Finance Departments (Bureaus) of all provinces, autonomous regions, municipalities directly under the central government, and cities under separate planning; Banking Regulatory Bureaus; and all centrally-administered banking and financial institutions:

To address the international financial crisis and implement the macroeconomic regulation requirements put forward by the Party Central Committee and the State Council—namely, "expanding domestic demand to ensure growth, upgrading the structure to raise standards, seizing reform opportunities to boost vitality, and prioritizing people's livelihoods to promote harmony"—relevant departments have successively introduced a series of fiscal, tax, financial, and industrial policies and measures, thereby establishing a policy framework that promotes steady and relatively rapid economic development. Banking and financial institutions have actively taken countermeasures, adjusted their development strategies, increased credit lending, strengthened operational management, and improved service quality, achieving initial positive results. To further intensify financial support for economic development, enhance the ability of banking and financial institutions to prevent and resolve risks, and promote the steady and healthy development of the national economy, we now offer the following recommendations on strengthening financial and risk management at banking and financial institutions:

1. Further enhance the quality of financial services and fully support economic development. Improving service quality is a fundamental social responsibility and obligation that banking and financial institutions must fulfill. Banking and financial institutions should adhere to the Scientific Outlook on Development as the guiding principle for their overall work, thoroughly implement the ten measures issued by the Party Central Committee and the State Council to further expand domestic demand and promote economic growth, as well as the spirit of the “General Office of the State Council’s Several Opinions on Current Financial Measures to Promote Economic Development” (Guobanfa [2008] No. 126), effectively intensify financial support for economic development, fully leverage the guiding role and supportive function of credit policies, better implement the state’s policy requirements of “safeguarding growth, expanding domestic demand, and adjusting the economic structure,” comprehensively enhance the efficiency, capability, and quality of services provided to the national economy, and make every effort to promote steady and relatively rapid economic development.

II. Pay close attention to the financial management of borrowing enterprises to ensure stable loan quality. The financial soundness of borrowing enterprises is a critical factor affecting the safety of credit funds provided by banking and financial institutions. In accordance with the "Several Opinions of the Ministry of Finance on Strengthening Corporate Financial Management in Response to the Current Financial Crisis" (Cai Qi [2009] No. 52), banking and financial institutions must pay close attention to the financial management status of borrowing enterprises and incorporate various aspects of their financial management as one of the criteria and standards for pre-loan investigations, in-loan reviews, and post-loan inspections. Special attention should be paid to the borrowing enterprise’s external guarantees and other contingent liabilities, particularly mutual guarantees and revolving guarantees among affiliated companies. Credit lines and credit management strategies should be adjusted promptly to prevent the accumulation of credit risks. When engaging in merger and acquisition (M&A) loan business, banking and financial institutions must, in compliance with the relevant provisions of the "Guidelines for Risk Management of M&A Loans by Commercial Banks," rigorously analyze and assess M&A loan risks, thereby avoiding losses of bank credit funds caused by enterprises’ reckless expansion. During this special period of rapid growth in credit business, it is even more important to strike a balance between effective development and prudent operations, enhance the ability to identify and assess risks, and ensure that newly issued loans can withstand the test of time.

III. Strengthen internal risk controls and effectively guard against market and operational risks. A sound internal control system is the foundation for effectively preventing risks. Banking and financial institutions must comprehensively strengthen risk management and foster a culture of internal control and compliance. They should allocate assets rationally, closely monitor liquidity, and implement timely risk alerts. It is essential to intensify analysis and assessment of exchange rate fluctuations of major global currencies and interest rate movements in key financial markets, as well as to enhance the evaluation and monitoring of market value changes in foreign currency assets held. Timely dynamic adjustments should be made to effectively guard against exchange rate risks. Institutions must actively adapt to adjustments in domestic interest rate policies and enhance their capacity to respond to interest rate changes. They should also comprehensively strengthen information technology development, engage in scientific and systematic planning, and improve the risk management functions of information systems to ensure synergy and security in IT infrastructure development. Furthermore, they need to continue perfecting the construction of operational risk management systems, maintain unwavering vigilance in preventing and controlling various types of incidents, and effectively prevent the occurrence of all kinds of cases, especially major and high-profile ones.

4. Timely and fully set aside provisions, and make every effort to resolve non-performing assets. Adequate provisions are the foundation for banking and financial institutions to withstand risks, operate prudently, and promote economic development. Banking and financial institutions must strictly adhere to financial regulations such as the "Notice of the Ministry of Finance on Issuing the " (Cai Jin [2005] No. 49), as well as relevant accounting standards and regulatory requirements, accurately classify and truthfully reflect non-performing loans, promptly and fully set aside provisions for various losses, enhance the adequacy ratio of provisions, and solidify their financial foundations. In accordance with national policies regarding write-offs of bad debts, loan restructuring, and debt relief, banking and financial institutions should intensify efforts to recover, revitalize, and write off non-performing loans, promptly resolve non-performing assets, and improve asset quality.

V. Prudently pursue overseas mergers and acquisitions and guard against risks associated with overseas investments. Affected by the international financial crisis, banking and financial institutions face both opportunities and challenges in their overseas investment and mergers & acquisitions. On the basis of staying firmly rooted in the domestic market, banking and financial institutions should prudently carry out overseas investment and M&A activities. They need to analyze and study the necessity and feasibility of such investments and acquisitions in light of their development strategies, financial conditions, and risk tolerance—especially by thoroughly examining the synergies that can be achieved through M&A. They should also make rational choices regarding target companies for investment and acquisition, thereby avoiding unnecessary losses caused by blind expansion. It is crucial to pay close attention to economic indicators such as fluctuations in international exchange rates, conduct in-depth research into the political, legal, and social environments of the host countries, build up a pool of specialized M&A and management talent, adopt effective risk-isolation measures, and thus mitigate investment and M&A risks. Moreover, banking and financial institutions must strictly comply with national laws and regulations as well as their internal management systems, and rigorously follow the internal decision-making and external approval procedures for overseas investment and M&A activities.

6. Strengthen the management of entrusted agency business and strive to reduce off-balance-sheet risks. Banking and financial institutions must attach great importance to the risks associated with entrusted agency business, strengthen the management of such business, and rigorously assess the risk management capabilities, internal control levels, and internal decision-making procedures of the enterprises being represented. They should enhance full-process management—before, during, and after the sale—to ensure that risks are measurable, costs are calculable, and information disclosure is adequate. In light of the upcoming maturity of wealth management products issued at peak periods in the capital market, institutions should make early predictions and develop contingency plans promptly, effectively safeguarding their market reputation and image, and maintaining financial and social stability. Furthermore, they should step up publicity and training efforts aimed at wealth management product investors, helping them fully grasp the relevant product information and characteristics, effectively identify and evaluate potential risks, and avoid misleading investors.

7. Focus on strengthening cost control to avoid rigid growth in expenses. Banking and financial institutions should consciously and self-disciplinedly strengthen expenditure management, rationally control the scale of expense outlays, optimize the structure of expenditure, and avoid rigid growth in various expenses. They must deeply recognize the severity and complexity of the current domestic and international economic situation, enhance their sense of crisis and awareness of potential challenges, work together to overcome these difficulties, and prevent further widening the gap between industry income levels and the average social income level. They should reasonably control executive compensation and firmly prevent the issuance of excessively high salaries that are detached from China’s national conditions, economic realities, industry development trends, and the actual circumstances of individual enterprises. They should intensify control and review over operational and management expenses, resolutely curb illegal expenditures as well as extravagant and wasteful behaviors such as showing off and ostentation. They should further improve financial systems, strictly enforce financial discipline, strengthen management of all types of expenditure, enhance the efficiency of fund utilization, and achieve cost savings while boosting effectiveness.

8. Strengthen financial analysis and risk early warning to enhance strategic decision-making capabilities. Financial risk analysis and early warning are crucial methods for enterprises to control future financial risks and serve as important bases for making business decisions. Banking and financial institutions must accurately grasp the macroeconomic situation and market development trends, pay close attention to macroeconomic indicators and key metrics, rationally set various financial targets and objectives, and scientifically forecast future financial activities and outcomes. They should strengthen the construction of information systems covering economic, financial, market, and policy-related data, enhance the alignment between financial risk analysis and early warning and corporate development strategies, make appropriate use of financial risk analysis and forecasting techniques, improve financial management levels, and boost strategic decision-making capabilities.

9. Deepen corporate governance reform and safeguard the interests of investors. Corporate governance structure is the core component of the modern enterprise system. In recent years, large state-owned banks have taken initial steps toward establishing a corporate governance framework through shareholding system reforms and public offerings and listings. However, both the underlying philosophy of corporate governance and its actual operational mechanisms still need further refinement. We must adhere to the principle of maximizing shareholder interests as the central goal, continuously improve operational management, effectively safeguard the rights and interests of investors, and properly balance the interests among the state, enterprises, and individuals. In accordance with the requirements of the Company Law, we should establish clear boundaries of responsibility and effective checks-and-balances mechanisms among the shareholders’ general meeting, the board of directors, the supervisory board, and senior management. We must strengthen the roles of equity-based directors and independent directors; the board of directors and its members must earnestly fulfill their supervisory duties as well as their “duty of loyalty” and “responsibility of care” toward the enterprise. Moreover, we should effectively enhance the supervisory role of the supervisory board and intensify its questioning and oversight of the board of directors and senior management.

Ministry of Finance, China Banking and Insurance Regulatory Commission
May 26, 2009