China Off-Balance-Sheet Debt Exceeds GDP of Most Nations
China Off-Balance-Sheet Debt Exceeds GDP of Most Nations
May 19, 2026
For decades, there have been claims that China had the fastest-growing economy, and that it would eventually overtake the U.S. as the world’s largest economy. However, the fastest-growing economies are always developing economies because mature economies do not have as much room to grow.
In other words, a country with a per-capita GDP of $80 per month, as China had in the year 2000, has far more room for rapid expansion than a country like the United States, where the figure now stands at around $7,000 per month.
There is also the concept of low-hanging fruit. When a country has no highways or rail infrastructure, building highways and railways causes GDP to skyrocket. But once all major cities are connected, building additional highways and rail lines has only a marginal impact on economic growth.
A case in point is China’s famous high-speed rail system. Once highways and conventional railways already existed in China, converting to high-speed rail represented a massive economic investment and a large accumulation of debt, while the resulting increase in GDP was relatively minimal. For one thing, high-speed rail cannot be used to carry freight.
While China is still building high-speed rail lines, linking small communities with other small communities, the world is moving toward a remote-work model, making the movement of people a smaller contributor to GDP. Moving freight, however, remains critically important. Despite having a population less than one-quarter the size of China’s, the United States operates approximately 220,000 kilometers of total rail, about 33 percent more than China’s 162,000 kilometers, the vast majority of which is dedicated to freight.
Along with this development boom in China came debt. Because of the centrally planned economy, the central government was able to order local governments to invest and develop by creating debt. That debt was financed largely through real-estate sales, as the Chinese government controls actual land ownership rather than simple lease arrangements, which is what individual “homeowners” in China actually possess.
In order to keep this debt from detracting from the appearance of investment and economic performance, large portions of the debt were kept off the balance sheet.
In accounting, off-balance-sheet debt, sometimes called incognito leverage, describes an asset, debt, or financing activity that does not appear on an entity’s balance sheet. The structure involves using legal arrangements to borrow money, acquire assets, or take on obligations that do not appear on the balance sheet. Common instruments include operating leases, special purpose entities (SPEs), and joint ventures.
In China’s case, the instrument is the Local Government Financing Vehicle, or LGFV, a government-created special purpose entity that borrows on behalf of local governments while keeping the resulting debt off official government balance sheets.
The LGFV structure is rooted in a 1994 budget law that banned local governments from issuing bonds or running deficits. To work around this, local governments created special-purpose entities to borrow from banks and capital markets, primarily to fund infrastructure. Because LGFV debt does not count toward official government debt ceilings, no definitive official statistics exist on total liabilities.
Because much of this debt is off the balance sheet, it is difficult to estimate accurately, and different methods produce different totals. The IMF estimates LGFV debt at $9.04 trillion as of the end of 2024. Other approaches produce significantly higher figures. A compilation of interest-bearing liabilities across roughly 4,000 LGFVs places the total at $12.10 trillion, while broader market estimates place the range between $8.35 trillion and $11.13 trillion. Overall, estimates suggest that China’s LGFV debt load has grown from approximately $1.2 trillion in 2014 to between $9 trillion and $14 trillion in 2024, representing roughly 50 to 80 percent of China’s GDP.
Only four countries, the United States, China itself, Germany, and Japan, have total GDPs exceeding $4 trillion. At the IMF’s conservative estimate, LGFV debt alone exceeds the GDP of every other nation on earth. China’s foreign-exchange reserves, the largest in the world, stood at approximately $3.2 trillion at the end of 2024, meaning estimated LGFV debt is larger than the foreign-exchange reserves of any country on earth and roughly three to four times larger than China’s own reserves.
The IMF has warned that even a 5 percent LGFV default rate would be equivalent to a 75 percent increase in the banking system’s non-performing loans. Debt not backed by earnings sufficient to cover interest payments already amounts to 37 percent of GDP.
Additionally, China is throwing good money after bad. Proof that massive state investment now has minimal impact on GDP is that only 3 percent of LGFVs post a return on equity of 4 percent or higher, while approximately 10 percent record net losses. Aggregate net profit for 2024 totaled $76.5 billion, yet government subsidies exceeded $139.1 billion, meaning that absent subsidies, nearly half would be loss-making.
Following the collapse of land-sale revenues after 2022, the primary source of financing for LGFVs, many vehicles lost cash flow and have relied on bank forbearance, debt refinancing, and repayment-deadline extensions. In November 2024, Beijing announced a 12 trillion yuan package to address hidden debt, the largest policy intervention directed at local-government liabilities.
However, Fitch Ratings estimated that the restructured portion covered only approximately 25 percent of the hidden debt load. Beijing’s own executive director to the IMF placed total LGFV debt at 44 trillion yuan, roughly three times the figure cited at the time of the restructuring announcement.
China has accumulated a second category of debt that exists outside formal accounting ledgers. Shadow banking refers to credit intermediation conducted outside the regulated banking system, primarily through non-bank entities and bank off-balance-sheet vehicles that circumvent the capital, liquidity, and lending restrictions imposed on commercial banks.
A key characteristic distinguishing China’s shadow-banking system from the Western model is that Chinese commercial banks themselves dominate the system, routing credit through structures that keep liabilities off their books while retaining effective control.
The primary instruments include wealth-management products, trust loans, entrusted loans, bankers’ acceptances, and informal lending. Wealth-management products are issued by banks, trusts, and securities firms and offer returns above standard deposit rates. They are sold as savings products that do not appear on the issuing institution’s balance sheet. Depositors’ funds are packaged into WMPs and deployed into property developers, LGFVs, or other restricted borrowers while the bank’s balance sheet shows nothing.
Trust companies, separately regulated firms with broad latitude to lend to restricted industries, including real estate and LGFVs, serve as conduits through which state banks on-lend to borrowers they cannot officially finance. Entrusted loans are made by one non-bank party to another borrower using a bank as a servicing agent, a structure necessitated by Chinese legislation prohibiting direct lending between companies.
Bankers’ acceptances are certificates issued by banks promising future payment, allowing financing to occur without a formal loan appearing on either party’s books. Informal lending consists of loans between private entities with no payment agents, operating entirely outside the banking system and unreported to regulators.
These mechanisms expanded after the 2008 global financial crisis as fiscal stimulus and tight formal credit controls pushed borrowers toward unregulated channels. Credit through shadow channels grew at an annualized rate of 34 percent from 2010 to 2013, with the sector reaching an estimated 60 trillion RMB before regulatory interventions reduced it by 16 trillion RMB by the end of 2019. Broad shadow banking assets rose to RMB 53.3 trillion in 2024, equivalent to approximately $7.3 trillion. China’s banking regulator previously estimated shadow banking at 84.8 trillion yuan ($12.9 trillion) in 2019, equivalent to 86 percent of GDP.
Shadow banking and LGFV debt are distinct pools that fund different borrowers through different mechanisms. LGFVs finance government infrastructure through special-purpose entities; shadow banking finances property developers, small businesses, and consumers through non-bank channels. However, local governments have used both simultaneously, and LGFVs themselves borrow through shadow banking channels, meaning the two systems are interconnected. A stress event in one transmits directly into the other.
Stacking the figures, the IMF estimates LGFV’s hidden debt at approximately $9 trillion, while broader market estimates place it between $9 trillion and $14 trillion. Shadow-banking assets stand at approximately $7.3 trillion, and official local-government bonds total roughly $7.5 trillion. The conservative combined total is approximately $24 trillion, while the high-end estimate approaches $29 trillion, against China’s official GDP of roughly $18 trillion.
China’s total non-financial debt, government, corporate, and household combined, reached 302.3 percent of GDP in 2025, according to the National Institution for Finance and Development, and 312 percent as of 2024, according to the IMF’s Article IV Consultation, up from 245 percent in 2019. By comparison, total U.S. public and private debt stood at approximately 265 percent of GDP in 2024.
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Author: Antonio Graceffo
