Rectification Results of the Problems Identified in the Audit on Fund Management, Budget Implementation and Other Fiscal Revenues and Expenditures of the National Council for Social Security Fundfor the Year 2013

Pursuant to the provisions of the Audit Law of the People’s Republic of China,the National Audit Office of Chinaconducted an audit from November 2013 to March 2014 on the fund management, budget implementation and other fiscal revenues and expenditures of theNational Council for Social Security Fund(hereinafter referred to as SSF) for the year 2013. According to the information provided bySSFup to the end of October 2014, the rectification of the problems identified by the audit is as follows:

I. Rectification of the main problems in fund management and operation

1.Audit on15spot-checked projects using trust loans found that there were 6 projects whose trust capital was not used according to the designated purpose, involving 1.42 billion yuan.

Regarding the above-mentioned problems, the trust companies involved have rectified all of them. Meantime, in the newly-launched investment projects, SSF,by elaborating the content for due diligence, designing the segmented payment of trust remuneration and other means,has urged trust companies to reinforce the post-investment management of trust loan projects.

2. In 2013, Liu’an Urban Construction Investment Co. Ltd. obtained 1 billion yuan of SSF trust loans, to be used for the construction of 3 projects, of which 2 had their construction areas exceeding the limitspermitted by the undertaking company’s qualification. SSF did not point out the problem in conducting due diligence and examination and approval of the loan.

Regarding the above-mentioned problem, SSF will take measures to further reinforce due diligence for investment projects and strengthen the investigation and research of the investment units.

3. Part of the contracted deposits did not meet the norm.

Regarding the above-mentioned problem, SSF has improved theinquiry anddecision makingmechanismfor contracted deposits and revised and perfected regulations on the management of contracted depositsaccording to the recommendations from the audit.

4. In 2013, SSF did not make timely arrangement for the use or exchange settlement of the Hong Kong dollar revenues gained from the reduction of H shares. The drop of HK dollar exchange rate led to a loss of 92.8797 million yuan in the exchange of deposited HK dollars.

Regarding the above-mentioned problem, SSF has promulgated SSF Regulations on Investment Management of the Outbound Transfers of the State-owned Shares, with explicit provisions for themanagement of the capital from/for the transfer and reduction of state-owned shares.

5. In 2013, a loss ofinterest revenue of 3.8 million yuan was resulted from the poor decisions made by the Department of Fund Finance ofSSF in theresearch and development of theprograms for contracted deposits.

Regarding the above-mentioned problem, SSF has added to the newly-revised regulations on contracted deposit management such content asthe establishment of mechanism for supervision and inspection by a evaluation group formed from relevant departments, etc.

6.The range of underlying indices of the social security fund’sproprietaryindexing investment was rather narrow, with a poor return on investment in recent years.

Regarding the above-mentioned problem, SSF is negotiating with relevant departments to research into widening the range of proprietary underlying indices andstudy and perfect entrusted indexing investment. Meantime, as for the suggestion put forward by the audit that the problem of the relevant staff members of proprietary indexing investment not being subject to the professional qualifications and rules of conduct for persons engaged in securities industry should be solved through consultation with relevant departments, SSF has revised the rules of conduct for staff members and is carrying out the feasibility study onrelevant staff members obtaining the professional qualifications for securities practitioners.

7.At the end of 2013, SSF, in violation of regulations, failed to set aside provisions for 6 stocksit shifted into holding whose lock-period had expired, and thus under-confirmed theimpairment loss by 10.302 billion yuan.

Regarding the above-mentioned problem, SSF has communicated with the Ministry of Finance and is currently researching on the solution.

II. Rectification of the main problems in budget implementation

1. In 2013, SSF over-claimed a total of 1.2442 million yuan of staffing expenses for the year 2013 and performance bonuses for the year 2012 through overstating the actual number of staff members.

Regarding the above-mentioned problem, SSF has formulated the budget for staffing expenses according to the actual number of staff members in preparing the budget for 2015. In addition, having studied with relevant departments and taken into accountchanges in the number of staff members in a year, SSF hascalculated, according to the annual average number of staff members, the total amount of performance bonuses that could be distributed.Meantime, respecting the suggestion put forward by the audit that the problem of the failure of performance bonuses to effectively play the role of motivation and constraint should be studied and solved, SSF is carrying out survey and demonstration on the calculation and evaluationcriteria and other content for performance bonuses.

2. In 2013, SSF disbursed 247,000 yuan over budgetfor theexpenses on the operation of vehicles, accounting for 50.41% of the budget for that year.

Regarding the above-mentioned problem, SSF has reported it to the competent authority and is striving for a proper solution.

3. In 2013, SSFdistributed 1.5207 million yuan ofallowances in kind in the name of welfare expenses for staff membersin violation of regulations.

Regarding the above-mentioned problem, SSF has ceased distributing benefits in kind, stopped setting aside andstatingwelfare expenses for staff membersproportionately, and stated the expenses within the 14 percent of the total amount of salariesaccording to the truth for a change. Meantime, as for the suggestion put forward by the audit that the problem of distributing meal allowances from the welfare expenses for staff members and of formulating the budget for utilities expenses,property management fees and other expenditures that come within the range of basic expenditures in the budget for project expenditures should be solved through negotiation with relevant departments, SSF is negotiating with the Ministry of Finance and other departments to research onconcrete measures and approaches.