China’s economic policy challenges, including its efforts to counter deflationary pressure and control financial leverage, will be heightened by the intensifying trade war with the US, potentially influencing issuer credit ratings, says Fitch Ratings in new a report.
The US’s effective tariff rate for China has surged far above the 35% Fitch assumed in our March Global Economic Outlook and poses a significant downside risk to China’s economic growth prospects. The headline US tariff rate on imports from China stood at 145% as of 17 April after several rounds of retaliatory tariff increases following the US’s initial hikes, albeit with several temporary sectoral carve-outs, such as on certain electronics and pharmaceuticals. Chinese tariffs on imports from the US have also risen, to 125%.
We believe domestic demand is likely to become the key driver of China’s growth again and domestic deflationary pressures may be exacerbated. This reinforces our belief the authorities will deploy sustained fiscal stimulus to support growth, weakening public finances – a view that underpinned our downgrade of China’s sovereign rating to ‘A’/Stable in April 2025. Still, Fitch has lowered its China economic growth forecast to 3.9% in 2025 and 3.8% in 2026, from 4.4% and 4% respectively, following recent tariff hikes.
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Fitch Ratings-Hong Kong-17 April 2025: China’s economic policy challenges, including its efforts to counter deflationary pressure and control financial leverage, will be heightened by the intensifying trade war with the US, potentially influencing issuer credit ratings, says Fitch Ratings in new a report.
The US’s effective tariff rate for China has surged far above the 35% Fitch assumed in our March Global Economic Outlook and poses a significant downside risk to China’s economic growth prospects. The headline US tariff rate on imports from China stood at 145% as of 17 April after several rounds of retaliatory tariff increases following the US’s initial hikes, albeit with several temporary sectoral carve-outs, such as on certain electronics and pharmaceuticals. Chinese tariffs on imports from the US have also risen, to 125%.
We believe domestic demand is likely to become the key driver of China’s growth again and domestic deflationary pressures may be exacerbated. This reinforces our belief the authorities will deploy sustained fiscal stimulus to support growth, weakening public finances – a view that underpinned our downgrade of China’s sovereign rating to ‘A’/Stable in April 2025. Still, Fitch has lowered its China economic growth forecast to 3.9% in 2025 and 3.8% in 2026, from 4.4% and 4% respectively, following recent tariff hikes.
The effectiveness of China’s policy response in mitigating the economic hit from tariffs will be key to the trade war’s credit impact on other sectors. Slower growth will weigh on corporate earnings and profitability, and could increase asset-quality risks for lenders. Banks’ standalone Viability Ratings could also be weakened if the authorities make greater use of directed policy lending to support growth, in ways that heighten credit risk without a corresponding increase in loss-absorption buffers. However, that is not our base case.
Source: Fitch Ratings
