China's financial sector pay cap is a bid to reduce income inequality
Updated 15:21, 08-Aug-2022
Matteo Giovannini
The Bund in Shanghai, China, November 11, 2020. /VCG

The Bund in Shanghai, China, November 11, 2020. /VCG

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 author's views and not necessarily those of CGTN.

Historically, the relationship that exists between economic equality and political stability has always represented a very sensitive issue for people in power due to its relevance for the future of both developed and developing nations.

According to the United Nations, today's level of inequality has grown for more than 70 percent of the global population, increasing the risks of divisions and curbing economic and social development.

Governments around the world, although aware of the urgency, have understood that the rise of inequality is an event far from inevitable, and it can be addressed at both national and international levels. Initiatives such as tax cuts and tax reforms, unemployment benefits and increasing the minimum wage, while representing valid actions taken for mitigating a growing gap between the wealthiest and the most vulnerable, remain baby steps.

On August 2, China's Ministry of Finance made public, through a notice published on its website, to have instructed firms in the financial industry to curb pay levels of 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 of senior executives in financial institutions should not overcome 35 percent of the total compensation package while at least 40 percent of performance bonuses should be deferred for three or more years.

At the same time, state-owned investment banks including China International Capital Corp and CITIC Securities Company Limited have made pay cuts as high 60 percent this year as well as delayed bonus payments to their senior staff.

To understand the significance of this decision, it is necessary to make clear why the Chinese government is now targeting the financial sector and why it plays a fundamental role in a country's economic development.

The financial services industry's major task is to create the conditions for a smooth distribution of assets among people, businesses, and governments by acting as an intermediary and by providing the infrastructures where transactions take place. In this sense, the financial sector plays a critical role in the economic development and in the stability process of a country since it ensures that financial resources are allocated in an efficient way toward the promotion of economic growth.

The fact that finance is so pervasive in the architecture of modern societies is probably the most important reason at the basis of the intervention decision of the Chinese government. In this context, the call for people to share opportunities through a firm reduction in income inequality represents a timely move aimed at narrowing the widening wealth gap and at preventing the possible seeds of social unrest.

A lack of decisiveness at a critical time of economic recovery from a global pandemic could be detrimental for China since it could pose a threat to long-term economic growth and could lead to financial instability with costly effects due to spillover effects on the economy.

Through "common prosperity," China aims to redistribute wealth by raising the incomes of low-income groups, promoting a higher level of fairness, and encouraging a more balanced regional development. To reach these goals, China has pledged to regulate excessively high incomes and encourage companies and high-income individuals to give back to society.

In my view, a key element in this campaign is the focus that the country puts on a people-centered growth where collectivism prevails over individualism. This is a central aspect of Chinese society, which profoundly differentiates itself from Western society.

The Chinese collectivist mindset promotes a society that is supportive and protects its members. On the contrary, the Western mindset focuses on individualism and freedom of choice, but lack interdependent support.

A homeless man sits in his tent with a river view in Portland, Oregon, U.S., June 5, 2021. /VCG

A homeless man sits in his tent with a river view in Portland, Oregon, U.S., June 5, 2021. /VCG

An excessive level of individualism and the preservation of the status quo have led the Western society to turn over the years into something that promotes greed, awards top executives beyond their performance level, and is characterized by an excessive focus on short-term results at the expense of long-term interests.

A recent study by Institute for Policy Studies on 300 top U.S. companies found that the wage gap between CEOs and median worker has reached a ratio of 670:1. Europe is not much better since UK CEOs make 759 times as much as their average employees, while Italy, Germany, and France boast wage gaps of 703:1, 622:1 and 604:1 respectively.

I am convinced of the fact that China has been demonstrating with facts its unwillingness to walk the same path of Western developed nations that have preferred to protect the interests of the privileged top 1 percent and the related lobbies at the expense of the interests of the vast majority of the population.

At the end of the day, China through the launch of another bold initiative shows its high degree of commitment to long-term growth by tackling problems at the root. 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 on the lives of low-income people, who can hardly access a fair share of what they have helped to produce.

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