Tuesday, January 27, 2009

Limits on SOE Executive Pay

The Ministry of Finance announced on Monday (which was New Year's Day in China, by the way) that SOEs in the finance sector would need to bring management salaries down to a "reasonable" level. Mirroring conditions in China as a whole, a significant income gap has opened up between those at the top and those at the bottom.

At first glance, a true capitalist would cringe at the notion that the market would not be allowed to determine compensation levels. After all, if the CEOs of Chinese banks are delivering earnings growth for their shareholders (the largest of whom is the state), why punish them by limiting their pay?

Well, one possible reason would seem to be that bank CEOs don't really have a lot of influence on earnings. Credit quality has improved since Zhu Rongji re-centralized lending authority and pushed through measures to clean up the banks in the late-90s -- early-00s.

Now, according to Victor Shih, the central government has ordered banks to lend, lend, lend without much regard for credit standards. Apparently Zhu's re-centralization has put the central government in a better position not only
to monitor credit quality, but also to destroy it if it sees fit.

All of which makes one wonder why some CEOs in China's financial sector have been taking home salaries north of 10 million RMB (US$1.4 million).