Bridgewater's Ray Dalio Discusses the Impact of China's Growth on the World Economy
Comment of the Day

August 08 2019

Commentary by Eoin Treacy

Bridgewater's Ray Dalio Discusses the Impact of China's Growth on the World Economy

This is a fascinating interview where Ray Dalio discusses the merits of betting on China.

Eoin Treacy's view

There are two very big questions we have to answer which are fundamental to the construction of a long-term portfolio. The first is does governance really mean anything? The second is how do you value private assets in a portfolio?
At this service we have long held that governance is everything. Is that still true? Ray Dalio appears to be agnostic on whether property rights, respect for minority shareholder interests, an independent judiciary and a free press are important. What I personally find particularly interesting is that the performance of China’s stock market, during the decade where it has achieved the heights of its ambition has been dismal.
It has been 11 years to the day since the start of the Beijing Olympics. In that time the perception of China’s rise has morphed from being a business-friendly infrastructure boom to an authoritarian global grab for power. The MSCI US Index has doubled the performance of the MSCI China Index over that time while Euro underperforming China.
China has certainly had some success stories not least in its protected technology sector where mirror companies to US companies have grown steadily and compete actively with the USA.

The fact that the Federal Reserve is planning a faster payments system for the US by 2024 is proof of just how far behind the US is on fintech. Afterall people still use cheques in the USA while China’s payments system is almost entirely online.

Investing in private companies that are under no pressure to ever list on the stock market has been one of the most lucrative strategies in the last decade. Low interest rates and availability of vast sums of capital have created outsized returns for large investors. For China, where foreign listing have seen foreign capital benefit disproportionately from the rise of companies like Tencent and Alibaba, this focus on private capital and keeping the returns at home has obvious merits.

However, it is impossible to value a private asset on a mark to market. Until they are providing reliable free cashflows they cannot be valued on a dividend discount model. Therefore, the unprecedented success of the sector is completely reliant on the bond bubble.  

I am very leery of the so-called Thucydides trap model which has been popularized over the last few years. The so-called peaceful transition between the USA and UK ignores the former’s War of Independence. Meanwhile the advent of nuclear weapons completely changes the calculations. Mutually assured destruction is a limiting effect on the great powers until one figures out how to neutralise ICBMs.

Then we have one of the clearest rationales for the trade war. If US government has reached the same conclusion as Ray Dalio that China’s ascent to displace the Dollar as the reserve currency is inevitable, everything needs to be done now to arrest the country’s ascent. That’s a Cold War, not a trade war.

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