China is considering establishing a deposit insurance system and will use FDIC’s experience as a reference, according to Xinhua News. On August 2 the People’s Bank of China (PBC) and FDIC signed a memorandum of understanding (MOU) designed to forge a formal international working relationship between the two entities, following two weeks of meeting and discussions between FDIC and the banking and government leaders in China.

The current situation of lacking deposit insurance in China is mainly due to the fact that most banks in the country are State-owned and offer guarantees to depositors. A deposit insurance system would promote the development in China’s financial market by boosting the confidence of those who put their money into smaller, local banks, said Zhou Xiaochuan, governor of the People’s Bank of China.

“The work of the Chinese to create a deposit insurer is critical for China’s continued progress in building the financial infrastructure necessary to sustain economic growth, particularly in rural areas where community-based lending and banking relationships are so critically important.” Said FDIC Chairman Sheila C. Bair, “the MOU is a very positive and important step toward making a deposit insurance system in China a reality.”

The central bank will cooperate with the FDIC in deposit insurance as well as financial services and financial management.