As 2025 ends and 2026 approaches, Fitch Ratings is reminding China investors why it may be time to fasten those seatbelts.
On Wednesday (December 17), Fitch downgraded troubled homebuilder China Vanke Co to “C” status from “CCC-” at a moment of maximum suspense for the last survivor of a years-long property crisis. The move adds to the strains on Vanke as it scrambles to avoid a default.
It hardly helps that November data on China’s economy suggest the outlook is losing momentum almost across the board. That includes new signs of weakness in already underwhelming consumer spending and investment.
New home sales in China’s 70 biggest cities continue to ratchet lower, falling 0.39% from October, a month in which prices dropped 0.45%, the largest decline in a year.
This matters because we’re more than a year past strong pledges from President Xi Jinping and Chinese Premier Li Qiang to roll out bold and creative measures to stabilize the property sector. Clearly, they’re not working as advertised. At the same time, China is entering its fourth year of deflation.
“Policy support should help drive a partial recovery in the coming months, but this probably won’t prevent China’s growth from remaining weak across 2026 as a whole,” says Zichun Huang, China economist at Capital Economics.
Barclays economist Yingke Zhou says that “with supply indicators still exceeding demand indicators, we think China’s deflation pressure could persist and its export-led growth model continue, which could lead to rising trade and investment tensions between China and non-US economies.”
If we’ve learned anything from Japan’s plight these last 30 years, it’s that a drip, drip, drip response to deflation doesn’t work. By the time Tokyo grasped the magnitude of the deflationary forces its bad-loan crisis had generated, it was too late. Even now, Asia’s No 2 economy is struggling to move past those mistakes.
Clearly, any comparisons between today’s China and Japan circa 1995 are imperfect. But the drag from a sector that long accounted for between a quarter and one-third of China’s annual growth is why “Japanification” chatter is stalking Xi’s economy into 2026.
And it could complicate China’s outlook for years to come as the property reckoning collides with a 47.5% US tariff. While way down from Donald Trump’s earlier threatened 145% import tax, it’s still a perilously large levy for an export-driven economy like China’s. Particularly as it struggles to recalibrate economic engines toward more domestic demand.
So far, Team Xi has been very savvy in pivoting away from the US market. Since the Trump 1.0 trade war from 2017 to 2021, Beijing exported more to Southeast Asia and Europe than to the US. The fact that China’s trade surplus topped US$1 trillion for the first time in November — despite the sky-high tariffs — was likely enough to ruin Trump’s month.
But the surplus also highlights China’s domestic weakness. As exports rose 5.9% year on year in November, imports were up just 1.9%. Growth in overseas shipments is masking the extent to which Chinese households are sitting on $22 trillion in savings they stubbornly refuse to spend.
The return of default risks among large property developers could further undermine household confidence. Not so much for global investors, though. They’re rushing back into Chinese stocks. But they are largely feeding off widespread tech optimism as the global artificial intelligence (AI) boom continues apace.
Global funds are also responding to the latest Five-Year Plan for 2026 to 2030. Investors were cheered by its focus on “high-quality growth” and reforms, including strengthening capital markets, stabilizing local government balance sheets, modernizing regulation and supporting innovation. Ditto for plans to accelerate China’s self-reliance in tech.
The plan’s emphasis on boosting domestic consumption through structural upgrades also boosted sentiment. In other words, building bigger and more resilient social safety nets to encourage households to save less and spend more.
That’s easier said than done in China, though. While investors are reacting to clues from government officials on high, households are looking at trade war without end, tepid wage growth, near-record youth unemployment, a global economy in disarray, their home values — or those of people in their family or social obits — ratcheting lower and a Communist Party talking about bold solutions that seldom seem to materialize.
China’s 1.4 billion people also understand better why the “around 5%” economic growth target can be more about marketing than reality, with the suggestion that Xi’s team fabricates rosy GDP figures. That’s because the single GDP figure Beijing publishes each quarter bears little resemblance to the average economic experience across the nation’s 22 provinces.
Indeed, Xi’s party is very skilled at keeping certain uncomfortable facts out of the informational channels. Social media algorithms make this easier, as they can be recalibrated in real time if too many sensitive or downcast news items are circulating. Yet the lived experience of the Chinese masses can’t be spun.
Here, consider the trouble US President Donald Trump is having convincing Americans that the affordability crisis is a “hoax.” Hence the confusion among Wall Street this week that the core consumer price index, which excludes food and energy, rose a less-than-forecast 2.6% in November from a year ago, the smallest increase since 2021.
This, of course, follows the Trump administration’s clumsy efforts to neuter the independence of the US Bureau of Labor Statistics, including firing the agency’s head. The whole exercise exudes Politburo energy.
Analysts at EY-Parthenon called it a “Swiss Cheese CPI report,” while William Blair analysts called the data “delayed and patchy.” TD Securities titled its report on the murkiness of the US inflation picture “Lost in Translation.”
“This one-of-a-kind report produced anomaly after anomaly, almost all pointing in the same direction,” says Stephen Stanley, economist at Santander. “I think it would be unwise to dismiss the results entirely, but I also believe it would be rash to take them at face value.”
Likewise, it’s hard to tell the Chinese that their personal financial worries are not valid. These efforts at spin will become even harder as the seatbelts come out.
The good news is that few China watchers think Vanke’s potential default will trigger China’s “Lehman moment.” If defaults by much larger developers, such as China Evergrande Group and Country Garden Holdings, didn’t shock global markets, Vanke might not either.
Yet there may still be a reluctance to let Vanke fail. At the moment, the cash-strapped property company is holding frantic meetings with investors holding 2 billion yuan (US$283.99 million) of its bonds to avoid a default. That, in turn, could put as much a $50 billion of debt in harm’s way and unnerve broader markets.
Mark Dong, co-founder of Minority Asset Management, tells Reuters that he expects bondholders to reach an agreement with Vanke to extend payment during the grace period. “A deal is better than default,” Dong notes. The game, he adds, is for bondholders “to push Vanke to make its biggest effort and show the most sincerity.”
Yet no one can say where this is headed. As Japan demonstrated, Shenzhen-based Vanke would be better off getting a likely default over with sooner rather than later. Delaying such reckonings, market history shows, often increases the scale and magnitude of the eventual crash.
True, there’s a psychological element here that may worry Vanke officials and regulators alike. Unlike Evergrande and other developers who let over-leveraging get the better of them, Vanke had long been thought of as the adult in the room — the best-run and most profitable of the top developers. So its stumble is a big blow to China Inc’s hopes that the property crisis is finally easing.
At the very least, Vanke’s troubles augur poorly for yuan bears. Anyone betting on a weaker yuan must now confront what that would mean for the massive piles of foreign currency-denominated debt developers would have to pay with a weaker exchange rate.
It’s a recipe for even more defaults. That risk could limit the People’s Bank of China’s latitude to cut benchmark interest rates to battle deflation.
Deutsche Bank economist Yi Xiong says that, based on the bank’s figures, overseas financing by Chinese enterprises is still mainly in foreign currencies. Outstanding dollar-denominated bonds total roughly $750 billion, about one-third of which mature in the next two years.
How the Vanke negotiations shake out could set the stage for China’s 2026. Fresh turmoil in the property sector could reduce the appetite in Beijing for letting market forces play a “decisive” role in economic decision-making and real-estate price-clearing.
Fitch Ratings analyst Tyran Kam notes that Vanke’s seeking a delay in bond payments “points to the company’s difficulty accessing bank funding, and the limited willingness of” state-owned enterprise (SEO) Shenzhen Metro Group “to extend further support.”
For now, “the case suggests that authorities see limited systemic contagion risk from a debt restructuring or default at Vanke, a large, flagship mixed-ownership developer,” Kam says.
“We believe policymakers’ primary objective remains the completion of unfinished housing projects, and that this is a key driver of banks’ extension of credit to developers. Official pressure to provide additional credit to large non-SOE developers facing liquidity stress has eased, given material progress towards the goal over the past two years.”
Yet the bigger picture is that “banks’ reluctance to lend in part reflects the poor prospects for imminent recovery in housing sales,” Kam says.
Fitch expects new home sales by value to fall by 7%-8% in 2026, to about 7 trillion yuan, with faster declines in lower-tier cities than in high-tier markets. “Housing market sentiment may be further dented in the near term should the high-profile Vanke fall into default,” Kam adds.
From a macro standpoint, though, the longer the steady flow of bad news in the property sector persists, the harder it may be to get the Chinese masses to open their wallets and drive the domestic demand-led growth policymakers want and need.
In 2026, Team Xi has an ideal opportunity to change the narrative, let market forces work and raise China’s economic game. Question is, will it?
Follow William Pesek on X at @WilliamPesek
