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Deposit insurance policy to be released soon

By Wang Xiaotian (China Daily)

08:50, March 07, 2013

Official research shows that a deposit insurance system - a major step for interest rate liberalization - is mature enough and is expected to be put before the public "very soon", Pan Gongsheng, a deputy central bank governor, said on Wednesday.

"The central bank has worked on establishing the system for many years, and we're just waiting for the right time to make a substantial move," Pan said while attending a group discussion of the annual session of the Chinese People's Political Consultative Conference as a member.

"A market exit mechanism for financial institutions is crucial for further progress as we push forward market-oriented reforms in such areas," he said.

Deposit insurance protects depositors from losses caused by a bank's inability to pay its debts when due and is one component of a financial safety net that promotes financial stability.

Central bank officials have said that the country's financial reforms must be conducted in a way that conforms to the basic principles of commerce and the market system.

The insurance system will be based on the model the central bank used when solving the bankruptcy of a Shenzhen-based securities company in 2004, Shanghai Securities News reported at the beginning of the year, quoting An Qilei, deputy head of the central bank's financial stability bureau.

According to An, the model means any official bailout for troubled lenders and their deposits would be based on the principle of "no interest rates, discounted principal and limited purchases".

Liu Mingkang, the former chairman of the China Banking Regulatory Commission and a member of the CPPCC, said he expected major progress on interest rate liberalization this year as the government put it ahead of currency reform in the annual work report.

"Freeing interest rates would be a correct path leading to more market-oriented pricing of the currency exchange rate."

Some analysts have worried that market-oriented interest rates will widen performance gaps among banks and harm the economy because lending rates may rise as long as State-owned banks have bargaining power due to their near-monopoly position.

Liu said the banking system is actually well prepared for the upcoming change, as wealth management products that are priced by market demand and supply have already served as substitutes for deposits.

But Cai Esheng, a vice-chairman of CBRC, said allowing financial institutions to exit the market if it is not well operated would not be that easy, as the country needs to guarantee enough employment.

"Without some complementary policies, we cannot imagine Chinese banks sacking their staff as much as their international counterparts did amid the global market turbulence, let alone letting them go bankrupt."


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