The details of the program are straightforward. Deposits of up to 500,000 yuan (about US$80,000) per bank made by businesses and individuals will be insured. Estimates from the central bank indicate that this will cover 99% of depositors in China. The program will be supported by a fund run by the PBOC and funded by the banks themselves, although the details behind this are not clear - banks will likely pay-in based on the size of their deposit bases. Deposit insurance is another step towards completely liberalized interest rates, which will likely complete over the next year.
Although no major global crises have hit the modern Chinese economy, we have seen the central bank lower reserve ratios and increase financing to help banks weather harsh economic conditions. One could only surmise that they would do the same in a period of real turmoil. The state also owns portions of nearly every bank in China with the exception of China Minsheng bank and the new private banks. The state and the banking sector are even more inextricably linked; it would be extremely difficult for the government to let any of the banks fail.
Yet that's exactly what deposit insurance allows the government to do. Individual consumers never had any doubt that the government would hold up banks in the past, so their confidence in the system has always been strong. They benefit from deposit insurance, but it's not for them. The deposit insurance puts the banks on notice that they could be allowed to fail.
Deposit insurance can also been seen in the bigger context of the Chinese government and regulators devolving themselves of direct responsibility for supporting the banking industry and moving into a guiding role.
Take for example the private banks. There is no government ownership of these new insitutions and they are expected to thrive or fail on their own. Personal credit as well: the government tasked the internet companies with setting up their own credit databases. It had made some progress in establishing a national credit database, but evidently had gotten to the point that they felt the tech companies could it better than the government itself. P2P lending and 3rd party online payments could also be seen as attempts by the government to let the industry mangage itself and find solutions on its own.
We should expect to see more of this in the future. This isn't to say that the government will actually let one of these institutions fail, but increasingly the government is washing its hands of direct involvement in banks - which is what we would expect and part of reform. And it doesn't mean that they would be completely on their own either. As we've seen in the US, even banks in a fully "market-driven" economy can expect government support.