Ray Dalio has a solution for China, but it will require radical change

• Ray Dalio is once again promoting the idea that China urgently needs to begin “nice deleveraging.”
• The country is at massive levels of debt and it is causing businesses and people to hold onto cash.
• To get the economy moving, Dalio said Beijing needs to free up indebted businesses and get them borrowing again.

Billionaire investor Ray Dalio believes China can save its economy with two major debt policies, although that would require major changes to the way China has operated for years.

However, the founder of Bridgewater Associates said that if China does not adopt them soon, the country risks suffering as Japan did in the “Lost Decade”.

In a LinkedIn post on Tuesday, Dalio wrote about what he called a “beautiful deleveraging,” or aggressive, two-pronged approach to solving debt problems.

Dalio wrote that Chinese leader Xi Jinping’s unprecedented stimulus has sparked a “big week” for economic optimism, but it won’t be enough.

If China wants its big week to go down in the history books as a turning point to success, then Beijing must “do what is necessary, which will require much more than what has been announced,” he said Dalio.

What is “nice deleveraging?”

The concept is not new to Dalio, whose company runs China’s largest foreign hedge fund. He coined “beautiful deleveraging” after the 2008 crisis.

According to him, the first move involves a country restructuring bad debts to free beleaguered borrowers from their loan commitments.

They will need to be spread over time in a “balanced manner” to avoid leaving borrowers out to dry and prevent a sudden shock to the economy, Dalio wrote.

The billionaire added that China should simultaneously lower interest rates to encourage new lending.

Ideally, interest rate cuts would be so drastic that they would be below inflation and nominal growth rates, Dalio wrote.

If the government cannot implement this policy, it could instead monetize the debt while weakening China’s currency to ease the burden, he added.

These measures essentially aim to do two things: give China’s struggling borrowers – of which there are now many – breathing room to grow their businesses, while encouraging them to borrow more and to take risks.

“This handsome debt relief can only be achieved in countries that have most of their bad debts denominated in their own currencies and have most of their debtors and creditors as their own citizens, which is the case with China,” Dalio wrote.

Why China’s massive debt is taking over its economy

China’s economy has been hit by rising debt levels after years of businesses and local governments gobbling up loans at loose interest rates, only for many to find themselves in debt later.

The country’s debt-to-GDP ratio is nearly three times what it was 10 years ago, and this has fueled a snowball pessimism in the country as major sectors such as real estate buckle under the weight of their debt payments. loan.

And because of that, many companies and people kept their money and didn’t spend, thus stalling the economy.

Dalio believes that a “beautiful deleveraging” would help the country out of this phase, largely by making holding cash in the bank one of the most unattractive options in China.

“Doing these things begins to rekindle the ‘bottom fishing’ and the ‘animal spirits.’ We clearly see it happening now,” he wrote.

Major “painful” changes are needed.

Still, Dalio warned that his “beautiful leverage” would cause Beijing to face “difficult and painful changes.”

A debt restructuring would fundamentally reshape how years of previous loans to China are now handled and could severely damage the fortunes of many people, especially if they lose out under the new terms, Dalio wrote.

“Imagine the plight of a perfectly good company that has borrowed from local governments and/or is dependent on local government spending, faced with the current situation,” Dalio wrote. “Who should do what at what cost to deal with this situation?”

Dalio also called for major reform of China’s tax system, saying it was “very inefficient at the national, provincial and local government levels” and making it difficult for regional governments to stay out of harm’s way.

And he warned of China’s rapidly aging population, calling a recent move to raise the retirement age a “minor policy change”. The decision was already deeply unpopular and rewrote a decades-old standard that retirement was possible at age 50.

However, Dalio pointed out that China is at a crossroads. If Beijing does not begin “beautiful debt relief,” he said, it risks allowing the crisis to drag on and create an “economic and psychological crisis like Japan experienced.”

China’s debt crisis is just one of five challenges Dalio believes the country faces in a future “100-year storm.” The others include the climate crisis, the US-China tech war, his sour ties to Washington and rising wealth inequality.

The investor has long considered himself bullish on China, but regularly talks about the fiscal decisions the country should make to avoid catastrophe.