Agricultural Policy Bank: A Major Component of China's Rural Financial
System

\--Speech By Mr. Liu Meisheng, Vice President of Agricultural
Development Bank of China

(May 22, 2008)

Mr. Chairman,, ladies and gentlemen:

Good afternoon! It is an honor to attend the Rural Finance Seminar, a
joint event between FDIC and PBOC, and to present you a brief
introduction to the Agricultural Development Bank of China (ADBC).

I. The position and role of ADBC in China's rural financial system

As the only agricultural policy bank in China, ADBC is an important
component of the nation's rural financial system. It was founded in
1994, within the context of a national movement to establish a market
economy system, and to highlight and enhance the development of
agriculture. Main missions of the bank include: raising funds for
policy-oriented agricultural loans based on the state credibility,
providing policy-oriented financial services to the agricultural sector
as required by the government, conducting the disbursement of
agriculture-supporting funds on the behalf of the treasury authority,
and supporting the development of agriculture and the rural economy in
accordance with relevant laws, regulations, government guidelines and
policies. Thanks to its reform and development in the past decade,
particularly in the past 3 years, ADBC has significantly improved its
agriculture-supporting function. With a business scope covering
virtually every aspect of agriculture and the rural economy, ADBC has
established a multi-dimensional, cross-sector agriculture-supporting
business pattern featuring: "one main body", i.e., loan service in
support of grain, cotton and edible oil purchase; "two wings", i.e.,
Loan service in support of leading agribusinesses in the
industrialization of agnculture and the medium/long-term loan services
in support of the rural infrastructure construction and agricultural
integrated development, as well as intermediary services as its
complement. During this time period, it has been playing the role of the
major financier in the rural financial system. Since 2004, the total
loan balance of ADBC has been increasing by about RMB 100 billion, or
12.5% on average each year. The operating profit of the bank increased
from RMB 2.4 billion in 2004 to RMB 14.88 billion in 2007, averaging an
annual growth of 83.7%. As of the end of March 2008, ADBC had 2,175
branches and offices at various levels(the Head Office, provincial level
branch, prefectural level branch, and county-level sub-branches),
including 1,604 county-level sub-branches, and more than 58,000
employees. Total loan balance of the bank amounted to RMB 1,066.4
billion, accounting for more than 30% of that of the entire banking
industry in support of agriculture. ADBC has been playing a role of
agriculture supporter, particularly from the following aspects:

1\) ADBC supports the purchase of grain, cotton and edible oil and
protects the interests of the farmers. Each year, ADBC funds
approximately 60% of total grain purchases and over 50% of cotton
purchases in China. ADBC's loan balance which supports grain, cotton and
edible oil purchases, amounts to RMB 227.5 billion, accounting for 21.3%
of the total loan balance of the bank.

2\) ADBC supports the reserve of grain, cotton, edible oil, sugar, meat
and agricultural production materials, such as chemical fertilizer. ADBC
plays an important role in ensuring the grain, cotton and edible oil
security of the nation, facilitating the implementation of the
macro-control policies of the government, and maintaining stable price
levels in the marketplace. Loan balance in support of these reserves
amounts to RMB 212.8 billion, accounting for 20% of the total loan
balance.

3\) ADBC supports the industrialization of agriculture, promoting modern
farming practices and helping to increase farmers' income. The balance
of loans in support of leading agribusinesses in agricultural
industrialization and agriculture product processing enterprises, and
agricultural technology development projects, amounts to RMB 74.7
billion, accounting for 7% of the total loan balance.

4\) ADBC supports the development of rural and agricultural
infrastructures, which enhances the agricultural integrated production
capabilities and improves the production and living standards in rural
areas. Loan balance for this purpose amounts to RMB 70.6 billion,
accounting for 6.7% of the total loan balance.

5\) ADBC supports the development of small-sized agricultural
businesses, creating job opportunities for the rural population. Loan
balance for this purpose amounts to over RMB 9.7 billion, accounting for
0.9% of the total loan balance.

II\. Corporate Governance and Credit Business of ADBC

\(I\) Corporate governance: As a policy-oriented bank, ADBC has a
corporate governance system with unique identities.

In terms of the corporate governance structure, ADBC is a completely
state-owned policy bank, with the Ministry of Finance (MOF) as its only
shareholder. Under the direct control of the State Council (China's
central government), ADBC does not have a shareholders' conference, or a
board of directors (BOD). The State Council dispatches a supervisory
board at ADBC. Playing the supervisory role of the asset owner on behalf
of the government, the supervisory board oversees the asset quality of
ADBC and the preservation and increase in the value of state-owned
assets, without getting involved in, or interfering into the
decision-making and day-to-day operations of the bank. The President of
ADBC, who is appointed by the State Council, is responsible for the
comprehensive management of the bank , with the assistance of the vice
presidents. The Head Office is a legal person, with the president as its
legal representative. 30 tier one branches are established in provinces,
autonomous regions and munispalities, tier two branches and sub-branches
are also set up in prefectures and counties. All its branches and
subbranches operate banking business with authorizations from the Head
Office.

In terms of relations with external parties, ADBC operates under the
guidance and supervision of the People's Bank of China and the China
Banking Regulatory Commission (CBRC). The Ministry of Finance is
responsible for the management of ADBC assets, as well as the financial
accounting of ADBC. The National Development and Reform Commission
provides ADBC with planning guidance concerning its policy-oriented
businesses.

In terms of internal structure, the ADBC Head Office set up 4 special
committees: Loan Oversight Committee, Financial Oversight Committee,
Loan Asset Security Committee and Internal Supervision Committee, which
are responsible for reviewing and coordinating issues with regard to
loan services, financial operations, loan asset security and internal
supervision, respectively. Under the Head Office, there are 20
departments in 3 major sectors: business development, general
administration, and business support, all operating and interacting
within their respective scopes of responsibilities. Based on the
principles of "primarily vertical auditing, with the support of
multi-level auditing", internal auditing of the bank is managed
vertically by the Head Office. With an independent, authoritative,
effective internal audit system that reports directly to the legal
person, ADBC has established 6 inter-regional special internal audit
offices that report directly to the Head Office for cross auditing
across the provinces. In line with the principles for truthfulness,
accuracy, integrity and comparability required by relevant laws and
regulations, ADBC maintains regulated disclosure practices, filing
reports on its business operations to the State Council and the
regulatory authorities, and publishing annual reports each year.

\(II\) Credit business: ADBC credit business can be divided into 3
categories: policy-oriented loans, quasi-policy-oriented loans, and
commercial loans. Despite the differences in terms of their policies,
their borrowers, and their methods of management, the three categories
of loans have the same fundamental objective: to support the development
of agriculture and the rural economy.

A policy-oriented loan is one that is issued for the implementation of
the macro-adjustment tasks of the central government or local
governments on grain and cotton, for which the treasury authorities
provide interest subsidies or compensation, and compensate losses
incurred. The borrower is usually identified by government agencies
involved in accordance with relevant policies. In terms of loan policies
and management, ensuring the implementation of government policies is
the top priority. In accordance with the mandatory plans of the
government, the loan fund that is needed by the borrower will be made
available in time and in full amount. A policy-oriented loan will be
issued primarily against the credit of the borrower (collateral free),
at the benchmark interest rate of the money authorities. It will be kept
under strictly closed management, with a term that can be extended
several times if necessary. Currently, policy-oriented loans mainly
include those issued in support of the grain reserve programs and grain
supply adjustment programs of the central government and local
governments, and cotton reserve and sugar reserve programs of the
central government. As of the end of March 2008, ADBC maintained a
policy-oriented loan balance of RMB 647.96 billion, accounting for 60.8%
of its total loan balance.

A quasi-policy-oriented loan is one issued by ADBC in accordance with
relevant policies to a grain/cotton/edible oil purchasing enterprise,
which makes the purchase autonomously and with ADBC assumes the risks
involved. The goal of the loan is to make sure that it will not be
difficult to sell grain or cotton in any region after the deregulation
of the grain and cotton market. The loan is issued to satisfy the
reasonable fund demand of the borrower for its autonomous
grain/cotton/edible oil purchase activities, give preference
consideration to the borrowing plan of such a cunstomer. The term of the
loan will be determined in accordance with the specific situation in the
grain and cotton market, as well as the quality of the stockpiles. The
interest rate will be the benchmark rate of the monetary authorities..
Currently, quasi-policy-oriented loans mainly include those issued to
support grain, edible oil purchases, and cotton purchases. As of the end
of March 2008, the balance of quasi-policy-oriented loans was RMB 155.24
billion, accounting for 14.6% of the total loan balance.

A commercial loan is one issued autonomously by ADBC within its business
scope, and by which ADBC assumes all risks involved. ADBC can
autonomously select and support the borrower, decide the direction of
lending and utilization of the loan in line with customer demand, its
risk tolerance capability , and the principle of "efficiency first",
make credit plan in accordance with its own financial power. A strict
risk management system is adopted for loan management. Usually, such a
loan would require a guarantee, with a term depending on the specific
risk situation, and an interest rate determined autonomously by ADBC
within the scope allowed by governmental policies. Currently, commercial
loans of ADBC mainly include those issued in support of leading
agribusiness companies in the industrialization of agriculture, grain
processing enterprises, agricultural integrated development projects,
rural infrastructure construction projects, agricultural technology
projects, small-sized agricultural enterprises, and rural circulation
system development projects. As of the end of March 2008, the commercial
loan balance of ADBC amounted to RMB 263.22 billion, accounting for
24.7% of the total loan balance.

\(III\) Government support: the Chinese government supports the
development of ADBC primarily regarding the following two aspects:

1\) Credibility support: as a completely state-owned policy bank, ADBC
has a sovereign credit rating. Moody's and Fitch have assigned ADBC "A1"
and "A+" long-term foreign currency ratings, respectively, which are at
the same level of China's sovereign rating. This enables ADBC to enjoy
great benefits for its business operation, particularly its fund raising
activities. For example: backed by the state credibility, financial
bonds issued by ADBC are regarded as "quasi-sovereign bonds" and
therefore, are highly popular in the market. Since 2004, ADBC has issued
68 batches of financial bonds, raising RMB 756.5 billion in total. As of
the end of March 2008, the bank's financial bond balance was RMB 521.77
billion, accounting for 45% of its total liabilities.

2\) Fund support: in addition to issuing financial bonds, ADBC has been
receiving direct fund support from the central bank through the POBC
refinance. The fund is used primarily for grain, cotton and edible oil
purchases. As of the end of March 2008, the POBC refinance balance
amounted to RMB 365.85 billion, accounting for 31% of its total
liabilities.

III\. ADBC's outlook

It is an established reality in both developing and developed countries
that policy-oriented financial support and the protection of agriculture
are used as long-term mechanism arrangements. Policy-oriented finance
may have different roles and positions in different countries and
different economic development stages, yet all of those roles and
positions are critical and indispensable.

China is the largest developing country in the world, as well as a major
agricultural country. Properly solving the problems related to
agriculture, rural areas and farmers, is the most challenging task in
the modernization process of the nation. The Chinese government has been
highly concerned with issues concerning agriculture, rural areas and
farmers, and has made them its top priorities. It has promoted the
development of agriculture with a number of supportive policies.
Nevertheless, there are still serious problems concerning agriculture,
rural areas and farmers. Agricultural infrastructures are still
vulnerable. It is increasingly difficult to maintain stable agricultural
development and to ensure sustained increases in farmers' income. The
widening gap between the urban and rural areas, and that between
different regions continues to grow. An important approach to solving
these problems is fund input, particularly credit support. As a result
of the financial reform, the rural financial system of the nation has
achieved significant development, playing an important role in the
development of agriculture and rural areas. However, the current rural
financial system leaves much to be desired. There is a sharp conflict
between short supply of and strong demands for financial services,
leaving many of the requirements for the development of agriculture and
rural areas unsatisfied.

Within such a context, it is essential to build a rural financial system
with multiple dimensions, extensive coverage and sustainable
development, in accordance with the principle of serving "agriculture,
rural areas and farmers", accelerating the reform of China's rural
financial system. This has created valuable opportunities for rural
financial players. As the only agricultural policy bank in China, ADBC
is a major player in the nation's rural financial system. With continued
government support for agriculture and the steady rise in financial
services demands from the agricultural sector and the rural areas, ADBC
will continue to expand its business scope and function, and consolidate
its role in providing financial support to agriculture.

Thank you!