WEBVTT - A Quant in China’s Casino 0:00:13.560 --> 0:00:17.760 Hello, and welcome to What Goes Up, a weekly markets podcast. 0:00:18.120 --> 0:00:20.319 My name is Mike Reagan, and I'm a senior editor 0:00:20.320 --> 0:00:23.680 at Bloomberg. This week on the show, while the attention 0:00:23.720 --> 0:00:27.800 of global investors has once again returned to China, but 0:00:27.960 --> 0:00:30.120 this time it wasn't because of the trade tensions with 0:00:30.160 --> 0:00:33.680 the US. Rather, it was China's own domestic crackdown on 0:00:33.760 --> 0:00:37.800 the for profit education industry, spooking investors to the tune 0:00:37.840 --> 0:00:40.320 of more than ten percent drop in the MSc I 0:00:40.520 --> 0:00:44.120 China Index in just two days. It was so shocking 0:00:44.159 --> 0:00:46.640 that Golden Sacks strategists actually came out with a note 0:00:46.680 --> 0:00:50.520 saying clients were asking them if China had become uninvestable? 0:00:50.920 --> 0:00:53.080 Well has it. We'll get into it with a chief 0:00:53.120 --> 0:00:57.800 investment officer who's currently in China, But first Charlie Pellett 0:00:57.960 --> 0:01:01.480 talls through this week's mystery co hosted is This week's 0:01:01.520 --> 0:01:04.959 mystery co host is Ye She. He is a markets 0:01:04.959 --> 0:01:08.320 reporter of Bloomberg and was a go chess champion as 0:01:08.319 --> 0:01:12.440 a kid in his hometown of woo Sheet, China. Since 0:01:12.520 --> 0:01:15.319 moving to the U S sixteen years ago, he's become 0:01:15.360 --> 0:01:20.160 a Seinfeld fanatic and still listens to reruns on his 0:01:20.240 --> 0:01:25.360 iPhone every night to help him understand close talkers like Reagan. 0:01:26.640 --> 0:01:30.040 He I to him as Seinfeld fanatic. As you know, 0:01:30.160 --> 0:01:33.560 I hopefully in the if Bloomberger Seinfeld, I'm thinking I'm 0:01:33.600 --> 0:01:37.480 probably the Kramer character. I don't I don't know, hopefully 0:01:37.480 --> 0:01:42.440 not the Newman character. What do you think? Yeah, my 0:01:42.600 --> 0:01:49.320 favorite is Geosh Castenda, Absolutely absolutely, I think he's everyone's favorite. 0:01:49.320 --> 0:01:51.640 And you also have now have been intrigued with go Chess. 0:01:51.640 --> 0:01:52.960 I'm gonna you're gonna have to teach me how to 0:01:52.960 --> 0:01:56.160 play that sometime, right. It's uh, it's like one of 0:01:56.200 --> 0:02:00.560 the Asian most ancient chess game, very popularly in China, 0:02:00.680 --> 0:02:05.120 South Korea and Japan. And I just taught myself at 0:02:05.120 --> 0:02:08.160 the age of the probably five six, and just uh 0:02:08.680 --> 0:02:12.760 really obsessed that he was playing it. But I want 0:02:12.840 --> 0:02:16.080 the the champion in the city when I was in 0:02:16.160 --> 0:02:19.600 middle school. Um, but I stopped playing in high school 0:02:19.880 --> 0:02:23.880 because I'm so busy. It was a study. So I'm 0:02:24.000 --> 0:02:28.160 sympathetic about the crackdown of the cram schools. I'm sure 0:02:28.200 --> 0:02:30.960 we all talk about on the show. That's a That's 0:02:31.000 --> 0:02:33.079 a good segue into our guest here and what's going 0:02:33.120 --> 0:02:36.120 on in China the gram schools UM and let's bring 0:02:36.200 --> 0:02:39.320 in our guest. He's uh really had a quite a 0:02:39.320 --> 0:02:42.359 resume in the financial industry. In the investing industry, it's 0:02:42.400 --> 0:02:45.760 one of the co founders of Research Affiliates, and more 0:02:45.840 --> 0:02:49.040 recently he is the founder and chief investment officer of 0:02:49.320 --> 0:02:53.280 Raylean Global Advisors. His name is Jason Sue. Jason, Welcome 0:02:53.320 --> 0:02:56.440 to the show. Glad to be here at Jason, I 0:02:56.480 --> 0:02:58.639 wanted to get into that idea about the the for 0:02:58.880 --> 0:03:02.240 profit educ asian industry in China. Now, luckily I know 0:03:02.280 --> 0:03:04.440 a little bit about this. I edity every day, so 0:03:04.520 --> 0:03:06.919 I've I'm able to read his insights on China, so 0:03:06.919 --> 0:03:08.600 so I know a little bit. But I think for 0:03:08.680 --> 0:03:12.040 a lot of Americans this seems like a strange thing 0:03:12.120 --> 0:03:16.600 for a market sell off, a crackdown on the education industry. 0:03:16.960 --> 0:03:20.840 But walk us through, um, you know, basically, what problem 0:03:21.080 --> 0:03:24.480 is China trying to solve here with this crackdown on 0:03:24.600 --> 0:03:28.440 for profit education and why such a dramatic impact on 0:03:28.480 --> 0:03:32.440 the market in China. Absolutely so this is a little 0:03:32.480 --> 0:03:36.680 difficult for I think Westerners understand because CRAM School, the 0:03:36.760 --> 0:03:41.600 for profit educational sector is something very foreign to Westerners, 0:03:41.600 --> 0:03:44.560 but it's a part of the Asian culture, not just Chinese, 0:03:44.640 --> 0:03:47.800 but really I think it is just a part of 0:03:47.960 --> 0:03:53.680 you know, the Korean, the Japanese and the Chinese culture. Essentially, 0:03:54.520 --> 0:03:58.880 CRAM schools offer you additional after school tutoring, and it 0:03:59.040 --> 0:04:03.840 often occurs in the form of sort of UH regurgitation 0:04:04.480 --> 0:04:10.200 UH memorization of a vast test bank of questions are 0:04:10.280 --> 0:04:13.960 likely to be on the next national entrance exam. Right 0:04:14.040 --> 0:04:18.280 in in Asia, gain gaining emissions into the top high 0:04:18.279 --> 0:04:23.000 schools and eventually from their top universities requires one scoring 0:04:23.640 --> 0:04:27.680 at the top of the list a national entrance exam. UH. 0:04:27.720 --> 0:04:32.719 So most students spend all of their days essentially preparing 0:04:32.760 --> 0:04:36.880 for that big exam. And the easiest way to to 0:04:37.000 --> 0:04:39.679 get a high score is not by doing well in school, 0:04:39.839 --> 0:04:42.679 not by just you know, by by understanding the actual 0:04:42.760 --> 0:04:45.480 knowledge UH. The easiest way to gain emissions is to 0:04:45.560 --> 0:04:49.800 practice test exams over and over and over and over again. 0:04:50.320 --> 0:04:52.359 And if you pay to go to one of the 0:04:52.440 --> 0:04:58.000 more UH premium UH tutoring programs, you just have access 0:04:58.040 --> 0:05:01.440 to the latest test banks. You have access to experts 0:05:01.520 --> 0:05:05.520 who may have UH greater ability to predict what's going 0:05:05.560 --> 0:05:08.559 to be on the exams. Uh and and thereby gaining 0:05:08.720 --> 0:05:12.240 enormous advantage. And so in Asia, it's a very expensive 0:05:12.279 --> 0:05:15.680 exercise to to go through these cram schools. They're they're costly, 0:05:15.680 --> 0:05:18.279 they're expensive, but it's also in terms of the hours 0:05:18.279 --> 0:05:23.880 that children commit to additional memorization and studying. I think 0:05:23.880 --> 0:05:26.720 this has become such a social problem. If you cite 0:05:26.760 --> 0:05:31.080 the the number one reason for for teens committing suicide, 0:05:31.120 --> 0:05:34.440 it's because of the just the unbearable hours that that 0:05:34.520 --> 0:05:37.279 they have to commit to this. And also for a 0:05:37.279 --> 0:05:39.599 lot of parents, it's it's it's very expensive and it 0:05:39.600 --> 0:05:43.200 feels very unfair because, uh, the premium programs that give 0:05:43.240 --> 0:05:46.000 you the highest chance of scoring high on the Nastal 0:05:46.040 --> 0:05:50.359 exams are quite expensive. So it's it's broadly understood and 0:05:50.440 --> 0:05:53.640 viewed as a social program problem. Uh. You know, Taiwan 0:05:53.720 --> 0:05:55.960 has tried to fix that. I think Japan has tried 0:05:55.960 --> 0:05:58.040 to fix that. Again. You know, as I mentioned, the 0:05:58.040 --> 0:06:00.640 the high suicide rate is really a problem, and I 0:06:00.640 --> 0:06:03.200 guess China has come down with its own way to 0:06:03.200 --> 0:06:07.560 fix the problem by essentially making these CRAM schools nonprofit 0:06:07.600 --> 0:06:11.720 and hopefully uh taking them out of the equation and 0:06:11.800 --> 0:06:14.960 never a pretty big chunk of equity involved in this. 0:06:15.080 --> 0:06:17.080 I guess you know, these companies have grown so large 0:06:17.080 --> 0:06:19.320 because of all those well absolutely, I mean the for 0:06:19.720 --> 0:06:24.240 profit cram schools are incredibly profitable. Their massive I mean, 0:06:24.560 --> 0:06:26.960 there was a point in time in China that the 0:06:27.240 --> 0:06:31.960 for profit educational sector is viewed as the most important 0:06:32.400 --> 0:06:36.160 consumption demand. Right like people are with would stop paying rents, 0:06:36.200 --> 0:06:38.520 they would stop eating just so they could keep paying 0:06:38.560 --> 0:06:41.240 for cram schools for their kids. And so you know, 0:06:41.440 --> 0:06:44.359 it was viewed by investors as one of the you know, 0:06:45.120 --> 0:06:52.680 probably safest industry to investent. The joking Chinese people asking 0:06:52.760 --> 0:06:58.240 why cracked um education companies are the cramp schools will 0:06:58.240 --> 0:07:00.720 bring down the whole market. Um. The joke was, I 0:07:00.839 --> 0:07:03.440 think about this way. If there's ten birds on a tree, 0:07:03.560 --> 0:07:06.159 you shoot down one, how many birds are left on 0:07:06.200 --> 0:07:09.440 the tree. I thought this is a good analogy to 0:07:09.520 --> 0:07:12.720 explain the fear. People are worried about who's the next 0:07:12.840 --> 0:07:17.240 target from for as you mentioned that Jason that for 0:07:17.440 --> 0:07:21.240 a lot of like foreign observers or investors, they don't 0:07:21.320 --> 0:07:25.560 quite understand Chinese policies. It seems quite random ad hoc 0:07:25.720 --> 0:07:29.440 in terms of policies and regulation changes. If we think 0:07:29.480 --> 0:07:32.160 about it, it it started with end Group in November when 0:07:32.280 --> 0:07:36.040 China put down their listing at the last minute. Then 0:07:36.120 --> 0:07:39.600 we start to have um government targeting Ali Baba Tennis 0:07:39.680 --> 0:07:43.400 and all these big internet companies for their acknowledged behavior. 0:07:43.920 --> 0:07:46.320 Then we have the d d UM the government banned 0:07:46.360 --> 0:07:49.440 their apps soon after the I p O in the US. 0:07:49.880 --> 0:07:53.400 Now we now we have the education companies. Is any 0:07:53.640 --> 0:07:58.800 coherent logic of all these government actions? Is any ultimate 0:07:58.920 --> 0:08:03.480 goal China is trying to achieve? Absolutely. I think the 0:08:03.520 --> 0:08:07.680 best analogy uh and hopefully one I think the the 0:08:07.840 --> 0:08:12.040 West will be more sympathetic to is you know the 0:08:12.160 --> 0:08:17.160 Chinese regulators. Uh. They see themselves as you know, part 0:08:17.240 --> 0:08:19.880 of the global E S G trend right. Um. You know, 0:08:19.960 --> 0:08:23.280 part of it is saying that, look, the free market 0:08:23.880 --> 0:08:27.400 doesn't solve all problems, so you can't just leave problems, 0:08:27.480 --> 0:08:31.120 especially social once the free market very much, you know, 0:08:31.200 --> 0:08:35.160 in line with the E S G. Uh, I think philosophy, 0:08:35.280 --> 0:08:41.040 which is you need regulators, you need socially minded individuals investors, 0:08:41.559 --> 0:08:45.000 uh to to sort of come and undo some of 0:08:45.000 --> 0:08:49.920 the excessis you know, some of the negative externalities of 0:08:50.720 --> 0:08:53.480 free market competition. And so I think the Chinese regulators 0:08:53.559 --> 0:08:56.040 very much I've been looking at, you know, what are 0:08:57.320 --> 0:09:01.480 the problems that perhaps we know profit maximization has created 0:09:01.520 --> 0:09:06.079 that they they think needs fixing, that that society can't 0:09:06.120 --> 0:09:09.560 tolerate anymore. So if you take the the educational sector, 0:09:09.640 --> 0:09:11.800 I think, as I mentioned, you know, that's that's been 0:09:11.840 --> 0:09:15.360 a social problem that a lot of Asian regulators, a 0:09:15.360 --> 0:09:17.840 lot of Asian economies have been trying to to fix. 0:09:18.640 --> 0:09:22.560 But if you even look back further right in in 0:09:22.640 --> 0:09:27.040 the recent month, as you mentioned, where it is um 0:09:27.160 --> 0:09:30.800 sort of cracking down on some of the big consumer 0:09:30.920 --> 0:09:35.680 tech where the monopoly power has made both war conditions 0:09:35.800 --> 0:09:38.880 very very bad for labors and also made it uncompetitive 0:09:38.880 --> 0:09:42.440 for smaller business to get in. For example, you know Maton, Uh, 0:09:42.480 --> 0:09:45.280 They're share price also took a beating when when the 0:09:45.280 --> 0:09:48.720 regulator announced that it is not acceptable for them to 0:09:49.679 --> 0:09:53.000 treat all of their employees as contractors and not pay 0:09:53.040 --> 0:09:57.160 a century social security for them. Um. So you know 0:09:57.200 --> 0:10:00.800 that's very much uh, something that that that's been talked 0:10:00.800 --> 0:10:03.679 about in the US, you know, with uber would lift 0:10:04.440 --> 0:10:08.679 where essence you regulars. As you know, the businesses are 0:10:08.679 --> 0:10:11.960 being unfair and not paying their fair share for uh 0:10:12.000 --> 0:10:14.640 you know what, other you know, for profit businesses have 0:10:14.640 --> 0:10:17.679 always paid. We just pay into the Social Security for 0:10:17.679 --> 0:10:21.920 for employees instead of treating them as contractors. So if 0:10:21.920 --> 0:10:26.000 you look at um these issues and understand them and 0:10:26.040 --> 0:10:29.440 clearly just they're gonna be idiosyncratic to each economy and markets, 0:10:29.760 --> 0:10:32.079 you'll start to be able to predict at least the 0:10:32.160 --> 0:10:35.760 Chinese regulators behaviors when it comes to what are the 0:10:35.800 --> 0:10:38.960 important E s G. Issues that they're grappling with and 0:10:38.960 --> 0:10:42.640 they're likely to act on, you know, Uh, Jason, It's 0:10:42.679 --> 0:10:45.280 one of those times I wish this podcast was on video. 0:10:45.520 --> 0:10:47.440 I just want to set the scene for listeners here. 0:10:48.160 --> 0:10:51.240 Jason is appearing to us from what looks like the 0:10:51.240 --> 0:10:55.199 Starship Enterprise from from from Star Check. Absolutely my favorite 0:10:55.280 --> 0:10:57.080 zoom background I've seen in a lot of these. I 0:10:57.160 --> 0:10:59.680 keep expecting to get a call from Scotty, you know, 0:10:59.760 --> 0:11:02.240 saying we we ain't got no power captain or something. 0:11:02.360 --> 0:11:06.480 But Jason wins the best zoon background of in what 0:11:06.520 --> 0:11:08.839 goes up History. I'm gonna say say it here right now, 0:11:09.200 --> 0:11:12.200 but Jason I in that intro, I said, I mentioned 0:11:12.240 --> 0:11:14.360 that note from Goldman that was out this week saying, 0:11:14.400 --> 0:11:17.120 you know, their clients are calling them up saying is 0:11:17.280 --> 0:11:20.439 UH is China uninvestable right now? And I know you're 0:11:20.480 --> 0:11:24.920 managing a active ETF with charity stock. So I'm assuming 0:11:24.920 --> 0:11:27.080 your answer is so, I hope not at least you know. 0:11:27.160 --> 0:11:31.520 But but but given this sort of you know, regulatory 0:11:31.640 --> 0:11:33.320 risk that we're talking about, how do you how would 0:11:33.320 --> 0:11:35.440 you answer that question? You know, you sort of hinted 0:11:35.480 --> 0:11:38.040 at the idea of trying to put your head in 0:11:38.040 --> 0:11:40.800 the mind of Chinese regulators and get ahead of what 0:11:41.080 --> 0:11:43.560 might come next. But what is sort of a good 0:11:43.600 --> 0:11:48.280 industry that in China is a beneficial to society that 0:11:48.320 --> 0:11:50.360 you don't have to worry about the government sort of 0:11:50.960 --> 0:11:54.160 turning off overnight like we saw in the education industry. Well, 0:11:54.200 --> 0:11:58.559 I would say now that the government has sat down 0:11:58.600 --> 0:12:01.640 and had a good talking to with the big financial 0:12:02.600 --> 0:12:05.720 I guess, with the big finn tax and the consumer 0:12:05.800 --> 0:12:10.640 tax uh, and then warned them about wielding monopoly power. UH. 0:12:11.160 --> 0:12:15.040 I think you know, for firms that truly have innovated 0:12:15.120 --> 0:12:18.080 and that have brought products and services that have made 0:12:18.120 --> 0:12:24.600 things better and easier, Uh, certainly benefited the consumers created large, 0:12:25.240 --> 0:12:27.000 you know, large number of jobs. You know. I think 0:12:27.040 --> 0:12:30.080 governments are are generally globally and and then certainly in 0:12:30.160 --> 0:12:34.400 China supportive of businesses and industries like that. So I 0:12:34.400 --> 0:12:37.679 would say, you know, broadly, you know, most of the 0:12:37.720 --> 0:12:41.720 firms that have sold off are probably good buying opportunities today, 0:12:42.080 --> 0:12:44.199 just pay attention to those are likely to be in 0:12:44.240 --> 0:12:47.080 a cross here of the regulators. Right so, uh, you know, 0:12:47.120 --> 0:12:50.800 firms are uh you know, continue to wheel monopoly powers 0:12:50.920 --> 0:12:53.400 and uh and and don't seem to sort of get 0:12:53.440 --> 0:12:57.400 the memo with regard to um, you know, the government's 0:12:57.400 --> 0:13:01.120 sort of displeasure with with monopoly hours and and anti 0:13:01.160 --> 0:13:04.480 competitive behaviors. Uh. And certainly, And I would say industries 0:13:04.559 --> 0:13:07.559 that traditionally in the West that we're more concerned about, 0:13:07.559 --> 0:13:12.080 you know, the liquor the tobacco, those are all likely 0:13:12.160 --> 0:13:14.800 to be issues as industries that are big polluters, that 0:13:14.920 --> 0:13:18.040 are anti green and being given that carbon neutral is 0:13:18.080 --> 0:13:23.480 now big initiative for for China. So those industries I 0:13:23.520 --> 0:13:28.200 think that that traditionally are more of the negative or 0:13:28.240 --> 0:13:31.880 low e s g uh firms and industries I think 0:13:31.880 --> 0:13:34.600 those sort of big risks in China. Uh and uh. 0:13:34.640 --> 0:13:38.280 And again you know this is partly because you know, 0:13:38.360 --> 0:13:41.640 Chinese regulators and the Chinese societies no different to the 0:13:41.679 --> 0:13:45.240 Western societies. As they become wealthier and can afford it, Uh, 0:13:45.320 --> 0:13:47.400 they do demand some of the very same sort of 0:13:47.440 --> 0:13:49.520 E s G issues to be taken care of as 0:13:49.600 --> 0:14:01.160 as that we in the West do. So there's this 0:14:01.320 --> 0:14:05.080 sort of a perception um from the investors, especially after 0:14:05.120 --> 0:14:08.920 the recent events, that it looks like the Chinese has 0:14:09.000 --> 0:14:13.559 become anti capital now they are moving backwards. At least 0:14:13.600 --> 0:14:16.960 there's there's a perception there. I guess that's why Goldman 0:14:17.080 --> 0:14:20.040 had feeded so many calls from their clients, whether Chinese 0:14:20.480 --> 0:14:23.360 investment or not. It looks like there should be a 0:14:23.560 --> 0:14:27.680 China discount because people don't understand the rule anymore. People 0:14:27.680 --> 0:14:32.000 don't understand the boundaries anymore. Um and Uh. I saw 0:14:32.600 --> 0:14:36.200 there article from Steven Roach, his long term China boar. 0:14:36.360 --> 0:14:40.120 He he said he's been optism optimistic about China for 0:14:40.120 --> 0:14:43.440 the last twenty five years. Now he started doubt whether 0:14:43.600 --> 0:14:46.400 this is a this is a moment he should have 0:14:46.520 --> 0:14:49.760 a have a second sought, So, do you think that 0:14:49.880 --> 0:14:54.760 China is doing the right thing. Well, uh, I think 0:14:55.640 --> 0:14:59.800 you know, execution can always be better. I think, you know, 0:15:00.000 --> 0:15:02.520 lot more pre communication, being a lot more clear about 0:15:02.520 --> 0:15:06.800 what the regulators I want to accomplish, being much more 0:15:07.680 --> 0:15:11.480 I would say transparent with regard to the sort of 0:15:11.560 --> 0:15:14.400 E s G agenda especially, I would say, you know, 0:15:14.600 --> 0:15:17.240 carbon neutrality will be a good one. China's been signaling that, 0:15:17.560 --> 0:15:20.800 signaling its path or green. Uh. And and I think 0:15:20.840 --> 0:15:22.440 that's helped out the market a lot in terms of 0:15:22.520 --> 0:15:25.600 understanding where to direct capital, what to expect. If if 0:15:25.680 --> 0:15:28.560 China sort of shares that same kind of transparency with 0:15:28.640 --> 0:15:32.440 regard to perhaps more of the negative E S G issues, 0:15:32.480 --> 0:15:35.040 that would help the market out a bit as well. 0:15:35.120 --> 0:15:37.160 And certainly I think the investors got to do the 0:15:37.160 --> 0:15:39.280 other half right because actually it's it's been in the 0:15:39.360 --> 0:15:42.960 number of policy speeches given by presidents She going all 0:15:43.000 --> 0:15:47.080 the way back to late eighteen with regard to his 0:15:47.240 --> 0:15:51.160 concern about the inequity in the educational feel and and 0:15:51.200 --> 0:15:54.200 really the pain created by the crams schools on on 0:15:54.280 --> 0:15:56.920 the children's and their parents. So I think investors also 0:15:56.960 --> 0:16:00.600 have to to you know, listen a bit more tentatively 0:16:01.200 --> 0:16:03.800 to to sort of some of these policy pre signaling, 0:16:04.480 --> 0:16:07.240 but I would say yes, in terms of execution, it 0:16:07.280 --> 0:16:10.600 can always be be better understanding how markets can lose 0:16:10.640 --> 0:16:16.120 confidence um from from even the slightest I think surprises 0:16:16.120 --> 0:16:19.160 coming from regulators, especially when it comes to China and 0:16:19.600 --> 0:16:23.040 especially in this current environment. So yes, you know, much 0:16:23.080 --> 0:16:25.480 can be improved upon. But I would say that the 0:16:25.480 --> 0:16:28.560 work goes on both sides, by both the regulators in 0:16:28.640 --> 0:16:32.160 China but also investors looking to invest in China, because 0:16:32.200 --> 0:16:34.520 we've got to recognize it is a more foreign market. 0:16:35.320 --> 0:16:38.960 Our access to information is a little bit more challenged 0:16:39.080 --> 0:16:42.119 versus our access to information when dealing with say us 0:16:42.240 --> 0:16:46.160 UH than the ICY, and so investors really do have 0:16:46.200 --> 0:16:48.720 to work a little harder as well. Right, It's not 0:16:49.040 --> 0:16:52.440 a responsible approach for for managers and investors to to 0:16:52.480 --> 0:16:56.480 simply just blame Chinese policymakers in this case. You know, Jason, 0:16:56.520 --> 0:16:59.200 you have such a strong background and sort of the 0:16:59.200 --> 0:17:02.800 the academic quantitative approach to to investing, you know, at 0:17:02.800 --> 0:17:07.159 research affiliates and presumably now at this firm, and at 0:17:07.240 --> 0:17:09.120 risk of repeating a joke I think I've already made 0:17:09.160 --> 0:17:12.080 on a previous episode of the podcast, but you know, 0:17:12.200 --> 0:17:14.399 to me, it's like being a quant in the market 0:17:14.560 --> 0:17:17.040 is is sort of taking the you know, being like 0:17:17.080 --> 0:17:21.240 in the college classroom approach to markets where the retail 0:17:21.440 --> 0:17:24.520 trader has taken over and it's it's now more like 0:17:24.520 --> 0:17:28.159 a market that's a fraternity party rather than a classroom setting, 0:17:28.200 --> 0:17:30.919 you know. And I know in China it has that 0:17:31.000 --> 0:17:34.240 reputation for being a such a retail driven market. I've 0:17:34.280 --> 0:17:38.359 seen stats something like correct me if I'm wrong, something 0:17:38.359 --> 0:17:43.800 like volume is China is retail driven and and very 0:17:43.880 --> 0:17:47.280 much a sort of a gambler's ethos rather than a 0:17:47.600 --> 0:17:51.080 you know, buy and hold investors approach to the market. 0:17:51.720 --> 0:17:53.640 So I want to ask you a two part question 0:17:53.720 --> 0:17:56.800 about that, and feel lucky sometimes I asked twelve part questions, 0:17:56.800 --> 0:17:59.679 So two parts let you off easy. But uh so, 0:17:59.760 --> 0:18:03.879 how is a quant approach China given that type of 0:18:03.880 --> 0:18:10.200 of dominance in the market among the retail set. And secondly, um, 0:18:10.280 --> 0:18:14.040 you know, are there lessons to be learned from analyzing 0:18:14.280 --> 0:18:17.480 that cohort of the Chinese market for what we're now 0:18:17.480 --> 0:18:20.480 seeing in the US where this growing dominance of of 0:18:20.600 --> 0:18:26.080 retail investors and kind of their unpredictability and they're sort 0:18:26.119 --> 0:18:30.159 of you know, investing on whims and message boards. I'm 0:18:30.200 --> 0:18:34.960 guessing momentum probably is a factor that that translates regardless. 0:18:35.000 --> 0:18:37.240 But I'm just curious, you know, as as a quant 0:18:37.280 --> 0:18:39.600 how do you how do you approach a retail driven 0:18:39.640 --> 0:18:43.000 market like China? And you know, are there lessons to 0:18:43.240 --> 0:18:46.000 apply to the US market as the retail trader sort 0:18:46.000 --> 0:18:48.840 of takes over. Absolutely, So, first of all, you're absolutely 0:18:48.960 --> 0:18:53.560 right that China is a retail dominatant market and because 0:18:53.600 --> 0:18:56.800 of that, there is a very much casino feel to 0:18:56.920 --> 0:19:01.080 it and rader than a loan term investment, retirement um 0:19:01.200 --> 0:19:06.080 investment based um feel too to that market. The result 0:19:06.119 --> 0:19:11.239 of which is, in a short run, prices can feel random, right, 0:19:11.359 --> 0:19:16.399 Prices don't seem to rationally respond to either news or 0:19:16.560 --> 0:19:19.920 sort of changes and developments in the fundamentals of companies. 0:19:20.160 --> 0:19:23.359 Now that's of course not a China specific issue. Any 0:19:23.440 --> 0:19:26.040 market that's heavily retail, for example, in the US has 0:19:26.080 --> 0:19:29.200 gone from three percent retail to now closer to thirty 0:19:29.280 --> 0:19:32.960 percent retail with you know robin Hood free trading and 0:19:32.960 --> 0:19:36.320 and you know Wall Street bet dot com, Uh, you 0:19:36.359 --> 0:19:39.639 know type type of activities and uh, and you know 0:19:39.680 --> 0:19:42.399 in China, it's just you know, three times the the 0:19:42.400 --> 0:19:45.119 the the magnitude right because they they're they're closer to 0:19:46.520 --> 0:19:49.879 or thirty. So I think as an investor in the 0:19:50.000 --> 0:19:53.600 short run, what will help you be successful is actually 0:19:54.480 --> 0:19:57.359 focusing more on what drive sentiment, right, so be it 0:19:57.440 --> 0:20:00.200 the news cycle orright, be it what is capt doing 0:20:00.240 --> 0:20:06.000 the attention of media, of major influencers on on blogs 0:20:06.200 --> 0:20:08.840 and and podcasts. Those are probably likely to give you 0:20:08.880 --> 0:20:10.840 more of an edge trading in that market. So in 0:20:10.880 --> 0:20:15.200 some ways, UH think of you know, short term signals, 0:20:15.440 --> 0:20:18.800 betting out short term momentum, short term mean reversion, looking 0:20:18.840 --> 0:20:23.800 at almost you know, technical pattern UH type analysis are 0:20:23.800 --> 0:20:26.080 going to give you an edge more so than looking 0:20:26.240 --> 0:20:30.159 at long term fundamentals understanding industries and firms. Uh. And 0:20:30.200 --> 0:20:33.399 in fact, you know, the most successful investors in China today, 0:20:33.920 --> 0:20:38.080 you know, are not the stock pickers who understand casual discounting, 0:20:38.240 --> 0:20:42.080 not the quantz who understand sort of these long term 0:20:42.160 --> 0:20:46.360 factors I predict earnings growth, but really people who employ 0:20:46.560 --> 0:20:50.000 technical analysis on a on a daily basis, you know, 0:20:50.080 --> 0:20:52.520 the you know, I would say more of the high 0:20:52.520 --> 0:20:57.920 frequency market maker type of investors and strategies uh and yeah, 0:20:58.119 --> 0:21:00.760 So in that type of market, uh, or you simply 0:21:00.880 --> 0:21:03.879 have to bring into play a lot more of the 0:21:04.000 --> 0:21:08.439 non fundamental, more of the sentiment based analysis to um 0:21:08.440 --> 0:21:10.840 to really have short term success. But I think in 0:21:10.880 --> 0:21:13.320 the long run markets always converge and come back to 0:21:13.359 --> 0:21:16.080 fundamental and China is no difference. It just means you 0:21:16.119 --> 0:21:18.080 have to put up with more of the short term noises. 0:21:35.240 --> 0:21:37.480 I just I'm I want to let you talk to 0:21:37.480 --> 0:21:39.880 your book a little bit here and uh to talk 0:21:39.920 --> 0:21:43.639 to me about the Railian quantamount old China e t 0:21:44.000 --> 0:21:52.160 F rayqu was the ticket right? And tell me race race? Okay? Good? 0:21:52.280 --> 0:21:53.880 That was a test. I'm just making sure you got 0:21:53.880 --> 0:21:57.000 your ticketres right there. So say say, I'm a guy 0:21:57.080 --> 0:21:59.719 in the elevator there on the Starship Enterprise with you 0:21:59.800 --> 0:22:03.119 when and you've got two minutes to to tell me? Uh, 0:22:03.200 --> 0:22:05.480 you know, sell me on the CTF. What it's an 0:22:05.520 --> 0:22:08.760 active ETF, So what you know, what's the selling point 0:22:09.400 --> 0:22:12.199 for it? As far as your methodology and how you 0:22:12.240 --> 0:22:15.440 construct the portfolio compared to say the f x I, 0:22:15.680 --> 0:22:19.000 you know, the index tracking passive ETF. That's US investors 0:22:19.080 --> 0:22:23.560 are pretty familiar with. What's what's your sales pitch. Well, 0:22:24.400 --> 0:22:28.120 if you want to access China right, UH, you want 0:22:28.160 --> 0:22:32.840 to access China actively. And that's because a capweight to 0:22:32.960 --> 0:22:37.960 passive index UH doesn't make sense for a very inefficient 0:22:37.960 --> 0:22:40.800 market where in the short run, lots of great companies 0:22:40.840 --> 0:22:44.240 are underprised and lots of back companies are overprized UH, 0:22:44.280 --> 0:22:46.840 and where you know, giving you know, doing some research 0:22:46.920 --> 0:22:49.159 is going to give you an edge in terms of 0:22:49.320 --> 0:22:52.199 knowing what the informed institutions are buying, perhaps knowing what 0:22:52.320 --> 0:22:56.080 the informed UH and and well plugged in people who 0:22:56.119 --> 0:23:00.000 understand policy shoots are buying and doing so the active 0:23:00.000 --> 0:23:03.199 approach is certainly going to help you. Additionally, by the 0:23:03.720 --> 0:23:06.120 you know, low price, good quality firms that will grow 0:23:06.520 --> 0:23:08.560 and avoid I think a lot of the hype, a 0:23:08.600 --> 0:23:11.440 lot of stories, a lot of firms that do eventually 0:23:11.440 --> 0:23:14.840 become regulatory risk, either because of poor governance or because 0:23:15.600 --> 0:23:19.520 you know, sort of just general pool compliance with the 0:23:19.600 --> 0:23:22.720 regulatory environment. So you gotta go active in the market. 0:23:22.760 --> 0:23:30.439 That's retail traded, Jason. One of the rationales I heard 0:23:31.040 --> 0:23:34.320 for the crackdown on the CRAM schools was tryinga's three 0:23:34.400 --> 0:23:37.640 child policy. You know, they want to encourage UH families 0:23:37.680 --> 0:23:39.560 to have three children, and obviously if you have to 0:23:39.600 --> 0:23:42.080 pay for three sets of cram schools, that's gonna get 0:23:42.240 --> 0:23:46.840 gonna get pretty expensive. Um. But I wonder that's a 0:23:46.840 --> 0:23:49.040 fascinating concept to me because here in the US, we 0:23:49.119 --> 0:23:51.760 have a hard time getting people to wear a mask, 0:23:51.960 --> 0:23:54.919 you know, to to stop a virus or get a 0:23:54.920 --> 0:23:58.480 free vaccination. Uh, you know, we have a hard time 0:23:58.720 --> 0:24:01.680 having the government getting people to to anything. But in China, 0:24:01.760 --> 0:24:05.760 you know, I wonder is it harder to get couples 0:24:05.760 --> 0:24:10.440 to have three kids than to say the wonder child policy? 0:24:10.640 --> 0:24:14.320 And how important is that of apolicies? First, the economy 0:24:14.359 --> 0:24:17.400 and how you're thinking about investments, does it play into 0:24:17.440 --> 0:24:20.040 it at all, this potential for for a sort of 0:24:20.040 --> 0:24:22.760 a baby boom relative to what China has seen in 0:24:22.800 --> 0:24:26.560 recent generations. Okay, so first of all, you're absolutely right. 0:24:26.840 --> 0:24:31.040 I think it is probably far more difficult today to 0:24:31.200 --> 0:24:34.639