Foreign banks’ honeymoon with China ends soon

The Chinese securities regulator has summoned executives of foreign banks, including Credit Suisse, asking them to cut their salaries and lengthen bonus periods, Bloomberg reported yesterday. The justification cited – that too high incomes sabotage the drive to reduce the wealth gap – may sound fair, but in reality it will simply increase the advantage that national players have.

At the height of the Sino-US trade war, Beijing made a series of concessions to Wall Street, allowing foreign financial institutions to take control of joint ventures with local partners; it was UBS that was the first to get the approval in 2018. Many did, and thanks to growing IPOs in Shanghai and Shenzhen, six of the seven licensed Western investment banking firms turned a profit in the country in 2021, according to the FT.

But they are still marginal. Official data shows that the combined net profits of 41 foreign banks in China were 1% of the total in the first quarter of 2021, and this latest move will help ensure they remain restrained.

International banks depended on Chinese IPOs to Hong Kong and New York for much of their profits. But now those flows have evaporated, leaving stock markets offshore, dominated by the locals, as the protagonists.

There are no official data on the width of the wage gap. Bloomberg calculates that foreign entities pay an average of 10%-20% more than local ones. It’s out of necessity: It takes a lot of incentives to convince executives from other countries to move there, and lockdowns make it that much harder. Banks have already seen several go for it.

As for local talent, graduates who prefer to work for global brands had dropped to 14% in 2020, from 36% in 2015, according to Fudan University. Fighting for a bigger piece of a smaller pie will take the best talent, which means offering higher salaries.