China's Soaring Debt Bill Is Eating Away Its Ability to Boost the Economy

A Budget Squeezed From the Inside

China's government has a spending problem — not because it spends too little, but because a rapidly growing slice of every yuan it spends goes straight to paying interest on debt. China is projected to allocate 19.2% of the central government's general public budget to debt-servicing payments this year, up from just 12% in 2014, according to Conference Board estimates cited by the Financial Times. That's nearly one in five dollars — before a single school is built, a single road is paved, or a single household receives a subsidy.

China's spending on interest payments skyrocketed 341% between 2013 and 2025, faster than any other major budget category. By comparison, total spending jumped 102% in that span, with outlays on social security and employment up 207%, science and technology up 137%, and defense up 141%. The debt bill, in short, has outrun everything else — and economists warn it is now actively constraining Beijing's options for reviving a sluggish domestic economy.

The Stimulus Dilemma

Debt servicing costs now command roughly 19% of Beijing's expenditures — putting China's interest burden above the 14% share carried by the U.S. federal budget, though it remains below Japan's 25.6%. The comparison with the United States is striking: it highlights a growing divergence between the world's two largest economic superpowers. While the U.S. economy accelerates amid resilient consumer spending and an artificial intelligence boom, China's fiscal health faces heavy strains from ballooning borrowing costs and an expansive mountain of public and private debt.

China's combined government, corporate, and household debt reached 302.3% of GDP as of the third quarter of last year. China's official general-government debt is projected to reach 75.1% of GDP in 2026. A broader measure that includes local-government financing vehicles and other off-balance-sheet liabilities is projected to reach 135.3% of GDP. That broader figure is the one that keeps analysts up at night — because much of it was accumulated quietly, through channels designed to keep headline deficit numbers looking respectable.

Weak Demand, Fewer Tools

China's historic growth model, which relies heavily on investment and state direction, faces mounting challenges, reflected in prolonged domestic demand weakness and deflationary pressures. The protracted property sector contraction, spillovers to local government finances amid a debt overhang, and subdued consumer and business confidence have led to persistent weakness in domestic demand and intensifying deflationary pressures. Property sales have dropped 65% from the 2020 peak, and construction has slowed to its lowest since before 2000.

China's leaders have refrained from adopting broad stimulus measures advocated by many economists to boost domestic consumption, partly in an effort to reduce debt levels, instead using narrow stimulus measures and government fixed-asset investment in manufacturing to boost growth. Meanwhile, many loans went to questionable borrowers. Business debt has doubled since 2019, while revenues are only 30% higher. That gap between borrowing and earnings is a warning sign of its own.

A Narrowing Path Forward

With many local governments now prioritizing debt management over infrastructure investment, debt swaps are diverting resources away from other spending priorities. A persistent imbalance between supply and demand compounds the problem: China's industrial capacity has expanded rapidly, reinforced by strong policy support for manufacturing, advanced industries, and supply-chain security, but household demand has not kept pace.

After expanding by 5% in 2025, GDP growth is expected to slow to 4.5% in 2026, with the contribution of net exports falling given prolonged effects of tariffs and trade policy uncertainty. The fundamental tension is hard to escape: China needs to spend more to reignite consumer confidence, but spending more means borrowing more — and borrowing more means even larger interest bills crowding out future budgets. Until Beijing finds a way to grow its economy from the demand side rather than the debt side, that cycle is likely to keep tightening.