Financial Management of Central SOEs

1. Financial Management of Central SOEs Yang Jie Bureau of Financial Supervision and Administration, SASAC

2. Financial Management of Central SOEs Lead the Transformation of Financial Management ◆Optimize resources allocation and increase capital gains ◆Enhance risk management, mitigating the negative impact that risks have on enterprise value creation. ◆Reflect the operation timely, accurately and objectively; disclose true accounting information Supervision and Evaluation ◆Implement Chief Accountant Appointment System ◆Review annual financial report ◆Conduct annual performance evaluation ◆Enhance auditing ◆Strengthen accountability for losses

3. Ⅰ Lead the Transformation of Financial Management 1. Lead central SOEs to optimize resources allocation and increase capital gains Promote comprehensive budget management in central SOES 01 04 02 Supervision Assessment Coordination Compilation 03 01 Boost effective resources allocation, create value and achieve strategic goals. Align with: Corporate lifecycle; strategic goals Together with: Business plan; financial plan

4. Ⅰ Lead the Transformation of Financial Management 1.Lead central SOEs to optimize resources allocation and increase capital gains Conduct operation analysis on a regular basis 02 Conduct financial statements analysis, specialized analysis and comprehensive analysis on a regular basis with the aim of optimizing enterprise value, and with focuses on increasing revenue, reducing costs, enhancing capital efficiency and capital returns. Analyze regularly Find problems Give feedback Support decisions

5. Safe, Standard, Efficient A large number of enterprises A Wide distribution A long chain A large flow Draw on advanced experience of Global Cash Pooling and Treasury Management adopted by multinational corporations Ⅰ Lead the Transformation of Financial Management 2. Lead the centrals SOEs to enhance risk management, mitigating the negative impact that risks have on enterprise value creation. Centralize capital management 01 ▲ Centralize the capital of the group to its headquarters. The headquarters takes charge of allocation, management and utilization of group capital. With resources integration and macro-allocation, the capital will be more efficient and financial risks will be lower.

6. Ⅰ Lead the Transformation of Financial Management Centralize capital management 01 Status quo of capital management：More than 70 central SOEs have established financial companies. The capital centralization rate is 57% on average and is over 80% for around 40 enterprises. Achievements of capital management: Online accounts monitored, capital is collected timely, expenditure budget constrained, capital flow controlled, information integrated and shared.Capital deposition in subsidiaries has been greatly reduced, making the utilization of capital more efficient and reducing the cost of capital.

7. Principles Make management a system. Make the system a process. Make the process information-based. Aims Measures Identify risks and address them with methods such as risk taking, avoidance, transfer, control, hedging, and complement. Establish a sound internal control system. Focus on the process control of key businesses. Ⅰ Lead the Transformation of Financial Management 2. Lead the centrals SOEs to enhance risk management, mitigating the negative impact that risks have on enterprise value creation. Establish an internal control system 02 ▲ With more and more Chinese enterprises participating in fierce international competition and the with various risks they face, a sound internal control system improves the efficiency of resources allocation and prevents operational risks.

8. Ⅰ Lead the Transformation of Financial Management 2. Lead the centrals SOEs to enhance risk management, mitigating the negative impact that risks have on enterprise value creation. 03 Strengthen control on the risk of debt ▲Faced with the increasing operation pressure after the 2008 financial crisis and the upward trend of the debt to assets level, we commence the risk control on the debt of central SOEs timely. According to their liability scale, debt to assets level and debt paying ability, we divide the central SOEs into 3 categories on an annual basis. By taking methods regarding evaluation, remuneration and human resources management, we propel enterprises with high debt level to achieve the balance between development and risk, ensuring the gradual reduction of their debt risk . After years of hard work, the overall debt to assets level has been decreasing for 3 consecutive years with the debt structure and debt-paying ability improved.

9. Ⅰ Lead the Transformation of Financial Management 3. Lead the central SOEs to report their operation timely, accurately and objectively, and disclose true accounting information. ▲ Based on the type of the business and a thorough review of the business process, clarify the subjects, timeline, content, basis and criteria of accounting for all items involved in accounting. Clarify the relations and criteria between the items and the front end of the business, achieving accounting standardization and the integration of corporate finance and business at the same time. ▲Further optimize current accounting item system with the management-oriented principle. Based on the requirements of accounting criteria and the demands of business analysis, standardize and define the set up , encoding and content for calculation of accounting items as well as the explanation of relevant economic issues, unifying the criteria and improving the quality of accounting information.

10. Ⅰ Lead the Transformation of Financial Management ▲With the increasing use of information technology, we lead and propel the the establishment a comprehensive business and finance sharing mechanism, making financial management more objective and timely and further cutting administrative costs. Currently 20 central SOEs have provided finance sharing services and have established finance sharing centers, unifying calculation, audit, control, process and data.

11. Ⅱ Effects of the Supervision and Evaluation of Financial Management Transformation 1. Promote the Chief Accountant Appointment System To fulfill the investor’s aim effectively, we promote the Chief Accountant Appointment System step by step. The chief accountants directly supervise the business activities of central SOEs on behalf of the investor, making sure that all financial management requirements are met. Currently we have appointed chief accountants to 13 central SOEs. Scope：Central SOE groups Aim：Implement the Chief Accountant Appointment System in all central SOEs Position: Dual role of administration and supervision. Strengthen the role of supervision.

12. Ⅱ Effects of the Supervision and Evaluation of Financial Management Transformation Monthly dynamic monitoring 二、监督评价财务管理转型效果 Quarterly operation analysis To ensure that the operation of the enterprises is truly disclosed, on the basis of day-to-day dynamic monitoring and operation analysis of the financial status of central SOEs, we organize a group of experts to double check their audited annual financial statements. We give timely feedback to the management of the enterprises if their accounting violates accounting criteria or if problems are found in their operation and management. These enterprises are required to rectify their mistakes in time. 2. Double-check the annual financial report 01 Annual double check of financial statements 02 03

13. Ⅱ Effects of the Supervision and Evaluation of Financial Management Transformation 二、监督评价财务管理转型效果 3. Conduct annual performance evaluation To make sure our evaluation of operation is effective, we establish a comprehensive performance evaluation system. With more than 20 key indexes, we evaluate the profitability, operating efficiency, solvency and developing capability of the enterprises on an objective, fare and accurate basis, finding weak links for enterprises and helping them improve financial indexes. Set the standard value for each industry with reference to advanced international corporations and historical data of central SOEs. Announce the results for performance evaluation. Urge the enterprises to analyze the result, find weak links and make improvements. 二、监督评价财务管理转型效果 Evaluate the annualperformance of central SOEs on the basis of their annual financial statements and conditions.

14. Ⅱ Effects of the Supervision and Evaluation of Financial Management Transformation 4. Enhance the audit and supervision of enterprises Apart from the annual audit from audit agencies, to make sure that the management of central SOEs fulfill their duties, we conduct economic accountability audit for them. An audit must be conducted if the top executives leave post or if the enterprise is reorganized. Meanwhile, fully employ the function of internal audit, promote the administration of internal audit, improve the setting of internal audit department, gather talents for internal audit, strengthen internal audit, widen the scope for audit, and establish a sound risk prevention mechanism for internal audit. Economic accountability audit Regular annual audit Internal audit

15. Ⅱ Effects of the Supervision and Evaluation of Financial Management Transformation 二、监督评价财务管理转型效果 5. Strengthen the accountability investigation of losses Release the Interim Measures to Accountability Investigation of Assets Losses for Central SOEs. Conduct accountability investigation when the top executives do not perform their duties or do not perform their duties properly which lead to direct or indirect assets losses, further preventing the loss of state-owned assets. 二、监督评价财务管理转型效果

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