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Low consumption is a “big problem” for China’s recovery, the analyst firm says

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A man works at a lithium battery factory in Huaibei, central China’s Anhui Province on Saturday, November 14, 2020.

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Persistent weakness in Chinese consumption will prevent companies from charging higher prices – even if production costs continue to rise, says Leland Miller of China Beige Book International, a US-based independent data and analytics company.

“The most problematic momentum of the Chinese recovery – which has been very strong overall for the past year and a half – was the main problem that the consumer is not all the way back,” Miller, the company’s CEO, told CNBC “Squawk Box Asia” on Thursday .

Until there is a “reset” in budget spending, companies will not be able to raise prices much, he said.

“This will essentially be a problem on the production side and especially on the factory side.”

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Yes, there is an inflation problem. Yes, it will be difficult for some parties in China.

Leland Miller

China Beige Book International

Miller said the inflation situation in China is “very focused” at the moment, focusing on raw materials and factories that are under cost pressures.

“Yes, there is an inflation problem. Yes, it will be difficult for some of the parties in China. But specifically … it’s on the production side. It hasn’t passed on to the consumer side, ”he said. “It’s a pretty specific problem in China right now, even if it’s pretty intense right now.”

Covid impact on services, retail

Following an earlier success in containing the spread of Covid-19, first reported in the Chinese city of Wuhan, China’s economy was among the few in Asia to grow in 2020.

Still, the threat from the virus remains. A recent spike in infections in the metropolitan city of Guangzhou around the Delta variant, first identified in India, has led to mass testing and the lockdown of local areas.

“You are seeing a Covid problem that hasn’t gone away,” Miller said. “As long as there is Covid, you will be putting pressure on the services, you will be putting pressure on retailers.”

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Although the service sector in China is “very stable,” it has not managed to break out of its rut, he added.

“Every single one we see for a month or two with stronger services is turning around,” Miller said. “It wasn’t a driver of the economy, and neither was retail.”

“If you want to see a healthier economy or any kind of normality the way people talk about normality, you should see strong services, more retail, and less reliance on production and raw materials,” he said.

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Katherine Clark