Several Issues Concerning the Trial Implementation of an Inquiry System for Initial Public Offerings of Shares Circular

With a view to protecting the lawful rights and interests of investors, strengthening market constraints and improving the pricing mechanism for share offerings, we hereby notify you on several issues concerning the trial implementation of an inquiry system for initial public offerings of shares as follows:

1. Companies making initial public offerings of shares (Issuers) and their sponsors shall determine the price of their share offerings by making inquiries to Inquiry Recipients.

For the purposes of this Circular, the term "Inquiry Recipient" means a securities investment fund management company, securities company, trust and investment company, finance company, insurance institutional investor or qualified foreign institutional investor (QFII) that complies with the conditions specified by the China Securities Regulatory Commission (CSRC), or another institutional investor approved by the CSRC.

2. When an Issuer and its sponsor(s) announce the offer price and the price-earnings ratio of an offering, the earnings per share shall be calculated by taking the lower of the net profit for the year preceding the offering as audited by an accounting firm before and after subtracting non-recurring profit and loss and dividing the resulting figure by the total share capital after the offering.

If an issuer provides an earnings forecast, it shall additionally provide a supplementary disclosure of the price-earnings ratio based on the earnings forecast. The earnings per share shall be calculated by taking the lower of the forecast net profit figure for the year of the offering as audited by an accounting firm before and after subtracting non-recurring profit and loss and dividing the resulting figure by the total share capital after the offering.

The Issuer may additionally disclose such offer price indicators as the price-to-book ratio, etc. that reflect the characteristics of the Issuer's industry.

3. After its offer application has been verified by the CSRC, the Issuer shall publish its letter of intent to offer shares and commence promotion and inquiry. Inquiry is divided into two phases, preliminary inquiry and cumulative tendered inquiry. The Issuer and its sponsor(s) shall determine the offer price range through the preliminary inquiry and the offer price through the cumulative tendered inquiry.

The aforementioned letter of intent to offer shares shall be identical in substance and form as a prospectus, with the exception that it does not contain the offer price and the amount to be raised, and shall have the same legal validity and effect as the prospectus. The Issuer and its sponsor(s) shall each bear commensurate legal liability for the truthfulness, accuracy and completeness of the letter of intent to offer shares.

At the time of the preliminary inquiry, the sponsor(s) shall provide to the Inquiry Recipients an investment value research report that shall have been prepared in accordance with the Circular.

4. The Issuer and its sponsor(s) shall make the preliminary inquiry to not less than 20 Inquiry Recipients and determine the offer price range and corresponding price-earnings ratio range based on the quote results from the Inquiry Recipients.

Each Inquiry Recipient shall independently submit its quote based on a comprehensive study of the Issuer's intrinsic investment value and market conditions and shall simultaneously submit the basis for its quote and the results of its quote to the sponsor(s). The preliminary inquiry and quote shall be made in writing.

If the number of shares to be offered to the public is to be not less than 400 million, not less than 50 Inquiry Recipients shall be involved in the preliminary inquiry.

5. After the offer price range has been determined, the Issuer and its sponsor(s) shall make a cumulative tendered inquiry, which shall fall within the offer price range, to Inquiry Recipients and determine the offer price based on the results of the cumulative tendered inquiry. All Inquiry Recipients that comply with the Circular may take part in the cumulative tendered inquiry.

After the offer price range, offer price and the corresponding price-earnings ratio for the offer have each been determined, the Issuer and its sponsor(s) shall respectively report the same to the CSRC for the record and announce the same. The basis for the determination of the offer price shall also be placed on the record and announced.

6. The Issuer and its sponsor(s) shall offer shares by a rights issue to those Inquiry Recipients who took part in the cumulative tendered inquiry. If the number of shares to be offered to the public is less than 400 million shares, the rights issue shall not exceed 20% of the total number of shares offered. If the number of shares to be offered to the public is not less than 400 million shares, the rights issue shall not exceed 50% of the total number of shares to be offered.

Subject to the consent of the CSRC, the Issuer and its sponsor(s) may adjust the aforementioned percentages based on market conditions.

7. After the cumulative tendered inquiry has been completed, if the total number of valid purchase applications above the offer price is greater than the number of shares to be offered in the rights issue to the Inquiry Recipients, the Issuer and its sponsor(s) shall make a pro rata offer of shares by rights issue in respect of all valid purchase applications above the offer price. The percentage of the rights issue shall be determined by dividing the number of shares to be offered in the rights issue to the Inquiry Recipients by the total number of valid purchase applications above the offer price. The criteria for valid purchase applications shall be expressly stipulated in the offer announcement.

The sponsor(s) shall check and confirm the qualifications of the Inquiry Recipients. An offer of shares by rights issue may not be made to investors that do not comply with this Circular or other relevant provisions.

8. After the cumulative tendered inquiry and rights issue have been completed, the Issuer and its sponsor(s) shall publish an announcement of the results of the rights issue. The announcement of the results of the rights issue shall at a minimum contain the following information:

(1) details of the cumulative tendered inquiry, including the number of valid purchase applications at different price levels of all the Inquiry Recipients, the cumulative number of valid purchase applications above the different price levels and their corresponding number of times oversubscribed, the total number of purchase applications and the total amount of frozen funds;

(2) the percentage of the rights issue allotted to valid purchase applications above the offer price and number of times oversubscribed; and

(3) the names of the Inquiry Recipients to whom shares have been offered by rights issue, the number of shares offered and the amount of monies refunded.

9. After the cumulative tendered inquiry has been completed, the Issuer and its sponsor(s) shall publicly offer to public investors the remaining shares at the same price in accordance with the principles and procedure specified in the offer announcement.

10. Inquiry Recipients shall separately participate in the cumulative tendered inquiry and the rights issue respectively through their own accounts as designated by them and the investment product accounts managed by them and shall observe relevant provisions on account management. The cumulative upper limit on any one designated securities account may not exceed the total number of shares to be offered by rights issue to the Inquiry Recipients.

An Inquiry Recipient that participates in the cumulative tendered inquiry and rights issue shall deliver in full the funds for its purchase applications. The interest accruing during the period the funds for its purchase applications are frozen shall belong to the Inquiry Recipient.

11. An Inquiry Recipient shall undertake to lock the shares allotted under the rights issue for participating in the cumulative tendered inquiry for a period of not less than three months. The lock-up period shall count from the date on which the shares offered to public investors were listed.

The stock exchange on which the Issuer's shares are listed and the securities depository and clearance institution shall make appropriate arrangements for the lock-up of the shares issued by way of the rights issue.

12. The sponsor(s) shall be responsible for arranging the promotion, inquiry and rights issue-related work. The sponsor(s) shall engage an accounting firm qualified to engage in securities-related practice to verify the frozen purchase application funds and issue a fund verification report. Additionally, the sponsor(s) shall engage a law firm to certify whether the inquiry and rights issue process, including but not limited to the targets of the rights issue and the rights issue method, are in conformity with laws, regulations and this Circular, etc. and issue a legal opinion thereon.

13. Sponsors, accounting firms, law firms and their relevant working personnel that take part in inquiry and rights issue-related work shall observe laws, regulations and this Circular and act in good faith, with due care and diligence. When submitting quotes and making purchase applications, Inquiry Recipients shall act in accordance with the principle of good faith and observe laws, statutes and the fund contract or company's articles of association, etc.

14. The distribution agreement and distribution syndicate agreement may be executed after determination of the offer price and shall be submitted to the CSRC for the record.

After completion of the share offer, the Issuer and its sponsor(s) shall submit such information on the offering as the details of the promotion, the inquiries and rights issue as well as the opinions of other intermediary organizations to the CSRC for the record.

15. The investment value research report prepared by the sponsor(s) shall comprehensively and objectively analyze the factors that may affect the offer price and the information cited in the report must be true and accurate and the source thereof must be indicated. The research report shall at minimum include the following information:

(1) the Issuer's industry and its status therein and the effect of this status on the determination of the price;

(2) the performance on the secondary market of the shares of listed companies in the same industry as the Issuer and the effect of overall market trends on the determination of the price;

(3) the effect of the Issuer's business position and growth potential on the determination of the price;

(4) the effect of the Issuer's profitability and financial position on the determination of the price;

(5) the effect of the investment project for which the Issuer is raising the funds on the determination of the price of the shares;

(6) a forecast of the trading price range on the secondary market once the Issuer's shares are listed; and

(7) other factors that may have an important impact on the pricing of the Issuer's shares.

16. The CSRC will regulate the acts of sponsors, other intermediary organizations and Inquiry Recipients in accordance with the law. It will, in accordance with the law, take regulatory measures against, and impose administrative punishments on, those sponsors, other intermediary organizations, Inquiry Recipients and their relevant persons in charge that violate relevant laws, regulations and rules. If it suspects that a sponsor, other intermediary organization, Inquiry Recipient or its relevant person in charge has committed a criminal offence, it will turn the case over to the judicial authorities in accordance with the law, which will pursue the criminal liability thereof:

(1) if a sponsor distributes a share offer that has not been verified, or divulges information on a share offer early, it will be punished in accordance with Article 176 or 183 of the Securities Law;

(2) if an Issuer discloses an earnings forecast and actual earnings are less than 80% of the earnings forecast, projects recommended by the relevant sponsor representative will not be accepted for a period of three months in accordance with Article 67 of the Sponsorship System for Offering and Listing of Securities Tentative Procedures (Order of the CSRC No.18, hereafter the "Sponsorship Procedures");

(3) if a sponsor or sponsor representative commits another improper act during the inquiry or rights issue process, a regulatory measure, such as a verbal warning, focused attention, an order to rectify the matter or a determination that it/he is not fit for the relevant position, etc., will be taken against it/him in accordance with Article 57 and 73 of the Sponsorship Measures;

(4) if an accounting firm or law firm commits a violation of laws or regulations during the inquiry or rights issue process, it shall be punished or subjected to the relevant regulatory measures in accordance with Article 202 of the Securities Law and Article 72 of the Sponsorship Measures;

(5) if an Inquiry Recipient fails to act in accordance with the principle of good faith during the quote, purchase application and rights issue process or if it ceases to meet the relevant conditions, it shall be removed from the list of Inquiry Recipients.

17. This Circular shall be implemented as of January 1 2005. The Analytical Reports on the Offer Price for Shares Guidelines (Trial Implementation) (Zheng Jian Fa [1999] No.8), the Further Improving Methods of Issuing Shares Circular (Zheng Jian Fa Xing Zi [1999] No.94), the Amending the Relevant Provisions of the «Further Improving Methods of Issuing Shares Circular» Circular (Zheng Jian Fa Xing Zi [2000] No.32) and the Method of Offering Shares by Rights Issue to Legal Persons Guidelines (Zheng Jian Fa Xing Zi [2000] No.111) shall be repealed simultaneously.