Administration of Investment and Equity Participation in Chinese-invested Financial Institutions by Offshore Financial Institutions Procedures

(Promulgated by the China Banking Regulatory Commission on December 8 2003 and effective as of December 31 2003.)

Article 1:These Procedures are formulated for the purposes of regulating offshore financial institutions¡¯ investment and equity participation in Chinese-invested financial institutions and optimizing the capital structure of Chinese-invested financial institutions.

Article 2:These Procedures apply to offshore financial institutions investing and making an equity participation in legally established Chinese-invested financial institutions.

For the purposes of these Procedures, ¡°offshore financial institutions¡± is defined to include international financial institutions and foreign financial institutions. ¡°International financial institutions¡± means the World Bank and its institutions, other inter-governmental development-oriented financial institutions and other international financial institutions recognized by the China Banking Regulatory Commission. ¡°Foreign financial institutions¡± means financial holding companies, commercial banks, securities companies, insurance companies and funds registered and established in foreign countries, and other foreign financial institutions recognized by the China Banking Regulatory Commission.

For the purposes of these Procedures, ¡°Chinese-invested financial institutions¡± means Chinese-invested commercial banks, urban credit cooperatives, rural credit cooperatives, trust and investment companies, enterprise group finance companies and lease-financing companies that are legally established within the territory of China, and other Chinese-invested financial institutions established with the approval of the China Banking Regulatory Commission.

For the purposes of these Procedures, ¡°investment and equity participation ratio¡± means the proportion of the amount of capital contribution or the proportion of shareholding to the total paid-up capital or total equity of a Chinese-invested financial institution.

Article 3:The China Banking Regulatory Commission shall regulate investment and equity participation in Chinese-invested financial institutions by offshore financial institutions in accordance with the law.

Article 4:To invest or make an equity participation in Chinese-invested financial institutions, offshore financial institutions shall obtain approval from the China Banking Regulatory Commission.

Article 5:Offshore financial institutions shall invest and make an equity participation in Chinese-invested financial institutions based on honesty and good faith and with a medium to long-term investment purpose.

Article 6:Offshore financial institutions shall make the capital contribution in the form of monetary funds when investing and making an equity participation in Chinese-invested financial institutions.

Article 7:Offshore financial institutions that invest and make an equity participation in Chinese-invested financial institutions shall meet the following conditions:

(1) the year-end total assets of the recent year shall in principle be not less than US$10 billion for investment and equity participation in Chinese-invested commercial banks, not less than
US$1 billion for investment and equity participation in Chinese-invested urban credit cooperatives or rural credit cooperatives and not less than US$1 billion for investment and equity participation in Chinese-invested non-bank financial institutions;

(2) their long-term credit ratings are appraised to be good in the recent two years by an international rating agency recognized by the China Banking Regulatory Commission;

(3) they have been profitable for the recent two accounting years;

(4) in the case of commercial banks, their capital adequacy ratio shall be not less than 8%; in the case of non-bank financial institutions, their total amount of capital shall be not less than 10% of their total amount of risk-weighted assets;

(5) they must have a sound internal control system;

(6) the place where they are registered must have a good financial institution regulatory system;

(7) the country (region) where they are located must have a sound economic environment; and

(8) other prudential conditions stipulated by the China Banking Regulatory Commission.

The China Banking Regulatory Commission may adjust the criteria for offshore financial institutions to invest and make an equity participation in Chinese-invested financial institutions according to the financial risk status and regulatory requirements.

Article 8:The investment and equity participation ratio made by a single offshore financial institution in a Chinese-invested financial institution shall not exceed 20%.

Article 9:If the investment and equity participation ratio of more than one offshore financial institution in an unlisted Chinese-invested financial institution reaches or exceeds 25% in aggregate, such unlisted financial institution shall be regulated in the same manner as a foreign-invested financial institution.

If the investment and equity participation ratio of more than one offshore financial institution in a listed Chinese-invested financial institution reaches or exceeds 25% in aggregate, such listed financial institution shall continue to be regulated in the same manner as a Chinese-invested financial institution.

Article 10:When an offshore financial institution invests and makes an equity participation in a Chinese-invested financial institution, the Chinese-invested financial institution absorbing the foreign investment shall act as the applicant and apply to the China Banking Regulatory Commission:

(1) wholly state-owned commercial banks, share system commercial banks and non-bank financial institutions regulated directly by the China Banking Regulatory Commission that absorb the investment and equity participation from offshore financial institutions, shall apply directly to the China Banking Regulatory Commission for approval; and

(2) Chinese-invested financial institutions other than those stipulated in Item (1) hereof that absorb the investment and equity participation from offshore financial institutions, shall apply to the local provincial-level authorities authorized by the China Banking Regulatory Commission and, upon examination and verification, shall submit the application to the China Banking Regulatory Commission for approval.

Article 11:The following documents shall be submitted by the Chinese-invested financial institution when applying to the China Banking Regulatory Commission for absorbing the investment and equity participation:

(1) an application of the Chinese-invested financial institution for absorbing the investment and equity participation;

(2) a resolution of the shareholders¡¯ meeting or the board of directors of the Chinese-invested financial institution that approves the absorption of the investment, or the approval document from the superior department in charge;

(3) a resolution of the shareholders¡¯ meeting or the board of directors of the offshore financial institution that approves the investment and equity participation in the Chinese-invested financial institution;

(4) a letter of intent signed by both parties;

(5) the offshore financial institution¡¯s annual reports or audited balance sheets, profit statements and other financial statements of the recent three years;

(6) material regarding the source of funds and operating conditions of the offshore financial institution; and

(7) other relevant material as required by the China Banking Regulatory Commission.

If the investor is a foreign financial institution, the Chinese-invested financial institution shall also submit a rating report on the foreign financial institution for the recent two years prepared by an international rating agency recognized by the China Banking Regulatory Commission and the approval documents of the financial regulatory authority of the place where the foreign financial institution is registered.

Article 12:The China Banking Regulatory Commission shall make a decision on approval or disapproval within three months of receipt of the complete application documents. If the China Banking Regulatory Commission decides not to approve the application, it shall notify the applicant in writing and explain the reasons therefor.

Article 13:The offshore financial institution shall transfer the funds in full to the account of the Chinese-invested financial institution within 60 working days of receipt of the approval from the China Banking Regulatory Commission, and an accounting firm recognized by the China Banking Regulatory Commission shall verify the same.

Article 14:If the registered capital or equity structure of a Chinese-invested financial institution is adjusted due to the investment and equity participation of an offshore financial institution, the Chinese-invested financial institution shall go through the formalities regarding the change according to the relevant provisions.

Article 15:If a Chinese-invested financial institution violates these Procedures by changing shareholders or adjusting equity structure without authorization, it shall be penalized by the China Banking Regulatory Commission according to relevant provisions.

Article 16:If an offshore financial institution that has already invested and made an equity participation in a Chinese-invested financial institution is to increase the percentage of its shareholding, the relevant provisions of these Procedures shall apply.

Article 17:These Procedures shall apply to financial institutions from Hong Kong, Macao and Taiwan that invest and make an equity participation in Chinese-invested financial institutions; if there are provisions otherwise stipulated by the State Council, such provisions shall prevail.

Article 18:These Procedures shall not apply to purchase of negotiable shares of listed Chinese-invested financial institutions by qualified foreign institutional investors.

Article 19:Investment and equity participation in auto finance companies shall be handled in accordance with the relevant provisions of the Administration of Auto Finance Companies Procedures.

Article 20:The China Banking Regulatory Commission shall be responsible for the interpretation of these Procedures.

Article 21:These Procedures shall come into effect as of December 31 2003. If there is any discrepancy between these Procedures and relevant documents issued before the promulgation of these Procedures, these Procedures shall prevail.

China Law & Practice acknowledges the assistance of Clifford Chance LLP, who kindly supplied an earlier draft of this translation.