China's Debt Crisis Fuels Aggressive Global Economic Expansion

Why It Matters

A new Congressional Research Service report on China's economic trends lands at a pivotal moment, as Congress and the Trump administration wrestle with how aggressively to confront Beijing's state-driven economic model. The report lays out a core tension: China is simultaneously weakening under the weight of structural debt, deflation, and demographic decline, while doubling down on industrial policies that are reshaping global markets in ways that directly threaten U.S. economic interests.

President Trump is set to meet Chinese leader Xi Jinping in Beijing on May 14 and 15 for talks about trade, Taiwan, and China's relationship with Iran as the war in the Middle East enters its third month.

The Big Picture

The report, updated in May 2026, offers a sobering look at Chinese economic challenges that go well beyond the current trade war. China's government officially reported five percent real GDP growth in 2025, but some economists put actual growth at 2 to 3 percent, a credibility gap that complicates how policymakers in Washington should read Beijing's economic signals.

The numbers that don't require interpretation are striking on their own. China's non-financial sector debt reached 296 percent of GDP in the third quarter of 2025, driven by private firms and provincial and local governments that have relied on debt-financed property sales as a primary revenue source. Property prices, in turn, are a key factor in firms' valuations and household net worth, creating a feedback loop that constrains Xi Jinping's stated goals of reducing debt while advancing his "common prosperity" agenda.

The International Monetary Fund and the World Bank both flag these dynamics as dangerous. The IMF has assessed that the high volume of Chinese exports is creating adverse spillover effects and destabilizing the global economy. It was also estimated in early 2026 that China's currency, the renminbi, is undervalued by 16 percent, and has pressed Beijing to revalue it. China's 2026 Government Work Report signaled the renminbi would remain "generally stable at an adaptive, balanced level," suggesting Beijing is in no hurry to comply.

China Economy Trends

At the core of PRC economic policy is what the report describes as a "dual circulation" strategy, which aims to create demand by increasing supply. Decades of policies boosting production without concurrently incentivizing domestic consumption have left China's economy structurally imbalanced. Gross capital formation, a measure of investment in long-term production capacity, stands at 43 percent of GDP, compared to 22 percent in the United States.

Rather than pivot toward broad consumer stimulus, PRC leaders have doubled down. The 2026 fiscal package includes $644.7 billion in local government bonds, $190.5 billion in long-term bonds for infrastructure and manufacturing upgrades, and $14.7 billion for consumer financing. Consumer goods trade-in programs, meanwhile, were trimmed to $36.6 billion, down from $44 billion in 2025. The message from Beijing is consistent: the state will invest its way to growth, even as economists argue the returns on that model are diminishing.

China's 15th Five-Year Plan, covering 2026 to 2030, reinforces this trajectory. It calls for "indigenous" innovation as the core driver of development, explicitly targeting a reduction in reliance on foreign science and technology. Key priorities include upgrading legacy industries such as steel, petrochemicals, and shipbuilding; expanding advanced manufacturing through artificial intelligence and robotics; developing PRC-controlled global supply chains; and digitalizing the economy, with a target of the digital economy reaching 12.5 percent of GDP by 2030.

China also controls roughly 29 percent of global manufacturing output as of 2023. State-led industrial policies are fueling export expansion in electric vehicles, solar energy, semiconductors, and steel, sectors where subsidized Chinese production is already reshaping global competition.

Political Stakes

China Economic Growth Projections Put Congress on Notice

For Congress, the report frames four distinct options, none of them simple. Lawmakers could move to address PRC industrial subsidies and the role of the state in PRC firms. They could examine how Chinese investments in the United States and third countries distort markets. They could pursue joint trade actions with top trading partners to apply multilateral pressure on Beijing. Or they could conduct a comprehensive assessment of aggregate U.S. exposure to the Chinese economy, an exercise the report implies has not been done with sufficient rigor.

Each option carries political weight. Multilateral coordination, for instance, sits uneasily alongside an administration that has simultaneously imposed tariffs on allies. And assessing U.S. economic exposure to China risks surfacing uncomfortable dependencies in supply chains, financial markets, and technology.

China's GDP Slowdown Creates Leverage and Risk for the Administration

For the Trump administration, the report is a double-edged document. On one hand, China's structural stress, slowing growth, a deflating property sector, and record debt levels suggest that U.S. economic pressure is having real effects. China's trade surplus of $1.2 trillion and its $3.8 trillion in goods exports are features of a model that depends on foreign demand to compensate for weak domestic consumption, making Beijing vulnerable to sustained trade pressure.

On the other hand, China's response to that pressure, accelerating its push for technological self-sufficiency and developing PRC-controlled global supply chains, could reduce American leverage over time. The 15th Five-Year Plan is, in part, a direct institutional response to U.S. export controls and tariffs. The more Washington restricts access to American technology, the report suggests, the faster Beijing moves to build its own.

Currency policy is another flashpoint. China remains on the U.S. Treasury Department's watch list for currency practices, including its failure to publish exchange rate intervention data. With the IMF estimating the renminbi is undervalued by 16 percent, the administration has both a multilateral imprimatur and a domestic political argument for escalating currency-related trade actions. Whether it chooses to do so, and how, will shape the next phase of the economic competition.

For Democrats, the report offers ammunition on multiple fronts. The IMF and World Bank findings about global spillover effects from Chinese overcapacity bolster arguments for coordinated international responses rather than unilateral tariff escalation. The structural debt crisis in China's property sector and local government finances also raises questions about financial contagion risks that a go-it-alone trade strategy may not adequately account for.

For the public, the stakes are more immediate. China's share of global manufacturing, its dominance in EV and solar supply chains, and its push to set global technical standards and trade rules all have direct implications for American jobs, energy costs, and the competitiveness of U.S. industry. The report doesn't predict outcomes, but it maps the terrain of a competition that is accelerating.

The Bottom Line

The CRS report makes clear that China's economic challenges are real and deepening, but so is its strategic ambition. Beijing is not retreating from its state-led model. It is refining it, insulating it from foreign pressure, and using it to position China as a rule-setter in global trade and technology.

For Congress and the administration, the report is a reminder that tariffs alone don't resolve the underlying structural questions. Whether the U.S. response is legislative, diplomatic, or a combination, the window for shaping the competitive landscape is narrowing as China's 15th Five-Year Plan moves from blueprint to implementation.

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