Central bank official says China has room to increase fiscal deficit to 5 percent of GDP - paper

A customer counts Chinese Yuan banknotes as she purchases vegetables at a market in Beijing, China, May 9, 2016. REUTERS/Kim Kyung-Hoon/File Photo

BEIJING (Reuters) - China has room to increase its fiscal deficit ratio to between 4 and 5 percent to more effectively boost the economy, official media quoted a central bank official as saying.

China’s current fiscal deficit target is 3 percent of gross domestic product (GDP), up from an actual 2.4 percent in 2015.

But there is room for a slight increase, the Shanghai Securities News quoted Sheng Songcheng, director of the Survey and Statistics Department at the People’s Bank of China, as saying at a forum on Saturday.

While monetary policy is effective, it is limited and requires coordination with a proactive fiscal policy, Sheng was quoted as saying at the forum, where he also suggested that China increase its government bond issuance.

Sheng also reportedly warned that China has already fallen into a “liquidity trap”, where increased money supply is being absorbed by firms that are not in turn investing the cash.

Data on Friday showed that China’s economy grew 6.7 percent from a year earlier in the second quarter, slightly faster than expected as higher government spending and a housing boom boosted construction-related activities and industrial output.

But the numbers also fuelled concerns that China’s growth is becoming ever more dependant on government spending and debt. First-half bank lending hit a record and government spending jumped 20 percent in June.

At the same time, growth in investment by private firms fell to a record low in the first half, as businesses retrenched in the face of the sluggish economic outlook and weak exports.

Reporting by Winni Zhou and Nick Heath; Editing by Kim Coghill