Laws of the People's Republic of China

Yin Jian Fa [2006] No.22

Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, China Construction Bank, and Bank of Communication,

in order to strengthen the reform of corporate governance of state-owned commercial banks and ensure the stock reform to get substantial results, this Commission has revised the Guidance to Corporate Governance of State-owned Commercial Banks and the Relevant Supervision thereof, which is hereby printed and distributed to you, please implement it accordingly.

China Banking Regulatory Commission

April 18, 2006

Guidance to Corporate Governance of State-owned Commercial Banks and the Relevant Supervision Thereof Chapter I General Provisions

Article 1

In order to ensure corporate governance of state-owned commercial banks to get substantial results, the present Guidance is formulated according to the Company Law of the People's Republic of China, Banking Regulatory Law of the People's Republic of China, the Law of Commercial bankof the People's Republic of China, and other laws and regulations.

Article 2

The overall objective of the reform of corporate governance shall be to put emphasis on reforming management systems, perfecting governance structures, transferring management mechanisms, and improving management performances so as to built the state-owned commercial banks into modern joint stock commercial banks with adequate capital, close internal control system , safe operation, good service and benefit, and international competitiveness step by step.

Article 3

Through the stock reform, the state-owned commercial banks shall improve the level of their operation management, strengthen their financial power, and reach and retain the level , which is above middle of the big banks ranking top 100internationally concerning the financial indexes widely accepted internationally.

Article 4

The core and crux of the reform is to improve corporate governance. The state-owned commercial banks shall enhance core competitiveness through setting up and perfecting corporate governance mechanism to stimulate the sustainable and healthy development.

Chapter II Corporate Governance

Article 5

In accordance with the requirements for the modern financial enterprise system, state-owned commercial banks shall set up standard shareholders'meeting, board of directors, and board of supervisors, and senior management level system, and set up a scientific mechanism with balance of power, accountability system and interest incentives system.

1.

In accordance with the provisions of the Company Law of the People's Republic of China and other laws and regulations, a state-owned commercial bank shall set up shareholders'meeting, board of directors, board of supervisors, and senior management level, constitute articles of association of the banks reflecting the requirements of modern financial enterprise system, and specify the obligations and powers of shareholders'meeting, board of directors, board of supervisors and directors, supervisors, and senior administrative personnel, in order to give shape to the organic combination of powers, responsibilities and benefits, and set up a reasonable and high efficient mechanism of decision-making, implementation and supervision, and make sure that each party runs independently and balances effectively.

2.

The shareholders'meeting is the organ of power of the state-owned commercial bank. The shareholders of a state-owned commercial bank shall lawfully exercise their rights through shareholders'meeting, be in compliance with laws and regulations and the provisions of the banks'articles of associations, and shall not interfere in the performance of duties of the board of directors and senior management level. If the shareholders cause losses to the banks or any other shareholder by misusing their rights, they shall be liable for the damage in accordance with law.

3.

The board of directors of a state-owned commercial bank shall take charge of the shareholders'meeting. The board of directors shall set up a special committee to formulate the rules of procedures and working instruction for each special committee. With the authorization of the board of directors, each special committee shall perform duties and provide professional opinions to the board of directors. Each special committee shall be entitled to have direct communication with the senior management personnel and other staff members to get adequate information on the operation and management of the bank.

In principle, the board of directors of a state-owned commercial bank shall set up a strategic planning committee, a compensation and nomination committee, an auditing committee, a risk management committee, a connected transaction control committee and other special committees. There shall be no less than 3 members in each special committee. The posts of the chairmen of the compensation and nomination committee, auditing committee, and connected transaction control committee shall be taken up by independent directors in principle. The number of the independent directors in the compensation and nomination committee, auditing committee, and connected transaction control committee shall exceed half of the total members of the committees they work in.

4.

The senior management level of a state-owned commercial bank shall bear responsibility for the board of directors, and be supervised by the board of supervisors. The senior management level shall exercise duties independently under their jurisdiction in accordance with law.

5.

The board of supervisors is the supervision organ of a state-owned commercial bank, and shall bear responsibility for the shareholders'meeting. The board of supervisors shall be in charge of supervising the acts of directors and senior management personnel for their performance of duties, and make suggestions on recalling the directors and senior management personnel who violate laws and regulations, articles of associations of the bank or the resolutions of the shareholders'meeting; and ask directors or senior management personnel to make a correction when any act of the director or the senior management personnel damages the interests of the bank; and supervise operation and management acts including decision of operation ,risk control internal control and so on.

6.

A commercial bank shall make detailed rules decision-making for shareholders'meeting, board of directors, and supervision board, and the detailed rules and procedures for the work of senior management level, and make clear the jurisdiction of the ogans, and set up a clear mechanism of report procedure and information communication .

7.

A state-owned commercial bank shall set up a due diligence system for directors, supervisors, and senior management personnel. The directors shall bear the relevant legal liabilities in their individual capacities, and discharge their functions as a trustee and custody . The supervisors shall strictly discharging their functions of supervision and supervise the operation of the bank and the performance of duties by directors, senior management personnel, and other staff members. The senior management personnel shall have good professional quality and moral fortitude to manage and run the bank professionally.

8.

A state-owned commercial bank shall set up a perfect system for nomination, appointment, resign and dismissal of directors, supervisors, and senior management personnel, and go through the relevant formalities according to the related provisions. A state-owned commercial bank shall set up and improve market-oriented performance evaluation methods and incentive and binding mechanism for directors, supervisors, and senior management personnel as well as a routine and multi-level system of accountability.

9.

A state-owned commercial bank shall fully respect the opinions and suggestions of directors and supervisors to make sure that the directors and supervisors be able to work in an independent way, and bring full play into corporate governance. The directors with stock rights shall play their role positively in corporate governance, to promote the state-owned commercial bank to perfect corporate governance, and reinforce risk control and internal management.

10.

State-owned commercial banks shall regulate the connected transactions. Connected transactions shall be implemented in accordance with the principle of honesty and good faith and fairness, and shall be governed by law and regulations, and make revealment of them in a comprehensive, objective and truthful way.

Article 6

State-owned commercial banks shall set up multiple equity structure, and bring in strategic investors on the basis of the enhancement of corporate governance of themselves and the operation management level.

That the principle of holding shares for long terms, optimizing governance, business cooperation, and evasion of competition shall be complied with by a state-owned commercial bank when introducing any strategic investor, and the following five standards shall be kept to:

1.

In principle, the strategic investors shall hold no less than 5% percentages of shares .

2.

The term for holding the stock right by the strategic investors shall be more than 3 years as of the settlement day,.

3.

In principle, the strategic investors shall send directors to the bank, and simultaneously encourage the experienced to send senior management talents to give about management experiences in a direct way.

4.

The strategic investors shall have abundant backgrounds of management in financial industry, and simultaneously, they shall have mature management experiences and technology in financial industry, and good will of cooperation.

5.

A strategic investor of a commercial bank shall not make investment in more than two state-owned commercial banks.

Article 7

Practically, a state-owned commercial bank shall work out clear medium and long-term development strategy according to its actual conditions to maximize the value of the bank.

1.

A state-owned commercial bank shall have accurate market orientation, work out and carry out famous brand strategy, and give play to the comparative competition advantages, and enhance the market to recognize bank brand through differentiation competitive strategy.

2.

A state-owned commercial bank shall have medium and long term development plans and propel their implementation gradually.

3.

After its listing, a state-owned commercial bank shall pay close attention to any factor that may affect the change of the market value, and set up the management ideas of maximizing the market value.

Article 8

For state-owned commercial banks, risk control and construction of compliance with regulations shall be reinforced, and scientific decision-making system, as well as internal control mechanism and risk control system shall be set up.

1.

State-owned commercial banks shall set up and improve the risk management system, such as credit risk, market risk, and operation risk, and identify, measure, monitor, and control all kinds of risks in an effective way.

2.

State-owned commercial banks shall set up a standard internal control and supervision system, which specifically includes: supervision carried out by the board of directors or the board of supervisors, supervision carried out by the personnel not participating in the specific operation of each kind of business fields, supervision carried out within the business flow, and supervision carried out by independent risk control department, compliance department, and audit department.

3.

State-owned commercial banks shall employ advanced international risk control technology to enhance the internal control management level and fulfill the effective combination of quantitative and qualitative risk control.

4.

In order to make clear the specific functions of the board of directors and senior management level in the compliance risk management, state-owned commercial banks shall set up and perfect the framework of the compliance risk management..

Article 9

For state-owned commercial banks, the business process flow and management process shall be integrated, organizational structure shall be optimized, resource allocation shall be perfected, and business operation efficiency shall be enhanced in accordance with the principle of intensive management.

1.

In accordance with their own conditions and the demand of the clients, state-owned commercial banks shall gradually set up a vertical management system of risk control, auditing, and etc., in order to give effect to enterprise department management system with the product units and business line as the process flow.

2.

State-owned commercial banks shall gradually simplify their organizations and make centralized management on their operation, in order to reduce the levels in management, adjust overall arrangement for the organization, and enhance operation efficiency.

3.

State-owned commercial banks shall set up a scientific and overall evaluation system and build up a good coordination and communication mechanism among internal departments, reinforce cooperation relationship inbusiness doing, and form a complete process flow in management and control.

Article 10

For state-owned commercial banks, its deliberate financial accounting system and market-oriented information revealment system shall be carried out in accordance with the standards and requirements for modern financial enterprises and large listed banks.

1.

State-owned commercial banks shall carry out deliberate accounting system and make business accounting system perfect. Based on strict implementation of domestic accounting system of financial enterprises, the state-owned commercial banks shall positively try to be in line with international accounting rules.

2.

State-owned commercial banks shall attach importance to management of the construction of accounting, reinforce financial management, and build up a financial operation mechanism with the comprehensive budgetary management as means, the comprehensive cost management as the main contents, and the financial information to be reported in a timely, accurate and smooth way.

3.

State-owned commercial banks shall reinforce information revealment work, set up a perfect information revealment system, and play the full role of the market in the supervision and check, and reveal the financial information and other information in a truthful, overall, and accurate way, in order to enhance the transparency of the operation and management of the banks.

Article 11

State-owned commercial banks shall reinforce the construction on information science and technology, so as to enhance comprehensive management and service functions in an overall way.

1.

State-owned commercial banks shall institutea clear medium and long-termed plan of information science and technology development , and make clear the overall objects and specific measures for building the information science and technology, and trace the development of financial science and technology attentively in order to enhance the information science and technology level gradually.

2.

State-owned commercial banks shall improve information science and technology system to fulfill the gathering of the data, and set up an advanced platform for information science and technology, in order to enhance functions of comprehensive management and service in an overall way.

Article 12

In accordance with the requirements for human resources management of modern financial enterprises, a market-oriented human resources management system and incentive and binding mechanism shall be set up by state-owned commercial banks.

1.

State-owned commercial banks shall consider comprehensively the capacity for acceptance and other factors, give consideration to the principle of both fairness and efficiency, so as to impel the human resources system reformed in a positive and steady way.

2.

State-owned commercial banks shall bring into competitive mechanism, so as to set up a market-oriented personnel system .of surviving of the fittest and competent to work ., assuming the posts according to their abilities,and enabling to come and leave, and call off the administrative levels , and implement the appointment and discharge system focusing on engagement. and

3.

State-owned commercial banks shall suit the market demand, reform the pattern of the salary payment, set up and improve the system of performance index and make the evaluation procedures in a strict way.

Article 13

State-owned commercial banks shall carry out financial talents strategy, and increase pertinent on training talents and do well in introducing talents to key positions, and simultaneously, attach importance to the effective usage and reasonable allocation of human resources, and make use of the activity and creativity of the existing human resources.

1.

State-owned commercial banks shall pay much attention to constructing the training system, set up and improve all employees'on-the-job training system with such main contents as on-the-job qualification training, performance capability training, and employee professional career development training.

2.

State-owned commercial banks shall pay much attention to cultivating medium and senior management talent teams, enhance the source structure of human resources, and do well in the examination of the relevant qualifications and the report and approval of them as introducing scarce talents to key job positions in market-oriented way.

Article 14

State-owned commercial banks shall display professional advantages of intermediate institutions to impel the reformation in the shareholding system steadily.

1.

For popurse of using the up-to-date experiences of corporate governance of international banking industry, state-owned commercial banks shall make full use of the professional technical advantages of intermediate institutions, such as financial consultants, certified public accountants firms, lawyers firms, and management consultants, and etc., so as to impel the reform on shareholding system to deeper development. and

2.

State-owned commercial banks shall set up the afterwards evaluation mechanism for the work of intermediate institutions, and submit to the regulatory departments in time

Chapter III Evaluation and MonitoringIndexes

Article 15

China Banking Regulatory Commission (hereinafter referred to as the CBRC) shall evaluate the stock reform of state-owned commercial banks according to the seven in three large categories, including such categories as operation performance, assets quality and prudent operation. The indicators in the category of operation performance shall consist of ratio of assets (ROA), ratio of equity (ROE), and cost-revenue ratio. The indicator in the category of assets quality shall be the percentage of bad loans. The indicators in the category of prudent operation shall consist of capital adequacy ratio, intensiveness of large amount risks, and non-performing loans (NPL) provisioning coverage ratio. State-owned commercial banks shall be monitored on the stock reform by CBRC.

Article 16

The ROA of state-owned commercial banks shall be up to 0.6% in the next year of the year when the financial reorganization is finished, and shall be up to internationally good level in the following three years.

The formula for computation of the ROA shall be: (Omitted)

Article 17

The ROE of the state-owned commercial banks shall be up to 11% in the next year of the year when the financial reorganization is finished, and shall be up to not less than 13% afterwards year by year.

The formula for computation of the ROE shall be: (Omitted)

Article 18

The cost-revenue ratio of a state-owned commercial bank shall be controlled in the scope of 35% to 45% from the next year after financial reorganization.

The formula for computation of cost/income ratio shall be: (Omitted)

Article 19

Strictly based on the five-leveled standard of classification, the state-owned commercial banks shall sort the credit assets and evaluate the quality of the credit assets based on the five- leveled classification standards, and the non-performing loans shall be controlled less than 5% continuously after financial reorganization.

The percentage of non-performing loans shall be measured based on the five- leveled classification standards for the loans, and the formula for computation shall be: (Omitted)

Article 20

The state-owned commercial banks shall make management on their capital strictly according to the related provisions of the Measures for the Administration of Capital Adequacy Ratio of Commercial Banks, and the capital adequacy ratio after financial reorganization shall be kept more than 8%.

Capital adequacy ratio shall be measured according to the related provisions of the Measures for the Administration of Capital Adequacy Ratio of Commercial Banks, and the formula for computation shall be: (Omitted).

Article 21

A state-owned commercial bank shall strictly control its collective risk for the credit granted to the same borrower, and the percentage of loan balance for the same borrower to capital balance by this bank shall not more than 10%.

The formula for computation of the intensiveness of large amount risk shall be: (Omitted)

Article 22

The NPL provisioning coverage ratio of a state-owned commercial bank shall be no less than 60% in the current year when the financial reorganization is finished, and the bank shall increase the percentage year by year on the precondition of ensuring the steadiness of finance, and shall try its best to have it up to 100% in 5 years.

The formula for computation of the NPL provisioning coverage ratio shall be: (Omitted).

Article 23

In order to set up a monitoring indicator system, CBRC shall monitor the business operations of state-owned commercial banks during their stock reform. A state-owned commercial bank shall set up a relevant risk monitoring mechanism to positively operate in coordination with the implement of risk monitoring.

The monitoring indicators and monitoring requirements of a state-owned commercial bank shall be as follows:

1.

Tier 1 Capital. The monitoring requirements consist of closing balance and increase rate.

2.

Capital scale. The monitoring requirements consist ofclosing balance, world ranking, and increase rate.

3.

Percentage of capital to assets. The monitoring requirements consist of closing balance of the current term, closing balance of the last term, ranking at the end of the current term, and ranking at the end of last term.

4.

Pre-tax profits. The monitoring requirements consist of closing balance and increase rate. and

5.

Actual profit increase. The monitoring requirements consists ofincrease at the end of the current term, increase rate in the balance of last term at the end, and the world ranking of the current term.

Chapter IV Examination and Report

Article 24

In accordance with the targets of reform and the requirements for the tasks, state-owned commercial banks shall work out specific corporate governance scheme, and carry out the responsibility on different levels. State-owned commercial banks shall carry out a rigorous target management, and evaluate the work of each stage through rigorous examination and checking and acceptance, and then submit to CBRC in time.

Article 25

CBRC shall evaluate and monitor the stock reform of the state-owned commercial banks and work out an evaluation and monitoring report and then submit it to the State Council.

Article 26

In accordance with the evaluation and monitoring, CBRC shall supervise and direct the work of stock reform of state-owned commercial banks in time, and reveal the corporate governance and all kinds of evaluation and monitoring indexes in proper ways.

Chapter V Supplementary Provisions

Article 27

CBRC shall be responsible for interpretation of the present Guidance .

Article 28

The present Guidance shall go into effect as of April 24, 2006. The Guidance to Corporate Governance of the Bank of China and China Construction Bank and the Supervision thereof promulgated on March 11, 2004 shall be abolished at the same time.