This paper proposes a state observer (SO) based capacitor-voltage-balancing method for modular multilevel converters (MMCs) without arm-current sensors. Without the knowledge of the actual arm-current signals, this method can balance capacitor voltages while reducing the sampling signals, compacting the control system and saving the overall cost. In this paper, the arm-current value estimated by an SO, instead of the measured one, is employed to determine which sub-modules (SMs) should be inserted or bypassed. Furthermore, the design procedure of the proposed SO is presented. In addition, a medium voltage MMC (20 kV, 25 MW) simulation model using Matlab/Simulink is constructed to verify the proposed method. Finally, the proposed method is also validated by experimental results based on a scaled-down MMC prototype.