On 3 April 2025, Fitch Ratings, a global ratings agency, downgraded China’s long-term foreign-currency Issuer Default Rating (IDR) from ‘A+’ to ‘A’. This came shortly after the US levied a fresh round of 10% tariffs on all Chinese goods, which exacerbated trade tensions, adding pressure to economic outlook. Amid the economic slowdown, the reciprocal tariffs combined with a sluggish domestic demand and shrinking access to overseas markets are expected to raise the government deficit to 8.4% of GDP in 2025, up from 6.5% in 2024, indicating sustained fiscal pressures. Whereas, in a Politburo meeting and Central Economic Work Conference (CEWC) held in December 2024, China raised the budget deficit to 4% of GDP, its highest so far, while maintaining a growth target of 5%. Fitch anticipates China’s government debt-to-GDP ratio will increase from 60.9% in 2024 to 74.2% by 2026, reflecting concerns over the country’s fiscal health. Fitch downgraded ratings on 38 China central-government owned corporations and subsidiaries and 20 Chinese public finance government-related entities (GREs).
A myriad of factors added to the downturn of the Chinese economy. One of the most significant setbacks has been the prolonged crisis in the real estate sector, once a pillar of China’s growth. The bursting of the property bubble, epitomized by the debt defaults and collapse of major real estate firms like Evergrande and Country Garden, triggered a ripple effect across the broader economy—impacting employment, local government revenues, and financial institutions. Compounding this slowdown is persistently weak domestic consumption. Despite the removal of COVID-era restrictions, consumer spending has failed to rebound to pre-pandemic levels. This reflects a deeper erosion of household confidence in the economic outlook, with many households choosing to save rather than spend—an indication of underlying insecurity about jobs, income, and the durability of the recovery.
Externally, China faces escalating geopolitical and economic headwinds. The intensifying US-China trade war, marked by successive rounds of tariffs, export controls, and technology restrictions, has severely disrupted China’s access to key markets and global supply chains. Simultaneously, the broader trend of “de-risking” and supply chain diversification—pursued by the US., EU, Japan, and others—has reduced global dependency on Chinese manufacturing, further challenging China’s export-driven model and contributing to deflationary pressures at home. In addition to these immediate pressures, long-term demographic shifts threaten to undermine China’s economic trajectory. A rapidly aging population, declining birth rates, and a shrinking workforce pose serious risks to productivity, consumption, and the sustainability of the current economic model. As these challenges converge, they cast growing doubt on China’s ability to restore economic stability and growth to pre-pandemic levels.
The Ministry of Finance described the agency’s action as “biased” and “failing to objectively reflect the actual resilience of China’s economy and the broad consensus in global markets”. China’s new fiscal deficit plan reveals a more proactive fiscal policy, its largest stimulus in years, focusing on reviving the struggling economy amid a sharp property downturn and declining consumer confidence. But the increased government spending is going to increase government debt. The government introduced tax cuts and People’s Bank of China reduced the reserve requirement ratio (RRR) by 50 basis points, to absorb the blow from the US tariffs but these fiscal and monetary policies are unlikely to protect the Chinese economy against external pressure. China has also tried to boost consumption through special plans and vouchers, but the colossal shut down of eateries, small businesses across China is a sign of an unhealthy market.
The projected trajectory of the Chinese economy is troubling, despite a series of statements made by Chinese leaders in the past. Chinese premier on several occasions in 2024 and 2025 dismissed Western skepticism over China’s “overcapacity” and insisted that the economy retains the scale and momentum to navigate through external pressures. Chinese officials criticized the US and EU for casting doubts on the health of the Chinese economy. However, the rapid downfall seen in various sectors compounded by tariffs, Chinese economy is going to remain weak. Countries like Thailand and Indonesia have already moved to put limits on imports from China to stabilize their economies. The emphasis put on the robustness of the Chinese economy and its potential are put under question as the downgrade in China’s sovereign credit ratings suggests China needs a larger reform to sustain the unstable global market.
Fitch’s downgrade is not just a reflection of short-term economic turbulence, but a broader signal of China’s deepening structural challenges. While the government has introduced a slew of fiscal and monetary measures to cushion the downturn, these responses appear increasingly insufficient in the face of compounding pressures—from a collapsing property sector and waning consumer confidence to shrinking external markets and long-term demographic decline. The downgrade also underscores growing skepticism about the sustainability of China’s current growth model, especially as geopolitical tensions and global de-risking efforts reshape trade and investment flows. Going forward, the credibility of China’s economic resilience will hinge not merely on stimulus packages, but on whether Beijing can deliver deeper structural reforms that restore investor confidence, unlock domestic demand, and adapt to a rapidly shifting global economic order.