China May Be Hiding the Largest Debt Crisis in the World

According to Beijing's own published numbers, by the end of 2025, China's official government debt stood at roughly 96 trillion yuan. 41 of it is central government debt, and then roughly 55 trillion is local government debt. Now China's GDP last year was 140 trillion, and so using these official numbers, we arrive at a debt-to-GDP ratio at roughly 68.5%. At first glance, it appears low because when you compare that to the rest of the world, the G20 countries, and this is based on an IMF report released last year, the average government debt ratio among G20 countries was about 118%, and then the average among G7 countries rose to 123. So officially, China appears to be in much better shape than most major economies, but this is where things become misleading, because those numbers mainly reflect explicit, officially recognized debt. And once those hidden liabilities are added back to the picture, China's debt story begins to look very different. Let's go through the hidden debts one by one. Officially, treasury bonds are the core component of China's central government debt, but they're not the whole picture. And by the end of 2025, China's outstanding treasury bonds, or this bucket, is roughly 41 trillion, and that's what this 41 trillion at the top is. But there is also a second category that's not listed in the fiscal budget, and these are liabilities that may not formally appear within the budget, but they're still tied to the central government's responsibility. So examples include foreign debts owed by central government departments and affiliated institutions or agencies, as well as borrowing linked to major national infrastructure projects, such as the South to North Water Diversion Project. But the problem is that Beijing has never clearly disclosed the full scale of this category, so it's difficult to quantify that. But some people have done their due diligence, and what they found is that according to the national audit results on government debt, officially known as announcement number 32, and this document is from 2013, it was more than 12 years ago, that document stated that by the end of 2012, the central government carried approximately 9.4 trillion yuan in debt obligations requiring repayment. Of that, roughly 7.76 trillion yuan consisted of treasury bond debt. So in other words, if you do the math, about 82% of central government debt at the time existed in the form of treasury bonds. So if we assume that this ratio remained broadly similar through 2025, now we can use the current treasury bond balance to estimate the central government's broader official debt burden. If we apply that to the 41% total treasury bonds in 2025, you get 50 trillion. And that's basically the broader, it's an estimated broader central government debt by the end of 2025. So the difference is 9 trillion, right? The difference between the 41 and the 50 is 9 trillion, and this 9 trillion, according to this methodology, is tied to central government agency or debts affiliated with the central government agencies or those state-sponsored infrastructure projects. And this brings us, keep in mind this 9 trillion, okay, we'll come back to it later. And this brings us to another important issue. Most people have heard about hidden local government debt, especially LGFVs, but far fewer people realize that Beijing's central government itself also carries enormous amounts of hidden or contingent debt. And the 9 trillion that we just calculated is only one piece of that. The first one is called policy bank financial bonds. These three institutions rely heavily on bond insurance for funding. Their bonds are approved by the state council and distributed throughout China's state-controlled financial system under guidance from the central bank. These policy bank bonds are often described as secondary sovereign bonds or quasi-sovereign debt. But unlike, here's the key point, okay, unlike formal government debt, their insurance is not constrained by official government debt ceilings. So in practice, they function as a hidden financing channel for the central government. And Beijing has increasingly relied on this mechanism over time. In 2025, insurance of policy bank bonds was up nearly 25% from the previous year. By the end of 2025, outstanding policy bank bond balances had exceeded 28 trillion yuan. Let's talk about this company. It's called Central Huijin Investment Limited. Now, this company is actually one of the most important and least understood institutions inside China's financial system. On paper, it's an investment company, but in reality, it functions more like the CCP's financial holding company, a state rescue vehicle and a strategic control mechanism over China's banking and financial system. It was established in 2003 during China's banking crisis era. So today, this company is a major shareholder in many of China's most important financial institutions. In many ways, it operates almost like a quasi-central bank financial vehicle and giving Beijing a mechanism to influence banks and financial markets through ownership structure rather than direct administrative orders. And this is why Huijin matters so much when discussing China's debt problem. And this company began issuing bonds in 2010, and such insurance has since become increasingly routine. Now, there's no clear disclosed official figure for the company's total outstanding bond balance. So there's no official number, but based on interbank bond market patterns and institutional issuance history and available financial disclosures, a rough estimate put Central Huijin's outstanding bond balance at somewhere between 300 billion and 800 billion yuan. And it could also potentially approach 1 trillion yuan. And then there's this piece, China State Railroad Group. The China Railway Construction Bonds is another major category of quasi-sovereign debt. These bonds were first issued in September 1995. So they were issued by China State Railway Group rather than the Ministry of Finance. The railway system remains fully state-owned and continues to enjoy implicit government backing. At one point in 2015, China Railway Corporation's debt was estimated at 4.1 trillion yuan. That was in 2015, 10 years ago. But what we've seen is in the following decade, China continued aggressively expanding its high-speed rail network and infrastructure, including many routes that don't generate much revenue. Again, it's an estimate or guesstimate. It's somewhere between 7 to 9 trillion yuan. It can go higher. But this is based on the 4.1 outstanding balance that was in 2015. So when we add everything together, the picture becomes much larger than Beijing's official numbers suggest. I'm talking about the central government. So the hidden central government debt, here you have the agency debt of 9 trillion. You have the policy bank's bond, 28 trillion. You have central Huijin bonds, up to 1 trillion. And then you have the railway systems, between 7 to 9. And there might be other quasi-sovereign financing structures that we have omitted here. So that brings us to the next player of China's debt crisis, the local government debt. A more important point is, in terms of the explicit debts, China's local government debt is actually larger than central government debt. And that's highly unusual. In most major economies, central government debt typically makes up the majority of total government debt. Because central governments possess greater fiscal flexibility, lower borrowing costs, and greater policy tools. And this is attributable to the 1994 tax sharing reform that I told you about in my last program, talking about China's economy. When was that? April the 30th? Remember I told you that as a result of the 1994 tax sharing reform, there's a distorted fiscal relationship between the central and the local governments. When Beijing centralized revenue, while local governments retain enormous share of spending responsibilities. Now that imbalance also applies to debts. So local governments are pushed to be ever-dependent on borrowing, land sales, and LGFVs, while the central government enjoys a revenue surplus and a smaller fiscal liability. And this is the source of the real problem. This distorted fiscal relationship between central government and local government, in my opinion, is the source of China's debt problem. And this is why this problem will not go away. It cannot be fixed. So now let's talk about the real problem, the local government's hidden debt. Now in November 2024, China's ministry of finance announced that the nationwide balance of local government's hidden debt stood at only 14.3 trillion yuan at the end of 2023. That number was widely questioned. Nobody believed it was so low. It was only 14 trillion. Now this January, January 28th, IMF released a report estimating that debt tied to LGFVs which is the core component of China's hidden local government debt, had already reached approximately 66 trillion yuan in 2024. And by 2025, that number was approaching 72 trillion yuan. So here's a question for you. Why is there such a massive gap between China's 14 trillion and IMF's 72 trillion? Or you could say 66 trillion if I compare Apple to Apple. The answer explains the fundamental causes of China's debt problem. According to China's ministry of finance, purely commercial loans taken on by LGFVs should not be counted as government debt. The authorities recognize only those liabilities for which local governments have explicitly promised repayment. The IMF argues that many LGFVs invest heavily in low return public infrastructure projects such as highway, high speed rails, and these projects have cash flows that are so low that they cannot cover their debt obligations. So you see, Beijing and IMF have different definitions on what government debt and corporate debt are. And honestly, the CCP often treats government liabilities as corporate obligations in order to keep official debt figures artificially low. And that blurred boundary between state finance and corporate finance is one of the defining characteristics of China's economic problem or debt problem. Now, meanwhile, Goldman Sachs produced even higher estimates. It estimated that China's hidden local government debt may have primarily tied to LGFVs, might have reached approximately 91 trillion yuan. All right, let's talk about another bucket, pension liabilities. This is another hidden layer. And it's also unique to China. This issue is extraordinarily complex because it sits in the gray zone between the local and central government. It's not clear whose bucket it is. Legally and administratively, most pension obligations remain local government responsibilities. But economically and politically, a growing portion is increasingly becoming an implicit central government liability. So formally speaking, local governments still administer and fund much of the pension system. But because many provinces are already under severe fiscal strain, pension payments increasingly depend on transfer payments and support from the central government. So in practice, Beijing is gradually becoming the ultimate guarantor of pension stability. For many years, contributions from current workers were used primarily to pay existing retirees, rather than being fully deposited into individual retirement accounts. And this created massive so-called empty accounts. There are pension promises that existed on paper, but were not backed by real assets. All right, so back in 2015, estimates suggested that these empty urban pension accounts, or there's a shortfall of 4.26 trillion yuan at the time. Now, if you look at China, China is entering an era of rapid aging, slower economic growth, shrinking labor supply, and weakening local government finances. So that liability may fall somewhere in the range of 15 to 30 trillion yuan. So let's put everything together. And now let's add everything up. So you have China's total debt is between 226 trillion to 264 trillion, because you have 132 to 168 trillion hidden debts between the local and central governments. Those are not shown in the previous calculation of debt to GDP ratio. So if we adjusted the debt to show the fully loaded debt, then you have the debt to GDP ratio at 170 to 180%, assuming China's GDP is 140 trillion. So that has already exceeded that of the US and the G20 and the G7 countries. Now, those of you who have followed my channel for several years already know that I personally do not believe China's GDP figures are entirely true. I believe China has been overstating its real economic growth for a long time. And I once did a program that estimated China's real GDP. It's somewhere half of what it is. So if China's actual GDP is significantly lower than officially reported, then the debt to GDP ratio will be far more alarming. So for example, if we assume that China's real effective GDP is only half of the official number, then the country's debt to GDP ratio is going to double at 340 to 360% because the denominator is smaller. And if that's even remotely close to reality, then China's debt problem may be far larger than most people currently realize. That, my friends, may be the real answer to China's debt problem.