On September 12, 2008 the China Securities Regulatory Commission (the CSRC) issued the Guiding Opinions on Further Regulating the Valuation Business of Securities Investment Funds (the Guiding Opinions), which took effect on the same date. The Guiding Opinions set forth rules on the valuation of investment products that fund management companies hold. In particular, the CSRC intends to further regulate the valuation of investment products that have no market value, such as stocks that have been suspended from trading for a long period of time.

Starting in 2007, the CSRC has required fund management companies and securities investment companies to comply with the new Enterprise Accounting Standards (the New Accounting Standards), which were issued by the Ministry of Finance in 2006. Most noticeably, the New Accounting Standards introduce the concept of fair value. The CSRC issued a circular on June 8, 2007 that lays out valuation rules pertaining to securities investment funds under the New Accounting Standards (Circular No. 21). The fair value judgment significantly impacts the accounting and risk management of fund management companies and securities investment companies.

Even though Circular No. 21 and the Guiding Opinions address the basic valuation principles for three types of investment products, the Guiding Opinions are more specific about when and how fund management companies are required to adjust their valuations to determine the fair value of investment products.

The Guiding Opinions stipulate that: (1) for an investment product that is actively traded on the market and has a market value on the valuation date, its market price will be deemed as the fair value; (2) for products that are actively traded on the market without a market value on the valuation date: (a) its last trading price will be deemed as the fair value if no material changes have occurred; or (b) if material changes have occurred, and, as a result, a potential adjustment to the valuation causes the fund’s net asset value to deviate by 0.25 percent or more from that of the last evaluation date, a fund management company should take into consideration the current market value of similar investment products and other factors, such as material changes, in determining its fair value; and (3) for products that are not actively traded on the market, if a potential adjustment to the valuation causes the fund’s net asset value to deviate by 0.25 percent or more from that of the last valuation date, a fund management company must use a reliable valuation technique that is commonly accepted by market participants and proven by past trading prices to be reliable in determining the product’s fair value. Material changes include material economic changes, or substantial events experienced by issuers of the securities that affect the price of such securities.

In addition, the Guiding Opinions require that fund management companies set up comprehensive and effective valuation policies and procedures. Such policies and procedures must include the tasks and responsibilities of the parties and personnel participating in the valuation, as well as provisions on models, assumptions, parameters, and validating mechanisms that can be employed in valuating the products.

According to the Guiding Opinions, fund management companies are expected to evaluate their valuation policies and procedures periodically to ensure they are effective and adaptable to new varieties. The CSRC recommends that fund management companies establish valuation committees and refer to opinions issued by related industrial associations and valuation information published by third parties to reduce or avoid the errors on valuating the varieties.

The Guiding Opinions further require fund management companies to fulfill their obligations in disclosing the following information in their periodic reports: (1) valuation policies and material changes, and if applicable, valuation models, assumptions, parameters, and effects on the net asset value of the fund and on current profits/losses; (2) description of the responsibilities, qualifications and related work experience of the parties and personnel participating in the valuation process; (3) the extent to which fund managers participate in or determine the value of an investment product; (4) any material conflicts of interests that exist among parties participating in the valuation process; and (5) the nature and extent of any of the pricing services for which the agreements have been concluded.

The CSRC expects fairness in the valuation of an investment product to more accurately reflect the value of that product and serve in the best interest of investors.