BEIJING, Nov. 30 -- China is to adopt a depositinsurance scheme to better protect savers and free up interestrates.

The Legislative Affairs Office of China's State Councilpublished a set of draft regulations containing 23 articles on itswebsite on Sunday to solicit public opinion until December 30,2014.

Financial institutions will be required to pay insurancepremiums to a special fund and an agency will be set up to managethe money. Domestic banks' overseas branches and foreign banks'China branches are exempt.

The fund will pay maximum compensation of 500,000 yuan (81,500U.S. dollars) per depositor if a bank suffers insolvency orbankruptcy.

The People's Bank of China (PBoC), the country's central bank,said 99.6 percent of Chinese depositors saved less than thissum.

Banks will cover losses more than 500,000 yuan with their ownassets, according to the regulations.

The new agency will make detailed rules on how to manage thefund and set insurance premium rate for different banks based onhow riskily they run their business.

Well-informed sources told Xinhua that the scheme will likely beimplemented as early as at the beginning of 2015.

"The deposit insurance scheme is one important component of afinancial safety net. Its purpose is to step up supervision ofbanks and prevent risks in the financial sector", said thePBoC.

The scheme will significantly improve the competitiveness ofmedium and small-sized banks as the insurance will assuredepositors of the safety of their savings, according to the centralbank.

"Therefore, it will help create a fair environment for allfinancial institutions," said the PBoC.

Deposit insurance is implemented in 112 economies to protectdepositors, in full or in part, from losses caused by a bank'sinability to pay its debts when due.

All G20 members have adopted such scheme, except South Africa,Saudi Arabia and China. Bank credit in China is virtually endorsedby the government.

"With the scheme in place, the government will retreat and leavebanks to bear their own risks," said Guo Tianyong, a bankingresearcher with the Central University of Finance andEconomics.

The country started to mull the establishment of a depositinsurance scheme in 1993 and the central authority promised to setup such scheme in an ambitious reform plan released in November2013 after 20 years of deliberation.

The deposit insurance scheme is considered a precondition forChina to free up deposit rates -- the last and most important stepof interest rate liberalization, according to Lian Ping, chiefeconomist with the Bank of Communications.

Interest rate liberalization has been high on the financialreform agenda. In March, central bank governor Zhou Xiaochuan saidChina was very likely to ease its grip on banks' deposit rates inthe coming one or two years.

Last Friday, the PBoC decided to raise the deposit rate ceilingto 120 percent of the one-year benchmark deposit rate, from 110percent, which economists saw as an important step in interest rateliberalization.

With more autonomy in deciding deposit rates, many banks tendedto lure savings with high return promise and invest in riskyprojects.

"The deposit insurance scheme will restrict them from going toofar and keep risks under control," said Lian.

"The establishment of such scheme is critical to deepening thefinancial reform," said Huang Xiaolong, vice director of the PBoC'sFinancial Stability Bureau.

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