State forecaster says relaxing ratio will free up capital for investment

The rising cost of borrowing is weighing on China's enterprises, especially real estate developers, an economist from a government think tank warned on Tuesday.

Zhu Baoliang, head of the State Information Center's economic forecasting department, called for more flexibility in the central bank's monetary policy, including cutting the reserve that banks must park in the People's Bank of China, the central bank.

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"Monetary policy still has its role" in lower borrowing costs, Zhu said at a news conference organized by the State Council Information Center. And while the central bank should maintain its prudent monetary policy, "a cut in the reserve requirement ratio could be an option," he suggested.

China in April cut the reserve requirement ratio (RRR) for rural banks by up to two percentage points but did not slash the ratio across the board. The ratio for large financial institutions is 20 percent, and for smaller ones it is 16.5 percent.

Many economists at investment banks have called for a cut in the RRR since China's growth slowed to 7.4 percent in the first quarter, but those in the government believe such a cut would send too strong a signal.

Zhu singled out the rising long-term bond rate as a particular threat to China's economy, as corporate investment is adversely affected by it.

China's benchmark borrowing costs have risen, with the yield on China's five-year sovereign note up 83 basis points over the past year to 4.02 percent.

"Compared with the manufacturing sector and local government financing vehicles, developers are much more sensitive to a rise in long-term bond rates. Housing prices rise once the rate drops. So the rising rate really dampens property investment," Zhu said.