Ray Dalio: Is Investing In China Dangerous?

So as you guys will have noticed, a lot of the discussions in the investing world and a lot of the content on this channel lately has been around China. We did that whole series on Alibaba and the Chinese regulatory crackdown, and now recently we've been diving into the real estate debt crisis we see with Evergrande. No doubt one of the most respected voices out there when it comes to investing in China is Ray Dalio, and I've been consuming quite a lot of Ray's content lately, trying to learn his perspective on that exact issue.

So today, I really wanted to show you some clips that summarize his main thoughts around investing in China and whether it really is the scary, controlling, brutal kind of communist country that it's made out to be in the U.S. media. So with that said, let's get started.

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For context, Ray Dalio has been traveling to China since the 1980s and has had some incredible exposure to Chinese business and also Chinese leadership over that time. So much so, he's really been able to understand their ideology and economic policies in depth.

So I wanted to firstly start with this clip of him discussing a common misperception of Westerners looking into China. "Do you envision a Beijing that's moving to a new territory? Well, you have, um, daughter and son-in-law in Shanghai, and we get living in real time. The more you have contact, I think the more you understand it. I don't think it's well understood. For a long time, the question is how can communism and capitalism coexist? That's the riddle you have to answer," he shared.

"And what do these people want at the top? The answer to that riddle was told also by Deng Xiaoping when he was asked. He said, 'It's glorious to be rich.' And then they asked about capitalism, and he says it doesn't matter if it's a black cat or a white cat just as long as it catches mice."

So the idea is producing wealth. In Ray's eyes, that's the first thing people get wrong when looking at China. They think the United States is capitalist and China is communist and we don't like communism. But when you look at the principles behind each approach, they're trying to do the same thing. They're trying to increase the wealth of their nation. Historically, they've had quite different approaches in achieving that, but recently, China has been able to embrace many pillars of capitalism in order to accelerate the growth of their country's wealth.

So forget the American capitalist versus Chinese communist thinking. China's goal is simply to embrace the economic and political structures that increase the wealth of their nation and lead to, as this clip will talk about, common prosperity.

So, we have four things that are really going on in China if you understand their intent. "Common prosperity is the word now, okay? And it has been the objective to raise money and to broaden the base of rights," Ray explained.

"If you look at their tax rates, they're lower than the United States. If you look at the measures of almost capitalism, they have as much capitalism, or more capitalism, much more so than Europe, for example. And now they're in a prospect to broaden that."

"I think there's a tendency, and an understandable tendency, to think because they are Maoist and capitalist and communist that they're going to go back to that kind of thing. Then they're not. Deng Xiaoping, excuse me, Xi Jinping, just for example, introduced the newest stock market in Beijing. He made a point of being the one who introduced the market in Beijing to the small and medium-sized enterprises. They know that it catches mice."

And so the issue is that the capitalist is not in control. The issue is that there's a system for the whole system. And then what they want to do is make sure that it's not a capitalist-driven system.

So there you go. It doesn't matter if it's the black cat or if it's the white cat as long as it catches mice. They don't care if it's called capitalism or communism as long as it works well to increase the wealth of the nation. So that's the primary motivator there.

The main difference is the structure of power, and Dalio goes on to discuss this. I'll play the clip in just a second. China has a very much a top-down political approach, which Ray likens to, you know, a parent that sets the rules. The Chinese government maintains total control over their people, which vastly conflicts with American freedom. They then use this control to make decisions to change their economic structure to improve the wealth of the country and then to distribute the wealth amongst the people—common prosperity.

I'll play the clip, but an upfront warning: this is quite a long clip. However, this is Ray really taking the time to explain these ideas in more depth. So apologies for the length of the clip, but try and focus on what he says here.

"Given the regulatory crackdown in China right now, there are a lot of people saying, you know, what you shouldn't be investing in China. You have a different view?"

"Yeah. First of all, I think people have not—a lot of people have not spent a lot of time there. I've been going there since 1984, and I've been very lucky to know many people from the most common people to the most senior leadership and so on and so forth. I think you have to understand what's going on, and I'll just try to say it in a nutshell. Everybody follows the approach that they believe is best for their own country. I can't tell you whether their approach or our approach—my job isn't to do that. But they have a top-down approach rather than a bottom-up approach, very much like a strict parent."

"So if the question, the riddle that you have to ask yourself answered before is how does a communist party that talks about Marxist-Leninism and at the same time has such the second largest capital markets and the development of capital markets coexist? And the answer to that is they believe that capitalism is a way of increasing the wealth and power of the country. That's been key."

"At the same time as it's important to redistribute it, if you look at the policies that are being dealt with now, I can rattle off the four elements of those policies. They're not going to disrupt; they're not going back to what you would call the old communism that you're—it’s—they're very practical people."

"The issue is really more control. Like they will tell your kids how many video games they could watch, where you wouldn't. It's like a strict parent. And they will redistribute the wealth. But if you take the measurements of capitalism right now, I have a continuum of a lot of measures—I won't get into, but of capitalism, the United States and China are the most capitalist countries."

"And if you were to say, will they go as far to the left as Europe has gone? It's unlikely that they will go as far to the left as Europe has gone on those measures, whether those are tax redistribution, the effects of capital markets and the like. And you can't get in and out of a place on the basis of that."

"In addition, you need diversification, right? Okay. So if you have two great powers, two developments of technologies, and so on and so forth, and you're looking at what percentage of your portfolio you have here and what percentage of your portfolio there, diversification is a key element. So when I look at it, I think that there are risks in the United States, there are risks there we can talk about those diversification is important, and I think the fundamentals are basically sound."

So isn't that interesting, to Dalio? China and the United States are the two most capitalistic countries in the whole world. So I think the communist versus capitalist language is largely unhelpful when we talk about China.

I like how Ray Dalio phrases it: the main difference is this structure of power and decision-making. China simply has a strict top-down or controlling approach where they set the rules that they think are best for their goals of increasing common prosperity.

And there we also started to hear Ray Dalio's perspective on how to think about investing in China. The first thing he said straight off the bat is that a long-term approach is definitely needed, and I agree, because China's vision is also long-term. As we've seen recently, they stopped for-profit education businesses, they're regulating tech, and they're currently cracking down on monopolistic practices. This is affecting a lot of Chinese businesses and, of course, their stock prices.

And they're not doing this to screw investors; they're doing it for long-term prosperity. So with the Chinese government thinking in this fashion, it makes sense that you, as an investor, should think long-term as well. China’s going to keep growing, it’s going to get richer, and it will be the largest economy in the world by a fair margin. So think in decades; don’t think in months or years.

And then secondly, Ray Dalio also advises diversification, not just within China but across countries. He knows how actually a lot of people currently are very U.S.-biased in their investments and advises that, you know, when there is a period where there's a risk of conflict between the established power and the rising power, you know, it's wise to be diversified in both directions.

You don’t want all of your eggs in one basket. Makes sense. And in the case of diversifying in China, that will also protect you from the short-term moves that the CCP may make in their quest for long-term common prosperity.

Alright, now one more clip, and this is again Ray Dalio going deeper on what we're just talking about: how to invest in China. How should the Western banks adapt and adjust in Hong Kong to new China realities?

"Well, I think very simply you have to decide whether the rules in the place are a place that you’re comfortable with. They will set the rules, and you go in there and you decide if you're going to be part of that as a good citizen or you're not. And then—but you don’t jump in and out. In other words, China's a strategic play; you're not going to jump in and out."

"And the amount that you're in should be that which you're comfortable with. It's the same as an investor; it's not smart to sell on the break or buy it. It's a strategic play. Most investors are very overweight in the United States or other places. Diversification—there's a competition, a big competition, a war of sorts going on between technologies and so on and so forth. Diversification puts the amount that, and the exposure that you want to have there because you have to have places on some money on two chips, because there are risks in the United States too."

So I jumped the gun a little bit before; in that clip, you hear Ray talking to those points that I mentioned previously. The first thing you have to be at peace with is the idea that the government can change the rules on you. You know, as we discussed before, once you understand that, it makes you treat China as a strategic long-term play, and it makes you seek some level of diversification.

But as Ray notes, it's not just China; you want to diversify across, right? You know, China is the rising power, but America is the established power with its own set of problems. You know, like all investing, there is risk no matter where you look.

So Ray’s perspective is to go long and just don’t have all of your eggs in one basket: China or the United States.

So overall, that is the crux of Ray Dalio’s sentiment when it comes to China. I hope you enjoyed the video; maybe it gave you a little bit of insight. As you probably know, it can get a little bit hard when you try and listen to Ray’s kind of one-hour-long interviews, because he often just dives straight into the deep end, because he's been doing this for decades and decades. But hopefully, this video gives you a bit of an overview or a breakdown of his general sentiment when it comes to investing in China.

The main point that I get from Ray is that the U.S. media really makes China look like this unpredictable, scary place to put your money. But hopefully, taking the time to understand the Chinese government's motivations helps you realize that this is really mostly just media spin. And like any other government, they just want to build the wealth of their nation.

That's the—I mean, the only thing that’s different is that the Chinese government implements their strategies in a different way that happens to be the polar opposite approach to what is seen in the United States, and that tends to bias the U.S. media to say that China's approach is wrong. But it’s not right; it’s not wrong; it’s just different.

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But guys, that will just about do us for today. Thank you very much for watching, and I'll see you guys in the next video.

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