Xi pours trillions into AI and military power as China's debt burden weighs on world economy

As Chinese President Xi Jinping pours trillions of dollars into transforming China into a technological and military superpower, the country's debt is mounting rapidly — and the consequences are increasingly being felt around the world.

Debt burdens have been rising in many countries, unsettling investors, but few have seen as steep an increase as China, the Wall Street Journal reported Saturday (local time).

Last year, China's non-financial sector credit — a broad measure of borrowing by businesses, the government and households — surpassed 300 percent of GDP, more than 60 percentage points higher than at the end of 2019 and well above the United States. According to the Bank for International Settlements, China's non-financial sector credit has grown by more than $43 trillion since Xi assumed power at the end of 2012.

Much of that borrowed money has been wasted. Vast sums flowed into factories and apartments for which there was insufficient demand, swelling the debts of companies and local governments.

Economists nonetheless believe an immediate financial crisis is unlikely. A large share of the debt is backed by domestic savings rather than foreign investors, who can pull their money out quickly when risks rise — making China's debt structure relatively insulated from sudden capital flight.

But the rapid buildup is increasingly becoming a global problem.

Chinese companies burdened with heavy debt are producing far more cars, solar panels and electronics than the domestic market can absorb. The surplus is being offloaded onto overseas markets at cut-rate prices, swelling China's trade surplus to around $1 trillion.

The flood of Chinese exports, including electric vehicles, has fueled a sharp backlash in Europe and deepened trade tensions with other countries. Yet Beijing shows no sign of changing course, the Wall Street Journal said.

The enormous debts carried by loss-making companies present another challenge. As economic growth slows, much of that debt has become difficult to repay. But cutting off new loans to those companies risks saddling China's state-owned banks with massive losses.

"Changing this system requires accepting significant losses, and I don't think the Chinese government is ready to do that yet," said Camille Boullenois, associate director at research firm Rhodium Group. "The most likely scenario is a gradual deterioration — a slow decline of the financial system and ever-diminishing efficiency in generating economic growth."

While Beijing has put debt resolution on the back burner, Xi has focused investment on strategic priorities such as new technologies and military power. Chinese officials see this as a moment to cement the country's status as a great power on par with the United States, viewing investment in key technologies — AI, space and energy — as essential.

The Chinese government maintains that its debt is manageable, pointing out that central government debt stands at roughly 30 percent of GDP in recent years, lower than that of the US federal government.

Most of China's debt, however, sits with local governments. Financing vehicles linked to those governments ramped up borrowing to hit growth targets and sustain local employment, accumulating trillions of dollars in new debt over the past several years. Many of these entities ventured into local real estate development and have been badly hurt by a property downturn that has dragged on for years.

The IMF estimates China's broad government debt — combining official local government borrowing with local government financing vehicle, or LGFV, liabilities — reached 127 percent of GDP last year, up sharply from 98 percent in 2020.

Corporate debt has also grown. Companies have continued to take on more debt even as profitable investment opportunities have dwindled. According to McKinsey, China's corporate debt as a share of GDP last year was double the global average, with cheap borrowing costs a key driver. Rhodium Group data citing China's central bank shows that more than half of new corporate loans issued at the end of last year were priced below the loan prime rate — the benchmark applied to banks' best customers — a far higher share than just a few years ago. The median lending rate for listed Chinese manufacturers last year was about 2.4 percent.

Many economists argue that breaking the debt cycle requires Beijing to make boosting household consumption its top priority. According to the World Bank, household consumption accounted for 40 percent of China's GDP in 2024, far below the nearly 70 percent recorded in the United States.

GDP growth in the second quarter of this year came in at 4.3 percent year-on-year, the slowest pace in more than three years, with exports accounting for much of the expansion.

As Chinese authorities signal their intention to maintain current policies, Jakob Gunter, head of the economy and industry program at the Mercator Institute for China Studies in Germany, said the strains are becoming visible. "We are witnessing the current Chinese economic system hitting certain limits," he said. "Local governments are subsidizing companies that are running at a loss to keep them alive, but the fact that these companies are running at a loss also means there are no profit-related tax revenues for the government to collect."