Banks may have to be more competitive
Print Edition
CHINA has issued draft regulations for the introduction of a bank deposit insurance system for the first time, the latest in a series of steps that will pave the way for liberalizing lending rates.
Under the draft rules, issued yesterday by the Legislative Affairs Office of the State Council, such a system will directly cover deposits of up to 500,000 yuan (US$81,395), according to a notice published on the website of the People’s Bank of China.
The government could adjust the level in future based on what it called economic development, deposit structure and financial risk.
Depositors will be paid in full if their principal plus interest is below the ceiling.
But any amount which exceeds that level will depend on liquidation of the assets of the bank which took the deposit.
The central bank did not say when the rules would be implemented.
The State Council has set a one-month period to seek public comment on the new regulations, according to Xinhua news agency.
Deposit insurance is aimed at “protecting the legal rights and interests of depositors, promptly preventing and resolving financial risk and protecting financial stability,” the draft rules state.
The Deposit Insurance Act (DIA) will cover the savings of 99.63 percent of all depositors, the State Council said.
Deposit insurance is a measure implemented in more than 110 economies to protect depositors, in full or in part, from losses caused by a bank’s inability to pay its debts when due.
China has a massive bank deposit base because there are limited choices for investment. Currency deposits on China’s mainland stood at more than 112 trillion yuan at the end of October, according to central bank figures.
The country has been considering insuring savers’ deposits for some 20 years, but the plans took on a new urgency in the past year as the government sought to deepen economic reforms that included removing state controls on interest rates.
“Establishment of a deposit insurance system will help better protect the interests of depositors and maintain public confidence in the financial markets and the banking system,” the State Council said.
Foreign bank branches operating in China, along with the overseas branches of Chinese banks, will not be covered by the scheme, the draft document said.
All banks under the system will be required to set aside capital, to be collected by China’s central bank and administered by a deposit insurance fund, to pay for the scheme.
The State Council will approve standard rates for the insurance program, along with additional risk rates, the draft regulations said. No details were provided.
The deposit fund will be permitted to invest in government bonds, central bank notes, and highly-rated financial bonds.
Analysts said the move would force China’s banks, the vast majority of them state-owned, to operate more in line with market principles and to be more competitive.
“The deposit insurance plan will require banks to shoulder their own operational risks and depositors will probably choose to put their money in banks with greater safety for deposits,” Liu Dongliang, a senior analyst for the financial markets department of China Merchants Bank, said yesterday.
“China is now speeding up the process of interest rate liberalization. At the same time, the risk to financial institutions is increasing, so the deposit insurance scheme will help respond to this situation,” Liu said.
Control of deposit rates is a legacy of China’s state planning and its financial troubles in the early 2000s, when its biggest banks were technically “insolvent” and bailed out by the government.
Authorities have since kept a close eye on financial institutions, and have in the past dictated a minimum level for lending rates that banks had to comply with. The floor was scrapped in July 2013.
The restrictions have been criticized by some economists, who say they distort credit costs by artificially depressing deposit rates and fuelling wasteful investment. China, they say, should instead allow markets to set the costs of lending and borrowing.
In a landmark measure, China removed controls on bank lending rates last July, but left a ceiling on deposit rates intact. The central bank further eased deposit rate restrictions earlier in November when it allowed domestic banks to pay savers as much as 1.2 times the official benchmark level. The ceiling was previously set at 1.1 times.
The move on November 21 was accompanied by China’s first interest rate cut in more than two years as authorities tried to lift flagging growth in the world’s second-largest economy.
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