Ray Dalio posted on LinkedIn on the weekend regarding the latest stimlus push from China. It's sparked a massive rally (and likely a short squeeze) in Chinese equities.
He's not convinced it's enough:
- China's leadership announced reflationary policies and support for free markets last week
- Sees this as potentially historic, comparable to Draghi's "whatever it takes" moment
- China faces two paths: "beautiful deleveraging" or prolonged economic struggle
- Key to success: restructuring bad debts while lowering interest rates below inflation/growth rates
- He notes that Chinese stocks were (and still are) very cheap
I think that it was such a big week that it could go down in the market-economic history books as comparable to the week Mario Draghi said that he and the ECB would "do whatever it takes,” if China’s policymakers, in fact, do what it takes, which will require a lot more than what was announced.
Dalio has been a long-time China bull and says that bad debts need to be cleared from the system while creating credit and lending.
He notes that it will be a complex and difficult problem to solve, particularly local government debt. Dalio also says the tax system needs to be reformed.
He also believes that more on the fiscal side is coming.
So, while last week we saw great actions and words that I am sure will be followed by highly stimulative policies that will help a lot and will support asset prices, I think that there are several important other things to keep an eye on to see how well China’s domestic debt-money-economy challenges will be handled.
China is definitely trying to turn the ship around but it might take some actual announcements to spark another leg in equities.
