BEIJING - The People's Bank of China (PBOC), the country's central bank, is on track to establish a deposit insurance system to strengthen risks management in the financial sector, while vowing to implement a prudent monetary policy in 2011 to soak up excessive liquidity.

In a press release published late on Thursday evening after the close of its annual conference, the central bank also highlighted a pressing need to reduce exposure to high financial risks, curb inflation and promote economic restructuring.

These proposed financial objectives will be applicable to both domestic and foreign financial institutions in the near future.

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Emerging countries should build up a counter-cyclical financial regulation system and adopt a prudent stance to counter the over-expansion of the economy, which was stimulated by positive measures during the global crisis, said Zhou Xiaochuan, the central bank governor, earlier at a conference in Beijing.

Deposit insurance is a measure to protect depositors from losses caused by a bank's inability to pay its debts when due. It is one component of a financial system safety net that promotes financial stability.

"The move means that the central bank has listed a deposit insurance system on its working agenda and breakthroughs will be made in the short term," said Lu Zhengwei, chief economist with the Industrial Bank.

He added that the establishment of the system will pave way for interest rate liberalization, as market-oriented interest rates may widen the performance gap between banks and place interests of depositors at risk.

China will liberalize market-oriented interest rates by allowing qualified financial institutions to price their products in the next five years, and set up a mature mechanism to guarantee concerted application of the central bank's monetary stance, said central bank's Zhou at the Caijing Annual Conference in Beijing last month.

"During the 12th Five Year Plan (2011-2015), we expect to see significant progress on interest rate liberalization," he said, emphasizing that Chinese policy banks and other institutions without rigid financial requirements will not be allowed to price their interest rates as freely as the commercial banks.

"The commercial banks should prepare themselves for the potential losses caused by self-determined interest rates and are prepared to take full responsibility in the future."

Limits on the price of relevant products, especially the fixed price of substitute products, will thaw gradually, he said.

The People's Bank of China also said on Thursday that it will implement a prudent monetary policy in 2011 to check excessive liquidity and curb inflation.

"We will prioritize the stabilization of consumer prices in our monetary regulation, and improve the pertinence of policies to curb monetary factors leading to over-rapid price rises," said the bank.

Li Yang, deputy head of the Chinese Academy of Social Sciences, said earlier that without market-based interest rates, the effects of monetary policy will be distorted and the central bank would not realize its regulation goals efficiently.