People's Bank of China, Announcement [2006] No.11

(Issued by the People's Bank of China on September 5 2006.)

With a view to regulating the issuance of hybrid captial bonds by commercial banks and protecting the interests of investors, pursuant to the PRC People's Bank of China Law and the Measures for the Administration of the Offering of Financial Bonds on the National Interbank Bond Market (the Measures), we hereby announce matters relevant to the issuance of hybrid captial bonds by commercial banks as follows:

1. For the purposes of this Announcement, the term “hybrid captial bonds” means bonds with the following characteristics issued by commercial banks:

(1) Bonds with a term of 15 years or more and that may not be redeemed within 10 years from the date of their issuance. Once those 10 years from date of issuance have elapsed, the issuer has the right to redeem them once. If the issuer does not exercise its right of redemption, it may appropriately increase the coupon rate on such bonds.

(2) If the issuer's core capital adequacy ratio is less than 4% before the maturity of the hybrid captial bonds, it may delay the payment of the coupon. If both of the following circumstances arise contemporaneously, the issuer must delay payment of the coupon: the total of its surplus reserve and undistributed profits recorded on its audited balance sheet for the most recent period is a negative number and during the most recent 12 months it has not paid cash dividends to holders of its common shares. Once the conditions for delaying payment of the coupon are no longer satisfied, the issuer shall immediately pay the coupon owed and the compound interest arising thereon.

(3) If the issuer is liquidated, the sequence for the discharge of the principal of, and the coupon on, the hybrid captial bonds shall follow general debts and junior debts and precede equity capital.

(4) If, at the time of maturity of hybrid captial bonds, the issuer does not have the capacity to discharge the debts that have precedence over such bonds in the discharge sequence or if the payment of such bonds would result in the issuer not having the capacity to discharge the debts that have precedence over the hybrid captial bonds in the discharge sequence, it may delay payment of the principal of, and the coupon on, such bonds. Once the aforementioned circumstance ameliorates, the issuer shall continue to perform its obligation of repaying the principal and paying the coupon thereon, and interest on the delayed principal and coupon shall be calculated based on the face coupon rate of the hybrid captial bonds.

2. A commercial bank offering hybrid captial bonds shall satisfy the relevant requirements of Article 7 of the Measures and submit to the People's Bank of China the relevant offer application documents as required in Article 10 of the Measures. Additionally, it shall submit information on its capital adequacy ratio for the most recent three years calculated in line with the requirements of the regulatory department and information on the payment of the principal of, and interest on, other debts.

3. hybrid captial bonds may be offered to the public or privately placed. When an issuer offers hybrid captial bonds, it shall disclose its business position in accordance with the relevant provisions of the Measures, as well as information on its capital adequacy ratio for the most recent three years calculated in line with the requirements of the regulatory department and information on the payment of the principal of, and interest on, other debts.

4. The issuer shall issue a risk alert in its prospectus and offer announcement that shall stress the discharge sequence of hybrid captial bonds and the risks of a delay in payment of the coupon prior to maturity and of a delay in payment of the principal and coupon at the time of maturity.

5. A credit rating assessment shall be required for both public offerings and private placements of hybrid captial bonds. During the life of hybrid captial bonds, the credit rating agency shall conduct regular and ad hoc follow-up ratings of the hybrid captial bonds, and issue a follow-up rating report once each year and follow-up rating information once each quarter. The credit rating agency shall issue follow-up rating reports in a timely manner in respect of material events that have an impact on the issuer's performance of its debt obligations.

6. If an issuer is, in accordance with provisions, to redeem hybrid captial bonds early, to delay payment of the coupon or, at the maturity of the hybrid captial bonds, to delay payment of the principal and coupon, it shall report the same to the People's Bank of China for the record five working days in advance, publicly disclose the same on the ChinaMoney website and the ChinaBond website and disclose the same as a material accounting event in its annual financial report.

7. The issuer shall disclose financial information on a quarterly basis during the life of hybrid captial bonds. If the hybrid captial bonds were issued by a public offering, the issuer shall, at the time of payment of the coupon on the bonds, publicly disclose information on its capital adequacy ratio and information on the payment of the principal of, and interest on, other debts, and, as a listed commercial bank, shall additionally disclose information on the payment of dividends on its common shares.

8. An investor in hybrid captial bonds shall be fully aware of, and shall itself bear, the risks attaching to investments in hybrid captial bonds. When an investor intends to invest in hybrid captial bonds, a written authorization document consenting to the investment in the hybrid captial bonds issued by the authority body specified in the company's articles of association or charter document shall be required and the intent shall be reported to the National Interbank Borrowing Centre for the record. The authorization document shall state that the institution understands the risks attaching to hybrid captial bonds and that it has the relevant internal controls and risk management capabilities.

9. The quantity of hybrid captial bonds issued and the method by which the proceeds are recorded as supplementary capital shall be handled in accordance with the relevant requirements of the regulatory department.

10. Any matters not covered herein shall be handled in accordance with the relevant provisions of the Measures.