ASIAN DEVELOPMENT BANK PCR: PRC 30040

PROJECT COMPLETION REPORT

ON THE

CHINA EVERBRIGHT BANK(Loan 1477-PRC)

TO THE

PEOPLE'S REPUBLIC OF CHINA

October 2001

CURRENCY EQUIVALENTS

Currency Unit – Yuan (Y)

At Appraisal At Project Completion(November 1996) (June 2001)

Y1.00 = $0.1204 $0.1208$1.00 = Y8.3052 Y8.2767

ABBREVIATIONS

ADB – Asian Development BankBCBS – Basle Committee of Banking SupervisionBOD – board of directorsBOS – board of supervisionCAR – capital adequacy ratioCEB – China Everbright BankCEGL – China Everbright Group LimitedCEO – chief executive officerCIB – China Investment BankDER – debt/equity ratioDSCR – debt service coverage ratioEIRR – economic internal rate of returnFIRR – financial internal rate of returnIAS – International Accounting StandardsISR – interest spread ratioIT – information technologyLDR – loan-to-deposit ratioLLP – loan loss provisionMOF – Ministry of FinanceNAV – net asset valueNPA – nonperforming assetPBC – People's Bank of ChinaPCR – project completion reportPRC – People's Republic of ChinaROA – return on assetROE – return on equitySOE – state-owned enterpriseTA – technical assistanceWACC – weighted average cost of capital

NOTES

(i) The fiscal year of the Government ends on 31 December.(ii) In this report, "$" refers to US dollars.

CONTENTS

Page

BASIC DATA ii

I. BACKGROUND 1A. History 1B. Scope of Operations of CEB 1C. CEB’s Relationship with ADB and Other Lenders 2D. Rationale for the ADB Loan 2

II. IMPLEMENTATION 3A. Lending Policies 3B. Characteristics of Subloans 3C. Implementation and Internal Operations of Subprojects 4D. Operational Performance of CEB 5E. Financial Performance of CEB 8F. Financial Statements and Ratios 8G. Covenants 10H. ADB’s Performance 11

III. EVALUATION 11A. Loan Appraisal 11B. Implementation 12

IV. CONCLUSIONS AND RECOMMENDATIONS 12A. Conclusions 12B. Lessons Learned 13C. Recommendations 13

APPENDIXES 15

I. BACKGROUND

A. History

1. In November 1996, the Asian Development Bank (ADB) approved from its ordinarycapital resources a $60 million loan to the People's Republic of China (PRC) for relending toChina Everbright Bank (CEB)1 for on-lending to financially and economically viable subprojectsin various sectors.

2. CEB was established on 18 August 1992 as a wholly state-owned commercial bank withthe approval of the State Council and the People's Bank of China (PBC). CEB's soleshareholder at that time was the China Everbright Group Limited (CEGL), a wholly state-ownedenterprise (SOE) with the status of a ministry.2 CEB was established as a legal entity with a(i) financial business license granted by PBC, (ii) business license from the State Administrationof Industry and Commerce, and (iii) foreign exchange business license granted by the StateAdministration of Foreign Exchange. It is authorized to engage in full commercial bankingservices as stipulated in the Commercial Banking Law of July 1995. ADB became a shareholderin CEB on 11 November 1996 by acquiring 92,222,000 shares at Y1.80 each, amounting toY165,999,600 ($20 million) at the time ADB approved its loan to CEB.3 In August 1997, CEGLtransferred 560 million shares in CEB to China Everbright Limited (CEL), an affiliate company ofCEGL, listed on the Hong Kong Stock Exchange.

B. Scope of Operations of CEB

3. CEB's main operations include commercial lending, trade financing, foreign exchangetransactions, and corporate and private banking. The business scope of CEB as stated in itsArticles of Association approved by PBC in 1994 covers all commercial banking business, i.e.,(i) taking deposits in yuan and foreign currencies from firms and individuals; (ii) providing loansin yuan and foreign currencies particularly to the electronics, energy, and transportation sectors;(iii) accepting and/or discounting commercial papers; (iv) banking services for payments;settlements, and remittances in yuan and foreign currencies; (v) foreign exchange dealing;(vi) organizing and participating in loan syndications; (vii) providing export credits andguarantees; and (viii) consulting services, and credit information. In addition, CEB’s charterauthorizes it to engage in domestic and international financial leasing of aircraft. CEB's maincustomer profile comprises large and medium-size state and nonstate-owned enterprises withgood financial performance, listed companies with good financial track record, companiesengaged in the information technology (IT) sector, and PRC enterprises with foreign directinvestment.

4. CEB's charter does not permit the bank to make policy loans.4 Pursuant to theCommercial Banking Law, which became effective on 1 July 1995, CEB no longer engages intrust investment or stock market business. Nor does it invest in real estate (other than for its

1 The bank's name was changed from Everbright Bank of China (EBBC) to China Everbright Bank effective 1 January 2000.2 See para. 37 of the Report and Recommendation of the President (RRP) for the other activities of China Everbright

Group Limited (CEGL).3 This Project Completion Report (PCR) covers ADB's loan to China Everbright Bank. A separate PCR for the equity

investment will be prepared in 2002 by the PSG.4 Loans directed to certain sectors that the State Planning Commission deems are priority, and which commercial

banks were required to make.

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own use) or in nonbanking financial institutions. CEB has also since transferred its securitiestrading business to another affiliate.

5. Since much of CEB's funding was short-term in nature, CEB's lending was alsostructured to avoid maturity mismatches. ADB's loan provided CEB with long-term funds toincrease its foreign-exchange-denominated term lending for project finance. As a matter ofpolicy, CEB does not take exchange exposure risks on its normal lending operations.Accordingly, it has sought to match the currencies in its funding and lending operations. This ishighly prudent, as there is no swap market in the PRC. On 18 August 1999, CEB acquiredChina Investment Bank (CIB) from China Development Bank. This acquisition resulted in CEBassuming the majority of CIB's assets, liabilities, and domestic banking business and retailnetwork.5 By 13 June 2001, CEB had 30 branches and 298 banking offices in 36 citiesthroughout the PRC.6 Although the acquisition of CIB caused financial problems in the short run(para. 28), CEB has benefited from an increase in its domestic market share through bettersynergy and access to CIB's large customer deposit base.

C. CEB's Relationship with ADB and Other Lenders

6. CEB received a technical assistance (TA) grant from ADB for institutional capacitybuilding before the approval of this loan.7 CIB had received a loan from ADB in 1987,8 whichwas fully repaid by CIB to the Government prior to its acquisition by CEB and is no morereflected in CEB's financial statements. CIB had loans from the World Bank totaling $852 millionwhose repayment liability was assumed by the Government prior to CIB's acquisition by CEB(footnote 5 and para. 27). CEB assumed CIB's liabilities of $96.6 million from the latter'sparticipation in bilateral (government) and commercial lenders' project-related lines (Appendix1). CEB participated as a manager in six syndicated loans in which its initial exposure totaled$121.8 million (Appendix 2). CEB's local currency lending was funded by domestic deposits andby the purchase, discounting, and rediscounting of domestic banking instruments. CEB'sdomestic equity issues in 1996 and 2000 augmented the bank's local currency fundingsources.9

D. Rationale for the ADB Loan

7. Operationalizing the PRC's Commercial Banking Law and restructuring PRC'scommercial banks have required more effective competition within the banking sector, togetherwith individual banks' actions to (i) improve corporate governance, (ii) institute sound assetmanagement practices with better loan loss provisioning to build better portfolio quality, and(iii) improve operational and financial disclosures to stakeholders and regulators. The projectdesign sought to meet these requirements and enhance PRC's banking sector reforms. TheProject's objectives were to assist CEB in becoming a model commercial bank in the PRCfollowing international best practices. ADB's participation in CEB's equity was the first foreignequity investment in a domestic commercial bank and demonstrated ADB's support for PRC's

5 Certain assets and liabilities of China Investment Bank (CIB), however, were not transferred to CEB but taken over

by the Government (para. 27).6 This included CIB's 137 domestic banking offices.7 TA 2658-PRC: Capacity Building of the Everbright Bank of China, for $600,000, approved on 7 October 1996

and whose TCR was circulated on 17 May 2000.8 Loan 895-PRC: China Investment Bank, for $100 million, approved on 8 October 1987.9 The Asian Development Bank (ADB) participated in CEB's equity issue of 1996 for $20 million (para. 2)

and will consider participating in the bank's rights issue in 2001.

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banking sector reforms. These objectives were consistent with ADB’s country operationalstrategy for the PRC, which emphasized assistance to select financial institutions which had thepotential to be key change agents in the liberalizing economic environment.

II. IMPLEMENTATION

A. Lending Policies

8. CEB's credit and risk management policies (Appendix 3) were comprehensive at thetime of loan appraisal. They were further enhanced during implementation of the ADB project,with inputs from ADB's capacity building TA (footnote 7). During this period, in line with TACEB's credit departments both at the head office and in branches were modernized. Its creditpolicy and approval processes were strengthened and reflect the bank's determination toachieve efficient risk control and management. CEB's new credit policy manual (also developedwith support from the TA) consolidated in a single document CEB's credit policies andprocedures that were earlier available piecemeal in various documents including its operationsmanual. CEB's new credit policy also identified its sector and geographic operational niches toenable this bank to best realize its core competence. CEB's policy on risk concentration limits itsexposure to any single borrower or sector to 10 percent of its registered capital. CEB's potentialloans are categorized into different risk categories based on the borrowers' equity, collateral,and credit rating. Lending limits for the different risk categories have been established at thebranch level. CEB's credit procedures for appraising and approving loans are supported byadequate checks and balances. Credit decision making is delegated to the management by theboard of directors (BOD). CEB's chief executive officer (CEO) is authorized to veto any loanproposal approved by the head office or branch credit committees. The CEO, however, cannotoverride the objections of the head office or branch credit committee if they reject a loanproposal. CEB's new credit monitoring system evaluates credit analysis separate from customerrelations and marketing functions, thereby incorporating the recommendations of ADB's TA.CEB has instituted an early warning system to identify potentially problematic loans, along withmechanisms to address them. Loan write-offs can be recommended by the credit approvalcommittee at the head office to the BOD's loan examination and approval committee, whichalone is authorized to write off nonperforming loans. CEB's Special Loan AdministrationDepartment is responsible for undertaking legal steps for recovery of written-off loans. ADB isfully satisfied with the adequacy of CEB's new credit policy and procedures to safeguard thebank's assets.

B. Characteristics of Subloans

9. CEB approved 10 subloans totaling $60.0 million (Appendix 4) and utilized $58.9 millionthereof. The unutilized loan balance of $1.1 million was cancelled. Of the utilized amount of$58.9 million, loans amounting to $26.3 million (44.7 percent) were loans approved by ADBabove the free limit. Approved subloans were widely distributed by location, loan size, industry,and subborrower ownership. Sixty percent of subborrower clients were from the coastal andeastern provinces who utilized 55.5 percent of the ADB credit. Subborrowers in the interiorprovinces accounted for 44.5 percent of the credit and 40 percent of subloans by number. Overthree fourths of the credit line was used for developing the infrastructure sector. Of the totalloan, 50.9 percent was used for development of telecommunication projects, 19.1 percent forthe transport sector, 8.5 percent for the power sector, and the remaining 21.5 percent for themanufacturing sector.

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10. Of the total loan amount, 66.4 percent went to SOEs, 8.1 percent to joint ventures, and25.5 percent to fully foreign-owned shareholding companies in the PRC. The high share ofSOEs is attributable to the fact that the infrastructure sector including roads andtelecommunications is dominated by SOEs. In these sub-sectors, 64 percent of the subloanswent to expansion and another 19.1 percent to new construction. The balance was used tofinance the import of new capital equipment and for balancing and modernizing existinginvestments. CEB selected subprojects on the basis of their technical, environmental,commercial, financial, and economic feasibility.

11. At appraisal, it was envisaged that the loan would finance 10-15 agro-processing andindustrial subprojects in the poorer provinces of Sichuan and Jilin (para. 109 of the RRP). Whilesome industrial and infrastructure-related subprojects were financed in Sichuan, no subprojectswere financed in Jilin.

C. Implementation and Internal Operation of Subprojects

12. The Project Completion Report (PCR) Mission visited eight subprojects,10 whichrepresented 80 percent of the total number of subloans and 75 percent of the total loan amount.Subprojects selected covered every geographic region and economic subsector covered by theloan.

13. The financial performance of 9 of the 10 subprojects is highly satisfactory11 (Appendix 4).All nine subprojects had financial internal rates of return (FIRRs) higher than their weightedaverage costs of capital (WACC). The three subprojects requiring subloans above the free limithad economic internal rates of return (EIRR) of over 12 percent. The subborrowers of thesenine subprojects maintained a sound financial condition in terms of solvency and liquidity. Theirdebt equity ratios (DERs) did not exceed 80:20 and debt service coverage ratios (DSCRs) didnot fall below 1.0 between 1997 and 2000.

14. The subprojects were completed on time (except for the one referred to in footnote 11)and did not face major cost overruns. Seven of the nine subprojects had achieved over 90percent capacity utilization by 2001 (Appendix 4). All procurements financed under this loanwere made in accordance with ADB guidelines. The eight subprojects reviewed by the PCRMission were found to be environment-friendly and had many positive externalities. The SichuanVinylon Company was the first polymer factory in the PRC to use natural gas as its feedstock.This is an energy-efficient and environmentally clean technology with minimal greenhouse gaseffects. The Chongqing Highway Construction Company constructed a new corridor to a remoteinterior part of the province, thereby opening up new markets and social infrastructure facilitiesto the residents. The Highway helps increase rural incomes and reduce incidences of poverty inPRC's interior provinces. In particular, the Highway provides a fast thoroughfare for the SichuanVinylon factory to transport more than 60 percent of its raw material and over 90 percent of itsfinished products, which previously had to use waterways. The Highway has saved the factory

10 These were (i) Chongqing Highway Construction (Main), (ii) Chongqing Highway Construction (Supplementary),

(iii) Sichuan Vinylon, (iv) Shenzhen Kangtai Biological Products, (v) Hainan Sundiro Motorcycle Company,(vi) Sichuan Posts and Telecommunications, (vii) Fujian Pacific Electric Power Company, and (viii) HeilongjiangTelecommunication Company.

11 The 10th subproject Fujian Pacific Electric Power Company is not yet operational, and its principal and interestinstallments are not yet due to CEB for the subloan under this loan. The subloan of $5.00 million was fullydisbursed. The subborrower also received a loan of $40 million and equity investment of $10 million from ADB'sprivate sector window, i.e., Loan 1610-PRC: Fujian Electric Power Company, approved on 26 February 1998.

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both time and cost and improved its profitability. At subproject approval, subprojects met ADB'sand PRC's environmental regulations.

15. The subborrowers' subloan repayment track record is impressive. To date, there are noarrears of either principal or interest from any subborrowers. There has been no rescheduling ofloans either. As of 27 June 2001, total repayments by six subborrowers had amounted to $37.5million or 63.7 percent of the total loan amount (Appendix 5). Five of them had fully repaid theirsubloans. By 15 September 2001, another $5.6 million (comprising $0.6 million from onesubborrower and $5 million from another) was repaid, bringing total repayments to $43.1 million(73.1 percent of the loan amount). With these repayments, seven of the subborrowers have fullyrepaid their subloans.

D. Operational Performance of CEB

1. Organization, Management, and Staffing

a. Apex Management

16. CEB’s apex management authority is its 17-member board of supervision (BOS). Four ofits 17 members are representatives of CEB employees (Appendix 6). Two members (includingthe chairman) are nominated by CEB's principal shareholder CEGL. The 11 other members arefrom outside representative nominated by the Government. The BOS has substantiallydelegated CEB’s management and supervision functions to its 15-member BOD. The BOS'svice chairman is concurrently CEB's CEO. Five members of its BOD are from within the bankand others are outsiders. CEB’s BOD meets once a month and reports to the BOS. Directorsand supervisors from outside the organization help healthy corporate governance practices.

b. Corporate Governance

17. To strengthen its corporate governance standards, CEB constituted four committeeschaired by its four executive vice presidents and comprising members of its BOD to cover(i) asset-liability management, (ii) loan examination and approval, (iii) internal auditing, and(iv) performance appraisal. The operationalization of the asset-liability management committeebank-wide as well as at branch levels support strengthening of CEB’s financial and riskmanagement systems in preparation for PRC’s future financial deregulation. CEB’s loanexamination and approval committee approves all loan write-offs and oversees theimplementation of CEB’s credit policy. CEB’s internal audit committee ensures compliance withthe bank’s recently established internal checks and internal control guidelines. CEB’sperformance appraisal committee reviews staff performance and the efficacy of its remunerationand personnel administration policies. Committees of BOD reflect CEB's emphasis onmaximizing shareholder values. CEB benefited in this endeavor from ADB’s capacity buildingTA (footnote 7) and ADB’s representation on CEB’s BOD as a result of ADB’s equity investmentin CEB. The Mission recommended that CEB prepare a governance manual, similar to its creditmanual (para. 8), to formally consolidate its corporate governance practices in one document.

c. Internal Management

18. CEB’s CEO is assisted by four executive vice presidents, two assistant vice presidents,11 general managers, 11 vice general managers, and 11 assistant general managers. On13 June 2001, CEB had 15 head office departments and one Special Office for the preparationfor CEB’s subscription and listing.

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19. With inputs from ADB’s capacity-building TA (footnote 7), CEB reorganized its internalmanagement structure to place customers at the focal point of its operational strategy. Thefunctions of each head office department are set according to a product line, a customer line,and a management and supervision line. The corporate banking department was established toinvestigate customers’ needs and to offer assistance to branches and other departmentscatering to customers. The Head Office Banking Department, Corporate Banking Department,Private Banking Department, Retail Banking Department, and Branch network were givenresponsibility for designing and promoting new financial products. The Internal AuditDepartment, Special Loan Administration Department, and Credit Administration Departmentare functionally responsible for supervision and control of potential risks and offering necessarysupport to other business departments. The responsibility of each line function is defined so thatevery officer knows his/her specific responsibility. CEB’s head office requires its branches tohave similar structures at the branch level. Such an organization structure serves to deliverCEB's objectives more efficiently.

d. Integrated Accounting and Management Information System

20. In 1999, CEB introduced a bank-wide internal accounting and spreadsheet system,which covers reporting for accounting, credit, operational, and administrative functions. Forfurther economy and efficiency, CEB consolidated and centralized all its IT processing centersinto one during 2001. The interconnection between all its branches (including those of CIB) andthe head office was strengthened through the installation of fiber-optic lines and satellitecommunications, which in 2000 began replacing conventional forms of telecommunications.These new forms of technology are now operational in all areas: wholesale and retail banking,domestic conventional and electronic banking, and internal accounting. In 2000 a bank-widereal-time payments, clearing, and settlements system for yuan-denominated transactions wasoperational. Applications in these areas are being expanded with systems developed in-houseand with software packages purchased in the market. Improvement of IT infrastructure of CEBwill enable it to facilitate faster fund transfers on behalf of its clients and thus enable CEB tocompete effectively for prime clientele.

2. Personnel Administration

21. On 31 December 2000, CEB had 6,456 employees, 6,196 of whom were based inthe branches/banking offices and 260 in the head office. The dispersion of staff outside thehead office and the balance of its executive and nonexecutive cadres are appropriate to CEB’soperational requirements. Of CEB’s 6,456 staff, 14 hold the PhD, 407 have the master’sdegree, and another 4,311 have a bachelor’s degree. The remaining 1,724 staff have eithervocational or technical training. From CIB, CEB inherited many staff with educationalqualifications lower than those of CEB's own employees. CEB instituted in-house trainingprograms for the entire staff to cope with the challenge of acquisition of CIB and CEB'sincreasing market orientation. The programs are supervised by CEB’s personnel and educationdepartment and provide courses on trade finance, risk management, project appraisal andcredit administration, planning, and accounting. Some staff have been given higher levelspecialized training overseas (para. 22). ADB’s capacity-building TA assisted CEB in training inall these areas. The bank now hires staff with a minimum graduate qualification and usuallyunder the age of 40. The average age of CEB’s staff is 32. Further, in accordance with PBC’sdirectives, CEB has required that any officer at the executive level should have a minimum workexperience of four years in the financial sector.

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22. CEB’s personnel evaluation and remuneration system is progressive. Individual staff areevaluated by their superiors and their peers. They, in turn, are given an opportunity to evaluatetheir supervisors. Individuals are evaluated annually on their moral character, capacity, attitude,and achievements. Employees’ salaries and other emoluments are related to their performance.About 30 percent of the employees’ salaries are fixed and the balance is in the form ofperformance-related bonuses. This scheme provides better incentives for superior performance.Remuneration and promotion policies were based entirely on its staff track record in terms ofmerit. Nonperforming staff usually have their employment terminated. Compensation paid forsuch terminations is usually set out in their employment contracts. Staff who have excellentratings are given opportunities for further training outside the country. CEB’s personnel andremuneration policies are considered adequate to its needs.

3. Lending Operations

23. CEB processed 10 subloans for 10 subprojects involving 9 subborrowers between 1997and 1999. On average, CEB took about three months to process loans above the free limit, andabout three weeks to process loans below the free limit. The time taken for loan processing wasreasonable, given the rigor with which CEB analyzed subloan proposals before submitting themto ADB and the specificity with which CEB responded to ADB's queries. Loans above the freelimit required greater scrutiny and hence took longer processing time. The information CEBsubmitted to ADB on the subprojects' technical, commercial, financial, and economic aspectswas adequate for ADB's decision making. The average maturity of CEB's subloans at the timeof approval was 5.8 years. No subloan's maturity exceeded that of the loan. Repayments wereeffected on or before the due date (Appendix 5).

24. CEB established a Project Implementation Office in its Head Office InternationalDepartment to process subloan applications under the Loan. Offices were set up in branches tomonitor subloan disbursements, procurements, and repayment (of both principal and interestinstallments). Once the subloans were approved, CEB monitored the subborrowers, closelyfocusing on subloan recovery in line with general banking principles. It was noted that oncesubborrowers repaid their loans, many of them closed their accounts with CEB. Thereafter, itwas difficult for CEB to obtain complete information from its former subborrowers on thesubprojects' financial and other performance.

4. Other Operations

25. Taking advantage of its market niche, CEB has embarked consciously since 1996 onincreasing its earnings of fee-based income. The success of these efforts increased CEB's feeincome between 1996 and 2000 by an annual compounded rate of 14 percent. CEB's fee andcommission earning activities include (i) selling of insurance policies; (ii) acting as an agent forbond issues, payments, and redemptions; (iii) performing security transfers and custodialservices (on behalf of clients); (iv) preparing clients' payrolls; (v) issuing travelers' checks;(vi) foreign exchange trading on behalf of clients; (vii) offering safe deposit box facilities toclients; (viii) financial and investment consulting services to customers; (ix) offering credit cardfacility to customers; (x) carrying outstanding instructions for customers for payment of utilityand other bills; (xi) issuing domestic and international letters of credit and guarantees;(xii) arranging for electronic and other remittances (through negotiable instruments) both for

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CEB's own customers and its client's customers; (xiii) collecting and negotiating of domestic andforeign documentary and accommodation bills on clients; (xiv) forfaiting;12 and (xv) factoring.

E. Financial Performance of CEB

26. CEB’s nonperforming assets (NPAs) comprising its substandard, doubtful, and baddebts were 20.5 percent of its total loan portfolio in 1998, 41 percent in 1999, and 26 percent in2000. CEB’s loan loss provisions (LLPs) of 1 percent of total portfolio in 1998, 1.97 percent in1999, and 1.99 percent in 2000 were inadequate in relation to the bank’s NPAs. CEB advisedthe Mission that the Ministry of Finance (MOF) allows commercial banks the right to deductLLPs against taxable income to enable banks to maintain an LLP of 1 percent of their totaloutstanding loans. PBC issued guidelines on loan classification based on portfolio quality(Appendix 7). According to CEB, PBC, however, does not specify the exact level of LLP foreach category of loan quality. Subsequently, in the case of CEB, because of the specialcircumstances under which it acquired CIB, MOF in 2000 raised the permissible LLP on atax-deductible basis up to 2 percent of loans outstanding.

27. Pursuant to its acquisition of CIB, MOF assumed responsibility for repayment of the$852 million (Y7.07 billion) of CIB’s borrowings from the World Bank and the recovery ofpending subloans made therefrom. The removal of these loans from CEB’s balance sheet,along with a similar reduction in its external liabilities, helped improve CEB's financial conditionduring 2000. In addition, CEB recovered Y7.7 billion in CIB’s loans during 2000, which improvedthe quality of CEB’s assets. These measures together facilitated (i) a decline in CEB's NPAsfrom 41 percent in 1999 to 15 percent in 2000, and (ii) improvement of CEB’s capital adequacyratio (CAR) from 0.6 percent in 1999 to 6.6 in 2000.13

F. Financial Statements and Ratios

28. CEB assets grew from Y47.1 billion in 1996 to Y207.4 billion in 2000 at an annualcompounded growth rate of 44.9 percent. While its growth was modest up to 1999, it more thandoubled in 2000 with CEB's acquisition of CIB.14 CEB’s financial performance in 1997 and 1998was reasonably satisfactory. However, its 1999 and 2000 financial performance did notmeasure up to the expectations at loan appraisal in terms of solvency, profitability, liquidity andefficiency of financial intermediation. CEB’s financial performance based on those parametersdeteriorated sharply in 1999 as a consequence of its acquisition of CIB. This acquisitionconstituted a serious drag on CEB’s solvency, profitability, and efficiency. For instance, CEB’sequity was offset by the write-off of CIB’s nonperforming portfolio. CEB’s CAR declined from 17percent in 1997 to 0.6 percent in 1999 though it improved to 6.6 percent in 2000. The CARswere lower than those projected in the adverse case scenario at appraisal.15

29. CEB’s profitability, measured by its return on assets (ROA), declined from 1.9 percent in1996, to 0.2 percent in 1999 and in 2000. CEB’s return on equity (ROE) declined from 37.8

12 Forfaiting is a method of trade finance which allows exporters to obtain cash free of risks by selling their medium-

term receivables on a non-recourse basis. It is a flexible product that can be modified to suit the exporters'particular requirements enabling them to receive lump sum payment shortly after delivery of export documents totheir bankers.

13 The removal of Y4.85 billion worth of nonperforming assets from CEB’s balance sheet during 2000 freed the bank’scapital and reserves, which helped to improve its CAR.

14 Appendix 8 gives CEB's comparative financial statements.15 At appraisal, CEB’s capital adequacy ratio (CAR) for adverse case scenario was projected at 20.3 percent in 1996,

15.8 percent in 1997, 12.1 percent in 1998, 9.8 percent in 1999, and 8.2 percent in 2000.

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percent in 1996 to and 4.2 percent in 1999, but improved to 4.5 percent in 2000. 16 A covenantof the Project Agreement required CEB to maintain a minimum ROE of 12 percent. The sharpdecline in CEB's ROA and ROE is attributable to increased LLPs, mainly on CIB’s portfolio, andincreased intermediation costs. CEB’s intermediation cost ratio (ratio of non-interest expensesto average total assets) increased from 1.2 percent in 1996 to 1.6 percent in 1999 and thendeclined to 1.5 percent in 2000.17 The bank's intermediation costs did not decline significantlybecause the benefits of increased automation have not yet accrued. CEB’s interest rate spreadratio (ISR) (interest margin expressed as a percentage of funds employed) increased from 3.6percent in 1996 to 5 percent in 1998, and then declined to 3.2 percent in 2000. CEB’s declininginterest spread ratio reflects its reduced margin following reduction of domestic interest ratesduring 1999 and 2000 by PBC as part of its monetary policy.

30. CEB’s liquidity – measured by its loan-to-deposit ratio (LDR) – improved from 91.2percent in 1996 to 68.6 percent in 2000. CEB’s high liquidity, which fully met the covenants ofthe Project Agreement, reflects the bank’s ability to continue attracting deposits. Total depositsincreased from Y28 billion in 1996 to Y134 billion in 2000, growing at a rate of 49.2 percent.This demonstrates the PRC domestic market’s confidence in CEB as a financial institution.

31. CEB applied for a rating from Moodys in 2000 and obtained an E+ rating for financialstrength and a Ba1 rating for long-term deposits. These ratings apply to nonprime financialinstitutions and their debt. The E+ rating implies that CEB has a weak intrinsic financial strengthand operates in an environment of regulatory and accounting standards that are less rigorousthan in G-7 countries (United States, Canada, Great Britain, France, Germany, Italy, andJapan). CEB submitted itself for such rating when its financial condition deterioratedimmediately after its takeover of CIB. Moodys granted CEB an E+ rating instead of mere Ebecause the rating agency recognizes that CEB has strong government support.

32. CEB has taken some measures to address its weak financial condition after acquisitionof CIB. In 2000, it raised new equity issue of Y1.7 billion that was fully paid and is now planningto seek another (new) rights equity issue for about Y4.5 billion. Through a board resolution, CEBplans to voluntarily set aside a greater volume of its profits into reserves (by way ofappropriation) for loan losses on a one-time basis, even if such setoffs are not tax-deductible.CEB’s fresh equity issue will provide the bank with the necessary cushion for such provisioning.

33. During 2000, CEB issued 1,652,101,888 ordinary shares of par value of Y1 each at theprice of Y1.90 per share (at a premium of Y0.90 per share). These shares were fully subscribedand paid for in cash by CEGL and some other shareholders.19 After this issue, CEB had5,964,101,888 shares. The net asset value (NAV) per share on 31 December 2000 wasY2.11.20 This compares favorably with ADB’s share acquisition price of Y1.80 per share in

16 Ratios for 1998, 1999 and 2000 were calculated from CEB’s financial statements cast according to International

Accounting Standards. If PRC accounting standards were used for these years, CEB’s ROA would have been 1.3percent in 1998, 0.56 percent in 1999, and 0.32 percent in 2000. Its ROE would have been 15.1 percent in 1998,8.85 percent in 1999, and 5.49 percent in 2000.

17 At appraisal (even in the adverse case scenario), it was assumed that CEB’s transaction costs would decline withbetter automation and improved banking practices and so would its intermediation cost ratio as a consequence.

18 Bank of China, CEB, Bank of Communications, and China Merchants Bank got themselves rated by Moodys in2000. Bank of China and China Merchants Bank obtained an E+ rating while Bank of Communications received aD rating.

19 ADB and China Everbright Limited (the Hong Kong listed company that acquired 560 million shares in CEB fromCEGL) did not participate in this increased subscription.

20 It was estimated at appraisal that CEB’s net asset value (NAV) in 2000 could range between Y1.96, in the adversecase scenario to Y2.66 in the favorable case scenario (Appendix 10 of RRP).

10

October 1996. If ADB were to exercise its put option (paras. 100-102 of RRP) by selling itsshareholdings in CEB to other CEB shareholders, at a premium of 22.5 percent over the NAV ofCEB's shares on 31 December 2000, ADB would earn a financial internal rate of return (FIRR)of 20 percent on its equity investment in dollar terms (see Appendix 9). CEB’s earnings pershare in 2000 was Y0.16, which was lower than that projected at appraisal21 because of lowerprofitability divided over a larger number of shares than envisaged at appraisal.

G. Covenants

34. CEB complied with most of the covenants of the Loan and Project Agreements(Appendix 10). In accordance with Sec 3.08 (a) of the Project Agreement, CEB furnished ADBwith its audited financial statements within 120 days of the conclusion of each financial year.CEB also provided ADB with a parallel set of audited financial statements in accordance withIAS for its 1998, 1999, and 2000.22 CEB did not fully comply with Section 3.12 of Article III of theProject Agreement, which required a minimum ROE of 12 percent.23 By acquiring CIB withoutthe prior concurrence of ADB, CEB violated Section 3.09 (c) of Article III of the ProjectAgreement. Noncompliance with the latter covenant reduced CEB's profitability, and resulted inits inability to comply with the former. This noncompliance will not threaten CEB's viability orsolvency nor the Project's sustainability if CEB is able to raise new equity in its proposed rightsissue (para. 32). CEB also did not comply with the requirements of Sec. 3.07 (b) of the ProjectAgreement regarding submission of half-yearly reports to ADB. CEB complied fully with Section3.14 in Article III of the Project Agreement, which required CEB to maintain an LDR of less than100 percent. Section 2.02 of the Project Agreement required CEB to refer any subloan abovethe free limit of $5 million to ADB for prior approval; any subloan of less than $5 million could beapproved by CEB and returned to ADB for confirmation. As a matter of caution, CEB referredevery subloan (including those below the free limit) to ADB for prior approval. Every subprojectapproved by ADB had adequate local currency working capital and met the requirements ofSection 3.04 of Article III of the Project Agreement.

H. ADB's Performance

35. ADB played an active role in project implementation. Subprojects referred to ADB byCEB were rigorously analyzed for technical, environmental, commercial, financial, andeconomic viability. ADB approved subprojects when their FIRR exceeded their WACC. ADBapproved subloans above the free limit when their economic internal rates of return (EIRR)exceeded 12 percent, in addition to the condition of financial viability. The subborrowers'financial condition based on their solvency, liquidity, and profitability was also thoroughlyscrutinized before the subloans were approved. The subborrowers' projected DSCR (reflectingtheir ability to service their debt repayments), ROA, and long-term DER were reviewed and onlyif these parameters appeared safe were subloans approved, although there were no specificcovenants in the Project Agreement for subproject eligibility. Subloan commitments weregenerally effected on schedule. Only one extension of five months of a subloan commitmentperiod was necessary. There was no disagreement between ADB and CEB on the approval of

21 At appraisal, CEB’s earnings per share for 2000 was estimated to range between 0.28 in the adverse case

scenario to 0.76 in the favorable case scenario.22 The covenant in Sec. 3.08 (a) of the Project Agreement, however, required CEB to furnish ADB with its unaudited

accounts cast according to IAS. CEB's delivery of audited financial statements using IAS exceeded the minimalrequirements of the Project Agreement on this count.

23 CEB's return on equity (ROE) slipped to 4.2 percent by IAS (8.9 percent by PRC accounting standards) in 1999and to 4.5 percent (5.5 percent by PRC accounting standards) in 2000 (para. 30).

11

subloans. CEB responded promptly to ADB's queries. All procurement undertaken for thesubprojects followed ADB's Guidelines.

36. ADB's supervision and loan administration were satisfactory. ADB fielded a LoanInception Mission in 1997, which explained in detail ADB's loan approval mechanism. CEB'scomprehensive subloan applications indicated its thorough understanding of ADB's procedures.A Loan Review Mission was fielded in January 1999. No further review missions were fieldeduntil the PCR Mission, since no issues required the attention of ADB staff in the field. CEB'sannual audited financial statements were rigorously analyzed in ADB and comments sent toCEB. ADB was not consulted by CEB prior to the latter's decision to take over CIB in March1999. As it was a major decision, which impinged on CEB's profitability and solvency, ADBcould have engaged the Government in a proactive policy dialogue on the merits of mergingCIB with CEB.

III. EVALUATION

A. Loan Appraisal

1. Distribution of Subloans

37. There were no specific covenants in either the Loan Agreement or Project Agreementrelating to the distribution of subloans by industry or location. CEB achieved adequate sectoraland geographic diversification of its subloans (para. 9). None of the agroprocessing andindustrial projects envisaged to be financed under this loan at appraisal (para. 11) were actuallyapproved. This is mainly because they did not meet the criteria of subproject selection, i.e.(i) technical, environmental, commercial, financial, and economic viability of subprojects; and(ii) solvency, profitability, and liquidity of the subborrowers. Geographic location was not themain criterion for selecting subprojects even though the interior provinces accounted for a fairshare of the credit made available (para. 9). Over three fourths of the loan financedinfrastructure which were financially viable. The balance of the loan went to manufacturing andbiotechnology industries using energy-efficient and environment-friendly sustainable technologywhich were also financially viable (paras. 13 and 14). All the subloans are being repaid on orahead of schedule (with no arrears for either principal or interest), which indicates a highsuccess rate for the subprojects and availability of efficient cost recovery mechanism (para. 15).These parameters are beneficial to PRC's long-term sustainable economic growth.

2. Covenants

38. ADB established financial covenants for CEB in terms of solvency, profitability, andliquidity. To ensure CEB's solvency, Section 3.13 of Article III of the Project Agreement requiredCEB to maintain a CAR of not less than 8 percent, calculated according to the formula of theBasle Committee of Banking Supervision (BCBS), from January 2001. Thus, although CEB'sCAR declined sharply after its takeover of CIB, from 15.1 percent in 1998 to 0.6 percent in 1999before recovering to 6.6 percent in 2000 CEB did not yet technically violate this covenant. Inretrospect, if ADB made this provision mandatory from 1997 or 1998 instead of from 2001 –giving ADB power to suspend loan withdrawals (while the loan was still active) – it could haveprovided some leverage to ADB on the issue of CEB's acquisition of CIB, which impinged onCEB's financial position. Although there were no covenants in the Project Agreement regardingeligibility criteria for subprojects' selection, ADB and CEB were in agreement on prudentialviability measures for subprojects and financial standards for subborrowers.

12

3. Quality of Appraisal

39. The Project's formulation and the quality were generally satisfactory. The Projectobjectives were to (i) assist CEB in becoming a model commercial bank following bestpractices; and (ii) expedite further liberalization of PRC's financial sector with ADB making thefirst foreign equity investment in a domestic bank. The financial covenants prescribed by ADBfor CEB were adequate benchmarks to measure CEB's progress in meeting these objectives.ADB's equity investment was intended to set the stage for similar investments by other potentialforeign investors. It was envisaged that, with the adoption of best practices in risk and liquiditymanagement, coupled with access to long-term funds for onlending for project finance, CEBwould prepare itself for credit rating by an international credit rating agency (paras. 85-86 ofRRP). The inputs of ADB's capacity-building TA (footnote 7) facilitated CEB's adoption of bestpractices in risk and liquidity management. CEB was in fact rated by Moodys (para. 31). CEB'sCAR of 9.5 percent in 1995 was adequate. In retrospect, ADB could have required CEB'simmediate and continuous compliance with all the financial covenants instead of providing CEBtime until 2001 to reach an 8 percent CAR (para. 39).

B. Implementation

40. CEB's implementation of the Project was generally satisfactory. Subloans werecommitted and disbursed promptly.24 Nine of the 10 subprojects were technically,environmentally, commercially, and financially viable. CEB's subloan processing was thoroughand rigorous, which reflected a very impressive subloan recovery track record. CEB's post-disbursement subloan monitoring, however, concentrated mainly on subloan recovery and noton the other parameters for measuring development impact. As a result, the PCR Mission haddifficulties in obtaining such development impact data for the subprojects and subborrowers.

IV. CONCLUSIONS AND RECOMMENDATIONS

A. Conclusions

41. Overall, the Project is considered successful using OED guidelines cited in theGuidelines for the Preparation of Project Performance Audit Reports (PPAR) as it had asignificant development impact and loan was implemented on schedule. ADB's loan served tomeet the long-term foreign exchange funding of subprojects and helped CEB diversify into termlending to finance such projects. Over three fourths of the loan financed infrastructure includinga new highway in remote and hitherto inaccessible interior areas in the western part of thecountry. This highway is a vital corridor for transporting produce from farms to market andthereby assists in reducing poverty in remote and interior provinces. The loan also financedsubprojects that were energy-efficient and environment-friendly. Nine of the 10 subprojects aresuccessful, with FIRRs greater than their WACCs. The three subprojects above the free limithad EIRRs over 12 percent. By 15 September 2001, 73 percent of the subloans had been fullyrecovered. There were no arrears of either principal or interest on the subloans.

42. The Project was successful in introducing international best practices to CEB,particularly in credit appraisal and post-disbursement loan management and corporategovernance. This is evidenced by the rigorous analysis of subprojects that helped finance goodquality of subloans and timely recovery of loans by CEB under the Project. CEB's credit

24 The loan was fully committed by 13 July 1999. (The loan's original closing date was 17 February 1999 and one

extension was allowed.)

13

appraisal, risk management, and corporate governance standards improved significantly withinputs from ADB's capacity-building TA (footnote 7). Based on the experience of ADB's equityinvestment in CEB, the PRC Government has allowed foreign investment in other domesticbanks, thereby helping in financial liberalization. Despite CEB's weakened financialperformance in 1999 as a consequence of its acquisition of CIB, the NAV of its shares on31 December 2000 was still higher than ADB's acquisition price.

B. Lessons Learned

43. Four important lessons emerged from this loan.

(i) Capacity building is necessary for financial institutions selected for ADB'sintermediation loans to ensure (a) sound credit and risk management policies,and (b) transparency in corporate governance and financial disclosures.

(ii) Rigorous analysis, supervision, and monitoring of subloan proposals andsubproject operations are necessary to ensure efficient subloan recovery andachievement of development objectives at the subproject level.

(iii) Commercial banks in the PRC participating as financial intermediaries areprimarily concerned about subloan recoveries. Subborrowers also tend toconcentrate primarily on loan repayment.

(iv) Prudential financial covenants should be made mandatory from the date of loaneffectiveness, thereby providing ADB some leverage in policy dialogue.

C. Recommendations

44. Based on the lessons, the PCR Mission has these recommendations:

1. Project Specific

(i) ADB's experience should be actively transcended into policy dialogues withrelevant government authorities. The major areas in the banking and financialsector that may warrant continuous dialogue could include (i) better recognitionof as well as improved provisioning policies and practices pertaining to NPAs ofshareholding banks, (ii) improved corporate governance and supervision,(iii) better disclosure to shareholders and depositors of material events, and(iv) improved operational and risk management capabilities in the face of fastexpanding economy and credit creation as well as increased competition in thefinancial sector.

(ii) The envisaged improvement in financial performance of CEB should bemonitored both by Government and ADB. Extension of a future credit line to CEBshould be conditional on an effective strengthening of CEB's balance sheet.

(iii) CEB may be advised to prepare a Governance manual formally highlighting itscorporate governance practices developed under ADB's capacity-building TA.

(iv) The PCR Mission recommends that the PPAR for this project be carried out in2003.

14

2. General

(i) In future loans to financial institutions, the prudential financial covenants shouldbe made mandatory before the loan is fully disbursed, to provide ADB someleverage in policy dialogue.

(ii) When TAs are provided to financial institutions to strengthen capacity [cited inpara. 43 (i)], they should have their terms of references extended to includebenefit monitoring of development impact to enable easier access to suchinformation at the time of the PCRs.

15

APPENDIXES

Number Title Page Cited on(page, para.)

1 Syndicated Loans to China Investment Bank fromOther Lenders

16 2, 6

2 Participation by China Everbright Bank (CEB) inSyndicated Loans

17 2, 6

3 China Everbright Bank's Credit Policy 18 3, 8

4 Subprojects' Distribution and Performance 21 3, 9

5 Subborrowers' Repayment 25 5, 15

6 China Everbright Organization Chart 26 5, 16

7 People's Bank of China's Classification of Banks'Loan Portfolios

27 8, 26

8 Financial Statements 29 8, 28

9 Financial Internal Rate of Return on ADB's EquityInvestment in China Everbright Bank

34 9, 33

10 Compliance with Covenants of Loan andProject Agreement

35 10, 34

Name of Project Name of Lender Amount of Loan Amount in Date of Purpose$ Approval

CIB1 Kreditanstalt fur Wiederaufbau (KfW) DEM27,000,000.00 15,561,959.65 22-Jan-91 Industrial ProjectCIB2 Kreditanstalt fur Wiederaufbau (KfW) DEM25,000,000.00 14,366,164.81 11-Oct-93 Industrial ProjectCIB3 Kreditanstalt fur Wiederaufbau (KfW) DEM6,885,000.00 4,179,059.18 28-Jan-97 Industrial Project

Den Danske Bank Aktieselskab $30,000,000.00 30,000,000.00 01-Jul-94 Industrial Project

Bank Austria AG S89,206,000.00 7,710,112.36 23-Dec-94 Industrial ProjectBank Austria AG S30,000,000.00 2,592,912.70 18-Apr-95 Industrial ProjectBank Austria AG S30,000,000.00 2,592,912.70 01-Aug-95 Industrial Project

Bank Hapoalim B. M. Israel $19,550,000.00 19,550,000.00 29-May-95 Medical ProjectTotal 96,553,121.40

CIB = China Investment Bank.Souce : China Everbright Bank.

SYNDICATED LOANS TO CHINA INVESTMENT BANK FROM OTHER LENDERS16

Appendix 1

Name of Project CEB's Amount of Outstanding Other Lenders Loan Loan MaturityParticipation in Amount Commencement

($) in ($)

White Autumn Leasing Company 10,000,000 4,350,000 Indosuez Finance 24-Feb-93 24-Feb-05(for aircraft leasing to Air China) (HK) Ltd.

China Construction Bank, Beijing

China Southwest Airlines 5,000,000 1,800,000 Minsheng Bank/ 01-Mar-93 01-Mar-03(aircraft leasing) Huaxia Bank, Xianan

New Century International 15,000,000 7,500,000 HSBC, Hong Kong 09-Dec-98 10-Jul-02Leasing Company China Construction Bank,(instrument for Shangdong BeijingProvincial Telecommunication Authority)

Heilongjiang Provincial 30,000,000 6,000,000 Mingsheng Bank, Beijing 06-Aug-98 06-Aug-01Telecommunication Agricultural Bank of China,Authority Beijing

Fujian Pacific Electronic 10,000,000 7,998,900 BNP-Paribas, Hong Kong 11-May-98 10-May-10Company (Mei Zhou Wan China Construction Bank,Power Plant) Beijing

Hainan Yangpu Land 51,750,000 51,750,000 Bank of China, Beijing 20-Nov-98 30-Nov-03Development Company China Communication Bank,

BeijingCitic Bank, Beijing

Total 121,750,000 79,398,900Souce: China Everbright Bank

PARTICIPATION BY CHINA EVERBRIGHT BANK (CEB) IN SYNDICATED LOANS

17A

ppendix 2

18

Appendix 3, page 1

CHINA EVERBRIGHT BANK'S CREDIT POLICY

1. CEB's credit and risk management policies were comprehensive at the time of loanappraisal (paras. 48-53, Appendixes 3, 4, and Supplementary Appendix A of RRP). They weresignificantly enhanced during CEB's reorganization, concurrent with its implementation of theAsian Development Bank (ADB) loan.

2. In its reorganization and pursuant to the recommendations of ADB's capacity buildingTA, CEB revamped its credit department both at the head office and branch levels to improveportfolio quality, credit procedures, and an overall system of checks and balances. In thisprocess, responsibility for credit decisions at CEB's head office was transferred to its newlycreated head office banking department.

3. CEB's new credit policy has distinct geographic and sector focuses: energy saving andenvironmental-friendly projects are CEB's new targets. Within these parameters, CEB's subsetof preferred lending is to ventures engaged in telecommunications, surface infrastructure,electricity generation, and aircraft leasing. CEB's credit policy prefers lending to borrowers incoastal areas and in the Yangtze delta. These areas are considered to be within CEB's corecompetence for optimum operational results and have identified CEB's operating niche. UnderCEB's new credit policy, loans to industries that are energy intensive and polluting are notencouraged.

4. With inputs from ADB's capacity building TA, CEB developed a new credit policymanual, which consolidated and concentrated its credit policies that were earlier scatteredthroughout its operations manual. The manual helped contribute to improved uniformity,transparency, and efficiency of its operating procedures. The quality of CEB’s credit analysisimproved with the adoption of cash flow analysis of project lending tested with sensitivityanalysis. To put its credit policy into practice, CEB adopted an integrated credit approval andauthorization system for domestic and foreign currency lending. Uniform rules for appraisal andvaluation of collateral were introduced.

5. In accordance with People's Bank of China's (PBC's) regulations on risk concentration,CEB's exposure to any single borrower is limited to 10 percent of the bank's registered capital.As a mark of further prudence, CEB has also limited its loans to any single subsector at 10percent of its registered capital. CEB undertakes rigorous credit analysis of its potentialborrowers prior to loan approval. The approval process is, however, moderately decentralized.CEB's potential loans are categorized into different quantitative risk categories based on (i) theborrowers' equity, (ii) value of collateral, and (iii) credit rating of the company. Differential limitshave been set at the branch level for lending units based on a potential loan's risk as shown inTable A3. These limits apply to both local and foreign currency lending. The branch creditcommittee's approval powers are inversely proportionate to the perceived risk of a loan.

19

Appendix 3, page 2

Table A3: CEB's Risk Coefficient Level and Lending Limits

Category RiskCoefficient

Lending Limit

A 0-0.19 Y500 million B 0.2-0.29 Y120 million C 0.3-0.39 Y80 million D 0.4-0.49 Y60 million E 0.5 and above Branch has to seek approval from

the head office credit committee.

6. At the branch level, every loan proposal has to pass through four departments prior toapproval. In the first stage, an account manager scrutinizes every loan application. For thispurpose, the account manager is required to examine the applicants' (i) business license,(ii) three years' financial statements, and (iii) documents relating to the clients' credit rating. Afterreviewing the application in conjunction with these documents, the account manager writes apreliminary credit report, specifically stating whether the documents are adequate. This report ispresented to the 7-member credit examination team.

7. The credit examination team scrutinizes, investigates, and evaluates the authenticity ofthe documents submitted and the value of the collateral. The team usually comprises credit andlegal department staff at the branch level. Based on its examination of the documents, the teamsubmits its credit report to the branch level credit approval committee.

8. The branch level credit approval committee is the final deciding authority at the branchlevel for credit decisions within the limits stated in Table A3. The committee usually meets oncea week and has a minimum of seven members drawn from the branch's Credit Department,Accounting Department, Auditing Department, and International Department.1 At least 80percent of the members of the committee must give their assent to a loan proposal before theloan is approved.

9. Credit decisions at the head office follow a similar procedure. The head office bankingdepartment initiates any credit proposal at the head office level. The head office creditcommittee comprises members from its credit, auditing, accounting, and internationaldepartments.

10. As a further measure of internal control, CEB's chief executive officer (CEO) isauthorized to veto any loan proposal approved by its branch or head office credit approvalcommittees. The CEO, however, is not authorized to reactivate and approve any loan proposalrejected by the head office or branch credit approval committees. All of CEB's credit decisionsare made by its management and do not go to its board of directors for approval.

11. Most importantly, CEB’s new credit policy and monitoring system separated creditanalysis from customer relations and marketing functions. This separation provided thenecessary checks and balances in the bank's management and operations. This distinctionstreamlined specific responsibilities for account managers and loan examiners, and helped

1 See organization chart in Appendix 6.

20

Appendix 3, page 3

mitigate the overall credit risk. It also helped in more objective staff performance appraisal. Thebank simultaneously instituted a risk-management system to provide early warning signals

about potentially problematic loans along with mechanisms to address them expeditiously. CEBeffectively implemented the TA’s recommendations, which specifically addressed CEB’s needsto substantially improve its credit monitoring mechanisms (para. 54 of RRP). These include thegeneration of reports at both the head office and branch levels analyzing CEB’s portfolio byquality, age, sector, borrower concentration, and geographic distribution.2

12. Simultaneous to the release of its credit policy manual, CEB formulated a new policygoverning the organization and management of problem loans. This policy addresses loanrecovery strategies and workout procedures and approaches. The policy defined the requiredqualifications of specialists designated to resolve problem loans and introduced initiatives toencourage staff to recover problem loans.

13. CEB's credit approval committees at the branches are authorized to reschedule loans upto the limit of the loan size approved (para. 8). Any rescheduling of a higher limit will require theauthorization of the head office credit committee. CEB's rescheduling processes are similar toits credit approval processes (paras. 6-8).

14. CEB's new credit policy clearly defines the bank's policy and procedures for loan write-offs. Under this policy, a loan qualifies for write-off only if it is overdue for more than a year. Thebranch credit approval committee can recommend the write-off to a specially convened workinggroup in the head office comprising representatives from the accounts department, special loanadministration department, and credit management department. This working group at the headoffice may in turn submit a proposal to the board of director's loan examination and approvalcommittee, which alone may authorize the write-off of any loan regardless of amount. CEB'sSpecial Loan Administration Department is responsible for undertaking legal steps for recoveryof written-off loans.

2 CEB advised the Mission that loan reports specifying geographic and distribution analyses of CEB’s lending

operations were generated from 2000 onward.

Appendix 4, page 1

Distribution Number % Amount %

$ million

Region

Coastal and Eastern 6 60 32.68 55.5

Middle and Western 4 40 26.23 44.5

Total 10 100 58.91 100.0

Enterprise

State-Owned 7 70 39.12 66.4

Joint Venture 1 10 4.80 8.1

Foreign-Owned 2 20 14.99 25.4

Total 10 100 58.91 100.0

Sector

Telecommunication 4 40 29.98 50.9

Industry 3 30 12.66 21.5

Infrastructure 2 20 11.28 19.1

Energy 1 10 4.99 8.5

Total 10 100 58.91 100.0

Project Character

New 4 40 21.22 36.0

Expansion 5 50 34.78 59.0

Revamp 1 10 2.91 4.9

Total 10 100 58.91 100.0

Table A4.1: DISTRIBUTION OF SUBLOANS

SUBPROJECTS' DISTRIBUTION AND PERFORMANCE

21

Subloan Borrower Type of Sector Type of Free Limi t Original Net DisbursedNo. City Region Ownership Project Amount Amount Amount

001 Chongqing Hi-way Construction Co. Chongqing M-W SOE Infrastructure New Below 4.95 4.95 4.95 010 Chongqing Hi-way Construction Co. Chongqing M-W SOE Infrastructure New Above 6.33 6.33 6.33 002 Sichuan Vinylon Works Chongqing M-W SOE Industry New Below 4.95 4.95 4.95 003 Shenzhen Kangtai Biological Products Co. Ltd. Shenzhen C-E SOE Industry Revamping Below 4.00 2.91 2.91 004 Hainan Sundiro Motorcycle Co. Ltd. Haikou C-E JV Industry Expansion Below 4.80 4.8 4.80 005 Sichuan Post & Telecommunication Bureau Chengdu M-W SOE Telecommunication Expansion Above 10.00 10.00 10.00 006 Fujian Pacific Electric Power Co. Ltd. Putian C-E Foreign Energy New Below 4.99 4.99 4.99 007 Heilongjiang Post & Telecommunication Bureau Harbin C-E SOE Telecommunication Expansion Below 4.99 4.99 4.99 008 Huhan Post & Telecommunication Bureau Changsha C-E SOE Telecommunication Expansion Below 4.99 4.99 4.99 009 New Century International Leasing Co. Ltd. Jinan C-E Foreign Telecommunication Expansion Above 10.00 10 10.00

Total 60.00 58.91 58.91 C-E = coastal and eastern region, JV = joint venture, M-W = middle and western region, SOE = state-owned.

Table A4.2: Loan Utilization ($ million)

Location

22A

ppendix 4, page 2

Subloan BorrowerNo. DER DSCR CR DER DSCR CR DER DSCR CR

001 & 010 Chongqing Hi-way Construction Co. 50:50 2.2 8.0 49:51 2.4 2.4 41:59 6.2 6.1 002 Sichuan Vinylon Works 19:81 1.0 0.8 2:98 1.9 1.3 2:98 1.5 1.3 003 Shenzhen Kangtai Biological Products Co. Ltd. 28:72 5.1 7.1 20:80 6.7 6.4 19:81 6.9 8.4 004 Hainan Sundiro Motorcycle Co. Ltd. 0.00 1.1 3.9 0:100 1.7 1.8 0:100 1.9 2.1 005 Sichuan Post & Telecommunication Bureau 19:81 1.0 0.8 2:98 1.1 1.3 2:98 1.5 1.3 006 Fujian Pacific Electric Power Co. Ltd. - - - - - - - - -007 Heilongjiang Post & Telecommunication Bureau 75:25 1.3 0.6 55:45 1.2 0.3 28:72 1.4 0.6 008 Huhan Post & Telecommunication Bureau 0.6:99.4 1.1 4.5 0.8:99.2 1.1 4.8 0.7:99.3 1.3 4.1 009 New Century International Leasing Co. Ltd. 33:67 1.2 0.8 30:70 1.7 0.7 53:47 2.1 0.6 – = data not available (either from subborrowers or PSG).

DSCR = debt service coverage ratio, CR = current ratio, DER = debt equity ratio.

Subloan Borrower WACC No. Original Actual Actual Original Actual

Estimate Estimate001 & 010 Chongqing Hi-way Construction Co. 15.61 13.82 6.03 21.09 16.03002 Sichuan Vinylon Works 21.50 22.31 6.04003 Shenzhen Kangtai Biological Products Co. Ltd. 50.00 49.35 7.10004 Hainan Sundiro Motorcycle Co. Ltd. 30.10 12.80 5.09005 Sichuan Post & Telecommunication Bureau 19.47 22.02 5.15 30.17 30.00006 Fujian Pacific Electric Power Co. Ltd. 16.63 -007 Heilongjiang Post & Telecommunication Bureau 29.99 23.76 6.83008 Huhan Post & Telecommunication Bureau 22.76 22.79 7.98009 New Century International Leasing Co. Ltd. 29.33 30.05 7.63 43.56 46.00EIRR = economic internal rate of return, FIRR = financial internal rate of return, WACC = weighted average cost of capital.

(Original = estimated at appraisal, Actual = computed at project completion).

Table A4.3: Summary of Financial Performance of Subprojects and Subborrowers

FIRR %

200019991998

EIRR (%)

Table A4.4: EIRR and FIRR of Subprojects

Appendix 4, page 3

23

Subloan Borrower Overrun Capacity No. Target Actual Overrun (%) Target Actual (%) Used (%)

001 & 010 Chongqing Hi-way Construction Co. 36 48 33 370.67 435.59 17.5 95002 Sichuan Vinylon Works 17 15 (12) 9.84 9.84 - 100003 Shenzhen Kangtai Biological Products Co. Ltd. 36 36 0 5.81 7.76 33.6 95004 Hainan Sundiro Motorcycle Co. Ltd. 12 12 0 29.90 28.60 (4.3) 10005 Sichuan Post & Telecommunication Bureau 12 12 0 359.88 343.60 (4.5) 100006 Fujian Pacific Electric Power Co. Ltd. 40 40 0 755.20 755.20 - Test run 007 Heilongjiang Post & Telecommunication Bureau 12 12 0 530.12 281.54 (46.9) 100008 Huhan Post & Telecommunication Bureau 12 12 0 36.47 36.70 - 100009 New Century International Leasing Co. Ltd. 12 12 0 508.24 508.24 - 100

Total 2,606.13 2,407.07 (7.6) Total % 100 92.36

Table A4.5: Summary of Project General Performance

Project Cost ($ million)Construction period (month)

24A

ppendix 4, page 4

Subloan Borrower Original NetNo. Amount Amount 1997 1998 1999 2000 Total

001 & 010 Chongqing Hi-way Construction Co. 11.28 11.28 4.95 4.87 1.46 11.28002 Sichuan Vinylon Works 4.95 4.95 2.99 1.47 0.49 4.95003 Shenzhen Kangtai Biological Products Co. Ltd. 4.00 2.91 1.05 1.86 2.91004 Hainan Sundiro Motorcycle Co. Ltd. 4.80 4.80 4.55 0.25 4.80005 Sichuan Post & Telecommunication Bureau 10.00 10.00 10.00 10.00006 Fujian Pacific Electric Power Co. Ltd. 4.99 4.99 4.99 4.99007 Heilongjiang Post & Telecommunication Bureau 4.99 4.99 4.99 4.99008 Huhan Post & Telecommunication Bureau 4.99 4.99 4.99 4.99009 New Century International Leasing Co. Ltd. 10.00 10.00 10.00 10.00

Total 60.00 58.91original amount = originally approved loan amount, net amount = revised and approved amount.

Subloan Borrower Disbursed Final

No. Amount Target Total Actual Payment S cheduled Actual001 & 010 Chongqing Hi-way Construction Co. 11.28 11.28 0.42 1.99 1.99002 Sichuan Vinylon Works 4.95 4.95 4.95 15-Sep-01 1.02 1.02003 Shenzhen Kangtai Biological Products Co. Ltd. 2.91 2.91 2.91 1.02 1.02004 Hainan Sundiro Motorcycle Co. Ltd. 4.80 4.80 4.80 1.07 1.07005 Sichuan Post & Telecommunication Bureau 10.00 10.00 10.00 0.68 0.68006 Fujian Pacific Electric Power Co. Ltd. 4.99 4.99 0.00 0.36 0.36007 Heilongjiang Post & Telecommunication Bureau 4.99 4.99 4.99 0.57 0.57008 Huhan Post & Telecommunication Bureau 4.99 4.99 4.99 1.04 1.04009 New Century International Leasing Co. Ltd. 10.00 10.00 10.00 10-Jul-01 1.56 1.56

Total 58.91 58.91 43.06 9.31 9.31Original amount = originally approved loan amount, net amount = revised and approved amount.

Drawdown and Repayment Performance of Subborrowers($ million)

Interest RepaymentPrincipal Repayment

Drawdown Record

Table A5.1: Drawdown Performance

Table A5.2: Repayment Performance

25A

ppendix 5

Appendix 6

26

CHINA EVERBRIGHT BANK ORGANIZATION CHART(as of 22 June 2001)

A sset-L iab ilityM an ag em en t

C om m ittee

L oan E xam in ationan d A p p rova l

C om m ittee

In te rn a l A u d itin gC om m ittee

P erform an ceA p p ra isa l

C om m ittee

S p ec ia l O ffice o fS u b sc rip tion an d

P u b lic L is t in g

E xecu tive V ice P res id en t

H ead O fficeB an k in g

D ep artm en t

C orp ora te B an k in gD ep artm en t

C learin g C en ter

In te rn a l A u d itD ep artm en t

A ccou n tin gD ep artm en t

E xecu tive V ice P res id en t

N etwork o f3 0 b ran ch es an d

2 9 8 b an k in goffices

R eta il B an k in gD ep artm en t

C om p u terC en ter

P riva te B an k in gD ep artm en t

E xecu tive V ice P res id en t

P lan n in g an dTreasu ry

D ep artm en t

C red itA d m in is tra tive

D ep artm en t

In te rn a tion a lB u s in ess

D ep artm en t

S p ec ia l L oanA d m in is tra tion

D ep artm en t

E xecu tive V ice P res id en t

In sp ec tionO ffice

A ss is tan t V ice P res id en t

P erson n e l an dE d u cation

D ep artm en t

A d m in is tra tionD ep artm en t

A ss is tan t V ice P res id en t

C h ie f E xecu tive O fficer(con cu rren tly V ice C h a irm an

of B O S )

B oard o f D irec to rs(1 5 M em b ers )

B oard o f S u p ervis ion(1 7 M em b ers )

BOS = board of supervision.

27

Appendix 7, page 1

PEOPLE'S BANK OF CHINA'S CLASSIFICATION GUIDELINESOF BANK LOAN PORTFOLIOS

A. Introduction

1. The People's Bank of China (PBC) issued in 1998 its regulations for a five-tierloan analysis management, which became effective that year. The PBC requires banksto classify their loan portfolios into five categories:

(i) standard(ii) special mention(iii) substandard(iv) doubtful(v) loss

1. Standard

2. A loan is defined as standard when the borrower has the capacity to act and fulfillhis, her, or its promise to pay principal the and interest according to tenor of the loan.

2. Special Mention

3. A loan is placed in this category when the net profit and cash flow of the borrowerhas decreased and the borrowers' key financial performance ratios have fallen below theindustry's average. The situation indicates the borrower's liquidity problem. Any one ormore of the following conditions should be present for a loan to be placed in thiscategory:

(i) the borrower has suffered severe problems in business managementand/or used money from the bank loan not in accordance with theconditions of the loan agreement,

(ii) the borrower demonstrates reluctance to cooperate with its banker andrepay the principal and interest components of the loan on schedule,

(iii) the value of the borrower's collateral has declined and/or the bank shouldhas lost control over the collateral, and

(iv) the bank lacks an effective monitoring mechanism for the loan.

3. Substandard

4. A loan is classified in this category, if the borrower:

(i) faces difficulties in obtaining funds from other sources to repay the loan,(ii) is unable to meet its liabilities to other creditors (apart from the bank),(iii) suffers management problems, and(iv) wantonly provides the bank with false information to obtain the loan.

4. Doubtful

5. A bank is required to declare a loan as doubtful when any or more of thefollowing conditions are present:

28

Appendix 7, page 2

(i) the borrower's business activities have stopped,(ii) fixed assets financed by the bank loan are nonoperational due to lack of

working capital,(iii) the borrower's total realizable assets are less than its external liabilities,(iv) the bank has to resort to legal action to collect loans, and(v) the borrower has overdue arrears on the principal and interest without

any chances of improvement in business circumstances.

5. Loss

6. A loan is categorized as a loss if any one or more of these circumstances arepresent:

(i) the borrower is not capable of repaying the loan,(ii) the value of mortgage is less than the amount of the loan,(iii) the bank cannot determine the value of the collateral,(iv) fixed assets financed by the bank loan has not been operating for a long

time, and(v) there is no hope of resuming the project.

Assets 31 Dec 1996 31 Dec 1997 31 Dec 1998 31 Dec 1999 31 Dec 2000CURRENT ASSETS Cash and bank balances 132,941,789 139,743,572 170,731,090 744,839,370 799,032,268 Precious metal 2,203,030 2,437,030 2,248,256 2,248,256 2,248,256 Deposits with central bank 5,514,347,340 7,255,386,021 12,625,806,422 33,835,003,124 33,512,501,200 Deposits with other banks 5,406,256,320 6,736,602,565 5,671,253,450 9,666,204,775 13,112,164,829 Placements with other banks 3,715,202,461 4,356,822,586 2,988,684,895 3,297,431,833 2,251,633,768 Short-term loans 18,941,257,800 24,469,809,840 23,845,388,908 38,033,186,099 59,162,835,874 Export and import loans 379,622,979 726,766,839 1,158,511,872 1,021,733,223 305,461,803 Accounts receivable 828,671,517 1,428,282,017 1,809,853,086 6,615,605,954 5,744,973,985 Less: Provision for doubtful receivables (3,468,981) (5,980,347) (12,325,460) (19,931,022) (17,438,782) Other receivables 324,852,838 535,672,948 1,601,579,476 2,898,134,478 6,317,692,999 Discounted bills 507,289,135 709,001,586 435,308,619 750,735,683 5,892,012,685 Short-term investments 577,042,628 377,969,951 214,609,417 2,329,255,668 748,655,491 Entrusted loans and investments 1,140,756,136 1,514,108,120 1,193,490,274 4,449,845,648 4,938,158,674 Securities held for dealing purpose 29,647,175 399,739,768 947,192,766 872,065,018 770,174,818 Underwritten securities 262,700,464 0 78,771,230 131,490,366 377,934,253 Reverse repos 2,842,786,988 264,206,202 1,000,283,515 1,124,097,111 9,202,760,781 Net loss of the disposable current assets 0 0 0 (23,600) (23,600) Other current assets 128,664,214 266,498,094 460,898,777 3,345,009,057 5,075,513,320 Current portion of long-term investments 174,531,925 279,739,000 514,314,100 1,440,521,000 2,622,793,000

Total Current Assets 40,905,305,758 49,456,805,792 54,706,600,693 110,537,452,039 150,819,085,622

NONCURRENT ASSETS 0 0 0 0 0 Medium-and long-term loans 2,512,565,687 4,132,305,383 7,452,045,321 9,935,397,125 10,691,393,404 Loans overdue 1,245,333,307 3,620,263,893 6,283,975,263 30,685,078,540 24,679,456,926 Less: Provision for loan losses (104,649,505) (191,991,011) (389,676,580) (1,587,406,521) (1,069,648,218) Finance lease receivable 13,761,183 23,501,183 17,922,918 55,326,896 30,798,406 Less: Finance lease charges receivable (2,200,628) (2,127,990) (1,749,725) (1,550,186) (1,550,186) Lease assets 52,919,870 656,000 0 0 8,000,000 Long-term investments 1,622,715,285 2,955,408,609 5,482,062,826 15,564,684,640 19,039,590,243 Less:Provision for investment losses (5,264,780) (8,700,079) (13,812,273) (22,574,684) (39,452,756) Fixed assets, cost 405,479,536 532,421,191 802,590,405 1,891,992,375 2,548,887,626 Less:Accumulated depreciation (44,244,023) (75,277,021) (123,452,809) (411,359,062) (571,862,790) Fixed assets, net 361,235,512 457,144,170 679,137,596 1,480,633,313 1,977,024,836 Dispose of fixed assets 7,080,077 7,080,077 255,293 21,005,598 982,300 Construction in progress 116,424,624 113,463,445 111,772,866 561,357,744 574,665,094 Net loss of disposable fixed assets 0 (23,600) (23,600) 2,000,000 0

Total Noncurrent Assets 5,819,920,632 11,106,980,081 19,621,909,906 56,693,952,466 55,891,260,050

INTANGIBLE, DEFERRED, AND OTHER ASSETS Intangible assets 134,279,100 131,974,200 133,089,369 194,583,117 228,183,863 Deferred assets 194,763,180 219,123,912 266,366,449 466,821,216 497,385,731 Other long-term assets 0 4,851,427 0 0 0Total Intangible, Deferred, and Other Assets 329,042,280 355,949,539 399,455,817 661,404,332 725,569,594

Total Assets 47,054,268,670 60,919,735,412 74,727,966,416 167,892,808,838 207,435,915,266

CHINA EVERBRIGHT BANK FINANCIAL STATEMENTSTable A8.1: Balance Sheet (Y)

29A

ppendix 8, page 1

Liabilities and Shareholders' Equity 31 Dec 1996 31 Dec 1997 31 Dec 1998 31 Dec 1999 31 Dec 2000CURRENT LIABILITIES Short-term corporate deposits 21,001,150,654 32,247,407,726 41,389,585,741 90,061,513,466 114,335,691,670 Short-term individual deposits 1,980,766,362 2,837,635,939 3,005,165,595 6,501,538,067 9,291,334,957 Deposits from governmental bodies 388,108,776 129,938,476 43,801,218 56,248,360 91,557,755 Loans from central bank 2,850,000,500 2,439,621,111 2,520,931,961 3,434,230,000 3,583,630,000 Deposits from other banks 3,627,039,410 6,113,291,417 7,550,735,014 13,685,355,127 15,386,121,141 Placements from other banks 2,458,223,438 2,891,732,760 2,092,986,810 7,840,281,332 8,274,477,874 Inward remittance 3,304,724,526 843,054,777 624,028,288 1,255,983,895 1,677,218,328 Outward remittance 581,448,502 311,510,047 1,418,860,944 3,887,925,863 3,434,305,264 Entrusted deposits 1,060,816,707 1,480,108,098 1,210,889,413 4,510,613,856 5,093,020,668 Underwriten securities payable 541,153,081 0 4,000 12,073,911 346,517,651 Repos 98,164,623 112,601,000 1,700,703,200 1,521,703,200 3,021,703,200 Accounts payable 0 751,993,240 749,626,103 2,668,785,946 3,602,878,920 Other payables 919,879,547 56,259,150 184,612,052 607,803,278 1,344,942,163 Short-term deposits for trade bills 1,072,011,308 759,735,306 1,436,949,345 3,765,989,805 12,872,252,482 Salaries payable 187,774 508,988 6,821,957 36,555,947 52,847,893 Welfare payable 2,546,993 2,837,859 5,225,419 8,222,427 20,196,336 Taxes payable 280,131,435 540,516,463 521,327,340 348,064,504 581,147,225 Profit payable 0 0 685,000 274,000 274,000 Accrued expenses 224,971 0 620,000 19,139,318 29,088,353 Other current liabilities 16,073,393 13,025,788 120,710,556 762,320,388 44,607,590

Total Current Liabilities 40,182,652,000 51,531,778,146 64,584,269,955 140,984,622,690 183,083,813,472

NONCURRENT LIABILITIES Long-term corporate deposits 4,370,642,032 3,345,125,002 2,248,169,869 9,463,301,741 7,794,949,697 Long-term individual deposits 308,360,986 453,946,925 1,507,445,051 1,717,445,923 2,349,141,705 Long-term deposits for trade bills 3,401,000 4,578,500 4,691,700 5,866,685 6,790,592 Long-term bonds 0 0 0 827,930,000 827,810,000 Long-term borrowings 0 0 289,589,428 5,582,531,730 947,862,295 Other noncurrent liabilities 0 0 14,824,741 75,890,819 (175,926,345)

Total Noncurrent Liabilities 4,682,404,018 3,803,650,427 4,064,720,789 17,672,966,898 11,750,627,944

Total Liabilities 44,865,056,018 55,335,428,573 68,648,990,744 158,657,589,587 194,834,441,415

SHAREHOLDERS' EQUITY Share capital 775,000,000 2,800,000,000 2,800,000,000 4,312,000,000 5,964,101,888 Capital reserve 212,186,267 1,524,755,389 1,524,662,455 2,771,636,628 4,166,478,641 Revenue reserve 613,821,406 0 654,945,040 1,111,582,794 1,463,785,055 Retained earnings 588,204,979 1,259,551,450 1,099,368,176 1,039,999,828 1,007,108,267

Total Shareholders' Equity 2,189,212,652 5,584,306,839 6,078,975,671 9,235,219,250 12,601,473,851Total Liabilities and Shareholders' Equity 47,054,268,670 60,919,735,412 74,727,966,416 167,892,808,838 207,435,915,266

Table A8.1: Balance Sheet (Cont'd)(Y)

30A

ppendix 8, page 2

Item 1996 1997 1998 1999 2000CASH FLOWS FROM OPERATING ACTIVITIES

Cash received from loan interest income 2,785,599,646 3,728,046,097 5,814,339,800Cash received from interest income from financial institutions 896,387,819 672,310,941 1,135,175,200Cash received from investment income 492,421,887 1,041,854,819 1,472,170,257Fee income (expenses), net 37,983,008 55,857,717 81,867,625Cash received from other operating income 37,373,623 107,404,948 130,764,314Increase in deposits, net 10,766,135,796 28,214,271,295 35,719,835,457Increase in balances with central bank 1,401,888,039 (2,052,304,477)Increase in balances with financial institutions 3,924,209,339 903,218,454 (7,646,363,103)Cash received from other operating activities 188,588,049 104,127,454 1,099,628,248

Cash Inflows from Operating Activities 19,128,699,167 36,228,979,764 35,755,113,321

Cash paid for deposit interest expenses (1,393,944,104) (2,300,860,569) (2,707,653,893)Cash paid for interest expenses to financial institutions (734,523,441) (733,217,281) (456,493,855)Cash paid for other operating expenses (475,619,695) (949,158,440) (1,386,234,318)Cash paid to and for employees (157,385,679) (166,581,413) (230,343,508)Increase in loans, net (5,196,464,595) (10,074,362,033) (30,486,598,763)Cash paid for deposits with central bank (5,289,109,551)Cash paid for securities and leasing activities (3,218,233,011) (5,392,244,793) (3,493,179,518)Business tax and surcharge paid (318,467,731) (339,048,468) (388,958,015)Enterprise income tax paid (419,467,152) (464,947,574) (405,349,481)Cash paid for other operating activities (1,148,827,097) (591,134,099) (643,785,858)

Cash Outflows from Operating Activities - - (18,352,042,056) (21,011,554,670) (40,198,597,209) Net Cash Flows from Operating Activities (1,398,705,525) 1,874,318,440 776,657,111 15,217,425,094 (4,443,483,888)

CASH FLOWS FROM INVESTING ACTIVITIES 5,241,628,388 Cash received from acquisition of other business units Net cash receipts from disposal of fixed assets, intangible assets and other long-term assets (111,326,049) (193,834,608) 6,597,793 49,674,799 Purchase of fixed assets, intangible assets, and other long-term assets (811,486,239) (1,574,238,279) (386,074,593) (375,865,294) (935,349,200) Net Cash Flows from Investing Activities (922,812,288) (1,768,072,887) (362,754,593) 4,872,360,887 (885,674,401)

CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from additional capital injection 2,466,000,000 3,138,993,587 Dividend paid -121,703,280 (97,006,741) (382,915,000) (280,411,000) (279,848,800) Net Cash Flows from Financing Activities 2,344,296,720 (97,006,741) (382,915,000) (280,411,000) 2,859,144,787 Net (Decrease) Increase of Cash and Cash Equivalents 22,778,907 9,238,812 30,987,518 19,809,374,981 (2,470,013,502)

23,320,000

Table A8.2: Income Statements(Y)

31A

ppendix 8, page 3

Item 1996 1997 1998 1999 2000

OPERATING INCOMEInterest income 1,849,443,775 2,821,765,875 3,233,093,316 4,064,606,788 5,039,282,756 Interest income from financial institution 1,016,744,785 1,345,129,750 968,983,186 762,868,933 1,218,845,705 Fees income 76,885,102 75,106,836 58,376,444 82,395,588 130,094,807 Other operating income 336,440,715 631,169,393 478,484,692 1,146,957,191 1,460,634,384

Total Operating Income 3,279,514,377 4,873,171,854 4,738,937,638 6,056,828,500 7,848,857,652

Business Tax and Surcharges (118,875,729) (259,189,152) (295,622,418) (371,124,196) (440,366,412)

Total Operating Income (net) 3,160,638,648 4,613,982,702 4,443,315,220 5,685,704,304 7,408,491,240

OPERATING EXPENSESInterest expenses (1,434,755,655) (1,538,074,639) (1,491,195,971) (2,314,866,769) (2,810,767,751)Interest expenses from financial institutions (341,935,687) (838,382,663) (739,783,522) (764,037,137) (1,007,096,545)Fees expenses (19,606,100) (26,696,458) (20,393,436) (26,537,871) (48,227,183)General and administrative expenses (327,429,799) (408,079,699) (569,755,877) (1,160,090,781) (1,624,865,220)Other operating expenses (129,541,913) (176,544,409) (302,144,251) (749,580,992) (1,218,285,064)

Total Operating Expenses (2,253,269,154) (2,987,777,868) (3,123,273,057) (5,015,113,550) (6,709,241,763)

Operating Profit 907,369,494 1,626,204,834 1,320,042,163 670,590,754 699,249,477

Other nonoperating income 4,326,931 2,219,826 3,241,245 12,685,039 25,041,351 Other nonoperating expenses (21,232,504) (9,644,667) (21,490,304) (5,900,450) (28,624,582) Profit adjustment of prior years 42,372,735

Profit Before Taxation 932,836,656 1,618,779,993 1,301,793,104 677,375,343 695,666,246

Taxation (230,166,680) (517,131,990) (423,396,056) 0 (96,473,830)

Net Profit 702,669,976 1,101,648,003 878,397,048 677,375,343 599,192,416

Table A8.2: Income Statements (Cont'd)(Y)

32A

ppendix 8, page 4

33 Appendix 8, page 5

Item 1996 1997 1998 1999 2000

Loan-to-Deposit Ratio 81.00 84.60 78.90 72.10 68.60Intermediation Cost Ratio 1.21 1.07 1.28 1.55 1.45Interest Coverage Ratio 133.80 146.40 139.40 122.00 115.70Return on Average Assets 1.87 2.04 1.30 0.56 0.32Return on Average Equity 37.83 28.30 15.10 8.85 5.49Interest Spread Ratio 3.55 4.55 4.99 3.75 3.15Earnings Spread Ratio 3.44 3.93 3.11 2.03 1.76

Capital Adequacy Ratioa 8.06 17.09 15.01 0.64 6.57aCalculated according to People's Bank of China formula.

Table A8.3: Financial Ratios(%)

Year FIRR (%)Investment

Dividendsa

Sale ProceedsOriginal Shares (no.) 92,222,000

Bonus Shares (no.) 49,799,800 b

Sale Price per share Y 2.58 c

Net Cash Flow 20ADB = Asian Development Bank, CEB = China Everbright Bank, FIRR = financial internal rate of return.a Source: Quarterly Report on Private Sector Operations for quarter end 31/03/2001.b Bonus shares were issued to ADB in 2001.c Sale price per share of Y2.58 was calculated as follows: net asset value (NAV) per share on 31 December 2000 was Y2.11 (12,601,473,852/596,410,188 shares).

1996

FINANCIAL INTERNAL RATE OF RETURN ON

($ million)ADB'S EQUITY INVESTMENT IN CEB

19981997 1999 2000 2001(20)

(20) 0

1.53

1.53 1.11

1.11 1.11

1.11

0.71

45.0219.26

44.31

28.77

34A

ppendix 9

COMPLIANCE WITH COVENANTS OF LOAN AND PROJECT AGREEMENTS

Reference toCovenants Loan Documents Status

1. Except if ADB disagrees, the Borrower will relend theproceeds of the Loan to EBBC pursuant to a SubsidiaryLoan Agreement acceptable to ADB with, inter alia, thefollowing terms and conditions:

Loan Agreement, Schedule 4, para. 1

Complied with

a. interest and commitment charge at the rate(s) notless than that determined in accordance with the LoanAgreement and the same maturity and grace period asapplicable to the Loan;

b. approximately equal semiannual aggregate paymentsof principal plus interest over a period of 15 years,including a grace period of 4 years;

c. the foreign exchange and interest rate variation risk inrespect of the Loan proceeds relent to EBBC under thesubsidiary Loan Agreement to be borne by EBBC; and

d. subject to the service commitments to the Borrowerunder the Subsidiary Loan Agreement, EBBC canuse the funds accruing from the repayment ofprincipal of subloans EBBC to make further subloansfor qualified projects in accordance with its lendingpolicy.

2. The Borrower will, upon the request of the Bank, discussand exchange views with ADB at least once a year onfinancial sector reforms and related issues, in particular,those related to EBBC, to ensure smooth implementation ofthe Project.

Loan Agreement, Schedule 4, para. 2

Complied with

3. Subject to the approval of the Borrower, the Borrower willenable EBBC to increase in a timely manner its capitalthrough private placement or public offering of EBBC'sshares to maintain its capital adequacy ratio up to thestandard set forth in Section 3.13 of the Project Agreement.

Loan Agreement, Schedule 4, para. 3

Complied with

4. At an appropriate time to be determined by the People'sBank of China and other relevant authorities of theBorrower, the Borrower will approve the application ofEBBC to list its shares on a stock exchange.

Loan Agreement, Schedule 4, para. 4

Complied with

5. EBBC will at all times make adequate provision to protectitself against any loss resulting from changes in the rate ofexchange between the Renminbi and the currency orcurrencies in which EBBC's outstanding money obligationswill have to be met.

Project Agreement, Article III, Section 3.02

Complied with

6. EBBC will not make a subloan to any subborrower unlesssuch subborrower has at his/her disposal, or has madeappropriate arrangements to obtain as and when required,all local currency funds, including adequate working capital,and other resources required by such sub-borrower forcarrying out its qualified project.

Project Agreement, Article III, Section 3.04

Complied with

35Appendix 10, page 1

Reference toCovenants Loan Documents Status

7. EBBC will complete, with the approval of the Borrower, butnot later than 30 April 1997, (i) its restructuring into ashareholding commercial banks; and (ii) a capital increaseof its paid-up equity shares capital of not less than renminbiY1.096 billion, including ADB's equity participation in EBBC.

Project Agreement, Article III, Section 3.11

Complied with

8. Except if ADB disagrees, EBBC will maintain, for each of itsfiscal years, an annual rate of return on equity of not lessthan 12 percent.

Project Agreement, Article III, Section 3.12

Partially complied with

9. Except if ADB disagrees, EBBC will achieve, commencingfrom 1 January 2001, and maintain thereafter, for each of itsfiscal years, an equity-to risk-adjusted assets ratio of notless than 1:12.5 (8%) as required by Basle Accord onInternational Convergence of Capital Measurement andCapital Standards established by the Bank for InternationalSettlements in July 1998.

Project Agreement, Article III, Section 3.13

Not yet applicable

10. Except if ADB disagrees, EBBC will achieve and maintain,for each of its fiscal years, a maximum loan-to-deposit ratioof not more than 100 percent.

Project Agreement, Article III, Section 3.14

Complied with

11. Whenever EBBC proposes to make a subloan in an amountexceeding the equivalent of $5,000,000 or such other sumas will from time to time be agreed upon by ADB and EBBC,EBBC will, before requesting a withdrawal, submit to ADBan application for approval of such subloan. Suchapplication will be in a form satisfactory to ADB and willcontain a description and appraisal of the qualified project,the terms and conditions of the proposed subloan, and otherinformation that ADB may reasonably request. A subloanshall be deemed to exceed the equivalent of the amountspecified in or agreed to pursuant to this paragraph if theamount of such subloan, when added to the amount of anyother subloan or subloans previously made or authorized forthe same qualified project, exceeds the equivalent of theamount so specified or agreed upon.

Project Agreement, Article II, Section 2.02

Complied with

12. Not complied withProject Agreement,Article III, Section3.09 (c)

Except if ADB disagrees, EBBC will not (i) sell, lease,transfer, or otherwise dispose of any of its assets except inthe ordinary course of business; and (ii) establish oracquire any subsidiary without ADB's concurrence.

13. Without limiting the generality of the foregoing, EBBC shallfurnish to the Bank semi-annual reports on the execution ofthe Project and on the operation and management of EBBC.Such reports shall be submitted in such form and in suchdetail and within such a period as the Bank shall reasonablyrequest, and shall indicate, among other things, progressmade and problems encountered during the six-monthperiod under review, steps taken or proposed to be taken toremedy these problems, and proposed program of activitiesand expected progress during the following six months.

Project Agreement,Article IIISection 3.07 (b)

Not complied with

ADB = Asian Development Bank, EBBC = Everbright Bank of China

36Appendix 10, page 2