China Holds Third Parliament Session.. Why Isn't Real Estate the Main Focus?

BEIJING – China’s real estate woes may be overwhelming, but analysts expect the upcoming third session of the Communist Party of China’s Central Committee to focus on other areas – such as high local government debt levels and the push toward advanced manufacturing.

The long-awaited political meeting, scheduled for Monday through Thursday, is a major gathering of senior members of China’s ruling Communist Party that usually takes place only once every five years. It was widely expected to take place last fall but was postponed.

“The main challenge for Beijing is to find an alternative financial system, as the current system, which relies heavily on land sales, is under severe pressure due to the falling land market,” Larry Hu, chief China economist at Macquarie, told CNBC in an email.

He expects next week’s meeting to focus on financial reform and other structural policies. He noted that cyclical policies — which may include real estate — are usually discussed at more regular meetings such as China’s Politburo, expected in late July.

“Otherwise, policymakers are also likely to emphasize their commitment to innovation, the so-called new productive forces,” Hu added, referring to Beijing's efforts to support advanced manufacturing and high-tech.

The Central Committee of the ruling Communist Party of China, which consists of more than 300 people including full and alternate members, usually holds seven plenary sessions during each five-year term.

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

The Politburo Standing Committee, which consists of seven key members, is China's highest authority and is headed by Xi Jinping, the party's general secretary and president of China.

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

“At the general meeting next week, the first thing I look for is the so-called financial reform,” Dan Wang, chief economist at Hang Seng Bank (China), told CNBC.

It will also watch for details on mergers in the banking sector, as well as policy signals on local government finance and taxation.

“As for the real estate markets, I don't think they should be the focus of the plenary session, because they are already in a state that everyone agrees on. They are in a downturn. They haven't hit bottom yet,” Wang said.

Although the real estate sector's problems are linked to the wealth of most households in China, they are also linked to local government financing and piles of hidden debt.

Local governments previously relied heavily on land sales for revenue.

In a report released on June 28 on the third plenary session, analysts at HSBC said: “In the medium to long term, developing sustainable revenue sources for local governments will become increasingly important.”

“Expanding the scope of direct taxes on consumption, personal income, property, etc., for example, is often considered a solution. Of these possibilities, a consumption tax may be the most effective,” analysts said, noting that it could incentivize local authorities to boost consumption.

But it’s not necessarily easy to boost sentiment. In the weeks leading up to the general meeting, Chinese stocks had slipped into correction territory — or more than 10% from their recent highs.

“We believe that shifts need to be carefully designed and implemented at this stage, given the low level of confidence in the private sector, otherwise they could work in the opposite direction to a supportive fiscal stance,” HSBC analysts said.

Attempts to address broad financial risks have led to more restrictions on the broader banking and financial services sector. Since the inauguration of the last Central Committee in October 2022, the CCP has increased its oversight of finance and technology through new committees.

“The scale of real estate has become so large that it has absorbed all of China’s resources,” Yao Yang, a 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, the excessive growth of the financial sector was the cause of the erosion of the industrial sector in the United States.

“For China to compete with the US, we need to develop manufacturing and technology. So we need to restrict the financial industry, including real estate. That's the fundamental reason behind tightening regulations on both real estate and finance,” Yao said.

Average wages at brokerage firms, which affect about 0.1% of China’s urban population, fell by about 20% in 2022 and were down slightly last year, Goldman Sachs analysts said in a report last month.

In addition to the much larger impact of local government tighter finances, analysts found that cuts in public sector funding and wages reduced urban wage growth by about 0.5 percentage points annually in 2022 and 2023.

Separately, China is reportedly planning to cap annual financial industry salaries by about 3 million yuan (about $413,350) — a cap that will be applied retroactively and require workers to return excess profits to their companies, the South China Morning Post reported 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 plenary session said the leaders would discuss “deepening comprehensive reform and advancing China's modernization.” The statement referred to China's goals of building a “high-level socialist market economy by 2035.”

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

That 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 constant US dollars was $12,174 — less than a fifth of the US’s $65,020, according to the World Bank.

While income inequality is a global issue, new research suggests that people in China are increasingly frustrated by what they see as “unequal opportunity.” That’s according to surveys conducted since 2004 by teams 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 believe their household's economic situation has deteriorated in 2023 compared to previous years.

“A slowing economy may mean fewer opportunities and raise more concerns about inequality and fairness 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 is faltering.”