Tang Shuangning

　　1. The State Council recently approved the reform plan of China Everbright Group, agreeing that China Everbright Group be restructured into China Everbright Financial Holding Group Company (China Everbright Group for short) and hold financial assets of the Group; Everbright Industrial Company be restructured into China Everbright Industrial Group Company and hold non-financial assets of the Group; and China Everbright Bank initiate a restructuring to improve corporate governance, introduce strategic investors and launch the IPO at proper time.

　　2. The incorporation of China Everbright Financial Holding Group Company implies the foundation of three categories of financial holding groups in China in the current period: the real financial holding groups such as China Everbright Financial Holding Group Company; the quasi financial holding groups such as CITIC Group and Ping An Insurance (Group) Company; and the sub-quasi financial holding groups such as investment banks, insurance companies, fund companies, trust companies and other non-banking financial companies incorporated by commercial banks at home or abroad in the form of joint venture or wholly-owned enterprise.

　　3. The incorporation of China Everbright Financial Holding Group Company is a landmark event in the comprehensive operation reform of China’s financial industry, it is a foreseeable scientific decision made by the state in light of the changes in international economic and financial situation and also a practical selection China’s financial industry adopts to fit into international financial competition and accelerate development. The license of financial holding group grants China Everbright Group the initiative rights of reform and innovation, and makes it a true pilot for the comprehensive operation of China’s financial industry.

　　4. As an effective organizational form, financial holding group is the inevitable choice of financial institutions’ comprehensive operation. Viewed from the development history of international financial industry, comprehensive operation is implemented by a majority of countries in most of the time, and is a widely-seen phenomenon in the development course of the financial industry; while separated operation is only a particular product occurring to certain period of some countries. Comprehensive operation used to prevail in the international financial market before 1929; the Glass-Steagall Act passed by the Congress of United States in 1933 fully denied the form of comprehensive operation and turned to the strict separation of commercial banking business and securities business; and in 1999, the US Congress abolished the Glass-Steagall Act and passed the Financial Services Modernization Act which allow the comprehensive operation form of financial holding groups. Nowadays, the form of comprehensive operation has been widely used in major economies outside China.

　　5. China used to practice the comprehensive operation system in the financial industry from mid 1980s to mid 1990s, and later transformed it to separated operation system with various reasons. However, the development tendency shows that comprehensive operation is the inevitable path to boost development of China’s financial industry, and is inherently accordant with the development requirements of China’s financial industry and the competition pressure from the international market after China’s entry to the WTO.

　　6. Seen from the practice of international financial industry, financial holding group has the unique advantages as a form of financial comprehensive operation:

　　(1) Firewall effect, the independent legal entity relationship between the financial holding group and the subsidiaries, particularly the form that the parent company assumes limited liability for debt liquidation and bankruptcy crisis of subsidiaries based on its contribution, can effectively eliminate the risk spread across the financial group in the institutional respect;

　　(2) Equity leverage effect (or capital enlargement effect), the parent company controls the subsidiaries by holding a certain proportion of shares in the latter, while the subsidiaries exercise control over the next-level subsidiaries by investment of their own capital, enlarging capital of the holding company and allowing it to control more assets and reap maximum return on limited capital;

　　(3) Synergetic effect, the financial holding group, as top executive of a comprehensive organizational structure, shoulders the responsibility of overseeing strategic decisions and long-term development plans rather than focusing on business operation, realizing the scientific responsibility division and cooperation as well as the ideal synergetic effect between the parent company and its subsidiaries on both the macro and micro basis in the present and in the long run;

　　(4) Reasonable tax evasion effect, subsidiaries of the Group may post profits or losses in the same year, therefore the profits can be offset with the losses on the consolidated statement, cutting down the expenditure on taxes.

　　Financial holding group also has its disadvantages:

　　1. Risks of internal connected transactions. The inevitable economic activities such as fund allocation, profit transfer and mutual guarantee among subsidiaries may cause chained effect of operation difficulties or crisis, extending the risks to other enterprises of a holding company.

　　2. Supervisory risks. The supervision over a financial holding group usually involves regulatory authorities of various sectors which differ largely in supervision objectives, means and focuses, therefore supervisory blind points or even absence of supervision always exist due to difficult coordination.

　　3. Interest conflicts. The financial holding group incorporated on modern corporate theory consists of shareholders, executives, employees and relevant stakeholders, where each party hopes to reap the maximum benefit according to the market distribution principle; therefore, the conflicts among interested parties arises in various forms, reducing the synergetic and complementary effect of the financial group.

　　7. At the preliminary stage of establishment, the form of financial holding group faces a number of restrictive factors in China, which hinders the development of financial holding groups.

　　(1) Implicit legal status of the financial holding group. Currently, financial holding groups of China remain at the stage of theoretical discussion and practical exploration, without governing law or clear judicial interpretations. As a special organizational form of business, financial holding groups are generally deemed as ordinary industrial and commercial businesses without the qualification as a financial enterprise; there exist no applicable legal systems except for the general stipulations in the Company Law; and basic issues such as definition, category, legal status of financial holding group remained elusive, restricting the development of financial holding groups.

　　(2) Imperfect corporate governance mechanism and internal control system. As an effective organizational form of financial enterprises, most overseas financial holding groups set up sound corporate governance mechanism and perfect internal system, to which China still has a long way to go.

　　(3) The mutual adaptation of capital control and organizational structure. The capital control system of financial holding groups shall adapt to the organizational structure of the company; efforts shall be made to prevent excessive intervention of the holding company into the operations management rights of subsidiaries, which may hinder the subsidiaries from exercising its functions as an independent legal entity; in the meantime, the excessive right expansion of subsidiaries shall also be curbed, in order to avoid the actual absence of capital control and restriction from the holding company and the damage to overall interests of the group.

　　8. The abovementioned issues to be addressed at the preliminary stage of financial holding companies calls for a pilot. China Everbright Group historically assumes the responsibility of being the “pilot”. According to the preliminary arrangement set down in light of the actual situation in China Everbright Group, China Everbright Financial Holding Group shall strive to build a “combined organizational structure” under which subsidiaries and business departments co-exist by highlighting the construction of China Everbright Bank, practicing the basis of subsidiary system and referring to the advantages of business departments of comprehensive operation banks, with an aim to giving full play to the firewall and equity leverage effects of a financial holding company and the smooth coordination and information sharing of a business department, so that the financial holding group may exercise its unique operational advantages as a new organizational form.

　　In light of the above considerations, China Everbright Financial Holding Group shall focus on the following three issues:

　　(1) Specify the strategic plan and functional position. Currently, the Financial Holding Group shall vigorously develop the commercial banking business and build China Everbright Bank into a foundation for the development and customer service of the whole Group; meanwhile, development strategies as well as the integration method and scale shall be set down for other subsidiaries including securities and insurance companies, in a bid to facilitating the future development of the whole financial group; the Group shall proactively promote the external expansion, and oversees the M&A activities, asset transfer events and changes to subsidiaries’ equity structure for the purpose of effective resource allocation. The internal resources shall be consolidated to boost resource sharing and form resultant forces; the centralized strategic planning platform, information exchange platform and internal supervision platform shall be established to accomplish the scale economy, scope economy and synergetic effect; and an effective firewall system shall be built to implement centralized and tier-based risk control and strengthen the vertical management on risk management and internal audit.

　　(2) Enhance the corporate governance mechanism. By restructuring and improving the corporate governance mechanism of the Group, we shall realize effective balance and check between the Shareholders’ General Meeting, the Board of Directors, the Board of Supervisors and the senior management, and highlight the importance of scientific decision-making and the improvement of operating results in order to boost the efficient and steady development of the Group at low risks. To achieve such an objective, we may design and apply the corporate governance structure flexibly. As tier-one legal entities, subsidiaries shall also enhance their corporate governance in strict compliance with the requirements of building a modern corporate system.

　　(3) Improve the corporate operations management. The Financial Holding Group shall practice a matrix management mode composed of tier-based management and vertical management, under which the subsidiaries may independently conduct operations and accounting as tier-one legal entities. The Financial Holding Group does not intervene into the subsidiaries’ daily operations, but is responsible for coordinating subsidiaries’ development strategies, appointing directors and nominating general managers for the subsidiaries, and overseeing other management issues including personnel, accounting, assessment, significant investments, internal audit, internal control, risk supervision and etc., in an effort to ensure the overall good performance of the group.