One of the first things you see after landing at Larnaca airport is an advert for a property development company. It is in Chinese.

It will soon be carnival time in the city of Pafos on the south-west coast of Cyprus – and this year theme is China.

"Everything will be Chinese," says Pafos mayor, Savvas Vergas, in his office in the pretty, whitewashed city hall, fronted by classical Greek pillars. "Meals … folklore … Everything will be on Chinese culture."

The carnival will be a way of celebrating a most unusual boom in a country which, like others in southern Europe, has been stricken by the eurozone crisis. Property prices in Cyprus have fallen by around 15% since 2007. Yet an official survey published last month found that between last August and October more than 600 properties were sold to Chinese buyers, 90% of which were in Pafos.

"The real growth came after August because that was when the government made clear the terms and conditions for third country nationals to get permanent residence," says Giorgios Leptos, a director of the Leptos property group and president of the Pafos chamber of commerce and industry.

The opportunity to secure permanent residence in an EU member state is a huge attraction for Chinese because it offers them visa-free travel throughout the union. Almost 4,500 miles away, Lisha Tang, a young client at a Beijing property firm, is relishing the prospect.

"A house in Cyprus means travelling freely in Europe, which is great for young people," she says.

And not just for young people – older Chinese who obtain permanent EU residence can put their children into European schools and visit them without difficulty. According to the 2012 Hurun report, 85% of China's 1.4 million dollar millionaires plan to send their children overseas for their education.

To obtain permanent residence in Cyprus, investors from outside the EU have to spend at least €300,000 (£260,000) on a property. They must also prove that they have no criminal record and are in good financial standing and agree to deposit €30,000 for a minimum of three years in a local bank account. Their permit normally arrives in about 45 days.

Cyprus is not the only EU state to be exploring this way of reinvigorating a stagnant property market. Last year, Ireland and Portugal also offered residency to foreigners who bought property worth more than a certain amount. In November Spain's trade minister, Jaime Garcia-Legaz, said his country was intending to follow suit in an attempt to clear his country's vast backlog of unsold homes.

For the European commission, the question of whether to grant residence to non-EU citizens remains entirely a matter for national governments. Conditions for the entry of investors into the EU are currently not harmonised.

But François Godement, head of the China programme for the European council on foreign relations, says: "I can see an issue cooking up here."

"I see intelligent and talented young Chinese whose presence in Europe might be to our benefit who run into problems when they try to stay. Yet there are immigrant businesspeople who don't seem to have any problems [in getting the necessary paperwork]."

But, he adds, "Where it really becomes a problem is where the country granting residence is part of Schengen [the agreement on freedom of movement of people]. That is quite problematic. That is going to raise eyebrows in Brussels and elsewhere. Cyprus is not in Schengen. But Portugal is, and so is Spain."

In the case of Cyprus, members of the buyer's immediate family can also get residence, but a further €30,000 has to be deposited for each one. That is almost as much as a Chinese citizen is allowed to take out of the country in a year. But, clearly, ways have been found to get around the restriction.

In Pafos, at this time of year, holidaymakers are thin on the ground and the developments in which the Chinese have bought their properties are mostly empty and locked. But the few who are staying in the town, contacted by the Guardian through agents, were reluctant to talk. Visa-free travel is not, apparently, the only reason for Chinese to want permanent residence in Cyprus.

"Chinese people tell us they may be allowed to have a second child if the child is born overseas," said Leptos. "And it offers them somewhere to live if things go wrong in their own country."

It has been estimated that around $225bn (£144bn) a year has been pouring out of China since worries spread about slower economic growth and falls in the value of stock and property. Cypriot developers have astutely positioned themselves in the path of this river of cash.

According to the China Daily newspaper, Cypriots were the most prominent foreign exhibitors at last year's Beijing international property autumn expo, taking 32 stands. Vergas says there were several reasons why Pafos had been particularly successful in attracting Chinese buyers. "It's a very quiet place with very little crime, and it's different from Chinese cities because its character has been kept intact. There are nice green areas and mountains nearby," he says.

"The Chinese also believe Pafos has a good future. Over the next 10 years there are plans for a new marina, a new port and a network of new roads around the city. In 2017, it will be the cultural capital of Europe. They believe it's a good investment."

Leptos says the influx of Chinese had enabled the city to buck an island-wide trend. "There was a 15% increase in sales of property in 2012 – the first time they have risen for some years. And I expect that, all things being equal, 2013 will be better than 2012."

Additional reporting by Daniel Parrott in Beijing