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*** ONE-TIME USE *** Ray Dalio, founder of Bridgewater Associates LP, looks on during China Development Forum (CDF) 2023 at Diaoyutai State Guesthouse on March 25, 2023 in Beijing, China.
Ray Dalio, founder of Bridgewater Associates, is warning that the world’s two largest economies are on the brink of war and beyond the ability to talk.
Dalio, who retired from being co-chief investment officer at the country’s largest hedge fund earlier this year, recently visited China. where he has built relationships over 40 years. He returned worried about the deterioration in the relationship. In a memo posted on LinkedIn, he said the two countries “are very close to crossing red lines that, if crossed, will irrevocably push them over the brink into some type of war that damages these two countries and causes damage to the world order in severe and irrevocable ways—like Russia’s invasion of Ukraine did for Russia and the world, just much bigger.”
Discussions between the two governments about important topics have become exchanges of accusations that make things worse, Dalio said, adding he is trying to work with both countries to avoid further deterioration. Most policy makers he speaks with, he added, are scared of war, with both sides having a lot to lose—an impediment in itself. Dalio is far from alone in citing the lack of dialogue between the two countries as a concern. Investors recognize a danger as well: The growing risk of conflict has held back Chinese stocks lately despite signs the economy is beginning to recover after three years of strict restrictions to fight Covid-19.
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U.S. officials are trying to limit the risks. Last week, Treasury Secretary Janet Yellen stressed the need to open dialogue, though she also said the U.S. is increasingly looking at the relationship through a lens of national security, even if that comes with some economic costs. Even National Security Adviser Jake Sullivan, seen as one of the more hawkish members of the administration, on Thursday stressed that the U.S. wasn’t trying to decouple from China, but rather reduce the risks in the relationship. At an event held by the Brookings Institution in Washington, D.C., Sullivan described the administration’s approach to restrictions as targeting “a small garden with high fences” to curb China’s access to advanced technology that could help its military efforts. He acknowledged the challenge in keeping restrictions narrow, especially as the Communist Party has a role in private-sector companies and the line between commercial and military-use technology is blurry. That’s one reason the administration has yet to release much-anticipated restrictions on outbound investments.
The run-up to the 2024 presidential election could further exacerbate U.S.-China tension as hawkish policy makers seek to exert more pressure on Beijing, Dalio said. Taiwan’s own elections around this time add another potential flashpoint. China has also taken a more “dictatorial-autocratic” turn in Xi Jinping’s third term, Dalio said, with decisions increasingly coming from the top and government officials and elites increasingly afraid of diverging from the favored approach.
U.S. economic sanctions to cut China off from access to essential semiconductor chips are already testing the relationship. China is considering its retaliation with a cybersecurity probe against Micron Technology (MU), which gets about a quarter of sales from Hong Kong and China.
Moves such as these efforts to control essential technologies and minerals, part of a push to move production home or to nations considered friendly, are an element of a broader reshaping of global alliances that Dalio described as a “self-reinforcing, economic-war-intensification dynamic.”
“We are on the brink of an economic resources war,” Dalio said, urging a focus on demand for key resources where supplies can be squeezed. Examples include lithium, cobalt, rare earths, wafers, and cells for solar energy.
Companies and countries are caught in the middle, with the U.S. urging allies like South Korea to join its restrictions on China and the war in Ukraine reshaping relationships with allies like Saudi Arabia. Flows of currencies and capital are changing to match shifting trade patterns and geopolitical alliances, Dalio wrote. “The U.S. and China are like two giants wrestling with each other six inches from the edge of a cliff and threatening to pull others into this dangerous fight,” he wrote. Leaders of some of the other countries see the U.S. as trying to control them and draw them into war in a more heavy-handed way than the Chinese are, Dalio said. All that is likely to make life difficult for U.S. companies, he added.
Dalio’s recommendation to leaders of both countries’ leaders: Talk it out. Visits by officials like Yellen or Commerce Secretary Gina Raimondo to China in the near term, as well as a meeting between the countries’ two leaders at the fall Asia-Pacific-Economic Cooperation summit, would help, he says.
Also important is outlining exactly what issues are red lines, or not up for discussion; establishing clear communications channels for dealing with worse-case scenarios; and leaders talking about the need for peace and making ways to reduce the risk of military conflict a priority, Dalio said.
Write to Reshma Kapadia at reshma.kapadia@barrons.com