So Ray Dalio wants to buy Chinese bonds, and he wants to convince others to buy them too.
Maybe he's on to something, but I'm not on that train
I mean, I'm sure a lot of us here read about Chinese economic topics fairly regularly. What has anyone read that leads them to be confident in China? I know vincent hit around this point in the thread about money. Personally, I haven't seen anything to convince me that China is a good place to invest in. Hell, the Chinese
themselves don't keep their own money in China. Plus, some of the problems he associates with American bonds are similar in Chinese ones. Some quotes from Zeihan (granted, from 6-7 years ago):
The Chinese government starkly limits what its citizens can do with their savings. Rather than allowing a wealth of investment options as exists in the capital-rich American or British systems, private savings are instead funneled to state goals in a manner somewhat similar to the German system. Specifically, there are very few banks in China, with some 3/4 of all deposits held in four large state-owned institutions. . . Those four banks have very clear mandates. They are to use the citizenry's deposits to maximize bank lending to the economy as a whole. The goal of the policy is a simple one: maximum possible employment. While this is technically a lending model, it is more accurately thought of as a system of subsidization. Since Chinese citizens have so few investment options, the banks have access to their deposits at rates that are ridiculously low. Consequently, internal interest rates in China are artificially held well below global norms and are certainly far below what they would normally be in an economy at China's level of development.
So, Dalio is saying he wants to forego the safe US Treasury bonds for more-risky-than-they-seem Chinese ones. Zeihan goes on to point out that in China, lending criteria are pretty much nonexistent, so people can get loans for anything, and at unreasonably low interest. I'm sure we all remember the articles about ghost cities built in China that nobody lives in. China subsidizes the costs of the inputs, so their growth looks impressive. Of course, credit isn't available to everyone, only those with the right political connections (Jack Ma's ANT financial is running into problems because the wrong political players backed him), which reduces the efficient deployment of capital.
So how big is this problem? Pretty big. In 2007, total Chinese lending topped 3.6 trillion RMB ($600 billion). How much is that really? Well, that's more than the total lending into the US economy when the US sub-prime bubble was at its maximum inflation, and that in a year when the Chinese economy was less than one-third the size of the US economy.
In other countries, that global demand for goods was killing companies and employment, but in China, they encouraged their companies to borrow more, tripling in 2 years. The Chinese government tried to dial back the credit expansion, but this just expanded the types of shady shit they were doing to get around the limits.
banks, firms, and retail investors, appalled by the idea that the government might actually deny them credit because of something as silly as a lending quota, built their own financial network to run in parallel to the existing system. This shadow system includes everything from loan-sharking to financial products with even fewer quality controls than official bank lending (after all, they were formed expressly to bypass government authority). By the first quarter of 2013, China's own central bank estimated that such shadow lending was exceeding all other forms of credit combined.
That puts total financing at around $5 trillion for an economy only worth about $8 trillion. Not only is that an absolute volume of capital more than seven times new lending in the United States, it is the equivalent of an Obama stimulus package (that's $800 billion over two years) about every twenty-nine days.
Compare that to what Dalio wrote:
Also, watch the rates of change in the injections of these stimulants in relation to the effects they are having on the economy’s vigor because the more stimulants that are being applied per unit of growth, the less effective they are and the more serious the situation is.
So in all, if one is concerned about the issues he brings up vis-à-vis American debt, then they should be equally or more concerned about China's.
I definitely agree with his thoughts on taxes at the end of the article, as I've said here before.
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