China Research

The Chinese debt problem is certainly not new. However, it has recently become more acute as a result of China’s structural slowdown of GDP growth and the real estate sector disaster – but also because of the possible consequences of president-elect Donald Trump’s announcement to introduce considerably higher tariffs on Chinese exports to the U.S. and following further international contagion risks.

In a worst-case scenario, China’s ongoing debt crisis may jeopardize stability in China itself but also develop as the starting point of another serious global financial and economic crisis. This crucial risk is mostly neglected or forgotten by Western analysts and decision-makers – probably since it still seems to be far away or insufficiently concrete. Sure, these two arguments can be neither supported nor rejected – but the risks are obvious all the same.

Major debt problems in different sectors

When looking more deeply into the details of the ongoing Chinese debt crisis – which is extremely difficult for transparency reasons – high debt ratios can be found in all sectors: central government (when including implicit debt commitments), local governments, corporates and private households. First when having summed up these indebted sectors, we get to total Chinese debt which includes both the private and the public sector.

The subgroup of total public debt consists of central government debt, local (and provincial) debt, governmental branch debt and debt of state organizations. Ten years ago when I made research on this topic, Chinese public debt was preferably referred to central government debt though local debt already then was higher than central government debt (see e.g. Fromlet, https://publications.bof.fi/bitstream/handle/10024/44981/172270.pdf?sequence=1&isAllowed=y ).

Since Chinese statistics are not really known as transparent and illuminating, different debt numbers can be found for the same kind of summarized debt (sub-)group. Logically, Western debt estimates are mostly much higher than the domestic Chinese ones (if the latter can be found at all). This phenomenon can particularly be referred to large amounts of implicit governmental debt commitments and hidden off-balance operations that usually are not calculated or discussed officially.

When it comes to China’s central government debt, numbers do not look too scary at the first sight. According to the statistical experts of CEIC in London, the ratio of central government debt to GDP is only 25 percent -but in my view on a (slightly?) rising trend (https://www.ceicdata.com/en/indicator/china/government-debt–of-nominal-gdp). 25 percent or even up to 50 percent ­- as indicated by other experts – still appears being quite a low number by comparable international standards.  

However, implicit future government funding needs still seem to exist due to the weak financial positions of many SOEs and real estate players, This should or could imply high credit losses of the banks at some point in the future, thus making financial government support inevitable in a really negative scenario. However, such perspectives cannot be put in figures by now – but may at least in qualitative terms worsen the central government debt outlook considerably in a longer perspective.

Local (and provincial) debt is already now a completely opaque issue, according to the IMF totally 80 percent of GDP (of which 32 percentage points of GDP via explicit credits and 48 percentage points more indirectly via Local Government Financing Vehicles called LFGVs, see by the IMF https://doi.org/10.5089/9798400284281.002 p 69, where also other debt-to-GDP ratios are available). And we do know that local debt conditions continue to deteriorate for different reasons – particularly as a consequence of the ongoing real estate crisis but also due to the weakening economic growth potential (which is highly related to the first explanation). By the way, official Chinese total government debt (central and local government) is these days noted at 55 percent (https://www.fidelityinternational.com/editorial/article/how-china-keeps-its-debt-in-order-e1feea-en5/; this number of 55 percent can be compared to 80percent for local debt only, see the IMF source above).

What we do know in our part of the world is that Chinese apartment prices have come down dramatically. This still dampens Chinese people’s confidence in the country as such and in the own future considerably. Historical experience from other countries tells us clearly that it usually takes a long time to see any kind of recovery after a burst real estate bubble. This kind of lost trust means, of course, that also Chinese people remain reluctant for quite some time as regards their potential purchases of (new) apartments which probably continues to keep down real estate prices on secondary markets and the creation of new dwellings (see statistics on sales prices   https://www.stats.gov.cn/english/PressRelease/202411/t20241115_1957438.html).

Declining price developments on residential markets also mean that tax revenues of local governments from their land sales remain under pressure – an important source of local tax income that for quite some time has been standing for almost half of all local income. In other words: This described setback of income induces that local borrowing needs (and debt) will be – ceteris paribus – expanding further. Altogether, the burst real estate bubble has without doubt meant an extremely negative vicious circle for local developments in China – and will go on doing so for quite some time in the future.

Consequently, it hardly can be estimated to what extent LFGVs will be able to repay their gigantic debt to their lending banks or to their municipal bond buyers. By the creation of these LFGVs, local governments were empowered to circumvent the prohibition to issue municipal bonds and to borrow money in banks. Thus, these transactions never showed up in municipal bookkeeping but seem to be partly allowed nowadays. However, in 2018 the government declared that it would not rescue LFGVs in troubles – whatever this means in reality.

When it comes to total private debt – or rather non-government sector debt – good “guestimates” cannot be found for the household and the corporate sector. Transparency appears also here very insufficient. Sure, corporate debt statistics can be found – but unfortunately without sufficient clarification. As unclear remains whether the definition of corporate debt includes both private and state-owned corporations or alternatively only the one or the other. This necessary distinction remains a conundrum and puzzles a lot.

When I looked through different sources, the ratio for corporate debt was mostly above 100 percent of GDP – but as mentioned above without giving a clear definition of the corporate sector. The IMF concluded last summer that China’s non-financial domestic corporate debt in 2023 amounted to 116 percent of GDP (see for this result https://www.imf.org/en/News/Articles/2024/07/31/pr24295-china-imf-exec-board-concludes-2024-art-iv-consult ). I would guess that the share of SOEs dominates there – and among them probably the less successful ones. It may also happen that parts of LFGV debt are registered as corporate debt which would make the summarized corporate debt even more muddy.

For household debt, results were more mainstream-oriented. Ratios around 60-64 percent of GDP could be found quite frequently; 63,7 percent of GDP for 2023 was calculated by the IMF and is not expected to change very much in the years to come (see for household debt by the IMF https://www.imf.org/en/News/Articles/2024/07/31/pr24295-china-imf-exec-board-concludes-2024-art-iv-consult, and furthermore https://tradingeconomics.com/china/households-debt-to-gdp, and https://www.ceicdata.com/en/indicator/china/household-debt–of-nominal-gdp, and below occasionally (?) together with other economic indicators  https://data.stats.gov.cn/english/easyquery.htm?cn=A01, and   https://www.stats.gov.cn/english/Statisticaldata/yearbook/).

Finally foreign debt. Here one may conclude that China’s foreign debt seems to be manageable in the shorter and medium run, due to still existing surpluses in the current account – though declining on trend. This does at least theoretically not provoke any net borrowing abroad (but it happens for reasons of diversification or favorable credit terms).

It therefore still seems plausible to assume that China will remain resilient to further protectionist challenges from the U.S. as far as a future necessity of sizeable borrowing abroad is concerned – at least as long as major global contagion and a big trade war can be avoided. 

Officially, Chinese foreign debt amounted in dollar terms to USD 2545 billion in June 2024, of which 56 percent were taken as short-term credits and 44 percent with medium- and long-term maturities. This meant altogether at the end of 2023 for total foreign credits almost 14 percent of GDP according to the experts of CEIC in London (see https://www.ceicdata.com/en/indicator/china/external-debt–of-nominal-gdp).

Interestingly, foreign institutions have granted a big share of their credits to China in its own currency, the RMB – as much as 49 percent of all Chinese foreign borrowing (see https://www.safe.gov.cn/en/2024/0930/2237.html). This is certainly an attempt by Chinese policymakers to gradually widen the role of the renminbi RMB) on international currency markets and to limit debt commitments in foreign currencies.

China’s high indebtedness may at some point lead to serious domestic and global troubles – economically and financially

This analysis of mine on the Chinese debt situation suffers unfortunately from insufficient statistical quality and transparency in the economic superpower of China. Despite these institutional shortcomings, the IMF considers China’s total non-financial debt having been at 302 percent of GDP at the end of 2023, and running up to expected 344 percent by the year 2029.

In this article, most debt sectors were analyzed – but not each and every one (see about the different debt ratios the following IMF estimates: https://www.imf.org/en/News/Articles/2024/07/31/pr24295-china-imf-exec-board-concludes-2024-art-iv-consult).

Altogether, I feel humble about all my conclusions. But I tried to analyze as carefully as possible despite all the statistical inconsistencies and shortcomings. A concrete example for that: On the current website of the People’s Bank of China, I could recognize that the latest Financial Stability Report to be found was from the year 2018 (http://www.pbc.gov.cn/english/130736/index.html). This picked example should be evidence enough on lagging transparency.

Even ifone makes a mild interpretation of China’s accumulated public and private debt problems, it hardly can be denied that the current debt situation remains worrisome in the future – which at least partly should lead to further rising debt ratios for certain groups of borrowers. It also should be clearly observed that China’s political leaders more lately have expressed serious worries about their country’s debt dilemma. Even if a rebound of the real estate market partly is predicted for 2025 (see https://www.globaltimes.cn/page/202410/1321145.shtml), reluctant psychological attitudes by private households and negative demographic developments could counteract such optimistic expectations – at least in my own understanding.

Uncertainty or worry is, for example, demonstrated by the Chinese government’s recent financial and liquidity-oriented support measures for the heavily burdened real estate sector (see, for example, https://www.goldmansachs.com/insights/articles/has-chinas-property-market-reached-the-bottom). Also other hints on official Chinese concerns about the critical debt position came up more recently (see for example https://www.scmp.com/economy/policy/article/3279014/china-warns-struggling-regions-be-more-strict-and-accountable-curbing-hidden-debt, and https://www.reuters.com/world/china/china-unveils-steps-tackle-hidden-debt-local-goverments-2024-11-08/.

Probably, current judgments of the IMF tell us a little bit more about the dimensions of China’s central and local government debt, predicting almost 150 percent of GDP by the end of this decade compared to 116 percent in 2023. This expected deterioration by over 30 percentage points expresses certainly a lot of IMF worries about the Chinese government’s debt trend – an international organization where China by the way is a member itself.

Conclusion: Since there do not exist accurate and/or reliable official Chinese debt numbers, more exact forecasts on the future consequences of the Chinese debt bubbles cannot be made – not even by the IMF. This uncertainty, however, should nevertheless be reason enough to carefully watch Chinese debt developments in the future – at least as much as possible.

In worst case scenarios – which not necessarily are unrealistic – both the Chinese and the global economy plus global financial markets would be hit dramatically by further bursting Chinese debt bubbles. Hopefully, Chinese decision makers soon will take more stabilization action and therefore be able to still avoid the most negative debt developments. At least it seems to be the case that official awareness of China’s alarming debt problems has started to emerge more visibly.

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University