Plan marks move toward market-based system
China's long-anticipated deposit insurance scheme is set to be implemented in May, according to a statement posted on the central bank's website on Tuesday, signaling a major step toward a more market-oriented financial system.
The draft nationwide scheme was first released on November 30, 2014, and the final version released Tuesday was almost unchanged.
Starting from May 1, deposits of up to 500,000 yuan ($80,658), including both principal and interest, will be insured. The scheme will cover both yuan deposits and foreign currency-denominated deposits.
Under the scheme, except for overseas branches of domestic banks and subsidiaries of foreign banks operating in China, financial institutions will be required to pay premiums consistent with their operations and risk control capacities into the deposit insurance fund.
Historically, there has been an implicit guarantee that China's banks would not be allowed to fail, with the State providing a safety net. The new insurance scheme marks a transition toward a more market-based system.
A separate statement jointly released on Tuesday by the Legislative Affairs Office of the State Council and the central bank said the introduction of the scheme is a key move in "protecting the interests of depositors in a market economy," and "a pivotal component of the [country's] financial safety net."
Deposit insurance schemes are in place in more than 110 countries and regions across the world, and now the time is ripe for China to set up such a scheme, read the statement, which also noted that the State Council had proposed establishing a deposit insurance fund as early as in 1993.
Some of the fund may be invested in government bonds, central bank notes or financial bonds with high credit ratings, but it will be used in a way that guarantees its safety and value.
Implementation of the bank deposit insurance scheme could mean that smaller banks will face a challenge, experts said.
"Rich depositors might disperse their money into several banks to minimize potential risks, and people who have put their deposits into small banks might transfer them to big ones," Liu Dongliang, a senior analyst at China Merchants Bank (CMB), told the Global Times on Tuesday.
"It will also be increasingly difficult for small banks, such as city commercial banks and rural banks, to compete for depositors' money," Liu said. "They will face rising costs in attracting deposits, which will add to their operational risks."
Addressing concerns over the safety of deposits, the joint statement also noted that deposits above the 500,000 yuan ceiling could still be protected in the event of serious troubles facing banks, as the deposits at failed banks would be transferred to other eligible financial institutions.
The 500,000 yuan ceiling might also be adjusted in the future, depending on the economy's development, the changing deposit structure and financial risks, but the current figure, equal to about 12 times the country's GDP per capita in 2013, is already higher than the level seen in many other countries and regions, said the joint statement.
The 500,000 yuan ceiling offers "full protection for 99.63 percent of depositors" nationwide, it said.
Implementation of the scheme is also regarded as a harbinger of further liberalization for interest rates.
Liu said removal of the cap on deposit rates is likely to take place within the year, a move seen as the last step toward the full liberalization of interest rates.
The scheme also stipulates that financial institutions' interbank deposits will not be insured. This has eased concerns about the scheme for some Internet-based financial service providers, as it means they will not have to pay premiums into the deposit fund.
It means individuals' investments in online monetary funds such as Alibaba Group's Yu'ebao will not be insured, Zeng Linghua, chief analyst at Shanghai-based fund consultancy Howbuy, told the Global Times on Tuesday.
Tianhong Asset Management Co, the operator of Yu'ebao, said that so far it has "no comment on the scheme's potential effect," when reached by the Global Times on Tuesday.
Zeng said the new scheme will not have a big impact on the business of big online monetary funds such as Yu'ebao, given their status and credibility in the industry.
