How Close Is China To A Financial Crisis?

“China has the second-highest number of flashing early warning indicators after Hong Kong.”

By Kenneth Rapoza and cross-posted from Forbes.

China haters have been waiting for a financial crisis out of China since at least the early 2000s. Each and every time, the People’s Bank of China’s plunge protection team or the central planners in Beijing would throw buckets of ice water on their heads.

This time might be different. This time they are dealing with a trade war.

Most investment banks have some proprietary model that gives their fund managers a gauge on crises. For Nomura Securities, no country is flashing red more than China.

“China has the second-highest number of flashing early warning indicators after Hong Kong,” says Rob Subbaraman, an Asia economist for Nomura in Singapore. Months of protests against an stalled prisoner extradition bill with China have turned into protests against the Hong Kong government, with the very real possibility of the U.S. doing away with its special trade relationship with Hong Kong. If that ever happened, the Hong Kong dollar would no longer be a de facto source of U.S. dollars for mainland China, assuming Washington included Hong Kong in its mainland China tariff regime.

Chinese policymakers need to guard against a renewed build-up of financial stability risks, Subbaraman says.

Out of 60 early warning indicators flashing on Nomura’s Cassandra risk assessment program, Hong Kong has 49 covered. China has 25. The U.S. has precisely zero

Cassandra has reliably signaled around two thirds of the past 50 financial crises in a sample of 30 emerging market and advanced countries, including the U.S., since the early 1990s, Nomura says

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