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“China’s going through two drags on its economy in the short term,” Dalio told FOX Business’ Maria Bartiromo on Monday during an interview at the World Economic Forum in Davos. “It’s dealing with a deleveraging, and deleveraging is a good thing. In other words, it’s controlling and restructuring its debt that slows demand.”
However, that process will dent global growth.
“I think that people have got to realize it’s going to be a negative of all things on growth,” he said. “Europe has a negative growth and the United States is going to have a negative growth environment. I don’t mean absolute negative. I mean slowing of growth in a material way that could be close to between 0 and 2 percent over the next 18 months.”
In addition, Dalio said the U.S. and China trade war will also impact capital flows.
“We have to remember that the other side of the trade deficit is a capital deficit,” he said. “They bought our goods and then at the same time they lent us a lot of money. And I think we should always be mindful that capital issues, capital flows have a very big effect on the world and the economy because they can change things a lot.”
Because of this, Dalio predicts that China will continue to make reforms.
“I do think they will change the mixes of their assets that they’re holding and I think that has implications,” he said. “I think it particularly has implications as we’re going through the next year or two or three when we have to sell a lot of U.S. dollar denominated debt because we will have larger deficits as a result of the corporate tax cut.”
China is currently the largest foreign holder of U.S. debt.
The U.S. national debt has exceeded $21 trillion, according to the Treasury Department.