CHINA has issued draft regulations to introduce deposit insurance of its banks for the first time, taking an important step that will pave the way for crucial interest rate reforms.

    The draft rules, issued by the State Council’s Legislative Affairs Office, directly cover deposits of up to 500,000 yuan (US$81,433), according to a notice on the website of the People’s Bank of China. Banks have been given until Dec. 30 to comment.

    China has considered insuring savers’ deposits for around two decades, but the plans took on new urgency in the past year as the country sought to deepen economic reforms that included removing State controls on interest rates.

    Chinese banking rules forbid banks to fix their own deposit rates. Instead, they are only allowed to pay no more than 1.2 times a benchmark deposit rate fixed by the central bank.

    The control on deposit rates is a legacy of China’s banking troubles in the early 2000s, when its biggest banks were technically insolvent and bailed out by the government.

    Authorities have since kept a close eye on banks, and had in the past dictated a minimum level for lending rates that banks had to comply with. The floor was scrapped in July 2013.

    Many analysts believe China needs to protect its savers before it can liberalize its interest rate market and give banks the freedom to set their own their deposit rates.

    The fear is that tougher competition between banks could lead to failures, especially among smaller banks.

    In a milestone move towards a free interest rate market, China removed controls on banks’ lending rate last July, but left a ceiling on the deposit rate intact.

    It loosened its restriction on the deposit rate earlier last month by allowing banks to pay savers as much as 1.2 times a benchmark level set by the central bank. The ceiling was previously set at 1.1 times.

    The move to slightly liberalize the deposit rate was accompanied by China’s first interest rate cut in more than two years as authorities tried to lift flagging growth in the world’s second-largest economy.(SD-Agencies)