Brendan Ahern on China’s Post Pandemic Economy

Jason Hartman is joined by Brendan Ahern of ChinaLastNight.com and the Chief Investment Officer at KraneShares to talk about China’s relation with the US and the rest of the world. They also discuss China’s economy and how Covid-19 has changed the trade negotiations. Brendan also tackles China’s change from being such a largely export-dependent country.

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Jason Hartman 0:29
It’s my pleasure to welcome Brendan Ahern. He is the Chief Investment Officer of KraneShares, and they specialize in China. So there’s a lot to talk about with what’s going on with China nowadays. We had a brewing trade negotiation, as I call it, everybody wants to call it a trade war. I think it’s a negotiation. And then, of course, we had sadly had Coronavirus. So lots to talk about there, Brendan, welcome. How are you?

Brendan Ahern 0:56
I’m doing fine. Thank you, Jason. Thanks for having me on.

Jason Hartman 0:58
It’s good to have you. So first, I’d like to talk about where is China now? Obviously, a lot of their factories were shut down. They’re getting back into business. They have had some news of second waves of infections. What’s the vibe on the China side right now.

Brendan Ahern 1:15
So in mainland China, they are back to work 100% I think countries in Asia and in Asia have had to deal with similar pandemics in the past if it’s SARS, or MERS, or h1 n one. And because of the strength of the quarantine in China, that they feel they’ve stamped it out. And so people are back at work, people are traveling domestically again. And we’re seeing you know, from an economic perspective of a serious rebound happening, and I think it’s not just China. You know, if you look at Vietnam, South Korea, Japan, Taiwan, you can see the strength of the quarantine, you know, Vietnam 100 million people under 400 cases of Coronavirus.

Jason Hartman 2:01
Yeah, well, those are pretty strong numbers in South Korea did a pretty good job. It seems like with everything, you know, the way they handled, it seemed like they were pretty successful. So you’re saying China’s back 100%, the supply chain has still got definitely some lag in it. We’re all seeing that. I mean, I’m just seeing as a consumer, buy something online, a lot of stuffs not available a lot of stuffs more expensive because of the lack of availability. And it’s been pretty surprising. But what about the trust aspect? There’s been some talk, I don’t want to say it’s a lot, but it’s certainly out there that China can’t be trusted on the world stage anymore. And other nations feel like they they misled the world in terms of the numbers, the severity, etc. Now, we’re going back a few months here from when those thoughts were developed, I guess, what are your thoughts about that? Is that fair or unfair to China?

Brendan Ahern 2:58
I mean, I think it’s easy that Monday morning quarterback things and say should have would have could have I think that’s true, you know, here in the United States, where I always kind of give people you know, give our government a pass that, you know, we haven’t had a pandemic here in 100 years. But when you hear that the head of the CDC spoke to the head of the CDC, China on January 2, that you know, people in very high levels of government knew by mid January that this was a very serious situation. And they let me get on an airplane and fly into China at that time period, you know, knowing that something was happening. And you know, from being in China at that time period, I attended a very large financial conference, you know, almost 2500 people, I can tell you Coronavirus was not discussed the people. So this was like call it like around January 10. Not quite this year, these were financial professionals. These are you know, the rich people of China, and they would never have gone to conference with so many people if they knew something was there. So I think there’s a lot of Monday morning quarterbacking that can be done from the China side from the US side from any any country. If you look at what’s happening in Brazil right now. And to some degree, I think it just shows you why we need high levels of communication and dialogue to try to try to do a better job the next time to prevent this from having incredibly negative effects on the US population as well as the US economy.

Jason Hartman 4:42
Okay, so, bottom line, then your take is maybe people are being overly critical of China. Would that be a fair way to sum it up?

Brendan Ahern 4:51
I mean, I thought you know, coming free in the New York area, you know, you had a 911 commission put together after the fact to go through and say this is what you know how we prevent this from happening. And clearly, that 911 commission was did a very good job because we’ve not had a serious incident here in the US and this time around. So we’re just going to point the finger over there, there’s not going to be any sort of leadership accountability, there’s not going to be any reflecting and looking in the mirror. If anything, we seem to want to separate ourselves from the World Health Organization, which was built to try to prevent this sort of situation from occurring. But then bipartisan, it looks like we’re just going to point the finger over there and not do any self reflection. I think that’s a very misguided strategy.

Jason Hartman 5:41
So talk to us about the trade negotiations. It’s not the trade, I don’t like it. I don’t think it’s a trade work. It’s a negotiation, you know, so before COVID, and after, has it changed? And if so, how?

Brendan Ahern 5:56
Well, I think the originally the trade war, the art of the deal, was driven by the White House. And now it’s become somewhat more bipartisan to try to punish China, because of COVID. Certainly the luck and coffee fraud, which was a terrible, disgraceful, that has only exacerbated these animals in this kind of frenzy on who can outdo themselves. And I think in some ways, the Constitution was written to provide checks and balances to try to keep the kind of madness of crowds from overextending themselves. And to some degree, I think, you know, we’re not seeing that happening. You’re ultimately China’s the third largest recipient of US exports, US multinationals doing exceedingly well in China. But none of that has a voice in this current frenzy environment.

Jason Hartman 6:50
Okay, so where do we go from here, though? Are we going to have better relations with China going forward? Or are they going to be a Cold War of sorts,

Brendan Ahern 7:01
I believe that ultimately, the economic relationship is much stronger. And I kind of agree with your point, Jason, that this is a this is a negotiation. And I think there is recognition that going into the election that you want the economy, to have a very strong robust q3 rebound, and that would be much, much harder to do if you really turn the screws on the trade war, neoconservative, especially in light of the fragile nature of the global and US economy today.

Jason Hartman 7:34
Okay, so that means that Trump is going to play the game with a softer hand,

Brendan Ahern 7:41
He will be a lot of bark, but I don’t think there’ll be as much a bite and that I think, you know, again, you have, it’s our third largest recipient of US exports. And so hurt that or diminish that, you know, would be very, I think, very problematic for the for the US economy. So

Jason Hartman 7:59
Right, but when you flipped out the other way around, we’re the largest importer, so we’re their biggest customer, right?

Brendan Ahern 8:04
For sure. For sure. You know, and then that’s where we do this is takes two to tango. I mean, I don’t I don’t. I mean, I think there’s a lot of things that China can do, to show some empathy and sympathy for what’s happening here to be a little more conciliatory. It takes two to tango, and unfortunately, we’re seeing a little bit of the primal human flight or fight or flight instinct. So you know, I think this is where it’s 2020 like, you know, you pick up the phone, you get on an airplane, you work it out, you know, it’s not, there’s not Sparta versus Athens, or Carthage versus Rome. I mean, you know, the means of dialogue and communication have never been more, but it takes it takes both sides. So so I don’t I’m not being critical of just one side or the other.

Jason Hartman 8:54
Yeah. Well, what do you think about you seem very diplomatic? Maybe too much so. It’s hard for me to get an answer out of you. I want you to take a side. Come on, man. Give us some give us some sensationalism here.

Brendan Ahern 9:10
I guess from it, and you know, as an investor, I mean, that’s, that’s kind of what I’m compensated to do. And you I call it almost, you know, there’s ESG investing and now I kind of call it P ESG. where, you know, even investing become political side. But as an investor, I mean, I mean, I, we see great growth opportunities in China. I mean, in terms of these Chinese internet and e commerce names, we’re invested in Chinese healthcare has performed exceedingly well. And we’ve had, you know, knock on wood and we’ve had some very strong returns in our portfolios. And I think that’s that’s where, you know, we’d love to talk about is you see these incredible opportunities, these great dynamic companies and you hate to see that you know, people are not investing in them because

Jason Hartman 10:02
Those are Chinese companies. When you say that that’s what you mean, right?

Brendan Ahern 10:04
Yep, yes, the Alibaba and Tencent. And

Jason Hartman 10:08
So there’s been there’s been an American capital flight from those companies or Americans just aren’t willing to invest in them as much as that is that what you’re saying?

Brendan Ahern 10:18
Well, over the last two years, the fundamentals of the companies have improved very dramatically, and yet the stock prices haven’t moved. So one of the things that’s happening, Jason is that the companies are actually relisting in Hong Kong. So in November, Alibaba relisted shares in Hong Kong, and they basically said, you know, US investors, they they treat our stock as like it’s some sort of China US trade war proxy, you know, they have nothing to do with the trade war. I mean, the company’s You know, this, the revenues and for Alibaba have doubled in the last two years, why hasn’t the stock so they went back to Asia where they don’t have to explain themselves. And we’re seeing netease, JD Badu, the sea trip, these companies are all going back and are going to relist in Hong Kong. Those share classes are fungible, we can convert us shares into Hong Kong shares. So we will benefit from that.

Jason Hartman 11:19
Well, let’s make sure we talk about Hong Kong. But you know, to really answer that question that you raised about the stock prices? I mean, you would have to ask the question, compared to what? And is the capital feel? Does that capital feel that there’s better deals on US companies or companies elsewhere? You know, and I don’t know, that’s such a complicated equation. That’s way above my paygrade. So I don’t know the answer. But I do know the question, because money always goes where it’s treated best. We hope we know that for sure. But I want to make sure we get to Hong Kong and the recent changes there. And what that means, because I think that’s hugely significant, especially with Pompeo, his recent comments about Hong Kong. But first, let’s go back to Peter Schiff. I don’t know if you know who that is, but maybe you do. He’s, uh, owns a brokerage company. And he’s quite outspoken. He’s been on the show before. And, you know, he’s quick with a sound bite, but often wrong. And years ago, maybe back in 2005, or so is when I first became aware of this theory that he kept promoting, saying that China is going to create their own middle class, they’re going to decouple from the US, they won’t need us anymore as a customer to buy their exports. And if they don’t need us anymore, as a customer, they’re going to stop buying our treasury bills, and our dollar is going to collapse. Obviously, he was glorious, wrong in like, every way. I mean, you couldn’t, you couldn’t have been more wrong than any of those statements. Right. But is that ever going to happen? You know, maybe he’s just 15 years late? I don’t know. Right? What do you think?

Brendan Ahern 12:59
Well, I do believe, you know, after the global financial crisis, trying to realize that being export dependent, made them made them very susceptible to downturns. So China’s exports, as a percentage of GDP falls, fallen from 35% to 18%. Now, that’s kind of manufacturing, as a percentage of GDP. China resembles the United States, you know, where over half of GDP is from the service sector today. So it has become become a much more consumption dependent, despite all the headlines around exports. Now, obviously, exports are very important still, but it has diminished and I think they do want to move will make themselves less reliant not not just on the United States is just in general.

Jason Hartman 13:47
Yeah. I mean, I don’t doubt that. I mean, any country would want that naturally. But can they is another quite another question. I mean, I, you know, I guess every country would want that, right. That’s not surprising. We want to be less reliant. Everybody wants to be written less reliant on a trading partner. But can they do it? I mean, they’ve got a long way to go. wages have been going up. But it’s not even close to, to the US in terms of the consumer class, you know?

Brendan Ahern 14:16
No, no, definitely not. I mean, I mean, they’ve made over the last 40 years incredible strides in terms of raising hundreds of millions of people out of poverty and urbanizing in a very dramatic fashion. But certainly to there’s an element of China is very rich, but there’s broadly speaking, you know, they’ve got a ways to go. So yeah, I think that’s part of the tactics from the US side is that that decoupling from the China side isn’t feasible. But I think the same does work in reverse also.

Jason Hartman 14:51
Well, as you see now the US not wanting to be so dependent for mask ventilators, other pp. We’ve really Seeing that it’s pretty dangerous to have your supply chain dependent on another country. And I think the US has woken up to that, and probably many other countries have, too. So do you see a lot of onshoring? I mean, this is all really seems like it’s just playing into the Trump narrative. When he was candidate Trump, this was the stuff he, he was promising. And it seems to all be coming true. And it seems like he’s been right. Like that he was right about how we need to bring these jobs back into the US, we need to bring some of this manufacturing back to the US. And he’s he’s really championed a lot of this blue collar work and this vocational type work, you know, love him or hate him? I’m not it’s not a political statement. I’m just saying that was his narrative. And it all seems to be coming true. And, you know, it all seems to have been a valid narrative too, at the same time, right?

Brendan Ahern 15:52
I think you’re broadly speaking, the factories are over there, not just because of cheap labor, but there’s 4 billion people live in Asia versus under 400 million here. So so the factories are there, because you can make it inexpensively and then sell to a huge market, you know, take India and China combined, right, but throwing the rest of Asia, 4 billion people so so the factories are there for a reason. And part of that is, you know, again, to make things inexpensively, but second is to sell it to the local market. So I think in terms of the healthcare, I mean, that isn’t a sector that we do, like not just China healthcare, but em healthcare, now self serving and highly biased, and we have investments in both of those in Sector funds on both those segments, and they’ve performed exceedingly well, for obvious reasons. I think ultimately, there’s 13 million Americans work in manufacturing, versus 100 million Chinese in manufacturing. So you know, this idea of you’re gonna bring the jobs back, every American would have to go work in a factory,

Jason Hartman 17:02
Well, you don’t need to bring that many jobs back. You just need to, it’s proportionate to the size of the American population. So if you have 150 million adults in the labor force in America, roughly 327 million people, then it’s just a percentage equation, right? I mean, there’s obviously a lot of people out of work, especially now, a few million manufacturing jobs wouldn’t hurt anybody.

Brendan Ahern 17:27
It’s almost like why why does US farming need migrant labor?

Jason Hartman 17:32
For I mean, only today, it’s only been because Americans got rich and, and didn’t want to pick strawberries, or at least not at the wages being offered. And currently, the immigrants came in and undercut the market and paid capitalism works great. You know, everybody just goes for the best deal. And so why wouldn’t they hire the low cost immigrants? Right? They just don’t pay American wages for those types of jobs, because the employers have been spoiled too.

Brendan Ahern 18:01
Yeah, no, that’s, I mean, I agree 100%, that you’re some element of just the costs. labor costs are so inexpensive, and it’s not even, you know, in China, it’s gotten richer. So So the real low labor in Asia is Malaysia and Asia, you really want to go down your clothing, you know, Bangladesh, so so to some degree, I agree that I think, you know, some element is, these manufacturing jobs in a lot of cases are very, very low skill set. And you just you can’t replace that here. Just as picking strawberries, you like you got to bring people up from Latin America, they do it because Americans won’t do it, you know, for certain. So I would have you know, I think some element does come back, I think you’re having we have a Strategic Petroleum Reserve, having a strategic healthcare reserve makes makes a world of sense to me. But to say we’re going to force something back here for something that happens, it’s happened once in 100 years. I mean, I mean, what’s the irony is like after SARS in 2009, or I’m sorry, h one n one in 2009. You know, they actually built a stockpile, and they just let it go. They never replenished it. The government had the stuff and didn’t replenish it, but but the local factories, they can’t exist unless you want to subsidize it. You know, do you want to state owned enterprise, you know, an American state owned enterprise? You know, that’s, that’s, that opens up a whole nother realm of discussion.

Jason Hartman 19:32
Of course, yeah. Okay. Well, what else do you want people to know?

Brendan Ahern 19:35
Hong Kong. We have a beautiful city, and we’ll hopefully be able to visit again soon. But no, I think my take on the nerve view, you know, you kind of hear our view on Hong Kong. To some degree, I think the EU a lot of the local business has been disrupted by the local protests. Really, tourism is stopped not just in Hong Kong and Macau, so You know, I think this bill was an attempt to try to, to obviously tighten the security from the perspective of these protests have had a adverse effect on the local economy. But obviously, if you extrapolate out, you know, where where that law can be applied, it makes, you know, obviously, makes a lot of people very, very nervous, you know, from the China side, you know, they knew what they were doing. So, you know, for us, it’s more of the local Hong Kong economy has really suffered for really the last two years, you know, well, before going into the Coronavirus. Obviously

Jason Hartman 20:43
Everybody’s already forgotten about the civil unrest there, and the protests, and you know, everything that was going on, it had just shut down immediately with Corona, for sure, that was pretty convenient for the government. But now, China has really exerted their authority over Hong Kong, rather than treating this this sort of loose region, like they were in being a little bit laissez faire about it. So things are changing. And I see a mass exodus out of Hong Kong, I see max as mass exodus out of cities in general, because of the virus fears. I mean, certainly New York were your offices, that things are changing and but then you take China and and they’re exerting more control over things. I mean, people are gonna want to leave and money will flee as much as possible. Of course, there are capital controls. But

Brendan Ahern 21:32
Yeah, I mean, certainly we know Singapore and Tokyo are actively lobbying the financial community to relocate. And so it’s hard to say, you know, Hong Kong has, you know, for expats and a beautiful place to live. My view is Hong Kong has an underlying issue, which is income and housing inequality, or housing affordability that you’ve got your seven and a half million people in a very, very small space, you know, apartments tend to be quite small. Because of so many people, there’s no wage growth, there’s no job security. So Hong Kong for the expats, it’s a great place to be, I think it’s a very difficult place for a lot of the locals, you know, we kind of fly in go to nice hotels, and

Jason Hartman 22:19
It’s like going to Dubai. Same idea, you know, yeah. The whole thing. Yeah. And people live in mostly crappy conditions, except for the, the rich, you know, yeah. Okay. Well, what else do you want people to know? And let’s wrap it up, give out your website.

Brendan Ahern 22:35
Yeah. So KraneShares calm is our website where we list our exchange traded funds we provide a daily blog on called China last night.com. So just an overview of what happened last night in China, in terms of economics, stock markets, but certainly, yeah, we know, I mean, stepping back, we just had MSCI semiannual index rebalance. So MSCI is the big Index Provider for a lot of index funds and ETFs. So so they refreshed or index kind of twice a year for emerging markets. Now China’s just about 42% of the weight, but it’s numerically it’s over 700. It’s more than 50% of the stocks in emerging markets. So So ultimately, your China as the trade war approved, China is an important trade partner and we believe we want to provide a balanced perspective on what’s happening there.

Jason Hartman 23:36
Good to know. Well, Brendan, thank you so much for sharing your knowledge about this very important market and the relationships between the countries and the world. And we appreciate having you on.

Brendan Ahern 23:46
No thank you very much, Jason.

Jason Hartman 23:52
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