China faces economic crisis amid rising debt and interest rate deadlock

China is facing a deepening financial crisis characterized by declining consumer spending, falling investment, and a collapsing real estate market. The central government is currently caught in a policy trap: lowering interest rates to stimulate domestic growth could trigger massive capital flight and weaken the yuan, especially as the interest rate gap with the United States widens.

As a result, the People’s Bank of China has kept key lending rates frozen for 16 consecutive months. The one-year loan prime rate remains at 3%, while the five-year mortgage rate is held at 3.5%.

Fiscal pressures are mounting as debt-servicing costs consume a larger portion of the national budget. Estimates suggest interest payments will account for approximately 19.2% of the central government’s general public budget this year, up from 12% in 2014. Reports indicate that China’s spending on interest payments increased by 341% between 2013 and 2025, a rate of growth that outpaces other major budget categories such as defense, science and technology, and social security.