Bridgewater Associates founder Dalio is optimistic about China's future market, the key lies in how to execute "beautiful deleveraging"

Ray Dalio, the founder of Bridgewater Associates who has always been optimistic about the Chinese market, warned in March this year that China should reduce its debt and loosen its monetary policy, or else it will face a "hundred-year storm."

Evergrande halts trading! Bridgewater founder warns: China will face a "hundred-year storm"

Currently, the Chinese leadership, including President Xi Jinping, the Politburo, the China Securities Regulatory Commission (CSRC), and the People's Bank of China (PBoC), has announced a series of fiscal and monetary policies aimed at ending deflation and stimulating creative productivity. The announcement of these policies comes at a time when Chinese asset prices are extremely low, leading to strong market reactions. Dalio believes that this week is worthy of being recorded in market economic history, as China is at a crucial crossroads, and the key lies in whether it can successfully implement a "beautiful deleveraging."

China Needs to Implement "Beautiful Deleveraging"

Dalio believes that China can effectively address the debt crisis by designing a "beautiful deleveraging" plan to reduce or spread the debt burden within an acceptable range, preventing China from falling into a debt crisis and dynamically improving productivity.

However, mishandling the debt crisis by prolonging it could lead to economic and psychological discomfort similar to what Japan experienced until policies were changed by Abe and Kuroda.

Therefore, China needs to simultaneously restructure debts, clean up bad debts, eliminate zombie institutions, and create currency and credit in a balanced manner to alleviate debt burdens, avoiding unacceptable deflation or inflation.

This deleveraging process can only be done in a country where most bad debts are denominated in the local currency, and where debtors and creditors are mostly domestic citizens.

Challenges and Reforms Facing China

Dalio believes that by deleveraging in this way, viable businesses can resume operations without being burdened by old debts, and companies and other entities can hold cash in safe banks and government debt assets. This is reigniting the "buying the dip" situation. President Xi's policy directives carry immense power, with top-level support from the Central Political Bureau, China Securities Regulatory Commission, and People's Bank of China, encouraging officials and the public to take innovative and bold approaches to support the economy, while ensuring that well-intentioned mistakes in implementing new policies will not be punished.

However, there are many challenges in the deleveraging process:

• The complex and politically sensitive issue of local government debts makes it very difficult to handle.
• The tax system needs reform as the current tax system inefficiently allocates funds between national, provincial, and local governments.
• Population structure issues, especially early retirement and late deaths, lead to many people having insufficient income after retirement, with only one child to take care of them.

Expectations for China to Continue High-Stimulus Policies but Watch Out for Other Influencing Factors

Dalio believes that China will continue to implement highly stimulating policies to help and support asset prices. However, he also warns that many other important forces will impact the future development of China and the world, including external geopolitics, natural disasters, and technological forces.

Bridgewater Associates, the world's largest hedge fund, was founded by Ray Dalio in 1975. Its wholly-owned subsidiary, Bridgewater China, was established in 2016, with assets under management reaching 40 billion RMB by the end of 2023.