Photographer: David Paul Morris/Bloomberg

Hong Kong Economy Most at Risk of Financial Crisis: Nomura Gauge

  • China is next most at-risk economy according to latest update
  • Emerging markets rated at higher risk than developed markets

Hong Kong is the economy most at risk of suffering a financial crisis, with China the second most vulnerable, according to the latest update of an early warning system devised by Nomura Holdings Inc.

The findings don’t mean there will be a crisis. “It’s not a purely scientific approach that is very precise,” Singapore-based analyst Rob Subbaraman said by phone on Friday. “It doesn’t mean that indicators are always accurate or that because they have worked in the past they will work in the future.”

Subbaraman developed the system along with fellow analyst Michael Loo using data going back to the early 1990s. The findings show that emerging markets are more prone than developed markets, and that Asia ex-Japan is the region that is most at risk.

The analysts selected five indicators that flash a signal of a financial crisis happening in the next 12 quarters when they breach set thresholds:

  • Corporate and household credit to GDP
  • The corporate and household debt-service ratio
  • The real effective exchange rate
  • Real -- or adjusted for inflation -- property prices
  • Real equity prices

The latest update covers the 12 quarters up to and including the first three months of this year. As there are five indicators, each of the countries studied can have a maximum of 60 signals.

Hong Kong has the most signals, 52 -- higher than during the 1997 Asian financial crisis. China’s total fell to 40 from 41 in the previous update that covered the period up to the fourth quarter of 2016.

“Hong Kong looks to be well in the danger zone,” Subbaraman and Loo wrote in the note. They described the decline in China’s total -- the first drop since its number of flashing indicators started a steep ascent from zero in the first quarter of 2013 -- as encouraging. “Nonetheless, China is still in the danger zone and without further efforts to drain its credit and property excesses, it will be difficult to arrest the trend slowdown in growth.”

Read about the 10 cities that tell the tale of China real-estate risk.

The number of signals for the other countries in the study is far below the level of Hong Kong and China. The next eight are all emerging markets, and six of the top 10 are in Asia.

Subbaraman described the early warning system as an “objective exercise looking at what have been some of the best early warning indicators in the past and applying them to the data now.”

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