China: Deposit Ownership, Seigniorage Allocation and QB

 In China, deposit ownership and seigniorage allocation operate within a state-dominated financial system, blending legal frameworks with opaque monetary governance. Here’s how it works:

Deposit Ownership in China

1. Legal Framework

   • Deposits are legally owned by depositors, as per Article 29 of the Commercial Bank Law, which mandates banks to protect depositors’ rights, ensure voluntary deposits, and maintain confidentiality3.

   • Banks act as custodians: Depositors retain ownership, but banks manage funds under strict PBOC regulations (e.g., interest rate limits, reserve requirements)34.

2. Judicial Interpretation

   • The Supreme People’s Court clarifies that deposits serve as a guarantee for creditors’ rights. For example, if a contract labels a payment as a “deposit” without specifying penalties, courts may still enforce compensation tied to the deposit’s value (up to 20% of the contract amount)2.

3. Implicit State Backing

   • While China lacks formal deposit insurance, the state implicitly guarantees deposits to prevent bank runs. Failed banks are typically bailed out, with depositors reimbursed using state funds4.

Seigniorage Allocation in China

1. Central Bank Control

   • The People’s Bank of China (PBOC) captures seigniorage through money creation. Historically, seigniorage from reserve money reached 7% of GDP in the 1990s, funding quasi-fiscal activities like infrastructure projects5.

   • Seigniorage is not transparently allocated. Revenue is directed by the State Council to stabilize markets, support state-owned enterprises (SOEs), or manage economic crises45.

2. Monetary Policy Tools

   • The PBOC uses seigniorage to influence liquidity via:

     • Reserve requirements: Banks must hold reserves at the PBOC, limiting lending capacity34.

     • Interest rate controls: Sets deposit/lending rate bounds to manage inflation and credit growth4.

3. Debt-Fueled Growth

   • Seigniorage has historically enabled debt-driven expansion. For example, local governments and SOEs borrow extensively from state banks, supported by PBOC liquidity injections45.

Contrast with Quantitative Balancing (QB)

Marco Saba’s QB framework proposes reforms that clash with China’s current system:

Aspect	China’s Current System	QB Proposal
Deposit Ownership	Depositors own funds, but banks manage them opaquely	Deposits legally segregated as state liabilities
Seigniorage	Captured by PBOC, allocated opaquely for state goals	Explicitly recorded as Treasury revenue
Transparency	Limited public oversight of money creation	Banks report money creation to the Treasury
Risk Management	Implicit state guarantees prevent bank runs	Depositor ownership reduces run incentives

Challenges for China

1. Political Feasibility
   QB’s transparency reforms would require dismantling China’s state-centric control over banking, which is unlikely given the CCP’s reliance on financial opacity to manage economic narratives45.

2. Debt Overhang
   China’s 330% Total debt/GDP ratio complicates seigniorage reallocation. QB’s focus on transparency would expose systemic risks tied to local government and property-sector debt5.

3. Legal Reforms
   Implementing QB would necessitate redefining deposit ownership in civil law (e.g., amending Article 586 of the Civil Code) and overhauling the PBOC’s role23.

Conclusion

China’s deposit ownership and seigniorage allocation are tightly controlled by the state, prioritizing stability over transparency. While QB offers a path to reduce systemic risks through clearer accounting, its adoption would require unprecedented political and legal reforms - a stark contrast to China’s centralized, debt-driven model.