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Across Asia, fiscal trajectories are becoming an increasingly important driver of rates performance and FX outcomes. China is best positioned to outperform the region on a total return basis, as fiscal expansion remains measured, monetary policy retains flexibility, and external balances continue to improve. In contrast, several regional peers face rising fiscal slippage risks alongside weaker currencies.
Fiscal concerns in India are re-emerging (see: India’s Budget to align with strategic objectives). Net tax receipts are missing budget estimates, while expenditure compression is still underway. Ongoing CAPEX investment in infrastructure and strategic sectors is calling for further bond issuance. These factors are keeping yields biased higher despite easing headline inflation. At the same time, FX depreciation risks are rising amid tariff-related uncertainties and a stronger USD backdrop. While the RBI has turned dovish, it remains reluctant to deliver outright rate cuts. This combination is capping bond total returns. Likewise, Indonesia’s fiscal risks are gaining attention (see: Indonesia markets: Domestic catalysts strengthen bearish pressure on rupiah). Its deficit trajectory is moving closer to the statutory 3% budget cap. Although Bank Indonesia arguably has room to stay dovish to accommodate fiscal expansion, IDR depreciation is likely to stall the pace of rate cuts. Beyond fiscal considerations, concerns over Bank Indonesia’s policy independence are also weighing on exchange rate performance.
North Asian government bonds are not immune from the same risks. In Korea, the government is leaning toward fiscal expansion. A supplementary budget for 2025 has already been implemented, and a record-high 2026 budget of KRW 728tn (+8.1% YoY versus the initial plan) has been approved. The net fiscal deficit is projected to widen to 4.0% of GDP from 2.8%. That said, monetary policy flexibility remains constrained. A weak KRW, combined with elevated property and equity valuations, leaves the Bank of Korea little room to cut rates aggressively. Despite some stabilization after the initial sell-off, Japan is still facing renewed fiscal expansion risks following political turnover and snap election dynamics.
In contrast, China’s fiscal expansion remains moderate. Incremental investment is focusing on AI and advanced manufacturing, which are less capex-intensive than past property or infrastructure cycles. Credit demand stays weak amid anti-involution campaign, which aims at curbing excessive investment and production. On the monetary policy front, the PBOC is likely to stay on course with its easing stance until PPI returns to positive territory. The RMB is also strengthening, supported by strong trade performance. China has achieved trade surpluses exceeding USD 1tn for two consecutive years despite tightening trade tensions. Taken together, these dynamics underpin China’s superior total return outlook relative to the rest of Asia.
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- Malaysia: BNM stood pat; preserving monetary ammunition in 2026 23 Jan 2026
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