This change in cycle is forcing analysts to revise their forecasts for the strength of the country’s growth.
The investment brake not only reflects the exhaustion of a model based on debt and real estate developmentbut is also amplifying credit risks in broad sectors of the economy.
The collapse of investment and its impact on the Chinese economy
Investment in fixed assets, one of the pillars of Chinese growth for decades, registered a drop of 3.8% in 2025, reaching around 48.5 trillion yuan. This is the first annual decline in several decades and a clear sign of the economic cooling that the country is going through.
This setback is directly linked to the prolonged crisis in the real estate sector and the restrictions imposed on debt of local governments.
The deterioration of the investment has reduced activity in key sectors such as construction, heavy industry and associated services.
Furthermore, the weakness of domestic demand and deflationary pressures have limited resilience, creating an environment in which growth is increasingly difficult to sustain without additional stimulus.
Fitch’s warning and the deterioration of the credit profile
Fitch Ratings has noted that the fall in investment is amplifying credit risks throughout the Chinese economy. The agency emphasizes that the weakening of activity reduces the capacity of companies and administrations to meet their financial obligations, which increases the probability of defaults.
In this context, Fitch recently downgraded China’s sovereign ratingciting the deterioration of public finances and increasing debt.
The agency warns that the growth prospects of several sectors are deteriorating, in an environment marked by lower consumption, pressure on prices and a property market in prolonged contraction.
The real estate crisis as the epicenter of the problem
The real estate sector continues to be the main source of instability. Investment in housing fell for the fourth consecutive year, with a decrease of more than 17% year-on-yearwhile residential sales were at their lowest level since 2015.
The fall in housing prices and excess supply have affected both developers, suppliers and financial entities.
This situation has forced many households to cut spendingwhich has ended up being transferred to the entire economy. At the same time, several large developers have entered into financial difficulties, which has increased pressure on the credit system.
The degradation of companies in the real estate sector to levels close to default reflects the depth of the adjustment underway.
Fiscal tensions and pressure on local governments
The slowdown in investment has also hit local governments, traditionally dependent on income from land sales.
With the real estate market at a minimum, these sources of financing have been drastically reduced, limiting their ability to promote infrastructure projects or sustain regional growth.
Local government financing vehicles continue to show a high dependence on state support. Although central authorities have strengthened control over debtthe need to finance projects considered strategic maintains pressure on public accounts.
Fitch warns that an increase in debt-financed spending could further deteriorate the credit profile of these entities.
The role of the banking system in a more fragile environment
Chinese banks face this scenario with caution. Entities are prioritizing credit quality over credit expansion, a strategy aimed at containing the deterioration of balance sheets.