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 (PBOC), 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 industrial output and construction-related activity and services.

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.

There are increasing signs that Chinese companies are hoarding cash, signalling a poor growth outlook, economists at ANZ said in a note last week after June money and lending data.

“The divergence between M1 and M2 growth developed further (in June), indicating corporates’ preference is to hold cash. Since the economic prospect is weak, corporates do not spend cash for investment. This is consistent with the declining trend of fixed asset investment by the private sector.”

June M2 grew 11.8 percent year-one-year, more than markets had expected but still below the PBOC’s target of 13 percent. M1 surged 24.6 percent, suggesting a faster increase in corporate demand deposits than time deposits, ANZ said.

Unless the private sector snaps back to life, more fiscal and monetary easing will be needed to keep China’s economy on an even keel, HSBC economists said in a note on Monday.

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

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