Hong Kong, China in Grave Danger of Financial Crisis Next Three Years

dollar sign dissolving
Hong Kong is well in the danger zone, with 52 of those early-warning signals flashing red, said Nomura (image ratpack223/iStockPhoto)

Hong Kong and China are the only constituencies in grave danger of a financial crisis or sharp drop in domestic demand in the next three years, according to Nomura Singapore.

The company was cited as saying in a Bloomberg report that the red flags are more prominent for Hong Kong than even during the peak of the Asian financial crisis in 1997-98.

Based on the most reliable 60 early-warning signals, Nomura determined that a financial crisis or demand plunge is typical for those economies that see at least 30 of those signals flashing red, according to the report. Hong Kong—with 52 of those signals—is well in the danger zone while China has 33 of them, the report says.

The only Asian economies among the 14 that have zero signals flashing red are India and South Korea, while Thailand and the Philippines are the closest to the unfavorable threshold at 21 and 19 respectively, according to the report.

Taking some cues from work by the Bank for International Settlements, economists at Nomura tested the reliability of indicators used to gauge conditions across 30 countries dating to the early 1990s and separated equally among Asian economies, emerging markets, and developed markets, the report says.

The economists found that five gap measures were most accurate in predicting a financial crisis within the ensuing  12 quarters include private credit-to-GDP, private debt-service ratio, real effective exchange rate, real property prices, and real equity prices.