China’s investment slump raises credit risks for homebuilders, banks and government: Fitch

A sharp investment slump in China will exacerbate credit risks in the economy, particularly in the homebuilders, real estate, banks and construction sectors, Fitch Ratings warned, as the economic slowdown curbs their ability to grow and repay debt.

China’s fixed capital investment, or FAI, is set to decline 3.8% to 48.52 trillion yuan ($6.8 trillion) in 2025, the first annual decline in decades, as a deepening property slump and tighter curbs on local government borrowing hamper one of China’s traditional growth drivers.

A sharp drop in investment in the second half of 2025 raises significant cross-sector credit risks for China’s rated issuers, including the government, Fitch said. Rating agency Lowered China’s sovereign rating A from ‘A+’ to ‘A’ in April on concerns about weakening finances and rising public debt.

Fitch warned that the growth outlook for several sectors was “deteriorating”, citing weak domestic demand, deep deflationary pressures and property slumps.

The world’s second-largest economy lost momentum in the last quarter of 2025, reducing its pace Slowest growth in three years at 4.5%.

Among the FAI, real estate investment fell for the fourth year in a row, decreased by 17.2% last year from a year ago, as the housing slump dampened activity in construction and upstream suppliers. Home sales nationwide fell to 7.3 trillion yuan ($1 trillion), their The lowest level since 2015and the prices of existing apartments continued to fall sharply.

The housing slump has prompted millions of households to cut costs, forcing businesses to cut prices and squeeze profit margins in the process.

The property slump has left several cash-strapped developers in trouble. Last month, Fitch downgraded China Vanke Co, once the country’s biggest developer, to “limited default” as the company sought to extend the maturity of its onshore bonds.

Earlier this month, Fitch downgraded Dalian Wanda Commercial Management Group and Wanda Commercial Properties to “limited default” as it completed a distressed debt swap. Jingrui Holdings was ordered to cease operations in Hong Kong last week.

The rating agency expects China’s GDP to grow by 4.1% due to net trade facilitation and slower consumer spending. A sustained double-digit decline in FAI is unlikely to sustain 4%-5% growth in 2026, Fitch said.

However, Goldman Sachs noted that concerns about a sharp drop in investment may be overblown, as the decline may be due in part to “a statistical correction of previously overreported data rather than a genuine slowdown.”

Local government finance vehicles, or LGFVs, cannot be self-sustaining in debt servicing, according to Samuel Kwok, managing director of international public finance for Asia Pacific at Fitch Ratings. The debt has been given a “neutral” rating on the assumption that the authorities will intervene in case of increased stress.

A “stronger-than-expected” fiscal stimulus plan financed by local public sector debt could worsen the sector’s outlook for LGFVs and their issuers, Kwok said, if debt used for “quasi-policy” investments rises faster than LGFVs and local governments can support it. Quasi-policy investment refers to projects funded off-budget through LGFV rather than direct fiscal spending to promote public policy objectives.

Local governments have lost revenue from land sales, and Beijing has tightened controls on local government-financed vehicles, limiting their investment in infrastructure.

Excluding real estate, FAI is down 0.5% for 2025 as government capital spending is squeezed by local governments’ focus on debt repayments, Maybank director of macro research Erica Tay said.

Beijing’s push to build infrastructure for the digital economy could lead to some recovery in public investment in 2026, Tay added, offsetting some of the weakness in real estate construction.

While a slowdown in local government investment could hamper growth in some “economically weak areas,” tighter limits on new borrowing could gradually improve the credit profile of some local government financing facilities, Fitch noted.

China is likely to be cautious about its monetary policy, with banks expecting to prioritize high-quality borrowers rather than credit growth – a stance Fitch believes 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 to 1.2% this year, citing limited room for aggressive easing given banks’ already squeezed yields.

Fitch expects a “mild deterioration” in banks’ asset quality. But he warned that a deeper downturn in investment, which could lead to a sharp rise in unemployment, could weaken lenders’ asset quality and put pressure on mortgage-backed and other asset-backed securities.

The unemployment rate in the country increased from 5.1% last year to 5.2% in 2025.

The agency said a stronger push to boost lending growth could be credit-negative for banks, as it could squeeze net interest margins or significantly increase leverage in the system.

China’s top financial regulator earlier this month extended a policy allowing banks to write off bad personal loans beyond an initial deadline of 2025, according to Bloomberg, easing pressure on banks as the risk of default rises.