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.

When drivers of an "economic miracle"—typically demographics and productivity—inevitably slow, governments often turn to debt to maintain high growth rates. This happened in post-WWII Italy and is happening now in China. It's a dangerous attempt to paper over a structural slowdown, leading to debt sustainability problems.

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.

Despite recent concerns about private credit quality, the most rapid and substantial growth in debt since the GFC has occurred in the government sector. This makes the government bond market, not private credit, the most likely source of a future systemic crisis, especially in a rising rate environment.

China's economic structure, which funnels state-backed capital into sectors like EVs, inherently creates overinvestment and excess capacity. This distorted cost of capital leads to hyper-competitive industries, making it difficult for even successful companies to generate predictable, growing returns for shareholders.

With local government finances strained, there is talk of "deep sea fishing" campaigns where anti-corruption probes are used as a pretext. Officials target business people, sometimes from other jurisdictions, with the potential goal of finding wrongdoing that allows them to seize the company's assets and shore up their budgets.

China's domestic crackdown on real estate and local debt has forced a pivot to an export-driven growth model. Exports now constitute a third of GDP, the highest since 1997, while investment's contribution has plummeted. This is a reaction to domestic constraints, not a strategic choice.

China's banks are trapped in a "zombification" process. To avoid recognizing massive bad loans, they must keep lending to insolvent borrowers. This prevents necessary recapitalization and traps capital, making a true economic recovery impossible.

Unlike a monolithic central bank, China relies on thousands of local banks. These banks are pressured by local governments, who must hit CCP-mandated growth targets, to issue high-risk loans. This top-down pressure on a decentralized system creates a massive, hidden credit bubble.