Remember 2008? When the world economy was on life support after Lehman collapsed, it was China that threw the biggest lifeline. They went on a borrowing and building binge that pulled the planet out of the ditch. The price tag? Their total debt roughly doubled in a few years, and then kept climbing. Fast forward to 2025, and that same debt monster has come back to bite, only this time Beijing doesn’t have the same room to maneuver.
The numbers coming out of China right now are honestly hard to wrap your head around. Local governments and their shadow financing arms, the infamous LGFVs, now owe something like $18.9 trillion. That figure alone is larger than the entire GDP of Japan. And it’s still growing.
The Property Collapse Nobody Wants to Talk About
For decades, local governments in China made easy money by selling land to developers. It was the golden goose: sell a plot, pocket billions, build some roads and stadiums, repeat. In 2021, land sales brought in more than 8.7 trillion yuan nationwide. This year? Barely 2.5 trillion in the first ten months. That’s a 70% drop in the main revenue stream virtually overnight.
When the property sector started cracking in 2021, most analysts thought it would be a controlled demolition. Turns out it was more like pulling the bottom block from a very tall Jenga tower. Evergrande went bust, Country Garden wobbled, and now even the last “too big to fail” developer, Vanke, is teetering. With no one buying apartments, developers stopped buying land. With no land sales, local governments ran out of cash.
“Over 10% of properties put up for sale received zero bids. The market isn’t cooling; it’s frozen.”
Market analyst at a major Chinese securities firm
How Local Governments Actually Work (or Don’t)
Most people outside China don’t realize just how decentralized the fiscal system is. Beijing collects the big taxes (VAT, corporate tax), but local governments are responsible for pretty much everything that matters day-to-day: schools, hospitals, pensions, infrastructure. To bridge the gap, they created these off-balance-sheet vehicles called Local Government Financing Vehicles (LGFVs). Think of them as municipal shadow banks that borrow in the bond market using future land sales as collateral.
Except those future land sales aren’t materializing anymore.
- Roughly 4,000 LGFVs across the country
- Total explicit local bonds: ~54 trillion yuan
- Estimated hidden LGFV debt: 60–80 trillion yuan
- Combined: approaching 134 trillion yuan ($18.9 trillion)
I’ve looked at LGFV financials when I can get my hands on them, and it’s grim. Almost one in ten is loss-making even with heavy subsidies. Strip out the government handouts and closer to half are bleeding red ink. Return on equity above 4%? Only about 3% of them manage that. These aren’t profitable companies; they’re infrastructure funding machines kept alive by cheap credit and implicit guarantees.
The Deflationary Debt Trap in Overdrive
Here’s where it gets really nasty. China is sliding into deflation, partly because hundreds of millions of middle-class households saw their main asset, property, drop 20-50% in value. When people feel poorer, they spend less. Prices fall. Falling prices make existing debt harder to service because revenues drop while nominal debt stays the same.
Classic debt-deflation spiral. And China has the mother of all debt loads to deflate against.
Right now, ultra-low interest rates are keeping the patient breathing. LGFV bonds issued in Beijing this year yielded on average just 2.1%, down from 3.5% in 2021. The PBOC has been easing hard to prop up growth, which helps local governments refinance. But every time they roll over debt at low rates while growth slows, they’re essentially betting that tomorrow’s economy will be big enough to handle today’s borrowing.
Except nominal GDP growth is heading toward 3%, and closing fast on those rock-bottom borrowing costs. When growth falls below the average interest rate on the debt stock, you’re in what economists call the wrong side of the Domar equation. The debt-to-GDP ratio starts rising automatically, no matter how much you cut spending.
Beijing’s Patchwork Fixes Aren’t Cutting It
Last fall, the central government announced a 10 trillion yuan debt-swap program, basically allowing local governments to issue official bonds at low rates to pay off higher-cost LGFV debt. Sounds good on paper. In practice, it’s like moving debt from your left pocket to your right pocket while the hole in both keeps getting bigger.
They’re also letting local governments issue record amounts of special bonds, already over 10 trillion yuan this year alone, blowing past last year’s record. The money is supposed to “resolve hidden debt, pay overdue bills, and fund investment projects.” Translation: keep the lights on and pray something turns around.
But every yuan of new borrowing to pay old borrowing just adds to the overall debt stock. And because much of it is going to low-return infrastructure, white-elephant stadiums, and highways to nowhere, there’s no productive growth coming out the other side to help service it.
Why This Should Worry the Rest of the World
China isn’t Greece. When Greece got in trouble, it was 3% of Eurozone GDP. China is 18% of global GDP and the workshop of the world. If local governments start defaulting en masse or if Beijing is forced to slash spending to rein in debt, the ripple effects would be enormous.
- Sharp drop in commodity demand (copper, iron ore, oil)
- Factory shutdowns and global supply-chain chaos
- Renewed deflation exported through cheap goods
- Potential currency volatility if capital controls tighten further
- Geopolitical fallout at a time when U.S.-China tensions are already high
And unlike 2008, the rest of the world isn’t in a position to rescue anyone. The U.S. has its own debt ceiling fights, Europe is barely growing, Japan is already at 260% debt-to-GDP. There’s no external cavalry coming.
So When Does the Dam Break?
Nobody knows exactly. The system has more shock absorbers than people give it credit for, capital controls, state-owned banks that can be told to keep lending, and a government willing to print whatever it takes to avoid social unrest. Japan has been running 250%+ debt-to-GDP for decades without collapse.
But Japan never had a 70% drop in its main local revenue source while simultaneously facing a demographic cliff and trade war.
My personal take? The Chinese leadership will keep kicking the can down the road for years, maybe even a decade, through ever more creative financial engineering. But each year the economy grows slower, the population ages, and the debt compounds. At some point the arithmetic stops caring about political will.
When that day comes, $18.9 trillion will look quaint.
The scariest part isn’t even the number. It’s that almost nobody outside a small circle of China watchers is paying attention. While markets obsess over Fed rate cuts and AI stocks, the world’s largest pool of unresolved debt keeps growing in the dark.
If you’re an investor, a policy maker, or just someone who likes global stability, it’s probably worth keeping an eye on those monthly land-sale figures and LGFV bond yields. They might end up being the canary in the biggest coal mine of our lifetimes.
