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The Chinese economic growth model ‘as we know it is over,’ China Beige Book CEO says

Leland Miller, China Beige Book Co-Founder & CEO, and Keith Krach, Chairman of the Krach Institute for Tech Diplomacy at Purdue, join Yahoo Finance Live to discuss the outcome of the Chinese Communist Party congress, the party's priorities, Xi Jinping consolidating his leadership and appointing loyalists to the politburo, and what that means for geopolitical stability.

Video Transcript

AKIKO FUJITA: We are beginning this hour, though, with all eyes on China. President Xi Jinping officially securing a third term on Sunday, making him the most powerful leader since Mao Zedong. Xi consolidating power by packing the Politburo standing committee with the most loyal to him. China's third quarter GDP data, delayed by a week, came in above estimates with growth at 3.9% year over year. But a robust recovery remains elusive as China faces challenges like such as persistent COVID-19 curbs and global recession risks.

We should point out that sent stocks lower in greater China on investor fears of Xi's new term favoring ideology-driven policies over growth. The Hang Seng in Hong Kong capped its worst day since the financial crisis in 2008. And the Shanghai Comp also down about 2% there. Major Chinese tech names also falling into the red on concerns about Xi's embrace of state-owned firms versus private companies.

We've got a panel for you to break it all down for us. We've got China Beige Book co-founder and CEO, Leland Mueller, alongside Keith Krach. He's chairman of the Krach Institute for Tech Diplomacy at Purdue. And gentlemen, it is great to have both of you on today. Leland, let me just start with you on the reaction that we got overnight in the Asia session here. Certainly, it looks like investors not feeling very comfortable with which direction China is now heading in, with Xi securing his third term. What do you make of this selloff?

LELAND MILLER: Well, it's not altogether clear whether markets believe China's economic data this time around, but what's pretty clear is that nobody was very happy with the way that she packed the new leadership with loyalists. I think there was always a desire to see somebody who symbolized more market openings, disagreements in the top leadership, some sort of more fulsome pushback against COVID zero.

Look, you can read tea leaves a million different ways here. But when you look at who he put up next to him, it looks like it's going to be the Xi show with very little pushback against him. And I think that worries people who've watched the crackdowns of the last two years.

AKIKO FUJITA: Leland, just to follow up there, I mean, this did seem very much like a focus more on national security, not necessarily on economic policy. And I know we don't come to expect that at the party Congress, but we're still looking at a growth rate here well above that 5 and 1/2% target that was initially set out for the year. What does that tell you about where the economic priorities are for the third term for this president?

LELAND MILLER: I just think the economic priorities have completely changed from this time around. We've been taught as China watchers to see the party as prioritizing growth above all. And that has been true for the last 5, 10, 15 years. It is not true anymore. The China we're looking at right now, led by Xi Jinping, is one focused more on security. It's focused more on restructuring the economy so there's fewer vulnerabilities for the party in terms of reckless credit expansion in the property sector, shadow finance out of control.

They want to take control of the economy, reroute the economic growth model. And to do that, they have to materially slow down the economy, stop pumping credit in. So things are changing dramatically. They're not forgetting about the economy, but the Chinese economic growth model, as we know it, is over. And they're shifting to a more realistic stance.

AKIKO FUJITA: Keith, certainly from the US perspective, a lot to watch here in terms of the language that came out of the party Congress. One thing certainly those in Washington watching here, the changing in terms of the language with the party's constitution here, specifically on Taiwan, using the words "strength" and "fighting spirit" and "ability deterring any kind of separatists" or saying that they are, in fact, still moving in the direction of reunification, what did you take away from this party Congress in terms of the timeline China is now thinking about in terms of reunification?

KEITH KRACH: Well, I don't think there's any doubt, Akiko, that Xi is committed to that. Xi is not only the most powerful dictator since Mao, but he's probably the most powerful dictator in the world since Hitler. And, you know, he's probably even more dangerous. So I think a question for your viewers is not just what our-- what's the data, what's the analysis. Leland is one of the great experts in the world on that.

The question is, we know what's happening. There's no limit to his ambitions. So the question is, in terms of the business boardrooms, what are you going to do about it? And what are the moral responsibilities, what are the fiduciary duties that shareholders have to mitigate risk, what these board members have to mitigate that risk for their shareholders?

And, you know, I've spent a lot of time with the corporate boards out here in Silicon Valley. And all of these folks are putting together China contingency plans because they see the crackdown on the private sector, they see the draconian COVID lockdowns, and they see no limit to his ambition for power.

AKIKO FUJITA: To what extent have those risks been elevated because of that consolidation of power that we saw over the weekend? I mean, you said that you're talking to companies and their boards. What do those contingency plans now look like?

KEITH KRACH: Well, they cover a number of things. First of all, they cover supply chains because if there's any bottlenecks there, they all saw that during COVID so that was a wakeup call. The other big wakeup call was when Xi's totalitarian twin, Putin, invaded Russia, and 300 companies had to come out. They lost hundreds of billions. The China problem is 10 to 20 times X that.

So there's a conflict in Taiwan. It's not only disastrous for the business community. It's catastrophic for the tech business because of Taiwan's lock on semiconductors. They also see the risk of Xi nationalizing firms, nationalizing, not being able to get their money out of there. But also a big question now that's popping up, Akiko, is these crimes against humanity they're committing in places like Xinjiang. The United States and several other countries have labeled that genocide. So there's a real moral issue because they export that slave labor all throughout China.

AKIKO FUJITA: And we have already seen legislation here in the US to crack down on some of that. Leland, last question to you. As you know, these party congresses are very closely orchestrated. Every single detail is really-- doesn't go without a hitch. And yet, we saw what was kind of an awkward moment here where we saw the former president, Hu Jintao, being escorted out. He's sitting right next to Xi Jinping there. It appeared at least that he didn't want to go. And there's been a lot being made of that. What exactly was the message Xi Jinping was trying to send if it was, in fact, that? What was your read on that moment that we saw over the weekend?

LELAND MILLER: You know, it's hard to know for sure. We know that it was a pretty big humiliation for Hu. But are we absolutely sure this is part of a public purge of the Communist Youth League faction, which barely exists anymore? That's not clear at all. Hu's son was in the room. You know, he's in the Politburo. So I guess if we track his career over the coming months, we'll be able to get indications of whether this is something that was specific as Hu, or it was some other dynamic.

But very weird with such a choreographed event. It is weird to have a spectacle like that that left people talking all weekend. So we're going to just have to watch the politics in the next couple of months to see what this was all about.

AKIKO FUJITA: OK, appreciate you both joining us today. China Beige Book co-founder and CEO Leland Miller, along with Keith Krach. He's chairman of the Krach Institute for Tech Diplomacy at Purdue.