China's debt interest costs are soaring above U.S. levels and growing faster than any other budget category as Beijing struggles to prop up growth | Fortune

The global economy is grappling with high levels of debt, and while the United States and Europe have recently raised concerns in financial markets, China's fiscal landscape is also becoming increasingly precarious. China's debt has escalated significantly in recent years, leading to a notable rise in interest payments on its borrowings, which are now consuming a larger portion of the government's budget.

According to estimates from the Conference Board, as reported by the Financial Times, debt servicing is projected to represent 19.2% of the central government's general public budget in 2023, an increase from 12% in 2014. This aligns with findings from the Center for Strategic and International Studies (CSIS), which indicated that 19% of Beijing's expenditures are allocated for interest payments. This percentage exceeds the 14% of the U.S. federal budget dedicated to interest, although it remains lower than Japan's 25.6%.

CSIS highlighted that China's interest payment expenditures have surged by an astonishing 341% from 2013 to 2025, outpacing growth in any other major budget category. In comparison, total government spending during the same period has risen by 102%, with allocations for social security and employment increasing by 207%, expenditures on science and technology climbing by 137%, and defense spending up by 141%.

Meanwhile, the U.S. has also experienced a significant rise in debt interest spending, which has increased approximately 390% since 2013, reaching $1 trillion—an amount that surpasses the Pentagon's budget. However, the two largest economies are diverging in critical aspects that could influence their future economic growth and levels of indebtedness.

The U.S. economy is showing signs of acceleration, bolstered by advancements in artificial intelligence. Despite facing high inflation, consumer spending has remained strong, and unemployment rates are low, signaling near full employment. Additionally, stock markets are performing well, often approaching record highs. Major technology firms are actively issuing bonds for data centers and chip acquisitions while also raising capital through new stock offerings and initial public offerings.

In contrast, China's GDP growth has been slowing and is projected to fall short of its annual target of 4.5% to 5%. While sectors reliant on exports are experiencing rapid growth, external trade barriers, consumer reluctance to spend, weak investment levels, and a struggling property market are all contributing to a lackluster economic performance. Furthermore, Chinese stock markets have not shown significant vitality.

In response to economic pressures, Beijing has directed state banks to finance key industries like electric vehicles, robotics, artificial intelligence, and renewable energy. However, this pressure to lend has led to questionable borrowing practices, with business debt doubling since 2019 while revenues have only increased by 30%. Many creditors are extending loans to keep unprofitable firms afloat, even as nearly one-third of these businesses are operating at a loss.

China's state-driven growth model appears to be losing momentum, and the rapidly increasing debt is a critical warning sign. Local governments frequently attempt to stimulate favored industries through low-cost loans, which exacerbates the situation. The International Monetary Fund has reported that China’s general government gross debt reached 107% of GDP in 2023, up from 41% in 2015, with projections suggesting it could hit 124% by 2030.

A broader measure of debt across both public and private sectors presents an even bleaker outlook. According to estimates by Capital Economics, China's total debt-to-GDP ratio, excluding the financial sector, has doubled since 2010 and now exceeds 300%. In comparison, the U.S. recorded a total public and private debt ratio of about 265% of GDP last year, which has significantly declined from the peaks reached during the pandemic.

As China's debt surge yields diminishing returns, it is increasingly becoming a hindrance to economic growth. Mark Williams, chief Asia economist at Capital Economics, noted in May that the very factors driving government borrowing and lenient lending practices by state-owned banks are intended to support economic growth and avert job losses. However, the prolonged credit boom, lasting 18 years, has resulted in a banking system that sustains unproductive firms, widespread industrial losses, and persistent overcapacity.