Insuring China's savings

By BI XIAONING (China Daily)
Updated: 2008-10-13 07:56

Is it time for the Chinese mainland to establish a deposit insurance system to handle financial risks? Given the worldwide financial meltdown, some financial experts and officials are reviving the call for the system, while others are opposed.

At the end of September, jittery depositors were triggered by rumors to withdraw their money from Bank of East Asia in Hong Kong and two banks in Macao, Wing Hang Bank and Luso International Banking Ltd. Quick responses from the banks and the government dissipated the threat of a full-scale bank run.

Though the rumors were dismissed in time, it sounded the alarm that the ripple of the US financial crisis is threatening the capital markets of Asia and the serene enclaves of the commercial banks.

"There is no sign of irregular cash withdrawals in the mainland, but it's quite necessary to consolidate the financial system," says Sun Minjie, executive vice-president of Bank of East Asia's mainland subsidiary. "The long-awaited deposit insurance system on the mainland needs to be set up soon."

"To guarantee savings and protect depositors from bankrupt banks, Hong Kong established the deposit insurance system in 2004," says Sun. "Thanks to the system, quite a few depositors didn't rush to withdraw money, so the banks' current crisis can be settled soon."

Deposit insurance is a measure introduced by policy-makers to protect deposits, in full or in part, in the event that banks are unable to pay deposits. The insurance can maintain public confidence in the financial system and prevent bank runs, thus helping promote financial stability.

The United States was the first country to establish an official deposit insurance system, during the Great Depression in 1934. Currently, nearly 100 countries have such an arrangement in place.

Others hold the same view as Sun and call for China to establish a deposit insurance systems soon.

"In case of bank run, it's time to set up a deposit insurance system, which can calm depositors' nerves and promote financial stability," says Cheng Siwei, former vice-chairman of the standing committee of the National People's Congress.

Yet, contradictory voices are also very strong. Tang Min, the China Development Research Foundation deputy secretary, says: "The deposit insurance systems, if launched now, probably can't instill public confidence and could trigger another financial crisis."

According to Tang, unlike other countries, most of the banks in the mainland are State-owned and the country has already guaranteed the deposits. Yet, the deposit insurance system can only protect deposits in part and China's small and medium-sized banks, which are important resources for loans for the country's many small and medium-sized enterprises, may be in a weak position to attract depositors.

"Through deposit insurance systems, the depositors will be more cautious about selecting banks, so uncompetitive banks will be washed out gradually," says Tang. "In the long run, it will build a healthy financial system, but the kickoff time is quite critical. Under current financial crisis, the deposit insurance systems would bring panic rather than confidence."

As for the time to establish the deposit insurance systems, experts say China has already missed the best time, but it's still quite necessary to prepare well for the system and implement it properly.

Wei Jianing, a researcher with the Development Research Center under the State Council, says: "Two years earlier, it was more suitable to launch the idea since China's economy is on an upswing. When the economic downturn appeared, the cost and risk of establishing the systems increased. Though they missed the best time, the preparation work should be accelerated."

In fact, a protection plan for depositors against risks from bankruptcy or insolvency of financial institutions has been studied for about 10 years. In April 2004, the People's Bank of China set up a deposit insurance division at its financial safety bureau. In August that year, the draft of a law for deposit insurance was put on the work schedule. Last year, the central bank signed a Memorandum of Understanding with the US Federal Deposit Insurance Co on cooperation regarding deposit insurance, but the discussions and study are still continuing.

According to sources with the People's Bank of China, the framework of the deposit insurance system has been fixed, including maximum payment, compulsory principle and risk-based insurance rates. As for the deposit insurance coverage in the initial phase and the position of deposit insurance company, authorities haven't reached an agreement yet.

Zhao Xijun, professor of finance at Renmin University of China, says "The deposit insurance systems are the natural requirement of marketization and help resolve the problems encountered by individual banks. As for systematic risks, like the US financial crisis, the role of deposit insurance is limited."