Lead-Lag Live

Tariffs, Trade Wars, and China's Economic Evolution with Henry Greene

• Michael A. Gayed, CFA

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Amidst headlines proclaiming economic doom from Trump's tariffs, a surprising reality emerges: Chinese exports to the United States represent a mere 2.3% of China's GDP. This revealing statistic underscores China's remarkable transformation from an export-driven economy to one powered by domestic consumption and services.

Henry Greene, Investment Strategist at KraneShares, breaks down this economic evolution with remarkable clarity. China's exports to America have plummeted from over 25% of total exports in 2006-2010 to just 14% today, while their manufactured goods exports represent only about 11% of GDP. For investors concerned about Chinese internet companies, the news grows even more intriguing – less than 2% of revenues from KWeb portfolio companies (including Alibaba, PDD, Tencent, and Meituan) originate from American consumers. Only PDD Holdings, with its popular Temu app, faces meaningful exposure at roughly 15% of revenue.

The conversation explores several misconceptions plaguing market narratives. Concerns about Chinese company delistings from U.S. exchanges largely rehash existing policies from the 2020 Holding Foreign Companies Accountable Act, rather than representing new threats. Similarly, trade tensions around Taiwan reflect long-standing political posturing rather than imminent geopolitical shifts. Meanwhile, Chinese internet valuations remain compelling at roughly 17% earnings multiples compared to 30% for U.S. tech counterparts.

Looking forward, multiple growth catalysts remain intact regardless of trade negotiations. Artificial intelligence development continues at pace with companies like Alibaba introducing increasingly efficient models. Consumer confidence has room to recover from pandemic-era lows. Perhaps most promising, cloud computing penetration among Chinese businesses sits at just 50% – substantially below Western rates and echoing the internet adoption curve that powered earlier growth cycles.

Discover how savvy investors are navigating this complex landscape using strategies like balanced onshore/offshore exposure, covered calls, buffer products, and Asian fixed income to capitalize on China's economic resilience while managing volatility. Subscribe to KraneShares.com or ChinaLastNight.com for ongoing market insights that challenge main

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Speaker 1:

We did some research as soon as the tariffs came out. We looked at okay, what is the impact here? What is really going to be the impact on China's economy, and especially in the sectors that we look at most closely, which is the internet sector, which we track through our fund KWEB. And so, out of China's overall exports of manufactured goods to the United States now this is going to sound a little shocking actually represent only 2.3% of China's GDP, so that's in 2024. Okay, how do we get that number? Where does that come from? Well, exports of manufactured goods in China have come down significantly over the past 10 years. So that says China has moved from an export manufacturing oriented economy to a more internal, domestic consumption oriented economy.

Speaker 2:

This will be actually a very well-timed conversation because this is going to be all about China From Henry Green, who's with Crane Shares, which is a pretty big fund issuer which knows a little bit about China, given some of their products. So I'm looking forward to learning from Henry here. This will be an edited podcast under Lead Lag Live on all of your favorite platforms Apple, youtube and Spotify. If you're watching this on X, do me a favor like and repost this. I want to get as many people watching this, as many eyeballs on this, as possible. And final thing I'll say is this is a sponsored conversation.

Speaker 2:

Craneshares is one of my clients big conversation. Craneshares is one of my clients big fan of the kind of work that they do. So let's get right into it. My name is Michael Guy, a publisher of the Lead Lag Report. Joining me here is Henry Green of CraneShares. Henry, first time you and I are doing this and talking, introduce yourself to the audience. Who are you, what's your background, what have you done throughout your career and what are you doing at CraneShares? Yeah, hi, everybody.

Speaker 1:

Michael, thank you so much for having me. I'm really excited to have this discussion as you said, very timely discussion today. So I'm an investment strategist at CraneShares ETFs. I've been doing this for five going on six years. I've spent a little time in the fintech industry and I've been at Crane Shares for a big chunk most of my career now and so it's been a really kind of interesting ride. So just the background of Crane Shares. So we are an ETF issuer.

Speaker 1:

As Mike said, we started off. So our founder, jonathan Crane, actually started. He's an American who started and ran a successful mobile ticketing business in China. So they were actually the first one of the first adopters of QR code mobile ticketing in China and that was able to increase trust and they were able to bring a lot of foreign acts into China. And then John came back to the United States and said you know what? I'm seeing all this great growth going on in China, seeing this transformation of what's happening in China's economy, and notice that US investors don't really have an act. It did not at the time, have a convenient way to access China in a passive investment vehicle. So we saw the rise of China. He saw the rise of China as an asset class, as part of an asset allocation, and he saw the rise of ETFs and he kind of married those two mega trends to create crane shares.

Speaker 1:

Now, over the years, we've expanded beyond China to other emerging markets as well, as we've embraced new kind of alternative investments. And so our goal now, our kind of raison d'etre, is to provide opportunities, to provide exposures that you can have in your portfolio, that you really wouldn't otherwise get elsewhere, and, of course, to make those asset classes, those strategies, as easy as possible to invest in. And so a big part of that is we do a lot of content. We run a blog, a daily blog on China's markets called ChinaLastNightcom, as well as we have research that's available through Cranesharescom and that's also a subscription, and so we really really value. One of my key roles is just educating investors, keeping investors informed not only on our products but also what's going on in the market. So we tend to have a very kind of nuanced, different perspective than what you might get through the mainstream financial media or mainstream media in general, like to kind of provide this alternative perspective to global events, global markets, and then pair that with some pretty what we think are some pretty unique investment strategies.

Speaker 2:

So yeah, that's what we're all about. Raison d'etre is a good term. What exactly is the raison d'etre of imposing tariffs on China?

Speaker 1:

Oof man, that's a good one, let's get right into it, man, let's do it. All right, let's get right into it. Yeah, no waiting around. Yeah, so I mean our initial.

Speaker 1:

So when Trump first won start here when Trump won the presidency, you know we took a look at what happened during the Biden administration and a lot of that, you know, was there was a little bit of progress on in terms of, you know, getting things right with the semiconductor restrictions, with kind of what, what we want. People talk about the small garden high fence developed by the Biden administration, kind of developing a few safeguards around the US-China relationship. And then we looked at so what is Trump going to do? Right, he's talking about tariffs. We think that, you know, we look at Trump and say we look at Trump and said, look, this guy's a dealmaker. He wrote a book called the Art of the Deal. And there's this kind of interesting moment going on where we thought we were saying, well, you know, the most positive view and again this was a bit contrarian, right, because we like to be a little contrarian and we say, well, you know, this could act. Trump could actually be positive for China in that you know he will use tariffs to to get this big deal signed to, to kind of force everybody to come to the table and really iron out once and for all the issues that have developed kind of as the US-China relationship has evolved over time.

Speaker 1:

And so we did some research saying that, well, you know, actually, like you know Trump, and given also what we spoke, the people that we spoke to on the ground in China as well, were pretty optimistic about Trump. And so we put out a piece saying, you know as well were pretty optimistic about Trump. And so we put out a piece saying you know, hey, maybe this is a Trump trade. You know, actually, china stocks will be a Trump trade. And that worked out kind of up until this trade tariff announcement, the Liberation Day earlier this month, right, and when the tariffs that came up were much higher than expected, much broader than expected, and that's obviously caused a lot, a lot of jitters, to put it lightly, in markets, including China markets. And so, again, that's my view.

Speaker 1:

Our view is that the tariffs, the idea behind the tariffs, the goal of the tariffs, the raison d'etre of the tariffs, should be to generate a trade deal, to have a trade deal, to have a deal on maybe not even just trade other things, intellectual property, how companies are protected or not protected when they're American companies doing business in China, how Chinese businesses are treated when they're doing business in America. So lots and lots of kind of potential. You know outcomes here and agreements that could be made, and that should be. We still think. I'm still optimistic that it still is. But that should be the reason for the tariffs. The tariffs should be a temporary measure that is used to bring the parties to the negotiating table.

Speaker 2:

The question for somebody watching on X odd here, which is good Talk, yet say the tariffs are worse for China. I have no idea how that's true. Am I missing something?

Speaker 1:

Yeah, well, thanks Todd. Yeah, that's a great question. So we did some research. You know, as soon as the tariffs came out, we looked at okay, what is the impact here? What is really going to be the impact on China, on China's economy, and especially in the sectors that we look at most closely, which is the internet sector, which we track through our fund, kweb, k-w-e-b, and so out of China's overall exports of manufactured goods to the United States now this is going to sound a little shocking actually represent only 2.3% of China's GDP. So that's in 2024.

Speaker 1:

Okay, how do we get that number? Where does that come from? Well, exports of manufactured goods in China have come down significantly over the past 10 years. So that says China has moved from an export manufacturing oriented economy to a more internal, domestic consumption oriented economy and services oriented economy. So this is a classic path when you go from being a developing country to a middle income to a developed country, where you move from mostly selling goods to the rest of the world mostly either manufacture raw materials to the rest of the world. To you know, having internal services and selling services to the rest of the world, mostly either manufactured or raw materials to the rest of the world to, you know, having internal services and selling services to the rest of the world.

Speaker 1:

So, anyway, china's exports to the United States have come down from it was over 25% around 2006, 2010 to today. It's 14% of China's total exports, and then China's total exports of manufactured goods as a percentage of GDP then are only about 11%. So if you take that about 14% by that 11%, you know that's how we get to that number we have Now. That's that 2.3% I mentioned earlier is probably a little bit on the low side, because now a lot of companies have moved their supply chains to go through, like Vietnam, southeast Asia, other countries. So maybe, factoring that in, maybe it's about 3%.

Speaker 1:

So overall it's a pretty low impact on China's economy and this is something that I think that the markets are not understanding, that a lot of the talking heads, as you mentioned, are not understanding right now. I mean, there are people I see people go on news oh my God, everybody in China is going to be unemployed because of this. That is far from what's going on. China does a lot of trade now with Europe, a lot of trade with Africa, and again, their, their reliance on external demand, on exports, has just come down so much that it really has a small impact. Now, if the whole world, you know, put these tariffs on China, yes, that would be a very significant impact, but it's just the United States, which again, is just 14 percent of total exports and that which then represents two to three percent of GDP. This is a pretty muted impact. It's certainly a lot, there will be an impact, but it's it's a lot less than what people might think.

Speaker 2:

Talk me through sort of how the political leaders there have been internally maybe talking about Trump. Presumably the new tariffs were coming, Maybe not to the magnitude right and the kind of boisterousness that we're seeing with Trump, but what's kind of the internal dialogue like?

Speaker 1:

The internal dialogue is that they're staying strong. They want to present a message domestically that I think they will not kind of back down. I mean, they did the reciprocal tariffs 84%, and these numbers seem to go up all the time and so, honestly, the numbers don't even matter here anymore with this tariffs, but because it's just so high. But the message domestically that they want to send is we're not going to be bullied by the United States. Right, they used this language saying actually a lot of the language saying that you know, we're not going to back down and everything is is.

Speaker 1:

Fight to the end is what they say. We will fight to the end on this tariff trade issue, which is actually the same language that was being is, because the first trade war did result in a pretty significant compromise whereby tariffs were reduced by 50 percent from 14 to 15 to 7.5. This kind of when it's domestically oriented, especially when it's domestically oriented, this kind of you know, very prideful, you know kind of maybe it sounds aggressive, but just saying you know, hey, you know we're, we're, we feel our position is strong and China's position is quite strong in my opinion, and it's stronger than it was in the first trade war, but you're seeing the same kind of rhetoric coming out which, you know, again doesn't say that much, because the first trade war did result in somewhat of a compromise. So but yeah, definitely there's a strong kind of message of strength and ability to withstand coming out of China, I think.

Speaker 2:

I have made the argument prior to this that China's stock market will outperform the US stock market under for the next four years and I made that argument not because of Trump. I made that argument purely because of valuations right, that the US market is extraordinarily expensive. China is incredibly cheap on a relative basis. Talk me through valuations in China and how tariffs might impact that.

Speaker 1:

Um. So for valuations, um, I think we've seen uh so talking about K web companies, right. So, china internet companies, that's Alibaba, pdd, tencent, meituan, Um, so we've seen those. They've had a significant re, re rating uptrend um going starting from the start of this year, uptrend going starting from the start of this year and that's come down a little bit more. So the valuations compared to US tech are still very, very low and we believe that this could be, you know, presenting another good entry point, given where valuations are at. So, in the K web portfolio currently, um, we're looking at uh earnings multiple of about 17% versus a closer to 30, even with the recent downturn closer to 30, maybe it's dip below 30 in what we look at as a basket of us uh internet tech names. Right, so you still have this massive discount, right, and in terms of the trade war's impact on those names, it's very, very limited. I mean, we look at K-Web. So one of the other things we did, right, when the trade on Liberation Day, we looked at okay, what's our exposure here? What, fundamentally speaking, what are the? What is the percentage of KYB's revenues coming from the United States? Um, that could be threatened by trade barriers and it was about. It was less than 2% Um. So fundamentally speaking, shouldn't be that much of an impact, shouldn't be a much of an impact on EPS Um. But on the price there has been an impact. Right, you know we've been selling off. I would argue that we've held up better than broad US markets. But you know we've been selling off with everything else as well, so that has impacted the valuation. But again, the EPS very muted impact.

Speaker 1:

I mean the most affected company in KWeb is PDD. Pdd Holdings used to be known as Pinduoduo because they do. So they actually don't, which is interesting because they do, they do a lot of US revenue which they don't actually break out in their earnings. So we've estimated about 15 percent Now PDD. You might not know PDD, you might not know Pinduoduo, but you very well might know Temu, t-e-m-u, which is an app e-commerce, fast fashion app that's become very popular here in the US and so that's their app. So they're the owner of that and they do a lot of revenue in the US. So their revenue is very likely to be impacted. We estimate their revenue from the United States to be at about 15%, but again, as a percentage of the total portfolio. Take that 15% go into PDDs, about 4% or 5% of the portfolio, so relatively low, but yeah, they're going to be the most affected.

Speaker 2:

So yeah, good question here from John which relates to some recent headlines I also saw this morning. Can you address the administration's comments as it relates to delisting Chinese companies? If I'm not mistaken, henry, wasn't that like a threat also in the first administration?

Speaker 1:

Yes. So, yes, this is. I'm glad that was brought up because there's a lot of kind of noise and commentary going on around this. So, in the beginning, in the first Trump administration, they passed in 2020, the Holding Foreign Companies Accountable Act, HFCAA. Okay Now, basically, what that act says was you need to have the PCAOB, which is the Public Company Accounting Oversight Board in the United States, be able to go on site for foreign listings. We need the PCAOB is saying we need to be able to go to your on-site locations in terms of I'm speaking of the auditors of these companies. We need to be able to go in on-site and review your audit work. This is exactly what the PCAOB does in the United States and all around the world for companies that are publicly listed on our exchanges.

Speaker 1:

The problem was, at the time, China's law did not allow for this to happen. There were laws where, in certain industries, they said you cannot have foreign regulators coming in and reviewing the books of these auditors. So in response and it took time to get this all worked out in response, China actually changed the law to allow for these PCAOB inspectors to come in and review the audit books of the auditors in China, to come in and review the audit books of the auditors in China. And when they did that and they reviewed the work of you know, these are the China branches of firms like EY, all the big four accounting firms and when they reviewed their books they said, okay, we've been given full access and they did find some violations in some places, Right. But the point was OK, now they're given the same access as they would be given if these companies were located in the United States. So that was really positive and that prevented the HFCAA. Because HFCAA basically said if this doesn't happen, companies get delisted. So it prevented that from happening. Companies get delisted, so it prevented that from happening. And now we have a situation, an arrangement, where these inspectors can go in and inspect the audit books and that's all kind of hunky-dory. So fast forward to today.

Speaker 1:

So this has been brought up again in a couple places. One was in one of the White House memos I believe it was the America First Investment Policy memo saying hey, if foreign companies, Chinese companies, don't abide by our accounting laws, they will get delisted, right. And then we had the Atkins at his SEC confirmation hearing for SEC chair. He said the same thing. He said, look, if these companies, the foreign companies especially I think he said Chinese companies specifically don't follow our accounting rules, they will get delisted. Now, a lot of this is being said over here and over, here and over here and that makes a lot of people think, oh no, this is being said over here and over, here and over here and that makes a lot of people think, oh no, they're going to get delisted. Not true? Because, well, I'll put it this way, the ones that the companies that are that don't follow the accounting rules, like he said, will get delisted, but this isn't actually a change in the policy. That's been the policy since the HFCAA, which was back in 2020. So, they're really just reiterating this policy.

Speaker 1:

And then, in the context, of course, of this trade conflict, this is coming up again, as you know, a lever, oh, Trump could use this as a lever to put pressure on China, for example, Right, but that's, that's a potentiality. And again, this is representing no actual change in policy, right? I mean, from our perspective, we're absolutely not concerned that these mega cap names like Alibaba are going to have serious violations found in their accounting work, right, Some Chinese companies maybe. Yeah, I mean, when they went in and were finally able to inspect these auditors, there were some violations found, like that, I mean, this happens all the time, right, but in terms of, and those companies and maybe they'll apply more scrutiny and some small names will get delisted, right, and that's totally fine and, honestly, from our perspective, that should be happening. We should be able to trust the accounting work and audit work that's done on these companies, so that's actually a good thing for these listings.

Speaker 1:

So I think people misinterpret this as Trump administration or others saying you know what blanket anything China should be delisted from US stock exchanges. We believe that probability is is extremely low. We think doing that would be number one antithetical to what Trump is actually trying to do, which is increase the revenues gained from abroad for the United States. I mean US banks, regulators, exchanges, other financial institutions make a lot of money on companies from abroad, from China, coming to list here. And number two, it would just threaten. It would threaten the reputation of the US capital markets, which are number one fora reason because we have strong rule of law, strong liquidity, and it would just threaten that reputation and again, that's, I believe, is also antithetical to to what Trump is trying to accomplish.

Speaker 2:

Uh, you have some fans, by the way. Is this person saying I like this guy, that's a? That's nice, yes, but but in fairness, this guy could be me too. I mean, we don't know what this guy is just to say, but the? Uh? Another good question from Todd. I appreciate Todd you asking these questions. I think this is also kind of, maybe, a lingering gray swan. I don't know if you call it a black swan, but found it interesting the recent comments attributed to China, including Taiwan. Although geopolitical, this could greatly impact economies. How big is the Taiwan issue? Now, those that are kind of more extreme in their thinking would say well, you know what, if this terror thing gets out of hand, then China is going to going to make their appoint a.

Speaker 1:

I think it was they said, appoint a representative to talk with us and show respect I think was the word used and including respect for issues that are important to us, including the status of Taiwan. I mean, look, this has been a longstanding issue that's come up again and again and again and it will again. I don't. I think that, as in the first trade war Let me put it this way China always brings up Taiwan as, in a way, to say OK, you know, they're always talking about what's your posture. They're always examining like, oh, you know, let's keep this issue separate or let's bring this up, you know, as a way to kind of say you know, this is something that an issue that's important to us, like will you respect our opinion on this issue? And then the US always, of course, has maintains this kind of strategic ambiguity with regard to Taiwan, where we have an institute there that's not an embassy, right, and and I don't really see a lot of that changing you know, china feels right now, basically when, when China feels disrespected as they do right now, like they bring up things like this, they bring up Taiwan and say, oh, you know, you don't respect our opinion on this issue, but I don't think, I don't see that the situation changing meaningfully from trade negotiation, and it's actually interesting to think about, well, what is Trump's so from the US side, like, what is Trump's position on Taiwan? And I think there are a couple of things we can look at. I mean, number one is actually the Republican Party platform in 2024, 2025, I forget which year it actually was but did not include a mention of Taiwan. For the first time in 40 years. It didn't mention, you know, the supporting Taiwan autonomy, independence. So that's one thing we can look at. And another thing we can look at is, I mean, you know Trump's been willing to deal with Russia on Ukraine. A lot of people draw a parallel there, which I think is a flawed comparison, but you know he's has kind of his. His posture there may lead some to and to it that you know he would be um, similarly um, not overly um, let's say, hawkish on on the Taiwan issue, um, but though that it makes it very difficult to say I just I don't think that I don't see the US posture towards Taiwan changing much and I don't think doing so would improve our hand in in negotiations with China. Again and you see this again and again and again. I think China brings this up when it feels threatened, when it, when it feels they're using the word disrespect, right, whatever it is. When they feel threatened, they bring up this issue. You know, and this is going to happen again and again.

Speaker 1:

I, from our, I believe that the, the real thinking in China is Taiwan is going to be so, the, the economic benefits they. They think that the economic benefits to reunification will become so great and overwhelming that Taiwan will be peacefully reunified in China. That's that's, that's our view, is that. That's what China's actual view is. Um, and you know it's interesting. So I actually I've spent time in Taiwan when I was a student and I met with this interesting this researcher who's she has a great book called Taiwan's China Dilemma and she talks about the identities, different identities, differing identities in Taiwan and how people have differing opinions on this political issue.

Speaker 1:

It's not that everybody wants to be hawkish on China and is against reunification with China in Taiwan. Um, they actually have um and and and. Moreover, the, the, the political party, the KMT that's in Taiwan that is more dovish on relations with China is, you know, the closest you could say that's pro quote-unquote reunification or liberalization and closer ties, is the KMT, which is the Kuomintang, which is the actual party that fled initially to Taiwan back in 1949. So they're actually more pro. It's a newer party, dpp, which has grown out of this identity of Taiwan as a separate identity from PRC. Right, they're the ones that are pushing, oh, you know, full independence and we want to have, you know, us leaders come over here and we want to assert ourselves, right? So there's a there's a lot of differing opinions, even within.

Speaker 1:

I think it's very underestimated that even within Taiwan, there are differing opinions on this. I think that if you look at the US, if you listen to the US media and read in US media, you would think that people in Taiwan are cowering at home thinking that China is going to invade tomorrow. That's not the case. I was there back in 2016. I've spoken with multiple people, multiple people. I've spoken with multiple people, including people I work with who've been there recently. That's how it's going on. I was in Shanghai. Uh, last year I was flying to Hong Kong. There was a flight literally at the gate next next to mine, with a flight every hour to Taipei. I mean the these two economies are already very integrated. Um, a lot of this is is political fostering, fostering, and I don't see that situation changing.

Speaker 2:

Talk me through, as an issuer, how you think about launching funds. I know you've got K-Web, which obviously is wildly popular, and you've got a suite of new products coming out related to China. Talk me through sort of just how that process is from a business perspective and what some of the newer products are focused on.

Speaker 1:

Sure. So, um, like I said at the beginning, our goal tends to be to what can we do to provide um investors with newer exposures, with exposures they wouldn't otherwise normally get other places? And a lot of those decisions have been inspired by our founder and CEO's experience in China and our own experience investing in China. So one example is KEMQ, which we designed to basically take our thesis in China about internet companies being the transmission engines, the drivers of domestic consumption in China and and just seeing this incredible growth through that and applying that to the rest of emerging markets, the rest of the developing world where you're seeing this digitalization trend. So we included companies like Mercado Libre in Latin America. Other, so we included companies like Mercado Libre in Latin America. Others looked at companies in India, but it was a lot of Latin America, and so that's one example. Right is, we're taking our lived experience as investors in China and applying that to the rest of the world. And then another way we look at it is you know, we look at we also work with sub-advisors, right? So we have, for instance, kmlm as a managed futures product. We've partnered with Mount Lucas on that IVOL, i-v-o-l, which is basically Treasury, inflation, protected Securities, but with an options tinge. So we've partnered with Nancy Davis from Quadratic on that. So that's another vein is kind of partners and we get a lot of partnership offers. People come to us hey, can you launch this or that? And we only launch with partners that we think really have a really good idea. Have a really good idea.

Speaker 1:

And then we recently we have expanded on on K web itself. So I talked about K M Q in the sense that the underlying investment thesis was expanded. The rest of the world Now we've been doing over the past couple of years is we've taken the ETF. K-web has just we realized that the ETF has become just a liquidity machine. It constantly is in one of the top 10 most liquid and again, that's by the notional value of open interest, total Top 10 of all US listed ETFs.

Speaker 1:

So we said, well, we have this incredible opportunity here to create products that are derivative of KWeb. So we started with Clip K-L-I-P, which is covered call strategy on KWeb, using KWeb as the underlying, so that'll deliver option income from selling covered calls on KWeb, thereby benefiting from the heightened volatility we've seen in K web over the past few years. Um, and then we also did uh, two buffer strategies, kbuf, kpro, um, and these provide so these are defined outcomes where you have a floor and a ceiling for performance, so you can kind of the. Our idea here was, you know, we were talking to so many investors who were really interested, uh, in getting involved in K-Web, in getting into China, but they were, but you know they were concerned about the volatility for their clients, that they have older clients, you know what their toes in China Um and then most recently, um, we've gone into, uh, the single stock space and looked at what are the top names, what are the names in KWeb.

Speaker 1:

So, looking basically at KWeb and KEMQ um and saying what are the names that are are the most kind of volatile up and down, have the best growth prospects in our opinion. And we launched single-stock levered. We've launched two so far single-stock levered ETFs on PDD, which I mentioned earlier, and Alibaba, of course, and those are KPDD and KBAB respectively.

Speaker 2:

I'm seeing a lot of good questions still popping in. Todd is rocking it. Todd man, you're the man with this stuff. We haven't really touched on currency movement. This is a good one here. What do you guys see in regards to the yuan going forward? Is it positioned to be more of a reserve currency? Now, that is a controversial statement. I think you have to worry about the yuan becoming the reserve currency, but I'm pretty sure most international trade says otherwise. But riff on that for a bit.

Speaker 1:

Yeah, this, so a more trade is been being denominated in yuan. I mean, that's just a fact. Especially with stemming from the sanctions and Russia being locked out of SWIFT, that increased transactions in Yuan significantly, and you've seen shatter of this kind of a BRICS. You know again BRICS, that's Brazil, Russia, India, China, South Africa having this kind of financial link, but that hasn't really happened yet. So there's been a lot of this has been a hot topic, right, there's been a lot of talk about this.

Speaker 1:

I don't see the Yuan as becoming more that much more of a reserve than it already is today, I think, especially because, with the trade negotiations that are going to come, I think you know that they are coming regardless of you know what people say, or that's 150%. This is going to be a key point. I think, most likely that Trump is going to say you need to still use US dollars, you can't try to make you on reserve currency, and I think that's actually something that would be pretty easy for China to concede on. Um, so no, I don't think it'll become more of a reserve currency that it already is and um, uh, and, but that doesn't mean that that my outlook on on the, the, the currency's value. No, I also. I also don't think that they're going to do this extreme devaluing that they've done in the past just because their situation has changed and they're more of a domestically oriented economy.

Speaker 1:

And the UN I mean, yeah, well, right, this was going to say is it is in, so it depends on your definition of reserve currency, Right? I mean, because it isn't. It is in so it depends on your definition of reserve currency, right? I mean because it is in the UN SDR, the Special Drawing Rights Basket, so, which is used by the IMF. So when countries take loans from the IMF, they get them in these SDRs, which are an amalgamation of different currencies, so it's like the pound, the euro, the dollar and the yuan and the yen, I believe. So they are included in that. So by that, if that makes them a reserve currency, then sure it already is, but again, I don't think it's going to become more of one. I think that China, again, with these trade negotiations, I think it's likely they'll abandon they could even say they're going to abandon the idea of a BRICS financial link. I think that's something that's easy for them to concede on, Right, Compared to other issues. So, short answer is no, but it's complicated.

Speaker 2:

Yeah, that's a fair way to say it. You talked to a lot of individual investors, financial advisors, obviously. What are people getting most wrong about Trump's way of dealing with China? What do people get wrong about it?

Speaker 1:

Yeah, the perception of Trump's way of dealing with China. What do people get wrong about it? Yeah, the perception of Trump's way of dealing with China. I mean, I've been in that camp too. To be honest, I was expecting tariffs to be lower than people expect. You know, I'll be honest, like I was wrong about the extent how far he went with the initial tariffs. Um, so, uh, I mean.

Speaker 1:

But look, at the end of the day, I think Trump's a dealmaker. He's a high risk guy, right, a really high risk guy. I think you've seen that his entire career. Um, uh, there was one, uh, I think, um, uh, I forget where it was some documentary on Trump where, when he was doing his real estate deals and he was just, his companies were so deep in debt that he made a comment that you know, oh, people you know begging for money on the street are actually wealthier than I am because my net worth is so deep in the red Right, and I think multiple times in his deep in the red Right and I think multiple times in his career that's happened, right. So he's just a high risk guy and you're seeing that play out now where he's really, really digging in, digging his heels in on these tariffs.

Speaker 1:

I think, and I would like to think, anything's possible. I still believe that this is still deal-making 101, and it's maximum pressure. And it is maximum pressure. It's maximum pressure with a capital M-A-N-X. I mean it is serious, right. And he's playing with the US economy. He is genuinely gambling with the US economy, which I hope will result in the deal of a lifetime. Honestly, I want to be able to call Trump a genius for what he's doing new paradigm between the US and China, with increased trust, with better protections for US businesses in China, with better access for the US to Chinese capital also, which isn't really discussed and I again, I want to be able to call him a genius for doing this. I want to be able to call him the dealmaker of a lifetime. He still may be that we just have to see. I mean it's difficult to say at this point, but you know, I mean I'm a perennial optimist, but I think what people might.

Speaker 1:

I guess the misunderstanding I think the misunderstanding is more with regard to what the Chinese think of Trump. I think that the Chinese actually have a lot of respect for him because of the way he deals with things, more so than other leaders we've had, I mean and I've actually heard people say that who know influential people in China, so I think that's one that's a misunderstanding. I mean, he invited we forget he invited Xi Jinping to his inauguration, right, and so I think that that's a misunderstanding. I think also, and again, the invitation she's invitation to the inauguration and then the subsequent massive, massive tariff, is also an indication of how quickly he can go from one position to another. It's really fantastical and it seems insane. It seems like he has no plan. I hope that he does. I think there is a plan, but you know that I think that certain things, I think that everything is negotiable, I think, with Trump viral of Xi Jinping reading the Art of the Deal.

Speaker 2:

Yeah, yeah, yeah, I have to see what that says. And then somebody flipped it with Donald Trump reading a version of that from Xi Jinping. So I do wonder, sort of, how the chess game plays out on this. Let's talk about managing risk for those that are wanting to invest in China. Um, um, what do you typically see in terms of how people think about either trading around positions, taking longer term allocations, managing those positions? Talk to me about that side of this.

Speaker 1:

Yeah, I think we had a very good example of that recently with the re-rating which is what we call it from the beginning of this year, where we saw a lot of moves in and out. A lot of hedge funds came into KWeb in size and then, you know, we saw it move up and some moved out right, taking their gains, you know. So we've seen a lot of that recently and you know that's the advantage of, and we, we I mean obviously we'd prefer to see more longer term allocations, um, but that's what these products are. You know, there are products ETFs in general right Are built to be liquid, um, and you can trade them all you want. And, um, I think, when it comes to um, when you're looking at investing in China, one of the things, one of the if you are looking at a long-term allocation right, um, which, again, you can do both with with, with our products, with other products, um, uh, is you really want to diversify between offshore, what we call offshore, and onshore? So onshore is stocks actually listed in Shanghai, shenzhen, and then offshore is stocks listed in the United States, here in New York, as well as in Hong Kong. So Hong Kong is actually considered offshore and it moves more closely with New York, new York with us markets, um, and so we recommend you know about a 50, 50 split between the two, which which um reflects the actual market capitalization.

Speaker 1:

So one of the things you don't get um with a lot of these popular China indexes, such as MSCI China, is they they very heavily overweight the offshore. So MSCI in particular very heavily overweights offshore, and they have their reasons. There are certain complications when it comes to trading onshore stocks. Also, the calendars don't line up. There are different holidays in mainland China, different holidays in Hong Kong and different holidays in the United States. So that can be challenging from a benchmarking perspective. So we have KBA, which is MSCI, so which is ironically, it is an MSCI index right A50, which are the 50 largest, most liquid stocks that also have futures available. So that's another thing. You don't get a lot of times mainland, and so we always you know I'm always telling clients right, you really want to think about these risks. You know you might think, oh, mainland China is more risky, right, but because there's a lower correlation between offshore and on, you're really reducing your risk. When you have both Right and you're capturing, you're really reflecting the full market cap opportunity. So we recommend using KBA to write that to kind of right size that the bias you tend to get with um, with a lot of China indexes um towards offshore Um. So that's one um, I think um we've also, you know, like I said, we, we, we do cover calls on K web Um, we do um, uh, we have buffer strategies.

Speaker 1:

So those are. Those are two examples of where, quite literally, you're investing in China but you're reducing your risk exposure and so we found those to be covered calls and mistakes to be quite popular with clients. And then also fixed income I think is very underrated in in in China and in in in Asia Um. So we have another fight, khyb um, which is Asia high yield Um, so inclusive of China it's. It's basically emerging Asia um in high yield bond space Um, and that's very interesting. It provides what we believe is a very attractive yield and at the same time, a lot of these bonds have a lower duration.

Speaker 1:

So you know, I don't know how deep we want to get into fixed income, but when you're looking at your exposure there, that's another place where you can diversify, where I think a lot of people don't think of diversifying with fixed income, diversifying with fixed income. And I mean, if you look at the China's 10-year treasury right now yields about 1.8 and change percent and it yields very low and that's gone down from three and a half, you know, two, three years ago. So you've seen, like the opposite of what's the US treasury, you've seen the China treasury doing the opposite, right, and so to have some exposure there also helps diversify not only your China exposure but also just your portfolio generally, right? So yeah, I think those are a couple examples. Well, I'll do one more question, and I know it's a legal analogy on the shore, right. So yeah, I think those are a couple examples.

Speaker 2:

Well, I'll do one more question and I know it's only a analogy on the issuer right In terms of answering questions like this, but maybe some just initial thoughts on this, also from John, who asked some good questions earlier. If a trade deal is accomplished, what are crane shares as projections for the performance of K-Web for the rest of 2025? Now I will say this to somebody who's in the industry no issuer is going to ever tell you that. Right, you know it's and obviously when you're multiple funds, you're product agnostic, you're just providing the vehicle and you know performance. But if you were to guess, not on the performance but on sort of the you know longer term potential of K-Web, because K-Web, because K-Web has been a big fund right for a number of years and it's sort of a go-to when it comes to playing China side of things, what happens to do? You think it's just going to be, you know, a relief rally, like in China's markets in general.

Speaker 1:

I think that China's markets more generally sold off somewhat in the initial tariffs. K-web certainly did so. If you think of a trade deal and the cancellation or reduction of these tariffs to be the opposite to having the opposite effect, then, yeah, that would be significant rewriting. Now it's really important, though, to remember that from the fundamental side, this doesn't really affect like tariffs don't really impact K-Web very much. From a fundamental side, right? The EPS growth, apart from PDD, maybe one or two other names really is unaffected by tariffs. So this is a purely sentiment driven phenomenon. Like for KO's price performance to be this impacted and it was by the tariff announcement purely driven by sentiment, right. So, yeah, I mean, if you think that'll continue to be true, it's a sentiment driven price, then by all means, yeah, I mean, if you think that'll continue to be true, it's a sentiment driven price, then by all means, yeah, like the announcement or a significant reprieve in tariffs will be beneficial to the KCO's price in terms of sentiment and longer term.

Speaker 1:

We still see these companies as having great growth prospects. There's a lot going on, a lot of innovation going on in China around AI, no-transcript, and Alibaba's come out with Q1, which is said to be even more efficient. Even the Kuaishou Baidu, they're all upgrading their models based on this. So, anyway, that's a catalyst in the internet again, the K-Web internet space, specifically, and just generally. Consumption rising, consumption rebounding too, which we're still waiting on to happen fully. You know, I know we've seen this significant re-rating in China's in these consumer names, but like, consumer confidence is still prettyrating in China's in these consumer names, but like, consumer confidence is still pretty low in China. I mean that that's driven by real estate, which has just now come back in tier one cities to 2020 levels. So we still have a ways to go with that Right, and that's going to, that's going to benefit, you know, these companies which are the transmission engines of spending on everything now right.

Speaker 1:

And then third and this is kind of a little bit going back to AI is cloud computing. So you might think that, oh, internet penetration has got already. You know, I'm like that internet penetration story because that's when you know, back when I started doing this, uh, internet penetration was the biggest thing. It was like, oh, my God, it's going to increase so much. You know, that's why you want to invest in these companies. Internet penetration has, penetration has increased. You might think that story has run its course, but what hasn't increased is the is cloud penetration. So businesses using cloud services and putting their data, their everything on the cloud is cloud. Penetration in China is actually very low. It's only like 50% of small medium-sized businesses, which is crazy compared to here. So that's another kind of penetration story that we're going to see play out in the coming years. So those are, yeah, just in terms of fundamental catalysts. So those are all still very much there for KWIP.

Speaker 2:

Henry, for those who want to track more of CraneShares as contents, you had mentioned earlier, but I think it's worth reemphasizing anyone who, just in general, learned more about the funds, where would you point them to?

Speaker 1:

Yeah, so I would point you to number one is Cranesharecom we. There you can see our latest content and I would invite you to subscribe to our research. So there's a little drop down there. You can sign up and you can even pick which topics are interested to you and we'll tailor that content specifically to your preferences. Specifically to your preferences. And then if you're really interested in China and you want to be informed of what's going on there as well as get our take and differing perspective, get a fresh perspective on China news, subscribe to our blog that's ChinaLastNightcom.

Speaker 2:

Appreciate those that watch again. This will be an edited podcast under Lead Lag Live. This is a sponsored conversation by Korean Shares and hopefully I'll see you all in the next episode of Lead Lag Live. Thank you, henry, appreciate it. Thanks, michael, my pleasure bye.

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Michael A. Gayed, CFA

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