China will hold the Third Plenary Session. Because real estate is probably not the main focus

BEIJING — China’s real estate problems may be huge, but analysts expect the upcoming Third Plenary Session to focus on other areas – such as high levels of local government debt and a push for advanced manufacturing.

The much-anticipated policy meeting, scheduled for Monday through Thursday, is a major gathering of top members of China’s ruling Communist Party that usually only happens once every five years. That plenary was widely expected to take place last fall, but has been delayed.

“The key challenge facing Beijing is to find an alternative fiscal system, as the current one, which relies heavily on land sales, is under severe pressure due to the plunging land market,” said Larry Hu, chief economist for China at Macquarie. an email to CNBC.

He expects next week’s meeting to focus on fiscal reform and other structural policies. Hu pointed out that circular policies — which may include property — are usually discussed at more regular meetings such as the one of China’s Politburo, due in late July.

“Furthermore, policymakers are also likely to iterate [their] commitment to innovation, that is, to so-called new productive forces,” Hu said, referring to Beijing’s push to support advanced manufacturing and high technology.

The ruling Chinese Communist Party’s Central Committee, made up of more than 300 people, including regular and alternate members, usually holds seven plenary meetings during each five-year term.

The political office it is a group of about 24 people within this committee.

The Politburo Standing Committee, consisting of seven core members, is the highest power circle in China, headed by Xi Jinping, the Party’s General Secretary and President of China.

The Third Plenary has traditionally focused on economic policy. Under the leadership of Deng Xiaoping in 1978, the meeting officially heralded major changes for the communist state, such as China “reform and opening”.

At next week’s plenary meeting, “the number one thing I’m paying attention to is the so-called financial reform,” Dan Wang, chief economist at Hang Seng Bank (China), told CNBC.

It will also be watching for details on consolidation in the banking sector, as well as signals about local government finance and tax policy.

“For real estate markets, I don’t think it should be the focus of the plenary, because it already is [in a] declare that all have consent [on]Wang said. “It’s in recession. It hasn’t bottomed out yet.”

While related to the wealth of most households in Chinathe real estate sector’s problems are also intertwined with local government finances and their hidden debt piles.

Local governments once relied heavily on land sales for revenue.

“In the medium and long term, the importance of cultivating sustainable sources of revenue for local governments will increase,” HSBC analysts said in a June 28 report previewing the Tuesday Plenary.

“Broadening the imposition of direct taxes, for example, on consumption, personal income, property, etc., is often considered as a solution. Among these possibilities, a consumption tax may be the most effective,” the analysts said, noting that incentives from local authorities could boost consumption.

However, it is not necessarily that simple to boost the emotion. In the weeks leading up to the plenary, Chinese stocks fell closer to correction territory — or more than 10% from a recent high.

“We believe that transitions need to be carefully planned and executed at this juncture, taking into account the low level of confidence in the private sector, otherwise it may work in the opposite direction from a supportive fiscal stance,” HSBC analysts said.

Efforts to address broader financial risk have resulted in more restrictions on the wider banking and financial industry. Since the last Central Committee was installed in October 2022, the Chinese Communist Party has increased its financial supervision and technology with new supplies.

“The scale of real estate has become so large that it is absorbing all of China’s resources,” said Yao Yang, a professor and director of the China Economic Research Center at Peking University. he said last monthaccording to a CNBC translation of his Mandarin speech.

In his view, the excessive growth of the financial sector was behind it hollowed out by the US industrial sector.

“For China to be able to compete with the US, we need to develop manufacturing and technology,” Yao said. “Therefore, we need to clamp down on the financial industry, including real estate. This is the main reason for tighter regulations on both real estate and finance.”

Analysts at Goldman Sachs said in a report last month that average salaries at brokerage firms, which affect about 0.1 percent of China’s urban population, will drop by nearly 20 percent in 2022 and hit a low last year.

Along with the much larger impact of tight local government finances, analysts found that cuts to public sector finances and wages dragged down urban wage growth by around 0.5 percentage points each year in 2022 and 2023.

Separately, China reportedly plans to cap the financial industry at an annual salary of about 3 million yuan (about $413,350) — a limit that would apply retroactively and require workers to return excess profits to their companies. said the South China Morning Post last week, citing people familiar with the matter.

China’s National Financial Regulatory Administration did not immediately respond to CNBC’s request for comment.

Beijing’s official statement on the Third Plenary Session said the leaders will discuss “the overall deepening of reforms and the promotion of Chinese modernization.” Reading noted China’s goals to build a “high-end socialist market economy by 2035.”

Beijing said in 2020 such “socialist modernizationIt would include the GDP per capita of “moderately developed countries”, an enlarged middle-income group and reduced inequalities in living standards.

It will not be an easy task, especially after the shock of the Covid-19 pandemic and rising geopolitical tensions. China’s GDP per capita last year in constant US dollars was $12,174 — less than one-fifth of the United States to 65,020 dollars, according to the World Bank.

While income inequality is a global issue, new research shows that people in China have become significant they are discouraged by the perceived “unequal opportunity”. That’s according to research from 2004 by teams led by Martin King White of Harvard University and Scott Rosell of Stanford University.

The latest survey found that regardless of income bracket, more respondents believed their families’ financial situation had declined in 2023 than in previous years.

“Could an economic slowdown mean fewer opportunities and raise more concerns about inequality and fairness than before,” a research summary from Big Data China he said. “In other words, inequality may be more acceptable when the pie is growing very fast, but it becomes less when the economy falters.”