Evergrande, Country Garden, Sunac: names that once embodied China’s housing boom have become bywords for overreach and collapse. Their defaults and restructurings have dominated headlines for two years. Less visible is the slow bleed into the balance sheets of small and midsize lenders — the city and rural commercial banks embedded in provinces where ghost towers loom and half-built estates dot the skyline. These institutions, often the first line of credit for local developers, land bureaus and households, are now wrestling with a tide of bad loans and collateral that no longer clears.

From boom to backlog

At its peak, real estate — including construction, materials and related services — has been widely estimated to account for roughly a quarter to nearly 30 percent of GDP. The model was simple and brittle: cheap credit, land finance for local governments, and relentless urban demand. Then came years of overbuilding and leverage, followed by Beijing’s “three red lines” policy in 2020, which forced overextended developers to deleverage. The music stopped.

Defaults followed. Evergrande’s 2021 failure cracked the illusion; others followed in 2022–23. China’s big state-owned banks can absorb losses. Local lenders cannot. Concentrated in single provinces or cities, they lent heavily to developers, to local-government financing vehicles (LGFVs) tied to land sales, and to households betting on perpetual appreciation.

Local lenders under pressure

Officially, the banking system’s non-performing loan (NPL) ratio has hovered around the high-1 percent range in recent years. That average masks stress at the periphery. Some city and rural commercial banks have disclosed NPLs above 5–8 percent, alongside a swelling stock of “special mention” loans — credits not yet in default but sliding that way. Collateral is often unfinished projects or land-use rights, hard to liquidate when buyers vanish.

Liquidity strains have flared episodically. The most visible were the Henan rural-bank deposit freezes in 2022, which drew national attention and a regulatory response. Other provinces have seen less dramatic but persistent stress — recapitalizations, forced management changes and mergers. Policymakers have been careful to contain each local fire before it spreads.

Unlike the national champions, many small banks lack deep capital buffers. Shareholders are often provincial governments or local SOEs, which means politics and local budgets shape rescue choices. Deposit insurance covers up to CNY 500,000 per depositor, but confidence can turn quickly when rumors outrun official reassurances.

Beijing’s selective support

Beijing has rejected a blanket bailout. Instead it has pursued triage: targeted liquidity facilities, project-completion funds to finish stalled housing, “white lists” to steer credit to relatively stronger developers, and pressure on healthier institutions to absorb weaker peers. The People’s Bank of China insists risks are “controllable,” and so far the strategy has prevented systemic panic. It has not removed the local pain.

Policy has also shifted toward stock reduction — encouraging local governments and state firms to absorb unsold homes for social housing — while trying to limit moral hazard. It is a narrow balance: too much support risks reigniting the bubble; too little risks a slow-motion banking problem in the provinces.

The wider stakes

What happens at the property–banking nexus matters beyond China. Commodity exporters from copper to iron ore are tethered to Chinese construction cycles; a structurally smaller housing sector implies softer medium-term demand. It also raises a domestic question: can EVs, green tech and advanced manufacturing shoulder the growth burden that property once carried? Beijing says yes. The speed and scale of that hand-off remain uncertain.

For emerging markets, the lesson is familiar: when real-estate booms deflate, local banks carry the scars longest. China’s system is larger, better capitalized and more coordinated than most. But gravity still applies.

Signals in the tape

The next phase is less about spectacular developer collapses and more about attrition — and the signals are hiding in plain sight.

The first is the evolution of problem loans. Headline NPL ratios can undercount stress when lenders evergreen credit or reclassify it as “special mention.” Provincial disclosures are the tell; a steady rise in special-mention loans ahead of reported NPLs usually foreshadows a delayed wave of recognitions and fresh capital needs. When city and rural banks start reporting double-digit problem-loan ratios, capital adequacy and merger pressure follow.

The second is depositor behavior. Confidence in small institutions is a whisper network as much as a balance sheet. Spikes in emergency liquidity from the central bank, abrupt changes in branch withdrawal policies, or unusually loud public statements by provincial officials promising “stability” are meaningful. In China, reassurance campaigns often mean reassurance is needed.

The third is land finance. Local governments fund themselves by selling land-use rights. Land revenues plunged in 2021–23 and remained weak into 2024. When that cash dries up, LGFVs borrow more to plug holes, often at higher cost and shorter maturities. An acceleration in LGFV issuance buys time but pushes risk forward — and deepens banks’ exposure to quasi-fiscal borrowers.

The fourth is policy language. Read the adjectives. “Targeted relief” and “project completion” signal selective rescue; “systemic risk prevention” and administrative pushes to consolidate small banks point to a broader restructuring phase. A stepped-up use of central-bank facilities channeled to affordable housing, or an uptick in forced mergers, would both mark escalation.

The road ahead

China’s property bust has entered its slow phase: fewer headlines, more erosion. The national picture can look calm while the periphery weakens. For Beijing, the challenge is to protect financial stability without rebuilding the speculative edifice it spent four years dismantling.

Globally, the question is one of composition. If property’s footprint shrinks for good, China will likely import fewer construction metals and more inputs for clean energy and high-end manufacturing. Domestically, the success of that transition will be judged not only by growth rates, but by whether small banks in provincial cities can survive the long tail of the housing hangover.

The ghost towers may linger on skylines. The real danger lies in quieter places: in local bank ledgers where non-performing loans creep higher, in county budgets squeezed by weak land sales, and in households who still ask the most basic question a banking system must answer — is my money safe?