CHONGQING, CHINA – JANUARY 16: An old man walks down a street with high-rise residential buildings under construction in the background, with tower cranes and overhead power lines visible, on January 16, 2026 in Chongqing, China.
Chen Xin | Getty Images News | Getty Images
Fitch Ratings warned that the sharp downturn in Chinese investment is amplifying credit risks across the economy, particularly in the homebuilding, real estate, banking and construction sectors, and that the economic slowdown is weighing on China’s growth and ability to service its debt.
China’s fixed asset investment (FAI) will fall by 3.8% to 48.52 trillion yuan ($6.8 trillion) in 2025, the first annual decline in decades. This comes as a deepening real estate recession and tightening restrictions on local government borrowing are hampering one of China’s traditional growth engines.
Fitch said the sharp investment downturn in the second half of 2025 has heightened significant cross-sector credit risks for China’s rating issuers, including the government. In April, rating agencies downgraded China’s sovereign rating from “A+” to “A” due to concerns over worsening public finances and rising public debt.
Fitch warned that growth prospects for several sectors have “deteriorated” due to weak domestic demand, persistent deflationary pressures and weakness in real estate.
The world’s second-largest economy lost momentum in the final quarter of 2025, posting its lowest growth rate in three years at 4.5%.
Within FAI, real estate investment has declined for the fourth consecutive year, plummeting 17.2% year-on-year last year, as the housing recession continued to reduce activity across construction companies and upstream suppliers. National home sales fell to 7.3 trillion yuan ($1 trillion), the lowest level since 2015, and existing apartment prices continued to plummet.
The slump in real estate has left several cash-strapped developers in dire straits. Last month, Fitch downgraded China Vanke, once China’s largest developer, to “limited default” after the company sought extensions to domestic bond payments.
Earlier this month, Fitch downgraded Dalian Wanda Commercial Management Group and Wanda Commercial Real Estate to “limited default” following the completion of a non-performing loan exchange. Jing Rui Holdings was ordered to cease operations in Hong Kong last week.
The rating agency expects China’s GDP growth rate to be 4.1% due to easing net trade and weak consumer spending. Fitch said that if FAI continues to decline by double digits, it will likely not be able to sustain growth of 4-5% in 2026.
However, Goldman Sachs noted that concerns about a sharp drop in investment may be overstated, and that the decline may be partially due to “statistical corrections to previously over-reported data rather than a true slowdown.”
Tight local government finances
Samuel Kwok, managing director of international public finance for Asia Pacific at Fitch Ratings, said local government financing vehicles (LGFVs) were still far from being self-sufficient in debt servicing. The debt has been given a “neutral” rating on the assumption that authorities will intervene if stress intensifies.
Kwok said a “stronger than expected” fiscal stimulus plan funded by local public sector debt could lead to a deterioration in the sector outlook for LGFV and its issuers if debt used for “quasi-policy” investments grows faster than LGFV and local governments’ ability to support them.
Quasi-policy investments refer to projects that are funded off-budget through the LGFV rather than direct fiscal expenditures to further government policy objectives.
Local governments are suffering from the loss of land sales revenue, and the Chinese government has tightened its grip on local government financing options, limiting investment in infrastructure.
Erika Tay, director of macro research at Maybank, said FAI excluding real estate declined by 0.5% in 2025 as local governments focused on debt repayments, putting pressure on national budget capital spending.
Hangzhou, China – January 16: Aerial view of the 8th main tower of the Northern Passage Bridge along the Hangzhou Bay Crossing Railway Bridge in Hangzhou, Zhejiang Province, China on January 16, 2026.
Ni Yanqiang/Zhejiang Daily Reporters Group | Visual China Group | Getty Images
The Chinese government’s efforts to boost infrastructure construction for the digital economy could lead to a modest recovery in public investment in 2026, potentially offsetting some weakness in real estate construction, Tay added.
Fitch noted that a slowdown in investment from local governments could hinder growth in certain “economically weaker regions,” while tighter limits on new borrowing could gradually improve the credit profile of some local government financing vehicles.
Concerns about the quality of bank assets
The agency added that a stronger boost to loan growth could be credit negative for banks, as it could compress net interest margins and significantly increase system-wide leverage.
Fitch said a deepening investment downturn, resulting in a significant rise in unemployment, could reduce lenders’ asset quality and weigh on mortgage-backed securities and other asset-backed securities, and said banks’ asset quality is expected to see a “moderate deterioration,” if any at all.
The national unemployment rate will rise to 5.2% in 2025 from 5.1% the previous year.
However, China is likely to stick to a cautious approach to monetary policy, with banks expected to prioritize high-quality borrowers rather than chasing loan growth, a stance Fitch said should help stabilize asset quality overall.
The rating agency expects the central bank to cut the seven-day reverse repo rate by 20 basis points to 1.2% this year, saying there is limited room for more aggressive monetary easing as bank profitability is already under pressure.
China’s top financial regulator earlier this month extended a policy that allows banks to process bad personal loans beyond the original deadline of the end of 2025, easing pressure on banks amid rising default risks, according to Bloomberg.
