The Great Fall of China?



China has experienced a major stock market correction since mid-June 2015. The Shanghai Stock Composite Index (Shanghai Composite) dropped from a high of 5,166 on 12 June to just below 3,000 on 25 August, a 40% drop in less than three months. However, the Shanghai Composite is still up almost 40% over the last 12 months.

This bull market run in the China stock market started in December of 2013 when the market for Initial Public Offerings was re-opened after a fourteen month hiatus imposed by the regulator. At the end of 2014, the Shanghai Composite had increased by 55% and was one of the world’s top performing stock markets.

Another major contributor to the China stock market increase in 2014 was margin trading by retail investors. Since margin trading was introduced in March 2010, it has represented about 4% to 6% of total trading volume. However, at the end of 2014, margin trading had jumped to 20% of total market trading volume.

Under the current rules on margin trading, loans should not exceed 50% of asset value. Yet some stock brokerage firms offered 60-70% loans to retail investors. When the market fell, loan recovery by the stock brokerage firms accelerated the downward trend.

The regulator has named three domestic firms that offered 60-70% loans on margin trading accounts, and it is expected that regulatory actions against these firms will be announced soon. In addition, some senior executives of major financial services firms are under investigation on wrong doing allegations in operating the securities business.

Fortunately, all of the local securities houses, asset management firms, and banks are financially healthy, and no international firms are under investigation so far.

In August the Chinese authorities devalued the Renminbi relative to the U.S. dollar by 1.9%.

Pressure on Control Functions

Over the last three years, salaries in China have been increasing by 7% to 8%. We expect 2016 salary increases to stay at that level, or go somewhat lower.

Despite the stock market correction the underlying economy is still relatively strong when compared to Europe or North America, but it is slowing. Many financial service firms in China had already achieved their annual budget goals in the first half of the year! As such, we are still expecting that market total incentive levels will not decrease significantly from 2014 levels.

We have been told that many firms are still controlling headcount and have adjusted their 2016 hiring plans down, with a few firms looking at modest staff cuts. However, we believe the current situation offers firms an opportunity to stabilize their workforces in what has historically been a very high staff turnover market.

Impact on the Rest of Asia Pacific

There’s a saying that when China sneezes, other countries get a cold. We believe the stock market decline in China and the slowing economy will have a bigger impact in the economies of Australia, Hong Kong, and South East Asia as these areas have significant trade flows with China, while India and Japan will likely be significantly less impacted. We don’t expect significant movement down for 2016 salaries or 2015 total incentives in these countries and regions but there is a reasonable amount of caution being applied to compensation budgets and it does look like overall 2016 business performance could be impacted.

The good news for U.S.-based firms is that most of the currencies for these countries are at five to ten year lows. This offers a significant advantage to firms working with U.S. dollar denominated incentive pools versus other firms.

In India we are witnessing continued healthy growth in the economy and in the financial services sector. This has been possible due to the changes in monetary and fiscal policies to abet growth and tame inflation, which have been pursued very stringently by the policy makers. Growth has been fueled more by domestic demand as its resilient consumer spending places India at an advantage as demand decelerates elsewhere. At the same time, Prime Minister Modi’s flagship ‘Make in India’ project is expected to drive both business and job opportunities in India.

One of the agendas the Central Bank of India (RBI) is driving is to pull a large section of the unbanked population under the banking umbrella. Introduction of two new full scale banks and an in-principle nod to eleven payment banks and ten small banks with the objective of financial inclusion has certainly energized the banking sector. Note: A McLagan Alert on India will be sent out soon.

Meanwhile in Japan we have seen significant M&A activity this year, up over 40%. Other business areas are slightly off 2014 levels, mainly due to domestic issues rather than a reaction to China. Although exports to China account for 18.3% of total exports of Japan, they are not final goods but mostly intermediate commodities such as components of final goods or plastics. On the other hand, a number of Japanese banks are expanding their footprints regionally and internationally and are seeing good returns on these investments.

At this point, we expect 2016 salary increases to be consistent with recent years (but firms are applying a wait and see approach) and total incentives up in M&A, but likely flat to down in other areas.

Financial services were late to join the digital movement, making 2015 a critical year for recovery and development, and an opportunity to pave the way for the future of digital banking.


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