Ray Dalio sheds light on a beautiful deleveraging with Chinese characteristics in his recent post.
“Last week, China’s leadership—including President Xi Jinping, the Politburo, the CSRC, and the PBoC—clearly 1) announced a reflationary barrage of fiscal and monetary policies and 2) made statements in support of free markets as a big step to end the deflationary deleveraging and to stimulate creative productivity,” wrote Ray Dalio.
Ray Dalio believes Chinese assets were and still are very cheap
It was a milestone week for China’s fiscal and monetary policy.
“I think that it was such a big week that it could go down in the market-economic history books as comparable to the week Mario Draghi said that he and the ECB would”do whatever it takes,” wrote Ray Dalio.
If China’s policymakers do what it takes, it will require a lot more than what was announced.
“Ray Dalio believes Chinese assets were and still are very cheap”
WEALTH TRAINING COMPANY
Ray Dalio sheds light on a beautiful deleveraging, China style
“In my 55 years as a global macro investor, I have seen, traded through, and studied many big debt crises (48 are covered in my book, “Principles for Navigating Big Debt Crises.”) It is that perspective that leads me to believe that China is at a fork in the road and can either:
- a) deal with its debt crisis well by engineering “a beautiful deleveraging,” which acceptably reduces debt burdens or spreads them out so China won’t have a debt crisis and will be energized to be productive,” he wrote and he added,
“or, deal with the debt crisis in a way that causes it to drag on, leading to an economic and psychological malaise like Japan experienced (until Abe and Kuroda shifted policies).”
“In my 55 years as a global macro investor, I have seen, traded through, and studied many big debt crises”
RAY DALIO
Ray Dalio sheds light on a beautiful deleveraging in a nutshell
“It all depends on whether Chinese policymakers do or don’t simultaneously a) restructure bad debts (thus eliminating zombie conditions of their institutions) and b) lower interest rates below inflation and nominal growth rates, or, if that proves impossible, monetize debt to get the rates below the inflation and nominal growth rates while weakening the currency to devalue the debt,” he wrote.
“More specifically, for China’s policymakers to engineer a “beautiful deleveraging,” they have to lower debt burdens by simultaneously
- a) doing debt restructurings that clean the bad debts out of the system (which is deflationary) while also
creating money and credit (which is stimulative and inflationary) in a balanced way so that debt service burdens are reduced and there is neither unacceptable deflation nor unacceptable inflation,” added Ray Dalio.
“it also allows viable businesses to get back to business unencumbered by their old debts” – Ray Dalio
Ray Dalio sheds light on a beautiful deleveraging for the condition needed
Ray Dalio’s beautiful deleveraging is only available to countries that have most of their bad debts denominated in their currencies, with most of the debtors and creditors being citizens, “which is the case for China,” he wrote.
“Doing a deleveraging in this way not only reduces debts without triggering either unacceptable deflation or unacceptable inflation, but it also allows viable businesses to get back to business unencumbered by their old debts, and it eliminates the pushing on a string, ” he added.
