Ray Dalio currently has approximately $3 billion invested in Chinese businesses, but even he's convinced the country's economy needs a massive restructuring.
China's economy could cause a headache across the globe, with its struggling property sector—embattled by failing property giants and sinking house prices—prompting fears of contagion in other industries.
But economists are convinced Beijing won't step in to prop up the likes of developers—despite the sector being described as the "single most important" industry in the global economy at present.
Legendary investor Dalio disagrees—he says it's time China "engineered" a restructuring of its debt.
According to the International Monetary Fund, China has nearly doubled its level of debt over the past five years to about 66 trillion yuan ($9.3 trillion)—equivalent to more than half of the country's annual economic output.
The shift will be massive, Dalio concedes, but necessary.
Writing on LinkedIn, the founder of Bridgewater Associates said: "There is an obvious need for a big debt restructuring of the sort that Zhu Rongji engineered in the late 1990s, just much bigger."
The investor—whose fund now reportedly manages more than $235 billion in assets—said in order for restructuring to be a success, the Chinese government must look to the history books.
The self-proclaimed Sinophile wrote: "How these big debt restructurings work should be clear to anyone who has studied them throughout history, because for as long as there is recorded history there are records of how countries have gotten themselves into too much debt and then gotten themselves out of it.
"There isn’t a country I know of that hasn’t done this, typically several times."
China's debt restructuring 'easier'
Dalio—whose book "Principles: Life and Work" was a bestseller in China after it debuted in a translated version—said the country's debt restructuring would be easier than other nations' had been because the majority of debt is held in the country's own currency.
He added there are two levers to pull in order for the "beautiful deleveraging" to happen.
The first is to allow deflationary defaults and restructurings while balancing this with the inflationary measure of printing money.
This is the only way China's economy can once again begin turning, Dalio believes—and will importantly result in an improvement to the standard of life of the poorest parts of the country.
Other nations including Japan, the United States and the continent of Europe will need to deleverage at some point as well, Dalio added, but said China should happen first.
He wrote: "China is overdue in doing this, so in my opinion, it needs to follow this beautiful deleveraging process now because the debt-burdened balance sheets and burdensome debt service payments are freezing the economy, especially at the provincial level and most especially in some of the poorest provinces."
Which alarm bells are ringing in China?
The Chinese economy is currently in a cataclysm of issues.
This week state-owned banks were reportedly asked by the government to intervene in the currency markets as the yuan fell toward 7.35 per dollar—an issue officials are apparently keen to avoid.
Meanwhile, soaring youth joblessness hit record levels this year, reaching 21.3% in June, before the unflattering data was pulled from publication by the government.
Data that also mysteriously disappeared from public view was the number of land sales—after the figure dropped more than 50% last year.
The data usually goes back to 1988, but according to Bloomberg the amount of land developers purchased and the price they paid for it is now being omitted in monthly releases.
Just this morning, property giant China Evergrande—formerly the country's top-selling developer—has filed for bankruptcy protection under U.S. courts, while China's largest developer Country Garden teeters on the edge of default.
