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.

During tech gold rushes like AI, the most skilled engineers ("level 100 players") are drawn to lucrative but less impactful ventures. This creates a significant opportunity cost, as their talents are diverted from society's most pressing challenges, like semiconductor fabrication.

The hukou system links social welfare benefits to one's hometown, not their place of work. Migrant workers in cities are thus excluded from local safety nets, compelling them to invest heavily in real estate as a private substitute for state-provided welfare, healthcare, and retirement security.

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.

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.

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.

The dramatic drop in China's Fixed Asset Investment isn't a sign of economic failure. Instead, it reflects a deliberate government-led "anti-involution" campaign to strip out industrial overcapacity. This painful but planned adjustment aims to create a more streamlined, profitable economy, fundamentally reordering its growth model away from sheer volume.

The massive capex spending on AI data centers is less about clear ROI and more about propping up the economy. Similar to how China built empty cities to fuel its GDP, tech giants are building vast digital infrastructure. This creates a bubble that keeps economic indicators positive and aligns incentives, even if the underlying business case is unproven.