Ray Dalio: Invest in China

By in China Economy

| 44 comments

Great video here from Ray Dalio on Cold War 2.0:

His history is terrific but I disagree on the future:

  • China’s investment-led economic model is running out of gas and will stagnate through the 2020s;
  • The key driver is the failure of reform which leaves it wedged between falling productivity, rising debt and declining demographics;
  • As China joins the secular stagnation club and its “catch-up” growth ends, its hard power will plateau;
  • That is not to say that it will be in outright decline. I expect China to remain a  great power and to compete for supremacy with the US on many fronts.

A few other observations:

  • First, Dalio almost admits that he is too close to China to judge, having been there so long and been a part of its liberalisation. This felt a bit like Wall St revenge for El Trumpo.
  • Second, nowhere in Dalio’s thesis did he describe China competitive advantage in the way he did the Dutch, British then American empires. Exactly what is it? For instance, everybody said Japan would rule the world via extrapolated charts. But it didn’t. China is bigger. And?
  • Third, Dalio seriously glosses over the problems associated with the autocratic regime versus liberal economic system. We can see them today in Hong Kong. More to the point, rule of law is virtually non-existent in China and that places a natural constraint on its globalisation. Simply conflating “Confuscion” and “Chinese” thought is seriously glib stuff. Does Dalio really think that Chinese peeps don’t want to be free owing to some ancient cave-dweller? And that that isn’t an issue for those that are free and wish to remain so, as well as engage with China?

All up, this was not much different to watching a presentation by the Australian Treasury, though I am sorry for the insult, Ray!

As for investing. It’s a great idea but so fraught with political problems (see rule of law again) that unless you’re Bridgewater or similar it’s very hard to get quality exposure. We have looked at direct and ETF investments and both are very difficult and low quality.

Not to mention that as Australians we are already so invested in China that diversifying away from it is essential.

David Llewellyn-Smith

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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Comments

  2. John Howards Bowling Coach

    As someone paid as an expert on this topic matter I have seen a lot more money lost than made by foreigners in China. The chances that your investment will never turn a profit and instead be a cash drain are likely more than 90%. In fact the Chinese Government are so wise to the nature of their own people to siphon off any profits that in that country a company has to pay their taxes based on turnover not profit, otherwise every single enterprise in the nation would be running an accounting loss. Investing in China is a sure path to losing your shirt. Even their massive online businesses with total market domination and ultra low human capital costs and listed on the NASDAQ are really only trading in the red. In the most dishonest society on the planet, how would you ever be able to trust the audited accounts? Don’t say you weren’t told!

    • fitzroyMEMBER

      And even if the accounts were audited, if a local wished to remove your share at the end of an AK 47 who is going to stop them???

      • John Howards Bowling Coach

        Fitzy, in fact the Chinese government are able to block the passage of audited accounts even to companies listed overseas, to anyone they chose, even on private or listed businesses, on the grounds of national/state secrecy. What a farce, amazing excuses to cover up lies all on the national sport of cheating foreigners.

      • Jumping jack flash

        Reverse propaganda.
        Yes everyone laughs at the poor quality junk coming out of China, but on the other hand we’re not making cars here anymore, of any quality, and China is…

        Its all relative.
        Only a few decades ago everyone in the US thought that US made stuff was utter rubbish. And it probably was. But the important thing was that they made it and somewhere, someone bought it.

        Now all we have is debt.

        We have a lot to learn.

    • NikolaMEMBER

      always felt it was the case. As much as I hate US because of their foreign policy and non existent social net it is still a better place.

    • littleguy

      ” In fact the Chinese Government are so wise to the nature of their own people to siphon off any profits that in that country a company has to pay their taxes based on turnover not profit, otherwise every single enterprise in the nation would be running an accounting loss.”

      And why doesn’t our government do the same since companies operating here don’t seem to be any more honest.

    • BrentonMEMBER

      https://www.businessinsider.com/how-caterpillar-got-bulldozed-in-china-2014-1?IR=T

      “Siwei was going to be our Chinese business card,” said a person with direct knowledge of Caterpillar’s strategy.

      The night of the awards on November 16 three Caterpillar lawyers were wrapping up an eight-hour grilling of Wang Fu, Siwei’s chairman. Major accounting problems had been unearthed at Siwei headquarters in the gritty Chinese city of Zhengzhou. Two months later, on January 18, 2013, Caterpillar said it had discovered “deliberate, multi-year, coordinated accounting misconduct” at Siwei.

      Wang was sacked. Caterpillar took a non-cash goodwill impairment charge of $580 million – 86 percent of the value of the deal. The company says it was caught unaware by the problems at Siwei and only discovered them in November 2012, five months after the deal closed.

      When CAT started moving into China their first taste was paying $680 million for an equipment manufacturer that was actually only worth $97 million. If someone like CAT can get cleaned out, imagine what individual smaller scale investors face?

      • John Howards Bowling Coach

        Even in China, the people of Henan province (of which Zhengzhou is the capital city) have a reputation as the most untrustworthy people (in China). They should have done better research to uncover that fact before setting up to do business there.

    • GramusMEMBER

      x 1 BILLION.
      China is the land is the land of broken investment dreams. For both foreigners and Chinese.

    • fisho

      Good advice because investing in China is not an easy task
      From my experience I’d say the following are the main mistakes most would be direct investors make
      1) Investing in the status quo (China is undergoing massive change and nothing decreases the value of an established business faster than change)
      2) Scams (For every business that actually manufactures something there are at least 3 times as many marketting businesses that claim to make stuff but they’re just middlemen and really don’t offer much value, I’ve even been taken on a factory tour by someone that had absolutely no affiliation with the factory that we toured ….he talked a good game but it still wasn’t his factory)
      3) Not investing in People. In the end analysis all worthwhile business investing is about the team. I’d take an impressive team with no equipment or existing product/ customers over a team that’s in disarray and lacks focus but has huge facilities and an impressive customer list. (An injection of additional cash can fix one problem but not the other)

  4. SnappedUpSavvyMEMBER

    Second, nowhere in Dalio’s thesis did he describe China’s competitive advantage……..ahhh but they do have an advantage, and that’s the total destruction of their environment in return for lower costs. The whole country is a mess, the heavy metals in the farming soils and rivers are beyond repair, there are cancer clusters all over the place, the people eat, breath and drink filth. From the border with Korea to HongKong the whole east coast is like some hideous end of times movie set

      • John Howards Bowling Coach

        H&H, I have taken the fast train from Beijing to/from Shanghai many times and even at that altitude, on a bad day you can hardly see the countryside you’re rushing through

    • NorthMEMBER

      A couple of years ago I was in Seoul and remarked to my Korean hosts how bad the pollution was. They said it was simply blowing over from Southern China.
      It was disgusting.
      I think its great the Chinese pollute themselves to death so I can have cheap electronics and clothing.

  5. BrentonMEMBER

    He did not have the Soviet Empire or the French Empire in his contemporary comparisons, I wonder why? Because they were emerging super-powers that collapsed/declined in relatively short order. The assumption he makes in regard to China is that their rise into preeminent power is assured, it’s absolutely not.

    Dalio is a bloody genius, but he is still a man; flaws, warts and all.
    It’s an interesting vid though. Says a lot about the decline of the West as much as it does about China.

  8. PeterMEMBER

    If you want to invest in China as an Australian buy Rio, BHP and FMG!

    But seriously, Dalio is a fascist so it’s no surprise he likes China… reading about how he runs Bridgewater with Strugfle sessions and self criticism etc it’s straight out of Mao

  9. skippy

    Liberal democratic government …. where – ????? – unless its a euphemism for free market corporatist spectator democracy.

    • Joe SMEMBER

      Just keep repeating “liberal democratic government” endlessly and it obscures seventy plus years of consistently predatory behaviour by USA

  10. Willy2MEMBER

    @H&H:
    – EVERY economy is suffering under “low productivity growth”. The low hanging (productivity) fruit has already been picked.

  11. Willy2MEMBER

    @H&H:
    – I think the US will end up in the gutter. And there it will meet up with it eternal rival called “China”.
    – The US and China will no longer exist in their current form & shape in say 50 years time.

    • John Howards Bowling Coach

      People have been predicting the end of the USA for a long while now, yet the best and brightest still beat a path to their shores, and a good part of the global innovation either originates there or is owned there via funding pathways. China is really an economic mirage, the USA is reality. I don’t see that changing for a long while. Most of the figures that come out of China are bullcrap

      • skippy

        Yeah must be why is going down the gurgler in about every measurable social metric, topped off with back tracking on any FinReg post GFC, corruption everywhere one looks, endless wars [looking to start new ones] and starting trade wars [tm] in the face of decades of deflation [confused with fighting inflation success].

        Hows those Ford carriers and F35 pissed up a wall on top …..

      • Willy2MEMBER

        – Both China and the US are sitting on a GIANT pile of debt that won’t be repaid. Both countries won’t survive in one piece when “the financial sh*t hits the financial fan”.
        – Once US interest rates start to rise the country is “toast”. In the US interest rates have been falling for 38 years (even in the GFC) and that has saved Uncle Sam’s rear end (for the time being). The US has the dubious advantage of having the world’s reserve currency and that has saved the Uncle Sam’s rear end even more. But once the US starts running a Trade and a Current Account Surplus the PetroDollar is toast and with it the US economy.

  12. YowieMEMBER

    Spoken like a wealthy guy for whom laws (or lack thereof) make no difference. Move along, nothing to see here.

  14. Major Beauner

    Ray Dalio – worth Billions and runs the world’s largest hedge fund.

    Writer of this article – works a dead end job at Macrobusiness.

    Yeah ok

  15. NorthMEMBER

    Investing in China is the dumbest idea ever.
    Ask the gagillion Chinese over here?
    They are all trying to get their money the f&*k out of that liar filled dump and put it over here (and anywhere else).