THE LAUNCH OF China’s long-awaited bank deposit insurance scheme looks set for early next year. The official news agency is implying it will happen in January. Public comment on the newly published draft proposal closes on December 30th. When it does happen deposit insurance will be the most important financial reform to date of the Xi era and an important further step along the road to interest-rate liberalisation. The central bank has pencilled in 2016 for fully freeing deposit rates to be market-based.
Under the proposed insurance scheme, savings deposits of up to 500,000 yuan ($81,000) would be covered. That would put more than 99% of depositors but, on best estimates, less than 50% of the country’s 112 trillion yuan of bank deposits within its remit. Neither wealth-management products nor deposits within the shadow banking system would be covered. Nor would deposits at overseas branches of Chinese banks or those in the Chinese branches of foreign lenders.
Most important of all, the implicit bailout guarantee that all depositors have hitherto got from the government goes. Just as Beijing has allowed the first corporate bond default, so a bank will now be allowed to fail. Bad loans across the banking system are at a six-years high of 767 billion yuan.
One question is how depositors will react if the government is now seen as willing to let banks fail while at the same time banks will be able to compete for deposits once interest rates are liberalised. Will depositors switch deposits to the large banks, perceived as safest, or leave their money in smaller banks, reassured by the introduction of deposit insurance?
If the former, that would be bad news for small and medium-sized businesses that want to borrow money, as the largest banks prefer to lend to the big state-owned enterprises, and for the smaller banks themselves as it could intensify a liquidity shortage increasing their risk of failure.