China should make the setting up of a bank deposit insurance system a priority to protect savers and help liquidate indebted banks, central bank governor Zhou Xiaochuan was quoted Monday as saying.

The government has been talking for years about a deposit insurance scheme that could give ordinary savers a formal line of defense against the collapse of financial institutions.

We should establish a deposit insurance system that suits China’s national situation as soon as possible,” Zhou said in an article carried in the Financial News.

While there has been no official protection for depositors in China, the government has usually handled local banking crises by stepping in to bail out lenders.

“In tackling problem-ridden financial institutions, we adopted a method of rescuing them in most cases and only ordered those heavily indebted and hopeless ones to exit the market through closures or bankruptcies,” Zhou said.

But the methods had created a “moral hazard” and could pose a threat to the central bank’s monetary policy, Zhou said.

The government has tightened supervision over financial institutions since the start of the Asian economic crisis in 1997, fearing problems with its banks and trust firms could trigger financial turmoil.

It has shut down dozens of trusts and banks since then, including Guangdong International Trust and Investment Corp., Hainan Development Bank and a number of credit cooperatives.

(Shenzhen Daily October 19, 2004)