The two largest Asian equity markets have the potential to rally further. Within corporate bonds, quality credits should prevail.
December 2, 2025
By Jasmine Duan; Nicholas Gwee, CFA; Shawn Sim
China and the U.S. have reached a one-year trade truce, which should support the Chinese economy and market sentiment in 2026, in our view. We recall that the major corrections in Chinese equities in 2025 were largely due to U.S.-China trade tensions. The latest deal reached in October appears more durable and is likely to set the stage for a more sustainable rally, in our view.
Stable global trade relationships should support Chinese exports, which have seen volumes growing but prices dropping. An increase in shipments to the U.S. could help ease price pressures. Beijing’s macroeconomic policy is likely to become more supportive of domestic demand in 2026, given the government’s ambition to boost domestic consumption over the next five years. However, we think the initial steps may be small and experimental.
The chart shows the China Export Volume Index and the China Export Price Index from end-January 2022 through end-September 2025 (the latest reading). The Export Volume Index started the period at 110.5; it dropped to as low as 87.7 in January 2023 and reached as high as 120.7 in January 2024. It finished the period at 111.4 as of end September. However, the Export Price Index, which was at 109.5 in January 2022, has steadily declined throughout the period and was at 97.3 at end-September.
Source – RBC Wealth Management, Bloomberg; monthly data through September 2025
The Chinese government continues to prioritize technology development, with a focus on high-end manufacturing. As a result, we expect capital expenditure in related sectors to continue growing. We believe Chinese companies are well-positioned to benefit from the global AI spending boom, as they supply many key components. The primary risk, in our view, is a potential reversal in global AI spending, which could have a ripple effect in China.
The Japanese equity market rose sharply in October, and while short-term volatility is likely, we expect further upside in the new year. Japan welcomed its first female prime minister, Sanae Takaichi, and her government is enjoying an unusually high approval rating. Since becoming prime minister in October, Takaichi has announced measures to counter inflation, accelerated the timeline for defence spending increases, and unveiled growth strategies for cutting-edge industries. In her very short time in office, we also witnessed a strengthening of the U.S.-Japan alliance.
We see “Sanaenomics” as a catalyst for Japanese equities, and we view her fiscal measures to be sufficient to help counter inflation and boost sluggish middle-class consumption.
We reiterate our long-term constructive view on Japanese equities given a sustainable two percent inflation target seems in sight; renewed investment from friendshoring and onshoring; improving returns on equity and shareholder returns; resilient domestic demand supported by high household savings and wage hikes; inbound tourism and elevated domestic inflows from individual investors under the revamped Nippon Individual Savings Account scheme.
Asian credit markets head into 2026 on firm footing after a resilient 2025. Asian investment-grade credit spreads remain anchored by steady economic growth, contained inflation and ample domestic liquidity. Corporate credit fundamentals are sound, leverage has moderated and supply remains disciplined. Even high-yield segments have weathered global rate volatility for most of 2025, underscoring Asia’s resilient credit markets.
Regional policymakers are likely to stay proactive in balancing growth and fiscal prudence. Governments of export-oriented economies – such as China, South Korea, Japan and Thailand – are expected by most investors to sustain targeted fiscal support to offset the drag from U.S. tariffs and subdued global demand. This should help anchor long-term yields and contain funding volatility. Yet, we believe elevated valuations and thinning fiscal buffers across several economies mean returns will hinge on credit selection and structural themes rather than broad market rallies.
China’s credit cycle should move toward stabilization in 2026. Systemic risks appear to be easing as real estate developers deleverage, and policy remains geared toward steady, productivity-driven expansion. Domestic investors will continue to be a key stabilizing force, in our view, while sectors linked to consumption and technology provide selective upside. Within China, we prefer investment-grade bonds issued by central state-owned entities and high-quality private companies.
The chart illustrates the credit spread (in basis points) of the Asia ex Japan USD Corporate IG Bond Index over U.S. Treasuries for the period from the start of 2025 to October 31, 2025. It shows the spread steadily getting tighter from the start of 2025, when it was at 102, then sharply widening in the first week of April to 132 (post the April 2 U.S. tariff “Liberation Day”), before sharply tightening again into the end of October.
Source – RBC Wealth Management, Bloomberg; data as of 10/31/25
Japan’s policy shift is set to be a defining force in regional markets, in our opinion. The Bank of Japan’s (BoJ) gradual normalization of monetary policy and a more expansionary fiscal stance by the new Takaichi administration have caused Japanese government bond (JGB) yields to rise, and not without credit implications. Higher JGB yields are prompting more Japanese corporates to issue U.S. dollar-denominated bonds, increasing Japan’s role in Asian credit markets. Although this may potentially widen credit spreads at the longer end of the yield curve, we think strong domestic demand driven by lower U.S. dollar hedging costs should support positive returns and provide attractive relative valuations for global investors.
Looking ahead, we believe the Asian credit outlook for 2026 points to more moderate returns, driven by stable fundamentals, net negative new supply – whereby more bonds are being paid back than newly issued – and selective value in higher-quality issuers.
The material herein is for informational purposes only and is not directed at, nor intended for distribution to or use by, any person or entity in any country where such distribution or use would be contrary to law or regulation or which would subject Royal Bank of Canada or its subsidiaries or constituent business units (including RBC Wealth Management) to any licensing or registration requirement within such country.
This is not intended to be either a specific offer by any Royal Bank of Canada entity to sell or provide, or a specific invitation to apply for, any particular financial account, product or service. Royal Bank of Canada does not offer accounts, products or services in jurisdictions where it is not permitted to do so, and therefore the RBC Wealth Management business is not available in all countries or markets.
The information contained herein is general in nature and is not intended, and should not be construed, as professional advice or opinion provided to the user, nor as a recommendation of any particular approach. Nothing in this material constitutes legal, accounting or tax advice and you are advised to seek independent legal, tax and accounting advice prior to acting upon anything contained in this material. Interest rates, market conditions, tax and legal rules and other important factors which will be pertinent to your circumstances are subject to change. This material does not purport to be a complete statement of the approaches or steps that may be appropriate for the user, does not take into account the user’s specific investment objectives or risk tolerance and is not intended to be an invitation to effect a securities transaction or to otherwise participate in any investment service.
To the full extent permitted by law neither RBC Wealth Management nor any of its affiliates, nor any other person, accepts any liability whatsoever for any direct or consequential loss arising from any use of this document or the information contained herein. No matter contained in this material may be reproduced or copied by any means without the prior consent of RBC Wealth Management. RBC Wealth Management is the global brand name to describe the wealth management business of the Royal Bank of Canada and its affiliates and branches, including, RBC Investment Services (Asia) Limited, Royal Bank of Canada, Hong Kong Branch, and the Royal Bank of Canada, Singapore Branch. Additional information available upon request.
Royal Bank of Canada is duly established under the Bank Act (Canada), which provides limited liability for shareholders.
® Registered trademark of Royal Bank of Canada. Used under license. RBC Wealth Management is a registered trademark of Royal Bank of Canada. Used under license. Copyright © Royal Bank of Canada 2025. All rights reserved.
We want to talk about your financial future.