China's nervous savers show need for deposit insurance
Mainland government expected to complete law on protection soon, after recent bank run
This week's run on a small rural lender in Jiangsu province has underlined the urgent need for mainland authorities to unveil a framework that will protect retail depositors and wind down insolvent banks.
On Monday, depositors queued up to withdraw their money from Jiangsu Sheyang Rural Commercial Bank in Yancheng after rumours that the bank had turned down a request to withdraw 200,000 yuan (HK$252,000). The panic soon spread to other branches in the area, which by Wednesday were exhibiting stacks of cash to try to calm depositors.
"It is logical that the Chinese government wants to insure bank deposits now with the noise of recent bank runs and corporate defaults," said Mike Murphy, managing director and restructuring specialist at Alix Partners.
Onshore market players now expect that the government will finish drafting legislation on a deposit insurance scheme within the next three months, and that the scheme will be accompanied by rules on bankruptcy of financial institutions.
Yiwen Lu, a Shanghai-based banking analyst at Shenyin Wanguo Securities, said she expected the two laws to be unveiled later this year. In fact, the bank bankruptcy law has already been drafted, according to Simon Gleave, regional head of financial services at KPMG.
Mainland depositors have long assumed that the government would step in to prevent a bank from failing. But the nervous savers in Jiangsu show that those assumptions are being challenged after an unprecedented bond default and a build-up of risks in the financial system.
A recent government approval for the establishment of smaller private banks also increases the need for depositor protection.
As a result, market participants expect the government to speed up the introduction of the legal infrastructure to ensure stability and pave the way for further reforms.
"China's financial sector risks have moved into our forecast horizon as the authorities appear to be laying the groundwork for addressing widespread moral hazard problems in the credit market," said Standard & Poor's economist Paul Gruenwald in a report on China's financial risks.
Murphy noted that deposit insurance would have to be put in place before interest rate deregulation.
"Deposit insurance is the next stage for banking in China in order to increase visibility," Murphy said.
So far, China does not have a law that deals with bank failures nor does it offer an explicit guarantee on deposits.
The current bank regulation states the People's Bank of China could step in to oversee banks that are in danger of being insolvent, but there are no details about liquidation procedures. Also there are no measures that allow the regulator to step in before a bank faces liquidity issues.
"It is important for the regulator to intervene before banks actually run into liquidity troubles. It is a way to curb losses and therefore limit the hit on the deposit insurance fund," Lu said.