China Beige Book CEO Leland Miller joins 'Squawk Box' to discuss the state of China's economy, U.S.-China trade talks, China's leverage in trade negotiations, the country's manufacturing sector, and more.

Beijing

Donald Trump has signed an order to impose tariffs imports into the U.S. from countries including China, Mexico and Canada.

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China has entered recent trade negotiations with a firmer position, supported by improved economic data compared to previous months. While growth is not exceeding last year's levels, the economy is performing well enough to provide confidence to Chinese negotiators. A significant factor in China's strengthened hand is the inclusion of export controls, particularly on critical minerals and rare earths, which has given China additional leverage in discussions with the United States.

Manufacturing in China continues to be a key driver, with the sector taking out more loans and maintaining strong export activity, especially to Asia. Despite a decline in exports to the United States, overall manufacturing remains robust, which is crucial for China's economic stability as other growth drivers remain limited.

Why the Chinese negotiating hand is quite firm right now

We're joined right now by China Beige Book CEO Leland Miller. His latest report says the Chinese delegation walked into Stockholm with the economy in stronger shape compared to recent months. While growth is still not outpacing year ago levels, July data was clearly better than June's. Leland, thanks for joining us this morning. Does that mean if the economy is improving slightly in China, they walk into these trade talks with a firmer hand or are they more worried about seeing that potential economic growth unset by another round of higher tariffs? I think the Chinese negotiating hand is quite firm right now. One, because the economy is doing fine. It's not doing great. It's doing well enough. On the other side of this, the Chinese have been able to include export controls as part of trade negotiations, which gives them significant leverage they wouldn't otherwise have if this were just a discussion about bilateral trade. So I think that the Chinese position right now is things are going pretty well. They're going pretty well in the trade talks. They're going pretty well in the economy. It doesn't mean the economy is roaring and the economy is not going to roar, but it's good enough right now for Xi Jinping. Explain the export controls, what that means. Well, historically there was a red line in trade talks, this Trump administration, Biden administration, every administration, that you do not include export controls as part of trade negotiations because export controls are considered national security restrictions that you do because your country has a national security need to do them. So they were taken outside the ambit of any type of trade talks. When the Chinese came to the table and said that they were putting a chokehold on rare earths and rare earth magnets, critical minerals, et cetera, this became part of the negotiation. All of a sudden the US side and the Chinese side were negotiating about supply chain choke points on both sides. The second this became part of the negotiation, Chinese leverage went up dramatically because now they have a choke point over the United States economy and in some ways it's mutually assured destruction. So the news that Joe just read about China raising potential security risks with the chips that NVIDIA just got the go ahead to go ahead and start shipping through, is that them playing tip for tat saying, hey, if you're going to talk about Huawei potentially having some security issues and you can't take it, we'll do the same with yours? It's some of that. It's some of them getting to Jensen Huang and saying, hey, look, we know you talk to Trump all the time, whisper in his ear nice things. And I think a lot of it's also concern, longer term concern about the idea of chips having built in tracking so that, you know, we are going towards a future where, you know, hopefully sooner rather than later, you're going to be able to geographically track where the chip goes to. So all this transshipment that's going to China, all these unbelievable, you know, hurricanes of NVIDIA chips that are going into China right now and all these other places they shouldn't, they will be able to be tracked. So we'll be able to know where things are going when that is a future that's not too far away. But I think the Chinese are worried it's coming sooner, meaning you're going to be able to catch us when we lie and cheat. Exactly. OK, let's talk a little bit about one of the things you pointed out in the report that could be concerning, and that's that manufacturing, that sector took out more loans than anybody else in China. And you say that that is a little troublesome just in terms of the trade front. Yeah, if you look at what the PMI is saying right now, it's trying to convey the idea of a weak manufacturing sector. We're not seeing a weak manufacturing sector. We're seeing a manufacturing sector that's continuing to go, go, go. Now, manufacturing has been so strong for so many years now through Covid and afterwards that there is an on-year slide in some of the metrics. But by and large, even though the exports to the United States have been contracting continuously, there has just been an explosion of exports to Asia. And it's really evident in our data. The manufacturing machine is continuing to produce, it's continuing to export. There may be some moderation in the acceleration, et cetera, but manufacturing is still relatively strong in China. And it has to be because they really don't have any other growth drivers right now.

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Why the Chinese negotiating hand is quite firm right now

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