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.

To meet aggressive CCP growth quotas without breaking rules against direct borrowing, local Chinese governments create corporate entities (LGFVs). These entities then borrow heavily from commercial banks, creating a huge, opaque system of high-risk debt that is now becoming unstable as the economy slows.

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.

Massive, record-breaking infrastructure projects in China are often "vanity projects" driven by local officials' desire for political promotion. The incentive structure rewards party secretaries for creating large, visible projects that boost local GDP and prestige, which they can leverage for advancement within the Communist Party.

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.

Despite rhetoric about shifting to a consumption-led economy, China's rigid annual GDP growth targets make this impossible. This political necessity forces a constant return to state-driven fixed asset investment to hit the numbers. The result is a "cha-cha" of economic policy—one step toward rebalancing, two steps back toward the old model—making any true shift short-lived.

China incentivizes its regional leaders by allowing them to personally profit from the economic growth they generate. This corrupt system, while flawed, aligns their interests with increasing their region's productivity, making them more effective planners than their counterparts in other systems.

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.

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.