Functions and Legal Basis of SASAC, the State Council May 19, 2005

1. SASAC Functions and Legal Basis of SASAC, the State CouncilMay 19, 2005

2. Outline: • Establishment of SASAC • Duties of SASAC • Legal basis for SASAC to fulfill its duties

3. Prominent issues in reform State-owned property right Clear ownership Definite rights and obligations Rigorous protection Smooth transfer Financer (representative) in place I Establishment of SASAC Basic path of reform Expanded autonomy in management Profits to be turned in are changed into tax Contract system Pilot project for joint stock system Switching mechanism and establishing system Establishing modern enterprise system

4. Basic systems Realization forms Strategic framework Corporate governance Opened and activated the 14th National Congress of CPC the Fourth Plenary Session of the 15th Central Committee of CPC the 16th National Congress of CPC the Second Plenary Session of the 16th Central Committee of CPC the Third Plenary Session of the 16th Central Committee of CPC Approaches for the reform of SOA and SOEs

5. Ideas for the reform of SOA system Under the precondition of sticking to the principle of being state-owned..., establishing a system for SOA administration in which the central government and local governments respectively represent the state to fulfill duties of the financer and enjoy the owner’s rights and benefits, rights, obligations and responsibilities are unified, and administration of assets, personnel and issues is combined. For large SOEs, infrastructure and critical natural resources etc. relating to lifelines of the national economy and national security, the central government will represent the state to fulfill duties of the financer. For other SOAs, local governments will represent the state to fulfill duties of the financer. The central government and provincial and municipal governments establish SOA administrative organs.

6. Establishment: According to the scheme for reform of organs under the State Council which was passed on 1st Conference of the 10th National Congress, the State-owned Assets Supervision and Administration Commission of the State Council (SASAC) was established in March 2003 and this is the first special organ under the State Council established by the central government since the foundation of PRC to represent the state to fulfill duties of the financer. Local SASACs are established in provincial (autonomous region or municipality directly under the central government) and municipal levels.

7. Nature: SASAC is an organ authorized by the State Council to fulfill duties of the financer. According to the principle that the function of public administration shall be separated from the function of the owner, SASAC is specially designed to assume the responsibility of supervising and administrating SOA. SASAC, neither a governmental administrative organ to provide public administration of enterprises in the society nor an ordinary enterprise or institution, is a special organ of ministerial level directly under the State Council.

8. New SOA system Gov. Enterprise’s SOA Special org. the State Council SASAC of the State Council Objective Provincial gov. Provincial SASAC Local gov. Local SASAC

9. Key indicators of central enterprises in 2004 • Total assets: RMB 0.919 trillion, up 12.3% from previous year • Net assets: RMB 0.395 trillion, up 11.8% from previous year • Owner’s equity: RMB 0.320 trillion, up 11.55% from previous year • Return rate of net assets: 8.9%, up 2.9% from previous year • Average return rate of total assets: 6.5%, up 1.5% from previous year

10. Sales income: RMB 0.55 trillion, up 25.8% from previous year • Profits realized: RBM 478.46 billion, up 57.6% from previous year • Taxes and duties turned in: RMB 428.56 billion, up 27% from previous year • All-personnel labor productivity: RMB 155,000/person-year, improved by RMB 31,000

11. II Duties of SASAC Economic adjustment Market supervision Social management Public service Right to earnings Critical decisions Selecting managers Government Financer In place Enterprise—profit

12. Fulfilling duties of the financer in the financed enterprise to maintain the owner’s rights and benefits in accordance with laws and administrative regulations such as Company Law etc.; Guiding and promoting the reform and restructuring of SOEs and state holding enterprises; Designating board of supervisors as stipulated; Appointing/dismissing and evaluating chief of the financed enterprise according to legal procedures and awarding or punishing the chief according to the result of evaluation; Supervising the maintenance or addition of SOA value by the enterprise by statistical and auditing means; Fulfilling other duties of the financer and handling other issues as specified by the government of equivalent level. In addition to duties said above, SASAC of the State Council can formulate regulations and systems for supervision and administration of the enterprise’s SOA. Duties: 1. The Second Plenary Session of the 16th Central Committee of CPC 6 functions 2. SASAC’s “3-fixes” scheme 6 functions 3. Regulation (No.378) 6 functions Article 13

13. Promoting reasonable circulation and optimized allocation of SOA and facilitating the adjustment of state-owned economy layout and structure; Maintaining and improving the control force and competitiveness of state-owned economies in sectors relating to lifelines of the national economy and national security to enhance overall quality of state-owned economies; Exploring effective systems and modes for the operation of the enterprise’s SOA, strengthening the supervision and administration of the enterprise’s SOA, promoting the maintenance of enterprise value and preventing the loss of SOA; Guiding and promoting SOEs and state holding enterprises to establish modern enterprise system, sophisticate the structure of governance by legal person and facilitate the modernization of administration; Respecting and maintaining the right of SOEs and state holding enterprises for autonomous management, maintaining their legal rights and benefits according to law, and promoting their legal operation and management; Providing SOEs and state holding enterprises with guidance and coordination to tackle difficulties and problems in reform and development. Obligations: Article 14 of the Regulation

14. III Legal basis for SASAC to fulfill its duties • Laws • Administrative regulations • Departmental rules • Regulatory documents

15. Laws: Company Law (1993, 1999) Enterprise Law (1988) Regulations: Interim Regulations on the Supervision and Administration of Enterprises’ State-owned Assets Overall: Currently there are totally 257 laws, administrative regulations, rules and regulatory documents relating to the supervision and administration of SOA. Key laws and regulations:

16. Rules and regulatory documents: • The Decree of SASAC No.1: Measures on Inventorying of Property and Auditing of Capital for SOEs • The Decree of SASAC No.2: Interim Measures on the Assessment of Operating Accomplishments by Chiefs of Central Enterprises • The Decree of SASAC No.3: Interim Measures on the Administration of Transference of Enterprise’s Property Right • The Decree of SASAC No.4: Measures on Accounting and Reporting of Enterprise’s SOA • The Decree of SASAC No.5: Measures on the Reporting and Administration of Financial Final Accounting for Central Enterprises • The Decree of SASAC No.6: Measures on the Administration of Legal Advisers of SOEs • The Decree of SASAC No.7: Interim Measures on the Administration of Economic Responsibilities of Central Enterprises

17. The Decree of SASAC No.8: Interim Measures on the Administration of Internal Auditing of Central Enterprises • The Decree of SASAC No.9: Interim Measures on the Confirmation of the Maintenance or Addition of the Value of Enterprise’s Government Capital • The Decree of SASAC No.10: Administrative Measures on the Planning of Development Strategy for Central Enterprises • The Decree of SASACNo.11: Interim Measures on the Administration of Legal Dispute for Central Enterprises • Guiding Opinions on the Normalization of Ownership Reform for SOEs • Opinions on Strengthening Party Construction Efforts in Central Enterprises • Interim Regulations on the Transference of Enterprise’s State-owned Property Right to the Management

18. Laws/regulations being drafted or revised: • State-owned Assets Law • Property Right Law • Company Law (revised) • Bankruptcy Law • Interim Measures on Boar of Supervisors of SOEs • Administrative Regulations on Budgeting, Operation and Management of Government Capital • Administrative Regulations on Authorized Operation of Central Enterprises

19. The principle of legally prescribed functions The principle of legislation in advance The principle of legal behaviors The principle of legal procedures The principle of unified rights and obligations The principle of supervision and check The principle of separated government and capital The principle of separated governmental function and enterprise management The principle of “3-unifications” The principle of “3-combinations” The principle of “2 separated powers” The principle of no direct intervention The principle of sophisticated system Principles for fulfillment of duties according to law

20. SASAC Thank You！ █