Recently in China, there has been a rapid increase in debt and soaring debt interest rates. In 2025, China’s non-financial sector debt reached three times the GDP. This year, the interest payments of the central government are estimated to account for nearly 20% of the total central expenditure, amounting to a staggering 870 billion RMB. Additionally, in recent years, the growth rate of interest payments by the central government has been much higher than the growth rate of fiscal revenue.
Analysts believe that China’s future debt will snowball, rolling faster and faster, ultimately reaching its limit and possibly triggering a Minsky Moment (a critical point of a financial crisis triggered by selling assets to pay off debt, causing a sharp drop in asset prices).
According to the latest statistics from the Bank for International Settlements, by the end of 2025, China’s non-financial sector debt (including enterprises, governments, and households) exceeded 42 trillion RMB (about 6 trillion USD), a significant increase from Xi Jinping’s initial term in 2012. The overall debt-to-GDP ratio has reached 300%, an increase of 60 percentage points from the end of 2019.
As of the end of March this year, the overall debt ratio of the non-financial sector had risen to 305%, with government debt (including central and local governments) reaching 143 trillion RMB (about 20.7 trillion USD), accounting for approximately 101% of the GDP. The IMF estimates that in 2025, China’s government debt is around 126.6% of GDP.
The Wall Street Journal reported that the towering debt has compressed China’s economic vitality, leading to internal market competition, weakening demand in the manufacturing sector, which in turn has negatively impacted enterprise profits, employee wages, and caused export dumping that has led to backlash in various countries.
The interest payments on China’s debt have also been soaring along with the debt itself. According to the latest data from the Chinese government, this year’s debt interest payments for the central government (including both central and local government general debt) are estimated to amount to a total of 1.4 trillion RMB (about 209 billion USD), a significant increase compared to 2014. The interest payments on the central government debt alone account for 19.2% of the total central expenditure.
However, many analyses point out that government debt interest payments are much higher when considering local government debt, specific debts, and implicit debts.
According to the data from the Ministry of Finance for the first eight months of the year, the total interest payments of local governments have exceeded 1 trillion RMB (including general debt and specific debts), in addition to even larger implicit debts.
Fortune, a globally renowned business media outlet, recently reported that a study by the Center for Strategic and International Studies (CSIS) highlighted a 341% surge in China’s government debt interest payments from 2013 to 2025, surpassing all other major budget categories.
Zhang Yuhan, Chief Economist of the China branch of the Conference Board, stated that the high debt burden in China has limited the space for implementing stimulus policies, particularly with debt repayment gradually becoming a significant constraint on local government finances, further constraining China’s fiscal flexibility.
While borrowing can enhance capital efficiency, it also poses a high risk of triggering a systemic financial crisis, especially when the growth rate of interest payments on government debt surpasses that of fiscal revenue for an extended period. The constraints and risks that debt imposes on China’s economy are becoming increasingly severe.
Based on the fiscal budget data released by the Chinese Ministry of Finance, the growth rate of debt interest payments in 2026 outpaced that of fiscal revenue, expenditure, and GDP growth.
The “2026 General Public Budget Expenditure Budget Table” indicates that interest payments on the central government’s debt are 873.99 billion, accounting for 19.24% of the total central expenditure of 4,542 billion, showing a 6.7% year-on-year increase, exceeding the overall expenditure growth rate of 5.5%.
The same budget table also reveals that the central government’s general public budget revenue is 9,567 billion, compared to 93,962.62 billion in 2025, representing a 1.8% increase.
Furthermore, the growth rate of government debt interest payments surpasses the official GDP growth target of 4.5% to 5.0%. The IMF predicted that China’s GDP growth rate in 2026 would be 4.5%, and 4% in 2027. Despite the booming AI industry in China, rising energy prices, and weak domestic demand are causing a slowdown in economic growth.
In the past seven years, the growth rate of debt interest payments has consistently outpaced that of fiscal revenue. According to the fiscal balance data from 2019 to 2025 released by the Ministry of Finance, total fiscal revenue decreased from 27.49 trillion RMB in 2019 to 27.39 trillion RMB in 2025, a 0.4% decline. Meanwhile, debt interest payments increased from 833.8 billion in 2019 to 1.35 trillion RMB in 2025, marking a 61.8% growth.
Jacob Gunter, the Head of Economic and Industrial Projects at the Mercator Institute for China Studies in Berlin, noted that the current system in China is reaching its limits, with local governments subsidizing loss-making enterprises to keep them operational, leading to reduced tax revenues due to the lack of profits.
Camille Boullenois, Deputy Director at the Rhodium Group, mentioned that if China aims to change its financial system, it must be prepared to accept significant losses, a step that the Chinese government seems unready to take. The most likely scenario is a gradual deterioration of the situation, leading to a decline in the financial system and diminishing efficiency in driving growth.
Wang Guochen, Deputy Researcher at the China Economic Research Institute of the Chinese Academy of Economic Sciences in Taipei, highlighted the challenges faced by local governments in China due to the collapse of the real estate market. The decline in taxes related to property transactions, urban construction taxes, and land transfer income is exacerbating the financial strain on local governments already struggling to balance their budgets.
He suggested a shift in China’s economic policy from production-centric to consumption-centric, emphasizing the need to improve social welfare and security such as education and healthcare to boost future consumer confidence, rather than focusing solely on supporting industrial investment for growth, which may lead to bigger financial gaps.
Fortune’s analysis mentioned the significant efforts made by the Chinese government to fund key industries like AI, semiconductors, electric vehicles, robotics, and renewable energy through state-owned banks to overcome technology sanctions and achieve national technological independence. However, this strategy has led to the financing of much industrial overcapacity, price wars, diminished corporate profits, and jeopardized debt repayment capacity.
McKinsey data revealed that in 2025, the ratio of corporate debt to GDP in China was double the global average, indicating a surge in corporate debt despite fewer financially viable projects.
In a recent article, “Mars Macro”, a prominent financial self-media outlet in China, warned that with accelerating debt interest rates and slowing income growth, the gap is widening, paving the way for an exponentially growing debt that could trigger a Minsky Moment.
The Minsky Moment, coined by American economist Hyman Minsky, describes a financial instability hypothesis where accumulating debt in a prolonged economic prosperity cycle shifts from hedge to speculative to Ponzi financing. Once asset prices decline or cash flow interrupts, debtors are forced to sell assets to repay debts, leading to a sudden drop in asset prices, credit contraction, and financial crises.
Jacob Gunter from the Mercator Institute for China Studies warned, “We are witnessing that this system is reaching some of its limits”, with local governments propping up loss-making companies to keep them afloat, which ultimately leads to reduced profitability for tax collection.
Camille Boullenois from the Rhodium Group concluded that if China intends to reform its financial system, it must be prepared for substantial losses; however, the lack of readiness on the part of the Chinese government may result in an ongoing slow deterioration where the financial system gradually declines, and growth efficiency diminishes.
The road ahead for China’s economy seems challenging, with rising debt levels and interest payments presenting significant obstacles. There is a growing concern that without substantial structural reforms and a shift towards a more sustainable economic model, the country may face more severe financial risks and limitations in the future.