China deposit insurance program in the offing

BEIJING - China is set to introduce its long-awaited deposit insurance program as early as at the beginning of 2015, which will pave the way for the full liberalization of interest rates, well-informed sources told Xinhua.

Multiple central Chinese government departments are finalizing the final stage of the program, including the People's Bank of China (PBOC, central bank) and the China Banking Regulatory Commission (CBRC), sources said.

China's deposit insurance program is expected to use practices commonly adopted in other nations, such as limited compensation for depositors and differential insurance premium rates for commercial banks.

Maximum compensation is likely to be set at 500,000 yuan ($81,433) per depositor when a bank suffers insolvency crisis or bankruptcy.

A special agency will be established to manage the deposit insurance fund, they said.

Deposit insurance is a measure implemented in more than 110 economies to protect bank depositors, in full or in part, from losses caused by a bank's inability to pay its debts when due.

The deposit insurance program is one important component of a financial system safety net that safeguards financial stability. China has been discussing extensively the setup of a deposit insurance program for years.

Over the last two months, there have been increasing signals that the deposit insurance program was forthcoming, as senior Chinese officials had, on four occasions, mentioned expediting the establishment of the program.

The latest comment came on Thursday by Hu Xiaolian, vice-governor of the central bank, who told a forum in Beijing that the PBOC will speed up the market-oriented interest rate reform and the establishment of a deposit insurance program.

Also on Thursday, a photo of a PBOC meeting notice appeared on Chinese websites, the PBOC held the meeting on Thursday afternoon to study and arrange the implementation of the deposit insurance program.

A deposit insurance program is considered a precondition for China to free up deposit rates -- the last and most important step of interest rate liberalization in China.

In March this year, central bank governor Zhou Xiaochuan said, during China's annual legislative session, the country was very likely to ease its grip on banks' deposit rates in the coming one or two years.

Interest rate liberalization has been high on the financial reform agenda. Overall, the PBOC has been following a step-by-step approach in interest rate liberalization.

Last Friday, the PBOC decided to raise the deposit rate ceiling to 120 percent of the one-year benchmark deposit rate, from 110 percent, which economists saw as an important step in interest rate liberalization.