Asia-Pacific credit conditions remain firmly on the downside.  While the Trump administration's 90-day pause of "reciprocal" tariffs (announced on April 2) offers some reprieve for Asia-Pacific economies, the region isn't out of the woods. The April 2 tariffs affected Asia-Pacific the most. This reflects the prevalence of large bilateral trade surpluses with the U.S. across most countries.

The threat and imposition of tariffs by the U.S. continue to loom over global trade and economic growth and could also reignite U.S. consumer inflation. In addition, confidence is set to deteriorate further amid halts in new business investments and worsening household sentiment. Furthermore, equity and debt markets are likely to stay volatile. Taken together, these economic, consumer, and financial market developments are negative for Asia-Pacific and global credit.

China-U.S. tensions are escalating.  The trade tussle between China and U.S. marks a significant escalation in ties between the two countries. The U.S. administration has imposed 145% additional tariffs on imports from China since Jan. 20, a big jump from an effective tariff rate of about 15% before President Trump returned to office. Such levels would slash the competitiveness of Chinese exports in the U.S., inflicting a heavy toll on China's economy. On April 11, in response to the latest U.S. tariff hikes, China raised levies on U.S. imports to 125% and maintained export curbs on rare earth minerals. However, Chinese authorities signal they will no longer match further tariff increases by the Trump administration as American goods are no longer economically viable for Chinese importers at those tariff levels.

Strained U.S.-China relations will affect Asia-Pacific economies,  given the region's integrated trade ties with both countries. Furthermore, a sharper deterioration in China-U.S. relations will further strain confidence, and severely disrupt supply chains and global trade flows. Together, these events could spur a sharper global slowdown. These rapid developments have prompted us to raise our assessment of the global trade risk to very high.

Should current U.S. tariff levels on China stay for a prolonged period, China's export engine could face material disruption, weighing on growth and confidence.  Even if Chinese policymakers substantially scale up fiscal and monetary stimulus, it is unlikely to fully offset the impact on growth. The country's GDP growth would be much lower than the 4.1% and 3.8% for 2025 and 2026 featured in our March forecast.

The U.S.-China exchange of counter tariffs is unsustainable, in our view.  For now, there are no obvious tariff levels that we could reasonably rely on as assumptions for a forecast. Further, at such high tariff levels we anticipate non-linear effects across trade elasticities and the behavior of businesses and households. We will need more time to assess the impact. This entails going beyond the existing suite of macro data.

Table 1

China's domestic growth engine remains subdued,  given the lingering real estate crisis, which is sapping confidence. For the manufacturers, revenue and profit compression is weighing down capital expenditure and labor needs. Cautious spending among households could intensify amid rising unemployment risks and a gloomier global backdrop. A slower China economy could affect Asia-Pacific, hurting countries that rely on Chinese demand (including tourism) or face greater competition brought about by Chinese exports. We changed our risk trend assessment on the risk to China's economy to worsening.

A short reprieve for the technology sector, but U.S. reshoring demands look set to stick.  The U.S. stance on key exports from China appears to have softened. On April 11, the U.S. Customs and Border Protection issued guidance indicating that smartphones, laptop computers, hard drives, computer processors, memory chips, and flat-screen displays are excluded from the 145% tariffs on China and the 10% universal rate. This was backdated to April 5, easing pressure on countries that are heavily exposed to exporting electronics to the U.S. (see chart 1).

Chart 1

In our view, technology companies will continue--and perhaps with some acceleration--their pace of supply-chain diversification, but we are unlikely to see dramatic shifts. The current environment (specifically, tariff policy) isn't conducive to large scale change in investment plans.

For the U.S. and China, tech supremacy pertains to both economic interest and national security. The U.S. and its allies could levy higher tariffs on semiconductors to slow China's progress. Meanwhile, U.S. Commerce Secretary Howard Lutnick signaled the reprieve on the exempted exports is temporary, and suggested a forthcoming levy will include these exempted items. We factored a 10% tariff rate on the semiconductor, pharmaceutical and auto sectors within our baseline.

While a stalemate looks possible, significant uncertainty remains.  Although China's cap of 125% tariffs on U.S. imports and the exclusion of some technology exports from tariffs raises the possibility of a stalemate, the situation remains tense. The Thucydides trap comes to mind, underlining the risk of intensifying conflicts between the two large economies. It is difficult to see either side making concessions for now, given their limited dialogue.

There are no winners in a trade conflict.  The trade tussle between China and the U.S. raises the risk of economic and geopolitical fallout. Home to sizable manufacturing activities, Asia-Pacific is highly dependent on exports to the U.S. and China for growth. The region's supply-chain networks are tightly linked with China's, given the latter's role in manufacturing intermediate parts and raw materials. At the same time, Asia-Pacific depends on the U.S. mostly for security. The region could find itself pushed to take sides or walk a delicate line between the two large economies.

Meanwhile, unilateral tariffs and shifting foreign policy from the U.S. underline a need to reevaluate options.  To counteract tariffs, Asia-Pacific governments are exploring the formation of regional trade blocs or bilateral trade agreements. These efforts could accelerate, expediting the need to relocate supply sources and production. Businesses may hold back investments as they reassess the trade landscape. To offload excess production, exporters may seek new markets and cut prices. For some economies, locally made products may be unable to compete against the influx of these competitive exports. To insulate local industries, affected economies might impose protectionist measures, thereby escalating trade tensions. Governments may use economic stimulus to reduce the hits to businesses and households, which would worsen fiscal balance sheets. In our view, small and export-dependent economies would face an outsized hit.

A pause means tariffs could return.  Unsurprisingly, if the paused U.S. tariffs are ultimately implemented as initially announced, the economic fallout for global markets would be broad and deep. Trade tensions that remain unresolved as the pause ends could have a marked impact on credit quality. Either way, the pause is for 90 days, and the prevailing uncertainty is likely to further undermine business and consumer confidence, heightening concerns about corporate investment, employment and consumer spending, and overall economic activity.

Squeezed from multiple fronts.  For the rest of Asia-Pacific, the partial tariff reprieve broadly cushions current growth assumptions. However, small and trade-centric economies (such as Vietnam, Thailand, Singapore, and Taiwan) may face greater obstacles to growth. Locally produced goods in Asia-Pacific and outside the U.S. could face more intense price competition as Chinese exporters scout new markets and cut prices to accelerate sales. A redirection of products into regional markets would further squeeze domestic markets or sectors with excess capacity. This could stoke further escalation of protectionist measures within Asia-Pacific.

Market volatility and increasing investor risk aversion to hit weakest credit cohorts.  The VIX breached 50 on April 8, up from about 15 in February (and remains high). Investors are demanding higher premiums for the risks they assume and seeking a flight to quality. At the same time, the region's equity markets have seen a sell-off (see chart 2). Furthermore, secondary-market spreads on U.S. speculative-grade debt have jumped above 300 basis points (bps) for the first time since November 2023. The intense market volatility included a sell-off in U.S. Treasuries on April 11 and swings in the dollar's value. Meanwhile, we expect the U.S. Federal Reserve will lower its policy rate by just 25 bps this year (see "Global Credit Conditions Special Update: Ongoing Reshuffling," published on RatingsDirect, April 11, 2025).

Table 2

Chart 2

Margin calls could expose weak links.  Outside the region, sharp declines in equities could force market participants to sell safer assets to raise liquidity to meet higher margin requirements. This, in turn, may have set off a decline in prices for a broader set of assets, including Treasuries. A sharp fall in Treasuries could have spillover effects onto Asia-Pacific. In the event a counterparty is unable to post margin, it could lead to major market disruption. Contagion risk could rise, leading to concerns about the creditworthiness of a broader set of counterparties, particularly in the banking space.

Asia-Pacific is not spared from volatility.  Risk-off sentiment is reverberating across the region, underlining the effect of significant U.S. trade policy uncertainty. While pain is largely occurring within riskier borrower cohorts, contagion could take hold. Investors may turn selective, demanding higher spreads (see chart 3). We raised our assessment of the financing risk to high.

Chart 3

Borrowers to finance onshore as access elsewhere tightens.  For emerging-market and speculative-grade borrowers, access to the U.S. dollar-financing market could stay narrow for protracted periods. At the same time, with Asia-Pacific central banks (except the Bank of Japan) likely to continue cutting policy rates, the region's currencies appear set to weaken (see chart 4), making offshore debt more costly. We anticipate issuers that have established stronger relationships with local financiers and previously tapped into the domestic market to feel less pain from tighter offshore funding access. However, banks could tighten lending standards amid a gloomier macro backdrop. Although borrowers could turn onshore, tighter bank lending standards could intensify credit strains.

Chart 4

Top Asia-Pacific Risks

Global trade: Intensifying trade tensions risk larger disruption in supply chains, weighing down growth and confidence

The step-up in tensions between the U.S. and its trade partners, following from the Trump administration's tariff announcement on April 2, is spiraling into a wider trade conflict and disrupting supply chains. For trade-centric Asia-Pacific, slower global demand will dent revenue and weigh down manufacturing activities and labor needs. Furthermore, low confidence among consumers and businesses could exacerbate recessionary pressures. A protracted imposition of tariffs will exacerbate second-round burdens on growth, risking a sharper slowdown. Meanwhile, the formation of trade blocs outside the U.S. to counteract tariffs could expedite needs to relocate supply sources and production, causing businesses to incur higher costs. Businesses may delay capex and investment plans, as they reassess the trade landscape. To offload excess production, exporters may seek new markets and cut prices. For some economies, locally made products may be unable to compete against the influx of these competitive exports. To insulate local industries, affected economies might impose protectionist measures, escalating trade tensions further. Similarly, governments may implement economic stimulus to reduce the hits to businesses and households, which would worsen fiscal balance sheets. Small and trade-dependent economies are particularly vulnerable, as they face risks of capital outflows and currency devaluation amid a slowdown from reduced global trade and foreign direct investment.

China's economy: Falling exports, sticky property weakness and subdued domestic confidence risk sharper slowdown

China's economic growth is seeing rising downside risk amid rising trade tensions with the U.S. as its export engine falters from weaker global demand. The country's domestic growth engine remains subdued, given the lingering real estate crisis, which is dragging down confidence. For the manufacturers, revenue and profit compression is weighing down capital expenditure and labor needs. Cautious spending among households could intensify amid rising unemployment risks and a gloomier global backdrop. A slower China economy could spill over into Asia-Pacific, hurting countries that rely on Chinese demand (including tourism) or face greater competition brought about by Chinese exports. Meanwhile, further strain on U.S.-China relations will have a knock-on effect on Asia-Pacific economies, given the very close trade ties with the world's two largest economies.

Financing: Intensifying risk aversion could trigger sharper risk-repricing and narrower funding access for borrowers

The intensifying trade tensions between the U.S. and its trade partners are compounding capital market volatility and risk-off sentiment. Investors' flight to quality had kept investment-grade spreads tight. However, rising contagion risk from widening spreads (on speculative-grade assets) could reverberate across the credit spectrum. If a sharp risk-repricing of assets occurs, market volatility could intensify and constrict capital raising activities. Rising U.S. recession odds and uncertain trade landscape could prompt lenders to demand higher risk premia. This means all-in financing costs could stay high, despite lower policy rates. Risk-aversion across lenders could result in capital outflows from emerging markets, causing sharper devaluation of domestic currencies. Cost of offshore financing will spike, affecting borrowers reliant on offshore financing. Weaker credit cohorts could face protracted closure of U.S. dollar funding access. Concurrently, banks and investors could become more selective and tighten lending standards. Credit strain on borrowers could intensify given tight liquidity and higher borrowing costs, raising the specter for more defaults. Meanwhile, narrowing interest rate differentials between the Bank of Japan (BOJ) and the Fed could unwind yen carry trades. Sudden capital inflows to Japan could increase foreign exchange volatility, which would affect the rest of the region.

Geopolitics: Escalating geopolitical tensions could hinder policy predictability and increase financial market volatility

Geopolitical challenges are likely to affect the Asia-Pacific region through fluctuations in energy and commodity prices, as well as declines in confidence and industrial production. Key issues include ongoing conflicts in the Middle East and the instability of the Russia-Ukraine war, along with rising diplomatic tensions between China and the U.S. and its allies. Uncertainty from U.S. policy could disrupt business activities and contribute to a global economic slowdown. Potential conflicts in the South China Sea could severely disrupt supply chains. Additionally, investment outflows from the region may lead to significant financial market volatility and currency depreciation, increasing interest costs for borrowers. In response, governments may increase defense spending, which could hinder efforts for fiscal consolidation.

Real estate: Negative equity and shrinking demand to exacerbate property devaluation and liquidity strains on developers

High mortgage and financing costs, coupled with changing demand for office and retail space, are eroding commercial real estate valuations. Slower sales volumes and occupancy rates, particularly in Hong Kong, China, and Korea, are increasing liquidity strains on property developers. Additionally, declining rental income or a knock to the employment outlook may lead to write-downs in real estate investment trusts (REITs) and structured finance markets. If banks become more selective with real estate borrowers, limited funding access could lead to a rise in defaults.

STRUCTURAL RISKS

Climate change: Extreme weather and energy transition to pose business challenges and raise costs

Changing weather patterns are increasing physical risks globally, with a more significant financial impact on developing markets. Climate-related disruptions in agriculture and energy supply could lead to inflation and social unrest. Meanwhile, the global push to reach net-zero emissions by mid-century could lose momentum, following the U.S. exit from the Paris Agreement, the withdrawal of major financial institutions from net-zero alliances, and Europe's shifting political priorities. Similarly, higher tariffs targeting some green products—such as Chinese electric vehicles—could cause the clean energy transition to falter and undermine the economics of past investments in low-carbon technologies. The rising frequency and severity of natural disasters could lead to higher insurance premia, putting pressure on households and enterprises. In extreme cases, some regions may become uninsurable, prompting a recalibration of asset prices.

Technology: Accelerating technological advancement and mounting cyberattacks to disrupt business operations

Technological advancements, particularly in generative artificial intelligence, are altering business environments and regulatory frameworks. Innovations in various fields, including biological and material sciences, can improve productivity and operational efficiencies but also introduce complexities and higher management costs. Businesses may need to invest more to continuously adopt and adapt to new technologies. Additionally, the growing interconnectedness of economic activities and technology networks increases the risk of cyberattacks. This could pose systemic threats and significant risks to individual entities, especially critical infrastructure and issuer operations.

Editor: Lex Hall

Related Research

• Global Credit Conditions Special Update: Ongoing Reshuffling, April 11, 2025
• Asia-Pacific Credit Conditions To Deteriorate Amid Tariff Fallout, April 7, 2025