Leland Miller is a member of the National Committee on US-China Relations, a member of the Council on Foreign Relations, a board member of the Global Interdependence Center, nonresident senior fellow at the Brent Scowcroft Center for International Security at the Atlantic Council, and Commissioner to the US-China Economic and Security Review Commission. He is CEO of China Beige Book, which helps institutional investors navigate China's economy.
This transcript has been edited for length and clarity.
Federal Newswire: What brought you to analyze China markets?
Miller: I was speaking at think tanks, mostly on Chinese military matters because there weren't a lot of conferences or events related to the Chinese economy. I did some buy-side advisory on the side.
I kept hearing all these questions that were outlandish and were based on official data overly focused on GDP and nonsensical Chinese pronouncements and statistics. Finally, I just burst out and said these are all the wrong questions. Somebody came up to me and said, “well, smart guy, why don't you do something better?” Obviously, that meeting went terribly, but it did spark something.
I went back and said, “look, if I could do anything I wanted to do on the ground in China, what would that be? How would I do it?” That started a strong multi-year exercise in which I worked with a handful of people to think through how creating good data from China would work.
We [became] the China Beige Book. We started with a Federal Reserve Beige Book methodology, but that's mostly qualitative. It took us two years or so to put this together.
In China, there's no quantitative data. So, we realized, forget this qualitative stuff. It's nice flavoring, but it's not the real important stuff that everybody wants. Just build up the quantitative side. Everybody in the world told us we couldn't do it. We'd never be able to get that out of China. It's a black box economy. These are Chinese communists. We did it. It worked. We did it more. We asked more questions. It was really remarkable how much we were able to build this up year after year.
Federal Newswire: How bad was the early analysis on China?
Miller: The information was bad, the data was bad. The key thing here is that it was bad intentionally, everybody was incentivized to talk up the China story. Why? Because investment banks who were writing a lot of this research wanted to sell China. They want to sell Chinese assets…[and] access into China.
Corporations wanted to get into China. In order to do that, they had to make the government happy–[it’s] the idea of consumption. I don't know how many times we heard back in the day, “well, look, there's a billion Chinese. If they all buy two eggs, you have to sell 2 billion eggs. How could you not have a successful business when everything is in the billions?”
There was an enormous incentive by the people who were doing China analysis to pump up the story, and there was even more incentive not to tell anyone about the warrants, the downside of the story, because you saw Beijing [watching]. If you got Beijing mad, then they might not approve your project. They might restrict your access; they might throw you in a gulag.
The way this used to work back in the day was that China would always predict its GDP ahead of time and would always hit its target. Until very recently, that was the dynamic for China. They would announce it and say, “okay, China's going to grow 8%. China is now at 8%.” At the end of that quarter, everyone walked around high fiving each other as if analysis was being done. There was no analysis. It was a complete conspiracy in terms of putting together the China story.
For years and years, corporations, retail investors, politicians, and policymakers were getting the wrong story. It wasn't until fairly recently that people said, “well, wait a second, what we're seeing just doesn't dovetail with the nonsense.” It's coming out of the average Goldman, JP Morgan or other investment reports. This is a different China. So, I think people have been opening their eyes in the last several years, but this was a decade or two too late.
Federal Newswire: What is the Beige Book, and how are you able to pull the data together?
Miller: We decided that what we wanted to do was tell a story about all of China, not just what's happening at state enterprises. We wanted to tell an independent story from the ground up, and we wanted to talk about all the different China's, all the smaller cities up to the bigger cities, the private firms, state owned enterprises, large firms, small firms, etc.
We did this thorough survey, and [back then it was] 1,200 firms a quarter. Everyone said that was too big. It was triple the size of the PMI. When we surveyed it, it couldn't be done.
Now we're at tens of thousands of firms that we survey, it's gotten much bigger. It's monthly. We have data that comes out on a daily basis. Essentially, it's real time. It's a different story. The idea behind it was we wanted it to look across all of China's important sectors, all of China's key regions, make sure that this was an all-China survey and then contrast what was happening in the different parts of China. We didn't want to just get a number.
China's 6.8% GDP growth is 51.2 PMI. What does that tell anybody? Even people who track these data usually can't tell you whether a 50.6 of the PMI to a 51.2 down to a 50.8 is a positive story. I mean, nobody really knows. These are just individual numbers.
We wanted to point out a lot of different metrics that told the story, and we wanted to not just talk about growth because underpinning everything in China is credit. We were the first and only firm in the world, the only people other than the People's Bank of China, who track credit conditions on the ground in China.
We were tracking who was borrowing, how much are they paying for their loans? Are they issuing bonds? What sectors have access to capital? What are they borrowing for? Are they getting rejected by banks? Have loan applications spiked? What's pent up demand? So, looking at credit, looking at shadow finance which was a huge part of the credit.
We wanted to get a story of all these things and then put it together through our analysis to say, here's what's happening in China. It's not all positive. It's not all negative. It's a nuanced story. But you can tell what's happening underneath the hood by actually getting granular data from the ground up and creating a story that explains what firms are doing and what the government's doing, and what the growth trajectory looks like.
Federal Newswire: Our dealings with China don't allow for transparency and accountability, so how are you able to get the information?
Miller: Certain questions have red lines. We don't sell into China. We don't put out a Chinese version. I think that's a big thing. I think the major reason that we're still around today is that we proved very early on that we're out there calling balls and strikes regardless of what we think, and we've got a lot of different people and views inside China Beige Book. We're there to call balls and strikes on the economy.
One of the early big victories for us that really put us on the map was in 2015, the world thought there was a ‘hard landing’ going on. There was a stock market collapse. There was a really bad PMI. There was something that people had thought was a currency devaluation. It was sort of one, two, three strikes, and markets fell dramatically.
Commodities and some of the Asian stocks fell 20-30%. Everybody was panicked on China. We came out and said, “Actually, it's probably the best time to buy in five years. There's nothing going on that was any different than a quarter ago. We're looking at this.”
Yes, you had a bad manufacturing PMI, but the service sector was strong. You had what people thought was a currency intervention, but that's not what it was. The stock markets not related to the real economy. We've been out there when people were way too pessimistic, and we've been out there when people are way too optimistic.
We're not trying to be bears or bulls. We're trying to get the growth story right at all times. I think we've proven that over and over. Back in 2015, there was about a six-week stint in which nobody would go on TV and articulate what they thought was going on in China because they thought they'd be wrong.
Federal Newswire: What are some trend lines in China's economic story?
Miller: China's economic growth model as we know it ended around 2020. For years, as China economy watchers, we were taught that the Chinese Communist Party works in very specific ways. They want to have high levels of growth. They won't tolerate weakness. If they see weakness in the data, then they're going to go big on stimulus to get it up. If the stimulus doesn't work, they're going to lie about the data…They really care about these numbers and they care about the stock market and they care about all these other things. None of that's true anymore, so what happened around 2020- 2021?
People saw this beginning with the Common Prosperity campaign, and they saw this with the tech crackdown on giants like Alibaba [and] Tencent. China decided that they did not want to continue this growth model anymore. It didn't just end.
Xi Jinping looked at this and said, “unlike Western politicians who can do whatever they want for the two, four, or eight years they're in and then pass it off to the next guy, we're the Chinese Communist Party. We want to be here for 50-100 years. What we have to do is make sure we're not having any of these vulnerabilities creep up on us.”
The number one vulnerability that was creeping up on them was big debt. You saw a massive change in credit and stimulus policy starting around 2021, and, you saw it earlier, but you really started to see it in 2020 and 2021.
It was amazing because this was during Covid, and we were doing a lot of online panels with the investment banks on our left and right. Every one of them, with very few exceptions, were saying double down. The Chinese stock market is going to have a roaring rally.
[People said,] “Xi Jinping can't stand this pain that's going to hit…he's going to reverse course. Just watch. This is how China's economy works.”
We said, “no it doesn't. We're looking at credit flows right now. We're looking at borrowing patterns right now. They have changed the way they're governing the economy. They're not worried about high levels of growth anymore. The stimulus playbook has completely veered off course from where it was. They're not worried about weak data. They want to make sure there's not a doom loop of confidence. There is a lot of worry about the housing sector and how much credit went into it.”
This black hole swallowed up credit because it was producing these ghost cities, [and] other things. They wanted to step in, stop that, and diminish the property sector as a growth driver in the economy. But what they did is they stepped in and they really tightened credit. But at a certain point, they would have to ease conditions a little bit.
70% of household assets in China, roughly, are in property. They want to make sure that they aren't going to spread contagion from property outside into the broader economy.
Xi is worried about the trajectory of China's economy based on throwing unlimited amounts of credit at the problem. So, they've completely changed the way they are governing.
Xi Jinping doesn't care about investor returns. There may never be a good time to buy. He doesn't care about the stock market. He doesn't care about high levels of growth anymore. The GDP target notwithstanding. He doesn't care about stimulating into weakness. The real issue here is that the economy doesn't work the way it used to.
Right now, it is not worries about growth, it's worries about security. It's building up a domestic chip ecosystem. It's worries about the vulnerabilities to the US dollar and the US dollar payment systems. That's what he wants to try to affect at the margins. He doesn't care about levels of growth, and he certainly doesn't care about investor returns.
Federal Newswire: What is sustainable and what is less sustainable in the Chinese economy?
Miller: [With respect to sustainability], I have a completely different take than most of my friends who are China bears. China is not going to collapse. The reason it's not going to ever collapse is because there's a noncommercial financial system.
A lot of people looked at what happened in the West, in Europe, in the United States, and said it was only a matter of time before China gets its comeuppance because of debt. But the Chinese economic system doesn't work the same as the West’s does. It's a noncommercial financial system, which means that it can squash huge waves of capital from one side of the system to the other in order to plug gaps.
You can have state enterprises bail out other state enterprises. You can have different parts of the economy bail out other parts of the economy. You can use the capital within the system to plug holes that are occurring as they happen, which means there is much less vulnerability to a collapse.
There's a huge downside to that. The more you do this, the more you throw good money after bad, the more you continue to build up the bad debt and bail out these entities, which should be allowed to fail but are rarely allowed to fail in China.
So, what happens? The problem is, it's going to continue to slow [down].
Federal Newswire: How should U.S. policy respond?
Miller: Let me start off by saying that I wear a number of hats. One of them is Commissioner of the US-China Economic and Security Review Commission. Nothing I say today reflects anything else. It's not the commission's view. It's not my colleague's view. It's just me talking. So let me get that out of the way up front.
You hear policy talk about decoupling, but I think the problem with the entire idea of decoupling is it means whatever anybody wants it to mean. Globalization, decoupling, and de-risking are sort of lumped in as the same type of term. What smart policy should be doing right now is understanding [that] you're not going to be able to cut off the links between the United States and China overnight.
Even if you absolutely wanted to, you have enormous supply chain vulnerabilities right now. For instance, we have no idea looking at pharmaceutical inputs, how much of the inputs to penicillin and other types of very important medications are produced in China that could be cut off? We don't have visibility in this.
The idea that we're going to wake up one day and the economies are going to be separated completely, it's not going to happen, but [what] we need to be more cognizant of is that there are issues in which for years and years, United States policy has either been unserious, or it has been actively helping the Chinese economy rise.
The Chinese technology sectors get better and better, and the Chinese military [is] becoming a peer competitor with the United States. So what's happening? You have a situation where China doesn't work on normal free trade policies. You've had uneven trade for many years. That can mean a lot of things to a lot of different people.
If you look at what Xi Jinping is saying right now, he's talking about new, productive forces. They want to produce, they want to export to the world, and they want to gobble up markets. That's what they're going to do.
There's a threat to industries in the United States and Europe and elsewhere from this. We need to have a better grasp of the problems related to trade that we have vulnerabilities on and have a sound trade policy that doesn't leave us vulnerable on that.
If you look at technology, we are fueling the rise of China as a technological superpower. What's been happening for the last 15 to 20 years is China's either been stealing technology or it's been getting ready access to Western technology that'll allow it to become a leader in what Xi Jinping calls the fourth industrial revolution.
The last thing is there's an enormous amount of capital that's going into China right now, some of which we know about, some of its direct investment, some of it is just enormous amounts of portfolio investment, which may go through third parties. It's obscured. I think there's a lot of things we need to get right.
We've got to fix our supply chains. We need to fix our defense industrial base so that it's able to deter some of these worst-case contingencies. Trade is [also] technology investment. What do we need to do to have smart policies that guard us from a national security perspective? Stop looking at it from an economic perspective. There will still be commercial relations between the US and China, but what do we need to do in order to make sure that we're operating smartly on the security side? If we're doing that, then we can dictate what parts of the economic relationship will have to change, and what can stay the same.
Federal Newswire: What do you say about the role or efficacy of a reciprocity doctrine with China?
Miller: I think we need it, and the reason we didn't have it before is that there was a disbelief that China was this smaller, unimportant economy that would never be a peer competitor, a true military challenge, or a technological peer of the United States. If we can get cheap t-shirts, we can get some other things out of it.
Now we have to consider China from a whole bunch of different dimensions. We have to worry about them being a commercial competitor, a military challenge, and an economic challenge. This is why we're worried about how we are going to deal with the threat of some of these advanced technology sectors that China wants to produce a ton of and export like crazy in the United States.
China's markets have been closed off once. Once they incubate these industries, they open them up, but they've always been closed off. We can't get our firms in there in order to do the same things. Our tech firms aren't able to operate in China, so it's about access and it's about markets. This has not been the case for a while.
People have been willing to overlook that. But I think right now we have to go down the list and say, “this is where we should be receiving reciprocity. If we don't get that, then there will be a price to be paid.”
Federal Newswire: Where can people go to follow your work and commentary?
Miller: China Beige Book has a Twitter feed that we try to keep very provocative. We put out our media on our website, Chinabeigebook.com and we're on LinkedIn and some other things. We make sure that all the media we do gets sifted through because we want to be part of the conversation, and we want to serve as a corrective to some of these other entities out there who are perhaps not telling the full story on China. I'd say Twitter is the best way [to keep up with us].
The China Desk podcast is hosted by Steve Yates, a former president of Radio Free Asia and White House national security advisor.
