For decades, China was the world’s economic marvel — a nation that built the largest high-speed rail network, constructed skyscrapers in days, and powered a massive infrastructure push that fueled double-digit GDP growth. But behind the façade of this unprecedented growth lies a colossal economic crisis — one built on hidden debt, overbuilt ghost cities, and dangerously misaligned incentives.
The Mirage of Low Debt
On paper, China’s debt-to-GDP ratio seems manageable — sitting below 100%, much lower than countries like Japan or the U.S. But experts and unofficial estimates suggest a different reality. China’s real debt-to-GDP ratio may be closer to 300%. The difference? A sprawling network of off-the-books borrowing by local governments, hidden behind technicalities and special financing structures.
How Did It All Begin?
To understand China’s looming debt bomb, we need to understand how its government operates. In China, hitting high GDP growth targets is not just a goal — it’s a career ladder. Local officials are rewarded with promotions if they outperform national targets. This leads to a frantic race among provinces to spend, build, and grow — often without any actual demand to back up that growth.
The catch? Local governments are responsible for 85% of public spending but receive only 50% of the tax revenues. They also cannot legally borrow money or issue bonds.
So how do they fund endless construction projects?
The Rise of Shadow Borrowing: LGFVs
Enter Local Government Financing Vehicles (LGFVs) — government-owned but technically separate entities. Here’s how the scheme works:
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The local government transfers a piece of state-owned land to the LGFV.
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The LGFV uses that land as collateral to borrow billions from banks.
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The borrowed funds are used to launch massive infrastructure projects.
These LGFVs have built everything from airports and highways to entire new cities. But many of these projects were unnecessary — built in places with little to no population, creating what are now known as ghost cities.
There are over 50 ghost cities across China, filled with shiny new buildings but barely any residents. An estimated 65 million housing units sit empty — enough to house the entire population of France.
The Bubble Begins to Burst
At first, this cycle worked. Construction drove GDP growth, developers got contracts, and citizens poured savings into real estate, believing prices would always rise.
By 2020, 70% of household wealth in China was tied up in property.
Then came the Evergrande crisis — the collapse of one of China’s largest developers, with over $300 billion in liabilities. Panic spread across the real estate market. Developers stopped buying land. Property prices fell. Local government revenues — largely based on land sales — dropped by up to 50%.
Without land sales, LGFVs lost their primary source of income, and debts began piling up. By late 2023, LGFV debt had skyrocketed to 60–66 trillion yuan (approx. $8–9 trillion) — nearly half of China’s GDP.
Many local governments began struggling to pay even basic salaries to civil servants. The cracks in China’s “economic miracle” were now too deep to hide.
Beijing’s Response: Delay, Don’t Solve
Instead of structural reform, the Chinese government opted for a short-term fix: the Debt Swap Program.
In this strategy, hidden local debts are converted into official government bonds — similar to combining maxed-out credit card debt into a lower-interest, long-term loan. It buys time, but it doesn’t reduce the debt burden.
📌 What Is the Problem?
Local governments in China borrowed a lot of money secretly using Local Government Financing Vehicles (LGFVs) — entities they created to borrow money unofficially, since they’re not allowed to borrow directly.
These loans became huge — trillions of yuan — and now many of them are struggling to pay the money back.
🔁 What Did the Chinese Government Do? (Debt Swap Program)
They took this unofficial debt (the hidden loans through LGFVs) and said:
“Let’s make it official. Instead of you owing banks in secret, we’ll turn this into a government bond.”
This is called a debt swap.
💳 Comparison with Credit Cards (Example)
Imagine:
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You owe ₹1,00,000 on multiple credit cards at 20% interest — you’re struggling to pay.
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A bank says: “We’ll give you a personal loan at 10% interest for 5 years. Use that to pay off your cards.”
You still owe ₹1,00,000 — the debt hasn’t reduced — but now:
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Your monthly EMI is lower (because of lower interest),
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You get more time to repay.
That’s exactly what China did:
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Old debt (high pressure, short-term, off-the-books) ➡️ turned into new official bonds (longer term, lower interest, government-backed).
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But the total amount of debt remains the same (or even grows).
🧨 So Why Is It a Problem?
Because:
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It doesn’t solve the real issue (too much borrowing).
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It just postpones the crisis.
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The governments still don’t have enough income to repay — even the new loans.
It’s like sweeping garbage under the carpet. It may look clean for now, but eventually, the pile will start to stink.
In parallel, regulators have instructed banks to slow down loan recoveries and reduce interest rates — again delaying the inevitable.
Why Hasn’t the Crisis Exploded Yet?
China’s state-controlled economy gives the government powerful tools to control the fallout — from silencing protests to restructuring debt without open market panic. But even this system has its limits. Between 2023 and 2024 alone, China must repay over 10 trillion yuan in maturing debt.
The question is not if the debt bomb will detonate, but when, and what the global ripple effects will be.
Three Lessons India Must Learn
1. Growth Without Demand Is a Mirage
China’s ghost cities are proof that growth without real demand is unsustainable. India must build infrastructure based on real needs — not just to inflate GDP numbers.
2. Transparency Is Protection, Not a Burden
China’s crisis was worsened by opaque financial practices. India must prioritize transparency in government borrowing and spending to avoid similar hidden risks.
3. Incentives Drive Behavior
China incentivized GDP growth at all costs, even if it meant building cities no one lives in. India must reward long-term value creation, such as job growth and sustainability, rather than short-term construction targets.
China’s debt crisis is more than a financial issue — it’s a structural warning. A high-growth model built on shaky foundations will eventually crack. The challenge now is whether China can engineer a soft landing or whether its debt dragon will spiral into a global crisis. And as the world watches, India and other developing nations must take heed — or risk following the same path.