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China to create deposit insurance for banks

A consensus has formed among China’s leaders that the country needs a formal system of bank deposit insurance because banks have ramped up lending and begun offering a wide variety of increasingly risky investment products.

Philippe Lopez/AFP/GettyImages

A consensus has formed among China’s leaders that the country needs a formal system of bank deposit insurance because banks have ramped up lending and begun offering a wide variety of increasingly risky investment products.

HONG KONG — China’s new leadership is preparing to introduce bank deposit insurance as the first step in financial reforms to be started soon at a top-level meeting in Beijing, a government official and banking policy advisers said.

A consensus has formed among China’s leaders that the country needs a formal system of bank deposit insurance as banks have rapidly ramped up lending and begun offering a wide variety of increasingly risky investment products that do not appear on their balance sheets, the official and advisers said.

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Introducing deposit insurance could also help the government steer the financial system toward providing more credit for small and medium private enterprises. These now receive as little as 3 percent of bank lending even as they account for at least half the country’s economic activity.

Without a clear system until now for closing banks that lend unwisely, banks have been encouraged by regulators to lend overwhelmingly to state-owned enterprises that appear certain to repay loans. That has left smaller businesses and private companies starved for credit.

The first public indication of the government’s intense interest in deposit insurance is likely to come at the Central Economic Work Conference this month, said the official, who discussed internal government matters only on the condition of anonymity. Held each December since 1994, the conference is the most important economic policymaking event in the Chinese calendar and sets the agenda for the coming year.

This month’s conference, the exact dates of which are secret, is being watched by economists and investors as a clue to the agenda for the next decade of Xi Jinping, the new general secretary of the Communist Party.

Until now, the government has informally and quietly paid off all depositors in full when small banks and rural cooperatives have failed; no large banks have been allowed to fail. The government’s fear has been that allowing any depositors to sustain losses would undermine confidence in the financial system.

China’s banking industry is divided on the need for deposit insurance. The biggest banks are the least enthusiastic.

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China’s banking industry is divided on the need for deposit insurance. As in other countries, the biggest banks are the least enthusiastic. With a little more than half the country’s deposits, China’s Big Four banks are widely viewed as too big to fail but are likely to owe hefty premiums for the deposit insurance plan being developed.

China’s current five-year plan calls for the government to study deposit insurance, but not necessarily to adopt it.

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