The tech crackdown in China is 'a paradigm shift': China Beige Book CEO

Leland Miller, China Beige Book CEO, joined Yahoo Finance Live to break down China's crackdown for companies listing overseas.

Video Transcript

SEANA SMITH: Thanks for taking the time to join us today. I guess, just your overall-- you follow this stuff so closely. So once you saw the news of the crackdown in China and, of course, what this means for future investments going forward within this space, what's your big takeaway from the developments that we're getting out this week?

LELAND MILLER: Well, Beijing has been signaling that they're getting serious on this for a long time. And you saw-- everyone saw what happened with Alibaba and Ant Financial and Jack Ma. But I think they still didn't take it seriously enough. This has been a very-- this has been a very easy world to operate in for a number of years. US investors were willing to overlook significant China policy risks because companies were doing so well.

And Chinese tech companies were able to raise so much money on US exchanges that they were basically giving wink-winks to the regulators who were giving them advice. This is a paradigm shift. Things have changed. And now Beijing is making it very, very clear that whether it's adherence to US compliance issues over Chinese law, whether it's securing of data in the homeland versus abroad, China is going to have a very strong take on this. And they're going to start using their leverage in order to pressure companies to do exactly what they want.

JARED BLIKRE: Well, I want to continue this, then. What's the end game? I could easily see a scenario in five or 10 years where we simply don't have Chinese ADRs traded in the US. But is that really what the Chinese authorities want? It seems like they've raised-- they've tried to effort their own capital raising efforts so they don't have to necessarily come to the Western market. Is that part of their strategy? I mean, what's the big picture end goal here?

LELAND MILLER: Yeah, I don't think that's what they want necessarily. But this is a very tricky policy question right now. Because you're looking at an end game that there's no clear endgame to where we're going. The Chinese want their compliance, their regulations, their laws to be the top of the chain. And the US is saying, no, you know, you're listing in US markets. You have to adhere to US laws.

Now in the past, this was done by a lot of winks and nods at each other. The US would have leverage in order to supposedly give audits to Chinese companies, and they simply didn't do it. And the Chinese companies would pay lip service to US regulations, and then they'd do their own thing. But with the political environment changing and with the row over big data and where it's housed becoming so important, that these are no longer things in which both sides are able to look the other way.

So China is pushing from their side. The US is pushing from their side. And there is no obvious endpoint for this. It's going to be a political game. It's going to be a geopolitical game. And we don't know where it's going yet.

SEANA SMITH: Leland, when we hear Chinese companies talking about the opportunity outside of China, I guess, should we always be skeptical of that then going forward?

LELAND MILLER: Well, I mean, look, Chinese companies want to come to the United States. And they want to go to foreign markets because that's where they can raise the most money. Now companies like Alibaba and Baidu and Tencent, all the largest companies can raise money anywhere they want. Smaller companies, it'll be harder for them to raise capital in smaller markets. So there has been a desire for Chinese companies to come this direction.

And I think what Beijing has been laying the groundwork for, for the last 6 to 12 months is to firm up markets back at home, whether it's on the mainland or Hong Kong, to give them more leverage to say, look, you come back home and raise money. It's not perfect. It's not as good as it was before. But we're in a new age. And there is going to be some decoupling going forward. And as long as that's happening, you know, you got to roll with the punches.

JARED BLIKRE: I want to shift directions a little bit. The People's Bank of China kind of surprised a lot of market participants this morning by cutting the reverse repo rate. They're going to free up a trillion Yuan, I believe. And some people saw this coming a couple of days ago, but it seems like the bond vigilantes or maybe the money market vigilantes, they kind of forced the bank into making this decision. I'm just wondering what your reaction is.

LELAND MILLER: Yeah, it's big medicine, but it's the wrong medicine for the problem that you're trying to address. And China Beige Book looks at borrowing and credit in China very, very closely. And what you're not seeing right now is banks that don't have enough funds to lend these-- to lend capital out to small businesses or to more broadly. What you're seeing right now is banks being pickier, sure. Loan projects have been going up. But you're seeing extraordinary loan demand moderate over the course of the past six months or so.

So firms that used to want to borrow, they're not borrowing as much. Our pent-up demand gauge is falling. Our loan application gauge is falling, some of these to record lows. So the problem is not that there's not enough capital being dispersed by banks. It's that there's not enough firms that want to borrow right now. So releasing a trillion Yuan into the economy through an RR cut is not going to solve the problem. It may be a nice, peppy, bullish move for the stock market, but it is not going to help the economy in a material way.

SEANA SMITH: Leland, but I guess, more broadly speaking, what does this tell us just about the slowdown that we could potentially be seeing over there? Of course, they were among the first to rebound from the COVID-19 pandemic. But in terms of how substantially maybe that recovery has slowed, what's your view on that?

LELAND MILLER: Well, there's always been sort of a two-track recovery. On the top line, things have gotten much better and GDP's improved because the industrial economy got up and running very, very fast. It's been doing very, very well. And our manufacturing sector data were very good the last several months and for the second quarter, in particular. Property is still going well. Commodity is still going well.

But what's not going well? Services is treading water. Retail is doing very poorly. So you're not seeing a sustainable consumption recovery at all. You haven't seen that at all since the coronavirus recovery began. As long as that's happening, it doesn't really matter what the GDP number says. What you're doing right now is looking at a growth-- is artificial growth that's not the heart of-- it's not sustainable growth that's going to push the economy forward. So I think until they get the consumption fixed, that these growth numbers don't mean that much, even though they're worried about the optics around them slowing down.

JARED BLIKRE: Yeah, I've been reading articles since Didi news broke and the crackdown began about the regulatory structure over in China. And I was shocked to learn-- I read this in an FT article the other day-- there's really not a lot of linkage between the actual laws and regulations. It seems ad hoc. You got mid-level people calling other mid-level people on the phone, not even using comment letters the way we do in the US. I guess this circles around to our original discussion, like can there ever exist a bridge between our two countries that kind of meet in the middle somehow?

LELAND MILLER: There can, but that means that US and other foreign investors are going to have to take China policy risk more seriously. You're exactly right. There are certain things that the Chinese government apparatus does. They have laws, and those laws always adhere to. But then they also have suggestions, and they have regulators calling people up in phone calls and saying, here's what we need you to do. Here's what the bosses want to see. And if those aren't adhered to, then the companies like Ant Financial and like Didi get into a huge amount of trouble.

So there are various levels in which you have to make-- you have to adhere to the Chinese laws, but you also have to make the party happy. And in the past, that wasn't seen as a big deal. But now it's a very big deal. And I think that any investor that's investing into China and isn't taking this stuff into consideration is going to really get walloped.