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The Chinese government is considering creating a deposit insurance system to ward off repercussions from the bankruptcy of financial institutions afflicting customers.

 

"The system will protect depositors' interests, raise public confidence in the banking sector and contribute to the stability of the financial system," said Wei Jianing, a researcher with the Development Research Center under the State Council.

 

"The system will help prevent depositors from making mass withdrawals from a bank, which can have a negative impact on other financial institutions, even "healthy ones"," said Wei. "A mass withdrawal is usually highly 'contagious' in a financial market, which is fragile and unstable by nature."

 

Although no financial crisis has broken out in China, mass drawings have brought down a number of small and medium sized financial institutions in recent years, threatening the whole banking system.

 

In 1999, the Hainan Development Bank went bankrupt after people formed long queues at its outlets after learning of the bank’s acquisition of 30 debt-laden urban credit cooperatives in Hainan Province.

 

The debate over whether to establish a deposit insurance system in China has raged for a decade, but until now the conditions were not seen as having matured.

 

"It is high time the system is established," said Wei, "the system will be exposed to lower risks because China's economic growth will continue at a steady pace and the supervision over the banking sector has been greatly enhanced thanks to the establishment of the China Banking Regulatory Commission, the country's banking watchdog.”

 

"Meanwhile, a number of state-owned commercial banks - including the Industrial and Commercial Bank of China, the Bank of China and the China Construction Bank - have reduced their non-performing loans and listed on the stock market."

 

The central bank has labeled it imperative that China set up the system since its banking sector has fully opened to the outside world.

 

Discussions on the establishment of a deposit insurance system has been put on the agenda of China's third national financial work conference, scheduled for later this month in Beijing, according to the 21st Century Business Herald.

 

China has long had a "latent" deposit insurance system, under which the central bank and local governments pay off personal debts when financial institutions fail due to management and operational faults.

 

But it has imposed a heavy burden on governments and undermined the central bank's monetary policy.

 

The world's first deposit insurance system was established in the United States in 1933. In the 80s and 90s, many countries followed suit after experiencing serious financial crises. By June 2006, 95 countries and regions had the system, with 20 more preparing for it.

 

(Xinhua News Agency January 17, 2007)