China is preparing to hold a "Third Plenum Committee" meeting next week. Despite the enormity of China's real estate sector problems, analysts expect the upcoming Third National Congress to focus on other areas, such as rising local government debt levels and promoting advanced manufacturing.
The upcoming political meeting, scheduled from Monday to Thursday, is a major gathering of the top members of China's ruling Communist Party. This important meeting is usually held only once every five years. That meeting was widely expected to take place last fall, but was postponed.
“The main challenge facing Beijing is to find an alternative financial system, as the current system that relies heavily on land sales is under severe pressure due to the deterioration of the real estate market,” Larry Hu, chief China economist at Macquarie University, told CNBC.
He expects next week's meeting to focus on fiscal reform and other structural policies. He noted that cyclical policies - which could include real estate - are usually discussed at more regular meetings such as China's Politburo meeting, expected to be held in late July.
Aside from that, policymakers are also likely to reiterate their commitment to innovation, namely the so-called new productive forces, Hu said, referring to Beijing's support for advanced manufacturing and high technology.
The Central Committee of the ruling Communist Party of China, which has more than 300 members including regular and reserve members, usually has seven plenary sessions during each five-year term.
The Politburo is a group of about two dozen people within that committee.
The Politburo Standing Committee, consisting of seven key members, is China's highest sphere of power headed by Xi Jinping, General Secretary of the Party and President of China.
Historically, the Third Full Committee has typically focused on economic policy. Since Deng Xiaoping's leadership in 1978, the meeting has formally witnessed important changes in the communist country, such as China's "reform and opening-up."
Regarding the upcoming meeting, Dan Wang, chief economist at Hang Seng Bank China, told CNBC: “The first thing I am looking forward to is the so-called financial reform... We will also be monitoring details about mergers in the banking sector, in addition to policy signals related to government financing.” and local taxes.
"For real estate markets, I don't think it should be a focus of the conference, because it is in a state that everyone already agrees on. It is in a state of stagnation and has not hit the bottom yet," Wang said.
Local government financing
While the real estate sector is closely linked to the wealth of most households in China, the sector's problems are also interconnected with the finances of local governments and their hidden debt piles.
In the past, local governments relied heavily on revenues from land sales.
In a June 28 HSBC report providing an overview of the third national conference, analysts said: “In the medium and long term, developing sustainable revenue sources for local governments will become increasingly important.”
"Direct taxes on things like consumption, personal income and property, for example, are often considered a solution. Of these possibilities, a consumption tax may be the most effective," the analysts suggested, noting that it could motivate local authorities to boost consumption.
“We believe that changes need to be carefully designed and implemented at this stage, taking into account the low level of confidence in the private sector,” the HSBC report said.
However, it is not necessarily easy to boost confidence and sentiment. In the weeks leading up to the Third National Congress, Chinese stocks fell close to correction territory - a decline of more than 10 percent from their recent high.
“We believe that transitions need to be carefully designed and implemented at this time, taking into account the low level of confidence in the private sector, otherwise they could be counterproductive,” HSBC analysts said.
Attempts to address public financial risks have prompted further restrictions on the broader banking and financial services sector. Since the installation of the last Central Committee in October 2022, the CPC has intensified its oversight of finance and technology through new committees.
“The size of the real estate sector has become so large that it has absorbed all of China’s resources,” Yao Yang, a professor and director of the China Economic Research Center at Peking University, said last month.
In Yao Yang's view, the excessive growth of the financial sector was behind the weakening of the industrial sector in the United States.
"For China to compete with the United States, we need to develop manufacturing and technology. Therefore, we must limit the finance industry, including real estate. This is the fundamental reason behind tightening restrictions on both real estate and finance," Yao said.
Average wages at brokerage firms, which affect about 0.1 percent of China's urban population, fell by about 20 percent in 2022 and fell slightly last year, Goldman Sachs analysts said in a report last month.
Combined with the much greater impact of restrictions on local government finances, financial and public sector pay cuts reduced urban wage growth by about 0.5 percentage points each year in 2022 and 2023, the analysts found.
Regardless, the South China newspaper reported last week, citing informed sources, that China intends to cap annual salaries in the financial field to about 3 million yuan (about $413,000) - a limit that will be applied retroactively and require workers to return excess earnings. To their companies.
Long-term goals and current challenges
Beijing's official statement on the Third National Congress announced that the leaders would discuss "deepening comprehensive reform and promoting China's modernization." The statement pointed to China's goals of building a "high-level socialist market economy by 2035."
Beijing specified in 2020 that “socialist modernization” would include achieving a per capita GDP comparable to “advanced developing countries,” expanding the middle class, and reducing disparities in living standards.
It will not be an easy task, especially after the shock of the Covid-19 pandemic and the escalation of geopolitical tensions. China's GDP per capita in constant US dollars last year was US$12,174, less than five times the US per capita of US$65,020, according to the World Bank.
A slowing economy may mean fewer opportunities and raise more concerns about inequality and justice than before.
Although income inequality is a global issue, new research suggests that people in China are becoming significantly more frustrated by “inequality of opportunity.” That's according to polls conducted since 2004 by a team led by Martin King White of Harvard University and Scott Rozelle of Stanford University.
The latest survey found that regardless of income bracket, more respondents believed their family's economic situation had declined in 2023 than in previous years.
“A slowing economy may mean fewer opportunities and raise more concerns about inequality and justice than before,” the Big Data China survey summary said. “In other words, inequality may be more acceptable when the pie is growing very quickly, but less acceptable when the economy falters.”
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