Talk Your Book: Investing in China

Episode Summary

Executive Summary: The episode focused on China investing with Brendan Ahern of CraneShares, contrasting onshore A-shares with offshore ADRs and internet stocks. The discussion covered zero-COVID, regulatory crackdowns, delisting risks under HFCAA, the case for Chinese A-shares, and why China’s stock market is far smaller than its economy. Ahern argued much of the worst policy uncertainty is behind China internet names and that mainland access is becoming more investable.

Main Topics: Onshore vs. offshore China markets (Priority: 5/5): Ahern explained the split between Shanghai/Shenzhen onshore markets, mostly owned by domestic investors and more reflective of Chinese sentiment, versus offshore Hong Kong/US-listed ADRs that foreigners typically own. Zero-COVID and public health policy (Priority: 4/5): He argued China’s strict COVID stance is driven by low elderly vaccination rates and the potential human cost of an Omicron wave, while also noting citywide lockdowns have become less likely after Shanghai. China internet regulation and ADR pressure (Priority: 5/5): The conversation covered the government’s crackdown on internet platforms, the role of anti-monopoly rules, and how opacity plus US hedge-fund liquidation contributed to the selloff in names like Alibaba and Tencent-related stocks. Delisting risk and HFCAA (Priority: 5/5): They discussed the US Holding Foreign Companies Accountable Act, the possibility of ADR delistings, why state-owned enterprises are most exposed, and how many investors may need Hong Kong share conversions. Why China is different from its GDP story (Priority: 4/5): Ahern emphasized that China’s stock market has historically lagged economic growth because household savings have flowed more into bank deposits, bonds, and real estate than equities. The investment case for A-shares and KBA (Priority: 5/5): Ahern made the case that mainland A-shares are a large, under-owned market, increasingly accessible to foreign investors, and better represented by CraneShares’ KBA product than broad offshore ETFs. Market structure, settlement, and index inclusion (Priority: 4/5): They reviewed how MSCI inclusion is only partial, why China’s T+0 settlement creates complications for global index managers, and how futures/holiday-schedule changes could support broader inclusion.

Key Arguments: China should be understood as two markets: onshore A-shares reflect domestic investor sentiment, while offshore ADRs reflect foreign investor fears and policy risk. China’s internet crackdown hurt confidence, but the worst of the regulatory uncertainty appears to be behind the sector. HFCAA delisting risk is real operationally, but it is a solvable issue; many large companies could convert to Hong Kong listings. State-owned enterprises are the most likely ADR delisting candidates because audit transparency is more sensitive for them. China’s stock market has underperformed because the public has historically preferred savings, bonds, and real estate over equities. A-shares offer exposure to the parts of China’s economy that are still underrepresented in global benchmarks, including growth and industrial leaders. MSC I inclusion of A-shares remains incomplete, creating potential room for future passive inflows if access frictions keep improving.

Data Points: China onshore market ownership: 95% owned by investors in China - Ahern contrasted domestic Shanghai/Shenzhen with offshore holdings China elderly vaccination rate (80+): 20% with three vaccines - Used to explain why China maintained a strict zero-COVID approach China vaccination rate (70-80): about 50% - Part of the public-health rationale for lockdown policy China vaccination rate (60-69): about 56% - Part of the public-health rationale for lockdown policy China cities with over 1 million residents: 128 - Illustrated China’s urban scale United States cities with over 1 million residents: about 28 - Used for comparison with China MSCI China total return since 1993: about 1% per year, 33% total - Referenced as evidence that the stock market has not tracked GDP growth S&P 500 return since GFC low (Mar. 9, 2009): 715% - Compared against China and emerging markets MSCI Emerging Markets return since GFC low: 199% - Compared against China and the S&P 500 MSCI China return since GFC low: 163% - Compared against the S&P 500 and EM MSCI EM tech return since GFC low: 816% - Showed growth sector outperformance within EM MSCI China tech return since GFC low: 2,127% - Highlighted massive growth-sector gains in China US-listed China names count: 273 - Referenced in discussion of HFCAA and delisting risk Aggregate market cap of those 273 names: $2 trillion - Used to explain the scale of potential impact from delisting Mainland China market cap: $14-$15 trillion - Used to explain scale of Shanghai/Shenzhen markets MSCI China A-share count: 500 of 700 stocks - Showed that A-shares now make up a large portion of MSCI China MSCI China A-share fund weight: 8% - Indicated A-shares are still only partially included Potential MSCI EM inflow from full A-share inclusion: about $300 billion - Ahern’s estimate based on index assets and 20% weight MSCI A-share inclusion progress: 20% complete - MSCI added only part of the potential A-share weight China mainland market share of world equity markets: second largest stock market in the world behind the US - Positioned China as huge but still underrepresented globally China 1980 urbanization rate: 20% of people lived in cities - Used to explain structural urban expansion China current urbanization rate: closer to 70% - Showed long-term urban migration trend Sichuan electricity mix: 80% hydro - Explained why heat and drought caused power shortages

Pivotal Quotes: "Stock market is not the economy, especially in China." — Michael Batnick: Introduced the core theme of China’s weak long-run stock performance despite rapid GDP growth "What do the Chinese think about China." — Brendan Ahern: Explaining why onshore markets can differ meaningfully from offshore investor sentiment "The thing about China to me that always kind of blows my mind is how big it is and how it seems like they can kind of pull these levers and make things happen very quickly." — Michael Batnick: Framing the discussion around China’s policy power and market influence

Implications: For investors, China must be analyzed by market segment, not as one monolith. A-shares and Hong Kong/ADR exposures have different risks, policy drivers, and upside. Delisting concerns are real but may be manageable through conversion or restructuring.