Administrative Rules Governing Equity Investment in Chinese Financial Institutions by Overseas Financial Institutions

Order of China Banking Regulatory Commission
Following the approval of the State Council, the Administrative Rules Governing Equity Investment in Chinese Financial Institutions by Overseas Financial Institutions is hereby promulgated by China Banking Regulatory Commission.

Chairman: Liu Mingkang
December 8, 2003

Article 1 The Administrative Rules Governing Equity Investment in Chinese Financial Institutions by Overseas Financial Institutions (hereinafter referred to as the Rules) is formulated for the purpose of regulating activities concerning equity investment by overseas financial institutions in Chinese financial institutions, thereby optimizing the capital structure of Chinese financial institutions.

Article 2 The Rules is applicable to equity investment by overseas financial institutions in a legally incorporated Chinese financial institution. The term "overseas financial institutions" in the Rules shall denote international financial institutions and foreign financial institutions, whereby international financial institutions shall refer to the World Bank and its affiliated entities, other inter-governmental financial development institutions and international financial institutions recognized by China Banking Regulatory Commission (hereinafter referred to as the CBRC); foreign financial institutions shall refer to financial holding companies, commercial banks, securities firms, insurance companies, fund investment companies and other foreign financial institutions recognized by the CBRC that are incorporated in foreign countries.
The term "Chinese financial institutions" in the Rules shall denote Chinese commercial banks, urban and rural credit co-operatives, trust and investment companies, financial leasing companies, finance companies affiliated to enterprises as well as other Chinese financial institutions that are chartered by the CBRC and are legally incorporated within the territory of the People`s Republic of China.
The term "equity investment proportion" in the Rules is defined as capital contribution or equity shares of a foreign financial institution as a percentage of the aggregate paid-up capital or the total equity of a Chinese financial institution.

Article 3 The CBRC shall be in charge of regulation and supervision of activities concerning The Equity investment in Chinese financial institutions by overseas financial institutions.

Article 4 A prior approval from the CBRC is required to be obtained for equity investment in Chinese financial institutions by overseas financial institutions.

Article 5 The equity investment in Chinese financial institutions by overseas financial institutions shall be carried out in good faith and take long-term investment as their objective.

Article 6 The equity investment in Chinese financial institutions by overseas financial institutions shall be made in cash.

Article 7 An overseas financial institution engaged in equity investment in a Chinese financial institution shall meet the following requirements:

(1) Its total assets at the end of the previous year shall be in principle no less than $10 billion when investing in a Chinese commercial bank, no less than $1 billion when investing in a Chinese urban or rural credit co-operative and no less than $1 billion when investing in a Chinese non-bank financial institution;

(2) Its long-term credit rating for the last two consecutive years assigned by international rating agencies recognized by the CBRC shall be favorable;

(3) It should have remained profitable for the last two consecutive fiscal years;

(4) When an overseas financial institution is a commercial bank, its capital adequacy ratio shall be no lower than 8 percent; when it is a non-bank financial institution, the ratio of its total capital to its total risk-weighted assets shall be no less than 10 percent;

(5) It shall be under in-place sound internal controls;

(6) Its home country (or region) shall have in-place sound framework and systems for financial regulation and supervision;

(7) Its home country (or region) shall have a favorable economic environment; and

(8) It shall satisfy other prudential requirements formulated by the CBRC.

The CBRC shall be authorized to make adjustments to the qualification requirements of the overseas financial institution to reflect changes in the risk profile of the financial sector and supervisory needs.

Article 8 The equity investment proportion of a single overseas financial institution in a Chinese financial institution shall not exceed 20 percent.

Article 9 When the combined equity investment proportion of all overseas financial institutions in a non-listed Chinese financial institution is equal to or exceeds 25 percent, the non-listed Chinese financial institution shall be treated as a foreign-funded financial institution by the regulatory authority.
When the combined equity investment proportion of all overseas financial institutions in a listed Chinese financial institution is equal to or exceeds 25 percent, the listed Chinese financial institution shall still be treated as a Chinese financial institution by the regulatory authority.

Article 10 When filing an application for the equity investment in a Chinese financial institution by an overseas financial institution, the Chinese financial institution shall act as the applicant and submit the application to the CBRC for approval.

(1) When the applicant is a wholly state-owned commercial bank, a joint-stock commercial bank, or a non-bank financial institution supervised directly by the CBRC`s headquarters, the application shall be submitted directly to the CBRC`s headquarters for approval.

(2) When the applicant is a Chinese financial institution other than those provided in the previous paragraph, the application shall be submitted to the CBRC`s local office in the location of the applicant for approval, and, following the review and approval of the CBRC`s local office, to the CBRC`s headquarters for final approval.

Article 11 A Chinese financial institution applying for the equity investment by an overseas financial institution shall submit the following documents and information to the CBRC:

(1) an application letter for the equity investment;

(2) the corporate resolution adopted by the general meeting of shareholders or the board of directors of the Chinese financial institution to approve the proposed equity investment, or relevant approval document(s) issued by the applicant`s supervisory authority;

(3) the corporate resolution adopted by the general meeting of shareholders or the board of directors of the overseas financial institution to approve the proposed equity investment;

(4) a letter of intent signed by both parties;

(5) the annual reports or the audited financial statements, including the balance sheet and the income statement of the overseas financial institution for its last three consecutive years;

(6) a description of the funding sources, business performance and other related information of the overseas financial institution; and

(7) other documents and information required by the CBRC.

When the equity investor is a foreign financial institution, the Chinese financial institution shall also submit the rating report issued by an international rating agency recognized by the CBRC to provide the investor`s credit ratings for the past two consecutive years as well as a letter of consent from the investor`s supervisor in its home country.

Article 12 Upon reception of a complete set of application documents and information, the CBRC shall provide its decision of approval or denial within three months; if the application is denied, the applicant shall receive a written notice in which reasons for denial are provided.

Article 13 Upon reception of the approval from the CBRC, the overseas financial institution shall transfer the full amount of capital required for equity investment to the bank account of the Chinese financial institution within 60 working days, which shall be verified by an accounting firm recognized by the CBRC.
 
Article 14 When the equity investment by the overseas financial institutions leads to a change in the amount of registered capital or equity structure of the Chinese financial institution, the Chinese financial institution shall proceed to apply for the approval of the change in accordance with applicable procedures and regulations.

Article 15 When a Chinese financial institution is found to be in violation of the Rules when seeking to change its shareholder or its equity structure without approval, it shall face a penalty imposed by the CBRC in accordance with applicable regulations.

Article 16 The relevant provisions of the Rules shall be applicable to the increase of the equity holdings of an overseas financial institution in its capacity as an existing shareholder of the Chinese financial institution.

Article 17 The Rules shall be applicable to equity investment in a Chinese financial institution by financial institutions incorporated in Hong Kong Special Administrative Region, Macao Special Administrative Region and Taiwan Region. When the State Council provides otherwise provisions, the provisions issued by the State Council shall prevail.

Article 18 The Rules is not applicable to the activities of the Qualified Foreign Institutional Investors (QFII) to purchase the marketable shares of the listed Chinese financial institutions.

Article 19 Activities concerning equity investment in an auto financing company by overseas financial institutions shall be governed by relevant provisions in the Administrative Rules Governing the Auto Financing Company.

Article 20 The CBRC shall be responsible for the interpretation of the Rules

Article 21 The Rules shall enter into effect on December 31, 2003 and shall prevail when there is any discrepancy between the Rules and any previously promulgated document.