Bridgewater Associates founder Ray Dalio has expressed concerns about the severe asset-liability problem in China, drawing parallels to Japan’s economic crisis a decade prior to the asset bubble burst.
Dalio, a prominent investor, comparing China’s situation to Japan’s economic downturn, has quickly garnered attention and caution from the public. Bridgewater Associates is one of the world’s largest hedge funds, and Dalio has had a long-term positive outlook on China investments.
In an interview with Bloomberg on Monday, September 16, Dalio stated that “China is facing real issues now,” acknowledging significant changes in the Chinese economy over the past four years.
He highlighted that China is currently in a more challenging situation than Japan faced, citing the need for adjustments due to challenges in the real estate sector.
Dalio disclosed that only “a small portion” of Bridgewater Associates’ portfolio is currently invested in China, but affirmed that they will still maintain a presence in the country.
On Wednesday, September 18, while participating in a panel discussion at the Milken Institute 2024 Asia Summit in Singapore, Dalio once again shared his views on the issues facing China.
“They (referring to Beijing) need to restructure the debts,” Dalio remarked. “It’s a very complex and politically charged task.”
The founder expressed concerns that the real estate crisis in China has led to local governments being unable to repay debts through land sales. This implies that provinces, counties, and towns, which account for over 80% of national expenditure, will require some form of debt relief, potentially leading to creditor write-downs.
In the late 1980s, Japan experienced a peak in its real estate bubble, with land in Tokyo’s Imperial Palace grounds valued higher than the entire state of California. When the bubble eventually burst, Japan endured decades of low growth and deflation. It was not until February 2024 that the Nikkei index finally surpassed its peak value in December 1989.
Dalio told attendees that the current situation in China has changed, with “significant structural issues” at play.
Apart from local government debts, a major hindrance to China’s economic development is consumer spending.
Dalio noted that Chinese households are now reluctant to consume, as traditionally, around 70% of their assets were invested in real estate.
He emphasized that Chinese people need to see economic recovery before their sentiments improve and savings habits change.
In a June interview with NIKKEI Asia, Dalio stated, “China is entering a once-in-a-century storm. Just as Japan took decades to recover following the collapse of its bubble economy, the test may continue.”
Dalio mentioned that his economic bubble measurement system indicated approximately five years ago that bubbles were forming in China’s real estate and local government bond markets, and it now appears these markets are on the verge of collapse.
He pointed out that since the economic boom in China in the 1980s, debt has been expanding, and the wealth gap has been widening. Simultaneously, the decrease in population due to the one-child policy has led to an increase in national debt.
Dalio believes that China now needs to restructure its debts, but this process will be “painful both politically and economically,” and extremely challenging.