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 relax its monetary policy, otherwise it will face a "century-old storm."

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Now China’s 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 amid extremely low asset prices in China, leading to a strong market reaction. Dalio believes that this is a week worthy of being recorded in the history of market economy. China is at an important fork in the road, and whether it can successfully implement "beautiful deleveraging" is the key.

China needs to implement "beautiful deleveraging"

Dalio believes that China can properly respond to the debt crisis by designing a "beautiful deleveraging" to reduce or spread the debt burden within an acceptable range, so that China will not fall into a debt crisis and can vigorously increase productivity.

But if it is not handled properly, and the debt crisis is handled in a way that prolongs it, there is the potential for economic and psychological malaise like the one in Japan (until Abe and Haruhiko Kuroda changed policy).

Therefore, China needs to simultaneously restructure its debt (clean up bad debts and eliminate the zombie situation of its institutions) while creating money and credit in a balanced way to reduce the burden of debt repayment and avoid the emergence of unacceptable deflation or inflation.

And this kind of deleveraging can only take place in countries where most bad debts are denominated in domestic currencies and where most debtors and creditors are domestic citizens.

Challenges and reforms facing China

Dalio believes that deleveraging in this way allows viable businesses to return to business unencumbered by old debt and allows companies and other entities to hold cash in safe bank and government debt assets. This is reigniting the “buy the dip” situation. President Xi’s statement of policy directives carries immense power, with supportive comments from the highest levels, including the Politburo, the China Securities Regulatory Commission and the People’s Bank of China, encouraging officials and people to adopt innovative and bold approaches to support the economy, while also reassuring that they will not Being punished for making good-intentioned mistakes in implementing new policies.

However, there are also many challenges in the process of deleveraging:

  • The issue of local government debt is complex and politically sensitive, making it very difficult to deal with.

  • The tax system needs reform, and the current tax system allocates funds inefficiently between national, provincial and local levels of government.

  • Demographic issues, particularly early retirement and late death, leave many people with insufficient income in retirement and only one child to care for them.

It is expected that China will still introduce high-profit stimulus policies, but other influencing factors need to be paid attention to

Dalio believes that China will also introduce highly stimulating policies to help and support asset prices. However, he also reminded that there are many other important forces that will affect the future development of China and the world, including external geopolitics, natural disasters and technological forces.

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

This article Bridgewater founder Dalio looks at China's market outlook. How to implement "beautiful deleveraging" is the key. It first appeared on Chain News ABMedia.