China to introduce deposit insurance system

Will lay the basis for interest rate liberalization in banking sector.

China is to launch a deposit insurance system after a consensus was reached within the government. A financial stability report by the People’s Bank of China, the central bank, supports liberalizing the interest rate regime and marks the latest move towards market-based reforms that will eventually loosen China's financial sector.

A deposit insurance program guarantees that a certain level of deposits is backed by the state even if a bank cannot pay them.

The report said PBOC is ready to set up a deposit insurance system. After numerous research and debates, all sides have reached consensus and PBOC will kick off the scheme at a proper time. The central bank is expected to issue the full report in the next few months.

The new insurance system is also seen as laying a foundation for interest rate liberalization, as a market-oriented interest rate would force banks to lose built-in interest rate margins and could put depositors at risk.

China started to relax its cap on interest rates in June 2012 by removing the ceiling of deposit rates and lowering the floor on lending rates.
Chinese banks can pay up to 110% of the benchmark deposit rate (now 3% annually) and impose loan rates as low as 70% of the benchmark level of 6%. This guarantees banks a margin of at least 90 basis points.