Cover Story: China’s Bank Deposit Insurance Plan Is Seen Needing New Support
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In the spring of 2019, a quiet but historic event shook China’s banking sector: Baoshang Bank collapsed. It was the first true bank failure in the country since the founding of the People’s Republic, and the first real test of a deposit insurance system created four years earlier. That test would define the future of financial risk management in China.
Today, the bank born from Baoshang’s ashes—Mengshang Bank—is not only alive but profitable. It reported 2024 net income of 180 million yuan ($25 million), up 65.2% from the previous year, excluding losses booked from merging with a dozen rural banks. Its bad loan ratio dropped to 1.02%, while provision coverage surged to nearly 300%. For regulators, these numbers are more than good news—they’re vindication. Baoshang’s messy but controlled exit was the proving ground for China’s deposit insurance experiment.
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- Since Baoshang Bank’s 2019 collapse, China’s deposit insurance fund has actively managed several bank failures, using payouts exceeding 180 billion yuan and covering 3,761 institutions, but faces challenges due to limited legal authority, fragmented oversight, and insufficient reserves (69.8 billion yuan as of 2024).
- Reforms are urged for clearer legal frameworks, stronger early intervention tools, and improved coordination among regulators to prevent systemic risks.
- Experts advocate enacting a dedicated Deposit Insurance Law to empower effective risk management and crisis response.
China’s deposit insurance system, established in 2015, faced its first major test with the collapse of Baoshang Bank in 2019—the country's first true bank failure since the founding of the People’s Republic. Baoshang’s resolution validated the role of the deposit insurance system and led to the creation of Mengshang Bank, which in 2024 reported a net income of 180 million yuan, a 65.2% increase year-on-year, with a drop in bad loan ratio to 1.02% and provision coverage nearing 300% [para. 1][para. 2]. This outcome reassured regulators about the deposit insurance system’s potential for managing financial risk [para. 2].
China’s deposit insurance system functions much like those in the West—banks pay premiums into a fund insuring deposits up to 500,000 yuan per account. As of the end of 2024, 3,761 institutions participated, providing 373.2 billion yuan in premiums—enough to insure over 99% of individual depositors, a global high [para. 3]. However, this sum is minor compared to 300 trillion yuan in commercial bank deposits and over 3.3 trillion yuan in non-performing loans [para. 4].
From its inception, the system was designed to proactively minimize risk via early-warning systems, risk-based premiums, and intervention authority—earning praise from the IMF and World Bank [para. 5]. Despite progress, issues remain: experts highlight legal gaps, vague early-intervention triggers, and weak enforcement, which mean that many banks fail to take corrective action promptly. Coordination between agencies is patchy, and penalties for violations are insufficient [para. 6]. The central bank advocates for smarter early-warning tools and firmer correction mechanisms [para. 7]. Internationally, models like the U.S. FDIC have evolved over decades, and experts believe China’s system could mature rapidly through similar crisis-driven reforms [para. 8].
Since 2019, the fund has increasingly assumed an active role in bank resolutions, starting with Baoshang Bank—whose bankruptcy was swiftly concluded by August 2021. Compensation for depositors and creditors reached close to 90%, and the fund facilitated mergers, such as between Yingkou Coastal Bank and Liaoyang Bank into Liaoshen Bank. However, the latter failed to secure a strategic investor—casting doubt on its long-term prospects. Liaoyang Rural Commercial Bank's cleanup cost the fund roughly 36.9 billion yuan, and critics argue that such administrative bailouts risk burdening healthy institutions without solving underlying issues [para. 13-18]. These experiences underline the need for targeted, deep interventions rather than superficial bailouts [para. 19-21].
Prompt Corrective Action (PCA) systems, common in the West, are still weak in China, with most corrective measures relying on non-binding “suggestions.” From 2020 to 2024, 481 risk alerts were issued, mainly targeting rural banks, but over 90% were resolved within two quarters. However, experts note that China lacks automatic triggers and binding penalties for noncompliance [para. 24-30]. Calls are growing for clear, enforceable triggers, and the ability to limit insurance coverage for acutely risky banks [para. 31].
Financially, the fund’s reserve, at 69.8 billion yuan by end-2024, is limited, especially as bank bailouts rapidly consumed resources after 2019. Annual premiums are rising (nearly 62 billion yuan in 2024), but may be inadequate for simultaneous crises. Experts recommend diversifying the fund’s financing by direct borrowing from the central bank, issuing bonds, prudent investment, and advance collection of premiums [para. 34-44].
Regulatorily, authority is split between the central bank, NFRA, and Ministry of Finance, engendering overlap and unclear lines of responsibility. Experts argue for a tiered approach: routine oversight by the NFRA, focus on risk monitoring by the insurance fund, and clear escalation protocols for crises [para. 45-57].
Ultimately, the absence of dedicated deposit insurance law leaves the system vulnerable. Current rules are administrative, not legislative. There’s strong momentum for codifying clearer authority, triggers, responsibilities, and financial mechanisms to ensure the system’s credibility in managing future financial crises [para. 58-72].
- Baoshang Bank
- Baoshang Bank collapsed in 2019, marking China’s first true commercial bank failure. Its demise tested China’s newly established deposit insurance system. Regulators paid out depositors, resolved bad assets, and created successor Mengshang Bank. Baoshang’s case was messy but ultimately successful, demonstrating that even in China, banks can exit the market in an orderly way when strong structures and powers are in place to manage financial risk and protect depositors.
- Mengshang Bank
- Mengshang Bank is the institution that emerged from the ashes of Baoshang Bank following its 2019 collapse. By 2024, Mengshang Bank reported a net income of 180 million yuan ($25 million), up 65.2% from the previous year (excluding merger losses), with its bad loan ratio down to 1.02% and provision coverage near 300%. Its performance is viewed as a success for China’s deposit insurance and banking system restructuring efforts.
- Huishang Bank
- Huishang Bank played a key role in the resolution of Baoshang Bank’s collapse. During the 2019 restructuring, the Deposit Insurance Fund acquired equity in Huishang Bank to help absorb Baoshang’s viable assets and operations, ensuring service continuity and aiding a rare clean exit in China’s banking history.
- Yingkou Coastal Bank
- In 2021, Yingkou Coastal Bank, together with Liaoyang Bank, was merged into a new entity called Liaoshen Bank as part of a banking sector cleanup in Liaoning province. The Deposit Insurance Fund invested 1 billion yuan for a 5% stake, but the merger failed to attract a true strategic investor, raising concerns about Liaoshen Bank’s long-term viability and the effectiveness of administrative-driven solutions over market-oriented reforms.
- Liaoyang Bank
- Liaoyang Bank was one of two struggling local lenders in Liaoning province that merged in 2021 to form Liaoshen Bank, with the Deposit Insurance Fund investing 1 billion yuan for a 5% stake. Despite strong state support, the newly formed Liaoshen Bank failed to attract a strategic investor, raising concerns about its long-term viability. Liaoyang Rural Commercial Bank, once controlled by a private conglomerate, was also restructured at significant cost to the deposit insurance fund.
- Liaoshen Bank
- Liaoshen Bank was formed in 2021 through the merger of two struggling local lenders in Liaoning province: Yingkou Coastal Bank and Liaoyang Bank. The Deposit Insurance Fund invested 1 billion yuan for a 5% stake, with local state-owned firms—led by Liaoning Financial Holding Group—holding the majority. However, the bank has struggled to attract true strategic investors, raising concerns about its long-term viability.
- Liaoyang Rural Commercial Bank
- Liaoyang Rural Commercial Bank, once controlled and hollowed out by a private conglomerate, was restructured in 2022. Its deposits, staff, and branches were transferred to Shenyang Rural Commercial Bank, costing the deposit insurance fund about 36.9 billion yuan. Critics argued that the operation, driven by administrative orders rather than market logic, risked burdening healthier institutions without addressing root problems.
- Shenyang Rural Commercial Bank
- Shenyang Rural Commercial Bank acquired the deposits, staff, and branches of Liaoyang Rural Commercial Bank as part of a cleanup operation in 2022. This restructuring effort, supported by the deposit insurance fund at a cost of roughly 36.9 billion yuan, aimed to stabilize the region’s financial sector after Liaoyang Rural Commercial Bank was hollowed out by a private conglomerate. Critics argue such approaches risk burdening healthy institutions rather than addressing root problems.
- May 2015：
- China’s deposit insurance system was established.
- 2017：
- The deposit insurance system was lauded by the IMF and World Bank as aligned with global best practices.
- Spring 2019：
- Baoshang Bank collapsed, marking the first true bank failure in China since the founding of the People’s Republic.
- May 24, 2019：
- Baoshang Bank was placed under regulatory takeover due to severe credit risks.
- 2019：
- China Deposit Insurance Fund Administration Company was created during Baoshang’s restructuring.
- 2019：
- Deposit insurance system concluded its first phase as a savings mechanism, with the balance reaching over 121.6 billion yuan.
- 2020：
- Deposit Insurance Fund Company began operating as a real institutional force.
- 2020：
- Deposit Insurance Fund paid over 103 billion yuan for bank resolutions, including 67.6 billion for Baoshang Bank.
- August 2021：
- Baoshang Bank’s bankruptcy proceedings were formally concluded.
- 2021：
- Liaoning province merged Yingkou Coastal Bank and Liaoyang Bank into Liaoshen Bank, with the Deposit Insurance Fund investing 1 billion yuan for a 5% stake.
- 2022：
- Liaoning province transferred deposits, staff, and branches of Liaoyang Rural Commercial Bank to Shenyang Rural Commercial Bank at a cost of roughly 36.9 billion yuan.
- 2022：
- Another 91 billion yuan spent by the Deposit Insurance Fund on cleaning up Liaoyang Rural Commercial Bank and other distressed lenders.
- 2022：
- By 2022, hard-constraint PCA pilots had rolled out in 19 provinces.
- 2023：
- The Central Financial Work Conference in October emphasized the need for binding corrective actions in bank regulation.
- 2023：
- The Financial Stability Board (FSB) revised its Core Principles for Effective Deposit Insurance Systems, calling for legal mandates for emergency liquidity.
- May 20, 2024：
- Photograph taken of the FDIC headquarters in Washington, DC (article context: US deposit insurance example).
- Nov. 8, 2024：
- Photograph of the PBOC building in Beijing (contextual event in article imagery).
- By the end of 2024：
- 3,761 institutions had joined China’s deposit insurance system, with premiums totaling 373.2 billion yuan. The fund's balance stood at 69.8 billion yuan.
- Between 2020 and 2024：
- Deposit Insurance Fund issued 481 risk alerts covering 253 unique banks.
- 2024：
- Mengshang Bank reported net income of 180 million yuan, up 65.2% from the previous year.
- 2024：
- The People’s Bank of China’s Financial Stability Report noted the increasingly active role of the Deposit Insurance Fund.
- April 2025：
- PBOC’s Deputy Governor Xuan Changneng called for reforms to China’s deposit insurance system.
- 2025：
- Mengshang Bank, successor to Baoshang, is profitable and operating stably.
- 2025：
- At the National People’s Congress, multiple delegates proposed speeding up deposit insurance legislation.
- 2025：
- Li Shuguang highlighted the hybrid nature of China’s deposit insurance and the need for legal clarity.
- CX Weekly Magazine
Jun. 6, 2025, Issue 21
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