PBOC: Time ripe for deposit insurance system

The People's Bank of China, the country's central bank, said now is the time for the country to establish a deposit insurance system.

That announcement came as part of an official report that was released over the weekend and is a strong indicator that the long-awaited system will be introduced soon.

Deposit insurance protects depositors from losses they would incur if a bank they had put their money in found itself unable to pay its debts. It is thus seen by many as an important means of promoting financial stability.

Experts said introducing the system will accord with the country's plans to liberalize its interest rates.

In the past, Chinese banks have been in little danger of going bankrupt and failing to pay back money they owe depositors. But defaults will become more common as interest rates are liberalized and the standards that banking institutions must meet to begin operating are lowered.

In the past month, the central bank allowed the interest rates banks pay on deposits to fluctuate more widely, setting in motion a liberalization of interest rates.

Zhou Xiaochuan, central bank governor, has spoken in the past about the importance of having a deposit insurance system.

"During the 12th Five-Year Plan (2011-15), we expect to see significant progress in liberalizing interest rates," he said in January.

He said Chinese policy banks and other institutions that do not have rigid financial requirements will not be allowed to price their interest rates as freely as commercial banks.

"Commercial banks should prepare themselves for potential losses caused by interest rates they set themselves and be prepared to take full responsibility for them in the future."