The PBoC Is About To Launch Its Biggest Economic Reform Yet

Florentijn Hofman’s duck, here pictured at Summer Palace Kunming Lake in Beijing.

The regime of Chinese President Xi Jinping has made reforming the Chinese economy and spreading the economic benefits of China’s massive growth its number one priority.

So news that the PBoC, China’s central bank, hosted a meeting in Beijing yesterday of China’s senior bankers with an aim to expedite the introduction of deposit insurance to Chinese bank deposits is the biggest sign yet that economic liberalisation continues apace.

The Wall Street Journal Asia (WSJA) reports that the deposit insurance plan “is expected to go into effect as early as January, the officials said, and would insure accounts up to 500,000 yuan, or about $81,000”.

“The plan will be announced very soon,” an official with PBOC told the WSJA.

Unlike the West, where deposit schemes across many jurisdictions, including Australia, were put in place to build confidence in banking systems during the GFC, the Chinese move is aimed at not homogenising bank risk, but differentiating it.

It is aimed at making depositors, who currently have full guarantees on all their deposits via an implied Government guarantee, now differentiate between institutions given only 500,000 yuan of their deposits are to be guaranteed in the future.

The recognition that all their deposits are not insured could have severe impacts on the Chinese banking system as depositors recognise that some of their savings may be at risk in a banking failure.

The WSJA reports that Zhang Ming, a senior economist at the Chinese Academy of Social Sciences said:

“A deposit-insurance system means rising chances of the government allowing bank failures in the future. On one hand, it could enhance investor confidence because it would provide financial stability in the event of a crisis, but on the other hand, it could also introduce greater risks into the economy.”

So this is not a policy without danger for the Xi or the economy. But it is an important step forward for the Chinese economy.

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