The FT learned how the growing debt burden prevents China from stimulating the economy

China’s growing debt burden limits the authorities’ ability to provide massive stimulus to boost economic growth and revive weakening domestic demand. About it writes the Financial Times (FT) with reference to studies of public finances of China.

According to the analysis of the non-profit research center Conference Board, this year debt service, according to the forecast, will require 19.2% of the total state budget. In 2014, this figure was 12%.

The FT notes that the debt problem is particularly acute in China at the level of local authorities, where interest payments on debts have grown by an average of 16% annually since 2014. According to the forecast of the center, in 2026, the aggregate interest payments on debts in central and regional governments will amount to about 1.4 trillion yuan ($ 209 billion).

“Debt servicing is becoming a significant constraint on local budgetary opportunities,” said Yuhan Zhang, lead economist at the Conference Board.

China’s debt has skyrocketed in the past few years due to an investment-driven growth model. According to Morgan Stanley analysts, by the end of the year, China’s public debt will reach 122% of GDP, which is 48% higher than the level that was before the coronavirus pandemic began in 2020.

A five-year slump in the Chinese real estate sector has worsened the financial position of households and regional authorities, despite Beijing’s pledge to boost domestic demand more actively. In the second quarter of 2026, the country’s economic growth slowed to 4.3%, below the target range of 4.5-5%. The newspaper points out that this is due to weakening retail sales and a sharp decline in fixed investment.

In September, China announced several support measures, including subsidies for mortgage interest payments and a reduction in the interest rate on one of the financing instruments. In addition, Beijing has stepped up efforts to collect taxes on interest and dividend income received through offshore trusts, thereby replenishing the treasury at the expense of the wealthiest citizens.

At the same time, China’s exports, especially of artificial intelligence-related electronics, continue to grow rapidly. “We must [...] constantly expand and strengthen advanced manufacturing, [and] increase the level of autonomy,” Chinese President Xi Jinping told the FT at the National Advanced Manufacturing Conference in Beijing in September.

According to economists, if the Chinese authorities decided to conduct a large-scale stimulus program, they could issue additional bonds of the central government, whose debt burden is considered less than that of local administrations. However, Beijing may not want to increase borrowing.

Yuhan Zhang noted that China’s budget provides targeted financial support for science, technology and other strategic areas, “rather than large-scale promotion of broad coverage, the main purpose of which is to accelerate economic growth in the short term.”.

China’s military spending accounts for 42% of central government spending, accounting for 15% of the total state budget.

According to Goldman Sachs, the central government’s budget deficit is 4% of GDP, while the extended deficit is about 10% of GDP.

In August, the FT, citing sources, wrote that the Chinese authorities began a “global hunt” for tax evaders and organized inspections covering in some cases more than 25 years.