Published on Oct 16, 2026
This article was written by Adem Tumerkan
Content Editor, Dunham | 2025 ThinkAdvisor Luminaries Award Winner | 2026 Wealthies Finalist, Thought Leader of the Year | Macroeconomics, markets, geopolitics & global trends
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China’s total debt-to-GDP has doubled since 2010 and topped 300%. Its macro leverage ratio hit 308.2% in 2026, government interest payments jumped 341% since 2013, and hidden local government debt adds another ~50% of GDP on top of official figures. Record exports are surging, but they can’t fix a domestic economy where households and businesses keep pulling back.
Debt.
Everyone’s worried about it right now. Just maybe not in the right places.
The surging U.S. deficit makes the news every week. France can’t find a buyer willing to touch its bonds unless yields are much higher. And Japanese yields are spiking, turning its own mountain of debt into a slow-motion crisis.
All three are real problems. All three are getting the press they deserve.
But what if I told you there’s another country that probably has the worst debt dynamics of any major economy today?
I’m talking about China.
So, contrary to what the mainstream media highlights, China is flying under the radar in the current fiscal crisis going on around the world. But that doesn’t mean it won’t suddenly become an issue.
And that puts Beijing in an extremely fragile position.
What China’s Macro Leverage Ratio Actually Means
China tracks its debt load through something called the macro leverage ratio.
Simply put, it’s a measure that tracks total debt in the economy (government, businesses, and households).
When the ratio rises, it means that debt is growing faster than the economy (GDP). And when it falls, it means the economy is growing faster than debt.
Well, China’s National Institute of Finance and Development put that ratio at 308.2% in the second quarter of 2026¹ – meaning China owes more than 3x its yearly economic output.
But the size of the debt is only part of the problem – because there’s also how quickly it grew.
For example, macro leverage was only 231% a decade ago (Q2/2016) vs. 308.2% currently – meaning its debt surged over a third relative to the size of the economy.
Now, keep in mind, there’s no magic number where too much debt becomes unsustainable (especially in this era).
But historically, such rapidly growing debt relative to the economy is what threatens financial and economic stability.
Ironically, even with record-low interest rates in China, interest payments on debt now eat up 19.2% of the central government’s general public budget - up from just 12% in 2014, and newer CSIS² figures put the 2025 share at 19%.
To put this into perspective, interest costs run about 14% of the U.S. federal budget and 25.6% in Japan.
But as I’ve mentioned before, it’s the rise that matters more here than the total share. Why? Because the trend will dictate the future total (think of it like money going in and out of your bank account. That will drive the total balance eventually).
And between 2013 and 2025, government spending on debt jumped 341% - the fastest-growing line item in the entire budget³.
That’s debt compounding on debt, and the government paying more every year just to stand still.
China’s official government debt-to-GDP via the IMF measure sits at 107% this year - up from just 41% in 2015⁴.
That’s already a near-tripling in a little over a decade and only about 19 percentage points below the U.S. figure of 126%
But that number doesn’t even count the debt local governments keep off the books - routed through local government financing vehicles (LGFVs).
In short, these LGFVs⁵ are state-owned companies that let local governments borrow by proxy - funding roads, transit, and other projects while keeping the debt on a company’s books instead of their own.
This is what we call “backdoor borrowing” – it’s there, we just don’t see it unless we look for it.
The IMF estimates that hidden LGFV debt alone runs around $7-11 trillion, close to 50% of GDP⁶ - meaning if we add that to the “official” number, then China’s government liabilities are closer to 130% of GDP (expected to surpass 150% by 2030).
That means it may already be more than the U.S. government's debt to GDP. . .
Beijing has tried to contain the problem through debt swaps and restrictions on new borrowing. Yet it hasn’t seemed to work.
According to the IMF estimates, LGFV debt continued growing through 2025 and likely did in 2026.
And here’s the irony.
Cutting debt is the surest way to turn this trend.
But reining in local government debt now would have significant risks for China’s economic growth.
For example, if local officials cut borrowing, they’ll be forced to cut spending – thus shelving projects and scrambling for other revenue sources. That would weaken demand when China desperately needs more of it.
Keep borrowing to fund more unprofitable parks and railways, and the debt burden will grow. But cut too sharply, and growth would suffer.
That’s the bind China faces.
Normally, a country can try to grow its way out of a debt load like this.
China’s problem is that its own economy keeps stepping on the brake.
Business debt has doubled since 2019 - while corporate revenues are up only 30% over the same stretch⁷. The housing downturn continues, with existing-home prices down more than 22% nationwide since 2021⁸. And nearly a third of listed firms are losing money⁹, and creditors keep rolling over loans just to keep them standing.
Meanwhile, households are deleveraging¹⁰ on their own.
Short-term consumer loans fell 8.3% in September from a year earlier - the steepest decline on record. Falling home sales mean fewer mortgages, while cautious consumers are less willing to borrow.
As I’ve written before about China’s balance sheet recession¹¹, paying down debt can make sense for each household. But when enough households do it at once instead of spending, the economy tips over.
Businesses earn less, growth slows, and unemployment rises.
The only bright side in all of this is China’s booming export industry.
But winning abroad hasn’t been enough to repair the weakness at home.
China’s massive export engine is running overtime.
September exports rose about 36% from a year earlier, while imports jumped 31%. The monthly trade surplus reached almost $134 billion, pushing the January–September (first 9mo of the year) total to $938 billion - on track to exceed 2025’s record $1.2 trillion¹².
Those are historic (and counting) numbers.
And they’re still not enough to fix things at home.
For example, look at Japan.
For decades, strong exports helped support its economy after the bubble burst in 1991, but it couldn’t resolve the damaged balance sheets and weak private demand behind its long stagnation.
China is staring at the same mess¹³.
Its factories can compete abroad, but cautious households and a prolonged property slump have left domestic demand struggling to keep pace. That makes overseas buyers more important to sustaining growth and managing its debt.
But those buyers come with governments that have industries and jobs of their own to protect.
Said another way, China’s too large to keep leaning harder on exports without adding to global trade tensions.
Beijing is already facing trade pressure on two fronts via the U.S. and increasingly the EU - where disputes have spread beyond electric vehicles to other industries (as I’ve written before¹⁴).
And that’s the risk.
Foreign markets can become harder to sell into before Chinese consumers are ready to spend again.
Record exports can help carry the economy. But relying on the rest of the world to keep buying more leaves China exposed - especially when weak domestic demand and heavy debts remain unresolved.
When you hear that China’s about to overtake the U.S. economy or replace the dollar, remember how much those predictions leave out.
China remains an industrial powerhouse. But behind its export records are heavily indebted local governments, a 2008-esque property bust, and households reluctant to spend. Those problems make sustained growth harder - and increase its reliance on foreign buyers just as trade barriers threaten that support.
None of this means China is headed for a financial collapse tomorrow. Its state-controlled banks and largely domestic funding give Beijing tools to refinance debts and spread losses over time. But keeping borrowers afloat doesn’t necessarily make their investments productive or restore households’ willingness to spend.
The danger may be a longer zombie-like grind - more resources devoted to managing old debts, weaker returns on new investment, and slower growth. That’s closer to the warning Japan offers than a sudden 2008-style crash.
America’s debt problems are serious. And China’s problems don’t make them disappear.
But they should challenge the idea that China’s economy is in great shape.
China can remain a formidable competitor while struggling to repair its own economy. Both can be true.
The U.S. deficit gets wall-to-wall coverage every time Congress sneezes. China’s balance sheet gets a shrug - and that’s exactly the kind of blind spot a black swan likes to fly through - the kind I’d rather catch early than read about after the fact.
But as always, time will tell.
Is China’s debt worse than the U.S.’s? China has a higher debt burden when measured by total nonfinancial debt relative to GDP. Its combined government, household, and corporate debt has doubled relative to GDP since 2010 and now exceeds 300%. Over the same period, the U.S. ratio fell to around 265%. That comparison shows the size and direction of borrowing, rather than every aspect of debt risk.
What is China’s macro leverage ratio? China’s macro leverage ratio measures government, household, and corporate debt against the size of its economy. The National Institute of Finance and Development uses it to track borrowing across those sectors. A rising ratio means debt is growing faster than GDP. The ratio reached 308.2% in Q2 2026, meaning debt exceeded three times China’s annual economic output.
What is LGFV debt in China? LGFV debt is borrowing by local government financing vehicles, which are state-owned companies set up to finance local projects. Chinese local governments created these companies because laws restricted their ability to issue bonds or borrow directly. The companies borrow outside the local government’s own balance sheet, making that borrowing less visible in official government debt figures.
How much hidden debt does China actually have? The IMF estimates that LGFV debt alone totals between $7 trillion and $11 trillion, or close to 50% of GDP. That covers borrowing through local government financing vehicles rather than a complete tally of every hidden obligation. Because these companies borrow outside local government balance sheets, official figures may not fully capture the scale of local borrowing.
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