Chinese officials recently announced that savings deposits will be guaranteed up to $81,000 starting May 1. This is similar to the US’s savings guarantee and may negatively affect China’s banking system. It is estimated that this policy will cover 99.6% of bank deposits, but the remaining uncovered 0.4% will make up nearly half the value of all bank deposits. This means that big account holders will be more inclined to move their money somewhere else, diminishing the liquidity in the banking system. In addition, smaller account holders will be likely to invest in wealth management products via the shadow banking system due to higher expected returns. These two side effects to China’s new guarantee will result in diminished liquidity and therefore drive up the cost of borrowing for over leveraged firms. Considering the negative deposit base growth, it is likely that highly indebted firms will find it increasingly difficult to stay afloat.
2 Responses to China’s new FDIC
This will negatively effect a lot of Financing activity within China. Without a cheap debt market, M&A activity should decrease. The decrease in M&A activity will cause a slowdown of China’s national economy.
I’m not sure you’re reading the implications correctly. The purpose of deposit insurance is to prevent bank runs, to make small savers feel more secure. Ceteris paribus, this should make banks more attractive relative to investment trusts. That is surely to the good!
Since it doesn’t change any of the rules for large depositors (if any!!), it shouldn’t affect their behavior at all. Nor need it make any difference on the lending side.
See the next post and comments thereon.