China’s total debt-to-GDP ratio, excluding the financial sector, has topped 300%, doubling since 2010 and putting the world’s second-largest economy in a debt category few countries ever reach. Borrowing by companies and by the central and local governments has kept outrunning GDP growth, even as officials try to keep the system moving.
Nearly 40% of outstanding debt is now owed by the public sector, including local government financing vehicles, and China’s total debt now exceeds the U.S., the eurozone, the U.K. and most other emerging markets. Aside from some smaller economies, only Japan carries more debt, according to Mark Williams, who said late last month that China’s current level of indebtedness puts it in a league of its own.
The scale of the buildup is not just a balance-sheet problem. Business debt in China has doubled since 2019, while business revenues are only 30% higher than they were that year. Nearly one-third of Chinese companies are losing money, and the country has been stuck in deflation for three straight years. That mix leaves borrowers less able to service loans just as more credit is needed to keep growth from slowing further.
Authorities said over the weekend they will ramp up efforts to ease local government debt risk through a restructuring program, while also calling for preventing new hidden borrowing, strengthening the domestic economy and advancing infrastructure. The move is aimed at containing the danger inside the public sector, but it also shows how little room policymakers have to rely on the same debt-driven model that helped fuel growth for years.
The tension is that China still leans on borrowing to sustain activity even as the return on that borrowing weakens. Its debt ratio has risen by more than 120% of GDP over the past 15 years, while households have been borrowing less after being battered by the collapse in the real estate market and overcapacity has kept excess supply and deflation alive. In the U.S., federal debt is now above 100% of GDP for the first time since the immediate aftermath of World War II, and total public and private debt last year was about 265% of GDP. That means China has now moved beyond even that benchmark.
The question has been answered by the numbers: Beijing is no longer managing a routine debt problem, but an economy whose liabilities have already crossed 300% of GDP and are still being pushed higher. The restructuring drive can slow the damage, but it does not change the fact that China’s growth model is now being financed by more debt than it can comfortably absorb.
