Expert says PBOC's plan for deposit insurance system is unnecessary

BEIJING - China is unlikely to liberalize deposit interest rates this year, and the deposit insurance system that the central bank plans to establish isn't necessary for the economy, a senior official told China Daily.

"Deposit insurance is not a must for interest rate liberalization, and it doesn't accord with the real condition of the banking industry in China," said Yang Zaiping, executive vice-president of the China Banking Association and an inspector of the China Banking Regulatory Commission (CBRC).

He made the remarks in an exclusive interview with China Daily.

Yang said the implementation of a deposit insurance system would mean that guarantees from the government would exit, which would be premature given the current development level of financial institutions.

Shang Fulin, chairman of the CBRC, said on Friday at a forum attended by global systemically important banks that an insurance net targeted at a crisis that has already occurred couldn't equate with efficient, preventive regulation.

Deposit insurance is a measure to protect depositors from losses caused by a bank's inability to pay its debts when due. It is believed to be one component of a financial system safety net that promotes financial stability.

The People's Bank of China (PBOC), the central bank, has finished drafting deposit insurance rules and will announce the establishment of the system before gradually implementing detailed policies, the China Securities Journal reported on Friday, citing an anonymous source.

It said a deposit insurance fund would be set up under the PBOC, into which participating commercial lenders would inject capital at a certain percentage of their deposits.

Some other types of financial institutions, such as insurance companies, are also expected to play a role in the system in the long term. Major State-owned lenders would be required to take part, the source said.

The PBOC said in January that it was preparing to establish a deposit insurance system to reduce systemic risks among financial institutions.

Zhou Xiaochuan, the central bank governor, said earlier that the authorities were waiting for the proper time to announce the rules.

In 2011, he said that in the next five years, there would be significant progress on interest rate liberalization.

"The demand for more liberalized interest rates is very urgent at present, and the establishment of a deposit insurance system should occur as soon as possible to secure the interest of depositors and pave the way for market-based interest rates," said Guo Tianyong, director of the Banking Research Center at the Central University of Finance and Economics.

Lu Zhengwei, chief economist with Industrial Bank Co Ltd, said market-oriented interest rates are expected to widen performance gaps among banks and place the interests of depositors at risk.

Facing tighter capital requirements from regulators, Chinese commercial lenders have rushed to raise funds from the capital markets in recent years, even as they continued to register record profits.

As of Monday, all seven banks that had released estimates of their financial performance in 2011 reported net profit growth rates of more than 35 percent year-on-year.

Among these banks, the Shenzhen Development Bank Co Ltd estimated a surge of between 60 and 70 percent.

The Central Huijin Investment Co, the State parent of China's "Big Four" banks, has agreed to cut the dividend payout ratio of Industrial and Commercial Bank of China Ltd, Bank of China Ltd and China Construction Bank Corp this year by 5 percentage points to 35 percent, to ease their capital-adequacy pressure, the 21st Century Business Herald reported on Thursday.

The three banks will get an estimated 26.4 billion yuan ($4.18 billion) in profits to replenish capital as a result of Huijin's move.

Wu Xiaoling, a former central bank deputy governor, said on Saturday that the first step to liberalizing interest rates should not be a loosening of the ceiling on deposit interest rates, because small- and medium-sized financial institutions needed the protection of an assured net interest margin.

"A measure to further lower the baseline of lending interest rates should be considered for this year in particular," she said.