Chinas investment crash raises credit risks for homebuilders, banks, government: Fitch

The ratings agency expects Chinas GDP to grow at 4.1% due to easing net trade and sluggish consumer spending. A sustained double-digit decline in FAI will likely be unable to sustain 4%-5% growth in 2026, Fitch said.

Goldman Sachs, however, noted that concerns over the sharp plunge in investment may be overblown, as the decline could be partly due to “statistical correction of previously over-reported data, rather than a genuine slowdown.”

Local governments fiscal strains

Local government financing vehicles, or 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.

“A stronger-than-expected” fiscal stimulus plan financed by local public-sector debt could lead to a deterioration in the sector outlook for LGFVs and their issuers, Kwok said, if debt used for “quasi-policy” investment rises faster than LGFVs and local governments capacity to support it.

Local governments have suffered from the loss of land sales revenue, while Beijing tightened its grip on local authorities financing vehicles, which has limited 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.

HANGZHOU, CHINA – JANUARY 16: 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.

Ni Yanqiang/Zhejiang Daily Press Group | Visual China Group | Getty Images

Beijings push to spur infrastructure construction for the digital economy may lead to a mild recovery in public investment in 2026, Tay added, offsetting some weakness in property construction.

While slower investment from local governments could hamper growth in certain “economically weaker regions,” tighter limits on new borrowing may gradually improve the credit profiles of some local-government financing vehicles, Fitch noted.

Bank asset quality concerns

Chinas 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.

The ratings firm expects the central bank to cut the 7-day reverse repo rate by 20 basis points this year to 1.2%, citing limited room for more aggressive easing given banks already-squeezed profitability.

Fitch expects a “mild deterioration,” if at all, in banks‘ asset quality. But it warned that 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.

Nationwide jobless rate inched up to 5.2% in 2025, from 5.1% in the previous year.

The agency added that a more forceful push to lift lending growth could be credit-negative for banks, as it could compresses net interest margins or materially increases leverage across the system.

Chinas top financial regulator extended a policy earlier this month to allow banks to dispose of bad personal loans beyond the original end of 2025 deadline, according to Bloomberg, easing pressure on banks as default risks climbed.