The Chinese government announced on Tuesday that it will implement the long-awaited bank deposit insurance scheme in May, taking a key step in the country's financial reform.
From May, financial institutions will be required to pay insurance premiums into a fund that will be managed by an agency appointed by the State Council, according to a statement posted on the government website.
The scheme is designed to return bank clients' deposits if their bank suffers insolvency or bankruptcy. The reimbursement will be drawn from the new fund in the case of the deposit being 500,000 yuan (81,433 U.S. dollars) or less, which applies to 99.63 percent of Chinese depositors, said the statement.
The reimbursement shall be paid within seven working days, according to the deposit insurance scheme's regulations.
Banks will pay also indemnity with their own assets to those who have deposited more than 500,000 yuan.
The scheme will cover both RMB deposits and foreign currency deposits from individuals as well as companies. Both the principal and interest are under protection by the scheme.
A separate statement quoted an unnamed official as saying, "The scheme will help build public confidence in the financial market, straighten the relationship between government and the market... and maintain financial stability."
Deposit insurance schemes are an important part of any financial safety net. More than 110 countries and regions have established such schemes. The scheme has long been considered a precondition for China to free up deposit rates -- the last step in interest rate liberalization.
Guo Tianyong, a professor at Beijing's Central University of Finance and Economics, stressed the importance of the scheme to broader economic reform. "Whether it is full liberalization of deposit rates or more approvals of private banks that China will push forward in the future, the country first needs a safety net in the shape of a deposit insurance scheme."
Guo said the scheme will help the development of small banks as it will make depositors more confident in them.
Chen Hufei, an analyst at Bank of Communications, said the scheme has to some extent reminded depositors of the potential risks of saving all their money as bank deposits, and will likely encourage them to diversify asset allocations via multiple investment channels, such as pension insurance, wealth management products, stocks, securities, and precious metals. (Updated)
