China to introduce deposit insurance  

China is to adopt a deposit insurance scheme to better protect savers and free up interest rates.

The Legislative Affairs Office of China's State Council published a set of draft regulations containing 23 articles on its website on Sunday to solicit public opinion until December 30, 2014.

Financial institutions will be required to pay insurance premiums to a special fund and an agency will be set up to manage the money. Domestic banks' overseas branches and foreign banks' China branches are exempt.

The fund will pay maximum compensation of 500,000 yuan (81,500 U.S. dollars) per depositor if a bank suffers insolvency or bankruptcy.

The People's Bank of China (PBOC), the country's central bank, said 99.6 percent of Chinese depositors saved less than this sum.

Banks will cover losses more than 500,000 yuan with their own assets, according to the regulations.

The new agency will make detailed rules on how to manage the fund and set insurance premium rate for different banks based on how riskily they run their business.

Well-informed sources told Xinhua that the scheme will likely be implemented as early as at the beginning of 2015.

"The deposit insurance scheme is one important component of a financial safety net. Its purpose is to step up supervision of banks and prevent risks in the financial sector", said the PBOC.

The scheme will significantly improve the competitiveness of medium and small-sized banks as the insurance will assure depositors of the safety of their savings, according to the central bank.

"Therefore, it will help create a fair environment for all financial institutions," said the PBOC.

Deposit insurance is implemented in 112 economies to protect depositors, in full or in part, from losses caused by a bank's inability to pay its debts when due.

All G20 members have adopted such scheme, except South Africa, Saudi Arabia and China. Bank credit in China is virtually endorsed by the government.

"With the scheme in place, the government will retreat and leave banks to bear their own risks," said Guo Tianyong, a banking researcher with the Central University of Finance and Economics.

The country started to mull the establishment of a deposit insurance scheme in 1993 and the central authority promised to set up such scheme in an ambitious reform plan released in November 2013 after 20 years of deliberation.

The deposit insurance scheme is considered a precondition for China to free up deposit rates -- the last and most important step of interest rate liberalization, according to Lian Ping, chief economist with the Bank of Communications.

Interest rate liberalization has been high on the financial reform agenda. In March, central bank governor Zhou Xiaochuan said China was very likely to ease its grip on banks' deposit rates in the coming one or two years.

Last Friday, the PBoC decided to raise the deposit rate ceiling to 120 percent of the one-year benchmark deposit rate, from 110 percent, which economists saw as an important step in interest rate liberalization.

With more autonomy in deciding deposit rates, many banks tended to lure savings with high return promise and invest in risky projects.

"The deposit insurance scheme will restrict them from going too far and keep risks under control," said Lian.

"The establishment of such scheme is critical to deepening the financial reform," said Huang Xiaolong, vice director of the PBOC's Financial Stability Bureau.