Lead-Lag Live

China’s Turning Point: Brendan Ahern on AI, Cloud Growth, and the Global Rebalance Into KWEB

• Michael A. Gayed, CFA

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n this episode of Lead-Lag Live, I sit down with Brendan Ahern, Chief Investment Officer at KraneShares, to break down the pivotal shift happening inside China’s equity markets. A Trump–Xi truce, policy stabilization, and a surge in cloud and AI revenues are driving fresh optimism into Chinese tech — and Brendan explains why global investors are quietly reallocating back into KWEB.

From improving CPI and government action on involution to cloud-driven AI monetization, semiconductor risks, and the new wave of international inflows, Brendan lays out the forces reshaping China’s market narrative after years of pessimism.

In this episode:
– Why China’s cloud and AI revenue growth is outpacing expectations
– How anti-involution policy is stabilizing competition and lifting margins
– Why global investors — especially Europe and Asia — are rotating back into China
– Where KWEB sees opportunity across online video, entertainment, and emerging tech
– Why semiconductor valuations demand caution despite the broader tech rebound
– How the Trump–Xi détente may open the door to further policy normalization

Lead-Lag Live brings you inside conversations with the financial thinkers who shape markets. Subscribe for interviews that go deeper than the noise.

#LeadLagLive #KWEB #KraneShares #ChinaTech #AI #EmergingMarkets #Investing #Markets

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SPEAKER_00:

In terms of an AI opportunity set in China, it is the cloud computing players that companies like Badu with its ErnieBot large language model, and in the case of Ali Bob, it's called QAn, they're basically giving it away for free. It's open source. You know, in China, they kind of recognize that anyone can build a large language model. There's no moat. The opportunity is in cloud computing, so they're actually literally giving it away for free.

SPEAKER_01:

Welcome to Lead Lag Live. China's equity market is entering a pivotal phase. A recent meeting between President Trump and President Xi in South Korea led to a one-year suspension of multiple tariffs and export controls, along with China resuming U.S. soybean purchases. A significant step that's boosted sentiment in both markets. At the same time, AI and semiconductor innovation, policy stimulus, and improving corporate earnings are driving a new wave of optimism for Chinese tech and internet stocks. My guest today is Brendan Ahern, Chief Investment Officer at Crane Shares and one of the most respected voices on China's markets and ETF investing. Brendan, it's great to have you here again.

SPEAKER_00:

Yeah, likewise, Melanie. Thank you for the opportunity.

SPEAKER_01:

So let's start with earnings. Internet and technology companies in China have outperformed expectations this quarter with cloud and AI revenues leading the way. What's your outlook for uh Q3 earnings among the major China-based internet mains? And do you think that strength is sustainable into 2026?

SPEAKER_00:

Yeah, I mean, really the strong performance of Chinese equities, particularly growth equities like we're invested in with K Web or China Internet ETF. It's really been multiple expansion. And certainly the earnings front, as we go into Q3, we know that e-commerce players like Alibaba, JD, and Medouan, they're facing the headwind of very, very light domestic consumption in China. Also the headwind of very fierce competition. At the same time, there's some really areas of opportunities in terms of online uh video. Uh companies like Billy Billy, Quashu. Uh, one of the stars thus far that's reported is uh online music provider, Tencent Music Entertainment. Online gaming's been a great uh spot for companies like Ten Cent as well as Netties. Um and again, so so part of part of what we offer in K-Web is a pretty diversified approach across, you know, almost uh 30 names, but uh across a whole different types of different subsectors. And those different subsectors are kind of like, you know, they they they're moving at different speeds at different times. And as much as Alibaba, it's probably you know the biggest, one of the biggest names in the space, one of the names people gravitate to, it's it's really struggled on the domestic e-commerce space. Obviously, their cloud computing, which is really driven by AI, has been one of the standout areas within the companies. But again, you know, that that's part of the diversified approach we have in K Web. And again, domestic consumption is a little bit tougher, but some of the other areas we do see some opportunities.

SPEAKER_01:

Okay, so what about involution? I mean, you've talked about that before, Renan, hyper competitive cycle we saw in e-commerce. Do you think that phase has finally peaked? And how has the government policy played into stabilizing the sector?

SPEAKER_00:

Yeah, certainly we saw this uh anti-involution, this campaign to look at excess competition, overcapacity, as well as excess competition back in July. I think where where we've seen the initial efforts really coming to fruition is in some of the solar companies that that that two of the global leaders in solar panel manufacturing, Tonghwei and Longye Green Energy, they have a lot of top uh top line revenue, but they actually don't make money because there's so much competition. Because we've seen the government curtail production, uh, these companies, as they reported their Q3 financial results, they dramatically reduced their losses. And again, this is just the first little taste of this anti-involution in solar. The other place we're seeing this pan out, Melanie, is uh the October CPI in China was actually turned positive. And uh we China's been stuck in a little bit of a deflationary spiral uh because of things like excess competition, light domestic consumption, but CPI actually turned positive. And yes, it's one month, but again, we're just seeing green shoots, and certainly e-commerce is an area we're seeing a lot of competition. We've seen the government only start to pivot to address this. And why? Well, certainly uh the 15th five-year plan talks a lot about domestic consumption of becoming self-reliant, uh, certainly in science, technology, but also in uh domestic consumption making, making themselves a little less dependent upon export-driven manufacturing. So again, green shoots, early days, uh, but something that we think is underappreciated in the market.

SPEAKER_01:

Yeah. So, Brandy, that leads me to my next uh question. For investors who are looking at allocations right now, what segments specifically of the China market do you find most attractive for the remainder of this year? And are there any areas that you would avoid?

SPEAKER_00:

Yeah, I think I think one, we're seeing um investors globally coming back into China and and and particularly amongst non-US investors, that a lot of European investors, uh, particularly in Switzerland, because of the Euro and Swiss francs appreciation versus the dollar, they're not making a lot of money in US equities. And so we see this rebalancing effect taking place in Europe. In Asia, uh, a lot of those investors, particularly institutionally, uh their economy is so geared to China. As we see in the export numbers, you know, China's largest trading partner is ASEAN. So, um, and then obviously the commodity world, like, you know, a company like Ballet in Brazil or BHP in Australia, uh, these very large companies are very followed by institutional investors locally. And they see those companies are doing really well in China. So we're seeing this global rebalance taking place. And where is that money gonna go within China? Uh, it's gonna go to growth stocks. I mean, I mean, investors look to EM for growth, and China has a whole host of cheap China tech companies that are on sale that we own in K Web. Now, now, within China Tech, an area that that we recommend a little caution is on, a lot of the semiconductor stocks in China, very, very high valuations. And I think we're seeing some recent weakness just because investors are worried, you know, can these domestic chip providers, can they really live up to exceedingly high expectations? And we've had a few misses from Q3 earnings space. So, so within the broader China tech space, you really got to be a little careful because of uh some of the exceedingly high semiconductor valuations in China today.

SPEAKER_01:

Yeah. So I speaking specifically then about Alibaba and Beidu both saw cloud revenue growth far outpacing the overpaw overall performance. Do you think this signals a structural shift then in where China's tech sector growth is going to come from over the next few years, given what you've said about the semiconductor things?

SPEAKER_00:

Yeah, it's it's it's interesting. You know, you're in terms of an AI opportunity set in China, it it is the cloud computing players that that companies like Badu with its ErnieBot, it's large language model, and in the case of Alibab, it's called QAn. Um, they're basically giving it away for free. It's open source. It's it's very different than what you're seeing from, say, USAI players, um, whether you know, you know, if it's open AI, anthropic perplexity, et cetera. You know, in China, they kind of recognize that, well, anyone can build a large language model. There's no mode. The opportunity is in cloud computing. So they're actually literally giving it away for free. Um, and we saw from uh in August, the previous quarter, you know, in the case of of Alibaba, you know, it was only 13.5% of their revenue, but it grew 26%. I'm talking about the cloud. In the case of Badu, it was 20% of revenue, grew at 27%. In the case of Tencent, it was uh coincidentally 10% of revenue, but it grew 15%. So we do really see this cloud computing as the way to monetize AI. And uh Stanford University has an AI index where they actually track global AI players. And certainly, you know, we we don't look at it as a race between the US and China. U.S. is ahead, but in some of the categories, Chinese companies are actually ahead of their U.S. equivalents. The big difference is these are not unicorns. These are companies that you can invest in today, and they're actually at uh reasonable valuations uh relative to what we're seeing in some of the USAI plays.

SPEAKER_01:

Yeah, so I think we've talked a little bit about some of the larger holdings within K Web. What are some of the smaller uh companies that K Web has allocated into where you see significant growth or that investors uh should be taking a look at within within the ETA?

SPEAKER_00:

Yeah, it's it's it's a great question, Million, because I think, you know, time and again we see investors say, okay, uh I get what you're saying. I'm just gonna go by Alibaba. And as much as we're believers in the company, uh, we do think that the company faces a little bit of a challenge because of the domestic consumption situation in China continues to be pretty tough going uh because of the real estate crisis, precipitous fall, and urban household wealth allocated to housing. Uh so e-commerce is an area we've actually kind of been uh we'd recommend almost an underweight, so to speak. Uh I mentioned Ten Cent Music, which really delivered some outstanding results. Uh, but other players in the space that I'd be watching are Billy Billy and Kuashu. These are online video companies. Uh, Billy Billy really geared to gamers. Um, and then Kuashu, it's almost like a TikTok. It's a short video platform. These are very, very popular across uh in China. They're actually going global as well. Kuashu's actually set up shop in Brazil. Uh, but those are really under the radar. And I think the nice thing is about a K Web is those names are going to be very volatile. I think, particularly for an investment professional, you'd be very nervous holding a stock that has such a exceedingly high standard deviation. But that's the benefit of K-Web. We can hold that for you, hold it in a diversified manner. So, so again, uh really online video, online entertainment is an area we really like. Um, and certainly, again, you know, it's nothing against Ali Bob and uh the e-commerce players, it's it's a real opportunity in the long run. We're just saying in the short term they face some challenges.

SPEAKER_01:

So then, you know, I I wouldn't take a step back to sort of the macro uh economic outlook right now, but given the thought in US-China relations following the Trump Shi meeting, and I know you've been over into the sort of area recently. How might global investors rethink their approach to Chinese equities as a whole? And what should they keep in mind about uh the potential policy reversals with President Trump leading the US and new trade developments?

SPEAKER_00:

Yeah, and I think I think we're seeing this re-rating of Chinese equities really being driven by non-US investors that that again, a lot a lot of those global investors, one, they're potentially rebalancing some of their US positions because of valuation concerns or currency deappreciation. Uh, but I think also just on an absolute basis, they're seeing inexpensive valuation and in the K Web name. So um in the US, it's it's it is a little bit tougher because the geopolitical, the media narrative remains so negative. But we really do believe that President Trump uh has done this truce, this detente uh with President Xi. That will arguably lead to further conversations, potentially a state, a state trip to China from President Trump. And certainly the Republican Party will follow whatever President Trump dictates because he is ultimately the El Jefe, the big boss of the Republican Party. And so I think they'll fall in line or potentially suffer the consequence, which you know, certainly you're either with Trump or against him. And I think the Republican Party will fall in line as he does more deals on the China side. So U.S. investors, because of this continuing negative uh media narrative, have been very slow to allocate. Again, you know, you know, we're outperforming the S P 500 significantly on a year-to-date basis, even more significantly when this rally started back in January of 2024. So we're really constructive on money getting pulled off of the sidelines back into Chinese equities because of this outperformance. It's just in the US, the narrative, the media narrative has been so negative that I think a lot of investors are still on their sidelines, but it's just gonna get increasingly harder to ignore.

SPEAKER_01:

Yeah, and Brendan, just finally, for anyone watching who wants to learn more about craneshares, explore specifically the K Web, find or read more about your research. Where's the best way for them to go?

SPEAKER_00:

Yeah, I mean, certainly craneshares.com or craneshares backslash K Web is uh you know, where you can find out uh we publish a lot of our K Web specific research, our presentations. And then uh I read a daily research blog called Chinalastnight.com, where uh we look at what we think is the important things that happened in China overnight, things that you're not gonna read from traditional US media sources, which are perpetually negative on China. Um and so again, it it's it's a balanced, data-driven perspective on what's happening there on a daily basis, not simply Chinalastnight.com.

SPEAKER_01:

Just like throwing it out there from left side, but what are your thoughts on the uh news that China is developing a drug that will let people live until they're 150?

SPEAKER_00:

Well, I that that, you know, I mean, personally, I I hope so. Uh you know, out of my own self-preservation. Um I think I think it's interesting. One of the one of the uh one of the areas we're seeing really strong performance uh across Chinese equities. Um, A, you obviously have the K Web companies, uh clean technology, you know, again, you know, we we have K-green. Uh part of that's driven by very inexpensive electricity in China because of the high amount of renewables and solar, wind, nuclear, and hydro. So people haven't really thought about clean tech as an AI play. And the other one is healthcare. And a lot of that is because a lot of the biotech companies in China are adopting AI very significantly. You know, you know, in China, there's no liberal arts graduates. People are STEM graduates. And so you've had this policy, this emphasis on STEM education for decades. And you're seeing that that investment pay dividends. And you see it in in AI and in industrial manufacturing. But biotech, I think, is an area where increasingly we see a lot of global uh pharmaceutical companies doing deals with uh Chinese biotech companies because they're doing very innovative drug sales. So, so you know, again, I think, I think, you know, we're seeing some really interesting developments. Actually, there's a big Chinese player. They're uh going to be launching their lung cancer drug globally through um a U.S. pharmaceutical company, a real opportunity again. Um, and and you know, the sooner the better. You know, you know, we can preserve life. I don't think anyone should care if it's China, the US, or Switzerland or Canada, where wherever. We'll take it.

SPEAKER_01:

Absolutely. Well, Brandon, thanks again for joining me, and thanks to everyone for watching. Be sure to like, share, and subscribe for more episodes of Lead Light Live.

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Michael A. Gayed, CFA

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