Circular on the Investment in the Equity Interests of Commercial Banks by Insurance Institutions

(Issued by the China Insurance Regulatory Commission on September 21 2006.)

Bao Jian Fa [2006] No.98

Insurance companies and insurance asset management companies:

With a view to further broadening investment channels for insurance capital, improving the asset allocation, increasing investment management efficiency and promoting strategic cooperation between the insurance and banking sectors, following the approval of the State Council, insurance group (or holding) companies, insurance companies and insurance asset management companies (Insurance Institutions) may invest in the equity interests of commercial banks (Bank Equity). We hereby notify you on relevant matters as follows:

1. Investment Scope and Investment Principles

Insurance Institutions may invest in the equity of unlisted banks, such as state-owned commercial banks, share-system commercial banks, urban commercial banks and other banks in China. When investing in Bank Equity, an Insurance Institution shall comply with the principle of prudence and, in line with the requirements of asset-liability matching management, strictly select the investment target, cautiously determine the investment method, reasonably arrange the investment limit, duly allocate the various types of funds, ensure the investment complies with the company's strategy, support the development of its core business, enhance its core competitiveness and duly safeguard the rights and interests of the company's shareholders and the insured.

2. Investment Methods and Sources of Funds

Investments in Bank Equity by Insurance Institutions are divided into common investments and material investments. If the total investment amount accounts for less than 5% of the target bank's share capital or paid-in capital, the investment is a common investment and if it accounts for 5% or more, it is a material investment.

An Insurance Institution may effectively apply such insurance capital as its corporate capital, that part of its liability reserve with a liability term of 10 years or more, etc., as well as other funds approved by the China Insurance Regulatory Commission (CIRC) to invest in Bank Equity and, depending on the different natures of such funds, determine the ownership of, and the distribution of returns on, the equity invested in. An insurance asset management company may accept entrustment for Bank Equity investments.

3. Investment Percentages and Accounting Base Figures

When investing in Bank Equity, an Insurance Institution must comply with the following percentages: the total of the balances of common investments, and of material investments in which an equity stake is taken out, may not exceed 3% of the institution's gross assets as at the end of the previous year; the balance of a common investment in the Bank Equity of a single bank may not exceed 1% of the institution's gross assets as at the end of the previous year. The balances of other material investments shall be submitted to the CIRC for examination and approval. The balance of corporate capital applied to material investments may not exceed 40% of the institution's paid-in capital as at the end of the previous year minus aggregate losses.

When an insurance group (or holding) company applies paid-in capital to invest in Bank Equity, it must deduct the capital invested in other legal persons and the funds invested in Bank Equity shall not include the insurance capital of other legal persons. The long-term liability reserve and other such insurance capital invested in Bank Equity by an Insurance Institution shall not include funds invested in investment-linked insurance products, universal life insurance products and other financial management type insurance products. If an Insurance Institution wishes to use a financing arrangement to invest in Bank Equity, it shall do so in accordance with relevant provisions and report the same to the CIRC for examination and approval.

4. Investment Qualifications and Basic Requirements

An Insurance Institution that wishes to make a common investment must have relatively sound corporate governance, sound and effective risk management, an emergency mechanism to rapidly deal with major contingencies, a good business position in its core business, solvency that has satisfied specified requirements during the most recent three years, continuing growth in premium income, be profitable, its insurance assets are held in custody independently and it has not committed a major violation of laws or regulations.

An Insurance Institution that wishes to make a material investment must, in addition to satisfying the requirements for a common investment, have a set corporate growth strategy, a core business plan and the relevant professional management capabilities and be capable of accurately assessing the performance and risks of the target bank. If the Bank Equity investment is to account for between 5% (inclusive) and 10%, an insurance group (or holding) company shall have gross assets as at the end of the previous year of not less than Rmb20 billion and an insurance company shall have gross assets as at the end of the previous year of not less than Rmb100 billion; if the Bank Equity investment is to account for 10% or more, an insurance group (or holding) company shall have gross assets as at the end of the previous year of not less than Rmb30 billion and an insurance company shall have gross assets as at the end of the previous year of not less than Rmb150 billion. In general, an Insurance Institution may not have material investments in more than two commercial banks.

5. Selection Conditions and Main Indicators

When an Insurance Institution wishes to make a common investment, the target bank shall have sound corporate governance and investment dividend provisions, a strict loan review and five-grade classification system, stable operations, act in good faith, have had relatively rapid business growth in the most recent three years, be relatively profitable, have a good financial position, be transparent in the disclosure of information and not have committed a major violation of laws or regulations. In accordance with relevant laws and provisions, the bank shall, as at the end of the previous year, have a capital adequacy ratio of at least 8%, a core capital adequacy ratio of at least 4%, a debt provisioning rate of not less than 70%, a rate of return on assets before provisioning of at least 1%, a rate of return on net assets of at least 12%, a rate of return on risk-weighted assets of at least 1.2%, a non-performing loan ratio not exceeding 5% and a most recent rating of A or above as rated by a domestic credit rating agency recognized by the CIRC or a most recent rating of BBB or above as rated by an international credit rating agency.

When an Insurance Institution wishes to make a material investment, in addition to satisfying the requirements for a common investment, if the Bank Equity investment is to account for between 5% (inclusive) and 10%, the target bank must have abundant customers, network and other such economic resources, a relatively good business brand, a clear and solid business plan, a management team with relatively high qualifications, be able to give rise to a new competitive force as a result of the mutual making up between the bank and Insurance Institution of each other's weaknesses with each other's strengths and undertake that the Insurance Institution will obtain a seat on the decision making or supervisory body; if the Bank Equity investment is to account for 10% or more, the target bank shall have gross assets of not less than Rmb50 billion, a debt provisioning rate of not less than 50%, a non-performing loan ratio of not more than 10%, a genuinely feasible bad asset disposal and risk compensation plan and undertake that the Insurance Institution will obtain one or more seats on its decision making or supervisory body.

6. Reporting Procedure and Items Subject to Examination and Approval

When an Insurance Institution is to make a common investment, it shall first report the same to the CIRC for the record. The materials to be submitted shall include the feasibility study on the investment, information on the institution's corporate governance, risk management, financial position, investment decision procedure, fund custody mechanism, the basic particulars of the target bank and the investment agreement, etc. (see the attachment).

When an Insurance Institution is to make a material investment, it shall make an application to the CIRC. If the Bank Equity investment is to account for between 5% (inclusive) and 10%, in addition to satisfying the requirements for a common investment, the application materials shall include the comments upon examination of the relevant regulatory authority and the assessment report of an external professional firm. If the Bank Equity investment is to account for 10% or more, the materials for a preliminary examination (Preliminary Examination Materials) and for examination and approval (Approval Materials) shall be submitted separately (see the attachment) in accordance with provisions. The Preliminary Examination Materials shall include the basic particulars of the target bank and the investment plan, etc., and the Approval Materials shall, in addition to satisfying the requirements in respect of the materials submitted for the record for a common investment, include a feasibility study on the investment, the corporate strategy plan, information on the management team, the investment agreement, the comments upon examination of the relevant regulatory authority and other materials specified by the CIRC.

If the Bank Equity investment is to account for between 5% (inclusive) and 10%, the CIRC will conduct a pro forma examination of the application materials for completeness and legal compliance and issue written comments on its examination. If the Bank Equity investment is to account for 10% or more, the Preliminary Examination Materials shall be submitted to the CIRC for preliminary examination. The Insurance Institution shall complete relevant matters within 12 months from the date of receipt of the written comments upon preliminary examination. If, for any special reason, it cannot complete such matters on time, it shall apply to the CIRC for an extension in a timely manner. The extension may not exceed six months. The Insurance Institution may only make the actual investment after the examination of the Approval Materials by the CIRC.

7. Withdrawal Mechanism and Emergency Handling

If an Insurance Institution is to transfer Bank Equity, it shall report the same to the CIRC for the record, in the case of a common investment, or report the same to the CIRC for examination and approval, in the case of a material investment. If a Bank Equity investment is to be converted into tradable shares and investment costs are to be booked as part of the balance of stock investments, matters shall be handled in accordance with provisions such as the Tentative Measures for the Administration of Stock Investments by Insurance Institution Investors. If the specified stock investment percentage is exceeded, gradual adjustments shall be made to achieve the specified requirements by the specified period of time, in the case of a common investment. As for material investments, the CIRC will issue separate provisions therefor. If withdrawal from Bank Equity investment is to be accomplished through a listing or a transfer by agreement, etc., the time limit and target shall be determined, and if it is to be accomplished by way of a buyback by the commercial bank, the buyback price and time limit must be determined.

If an Insurance Institution discovers that the de facto control of a target bank or the bank it has invested in has been transferred, that the investment cooperation partner has violated laws or regulations, or committed a material breach of contract, or that another such material event has occurred, it must immediately initiate the emergency handling mechanism, disclose relevant information in a timely manner, control investment management risks, carry out the investment decision procedure anew and report the decision opinions and relevant information to the CIRC in writing.

8. Risk Management and Monitoring Inspections

When an Insurance Institution is to invest in Bank Equity, it must thoroughly consider the same, make the decision prudently, operate in a compliant manner, fully understand the actual circumstances and management of the target bank, carefully review its shareholding structure, asset quality, growth prospects, profitability, dividend level and liquidity arrangement. The Insurance Institution shall engage an external professional firm with the qualifications specified by the CIRC to conduct a due diligence investigation, comprehensively assess investment returns and major risks and reasonably determine the investment price. The Insurance Institution must erect a firewall, strictly handle transaction arrangements, avert delivery risks, ensure that the Bank Equity invested in is free of legal defects, is not the subject of a dispute over ownership and has not been pledged or otherwise encumbered. The Insurance Institution shall do follow-up analyses of the business performance of the bank it invested in, scientifically determine business growth targets and continue to duly carry out follow-up evaluation management.

If an Insurance Institution, in investing in Bank Equity, submits fraudulent materials, omits or fails to report material information, diverts returns or violates relevant provisions or requirements, the CIRC will take such regulatory measures against it as calling in for questioning, giving of a warning, distributing a circular of criticism, ordering a suspension or halting of the investment or withdrawal within a specified period of time. If the circumstances are serious and a major loss is incurred as a result thereof, the liability of the parties concerned shall be pursued in accordance with laws and relevant provisions.

If an Insurance Institution wishes to invest in Bank Equity offshore, it shall proceed in accordance with provisions on the offshore investment of insurance capital. Based on the development of the financial market and the investment capabilities of Insurance Institutions, the CIRC will revise at the appropriate time the qualifications for investing in Bank Equity by Insurance Institutions, the scope of investment and percentages.

September 21 2006

Attachment

MATERIALS TO BE SUBMITTED FOR THE INVESTMENT IN BANK EQUITY BY AN INSURANCE INSTITUTION

1. Materials to be submitted for the record for a common investment where the Bank Equity investment is to account for less than 5%

(1) Basic particulars of the Insurance Institution, including information on corporate governance, risk management, financial position, investment decision procedure and fund custody mechanism, etc.

For corporate governance, the share capital structure, organizational structure, duties of directors, functions of special committees, investment operation mechanism and the qualifications of the management team, etc., shall be detailed. For risk management, the previous year's risk management report deliberated on by the board of directors and the written recommendations on the internal controls issued by the external professional firm shall be provided. The risk management report shall detail system establishment, basic elements, principal stages, implementation status, risk position and mitigation measures, etc. For the financial position, the audited financial statements for the most recent three years, notes to the statements and calculation of the main indicators, etc., shall be provided. The calculation of the main indicators shall detail the relevant calculation process, the legal compliance and veracity of the results, etc. For the investment decision procedure, the board resolutions, decision making procedure of the investment decision committee, meeting resolutions and voting results, etc., shall be detailed. For the fund custody mechanism, the basic particulars of the custodian bank, the mechanism for the effective separation of assets, the investment valuation and accounting methods, etc., shall be detailed.

(2) Basic particulars of the target bank, including its name, place of business, legal representative, scope of business, business qualifications, corporate governance, shareholding structure, asset quality, management capabilities, position in the industry and major indicators, etc. Management capabilities, including growth prospects, profitability, dividend level and liquidity arrangement, etc. For major indicators, the data, source of the data and the opinion issued by the external professional firm shall be detailed.

(3) A feasibility study on the investment that shall detail the business strengths of the target bank, its historical financial position and the basic particulars of the transferor of the Bank Equity; the Insurance Institution's source of funds, size of the investment, the length of time of the shareholding, the anticipated returns and calculation of the cash flow from returns; main risks, bearing capacity and equity withdrawal plan; and the necessity, feasibility, reasonableness and lawfulness, etc., of the investment.

(4) The investment agreement that shall specify the agreed upon transaction method, transaction price, rights and obligations, liability for breach of contract, etc.

(5) Other materials specified by the CIRC.

2. Application materials for a material investment where the Bank Equity investment is to account for between 5% (inclusive) and 10%

(1) Basic particulars of the Insurance Institution that, in addition to the information specified in Item (1) of the materials submitted for the record for a common investment, includes the corporate growth strategy and the plan for the development of the core business after the Bank Equity investment.

(2) Basic particulars of the target bank that, in addition to the information specified in item (2) of the materials submitted for the record for a common investment, shall detail the type of customers of the target bank, its branch distribution, information on its outlets and brand strengths; the board's and management's rules of procedure, decision-making procedure and incentive and constraint mechanisms; plan for the development of its business during the forthcoming three years, etc.

(3) A feasibility study on the investment that, in addition to the information specified in item (3) of the materials submitted for the record for a common investment, includes a financial advisor report, due diligence investigation report, assessment opinions on the financial position, operations and management of the target bank, the legal, financial and business risks to which the investment will be exposed, the proposed investment method, price, transaction arrangements, etc.

(4) The investment agreement that shall specify that the Insurance Institution will obtain one or more seats on the decision making or supervisory body of the target bank, etc.

(5) The comments upon examination of the relevant regulatory authority and other materials specified by the CIRC.

3. Preliminary Examination Materials and Approval Materials for a material investment where the Bank Equity investment is to account for 10% or more

(1) In addition to the information specified for the application materials for a material investment, Preliminary Examination Materials shall, in the feasibility study for the investment, detail the effect that the Bank Equity investment could potentially give rise to, for example, the effect on the financial market, insurance market and the public interest, the effect on the Insurance Institution's economic scale, operational efficiency, financial position, risk controls and management capabilities, and the effect on the Insurance Institution's business growth and profitability in the forthcoming three years, etc.

(2) In addition to the information specified for the Preliminary Examination Materials, the Approval Materials shall detail, in the basic particulars of the Insurance Institution, the affiliation of the Insurance Institution with the target bank, its solvency status during the most recent three years, the method of valuing the Bank Equity and the pricing basis; the price quote range for the equity invested in, the timetable, future disposal, remedies, information disclosure and assurance of related interests, etc.

In the basic particulars of the target bank, the target bank's share capital structure, organizational structure, duties of directors, functions of the special committees, investment operation mechanism and the qualifications of the management team; forecast loan situation, information on loan loss provisioning during the most recent three years, non-performing asset term structure, the bank's plan for disposing of non-performing assets and risk reward mechanism, etc., shall be detailed.

The feasibility study for the investment shall additionally detail the Insurance Institution and bank's business direction, asset integration and overall capabilities after the Bank Equity investment; the development plan for the forthcoming three years, information on the personnel to be assigned by the Insurance Institution and the bank's management arrangements, etc. The investment agreement shall additionally specify the mechanism for the withdrawal from the Bank Equity investment, etc.