China debt crisis stems from historical suppression of household savings

China’s debt has increased at one of the fastest rates in history, resulting in a debt-to-GDP ratio that is second only to Japan among major economies. According to research published by the Carnegie Endowment for International Peace, this surge makes future economic growth unsustainable.

The current crisis is linked to how China addressed its banking crisis in 2000. During the late 1990s, the nation’s Big Four state-owned banks faced technical insolvency due to massive quantities of non-performing loans. While official estimates placed these bad loans at 25 to 30 percent, independent analysts and the World Bank suggested the figure was as high as 40 to 50 percent.

Rather than the government absorbing these losses, the burden was shifted to the Chinese household sector through financial repression. By keeping bank deposit rates well below nominal GDP growth and often below inflation, the state ensured that households—the primary net savers—earned extremely low or negative real returns. This mechanism allowed businesses, state-owned enterprises, and local governments to borrow at artificially low rates, effectively using household savings to recapitalize the financial system.