Ray Dalio, the billionaire founder of the world’s biggest hedge fund, said preliminary discussions on limiting U.S. investments in China make him wonder if the Trump administration is “inching toward bigger moves.”
In a new essay posted on LinkedIn Tuesday, the Bridgewater Associates co-chairman points to the U.S. freezing Japanese assets and embargoing oil to Japan in the late 1930s to early 1940s as a potential example of how special emergency powers could be used by the president.
“Regarding the capital and currency wars, the ability of the U.S. president to unilaterally cut off capital flows to China and also freeze payments on the debts owed to China, and also use sanctions to inhibit non-American financial transactions with China must be considered as possibilities,” Dalio wrote. “That’s why the proposed step of limiting American portfolio investments in China makes me both think about the implications of this step and wonder if it is an inching toward bigger moves.”
Bloomberg News on Friday reported that Larry Kudlow, the head of President Donald Trump’s National Economic Council, was leading deliberations inside the White House over what some hawks have labeled a potential “financial decoupling” of the world’s two largest economies.
The options discussed have included forcing a delisting of Chinese companies from U.S. exchanges, imposing limits on investments in Chinese markets by U.S. government pension funds and putting caps on the value of Chinese companies included in indexes managed by U.S. firms, according to people familiar with and involved in the discussions.
In a statement emailed to Bloomberg over the weekend, a spokeswoman for U.S. Treasury Secretary Steven Mnuchin said there were no current plans to stop Chinese companies from listing on U.S. exchanges.
Bloomberg’s report was later matched by other news organizations including the Financial Times and New York Times. White House trade adviser Peter Navarro, in an interview Monday with CNBC, acknowledged that the White House is looking at issues related to Chinese stocks, while broadly denying Bloomberg’s story as “fake news.” He refused to answer multiple questions from the network’s anchors about what was inaccurate.
In his essay, Dalio cites the International Emergency Economic Powers Act of 1977, or IEEPA, as the powers most accessible to President Trump for such a move.
“It empowers the president to unilaterally impose capital and FX controls, freeze assets and/or payments on assets (coupons), and force asset divestures to ‘deal with any unusual and extraordinary threat’ from outside the U.S.,' Dalio wrote.
Trump is aware of the powers and has referred to them as a tool in his trade policies. He mentioned them when he threatened in May to place levies on Mexican goods as a way to force curbs on the flow of undocumented immigrants across the U.S.-Mexican border. His administration also said in August that the legislation would give the president the authority to force American companies to leave China if Trump declared an emergency.
Dalio said the news last week 'seemed like the most recent logical steps in this classic dangerous journey that is analogous with that which occurred in the 1935-45 period.'
During those years, as is the case today, America experienced a widening gap between the rich and poor, and intensifying conflicts between populist politicians on the left and right, Dalio wrote. It was also a time, like now, when the world’s central banks were limited in their ability to stimulate economies in a downturn and there was a rising world power challenging the existing one.
“From not having to worry about such things in the past, now all market participants need to worry about them,' he wrote.
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