Shuli Ren, Bloomberg
The disconnect between Wall Street and Main Street is reaching a flash point in China.
President Xi Jinping has made it clear that he is no fan of bankers and uncertain of what value they add to society. His powerful anti-graft agency is conducting new inspections of the largest lenders and financial regulators, only three years after the previous round. Pay caps and more stringent clawback clauses are being formulated at state-owned institutions. New legislation on the regulation of all aspects of finance, from shareholder rights to insurers’ risk exposure, is in the works.
Some of these are no doubt populist moves. As the economy slows, the lavish lifestyles of top-earning finance professionals can sow public discontent.
But looking at things from Xi’s perspective, his experiences with the industry have not been exactly positive. The executive pay gap, where top managers earn a lot more than most employees, as well as finance’s role in exacerbating wealth inequality are worrisome.
Star mutual fund managers are well paid for their ability to fundraise, presumably because their track record can draw in new investors. But what if they just happen to be in the right place at the right time? How much is the manager’s intrinsic value worth?
Last year, quant funds flourished, outperforming the market with an average 6.4% gain. Their splashy compensation was on full display when the founder of a top investment house bought a villa in Shanghai for $39 million. Then came this February’s quant quake, when a number of high-profile funds suffered outsized losses and triggered a broader market rout.
Many had been swimming naked, overly exposed to small-cap stocks that have thin trading volumes. The so-called national team, a shadowy group of institutional investors set up in mid-2015, had to spend an estimated $57 billion to stabilize the stock market. It’s unlikely Xi had a restful Lunar New Year break.
The president may also be worried that the public is becoming less tolerant as the flourishing private wealth management industry is making the economic system more unfair.
For instance, one couple, a businessman and his famous actress wife, invested in Ant founder Jack Ma’s film venture with loans from Credit Suisse as well as from a banking tycoon, who is now languishing in jail. They flipped the stocks and netted $75 million in just four months in 2015.
Some of Xi’s policies, such as imposing a $400,000 pretax pay cap, have raised eyebrows, and are attributed to his “common prosperity” drive. But frankly, he can find a lot of sympathetic ears in the West.
The Swiss government, for one, is having a very public clash with UBS Group AG’s top executives over issues from tighter capital requirements to banker pay. Commenting on Chief Executive Officer Sergio Ermotti’s $15.9 million package, finance minister Karin Keller-Sutter said she “cannot comprehend certain sums,” and that it would take her 30 years to earn a similar amount. A tighter capital rule could cost UBS, which that took over rival Credit Suisse, somewhere between $15 billion and $25 billion, and would almost certainly translate to lower executive compensation.
The sentiments are the same — the only difference lies in the political systems. Xi is more forceful and heavy-handed because he can. He is trying to tackle hot-button social issues before they get out of hand. [Abridged]
Courtesy Shuli Ren/Bloomberg
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