Which Factors Could Shape Asian Bond Markets in 2025?

The interest-rate cycle isn’t the only theme affecting asset-price movements. Heading into 2025, we explore other developments that investors should consider.

In the past year, global monetary policy has gradually turned on its axis, with the US Federal Reserve journeying down the rate-reduction path. This move prompted other central banks in developed and emerging markets to follow suit. From an investment perspective, a backdrop of lower borrowing costs could create a tailwind for bonds.

Meanwhile, on the political front, we will soon discover if President-elect Trump’s promises to impose tariffs on the goods imported from certain markets will be implemented. It remains unclear if the campaign rhetoric of 60% tariffs on goods bought from China will translate into concrete policy ._¹ If this happened, demand for its goods would decline in the face of steep price increases. China’s response could be a deliberate devaluation of the yuan to mitigate the impact of the levies and make its goods cheaper in US-dollar terms .²

China’s Economic Trajectory is Important for Asia

As the world’s second-largest economy, China's performance is vital, particularly for Asia. Trade between China and ASEAN markets reached US $468 billion in 2023, an increase of 10.5% from 2022. ASEAN also overtook the European Union as China’s largest trading partner in 2020 .³ This demonstrates the strong economic interlinkages between China and its neighbours.

Specifically, China’s property sector and associated debt levels remain a concern for the broader economy. Policymakers have announced a large recapitalisation package for local governments and banks to help alleviate their debt challenges, which have been exacerbated by declining revenue from land sales .⁴ To help stimulate demand, the central government has reduced the minimum down payment ratio to 15% for house purchases and relaxed other rules relating to said transactions .⁵

The issues in the property sector have affected consumer spending as the wealth impact of tumbling house prices is weighing on sentiment, prompting people to spend less and save more .⁶ However, recent signals have grown more positive, with prices stabilising. In fact, they could potentially rise in 2026, according to a Reuters poll .⁷

While the measures taken by China to bolster its economy may not fully qualify as ‘game changers,’ they should help alleviate near-term risks .⁸

Geopolitical Tensions Will Underpin Ongoing Uncertainty

Conflicts in the Middle East and Europe have come at a significant human cost, but they also reflect geopolitical bloc competition – equivalent to that seen during the Cold War. The Western powers can be viewed as one bloc, with China, Russia and some emerging economies creating others. The military alliances are looser now than during the Cold War, but proxy wars (and trade wars) are still used to weaken rivals. In economic terms, this increases the possibility of any upheaval in remote or smaller regions, drawing in the major powers. Such developments would raise uncertainty and, sequentially, impact trade flows and growth .⁹

Remaining with trade and the impact of geopolitical manoeuvres on Asian markets would be varied. China faces multiple restrictions on its semiconductor industry aimed at stopping the transfer of advanced technology from the US and its allies, which could be harnessed in, for example, military applications .¹⁰ While this policy is aimed at China, it could also have knock-on effects on other Asian markets that export chips to China .¹¹

That said, the concept of ‘friendshoring’ may benefit some regional markets .¹² Friendshoring is when political alignments or alliances become the key factor in determining where international firms choose to invest in manufacturing.

Steady Economic Growth Underpins a Positive Outlook for Asian Bonds

More positively, uncertainty is nothing new, and there is always room for growth. The International Monetary Fund (IMF), in its October 2024 World Economic Outlook, projected annual growth in real GDP for Emerging and Developing Asia of 5.0% in 2025. This grouping excludes China and India, which have projected rates of 4.5% and 6.5%, respectively. In contrast, the advanced economies are expected to grow by 1.8% in 2025 .¹³ Continued expansion, coupled with moderating interest rates, should support an economic soft landing in 2025 .¹⁴

This anticipated growth demonstrates the improvement of the region's fundamentals. While areas of concern, like China’s property sector and geopolitics, certainly exist, the overall outlook remains positive. Concurrently, Asian bonds still allow investors to gain exposure to a region with a largely upbeat economic outlook.