China’s expanding debt burden threatens to constrain economic growth even if it does not trigger a financial crisis, Capital Economics warns. Mark Williams, the firm’s chief Asia economist, estimates that total debt outside the financial sector has doubled since 2010 and exceeded 300% of gross domestic product.
In a note issued in late April, Williams said borrowing by companies and central and local governments had continued to outpace GDP growth despite weaker household borrowing following the property-market downturn. His analysis concerns borrowing across the economy, rather than central government debt alone.
Public-sector borrowers account for nearly 40% of outstanding debt when local government financing vehicles are included, Williams calculated. His comparison places China’s debt ratio above those of the United States, eurozone, United Kingdom and many emerging markets, with Japan among the few major economies carrying a higher ratio.
A reported comparison put combined U.S. public and private debt at about 265% of GDP in 2025, below pandemic-era highs. That broader measure differs from comparisons focused solely on federal borrowing.
Local government debt remains a policy priority
China’s State Council addressed local government debt risks at a May 9 meeting chaired by Premier Li Qiang. Its statement called for improving policies that support debt resolution, strengthening local governments’ repayment capacity and completing existing debt-resolution tasks on schedule.
The statement also called for long-term mechanisms to prevent new hidden debt. More broadly, the meeting urged continued efforts to address risks involving property, local government debt and small and medium-sized financial institutions.
Corporate borrowing outpaces revenue growth
Capital Economics estimates that Chinese business debt has doubled since 2019, while revenues have risen about 30%. Williams argues that creditors’ willingness to roll over loans keeps struggling companies operating and diverts financing from healthier borrowers.
He links that lending to industrial overcapacity and deflation, arguing that continued support for unproductive firms sustains excess production and financial losses. These effects form part of his explanation for how rising debt can weigh on growth without causing an abrupt banking crisis.
A growth constraint rather than an imminent crisis
Capital Economics judges the risk of a debt-triggered crisis to remain low in China’s state-dominated financial system. Williams also noted that the system had survived the property-market crash.
China has high domestic savings and capital controls, alongside a financial sector dominated by the state. Those features help explain the distinction between the risk of a sudden financial crisis and the longer-term economic costs identified in Williams’s analysis.
Williams argues that government borrowing and bank lending intended to support growth and prevent job losses have helped sustain unproductive firms and excess capacity. In his assessment, the resulting misallocation of physical and financial resources will continue to constrain growth.
