Talk Your Book: Finding a Bottom in China

Episode Summary

Executive Summary: The episode centers on China’s beaten-down equity market and CraneShares’ view that the country is entering a recovery phase after years of policy stress, weak consumer sentiment, and real estate pain. Jonathan Schellen argues China requires targeted policy fixes, not a U.S.-style bazooka, and highlights strong fundamentals in Chinese internet names, improving earnings, and new ETF structures that offer upside with downside buffers.

Main Topics: China’s market reset and turnaround case (Priority: 5/5): The hosts and Jonathan Schellen discuss whether China’s prolonged underperformance has created an attractive entry point after a severe drawdown. They frame current conditions as similar to China’s own financial crisis, with sentiment deeply negative but fundamentals improving. Why China stimulus looks different from the U.S. (Priority: 5/5): Schellen explains that China cannot rely on massive broad stimulus because consumers already have high cash balances and remain cautious after zero-COVID. Instead, policymakers are using targeted measures to address specific issues like real estate and unemployment. Chinese internet stocks vs. stock prices (Priority: 5/5): The discussion contrasts the huge declines in names like Alibaba, Tencent, Meituan, and PDD with their still-strong earnings growth and relatively low valuations, suggesting the market is discounting sentiment and policy risk more than business deterioration. Investor sentiment and benchmark pressure (Priority: 4/5): Participants argue that China has become a political and media boogeyman in the U.S., depressing allocations. They also note that China’s size in emerging market indexes may eventually force underweight managers to buy back exposure if performance turns. Defined-outcome and buffered China ETFs (Priority: 4/5): Schellen explains CraneShares’ K-Pro and K-Buff ETFs, which use options to provide downside protection and capped upside over a two-year outcome period, allowing investors to express a bullish view with less risk. Real estate damage and policy response (Priority: 4/5): The conversation covers China’s real estate slump, household wealth effects, and the government’s attempt to stabilize construction, reopen demand, and avoid a systemic collapse similar to Lehman Brothers. Diversification and the long cycle of EM leadership (Priority: 3/5): The hosts and Schellen compare the post-2000s period when emerging markets outperformed U.S. equities with the last 12 years of U.S. dominance, arguing that extremes in relative performance tend to revert over time.

Key Arguments: China’s economy is too large, and its consumer base too important, to ignore indefinitely, even after a severe drawdown in Chinese equities. The Chinese government is unlikely to deploy a U.S.-style stimulus bazooka because households already hold large cash balances and are still cautious from zero-COVID. Chinese internet companies have suffered huge stock drawdowns, but earnings and balance sheets remain strong, implying that sentiment rather than fundamentals is driving much of the pain. Negative U.S. political and media sentiment toward China has become a major overhang on valuations and allocations. China’s weight within emerging markets is large enough that a recovery in Chinese stocks could force benchmark-driven buying from underweight managers. The national team and policy support may help establish a floor, but a lasting rerating likely requires better performance and improving investor confidence. Buffered ETF structures can make China exposure more palatable by limiting downside while retaining meaningful upside in a volatile market. Real estate weakness was intentional policy at first, but the government has now shifted toward stabilization because of its effects on household wealth and consumer behavior.

Data Points: Alibaba drawdown: 78% off its high - Used as an example of the severity of the selloff in Chinese internet stocks Chinese consumer bank deposits: Almost $3 trillion - Cited as a reason China cannot simply hand out broad stimulus checks China 10-year yield during COVID: 2.5% - Compared with the U.S. 10-year falling to around 0.6% in April 2020 U.S. 10-year yield in April 2020: 0.6% - Referenced to contrast the U.S. and China policy response during COVID KWeb forward P/E: About 14x - Presented as evidence that Chinese internet stocks remain cheap on valuation Tencent revenue growth: 7% - Latest earnings example showing stable top-line growth Tencent EPS growth: 44% - Illustrates operating leverage and profit growth despite modest revenue growth Tencent buybacks: Doubled - Sign of strong cash generation and shareholder return activity Meituan net income growth: 70% - Cited as another example of strong earnings momentum PDD net income growth: 110% - Used to show sharp profitability growth among major Chinese platforms K-Web fund size: $5-$6 billion - Shows the ETF is large enough to support meaningful options activity K-Web option open interest rank: Top 10 among 3,400 U.S. ETFs - Explains why CraneShares can build options-based strategies around the fund K-Buff downside buffer: 10% - Investor can lose up to 10% before protection is exhausted over the outcome period K-Buff upside cap: 41.2% - Potential maximum upside over the defined outcome period at launch K-Pro upside cap: 22.69% - Maximum return over the two-year period in exchange for full downside protection K-Buff/K-Pro outcome period: Jan. 16, 2026 maturity - The defined outcome period runs roughly two years from launch K-Web performance since K-Buff launch: +9% - Used to show that K-Web has already rallied after the new strategies were launched K-Buff performance since launch: +4% - Demonstrates how rising NAV reduces remaining upside room K-Pro performance since launch: +2% - Shows partial use of the cap already during the outcome period Number of two-year periods studied for K-Web: 67 - Historical analysis of how often K-Web doubled over rolling two-year windows Emerging markets share of broad EM: 30%-40% - China’s approximate weight in broad emerging market indices, depending on construction China urbanization rate: About 70% - Used to argue that long-term real estate demand still has room to grow U.S. urbanization rate: Over 90% - Compared against China to support the long-term urbanization thesis China online retail sales vs. U.S.: 2x - Shows how important e-commerce is to China’s consumer economy China market rally after January bottom: 9%-10% - Referenced as evidence that ETFs may have established a floor Last 12 years U.S. vs EM performance: S&P outperformed EM by 11%/year - Used to highlight the extreme relative outperformance of U.S. equities 2001-2012 EM vs S&P performance: EM outperformed by 11%/year - Historical comparison to argue that leadership cycles can reverse Currency contribution to period returns: 30% - Schellen noted currency returns were roughly 30% of the EM outperformance/underperformance story K-Pro downside protection: 100% - The strategy is presented as full principal protection at maturity, subject to structure conditions

Pivotal Quotes: "The answer is now." — Jonathan Schellen: His direct response to when China might start rising again "China can't apply a bazooka like the U.S. ... They're going to use something like a grand sniper rifle." — Jonathan Schellen: Explaining why China’s policy response is targeted rather than broad-based "This has really been like our GFC in terms of China markets." — Jonathan Schellen: Describing the scale and severity of the Chinese equity drawdown

Implications: Listeners are being told China may be in an early recovery phase, but the path is likely gradual and policy-dependent. For investors, the key takeaway is that valuation and sentiment may matter more than headlines, and buffered structures can help manage risk while staying exposed.