China's deposit insurance brings floating interest rates closer

The deposit insurance comes as the comfortable days of Chinese banks seem to be drawing to a close. New financial platforms with higher return promises, including Internet-based financing and wealth management products from Alibaba and Tencent, have prompted Chinese savers to withdraw their money from banks and invest directly, causing a decline in deposits.

Affected by this "financial disintermediation" and the economic slowdown, Chinese banks are reporting rising bad debts and squeezed profit margins. If deposit rates are liberalized, banks can fight back with rate hikes to win over savers.

Small and private banks, burgeoning in China thanks to government support, will particularly benefit from the scheme, which can attract deposits with higher rates.

Despite all the benefits, Lian Ping, chief economist of the Bank of Communications, said the scheme could also be a test for small banks. "The scheme is expected to level the playing field for smaller and private banks in the long term," she said.

"They need to strike a balance between high deposit rate incentives and their own investment management to secure a proper profit margin," said Lian.