By Clint Gharib
Last month, I mentioned I’d dig into China’s ongoing battle with its debt “monster.” I use that word intentionally—years ago, in one of my Market Updates on OxfordRA.com, I compared China’s growing debt to Frankenstein’s monster: an artificial creation sustained by experimental methods. Back then, China’s cashflow from exports was like the doctors furiously trying to keep patching the creature together.
During President Trump’s first term, U.S. policies significantly worsened China’s debt load. And now, that monster appears to be stirring again.
What Most People Miss About China’s Debt
Many analysts—and certainly many investors—misunderstand the situation by focusing only on China’s sovereign debt (comparable to U.S. Treasury debt). What often gets overlooked is the hidden debt: government-owned corporations borrowing from government-owned banks. This kind of off-balance-sheet lending creates a shadow financial system that’s difficult to quantify.
On January 1, 2025, China expert Gordon Chang wrote for 19FortyFive:
“After taking into account the so-called ‘hidden debt’ and adjusting for inflated GDP reports, the ratio could be, according to my estimate, 350%. A higher estimate—say, 400%—is also possible.”
That’s far more than the debt levels seen in Greece or Portugal during the 2011 Sovereign Debt Crisis.
And when people say “they owe it to themselves, so it’s no big deal,” they’re missing the key issue: if China wants to write down that debt, the pain is still internal. The lenders are the borrowers, so debt relief just shifts losses around within the system. So far, China has avoided a reckoning by issuing more stimulus—which, of course, means more debt.
Meanwhile, capital outflows from China suggest the country’s wealthiest are noticing the risks. Just on May 20th, several media outlets ran stories with headlines like “China Asks Officials to Cut Spending on Alcohol, Cigarettes, and Travel.” Clearly, the government’s spending crackdown that began in 2023 is ongoing… though arguably too little, too late.
BRI: Ambition Meets Reality
China’s domestic troubles are also spilling over into its international ambitions. Under the Belt and Road Initiative (BRI), China extended massive loans to low-income countries. But now, the cracks are showing. Pakistan, the largest BRI borrower, has had to refinance multiple times due to non-payment—often on projects that remain unfinished.
Even more troubling is the dual-use nature of many of these investments. As reported by Epoch Times on February 8, 2025, in The Reality of China’s Belt and Road Initiative: Failing, Faltering, Retreating: “Many BRI investments carry dual-use potential, allowing the Chinese regime to convert civilian infrastructure into military assets.”
It’s frustrating to me that institutions like the IMF continue to lend money to China, which indirectly covers losses on BRI loans—effectively giving China leverage over indebted countries at the IMF’s expense.
Internal Pressures Mount
On the domestic front, signs of stress are piling up. Protests over unpaid wages and factory shutdowns are on the rise. According to a New York Post article on May 6th: “In April (2025), China’s factory activity showed its steepest contraction in 16 months, while new export orders dropped to their lowest levels in three years since the pandemic.”
For now, China is still managing to contain its growing debt monster. But a prolonged trade war with the U.S., a deeper economic slowdown, or defaults by indebted nations could crack the mortar holding the whole thing together.
This is not just a regional issue – it has the potential to reverberate across global markets. And if internal pressures push China toward foreign aggression, the consequences could be far-reaching.
U.S. Market Update
Meanwhile, U.S. corporate earnings have continued to outperform. According to Argus Equity Research, recent earnings have landed in the “mid-teens range,” beating the 10–12% forecast. Operating margins for S&P 500 companies rose again to 12%, a strong sign of profitability from core operations.
With attractive rates available on cash and growing global uncertainty, I continue to urge investors to maintain some extra cash in portfolios. Be ready to take advantage of long-term opportunities that emerge from short-term panics.
Use short-term fear to your long-term advantage.
For more insights, visit us at www.OxfordRA.com or reach out directly via email:
cgharib@OxfordRA.com tpashley@OxfordRA.com
Source: “China’s Economy Could Soon Face a Massive Debt Crisis” by Gordon Chang, January 1, 2025, 19FortyFive.com
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