China’s massive lending machine, which has powered the world’s second-largest economy for decades, is showing clear signs of strain. The country’s credit engine has hit a quarter-century low, creating ripple effects that touch everything from bank profits to housing markets.
Total loans in China reached an impressive USD 36 trillion by January 2025, nearly matching record highs from September 2024. However, this big number tells only part of the story. The monthly growth rate of 7.53% represents a significant slowdown compared to previous years, like a car that’s still moving but running out of gas.
Banks are feeling the pinch in their wallets too. Over half of all lenders now offer rates at or below the official Loan Prime Rate, squeezing their profit margins thinner than pancakes. Bank profits actually dropped 2.3% in 2024, marking the first decline since 2021.
When banks make less money, they become less *enthusiastic* to lend, creating a cycle that’s hard to break.
The housing sector tells an even gloomier tale, with property-related loans shrinking throughout 2024. Both consumer and corporate lending growth slipped into single digits, reflecting weak demand across major economic sectors. It’s like a restaurant with fewer customers ordering smaller meals.
Private debt now represents a hefty 194.17% of the country’s GDP, showing how leveraged Chinese businesses and individuals have become. This high debt burden makes people and companies more cautious about borrowing additional money, even when banks offer attractive rates.
External pressures like tariffs have made matters worse, dampening credit demand and hurting asset quality. Meanwhile, China’s total external debt reached USD 2451.4 billion as of March 2025, adding another layer of financial complexity to the lending landscape. Experts estimate a potential credit shortfall of RMB 213.9 billion for 2025, roughly 1.2% of total new loans in worst-case scenarios.
Local Government Financing Vehicles face their own challenges with rapid debt growth raising sustainability concerns. China has launched debt swap programs to help restructure these obligations, but success depends heavily on continued economic growth and fiscal reforms. The dramatic expansion from the record low of USD 775.253 billion in January 1997 to today’s levels illustrates how far China’s credit markets have evolved over nearly three decades.
The credit slowdown creates a domino effect, reducing investment and consumer spending throughout China’s economy. For investors, maintaining cash reserves and focusing on quality companies becomes even more important during periods of economic uncertainty and credit constraints.
