Analysis | China bailout guarantee seen as alive and well despite deposit insurance scheme
“When all financial institutions are government owned, and even shadow banks are bailed out, [it’s] hard to see what deposit insurance means in China’s context,” said Andy Xie, an independent economist
China says it’s phasing out one of its most popular deals: high-return, zero-risk investments.
The central government has kept an unspoken promise to depositors, investors and local governments that no matter how risky or poorly executed a venture, Beijing will bail it out in order to maintain financial and social calm.
The implicit deal has been especially important this year as the economy cools and many corporations and trust companies struggle to pay back loans and investors.
On Sunday, the People’s Bank of China indicated that it might fudge on that generous, long-standing offer. The central bank published a draft of a deposit insurance scheme for banks that would cover up to 500,000 yuan per account.
That is no small explicit guarantee. The PBOC says up to 99.6 per cent of depositors will be covered in the scheme, or nearly 50 trillion yuan.
What the central bank has also hinted with the scheme is that which it does not intend to cover, namely, trust and wealth management products that banks offer to customers as a higher-yielding alternative to deposits. In response, analysts expect a wave of assets from wealth management products to sweep back onto bank balance sheets.
For many investors and local cadres, the notion is somewhat unconvincing that the government would give up on the guarantee. In an environment where the main players are connected to the communist party – if not taking direct orders from the state – it’s hard for some experts to imagine a true unwinding of the mainland’s bailout promise.