China sets up bank deposit guarantee

The People’s Bank of China announced on Sunday the creation, in early 2015, of a public fund guaranteeing accounts up to 65,000 euros per individual, if a financial institution collapsed.

Expected for a long time and presented as an important step in the opening of the Chinese economy, a guarantee of bank deposits will be put in place by the Chinese authorities at the beginning of next year.

The People’s Bank of China announced on Sunday, November 30, the next creation of a public fund guaranteeing accounts up to 500,000 yuan (65,000 euros) per individual if a financial institution would collapse in the future.

With South Africa and Saudi Arabia, the world’s second-largest economy remained the only G20 country that had not yet adopted such a mechanism, even though its leaders had been talking about it for two decades.

The official news agency, China News, said Sunday that this guarantee system will be implemented “early 2015”. Probably in January, according to other media and some economists.

Liberalization of rates

The deposit guarantee of bank customers is the corollary of the ongoing liberalization of interest rates. Until recently, the Chinese state itself set the cost of the loans made by the banks as well as the remuneration of the savings. This widespread control meant that competition among banks was weak.

As a result, most of these banks preferred to lend to state-owned enterprises and local governments, sometimes financing themselves behind these companies, as all of them had an implicit guarantee from the state. The gap was wide enough between the rate required to obtain credit and the low remuneration of savings for the big Chinese banks to record lucrative profits in recent years.

On the same subject To support its economy, Beijing lowers the cost of credit

As a result of this system, Chinese SMEs and the private sector as a whole are still struggling to obtain loans. They default to the proposed high-rate credits by the “shadow bank”, a flurry of institutions existing at the margins of the Chinese financial system, on which the party-state turned a blind eye.

The absence of the notion of risk

These two sides, the official system and the “shadow bank” have until now in common the absence of the notion of risk: each considers that the government will bail out its coffers in one way or another in case big glitch.

“The implicit quasi-universal guarantee of the state is the most important factor that has protected China from a systemic crisis until today, but it is also the most detrimental factor to the efficiency of the Chinese economy.” , summarizes Yao Wei, an economist at Société Générale on China, in a note published Monday, December 1.

The secretary-general of the Communist Party since the fall of 2012, Xi Jinping, has pledged credibility on its ability to deeply reform the Chinese economy. Liberalization of interest rates is a crucial element of this program.

In July 2012, Beijing had already decided to regulate the price that banks must charge for credit.

The reluctance of the big public banks

The step of liberalizing the remuneration of savings is more complex. Banks will take more risks to offer better pay to their savers. So it is necessary to introduce beforehand a mechanism guaranteeing a part of the savings. This will be done after a period of consultation by Beijing sector players, which runs until the end of December.

Behind the curtain, the big Chinese-owned banks – and their powerful relays in the Communist Party and the families of its leaders – have long held back the liberalization of interest rates, citing unconscious risks in other economies. the banks.

The rigidity of the system assured them a good rent. But the sharp slowdown in the Chinese economy, which fell to 7.3% growth in the third quarter, convinced Beijing of the need to quickly modernize the financing system of the economy, to bring him a breath of fresh air.