The confrontations between the U. S. and China on trade, currencies and geopolitics will begin immediately at a rhetorical level, but may take a year or two to play out at a policy level. Supply chains, long-term contracts, and reserve positions don’t turn on a dime even when new administrations are sworn in.
Yet, one issue that will not wait and is a ticking time bomb is the Chinese credit bubble. That bubble is primed to explode with or without new policies from Trump. When it happens and how it happens will have profound implications for your portfolio.
The dimensions of the problem are vast. China’s growth has become captive to what economists call Goodhart’s Law. This law says that when an economic metric becomes the goal of policy, it loses meaning as a metric. Goodhart’s Law applies in the case of Chinese GDP.
Once the Chinese government decided to ‘target’ GDP growth of 8 percent, or 7 percent, or 6.5 percent more recently, GDP growth lost its meaning as a reliable guide to Chinese economic performance. Instead the Chinese hit the economic target by non-economic means merely to say they hit the target.
This post was published at Wall Street Examiner on January 31, 2017.