Chinese authorities pledged to protect deposits and investments during the reshuffle of banks, brokerages, trust firms and other financial institutions.

The People's Bank of China, Ministry of Finance, China Banking Regulatory Commission and China Securities Regulatory Commission issued a joint document on Thursday on the State purchase of individual investments and deposits in financial institutions when major risks develop during management and operation.

The document aims to give best protection possible to depositors and investors and maintain financial and social stability when the government handles relevant financial risks.

The State guarantees the full value of personal savings at banks and rural credit cooperatives as well as deposits placed by individual securities traders at brokerages as guarantee funds for settlements.

The State will also offer payment for other individual creditors' rights in financial investments like trust products, financial bonds and wealth management projects, when relevant financial firms are closed down or taken over by the State.

Those investments will be fully covered if they are less than 100,000 yuan (US$12,077). Anything beyond that will be covered at a discounted rate.

That's because trust and bond investors should shoulder some risks, while bank savings and guarantee funds are deposits that should be fully protected, said Zhu Jianfang, an analyst with China Securities Co.

All these arrangements will protect minority investors and small depositors in the reshuffle of financial firms and will help maintain social stability during the reforms, he said.

It also sets up a clear procedure for the handling of individual creditors' rights and shows respect for the choice of investors.

According to the document, investors can also choose not to take the State price for the creditors' rights purchase but wait for the allocation of the assets of the financial institutions according to legal bankruptcy, clearing and settlement procedures. 

Institutional investments in financial businesses, however, are not covered in the document, which means they will be subject to existing laws in order to recover investments.

The new rule also does not apply to investments in futures companies and insurance firms.

China's financial authorities have been promoting the restructuring of various financial institutions to clear up irregularities in the industry.

Seven securities companies with problematic management and a heavy debt burden have been taken over by the government or State-run debt managers so far this year.

Trust firms and rural credit co-operatives are also being tested with tighter risk control requirements.

Some poorly-managed firms have failed over the past years.

The failures have underlined the need of a mechanism to protect deposits when these institutions are reshuffled.

Compared to institutions, individuals are often at a more disadvantaged position due to their limited financial strength, expertise and risk control awareness.

The government's move to offer small investors better protection will pave the way for faster restructuring in the financial businesses, said Zhu.

Following the release of the new document, relevant government departments have vowed to adopt more rigorous measures to crack down on irregularities and violations among financial institutions.

Executives of these institutions will also shoulder some of the liability.

Authorities will also try to recover any embezzled or misused funds.

Under the new rule, the central government will cover payment to individual deposits and securities trading guarantee funds. It will also cover 90 percent of the funds used for the purchase of other individual creditors' rights in financial institutions, while local governments will raise the funds to cover the remaining 10 percent.

(China Daily November 6, 2004)