The Direct Comparison of Debt to GDP This article is longer than my usual contribution, but the issue is of critical importance. Donald Trump’s meeting with Xi Jinping is taking place at a time of unprecedented economic turmoil caused by the closure of the Strait of Hormuz. As I have discussed in my recent articles, the disruption of the supply chains for oil, Liquid Natural Gas, sulfur, helium and urea marks a global event that has not happened in modern history.
Many Western economists claim that China’s economy is more troubled than the US, even though the US has a far worse debt to gdp ratio. Based on official data from US government sources and China’s State Administration of Foreign Exchange, the United States has a significantly higher debt-to-GDP ratio than China. As of the end of 2025, the US ratio was 122.6% , while China’s ratio was 11.9% .
However, it is crucial to understand that these two figures measure very different things. They are like comparing the debt of an entire country to the foreign debt of a single corporation. Here is a detailed breakdown of the comparison.
The Western analysts give the edge to the US over China using the following criteria: Debt quality and productivity matter more than raw ratios. The core Western argument is not simply about the size of debt but about what it bought. Western analysts point to China’s debt-fueled investment in property, infrastructure, and state-owned enterprises as having generated diminishing returns — ghost cities, empty highways, and overcapacity in steel and aluminum — whereas US debt has financed consumption, defense, and transfer payments in a predominantly market-driven economy where capital allocation is more efficient. The property crisis is structural and severe. China’s property sector, which at its peak accounted for roughly 25–30% of GDP when including related industries, has been in a prolonged downturn since Evergrande’s collapse in 2021. Unlike a cyclical recession, this represents a fundamental repricing of the dominant store of household wealth in China, with no clear floor yet established. The US has no equivalent structural drag of comparable scale. Deflation vs. inflation dynamics. China is battling deflation — consumer prices were negative or near-zero through much of 2024 and 2025 — which is particularly dangerous for a heavily indebted economy because it increases the real burden of debt even without new borrowing. The US, despite recent inflation, has seen nominal GDP grow faster than its debt in recent years, which mechanically improves its debt-to-GDP ratio. Demographics are dramatically worse. China faces one of the most severe demographic contractions in history — a consequence of the one-child policy — with its working-age population already shrinking and its old-age dependency ratio set to roughly triple by 2050. A shrinking workforce means slower growth, higher social spending, and a smaller tax base to service debt. The US demographic outlook, while challenging, is substantially better due to immigration. Reserve currency privilege. This is arguably the most important distinction. The US dollar is the world’s reserve currency, meaning the US can borrow in its own currency at relatively low interest rates from a virtually unlimited global pool of creditors. If the US faces a debt crisis, it can ultimately print dollars. China cannot do this — the renminbi is not freely convertible and is not a global reserve currency — meaning China’s debt dynamics are more constrained. Al Jazeera Transparency and data reliability. Many Western analysts distrust China’s official statistics. GDP figures, local government debt levels, and bank non-performing loan ratios are all viewed with suspicion, with analysts routinely assuming the real figures are worse than reported. US data, produced by independent statistical agencies, is generally taken at face value. MS NOW An Alternative View :
These arguments, on the surface, appear valid but reflect a Western bias that is a product of arrogance and ignorance. Here are the main biases I see that skew the Western analysis: Dollar-centric framing. Much Western financial analysis is produced by institutions — Wall Street banks, Washington think tanks, European universities — whose entire intellectual framework assumes dollar hegemony as a permanent feature of the world. Any analysis that questions that hegemony is institutionally uncomfortable. Confirmation bias in the analyst community. For roughly fifteen years, Western analysts have been predicting an imminent Chinese economic collapse that has not arrived. Having made those predictions publicly, there is professional pressure to continue making them rather than to revise the framework. Political convenience. At a moment of intense US-China geopolitical rivalry — and now active conflict in the Gulf — there is obvious political utility in portraying China’s economy as fragile. Analysts who work for institutions with government contracts or who seek access to policymakers have subtle incentives to align with the prevailing political narrative. The US debt problem is genuinely uncomfortable to discuss. Interest payments on the US national debt surpassed spending on both Medicare and national defense in fiscal year 2024 — a milestone that would, in any other country, prompt serious discussion of fiscal sustainability. The tendency to focus analytical attention on China’s problems rather than comparably serious US structural issues reflects a form of motivated reasoning.
Both economies have serious structural problems. China’s are more acute in the near term — the property crisis, deflation, and demographic collapse are genuine and severe. However, the US problems are more dangerous in the long run — a debt trajectory that is mathematically unsustainable without either significantly higher taxes, significantly lower spending, or financial repression through inflation. The critical variable is the US reserve currency privilege… Can the US maintain that privilege? I say no.
There is substantial and growing evidence across multiple independent indicators that dollar erosion is real, measurable, and accelerating, though its pace and ultimate destination remain genuinely contested. The dollar’s share of global foreign exchange reserves has fallen below 57% for the first time since 1995, reaching 56.9% in Q3 2025 and dropping further in subsequent quarters. This represents a structural decline from a peak of 72% in 2001. US Government Spending The IMF adds an important nuance: once adjusted for exchange rate effects — since a weaker dollar mechanically reduces the dollar-denominated value of reserves held in other currencies — the underlying active diversification away from dollars is somewhat smaller than raw figures suggest. Even so, the longer-term decline is real. NBER The dollar’s share has now dropped to a 31-year low, though what has primarily driven the declining share is not central banks selling dollar assets but rather a surge in assets denominated in dozens of smaller currencies as central banks diversify their growing reserve piles. The Dollar’s Exchange Rate The DXY index — the dollar against a basket of major currencies — fell more than 10% in the first half of 2025, its biggest drop since 1973. The dollar fell 7.9% against the euro and over 11% against the Swiss franc in those six months alone. In January 2026, it fell a further 1.2%, following the cumulative 10% decline against major currencies over the prior year. Pew Research Center Congressional Budget Office The sudden, sharp nature of these falls is unusual for a currency traded as widely as the dollar. The daily flow of transactions into and out of the dollar is so massive that sudden sharp declines should theoretically be smoothed out — the fact that they have occurred has sparked serious debate about whether the US is losing reserve currency status. MacroTrends Foreign Holdings of US Treasuries The share of foreign ownership in the US Treasury market has fallen from above 50% during the Global Financial Crisis to roughly 30% today. China specifically has cut its Treasury holdings from $1.3 trillion in 2013 to $682 billion as of November 2025. However, total foreign holdings have continued rising in absolute terms, hitting a record $9.35 trillion in November 2025, split between private entities ($4.8 trillion) and official institutions ($3.8 trillion) — so the decline in share reflects rapid Treasury issuance more than an exodus. The Gold Signal Gold’s share of global reserves has risen from 13% in 2017 to approximately 30% in 2025, with BRICS+ nations now holding 17.4% of global gold reserves, up from 11.2% in 2019. Net central bank gold purchases surged to 230 tonnes in Q4 2025 alone, bringing the full-year total to 863 tonnes. Increases in gold holdings are most strongly associated with a decline in dollar reserves specifically for China, Russia, and Turkey — the three countries most strategically motivated to reduce dollar dependence. Rhodium Group The Petrodollar: The Most Consequential Crack The petrodollar system — the cornerstone of dollar dominance since the 1970s — is showing cracks. BRICS nations now settle approximately 67% of intra-bloc trade in local currencies, up from under 20% a decade ago. The current Gulf conflict has materially accelerated this: Iranian oil is being sold for Chinese yuan, tolls at the Strait are being settled in yuan, and the PGSA’s payment infrastructure operates entirely outside the dollar system . \ The Safe Haven Question Perhaps most significantly, a January 2026 CEPR paper titled “The US Dollar: Not a Traditional Safe Haven” argued that the dollar no longer behaves as a reliable safe haven in all risk-off events — a foundational assumption of dollar dominance that, if permanently impaired, would have profound implications for reserve demand. However, the Reserve Bank of Australia noted that the dollar did appreciate following the recent attacks on Iran, suggesting the safe-haven function has not fully eroded. China’s Alternative Infrastructure China’s Cross-Border Interbank Payment System (CIPS) recorded 750,540 transactions valued at approximately $270 billion in a single month by March 2026, now connecting 194 direct participants and 1,597 indirect participants across 117 countries, with total annual volume reaching 180 trillion yuan ($25 trillion) in 2025 — a 43% annual volume increase. This is the plumbing of a parallel financial system being built in real time.
The question that analysts ought to be asking is what happens when (not if) the current supply chain disruption triggers a global depression, rather than global stagflation? The primary vulnerability for the US is not the size of its debt ($39 trillion, ~125% of GDP) but its funding model . The US relies on the constant goodwill of global investors to roll over its debt. A severe recession would directly test this confidence.
If a recession hit, the US government would face a massive fiscal cliff: Required Stimulus : To fight the recession, the government would likely need to pass another multi-trillion dollar stimulus package Automatic Stabilizers Surge : Spending on unemployment benefits, food assistance, and healthcare would skyrocket. Tax Revenues Collapse : Corporate and personal income tax receipts would plummet.
This sudden explosion in borrowing needs would come at the worst possible time. Here is the “doom loop” that former Treasury Secretary Henry Paulson and Federal Reserve Chair Jerome Powell have warned about :
- The Trigger : A recession causes the budget deficit to balloon far beyond current projections.
- - Loss of Confidence : Global investors, spooked by the US’s inability to control its finances, demand much higher interest rates (yields) to buy new Treasury bonds.
- - Debt Spiral : Higher interest rates dramatically increase the government’s cost to borrow, adding hundreds of billions to the deficit, which forces the government to issue even more debt.
- - The “Minsky Moment” : This self-reinforcing cycle could trigger a sudden collapse in bond prices, leading to what experts call a financial crisis or a currency crisis , potentially undermining the US dollar’s status as the world’s safe-haven currency .
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- China’s vulnerability is the opposite of America’s. Because its debt is mostly domestically held and controlled, it is less vulnerable to a sudden loss of confidence from foreign investors . Its risk is structural : The Chinese economy now requires enormous amounts of debt to generate very little growth.
Research data shows that in 2000, China needed roughly 13-16 yuan of new debt to generate 1 yuan of GDP growth. By 2025, it needed 60-75 yuan of debt to generate the same 1 yuan of growth. This collapsing “debt productivity” is the key danger. However, China’s Belt-and-Road-Initiative provides the Chinese with some options that would mitigate suffering in China from a global economic crisis.
The Belt and Road Initiative (BRI) is no longer just a foreign infrastructure program; it has evolved into a central pillar of China’s domestic economic strategy. Far from retreating as some Western analysts predicted, the BRI saw a record-breaking resurgence in 2025, with total project value reaching a staggering $213.6 billion . It now serves as a critical pressure valve and strategic engine for the Chinese economy in three major ways: absorbing industrial overcapacity, securing essential resources, and creating new export markets. Massive Scale and Recent Resurgence After a period of slower growth, the BRI has re-emerged with unprecedented scale and strategic focus. The data below illustrates the initiative’s recent explosive growth: The initiative’s focus has also shifted, moving beyond “small yet beautiful” projects to massive, strategic investments . This growth is directly linked to solving challenges inside China’s economy. A Safety Valve for Domestic Overcapacity China faces a significant domestic challenge: it manufactures far more than its population and slowing economy can consume, particularly in green and high-tech sectors. The BRI provides a crucial outlet for this excess production . High-Tech & Green Energy Surge: In 2025, China’s exports of electric vehicles (EVs), lithium batteries, and solar panels jumped by 27.1% , and wind turbine exports skyrocketed by 48.7% . Much of this production is finding a home in BRI partner countries. Building Factories Abroad: To bypass trade barriers like high US tariffs on Chinese goods, Beijing is using the BRI to relocate manufacturing capacity. In 2025 alone, BRI projects in the technology and manufacturing sector hit a record $28.7 billion , focusing on EV battery factories and semiconductor facilities in intermediary countries like those in Southeast Asia . Diversifying Markets Away from the West As Western markets, particularly the United States, have become less accessible due to trade tensions, the BRI has been instrumental in finding new customers for Chinese goods . BRI Now Dominates Trade: For the first time, trade with BRI partner countries now accounts for over half (51.9%) of China’s total foreign trade . The African Pivot: The most dramatic shift has been towards Africa. In 2025, Chinese exports to Africa jumped by roughly 18% , making it the top destination for Chinese export growth. Correspondingly, the value of BRI projects in Africa surged by a staggering 283% to reach $61.2 billion .
This strategy is reshaping global trade patterns. As one analysis notes, “south-south trade” —economic exchange between developing countries—has expanded tenfold over the past three decades and now accounts for over a third of global commerce Securing Supply Chains and Critical Resources Beyond selling goods, the BRI is also about securing what China needs to keep its industries running. It is being used as a tool to vertically integrate global supply chains . Critical Minerals: Massive investments are being made in mining and resource processing. The mining and metals sector under the BRI saw investments reach about $32.6 billion in 2025, including significant projects in Kazakhstan and other resource-rich nations . Energy Transition: While China has pledged to stop building new coal plants abroad, the 2025 BRI saw record green energy investments of $18.3 billion in solar and wind projects, alongside continued investment in oil and gas to meet its energy needs The competition between the US economy and the China economy is the backdrop for this week’s meeting in Beijing. If the shutdown of the supply chains from the Persian Gulf persist, the US economy and financial system is the most vulnerable. Does Donald Trump understand that?
Here is a conversation I had on Friday with Zulfiqar Ali. Zulfiqar is my source for the intel provided by the Pakistani ISI official: Judge Napolitano and I discussed the current situation in the Persian Gulf: Nima and I discussed Trump’s reaction to the Iranian position paper on ending the war (what a terrible AI photo --- I thank you for your invaluable support by taking time to read or comment. I do not charge a subscription fee nor do I accept advertising. I want the content to be accessible to everyone interested in the issues I am discussing. However, if you wish to make a donation, please see this link .