PBOC releases rules for deposit insurance

Measures part of move toward interest rate liberalization

China's central bank on Sunday unveiled draft rules for a long-awaited insurance scheme for bank deposits, in order to protect savers' money as banks become more liberalized.

The draft rules, which are now in the stage of seeking public feedback until the end of December, will apply to Chinese banks, rural banks and credit cooperatives, but will exclude domestic banks' overseas branches and subsidiaries of foreign banks in China, the People's Bank of China (PBOC), the central bank, announced on Sunday.

The maximum compensation for savers' deposits in a bank will be capped at 500,000 yuan ($81,300) per depositor in cases of banks becoming insolvent or going bankrupt. For amounts above the limit, depositors will be compensated from the liquidated properties of the banks.

"The maximum compensation will be able to cover more than 99.5 percent of depositors," the central bank said in a statement Sunday.

The country is set to officially roll out the deposit insurance scheme as early as at the beginning of 2015, the Xinhua News Agency reported on Friday, citing sources.

Deposit insurance is widely adopted in major economies to protect depositors from potential losses triggered by a bank's failure to pay its debts when due.

"Implementation of the insurance deposit system will pave the way for the forthcoming fully liberalized interest rates, as some badly managed banks may eventually go bankrupt amid fierce competition for deposits," Zhang Taowei, a finance professor at Tsinghua University, told the Global Times on Sunday.

China needs to protect its savers before it can liberalize its financial markets and give banks the full freedom to set their own deposit rates.

A deposit insurance fund corporation will charge premiums to banks based on their operations and risk control abilities, according to the central bank.

Establishment of the deposit insurance system means that bank savings will no longer all be guaranteed, so clients may save money in more than one bank to dilute risks or invest in the stock market and wealth management products, Bai Tian, a senior financial analyst at Shanghai-based RoundStone Finance Academy, told the Global Times on Sunday.

Once rates are fully liberalized, commercial banks will be more flexible in setting their own rates to compete for deposits and lending, which will help the business and economy in general, Bai said.

China has been considering the deposit insurance system for years, and it was also written into the reform blueprint set by the top Party meeting held in November 2013.

"It is a trend that banks will compete in a fully liberalized market, and only competition can drive banks to improve products and services," Wang Zhan, a 34-year-old Shanghai resident, told the Global Times on Sunday.

Under a free market, tougher competition may lead to failures, especially among smaller local banks, analysts said.

Currently, Chinese banks are backed by the State, and bank savings are regarded as risk-free.

Amid efforts to free up its interest rates, China removed controls on banks' lending rates in July 2013, and further loosened restrictions on the deposit rate on November 22 by allowing banks to pay savers as much as 1.2 times the benchmark rate set by the central bank, up from 1.1 times the rate previously.