China is not the economic miracle it’s often made out to be. It has too much government regulation, too much debt and too little innovation and suppresses free speech.

China’s economic model is the opposite of the one you would employ to create a fast-growing dynamic economy. Chinese growth has been rapid for the past 20 years, but that’s because it was starting from a low base and had ample supplies of cheap labor to feed the growth of manufacturing. Now that labor source is starting to dry up and China’s edge in cheap manufacturing is being eroded by Vietnam, Indonesia, India and other countries that also offer cheap labor.

China’s other growth engine was investment, but that was debt driven and over 50% of it was wasted on ghost cities and white elephant infrastructure. What China needs to take it to the next level is technological innovation and a migration to more high-value-added exports. But that’s exactly what’s missing in China because of the lack of freedom to innovate.

Now that China’s debt bomb has caught up with slow growth, a credit crisis is next. This article shows that China is responding to the ongoing currency wars and trade wars with threats to start a shooting war over the status of Taiwan.

Whenever a country tries to rally support around war rather than innovation, that’s a sure sign that innovation is not working and the economy is slowing down. China is ground zero for the next great economic collapse.

Unfortunately for investors everywhere, what happens in China won’t stay in China. Investors should be prepared for a Chinese credit crisis by reducing exposure to risky assets such as stocks and corporate debt and increasing allocations to safe assets such as cash, Treasury securities and gold.

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