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Interview

U.S. vs. China: Internal order will decide victor, Ray Dalio says

Hedge fund Bridgewater founder sees Beijing checking off the right boxes

The Bund promenade in Shanghai: Rapid improvement in education, productivity and trade help underpin China's position as an ascendant power, Dalio says.   © Reuters

NEW YORK -- China's improving government balance sheets, domestic stability, and gains in education and productivity have positioned it as an ascendant power, based on cycles observed throughout history, hedge fund billionaire Ray Dalio told Nikkei.

In contrast, the U.S. has financial problems, internal conflicts and outside challenges that put it at risk of further deterioration without political bipartisanship and investment in broad-based education, Dalio said.

In his recent book "Principles for Dealing with the Changing World Order," the founder of Bridgewater Associates examined historical trends to diagnose countries' health and determine their likely trajectories.

"I'm passing it along because I hope people will put what's happening now in context" and take lessons from history, Dalio said.

Edited excerpts from the interview follow.

Bridgewater Associates founder Ray Dalio sees serious financial, political and social risks to the U.S.

Q: In your book, you discussed factors that determine the health of a country and looked at the cycles that countries go through throughout history. Where would you place the U.S. right now?

A: The United States is late in what I call the fifth stage of the cycle, in which it is having financial problems, it is having internal conflicts that are highly disorderly, and it is facing outside challenges. It hasn't yet gone on to stage six, which is a civil war, but it is financially at risk, and it is politically and socially at risk.

We live in a world where the dollar is the world's leading reserve currency, and [investors] around the world are holding a lot of dollar-denominated debt. When there is a very low or negative real interest rate and a lot of printing of money and inflation, that is detrimental for holders of that debt, and it is detrimental for the purchasing power of the dollar, and it could risk the dollar.

When I studied history, I learned that pandemics, droughts and floods had more impact, cause more deaths, and had more impact on politics than wars. So these things come along occasionally. Like there's a one-in-100-year flood or one-in-100-year pandemic and so on. But they've had big impacts, and we forget about them because they haven't come across in our lifetime before, but they've happened many times in history.

Q: Where is China in this framework?

A: They're earning more than they're spending, they have domestic order, and they've had very rapid improvement in all the measures -- rapid improvement in education, rapid improvement in productivity, rapid improvement in trade. They don't have much in the form of internal conflict.

I can't say that's the question of whether democracy is better than autocracy or Western-style capitalism is better than their form of socialist capitalism. But there's not much risk of internal conflict -- there's politics and so on, but it's not like the United States, which is at risk of a type of civil war, and democracy is being challenged.

Q: If China is a rising empire while the U.S. is a declining one, what are the factors that decide these things?

A: I studied all the dynasties starting with the Tang Dynasty, so just after the year 600. I watched these things because they provide more examples of [how] a rise and decline of a dynasty is the same as the rise of decline of an empire. China and the Chinese are very good in understanding the lessons from history. When you see that, you can see those same patterns, when they are doing planning and a leader, like an emperor, will only be one small part of that cycle. [From Mao to] Xi Jinping nine years ago, each was at a different stage. And now it is at that stage of being strong. They look at it in terms of the whole cycle and the leaders that will come.

Q: There has been criticism of the Chinese government's tightening control, like its crackdown on technology companies and limits on video gaming, and some are reluctant to invest there. What is your view?

A: I think that foreigners don't understand what's going on in China. I'm very lucky, because I've been going to China for 34 years, and I've developed relationships with top policymakers, and I understand what they're thinking. One of the top leaders -- I won't quote who it is -- said the United States is a country of individuals and individualism, and it is bottom-up. China is an extension of the family, and the leaders operate like strict parents.

Technology companies, sometimes, particularly in financial services, are moving ahead faster than the regulators. Jack Ma's moves were such a case. And so they are making clear who is in control. There is a notion that rich billionaires running companies can mistake themselves for being powerful, and they can get arrogant, so there has to be a clarification and like a strict parent.

The move to common prosperity is not a move to go back to something like the communism pre-Deng Xiaoping, but it is a recognition that at this stage in its evolution, there needs to be a movement toward common prosperity.

Q: You've been criticized recently for comments on China's human rights record.

A: I assure you that I didn't mean to convey that human rights aren't important, because I certainly believe they are. I am an American who has lived my whole life in the U.S., experiencing the American dream, and I believe in our system.

At the same time, I have spent more than half my life in contact with China, which has helped me understand their system as well. I was attempting to explain what a Chinese leader told me about how they think about governing -- about how Confucianism is based on the family and that extends into their governance, which is a more autocratic approach that is like a strict parent. I was not expressing my own opinion or endorsing that approach.

I also want to clarify how I weigh the pros and cons of investing in China in light of the human rights issue. This is not a challenge that Bridgewater alone faces. There are more than 40,000 investors and an untold number of banks and companies from the U.S. and other countries facing the same issue.

It is a reality that many Americans and Chinese are intertwined and that separating them would be terrible for just about everyone. Besides the direct functional synergies of producing things together that benefit Americans, Chinese and the rest of the world, these connections produce mutual understandings and mutual influences that promote peace and progress globally.

Q: What does the U.S. need to do to recover and compete with China?

A: [The parties] have to come together. They can't keep moving farther apart. I have a principle, which is when the causes that people are behind are more important to them than the system, the system is in jeopardy. So you need bipartisanship.

There needs to be more investment in education. There needs to be broad-based education because all societies throughout history don't know where the best talents are going to come from. They can come from anywhere. So history shows that drawing from the largest amount of population will bring you the best thinkers. And it also shows a system that is fair. If you don't have a system that people believe is fair, then you're in jeopardy.

If you take the best American universities, they are the best in the world. But that represents something that is not representative of America's broad education issues.

History has almost always shown that wealthy people will educate their children well but not contribute to equal education for poor people. So the only way that can be done is through the government.

But in the United States, it's largely a state government matter, not a federal government matter. And that's one of the problems because what you find is even within the states, it is delegated down to the town, the tax district. Rich people have good public schools in rich neighborhoods, and poor people don't spend much because they don't have much. That's a structural problem.

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