China’s Investment Slump Deepens Credit Risks Across Economy, Fitch Warns

China’s sharp investment downturn is amplifying credit pressures across multiple sectors, particularly real estate, construction, banks and local governments, according to a new warning from Fitch Ratings. The ratings agency said a slowing economy and weak domestic demand are eroding borrowers’ ability to service debt, creating rising cross-sector risks.

Fixed-asset investment (FAI) fell 3.8% in 2025 to 48.52 trillion yuan ($6.8 trillion), marking the first annual contraction in decades. The decline reflects a deepening property slump and stricter limits on local government borrowing, which have curtailed one of China’s traditional growth engines. Fitch said the investment collapse in the second half of the year significantly increased credit risks, including for the sovereign, after it downgraded China’s rating to “A” in April due to weaker public finances and rising debt.

The economic slowdown was evident toward the end of the year, with China’s growth easing to 4.5% in the fourth quarter, the slowest pace in three years. Fitch noted that subdued consumption, deflationary pressures and the prolonged housing downturn are worsening the growth outlook for several sectors.

Property investment continued to drag heavily on overall activity, plunging 17.2% in 2025 for a fourth straight annual decline. Residential property sales fell to 7.3 trillion yuan, their lowest level since 2015, while prices for existing homes kept sliding. The downturn has forced households to rein in spending, intensified price competition among businesses and squeezed corporate profit margins.

Financial stress among developers has escalated. Fitch recently downgraded China Vanke to restricted default after it sought to extend an onshore bond payment deadline. Dalian Wanda Commercial Management Group and Wanda Commercial Properties were also downgraded following distressed debt exchanges, while Jingrui Holdings was ordered to wind up operations in Hong Kong.

Looking ahead, Fitch expects China’s GDP growth to slow to around 4.1% as exports ease and consumer spending remains weak. The agency cautioned that a sustained double-digit contraction in investment would make it difficult to sustain 4%–5% growth in 2026. In contrast, Goldman Sachs suggested the sharp drop in investment could partly reflect statistical revisions rather than a purely economic slowdown.

Local governments remain under strain as land-sale revenues fall and borrowing channels tighten. Fitch said local government financing vehicles (LGFVs) are still not self-sufficient in servicing debt and rely on expectations of state support. While stricter borrowing limits may gradually improve some credit profiles, a large, debt-funded fiscal stimulus could worsen risks if liabilities grow faster than repayment capacity.

Banks are expected to maintain a cautious stance, prioritizing asset quality over rapid loan growth. Fitch anticipates only a mild deterioration in banks’ balance sheets, with the central bank likely to limit easing to preserve profitability. However, the agency warned that a deeper investment slump or rising unemployment could heighten credit stress, particularly for mortgage-backed and other asset-backed securities.

Overall, Fitch said China’s investment-led slowdown is no longer a sector-specific issue but a systemic challenge, with implications for growth, financial stability and public finances as policymakers navigate the trade-offs between stimulus, debt control and long-term reform.