In May, China will begin a deposit insurance system for the nation’s 100 trillion yuan in bank accounts. It is part of a move to create a more market driven deposit rate.
The deposit insurance system is needed to protect weaker banks from runs were the central bank to liberalize the deposit market. If China did not insure deposits, money would immediately flee the perceived weak banks.
The Chinese government plans to set a limit of $500,000 yuan per account in comparison to the $250,000 insured by the FDIC. The limit will protect the savings of 99.63% of savers in the population, though will only account for half of total deposits. This derives from the large share of deposits held by companies and high-net-worth individuals.
The liberalization could likely lead to higher interest rates as banks start competing for more depositors. Additionally, this could spur M&A activity within the Chinese financial sector as banks attempt to build their customer base and economies of scale…and we all know how that typically ends.