Deposit scheme key step to free interest rates
Print Edition
CHINA will launch a deposit insurance scheme to help protect bank customers on May 1, the government said yesterday, a move seen as key to eventually freeing interest rates.
The Deposit Insurance Act has been officially approved and will cover deposits up to 500,000 yuan (US$81,000), the State Council, China’s Cabinet, said in a statement on its website. From May, financial institutions will be required to pay insurance premiums into a fund managed by an agency appointed by the State Council, Xinhua news agency reported, citing the statement.
The scheme is designed to return customers’ deposits if their bank is insolvent or bankrupt.
The reimbursement will be drawn from the new fund in the case of deposits of 500,000 yuan (US$80,657) or less, which applies to 99.63 percent of Chinese depositors, the statement said.
Reimbursement
The reimbursement will be paid within seven working days, according to the scheme’s regulations.
Banks will pay indemnity with their own assets to those who have deposited more than 500,000 yuan.
The scheme will cover both yuan deposits and foreign currency deposits from individuals as well as companies. Both the principal and interest are protected.
The scheme will “protect the legal rights of depositors, allow timely prevention and resolution of financial risk (and) preserve financial stability,” the statement said.
The long-awaited plan, which was first announced in November through the release of draft rules, could help force China’s banks — most of which are state-owned — to operate in line with market principles and be more competitive.
China has a vast bank deposit base because savers have limited choices for investment. China’s savers had piled up 122 trillion yuan in local-currency deposits as of February.
Economic research consultancy Capital Economics called deposit insurance a “stepping stone” to full liberalization of interest rates.
China still sets deposit rates by administrative order, though it began allowing banks to decide their own lending rates in 2013.
Central bank governor Zhou Xiaochuan has revealed that the deposit insurance scheme would be implemented in the first half, adding that the government could remove a ceiling on deposit rates later in the year.
The insurance system and other financial reforms had been widely anticipated, with Zhou suggesting further capital account liberalization this year, including cross-border investment, easier access for the Shenzhen-Shanghai Stock Connect and amendments to foreign exchange rules.
Zhou said early last month that the possibility of fully liberalizing China’s interest rates mechanism is “very high” this year. China has many accomplishments in liberalizing its interest rates over the years, and it is “a reasonable prediction” that China is very close to the last step of fully liberalizing interest rates, namely scrapping the upper limit of deposit rates, Zhou told reporters.
In February, the central bank allowed banks to offer deposit rates within 30 percent above the benchmark, up from the band of 20 percent.
“The removal of the deposit rate ceiling is the final step of interest rate liberalization, and, if done within this year, would be a significant turning point for China’s economy,” Nomura said last month.
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