Talk Your Book: The Bull Case for China With Brendan Ahern

0:00Today's Animal Spirits Talk Your Book is brought to you by CraneShares. Go to CraneShares.com to learn more about their whole suite of ETFs including Kweb. at Craneshares China Internet ETF. Clip, that's a Craneshares K-Web covered call strategy. And also check out China Last Night, which is your daily newsletter for all things China. Craneshares.com to learn more. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnick and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management.

0:39This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.

0:53Welcome to Animal Spirits with Michael and Ben. Michael, I think we both learned this past year that we don't really know a lot about China. Is that fair to say? It's the second largest economy in the world, And yet, I think to a lot of Americans, frankly, the country remains kind of a mystery. It's not exactly a destination people go to travel to for vacations, right? So I don't think a lot of people know and understand that much about society. And so we read Dan Wong's new book, Breakneck, and felt like we understood a little bit more. But we have experts from CraneShares we've talked to multiple times now.

1:27Brandon, most notably, who writes China Last Night, who travels there all the time. He invests in the companies, knows about others to know. But I do think it is kind of a blind spot for US investors. Is that fair to say? I was just going to say that exact thing, Ben. It is a blind spot. I think we are fortunate to live in our bubble, a very beautiful bubble. It is. But we often don't think about what's going on outside of our borders. And China is arguably hard to argue that there's anything else that's the second biggest economy in the world. Just is. It's very important. Dan Wang's book definitely opened my eyes.

2:02the stock market versus the economy. I think this is like one of the first posts I wrote, how the stock market does not equal the economy. No place isn't more true than in China. I think Vanguard had a study about this like in probably 2014. Right, the GDP growth versus the stock market growth. Yeah, right, since 1990 hasn't really gone anywhere. And it's widened ever since. Pretty remarkable. One of these days though, maybe. Well, they do have this huge tech sector now and they're fighting us for AI supremacy. Yeah. And it sounds like the race is closer than most people would assume. And obviously, the deep seek thing was maybe a little bit of a wake-up call.

2:36So we talked to Brendan Ahern, who is a chief investment officer at Craneshares. We talked to him a number of times before. It's always great to learn because he's in this. He's following this China news a lot. He's writing on it on a daily basis for his China Last Night newsletter, which he's been doing for a long time now. So we peppered Brendan with questions about the book that we read and about the societies and about the tech stocks there and the actual companies. Michael tried to pronounce one of them. Didn't go very well. So here is our talk with Brendan.

3:07Brendan, welcome back to the show. Great to be back, Ben. Happy holidays. All right, Michael and I are now self-professed China experts because we read Dan Wong's book, Breakneck. Very good. Curious to hear your thoughts. Do you think he just tonally or because China has always been something of a mystery to me, And I thought he really nailed the differences between the societies. And maybe it was a little too clever to say like, hey, it's the engineering society versus a lawyerly society. But do you think he - Ben bought it hook, line, and sinker. I did. But do you think he was, as you being an actual China expert, do you think he kind of nailed the tone of the different societies and the pros and cons between the two different systems?

3:47I thought it was a great book. I thought the chapter on the Shenzhen manufacturing ecosystem is worth the price of the book. And the book was expensive. It was like 37 bucks. So I might have to go back and expense it. I thought, you know, A, I mean, I mean, he lived there and experienced it firsthand. So I thought that kind of boots on the ground perspective, you know, the, you know, the views of different cities and culturally, you know, arguably academically, you know, China, China is paying the, you know, receiving the dividends of investing in STEM education from 10, 20, 30, 40, 50 years ago.

4:32And I kind of jokingly say, you know, there's probably not a lot of middle-aged French poet majors in Chinese schools. It's a very STEM orientation, I think. You see, you know, there's an output to that. And they're arguably maybe receiving some of the rewards of that. A couple of weeks ago, Ben and I were talking about the tech bubble bursting. And I know you know this, but I feel like, I don't know if it's being underreported or people are just tired of talking about it, but 21, 22, and 23 was a mini bursting of the bubble. I don't know if it was a bubble or not, but it was similar to 99, 2000, where, Ben, do You remember the numbers offhand, 2000, 01 and 02, what they were like?

5:24Oh, for the NASDAQ, it was down 30 % or more each year. Okay. Consecutively. So 2021 was down 49%. I'm talking about K-Web. 2022 was down 17%. 23 was down 9%. Now, rebound to 24, healthier to date in 2025, up 25 % as of this recording. It's Monday, December 22nd. Before we look forward, 21, 22, and 23. Was that the bursting of a bubble? Like remind us exactly what happened because I know it's not that long ago, but it feels like it's pretty far in the rearview mirror. You had a few contributors. One of them was, you know, the U.S. hedge fund, Archegos, was levered up in 10 U.S. listed stocks. Five of those five of those 10 stocks were Chinese ADRs where, you know, he was levered up 100 to one.

6:11And that was really the catalyst in February of 2021. That was the peak. An element of that rise was driven by Archegos's activity and the knock-on effect. But yeah, then you had a whole host of, these are policy errors. And we can rationalize why they did each of these policies. They popped the housing bubble. The government did that on purpose. Why? Because they don't need more houses. They need technology. And they wanted to shift that savings, that investment that historically went into housing. They geared it into semiconductors and high end manufacturing. capturing you had internet regulation, that you had the polling of Ant Group's IPO.

7:05And again, there's rationalization that you had a lot of data in there that they were going to be come under, you know, they were skirting bank laws by calling themselves a fintech company. You had internet regulation in terms of online education companies. You had COVID, you know, and obviously in Dan Wang's book, you know, he speaks about his experience during zero COVID policy. You have this whole host of policy errors that really slaughtered the China bulls, right? If you were a China bear, you never owned those names or you had, you know, you had very little non-US equity exposure. So it was the China bulls that got hurt.

7:48And I think that's where this process of people coming back into the space will take so long that there's a lot of scar tissue. There's a lot of people who hold grudges. And in terms of this re-rating we've seen over the last two years, it's really been, I would argue, outside of U.S. hedge funds and U.S. technical analysts, it's really non-U.S. institutions are the one coming back into the space. Part of that is just the US markets done so well. Why would you bother with non-US equities in general, right? For 16 years, they haven't worked. Harry Markowitz, they should take back his Nobel Prize.

8:31Diversification doesn't work. I mean, I don't believe that, but it's hard after 16 years, 64 quarters of these non-US equities never keep up. They finally did in 2025. I'm curious about the AI story in China? Because that's all people are talking about in the US, of course. Where do we stand there? I mean, we had the deep seek moment, and that was a freak out for like four days. But other than that, like, how far is China really behind the US? Or are they still behind? Like, where, where do we stand in terms of the artificial intelligence race between the countries? I mean, on AI, it's a very different, you know, how they're going about it is, it's all open source.

9:11You know, if you look, at DeepSeek and Alibaba's Q1, Badu's Ernie Bot, these are open source code. Anyone can download it for free. And that's very different than the business model of perplexity and anthropic and open AI where they're trying to build a moat around their businesses. And that's maybe why there's this race element, because you're in a race to try to garner market share and clients. And in China, it's more about the implementing it across businesses. And that's where the real AI companies are really the cloud computing companies, Alibaba, Tencent, and Badu. They're the ones that are ultimately really benefiting from AI as opposed to trying to monetize large language models.

10:03So what does the adoption rate look like in China then? Are people and businesses using it more? Is this something that the government really wants to happen? Where are we in the adoption curve? The government is very geared and, you know, we've got this draft of the 15th five-year plan and technology, you know, you'd argue it's all about domestic consumption and technology self-reliance. So there's definitely a policy tailwind to not just AI, but you'd argue semiconductors, big data. The US putting China companies on export controls, it kind of forced them to say, we have to come up with our own alternatives.

10:45I mean, Apple, I would argue that trying to bankrupt Huawei by cutting them off from US technology, they were either going to go bankrupt or they were going to innovate. And unfortunately for Apple, they innovated their way out of it by making a phone that's arguably better than an iPhone. I mean, just flat out, the ProMate 60 Plus is a better phone than an iPhone. And that's a consequence of power. Shut your mouth. Brandon, let me ask you this. I can't say this for sure, but I'm going to guess that KWeb is the only chart that looks like this. I have a chart that shows the total assets under management versus the price.

11:33And the price peaked. And yeah, this was a hell of a run-up. It went from, what is this? 42 bucks a share. I'm cherry picking the bottom, so forgive me. Let's just say it went from like 47 bucks a share prior to COVID, okay? And it ran all the way up to$103 by the end of February 2021. And then we know what happened. but I spoke about that a few minutes ago. But investors didn't really panic the way that you would expect them to. I mean, there was, of course, ebbs and flows, but my point is this. We're now four years removed from the top. The top was$103. The share price today is$35, give or take.

12:15And yet, total assets and their management hit the new all-time high. You don't see too many charts like that. Most of the times, investors run away from bad investments. What's your take on what's happening here? Like, how do you explain those dynamics? K-Web is probably unique across the US-listed China. Yeah, the majority of China ETFs were closed over the last three years. I mean, the number of funds available declined dramatically. We've been pounding the table for many, you know, for a long time saying, you know, K-Web is really a growth factor for China. And we don't hold financials, energy, industrials.

12:53you know, if you're going to cut your China position down, you're probably going to get rid of old China. And maybe the piece you keep is going to be, you know, this kind of growth China tech, you know, China tech, so to speak. So I think we've been very fortunate, you know, where the asset class is either gone out of business or been eviscerated. And, you know, I mean, literally half of the China ETFs no longer exist in the US. Wait, so why is that? What happened? Just got destroyed. Oh, so the bad performance and the companies closed them down? Yeah, just closed them down. OK. I'm curious about that.

13:30So we've talked about the currency effects with other countries. European stocks and other foreign developed stocks are benefiting from the dollar falling this year. I assume it's the same thing in China. You're getting a good currency tailwind. I would definitely agree. I think from traveling to Europe for work, you feel the conversation that comes up is European investors are not up nearly 20 % on the S &P 500. If you're a euro-denominated investor in US equities, you're up four. If you're Swiss franc, you're three. Swedish krona is like five. So one, I definitely think investors are kind of, there's an element of non-US investors, particularly out of Europe, are rebalanced.

14:19I mean, I'm not saying they're dumping US equities. I'm just saying they're arguably hitting that rebalance button. European investors and US stocks have had a hell of a decade. Yes. Yeah, because they had the dollar falling before, or rising before, which is good for them. Exactly. I mean, they had this huge tailwind that's becoming a headwind. We're starting to see this, particularly in, you know, we have a European business, And the flows in China ETFs in Europe is, you know, in the US, it's about one and a half billion of net inflow into US listed China ETFs. The US ETF industry is 13 trillion.

15:00In Europe, it's over 8 billion. And that's on a$3 trillion ETF market. So why are European investors putting Forex the money into China? It's just as they rebalance and position, some of it's going to end up in European stocks, but some of it's going to end up in Asia and emerging markets. So I think we're seeing the currency a big factor for US. 1.5 billion into China ETFs for 2025. if that was a US equity ETF that had that inflow, it would be the 78th largest inflow year to date, which means it's basically there's zero money despite, you know, really two pretty good years, two pretty good years.

15:52So in the US, everyone and their brother are worried about an AI bubble popping. People are concerned about, I guess, the ethics of AI and what it could do to the labor market. And you mentioned China has this like five or 15 year plan. And obviously we talk about the Dan Wong book, building out of stuff is a big part of that. And it sounds like technology is a piece of that. Is the public in China concerned at all about AI? Do they have the same fears that we do? Or is it kind of like, no, this comes from the top that AI is a part of what we're doing now. Everyone get on board. I think it's more the latter that I think it's viewed as a tool.

16:23The other thing is I'm not, I'm not really a buyer that, you know, I was out in San Francisco where there's Waymos all over the place. And, you know, having a limited in San Francisco, you know, Uber was invented in San Francisco. There was no taxis. I mean, you literally couldn't get a taxi. So eliminating your taxi cab force for the city of San Francisco, particularly when you got, you know, Alphabet, you know, basically funding the whole thing. Like, you don't really care. But here in New York, you know, if I want to get from JFK into New York and I don't want to take a cab, I got to get on a monorail, then the Long Island Railroad.

17:07That's all done on purpose, right? Like the New York taxi and lumousine position is like, we've got a lot of money and a lot of political pool. So this idea that AI is just going to, you know, I really think locally, you know, municipal governments, state governments naturally are going to say, you know, you know, we're not just going to put huge swathes of our, you know, of our workforce out of business. Like who's going to vote for us if we fire all of our voters? So, so this idea of like, yeah, I think things might get a little more efficient. But I definitely think it'll get, you know, it'll get implemented very incrementally.

17:46And in China, you know, I mean, I've heard the argument, well, you know, they got a demographic issue, but it's like, yeah, but so, but so does everybody. everybody's got a demographic. I mean, I think, I think where we see AI, where we're, you know, kind of, you know, really think AI is going to get there is actually on the humanoid robotics. And that's self, you know, that's self, you know, that's kind of a self-fulfilling argument since we have a humanoid robotic ETF. But, you know, in, in China, it's like, yeah, you know, people really want to adopt that technology to make their lives easier.

18:22And I think that's true here in the US. I mean, Musk is obviously the biggest proponent. I mean, there's people that say Tesla will be out of the car making business, just going to be an optimist, just a humanoid robotics company. When investors are considering buying Chinese tech stocks, what exactly are they buying? Is it Chinese governance making some sort of adjustments? Is it the growth in the earnings per share? Is it a potential re-rating of how investors feel about this? Like, what am I, if I buy this, what am I betting on? Part of it is a re-rating. The geopolitical, you know, is very hard for US investors.

19:06You know, you got your MBA, your CFA, you should be buying low, selling high. by low valuations and trimming your high. But when you apply that to China, I think it's hard because even if I'm an institutional investor, I have a board, I have trustees. I think the US geopolitical narrative is tough. I mean, I think, so one, I think, if Trump is supposed to go to meet with Xi in China in April, their APAC meeting is actually in pretty sure it's actually in Shenzhen in the fall. Anyway, like what if what if what if some of that geopolitical headwind goes away because Trump says we're going to do a bigger deal with China?

19:51I think it allows investment professionals to come back. You know, in the case of K-Web, Michael, you know, these are, you know, private companies. You know, the founder is the CEO or the chairperson of every company. You know, there, you know, yes, you have e-commerce companies, but you have online video, online gaming, mobile payments. There's a, you know, there's more to the space than just like Alibaba. There's arguably, you know, companies like Badu. And, you know, I think there's a whole host of value plays. And then you could get this re-rating, which is multiple expansion. And that's a part of what we've seen.

20:33I think if you get this policy to raising domestic consumption in China, that's where you actually see earnings per share growth. If you look at the valuations of small caps or mid caps or international stocks, they all kind of trade at a similar discount to the large cap U.S. stocks. Is it similar in China where it's that kind of discount? With China, you've got A shares, Shanghai, Shenzhen. That's only about, if you're an MSCI investor, it's only like 15 % of MSCI. It's a small part of the definition of China. That's a closed capital system. So the valuations tend to be very high. And that's where you see some of these companies in the AI space, they're more expensive than NVIDIA.

21:18And it's just because if I'm in mainland China, my investment universe is really small because I can't buy EFA or VU or whatever, IEMG. I have a really narrow, I have capital controls. My money has to stay in China. So it bids up the growth names. The offshore, the Hong Kong names, USADRs, that's where a lot of other growth companies list, mainly because they were funded by U.S. private equity. You know, one of these companies you might have heard of, TikTok, you know, funded by ByteDance is funded by U.S. private equity. But a lot of those companies listed in Hong Kong and the U.S. So their U.S.

22:04private equity could get a Hong Kong dollar denominated exit strategy. So a lot of the growth names are actually in Hong Kong. How are these companies doing? Like, let's talk about, I'll use one example because I'm not familiar with this company. Meituan. I don't know if I said that right. What is this company? How are they doing? It's a 7.5 %-ish weight in the fund. Yeah. So Meituan, you know, this is where - Not even close. Oh, that was close enough. I mean, you said Archejos, so I think we're fair. Okay, yeah, yeah. I mean, listen, people say like, you know, I say I'm still working on my first language.

22:39It's just the struggle is real. This is a restaurant delivery company, dominant, dominant market share. JD decided to enter into that space and they've destroyed their bottom lines. You basically can order restaurant delivery for free in China today because these two companies are just battling it out for market share. and it's really, really hurt their bottom line. Their net income and earnings per share growth has just been wiped out. And that's weighed a little bit on Alibaba. They have a restaurant delivery union. That's where we've actually, you know, we favor some of the other parts of the portfolio today.

23:27How is the Chinese consumer? And like these tech names, are they, how reliant are they on enterprise deals versus the health of the consumer? It's more the latter. I mean, it's very much, you know, 25 % of all retail sales is online. Online retail sales is up 9 % through November year over year. So that's versus about, you know, 4%. So it's actually, it's the consumer. The consumer in China is very wealthy. It's just they're being very conservative because real estate accounted for two thirds of their portfolio. and that just really, really came down. So the households have been hoarding cash as opposed to spending it.

24:15And that's why you read so much about, the Chinese consumer isn't consuming. It's not that they don't have money or they don't have a job. It's just they've taken up such a hit on their portfolio because of the decline in real estate prices. So you have, I don't know, Now, if you look at the top five or six names here, you have something like 30 to 40 percent in those top names. Is that pretty standard for the fund to have that level of concentration? It has been. Part of that is simply the big companies like a Tencent and Alibaba are just worth so much more than some of the other players in the space.

24:54It's not been unusual. Uh, it's, what's kind of an interesting is some of the companies that have been our best performers, um, online video companies, these are kind of competitors to tick tock in China, uh, Billy Billy and Quashu have done very well. Well, you know, Trip.com is like their online travel has had, you know, has done pretty well. So it's it's been an inner, you know, Tencent, you know, it's the Facebook of China, but also, you know, one of the largest gaming companies globally. You know, they own Clash of Clans and Fortnite. They've done well. So it's, you know, that that's where the what kind of what the fun does for you is it's it's actually, you know, held a diversified basket.

25:41And, you know, it's been a diverse group of winners over the last two, three years. So I mentioned earlier that the assets in the fund are at an all-time high. When you talk to investors, are you sensing their tone is different? Like, is this just a consolidation that there's not a ton of other vehicles to invest in? Or are they like excited? In the US, you say China, people throw stuff at you. Going to Europe, there's a lot of money in motion. You know, there's a large part of the world is geared economically to China. So if you think about BHP is the largest company in Australia. So Australian, you know, institutions, they have these, you know, super annuities.

26:28You know, those Australian super annuities, they don't get their China news from the Wall Street Journal or Bloomberg or, you know, they get it from listing the BHP on a quarterly basis. And what's BHP saying about China? Things are going well. And in Brazil, Valet is the second largest company. Rio Tinto, Anglo-American, Southern Copper, SQM, Glencore, right? A lot of these non-U.S. institutions, their economies are geared. Same in Asia, obviously. ASEAN is China's biggest trade partners. So that's where we spend a lot of time outside of the US meeting with our very global and very institutional client base, because they're not deterred by a geopolitical narrative.

27:16And I think that is a big issue for US institutions. So we're in outlook season now. If you had to give us the 2026 outlook for investing in China, what's the glass-to-sat-full version of that? What are you bullish on? I mean, I think we're bullish on US-China relations under President Trump that him going to China, taking this trade truce and making it into a broader trade deal will allow for a re-rating of Chinese equities. We think our view is like uber optimists. The market is not pricing in that outcome. And I'd argue there's signs of that. But then obviously, we've got this 15th five-year plan, very focused on domestic consumption.