China’s Constraining Debt Load

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Sep 30, 2025 - 09:52 Updated: Sep 30, 2025 - 02:36
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China’s Constraining Debt Load

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Commentary

China’s economic troubles have, in many ways, emerged from past policy blunders. Take, for instance, the stubborn and headline-grabbing property crisis. The economic and financial ills have flowed directly from three grave policy mistakes.

First, planners in Beijing hyped residential property development for decades. At its peak, property development accounted for approximately 30 percent of China’s economy.

Second, in 2020, these same planners precipitated failures among developers by suddenly removing that public support.

Third, Beijing waited an inordinate amount of time before moving to mitigate the financial repercussions of those failures. In another severe error of this sort, it has become increasingly clear that Beijing has relied excessively on debt—much of it external—to finance growth.
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Debt statistics are striking. According to Beijing’s State Administration for Foreign Exchange, China carries an external debt burden of some 17.6 trillion yuan (about $2.4 trillion), about half of which is denominated in dollars. This figure excludes debts owned by Hong Kong, Macau, and, of course, Taiwan. The amount dwarfs amounts owed by other high-debt nations, such as Mexico, India, and Brazil. To be sure, China has a much larger economy than these other countries. Still, the debt it owns amounts to a not insignificant 13 percent of its economy.

With government revenues in China amounting to approximately 22 trillion yuan per year, it would take some 80 percent of a year’s revenues to discharge this debt. Assuming conservatively that this debt carries an interest expense of about 5 percent, the carrying costs to foreign lenders take up some 4.5 percent of the country’s annual budget.

For now, the amount remains manageable. There is no talk about default, nor should there be. Nonetheless, the debt load is far from comfortable. It is sufficient to constrain any new external debt issuance and, therefore, constrain Beijing’s ability to deal with the country’s financial and economic troubles. At the same time, the debt load severely complicates Beijing’s options in dealing with the trade pressures from the United States and, more recently, Europe.
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A China Shipping cargo container sits stacked at the Port of Long Beach in Long Beach, Calif., on April 10, 2025. Patrick T. Fallon/AFP via Getty Images
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Certainly, attention to this large debt load limits how far Beijing can go with economic stimulus. In the past, infrastructure spending has been Beijing’s default means of accelerating growth. Lavish spending on roads, ports, dams, bridges, and similar infrastructure has long driven growth in China’s overall economy and garnered attention and praise in the Western media.

Indeed, the need to finance this impressive infrastructure spending largely explains today’s debt burden. Now the accumulated burden imposes an admittedly vague limit on how much more of this sort of spending Beijing can do. The fact that local governments in China face similar debt constraints and need Beijing’s help further impedes the country’s ability to consider this time-honored approach to economic stimulus.
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The fact that a large part of external debt is denominated in dollars complicates Beijing’s efforts to shift the emphasis of its economy. The Chinese Communist Party (CCP) has made it clear that it wants to move away from an export-driven to a domestically driven growth engine. However, the need to service dollar-denominated debt will compel China to continue striving for a dollar surplus in its foreign account.

China has consistently run a huge surplus on its foreign trade account, much of it in dollars with the United States. But U.S. President Donald Trump’s aggressive moves on tariffs and other forms of trade restraint suggest that sufficient surplus dollar flows will be harder to get in the future, even as the need to service dollar-denominated debt impels a continued emphasis on an export surplus.

In the extreme, which at this point remains a distant event, China would have to utilize its official foreign exchange reserves or borrow in other currencies to meet its dollar-denominated debt obligations. But even far from such extremes, the existing dollar-denominated debt burden will likely impel China to retain the export-driven growth model it claims to want to move beyond, despite Trump’s obstructions.

The dollar debt load also complicates Chinese currency policies. In order to blunt the impact of Trump’s tariffs, Beijing has reason to devalue the yuan. A drop in the yuan’s value against the U.S. dollar would reduce the price of Chinese-made goods to Americans (paying as they do in dollars) and so hold up sales volumes despite the tariffs.

But a devaluation of the yuan would also mean that China would have to sell a lot more in the United States to get the dollars it needs to service what it owes in dollars. There are other currency considerations that further complicate currency policy decisions in Beijing, but this one also makes the decision on appreciation or depreciation fraught.

China still has options. It is not yet between the proverbial rock and a hard place. But there is no denying that Beijing is in an increasingly difficult economic, financial, and currency situation, and that every move, if it helps in one way, tends to hurt in another. It must be especially frustrating to Chinese leader Xi Jinping and his colleagues in power that much of this terrible pressure is the result of past CCP policy choices.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
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