Cross-border bank credit to Asia-Pacific emerging market and developing economies (EMDEs) experienced a significant contraction in the third quarter of 2025, falling by $45.5 billion. This marks the largest quarterly decline in two years, coinciding with a deepening annual contraction for the region, now at 6%. The decline was overwhelmingly driven by China, where cross-border claims shrank by $48 billion over the same period, effectively accounting for the entirety of the Asia-Pacific outflow.

The pullback in credit extends beyond a regional trend, signaling broader shifts in global financial flows. While Asia-Pacific saw a $45.5 billion outflow, it marginally exceeded a similar decline of $44.9 billion observed elsewhere, suggesting a wider recalibration of risk appetite among international lenders. This contraction raises questions about the sustainability of growth in emerging Asian economies and the potential impact on businesses reliant on foreign capital.

The timing of this decline is noteworthy. While global inflation has been a concern, particularly in the US and Europe, much of Asia has managed to avoid significant price spikes, allowing many countries to sidestep aggressive monetary tightening. UBS, in a recent report, highlights the relatively stable macroeconomic environment in Asia, characterized by subdued inflation and healthy economic growth, forecasting a 4.6% expansion for the region in 2024. This contrasts sharply with the more subdued outlook for the US (1.2% growth) and the Eurozone (0.6% growth) over the same period.

Despite the favorable macroeconomic conditions, the contraction in cross-border credit suggests that factors beyond domestic economic fundamentals are at play. The decline in lending from China, in particular, warrants closer examination. While the specific reasons for this pullback aren’t detailed in the available information, it could be linked to China’s own economic challenges, shifts in its foreign exchange policies, or a reassessment of risk by international banks.

The broader context of private credit’s growing role in the APAC lending landscape adds another layer of complexity. As interest rates rise and market volatility increases, investors are increasingly turning to alternative assets like private credit. However, questions remain about the sector’s ability to sustain its strong growth trajectory, particularly in the face of economic headwinds.

The strength of credit fundamentals in Asia, excluding China, remains a positive sign. UBS notes that net leverage for Asian investment grade companies, while increasing from 1.4 in 2012 to 2.0 at the end of 2022, remains lower than that of US investment grade companies (2.4 in 2022). This suggests that Asian companies are, on average, less burdened by debt and better positioned to weather economic shocks. Demand for Asian corporate bonds remains robust, fueled by higher yield levels and increased interest from local buyers in USD-denominated debt.

China’s Belt and Road Initiative (BRI), a massive infrastructure development project spanning numerous countries, has faced both praise, and criticism. While the World Economic Forum has lauded the BRI’s potential benefits, the initiative has also drawn scrutiny from countries like those in the “Quad” grouping and their allies. The impact of the BRI on China’s cross-border lending and the recent pullback in credit warrants further investigation.

The current situation presents a mixed picture for Asian credit markets. While macroeconomic fundamentals remain relatively strong, the decline in cross-border credit, particularly from China, is a cause for concern. The increasing prominence of private credit offers a potential alternative source of funding, but its long-term sustainability remains uncertain. Investors will be closely monitoring developments in China and the broader Asia-Pacific region to assess the implications for their portfolios.

The outflow of capital from emerging Asia, as highlighted by the Bank for International Settlements (BIS) data, underscores the need for careful risk management and a nuanced understanding of the evolving dynamics in the region. The coming quarters will be crucial in determining whether this contraction in credit is a temporary blip or a sign of a more prolonged shift in global financial flows.