(Shanghai Daily)
Updated: 2007-08-03 16:42

China's central bank said it will set up a deposit insurance to guarantee savings and protect depositors from bankrupt banks as it seeks to instill public confidence in the country's financial system.

The People's Bank of China yesterday signed an accord with the US Federal Deposit Insurance Corp to cooperate on financial services and deposit insurance, according to Bloomberg News.

China's central bank, custodian of the world's largest foreign-currency reserves, wants to shield the country's 36.9 trillion yuan (US$4.87 trillion) of local currency deposits from bankrupt banks and also maintain public confidence in the financial industry. The plan comes amid increasing calls by government officials for banks to refrain from lending money to speculators in real estate and the stock market.

"There is an increasing need to set up a deposit insurance system in China," central bank Governor Zhou Xiaochuan said yesterday in Beijing. "The time is ripe to establish the system" because "the level of China's financial supervision has been improving and the cost of setting up a deposit insurance system is low," he said.

About 6.6 percent, or 1.2 trillion yuan, of China's total loans were non-performing at the end of March, an improvement from 7.3 percent six months earlier. The country's foreign currency reserves rose to a record US$1.33 trillion at the end of June.

Setting up insurance will provide transparency and security for depositors, Standard & Poor's Beijing-based analyst Liao Qing said. At present depositors do not know whether China will step forward to rescue a failing bank.

The Federal Deposit Insurance Corp will provide support to China in the areas of technology, financial education and the examination system for risk control, the agency's Chairwoman Sheila Bair said yesterday. Examiners will also be trained, she said.

China has been drafting legislation for setting up the deposit insurance since last year. The government, which will provide the insurance for China's domestic banks, "hasn't considered" offering it to overseas banks operating in the country, Zhou said.