China's nervous savers show need for deposit insurance

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.