Ray Dalio to publish on LinkedIn over the weekend regarding the latest batch of stimulus from China. It sparked a massive rally (and possibly a short squeeze) in Chinese stocks.
He’s not convinced that’s enough:
- The Chinese leadership announced recovery policies and support for free markets last week
- He sees this as potentially historic, and could be compared to Draghi’s “do whatever it takes” moment.
- China faces two paths: either “beautiful deleveraging” or prolonged economic struggle
- The key to success: restructuring bad debts while lowering interest rates below inflation/growth rates
- He points out that Chinese stocks were (and still are) very cheap
I think it was such a big week that it could go down in the market economy history books as being analogous to the week in which Mario Draghi said he and the ECB would “do whatever it takes,” if, in fact, China’s policymakers did what it took, which It will require much more than announced.
Dalio has been a long-time China advocate and says bad debts need to be filtered out of the system while creating credit and lending.
He points out that it will be a complex and difficult problem to solve, especially local government debt. Dalio also says the tax system needs reform.
He also believes more on the financial side is coming.
So, while last week we saw great actions and words that I’m sure will be followed by very stimulating policies that will help a lot and support asset prices, I think there are many other important things to watch to see how much impact they have. It is certain that China will be able to deal with the challenges associated with domestic financial debt.
China is certainly trying to turn the ship around but it may take some actual announcements to get stocks moving again.
See also: Goldman Sachs says Chinese stimulus is not enough.