China Releases Plan for Bank Deposit Insurance

The State Council, the Chinese government’s top decision-making body, on Sunday released a draft of a plan to insure up to 500,000 yuan ($81,000) in deposits made by businesses and individuals per bank. Banks and the general public have until Dec. 30 to comment on the proposal.
While the State Council statement doesn’t specify when the program will be officially launched, Chinese officials involved in the deliberations say it could be put in place as early as January.
Unlike other major economies, China doesn’t have deposit insurance. For years, banks and the investing public in the world’s second-largest economy have been operating on the assumption that the government would bail them out in times of crisis.
Deposit insurance suggests that Beijing will allow banks to fail because the depositing public would be protected from such a shutdown. The move comes at a time of mounting worries in China after years of lending to troubled industries ranging from real estate to solar panels to steel.
Deposit insurance will help reduce the perception that there is “no risk” in banking in China, said Lian Ping, chief economist at Bank of Communications Corp. , the fifth-largest state-owned Chinese bank by assets. It also paves the way for “eventually realizing interest-rate liberalization,” Mr. Lian said.
As China’s economy has slowed, soured loans in the country’s banking system surged 10% in the third quarter to 766.9 billion yuan. While banks say that amount remains a tiny part of their loan portfolios, the rise is the biggest percentage increase since 2005.
In disclosing plans for a deposit-insurance system, policy makers appeared to nod to rising concerns about financial risks. Deposit insurance will help maintain “public confidence” in China’s banking system, said the People’s Bank of China in a statement accompanying the draft plan. The central bank, which is spearheading the effort, also said the insurance program will ensure that “risks will be discovered early and risks will arise less frequently.”
In a bid to control how the plan is being delivered to the Chinese public, the PBOC—locally sometimes called yang ma, or big mama—has banned banks from talking publicly about their views of the proposal, according to banking officials with direct knowledge of the matter.
China currently has more than 112 trillion yuan in bank deposits, among the world’s largest totals. Under the proposal, more than 99% of depositors would be covered by the program. The plan doesn’t specify how banks would be charged to fund the insurance program, though central-bank officials say all banks would be required to pay a fee to a fund run by the bank according to the size of their deposit bases and risk profiles.
In recent months, deposit insurance—a topic that has been under discussion in China on and off for two decades—also has taken on new urgency as President Xi Jinping repeatedly pledged to carry out a number of overhauls to put China’s economic growth on a more sustainable path. Deposit insurance is seen as a crucial step toward another, more difficult reform: freeing up government-controlled interest rates on bank deposits.
Without such insurance, depositors could take big hits if banks sharply raise rates to attract savers but then run into trouble making the big payouts. Deposit insurance frees up banks to compete for depositors’ money without risking the savings of their customers, potentially challenging China’s biggest banks for deposits and introducing more market-based principles into the system.
Zhou Xiaochuan , China’s long-serving central-bank governor, said early this year that China could free up deposit rates by the spring of 2016, the first time a senior official publicly put forward a timetable for the reform. However, many Chinese officials and analysts warn that Beijing might be inclined to put off that move if the economy weakens further. Liberating deposit rates could drive up companies’ funding costs, at least in the near term.
One reason why the insurance plan has taken so long to come out is the concern among policy makers over a potential flight of deposits to big state-owned banks. For many ordinary Chinese savers, deposit insurance introduces the concept of risk into a banking system that has long been seen as implicitly backed 100% by Beijing.
That could lead them to move deposits to China’s big four state-run lenders, which are widely considered too big to fail and could give depositors extra peace of mind, according to bankers and analysts.
With deposit insurance, “savers will be more inclined to choose big banks rather than smaller ones,” said an official at Industrial & Commercial Bank of China Ltd. , China’s largest bank by assets. Press officials at the bank couldn’t be reached for comment Sunday night.
If such a shift occurs, it could mean fewer loans for small and private businesses—the very group seen by Beijing as key to the country’s future economic growth—because the largest banks focus their lending on big state-owned companies. To that end, the central bank is taking pains to ensure there is no panic among those who have parked their funds with small banks.
In its statement, the PBOC said the insurance plan will benefit small and medium-size banks more because it can enhance their “creditworthiness and competitiveness.”
Still, the program could lead to higher costs of funding for banks as they more fiercely compete for depositors, potentially hurting their profits and passing the added costs onto borrowers.
“One obvious way to compete is to raise deposit rates to the maximum allowed,” said an official at Bohai Bank Co., a regional lender. Currently, banks in China can offer up to 3.3% on one-year deposits.
“No question [deposit insurance] will cause banks’ funding costs to rise,” the official said. Press officials at Bohai couldn’t be reached for comment Friday night.
Chinese banks already are battling with the potential for thinner profit margins after the PBOC cut interest rates in late November for the first time since 2012. Because the central bank cut benchmark lending rates more than it cut rates on deposits, the difference between how much banks charge borrowers and how much they pay depositors could narrow sharply, pressuring profits.
To help relieve the pressure, banks are already calling for the PBOC to lower the amount of reserves they have to set aside with the central bank, which could help boost their ability to make loans, according to Chinese banking executives.
But taking such a move too soon would risk overstimulating the economy, according to advisers to the central bank.
The PBOC “has a difficult balance to strike,” said Peng Junming, a former central-bank official who now runs his own private investment firm in Beijing, called Junfan Investment Co.