RULES ON FOREIGN FINANCIAL INSTITUTIONS' ACQUISITION OF SHARES IN PRC FINANCIAL INSTITUTIONS

01/01/2004

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On 31 December 2003 the China Banking Regulatory Commission (CBRC) implemented the Regulations Governing Investments by For-eign Financial Institutions in Shares in Chi-nese-Invested Financial Institutions, which it had promulgated on 8 December. The regulations contain provisions regarding the scale of assets, credit rating, continuous profitability, capital adequacy ratio, internal control systems, and regulatory system in the territory of registration that are required of foreign financial institutions wishing to acquire shares in PRC financial in-stitutions.

"Foreign financial institutions" as referred to in the regulations include both international finan-cial institutions and foreign financial institutions. The main conditions for such an institution to be permitted to acquire shares in a Chinese financial institution are as follows:

The foreign institution has been continuously profitable during the two most recent ac-counting years; if it is a commercial bank, it has a capital adequacy ratio of not less than 8%, or if not a bank, its total capital is not less than 10% of its total risk-weighted assets;

During the last two years it has continuously received a long-term credit rating of "good" from an international credit rating agency recognized by the CBRC; and

If the foreign institution intends to acquire shares in a Chinese commercial bank, the foreign institution's most recent year-end total assets must in principle have been not less than US$10 billion; or if it intends to acquire shares in a Chinese urban or rural credit co-operative or financial institution other than a bank, its most recent year-end total assets must in principle have been not less than US$1 billion.

In addition, the foreign financial institution must contribute its capital in currency, and a single foreign institution may not acquire more than a 20% shareholding in a PRC financial institution. If the combined shareholdings of multiple for-eign institutions in an unlisted PRC institution equal or exceed 25%, the unlisted institution will be subject to the regulatory regime for for-eign-invested financial institutions. However, if the combined shareholdings of multiple foreign institutions in a listed PRC institution exceed 25%, the listed institution will remain subject to the regulatory regime for PRC financial institu-tions.

The regulations also apply when a foreign fi-nancial institution that already holds shares in a PRC financial institution increases its share-holding, and when a financial institution from Hong Kong, Macao, or the Taiwan Area acquires shares in a PRC financial institution. But the regulations do not apply to acquisitions by Qualified Foreign Institutional Investors of ne-gotiable shares in listed PRC financial institu-tions.