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China Pushes Deposit Insurance in Bank Overhaul China Pushes Deposit Insurance in Bank Overhaul
(about 9 hours later)
HONG KONG — China’s new leadership is preparing to introduce bank deposit insurance as the first step in financial reforms to be started soon at a top-level meeting in Beijing, a government official and banking policy advisers said.HONG KONG — China’s new leadership is preparing to introduce bank deposit insurance as the first step in financial reforms to be started soon at a top-level meeting in Beijing, a government official and banking policy advisers said.
A consensus has formed among China’s leaders that the country needs a formal system of bank deposit insurance as banks have rapidly ramped up lending and begun offering a wide variety of increasingly risky investment products that do not appear on their balance sheets, the official and advisers said.A consensus has formed among China’s leaders that the country needs a formal system of bank deposit insurance as banks have rapidly ramped up lending and begun offering a wide variety of increasingly risky investment products that do not appear on their balance sheets, the official and advisers said.
Introducing deposit insurance could also help the government steer the financial system toward providing more credit for small and medium-size private enterprises. These now receive as little as 3 percent of bank lending even as they account for at least half the country’s economic activity.Introducing deposit insurance could also help the government steer the financial system toward providing more credit for small and medium-size private enterprises. These now receive as little as 3 percent of bank lending even as they account for at least half the country’s economic activity.
Without a clear system until now for closing banks that lend unwisely, banks have been encouraged by regulators to lend overwhelmingly to state-owned enterprises that appear certain to repay loans. That has left smaller businesses and private companies starved for credit.Without a clear system until now for closing banks that lend unwisely, banks have been encouraged by regulators to lend overwhelmingly to state-owned enterprises that appear certain to repay loans. That has left smaller businesses and private companies starved for credit.
The first public indication of the government’s intense interest in deposit insurance is likely to come at the Central Economic Work Conference this month, said the official, who discussed internal government matters only on the condition of anonymity. Held each December since 1994, the conference is the most important economic policy-making event in the Chinese calendar and sets the agenda for the coming year.The first public indication of the government’s intense interest in deposit insurance is likely to come at the Central Economic Work Conference this month, said the official, who discussed internal government matters only on the condition of anonymity. Held each December since 1994, the conference is the most important economic policy-making event in the Chinese calendar and sets the agenda for the coming year.
This month’s conference, the exact dates of which are still secret but which could start as soon as this weekend, is being watched with particular scrutiny by economists and investors as a clue to the agenda for the next decade of Xi Jinping, the new general secretary of the Communist Party. The conference is jointly overseen by the cabinet and by the Central Committee of the Communist Party.This month’s conference, the exact dates of which are still secret but which could start as soon as this weekend, is being watched with particular scrutiny by economists and investors as a clue to the agenda for the next decade of Xi Jinping, the new general secretary of the Communist Party. The conference is jointly overseen by the cabinet and by the Central Committee of the Communist Party.
Mr. Xi startled many analysts by rushing down to Shenzhen in southern China last weekend for an inspection tour of the city, known within China for its embrace of free-market capitalism. He is following in the footsteps of Deng Xiaoping, who restarted China’s economic liberalization after the Tiananmen Square crackdown in 1989 with a trip three years later to the same city.Mr. Xi startled many analysts by rushing down to Shenzhen in southern China last weekend for an inspection tour of the city, known within China for its embrace of free-market capitalism. He is following in the footsteps of Deng Xiaoping, who restarted China’s economic liberalization after the Tiananmen Square crackdown in 1989 with a trip three years later to the same city.
Until now, the government has informally and quietly paid off all depositors in full, regardless of the size of their deposits, when small banks and rural cooperatives have failed; no large banks have been allowed to fail. The government’s fear has been that allowing any depositors to sustain losses, even at the worst-run institutions, would undermine confidence in the financial system Until now, the government has quietly paid off all depositors in full, regardless of the size of their deposits, when small banks and rural cooperatives have failed; no large banks have been allowed to fail. The government’s fear has been that allowing any depositors to sustain losses, even at the worst-run institutions, would undermine confidence in the financial system.
China’s banking industry is divided on the need for deposit insurance. As in other countries, including the United States, the biggest banks are the least enthusiastic. With a little more than half the country’s deposits, China’s Big Four banks are widely viewed as much too big to fail but are likely to owe hefty premiums for the deposit insurance plan being developed.China’s banking industry is divided on the need for deposit insurance. As in other countries, including the United States, the biggest banks are the least enthusiastic. With a little more than half the country’s deposits, China’s Big Four banks are widely viewed as much too big to fail but are likely to owe hefty premiums for the deposit insurance plan being developed.
“The debate over the deposit insurance scheme is that the larger banks that would contribute more feel as though they would be subsidizing smaller banks,” said Andrew Sheng, a former head of Hong Kong’s securities regulator who for the last 10 years has been the convener of the international advisory council of the China Banking Regulatory Commission.“The debate over the deposit insurance scheme is that the larger banks that would contribute more feel as though they would be subsidizing smaller banks,” said Andrew Sheng, a former head of Hong Kong’s securities regulator who for the last 10 years has been the convener of the international advisory council of the China Banking Regulatory Commission.
China’s current five-year plan calls for the government to study deposit insurance, but not necessarily to adopt it. Mr. Sheng expressed surprise when told that the subject was likely to be on the agenda of the Central Economic Work Conference and said that “it means that they are taking it more seriously.”China’s current five-year plan calls for the government to study deposit insurance, but not necessarily to adopt it. Mr. Sheng expressed surprise when told that the subject was likely to be on the agenda of the Central Economic Work Conference and said that “it means that they are taking it more seriously.”
But Mr. Sheng cautioned that even once the leadership approves the concept of deposit insurance, it could take a full year just to draft the necessary legislation. Particularly tough would be drafting rules for when and how a bank is declared to have failed, he said, noting that China already has a bankruptcy law for other corporations that is widely seen in China as having serious shortcomings. But Mr. Sheng cautioned that even once the leadership approves the concept of deposit insurance, it could take a full year just to draft the necessary legislation.
Charlene Chu, a specialist in Chinese banks in the Beijing office of Fitch Ratings, said that the introduction of deposit insurance could help address the very rapid increase in credit in China relative to the size of the economy.Charlene Chu, a specialist in Chinese banks in the Beijing office of Fitch Ratings, said that the introduction of deposit insurance could help address the very rapid increase in credit in China relative to the size of the economy.
Responding to orders from the Communist Party, Chinese banks this autumn have lent heavily for infrastructure projects. This has helped stop, at least temporarily, the sharp economic slowdown of last summer, but at the price of increasing stresses in the Chinese financial system.Responding to orders from the Communist Party, Chinese banks this autumn have lent heavily for infrastructure projects. This has helped stop, at least temporarily, the sharp economic slowdown of last summer, but at the price of increasing stresses in the Chinese financial system.
Chinese households and businesses have become increasingly leery of bank deposits that carry extremely low, regulated interest rates. So banks have offered much less regulated trusts that offer higher interest rates, and have then turned around and offered riskier loans at higher interest rates to cover their extra interest costs.Chinese households and businesses have become increasingly leery of bank deposits that carry extremely low, regulated interest rates. So banks have offered much less regulated trusts that offer higher interest rates, and have then turned around and offered riskier loans at higher interest rates to cover their extra interest costs.
Trust loans nearly tripled last month compared with those a year earlier, to 200 billion renminbi ($32 billion). That is still less than regular bank loans, at 523 billion renminbi ($84 billion). But many experts worry that bank customers assume the trust investments carry the same implicit government guarantee as regular bank deposits.Trust loans nearly tripled last month compared with those a year earlier, to 200 billion renminbi ($32 billion). That is still less than regular bank loans, at 523 billion renminbi ($84 billion). But many experts worry that bank customers assume the trust investments carry the same implicit government guarantee as regular bank deposits.
The government has not clearly told the public otherwise but is expected to do so as part of any deposit insurance plan.The government has not clearly told the public otherwise but is expected to do so as part of any deposit insurance plan.
“This is one way of saying there are going to be protected investments at banks and unprotected investments at banks,” Ms. Chu said.
The usual argument against introducing deposit insurance is that it creates a moral hazard problem: banks may start lending recklessly and growing too swiftly if depositors trust them absolutely with their money because of government guarantees.The usual argument against introducing deposit insurance is that it creates a moral hazard problem: banks may start lending recklessly and growing too swiftly if depositors trust them absolutely with their money because of government guarantees.
But China’s current practice of paying off all deposits at failed institutions anyway, for fear of social instability from street protests by any depositors who are not reimbursed, means that deposit insurance might actually reduce moral hazard at Chinese banks, many experts contend.But China’s current practice of paying off all deposits at failed institutions anyway, for fear of social instability from street protests by any depositors who are not reimbursed, means that deposit insurance might actually reduce moral hazard at Chinese banks, many experts contend.
The introduction of deposit insurance would cap reimbursements for each account at some fixed amount. So banks that want to attract depositors with larger sums of money might choose to pursue more prudent lending policies. Still unclear are the limits that the Chinese government will set for insuring deposits. In the United States, the Federal Deposit Insurance Corporation guarantees up to $250,000 for each depositor at each financial institution. It also has an unlimited guarantee on zero-interest checking accounts through the end of this year, a temporary policy introduced in response to the recent global financial crisis.The introduction of deposit insurance would cap reimbursements for each account at some fixed amount. So banks that want to attract depositors with larger sums of money might choose to pursue more prudent lending policies. Still unclear are the limits that the Chinese government will set for insuring deposits. In the United States, the Federal Deposit Insurance Corporation guarantees up to $250,000 for each depositor at each financial institution. It also has an unlimited guarantee on zero-interest checking accounts through the end of this year, a temporary policy introduced in response to the recent global financial crisis.
But most countries set lower limits, and China is expected to do so as well.But most countries set lower limits, and China is expected to do so as well.
Mr. Sheng said that the F.D.I.C.’s ability to close banks without undermining confidence in the financial system was an inspiration for Chinese officials. “This financial crisis has proven that the F.D.I.C. works, particularly that small financial institutions can exit without disruption to the financial system,” he said.Mr. Sheng said that the F.D.I.C.’s ability to close banks without undermining confidence in the financial system was an inspiration for Chinese officials. “This financial crisis has proven that the F.D.I.C. works, particularly that small financial institutions can exit without disruption to the financial system,” he said.
In addition to deposit insurance, Mr. Xi’s new administration is also looking at the possibility of combining the country’s banking, securities and insurance regulators into a single financial regulatory commission, said a businessman with close government connections who also spoke on the condition he not be identified by name.In addition to deposit insurance, Mr. Xi’s new administration is also looking at the possibility of combining the country’s banking, securities and insurance regulators into a single financial regulatory commission, said a businessman with close government connections who also spoke on the condition he not be identified by name.
The administration is also studying a possible move to upgrade the country’s central bank, the People’s Bank of China, the businessman added. It is currently one of the politically weakest and least independent central banks among the world’s leading economies.The administration is also studying a possible move to upgrade the country’s central bank, the People’s Bank of China, the businessman added. It is currently one of the politically weakest and least independent central banks among the world’s leading economies.
Both of these administrative moves, if they win a consensus in the new administration, would require approval by the National People’s Congress in March. Both of these administrative moves, if they won a consensus in the new administration, would be subject to the approval of the National People’s Congress in March.