China’s Interest Bill Hits 19.2% as Local Debt Bites

China’s debt-interest bill is set to consume 19.2% of the central government’s general public budget in 2026, the Conference Board estimates. That share is up from 12% in 2014, and it now exceeds the 15% of U.S. federal spending that went to net interest in the fiscal year that ended Sept. 30.

The ratio that moved with the figure treats two different budgets as if they were twins. The heavier load is in the provinces, in the vehicles that borrowed for them, and in the banks that keep rolling the loans.

The 19.2 Percent Is Only the Central Slice

The Conference Board’s China Center, in a budget study covering 2014 to 2026, put debt-servicing at 19.2 percent of the central budget for 2026. Yuhan Zhang, the center’s principal economist, has described debt service as a growing limit on local fiscal room. The 19.2% line is a central-government ratio. It is not a picture of all public interest China will pay.

A CSIS ChinaPower budget feature, updated March 26, 2026, found that interest costs jumped 341 percent from 2013 to 2025, faster than any other major spending line. Total spending rose 102% in that span, while revenue rose 77%. Debt payments in 2025 were 1.4 trillion yuan ($189.2 billion), up 4.8% from 2024, after an 8.8% jump the year before.

THE CENTRAL LEDGER, 2013 TO 2025

• Interest: Up 341%, the fastest major line in the CSIS tally.
• Social security and employment: Up 206.5%, still far short of rich-country welfare levels, CSIS notes.
• Defense: Up 141%; the 2026 defense budget is 1.9 trillion yuan ($276.7 billion), a 7% nominal rise.
• Science and technology: Up 137% across the same years.

The 2026 general public budget, as CSIS reads the March books, projects revenue of 24.1 trillion yuan ($3.5 trillion) and spending of 30 trillion yuan ($4.3 trillion), both up about 4%. The official deficit is 5.89 trillion yuan ($853.6 billion), the largest on the general public budget record, after 5.66 trillion yuan ($793.9 billion) in 2025.

Local Governments Face a Faster Interest Climb

The same Conference Board work found local-government interest payments rising 16% a year from 2014 through 2026. That is the layer the 19.2% ratio does not carry. In 2025, CSIS found, local spending growth was almost flat at 0.2%, while central-level spending grew 5.7% and transfers to local governments grew 1.6%.

Revenue is the other half of that bind. National general public budget revenue fell 5.5% in 2025, to 23.2 trillion yuan, the sharpest drop in decades and steeper than 2020. CSIS lists a high 2024 base in non-tax receipts, weak prices, the trade fight with the United States, and the drawn-out property slump. Land sales, the old local cash machine, have not come back.

An IMF staff paper dated Sept. 25, 2026, put official local-government and LGFV debt at local and LGFV debt at 90 percent of GDP as of 2025. The authors, including Sonali Jain-Chandra and Sandeep Saxena, wrote that financing gaps at both layers mean more borrowing unless there is a hard fiscal squeeze or much larger central support. They said recent swaps slowed LGFV credit growth and eased near-term servicing costs, and that the overhang remains.

The Swap That Put Hidden Debt on the Books

Beijing’s cleanup moved a pile of off-book local liabilities onto official local bonds, which is why the visible interest line is fatter even as officials talk about hidden debt coming down.

HOW THE HIDDEN PILE WAS SHIFTED

1. End of 2023: Finance Minister Lan Fo’an later put hidden local debt at 14.3 trillion yuan on the official list.
2. End of 2024: That hidden stock had fallen 3.8 trillion yuan, to 10.5 trillion yuan, Lan told the legislature, as special-purpose bonds replaced costlier off-book paper.
3. End of 2024: PBOC Governor Pan Gongsheng put operational LGFV debt owed to financial institutions at 14.8 trillion yuan, a separate stock from the hidden-debt list.
4. March 2026: The new general public budget locked in the 5.89 trillion yuan deficit and the 19.2% central interest share.

Fitch Ratings, in a February 2026 public-finance note, still saw a 34 trillion yuan debt-servicing gap at LGFVs, and said the substitution programme covers about 30% of that gap. Fitch also found special-purpose-bond interest equal to 10% of local capital spending in 2025, up from 2.9% in 2019. Cheaper official paper replaced expensive hidden paper. The coupons did not vanish. They changed letterhead.

Banks Keep Rolling Loans to Loss-Making Firms

The public ledger is only one servicing channel. State banks have been steered toward electric vehicles, robotics, artificial intelligence and renewable energy, and they have also kept credit flowing to borrowers that cannot cover interest from operations.

Scott Davis and Brendan Kelly, writing for the Federal Reserve Bank of Dallas on Dec. 23, 2025, classified a firm as a zombie when operating earnings fall short of interest. On that test, zombie firms held 16 percent of assets among Chinese non-financial companies in 2024, up from 5% in 2018.

ZOMBIE SHARE OF SECTOR ASSETS

Davis and Kelly note that China’s credit boom after 2008 was funded by domestic savings, not foreign inflows, and that capital controls keep those savings at home. Banks can roll a loan to a weak borrower rather than book a loss. That is the same trap Japan hit in the 1990s, when zombie assets in non-financial firms rose from 3% in 1991 to 16% in 1996. China’s National Bureau of Statistics put total debt above 300% of GDP as of June 2025, they add, with government borrowing now doing the work that corporate leverage did before the 2016 deleveraging campaign.

Business debt has doubled since 2019, while revenues are only 30% higher, and creditors keep rolling loans even as nearly a third of the borrowers lose money. Listed-company results in the first half of 2026 showed the same split: profits concentrated in a few AI-linked names, losses elsewhere. Evergreening protects bank capital in the short run. It also parks credit in firms that cannot pay a coupon without a new loan.

Washington’s Interest Tab Hit $1.143 Trillion

The share comparison that made the 19.2% figure travel is real, and it is not a dollar comparison. The Congressional Budget Office’s tally for the U.S. fiscal year that ended Sept. 30, 2026, put net interest at $1.143 trillion, up $115 billion, or 11%, from the year before. That was 15% of federal spending, with outlays near $7.4 trillion. Interest exceeded the $890.6 billion Congress authorized for defense in fiscal 2026.

INTEREST AS A SHARE OF THE BUDGET

China’s 1.4 trillion yuan of debt payments in 2025, about $189 billion at the CSIS conversion, is a much smaller cash bill than Washington’s $1.143 trillion. Beijing still borrows mostly at home, in yuan, from banks it owns. The United States borrows in the world’s reserve currency, at yields that reset with the Treasury market. The 19.2% versus 15% gap is a claim on each government’s own spending envelope, not a ranking of who owes more money.

What China’s Interest Bill Crowds Out

Every yuan that services old local paper is a yuan that does not fund the household transfers Beijing has been promising as the way to lift domestic demand. The 19.2% central share, the 16% annual climb in local interest, and the 14.8 trillion yuan of LGFV operating debt sit on top of a revenue base that shrank 5.5% in 2025.

WHERE THE ROOM RAN OUT

• Local cash: Spending in the provinces grew 0.2% in 2025, while interest at that layer has been compounding at 16% a year since 2014.
• Consumption support: CSIS notes plans for childcare, elderly care and goods trade-in subsidies, funded in part by ultra-long special treasury bonds, against a deficit already at 5.89 trillion yuan.
• New projects: Fitch found special-purpose-bond interest absorbing 10% of local capital spending in 2025, up from 2.9% in 2019, so more of each new bond goes to old coupons.
• Bank margins: Cheap directed credit keeps priority industries and weak borrowers afloat, and it leaves less room for a broad rate cut that would help households without bruising lenders.

Households are the quiet party on this ledger. They supply the deposits that let banks roll corporate loans, they live with weak property prices that gutted local receipts, and they are asked to spend more while the budget’s fastest-growing line is interest on debts taken in their name.

Li Qiang’s Growth Target Has Little Slack

Premier Li Qiang, opening the National People’s Congress in March 2026, set a real GDP target of 4.5% to 5%, the lowest since 1991 except for 2020, when no target was published. The National Bureau of Statistics put first-half 2026 growth at 4.7%, inside that band and closer to the floor than the ceiling. The deficit ratio is set around 4% of GDP. General public spending is booked at 30 trillion yuan for the first time.

On Oct. 9, 2026, the Ministry of Finance said it would carry out a more proactive fiscal policy, add counter-cyclical steps, and issue special treasury bonds to put capital into eight central financial institutions. That is the same ministry whose central budget already sends 19.2% of its envelope to interest, and whose local counterparts are still digesting swapped hidden debt plus 14.8 trillion yuan of LGFV operating liabilities.

The 19.2% figure will keep being compared with America’s 15%. The parties writing the checks are the provinces, the vehicles, and the banks that will not call the loans. Until that servicing load shrinks, the extra stimulus households are waiting on has to squeeze into whatever is left.