Michael Batnick and Ben Carlson host Brendan Ahern, Chief Investment Officer at Crane Shares, for their third conversation about Chinese markets and investing. The hosts recently read Breakneck by Dan Wang, which helped them better understand Chinese society and its differences from American culture.

The discussion covers China's massive tech sector correction from 2021-2023, the current AI race between China and the US, and why European investors are allocating significantly more capital to Chinese equities than American investors. Ahern explains the unique dynamics of K-Web ETF, which has reached all-time high assets despite share prices remaining well below 2021 peaks.

The conversation explores China's approach to artificial intelligence, consumer spending patterns, and the outlook for US-China relations under the Trump administration. Ahern draws from his daily research through the China Last Night newsletter and extensive experience with institutional investors globally.

The Great China Tech Correction of 2021-2023

K-Web fell dramatically over three consecutive years: 'down 49% in 2021, down 17% in 2022, down 9% in 2023' before rebounding 25% in 2024

The correction was triggered by multiple policy errors including Archegos collapse, housing bubble popping, internet regulation, Ant Group IPO cancellation, and zero COVID policy

Half of China ETFs in the US market 'no longer exist' due to poor performance, with fund companies closing them down entirely

The correction 'slaughtered the China bulls' while China bears were unaffected, creating lasting 'scar tissue' among US investors

China's Open Source AI Strategy vs US Moat Building

China's AI development is 'all open source' with free downloads, contrasting sharply with US companies like OpenAI and Anthropic trying to 'build a moat around their businesses'

The real AI beneficiaries in China are 'cloud computing companies, Alibaba, Tencent, and Baidu' rather than large language model creators

China's government strongly supports AI through the 15th five-year plan focused on 'domestic consumption and technology self-reliance'

US export controls backfired as companies like Huawei 'innovated their way out of it by making a phone that's arguably better than an iPhone'

K-Web's Unique Asset Growth Despite Price Decline

K-Web assets hit all-time highs while share price remains at $35 versus $103 peak, a dynamic that's 'probably unique across US-listed China ETFs'

The fund serves as 'really a growth factor for China' holding no financials, energy, or industrials - just tech growth names

US investors contributed only $1.5 billion to China ETFs in 2024, which 'would be the 78th largest inflow' if it were a US equity ETF

European investors are putting '4x the money into China' due to dollar headwinds reducing their US equity returns from 20% to 3-5%

Chinese Consumer Behavior and Real Estate Impact

The Chinese consumer 'is very wealthy' but 'being very conservative because real estate accounted for two-thirds of their portfolio' and prices declined

Online retail sales grew 9% year-over-year through November versus 4% for total retail, with '25% of all retail sales' now happening online

Restaurant delivery competition between Meituan and JD has created a price war where 'you basically can order restaurant delivery for free in China today'

Geopolitical Outlook and Investment Implications

Trump is scheduled to meet with Xi in China in April, potentially reducing geopolitical headwinds and allowing 'investment professionals to come back'

Non-US institutions are less deterred by geopolitical narratives because their economies are 'geared economically to China' through commodity companies

The Taiwan invasion narrative lacks credibility given 'it's been 76 years since Chiang Kai-shek went to Taiwan' - that's '27,740 days' of zero probability events

Breakneck by Dan Wang provides valuable 'boots on the ground perspective' for understanding Chinese society, though Ahern notes the book was expensive at '$37'