The Dragon’s House of Cards: China’s Debt Could Total 400% of GDP
Image created by ChatGPT (OpenAI), generated with AI, September 2025.
The collapse of Evergrande last month—once the world’s most indebted property developer with $300 billion in liabilities—has underscored a far broader and more troubling reality: China’s economy is drowning in debt. Despite various rescue efforts, the real estate sector remains a vast debt bubble, now propped up by an estimated $695 billion in newly approved government loans.
While the property crisis has drawn widespread attention, the full scope of China’s debt problem remains underappreciated. Official data pegs combined public and private debt at over 309% of GDP. But when additional sources of leverage—like shadow banking, margin trading, and off-the-books local government borrowing—are included, the real figure likely exceeds 400% of GDP.
China’s long-awaited post-COVID recovery never materialized. Instead, 2024 laid bare deep structural flaws and a government reluctant to enact significant reforms. The Third Plenum, a major policy-setting event, passed without any meaningful shifts, leaving the economy burdened by soaring debt, a deteriorating property market, sluggish consumption, and a stifled private sector.
Consumer spending remains weak. Retail sales continue to lag behind pre-pandemic levels, dragged down by falling home values and persistent youth unemployment, both of which have dented household confidence and wealth.
The most visible crisis remains in real estate. Years of overbuilding have left millions of apartments unsold, while major developers like Evergrande have collapsed under unpayable debt loads. Housing sales are now below 2017 levels. Government schemes to buy up unsold units have proven too small to stabilize the market.
These pressures have helped inflate China’s growing debt bubble. By mid-2025, total social financing—a broad measure of overall credit—had surged to $59 trillion, or 309% of GDP. Ironically, the stock market has become a new source of leverage. As investors pull away from property, capital has flowed into equities—often via margin trading, or borrowing to invest. Margin debt reached a record $320 billion by September 2025, a figure not included in official debt ratios.
Though China’s state-controlled financial system reduces the chance of a traditional banking crisis, the real danger lies in hidden losses scattered across local governments and state-linked firms. For over a decade, growth targets have driven spending on infrastructure and property, often without regard for returns. Many failed projects remain on the books at full value, inflating both GDP and asset prices while concealing the true scale of economic damage.
Shadow banking further complicates the picture. Wealth management products—held off balance sheets—account for an estimated $8–12 trillion in hidden debt. Local governments have also relied heavily on Local Government Financing Vehicles (LGFVs), which allow them to bypass official borrowing limits. Much of this debt is obscured from national statistics, treated as corporate rather than public debt.
By Q3 2024, local government debt—including $10.7 trillion in hidden LGFV liabilities—had climbed to around $17.2 trillion. Many provinces are now cutting services and delaying salaries, as plummeting land-sale revenues—once a key funding source—strain their ability to repay.
Hidden LGFV debt has more than tripled over the past five years and now makes up about 16% of all bank assets. The repayment schedule is daunting: around $348 billion in LGFV bonds will mature in the next 12 months. Banks are now more exposed to LGFVs than to the troubled housing sector. While Beijing is expected to bail out some of these loans to avoid financial contagion, doing so risks perpetuating moral hazard and masking losses, leaving banks vulnerable if the broader economy fails to recover.
In response, Beijing has rolled out a $1.4 trillion initiative, including a debt swap program that allows local governments to convert short-term LGFV loans into longer-term, lower-interest bonds. The central bank has also announced a broader plan to tackle hidden local debt through 2026. However, these measures largely shift liabilities from local to central government books—without addressing the root problem: chronic over-borrowing and inefficient investment.
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