CHONGQING, CHINA – JANUARY 16: An elderly man walks along a street with high-rise residential buildings under construction in the background, where tower cranes and overhead power lines are visible on January 16, 2026, in Chongqing, China.
Cheng Xin | Getty Images News | Getty Images
China’s sharp investment downturn is amplifying credit risks across the economy, particularly homebuilders, real estate, banks and construction sectors, Fitch Ratings has warned, as a slowing economy crimps their growth and the ability to repay debt.
Fixed-asset investment in China, or FAI, declined 3.8% in 2025 to 48.52 trillion yuan ($6.8 trillion) — the first annual decline in decades — as a deepening property slump and tighter constraints on local governments’ borrowing have hampered one of China’s traditional growth drivers.
The drastic investment slump in the second half of 2025 has raised significant cross-sector credit risks for rated issuers in China, including that for the government, Fitch said. The rating agency downgraded China’s sovereign rating to “A” from “A+” in April on concerns over weakening finances and rising public debt.
Fitch warned that growth outlook for several sectors was “deteriorating,” citing subdued domestic demand, deep-seated deflationary pressures and property downturn.
The world’s second largest economy lost momentum in the final quarter of 2025, clocking its slowest growth in three years at 4.5%.
Among FAI, property investment declined for a fourth consecutive year, plummeting 17.2% last year from a year ago, as the housing downturn continued to sap activity across construction and upstream suppliers. Nationwide residential sales dropped to 7.3 trillion yuan ($1 trillion), their lowest level since 2015, while prices for existing apartments continued plummeting.
The property downturn has pushed several cashed-strapped developers into distress. Last month, Fitch downgraded China Vanke Co, once the country’s biggest developers, to “restricted default” as the the company sought to extend the deadline for an onshore bond payment.
Earlier this month, Fitch downgraded Dalian Wanda Commercial Management Group and Wanda Commercial Properties to “restricted default” on completion of a distressed debt exchange. Jingrui Holdings last week was ordered to wind up operations in Hong Kong.
The rating agency expects China’s GDP to grow at 4.1% due to easing net trade and sluggish consumer spending. A sustained double-digit decline in FAI will likely be unable to sustain 4%-5% growth in 2026, Fitch said.
Goldman Sachs, however, noted that concerns over the sharp plunge in investment may be overblown, as the decline could be partly due to “statistical correction of previously over-reported data, rather than a genuine slowdown.”
Local governments’ fiscal strains
Local government financing vehicles, or LGFVs, remain far from self-sufficient in servicing debt, said Samuel Kwok, managing Director, Asia-Pacific International Public Finance, Fitch Ratings. The debts are assigned a “neutral” rating on expectations that authorities will step in if stress intensifies.
“A stronger-than-expected” fiscal stimulus plan financed by local public-sector debt could lead to a deterioration in the sector outlook for LGFVs and their issuers, Kwok said, if debt used for “quasi-policy” investment rises faster than LGFVs and local governments’ capacity to support it.
Quasi-policy investment refers to projects financed off-budget through LGFVs rather than direct fiscal spending to advance government policy goals.
Local governments have suffered from the loss of land sales revenue, while Beijing tightened its grip on local authorities’ financing vehicles, which has limited their investment into infrastructure.
FAI excluding real estate fell 0.5% for 2025, as state-budget capital spending was squeezed by local governments’ focus on debt repayment, said Erica Tay, director of macro research at Maybank.
HANGZHOU, CHINA – JANUARY 16: Aerial view of the No. 8 main tower of the northern navigation channel bridge along the Hangzhou Bay Cross-Sea Railway Bridge on January 16, 2026 in Hangzhou, Zhejiang Province of China.
Ni Yanqiang/Zhejiang Daily Press Group | Visual China Group | Getty Images
Beijing’s push to spur infrastructure construction for the digital economy may lead to a mild recovery in public investment in 2026, Tay added, offsetting some weakness in property construction.
While slower investment from local governments could hamper growth in certain “economically weaker regions,” tighter limits on new borrowing may gradually improve the credit profiles of some local-government financing vehicles, Fitch noted.
Bank asset quality concerns
The agency added that a more forceful push to lift lending growth could be credit-negative for banks, as it could compresses net interest margins or materially increases leverage across the system.
A deeper investment slump that drives a meaningful rise in unemployment could weaken lenders’ asset quality and pressure residential mortgage-backed and other asset-backed securities, Fitch said, expecting a “mild deterioration,” if at all, in banks’ asset quality.
Nationwide jobless rate inched up to 5.2% in 2025, from 5.1% in the previous year.
However, China is likely to stick with a cautious approach to its monetary policy, with banks expected to prioritize higher-quality borrowers over chasing loan growth — a stance Fitch said should help keep asset quality broadly stable.
The ratings firm expects the central bank to cut the 7-day reverse repo rate by 20 basis points this year to 1.2%, citing limited room for more aggressive easing given banks’ already-squeezed profitability.
China’s top financial regulator extended a policy earlier this month to allow banks to dispose of bad personal loans beyond the original end of 2025 deadline, according to Bloomberg, easing pressure on banks as default risks climbed.
