The world is awash in debt, but while the United States and Europe have recently sowed concern in global markets, China’s fiscal situation doesn’t look so good either.
In fact, China’s debt has increased so much in recent years that the interest on all its borrowing represents a larger share of government spending.
Debt service payments will represent 19.2% of the central government’s general public budget this year, compared to 12% in 2014, according to new Conference Board estimates cited by the Financial Times.
This follows a separate report released earlier this year by the Center for Strategic and International Studies, which also found that 19% of Beijing’s spending went toward debt interest. That’s more than the 14 percent of the U.S. federal budget spent on interest costs, but less than Japan’s 25.6 percent.
CSIS added that China’s spending on interest payments soared 341% between 2013 and 2025, faster than any other major budget category. For comparison, total spending jumped 102% during this period, spending on social security and employment by 207%, science and technology by 137% and defense by 141%.
To be sure, interest costs on the U.S. debt also look bleak and have jumped about 390% since 2013 to $1 trillion, which also exceeds the Pentagon’s budget.
But the world’s two largest economies have diverged on key issues, with implications for future growth and debt.
The U.S. economy is accelerating, helped by the AI boom, and despite high inflation, resilient consumers have continued to spend. Unemployment is low and signals full employment, while stock markets are at or near record highs.
Sure, hyperscalers are rushing to issue bonds to fund their data center and chip purchases, but they’re also raising money through new stock offerings and IPOs.
At the same time, China’s GDP has slowed and is on track to miss its annual target of 4.5% to 5%. And while export-oriented sectors are growing rapidly, trade partners are throwing up barriers, Chinese consumers remain reluctant to spend, investment is weak, the real estate sector is still recovering from an epic crash and Chinese stocks are anemic.
Beijing has also pushed state banks to finance priority sectors such as electric vehicles, robotics, artificial intelligence and renewable energy.
But under lending pressure, many loans were given to dubious borrowers. Corporate debt has doubled since 2019, while revenues have only increased 30%. Creditors continue to roll over loans to keep struggling businesses afloat, even though nearly a third of them are losing money.
China’s state-led growth model now appears to be running out of steam, and rapidly rising debt is a warning sign as local governments often seek to boost favored industries with low-cost loans.
China’s government gross debt reached 107% of GDP this year, up from 41% in 2015, and is on track to reach 124% in 2030, according to the International Monetary Fund.
A broader measure of public and private sector debt reveals an even worse situation. China’s total debt-to-GDP ratio, excluding the financial sector, has doubled since 2010 and now exceeds 300%, Capital Economics estimated earlier this year.
But in the United States, total public and private debt last year stood at about 265% of GDP, down sharply from pandemic-era highs.
Not only is the Chinese debt boom leading to diminishing returns, it is also becoming a drag on the economy.
“The irony is that one of the drivers of government borrowing and lax lending standards by (public) banks is the desire to support economic growth and avoid job losses,” Mark Williams, chief Asia economist at Capital Economics, wrote in May. “But the product of an 18-year credit boom is a banking system that props up unproductive businesses, widespread losses across the industry and entrenched overcapacity. »
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