Ray Dalio, the founder of the world’s biggest hedge fund, spends a lot of time contemplating what he deems the China “riddle.”
“How is it that a communist country can be so capitalist that they have the second largest capital market in the world, produce billionaires, and simultaneously be Marxist?” he asks from his Connecticut home, where The Wire reached him by Zoom. “If you don’t know how to answer that riddle, then you must not understand China.”
Dalio, 72, believes he understands China better than most. Since first visiting the country in 1984, on an invitation from China CITIC Bank, he has cultivated a rolodex that extends to the highest echelons of China’s political and corporate classes, giving him insight, he says, into “how China works, who to trust and who not to trust.”
His firm, Bridgewater Associates, has been investing billions from Chinese clients outside of the country for years, but in 2018, it launched its first onshore China fund. With offices in Shanghai and Beijing — the only two outside of Connecticut — Bridgewater is now the third largest Western fund operating in the country, after the British firm, Winton Group and Switzerland’s UBS. Last year, Bridgewater raised more than $140 million in China to establish a second private fund there.
Dalio, of course, is not unique in his decision to be “very bullish” on China. Since 2020, when China for the first time allowed foreign firms to manage money for any Chinese investor, signalling a more open Chinese investment environment than ever before, Wall Street has poured resources and personnel into the Middle Kingdom. Many big names, including Goldman Sachs and JP Morgan, have expanded their presence in China. But Dalio — who is known for cultivating a culture of “radical transparency” at Bridgewater that some have said resembles Maoist struggle sessions — has been uniquely outspoken about his China optimism. He frequently publishes missives about the country’s strengths — as well as the U.S.’s “disorder” — while publicly rebuffing those who question the wisdom of operating in a one-party, communist state as people with a “persistent anti-China bias” or “people who are not close to what’s happening.”
For instance, after Beijing scuttled the fintech behemoth Ant’s $37 billion IPO in November of 2020, many observers warned the move represented a sea change in how the Party would treat big business going forward. But, in a public statement, Dalio praised Beijing’s decision to crack down on Ant, which he said “almost could replace or threaten the banking system in China,” adding that he found Chinese regulators to be “reasonable, caring, and highly-informed.”
Then in July, after Beijing punished the ride-hailing firm Didi for its rushed U.S. IPO and then banned for-profit tutoring — a major money maker in China — Dalio penned a widely shared LinkedIn post, in which he referred to the government interventions as merely “the wiggles” — nothing, ultimately, to worry about. “I urge you to not misinterpret these sorts of moves as reversals of the trends that have existed for the last several decades and let that scare you away,” he wrote.
“There’s a rationale for what Dalio is doing,” says Peter Alexander, founder of Z-Ben Advisors, an asset-management consulting firm in Shanghai. “China is the second largest economy, and there are very valid arguments for why global investors should have some allocation there. But his enthusiasm is more hyperbolic than it needs to be. He doesn’t have to keep coming out and pounding the table.”
When pressed on why he, one of the biggest capitalists in the world with a net worth of $15.6 billion, has emerged as a public cheerleader for China’s “state capitalism” and long term Marxist goals, Dalio frequently trumpets three things: the remarkable trajectory of the Chinese economy over the past 30 years; his conviction that history resembles a series of repeating “cycles,” with the largest trading countries (i.e., China) inevitably evolving into having the global financial center and the global reserve currency; and the unwavering trust he has in both the Chinese leadership as well as his own personal connections in China.
“I know that the capital markets are very important to China,” he told The Wire. “I’m saying I know this very close up. Continuing to develop those markets and operate them well is very important to China.”
How China is operating its markets, however, is changing. As Stephen Orlins, president of the National Committee on U.S.-China Relations, noted in a November 2020 town hall with Dalio, Beijing’s own language regarding state participation in the economy has changed drastically from 2013 to 2020. Considering much of the ‘China miracle’ was due to the private sector, Orlins asked Dalio if the miracle could continue with the state now playing such a major role.
“I think it’s important to know the people and to understand the intentions and interpret the actions in light of those intentions,” Dalio said.
Dalio does not speak Chinese, but he counts people like Vice President Wang Qishan, Vice Premier Liu He, and even the late Lee Kuan Yew, of Singapore, who was close to Chinese leadership, as close friends and confidants. In his memoir-cum-self-help tome, Principles, which was published in China by CITIC Press Group, Dalio wrote of Wang: “I have rarely known a person to be both extremely wise and extremely practical… Every time I go to China, we meet for sixty to ninety minutes.”
Dalio is also close with Jesse (Jianxi) Wang, the former chief risk officer of China’s sovereign wealth fund, China Investment Corp (CIC). Jesse Wang now runs Dalio’s China charity, The Beijing Dalio Public Welfare Foundation, which focuses on child welfare. Dalio himself has made more than $100 million in charitable donations in China, including to aid victims of the 2008 Sichuan earthquake and to the prestigious Tsinghua University, where there is now a Dalio Auditorium.
Dalio has also spoken several times at the China Development Forum, an annual gathering of economists, business leaders and state officials that requires a six-figure donation to a government agency to attend. And during visits, he often dines at the uber-exclusive Diaoyutai Guesthouse, where state officials regularly host foreign dignitaries. In his conversation with The Wire, Dalio was effusive about the hospitality he and his family have been shown over the years. “What struck me in the beginning was that the Chinese were very intelligent, civilized, and wise in a way that wasn’t typical of some of the emerging countries that I had seen,” he says.
Dalio’s critics, however, are not convinced his special connections in China equate to special knowledge.
“The world smells of new paint to the queen,” says Fraser Howie, an author of three books on the Chinese financial system, when asked about Dalio’s experience in China. “Chinese political officials are brilliant at providing a show and presenting a worldview that the Chinese want to present. Whether that’s reality is an entirely separate discussion.”
The world smells of new paint to the queen… Chinese political officials are brilliant at providing a show and presenting a worldview that the Chinese want to present. Whether that’s reality is an entirely separate discussion.
Fraser Howie, an author of three books on the Chinese financial system
Lately, the reality for many investors is that the world of Chinese investments smells of sour milk. As Xi Jinping attempts to sculpt a more compliant capitalist class out of the world’s second largest economy, insisting on the notion of “common prosperity” over exorbitant individualized wealth, he has enacted a series of regulatory actions that have erased over $1 trillion of market value from Chinese equities since February and now threaten to destabilize the real estate sector — which accounts for close to 30 percent of China’s GDP. (Dalio deems the Evergrande debt debacle “all mangeable.”)
Meanwhile, political winds in Washington appear to be discouraging Americans from getting too cozy with Beijing or Chinese firms, transforming a simple question of risk tolerance into a philosophical debate about patriotism.
“Pouring billions of dollars into China now is a tragic mistake,” opined George Soros, another American hedge fund mogul, in The Wall Street Journal last month. “It is likely to lose money for [investors] and, more important, will damage the national security interests of the U.S. and other democracies.”
Soros and Dalio have long been held up as rivals cut from the same cloth: billionaires who are keen to understand how the world works and then explain it to others. Now, with around $30 billion between them, they represent polar opposites on the biggest question staring down American investors: Is China worth the risks?
‘A TRANSFORMATIVE EXPERIENCE’
In March 1989, three months before the massacre in Tiananmen Square, a small team of young businessmen in Beijing set out to create the first stock exchange in the People’s Republic of China. Working from a cramped, cheaply-rented office in the annex of a dirty hotel, it was a ragtag operation. To enter, one had to scale a metal stairway past the building’s dumpsters. They called themselves the Stock Exchange Executive Council.
Some of the men had studied or worked in financial markets abroad; one member, Wang Boming, was the son of a diplomat, Columbia grad and former economist at the New York Stock Exchange (NYSE). The men viewed a stock exchange as a crucial component of a modern economy, and their efforts focused on designing a system appropriate to China and advocating for it to cadres. But even though this was 11 years into Deng Xiaoping’s famous Reform and Opening period, capitalism was still a suspect word. This was especially so following June 4th of that year, when domestic political tensions reached a fever pitch following the events at Tiananmen and international ostracism.
“The stock exchange was criticized as a bad bourgeois idea by the official press at the time,” recalls Gao Xiqing, who was a member of the Council. “Not many people were interested in us.”
One person who was interested was Ray Dalio.
During one of his first visits to China, Dalio was introduced to the Council through Wang Li, CITIC’s executive vice president. Impressed by their chutzpah, he made a “small donation,” he writes in Principles. As the Council’s ambitions were fulfilled with the launch of the Shanghai and Shenzhen Stock Exchanges, in 1990, Dalio stayed in touch as an informal consultant.
“On very specific technical issues, I would send him letters asking, ‘What do you guys do there?’” recalls Gao, who went on to serve as director of public offerings at the China Securities Regulatory Commission (CSRC) and then president of CIC, the sovereign wealth fund. “He’d send me a whole bunch of materials that helped us with the designing of our system.”
For the nascent Chinese investment world, this was a heady time. Chinese firms were desperate for capital, but state overseers maintained a skeptical stance. Anyone without a Chinese bank account was still barred from buying Chinese stocks, which severely limited capital inflows.
“In the nineties, the Chinese stock market was still an experiment,” says Andy Mantel, of Pacific Sun Advisors in Hong Kong, one of the few foreign investors active on the mainland at the time. “The government didn’t know if they wanted to proceed.”
Regulators were forced to tread a fine line between sound market economics and appeasing the whims of political overseers. Predictably, SOEs were allowed to list first.
The two stock exchanges took on different feels. The Shanghai exchange developed a reputation for moving slower and acting more in conjunction with government diktats. Shenzhen, in line with the character of the fast-moving city, was seen as more speculative, catering to less conventional industries like tech.
There were some bumps along the road, like the inflation-sparked austerity program of 1993, during which all listings were stopped, followed by the 1997 Asian Financial Crisis. But China’s stock market “experiment” was largely a win-win for the Communist Party and big business, and the country’s nascent entrepreneurial class was exuberant at the possibility of new cash.
“Oh my god, we were like rock stars,” recalls Mantel, who was a fund manager for the Shanghai Growth Fund. “Whenever a company would list, they would invite fund managers from Hong Kong to come visit their company for a few days. Meals, hotels, tours of local sites — they’d pay for everything.”
As firms were attracting capital from within China, they were also, in the mid-’90s, given the green light to list in the U.S. The SOEs were again given preference: China Telecom, China Mobile, PetroChina hit the New York Stock Exchange first.1China Telecom and China Mobile were delisted in January to comply with a Trump administration executive order. Beyond new sources of capital, opening up to America was a way for China to show, on the global stage, that its firms were aboveboard.
“The logic of them coming to the U.S. was to show people that their disclosures were high quality,” says James Shapiro, NYSE’s senior managing director for Asia at the time. “But if you read some of those early Chinese filing documents, you would be insane to invest in those companies because the risks were so big. People bought the stocks anyway.”
Dalio, though, did not rush to invest in Chinese firms. His initial aims in coming to China, he says, were to develop relationships and learn about the country from the ground up. It was a decade from that first 1984 visit to Bridgewater’s announcement that it was officially entering China in 1994, with the launch of Bridgewater China Partners.2According to Bridgewater, though, the company began investing Chinese institutional money overseas as early as 1993.
Interestingly, Bridgewater China Partners did not have a Chinese partner, like many other such ventures at the time; instead, its named partners were The Rockefeller Foundation and the pension funds of U S WEST Inc. and Hughes Aircraft. With its $100 million in expected allocations, the goal, Dalio said at the time, was to buy “the Wal-Marts of China.”
“Essentially, I was setting up the first U.S.-based private equity firm in China,” he writes in Principles.
Even then, Dalio was emphasizing the advantage his connections in China gave him. According to a Pensions & Investments article announcing the venture, Dalio believed his network “is what convinced his now-partners ‘to go through with this arrangement.’”
First and foremost in that network was Gu Zeqing, who Dalio first met when she was an executive at CITIC. Gu’s brother-in-law served as the country’s minister of defense and was also a member of the Politburo’s standing committee, according to Dalio and accounts in the media.3The Wire asked Dalio and Bridgewater the identity of Gu’s relative; Dalio and Bridgewater did not respond to that request. Our own searches found that Dalio describes Gu by saying her brother was the minister of defense, possibly in 1989; in the Chinese media, a report says that Gu’s “brother-in-law” was the minister of defense and a member of the Politburo Standing Committee. We were unable to verify this information. Gu herself seems to have worked for the Ministry of Foreign Trade. She started working for Dalio around 1993 and was to be a senior official at Bridgewater China Partners – if only the venture had got off the ground.
According to Dalio, the project was scrapped after it became too difficult to manage both enterprises simultaneously. Despite his connections, Dalio — an expert in the bond and currency markets — says that in the years that followed, there just weren’t Chinese markets with adequate liquidity for him to invest in. While he personally invested small amounts in a couple of companies, he says he continued traveling to China because he “liked the people” and he liked helping them by offering advice where he could.
Dalio also kept his China education and connections going in a slightly unorthodox way. In 1995, he received special permission from the government to send Matt, one of his four sons, to live in Beijing for a year of public schooling. While the rest of the family lived in Greenwich, Conn., an 11-year-old Matt, Dalio says, “had a transformative experience,” living “this very poor life” with hot showers only available twice a week. Matt lived with Gu Zeqing, who Dalio refers to almost exclusively as Madame Gu, and later on, when a 16-year-old Matt started a nonprofit organization, China Care, Gu served as a director.
In Beijing, one of Gu’s neighbors was Ji Chaozhu, Mao’s English translator and a longtime diplomat. When Dalio learned this, he bankrolled a ghostwriter, former Wall Street Journal columnist R. Foster Winans — who had been convicted of insider trading in the 1980s — to pen Ji’s English autobiography.4 Dalio has also paid to have another book, The Lessons of History by Will and Ariel Durant, translated and distributed in China.
“There’s this Chinese expression, haowei renshi, meaning this person always wants to be a teacher to other people,” notes Gao Xiqing. “Ray is like that.”
By 2011, Bridgewater was ready to try again in China. Starting around 2005, the private equity field in China had matured, with a number of foreign investment businesses — such as the Carlyle Group, TPG, Hillhouse Capital, Sequoia Capital China and Tiger Global — venturing into the market, as well as funds like Boyu Capital, which was co-founded by Alvin Jiang, the grandson of retired Chinese leader Jiang Zemin.
“We made a lot of money with these firms that were springing up and doing — not really venture capital — but growth equity,” says Mark Yusko, of Morgan Creek Capital, who first started investing in China in the 1990s. “It was really taking proven business models and bringing them to China.”
Bridgewater opened its first China office, in Beijing, one year after Chinese regulators approved margin trading on individual stocks as well as financial futures on the CSI 300 Index, which reflects the performance of 300 big stocks on the Shanghai and Shenzhen exchanges. “When the government opened China up for foreign investors to manage onshore money, we were right at the first round of setting up our fund there,” Dalio says. For some years, Bridgewater had already been managing a large amount of capital from Chinese institutions such as the China Investment Corporation, the sovereign wealth fund.
After 27 years of building connections with the nation’s elites, Dalio was finally making significant money in China.
It wasn’t until around 2015 that other foreign financial services firms followed, all in search of more direct contact with China’s super wealthy. That year, regulators approved three additional important financial instruments, further opening up the field.
“You started to see just an explosion of hedge fund formation,” says Yusko. “It was like in the U.S. in the ’90s, where everybody left Tiger Management and left Steinhardt and left Goldman Sachs and started their own funds.”
Much of this was fueled by the growth in the Chinese tech sector, which produced behemoths like Alibaba, JD.com, NIO, Baidu and Pinduoduo, all of which Bridgewater has bought into.
There was only one blip. In the summer of 2015, China’s markets went into a tailspin after regulators popped a stock market bubble that cut a third of the value from Shanghai’s main index. The government paused all IPOs, restricted short selling, and arrested dozens of journalists and stock market officials accused of spreading panic. Dalio, to the surprise of many, did an aggressive about-face. “Our views about China have changed,” Dalio penned in a mid-July note to clients following the crash. “There are now no safe places to invest.”
Immediately after, according to reporting from the Wall Street Journal, the company suffered what looked like a cyber attack on its servers. No sensitive data was stolen, the firm said, but employees suspected Chinese hackers, according to the Journal. In subsequent company notes on China, Dalio had a softer tone, writing just one day later, “We assess the leadership in China to be skilled.” In a statement to The Wire, Bridgewater disputes the Journal’s summary of its position on China at the time, saying it had not fundamentally changed and also denies that the cyber attack had anything to do with its positioning towards China.
In the following years, Dalio seemed to focus on improving Bridgewater’s brand in China. In 2017, Bridgewater launched an All Weather China Fund in the Cayman Islands, as a sort of pilot project to prove their investment strategies would work well on the mainland.
And in 2018, the Chinese version of Principles was published and included a launch ceremony in Beijing as well as a documentary about Chinese entrepreneurs finding inspiration in Dalio’s book. One of those interviewed was Yu Minhong, the founder of New Oriental Education, which has lost about $868 million in value since Beijing banned for-profit tutoring services this summer.
That year, Bridgewater won a rare permission to trade directly in domestic Chinese markets and launched its All Weather China Fund. In 2020, Bridgewater set up a second investment fund on the mainland. As China’s economy rebounded while the rest of the world languished under Covid, Bridgewater’s All Weather China Fund boasted 22 percent annualized returns.
“Bridgewater understands the complexities — and that’s what they are, complexities — of doing business with China,” says Alexander, of Z-Ben Advisors. “To say there are cultural differences is a gross understatement. Ray’s been coming here, and he’s been talking with groups — he gets it. Most people in his position don’t.”
ALL IN THE FAMILY
Some of the other big hedge fund players — including Cathie Wood of Ark Invest, Soros Fund Management and Paul Marshall of Marshall Wace — don’t seem to want to. According to recent filings, all three have severely lessened or cut entirely their exposures to China and are now urging folks to get out of Dodge.
“The effect of these various interventions…has been to discourage many U.S.-based or international investors,” said Marshall in an August letter to clients. “You could argue that U.S.-listed Chinese American Depositary Receipts [shares in Chinese companies listed on U.S. exchanges] are now uninvestable.”
For these investors, the regulatory assaults, which have bruised firms in industries ranging from fintech to ride-sharing to tutoring, are not mere “wiggles,” but rather indicative of a larger shift in China’s financial system. While Dalio seems certain Xi Jinping’s “common prosperity” drive is good for the country’s long term political economy, the more skeptical investors see the government interventions as too volatile and unpredictable to weather.
“I don’t know how you discount the risks that you’re facing today in China,” says Kyle Bass, of Hayman Capital in Texas, who has long been bearish on China. “I guess investors are gonna say, ‘Well, I just hope Xi Jinping doesn’t crack down on the company I’m investing in. And I really hope the company I’m investing in is actually telling the truth about its numbers.’”
For investors, these risks are compounded by the fact that Beijing, which is wary of short sellers, makes hedging or balancing against risk, especially difficult.
“It’s very difficult to run a hedge fund in China,” says Gao. “Investors have only a few products to play with. You can only do macro hedges. Specific stock hedges are not possible. You can’t do it.”
Another challenge is the fact that China simply doesn’t need foreign capital the way it used to. NYSE’s Shapiro notes this as one of the biggest changes between the 1990s and today. Investors in China, he says, have always had “to read the tea leaves of the government’s attitude towards foreign investors in order to get comfortable or not [with the risks]. In those early days, most people believed that Beijing really cared about foreign investors, partly because they needed the foreign markets so much. But now, the local markets are so big, and they don’t really need foreigners for capital raising — there’s plenty of capital in China.”
Indeed, as the result of both Chinese and U.S. regulators’ recent actions, the great tide of Chinese companies listing in the U.S. seems to be turning. The Chinese AI chip startup Horizon Robotics Inc., for example, is considering shifting its potential U.S. initial public offering to Hong Kong, according to recent reporting from Bloomberg, as are others.
But while U.S. investors can now operate in China as unfettered as Chinese investors, some say that the big upsides are no longer there. With companies being forced to give more power to Party representatives within corporate structures, some caution that Chinese firms will be incentivized to limit growth in the name of stability and common prosperity, thus shrinking their value to investors. Their global competitiveness will also take a hit, some say, because the recent regulatory reforms de-incentivize innovation, especially in China’s much-vaunted tech sector, an historic cash cow for investors.
“The recent regulatory actions have been great news for Google, Facebook and Amazon,” says Jeffrey Towson, a consultant focused on Chinese tech. “They have created uncertainties and raised the price for any Chinese tech company accessing international capital — which means less money for reinvestment in technology, product development and international expansion.”
There is also the matter of human rights abuses and the complicity of Western investors who increase wealth for the Chinese state. Michael Santoro, a corporate ethicist at Santa Clara University who focuses on China, believes that powerful business figures like Dalio have both the capacity and moral obligation to “push the human rights agenda forward” in China.
“He could do it, he can make a difference,” says Santoro. “Dalio might not be able to solve the Uyghur problem or fundamentally change China. But he could make a difference in some peoples’ lives. The question is, does he care?”
He could do it, he can make a difference… Dalio might not be able to solve the Uyghur problem or fundamentally change China. But he could make a difference in some peoples’ lives. The question is, does he care?
Michael Santoro, a corporate ethicist at Santa Clara University who focuses on China
When asked, Dalio says he doesn’t believe he is able to knowledgeably assess the issues of human rights and their implications. According to his office, “He believes that the good and common practice people all over the world use to navigate these situations is to rely on the assessments of their governments and the rules their governments set regarding the implications of doing business in other countries. He and Bridgewater will comply with any rules and laws set by either the U.S. or China.”
Many investing stalwarts seem to agree with this stance. Goldman Sachs remains bullish on China. So does BlackRock, the world’s biggest asset manager, which recently recommended that investors triple their exposure to China. J.P. Morgan, too, is cautiously optimistic. “It may be hard to imagine the light at the end of the tunnel for Chinese equities,” the company surmised in a recent report. “But we think we are getting closer, day by day.”
In a world of swashbuckling and opinionated investors, it can be difficult to hear the voices of the middle opinion in this debate, but it’s there. These folks acknowledge that China has a lot of pitfalls and red tape to navigate — especially now and especially for the uninitiated — but remain wary of anyone who writes off the second largest economy in the world. As Towson puts it, “Investing in China is not a yes or no question. It’s a question of at what price.”
“Wiggles isn’t the right term since we are talking about serious economic reform here,” says Rui Ma, a longtime China investor and podcast host. “But it remains a good place to invest. China is one of the few places where there exists together: a large market, sufficient capital, growing talent pool, pretty good supply chain, improving infrastructure, strategic government, and moderate growth.”
Howie, the author on Chinese finance, notes that there could still be plenty of growth left in China’s economy. “But it’s just going to be a lot tougher,” he says. “The past 30 years is a poor guide for the next 30.”
Dalio, for his part, maintains that the past 10 years — since Xi Jinping came to power — have sealed the deal for him.
“I would worry more if Xi wasn’t there and wasn’t more in control,” he says. “I’ve had close enough contact over the last 10 years to know that there’s a desire to develop those capital markets and continue to make progress in moving to market reforms and more law-based regulatory environments.”
“The [government’s] plan in China has always been to make money first and then work on redistributing it,” Dalio continues. “I won’t tell you who said it but one of the top three most important leaders in China told me that the system is an extension of the family, that they run the country like strict parents.”
And for now, at least, Dalio seems to be part of the family.
Brent Crane is a journalist based in San Diego. His work has been featured in The New Yorker, The New York Times, The Economist and elsewhere. @bcamcrane
