The founder of Bridgewater, one of the world’s largest hedge funds, fears the property crisis in China has left local governments unable to service their debt by extracting equity through land sales. 

That raises the risk that provinces, prefectures and townships responsible for more than 80% of overall state spending will need some form of debt forgiveness that would likely result in a haircut for creditors. 

“It’s a situation which is at least as severe as the Japanese situation starting in 1990,” Dalio said during a panel discussion on Wednesday at the Milken Institute Asia Summit 2024 in Singapore. “They need to have a restructuring of the debt. It’s a very complicated and politically charged thing.” 

At the height of its property bubble in the late 1980s, the land upon which the Tokyo’s imperial palace rested was famously more valuable at the time than the entire state of California. When it finally burst, Japan went through decades of sluggish growth and deflation. It wasn’t until February of this year that the Nikkei stock index finally eclipsed its December 1989 peak. 

Any prominent investor comparing China with Japan prior to its lost decades of stagnation ought to be alarming. Dalio, who remains a member of Bridgewater’s operating board of directors, is however well known for his bullish views on China.

Not anymore. 

“There are big structural problems there,” he told attendees to the conference. 

It’s not just the local governments that are holding China’s economy back, either. 

Households that have traditionally held about 70% of their money tied up in property are shying away from spending, according to Dalio. They will need to see a recovery, before sentiment improves and consumers stop hoarding cash.

Fortune reached out to the Chinese foreign ministry via its embassies for comment, but has not received a response. 

U.S. faces its own unique challenges

Dalio was more optimistic about the fundamentals of the U.S. economy, but warned it too faces its challenges of its own.

Sizeable gaps in income inequality have exacerbated social tensions to the point where there are irreconcilable differences in the country, argued the Bridgewater founder. This makes the kind of bipartisan structural reforms crucial for mitigating these divisions by broadening out wealth all but politically impossible.

With equity valuations fully priced in his view and the potential for Treasury bonds to sell off if supply exceeds global demand, he recommends investors hedge their downside risks first and foremost by building a diversified portfolio that is not too dependent on any one economy.

“There’s so much that’s positive in the United States—the rule of law, capital markets, so many different things [that are] fantastic in many ways,” Dalio said, “however I just want to emphasize there is a lot of risk, because a limited number of companies constitute a lot of the performance in a country where we have to be concerned with […] the orderly transition of power.”

Dalio has in the past warned about the growing risk of civil war erupting in the United States.