China’s financial sector salary cap is an attempt to reduce income inequality
Editor’s note: Matteo Giovannini is a finance professional at the Industrial and Commercial Bank of China in Beijing and a member of the China Task Force at the Italian Ministry of Economic Development. The article reflects the views of the author and not necessarily those of CGTN.
Historically, the relationship between economic equality and political stability has always been a very sensitive issue for those in power because of its relevance to the future of developed and developing countries.
According to the United Nations, the current level of inequality has increased for more than 70% of the world’s population, increasing the risks of divisions and hampering economic and social development.
Governments around the world, while aware of the urgency, have realized that rising inequality is far from inevitable and can be addressed at national and international levels. Initiatives such as tax cuts and tax reforms, unemployment benefits and raising the minimum wage, while representing valid steps taken to mitigate a growing gap between the wealthiest and the most vulnerable, remain steps embryonic.
On Aug. 2, China’s Ministry of Finance made public, through a notice on its website, that it had ordered companies in the financial sector to cut pay levels for high-level executives. The decision, which echoes Chinese President Xi Jinping’s goal of promoting “common prosperity”, targets a wide range of financial institutions, including state-backed institutions and sovereign wealth funds.
According to the policy, base salaries for senior executives at financial institutions should not exceed 35% of total compensation, while at least 40% of performance bonuses should be deferred for three years or more.
Meanwhile, state-owned investment banks, including China International Capital Corp and CITIC Securities Company Limited, have this year taken pay cuts of up to 60% and delayed bonus payments to their senior executives.
To understand the scope of this decision, it is necessary to fully understand why the Chinese government is now targeting the financial sector and why it plays a fundamental role in the economic development of a country.
The main task of the financial services industry is to create the conditions for a harmonious distribution of assets between people, businesses and governments by acting as an intermediary and providing the infrastructure where transactions take place. In this sense, the financial sector plays an essential role in the economic development and in the process of stability of a country since it guarantees that financial resources are allocated in an effective way to the promotion of economic growth.
The fact that finance is so ubiquitous in the architecture of modern societies is probably the most important reason behind the Chinese government’s decision to intervene. In this context, the call for people to share in opportunities through a firm reduction in income inequality represents a timely move aimed at reducing the growing wealth gap and preventing possible seeds of social unrest.
A lack of decision-making at a critical time in economic recovery from a global pandemic could be detrimental to China as it could pose a threat to long-term economic growth and could lead to financial instability with costly effects due to fallout. on the economy.
Through “common prosperity”, China aims to redistribute wealth by increasing the incomes of low-income groups, promoting a higher level of equity and encouraging more balanced regional development. To achieve these goals, China is committed to regulating excessively high incomes and encouraging high-income businesses and individuals to give back to society.
In my opinion, a key part of this campaign is the country’s emphasis on people-centered growth, where collectivism trumps individualism. It is a central aspect of Chinese society, which differs profoundly from Western society.
The Chinese collectivist mindset promotes a society that supports and protects its members. On the contrary, the Western mentality focuses on individualism and freedom of choice, but lacks interdependent support.
An excessive level of individualism and the preservation of the status quo has led Western society to transform itself over the years into something that encourages greed, rewards top executives beyond their level of performance, and is characterized by a focus excessive on short-term results at the expense of long-term interests.
A recent study by the Institute for Policy Studies of 300 large US companies found that the pay gap between CEOs and the median worker reached a ratio of 670:1. Europe is not much better as UK CEOs earn 759 times more than their average employees, while Italy, Germany and France have pay gaps of 703:1, 622:1 and 604:1 respectively.
I am convinced of the fact that China has demonstrated by facts its reluctance to follow the same path as the developed Western nations which preferred to protect the interests of the privileged 1% and related lobbies to the detriment of the interests of the vast majority of the population.
Ultimately, China, by launching yet another bold move, is showing its high degree of commitment to long-term growth by tackling root problems. By applying the same playbook, other nations should be able to find a solution to the economic inequality in our society, where high-income people maintain an unacceptable level of control over the lives of low-income people, who can hardly access a fair share of what they have helped to produce.
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