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%, 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 near-term 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.
"The central bank is not prepared to cut RRR or interest rates. The effectiveness of monetary policy is limited and we will have to rely on fiscal policy," said a person familiar with the PBOC's thinking, who spoke on condition of anonymity.
Even with China's official lending rate at a record low of 4.35%, economic data shows that firms are depositing money at banks rather than investing for the future, this person said.
July money supply figures showed a sharp increase in cash and short-term deposits and a much smaller rise in longer-term 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 favor borrowing and investing over saving, they said.
A Reuters analysis of the top 100 listed companies who provided quarterly figures shows that their cash and short-term investments at the end of June were up more than 27% from a year earlier. The increase for the top 2,071 was 17%, led by real estate with a rise of 87%.
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".
Household loans, mostly mortgages, accounted for more than 90% of new bank loans in July as corporate credit demand faltered, central bank data shows.
That lowers the urgency for the central bank to cut interest rates or RRR because the price and availability of cash do not appear to be having the desired effect, the policy insiders said.
While policymakers believe rate or RRR cuts yield limited economic returns, they are also worried easing would weigh on the yuan, which hit a six-year low last month, at a time when financial markets are speculating about the next U.S. rate rise.
Easing could also have other negative effects.
"Cutting interest rates could increase pressure on asset bubbles as money flows into sectors outside the real economy. Housing prices in some cities are still rising due to more liquidity and loose monetary conditions," said another policy adviser.
Cutting rates would be an obvious incentive for companies to borrow funds if they want to invest. But many private companies, which account for 60% of overall investment, are either reluctant to borrow of find themselves unable to get loans while economic growth is uncertain.
Many banks shy away from lending to private firms because they are seen as more of a credit risk than a state-related entity that they assume would be bailed out by the government if it was unable to pay its debts.
Private-sector investment grew at a record-low pace of just 2.1% in January-July compared with a year earlier, while investment by state-owned firms jumped 21.8% as Beijing boosted infrastructure and other spending to support the economy.
Government spending overall rose 13% in the first seven months of 2016, double the 6.7% pace of first-half GDP growth.
Earlier this month, Sheng Songcheng, head of the PBOC's Survey and Statistics Department, was quoted by China Business News as saying China's fiscal deficit could rise to between 4% and 5% of GDP, up from the 2016 target of 3%.
To be sure, the sources said easing monetary policy would be an option if economic growth unexpectedly dipped to near or below 6.5% – a baseline needed until 2020 to meet long-term GDP goals.
"Fiscal policy is definitely more effective than monetary policy, but we cannot say monetary policy is ineffective," said a senior economist at a top government think-tank.
"We won't allow growth to slip below 6.5% - it's a bottom line," said the economist.