A 1994 reform shifted tax revenues to China's central government while leaving spending obligations at the local level. This created a structural deficit for municipalities, forcing them to rely on off-balance-sheet land lease auctions as their primary source of funding, which in turn fueled the property bubble.

The policy restricted developer borrowing to curb speculation but failed to address the core drivers: households' need for a savings vehicle and local governments' dependency on land sales for revenue. By attacking the intermediary, the policy caused a crisis without solving the fundamental problem.

China cannot pivot to a consumption-based economy because its citizens' wealth is trapped in a collapsing property market. With 60% of household wealth in real estate and prices falling, families cannot borrow against their homes to spend. This structural problem locks China into an export-focused model until at least 2027.

While former Premier Zhu Rongji is often compared to Margaret Thatcher for his free-market reforms, the scale of social dislocation was vastly different. His policies led to an estimated 35 million job losses in state-owned enterprises, dwarfing the 2 million jobs lost during Thatcher's tenure in the UK.

Deng Xiaoping’s reforms, which ignited China’s growth, were based on adopting American free-market principles like private enterprise and foreign capital. China’s success stemmed from decentralizing its economy, the very system the U.S. is now tempted to abandon for a more centralized model.

The conviction that property prices could never fall was reinforced by the government's actions. Local governments relied on land sales for revenue, and the central government used real estate to boost short-term GDP, creating a powerful incentive structure that convinced citizens the government would always prop up the market.

In the late 1980s, facing a lack of capital, China began experimenting with Hong Kong's model of leasing state-owned land. This became the primary financing mechanism for local governments, especially after a 1994 tax reform limited their revenue, fueling decades of rapid urban development.

The widely reported collapse of China's housing market is not an organic crisis but a state-directed reallocation of capital. By instructing banks to prioritize industrial capacity over mortgages, the government is deliberately shifting funds away from a speculative real estate bubble and into strategic sectors like microchips to counter US sanctions and build self-sufficiency.

Due to financial repression and a lack of viable investment alternatives, Chinese households rationally pour savings into property, often leaving them vacant. This creates an affordability crisis for those needing a home, alongside a massive inventory of empty apartments held as investments.