China must pair stimulus with ‘beautiful deleveraging,’ says Ray Dalio

China must employ a “beautiful deleveraging” in addition to its recent stimulus measures in order to avoid a debt crisis, said Bridgewater Associates founder Ray Dalio at a conference on Friday

The billionaire investor defines a “beautiful deleveraging” as a balanced approach to deficits that utilizes debt restructuring along with the printing of money and debt monetization. 

He said that while restructuring is deflationary, the creation of money is inflationary; thus, it is the best way to reduce debt burden. 

“That’s the real interesting question of China, in terms of how it’s approaching its debt issue,” Dalio said, speaking at the FutureChina Global Forum in Singapore. 

“They have the capacity to do that, and I believe they have the willingness to do that. That’s being demonstrated by [recent] policies,” he added. 

Since the end of September, Beijing has announced several waves of stimulus and reform measures aimed at boosting its economy. 

“I think the changes that are taking place are terrific changes, but you still have to do the debt restructuring,” Dalio said. 

In addition to Beijing’s latest stimulus measures, markets have been watching to see if the policymakers will roll out a fiscal stimulus package, which some economists suggest should be as large as 10 trillion yuan ($1.4 trillion).

While it’s easy to create money and credit and throw it into the economy, Dalio said that this could reinforce other problems. 

“You need to do it correctly, and that’s as part of a restructuring. That becomes the challenging part of it. I think that will be the test.” 

However, Dalio also outlined other challenges, including the fact that much of China’s debt is at the local level as well as the country’s aging population. 

The Bridgewater founder recently warned that Beijing has become less favorable toward capitalism in recent times. 

On Friday, he said it remains to be seen if China can maintain the “vitality of the private markets” and foster the entrepreneurship and inventiveness that comes from individuals in capital markets. 

It remains a question if it’s still “glorious to be rich in China.” 

This year, Beijing has cracked down on “wealth flaunting.” The government also has a history of keeping wealthy entrepreneurs in check. 

“I don’t think it’s clear yet what is the direction and plan exactly. I am sure about this: there is a lot of uncertainty. More clarity would be good,” he told the conference.  

However, discussions occurring in China about tax reform and raising the retirement age are good policy signs, he added. 

According to Dalio, pulling off a “beautiful deleveraging” could see China energize productive forces and avoid a debt crisis, as he laid out in a social media post earlier this month.

On the other hand, he believes a mishandling of debt restructuring could lead to the economic and psychological malaise of 90’s Japan, often referred to as the “The Lost Decade.”