China Beige Book CEO Leland Miller joins Yahoo Finance Live to discuss China's economy as another city is locked down ahead of the Winter Olympics over COVID concerns, President Xi Jinping's leadership, and the country's supply chain operations.
ADAM SHAPIRO: So a lot of attention is being paid on-- for China not only because of supply chain issues, but the most recent wave of lockdowns as they combat the most recent wave of the COVID-19 variants which are sweeping the globe.
Let's bring in Leland Miller. He is the CEO of the China Beige Book. It's good to have you here. And when we look to China, I mean, where to begin? You got the Winter Olympics coming up in February. You've got supply chain issues. And we have these cities that are under massive lockdown, the horrific stories of people who can't get food. From the Western perspective, what is this telling us about China at this moment in time?
LELAND MILLER: Well, what we know is it's one of the most politically sensitive years, not just in years, but really, in decades, because of the fact that the party Congress is in the fall, where Xi Jinping will presumably be coronated for life. You have the Olympics right now. It's a very, very politically sensitive year for a lot of reasons.
And yet you have the economy, which is not in very good shape going into it. You know, you had property really sink the second half of 2021. Your service is a bit in trouble, and you're staring down at the potential for Omicron to be spreading. There's a lot of questions to what China can do to boost policy and whether they have the appetite to be more aggressive than people think.
EMILY MCCORMICK: Leland, this is Emily here. I'm wondering as we hear now about the third Chinese city now locking down over an uptick in COVID cases, is China's aggressive approach with these stringent lockdown measures going to, in the long run, leave the economy stronger or weaken it, both in terms of the near term and again, in the long term? Because, again, they are taking this very aggressive approach and really having zero tolerance for any COVID cases.
LELAND MILLER: Well, look, through Delta, it looked like the strategy was mostly a success because China was able to deal with the virus in a way that other economies weren't. It stayed open for business. It boosted exports as a result. You know, Omicron's a completely different beast. The transmissibility of Omicron is far higher than any previous variant. And it's very unclear whether Beijing is going to be able to keep on a COVID zero strategy.
Now, the fact is they really, really don't want to pull back before the Olympics, I don't think they will. But, you know, if you see these cases continue to slip through and then it spreads, at some point, they're going to be under pressure to change strategy because Omicron has just opened up a completely different type of problem than the previous variants.
ADAM SHAPIRO: When we take a look at China after the Winter Olympics and dealing with a-- I don't want to say a stagnant economy, but one that's not performing like it had over the last 15 years. Lots of people in the middle class who got burned by the real estate problems that the country is facing. Is there a threat or a potential for the rulers to turn attention away from those issues by making a move on maybe Thailand or islands-- Taiwan, rather-- doing something to distract their own population from what's going on?
LELAND MILLER: Yeah, look, any time news gets particularly gloomy, there's always a wag the dog worry. But I don't think 2022, that worry's that big a deal. You know, you have, regardless of what's happening with the economy at the beginning of the year, you have an incredibly important political Congress at the end. This is something where Xi Jinping is upending decades of Chinese political tradition and keeping himself on as ruler. And I think to shake that up and it is very unlikely unless he feels like he's losing a grasp of this going forward.
Everything up to this point signaled that Xi Jinping is in control. He's in control of the process, that there will not be a problem with his appointment for life. If this changes because, you know, Omicron or because of economic weakness, then, you know, it opens up additional bag of risks. But right now, 2022 is not the year I think where the Chinese want to go out and do something particularly aggressive outside their borders.
EMILY MCCORMICK: In terms of the supply chain issues that we've been talking about for months now, are companies, US companies with factories and that source from China, do you think they're at risk of moving their supply chains out of the region? Because when you have a risk in a city where your factory's at, is going to be in lockdown, what does that say about the credibility of a supply chain-- the reliability, rather, of a supply chain-- for many of these international companies?
LELAND MILLER: Yeah, I think supply chains are moving, but I don't think that operations are. And what I mean by that is over the last several years, there's been this transition to a system where operations in China are primarily serving the Chinese market. And if you're serving the Western market, you are trying as much as you can to move your operations out of the country. So you don't have these political problems, these geopolitical ones, these trade problems, these COVID problems, supply chain bottlenecks.
So, you know, there has been a transition for years to try to make that happen. There are still American factories that are very happy being in China despite the uncertainty because they are gearing up to serve the Chinese consumer for decades going forward. So it looks different than it did five years ago, but-- and supply chains are moving. But operations are still very firmly ensconced in China.
ADAM SHAPIRO: Turning back to property and the fact that it might be doing better than what they had seen earlier last year, is the Evergrande situation firmly behind China at this point? Or does it pose future threats that could destabilize what's going on in their economy?
LELAND MILLER: Yeah, it completely depends on what you mean by the Evergrande situation. From the very beginning, there was never a contagion risk outside of property, simply because China has a non-commercial financial system. You're not going to have a Lehman moment because China owns or controls all the counterparties. So if it wants to tell, it tells counterparties to lend or to borrow or to supply, and they'll do it. So you don't have a contagion risk in the traditional sense.
You know, what you do have is with property de-risking, you have a serious issue with growth going away. So high levels of growth have been achieved for many, many years based on juicing growth through property buildouts, infrastructure buildouts for the reckless credit expansion inside the property sector. If you're taking that out, then growth is going to slow pretty precipitously, and you don't know where that replacement growth is going to come from.
ADAM SHAPIRO: We appreciate your insight, Leland Miller, China Beige Book CEO. All the best to you.