Ray Dalio: China Is Going To Be Fine, Just Weaker

On Wednesday evening's Bloomberg broadcast, Ray Dalio spoke with Tom Keene and Michael McKee. At one point in the interview, Keene and McKee asked about how Bridgewater sees China.

The investor explained that there are two main problems in China. The first one is a debt problem.

The Debt Problem

"You have to restructure, particularly local governments have to restructure and SOEs [State Owned Enterprises] have to restructure [...] but that's a manageable problem because it's in their local currency," he explicated.

Dalio added that he has gotten to know several of the policy makers ("intelligent, very capable, very prudent people"). "So, restructuring your debts in your local currency is a manageable exercise. We've done it three times," he added.

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"We defaulted in '71; we had the Latin American debt crisis and we moved that, restructured. And then we had the S&L crisis, and the RTC. So that is a manageable process. If you've got your balance sheet, you can manage that."

The Restructuring Problem

The second issue in China is that the country needs to restructure what it’s "spending money on, what the economy is like" and replace the old economy with a new one. And that is certainly a challenge.

"So that's like a heart transplant, it's a serious operation, tends to weaken them. But, like most heart transplants nowadays, you're going to get through it okay if you have good surgeons," Dalio expounded.

Bonus Issue

The third thing was they went from an equity market, which is normal in early emerging stages of many economies where you get the speculator in; hyped up, they get leverage on margin, and then you have the bubble. And they had that bubble. That bubble was a negative at the same time."

"All I'm saying," he went on, "is you went from a bull market and you were having essentially then another force, you have a negative force coming in at the same time. You have those three negative forces. Now, if you at then what other economies? We look at all economies that have analogous set of circumstances. What are economies that have to restructure their debt? What is it like? That's a negative for economic activity."

So, what comes next, the investor asked.

"When we had that bubble burst [...] we had shifted from one kind of set of circumstances -- sort of two plus two minuses and a plus, in a sense. That's another negative."

To conclude, Dalio assured, "I think we exaggerate over the short term a lot of the importances. We look at everything up close. And so when you look at China -- I think China's going to be just fine. Just to be clear. But it's going to be weaker [...] but their weak growth is still probably going to more than twice our normal growth."