Abstract
Are there early warnings of an impending financial crisis in China? Our analysis using the Kaminsky–Lizondo–Reinhart (KLR) signal approach reveals that the probability of China having a currency crisis in the 24 months to October 2017 could be increased assuming no remedial action by the authorities to avert an impending crisis. Notwithstanding the above, our analysis shows that nine out of 15 economic indicators are effective in predicting a currency crisis. Loss function of policymakers and evaluation of usefulness are then employed to verify their validity. The results show that bank deposits and M2/international reserves are the most powerful indicators.
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