China has entered a new phase in its economic story, one defined less by roaring growth and more by a towering wall of accumulated debt. In mid 2025, China’s total debt to GDP ratio reached an estimated 309 percent according to calculations that draw on data from the central bank, the International Monetary Fund, and the Bank for International Settlements. It is one of the sharpest and largest expansions of national leverage ever recorded for a major economy.
The number presents a stark question. Has Beijing engineered the most sophisticated debt management system on Earth, capable of absorbing shocks that would upend other countries? Or is the world witnessing a slow moving crisis dressed up as stability, held together by administrative muscle and political will? China has built a system that continues to function even as its debt rises faster than its growth. The real issue is how long that balance can last.
The Big Picture in Three Numbers
China’s debt burden can be understood through three headline figures.
The first is the overall leverage ratio of about 309 percent of GDP. This places China in a category once reserved for advanced economies with slow population growth and mature financial markets. China’s demographic profile is beginning to resemble that group, but its institutional structure is far more centralized and its growth model far more dependent on credit.
The second number is China’s extraordinary level of non financial corporate debt, which ranges from 123 to 160 percent of GDP depending on the measurement window. This is the highest corporate leverage ratio of any major economy and is dominated by state owned enterprises. These firms carry debts that are many multiples of their operating income and sit at the center of China’s industrial and infrastructure push.
The third number is the true size of government debt. Official government debt remains modest by global standards, but once hidden liabilities from local government financing vehicles are added, China’s augmented public debt reaches about 120 percent of GDP. These entities were used for more than a decade as off balance sheet engines of growth, often borrowing heavily against future land sales.
A global comparison underscores how unusual China’s position has become. The United States carries total leverage of about 260 percent of GDP. The Eurozone is close to 280 percent. Japan remains the outlier at more than 400 percent. China has now moved into this upper tier while still retaining characteristics of an emerging market. That combination places it in uncharted territory.
Where the Debt Actually Lives
State Owned Enterprises
China’s state owned enterprises are the deepest pool of debt risk in the system. They are responsible for roughly three quarters of all non financial corporate borrowing. Many of these firms operate in heavy industry, coal, steel, shipping, and real estate related services. Over the years they have accumulated layers of liabilities that far exceed their ability to generate revenue. In several provinces, SOE debt to revenue ratios exceed 500 percent.
These entities survived thanks to cheap credit from banks that are also state owned. Some are effectively zombies, kept alive to maintain employment or deliver politically important infrastructure. Their debt is not simply a financial issue. It is tied to China’s political priorities and its commitment to maintaining economic stability.
Local Governments and LGFVs
A second major concentration of debt lies within China’s local governments and their financing arms. Estimates place the stock of hidden debt issued through these vehicles between 58 and 78 trillion yuan. This layer of borrowing grew rapidly after the global financial crisis and again after the 2015 slowdown.
Local governments depended heavily on land sales to manage these liabilities. When land markets boomed, the model seemed manageable. Since 2021, land revenue has fallen sharply, returning in 2025 to levels last seen a decade earlier. The collapse of this revenue pipe has left many local governments struggling to meet interest payments, let alone repay principal. Beijing has responded with a special bond rescue package that allows local authorities to swap older high interest debt for longer maturity official bonds, essentially nationalizing part of the burden.
Households
Household debt is the calmest part of the picture, making up about 61 to 65 percent of GDP. Most of it is tied to mortgages. China’s household leverage is not abnormally high for a middle income country. However, as property values fall and construction halts continue, mortgage boycotts and negative equity risks are rising. These pressures are significant but still relatively contained compared to the strains elsewhere in the system.
Shadow Banking
A final shift is taking place in the shadow banking sector. Once a vibrant arena for high yield lending, it has been shrinking as regulators crack down on off book activity. Many of these debts have been forced back into the formal banking system, adding to the visible stock of credit even as the opaque portion declines.
Why the Ratio Keeps Climbing
China’s debt grows faster than its economy. In the first half of 2025, nominal GDP grew about 4.1 percent, while credit expanded at roughly double that pace. The economy now needs about six yuan of new debt to produce one yuan of additional GDP. This imbalance is one of the core reasons China’s leverage ratio rises year after year.
China is also wrestling with deflationary pressure. Falling prices increase the real burden of existing debt and push firms to borrow more to maintain operations. This cycle is difficult to escape. Beijing remains unwilling to pursue hard deleveraging because it would trigger layoffs and damage near term growth. Instead, policymakers prefer gradual adjustment supported by credit injections.
External buffers are no longer as strong as they once were. China continues to run a large trade surplus, but global conditions are shifting. The return of tariffs in the United States has introduced renewed uncertainty, and export growth has become less reliable as a source of economic support.
The Beijing Playbook: How China Has Avoided a Crisis So Far
Beijing has several tools that have allowed it to delay a systemic credit crisis.
The first is the nature of the debt. Most liabilities are internal, owed by state owned firms to state owned banks. This structure allows Beijing to intervene directly in repayment schedules, refinancing, or loan extensions.
Capital controls give the government a second buffer. China’s household saving rate remains high, giving banks a deep pool of deposits. These savings help shield the system from capital flight that could destabilize the currency.
China has also relied on evergreening and large scale debt swaps. This cycle began in 2015 with local government bond swaps and has evolved into increasingly sophisticated operations. Selective defaults have been allowed, particularly in 2020 and 2021, when several provincial SOEs missed bond payments. The government treated those events as controlled experiments in market discipline, ensuring they did not spread through the broader financial system.
Bank recapitalization is another tool. Central Huijin, a sovereign investment arm, has injected capital into major banks when necessary. Asset management companies have purchased bad debt from banks to keep balance sheets clean.
These tactics have been effective so far. Yet the cumulative effect is a steady rise in overall leverage.
Cracks Appearing in 2025 and 2026
The signs of strain are now becoming visible.
Some local governments are delaying wages and taking longer to pay suppliers. This represents a shift from financial distress hidden within financing vehicles to wider economic stress felt by households and businesses.
Several large LGFVs in provinces such as Tianjin, Guizhou, and Yunnan are approaching open default. Even one major failure could test Beijing’s capacity to contain contagion.
Banking sector health is also more fragile than official numbers suggest. Non performing loans remain below 2 percent on paper, but special mention loans and restructured loans exceed 10 percent in some regions. These are early warning signs of deeper trouble.
The property sector remains in liquidation mode. Developers continue to collapse under the weight of unfinished projects and unpaid bills. The broader economic consequences include falling consumption, weak private sector confidence, and rising youth unemployment. Households respond to this environment by saving more, which forces the government to rely even more heavily on credit to meet growth targets.
Future Scenarios for 2026 to 2035
Scenario One: Soft Landing
Beijing expects a soft landing. This outcome assumes growth stabilizes at about 4 to 4.5 percent supported by technological upgrades, consumption incentives, and new tax structures aligned with common prosperity principles. In this scenario, total debt peaks at around 320 to 330 percent by 2028 before edging down. Some degree of SOE privatization and higher dividend payouts could help improve efficiency. The probability of this scenario is about 35 to 40 percent.
Scenario Two: Japanification
Many foreign economists expect a path closer to Japan’s experience. Growth drifts to 2 or 3 percent long term. The debt ratio climbs toward 350 to 400 percent. Deflation becomes chronic and zombie firms remain in operation for political reasons. China could face one or more lost decades under this scenario. The probability is roughly 45 percent.
Scenario Three: Hard Landing or Financial Crisis
A more severe outcome is possible. A major LGFV or property sector failure could trigger a credit freeze. Banks would require large scale recapitalization. The rescue cost could amount to 20 to 30 percent of GDP. Growth could fall below 2 percent for several years. The probability of this scenario is 15 to 20 percent.
What Would Force Beijing’s Hand?
Several indicators would signal a tipping point. Sustained capital outflows exceeding one hundred billion dollars per quarter would strain reserves. A fall of the renminbi beyond eight per dollar despite intervention would increase financial pressure. Nationwide reports of local government wage arrears would signal a social rather than purely financial crisis. A central government deficit rising above six to eight percent of GDP would suggest the current model is reaching its limits.
Conclusion
China’s debt is no longer just an economic metric; it is now the central political constraint of the Xi Jinping era. The state’s control over banks, firms, and information allows Beijing to manage pressures that would be unthinkable in other economies. Yet these strengths also conceal growing vulnerabilities. The system continues to expand its liabilities even as the pace of growth slows. Every year the treadmill moves faster while the runner tires. China shows that debt crises in command economies do not erupt suddenly. They unfold quietly, in the shadows, disguised as stability.
FAQ:
1. Why is China’s debt so high compared to other emerging markets?
Unlike most emerging markets, China relies heavily on state-directed investment to drive growth. This model channels enormous credit to state owned enterprises, local governments, and infrastructure projects. Over time, the economy has become structurally dependent on credit expansion to meet growth targets, pushing total debt levels to advanced-economy territory despite still-developing institutions.
2. Is China at risk of a sudden financial crisis?
A sudden, Western-style financial crisis is less likely because China’s debt is primarily internal and controlled by state owned banks. Beijing can order loan extensions, coordinate bailouts, or prevent bank runs through administrative tools. However, this does not eliminate risk. Instead, China faces a slow-burn crisis: declining returns on investment, rising hidden liabilities, and accumulating stresses within local governments and SOEs.
3. Why does China keep adding more debt if growth is slowing?
China now needs roughly six yuan of new credit to generate one yuan of GDP, a sign of diminishing economic efficiency. Policymakers avoid aggressive deleveraging because it would trigger layoffs, bankruptcies, and social instability. Credit injections keep the system functioning in the short term even as long-term debt sustainability worsens.
4. How serious is the local government debt problem?
Local government financing vehicles carry debts estimated between 58 and 78 trillion yuan. As land sale revenues collapse, these entities struggle to service existing obligations. Defaults remain rare because Beijing transfers some liabilities onto official balance sheets via special bond swaps. Still, several provinces face acute strain, making the local government layer one of the most fragile components of China’s debt system.
5. Does China’s high corporate debt mean SOEs will start failing?
Some SOEs already have. Large provincial SOEs defaulted in 2020 and 2021, but Beijing treated these as controlled experiments to introduce market discipline. Many SOEs remain highly leveraged, with debt levels multiple times annual revenue. While Beijing is unlikely to allow mass failures, selective defaults will continue as part of gradual deleveraging.
