In a report released this month, Mckinsey discussed the Asian debt crisis. China, Singapore, and Hong Kong have a total debt-to-GDP ratio of 257%, 286%, and 338%, respectively. China witnessed the sharpest rise in debt. The mining and agriculture sector has the highest financial stress across Asia. The Asian financial system has been exposed to a higher risk. The total debt includes household, non-financial corporate, and government debt.

Asian Debt Crisis: Should Investors Be Concerned?

Based on the Mckinsey report, India had the highest number of corporations with an interest coverage ratio less than 1.5x. Between 2007 and 2017, India witnessed the highest rise in the number of potential defaulters. The interest coverage ratio represents the EBIT-to-interest expenses ratio. A lower ratio indicates the degree of a firm’s inability to meet its interest payment obligation.

Asian equities underperforming

On a year-to-date basis, the iShares China Large-Cap ETF, the iShares India 50 ETF, and the iShares MSCI Singapore ETF have returned -0.2%, -1.7%, and 3.8%. The iShares MSCI All Country Asia ex Jpn ETF (AAXJ) has risen 2.7%. However, the S&P 500 Index (SPY) has risen around 15.7%. The unemployment rate near a decade low and domestic consumption could be behind SPY’s outperformance. Positive interest rates in the US compared to the negative yield in Japan and Europe help investors’ confidence.

Will the Asian debt crisis repeat?

The Asian debt crisis started in Thailand in 1997. Later, the shock spread to Indonesia, South Korea, and other Asian nations. The crisis was due to a significant increase in Asian economies’ foreign debt-to-GDP ratio. Investors had less confidence in the economies. The situation got worse due to large capital outflows.

However, the situation is completely different this time. The trade war between the US and China could shield some Asian economies. Investors’ confidence could rise in nations like Vietnam and Taiwan. India might be favored due to ongoing trade disputes. 

Vietnam and Taiwan’s trade surplus with the US rose at China’s expense. Companies started to move their production facilities out of China. However, the trade war isn’t related to global trade. The US sees China as its biggest threat. Legendary investor Ray Dalio thinks that the tariff war could lead to resource restructuring. The move would be important for “global world order.” If investors are concerned about investing in China, they could get exposure to other Asian economies. If the trade war escalates more, it could reduce the US and Chinese GDP by 1.7% to 2.6%.

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