Weak Demand and External Shocks Weigh on China Credit
China’s credit outlook remains constrained by weak domestic demand, while the US-Iran war has added external pressure through weaker energy, trade and global demand, Fitch Ratings says. A ceasefire reduces the risk of a more severe disruption, but slower normalisation in oil flows and regional logistics would intensify credit pressure.
China’s main credit challenge remains persistent weak demand. Fitch’s base case is for 2026 real GDP growth of 4.3%, but an adverse scenario based on a sustained closure of the Strait of Hormuz through end-2Q26 would lower growth to 3.8%. Weaker global demand, higher input costs and reduced export support would add to already soft consumption and property activity.
Credit pressure is likely to remain concentrated in exposed sectors rather than become broad-based. Chemicals warrant the closest review as tighter crude, naphtha and liquefied petroleum gas markets raise feedstock costs and dampen utilisation, especially for import-dependent and non-integrated producers. Downstream oil and gas also face margin pressure, although larger state-linked and integrated groups have more capacity to absorb the shock.
China’s policy mix is likely to keep favouring supply over demand, limiting the scope for a stronger recovery in household spending. Consumption-support measures may provide only marginal relief, while industrial upgrading and manufacturing support risk adding capacity faster than demand improves, increasing debt pressure and weakening pricing power.
Property remains a drag on credit conditions across sectors. Recent housing data remained weak and Fitch expects 2026 sales to decline by 7%-8%, with easing measures likely to have only marginal and uneven effects.
Funding conditions remain accommodative despite the external shock. Ample domestic liquidity and low market rates have kept China’s bond market resilient, but easier funding has not translated into stronger private credit demand.
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