Government approves long-awaited law on deposit insurance

BOFIT Viikkokatsaus / BOFIT Weekly Review 2015/14

The deposit insurance scheme enters into force at the beginning of May, and will cover deposits up to 500,000 yuan (about €75,000). Over 99 % of China’s depositors will be covered by the scheme. Banks will pay insurance payments into a fund, from which customer deposits will be reimbursed if the bank becomes insolvent. The People’s Bank of China will administer the fund and change the amount of reimbursement. The size of bank premiums has yet to be announced. Foreign banks operating in China and foreign branches of Chinese banks will not be covered by the deposit insurance scheme.

After the introduction of deposit insurance, the PBoC is expected to continue the deregulation of deposit interest rates. The shift to market-based interest rates should increase competition among banks and reduce bank profit margins. Deposit insurance in principle allows banks to fail. So far the state has guaranteed bank deposits by preventing bank insolvencies through bail-outs. Even with the change, however, it is clear the government, which emphasises economic and social stability, would continue keep failed banks on life support. Most of China’s banking sector is still publicly held.

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