China Beige Book CEO explains 'the big X factor’ for China's lockdowns

China Beige Book CEO Leland Miller joins Yahoo Finance Live to discuss China’s COVID-19 policy, economic growth, and the outlook for Asian markets amid lockdowns.

Video Transcript

AKIKO FUJITA: And Asian markets tumbling overnight on reports of a COVID spike in Beijing this time. Officials in China confirmed 70 new infections over the weekend, leading to fears of strict lockdowns in the capital city. We saw the Shenzhen component tumbled 6%, while the Shanghai comp fell 5%.

For more on China's COVID outbreak, let's bring in Leland Miller. He is the CEO of China Beige Book. Leland, it's good to talk to you. It certainly feels like every day that goes by, it feels a little more dire, at least when you consider the reports coming out of China. How significant is this latest outbreak coming out of Beijing, given what we have seen play out in Shanghai?

LELAND MILLER: You know, I think the most interesting thing happening in China right now is not that the Yuan's moving and not that the economy is slowing. It's that everything that's happening right now, we knew not just days ago, but weeks ago. You know, everything was pretty clear. We knew the economy was slowing. We knew that they weren't going to stimulate in a big way. We knew that lockdowns were spreading from Shanghai to other big cities. We knew the Fed was hiking. We know there's a policy crackdown.

So it's interesting that people are seeing this weekend or this-- today, as this pivotal moment, all these things are known knowns. And so, yes, the economy is in a bit of distress. But this is nothing that people should have been expecting, considering all the warning signs that we've seen for weeks, in some ways, months now.

AKIKO FUJITA: With that said, though, Leland, it does feel like there is growing discontent within the country. I mean, you're hearing of outrage on social media, people saying they don't have enough access to food. I mean, we're, what, more than two years into this pandemic. And I wonder how much of that discontent is translating into growing opposition against President Xi.

LELAND MILLER: Well, that's a great question. I don't think anyone knows the answer. People are not happy. There's no question about that. I mean, you could see it anecdotally. And, you know, you're locked down for week after week after week and with the clock continuing to restart, if you have even one case in your neighborhood. And people are going crazy right now.

But this is only important from a markets perspective if either this creates some backlash against COVID zero, which forces the leadership to do a U-turn-- very, very unlikely-- or if this has created some sort of semblance of popular discontent, which is enough to challenge Xi at the end of the year at the party congress, which is very, very unlikely. So yes, people aren't happy. They don't like to be locked down. That's not a China thing. That's a everybody thing. But, you know, I'm not seeing this political-- this turn from a societal discontent to a political movement. There's no evidence that anything like that is happening.

AKIKO FUJITA: So you think the zero COVID policy stays in place, even with the latest that's played out in Shanghai and now Beijing?

LELAND MILLER: Yeah, look, I don't see what the argument is for it not being in place. Now forget whether we like it or not. The leadership had a window between the Olympics ending and the run-up to the Party Congress, which once we can roughly say is this summer. And that was when they had the ability to sort of relinquish things, to play down COVID zero, to allow some sort of community spread, whatever the situation might be. They are locked in a situation where they're hitting-- it's hitting their big cities. It's spreading to Beijing.

I don't see what the tea leaves people are reading that they're about to walk away from it. Xi was on the radio a week ago, tripling down on COVID zero policy. And they're certainly not going to let an outbreak or crisis happen as the Party Congress approaches in the fall. So, you know, I think people are just daydreaming themselves into thinking they're going to walk away from this. It doesn't mean they can't shift things at the margins. They probably will. But in terms of walking back or retracting COVID zero, I think that's very unlikely.

AKIKO FUJITA: Of course, I mean, you know, I'd imagine people are watching this closely, along with the economic picture. If there is a dramatic slowdown, then does that force the leadership to maybe shift up their policy? We got the Q1 GDP print last week. 4.8% growth, but that doesn't necessarily include the most stringent part of the restrictions that took into-- that went into effect in Shanghai. How significant do you think the slowdown is going to be? What are you seeing in the data?

LELAND MILLER: Well, we have our new April data out in a couple of days. So that will be the most important data we've seen since January 2020. But look, you know what's happening right now. There's a big shutdown happening in a lot of the bigger cities. It's not about whether these cities are shut down for one or two weeks. The question is whether they're shut down for April into May, maybe all of May. If you've got zero growth or contractionary growth during that period, then you've got a bigger problem on your hands.

But keep in mind this. If the economy-- if 40% of the population is locked down or 40% of GDP in the country is locked down, you could talk all you want about stimulus, but what are you going to stimulate? You won't have the typical options to just juice the economy in a normal way. So, you know, they're in a very tough spot because even if they decide to stimulate, and they have not so far, then it's an open question to whether they can do that until all the lockdowns are done. So Q2 could-- has the potential to be an absolute bloodbath.

AKIKO FUJITA: What do you think the knock-on effect is going to be outside of China? I mean, we're thinking back to that initial outbreak at the beginning of the pandemic. Obviously, a very different picture, but we have heard ports starting to slow down. We had the Port of LA executive director on last week, who said he's not seeing the impact yet, but he does expect a bit of a slowdown. What are you anticipating? Is it going to be on the level of what we saw early on in the pandemic?

LELAND MILLER: It could be, but the big X factor is, again, the duration of these lockdowns. If you've got one or two week lockdowns and they move on because they've been easing COVID zero in a big way, then you're going to have less stress. If you're shutting down these major metropolises, if you're shutting down four of the largest ports in China for multiple weeks, if not maybe months, then yeah, you're going to have a supply chain disaster in your hands. That doesn't mean it's going to happen, but it just means we have to be watching things so closely right now in the data for April for early May because this is going to dictate the state of the world economy for the first half of the year. It's really, really important stuff.

AKIKO FUJITA: Yeah, no question, especially with the bottlenecks that are already in place with the supply chain. Leland, always good to have you on the show. Leland Miller, China Beige Book CEO, joining us there.