With a population of more than 1 billion people, strictly from a size perspective, China has leapfrogged the U.S. to become the world’s largest economy, Forbes wrote, citing data from the International Monetary Fund. The country is expected to have an economic output of $17.6 trillion in 2015, slightly outpacing U.S. predictions of $17.4 trillion.
However, given its newfound global standing – which has been years in the making and something analysts predicted would only be a matter of time – the government of China has taken a number of steps to modernize its infrastructure in certain areas, such as banking. For the past 30 years, China has been under significant scrutiny to make changes to its economic policies. One of which is to commercialize banking.
According to The Wall Street Journal, banks in China have approximately $19.654 trillion in deposits. This number puts the country near the top of the list in this category. Traditionally, the role of Chinese banks was to extend lines of credit to businesses that were essentially state owned. However, this has led to an increase in off-the-books transactions via covert banking operations, such as the establishment of trust companies.
The Journal wrote these transactions have left many companies owned and run by China with debt dating back to 2008 when credit was essentially given freely. This has led to a push by the country to ensure its deposit using a system similar to that of the Federal Deposit Insurance Corporation in the U.S.
A closer look at China’s newly adopted stance on insuring bank deposits
The FDIC was established in 1933 to strengthen consumer confidence in the U.S. financial system. As such, an individual or company can make deposits at their bank and have confidence in knowing that should the institution somehow become insolvent any deposits up to $250,000 will be insured.
At present, the FDIC insures approximately $9 trillion dollars in deposits made at every bank currently operating in the U.S. The Chinese model will be similar, albeit on a significantly smaller scale in terms of the dollar amount that will actually be protected.
The Journal wrote China’s cabinet, the State Council, developed a plan where every individual consumer or business will have deposits ensured up to 500,000 yuan. This amount comes to approximately $80,550.
This new policy is expected to take effect on May 1, will be managed by the People’s Bank of China and will insure 99 percent of all depositors. This measure was implemented after the global financial crisis that set off the Great Recession.
With China’s current business infrastructure being so unpredictable, in additional to its financial regulatory system, the move to insure bank deposits is seen as a step in the right direction. Although there has yet to be an established plan to determine how China’s depositor insurance program will ultimately be funded, at present, financial institutions will be required to pay a fee based on risk profiles and the average sizes of their deposits.
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