Bridgewater’s Ray Dalio Discusses the Impact of China’s Growth on the World Economy
What this covers
Over the last 40 years, China’s rapid economic expansion has altered the world’s geopolitical and economic landscape. Bridgewater’s Founder, Co-CIO and co-Chairman Ray Dalio joins Bridgewater's Senior Portfolio Strategist Jim Haskel to discuss the historical arc of this growth and why the portfolio characteristics of China’s markets are attractive and diversifying despite escalating global tensions. To learn more visit: https://www.bridgewater.com/china/
To skip to specific sections in the video please find chapters marked below: The US-China Conflict - 4:38 Investing in China - 11:30 Public and Private Markets in China - 20:32 Portfolio Characteristics of Chinese Markets - 24:47 Looking Ahead - 27:53
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Ray Dalio argues that China represents a historically comparable economic power to the United States whose rise is inevitable and cyclical, making it essential for global investors to diversify into Chinese markets despite geopolitical tensions, rather than repeating the historical mistake of avoiding emerging powers.
- China's economic metrics (GDP share, per capita income, poverty reduction) match or exceed historical precedents of Dutch, British, and American imperial rises
- The conflict between US and China is a natural pattern repeated 16 times in 500 years when rising powers challenge existing ones, not a reason to avoid investment
- Chinese markets now offer comparable risk-adjusted returns to developed markets with greater central bank policy flexibility, making exclusion riskier than inclusion
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Investors have historically shown bias against investing in new things, with a pattern of institutional resistance that took time to overcome for bonds, equities, international equities, emerging markets, and now China.
“I've been doing this for a long enough period of time to know that there's a tendency of bias not to do the new things. Like when I first started, we were at the end of the era where pension funds invested mostly in bonds. OK, then, then they thought it was bold to go to equities. Then they thought it was bold to go to international equities. And a lot of people argued against going to global equities. And so on. Emerging markets equities and emerging markets—all of that was considered to be bold.”
In 1984, when Dalio first visited China, the cost level was significantly lower than the rest of the world, and if China could eliminate inefficiencies, it would become economically dominant, which is what occurred.
“The rest of the world had a cost level that was here, and China had a cost level there, and if they could eliminate their inefficiencies, it would go like this... And so I looked out there and I said, you know, you'll see those hutongs become replaced by skyscrapers and so on”
Market timing is difficult because markets continuously discount new information; waiting for certainty means paying higher prices, so the real question is whether conflict will become a full war, not whether conditions are perfect.
“the markets as you know are always discounting timing, right? You have a new, good thing happens and the markets rally; you have a bad thing that happens and the markets sell off... if you wait for everything to be, you know, crystal clear, everything's going to be terrific, you'll pay a higher price than if you don't. I think the real question is are we going to go to war.”
Investors should practice diversification by having 'bets on both horses in the race' between China and the United States, rather than choosing one at the exclusion of the other.
“I believe that China's a competitor of the United States or Chinese businesses will be competitors of American business or other businesses around the world, and that you're going to therefore—you wanna be, if you're diversified, having bets on both horses in the race.”
Central banks are less effective when interest rates approach zero, and quantitative easing becomes less effective, creating a challenge for Western economies that Dalio views as a major concern.
“one of my big concerns— and I've got a number of big concerns about the West, the United States, and some of the issues that are facing the western economies— and among those are the inabilities of central banks to be as effective when interest rates get to zero and quantitative policies, quantitative monetary easing, is not as effective.”
China's per capita income has increased by 26 times since 1984, and the share of world GDP has risen from 2% to 22%, making it a comparable economic power to the United States.
“per capita income since then increased by 26 times. The share of world GDP went from 2% to 22% today, so it's a comparable power to the United States.”
The Dutch in the late 1500s and early 1600s invented ships capable of global circumnavigation; armed with weapons, these ships enabled them to control trade and achieve 50% of world trade, establishing the template for reserve currency empire.
“the Dutch back in the 1600s—late 1500s and early 1600s— invented ships that could go all around the world. And because Europe fought a lot, they put arms on the ships and then they could go all around the world, and the world was their oyster... they increased their share of world trade to be 50% of world trade.”
The British East India Trading Company had a military twice the size of the British military itself and conquered India, exemplifying how private enterprise and state military power were intertwined in imperial expansion.
“For example, the British East India Trading Company had a military that was twice the size of the British military, and they were the ones that conquered India, and so on.”
Charts tracking average power across the six dimensions from 1500 to present show the US in relative decline and the emergence of China as an almost comparable power, with China historically being one of the highest or most powerful countries until decline from around 1800.
“you could see the blue line is the United States, and you could see its rise and then its relative decline. And you could see the emergence of China to be almost a comparable power. And you look at that red line over a period of time, and you could see going back to 1500, that China was always one of the either the highest, most powerful country, or one of the most powerful countries, until they had the decline from about the 1800 period. But you could see that emergence.”
Public markets in China provide liquidity, diversity, ability to rebalance, and the flexibility to move positions, making them foundational for portfolio management.
“The public markets are going to provide the liquidity, the diversity, the ability to move positions around and rebalance and so on, which is very important to us.”
Countries can manage high debt levels if the debt is denominated in their own currency, contrary to common narratives about debt problems; this is explained in Dalio's book on the nature of debt.
“I'd suggest you read the dynamics in my book about the nature of debt and what countries can do when the debt is in their own currency.”
The pattern of conflict between rising and existing world powers has occurred 16 times in the last 500 years, with wars resulting 12 of those times, establishing that US-China conflict is a natural historical development rather than an anomaly.
“when there's a rising power challenging an existing world power, that there is going to be a conflict. And there's a global world order... That's happened 16 times in the last 500 years, and in 12 of those times, there've been wars and sometimes you get around them.”
Dutch trade growth, military expansion, and financial center development were all interconnected: trade required military protection, which led to financial markets and capital formation in Amsterdam, which became the world's financial center.
“when they went globally, through their businesses, Dutch East Indian Trading Company, they had to be enabled with military to protect their trade routes, and they developed financial empires. So as a result, we saw not only trade grow, we saw the military grow; we saw them carry their reserve currencies around, and because they were used so commonly, they became world currencies... they also developed financial centers; because of developed capital markets, money came around the world to invest through those capital markets”
Dutch decline resulted from a combination of higher indebtedness, competitive advantage shifting to other powers (e.g., English shipbuilders trained by Dutch), and technological change that was not unique to the Dutch.
“over a period of time, there were forces that led to their decline. And those forces were typically a combination of higher levels of indebtedness, others gaining competitive advantage—for example, the Dutch shipbuilders were hired by the English to learn how to build great ships that would carry them around the world, and there was a change in technology.”
Historical analysis of reserve currency empires (Dutch, British, US) shows a repeating pattern across six dimensions of power: technology/education, economic output, trade, military, financial center strength, and reserve currency status, tracked from 1500 to present.
“The charts on this page show six major measurements of power. The first is technology and education; second is output, how strong the economy is; third is trade; fourth is military; the fifth is the strength of the financial center; and the sixth is reserve status. What we did is to stitch together a whole bunch of statistics so that we can measure each one of those. And so they go back to 1500 and you can see the cycle repeat over and over again.”
Greater levels of inefficiency in Chinese markets provide investment opportunities, making this a positive rather than purely negative characteristic.
“It has also greater levels of inefficiency. So the greater levels of inefficiency provide investment opportunity.”
China has substantially greater capacity to coordinate fiscal and monetary policy and manage room for policy maneuver compared to the United States.
“the Chinese have more ability to deal with monetary and fiscal policy relative to the United States... they have a lot more room to be managing those things, and they are managing.”
Going where the growth is and maintaining diversification across markets is a smart investment strategy, while waiting for everything to be certain and terrific results in paying higher prices later.
“going where the growth is and also having the diversification is a smart thing to do. So when you considered the merits of that, even if you agreed with what you're saying, is now the time when the trade part of the conflict may be getting even more serious... the thing that people haven't yet done seems like the big risky thing where, in my opinion, going where the growth is and also having the diversification is a smart thing to do.”
Private markets (venture capital) in China expose investors to new technologies and entrepreneurship, and significant capital is chasing these opportunities.
“the private markets, let's say the venture markets, expose one to the new technologies and the energy that's happening in terms of entrepreneurship and young technologies there. And I think that's important. I think there's an awful lot of money that is chasing those venture capital investments”
China accounts for 34% of the world's unicorn companies (vs 47% for the US and 19% for rest of world), and 43% of unicorn value (vs 45% for the US and 12% for rest of world), representing China's dominant position in startup creation.
“They now account for 34% of unicorns in the world, by comparison to 47% in the United States and only 19% in the rest of the world. And that's when they start as unicorns. If they take the share of unicorn value, it's 43% versus 45% in the United States and only 12% in the rest of the world.”
China is the #1 country globally in fintech, #3 in AI and machine learning, #2 in wearables, #2 in virtual reality, #2 in educational technology, and #2 in autonomous driving, and is 'running fast' to be #1 in these industries.
“they're now the #1 country in fintech, #3 in AI and machine learning, #2 in wearables, #2 in virtual reality, #2 in educational technology, #2 in autonomous driving, and they are running fast to be #1 in those industries.”
At the time of Dalio's 1984 visit, Beijing was mostly composed of hutongs (small, poor neighborhoods), and he predicted that these would be replaced by skyscrapers, which the local contacts dismissed by saying 'you don't know China.'
“At the time uh the city was mostly hutongs, which are small neighborhoods, poor neighborhoods. And I remember speaking in their office building, called the Chocolate Building, and looking outside, and we were talking about opening up... I said, you know, you'll see those hutongs become replaced by skyscrapers and so on, and they told me that, you don't know China.”
Over 5, 10, and 15 years, China and the United States will undergo significant and partially unpredictable transformations, with some changes inevitable (like demographics) and others unknown from current perspective.
“We'll be looking at a very different world, and we'll be looking at a very different China, and we'll be looking at a very different United States in 5, 10, 15 years. In some ways that we will never be able today to anticipate and in some ways that are inevitable, in kinda the same sort of ways that demographics is inevitable.”
Europe is very risky due to: nearly exhausted monetary policy, political fragmentation, and lack of participation in the technology revolution.
“I think Europe is very risky, when monetary policy is almost out of gas, and we have the political fragmentation, and they're not participating in the technology revolution.”
Failing to invest in China is itself a risky decision because China is emerging as a major power in the 21st century, and choosing not to be exposed to that future is a form of concentrated risk.
“I also think that not investing in China is very risky. I mean, think about it. Here we are in the early part of the 21st century, and there's this emergence of China. Do you really want to make the decision not to invest in China and not to be there in the future?”
China is somewhere between 60-70% more like an emerging market and 30-40% like a developed market based on dimensions including market capitalization, liquidity, legal structure, property rights, and regulatory system development.
“I would make as a generalization that China is somewhere between 60 or 70% more like an emerging country in those respects than it is like a fully developed country. But it doesn't have a regulatory system that is as developed as the developed countries... It has market capitalization, it has liquidity, and that's a two-edged sword. It has also greater levels of inefficiency.”
To the question of whether one should have invested in the Dutch, British, or US empires during their rise, the answer is yes, making the same case for investing in China today.
“Would you have not want to have invested with the Dutch in the Dutch empire? Would you have not want to have invested in the industrial revolution and the British empire? Would you have not want to have invested in the United States and the United States' empire? I think it's comparable.”
On the choice between autocratic and democratic leadership systems, investors must make their own decision; the Confucian approach to governance has merits and should not be dismissed as uniquely problematic.
“if you deal with the question of whether it's a more autocratic system and whether you prefer a more autocratic leadership system than a democratic leadership system, you'll have to make that choice for yourself. I would say that the Chinese or Confucian way of approaching things has a lot to be said for it.”
China's character and creativity, as exhibited by its people, enabled it to achieve 'the greatest economic miracle of all time.'
“that force, and their character and the creativity that they exhibited took them to what is the greatest economic miracle of all time.”
Dalio's primary motivation in visiting China has been curiosity and relationship-building, not profit-seeking; for over 20 years he engaged with China before any commercial activity.
“But I never went for making money; I went for curiosity, you know? And that curiosity brought me in contact with the Chinese people...I've done that for 20 years or more before we ever did anything commercially.”
Trade is described as 'just the symptom' of the broader US-China conflict, not the root cause; the underlying causes are structural power competition and geopolitical repositioning across multiple dimensions (military, technology, supply chains, export controls).
“you've sort of put the framework around this where trade is just the symptom of this broader conflict; whereas trade is always in the financial news, but it's really just one symptom. There's also, you know, military posturing—there's other elements of this whole conflict.”
Dalio does not expect a classic war between the US and China, but rather expects restructuring of the world order including changes in supply chains and technology production, with continued evolution and diversification remaining beneficial.
“I don't think we're going to go to classic war. I do think there's going to be a restructuring of the world order in terms of changes in supply chains. There'll be changes in who's making what technologies; important changes and sort of those things. But I don't think that that's going to mean that there won't be the evolution of China, the evolution of the United States, and I think that that diversification is good.”
Chinese stock, bond, and corporate bond markets are accelerating in growth, with foreign flows entering at an accelerating pace, and these markets can be expected to become larger than markets anywhere in the world over time.
“You could see the market capitalizations accelerating in the stock, bond, corporate bond markets, all of their instruments, and you could see the foreign flows coming in at an accelerating pace. You can expect those markets to be bigger than the markets that we have in anywhere in the world, with time”
Dalio knew seven companies that were the first pioneers to set up China's stock market, each company sending a representative to a dingy hotel meeting to establish the financial market structure.
“I've a great old group of friends who were the first pioneers to set up the stock market there. They were seven companies—each had a representative. And it was in a dingy hotel, and these people were to form the stock market and the financial markets”
Every major market (Europe, US, emerging markets, China) carries distinct risks; the relative risk question matters more than absolute risk, and China is not riskier than these alternatives.
“I think that every place is risky. So we're talking about relative risk, OK? I think Europe is very risky... I think the United States is very risky in its own ways... I think emerging markets in their own ways have their own distinct risks. And I think that China has its own particular distinct risks, which are all different... when I look at it, I think that it's less or no more risky in the totality than other markets”
Dalio has developed contact with Chinese market regulators and financial professionals and admires the quality of the markets and those managing them.
“I have had plenty of contact with those markets and with those people, the regulators and so on behind them, and I have you know a lot of admiration for that.”
Dalio spoke in the 'Chocolate Building' office in Beijing in 1984, which is a specific memory marker from his early engagement with China.
“I remember speaking in their office building, called the Chocolate Building”
Dalio brought his family, including his son Matthew, to China when Matthew was very young, and Matthew attended school there at age 11, experiencing a different world and having early exposure to China's development.
“I brought my family, I brought my kids. I remember bringing my son Matthew when he was very young along, and we would go in and we'd have meetings and they would bring cookies and milk and he'd be there. And he ended up going to school there when he was 11; it was a whole different world”