China issues rules on bank deposit insurance scheme
Beginning May 1, banks must set aside funds to cover liabilities should they become insolvent
Beijing took a key step yesterday towards drastic reform of the mainland's banking sector as the cabinet published rules governing the deposit insurance system, part of Premier Li Keqiang's efforts to introduce more competition in the finance industry.
The State Council said the rules, which take effect on May 1, stipulated depositors could receive up to 500,000 yuan (HK$632,260) each in compensation if a bank went under.
The People's Bank of China said the rules, endorsed by the premier, paved the way for a smooth establishment of a deposit insurance system on the mainland after 22 years of drawn-out preparations.
The council's announcement confirmed an earlier report by the that the premier would push ahead with the liberalisation of the interest rate mechanism and that the scheme would be established on May 1.
Financial institutions will have to place a small portion of their funds with a deposit insurance institution, expected to be under the control of the central bank, and the fund would be used to repay a member's debts if it became insolvent. The percentage of capital banks must put in reserve has not been announced but is likely to be in line with practices followed by developed nations.
With the scheme, the central bank can set up a market-based interest rate mechanism, giving banks greater freedom in deciding deposit and lending rates.
"It is very significant, and banks will have to be prepared for a big reform eventually," said Qin Hua, a senior official with the Industrial and Commercial Bank of China's Shanghai branch. "Strenuous efforts will be made by the banking sector to embrace the new system and the new interest rate mechanism."
Several months will likely be needed for the operating guidelines of the system to be worked out.
Mainland banks currently operate under a rigid system under which they take deposits and extend loans according to the central bank's guide rates, which allows them to rake in large profits due to the gap between the two rates.
Since taking office in 2013, Li has been striving to deleverage an economy facing increasing financial risks. He has expressed determination to give market forces a bigger role in deciding the interest rates and wants banks to lend more to small private firms.
