The manager of the world’s largest hedge fund is worried about the world’s second-largest economy, and he’s using the R-word.

Ray Dalio, who heads the $160 billion hedge fund firm Bridgewater, says China’s economy is headed for a “sort-of recession,” that will last as long as three years. Dalio says the implications of that could be huge for the world economy, and the U.S. Federal Reserve.

“China is going to be a negative for the world economy,” says Dalio, who was talking on Thursday morning on a panel at the World Economic Forum. “China is going through a cyclical adjustment that will add to the world’s deflationary pressures.”

Dalio said China’s biggest problem is its balance of payments, with more money flowing out of the country than is coming in (around $676 billion left the country last year, according to the Institute for International Finance). Dalio also said China’s economy, after years of government spending, has a local debt problem. Dalio said that local government spending accounts for about 30% of GDP. Yet, Dalio says the average local government is now 20% over budget. Erasing those deficits, Dalio says, would cut six percentage points off of China’s GDP growth.

Jiang Jainqing, who is the head of board chairman of Industrial and Commercial Bank of China idcby , the world’s biggest bank by assets, said that China’s local debt is manageable, and while there is a glut of real estate in China, houses are rapidly filling up, and demand is catching up for other properties. What’s more, the government and consumers have more capacity to borrow. Government data suggest house prices have been rising in the country’s top-tier cities for the last few months, although prices in cities further inland are still falling.

“China’s debt is not too high right now,” says Dalio. “But it’s growing faster than incomes and that’s not sustainable.”

 

Dalio doesn’t actually expect China’s growth rate to turn negative or even close to it. He does say, though, that the country’s economic growth will likely fall to 5% or lower for the next few years, and that that will feel like a recession. China’s government has targeted GDP growth around 7%, but undershot that in 2015, even according to figures that many western economists fear were inflated. “Years ago we used to describe 3% growth in Japan as a recession,” says Dalio. “For China, I think that level is 5%.”

Dalio still thinks China’s economy will do well in the long term, and that regulators and policy-makers have generally done a good job in dealing with the current economic troubles.

Goldman Sachs’ gs Gary Cohn, who was also on the panel with Dalio, says the problem for China is that, as it makes the transition to a consumer economy, it is harder to generate spending than when growth was being driven by the government.

“Most market participants believe China’s currency will be lower at the end of 2016 than it is today,” says Cohn.