China to create deposit insurance infrastructure

The country will accelerate the establishment of a deposit insurance system, according to an article written by Zhou Xiaochuan, governor of the People's Bank of China, the country's central bank.

The Fourth National Financial Work Conference held in January had urged policymakers to draft the details of the system, and that the new system will be introduced when the timing is right, Zhou wrote in the article published in the latest issue of China Finance, a bimonthly magazine under the central bank.

This is the second time Zhou signaled the importance of the deposit insurance system this year. He previously said that preparations for such a system were going on smoothly. The system, long deemed as a reform having been stalled for almost 10 years in China, aims to provide financial institutions a safety net, should a bank file for bankruptcy or be entangled in a crisis.

Guo Tianyong, a professor calling for the setting-up of such a system, said the system means a lot to maintain the banking sector's stability and protect depositors. "Without such a system, the financial system will be a mess after China liberalizes its interest rate and lowers the market entry threshold for financial institutions. In other words, the system is a precondition for fully liberalized interest rates," Guo, director of the Research Center of Chinese Banking Industry at Central University of Finance and Economics, told the Global Times.

China started its trial of the system back in 1995, before the central bank convened experts to form a team focusing on such reform in 2007. But the financial crisis in 2008 made the central bank shift its attention to weathering the setback.

"Large and small-sized banks hold different attitudes toward the system. It is generally considered that the biggest five State-owned banks have no risk of bankruptcy, and therefore, are not interested in getting involved in such a system that will increase their operation costs," Guo said.

If only medium- and small-sized banks participate, the overall insurance costs will be higher, which may force them to take on high-risk-high-return businesses to offset the costs, he said.

The proposed deposit insurance system, with no specific timetable, is tightly linked with China's interest rate liberalization. "The market conditions are basically ready for China to liberalize its interest rates," Zhou Xiaochuan also wrote.

Hu Xiaolian, vice governor of the central bank, said at a press conference last week that the establishment of a deposit insurance system will help banks exposed to intense competition brought by the interest rate liberalization, in a way of offering a cushion.