Chairman of the Board: Liu Haiyan President: Wu Jian TABLE OF CONTENTS

CHAPTER I IMPORTANT NOTICE ...... 2

CHAPTER II BRIEF INTRODUCTION TO THE COMPANY...... 3

CHAPTER III SUMMARY OF KEY FINANCIAL AND PERFORMANCE INDICATORS ...... 4

CHAPTER IV CHANGES IN EQUITY AND SHAREHOLDERS ...... 9

CHAPTER V DIRECTOR, SUPERVISOR, SENIOR MANAGEMENT AND EMPLOYEES ...... 14

CHAPTER VI CORPORATE GOVERNANCE STRUCTURE...... 21

CHAPTER VII SHAREHOLDERS GENERAL MEETING ...... 26

CHAPTER VIII REPORT OF THE BOARD OF DIRECTORS ...... 27

CHAPTER IX REPORT OF THE SUPERVISORS COMMITTEE...... 42

CHAPTER X IMPORTANT ISSUES...... 44

CHAPTER XI FINANCIAL REPORT ...... 48

CHAPTER XII REFERENTIAL DOCUMENTS ...... 49

APPENDIX ...... 49 CHAPTER I IMPORTANT NOTICE

The Board of Directors of Hua Xia Bank Co., Ltd. (the Com- pany hereinafter), Board of Supervisors, directors, supervisors, and senior managements guarantee that the information pre- sented in this report is free from any false record, misreading statement, material omission, and accepts, individually and collectively, liability for its truthfulness, accuracy and completeness.

On March 12 ,2007 the 18th meeting of the 4th Board of Directors of the Company examined and approved the 2006 Annual Report and its related abstract. 17 directors presented in the meeting except Mr. Zhang Meng, a director, who autho- rized Mr. Fang Jianyi, vice chairman of the board, to vote on his behalf. Six supervisors of the Company presented in the meeting. No director, supervsor, or senior management refuses to guar- antee or dissents to the truthfulness, accurancy and complete- ness of this report.

The annual financial statements of the Company for 2006 were audited by Beijing Jing Du Certified Public Accountants Co., Ltd. and Ernst and Young, respectively in accordance with PRC Generally Accepted Accounting Principles (GAAP) and International Accounting Standards (IAS), and have obtained standard auditor's report without any reserved opinions.

The Chairman of the Board, Mr. Liu Haiyan, the President, Mr. Wu Jian, the Financial Controller, Ms. Liu Xifeng and the Head of the Treasury and Finance Department Mr. Han Yunfu and Mr. Sun Liguo guarantee the truthfulness and complete- ness of the financial statements in the annual report.

-2- 2006 ^kkr^i=obmloq

CHAPTER II BRIEF INTRODUCTION TO THE COMPANY

I. Registered Company Name in Chinese: !"#$%&' (Abbreviation: Hua Xia Bank, hereinafter referred asthe Company) Registered Company Name in English: Hua Xia Bank Co., Limited

II. Legal Representative: Liu Haiyan

III. Corporate Secretary: Mr. Zhao Junxue (alias: Zhao Jingxue) Representative of Securities Affair: Mr. Zhang Taiqi Address: Hua Xia Bank Mansion, 22 Jianguomen Nei Avenue, Dongcheng District, Beijing P.C.: 100005 Tel: 010-85239938, 85238570 Fax: 010-85239605 E-mail: [email protected]

IV. Registered Address: 22 Jianguomen Nei Avenue,Dongcheng District, Beijing Business Address: Hua Xia Bank Mansion,22 Jianguomen Nei Avenue,Dongcheng District, Beijing P.C.: 100005 Internet website: http://www.hxb.com.cnhttp://www.95577.com.cn E-amil: [email protected]

V. Designated newspaper for information disclosure: China Securities Journal, Shanghai Securities News and Securities Times. Internet website designated by China Securities Regulatory Commission for the publication of the Company's annual report: http://www.sse.com.cn Copies of the Annual Report are available at: General Office to the Board, Hua Xia Bank

VI. Venue of shares listed: Shanghai Stock Exchange Ticker: Hua Xia Bank SSE Code: 600015

VII. Other Relevant Information Date of Initial Registration: March 18, 1998 Place of Initial Registration: State Administration for Industry and Commerce Date of Registration Modification: April 20, 2005 Place of registration Modification: State Administration for Industry and Commerce Registered Number of Business License of the Corporate Legal Entity: 000001002967 Registered Number for Taxation: JGSXZ No. 11010210112001X Name of the Trustee for the non-free-floating shares: China Securities Depository and Clearing Co., Ltd., Shanghai Branch Name of the domestic auditor appointed: Beijing Jing Du Public Certified Accountants Co., Ltd. Office Address: 5/F, Scitech Plaza, 22 Jianguomen Nei Avenue, Chaoyang District, Beijing Name of the international auditor appointed: Ernst & Young Office Address: Hutchison House, 10 Harcourt Road, Central, Hong Kong

VIII. The report is prepared in both Chinese and English. Should there exist any inconsistency between the two versions, the Chinese version shall prevail.

-3- CHAPTER III SUMMARY OF KEY FINANCIAL AND PERFORMANCE INDICATORS

I. Key Profitability Indicators for the Year (Unit: RMB '000) Items PRC GAAP IAS Total profit 2,411,230 2,435,890 Net profit 1,457,043 1,481,704 Net profit excl. extraordinary items 1,585,781 1,481,704 Profit from core business 2,570,445 2,435,890 Profit from other business 0 0 Operating profit 2,570,445 2,435,890 Investment income 2,245,118 2,254,997 Allowance income 0 0 Net income from non-operating activities -159,216 0 Net cash flow from operating activities 37,893,741 39,618,294 Net increase in cash and cash equivalents 25,171,623 25,171,623

Note: The extraordinary profit and loss is determined and calculated according to Q&A for Information Disclosure Regulation for Companies Issuing Securities Publicly No.1: Extraordinary Profit and Loss (revised version 2004) in the [2004] No.4 document of China Securies Regulatory Commision. The extraordinary profit and loss items deducted are as follows: (In RMB '000) Extraordinary profit and loss items Amount Non-operating income and expense exclusive of provision for depreciation -159,216 Recovery of write-off asset in previous years 12,429 Reverse of asset depreciation provision in previous years 5,368 Income tax relating to extraordinary profit and loss 12,681 Total -128,738

-4- 2006 ^kkr^i=obmloq

II. Key Financial and Performance Indicators for the last three years prior to the end of the reporting period ( RMB'000) Items 2006 PRC GAAP in 2005 2004 PRC IAS After Before PRC GAAP adjustment adjustment GAAP Income from core business 18,082,583 18,097,981 13,780,919 13,794,473 10,826,804 Total profit 2,411,230 2,435,890 1,989,175 2,002,729 1,660,677 Net profit 1,457,043 1,481,704 1,279,594 1,288,675 1,016,918 Net profit excluding extraordinary items 1,585,781 1,481,704 1,437,393 1,446,474 1,119,501 Total asset 445,053,424 445,287,175 355,921,472 356,128,420 304,325,736 Shareholder's equity (excl.minority interest) 11,642,795 11,876,545 10,530,822 10,453,009 9,608,995 Net cash flow generated by operating activities 37,893,741 39,618,294 -6,586,159 -6,586,159 16,602,408 Fully diluted earnings per share (RMB) 0.35 0.35 0.30 0.31 0.24 Weighted average earnings per share (RMB) 0.35 0.35 0.30 0.31 0.24 Earnings per share excluding extraordinary items (RMB) 0.38 0.35 0.34 0.34 0.27 Net asset per share (RMB) 2.77 2.83 2.51 2.49 2.29 Net asset per share after adjustment (RMB) 2.65 2.83 2.37 2.36 2.16 Net cash flow generated by operating activities per share (RMB) 9.02 9.43 -1.57 -1.57 3.95 Net assets-income ratio 12.51% 12.48% 12.15% 12.33% 10.58% Fully diluted return onequity excluding extraordinary items 13.62% 12.48% 13.65% 13.84% 11.65% Weighted average return on equity excluding extraordinary items 14.43% 13.13% 14.32% 14.40% 12.28%

Notes: 1. Indicators are based on the 21st Article of Content and Format of Annual Report, the 2nd Publication of Content and Format Regulation of Information Disclosure by Company Issuing Securities Publicly (revised in 2005) and Calculation and Disclosure of Return on Equity and Earning Per Share, the 9th publication of Content and Format Regulation of Information Disclosure by Company Issuing Securities Publicly. 2. Earnings per share (IAS) is calculated based on 33rd publication of International Accounting Standard. 3. According to the provisions of the Ministry of Finance, commencing from January 1, 2006, the Provisional Regulations on Acknowledgement and Measurement of Financial Instruments (Trial) has been practiced within commercial banks listed and to be listed on trial basis. The Company has implemented these regulations and adjusted on retroactive basis the retained earnings as of the beginning of 2006 and the opening balance of the relevant items; several columns in 2005 profit statement and profit distribution statement have been filled in with the amounts after adjustment.

III. Key financial data and their discrepancies between PRC GAAP and IAS (RMB '000)  Net profit Net asset in Net profit in 2005 Net asset in the end in 2006 the end of 2006 (after adjustment) of 2005(after adjustment) Based on PRC GAAP 1,457,043 11,642,795 1,279,594 10,530,822 Adjustment under IAS: Housing system reformamortization 24,633 Interest income of billdiscount and rediscount 113,107 Write-off of organization cost 8,406 Cumulative translation adjustments 24,661 -24,661 Unrealized profit of the investment under available for sale 233,750 281,827 Subtotal of adjustment 24,661 233,750 121,485 281,827 Complementary financial statementunder IAS 1,481,704 11,876,545 1,401,079 10,812,649

-5- Notes: 1. Conforming to the PRC GAAP, after the termination of the housing revolving funds, the debit balance of the housing revolving funds as of December 31st, 2000 should be amortized in no more than five years. However, under IAS, the expense should be charged into the current period once for all. The relevant amount in the financial statements under the PRC GAAP had been amortized up in 2006. 2. In the financial statements of year 2005 and 2006 prepared under PRC GAAP or IAS, discounted bill and interest of bills rediscounted are prepared on an accrual basis. The discrepancy of net profit herein is the accumulated discrepancy in the financial statements prepared under PRC GAAP or IAS before year 2004. There was no relevant discrepancy in 2006. 3. Under the PRC GAAP, organization cost should be recorded as the profit and loss in the month of the establishment of the entity, and should be charged into the profit and loss on the date of the establishment of the entity under IAS. 4. Under the PRC GAAP, translation discrepancy in the statements in foreign currency in 2005 is charged into the profit and loss. 5. The discrepancy of unrealized income from the investments available for sales is the unrealized income balance from the investments available for sales not yet amortized under IAS.

IV. Information of provision for loan losses under both PRC GAAP and IAS (RMB '000) PRC GAAP IAS Opening balance 4,932,316 4,932,316 Provision in the reporting period 2,310,369 2,310,369 Offset against interest of deprecivated loan 265,655 265,655 Recovery in the reporting period 12,428 12,428 Write-off in the reporting period 1,014,042 1,014,042 Reverse in the reporting period 11,256 11,256 Closing balance 5,964,160 5,964,160

Note: "Reverse in the reporting period" refers to such loans for which the loss provision had already been, and it will be shifted in repossessed assets. The corresponding loss provision will transfer in provision for repossessed assets.

V. Complementary accounting data three years before the end of the reporting period (RMB '000) Items 2006 PRC GAAP in 2005 2004 PRC IAS After Before PRC GAAP adjustment adjustment GAAP Total liabilities 433,410,629 433,410,630 345,390,650 345,675,411 294,716,741 Borrowing from banks 1,936,363 1,936,363 16,763 16,763 520,000 Total deposit 371,295,024 371,295,024 314,166,617 310,503,499 267,842,372 Incl: long-term deposit 64,689,461 64,689,461 58,040,346 58,040,346 55,370,859 Total loan 259,767,145 259,767,145 233,423,475 233,687,524 181,112,202 Incl: Short-term loan 146,520,845 146,520,845 123,902,483 123,902,483 107,015,852 Import and export trade finance 969,478 969,478 1,337,866 1,337,866 1,212,047 Discount 24,454,467 24,454,467 40,224,387 40,488,436 18,206,993 Medium-and-long-term loan 80,433,762 80,433,762 60,960,804 60,960,804 48,645,423 Over-due loan 7,388,593 7,388,593 6,997,935 6,997,935 6,031,887

-6- 2006 ^kkr^i=obmloq

Note: Total deposit includes short-term deposit, short-term saving deposit, amounts payable on wire transfers received and temporary deposit, short-term deposits received, long-term deposit, long-term saving deposit, long-term deposits received, money remitted; uder PRC GAAP it also does not include outward remittance before 2005. Long-term deposit includes long-term deposit, long-term saving deposit, and long-term deposits of margin. Total loan includes short-term loan, import and export trade finance, discount, medium-and-long-term loan, over-due loan.

VI. Appendix to the income statement

Conforming to the Rules of Calculation and Disclosure of Return on Equity and Earning Per Share, the 9th publication of Content and Format Regulation of Information Disclosure by Company Issuing Securities Publicly, the return on equity and earning per share in 2006 are calculated as following:

(I) PRC GAAP

Items Profit inreporting Return on equity Profit per share period(RMB '000) Fully diluted Weighted average Fully diluted Weighted average Profit from core business 2,570,445 22.08% 23.39% 0.61 0.61 Operating profit 2,570,445 22.08% 23.39% 0.61 0.61 Net profit 1,457,043 12.51% 13.26% 0.35 0.35 Net profit excluding extraordinary items 1,585,781 13.62% 14.43% 0.38 0.38

(II) International Accounting Standards

Items Profit in reporting Return on equity Profit per share period(RMB '000) Fully diluted Weighted average Fully diluted Weighted average Profit from core business 2,435,890 20.51% 21.59% 0.58 0.58 Operating profit 2,435,890 20.51% 21.59% 0.58 0.58 Net profit 1,481,704 12.48% 13.13% 0.35 0.35 Net profit excluding extraordinary items 1,481,704 12.48% 13.13% 0.35 0.35

VII. Complementary financial indicators in the last three years prior to the end of the reporting period

Indicators (%) Benchmark 2006 2005 2004 ratio After adjustment Before adjustment End Average End Average End Average End Average Capital adequacy ratio  8% 8.28 8.14 8.27 8.32 8.23 8.31 8.61 7.87 Non-performing loan ratio  15% 2.73 2.89 3.05 3.34 3.04 3.34 3.96 3.89 Deposit toloan ratio RMB  75% 64.34 65.19 61.70 66.63 62.26 66.71 62.05 67.20 Foreign currencies  85% 34.37 40.24 54.50 56.78 54.71 56.80 59.36 68.56 RMB equivalents  75% 63.38 64.38 61.50 66.30 62.22 66.36 60.82 67.25 Asset liquidity ratio RMB  25% 64.29 41.76 51.79 51.11 51.79 51.11 57.21 53.76 Foreign currencies  25% 79.96 110.56 87.19 77.98 87.19 77.98 69.56 71.86 Moneymarket ratio RMB borrowing  4% 0.53 0.13 0.00 0.08 0.00 0.08 0.20 0.35 RMB lending  8% 0.05 0.06 0.02 0.08 0.02 0.08 0.20 0.18 Borrowing from overseas  100% 0 0 0 0 0 0 0 0 Interest collection ratio  97.00 95.70 95.92 96.08 95.92 96.08 97.82 95.43 Lending ratio to the top borrower  10% 7.04 6.45 6.15 5.66 6.18 5.66 5.31 6.20 Lending ratio to the top 10 borrowers  50% 36.31 36.06 38.02 34.76 38.20 34.80 31.81 35.02

-7- Notes: 1. Non-performing loan ratio is based on CBRC 5 categories of loan classification, NPL ratio= (substandard loan+ doubtful loan + loss loan) total loan outstanding  100%. 2. Circular of China Banking Regulatory Commission on Printing and Issuing the Core Indexes of Risk Supervision of Commercial Bank (Trial Implementation), the foreign currency asset liquidity ratio in 2006 is greater than or equal to 25% while the figure as of the previous year is greather than and equal to 60%.

VIII. Changes in shareholder's equity in the reporting period

(I) PRC GAAP (RMB '000) Items Equity Capital General Surplus Incl.:statutory Retained Cumulative translation Total ofshare- capital reserve provision reserve welfare reserve profit adjustments holder's equity Opening balance 4,200,000 3,822,995 900,000 744,419 211,149 888,069 -24,661 10,530,822 (after adjustment) Increase 0 66,624 1,000,000 356,853 0 1,457,043 24,661 2,905,181 Decrease 0 -25,645 0 211,149 211,149 1,607,704 0 1,793,208 Ending balance 4,200,000 3,915,264 1,900,000 890,123 0 737,408 0 11,642,795

The main reasons for the changes in shareholder's equity: 1. The change in the capital reserve is due to that the change in the fair value of financial asset available for sale is charged to the owner's equity. Increase in the reporting period is the amount resulted from change of the fair value of financial assets available for sale upon the owner's equity (after taxation); increase in the reporting period is the amount transferred to the profit and lost of the reporting period (after taxation). 2. Increase of the reserve for general risks is mainly due to that the reserve for general risks was provided from the net profit of the report period. 3. The reason for the increased surplus reserves: the net profit transferred to surplus reserves in the reporting period. 4. The reason for decreased statutory welfare reserve: According to the Circular of the Ministry of Finance on Issues concerning Enterprise Financial Treatment upon Implementation of the Company (CAI QI [2006] No. 67, ended December 31, 2005, the balance of the welfare reserve was transferred to the statutory surplus reserve. 5. The reason for the increased undistributed profit: 2005 dividend distribution, and provision of 2006 statutory surplus reserves and general provision.

(II) IAS (RMB '000) Items Equity Capital General Surplus Retained Unrealizedgain on available- Total of Share- capital reserve provision reserve Profit for-sale securities(after tax) holder's equity Opening balance 4,200,000 3,759,620 900,000 742,254 865,573 345,202 10,812,649 Increase 0 0 1,000,000 359,018 1,481,704 44,192 2,884,914 Decrease 0 0 0 211,149 1,609,869 0 1,821,018 Closing balance 4,200,000 3,759,620 1,900,000 890,123 737,408 389,394 11,876,545

The reasons for changes in the shareholder's equity are same as under PRC GAAP.

-8- 2006 ^kkr^i=obmloq

CHAPTER IV CHANGES IN EQUITY AND SHAREHOLDERS

I. Statement of changes in shares (Shares) Before the change(Date of trading Increase / Decrease (+, -) After the change resumption of G shares: Jun 6, 06) (Dec 31, 2006) Quantity Rate New Bonus Capital surplus Others Sub Q'ty Rate issuance issue converted into equity -total I Unlisted Shares 2,640,000,000 62.86% 0 0 0 0 0 2,640,000,000 62.86% 1. State owned shares 2. Domestic legal entity shares 1,947,056,000 46.36% 0 0 0 -31,000,000 -31,000,000 1,916,056,000 45.62% 3. Other domestic shares Including: Domestic legal person shares 105,744,000 2.52% 0 0 0 +31,000,000 +31,000,000 136,744,000 3.26% Domestic natural person shares 4. Foreign shares Including: Overseas legal person shares 587,200,000 13.98% 0 0 0 0 0 587,200,000 13.98% Overseas natural person shares II Listed shares 1,560,000,000 37.14% 0 0 0 0 0 1,560,000,000 37.14% 1. RMB common shares 1,560,000,000 37.14% 0 0 0 0 0 1,560,000,000 37.14% 2. Foreign invested shareslisted in Mainland China 3. Foreign invested shareslisted out of Mainland China 4. Others III Total shares 4,200,000,000 100.00% 0 0 0 0 0 4,200,000,000 100.00%

Notes: 1. On September 16, 2006, 21 million unlisted shares (domestic legal equity shares) held by Luen Tai Group Co., Ltd. were sold at auction to the order of the court; the buyer was Beijing Jingen Technology Development Co., Ltd. (domestic legal entity shares). The transfer was completed on September 29, 2006. 2. As Shanghai Giant Biotech Co., Ltd., one of the Company's shareholders, paid the valuable consideration for Xinyuan Industry Holding Group Co., Ltd. in the equity separation reform, Xinyuan Industry Holding Group Co., Ltd., the Company's former shareholder reimbursed the payment to Shanghai Giant Biotech Co., Ltd. with its 10 million listed shares with sales restriction (state legal entity shares) in the Company. The transfer was completed on November 27, 2006.

II. General Situation of share listing

(I) Equity issuance in the last three years prior to the end of the reporting period The Company issued an initial public offering of 1 billion Renminbi based common shares on August 26, 2003, and no more shares were issued in the past three years prior to the end of the reporting period,

(II) Changes in the total share and shareholding structure within the reporting period. According to the Company's equity merger reform plan, the Company's former shareholders of unlisted shares made valuable consideration arrangement by paying shares to the shareholders of listed shares: The shareholders of listed shares shall obtain 3.0 shares for every 10 listed shares they are holding. The total number of shares to be paid to the shareholders of listed shares will be 360 million.At the end of the reporting period, the Company had totally 4.2 billion shares. (For the detail, refer to the above "Statement of changes in shares"

-9- About the time of listing for trading of the shares with sales restrictions (Shares) Time Quantity of newly added shares available Balance of quantity of shares Balance of quantity of shares Notes for trading in the market upon maturity with limited sales conditions without limited sales conditions Jun 6, 07 126,600,000 2,513,400,000 1,686,600,000 Jun 6, 08 540,600,000 1,972,800,000 2,227,200,000 Jun 6, 09 1,556,800,000 416,000,000 3,784,000,000 May 18, 11 416,000,000 0 4,200,000,000

(III) During the reporting period, there is no employees share.

III. Information of Shareholders

(I) Shareholder quantity and shareholding Total shareholders:214,130 (Shares) Shareholding of top 10 shareholders

Shareholders Share type Holding Quantity Quantity of non- Quantity of shares rate of total shares stradable shares pledged or frozen Shougang Group Corporation HQ State-owned legal entity share 10.19% 428,012,480 428,000,000 Shandong Power Corporation State-owned legal entity share 8.15% 342,400,000 342,400,000 Yuxi Hongta Tobacco (Group)Co.,Ltd. State-owned legal entity share 7.13% 299,600,000 299,600,000 DEUTSCHE BANK AKTIENGESELLSCHAFT Overseas legal entity shares 7.02% 295,000,000 295,000,000 Luen Tai Group Co., Ltd. State-owned legal entity share 6.88% 289,000,000 289,000,000 289,000,000 SAL.OPPENHEIM JR. CIE.KOMM AND Overseas legal entity shares 4.08% 171,200,000 171,200,000 ITGESELLSCHAFT AUF AKTIEN Beijing San Ji Li Energy Co., Ltd. State-owned legal entity share 3.22% 135,200,000 135,200,000 DEUTSCHE BANK LUXEMBOURG S.A. Overseas legal entity shares 2.88% 121,000,000 121,000,000 Baotou Huazi Industry Co., Ltd. State-owned legal entity share 2.51% 105,600,000 105,600,000 60,000,000 Shanghai Giant Biotech Co., Ltd. Domestic legal entity shares 2.41% 101,200,000 101,200,000

Shareholding of top 10 shareholders of tradable share

Shareholder Quantity of tradable share Share type SSE Dividend Index Securities Investment Fund 25,435,517 A share Morganstanley China A-Share Fund 21,398,619 A share Baogang Group Co., Ltd. 13,828,898 A share SSE 50 Index Securities Investment Fund 12,888,623 A share CITIGROUP GLOBAL MARKETS LIMITED 10,947,621 A share Shanghai Baogang Industrial Testing Co. 9,123,177 A share Taixin High Quality Life Stock Type Securities Investment Fund 8,350,000 A share GREAT WALL EASY MIND RETURN Mixed Securities Investment Fund 8,193,215 A share National Social Security Fund 002 Portfolio 8,095,593 A share National Social Security Fund 102 Portfolio 7,015,274 A share Explain to the association Of the above 10 shareholders, DEUTSCHE BANK LUXEMBOURG S.A. is an exclusively invested relation or acting in concert subsidiary of DEUTSCHE BANK LUXEMBOURG S.A.; The Company has no knowledge whether of the above shareholders. there is any inter-relationship between any of the other above shareholders.

-10- 2006 ^kkr^i=obmloq

(II) Share assignment  1. In the report period, 18 of the Company's shareholders of untradable shares assigned totally 587.20 million shares to three overseas financial institutions, namely DEUTSCHE BANK AKTIENGESELLSCHAFT, DEUTSCHE BANK LUXEMBOURG S.A. and SAL.OPPENHEIM JR. CIE.KOMMANDITGESELLSCHAFT AUF AKTIEN. The transfer procedures were completed up to May 17, 2006. For the detail, refer to Announcement of Hua Xia Bank Co., Ltd. on Completion of the Transfer of the Equity Assignment to Three Overseas Financial Institutions Represented by DEUTSCHE BANK AKTIENGESELLSCHAFT published on China Securities Journal, Shanghai Securities News and Securities Times as well as the website of Shanghai Stock Exchange. 2. In the reporting period, Beijing Jingen Technology Development Co., Ltd. took 21 million tradable shares with sales restriction assigned by Luen Tai Group Co., Ltd. through judiciary auction procedures and the transfer procedures were completed on September 29, 2006. 3. As Shanghai Giant Biotech Co., Ltd., one of the Company's shareholders, paid the valuable consideration for Xinyuan Industry Holding Group Co., Ltd. during the equity separation reform in the reporting period, Xinyuan Industry Holding Group Co., Ltd., a former shareholder of the Company reimbursed its 10 million tradable shares with sales restriction in the Company to Shanghai Giant Biotech Co., Ltd. The transfer procedures were completed by November 27, 2006.

(III) Quantity of shares with sales restriction held by top 10 shareholders and the conditions of restriction (shares) Serial Names of shareholders Number of shares Time of Quantity of newly Sales restriction conditions No. with restricted held with restricted listing added shares available sales conditions sales conditions for trading for trading in the market 1 Shougang Group 428,000,000 Jun 6, 2008 128,400,000 No shares with sales restriction should be on sale within 24 months after implementa- Corporation Jun 6, 2009 299,600,000 tion of the equity separation reform; the proportion of the shares with sales restriction 2 Shandong Power 342,400,000 Jun 6, 2008 102,720,000 that is put on sale within 36 months after the same must not exceed 30% of the total Corporation Jun 6, 2009 239,680,000 with sales restriction. 3 Yuxi Hongta Tobacco 299,600,000 Jun 6, 2008 89,880,000 (Group)Co.,Ltd. Jun 6, 2009 209,720,000 4 DEUTSCHE BANK 295,000,000 May 18, 2011 295,000,000 Unless there shall be otherwise requirements as specified by the law, regulations or the AKTIENGESEL supervision authority, within 5 years commencing from the date of delivery of the shares, LSCHAFT none and/or no part of the shares or the relevant equity taken from the assignment shall be disposed by means of sales, assignment, kept as custodian or any other ways; or any of or relevant equity should be assigned or pledged to any person by any other method. 5 Luen Tai Group Co., Ltd. 289,000,000 Jun 6, 2008 86,700,000 No shares with sales restriction should be on sale within 24 months after implementa- Jun 6, 2009 202,300,000 tion of the equity separation reform; the proportion of the shares with sales restriction that is put on sale within 36 months after the same must not exceed 30% of the total with sales restriction. 6 SAL.OPPENHEIM JR. & CIE. 171,200,000 Jun 6, 2007 25,680,000 The proportion of the shares with sales restriction that is put on sale within 24 months KOMM AND ITGESEL- Jun 6, 2008 25,680,000 after implementation of the equity separation reform should not exceed 15% of; LSCHAFT AUF AKTIEN Jun 6, 2009 119,840,000 the proportion of the shares with sales restriction that is put on sale within 36 months 7 Beijing San Ji Li Energy 135,200,000 Jun 6, 2007 20,280,000 after the same must not exceed 30% of the total with sales restriction. Co., Ltd. Jun 6, 2008 20,280,000 Jun 6, 2009 94,640,000 8 DEUTSCHE BANK 121,000,000 May 18, 2011 121,000,000 Unless there shall be otherwise requirements as specified by the law, regulations or the LUXEMBOURG S.A. supervision authority, within 5 years commencing from the date of delivery of the shares, none and/or no part of the shares or the relevant equity taken from the assignment shall be disposed by means of sales, assignment, kept as custodian or any other ways; or any of or relevant equity should be assigned or pledged to any person by any other method. 9 Baotou Huazi 105,600,000 Jun 6, 2007 15,840,000 The proportion of the shares with sales restriction that is put on sale within 24 months Industry Co., Ltd. Jun 6, 2008 15,840,000 after implementation of the equity separation reform should not exceed 15% of; the Jun 6, 2009 73,920,000 proportion of the shares with sales restriction that is put on sale within 36 months 10 Shanghai Giant 101,200,000 Jun 6, 2007 15,180,000 after the same must not exceed 30% of the total with sales restriction. Biotech Co., Ltd. Jun 6, 2008 15,180,000 Jun 6, 2009 70,840,000

-11- (IV) Shareholder holding over 5% shares of the Company The Company has no controlling shareholder or actual controller. During the reporting period, the largest shareholder of the Company has not been changed.

1. Shougang Group Corporation HQ Shougang Group Corporation HQ was founded on October 15, 1992. It was used to be Shi Jingshan Iron & Steel Plant in 1919, and then was restructured into Shougang Iron & Steel Group in September, 1996. Shougang Corp. HQ is the parent company of the group, and manages the assets on the group's behalf. Approved by the State Economic and Trade Commission and the Beijing municipal government, Shougang Corp. HQ was restructured into a solely state-owned company that manages the state-owned asset under the authorization of Beijing Municipal Government with a registered capital as RMB7,263.94million, and Mr. Zhu Jimin as the legal representative. The Company is a conglomerate that covers different business domains, regions and countries. Its core business includes manufacturing, architecture, geologic exploration, transportation, foreign trade, telecommunication, finance, science and technology service, domestic trade, restaurants, material supply, warehouse, real estates, residential service, consultation, leasing, agriculture, forest, herd, fishing (other than those need to be specifically licensed), and state-owned assets management etc. The relationship between the biggest shareholder and the Company:

State-owned Assets Administration and Regulation Commission of Beijing

100%

Shougang Group Corporation HQ

10.19%

Hua Xia Bank Co., Ltd.

2. Shandong Power Corporation Shandong Power Corporation, which was formerly Electric Power Industry Bureau of Shandong Province established in Jan., 1958, was founded as Electric Power Company of Shandong Province in 1989, and was reorganized as Shandong Power Corporation in July 1997, with a registered capital of RMB 9,860,000,000, and Mr. Zhu Changfu as legal representative. Its main business includes electricity grid management, power supply, electricity engineering, designing, construction, repair, and maintenance, construction project contracting, electricity trading, power investment, construction project supervision, trading of raw materials, supporting materials fuel, and facilities for electricity power projects (excluding those need to be specially licensed), technology development, training, and consultation.

3. Yuxi Hongta Tobacco (Group) Co.,Ltd. Yuxi Hongta Tobacco (Group) Co.,Ltd. is an affiliate fully owned by the State Tobacco Monopoly Bureau, restructured from the former Yuxi Cigarette Plant on September 15th, 1995 with a registered capital of RMB 680,000,000, and Mr. Liu Wandong as legal representative. Its core business includes tobacco manufacturing, tobacco distribution, manufacturing of tobacco machinery, tobacco raw materials and supporting materials trading, and also involves energy, transportation, chemical, machinery, construction materials, and technology through investment.

-12- 2006 ^kkr^i=obmloq

4. DEUTSCHE BANK AKTIENGESELLSCHAFT DEUTSCHE BANK AKTIENGESELLSCHAFT, incorporated in Frankfurt, Germany, is an enterprise type company with limited liability, with legal representative: Josef Ackermann, the registered capital: EURO 1,392,266,869.76.principal business: engaged in various banking businesses by itself or through its subsidiaries or associates, offering financial services including capital and fund management, real estate finance, financing, research and consulting, etc. As long as in compliance with the law, the company is entitled to deal with various transactions, take different measures helpful to realize the company's objective, specially in respect of purchase and assignment of real estate, establishment of branches both at home and abroad, purchase, management and sales of its equity in other enterprises and execution of enterprise agreements.

5. Luen Tai Group Co., Ltd. Luen Tai Group Co., Ltd. was found in May 1995, with a registered capital of RMB50,870,000 , and with Mr. Wu Xiaomeng as the legal representative. It was authorized to manage state-owned assets by Economic and Trade Commission of Shandong Province, Planning Commission of Shandong Province, Restructuring Commission of Shandong Province, Bureau of Finance of Shandong Province and Stateowned Assets Administration and Regulation Bureau of Shandong Province on basis of Shandong Economic Dossier [1995] 120th Document. Its core business includes industrial materials trading (excluding those need to be specifically licensed), general merchandise, mental and machinery products, computers and appliances, ordinary machinery, chemicals (excluding dangerous chemicals), construction materials, household electric appliance, science and technology development, technology service; information consultation (excluding brokerage).

-13- CHAPTER V DIRECTOR, SUPERVISOR, SENIOR MANAGEMENT AND EMPLOYEES

I. Director, Supervisor and Senior Management

(I)Change in shareholding and remuneration of director, supervisor and senior management

Name Post Gender Date Office tenure Shares held Shares held Remuneration in the reporting of birth at year beginning at year end period (RMB 10,000) Liu Haiyan Chairman male 1941.11 2004.6.29-2007.6.29 0 0 103.89 Fang Jianyi Vice-Chairman male 1953.07 2004.6.29-2007.6.29 0 0 4.5 Gen Liuqi Vice-Chairman male 1951.01 2005.5.19-2007.6.29 0 0 2.8 Sun Weiwei Director female 1955.06 2004.6.29-2007.6.29 0 0 3.2 Zhao Jian Director male 1961.12 2004.6.29-2007.6.29 0 0 2.4 Zhang Meng Director female 1958.10 2004.6.29-2007.6.29 0 0 2.9 Colin Grassie Director male 1961.06 2006.10.10-2007.6.29 0 0 1.6 Yu Jianping Director male 1956.07 2004.6.29-2007.6.29 0 0 2.9 Wu Jian Director and president male 1954.03 2004.6.29-2007.6.29 0 0 103.89 Liu Xifeng Director, vice president female 1950.11 2004.6.29-2007.6.29 0 0 69.33 Chief Financial Officer Zhao Junxue DirectorSecretary of the Board male 1958.04 2004.6.29-2007.6.29 0 0 69.33 Gao Peiyong Independent director male 1959.01 2004.6.29-2007.6.29 0 0 10.0 Qi Yudong Independent director male 1966.09 2004.6.29-2007.6.29 0 0 9.7 Mu Xinming Independent director male 1957.05 2004.6.29-2007.6.29 0 0 8.6 Zhang Mingyuan Independent director male 1956.10 2004.6.29-2007.6.29 0 0 10.0 Sheng Jiemin Independent director male 1941.03 2006.10.10-2007.6.29 0 0 2.25 Luo Xiaoyuan Independent director female 1954.01 2006.10.10-2007.6.29 0 0 2.55 Lu Jianping Independent director male 1963.12 2006.10.10-2007.6.29 0 0 2.75 Cheng Yanhong Chairman of female 1958.02 2004.6.29-2007.6.29 0 0 103.89 Supervisory Committee Song Bin Supervisor male 1965.04 2004.6.29-2007.6.29 0 0 3.0 Guo Jianrong Supervisor male 1962.08 2004.6.29-2007.6.29 0 0 4.2 Liu Guolin Supervisor male 1951.03 2004.6.29-2007.6.29 0 0 2.7 Niu Hesheng Supervisor female 1946.07 2004.6.29-2007.6.29 0 0 4.2 He Dexu Outside supervisor male 1962.09 2004.6.29-2007.6.29 0 0 9.2 Chen Yulu Outside supervisor male 1966.11 2004.6.29-2007.6.29 0 0 7.7 Dai Gang Staff representative supervisor male 1957.08 2004.6.29-2007.6.29 0 0 40.05 Li Qi Staff representative supervisor male 1958.08 2004.6.29-2007.6.29 0 0 40.05 Qiao Rui Vice President male 1954.08 2004.6.29-2007.6.29 0 0 69.33 Li Guopeng Vice President male 1955.02 2004.6.29-2007.6.29 0 0 69.33 Total / / / / 0 0 766.24

-14- 2006 ^kkr^i=obmloq

1. Director and supervisor remuneration deciding procedure and defining basis: According to Allowance Policy of Director and Supervisor, any director or supervisors collecting salary from the Company shall not collect allowance under the Policy. Director or supervisor's allowance consists of service compensation, committee post allowance and meeting allowance. Service allowance is the basic remuneration of independent director and outside supervisor carrying out work in board of directors or board of supervisors and standard is annual RMB 50000 per person. Committee post allowance is the post allowance of independent director and outside supervisor carrying out work in board of directors or board of supervisors and standard is monthly RMB 1000 per person (equal to annual RMB 12000 per person). Committee post allowance for director or supervisors that works in more than one special committee is based on the quantity of their post in committee. Meeting allowance is the subsidy of independent director and outside supervisor attending meetings of board of directors or board of supervisors and standard is RMB 3000 per meeting. Colin Grassie, Sheng Jiemin, Luo Xiaoyuan, Lu Jianping received the allowances according to the aforesaid regulations commencing from October, 2006.

2. Senior management remuneration deciding procedure and defining basis: Salary of senior management is audited and paid according to the Rules on the Salary of Headquarters-level Senior Management of Hua Xia Bank.

3. All the remuneration paid to the aforesaid personnel is of after-tax amount.

(II) Post held by the Company's directors and supervisors in shareholders

Name Shareholders Post Tenure term Fang Jianyi Shougang Group Corporation HQ Chief Accountant From June 1998 to present Sun Weiwei Shougang Group Corporation HQ Deputy General Manager From November 2003 to present Zhang Meng Yuxi Hongta Tobacco (Group)Co., Ltd. Vice Chief Accountant From June 1999 to present Colin Grassie DEUTSCHE BANK AKTIENGESELLSCHAFT Chief Executive Officer of Asia- From 2005 to present Pacific Region (with Japan exclusive) Yu Jianping Beijing San Ji Li Energy Co., Ltd. General Manager December, 1999 to present Guo Jianrong Baotou Huazi Industry Co., Ltd. Assistant to President From February 2002 to present Liu Guolin Shanghai Construction (Group) Corporation HQ Director, Chief Accountant From January 1994 to present

(III) Main Work Experience and Post in Other Companies of Director, Supervisor and Senior Management

Liu Haiyan, Chairman, male, born in November, 1941, holding master's degree and professional title of professor of engineering. Once he was the manager of Beijing Dongfanghong Refinery Plant, General Manager, Secretary of the Party Committee and Chairman of the Board of Beijing Yanshan Petroleum Chemical Group LTD, Vice Chairman of the board of Taikang Life Insurance Co., Ltd., Alternate Member of the 15th Central Committee of the China Communist Party of China, Member of the 8th Beijing Committee of the China Communist Party, Vice Mayor of Beijing, Vice-Chairman, Chinese Federation for Enterprises and China Entrepreneurs Association, Part-time professor of Tsinghua University, People's University of China and China University of Petroleum. Now he is a member of the 10th of The Chinese People Politics Consultation Conferencre, Secretary of the Party Committee and Chairman of the Board of the Company.

-15- Fang Jianyi, vice Chairman, male, born in July,1953, holding master's degree and professional title of senior accountant. He once was the assistant to general manager of ShouGang NEC Electronics CO., LTD. and manager of Financial Department, Deputy head of the Financial Section of the Economic and Trade Department of Shougang International, Deputy head of the Financial Section of ShouGang Zhongshou Company, assistant to general manager of ShouGang Zhongshou Company, deputy general manager of ShouGang Shipping Company, Head of Funding Division of Financial Department and deputy director of Financial Department of ShouGang Company Overseas HQ, Deputy director of Development department, financial assistant general manager, general manager's financial assistant of ShouGang Corporation. Now he is the Chief Accountant of ShouGang Corporation HQ.

Geng Liuqi, Vice Chairman, male, born in January, 1951, having the education background of university graduate and holding professional title of senior economist. He once acted as general manager of Qingdao Power Industry Corporation, assistant and vice director of Qingdao Electric Power Bureau, vice general manager of Beijing Yingda Industrial Development Co., Ltd., general manager of Shandong Luneng Investment Corporation, chairman of Shandong Luneng Jin Sui Futures Brokage Company, vice chairman, general manager, chairman and secretary of the Party Committee of Yingda International Trust & Investment Co.Ltd., Now he is the chairman and secretary of the Party committee of Da Tong securities Co., Ltd.

Sun Weiwei, director, female, born in June, 1955, holding master's degree and professional title of senior accountant. She once was deputy director and director of the financial department of TaiYuan Heavy Industry CO., LTD, deputy general manager, executive deputy general manager of TaiYuan Heavy Industry CO., LTD., assistant to general manager of Shougang Corporation, director of Group Management Department. Now she is the deputy general manager of Shougang Corporation HQ.

Zhao Jian , director, male, born in December, 1961, having education background of university graduate and holding professional title of senior engineer. He once was manager of business department of the Material None Supply Company of the Power Supply Bureau of Shandong, deputy director of the Shandong Power Supply Group Company, General manager, Member of Party Committee of Luneng Yingda Group Company. Now he is the general manager of Luneng property Group.

Zhang Meng, director, female, born in October, 1958, holding master's degree and professional title of assistant accountant. She was the deputy chief and chief of the industrial finance section of Yuxi Hongta Tobacco Group Co., LTD. Now she is the deputy Chief Accountant of Yuxi Hongta Tobacco Group Co., LTD.

Colin Grassie, director, from United Kingdom, male, born in June, 1961, holding master's degree. He used to be the chief supervisor of the foreign corporate bonds department of JP Morgan (U,S,A), chief supervisor of the global market sales department (Asia) of DEUTSCHE BANK AKTIENGESELLSCHAFT, chief supervisor of the global market sales department (Europe) of DEUTSCHE BANK AKTIENGESELLSCHAFT, co-chairman of the customer group of the global market sales department of DEUTSCHE BANK AKTIENGESELLSCHAFT, chief supervisor of the global market sales department (Europe) of DEUTSCHE BANK AKTIENGESELLSCHAFT. He is now Chief Executive Officer of Asia-Pacific Region (with Japan exclusive).

Yu Jianping, director, male, born in July, 1956, having education background of university graduate and holding professional title of senior engineer. He once was an engineer of Information Section of Water-Electric Department, an Engineer of Plan Section, the deputy director of the Plan Section of State Energy Investment Corporation, general manager of Beijing Sanjili energy Company. Now he is the general manager of Beijing Sanjili energy Co., Ltd

-16- 2006 ^kkr^i=obmloq

Wu Jian , director, president, male, born in March, 1954, having education background of university graduate and holding professional title of senior economist. He once was the deputy chief of Equipment Credit Division of Industrial & Commercial Bank of China Beijing Branch, deputy director, director of Chaoyang District sub-branch of Industrial & Commercial Bank of China Beijing Branch, deputy general manager, member of the Party Committee, general manager, Secretary of the Party Committee of Bank of Communications Beijing Branch, member of the Party committee and Secretary of Discipline, vice president of Bank of Communications. He is now a director, President and vice Secretary of the Party committee of the Company.

Liu Xifeng, director, vice president, chief financial officer, female, born in November, 1950, having education background of university graduate and holding professional title of senior accountant. She was once the deputy director of finance bureau of the Construction company of Shougang Corporation, director of the audit office of Hua Xia Bank, assistant to president, vice secretary of the Party Committee, and vice president of HR, vice President of Hua Xia Bank, vice Secretary of the Party committee of Hua Xia Bank. Now, she is a director of the Company, vice President of the Bank, chief of finance, member of the Party Committee.

Zhao Junxue (alias: Zhao Jingxue), director, secretary of the Board, male, born in April, 1958, holding master's degree and professional title of senior economist. He was once the assistant to president in NanFang Branch of China National Packaging Corporation, vice President, President of YueHai Finance Holding Co, Ltd, Secretary of Party Committee , and President of Hua Xia Bank ShenZhen Branch. He is now a Director and Secretary of the Company.

Gao Peiyong, independent director, male, born in January, 1959, holding doctorial degree and professional title of professor. He was once a lecturer, associate professor in the Finance Department of Tianjin University of Finance and Economics, the assistant to the president, professor of China People's University. He is the deputy dean, professor of Finance and Trade Institute of China Academy of Social Science.

Qi Yudong, independent director, male, born in September, 1966, holding docterial degree and professional title of professor. He once was the assistant lecturer, lecturer, associate professor in Finance Department of Capital University of Economics and Business, deputy standing editor, editor, and director of Journal of Capital University of Economics and Business. Now, he is deputy standing director in Industry Economic Research Center of the university, deputy dean of the Business Administration School, deputy director of Business Management Department, deputy standing director in the MBA Education Center.

Mu Xinming, independent director, from the United States, male, born in May, 1957, holding doctorial degree and professional title of professor. He once served as an investment advisor at the Infrastructure Bureau of the World bank in Washington DC UAS, International Development Organization of The United Nations, and U.S. Agency for International Development, project official of the Asian Development Bank in Philippine, professor of America Texas State University, vice president of Salomon Brothers in Asia-Pacific. Now he is a director of Bank of Morgenstern Merchant Bank, CEO of Kang Qiao Investment Fundation, and president of the America Dongying Investment Co.

Zhang Mingyuan, independent director, from the United States, male, born in October, 1956, holding master's degree and professional title of American certified financial ayalyst. He once was a vice president of J.P. MORGAN CHASE & CO., corporate finance at New York, vice president of J.P. MORGAN CHASE & CO. global debt capital market at Hong Kong, general manager of the Capital Market in China International Capital Co., Ltd, general manager, Executive director of IBD of BOC International Holding Limited. Now he is the executive vice president of Fubon Bank (Hong Kong)

Sheng Jiemin, independent director, male, born in March, 1941, having education background of universtity graduate and holding professional title of professor. He used to teach in East China University of Politics and Law, Shanghai Fudan University and the Law School of Beijing University. He is now dean of the Economic Law Research Institute of Beijing University.

-17- Luo Xiaoyuan, independent director, female, born in January, 1954, having education background of univesity graduate and holding professional title of senior economist. She used to be vice chief editor and director of the editorial department of the Finance Research Journal, director of the editorial department of the Journal of the Accountants' Society and Journal of the Certified Public Accountants' Association, a member of the National Examination Commission of Certified Public Accountants and director of the general office of the commission, chief accountant of China Certified Public Accountants' Association. She is now the director of the Registration Center of China Certified Public Accountants' Association.

Lu Jianping, independent director, male, born in December, 1963, having doctorial degree and holding professional titles of doctorial tutor and professor. He used to be a lecturer and associate professor of the Philosophy Department of Zhejiang University, director of the Foreign Economic Law Research Institute of Zhejiang University, dean and professor of the International Economic Law Department of Zhejiang University and executive director of the Criminal Law Research Center of People's University of China. He is now executive vice president of Criminal Law Science Research Institute of Beijing Normal University.

Cheng Yanhong, Chairman of the Supervisors Committee, female, born in February, 1958, having educational background of junior college and holding professional title of senior accountant. She once was a vice director of the Department of General Affairs, vice director, director, member of the Party Committee and vice chief of Debt Department in Beijing Bureau of Finance; general manger and secretary of the Party Committee of Beijing Securities Co., Ltd.; deputy secretary and secretary of Financial Working Committee of the Party Committee of Beijing municipality; Now she is the ninth committee member of the Beijing committee of china Communist Party. Chairman of the supervisor committee, deputy secretary of the Party Committee and secretary of Discipline Inspection Committee of the Company.

Song Bin, supervisor, male, born in April, 1965, having educational background of university graduate. He once was a journalist of People's Daily, general manger of Beijing Xinyuan Industrial Investment company, president of Xinyuan Industrial holdings Group Co. Ltd.. Now he is the vice chairman of the Board of Xinyuan Industrial holdings Group Co. Ltd.

Guo Jianrong, supervisor, male born in August, 1962, having the educational background of university graduate and holding professional title of economist. He once was a vice director, director of Bank of Communications Baotou Branch. Now he is the assistant president of Baotou Huazi Industry Co., Ltd.

Liu Guolin, supervisor, male, born in March, 1951, having educational background of junior college and holding professional title of senior accountant. He once was a vice director and director of Finance Department in Shanghai Construction Engineering Bureau. Now he is a director and Chief Accountant of Shanghai Construction Group.

Niu Hesheng, supervisor, female, born in July, 1946, having educational background of university graduate and holding professional title of senior accountant. She once was a vice director, director and vice chief of the Industrial and Communication Financial Department of the Ministry of Finance, assistant to general manager and chief of financial department of China Imported Automobile Trading Center. Now she is a supervisor of the Company.

Dai Gang, supervisor of staff's representative, male, born in August, 1957, having educational background of university graduate and holding professional title of senior political engineer. He once was a vice Secretary of the Youth League Committee and deputy director of Training Department of the University of Shougang Corporation, deputy director of the Dual-exam committee in Shougang Corporation. Now he is the director of Office Of Party Committee and President of Labor Union of Shougang Corporation.

-18- 2006 ^kkr^i=obmloq

Li Qi, supervisor of staff's representative, male, born in August, 1958, having educational background of university graduate and senior economist. He once was an educator of the Department of Law in Shandong University, vice general manager of the Rural Credit Cooperative of China in Shandong, Vice General manager of Shandong Yingtai Group Co., Director of Audit and Compliance Department in Hua Xia Bank Jinan Branch, and a Member of the Party's Committee of Discipline, general manager of Law Affairs Department & NPA Management Department of the Company. He is now predident of Hua Xia Bank Chongqing Branch.

He Dexu, outside supervisor, male, born in September, 1962, holding doctorial degree and professional title of professor. He once was an associate professor of Institute of Commerce and Finance of China Academy of Social Science, director of Science Research Supporting Department of China Academy of Social Science. Now he is the deputy dean of Research Center of Finance in China Academy of Social Science, professor of Institute of Commerce and Finance, professor of Graduate School of China Academy of Sciences.

Chen Yulu, outside supervisor, male, born in November, 1966, holding doctorial degree and professional title of professor. He once served as vice director of finance department, vice president and professor of finance Institute in The People's University of China. Now he serves as vice president in The People's University of China and dean of finance Institute.

Qiao Rui, vice president, a member of the Party Committee, male, born in August, 1954, holding master's degree and senior economist. He once was the deputy director of the Institute of Finance, deputy director of the Foreign Debt Information Section, director of the Foreign Debt Management Section, deputy chief of the Foreign Debt Management Department, Chief of the Administration and Investigation Department at State Administration Bureau of Foreign Exchange; deputy manager, member of the Party Committee, director of the Board, vice president, chief of finance of China Construction Bank Beijing Branch. Now he is the vice president and member of the Party Committee of the Company.

Li Guopeng, vice president, a member of the Party Committee of the Company, male, born in February, 1955, holding master's degree and professional title of senior economist. He once was a deputy director of Financial Research Institute of the People's Bank of China Shandong Branch, deputy director of the Office of The Financial System Reform, Director of the Information Department of Survey and Study, President & Secretary of the Party Committee of People's Bank of China Taian Branch, and Director of the State Administration Bureau of Foreign Exchange Taian branch, Secretary of the Party Committee and president of Hua Xia Bank Ji'nan branch, assistant to president, member of the Party Committee, vice president of Hua Xia Bank, Secretary of the Party Committee and general manager of the Banking Department of Head Office. Now he is the vice president, member of the Party Committee of the Company.

-19- Name Office taken or part-time job in other unit excluding shareholders Liu Haiyan none Fang Jianyi Chairman of Xinbang Investment Co., Ltd. and Chairman of Bodi Investment Co., Ltd. Gen Liuqi Chairman of Datong Securities Co., Ltd. Sun Weiwei Chairman of Shougang Mechanical and Electrical Co., Ltd. and Chairman of Beijing Ximan Special Vehicle Co., Ltd. Zhao Jian General manager of Shandong Luneng Property Group Company Zhang Meng Director of China Pacific Insurance (Group) Co., Ltd., director of China Pacific Life Insurance Co., Ltd. and director of Huatai Property Insurance Co., Ltd. Colin Grassie none Yu Jianping Chairman of Beijing Guoli Energy Investment Co., Ltd. Wu Jian none Liu Xifeng none Zhao Junxue none Sheng Jiemin Independent director of MARKOR INTERNATIONAL FURNITURE CO., LTD. Luo Xiaoyuan Independent director of Jiashi Fund Management Co., Ltd. Lu Jianping Independent director of Zhejiang Supor Co., Ltd. and independent director of Harbin Hi-tech Co., Ltd. Gao Peiyong Independent director of Shanghai Industry Development Co., Ltd. Qi Yudong Independent director of Lucky Film Co., Ltd. Mu Xinming none Zhang Mingyuan none Cheng Yanhong none Song Bin none Guo Jianrong none Liu Guolin none Niu Hesheng none He Dexu none Chen Yulu Independent director of Celebrities Real Estate Co., Ltd. and independent director of Baoying Fund Management Co., Ltd. Dai Gang none Li Qi none Qiao Rui none Li Guopeng none

(IV) Change in Directors, Supervisors, Senior Executives At the 12th meeting of the Fourth Board of Directors dated April 19, 2006, Gen Liuqi was elected Chairman of the Board. At 2006 3rd Extraordinary Shareholders' Meeting, Mr. Colin Grassie was elected director of the Company, Mr. Sheng Jiemin, Ms. Luo Xiaoyuan and Mr. Lu Jianping were elected independent directors of the Company on October 10, 2006. Mr. Jiang Peiwei, Mr. Xu Tieliang and Mr. Zhang Liguo were no longer independent directors of the Company due to expiry of their office term. The 10th meeting of the Fourth Board of Supervisors held on October 26, 2006 approved Mr. Zeng Beichuan's application for resigning the office of the staff's representative supervisor.

II. Employees

By the end of the reporting period, the Company had 8290 permanent employees, including 1420 at managerial levels, 6378 business staff, and 492 supporting staff. 7785 employers have acquired a college degree or above, accounting for 93.90% of the total staff. There are 38 retired employees in the Company.

-20- 2006 ^kkr^i=obmloq

CHAPTER VI CORPORATE GOVERNANCE STRUCTURE

I. Overview of Corporate Governance

In 2006, the Company has been perfecting constantly the corporate Governance structure to allow independent operation and effective coordination of general meeting, board of directors, supervisors Committee and senior managers. The key goal is to pursue long-term maximization of shareholder's equity, on the premise of respecting and protecting depositor's interests. During the reporting period, the following sections provide a brief introduction to the Company's corporate governance:

(I) Amendment and Improvement of the Corporate Governance Basic Systems On the premise of establishing and improving the corporate governance basic system, the Board of Directors amended the Articles of Association on overall basis in 2006 according to the Company Law of the People's Republic of China (Revised in 2005), the Securities Law of the People's Republic of China (Revised in 2005), the Guidelines for the Articles of Association of Listed Companies (Revised in 2006), Rules for the General Meetings of Shareholders of Listed Companies (Revised in 2006) promulgated by China Securities Regulatory Commission, the Rules for Listing Shares (Revised in 2006), Model Rules of Procedure for the Board of Supervisors of Listed Companies in Shanghai Stock Exchange (Promulgated in May, 2006) so that the system foundation of the corporate governance has been further compacted. Meanwhile, the rules of procedures of the three committees were correspondingly revised according to the amended Articles of Association of the Company and the establish- ment of the supplementary system and the revision work have been improved. At present, the Company further improved the corporate governance basic systems based on the Articles of Association, including the Rules of Procedures for General Meeting, the Rules of Procedures for Meetings of the Board of Directors, the Rules of Procedures for Various Special Committees, the Work Instructions of President, the Work System of Independent Directors, the System of Allowances to Directors and Supervisors, Information Disclosure Work System, the Inner Report Policy of Signifcant Information, Investor Relationship Management Methods, the Provisional Measures for Management of Associated transactions between Huaxia Bank, Insiders and Shareholders so that the corporate governance structure can continuously adapt itself to the change and adjustment of the law and regulations and regulatory requirements.

(II) Shareholders and Shareholders General Meeting

1. Process of Holding Shareholders General Meeting In 2006, the Company convened and held four Shareholders general meetings according to the Rules for Shareholders General Meeting of Listed Companies, the Articles of Association and the Rules of Procedure of Shareholders General Meeting of Hua Xia Bank. The Company established and improved the effective channel for communication with the shareholders, provided modern technical means, including on-line voting, expanded the proportion of shareholders of public shares to attend the general meeting, so as to ensure equality of all shareholders, specially minority shareholders, ensure all shareholders' rights to know, attend and vote for significant events and fully exercise shareholders' rights.

-21- 2. About Management of Associated Transactions According to the Measures for Management of Associated Transactions between Commercial Banks, Insiders and Shareholders and the Provisional Measures for Management of Associated Transactions between Hua Xia Bank Co., Ltd. and Insiders and Shareholders, the Associated Transaction Control Committee of the Board of Directors and the Board of Directors further enhanced the internal control over the associated transactions, strictly implemented the procedures of review and approval of associated transactions and effectively controlled risks of associated transactions. In the report period, the Board of Directors heard the special report of the risk control department concerning implementation of the associated transaction management system and associated transactions of the year, and the special auditing report of the year concerning associated transactions and submitted a report on associated transactions to the annual general meeting; The Board of Directors also reviewed and approved such significant associated transactions as authorization of Luen Tai Group Co., Ltd. for "Borrowing the New and Paying the Former" and offering composite credit line to DEUTSCHE BANK; independent directors expressed independent opinion on significant associated opinions. The Company implemented the obligation of disclosing the information concerning associated transactions according to the standardized requirements of Shanghai Stock Exchange concerning disclosure of associated transactions, and standardized the procedures of submitting important associated transactions to the general meeting for review. In the reporting period, the Board of Supervisors inspected, reviewed and approved the Report of Hua Xia Bank on Inspection of Associated Transactions and implemented the duties of supervision of the associated transactions.

(III) Directors and Board of Directors

1. Composition of board of directors and working status The Company's Board of Directors is made up of 18 directors, among whom 7 are independent directors and 4 are of senior management. In terms of decision procedure, authorization procedure, voting procedure, the board of directors strictly follows regulations of the laws, regulations and Articles of Association. In 2006, the company held 8 meetings of board of directors altogether in accordance with relevant regulations of Articles of Association and Board of Directors Procedure Rules. All directors attended the meetings, reviewed every proposal carefully, excise their rights and fulfill their liabilities, an effective decision and supervision mechanism has come into being.

2. Operation of special committee of board of directors In the report period, the Company has improved the establishment of the special committee of the board of directors according to the Articles of Association. The 14th meeting of the fourth board of directors held on August 29, 2006 and the 15th meeting of the fourth board of directors held on October 29, 2006 respectively reviewed and approved the Proposal on Establishment of the Strategic Committee of the Board of Directors and the Proposal on Establishment of the Audit Committee and Adjustment of Members of the Special Committees of the Board of Directors. On the basis of the 4 newly elected directors, the board of directors elected members of two newly established committees and adjusted the members of the four existing special committees. While improving the establishment of the special committees, the 17th meeting of the fourth board of directors held on December 20, 2006 approved the Proposal on Preparation of the Work Rules for the Audit Committee of the Board of Directors of Hua Xia Bank Co., Ltd.

-22- 2006 ^kkr^i=obmloq

In 2006, various special committees of the board of directors further standardized the operation and implemented duties in a practical way. The risk management committee held two meetings and reviewed the Self-Appraisal Report on Internal Control in 2005 and Measures for Market Risk Management of Huaxia Bank (for Trial Implementation). Associated Transaction Control Committee held 2 meetings, reviewed special reports on the conditions in connection with implementation of the associated transaction management system and associated transactions, the annual check report of the associated transactions, special opinions of independent directors on important associated transactions, such important associated transactions as authorization of Luen Tai Group Co., Ltd. for "Borrowing the New and Paying the Former" and offering composite credit line to DEUTSCHE BANk amounting to USD 99 million. The Nomination Committee held 3 meetings, reviewed the proposal on electing Geng Liuqi Vice Chairman and additionally electing Colin Grassie director, the proposal of reelecting Sheng Jiemin, Luo Xiaoyuan and Lu Jianping independent directors, and made preliminary examination of the qualification of the aforesaid candidates for taking the office. The Salary Management and Examination Committee held one meeting and conducted examination and assessment of the duties implemented by the board of directors and senior management as of the year 2005 and organized the mutual assessment of independent directors. The audit committee held one meeting and reviewed the Work Rules of the Audit Committee of Huaxia Bank.

(IV) Supervisor and Board of Supervisors

1. Composition of board of supervisors and working status The Company's supervisors Committee is made up of 9 supervisors, among whom 2 are outside supervisors and 2 are employee's representative supervisors. In 2006, the supervisors Committee held 4 meetings of supervisors Committee altogether in accordance with relevant regulations of Articles of Association and Supervisors Committee Procedure Rules of Hua Xia Bank. All directors attended the meetings in accordance with regulations, excised their supervision rights empowered by laws and the Articles of Association. They have organized and attended special examinations, and fulfilled their responsibilities.

2. Special committees of supervisors committee In the reporting period, the auditing committee of the board of supervisors held three meetings according to the work rules, reviewed the Opinions on Appraisal of the Implementation of Duties by Directors and Senior Management of Huaxia Bank and special inspection or investigation report of the inspection team of the board of supervisors, and further enhanced the supervision and inspection.

3. Outside supervisor system By the end of the reporting period, there were two outside supervisors in the supervisors committee. In accordance with relevant laws and regulations and Articles of Association and in the spirit of safeguarding the interests of the depositors and the company as a whole, they acted in due diligence to discharge their various duties, independently expressed their opinions on relevant proposals, performed their function as the convener of the special committees, organized and participated in special inspection and investigation activities of the supervisors Committee.

(V) Information Disclosure and Investors Relation Management The Company further regulated the day-to-day information disclosure strictly in accordance with Rules on Listing of Stocks in Shanghai Stock Exchange and the Information Disclosure System of Hua Xia Bank Co., Ltd., ensured rapid and smooth delivery, summary and collection and affective management of the Company's internal significant information according to the Internal Reporting System on Significant Information of Hua Xia Bank Co., Ltd. and laid a good foundation for implementation of the obligation of information disclosure. In 2006, the Company completed disclosure of 4 regular reports (annual report, semi-annual report and quarterly report) and 43 provisional reports according to the rules for information disclosure and company information disclosure system of China Securities Regulatory Commission and Shanghai Stock Exchange, and ensured authenticity, accuracy, completeness and timeliness of the information as disclosed.

-23- In 2006, management the Company deepened the management of the investors relations through equity separation reform, brought the management of the investors relations into play in the equity separation reform, and established a favorable market identity of the Company in terms of the credibility, steadiness and standardization. In the daily management of the investors relations, the Company received over 100 person-times of visitors from domestic and foreign institutional investors and research institutions. Based on the negative report of media, the Company has improved the awareness on crisis and early warning from media, enhanced the supervision and management of the media and established the media crisis early warning mechanism.

II. Performance of Independent Director

At the end of the reporting period, the Company had 7 independent directors, occupying more than 1/3 of the number of board of directors. The independent directors have displayed their significant function in independence and specialty. Following laws and regulations and Articles of Association of the Company, they, keeping the interests of depositors and minority shareholders in mind, fulfill their responsibilities, participate in relevant meetings and review every proposal carefully and seriously performed the convener role of associated transaction control committee, nomination committee, salary management and examination committee and audit committee. They have provided valuable professional suggestions on the corporate governance, operation and management of the Company.

(I) Attendance of Independent Directors at Meeting of Board of Directors

Independent Required attendance By Person By authorized Absence Remarks directors times in 2006 (times) representative(times) (times) Gao Peiyong 8 8 Qi Yudong 8 7 1 Independent Director Qi Yudong entrusted Independent Director Gao Peiyong to vote on his behalf at the 15th meeting of the fourth board of directors. Zhang Mingyuan 8 8 Mu Xinming 8 8 Sheng Jiemin 3 2 1 He took the office commencing from October 10, 2006; Independent Director Sheng Jiemin entrusted Independent Director Lu Jianmin to vote on his behalf at the 17th meeting of the fourth board of directors Luo Xiaoyuan 3 3 He took the office commencing from October 10, 2006 Lu Jianping 3 3 He took the office commencing from October 10, 2006.

(II) Objection of independent directors on some relevant issues

Independent directors Issues involved in objection Description of objection Remarks Mu Xinming 2006 Financial Budget Report reviewed at the The financial budget was not well understood. Abstaining from voting 10th meeting of the fourth board of directors Zhang Mingyuan 2005 Annual Profit Distribution Proposal reviewed In 2005, the higher dividend rate did not match the Abstaining from voting at the 10th meeting of the fourth board of directors recent higher capital demand and financing activities.

III. Operational Decision-making System

The supreme authority of the Company is shareholders general meeting that performs management and supervision through board of directors and supervisors committee. President of the bank is engaged by board of directors and is fully responsible for carrying out management of daily operation under leadership of board of directors. The Company adopts one-level juridical person and vertical management system. Branch is a nonindependent accounting unit, business subject to instruction of the headquarters bank.

-24- 2006 ^kkr^i=obmloq

The Company has no controlling shareholder and gets listed as a whole. Its fully independent to shareholders in personal, asset, finance, institution and business. It has independent business and capability of carrying out business on its own. The board of directors, board of supervisors and internal departments are able to operate independently.

IV. Performance Evaluation and Incentive Mechanism for Senior Executives

The Company employs senior executive mainly in two ways, external recruitment and internal selection. The senior executives are engaged by the board of directors, subject to examination of China Banking Regulatory Commission on his/her qualifications. . The Company's Board of Supervisors will carry out resign/dismission audit on senior executives and monitor senior executives_ behaviors violating laws and regulations, or harming interests of Company, and request them to correct, and report to general meeting or national relevant authorities if necessary. In the reporting period, the Salary Management and Examination Committee carried out examinations on senior executive's performance in 2005 according to the Provisional Measures of Hua Xia Bank on Annual Assessment of Senior Executives. The examination is mainly based on compliance of main operation targets proposed by the Company, performance of supervision indicators proposed by China Banking Regulatory Commission, and appraisal by directors. The examination focuses on benefits and efficiency, taking cost control and risk control as main theme, emphasizing high-quality development, reflecting principle of objectivity and matching responsibility with right and rewards with punishment. In addition, the special committee of supervisors committee evaluates legality of senior executives' performance in 2005. The examination result of Salary Management and Examination Committee and appraisal advice of the supervisors committee will be taken as basis of defining senior executives' salary and other rewards.

-25- CHAPTER VII SHAREHOLDERS GENERAL MEETING

During the reporting period, the Company held 4 Shareholders general meetings as follows:

I. Annual general meeting of 2005 The Company held its 2005 Annual shareholders General Meeting on March 20, 2006. The public notice of the resolutions was published on China Securities Journal, Shanghai Securities News, Securities Times and the website of Shanghai Stock Exchange on March 21, 2006.

II. First Temporary Shareholders General Meeting in 2006 and the Relevant Shareholders General Meeting The Company held its 2006 First Temporary shareholders General Meeting on April 24 to 26, 2006. The public notice of the resolutions was published on China Securities Journal, Shanghai Securities News, Securities Times and the website of Shanghai Stock Exchange on April 27, 2006.

III. 2006 Second Temporary Shareholders General Meeting The Company held its 2006 Second Temporary Shareholders General Meeting on August 11, 2006. The public notice of the resolutions was published on China Securities Journal, Shanghai Securities News, Securities Times and the website of Shanghai Stock Exchange on August 12, 2006.

IV. 2006 Third Temporary Shareholders General Meeting The Company held its 2006 Third Temporary Shareholders General Meeting on October 10, 2006. The public notice of the resolutions was published on China Securities Journal, Shanghai Securities News, Securities Times and the website of Shanghai Stock Exchange on October 11, 2006.

-26- 2006 ^kkr^i=obmloq

Chapter VIII REPORT OF THE BOARD OF DIRECTORS

I. Discussion and analysis of the management

(I) Review of business operation during the reporting period The Company's core business scope: taking public RMB deposits; granting loans of short-term, midterm and long-term natures; performing settlements; discounting bills and notes; issuing financial corporate bondss; issuing, underwriting and cashing securities on behalf of governmental authorities; trading of governmental bonds and corporate bondss; inter-bank loans and deposits; services relating to letters of credit and letters of guarantee; factoring and assignment of receivables and payables; safe deposit services; accepting deposit in foreign currencies; granting loans in foreign currencies; remittance of foreign currencies; lending in foreign currencies; accepting and discounting of bills and notes expressed in foreign currencies; purchase and sale of foreign currencies, either for itself or on behalf of clients; purchase and sale of marketable securities expressed in foreign currencies(excluding stocks), either for itself or on behalf of clients; issuance of marketable securities expressed in foreign currencies(excluding stocks), either for itself or on behalf of clients; exchange of foreign currencies; guarantees in foreign currencies; lease of foreign currencies; Offshore banking credit investigation, consultancy and testimonial services and other services as approved by CBRC.

1. Overview of the Company’s overall operation In 2006, the Company insisted on implementation of the macroeconomic control policy of the central government and the requirements of the regulatory authority, strived to coordinate development of quality, profit, speed and structure and gained sound achievement. The Company insisted on development as the theme, structural adjustment as the main line and carried out the operation in a down-to-earth way. As a result, various businesses grew steadily and the structural adjustment achieved a preliminary success, the risk control capacity was unceasingly heightened, the asset quality was gradually improved, the financial strength was significantly enhanced, the equity separation reform resulted in a great success, the cooperation with Deutsche Bank was carried out smoothly, various tasks assigned by the board of directors had been fulfilled on overall basis and a great business success had been achieved. (1) Sound Operation By the end of 2006, the Company's total assets hit RMB 445.053 billion, increased by RMB 89.132 billion or a 25.04% growth over the end of the previous year; the balance of deposits was RMB 371.295 billion, increased by 57.128 billion or an 18.18% growth over the end of the previous year; The balance of various loans reached RMB 259.767 billion, increased by RMB 26.344 billion or a 11.29% growth over the end of last year;bad loan rate was 2.73%, a 0.32% drop over the previous year; In 2006, the company realized revenue from the principal business amounting to RMB 18.083 billion, increased by RMB 4.302 billion, a 31.22% growth; realized total profit amounting to RMB 2.411 billion, increased by RMB 0.422 billion, a 21.22% growth; realized net profit amounting to RMB 1.457 billion, increased by RMB 0.177 billion, a 13.87% growth. (2) Marketing work advancing forward steadily Commencing from 2005, the Company implemented the Measures for Branches of Hua Xia Bank to Carry out the Marketing Work in a Centralized Way, specified the basic model of propelling the centralized marketing: implementing centralized marketing at branch level for the key customers of partial sectors, implemented centralized credit at branch level to the customers enjoying credit line over RMB 30 million, implemented the marketing management in a way of "being centralized in four aspects", namely customer service plan, teamwork plan, group credit and risk monitoring on overall basis. In the report period, the Company achieved success in development of customers, quickly increased the number of basic settlement accounts and high quality customers; established trans-sector, trans-field product research and development system as well as an interactive mechanism of product innovation and marketing, developed and optimized a number of new products; constantly improved the business outlet service level, persistently carried out personal business them marketing activities and unceasingly enhanced the development and promotion of products with distinguishing features and implemented the VIP customer service plan on overall basis.

-27- (3) A Preliminary Success Achieved from the Structural Adjustment The Company has made proper control over the rhythm of lending, adjusted the credit structure, reduced the balance of the notes discounting and increased the pure loans so that the loan earning level has been improved; the development of low risk weight business was enhanced, personal housing collateral loan and collateral and collateral loan have been developing quickly; in respect of adjustment of the liability structure, the proportion of low cost business has increased; the Company has popularized such products and group clearing center, direct alliance between bank and enterprise, enterprise finance consultant, etc. and the income from agency business has increased somewhat. (4) The risk control and internal control construction have been continuously enhanced The Company prevents credit risk through standardization of mutual guarantee business, real estate loan business and the secured credit for the companies offering guarantee; worked out such rules and regulations as the Rules for Implementation for Market Risk Management so as to prevent the market risks; and prevented the operation risks through special inspection of the operation conditions of the loan center, law compliance in the collateral and collateral registration procedures and bill business risks; carried out the responsibility for "three inspections" of loan, conducted the due diligence investigation for after loan inspection; established the regular research meeting system for the doubtful loans and has better reconciled emergency risks of enterprise loans. (5) A periodical success has been achieved in internationalization reform The whole bank has been working hard in carrying forward restructure of the business procedures and construction of the Great Concentration Project and achieved periodical success; the Company successfully completed the equity delivery procedures for introducing overseas strategic investors, is propelling the cooperation with Deutsche Bank in an orderly way; both parties have achieved a preliminary success in the cooperation in respect of trade financing, foreign currency clearing, commissioned fund selling, personnel training, etc. The Company has established credit card center and various preparation work for issuing credit cards is in process.

2. Composition of Income and Profits from Core business In the reporting period, the Company's income from core business reached RMB 18,082,583,000 and profits from core business reached RMB2,570,445,000. (1) As per business category In RMB'000 Category Core Business Income Loan 13,069,184 Inter-bank loan and deposit 1,953,462 Bond investment 2,245,118 Other business 814,819 Total 18,082,583

(2) As per geographic region In RMB'000 Income from core business Profit from core business East and North China 11,942,668 1,205,656 South and Central China 2,110,915 347,774 Southwest and Northwest China 2,646,267 746,390 Northeast China 1,382,733 270,625 Total 18,082,583 2,570,445

(3) Comparison of the core business and its structure in the reporting period with that of the previous reporting period

-28- 2006 ^kkr^i=obmloq

The Company carries out various business activities within the business scope approved by the People's Bank of China and China Banking Regulatory Commission. The deposit and loan, securities investment, inter-bank loan and deposit and settlement and agency are the principal sources of the Company's income. In the report period, the Company had never been involved in any other business activities having major influence on the Company's profit.

3. Financial Status and Operation Performance (1) Changes of main financial indicators and related reasons In RMB'000 Main Financial Indicators End of 2006 Increase/decrease Main reasons Total assets 445,053,424 25.04% Growth in loan and investment Total debts 433,410,629 25.48% Growth in deposit Incl: Long-term debt 71,104,243 13.96% Growth in long-term deposit Shareholder equity 11,642,795 10.56% Growth in undistributed profit Profit from core business 2,570,445 18.41% Growth in business scale Net profit 1,457,043 13.87% Growth in business scale Increase in cash and cash equivalent 25,171,623 195.89% Growth in loan

(2) Items in financial statement with change over 30% In RMB'000 Accounting items End of reporting period Increase/decrease Main reasons Cash and due from central bank 66,372,574 80.07% Decrease in cash and due from central bank Noble metal 7,940 100.00% Increase in noble metal Offered fund 2,590,697 2261.42% Increase of offered fund Transaction based financial assets 2,768,746 100.00% Increase of transaction based financial assets Buy of resold financial assets 29,735,661 140.89% Increase in buy of resale business Other assets 1,722,097 39.54% Increase of other assets Funds borrowed from interbank lendings 1,936,363 11451.46% Increase of funds borrowed from interbank lendings Amount from repurchase agreements 25,743,248 1839.96% Growth in sales of repurchase business Taxes payable 958,663 41.98% Increase of taxes payable Bonds payable 6,250,000 47.06% Issuing secondary bonds in the reporting period Net income interest 7,386,212 31.99% Increase of net income interest Net income service charge and commission 304,414 53.41% Growth in agency business Investment income 2,245,118 33.71% Growth in investment income Income from change of fair value 9,879 100.00% Increase in income from change of fair value Loss from impairment of assets 2,429,125 78.51% Increase in provision for impairment of assets Other business costs 9,545 70.56% Increase of other business costs Non-operating income 34,638 59.51% Increase of non-operating income Income tax expenses 954,186 34.47% Increase of income tax expenses

4. Analysis on cash flow In 2006, the Company's net cash and cash equivalents flow was RMB 25.172 billion of cash flow in, That the net cash flow produced from operating activities was RMB 37.894 billion net cash flow in was mainly due to quick growth of deposits. In 2006, the net cash flow in from customers' deposit and placements of banks amounted to RMB 59.352 billion. That the net cash flow produced from investment activities was RMB 14.268 billion cash flow out was mainly due to increase of bond investment. In 2006, the cash payment for the Company's investments amounted to RMB 200.274 billion. That the net cash flow produced from fund raising activities amounted to RMB 1.542 billion was mainly due to that the Company issued the secondary bonds in 2006.

-29- 5. Discussion and Analysis on Non-financial Information In the report period, the Company was in steady progress in the marketing work and achieved a preliminary success in product innovation. The Company achieved a good result in developing customers: the number of basic settlement accounts increased to 10337, a 13.3% growth; the number of high quality customers increased to 1799, a 10.28% growth. The Company established business cooperation relationship with over 20 large enterprises and enterprise groups such as China Railway Engineering Corporation, China Metallurgy Construction Group, China Communications Group, and established trans-department and trans-discipline interactive mechanism of product research and development review meeting system and marketing. In the reporting period, there were 13 new products reviewed and approved, 25 new products optimized and improved. YIN GUAN TONG, Corporate Account Overdraft, Property Assurance Guarantee, Export Instruments Means as well as the four products serving enterprises with Taiwan investment, including Cross-Strait Remittance Transfer Means, Full Payment to Account in US Dollars, Centralized Payment and TAI TAI TONG, etc. have all been put into application. "Middle and Small Enterprise Growth Product Service Plan" was rewarded as the "Best Middle and Small Enterprise Financing Plan" by China Middle and Small Enterprises Association, China Banking Association and Finance Times; the foreign currency clearing series product was rewarded "Excellent Financial Product Award" at Beijing Finance Exhibition and Guangzhou Expo; the clearing center was once again rewarded as "Excellence Award for US Dollar Clearing Straight Through Rate of Citigroup "; the customer service center 95577 was elected the "Ten Brands to Customers' Satisfaction" of China Financial Call Center and "Ten Brands of High Influence" by People's Daily, etc. The Company continuously enhanced development and promotion of such products with unique characteristics as BEAUTY CARD, VIP COLD CARD and "Steady Profit Earning", "Profit Increase", etc. The Company implemented VIP customer service program on overall basis, started to study and prepare the bank wide marketing strategy, carefully planned the market, directed the whole bank to carry out the marketing work in an organized and objective-oriented way.

6. Operation and Performance Analysis of the Principal Subsidiaries and Holding Companies At the end of the reporting period, the investment balance in China UnionPay Co., Ltd. was RMB 53.125 million, taking 3.22% of its registered capital. China UnionPay has experienced a rapid development since its establishment in March, 2002.

(II) Development Prospect

1. Change of the future operation environment First of all, China's economy still keeps sustainable rapid development trend on overall basis. In the past two years, China's economy has experienced a positive situation of "higher growth and lower inflation." Under the direction of the guiding principles of implementation of the scientific view of development and construction of harmonious society, new change shall take place in China's social and economic development and way of economic growth and the banking industry shall have new development space. This can be mainly reflected that it is necessary to realize the objective of "being good and fast" in China's economic growth, adjust the economic structure and change the way of growth, achieve coordination in speed, quality and efficiency in the economic growth, takes the policy of coordination of consumption, investment and export, demands commercial banks necessary to conduct operation strategy transfer and adjustment of business structure. Secondly, the Company shall be confronted with big pressure from the financial adjustment and control. Generally speaking, macro adjustment and control policy insists on the principle of retaining stable but slightly tight. The Company shall continue to practice the coordination and collaboration in respect of steady financial policy and monetary policy, enhance the financial policy, monetary policy, industrial policy, land policy and social development policy, continue to apply economic, law and necessary administrative means, enhance and improve the directivity and efficiency of the macro adjustment and control and gradually buffer some structural contradiction in process of economic growth.

-30- 2006 ^kkr^i=obmloq

Thirdly, the domestic banking industry is going to meet new development opportunity, which can be mainly reflected that the rapid development of the capital market and stable advance of the comprehensive operation have created development opportunity for banking and transaction business, provided space for agency business growth; the quickened progress of interest rate and exchange rate marketing has expanded the space for commercial bank to make financial innovation, and at the same time, brought up new demand on commercial banks for risk control ability, pricing ability and profit making model. Fourthly, competition in the banking sector is intensified. After listing, a number of large state-owned banks enjoy significant superiority in competition in terms of financial power, business outlets, management background and personnel qualification, etc.; medium and small joint stock commercial banks have quickened the steps of reform and development and the competitive- ness has been improving continuously; some foreign banks have been registered in China and established corporate banks with foreign investment and have been fully involved in the competition of the domestic financial market.

2. Operation Plan and Measures to be Taken in the Coming Year (1) Operation Objectives - Total assets not lower than RMB 534 billion - By the end of the year, bad loan rate shall be controlled within 2.5%. (2) Main Measures in Coming Year The Company shall further implement the spirits of the Sixth Plenary Session of the Sixteenth CPC Central Committee, the Economic Work Conference of the CPC Central Committee and the National Financial Work Conference, fully implements the scientific view of development, continuously deepen the reform, insists on the principle of taking development as the theme, with structural adjustment as the key line, with quality efficiency as the center, with deepening centralized marketing as the key point, with compliance operation as the security for the purpose of improving the Company's competitiveness and realizing the objective of sound and quick development. In order to fulfill the annual operation objectives on overall basis, the Company shall focus on the following work:  Sparing no effort to push ahead the marketing work The Company shall work out 2007 marketing strategy according to the industrial and professional policy of the central government and the Company's own marketing ability as well as based on the requirements of the business growth and structure adjustment to specify the development focus in different markets; improve the operation mechanism of the centralized marketing, work out service plan and organize customer managers team to conduct customer maintenance in a centralized way and unify the credit line to group customers as well as the principle of "Four Unifications" in the customer risk monitoring and devote every effort to push on the marketing work; carefully study the market demand, based on the Company risk resistance and customers' demands, tailor make personalized products for customers and continuously upgrade services and service quality.  Insisting on deepening structural adjustment The Company shall, based on the market development and change, implement structural adjustment in the process of promoting continuous growth of the total volume; meanwhile, the growth of the total volume shall also reflect the requirement of structural adjustment; adjust the liabilities structure with promotion of stable growth of deposits and reduction of the interest payment of deposits as the key; adjust the asset structure with reasonable deployment of essential factors and development of low risk business as the key; adjust the income structure with improvement of the agency service income as the key; adjust the customers structure with development of medium sized customers and consolidation of customer foundation as the key.  Continuously Improving Assets Quality The Company shall further enhance the whole process management of credit business and positively take effective measures to improve the assets quality; specify the management duties and strictly control the volume of new bad loans; make full use of credit system to monitor the whole process of loans, establish the risks classification early warning management system, focus on enhancing early warning and management of the risks from the inter-group associated transactions and real estate business; enhance recovery of the accounts receivable and reconciliation, further improve the relevant system, standardize the operation procedures; realize stopping loss in value, recovery and upgrading of bad assets.

-31-  Exert great effort to enhance compliance construction Build compliance culture, establish compliance principle, insist on compliance management and let the compliance culture play a role in creating value and avoiding loss for the Company; establish a compliance management system, establish compliance management department, team and post among branches at different levels, provide reasonable resources, specify duties, accurately define the relationship between the compliance management department and other departments; implement profes- sional management responsibilities and post operation rules, on the basis of reorganizing the systems, continue to put in order, make up and improve the existing systems so as to ensure all the Company's rules regulations to be in compliance with the laws and regulations.  Speeding up the internationalization oriented reform Internationalization oriented reform is an important measure to promote the Company to build itself into a modern financial enterprise and improve the core competitiveness. In 2007, it is necessary to speed up new system development promotion and application and cooperation the cooperation with Deutsche Bank, etc. by deepening the restructure of the business procedures, make full use of the advanced operation and management experience of international banking industry, improve on overall basis the Company's operation and management level and positively deal with the intense market competition in the domestic banking industry.

3. Capital requirement necessary for future strategic development, capital use plan and capital source Capital restraint is not only the rigid requirement for banking regulatory purpose, also an inherent requirement for a commercial bank to achieve sustainable and healthy development. To ensure its future business growth, the company will gradually enrich capital replenishment channels to continue improving its capital strength and enhance its ability to prevent risk and develop business. On the condition that the capital adequacy ratio meets the regulatory requirement, the company will reasonably expand business scale. Firstly, it will consistently improve capital strengthen through internal accumulation; secondly, it will push ahead additional issue of share to replenish core capital; thirdly, continue to promote the additional issuing work so as to make up core capital.

4. Possible Changes Possibly Taken Place in Accounting Policy and Accounting Estimate in the Company upon Implementation of the New Enterprise Accounting Standards and the Influences upon the Company’s Financial Conditions and Operation Results In 2006, the Company implemented the Provisional Regulations on Acknowledgement and Measurement of Financial Instru- ments (Trial) (CAI KUAI [2005] No. 14) promulgated by the Ministry of Finance. According to the relevant regulations, commencing from January 1, 2007, the Company started to implement the Enterprise Accounting Standard promulgated by the Ministry of Finance in 2006. The accounting policy and accounting estimate made according to the provisional regulations substantially comply with the account accounting standard. In 2006 Financial Report, the Company has taken the link with the new standards into full consideration and has already complied with the new accounting standards in all principal accounting policies and accounting estimates; implementation of the new accounting standards shall not produce big influence upon the Company's financial position and operation results.

5. Major Risks and Countermeasures In the reporting period, the Company was confronted with risks from credit, operation, market, etc., insisted on steady operation, implemented overall and whole-process risk control based on the risk identification, assessment, early warning, control and disposal functions and promoted growth in business and profit. The specific risk countermeasures are: (1) Countermeasures against the credit risks: Enhance credit rating management, improve risk identification capacity; enhance risk migration and risk offsetting management, improve the risk assessment capacity; reinforce early warning of risk information, improve the risk early warning capacity; reinforce control over risks from mutual guarantee to improve the Company's ability to control risks from guarantee; enhance study on doubtful loans to improve the ability to dispose doubtful loans; enhance study on industrial policy to prevent risks from industrial systemization; enhance adjustment of asset structure to optimize the structure of industry, customers and guarantees, etc.

-32- 2006 ^kkr^i=obmloq

(2) Countermeasures against risks from operation: Enhance the work of putting the business system in good order to promote standardization of the operation procedures; enhance the duties of crediting center to improve the independence of the crediting operation; enhance supervision over the business operation to construct risk monitoring index system; to carry out the criteria compliance of risk nodes to standardize the business operation action; enhance complete and effective credit file to standardize the action of "three checks" of credits; enhance the investigation of the due diligence for credit granting to form credit discipline; enhance application of the credit system to standardize credit business operation, etc. (3) Countermeasures against market risks: Implement the Guide to Market Risk Management of Commercial Banks and study the establishment of the market risk management system; enhance foreign exchange business exposure limit and procedure monitoring management; popularize application of fund business transaction system and improve market risk management computerization level; enhance study on economic policy and financial market and seize the trend of change of the market interest rate and exchange rate; enhance analysis of interest rate sensitivity and gradually improve the mechanism of reasonable matching of capital and risks, etc. (4) Countermeasures against risks from informationization technology: Further improve the information security technical system, management system and protection system; enhance unified management of the security of information system and improve the centralized handling capacity of the risks from information technology; popularize application of the new business system and improve the informationization technical level, etc.

II. Data of Bank Operation

(I) Basic information of branches

Branches Location QTY of QTY Capital scale branches of staff (RMB10,000) Headquarter 22 Jianguomen Nei Avenue, Dongcheng District, Beijing City 591 11,634,251 Business Division International Financial Centre, 11 Financial Venue, Xicheng District, Beijing City 34 960 7,287,893 in Headquarter Nanjing Branch 81 Zhongshan Road, Gulou District, Nanjing City 31 801 4,051,751 Hangzhou Branch 73 Qingchun Road, Shangcheng Gulou District, Hangzhou City 17 470 2,297,507 Shanghai Branch 256 Pudong Road S., Pudong New District, Shanghai City 18 482 2,094,345 Jinan Branch 139 Weier Road, Shizhong District, Jinan City 24 630 2,051,004 Kunming Branch Hua Xia Building, 98 Weiyuan Road, Wuhua District, Kunming City 19 446 1,266,471 Shenzhen Branch Nanguang Jiejia Building, 3037 Shennan Road M., Futian District, Shenzhen City 15 380 1,297,035 Shenyang Branch 112 Zhongshan Road, Heping District, Shenyang City 9 251 1,243,363 Guangzhou Branch 111-115 Wuyang Xincheng Plaza, Si You Xin Road, Yuexiu District, Guangzhou City 7 263 1,346,186 Wuhan Branch Hua Yin Building, 786 Minzhu Road, Wuchang District, Wuhan City 14 356 1,050,285 Chongqing Branch 6 Shang Qing Shi Road, Yuzhong District, Chongqing City 13 331 1,100,698 Chengdu Branch 48 Renmin Road E., Jinjiang District, Chengdu City 7 220 753,018 Xian Branch Heping Yinzuo building, 118 Heping Road, Beilin District, Xian City 7 192 570,553 Urumchi Branch 8 Dongfeng Road, Tianshan District, Urumchi City 5 152 350,157 Dalian Branch 25 Tongxing Street, Zhongshan District, Dalian City 9 239 1,046,765 Qingdao Branch Yinhe Building, 29 Shandong Road, Shinan District, Qingdao City 10 274 909,719 Taiyuan Branch 113 Yingze Street, Yingze District, Taiyuan City 10 275 1,508,921 Wenzhou Branch Hua Xia Bank Building, Chezhan Avenue, Lucheng District, Wenzhou City 9 232 593,394 Fuzhou Branch 92 Dongda Road, Gulou District, Fuzhou City 3 130 253,033 Huhhot Branch Capital Plaza, 1 Zhongshan Road W., Huimin District, Huhhot City 3 127 230,341 Tianjin Branch Mansion E, Pan-Bohai Development Centre, 9 Bin Shui Dao Zeng,Hexi District, Tianjin City 4 147 353,251 Shijiazhuang Branch 48 Zhongshan Road W., Qiaoxi District, Shijiazhuang City 10 257 1,074,942 Ningbo Branch 787 Baizhang E. Road, Jiangdong District, Ningbo City 1 84 140,459 Total 279 8,290 44,505,342

-33- (II) Capital Composition and Changes (In RMB100 million ) Items Dec 31, 2006 Dec 31, 2005 Dec 31, 2004 After Adjustment Before Adjustment Net amount of capital 191.79 162.55 161.77 150.78 Core capital 111.81 100.69 99.91 91.89 Affiliate capital 79.98 61.86 61.86 58.89 Deduction 0 0 0 0 Weighted risk asset 2317.68 1964.82 1965.63 1751.77 Core capital adequacy ratio 4.82% 5.12% 5.08% 5.25% Capital adequacy ratio 8.28% 8.27% 8.23% 8.61%

(III) Five Classifications of Loan and Reserve for Loan Loss

1. Five classifications of loans and provision ratio for loss from loan at each classification In RMB'000 Loan Rate Withdrawal ratio Pass 238,835,062 91.94% 1% Special mention 13,845,082 5.33% 2% Sub-standard 3,453,387 1.33% 25%(+/- 20%) Doubtful 3,000,493 1.16% 50% (+/-20%) Loss 633,121 0.24% 100% Total loan 259,767,145 100.00%

At the end of a reporting period, the Company checks the book value of loans and makes provision for impairment when there is objective evidence showing impairment incurs in loan. The Company first of all makes separate assessment of loans in big amount to ensure if there is any objective evidence showing the existence of impairment; afterwards, makes separate of overall assessment of loans of smaller amount to ensure if there is any objective evidence showing the existence of impairment. In case there is no objective evidence showing there exists any impairment in a loan, the Company shall classify it to the group of loans with the similar credit risk characteristics and make overall impairment assessment regardless the size of such a loan. At the end of the reporting period, the balance of the provision for impairment of the loans was RMB 5.964 billion with the provision coverage being 84.15%.

2. During the reporting period, the changes of bad loan are as follows: (RMB '000) Classification Dec 31, 2005 Changes in the period Dec 31, 2006 Balance Rate intotal loan Balance Rate intotal loan Balance Rate intotal loan Sub-standard 5,299,597 2.27% -1,846,210 -0.94% 3,453,387 1.33% Doubtful 1,396,943 0.60% 1,603,550 0.56% 3,000,493 1.16% Loss 416,220 0.18% 216,901 0.06% 633,121 0.24%

-34- 2006 ^kkr^i=obmloq

(IV) Overview of loan distribution

1. Loan distribution as per sector At end of the reporting period, industry, construction, material sale & supply, energy and transport, and commerce were the top 5 sectors of getting loans provided by the Company to enterprise. (RMB '000) Sector Balance of loan Rate in total loan Industry 67,388,665 25.94% Construction 36,434,406 14.03% Energy and transport 27,933,633 10.75% Material sale & supply 22,559,015 8.68% Commerce 13,908,172 5.36%

2. Loan distribution as per geographic region (RMB '000) Geographic region Loan Balance Proportion in total loan Beijing 42,097,251 16.21% Shanghai 15,481,534 5.96% Jiangsu 33,699,994 12.97% Zhejiang 32,449,455 12.49% Hubei 10,021,540 3.86% Shanxi 12,616,005 4.86% Hebei 7,512,506 2.89% Guangdong 21,392,873 8.23% Shandong 26,140,738 10.06% Yunnan 10,970,898 4.22% Liaoning 13,183,975 5.08% Sichuan 6,372,915 2.45% Shaanxi 5,839,575 2.25% Xinjiang 2,264,229 0.87% Chongqing 10,611,584 4.09% Inner Mongolia 2,865,908 1.10% Fujian 2,794,168 1.08% Tianjin 3,451,997 1.33%

(V) Loans to the Top 10 Customers At the end of the reporting period, the top 10 loan customers are: PetroChina Company Limited, Changchun Urban Development (Group) Co., Ltd., Foshan Road and Bridge Construction Co., Ltd., Shanxi Communications Construction and Development Investment Corporation, Shaoxing Paojiang Industrial Zone Investment and Development Co., Ltd., Pangang Group Chengdu Iron & Steel Co., Ltd., Taiyuan Iron & Steel (Group) Co., Ltd., Dali Bai Autonomous Prefecture State Assets Operation and Investment Co., Ltd., Shanghai International Group Co., Ltd., Qingdao Economic and Technology Development Zone Urban Development and Investment Co., Ltd., with total loan balance of RMB 6.963 billion, taking 2.68% of the loan balance at the end of the reporting period or 36.31% of the net capital at the end of the reporting period.

-35- (VI) Discount loan occupying over 20% (including 20%) of total loan at end of the year During the reporting period, the Company has not issued discount loan.

(VII) Balance of restructured loan at end of year and over-due loan At the end of the reporting period, the balance of regrouped loan provided by the Company was RMB 1.195 billion including over- due loan of RMB 183 million.

(VIII) Main loan category, monthly average balance and annual average loan interest rates (RMB '000) Average loan interest rate(%) 5.33% Short-term loan 177,982,445 Medium-and-long-term loan 58,457,004

(IX) Large government bond held at end of the year (RMB 10,000) Bond type Par value Maturity Coupon rate 1997 registered treasury note 5,700 2007.09 9.78 1999 registered treasury note 15,000 2007.08-2009.04 3.28-4.72 2000 registered treasury note 40,000 2007.02-2010.09 2.9-3.5 2001 registered treasury note 402,000 2008.06-2021.10 2.82-4.69 2002 registered treasury note 380,800 2007.04-2032.05 2-2.93 2003 registered treasury note 666,900 2008.04-2018.10 2.45-4.18 2004 registered treasury note 990,000 2007.04-2011.11 3.01-4.86 2005 registered treasury note 873,000 2007.12-2025.05 1.58-4.44 2006 registered treasury note 944,000 2007.01-2026.06 1.92-3.27 2002 voucher treasury note 44,363 2007.05-2007.11 2.29-2.74 2003 voucher treasury note 44,468 2008.3-2008.11 2.32-2.63 2004 voucher treasury note 63,696 2007.03-2009.11 2.52-3.81 2005 voucher treasury note 15,819 2008.03-2010.10 3.24-3.81 2006 voucher treasury note 17,043 2009.03-2011.11 3.14-3.81 Total 4,502,789  

(X) Provisions for interest receivable and other receivables (RMB '000) Item Amount Reserve Provision basis Interest receivable 898,637 0 Case-by-case identification Other receivable 808,974 282,526 Case-by-case identification

(XI) Main deposit type, monthly average balance and annual average deposit interest rates (RMB '000) Item Amount Average balance of various deposits 315,558,308 Including: Enterprise deposit 158,372,660 Saving deposit 36,386,666 Other deposit 120,798,982 Yearly average deposit interest rate (%) 1.90%

-36- 2006 ^kkr^i=obmloq

(XII) Unrecalled over-due debt At the end of the reporting period, the Company has no unrecalled over-due debt.

(XIII) Balance and details of off-balance sheet items that might cause major influence to financial status and operation performance In light of its businesses, OBSI business and OBSI interest receivable might cause major influence to financial status and operation result of the Company. (RMB '000) Item December 31, 2006 December 31, 2005 Bank acceptance 100,909,617 96,428,190 Issuance of letter of warranty 2,521,600 2,569,887 Issuance of letter of credit 6,637,182 5,665,724 Spot foreign exchange contract 2,196,138 112,732 Off-balance sheet interest receivable 2,341,341 1,964,493

(XIV) Overview of collateral

1. Balance At the end of the reporting period, the Company's balance of collaterals was RMB 629,348,666.92, against RMB 458,006,856.28 at the beginning of the period.

2. Provisions for loan impairment At the end of the reporting period, the Company's depreciation reserve for collateral was RMB 156,172,378.93, against RMB 89,070,908.26 at the beginning of the period.

3. Classification of collateral Among the RMB 629,348,666.92 collaterals, RMB 438,205,485.98 was real estate, occupying 69.63%, RMB 7,000,000.00 was land use right, occupying 1.11%, RMB 135,429,494.47 was equity, occupying 21.52%, RMB2,805,347.24 was vehicles, occupying 0.45% and RMB 45,908,339.23 was other assets, occupying 7.29%.

(XV) Risk Management over the Credit Granted to Group Customers In the reporting period, the Company enhanced the management over group customers, exercised whole process risk monitoring and the management capability has been improved continuously. The Company has further improved the approaches for risk management over the credit granted to group customers, optimized the business management process; enhanced the group customer admission management and strictly controls the mutual guarantee among associated group enterprises; unified the verification of the credit line to group customers and reinforced the overall risk control over the group customers; established group customer vertical management team and implemented interactive management all over the bank; reinforced the risk early warning and prompting of group customers and implemented whole process risk early warning and dynamic monitoring, etc.

-37- (XVI) Conditions of bad loans and corresponding measures adopted At the end of the reporting period, the bad loan rate of five classifications was 2.73%, a 0.32% drop over the year beginning. In the reporting period, the measures taken by the Company against bad loans are summarized as follows: 1. implementing risk management on overall and whole process basis with the focus on reinforcing management of credit risk and operation risk; 2. reinforcing risk management over mutual guarantee business to control the risk from guarantee business; 3. establishing risk monitoring index system to improve capability to monitor the risk from business process; 4. enhancing credit files complete and effective and standardizing the "Three Checks" action for credits; 5. establishing regular due diligence and duty check system and strictly implementing the discipline for credit granting; 6. enhancing risk information early warning and improving the risk early warning ability; 7. enhancing doubtful loan study and improving the doubtful loan risk prevention and control ability; 8. enhancing study on bad loan disposal method and improving bad loan disposal ability; 9. reinforcing loan cancellation and improving the financial power and risk resistance.

(XVII) Establishment and Improvement of Internal Control According to the relevant laws, regulations and rules such as the Law of the People's Republic of China on Commercial Banks, Guides to Internal Control of Commercial Banks, in 2006, the Company significantly improved the internal control environment by upgrading the governance structure, improving and implementing the basic systems for company governance; by introducing international up-to-date risk management principle, techniques and methods developed risk management system for core business, credit, funds, etc., gradually realized centralized data management and continuously improved the capability of risk distinguishing and monitoring; further improved the adequacy, compliance, effectiveness and applicability of the internal control systems by overall arrangement, readjusting the rules and regulations; the information interchange and feedback among the Board of Directors, the Board of Supervisors, senior management, departments and staff became more smooth through improving the information interchange and feedback mechanism and the information disclosure became more timely and sufficiently; improved the implementation capacity and promoted branches to continuously enhance reform and restructuring by reinforcing profes- sional inspection and internal audit supervision so that the supervision and assessment of internal control and correction mechanism has been further improved. In 2007, approved by the Board of Directors, the Company shall further improve the corporate governance mechanism according to the instructions of China Securities Regulatory Commission by perfecting the system base of the corporate governance, reinforcing the role of different special committees under the Board of Directors and enhancing the supervision inspection of the Supervisors Committee; strengthened the accountability implementation by perfecting the overall accountability system which is practiced in all business lines and management at all levels, practiced the measures of "looking into further two higher levels and conducting double-line responsibility questioning" and further deepened the encouragement and accountability mechanism; further improved the internal control organization structure through focusing on implementation of the credit granting system reform and deepening reform of the audit system; further enhanced overall risk management by establishing compliance risk management system, information technology risk management system, strengthening the operation risk management and reinforcing the credit risk management; further improved the internal control system by updating the personnel management based system and the "Three Checks" system of credit granting, amending important information report and disclosure based system and establishing post-assessment based system; reinforced the supervision over the operation offices at basic level, put forth effort to promote effective adjustment and reform for solving the problems found in the internal and external inspection of the Company by conducting special audit of the rectification and reform for solving the problems found in the internal and external inspection in the past two years, special audit of the information technology risks, audit of dismissal and forced vocation taking, special audit of market risk management, and overall internal control audit over the key branches so as to promote the problems found in the internal and external inspection to be effectively solved, enhance the power of internal control and implementation and strengthen the auditing and supervision force.

-38- 2006 ^kkr^i=obmloq

The Company already established the vertical management based audit management system in 2004, constructed the basic organization structure with the headquarters as the head, auditing division as the main body and auditing offices of branches as the base; the audit department of the headquarters consists of four divisions and four offices, where the four divisions are the four audit divisions respectively in Beijing, Shanghai, Wuhan and Chengdu; the staff and business of the divisions are managed by the headquarters independent from the administrative management and business management system of various branches and sub-branches; the four offices are divided into three site inspection offices and one non-site inspection office according to the business lines; the audit department of branches is subordinate to the respective branches in administration while their business is under the management and direction of the headquarters. As audited by Both Beijing Jing Du Certified Public Accountants Co., Ltd. and Ernst & Young Accounting Co., Ltd, no significant defeat in respects of the integrality, reasonability and effectiveness of the Company's inner control systems was found.

III. Investment during Reporting period

(I) Usage of funds raised during the reporting period The Company issued one billion RMB common shares to the public (A shares) of at Shanghai Stock Exchange during August 26 and September 3, 2003, using systems of Shanghai Stock Exchange through combination of secondary market investor pricing & directional offering and internet pricing, the Compang is issued 1 billion RMB common shares (A shares) with a par value of RMB1.00 per share and the issue price of RMB5.60 per share. Minus listing and issuing fees and plus interest income, the net amount of raised funds was RMB5.46 billion. And the funds raised, following instruction of the People's Bank of China and share offer commitment, were used to increase the Company's capital, which enhanced the Company's capital adequacy ratio and improved capability of anti-risk considerably. Sticking to the commitment on usage of the funds, the Company uses the funds raised in a rational way, details as follows. 1. Construction of organizational networks: planning to invest an amount of RMB1.65 billion. At the end of the reporting period, the Company has allocated operation funds of RMB1.439 billion to branches. 2. Electronic construction: planning to invest an amount of RMB1 billion. At the end of the reporting period, the Company has invested RMB 1 billion. 3. Personnel training: planning to invest an amount of RMB 200 million. At the end of the reporting period, the Company has invested RMB 200 million. 4. Procurement of fixed assets: planning to invest an amount of RMB 850 million. At the end of the reporting period, the Company has invested RMB 850 million. The rest has been used for the Company's daily operation. The actual application of the proceeds raised in the previous issuing complied with the commitments as specified in the prospectus, and fully added the core capital with the previous proceeds, improved and optimized the operation environment, enhanced the profit earning ability, promoted various businesses developed steadily and quickly. The remaining proceeds amounting to RMB 211 million, taking 3.86% of the total previous proceeds as raised was the funds planned for institutional outlets and shall be applied according to the commitment.

(II) Major projects invested with non-financing funds and relevant schedule during the reporting period During the reporting period, the Company has not invested in projects with non-financing funds.

-39- IV. Influence from significant changes in the production and operation environment, macro policy, laws and regulations

1. On April 28, 2006 and Angust 18, 2006, The People's Bank of China promulgated respectively the Circular of the People's Bank of China concerning Adjustment of the Interest Rate of Renminbi Based Loans of Financial Institutions (YIN FA [2006] No. 134) and the Circular of the People's Bank of China concerning Adjustment of the Interest Rate of Renminbi Based Loans of Financial Institutions (YIN FA [2006] No. 289), commencing from April 28, 2006, the People's Bank of China shall adjust high the basic interest rate of Renminbi based loans of different term levels; the basic interest rate of one year term loan from financial institutions shall be 0.27% and the deposit interest rate shall remain unchanged; the interest rate of personal housing loan shall be based on no less than 0.9 times of the basic interest rate; Commencing from August 19, 2006, the basic interest rate of Renminbi deposits with financial institutions was adjusted 0.27% high up to 2.52% from 2.25%; the basic interest rate for one-year term loan was adjusted 0.27% high up to 6.12% from 5.85%; the basic interest rates for deposits and loans at different levels were adjusted correspondingly; the adjustment range for long term interest rate was bigger than that of short term interest rate; The two interest rate adjustments are helpful to guide investment and reasonable growth of monetary credit, to guide enterprises and financial institutions to properly measure risks, to maintain basic stability of price level, optimize the economic structure, promote transition of the economic growth method and maintain steady, quick and coordinative development of the national economy. 2. The People's Bank of China has made up adjustment of deposit reserve rate three times in succession, which is summarized as follows: on June 16, the People's Bank of China announced that commencing from July 5 on, the Renminbi deposit reserve rate for the deposit based financial institutions would be adjusted 0.5% up; on July 21, the People's Bank of China announced that commencing from August 15 on, the deposit reserve rate for the deposit based financial institutions would be adjusted 0.5% up; on November 3, the People's Bank of China announced that commencing from November 15 on, the Renminbi based deposit reserve rate for the deposit based financial institutions would be adjusted 0.5% up; the increase of the deposit reserve rate shall effectively control banks' credit and buffer the excessive fluidity. 3. On September 1, 2005, the Ministry of Finance promulgated the Provisional Regulations for Confirmation and Measurement of Financial Instruments, which was applied in listed commercial banks on trial basis commencing from January 1, 2006. These regulations have specified the assets and liabilities of commercial banks in five aspects, including classification of assets/ liabilities, accounting of derivative instruments, pricing principle, provision for impairment of assets and determination of the preliminary value; The provisions shall be basically geared the prevailing international accounting standards IAS39. The fundamental change is that the concept of "Mark to Market" has been introduced which shall play a role in commercial banks to intensify awareness of self credit risk management, improve interest rate risk management capacity and enhance external supervision, etc.

V. Routine Work of the Board of Directors

(I) Board Meetings in the Report Period 1. The 10th meeting of the fourth Board of Directors was held on February 15, 2006. The public notice of the resolutions was published on China Securities Journal, Shanghai Securities News, Securities Times and the website of Shanghai Stock Exchange dated February 17, 2006. 2. On March 23, 2006, the 11th meeting of the Fourth Board of Directors was held through voting by means of communication. The public notice of the resolutions was published on China Securities Journal, Shanghai Securities News, Securities Times and the website of Shanghai Stock Exchange dated March 27, 2006. 3. On April 19, 2006, the 12th meeting of the Fourth Board of Directors was held through voting by means of communication. The public notice of the resolutions was published on China Securities Journal, Shanghai Securities News, Securities Times and the website of Shanghai Stock Exchange dated April 21, 2006. 4. The 13th meeting of the fourth Board of Directors was held in Beijing on July 10, 2006. The public notice of the resolutions was published on China Securities Journal, Shanghai Securities News, Securities Times and the website of Shanghai Stock Exchange dated July 11, 2006.

-40- 2006 ^kkr^i=obmloq

5. The 14th meeting of the fourth Board of Directors was held in Beijing on August 29, 2006. The public notice of the resolutions was published on China Securities Journal, Shanghai Securities News, Securities Times and the website of Shanghai Stock Exchange dated August 31, 2006. 6. The 15th meeting of the fourth Board of Directors was held in Beijing on October 29, 2006. The public notice of the resolutions was published on China Securities Journal, Shanghai Securities News, Securities Times and the website of Shanghai Stock Exchange dated October 31, 2006. 7. On December 8, 2006, the 16th meeting of the Fourth Board of Directors was held through voting by means of communication. The public notice of the resolutions was published on China Securities Journal, Shanghai Securities News, Securities Times and the website of Shanghai Stock Exchange dated December 12, 2006. 8. The 17th meeting of the fourth Board of Directors was held on December 20, 2006. The public notice of the resolutions was published on China Securities Journal, Shanghai Securities News, Securities Times and the website of Shanghai Stock Exchange dated December 22, 2006.

(II) Implementation of the Resolutions of General Meeting The Board of Directors distributed cash dividend according to 2005 Profit Distribution Plan as approved at 2005 Annual General Meeting, namely with the total capital stock of 4,200,000,000 shares of 2005 as the base at the rate of RMB 1.10 for every 10 shares (with tax inclusive) and the total amount of cash dividend distributed was RMB 462,000,000.00. The announcement was published on China Securities Journal, Shanghai Securities News and Securities Times respectively on March 27, 2006. The cash dividend distribution plan was implemented on April 6, 2006.

VI. 2006 Profit Distribution Proposal

Beijing Jing Du Certified Public Accountants Co., Ltd. and Ernst & Young Accounting Co., Ltd. engaged by the Company produced a standard unqualified auditor's report. The net profit as of 2006 audited by the domestic certified public accountants was RMB 1,457,043,272.90 and the net profit as audited by the international certified public accountants was RMB 1,481,704,000.00. According to Notice of China Securities Regulatory Commission on Issuing the No. 4 Questions and Answers for Criteria on the Information Disclosure of Companies that have Issued Securities - Discrepancy in Domestic and International Auditing and Profit Distribution Criteria for Financial Enterprises (ZHENG JIAN KUAI JI ZI [2001] No. 58), Measures for Management of Provision for Doubtful Debts in Financial Enterprises (CAI JIN [2005] No. 49) and the Articles of Association of Hua Xia Bank Co., Ltd., the Company provided the statutory surplus public reserve with the audited net profit as the base. At the end of the year, the Company provided general reserve from the net profit which was used for making up for unidentified possible loss; according to the principle of profit distribution based on the lower of the profit, dividend for common shares shall be distributed to the shareholders with the profit available to shareholders as audited by the international certified public accountants as the base. The Company's 2006 annual profit distribution proposal is brought up as follows: 1. The statutory surplus public reserve is to be provided based on 10% of the net profit totaling RMB 1,457,043,272.90 in 2006 as audited by the domestic certified public accountants amounting to RMB 145,704,327.29. 2. According to the Measures for Management of Provision for Doubtful Debts in Financial Enterprises (CAI JIN [2005] No. 49) promulgated by the State Ministry of Finance, the Company plans to provide general reserve amounting to RMB 1,000,000,000.00 based on 0.31% of the balance of the assets involved in risks and possible loss. 3. Dividend to be distributed to shareholders of common shares: Based on the total capital stock of 4,200,000,000 shares, dividend is to be distributed at the rate of RMB 1.10 for every 10 shares (with tax inclusive) for the year 2006 and with the total amount of the dividend to be distributed being RMB 462,000,000. The retained earnings after distribution of the profit for the year 2006 shall be carried down for distribution in the next year. The aforesaid profit distribution proposal shall be implemented within 2 months after approval by the annual Shareholders general meeting.

-41- CHAPTER IX REPORT OF THE SUPERVISORS COMMITTEE

I. Meetings

(I) On February 14, 2006, the 7th meeting of the Fourth Supervisors Committee was held in Beijing. the meeting reviewed and approved 2005 Work Report and 2006 Work Plan of the Supervisors Committee of HUA XIA BANK CO., LTD. 2005 Financial Settlement Report of HUA XIA BANK CO., LTD., 2006 Financial Budget Report of HUA XIA BANK CO., LTD.,2005 Profit Distribution Proposal of HUA XIA BANK CO., LTD., Proposal on Provision of General Reserve of HUA XIA BANK CO., LTD., 2005 Annual Report of HUA XIA BANK CO., LTD. and Summary, 2005 Special Audit Report on Associated Transactions of HUA XIA BANK CO., LTD., Rules for Implementation of the Qualification for and Procedures of Election of Supervisors of HUA XIA BANK CO., LTD., Comments on Report on the Relevant Conditions for Verification of Bank-wide Credit Business, Comments of the Board of Supervisors on Supervisors and Results of Mutual Assessment of External Supervisors in 2005. The public notice of the resolutions was published on China Securities Journal, Shanghai Securities News, Securities Times and the website of Shanghai Stock Exchange dated February 17, 2006.

(II) On April 19, 2006, the 8th meeting of the Fourth Supervisors Committee was held through voting by means of communication. The meeting reviewed and approved: 2006 First Quarterly Report of HUA XIA BANK CO., LTD., 2006 Supervision Inspection Work Plan of the Supervisors Committee of HUA XIA BANK CO., LTD. The public notice of the resolutions was published on China Securities Journal, Shanghai Securities News, Securities Times and the website of Shanghai Stock Exchange dated April 21, 2006.

(III) On August 28, 2006, the 9th meeting of the Fourth Supervisors Committee was held in Beijing. the meeting reviewed and approved The Rules of Procedures of the Supervisory Committee of HUA XIA BANK CO., LTD., Comments on Appraisal of Implementation of the Duties by Directors and Senior Management of HUA XIA BANK CO., LTD. 2006 Semi-annual Report of HUA XIA BANK CO., LTD. The public notice of the resolutions was published on China Securities Journal, Shanghai Securities News, Securities Times and the website of Shanghai Stock Exchange dated August 31, 2006.

(IV) The 10th meeting of the fourth Supervisors Committee was held on October 26, 2006. The meeting reviewed and approved: 2006 Third Quarterly Report of HUA XIA BANK CO., LTD., Report on Inspection of Associated Transactions of HUA XIA BANK CO., LTD., Comments on the Report on Special Inspection Analysis on Loan Interest Collection Ratio of HUA XIA BANK CO., LTD., Proposal on the Application for Resignation of Supervisor Zeng Beichuan. The public notice of the resolutions was published on China Securities Journal, Shanghai Securities News, Securities Times and the website of Shanghai Stock Exchange dated October 31, 2006.

II. Special Inspection of the Board of Supervisors

(I) In June, 2006, the Supervisors Committee conducted special inspection on law and regulation compliance of directors and senior management in implementing their duties in 2005 and completed the Comments on Assessment of the Duties Performed by Directors and Senior Management.

-42- 2006 ^kkr^i=obmloq

(II) In July, 2006, the Supervisors Committee conducted investigation on trade concentration of loans and concentration of customers of Urumuqi Branch and formed a survey report.

(III) In August, 2006, the Supervisors Committee conducted inspection over the key associated transactions and formed an inspection report.

(IV) In September, 2006, the Supervisors Committee heard the report of the audit department on the special inspection over the loan interest collection ratio of branches and formed an inspection report.

(V) In October, 2006, The Supervisors Committee conducted inspection over the asset risk status of Shenzhen Branch and formed an inspection report.

(VI) In December, 2006, the Supervisors Committee conducted investigation over the profit contribution structure of Qingdao Branch and completed the investigation report.

III. Independent Opinions from Supervisors committee

During the reporting period, the Company had held 4 Shareholders general meetings and 8 meetings of board of directors. Supervisors attended all the shareholders general meetings and board meetings as non-vote delegates and supervised the performance of directors and senior managers of the Company.

(I) Operation in accordance with regulations During the reporting period, the Company operated in accordance with all governing laws and regulations. The decision-making procedures were all legal and valid. The directors and senior Manager did not violet any law or regulation in the process of business operation and management, nor have them been found to conduct any behavior that caused any damage to shareholders' equity.

(II) Authenticity of the financial statement The Company's financial report accurately reflects the Company's financial status and performance during the reporting period. The auditors, Beijing Jing Du Certified Public Accountants Co., Ltd. and Ernst & Young Accounting Co., Ltd. both issued an auditor's report in accordance with GAAP and IAS without any reserved opinions.

(III) The Company's utilization of the funds raised The actual projects invested with these funds and the uses of the funds comply with commitment made at share offer.

(IV) Acquisition and sales of assets During the reporting period, the company neither sold any assets nor acquired or merged any assets.

(V) Transactions with related parties Within the reporting period, the Company's associated transactions were fair and reasonable, and such related transactions haven't been discovered to cause any damage to shareholders' equity or the Company's equity.

(VI) Internal control system The Company had established a comprehensive, rational and effective internal control system.

(VII) Execution of resolutions made at the General Meeting The Supervisors Committee had no objections to the contents of the reports and proposals submitted by the Company's Board of Directors to the Shareholders General Meeting for examination and approval. The Company's Supervisors Committee supervised the execution of resolutions made at the Shareholders general meetings and deemed that the Board of Directors had implemented relevant resolutions.

-43- CHAPTER X IMPORTANT ISSUES

I.Major lawsuit and arbitration affairs

Within the reporting period, the Company had no lawsuits or arbitration that resulted in a major impact on its business. Ended December 31, 2006, there were 87 major lawsuits concerning the Company with each case amount exceeding RMB 10 million that had not been verdict and involved RMB 22,672,606,000 including 8 lawsuits in which the Company was the defendant and involving RMB 167,200,000. The par value of state bond held by the Company but frozen by court was RMB 20 million. In terms of losses may caused by unsettled lawsuits, the Company has charged the loss to the balance sheet as the estimated liabilities.

II. Assets Procurement, Sale, Absorption and Merger

During the reporting period, the Company had no major matter concerning procurement, sale, absorption and merger of assets.

III. Important Associated Transactions

During the reporting period, the Company's important associated transactions are of loans to shareholders holding 5% or above shares of the Company. During handling associated transactions, the Company strictly abided by relevant law, rule and business management policies of the Company and carried out such transaction on the condition not more favorable than similar transactions without associated, which complied with credit and fair principle and didn't exert negative influence on the operation results and financial condition of the Company.

(I) Loan provided to shareholder holding 5% of the total shares The company has no related party that holds controlling stakes of the company. The loans provided to shareholder holding 5% of the Company's total shares are as follows: (RMBRMB '000) Shareholders Shares(10,000 shares) Loan balance at end of 2006 Loan balance at end of 2005 Shougang Group Coropration 42,801 180,000 249,000 Luen Tai Group Co., Ltd. 28,900 199,000 199,000

Note: Loan to associated party doesn't exceed its investment in the Company.

-44- 2006 ^kkr^i=obmloq

(II) At the end of the reporting period, over RMB 30 million loans provided to shareholder holding over 5% of the total shares or its associated enterprises or other enterprises with same key executives are as follows: (RMB '000) Associated enterprise Loan balance at end of 2006 Rate in total loan Shougang Group General Corporation 180,000 0.07% Beijing Shougang Construction Group Co., Ltd. 96,179 0.04% Beijing Shougang New Steel Co., Ltd. 137,440 0.05% Beijing Shougang Special Steel Co., Ltd. 118,000 0.05% Beijing Shougang Machine-electricity Co., Ltd. 138,780 0.05% Shougang International Trade & Engineering Co., Ltd. 40,000 0.02% Shougang Baosheng Strip Steel Co., Ltd. 150,000 0.06% Luen Tai Group Co., Ltd. 199,000 0.08% Shandong Economy & Technology Research Centre 99,940 0.04% Shandong Jinan Investment Co., Ltd. 88,300 0.03% Zhuhai Special Economic Zone Hongtai Renheng Paper Co., Ltd. 60,000 0.02% Beijing Guoli Energy Investment Co., Ltd. 280,000 0.11%

In 2006, according to the Measures of China Banking Regulatory Commission on Administration over Associated Transactions between Commercial banks and Insiders and Shareholders, the Company further enhanced the risk management of and control over the associated transactions, rationally controlled the line of the associated transactions, promoted the Company to further improve the management of associated transactions and more effectively controlled the risks from associated transactions.

IV. Major contracts and related implementation

(I) Major trusteeship, lease and contract issues 1. In the reporting period, the Company had never kept as custodian, contracted or leased any other company's assets and vice versa.

(II) Major guarantees Apart from the financial guarantee business which falls within the Company's business scope as approved by the China Banking Regulatory Commission within the reporting period, the Company had no other major guarantee issues requiring disclosure.

(III) Assets management entrusted to other parties During the reporting period, the Company did not entrusted any party to manage any of its assets.

(IV) Other major contracts and implementation The Company's various business contracts were implemented normally during the reporting period, and no disputes over any major contracts occurred.

V. Commitments

(I) In the report period, the Company or any shareholder holding over 5% of the Company's shares has not been involved in any commitments which may impact significantly the Company's operation result and/or financial position.

-45- (II) Commitments in Process of Equity Separation Reform

1. Commitments made by the former shareholders of non-negotiable shares in process of equity separation reform and the implementation of special commitments

Shareholders Commitments Implementation Remark Shougang Group General Corporation After implementation of the equity separation reform, they shall not The commitment Shandong Electric Power Corporation sell shares with sales restriction within 24 months; and within 36 has not been Yuxi Hongta Tobacco (Group)Co., Ltd. months, the number of shares with sales restriction sold shall not infringed. Luen Tai Group Co., Ltd. exceed 30% of the total shares with sales restriction held by them. SAL.OPPENHEIM JR.& CIE. Within 36 months after implementation of the equity separation The commitment KOMMANDITGESELLSCHAFT AUF reform, the number of shares with sales restriction sold shall not has not been AKTIENBeijing San Ji Li Energy Co., Ltd. exceed 15% of the total shares with sales restriction held by them; infringed. Baotou Huazi Industry Co., Ltd. and within 36 months, the accumulative number of shares with sales Shanghai Giant Biotech Co., Ltd. restriction sold shall not exceed 30% of the total shares with sales Shanghai Construction (Group) Corporation HQ restriction held by them. China Imported Automobile Trading Center China Construction First Division Construction & Developing Co. Jiangsu Communications Holdings Co., Ltd. Suzhou Yingcai Investment Group Co. Shanghai Shangtou Investment Management Co., Ltd. Jiangsu Oil Exploration Corporation Of Sinopec Zhuhai Zhenhua Group Co., Ltd. Tangshan Iron & Steel Group Co., Ltd. Sinopec Yangzi Petrochemical Company Ltd. Baoding Changan Passenger Coach Manufacture Co., Ltd. Handan Iron & Steel Group Co., Ltd. Xinyuan Holdings Group Co., Ltd. Zhejiang Silk Holding Co., Ltd. Shanghai Shangshi Investment Development Co., Ltd. China Construction Bank Co., Ltd., Shanghai Branch Beijing Wannian Yonglong Real Estate Development Co., Ltd.

Note: The change in shares with sales restriction held by the former shareholders of non-negotiable shares from the implemen- tation of the equity separation reform to the end of the reporting period is as follows: (1) On September 16, 2006, 21 million unlisted shares (domestic legal equity shares) were sold at auction to the order of the court; the buyer was Beijing Jingen Technology Development Co., Ltd. (domestic legal entity shares). The transfer was completed on September 29, 2006. Beijing Jingen Technology Development Co., Ltd., the buyer made commitment that it agreed to implement the obligations for locking the shares and circulation in steps according to the relevant law, rules, regulations and requirements of the securities regulatory authority. (2) As Shanghai Giant Biotech Co., Ltd., one of the Company's shareholders, paid the valuable consideration for Xinyuan Industry Holding Group Co., Ltd. in the equity separation reform, Xinyuan Industry Holding Group Co., Ltd., the Company's former shareholder reimbursed the payment to Shanghai Giant Biotech Co., Ltd. with its 10 million listed shares with sales restriction (state legal entity shares) in the Company. The transfer was completed on November 27, 2006. Except the aforesaid (1) and (2), there is no other change in shares with sales restriction held by the former shareholders of non- negotiable shares.

2. Increase and decrease in the number of negotiable shares without sales restriction held by the former shareholders of non-negotiable shares holding over 5% of the total shares at the end of the reporting period Inapplicable. The term of the negotiable shares with sales restriction is not yet expired.

-46- 2006 ^kkr^i=obmloq

(III) DEUTSCHE BANK and its associated entity, DEUTSCHE BANK LUXEMBOURG S.A. made the following commitment for the former 416 million non-negotiable shares acquired through equity assignment (taking 9.9% of the Company's total capital stock) during the locking period: unless there shall be otherwise requirements as specified by the law, regulations or the supervision authority, within 5 years commencing from the date of delivery of the shares, none and/or no part of the shares or the relevant equity taken from the assignment shall be disposed by means of sales, assignment, kept as custodian or any other ways; or any of or relevant equity should be assigned or pledged to any person by any other method.

VI. Engagement/Disengagement of Certified Public Accountants

In the reporting period, the Company engaged Beijing Jing Du Certified Public Accountants Co., Ltd. and Ernst & Young Accounting Co., Ltd. to audit the statutory and additional financial report of the year 2006. The Company paid RMB 2.70 million and RMB 2.70 million to Beijing Jingdu Certified Public Accountants Co., Ltd. and Ernst & Young respectively as the auditing fee of the year 2006. Beijing Jingdu Certified Public Accountants Co., Ltd. and Ernst & Young had offered the auditing service to the Company successively for 6 years.

VII. Penalty of the Company, Board of Directors and Director

During the reporting period, the Company, Board of Director and directors and have not been investigated, penalized or circularly criticized by China Securities Regulatory Commission and publicly condemned by stock exchanges and not penalized by other regulatory department and judicial authorities.

VIII.Other significant matters

(I) In the report period, the Company completed the work of introducing overseas strategic investors. On May 17, 2006, the Company's 18 shareholders of non-negotiable shares assigned totally 587.20 million shares to DEUTSCHE BANK, DEUTSCHE BANK LUXEMBOURG S.A. and SAL.OPPENHEIM JR. CIE.KOMMANDITGESELLSCHAFT AUF AKTIEN, and completed the statutory procedures of transfer with Shanghai Stock exchange and China Securities Registration and Clearing Co., Ltd. Shanghai Office. The public notice of this event was published on China Securities Journal, Shanghai Securities News, Securities Times and the website of Shanghai Stock Exchange dated May 19, 2006.

(II) In the report period, the Company completed the equity separation reform. According to the Company's equity separation reform plan, the shareholders of negotiable shares obtained 3.0 shares for every 10 shares as valuable consideration and the shares of valuable consideration were listed on June 6, 2006. The public notice of this event was published on China Securities Journal, Shanghai Securities News, Securities Times and the website of Shanghai Stock Exchange dated May 31, 2006.

(III) In the report period, the Company completed the secondary securities issuing work. On November 9, 2006, all the proceeds from issuing of the secondary bonds amounting to RMB 2 billion were entered into the account book to the public in the national inter-bank bond market. Upon completion of the bond issuing, the proceeds replenished the Company's collateral capital and increased the capital sufficiency. The public notice of this event was published on China Securities Journal, Shanghai Securities News, Securities Times and the website of Shanghai Stock Exchange dated November 18, 2006.

-47- CHAPTER XI FINANCIAL REPORT

I. The Company's 2006 Financial Report has been audited by Beijing Jingdu Certified Public Accountants Co., Ltd. and signed by Li Xin and Li Hong, two certified public accountants, who issued Standard Unqualified Auditor's Report (BEIJING JINGDU SHEN ZI (2007) No. 0566) and the Report upon Review of the Adjustment for Discrepancy in Shareholders' Equity between the New and Old Accounting Standards (BEIJING JINGDU ZHUAN ZI (2007) No. 222). Ernst & Young audited the Supplementary Financial Report prepared by the Company according to the international standards for financial report according to the International Auditing Standards. (Refer to Appendix I, Appendix II and Appendix III).

II. Change in the accounting policy and accounting estimation or correction of accounting error in the Reporting Period:

(I) Change in the Accounting Policy and Accounting Estimation According to the Provisional Regulations on Acknowledgement and Measurement of Financial Instruments (Trial) (CAI KUAI [2005] No. 14) promulgated by the Ministry of Finance, commencing from January 1, 2006, these regulations shall be practiced on trial basis in commercial banks listed and to be listed. The Company implements these regulations and adjusted the retained earnings at the beginning of 2006 on retroactive basis and the corresponding items at the beginning of the period; several columns of the profit statement and profit distribution statement as of 2005 have been filled in with the data after the adjustment. Through the retroactive adjustment, decrease of the net profit of 2005 by RMB 9,081,018.37 was due to that the reclassification of bond investment caused change of the recognition of the investment income and adjustment of the deferred income tax; the adjustment growth of the retained earnings at the beginning of 2006 was RMB 14,437,843.99, of which the adjustment growth of the retained earning was RMB 12,272,167.40 and the adjustment growth of the surplus reserve was RMB 2,165,676.59; the adjustment growth of the capital public reserve amounting to RMB 63,374,934.27 was recognized as the unrealized gain and loss from sales of financial assets and adjustment of the deferred income tax. The adjustment growth of the retained earning at the beginning of 2005 in the profit distribution statement by RMB 19,991,033.01 was due to that the reclassification of bond investment caused change of the recognition of the investment income and adjustment of the deferred income tax. Due to change of the accounting policy, the net profit increased by RMB 83,911,855.76 in the report period was that the reclassification of the bond investment caused change in the method of recognition of the investment income and adjustment of the deferred income tax; increase of the capital reserve amounting to RMB 155,643,904.98 was due to gain and loss unrealized from the financial assets available for sale and adjustment of the deferred income tax.

(II) Correction of Significant Accounting Errors There exists no significant accounting errors necessary to be corrected in the Company.

(III) Restatement of Accounting Statement According to the Provisional Regulations on Acknowledgement and Measurement of Financial Instruments (Trial) (CAI KUAI [2005] No. 14) promulgated by the Ministry of Finance, the Company made restatement of the accounting statements and made adjustment of the presentation of the data at the beginning of the year (the data of the same period of the previous year).

-48- 2006 ^kkr^i=obmloq

CHAPTER XII REFERENTIAL DOCUMENTS

1. Financial statements endorsed with the signatures and seals of the Company's legal representative, president and finance controller.

2. The original auditor's report endorsed with the stamp of the accounting firm and the signatures and stamp of certified public accountants.

3. The original Annual Report endorsed with the signature of the Company's Chairman of the Board.

4. The texts and original copies of all documents and announcements released in China Securities Journal, Shanghai Securities News and Securities Times by the Company within the reporting period.

5. Articles of Association of Hua Xia Bank Co., Ltd.

APPENDIX:

Appendix I: Domestic Auditing Report Appendix II: Report upon Review of the Adjustment for Discrepancy in Shareholders’ Equity between the New and Old Accounting Standards Appendix III: International Auditing Report

Chairman of Board:

Board of Directors of Hua Xia Bank Co., Ltd.

12 March 2007

-49- Appendix I: Domestic Auditing Report

Auditor's Report

BEIJING JINGDU AUDIT [2007] No.0566 To the Shareholders of Huaxia Bank Co., Ltd., We have audited the accompanying financial statements of Huaxia Bank Co., Ltd. (the Company) including balance sheet ended December 31, 2006 and the profit statement, the cash flow statement and notes to the financial statements as of the fiscal year 2006. I. Responsibility of the Management for the Financial Statement The financial statements prepared according to the enterprise accounting standard and the Enterprise Accounting System are the responsibilities of the management of Hua Xia Bank. These responsibilities include: (1) design, implementation and maintenance of the internal control in connection with the preparation of the financial statements so that there may exist no material misstatement caused by fraudulence or mistake; (2) selection and application of the proper accounting policy; (3) making reasonable accounting estimate. II. Responsibilities of the Certified Public Accountants Our responsibility is to express an opinion on these financial statements based on our audits. We conducted the audit work according to the auditing standards for Chinese certified public accountants. These standards demand us to comply with our professional ethics and standards and plan and implement the audit work so as to make reasonable assurance that there would exist no material misstatement in the financial statements. The audit work involves the implementation of audit procedures so as to obtain the audit evidence concerning the amount in and disclosure of the financial statements. The audit procedures as chosen rely on the judgment of the certified public accountants, including the assessment of material misstatement risks caused by fraudulence or mistake. In the process of risk assessment, we have considered the internal control in connection with preparation of the financial statement so as to design proper auditing procedures. However, such purpose is not to express opinion on the effectiveness of the internal control. The audit work also includes the appropriateness of the management in choosing the accounting policy and the reasonability of the accounting estimate as well as assessment of the overall presentation of the financial statements. We believe the audit evidences we have obtained are sufficient and appropriate and have provided basis for use to express our audit opinion. III. Auditor's Opinion In our opinion, the Company's financial statements comply with the Enterprise Accounting Standards, fairly present, in all material aspects, the financial position of the Company as of December 31, 2006 and the operation results and the cash flow for the year 2006.

Beijing Jingdu Certified Public Chinese Certified Public Accountant Accountants Co., Ld. Beijing, China

Chinese Certified Public Accountant

March 12, 2007

-50- 2006 ^kkr^i=obmloq

Balance Sheet

Prepared by: Huaxia Bank Co., Ltd. In RMB

Items Notes 31-Dec-06 31-Dec-05

Assets:

Cash on hand and cash at bank V.1 66,372,573,792.60 36,859,172,794.82

Due from banks V.2 5,182,300,860.67 7,254,872,077.40

Previous metal 7,940,000.00

Money market placement V.3 2,590,697,000.00 109,709,140.00

Transactional financial assets V.4 2,768,745,859.81

Derivative financial assets

Buy of resold financial assets V.5 29,735,660,962.03 12,344,171,115.23

Interest receivable V.6 898,637,418.23 802,405,713.16

Loan provision and advances V.7 253,802,984,535.78 228,491,158,996.17

Available-for-sale assets V.8 12,486,536,421.23 12,940,966,960.95

Held to the due investment V.9 65,134,238,309.11 51,453,041,742.61

Long-term equity investment V.10 53,125,000.00 50,000,000.00

Fixed assets: V.11 3,564,124,023.81 3,723,942,223.41

Deferred taxes and debit V.12 733,762,980.43 657,949,507.40

Other assets V.13 1,722,097,142.26 1,234,082,006.66

Total assets 445,053,424,305.96 355,921,472,277.81

Legal representative: President Chief Financial Officer

-51- Balance Sheet (Cont'd)

Prepared by: Huaxia Bank Co., Ltd. In RMB

Items Notes 31-Dec-06 31-Dec-05

Liabilities:

Interbank deposits and loans and V.14 23,199,609,845.86 21,426,952,248.09

those with other financial institutions

Funds borrowed from banks V.15 1,936,362,851.90 16,762,921.02

Amount from repurchase agreements V.16 25,743,247,900.04 1,326,996,470.99

Deposit absorption V.17 371,295,023,735.74 314,166,616,861.04

Salaries payable 178,544,803.65 144,473,689.03

Welfares payable 62,651,462.66 49,295,932.55

Taxes payable V.18 958,662,533.89 675,227,594.81

Interest payable V.19 1,643,618,466.30 1,478,240,890.25

Predicted liabilities V.20 43,391,900.00 35,741,900.00

Bonds payable V.21 6,250,000,000.00 4,250,000,000.00

Other liabilities V.22 2,099,515,693.79 1,820,341,901.51

Total liabilities 433,410,629,193.83 345,390,650,409.29

Shareholders' equity:

Capital stock V.23 4,200,000,000.00 4,200,000,000.00

Capital Reserve V.24 3,915,263,523.69 3,822,994,552.98

Surplus Reserve V.25 890,123,574.63 744,419,247.34

Reserve for general risks V.26 1,900,000,000.00 900,000,000.00

Retained earnings V.27 737,408,013.81 888,069,068.20

Including: Cash dividend to be distributed 462,000,000.00 462,000,000.00

Foreign currency conversion balance of statement -24,661,000.00

Total Shareholders' Equity 11,642,795,112.13 10,530,821,868.52

Total shareholders' equity and liabilities 445,053,424,305.96 355,921,472,277.81

Legal representative: President Chief Financial Officer

-52- 2006 ^kkr^i=obmloq

Statement of Profit

Prepared by: Huaxia Bank Co., Ltd. In RMB

Items Notes 2006 2005

I. Business income 10,070,477,467.05 7,630,887,704.56

Net Interest income V.28 7,386,212,401.99 5,595,991,257.34

Interest income 15,026,468,964.87 11,647,247,160.22

Impaired loan interest income 265,654,853.05

Interest expense 7,905,911,415.93 6,051,255,902.88

Net service charge and commission income V.29 304,413,516.14 198,424,883.54

Net service charge and commission income 410,607,795.99 297,200,326.71

Service charge and commission expense 106,194,279.85 98,775,443.17

Investment income V.30 2,245,117,595.06 1,679,096,042.81

Income from change of the fair value V.31 9,878,765.04

Exchange gain 80,924,500.22 114,975,009.22

Income from other businesses V.32 43,930,688.60 42,400,511.65

II. Operating expenses 7,500,032,365.05 5,460,168,453.55

Business Taxes and Surcharge V.33 757,447,155.34 604,878,453.58

Business and Management Fee V.34 4,303,914,493.04 3,488,928,185.17

Loss from impairment of assets 2,429,125,416.62 1,360,765,487.69

Other business cost 9,545,300.05 5,596,327.11

III. Operating profit 2,570,445,102.00 2,170,719,251.01

Plus: Non-operating income V.35 34,638,481.39 21,716,054.27

Less: Non-operating expenses V.36 193,853,997.68 203,260,486.35

IV. Total profit 2,411,229,585.71 1,989,174,818.93

Less: Income tax expense V.37 954,186,312.81 709,580,736.72

V. Net profit 1,457,043,272.90 1,279,594,082.21

Legal representative: President Chief Financial Officer

-53- Statement of Profit Distribution

Prepared by: Huaxia Bank Co., Ltd. In RMB

Items Notes 2006 2005

I. Net profit 1,457,043,272.90 1,279,594,082.21

Plus: retained earnings at year beginning 888,069,068.20 1,020,414,098.32

II. Profit available for distribution 2,345,112,341.10 2,300,008,180.53

Less: Provision for general risks 1,000,000,000.00 800,000,000.00

Provision of statutory surplus reserve 145,704,327.29 127,959,408.22

Provision of statutory public welfare fund 63,979,704.11

III. Profit available for distribution to the shareholders 1,199,408,013.81 1,308,069,068.20

Less: Dividends of common shares payable 462,000,000.00 420,000,000.00

IV. Retained earnings 737,408,013.81 888,069,068.20

Legal representative: President Chief Financial Officer

-54- 2006 ^kkr^i=obmloq

Schedule of Provision for Impairment of Assets 2006

Prepared by: Huaxia Bank Co., Ltd. In RMB

Items Opening Provision Transfer Recovery Transfer out Write-off of Amortiza- Ending balance in the report- in the report- of the in the report- the impaired tion in the balance ing year ing year canceled ing year loan interest current year

I. Reserve for due from banks 5,500,000.00 5,500,000.00

II. Reserve for lendings 187,262,478.21 -5,367,971.74 23,426,100.00 158,468,406.47

III. Provision for bad debts 222,183,366.48 36,996,858.09 25,081,100.00 1,734,824.73 282,526,499.84

IV. Provision for available-

for-sale financial assets

V. Provision for impairment

of the held to the due

investment

VI. Provision for impairment 4,932,315,726.33 2,310,368,642.98 12,429,468.51 11,256,357.83 265,654,853.05 1,014,041,746.35 5,964,160,880.59

of loans

VII. Provisions for impairment

of fixed assets

VIII. Provision for impairment

of intangible assets

IX. Provision for impairment 89,070,908.26 87,127,887.29 9,601,357.83 29,627,774.45 156,172,378.93

of the repossessed assets

to be disposed

Legal representative: President Chief Financial Officer

-55- Cash Flow Statement

Prepared by: Huaxia Bank Co., Ltd. In RMB

Items Notes 2006 2005

I. Net cash flows arising from operating activities Net increase of the customers' deposit and amount from banks 59,351,896,802.72 50,823,963,566.17 Net increase of borrowing from the central bank Net increase of borrowing from other financial institutions 11,823,845,431.67 -2,196,790,696.96 Cash from collection of interest, service charge and commission 7,701,988,091.13 6,679,691,512.23 Other cash in connection with operation activities as received 174,778,684.59 2,217,367,247.67 Subtotal of cash flow in from operating activities 79,052,509,010.11 57,524,231,629.11 Net increase of loans and advances to the customers 30,467,314,629.15 55,505,868,347.65 Net increase of amounts due from the central bank and other banks 4,655,694,168.23 4,195,155,185.86 Cash for payment of service charge and commission 106,194,279.85 98,775,443.17 Cash paid to and for staff 1,465,785,739.59 1,238,949,250.29 Taxes paid 1,516,659,197.31 1,180,566,870.53 Other business related cash payments 2,947,120,169.77 1,891,075,082.35 Subtotal of cash flow out from operating activities 41,158,768,183.90 64,110,390,179.85 Net cash flows arising from operating activities 37,893,740,826.21 -6,586,158,550.74 II. Cash flows arising from investment activities: Cash received from recovery of investment 184,435,215,941.10 129,928,223,620.03 Cash received from investment income 2,134,745,178.23 1,470,958,030.88 Other investment related cash receipts 39,087,954.11 6,016,916.20 Subtotal of cash flow in from investment activities 186,609,049,073.44 131,405,198,567.11 Cash paid for investment 200,273,555,419.07 149,921,189,873.30 Cash paid for construction/purchase of fixed assets, 603,686,901.87 740,847,525.12 intangible assets and other long term assets Other investment related cash payments Subtotal of cash flow out from investment activities 200,877,242,320.94 150,662,037,398.42 Net cash flow arising from investment activities -14,268,193,247.50 -19,256,838,831.31 III. Cash flows arising from fund raising activities: Cash received from absorption of investment Cash received from bond issuing 2,000,000,000.00 Other fund raising related cash receipts Subtotal of cash flow in from fund-raising activities 2,000,000,000.00 Cash paid for liabilities repayment Cash paid for dividend/profit distribution or repayment of interest 458,210,000.00 416,300,000.00 Other fund raising related cash payments Subtotal of cash flow out from fund-raising activities 458,210,000.00 416,300,000.00 Net cash flow arising from fund-raising activities 1,541,790,000.00 -416,300,000.00 IV. Influence upon cash due to change of exchange rate 4,285,894.11 7,674,915.58 V. Net increase of cash and cash equivalents 25,171,623,472.82 -26,251,622,466.47 Plus: Opening balance of cash and cash equivalents 25,147,973,719.00 51,399,596,185.47 VI. Ending balance of cash and cash equivalents 50,319,597,191.82 25,147,973,719.00

Legal representative: President Chief Financial Officer

-56- 2006 ^kkr^i=obmloq

Additional Information to the Cash Flow Statement

Prepared by: Huaxia Bank Co., Ltd. In RMB

Items Notes 2006 2005

1. Net cash flows arising from adjustment of net profit into operating activities: Net profit 1,457,043,272.90 1,279,594,082.21 Plus: Reserve for impairment of assets 2,172,782,835.28 1,362,715,487.69 Depreciation of fixed assets 356,107,563.54 300,287,035.80 Deferred assets 372,701,477.56 362,117,900.55 Loss from disposal of fixed assets, 2,584,483.60 22,773,947.93 intangible assets and other long term assets Losses from rejection of fixed assets Loss from change in the fair value -9,878,765.04 Investment loss -2,245,117,595.06 -1,679,096,042.81 Deferred income tax 44,598,952.66 -38,388,911.76 Decrease of operative items receivable -50,265,620,183.77 -60,962,318,357.26 Increase of operative items payable 86,008,538,784.54 52,766,156,306.91 Others Net cash flows arising from operating activities 37,893,740,826.21 -6,586,158,550.74 2. Significant investment and fund-raising activities with no cash income and expenses involved: Capital converted from liabilities Convertible company bonds due within a year Fixed assets rented through financing 3. Net change in cash and cash equivalents: Ending cash balance 1,298,740,742.45 1,049,244,797.96 Less: Opening cash balance 1,049,244,797.96 972,863,036.46 Plus: Ending balance of cash equivalent 49,020,856,449.37 24,098,728,921.04 Less: Opening balance of cash equivalent 24,098,728,921.04 50,426,733,149.01 Net increase of cash and cash equivalents 25,171,623,472.82 -26,251,622,466.47

Legal representative: President Chief Financial Officer

-57- Hua Xia Bank Co., Ltd. Notes to 2006 Financial Report All amounts are in Renminbi unless there is otherwise expression

I. Background Hua Xia Bank Co., Ltd. ("the Company"), of which its predecessor was Hua Xia Bank, is a nationwide commercial bank approved by the People's Bank of China, which issued document YF [1992] No.391. The Company was founded by Shougang Group General Corporation on October 14 1992. On April 10, 1996 the People's Bank of China issued the YF (1996) No.109 document, "Approval on Hua Xia Bank to Change its Registered Capital and Approval of Articles of Association of Hua Xia Bank Co., Ltd. " which approved the Hua Xia Bank to conduct reformation to a joint stock company. The enterprise Business License (Registration No. 1000001002967) was issued on March 18, 1998 by the State Administration of Industry and Commerce. The Company also obtained "Financial Institution Qualification License" (No. B10811000H0001). The Company was established jointly by 33 enterprises with registered capital of RMB 2.5 billion, which was verified by Jian Yin Certified Public Accountants on March 13, 1996, which issued JYYZ(96) No.2 capital verification report. On July 21, 2003, as approved by ZJFXZ(2003) No.83 document issued by the China Securities Regulatory Commission, the Company issued 1 billion Renminbi common shares A share with par value RMB 1.00 at issuing price of RMB 5.60 per share to the general public. After deduction of listing and issuing cost including the interest from fund raised, the Company raised a net amount of RMB 5.460 billion in total. The above shares were listed in Shanghai Stock Exchange on September 12, 2003. After the listing, the registered capital of the Company was increased to RMB 3.5 billion, which was verified by Beijing Jing Du Certified Public Accountants Co., Ltd. on September 5, 2003, which issued Beijing JDYZ (2003) No.0036 capital verification report. According to the resolution passed at the 2003 annual general meeting of the Company which was held on April 28, 2004 and after the amendment of the Article of Association of the Company, the Company transferred capital surplus of RMB 0.7 billion to issued capital at a ratio of 2 for 10 on the basis of 3.5 billion issued shares. After the change, the registered capital of the Company is RMB 4.2 billion, which was verified by Beijing Jing Du Certified Public Accountants Co., Ltd. on May 26, 2004, which issued Beijing JDYZ (2004) No.0017 capital verification report. On June 6, 2006, the Company completed the equity separation reform. The shareholders of non-negotiable shares made valuable consideration arrangement by paying shares to all the shareholders of negotiable shares registered as at the equity registration date according to the plan and the shareholders of negotiable shares may obtain 3 shares for every 10 negotiable shares held by them. The number of shares to be paid by the shareholders of non-negotiable shares is determined based on the proportion of the non- negotiable shares held by them; upon implementation of the valuable consideration arrangement, the non-negotiable shares held by the former shareholders of non-negotiable shares were changed into the shares with sales restriction; the total number of shares paid to the shareholders of negotiable shares is 360 million shares. As specified in the Company's "Enterprise Business License", the business scope of the Company includes: taking RMB customer deposits; granting loans of short-term, mid-term and long-term nature; performing settlements; discounting bills and notes; issuing financial corporate bonds; issuing, underwriting and cashing securities on behalf of governmental authorities; trading of governmental bonds and corporate bonds; inter-bank loans and deposits; services relating to letters of credit and letters of guarantee; factoring and assignment of receivables and payables; safe deposit services; accepting deposit in foreign currencies; granting loans in foreign currencies; remittance of foreign currencies; lending in foreign currencies; accepting and discounting of bills and notes expressed in foreign currencies; purchase and sale of foreign currencies, either for itself or on behalf of clients; purchase and sale of marketable securities expressed in foreign currencies(excluding stocks), either for itself or on behalf of clients; issuance of marketable securities expressed in foreign currencies(excluding stocks), either for itself or on behalf of clients; exchange of foreign currencies; guarantees in foreign currencies; lease of foreign currencies; Offshore banking credit investigation, consultancy and testimonial services.

-58- 2006 ^kkr^i=obmloq

As of December 31, 2006, the Company has the following divisions: Headquarters-base office, Headquartersbusiness division, Nanjing Branch, Hangzhou Branch, Shanghai Branch, Jinan Branch, Kunming Branch, Shenzhen Branch. Shenyang Branch, Guangzhou Branch, Wuhan Branch, Chongqing Branch, Chengdu Branch, Xian Branch, Urumchi Branch, Taiyuan Branch, Dalian Branch, Qingdao Branch, Wenzhou Branch, Shijiazhuang Branch, Tianjin Branch, Huhhot Branch and Fuzhou Branch. Nibo Branch. In addition, the Company also established cross-city sub-branches in Suzhou, Wuxi, Yantai, Liaocheng, and Yuxi. The Company has 279 business units in total.

II. Significant Accounting Policies and Accounting Estimation

1. Accounting policies The Company adopts the "Accounting Standards for Business Enterprises", the "Accounting System for Financial Enterprises", the "Provisional Regulations on Acknowledgement and Measurement of Financial Instruments (Trial)" and the additional regulations.

2. Fiscal year The fiscal year of the Company is from January 1 to December 31 of each calendar year.

3. Reporting currency The reporting current of the Company is Renminbi ("RMB").

4. Recording basis and valuation principle The Company's books and ledgers have been prepared on an accrual basis and under the historical cost convention.

5. Foreign Currency Translation: The Company adopts the system of independent account for transactions in foreign currencies. All balance sheet items denominated in foreign currencies are translated into RMB at the exchange rate published by the People's Bank of China or the rate accepted by the central government at the end of the year. Except retained profit item, shareholders equity items are translated into RMB at the exchange rate published by the People's Bank of China or the rate accepted by the central government at the transaction date. Retained profit items are expressed in the appropriation statements with the translated amount.

6. Basis of preparation The financial statements of the Company are compiled with the financial statement and other information of headquarter-base office, headquarter-business division, branches and sub-branches. Transactions and balances between units are offset internally.

7. Cash and cash equivalents Cash equivalents comprises of cash at banks, non-statutory deposits with the Central Bank, due from banks and placements with banks both maturing in less than three months, and short-term highly liquid investments which are readily convertible into known amount of cash, subject to an insignificant risk of changes in value, and have a short maturity term of generally within three months when acquired.

8.Financial assets The Company classified its financial assets into four categories: financial assets that are measured at fair value and changes in the value are charged to current gain and loss; held to maturity financial assets; loans and receivables; and available for sale financial assets.

-59- (1) Financial assets that are measured at fair value and changes in the value are charged to current gain and loss. Such financial assets include: transactional financial assets and the financial assets designated to be measured based on the fair value and stated in the gain and loss of the very period based on the fair value. The financial assets that is obtained mainly for the purpose of sales in short term shall be classified as this type of financial assets; in addition, when the financial asset is obtained, the management may instruct it to be classified to such financial asset. Derivative financial products are also classified as the financial assets measured based on the fair value and the change of their fair value is charged to the current gain and loss. (2) Held to maturity investments Held to maturity investments refer to non-derivative financial assets which are fixed up to the maturity, fixed in recovery amount or can be determined while the Company has definite intention and capability to hold mature non-derivative financial assets. In case the Company sells partial due investment held by it or reclassifies the amount of financial assets available for sale, when the total amount of such investment before sale or reclassification is big, the remaining part of such investment is reclassified as the financial asset available for sale; while in the fiscal year or within the next two complete fiscal years, the financial asset must not be reclassified into the held to maturity investments. (3) Loans and receivables Loans and account receivable refer to non-derivative financial assets in the active market without quotation, with the recoverable amount fixed or which can be determined. (4) Financial Assets Available for Sale Financial assets available for sale refer to non-derivative financial assets available for sale when they are initially recognized as well as the financial assets except such financial assets as loan, account receivable, held to the maturity investment, measured based on the fair value and the change of the fair value is charged to the current gain and loss. Financial assets as initially recognized are measured according to the fair value. For the financial assets which are measured based on the fair value and whose change is charged to the current gain and loss, the relevant transaction fee is directly charged to the current gain and loss; for other types of financial assets, the relevant transaction fee is charged to the amount as initially determined. The financial assets are measured based on the fair value and their changes are charged to the current gain and loss and the financial assets available for sale are measured based on fair value afterwards; the held to the maturity investment and loans and accounts receivable are measured afterwards by means of actual interest rate method. The gain or loss formed due to change in fair value of transactional financial assets is directly charged to the current gain and loss; the gain or loss formed from change of the fair value of the financial assets available for sale is determined in the owner's equity.

9. Impairment of Financial Assets (1) Assets measured with the amortized cost The Company conducts inspection over the book value of the financial assets other than the financial assets measured based on fair value and whose change is charged to the current gain and loss on the balance sheet day; and provides reserve when objective evidence shows that such financial assets experiences impairment. The Company first of all makes separate assessment of financial assets in big amount to ensure if there is any objective evidence showing the existence of impairment; afterwards, makes separate of overall assessment of financial assets of smaller amount to ensure if there is any objective evidence showing the existence of impairment. In case there is no objective evidence showing there exists any impairment in financial assets, the Company shall classify them to the group of financial assets with the similar credit risk characteristics and make overall impairment assessment regardless the size of such financial assets.

-60- 2006 ^kkr^i=obmloq

(2) Assets Measured Based on Fair Value When the financial assets available for sale experiences impairment, even if such financial assets have not yet been eventually confirmed, the accumulated loss which is directly charged in the owner's equity and formed due to falling of fair value should be allowed to transfer out and charged to the current gain and loss. Such transferred out accumulated loss is the balance of the cost of the financial assets available for sale initially obtained less the principal already recovered and the amount already amortized, present fair value and the loss from impairment already charged to the gain and loss. Loss from impairment incurred to the investment of the equity instruments available for sale must not be transferred out through gain and loss. However, the equity instrument investment active in the market but without quotation whose fair value cannot be reliably measured or the loss from impairment of derivative assets which is linked with such equity instrument and settled through delivery of such equity instrument must not be carried back.

10. Financial liabilities The financial liabilities held by the Company comprise of financial liabilities that are measured at fair value and changes in the value are charged into current gain and loss, deposits, issued bonds and other liabilities. The financial liabilities the Company measures based on the fair value and charges to the current gain and loss include the financial liabilities held for transaction purpose and the financial liabilities measured based on the fair value designated by the management at the time of initial recognition and whose change is charged to the current gain and loss. The Company conducts follow-up measurement of the financial liabilities by using the actual interest rate method based on the amortized cost. However, the following cases are the exception: (1) The financial liabilities measured based on the fair value and whose change is charged to the current gain and loss are measured according to the fair value but the transaction expenses possibly incurred in settlement of the future financial liabilities are not deducted. (2) The derivative financial liabilities linked with the equity instruments which are active in the market but without quotation and whose fair value cannot be reliably measured and settled by delivering that equity instrument are measured according to the cost.

11. Fair Value For financial instruments active in the market, the quotation active in the market is taken as the fair value. That quotation refers to the price easy to be obtained from the exchange, broker, industrial association, pricing service institution, etc. which represents the price of the market transaction occurred in the fair transaction. For the financial instrument inactive in the market, the fair value is determined by means of valuation techniques. Such valuation techniques include such proper methods as cash flow discounting method, earning rate curve method or option pricing model, etc.

12. Commissions The Company takes charge of commissions, including designated loan and commissioned investment. Designated loans are that funded by entrusting parties. According to the instruction of the entrusting parties, such as the requirement on the borrower, purpose, amount, duration and interest rate of loans, the Company acts as an agent to grant loans to borrowers and monitor the usage and repayment of the loan. Commissioned investment is that the entrusting parties provide fund. The Company makes own investment decision within the designated range during the commission and makes investment for the entrusting parties. The entrusting parties assume all the risks, gain and loss and responsibilities involved in the commission and the Company only receives arrangement fees. The difference between designated loans and the commissioned investment is reported in net on the balance sheet.

13. Repurchase and reverse repurchase agreements Securities under repurchase and reverse repurchase agreements are stated at cost. Interest earned on reverse repurchase agreement and interest incurred on repurchase agreements are recognized as interest income and expense respectively on a accrual basis.

-61- 14. Fixed Assets (1) Fixed assets are properties and buildings, office equipment and motor vehicles with respectively high unit values held for the purpose of providing services, leasing or business operation with useful lives over 1 year. Fixed assets are stated at the actual cost at the time of obtainment. (2) The follow-up expenses in connection with fixed assets are charged to the book value of fixed assets in case they cause the interest what may flow into the Company exceeding the former estimate, or have prolonged the service life of fixed assets, or make product quality substantially improved or make product cost substantially drop; however the added amount must not exceed the recoverable amount of such fixed assets. All the other follow-up expenses are recognized as the current expenses. (3) The Company provides depreciation based on composite life method. The depreciation rates determined based on classifica- tion of fixed assets, predicted service life and predicted net residue rate (the predicted net residue rate is 3%) without considering the reserve for impairment of the fixed assets are as follows:

Categories of fixed assets Estimated useful life Annual depreciation rate Properties and buildings 5-40 years 19.40%-2.43% Office equipment 3-12 years 32.33%-8.08% Motor vehicles 5-10 years 19.40%-9.70% where, for the fixed asset whose reserve for impairment has been already provided, the depreciation rate is re-determined based on the book value of the fixed asset and the service life available for use. In case the fixed asset whose reserve for impairment has been already provided is recovered again, the depreciation rate and depreciation amount are re-determined based on the book value of the fixed asset upon recovery and the service life available for use. (4) The Company inspects fixed assets item by item at the end of the period and provides reserve of impairment of the fixed assets in case the recoverable amount is lower than the book value due to out-of-date technology, damage, long term idleness, etc. At the time of calculation and provision, the reserve for impairment of fixed asset is determined based on the difference between the recoverable amount of fixed assets lower than the book value of the individual fixed assets. (5) For the fixed asset whose reserve for impairment has been provided, in case there is evidence showing that change has taken place in various factors on which reserve for impairment was provided and which has caused the recoverable amount of the fixed asset is greater than its book value, the reserve for impairment previously provided should be carried back. (6) According to the "Questions and Answers (VI)" of the Ministry of Finance, while carrying back the reserve for impairment of the fixed asset, the book value of the carried back fixed assets should not exceed the net book value of the fixed assts worked out without consideration of the reserve for impairment.

15 Construction in progress (1) Construction in progress is stated at cost. When construction in progress has reached the application status, all the expenses incurred in the procedures that the construction in progress is completed and reaches the predicted application status are regarded as the value for charging the fixed assets. (2) The carrying amount of construction in progress is individually reviewed at each balance sheet date. When a construction in progress has been suspended for a long period and is not expected to resume construction within 3 years, a provision for impairment will be made against the carrying values of the construction in progress in the income statement of the year. At the time of calculation and provision, the reserve for impairment of construction in progress is determined based on the difference between the recoverable amount of construction in progress lower than the book value of the individual construction in progress.

16. Long-term deferred expenses (1) Long-term deferred expenses includes leasehold improvements of operating leases and the other capitalized expenditures that are amortized over 1 years.

-62- 2006 ^kkr^i=obmloq

(2)Leasehold improvement are amortization over the expected useful lives; prepaid rental expense is amortized over the lease term; other expenditures are amortized over the beneficiary period. (3) Long-term deferred expenses that cannot benefit the subsequent periods, the amortized expenses will be totally amortized and charged to the income statement of the year. (4)The expenditures for the newly-established branches occurred before the branches operate shall be collected in long-term deferred expenses and charged to the income statement when the branches commerce operation.

17. Repossessed assets (1) Repossessed assets are recognized at the carrying amount of principal of the loan and the recognized interest receivable which are settled by such repossessed assets. The provisions previous accounted for the loan is transferred to the provision for repossessed assets upon the recognition of the repossessed assets. (2) Upon disposal of a repossessed asset, if the proceeds received exceed the carrying amount, the difference is recognized as a non-operating income; If the proceeds received are less than the carrying amount, the difference is charged to non-operating expense. Expenditures incurred before the repossessed asset is disposed are charged as non-operating expenses. Expenses incurred in the process of disposal are offset with the proceeds received. (3)The carrying amount of repossessed assets are reviewed as each balance sheet date on an individual asset basis. Provision for impairment is made with reference to the difference between the carrying amount and the recoverable amount.

18. Predicted liabilities Predicted liabilities shall be recognized when the obligation in connection with the contingent events complies with the following conditions: (1) Such obligation is a present obligation the Company should assume; (2) Implementation of such obligation may possibly cause economic loss of the enterprise (3) The amount involved in such obligation can be reliably counted In case payment for the predicted liabilities already determined is all or partially compensated by the third party or other party, the compensation amount can be individually determined as asset only when the compensation has been confirmed as received. The confirmed compensation shall not exceed the book value of liabilities as confirmed.

19. Calculation of Payable Bonds (1) Pricing of payable bonds When the Company issues bonds, they are stated in the payable bonds based on the total amount of issuing price. (2) Amortization of bond premium or discount The difference between the total bond issuing price and total book value of bonds is used as the bond premium or discount, which is amortized when interest is provided based on the actual interest rate during the existence of bonds.

20.Revenue recognition The income is recognized when the relevant economic benefits may very reliably flow to the Company and the amount can be reliably measured. (1) Interest income The corresponding interest income is recognized on accrual basis according to the actual interest rate method. (2) Service charge and commission income Service charge and commission income is recognized on accrual basis when the corresponding service is provided.

21. Payment Interest payment and other payments are all recognized on accrual basis.

-63- 22. Financial derivative instruments Financial derivative instruments are recognized initially based on the fair value on the very day when the derivative transaction contact is executed and afterwards are measured based on their fair value. In case the current fair value is positive, the derivative financial products are used as assets; in case the fair value is negative, the derivative financial products are used as liabilities. In case financial derivative instruments are active in the market, the fair value is determined based on the market quotation, including the recent market transaction; otherwise, the fair value is determined based on the fair value, including the cash discount method or other proper method, such as futures pricing model.

23. Income tax (1) The Company adopts the "Tax Effect Accounting Method". (2) The timing difference between the carrying value of assets and liabilities on the taxation basis and their book values is subject to the calculation of deferred tax at the prevailing tax rate. When there is sufficient evidence to prove that there is enough taxable income to offset against such timing difference, deferred tax is then recognized. Provision for deferred tax is recognized at each year end if the deferred tax cannot be recovered. (3) The Company adopts "Tax Effect Accounting Method". Major items that may cause timing difference include: provision for credit losses, provision for other asset impairment and amortization of preoperating expenses. Deferred tax asset is recognized on individual basis after taking into account of the above timing difference and the recoveries. (4) When assessing the deferred tax asset, the management considers if the expected tax benefit from the provision for credit losses and impairment of other assets and the amortization of pre-operating expenses cannot be flown to the Company in the future. The Company also considers the prevailing tax rate and regulations when assessing the deferred tax asset. (5) The Company analyses the deferred tax asset at each year end and estimates the write-back amount based on the following expected future tax benefit: A. Provision for credit losses and provision for asset impairment a. For impairment losses recognized in the current year profit statement which have been allowed by tax bureau for tax deduction, the income tax expense of the current year is adjusted for the deferred tax asset; b. Decrease in credit risk due to the changes in economy and the higher expected recovery is resulted, the income tax expense of the current year is adjusted for the provision for credit losses written back. B. Amortization of pre-operating expenses In accordance with Accounting System for Business Enterprises, pre-operating expenses are charged to the income statement once the business unit commences its operation. However, according to the prevailing tax rules, the pre-operating expenses are amortized over a period of 5 years. The income tax expense of the current year is adjusted for the deferred tax asset recognized in the abovementioned timing difference. (6) If certain provisions for credit losses, provisions for asset impairment and amortization of preoperating expenses cannot bring future tax benefit to the Company, the management makes provision for deferred tax assets and the income tax of the current year is adjusted. (7) Based on the abovementioned principles, the Company changes the difference between the deferred tax recognized at the balance sheet date and that of the previous one to the income statement. (8) Except the equity in connection with the equity item and directly recognized, the income tax expenses are all recognized in the profit statement.

III. Changes in Accounting Policies, Accounting Estimations and Adjustments of Fundamental Accounting Errors

1. Change in the Accounting Policy and Accounting Estimation Commencing from January 1, 2006, the Company implements the Provisional Regulations on Acknowledgement and Measure- ment of Financial Instruments (Trial) (CAI KUAI [2005] No. 14) promulgated by the Ministry of Finance and adjusted the retained earnings at the beginning of 2006 and the opening balance of relevant items; several columns in the profit statement and the profit distribution statement in 2005 have been filled up with the adjusted data.

-64- 2006 ^kkr^i=obmloq

Through retroactive adjustment, the net profit of 2005 decreased by RMB 9,081,018.37, which is due the change in recognition of investment income and deferred income tax; the retained earnings at the beginning of 2006 increased by RMB 14,437,843.99, of which the undistributed profit increased by RMB 12,272,167.40, surplus reserve increased by RMB 2,165,676.59; capital reserve increased by RMB 63,374,934.27, which was due to adjustment of the unrealized gain and loss from the financial assets available for sale and deferred income tax. The retained earnings in the profit distribution statement at the beginning of 2005 increased by RMB 19,991,033.01 after adjustment due to change in recognition of investment income and adjustment of deferred income tax. Due to change in accounting policy, increase of the net profit in the report period by RMB 83,911,855.76 was due to change of the way of investment income recognition due to reclassification of the bond investment and adjustment of the deferred income tax; increase of the capital reserve by RMB 155,643,904.98 was due to that the financial assets available for sale had not realized the gain and loss and the deferred income tax had been adjusted.

2 . Correction of Material Accounting Errors There exist no significant accounting errors necessary to be corrected in the Company.

3. Restatement of the Accounting Statements According to the Provisional Regulations on Acknowledgement and Measurement of Financial Instruments (Trial) (CAI KUAI [2005] No. 14) promulgated by the Ministry of Finance, the Company made restatement of the accounting statements of 2005.

IV. Taxes

1. Major types of tax and tax rates

Categories Tax Rate Basis of calculation Business Tax 5% taxable operating income Corporate Income Tax 15%33% Taxable income (Shenzhen)Taxable income (Other than Shenzhen) City Construction Tax 1%7% 5% of Business Tax (Shenzhen)5% of Business Tax(Other than Shenzhen)

2. Preferential Tax and Approval According to the Notice of the State Administration of Taxation on Payment of Corporate Income Tax for Huaxia Bank [GUO SHUI HAN (2004) No. 1390] promulgated by the State Administration of Taxation on December 27, 2004, commencing from 2004, the Company pays corporate income tax on a consolidated basis in Beijing and the Company's branches pays in advance the corporate income tax based on 60% of the annual income tax payable.

V. Notes to the Financial Statements

1. Cash on hand and at bank

Items December 31, 2006 December 31, 2005 Cash in stock 1,298,740,742.45 1,049,244,797.96 Statutory reserve for deposited with the central bank 23,562,170,086.45 18,864,545,093.22 Reserve for overage deposit with the central bank 41,507,497,963.70 16,945,108,903.64 Other account deposited with the central bank 4,165,000.00 274,000.00 66,372,573,792.60 36,859,172,794.82

-65- (1) Cash in stock

Currency December 31, 2006 December 31, 2005 In Original Currency Exchange Rate RMB Equivalent In Original Currency Exchange Rate RMB Equivalent RMB 1,085,162,398.38 - 1,085,162,398.38 845,267,372.66 - 845,267,372.66 USD 14,422,277.60 7.8087 112,619,239.10 14,333,522.28 8.0702 115,674,391.51 HKD 44,843,565.00 1.004 45,022,939.26 42,054,372.30 1.0406 43,761,779.82 JPY 346,179,565.00 0.065586 22,704,532.96 297,015,607.00 0.068569 20,366,063.16 EUR 3,193,915.23 10.3075 32,921,281.23 2,488,130.05 9.5539 23,771,345.68 Other curencies 310,351.52 403,845.13 1,298,740,742.45 1,049,244,797.96

Cash and cash equivalents listed in the cash flow statement include:

Amount Cash 1,298,740,742.45 Cash equivalents: Deposit with the central bank 41,511,662,963.70 Interbank deposit and Interbank lending due within three months and 7,509,193,485.67 sum of money with other financial institutions Balance of cash and cash equivalents as at December 31, 2006 50,319,597,191.82 Less: Balance of cash and cash equivalents as at December 31, 2005 25,147,973,719.00 Net increase of cash and cash equivalents 25,171,623,472.82

(2) The Company deposits reserve for general deposits with the People's Bank of China and that deposit must not be used for regular business. The deposit reserve deposited covers the deposits of government organizations and groups, deposits beyond the financial budget, personal deposits, deposits of units and other deposits. The depositing proportions are as follows:

Categories December 31, 2006 December 31, 2005 RMB 9% 7.5% Foreign Currency 4% 3%

(3) Cash reserves deposited with the central bank refers to various funds deposited with the central bank for the purpose of ensuring normal withdrawal of deposits and conducting normal business, but excluding the funds for special purpose, such as the statutory deposit reserve.

2. Interbank Deposit

Categories December 31, 2006 December 31, 2005 Interbank deposit with domestic banks 3,900,239,760.49 5,796,844,689.79 Interbank deposits with foreign banks 1,287,561,100.18 1,463,527,387.61 Less: Provisions for doubtful debts 5,500,000.00 5,500,000.00 Book value of interbank deposits 5,182,300,860.67 7,254,872,077.40

-66- 2006 ^kkr^i=obmloq

3. Placements with banks

Categories December 31, 2006 December 31, 2005 Interbank lendings with other banks 2,601,697,000.00 120,709,140.00 Lendings with non-bank financial institution 147,468,406.47 176,262,478.21 Less: Reserve for loss from loans 158,468,406.47 187,262,478.21 Book value of the lendings 2,590,697,000.00 109,709,140.00

4. Transactional financial assets

Items December 31, 2006 December 31, 2005 Bonds 2,768,745,859.81 -

5. Reverse repurchase agreements

Items December 31, 2006 December 31, 2005 Securities 18,440,800,000.00 4,000,000,000.00 Including: government bonds 6,240,000,000.00 4,000,000,000.00 Bond from the central bank 3,830,000,000.00 - Financial bonds 8,370,800,000.00 - Bill 11,294,860,962.03 8,344,171,115.23 Including: banks acceptance 6,841,556,726.76 5,720,203,513.02 Commercial acceptance 4,453,304,235.27 2,623,967,602.21 Less:provision for bad debt - - Book value of the bought repurchase financial assets 29,735,660,962.03 12,344,171,115.23

6. Interest receivable (1) Analysis by aging

Aging December 31, 2006 December 31, 2005 Balance Percentage Balance Percentage Within 1 year 898,637,418.23 100.00% 802,405,713.16 100.00% 1-2 years - - - - 2-3 years - - - - Above 3 years - - - - Book value of Interest receivable 898,637,418.23 100.00% 802,405,713.16 100.00%

(2) Analysis by nature

Categories December 31, 2006 December 31, 2005 Loans interest 17,018,787.12 25,190,761.09 Interest on placements with banks 6,468,471.19 1,111,576.39 Bonds interest 873,249,290.80 775,580,635.95 Interest on securities under reverse repurchase agreements 1,900,869.12 522,739.73 Book value of interest receivable 898,637,418.23 802,405,713.16

-67- (3) As at December 31, 2006,there is no other interests receivable from shareholders holding 5% or more of the Company's shares.

7. Loan provision and advances (1) Based on personal and enterprise distribution

Items December 31, 2006 December 31, 2005 Personal loan and advances 27,952,397,926.65 19,129,838,271.32 - Housing collateral 19,890,694,376.82 13,977,138,872.40 - Others 8,061,703,549.83 5,152,699,398.92 Enterprise loan and advances 231,814,747,489.72 214,293,636,451.18 - Loan 206,390,802,446.77 172,731,383,263.28 - Discount 24,454,467,403.81 40,224,386,779.25 - Import and export negotiation 969,477,639.14 1,337,866,408.65 - Others - - Total loan and advances 259,767,145,416.37 233,423,474,722.50 Less: Provision for loan loss 5,964,160,880.59 4,932,315,726.33 Book value of loan and advances 253,802,984,535.78 228,491,158,996.17

(2) Based on sectors

Sectors December 31, 2006 December 31, 2005 Book balance Proportion (%) Book balance Proportion (%) Industrial 67,388,664,644.48 25.94% 61,440,769,672.72 26.32% Commercial 13,908,172,380.57 5.36% 15,274,503,212.98 6.54% Building 36,434,405,769.70 14.03% 29,794,316,075.96 12.76% Logistic 22,559,015,016.41 8.68% 22,411,838,053.99 9.60% Foreign trade 5,578,621,664.35 2.15% 6,699,448,307.19 2.87% Technology 4,296,721,158.10 1.65% 4,946,292,256.08 2.12% Cultural and medical 8,683,024,781.97 3.34% 6,361,562,550.60 2.73% Energy and transport 27,933,633,247.14 10.75% 24,523,282,754.87 10.51% Personal loan 27,952,397,926.65 10.76% 19,129,838,271.32 8.20% Other sectors 45,032,488,827.00 17.34% 42,841,623,566.79 18.35% Total loan and advances 259,767,145,416.37 100.00% 233,423,474,722.50 100.00% Less: Reserve for loan loss 5,964,160,880.59 4,932,315,726.33 Book value of loan and advances 253,802,984,535.78 228,491,158,996.17

-68- 2006 ^kkr^i=obmloq

(3) Based on regions

Based on Regions December 31, 2006 December 31, 2005 Book balance Proportion (%) Book balance Proportion (%) Beijing 42,097,251,038.45 16.21% 43,220,865,147.49 18.52% Shanghai 15,481,533,697.93 5.96% 15,051,126,965.80 6.45% Jiangsu 33,699,994,181.24 12.97% 26,883,318,365.42 11.52% Zhejiang 32,449,455,022.86 12.49% 23,580,741,571.02 10.10% Hubei 10,021,540,175.48 3.86% 8,697,332,841.50 3.73% Shanxi 12,616,005,213.52 4.86% 13,626,286,117.57 5.84% Hebei 7,512,506,065.74 2.89% 8,786,554,207.90 3.76% Guangdong 21,392,872,819.21 8.23% 19,082,443,665.80 8.18% Shandong 26,140,737,768.81 10.06% 26,104,873,757.82 11.18% Yunnan 10,970,898,232.95 4.22% 10,512,820,321.27 4.50% Liaoning 13,183,974,618.04 5.08% 12,889,415,676.44 5.52% Sichuan 6,372,915,117.43 2.45% 5,559,293,369.19 2.38% Shaanxi 5,839,575,373.35 2.25% 3,459,354,797.08 1.48% Xinjiang 2,264,229,143.20 0.87% 3,226,683,872.83 1.38% Chongqing 10,611,583,864.40 4.09% 8,919,852,872.31 3.82% Inner Mongolia 2,865,908,106.65 1.10% 990,587,036.72 0.42% Fujian 2,794,167,899.25 1.08% 1,673,415,828.63 0.72% Tianjin 3,451,997,077.86 1.33% 1,158,508,307.71 0.50% Less: Provision for loan loss 5,964,160,880.59 4,932,315,726.33 Book value of loan and advances 253,802,984,535.78 100.00% 228,491,158,996.17 100.00%

(4) Based on ways of guarantee

Categories December 31, 2006 December 31, 2005 Credit loan 15,483,695,953.65 6,316,106,287.12 Secured loan 97,169,056,892.73 95,073,677,635.66 Loan with collateral 147,114,392,569.99 132,033,690,799.72 Including: Collateral loan 89,767,210,338.88 67,155,052,236.16 Hypothecated loan 57,347,182,231.11 64,878,638,563.56 Less: Provision for loan loss 5,964,160,880.59 4,932,315,726.33 Book value of loan and advances 253,802,984,535.78 228,491,158,996.17

(5) Overdue loan

Items December 31, 2006 Overdue for 1 to 90 Overdue for 90 to Overdue for 360 days to Over 3 years Total days (incl.; 90 days) 360 days (incl.; 360 days) 3 years (incl.; 3 years) Credit loan 42,768.84 595,920.00 15,998,686.92 5,224,176.47 21,861,552.23 Secured loan 458,577,806.63 1,929,325,871.68 1,853,637,620.24 748,196,696.00 4,989,737,994.55 Collateral loan 198,018,270.97 643,624,676.62 470,962,149.67 363,159,384.12 1,675,764,481.38 Hypothecated loan - 133,299,692.16 140,459,684.63 427,469,943.08 701,229,319.87 656,638,846.44 2,706,846,160.46 2,481,058,141.46 1,544,050,199.67 7,388,593,348.03

-69- Items December 31, 2005 Overdue for 1 to 90 Overdue for 90 to Overdue for 360 days to 3 Over 3 years Total days (incl.; 90 days) 360 days (incl.; 360 days) years (incl.; 3 years) Credit loan - 20,798,686.92 17,904,475.00 5,399,125.20 44,102,287.12 Secured loan 494,326,796.97 1,245,749,570.16 1,312,273,392.96 1,220,153,394.95 4,272,503,155.04 Collateral loan 222,863,919.58 631,495,502.34 557,495,289.35 418,975,497.28 1,830,830,208.55 Hypothecated loan 192,942,105.30 180,202,282.29 397,798,874.43 79,556,053.53 850,499,315.55 910,132,821.85 2,078,246,041.71 2,285,472,031.74 1,724,084,070.96 6,997,934,966.26

(6) Provision for loan loss

Items 2006 2005 Opening balance 4,932,315,726.33 4,408,978,163.73 Provision in the reporting period 2,310,368,642.98 1,337,285,193.06 Charge of impaired loan interest 265,654,853.05 - Recovered in the reporting period 12,429,468.51 3,215,638.01 Cancelled in the reporting period 1,014,041,746.35 799,997,518.47 Transfer out in the reporting period 11,256,357.83 17,165,750.00 Ending balance 5,964,160,880.59 4,932,315,726.33

The reserve transferred out in 2006 was the loan transferred to the debt offset asset to be disposed whose reserve for loss had already been provided. (7) Ended December 31, 2006, the balance of the loans offered to the shareholders holding over 5% (with 5% inclusive) in the Company was RMB 1,506.8123 million.

8. Financial Assets Available for Sale

Items December 31, 2006 December 31, 2005 Bonds 12,486,536,421.23 12,940,966,960.95 Incl: Government bonds 4,034,097,000.00 3,916,679,400.00 Financial bond 7,295,760,461.32 7,850,876,649.76 Bond of the central bank 982,627,400.00 1,008,295,000.00 Other bonds 174,051,559.91 165,115,911.19 12,486,536,421.23 12,940,966,960.95

9. Held to maturity investments

Items December 31, 2006 December 31, 2005 Book balance Fair value Book balance Bonds 65,134,238,309.11 66,133,521,409.98 51,453,041,742.61 Incl: Government bonds 41,383,533,915.94 42,286,725,399.53 38,503,801,074.54 Financial bond 13,899,864,345.97 13,999,131,907.90 10,709,242,292.24 Bond of the central bank 9,484,740,672.02 9,484,537,473.42 1,817,114,230.02 Other bonds 366,099,375.18 363,126,629.13 422,884,145.81 Total held to maturity investments 65,134,238,309.11 66,133,521,409.98 51,453,041,742.61 Less: provision for impairment of held to maturity investments - - - Book value of held to maturity investments 65,134,238,309.11 66,133,521,409.98 51,453,041,742.61

-70- 2006 ^kkr^i=obmloq

(1) Ended December 31, 2006, of the bonds held by the Company, the bonds amounting to RMB 1,204.894 million are the special financial management products titled WEN YING No. 3, 4 and 6 and ZENG YING No. 1 and 2 are in custody as special account. (2) Ended December 31, 2006, of the bonds held by the Company, the government bonds amounting to RMB 20 million has been frozen by the court due to legal proceedings. (3) Ended December 31, 2006, of the bonds held by the Company, the bond amounting to RMB 15,630 million was used to hypothecate the business of selling repurchased securities business.

10. Long-term equity investment

Types December 31, 2006 December 31, 2005 China UnionPay Co., Ltd. 53,125,000.00 50,000,000.00

Note: As that equity instrument investment active in the market had no quotation, its fair value could not be reliably measured, it was measured based on the cost. Ended December 31, 2006, there existed no impairment in the long term equity investment.

11. Fixed assets

Types December 31, 2006 December 31, 2005 Cost of fixed assets 5,052,751,969.95 4,954,465,290.57 Less: accumulative depreciation 1,518,290,887.62 1,267,388,066.66 Construction-in-progress 29,662,941.48 36,864,999.50 3,564,124,023.81 3,723,942,223.41

(1) Cost of fixed assets

Types December transfer in of Other increase Decrease in December 31, 2005 constructin in progress the reporting period 31, 2006 Housing and buildings 3,340,242,941.58 838,324.42 46,905,748.62 8,988,505.69 3,378,998,508.93 Office equipment 1,397,360,938.86 35,770,809.67 162,890,183.40 31,703,536.75 1,564,318,395.18 Motor vehicles 216,861,410.13 - 6,323,697.00 113,750,041.29 109,435,065.84 4,954,465,290.57 36,609,134.09 216,119,629.02 154,442,083.73 5,052,751,969.95

A. Decrease of fixed assets in the report period is mainly due to discarding of office equipment, implementation of the reform for regulations on using company owned vehicles and checking up company owned vehicles. B. Fixed assets without collateral or guarantee in the reporting period. C. Ended December 31, 2006, the Company had not yet handled the procedures for certification of title for housing and buildings with cost of RMB 72,349,540.91.

-71- (2) Accumulative depreciation

Types December Increase in Transfer-in in the Decrease in the December 31, 2005 the report period report period report period 31, 2006 Housing and buildings 286,078,445.23 98,958,157.18 - 1,456,690.52 383,579,911.89 Office equipment 863,114,465.70 236,793,778.37 - 30,389,576.65 1,069,518,667.42 Motor vehicles 118,195,155.73 20,355,627.99 - 73,358,475.41 65,192,308.31 1,267,388,066.66 356,107,563.54 - 105,204,742.58 1,518,290,887.62

(3) Construction in process A. Main construction in progress

Projects Budget December Increase in the Transferred in to Others trans- December Construction 31, 2005 report period fixed assets ferred out 31, 2006 progress Bank-wide network project Phase I 54,294,000.00 24,064,200.00 - 24,064,200.00 - - 100% Office building of Xian Branch 71,380,000.00 28,841,856.00 - - 28,841,856.00 40% Others 12,800,799.50 565,220.07 12,544,934.09 - 821,085.48 36,864,999.50 29,407,076.07 36,609,134.09 - 29,662,941.48

B. The fund source of the construction in progress is proceeds from share offering and fund from self-operation. Ended December 31, 2006, there existed no interest capitalization in the Company's construction in progress. (4) Ended December 31, 2006, there existed no impairment in the Company's fixed assets.

12. Deferred taxes and debit

Types December 31, 2006 December 31, 2005 Provision for loan loss 688,583,704.14 557,463,138.60 Provision for impairment of other assets and others 164,250,627.91 138,812,065.56 Change in fair value of financial assets available for sale (76,660,430.79) (31,214,519.87) Change in fair value of transactional financial assets (3,259,992.46) - Others (39,150,928.37) (7,111,176.89) 733,762,980.43 657,949,507.40

13. Other assets

Types December 31, 2006 December 31, 2005 Other receivables 808,973,790.21 582,268,005.27 Less: reserve for bad debts 282,526,499.84 222,183,366.48 Deferred assets 489,504,483.90 505,061,419.85 Assets for repaying debts to be disposed 473,176,287.99 368,935,948.02 Others 232,969,080.00 - 1,722,097,142.26 1,234,082,006.66

-72- 2006 ^kkr^i=obmloq

(1) Other receivables A. Analysis on aging

Age December 31, 2006 December 31, 2005 Amount Percentage Amount Percentage Within a year 442,622,930.39 54.72% 274,590,243.17 47.15% 1 to 2 years 140,373,960.04 17.35% 72,991,503.32 12.54% 2 to 3 years 65,149,204.12 8.05% 98,516,294.50 16.92% Over 3 years 160,827,695.66 19.88% 136,169,964.28 23.39% 808,973,790.21 100.00% 582,268,005.27 100.00%

B. Analyzed based on nature

Types December 31, 2006 December 31, 2005 Amount withheld by court 178,586,845.81 185,522,029.85 Litigation expense 107,375,495.22 87,543,208.02 Reserve 20,311,109.24 13,460,677.44 Others 502,700,339.94 295,742,089.96 808,973,790.21 582,268,005.27

C. Ended December 31, 2006, of the other receivables there was none from shareholders holding over 5% (with 5% inclusive) of the total shares in the Company. (2) Provision for bad debts

December Provided in the Transfer in the Transfer out the Canceled in the December 31, 2005 reporting period reporting period reporting period reporting perio 31, 2006 222,183,366.48 36,996,858.09 25,081,100.00 - 1,734,824.73 282,526,499.84

Ended December 31, 2006, the account receivable for which reserve for bad debt was provided was mainly the amount withheld by the court and the litigation fee, etc. (3) Deferred assets

Items Initial amoiunt December Increase in the Amortization in the December 31, 2005 reporting period reporting period 31, 2006 Refurbishing 437,915,984.96 332,950,361.96 35,401,525.19 81,230,360.00 287,121,527.15 Rental 201,224,967.29 130,906,865.19 246,006,128.89 249,317,392.98 127,595,601.10 Development of computer and software 77,125,158.87 26,719,100.25 35,481,792.31 16,957,926.96 45,242,965.60 Expenses of preparation for new branches 4,344,846.27 - 4,344,846.27 4,344,846.27 - Others 14,248,446.70 14,485,092.45 35,910,248.95 20,850,951.35 29,544,390.05 505,061,419.85 357,144,541.61 372,701,477.56 489,504,483.90

-73- (4) Assets for repaying debts to be disposed

Types December 31, 2006 December 31, 2005 Real estate 438,205,485.98 365,388,087.79 Land use right 7,000,000.00 7,000,000.00 Equity 135,429,494.47 26,317,434.22 Motor vehicle 2,805,347.24 3,903,528.67 Others 45,908,339.23 55,397,805.60 Total 629,348,666.92 458,006,856.28 Less: Provision for impairment of assets 156,172,378.93 89,070,908.26 for repaying debts to be proposed Net amount 473,176,287.99 368,935,948.02

14. Interbank deposits and loans and those with other financial institutions

Items December 31, 2006 December 31, 2005 Interbank deposits and loans 23,199,609,845.86 21,426,952,248.09

15. Interbank borrowing

Items December 31, 2006 December 31, 2005 Interbank borrowing 1,936,362,851.90 16,762,921.02

16. Payment from sale of the repurchased financial assets

Items December 31, 2006 December 31, 2005 Securities 15,550,000,000.00 - Including: government bonds 12,210,000,000.00 -  Bills from the central bank 1,940,000,000.00 - Financial bonds 1,400,000,000.00 - Bills 10,193,247,900.04 1,326,996,470.99 25,743,247,900.04 1,326,996,470.99

17. Deposit absorption (1) Stated based on details

Items December 31, 2006 December 31, 2005 Current deposit 125,022,581,492.32 94,353,362,752.01 Current saving deposit 16,078,033,864.62 11,971,283,431.98 Fixed deposit 135,674,698,425.61 120,756,907,676.10 Fixed saving deposit 29,488,035,304.68 24,118,234,713.55 Outward remittance and remittance Outstanding 1,438,574,648.12 1,880,441,816.93 Deposit in security 63,593,100,000.39 61,086,386,470.47 371,295,023,735.74 314,166,616,861.04

-74- 2006 ^kkr^i=obmloq

(2)Distribution based on regions

Distribution based on regions December 31, 2006 December 31, 2005 Book balance Proportion (%) Book balance Proportion (%) Beijing 85,708,850,841.95 23.09% 74,985,159,208.70 23.87% Shanghai 23,984,496,220.62 6.46% 21,424,347,567.75 6.82% Jiangsu 47,321,901,358.76 12.75% 40,855,620,097.22 13.00% Zhejiang 34,964,588,966.25 9.42% 28,246,313,758.14 9.00% Hubei 12,597,326,914.09 3.39% 10,718,278,664.19 3.41% Shanxi 18,640,714,942.93 5.02% 17,164,908,726.11 5.46% Hebei 12,116,884,689.51 3.26% 9,552,629,346.33 3.04% Guangdong 28,975,875,248.37 7.80% 24,500,834,397.42 7.80% Shandong 32,908,295,922.72 8.86% 28,079,453,536.94 8.94% Yunnan 14,407,151,103.12 3.88% 12,606,775,376.89 4.01% Liaoning 18,873,079,333.80 5.08% 15,637,514,393.78 4.98% Sichuan 9,146,581,236.96 2.46% 7,267,459,914.59 2.31% Shaanxi 6,585,147,536.15 1.77% 4,546,039,166.38 1.45% Xinjiang 3,376,074,072.90 0.91% 2,533,084,995.90 0.81% Chongqing 12,357,144,532.05 3.33% 10,883,769,264.02 3.46% Inner Mongolia 2,448,032,787.13 0.66% 1,171,181,909.98 0.37% Fujian 2,580,789,155.25 0.70% 1,581,503,974.10 0.50% Tianjin 4,302,088,873.18 1.16% 2,411,742,562.60 0.77% Book value of deposit absorbed 371,295,023,735.74 100.00% 314,166,616,861.04 100.00%

18. Taxes payable

Taxes December 31, 2006 December 31, 2005 Corporate income tax 708,712,293.95 404,688,141.97 Business tax 221,477,737.83 220,921,045.31 Housing tax 14,539.45 931,292.07 City planning tax 14,933,648.90 11,930,257.91 Withholding of the income tax of public shares - 23,391,823.34 Others 13,524,313.76 13,365,034.21 958,662,533.89 675,227,594.81

19. Interest payable

Items December 31, 2006 December 31, 2005 Deposit interest 1,519,859,135.66 1,385,270,243.53 Interest of junior debt 100,176,312.98 85,362,597.23 Other interest 23,583,017.66 7,608,049.49 1,643,618,466.30 1,478,240,890.25

20. Predicted liabilities

Items December 31, 2006 December 31, 2005 Unsettled suit 43,391,900.00 35,741,900.00

-75- 21. Bonds payable

Type December 31, 2005 Increase in the yerar Decrease in the year December 31, 2006 Junior debt 4,250,000,000.00 2,000,000,000.00 - 6,250,000,000.00

(1) According to the Official Reply of China Banking Regulatory Commission on Huaxia Bank to Raise Proceeds by Issuing Junior Term Bonds (YIN JIAN FU [2004] No. 84), the Company issued RMB 4.25 billion of junior term bonds from July to August, 2004 with a term of 6 years and annual interest rates being 2.72% to 2.82% plus the one year deposit interest rate as specified by the People's Bank of China. (2) Approved by China Banking Regulatory Commission with the Official Reply of China Banking Regulatory Commission on Huaxia Bank to Raise Proceeds by Issuing Junior Term Bonds (YIN JIAN FU [2006] No. 308) and the People's Bank of China with "Written Decision of the People's Bank of China on Approval of the Administrative Permit (YIN SHI CHANG XU ZHUN YU ZI [2006] No. 18), the Company issued RMB 2 billion of junior bonds in the national interbank bond market. The bonds issued in the reporting period were the junior bonds with fixed interest rate with a term of 10 years; at the end of the 5th year, the issuer is entitled to redeem the bonds and the book interest rate in the first five years shall be 3.70% and 6.70% for the last five years. The bond interest started from November 9, 2006. In case the issuer fails to exercise the right of redeeming, the interest counting term of the bonds shall be from November 9, 2006 to November 8, 2016; in case the issuer exercises the right of redeeming, the interest for the redeemed bond shall be from November 9, 2006 to November 8, 2011. The claim for the aforesaid junior bonds is after the Company's other debts but is prior to the Company's equity capital. It can be listed to the subsidiary capital in calculating the capital sufficiency.

22. Other liabilities

Currencies December 31, 2006 December 31, 2005 Other payables 1,908,500,722.77 1,712,829,137.55 Dividend payable 7,640,000.00 3,850,000.00 Fund converted into loan 164,781,935.99 101,309,805.15 Other current liabilities 18,593,035.03 2,352,958.81 2,099,515,693.79 1,820,341,901.51

(1) Other payables A. Analysis on aging

Age December 31, 2006 December 31, 2005 Amount Percentage Amount Percentage Within a year 1,777,423,258.31 93.13% 1,529,565,801.23 89.30% 1 to 2 years 112,540,466.75 5.90% 37,592,154.94 2.19% 2 to 3 years 5,977,475.53 0.31% 8,038,126.45 0.47% Over 3 years 12,559,522.18 0.66% 137,633,054.93 8.04% 1,908,500,722.77 100.00% 1,712,829,137.55 100.00%

-76- 2006 ^kkr^i=obmloq

B. Analyzed based on nature

Types December 31, 2006 December 31, 2005 Assigned credit 85,588,283.14 366,871,941.96 Bond cashed on behalf 35,838,319.35 65,018,652.85 Open promissory note 1,242,120,591.17 992,024,671.24 Expenditure for housing reform 180,000,000.00 - Others 364,953,529.11 288,913,871.50 1,908,500,722.77 1,712,829,137.55

C. Ended December 31, 2006, of the other payables there was none payable to shareholders holding over 5% (with 5% inclusive) of the total shares in the Company. (2) Dividends Payable

Shareholders December 31, 2006 December 31, 2005 Luen Tai Group Co., Ltd. 6,290,000.00 - Hebei Changan Shengli Automobile Co., Ltd. 1,200,000.00 1,200,000.00 Beijing San Ji Li Energy Co., Ltd. - 1,000,000.00 Zhuhai Zhenhua Group Co. 150,000.00 1,650,000.00 7,640,000.00 3,850,000.00

(3) Other current liabilities

Types December 31, 2006 December 31, 2005 Agency 18,593,035.03 2,352,958.81

23. Capital stock (in Shares 10,000)

Type of shares 2005.12.31 Increase in the reporting period December Allotted and Converted and Equity separa Sub-total 31, 2006 converted shares bonus shares tion reform I. Non-negotiable shares Including: domestic corporate shares 300,000.00 - - (300,000.00) (300,000.00) - Foreign corporate shares ------Total non-negotiable shares 300,000.00 - - (300,000.00) (300,000.00) - II. Negotiable shares with sales restriction Including: domestic corporate shares - - - 205,280.00 205,280.00 205,280.00  Foreign corporate shares - - - 58,720.00 58,720.00 58,720.00 Total negotiable shares with sales restriction - - - 264,000.00 264,000.00 264,000.00 III. Negotiable shares without sales restriction Including: Renminbi based common shares 120,000.00 - - 36,000.00 36,000.00 156,000.00 Total negotiable shares without sales restriction 120,000.00 - - 36,000.00 36,000.00 156,000.00 Total shares 420,000.00 420,000.00

-77- Reviewed and approved by 2006 First Temporary General Meeting and shareholders' meeting concerning equity separation reform held on April 26, 2006, the Company completed the equity separation reform on June 6, 2006; the shareholders of non- negotiable shares made valuable consideration arrangement by paying shares to the whole shareholders of negotiable shares registered on the date of equity registration for the reform implementation plan and the shareholders of negotiable shares would be entitled to obtain 3 shares for every 10 negotiable shares. The number of shares to be paid by the shareholders of non-negotiable shares is determined based on the proportion of the non-negotiable shares held by them; upon implementation of the valuable consideration arrangement, the non-negotiable shares held by the shareholders of non-negotiable shares would be entitled to get listed for trading; the total number of shares paid to the shareholders of negotiable shares is 360 million shares. Shareholders of non-negotiable shares holding below 5% of the total shares of Huaxia Bank Co., Ltd. made the following undertaking: within 24 months after implementation of the equity separation reform, the number of shares with sales restriction to be sold would not exceed 15% of the total shares with sales restriction held by them; and within 36 months, the number of shares with sales restriction to be sold would not exceed 30% of the total shares with sales restriction held by them. Shareholders of non-negotiable shares holding over 5% of the total shares of Huaxia Bank Co., Ltd. made the following undertaking: within 24 months after implementation of the equity separation reform, the number of shares with sales restriction to be sold would not exceed 15% of the total shares with sales restriction held by them; and within 36 months, the number of shares with sales restriction to be sold would not exceed 30% of the total shares with sales restriction held by them.

24. Capital public reserve

Items December 31, 2005 Increase in the report period Decrease in the report period December 31, 2006 Share capital premium 3,759,619,618.71 - - 3,759,619,618.71 Other capital public reserve 63,374,934.27 66,623,476.86 (25,645,493.85) 155,643,904.98 3,822,994,552.98 66,623,476.86 (25,645,493.85) 3,915,263,523.69

Other capital reserve is the change of the faire value of the financial assets available for sale which is charged to the owner's equity; the increase in the reporting period was due to the amount (after tax) involved in the change of the fair value of the financial assets available for sale affecting the owner's equity; the decrease in the reporting period was carried to the amount (after tax) of the current gain and loss.

25. Surplus public reserve

Items December 31, 2005 Increase in the report period Decrease in the report period December 31, 2006 Statutory surplus public reserve 422,298,831.56 356,853,743.07 - 779,152,574.63 Statutory public welfare fund 211,149,415.78 - 211,149,415.78 - Discretionary surplus public reserve 110,971,000.00 - - 110,971,000.00 744,419,247.34 356,853,743.07 211,149,415.78 890,123,574.63

Decrease in the statutory public welfare fund was due to the settlement of the public welfare fund ended December 31, 2005 which was transferred to the item of statutory public welfare fund according to the Circular of the Ministry of Finance on the Enterprise Financial Treatment Issues upon Implementation of the Company Law (CAI QI [2006] No. 67). The Company provides statutory surplus reserve based on 10% of the after-tax net profit as of 2006 on temporary basis. Refer to Note XI [Matters after the Balance Sheet Date].

-78- 2006 ^kkr^i=obmloq

26. General risk reserve

Items December 31, 2006 Provision proportion December 31, 2005 General reserve 1,900,000,000.00 68.63% 900,000,000.00

The Company provides general reserve from the after-tax net profit as of 2006. Refer to Note XI [Matters after the Balance Sheet Date].

27. Retained Earnings (1) Statement of retained earnings

Items December 31, 2006 December 31, 2005 Net profit in the report year 1,457,043,272.90 1,279,594,082.21 Add: retained earning at year beginning 888,069,068.20 1,020,414,098.32 Other transfer-in - - Distributable profit 2,345,112,341.10 2,300,008,180.53 Less:Provision of statutory surplus public reserve 145,704,327.29 127,959,408.22 Allotting statutory public welfare fund - 63,979,704.11 Provision of general reserve 1,000,000,000.00 800,000,000.00 Profit available for distribution to the shareholders 1,199,408,013.81 1,308,069,068.20 Less:Discretionary surplus public reserve provided - - Dividends of common shares payable 462,000,000.00 420,000,000.00 Retained earnings at year end 737,408,013.81 888,069,068.20

(2) Commencing from January 1, 2006, the Company implemented the Provisional Regulations on Acknowledgement and Measurement of Financial Instruments (Trial) (CAI KUAI [2005] No. 14) promulgated by the Ministry of Finance, made comparison with the financial statements of the previous year and made corresponding adjustment. As a result, the net profit of 2005 decreased by RMB 9,081,018.37 and the retained profit at the beginning of 2005 increased by RMB 23,518,862.36. (3) Of the ending balance of the reporting period, the cash dividend to be distributed after the balance sheet date amounting to RMB 462,000,000.00 included. Refer to Note XI [Matters after the Balance Sheet Date].

-79- 28. Net interest income

Items 2006 2005 Interest income 15,026,468,964.87 11,647,247,160.22 due to banks 66,375,722.74 82,316,762.45 Deposit with the central bank 487,932,335.45 479,958,280.70 Loans to other banks 163,778,592.17 47,896,653.88 Loan offering and advances 13,069,184,186.50 10,476,754,854.27 Including: loans and advances 12,003,301,081.31 9,872,871,885.57 Bill discount 1,065,883,105.19 603,882,968.70 Buy of the repurchased financial assets and transfer to discount 1,235,375,255.42 560,208,808.04 Others 3,822,872.59 111,800.88 Income from the interest in the impaired financial assets 265,654,853.05 - Interest payment 7,905,911,415.93 6,051,255,902.88 Interbank deposit 156,011,321.38 103,386,119.17 Borrowing from the central bank - - Fund borrowed 10,342,790.82 30,443,733.56 Deposit absorption 6,028,757,154.53 5,058,354,025.92 Sale of the repurchased financial assets 1,389,097,604.96 551,659,885.82 Bond issuing 227,448,715.75 215,375,652.78 Others 94,253,828.49 92,036,485.63 Net interest income 7,386,212,401.99 5,595,991,257.34

29. Net service charge and commission income

Items 2006 2005 Net service charge and commission income 410,607,795.99 297,200,326.71 Settlement and liquidation service charge 23,747,428.45 20,657,347.25 Agency service charge 108,288,757.17 58,067,659.00 Credit commitment service charge and commission 190,965,584.07 166,295,856.80 Bank card service charge 41,913,754.86 26,039,601.98 Consulting and inquiry fee 21,020,714.85 7,575,463.56 Custody and other commission 4,306,477.80 1,434,592.42 Others 20,365,078.79 17,129,805.70 Payment of service charge and commission 106,194,279.85 98,775,443.17 Net income from service charge and commission 304,413,516.14 198,424,883.54

30. Investment income

Items 2006 2005 Income form bond investment 2,245,117,595.06 1,679,096,042.81

-80- 2006 ^kkr^i=obmloq

31. Income from change of the fair value

Items 2006 2005 Transactional financial instrument 9,878,765.04 -

32. Income from other businesses

Items 2006 2005 Rental 36,988,458.01 36,159,738.01 Others 6,942,230.59 6,240,773.64 43,930,688.60 42,400,511.65

33. Business Taxes and Surcharge

Taxes 2006 2005 Business tax 683,967,599.82 547,608,787.04 urban construction tax 46,443,869.12 36,831,956.28 Educational Surcharge 24,366,011.75 18,825,338.41 Others 2,669,674.65 1,612,371.85 757,447,155.34 604,878,453.58

34. Business and Management Fee

Items 2006 2005 Operation of electronic equipment 146,799,554.67 118,342,411.65 Security fee 23,739,049.01 17,827,022.82 Expenses to staff 1,613,864,884.87 1,170,027,157.61 Depreciation and amortization 499,688,454.70 467,534,644.84 Others 2,019,822,549.79 1,715,196,948.25 4,303,914,493.04 3,488,928,185.17

35. Non-operating income

Items 2006 2005 Settlement penalty 658,337.79 1,834,651.82 Gain on disposals of fixed assets 3,330,832.27 1,269,545.76 Gain on disposals of repossessed assets 8,244,344.59 7,103,747.66 Others 22,404,966.74 11,508,109.03 34,638,481.39 21,716,054.27

-81- 36. Non-operating expenses

Items 2006 2005 Donations 1,685,885.00 2,035,000.00 Loss on disposals of fixed assets 13,480,219.31 3,323,885.20 Housing allowance 149,347,499.45 146,268,792.19 Amortization of housing reform expenditures - 18,180,516.97 Compensation 9,106,711.94 17,166,315.70 Disposal of repossessed assets 693,576.09 951,603.50 Others 19,540,105.89 15,334,372.79 193,853,997.68 203,260,486.35

About the staff's housing, refer to Note X.1 [Other important matters - staff's housing].

37. Corporate income tax

Items 2006 2005 Areas other than Shenzhen (taxes rate 33%) 1,068,334,519.87 659,982,819.37 Shenzhen area (taxes rate15%) - 11,209,005.59 Deferred tax (114,148,207.06) 38,388,911.76 954,186,312.81 709,580,736.72

VI. Off Balance Sheet Items

For the purpose of reflecting various businesses in an accurate and overall way, the Company has put up special accounting items, i.e. off balance sheet items, and conducted accounting and disclosure of such businesses.

1. Off balance sheet businesses can be classified into two categories in respect of risks: (1) Off balance sheet businesses without risks mainly include settlement and agency services. (2) The off balance sheet businesses with contingent risks are the businesses of offering guarantee to customers for their liabilities discharging capability and taking risks of customers' default, mainly including various bank guarantee, letter of credit, bank acceptance, irrevocable loan undertaking. The balance of the main items outside statements with contingent risks is as follows:

Items December 31, 2006 December 31, 2005 Bank acceptance 100,909,616,759.04 96,428,189,529.16 Issued letter of credit 6,637,181,612.22 5,665,723,606.45 Issued bank guarantee 2,521,599,897.16 2,569,887,256.89

2. The contingent income mainly includes the uncovered interest receivable with the balance as follows:

Items December 31, 2006 December 31, 2005 Interest receivable outside statements 2,341,340,937.49 1,964,492,764.58

-82- 2006 ^kkr^i=obmloq

3. Commissioned transactions

Items December 31, 2006 December 31, 2005 Commissioned loans 9,147,494,174.44 7,296,716,842.14 Commissioned deposits 9,147,494,174.44 7,296,716,842.14

4. Foreign exchange contract The nominal value of foreign exchange contract is as follows:

Items December 31, 2006 December 31, 2005 Spot exchange contract 2,196,138,489.35 112,731,507.70

The spot exchange contract at the end of the reporting period was the spot exchange contract unsettled signed by the Company. Based on the exchange rate at the end of the reporting period, it was converted into RMB 2,196,398,303.69.

VII. Relationship with the related parties and the transactions

1. Related Parties The related parties include corporate or other organizations that can directly, indirectly, jointly hold or control more than 5% of the Company's shares or voting power; are under the direct or indirect control of the same enterprise with the Company; are under direct, indirect or joint control of the Company's director, supervisor or senior executive and their close relatives or can exert important influence upon the Company. Ended December 31, 2006, the Company's principal shareholders and their respective shareholding are as follows: (in 10,000 Renminbi based shares)

Shareholders Shares Proportion Shougang Group General Corporation 42,801.25 10.19% Shandong Electric Power Corporation 34,240.00 8.15% Yuxi Hongta Tobacco (Group)Co., Ltd. 29,960.00 7.13% DEUTSCHE BANK AKTIENGESELLSCHAFT 29,500.00 7.02% Luen Tai Group Co., Ltd. 28,900.00 6.88%

(1) Profile of Related Parties

Related Parties Ownership Registration place Principal Business Legal representative Shougang Group General Corporation Solely state owned Beijing City Industry, building, geological survey, transportation, etc. Zhu Jimin Shandong Electric Power Corporation Solely state owned Jinan City Power network operation, electricity production, Zhu Changfu power engineering survey, etc. Yuxi Hongta Tobacco (Group)Co., Ltd. Solely state owned Yuxi City Tobacco processing and production, sales; manufacture Liu Wandong and sales of tobacco equipment, etc. DEUTSCHE BANK Company limited Frankfurt, Various banking businesses; offering services, including Josef Ackermann AKTIENGESELLSCHAFT Germany capital, fund management, real estate finance, financing, research and consulting, etc. capital, fund management, real estate finance, financing, research and consulting, etc. Luen Tai Group Co., Ltd. Company limited Jinan City Sales of industrial production materials, general merchandise, Wu Xiaomeng hardware and traffic electrical appliances, computer and accessories; production and sales of general machinery, chemicals, building materials, household appliances, etc.

-83- (2)Registered capital of the related parties and the change (in RMB 10,000)

Related Parties December Increase in the Decrease in the December 31, 2005 report period report period 31, 2006 Shougang Group General Corporation 726,394 - - 726,394 Shandong Electric Power Corporation 986,000 - - 986,000 Yuxi Hongta Tobacco (Group)Co., Ltd. 68,000 - - 68,000 DEUTSCHE BANK AKTIENGESELLSCHAFT 1,412,594 - - 1,412,594 Luen Tai Group Co., Ltd. 5,087 - - 5,087

2. Associated transactions (In RMB 10,000) The associated transactions are carried out based on the commercial principle with the terms and conditions not superior to the similar transactions with non-related parties. (1) Balance of credit assets (including loan, discount, negotiation, honoring, letter of credit, bank guarantee) A. Related shareholders and their associates

Related Parties December 31, 2006 December 31, 2005 Shougang Group General Corporation 59,211.03 115,879.00 (Balance of the credit assets with deduction (Balance of the credit assets with deduction of deposit receipt and government bonds of deposit receipt and government amounting to RMB 430.46.20 million) bonds amounting to RMB 398.71 million) Yuxi Hongta Tobacco (Group)Co., Ltd. 9,700.00 6,152.80 Luen Tai Group Co., Ltd. 38,724.00 45,244.56

B. Other enterprises with the same key management

Related Party December 31, 2006 December 31, 2005 Beijing Guoli Energy Investment Co., Ltd. 28,000.00 28,000.00

(2) Interest income

Related Parties 2006 2005 Related shareholders and their associates 8,525.44 6,494.26 Other enterprises with the same key management 1,635.20 1,626.29

VIII. Contingencies Ended December 31, 2006, there were 8 unsettled suits with amount of each case exceeding RMB 10 million with the Company as the defendant and the total subject amount of RMB 167.20 million. The unsettled suits with the Company as the defendant may suffer from loss and the Company has provided the reserve.

IX. Commitments Lease Commitments The housing lease commitments mainly reflected the rental paid for the premises and offices rented by the Company based on the requirement. Ended December 31, 2006, the rental as specified in the tenancy contract is as follows:

Within 1 year 1 to 2 years 2 to 3 years 3 to 4 years 4 to 5 years Over 5 years Total 311,326,275.79 275,268,869.38 239,199,532.33 202,751,924.17 174,760,514.41 549,928,150.30 1,753,235,266.38

-84- 2006 ^kkr^i=obmloq

X. Other Significant Issues

1. Staff quarters The Company grants loans to assist its employees to purchase residential properties. As at December 31, 2006, the Company has signed loan agreement with the employees. The Company estimates that RMB 1,262,242,070.91 will be borne by the Company, of which RMB670,960,270.91 has already been charged to the income statements. According to "Proposal on Modifying Method of Housing Allowance" passed at the 8th meeting of the Fourth Board of Directors, the Company agreed to formulate standard method of housing allowance by continuously following the decision of the Board of Directors in executing reform of housing distribution monetization. The measures of housing allowance was formulated by the Company's management. Ended the date of this report, the Company had not yet formed the final housing allowance implementation plan. In 2006, the Company provided expenditure for housing reform amounting to RMB 180 million according to the housing allowance distribution principle determined by the Board of Directors.

2. Changes in the Company's shareholding structure (1) On May 17, 2006, the Company's 18 shareholders of non-negotiable shares assigned totally 587.20 million shares to DEUTSCHE BANK, DEUTSCHE BANK LUXEMBOURG S.A. and SAL.OPPENHEIM JR. CIE. KOMMANDITGESELLSCHAFT AUF AKTIEN, taking 13.98% of the Company's total capital stock. (2) On September 16, 2006, 21 million unlisted shares held by Luen Tai Group Co., Ltd. were sold at auction; the buyer was Beijing Jingen Technology Development Co., Ltd. The transfer was completed on September 29, 2006. (3) 50 million negotiable shares with sales restriction held by Luen Tai Group Co., Ltd. was sold at auction to the court's order to Beijing San Ji Li Energy Co., Ltd. The share assignment registration procedures are in process at present. (4) As Shanghai Giant Biotech Co., Ltd., one of the Company's shareholders, paid the valuable consideration for Xinyuan Industry Holding Group Co., Ltd. during the equity separation reform in the reporting period, Xinyuan Industry Holding Group Co., Ltd., a former shareholder of the Company reimbursed its 10 million tradable shares with sales restriction in the Company to Shanghai Giant Biotech Co., Ltd. The transfer procedures were completed by November 27, 2006. (5) Ended December 31, 2006, 370 million negotiable shares with sales restriction had been frozen, including 60 million shares frozen by collateral and 310 million shares frozen to the court's order.

3. The 15th meeting of the Fourth Board of Directors reviewed and approved the Proposal on Establishment of Huaxia Bank Credit Card Center. The credit card center is an internal independent function department established according to the Agreement on Credit Card Business Cooperation executed between the Company and Deutsche Bank. Its main function is to take charge of all the operation of the Company's credit card business, including product design, card distribution, marketing, transaction treatment, account treatment, risk control, receivables on demand, customer service, etc.

4. The 15th meeting of the Fourth Board of Directors reviewed and approved the Proposal on Amendment of the Policy for Accounting of Fixed Assets. According to the original regulations, the depreciation term of fixed assets (including partial computerized equipment and cash dispenser machine) was 3 years and it has been adjusted into 5 years; according to the original regulations, the residue rate of all the fixed assets was 3% and now it is adjusted to 5%; the new policy came into force commencing from January 1, 2007.

5. Reviewed and approved at the 15th meeting of the Fourth Board of Directors, it is planned to establish branches in Changzhou, Shaoxing, Nanning.

-85- 6. Ended December 31, 2006, the assets and liabilities in different currencies are stated as follows (In RMB 1 million)

Items RMB RMB converted RMB converted RMB converted from Total from USD from HKD other currencies Cash and deposit with the central bank 65,528 675 114 56 66,373 Interbank deposits 2,214 2,354 321 293 5,182 Loan to other banks 170 2,421 - - 2,591 Buy of repurchased financial assets 29,736 - - - 29,736 Loan offering and advances 249,777 3,444 255 327 253,803 Bond investment 76,565 3,309 371 144 80,389 Other assets 6,917 50 12 1 6,980 Total assets 430,907 12,253 1,073 821 445,054 Absorption of deposits 359,125 10,603 966 601 371,295 Income from sales of repurchased financial assets 25,743 - - - 25,743 Interbank deposits and loans and deposit 24,108 933 63 32 25,136 with and loan to other financial institutions Other liabilities 10,926 80 65 166 11,237 Total liabilities 419,902 11,616 1,094 799 433,411 Net position of asset liabilities 11,005 637 (21) 22 11,643

7. Assets liquidity ended December 31, 2006 is summarized as follows (In RMB 1 million):

Items Overdue Timely Within 3 3 months t 1 to Over Total repayment months o 1year 5 years 5 years Cash and deposit with the central bank - 66,373 - - - - 66,373 Interbank deposits - 4,930 88 164 - - 5,182 Loan to other banks - - 2,491 100 - - 2,591 Buy of repurchased financial assets - - 26,090 3,646 - - 29,736 Loan offering and advances 4,505 - 44,815 115,690 66,852 21,941 253,803 Bond investment - - 4,625 18,151 35,697 21,916 80,389 Other assets - 8 57 474 3,156 3,285 6,980 Total assets 4,505 71,311 78,166 138,225 105,705 47,142 445,054 Absorption of deposits - 142,286 104,907 93,255 30,826 21 371,295 Income from sales of repurchased financial assets - - 22,213 3,530 - - 25,743 Interbank deposits and loans and deposit - 19,932 4,659 545 - - 25,136 with and loan to other financial institutions Other liabilities - 60 2,731 1,334 6,867 245 11,237 Total liabilities - 162,278 134,510 98,664 37,693 266 433,411 Net position of asset liabilities 4,505 (90,967) (56,344) 39,561 68,012 46,876 11,643

8. Reports of divisions (1) The Company's principal business is commercial loans and acceptance of deposits from the public. The fund from the existing personal and enterprise loans is mainly from the customers' deposits. As the Company's business is mainly concentrated in the enterprise banking service, the sector based division report has not been prepared.

-86- 2006 ^kkr^i=obmloq

(2) In reporting the information based on regions, the operation income is divided based on the places where the branches of earning income are located. Assets and capital based expenses of divisions are divided based on the places where the relevant assets are located. (In RMB 1 million)

2006 Beijing Jiangsu Zhejiang Shandong Others Inter-division offset Total Business income 2,123 1,211 1,216 1,129 4,391 - 10,070 Net Interest income 148 1,118 1,128 1,020 3,972 - 7,386 Including: net inter-division interest income (760) 157 83 76 444 - - Income of service charge and commission 59 44 27 53 121 - 304 Including: Net inter-division income ------of service charge and commission II. Operation expenses 1,405 350 358 417 1,774 - 4,304 III. Operation profit (loss) (969) 598 646 515 1,780 -- 2,570 IV. Total assets 239,612 51,289 38,377 37,455 196,555 (118,234) 445,054 V. Total liabilities 230,175 50,904 37,918 37,172 195,476 (118,234) 433,411 VI. Additional information ------1. Depreciation and amortization expenses 137 43 29 56 235 - 500 2. Capital based expenses 154 72 61 34 282 - 603 3. Non-cash expenses other ------than depreciation and amortization

2005 Beijing Jiangsu Zhejiang Shandong Others Inter-division offset Total Business income 657 962 966 949 4,097 - 7,631 Net Interest income 75 877 746 757 3,141 - 5,596 Including: net inter-division interest income (409) 92 64 22 231 - - Income of service charge and commission 15 31 18 37 97 - 198 Including: Net inter-division income of ------service charge and commission II. Operation expenses 922 335 275 370 1,587 - 3,489 III. Operation profit (loss) (1,046) 477 527 422 1,791 - 2,171 IV. Total assets 167,661 44,471 30,247 33,093 158,818 (78,369) 355,921 V. Total liabilities 159,444 44,165 29,862 32,810 157,479 (78,369) 345,391 VI. Additional information ------1. Depreciation and amortization expenses 118 38 29 56 227 - 468 2. Capital based expenses 207 34 34 38 428 - 741 3. Non-cash expenses other ------than depreciation and amortization

9. Concentration of loans As at December 31, 2005, the balance of loans of top ten borrowers aggregates to RMB 696,300.00, representing 2.68% of total credit assets.

XI. Post Balance Sheet Events

1. Commencing from January 1, 2007, the Company started to implement the enterprise accounting standards promulgated by the Ministry of Finance in 2006.

-87- 2. Through resolution of the 18th Meeting of the Fourth Board of Directors dated March 12, 2007, the Company provided the statutory surplus public reserve amounting to RMB 145,704,327.29 based on 10% of the net profit of the year 2006 amounting to RMB 1,457,043,272.90 as audited by the domestic certified public accountants and provided general reserve amounting to RMB 1,000,000,000.00. Based on the total capital stock of 4,200,000,000 shares at the end of 2006, the Company proposed to distribute cash dividend at the rate of RMB 1.1 for every 10 shares (with tax inclusive) and the total dividend to be distributed is to be RMB 462,000,000.00. This profit distribution proposal is subject to review at 2006 Annual General Meeting. Except the aforesaid events, ended March 12, 2007, there existed no important information necessary for the Company to disclose after the date of the balance sheet.

XII. Fluctuation of the Financial Statements

Comparing the balance as at December 31, 2006 with that of December 31, 2005, balance sheet items with fluctuation over 30% include due from the Central Bank, due from banks, placements with banks, placement with other financial institutions, interest receivable, other receivables, discounted bills, short-term investments, long-term bond investments, construction in progress, fixed assets pending for disposal, repossessed assets, discounted bill refinancing, due to banks, borrowing from banks, designated deposits, account payable under repurchase agreement, short-term guaranteed deposits, interest payable, wage payable, public welfare fund payable, dividend payable, deferred revenue, long-term liabilities due in one year, other current liability, long-term guaranteed deposits, and international finance loans. 2005 income statement items with fluctuation over 30% compared with that of 2004 include commission income, other operating revenue, interest expenses, and commission expense. The fluctuations are mainly attributable to the expansion of the Company's operation.

XIII Reconciliation of the Financial Statements Reported under PRC Accounting Standards with Those prepared under International Accounting Standards

1.Net Profit

2006 2005 Net profit as reported in the auditedfinancial statements under PRCAccounting Standards 1,457,043,272.90 1,279,594,082.21 Adjustments: (1) Amortization of housing reform expenditures - 24,633,071.80 (2) Amortization of interest of discounted bills and re-discounted bills - 113,106,630.55 (3)Write-off of pre-operating expenses - 8,406,353.84 (4)Cumulative translation adjustments 24,661,000.00 (24,661,000.00) Net assets as reported in the audited financial statements under International Accounting Standards 1,481,704,272.90 1,401,079,138.40

2. Net Assets

December 31, 2006 December 31, 2005 Net assets as reported in the audited financial statements under PRCAccounting Standards 11,642,795,112.13 10,530,821,868.52 Adjustments: Amortization of housing reform expenditures 233,750,495.83 281,826,647.72 Prepared according to the International Financial Reporting standards 11,876,545,607.96 10,812,648,516.24

-88- 2006 ^kkr^i=obmloq

XIV. Return on Equity and Earnings Per Share

Profits in theReport Period Return on Equity Earnings Per Share(Yuan) Fully Diluted Weighted Average Fully diluted Weighted Average Year of2006 Year of2005 Year of2006 Year of2005 Year of2006 Year of2005 Year of2006 Year of2005 Operating profit on principal activities 22.08% 20.61% 23.39% 21.62% 0.6120 0.5168 0.6120 0.5168 Operating profit 22.08% 20.61% 23.39% 21.62% 0.6120 0.5168 0.6120 0.5168 Net profit 12.51% 12.15% 13.26% 12.75% 0.3469 0.3047 0.3469 0.3047 Profit afterextraordinary items 13.62% 13.65% 14.43% 14.32% 0.3776 0.3422 0.3776 0.3422

Where, the extraordinary items of 2006 are as follows:

Items Amount Operating profit or loss after proportion for asset impairments (159,215,516.29) Recovery of assets written off in the previous years 12,429,468.51 Write back of provisions for asset impairments 5,367,971.74 Income tax corresponding to the extraordinary gains and losses 12,680,332.49 (128,737,743.55)

XV. Approval of the Financial Statements

The financial statements and the explanatory notes are prepared by the company's management, which have been approved by the 18th meeting of the Fourth Board of Directors on March 12, 2007.

-89- Appendix II: Report upon Review of the Adjustment for Discrepancy in Shareholders’ Equity between the New and Old Accounting Standards

Review Report

BEIJING JINGDU ZHUAN ZI [2007] No.222

To the Shareholders of Huaxia Bank Co., Ltd., We have reviewed the attached Statement of Adjustment for Discrepancy in Shareholders' Equity between the New and Old Accounting Standards (the Discrepancy Adjustment Statement) prepared by Huaxia Bank Co., Ltd. (hereinafter referred to as the Company) According to the Enterprise Accounting Standard No. 38 - Initial Implementation of the Enterprise Accounting Standards and the Circular on Doing a Good Job in Disclosure of the Financial and Accounting Information in Connection with the New Accounting Standards ZHENG JIAN FA [2006] No. 136 (hereinafter refer to as the Circular), preparation of the Discrepancy Adjustment Statement according to the relevant regulations is the responsibility of the Company's management. Our responsibility is to produce a review report on the Discrepancy Adjustment Statement based on our review work. In accordance with the relevant provisions of the Circular, we implemented the review work with reference to the Review Standard for Chinese Certified Public Accountants No. 2101 - Review of Financial Statements. These standards demand use to plan and implement the review work for the purpose of obtaining limited assurance for nonexistence of material misstatement in the discrepancy adjustment statement. Our review was mainly restricted in inquiry of the relevant personnel from the Company and implemented the analysis procedures over the financial data; however, the warranty level we have offered is lower than audit. We have not implemented auditing and therefore cannot express any auditor's opinion. Based on our review, we have not noticed anything that would render us believe that the Discrepancy Adjustment Statement is not prepared in accordance with the Enterprise Accounting Standard No. 38 - Initial Implementation of the Enterprise Accounting Standards and the Circular, and is not able to fairly reflect in all material aspects the result of adjustment for discrepancy in shareholders' equity between the new and old accounting standards as at January 1, 2007.

Beijing Jingdu Certified Public Chinese Certified Public Accountant Accountants Co., Ld. Beijing, China

Chinese Certified Public Accountant

March 12, 2007

-90- 2006 ^kkr^i=obmloq

Adjustment for Discrepancy in Shareholders' Interests between the New and Old Accounting Standards

Prepared by: Huaxia Bank Co., Ltd. In RMB

Items Notes Amount

. Shareholders' equity as at December 31, 2006 (the prevailing accounting standards) 11,642,795,112.13

Plus: 1. Difference in long-term equity investment

Including: the difference in the long term equity investment formed in consolidation of enterprises under the same control

Credit balance of long term equity investment calculated based on the equity method

2. Investment oriented real estate to be measured according to the fair value method

3. Depreciation of the previous years additionally provided due to the predicted expenses for discarding assets

4. Compensation for dismissal in compliance with the expected liability recognition conditions

5. Payment for shares

6. Obligation of reorganization in compliance with the expected liability recognition conditions

7. Enterprise consolidation

where: Book value of the enterprise consolidation goodwill under the same control

Provision for impairment of the goodwill made according to the new standards.

8. Financial assets measured based on the fair value and whose change was charged

in the current gain and loss and the financial assets available for sale

9. Financial liabilities that are measured at fair value and changes in the value are charged into current gain and loss.

10. Equity increased from separation of financial instruments

11. Derivative financial instruments

12. Income Tax

13. Minority shareholders' equity

14. Others

II. Shareholders' equity as at January 1, 2007 (based on the new accounting standards) 11,642,795,112.13

The notes to the Adjustment for Discrepancy attached hereinafter shall be the integrated part of the Adjustment for Discrepancy in Shareholders' Interests between the New and Old Accounting Standards.

Legal representative: President Chief Financial Officer

-91- Notes to Adjustment for Discrepancy in Shareholders' Equity between the New and Old Accounting Standards

I. Purpose of Preparation of the Discrepancy Adjustment Statement The Company started to implement the Enterprise Accounting Standards promulgated by the Ministry of Finance in 2006 (hereinafter referred to as the New Accounting Standards commencing from January 1, 2007. For the purpose of analysis and disclosure of the influence from implementation of the new accounting standards upon the financial status of listed companies, China Securities Regulatory Commission promulgated the Circular on Doing a Good Job in Disclosure of the Financial and Accounting Information in Connection with the New Accounting Standards (ZHENG JIAN FA [2006] No. 136) (hereinafter referred to as the Circular) in November, 2006, which demands the Company to disclose the process of adjustment of the significant differences by means of the table of adjustment for discrepancy in the "Additional Information" of 2006 Financial Report.

II. Basis of Preparation of Statement of Adjustment for Discrepancy The Discrepancy Adjustment Statement is prepared according to the Enterprise Accounting Standard No. 38 - Initial Implemen- tation of the Enterprise Accounting Standards and the Circular on Doing a Good Job in Disclosure of the Financial and Accounting Information in Connection with the New Accounting Standards ZHENG JIAN FA [2006] No. 136 (hereinafter refer to as the Circular), with combination of the specific conditions of the Company, with the consolidated financial statements as the basis and according to the principle of importance in the light of the following policies: Income tax For the deferred income tax liabilities increased due to implementation of the new accounting standards commencing from January 1, 2007, the retained earnings was adjusted to decrease; the for deferred income tax assets increased, retained earnings was adjusted to increase.

III. Change in Principal Accounting Policies in Implementation of the New Accounting Standards Reviewed and approved at the 18th meeting of the Fourth Board of Directors, the Company implemented the Enterprise Accounting Standards promulgated by the Ministry of Finance commencing from January 1, 2007. The tax effect method is no longer used for the accounting treatment of income tax; instead, the balance sheet liability approach is applied according to the income tax regulations. The amount of assets of deferred income tax liability and deferred income tax asset is calculated according to the Enterprise Accounting Standard No. 18 - Income Tax. Meanwhile, the amount of the original deferred income tax debit or credit is written off. The margin between the aforesaid two amounts is used to adjust the retained earnings at the beginning of the reporting period.

IV. Notes to the Main Items of the Discrepancy Adjustment Statement

1. Shareholders' equity as at December 31, 2006 (the prevailing accounting standards) The amounts of the shareholders' equity as at December 31, 2006 (based on the prevailing accounting standards) were taken from the Balance Sheet as at December 31, 2006 according to the prevailing enterprise accounting standards and the Enterprise Accounting System, the Provisional Regulations on Acknowledgement and Measurement of Financial Instruments (Trial) (hereinafter referred to as the Prevailing Accounting Standards). For the preparation basis in connection with these statements and the key accounting policies, refer to the Company's 2006 Financial Report. The Company's 2006 financial statements have been audited by Beijing Jingdu Certified Public Accountants that produced a standard unqualified auditor's report (BEIJING JINGDU SHEN ZI (2007) No. 0566) on March 12, 2007.

-92- 2006 ^kkr^i=obmloq

2. Income Tax Ended December 31, 2006, the debit balance of the Company's deferred tax was RMB 733,762,980.43, which shall fully be written off and the retained earnings at the beginning of 2007 shall be decreased through adjustment. On January 1, 2007, the book value of the Company's deferred income tax asset was RMB 852,834,332.05 and the retained earnings at the beginning of the period was correspondingly increased through adjustment; the book value of the deferred income tax liabilities was RMB 119,071,351.62 and the retained earnings at the beginning of the period was correspondingly decreased through adjustment; the total increase of the retained earnings through adjustment at the beginning of the period was zero.

V. Affect of Implementation of the New Accounting Standards upon the Shareholders’ Equity Ended December 31, 2006, the shareholders' equity based on implementation of the old accounting standards was RMB 11,642,795,112.13 (based on audited 2006 Financial Statement of the Company). The shareholders' equity as at January 1, 2007 upon implementation of the new accounting standards; there was no discrepancy in the shareholders' equity between the new and old accounting standards.

VI. Important Notice The Company shall implement the new accounting standard commencing from January 1, 2007. At present, the Company is assessing the influences from implementation of the new accounting standards upon the Company's financial conditions, operation results and cash flow. After making careful consideration or referring to the further explanation of the Ministry of Finance of the New Accounting Standards, the Company made adjustment of the relevant accounting policies or important identifications possibly adopted in preparation of the Adjustment Statement for Discrepancy in Shareholders' Equity between the New and Old Accounting Standards, which may cause possible discrepancy in the shareholders' equity as stated in the discrepancy adjustment statement as of January 1, 2007 (based on the New Accounting Standards) and the corresponding data as stated in the financial report of the year 2007.

VII. Approval of the Discrepancy Adjustment Statement The discrepancy adjustment statement for the shareholders' equity between the New and Old Accounting Standards as of January 1, 2007 was approved at the 18th meeting of the Fourth Board of Directors on March 12, 2007.

Huaxia Bank Co., Ltd.

March 12, 2007.

-93- Appendix III: International Auditing Report

INDEPENDENT AUDITORS' REPORT

To the shareholders of Huaxia Bank Co., Ltd.

We have audited the accompanying financial statements of Huaxia Bank Co., Ltd. (the "Company") which comprise the balance sheet as at 31 December 2006, and the income statement, statement of changes in equity and the cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes.

Management's responsibility for the financial statements The management of the Company is responsible for the preparation of these financial statements in accordance with International Financial Reporting Standards promulgated by the International Accounting Standards Board. This responsibility includes designing, implementing and maintaining internal control relevant to the preparation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditors' responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance as to whether the financial statements are free from material misstatement. Our report is made solely to you, as a body, in accordance with the terms and conditions of our agreement, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors' judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the Company's preparation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion In our opinion, the financial statements of the Company have been prepared in accordance with International Financial Reporting Standards, and present fairly, in all material aspects, the financial position of the Company as at 31 December 2006 and the results of its operations and its cash flows for the year then ended.

Ernst & Young Hong Kong 12 March 2007

-94- 2006 ^kkr^i=obmloq

HUAXIA BANK CO., LTD. INCOMESTA TEMENT YEAR ENDED 31 DECEMER 2006 (Unit:in RMB 1thousand)

Notes 2006 2005

Interest income 4 17,547,121 13,762,467

Interest expense 4 ( 7,905,911 ) ( 6,064,836 )

Net interest income 4 9,641,210 7,697,631

Net fee and commission income 5 304,414 198,425

Other income, net 6 130,103 108,293

OPERATING INCOME 10,075,727 8,004,349

Personnel expenses 7 ( 1,464,736 ) ( 1,188,092 )

Business & management cost 8 ( 2,509,754 ) ( 1,979,543 )

Depreciation and amortization charge ( 478,774 ) ( 455,015 )

Business tax and surcharges ( 757,447 ) ( 604,878 )

Provisions for credit losses 15b ( 2,310,369 ) ( 1,575,730 )

Other provision for asset loss 9 ( 118,757 ) ( 23,480 )

PROFIT BEFORE TAX 2,435,890 2,177,611

Income tax 10 ( 954,186 ) ( 776,532 )

NET PROFIT FOR THE YEAR 1,481,704 1,401,079

EARNINGS PER SHARE

BASIC (IN RENMINBI - "RMB") 11 0.35 0.33

The accompanying notes form an integral part of the financial statements.

-95- HUAXIA BANK CO., LTD. BALANCE SHEET YEAR ENDED 31 DECEMER 2006 (Unit:in RMB 1 thousand)

Note December 31 2006 2005

ASSETS Cash on hand and due from the Central Bank 12 66,372,574 36,859,173 Due from banks and placements with banks 13 7,772,998 7,364,581 and other financial institutions Reverse repurchase agreements 14 29,735,661 12,364,883 Loans and advances 15 253,802,985 228,755,208 Investments 16 80,658,279 64,742,922 Fixed assets 17 3,852,570 4,029,322 Deferred income tax 10 618,632 519,140 Other assets 18 2,473,476 1,852,831

TOTAL ASSETS 445,287,175 356,488,060

LIABILITIES Due to banks and borrowings from banks 25,135,973 21,443,715 Repurchase agreements 19 25,743,248 1,326,996 Customer deposits 20 371,295,024 314,166,617 Bonds payable 21 6,250,000 4,250,000 income tax payable 708,712 404,689 Other liabilities 22 4,277,673 4,083,394

Total liabilities 433,410,630 345,675,411

Shareholders' equity Capital stock 23a 4,200,000 4,200,000 Capital Public Reserve 23b 3,759,620 3,759,620 Surplus public reserve 23c 779,152 420,856 Public welfare fund 23c - 210,427 Discretionary surplus public reserve 23c 110,971 110,971 Reserve for general risks 1,900,000 900,000 Retained earnings 23e 737,408 865,573 Change in fair value of investment, after tax 389,394 345,202

Total Shareholders' Equity 11,876,545 10,812,649

Total shareholders' equity and liabilities 445,287,175 356,488,060

This financial statement has been approved by the Board of Directors.

______

Signature of director Signature of director Signature of director Seal of Huaxia Bank

-96- 2006 ^kkr^i=obmloq

The accompanying notes form an integral part of the financial statements.

HUAXIA BANK CO., LTD. Statement of Change in Shareholders' Equity YEAR ENDED 31 DECEMER 2006 (Unit:in RMB 1 thousand)

Capital Capital Statutory Statutory Statutory discre- Reserve Retained Change in fair Total stock Public surplus public tionary surplus for general earnings value of invest- Reserve public reserve welfare fund public reserve risks ment, after tax

Balance as at January1, 2005 4,200,000 3,759,620 291,988 145,993 110,971 100,000 877,796 (265,672) 9,220,696

Profit for the year ------1,401,079 - 1,401,079

Transfer to surplus reserve - - 128,868 64,434 - - ( 193,302) - -

Provision for reserve for risks - - - - - 800,000 ( 800,000) - -

Dividend to be distributed ------( 420,000) - (420,000)

Change in fair value of investment, after tax

Unrealized gain and loss arising from change in fair value ------602,453 602,453

Gain and loss realized after sale ------8,421 8,421

Balance as at December 31, 2005 4,200,000 3,759,620 420,856 210,427 110,971 900,000 865,573 345,202 10,812,649

Net profit in the report year ------1,481,704 - 1,481,704

Provision of surplus public reserve (Note 1) - - 147,147 722 - - ( 147,869) - -

Transfer out of the statutory public welfare fund (Note 2) - - 211,149 (211,149) - - - - -

Provision for reserve for risks - - - - - 1,000,000 (1,000,000) - -

Dividend distribution (Note 23d) ------( 462,000) - (462,000)

Change in fair value of investment, after tax

Unrealized gain and loss arising from change in fair value ------41,802 41,802

Gain and loss realized after sale ------2,390 2,390

Balance as of December 31, 2006 4,200,000 3,759,620 779,152 - 110,971 1,900,000 737,408 389,394 11,876,545

Note 1: It includes the statutory surplus public reserve additionally provided according to the new Chinese Accounting Standard amounting to RMB 1,443 thousand and the statutory public welfare fund amounting to RMB 722 thousand. Note 2: The reason for decreased statutory welfare reserve: according to the Circular of the Ministry of Finance on Issues concerning Enterprise Financial Treatment upon Implementation of the Company (CAI QI [2006] No. 67, the balance of the welfare reserve was transferred to the statutory surplus reserve. The accompanying notes form an integral part of the financial statements.

-97- HUAXIA BANK CO., LTD. Cash Flow Statement YEAR ENDED 31 DECEMER 2006 (In RMB'000)

2006 2005

Cash flows arising from operating activities

Profit before tax 2,435,890 2,177,611 Adjustment: Depreciation and amortization fee 478,774 455,015 Reserve for impairment of various assets 2,429,126 1,599,210 Net loss from sales and sorting out fixed assts 10,149 2,054 Net gain and loss from sales of bond investment ( 20,062 ) 1,288

Net increase/(decrease) of operating assets Restrictive amount due from the Central Bank ( 4,697,625 ) ( 4,190,167 ) Due from and placement with banks and other financial companies ( 80,351 ) 37,134 Reverse repurchase agreements (17,370,778 ) ( 1,308,360 ) Loan (27,427,279 ) (53,642,600 ) Other assets ( 1,026,571 ) ( 515,660 )

Net increase/(decrease) of operating liabilities Borrowings from the Central Bank: - ( 27,107 ) Inter-bank deposit and borrowing 3,692,258 7,659,600 Repurchase agreements 24,416,252 ( 2,430,264 ) Customers' deposits 57,128,407 42,461,012 Other liabilities 421,525 2,950,894

Net cash flow in/(out) from operating activities before payment of income tax 40,389,715 ( 4,770,340 ) Income tax payment ( 771,421 ) ( 619,823 )

Net cash flow in/(out) arising from operating activities 39,618,294 ( 5,390,163 )

-98- 2006 ^kkr^i=obmloq

HUAXIA BANK CO., LTD. Cash Flow Statement YEAR ENDED 31 DECEMER 2006 (In RMB'000)

2006 2005

Net cash flow in/(out) arising from operating activities 39,618,294 ( 5,390,163 )

Cash flows arising from investment activities Cash received from recovery of investment 184,110,059 31,406,696 Cash received from sales of fixed assets 44,982 40,698 Cash paid for addition of fixed assets ( 295,654 ) ( 485,317 ) Cash paid for addition of investment (199,843,483 ) (51,399,513 ) Net cash flow arising from investment activities ( 15,984,096 ) (20,437,436 )

Cash flows arising from fund-raising activities: Dividend payment ( 458,210 ) ( 416,300 ) Cash received from subordinated liabilities issuing 2,000,000 - Net cash flow in/(flow out) arising from fund-raising activities 1,541,790 ( 416,300 )

Amount involved in change of exchange rate influencing the cash and cash equivalent ( 4,365 ) ( 7,723 )

Increase/(decrease) of net increase of cash and cash equivalents 25,171,623 (26,251,622 ) Cash and cash equivalents at the year beginning 25,147,974 51,399,596 Cash and cash equivalents at the year end 50,319,597 25,147,974

Net cash flow in/(out) arising from operating activities, including: Interest received 17,439,364 13,299,516 Interest paid ( 7,740,534 ) ( 5,631,605 )

Analysis on cash and cash equivalents at the year end : Cash on hand 1,298,741 1,049,245 Cash equivalents: Due within three months - Amount due from the Central Bank 41,511,663 16,945,383 - Interbank deposits and loans and those with other financial institutions 7,509,193 7,153,346 50,319,597 25,147,974

The accompanying notes form an integral part of the financial statements.

-99- HUAXIA BANK CO., LTD. NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED 31 DECEMER 2006 (Unit:in RMB 1 thousand)**

1. Corporate Information Hua Xia Bank Co., Ltd. (the Company) is a nationwide commercial bank incorporated on 14 October 1992 and was founded by Shougang Corporation with the approval of the People's Bank of China. On 10 April 1996, the People's Bank of China approved Huaxia Bank to initiate the establishment of a joint stock company through reformation in accordance with the document of YF [1996] No.109. As a result, the Company was renamed Huaxia Bank Co., Ltd. and was changed to a joint stock company. On 21 July 2003, as approved by the General Office of the China Securities Regulatory Commission (the "CSRC"), the Company was approved to be listed and to issue A-shares. The shares were listed for trading on 12 September 2003. On 21 May 2004, the Company transferred the capital surplus of RMB700,000,000 to share capital at a ratio of 2 for 10 on the basis of 3.5 billion of issued shares. Upon the transfer, the registered capital was increased to RMB4,200,000,000. The newly issued capital was verified by Beijing Jingdu Certified Public Accountants. The capital verification report (BJJDYZ[2004] No. 0017) was issued on 26 May 2004. The Company operates as a commercial bank. The Company's business scope include: Renminbi customer deposits taking; provision of short term, medium term and long term loans; provision of settlement services; bills discounting; issuing treasury bond can only be issued by government bonds; provision of agency services in underwriting, sale and cashing of government bonds; proprietary trading of government bonds; inter-bank placements and borrowings; providing letters of credit related services and guarantee facilities; provision of agency collection and payment services; provision of safe box custodian services; foreign currency customer deposits taking, loans, remittances, borrowings and bills acceptance and discounting facilities; proprietary trading and agency trading of foreign exchange; proprietary trading and agency trading of foreign securities excluding stocks; provision of underwriting and agency underwriting services of foreign currency securities excluding stocks; provision of foreign exchange services; provision of guarantee facilities in foreign currencies; provision of leasing services in foreign currencies; provision of international trade and non-trade settlement; provision of investigation, consultation and certification services. The registered address of the Company is No.22, Jianguomen Neidajie, Dongcheng District, Beijing, the People's Republic of China (the "PRC"). The Company carries out its business within the territory of the PRC.

2.1 Basis of Preparation The financial statements of the Company have been prepared in accordance with International Financial Reporting Standards ("IFRS"), promulgated by the International Accounting Standards Committee. With the exception of the derivative financial instruments, the financial assets measured based on the fair value and whose change was charged to the current gain and loss, as well as the financial assets available for sale and stated based on the fair value, these financial statements were prepared based on the historical cost method. These financial statements are presented in Renminbi. Unless there is no otherwise expression, all amounts are in Renminbi '000. The Company maintains its books and prepares its statutory financial statements in accordance with the relevant financial regulations and accounting principles applicable to financial institutions promulgated by the Ministry of Finance of the PRC. The accounting policies and bases adopted in the preparation of the statutory financial statements differ in certain respects from IFRS. Accordingly, the financial statements differ from statutory financial statements. The accounting measurement adjustments arising from restating the results and net assets of the Company to comply with IFRS have been made in the preparation of these financial statements, but will not be taken up in the accounting records of the Company. The impact of IFRS adjustments is disclosed in the additional information of the financial statements.

-100- 2006 ^kkr^i=obmloq

2.2 Significant Judgments and Estimates

(a) Judgments During executing the Company's accounting policies, besides estimates, the management performed the following judgments that might exert significant influence to the financial statement.

Category of investment The Company's management needs employ many estimates to define category of investment. Different category of investment may affect accounting audit and financial status of the Company. After the reporting period, in case of founding wrong estimate in category of investment that might affect overall investment, the Company may re-classify the category.

(b) Uncertain Estimates The following main assumes and other main uncertain estimates employed by the Company's management at end of year could cause significant risk that the Company performs major adjustment to its assets and liabilities items in the next fiscal year.

Credit loss The Company regularly judges whether it's evidenced that certain loan is in loss. If so, the Company will estimate the amount of loss. The amount of loss is the difference between carrying value and present value of expected future cash flow. During estimating loss, the Company needs to employ many judgments to define whether there have objective evidence showing the happening of loss and needs to make significant estimates to present value of future cash flow.

Income tax The Company needs to make judgment to the taxation of some future transactions to define provision for income tax. In accordance with tax law and regulation of the People's Republic of China, the Company prudently judges the influence of income tax on transaction and accordingly makes provisions for income tax. Deferred tax assets can only be defined whether profit to be taxed could be used for offset certain deferred tax asset in the future. For this, it's required to make significant judgment to the taxation of certain transaction and make significant estimate that whether profit to be taxed is enough for offsetting deferred tax assets in the future.

Fair value of financial instruments In case a financial instrument lacks active market, the Company uses the evaluation method to determine the fair value. The evaluation method includes the transaction price as determined when fair transaction is carried out between the economic subjects with complete information in the market and desire for transaction as reference. It is also possible to refer to, if it can be obtained, the present fair value of another type of similar financial instrument in the market, or using the cash flow discount analysis and futures pricing model. The pricing method is in maximum degree to use the market information. However, if market information is impossible to be obtained, the management shall make estimate of such factors as credit risks (of the Company and the competitors), fluctuation and the relevance, etc. About the consumption as based on these factors, the change, if any, shall affect the fair value of the financial instruments.

2.3 Summary of Significant Accounting Policies

1)Foreign currency transactions The Company's account books and financial statements are presented in RMB. All foreign currency transactions are presented in RMB by market rate at the transaction happening date. At the balance sheet date, the balance sheet and income statement amounts denominated in foreign currencies are translated into RMB at the year end rate, respectively. Foreign currency translation differences are dealt with in the income statement.

-101- Non-currency items in foreign currency measured at historical cost are booked after being translated into RMB according to exchange rate at the initial transaction date. Non-currency items in foreign currency measured at fair value are booked after being translated into RMB according to exchange rate at the fair value recognition date.

(b) Financial assets The Company classified its financial assets into four categories: financial assets that are measured at fair value and changes in the value are charged to current gain and loss; held to maturity financial assets; loans and receivables; and available for sale financial assets. Upon the initial recognition, all financial assets shall be measured as their fair value plus, in the case of financial asset that is not measured at fair value and changes in the value are not charged into current gain and loss, transaction cost that are directly attributable to the acquisition.

1)Financial assets that are measured at fair value and changes in the value are charged to current gain and loss. Financial assets that are measured at fair value and changes in the value are charged to current gain and loss comprise of financial asset classified as held for trading or by the initial recognition defined by the Company's management as financial assets that are measured at fair value and changes in the value are charged to current gain and loss. The Company classified those financial assets that are to be sold within short term and derivative financial instruments excluding those being defined as effective derivative instrument as financial assets held for trading. Financial assets held not for trading purpose, if they satisfy the following conditions and are designated by the management, can all be classified as the financial assets measured based on the fair value while their change can be charged to the current gain and loss at the time of initial recognition:  when the inconsistence in measurement and recognition method brought about from different basis in measurement of financial assets or Financial bondsor recognition of income and loss has been eliminated or significantly lowered;  For a group of financial assets or financial liabilities, or the sum of the two which is measured and managed based on the fair value and complies with the recorded risk management or investment strategy, and the key executives are accessible to the relevant information of that group of financial instruments based on the fair value; or  financial assets may contain embedded derivative, unless the embedded derivative produces no significant change to the cash flow of financial instruments or the relevant inserted derivative instruments may not significantly recorded respectively with the financial instruments. Such financial assets are measured based on the fair value during the follow-up measurement. All realized as well as unrealized income is charged to the current gain and loss.

2) Held to maturity investments Held to maturity investments refer to the non-derivative financial assets that the Company's management has specific intention and is capable of holding to maturity and have fixed or confirmable payment amount and fixed term. The held to maturity investment is measured at amortized cost applying effective interest method and reduced by provisions for loss. A gain or loss arising shall be recognized in profit or loss when the investment is derecognized, impaired and during amortization process. If the Company, during the current fiscal year or two fiscal years, sold or re-class held to maturity investments exceeding non- significant amount prior to the maturity date, the rest held to maturity investments will be reclassified to available-for-sale financial assets. In case due to the change in desire or ability, or in a rare case, due to that fair value can no longer be reliably measured, or due to that "the previous two fiscal years" has gone, it turns more proper to measure financial assets or Financial bondsaccording to the cost or cost after amortization instead of the fair value, it is necessary to take book amount of the financial assets or Financial bondsmeasured based on the fair value on that day as its new cost or new cost after amortization. The profit or loss before that asset which is directly charged to the interest according to the regulations should be calculated according to the following provisions:

-102- 2006 ^kkr^i=obmloq

(1) For the financial assets with fixed due date, the aforesaid gain or loss should be charged to the gain and loss within the remaining duration of that asset by using the actual interest rate method. The difference between the new cost after amortization and the due amount should be amortized also by using the actual interest rate method within the remaining duration similar to amortization of the discount and premium. In case the financial asset experienced impairment afterwards, all the profit or gain directly charged to the interest should be charged to the gain and loss of the very period. (2) For the financial assets without fixed due date, the aforesaid profit or loss should be retained in the interest and should not be charged to the gain and loss until the financial asset is sold or disposed. In case the financial asset experienced impairment afterwards, all the profit or gain already directly charged to the interest should be charged to the gain and loss of the very period.

3) Loans and receivables Loans and receivables refer to non-derivative financial asset that have fixed or confirmable payment amount and have less active market and financial asset that the Company's management has no intention to sell immediately or within short term. The value of loans and receivables are determined by the amortized cost applying effective interest method and deducted by provisions for loss. When the account receivable is terminated for recognition, the impairment or the profit or loss incurred in the amortization should be charged to the gain and loss of the very period.

4) Available-for-sale financial assets Available-for-sale financial assets refer to available-for-sale non-derivative financial assets and other financial assets not classified as loans and receivables, held to maturity investments or financial assets that are measured at fair value and changes in the value are charged to current gain and loss. During the subsequent measurement, such financial assets are measured at fair value. The discount and premium is amortized by applying effective interest method and is recognized as interest income. Prior to available-for-sale financial assets are derecognised or impaired, the unrealised gain on change their fair value is solely presented in equity. Upon the available-for-sale financial assets are derecognised or impaired, accumulated changes in their fair value presented in the equity are charged into current net gain and loss.

(c) Impairment of Financial Assets The Company assesses at each balance sheet date whether there is any objective evidence that one or more financial assets are impaired after the initial recognition of the assets and such impairment could cause measurable loss in expected cash flow of the financial asset or the asset group. 1) Financial asset measured at amortized cost When there exists any objective evidence that loan and receivables or held to maturity investments measured at amortized cost are impaired, the amount of loss is recognised at the difference between carrying value of the asset and discounted expected cash flow by applying initially effective interest rate of the assets. The carrying value of asset is reduced to the expected recoverable amount through provision for loss and the amount of loss shall be charged into current gain and loss. The Company assesses financial asset with high unit price to determine whether there exists any objective evidence that any impairment is happened. Also, the Company assesses asset with low price from one or combined aspects to determine whether there exists any objective evidence that any impairment is happened. he Company classes the assets according to credit risk features and assesses the assets from combined aspects to determine whether there exists any objective evidence that any impairment is happened. Even there exists objective evidence that a single financial asset is not impaired, the asset and those with same credit risk features constitute a combination to be assessed. Any financial assets that is solely assessed and loss has been or continues to be recognized is beyond the scope of combined assess. For the financial assets whose impairment is measured based on the combination, the estimate of the future cash flow is determined still with reference to historical loss experience of the financial asset similar to the credit risk characteristics of that asset combination. The Company shall make amendment of the historical loss experience as the reference based on the present conditions, including addition of the factors which exist in the present period but shall not affect the reference time of the historical loss experience as well as the factors which only affect the reference time of the historical loss experience but are not applicable now. The Company regularly review and adjust the method and assumption used to predict the future cash flow.

-103- During the subsequent measurement, if the amount of loan loss decreases, and there exists any objective relation between the decrease and matter happened after withdrawing provision for loss, the reversal amount of the asset shall be directly deducted by provisions for loan loss and charged into current gain and loss. Any subsequent impairment released shall be charged into current gain and loss. The recognition of released amount shall ensure carrying value of the asset on the releasing date doesn't exceed the amortised cost. When the loan is not recoverable, it shall be written-off according to the withdrawn provision for loan loss deducted by amount of loss determined. If the written-off loan is recovered, it shall be charged into current gain and loss for deducting the provision for loan loss to be withdrawn in the current period.

2) Financial expenses measured at cost If there exists any evidence that shows equity financial instrument can_t be measured fair value due to no market price, the provision for loss the difference between its book balance and present value of expected cash flow of the asset in the future. The loss from impairment of such assets must not be released. 3 Available-for-sale financial assets If available-for-sale financial assets are impaired, no matter the assets are not derecognised, any accumulated gain and loss directly recognised in equity will be transferred out from equity and be recognised in income statement. The amount of accumulated gain and loss transferred out from equity and recognized in income statement is equal to deducting all provision for loss of the asset previously recognized in the income statement from the difference between acquisition cost (deducted by any capital repayment and amortisation) and current fair value. With respect to available-for-sale equity financial instrument, its loss recognised in gain and loss can't be released through income statement. But for available-for-sale debt financial instrument, if its value increases in the subsequent measurement, and such value increase may be objectively attributed to the matter happened after the recognition of impairment of the asset, the loss may be released through income statement.

(d) Financial liabilities The Financial liabilities held by the Company comprise of Financial liabilities that are measured at fair value and changes in the value are charged into current gain and loss, deposits, issued bonds and other liabilities. 1) Financial liabilities that are measured at fair value and changes in the value are charged into current gain and loss. Financial liabilities that are measured at fair value and changes in the value are charged to current gain and loss comprise of Financial liabilities classified as held for trading or by the initial recognition defined by the Company' management as Financial liabilities that are measured at fair value and changes in the value are charged to current gain and loss. All changes in fair value are charged to current gain and loss. 2) Deposits, issued bonds and other liabilities With the exception of the designated transactional liabilities or the deposits or issued bonds measured based on the fair value and whose change is charged to the current gain and loss, all other Financial liabilities are measured based on the cost after amortization.

(e) Final recognition of financial assets and financial liabilities

Financial assets When the following conditions are satisfied, some financial asset (or part of some financial asset or a part of similar financial asset in some group) shall be finally recognized:  The right of receiving the asset cash flow in has been due; The Company still retains the right to receive asset cash flow in but under the arrangement of "handing over" assumes the obligation of handing all the cash flow in without big delay over to the third party; or  The Company has transferred the right of receiving the asset cash flow in, and (i) has shifted all the risks and remuneration in connection with that financial assets, or (ii) has neither shifted nor retained almost all the risks and remuneration in connection with the ownership of such financial asset, but has transferred the control power over the financial assets.

-104- 2006 ^kkr^i=obmloq

When the Company has assigned the right of obtaining the cash flow in of some asset, meanwhile has neither assigned nor retained almost all the risks and remuneration in connection with the ownership of the assets to be assigned, nor transferred the control over the assets, the Company may continue to confirm the asset to be assigned based on the level of the successive involvement in the assets to be assigned. In case the Company adopts the successive involvement by means of offering guarantee for the asset to be assigned, the Company's successive involvement level shall be the lower of the following two - the initial book value of the asset or the maximum amount the Company may be demanded to pay the valuable consideration.

Financial liabilities The Financial liabilities scannot be finally confirmed until the obligations specified in the contract have been released, cancelled or terminated. When a financial liability has been replaced by an accommodator with another liability while the terms and conditions of the new financial liability are significantly different, or the clauses on the current liabilities have been amended greatly, the replaced or amended matters shall be finally recognized as the original financial liability and treated as initial recognition of a new financial liability. The margin of the book value between the two should be charged to the current gain and loss.

(f) Derivative financial instruments Derivative financial products are initially recognised at the faire value upon the date of signing the derivative transaction agreement and their fair values are subsequently measured. The derivative financial products with positive fair value in the current period are deemed as asset and those with negative fair value for liability. If the exist active market, the fair value is determined according to market quotations, such as recent market transaction. If no such market exists, the fair value is determined by applying estimating methods, such as cash flow discounting method and option pricing model. With respect to derivative financial product embedded into other financial product, if its economic feature and risk have no close relation with the main contract, and the main contract is not a financial product that is measured at fair value and change in the value are charged into current gain and loss, the Company solely measures the embedded derivative products at far value and changes in the value are charged into current gain and loss. The fair value of forward exchange contract is measured with reference to the contract with similar term in the market; the fair value of interest rate swap contract is measured based on the market value of the similar financial instrument with reference to the fair value in the market.

(g) Related Parties In case of compliance with the following cases, the other party may be regarded as the Company's related party: (i) the other party directly or indirectly through one or more media: (a) has controlled the Company or has been solely or jointly controlled by the Company ; (b) holds the Company's equity and has significant influence upon the Company; (c) has joint control over the Company; (ii) the other party is an associate of the Company; (iii) the other party is a joint venture of the Company and the Company is a party in the joint venture; (iv) the other party is a member of the key management of the Company or its parent company; (v) the other party is a close family member of a person mentioned in (i) or (iv); (vi) the other party is the principal directly, indirectly, jointly or significantly controlled by the person as specified in (iv) or (v) or the principal whose significant voting power is directly or indirectly controlled by the persons as specified in (iv) or (v); (vii) the other party is a welfare plan established for the welfare of any employee of the Company and any employee of the Company as a related party of the Company upon leaving the Company.

(h) Offsetting Assets and liabilities are offset only when the Company has the legal right to offset amounts with the same counter party and transactions are expected to be settled on a net basis.

-105- (i) Repurchase and reverse repurchase agreements According to the agreement, the sold assets which shall be repurchased on some definite date in the commitment shall still be recognized within the balance sheet. The income obtained from repurchase agreements including the interest, is presented as "income from repurchase agreement" in the balance sheet so as to reflect the economic essence as the Company's borrowing. The margin between the repurchase agreement and reverse repurchase agreement is recognized based on the actual interest rate within the agreement period and charged to the interest payment. Contrary, at the time of purchase, the assets to be repurchased on some definite day in future according to the agreement shall not be recognized in the balance sheet. The cost for purchase of such assets includes interest and is presented as "buy of repurchased items" in the balance sheet. The margin between the purchase and resale price is recognized based on the actual interest rate within the agreement period and charged to the interest income.

(j) Fixed asset Fixed assets are stated at actual cost with determined value. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its present working condition and location for its intended use. Expenditure incurred after the asset has been put into operation, such as repairs and maintenance, is normally charged to the income statement in the period in which it is incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the asset, the expenditure is capitalised as an additional cost of the asset. At end of the period, the Company performed check to fixed assets one-by-one. The difference of recoverable amount and carrying value is recognized as provision for fixed asset impairment and charged into current gain and loss. Depreciation is provided using the straight-line method. The depreciation is determined based on the cost of the asset, the estimated useful lives and the estimated residual value (at 3% on the cost). The depreciation years of fixed assets and the depreciation rate are listed as follows:

Estimated useful life Depreciation rate Properties and buildings 5 - 40 years 2.4%-19.4% Leasehold improvements 5 -10 years 9.7%-19.4% Office equipment and computer 3 -12 years 8.1%-32.3% Motor vehicles 5 -10 years 9.7%-19.4%

The estimated residual value, depreciation rate and the method of depreciation of the Company's investment property are adopted with reference to the depreciation policy of properties and buildings. No provision for depreciation is made on construction in progress.

(k) Repossessed assets Repossessed assets are charged to the cost at the initial recognition. As at each balance sheet date, the management inspects the repossessed assets. For the repossessed assets whose recoverable amount is lower than the book value, reserve for impairment is provided and the change of the reserve for impairment is charged to the current gain and loss.

-106- 2006 ^kkr^i=obmloq

(l) Impairment of assets The Company, at each balance sheet date, assess whether there exists any objective evidence that asset impairment is happened. If such evidence exists or there has need for performing annual impairment examination, the Company will estimate the recoverable amount of each asset. The recoverable amount is the higher of the asset's fair value deducted by disposal fee and the asset's value in use. The recoverable amount is determined against one asset, unless cash flows generated by the asset is basically dependent on the cash flows generated by other asset or asset group. If the carrying value of certain asset is more than its recoverable amount, it's deemed that the asset is impaired and its carrying value is adjusted to the recoverable value. In assessing asset's value in use, the present value of future cash flow is calculated according to discounting rate before tax reflecting the currency time value of current market and actual risk of the asset. Loss happened in continuous operation is charged into current gain and loss and fee items of impaired assets with same purpose.

(m) Cash and cash equivalents Cash and cash equivalents comprise of cash on hand, due from the Central Banks, due from banks, placement with banks and other financial institutions both maturing in less than three months, short term highly liquid bond investments which are readily convertible into known amounts of cash, subject to an insignificant risk of changes in value, and have a short maturity term of generally within three months when acquired.

(n) Operating leases Leases where substantially all the rewards and risks of ownership of the assets remain with the lessor are accounted for as operating leases. Rental payments applicable to such operating leases are charged to the current gain and loss on the straight-line basis over the lease terms.

(o) Transaction date accounting Acquisition and sale of financial assets in regular method are recognised at transaction date that the Company is liable for purchasing the assets. The acquisition and sale in regular method refers to the delivery of financial assets is done on the date according to market rule or practice.

(p) Revenue recognition Revenue is recognised when it is probable that the economic benefits will flow to the Company and when the revenue can be measured reliably, on the following bases: 1) Interest income is recognised by applying effective interest method upon the generation, which the discounted expected future cash inflow generated within financial instrument's expected duration is recognised in financial statement. When single financial asset or similar asset group is impaired, the interest income is recognised at discounting rate to measure loss. 2) Lease income from the investment property is recognized on accrual basis; 3) Fee and commission income is recognised when the service is provided and the proceeds can be reasonably estimated;

(q) Income tax The income tax includes the current tax and deferred tax. The income tax is directly charged to the gain and loss. However, if the items in connection with the income tax is directly charged to the equity; its corresponding income tax should be directly charged to the equity instead of gain and loss. The current income tax assets and liabilities formed in the current and previous periods should be measured based on the amount rebated from or payable to the tax authority. Deferred tax is calculated by liability method on all temporary differences between the tax bases of assets and liabilities and their carrying values for financial reporting purposes. Currently enacted tax rates are used to determine deferred tax.

-107- Various taxable temporary discrepancies should all be based to recognize the deferred income tax liability unless the deferred income tax liability experiences one of the following cases:  Initial recognition of goodwill or initial recognition of assets or liabilities in process of transaction with the following characteristics: it is not the enterprise consolidation, and transaction when it occurs will neither influence the accounting profit nor taxable profit; For all the taxable temporary discrepancy in connection with the investment of the subsidiaries or associates, the time arrangement of the temporary discrepancy reversal can be controlled and such temporary discrepancy may not be reversed in the foreseeable future. For the taxable profit which can possibly be used to offset the temporary discrepancy, or the taxable profit which has not been used for offsetting loss and therefore be carried over to the following period and has not yet used for tax payment, the deferred income tax asset is recognized based on the taxable profit which can be used for offsetting the temporary discrepancy, or which has not be used for offset the loss and is carried over to the following period and has not used the tax unless the deferred income tax asset occurs from the following transaction: The temporary discrepancy available for offsetting does not occur due to enterprise consolidation while it neither influence the accounting profit nor taxable profit at the time of the transaction. For all the temporary discrepancies available for offsetting in connection with subsidiaries and associates, such temporary discrepancies may highly possible be reversed in the foreseeable future and it is highly possible to be able to taxable profit which can be used to offset the temporary discrepancies. As at each balance sheet date, it is necessary to recheck the book amount of the deferred asset income tax. In case it is no longer possible to obtain sufficient taxable profit so as to allow to use the interest from partial or all deferred income tax asset, the Company may reduce the book amount of that deferred income tax asset. As at each balance sheet date, the Company may make re-evaluation of the unrecognised deferred income tax asset. When the future taxable profit may be highly possible to recover the deferred income tax asset, the Company may recognize the previously unrecognized deferred income tax asset. The deferred income tax assets and liabilities based on the tax rate during the realization of the assets and liquidation of the liabilities as predicted with the tax rate (and tax law) already implemented or substantially implemented as at the balance sheet date as the base. Deferred income tax asset and deferred income tax liabilities cannot be offset unless there is statutory exercise power for offsetting the current income tax asset with the income tax liabilities, and in addition the deferred income tax belongs to the same principal tax payer and tax authority.

(r) Retirement benefits scheme According to the statutory requirements in the PRC, the Company is required to provide certain staff retirement and pension benefits. The Company is obligated to contribute a fixed percentage of staff salaries to a fixed contribution employee retirement benefits scheme, governed by the Labour Department of the Provincial People's Government. The contributions are charged to the income statement.

(s)Drafts acceptance Drafts acceptance is the payment promise of the Company on the bill issued by customers. The Company estimates that most draft acceptance businesses will be repaid by the customer while performing payment liability. Drafts acceptance is the major off balance sheet item and disclosed as contingent liabilities and promise.

-108- 2006 ^kkr^i=obmloq

(t) Designated transactions Asset generated from the business activities that the Company is appointed, designated or agent and guarantee of repaying the asset to customer are not included in the financial statements. The Company issue designated loan on behalf of third party loaner. As an agency the Company issue designated loan to borrower according to instruction of fund designator. The Company signs agreement with these third party loaner and management the use and recovery of loan on behalf of them. The standard and condition for issuing designated loan, including loan purpose, amount, interest rate and repayment arrangement, are determined by the third party loaner. The Company collect handle fee against the management activities relating to the designated loans and such fee is recognised as revenue of the period. The loss risk of designated loan is undertaken by third party loaner.

(u) Financial guarantee contract The Company issues letter of credit and guarantee. When a party under the guarantee violates the initial clauses or the updated clauses of the debt based financial instrument, loan or other obligations, these financial guarantee contract provides compensation by a certain amount for the loss suffered by the creditors. The Company takes the relevant payment as received at the initial confirmation as the fair value to measure all the financial contract and charge it to the liabilities. This amount is recognized as the service charge and commission income in average during the valid term of the contract. Afterwards, the amount of liabilities as charged is recognized with the lower of margin of the fair value as recognized initially less the accumulated amortization and the expense possibly incurred at the time of financial liability corresponding to the guarantee contract. The added financial guarantee liability is recognized in the profit statement. The relevant fee as received is recognized in average as service charge and commission during the valid term of the contact by means of the straight line method.

(v) Reserve In case the Company should assume legal or constructive responsibilities for some case as occurred, while implementation of such responsibility is predicted to possibly lead to outflow of the economic benefit bearing resources, and the amount involved in such responsibility may be reliably estimated and reserve may be provided for accounting. When the Company predicts that some reserve may get compensation partially or wholly, such as compensation under the guarantee contract, that compensation shall be recognized as a separate asset. When the compensation amount is highly definite, the expense in connection with the reserve can only be recognized in the profit statement with the net value with deduction of any compensation. If the influence from the monetary time value is significant, the relevant reserve is estimated by the discount method at the pre-tax discount rate through the predicted future cash flow. Such discount rate should reflect the unique risk estimate of the liability. When the discount method is adopted, as the time passes by, the book value for reserve provision may increase and the increased part shall be recognized as the interest payment.

(w)Contingent Liabilities Contingent liabilities refer to the past transactions or the obligations necessary to be implemented arising from the event, their existence can only be determined by the existence of one or more future events which cannot be controlled by the Company. A contingent liability may also be a present obligation occurred from the past event. However, it cannot be reliably measured if it does not cause flow-out of the economic benefit or flow-out of the economic benefit impossible to be reliably measured. Therefore, such obligation is not recognized. The Company does not recognize contingent liabilities but only discloses them in the notes. In case change takes place in a contingent liability which may cause flow out of economic benefit, reserve will be provided for it.

-109- 3. International Financial Reporting Standards not in Force The Company has adopted the International Financial Reporting Standards which has been fully issued and is in connection with the Company. Commencing from this year, the Company adopts the new clause as specified in the updated "International Accounting Standard No. 39, according to which for initial recognition, for the financial assets whose fair value is designated for measurement and whose change is charged to the current gain and loss, certain conditions must be satisfied and the financial guarantee contract needs to be measured based on the fair value. In the Company's opinion, implementation of eh aforesaid new regulations has produced no significant influence upon the financial statements. The Company has not yet adopted the following International Financial Reporting Standards which has been published but not yet come into force:

International Accounting Standard No. 1, Revision Capital Disclosure International Financial Reporting Standards No. 7 Financial Instrument: Disclosure International Financial Reporting Standards No. 8 Operational Segment Interpretation Document of International Financial the Range of International Financial Reporting Standards No. 2 Reporting Interpretation Committee No. 8 Interpretation Document of International Financial Reassessment of Inserted Derivative Instrument Reporting Interpretation Committee No. 9 Interpretation Document of International Financial Semi-annual Financial Report and Impairment Reporting Interpretation Committee No. 10 Interpretation Document of International Financial International Financial Reporting Standards No. 2 Reporting Interpretation Committee No. 11 - Group and Treasury Stock Trading

International Accounting Standard No. 1, Revision shall come into force in fiscal period commencing from or after January 1, 2007. International Accounting Standard No. 1, Revision mainly influence the disclosure of the qualitative description made for the Company's purpose of capital management, policy and procedures; the disclosure of the quantitative data of capital presumed by the Company; and the disclosure of the consequences in compliance with any requirements on capital and any non-compliance. International Financial Reporting Standards No. 7 shall come into force in fiscal period commencing from or after January 1, 2007. International Financial Reporting Standards No. 7 mainly specifies the importance for users of financial report to assess the Company's financial instrument and the disclosure of information in connection with the nature and level of risks produced by the financial instrument. Meanwhile, these standard shall replace the requirements for disclosure as specified in the International Accounting Standard No. 32 - Financial Instrument: Disclosure and Presentation, and the International Accounting Standard No. 30: Disclosure in the Financial Statements of Banks and Similar Financial Institutions. International Financial Reporting Standards No. 7 shall come into force in fiscal period commencing from or after January 1, 2007. and at the same time shall replace the previous International Accounting Standard No. 14. This standard demands an economic entity to disclose financial information as part of the report from the viewpoint of the management. Generally speaking, the details to be disclosed should be used for internal assessment and segment operation information on resource distribution. Such information may be different from the contents for preparation of balance sheet and profit statement. Therefore, the International Financial Reporting Standards No. 8 demands interpretation of the basis for preparation of segment report and adjustment of the discrepancy between segment report and the balance sheet and profit statement. Interpretation Document of International Financial Reporting Interpretation Committee No. 8 was promulgated on January 1, 2006 and came into force in fiscal period commencing from or after May 1, 2006. This interpretation document specified that the "payment based on shares" as stated in the International Financial Reporting Standards No. 2 shall be applied to all the equity instrument with the issuing price lower than the fair value. Interpretation Document of International Financial Reporting Interpretation Committee No. 9 was promulgated in March, 2006 and came into force in fiscal period commencing from or after June 1, 2006. This interpretation document specifies that the date of signing contract is used to determine the initial assessment date of the inserted derivative instrument; reassessment is not necessary until a contract is amended somewhat and the cash flow is seriously affected.

-110- 2006 ^kkr^i=obmloq

Interpretation Document of International Financial Reporting Interpretation Committee No. 10 came into force in fiscal period commencing from or after November 1, 2006. This interpretation forbids writing off loss from impairment of goodwill, impairment of equity instrument investment, and loss from impairment of financial assets measured based on cost as confirmed in the middle term of the previous fiscal year. Interpretation Document of International Financial Reporting Interpretation Committee No. 11 shall come into force in fiscal period commencing from or after March 1, 2007. This interpretation document is mainly for distinguishing the transaction with cash settlement from transaction wit equity settlement in some designated cases in the payment plan with stock as the base and provide guide to the payment plan among different entities within the group with stock as the base. The Company is assessing the influence of the first application of these updated international financial Reporting Standards upon the financial information. Up to now, the Company predicts that except the International Accounting Standard No. 1 Revision and the International Financial Reporting Standards No. 7 which may cause increase or updating of some disclosure, the other new international financial Reporting Standards will not produce any significant influence upon the Company's operation status and financial position.

4. Net Interest Income

2006 2005 Interest income: Loan 12,195,020 10,038,946 Discount 2,351,687 1,300,157 Bonds 2,254,997 1,692,650 Amounts due from the Central Bank 487,932 479,958 Amounts due from banks and other financial institutions 257,485 250,756 17,547,121 13,762,467 Interest expense: Call deposits ( 1,027,986 ) ( 857,650 ) Time deposits ( 5,000,771 ) ( 4,129,571 ) Amounts due to banks and other financial institutions ( 1,649,681 ) ( 789,550 ) Bonds payable and others ( 227,473 ) ( 288,065 ) ( 7,905,911 ) ( 6,064,836 ) Net interest income 9,641,210 7,697,631

Interest income as of 2006 contains the national interest income for impaired loan totaling RMB 265,655 thousand (RMB 238,445 thousand in 2005). Please refer to Note 15b.

5.Net Fee and Commission Income

2006 2005 Service charge and commission income Service charge of bank acceptance 110,340 89,895 Import letter of credit 57,200 52,111 Financing bonds underwriting service charge income 30,898 - Government bonds service charge income 24,180 24,670 Others 187,990 130,524 410,608 297,200 Service charge and commission expense (106,194 ) ( 98,775 ) Net service charge and commission income 304,414 198,425

-111- 6.Other Income, Net

2006 2005 Foreign exchange gains, net 105,586 90,314 Loss from disposal of fixed asset, net ( 10,149 ) ( 2,054 ) Gain/(loss) from sale of bond investment, net 20,062 ( 1,288 ) Others 14,604 21,321 Total 130,103 108,293

7.Expenses to Staff

2006 2005 Salaries and bonuses 985,493 844,762 Staff's welfare 409,243 343,330 Enterprise annuity (Note) 70,000 - Total 1,464,736 1,188,092

Note: The above amount is provided according to the Trial Measures for Enterprise Annuity for 2006. However up to now, the Company still cannot settle the measures and operation plan of the enterprise annuity.

8.Business & management cost

2006 2005 Entertainment and Traveling 530,340 359,413 Printing and stationery fee 446,881 449,721 Rental expenses 366,078 359,771 Housing payment 371,923 183,079 Promotion 207,845 157,031 Communication, power and water supply 134,668 116,352 Supervision 74,635 64,225 Tax 43,862 42,868 Repairs and maintenance 39,432 40,913 Bank note transport fees 31,009 49,393 Others 263,081 156,777 Total 2,509,754 1,979,543

9.Other provisions for asset impairments

2006 2005 Provision/(reversal) Due from bank and placement with bank and other financial institutions (Note 13) ( 5,368 ) ( 3,967 ) Repossessed asset 87,128 20,606 Other asset 36,997 6,841 Total 118,757 23,480

-112- 2006 ^kkr^i=obmloq

10.Income Tax Including:

2006 2005 Current income tax 1,075,444 675,665 Deferred income tax Temporary generated difference/(reverse) ( 121,258 ) 100,867 Total 954,186 776,532

Deferred income tax of current year charged into current owner's equity items.

2006 2005 Change in fair value 21,766 (300,878 )

The deviations between the income tax listed in the profit statement and the amount worked out based on the statutory tax rate 33% are as follows:

2006 2005 Profit before tax 2,435,890 2,177,611 Income tax at the Chinese statutory rate 803,844 718,612 Non-deductible expenses (i) Expenses to employees 340,955 243,670 Others 237,318 203,175 578,273 446,845 Tax free income Tax free income from bond (ii) ( 427,931 ) ( 388,925 ) ( 427,931 ) ( 388,925 ) Income tax under actual tax rate 954,186 776,532

(i)Non-deductible expense is mainly the amount of expenses to employees exceeding the limit as specified in the tax law, the non-deductible entertainment allowance, depreciation expenses and expenses amortized not yet approved for cancellation by the tax authority. (ii)Tax free income from bonds is mainly the interest income from the tax free Chinese government bonds. Deferred income tax Deferred income tax assets and liabilities are detailed as follows:

December 31 2006 2005 Deferred income tax assets -Provisions for asset impairment 837,744 682,207 -Other 15,090 14,069 852,834 696,276 Deferred income tax liabilities -Change in available-for-sale investment 191,791 170,025 -Other 42,411 7,111 234,202 177,136 Net deferred income tax 618,632 519,140

-113- 11. Earnings Per Share The basic earning per share is calculated based on the net profit taken by shareholders of common shares of the current year divided by weighted average of common shares. In the fiscal year ended December 31, 2006, there was no dilution and therefore there was no diluted earnings per share to be disclosed.

December 31 2006 2005 Earnings per share calculation: Net profit attributable to shareholders (in RMB '000) 1,481,704 1,401,079 Number of common shares outstanding (in thousand shares) 4,200,000 4,200,000 Weighted average number of common shares (in thousand shares) 4,200,000 4,200,000 Basic earnings per share (in RMB) 0.35 0.33

12.Cash on hand and due from the central bank

December 31 2006 2005 Cash on hand 1,298,741 1,049,245 Non-statutory deposits in the Central Bank 41,511,663 16,945,383 Non-statutory cash and deposits in the central bank 42,810,404 17,994,628 Reserve for statutory deposit 23,562,170 18,864,545 Statutory deposits in the Central Bank 23,562,170 18,864,545 Total 66,372,574 36,859,173

The Company deposits reserve for general deposits with the People's Bank of China and that deposit must not be used for regular business.

13.Due from and placement with banks and other financial institutions

December 31 2006 2005 Due from banks Domestic banks 3,900,240 5,796,845 Foreign banks 1,287,561 1,463,527 5,187,801 7,260,372 Less: Provisions for losses ( 5,500 ) ( 5,500 ) 5,182,301 7,254,872 Placement with banks and other financial institutions Domestic banks 2,367,436 11,000 Foreign banks 234,261 109,709 Domestic financial institutions 147,468 176,262 2,749,165 296,971 Less: Provisions for losses ( 158,468 ) ( 187,262 ) 2,590,697 109,709 Total 7,772,998 7,364,581

-114- 2006 ^kkr^i=obmloq

Change in provision for loss

Deposit Placement Total Jan 1, 2005 5,500 191,229 196,729 Reverse in the reporting year (Note 9) - ( 3,967 ) ( 3,967 ) December 31, 2005 and January 1, 2006 5,500 187,262 192,762 Reverse of the year (Note 9) - ( 5,368 ) ( 5,368 ) Write-off of the year - ( 23,426 ) ( 23,426 ) December 31, 2006 5,500 158,468 163,968

14.Buy of resale

December 31 2006 2005 Classified by counter party Banks 22,612,012 12,100,997 Other financial institutions 7,123,649 263,886 Total 29,735,661 12,364,883 Classified by collateral Bond 18,440,800 4,000,000 Bill 11,294,861 8,364,883 Total 29,735,661 12,364,883

15. Loan

December 31 2006 2005 Corporate loan 207,360,280 174,069,250 Discounted bills 24,454,467 40,488,436 Individual loan 27,952,398 19,129,838 259,767,145 233,687,524 Less: Provisions for credit losses (Note 15b) ( 5,964,160 ) ( 4,932,316 ) Total 253,802,985 228,755,208

15a.Total loans classified based on the ways of guarantee are classified as follows:

December 31 2006 2005 Mortgage 89,767,210 67,155,052 Hypothecation 57,347,182 65,142,689 Secured 97,169,057 95,073,677 Creditor's right 15,483,696 6,316,106 Total 259,767,145 233,687,524

-115- 15b. Provisions for Credit Losses

2006 2005 Opening balance 4,932,316 4,408,978 Provision in the year 2,310,369 1,575,730 Offsetting with interest on impaired loan (Note 4) ( 265,655 ) ( 238,445 ) Recovery of write-off 12,428 3,216 Transfer out (i) ( 11,256 ) ( 17,166 ) Write-off during the year (1,014,042 ) ( 799,997 ) Ending balance 5,964,160 4,932,316 Provision for loss: Individual assessment 3,853,389 3,031,975 Collective assessment 2,110,771 1,900,341 Total 5,964,160 4,932,316

(i) Transfer out in the reporting year includes provision for loss from transfer out to the repossessed asset and other receivables. 15c. The Company signed agreements with other financial institutions and enterprises to transfer certain loans and advances to customers and their respective guarantees to these financial institutions and enterprises. Due to the repurchase terms included in these agreements, or due to the validity of legal conditions of these agreements, the Company may bear the credit risks of these transferred loans and advances. These transferred loans and advances were then accounted for in the Company's loan portfolio as of end of year 2006. Ended December 31, 2006, the total balance presented in the loans due to assignment of credit with such financial institutions and enterprises was RMB 85,588 thousand (December 31, 2005: RMB 366,872 thousand). The amount received from credit assignment was calculated in the item of other liabilities (Refer to Note 22). 15dAs at December 31, 2006, of the notes held by the Company, RMB 10,193,248 thousand of the notes was used as collateral for the sale of repurchase agreement (December 31, 2005: RMB 1,326,996 thousand).

16.Investments

December 31 2006 2005 Held to maturity investment (Note 16a) 65,349,872 - Available-for-sale investment (Note 16b) 12,539,661 64,742,922 Investment that is measured at fair value and change 2,768,746 - in the value are charged to current gain and loss. (Note 16c) 80,658,279 64,742,922

-116- 2006 ^kkr^i=obmloq

16a.Held to maturity investment

December 31 2006 2005 Bond investment, measured based on the amortized cost: - Government bonds 41,779,435 - - Financial bonds 13,719,928 - - Bonds with the central bank 9,486,010 - - Corporate bonds and others 364,499 - Total 65,349,872 - Listing 65,349,872 -

In the fiscal year of 2003, the Company sold the held to thedue investment with more than an in significant amount while it was necessary to reclassify the held to thedue investment to available-for-sale investment. On January, 2006, the Company reclassified the bonds according to the practical conditions, took this part of the investment measured based on the fair value with the book amount of RMB 51,439,548 thousand as its new amortized cost and charged it to the held to due investment. This part of investment has been directly charged to the unrealized gain and loss of the equity; the amortization in the remaining duration of this part of investment by means of the actual interest rate method was charged to the gain and loss. In 2006, the amortized amount was RMB 70,961 thousand. The margin between the new amortized cost and due amount continued to be amortized in the remaining duration of the investment based on the actual interest rate method.

16b.Available-for-sale investment

December 31 2006 2005 Bond investment, measured based on the fair value: - Government bonds 4,034,097 42,897,361 - Financial bonds 7,295,760 18,479,267 - Bonds with the central bank 982,627 2,821,235 - Corporate bonds and others 174,052 495,059 Sub-total 12,486,536 64,692,922 Equity investment, measured based on cost (Note): - China UnionPay Co., Ltd. 53,125 50,000 Sub-total 53,125 50,000 Total 12,539,661 64,742,922 Listing 12,486,536 64,692,922 Non-listing 53,125 50,000 Total available-for-sale investment 12,539,661 64,742,922

Note: As the non-listed equity investment in the available-for-sale investment has not been marked with the price in the active market while the fair value cannot be reasonably measured, it is therefore measured based on cost.

-117- 16c.Investments that are measured at fair value and changes in the value are charged to current gain and loss. Investments that are measured at fair value and changes in the value are charged to current gain and loss and are classified as transactional investment:

December 31 2006 2005 Bond investment - Financial bonds 570,472 - - Bonds with the central bank 644,148 -  Corporate bonds 1,554,126 - Total 2,768,746 - Listing 2,768,746 -

16d. As at December 31, 2006, of the above bonds, there were RMB 15,630,000 thousand of such bonds used as hypothecation in the sale of repurchased securities agreement (as at December 31, 2005: zero), of which the sale of repurchase agreement amounting RMB 80,000 thousand was due but the procedures for releasing the bond hypothecation are still in process. On December 31, 2006, of the bonds held by the Company, there was RMB 20,000 thousand of them frozen due to legal dispute (s) (As at December 31, 2005: RMB 96,542 thousand). All the aforesaid frozen national debt was relevant to the unsettled lawsuits (Refer to Note 28a). The Company has made enough reserve for the amount involved in the aforesaid cases for which the Company may take responsibility.

17. FIXED ASSETS

Properties and Leaseholdim Office equipment Motor Construction Investment Total buildings provements and computer vehicles in progress property Cost January 1, 2005 2,849,561 632,239 1,272,539 216,371 67,412 306,000 5,344,122 Additions 178,819 87,127 177,946 12,130 17,458 - 473,480 Transferred in /(out) 6,287 - 31,754 - (48,006 ) - ( 9,965 ) Disposals ( 423 ) ( 115,498 ) ( 84,878 ) ( 11,639 ) - - ( 212,438 ) Dec 31, 05/Jan 1, 06 3,034,244 603,868 1,397,361 216,862 36,864 306,000 5,595,199 Additions 29,131 50,127 162,889 6,324 29,408 17,775 295,654 Transferred in /(out) 838 - 35,771 - (36,609 ) - - Disposals ( 8,989 ) ( 24,700 ) ( 31,703 ) (113,751 ) - - ( 179,143 ) December 31, 2006 3,055,224 629,295 1,564,318 109,435 29,663 323,775 5,711,710 Accumulated depreciation: Jan 1, 05 185,679 298,014 749,831 108,446 - 12,014 1,353,984 Charge for the year 79,905 81,292 193,207 18,694 - 8,481 381,579 Disposals - ( 80,817 ) ( 79,924 ) ( 8,945 ) - - ( 169,686 ) Dec. 31, 05/Jan 1, 06 265,584 298,489 863,114 118,195 - 20,495 1,565,877 Charge for the year 89,985 61,168 236,794 20,356 - 8,973 417,276 Disposals ( 1,457 ) ( 18,808 ) ( 30,390 ) ( 73,358 ) - - ( 124,013 ) December 31, 2006 354,112 340,849 1,069,518 65,193 - 29,468 1,859,140 Net carrying value: December 31, 2006 2,701,112 288,446 494,800 44,242 29,663 294,307 3,852,570 December 31, 2005 2,768,660 305,379 534,247 98,667 36,864 285,505 4,029,322

-118- 2006 ^kkr^i=obmloq

All the Company's properties and buildings are located in China. Properties and buildings amounting to RMB72,350 thousand million were in use but the legal ownership registration procedures were still in process as at 31 December 2006 (2005: RMB352,246 thousand). In the opinion of the Company's management, there was no impairment of properties and buildings at the balance sheet date. The Company's investment property is the units leased or to be leased of the headquarters building. In 2006, the rent income was RMB 30,318 thousand (2005: RMB 31,743 thousand). As at 31 December 2006, there was no material difference between the carrying value of the investment property and its fair value with reference to the values of nearby properties. As such, no provision for impairment has been made.

18.Other Assets

December 31 2006 2005 Interest receivable Bond investment 1,006,497 897,304 Loans 25,388 26,825 1,031,885 924,129 Repossessed assets (note 18a) 473,176 368,936 Other receivables 526,448 360,085 Deferred assets 201,059 199,681 Assets under management on commission 232,969 - Others 7,939 - Total 2,473,476 1,852,831

18a. Repossessed Assets

December 31 2006 2005 Cost 629,349 458,007 Less: Provisions for impairment (156,173 ) ( 89,071 ) Net value 473,176 368,936

19. Repurchases agreements

December 31 2006 2005 Classified based on transactions Banks 23,727,758 1,326,996 Other financial institutions 2,015,490 - Total 25,743,248 1,326,996 Classified by collateral: Bonds 15,550,000 - Bonds 10,193,248 1,326,996 Total 25,743,248 1,326,996

-119- 20.Customer Deposits

December 31 2006 2005 Current deposit and current savings 141,100,615 106,324,646 Fixed deposits and fixed savings 165,162,734 144,875,143 Marginal deposit for security 63,593,100 61,086,386 Draft and outward remittances 1,438,575 1,880,442 Total 371,295,024 314,166,617

21.Bonds payable

December 31 2006 2005 Issued subordinated bonds 6,250,000 4,250,000

Approved by the People's Bank of China and China Banking Regulatory Commission, the Company issued the following subordinated bonds, including:

(a) From July to August, 2004, the Company issued RMB 4.25 billion of subordinated bonds as the bonds with flexible interest rates with valid term of 6 years due in 2010. The book interest rate is one year deposit interest rate of the People's Bank of China increased from 2.72% to2.82%.

(b) On November 8, 2006, the Company issued RMB 2 billion of subordinated bonds redeemable in advance as bonds with fixed interest rates with valid term of 10 years due in 2016. The book annual interest rate is 3.7%. The Company is entitled to redeem all or partial issued bonds based on the book value on November 9, 2011. In case the Company fails to exercise this option, the book interest rate shall be adjusted from 3% to 6.7% after 2011.

22. Other Liabilities

December 31 2006 2005 Interest payable 1,643,618 1,478,241 Banker's check 1,242,121 992,025 Other taxes payables 249,950 270,539 Salaries and staff welfare payables 241,196 193,770 Payable housing allowance 180,000 - Loan converted fund 164,782 101,310 Assignment consideration of payable loan credit (Note 15c) 85,588 366,872 Payable annuity 70,000 - Dividend payable 7,640 3,850 Others 392,778 676,787 Total 4,277,673 4,083,394

-120- 2006 ^kkr^i=obmloq

23.Shareholders’ Equity

23a.Capital Stock

December 31 2006 2005 Registered capital (par value: RMB1) 4,200,000 4,200,000 Paid-up capital (par value: RMB1) 4,200,000 4,200,000

23b.Capital Reserve Capital reserve is the premium of shares issued in the public offering of 2003 less the transfer of RMB700,000,000 to issued capital.

23c.Surplus Reserves Pursuant to the Company's articles of association and according to the accounting standards and relevant regulations in the PRC, the Company should make accruals for surplus reserves, including the statutory public welfare fund, statutory surplus reserve and discretionary surplus reserve, at a certain percentage of the Company's net profit. Accruals for the statutory public welfare fund should be made at 5% to 10% on the Company's net profit arrived at under PRC accounting standards and relevant regulations. Accruals for the discretionary surplus reserve can be determined by the shareholders. Surplus reserves can be used to compensate the accumulated losses or can be transferred to issued capital with the approval of shareholders. The purpose of the statutory public welfare fund is to provide for staff's facilities and other benefits.The statutory public welfare fund cannot be distributed unless the Company's operation is terminated and liquidation is in progress.Accruals for the statutory surplus reserve should be made at a minimum of 10% on the net profit arrived at under PRC accounting standards and relevant regulations, until its balance reaches 50% of the registered or issued capital. According to the Circular of the Ministry of Finance on Issues concerning Enterprise Financial Treatment upon Implementation of the Company (CAI QI [2006] No. 67, the balance of the welfare reserve was transferred to the statutory surplus reserve.

23d.Dividends The final dividend of 2005 in 2006 totaling RMB 462,000 thousand was distributed at RMB1.10 (including tax) for each 10 shares to the whole shareholders on the basis of 4.2 billion of issued shares. That profit distribution proposal is subject to review and approval at 2006 Annual General Meeting held on March 21, 2006. According to the profit distribution proposal of the Board of Directors as at March 12, 2007, on the basis of total 4.2 billion of issued shares, dividend shall be distributed at RMB1.10 (including tax) for each 10 shares to the whole shareholders. The proposal is subject to approval of the general meeting.

23e.Retained Earnings In accordance with the articles of association of the Company, the profit recognised under PRC accounting standards can be distributed to shareholders after the obligations are satisfied for (1) all tax liabilities; (2) the accumulated losses of prior years; and (3) accruals for the statutory surplus reserve, statutory public welfare fund and discretionary surplus reserve, and reserve for general risks. As stated in note 2(1) to the financial statements, these financial statements are prepared under International Financial Reporting Standards. The statutory surplus reserve and statutory public welfare fund are derived from the net profit recognised under PRC accounting standards audited by the PRC auditors according to the laws and regulations governing listed financial institutions in the PRC. However, the provision of discretionary surplus reserve and distribution of dividend should be based on the lower of net profit attributable to shareholders audited by the PRC auditors or international auditors. Profit distribution decision is made at the shareholders' meeting with reference to the operating results, financial status and other relevant factors.

-121- 24.Derivative Financial Instruments Derivative financial instrument refers to a kind of financial product, of which its value is dependent on the other "basic" financial product index or other changeable value. Generally, such "basic" financial product includes share, large sum of commodity, bond market price, index market price, exchange rate or interest rate. The notional amount of a derivative represents the amount of underlying asset upon which the value of the derivative is based. The amount presents the transaction amount of the Company, but doesn't reflect its risk. Fair value is the value of exchanging an asset or the amount of repaying a liability on basis of fairness between understanding and willing transactors. The notional amount of the Company's derivative financial instruments is shown as follows:

December 31 2006 2005 Derivative financial instruments held for trading: Spot foreign exchange contract 2,196,138 112,732

The fair value of the Spot foreign exchange contract is not significant.

25.Operating lease commitments As at balance sheet date, the Company had total future minimum lease payments under irrevocable operating leases contract as follows:

December 31 2006 2005 Within one year 311,326 305,110 Within 1 to 5 years 891,981 887,427 Over 5 years 549,928 629,220 Total 1,753,235 1,821,757

26.Off Balance Sheet Items

December 31 2006 2005 Letters of credit issued 6,637,182 5,665,723 Guaranteed trust issued 2,521,600 2,569,887 Bank acceptance 100,909,617 96,428,190

The Company's credit commitment includes the loan commitment and letter of credit and bank guarantee issued to third parties for customers. Acceptance is the Company's payment commitment for the bills issued to customers. The Company predicts that most acceptance bills can be recovered from the customers at the same time. The Company grants credit facilities to certain customers. However, in the opinion of the Company's management, the Company is not committed to the undrawn credit facilities and they are all revocable at the discretion of the Company.

-122- 2006 ^kkr^i=obmloq

27.Designated Deposits & Loans

December 31 2006 2005 Designated deposits 9,147,494 7,296,717 Designated loans 9,147,494 7,296,717

Designated deposits refer to saving deposited by depositor and used by the Company to issue loan to third party specified by the depositor. Loan risk connecting to the loan is undertaken by the depositor.

28.Contingent Liabilities

28a. Unsettled litigation case As at 31 December 2006, there were still some unsettled litigation cases against the Company involving an amount of RMB250 million (RMB 240 million as at December 31, 2004). There were government bonds of RMB20 million where a lien has been put on by the court relating to cases which involved RMB 23 million. Such cases are in the process of third hearing. Based on the present facts and conditions, the Company's management estimates the potential loss and made adequate provisions.

28b. Redemption of voucher government bonds The Company issues voucher government bonds as designated agent of the Ministry of Finance. The holder of voucher government bond may demand for cash in on the bond in advance and the Company is liable for performing acceptance. The amount of acceptance is the capital of voucher government bond plus interest payable up to the acceptance date. As at December31, 2006, the accumulated capital of un-mature and unaccepted voucher government bond issued by the Company was RMB1.854 billion (RMB 1.798 billion as at December 31, 205). The Company's management deems, prior to the mature date of such voucher government bonds, the amount of voucher government bonds to be accepted by the Company is not significant. The Ministry of Finance will not immediately accept the voucher government bonds accepted in advance but shall accept the principal and pay interest for the due bonds.

29.Disclosure of Related Parties

29a.Shareholders and related companies The related transactions with the shareholders holding over 5% of the Company's shares and their related companies are as follows:

December 31 2006 2005 Loans 1,374,639 1,319,445 Deposits 1,366,901 1,303,114 Off balance sheet items 132,173 752,023

2006 2005 Interest income 85,254 66,455 Interest expense 15,295 9,387

-123- 29b.Related transactions with other companies managed by the same key executives are as follows:

December 31 2006 2005 Loans 280,000 280,000 Deposits 130 3,910

2006 2005 Interest income 16,352 16,263 Interest expense - 101

Loans and advances to shareholders, other related companies, minority shareholders (holding shares of less than 5%) and other companies managed by the same key executives are granted according to similar terms and conditions offered to other customers.

29c.Key executives Key executives are the personnel that have rights to and are liable for directly or indirectly plan, instruct and control and activities of the Company, such as supervisors, directors and senior managements. The salary of remuneration of supervisors, directors and senior managements collected the Company are as follows:

2006 2005 Salary of remuneration 7,662 5,747

30.Segment Information The Company's main business activities are commercial lending and accepting customer deposits. Accordingly, no business segment report has been prepared. The Company's geographical segment report consists of the financial data of the following major business regions:

Total assets (RMB 1 million) Dec 31, 06 % Dec 31, 05 % Headquarters and Beijing 189,477 42 137,676 39 Jiangsu 40,531 9 36,485 10 Shandong 29,600 7 27,172 8 Zhejiang 30,328 7 24,802 7 Shanghai 20,950 5 20,317 6 Others 134,401 30 110,036 30 Total 445,287 100 356,488 100

Loans (in RMB 1 million) Dec 31, 06 % Dec 31, 05 % Headquarters and Beijing 40,520 16 41,815 18 Jiangsu 33,214 13 26,531 12 Shandong 25,616 10 25,768 11 Zhejiang 32,066 13 23,262 10 Shanghai 14,921 6 14,630 7 Others 107,466 42 96,749 42 Total 253,803 100 228,755 100

-124- 2006 ^kkr^i=obmloq

Loan comprises of loans and advances to corporate and individual, and discounted bills.

Customer deposits (in RMB 1 million) Dec 31, 06 % Dec 31, 05 % Headquarters and Beijing 85,709 23 76,590 24 Jiangsu 47,322 13 40,612 13 Shandong 32,908 9 27,885 9 Zhejiang 34,965 9 28,160 9 Shanghai 23,984 6 21,322 7 Others 146,407 40 119,598 38 Total 371,295 100 314,167 100

Deposit comprises of savings deposits and time deposits, deposits pledged as collaterals, inward remittances and outward remittances.

Interest income (in RMB 1 million) 2006 % 2005 % Headquarters and Beijing 5,773 33 3,968 29 Jiangsu 1,695 10 1,241 9 Shandong 1,610 9 1,254 9 Zhejiang 1,585 9 1,156 8 Shanghai 768 4 612 5 Others 6,116 35 5,531 40 Total 17,547 100 13,762 100

Interest income comprises of interest earned on loans and advances to customers, interest earned on discounted bills, interest income on amounts due from the Central Bank, interest income on amounts due from banks and other financial institutions, and interest income from debt securities investments.

Interest expense (in RMB 1 million) 2006 % 2005 % Headquarters and Beijing 3,337 42 2,610 43 Jiangsu 632 8 428 7 Shandong 614 8 443 7 Zhejiang 513 6 351 6 Shanghai 336 4 251 4 Others 2,474 32 1,982 33 Total 7,906 100 6,065 100

Interest expense comprise of interest on savings account and time deposits, interest on amounts due to the Central Bank, and interest on amounts due to banks and other financial institutions.

Off balance sheet items(in RMB 1 million) Dec 31, 06 % Dec 31, 05 % Headquarters and Beijing 7,072 6 9,932 9 Jiangsu 23,514 21 20,242 19 Shandong 14,308 13 14,292 14 Zhejiang 15,498 14 12,930 12 Shanghai 3,979 4 3,773 4 Others 45,697 42 43,495 42 Total 110,068 100 104,664 100

-125- Off balance sheet items comprises of letters of credit issued, letters of guarantee issued and drafts acceptance.

Capital commitments (in RMB 1 million) 2006 % 2005 % Headquarters and Beijing 72 24 117 25 Jiangsu 46 16 21 4 Shandong 24 8 28 6 Zhejiang 20 7 24 5 Shanghai 8 3 25 5 Others 126 42 258 55 Total 296 100 473 100

31.Risks Of Financial Derivative Instruments A description and analysis of the major risks faced by the Company are as follows:

31a.Credit risk Credit risk is the risk of loss from the default by an obligor or counter party when payments fall due. Credit risk is often greater when counter parties are concentrated in a single industry or geographic location or have comparable economic characteristics. The Company's loans and advances to customers are all domestic loans. Major off balance sheet items such as bank drafts acceptance are also related to domestic enterprises. However, due to the uniqueness of the development and economy of each region, the risk faced by the Company varies. For the geographical concentration of the loan portfolio and major off balance sheet items, please refer to note 30 for details. Loans and advances to customers classified based on the industries are as follows:

December 31 2006 % 2005 % Manufacture 86,570 33 71,370 31 Aggregate 37,930 15 37,061 16 Trade 39,182 15 36,278 15 Real estate 32,099 12 28,680 12 Others 63,986 25 60,299 26 Total 259,767 100 233,688 100

31b. Liquidity risks Liquidity risk is the risk involved in lack of fund for repayment to the due liabilities. The above risks may occur in case the amount or term of assets and liabilities do not match each other. The Company controls the liquidity risks through its risk management department and aims at optimizing asset-liability structure, keeping stable deposit base and predicting the cash flow volume and assessing the liquidity asset level.

-126- 2006 ^kkr^i=obmloq

As at different balance sheet date, the Company's assets and the due dates of liabilities are analyzed as follows:

December 31, 2006 (in RMB 1 million) Overdue Timely Within 3 3 months 1 to5 Over Total repayment months to 1 year years 5 years Assets: Cash on hand and due from the Central Bank - 66,373 - - - - 66,373 Due from banks and placements with banks - 4,930 2,579 264 - - 7,773 and other financial institutions Reverse repurchases agreements - - 26,090 3,646 - - 29,736 Loans 4,505 - 44,815 115,690 66,852 21,941 253,803 Investments - 147 4,548 18,004 35,884 22,075 80,658 Fixed assets - - - - 858 2,995 3,853 Deferred income tax - - - - 619 - 619 Other assets - 8 60 540 1,628 236 2,472 Total assets 4,505 71,458 78,092 138,144 105,841 47,247 445,287 Liabilities: Due to other banks borrowings from banks - 19,932 4,659 545 - - 25,136 Reparchases agreements - - 22,213 3,530 - - 25,743 Customers' deposits - 142,286 104,908 93,255 30,826 20 371,295 Bonds payable - - - - 4,250 2,000 6,250 income tax payable - - 496 213 - - 709 Other liabilities - 60 2,354 1,053 540 271 4,278 Total liabilities - 162,278 134,630 98,596 35,616 2,291 433,411 Net liquidity 4,505 ( 90,820) ( 56,538) 39,548 70,225 44,956 11,876

December 31, 2005 (in RMB 1 million) Overdue Timely Within 3 months 1 to Over Total repayment 3 months to 1 year 5 years 5 years Assets: Cash on hand and due from the Central Bank - 36,859 - - - - 36,859 Due from banks and placements with banks - 6,908 246 171 40 - 7,365 and other financial institutions Reverse repurchases agreements - - 11,033 1,332 - - 12,365 Loans 4,629 - 55,564 124,055 28,145 16,362 228,755 Investments - 165 4,086 7,121 30,903 22,468 64,743 Fixed assets - - - 13 962 3,054 4,029 Deferred income tax - - - - 519 - 519 Other assets - 33 207 780 314 519 1,853 Total assets 4,629 43,965 71,136 133,472 60,883 42,403 356,488 Liabilities: Due to other banks borrowings from banks - 20,182 394 868 - - 21,444 Reparchases agreements - - 1,128 199 - - 1,327 Customers' deposits - 107,937 83,699 81,251 41,275 5 314,167 Bonds payable - - - - 4,250 - 4,250 Income tax payable - - 283 122 - - 405 Other liabilities - 57 2,154 1,692 133 46 4,082 Total liabilities - 128,176 87,658 84,132 45,658 51 345,675 Net liquidity 4,629 (84,211) (16,522) 49,340 15,225 42,352 10,813

-127- 31c.Risks from exchange rate The Company mainly operates Renminbi based business; the designated transactions are mainly carried out in US dollars; there are fewer transactions in other currencies. The transactions in foreign currency are mainly the Company's fund operation exposure. The exchange rate between Renminbi and US dollars is specified by the People's Bank of China. There was small fluctuation before July, 2005. Afterwards, the controlled floating exchange rate system is excised causing the exchange price of Renminbi rising gradually. The relevant assets and liabilities based on currencies are stated as follows:

December 31, 2006RMB 1 million RMB US$ Others Total Assets: Cash on hand and due from the Central Bank 65,528 675 170 66,373 Due from banks and placements with banks and other financial institutions 2,384 4,775 614 7,773 Reverse repurchases agreements 29,736 - - 29,736 Loans 249,777 3,444 582 253,803 Investments 76,835 3,290 533 80,658 Fixed assets 3,853 - - 3,853 Deferred income tax 619 - - 619 Other assets 2,346 73 53 2,472 Total assets 431,078 12,257 1,952 445,287 Liabilities: Due to other banks borrowings from banks 24,108 933 95 25,136 Reparchases agreements 25,743 - - 25,743 Customers' deposits 359,126 10,603 1,566 371,295 Bonds payable 6,250 - - 6,250 Income tax payable 709 - - 709 Other liabilities 3,967 81 230 4,278 Total liabilities 419,903 11,617 1,891 433,411 Net long position 11,175 640 61 11,876

December 31, 2005(in RMB 1 million) RMB US$ Others Total Assets: Cash on hand and due from the Central Bank 35,962 753 144 36,859 Due from banks and placements with banks and other financial institutions 3,513 2,605 1,247 7,365 Reverse repurchases agreements 12,365 - - 12,365 Loans 224,200 3,999 556 228,755 Investments 61,773 2,440 530 64,743 Fixed assets 4,029 - - 4,029 Deferred income tax 519 - - 519 Other assets 1,746 88 19 1,853 Total assets 344,107 9,885 2,496 356,488 Liabilities: Due to other banks borrowings from banks 18,939 1,842 663 21,444 Reparchases agreements 1,327 - - 1,327 Customers' deposits 305,377 7,194 1,596 314,167 Bonds payable 4,250 - - 4,250 Income tax payable 405 - - 405 Other liabilities 3,828 149 105 4,082 Total liabilities 334,126 9,185 2,364 345,675 Net long position 9,981 700 132 10,813

-128- 2006 ^kkr^i=obmloq

31d.Interest rate risk The Company's interest rate risk is originated from that the contracted due date interest-bearing assets and interest payment liabilities does not match that of the re-pricing date. Both interest-bearing assets and interest payment liabilities are valuated mainly in Renminbi. Renminbi based standard interest rate published by the People's Bank of China specifies the minimum interest rate of the Renminbi loans and maximum interest rate of Renminbi deposits. The Company adopts the following methods to control the interest rate risks: regularly monitor the overall factors which may influence the standard interest rate of the People's Bank of China, optimize the matching of the contracted due date of interest bearing assets and interest payment liabilities with their date of re-pricing and manage the standard interest rate of the People's Bank of China and the pricing difference between the nterest bearing assets and interest payment liabilities. According to applicable rules of the People's Republic of China, commercial bank shall define RMB loan and deposit interest rate within the floating of benchmark interest rate set by the People's Bank of China. As at August 19, 2006, the People's Bank of China adjusted to the central bank benchmark rates for deposit and lending. Currently effective and applicable PBOC Renminbi benchmark rates are as follows:

Loan and deposit interest benchmark rate of PBOC (% year) Commencing from Aug 19, 2006 From October 29, 2004 to August 18, 2006 Loans Within 6 months 5.58 5.22 Between 6 months and 1 year 6.12 5.58 Between 1 and 3 years 6.30 5.76 Between 3 and 5 years 6.48 5.85 Over 5 years 6.84 6.12 Housing mortgage loan:(1) Not more than 5 years 4.14 4.95 Over 5 years 4.59 5.31 Current deposits 0.72 0.72 Time deposits: 3 months 1.80 1.71 6 months 2.25 2.07 1 year 2.52 2.25 2 years 3.06 2.70 3 years 3.69 3.24 5 years 4.14 3.60

Effective from March 17, 2005, housing mortgage loan benchmark interest rate of PBOC is equal to that of loans with same term. Since the government further released the administration of interest rates and broadened the floating ranges of RMB loan and deposit rates. Allowable floating ranges of Renminbi loan and deposit rates at different term are as follows:

Loans Deposits Commencing from October 29, 2004 Commencing from October 29, 2004 Top limit No limit (urban and rural financial cooper Based on the benchmark interest rate of the People's atives for 230% of benchmark rate) Bank of China except agreement based deposits Bottom limit Not less than 90% of benchmark rate None

Commercial bank may, according to re-discounting rate of PBOC, independently define discounting rate on the basis of not exceeding loan benchmark rate of same term. The re-discounting rate of PBOC commencing from March 25, 2004 is 3.24%. Loan and deposit interest rates among banks are beyond the administration of the People's Bank of China, but shall be defined according to market rules or practices.

-129- 32.Fair Value of Financial Instruments Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction. If there exists market with active transaction (such as authorized stock exchange), market price is the best present of the fair value of financial products. Since part of financial assets and liabilities held by or issued by the Company is lack of market price, thus, with respect to such financial instruments without quotation, their fair value is determined by applying following present value or other estimating methods. However, the value on the basis of such method in subject to the amount of future cash flows, timely assumption and discounting rate applied.

Financial assets The Company's financial assets mainly include cash, due from the central bank, due from and placement with banks and other financial institutions, loans and investment.

Due from the central bank, due from and placement with banks and other financial institutions Due from the central bank, due from and placement with banks and other financial institutions are mainly priced based on the market interest rate and are mainly due within a year. Therefore, their book value and their fair value are approximately the same.

Loans Loans are mainly priced based on the floating interest rates of interest rates specified by the People's Bank of China. Therefore, their book value and their fair value are approximately the same.

Investment Except that partial equity investments are priced based on the historical costs, available-for-sale investments and the bond investments measured based on the fair value and whose change is charged to the current gain and loss are measured based on the fair value in the balance sheet.

Financial liabilities The Financial bondsof the Company mainly include the interbank deposits and lendings, customers' deposit and the issued subordinated bonds.

Interbank deposits and lendings Interbank deposits and lendings are priced mainly based on the market interest rate and mainly due within a year. Therefore, their book value and their fair value are approximately the same.

Customers' Deposits Customers' deposits are mainly current deposits or short term deposits. Therefore, their book value and their fair value are approximately the same. For the held to maturity bonds and subordinated bonds whose fair value is not reflected or disclosed, their book value and fair value are presented in the following statements:

Book value Fair Value December 31, 2005 Subordinated bonds 4,250,000 4,936,375 December 31, 2006 Held to maturity bonds 65,349,872 66,270,588 Subordinated bonds 6,250,000 6,823,655

-130- 2006 ^kkr^i=obmloq

The methods and assumptions adopted in estimating the fair value are as follows: (a)For financial assets measured based on the fair value and whose change is charged to the current gain and loss and the available- for-sale financial assets, the fair value can be worked out with reference to the available market price. In case of no market price available, the fair value is estimated based on the pricing model or cash flow discount method. The book value of such assets is their fair value. (b)The fair value of the held to maturity investment may be worked out with reference to the available market price. In case of no market price available, the fair value is estimated based on the pricing model or cash flow discount method. (c)For current assets and the assets due within 12 months, the book value and fair value are supposed to be approximately the same. This assumption applies to the current assets, various other short term financial assets and financial liabilities. (d)The fair value of loans with fixed interest rate is estimated through comparison of the market interest rate at the time of loan granting with the market interest rate of the similar loans. The interest rate of most loans may be re-priced based on the change of the benchmark interest rate of the People's Bank of China. Therefore, the book value and the fair value are approximately the same. No consideration will be taken into consideration of the change of credit quality taken place in the loans in the loan portfolio in determining the general fair value. This is because the influence from the credit risk has been reflected by means of provision for loss of loans and deducted from the book value and fair value. (e) The interest rate applicable to the customers' deposits is determined based on specific products. It may be fluctuating or also possibly become fixed interest rate. The fair value of current deposit and savings account without designated expiry is the amount payable to the customers at any time. As most fixed deposits are all of short term, the fair value and the book value are approximately the same. The above assumptions and methods are to provide a unified basis for calculating the fair value of the Company's assets and liabilities. However, as other institutions may use different methods and assumptions, the fair value disclosed by various financial companies do not have to be completely comparative.

33.Comparative figures Some comparative figures are still rearranged so as to comply with the reporting form of the fiscal year.

34.Approval of financial statements These financial statements were approved by the Board of Directors on March 12, 2007. IMPACT OF IFRS ADJUSTMENTS ON NET PROFIT AND NET ASSETS AND RECONCILIATION WITH THOSE REPORTED UNDER PRC ACCOUNTING STANDARDS

(a)Reconciliation to the net profit

2006 2005 Net profit as reported in the audited financial statements under PRC accounting standards 1,457,043 1,279,594 Amortisation of the housing reform expenditures - 24,633 Discount and amortisation of other interest revenue and expenditure - 113,107 Write off of pre-operating expenses - 8,406 Foreign current translation discrepancy 24,661 ( 24,661 ) Net profit as reported in the financial statements under IFRS 1,481,704 1,401,079

(b)Reconciliation to the net assets

December 31 2006 2005 Net assets as reported in the audited financial statements under PRC accounting standards 11,642,795 10,530,822 Change in fair value available-for-sale investment 233,750 281,827 Net assets as reported in the financial statements under IFRS 11,876,545 10,812,649

-131- Written Opinion of the Directors and Senior Managements of Hua Xia Bank Co., Ltd. on 2005 Annual Report

Conforming to the rules in "Law of Securities" and "Content and Format of Annual Report, the 2nd Publication of Content and Format Regulation of Information Disclosure by Company Issuing Securities Publicly" (revised in 2005), as directors and senior managements of Hua Xia Bank Co., Ltd, we, after overall understand and audit the Company's 2005 Annual Report and its Abstract, deem: 1. The Company operates complying with "Accounting Standard for Business Enterprises", "Accounting System for Business Enterprises", and "the Provisional Regulations on Acknowledgement and Measurement of Financial Instruments (Trial)" and additional provisions, and the Company's 2006 Annual Report and its Abstract present fairly, in all material respects, the financial position of Hua Xia Bank Company and of the results of its operations for the year then ended. 2. 2006 Auditor's Report of Hua Xia Bank Co., Ltd. respectively issued by Beijing Jingdu Certified Public Accountants Co., Ltd. and Ernst & Young Certified Public Accountants is true, objective and fair. We guarantee that the information presented in the Company's 2006 Annual Report and its Abstract is free from any false record, misleading statement or material omission, and accepts, individually and collectively, liability for its truthfulness, accuracy and completeness.

12 March, 2007

-132-