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Ray Dalio says 'capital wars' will be the next front in the US-China economic conflict

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Key Points
  • The U.S.-China fight could soon mushroom into a melee over investment capital and the dollar's long-held place as the globe's reserve currency, Ray Dalio said Thursday.
  • "There is a trade war, there is a technology war, there is a geopolitical war, and there could be capital wars," Dalio said.
  • The warnings from the founder of the world's largest hedge fund came as lawmakers work to stem the tide of U.S. money flowing into China.
Ray Dalio speaking at the 2017 Delivering Alpha conference in New York on Sept. 12, 2017.
David A. Grogan | CNBC

The economic fight between the U.S. and China that has roiled financial markets over the last two years could next blossom into a full-blown war for investing capital and ultimately, for the prestige of the globe's reserve currency, according to hedge fund magnate Ray Dalio.

The power struggle between the world's two largest economies — in the form of a tit-for-tat trade war at present — may soon mushroom into a melee over the dollar's long-held place as world's preferred form of exchange, the Bridgewater Associates founder said Thursday at the annual gala of the National Committee on U.S.-China Relations in New York.

"There is a trade war, there is a technology war, there is a geopolitical war, and there could be capital wars. And how that's approached is going to determine what our futures are like," Dalio said.

The founder of the world's largest hedge fund said that countries or empires that once enjoyed reserve currency status tended to prioritize education and civility, infrastructure and new technologies, which facilitated global influence over time.

"I honestly don't know how it will be approached. We want to be optimistic," he added.

Dalio's warnings come as federal lawmakers, alarmed that some U.S. retirement money is pouring into China, work to stem the tide of funds to Beijing. Senators' fears peaked earlier this week, when the main pension plan for U.S. government workers reaffirmed its decision to allow one of its funds to invest in an international index that includes Chinese companies.

Sen. Marco Rubio, R-Fla., called the Federal Retirement Thrift Investment Board's decision "unconscionable," echoing bipartisan concerns that U.S. money is supporting Beijing's military and corporate growth.

The U.S. and China are in the middle of an extended trade war during which both countries have imposed import duties on billions of dollars' worth of each other's goods. Progress to resolve the dispute remains questionable, with both sides seemingly unable to nail down a watered-down truce that President Donald Trump categorized as a "phase one" deal earlier this fall.

But for Dalio, China's success is the result of what he characterized as a centuries-old socio-cultural attitude.

"It is because of an approach. It's not an American approach. It's not democracy, it's not – but it is an approach. It's their approach. A Confucian approach," he said Thursday.

"It has to do with the way that they're operating," he said. "And so there are things that make Americans American and there are things that make Chinese Chinese. And we can't ever expect that we're going to make the Chinese like Americans and to adopt our system any more than they should expect that Americans should be made like Chinese."