The Hidden Challenges Behind China’s Economic Model
China's economic rise has been one of the most significant stories of the 21st century. For over three decades, the country experienced rapid growth, lifting hundreds of millions out of poverty and becoming a global manufacturing hub. However, beneath this success lies a growing concern: the sustainability of China’s economic model.
The prevailing perception in many Western countries is that China is an unstoppable force. While it remains a powerful economic and military entity, its financial health presents a more complex picture. One of the key issues is the level of debt across different sectors of the economy.
According to the Bank for International Settlements, China's combined government, corporate, and household debt now exceeds 300% of GDP. This high level of leverage is particularly worrying given the slowing growth and shrinking population. The problem isn’t primarily about central government debt but rather the extensive local government borrowing accumulated during years of investment-driven growth.
Local governments have relied on financing vehicles to fund infrastructure projects, often borrowing outside of formal government balance sheets. These entities are estimated to hold over 60 trillion yuan (C$12.35 trillion) in debt, surpassing the annual economic output of Germany. Much of this borrowing was tied to the real estate sector, which at its peak accounted for over 30% of China’s GDP.
Local governments sold land-use rights to developers, who then borrowed heavily to build housing. Rising property values generated revenues that funded further infrastructure spending. This system appeared self-sustaining until the underlying assumptions began to falter.
The collapse of major developers like Evergrande exposed the fragility of this model. Property prices have dropped, construction activity has slowed, and local government revenues have weakened. In 2024, local government land sale revenues declined by 16%, signaling a shift in the financial engine that once supported local government spending.
Demographic Pressures and Economic Challenges
China’s challenges are compounded by demographic shifts. The working-age population has already peaked and is now declining. In 2025, only 7.9 million births were recorded, among the lowest levels in modern history. Meanwhile, the share of citizens over 65 is projected to double by 2050.
Debt management becomes increasingly difficult when growth slows and retirees make up a larger portion of the population. China is aging before it becomes wealthy, with a demographic profile resembling Japan’s but with per capita income far below that of developed nations. These structural realities will shape China’s economic performance for decades.
There is also an external dimension to China’s debt burden. Since 2013, Beijing has committed over US$1 trillion (C$1.4 trillion) to its Belt and Road Initiative. These investments have expanded Chinese influence globally but also created substantial financial exposure. Research indicates that more than half of China’s overseas lending portfolio is concentrated in countries experiencing elevated debt distress.
Some observers argue that these trends signal China’s impending collapse, but this conclusion is premature. China still possesses significant strengths, including a massive industrial base, substantial domestic savings, world-class manufacturing capacity, and a government with considerable influence over the banking system. Beijing can compel banks to extend loans, restructure debt, and delay potential financial crises.
The more likely outcome is not collapse, but slower growth. For Canada, this has important geopolitical implications. Economic weakness does not necessarily reduce military ambition. China’s defense budget reached approximately US$245 billion in 2025, making it the second-largest military spender globally.
History suggests that governments facing economic pressure often emphasize nationalism and military prestige to maintain domestic legitimacy. A slower-growing China may become more determined to secure strategic objectives while it still holds relative strength.
Implications for Canada and Global Trade
Excess industrial capacity will increasingly seek foreign markets. Chinese producers of electric vehicles, batteries, solar panels, steel, and advanced manufacturing equipment will need customers. This will create growing trade friction with Western countries, including Canada.
Beijing’s need for stable access to resources will also intensify. Canada possesses critical minerals, energy resources, advanced agricultural production, and strategic Arctic access. These assets will become increasingly important in an era of great-power competition.
Canadian policymakers must recognize that China’s debt problem is no longer just an economic issue—it’s a strategic one. Debt influences growth, military spending, trade behavior, and geopolitical decision-making. Canada should avoid two analytical mistakes: assuming China’s rise is inevitable or assuming its decline is imminent. Neither view reflects reality.
China remains a formidable competitor with high debt levels, a property sector correction disrupting the entire economy, declining birth rates, and a rapidly aging population. The task for Canada is not to predict China’s future, but to prepare for it.
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