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March 11, 2010

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Executives facing new strict rules on bonuses

CHINA yesterday unveiled stricter rules for bank executives aiming to avoid the bonus-driven, risk-taking culture that dominates Wall Street and triggered the credit crunch.

Senior bank executives' performance-related bonuses should be within three times that of their basic salary, the China Banking Regulatory Commission said in its new guidelines.

At least 40 percent or more of an executive's bonus must be delayed for a minimum of three years and could be withheld if their bank suffers losses due to poor control of risk, the top banking regulator said on its Website.

"We're not limiting bankers' pay but putting a brake on the bonus culture that drives bankers to take unnecessary risks," the banking watchdog said. "This guideline aims to instruct commercial banks to learn lessons from the financial crisis."

The risk-taking, over-leveraged culture in Wall Street has been blamed for triggering the worst financial crisis since the World War II. Banks in China escaped the crisis because of limited global involvement.

In China, the banking industry is also a high-profile and high-income sector though bankers' remuneration packages are limited when compared to their Western rivals.

"The question at the heart of the industry is different in China," said She Minhua, a Haitong Securities Co analyst. "The question in China is that bankers can always ride on high income because banks can rake in high profits because of their monopoly."

Chinese banks are under wide government influence as the big-five banks are state owned.

The rules also come to alleviate the widening income gap between the haves and have-nots in China.

Premier Wen Jiabao touched on the topic of deeper reforms on income distribution at monopoly industries last week at the National People's Congress. China will strictly regulate the income of managers, especially senior executives, at state-owned companies and financial institutions, he said.

Banks must consider a range of indicators, such as capital adequacy ratio, non-performing loan ratio and provisions for bad loans, when assessing executives' performance, the banking regulator said.


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