HONG KONG • Hong Kong, which for years rode a wave of cheap capital and China's economic boom, is as vulnerable now as it was before the 1990s Asian financial crisis as those drivers reverse, according to analysis by Daiwa Capital Markets.

In a bearish take on the financial hub, Daiwa forecasts "enormous stress" ahead as money heads out amid a global US-dollar debt deleveraging, China's economy slows and currency weakens, United States interest rates increase, and domestic property prices slump.

"If the Asian financial crisis was preceded by a classic credit and housing bubble, we see another one now of a bigger scale," the Daiwa analysts led by Mr Kevin Lai, chief economist for Asia excluding Japan, wrote in a note. "Money inflows have been unprecedented; we expect this money to leave eventually on the back of global dollar-debt deleveraging."

Daiwa flagged six metrics to gauge Hong Kong's strength: net money inflows, total credit expansion, China or regional credit exposure, real estate lending and the direction of US monetary policy as policymakers consider further tightening and Hong Kong dollar's valuation. Of those, the first four are flashing danger, Daiwa said.

"Measures of macro and financial vulnerability indicate things are no better now than they were just before the Asian financial crisis," the brokerage said.

Because Hong Kong's currency is pegged to the US dollar, the former British colony effectively imports US monetary policy. Rising US interest rates increase the cost of servicing US-dollar loans taken out in Hong Kong.

Hong Kong was hit hard by the Asian financial crisis that started in Thailand in 1997 and spread across the region, forcing the Hong Kong Monetary Authority to spend HK$120 billion (S$21 billion) buying up Hong Kong stocks and to use its foreign currency reserves to defend the US-dollar peg. House prices tumbled 70 per cent.

BLOOMBERG