China’s debt interest costs are soaring above U.S. levels and growing faster than any other budget category as Beijing struggles to prop up growth

China's soaring debt interest costs now exceed those of the United States and are increasing at an unprecedented rate. As Beijing grapples with a faltering growth, the nation's fiscal situation is deteriorating. Debt servicing payments now account for 19.2% of the central government's general public budget, a significant jump from 12% in 2014.

This trend mirrors a report from the Center for Strategic and International Studies, which also found that 19% of Beijing's spending is dedicated to interest on debt. This figure surpasses the U.S. federal budget's 14% allocation to interest costs, although it lags behind Japan's 25.6%. China's spending on interest payments has ballooned by 341% between 2013 and 2025, outpacing all other major budget categories.

In contrast, total spending grew by 102% over the same period, with social security and employment costs rising by 207%, science and technology expenditures up by 137%, and defense spending increasing by 141%. Despite the U.S. debt-interest spending also surging to $1 trillion since 2013, outpacing even the Pentagon's budget, the economic trajectories of the two nations have diverged.

The U.S. economy is thriving, bolstered by the artificial intelligence boom, robust consumer spending, low unemployment, and soaring stock markets. However, China's GDP growth has slowed, falling short of its 4.5%-5% annual target. While export-dependent sectors are expanding rapidly, China's trade partners are imposing restrictions, domestic consumers are hesitant to spend, investment is dwindling, the property sector is recovering from a severe crash, and Chinese stocks have performed poorly.

The Chinese government has been pumping funds into state banks to support priority industries such as electric vehicles, robotics, artificial intelligence, and renewable energy. However, this policy has resulted in a surge in business debt and only a 30% increase in revenues. Many loans have been extended to dubious borrowers, and nearly a third of them are operating at a loss.

As the International Monetary Fund reported, China's general government gross debt has reached 107% of GDP, up from 41% in 2015 and is projected to reach 124% by 2030. A wider measure of indebtedness across both public and private sectors reveals an even graver situation. China's total debt-to-GDP ratio, excluding the financial sector, has nearly tripled since 2010 and has now surpassed 300%, according to Capital Economics.

In the U.S., total public and private debt last year stood at about 265% of GDP, a significant decline from the pandemic-era peaks. The growing debt mountain has become counterproductive and detrimental to China's economy. Mark Williams, chief Asia economist at Capital Economics, noted in May that the demand for government borrowing and the lax lending standards of state-owned banks is driven by the need to sustain economic growth and avert job losses.

However, the consequences of an extended credit boom since the past 18 years include a banking system supporting unproductive firms, widespread losses across industries, and entrenched overcapacity.