Cash hoarding by companies reinforces China’s anti-easing view

The current easing cycle began when the central bank cut interest rates in November 2014

On the face of it, China’s central bank has room to cut interest rates to try to lift the economy, but sources say evidence companies and banks are hoarding cash has reinforced policymakers’ view there is no major benefit in easing policy further.

The reluctance has also been shaped by the experience of Japan and the European Union. Despite much more aggressive easing policies than China, including negative interest rates, they have struggled to lift their economies out of the doldrums, these sources said.

So unless China’s economic growth is at serious risk of falling below 6.5 per cent, policymakers do not see the need to reduce interest rates or bank reserves, known as the reserve requirement ratio (RRR), they said. The sources are involved in internal discussions of policy proposals and offer advice, but are not part of the final decision-making process. The People’s Bank of China (PBOC) did not respond to a request for comment.

Beijing has already cranked up government spending this year to support economic growth, but the view that policymakers see limited dividend from cutting rates or the RRR could knock any lingering market expectations for a nearterm easing.

It is also likely to disappoint state-owned enterprises and provincial governments, many of which are saddled with heavy debts, while many private companies are reluctant to invest right now given economic uncertainties, so cheaper credit may not make much difference to them.

Even with China’s official lending rate at a record low of 4.35 per cent, economic data shows that firms are depositing money at banks rather than investing for the future, sources said. July money supply figures showed a sharp increase in cash and short-term deposits and a much smaller rise in longerterm deposits, a divergence economists say shows companies are holding onto cash and banks are not lending all that they can.

China’s relatively low interest rates should favour borrowing and investing over saving, they said.

The current easing cycle began when the central bank cut interest rates in November 2014. It subsequently cut rates another five times and RRR for all banks five times.

That has left the financial system flush with cash and interest rates low for borrowers, but has not pushed money into areas of the economy most in need, raising concerns of a “liquidity trap”.