CHINAMacroReporter

Leland Miller on Pressing China Issues

Leland Miller, the founder of China Beige Book, spoke with The Epoch Times about which investors and companies are interested in China, the latest developments in the currency, U.S.-China relations, overcapacity problems, and the One Belt One Road Initiative. : The Chinese economy is strange in many ways. Not only is it a hybrid between private capital and state control, but very few people directly invest in the mainland — and yet everybody is interested in how the second largest economy in the world is going to develop. That’s because Chinese demand determines the prices of world commodities, and the operations of multinational companies in China impact earnings. When the yuan falls, markets across the world get jittery. China watchers accept the fact that official Chinese data is severely flawed, and often simply fabricated, yet they still use it to analyze the Chinese economy and markets because there are few alternatives. One alternative, however, is the China Beige Book International (CBB), a research service that interviews thousands of companies and hundreds of bankers on the ground in China each quarter. They collect data and perform in-depth interviews with Chinese executives.
by

|

China Beige Book

August 2, 2017
Leland Miller on Pressing China Issues

The Epoch Times: Who are the investors and companies interested in China and your services?

Leland Miller: There’s people who play the share roulette or people who have a specific company in mind. We see a lot of this in the retail space and they want to get more information from us. They invest in something where they think there is this untapped market either in China or as China goes abroad.

You’ve got macro firms who may not care about the day-to-day in China but want to make sure they understand the dynamics of China demand, of China credit, of China currency, so that they don’t get caught out.

Commodities are in incredibly high demand. We spend a lot of our time dealing with commodities firms now because we have all this data that’s not typically available. Things like net capacity, and a lot of firms have said, “Well, we have no way of checking government numbers…. If they say they’re cutting capacity, we have to believe them.” Well, we don’t believe them, we do it ourselves and what we found is that the opposite is happening across commodities, across time.

So you have all these different types of firms, but I think there is one uniting factor: whether they’re doing China micro, they’re doing China macro, or some niche element of the economy. If they don’t get China right, there are going to be repercussions in their portfolio.

So even people now who have absolutely nothing to do with China are clients of ours because as they keep abreast of what’s going on, they need to understand this and not get knocked from the side off their feet when they weren’t expecting it.

An increasing share of our clients are people who just want to understand China at the 30,000-feet level. Our early clients are people who want to understand at the 30-feet level. And we have everything in between, but also the corporates. The corporates have a very different mind-set: they need to know different things than, say, a hedge fund or other asset manager, who is simply trying to find a good trade.

The Epoch Times: How do you see the Chinese currency developing?

Mr. Miller: They took a very risky strategy on the currency dating back to last fall, and it worked. But it didn’t have to work and it may not have worked, and I think it’s worth looking back at this chronology because this could have been a very different year had some of this not worked out. Back in September 2016, the Chinese started to understand that there was a very real chance that the Federal Reserve (Fed) was going to hike in December, and they needed to prepare the currency and prepare themselves for a rate hike.

They started doing that and they weakened the currency. And then when President Trump was elected, they said, “Okay, well, we got to do this even more. We have to weaken right up until he gets elected so that we can come back and say we’re going to strengthen it once he gets elected.” Now it’s a very cynical strategy that happened to work, but what’s interesting is that there was an enormous amount of commentary late in 2016, early 2017, about how — and we see this all the time — now that China is pegged to a basket, it’s not pegged to the dollar, and that the Chinese have made this move.

That is just not correct. They had not switched, there has not been this back-and-forth. The yuan is essentially pegged to the dollar. The seven handle on this, the seven yuan to the dollar is extremely important for a lot of reasons, most importantly the politics around this, the politics with Congress, the politics with Trump, the politics with the Chinese leadership.

And the idea of them creeping closer and closer to 7 was a real major problem. They understood that this was a politically charged number and they got real close to it and they timed it well and they backed off it, and it had been strengthening ever since which has been supported by the fact that the dollar has been in a weakening trend.

But the interesting thing here is they figured out, “We’re going to give Trump little rationale for letting him say we are a currency manipulator. But right up until that point, we’re going to keep weakening, and we’re going to hope that nothing bad happens.”

Shockingly, they got up to 6.9 — it was approaching a danger point where I think markets would have started caring, and they backed off at the right time. So they have had the 2017 best case scenario, they haven’t had these interruptions, they haven’t had a super strong dollar that a lot of people thought was going to happen six months ago.

So the yuan is not on the top of people’s worry list right now but it’s just a matter of time before they have to deal with these dynamics again, unless the dollar is in a long term weakening trend.

The Epoch Times: How do you see U.S.-China relations in the future?

Mr. Miller: The administration understood that China’s a radioactive word if you use it politically, so we’re going to fight back on China, we’re going to save American workers from the tyranny of Chinese goods. That was the calling card for a while. And then of course President Xi and President Trump met at Mar-a-Lago and had this beautiful chat and everything turned around.

President Trump was convinced to give the Chinese some amount of time to fix the trade problem and fix North Korea and a whole bunch of other things. A lot of really smart China watchers have been saying recently that the President is angry that the Chinese have not done what he wanted them to do on the trade side of North Korea and he’s flipped and you’re about to see the repercussions.

I would actually push back against that. I think that what you’re seeing right now is a gradual dissatisfaction with this. But the real tea leaf here will be the South China Sea. The U.S. position in the South China Sea has just been invisible for the most part. I mean, they talk about a few spy ops but they have been mostly invisible for the past six, seven months.

And when the President, the White House, the administration makes this turn and decides: “Alright, China is not going to help us out, we now need a stick and we need a big stick,” you’re going to start seeing developments in the South China Sea. The fact that there has been some push back on trade, the fact that we’re talking a little bit about steel, it’s totally misunderstood.

The steel measures being talked about are not anti-China, although they’ll be sold as that. So I think we need to stop jumping the gun on the idea that the president has turned hostile on China. This hasn’t happened. Do we think it will happen? Yes. I think it’s a 2018 thing. But I don’t think that there has been a major shift in policy.

The Epoch Times: Are the Chinese really tackling the overcapacity problem?

Mr. Miller: There are two stories here. The first is what our data is saying and the second is the mistake I think a lot of investors make in seeing commodities as monolithic in China.

People usually think that they’re either going to cut capacity across the board or they’re not going to cut capacity at all. So what we have been seeing is not cutting capacity. When prices have gone up, a lot of investors said, “Look, the Chinese government is making good on their pledges to cut capacity. Look at prices are going up, imports are going up.” Anecdotally, that suggests they’re cutting capacity.

Now, they are cutting gross capacity, but total capacity added has gone up every quarter and it’s gone up in almost every sub-sector every quarter. They are adding capacity, and this is very intuitive if you think about it. There are all these industries who used to laugh about the economic reports we used to get from these firms quarter after quarter after quarter of higher inventories, worse revenue, no profits, more capacity — it was just a joke.

Now all of a sudden they’re getting this good economic scenario and they are not about to cut back. It makes sense that they’re not cutting back, but the narrative on this is that the Chinese government is hard at work cutting capacity, and it’s totally a mistaken narrative. Now, we tracked this very closely across coal, aluminium, steel, and copper, and there is a very clear dynamic there and it’s been clear for the last year plus. They are not cutting net capacity.

Now the other issue here is the differences between sub-sectors. When you look at coal and when you look at steel, there’s a different long term concern about the two of them. With all these Chinese commodities, there’s potential overcapacity issues, but coal kills people and coal turns people’s lungs black.

And so the idea that the Chinese can continue to crank out coal the same way they can crank out steel, with the same repercussions, it’s not there. So over time I think we will see a pullback on the coal side. It’s an open question as to whether we’ll see it in steel and aluminum; a lot of this might be affected by the trade actions coming out of the United States, but right now the major story here is that investors are guessing.

They’re guessing based on prices and they’re getting this wrong more often than not. They don’t understand the degree to which these sub-sectors are cutting back. In fact, they increasing capacity, they’re bringing more capacity online. They take the old ones and take them offline or the ones that aren’t being used, but they’ll activate others or they’ll build others or they’ll upgrade others. So the overall dynamic is that more capacity is being brought online but then make a very big show of what they take offline or what they blow up.

They used to put TNT into giant iron plants and blow them up to show that the government was doing something. This is the equivalent of this in 2017. But net net, they’re not cutting back right now. They’re trying to take advantage of a good market for their goods and so this is going to shock people. It’s already surprised people; that’s why you see these enormous 5 percent, 8 percent moves in a day on these commodity markets. But it’s going to shock people more going forward when they understand the totality of what has happened over the past year.

The Epoch Times: What are your thoughts on the One Belt One Road (OBOR) initiative?

Mr. Miller: What is the real goal for this? The goal is to exert Chinese influence abroad, it’s to recycle surpluses in goods and services abroad to some degree because of oversupply. It will accomplish certain things but is it a worthwhile project? Is it going to do what everyone thinks it’s going to do? No, of course not.

But there are things being done. It is a project large in scope, it will attract headlines for many years, but at the end of the day is this a game changer for China? No. Have the Chinese ever in any context found a sustainable ability to get returns, to get an actual return on their investment? No. And they’re going into a situation where they’re irritating a lot of these states who think that they were going to be able to use their own labor, but the Chinese are using Chinese firms who are doing quite well so far, and having them do the labor.

There are political problems that brings up. They also have a different situation right now than they did three years ago when you talk about the Forex reserves in the capital accounts. So the idea that they had too much and had to figure out ways of dumping Chinese capital in other places, that problem has reversed itself. Now we are not at any kind of problematic point at around $3 trillion, people have the opposite concerns. I think that if this were not a President Xi initiative that he has attached his name to, this would have been deescalated far more dramatically.

They’re going to have to build it up, it still plays a role, it’s still worth watching, but the idea that this is a real game changer similar to the Asian Infrastructure and Investment Bank which was a political upheaval about a year ago, two years ago, whenever it was, these are not game changers. These are Chinese inefficiencies at work abroad.

More

CHINAMacroReporter

February 18, 2021
'Like It Or Not, America Is Still A Superpower'
‘The twentieth century was littered with the carcasses of foreign leaders and governments that misjudged the United States, from Germany (twice) and Japan to the Soviet Union to Serbia to Iraq. Perhaps the Chinese, careful students of history that they are, will not make the mistake that others have made in misjudging the United States.’
keep reading
February 16, 2021
'Is China experiencing an advance of the state sector?'
‘The value-added produced by state-owned enterprises has usually been in the range of 25-30% of China’s GDP. And what’s really striking about those numbers is that they just haven’t changed very much over the past 25 years. The share of China’s economic output being produced by SOEs today, under Xi Jinping, is not significantly different than it was under Hu Jintao, or even in the later years of Jiang Zemin.’
keep reading
February 16, 2021
‘China Blocked Jack Ma’s Ant IPO After Investigation Revealed Likely Beneficiaries’
‘Behind layers of opaque investment vehicles that own stakes in Ant Financial are a coterie of well-connected Chinese power players, including some with links to political families that represent a potential challenge to President Xi and his inner circle. Those individuals, along with Mr. Ma and the company’s top managers, stood to pocket billions of dollars from a listing that would have valued the company at more than $300 billion.’
keep reading
March 11, 2021
China, Ai, & the Coming U.S. Industrial Policy
‘The government will have to orchestrate policies to promote innovation; protect industries and sectors critical to national security; recruit and train talent; incentivize domestic research, development, and production across a range of technologies deemed essential for national security and economic prosperity; and marshal coalitions of allies and partners to support democratic norms.'
keep reading
March 11, 2021
'Why Biden Should Ditch Trump’s China Tariffs'
‘President Joe Biden has to decide whether to rescind his predecessor’s China tariffs.’
keep reading
March 11, 2021
Then There are Semiconductors
‘While American companies pioneered semiconductors and still dominate chip design, many have outsourced the actual fabrication of chips, mostly to Asia.’
keep reading
March 11, 2021
'Hard lesson for HK opposition: Extreme political confrontation is not in the designs of China'
'The radical forces in Hong Kong thought they were strong!’
keep reading
March 11, 2021
'China Turns to Elon Musk as Technology Dreams Sour'
‘China is having its techlash moment. The country’s internet giants, once celebrated as engines of economic vitality, are now scorned for exploiting user data, abusing workers and squelching innovation. Jack Ma, co-founder of the e-commerce titan Alibaba, is a fallen idol, with his companies under government scrutiny for the ways they have secured their grip over the world’s second-largest economy.’
keep reading
March 11, 2021
For Industrial Policy: National Security Advisor, Jake Sullivan
‘While American companies pioneered semiconductors and still dominate chip design, many have outsourced the actual fabrication of chips, mostly to Asia.’
keep reading
March 10, 2021
'Beijing replicates its South China Sea tactics in the Himalayas'
‘Emboldened by its cost-free expansion in the South China Sea, Chinese President Xi Jinping’s regime has stepped up efforts to replicate that model in the Himalayas.'
keep reading
March 10, 2021
'China Crackdown on Hong Kong'
‘The scale of the protests really shook Beijing. All the previous protest movements had lasted a few months, at most. This time, there was huge support, and it wasn’t dying down on its own.’
keep reading
March 9, 2021
'Neither China nor the US fits neatly into any one box’ Yuen Yuen Ang
‘Binary narratives lie behind the common misconception that China’s economic success has vindicated autocracy. (The simplistic logic is that if China is not a democracy, it must be an autocracy, and when it prospers, that prosperity must be because of its autocracy). For liberal democracies, this raises the fear that the “China model” poses an ideological challenge to democracy.’
keep reading
March 7, 2021
Part 2 | 'How Biden Can Learn From History in Real Time' Copy
‘ “International relations scholars,” the political scientist Daniel Drezner has written, “are certain about two facts:'
keep reading
March 7, 2021
How the WTO Changed China
'WTO membership, the new consensus goes, has allowed China access to the American and other global economies without forcing it to truly change its behavior, with disastrous consequences for workers and wages around the world.’
keep reading
March 7, 2021
With growth on track, China starts to unwind stimulus
‘China was the first country to open its lending and spending taps in the face of the coronavirus downturn. Now, it is the first to start to close them, giving others a partial preview at the National People’s Congressof what the end of stimulus will look like. The most notable aspect is its gradualism.’
keep reading
March 6, 2021
'Taper test - With growth on track, China starts to unwind stimulus'
‘China was the first country to open its lending and spending taps in the face of the coronavirus downturn. Now, it is the first to start to close them, giving others a partial preview at the National People’s Congressof what the end of stimulus will look like. The most notable aspect is its gradualism.’
keep reading
March 5, 2021
Nursing China’s Debt Hangover
‘China official target of 6% annual economic growth, announced Friday, is so modest it’s clear something else is going on. A plausible theory is that this is part of a strategy to rein in debt.’
keep reading
March 4, 2021
China & the U.S.: Getting Each Other Wrong
China and the U.S. seem to be in the process of reassessing their views of each other’s strengths and weaknesses. Xi Jinping appears to be seeking some balance in his assessment of the U.S. And analysts in the U.S. have reversed a trend of opinion that ‘China is inexorably rising and on the verge of overtaking a faltering United States.' They argue instead ‘the United States has good reason to be confident about its ability to compete with China.’
keep reading
March 4, 2021
'NATO's Shifting Focus to China'
‘Consider, for example, a war escalating over the defense of Taiwan. “We should not forget that the main member state in NATO, the United States, is not only a transatlantic nation, but also a Pacific nation. And the question is, if at a certain stage, the U.S. were to be threatened by China, would that invoke Article 5 in the treaty?"'
keep reading
March 3, 2021
Missing: Has anyone seen Europe’s China plan?
‘Caught between Washington and Beijing, European capitals find themselves in lack of a strategic China policy.’
keep reading
February 28, 2021
Why Beijing was right to rein in Jack Ma's rogue Ant Group IPO
‘In July 2020, just before their IPO application, Ant Financial not only abandoned the word "financial" and renamed themselves Ant Group, they attempted to list not on the Shanghai or Shenzhen exchanges, where financial institutions list, but rather on the Shanghai STAR Market, which was created as an exchange for high-tech innovators.’
keep reading
February 27, 2021
The rivalry between America and China will hinge on South-East Asia
‘In the rivalry between China and America, there will be a main zone of contention: South-East Asia. Of the two competitors, China looks the more likely prize-winner.'
keep reading
February 26, 2021
'Inside Xinjiang’s Prison State'
‘After years of first denying the facilities’ existence, then claiming that they had closed, Chinese officials now say the camps are “vocational education and training centers,” necessary to rooting out “extreme thoughts” and no different from correctional facilities in the United States or deradicalization centers in France.’
keep reading
February 24, 2021
Japan Is the New Leader of Asia’s Liberal Order
‘In an era of Chinese bellicosity, North Korean provocations, and a raging pandemic, Japan’s inconspicuous ascent to regional leadership has gone mostly unnoticed.’
keep reading
February 23, 2021
‘Patriots’ Only: Beijing Plans Overhaul of Hong Kong’s Elections
‘China plans to impose restrictions on Hong Kong’s electoral system to root out candidates the Communist Party deems disloyal, a move that could block democracy advocates in the city from running for any elected office.’
keep reading
February 23, 2021
HSBC offers lesson in corporate realpolitik
‘HSBC’s Asia pivot is a lesson in corporate realpolitik. It is just as much a recognition of the new political reality facing every western company that is dependent on doing business with China. Businesses will have to choose between western markets and access to China, and between liberal and authoritarian value systems.’
keep reading
February 23, 2021
Germany Is a Flashpoint in the U.S.-China Cold War
'As goes Germany, so goes Europe — and that’s a real challenge for the U.S. Berlin leads a European bloc that could cast a geopolitical swing vote in the U.S.-China rivalry.’
keep reading
February 22, 2021
Remaking “Made in China”: Beijing’s Industrial Internet Ambitions
‘The Chinese government is placing large bureaucratic and financial bets on upgrading and digitizing its already dominant manufacturing base. Such efforts have coalesced around one key term: the “industrial internet” (工业互联网). The successful application of it across Chinese industry would prolong and elevate the “Made in China” era.’
keep reading
February 22, 2021
How American Free Trade Can Outdo China
‘When it comes to trade, a critical dimension of the U.S. and China competition, America is ceding the field. At the same time, China has expanded its trade footprint. When it comes to trade and investment agreements, China isn’t isolated. The U.S. increasingly is. Now we have to make up for lost ground. America can out-compete China, but first it needs to get back in the game.’
keep reading
February 21, 2021
China’s ‘two sessions’: why this year’s event is so important for Xi Jinping’s vision for the future
‘The ‘Two Sessions,’ the annual meeting of the National People’s Congress, the country’s legislature, and the top political advisory body, the Chinese People’s Political Consultative Conference, begins on March 5 and runs for about two weeks.’
keep reading
February 20, 2021
‘The Future of China’s Past: Rising China’s Next Act'
‘By the Party’s own acknowledgment, Deng’s initial arrangement has run its course. It is therefore time to develop a new understanding that will do for the Party in the next 30 years what Deng’s program did in the previous era.'
keep reading
February 20, 2021
‘UNDERSTANDING DECOUPLING: Macro Trends and Industry Impacts’
‘Comprehensive decoupling is no longer viewed as impossible: if the current trajectory of U.S. decoupling policies continues, a complete rupture would in fact be the most likely outcome. This prospect remains entirely plausible under the Biden administration.’
keep reading
February 20, 2021
‘Europe can’t stay neutral in US-China standoff’
‘China aims to create a world that is not safe for Europe — strategically, economically or ideologically. Xi is actively striving to undermine the stature of democracies in the global order. The more power China amasses, the less tolerant it will become with any government that won’t toe its line. China also represents a long-term economic threat to Europe — not merely because it is an advancing competitor in a global market economy, but because Beijing’s policies are designed to use and abuse that open world economy to eventually dominate it.
keep reading
February 20, 2021
‘Beat China: Targeted Decoupling and the Economic Long War'
‘The economy is the primary theater of our conflict with China. It is now clear that the U.S. and Chinese economies are too entangled, particularly in critical sectors such as medicine, defense, and technology.'
keep reading
February 19, 2021
‘No, China is not the EU’s top trading partner'
‘This week the media seized on a report by Eurostat, the European Union’s statistical agency, to declare that China surpassed the United States in 2020 to become the EU’s main trade partner. This is simply not true.’
keep reading
February 18, 2021
‘China faces fateful choices, especially involving Taiwan’
'Should Mr Xi order the People’s Liberation Army to take Taiwan, his decision will be shaped by one judgment above all: whether America can stop him. If China ever believes it can complete the task at a bearable cost, it will act.’ ‘
keep reading
February 18, 2021
'An Unsentimental China Policy'
'Jake Sullivan, wrote in Foreign Affairs in 2019, “The era of engagement with China has come to an unceremonious close.”Yet it is worth remembering what engaging China was all about.’ For most of the past half century, efforts to improve ties with the country were not about transforming it. Judged by its own standards, U.S. engagement with China succeeded. It was only after the Cold War that a desire to change China became a prominent objective of U.S. policy.’
keep reading

Heading

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Suspendisse varius enim in eros elementum tristique. Duis cursus, mi quis viverra ornare, eros dolor interdum nulla, ut commodo diam libero vitae erat. Aenean faucibus nibh et justo cursus id rutrum lorem imperdiet. Nunc ut sem vitae risus tristique posuere.