Introduction
The rise of China has been one of the defining stories of the 21st century. After a relatively closed economy in the late 1970s, China has emerged as the world’s second-largest economy and a formidable global actor. Many have hailed its growth model—driven by manufacturing, exports, and increasingly by digital innovation—as a miracle. Yet beneath this remarkable story lies a growing vulnerability that threatens not only Beijing’s economic trajectory but also the stability of the world economy: debt.
Debt is not inherently detrimental. In modern economies, borrowing plays a crucial role in investing in infrastructure, driving innovation, and promoting long-term growth. Excessive debt accumulation and projects that yield little productive return pose a challenge. Under such circumstances, debt no longer catalyzes growth but instead becomes a potential threat.
Debt has significantly contributed to China’s rapid ascent. Local governments, state-owned enterprises (SOEs), and even households have been encouraged to borrow to sustain high growth rates. The Belt and Road Initiative (BRI), launched in 2013, expanded this pattern internationally, with Beijing extending loans to dozens of developing countries for ambitious infrastructure projects.
The issue, however, is not simply the volume of China’s debt but the quality of the investments it supports. Roads to nowhere, ghost cities, underused ports, and financially unsustainable power plants have become recurring features of the debt-fueled expansion. These projects, while politically useful for elites and contractors, do little to ensure long-term prosperity.
This essay seeks to unpack China’s debt dilemma in nine parts. We will examine the structure of China’s debt, the risks it poses domestically and globally, and case studies of countries grappling with the consequences of Chinese financing. We’ll also examine how China, its investors, and policymakers can protect themselves. Ultimately, the story of China’s debt is not just about Beijing; it is about the future of the global economy.
Understanding China’s Debt Landscape
We must first understand the scale of China’s debt problem. According to recent estimates, China’s gross debt-to-GDP ratio stands at above 250%. This figure includes central government debt, local government obligations, corporate borrowing, and household loans. By comparison, the United States’ gross debt-to-GDP ratio is around 120%, and many developing economies fall below 80%. On paper, China’s numbers are alarming.
However, gross debt only provides a partial picture. Net debt-to-GDP—a measure that accounts for the assets held by the state—is lower, around 66%. This indicates that debt is more manageable, suggesting that China has the fiscal capacity to absorb shocks. The real issue lies not in whether China can technically cover its debts, but in the distribution of obligations across different levels of government and the economy.
Local governments in China are particularly indebted. Lacking sufficient revenue streams, many resort to “local government financing vehicles” (LGFVs) to borrow money for infrastructure and urban development. Often, these LGFVs operate with minimal transparency and lack proper regulation. The result is a buildup of hidden, poorly collateralized obligations that are dependent on continuous refinancing.
SOEs, too, have been major borrowers. Protected by state backing, many SOEs take on loans without rigorous assessment of profitability. Such behavior leads to overcapacity in industries like steel, cement, and shipbuilding. The infamous “ghost cities” of China—entire urban areas built but uninhabited—are symbols of this debt-driven misallocation.
Shadow banking introduces an additional layer of risk. Informal lending channels, trust companies, and wealth management products provide credit outside the formal banking system. These mechanisms often lack transparency and operate in legal gray zones, further amplifying systemic vulnerabilities.
A comparison with Japan’s 1990s bubble economy is instructive. Japan, too, saw a massive buildup of debt tied to property and financial speculation. The subsequent crash led to the “Lost Decade” of stagnation. China risks a similar fate unless it transitions to a more sustainable growth model. Yet unlike Japan, China is a civilization-state with a highly centralized political system. Its leaders are unlikely to accept prolonged stagnation if they can avoid it.
Thus, China’s debt landscape is not just a matter of numbers. It involves the political economy of a system that prioritizes stability and growth, even at the risk of accumulating dangerous levels of debt.
Why China’s Debt Matters
Why should the world be concerned about China’s debt? After all, many advanced economies have high debt ratios. The difference lies in the uses of debt and the structure of governance.
In booming economies, debt is channeled toward productive investments—innovative industries, education, and sustainable infrastructure. In China, much of the borrowing has been directed toward unproductive assets, such as real estate speculation or duplicative construction projects. This leads to bubbles: asset prices rise far beyond their intrinsic value, creating illusions of prosperity that can collapse suddenly.
These unproductive loans heavily expose China’s banking system, making it vulnerable. Political directives pressure state-owned banks to extend credit even when their repayment capacity is doubtful. This creates “zombie firms”—companies kept alive by continuous refinancing but contributing little to economic value.
China’s regulatory oversight has often been weak or politically compromised. Local governments have incentives to report high growth, and debt-financed projects help them achieve short-term targets. Despite being aware of the risks, the central government often ignores them to maintain stability. Such behavior creates moral hazard: borrowers assume that Beijing will always step in to rescue them.
Debt also distorts global trade balances. By sustaining growth through borrowing, China maintains high demand for imports and commodities while simultaneously pushing exports into international markets. This situation creates imbalances that ripple across supply chains.
This also affects the internationalization of the yuan (RMB). For China to promote the yuan as a global reserve currency, it must project financial discipline. Excessive debt undermines confidence in the stability of the Chinese economic system. Investors are wary of a currency backed by opaque liabilities.
Ultimately, debt matters because it is closely tied to political legitimacy. The Chinese Communist Party (CCP) derives legitimacy not from elections but from delivering prosperity. If debt-fueled growth stalls and unemployment rises, the Party risks losing its social contract with the people. Thus, debt is not only an economic issue but a political one.
Domestic Dangers
Within China, the debt problem manifests in several dangerous ways.
As previously mentioned, local governments have overextended themselves. Many have borrowed to fund showcase projects—such as grand highways, stadiums, or industrial parks—that yield little economic return. When these loans mature, governments often struggle to refinance them without central assistance.
The property sector is particularly vulnerable. Developers such as Evergrande and Country Garden epitomize the risks associated with excessive leverage. By relying on presales and continuous borrowing, these firms built massive empires of unfinished apartments. Defaults became inevitable when cash flows dried up, shaking investor confidence and putting millions of homeowners at risk of stranding.
Household debt has also risen dramatically. Chinese families, once known for their high savings rates, are increasingly incurring debt through mortgages, consumer loans, and credit cards. This shift reduces resilience: when downturns hit, households have less capacity to absorb shocks.
Shadow banking introduces hidden dangers. Off-balance-sheet loans and opaque financial products make it difficult to assess the accurate scale of risk. Investors may believe they are buying safe instruments, only to discover that they are exposed to failing projects.
Youth unemployment adds a social dimension. Debt-fueled growth distorts job creation by misallocating resources. Millions of university graduates face underemployment, fueling frustration. The CCP is acutely aware that economic dissatisfaction among youth can translate into political instability.
The stakes are existential for the party. If a major debt crisis erupts, the CCP will face not only economic disruption but also political unrest. Social stability is the foundation of the regime’s legitimacy. Thus, Beijing will go to extraordinary lengths to prevent a systemic collapse.
Global Dangers of China’s Debt
China’s debt problem extends beyond its borders. It has global repercussions.
A financial crisis in China could trigger capital flight, as foreign investors withdraw funds to avoid losses. This would destabilize global markets, especially in Asia. The 1997 Asian Financial Crisis showed how quickly contagion can spread; a Chinese crisis would be far larger.
Particularly vulnerable are the commodities markets. China is the largest consumer of oil, copper, steel, and other raw materials. A slowdown would depress prices, harming exporters from Brazil to Nigeria. For economies dependent on commodity revenues, the impact could be devastating.
The Belt and Road Initiative (BRI) amplifies the risks. By extending loans to developing countries for infrastructure, China has exported its debt model abroad. Limited transparency and high collateralization characterize the structure of many of these loans. When countries struggle to repay their debts, Beijing gains leverage over strategic assets.
This “debt diplomacy” has geopolitical consequences. The United States and its allies accuse China of using debt to entrap nations, while Beijing insists it is offering development opportunities. Regardless of intent, the outcome is dependency. Countries saddled with unsustainable Chinese loans lose fiscal autonomy and risk ceding sovereignty.
Debt also intersects with great power rivalry. As Washington restricts China’s access to technology and markets, Beijing may double down on using debt as a tool of influence in Africa, Latin America, and Southeast Asia. This intensifies the competition between the US and China.
Finally, the lessons of 2008 cannot be ignored. Debt mismanagement in the United States triggered the Global Financial Crisis. If the next global crisis originates from China, the consequences could be even more severe, given China’s extensive integration into global supply chains.
Case Studies
The Maldives
In the early 2000s, the Maldives accepted Chinese loans to finance infrastructure projects, including roads and bridges. Many of these projects were politically motivated rather than economically necessary. The result was a heavy debt burden that strained the island nation’s finances. By 2016, the Maldives struggled to service its obligations, leading to debt restructuring. The lesson is clear: small states can easily become overwhelmed by loans that exceed their repayment capacity.
Sri Lanka
Perhaps the most famous example of China’s debt diplomacy is Sri Lanka’s Hambantota Port. Built with Chinese loans, the port proved commercially unviable. Unable to service the debt, Sri Lanka in 2017 agreed to a debt-for-equity swap that handed operational control of the port to a Chinese company on a 99-year lease. The episode has become a symbol of how poorly conceived infrastructure projects can translate into geopolitical leverage.
Uganda
Uganda’s experience highlights environmental and sovereignty risks. Chinese loans funded major projects, including a railway and an oil pipeline. The pipeline route cut through a national park, sparking environmental concerns. Moreover, Uganda struggled to service the debt, raising fears that China could seize control of strategic infrastructure. The episode illustrates how debt can compromise both ecological sustainability and national sovereignty.
Kenya
Kenya’s Standard Gauge Railway (SGR), financed by Chinese loans, was touted as a transformative project. Yet the railway has struggled financially, with revenues insufficient to cover operating costs. As debt obligations mount, concerns have grown that Kenya may be forced into unfavorable renegotiations with Beijing. The project highlights the risks of ambitious infrastructure that fails to generate adequate returns.
Additional Briefcases
Pakistan, Laos, and Zambia provide further cautionary tales. Pakistan’s China-Pakistan Economic Corridor (CPEC) projects have left it heavily indebted, forcing Islamabad to seek IMF assistance. Laos’s Chinese-financed railway has created unsustainable debt levels in a small economy. Zambia, after defaulting on debt in 2020, faced prolonged negotiations with creditors, with Chinese loans complicating the restructuring process.
Together, these cases reveal a pattern: Chinese loans, while offering short-term development, often leave countries with long-term vulnerabilities.
Policy and Investor Responses
For policymakers, the priority is to enhance transparency. Loan contracts must be disclosed, terms scrutinized, and projects subjected to cost-benefit analysis. Blindly accepting Chinese financing risks long-term dependency.
Diversification is essential. Countries should cultivate multiple financing sources, from multilateral lenders like the World Bank to regional development banks and private investors. Relying solely on Chinese loans concentrates risk.
Investors, meanwhile, should diversify portfolios to avoid overexposure to China or commodity-dependent economies. Sectors that may benefit from China’s slowdown, such as healthcare and tourism, deserve attention. Vigilance in monitoring Chinese financial indicators is critical.
The global community also has a role. Multilateral frameworks must adapt to provide competitive alternatives to Chinese financing. The G7’s “Build Back Better World” initiative and the EU’s “Global Gateway” are attempts to counterbalance Beijing. Success depends on follow-through.
Ultimately, policymakers and investors alike must adopt a mindset of vigilance. The risks of China’s debt problem are not hypothetical—they are real, present, and growing.
China’s Calculus: Buying Time with Debt
Beijing is acutely aware of the risks. The CCP has powerful tools at its disposal to prevent a systemic crisis. State-owned banks can be ordered to restructure loans. The central government can inject liquidity. Foreign exchange reserves—over $3 trillion—provide a buffer.
Yet these tools buy time rather than solve the structural issue. China’s growth model remains heavily reliant on debt-driven investment. Transitioning to a model based on innovation, services, and domestic consumption is politically tricky. Slower growth may be economically healthy, but it risks social unrest.
Controlled defaults may be part of the strategy. By allowing selective failures, Beijing can reduce systemic risk without triggering collapse. However, the approach requires careful management to avoid contagion.
The CCP’s legitimacy hinges on stability. Leaders will prioritize preventing a financial crisis above all else. This means that Beijing may tolerate inefficiencies and zombie firms if doing so maintains social calm.
The key question is whether China can reform before crisis forces its hand. If successful, it can manage a “soft landing.” If not, the risks multiply.
Conclusion: The World’s Debt Problem
China’s debt dilemma is not just a domestic challenge. It is a global problem with far-reaching consequences.
If China manages to reform its growth model, the world will benefit from continued stability. If Beijing makes a mistake, it will impact everything from African mines to Wall Street banks. Sovereignty, trade, and global financial stability all hang in the balance.
The lesson for policymakers is clear: vigilance, diversification, and transparency are essential. The lesson for investors is equally sharp: balance opportunity with caution. For China, the imperative is reform, not denial.
Debt has the potential to serve as both a growth tool and a destructive weapon. China’s choices in the coming decade will determine which path it takes. And in an interconnected world, those choices will affect us all.
