China may soon announce plan to insure deposits - sources

BEIJING (Reuters) - China's central bank has drawn up plans for the introduction of an insurance system for bank deposits, and the draft rules could be announced soon, three sources with knowledge of the matter said on Thursday. China has considered insuring savers' deposits for around two decades, but the plans took on new urgency in the past year as the country sought to deepen economic reforms. Some Chinese media said on Thursday that the deposit insurance system could be unveiled as soon as January. Many analysts believe China needs to protect its savers before it can liberalise its interest rate market and give banks the freedom to set their own their deposit rates. The fear is that tougher competition between banks could lead to failures, especially among smaller banks. A source with knowledge of the matter said the central bank is studying how to set up a deposit insurance system and an announcement may be imminent. The People's Bank of China was not immediately available for comment. Having pulled its biggest banks back from the brink of technical insolvency in the early 2000s, China tried to protect banks' profitability in recent years by setting limits on their lending and deposit rates. Economists have criticised the restrictions, say they distort credit costs by artificially depressing deposit rates, and also led to wasteful investment. In a milestone move towards a free interest rate market, China removed controls on banks' lending rate last July, but left a ceiling on the deposit rate intact. It loosened its restriction on the deposit rate earlier this month by allowing banks to pay savers as much as 1.2 times a benchmark level set by the central bank. The ceiling was previously set at 1.1 times. Last week's move to slightly liberalise the deposit rate was accompanied by China's first interest rate cut in more than two years as authorities tried to lift flagging growth in the world's second-largest economy. (Reporting by Xie Heng in BEIJING and Victoria Bi in Hong Kong; Editing by Simon Cameron-Moore)