Recently again, Ray Dalio, of the world’s largest hedge fund Bridgewater Associates, again reiterated the critical necessity for China to do some balanced deleveraging of its swelling debt. He refers to it as “beautiful deleveraging,” where deleveraging will include decreased debt burden and keep the economy stable, or, in his words, “”increased potential prospects of revival of economic vigor.” As he further opines, China came to such a point where it can choose either revival of economic vigor or long-term stagnation like Japan, which will occur if the debt problem is mishandled.
Comments by Dalio came at a time when the Chinese economy remains not yet out of the depths of a gigantic debt burden, especially from local governments, which also got a little worse due to the poor speed of recovery from COVID-19 and issues of deep structures. In an attempt to counter the slowing pace, China’s government has undertaken various policies that try to provide stimulus, such as reducing interest rates and fiscal policies that were aimed at flooding the market with liquidity. Yet Dalio warns that, although these steps are positive, they are not enough on their own.
This implies, according to him that the bad debts in the system of China should be restructured and simultaneously new credits and money should be created so that there is a balance during recovery from an economic downturn not to cause hyperinflation and less interest rate so that it is below the inflationary rate and nominal growth rate in which, the country will be able to reduce its debt faster.
Dalio called this kind of deleveraging “beautiful deleveraging,” referring to his assertion that China needs to find a way to clean off bad debts—especially local government bad debts—without creating deflationary pressures. That is, it was decreasing debt while at the same time redistributing some of the burden through inflation by finding a delicate balance between fiscal policy and monetary expansion. Dalio makes a point here that this approach cannot be realized without deep tax reforms in China and demographic policies like high retirement age and a shrinking labor force.
Dalio believes that China’s policy shift has to be akin to Mario Draghi’s famous “whatever it takes” moment during the European debt crisis as he holds that China’s top leadership needs to be bold and coordinate its actions in the right direction so as not to perpetuate long-run economic stability. In any other case, the country could get stuck in an era of protracted economic malaise as has been witnessed in Japan after the debt crisis.
While stimulus measures over the past year and some months have brought good effects-there was indeed a spectacular rally of Chinese stocks-Baylor urged caution. The restructuring process will be politically and technically complex, he said, particularly in China, where entrenched interests are entrenched within local governments. “However, it’s quite a big opportunity, potentially, for China to finally come out of this period of economic uncertainty,” he said, recommending that its leadership seize the moment to restructure debt, reform the tax system, and stimulate productivity through targeted investments.
Concluding, Ray Dalio depicts an attractive view of China’s possible economic recovery, based on the very fragile balance between debt reduction and economic stimulation. The road is under heavy challenge, but Dalio is of the opinion that with the right policy mix, it is possible for China to avoid a complete debt crisis and initiate a recovery pattern that could lead to further growth.
