The U.S. Federal Reserve monetary tightening initiations lead to global monetary policy divergence as most Asia-Pacific economies are seen maintaining an easing bias in the near future. In this context, global economies fundamentals will be key important factors, as government finances, external positions, household finances and corporate balance sheets will determine risk differentials and exchange rate dynamics.
Moreover, corporate distress is further increased by the rising non-financial sector leverage in times of subdued economic growth. This is seen as the nonfinancial debt burden of China, South Korea and Hong Kong averaged 165% of GDP in mid-2015, almost 40 percentage points up over the previous five years. While lower interest rate environment has been providing strong house price gains, policymakers in Australia, Hong Kong, South Korea, and China will continue to focus on real estate developments and household debt. The region's increasing resilient financial sector, improved external trade positions, firm sovereign debt profiles and enormous foreign exchange reserves counterbalance's the risks of higher interest rates and a heavy debt burden.
