In an interview with Beijing Youth Daily, Li Yang, a member of the People's Bank of China (PBC) monetary policy committee, confirmed that China is taking a close look at implementing a deposit insurance system. He said that an institution resembling the Federal Deposit Insurance Corporation (FDIC) in the United States is under consideration.
The PBC - China's central bank - formed a research team to study deposit insurance systems in 1997. Although the issue has been discussed many times in internal meetings, there is still no firm timetable to put a system in place.
Financial issues are a top concern of China's leaders, especially in light of the huge non-performing assets that threaten the national economy and enormous private deposits that affect millions of households.
Deposits by individuals in China have topped 10 trillion yuan (US$1.2 trillion), according to the central bank. The immaturity of the capital market means that they have few investment options, so the majority of Chinese tend to put money in banks even when the interest rate has been slashed to the lowest point in years.
But the banks - especially the Big Four, China's main state-owned banks - have generated huge non-performing assets. The PBC reports that the total amount of non-performing loans (NPLs) reached nearly 2 trillion yuan (US$239.8 billion) by the end of September 2003, with an average NPL rate of 21.4 percent.
China's financial institutions mainly depend on sovereign credit, which keeps deposits relatively safe during periods of panic withdrawal. The central bank research team last year completed a 10-page research report revealing that the saving deposits in the Big Four, nearly 70 percent of the total, were backed by recessive sovereign credit.
However, China has nine more national commercial banks, hundreds of city commercial banks and rural credit cooperatives, and other financial institutions. These smaller financial institutions are easily exposed to risks since they lack the support of sovereign credit. In 1998, the Hainan Development Bank went bankrupt. The central bank entrusted its clearing to the Industrial and Commercial Bank of China (ICBC), the biggest state-owned bank in China, to ease panic. Still, it was a costly experience for the PBC and required coordination with all levels of government and judicial departments.
The necessity and feasibility of a deposit insurance system have been proved, but the real question is how to build one from the ground up. The Big Four have expressed reluctance, and the banking watchdog has also worried about moral hazard that deposit insurance can generate, says Wei Jianing, a research fellow at the State Council Development Research Center, a government think-tank.
An anonymous PBC official told the 21st Century Economic Report that the central bank is leaning toward setting up an independent deposit insurance corporation with a board that includes representatives from the PBC, the China Banking Regulatory Commission (CBRC), the Ministry of Finance, policyholders and independent scholars.
It also wants to implement a compulsory deposit insurance system. Initial capital might come from the Ministry of Finance and central bank, with revenue deriving primarily from insurance premiums, earnings on investment and additional capital from the original sources. To avoid moral hazard, the PBC will regulate compensation rates and ceilings, and adopt a graduated premium rate based on risk, the newspaper reports.
Wei Jianing says that the PBC, CBRC and the deposit insurance institution form the framework for China's financial supervision: The central bank is responsible for macro-policy, the CBRC directly governs financial institutions, and the deposit insurance institution will form the final firewall against possible financial risks.
(China.org.cn by Tang Fuchun, February 20, 2004)
