China's local and regional governments face a dynamic impact from trade tariffs and tax base changes, which could challenge their ability to meet the 3.7% budgeted tax revenue growth target, Fitch Ratings said in a Thursday release.

Fitch has not yet observed direct tariff effects on local governments' fiscal revenue, adding that the impact will likely flow through business activities-linked revenue.

Despite a 12.9% annual decline in revenue for the first quarter, China's local governments boosted capital expenditure by 10% due to a rise in Special Purpose Bond (SPB) issuance.

Total SPBs jumped 127.3% in the first quarter to 2.4 trillion yuan, with new issuance hitting 960 billion yuan.