China to Insure Bank Deposits

Published on Author spencerb15

China announced that they will insure bank deposits starting on May first of this year. They plan on insuring all deposits, up to 500,000 renminbi or $81,000. With these limits the program would cover roughly 99.6% of all Chinese savers. This program would help bolster consumer confidence and increase consumption by increasing the protections for savers.

In 1998, China conducted one of the biggest bank bailouts in history. This led to investors and consumers believing that the government would always bailout banks, no matter their lending patterns. Experts believe that this thought process would die slowly. Many people, despite deposit insurance, would look towards the government when a bank failed.

To pay for this program, banks would have to pay a deposit. These deposits would be set up on a variety of factors. These would include: “economic and financial developments, deposit structures and the risk management status of each institution.” Finally, this program will hopefully allow the government to loosen deposit regulations that have been stringently controlled by the central government for institutions. This, according to the article, could raise deposit rates by 1% and shift income towards depositors and finally consumption.

Source paraphrased throughout:


5 Responses to China to Insure Bank Deposits

  1. Looks like China is taking steps towards liberalizing its interest rate, which it needs to do. Still, China suffers from a worryingly uneven wealth distribution, and the insurance on deposits do not cover 0.4% of all accounts. Economist Wei Yao estimates that this 0.4% holds nearly half the total value of all Chinese bank deposits. If these massive accounts decide to relocate, it could drain cash from the system and prove catastrophic for the yuan.

    • That is an incredible wealth disparity. I image those accounts have massive holdings abroad as well, so I do not imagine them exiting Chinese accounts.

  2. Some experts believe that to help relieve banks’ funding pressure, the central bank is expected to free up more money for banks to lend by lowering the proportion of deposits they have to hold as reserves with the central bank, according to banking officials and analysts. What is your opinion?

  3. This should lessen the chance of bank runs. It ought to be paired with prudential supervision to try to prevent banks from failing and insurance paid off. The US dropped the effectives of the prudential side with progressive deregulation starting in the 1980s. In principle another component is to prevent banks from becoming too big to fail, but it’s too late for that as the Chinese market is dominated by megabanks.

  4. The problem with insuring deposits and the whole idea of bailing out banks is that it distorts the capitalist system. An economy needs to have winners and losers to be successful overall. By privatizing profits and socializing the risk of losses, China is depriving itself of one of the market’s key functions.