Regional Economic Outlook for Asia and Pacific, October 2025

Chapter 3: Investment Efficiency and Capital Allocation: The Role of Financial Structure

Since the global financial crisis, slowing growth and rising global trade fragmentation has highlighted the need to strengthen domestic growth drivers in the Asia-Pacific region. High regional investment rates have relied on a financial structure favoring capital-intensive growth, but recent years have seen increased capital misallocation and declining investment returns. These trends are partly attributable to inefficiencies in financial intermediation, with financial institutions favoring larger, less productive firms over smaller, more productive ones, and a rise in debt evergreening. To address these issues, policies should improve financial intermediation by broadening financing options for a wider range of firms and support timely restructuring of nonviable debt. Expanding financing instruments is essential for efficient capital allocation as economies advance. Such reforms will promote broad-based growth, improve capital allocation, boost job and income growth, spur domestic demand, and facilitate economic rebalancing.