Fitch Ratings just did something it doesn’t do lightly. The agency downgraded China’s Long-Term Foreign-Currency Issuer Default Rating from ‘A+’ to ‘A’ on April 3, maintaining a Stable Outlook but sending a clear message: the world’s second-largest economy has a fiscal problem that official numbers don’t fully capture.

The numbers behind the downgrade

Fitch projects general government deficits will hit 8.4% of GDP in 2025. The average general government deficit since 2020 sits at 6.5% of GDP.

Government revenue as a share of GDP is expected to plunge to 21.3% in 2025. That’s down from 29.0% in 2018, a decline of nearly eight percentage points in seven years. Tax cuts and cratering local government income have driven the collapse.

General government debt is forecast to reach 68.3% of GDP in 2025 and climb to 74.2% by 2026.

China’s fiscal architecture relies heavily on local and regional governments (LRGs) and Local Government Financing Vehicles (LGFVs). Beijing has allocated CNY10 trillion for LRG-LGFV debt swaps running through 2028, roughly 7.4% of GDP. The central government has ramped up transfers to support local authorities, but Fitch says those measures haven’t meaningfully eased the fiscal pressure.

Fitch anticipates a modest deficit reduction to 7.3% of GDP by March 2026, with policy settings expected to remain neutral-to-slightly contractionary.

Why this matters beyond bonds

Higher perceived risk in Chinese assets, particularly government bonds, could push borrowing costs upward and dent investor confidence in Beijing’s ability to manage its fiscal transition. When a major ratings agency says fiscal risks are worse than they appear, bond traders listen. Increased spreads on Chinese government debt could tighten financial conditions domestically, creating a feedback loop that makes the deficit problem harder to solve.

What crypto investors should watch

Fitch’s report made no mention of cryptocurrencies. China’s approach to crypto has been restrictive for years, and fiscal stress is unlikely to change that in the near term. Institutional crypto adoption within China remains a non-starter as long as Beijing is fighting to maintain fiscal control.