(Yicai Global) March 7 -- China plans to establish a fund to ensure financial stability, according to the government work report submitted to the National People’s Congress for deliberation.

China will set up the fund to defuse risk at financial institutions in market-based and law-based ways, Chinese Premier Li Keqiang said when delivering the report at the opening meeting of the fifth session of the 13th NPC on March 5.

It is a common international practice that such funds are generally managed by the public sector and use public funds or industry resources to bail out and dispose of specific financial institutions, usually systemically important ones, and deal with major financial risks and incidents.

“The proposed fund can finance the disposal of problematic financial institutions, maximize the protection of related creditors, and use as little taxpayers’ money as possible,” Li Peijia, senior researcher at Bank of China, told Yicai Global. “It is also beneficial to the procedural and market-based disposal of problematic assets, minimizing any adverse impacts.”

Yicai Global learned that funds to promote financial stability usually have three sources of capital: payments from financial institutions, funds returned by financial institutions that received help from the fund and have recovered, and money from the government.

The authorities in provincial-level areas, where potential risks are higher and small- and mid-sized banks are concentrated, will spearhead the fund, Li added, noting that it will mostly prevent and deal with local financial risks.

Editors: Tang Shihua, Futura Costaglione