Fitch Ratings downgraded China' s long-term foreign currency issuer default rating ("IDR") to "A" from "A+" on Thursday due to the nation's weakening public finances and rapidly rising public debt trajectory. Its rating outlook is stable.

"A" is an upper mid-range investment grade rating for Fitch. AAA is its highest grade.

"In our view, sustained fiscal stimulus will be deployed to support growth, amid subdued domestic demand, rising tariffs and deflationary pressures," Fitch Ratings said. "This support, along with a structural erosion in the revenue base, will likely keep fiscal deficits high."

As a result, Fitch expects China's government debt/GDP will continue a sharp upward trend over the next few years, driven by the high deficits, "crystallization of contingent liabilities, and subdued nominal GDP growth."

China's general government deficit is expected to rise to 8.4% of GDP in 2025 from 6.5% in 2024, Fitch estimates. It forecasts that China GDP growth will slow to 4.4% in 2025 from 5.0% in 2024. "Challenges from the property sector and consumption will persist amid a rise in external risks," Fitch said.

Furthermore, external demand will hamper growth from increased U.S. tariffs on Chinese goods. While the rate announced on Wednesday is higher than Fitch's baseline effective rate of 35%, China has become more resilient to direct U.S. tariffs by diversifying its export markets, the ratings firm said. (Note that the reciprocal tariffs add 34% to tariffs that were already in place).

iShares MSCI China ETF (NASDAQ:MCHI) dropped 2.1% in Thursday premarket trading, and the Chinese yuan (CNY:USD) slipped 0.4% against the US Dollar. iShares China Large-Cap ETF (NYSEARCA:FXI) slid 1.8%, and KraneShares CSI China Internet ETF (NYSEARCA:KWEB) sank 2.7%.