Speech: New Investment Vehicles in China (2007)

This speech was made at "2007 New Environment For Foreign Investment In China".

Contents

Part One   Traditional Investment Vehicles
Part Two   New Investment Vehicles (I) Strategic Investment in Listed Companies
Part Three  New Investment Vehicles (II) Acquisition of Listed Companies

Part One  Traditional Investment Vehicles

Main Traditional Investment Vehicles

1. Foreign Direct Investment (FDI): EJV, CJV, WFOE

2. BOT

3. M&A

4. QFII

1. Foreign Direct Investment (FDI): mainly includes Equity Joint Venture (EJV), Contractual Joint Venture (CJV) and Wholly Foreign Owned Enterprise (WFOE)

(1) Sino-foreign Equity Joint Venture Enterpriseit is an enterprise jointly invested by foreign companies, enterprises, other economic organizations or individuals and Chinese companies, enterprise or other economic organizations

The characteristic of the Joint Venture is joint investment, joint operation, and sharing the risk, profit and loss according to the respective ratio of contribution.

The contribution of each party will be converted to relevant ratio, and the ratio of foreign investors shall not be less than 25%.

Joint Venture is the earliest and most popular way to invest in China. It still has some importance at present.

(2) Sino-Foreign Contractual Joint Venturea joint venture established by foreign companies, enterprises and other economic organizations or individuals and Chinese companies, enterprises or other economic organizations. It is jointly invested by parties or the parties provide conditions for operation. The rights and obligations of each party shall be agreed in the contract.

Usually, the foreign parties will provide all or most of the capital and the Chinese parties will provide lands, premises, equipment and utilities, and sometimes, capital in a certain amount.

(3) Wholly Foreign Owned Enterprise: an enterprise established in China according to the laws of China, whose total investment is made by foreign companies, enterprise, other economic organizations or individuals.

2BOT

Abbreviation for BuildoperateTransfer. The government will grant an enterprise a concession for a term, to permit it to finance, build and operate a special infrastructure, and permits it to pay back the loans, recover the investments and make profits by charging the users or selling products. When the concession expires, the infrastructure shall be transferred to the government for free.

3M&AMerge & Acquisition

Acquiring domestic companies by foreign investors
Including asset deal and share deal

4QFIIQualified Foreign Institutional Investors

Which refers to the foreign fund management institutions, insurance companies, securities companies and other assets management institutions that invest in Chinaˇs securities market in accordance with the relevant provisions after being approved by China Securities Regulatory Commission and granted an investment quota by State Administration of Foreign Exchange.

Part Two  New Investment Vehicles

New Investment Vehicles include:
Strategic investment in listing companies Acquisition of listing companies

1 Strategic Investment

Foreign investors may obtain the A share stock of the listed companies that have completed the share-trading reform and the newly listed companies after the share-trading reform through a scale of medium and long-term strategic merger Investment.
¨Measures for the Administration of Strategic Investment in Listed Companies by Foreign Investors〃 (December 31, 2005, hereinafter referred to as ¨Measures〃)

2Requirements on Investors:

(1) It is a foreign legal person or other organization that is established and operated according to law, with sound finance, good credit standing, and mature management experiences;

(2) Its total overseas paid-in capital shall be no less than USD 100 million or the total overseas paid-in capital under its management shall be no less than USD 500 million; or the total overseas paid-in capital of its overseas parent company is no less than USD 100 million or the total overseas paid-in capital under the management of its parent company shall be no less than USD 500 million;

(3) It has sound governance structure and sound internal control system, and criterions for management acts; and

(4) It (including its parent company) has no records of grave penalties by any regulatory institution both home and abroad within the past three years.

When the investors are subsidiaries of the foreign company

Any foreign company (parent company) meeting the Above requirements may make strategic investment through its wholly owned overseas subsidiaries (investors), the investors shall, apart from submitting the required documents, submit the letter of irrevocable commitment of the parent company on assuming joint and several liabilities for the investment acts of the investors to the Ministry of Commerce.

3Ways of Strategic Investment

Strategic investment in listed companies is a kind of share acquisition

Two Ways
Directional issuance of new shares
Transfer by agreement

A. Procedures for directional issuance

(1) Board of Directors and Shareholders meeting adopt resolutions;
(2) The listed company signs a directional issuance contract with the investor;
(3) The listed company submits the relevant application documents to the Ministry of Commerce and obtains the letter of principle reply of the Ministry of Commerce
(4) the listed company shall submit the application documents for directional issuance to China Securities Regulatory Commission (hereinafter referred to as the CSRC), and the CSRC shall grant approval according to law; and
(5) After completing the directional issuance, the listed company shall obtain the certificate of approval for foreign-funded enterprises at the Ministry of Commerce, and go through alteration registration at the administrative department of industry and commerce upon the certificate of approval.

B. Procedures for transfer by agreement

(1) Board of Directors and Shareholders meeting adopt resolutions;
(2) The listed company signs a directional issuance contract with the investor;
(3) The investor submits the relevant application documents to the Ministry of Commerce;
(4) go through the formalities for confirmation of share transfer at the securities exchange after it has obtained the aforesaid approval, and apply for going through registration and transfer formalities at the securities depository and clearing institution, and report to the CSRC for archival filing;
(5) After completing the transfer under an agreement, the listed company shall obtain the certificate of approval for foreign-funded enterprises at the Ministry of Commerce, and go through alteration registration at the administrative department of industry and commerce upon the certificate of approval.

4Requirements on Relevant Proportions of Shares

冹 The investment may be made by stages, but the proportion of shares obtained by it after completing initial investment shall be no lower than 10% of the shares having been issued by the company

冹 If after acquisition, the investors have actual control on the listed company, it shall submit the acquisition report and relevant documents to CSRC

冹 When the acquired share meets 30% or more, the investors shall place offers to all of the shareholders of the listed company to purchase their shares

5Limitations on Industries

For the industry for which there are clear provisions by any law or regulation on the proportion of shares held by a foreign investor, the proportion of shares of the aforesaid industries held by an investor shall comply with the relevant provisions; for any fields to which foreign investment is prohibited by any law or regulation, the investor shall not make investment in any listed company in the aforesaid field

6Limitations on transfer of the acquired shares of the listed companies

Shall not be transferred within three years
Shall not be transferred within the promised shareholding period

7Allowed sale and purchase of securities by foreign investors
(1) The A share stock of a listed company held by the investor for making strategic investment may be sold after the expiry of shareholding period in its promise;

(2) In case the investor purchases by offer in accordance with the relevant provisions of the Securities Law, it may purchase the shares sold by A share shareholders of the listed company within the period of the offer;

(3) The non-tradable shares held by the investor before the share-trading reform of a listed company may be sold after the share-trading reform is completed and the expiration of the time limit for sale prohibition;

¨Measures for Administration on Share-trading Reform of Listed Companies〃 provides that the sales of the original non-tradable shares of the listed companies after reform shall be in accordance of the following provisions:
(1) The aforesaid shares may not be listed for trading or be transferred within twelve months as of the day when the reform scheme is implemented; and

(2) The holders of original non-tradable shares holding 5% or more of the shares of a listed company that sell their original non-tradable shares through listing in a stock exchange after the time limit as prescribed in the preceding item expires may not sell 5% or more of the total shares of the company within twelve months and may not sell 10% or more of the total shares of the company within twenty-four months.

4. The shares held by the investor before the public issuance of a listed company for the first time may be sold after the expiry of the time limit for sale prohibition; and

5. Before the expiry of the share holding period as promised by an investor, if there is necessity to transfer its shares due to its bankruptcy, liquidation, or mortgage, or other special reasons, it may transfer its shares upon the approval of the Ministry of Commerce.

8Documents to be submitted

The listed companies or investors shall submit the following
documents to the Ministry of Commerce

1. Application Letter for Strategic Investment

2. Strategic Investment Scheme;

3. Directional issuance contract or share transfer agreement;
4. Opinions of a recommendation institution (in case of a directional issuance) or legal opinions;
5. The letter of commitment for holding shares incessantly by the investor;
6. Statements of the investor on its having no records of grave punishment by any regulatory institution both home and abroad within three years, and statements on whether it has any other record of non-grave penalties;
7. The registration certificate of the investor that has been notarized and certified according to law, and the identity certificate of the legal representative (or the authorized representative);
8. The statements of assets and liabilities of the investor in recent three years, which have been audited by a certified accountant

9Time limits on Completion of Strategic Investment

An investor shall start up its strategic investment act within 15 days from the date of settling the foreign exchange for the capital, and shall complete the strategic investment within 180 days from the day of principle reply.

Specific time schedule

冹 Due diligence, auditing and valuation: 30-60 days
冹 Negotiation and draft of share transfer agreement30-60 days
冹 Resolutions of Board of Directors and announcement15 days
冹 Sending notices, holding of shareholders meeting,  resolution an announcement45 days
冹 Signing on the agreement15 days
冹 Submitting for approval (Ministry of Commerce)15 days
冹 Principle reply30 days
冹 Opening an foreign exchange account and remittance of capital15 days
冹 Submitting the acquisition report and relevant documents to CSRC: 5 days
冹 Term for filing a demurral with CSRC15 days
冹 Confirmation and transfer of ownership10 days
冹 Issuance of approval certificate15 days
冹 Registration at the Administration of Industry and Commerce10 days

Part Three  New Investment Vehicles (II)
 Acquisition of Listed Companies

1 Limitations on investors
2 Financial Accountants
3 Measures of Acquisition
4 Special rules on acquisition of listed companies by foreign investors

The ¨Measures for the Administration of the Takeover of Listed Companies 〃 (hereinafter referred to as ¨Measures〃) promulgated by the CSRC on July 31, 2006 has a comprehensive provisions on the acquisition of listed companies, which applies to the acquisition of the companies listed on the domestic securities exchanges. The Measure shall also apply to the companies which are listed both in the mainland China and Hong Kong.

1Limitations on Investors

If it is under any of the following circumstances, a Listed company shall not be taken over:
(1) The purchaser owes a large amount of debts, and has not paid its due debts, and the said circumstance is in a continuous state;

(2) The purchaser has ever committed any major illegal act or has ever been suspected of being involved in any major illegal act within the recent three years;

(3) The purchaser has ever committed any serious credit-breaking act in the securities market within the recent three years;

(4) The purchaser, if being it is a natural person, is under any of the circumstances as prescribed in Article 147 of the Company Law; or

(5) Any other circumstance as prescribed by the laws or administrative regulations or as recognized by the CSRC under which no listed company can be taken over.

2Financial Accountants

The Measures requires the purchasers to engage financial accountants, who shall be liable for investigation of the capacity of the purchasers, purpose of acquisition, actual strength, creditability records, sources of capital and the abilities to perform contracts. It shall pay attention to whether there is misconducts during the acquisition. It shall give guidance on standardizing the operation of securities market, and continue to give guidance to purchasers within 12 months after the acquisition is completed, to prevent infringing the lawful rights and interests of the listed companies and medium and minority shareholders by the investors.

3Measures of Acquisition

The Measures allows the purchasers to adopt various measures to acquire the listed companies according to the number of shares, such as through securities exchange (namely secondary market), tender offer, acquisition by agreement, directional issuance, indirect acquisition, administrative distribution or transfer. These measures can be adopted independently, or in combination.

4Special rules on acquisition of listed companies by foreign investors

冹 In compliance with the requirements on state industrial policies and industrial access
冹 Approval by Ministry of Commerce
冹 Application of laws of China, and governed by the Chinese courts or arbitral institutions