How Much Debt Is China?

China, which has lent nearly $1 trillion to about 150 developing countries, has been reluctant to cancel huge debts owed by countries struggling to make ends meet. That's at least in part because China is facing a debt bomb at home: trillions of dollars owed by local governments, most of their unlisted financial affiliates, and real estate developers.

One of Treasury Secretary Janet L. Yellen's top issues during her visit to Beijing this week is whether she can persuade China to cooperate more to address the growing debt crisis facing low-income countries. But China's state-controlled banking system is wary of accepting losses on foreign loans when it faces far greater losses on loans within China.

It's hard to know for sure because there's so little official data. Researchers at JPMorgan Chase calculated last month that China's overall debt — including households, companies and the government — already accounts for 282 percent of the country's annual economic output. That compares with an average of 256 percent in developed countries worldwide and 257 percent in the United States.

What sets China apart from most other countries is how quickly it accumulates debt relative to the size of its economy. In comparison, in the United States or even Japan, which is heavily indebted, debt increases are not too drastic. China's rising debt has more than doubled the size of its economy since the global financial crisis 15 years ago, making its management even more difficult.

China's loans to developing countries are small relative to its domestic debt, representing less than 6 percent of China's annual economic output. But these loans are politically sensitive. Despite strict censorship, regular complaints appear on Chinese social media that banks should be lending money to poor households and areas within the country, not abroad. Accepting huge losses on these loans would be extremely unpopular in China.

It started with real estate, which was overdeveloped, prices plummeted, and potential buyers were beleaguered. In the last two years, several dozen real estate developers who borrowed money from offshore investors have defaulted on these debts, including two more in recent days. Developers have struggled to keep paying off the much larger debt owed to banks in China.

Compounding the problem has been loans by local governments. Over the last decade, many cities and provinces have established special financing units that are lightly regulated and heavily borrowed. Officials use the money to cover day-to-day expenses, including interest on other loans, as well as building roads, bridges, public parks and other infrastructure.

Real estate issues and government debt overlap. For many years, the region's main source of revenue has been the sale of long-term leases for state land to developers. As many private sector developers run out of money to bid on land, these revenues fall. Local financing affiliates instead took out large loans to buy land the developer could no longer afford, at steep prices. As the real estate market continues to weaken, many of these financing affiliates are in trouble.

The debt was piling up. Fitch Ratings, a credit rating agency, estimates local governments have debt equivalent to about 30 percent of China's annual economic output. Their affiliated financing units have debt equal to an additional 40 to 50 percent of national output – although there may be double counting as local governments borrow and then transfer debt to their financing units, Fitch said.

For any government or business, loans can make economic sense if the money is used productively and efficiently. But borrowers who binge on debt that don't generate enough returns can get into trouble and struggle to pay back their lenders. That's what happened in China. As the economy slows down, more and more local governments and their financing units are unable to continue paying interest on their debts. The ripple effect means many areas lack the money to pay for public services, health care or pensions.

Debt problems also make it difficult for banks in China to accept losses on their loans to low-income countries. But many of these countries, such as Sri Lanka, Pakistan and Suriname, are currently facing considerable economic difficulties.

Nearly two-thirds of the world's developing economies depend on commodity exports. The World Bank forecast in April that commodity prices would be 21 percent lower this year than last year.

In 2010, only 5 percent of China's foreign loan portfolio supported borrowers in financial difficulty. Today, that figure is as high as 60 percent, said Bradley Parks, executive director of AidData at William & Mary, a university in Williamsburg, Va.

China is by far the biggest lender to developing countries, although Western hedge funds have also bought many bonds from these countries. Bonds tend to be at a fixed rate. But Chinese banks tend to lend dollars at adjustable rates tied to interest rates in the West. As the Federal Reserve has raised interest rates sharply since March 2022, developing countries are facing soaring debt payments to China.

If little is done to reduce their debt, many of the world's poorest governments will continue to spend huge amounts of money on debt servicing, money that could otherwise be spent on schools, clinics and other services. “The biggest losers are ordinary people in developing countries who are denied basic public services because their governments are burdened with unsustainable debt,” said Mr. Parks.

China's domestic debt overhang defies a quick fix. The country needs to gradually move away from government construction projects fueled by debt and heavy national security spending, towards an economy based more on consumer spending and services.

Strong constituencies in Beijing and China's provincial capitals protect current economic priorities. Ms. Yellen will try to learn more about China's economic plans, but can do little to influence them.

Last winter, 21 Chinese banks agreed to let a local government financing unit in southwest China extend up to 20 years of repayments on loans that were nearing maturity, saying that only interest payments, not principal, needed to be repaid for the first 10. many years. But the arrangement means huge losses for banks – and nearly every province in China is experiencing similar problems with local financing units.

But solving the debt problems of developing countries will be difficult. “Yellen's ability to pressure China into accepting debt relief is limited,” said Mark Sobel, a former longtime U.S. Treasury official. “The US and Yellen have quite a bit of clout,” he added.