China’s deepening investment slowdown is intensifying credit pressures across multiple parts of the economy, with property developers, real estate services, construction firms and banks among the most exposed, according to a recent warning from Fitch Ratings. As economic growth cools, these sectors are facing mounting challenges in sustaining expansion and meeting debt obligations.

China’s fixed-asset investment, a long-standing engine of growth, fell by 3.8 percent in 2025 to 48.52 trillion yuan, equivalent to about $6.8 trillion. This marked the first annual contraction in decades. The decline reflects a prolonged slump in the property market and stricter limits on local governments’ borrowing capacity, both of which have weighed heavily on investment activity.

Fitch said the sharp pullback in investment during the second half of 2025 has created elevated credit risks across industries, including for sovereign-related entities. In April, the agency cut China’s sovereign credit rating from A+ to A, citing concerns over weakening fiscal conditions and rising public-sector debt.

The agency noted that the outlook for several sectors continues to worsen amid sluggish domestic demand, persistent deflationary pressures and an ongoing real estate downturn. China’s economy lost momentum toward the end of 2025, with growth slowing to 4.5 percent in the final quarter, the weakest pace in three years.

Property investment has been a major drag. Spending in the sector declined for a fourth consecutive year, plunging 17.2 percent in 2025. The prolonged housing slump has rippled through construction and upstream industries. Nationwide residential property sales fell to 7.3 trillion yuan, the lowest level since 2015, while prices for existing homes continued to slide.

Financial stress among developers has intensified. Fitch recently downgraded China Vanke, once the country’s largest property developer, to restricted default after the company sought to extend repayment on an onshore bond. Earlier this month, Dalian Wanda Commercial Management Group and Wanda Commercial Properties were also downgraded to restricted default following a distressed debt restructuring. Meanwhile, Jingrui Holdings was ordered last week to wind up its operations in Hong Kong.

Fitch forecasts China’s gross domestic product to expand by around 4.1 percent, citing weaker net trade performance and subdued consumer spending. The agency cautioned that a sustained double-digit contraction in fixed-asset investment would make it difficult for the economy to maintain growth of 4 to 5 percent in 2026.

Some economists are more cautious about drawing alarmist conclusions. Goldman Sachs suggested that part of the investment decline may stem from statistical revisions to previously overstated figures rather than an abrupt deterioration in real economic activity.

Pressure on local government finances

Stress at the local government level remains a key concern. Local government financing vehicles, or LGFVs, continue to rely heavily on external support to service their debt, according to Fitch’s Asia-Pacific public finance team. These entities are generally assigned neutral ratings based on expectations that authorities will intervene if financial stress escalates.

Samuel Kwok, managing director for Asia-Pacific international public finance at Fitch, warned that an unexpectedly large fiscal stimulus funded through local public-sector borrowing could worsen the credit outlook for LGFVs. This risk would rise if debt used for so-called quasi-policy investments grows faster than the capacity of local governments and their financing vehicles to manage it.

Quasi-policy investments typically involve projects funded off-budget through LGFVs rather than through direct fiscal expenditures, often to advance policy objectives such as infrastructure development.

Local governments have been hit by shrinking land-sale revenues, while Beijing’s tighter oversight of financing vehicles has further constrained their ability to invest in infrastructure. As a result, fixed-asset investment excluding real estate fell by 0.5 percent in 2025. According to Maybank’s macro research director Erica Tay, capital spending from state budgets has been squeezed as local authorities prioritize debt repayment.

Looking ahead, Tay said government efforts to promote infrastructure linked to the digital economy could support a modest rebound in public investment in 2026, partially offsetting weakness in property-related construction.

Fitch added that while reduced local government investment may weigh on growth in economically weaker regions, stricter controls on new borrowing could gradually improve the credit quality of some LGFVs over time.

Concerns over bank asset quality

Fitch also flagged potential risks to the banking sector. A more aggressive push to boost lending could be credit-negative, as it may further compress banks’ net interest margins or significantly increase leverage across the financial system.

If the investment downturn deepens and leads to a meaningful rise in unemployment, banks could face deterioration in asset quality, particularly in residential mortgage-backed securities and other asset-backed products. That said, Fitch expects any decline in asset quality to be mild.

China’s nationwide unemployment rate edged up to 5.2 percent in 2025, compared with 5.1 percent the year before. Despite these pressures, Fitch believes authorities will maintain a cautious monetary stance, with banks focusing on higher-quality borrowers rather than aggressively expanding loan volumes. This approach should help keep overall asset quality relatively stable.

The ratings agency expects the central bank to lower the seven-day reverse repo rate by 20 basis points this year to 1.2 percent. It noted that there is limited room for more aggressive monetary easing given already thin bank profitability.

In a move aimed at easing pressure on lenders, China’s top financial regulator recently extended a policy allowing banks to dispose of non-performing personal loans beyond the original end-2025 deadline, as default risks across the economy continue to rise.