By Lingling Wei
BEIJING--By moving to insure bank deposits at home, China's
leadership has its eyes abroad.
China on Tuesday detailed a plan to launch a bank
deposit-insurance system in May, a long-awaited move that is aimed
at better disciplining its lenders and their customers. Deposit
insurance is seen as a prelude to freeing up government-controlled
interest rates on bank deposits--a step China's Central Bank Gov.
Zhou Xiaochuan has said could be taken as soon as this year.
Under the plan released Tuesday by the State Council, China's
cabinet, up to 500,000 yuan ($80,550) in deposits made by
businesses and individuals per bank will be insured. China
currently has more than 122 trillion yuan ($19.654 trillion) in
bank deposits, among the world's largest totals. More than 99% of
depositors would be covered by the program, according to central
bank officials, which will start May 1 and will be backed by a fund
run by the central bank.
The plan has little detail on how banks would be charged to fund
the insurance program, though central-bank officials say all banks
would be required to pay a fee according to the size of their
deposit bases and risk profiles.
China has plenty of domestic reasons to insure bank deposits, a
long-established scheme in many Western countries, including the
U.S. But the move also comes as China seeks a greater international
role for its currency, the yuan. The Chinese leadership is gunning
for the International Monetary Fund to declare the yuan an official
reserve currency later this year, like the U.S. dollar, the euro
and the Japanese yen. A designation from the IMF could help China's
effort to elevate the yuan's role in international trade and
finance, as Beijing increasingly seeks to challenge Washington on
the world stage.
To get there, China would need to relax its controls on interest
rates, Chinese officials and economists say. Bank deposit-insurance
is a key step in that direction.
The IMF bid is being used as "a goal post to catalyze domestic
financial-sector reforms, especially interest-rate liberalization
and China's capital-account opening," said China economist Tao Wang
at UBS.
China has traditionally kept a tight grip on its financial
system. That has limited the surges of money in and out of the
country that has bedeviled other economies, but it makes the yuan
less appealing as a tradable currency because its moves don't fully
follow market dynamics.
A market-based rate system is seen as crucial to preparing
China's financial markets for an eventual opening up of
cross-border capital flows. Two years ago, China removed controls
on lending rates. It has also moved in recent years to widen the
band within which the yuan can be traded on a daily basis. Chinese
officials proposed a draft plan to launch deposit insurance in
December.
Meanwhile, the yuan's global use has been rising. More than
one-fifth of China's total trade is now settled in the yuan,
compared with only 2.3% in 2010, according to data from UBS AG.
For years, banks and the investing public in the world's
second-largest economy have been operating on the assumption that
the government would bail them out in times of crisis. Setting up a
deposit-insurance system suggests that Beijing is pressing ahead on
its pledge to give the market a bigger role in deciding winners and
losers.
Deposit insurance frees up banks to compete for depositors'
money without risking the savings of their customers, potentially
challenging China's biggest banks for deposits and introducing more
market-based principles into the system. Currently, banks in China
can offer up to 3.25% on one-year deposits.
The move also represents a nod by China's policy makers to
worries over financial risks in China as soured loans in the
country's banking system continue to rise. China's economic growth
has slowed to its slowest pace in more than two decades, and local
government and state-run companies are still burdened with debt
from a post-2008 lending binge.
The insurance system is aimed at "preventing and resolving
financial risks in a timely manner," according to the State Council
plan.
Deposit insurance is expected to pave the way for another, more
difficult reform: freeing up government-controlled interest rates
on bank deposits. Many Chinese officials and analysts warn that
Beijing might be inclined to put off that move if the economy
weakens further. Liberating deposit rates could drive up companies'
funding costs, at least in the near term.
China's banking regulators have expressed concerns that relaxing
deposit rates too fast could lead Chinese banks to compete for
funds, pushing up their costs and leading them to make risky loans
that would end up badly, according to officials with knowledge of
the matter.
"Slower economic growth and interest-rate liberalization are
among the factors that are curbing our profit growth," Jiang
Jianqing, chairman of Industrial & Commercial Bank of China
Ltd., China's largest bank by assets, told reporters last week.
To help relieve banks' funding pressure, the central bank is
expected to free up more funds for banks to lend by lowering the
amount of reserves they have to set aside with the central bank,
according to banking officials and analysts.
Liyan Qi contributed to this article.
Write to Lingling Wei at lingling.wei@wsj.com