Ray Dalio: We’re Not Bearish on China Yet

Soon after declaring there are “no safe places to invest” in China to clients, Bridgewater Associates stressed that “too much has been made of the shift in their thinking.”

(Art by Nigel Buchanan)“Ray Dalio and Bridgewater believe that too much has been made of the shift in their thinking and want to clarify their thinking.”

That was the statement from the world’s largest hedge fund following leaks of a private investment note on China’s crash.

Reports began rolling in Wednesday that Bridgewater is no longer bullish on China’s economy, following the country’s most recent and dramatic stock market dive.

“Our views about China have changed,” Bridgewater’s founder Ray Dalio wrote in an internal memo, according to the Wall Street Journal. “There are now no safe places to invest.”

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The Shanghai Composite Index plummeted 32% on July 8 from its June highs, Bloomberg’s data showed. Though Chinese stocks have begun to inch back up, the Shanghai Composite still remains 22% lower than the same June peak.

“The observations that were made simply noted that falling stock prices have a negative wealth and negative psychological effect.”

The comment came as a shock as Dalio had said China’s stock market move was “not significantly reflective of, or influential on, the Chinese economy, Chinese investors, or foreign investors” as recently as earlier this month, the Journal continued.

This week, instead of viewing China’s problems as “opportunities,” Dalio warned “even those who haven’t lost money in stocks will be affected psychologically by events, and those effects will have a depressive effect on economic activity.”

However, soon after the private comments were leaked to the media, the $169 billion hedge fund clarified its positions, saying “too much has been made of the shift in their thinking.”

A Bridgewater spokesperson told CIO Dalio’s comments “simply noted that falling stock prices have a negative wealth and negative psychological effect.”

In addition, the firm said it still believes China has the resources to manage debt and economic restructuring challenges going forward.

Bridgewater’s clarification is reproduced in full below:

While the report to Bridgewater clients is a private communication which they want to continue to try to keep private, Ray Dalio and Bridgewater believe that too much has been made of the shift in their thinking and want to clarify their thinking.

The observations that were made simply noted that falling stock prices have a negative wealth and negative psychological effect. When a classic stock market bubble (supported by unsophisticated investors buying stocks on a lot of margin) bursts, there are negative growth effects. When combined with the debt and economic restructurings underway, that will most likely result in slower growth, and more stimulative government policies to offset these downward pressures.

Bridgewater’s view that China faces debt and economic restructuring challenges, and that it has the resources and capable leaders to manage these challenges, remains the same.

Competition among politicians to win votes and keep taxes low is often directly linked to poorer funding for public pensions, a research paper has claimed.

The study, by Sutirtha Bagchi, assistant professor of economics at Villanova University, reported that funding levels of US public pensions are worse when local political competition is fiercer.

“A one standard deviation increase in the level of political competition is associated with a decrease in pension plan funding levels of approximately 7% to 10%.” —Sutirtha Bagchi, Villanova UniversityBagchi studied data from 1,400 municipal pensions in Pennsylvania between 1985 and 2009. He found that increased political competition in an area correlated with pension plans being “less funded, more generous, and [using] higher interest rates at which to discount future actuarial liabilities”.

“A one standard deviation increase in the level of political competition is associated with a decrease in pension plan funding levels of approximately 7% to 10% and an increase in unfunded liabilities per active member of approximately $2,300 to $3,200,” Bagchi reported.

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Bagchi cited previous research into public pension funding, which asserted that “a higher intensity of political competition exacerbates the incentives of politicians to not fund the retirement benefits that have been promised to public sector workers fully, in order to avoid raising taxes on workers in the private sector.”

The study comes amid increasing scrutiny of state and municipal pensions and their funding levels. It also follows the bankruptcies of the cities of Stockton and San Bernardino in California, both of which led to protracted legal battles involving the California Public Employees’ Retirement System.

Last year, New Jersey Governor Chris Christie outlined plans to cut the state’s contributions to its pension funds by $2.5 billion over two years in order to close a near-$1 billion budget deficit. New Jersey’s Public Employees’ Retirement System was already underfunded by more than $50 billion at the time of the announcement, according to the state’s treasury department.

Several states have seen their credit ratings downgraded due to underfunded pensions placing large burdens on government budgets.

Read his full paper, “The Effects of Political Competition on the Funding and Generosity of Public Sector Pension Plans”.