Dalio, White kowtow to Beijing

China is everybody’s destiny! So says Ray Dalio whose admiration for Beijing knows no bounds:

“Time is on China’s side and it’s not on the United States’ side, for various developments,” Dalio said Monday in a conversation with New York Times columnist Thomas Friedman at the Milken Institute Global Conference. “What’s going to be a difficult situation in the new administration is destiny is on the side of China growing, and doing better probably.”

He noted how China’s economy has rebounded faster during the pandemic than that of the U.S. and that the listing of “hot” companies on Chinese stock markets is attracting capital. He also said China’s higher interest rates mean the nation is in a better position of “not having to print money.”

…“You’re going to see the internationalization of the renminbi, which was intentionally not developed before, because it is a threat to the American world order,” said Dalio, 71.

Just a few issues:

  • Chinese soft power has collapsed post-COVID.
  • Chinese decoupling is real and accelerating.
  • Chinese stimulus is easy but it borrows growth from the future which gets ever bleaker with each new iteration because it kills economic dynamism with rentier debt.
  • I assume Dalio is joking when he says that China isn’t printing money. How does he think that they maintain the $US peg? Which is one reason why it will never be able to internationalise CNY. If it did so it would collapse and domestic growth tank.
  • China is unable to reform to prevent this slide into the middle-income trap, which will get much worse as its demographics deteriorate:

In short, China will grow old long before it grows rich. Sure, it’s large enough anyway for GDP to catch and overtake the US (it already has in volume terms in some segments). But this is not the profile of tearaway rising power. It is the economic profile of a peaking and abortive development economy.

I expect China to be growing at 3% by 2030 and probably to be shrinking in real terms if it actually calculated its misallocated capital correctly in the national accounts.

Does this profile suggest global dominance and reserve currency status? Meh. It suggests a hegemonic great power that dominates only like-minded autocracies that rule over relatively poor states. Pretty much like it does now.

Which is not to say that it won’t be a serious military contender. It will. Hugh White is equally enamored of the Chinese rise:

China’s challenge to the Anglo-Saxon dominance of Asia is, so far, much less militaristic and violent than Japan’s was 80 years ago, but in the long run it is more formidable. That is because China is so much more wealthy, and hence a lot more powerful, today than Japan was in 1941. Japanese GDP then was perhaps one-fifth of America’s, whereas today Chinese GDP is well on the way to overtaking America’s.

Even without COVID-19, and even without Donald Trump, China today poses the most serious challenge ever to America’s strategic position in Asia. For all the tough talk in Washington of a “new Cold War”, there is no clear way for the United States to resist China’s ambitions without risking a major war, which it seems quite unwilling to fight and cannot win. So it is time to recognise that we are probably seeing the end of the American era in Asia, and the beginning of Chinese-dominated era.

That means Australians should start thinking hard about how we prepare ourselves to survive and hopefully flourish when we can no longer rely on America for our security.

Clearly we have a long way to go before we get this right. We must strike the right balance between excessive deference towards Beijing and unnecessary provocation. The first step might be to realise that China’s power and ambition is not going to go away, as some people in Canberra seem to hope and expect. They are new realities that we must learn to live with and manage as best we can.

…This is the immense challenge facing Australian defence policy today. Our task is to build armed forces that would allow us to defend ourselves independently from a major power like China. This is a far harder challenge than we have ever faced before, and it requires us to rethink our approach to defence from the ground up.

Chinese GDP can overtake that of the US without destroying the latter’s power if the disparity slows, as it is and will keep doing so.

Asia will not want Chinese overlordship any more than Australia does. It has a long history of enmity with China, much more so than Australia does, and plenty of embedded liberal democratic institutions to bulwark it. Nor is the US going to abandon the western Pacific. Not even if it lets Taiwan sink. Why would it when that would invite the rising great power to occupy everything west of Hawaii meaning it draws the enemy closer to US soil?

In short, Asia is going to be fiercely contested not simply roll-over into the Chinese embrace. And the US will keep it that way, via many proxy wars if needs be.

That, in itself, may not be a great prospect for Australian living standards. But we’re far enough away for it to be no disaster, either.

We don’t need to be planning for life without the US. If that day comes then we’re cooked any way with regards to China. There’s no military option that can keep it out without a US regional hegemon. We need to be planning how to keep the US as engaged as possible, as well as how to slow Chinese development and keep it from bluffing its way to power across the region.

Not listening to Beijing fanbois like Dalio and White is a good start.

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)

Comments

  1. PaperRooDogMEMBER

    Strange that Dalio has a great grasp of debit & bubbles etc then makes dumb statements like above, I don’t understand how it’s possible.

    One thing developed nations should do is block or tax that money flowing in seeking high interest rates else we are funding the CCP system (though with their opaque lightly audited company balance sheets & iffy government economic numbers & housing ponzi I wonder how much will be redeemable when needed)

  2. Dalio totally missed COVID, which any self-respecting China analyst was all over. I went up to Asia in the first week of February and it was quite clear then the Western financial markets had completely got COVID wrong. Bought puts and advised my clients to do likewise. His miss on that was a colossal mistake.

    As for China, their population dynamics are a serious handicap and they will have to contend with a united opposition consisting of India, Japan, Vietnam, Australia and the US. This opposing force has multiples of China’s population and GDP. To say they can achieve hegemony is nonsense.

    I wonder how much CIC has invested with Bridgewater? Quite a lot would be my guess from the depth of his constant Kowtow.

  3. A turbulent market sent Bridgewater Associates’ flagship Pure Alpha II fund down 18.6% as of August, the hedge fund’s worst performance in a decade. – LOL!

    • A lot of these ‘successful’ investors were successful because right place, right time.

      Only those who deliver consistent returns through several market cycles can truly be called successful.

      • Too true. Making money across asset classes across cycles is what counts.

        Problem is, the performance of Bridgewater Pure Alpha II is terrible. Between 2012-18 he barely made more than about 5%p.a., he had a decent year in 2018 where he cracked double digits, but gave back small in 2019 and is down massively this year. Basically, he’s not returned any money for his investors in the past 4 years but still takes the 2/20 fee structure.

        Now you could argue that there haven’t been many investible themes for macro over those years – as there wasn’t in say 2013 which was an awful year of watching paint dry – but that’s simply not the case. We’ve seen big ups and downs in rates, FX, commodities, equities and credit. There’s been plenty of opportunities.

        When I started in this game back in ’98 after leaving the central bank, I had a lot of respect for Dalio. I read his newsletters every day for years. But in the past decade, he’s really gone off the boil. It’s time for him to retire…

        • Yep, he has become quite inconsistent. I’ll read one article and broadly agree with most themes and then he’ll produce something which contradicts a few of his positions in the previous one. And so on …

          I believe he must be conflicted by his business interests and relationships.

  4. Yes, indeed we need to keep the USA engaged with Australia. Banning China as a foreign investor, and giving US investors a open door would be a start.
    Nothing like vested corporate interests to shape foreign policy and keep politicians focused.
    Australia needs to throw out the ” Level Playing field” doctrine and start implement bias policies that benefit the country.

Leave a reply

You must be logged in to post a comment. Log in now