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 domain problems may be massive, but analysts expect the upcoming Third Plenum to focus on other areas — such as high state government debt levels and a push for advanced manufacturing.

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

“The key challenge faced by Beijing is to find an alternative fiscal organized whole, 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, conveyed in an email to CNBC.

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

“Other than that, policymakers are also likely to reiterate [their] commitment to innovation, i.e. the styled 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 Signatory, made up of more than 300 people including full and alternate members, typically holds seven plenary assemblies during each five-year term.

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

The Static Committee of the Politburo, made up of seven key members, is the highest circle of power in China which is headed by Xi Jinping, Broad Secretary of the Party and President of China.

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

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

She’ll also be watching for details around consolidation in the banking sector, as well as signals on policy around neighbouring 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] assert 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 provincial government finances and their piles of hidden debt.

Local governments once relied heavily on land purchases for revenue.

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

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

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

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

Attempts to tackle improper financial risk have prompted more restrictions on the broader banking and finance industry. Since the latest Pre-eminent Committee was installed in October 2022, the Chinese Communist Party has increased its oversight of finance and tech with new commissions.

“The spectrum 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 Fiscal Research at Peking University, said last month, according to a CNBC translation of his speech in Mandarin.

In his view, unwarranted 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 mass-producing and tech,” Yao said. “Consequently we must constrain the financial industry, including real estate. That’s the underlying persuade for tightened regulations on both real estate and finance.”

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

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

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

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

Beijing’s official announcement of the Third Plenum explained leaders will discuss “comprehensively deepening reform and advancing Chinese modernization.” The readout noted China’s objects to build a “high-standard socialist market economy by 2035.”

Beijing said in 2020 such “socialist modernization” would group per capita GDP of “moderately developed countries,” an expanded middle-income group and reduced disparities in living standards.

It won’t be an easy business, especially following the shock of the Covid-19 pandemic and rising geopolitical tensions. China’s per capita GDP last year in persistent U.S. dollars was $12,174 — less than one-fifth of the United States at $65,020, according to the World Bank.

While receipts inequality is a global issue, new research indicates that people in China have become significantly discouraged by saw “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.

“It may be that a slowing economy means fewer opportunities and raises varied concerns about inequality and fairness than before,” a summary of the survey by Big Data China said. “In other books, inequality may be more acceptable when the pie is growing very quickly, but it becomes less so when the economy falters.”