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DECISION OF THE STATE COUNCIL ON REFORM OF THE FINANCIAL SYSTEM

    In order to carry out the decision of the Third
Plenary Session of the Fourteenth Central Committee
of the Party, to suit the needs of establishing the
socialist market economy system, to bring into fuller
play the role of finance in macroregulation,
macrocontrol and optimal resource allocation in the
national economy, and to promote sustained, speedy and
healthy development of the national economy, the State
Council has decided to reform the current financial
structure.

    The goals of the financial structure reform are:
to set up a macro-regulatory system of the central
bank that implements independently the monetary
policy under the leadership of the State Council; to set
up the financial organization system that
separates the policy finance from the commercial
finance, makes the State-commercial banks principal
part and different financial institutions coexist; to
build a financial market system which is uniform and
open, with orderly competition and strict administration.

    1. Establish a Strong Macro-regulatory System of
the Central Bank

    The primary task of deepening reform of
the financial structure is to turn the People's Bank
of China into a central bank true to its name. The main functions
of PBC are: formulate and implement monetary policy,
keep the currency stable, supervise and administer
strictly financial institutions and ensure that the
financial system operates safely and effectively.

    (1) Clearly and define the responsibilities of
of PBC offices at all levels, transform PBC's functions.

    a. PBC is the functional sector under the leadership
of the State responsible for the administration of the financial
industry. The head office of PBC has the rights of
issuing currency, administering basic money,
regulating and controlling the aggregate amount of
credit, and regulating the base rate, to ensure the
implementation of the
unified nation-wide monetary policy. In general, the
head office of PBC circulates necessary funds only
to head offices of the nation-wide commercial banks
(mainly referred to the head offices of specialized
banks at present).

    b. Business operations of PBC offices at all levels
shall be put under centralized management in accordance with
the requirements of nationwide currency
circulation. As agencies of PBC, the
branch banks should actively create conditions to set up
transregional offices whose main functions are: financial supervision and
administration, investigation and statistical
analysis, lateral position adjustment, national
treasury management, allocating issue fund, foreign
exchange control and interbank settlement.

    (2) Reform and perfect the monetary policy system.

    a. The final goal of PBC's monetary policy is to
keep the currency stable, and to promote economic
growth through it; The intermediary and operating
goals of monetary policy are amount of currency
supply, aggregate amount of credit, inter-bank
offered rate and bank provision rate.

    b. The instruments of monetary policy are:
statutory reserved rate of deposit, loan of central
bank, official re-discount rate, open market
operations, foreign exchange operations of central
bank, loan restricted volume, deposit and loan rates
of central bank. In accordance with the macro-economic
situation, the PBC utilizes all these policy instruments
flexibly and selectively to regulate and control
amount of money supply.

    c. From 1994 on, the Central Bank begins to
practise asset-liability ratio management and asset
risk management with commercial banks.

    d. PBC should set up a perfect investigation and
statistic system and a monetary policy forecasting
system, and provide scientific basis for
formulating monetary policy by way of stepping up
analysis and prediction of macroeconomy.

    e. Set up monetary policy committee, to make
formulation of monetary policy more scientific.

    (3) Perfect financial laws and regulations,
enforce financial supervision and administration.

    a. Make the best use of time to draw up laws
such as Banking Law of the People's Republic of
China, Law of People's Bank of China, Law of Bills
and Law of Insurance etc. and submit all them to
the National People's Congress for examination.

    b. Make the best use of time to formulate and
perfect the administrative regulations and
supervising criteria for different
kinds of financial institutions, and conform the mode of
supervision and administration to laws and
regulations. The main contents of supervision and
administration are: registration administration,
review of the qualification of legal representative,
scope of business definition, capital abundance rate,
capital mobility and degree of capital risk, etc..

    c. Investigate
and deal with cases of setting up financial institutions and conducting
financial business on their own without the approval of
PBC, in accordance with laws and regulations.

    d. Auditing shall be further strengthened. The head office of
PBC shall strictly audit financial
institutions at the national level, and even audit their branch offices when
necessary; The branch offices of PBC shall
set up auditing financial institutions under
their jurisdiction. Conscientiously
investigate and deal with violations of laws
and regulations as soon as they are discovered.

    (4) Reform PBC's financial system.

    Abolish the profit retaining and tax paying
system of branches of PBC at different levels.
The Head Office and all branches of PBC shall implement
respectively independent financial budget
management system. The financial revenue and
expenditure plans drawn up by all
branches yearly will be carried out upon
approval by the Head Office of PBC. Expenses
balance receipts, all of the surplus profit must be
delivered to central finance, the deficit will be
subsidized by the central finance. The
financial statement of PBC shall be examined
and verified by the Ministry of Finance, and to
be audited by the Sate Auditing Bureau. Banking
personnel rank wage system shall be implemented for staff
(excluding manual workers) working in different levels
of branches of PBC.

    2. Set Up Policy Banks

    The aims of setting up policy banks are:
Separating policy finance from commercial finance,
in order to solve the problem of national
specialized banks executing dual functions; Cutting off
the direct connections of policy
loans with base currency, to ensure
PBC's initiative in regulating and
controlling base money.

    It is necessary for policy banks to strengthen
management, to keep to the principle of self-bearing of
risks, break-even operating, and not competing with
commercial financial institutions. Business of policy
banks is supervised by PBC.

    (1) Set up National Development Bank, to
administer the People's Construction Bank of China
(PCBC) and national investment institutions.

    a. National Development Bank handles policy
loans and discount business for key national
construction projects (including capital construction
and technical transformation). National Development
Bank has only the head with no branches office. Its
credit business is represented by PCBC.
People's Construction Bank of China shall be
transformed into a state-owned commercial bank mainly
engaging in middle and long term credit business
after the policy credit business of the bank is
separated. The investment departments of National
Development Bank shall utilize state approved and
appropriated capital fund for stock-investing in
key national construction projects.

    b. The National Development
Bank shall be accountable to the Ministry of
Finance for its financial affairs. Subject to approval
by the Ministry of Finance, the
Bank shall be in a position to regulate and adjust capital funds
and profit among legal persons. The person in charge
of financial affairs of the Bank shall be nominated by
president of the Bank, and submitted to the State
Council for appointment.

    c. According to its fund-raising capacity and
risks of projects, National Development Bank shall
consult repeatedly with State Planning Commission and State
Economy and Trade Commission before determining jointly and
carrying out the plan of key construction investment
and loan.

    d. The fund resources of National Development
Bank mainly are: (a) the capital fund and key
construction funds appropriated by the Ministry of
Finance; (b) issuance of
state-guaranteed bonds in the society and financial
bonds to financial institutions by National Development Bank, the amount of
which shall be determined by State Planning
Commission and People's Bank of China; (c) a portion of
deposit absorbed by People's Construction Bank of
China.

    e.  Adjust the organizational structure of People's
Construction Bank of China, merge China Investment
Bank into international business department of PCBC.

    f. Formulate Act of National Development Bank
and Constitution of National Development Bank.
National Development Bank shall begin its operation in 1994.

    (2) Set up Agricultural Development Bank of
China (ADBC) to undertake policy loans for State
reserve in grain, cotton and edible oil, for
contract-purchasing of farm and sideline products, and agricultural
development, and to appropriate fiscal
funds for supporting agriculture and to supervise
their use as an agent.

    a. As an independent legal person, the capital
fund of Agricultural Development Bank of China shall
come from the existing Agricultural Bank of China (ABC) which shall
transfer a portion of its capital fund to the former. ADBC will
take over agricultural policy loans which belong to
ABC and Industrial and Commercial Bank of China now
(creditor's right), and accept corresponding loans of
PBC (debt).

    b. ADBC can set up some agencies(branch offices)
and county-level business offices in a number of provinces
and autonomous regions where agriculture has a big
proportion in the economy.

    c. The fund resources of ADBC mainly are:
(a) financial bonds issued to financial institutions;
(b) fiscal fund for supporting agriculture; and
(c) deposit of enterprises utilizing agricultural
policy loans.

    d. Formulate Act of Agricultural Development
Bank of China and Constitution of Agricultural
Development Bank of China. The task of setting
up the Bank shall be finished before the summer harvest
of 1994.

    After the founding of ADBC, Agricultural Bank of
China will be transformed into a State-owned
commercial bank.

    (3) Set up China Import-Export Credit Bank (CIECB).

    a. As an independent legal person, the capital
fund of China Import-Export Credit Bank will be
appropriated by the Ministry of Finance.

    b. The operating business of CIECB are
supplying buyer's and seller's credits for
importing and exporting of large scale
mechanical and electrical equipment, handling
discount interest and export credit guarantee for
export credit of complete sets of mechanical and
electrical equipment of the Bank of China. CIECB
does not handle business of commercial banks. The
fund resources of CIECB mainly are special fiscal
fund and financial bonds issued to financial
institutions, etc..

    c. CIECB sets up no branch offices but head office
only. The credit business of CIECB shall be handled by
the Bank of China or other commercial banks as its agents.
The agencies of CIECB who are responsible for
investigation and statistics and supervision over agency
business and other matters, can be set up only in a few
specific major cities.

    d. Formulate Act of China Import-Export Credit Bank and
Constitution of China Import-Export Credit Bank. CIECB shall begin
its operation in 1994.

    (4) The policy banks must establish boards of
supervisors, which shall be composed of members from the
Ministry of Finance, People's Bank of China,
representatives of relevant government departments
and others. Mandated by the State Council, the boards
shall supervise and examine the business guiding principles
of the policy banks and value in maintenance and
appreciation of State owned capital, supervise,
appraise and record the presidents' business
achievement of the policy banks, and put forward
proposals on appointment or removal,
reward or punishments.

    3. Transform the State Specialized Banks into
State-Owned Commercial Banks True to Their Names

    (1) After separating the policy business, existing
State specialized banks (China Industrial and
Commercial Bank, Agricultural Bank of China, Bank of
China and People's Construction Bank of China)
should be transformed into State owned commercial banks as soon as possible,
operating according to the management mechanism of
modern commercial banks. Firstly, implement the
business principle of conducting independent
operations, practising its own risk bearing,
bearing the responsibility of profit
and losses, and self-control; Secondly, the head
offices of the State owned commercial banks should
strengthen centralized management, upgrade the capability
of unified dispatch of funds, practise uniform accounting in
the whole bank, and not allow inter-branch market transactions.
Thirdly, in general, only the head
offices of the commercial banks are authorized to get financing
from the central bank, and the head offices bear full
responsibility for asset liquidity and
capacity to pay of the whole bank; Fourthly, the
State owned asset equity in the State owned
commercial banks shall be controlled according to laws
and regulations of State owned asset management.

    Business intersection and competition are
allowed among the State-owed commercial banks. All
operating activities of the State-owed commercial banks shall
strictly abide by the financial laws and regulations of the State, and
accept supervision and control by the central bank.

    The State-owned commercial banks shall establish
board of supervisors, which shall be composed of members from
People's Bank of China, relevant departments of the
government and others. Mandated by the State
Council, the boards shall supervise and examine the
business guiding principles, important decisions and
the value in maintenance and appreciation of
State-owned capital of the State-owed commercial banks,
supervise, appraise and record the presidents'
business achievement of these banks, and put forward
proposals on appointment or removal, reward
or punishment.

    The State-owned commercial
banks are not authorized to invest in non-financial enterprises. The
amount of investment of the State-owed commercial banks in industries of
insurance, trust business, and securities shall not
exceed a definite proportion of their capital fund.
Besides, investment in these industries should
be deducted from the whole capital funds in calculating
abundance rate of capital. The banks should separate
from the industries of insurance, trust business and
securities in personnel, fund and property, and operate
separately. The branches and sub-branched of the State-owed commercial banks
have no capital authority.

    (2) The commercial banking system in China includes the State-owned
commercial banks, Bank of Communications,
Industrial Bank of CITIC, Everbright Bank, Huaxia
Bank, China Merchant's Bank, Fujian Industrial
Development Bank, Guangdong Development Bank,
Shenzhen Development Bank, Pudong Development Bank
of Shanghai, and rural cooperative banks, urban
cooperative banks, etc. All commercial banks
should perfect and develop in accordance with the
relevant financial laws and regulations of the State.

    (3) Develop cooperative
banking system in a positive and sound way.
The cooperative banking system mainly includes two parts: the
urban cooperative banks and the rural cooperative
banks, whose main tasks are to provide
medium and small enterprises, agriculture and
regional economic development with financial service.

    a. Run the urban cooperative banks as an
experiment on the basis of urban credit
cooperatives. The urban cooperative banks shall be
established only at municipal and banking office
levels, both of which are independent legal persons.
Formulate Act of Urban Cooperative Banks,
found and rebuild the urban
cooperative banks in line with the Act. Running of urban cooperative
banks on an experimental basis should be carried out in stages and
batches and shall not rush headlong into action.

    b. Set up the rural cooperative banks step by
step. According to the requirement of rural commodity
economic development, set up the rural cooperative
banks step by step on the basis of the rural
joint-credit cooperatives. Formulate Act of the
Rural Cooperative Banks of China, and firstly
separate the rural joint-credit cooperatives from
the Agricultural Bank, and turn them into
joint organizations of basic-level credit cooperatives. At present, the rural
cooperative banks shall be established only in areas below the
county level (inclusive).
The State-owned commercial banks can have equity participation
in the rural cooperative banks according to
the Act of Rural Cooperative Banks, but
shall not change the collective cooperative
financial nature of the rural cooperative
banks.

    c. The rural cooperative foundations are not
financial organs. They are not empowered
to handle deposits and loans, and should
become real community mutual aid fund
organizations. The rural cooperative foundations handling
deposits and loans at present can be transformed into the
rural credit cooperatives after rectification
and qualification check and acceptance.

    (4) According to the principle of reciprocity and
mutual benefit, subject to approval by the People's
Bank of China, foreign financial institutions can be
introduced in a planned way and step by step. The
foreign financial institutions should handle their
business operation according to the scope of business approved
by the People's Bank of China.

    (5) Progressively unify the different kind of
income tax rate existing between domestic financial
institutions, Chinese and foreign or joint stocking
financial institutions. The income tax of financial
institutions becomes the fixed central fiscal revenue.

    (6) Financial institutions are allowed to declare
bankruptcy because of bad management, but their
creditor's rights and debts should be transferred as
smoothly and steadily as possible. Deposit
insurance fund shall be established to protect the
public interest.

    4. Set up a Unified Open Financial Market where is
Orderly Competition under Strict Control

    (1) Perfect the money market.

    a. Strictly control the money market, clearly
define and standardize the qualifications and
business actions of the market bodies, prevent fund
in money markets from flowing to securities and real
estate markets.

    b. All the financial institutions can call
position money mutually by bank clearing. The banks
(including their branches) that barrow money from the
People's Bank generally shall not go
beyond seven day limit; In general, the time limit that
the commercial banks and the cooperative banks lend
money to securities companies, trust and investment
companies, financial companies and financial leasing
companies shall not go beyond seven days.
However, the above restrictions do not apply to the
banks that do not borrow money from the People's Bank
and to other non-banking financial institutions. Yet
gradual transition to bank clearing shall be effected.

    c. The People's Bank of China shall set the
ceiling and floor interest rates of the deposit and
loan, further rectify the interest rates relations
between deposit, loan and securities; all the different
kinds of interest rate should reflect the difference
in time limit, cost and risks, so as to keep a
reasonable rate differential; progressively set up the
market interest rate system based on the central
bank's interest rates.

    d. The People's Bank should strictly supervise
and administer the financing action between the
financial institutions, investigate and deal with
those violating relevant regulations in accordance
with laws.

    (2) Perfect the securities markets.

    a. Perfect the national debt market, in order
to create favorable conditions for the People's
Bank to handle the business of open market
operations. The Ministry of Finance shall stop
borrowing money from the PBC. The fiscal position
shortage shall be settled by short-term national debt,
while the deficit budget shall be made up by
issuing national debt. According to the approved
amount, the policy banks can issue state-guaranteed
financial bond, which is used to adjust economic
structure. It is essential for postal savings,
surplus of social security funds, and funds
of all financial institutions to keep a definite
proportion of national debt, which the national
commercial banks can use as mortgages for
financing from the People's Bank.

    b. Adjust issuing objects of financial bonds,
stop issuing financial bonds to individuals. The
People's Bank handles mortgage loan for only the
national commercial banks that have financial bonds.

    c. Perfect stock markets. Standardize stock
issuing and listing on the basis of enterprise
joint stock system transformation; Perfect management
of securities exchange and exchange systems; Create
favorable conditions to unify the legal person stock
markets and individual stock markets, A-stock markets
and B-stock markets.

    5. Reform Foreign Exchange Control System,
Coordinate the Policy of Foreign Exchange and
Monetary Policy

    Foreign exchange control is an important
part of the central bank's monetary policy. The long
term target of foreign exchange control system
reform is realization of RMB's convertibility.
Based on the prevailing circumstances in China and
with reference to successful international experiences,
the short-term reform measures shall be as follows:

    (1) Realize unified foreign exchange rate in
1994, establish unified controlled and floating RMB
exchange rate system based on market
exchange rate;

    (2) Abolish foreign exchange retaining system,
implement foreign exchange settlement and selling system.

    (3) Realize RMB's conditional convertibility in the
current account.

    (4) Strictly administer, examine and approve foreign
exchange drawing and receipt in the capital account;

    (5) Set up a unified national foreign exchange
market, in which the designated foreign exchange
banks are the transaction bodies. According to the
requirement of regulating macro-economy, the
People's Bank of China should timely take in and
send out foreign exchange, to
stabilize the exchange rate.

    (6) Stop issuing and gradually call back
foreign exchange certificates. Strictly forbid
foreign currency pricing, settling and circulating.

    (7) The People's Bank of China centrally controls
State foreign exchange reserves. According to the
foreign exchange reserve principles of security,
liquidity and profitability, perfect operating mechanism
of foreign exchange reserve.

    The measures of foreign exchange control
system reform shall be carried out according to the
relevant provisions of the State Council.

    6. Properly Guide Non-Bank Financial
Institutions in Stable and Healthy Development

    The amount of capital fund, standards of managerial staff quality and
business scopes of all kinds of non-bank
financial institutions shall be clearly defined, examined
and approved strictly with enhanced administration. Properly develop different
kinds of non-bank financial institutions such as
specialized insurance company, trust and
investment company, securities company, financial
leasing company, finance corporation of enterprise
group, etc., implement the policy of classified
management for the industries of insurance,
securities, financial trust and banking.

    (1) The principle of separating social insurance from
that of commerce and separating the functions of
government from those of the enterprise shall be upheld
in insurance system reform. The
policy insurance and the commercial insurance
should keep separate accounts respectively, transform
the insurance companies into genuine insurance
enterprises, and realize equal and orderly
competition. Progressively separate personal
insurance business from that of non-personal.
Develop a number of nation-wide, regional and specialized
insurance companies; establish re-insurance
companies; and step by step develop rural insurance
undertakings in many forms. Properly enlarge the
scopes and the autonomous right of the insurance
enterprises' utilizing fund, properly raise the
general insurance reserve rate, so as to strengthen
economic power of the enterprises. Set up the
insurance guild in order to strengthen
self-discipline and control of the trade.

    (2) The fund of the trust and investment company
mainly comes from long-term and wholesale enterprise
trust or entrusted deposit. The business scope of the
company is handling trust and entrusted loans,
securities buying and selling, financial leasing,
proxy and consultancy, etc.

    (3) The finance companies of enterprise groups
collect short-term fund for the enterprises mainly
by issuing commercial bills.

    (4) The securities companies are not authorized to
handle the business of non-security investment.
Clearly distinguish the securities companies going
into the first class markets from those into the
second class markets. Strictly separate the
business of the securities company's own from that of
proxy.

    7. Strengthen Financial Infrastructure
Construction, Establish Modern Financial Management
System

    (1) Speed up accounting and settlement system
reform. According to the international accounting
standards, the financial institutions should reform
accounting basis, accounting items and accounting
system, and reform financial statistic and
supervising monitoring system. Build modern system of payment
to realize settlement billization. Expand the
scopes of payment measures such as credit
card, commercial bill of exchange, cheque and
cashier's check, etc., strengthen the flexibility,
liquidity and safety of the bill use, in order to
reduce the use of cash.

    (2) Accelerate financial system
computerization. Speed up the
construction of the PBC's satellite communication network.
Extend utilization and development of computers,
realize the automation of inter-bank settlement,
loan and deposit, information statistics, handling
business and office work. Financial system
computerization should be centrally planned,
standardized and carried out respectively.

    (3) Strengthen construction of financial
personnel. Renew knowledge structure of the staff,
and speed up the training of modern financial
personnel, implement the cadre and personnel system
and labour and wage system suiting the
characteristics of the financial system, and set up
the restraining and motivating mechanism.