Credit:Jo Simpson Guiyang is but one example of the quixotic nature of centrally planned urbanisation. Just last week, China announced a sweeping plan to manage the next stage in one of the greatest migrations in human civilisation. The central government expects 100 million more rural residents to move into cities by 2020, on top of 100 million former farmers already in cities but lacking access to basic services. This means hospitals and schools, roads and railways and, above all, housing - lots of it - need to be built. But with China already grappling with the risks presented by its extensive shadow banking sector and surging local government debts, analysts are warning that the biggest demons lurk in its overheated property market. ''We believe that a sharp property market correction could lead to a systemic crisis in China, and we regard it as the biggest risk that China's economy faces,'' says Zhang Zhiwei, a research analyst at Nomura.

It is still a contrarian view. Most investors retain the faith that China's relentless urbanisation will support its property market. Month after month, property prices across the board - except in Wenzhou - are rising, in many cases sharply. But as Zhang points out, his team at Nomura are far from the only ones concerned. The head of the Development and Research Centre at the State Council, Li Wei, said in October that ''it is undeniable that the property bubble is getting bigger and has become the most unpredictable risk for China's economy''. Wang Shi, the chairman of China's largest property developer, Vanke, said in September that property prices in China were ''strikingly similar'' to what Japan experienced in its dark economic period in the late-1980s. In February, he said that while he was sure the property bubble would not burst in 2012 and 2013, he was not so sure about this year. And the richest man in Asia, the legendary Hong Kong tycoon ''Superman'' Li Kashing, has been busy dumping 20 billion yuan ($7 billion) of Chinese property from his portfolio. ''This is a signal worth attention,'' Wang says.

The Financial Times reported this week that China's central bank and one of its largest state lenders held emergency talks over whether to bail out failing Zhejiang property developer Xingrun Real Estate and help repay the company's 3.5 billion yuan debts. It came quickly after Chaori Solar became China's first bond default this month. It came just a week after Premier Li Keqiang warned that defaults in China's financial system were proving ''hardly avoidable'' - highlighting the tightrope authorities tread between courting moral hazard and undermining confidence in the country's debt-laden financial sector. In a rare move highlighting the sensitivity of the situation, the People's Bank of China denied it had sought to intervene. ''The People's Bank strongly condemns the media publishing false reports without verifying the facts,'' it said in a statement, only serving to add fuel to investor speculation that the report was right on the money. Far from being a disparate issue, China's property conundrum is inextricably linked to its multi-trillion-yuan shadow banking sector.

''China's credit expansion has generated a lot of concern - to put it mildly,'' says Stephen Green, a Hong Kong-based analyst at Standard Chartered Bank. The most popular and fastest-growing product offered by financial services firms in China are wealth management products, or WMPs, due to the higher than average returns promised, compared with savings rates, kept artificially low due to government controls on interest rates. Legally, WMPs are not deposits, they are investment products kept ''off-balance sheet'' by banks, and there is little transparency about where the funds are deployed. Though the sector is not the ''financial black hole'' as is sometimes alleged, Green says, funds in the 11 trillion yuan industry are often channelled to support sectors of the economy regulators have tried to fence off from normal bank lending, including real estate and local government infrastructure, ''partly because these sectors are deemed to be particularly risky''. Then there is the spiralling amount of non-bank lending thriving in China, including by underground banks, guarantee companies, pawn brokers and P2P (person-to-person) lending firms.

''We estimate that this activity is worth some 5 trillion yuan, or 8 per cent of GDP, but no one really knows the numbers,'' says Green. The slowing sale of excess inventory stock is causing financial stress for smaller property developers who rely heavily on sales to run down their loans. These developers are turning to riskier non-bank lenders. ''If you're a local small-to-medium size developer you're pretty screwed,'' Tim Murray, an analyst at the Beijing-based J Capital Research, says. ''Banks aren't lending to you, the trusts lend at high rates and you have to turn to the private channels to get the funds.'' Seated in his modern 15th-floor office overlooking Guiyang, Li Yongsheng says business at his P2P firm is booming. Having struck out on his own two years ago, Li says he was among one of the early movers in the P2P industry, capitalising on the need for quick cash in a fast-growing town with little financial regulatory oversight. ''What we do is completely different from the banks. For people that want money very urgently, we can release the funds within 24 hours,'' he said. Li effectively acts as middleman, finding borrowers for his investors' loan book. Li charges 30 per cent interest to borrowers needing quick credit, and slaps on a service fee of about 8 per cent for his troubles. If those rates make the eyes water, Li says a flood of new entrants into the market have been able to charge twice as much.

''We're basically loan sharks, but with a fancier title,'' he says cheerfully. As Li points out, the ''market is too big'', and he is able to pick and choose who he lends to. He says numerous property developers have approached him for loans of upwards of 50 million yuan, but he has chosen not to take their business. ''This line of work has a high-level need for knowing how to control risk,'' he says. Tightening credit in China played its part in the iron ore price ''flash crash'' this month. If real estate construction goes south, it naturally follows that steel demand will be affected. ''Right now it's a real inflection point about which way the steel markets are going,'' Murray says. ''I think there's real potential for construction markets to go down quite significantly. It's a very direct function of how much the government decides to stimulate.'' But stimulus is somewhat of a taboo in China at the moment. A massive injection of credit into the economy during the global financial crisis led to dramatic imbalances in the economy, none more apparent than in China's steel sector, now beset by overcapacity.

''The stimulus policy was a mistake and today's predicament was caused by it,'' says Xu Zhongbo, an economist at the Beijing University of Science and Technology. ''China now runs a market economy and will let the market weed themselves out.'' With a focus on efficiency and the environment, local governments have been ordered to shut down unprofitable and inefficient steel mills. China's steel hub Hebei, has been instructed to shut down 60 million tonnes - or about a third - of its production capacity by 2017. ''China's demand for iron and steel has entered an era of zero or minus growth and demand for iron ore will decline consequently,'' Xu says. ''So too will follow the iron ore price.'' Haixin Steel, in the northern Shanxi province, became an early test case for China's determination to see more market-oriented behaviour in China's state-dominated economy.

The private steel mill failed to pay back overdue bank loans last week in a default that has been felt far beyond the local economy, where Haixin is entangled in a web of so-called triangular debt and shadow banking activity. BHP Billiton cut off iron ore supply to the steel mill 18 months ago. ''All those iron ore and steel traders who have managed to survive are now at the brink of their anti-risk thresholds,'' says steel analyst Yin Jimei. ''Many have already given up and turned to other businesses. The demand for iron and steel is OK, but there is no longer any profit. ''Almost every day there are stories of iron ore and steel traders running away from their debts or being arrested.'' The equation underlining the cascading effect of China's property market is broadly this: if property prices fall sharply, construction slows, assets backing WMPs and non-bank lending devalue, steel and iron ore demand also takes a hit. But China's ghost city phenomenon is not new. Ordos was first ''discovered'' in 2011 and despite the headlines, China's property prices and economy as a whole have defied doomsayers time and again.

So why could things be different three years on? The key difference, Nomura's Zhang says, is that the property market has become acutely oversupplied. ''In 2011, real demand for properties in most cities was still strong,'' he says. ''Today, this is no longer the case, as an oversupply problem appears to have materialised in many third and fourth-tier cities, and this is set to worsen.'' Property over-investment has become a pillar of growth for China, making up 16 per cent of GDP, 33 per cent of fixed-asset investment, and 39 per cent of government revenue. ''If it slows sharply, we see no obvious replacement to support growth,'' Zhang says. He says property prices in first-tier cities such as Beijing, Shanghai, Guangzhou and Shenzhen will remain strong but that they only accounted for 5 per cent of new housing. The greatest risk in oversupply lies in the third and fourth-tier cities, where two-thirds of new housing is being built. Zhang says this cognitive bias leads investors to under-appreciate the true risks in China's property market.

''This is comparable to when the US property bubble burst, since property prices did not collapse in New York, but instead in places like Orlando and Las Vegas,'' he says. ''In China, the true risks of a sharp correction in the property market fall in third and fourth-tier cities, which are not on investors' radar screens, not Beijing or Shanghai.''