(REUTERS/Ruben Sprich)
Ray Dalio, chairman and chief investment officer of Bridgewater Associates.
Everyone is trying to make sense of what's happening in China's economy right now. The billionaire founder of Bridgewater Associates, Ray Dalio, is no different.
Here's how he put it in an interview with Bloomberg TV's Erik Schatzker on Thursday morning.
"China is having a heart transplant," Dalio said. "You're probably going to be fine in the long run, but it's going to weaken you, and it's got to be well executed ... You will get through it, and you will be better than before. I think that's what the situation is."
So what does that mean? It means that Dalio thinks that China is about to go through a rough patch, but things will eventually be fine.
China is going through a really crucial economic transition from an investment-based economy to one based on consumption. The problem is during that investment phase, the country racked up a lot of debt and overcapacity in sectors that used to drive the economy, like industrials and property.
That debt has to be handled. "You can't have debt rise," said Dalio.
(IMF)
For the economy to flourish, those massive sectors have to be restructured, and that means pain. These are huge state-owned enterprises (SOE), and the Chinese government's philosophy about them has generally been the bigger the better.
That's changing. Officials told Reuters that 5 million to 6 million people may be laid off over the next few years.
Dalio, however, thinks this can be managed and that the Chinese government has leadership competent enough to do it. Yes, its handling of the stock market was a fiasco, he said on Bloomberg, but "people [who] have looked at it as a total disaster are misunderstanding" the situation.
"There are good ways to manage these things, and there are bad ways to manage these things," he told Schatzker; "the leadership is very important."
The problem, and Dalio's something of a solution
Dalio does think China has one major problem right now: its balance-of-payments issue. Money is leaving the country faster than it's coming in. That's dragging down the yuan and affecting the country's foreign-exchange reserves. They're at their lowest level in years, at around $3 trillion.
"The balance-of-payments issue is going to be a problem," Dalio said. "These cycles happen every place ... In terms of that money [leaving] the country, they have a lot of control over that money because a lot of those are SOEs."
He also pointed to the fact that China's bond market just opened up to foreigners as a way to bring money back into the country.