Xi’s ambitions deepen China’s debt burden and trade pressure abroad

what happened

Dow Jones Newswires, citing a Wall Street Journal report by Brian Spegele, says President Xi Jinping’s drive to spend trillions of dollars on China’s rise as a technological and military superpower is being accompanied by a dangerous debt buildup. Last year, credit to China’s nonfinancial sector—a broad total covering companies, government and households—rose above 300% of GDP. That was 60 percentage points higher than at the end of 2019 and well above the comparable U.S. measure. Since Xi became leader in late 2012, the amount of this credit has risen by more than $43 trillion, Bank for International Settlements data show.

A large share of the financing went into factories and housing projects that lacked sufficient demand. The resulting overcapacity has fueled damaging price competition and weakened profits and wages. Many economists do not see an immediate financial crisis as the most likely outcome, partly because the debt expansion has relied mainly on domestic savings rather than foreign investors who could withdraw funds more quickly. Still, the consequences are increasingly global. Companies that must service their liabilities are producing more cars, solar panels and electronics than Chinese consumers can absorb, pushing the surplus goods into international markets. The flow has helped create an annual trade surplus of about $1 trillion with the rest of the world.

According to the report, Beijing has shown little willingness to change direction despite trade disputes, including growing European anger over Chinese electric vehicles and other exports. Loss-making companies pose a particular risk: limiting new lending to them could leave state-owned banks with substantial losses. Camille Boullenois, an associate director at Rhodium Group, said a major restructuring would require accepting significant losses; otherwise, the financial system could deteriorate gradually and become less effective at generating growth. Delaying the problem also leaves Xi free to keep directing resources toward advanced technology, the military and other strategic priorities, including artificial intelligence, space technology and energy.

Chinese officials say government debt is manageable, pointing to central-government borrowing of only about 30% of GDP in recent years. That figure excludes much of the debt accumulated locally. Financing companies linked to local governments added trillions of dollars in liabilities as they sought to meet growth targets and preserve employment, while many were exposed to real estate and have been hurt by China’s yearslong property downturn. The International Monetary Fund estimates that broader government debt—including official local borrowing and local-government financing vehicles—reached 127% of GDP last year, up from 98% in 2020. McKinsey says corporate debt was twice the global average relative to GDP. Low-cost loans have helped drive the increase: by late last year, more than half of new corporate loans carried rates at or below the prime benchmark offered to banks’ strongest business customers. The median rate for listed Chinese manufacturers was about 2.4% last year. Resolving the imbalance would likely require moving away from fixed-asset investment and factory exports toward stronger household spending. Consumption represented 40% of China’s GDP in 2024, versus nearly 70% in the U.S., World Bank figures show. China’s GDP grew 4.3% year over year in the second quarter, the weakest pace in more than three years, with exports accounting for a substantial share of the increase. Jacob Gunter of the Mercator Institute for China Studies said the system was approaching its limits, as local governments keep unprofitable companies alive even though those businesses generate no profits to tax.

why it matters

The debt buildup supports China’s strategic investment program while intensifying excess-supply pressure on foreign markets. For markets, the key tension is between Beijing’s policy priorities, weak domestic demand and growing risks for banks and local-government borrowers.

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