Declining Investment Expands Credit Risks in China, Pressuring Real Estate, Banks, and Public Finances

Beijing | EcoPulse24

Fitch Ratings has warned of mounting credit risks in China amid a sharp decline in investment that is adversely affecting major sectors including real estate, construction, banks, and local government financing vehicles. The economic slowdown has limited these sectors’ ability to service their debts.

Fixed asset investment declined by 3.8% in 2025 to 48.52 trillion yuan, marking the first annual drop in decades. The fall was driven by a shrinking property market and tighter borrowing restrictions on local governments, affecting one of China’s traditional growth engines. Fitch noted that the sharp decline in the second half of 2025 increased credit risks across several sectors, including the sovereign sector itself.

On the sovereign side, Fitch downgraded China’s credit rating from A+ to A in April, citing weak public finances and rising debt. The agency also warned of deteriorating sector growth prospects due to weak domestic demand, deep deflationary pressures, and the ongoing property crisis.

Economically, the world’s second-largest economy lost momentum in the last quarter of 2025, with growth at 4.5% - the slowest in three years. In real estate, investment fell for the fourth consecutive year by 17.2%, while home sales dropped to 7.3 trillion yuan, their lowest since 2015, as existing home prices continued to decline. This downturn weighed on household spending and forced companies to cut prices, eroding margins.

On the corporate credit front, the crisis worsened conditions for distressed developers. Fitch downgraded China Vanke to “Restricted Default” after it sought to extend repayment of a local bond. The agency also downgraded Dalian Wanda and Wanda Commercial Management to the same level following distressed debt exchanges, while Jingrui Holdings was ordered to wind up its Hong Kong operations.

Looking ahead, Fitch projects China’s GDP growth at 4.1%, warning that persistently double-digit declines in investment will not be sufficient to maintain 4–5% growth in 2026. In contrast, Goldman Sachs suggested that some of the investment drop may reflect statistical corrections of previously overstated data, rather than a full-scale slowdown.

Local Government Pressures
Fitch noted that local government financing vehicles remain far from self-sufficient in servicing their debts, with these debts rated “neutral” based on expectations of official intervention if pressures intensify. The agency cautioned that stronger fiscal stimulus funded by local debt could weaken credit outlooks if debt is deployed faster into quasi-political investments than authorities can support. Lost land sales revenue and tighter central oversight have also reduced local governments’ ability to invest in infrastructure. Excluding real estate, fixed asset investment fell 0.5% in 2025 as spending focused on debt repayment.

EcoPulse24 Analysis:
The investment contraction represents a structural pressure point that goes beyond any single sector, with the property crisis intersecting with local fiscal constraints to broaden credit risks across the economy. Declining investment weakens potential growth and limits borrowers’ ability to service debt, while reliance on local financing tools restricts fiscal flexibility. Sustaining growth will require rebalancing between stimulus and discipline, addressing the roots of the property crisis, and easing deflationary pressures without deepening debt risks.