The move adds Mr. Dalio and Bridgewater to a growing chorus of high-profile investors who arechallenging the long-held view that China’s rise will provide a ballast to a whole host of investments, from commodities to bonds to shares in multinational firms. For a generation, bets on China’s rising middle class have been commonplace on Wall Street and beyond as investors have looked to diversify their holdings.But with the country’s stocks on a roller-coaster ride this summer, those beliefs are being tested. The world’s second-largest economy faces renewed questions about the sustainability of its growth and the government’s commitment to loosening its grip on the country’s heavily controlled markets.
We previously conveyed our thinking about the debt and economic restructurings being negative for growth over the near term and positive for growth over the long term—i.e., that it is a necessary and delicate operation that can be well managed. While we had previously considered developments in the stock market to be supportive to growth, recent developments have led us to expect them to be negative for growth. While we would ordinarily consider the impact of the stock market bubble bursting to be a rather small net negative because the percentage of the population that is invested in the stock market and the percentage of household savings invested in stocks are both small, it appears that the repercussions of the stock market’s declines will probably be greater.Because the forces on growth are coming from debt restructurings, economic restructurings, and real estate and stock market bubbles bursting all at the same time, we are now seeing mutually reinforcing negative forces on growth. While at this stage it is too early to assess how strongly the stock market’s decline will pass through negatively to credit and economic growth, we will soon have indications of this. We will be watching our short-term indicators of Chinese credit and economic growth carefully to see what the pass through to the economy of these developments is like.
The negative effects of the stock market declines will come from both the direct shifts in wealth and the psychological effects of the stock market bubble popping. Though stock prices are significantly higher than they were two years ago, the average investor in the stock market has lost money because more stocks were bought at higher prices than were bought at lower prices. We now estimate stock market losses in the household sector to be significant—i.e., about 2.2% of household sector income and 1.3% of GDP. However, these losses appear to be heavily concentrated in a small percentage of the population as only 8.8% of the population owns stocks. These are rough estimates. We don’t yet know who is experiencing what losses. Such information usually surfaces in the days and weeks after the plunge. Even more important than the direct financial effects will be the psychological effects."The stock market and debt bubble bursting simultaneously has happened many times before in many countries. We identified 28 cases among major economies in the last 100 years. While no two cases are exactly the same, the basic dynamics of such cases and the tools for treating them are essentially the same. Looking at these other cases provides perspective concerning the range of possible outcomes and the most effective ways of using the available tools. The most analogous cases created a depressant on real GDP growth of 1.8% on average, annually, for three years relative to what growth would have been without these events; bad cases saw an annual drag of 4% for three years; and, well managed cases saw no drag over three years (i.e., growth averaging its potential). We would expect China’s outcome to be within that range, depending on how Chinese policy makers use their tools.