Background Information to ICBC Reform

ICBC restructuring is one major strategic decision made by Central Party and State Council, and another major move to fully implement the Directives of The sixteenth National Congress of CPC and the Third Plenary Session of Sixteenth Congress of CCP to further reform the banking sector. It is also an important milestone for ICBC to become a modern financial corporation. Appropriate decisions made by Central Party and State Council on ICBC restructuring is an indication that State is determined to launch banking reform, as well as their full confidence and high expectation on ICBC.

Restructuring is an ultimate change to ICBC, a new historic breakthrough, and a complex and high-standard system engineering as well. This is a reform "that cannot be afford to lose". All ICBC staff and party personnel will all wholeheartedly establish a modern financial corporation as the target. ICBC will shoulder this historic task with utmost responsibilities and dedication to open another new horizon.

I. Objective of the Reform
Objectives of ICBC restructuring are: Speed up the reform and convert operating mechanism focusing on complete modern equity system and modern corporate governance system in accordance with modern commercial banking requirements. Complete restructuring in 2005 and create conditions to seek for overseas listing opportunities. Establish a comprehensive modern financial corporate system. Ultimate aim is to transform ICBC into a large modern commercial bank with sufficient capital, strict internal control, safe operation, good service and well-efficient, main operating management index of medium-to-high standard met with international counterparts, and strong international competitiveness.

II. Basic Conditions for the Reform Are Ready
State support ICBC restructuring through rational utilization of resources. Conditions to start ICBC reform are ready now.

First, the whole country is now following the Directives of The sixteenth National Congress of CPC and Third Plenary Session of Sixteenth Congress of CCP to manage scientifically. Macro-control has received effective results. Growth of national economy remained robust. State financial income and foreign exchanges reserves continued significant increase. All of these offer a relaxed external environment and resources bases for ICBC reform.

Moreover, from ICBC itself, recent years of efforts have created a certain internal conditions for its reform: 1. Strong profitability, over RMB 220 billion of accumulative operating profits earned between 2000 and 2004. ICBC will have strong profitability potential in the next couple of years. 2. Assets quality continued to improve.

Net balance of ICBC non-performing assets is down over RMB 200 billion since 2000. Rate of non-performing loan decreased around 4 percentage points averagely per year. ICBC rate of non-performing loan is around 19% in 2004. Moreover, quality of newly-increased loan is good. Rate of non-performing loan after 1999 is only 1.

6%. 3. Rapid reorganization and downsizing have moved or combined 21000 offices and 200000 staff less. 4. Advanced management information system where an all-in-one business processing technology platform is in place. Data are consolidated to support a comprehensive e-banking product scheme. 5. Risk control and internal management are significantly improved.

Systematic risk circumvention strategy is instituted. A robust operating pattern has been laid.

III. Main Items of the Reform
According to the principle of "One Policy for One Bank" in state-owned bank reform, ICBC restructuring involved rational usage of national resources and proceed under State support and ICBC own efforts. ICBC existing financial resources should be reasonably allocated relative to ICBC real situation. Till end of 2004, RMB 124 billion among ICBC available financial resources (including owner rights and planned risk provisions advance) will be used as capital fund of Ministry of Finance. The rest are risk allocated reserve. Besides, State injected USD 15 billion (RMB 124 billion) through Central SAFE Investment Ltd. This let ICBC core capital stood at RMB 248 billion. State approved ICBC to use market operation to quickly dispose non-performing assets.

During the process of restructuring, ICBC will concentrate in the following 10 items of work. 1. Actively worked with concerned State Departments to build a modern corporate government framework including shareholders meetings, board of directors, council board and high-management team. Introduce independent director system and set up special committees under board of directors.

2. Formulate mid- and long-term development strategic Plan. 3. Institute a new operation performance appraisal system. 4. Restructure organization structure and business flow. 5. Complete comprehensive risk management and internal control scheme. 6. Establish discreet, standardized and transparent financial accounting system.

7. Complete capital management and operation mechanism. 8. Establish information disclosure and reporting system that met with capital market requirements. 9. Establish market-oriented human resources management system and incentive-restraint mechanism. 10. Further improve informatization of management.

ICBC contribute tremendously to national economy since inception 20 years ago. In recent years, under the aegis of state policy, ICBC has sharp improvement in operation through launching overall reform, strengthen the internal management and speed up the innovative development. This time of restructuring under the support of state policy will ultimately solve the historic problem that plagued ICBC steady operation and healthy development.

More important, through restructuring, equity system implementation and corporate governance structure reform, fundamental changes in management system and operation mechanism will soon fall into play and modern financial corporation system can thus be fully established.