The first step in massive financial reforms in China includes introducing a formal system of bank deposit insurance as banks have rapidly ramped up lending and begun offering a wide variety of increasingly risky investment products that do not appear on their balance sheets.
Introducing deposit insurance could also help the government steer the financial system toward providing more credit for small and medium-sized businesses, the New York Times reports. Currently, these now receive as little as three percent of bank lending even as they account for at least half the country’s economic activity.
Without a clear system until now for closing banks that lend unwisely, banks have been encouraged by regulators to lend overwhelmingly to state-owned enterprises that appear certain to repay loans. That has left smaller businesses and private companies starved for credit. The first indication of the government’s interest in the issue will likely come at the Central Economic Work Conference later this month. Until then, while things have gotten better, China’s small businesses still wait in cold for the decision.