Recently, CCB spokesperson answered questions on the issues of remuneration and incentive mechanism reform.

Q: Recently some media reports that CCB plans to raise its employees’ wage by over 30% this year. Is it true?

A: It is a completely wrong report. We do not have such a plan and will not have it in the future under regular conditions. CCB has established an effective corporate governance system and our financial management is especially sophisticated. Our budget plan must be reviewed carefully and approved by the Board of Directors, and the management must make detailed preparations, analysis, communications and discussions in advance to ensure rational and prudent decisions.

Q: But according to the interim report 2006 just released by CCB, by the end of June this year its employee expenses have risen by 32.9% over the same period of last year. What’s the reason for the rise?

A: Employee expenses are different from wage, and the latter usually makes up about 60% of the former. Last year a large amount of employee expenses were incurred in the latter half of the year, and as a result the expenses in the first half of the year were relatively small. This year the expenses are fairly balanced. That’s why compared with the same period of last year the employee expenses in the first half of this year increase by a big margin. As required by the IPO, last year we solved some problems concerning remuneration and benefits according to related laws and regulations and increased a number of necessary expenses. First, we make timely payment of the full amount of basic social security for all our employees in line with laws and regulations; second, the enterprise annuity system, with the approval of related authorities, was formally launched in the latter half of last year; third, after the housing system reform, the original public houses are basically sold out and in the latter half of last year various branches started implementing the rules on the increase of housing subsidy. Meanwhile, wage reform is accelerated. While maintaining a reasonable gap, the wages of grassroots lowest-income employees are readjusted. As of September 2005, the income of a total of 10,513 CCB staffs was lower than the local average, which is mainly attributable to the excessively high proportion of performance-based wage and insufficient local financial resources. Such a situation may easily lead to moral hazard and operational risks. Therefore, we make unified readjustment to raise their wages to or slightly higher than the local average level. This is another factor leading to the increase over the same period of last year.

Q: Will CCB raise its employees’ wage this year? If yes, how about the margin?

A: So far this year CCB has not formulated any new policy or standard concerning employees’ remuneration and throughout the year the employee cost budget increase will be linked with the increase of business revenue and profit. In fact, CCB’s cost/income ratio has been maintained at a fairly low level in the industry. In 2005 it was 45.13% and as of June this year was 41.65%, dropping by 3.48 percentage points.

Q: There is also report that CCB intends to implement the employee stock ownership plan which will allocate as many as RMB15.6 billion worth of stocks to its employees for free. Is this true?

A: The report is totally misleading. To increase the cohesive force of the bank, integrate as much as possible the interests and concerns of employees with those of shareholders and reduce the operational risks and moral hazard of the bank, in the process of exploring the establishment of a long-term incentive mechanism with Chinese characteristics, we proposed the management’s stock appreciation right plan and the employee stock ownership plan with the purpose of attracting and retaining talent, increasing the study and innovation capacity and ultimately building up our core competitiveness. In August 2005, our shareholders’ meeting passed the management’s stock appreciation right and employee stock ownership incentive policies. So far the design of detailed plans has finished and is undergoing internal and external review and approval. The employee stock ownership plan mainly involves the voluntary subscription of employees and at the same time the bank will reward those employees with outstanding performance, especially those who have made outstanding contributions. All the incentive expenses shall neither exceed the budget of the period nor raise the cost/income ratio of the bank. Since the plan is implemented in several stages according to the performance evaluation criterion defined by the Board of Directors, the specific number of stocks really bought in the first year has yet not been decided. But the number will definitely be far lower than what some media estimates.

Q: The core of remuneration system reform is to reward those with sound performance and punish those with poor performance and make distributions according to capacity and contributions. It is understandable to pay the professionals the remuneration of market level. However, some experts and scholars say that the major problem of state-owned banks remains to be equalitarianism and it seems all their employees are paid high wages. Is it still the case?

A: With the reform in recent years CCB’s internal income distribution system has undergone fundamental changes and a new incentive and disincentive system suitable to the market economy has taken initial shape. However, since the internal transfer price calculation is yet to be improved and the job position assessment and performance evaluation are somewhat limited, problems like equalitarianism and unreasonable income gap still exist. Due to various restraints, our payment for professionals in general is lower than the market level, the compensation for the managerial staffs is lower not only than the international level but also the domestic level and the problem of “same work different reward” is yet to be resolved among the grassroots employees. Brain drain is still a serious problem faced by the bank. Some of our key business staffs joined foreign banks and an increasing number of professionals moved to other Chinese financial institutions. In some shareholding banks a large number of heads of their branches just come from CCB and the management of many newly established financial institutions in some cities nearly all once worked for CCB. We believe that such talent mobility is a normal phenomenon and to retain talent we must make use of the ideological encouragement and corporate culture and provide a better platform for the growth of talent. This is in fact what we are doing over the years. The material incentive should be close to or at least not obviously lower than the market level for long. The market level is decided by the interaction of demand and supply over a long period of time and cannot be changed by any department, industry or individual.

Q: Talking about market, there is an opinion that the banking industry is monopolistic and hence the remuneration and profit of the industry are higher than the normal market level. Do you agree?

A: We believe that the commercial bank market should be further opened, which serves the interest of the country and the consumers. However, this market already has fierce competition and generally speaking there is no single bank which is in a monopolistic position. The four state-owned banks are competing intensely, and even the three policy banks have already joined the competition in some business areas. In addition to a dozen of domestic shareholding banks, city commercial banks and rural cooperative banks or credit cooperatives are everywhere in the country, not mentioning the several hundreds of branches of foreign banks in China. How can it be possible to monopolize the market?

At present the wage income of commercial banks is indeed higher than the social average level, but our benefits and social security are the same with other commercial and industrial entities. All the employees of the bank, including the Chairman and the President, must pay such fees as pension insurance, medical insurance and unemployment insurance and the real social security they enjoy is clearly lower than that enjoyed by public servants.

Q: Since last year both the international market and authoritative professional agencies have had high recognition of CCB. The Britain-based journal The Banker rated CCB as the best bank of China, the US magazine Forbes ranked CCB the 65^th among the top 2,000 global listed companies and Asiaweek rated CCB as the most profitable bank in Asia. Such news is fairly encouraging. However, some people on the Internet expressed doubt that the increase of CCB’s profit is attributable to the bank’s behavior of raising service prices and undermines the interest of the public. What is your comment on this?

A: The service pricing system of Chinese banking industry originated from the planned economy period, with both distorted pricing structure and levels. Some services are completely for free for long and some just charge disproportionately low fees. At present, most of the increasing revenue of our bank comes from business expansion and delivery of new products and services, and the contribution of price increase is almost negligible. The so-called most profitable bank means that in 2005 the total profit of CCB outnumbered that of many Japanese and South Korean leading banks and ranked No.1 in Asia. The maximization of profit of CCB also maximizes not only the value of shareholders but also the interest of the state and the public. In general, of every RMB10 profit of CCB about RMB8.5 will go to the state. The various taxes paid by CCB are about 42% of its pre-tax profit, the dividends allocated to the state, with 74.26% of equity in the bank, equal 30% of the bank’s post-tax profit and a majority of net assets increase of the bank belongs to the state. The state also benefits most from the increase of CCB’s share price and at the same time the bank makes donation to many charity programs. In short, we believe that the interest of CCB is completely consistent with that of the state and the people.

Q: The overseas listing of CCB has raised the bank’s transparency sharply and the media and the public are paying unprecedented attention to the bank. Will CCB feel uncomfortable about that? In particular, will CCB feel tired of or annoyed by some wrong report and comment?

A: Media and public monitoring is a component of modern bank’s governance structure. We will, as always, strive to raise transparency and provide the shareholders and the public with more timely, comprehensive and accurate information in line with laws, market rules and articles of association. We welcome all the fact-based criticism and especially the suggestions on how to make improvement. We also hope friends in various sectors look at CCB objectively, faithfully introduce and comment on CCB and communicate with us in a timely manner whenever they have questions. We have established sound working relations with the media and hope in the future with the joint efforts of both sides the misleading reports will be reduced or eliminated. I believe this is also the common aspiration of the shareholders, customers, employees and the public.