AFP: China will launch deposit insurance to help protect bank customers from May 1, the government said yesterday, in a move seen as key to eventually freeing interest rates.
Deposit insurance will “protect the legal rights of depositors, allow timely prevention and resolution of financial risk (and) preserve financial stability”, according to a statement posted on the central government’s website.
The long-awaited plan, which was first announced in November through the release of draft rules, could help force China’s banks -- most of which are state-owned -- to operate in line with market principles and be more competitive, analysts say.
Such insurance raises the possibility that Chinese authorities could allow a bank to fail, though analysts widely expect the government would bail out troubled lenders in order to prevent social protests.
Under the rules, the maximum compensation will be 500,000 yuan (US $ 81,400), the statement said, as in the earlier draft regulations. State media say that would effectively cover 99 percent of the country’s depositors.
China has a vast bank deposit base because savers have limited choices for investment. The country’s domestic currency deposits reached nearly 114 trillion yuan by the end of last year, according to the central bank.
Economic research consultancy Capital Economics called deposit insurance a “stepping stone” to full liberalisation of interest rates.
China still sets deposit rates by administrative order, though it began allowing banks to decide their own lending rates in 2013.
Central bank chief Zhou Xiaochuan revealed earlier this month that the deposit insurance scheme would be implemented in the first half, adding that the government could remove a ceiling on deposit rates this year.
“The removal of the deposit rate ceiling is the final step of interest rate liberalisation, and, if done within this year, would be a significant turning point for China’s economy,” Nomura said in a research note earlier this month.