Banking Industry Reform

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2. Contents Banking Industry Reform Moving towards commercial orientation Banking Market Opening Achieving a win-win development Banking Supervision & Regulation Benchmarking to international standards 2

3. The Status Quo of China’s Banking Industry Source: CBRC 3

4. Big Five – a glimpse of their dominance Source: CBRC 4

5. Reforms of Big Five: a gradual process • Recapitalization • Reform of internal structure • Strategic partnership • Stock market listing Source: CBRC 5

6. Reforms of Big Five Clear Strategy • A customer-oriented strategy • Innovation, efficiency and profit-driven • Shareholder value maximization • In line with international practice • Experienced bankers as independent directors • Management accountability, directors’ performance of duty of care and fiduciary duty Corporate Governance Risk Management & Internal Control • Risk & internal control • Pricing and diversification • IFRS, RAROC, EVA, etc. Information Disclosure • More disclosure after IPO • Quality financial reporting • Educationto consumers and investors Compliance Function • Effectiveness • Compliance culture 6

7. Reforms of Other Banking Institutions • Reforms of other commercial banks: work in progress • Joint-stock banks • City commercial banks • Reform of rural financial institutions: incipient reform • Consolidation • New policy • A nation-wide coverage • Postal savings bank: the new heavyweight • Other non-bank financial institutions 7

8. Progress made (1) Capital Adequacy Source: CBRC 8

9. Progress made (2) NPL balance & NPL ratio RMB trillion Source: CBRC 9

10. Progress made (5) 10

11. …Yet, betterment of external environment needed #1 Efficient capital market Well-defined property rights infrastructure #2 Sound and robust credit culture #3 Prudent accounting framework & policies #4 Enforceable rules for bank foreclosure #5 Bankruptcy law specifically for banks #6 11

12. Contents Banking Industry Reform Moving towards commercial orientation Banking Market Opening Achieving a win-win development Banking Supervision & Regulation Benchmarking to international standards 12

13. Overall statistics of Foreign Banks in China Source: CBRC 13

14. Full-scale Banking Market Opening • Liberalization of China’s banking sector under WTO commitments • The new Regulation of the PRC on Administration of Foreign-funded Banks – on November 11 2006 • Removing the geographical and customer restrictions • Encouraging to set up locally incorporated banks on a voluntary basis • So far, 11 banks have been approved to establish local subsidiaries, and many more are following suit. 14

15. Strategic partnership to Foster a Win-win Development 15

16. Corporate governance Overall management Business innovation Risk management Foreign Banks Bringing to Their Chinese Partners the Much-needed Know-how: 16

17. Expanding customer base Understanding local market Establishing a niche position Foreign Banks Benefiting From the Partnership: 17

18. Contents Banking Industry Reform Moving towards commercial orientation Banking Market Opening Achieving a win-win development Banking Supervision & Regulation Benchmarking to international standards 18

19. Regulatory agencies in China • People’s Bank of China (PBC) • China Banking Regulatory Commission (CBRC) • State Administration of Foreign Exchange (SAFE) • China Securities Regulatory Commission (CSRC) • China Insurance Regulatory Commission (CIRC) 19

20. Supervisory philosophy • Conduct consolidated supervision, i.e. assessing, monitoring and mitigating the overall risks of each banking institution • Stay focused on risk-based supervision and improvement of supervisory process and methods • Stress on banks’ internal controls • Enhance supervisory transparency 20

21. Regulatory objectives • Protect the interests of depositors and consumers through prudential and effective supervision • Maintain market confidence through prudential and effective supervision • Enhance public knowledge of modern finance through customer education and information disclosure • Combat financial crimes 21

22. Supervisory and regulatory criteria • Promote the financial stability and facilitate financial innovation at the same time • Enhance the international competitiveness of the Chinese banking sector • Set appropriate supervisory and regulatory boundaries and refrain from unnecessary controls • Encourage fair and orderly competition • Clearly define the accountability of both the supervisory and the supervised institutions • Employ supervisory resources in an efficient and cost-effective manner 22

23. Supervisory Approach and Focus • Rule-based plus Principle-based approach • Issuing over 150 supervisory rules and guidelines • Guidelines on compliance risk for commercial banks • Protection to financial consumers • Core principles for effective banking supervision • New Basel Accord – to be adopted by 2010 • MOUs or cooperative agreements with 23 overseas financial regulators • China Banking Association • Supervision focused on • Corporate governance • Risk management • Compliance performance • Corporate Social Responsibility 23

24. Concluding remarks Strong commitment to fulfill our mandate Add value to the industry #1 #2 24

25. “Few things are impossible in themselves; and it is often for lack of will, rather than of means, that man fails to succeed.” --- La Rocheforcauld 25

26. Thank you! 26