China gears up for next week’s Third Plenum meeting. Here’s why real estate isn’t likely the main focus

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

The
much-anticipated
policy
meeting,
scheduled
for
Monday
to
Thursday,
is
a
major
gathering
of
the
top
members
of
the
ruling
Communist
Party
of
China
that
typically
happens
only
once
every
five
years.
This
plenum
was
widely
expected
to
be
held
last
fall
but
has
been
delayed.

“The
key
challenge
faced
by
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,”
Larry
Hu,
chief
China
economist
at
Macquarie,
said
in
an
email
to
CNBC.

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

“Other
than
that,
policymakers
are
also
likely
to
reiterate
[their]
commitment
to
innovation,
i.e.
the
so-called
new
productive
forces,”
Hu
said,
referring
to
Beijing’s
push
to

support
advanced
manufacturing
and
high-tech.

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

The

Politburo
is
a
group
of
about
24
people
within
that
committee. 

The Standing
Committee
of
the
Politburo,
made
up
of
seven
key
members,
is
the
highest
circle
of
power
in
China
which
is
headed
by

Xi
Jinping,
General
Secretary
of
the
Party
and
President
of
China.

The
Third
Plenum has
traditionally
focused
on
economic
policy.
Under Deng
Xiaoping’s
leadership
in
1978,
 the
meeting officially
heralded
significant
changes
for
the
communist
state,
such
as
China’s

“reform
and
opening.”

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

She’ll
also
be
watching
for
details
around
consolidation
in
the
banking
sector,
as
well
as
signals
on
policy
around
local
government
finances
and
taxes.

“For
real
estate
markets,
I
don’t
think
it
should
be
a
focus
of
the
plenum,
because
it’s
already
[in
a]
state
that
everyone
has
a
consensus
[on],”
Wang
said.
“It’s
in
a
downturn.
It
hasn’t
reached
the
bottom
yet.”

While
pertinent
to
the
wealth
of

most
households
in
China,
the
property
sector’s
troubles
are
also
intertwined
with
local
government
finances
and
their
piles
of
hidden
debt.

Local
governments
once
relied
heavily
on

land
sales
for
revenue.

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

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

It’s
not
necessarily
that
straightforward
to
boost
sentiment,
however.
In
the
weeks
ahead
of
the
plenum, Chinese
stocks
slipped closer
to
correction
territory
—
or
more
than
10%
from
a
recent
high.

“We
believe
transitions
need
to
be
carefully
designed
and
carried
out
at
this
juncture,
considering
the
low
confidence
level
in
the
private
sector,
or
it
may
work
in
the
opposite
direction
to
a
supportive
fiscal
stance,”
the
HSBC
analysts
said.

Attempts
to
tackle
broad
financial
risk
have
prompted
more
restrictions
on
the
broader banking
and
finance industry.
Since
the
latest
Central
Committee
was
installed
in
October
2022,
the
Chinese
Communist
Party
has
increased
its

oversight
of
finance
and
tech
with

new
commissions.

“The
scale
of
real
estate
has
become
so
large,
it’s
absorbed
all
of
China’s
resources,”
Yao
Yang,
professor
and
director
of
the
China
Center
for
Economic
Research
at
Peking
University,

said
last
month, according
to
a
CNBC
translation
of
his
speech
in
Mandarin.

In
his
view,
excessive
growth
of
the
financial
sector
was
behind
the

hollowing
out
of
the
U.S.
industrial
sector.

“For
China
to
compete
with
the
U.S.,
we
need
to
develop
manufacturing
and
tech,”
Yao
said.
“Consequently
we
must
constrain
the
financial
industry,
including
real
estate.
That’s
the
underlying
reason
for
tightened
regulations
on
both
real
estate
and
finance.”

Goldman
Sachs
analysts
said
in
a
report
last
month
that
average
wages
at
brokerages,
affecting
about
0.1%
of
China’s
urban
population,
fell
by
almost
20%
in
2022
and
ticked
lower
last
year.

Together
with
the
far
larger
impact
of
constrained
local
government
finances,
the
analysts
found
that
finance
and
public
sector
pay
cuts
dragged
down
urban
wage
growth
by
about
0.5
percentage
points
each
year
in
2022
and
2023.

Separately,
China
reportedly
plans
to
limit
the
financial
industry
to
an
annual
salary
of
around
3
million
yuan
(about
$413,350) —
a
cap
that
would
apply
retroactively
and
require
workers
to
return
excess
earnings
to
their
companies,
the

South
China
Morning
Post
said
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
announcement
of
the
Third
Plenum
said
leaders
will
discuss
“comprehensively
deepening
reform
and
advancing
Chinese
modernization.”
The
readout
noted
China’s
goals
to
build
a
“high-standard

socialist
market
economy
by
2035.”

Beijing
said
in
2020
such

“socialist
modernization”
would
include
per
capita
GDP
of
“moderately
developed
countries,”
an
expanded
middle-income
group
and
reduced
disparities
in
living
standards.

It
won’t
be
an
easy
task,
especially
following
the
shock
of
the
Covid-19
pandemic
and
rising
geopolitical
tensions.
China’s
per
capita
GDP
last
year
in
constant
U.S.
dollars
was
$12,174
—

less
than
one-fifth
of
the
United
States
at
$65,020,
according
to
the
World
Bank.

While
income
inequality
is
a
global
issue,
new
research
indicates
that
people
in
China
have
become
significantly

discouraged
by
perceived
“unequal
opportunity.”
That’s
according
to
surveys
since
2004
by
teams
led
by
Martin
King
Whyte
of
Harvard
University
and
Scott
Rozelle
of
Stanford
University.

The
latest
survey
found
that
regardless
of
income
bracket,
more
respondents
thought
their
families’
economic
situation
had
declined
in
2023
compared
to
prior
years.

“It
may
be
that
a
slowing
economy
means
fewer
opportunities
and
raises
more
concerns
about
inequality
and
fairness
than
before,”
a
summary
of
the
survey
by

Big
Data
China
said.
“In
other
words,
inequality
may
be
more
acceptable
when
the
pie
is
growing
very
quickly,
but
it
becomes
less
so
when
the
economy
falters.”