BUSINESS

OVERVIEW A1A(28)(1)( A1A(34)(1)( We are one of the four largest commercial banks in the PRC in terms of total assets with the 3rd Sch 1 most extensive international branch network among PRC commercial banks. According to the LR1107 Banker magazine, we were the 32nd largest bank in the world based on total assets as of December 31, 2004. Our core business is commercial banking, which primarily consists of corporate LR8.04 banking, personal banking and treasury operations and accounted for 92.7% of our operating proÑt in 2005. We also conduct investment banking and insurance activities through our subsidiaries. The combination of our commercial banking, investment banking and insurance businesses has created a universal banking platform that allows us to provide integrated services to our customers. We are headquartered in Beijing with operations in the Chinese Mainland, Hong Kong and Macau and other overseas regions. Our operating proÑt was RMB37,416 million, RMB37,122 million and RMB53,636 million in 2003, 2004 and 2005, respectively, of which RMB13,203 million, RMB17,786 million and RMB29,676 million was derived from our domestic operations, respectively. As of December 31, 2005, our total assets were RMB4,740,048 million, of which 76.4% were derived from our domestic operations, before inter-company balance elimination. We are the market leader in the PRC in a number of areas. Based on data from PBOC, we were:

¬ the largest foreign currency-denominated loan provider and deposit taker in terms of outstanding balance among PRC commercial banks, with market shares of approximately 43.3% and 40.9%, respectively, as of December 31, 2005;

¬ the largest provider of international trade settlement services among PRC commercial banks, with a market share of approximately 32.6% in terms of transaction volume for the the year ended December 31, 2005, and the leader in trade Ñnance among the Big Four, with a market share of approximately 57.7% in terms of outstanding balance as of December 31, 2005;

¬ the bank among the Big Four with the highest non-interest income as a percentage of our total operating income as calculated based on PRC GAAP in 2004;

¬ the bank with the highest growth rate among the Big Four in total residential mortgage loans, which was 31.0% from 2003 to 2004 and 14.5% from 2004 to 2005; and

¬ the only bank among the Big Four which experienced growth in market share of Renminbi- denominated-deposits among PRC commercial banks in each of the year from 2003 to 2005. We had one of the most extensive domestic distribution networks, with over 11,000 branches and outlets, 580 self-service centers and 11,600 automated service machines throughout the PRC as of December 31, 2005. We also have an extensive international network. As of December 31, 2005, our international network comprised over 600 overseas branches, subsidiaries and representative oÇces covering 27 countries and regions, and we had correspondent banking relationships with over 1,400 foreign banks. In addition, we oÅer electronic-banking services such as telephone banking and Internet banking. As of December 31, 2004, we had the highest total assets, customer deposits and outstanding loans and advances per branch among the Big Four according to data released by the Big Four. We are also a leading commercial bank in Hong Kong and Macau. Our Hong Kong and Macau operations together accounted for 19.8% of our total assets before inter-company balance elimination as of December 31, 2005 and approximately 41.1% of our operating proÑt in 2005. Our subsidiary, BOCHK, was the second largest commercial bank in Hong Kong in terms of total assets as of December 31, 2005, and its direct holding company, BOCHK Holdings, is listed on the Hong

120 BUSINESS

Kong Stock Exchange. Our Macau branch was the largest commercial bank in Macau in terms of total assets as of June 30, 2005 based on data published by the Macau government. BOCHK and our Macau branch are each one of the few banks authorized to issue bank notes in their respective jurisdictions.

OUR STRENGTHS Our principal strengths include:

Well-Recognized Brand Name Established in 1912, we are one of the best-known commercial banks in the PRC. During more than 90 years of history, we have built one of the most recognized brand names in the PRC through our contributions to the evolution of the PRC commercial banking industry. We have made many signiÑcant achievements in the PRC commercial banking sector. For example, in 1929, we were the Ñrst PRC commercial bank to establish a foreign branch when we opened our London branch. In addition, in 1985, we oÅered the Ñrst bank card in the PRC. In 1994 and 1995, our Hong Kong branch and our Macau branch became bank note issuing banks in Hong Kong and Macau, respectively. Furthermore, in 1998, we arranged the Ñrst U.S. dollar- denominated syndicated loan for a PRC bank as the lead manager and agent. We have been a Global Fortune 500 company since 1990. Since 1992, we have been selected eight times as the ""Best Bank in the PRC'' or ""Best Domestic Bank in the PRC'' by EuroMoney, as well as ""Best at Commercial Banking (2005 Real Estate Awards)'' in the PRC and Hong Kong in 2005 by EuroMoney. In each of 2004 and 2005, we were named as the ""Best Trade Finance Bank in the PRC'' and ""Best Foreign Exchange Provider in the PRC'' by Global Finance. We are awarded the ""Well-Known Brand in the PRC'' recognition by the SAIC. In 2006, we were named as the ""Triple A Best Trade Finance Bank for China'' and ""Triple A Best Cash Management Bank for China'' by the Asset. According to the August 2005 survey conducted by the Financial Times, ""Bank of China'' was ranked as one of the top ten global brands in the PRC. We have also been appointed as the oÇcial banking partner of the Beijing 2008 Olympic Games, which further strengthens our brand recognition domestically and internationally.

Largest and Rationally Distributed Overseas Network Complementing an Extensive Domestic Network Our domestic branch network consisted of over 11,000 branches and outlets, 11,600 automated service machines and 585 self-service centers throughout the PRC as of December 31, 2005. As of the same date, approximately 46.5% of our domestic branches were located in the Yangtze River Delta, Pearl River Delta and Bohai Rim Economic Zone, which are among the more economically developed regions of the PRC. As of the same date, approximately 63.9% of our domestic branches were located in urban regions. We currently have the largest overseas network among the PRC commercial banks, with over 600 branches, subsidiaries and representative oÇces covering 27 countries and regions, including major international Ñnancial centers such as New York, London, Tokyo, Hong Kong, Frankfurt and Singapore. BOCHK had over 280 branches in Hong Kong, the largest branch network among the banks in Hong Kong as of December 31, 2005. BOCHK is well positioned to take advantage of the rapidly growing Öow of business between the PRC and Hong Kong. Our Macau branch had a market share of approximately 30% in terms of total assets as of June 30, 2005 according to data published by the Macau government.

121 BUSINESS

We believe we operate the most eÇcient branch network among the Big Four as measured by total assets, customer deposits and outstanding loans and advances per branch, which totaled approximately RMB359 million, RMB281 million and RMB180 million, respectively, as of December 31, 2004 based on data released by the Big Four. Our extensive domestic and overseas network enables us to structure and deliver products and services to serve our customers on a global basis, and allows us to capture the business opportunities arising from the increasing integration of the PRC into the global economy.

Solid Customer Base and Strong Presence in Attractive Customer Segments In the PRC, foreign exchange services tend to be utilized by larger corporate customers and more aÉuent individuals. Capitalizing on our position as one of the most experienced foreign exchange banks in the PRC and on our extensive global network, we have established and continue to maintain strong relationships with leading domestic and international corporations and Ñnancial institutions. We also have a strong presence in the aÉuent retail customer segment. We had business relationships with more than 220 of the Global Fortune 500 companies operating in the PRC and maintained lending relationships with more than 41,000 domestic corporate customers, including over 6,700 foreign-invested enterprises, as of December 31, 2005. Large corporate customers account for the majority of our overall business. As of December 31, 2005, approximately 66.3% of the aggregate balances of our domestic corporate loans and advances were made to corporate customers that had outstanding loans and advances with us in excess of RMB100 million. See ""Description of Our Assets and Liabilities Ì Assets Ì Loans and Advances by Size of Exposures to Single Corporate Borrowers for Our Domestic Operations''. In addition, we provide trade related services to over 370 of the leading 500 PRC import and export companies as ranked by the Ministry of Commerce of the PRC. Our relationships with these large corporate customers have enabled us to increase our product penetration in the most signiÑcant corporate customer segment in the PRC. As of December 31, 2005, we had approximately 3.3 million personal banking customers with deposit balances of RMB100,000 or more and approximately 334,800 personal banking customers with deposit balances of RMB500,000 or more. As of the same date, we had established over 200 wealth management centers that serve our wealth management customers under our global wealth management brand of ""BOC Wealth Management ( )''. We have achieved signiÑcant growth in the domestic residential mortgage loan market, with a compound annual growth rate of 34.2% from 2003 to 2005. As of December 31, 2005, we accounted for 33.2% of total new mortgage loans extended by the Big Four, according to data provided by the Big Four. As of December 31, 2005, we had RMB286,829 million of domestic mortgage loans outstanding, representing 75.5% of our total personal loans and advances. In addition, we were approved to establish the Ñrst automobile Ñnancing joint venture between a PRC commercial bank and a foreign automobile manufacturer in 2005.

Universal Banking Platform In addition to commercial banking, we provide investment banking, insurance and other services through our wholly owned subsidiaries, BOCI, BOCG Insurance and BOCG Investment. The combination of these businesses has created a universal banking platform that provides us with the ability to oÅer a broad range of Ñnancial products and services and enables us to establish stronger relationships with strategically targeted customers and strengthen customer loyalty. BOCI is one of the leading local investment banks based in Hong Kong. In 1999, BOCI Asset Management Limited, a wholly owned subsidiary of BOCI, established BOCI-Prudential Asset

122 BUSINESS

Management Limited, a joint venture with Prudential Corporation Holdings Limited, to conduct asset management operations in Hong Kong. In 2002, BOCI established BOCI China, a joint venture with other third parties, to engage in the domestic securities business. In 2004, BOCI established BOC International Investment Managers, a joint venture with BOCI China and Merrill Lynch Investment Managers Limited, to conduct fund management operations in the PRC. See ""Ì Investment Banking''. BOCG Insurance provides a broad range of insurance products. BOCG Insurance's net premiums from property and casualty insurance in Hong Kong ranked Ñrst for seven consecutive years from 1998 to 2004 according to data released by the OÇce of the Commissioner of Insurance of Hong Kong. Bank of China Insurance Co., Ltd., a wholly owned subsidiary of BOCG Insurance, began distributing property and casualty insurance products in Guangdong Province in 2005. In December 2005, Bank of China Insurance Co., Ltd. was approved by the CIRC to open its Ñrst domestic branch in Jiangsu Province. See ""Ì Insurance''. BOCG Investment was established in 1984 in Hong Kong as an investment management company focusing on strategic investment as well as distressed assets investment business. See ""Ì Other Business''. Through these subsidiaries, we believe we are well positioned to beneÑt from the signiÑcant growth potential in the investment banking and insurance businesses. In addition, this business structure enables us to diversify our sources of income. Leader in Non-Interest Income and Foreign Exchange Businesses with Strong Product Innovation Capabilities In 2004, our non-interest income as a percentage of our total operating income based on PRC GAAP was the highest among the Big Four. We believe our diversiÑed product and innovation capabilities have enabled us to generate a higher level of non-interest income compared with the other members of Big Four, thus reducing our reliance on traditional bank lending business. Through our global markets department, we oÅer a broad range of treasury products and services for diÅerent customer groups, and conduct treasury activities through our trading centers located in Hong Kong, London, New York, Beijing and Shanghai. As of December 31, 2005, we managed the largest foreign exchange portfolio among the PRC commercial banks according to data published by the PBOC. We believe our ability to oÅer innovative Ñnancial solutions to our customers provides us with a competitive advantage over other PRC commercial banks. We have also demonstrated our product innovation capabilities through the development of our retail product portfolio. We oÅer a variety of bank card services, with the largest number of quasi- credit cards issued in the PRC, as of December 31, 2005, according to the PBOC. In addition to being a market leader in the automobile loan market, we provide education loans and cross-border wealth management services in the PRC. We are a market leader in the foreign currency-denominated deposit, lending, and trade-service businesses in the PRC. According to the PBOC, as of December 31, 2005, we had a market share of approximately 43.3% in foreign currency-denominated loans among PRC commercial banks and a market share of approximately 40.9% in foreign currency-denominated deposits among PRC commercial banks. We had a market share of approximately 32.6% in international trade settlement in terms of transaction volume as of December 31, 2005 and a market share of approximately 57.7% in trade Ñnance in terms of outstanding balances among the Big Four as of December 31, 2005.

Experienced Senior Management Team with Proven Track Record Our senior management team has extensive experience in the banking and Ñnancial services, with an average of 21 years of relevant experience. In particular, our chairman, Mr. Xiao Gang, has

123 BUSINESS over 24 years of banking industry experience and was a deputy governor of the PBOC prior to joining us. Our President, Mr. Li Lihui, has over 26 years of banking industry experience and has held a number of senior management positions in key Ñnancial institutions, including as Executive Vice President of ICBC. Over 40% of our management personnel at or above the level of assistant general manager in our head oÇce have overseas working experience. See ""Directors, Supervisors, Senior Management and Employees''.

In addition, our successful experience in restructuring our banking business in Hong Kong and the listing of BOCHK Holdings on the Hong Kong Stock Exchange in 2002 have provided us with knowledge and experience in the area of bank reform.

OUR STRATEGY A1A(34)(1)(

We strive to become the premier bank in the PRC by pursuing sustainable proÑtability and quality-driven growth. We intend to become the Ñnancial services provider of choice in the PRC for large corporations and aÉuent retail customers, as well as a leading international Ñnancial services company.

To achieve our strategic objectives, we intend to focus on the following:

Strengthen Corporate Governance, Risk Management and Financial Management

We have implemented a corporate governance framework to align our management practices with international best practices. Our corporate governance structure consists of our general meeting of shareholders, the Board of Directors and the Board of Supervisors. We intend to strengthen the functions of the Ñve Board of Directors committees, which were established to assist the Board of Directors to make decisions on, as well as supervise, strategic planning, audit, risk management, personnel and remuneration and related party transactions.

We strive to achieve an appropriate balance between risk and return. We recognize that it is essential to continue to improve our risk management and internal control in order to maintain our asset quality. We are in the process of building an integrated risk management framework covering credit risk, market risk, liquidity risk and operational risk. We intend to further improve our centralized credit approvals at our head oÇce and tier-one branches, as well as increase the role of our head oÇce in managing and evaluating authorized credit application approvers. We are also in the process of further upgrading our management information systems and other information technology systems to support more advanced risk management processes.

We will continue to enhance our loan provisioning strategies. We believe this will enhance our ability to manage credit risks and provide us with potential for future earnings growth. We seek to continue to enhance our procedures for on-going credit monitoring and intend to establish a more stringent process for managing non-performing loans that supports early identiÑcation, accurate and timely classiÑcation, adequate provisioning and eÅective collection.

We seek to manage our capital base, and improve our asset and liability mix and pricing. We are in the process of improving our system to regularly review our asset portfolio in order to maximize our returns while maintaining a suitable risk proÑle, and to optimize our deposit structure to lower our cost of funding. We plan to implement more advanced performance measures, such as merit- based performance management system for monitoring of economic value-added and risk-adjusted return on capital. In addition, we plan on further improving our Ñnancial and accounting controls.

124 BUSINESS

Focus on Attractive Customer Groups We seek to expand the scope of our business with large corporate customers by providing them with a broad range of treasury, investment banking and insurance services in addition to traditional banking products and services. We have developed a set of marketing standards for key domestic customers of our bank. These standards will be implemented throughout our bank to ensure high quality services are provided to our key customers and their subsidiaries on a timely basis. We are also seeking to enhance the coordination and integration between our specialized product manager teams and customer relationship manager teams. We believe the small and medium-sized enterprise segment will become a source of signiÑcant growth in the future. We will continue to selectively seek small and medium-sized enterprise customer opportunities based on improved risk management tools, risk management and pricing policies and customized product oÅerings. We also intend to focus on the mid- to high-end retail segment by further developing our wealth management products and services. We will continue to build on our Ñnancial advisors team and product oÅerings as well as improve our electronic distribution channels. We will also focus on delivering customized products and services to our mid- to high-end customers in order to enhance our service quality. We are developing a customer-centric culture that emphasizes the importance of service quality throughout our organization. We also intend to leverage our status as the oÇcial banking partner of the Beijing 2008 Olympic Games to expand our corporate and retail businesses by enhancing our brand awareness among corporate and retail customers in the global community.

Seek Further DiversiÑcation by Enhancing Our Product OÅerings and Strengthening Our Universal Banking Platform We believe our diversiÑed business structure is one of our core competencies. This competency is attributable to our product design capabilities and our universal banking platform. We seek to further enhance our product design capabilities and business platform by working with the strategic investors. For the personal banking business, we will continue to focus on our mortgage lending. In particular, we have developed a direct-sale model to market our mortgage products directly to our retail customers in order to provide customized mortgage products and to improve our customer service. By leveraging our partnership with various business alliances, we strive to solidify our market leading position in auto Ñnancing. We also seek to expand our credit card, wealth management and insurance by leveraging the support of and cooperation with our strategic investors. We plan to grow unsecured personal lending selectively, leveraging the experience and expertise of BOCHK. For the corporate banking and treasury operations, we will reinforce our leading position in trade related services, trade Ñnance and treasury products, and continue to develop fee-based businesses. We also intend to develop and promote globalized products and services based on our overseas network, and to develop our investment banking and insurance operations, leveraging our existing platform and customer relationships. We intend to promote and capture cross-selling opportunities by developing appropriate proÑt sharing and incentive schemes. We will continue to increase the contribution of non-interest income to our total income. We plan to achieve this by focusing on high-end retail customers, who we believe have a greater need for wealth management products and other value-added services. We will also focus on large corporate customers that require treasury, cash management, foreign exchange, custody and trade services

125 BUSINESS and products. As the PRC continues to liberalize interest and exchange rates, we believe we will have additional opportunities to leverage our treasury capabilities to provide hedging and other treasury products for our customers. In addition, we plan to strengthen our overseas product oÅerings and develop products and services tailored to meet the demands of the local markets of our overseas network. Furthermore, as the only Ñnancial institution that is authorized to develop Olympic-related Ñnancial products, we intend to leverage this position and design more products to meet market demand.

Focus on Domestic Strategic Regions and Further Develop Our International Franchise to Support Cross-Border Businesses We have identiÑed 10 Key Regions and 40 Key Cities in the PRC as our key strategic regions. We will allocate resources and prioritize our eÅorts accordingly. These regions include the more developed geographic markets in the Yangtze River Delta, Pearl River Delta and Bohai Rim Economic Zone, and selected major capital cities of certain inland provinces. As of the end of 2005, these 10 Key Regions accounted for approximately 61.9% of our total domestic deposits and approximately 61.8% of our total domestic loans based on our operating data. As of the end of 2005, the 40 Key Cities accounted for approximately 58.3% of our total domestic deposits and approximately 64.6% of our total domestic loans based on our operating data. The identiÑcation of the domestic strategic regions also provides us with a base to facilitate further customer segmentation. As of December 31, 2003, 2004 and 2005, loans and advances to customers originated in Yangtze River Delta, Pearl River Delta and Bohai Rim regions accounted for approximately 60.6%, 60.8% and 65.3%, respectively, of loans and advances for our domestic operations. We will continue to develop our overseas network in order to support our domestic and international customers. Through better coordination and expanded cross-border services and products, we intend to capture business opportunities arising from the increasing globalization of the PRC economy. We will continue to strengthen risk management and develop information technology systems in our global network in order to eÅectively manage risks and facilitate information sharing.

Implement Infrastructure Reform to Streamline Processes and Increase EÇciency We are in the process of transforming our organizational structure to centralize and streamline key decision-making processes. We expect our Board committees and senior management to continue to focus on reform, and adopt a combination of matrix management, regional management and centralized vertical management according to the business development needs. We are also in the process of streamlining and standardizing our operational processes. Between 2003 and 2005, we rolled out a program on a bank-wide basis to improve our processing eÇciency and service quality, as well as to reduce our organizational redundancy. We plan to further implement such program in the next two years. We also intend to enhance existing distribution channels as well as develop new distribution channels, including improving our phone-banking and Internet banking services. We believe that the development and use of information technology plays a critical role in our business management and operations. In 2004, we launched the information technology blueprint project. This project aims to implement a number of initiatives including, among others, the development of a new core banking system and a new management information system. See ""Ì Information Technology''. By implementing the information technology blueprint project, we expect the information technology system will serve as a foundation for the sustainable and long-term growth of our businesses. The new core banking system is designed to enable our transformation to a customer-

126 BUSINESS based management and service model, which will support product customization and bundling in accordance with targeted customer needs. The new management information system will support management decisions, such as assets and liabilities management, risk management and proÑtability analysis.

Train and Develop Our Employees to Enhance Our Competitive Advantage

Our competitive advantage depends on our ability to attract, retain, train and motivate our employees. Since 2003, we have been rolling out a bank-wide human resource reform program. We will continue to enhance our strategic human resource management to align our employees' and shareholders' interests. We will continue to provide our employees with extensive training and overseas rotation programs to improve and upgrade their skills and experience. We believe our commitment to facilitating the career development of our employees enables us to develop a high quality banking team. See ""Ì Employees''. In addition, we plan to introduce an equity-based incentive plan for our senior management. See ""Directors, Supervisors, Senior Management and Employees Ì Share Appreciation Rights Policy''.

Cooperate with Our Strategic Investors to Create Synergies

We have established strategic relationships with our strategic investors, who have invested an aggregate amount of approximately US$5.1 billion in the Shares of our bank. We believe our strategic investors have complementary areas of expertise that can assist us in our business and infrastructure development. The areas of cooperation with RBS Group include credit cards, wealth management, corporate banking and general insurance. We also intend to cooperate with RBS Group with respect to risk management, Ñnancial management and operational support. In the cooperation arrangement with AFH, we intend to share their expertise in corporate governance, corporate restructuring and technology development. We intend to work with UBS AG to further develop our investment banking and Ñxed income securities businesses. Our cooperation with ADB will be primarily related to anti-money laundering and internal controls. Our strategic investors are also expected to contribute their technologies and expertise in human resource management and training and other infrastructure development areas.

We have established working teams and plans with our strategic investors to cooperate on a number of projects. We have established action plans relating to employee training and technology transfer with the assistance of our strategic investors. RBS Bank and its aÇliates have seconded and will continue to second professionals to take management roles in our credit card operations and advisory roles in our operational risk and credit risk operations. Through cooperation agreements, we will seek to take advantage of the expertise of our strategic investors to enhance the business opportunities with our existing customers to increase market penetration. We believe our cooperation with our strategic investors will enhance our competitiveness.

OUR PRINCIPAL BUSINESS ACTIVITIES

Our three principal lines of business consist of commercial banking, investment banking and insurance. Our core business, commercial banking, accounted for 92.7% of our operating proÑt in 2005.

127 BUSINESS

The following table sets forth our operating proÑt attributable to each of our principal lines of business for the periods indicated:

For the year ended December 31, 2003 2004 2005 Amount % of total Amount % of total Amount % of total (in millions of RMB, except percentages) Commercial banking ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31,022 82.9% 34,902 94.0% 49,735 92.7% Investment banking ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 337 0.9 338 0.9 274 0.5 Insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 196 0.5 266 0.7 334 0.6 Others(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,861 15.7 1,616 4.4 3,293 6.2 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37,416 100.0% 37,122 100.0% 53,636 100.0%

(1) Include investment holding and other miscellaneous activities.

We conduct our business in the PRC, Hong Kong and Macau and other overseas regions. Our domestic operations accounted for 55.3% of our total operating proÑt in 2005. The following table sets forth our operating proÑt attributable to our business in the PRC, Hong Kong and Macau and other overseas regions for the periods indicated:

For the year ended December 31, 2003 2004 2005 Amount % of total Amount % of total Amount % of total (in millions of RMB, except percentages) Domestic(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13,203 35.2% 17,786 47.9% 29,676 55.3% Hong Kong & Macau ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21,797 58.3 18,014 48.5 22,035 41.1 Other overseas regions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,416 6.5 1,322 3.6 1,925 3.6 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37,416 100.0% 37,122 100.0% 53,636 100.0%

(1) Includes the operations of our head oÇce (including the treasury operations conducted in Hong Kong by the global markets department of our head oÇce) and its branches in the PRC.

COMMERCIAL BANKING

Our commercial banking business comprises three major lines of business: corporate banking, personal banking and treasury operations. Corporate banking accounted for 56.2% of our total commercial banking operating proÑt in 2005. Our personal banking operations experienced signiÑcant growth in the past three years in terms of operating proÑt, increasing from RMB4,050 million in 2003 to RMB6,990 million in 2004 and to RMB18,823 million in 2005. The following table sets forth our operating proÑt attributable to each of our principal lines of commercial banking business for the periods indicated:

For the year ended December 31, 2003 2004 2005 Amount % of total Amount % of total Amount % of total (in millions of RMB, except percentages) Corporate banking ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17,103 55.1% 17,215 49.3% 27,944 56.2% Personal banking ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,050 13.1 6,990 20.0 18,823 37.8 Treasury operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,869 31.8 10,697 30.7 2,968 6.0 TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31,022 100.0% 34,902 100.0% 49,735 100.0%

128 BUSINESS

Commercial Banking Business in the PRC Corporate Banking We oÅer a broad range of corporate banking products and services to our corporate customers, including state-owned enterprises, private enterprises, foreign-invested enterprises and Ñnancial institutions. As of December 31, 2005, corporate loans and advances of our domestic operations accounted for 78.9% of our total domestic gross loans and advances to customers. As of December 31, 2005, domestic corporate deposits accounted for 38.5% of our total domestic customer deposits.

Corporate Banking Products and Services We oÅer a broad range of corporate banking products and services in Renminbi and foreign currencies. These products and services include loans and advances, deposits, fee-based products and services and trade-related services and trade Ñnance.

Corporate Loans and Advances Our principal corporate loan products include Renminbi-denominated and foreign currency- denominated loans. These corporate loan products may take the form of Ñxed asset loans, working capital loans, bill discounting and trade Ñnance. We provide Ñxed asset loans to our corporate customers to meet their funding needs for infrastructure projects, acquisition of machinery and equipment and real property development. Working capital loans are extended to meet our corporate customers' working capital or cash Öow needs. Bill discounting involves providing our customers with short-term Ñnancing in exchange for their bills of exchange issued or accepted by other commercial banks and corporations. We may re-discount these bills with the PBOC or other authorized Ñnancial institutions. We also provide trade Ñnance to our customers. See ""Ì Trade- Related Services and Trade Finance Ì Trade Finance''.

Renminbi-Denominated Corporate Loans and Advances Leveraging our strength in foreign currency-denominated corporate loan market, we endeavor to expand our Renminbi-denominated corporate loan business. As of December 31, 2003, 2004 and 2005, our Renminbi-denominated corporate loans and advances for our domestic operations were RMB1,067,382 million, RMB1,027,269 million and RMB1,096,103 million, respectively, and accounted for 71.3%, 74.2% and 77.2%, respectively, of the corporate loans and advances for our domestic operations. As of December 31, 2005, our Renminbi-denominated corporate loans and advances for domestic operations represented a market share of approximately 9.5% among the PRC commercial banks according to data from the PBOC.

Foreign Currency-Denominated Corporate Loans and Advances We are the market leader in foreign currency-denominated corporate loans. As of December 31, 2005, our foreign currency-denominated corporate loans and advances for our domestic operations were RMB324,080 million, representing a market share of 43.3% among PRC commercial banks according to data from the PBOC. We acted as the specialized foreign exchange bank in the PRC before 1994 and among the Ñrst PRC commercial banks to engage in foreign currency-denominated loans, foreign currency-denominated on-lending loans, international syndicated loans, project Ñnance and export credit. Our strong market position in foreign currency-denominated corporate loans has helped us build up long-term relationships with leading corporations in energy, petroleum and chemicals, telecommunication, transportation and international trade industries.

129 BUSINESS

Corporate Deposits

We accept deposits from our corporate customers in Renminbi and major foreign currencies such as U.S. dollars, Hong Kong dollars, Euros, Japanese yen and British pounds. As of December 31, 2005, we had the largest amount of foreign currency-denominated corporate deposits among PRC commercial banks, with a market share of approximately 26.9%, based on data from the PBOC. As of the same date, we had RMB132,156 million of foreign currency-denominated corporate deposits for our domestic operations. As of December 31, 2003, 2004 and 2005, we had RMB698,657 million, RMB817,674 million and RMB995,378 million, respectively, of Renminbi- denominated domestic corporate deposits, representing a compound annual growth rate of 19.4% from 2003 to 2005.

Fee-Based Products and Services

Capitalizing on our product innovation capabilities, we oÅer a wide range of fee-based products and services, including settlement, guarantees, fund custody and cash management. We have strong market positions in a number of these businesses. We believe our fee-based products and services not only generate income, but also help us to build long-term relationships with our customers.

Settlement

We provide domestic and international settlement services to our customers. Our domestic settlement services include, among others, bank drafts, promissory notes, checks, foreign currency exchange, remittance, collection, collection and acceptance, bank-accepted drafts and domestic letters of credit. We were the Ñrst PRC commercial bank to provide domestic letters of credit. Our international settlement services primarily consist of trade services, including letters of credit, export collection, import collection and inward and outward remittance. For description of international trade settlement, see ""Ì Trade-Related Services and Trade Finance Ì International Trade Settlement Services''.

Guarantee Services

Our guarantee services to corporate customers include, among others, loan guarantees, credit facility guarantees, leasing guarantees, payment guarantees, tender and performance guarantees, maintenance guarantees, advance payment guarantees, customs guarantees and processing trade tariÅ payment guarantees. The balance of our outstanding guarantees increased from RMB134,380 million as of December 31, 2003 to RMB172,519 million as of December 31, 2004, and to RMB197,456 million as of December 31, 2005.

Custodian Services

According to the Comprehensive Handbook of Chinese Securities 2004-2005, we ranked second in the PRC in terms of total assets under custody in 2004, and were the largest custodian in the PRC in terms of the volume of institutional investors' assets under custody. We serve as custodian for securities investment funds, social security funds, insurance companies, trust companies, qualiÑed foreign institutional investors and securities companies. We also provide custodian services for pension funds and annuities. We receive fees for acting as custodian and provide services such as safekeeping, clearing and settlement, valuation, accounting, corporate action, compliance and performance measurement and risk analysis services to our clients. As of December 31, 2005, we had total domestic assets under custody of approximately RMB168,300 million.

130 BUSINESS

Cash Management Products and Services We oÅer a variety of value-added and customized cash management products and services, including Renminbi payment and collection, account services, clearing and settlement services, integrated receivables management and liquidity management. We also provide group companies with foreign exchange fund sweeping and management services. We were recognized as the ""Best Cash Management Bank in the PRC'' by AsiaMoney in 2005. We utilize our Internet banking platform to provide customized real-time cash management products and services. All our domestic branches provide online cash management services, such as online cash Öow and liquidity management, online banking service linking our internal banking system with our corporate customers' enterprise resource planning systems and online tariÅ payment services. We believe these products and services will enhance customer loyalty and provide cross-selling opportunities.

Other Fee-Based Services We act as agent for certain PRC policy banks and receive agency fees in connection with providing payment disbursement, clearance and other services. We also utilize our extensive branch network and other distribution channels to sell third party investment funds and insurance products in the PRC. We also oÅer other fee-based services to our corporate customers such as entrusted loans, syndicated loan arrangements, credit facility arrangements and credit reference services.

Trade-Related Services and Trade Finance We have been providing trade-related services since 1915. Our key products and services include international trade settlement, trade Ñnance, factoring and forfaiting. Our representatives occupy key positions of certain international industrial organizations in this business. Since 1999, our representative has been serving as the vice chairman of the Commission on Banking Technique and Practice of the International Chamber of Commerce, the industry association that promulgates many of the international trade Ñnance industry standards. In addition, our representative became the non-executive director of the International Forfaiting Association in 2005, the only director from Ñnancial institutions outside Europe. We believe our trade-related services and trade Ñnance has growth potential and we are well positioned to capture the growth opportunity from the expanding domestic and international trade.

International Trade Settlement Services As of December 31, 2005, we were the leading PRC commercial bank in international trade settlement business with a market share of approximately 32.6% in terms of transaction volume, based on data provided by the SAFE. We provide a broad range of international trade settlement services to exporters and importers, including letters of credit, inward and outward bill collections and remittances. In 2003, 2004 and 2005, transaction volumes for our international trade settlement business were US$254,487 million, US$353,299 million and US$413,383 million, respectively.

Trade Finance We are a market leader in the PRC trade Ñnancing business, with a market share of approximately 61.4% in terms of outstanding balances among the Big Four as of December 31, 2005, according to data from the PBOC. We provide our corporate customers in the import business with letters of credits, conÑrmation of letters of credits, import bill advances and shipping guarantees. For our customers who are engaged in the export business, we oÅer packing loans, export discounting, export invoice discounting and export bill purchasing to assist them in managing

131 BUSINESS their liquidity. Our trade Ñnance business experienced rapid growth over the past three years. In 2003, 2004 and 2005, transaction volumes for our trade Ñnance business were US$12,344 million, US$21,684 million and US$26,326 million, respectively.

Factoring In 1992, we became the Ñrst PRC commercial bank to engage in factoring business. We provide factoring services by guaranteeing payments on receivables, providing customers with trade Ñnance, managing customers' sales accounts and collecting account receivables. Our factoring volume was US$2,351 million, US$4,214 million and US$6,321 million in 2003, 2004 and 2005, respectively. Our export factoring business ranked the fourth among 196 members of the Factors Chain International in 2004.

Forfaiting Forfaiting is the non-recourse purchase of receivables arising from trade-related transactions. The transaction volume of our forfaiting business increased from US$414 million in 2003 to US$650 million in 2004 and to US$1,182 million in 2005.

Other Trade-Related Services We also provide other trade-related services to our corporate customers such as processing trade account services, customer credit information and bill of lading information investigations. We are the Ñrst PRC commercial bank appointed by the State Council of the PRC to provide processing trade account services starting from 1995.

Customer Base In accordance with our strategy to focus on large corporate customers, we have built business relationships with many large PRC companies, Ñnancial institutions and leading multinational companies operating in the PRC. As of December 31, 2005, we maintained lending relationships with over 41,000 corporate customers, including over 6,700 foreign-invested enterprises. As of December 31, 2005, approximately 66.3% of the aggregate balances of our domestic corporate loans and advances were made to corporate customers that had outstanding loans and advances from us in excess of RMB100 million. We also maintain business relationships with over 220 of the Global Fortune 500 companies operating in the PRC. As of December 31, 2005, we had over 1,490 group Ñnancial institution customers. We currently provide trade-related services to over 370 of the leading 500 import and export companies ranked by the Ministry of Commerce of the PRC. In addition, we will continue to selectively seek small and medium-sized enterprise customer opportunities.

Marketing In line with our strategy to build a customer-centric culture, we have adopted a customer- oriented approach in organizing the marketing function within our bank. Our head oÇce is in charge of our overall marketing strategies and plans. Our branches are responsible for developing and implementing marketing initiatives in their respective regions, and collecting valuable information from customers that allows us to further enhance our sales and marketing programs. We are in the process of implementing a relationship manager system pursuant to which promotions and compensations of our relationship managers are linked to their performance. Under this system, the key corporate customer is usually served by a customer service team. A typical customer service team comprises relationship managers, product managers and supporting staÅ.

132 BUSINESS

Market Segmentation

We strategically focus on attractive customer groups. Our head oÇce is primarily responsible for the sales and marketing to our key corporate customers that hold leading positions in industries of strategic importance to us, with strong Ñnancial status and sound credit ratings and who we believe can make signiÑcant contributions to our business. We leverage resources throughout our banking platform to provide comprehensive services to these key corporate customers. Our branches are primarily responsible for the sales and marketing to our corporate customers within the areas covered by such branches. In particular, our branches serve their own key corporate customers as well as the key corporate customers identiÑed by our head oÇce in their respective area. Our head oÇce also establishes bank-wide marketing standards for the key corporate customers identiÑed by our head oÇce to ensure consistent and high quality Ñnancial services to these customers and their subsidiaries and branches.

We tailor our marketing strategies based on industries and regions. We have identiÑed the transportation, storage and postal industries, the electric power, gas and water industries, petroleum and chemicals industries and the telecommunications, computer and software industries as key industries of our corporate lending business. In addition, we have identiÑed 10 Key Regions as well as 40 Key Cities in the PRC.

We also have a Ñnancial institutions department responsible for marketing and customer service for our Ñnancial institution customers. Our Ñnancial institutions department has developed a set of marketing initiatives to promote our products and services that are tailored speciÑcally to Ñnancial institutions.

Cross Marketing

Capitalizing on our universal banking platform in the PRC, we utilize our resources in commercial banking, investment banking and insurance as well as our extensive global network to provide integrated and ""one-stop shop'' services to our corporate customers. For example, we oÅer our corporate customers a broad range of investment banking services through our wholly-owned subsidiary, BOCI, including equity and debt raising and underwriting, mergers and acquisitions, re- Ñnancings and asset management. We have focused and will continue to focus on cross-selling and synergies across various business and product lines within our bank. In particular, we seek to increase cross-referrals among our business lines, business departments, and domestic and overseas branches, representative oÇces and subsidiaries. For example, our corporate banking department works closely with our global markets department to provide asset management products and trading services to our corporate customers. See ""Ì Treasury Operations Ì Treasury Transactions on Behalf of Customers''.

Business Initiatives

We intend to further develop our corporate banking business by adopting the following business initiatives:

¬ Focus on Our Key Customers Based on a Customer-Centric Service Model. We are in the process of conducting a bank-wide review of our existing corporate customers to select a group of key customers at the head oÇce level and branch level based on the customers' proÑt contribution, strategic importance to our overall corporate banking business, Ñnancial performance and credit rating. We are also in the process of implementing marketing standards for key corporate customers throughout our bank.

133 BUSINESS

¬ Leverage Our Strong Product Platform to Increase Market Penetration. We plan to capitalize on our universal banking platform by developing proÑt sharing and incentive mechanisms to encourage cross-selling and product referrals among our business lines. We also plan to establish more dedicated customer service teams involving relationship managers and product managers to further develop our fee-based products and services and trade-related services based on our product platform.

¬ Improve Our Corporate Loan Portfolio Quality. We seek to improve the quality of our corporate loan portfolio by improving our lending practices and increasing our eÅorts to monitor the ongoing credit quality of our corporate customers. We also plan to conduct bank-wide customer credit rating evaluations based on a more advanced credit rating module which is currently under development.

¬ Selectively Exploit Small and Medium-Sized Enterprise Customer Opportunities in the Medium to Long Term. Given the relatively complicated risk proÑle of small and medium-sized enterprise customers, we are in the process of developing credit policy guidelines for small and medium-sized enterprise customers, as well as a risk-based pricing mechanism in order to enhance our risk-adjusted return on capital. Targeting the speciÑc needs of small and medium-sized enterprise customers, we intend to focus on providing standard products and services, including short-term Ñnancing, trade related services and other settlement products.

Personal Banking

Our personal banking business has experienced signiÑcant growth since we placed increasing emphasis on personal banking business in 2000. The operating proÑt derived from our overall personal banking business grew from RMB4,050 million in 2003 to RMB6,990 million in 2004 and to RMB18,823 million in 2005. Our personal loans and advances for our domestic operations grew from RMB254,019 million as of December 31, 2003, to RMB351,345 million as of December 31, 2004 and to RMB379,958 million as of December 31, 2005, representing a compound annual growth rate of 22.3%.

Personal Banking Products and Services

We oÅer a broad range of personal banking products and services, including loans, deposits, wealth management services, foreign exchange services and card services. We are the market leader for a number of these businesses. For example, as of December 31, 2005, we accounted for approximately 33.2% of the new mortgage loans among the Big Four according to data provided by the Big Four. As of December 31, 2005, we also had leading market shares of approximately 32.4% in automobile loans among the Big Four according to data provided by the Big Four, and 53.6% in total foreign currency-denominated personal deposits among the PRC commercial banks according to data from the PBOC. We are the largest issuer of quasi-credit cards in the PRC with a market share of over 24.0% according to data from the PBOC.

Personal Loans and Advances

Our personal loans and advances primarily consist of mortgage loans and other personal loans. Other personal loans include automobile loans, credit card loans, loans for business purposes, educational loans and revolving credit lines. Our personal loans and advances for our domestic operations accounted for 14.5%, 20.2% and 21.1% of the loans and advances for our domestic operations as of December 31, 2003, 2004 and 2005, respectively.

134 BUSINESS

Mortgage Loans We provide mortgage loans to Ñnance the purchase of properties with terms generally up to 30 years. We may lend up to 80% of the appraised value of the property based on our evaluation of a particular borrower's credit and risk proÑle. As of December 31, 2003, 2004 and 2005, we held market shares of approximately 18.6%, 21.8% and 22.9%, respectively, among the Big Four according to data provided by the Big Four. In recent years we have built cooperation relationships with key real estate developers nation wide. We are implementing a direct-sale model to market our mortgage products to customers, and oÅer ""one-stop shop'' services to our customers for mortgage loan-related procedures such as loan applications, property insurance, notarization and advisory services in connection with investment in real properties. We accounted for approximately 34.3% and 33.2% of the new mortgage loans among the Big Four in 2004 and 2005, respectively, based on data provided by the Big Four. We believe the secondary real estate market provides us with additional growth potential. As a result, we have started to oÅer mortgage loans in the secondary real estate market in relatively developed regions. As of December 31, 2005, we had RMB286,829 million in aggregate principal amount of mortgage loans outstanding, representing 75.5% of our total domestic personal loans and advances.

Other Personal Loans In addition to mortgage loans, we also provide individuals with automobile loans, credit card loans, loans for business purposes, educational loans and revolving credit lines. We held a leading position in automobile loans among the Big Four with a market share of approximately 32.4% as of December 31, 2005 according to data provided by the Big Four. To further promote our automobile loan business, we recently entered into cooperation arrangements with international and domestic automobile manufacturers and their aÇliates such as Dongfeng Peugeot Citroen Automobile, Beijing Hyundai and Volkswagen Finance (China), under which we provide Ñnancing to dealers and automobile purchasers. Although the PRC automobile sector has experienced a recent downturn, we consider automobile loans an important part of our personal banking business and have taken measures to manage our risk exposure to automobile loans. For example, we decreased the maximum loan to collateral ratio from 80% to 70% for our automobile loans. We also adopt a direct-sale model to market our automobile loans and oÅer ""one-stop shop'' service to automobile loan applicants at our designated sub-branches and stores of dealers with whom we entered into cooperation agreements. In addition, our personal loans may be extended to entrepreneurs in the relatively developed coastal region of the PRC and generally secured by real properties. We intend to provide personal loans to franchisees of well-recognized chain stores to further expand this business. In August 2004, we were selected through a competitive bidding process to be the exclusive provider of educational loans to students attending all of the 115 colleges and institutes directly aÇliated with the ministries of the PRC Government. As part of the cooperation arrangements with these colleges, many of them have agreed to gradually transfer their employees' payroll accounts to our bank. As of December 31, 2005, we had RMB6,785 million in aggregate principal amount of credit card loans outstanding for our operations in the Chinese Mainland, Hong Kong and Macau, representing 1.3% of our total personal loans and advances for the Chinese Mainland, Hong Kong and Macau.

Personal Deposits We accept deposits in Renminbi as well as certain major foreign currencies. The range of foreign currencies available for our deposit products is one of the most comprehensive among PRC commercial banks. We mainly oÅer demand deposits and time deposits to our personal banking

135 BUSINESS customers. Our total domestic personal deposits grew from RMB1,392,190 million as of December 31, 2003 to RMB1,508,276 million as of December 31, 2004 and to RMB1,678,684 million as of December 31, 2005. As of December 31, 2005, we had a leading market share of approximately 53.6% in terms of total foreign currency-denominated personal deposits among PRC commercial banks in accordance with data from the PBOC. Our Renminbi-denominated domestic personal deposits grew from RMB992,216 million as of December 31, 2003 to RMB1,184,253 million as of December 31, 2004 and to RMB1,416,326 million as of December 31, 2005, representing a compound annual growth rate of 19.5%. See ""Description of Our Assets and Liabilities Ì Liabilities and Sources of Funds'' for a description of our deposit proÑle.

Wealth Management Services Wealth management services are the key focus of our personal banking business. We believe our long history of providing foreign exchange services traditionally required by more aÉuent customers, extensive international network, strong brand name and close relationships with many aÉuent customers provide us with advantages in attracting and retaining wealth management customers. As of December 31, 2005, we had approximately 503,000 wealth management customers. We oÅer a wide variety of wealth management products denominated in Renminbi and foreign currencies, mainly developed by our global markets department. See ""Ì Treasury Operations Ì Structuring of Asset Management Products''. We were the Ñrst PRC commercial bank approved by the PRC Government to oÅer bullion trading services to individuals. As of December 31, 2005, we had over 200 wealth management centers located at the major cities in the PRC. Our wealth management centers are managed by the personal banking departments of our tier one branches. To promote a consistent brand image, our wealth management centers have uniform appearances. All of our wealth management advisors are directly trained by our head oÇce to ensure consistent service quality. We believe human capital is a key strength of our wealth management services. We have a team of over 2,000 wealth management advisers focusing on the provision of customized wealth management services. Through cooperation with the Financial Planning Standard Committee of the PRC, or FPSCC, and a number of overseas training institutions, we have improved our training on wealth management advisors and wealth management relationship managers. As of December 31, 2005, 33.6% of the total number of certiÑed Ñnancial advisors with the associate Ñnancial planner certiÑcates issued by the FPSCC were our employees.

Foreign Exchange Services We acted as the specialized foreign exchange bank in the PRC before 1994. We were selected as the ""Best Foreign Exchange Services Provider in the PRC'' by Global Finance in 2005. We provide a broad range of foreign exchange products and services to our customers, including, among others, foreign currency trading services, deposits, remittance as well as structured products linked to interest rates, exchange rates, commodities or equities. We also provide entrusted trading and related customer inquiries services through our foreign exchange trading system, telephone banking and Internet banking facilities. Electronic-banking services channels have become the main platform on which we provide real-time foreign exchange services. To utilize our extensive international network and promote cross-border services, our domestic and overseas branches initiated cooperation programs in a number of areas such as remittance,

136 BUSINESS account opening services and marketing. Our cross-border services mainly target overseas Chinese, frequent business travellers and tourists. We oÅer diÅerent foreign exchange products and services to these customers on a ""one-stop shop'' basis.

Bank Card Services

One of our key business initiatives in personal banking business is to continue strengthening our bank card business. We oÅer a wide range of card products to our customers, including single and dual-currency credit cards, quasi-credit cards and debit cards. We issued the Ñrst bank card in the PRC in 1985. As of December 31, 2005, we issued approximately 87 million cards. In 2005, our bank card business revenue reached RMB1,540 million, representing an increase of 40.6% from RMB1,095 million in 2004.

In 2004, we established a bank card operating platform and related information technology systems, which enabled us to issue the BOC dual-currency credit cards and streamline our card operating processes. This new operating platform has improved our processing capability and eÇciency and provided support for our future business expansion and product innovation.

Credit Cards

We oÅer a broad range of credit card products, including dual-currency credit cards and single- currency credit cards. Our credit card products can be settled in Renminbi, U.S. dollars, Hong Kong dollars, Euros and Japanese yen. Since we launched our BOC dual-currency credit card in October 2004, we have introduced a number of additional credit cards in cooperation with third parties, such as the BOC Visa Olympic credit card, the BOC Lenovo Visa Olympic credit card and the BOC JCB credit card. Our single-currency credit card, Great Wall international credit card, was issued through our cooperation with BOC Credit Card (International) Limited. PRC residents who study abroad or frequently travel overseas are the target customers of our Great Wall international credit cards. As of December 31, 2005, we had issued approximately 1.4 million credit cards in the PRC.

Quasi-Credit Cards

We were the Ñrst PRC commercial bank to issue quasi-credit cards. Our quasi-credit cards carry the ""Great Wall'' or "" '' brands that have been well-recognized brands in the PRC for nearly 20 years. Quasi-Credit Cards require a cash deposit balance, and provide the cardholders with an interest-bearing overdraft line. Quasi-credit cards are denominated in Renminbi and can be used for multiple purposes, such as savings, fund transfers and payments. Our branches may also add additional functions to our quasi-credit cards, such as installment payment and bill payment tailored to the needs of their respective quasi-credit cardholders. As of December 31, 2005, we issued approximately 6.7 million quasi-credit cards and, based on data from the PBOC, we were the largest issuer of quasi-credit cards in the PRC in terms of the number of cards issued, with a market share of over 24.0%.

Debit Cards

A debit card is directly linked to a cardholder's bank account. The cardholders cannot draw amounts in excess of the deposits in their respective bank accounts. Our debit cardholders may engage in trading in foreign exchange, bullion, fund, treasury bonds and other securities through their debit card accounts, and may also access telephone banking and Internet banking through their debit cards. As of December 31, 2005, we had issued approximately 79.1 million Renminbi- denominated debit cards which can be used in the PRC and certain overseas regions through the

137 BUSINESS

China UnionPay network. We oÅer U.S. dollar-denominated international debit cards that can be used abroad through the MasterCard network.

Merchant Acquiring Services We provide settlement services to merchants by processing credit card, quasi-credit card and debit card transactions. We charge the merchants a fee that is based on a percentage of the amount of each transaction processed. In the PRC, we had one of the most extensive merchant networks with 140,311 merchants as of December 31, 2005. We were also the largest foreign card acquiring bank in terms of transaction value according to data from the PBOC, with a market share of approximately 52.5% as of December 31, 2005.

Other Personal Banking Products and Services In addition to the products and services described above, we provide other products and services to our personal banking customers, including distribution of funds, insurance products and government bonds, securities trading services, payroll services, remittances, bill payment and safe deposit boxes. We have built up strategic cooperative relationships with fund companies and started to oÅer open-ended fund products to our personal banking customers through our extensive network in 2002. In 2004, we acted as the distribution agency for the Ñrst open-ended fund with an amount over RMB10 billion in the PRC. We oÅer a range of investment fund products, such as equity funds, index funds and money market funds. We also provide fund information inquiry services through our call centers and initiated online fund trading services through our Internet banking.

Customer Base As of December 31, 2005, we had approximately 118 million retail customers. We also had approximately 21 million foreign currency deposit accounts and 193 million Renminbi currency deposit accounts as of December 31, 2005. As of the same date, we had approximately 4.6 million personal loan accounts. Following our business initiative to focus on aÉuent customers, we have built a relatively aÉuent personal banking customer base including approximately 3.3 million customers with deposit balance of RMB100,000 or more and approximately 334,800 customers with deposit balance of RMB500,000 or more as of December 31, 2005. Marketing We conduct our personal banking activities through our personal banking department and card center. These department and center at our head oÇce generally formulate marketing initiatives and manage brands for our personal banking products and services, including, among others, personal loans, cards, wealth management and foreign exchange services. The relevant departments at our tier one and tier two branches develop detailed marketing plans to implement these initiatives. Our marketing activities are conducted through our extensive distribution network and multiple distribution channels including over 11,000 branches and outlets, 580 self-services banking centers and 11,600 automated service machines, as well as telephone banking and Internet banking. See ""Ì Distribution Network''. By rationalizing our back oÇce operation, we are in the process of re-allocating personnel from back oÇce functions to front-line marketing functions. To promote our wealth management service under our own brand, we introduced ""BOC Wealth Management ( )'' services in 2002. We currently market all of our wealth management services and products, including those provided by BOCI and BOCG Insurance, on a global basis under this brand. We are in the process of launching our ""BOC Wealth Management Global Service''

138 BUSINESS program in the Asia-PaciÑc region, which includes wealth management, real estate advisory and travel services. We have also adopted a customer information system in the coastal region which enables us to identify potential wealth management customers.

Following our strategy to promote cross-selling and increase market penetration, we have recently increased our cross-selling eÅorts among our various products and with our corporate banking business. For example, we provide our premier credit cards, the ""Great Wall'' international platinum credit card and the BOC Visa Olympic credit card, to our wealth management customers. Through oÅering payroll services to employees of our corporate customers, we retain and enhance our business relationships with our corporate customers. We have developed the ""Ideal Home'' brand to market our personal loans and related value-added services such as real estate investment and automobile purchase advisory services.

Business Initiatives

We intend to further develop our personal banking business by adopting the following business initiatives:

¬ Focus on Wealth Management Segments and Increase Our Market Share and Penetration for Mid- to high-end Customers. We intend to develop an integrated wealth management platform targeting the aÉuent customer base. Through cooperation with our strategic investors, we plan to improve our ability to reÑne customer segmentation and further develop our wealth management business. We also plan to increase the number of our wealth management centers and provide customized products and services by leveraging the product design capabilities of our global markets department, BOCI and our strategic investors. We plan to expand our ""BOC Wealth Management Global Services'' beyond the Asia-PaciÑc region. We are also working with RBS Group and its aÇliate to set up private banking departments in our Beijing and Shanghai branches.

¬ Further Implement Our Direct-Sale Model to Capture Personal Loan Growth Opportunities. We plan to implement our direct-sale model to over 70% of our branches and outlets. We also plan to explore the secondary real estate market by applying the direct-sale model. We believe that these initiatives will enable us to capture the growth of new personal loans.

¬ Strengthen Our Bank Card Business. We intend to further strengthen our bank card business. With respect to quasi-credit cards, we intend to increase the number of card functions as well as the scope of related value-added service oÅerings. With respect to credit cards, we intend to cooperate with RBS Bank in Ñnance, marketing, risk management, information technology system and operations to enhance our product research and development, customer services and risk control. With respect to debit cards, we intend to gradually introduce service fees with enhanced features and value-added services. In addition, we plan to issue debit cards at some of our overseas branches.

¬ Enhance Risk Management. We intend to further improve our retail credit approval procedures and enhance the collection process of personal loans and advances. In addition, we plan to develop credit scoring systems to accelerate our retail credit approval process and improve the retail credit risk management. To ensure eÅective execution of our risk management measures, we have produced easy-to-understand training materials and brochures identifying the regulatory and other requirements for our credit risk, operational risk and compliance risk management.

139 BUSINESS

¬ Implement a Sales-Driven Service Model Throughout Our Outlets. We completed our pilot outlet reform program at selected outlets and intend to roll out such program throughout our organization. This program is designed to establish a sales-driven branch service model, streamline branch operations and promote standardized operating procedures to increase eÇciency, lower costs and reduce operating risks. As part of the outlet reform program, we plan to migrate more transactions involving small amounts and standard procedures to electronic-banking services channels.

¬ Capture Cross-Selling Opportunities. We plan to capture cross-selling opportunities by increasing the cooperation of our personal banking business with BOCHK, BOCI and BOCG Insurance as well as enhancing the cooperation between our domestic and overseas branches in cross referral and services.

Treasury Operations

We engage in treasury transactions on our proprietary accounts and provide treasury products and services to our corporate and retail customers. Our treasury operations primarily include the following business activities: liquidity management and inter-bank money market transactions, investment portfolio management, foreign exchange, bullion and derivatives trading, debt securities issuance and underwriting, treasury transactions on behalf of our customers and structuring of asset management products. Over the years, we have accumulated signiÑcant experience, trained skilled employees and established a strong market position among PRC commercial banks in foreign exchange treasury operations.

We conduct our treasury operations primarily through Ñve trading centers located in Beijing, Shanghai, Hong Kong, London and New York. These trading centers manage positions in relays and enable us to conduct treasury operations on a 24-hour basis.

Product design is one of our core competitiveness. We seek to further improve our skills in designing products, especially Renminbi-denominated derivatives, by leveraging our experience in the foreign exchange business and the expertise of our strategic investors. We intend to expand our customer base, especially to attract and retain more aÉuent customers by developing innovative and tailored products and services.

Liquidity Management and Inter-Bank Money Markets

We generally conduct money market transactions to manage our liquidity, including short-term security trading, and short-term borrowings from, and loans to, other domestic and foreign banks and non-bank Ñnancial institutions. As of December 31, 2005, we had an aggregate principal amount of placements with banks and other Ñnancial institutions of RMB332,645 million before allowance for impairment losses, representing 13.0% of our total loans and advances and placements with banks and other Ñnancial institutions before allowance for impairment losses, and certiÑcates of deposits and placements from banks and other Ñnancial institutions of RMB212,626 million, representing 4.7% of our total liabilities.

We also enter into repo and reverse repo transactions whereby we sell securities to or purchase securities from a counterparty with an obligation to repurchase them from or resell them to the counterparty at a pre-determined price on a speciÑed future date. Most of the securities underlying our repo and reverse repo transactions are bonds with high liquidity issued by governments or government agencies. The majority of our repo and reverse repo transactions have maturities ranging from one to fourteen days from the date of origination.

140 BUSINESS

Investment Portfolio Management

Prior to 1994, we were designated by the PRC Government to manage the PRC's foreign currency reserves and as a result, we have gained signiÑcant experience in foreign exchange investment portfolio management. Our investment portfolio consists principally of debt securities and derivatives. We generally invest in short-term, less than three years, to medium-term, between three and ten years, debt securities. Our Renminbi-denominated investment securities primarily include PRC Government bonds, Ñnance bonds issued by PRC policy banks, bills issued by the PBOC and bonds issued by PRC commercial banks. Our foreign currency-denominated investment securities primarily include foreign currency-denominated bonds issued by foreign governments, government agencies and supranational Ñnancial organizations. We also invest our foreign currency in corporate bonds, mortgage-backed securities and asset-backed securities. Our foreign currency- denominated securities generally have a Moody's credit rating of A or above. We also conduct forward, option, swap and other derivatives transactions to hedge our risk exposure or to meet our investment target. As of December 31, 2005, we manage the largest foreign exchange investment portfolio among PRC commercial banks according to data published by the PBOC. Our investment portfolio is managed according to the investment guidelines, which are reviewed and updated on an annual basis. See ""Risk Management Ì Market Risk Management''. These guidelines set forth the requirements with respect to the portfolio size, product mix, maturities, industry and country concentration and credit rating of our investment portfolio. We generally employ a top-down approach in managing our investment portfolio, pursuant to which we determine the asset allocation of the investment portfolio based on the assessment of economic conditions of relevant countries and growth prospects of relevant industries. Our portfolio managers then invest in individual securities on a relative value basis. From time to time, we analyze the market risk associated with our investment portfolio and adjust our investment strategy according to the prevailing investment environment and market conditions.

Foreign Exchange, Bullion and Derivatives Trading We are a leading foreign exchange bank in the PRC and were named as the ""Best Domestic Provider of Foreign Exchange Services in China'' by AsiaMoney in 2005. We conduct spot and forward foreign exchange trading, and enter into foreign currency swaps, foreign currency- denominated bond options, interest rate swaps and other derivatives transactions. We market retail foreign exchange services primarily through our extensive branch network. We have set up diÅerent teams to engage in proprietary trading as well as price quotation services. We provide 24-hour dealing and order execution services to our domestic branches as well as other banking institutions in the PRC. In July 2005, we upgraded our quotation system to enable us to quote foreign currency/Renminbi prices multiple times a day based on the inter-bank market changes for the regulated sale and purchase of foreign currencies against Renminbi between retail and corporate customers and PRC commercial banks. As a result, we can more eÅectively manage the exchange rate risk in this business. According to SAFE, we had the largest market shares in sales and purchases of foreign currencies against the Renminbi in the PRC in 2004 and 2005. Our trading systems are connected with our middle and back oÇce systems and enable real-time risk monitoring. The monitoring of risk exposure resulting from derivatives transactions is an integral part of our overall risk management framework, and is evaluated on a daily basis. For description of our risk management framework, see ""Risk Management''. Bullion trading is also one of our key treasury operation activities. As of December 31, 2005, we were the leader in bullion trading in the PRC with a market share of approximately 17.7% on the Shanghai Gold Exchange, the only gold exchange in the PRC. Our bullion trading volume has

141 BUSINESS experienced consistent growth in recent years. The total volume of our bullion trading in the Shanghai Gold Exchange increased from 100.5 tons in 2003 to 131.8 tons in 2004 and to 160.2 tons in 2005.

Debt Securities Issuance and Underwriting We obtain Ñnancing for our bank and our corporate customers by issuing Renminbi and foreign currency-denominated bonds and arranging syndicated loans in the international and domestic markets. We issued our Ñrst overseas bond in 1984. Since then, we have made a total of 27 bond oÅerings in the international market. Among these oÅerings, the US$300 million Öoating rate notes we issued in April 1997 was awarded as ""Asian FRN of the Year'' by International Financial Review. In July 2004, we issued RMB14.07 billion subordinated bonds, which was the Ñrst Renminbi- denominated subordinated bond issued by a PRC commercial bank. In addition to obtaining Ñnancing for ourselves, we are one of the most active PRC banks arranging U.S. Dollar- denominated syndicated loans and bonds for our customers in the domestic market. We also actively engage in Renminbi-denominated bond and bill underwriting in the inter-bank market. We successfully arranged the Ñrst Renminbi-denominated short-term Ñnance bill issuance in the inter- bank market in 2005.

Treasury Transactions on Behalf of Customers In addition to conducting treasury transactions on our proprietary account, we trade bonds and bullion, and conduct spot and forward foreign exchange trading, interest rate swaps, currency swaps and options, and other Ñnancial derivatives transactions on behalf of our corporate customers. We engage in treasury transactions on behalf of our corporate customers for both liability hedging and asset management purposes. In conducting these transactions, we generally conduct back-to-back transactions to hedge our risk exposure.

Structuring of Asset Management Products Our treasury operations engage in the research and development of new asset management products for both our corporate banking and personal banking customers. For example, one of our corporate banking products is ""Season Forward'', a series of forward contracts that oÅers a Ñxed notional coupon on investment with Ñxed terms. This product enables our corporate customers to monitor changes in interest rates to identify the appropriate opportunity to trade or execute the forward contracts before expiration of the term. One of our personal banking customer products is ""Huijubao'', a series of wealth management products whose yield is linked to, among others, LIBOR, exchange rates or commodities prices. ""Huijubao'' was awarded as the ""Best Wealth Management Product'' in 2004 and 2005 by Hexun Information Technology Ltd., an online Ñnancial information provider in the PRC. We have devoted more eÅorts in developing and structuring Renminbi-denominated asset management products. We have performed research on the Renminbi market, the Renminbi bond yield curve, and pricing of Renminbi derivative products. Our research has facilitated the development and evaluation of new products. On June 3, 2002, we started to provide ""BOC Bond Index'', which was the Ñrst index product reÖecting the movements of the PRC inter-bank bond market. Our wealth management product linked to Renminbi-denominated bonds was awarded as the ""Best Wealth Management Product of 2005'' by Sina.com. In September 2005, we conducted the Ñrst Renminbi-foreign exchange swap among the PRC commercial banks. In addition, we conducted our Ñrst Renminbi-denominated interest rate swap in early 2006. We currently provide pricing services for Renminbi-foreign exchange swaps and Renminbi-denominated interest rate swaps for our customers.

142 BUSINESS

Customer Base and Marketing In addition to conducting treasury operations on our own behalf, we design and market our treasury products and services to corporate banking and personal banking customers. We have a marketing group within our treasury operations responsible for overall marketing strategies, promotional activities, customer origination and customer relationship management in connection with our treasury products and services. The marketing group of our treasury operations is responsible for serving our existing network of customers and developing new client relationships. Their marketing eÅorts are focused on strengthening existing customer relationships, developing new client contacts and generating opportunities for cross-selling our corporate banking products.

Commercial Banking Business in Hong Kong and Macau Hong Kong We conduct our commercial banking business in Hong Kong through our subsidiary, BOCHK. BOCHK oÅers a wide range of Ñnancial products and services to corporate and retail customers and is our most signiÑcant overseas operation in terms of assets and proÑt contributions. As of December 31, 2005, BOCHK had an approximately 13.6% market share among authorized institutions in Hong Kong in terms of total outstanding loans and an approximately 15.7% market share among authorized institutions in Hong Kong in terms of total deposits, in each case based on data released by the HKMA. BOCHK is one of the three banks authorized to issue bank notes in Hong Kong and its direct holding company, BOCHK Holdings, has been listed on the Hong Kong Stock Exchange since July 2002.

Business Operations of BOCHK BOCHK has a strong corporate banking business with an approximately 12.4% market share in Hong Kong in terms of total outstanding corporate loans and advances as of December 31, 2005 based on data published by the HKMA. In addition, BOCHK was ranked as the largest arranger in the Hong Kong and Macau syndicated loan market in 2005 by Basis Point. BOCHK oÅers to its corporate customers a variety of corporate banking products and services, including loan products, deposit products and fee-based services. BOCHK also provides special Ñnancial products and services that are tailored to the needs of small and medium-sized enterprise corporate customers. In February 2004, BOCHK launched Renminbi clearing services after its appointment by the PBOC as the only clearing bank for Renminbi business in Hong Kong. As of December 31, 2005, BOCHK's corporate banking business accounted for approximately 25.0% of BOCHK's total operating income. BOCHK is one of the leaders in personal banking in Hong Kong and oÅers a broad range of personal banking products and services, including deposits, mortgage loans, remittances, credit cards, investment product services and personal wealth management services. As of December 31, 2005, BOCHK had an approximately 18.3% market share in Hong Kong in terms of total outstanding mortgage loans based on data released by the HKMA. In addition to maintaining its leading positions in personal deposits and mortgage loans, BOCHK is increasingly focused on developing its wealth management and consumer lending. As of December 31, 2005, BOCHK's personal banking business accounted for approximately 49.3% of its total operating income. BOCHK's treasury operations engage in inter-bank money market, capital market, foreign exchange, derivatives and precious metals trading transactions. BOCHK is one of the most active participants in the inter-bank money market in Hong Kong. BOCHK provides treasury products and services to its customers and engages in treasury transactions on its proprietary account. As of December 31, 2005, BOCHK's treasury operations accounted for approximately 19.4% of BOCHK's total operating income.

143 BUSINESS

BOCHK delivers its products and services through a combination of its divisions, branch network and ATMs and other delivery channels such as commercial centers in Hong Kong, telephone banking and Internet banking. As of December 31, 2005, BOCHK had an aggregate of over 280 branches and more than 450 ATMs in Hong Kong, as well as 14 branches and sub- branches in the PRC to meet the cross-border banking needs of their customers. Customers can access their accounts, perform various transactions and obtain Ñnancial information through BOCHK's Internet banking service. BOCHK set up an online corporate banking services system that oÅers an Internet-based channel to corporate customers in 2004. A Credit WorkÖow Management System was also launched by BOCHK in 2004, which facilitates quick and eÇcient credit approval and management for personal banking.

BOCHK also provides banking products and services through its two subsidiaries in Hong Kong which are also full licensed banks: Nanyang Commercial Bank Limited (""Nanyang'') and Chiyu Banking Corporation Limited (""Chiyu''). Nanyang is a wholly-owned subsidiary of BOCHK. BOCHK owns approximately 70% of Chiyu, with Chip Bee Private Institution ( ) and Chip Bee Foundation ( ) owning approximately 14% and 11% of Chiyu's shares respectively. Both Nanyang and Chiyu have their own board of directors and management. Nanyang and Chiyu's business complements that of BOCHK.

Business Initiatives of BOCHK

BOCHK seeks to strengthen and grow its business in Hong Kong and the Chinese Mainland.

In Hong Kong, BOCHK intends to expand and diversify its income base, raise its net interest margin by developing and increasing the sale of high yield products and optimize its income structure by growing non-interest income.

On corporate banking, BOCHK intends to maintain the growth of its loan portfolio and expand cross-selling of its trade and treasury products to large corporations. Based on the capital strength and international network of both banks, BOCHK and our bank will cooperate in large Ñnancing projects. BOCHK will continue to develop small and medium-sized enterprise customer relationship and marketing capabilities, customize its services and products for both large and small and medium-sized enterprises and cross-sell trade Ñnance and other high margin products to small and medium-sized enterprise customers. BOCHK will also enhance its treasury business through expanding its product oÅerings and strengthening its treasury product manufacturing capabilities.

BOCHK will leverage its product innovation, customization, customer relationship and cross- selling capabilities to maintain its growth of wealth management business. It seeks to maintain its leading position in the residential mortgage business by developing products that are competitive and Öexible. It will expand its wealth management platform by adding sales team, upgrading network infrastructure and developing new in-house wealth management products. BOCHK also plans to expand its consumer lending and personal banking business and explore using structured Ñnancial instruments to expand this business without increasing capital risk.

As the clearing bank for Renminbi services in Hong Kong, BOCHK expects that its expertise and experience in Renminbi services will give it competitive advantages for the further extension of Renminbi banking business.

BOCHK considers the Chinese Mainland market as one of its major business focuses. It will leverage its branch network in the Chinese Mainland and its relationship with BOC. It intends to focus on the Yangtze and Pearl River Delta regions. BOCHK will also selectively exploit regional opportunities outside Hong Kong and the Chinese Mainland in the future.

144 BUSINESS

BOCHK intends to expand its business lines through organic growth and merger and acquisition to broaden product development capabilities in selective areas such as retail brokerage, asset management and life insurance.

Delineation of Business and Complementary Operations between our Bank and BOCHK

As one of Hong Kong's leading banks, BOCHK will continue to consolidate its strength in the Hong Kong market and leverage its strong base and platform to grow businesses both in the Chinese Mainland and elsewhere. In light of the substantial business opportunities in the Chinese Mainland's large and growing economy, we believe BOCHK's business strategy is complementary to our bank's business as we together seek to increase our combined market share in the Chinese Mainland banking market.

As BOCHK has the status of a foreign bank in the Chinese Mainland, our bank is able to take advantage of the latitude aÅorded by the PRC laws and regulations to both domestic and foreign banks in terms of products and services. In addition, BOCHK's extensive network and branches in Hong Kong enable our bank to better serve our Chinese Mainland-based customers who have banking needs in Hong Kong. On the other hand, our network of over 11,000 branches in the Chinese Mainland also provides BOCHK's Hong Kong-based customers access to a banking network that may serve their needs. BOCHK and our bank also cooperate in providing products and services such as loans, cash management, wealth management and Renminbi business in both the Chinese Mainland and Hong Kong.

Notwithstanding the complementary business operations that our bank and BOCHK have, there is also delineation in our respective banking business. BOCHK currently has a network of 14 branches in the Chinese Mainland mainly concentrated in the Yangtze and Pearl River Delta regions and certain major coastal cities. As a foreign bank in the PRC, BOCHK's Chinese Mainland branches have restricted scope of business. Any expansion of BOCHK branches and their location on the Chinese Mainland continues to be subject to regulatory approvals. Please refer to ""Supervision and Regulation Ì Regulation and Supervision of Our Overseas Operations'' for the restrictions imposed on foreign banks by the PRC government. Although the geographical restrictions and restrictions on business scope on foreign banks operating in the PRC will be removed in December 2006 pursuant to the PRC Government's commitment to the WTO, under the current legal framework, certain capital and Ñnancial requirements which are pre-requisites to setting up a branch will continue to apply to the licensing of foreign bank branches after 2006.

Recognizing that its competitive strength lies in cross-border banking business services, BOCHK's branches on the Chinese Mainland will continue to emphasise serving the cross-border needs of its Hong Kong customers as well as provide cross-border services to Chinese Mainland customers to meet its business needs in Hong Kong. BOCHK also intends to develop business in the Chinese Mainland with its strength in product and service capabilities that, as a whole, would complement our bank and enhance our combined market position in Chinese Mainland.

Given the cooperative nature of the business relationship and the clear delineation of business between our bank and BOCHK, and as both our bank and BOCHK are under the supervision of a number of regulators, we are of the view that minority shareholders of our bank and BOCHK are adequately protected when new business opportunities arise in the future. In addition, our bank has also provided a letter, dated January 18, 2002, to the Hong Kong Monetary Authority to inform the Hong Kong Monetary Authority that it is our bank's policy to provide BOCHK with support and assistance as may be required to ensure that BOCHK maintains capital and liquidity levels suÇcient to meet its obligations in conformity with standards or prudence generally accepted for its Ñeld of

145 BUSINESS business. Please refer to ""Business Ì Our Relationship with BOCHK Holdings Ì Status of BOCHK Holdings Following our Listing''.

Macau We conduct our business in Macau through our Macau branch, which had 24 sub-branches with over 1,000 employees as of December 31, 2005. Our Macau branch provides commercial banking services to corporate and retail customers, including loans, deposits and fee-based products and services. Our Macau branch was the largest commercial bank in Macau with a market share of approximately 30% in terms of total assets as of June 30, 2005 based on data published by the Macau government. As of December 31, 2005, our Macau branch had total assets of HK$52,711 million, total loans and advances to customers of HK$14,300 million, total deposits of HK$43,671 million, and proÑt before tax of HK$1,196 million. Our Macau branch is one of the only two banks authorized to issue bank notes in Macau and one of the agents for the public cashier of the Macau government. We are also the only bank providing Renminbi clearing and Hong Kong dollar bill clearing services to banks in Macau. Our Macau branch has been the bank chairing the Macau Association of Banks since 2000. We also conduct commercial banking business in Macau through our 50.3% owned subsidiary, Tai Fung Bank. Tai Fung Bank had 21 branches and 544 employees as of December 31, 2005. As of the same date, Tai Fung Bank had total assets of HK$27,438 million, total loans and advances to customers of HK$8,939 million and total deposits of HK$24,851 million.

Commercial Banking Business in Other Overseas Regions In addition to our business operations in the Chinese Mainland, Hong Kong and Macau, we have the most extensive overseas branch network among PRC commercial banks, with operations in Europe, America, Africa and the Asia-PaciÑc region. As of December 31, 2005, we maintained correspondent relationships with over 1,400 foreign banks that collectively had over 46,900 branches. Our other overseas operations had RMB1,925 million operating proÑt in 2005. We provide a broad range of commercial banking services to our corporate and personal banking customers in overseas regions including loans, deposits and fee-based products and services. Our branches in New York, Frankfurt and Tokyo are our main clearing channels for U.S. dollar, Euro and Japanese yen transactions, respectively. These branches and our Singapore branch are all level one clearing banks that can directly clear transactions through the respective local banking systems. Our New York branch ranked 11th in terms of clearing volume in U.S. dollars in the Clearing House Interbank Payments System in 2004 according to the New York Clearing House. Our overseas operations have a long history of providing trade-related Ñnance and services. In light of the steady growth of foreign trade in the PRC, we believe that our overseas trade related services have signiÑcant growth potential. Our overseas branches in London, New York and Luxembourg also participate in the global syndicated loan market. Furthermore, we conduct our treasury operations on a 24-hour and global basis through Ñve centers in Beijing, Shanghai, Hong Kong, New York and London. In addition, as of December 31, 2005, eight of our overseas branches oÅered Internet banking services to our customers.

INVESTMENT BANKING We started to engage in investment banking business in 1983. We currently conduct our investment banking business through BOCI Group. BOCI Group provides a broad range of investment banking services for a diverse group of domestic and international companies, Ñnancial

146 BUSINESS institutions, government agencies and individuals through its subsidiaries and branches in Hong Kong, Beijing, Shanghai, London and Singapore. BOCI Group engages in underwriting and Ñnancial advisory, sales and trading of securities, investment research, asset management and private equity investments. BOCI Group's PRC operations are conducted through BOCI China. BOCI China has 20 branches in 17 major cities in the PRC and has been an active participant in A Share initial public oÅerings and has acted as advisor in a number of mergers and acquisitions. It is also an active underwriter of PRC sovereign bond as well as PRC corporate and Ñnancial institution bonds. According to the MOF, BOCI China ranked second in 2004 and Ñrst in 2005 among all brokerage Ñrms in the PRC in terms of underwriting volume of PRC sovereign bonds. We believe our extensive corporate customer base provides a platform for BOCI China to further expand its business in the PRC.

Underwriting and Financial Advisory BOCI Group is engaged in the underwriting of equity securities oÅerings in Hong Kong and the PRC. As of December 31, 2004, BOCI Group acted as the global coordinator, sponsor or lead underwriter in over 27 global equity oÅerings and participated in over 150 initial public oÅerings, including the initial public oÅerings of some major companies in the PRC, raising an aggregate of over HK$400 billion. BOCI Group has also acted as a lead underwriter in a number of B Share and, through BOCI China, A Share public oÅerings. BOCI Group also secures a strong position in the underwriting of debt securities oÅering in Hong Kong and the PRC. In July 2004, BOCI Group acted as a joint global coordinator, lead manager and bookrunner of the Hong Kong Government's inaugural HK$20 billion sovereign issue of global Ñxed rate notes. This transaction was awarded the ""Best Quasi-Sovereign/Sovereign Bond Deal of 2004'' by AsiaMoney. BOCI Group, through BOCI China, is an active underwriter of PRC corporate, sovereign and Ñnancial institution bonds. BOCI Group provides Ñnancial advisory services with respect to mergers and acquisitions, restructurings and private placements of equity to corporations, Ñnancial institutions and government agencies in Hong Kong and the PRC. BOCI Group seeks to leverage its investment banking expertise and extensive reach in the PRC market to further expand its Ñnancial advisory business in the PRC. BOCI Group has advised on high proÑle transactions in Hong Kong such as the acquisition of Cable & Wireless HKT Limited, a 54%-owned subsidiary of Cable & Wireless plc, by a subsidiary of PaciÑc Century Cyberworks Limited and BOCHK's restructuring prior to its initial public oÅering.

Sales and Trading of Securities BOCI Group is one of the few investment banks owned by PRC entities that have a global institutional client base to support its sales and trading business. BOCI Group has an active business in sales and trading of equity derivatives and Ñxed income products. BOCI Group is active in the development of structured products in Hong Kong and provides a broad range of interest rate, currency, credit and equity structured products for corporations and institutional and retail investors. BOCHK acts as the distribution agent for BOCI Group's securities products, providing BOCI Group with access to BOCHK's extensive network of retail investors to facilitate sale and distribution of BOCI Group's securities products. In addition, BOCI Group has secured a leading position in Hong Kong and PRC brokerage markets. BOCI Group ranked the top brokerage house in Hong Kong in terms of stock transaction volume by 2005 Asset Equities Benchmark Research. BOCI Group was also recognized as the ""Best

147 BUSINESS

Local Brokerage in China'' in the 1990-2004 AsiaMoney Polls. BOCI Group has a strong brokerage business in trading of Hong Kong shares, futures and index options. BOCI Group cooperates with BOCHK by providing brokerage services with respect to order execution to BOCHK's customers, which secures a strong backing for BOCI Group's brokerage business. BOCI Group has also enhanced its relationships with brokerage houses in Hong Kong and provides integrated brokerage services for its retail customers via on-line and oÅ-line systems.

Investment Research BOCI Group has research teams located in Hong Kong, Beijing and Shanghai, covering important industry sectors and over 200 companies in the Chinese Mainland and Hong Kong. BOCI Group's research teams ranked third in the 2004 SCMP/StarMine Analyst Awards in terms of awards received by individual team members, and second in the 2005 SCMP/StarMine Hong Kong Broker Awards in terms of stock recommendations in H-shares (Hang Seng China Enterprise Index).

Asset Management BOCI Group oÅers a broad range of asset management services, including Hong Kong Mandatory Provident Fund Schemes (""MPF''), retirement schemes, retail unit trusts and institutional mandates through BOCI-Prudential. BOCI-Prudential was formed by BOCI's wholly- owned subsidiary and Prudential Corporation Holdings Limited. According to MPF Watch Annual Report 2004 published by Watson Wyatt, BOCI-Prudential is one of the top Ñve MPF asset management companies in Hong Kong in terms of total assets under management as of December 31, 2004. As of December 31, 2005, the total assets, including MPF, under the management of BOCI-Prudential were approximately HK$25,395 million. In addition, BOC International Investment Managers, which was established in the PRC jointly by BOCI, BOCI China and Merrill Lynch Investment Managers Limited in 2004, launched its Ñrst open-ended securities investment fund in 2004 which is listed on the Shenzhen Stock Exchange, and its second open-ended securities investment fund in 2005 which is unlisted and invests in the money market in the PRC.

Private Equity BOCI Group launched its private equity business in August 2004 to tap into the growing private equity market in the PRC and Asia. With our background and network in the PRC, Ñnancial capabilities and industry knowledge, deal structure and transaction experience in investment banking, we believe that BOCI Group is well positioned to assist foreign investors entering the China market. BOCI Group actively develops its equity investment business and is in the process of establishing a number of private equity funds in which BOCI Group will act as an independent manager and advisor.

INSURANCE We conduct our insurance business through our wholly-owned subsidiary, BOCG Insurance, which was established in Hong Kong in July 1992. BOCG Insurance conducts business through six branches and two subsidiaries, Bank of China Insurance Co., Ltd. and BOCG Life. BOCG Insurance provides a broad range of general insurance services, including accident and health, automobile, goods in transit, property damage, general liability and other insurance products. As one of BOCG Insurance's initiatives to develop its insurance business in the PRC, the Shenzhen branch of BOCG Insurance completed its restructuring and was incorporated as a wholly-

148 BUSINESS owned subsidiary of BOCG Insurance, Bank of China Insurance Co., Ltd., in 2005. In December 2005, Bank of China Insurance Co., Ltd. was approved by the CIRC to open its Ñrst domestic branch in Jiangsu province. In 2004, BOCG Insurance had consolidated gross written premiums of HK$3.8 billion and consolidated pre-tax proÑt of HK$265.5 million. As of December 31, 2005, BOCG Insurance's consolidated total assets were HK$13.0 billion. BOCG Insurance ranked as the largest general insurance company in Hong Kong in terms of gross written premiums in 2004, and the net written premiums for its property and casualty insurance business ranked Ñrst in Hong Kong for seven consecutive years from 1998 to 2004 according to data published by the OÇce of the Commissioner of Insurance of Hong Kong. BOCG Insurance plans to expand its business overseas and expand its network into major cities, through Bank of China Insurance Co., Ltd., in the PRC where our bank has a presence. BOCG Life oÅers long-term life insurance products, including traditional and linked individual life insurance and group life insurance products. BOCG Life provides its insurance products through BOCHK's distribution network. BOCG Life oÅers life insurance products as wealth management products to BOCHK's retail customers. As of December 31, 2005, BOCG Life had gross written premiums of HK$3,639 million. In April 2006, BOCG Insurance conditionally agreed to sell 51% of its equity interests in BOCG Life to BOCHK Holdings at the purchase price of HK$900 million, payable in cash. The purchase price was negotiated on an arms-length basis, on normal commercial terms, having regard to the appraised value of BOCG Life as of December 31, 2005. The sale is subject to the satisfaction of a number of conditions, including the approval of the independent shareholders of BOCHK Holdings and the Insurance Authority of Hong Kong. After the completion of the transaction, BOCG Insurance will continue to own 49% of BOCG Life and BOCHK Holdings will own 51% of BOCG Life. The transaction will result in BOCG Life becoming a part of the BOCHK Holdings group, and will create more synergy and enhance cooperation between our insurance and banking businesses in Hong Kong. Furthermore, the transaction will enable BOCHK Holdings to develop insurance related products more eÅectively and contribute to BOCHK Holdings' goal of becoming a comprehensive Ñnancial services group with full product manufacturing capabilities, including insurance. The new structure will also enable BOCG Life to more eÅectively sell its insurance products through BOCHK's sales and marketing network by leveraging BOCHK's customer base.

OTHER BUSINESS We engage in other businesses, mainly direct investments through BOCG Investment, our wholly-owned subsidiary, which was incorporated in Hong Kong in December 1984. As an investment management company, BOCG Investment focuses on strategic investments and investments in distressed assets. BOCG Investment's strategic investments include equity investments in companies before their initial public oÅerings and investments in listed shares which BOCG Investment believes have long-term growth potential. BOCG Investment also invests in distressed assets, including the purchase and disposal of non-performing debts and equities. Leveraging its relationship with our bank, BOCG Investment has built up a network of domestic and international customers and participated in a number of infrastructure investment projects focusing on the energy, transportation, telecommunication, media and real estate industries. As of December 31, 2005, BOCG Investment had over 100 investment projects and the aggregate carrying value of its 20 largest outstanding investments, before consolidating adjustments, was HK$9,625 million.

149 BUSINESS

PRODUCT PRICING

Prices for certain commercial banking products and services are subject to regulation in the PRC. For example, under current PRC regulations, our Renminbi-denominated loans are generally subject to minimum, but not maximum interest rate requirements based on PBOC benchmark rates. Conversely, interest rates we oÅer on our Renminbi-denominated deposits generally may not exceed PBOC benchmark rates. See ""Supervision and Regulation Ì Prudent Operating Requirements Ì Interest Rates on Loans and Deposits''. The prices for products and services we oÅer overseas through our global network are also subject to the relevant local rules and regulations in various jurisdictions.

Subject to these applicable rules and regulations and to the extent we are able to, we set prices based upon our risk and return assessment and business judgment. When determining our pricing, we take into consideration factors including, among others, the risk proÑle, relevant clients' contribution to our business, cost of providing the products or services as well as the expected risk adjusted return. In addition, we consider general market conditions and prices for similar products and services oÅered by our competitors.

DISTRIBUTION NETWORK

We have established a broad distribution network including domestic and overseas branches and outlets as well as electronic banking services channels. We have the most extensive overseas branch and subsidiary network among PRC commercial banks. We intend to enhance and integrate both our traditional and electronic-banking services channels by:

¬ leveraging our electronic banking channels, such as telephone banking and Internet banking to provide convenient access to our customers and to attract potential customers;

¬ focusing on the development of our distribution in the more economically developed areas in the PRC;

¬ focusing on increasing the proÑtability and eÇciency of outlets rather than the absolute number of outlets; and

¬ improving coordination among diÅerent distribution channels.

Domestic Branch Network

As of December 31, 2005, we had 32 tier one branches, 288 tier two branches and 10,698 outlets in the PRC. We will continue to focus our resources on enhancing and expanding our branch network in the more economically developed areas, such as the Yangtze River Delta, the Bohai Rim Economic Zone and the Pearl River Delta, which accounted for approximately 11%, 22% and 3%, respectively, of the entire population of the PRC as of December 31, 2004 according to China Statistical Yearbook. Based on the same source, as of December 31, 2004, the GDPs of the Yangtze River Delta, the Bohai Rim Economic Zone and the Pearl River Delta accounted for approximately 32%, 25% and 12%, respectively, of the GDP of the PRC.

150 BUSINESS

The following table sets forth, as of the dates indicated, the number of domestic branches and outlets in our network by geographic region.

As of December 31, 2003 2004 2005 Branches Branches Branches and % of and % of and % of outlets total outlets total outlets total Yangtze River Delta ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,824 15.7% 1,832 16.2% 1,840 16.7% Pearl River Delta ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,556 13.4 1,536 13.6 1,512 13.7 Bohai Rim ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,895 16.3 1,788 15.8 1,773 16.1 Central China(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,920 25.2 2,785 24.6 2,680 24.3 Western China(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,288 19.7 2,281 20.2 2,222 20.2 Northeastern China(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,125 9.7 1,084 9.6 991 9.0 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,608 100.0% 11,306 100.0% 11,018 100.0%

(1) Includes Shanxi Province, Henan Province, Hubei Province, Anhui Province, Jiangxi Province, Hunan Province and Hainan Province. (2) Includes Chongqing Municipality, Sichuan Province, Guizhou Province, Yunnan Province, Shaanxi Province, Gansu Province, Ningxia Autonomous Region, Qinghai Province, Inner Mongolia Autonomous Region, Tibet Autonomous Region and Xinjiang Autonomous Region. (3) Includes Heilongjiang Province, Jilin Province and Liaoning Province.

Domestic Electronic-Banking Services Channels Our electronic-banking services channels include automated service machines, self-service centers, telephone banking and call centers and Internet banking. The accumulated transaction value conducted through our telephone and Internet banking services channels was approximately RMB4,218 billion as of December 31, 2005.

Automated Service Machines and Self-Service Banking Centers Our automated service machines include ATMs, CDMs, CRSs and automated service terminals. As of December 31, 2005, we had over 580 self-service centers and 11,600 automated service machines throughout the PRC. We have automated service machines located at a majority of our branches and outlets, as well as in numerous shopping centers, oÇce buildings and residential areas in the PRC. In 2005, 264 million cash withdrawal and deposit transactions were conducted through our self-service banking network with a total transaction value of RMB177.5 billion, representing increases of 23.9% and 25.5%, respectively, from 2004.

Telephone Banking and Call Center Our telephone banking services are available to all our domestic personal banking customers, and can perform balance and transaction inquiries, inter-account fund transfers, bill payment, credit card transaction inquiries and trading services such as foreign exchange and securities trading. Our telephone banking system also permits fund transfers between securities companies and our customers. Our branches modify and adjust the telephone banking services in their respective regions based on speciÑc local market demand. Our call center services currently cover 19 provinces. We may answer customer inquiries over the phone, provide advisory services and receive customer feedback and suggestions. We have also initiated the program to make outbound customer service calls to promote our products and

151 BUSINESS services. We are in the process of establishing a nationwide call center system. Our new call center system is designed to reÖect our customer-oriented business model, increase the level of integration among our diÅerent distribution channels and improve the consistency of our service.

Internet Banking Services Our Internet banking service oÅers a number of cash management solutions to our corporate customers. As of December 31, 2005, all of our domestic branches and eight of our overseas branches were able to provide Internet banking services. We also oÅer Internet banking services to domestic retail customers in regions covered by all of our tier one branches except for Tibet. In addition to various payment and other account management services, our Internet banking oÅers trading services for foreign exchange, stocks, government bonds, open-end mutual funds and other investment products. Our branches customize their Internet banking services in order to meet speciÑc local market demand in their respective regions. We are in the process of developing a new Internet banking platform that will allow us to provide additional services and unify our services to all of our corporate and retail customers. The new platform has completed its initial testing in Beijing, Shanghai, Tianjin, Jiangsu, Zhejiang, Fujian and Liaoning.

Overseas Branch Network We were the Ñrst PRC commercial bank to set up an overseas branch when we established our London operations in 1929. As of December 31, 2005, we had over 600 branches, subsidiaries and representative oÇces, including in Australia, Bahrain, Brazil, Canada, Cayman Islands, France, Germany, Hungary, Indonesia, Italy, Japan, Kazakhstan, Luxembourg, Macau, Hong Kong, Malaysia, Panama, the Philippines, Russia, Singapore, South Africa, South Korea, Thailand, the United Kingdom, the United States, Vietnam and Zambia. Our overseas operations in certain countries also utilize other distribution channels, including ATMs, telephone banking and Internet banking.

INFORMATION TECHNOLOGY Our information technology system provides critical support to our business operations, including customer services, transaction processing, risk management and Ñnancial management. Our information technology governance structure is designed to enhance our overall information technology management. Our governance structure focuses on establishing a cost- eÅective and integrated management system, as well as improving the supervision and guidance in the process of building our information technology infrastructure. As of December 31, 2005, we had 4,052 staÅ in information technology-related positions. Our information technology governance structure consists of the business development committee, information technology department, information center, software center, testing center and our branches' information technology divisions. Within the framework of our bank's overall information technology strategy established by our Board of Directors, our business development committee is responsible for reviewing and approving our information technology strategies, plans and projects initiated by our business departments and information technology department, overseeing and supervising the implementation of information technology plans and projects and providing guidance to our branches with respect to information technology development. In 2000, we initiated a data consolidation project and began consolidating our data and information processing systems into several data centers. As of December 31, 2005, we established Ñve data centers in the PRC and three overseas data centers in New York, London and Hong Kong.

152 BUSINESS

These data centers support various aspects of our business operations such as the processing of deposits, loans, remittance, clearing, settlement and treasury operations. We have also established a high-speed global network connecting our head oÇce, data centers and branches.

We have completed a number of key projects to improve our system capability, including the real-time payment system, credit card system, KONDOR° system and OPICS system. Our real-time payment system has an information exchange platform and a centralized clearing system, providing real-time payment and fund transfer services. Our credit card system has a centralized processing system with card issuance, acquiring, credit policy, fraud detection, customer service and other sub- systems. Our KONDOR° system and OPICS system have enabled us to conduct real-time monitoring of market risk and settle trading transactions in a timely manner, respectively. We are also in the process of establishing the consumer credit approval system which can process personal loan applications online and analyze customer records.

In 2004, we launched the ""information technology blueprint project''. Based on the advice of a leading international consulting Ñrm, we will implement a number of initiatives to improve the architecture, infrastructure, governance and security of our information technology system. We have commenced implementing this project, including developing a new core banking system and upgrading the management information system. The new core banking system is designed to improve our business processing capacity, enhance our risk management and support our product packaging and innovation. The new management information system will support management decisions, such as assets and liabilities management, risk management and proÑtability analysis. As part of the new management information system, we plan to launch phase 1 of our Ñnancial reporting management project in 2006 which is aimed to improve the collection, consolidation, sharing and processing of our Ñnancial data. In addition, we are planning to consolidate our domestic data centers into a single data center that will be backed by a disaster recovery center.

COMPETITION

The competitive landscape of the PRC commercial banking industry mainly consists of the Big Four, other joint stock commercial banks and urban commercial banks, as well as foreign-invested commercial banks. The Big Four generally have larger capital bases, wider distribution networks and more customers than other banks in the PRC. As of December 31, 2005, the aggregate banking assets of the Big Four and other joint stock commercial banks accounted for approximately 52.5% and 15.5%, respectively, of the total banking assets in the PRC based on data released by the CBRC. As of the same date, our domestic banking assets accounted for approximately 10.2% of the total banking assets in the PRC based on data released by the CBRC.

We face competition in all of our principal areas of business from commercial banks and other Ñnancial institutions in the PRC, especially from the other members of Big Four and other joint stock commercial banks. In recent years, the market shares of other joint stock commercial banks have been increasing signiÑcantly and they generally have less of a historical burden of non-performing loans and more Öexibility in their operations.

We compete for customer funds with other Ñnancial institutions, including the postal savings bureau and credit cooperatives. In addition, with the rapid development of the capital market and insurance industry in the PRC, the non-banking Ñnancial institutions such as securities Ñrms, fund management companies and insurance companies also impose competitive pressure on the PRC commercial banking industry.

In addition, as a result of the PRC joining the WTO in December 2001, the PRC Government is gradually phasing out restrictions on foreign participation in the PRC commercial banking market,

153 BUSINESS which we expect will result in the further opening of the PRC commercial banking market to foreign Ñnancial institutions and could increase the competition in the PRC commercial banking industry. We believe that the competition in the PRC commercial banking industry will continue to intensify in the future. The principal competitive factors in the commercial banking industry include, among others, capital strength, risk management and asset quality, reach of distribution network and customer base, brand recognition and scope, quality and pricing of products and services. In response to the competitive environment, we intend to pursue our strategies to diÅerentiate us from our competitors and to enable us to compete eÅectively in the PRC commercial banking industry.

EMPLOYEES A1A(28)(7) As of December 31, 2005, we had 209,265 employees, consisting of 190,828 domestic employees and 18,437 overseas employees. The following table sets forth the total number of domestic employees by function as of December 31, 2005: As of December 31, 2005 Number of employees % of total Corporate banking ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,416 6.5% Personal banking ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 95,190 49.9 Treasury operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,697 0.9 Finance and accounting ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,602 6.6 Risk management, internal audit, legal and complianceÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,649 4.0 Information technology ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,052 2.1 Management(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,722 7.7 Other(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 42,500 22.3 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 190,828 100.0%

(1) Includes management at and above the level of deputy general manager of tier two branches. (2) Includes operation, administration and other supporting staÅ. We believe that our sustainable growth depends on the capability and dedication of our employees and we recognize the importance of human resources for improving our business and results of operation. Over 72% of our employees have received junior college or college degrees or above, and over 40% of our management personnel at or above the level of assistant general manager in our head oÇce have overseas working experience. As part of our Joint Stock Reform Plan, we have structured our employee promotion system along three lines, including managerial, professional and operational lines and reformed our recruiting process by introducing quantitative examinations for applicants. We have also established a new compensation system that links compensation with employee contributions, competence and performance. We have developed a merit-based performance management system that is based on various performance criteria, including economic value-added and risk adjusted return on capital. A balanced score card system is used to evaluate employee performance and progress under this system. In 2005, we were named as having the ""Best Human Resource Strategy in Line with Business'' by China StaÅ. We have devoted attention and resource to recruiting and training our employees and have a training program for all levels of employees, including a senior executive leadership program, a core talent development program and a series of training programs for banking professionals. We have also established a risk management training system, chartered Ñnancial planner training programs

154 BUSINESS and an accreditation process that staÅ must pass for promotion to management positions. In order to ensure that proper training is available to our employees on a timely basis and to improve our training cost-eÇciency, we are developing a range of alternative on-the-job-training programs, such as our e-training program. In addition, we have undertaken measures to streamline and Öatten our management structure and to optimize resource allocation among our front, middle and back oÇces to improve eÇciency, reduce management costs and provide our customers with better services.

INTELLECTUAL PROPERTY A1A(28)(4) We conduct business under the ""Bank of China'', ""Bank of China Limited'', ""BOC'', "" '', "" '', "" '' and "" '' brand names and logos. Among them, ""BOC'', "" '' and "" '' are recognized by the Trademark Bureau of the SAIC as ""Well-Known Brand in the PRC''. We have registered 108 trademarks and 327 domain names in the PRC and overseas and are the registered owner of the domain name ""bank-of-china.com'', the name of our homepage website. Beginning on June 1, 2006, we will use a new domain name ""boc.cn''. The information contained in this website is not a part of this prospectus. Details of our intellectual property rights are set forth in ""Further Information about Our Business'' in Appendix IX to this prospectus.

OUR RELATIONSHIP WITH BOCHK HOLDINGS Management of BOCHK Holdings As of May 8, 2006, we owned 65.88% of the share capital of BOCHK Holdings, a company listed on the Hong Kong Stock Exchange under stock code ""2388''. BOCHK, through which we conduct our commercial banking business in Hong Kong, is a wholly-owned subsidiary of BOCHK Holdings. As at the Latest Practicable Date, the board of directors of BOCHK Holdings had 13 members, comprising a chairman, one executive director, Ñve non-executive directors and six independent non-executive directors. Mr. Xiao Gang serves as Chairman of both our bank and BOCHK Holdings. BOCHK Holdings' chief executive, Mr. He Guangbei, is neither a director of our bank nor a member of our senior management team. Prior to joining BOCHK Holdings, Mr. He Guangbei was a vice president of our bank. Four of BOCHK Holdings' non-executive directors are also members of our Board of Directors or senior management team. They are: Mr. Hua Qingshan, our vice-president and executive director; Mr. Li Zaohang, our vice-president and executive director; Mr. Zhou Zaiqun, our vice- president and Mdm. Zhang Yanling, our vice-president. The six independent non-executive directors of BOCHK Holdings and the remaining one non- executive director, Mr. Sun Changji, are neither directors nor senior management personnel of our bank. Prior to August 2004, Mr. Sun Changji was vice chairman and executive vice president of our bank. BOCHK Holdings' senior management team comprises seven members. They are: Mr. He Guangbei, vice-chairman and chief executive; Mr. Lam Yim Nam, deputy chief executive; Mr. Lee Raymond Wing Hung, Chief Financial OÇcer; Mr. Gao Yingxin, deputy chief executive; Mr. Cheung Alex Yau Shing, Chief Risk OÇcer; Mr. Liu Peter Yun Kwan, Chief Information OÇcer and Mr. Yeung Jason Chi Wai, Company Secretary. Save for Mr. Yeung Jason Chi Wai who is also our Company Secretary, none of BOCHK Holdings' senior management team is a member of our Board of Directors or senior management team.

155 BUSINESS

Although we had a controlling interest of 65.88% in the share capital of BOCHK Holdings as of May 8, 2006, a majority of the board of directors of BOCHK Holdings is independent of our bank in that they are neither our Board members nor our senior management team members. Accordingly, BOCHK Holdings is independently managed.

In circumstances where there are issues involving a conÖict of interest with our bank, those BOCHK Holdings' directors with involvement in our bank must disclose their interests to the board of BOCHK Holdings and a board meeting attended by independent non-executive directors who have no material interest in the matter shall be held to deliberate on the same.

Further, as required by the Hong Kong Listing Rules, BOCHK Holdings' Articles of Association provide that where any director or its associates has a material interest in a matter, he or she shall refrain from voting and shall not be counted in the quorum present at the meeting.

In addition, although BOCHK Holdings is not our connected person pursuant to the Hong Kong Listing Rules, as the controlling shareholder of BOCHK Holdings, we are BOCHK Holdings' connected person. Any transaction between BOCHK Holdings and us is subject to announcement, reporting and/or independent shareholder approval requirements pursuant to Chapter 14A of the Hong Kong Listing Rules on the part of BOCHK Holdings, with the exception of those transactions for which there are exemptions pursuant to the Hong Kong Listing Rules. Further, according to BOCHK Holdings' board mandate, a special committee, consisting of only independent non- executive directors, shall be authorised by the board to review, approve and monitor connected transactions, i.e., transactions with connected parties of our bank.

The following table sets forth the list of directors of our bank and BOCHK Holdings as of the Latest Practicable Date: Name of Directors Position held in BOC Position held in BOCHK Holdings XIAO GangÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Chairman Chairman LI Lihui ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Vice-Chairman and President None HUA Qingshan ÏÏÏÏÏÏÏÏÏÏÏÏÏ Vice-President and Executive Non-Executive Director Director LI Zaohang ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Vice-President and Executive Non-Executive Director Director ZHANG Jinghua ÏÏÏÏÏÏÏÏÏÏÏÏ Non-Executive Director None YU ErniuÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Non-Executive Director None ZHU Yan ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Non-Executive Director None ZHANG Xinze ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Non-Executive Director None HONG Zhihua ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Non-Executive Director None HUANG HaiboÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Non-Executive Director None Sir Frederick Anderson GOODWIN ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Non-Executive Director None SEAH Lim Huat PeterÏÏÏÏÏÏÏ Non-Executive Director(1) None Anthony Francis NEOH ÏÏÏÏÏ Independent Non-Executive None Director William Peter COOKE ÏÏÏÏÏÏÏ Independent Non-Executive None Director Patrick de SAINT-AIGNAN ÏÏ Independent Non-Executive None Director Alberto TOGNI ÏÏÏÏÏÏÏÏÏÏÏÏÏ Independent Non-Executive None Director(1)

(1) Subject to approval of the CBRC

156 BUSINESS

Name of Directors Position held in BOC Position held in BOCHK Holdings SUN Changji ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ None Vice-Chairman and Non- Executive Director (Ex-director of BOC) HE GuangbeiÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ None Vice-Chairman, Chief Executive and Executive Director (Ex-director of BOC) ZHOU Zaiqun ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Vice President Non-Executive Director (Ex- director of BOC) ZHANG Yanling ÏÏÏÏÏÏÏÏÏÏÏÏ Vice President Non-Executive Director (Ex- director of BOC) FUNG Victor Kwok KingÏÏÏÏÏ None Independent Non-Executive Director KOH Beng SengÏÏÏÏÏÏÏÏÏÏÏÏ None Independent Non-Executive Director SHAN Weijian ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ None Independent Non-Executive Director TUNG Chee Chen ÏÏÏÏÏÏÏÏÏÏ None Independent Non-Executive Director TUNG Wai-Hok Savio ÏÏÏÏÏÏÏ None Independent Non-Executive Director YANG Linda Tsao ÏÏÏÏÏÏÏÏÏÏ None Independent Non-Executive Director The following table sets out the list of senior management personnel of BOCHK Holdings as of the Latest Practicable Date:

Name of senior management Position held in BOC Position held in BOCHK Holdings HE Guangbei ÏÏÏÏÏÏÏÏÏÏÏ None Chief Executive LAM Yim Nam ÏÏÏÏÏÏÏÏÏÏ None Deputy Chief Executive LEE Raymond Wing Hung None Chief Financial OÇcer GAO YingxinÏÏÏÏÏÏÏÏÏÏÏÏ None Deputy Chief Executive CHEUNG Alex Yau Shing None Chief Risk OÇcer LIU Peter Yun KwanÏÏÏÏÏ None Chief Information OÇcer YEUNG Jason Chi Wai ÏÏ Board and Company Secretary Company Secretary

Status of BOCHK Holdings Following Our Listing Following our bank's listing, BOCHK Holdings will continue to be our Öagship company in Hong Kong through which we will continue to conduct commercial banking business. We also operate a branch in Hong Kong, known as BOC Markets. Although BOC Markets is fully licensed to conduct commercial banking activities, it serves primarily as our overseas treasury operations and its activities include internal liquidity and investment portfolio management and asset management for our institutional clients. At or around the time of BOCHK Holdings' listing on the Hong Kong Stock Exchange, we advised the HKMA that we have no intention to engage in commercial banking business that may result in direct competition with BOCHK Holdings. In addition, we informed the HKMA in a letter dated January 18, 2002 that it is our policy to provide BOCHK with support and assistance as may be required to ensure that BOCHK maintains capital and liquidity levels suÇcient to meet its obligations in conformity with standards of prudence generally accepted for its Ñeld of business.

157 BUSINESS

LEGAL AND REGULATORY PROCEEDINGS A1A(40) Legal Proceedings We are involved in legal proceedings in the ordinary course of our business. We are not involved in any litigation, arbitration or administrative proceedings that could reasonably be expected to, individually or in the aggregate, if adversely determined, have a material adverse eÅect on our Ñnancial condition and results of operations. See note VI.41 to Appendix I Ì ""Accountants' Report''. In connection with the incident relating to our Hesongjie sub-branch in Heilongjiang as described below under ""Special Events'', several corporate and institutional customers whose accounts were aÅected have taken, or have threatened to take, legal action against us relating to their deposits with us. The relevant legal proceedings have not been concluded and we cannot estimate the exact amount of damages to our bank. In 2004, we made an adequate provision based on our best estimate with respect to potential losses from such legal proceedings and other potential claims relating to this incident. In connection with the incident relating to our Simalu sub- branch in Heilongjiang, several branches of two PRC commercial banks have recently Ñled legal claims against our Simalu sub-branch and the endorsors of certain bank acceptance bills to recover these unpaid bank acceptance bills. These legal proceedings are still ongoing and we cannot predict their outcome at this point in time. See ""Ì Special Events Ì Heilongjiang Incident''.

Regulatory Proceedings We are subject to both routine and unscheduled inspections and examinations by PRC regulatory authorities, including the PBOC, the CBRC, the MOF, the SAIC, the SAFE and the CNAO and their respective local oÇces.

CBRC The CBRC conducts annual examinations of our bank's operations. As a result of the 2004 annual examination, the CBRC noted in its report that we have made signiÑcant progress in meeting the examination targets set by the CBRC in the Guidelines on Bank of China and China Construction Bank, which are further described under ""Supervision and Regulation Ì PRC Supervision and Regulation Ì Prudent Operating Requirements Ì Special Requirements Applicable to Us''. In addition, the CBRC also conducted on-site examinations in 2003, 2004 and 2005. Each of these on- site examinations was conducted with respect to two or more areas of the following aspects of our bank's operations: loan classiÑcation practice, non-credit assets, oÅ-balance sheet transactions, internal controls, commercial paper transactions, credit extensions to certain kinds of projects and personal loans. As a result of the 2005 examination, the CBRC reported that we have made signiÑcant progress in improving our corporate governance, internal controls, risk management, business operations and information technology system development. As a result of the examinations, the CBRC also identiÑed certain weaknesses in our business operations, internal audit, internal controls and risk management function, including weaknesses relating to the quality of newly issued loans in certain of our domestic branches, the independence of our internal audit department, weakness in maintaining the independence of our internal audit function, control over certain of our branches, management of risks relating to credit extended by certain of our branches, level of reliance on interest income, write-oÅs of certain non-performing loans, coordination between our domestic and overseas branches, certain loans made for purposes prohibited by applicable PRC rules and inaccuracy of our loan classiÑcation. For example, in the 2005 examination, the CBRC identiÑed that certain of our loan classiÑcation did not fully follow the Loan ClassiÑcation Principles, our loan documentation system required further improvement, certain

158 BUSINESS loans extended in connection with land and Ñxed-assets investment programs did not follow the land use planning and project approval procedures, and that certain personal loans were extended without suÇcient due diligence investigation. Following these examinations, the CBRC issued recommendations for measures intended, among other things, to prevent further incidents of non- compliance, improve the independence of our internal audit department, improve the independence of our internal audit function, improve our control and monitoring of our branches and strengthen our risk management and internal control system, and we have taken steps to implement these recommendations. Some of these steps include establishing special investigation teams at our head oÇce and tier one branches to review special events involving amounts meeting certain minimum thresholds, implementing improvements to our internal controls and risk management function, upgrading our information technology system, enhancing the authority and independence of our internal audit function, and integrating resources both at home and at our overseas branches in an eÅort to promote coordination between our domestic and overseas branches.

CNAO

In 2001, the CNAO conducted an audit of our asset quality and our PRC GAAP Ñnancial statements for the year ended December 31, 2000. The CNAO issued a report in March 2002 that identiÑed several issues relating to our business operations and accounting system, including accounting irregularities, write-oÅs in violation of applicable procedures, credit extensions to projects not in compliance with applicable PRC rules, purchase of real estate properties in violation of relevant laws and regulations, unauthorized use of proÑts of overseas branches, representative oÇces and subsidiaries, insuÇciency of our information technology system and untimely disposal of non-banking investments. We subsequently submitted a report to the CNAO setting forth the steps we had taken to correct these problems, including accounting adjustments and payment of relevant taxes, fees and Ñnes resulting from improper accounting. In particular, we have gradually centralized the accounting for capital expenditures and expenses, and strengthened our internal accounting policies and monitoring of the tier one branches' Ñnancial reports on a monthly basis. Subsequent to the report we submitted to the CNAO in response to its 2001 audit, we have consulted the CNAO from time to time, and CNAO has not raised any further issues in connection with the deÑciencies discovered in its 2001 audit or the Bank's remedial measures to address these deÑciencies. The CNAO has announced that, as part of its annual audit plan, it will conduct audits of some branches of certain PRC commercial banks, including our bank, in 2006.

Impact and Remedial Measures

To the extent any of the PRC regulatory authorities' Ñndings did suggest any such deÑciencies, we have implemented, or are in the process of implementing, necessary remedial measures, as described below and elsewhere in this prospectus. None of the Ñndings have resulted in any material adverse eÅect on our Ñnancial condition and results of operations.

We have undertaken a number of measures designed to prevent future violations of laws or regulations and to correct the deÑciencies identiÑed by the relevant PRC regulatory authorities, including those identiÑed in the above-mentioned examinations and inspections. For details of recent initiatives to reduce the occurrence of non-compliance and strengthen our internal controls, see ""Risk Management''. However, in some cases, these measures have not yet been fully or eÅectively implemented. See ""Risk Factors Ì Risk Relating to Our Business Ì We have implemented or are in the process of implementing improvements to our current risk management and internal control systems and practices, but our compliance with some of these improved systems and their eÅectiveness have not been fully tested. As a result, our business and prospects may be materially and adversely aÅected if our implementation of these systems proves to be

159 BUSINESS ineÅective'' and ""Ì We may encounter diÇculties in eÅectively implementing centralized management and supervision of our branches and subsidiaries and may not be able to timely detect or prevent fraud or other misconduct by our employees or third parties''. Our overseas branches, representative oÇces and subsidiaries are also subject to regulation by governmental authorities in the jurisdictions in which they operate. See ""Supervision and Regulation Ì Regulation and Supervision of Our Overseas Operations'' for a discussion of certain consent orders issued by the United States Treasury Department's OÇce of the Comptroller of the Currency against our branches in the United States and the remedial measures we were required to adopt as a result.

SPECIAL EVENTS We and other commercial banks in the PRC have been, from time to time, subject to fraud and other misconduct committed by the employees, customers and other third parties. The misconduct our bank has been subject to include violations of our internal credit approval or foreclosure procedures and guidelines, forgery of loan or other documentation, embezzlement of customers' funds and unauthorized use of chops or other instruments evidencing bank or corporate approvals. Some incidents of misconduct have involved only one individual, while others have involved multiple persons both within and outside our bank. Some of these incidents have also involved employees in managerial positions within our head office, branches and subsidiaries. The most significant of these incidents in terms of amounts involved or other factors are discussed below. In each of these cases, we have dealt strictly with the perpetrators to the extent of our authority and adopted tailored corrective measures as necessary to address any operational or internal control- related weaknesses evidenced by these cases. We believe that the financial losses and other negative factors resulting from these irregular incidents have not had, either individually or in the aggregate, any material adverse effect on our business, financial condition and results of operations. Nevertheless, we will continue to focus on improving and strengthening our internal controls and risk management function with the goal of successfully preventing such irregular incidents or misconduct from recurring in the future. For more information regarding our internal controls and risk management function, including pending and planned improvements thereto, see ""Risk Management''.

Heilongjiang Incidents From 2001 to 2004, the former head of our Hesongjie sub-branch located in the city of Harbin, Heilongjiang Province, allegedly conspired with several of our employees and individuals outside our bank to transfer approximately RMB939 million in funds from certain corporate or institutional customer deposit accounts into accounts controlled by the alleged perpetrators. Certain of these individuals, including the former head of the Hesongjie sub-branch, fled PRC several days before the incident was discovered. This incident is currently under investigation by the relevant law enforcement authorities in the PRC. Several of the corporate or institutional customers whose accounts were affected have filed or threatened to file legal claims against us to recover their respective deposits placed with us. These claims are in the process of being resolved and it is difficult to predict their outcome at this time. See ""Ì Legal and Regulatory Proceedings Ì Legal Proceedings''. After this incident, we dismissed the employees allegedly involved, reorganized the senior management team at our Heilongjiang branch and took disciplinary actions against the responsible persons in managerial positions, including the head of our Heilongjiang branch and several other members of that branch's senior management. We also initiated several measures to strengthen our internal control system, such as establishing an internal control committee at our head office chaired by our President, further delineating our front, middle and back office functions, limiting the authority

160 BUSINESS granted to our sub-branches, requiring our larger branches to undertake more frequent account- checking at their subordinate branches and sub-branches of corporate customers' accounts and making our internal audit system independent from our business operation departments. From March 2003 to December 2005, the former head of our Simalu sub-branch located in the city of Shuangyashan, Heilongjiang Province, allegedly conspired with several of our employees and individuals outside our bank to fraudulently obtain bank acceptance bills and cash them at the branches of other PRC commercial banks, mostly located in other provinces. The total amount of unpaid bank acceptance bills involved in this scheme was approximately RMB430 million based on information currently known to us. The individuals allegedly involved in this scheme, including our employees, were arrested by the relevant law enforcement authorities in the PRC. Several branches of two PRC commercial banks have filed legal claims against our Simalu sub-branch and the endorsors of the bank acceptance bills to recover the unpaid amount of RMB394.6 million of these bank acceptance bills. These legal proceedings are still ongoing and we cannot predict their outcome at this point in time. See ""Ì Legal and Regulatory Proceedings Ì Legal Proceedings''. After this incident, we conducted a comprehensive review of all aspects relating to our bank acceptance bills business, improved the clearing system for bank acceptance bills and began implementing a compulsory rotation system among the heads of local branches as well as among individuals holding important branch level positions at our bank. As these incidents are still under investigation by the relevant law enforcement authorities, their impact on us, including any potential regulatory fines, currently cannot be accurately estimated.

Beijing Huayunda Incident From December 2000 to June 2002, Beijing Huayunda Real Estate Development Co., Ltd., or Huayunda, with the assistance of several employees at our Beijing branch, used falsified housing purchase contracts and forged income certificates to apply for and obtain approximately RMB670 million in home mortgage loans from our Beijing branch in the names of Huayunda's employees for the Senhao Apartment project in Beijing. The loans were then diverted to unspecified accounts outside Beijing and the construction of the Senhao Apartment project was suspended. After our inspection and internal audit department discovered this incident, the employees responsible for approving these loans at our Beijing branch were dismissed and later arrested by the relevant law enforcement authorities in the PRC. These mortgage loans were part of the group of non-performing loans that we sold to Cinda on a non-recourse basis in connection with our financial restructuring in 2004. See ""Our Restructuring Ì Financial Restructuring''. As a result of this incident, we also initiated several measures to strengthen our personal loan credit risk management function, such as relying more upon independent investigations of the creditworthiness of the mortgage loan applicants, rather than on recommendations from real estate developers, and establishing personal loan centers with separate middle and back office functions. For a discussion of our personal loan credit risk management framework and the changes we are in the process of implementing, see ""Risk Management Ì Credit Risk Management Ì Credit Risk Management for Personal Loans''.

Wang Xuebing Incident Mr. Wang Xuebing, our former Chairman and President and the former general manager of our New York Branch, was convicted of accepting over RMB1 million in bribes in exchange for assisting certain companies with obtaining loan approvals. Mr. Wang was sentenced to 12 years in prison by the Beijing Second Intermediate Court and the Beijing High Court in 2004.

161 BUSINESS

Liu Jinbao Incident Mr. Liu Jinbao, our former Vice Chairman and the former Vice Chairman and Chief Executive of BOCHK Holdings, and three other employees of BOCHK Holdings, including Mr. Zhu Chi and Mr. Ding Yanshang, former Deputy Chief Executives of BOCHK Holdings, embezzled approximately RMB14 million through unauthorized transfers, fabrication of accounting records and other means from 1996 to 2003. Mr. Liu also accepted bribes in exchange for providing certain preferential treatment to several companies in 1997 and 1998. A former deputy general manager of our Shanghai branch was also implicated and has been sentenced to 16 years in prison. Mr. Liu was given a suspended death sentence with a two-year stay of execution. After this incident, BOCHK Holdings undertook a substantial reorganization of its management.

Zhao Ange Incident Mr. Zhao Ange, our former Vice President, accepted bribes of approximately RMB6 million and conspired with our former general manager of the finance department to misappropriate RMB50 million in funds. Mr. Zhao was sentenced to life imprisonment in 2004. The misappropriated funds have been recovered.

Kaiping Incident From 1993 through 2001, three successive heads of the Kaiping sub-branch of our Guangdong branch allegedly conspired to embezzle or misappropriate approximately US$482 million from that sub-branch. The suspected misconduct took various forms, including foreign exchange trading activity in violation of regulations, off-balance sheet loans, and the diversion of bank funds to third parties. We discovered these activities in the course of integrating such sub-branch's information technology infrastructure with our overall information technology system. After we commenced our investigation of these matters in October 2001, all three individuals fled the PRC. We have written off the receivables representing the full amount of the funds with which the alleged perpetrators are accused of embezzling. This incident is still under investigation by the relevant law enforcement authorities in the PRC. One of the three individuals was arrested in the United States and extradited to the PRC for trial in April 2004. This individual was sentenced to 12 years in prison by the People's Intermediate Court of Jiangmen, Guangdong Province in March 2006. The two other individuals were arrested by United States law enforcement authorities and have been indicted by a federal grand jury on charges of racketeering, money laundering and fraud. The trial of these individuals is expected to commence in September 2006 in the United States District Court of Nevada in Las Vegas. In response to this incident, we closed our inter-bank trading system and reconfigured our clearing and payment system in 2001.

OTHER MATTERS The PRC Commercial Banking Law, which became effective in July 1995, prohibits any investment by a PRC commercial bank in a non-bank entity in the PRC, unless otherwise approved by the government. Furthermore, on November 25, 1998, the PBOC and a governmental task force issued a joint release requiring financial institutions to dispose of their investments in non-bank entities. We had holdings or investments in non-bank entities in the PRC. As a result, we entered into a disposal arrangement with China Orient to dispose of such holdings and investments, which was approved in principle by the MOF in 2002. Beginning from 2002, our various branches have respectively entered into transfer agreements with China Orient in order to transfer our shareholding interests or investments in 906 non-bank entities in the PRC, and we further entered into an overall supplemental agreement with China Orient on December 30, 2005. Pursuant to the transfer

162 BUSINESS agreements and the supplemental agreement, all economic benefits and liabilities related to interests or holdings in these 906 non-bank entities have been transferred to China Orient by us effective from the date of the supplemental agreement, notwithstanding that we are still in the process of effecting certain registration procedures with the SAIC. China Orient undertook that it would be responsible for all risks and consequences arising out of, among others, non registration of the investment in the 906 non-bank entities. As of March 2006, we still had holdings or investments in approximately 190 non-bank entities in the PRC which are not in compliance with the PRC Commercial Banking Law. On March 19, 2006, the CBRC granted us an approval to continue our investments in those non-bank entities temporarily, but required us to dispose of the investments within one year after the issuance date of the approval letter. According to the CBRC approval, failure to dispose of the holdings and investments before March 19, 2007 may subject us to fines or other regulatory actions. We have started to transfer the investments and holdings to other parties, and expect to enter into all the relevant agreements in the near future. Jun He Law Offices, our PRC legal counsel, is of the opinion that, with the CBRC approval, failure to dispose of these holdings and investments before the Global Offering will not have a material adverse impact on our business operations or financial condition.

PROPERTIES A1A(29)(2) Our head oÇce is located at One Fuxingmen Nei Dajie, Beijing 100818, China. As of March 31, 2006, we held 11,598 properties and leased 8,158 properties in the Chinese Mainland, Hong Kong and other overseas countries.

Land As of March 31, 2006, we owned and occupied 11,403 land lots with a total site area of approximately 8.9 million square meters to support our business activities and operations throughout China. These land lots consist of (i) 6,060 land lots with a total site area of approximately 3.89 million square meters for which we have the relevant granted land use rights; (ii) 3,470 land lots with a total site area of approximately 3.06 million square meters for which we held land use rights as authorized land; (iii) 794 land lots with a total site area of approximately 1.03 million square meters for which we held land use rights as allocated land; (iv) 38 land lots with a total site area of approximately 55,572 square meters for which we held land use rights as leased land; and (v) 1,041 land lots with a total site area of approximately 0.9 million square meters for which we have not obtained proper land use rights. The properties for which we have obtained granted land use rights above were valued at approximately RMB29 billion as of March 31, 2006, which are freely transferable by us without further payment of land grant fees to the PRC Government. The properties for which we have obtained land use rights as authorized land above were valued at approximately RMB12.8 billion as of March 31, 2006. Our PRC legal counsel, Jun He Law OÇces, has advised us that under PRC laws and regulations, for as long as we use these land lots for the purposes and during the period stated on their land use right certiÑcates, we will not be required to pay any land grant fees to the PRC Government. However, if we use these land lots for purposes other than their original purposes, or if we transfer any land use rights relating to these land lots to a third party other than our subsidiaries, we are required to pay land grant fees to land administration authorities for those land lots that are subject to the change of use or the transfer. Land grant fees are determined based on the land transfer price and the regulation of the local land administration authorities. We may transfer the land use rights of certain parcels or alter their use out of business necessity, and consequently we would be required to pay land grant fees for the aÅected land lots. As we have not obtained proper land use rights for the 1,041 land lots as stated in (v) above, no commercial value has been attributed to them.

163 BUSINESS

Owned Properties As of March 31, 2006, we owned 9,591 buildings, units and carparks, which are mainly used as oÇces and branches that support our business activities and operations throughout China. The total gross Öoor area of the completed buildings is approximately 13.4 million square meters. We do not have the relevant land use right certiÑcates or building ownership certiÑcates in respect of 1,214 buildings, units and carparks with a total gross Öoor area of approximately 1.94 million square meters. No commercial value has been attributed to such buildings and these properties can be, if necessary, replaced by other comparable alternative premises for the relevant uses without any material adverse eÅect to our business operations.

Properties under Construction As of March 31, 2006, we had 59 projects under construction in China, which, upon completion, will have an estimated total gross Öoor area of approximately 0.74 million square meters. We have not obtained the relevant land use rights certiÑcates and the relevant construction permits in respect of 41 properties with an estimated total gross Öoor area upon completion of approximately 487,935 square meters. As of March 31, 2006, no commercial value has been attributed to these properties.

Property Titles We changed our legal name from Bank of China to Bank of China Limited on August 26, 2004. As a result, we are in the process of applying for re-registration for name change of the relevant land use right certiÑcates and building ownership certiÑcates. Our PRC legal counsel, Jun He Law OÇces, has advised us that there is no legal impediment to our obtaining the registration in our name for the land use right certiÑcates and building ownership certiÑcates in respect of such land and buildings. In addition, in relation to those properties in China that are subject to legal defects in title the net book value of properties with title defects amounted to RMB5.57 billion, representing approximately 8.6% of the net book value of our total properties as of March 31, 2006. We are of the view that the absence of such title certiÑcates and the existence of such title defects will not have any material Ñnancial and operational impact on us as the relevant properties represent an insigniÑcant portion of the total value of our properties and the relevant properties, individually or collectively, are not crucial to our business operations. See, however, ""Risk Factors Ì Risks Relating to Our Business Ì We have not obtained formal title certiÑcates to some of the properties we occupy and some of our landlords lack relevant title certiÑcates for properties leased to us, which may materially and adversely aÅect our right to use such properties''.

Leased Properties As of 31 March 2006, we leased over 8,158 properties throughout the PRC and overseas. The total gross Öoor area of the leased properties is approximately 1.9 million square meters. No commercial value will be attributed to any leased properties, including those where the relevant lessors have not obtained requisite title certiÑcates. For the leased properties where the relevant lessors have not obtained requisite title certiÑcates, we are of the view that this will not have a material adverse eÅect on our business as our key operations, including the head oÇce and Ñrst tier branch headquarters, do not operate on leased properties where the lessors have not obtained the requisite title certiÑcates. Furthermore, such leased properties are located in 32 diÅerent provinces in the PRC, and we are of the view that the concentration risk of such leased properties is low. We do not foresee any diÇculty in seeking alternative premises for these leased properties if necessary. Accordingly, the absence of the requisite title certiÑcates by lessors of some of the properties leased will not have a material adverse impact on our business. For a description of risks relating to our properties, see ""Risk Factors Ì Risks Relating to Our Business Ì We have not obtained

164 BUSINESS formal title certiÑcates to some of the properties we occupy and some of our landlords lack relevant title certiÑcates for properties leased to us, which may materially and adversely aÅect our right to use such properties''.

Property Valuation American Appraisal China Limited and Grant Sherman Appraisal Limited, both independent property valuers, have valued our owned property interests in the Chinese Mainland, Hong Kong and overseas as of March 31, 2006 at RMB72,790 million. The text of the valuation letter, a summary of values and the valuation certiÑcate jointly issued by American Appraisal China Limited and Grant Sherman Appraisal Limited for this prospectus, is set out in Appendix V.

Waivers from Certain Valuation Report Requirements According to the valuation report set out in Appendix V to this prospectus, we owned 11,403 land lots with an aggregate area of approximately 8.9 million square meters, 9,591 buildings, units and carparks with an aggregate gross Öoor area of approximately 13.4 million square meters, and 59 projects which are under construction with an aggregate gross Öoor area of approximately 0.74 million square meters upon completion in the PRC. We also leased 8,158 properties with an aggregate gross Öoor area of approximately 1.9 million square meters in the Chinese Mainland, Hong Kong and overseas. Owing to the substantial number of properties involved, we have applied to the SFC for an exemption and the Hong Kong Stock Exchange for a waiver from strict compliance with paragraph 34(2) of the Third Schedule to the Companies Ordinance and Rules 5.01, 5.06 and 19A.27(4) and paragraph 3(a) of Practice Note 16 of the Hong Kong Listing Rules, respectively, on the grounds that (i) it would be unduly burdensome to include a fully compliant valuation report in this prospectus and the inclusion of such detailed information would be irrelevant to potential investors in a commercial bank and would not be material to a potential investor's investment decision; and (ii) it would be unduly burdensome to prepare an English translation of the report, as substantially all of the properties are located in the PRC and consequently the underlying valuation and title information is in Chinese. The SFC has granted an exemption under section 342A(1) of the Companies Ordinance and the Hong Kong Stock Exchange has granted a waiver from Rules 5.01, 5.06 and 19A.27(4) and paragraph 3(a) of Practice Note 16 of the Hong Kong Listing Rules, subject to the following conditions: (i) a full valuation report in the Chinese language complying with the requirements under the Listing Rules and the Hong Kong Listing Rules and paragraph 34 of the Third Schedule will be made available for inspection in accordance with Appendix X Ì ""Documents Delivered to the Registrar of Companies and Available for Inspection''; (ii) the valuer's letter and the valuer's certiÑcates containing a summary valuation of all of our property interests of the Group, including particulars of occupancy, open market values and the title status thereof, based on the full valuation report will be included in this prospectus in the form set out in Appendix V to this prospectus; (iii) this prospectus must set out particulars of this exemption. In addition, as at March 31, 2006, we owned or leased 75 properties in 13 overseas developing countries. Of these properties, 40 properties with an aggregate Öoor area of approximately 10,151 square meters are owned and 35 properties with an aggregate Öoor area of approximately 12,416 square meters are leased by us, representing 0.34% and 0.43%, respectively, of the total number of properties, and 0.1% and 0.95%, respectively, of the total value of properties owned or total rental value of properties leased by us as of March 31, 2006.

165 BUSINESS

We have also applied for and the Hong Kong Stock Exchange has granted a waiver from strict compliance with paragraph 5.1 of Practice Note 12 of the Hong Kong Listing Rules on the grounds that it would be unduly burdensome to ascertain and include information on title to overseas properties owned or leased by us situated in various developing property markets and these properties are not crucial to our business operations. No commercial value was attributed to these properties in the valuation report set out in Appendix V Ì ""Property Valuation Report''. Instead, a comparable market value was disclosed in the property valuation report for investors' reference. We are of the view that the exemption from the SFC and the waivers from the Hong Kong Stock Exchange would not prejudice the interests of potential investors on the grounds mentioned above.

166