China deposit insurance steps forward for financial reform

 China's proposed bank deposit insurance scheme will be an important development for further financial reforms, reducing financial risks and rebalancing the economy, said Fitch in its latest report.
"This (the deposit insurance scheme) would ultimately translate into greater economic rebalancing as well as a potentially lower propensity for the state to support non-systemically important banks," Fitch said.
According to the People's Bank of China (PBOC), the proposed insurance scheme will cover a maximum of 500,000 yuan (81,566 U.S.dollars) per deposit account (yuan and foreign currency), allowing for full insurance of 99.6 percent of accounts or an estimated 46 percent of total deposits.
Deposits at the China branches of foreign institutions, and Chinese banks' offshore deposits, will not be covered. Neither will interbank deposits of other institutions.
Fitch said that the deposit insurance will lead to further financial reforms and potentially significant changes to China's banking system as well as macroeconomic effects.
Introducing a deposit insurance scheme in conjunction with a resolution framework could mean the state may lower the likelihood of support for less systemically important banks, thus mitigating inappropriate risk-taking, said the report.
Furthermore, Fitch views insurance as an important pre-requisite for full deposit rate liberalization - a necessary reform for more market-determined pricing of capital.
On Sunday, the PBOC published draft rules for the deposit insurance system and started soliciting public opinion. Well-informed sources told Xinhua that the scheme will likely be implemented as early as the beginning of 2015.