Date
21 November 2017
Central bank chief Zhou Xiaochuan hinted at imminent deposit rate deregulation last month, saying China could remove the cap on bank deposit rates. Photo: Bloomberg
Central bank chief Zhou Xiaochuan hinted at imminent deposit rate deregulation last month, saying China could remove the cap on bank deposit rates. Photo: Bloomberg

China moves closer to deposit rate deregulation

China will launch a long-awaited deposit insurance scheme next month, a crucial step toward deregulating domestic interest rates and promoting market-driven capital allocation.

Deposits up to 500,000 yuan (US$80,600) would be insured, the Financial Times reported Wednesday, citing China’s central bank.

“Deposit insurance is a precondition for interest-rate liberalisation. The implementation of the system means rate liberalisation is speeding up,” said Tao Wang, greater China economist of UBS in Hong Kong.

Last month, central bank governor Zhou Xiaochuan said China could remove the cap on bank deposit rates, the last remaining domestic interest rate subject to administrative regulation, by the end of this year.

Economists say lifting the cap on bank deposit rates will lead to higher interest rates as banks compete for funds.

That should improve capital allocation as lenders seek out more productive borrowers able to afford higher rates, including small, privately owned businesses that have long struggled to obtain bank loans.

The People’s Bank of China was widely expected to launch deposit insurance last year but wrangling led to delays.

Larger banks resisted a structure that would have forced them to pay a disproportionate share of insurance premiums, in effect subsidising smaller lenders that are most likely to fail.

The details of the system largely match those of a draft plan released in late November last year.

Analysts said at the time that the 500,000 yuan limit would fully cover about 98 per cent of Chinese depositors, although the large share of deposit funds held by wealthy savers means that would still leave a significant chunk of the banking system’s Rmb126tn in deposits uninsured.

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