China on Sunday moved closer to introducing deposit insurance, a long-awaited economic reform seen as a way to impose greater market discipline on the country's banks.

The People's Bank of China (PBoC), the central bank, published draft rules for deposit insurance but did not say when they would be implemented.

The State Council, or cabinet, has set a one-month period to seek public comment on the rules, the official Xinhua news agency said. Other state media said the scheme could be implemented early next year.

Deposit insurance was aimed at "protecting the legal rights and interests of depositors, promptly preventing and resolving financial risk and protecting financial stability," according to the draft rules posted on the website of the PBoC.

Analysts said the move would force China's banks, the vast majority of them state-owned, to operate more in line with market principles and to be more competitive.

"The deposit insurance plan will require banks to shoulder their own operational risks and depositors will probably choose to put their money in banks with greater safety for deposits," Liu Dongliang, a senior analyst for the financial markets department of China Merchants Bank, told AFP.

The plan raises the possibility that China might even allow a bank to collapse, a prospect long ruled out by analysts on expectations of a government rescue.

The government wants to protect small depositors in case of a bank failure, fearing the impact on social stability should their savings disappear.

Under the draft rules, accounts with deposits of up to 500,000 yuan ($82,000) would be insured. The government could adjust the level in future based on what it called economic development, deposit structure and financial risk.

Depositors will be paid in full if their principal plus interest is below the ceiling. But any amount exceeding that level will depend on liquidation of the assets of the bank which took the deposit, the rules showed.

China has a massive bank deposit base because there are limited choices for investment. Domestic currency deposits stood at more than 112 trillion yuan at the end of October, according to PBoC figures.

The announcement of the plan for deposit insurance comes as China pushes another economic reform, the long-cherished goal of free interest rates.

The government began allowing banks to decide their own lending rates in July last year, but still sets deposit rates by administrative order.

Just over a week ago, the PBoC cut both lending and deposit rates and also allowed banks to offer deposit rates up to 20 percent higher than its benchmark level, compared to the previous 10 percent.

"China is now speeding up the process of interest rate liberalisation. At the same time, the risk to financial institutions is increasing, so the deposit insurance scheme will help respond to this situation," Liu said.