China’s Property Crisis Three Years On: Ghost Cities, Shadow Banks, and the $3 Trillion Question for Global Markets

Three years after Evergrande’s default sent shockwaves through global financial markets, China’s property crisis has entered a chronic phase that defies both the apocalyptic predictions of bears and the recovery hopes of bulls. The sector that once contributed 25-30% of Chinese GDP (including construction, materials, and related services) has contracted to approximately 18-20%, a structural decline that has permanently altered China’s growth model. New housing starts have fallen 60% from their 2021 peak, and residential property transactions remain 40% below pre-crisis levels despite mounting policy support.

The controlled demolition of overleveraged developers continues in slow motion. Over 50 major developers have defaulted or restructured debt since 2021, with aggregate developer liabilities exceeding $5 trillion. Evergrande’s restructuring, which officially commenced in Hong Kong courts in January 2024, has produced recovery rates for offshore bondholders estimated at 2-5 cents on the dollar — worse than virtually any comparable sovereign or corporate default in modern financial history. Country Garden, once considered a model of prudent development, narrowly avoided default in late 2023 before implementing a painful restructuring of its $200 billion in liabilities.

The crisis is not primarily about overbuilt luxury towers in tier-1 cities — though that narrative captivated Western media. It’s fundamentally about the collapse of a financial-economic model where local governments funded infrastructure through land sales, developers used pre-sales as a leveraged borrowing mechanism, and households accepted unfinished apartments as a primary savings vehicle. Each pillar of this triangle has cracked: land sale revenues have halved, pre-sale mechanisms have been tightened, and household willingness to purchase unfinished properties has collapsed alongside confidence. Rebuilding this system requires not just financial triage but institutional transformation.

The most systemically dangerous dimension of China’s property crisis lies in local government finance. For decades, Chinese local governments funded approximately 40% of their expenditures through land use rights sales to developers — a model that worked brilliantly during the urbanization boom but has become a fiscal trap as property sales collapse. Land sale revenues fell from a peak of 8.7 trillion yuan in 2021 to approximately 4.2 trillion yuan in 2025 — a 52% decline that has blown holes in local government budgets across the country.

The response has been to shift borrowing to Local Government Financing Vehicles (LGFVs) — off-balance-sheet entities that borrow on behalf of municipalities for infrastructure projects. LGFV debt now exceeds 60 trillion yuan ($8.4 trillion) according to IMF estimates — roughly equivalent to 50% of China’s GDP. While not all LGFV debt is problematic, the IMF and China’s own audit agencies have flagged approximately 12-15 trillion yuan as “hidden debt” with questionable repayment capacity, secured against assets whose values have deteriorated alongside the property market.

Beijing’s approach has been to facilitate LGFV debt refinancing rather than allow defaults. A 1.5 trillion yuan special refinancing bond program, announced in late 2023 and expanded in 2024, allows local governments to swap expensive LGFV debt for lower-cost government bonds. This reduces interest burdens and extends maturities but does not address the underlying solvency questions. The fiscal federalism challenge is acute: China’s central government has a relatively healthy balance sheet (central government debt-to-GDP of approximately 24%), but the political economy of bailing out local governments that overspent on prestige infrastructure projects and corrupt land deals creates moral hazard that Beijing is reluctant to fully underwrite.

New home prices across 70 major Chinese cities have declined for 18 consecutive months through early 2026, with tier-2 and tier-3 cities experiencing average declines of 15-25% from their peaks. Existing home prices — a more reliable market signal — have fallen even further, with transactions in some provincial capitals occurring at 30-40% discounts to developer list prices. The orderly nature of the decline, compared to the crash dynamics seen in US or Spanish housing crises, reflects China’s unique market structure: most Chinese mortgages are full-recourse with loan-to-value ratios of 60-70%, homeowners are reluctant to sell at losses, and the government actively suppresses panic-selling through administrative measures.

The parallel to Japan’s post-bubble experience is instructive and sobering. Japanese property prices peaked in 1991 and did not reach their nadir until 2012 — a 21-year decline that erased approximately 65% of residential property value in major cities. The key transmission mechanism in Japan was the “wealth effect in reverse”: as households watched their primary asset (housing) depreciate year after year, they responded by increasing savings and reducing consumption, contributing to the deflationary psychology that proved almost impossible to reverse. The BOJ’s subsequent decades of zero-rate policy and QE were largely a response to this dynamic.

China’s consumer confidence indices suggest a similar psychological shift is underway. The Consumer Confidence Index, published by the National Bureau of Statistics, has remained below the neutral 100 threshold since April 2022 — the longest sustained period of pessimism in the survey’s history. Household savings rates have risen from 33% to 38%, and youth unemployment (16-24 age group) — while methodologically controversial — has remained elevated above 15%. The behavioral change is visible in consumption patterns: luxury spending has slowed, automobile sales have softened, and the “lying flat” (tangping) cultural movement reflects a generation skeptical of the asset-accumulation model that drove their parents’ economic behavior.

Beijing’s policy response to the property crisis has been substantial in aggregate but fragmented and reactive in execution. The People’s Bank of China has cut the 5-year Loan Prime Rate (the mortgage benchmark) by 60 basis points since the crisis began, reduced down payment requirements from 30% to as low as 15%, and lowered existing mortgage rates to reduce household debt service burdens. The Ministry of Housing has relaxed purchase restrictions in most cities (tier-1 cities like Beijing and Shanghai retain modified restrictions), reduced transaction taxes, and subsidized developers to complete pre-sold but unfinished apartments through a “deliver the buildings” (保交楼) campaign.

The fiscal dimension has been the most impactful but also the most controversial. A 300 billion yuan relending facility explicitly for local governments to purchase unsold apartment inventory — announced in mid-2024 and expanded since — represents a direct government intervention in the property market. Local governments use the funds to buy completed but unsold units from developers, converting them to social or affordable housing. While this addresses the immediate inventory overhang and provides developers with desperately needed cash flow, the program’s scale remains insufficient relative to the problem: unsold apartment inventory nationwide exceeds 700 million square meters, and the government purchasing program has absorbed less than 5% of this volume.

The “three arrows” framework for developer financing — bank loans, bond issuance, and equity financing — has been selectively deployed for developers deemed systemically important. State-owned enterprises and the strongest private developers have received financing support, while weaker developers have been allowed to restructure or fail. This triage approach has prevented a Lehman-style cascading collapse but has prolonged the adjustment period, as zombie developers continue to hold land and unfinished projects that block market clearing. The policy mix reveals Beijing’s core dilemma: preventing a financial crisis while allowing the structural adjustment that is necessary for China’s economy to transition from investment-driven to consumption-driven growth.

China’s construction sector has historically consumed 50-55% of global steel production, 55% of copper used in construction wiring and plumbing, 60% of iron ore imports, and approximately 45% of global cement output. The 60% decline in housing starts since 2021 has sent shockwaves through global commodity markets, fundamentally altering supply-demand dynamics for industrial metals, bulk commodities, and the mining companies that supply them.

Iron ore prices have experienced sustained pressure, declining from their 2021 peak of $220/tonne to a range of $90-110/tonne in 2025-2026. Australian exports — iron ore accounts for approximately 20% of Australia’s total export revenue — face a structural demand reduction that threatens the nation’s terms of trade and fiscal position. BHP, Rio Tinto, and Fortescue Metals have responded by moderating capacity expansion plans, focusing on cost reduction, and diversifying into metals tied to the energy transition (copper, lithium, nickel) rather than relying on the China construction demand that drove two decades of mining super-cycle returns.

The copper market presents a more nuanced picture. While construction demand from China has weakened, the global energy transition and AI data center buildout are creating offsetting demand. Electric vehicles use 3-4x more copper than internal combustion engine vehicles, and a single AI data center campus can contain thousands of tonnes of copper wiring. This demand substitution has prevented a copper price collapse but has introduced new volatility: copper prices now respond to AI capex announcements and EV sales data as much as Chinese property construction statistics. For commodity investors and mining companies, the China property crisis marks the definitive end of the construction-dominated commodity cycle and the beginning of a technology and energy transition-driven cycle with different geographic, sectoral, and temporal characteristics.

China’s banking system has absorbed the property crisis with remarkable surface stability but growing underlying stress. The four largest state-owned banks — ICBC, China Construction Bank, Agricultural Bank of China, and Bank of China — have reported modest increases in non-performing loan (NPL) ratios to 1.4-1.8%, well below levels that would indicate systemic distress. However, these headline figures understate the true extent of asset quality deterioration. Chinese banks have used regulatory forbearance, loan restructuring (extending maturities without recognizing impairment), and classification reclassification to manage reported NPL ratios.

The real risks lie in the shadow banking system and smaller regional banks. Trust companies — which channel household savings into property development and LGFV financing — manage approximately 20 trillion yuan in assets, with property-related exposures estimated at 3-5 trillion yuan. Several major trust companies have already restructured or suspended redemptions: Zhongrong Trust’s failure to make payments on over $10 billion in investment products in 2023 revealed the tight connections between trust companies, property developers, and retail investors that amplify contagion risk.

Regional banks, particularly in provinces where property and LGFV exposure is concentrated, face existential challenges. China has approximately 4,000 small and medium banks with combined assets of roughly 100 trillion yuan. Regulatory assessments have classified over 300 of these as “high-risk institutions” — a designation that implies capital erosion, elevated NPLs, and governance failures. Beijing’s approach has been consolidation: merging weak banks into stronger regional entities, injecting capital through special government bonds, and gradually shrinking the number of institutions. This managed consolidation reduces the probability of a disorderly banking crisis but creates a multi-year drag on credit availability in the provinces where these banks are concentrated.

Investing around China’s property crisis requires distinguishing between the cyclical (will the sector recover?) and the structural (how does China’s economic model change?). The cyclical outlook is modestly positive: the combination of inventory drawdown, policy stimulus, and pent-up demand from household formations suggests that property transactions will stabilize at a level approximately 30-40% below the 2021 peak. This is not a recovery to previous highs but a finding of a new equilibrium consistent with China’s demographic trajectory (the population is now declining and urbanization rates are plateauing at 65%).

The structural rebalancing creates distinct winners and losers within the Chinese equity market. State-owned enterprises with policy-aligned businesses in semiconductors, renewable energy, EVs, and aerospace represent Beijing’s vision for the next growth engine and receive regulatory support, capital access, and procurement preferences. The consumer sector offers selective opportunities as Beijing attempts to boost consumption’s share of GDP from 38% toward the 55-60% norms of developed economies — a transition that benefits domestic brands, e-commerce platforms, and services companies but requires patience as household confidence rebuilds.

For global portfolio construction, China’s property crisis argues for structural underweight to commodity-heavy allocations that depended on China’s construction cycle, and overweight to commodity sectors aligned with the energy transition and AI infrastructure themes that are replacing construction as the marginal demand driver. Emerging markets whose economic models are tightly linked to China’s old-economy demand — Australia (iron ore), Brazil (soybeans, iron ore), Chile (copper, though this has the transition offset), and Southeast Asian exporters — need disaggregation: their commodity exposure is being restructured by the same forces reshaping China itself. The winning positioning is not simply “avoid China” but rather to map which China is emerging from the rubble of the property boom and align portfolio exposure accordingly.