China’s Debt Is a Strategic Problem

Commentary

Much has been written about China’s rise. Far less attention has been paid to a more important question: whether China’s economic model can sustain it.

For more than three decades, China has been cited as an economic expansion success story once it eased its central planning efforts and ceased experimenting with disastrous policies such as the Great Leap Forward, with some crediting it for transforming itself into the manufacturing centre of the world. Yet beneath that success lies a growing structural weakness that Canadian policymakers should watch closely: debt.

The conventional wisdom in many Western capitals portrays China as an unstoppable economic force. The reality is more complicated. China remains an economic and military powerhouse, but it is also one of the most indebted major economies in the world. According to the Bank for International Settlements, China’s combined government, corporate, and household debt now exceeds 300 percent of GDP. That level of leverage would be concerning in any economy. It is particularly concerning in one experiencing slowing growth and a shrinking population.

The problem is not primarily Beijing’s central government debt. The larger challenge lies in the vast network of local government borrowing accumulated during decades of investment-led growth. Municipal governments financed infrastructure projects through Local Government Financing Vehicles, often borrowing outside formal government balance sheets. Today, these entities are estimated to hold more than 60 trillion RMB in debt, equivalent to approximately C$11 trillion, a figure that exceeds the annual economic output of Germany.

Much of this borrowing was tied to China’s property sector. At its peak, real estate and related industries accounted for roughly 25 to 30 percent of China’s GDP. Local governments sold land-use rights to developers. Developers borrowed heavily to build housing. Rising property values generated revenues that financed additional infrastructure spending. It was a model that appeared self-sustaining until the underlying assumptions began to fail.

The collapse of major developers such as Evergrande exposed the fragility of the system. Property prices have fallen, construction activity has slowed, and local government revenues have weakened. In 2024 alone, land sale revenues declined by approximately 16 percent nationwide. The financial engine that helped support local government spending for more than two decades is no longer performing as it once did.

China’s challenge is compounded by demographics. The country’s working-age population has already peaked and is now declining. In 2025, China recorded only 7.9 million births, among the lowest levels in its modern history. Meanwhile, the share of citizens over 65 is projected to increase from approximately 15 percent today to more than 30 percent by 2050. Debt is far easier to manage when an economy is growing rapidly and adding workers. It becomes far more difficult when growth slows and retirees become a larger share of the population.

China is, in many respects, aging before it becomes rich. Its demographic profile increasingly resembles Japan’s, but its per capita income remains far below that of Japan, Canada, or the United States. These are not temporary headwinds. They are structural realities that will shape China’s economic performance for decades.

There is also an external dimension to China’s debt burden. Since 2013, Beijing has committed more than US$1 trillion through its Belt and Road Initiative. These investments have expanded Chinese influence across Asia, Africa, Latin America, and parts of Europe. They have also created substantial financial exposure. Research suggests that more than half of China’s overseas lending portfolio is now concentrated in countries experiencing elevated debt distress. Loans intended to expand influence are increasingly becoming liabilities requiring restructuring and financial support.

Some observers interpret these trends as evidence that China is headed for collapse. That conclusion is premature. China retains enormous strengths, including a massive industrial base, substantial domestic savings, world-class manufacturing capacity, and a government that exercises extraordinary influence over the banking system. Beijing can compel banks to extend loans, restructure debt, and delay financial crises that might otherwise emerge. The more likely outcome is not collapse, but slower growth.

For Canada, however, slower Chinese growth carries significant geopolitical implications. Economic weakness does not necessarily reduce military ambition. China’s official defence budget reached approximately US$245 billion in 2025, making it the second largest military spender in the world. History suggests that governments facing economic pressure often place greater emphasis on nationalism and military prestige as sources of domestic legitimacy. A slower-growing China may not become less assertive. It may become more determined to secure strategic objectives while it still possesses relative strength.

At the same time, excess industrial capacity will increasingly seek foreign markets. Chinese producers of electric vehicles, batteries, solar panels, steel, and advanced manufacturing equipment will need customers. This will create growing trade friction with Western economies, including Canada. Beijing’s need for stable access to resources will also intensify. Canada possesses critical minerals, energy resources, advanced agricultural production, and strategic Arctic access. These assets will become increasingly important in an era of great-power competition.

Canadian policymakers must recognize that China’s debt problem is no longer merely an economic issue. It is a strategic issue. Debt influences growth, military spending, trade behaviour, and geopolitical decision-making. Canada should avoid two analytical mistakes: assuming China’s rise is inevitable or assuming its decline is imminent. Neither view reflects reality.

China remains a formidable competitor confronting debt exceeding 300 percent of GDP, trillions in local government liabilities, a property sector correction affecting nearly one-third of economic activity, declining birth rates, and a rapidly aging population. The task for Canada is not to predict China’s future. It is to prepare for it.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.