China’s Bank Deposit Insurance Draws Near

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.

Bank Runs Show China’s Need For Bank Deposit Insurance

THE THREE DAY run on Jiangsu Sheyang Commercial Bank and then on Rural Commercial Bank of Huanghai earlier this week highlights the need for explicit bank deposit insurance in China to replace the implicit guarantees that the government will stand behind depositors. Jiangsu Sheyang is a small rural lender whose 12 billion yuan ($1.9 billion) in assets is barely a rounding error in the total assets of China’s banking system. Yet the panicky withdrawal of funds from four of its branches on nothing more than a rumor that a customer had been denied a withdrawal of their funds needed a full-court press by authorities, including a very public demonstration of large stacks of cash bearing the central bank’s seal being made available, to restore depositors’ confidence and bring the run to a halt.

Setting up a bank deposit insurance scheme would also provide a point of differentiation between the formal and shadow banking systems, making the former more attractive to depositors who are starting to see a number of failures of shadow banking products, albeit small-scale ones, along with, pertinently in Jiangsu Sheyang’s case, the failures of some rural credit co-operatives in the province in January, whose bosses fled in the face of investment losses.

It would also provide a firebreak of sorts between the two banking systems. That might help calm the nerves of policymakers, already frazzled by China’s first corporate bond default and mounting anxiety about the real estate market. They worry that a shadow banking collapse could reverberate into a bigger systemic buckling of the financial system. In the interim, China has resorted to a bit of old-fashioned regulation. The suspected original rumormonger has been arrested.