Laws of the People's Republic of China

China Securities Regulatory Commission (CSRS)

Circular of China Securities Regulatory Commission (CSRC) on Relevant Issues concerning Securities Companies' Borrowing Subordinated Debt

All the securities companies:

In accordance with the Circular on Promoting the Self-examination and Self-correction, the Operation in Line with the Rules, and the Innovative Development of Securities Companies (Ref: No.37 [2005] CSRC) issued by the CSRC, the securities companies' borrowing of corporate debts from their shareholders or converting them into subordinated debts ranking behind other debts in the discharge sequence are encouraged. In order to support securities companies to undertake debt restructuring, to adjust their asset/liability structures and to enhance their anti-risk capabilities, a circular on relevant issues concerning securities companies' borrowing of subordinated debt is hereby given as follows:

I.

The subordinated debt as mentioned in this circular refers to the fixed-maturity debt, with a time limit of more than 3 years (included), borrowed by securities companies from such targeted resources as their shareholders or other qualified institutional investors of subordinated debt, which ranks behind the common liabilities of the securities companies hereof in the discharge sequence and needs to fulfilled before the equity capital liquidation of the securities companies hereof.

The qualified institutional investor of subordinated debt refers to the legally-established legal entity or investment institution with an audited net asset of more than 20 million Yuan (included). The securities company shall not borrow subordinated debt from other institutions or individuals except its shareholders and the qualified institutional investors of subordinated debt.

II.

Where the securities company borrows subordinated debt, its Board of Directors shall formulate the plan, and the shareholders' meeting shall make a special resolution on the following items:

1.

The size, time limit and interest rate of the subordinated debt;

2.

The function of the borrowed capital;

3.

The duration of validity of the resolution; and

4.

Other important issues in relation to the borrowing of subordinated debt

III.

Where the securities company borrows subordinated debt, a contract of subordinated debt shall be concluded between it and the creditors, and this contract shall stipulate the items as follows:

1.

The subordinated debt shall be discharged after the common liabilities of the securities company hereof, and shall be repaid before the equity capital liquidation of the securities company hereof;

2.

Where the securities company repays the due subordinated debt, it shall obtain the consent from the creditors of the due common liabilities of the company hereof;

3.

Where its net asset is lower than the stipulated standard, the securities company shall not repay the due subordinated debt.

4.

The volume, time limit and interest rate of the subordinated debt hereof;

5.

The arrangement for repaying the principal and interest of the subordinated debt hereof;

6.

The function of the borrowed capital;

7.

The content of the information to be disclosed by the securities company to its creditors and the mode of disclosure; and

8.

Liabilities for breach of contract

IV.

In order to guarantee the rights and interests of the creditors of the subordinated debt and to reduce the repayment risks of the securities company, the securities company shall formulate resolutions through its shareholders' meeting, and during the period of continued existence of the subordinated debt, these measures as follows shall be taken:

1.

Profit shall not be distributed to the shareholders without the consent from the creditors of the subordinated debt

2.

Financing or guarantee shall not be supplied to the shareholders and their related parties;

3.

Related transactions injuring the interests of the company shall not be conducted together with the shareholders and their related parties;

4.

The withdrawal ratio of the common accumulation fund of free surplus and the reserve fund of average risk shall be raised;

5.

Such programs of capital expenditure as important overseas investments and acquisition and merger etc. shall not be conducted without the consent from the creditors of the subordinated debt; and

6.

Shareholders or actual controllers with stock equities of more than 5% shall undergo no alteration without the consent from the creditors of the subordinated debt

V.

The securities company shall set up a special debt-redemption account to repay the principal and interest of the subordinated debt, and specify the capital resources of the account hereof, the mode of withdrawal, the management of the account hereof and other related issues. And the capital of the account hereof may be invested in such low-risk and high-liquidity products as the national debt etc.

VI.

The securities regulatory authorities of where the company was registered and the Department of Intermediary Supervision of the CSRC shall, ex ante facto, be reported with the plan and the contract for borrowing subordinated debt and other documents of the securities company, and shall be, ex post facto, be filed with them for record.

VII.

After obtaining the consent from the securities regulatory authorities of where the company was registered and the examination and approval from the Department of Intermediary Supervision of the CSRC, the securities company may account the borrowed subordinated debt into its net asset at a certain ratio.

As regard to the subordinated debt borrowed in cash and with a time limit of more than 5, 4, 3, 2 and 1 years, it shall in principle be accounted into the net asset at a ratio of 100%, 90%, 70%, 50%, and 20% respectively.

As regard to the subordinated debt converted from the debt of the entrusted institution of asset-backed securities, the entrusted capital shall, above all, be incorporated into the self-support capital, and then it may, on the basis of the net worth after the full-sum deduction of the loss and adequate collection of the depreciation reserve, be accounted in principle into the net asset at a ratio of 90%กข70%กข50%กข30%กข15% respectively in accordance with the aforesaid time limits.

The exact ratio for accounting the subordinated debt into the net asset shall also be defined in accordance with the company's situation of carrying out correction, the result of correction and its influence upon the company's financial condition.

VIII.

Where the securities company repays the due subordinated debt, it shall, in advance, notify the securities regulatory authorities of where it was registered and the Department of Intermediary Supervision of the CSRC; and the repayment of the borrowed subordinated debt shall not be conducted against the agreement in the contract and the related resolutions made by its shareholders' meeting.

IX.

Where the securities company encounters important problems, it shall timely notify the securities regulatory authorities of where it was registered and the Department of Intermediary Supervision of the CSRC.

Ministry of Commerce

December 13, 2005