(Bloomberg) — Billionaire investor Ray Dalio says China’s surge of market stimulus will be a historic turning point for the world’s second-largest economy, if policymakers in Beijing deliver “a lot more” than pledged.
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The comments came after Chinese stocks posted the biggest rally since 2008 following a policy blitz last week that included lowering interest rates and allowing brokers to tap central bank funding to buy stocks. China’s top leaders have also pledged to support fiscal spending and stabilize the beleaguered property sector.
In a LinkedIn post on Monday, Dalio drew a parallel between President Xi Jinping’s moves and the moment in 2012 when former European Central Bank President Mario Draghi pledged to “do whatever it takes” to preserve the euro. Draghi’s speech eventually helped bring an end to that period’s European debt crisis.
“It was a big week,” wrote Dalio, founder of Bridgewater Associates. “In fact, I think that it was such a big week that it could go down in the market-economic history books,” as long as China’s policymakers “do what it takes, which will require a lot more than what was announced.”
China’s Crossroad
Beijing is at a crossroad in confronting the bursting of a housing bubble and mounting local government debt, said Dalio, who has frequently visited China to meet senior leaders.
The nation could either slip into an economic malaise similar to what Japan experienced in the past, or successfully cut debt and avoid a crisis, the closely followed investor said.
To achieve what he calls a “beautiful deleveraging,” Beijing needs to restructure bad debt, while creating more money to reduce the debt service burden without fueling too much inflation. Such “reflation” moves would encourage risk-taking by making cash less attractive than other assets, he said.
“Doing these things starts to rekindle ‘bottom fishing’ and ‘animal spirits,’” he wrote. “We are clearly seeing that happen now.”
Dalio warned that the deleveraging would be painful because it will destroy wealth and bring about the politically-charged decisions as to who will shoulder the costs of debt losses. A decline in the working-age population and aging demographics compound China’s challenges, he added.
“So, while last week we saw great actions and words that I am sure will be followed by highly stimulative policies that will help a lot and will support asset prices, I think that there are several important other things to keep an eye on to see how well China’s domestic debt-money-economy challenges will be handled,” he wrote.
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