BEIJING—By moving to insure bank deposits at home, China’s leadership has its eyes abroad.
China on Tuesday detailed a plan to launch a deposit-insurance system in May, a long-awaited move that is aimed at better disciplining its lenders and their customers. Deposit insurance also is seen as a prelude to freeing up government-controlled interest rates on bank deposits—a step Zhou Xiaochuan, governor of China’s central bank, has said could be taken as soon as this year—and eventually allowing money to flow freely into and out of the country.
Under the plan released by the State Council, China’s cabinet, up to 500,000 yuan ($80,550) in deposits made by businesses and individuals per bank will be insured. More than 99% of depositors would be covered, according to central-bank officials. The program will start May 1 and will be backed by a fund run by the People’s Bank of China.
China currently has more than 122 trillion yuan ($19.654 trillion) in bank deposits, among the world’s largest totals.
The plan has little detail on how banks would be charged to fund the insurance program, though central-bank officials say all banks would be required to pay a fee according to the size of their deposit bases and risk profiles.
China has plenty of domestic reasons to insure bank deposits, a long-established arrangement in many Western countries, including the U.S. Soured loans in the banking system continue to rise as China’s economic growth slows. Local government and state-run companies still are burdened with debt from a post-2008 lending binge.
The number of countries that provide bank-deposit insurance has been growing, particularly since the financial crisis. A group of researchers said in a study last year that 112 countries have adopted such insurance, up from 84 in 2003. The list includes countries ranging from Austria, the U.K. and Denmark to Germany, South Korea and Japan. Five countries added insurance programs in 2008, including Australia. The study—by Asli Demirgüç-Kunt,Edward J. Kane and Luc Laeven—found that nearly all European countries have adopted this backstop. By contrast, only about one-quarter of African countries had deposit insurance.
The insurance system is aimed at “preventing and resolving financial risks in a timely manner,” according to the State Council plan. But the move also comes as China seeks a greater international role for its currency, the yuan.
The Chinese leadership is gunning for the International Monetary Fund to declare the yuan an official reserve currency later this year, like the U.S. dollar, the euro and the Japanese yen. A designation from the IMF could help China’s effort to elevate the yuan’s role in international trade and finance, as Beijing increasingly seeks to challenge Washington on the world stage.
The IMF bid is being used as “a goal post to catalyze domestic financial-sector reforms, especially interest-rate liberalization and China’s capital-account opening,” said Tao Wang, China economist at UBS AG.
China has kept a tight grip on its financial system. That has limited the surges of money in and out of the country that have bedeviled other economies, but it makes the yuan less appealing as a tradable currency because its moves don’t fully follow market dynamics.
For the yuan to become more widely traded abroad, Beijing would have to lift some of those controls, a process that has begun already. Two years ago, China removed controls on lending rates. It also has moved in recent years to widen the band within which the yuan can be traded on a daily basis.
Yet the government continues to cap the rate of interest banks may pay on deposits—the current limit on one-year funds is 3.25%—shielding lenders from competing among themselves for money. Policy makers have allowed depositors and the investing public to assume that all banks are implicitly backed by Beijing.
Deposit insurance would make it possible for banks to compete via higher rates without putting customers’ money at risk, and for the government to shift away from the implicit guarantee of all lenders, pressing ahead with a pledge to give the market a bigger role in deciding winners and losers. Basing interest rates on market factors, rather than government policy, also could make the financial system more robust and better able to handle capital moving freely into and out of the country.
Many Chinese officials and analysts warn, though, that Beijing might be inclined to put off liberalizing deposit rates if the economy weakens further. They say that if banks have to pay more for deposits, they may charge borrowers more for loans, at least in the near term. Banking regulators also have expressed concern that relaxing deposit rates too fast could lead Chinese banks to make riskier loans to cover their increased funding costs, a scenario that could end badly, according to officials with knowledge of the matter.
“Slower economic growth and interest-rate liberalization are among the factors that are curbing our profit growth,” Jiang Jianqing,chairman of Industrial & Commercial Bank of China Ltd., China’s largest bank by assets, told reporters last week.
To help relieve banks’ funding pressure, the central bank is expected to free up more money for banks to lend by lowering the proportion of deposits they have to hold as reserves with the central bank, according to banking officials and analysts.
—Liyan Qi contributed to this article.
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