Chinese leader Xi Jinping, intent on pouring trillions into making China a technological and military superpower, is presiding over a dangerous spiral of debt that is strangling the economy at home and damaging trade partners around the world.
Rising debt loads in many countries have spooked investors of late. But few nations have seen a surge more dramatic than China.
Last year, China's credit to the nonfinancial sector -- a broad measure of corporate, government and household borrowings -- topped 300% of gross domestic product, 60 percentage points higher than at the end of 2019 and now far bigger than in the U.S. It has jumped by more than $43 trillion since Xi took office in late 2012, according to the Bank for International Settlements.
Much of the money has been wasted, financing factories and apartment blocks for which there isn't enough demand, sparking debilitating price wars, and hurting profits and wages.
Many economists say China likely isn't facing an imminent financial crisis, in part because the debt buildup has largely relied on domestic savings, rather than foreign investors who might be quicker to dump it.
But China's debt deluge is increasingly becoming the world's problem too.
Chinese companies that need to service this enormous debt are churning out more cars, solar panels and electronics than consumers at home want. In response, exporters are pouring these goods onto foreign markets, opening up a trillion-dollar annual trade surplus with the rest of the world.
Despite trade tensions with many countries -- including rising anger in Europe over a flood of Chinese electric cars and other exports -- Beijing appears unwilling to change course.
One challenge for China is the huge amount of debt carried by loss-making companies, much of which can't easily be repaid as overall growth stagnates. Efforts to cut back on extending fresh credit to such firms could expose Chinese state banks to big losses.
"If you want to change that system you have to accept a lot of losses and I think the Chinese government is not ready for that," said Camille Boullenois, associate director at research firm Rhodium Group. "The most likely scenario is that it continues getting worse slowly and there's a sort of slow decay of the financial system that becomes increasingly inefficient at producing growth."
By kicking the debt problem down the road, it also allows Xi to remain focused on investing in new technologies, the military and other strategic priorities. Chinese officials see a window of opportunity now to firmly establish China as a great power alongside the U.S., and consider investment in core technologies such as artificial intelligence, space technology and energy as crucial.
China's government says its debts are under control. Central government borrowings were only around 30% of GDP in recent years, small compared with federal debts in the U.S.
But that doesn't account for the bulk of China's problem, which sits at the local level.
In particular, financing firms tied to local governments ran up trillions of dollars of new liabilities over the past few years as they tried to drum up enough business to hit economic growth targets and keep people in their cities employed. Many such firms were involved in local real-estate development and have been hit hard by China's yearslong property bust.
A broader gauge of overall Chinese government debt -- including official local borrowings as well as the debts of these local government financing vehicles -- ballooned to an estimated 127% of GDP last year, according to the International Monetary Fund, up from 98% in 2020.
Corporate debt, meanwhile, has surged even as financially attractive projects have grown more scarce. China's level of corporate debt was double the global average relative to GDP last year, according to McKinsey.
Cheap credit is a big part of the reason. As of late last year, more than half of new company loans were at or below the prime benchmark rate reserved for banks' best corporate customers, far more than a few years earlier, according to central-bank data cited by Rhodium. The median interest rate for listed Chinese manufacturing companies was about 2.4% last year.
Resolving China's debt problem won't be easy. It would likely require a fundamental shift in Xi's growth strategy away from relying on investment in fixed assets like factories -- and the export of goods from those factories -- to drive growth.
Many economists call for the government to give priority to policies that would induce Chinese households to spend more in order to halt the debt spiral. Household consumption in China was 40% of GDP in 2024, compared with nearly 70% in the U.S., according to the World Bank.
China's gross domestic product expanded 4.3% in the second quarter compared with the same period last year, the slowest in more than three years. Much of that growth came from exports.
While Beijing has said it wants to lift household consumption, that would mean giving up some of its control over the economy, potentially diverting money away from sectors that Xi has been prioritizing to close the technology gap with the U.S.
Even as Chinese officials signal they prefer to stick to the current course, "we are seeing a system running into some of its limits," said Jacob Gunter, head of the economy and industry program at the Mercator Institute for China Studies, a Berlin-based think tank.
"Local governments are subsidizing loss-making companies to keep them alive," said Gunter. "But the fact that they are loss-making also means that there are no profits to tax."