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Authored by Daniel Lacalle,
The latest social financing figures from China show an economy that is increasingly relying on government debt while private demand for credit remains weak. The strength of the Chinese technology sector and its exporting companies gives enough room for leverage. However, behind the weak private sector credit demand lies an evident economic slowdown that the Chinese government acknowledges, challenging consumption patterns, a significant overcapacity problem, and the depth of the housing crisis.
The current economic model, focused on delivering 5% real economic growth, requires larger doses of debt to achieve smaller increments of growth, especially productive sector growth. The government has focused on reducing debt and overcapacity imbalances while reorienting its exports and financial system to lessen dependence on the US dollar; however, the main challenge for the Chinese economy remains boosting consumer demand, despite rate cuts and easing financial conditions.
To understand the intensity of debt of the Chinese model, we must go to the year 2000 and see the acceleration in the flow of debt, not just the current stock. At that time, real GDP growth was around 8–9%, so each percentage point of growth came with roughly 13–16 points of debt‑to‑GDP. Government debt was very low, at around 25% of GDP, and most leverage sat in the state-owned corporate sector with modest household debt. China was able to deliver near‑double‑digit growth with a total non‑financial debt ratio barely above 120% of GDP.
By 2023, non‑financial sector debt had risen to about 285% of GDP, more than doubling its level of 2000. Chinese think‑tanks and official commentators put the “macro leverage ratio” closer to 300% of GDP by 2025, according to the Chinese Academy of Social Sciences. The macro leverage ratio rose by 11.8 percentage points to 302.3 percent in 2025, exceeding the 10.1-point increase reported in 2024.
Over the same period, the trend of real GDP growth has slowed to roughly 4–5%, so each percentage point of growth now requires around 60–75 points of debt‑to‑GDP, more than three times the debt per point of growth required in 2000. Furthermore, it comes mostly from government debt.
In January 2026, aggregate social financing jumped by 7.22 trillion yuan, significantly higher than in the same month of 2025 and above market expectations, consistent with 5% annual GDP growth and a larger composition of the public sector in the mix. Outstanding social financing reached 449.11 trillion yuan at the end of January, rising 8.2% year‑on‑year, while money supply (M2) rose by 9%.
New yuan bank loans were 4.7 trillion yuan, about 420 billion less than a year earlier and significantly below consensus, showing the weak private‑sector credit demand and the prudent approach of Chinese customers and businesses to debt addition. RMB loans outstanding stood at 276.62 trillion yuan, up only 6.1% year‑on‑year, clearly below the pace of overall financing and money growth.
The driver of credit growth in China is no longer households and private firms but the government and state-owned companies.
The real estate problem has impacted Chinese families in numerous ways. Not only did most of them see the value of their homes decline, but many families invested in the attractive yields of real estate developers’ commercial paper, which led to large losses and even the wipe-out of savings for many. Additionally, despite the excess in supply of houses, prices have not fallen enough to warrant enough appetite for new mortgages, as affordability remains an issue and the traditional prudence of Chinese citizens when it comes to consuming and borrowing adds to the challenge.
Beijing plans to issue 4.4 trillion yuan in local government special‑purpose bonds in 2025, 500 billion more than in 2024, looking to boost government investment and a “proactive fiscal policy,” knowing that raising taxes would be exceedingly negative for growth and consumption.
Local governments are expected to issue more than 10 trillion yuan in bonds in 2025, including refinancing, general bonds, and new special bonds.
The Chinese government knows that it can manage more debt but also sees the weak investment and household spending and acknowledges that large tax increases would be counterproductive. However, to prevent future debt-driven stagnation, a focus on productivity is necessary.
The official budget sets a deficit of 4% for 2025. However, once all budget items are consolidated, including government funds, special bonds, and off‑budget vehicles, this true fiscal deficit in 2025 is closer to 9%, up from 7.7% in 2024, according to Rhodium Group and JP Morgan. China increasingly relies on hidden or almost fiscal borrowing to support growth.
With outstanding social financing now around 449 trillion yuan and real growth around 4–5%, each incremental point of GDP is increasingly linked with a much larger stock of debt than a decade ago. This rising credit intensity of growth may prevent a significant slowdown but may create a significant fiscal challenge in the future. The Chinese model demands high growth and low taxes; any change to the fiscal system will be negative.
For years, local governments relied on the sale of land for property development to collect tax receipts. Thus, the drag from real estate is evident in the economy and in fiscal sustainability. Real estate development investment fell 13.9% year‑on‑year in the first three quarters of 2025, with residential investment down 12.9%, the steepest drop since 2021, according to official figures. Property investment and sales both posted double‑digit declines in 2024, and forecasters expect real estate investment to fall another 11% and sales to drop 7.5% in 2025, according to Reuters, with further declines in 2026 before stabilizing only in 2027… if it happens as fast as consensus estimates.
The property sector, once a key engine for economic growth and tax receipts, absorbs new credit to stabilize its accounts without boosting growth or creating a multiplier effect.
Additionally, China’s industrial capacity utilization remained at 74.9% at the end of 2025, well below the 78.4% peak reached in 2021. Overcapacity is clear in steel, autos, legacy chips, and parts of sectors like green tech, where expansion has surpassed domestic and external demand. Thus, the purchasing managers’ indices show weak new orders and foreign demand, while bankruptcies and insolvencies have risen, although not to levels that would indicate a financial crisis.
The Chinese economy needs to reopen, improve investor and legal security and allow the housing slump to materialize fully to see the type of productive economic growth it needs to avoid much larger increases in debt. Otherwise, the risk of stagnation will likely be elevated as population growth stalls, overcapacity remains, and the stock of unsold property becomes a larger liability.
Tyler Durden
Mon, 02/16/2026 - 22:25
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• Accumulated losses hit Rs2.07tr by June 2025; half of it piled up in just three years
• Outstanding loans stand near Rs3.1tr, debt rising Rs300bn a year
• Financing cost reaches Rs210bn in FY25, highest among SOEs
ISLAMABAD: Carrying the largest outstanding loan portfolio on its books and a negative return on assets, the National Highway Authority (NHA) — the country’s logistics backbone — is the single largest entity bleeding the federal budget, exposing Pakistan to substantial fiscal risk despite the recent doubling of tolls.
The NHA is the “largest loss-maker”, operating on a “structural deficit model and reliant on budgetary support”, the Central Monitoring Unit (CMU) of the Ministry of Finance said in its Annual Aggregate Report on state-owned enterprises (SOEs) for the year ended June 30, 2025.
With accumulated losses of Rs2.074 trillion, the entity that owns and operates all the national highways and motorways accrued around Rs1.004tr in the last three years alone — about Rs295 billion each in FY24 and FY25 and Rs413bn in FY23.
Moreover, it stands out at the top of the SOE list, with the largest accrued financing cost of Rs210bn in FY25, as its toll revenue remains unaligned with debt servicing, leading to fiscal dependence and sovereign guarantee exposure.
“Currently, the NHA holds outstanding loans totalling approximately Rs3.1tr, with an annual debt accretion rate of Rs300bn. This debt portfolio generates Rs98bn in markup, which is expected to rise to more than Rs150bn per annum, creating a substantial credit risk for the government of Pakistan (GoP), which guarantees these loans”, the CMA said.
It said the presence of sovereign guarantees for public-private partnership (PPP) contracts added further financial strain, amplifying the government’s credit risk exposure.
With more than Rs115 billion in loans given by the federal government last year, it is also among the top borrowers. On the other hand, its net assets remained almost static over the last three years, actually declining slightly from Rs5.84tr in FY23 to Rs5.83tr in FY25. Its total equity has been declining over time from Rs2.57tr in FY23 to Rs2.27tr in FY24 and Rs1.95tr in FY25.
Conversely, NHA’s total liabilities have been increasing, making it the single-largest entity to accrue current liabilities. Its total liabilities amounted to Rs3.27tr in FY23, increasing to Rs3.54tr in FY24 and reaching Rs3.88tr by the end of FY25.
The CMU observed that National Highway Authority’s 2025 performance underscored its strategic importance yet exposed growing fiscal vulnerability. “Despite an impressive surge in toll revenues and build, own and transfer (BOT) project inflows, the authority continues to operate under a persistent deficit, driven by high depreciation and finance costs,” it said.
Operating income rose sharply to Rs83.1bn in FY25 (against Rs42.4bn in FY24), propelled by the doubling of toll income to Rs64.4bn. However, the overall income of Rs119.7bn remained insufficient against total expenditures of Rs408.1bn. Consequently, the deficit before levy and taxation stood at Rs292.98bn and the deficit after tax at Rs294.86bn, reflecting continued structural stress.
It noted that two critical components eroded National Highway Authority’s profitability. These include depreciation expense of Rs133.8bn, reflecting a heavily capital-intensive asset base and growing maintenance backlog and Rs193.5bn finance cost, up from Rs182bn last year, highlighting the escalating burden of debt and interest rate exposure.
The CMU advised diversification of funding sources through infrastructure bonds targeted at domestic institutional investors and international development markets.
It said the expansion of public-private partnerships for new road construction, maintenance outsourcing and service area development can shift part of the fiscal and operational burden to the private sector while improving efficiency and service quality.
The CMU also called for renegotiating loan terms with lenders to extend maturities, reduce interest rates or convert debt into quasi-equity instruments to create immediate fiscal space.
Published in Dawn, February 16th, 2026