Fitch Warns China’s Investment Crash Threatens Banks and Local Governments

2026-01-21 economy

Beijing, Wednesday, 21 January 2026.
Fitch warns credit risks are surging as China records its first annual fixed-asset investment decline since 1989, driven by a staggering 17.2% plunge in property spending.

A Historic Contraction in Fixed Assets

The scale of the downturn identified by Fitch Ratings is historic in nature. In 2025, China’s fixed-asset investment (FAI) contracted by 3.8% to 48.52 trillion yuan, marking the first annual decline in this metric since 1989 [1][2]. This contraction was primarily driven by a severe slump in the property sector, where investment plummeted by 17.2% over the course of the year [1][2]. While manufacturing investment managed a modest increase of 0.6%, it was insufficient to offset the broader declines, including a 2.2% drop in infrastructure investment and a 7.4% contraction in the tertiary industry [2]. Excluding the volatile real estate sector, FAI still fell by 0.5% for the year, signaling that investment weakness has permeated the broader economy [1][2].

Deepening Crisis in Real Estate

The property market, once a primary engine of China’s economic expansion, continues to face profound headwinds. Nationwide residential sales dropped to 7.3 trillion yuan in 2025, the lowest level recorded since 2015 [1]. This volume contraction is accompanied by persistent price deflation; in December 2025, new home prices fell 0.4% month-on-month and 2.7% annually, with 58 out of 70 surveyed cities recording price declines [3]. Market sentiment remains bearish, with analysts predicting further corrections. Sam Radwan of ENHANCE International forecasts that the downturn could extend to 2030, with a potential further price correction of 40% before the market bottoms out [4].

Corporate Defaults and Sector Divergence

The liquidity crunch resulting from this investment crash is rapidly crystallizing into corporate defaults. Earlier this month, on January 13, 2026, Fitch downgraded Dalian Wanda Commercial Management Group and Wanda Commercial Properties to “restricted default,” while Jingrui Holdings was ordered to wind up its Hong Kong operations on January 19 [1]. However, the economic pain is not distributed evenly. A sharp divide has emerged between consumer-facing sectors and technology industries. While hotels, catering, and retail trade softened to their weakest post-pandemic levels, the software and information technology sector expanded by over 11% last year, highlighting a bifurcated economy where high-tech growth struggles to compensate for traditional sector weakness [5].

Economic Outlook and Structural Challenges

Despite these headwinds, China’s Gross Domestic Product (GDP) grew by 5% in 2025, meeting the government’s official target [6][7]. However, momentum slowed significantly toward the end of the year, with the economy growing at just 4.5% in the final quarter—the slowest pace in three years [1]. Looking ahead, Fitch expects growth to cool further, projecting a GDP expansion of 4.1% for 2026 [1]. The rating agency also warned that any stronger-than-expected fiscal stimulus funded by local public-sector debt could deteriorate the outlook for Local Government Financing Vehicles (LGFVs), particularly if debt accumulation outpaces the capacity of local governments to support it [1].

Sources

China Economy Credit Risk