High-rise buildings are seen in the West Coast New Area of Qingdao, Shandong province, China, on July 6, 2024.
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BEIJING – China’s real estate problems may be many, but analysts expect the upcoming Third Plenum to focus on other areas – such as high levels of local government debt and the push for advanced manufacturing.
The much-anticipated policy meeting, scheduled for Monday through Thursday, is a major gathering of top members of the Chinese Communist Party that usually takes place only once every five years. This plenum was expected to be held late autumn but has been delayed.
“The main challenge facing Beijing is to find an alternative fiscal system, because now, which is heavily dependent on land sales, it is under severe pressure due to the plunging land market,” said Larry Hu, chief China economist at Macquarie, in an email to CNBC.
He expects next week’s meeting to focus on fiscal reform and other structural policies. Hu pointed out that the cyclical policy – which can include property – is usually discussed in other regular meetings such as China’s Politburo, expected at the end of July.
“In addition, policymakers will also reiterate their commitment to innovation, which is the so-called new productive force,” Hu said, referring to Beijing’s push to support manufacturing and high technology.
The ruling Central Committee of the Communist Party of China, made up of more than 300 people including full and alternate members, usually holds seven plenary meetings in each five-year period.
The Politburo is a group of about 24 people in the committee.
The Politburo Standing Committee, made up of seven key members, is China’s highest power circle headed by Xi Jinping, Party General Secretary and President of China.
The Third Plenum, scheduled for July 15-18, is one of the most important political meetings of the Chinese Communist Party.
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The Third Plenum has traditionally focused on economic policy. Under the leadership of Deng Xiaoping in 1978, the meeting officially announced significant changes for the communist country, such as the “reform and opening” of China.
At next week’s plenary meeting, “the number one thing I want is financial reform,” Dan Wang, chief economist at Hang Seng Bank (China), told CNBC.
They will also watch for details on consolidation in the banking sector, as well as signals on local government finance and tax policies.
“For the real estate market, I don’t think it should be the focus of the plenary, because it is (in) a country where everyone has a consensus (on),” Wang said. “It’s gone down, it hasn’t reached the bottom yet.”
Link to local government finance
While it relates to the wealth of most households in China, the problems of the property sector are also linked to local government finances and hidden debt piles.
Local governments used to rely on land sales to generate revenue.
“In the medium and longer term, the importance of developing sustainable sources of revenue for local governments will increase,” HSBC analysts said in a June 28 report on the preview of the Third Plenum.
“Increasing the imposition of direct taxes, for example, consumption, personal income, property, etc., is often considered as a solution. Among these possibilities, the consumption tax may be the most effective,” said the analysts, noting that it can incentivize local authorities to increase consumption .
We believe that the transition must be carefully designed and implemented at this time, due to the low level of confidence in the private sector…
However, it is not always easy to improve sentiment. In the week before the plenary meeting, China’s shares are approaching correction territory – or more than 10% from new highs.
“We believe the transition should be carefully designed and implemented at this time, given the low level of confidence in the private sector, or it may be in the opposite direction to the supportive fiscal stance,” HSBC analysts said.
Efforts to address broad financial risks have led to further restrictions on the banking and finance industry more broadly. Since the Central Committee was most recently installed in October 2022, the Chinese Communist Party has increased its oversight of finance and technology with new commissions.
“The scale of real estate has become huge, absorbing all of China’s resources,” Yao Yang, professor and director of the China Economic Research Center at Peking University, said last month, according to a CNBC translation of his speech in Mandarin. .
In his view, the enormous growth in the financial sector is behind the hollowing out of the US industrial sector.
“For China to compete with the US, we need to develop manufacturing and technology,” Yao said. “As a result we have to restrict the financial industry, including real estate. This is the underlying reason for strict regulation of real estate and finance.”
Goldman Sachs analysts said in a report last month that average salaries in brokerages, which affect about 0.1% of China’s urban population, will drop by nearly 20% in 2022 and fall from last year.
Along with the greater financial impact of local governments, analysts found that financial and public sector salary cuts drag down city wage growth by 0.5 percentage points per year in 2022 and 2023.
Separately, China is reportedly planning to cap the financial industry at an annual salary of around 3 million yuan (about $413,350) – a cap that would apply retroactively and require workers to hand over excess earnings to companies, the South China Morning Post said last week, citing people who is familiar with the matter.
China’s National Financial Regulatory Administration did not immediately respond to CNBC’s request for comment.
Long term goals, existing challenges
Beijing’s official announcement of the Third Plenum said the leaders will discuss “deeper reforms and advance the modernization of China.” The text notes China’s goal of building a “high-standard socialist market economy by 2035.”
Beijing says that by 2020 its “socialist modernization” will include the GDP per capita of “developed countries,” an expanded middle-income group and a reduction in disparities 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 per capita GDP last year in US dollars stood at $12,174 – less than a fifth of the United States’ $65,020, according to the World Bank.
It’s possible that a slowing economy means fewer opportunities and more concerns about inequality and fairness than ever before.
While income inequality is a global problem, new research shows that people in China are deeply discouraged by “unequal opportunities”. That’s according to a survey from 2004 by a team 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 think their family’s economic situation will have declined in 2023 compared to previous years.
“It may be that the slowing economy means fewer opportunities and increased concerns about inequality and fairness than before,” a summary of the survey by Big Data China said. “In other words, inequality may be more tolerable when the pie is growing rapidly, but less so when the economy is collapsing.”