PBOC’s Sheng Sees ‘Liquidity Trap’ as Companies Hoard Cash

A senior official at China’s central bank said companies may be falling into a "liquidity trap" and that the government still has room for to expand the fiscal deficit. 

Signs of a liquidity trap, economist-speak for when central bank cash injections into the economy fail to spur growth as monetary policy loses potency, are showing in businesses and households, said Sheng Songcheng, head of the statistics and analysis department at the People’s Bank of China, according to an article Monday in National Business Daily.

Companies are hoarding cash because they can’t find attractive investment uses for it, while households are investing more in the property market, both of which contribute to the liquidity trap conditions, NBD cited Sheng as saying at a forum in Shanghai Saturday.

While some researchers have drawn similar conclusions in the past, such comments are rare from a senior Chinese monetary official. Sheng’s remarks suggest PBOC policy makers may favor more fiscal stimulus instead of additional monetary easing.

Sheng cited the gap between two of the main money supply gauges. Data released Friday showed M1 growth and M2 growth continued to diverge in June, indicating that companies are holding on to money as they wait for better investment opportunities.

Sheng called for more proactive fiscal policy, saying the government can manage a deficit of as much as 5 percent, and said tax cuts are needed to help support businesses, according to the newspaper report. China’s targeted deficit ratio this year is 3 percent.