I. The Strategic Position of the Reform of the Investment Mechanism in Geological Exploration Units

Mining and agriculture are foundational industries of a country and should be classified as primary industries. If our country insists on pursuing the path of industrialization and urbanization to achieve its goal of economic modernization, it will inevitably have to confront the harsh reality of tight constraints on mineral resources.

To alleviate the severe constraints posed by resource and mineral shortages, we can adopt two approaches: "reducing consumption" and "diversifying sources." "Reducing consumption" means, first, shifting away from the current resource-intensive, extensive growth model of downstream industries in China, and second, improving the utilization rate of our country’s already discovered resources, thereby maximizing the duration over which these proven resources can support the development of downstream industries. "Diversifying sources" means, first, maximizing the discovery of new domestic resource reserves, and second, increasing the volume of imported resources from overseas as much as possible, so as to extend the period during which mining activities can continue supporting the development of downstream industries.

For “reducing consumption” measures to be effective, at least two prerequisites must be met: first, the emergence of new technologies; and second, people’s willingness to adopt these new technologies. This, in turn, involves technological upgrades within the time-consuming mining industry itself, technological advancements in downstream mining sectors, and complementary reforms of the social system. Even if “reducing consumption” measures were to yield significant results within just three to five years, given China’s ongoing transition from the mid-to-late stages of industrialization and the accelerating pace of urbanization, the pressure on our supply of both energy and non-energy mineral resources will remain immense over the next three to four decades. And even beyond that 30-year horizon, the pressure on energy and mineral supplies will continue to be substantial. In a word, “reducing consumption” is indeed essential and must be pursued persistently over the long term—but at least it cannot serve as the primary approach for addressing China’s hard constraints on mineral resources over the next three to four decades.

For a while, the vast majority of our citizens were inexplicably thrilled about global integration, and it became fashionable to mimic the letters W, T, and O with their fingers. Some of our economists even mistakenly believed that achieving “comparative advantage theory” didn’t require any conditions beyond purely economic factors. The saying, “It’s better to buy mines than to search for them,” seemed like a shrewd and highly profitable judgment. However, Rio Tinto, BHP Billiton, and Vale have taught us a valuable lesson: the world is far from unified, and we must absolutely avoid naivety.

In the United States, Canada, and Australia, our mining companies have encountered numerous obstacles in their attempts to gain control over resources. As a result, they’ve begun to adopt a “rural areas encircling cities” approach in the global resource sector, shifting their focus to regions such as Africa, South America, and Central Asia. However, these “rural” areas—global mineral resource regions—face the serious challenge of weak foundational infrastructure. The most immediate difficulty is the lack of basic geological data, leaving mining companies like blind men hunting elephants, unable to find any viable deposits to exploit. While an “open-source” strategy—moving toward directly purchasing mineral products—might seem appealing, we currently lack sufficient bargaining power and the timing isn’t right. Exploring resource extraction in Africa, South America, and Central Asia can still be worth trying, but first we must overcome the critical barriers of insufficient foundational data and unclear mining areas. The most reliable option remains achieving a major breakthrough in domestic mineral exploration. In short, pursuing an “open-source” strategy requires us to build on our domestic strengths while also venturing overseas—but it absolutely depends on robust geological exploration work for support.

Geological exploration work must shoulder the aforementioned heavy responsibility of “expanding revenue sources.” It absolutely cannot do without technical personnel, advanced technological equipment, and sufficient funding. Ultimately, it still comes down to the fact that the enthusiasm of geological exploration units and adequate financial resources are the key constraints on their ability to take on this critical task of “expanding revenue sources.” To boost the enthusiasm of geological exploration units and ensure they receive sufficient financial support, we need an appropriate investment mechanism to provide the necessary impetus.

II. Reform of China’s Geological Exploration Investment Mechanism and Its Effects

After the founding of New China, the geological exploration sector operated under a typical planned economic model. Geological exploration work was entirely managed by the state: the training of personnel required by geological exploration units, the procurement of equipment, and the funds needed for the living expenses and operational activities of geological exploration staff—all were fully financed by the government treasury. Correspondingly, the outcomes generated by the intellectual labor invested by geological exploration units belonged to the government and were controlled by the government. The primary method for enhancing the dedication of professionals was to praise, publicize, and promote the spirit exemplified by “Iron Man” Wang Jinxing.

In an era when both the Chinese government and the general public were impoverished, the state-run mechanism effectively mobilized the entire nation’s resources to develop geological exploration. This state-sponsored approach yielded two remarkable achievements: first, it fostered the development of China’s own geological workforce; second, it produced a wealth of geological exploration results, gradually resolving the longstanding challenge of China’s mining industry being unable to support the growth of downstream sectors. However, starting in the 1980s, as the number of employees in geological exploration units—exceeding 800,000—continued to grow, the government’s fiscal resources increasingly fell short, leaving these units facing an acute shortage of funds for survival and development. Particularly after the central government’s 1992 policy shifted expenditure on geological exploration primarily toward basic geological research and general mineral prospecting, most geological exploration units found themselves directly confronted with the pressing issue of simply making ends meet.

To address the shortage of funding sources for geological exploration units, in 1985, the Ministry of Geology and Mineral Resources put forward the well-known “Three Transformations” theory: “commercialization of certain geological achievements, corporatization of geological exploration units, and socialization of the geological workforce.” From that point onward, China’s mechanism for investing in geological exploration began to shift toward “seeking funds from society.” In 1994, the Ministry of Geology and Mineral Resources proposed that geological work should be divided into two distinct parts: public-interest and commercial. In August, then Vice Premier Zhu Rongji issued a directive stating: “The geological workforce should gradually transform into a ‘field army’ and local forces. The field army would be supported by central government funding, equipped with elite personnel and modernized equipment, and tasked with undertaking national strategic missions; while the local forces would engage in diversified operations, reassign personnel, and gradually move toward corporate management.” Thus, the structure of the geological exploration system—specifically, the main actors involved in geological exploration and their respective roles—began to take shape along the path of reform: the “field army,” responsible for public-interest and strategic geological work; and the “local forces,” focused on commercial geological activities. Corresponding to this broad direction of institutional reform, the reform of the investment mechanism for geological exploration also became initially clear: the “field army” would be funded by the central government, while the “local forces” would become corporatized, each leveraging its own strengths and finding its own sources of revenue.

The reform of the geological exploration investment mechanism between 1985 and 1999 was a highly beneficial and absolutely necessary endeavor. The original intention behind the reform was simply to address the “difficulty in making ends meet” faced by geological exploration units. However, the implementation of the reform proceeded through trial and error under conditions characterized by “broad objectives but no clear path, and a lack of supporting environmental conditions.” Naturally, the results of the reform fell short of expectations: geological exploration units, burdened with heavy liabilities, ventured into the commercial sector, beginning to focus on “one primary business while diversifying into others.” Yet for most units, their efforts in the “tertiary sector” did not succeed. As a result, nationwide basic geological surveys and mineral exploration and prospecting activities shrank, and talented professionals continued to leave the exploration industry.

On April 9, 1999, the General Office of the State Council issued the "Reform Plan for the Management System of Geological Exploration Teams" (Guobanfa [1999] No. 37). Right from the outset, this plan mentioned the original intention behind the reform of geological exploration units at the time—to save central government finances. Subsequently, it set forth the reform objective of "separating government administration from enterprise (or institutional) management," as well as the guiding principle that "basic, public-interest, and strategic geological exploration units would be financially supported by the central government, while other geological exploration units would be managed locally and operated as enterprises." The plan further elaborated on specific reform measures under "Section II: Specific Reform Measures" and "Section III: Policy and Measures for the Reform." Additionally, the "Implementation Plan for the Reform of the Management System of Geological Exploration Units Affiliated to National Bureaus Under the Administration of the State Economic and Trade Commission," issued by the General Office of the State Council on January 4, 2001 (Guobanfa [2001] No. 2), the "Notice on Further Deepening the Reform of Geological Exploration Teams," issued by the General Office of the State Council on September 4, 2003 (Guobanfa [2003] No. 76), and the "Administrative Measures for the Collection of Fees and Payments for Prospecting and Mining Rights," issued jointly by the Ministry of Finance and the Ministry of Natural Resources on June 7, 1999 (Cai Zongzi [1999] No. 74)—specifically Article 11 thereof—as well as the "Supplementary Notice on the Administrative Measures for the Collection of Fees and Payments for Prospecting and Mining Rights," issued by the Ministry of Finance and the Ministry of Natural Resources on November 11, 1999 (Cai Zongzi [1999] No. 183), Articles 1 and 2 thereof; the "Interim Provisions on the Transfer and Assignment of Mineral Rights," issued by the Ministry of Natural Resources on October 31, 2000 (Guotu Zi Fa [2000] No. 309), specifically Articles 3, 6, 11, 12, 16, 19, 39, and 50 thereof; and the "Administrative Measures for Converting Fees for Prospecting and Mining Rights into State Capital," issued by the Ministry of Finance and the Ministry of Natural Resources on August 17, 2004 (Cai Jian [2004] No. 262)—all these centrally issued regulations provide relatively clear guidance on the distinction between "field armies" and "local forces," as well as on the survival strategies and support policies for "local forces."

It can be said that starting from April 9, 1999, China’s geological exploration units officially and on a large scale began to implement reforms in their investment mechanisms.

Objectively speaking, the reform that began on April 9, 1999, was more aimed at alleviating the financial difficulties faced by geological exploration units than at promoting their development. In other words, from the very outset, the reform still placed greater emphasis on reducing the financial burden of the geological exploration workforce on the government budget, while neglecting the strategic importance of geological exploration work.

The “Four Mining Issues”—mining, mines, miners, and mining towns—began to attract attention from China’s insightful intellectuals at the dawn of the new century. On March 7, 2002, during the first plenary session of the Fifth Session of the Ninth National Committee of the Chinese People's Political Consultative Conference, Committee Member Zhu Xun delivered a speech titled “We Must Attach as Much Importance to the ‘Four Mining Issues’ as We Do to the ‘Three Rural Issues,’” a speech that had a profound and lasting impact. After 2003, downstream industries experienced robust growth, the mining sector boomed, and mineral products became in short supply, highlighting the increasing importance of geological exploration work. On January 20, 2006, the “Decision of the State Council on Strengthening Geological Work” (Guofa [2006] No. 4) was issued; and on October 25, 2006, the “Notice of the Ministry of Finance and the Ministry of Natural Resources on Deepening Reform of the Paid Acquisition System for Prospecting and Mining Rights” (Caijian [2006] No. 694) was released. The most significant difference between the “Decision of the State Council on Strengthening Geological Work” and earlier documents on geological exploration reform lies in its urgent focus, from the perspective of promoting the development of the geological exploration sector, on addressing systemic and investment-related issues that have long constrained the sector’s growth, as well as issues concerning technical preparedness, talent cultivation, alleviating historical burdens, and supporting policies related to obtaining mining rights. In our view, Document Caijian [2006] No. 694 provides geological exploration units with an opportunity to “exchange cash for full mining rights.” Thus, the mechanism for geological exploration investment has entered a new round of reform.

Over the past four-plus years, the ratio of government fiscal investment to social capital investment in the geological exploration sector has shifted from a 70/30 split before the new reforms to a 20/80 split after the reforms. However, in terms of effectiveness, social capital has bypassed geological exploration agencies and entered the mineral exploration sector directly, leading to a disconnect between exploration activities and exploration technologies—and even giving rise to speculative trading of exploration rights without actual exploration taking place. As a result, the process of turning geological exploration enterprises into “local forces” has been hindered. Major breakthroughs in mineral exploration have only emerged recently, following the introduction last year of the concept of “integrated exploration” and the subsequent increase in central government financial investment.

Under the overarching goal of promoting successful mineral exploration, it has now become a pressing issue that requires careful deliberation: how to advance the corporatization of “local geological survey teams” while respecting the objective laws governing mineral exploration and achieving an effective integration of technology with social capital.

III. The First Step in the Enterprise Transformation of Geological Exploration Units: A Discussion on the Transformation to a Limited Liability Company System

In our view, the overarching direction for the corporatization of geological exploration units is to combine geological exploration technologies with the idle funds available throughout society, thereby fostering a situation in which “the entire population participates in mining.” This approach aligns with the technology-intensive nature of geological exploration activities while also opening up a channel for idle social capital to flow into this sector. However, given that geological exploration units as a whole have yet to shed their status as “public institutions,” achieving the corporate model—where geological exploration technologies take the lead and social capital provides the necessary impetus—will require a two-step process: First, transforming geological exploration units into limited liability companies; second, taking these companies public through an initial public offering (IPO).

According to the feedback from the “Grand Discussion on Geological Prospecting, Reform, and Development” launched by the land and resources system on March 27 last year, many specific issues—both in terms of understanding and operational practices—still remain in the first stage of enterprise-based transformation for geological exploration units, and it is necessary to clarify these issues.

(1) Should we undergo corporate restructuring?

Based on current practices in the operation of geological exploration units, these units generate revenue by investing technical labor in three main ways: a fixed-salary model, a combination of fixed salary and commission-based incentives, and an equity-based model. Each of these approaches has a different impact on the realization of the geological exploration units’ true entrepreneurial objectives—survival, development, and achievement of tangible results.

1. Base salary system

In one scenario, in certain regions, the government initiates all mineral resource exploration projects through official approval and then allocates funds from the fiscal budget to finance geological exploration work, entrusting geological exploration agencies to carry out exploration activities. If the exploration efforts fail, the government writes off the fiscal investment; if the exploration is successful, the government places the mining rights on the primary market for auction and tendering. The geological exploration agencies receive no share of the proceeds from these auctions and tenders.

In another scenario, the mining enterprise provides funding and commissions a geological exploration unit to conduct deep-sea mineral exploration within the scope of its mining rights, or commissions the geological exploration unit to carry out exploration in areas adjacent to its mining rights. If the exploration effort fails, the mining enterprise bears the risk entirely on its own; if the exploration is successful, the mining enterprise will exclusively enjoy the resulting benefits.

Under the “base salary” operating model, whether or not exploration results are achieved—or their magnitude—has nothing to do with the geological exploration unit itself. The only incentives for exploration units come from the sense of responsibility or commitment to keeping promises demonstrated by their staff members. This approach lacks economic incentives and is thus most detrimental to motivating geological exploration units. It cannot rule out instances where exploration units put in effort but fail to deliver full performance, or where they cut corners and use substandard materials. As a result, this model is the least conducive to achieving tangible results in mineral exploration efforts.

The “fixed-salary” operational model is, in effect, based on the assumption that geological exploration technology and intellectual input are of low value. As a result, geological exploration units find themselves in the position of mere “wage earners.” In today’s societal climate, where “money reigns supreme,” staff members struggle to gain respect and see any prospects for advancement. This is precisely why geological exploration talent—especially mid- and high-level professionals—are increasingly turning their backs on these units.

In our view, the “wage-earner” role can, for a time and with great difficulty, merely help geological exploration units eke out a living—but it cannot address the issue of their sustained growth and development. While it’s true that geological exploration units’ acceptance of this role and tolerance of the “fixed-salary” operational model reflect, in part, the inertia and complacency of unit leaders who are content with the status quo and unwilling to strive for progress, the more critical factor is that, given their meager financial resources and heavy burdens, these units find themselves—out of sheer necessity—forced into adopting such a “fixed-salary” approach. As for local governments, their preference for this “fixed-salary” operational model is indeed partly due to rigid thinking and habitual patterns of mind—a kind of genuine confusion—but even more significantly, it stems from the government’s failure to clearly distinguish between its own role and that of commercial enterprises. With an immediate focus on cash flow above all else, the government lacks a holistic, long-term perspective on geological exploration and its downstream industries.

2. Base salary plus commission

Under this operational model, local governments initiate mineral resource exploration projects through official approval procedures and then allocate funds from the fiscal budget to finance geological exploration work, entrusting geological survey institutions to carry out exploration activities. If the exploration efforts fail, the government’s financial investment is written off; if successful, the government places the mining rights on the primary market for auction and tender. The geological survey institutions receive a portion of the proceeds from these auctions and tenders—for instance, in certain areas of Henan Province, the share ranges from 2% to 5%; in some regions of Guangdong Province, it’s 10%; and Liaoning Province stipulates: “State-owned geological survey institutions shall participate in the distribution of revenues from state-funded geological exploration projects based on their contributions in terms of knowledge, technology, management, and other factors. Depending on the type of mineral resource and the success of exploration efforts, the transfer revenue from exploration rights will be returned to the state-owned geological survey institutions at a rate of 20% to 30% of the transaction price.”

The “base salary plus commission” operational model has recognized the critical role of technology and expertise in exploration activities and links exploration outcomes directly to geological survey institutions. This approach is a highly beneficial attempt to boost the enthusiasm of geological survey institutions, accelerate the achievement of tangible results in mineral exploration, and strengthen the financial resources and asset base of these institutions.

In our view, the “base salary plus commission” operational model is well-suited for most geological exploration units today, precisely because these units are currently very impoverished. However, this model should be seen merely as a measure to lay the groundwork for the corporatization of geological exploration units—used only temporarily and on a transitional basis. After all, the ultimate value of mineral exploration results is reflected in the selling prices of mined products. Once geological explorers no longer have to worry about food, clothing, shelter, and transportation, they will begin to realize the enormous gap between income from geological exploration and income from mining. From that point onward, the incentive effect of commissions will gradually erode, and the geological exploration units’ most precious asset—their talent—will start to drift away.

3. Equity-income type

Under this operational model, geological exploration units join forces with other entities—such as mining companies—to establish a new joint venture, which then carries out exploration activities in its own name. If the mineral exploration efforts fail, the geological exploration unit and the other entities bear the risks based on their respective investments in the new company. However, if the exploration is successful, the geological exploration unit and the other entities share the resulting profits in proportion to their equity stakes in the new company. The “Nihé Model” in Anhui Province serves as the most exemplary example of this approach: In November 2007, the China Geological Survey, the Department of Natural Resources of Anhui Province, the Anhui Provincial Bureau of Geology and Mineral Resources, and China Minmetals Corporation signed a “Quadripartite Agreement.” According to this agreement, China Minmetals invested 60 million yuan to form the “Anhui Wuxin Mining Company” together with the Anhui Provincial Bureau of Geology and Mineral Resources, which was tasked with the exploration and development of the Nihé iron ore deposit. In “Anhui Wuxin Mining Company,” China Minmetals holds a 70% stake, while the Anhui Provincial Bureau of Geology and Mineral Resources holds a 30% stake. As it turns out, “Anhui Wuxin Mining Company” has achieved remarkable success in the Nihé iron ore project.

The equity-revenue-based operational model allows the value of geological exploration’s intellectual labor to gain more opportunities for market recognition. In particular, when geological exploration firms collaborate with mining enterprises under an equity-revenue-based model, the revenue generated from geological exploration work can be more closely linked to the ultimate value of exploration results—making this model the optimal choice for long-term motivational incentives for geological exploration units. This approach simultaneously resolves the contradiction between geological exploration units that possess prospecting talent and technology but lack funding, and mining enterprises that have both capital and mining talent and technology but lack prospecting talent and prospecting expertise—a contradiction that is particularly acute in China’s current trend toward integrated exploration and mining development. Therefore, the equity-revenue-based operational model—specifically, the transformation of geological exploration units into corporate entities through cooperation with mining enterprises, thereby integrating geological exploration technologies with the segment of society most closely associated with capital—is also the best initial step toward the corporatization of geological exploration units.

In the face of the success of the "Nihé Model," some geological exploration units still raise questions: “Geological exploration units are public-service organizations—can they act as shareholders to establish a company? On what basis is this allowed?”

As for the first question mentioned above, the answer was already quite clear at the very beginning of these entities’ localization reform: absolutely possible.

On April 9, 1999, the “Reform Plan for the Management System of Geological Exploration Teams” issued by the State Council stipulated in Paragraph 2 of Section I, “Goals and Principles of the Reform”: “The principles of the reform are: ... to separate government administration from enterprise management ... and gradually transform the remaining geological exploration units into economic entities operating and managed according to market rules...”; and in Paragraph 2 of Section II, “Specific Reform Measures (I)”: “...geological exploration units ... will gradually become economic entities that operate independently, assume their own profits and losses, exercise self-discipline, and pursue their own development.”

On January 4, 2000, the "Implementation Plan for the Reform of the Management System of Geological Exploration Units Affiliated with State Bureaus Under the Administration of the State Economic and Trade Commission" explicitly stated in Section III, "Specific Measures for the Reform (3) Reform and Transition to Enterprise-Based Operation": "Geological exploration units that adopt an enterprise-based operational model... may... invest in mineral exploration and development, becoming operators of mining rights or integrated resource companies that combine exploration and production."

The penultimate sentence of Document No. 13, “Decision of the State Council on Strengthening Geological Work,” dated January 20, 2006, reads: “Encourage state-owned geological exploration units to form joint ventures and cooperate with private capital to establish mining companies or geological technical service companies.”

In our view, the second question mentioned above is actually the most important one. The real intent behind the question is to urge the government to earnestly fulfill its “supportive responsibility” for the restructuring of geological exploration units— a responsibility that was already established 11 years ago—and thereby address the lingering concerns surrounding the restructuring of these units.

It reminds us to revisit the “Reform Plan for the Management System of Geological Exploration Teams,” specifically Section III, “Policy Measures for Reform”: Currently, geological exploration units have limited net assets available for operations, their equipment is outdated and aging, and they have a large number of retired and soon-to-be-retired personnel, making reform particularly challenging. Both the central and local governments must provide the necessary financial support and policy assistance for the reform of the management system of geological exploration teams—especially in regard to six accompanying policies, including the allocation and use of geological exploration fees, conversion of such fees into state capital contributions, fiscal interest subsidies on bank loans, livelihood security for laid-off workers, and pension guarantees for retired employees.

It reminds us to revisit the full text of the “Notice of the General Office of the State Council on Deepening the Reform of the Geological Exploration Team,” issued on September 4, 2003 (Guobanfa [2003] No. 76). It also prompts us to carefully study the following provision from the “Decision of the State Council on Strengthening Geological Work” dated January 20, 2006: “(15) Deepen the reform of state-owned geological exploration units. Further implement the State Council’s plan for reforming the management system of the geological exploration team... In accordance with relevant regulations on the reform of public institutions, promptly put into effect social security policies for retired personnel and current employees of state-owned geological exploration units. For geological exploration units under local administration, local governments shall, in line with unified local policies, accelerate the implementation of funds required for housing reform and address issues such as the substantial backlog in housing and infrastructure construction. As for the former centrally-administered geological exploration units, during the 11th Five-Year Plan period, the state will continue to provide investment subsidies from the central budget, primarily for infrastructure construction. Actively promote the reform aimed at separating the social functions of geological exploration units. The above-mentioned policies shall also apply, by analogy, to coal, nuclear industry, metallurgy, nonferrous metals, Armed Police Gold, chemical industry, building materials, and salt industry geological exploration units under central administration.”

(2) What will be used as the capital contribution?

Geological exploration units can become shareholders, and there is a legal basis for this under national regulations. The current issue, however, is: What will geological exploration units contribute as capital?

The assets currently held by geological exploration units include: monetary funds, physical assets such as equipment and real estate, certified intangible assets like land-use rights, patent rights, trademark rights, and copyright, as well as mineral exploration and mining rights, know-how, and human talent—these are all forms of living intellectual capital that are as precious as “African Star” diamonds, with their value capable of rising indefinitely in response to demand. No one can deny that an expert like Li Siguang could be exchanged for one, five, or even five hundred sets of high-value machinery and equipment.

Among the entities listed above held by geological exploration units, which ones can serve as the basic criteria for making contributions? Article 27, Paragraph 1 of the Company Law provides: “Shareholders may contribute capital in cash, or in kind, intellectual property rights, land use rights, and other non-monetary assets that can be valued in monetary terms and legally transferred; however, assets prohibited from being used as capital contributions by laws and administrative regulations are excluded.”

We must recognize the following: First, Article 27, Paragraph 1 of the Company Law addresses only the question of “which assets can be contributed as capital,” but neither does nor need to address the question of “what procedures should be followed when making capital contribution decisions.” Second, for most geological exploration units, enterprise reform has yet to be fully completed, and the issue of property rights—specifically, whether each asset they hold is “owned by the state or owned by themselves”—remains relatively complex. This fact dictates that the decision-making bodies of geological exploration units cannot simply follow the example of private enterprise owners and make capital contribution decisions by merely banging their fists on the table. On issues such as which assets should be contributed, which assets should be chosen for capital contributions, and who should have the final say in these matters, it is imperative to clearly distinguish between “state-owned” and “self-owned” assets and to exercise utmost caution. After all, it would be utterly unworthy to invite accusations—such as “privately dividing state-owned assets” or “causing the loss of state-owned assets”—simply because of neglecting proper procedures.

[1] Monetary Contribution

At a given point in time, the amount of currency held by a geological survey unit is determined by the total balance in its “bank account.”

However, based on the “Notice of the General Office of the State Council Forwarding the Opinions of the Supervisory Ministry, the Ministry of Finance, the People’s Bank of China, and the National Audit Office on Clearing Up and Rectifying Bank Accounts of Administrative and Public Institutions,” dated May 24, 2001, together with its attached tables (Guobanfa [2001] No. 41), and Article 1, items 2, 3, and 7 of the “Notice of the Supervisory Ministry, the Ministry of Finance, the People’s Bank of China, and the National Audit Office on Relevant Issues Concerning the Clearing Up and Rectification of Bank Accounts of Central Administrative and Public Institutions,” dated December 31, 2001, as well as the provisions set forth in the “Accounting System for Geological Exploration Units” (Caihui [1996] No. 15), specifically under “II. Accounting Subjects (II) Instructions for the Use of Accounting Subjects,” namely “Account No. 141—Long-term Investments,” “Account No. 301—National Funds,” “Account No. 401—Allocations for Geological Exploration Work,” and “Account No. 311—Geological Exploration Development Fund,” it can be concluded that among the “National Funds Account,” “Geological Exploration Development Fund Account,” and “Special Allocations Account” held by geological exploration units: only the funds in the “Geological Exploration Development Fund Account” are owned by the geological exploration unit itself and may be freely managed and utilized by the unit as monetary contributions for equity participation. By contrast, the funds in the “National Funds Account” and the “Special Allocations Account” are, by nature, state-owned, and their use is controlled by the financial authorities; currently, these funds do not yet include equity contributions made by geological exploration units.

Therefore, if a geological exploration unit chooses to contribute capital in the form of currency, it can now only take into account the funds available in its “Geological Exploration Development Fund Account.”

[2] Contribution in kind

The physical assets currently held by geological exploration units—including technical equipment and real estate as fixed assets—can be categorized, from the perspective of ownership, into state-owned physical assets registered in the “Certificate of State-Owned Asset Ownership for Public Institutions” issued by the government’s financial authorities, as well as physical assets owned by the geological exploration units themselves that are not included in this “Certificate of State-Owned Asset Ownership for Public Institutions.”

For its own physical assets, geological exploration units may independently decide to invest them as equity stakes. According to Article 27, Paragraph 2 of the Company Law—“Non-monetary property contributed as capital shall be appraised and valued, and the property shall be verified; overvaluation or undervaluation is prohibited”—and in accordance with the provisions of the “Accounting System for Geological Exploration Units” (Caihui [1996] No. 15), specifically under accounts such as “Account No. 141—Long-term Investments,” “Account No. 151—Fixed Assets,” and “Account No. 311—Geological Exploration Development Fund”: First, appraisal is a mandatory procedure; second, the appraised value serves as the basis for the geological exploration unit’s accounting records; third, the appraised value does not constitute the minimum price for equity negotiation—if the negotiated price falls below the appraised value, Account No. 311 will reflect an impairment; if the agreed price exceeds the appraised value, Account No. 311 will reflect an appreciation—and that’s all there is to it.

With regard to state-owned physical assets, in accordance with Article 27, Paragraph 2 of the Company Law and Article 8, Item 3 of the “Interim Measures for the Management of State-Owned Assets in Public Institutions,” issued by the Ministry of Finance on June 7, 2006 (Ministry of Finance Order [2006] No. 36)—which stipulates that “public institutions… shall handle the approval procedures for matters related to the external investment of their state-owned assets”—as well as Article 19, which states that “the use of state-owned assets by public institutions includes…”