Translated by 21st Century Business Herald

China’s central bank said it will create a deposit insurance system to promote the reform of the financial system.

Under the plan, insurance on deposits will be paid by banks to insurance companies. If a bank goes bankrupt, insurance companies will compensate the bank’s clients. This is an effective firewall between the government and banks.

The deposit insurance system can also help correct the distortion of interest rates in the long run. As deposit interest rates are rising and loan interest rates are being kept low to stimulate the economy, some banks are facing difficulties. The insurance system can help the banks overcome the difficulties and protect depositors.

The insurance system is also a reminder to depositors that their money is not absolutely safe. They must choose the most reliable banks. Chinese banks have to compete for customers by improving their services.

Although the mortgage crisis of the United States showed that an insurance system does not work well for big banks and has some issues, starting it in China should be regarded as progress in China’s financial reform.