Chinese President Xi Jinping’s drive to transform China into a leading technological and military superpower is linked to a rapidly escalating debt burden that is weighing heavily on the domestic economy and rippling across global markets. Since Xi assumed office in late 2012, China’s credit to the nonfinancial sector—encompassing corporate, government, and household borrowing—has surged by more than $43 trillion, reaching over 300% of gross domestic product (GDP) as of last year. This marks an increase of 60 percentage points from the end of 2019 and places China’s debt load far above that of the United States.

Much of the increased borrowing has funded factories and residential projects that have failed to attract sufficient demand, contributing to price competition that squeezes profits and wages. While some economists suggest an immediate financial crisis is unlikely, citing China’s reliance on domestic savings rather than volatile foreign capital, the implications of this debt accumulation are increasingly global. Chinese companies, burdened by debt servicing pressures, have been exporting excess production of vehicles, solar panels, and electronics to international markets, resulting in a substantial trade surplus exceeding $1 trillion annually. This has heightened tensions with trading partners, particularly in Europe, where there is growing concern over the influx of Chinese electric cars and other goods.

Despite these pressures, Beijing remains committed to its current economic strategy, which prioritizes investment in emerging technologies such as artificial intelligence, space exploration, and energy, alongside military modernization. Chinese officials view this period as a critical opportunity to cement the country’s status alongside the United States as a global power.

A key challenge lies in the substantial debt held by many unprofitable companies, especially those linked to local governments. Efforts to reduce credit allocations to such entities risk creating significant losses for state-owned banks. Analysts caution that attempts to reform the system may encounter resistance due to the potential for financial disruption. Camille Boullenois, associate director at the Rhodium Group, noted that the government appears unprepared to absorb these losses, making a slow deterioration in financial efficiency more likely than abrupt reform.

While central government debt levels have remained relatively modest at about 30% of GDP, local government entities and their associated financing vehicles have accumulated substantial liabilities, often tied to real estate development projects now hampered by a prolonged property market downturn. According to the International Monetary Fund, the combined official and local government debt reached an estimated 127% of GDP last year, up from 98% in 2020.

Observers point out that local governments have intervened to sustain loss-making enterprises, which undermines their tax base and limits available public revenues. Jacob Gunter, head of the economy and industry program at the Mercator Institute for China Studies in Berlin, described the situation as a system approaching its operational limits, with local authorities subsidizing entities that generate no profits.

Despite these mounting risks, Chinese officials signal a continued commitment to the existing trajectory, seeking to balance debt management with strategic investments designed to bolster China’s long-term global standing.