China’s sharp investment downturn is intensifying credit risks across the economy, particularly in the property, construction, and banking sectors, Fitch Ratings warned, as a slowing economy limits growth and debt repayment capacity.
Fixed-asset investment (FAI) in China fell 3.8% in 2025 to 48.52 trillion yuan ($6.8 trillion), marking the first annual decline in decades. A deepening property slump and tighter local government borrowing constraints have weighed on one of the country’s traditional growth engines.
“The sharp investment slowdown in the second half of 2025 has raised cross-sector credit risks for rated issuers, including the government,” Fitch said, noting it downgraded China’s sovereign rating to “A” from “A+” in April over concerns about weakening finances and rising public debt.
Fitch cited a deteriorating growth outlook across multiple sectors, driven by subdued domestic demand, persistent deflationary pressures, and the ongoing property downturn. China’s economy lost momentum in the final quarter of 2025, posting its slowest growth in three years at 4.5%.
Property investment fell for the fourth consecutive year, plummeting 17.2% in 2025, while nationwide residential sales dropped to 7.3 trillion yuan ($1 trillion), the lowest level since 2015. Prices for existing apartments continued to decline, dragging down activity in construction and upstream industries.
The property slump has pushed several heavily indebted developers toward distress. Fitch last month downgraded China Vanke Co, once among the country’s largest developers, to “restricted default” after the company sought to extend an onshore bond payment. Earlier this month, Fitch similarly downgraded Dalian Wanda Commercial Management Group and Wanda Commercial Properties following a distressed debt exchange. Jingrui Holdings was ordered to wind up operations in Hong Kong last week.
Fitch expects China’s GDP to grow 4.1% in 2026, constrained by sluggish consumer spending and easing net trade. The agency warned that a sustained double-digit decline in FAI would likely prevent the economy from sustaining 4%-5% growth next year. Goldman Sachs, however, suggested that some of the investment drop may reflect a statistical correction rather than a true slowdown.
Local government financing vehicles (LGFVs) remain far from self-sufficient in servicing debt, Fitch managing director Samuel Kwok said. Their debts are assigned a “neutral” rating, reflecting expectations that authorities would intervene if stress intensifies.
“If debt used for quasi-policy investment rises faster than LGFVs and local governments’ capacity to support it, the sector outlook could deteriorate,” Kwok added. Quasi-policy investment refers to off-budget projects financed by LGFVs to meet government policy goals.
Local governments have faced revenue losses from land sales, while tighter central oversight has limited investment in infrastructure. Excluding real estate, FAI fell 0.5% in 2025 as capital spending from state budgets was constrained, Erica Tay, director of macro research at Maybank, noted.
Beijing’s efforts to boost digital economy infrastructure may support a modest rebound in public investment in 2026, partially offsetting weakness in property construction. Fitch noted that slower investment in weaker regions could hamper growth, but tighter borrowing limits may improve credit profiles for some LGFVs.
Fitch warned that aggressive measures to boost lending could be credit-negative for banks, compressing net interest margins and increasing leverage. A prolonged investment slump raising unemployment could also weaken asset quality, particularly for residential mortgage-backed and other asset-backed securities. Nationwide unemployment rose to 5.2% in 2025 from 5.1% the previous year.
However, Fitch expects banks to maintain a cautious lending approach, focusing on higher-quality borrowers, which should help keep asset quality broadly stable. The ratings firm anticipates the central bank will cut the seven-day reverse repo rate by 20 basis points to 1.2% this year, reflecting limited room for aggressive monetary easing.
China’s top financial regulator recently extended a policy allowing banks to dispose of bad personal loans beyond the original 2025 deadline, easing pressure amid rising default risks, Bloomberg reported.
