China Series #2: Unpacking The Debt Burden
This post is for academic and informational purposes only. It is not financial advice or a recommendation of any kind.
Layers Of Debt:
China's debt problem is complex because it is hidden and spread out across multiple levels of government, government corporations, and special entities designed to take on debt off the books. While individual debt metrics might not seem concerning in isolation, their collective sum paints a grim picture.
National Debt: China's national government debt-to-GDP ratio is approximately 77% to 84%. While this figure is significantly up in recent decades, it is still considered "perfectly healthy" compared to some Western economies like the USA (around 122-123% of GDP) or Japan (250% of GDP). However, this national debt figure does not represent the full extent of China's borrowing.
Provincial and Local Government Debt: This layer of debt is more concerning because provinces in China do not have the authority to print money, meaning they can become insolvent.
Scale: The best estimates by Goldman Sachs put total provincial debt at the equivalent of over $23 trillion, which translates to approximately 150% of the country's total economic output. This amount is in addition to the national government debt.
Funding Mechanism: Local governments primarily generate revenue by taxing businesses and selling 20- to 70-year leases on their land holdings. All revenue from these land sales remains with the local government. To fund infrastructure projects before land revenues materialise, provincial governments use "local government financing platforms" (LGFPs). These LGFPs are supposedly private companies set up by local governments, given state assets as collateral to secure loans from banks. As of 2019, LGFPs constituted 39% of all outstanding bonds in China's domestic market.
Risk: These bonds are perceived as safe because they are indirectly backed by the Communist Party. However, local governments have a high chance of bankruptcy due to revenue limitations. The system relies on the real estate market appreciating relentlessly to wipe away reckless borrowing.
Combined Government Debt: When combined with national debt, China's total government debt is estimated to be over 200% of its GDP, a level at which "alarm bells do start ringing in even the most resilient economies". This far exceeds the collective state and local government debt in the USA (approximately 12% of GDP).
State-Owned Enterprise (SOE) Debt: A significant portion of government initiatives in China are funded not directly by the government, but through thousands of state-owned companies.
Dual Function: These SOEs act as both private firms seeking profits and government departments pursuing party goals. For example, China State Construction and Engineering Corporation, the world's largest construction company, builds what the government wants, including multi-billion-dollar projects domestically and internationally, serving national interests without technically being funded by the government itself.
Scale: There are at least 391,000 fully state-owned firms in China and over a million with some level of state ownership. These SOEs are highly leveraged, conservatively holding $30 trillion in debt.
Implications: If these companies default, the government would either lose them or have to bail them out. Companies like China Railway Corporation have over-invested in infrastructure based on future growth expectations, taking on debt burdens only manageable with very rapid economic activity.
Running Total: Including SOE debt, China's total debt is estimated to be over $52.3 trillion, or roughly 300% of its GDP. Some independent researchers suggest that due to routine compounded inaccuracies, China's economy might be 20-60% smaller than officially reported, which would push these debt figures conservatively to as much as 450% of GDP.
Household Debt: Regular households have also borrowed heavily, primarily to invest in real estate. This debt is often directed towards unproductive assets that are losing market value.
Growth: Household debt rose from 18% of GDP in 2008 to 61% in 2020.
Total Debt Burden: Including household debt, China's total debt burden is potentially as high as 360% of its GDP.
Interest Rates: Despite high debt levels, China's 10-year government bond yield fell to near 1.6% at the beginning of 2025, significantly lower than the US 10-year Treasury bond yield (roughly 4.5%). This is partly due to China's strict capital controls, which prevent domestic institutions and individuals from easily buying foreign bonds, and the limited alternative investment options within China itself. However, provincial governments and SOEs often pay significantly higher interest rates than the central government.
The Property Overhang:
China's housing glut, which first emerged in 2021, remains a significant economic headwind. This oversupply was primarily caused by easy local government credit and home builders' overdevelopment.
Impact on Prices and Construction: The glut has led to falling new home prices, which in turn pressure construction activity. Overall, prices have fallen by approximately 20-30% since the housing peak in August 2021. While some larger cities like Beijing, Guangzhou, Shanghai, and Shenzhen have shown signs of revival in sales and prices following government relief measures, this trend has not extended to smaller cities, where excess inventory continues to rise. Industry analysts predict it could take 5 to 15 years for the market in some cities to find a floor.
Historical Economic Contribution: Before this crisis, China's surging property development was a key contributor to the country's rapid growth rate, accounting for close to one-third of its Gross Domestic Product (GDP). In the US, housing contributes about 15-18% of total output, making China's 30% contribution a significant overexposure to this speculative industry. Housing, like infrastructure, was seen as an easy way to boost employment and household spending.
Household Indebtedness: Households have taken on astronomical amounts of debt to purchase apartments, often in poorly constructed buildings on government-rented land. In major cities like Beijing, average homes cost around 35 times the average income, compared to 7.5 times in Los Angeles or 19 times in London. This unaffordability was driven by several factors:
Expectation of Future Growth: People invested assuming that continuous economic growth would make properties more valuable.
Lack of Investment Alternatives: With limited other investment options (e.g., poor stock market performance, crackdown on peer-to-peer lending), real estate became the primary asset class for savings.
Societal Pressure and Hukou System: Strong social pressure to own a home (e.g., for marriage) and the Hukou system (household registration) incentivised property ownership. Migrant workers, who often move to cities for higher wages, cannot access basic public services like healthcare and education for their children unless they own a home in that city.
Government Interventions and Their Limitations: The government has tried to cool the bubble with high deposit requirements for multiple properties, a proposed nationwide property tax, and hard caps on real estate ownership. However, some measures, like limiting ownership, have had the opposite effect by concentrating investment into fewer, more valuable properties, drying up the supply of affordable homes. The national government has also recently centralised the collection of land rights revenue, which was historically a significant portion of provincial government revenue, as a potential step towards a uniform land tax.
Consequences: The wavering confidence in real estate has meant fewer people want to invest in properties, leading to less construction and reduced land lease revenues for local governments. Deflation also compounds the debt problem by making money more valuable over time, discouraging spending and investment.
Ghost Cities And Unproductive Investments:
China's rapid growth led to the development of "ghost cities" and vast infrastructure projects that were built on the premise of continuous, rapid expansion, but often sit empty or lack sufficient demand.
Development and Rationale: Entire cities, housing thousands or millions, were developed on the outskirts of existing major centres. These projects required significant investments from governments, companies, and individuals. The expectation was that the country would "grow into" these areas, and the rapid pace of growth at the time made such forward planning seem logical.
Unproductive Nature: While infrastructure spending can be a great form of stimulus by creating jobs and long-term value, China has been "putting the accelerator to the floor" for two decades, even when it wasn't necessary. This has resulted in a situation where China has run out of sensible things to build domestically. The government has resorted to ripping up and redoing perfectly good projects or building in areas that don't genuinely need them. These ghost cities come with ghost road networks, ghost utilities, and ghost public services.
Ongoing Liabilities: This infrastructure, even if unused, represents an ongoing liability because it requires maintenance, and in many cases, it was funded through municipal borrowing.
Unsustainable Growth Expectations: The underlying assumption of endless growth proved flawed. International migration rates to major cities have been slowing for decades, and for the first time in recorded history outside of war, China's population has begun decreasing. This means that the expectation of the country growing into these endlessly built structures was not going to last forever.
High Speed Rail Instance:
China's high-speed rail network, once a "jewel in the crown" of its building spree, is now threatening to be a problem that could make the Evergrande crisis "look like a sideshow".
Construction & Purpose: The network was rapidly built, partly as a fiscal stimulus during the Global Financial Crisis (GFC) to employ millions of people. The Beijing to Shanghai track alone employed over 100,000 direct on-site workers.
Problems: The program has been marred by corruption and management failures, including a 2011 crash caused by route overloading. While semi-privatised to state-owned China Railway and CRRC, these entities borrowed almost a trillion dollars to expand the network.
Unprofitable Lines: By the time of the latest building spree, most highly profitable lines between major population hubs were already established. New lines were laid to smaller cities, driven by political motivations rather than demand, meaning they would not generate sufficient revenue from ticket sales.
Financial Strain: Since 2015, the interest payments on the accrued debts have outpaced the operating profits of the rail lines. Factors worsening this include aging infrastructure requiring more maintenance, inability to increase prices due to competition from flights and buses, and the impact of COVID-19 on demand. The state-owned China Railway now faces $850 billion in debt it cannot repay. The government has since halted construction of new high-speed rail lines.
Unappealing Options: The options for addressing this include selling off profitable routes (leaving the government to maintain unprofitable ones with taxpayer money), closing railways (leading to job losses and damaging China's symbol of success), or a bailout/renationalization. None of these options are appealing, especially amidst other economic challenges.