In an interview with Beijing Youth Daily, Li Yang, a
member of the (PBC) monetary policy committee, confirmed that China
is taking a close look at implementing a deposit insurance system.
He said that an institution resembling the Federal Deposit
Insurance Corporation (FDIC) in the United States is under
consideration.
The PBC - China's central bank - formed a research team to study
deposit insurance systems in 1997. Although the issue has been
discussed many times in internal meetings, there is still no firm
timetable to put a system in place.
Financial issues are a top concern of China's leaders,
especially in light of the huge non-performing assets that threaten
the national economy and enormous private deposits that affect
millions of households.
Deposits by individuals in China have topped 10 trillion yuan
(US$1.2 trillion), according to the central bank. The immaturity of
the capital market means that they have few investment options, so
the majority of Chinese tend to put money in banks even when the
interest rate has been slashed to the lowest point in years.
But the banks - especially the Big Four, China's main
state-owned banks - have generated huge non-performing assets. The
PBC reports that the total amount of non-performing loans (NPLs)
reached nearly 2 trillion yuan (US$239.8 billion) by the end of
September 2003, with an average NPL rate of 21.4 percent.
China's financial institutions mainly depend on sovereign
credit, which keeps deposits relatively safe during periods of
panic withdrawal. The central bank research team last year
completed a 10-page research report revealing that the saving
deposits in the Big Four, nearly 70 percent of the total, were
backed by recessive sovereign credit.
However, China has nine more national commercial banks, hundreds
of city commercial banks and rural credit cooperatives, and other
financial institutions. These smaller financial institutions are
easily exposed to risks since they lack the support of sovereign
credit. In 1998, the Hainan Development Bank went bankrupt. The
central bank entrusted its clearing to the Industrial and
Commercial Bank of China (ICBC), the biggest state-owned bank in
China, to ease panic. Still, it was a costly experience for the PBC
and required coordination with all levels of government and
judicial departments.
The necessity and feasibility of a deposit insurance system have
been proved, but the real question is how to build one from the
ground up. The Big Four have expressed reluctance, and the banking
watchdog has also worried about moral hazard that deposit insurance
can generate, says Wei Jianing, a research fellow at the State
Council Development Research Center, a government think-tank.
An anonymous PBC official told the 21st Century Economic
Report that the central bank is leaning toward setting up an
independent deposit insurance corporation with a board that
includes representatives from the PBC, the China Banking Regulatory
Commission (CBRC), the Ministry of Finance, policyholders and
independent scholars.
It also wants to implement a compulsory deposit insurance
system. Initial capital might come from the Ministry of Finance and
central bank, with revenue deriving primarily from insurance
premiums, earnings on investment and additional capital from the
original sources. To avoid moral hazard, the PBC will regulate
compensation rates and ceilings, and adopt a graduated premium rate
based on risk, the newspaper reports.
Wei Jianing says that the PBC, CBRC and the deposit insurance
institution form the framework for China's financial supervision:
The central bank is responsible for macro-policy, the CBRC directly
governs financial institutions, and the deposit insurance
institution will form the final firewall against possible financial
risks.
(China.org.cn by Tang Fuchun, February 20, 2004)