The deposit insurance system, which involves setting up deposit insurance institutions, aims to protect depositors against financial losses caused by bankruptcy of financial institutions through a risk compensation mechanism.

"The system will protect depositors' interests, raise public confidence in the banking sector and contribute to the stability of the financial system," said Wei Jianing, a researcher with the Development Research Center under the State Council.

"The system will help prevent depositors from making mass withdrawals from a bank, which can have a negative impact on other financial institutions, even "healthy ones"," said Wei

"A mass withdrawal is usually highly 'contagious' in a financial market, which is fragile and unstable by nature," he added.

Although no financial crisis have broken out in China, mass drawings have occurred to a number of small to medium sized financial institutions in recent years, posing direct threats to the whole banking system.

In 1999, the Hainan Development Bank went bankrupt when people formed long queues at its outlets after learning the bank had acquired about 30 debt-laden urban credit cooperatives in Hainan Province.

The debate over whether to establish a deposit insurance system in China has raged for a decade, but it is not until now that the conditions are believed to have matured.

"It is high time the system is established," said Wei, "the system will be exposed to lower risks because China's economic growth will continue at a steady pace and the supervision over the banking sector has been greatly enhanced thanks to the establishment of the China Banking Regulatory Commission, the country's banking watchdog.

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