Fitch Downgrades China’s Sovereign Credit Rating to 'A' from 'A+' Amid Rising Debt, Deficits, and Tariff Tensions
3min read Global ratings agency Fitch downgraded China’s long-term foreign-currency issuer default rating from "A+" to "A" on Thursday, citing expectations of deteriorating public finances, rising debt burdens, and a structural shift in economic management that will require prolonged fiscal stimulus. The outlook on the new rating is stable, though Fitch emphasized significant macroeconomic challenges ahead.
Ask Aime: How will Fitch's downgrade affect China's economic stability and fiscal policies?
The downgrade came on the same day that U.S. President Donald Trump announced a sweeping set of new reciprocal tariffs, escalating an already strained trade relationship and adding a new layer of external pressure on China’s fragile recovery.
Ask Aime: How will the US-China trade war impact China's economy and stock market?
Why Fitch Downgraded China
The key driver behind the downgrade was Fitch’s assessment that China’s debt-to-GDP trajectory is on a sharp upward path, a trend unlikely to stabilize in the near term. The agency forecast China’s general government debt ratio to climb from 60.9% in 2024 to 74.2% in 2026 and as high as 80% by 2029. That compares unfavorably with the median for ‘A’ rated sovereigns, which is projected to hover near 57% over the same period.
China’s fiscal deficits are also ballooning. Fitch expects the general government deficit to expand to 8.4% of GDP in 2025, up from 6.5% in 2024, well above the 2.7% average for its peer group. The widening fiscal gap stems from multiple factors: structural revenue erosion from falling land sales and tax cuts, continued support for local governments through central transfers, and persistent stimulus aimed at supporting domestic demand in the face of a sputtering property sector and low consumer confidence.
Moreover, Fitch noted that China’s revenue-to-GDP ratio is projected to fall to just 21.3% in 2025, down sharply from 29.0% in 2018. Without comprehensive revenue reform, particularly at the local government level, Fitch sees limited scope for meaningful deficit reduction.
Compounding fiscal concerns is the mounting risk from contingent liabilities—particularly from local government financing vehicles (LGFVs). While the government has taken steps to refinance and migrate this hidden debt onto official balance sheets, Fitch remains cautious. The CNY14.3 trillion in identified hidden debt accounts for less than 25% of market estimates, implying significant off-balance sheet risks.
Implications of the Downgrade
A downgrade from 'A+' to 'A' signals a modest deterioration in creditworthiness, but the implications are meaningful. Borrowing costs could rise as investors demand a higher premium to hold Chinese debt, especially if other rating agencies follow suit. In addition, some foreign investors, such as pension funds and insurance companies, may be forced to reduce their China exposure due to portfolio constraints.
The move also raises concerns about capital flight and currency pressure, particularly at a time when the Chinese yuan is already under strain. On Thursday, the yuan fell to its lowest level in seven weeks, and equity markets sold off in response to both the downgrade and tariff escalation.
Tariff Concerns Add to the Pressure
While Fitch stated that the April 2 U.S. tariff announcement was not factored into its forecasts due to uncertainty around its implementation, the agency acknowledged that the new measures pose clear downside risks to growth and fiscal metrics.
The U.S. reciprocal tariffs unveiled by President Trump included a staggering 34% tariff on Chinese goods, on top of an existing 20% rate introduced last month. If stacked with earlier Trump-era tariffs still in place, some Chinese exports may face cumulative duties exceeding 54%. Fitch warned that such levels exceed its baseline assumption of a 35% effective tariff rate and could further depress China’s external demand outlook.
Though China has diversified export destinations since the earlier phases of the trade war, the scale of the latest tariff round is much broader. The resulting global demand slowdown—and its impact on manufacturing exports—could compound domestic economic fragilities.
A Growing List of Challenges
While Fitch noted China’s continued strengths—such as large foreign reserves, current account surpluses, and a key role in global supply chains—these were no longer sufficient to maintain the A+ rating. The agency projects real GDP growth to moderate to 4.4% in 2025 from 5.0% in 2024, with limited momentum in consumption and ongoing risks in the property market.
Beijing’s Ministry of Finance pushed back strongly against the downgrade, calling it “biased” and not reflective of China’s economic fundamentals. Still, the timing of the move—on the very day Trump reignited tariff tensions—added symbolic weight to a downgrade that could have long-term implications for investor perception and global capital flows.
Bottom Line
Fitch’s downgrade reflects a recalibration of China’s sovereign risk profile amid mounting debt, fiscal vulnerability, and external shocks. With a global trade war heating up again and domestic growth struggling to find footing, the credit outlook for the world’s second-largest economy has just become meaningfully more complicated.
