Ticking time bombs in Asia: Why China's hidden debts, among others, threaten us all

The $12 Trillion Danger: How Japan's Debt Could Trigger a Global Financial Tsunami

In the shadow of Asia's economic rise, a threat is growing that has the potential to trigger the next global financial crisis: a debt burden of historic proportions. From Japan's record debt, which defies imagination, to China's hidden debt mountains, which lie like a financial unexploded bomb beneath the global economy, the continent has become an epicenter of financial instability. With debt ratios climbing to over 236% of gross domestic product in Japan and unofficially exceeding the 300% mark in China, the question is no longer if the bubble will burst, but when.

But the picture is complex and full of contradictions. While Pakistan teeters on the brink of insolvency and is deeply entangled in China's geopolitical debt trap, Taiwan presents itself as a model student with declining debt. Singapore, in turn, astonishes with an astronomically high debt ratio, which is nevertheless part of a unique and stable financial strategy. This development is far more than a statistical curiosity – it poses systemic risks for global financial markets, directly influences interest rate policy, which also affects German savers, and is permanently shifting the geopolitical balance of power. The following analysis delves deep into Asia's debt crisis, uncovering the most pressing dangers and explaining why the world's financial future hangs in the balance.

Debt apocalypse or clever strategy? Why Singapore is considered stable despite a 173% debt-to-GDP ratio

Government debt in Asia has reached dramatic proportions in recent years and is developing into one of the region's greatest economic risk factors. While individual countries are affected to varying degrees, there is a consistent trend toward rising debt ratios, which could have serious consequences for global economic stability.

The situation varies considerably between countries: Japan leads the list with a government debt ratio of 236.7 percent of gross domestic product in 2024. Singapore follows surprisingly with 173.1 percent, although this should be assessed differently due to the unique structure of the city-state economy. China reached an official debt ratio of 88.3 percent of GDP in 2024, although experts estimate the actual debt, including local government debt, to be significantly higher. India has a debt ratio of 57.2 percent, while South Korea stands at 46.8 percent. Pakistan struggles with 70.1 percent of GDP, Indonesia is at 39.2 percent, and Taiwan has the lowest debt ratio of the countries examined at 29 percent.

How has debt developed in Japan?

Japan is at the center of the Asian debt crisis and is considered a cautionary tale of the risks of extreme government debt. With a government debt ratio of over 236 percent of GDP, Japan is the most indebted industrialized country in the world. This unprecedented debt is the result of decades of deflationary tendencies, an aging population, and expansionary fiscal policy.

Japan's total debt, encompassing all sectors, reached 1,279 percent of GDP at the end of 2024, meaning the total debt burden is almost thirteen times its annual economic output. These astronomical figures are made possible by the Bank of Japan's decades-long zero-interest rate policy, which, however, is increasingly reaching its limits.

The situation is further exacerbated by demographic trends. Japan is aging faster than any other industrialized country, dramatically increasing the burden on social security systems while simultaneously shrinking the tax base. The government faces the insoluble dilemma of having to choose between debt reduction and necessary social spending.

What specific risks arise from Japan's debt?

Japan's debt situation poses systemic risks to global financial stability. The greatest risk arises from the so-called yen carry trade, in which international investors borrow cheaply in yen to invest in higher-yielding assets worldwide. Estimates suggest that between $8 and $12 trillion are affected by this mechanism.

Every interest rate hike by the Bank of Japan therefore has far-reaching global repercussions. When the central bank raised its key interest rate for the first time in years in 2024, this caused considerable turmoil in international financial markets. A further tightening of monetary policy could lead to massive capital outflows from other markets as investors repay their yen-denominated loans.

The interest burden is becoming increasingly unsustainable for the Japanese government. While the government had to pay 1.2 percent interest on a 20-year bond at the beginning of 2024, it has now risen to 2.4 percent. Given the enormous debt burden, every percentage point increase in interest rates represents an additional burden of over 13 trillion yen per year for the national budget.

How serious is China's debt problem?

China's debt situation is more complex and potentially more dangerous than official figures suggest. While the official government debt-to-GDP ratio of 25.6 percent appears moderate, this figure obscures the true extent of the problem.

Various international organizations estimate the actual national debt ratio of the central government to be significantly higher:

• Trading Economics: 88.3 percent of GDP for 2024
• Statista forecasts: 96.3 percent of GDP for 2025
• Federal Ministry of Finance: Similar values ​​in international comparison

The country's total debt, including corporate and local government debt, reached 408.3 trillion yuan by the end of 2024, equivalent to 303 percent of GDP.

Particularly problematic is the hidden debt of local governments, which is financed through so-called Local Government Financing Vehicles (LGFVs). These structures circumvent official debt limits and have created a shadow financial system whose risks are difficult to quantify. Experts estimate China's actual debt ratio, taking all liabilities into account, to be between 330 and 360 percent of GDP.

The Chinese government has announced a moderate easing of monetary policy in 2024 for the first time in 14 years and has increased the official budget deficit to 4 percent of GDP—the highest level since at least 2010. These measures indicate that the Chinese leadership has also recognized the severity of the debt problem.

What are the consequences of local debt in China?

Local government debt in China represents one of the greatest threats to the country's financial stability. At the end of 2023, local governments' hidden debt amounted to 14.3 trillion yuan, which could grow to over 60 trillion yuan by 2028. In response, the Chinese government has announced an unprecedented 10 trillion yuan aid package to restructure this debt.

Local governments drastically cut their investments by an average of 15 percent in 2024, and in some regions such as Guizhou and Yunnan by as much as 25 percent. At the same time, salaries of civil servants were delayed, highlighting the financial hardship.

The problem is exacerbated by China's real estate crisis, which has a direct impact on the revenues of local governments. These governments traditionally finance themselves through land sales, whose revenues have plummeted dramatically due to the crisis. The collapse of the real estate market has thus triggered a chain reaction that threatens the entire local financing system.

How does India fare in terms of national debt?

India presents itself as a relative success story in the debt debate, but nevertheless faces significant structural problems. With a government debt ratio of 57.2 percent of GDP, the country is below the critical thresholds for emerging markets, but above the 50 percent threshold considered safe for developing countries.

India's external debt reached a record high of $736.3 billion in the first quarter of 2025, an increase of $67.5 billion year-on-year. Particularly notable is the increase in short-term debt, whose ratio to foreign exchange reserves rose to 20.1 percent.

A positive aspect of India's debt is its domestic structure. A significant portion of the national debt is held by local banks and the central bank, which reduces risk in stress situations. India's nominal GDP must grow by 10 percent annually to stabilize the national debt at current levels, which experts consider a realistic assumption.

What dramatic developments are taking place in Pakistan?

Pakistan is in an acute debt crisis that has repeatedly brought the country to the brink of insolvency. With a national debt-to-GDP ratio of 70.1 percent and critical external debt indicators, Pakistan is a prime example of the dangers of excessive debt in emerging markets.

Pakistan's external debt reached $131.1 billion at the end of 2024, with annual debt service consuming 42 percent of export earnings. This ratio is well above the 15 percent threshold considered critical and demonstrates the unsustainability of the current situation.

Pakistan has fallen into a Chinese debt trap, as China has loaned the country $30.3 billion, primarily through the Belt and Road Initiative. This dependence severely limits Pakistan's political freedom of action and makes it a pawn in geopolitical interests.

The country's currency, the rupee, fell to record lows in 2023, at one point reaching 250 rupees to the US dollar. Inflation reached 31.5 percent, giving Pakistan the third-highest inflation rate in Asia. Only a €3 billion IMF bailout package saved Pakistan from national bankruptcy in 2023.

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What is the situation in South Korea and the other countries?

South Korea's government debt ratio is still moderate at 46.8 percent of GDP, but the upward trend is worryingly high. Forecasts predict a steady increase to 59.19 percent by 2030, driven primarily by demographic developments. The country has the lowest fertility rate in the world at just 0.72, which will have massive long-term implications for the financial viability of its social security systems.

At 39.2 percent of GDP, Indonesia's debt situation remains relatively stable. The country currently has no acute debt problem, nor will it in the near future, but its high debt load in the form of government bonds makes it vulnerable to potential interest rate increases. At 39 percent of gross national income, external debt is just below the critical threshold of 40 percent.

Taiwan stands out positively, with the lowest national debt ratio at 29 percent of GDP. The country is even showing a continuous decline in debt and is expected to report only 17.37 percent of GDP as national debt by 2029. This positive development makes Taiwan one of the few countries in the region with a sustainable fiscal policy.

What makes Singapore's debt so special?

Singapore's high public debt ratio of 173.1 percent of GDP is misleading and not comparable to that of other countries. The city-state has developed a unique financial architecture in which the government strategically borrows while simultaneously investing these funds in long-term investments and reserves.

Singapore is taking on strategic debt to finance major infrastructure projects while simultaneously building up massive foreign exchange reserves. This dual strategy works because of the country's exceptionally high credit rating and its role as an international financial center. The debt is backed by corresponding assets, which significantly reduces the actual risk.

The high debt-to-GDP ratio also reflects Singapore's role as a financial center, where international capital flows are channeled through the government's balance sheet. This explains why, despite the high nominal debt, there are no signs of financial instability.

Are the negative consequences already visible?

The negative effects of high government debt in Asia are already clearly visible and manifesting themselves at various levels. In Japan, rising interest rates are leading to a dramatic increase in the interest burden, forcing the government to once again postpone its goal of a balanced primary budget. Demographic challenges are further exacerbating the situation, as a shrinking population means a greater per capita debt burden.

China is already showing clear signs of a slowdown in economic growth, which is directly linked to its debt burden. Deflation has persisted for six quarters—the longest period this century. The real estate market shows no signs of recovery, and consumer and business confidence remains at a low.

In 2023, Pakistan experienced an acute financial crisis that was only averted by an IMF bailout. Inflation reached 31.5 percent, the currency plummeted, and the country was on the verge of default. These events demonstrate how quickly a debt crisis can escalate.

What long-term consequences can be foreseen?

The long-term consequences of the Asian debt crisis will be far-reaching and fundamentally alter the global economic order. Demographic change in countries like Japan, China, and South Korea will further exacerbate the debt problem. An aging population will mean higher social spending while simultaneously declining tax revenues, putting enormous pressure on public finances.

China faces the challenge of reforming its debt-driven growth model before it leads to a systemic crisis. The likelihood of a financial crisis in China is continuously increasing, and such an event would have serious repercussions for the global economy, as China is now the world's second-largest economy.

The geopolitical implications will also be significant. Countries like Pakistan, which have become dependent on Chinese debt, will increasingly lose their foreign policy sovereignty. This could lead to a reordering of the regional balance of power, with China transforming its economic dominance into political influence.

How does debt affect global financial markets?

The Asian debt crisis has already begun to destabilize global financial markets. The yen carry trade, based on Japan's zero-interest rate policy, ties up an estimated $8 to $12 trillion in capital. Any change in Japanese monetary policy therefore triggers chain reactions in global markets.

The low interest rate policy in indebted Asian countries is contributing to the fact that German savers will continue to see no higher interest rates. Since highly indebted countries cannot tolerate rising interest rates, they will adjust their monetary policy accordingly, which will have global repercussions.

A further risk arises from the increasing interdependence of Asian financial systems. A collapse in a large country like China could trigger domino effects that sweep other Asian economies along with it. The experience of the 1997 Asian financial crisis demonstrates how quickly financial crises can spread in the region.

What structural reforms are necessary?

To overcome the debt crisis, far-reaching structural reforms in the affected countries are essential. China must fundamentally rethink its debt-driven growth model and shift to consumption-based growth. This requires strengthening the social safety net to reduce households' propensity to save.

Japan faces the difficult task of consolidating its public finances without further strangling its already weak economy. One possible solution could be the introduction of bond-to-equity swaps, in which government bonds are used to finance strategic investments.

For countries like Pakistan, fundamental reform of the tax structure and public administration is necessary. Chronic political instability and poor governance must be overcome to enable sustainable fiscal policy.

How can the risks of a regional financial crisis be minimized?

Minimizing the risks of a regional financial crisis requires coordinated international efforts. Stronger regulation of shadow banking systems, especially in China, is urgently needed. Local financing vehicles must be made more transparent, and their risks must be better quantified.

The international community should create alternative sources of financing for developing countries to reduce their dependence on Chinese loans. A European infrastructure initiative could remedy this situation and limit China's geopolitical influence.

Early warning systems for debt crises must be further developed to enable timely countermeasures. Experience from the 1997 Asian crisis has shown that preventive measures are significantly more cost-effective than subsequent bailouts.

The demographic challenges require a complete reorientation of social systems in the affected countries. Greater openness to immigration, pension system reforms, and investments in automation are essential to cope with the burdens of an aging society.

The current sovereign debt situation in Asia poses one of the greatest challenges to global economic stability. While some countries, such as Taiwan and Singapore, are managing their finances sustainably, others, such as Japan, China, and Pakistan, are facing existential problems. The already visible negative consequences will intensify in the coming years and urgently require coordinated international efforts to prevent crises. Without fundamental structural reforms, the Asian continent risks becoming a trigger for the next global financial crisis.

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