China’s macro leverage ratio exceeded 300% in the second quarter of 2025, with the debt of the Chinese Communist Party (CCP) government, central state-owned enterprises, and state-owned enterprises skyrocketing. Experts believe that the CCP’s blind investments have led to high debt, low returns, and contributed to intense internal competition within Chinese companies. The attempt to move three hundred million farmers to cities to boost consumption is also proving to be challenging.
The National Institute of Finance and Development (NIFD) recently released a report titled “Macro Leverage Ratio Breaks 300% for the First Time, Private Sector Credit Expansion Slows Down” for the second quarter of 2025. The report states that China’s macro leverage ratio increased by 1.9 percentage points in the second quarter of 2025, reaching 300.4%, exceeding 300% for the first time.
This 300% figure already surpasses that of the United States and Japan. According to calculations by institutions like the Bank for International Settlements (BIS), the US debt structure is estimated to be around 260%, and Japan’s near 400%. In China, non-financial corporate debt accounts for the highest proportion of overall debt, far exceeding local governments even surpassing the central government, reflecting that while it appears the central government’s debt pressure is light, the overall debt ratio has surpassed the US and is catching up with Japan at an accelerated rate.
Chinese expert Wang He analyzed for Epoch Times, “After 2022, the debt ratio of Western countries began to decline, but in order to maintain GDP growth, China is using debt to stimulate GDP growth. The government is in debt for infrastructure investment, and designated state-owned enterprises and central enterprises are heavily indebted to advance CCP-designated infrastructure projects and ‘dual circulation’ and ‘dual innovation’ projects.”
“However, China’s return on investment continues to decline, now down to around 4%, meaning China’s economic growth driven by investment and debt is no longer sustainable.”
While the CCP aims to maintain GDP growth, China’s nominal economy has been experiencing negative growth in recent times, leading to an increase in the macro leverage ratio. In the second quarter of 2025, nominal GDP growth continued to slow to 3.9%, the lowest since 2023, with the gap between nominal and real GDP growth expanding to -1.3%, marking the ninth consecutive quarter of negative growth since the second quarter of 2023.
The indicator for nominal economic growth is Nominal GDP, calculated based on current market prices of the total domestic product; while Real GDP adjusts total domestic product for price levels.
Wang He used the analogy of “chickens flying and eggs cracked” to illustrate the actual effect of the CCP’s massive debt-investment approach, which has led to intense internal competition within Chinese enterprises. He stated, “Initially, borrowing for investment should result in ‘borrowing to lay eggs,’ but now ‘eggs’ are absent, ‘chickens’ are also dead, becoming a ‘fruitless endeavor.'”
“China and the US have different fiscal systems, with the US mainly holding federal debt exceeding 80%, whereas in China, over 80% of the debt is held by local governments. China’s local governments do not declare bankruptcy; instead, they keep piling up debts without addressing the issues.”
The NIFD report also suggested three ways to boost nominal economic growth. Firstly, unleashing consumer potential; secondly, moving nearly three hundred million farmers to cities to boost consumption; and thirdly, opening up market space through technological innovation to move away from internal competition and deleveraging passively.
Currently, as China’s economy slows down, small and medium enterprises face tough challenges, and the phenomenon of university graduates being unemployed immediately post-graduation is severe. Even in the legal profession, individuals are resorting to delivering takeout for survival. How can Chinese cities accommodate nearly three hundred million rural residents?
In response, Wang He expressed, “In reality, it’s very difficult to operate. When migrant workers become urban residents, the government needs to provide massive funds for social welfare, yet local governments lack the financial capacity to do so. Policy recommendations are in place, but there’s no means to implement them currently.”
Wang He explained, “China has reached the later stages of urbanization, with the proactive urbanization phase already ending, transitioning into a passive urbanization phase.”
“In 1977, Japan’s proactive urbanization phase essentially ended with an urbanization rate of 75%, remaining steady until the early 21st century. Later, urbanization surged to 90% due to Japan’s aging rural population; as the rural population declined after elderly individuals passed away, urbanization consequently increased passively. China’s rural aging rate is nearly double that of urban areas, meaning with time, China’s urbanization rate will passively increase.”
Wang He noted that the CCP authorities have recognized this issue, implementing numerous policies such as exempting pre-school children from tuition fees. However, China’s government revenue decreased in the first half of the year, with fiscal expenditures rapidly rising, leading to a growing deficit. The question remains, where would the funds come from to provide subsidies?
He stated, “China’s fiscal system is distorted, with central government revenues annually amounting to less than 10 trillion yuan, while transfer expenses to local governments exceed 10 trillion yuan, relying on issuing three to four trillion yuan in national debt to function. It is hard to find any other government worldwide operating in such a ludicrous manner.”
“Moreover, many investments in China are inefficient or ineffective, resulting in the accumulation of vast fixed assets. China’s total fixed asset investment relative to GDP investment exceeds four times and approaches five times, indicating severe inefficiencies. This figure far exceeds those of the US, Japan, and Germany.”
The so-called ‘dual circulation’ refers to the strategic implementation of major projects and the construction of security capabilities in key areas. It involves a large scale of funds, particularly in infrastructure investment.
According to official Chinese media reports in early July, this year’s 800 billion yuan ‘dual circulation’ construction project list has been fully distributed, supporting a total of 1459 projects, including the restoration of the ecological environment in the Yangtze River Basin, significant transportation infrastructure along the Yangtze River, the development of new land and sea routes in the western region, high-standard farmland creation, significant water conservancy projects, urban underground pipe networks, etc. The so-called ‘dual new’ refers to promoting a new round of large-scale equipment upgrades and trading out old for new consumer goods.
Wang He analyzed, “A market economy has natural controls on investment, where investments are market-driven and government intervention is limited. China, on the contrary, has excessive government interference overshadowing the market. Under political pressure, local governments, state-owned enterprises, and central enterprises have heavily borrowed money, significantly raising China’s leverage ratio, with investment failing to yield corresponding returns; therefore, the CCP is the main culprit.”
“The CCP has heavily invested in emerging strategic industries like new energy vehicles, batteries, and solar energy, far exceeding actual demand, leading to substantial investment waste. The intense internal competition within Chinese enterprises is a result of overinvestment.”
The third recommendation in the NIFD report is to leverage technological innovation as one of the ways to boost nominal economic growth.
Wang He believes that this is the CCP’s attempt to break through in key technologies, developing new strategic industries. However, the potential emerging technology industries are insufficient to support overall economic growth in China.
He stated, “Since the collapse of the Chinese real estate industry, no pillar industry has emerged to replace real estate. While individual sectors like manufacturing and emerging industries show high growth rates, their volumes are insufficient.”
The CCP has set a strategic target to become a technological powerhouse by 2035, aiming for self-reliance and strength in technology. Wang He explained, “The CCP aims to compete with the US for dominance in high technology, hoping for a leap forward in high-tech development, breaking through technologically.”
“At present, China is not focusing on traditional chip breakthroughs but rather overtaking through other lanes, such as biochips or quantum chips, despite the substantial risks. According to Western standards, technological innovation is unpredictable. However, the CCP hopes to mass-produce some innovations, which is absurd and contradicts the essence of innovation.”
“With CCP politics leaning toward the left, social internal competition and plagiarism intensifying, lacking the foundation for creative freedom, as well as the disconnect between Chinese and Western education, China’s aspiration to stand out in technology and strive for independence is nearly impossible.”
Wang He believes DeepSeek is a typical example. Initially popular upon its debut, the subsequent downfall was inevitable.
When the AI chatbot developed by DeepSeek was released in the US in January of this year, the cost advantage compared to American AI companies caused financial market chaos – in the US, AI chip manufacturers like Nvidia saw stock prices drop by 16.9%, Broadcom by 17.4%, Microsoft by 2.14%, and Alphabet by over 4%; in Europe, Dutch chip equipment manufacturer ASML saw its stock price drop by over 7%. DeepSeek mainly employed domestic Chinese-trained Ph.D. holders.
Apart from security concerns, DeepSeek also faced various other issues. According to a report by Taiwanese tech publication ‘Tech Orange,’ cybersecurity company Wiz Research discovered that DeepSeek’s customer database was exposed without proper authentication or defense mechanisms, resulting in potential leaks of sensitive data. Additionally, the service was slow and unstable, possibly due to inadequate cloud-based hardware for running large language models.
DeepSeek has lost its initial luster and traction. Focused on hard AI technology, the online media outlet ‘ThunderTech’ lamented, “In less than half a year, DeepSeek has fallen from grace!” Citing data from the Q2 2025’s AI Application Value Ranking by QuestMobile, DeepSeek’s monthly downloads plummeted by 72.2% – from an impressive over eighty million downloads to just over twenty million.
On the night of August 11, DeepSeek experienced a sudden and extensive outage, rendering its API interface, web interface, and mobile applications inaccessible or unresponsive. ‘ThunderTech’ reported that the downtime lasted for a prolonged three hours. An outage signifies a severe system error that the operating system cannot recover from or hardware issues resulting in an extended period of unresponsiveness.