Global ratings agency Fitch on Thursday downgraded China's sovereign credit rating, citing rapidly rising government debt and risks to public finances, as policymakers gear up to shield the economy from rising U.S. tariffs.
The downgrade came a day after President Donald Trump imposed sweeping tariffs on imports from U.S. trading partners, with China among the hardest hit, though Fitch said his move had not yet been incorporated into its forecasts.
Fitch cut China's long-term foreign currency rating by one notch to "A" from "A+", one year after it downgraded its outlook on China's credit rating.
"The downgrade reflects our expectations of a continued weakening of China's public finances and a rapidly rising public debt trajectory during the country's economic transition," Fitch said in a statement.
"We expect the government debt/GDP to continue its sharp upward trend over the next few years, driven by these high deficits, ongoing crystallisation of contingent liabilities and subdued nominal GDP growth."
In April 2024, Fitch cut its outlook on China's sovereign credit rating to negative, citing risks to public finances as the economy faces increasing uncertainty in its shift to new growth models.
Fitch expects China's explicit local and central government debt to rise to 68.3% of GDP in 2025 and 74.2% in 2026, up from 60.9% in 2024 - a clear deterioration from 37.9% in 2019, and the general government deficit to rise to 8.4% of GDP in 2025, from 6.5% in 2024.
China's move in November to allow local governments to issue 10 trillion yuan ($1.37 trillion) in bonds to swap for hidden debt will help reduce fiscal constraints and lower financing costs, but will not alleviate the overall local debt burden, Fitch added.
China will have to sustain fiscal stimulus to support growth amid subdued domestic demand, rising tariffs and deflationary pressures, which will keep fiscal gaps high, it said.
In March, China unveiled fiscal measures, including a rise in its annual budget deficit, to help hit an economic growth target of around 5% this year, which analysts have described as ambitious. Officials have flagged more fiscal and monetary stimulus to cope with rising headwinds.
In late 2023, Moody's slapped a downgrade warning on China's credit rating, saying costs to bail out local governments and state firms and control its property crisis would weigh on the world's second-largest economy.
Fitch forecasts China's economic growth to slow to 4.4% in 2025 from 5.0% in 2024, dragged by a property downturn, weak household confidence and rising external risks.
Analysts at UBS said that the U.S. reciprocal tariff hikes could reduce China's 2025 export growth by 5 percentage points and lower its annual economic growth by 1.5 percentage points.
"We think the government may need to increase its broad fiscal expansion by another 1-1.5ppt of GDP this year to stabilise growth to around 4%," the UBS analysts said.
"We also see the policy rate and RRR (reserve requirement ratio) may be cut starting from April-May, with total policy rate cuts of at least 30-40bps."
China's finance ministry said in a statement that Beijing deeply regretted Fitch's downgrade, adding the move was "biased and cannot fully and objectively reflect the actual situation in China".
"The Chinese government has also reserved ample policy space and will dynamically adjust its policy toolkit in response to changing conditions," the ministry said.
($1 = 7.2813 Chinese yuan renminbi)
