Trade reset: navigating prosperity amid global fragmentation

This year was expected to be one of the most challenging for Asia. In the end, China is likely to grow about 5%, India above 6% and the remainder of the region at 3½% – a rate higher than in 2023. Regional currencies have also strengthened.

This adaptability belies the tectonic shifts impacting the region, without and within.

The US tariffs imposed on the region are unlikely to be a flash in the pan. Current trends suggest tariffs may raise around USD300 billion over the coming year. US public debt is 120% of GDP, the fiscal deficit 6% of GDP, and the One Big Beautiful Bill passed in July adds around USD400 billion to the deficit each year. Any future US administration is likely to find tariff revenue too lucrative to forego.

Not only that, but tariffs seem to be an element of trade policy (on surplus economies), foreign policy (such as India or Brazil) and even potentially fiscal policy. Tariffs trying to meet multiple objectives are unlikely to settle for long.

Within the region, China’s current growth strategy is facing its limits, and not just because of tariffs. Growth in real-estate lending peaked in 2017 at 27% and hasn’t grown since the end of 2023. The Chinese economy hardly missed a beat, though, as the baton passed to industry. Growth in industrial lending picked up from 5% in 2019, to a record 32% by 2023.

But that boom hasn’t lasted. Lending growth is back to 10% and the structural challenges of this strategy are becoming apparent. “Involuted” competition erodes sector margins to the point of unprofitability.

Chinese companies feature prominently in the Fortune 500 across multiple sectors, and lead in several sectors. But the Fortune 500 ranks companies on revenue. Representation from China drops in a list of the most profitable companies.

Profitability is now a focus of policy, and the choices are unclear. Industry rationalisation to raise profitability will free up both capital and labour, but cautious consumers are unlikely to mop up the excess. Sharply lower interest rates might encourage sufficient consumption, but they are already at 1½%. Any further reduction in interest rates would place further pressure on the profitability of an already challenged banking sector.

China’s exporters, as a consequence, are likely to remain a key element of China’s growth strategy.

Encouragingly, the region has some new super-powers. The first is the US’s Achilles heel – the fiscal policy and bond market nexus. Asian currencies don’t depreciate during periods of instability as they might once have. This provides policy room for Asia to provide stimulus when conditions are challenging. Indonesia did this in July. This is quite a radical departure from the region’s experience.

Secondly, Asia can rely on a structural inflow of capital. The US returning to the budget and trade deficits of the GFC period amid scepticism of the US administration’s economic policies is likely to drive capital reversion.

Remarkably, the European Central Bank reports the increase in foreign ownership of US Treasuries since 2019 has come from geopolitically aligned countries. Which economies have been most surprised by the US’s posture this year?

Asia’s US portfolio holdings have more than doubled to USD4.8 trillion since 2009, with a substantial share of this growth coming from the private sector. The diversification from US portfolio assets is a long-term trend, still in its nascency. But it will profoundly impact Asian economies’ liquidity, asset prices and currencies, as it matures.

Australian super funds have entered the investment conversation in the US for the first time. Their scale (the fifth largest pool in the world) and benchmark-hugging asset allocation has seen them become an asset pool of genuine global note. Their assets will also gravitate towards our region if, as we expect, the US share of global benchmarks trends down.

Super funds have started to inoculate the Australian dollar from offshore events, too. Australia’s net foreign liabilities have more than halved from 63% of GDP in 2016 to 24% of GDP, a level last seen in 1984. It imports much of its machinery and equipment. This won’t face the same scale of challenge during a downturn. Economic policy will need to be more responsive therefore, but Australia’s productivity won’t be sacrificed.

Fortunately, Asia can also fall back on its adaptability.

This article originally appeared in the Australian Financial Review on September 9, 2025

Richard Yetsenga is Chief Economist at ANZ