East Asia
Opinion | How China’s move to cap salaries is redefining finance’s role in society
After China concluded its third plenum, the key policy meeting that will shape the nation’s economic blueprint for the next decade, the central message remains clear: stay the course. No major stimulus was announced, and neither were there significant policy deviations from the steadfast pursuit of “high-quality development”. Instead, President Xi Jinping called for the party to show “unwavering faith” and commitment to the established path.
One potentially significant policy emerged before the plenum, with the government moving to cap the annual salaries of financial workers at around 3 million yuan (US$412,460). The measure, targeting state-backed financial institutions, marks a notable step in China’s pursuit of common prosperity and is emblematic of Xi’s governance ethos of strategically reallocating resources to areas deemed critical to enhancing the nation’s core strengths, with finance increasingly falling to the periphery.
The proposed cap places the highest level of earnings well above the top 1 per cent of income brackets in China. For context, the cap is larger than the median base chief financial officer salary of US$362,000 in the United States and is on a par with the salary of US presidents, albeit without the latters’ extensive benefits.
While seemingly a simple measure to limit high earnings, its implications are profound and touch on various aspects of labour productivity, economic stability and China’s strategic view of the finance industry itself.
High salaries have traditionally been a significant draw for top talent, fuelling ambition and driving performance. However, instituting a cap now and establishing clear future guidelines could shift the focus from personal financial gain to collective organisational and societal objectives.
This approach could inspire professionals to find fulfilment in contributing to the greater good. By attracting intrinsically motivated individuals aligned with these goals, the government can redirect skilled professionals to other critical industries.
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China posts 4.7% second-quarter growth, lower than expected
China posts 4.7% second-quarter growth, lower than expected
Jim Simons, a pioneering mathematician who conducted breakthrough studies in quantum field theory, string theory and condensed matter physics, left academia to establish Renaissance Technologies, one of the most successful hedge funds of all time.
In a parallel world, retaining such brilliant minds in academia and R&D could spark unparalleled innovation and growth in vital sectors, driving societal progress and economic competitiveness. Perhaps China aims to ensure that the next Elon Musk channels their talents into transformative advancements rather than speculative assets.
To grasp the potential impact of this policy, consider the distribution of degrees awarded in different majors across the US and China. In China, 33 per cent of undergraduate degrees were in engineering in 2022 compared to 7 per cent in the US.
Meanwhile, business or social-sciences-related degrees accounted for only about 28 per cent of graduates in China that year. This suggests China already places a strong emphasis on STEM education, highlighting the rising importance of innovation as a cornerstone of long-term economic growth.
Moreover, this policy shift promotes a balanced distribution of skills, enhancing productivity conducive to “new quality productive forces” by encouraging talent to enter essential sectors such as technology, healthcare and education.
It mirrors Adam Smith’s perspective from The Wealth of Nations and Joseph Schumpeter’s The Theory of Economic Development, both of which emphasise that a nation’s true economic progress comes from innovation, productivity and the labour of its people rather than the accumulation of money. More importantly, it reflects China’s evolving view of the financial industry’s role, advocating for a sector focused on meeting basic industry demands and moving away from complex derivatives and speculation.
In this framework, finance is viewed as a support mechanism for the real economy, not a stand-alone profit centre. This is particularly pertinent to China’s quest to close the technological gap with developed countries, aiming to move up the value chain and lay a foundation to remain competitive for decades to come.
This approach is reminiscent of the rapid industrialisation in East Asia from the 1960s to the 1990s. That period demonstrated that focusing on manufacturing and export-oriented growth supported by finance leads to prosperity, perhaps providing a blueprint that China’s new policy seeks to embody.
However, the new salary cap could also bring about several challenges. One major concern is the potential for a brain drain, with top financial professionals possibly seeking more lucrative opportunities abroad and creating a talent exodus. Financial institutions will need to find innovative ways to attract and retain their best employees in this new landscape.
In addition, the cap could create immediate hurdles to maintaining motivation and retaining talent, particularly as competitors in the private sector might lure away top performers. This policy could also inadvertently encourage corrupt practices or covert compensation methods in an attempt to bypass the cap. If implemented retroactively, it could induce uncertainty and fear while exacerbating negative effects if not managed with fairness and precision.
Some of China’s largest state-backed financial firms are already asking employees in Hong Kong to return a portion of their pay, further highlighting the complex balancing act in policy and implementation. This is another challenge the city must overcome as it aims to attract talent and promote its narrative of being a prime destination for professionals.
As China navigates this transition, the world will be watching closely, learning valuable lessons about the interplay between equity, productivity and prosperity. The success or failure of this policy could shape future economic strategies not only within China but in other nations seeking to balance growth with social equity.
Jeffrey Wu is a director at MindWorks Capital
