(Yicai Global) Nov. 12 -- China is not experiencing deflationary pressures and still has fiscal wiggle room, so the best policy is to cut lending rates rather than inject liquidity into the economy, according to an advisor to the Shanghai government.

Proactive fiscal policies should be the top priority while monetary policy adjustments should be complementary, Sheng Songcheng, counselor to the Shanghai Municipal People's Government and former director of the Statistics and Analysis Department of the People's Bank of China, said in an interview with Yicai Global yesterday.

Banks are not short of liquidity, he added. Further reserve requirement ratio cuts, which allow banks to lend more, are unsuitable for now.

Rather, lower lending rates can make business financing somewhat easier and more affordable, he said. The PBOC should focus on lowering the medium-term lending facility and loan prime rates to stimulate willingness to borrow money.

Although such a move may squeeze banks, it helps promote investment in the real economy, which will benefit lenders in the medium- to long-term, he added. China's interest rates are still relatively high compared to the rest of the world.

Rising pork prices have hampered monetary policy to some extent, but the core consumer and producer price indexes are still falling. Hence monetary policy shouldn't be eased but structural adjustments are still necessary. 

GDP Under Pressure

Judging from gross domestic product in the third quarter, China's economy is under considerable downward pressure, he said. Consumption and net exports are contributing less to economic growth, while investments are weakening steadily.

This is mostly due to three factors. First, the global purchasing managers' index is falling and export orders are at their lowest since the 2008 financial crisis. Second, insufficient domestic demand has curbed business' willingness to expand output. 

Third, implicit debt and restricted capital sources have impacted infrastructure investments, while new infrastructure-related policies have not yet come into full play. Therefore, fiscal and monetary policies are still needed to support economic growth.

Additional tightening of the housing market is not necessary, as existing regulations are already taking effect, he added. Property investments have been decreasing over the last half year. If supply is restricted, prices may not be controlled as planned. Rather, a lack of demand could boost house prices at a later stage.

Investment in real estate development came to CNY9.8 trillion (USD1.4 trillion) between January and September, up 10.5 percent from a year earlier, according to data from the National Bureau of Statistics. The growth rate has fallen for five months in a row. Commercial building sales fell 0.1 percent and land purchases dropped 20.2 percent over the same period, with the growth of both slowing for eight consecutive months.

At the end of September, outstanding yuan-denominated real estate loans made up 28.9 percent of total yuan loans. New mortgages accounted for 33.7 percent of new loans in the first three quarters, 6.2 percentage points lower than in the same period last year, and within a reasonable range, Sheng said. So further policy tightening it is not needed.