PBOC considers deposit insurance

PUBLISHED : Wednesday, 11 February, 2004, 12:00am
UPDATED : Wednesday, 11 February, 2004, 12:00am

The US model will be hard to follow in China due to the size of state holdings

The People's Bank of China (PBOC) is considering the establishment of a deposit insurance scheme similar to that run by the Federal Deposit Insurance Corp (FDIC) in the United States, according to reports.

While such a move has been mooted in the media before and is believed to be the subject of intense debate within the central bank, yesterday's speculation follows moves by the central government over recent months to restructure and commercialise the mainland's Big Four state banks. Central bank officials declined to comment yesterday.

Analysts said the FDIC, which guarantees individual deposits of up to US$100,000, would be a hard model to follow on the mainland.

'The dilemma of such insurance in China is that it would not cover the bulk of the savings in the system,' said Arthur Lau, director at Fitch Ratings. Unlike in the US, where most savings are held by individuals, more than 60 per cent of the US$1.3 trillion deposited in mainland banks are held by state companies in large accounts.

Another problem is that such a scheme would suggest the government is prepared to let banks go under, undermining market confidence in China's leading banks.

At present, the Big Four all have high non-performing loan ratios and would be susceptible to bank runs if the public lost confidence in their financial soundness.

After several high-profile bankruptcies in recent years in Hainan and in Guangdong, depositors' money was returned in full. During Hainan Development Bank's bankruptcy in 1998, central bank officials ploughed in 3.4 billion yuan to keep depositors quiet.

'Such a system has pros and cons,' said Standard & Poor's analyst Connie Wong. 'It would help stabilise the system ... and some banks might become more aggressive and increase their risk exposure.'

Hu Biliang, a senior economist with the Chinese Academy of Social Sciences, urged the fast launch of the scheme. 'The government should not guarantee all deposits, but establish a limit. Only by setting a limit can it enforce banking reforms,' Mr Hu said.