China | Milestones
The Chinese government has followed the US and Western European model by providing deposit insurance for private savers in the Chinese banking system. The People’s Bank of China, the country’s central bank, issued draft regulations in November with respect to private accounts of up to 500,000 renminbi, both in local and foreign currency. Insurance of this kind has proved crucial in previous financial crises around the world; it has helped secure the stability of the banking system, prevented the unnecessary rescue of troubled banks and sustained long-term savings in global financial markets.
The introduction of deposit insurance should be seen in context. The Chinese government is concerned about excessive lending in the financial system and preventing a credit crisis, as well as the impact of the economic slowdown in China on banks and savers’ behavior. The government wants to shift more risk to the market, reversing the trend of regulatory protection and “moral hazard.”
Douglas Arner, a professor in the faculty of law at the University of Hong Kong, says deposit insurance is an institutionalization of an official policy change of the current implicit state guarantee of banks, and is unlikely to have much immediate impact.
However, the long-term effect could be significant. While big banks enjoy strong reputations and credibility, deposit insurance could help smaller banks to stay in business and compete during times of volatility in China and markets globally. The Chinese government is fighting the perception that a significant part of the banking system is subsidized by government intervention. The recent announcement follows several measures designed to promote a market-based banking system and better integration of Chinese banks into the global financial system. It may also be “the start of much greater openness to the establishment of new banks, bringing greater competition to the sector,” says Arner.