China to hold Third Plenum. Why real estate isn’t likely the main focus

“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…