China to set annual cap on financial sector salaries in shared drive for prosperity, sources say

China plans to cap annual salaries for financial sector workers at about 3 million yuan ($412,460) as the government redoubles efforts in a campaign to stamp out extravagance and hedonism in the industry and narrow the wealth gap amid a continued slump in economic growth, people familiar with the matter said.

The limit will apply to all state-backed brokerages, investment fund firms and banks, with the exception of financial institutions backed by private investors, the sources said, adding that the information should not be made public.

The measure will be applied retroactively, sources said, meaning those who earned more than 3 million yuan in the past few years will likely have to return the excess to their companies.

The move is the latest in a series of actions to align with President Xi Jinping’s Universal Prosperity Initiative, which emphasizes the equitable distribution of wealth at a time when the country is facing economic difficulties.

“The financial sector has not done much to contribute to the real economy in recent years and its image among the public is not the best,” said Dai Ming, a fund manager at Huichen Asset Management in Shanghai.

Dai added that the wage squeeze may also have something to do with the fiscal problems facing the government as it tries to diversify revenue sources amid falling tax revenues and land sales.

A group of Chinese listed companies said last month they may have to make tax payments owed three decades ago, and the state tax bureau denied it was taking retroactive action.

Some major financial firms, including leading mutual fund firms, have tightened scrutiny of expense reimbursements because they constitute a disguised form of salary payment aimed at circumventing regulatory oversight, according to a source.

Some major brokerages have already worked out measures to implement the salary cap, while the rest are yet to make plans, another source said.

Although Xi has stressed the importance of the financial sector as he seeks to build it into a global powerhouse, the sector has come under heightened regulatory scrutiny in recent years as part of the Communist Party’s crackdown on corruption.

In addition to government repression, falling profitability in the financial sector, which has been hit by a three-year bear market and a housing market collapse, has also prompted companies to tighten budgets and refrain from paying high pay rises and bonuses.

Average pay at Citic Securities, China’s largest brokerage firm, fell 5.3 percent last year to 792,000 yuan, while the salary of its chief executive, Zhang Youjun, fell to 5.05 million yuan from 5.6 million yuan the previous year, according to data compiled by Wind and the company’s annual reports.

According to brokerage reports, profits at 51 publicly listed Chinese brokerages fell an average of 23% in the first quarter from a year earlier, due to a decline in revenue from investment banking, while net income at 37 listed banks fell 0.7% due to shrinking net interest margins.

The outlook for the financial sector may not improve immediately as the rebound in yuan-denominated equities weakens and property prices continue to fall amid an uneven economic recovery.

The latest official data showed China’s manufacturing industry contracted for a second straight month in June, underlining the need for further easing measures to boost economic growth.

“From the perspective of public opinion, the wage cut and cap are justified and reasonable,” said Wang Chen, a partner at Xufunds Investment Management in Shanghai.

“We have seen a steady decline in profit margins in the financial industry in recent years, so wages in this industry should return to the level of the social average, emphasizing equality in society.”