CHINA announced plans yesterday to roll out its first deposit insurance in May as part of steps to make the State-owned banking industry more flexible and competitive.

    From May, financial institutions will be required to pay insurance premiums into a fund that will be managed by an agency appointed by the State Council, according to a statement posted on the government website.

    The plan is designed to return bank clients’ deposits if their bank suffers insolvency or bankruptcy. The reimbursement will be drawn from the new fund in the case of the deposit being 500,000 yuan (US$82,000) or less, which applies to 99.63 percent of Chinese depositors, said the statement. Banks will pay indemnities with their own assets to those who have deposited more than 500,000 yuan.

    The policy would exclude branches of foreign banks in China, the statement said.

    The measure would allow regulators to wind down a financially troubled bank without hurting depositors. Previously, all Chinese banks were assumed to be backstopped by the government to avoid losses to depositors.

    Chinese regulators also have taken steps, including easing controls on interest rates banks can pay, in an effort to make the industry more market-oriented and efficient.

    “The introduction of deposit insurance is an important step in interest rate liberalization,” JP Morgan economist Haibin Zhu said in a report.

    Economic planners have talked about instituting deposit insurance since the early 1990s and the central bank governor, Zhou Xiaochuan, said last month that it probably would be unveiled this year.

    Regulators also have said they plan to allow banks set up with private capital for the first time since 1949 when the People’s Republic of China was established.

    The policy has long been considered a precondition for China to free up deposit rates — the last step in interest rate liberalization.

    (SD-Xinhua)