China’s Investment Downturn: A Growing Concern for Credit Risks

China’s sharp investment downturn is amplifying credit risks across the economy, particularly in the homebuilding, real estate, banking, and construction sectors, according to Fitch Ratings. The country’s fixed-asset investment (FAI) declined 3.8% in 2025 to 48.52 trillion yuan ($6.8 trillion), marking the first annual decline in decades. This downturn is largely attributed to a deepening property slump and tighter constraints on local governments’ borrowing, which have hampered one of China’s traditional growth drivers.

Aerial view of the No. 8 main tower of the northern navigation channel bridge along the Hangzhou Bay Cross-Sea Railway Bridge on January 16, 2026 in Hangzhou, Zhejiang Province of China.

The drastic investment slump in the second half of 2025 has raised significant cross-sector credit risks for rated issuers in China, including the government, Fitch said. The rating agency downgraded China’s sovereign rating to “A” from “A+” in April on concerns over weakening finances and rising public debt. The growth outlook for several sectors is “deteriorating,” citing subdued domestic demand, deep-seated deflationary pressures, and a property downturn.

Impact on Local Governments and Banks

Local government financing vehicles (LGFVs) remain far from self-sufficient in servicing debt, said Samuel Kwok, managing Director, Asia-Pacific International Public Finance, Fitch Ratings. The debts are assigned a “neutral” rating on expectations that authorities will step in if stress intensifies. Local governments have suffered from the loss of land sales revenue, while Beijing tightened its grip on local authorities’ financing vehicles, limiting their investment into infrastructure.

FAI excluding real estate fell 0.5% for 2025, as state-budget capital spending was squeezed by local governments’ focus on debt repayment, said Erica Tay, director of macro research at Maybank. Beijing’s push to spur infrastructure construction for the digital economy may lead to a mild recovery in public investment in 2026, offsetting some weakness in property construction.

Credit Risks and Bank Asset Quality

The agency added that a more forceful push to lift lending growth could be credit-negative for banks, as it could compress net interest margins or materially increase leverage across the system. A deeper investment slump that drives a meaningful rise in unemployment could weaken lenders’ asset quality and pressure residential mortgage-backed and other asset-backed securities, Fitch said, expecting a “mild deterioration,” if at all, in banks’ asset quality.

Nationwide jobless rate inched up to 5.2% in 2025, from 5.1% in the previous year. However, China is likely to stick with a cautious approach to its monetary policy, with banks expected to prioritize higher-quality borrowers over chasing loan growth — a stance Fitch said should help keep asset quality broadly stable.

Smart Tip for Readers

When assessing the credit risks associated with China’s investment downturn, consider the potential impact on various sectors, including real estate, banking, and construction, and stay informed about the latest developments and forecasts from reputable sources, such as Fitch Ratings and other financial experts. For more information, visit Here