and its net profit decreased by 29.51 percent year-on-year to 7.598 billion yuan.
- 2023: CICC’s revenue decreased by 11.87 percent year-on-year to 22.99 billion yuan, and its net profit attributable to the parent company decreased by 18.97 percent year-on-year to 6.156 billion yuan.
- 2024: CICC’s revenue decreased by 37.61 percent year-on-year to 3.874 billion yuan, and its net profit decreased by 45.13 percent year-on-year to 1.239 billion yuan.
Meanwhile, all of CICC’s business segments saw varying degrees of decline. In 2023, CICC’s investment banking revenue fell by 40 percent and its investment banking profits plummeted by 80 percent. CICC’s IPO underwriting volume dropped by 39 percent from a year ago in mainland China and by over 40 percent in Hong Kong. In the first half of 2024, CICC sponsored 55 companies for listing, compared to 99 companies in the same period in 2023.
The sharp decline of CICC”s profitability and salary cuts are a microcosm of what is happening in the financial industry. Examples include:
- Of the 27 listed brokerage firms that have released their 2023 financial reports, over 80 percent saw a decrease in the total annual compensation of their management teams.
- In the fund management sector, 165 fund managers had left their positions in the first half of 2024 according to Wind, the highest number in the same period over the past nine years.
- In the banking sector, the average salary reduction for bank managers was 13 percent according to a report by Yicai in April 2024.
3. Assuming the various details circulating about the case are accurate, the suicide of CICC Shanghai’s Zheng Wenlu could be a tragic case of the CCP’s propaganda working too well and deceiving someone who ought to have a more accurate read of the economic and financial situation.
As a financial elite at CICC, Zheng should have had access to an abundance of economic and financial information and sources, as well as have ample experience interacting with local authorities. Yet despite the obvious problems with China’s real estate sector, she still took on substantial leverage to acquire a 16 million yuan property. This suggests that Zheng likely believed and betted on the CCP authorities’ propaganda and policies about reinvigorating the real estate market, and was misled by the CICC’s overly optimistic assessment of China’s economic recovery. For instance, the CICC wrote in its top ten predictions for 2023:
- “China is expected to be the first to recover globally in 2023” while “recessionary pressures in the United States are increasing.”
- Domestic inflation may face “phased pressure” with the post-pandemic “recovery in demand.”
- “Monetary easing in China is diminishing, interest rate levels are rising, and equities will outperform bonds among major asset classes.
- Real estate sales area will “rebound and turn to positive growth,” with “local upward pressure on housing prices.”
Predictions like by the CICC and Party propaganda led the Chinese public (including the financial industry) to, at the start of 2023, have strong confidence in the People’s Bank of China’s efforts to stimulate the market, expect a boom in China’s exports, and anticipate several rate cuts by the Federal Reserve. This led to a minor uptick in home prices and transaction volume. The CCP authorities also eased property purchase restrictions and issued other policies to help the real estate sector.
Had CICC’s prediction about the property market played out and home prices surged (as in 2016), Zheng Wenlu’s 16 million yuan home could have potentially doubled in value and she could have potentially made profits in excess of 10 million yuan after selling her property after three years. However, China’s economy likely contracted in real terms in 2023 and home prices continued on a downward trajectory instead of spiking even after the CCP authorities rolled out “historic” measures to support the property sector. Significant mortgage payments each month after receiving a pay cut and a home that would likely become a negative asset would have weighed heavily on Zheng Wenlu and are plausibly major factors that pushed her towards a tragic decision.
In our China 2023 Outlook, we wrote: “Financial institutions and investors could bet on the Chinese economy recovering under the expectation that things will return to normal with the easing of ‘zero-COVID.’ However, signs of a quick recovery will likely be illusory as the Chinese economy continues to deteriorate and people lose confidence in China’s economic prospects.” We also wrote, “China’s real estate crisis will worsen further and the CCP will find it difficult to turn things around even as it introduces various stimulus and rescue policies.”
2 CCP signals more financial sector crackdowns
July 5
1. The State Council General Office forwarded an opinion on “further improving the comprehensive punishment and prevention of financial fraud in the capital market” (關於進一步做好資本市場財務造假綜合懲防工作的意見) by the China Securities Regulatory Commission, the Ministry of Public Security, the Ministry of Finance, the People’s Bank of China, the National Financial Regulatory Administration, and the State-owned Assets Supervision and Administration Commission.
The opinion pointed out that financial fraud has become more sophisticated (造假花樣翻新) in recent years, making it challenging to investigate and prosecute cases. Also, effectively combating systemic, covert, and complex financial fraud is a formidable task that requires a multifaceted approach, strengthening immediate and long-term measures, and maintaining a high-pressure stance.
The opinion called for pursuing primary offenders and accomplices, as well as reinforcing accountability for those responsible for fraud and those who assist in it. The goal is to enhance the systematization, comprehensiveness, and coordination of efforts to combat and prevent financial fraud.
The opinion proposed five key measures:
i) Decisively combat and curb financial fraud in key areas.
- Severely punish fraudulent issuance of stocks and bonds.
- Strictly crack down on systemic fraud and those who aid in fraudulent activities. Target actions that involve forging or altering documents, fictitious transactions with related parties, or cooperation with third parties to implement systemic fraud.
- Strengthen regulation against the abuse of accounting policies to commit fraud. Intensify efforts to tackle manipulation of asset impairment provision to adjust profits and the use of financial “baths” to cover up fraudulent activities.
- Reinforce the crack down on financial fraud in specific fields:
- Punish securities issuers and listed companies engaging in financial fraud through false trade practices such as “idling” (空轉) and “one way transactions” (走單).
- Severely crack down on financial fraud conducted through supply chain financing, invoice factoring, and bill transactions.
- Strictly penalize financial fraud aimed at meeting performance commitments for mergers and acquisitions, enabling large shareholder dividends, satisfying equity incentive exercise conditions, or avoiding delisting.
- Enhance due diligence on the financial authenticity of projects invested by funds and improve post-investment management to prevent fraud.
ii) Optimize the enforcement system and mechanisms for securities regulation
- Improve the mechanism for detecting clues, enhance administrative enforcement efficiency, and deepen collaboration between administrative and criminal enforcement.
iii) Increase comprehensive accountability measures
- Strengthen the deterrent effect of administrative accountability, push for greater criminal accountability, and promote the improvement of civil accountability support mechanisms.
iv) Enhance interdepartmental coordination (i.e. among departments under the State Council) and central-local collaboration.
- State-owned asset investors should strengthen supervision and management, financial regulatory authorities should improve collaborative enforcement efforts, and local governments should be held accountable.
v) Establish long-term mechanisms for preventing and controlling financial fraud.
- Enhance internal constraints on corporate governance, hold intermediaries accountable as “gatekeepers,” improve financial information-related systems, and strengthen joint punishment and social supervision.
2. In answering questions from reporters about the opinion, a spokesperson for the China Securities Regulatory Commission said that the CSRC handled 397 cases of information disclosure violations from 2021 to 2023, including 203 cases of fraud. Since 2021, more than 150 criminal cases involving financial fraud and fund misappropriation by listed companies and bond issuers have been transferred to the public security authorities.
The spokesperson added that new challenges and issues have emerged in the fight against and prevention of financial fraud with the intensification of law enforcement. For instance, the concealment and complexity of financial fraud have significantly increased, making it more difficult to detect and investigate. In several recent cases, the involvement of third parties in assisting fraud has become apparent and is drawing significant attention from the market.
Our take
1. The CCP authorities’ announcement of punitive and preventive measures to curb financial fraud both hints at the seriousness of existing financial problems in China and signals more thorough purges ahead as the Xi leadership strengthens the Party’s control over the financial system and have it serve “socialist construction” instead of domestic elite or external financial interests.
The characterization of financial fraud in the State Council’s forwarded “opinion” indicates that the problem is severe. For instance, financial fraud in China is described as becoming “more sophisticated” in recent years, as well as “systemic,” “covert,” “complex,” and involving third-party collusion. This means that the financial industry’s added value of nearly 8 percent to China’s GDP in 2023 should be discounted, and further underscores our assessment that the official growth figure is inflated.
China’s current financial woes have their roots in the Jiang faction’s era of dominance. The financial sector began to really take off after the 2008 financial crisis, or when the CCP authorities undertook a 4 trillion yuan fiscal stimulus and liberalized local government bond issuance. The financial “liberalization” during this period created opportunities for collusion between the political and business elites in the regime, as well as the massive accumulation of various financial risks as the elites enriched themselves at the expense of regime security.
The end of financial “liberalization” came in 2015 after the stock market boom peaked and the Jiang faction launched a “financial coup” against the Xi leadership. This prompted Xi Jinping to consolidate his control over the military and accelerate power centralization to have the means and capability to effectively “rectify” the financial system and sector. The Xi leadership announced that the financial sector would be a focus of the anti-corruption campaign at the start of his second term in 2017 and would eventually crack down on some financial moguls, business elites, and large tech companies near the end of that term. With Xi having consolidated power to an even greater degree at the 20th Party Congress and Beijing warning about regulating the financial sector with “teeth and thorns” and with “clear edges and corners,” the upcoming purge of the financial system and sector is likely to make Xi leadership’s earlier efforts at “rectification” appear moderate in comparison.
2. Xi Jinping’s increased efforts to “rectify” the financial sector will most likely fail to mitigate the risks that he inherited from predecessors and created during his tenure as long as the CCP authoritarian dictatorship is in place. If anything, Xi’s attempt to crack down on those risks will exacerbate them and lead to serious and uncontrollable outcomes for China’s fiscal and economic stability.
The financial system and capital markets in the PRC were always intended to serve the regime’s development (“socialist construction,” etc.) and meet its fiscal needs, rather than function like those in most Western and other free market economies. While the CCP gradually adopted certain aspects of the Western financial system from the Deng era onwards, the economy and markets never truly liberalized in Communist China and the state continued to control the “commanding heights of the economy.” The pseudo-“liberalization or “Westernization” of the Chinese economy, however, allowed the CCP to attract external investments and leverage the financial markets to mobilize greater resources (i.e. securing national and local government financing through the bond market, tapping the stock market to supplement the capital of state-owned enterprises and financial institutions, etc.) to consolidate its power and expand its global influence.
Financial “liberalization” allowed China to get wealthy, but it also weakened the Party’s leadership and control over the regime, created a massive economic bubble, and multiplied financial risks. Many of the aforementioned problems were made worse during the Jiang-Hu era as the Jiang faction sought to “rule the country through corruption” (以貪治國).
Xi is now focusing on “rectifying” financial risks in China because the problems are acute and can no longer be ignored. Xi is also likely proceeding with the undertaking because he has accrued enough power and kept the CCP elites under sufficient control to minimize the political risks stemming from moving against elite interests in the financial sector and system. Even so, the treatment is likely to be worse than the disease for Xi because his “rectification” efforts will undermine confidence in China’s markets and Beijing’s credibility both at home and abroad. Growing pessimism resulting from crackdowns in the financial system and sector will worsen China’s already bleak economic and financial situation, and could lead to a tipping point that sends economic Gray Rhinos charging and the emergence of political Black Swans.
The Xi leadership will likely issue a string of policies and reforms to change the narrative on China’s economic troubles and decline at the Third Plenum of the 20th Central Committee. However, those measures are likely to worsen or have negligible impact in turning around China’s economic and financial situation because the underlying problems of the CCP authoritarian system remain unresolved. Xi Jinping is unlikely to pull off a successful economic rescue if he insists on working within the CCP system and does not pursue genuine market-oriented and rule-of-law-based financial reforms.
