Executives and researchers at the People's Bank of China (PBOC) on Wednesday urged Beijing to tolerate a much higher fiscal deficit than its current ceiling allows, claiming cheap bank loans can no longer drive China's economic expansion.

The PBOC made the recommendation in a report submitted to the country's leaders as national bank executives and finance officials from around the world gather in Shanghai to discuss new ways to revive global growth. 

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The G-20 meeting is expected to promote policies that favor increased spending and the vigorous implementation of reforms to stimulate global economic expansion. 

Robust Reforms Needed

The G-20 conference comes at a time when persistent apprehensions over Beijing's ability to manage China's economic slowdown have tottered global markets. 

The benchmark Shanghai composite index fell by six percent on Thursday, its steepest decline in a month.

Sheng Songcheng, head of the PBOC's statistics department, told the Wall Street Journal that fears of a fiscal crisis have held back reforms in China's fiscal policies for too long.

"Fiscal policy hasn't been proactive enough," Sheng says. "The concern over increasing the fiscal deficit is that it could lead to a fiscal crisis, but our research shows otherwise."

China's present policies maintain the country's budget deficit at 2.3 percent of the gross domestic product (GDP).  Chinese officials say the State Council is currently mulling a move to widen that benchmark to three percent.   

"China has room to expand the deficit to four percent -- or even 4.5 percent -- even if the GDP growth rate drops to five percent," says Sheng.

Tax Cuts

The PBOC says a four percent fiscal deficit would allow government to cut taxes on businesses, freeing up their funds for much-needed investments.  The tax cuts would be in keeping with the reforms outlined by China's central authorities in January.

However, sources tell the WSJ the Chinese finance ministry is likely to balk at proposals to allow such a sharp expansion in the shortfall due to the financial risks involved and the implied decline in government revenues.

There is also some concern that the central government may have to recapitalize Chinese banks at some point, according to people close to the agency.

PBOC officials argue that the country's low debt levels, "relatively fast" economic growth and a wealth of state-owned assets allows China room to sell more bonds and sustain a much higher deficit level.

China's corporate debt now amounts to 160 percent of the country's GDP even as corporate taxes account for an estimated 90 percent of the government's revenues, according to experts at the PBOC. 

"The government should cut taxes to help companies reduce cost," says the PBOC's report to national authorities.

Tagschina economic growth, fiscal reforms, China deficit, G-20