China's banking regulators, after years of study and preparation, are preparing to launch the long-awaited deposit insurance scheme, which is the "missing link" of the country's banking regulatory framework.

Once implemented, the scheme will help China's banking industry cushion risks and make it easier for regulators to deal with bankrupt deposit-taking institutions, experts said.

While details of the proposal are still being reviewed by the State Council, the People's Bank of China, the nation's central bank, has established a deposit insurance division to oversee the scheme.

Yi Cheng, the division's newly appointed head, told China Business Weekly the division's establishment "could be soon, but no specific timetable has been set."

The central bank since 1997 has been considering establishing a deposit insurance system that mimicks the US-based Federal Deposit Insurance Corp (FDIC).

"An ideal deposit insurance scheme should include all deposit-taking institutions, and should be clearly identified in law," said Zhang Jiguang, a financial expert with Bank of Shanghai's Research and Development Centre.

As a result, China's four largest State-owned lenders -- Bank of China, the Industrial and Commercial Bank of China, China Construction Bank and the Agricultural Bank of China -- will eventually join the scheme, Zhang said.

China will most likely introduce a pilot programme in regions with well-established financial infrastructure, for example, in the eastern coastal region, before implementing it nationwide, Zhang said.

Yi said central bank officials are still considering how to implement the scheme.

"A deposit insurance scheme is a crucial link -- on par with the central bank and the banking regulatory body -- in a country's banking industry safety net. It has all necessary functions to cushion risks when banking firms are forced into a liquidation process," Zhang said.

Accurate assessment of risks needed

China's commercial banks have watched their assets balloon at an accelerated pace since early last year. Bank lending in the Chinese currency, the renminbi, peaked at 254.15 billion yuan (US$30.71 billion) last May, up almost 55.46 per cent in the past month.

Despite the central bank's credit-tightening measures, since late last year, the growth of bank loans has continued this year, although at a slower pace.

Last month, outstanding loans in both the renminbi and foreign currencies were up 19 per cent -- 1.4 percentage points lower than that at the end of April -- at 18.25 trillion yuan (US$2.21 trillion).

As banks' assets grow rapidly, risks within China's banking sector accumulate. That threatens the country's financial stability, Zhong Wei, a researcher with Beijing Normal University's Financial Research Centre, wrote in a paper.

"Banks that participate in the deposit insurance programme will have to pay the premium while the government could also contribute financially to jump-start the fund," Zhong told China Business Weekly.

China's State-owned banks, however, will likely negotiate, with regulators, the amount of premium payments once they are forced to join the scheme, he said.

They are currently receiving free, de facto insurance from the central government on all the deposits they accept, he added.

China's small and medium-sized banking firms, including recently mushrooming private banks, will benefit considerably from the deposit insurance scheme, economists said.

"Depositors' major concerns with private banks is the safety of their funds when these institutions go bankrupt," said Xia Bin, director of the State Council Development Research Centre's finance institute.

With a well-functioning deposit insurance scheme, regulators will be able to resolve failed banking firms promptly, and provide full or partial protection to depositors, regardless if the funds are in State-owned or private banks, Xia said.

The growth of private banks in China will boost the country's cash-strapped privately owned enterprises, which have, over the past two decades, become the backbone of the nation's economy, he added.

China is unlikely to introduce, during the scheme's early stages, , a differential premium-fee system, based on the degrees of risk facing each financial institution, Zhong said.

Creating such a system is one of the Chinese regulators' long-term goals, but it will require more accurate assessments of banks' risks, he said.

"As Chinese regulators' skills improve, over time, financial institutions will be required to pay premiums based on their business risks and the quality of their assets," Zhong said.

Under such a scheme, some large banking firms, holding huge amounts of overdue loans, or institutions, weighed down by their own debts, will be subjected to high premium charges and possibly removed from the market, he added.

China's deposit insurance scheme will be compulsory rather than optional, otherwise the State-run lenders will refuse to participate, experts said.

Foreign banks will also join the deposit insurance scheme, and will pay premiums to a government-sponsored insurance fund, Zhong said.

Foreign banks, since 1979, have established more than 180 operations in the Chinese mainland. Those banks have more than 210 representative offices.

Foreign banks hold about 5 per cent of China's banking market, Zhong wrote in his research paper.

Without a clearly identifiable deposit insurance programme, Chinese depositors will not be able to determine if their money will be safe in foreign banks, or if their money will be guaranteed by the central government, Zhong said.

China Pacific Insurance Co Ltd recently teamed with local banks in Zhejiang Province to offer insurance policies that partially guarantee the safety of depositors' money.

(China Daily June 28, 2004)