The Chinese government is considering creating a deposit
insurance system to ward off repercussions from the bankruptcy of
financial institutions afflicting customers.
"The system will protect depositors' interests, raise public
confidence in the banking sector and contribute to the stability of
the financial system," said Wei Jianing, a researcher with the
Development Research Center under the State Council.
"The system will help prevent depositors from making mass
withdrawals from a bank, which can have a negative impact on other
financial institutions, even "healthy ones"," said Wei. "A mass
withdrawal is usually highly 'contagious' in a financial market,
which is fragile and unstable by nature."
Although no financial crisis has broken out in China, mass
drawings have brought down a number of small and medium sized
financial institutions in recent years, threatening the whole
banking system.
In 1999, the Hainan Development Bank went bankrupt after people
formed long queues at its outlets after learning of the bank’s
acquisition of 30 debt-laden urban credit cooperatives in Hainan
Province.
The debate over whether to establish a deposit insurance system
in China has raged for a decade, but until now the conditions were
not seen as having matured.
"It is high time the system is established," said Wei, "the
system will be exposed to lower risks because China's economic
growth will continue at a steady pace and the supervision over the
banking sector has been greatly enhanced thanks to the
establishment of the China Banking Regulatory Commission, the
country's banking watchdog.”
"Meanwhile, a number of state-owned commercial banks - including
the Industrial and Commercial Bank of China, the Bank of China and
the China Construction Bank - have reduced their non-performing
loans and listed on the stock market."
The central bank has labeled it imperative that China set up the
system since its banking sector has fully opened to the outside
world.
Discussions on the establishment of a deposit insurance system
has been put on the agenda of China's third national financial work
conference, scheduled for later this month in Beijing, according to
the 21st Century Business Herald.
China has long had a "latent" deposit insurance system, under
which the central bank and local governments pay off personal debts
when financial institutions fail due to management and operational
faults.
But it has imposed a heavy burden on governments and undermined
the central bank's monetary policy.
The world's first deposit insurance system was established in
the United States in 1933. In the 80s and 90s, many countries
followed suit after experiencing serious financial crises. By June
2006, 95 countries and regions had the system, with 20 more
preparing for it.
(Xinhua News Agency January 17, 2007)