It has been 20 years in the making. But last Sunday China took a a major step on the path towards full interest rate liberalisation when the State Council published draft regulations on the long-awaited deposit insurance scheme.
By removing its implicit guarantee over the banking sector, the government has paved the way for banks to compete for depositors by setting their own savings rates (and, of course, raising the possibility that banks will be wound up if they fail).
Deposit insurance is being piloted at a time when the financial authorities are loosening controls over interest rates and HSBC says the scheme could be implemented soon after the consultation period closes at the end of this month.
“Today’s action suggests the authorities are now comfortable and ready to accelerate financial liberalisation in 2015,” it said in a research note. Freeing banks to compete among themselves will weaken the state’s ability to guide the financial sector, but should lead to proper risk-based pricing.
Chinese lenders had amassed $12 trillion of local currency deposits by the end of October. The draft rules envisage protection for deposits up to Rmb500,000 ($81,000) for each saving account. The ceiling would apply to the deposits of 99.6% of savers (including corporates), the People’s Bank of China (PBoC) says. Compensation for deposits beyond the insured cap will come from selling a bank’s assets. For depositors the scheme is more generous than the global average – the covered amount equating to 12 times per capita GDP versus two to five times elsewhere.
The protection will extend to renminbi as well as foreign-currency deposits, but not wealth management products. One welcome side effect may be a reduction in moral hazard, with the unregulated shadow-banking sector becoming less attractive as an investment proposition.
Participation is mandatory for all deposit takers, although insurance premiums will vary, based on the perceived risk of each institution. Larger state lenders are likely to enjoy lower premium rates than smaller competitors.
The PBoC is yet to specify how banks will pay for the scheme. As HSBC points out, there is no mention whether they can use their reserves to fund it. In cases in which depositors will be paid compensation, the central bank says the fund will initially try to bring about a takeover by another institution and will only make full payouts if this cannot be achieved.
Analysts are divided on the likely impact of the new rules. One possibility is that nimble private sector banks steal market share from their less entrepreneurial state-owned rivals, with lure of better service.
But nervous depositors may still prefer to park their funds with the state-owned banks and in order to get deposits the smaller players may then be forced to offer more compelling interest rates, reducing their margins and putting pressure on their business.
A broader savings rate deregulation is thought to be about one or two years away. At that point, the central bank’s monetary policy will look similar to its global peers, with reserve requirements and lending quotas giving way to interest rates as the principal macroeconomic lever.
Whether the changes will lead to turbulence in the market – as previous distortions in credit allocation get unwound – is a pressing question. Even now, each new headline about potentially distressed lenders sparks acres of newsprint, with journalists speculating on the possibilities of wider contagion. Changing the rules on interest rates and removing Beijing’s ‘implicit’ guarantee on all deposits makes the landscape a little more uncertain. But the market has responded well to the latest developments. Shares in Minsheng Bank jumped 4.7%, while China Merchants Bank rose 5.3% before falling back this week, suggesting these two banks are viewed as potential beneficiaries in a freer market (the two have a greater proportion of private sector ownership in their shareholder structure).
Both outperformed state giants ICBC and CCB, which rose about 1.5% on the announcement.
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