On October 3, 2003, the China Banking Regulatory Commission ("CBRC") issued the Rules for Administration of Automobile Financing Companies ("Rules"). In response to explosive growth in the automotive industry, the Rules were established to serve the growing need for the development of auto financing, as well as to regulate the business activities of non-bank financial institutions that engage in this type of financing. The CBRC will be the supervision and oversight authority for auto financing companies ("AFCs"), which are considered under the law to be non-bank financial legal entities chartered by the CBRC. The Rules have the following features:

1. Function of AFCs
The Rules provide that AFCs are incorporated to provide loans for auto buyers and dealers in the mainland of China. Hence, the establishment of AFCs shall be subject to the approval of the CBRC and without the approval of the CBRC, no individual or entity shall be allowed to establish AFCs or engage in auto financing business.

2. Investors Requirements for AFCs
Generally speaking, investors into AFCs should be legally incorporated entities. They may be from inside or outside China. Since AFCs may be established as non-bank financial institutions, Sino-foreign joint ventures or even wholly foreign-owned enterprises, may form an AFC. The Rules set forth a series of requirements, as follows:
1) An investor shall not make investment in more than one auto financing company;
2) If the investor is a non-financial entity, its total assets of the previous year shall be no less than RMB4 billion, or if the investor is non-bank financial institution, its registered capital shall be no less than RMB300 million;
3) An investor shall maintain sound business performance and remain profitable for the last three consecutive years,
4) The largest investor whose capital contribution accounts for not less than 30 percent of the total equity of the auto financing company must be an auto enterprise or a non-bank financial institution.

3. Minimum Registered Capital Requirement for AFCs
The Rules set forth that the minimum registered capital requirement for an AFC shall be no less that RMB500 million or an equivalent amount in convertible currencies. In addition, such registered capital shall be paid-in capital.

4. Other Incorporation Requirements
According to the Rules, in addition to having qualified investors, AFCs shall also need to fulfill the following requirements:
1) Paid-in minimum amount of required registered capital;
2) Articles of association must be established in compliance with all applicable laws;
3) Senior management must be familiar with auto financing and other related business;
4) The AFC must have a sound organizational structure, management and risk control system;
5) The AFC must maintain proper business premises, safety measures and so on.

5. Application and Approval Process of AFCs
The Rules state that the process to establish an AFC shall cover two stages, i.e. the preparation stage and the business launch stage. In the preparation stage, the largest investor of an AFC shall act as the applicant to apply to the CBRC for the preparation of a prospective AFC. That investor entity must submit required documentation to the CBRC and complete all the preparatory work within six months of receipt of the approval from the CBRC. In the business launch stage, the applicant should register with the State Administration of Industry and Commence and receive a corporate legal entity business license.

6. Business Scope
AFCs may conduct various activities with the approval of the CBRC. These include:
1) Accept deposits from domestic shareholders (with a maturity of not less than three months);
2) Extend loans for auto purchases;
3) Extend loans to auto dealers for the purpose of purchasing automobiles or facilities for operations;
4) Transfer and sell auto loan receivables;
5) Borrow from financial institutions;
6) Provide guarantees for auto purchase financing;
7) Act as an agent in relation to auto purchase financing.

7. Supervision Measures
As a relatively new governing body (the CBRC was created out of the supervisory arm of the People’s Bank of China), the CBRC has stringent supervisory powers with respect to its governance over AFCs. For example, the appointment of senior managerial personnel of an AFC shall be either subject to the qualification review by the CBRC or filed with the CBRC for their record. Also, the capital adequacy ratios for an AFC shall be not less than ten percent, but the CBRC has the right to increase such minimum capital requirement ratios for an individual company in line with its risk profile and risk management capability.