cy
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
 
FORM 20-F
(Mark One)
 
£
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
     
   
OR
     
 
S
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
   
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009
   
OR
     
 
£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
   
FOR THE TRANSITION PERIOD FROM _______ TO_______
 
OR
 
 
£
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
   
DATE OF EVENT REQUIRING THIS SHELL COMPANY REPORT ……………….
     
   
FOR THE TRANSACTION PERIOD FORM ____________ TO __________
 
COMMISSION FILE NUMBER 1-15138
_______________________
 
中国石油化工股份有限公司
CHINA PETROLEUM & CHEMICAL CORPORATION
(Exact name of Registrant as specified in its charter)
_______________________
 
The People's Republic of China
(Jurisdiction of incorporation or organization)
_______________________
 
22 Chaoyangmen North Street
Chaoyang District, Beijing, 100728
The People's Republic of China
(Address of principal executive offices)
_______________________
 
Mr. Chen Ge
22 Chaoyangmen North Street
Chaoyang District, Beijing, 100728
The People's Republic of China
Tel: +86 (10) 5996 0028
Fax: +86 (10) 5996 0386
(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)
________________________
 
Securities registered or to be registered pursuant to Section 12 (b) of the Act.

Title of Each Class
Name of Each Exchange
On Which Registered
American Depositary Shares, each representing 100 H Shares of par value RMB 1.00 per share
New York Stock Exchange, Inc.
H Shares of par value RMB 1.00 per share
New York Stock Exchange, Inc.*
 
*   Not for trading, but only in connection with the registration of American Depository Shares.
Securities registered or to be registered pursuant to Section 12 (g) of the Act.
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15 (d) of the Act.

 
 
 

None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report.
 
H Shares, par value RMB 1.00 per share
    16,780,488,000  
A Shares, par value RMB 1.00 per share
    69,921,951,000  
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
 
Yes X
No__
 
 
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 
 
Yes __
No X
 
 
Note - Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
 
Yes X
No__
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
 
Large accelerated filer X
Accelerated filer __
Non-accelerated filer __
 
 
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
 
U.S. GAAP ___
International Financial Reporting Standards X
Other ___
 
as issued by the International Accounting
 
 
Standards Board
 
 
If "Other" has been checked in  response to the previous question,  indicate by check mark which  financial statement item the registrant has elected to follow.
 
 
Item 17__
Item 18__
 
 
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
 
Yes __
No X
 

 
 
 
 
Table of Contents
Page
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
6
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
6
ITEM 3.
KEY INFORMATION
6
 
A.
SELECTED FINANCIAL DATA
6
 
B.
CAPITALIZATION AND INDEBTEDNESS
8
 
C.
REASONS FOR THE OFFER AND USE OF PROCEEDS
8
 
D.
RISK FACTORS
8
ITEM 4.
INFORMATION ON THE COMPANY
13
 
A.
HISTORY AND DEVELOPMENT OF THE COMPANY
13
 
B.
BUSINESS OVERVIEW
14
 
C.
ORGANIZATIONAL STRUCTURE
30
 
D.
PROPERTY, PLANT AND EQUIPMENT
30
ITEM 4A.
UNRESOLVED STAFF COMMENTS
31
ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
31
 
A.
GENERAL
31
 
B.
CONSOLIDATED RESULTS OF OPERATIONS
34
 
C.
DISCUSSIONS ON RESULTS OF SEGMENT OPERATIONS
40
 
D.
LIQUIDITY AND CAPITAL RESOURCES
47
ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
50
 
A.
DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
50
 
B.
COMPENSATION
57
 
C.
BOARD PRACTICE
58
 
D.
EMPLOYEES
59
 
E.
SHARE OWNERSHIP
60
ITEM 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
60
 
A.
MAJOR SHAREHOLDERS
60
 
B.
RELATED PARTY TRANSACTIONS
60
 
C.
INTERESTS OF EXPERTS AND COUNSEL
60
ITEM 8.
FINANCIAL INFORMATION
61
 
A.
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
61
 
B.
SIGNIFICANT CHANGES
61
ITEM 9.
THE OFFER AND LISTING
61
 
A.
OFFER AND LISTING DETAILS
61
ITEM 10.
ADDITIONAL INFORMATION
62
 
A.
SHARE CAPITAL
62
 
B.
MEMORANDUM AND ARTICLES OF ASSOCIATION
63
 
C.
MATERIAL CONTRACTS
70
 
D.
EXCHANGE CONTROLS
70
 
E.
TAXATION
71
 
F.
DIVIDENDS AND PAYING AGENTS
74
 
G.
STATEMENT BY EXPERTS
74
 
H.
DOCUMENTS ON DISPLAY
74
 
I.
SUBSIDIARY INFORMATION
75
ITEM 11.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
75
ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
81
ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
81
ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
81
 
A.
MATERIAL MODIFICATIONS TO THE RIGHTS TO SECURITIES HOLDERS
81
 
B.
USE OF PROCEEDS
81
ITEM 15. CONTROLS AND PROCEDURES 81

 
1
 
 
ITEM 16.
RESERVED
83
ITEM 16A.
AUDIT COMMITTEE FINANCIAL EXPERT
83
ITEM 16B.
CODE OF ETHICS
83
ITEM 16C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
83
ITEM 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
83
ITEM 16E.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
83
ITEM 16F.
CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
83
ITEM 16G.
COMPARISON OF NEW YORK STOCK EXCHANGE CORPORATE GOVERNANCE RULES AND CHINA CORPORATE GOVERNANCE RULES FOR LISTED COMPANIES
83
ITEM 17.
FINANCIAL STATEMENTS
86
ITEM 18.
FINANCIAL STATEMENTS
86
ITEM 19.
EXHIBITS
86

 
2
 
 
CERTAIN TERMS AND CONVENTIONS
 
Definitions
 
Unless the context otherwise requires, references in this annual report to:
 
 
·
"Sinopec Corp.", "we", "our" and "us" are to China Petroleum & Chemical Corporation, a PRC joint stock limited company, and its subsidiaries;
     
 
·
"Sinopec Group Company" are to our controlling shareholder, China Petrochemical Corporation, a PRC limited liability company;
     
 
·
"Sinopec Group" are to the Sinopec Group Company and its subsidiaries other than Sinopec Corp. and its subsidiaries;
     
 
·
"China" or the "PRC" are to the People's Republic of China, excluding for purposes of this annual report Hong Kong, Macau and Taiwan;
     
 
·
"provinces" are to provinces and to provincial-level autonomous regions and municipalities in China which are directly under the supervision of the central PRC government;
     
 
·
"RMB" are to Renminbi, the currency of the PRC;
     
 
·
"HK$" are to Hong Kong dollar, the currency of the Hong Kong Special Administrative Region of the PRC; and
     
 
·
"US$" are to US dollars, the currency of the United States of America.
 
Conversion Conventions
 
Conversions of crude oil from tonnes to barrels are made at a rate of one tonne to 7.35 barrels for crude oil we purchase from external sources and one tonne to 7.1 barrels for crude oil we produce, representing the American Petroleum Institute (“API”) gravity of the respective source of crude oil. Conversions of natural gas from cubic meters to cubic feet are made at a rate of one cubic meter to 35.31 cubic feet.
 
Glossary of Technical Terms
 
Unless otherwise indicated in the context, references to:
 
 
·
"billion" are to a thousand million.
     
 
·
"BOE" are to barrels-of-oil equivalent; natural gas is converted at a ratio of 6,000 cubic feet of natural gas to one BOE.
     
 
·
"primary distillation capacity" are to the crude oil throughput capacity of a refinery's crude oil distillation units, calculated by estimating the number of days in a year that such crude oil distillation units are expected to operate, excluding downtime for regular maintenance, and multiplying that number by the amount equal to the units' optimal daily crude oil throughput.
     
 
·
"rated capacity" are to the output capacity of a given production unit or, where appropriate, the throughput capacity, calculated by estimating the number of days in a year that such production unit is expected to operate, excluding downtime for regular maintenance, and multiplying that number by an amount equal to the unit's optimal daily output or throughput, as the case may be.

 
3
 
 
CURRENCIES AND EXCHANGE RATES
 
We publish our financial statements in Renminbi. Unless otherwise indicated, all translations from Renminbi to US dollars have been made at a rate of RMB 6.8259 to US$1.00, the noon buying rate on December 31, 2009 as set forth in the H.10 statistical release of the U.S. Federal Reserve Board. We do not represent that Renminbi or US dollar amounts could be converted into US dollars or Renminbi, as the case may be, at any particular rate, the rates below or at all. On April 23, 2010, the noon buying rate was RMB 6.8270 to US$1.00.
 
The following table sets forth noon buying rate for US dollars in Renminbi for the periods indicated:
 
   
Noon Buying Rate (1)
 
Period
 
End
   
Average (2)
   
High
   
Low
 
   
(RMB per US$1.00)
 
2005
    8.0702       8.1826       8.2765       8.0702  
2006
    7.8041       7.9723       8.0702       7.9723  
2007
    7.2946       7.5806       7.8127       7.2946  
2008
    6.8225       6.9193       7.2946       6.7800  
2009
    6.8259       6.8307       6.8470       6.8176  
October 2009
    6.8264       6.8267       6.8292       6.8248  
November 2009
    6.8265       6.8271       6.8300       6.8255  
December 2009
    6.8259       6.8276       6.8299       6.8260  
January 2010
    6.8268       6.8269       6.8295       6.8258  
February 2010
    6.8258       6.8285       6.8330       6.8258  
March 2010
    6.8258       6.8262       6.8270       6.8254  
April 2010 (up to April 23, 2010)
    6.8270       6.8256       6.2875       6.8229  
__________
 
(1)
For the period prior to January 1, 2009, the exchange rates reflect the noon buying rates certified by the Federal Reserve Bank of New York. For the period after January 1, 2009, the exchange rates reflect those set forth in the H.10 statistical release of the U.S. Federal Reserve Board.
   
(2)
Annual averages are determined by averaging the rates on the last business day of each month during the relevant period. Monthly averages are calculated using the average of the daily rates during the relevant period.

 
4
 

FORWARD-LOOKING STATEMENTS
 
This annual report includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995.  All statements, other than statements of historical facts, included in this annual report that address activities, events or developments which we expect or anticipate will or may occur in the future are hereby identified as forward-looking statements for the purpose of the safe harbor provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words such as believe, intend, expect, anticipate, project, estimate, predict, plan and similar expressions are also intended to identify forward-looking statements. These forward-looking statements address, among others, such issues as:
 
 
·
amount and nature of future exploration and development,
 
·
future prices of and demand for our products,
 
·
future earnings and cash flow,
 
·
development projects and drilling prospects,
 
·
future plans and capital expenditures,
 
·
estimates of proved oil and gas reserves,
 
·
exploration prospects and reserves potential,
 
·
expansion and other development trends of the petroleum and petrochemical industry,
 
·
production forecasts of oil and gas,
 
·
expected production or processing capacities, including expected rated capacities and primary distillation capacities, of units or facilities not yet in operation,
 
·
expansion and growth of our business and operations, and
 
·
our prospective operational and financial information.
 
These statements are based on assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in particular circumstances. However, whether actual results and developments will meet our expectations and predictions depends on a number of risks and uncertainties which could cause actual results to differ materially from our expectations, including the risks set forth in "Item 3. Key Information ¾ Risk Factors" and the following:
 
 
·
fluctuations in crude oil prices,
 
·
fluctuations in prices of our products,
 
·
failures or delays in achieving production from development projects,
 
·
potential acquisitions and other business opportunities,
 
·
general economic, market and business conditions, and
 
·
other risks and factors beyond our control.
 
Consequently, all of the forward-looking statements made in this annual report are qualified by these cautionary statements and readers are cautioned not to place undue reliance on these forward-looking statements.  These forward-looking statements should be considered in light of the various important factors set forth above and elsewhere in this Form 20-F.  In addition, we cannot assure you that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected effect on us or our business or operations.

 
5
 
 
  ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
 
Not applicable.
 
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
 
Not applicable.
 
ITEM 3.
KEY INFORMATION
 
 
A.
SELECTED FINANCIAL DATA
 
The selected consolidated income statement data (except per ADS data) and consolidated cash flow data for the years ended December 31, 2007, 2008 and 2009, and the selected consolidated balance sheet data as of December 31, 2008, and 2009 have been derived from, and should be read in conjunction with, the audited consolidated financial statements included elsewhere in this annual report. The selected consolidated income statement data and consolidated cash flow data for the years ended December 31, 2005 and 2006 and the selected consolidated balance sheet data as of December 31, 2005, 2006 and 2007 are derived from our audited consolidated financial statements which are not included elsewhere in this annual report and the financial statements of the acquired businesses described below.
 
We acquired from Sinopec Group Company the equity interests of Sinopec Hainan Refining and Chemical Company Limited (Sinopec Hainan) and certain oil and gas production companies (Oil Production Plants) in 2006, the equity interests of Zhanjiang Dongxing Petroleum Company Limited, Sinopec Hangzhou Oil Refinery Plant, Yangzhou Petrochemical Plant, Jiangsu Taizhou Petrochemical Plant and Sinopec Qingjiang Petrochemical Company Limited (collectively, Refinery Plants) in 2007, and the entire equity interests of Sinopec Qingdao Petrochemical Company Limited and certain storage and distribution operations (collectively, the Acquired Group) in 2009.  As we and these companies are under the common control of Sinopec Group Company, our acquisitions are reflected in our consolidated financial statements as combination of entities under common control that is accounted for in a manner similar to a pooling-of-interests.  Accordingly, the acquired assets and related liabilities have been accounted for at historical cost and our consolidated financial statements for periods prior to the combinations have been restated to include the financial condition and the results of operation of these companies on a combined basis.
 
Moreover, the selected financial data should be read in conjunction with our consolidated financial statements and “Item 5. Operating and Financial Review and Prospects” included elsewhere in this annual report. Our consolidated financial statements are prepared and presented in accordance with International Financial Reporting Standards, or IFRS.

 
6
 

   
Years Ended December 31,
 
   
2005
   
2006
   
2007
   
2008
   
2009
 
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
 
   
(in millions, except per share and per ADS data)
 
Consolidated Income Statement Data (1) :
                             
Operating revenues
    814,093       1,056,363       1,200,997       1,444,291       1,345,052  
Other income
    9,912       5,225       4,863       50,857       -  
Operating expenses
    (752,488 )     (980,338 )     (1,120,364 )     (1,468,812 )     (1,260,621 )
Operating income
    71,517       81,250       85,496       26,336       84,431  
Earnings before income tax
    68,090       79,073       82,847       22,116       80,568  
Tax (expense)/benefit
    (21,048 )     (23,865 )     (24,723 )     2,840       (16,084 )
Net income attributable to equity shareholders of the Company
    43,743       53,773       55,914       28,525       61,760  
Basic earnings per share (2)
    0.50       0.62       0.64       0.33       0.71  
Basic earnings per ADS (2)
    50.45       62.02       64.49       32.90       71.23  
    Diluted earnins per share (2)     0.50        0.62        0.64        0.29        0.71  
    Diluted earnings per ADS (2)      50.45        62.02        64.49        28.87        70.78  
Cash dividends declared per share
    0.12       0.13       0.16       0.145       0.16  
Segment results
                                       
Exploration and production
    49,307       63,498       48,766       66,569       19,644  
Refining
    (2,801 )     (26,001 )     (10,997 )     (63,635 )     23,077  
Marketing and distribution
    10,583       30,361       35,904       38,519       30,300  
Chemicals
    15,626       14,924       13,306       (12,950 )     13,615  
Corporate and others
    (1,198 )     (1,532 )     (1,483 )     (2,167 )     (2,205 )
Operating income
    71,517       81,250       85,496       26,336       84,431  
 
   
As of December 31,
 
      2005       2006       2007       2008       2009  
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
 
   
(in millions)
 
Consolidated Balance Sheet Data (1) :
                                       
Cash and cash equivalents
    15,418       7,187       7,785       7,008       8,750  
Total current assets
    150,640       148,073       186,761       165,398       201,280  
Total non-current assets
    400,160       471,413       556,610       613,774       676,562  
Total assets
    550,800       619,486       743,371       779,172       877,842  
Short-term debts and loans from Sinopec Group Company and its affiliates (including current portion of long-term debts)
    50,734       70,952       69,462       108,926       72,541  
Long-term debts and loans from Sinopec Group Company and its affiliates (excluding current portion of long-term debts)
    103,408       100,637       120,314       127,144       145,828  
Equity attributable to equity shareholders of the Company
    226,506       264,911       307,897       327,889       375,661  
Capital employed (3)
    396,404       451,636       515,213       577,604       608,472  
 
   
Years Ended December 31
 
      2005       2006       2007       2008       2009  
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
 
   
(in millions)
 
Other Financial Data (1) :
                                       
Net cash generated from operating activities
    78,294       91,934       118,612       66,517       152,075  
Net cash (used in)/generated from financing activities
    (6,835 )     6,202       (3,196 )     42,820       (34,294 )
Net cash used in investing activities
    (75,142 )     (106,342 )     (114,754 )     (110,035 )     (116,039 )
Capital expenditure
                                       
Exploration and production
    25,479       35,198       54,498       57,646       51,550  
Refining
    20,932       22,815       22,964       12,793       15,468  
Marketing and distribution
    13,262       13,475       14,671       14,796       16,283  
Chemicals
    9,386       12,629       16,184       20,622       25,207  
Corporate and others
    1,164       2,170       3,289       2,393       1,505  
Total
    70,223       86,287       111,606       108,250       110,013  

 
7
 
__________
 
(1)
The acquisitions of equity interests of Sinopec Hainan and Oil Production Plants in 2006, the acquisition of equity interests of the Refining Plants in 2007 and the acquisition of the Acquired Group from Sinopec Group Company in 2009 are treated as “combination of entities under common control” which are accounted in a manner similar to a pooling-of-interests.  Accordingly, the acquired assets and liabilities have been accounted for at historical cost and the consolidated financial statements for periods prior to the combinations have been restated to include the financial condition and results of operation of these acquired companies on a combined basis.  The considerations for these acquisitions were treated as equity transactions.
   
(2)
Basic earnings per share have been computed by dividing net income attributable to equity shareholders of our company by the weighted average number of shares in issue. For the years ended December 31, 2005, 2006 and 2007, diluted earnings per share and per ADS are calculated on the same basis as basic earnings per share and per ADS, respectively, since there were no dilutive potential ordinary shares or they were considered anti-dilutive. The calculation of diluted earnings per share for the years ended December 31, 2008 and 2009 is based on the diluted net income attributable to equity shareholders of our Company of RMB 25,348 million and RMB62,136 million and the diluted weighted average number of the shares of 87,790 million and 87,790 million, respectively. Basic and diluted earnings per ADS have been computed as if all of our issued or potential ordinary shares, including domestic shares and H shares, are represented by ADSs during each of the years presented. Each ADS represents 100 shares.
   
(3)
Capital employed is derived by the sum of short-term debts, long-term debts, loans from Sinopec Group Company and its affiliates and total equity less cash and cash equivalents.
 
 
B.
CAPITALIZATION AND INDEBTEDNESS
 
Not applicable.
 
 
C.
REASONS FOR THE OFFER AND USE OF PROCEEDS
 
Not applicable.
 
 
D.
RISK FACTORS
 
Risks Relating to Our Business Operation
 
Our business may be adversely affected by the fluctuation of crude oil and refined petroleum product prices.
 
We consume a large amount of crude oil to produce our refined petroleum products and petrochemical products. While we try to adjust the sale price of our products to track international crude oil price fluctuations, our ability to pass on the increased cost resulting from crude oil price increases to our customers is dependent on international and domestic market conditions as well as the PRC government’s price control over refined petroleum products. Although the current price-setting mechanism for refined petroleum products in China allows the PRC government to adjust price in the PRC market when the average international crude oil price fluctuates beyond certain levels within a certain time period, the PRC government still retains discretion as to whether or when to adjust the refined petroleum products price. The PRC government generally exercises certain price control over refined petroleum products once international crude oil price experiences sustained rises or becomes significantly volatile. As a result, our results of operations and financial condition may be materially and adversely affected by the fluctuation of crude oil and refined petroleum product prices.
 
Our continued business success depends in part on our ability to replace reserves and develop newly discovered reserves.
 
Our ability to achieve our growth objectives is dependent in part on our level of success in discovering or acquiring additional oil and natural gas reserves and further exploring our current reserve base. Our exploration and development activities for additional reserves also expose us to inherent risks associated with drilling, including the risk that no economically productive oil or natural gas reservoirs might be discovered. Exploring for, developing and acquiring reserves is highly risky and capital intensive. Without reserve additions through further exploration and development or acquisition activities, our reserves and production will decline over time, which may materially and adversely affect our results of operations and financial condition.

 
8
 

We rely heavily on outside suppliers for crude oil and other raw materials, and we may even experience disruption of our ability to obtain crude oil and other raw materials.
 
We purchase a significant portion of our crude oil and other feedstock requirements from outside suppliers located in different countries and areas in the world. In 2009, approximately 75% of the crude oil required for our refinery business was sourced from international suppliers, some of which are from countries or regions that are on the sanction list published and administered by the Office of Foreign Assets Control of the US Department of Treasury, including Iran and Sudan.   In addition, our development requires us to source an increasing amount of crude oil from outside suppliers. We are subject to the political, geographical and economic risks associated with these countries and areas. If one or more of our material supply contracts were terminated or disrupted due to any natural disasters or political events, it is possible that we would not be able to find sufficient alternative sources of supply in a timely manner or on commercially reasonable terms. As a result, our business and financial condition would be materially and adversely affected.
 
Our business faces operation risks and natural disasters that may cause significant property damages, personal injuries and interruption of operations, and we may not have sufficient insurance coverage for all the financial losses incurred by us.
 
Exploring for, producing and transporting crude oil and natural gas and producing and transporting refined and petrochemical products involve a number of operating hazards.  Significant operating hazards and natural disasters may cause interruption to our operations, property or environmental damages as well as personal injuries, and each of these incidents could have a material adverse effect on our financial condition and results of operations.
 
We have been paying high attention to the safety of our operation and implemented health, safety and environment management system within our company with the view to preventing accident, and reducing personal injuries, property losses and environment pollution. We also maintain insurance coverage on our property, plant, equipment and inventory. However, our preventative measures may not be effective and our insurance coverage may not be sufficient to cover all the financial losses caused by the operation risks and natural disasters. Losses incurred or payments required to be made by us due to operating hazards or natural disasters, which are not fully insured, may have a material adverse effect on our financial condition and results of operations.
 
The oil and natural gas reserves data in this annual report are only estimates, and our actual production, revenues and expenditures with respect to our reserves may differ materially from these estimates.
 
There are numerous uncertainties inherent in estimating quantities of proved oil and natural gas reserves, and in the timing of development expenditures and the projection of future rates of production. The reserve data set forth in this annual report represent estimates only. Adverse changes in economic conditions may render it uneconomical to develop certain reserves. Our actual production, revenues, taxes and fees payable and development and operating expenditures with respect to our reserves may likely vary from these estimates.
 
The reliability of reserves estimates depends on:
 
 
·
the quality and quantity of technical and economic data;
     
 
·
the prevailing oil and gas prices applicable to our production;
     
 
·
the production performance of the reservoirs; and
     
 
·
extensive engineering judgments.
 
In addition, new drilling, testing and production results following the estimates may cause substantial upward or downward revisions in the estimates.
 
Our operations may be adversely affected by the global and domestic economic conditions.
 
Our results of operations are materially affected by economic conditions in China and elsewhere around the world. The global financial crisis that began in 2008 has adversely affected China and other world economies, including the United States. Although many countries have adopted various macroeconomic policies, including stimulus packages, aiming at

 
9
 

offsetting the slowdown brought about by the financial crisis, the global economy has been negatively impacted. The global financial crisis also resulted in a tightening in credit markets, a low level of liquidity in many financial markets and increased volatility in credit, equity and commodity markets. The timing and nature of any recovery in worldwide financial markets and the global economy remain uncertain, and there can be no assurance that market conditions will improve in the near future, or even if they do improve, will not deteriorate again. Our operations may also be adversely affected by factors such as volatility in international commodity prices, governmental policies and measures affecting international trade and the PRC government’s regulatory schemes and policies affecting domestic market. If the global and domestic markets experience significant or continuous slowdown or downturn, our business, financial condition, results of operations would be adversely affected.
 
Our operations may be adversely affected by the cyclical nature of the market.
 
Most of our revenues are attributable to sales of refined petroleum products and petrochemical products, and certain of these businesses and related products have historically been cyclical and sensitive to a number of factors that are beyond our control. These factors include the availability and prices of feedstock and general economic conditions, such as changes in industry capacity and output levels, cyclical changes in regional and global economic conditions, prices and availability of substitute products and changes in consumer demand. With the further reduction of tariffs and other import restrictions in the PRC on refined petroleum products and petrochemical products, many of our products have become increasingly subject to the cyclicality of global markets, and hence, our operations may be adversely affected by the cyclical nature of the market.
 
We face strong competition from domestic and foreign competitors.
 
Among our competitors, some are major integrated petroleum and petrochemical companies within and outside the PRC, which have recently become more significant participants in the petroleum and petrochemical industry in China. On December 4, 2006, Ministry of Commerce of the PRC promulgated the “Administrative Rules for Crude Oil Market” and “Administrative Rules for Refined Petroleum Products Market” to open the wholesale market of crude oil and refined petroleum products to new market entrants. As a result, we expect to face more competition in both crude oil and refined petroleum product markets. We also expect to face more competition in petrochemical product market as a result of our domestic and international competitors’ increasing production capacity. Increased competition may have a material adverse effect on our financial condition and results of operations.
 
Risks Relating to Our Controlling Shareholder
 
Related party transactions.
 
We have engaged from time to time and will continue to engage in a variety of transactions with Sinopec Group, which provides to us a number of services, including, but not limited to, ancillary supply, engineering, maintenance, transport, lease of land use right, lease of buildings, as well as educational and community services. The nature of our transactions with Sinopec Group is governed by a number of service and other contracts between Sinopec Group and us. We have established various schemes in those agreements so that these transactions would be entered into under terms at arm’s length. However, we cannot assure you that Sinopec Group Company or any of its members would not take actions that may favor its interests or its other subsidiaries' interests over ours.
 
Non-competition.
 
Sinopec Group Company has interests in certain businesses, such as oil refining, petrochemical producing, retail service stations and overseas exploration and development, which compete or are likely to compete, either directly or indirectly, with our businesses. To avoid the adverse effects brought by the competition between us and Sinopec Group Company to the maximum extent possible, we and Sinopec Group Company have entered into a non-competition agreement whereby Sinopec Group Company has agreed to: refrain from operating new businesses which compete or could compete with us in any of our domestic or international markets; grant us an option to purchase Sinopec Group Company's operations that compete or could compete with our businesses; operate its sales enterprises and service stations in a manner uniform to our sales and service operations; and appoint us as sales agent for certain of its products which compete or could compete with our products. Notwithstanding the foregoing contractual arrangements, because Sinopec Group Company is our controlling shareholder, Sinopec Group Company may take actions that may conflict with our own interests.

 
10
 

Investments in OFAC sanctioned countries.
 
Sinopec Group Company undertakes, from time to time and without our involvement, overseas investments and operations in the oil and gas industry, including exploration and production of oil and gas, refining and LNG projects.  Sinopec Group Company’s overseas asset portfolio includes oil and gas development projects in Iran, Sudan and Syria, which countries are on the sanction list published and administrated by the Office of Foreign Assets Control, or OFAC, of the U.S. Department of Treasury. Certain U.S.-based investors, including state and municipal governments and universities, may not wish to invest, and have proposed or adopted divestment or similar initiatives regarding investments, in companies that do business with countries on OFAC’s sanction list. These investors may not wish to invest, and may divest their investment, in us because of our relationship with Sinopec Group Company and its investments and activities in those OFAC sanctioned countries. As a result, the trading prices of our ADSs may be materially and adversely affected.
 
Risks Relating to the PRC
 
Government regulations may limit our activities and affect our business operations.
 
The PRC government, though gradually liberalizing its regulations on entry into the petroleum and petrochemical industry, continues to exercise certain controls over the petroleum and petrochemical industry in China. These control mechanisms include granting the licenses to explore and produce crude oil and natural gas, granting the licenses to market and distribute crude oil and refined petroleum products, regulating the pricing of refined petroleum products, collecting special gain levies, assessing taxes and fees payable, deciding import and export quotas and procedures for the oil and gas industry, and setting safety, environmental and quality standards. As a result, we may face constraints on our flexibility and ability to expand our business operations.
 
Our business operations may be adversely affected by present or future environmental regulations.
 
As an integrated petroleum and petrochemical company, we are subject to extensive environmental protection laws and regulations in China. These laws and regulations permit:
 
 
·
the imposition of fees for the discharge of waste substances;
     
 
·
the levy of fines and payments for damages for serious environmental offenses; and
     
 
·
the government, at its discretion, to close any facility which fails to comply with orders and require it to correct or stop operations causing environmental damage.
 
Our production operations produce substantial amounts of waste water, gas and solid waste materials. In addition, our production facilities require operating permits that are subject to renewal, modification and revocation. We have established a system to treat waste materials to prevent and reduce pollution.  However, the PRC government has moved, and may move further, toward more rigorous enforcement of applicable laws, and toward the adoption of more stringent environmental standards, which, in turn, would require us to incur additional expenditures on environmental matters.
 
Some of our development plans require compliance with state policies and regulatory confirmation and registration.
 
We are currently engaged in a number of construction, renovation and expansion projects. Some of our large construction, renovation and expansion projects are subject to governmental confirmation and registration. The timing and cost of completion of these projects will depend on numerous factors, including when we can receive the required confirmation and registration from relevant PRC government authorities and the general economic condition in China. If any of our important projects required for our future growth are not confirmed or registered, or not confirmed or registered in a timely manner, our results of operations and financial condition could be adversely impacted.
 
Foreign enterprise holders of H shares may be subject to PRC taxation.
 
In accordance with the new Enterprise Income Tax Law and its implementation rules that became effective on January 1, 2008, dividends derived from the revenues after January 1, 2008 and are paid by PRC

 
11
 

companies to record holders that are non-resident enterprises, which are established under the laws of non-PRC jurisdictions and have no establishment or place of business in China or whose dividends from China do not relate to their establishment or place of business in China, are generally subject to a PRC withholding tax levied at a rate of 10% unless exempted or reduced pursuant to an applicable tax treaty or other exemptions. Under the notice issued by the State Administration of Taxation of the PRC on November 6, 2008, we are required to withhold PRC income tax at the rate of 10% on dividends paid for 2008 and later years payable to our H Share record holders that are “non-resident enterprises”. Accordingly, the investors of our American Depositary Shares representing our H Shares will be subject to such withholding of the PRC income tax at the rate of 10%, as Citibank N.A., the record holder of the H Shares represented by our American Depositary Shares, is deemed as a "non-resident enterprise" under the relevant PRC laws and regulations.
 
Government control of currency conversion and exchange rate fluctuation may adversely affect our operations and financial results.
 
We receive a significant majority of our revenues in Renminbi. A portion of such revenues will need to be converted into other currencies to meet our foreign currency needs, which include, among other things:
 
 
·
import of crude oil and other materials;
     
 
·
debt service on foreign currency-denominated debt;
     
 
·
purchases of imported equipment;
     
 
·
payment of the principals and interests of bonds issued overseas; and
     
 
·
payment of any cash dividends declared in respect of the H shares (including ADS).
 
The existing foreign exchange regulations have significantly reduced government foreign exchange controls for transactions under the current account, including trade and service related foreign exchange transactions and payment of dividends.  Foreign exchange transactions under the capital account, including principal payments in respect of foreign currency-denominated obligations, continue to be subject to significant foreign exchange controls and require the approval of the State Administration of Foreign Exchange. These limitations could affect our ability to obtain foreign exchange through debt or equity financing, or to obtain foreign exchange for capital expenditures.  The PRC government has stated publicly that it intends to make the Renminbi freely convertible in the future. However, we cannot predict whether the PRC government will continue its existing foreign exchange policy and when the PRC government will allow free conversion of Renminbi.
 
The exchange rate of the Renminbi against the U.S. dollar and other foreign currencies fluctuates and is affected by, among other things, the foreign exchange control policies of the PRC government and the changes in the PRC’s and international political and economic conditions.  On July 21, 2005, the PRC government introduced a floating exchange rate system to allow the value of the Renminbi to fluctuate within a regulated band based on market supply and demand and by reference to a basket of foreign currencies. From July 21, 2005 to December 31, 2009, the value of the Renminbi has appreciated by approximately 21.3% against the U.S. dollar, according to exchange rates as set forth in the H.10 statistical release of the U.S. Federal Reserve Board. We purchase a significant portion of the crude oil from international suppliers, and the purchase prices are benchmarked to US dollar-denominated international prices. Fluctuations in the exchange rate of the Renminbi against the U.S. dollars and certain other foreign currencies may materially and adversely affect our financial condition and results of operations.
 
Risks relating to enforcement of shareholder rights; Mandatory arbitration.
 
Currently, the primary sources of shareholder rights are our articles of association, the PRC Company Law and the Listing Rules of the Hong Kong Stock Exchange, which, among other things, impose certain standards of conduct, fairness and disclosure on us, our directors and our controlling shareholder. In general, their provisions for protection of shareholder's rights and access to information are different from those applicable to companies incorporated in the United States, the United Kingdom and other Western countries. In addition, the mechanism for enforcement of rights under the corporate framework to which we are subject may also be relatively undeveloped and untested. To our knowledge, there has not been any published report of judicial enforcement in the PRC by H share shareholders of their rights under constituent documents of joint stock limited companies or the PRC Company Law or in the application or interpretation of the PRC or Hong Kong regulatory provisions applicable to PRC joint stock limited companies. We cannot assure you that our shareholders will enjoy protections that they may be entitled in other jurisdictions.

 
12
 

China does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the United States, the United Kingdom or most other Western countries, and therefore recognition and enforcement in China of judgments of a court in any of these jurisdictions in relation to any matter not subject to a binding arbitration provision may not be assured. Our articles of association as well as the Listing Rules of the Hong Kong Stock Exchange provide that most disputes between holders of H shares and us, our directors, supervisors, officers or holders of domestic shares, arising out of the articles of association or the PRC Company Law concerning the affairs of our company, are to be resolved through arbitration by arbitration organizations in Hong Kong or China, rather than through a court of law. On June 18, 1999, an arrangement was made between Hong Kong and the PRC for the mutual enforcement of arbitral awards. This new arrangement was approved by the Supreme People's Court of the PRC and the Hong Kong Legislative Council, and became effective on February 1, 2000. We are uncertain as to the outcome of any action brought in China to enforce an arbitral award granted to shareholders.
 
ITEM 4.
INFORMATION ON THE COMPANY
 
 
A.
HISTORY AND DEVELOPMENT OF THE COMPANY
 
Our legal and commercial name is China Petroleum & Chemical Corporation. Our head office is located at 22 Chaoyangmen North Street, Chaoyang District, Beijing 100728, the People's Republic of China, our telephone number is (8610) 5996-0028 and our fax number is (8610) 5996-0386. We have appointed our subsidiary in the United States, SINOPEC-USA Co., Ltd., 410 Park Avenue, 22nd Fl., New York, NY 10022, USA (telephone number: (212) 759-5085; fax number: (212) 759-6882) as our agent for service of processes for actions brought under the U.S. securities laws.
 
We were established as a joint stock limited company on February 25, 2000 under the Company Law of the PRC with Sinopec Group Company as the sole shareholder. Our principal businesses consist of petroleum and petrochemical businesses transferred to us by Sinopec Group Company pursuant to a reorganization agreement.  Such businesses include:
 
 
·
exploration for, development, production and marketing of crude oil and natural gas;
     
 
·
refining of crude oil and marketing and distribution of refined petroleum products, including transportation, storage, trading, import and export of petroleum products; and
     
 
·
production and sales of petrochemical products.
     
 
Sinopec Group Company's continuing activities consist, among other things, of:
   
 
·
exploring and developing oil and gas reserves overseas;
     
 
·
operating certain petrochemical facilities, small capacity refineries and retail service stations that it retained;
     
 
·
providing geophysical exploration, and well drilling, survey, logging and downhole operational services;
     
 
·
manufacturing production equipment and providing equipment maintenance services;
     
 
·
providing construction services;
     
 
·
providing utilities, such as electricity and water; and
     
 
·
providing other operational services including transportation services.
 
Sinopec Group Company transferred the businesses to us either by transferring its equity holdings in subsidiaries or by transferring their assets and liabilities. Sinopec Group Company also agreed in the reorganization agreement to transfer to us its exploration and production licenses and all rights and obligations under the agreements in connection with its core businesses transferred to us. The employees relating to these assets were also transferred to us.

 
13
 

In order to expand our core businesses, prevent competition between us and members of Sinopec Group and reduce related party transactions, between 2001 and 2008 we have acquired from Sinopec Group Company Sinopec National Star Petroleum Company, Sinopec Group Maoming Petrochemical Company, Tahe Oilfield Petrochemical Factory and Xi'an Petrochemical Main Factory, certain Petrochemical and Catalyst Assets, certain Refinery Plants and certain service stations, certain Oil Production Plants, Sinopec Hainan and certain downhole operation assets. We have also sold and disposed of certain auxiliary assets to third parties. In addition, we completed the privatization of Beijing Yanhua Petrochemical Co., Ltd. and Sinopec Zhenhai Refinery and Chemicals Co., Ltd. and the tender offers for the acquisition of publicly-held A-shares of four subsidiaries formerly listed on stock exchanges in China, namely Sinopec Qilu Petrochemical Co., Ltd., Sinopec Yangzi Petrochemical Co., Ltd., Sinopec Zhongyuan Petroleum Co., Ltd., and Shengli Oil Field Dynamic Co., Ltd. In addition, in 2007, we acquired 20 service stations and fuel business in Hong Kong from China Resources Enterprise, Ltd.
 
On June 30, 2009, we completed the acquisition of 100% equity interest of Sinopec Qingdao Petrochemical Co., Ltd., 41.99% equity interest in Shijiazhuang Chemical Fiber Co. Ltd., property interests in eight oil product pipeline project divisions and certain other assets relating to our exploration and production, refining and marketing and distribution segments from Sinopec Group Company. On the same day, we also disposed certain assets in our chemicals segment to Sinopec Group Company. The total consideration for the acquisition was RMB 1,839 million and the total consideration for the disposal was RMB 157 million.  We funded the net acquisition consideration through our internal resources.
 
On August 31, 2009, we completed the acquisitions from Sinopec Group Company of (i) all the assets in Petroleum Exploration & Production Research Institute, Research Institute of Petroleum Processing, Beijing Chemical Research Institute, Shanghai Research Institute of Petrochemical Technology, Fushun Research Institute of Petroleum and Petrochemicals and Qingdao Safety Engineering Research Institute, and (ii) 100% equity interests in Beijing Xingpu Fine Chemical Technical Development Company, Beijing Petrochemical Design Institute of Beijing Chemical Institute, Qingdao Sinosun Management System Certification Center, Fushun Huanke Petrochemical Technical Development Co., Ltd. and Sinopec Material Equipment Company. The total consideration for the acquisitions is RMB 3,946 million, which we funded through our internal resources.
 
On March 26, 2010, Sinopec Corporation Hong Kong International Limited, a wholly-owned subsidiary of Sinopec Corp., and Sinopec Overseas Oil & Gas Limited, a wholly-owned subsidiary of Sinopec Group Company, entered into a purchase agreement and a deed of novation, pursuant to which Sinopec Corporation Hong Kong International Limited agreed to acquire (i) 55% of the total issued share capital of Sonangol Sinopec International Limited, or SSI, a company which is incorporated in the Cayman Islands and a joint venture between China Sonangol International Holding Limited and Sinopec Overseas Oil & Gas Limited, and (ii) the shareholder’s loan provided by Sinopec Overseas Oil & Gas Limited to SSI with a cap of US$ 2.465 billion (equivalent to approximately RMB 16.831 billion). As of November 30, 2009, in respect of the shareholder’s loan, SSI had utilized US$2.3 billion (equivalent to approximately RMB15.9 billion), and the outstanding balance (with accrued interest) of which amounted to US$779.1 million (equivalent to approximately RMB5.3 billion). The total consideration for the acquisition of shares and shareholder’s loan is US$ 2.5 billion (equivalent to approximately RMB 16.8 billion). Sinopec Corporation Hong Kong International Limited will pay the consideration through its own financial resources and bank loans. After the completion of the transaction, SSI will be controlled by Sinopec Corp.  The acquisition is subject to the approvals by relevant PRC governmental authorities and our independent shareholders.
 
 
B.
BUSINESS OVERVIEW
 
Exploration and Production
 
Overview
 
We currently explore for, develop and produce crude oil and natural gas in a number of areas across China. As of December 31, 2009, we held 193 production licenses with an aggregate acreage of 19,136 square kilometers and with terms ranging from 10 to 80 years. Our production licenses are renewable upon our application at least 30 days prior to expiration. During the term of our production license, we pay an annual production license fee of RMB 1,000 per square kilometers. Oilfields at our Shengli production bureau accounted for approximately 58% of our total crude oil and natural gas production in 2009.

 
14
 

As of December 31, 2009, we held 318 exploration licenses for various blocks in which we engaged in exploration activities. The maximum term of our exploration licenses is 7 years and the authorized total acreage under such licenses are 964 thousand square kilometers. Our exploration licenses may be renewed upon our application at least 30 days prior to expiration of the original term with each renewal for a two-year term. We are obligated to make an annual minimum exploration investment in each of the exploration blocks which we obtained the exploration licenses. In addition, we are also obligated to pay an annual exploration license fee ranging from RMB 100 to RMB 500 per square kilometer.  However, we are entitled under PRC laws and regulations for reduction and exemption of exploration license fee for exploration in China’s western region, northeast region and offshore China.
 
Properties
 
We currently operate 16 oil and gas production bureaus, each of which consists of many oil and gas producing fields and blocks and all of which are located in China.
 
Shengli production bureau, our most important crude oil production bureau, consists of 70 producing blocks of various sizes extending over an area of 2,564 square kilometers in northern Shandong province. Most of Shengli’s blocks are located in the Jiyang trough with various oil producing levels. In 2009, Shengli production bureau produced 200 million barrels of crude oil and 24.7 billion cubic feet of natural gas, with an average daily production of 553 thousand BOE, accounting for approximately 58% of our total crude oil and natural gas production for the year.
 
As of December 31, 2009, the total acreage of our oil and gas producing fields and blocks was 8,349 square kilometers, including 5,684 square kilometers that are developed acreage and 2,665 square kilometers that are undeveloped acreage. All of our oil and gas producing fields and blocks with respect to which acreage information is given are wholly owned by us.
 
Oil and Natural Gas Reserves
 
Our estimated proved reserves of crude oil and natural gas as of December 31, 2009 were 3,943 million BOE (including 2,820 million barrels of crude oil and 6,739 billion cubic feet of natural gas), representing a decrease of 1.4% from 2008. Our estimated proved reserves do not include additional quantities recoverable beyond the term of the relevant production licenses, or that may result from extensions of currently proved areas, or from application of improved recovery processes not yet tested and determined to be economical.
 
The following tables set forth our proved developed and undeveloped crude oil and natural gas reserves by our major oil and gas production bureaus as of December 31, 2007, 2008 and 2009. Reserves information as of December 31, 2009 shown in the following tables was calculated using the average of first-day-of-the-month price for oil and gas during 2009. Reserves information as of December 31, 2007 and 2008 shown in the following tables was calculated using year-end oil and gas price.

   
As of December 31,
 
   
2007
   
2008
   
2009
 
Crude Oil
 
(in millions of barrels)
 
Proved Reserves
                 
    Developed                        
Shengli
    2,167       1,964       2,009  
Zhongyuan
    154       116       124  
Xibei
    119       158       173  
Henan
    75       77       72  
Jiangsu
    84       88       89  
Others
    52       48       46  
Total Developed
    2,651       2,451       2,513  
Undeveloped
                       
Shengli
    64       187       114  
Zhongyuan
    81       49       33  
Xibei
    161       117       132  
Henan
    21       4       1  
Jiangsu
    3       3       3  
Others
    43       30       24  
Total Undeveloped
    373       390       307  
Total Proved Reserves
    3,024       2,841       2,820  

 
15
 
 
   
As of December 31,
 
   
2007
   
2008
   
2009
 
Natural Gas
 
(in billions of cubic feet)
 
Proved Reserves
                 
Developed
                 
Shengli
    328       264       262  
Zhongyuan
    198       133       103  
Xibei
    196       242       296  
Jiangsu
    10       12       12  
Xinan
    417       420       446  
Huabei
    327       384       450  
Puguang
    0       0       0  
Others
    43       116       158  
Total Developed
    1,519       1,571       1,727  
Undeveloped
                       
Shengli
    0       0       0  
Zhongyuan
    163       56       33  
Xibei
    2       210       122  
Jiangsu
    0       0       0  
Xinan
    340       262       241  
Huabei
    454       325       275  
Puguang
    3,509       4,001       3,926  
Others
    344       534       415  
Total Undeveloped
    4,812       5,388       5,012  
Total Proved Reserves
    6,331       6,959       6,739  
 
As of December 31, 2009, approximately 307 million barrels of our crude oil proved reserves and 5,012 billion cubic feet of our natural gas proved reserves were classified as proved undeveloped reserves. This compares to 390 million barrels and 5,389 billion cubic feet of proved undeveloped reserves of crude oil and natural gas, respectively, as of December 31, 2008. During the year, 1,193 new wells were drilled, including 607, 185 and 155 new wells at our Shengli production bureau, Zhongyuan production bureau and Xibei production bureau, respectively. We converted 111 million barrels of proved undeveloped crude oil reserves and 203 billion cubic feet of proved undeveloped natural gas reserves into proved developed reserves in 2009. Total capital expenditure incurred in converting proved undeveloped reserves into proved developed reserves amounted to RMB 12.2 billion, including RMB 4.7 billion, RMB 4.2 million and RMB 1.2 million incurred in connection with our operations at Xibei production bureau, Shengli production bureau and Zhongyuan production bureau, respectively, in 2009.
 
We manage our reserves estimation through a two-tier management system. Our Oil and Natural Gas Reserves Management Committee, or the RMC, at our headquarters level oversees the overall reserves estimation process and reviews the reserves estimation of our Company. Each of our production bureaus has a reserves management committee that manages the reserves estimation process and reviews the reserves estimation report at production bureau level.
 
Our RMC is chaired by Mr. Wang Zhigang, one of our senior vice presidents, and is co-led by our deputy chief geologist and our director general of our exploration and production segment.  Mr. Wang holds a Ph.D. degree in geology from Geology and Geo-physics Research Institute of the China Academy of Science and has 28 years of experience in oil and gas industry. Our RMC also consists of 31 other members who are senior management members in charge of exploration and development activities at production bureau level. A majority of our RMC members hold doctor’s or master’s degrees and our RMC members have an average of 20 years of technical experience in relevant industry fields, such as geology, engineering and economics.

Our reserves estimation is guided by procedural manuals and technical guidance. Initial collection and compilation of reserves information are conducted by different working divisions, including exploration, development, financial and legal divisions, at production bureau level. Exploration and development divisions collectively prepare the initial report on reserves estimation. Together with technical experts, reserves management committees at production bureau level then holds peer review to ensure the qualitative and quantitative compliance with technical

 
16
 

guidance and accuracy and reasonableness of the reserves estimation. At headquarter level, the RMC is primarily responsible for the management and coordination of the reserves estimation process, review and approval of annual changes and results in reserves estimation and reporting of our proved reserves. We also engage outside consultants who assist us to be in compliance with the U.S. Securities and Exchange Commission rules and regulations. Our reserves estimation process is further facilitated by a specialized reserves database which is improved and updated periodically.
 
Oil and Natural Gas Production
 
In 2009, we produced an average of 962 thousand BOE per day, of which approximately 85.8% was crude oil and 14.2% was natural gas. The following tables set forth our average daily production by final product sold and by our major oil and gas production bureau for the last three years. The production of crude oil includes condensed oil.

   
For the Years Ended December 31,
 
   
2007
   
2008
   
2009
 
   
(in thousands of barrels daily)
 
Average Daily Crude Oil Production
                 
Shengli
    539       538       541  
Zhongyuan
    59       58       56  
Xibei 
    104       116       128  
Henan 
    35       35       36  
Jiangsu 
    33       33       33  
Others
    29       31       31  
Total Crude Oil Production
    799       811       825  

   
For the Years Ended December 31,
 
   
2007
   
2008
   
2009
 
   
(in thousands of barrels daily)
 
Average Daily Natural Gas Production
                 
Shengli 
    76       74       68  
Zhongyuan 
    143       102       90  
Xibei
    92       123       130  
Henan
    7       6       6  
Jiangsu
    5       6       6  
Xinan
    260       261       281  
Huabei
    140       185       190  
Others
    51       44       48  
Total Natural Gas Production                                                                             
    774       801       819  

Lifting Cost & Realized Prices
 
The following table sets forth our average lifting costs per BOE of crude oil and natural gas produced, average sales prices per barrel of crude oil and average sales prices per thousand cubic meters of natural gas for the years ended December 31, 2007, 2008 and 2009.
 
   
Total
   
Shengli
   
Others
 
   
(RMB)
 
For the year ended December 31, 2009
                 
Average petroleum lifting cost per BOE
    90.51       96.34       82.63  
Average realized sales price
                       
   Per barrel of crude oil
    339.36       337.12       343.70  
   Per thousand cubic meters of natural gas
    959.04       1019.98       956.75  
For the year ended December 31, 2008
                       
Average petroleum lifting cost per BOE
    88.80       92.24       83.99  
Average realized sales price
                       
   Per barrel of crude oil
    601.22       598.99       605.80  
   Per thousand cubic meters of natural gas
    914.47       992.15       939.48  
For the year ended December 31, 2007
                       
Average petroleum lifting cost per BOE
    84.62       87.23       80.78  
Average realized sales price
                       
   Per barrel of crude oil
    435.94       421.66       466.17  
   Per thousand cubic meters of natural gas
    822.83       939.92       817.72  

 
17
 
 
Exploration and Development Activities
 
In 2009, we continued to increase our production capacity and scale of our reserve development. We made progress with our key exploration and development projects in Shengli and Tahe. Our Songnan gas field started production. In 2009, our crude oil production capacity increased by 5.7 million tonnes per annum and our natural gas production capacity increased by 1.205 billion cubic meters per annum. Our Sichuan-to-East China Gas Project commenced trial operation in 2009.

The following table sets forth the numbers of our exploratory and development wells, including a breakdown of productive wells and dry wells we drilled during the years ended December 31, 2007, 2008 and 2009.

   
Total
   
Shengli
   
Xibei
   
Others
 
For the year ended December 31, 2009
                       
Exploratory
                       
     — Productive
    259       109       15       135  
     — Dry
    311       95       30       186  
Development
                               
     — Productive
    3,079       1,702       147       1,230  
     — Dry
    22       8       8       6  
For the year ended December 31, 2008
                               
Exploratory
                               
     — Productive
    248       128       26       94  
     — Dry                                                                
    296       105       18       173  
Development
                               
     — Productive
    3,128       1,563       141       1,424  
     — Dry
    24       4       12       8  
For the year ended December 31, 2007
                               
Exploratory
                               
     — Productive
    251       118       16       117  
     — Dry 
    306       119       24       163  
Development
                               
     — Productive
    2,956       1,136       112       1,708  
     — Dry
    20       2       8       10  

The following table sets forth the number of wells being drilled by our major oil and gas production bureau as of December 31, 2009, as compared to December 31, 2008. We own 100% of the working interest in these wells:
   
As of December 31,
 
   
2008
   
2009
 
Wells Drilling
           
Shengli 
    47       54  
Zhongyuan 
    21       33  
Xibei
    30       43  
Jiangsu
    6       22  
Others
    73       67  
Total Wells Drilling
    177       219  

As of December 31, 2009, we were conducting waterdrive testing at the undeveloped reserves with extra-low permeability at production bureaus of Shengli, Xibei and Dongbei.

The following table sets forth our number of productive wells for crude oil and natural gas as of December 31, 2009, as compared to December 31, 2008:

 
18
 
 
   
As of December 31,
 
   
2008
   
2009
 
   
Crude Oil
   
Natural Gas
   
Crude Oil
   
Natural Gas
 
Shengli 
    24,303       394       25,600       415  
Zhongyuan
    3,936       301       4,033       296  
Xibei 
    840       80       995       88  
Jiangsu 
    1,776       5       1,929       6  
Others
    6,038       2,095 (1)     6,427       2,275 (1)
Total Productive Wells 
    36,893       2,875       38,984       3,080  
__________
 
(1)
Including (i) six (6) natural gas productive wells in which a third party owns 50% of the working interest; and (ii) twelve (12) natural gas productive wells in which a third party owns 70% of the working interest.
 
Refining
 
Overview
 
We processed approximately 182.0 million tonnes of crude oil in 2009, representing approximately 53.57% of China's total crude oil throughput.  We produce a full range of refined petroleum products. The following table sets forth our production of our principal refined petroleum products for the years ended December 31, 2007, 2008 and 2009.
 
   
For the Years Ended December 31,
 
   
2007
   
2008
   
2009
 
   
(in million tonnes)
 
Gasoline
    26.6       29.6       34.4  
Diesel
    63.4       69.7       68.9  
Kerosene including jet fuel
    8.3       8.0       10.4  
Light chemical feedstock
    24.0       23.1       26.9  
Lubricant
    13.3       12.1       1.3  
Liquefied petroleum gas
    7.4       8.2       8.7  
Fuel oil
    5.6       5.1       4.1  

Gasoline and diesel are our largest revenue producing products, and are sold mostly through our marketing and distribution segment through both wholesale and retail channels. We use most of our production of chemical feedstock as feedstock for our own chemical operations. Most of our refined petroleum products were sold domestically to a wide variety of industrial and agricultural customers, and a small amount are exported.
 
Refining Facilities
 
Currently we operate 34 refineries in China, all of which are located in our principal market. As of December 31, 2009, our total primary distillation capacity was 227.0 million tonnes per annum.
 
The following table sets forth our total primary distillation capacity per annum and crude oil throughputs as of and for the years ended December 31, 2007, 2008 and 2009.
 
   
As of and for the Years Ended December 31 ,
 
   
2007
   
2008
   
2009
 
Primary distillation capacity (million tonnes per annum)
    191.9       208.0       227.0  
Crude oil throughputs (million tonnes)
    164.0       171.1       182.6  

In 2009, measured by the total output from our refineries, our overall gasoline yield was 18.85%, overall diesel yield was 37.71%, overall kerosene yield was 5.69% and overall light chemical feedstock yield was 14.71%. Other products include lubricant, liquefied petroleum gas, solvent, asphalt, petroleum coke, paraffin and fuel oil. For the years ended December 31, 2007, 2008 and 2009, our overall yield for all refined petroleum products at our refineries was 93.95%, 94.05% and 94.53%, respectively.
 
The following table sets forth the primary distillation capacity per annum as of, and refinery throughput for the years ended, December 31, 2007, 2008 and 2009 of each of our refineries with the primary distillation capacity of  8 million tonnes or more per annum as of December 31, 2009.

 
19
 
 
   
As of and for the Years Ended December 31,
 
   
2007
   
2008
   
2009
 
Refinery
 
Primary
Distillation
Capacity
   
Refinery
Throughput
   
Primary
Distillation
Capacity
   
Refinery
Throughput
   
Primary
Distillation
Capacity
   
Refinery
Throughput
 
   
(in million tonnes)
 
                                     
Zhenhai
    20.0       18.6       20.0       19.4       23.0       19.2  
Shanghai
    14.0       8.9       14.0       9.2       14.0       8.8  
Maoming
    13.5       13.1       13.5       13.0       13.5       13.0  
Guangzhou
    13.2       10.4       13.2       11.6       13.2       11.2  
Jinling
    13.0       11.5       13.0       11.2       13.0       12.4  
Yanshan
    13.0       8.6       13.0       10.7       13.0       10.8  
Gaoqiao
    11.0       8.1       11.0       10.2       11.0       10.5  
Qilu
    10.5       10.6       10.5       10.0       10.5       10.1  
Qingdao (1)
    -       -       10.0       5.1       10.0       9.5  
Yangzi
    8.0       8.2       8.0       7.5       8.0       8.0  
Hainan
    8.0       8.0       8.0       7.8       8.0       8.2  
Luoyang
    6.5       5.2       8.0       4.8       8.0       6.4  
Wuhan
    5.0       4.3       8.0       4.0       8.0       4.5  
Fujian
    4.0       3.5       4.0       3.1       12.0       7.0  
Tianjin
    5.5       5.3       5.5       3.6       12.5       4.3  
__________
 
(1)
Qingdao Refinery was completed and commenced operation in May 2008.

In 2009, our primary distillation capacity of crude oil increased by 22.0 million tonnes per annum, representing a net increase of 19.0 million tonnes per annum from 2008 after adjusting for the facility shut-downs, which includes an increase of 21.0 million tonnes per annum in the distillation capacity of high-sulfur crude oil. In addition, in 2009, our hydro-refining capacity and coking capacity increased by 16.8 million tonnes per annum and 3.3 million tonnes per annum, respectively. The revamping projects for a number of refining facilities to improve refined petroleum product quality were also progressing as planned.
 
Sources of Crude Oil
 
Crude oil is our most important raw material.  The following table sets forth the sources of our crude oil supply for the years ended December 31, 2007, 2008 and 2009.
 
   
For the Years ended December 31,
 
   
2007
   
2008
   
2009
 
Source of Supply
 
(in million tonnes)
 
Self-supply
    30.83       30.88       31.90  
PetroChina Company Ltd.
    6.89       6.13       7.05  
CNOOC Ltd.
    7.42       7.55       6.49  
Import
    116.87       127.98       138.07  
Total
    162.01       172.54       183.51  

Marketing and Sales of Refined Petroleum Products
 
Overview
 
We operate the largest sales and distribution network for refined petroleum products in China. In 2009, we distributed and sold in China approximately 124.02 million tonnes of gasoline, diesel and kerosene including jet fuel, representing a market share of approximately 60% in China.  Most of the refined petroleum products sold by us are produced internally. In 2009, approximately 84% of our gasoline sales volume and approximately 87% of our diesel sales volumes were produced internally.
 
The table below sets forth a summary of key data in the marketing and sales of refined petroleum products for the year ended December 31, 2007, 2008 and 2009.

 
20
 
 
   
For the Years Ended December 31,
 
   
2007
   
2008
   
2009
 
Sales volume of refined petroleum products
(in million tonnes)
    119.39       122.98       124.02  
Of which: Retail
    76.62       84.10       78.90  
                 Direct Sales
    20.17       19.63       25.61  
                 Wholesale
    22.60       19.25       19.52  
Average annual throughput of service stations (tonnes per station)
    2,697       2,935       2,715  
Total number of service stations under Sinopec brand as of December 31 of the respective year
    29,062       29,279       29,698  
Of which:  Self-operated service stations
    28,405       28,647       29,055  
                   Franchised service stations
    657       632       643  
 
Retail
 
All of our retail sales are made through a network of service stations and petroleum shops operated under the Sinopec brand. Through this unified network we are more able to implement consistent pricing policies, maintain both product and service quality standards and more efficiently deploy our retail network.
 
In 2009, we sold approximately 78.9 million tonnes of refined petroleum products through our retail network, representing approximately 63.6% of our total refined petroleum products sales volume. Our retail market share in 2009 was approximately 76.7% in our principal market. Our retail network mainly consists of service stations that are wholly-owned and operated by us or jointly-owned and operated or leased by us and franchised service stations that are owned and operated by third parties.
 
In 2009, we continued to improve our refined petroleum products retail networks through acquisition, construction and renovation of service stations, and added 408 new service stations wholly-owned and operated by us into our retail network. We believe we have further strengthened our leading position in our principal market, and further improved our brand awareness and customer loyalty.
 
Direct Sales

In 2009, we sold approximately 25.61 million tonnes of refined petroleum products, including 2.42 million tonnes of gasoline, 23.06 million tonnes of diesel and 0.13 million tonnes of kerosene, through direct sales to commercial customers such as industrial enterprises, hotels, restaurants and agricultural producers.
 
Wholesale
 
In 2009, we sold approximately 19.52 million tonnes of refined petroleum products through wholesale channels, representing approximately 15.7% of our total sales volume of refined petroleum products. Our wholesale sales include sales to large commercial or industrial customers and independent distributors as well as sales to certain long-term customers such as railway, airlines, shipping and public utilities.
 
Through our wholesale centers, we operate 410 storage facilities with a total capacity of approximately 14.0 million cubic meters, substantially all of which are wholly-owned by us. Our wholesale centers are connected to our refineries by railway, waterway and, in some cases, by pipelines. We also own some dedicated railways, oil wharfs and oil barges, as well as a number of rail tankers and oil trucks.
 
Chemicals
 
Overview
 
We are the largest petrochemicals producer in China.  We produce a full range of petrochemical products including intermediate petrochemicals, synthetic resins, synthetic fiber monomers and polymers, synthetic fibers, synthetic rubber and chemical fertilizers. Synthetic resins, synthetic fibers, synthetic rubber, chemical fertilizers and some intermediate petrochemicals comprise a significant majority of our external sales. Synthetic fiber monomers and polymers and intermediate petrochemicals, on the other hand, are mostly internally consumed as feedstock for the production of other chemical products. Our chemical operations are integrated with our refining businesses, which

 
21
 

supply a significant portion of our chemical feedstock such as naphtha. Because of strong domestic demand, most of our petrochemical products are sold in China’s domestic market.
 
In 2009, our Fujian ethylene project commenced operation and construction of our Tianjin ethylene project achieved mechanical completion.
 
Products
 
Intermediate Petrochemicals
 
We are the largest ethylene producer in China.  Our rated ethylene capacity was 7.13 million tonnes per annum, which represented 59.6% of China’s total domestic ethylene capacity, as of December 31, 2009. In 2009, we produced 6.71 million tonnes of ethylene, representing approximately 62.8% of the total domestic output. Nearly all of our olefins production is used as feedstock for our petrochemical operations.
 
We produce aromatics mainly in the forms of benzene and para-xylene, which are used primarily as feedstock for purified terephthalic acid, or PTA, the preferred raw material for polyester. We are the largest aromatics producer in China.
 
Organic chemicals extracted mainly from olefins and aromatics are intermediate petrochemicals and are essential raw materials for synthetic resins, synthetic rubber and synthetic fibers. We are the largest producer of butanol, styrene, paraxylene, vinyl acetate, phenol and acetone in China.
 
The following table sets forth our rated capacity per annum, production volume and major plants of production as of or for the year ended December 31, 2009 for our principal intermediate petrochemical products. These operational data include 100% of the rated capacity and production of our joint ventures, SECCO, BASF-YPC, and Fujian Refining and Petrochemical Company Limited., which we own 50%, 40% and 50%, respectively.
 
   
Our Rated
Capacity
 
Our
Production
 
 
Major Plants of Production
   
(thousand tonnes
per annum)
 
(thousand
tonnes)
   
Ethylene
 
7,135
 
6,713
 
Yanshan, Shanghai, Yangzi, Qilu, Maoming, Guangzhou, Tianjin, Zhongyuan, SECCO, BASF-YPC and Fujian
             
Propylene
 
6,343
 
6,169
 
Yanshan, Shanghai, Yangzi, Qilu, Maoming, Guangzhou, Tianjin, Zhongyuan, SECCO, BASF-YPC, Gaoqiao, Anqing, Jinan, Jingmen, Wuhan and Fujian
             
Benzene
 
3,701
 
2,488
 
Yanshan, Shanghai, Yangzi, Qilu, Guangzhou, Zhenhai, Tianjin, Luoyang, SECCO and BASF-YPC
             
Styrene
 
1,241
 
996
 
Yanshan, Qilu, Guangzhou, Maoming and SECCO
             
Para-xylene
 
4,068
 
2,997
 
Shanghai, Yangzi, Qilu, Tianjin and Luoyang
             
Phenol
 
350
 
322
 
Yanshan and Gaoqiao

Synthetic Resins
 
We are the largest producer of polyethylene, polypropylene and polystyrene and supplier of major synthetic resins products in China.

 
22
 

The following table sets forth our rated capacity per annum, production volumes and major plants of production for each of our principal synthetic resins as of or for the year ended December 31, 2009. These operational data include 100% of the rated capacity and production of our joint ventures, SECCO, BASF-YPC, and Fujian Refining and Petrochemical Company Limited., which we own 50%, 40% and 50%, respectively.
 
   
Our Rated
Capacity
 
Our
Production
 
Major Plants of Production
   
(thousand tonnes
per annum)
 
(thousand
tonnes)
   
Polyethylene
 
5,081
 
4,747
 
Yanshan, Shanghai, Yangzi, Qilu, Maoming, Guangzhou, Tianjin, Zhongyuan, SECCO, BASF-YPC and Fujian
Polypropylene
 
4,287
 
4,297
 
Yanshan, Shanghai, Yangzi, Qilu, Guangzhou, Maoming, Tianjin, Zhongyuan, SECCO, Wuhan Fenghuang, Jingmen and Fujian
Polyvinyl chloride
 
600
 
514
 
Qilu
Polystyrene
 
536
 
412
 
Yanshan, Qilu, Maoming, Guangzhou and SECCO
Acrylonitrile butadiene styrene
 
200
 
142
 
Gaoqiao

Synthetic Fiber Monomers and Polymers
 
Our principal synthetic fiber monomers and polymers are purified teraphthalic acid, ethylene glycol, acrylonitrile, caprolactam, polyester, polyethylene glycol and polyamide fiber. Based on our 2009 production, we are the largest producer of purified teraphthalic acid, ethylene glycol, caprolactam and polyester in China.  Most of our production of synthetic fiber monomers and polymers are used as feedstock for synthetic fibers.
 
The following table sets forth our rated capacity per annum, our production volume and major plants of production as of or for the year ended December 31, 2009 for each type of our principal synthetic fiber monomers and polymers. These operational data include 100% of the rated capacity and production of our joint ventures, SECCO, BASF-YPC, and Fujian Refining and Petrochemical Company Limited., which we own 50%, 40% and 50%, respectively.
 
   
Our Rated
Capacity
 
Our
Production
 
Major Plants of Production
   
(thousand tonnes
per annum)
 
(thousand
tonnes)
   
Purified teraphthalic acid
 
3,078
 
3,289
 
Shanghai, Yangzi, Yizheng, Tianjin and Luoyang
Ethylene glycol
 
1,413
 
1,013
 
Yanshan, Shanghai, Yangzi, Tianjin, Maoming, BASF-YPC and Fujian
Acrylonitrile
 
510
 
496
 
Shanghai, Anqing, Qilu and SECCO
Caprolactam
 
210
 
184
 
Shijiazhuang and Baling
Polyester                                     
 
2,812
 
2,701
 
Shanghai, Yizheng, Tianjin and Luoyang

Synthetic Fibers
 
We are the largest producer of polyester and acrylic fibers in China. Our principal synthetic fiber products are polyester fiber and acrylic fiber.
 
The following table sets forth our rated capacity per annum, production volume and major plants of production for each type of our principal synthetic fibers as of or for the year ended December 31, 2009.

 
23
 
 
   
Our Rated
Capacity
 
Our
Production
 
Major Plants of Production
   
(thousand tonnes
per annum)
 
(thousand
tonnes)
   
Polyester fiber                                     
 
1,200
 
991
 
Yizheng, Shanghai, Tianjin and Luoyang
Acrylic fiber                                     
 
315
 
305
 
Shanghai, Anqing and Qilu
 
Synthetic Rubbers
 
Our principal synthetic rubbers are cis-polybutadiene rubber, styrene butadiene rubber, or SBR, styrene butadiene-styrene thermoplastic elastomer and isobutadiene isoprene rubber, or IIR. Based on our 2009 production, we are the largest producer of SBR and cis-polybutadiene rubber and the only producer of IIR in China.
 
The following table sets forth our rated capacity per annum, production volume and major plants of production as of or for the year ended December 31, 2009 for each of our principal synthetic rubbers.
 
   
Our Rated
Capacity
 
Our
Production
 
Major Plants of Operation
   
(thousand tonnes
per annum)
 
(thousand
tonnes)
   
Cis-polybutadiene rubber
 
285
 
296
 
Yanshan, Qilu, Maoming and Gaoqiao
Styrene butadiene rubber
 
430
 
354
 
Yanshan, Qilu, Maoming and Gaoqiao and Yangzi
Styrene-butadiene-styrene thermoplastic elastomers
 
170
 
194
 
Yanshan and Maoming
Isobulylene isoprene rubber
 
45
 
40
 
Yanshan

Chemical Fertilizers
 
We produce synthetic ammonia and urea. Our synthetic ammonia is used to manufacture urea, caprolactam and acrylic nitrile.
 
The following table sets forth our rated capacity per annum, our production volume and major plants of production for ammonia and urea as of or for the year ended December 31, 2009.
 
   
Our Rated
Capacity
 
Our Production
 
Major Plants of Production
   
(thousand tonnes
per annum)
 
(thousand
tonnes)
   
Ammonia
 
2,227
 
1,123
 
Zhenhai, Jinling, Anqing, Jiujiang, Qilu, Hubei and Baling
Urea
 
3,634
 
1,752
 
Zhenhai, Jinling, Anqing, Jiujiang, Qilu, Hubei and Baling
 
Marketing and Sales of Petrochemicals
 
Price and volume of petrochemical sales are primarily market driven. The southern and eastern regions in China, where most of our petrochemical plants are located, constitute the major petrochemical market in China. Our proximity to the major petrochemical market gives us a geographic advantage over our competitors.
 
Our principal sales and distribution channels consist of direct sales to end-users, most of which are large- and medium-sized manufacturing enterprises, and sales to distributors in our national sales network. We also provided after-sale services to our customers, including technical support. We continuously strive to improve our product mix and enhance our product quality to meet market needs.

 
24
 

Competition
 
Exploration and Production
 
Because our production of crude oil can only meet approximately 17.4% of our crude oil requirements, we generally do not compete for crude oil customers. However, we compete with other market participants for the acquisition of desirable crude oil and natural gas prospects.
 
Refining and Marketing of Refined Petroleum Products
 
Market participants compete primarily on the basis of quality of products and service, efficiency of operations including proximity to customers, awareness of brand name and price. While we constantly face competition from other market participants, we believe that we have a competitive advantage in our principal market over our competitors in most of these aspects.
 
Chemicals
 
We compete with domestic and foreign chemicals producers in the chemicals market.  We believe our proximity to customers has given us significant geographical advantages. Most of our petrochemical production facilities are located in the eastern and southern regions in China, an area which has experienced higher economic growth rates in China in the past two decades. Proximity of our production facilities to our markets has given us an advantage over our competitors in terms of easy access to our customers, resulting in lower transportation costs, more reliable delivery of products and better service to customers.
 
Patents and Trademarks
 
In 2009, we were granted 605 patents in China and 37 patents overseas. As of December 31, 2009, we owned a total of 5,082 patents in China. We are also entitled to use certain patents, trademarks and computer software owned by Sinopec Group Company under a royalty-free basis, provided that we bear all such annual expenses of maintaining the validity of such trademarks, patents and computer software. Certain patents expire from time to time and cover various products, processes and product uses.  Our royalty-free trademark licenses from Sinopec Group Company also include the right to use the “Sinopec” brand for our products and services. Pursuant to a supplemental agreement we entered into with Sinopec Group Company on October 21, 2009, our intellectual property licenses from Sinopec Group Company were extended to December 31, 2019.
 
Regulatory Matters
 
Overview
 
China's petroleum and petrochemical industry has seen significant liberalization in the past ten years. However, the exploration, production, marketing and distribution of crude oil and natural gas, as well as the production, marketing and distribution of certain refined petroleum products are still subject to regulation of many government agencies including:
 
National Development and Reform Commission ("NDRC")
 
The NDRC is responsible for formulating and implementing key policies in respect of petroleum and petrochemical industry, including:
 
 
·
Formulating guidance plan for annual production, import and export amount of crude oil, natural gas and gasoline nationwide based on its forecast on macro economic conditions in China;
     
 
·
Setting the pricing policy for refined petroleum products;
     
 
·
Approving certain domestic and overseas resource investment projects which are subject to NDRC’s approval as required by the Catalogue of Investment Projects Approved by the Government (2004); and
     
 
·
Approving foreign investment projects that are in excess of certain investment limits.

 
25
 
 
The Ministry of Commerce ("MOFCOM")

MOFCOM is responsible for examining and approving production sharing contracts, Sino-foreign equity joint venture contracts and Sino-foreign cooperation joint venture contracts for oil and gas development within the PRC. It is also responsible to issue quotas and licenses for import and export of crude oil and refined oil.

Ministry of Land and Resources ("MLR")

The MLR is responsible for issuing the licenses that are required to explore and produce crude oil and natural gas in China.

Regulation of Exploration and Production
 
Exploration and Production Rights
 
The PRC Constitution provides that all mineral and oil resources belong to the state. In 1986, the Standing Committee of the National People's Congress passed the Mineral Resources Law which authorizes the Ministry of Land and Resources, or the MLR, to exercise administrative authority over the exploration and production of the mineral and oil resources within the PRC, including its territorial waters. The Mineral Resources Law and its supplementary regulations provide the basic legal framework under which exploration licenses and production licenses are granted. The MLR has the authority to grant exploration licenses and production licenses on a competitive bidding or other basis it considers appropriate. Applicants for these licenses must be companies approved by the State Council to engage in oil and gas exploration and production activities.  Currently, only we, PetroChina, CNOOC and Yanchang Petroleum Group Ltd. have received such exploration licenses and production licenses in oil and gas industry. In addition, pursuant to the Regulation on the Administration of Geological Survey Qualifications promulgated by the State Council, which became effective from July 1, 2008, any entity engaging in geological survey activities shall obtain a geological survey qualification certificate. Oil and natural gas survey qualifications, among others, shall be examined, approved and granted by the MLR.
 
Applicants for exploration licenses must first register with the MLR blocks in which they intend to engage in exploration activities. The holder of an exploration license is obligated to make an annual minimum exploration investment relating to the exploration blocks in respect of which the license is issued. Investment ranges from RMB 2,000 per square kilometer for the initial year to RMB 5,000 for the second year and to RMB 10,000 for the third and subsequent years. Additionally, the holder has to pay an annual exploration license fee of RMB 100 per square kilometer for each of the first three years. Afterwards, the annual fee increases by an additional RMB 100 per square kilometer per year up to a maximum of RMB 500 per square kilometer. The maximum term of an exploration license is 7 years. The exploration license may be renewed upon application by the holder at least 30 days prior to expiration of the original term with each renewal for a two-year term.
 
At the exploration stage, an applicant can also apply for a progressive exploration and production license that allows the holder to test and develop reserves not yet fully proved. The progressive exploration and production license has a maximum term of 15 years. When the reserves become proved for a block, the holder must apply for a full production license in order to undertake production.
 
The MLR issues full production licenses to applicants on the basis of the reserve reports approved by relevant authorities. The maximum term of a full production license is 30 years unless a special dispensation is given by the State Council. Due to a special dispensation granted to us by the State Council, the maximum term of our full production licenses is 80 years. The full production license is renewable upon application by the holder at least 30 days prior to expiration of the original term. A holder of the full production license has to pay an annual full production right usage fee of RMB 1,000 per square kilometer.
 
All companies approved by the State Council to engage in oil and gas exploration and production activities may apply for exploration and production licenses for onshore and offshore oil and natural gas resources without geographical restrictions. We have exploration and production licenses for the exploration and production of both onshore and offshore crude oil and natural gas resources in China.
 
Exploration and production licenses do not grant the holders the right to enter upon any land for the purpose of exploration and production. Holders of exploration and production licenses must separately obtain the right to use the land covered by the licenses, and if permissible under applicable laws, current owners of the rights to use such land may transfer or lease the land to the license holder.

 
26
 

Volume and Price of Natural Gas
 
The NDRC formulates the annual natural gas supply guidelines which require natural gas producers to distribute specified amount of natural gas to specified fertilizer producers. The actual production level of natural gas (excluding the amount supplied to the fertilizer producers) is determined by the natural gas producers themselves.
 
The price of natural gas has two components:
 
 
·
ex-factory price; and
     
 
·
pipeline transportation fee
 
Since December 2005, the NDRC simplified the ex-factory price-setting mechanism by dividing natural gas prices into two tiers and setting a median guidance ex-factory price for each tier.  The price for the first tier may be set within ± 10% of the guidance price through negotiation between the producers and their customers, while the price for the second tier may fluctuate up to 10% of the guidance price with no limitation on the minimum price.  In addition, the NDRC would adjust the guidance prices once per year by up to 8% annually to reflect the price trends of crude oil and other alternative energies. On November 8, 2007, the NDRC adopted an adjusted pricing policy for natural gas, by increasing the guidance ex-factory price of the natural gas for industrial applications other than chemical fertilizers and independent heating enterprises by RMB 400.0 per thousand cubic meters, deregulating the ex-factory price of the natural gas for LNG producers, fixing the minimum ratio between the base retail price of natural gas for automobiles and the base retail price of #90 gasoline at 0.75:1.
 
Natural gas producers submit to the NDRC for examination and approval of any proposed transportation fee for the natural gas transported by pipelines, which was based on the capital investment made in the pipeline, the depreciation period for the pipeline and the ability of end users to pay.
 
Regulation of Refining and Marketing of Refined Petroleum Products
 
Volume and Price Controls on Gasoline, Diesel and Jet Fuel
 
The PRC government continues to exercise control over gasoline, diesel and jet fuel prices.
 
According to the Notice on Implementing Reforms on Prices of Refined Products and Tax promulgated by the State Council on December 18, 2008 and the Measures for Administration of Petroleum Products Price (Trial) issued by the NDRC on May 7, 2009, the sale price for refined petroleum products in the PRC market shall be adjusted with reference to international crude oil price fluctuations, subject to governmental control. The NDRC will set maximum retail price and the provincial price bureaus have the authority to set maximum whole sale prices for gasoline and diesel . As a principle, maximum retail price for gasoline and diesel in the Chinese market shall be decided with reference to the international crude oil price plus the average domestic processing costs, tax levies, reasonable sales and marketing expenses and appropriate profit. The refined petroleum products price in the PRC market may be adjusted when the moving average price of international crude oil price fluctuates beyond 4% within a period of 22 consecutive business days. If the international crude oil prices experience sustained increase or radical fluctuation, the price of refined petroleum products, including gasoline and diesel products, will be controlled by the government to reduce the oil price fluctuation impact upon the PRC market.
 
Regulation of Crude Oil and Refined Petroleum Products Market
 
On December 4, 2006, Ministry of Commerce of the PRC promulgated the “Administrative Rules for Crude Oil Market” and “Administrative Rules for Refined Petroleum Products  Market” to open the wholesale market of crude oil and refined petroleum products to new market entrants, respectively. We will face more competition in both crude oil and refined petroleum products markets. Such increased competition may have a material adverse effect on our financial conditions and results of operations.
 
Investment
 
Under the State Council's   Decision on Investment System Reform, investments without the use of government funds are only subject to a licensing system or a registration system, as the case may be. Under the current

 
27
 

system, only significant projects and the projects of restrictive nature are subject to approval so as to maintain social and public interests, and all other projects of any investment scale are only subject to a registration system.
 
Overseas investment project falling within the category of resources development involving investment by any Chinese party of above US$ 200 million (inclusive) shall be verified and approved by the State Council, and those involving investment of above US$ 30 million (inclusive) shall be verified and approved by the NDRC. Other overseas investment project shall be verified and approved by State Council if it involves investment by any Chinese party of above US$ 50 million (inclusive), or by the NDRC if it involves investment by any Chinese party of above US$ 10 million (inclusive). Any overseas investment projects other than the foregoing shall be filed with the NDRC and/or the MOFCOM if the investor is an enterprise managed by the central government, or approved by its local government according to applicable laws and regulations. Overseas investment projects involving domestic enterprise's establishment or acquisition of overseas enterprise to acquire ownership, control or management rights of overseas enterprise (with the exception of financial enterprises) shall be approved by the MOFCOM or relevant provincial-level commerce authorities according to applicable laws and regulations.
 
Pursuant to the Anti-Monopoly Law of the PRC which became effective on August 1, 2008, when market concentration by business carriers through merger, acquisition of control through shares or assets acquisition, or acquisition of control or the ability to exercise decisive influence over other business carriers by contract or by other means reaches a threshold of declaration level prescribed by the State Council, the business carriers shall declare in advance to the Anti-monopoly Law Enforcement Agency, otherwise, the business carriers shall not implement such market concentration.
 
Taxation, Fees and Royalty
 
Companies which operate petroleum and petrochemical businesses in China are subject to a variety of taxes, fees and royalties.
 
Effective from January 1, 2008, the general enterprise income tax rate imposed on entities, other than certain enterprises defined in the new Enterprise Income Tax Law of the PRC, is 25%.
 
According to the Notice on Implementing Reforms on Prices of Refined Products and Tax, starting from January 1, 2009, consumption tax on refined petroleum products were adjusted. Applicable tax, fees and royalties on refined petroleum products and other refined products generally payable by us or by other companies in similar industries are shown below.
 
Tax Item
 
Tax Base
 
Tax Rate
 
Enterprise income tax
 
Taxable income
 
25% effective from January 1, 2008.
         
Value-added tax
 
Revenue
 
13% for liquefied petroleum gas, natural gas, and low density polyethylene for production of agricultural film and fertilizers and 17% for other items. We generally charge value-added tax to our customers at the time of settlement on top of the selling prices of our products on behalf of the taxation authority. We may directly claim refund from the value-added tax collected from our customers of any value-added tax that we paid for (i) purchasing materials consumed during the production process; (ii) charges paid for drilling and other engineering services; and (iii) labor consumed during the production process.
         
Business tax
 
Revenue from pipeline transportation services
 
3%.
         
Consumption tax
 
Aggregate volume sold or self-consumed
 
RMB 1 per liter for gasoline, naphtha, solvent oil and lubricant; RMB 0.8 per liter for diesel, jet fuel and fuel oil. Prior to December 31, 2010, the consumption tax paid for imported naphtha for the

 
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production of ethylene and aromatic hydrocarbon will be refunded, and naphtha procured from domestic sources for the production of ethylene and aromatic hydrocarbon will remain tax-free. Consumption tax on jet fuel is currently exempted.
         
Import tariff
 
CIF China price
 
5% for gasoline, 6% for light diesel, 9% for jet kerosene and 6% for No. 5-7 fuel oil. The current applicable tax rates in 2010 for jet kerosene and No. 5-7 fuel oil are 6% and 3%, respectively.
         
Resource tax
 
Aggregate volume sold or self-consumed
 
RMB 14 to RMB 30 per tonne for crude oil. RMB 7 to RMB 15 per thousand cubic meters for natural gas.
         
Compensatory fee for mineral resources
 
Revenue of crude oil and natural gas
 
1%
         
Exploration license fee
 
Area
 
RMB 100 to 500 per square kilometer per annum.
         
Production license fee
 
Area
 
RMB 1,000 per square kilometer per annum.
         
Royalty fee (1)
 
Production volume
 
Progressive rate of 0-12.5% for crude oil and 0-3% for natural gas.
         
City construction tax
 
Total amount of value-added tax, consumption tax and business tax
 
1%, 5% and 7%.
         
Education Surcharge
 
Total amount of value-added tax, consumption tax and business tax
 
3%.
         
Special Oil Income Levy
 
Any revenue derived from sale of domestically produced crude oil when the realized crude oil price exceeds US$ 40 per barrel.
 
Progressive rate of 20% to 40% for revenue derived from crude oil with realized price in excess of US$ 40 per barrel, i.e. 20% for the portion in excess of US$ 40 per barrel up to US$ 45 per barrel (inclusive); 25% for the portion in excess of US$ 45 per barrel up to US$ 50 per barrel (inclusive); 30% for the portion  in excess of US$ 50 per barrel to US$ 55 per barrel (inclusive); 35% for the portion in excess of US$ 55 per barrel to US$ 60 per barrel (inclusive); and 40% for the portion in excess of US$ 60 per barrel.
__________
 
(1)
Payable only by Sino-foreign oil and gas exploration and development cooperative projects, and the project companies of those cooperative projects are not subject to any other resource taxes or fees.

 
C.
ORGANIZATIONAL STRUCTURE
 
For a description of our relationship with Sinopec Group Company, see "Item 4. Information on the Company ¾ A. History and Development of the Company" and "Item 7. Major Shareholders and Related Party Transactions." For a description of our significant subsidiaries, see Note 34 to our consolidated financial statements.
 
 
D.
PROPERTY, PLANT AND EQUIPMENT
 
We own substantially all of our properties, plants and equipment relating to our business activities.  We hold production licenses covering all of our interests in our developed and undeveloped crude oil and natural gas fields and productive wells.  See "Item 4. Information on the Company ¾ B. Business Overview" for description of our property, plant and equipment.

 
29
 

Environmental Matters
 
We are subject to various national environmental laws and regulations and also environmental regulations promulgated by the local governments in whose jurisdictions we have operations. For example, national regulations promulgated by the central government set discharge standards for emissions into air and water. They also set forth schedules of discharge fees for various waste substances. These schedules usually provide for discharge fee increases for each incremental increase of the amount of discharge up to a certain level. Above a certain level, the central regulations permit the local government to order any of our facilities to cure certain behavior causing environmental damage and subject to the central government's approval, the local government may also issue orders to close any of our facilities that fail to comply with the existing regulations. In addition, the PRC government has set certain environmental protection objective for the petroleum and chemical industry to reduce energy intensity, chemical oxygen demand, industrial water consumption and sulfur dioxide emission by certain level by 2009 compared to 2005. In light of such objective, we have incurred capital expenditure specifically to promote energy saving and environmental protection in China.
 
Each of our production subsidiaries has implemented a system to control its pollutant emissions and to oversee compliance with the PRC environmental regulations. We have a central safety and environmental compliance department to set our internal environmental requirements and procedures, and to manage and supervise the environmental protection programs at the various production facilities. Each production subsidiary has an environmental compliance department which is responsible for supervising environmental matters at the subsidiary and implementing our environmental requirements and procedures. These departments report both to the management of the subsidiary and to the central environmental compliance department.
 
Our production facilities have their own facilities to treat waste water, solid waste and waste gases on site. Waste water first goes through preliminary treatment at our own waste water treatment facilities. Thereafter, the water is sent to nearby waste water treatment centers operated either by us or by Sinopec Group for further treatment. All solid waste materials generated by our production facilities are buried at disposal sites or burned in furnaces either operated by us or by Sinopec Group. Waste gases are generally treated and burned in furnaces before dissipation and the ash is disposed in accordance with our solid waste disposal procedures.
 
Environmental regulations also require companies to file an environmental impact report to the environmental bureau for approval before undertaking any construction of a new production facility or any major expansion or renovation of an existing production facility. Such an undertaking will not be permitted to operate until the environmental bureau has performed an inspection and is satisfied that environmentally sound equipment has been installed for the facility.
 
We believe our environmental protection systems and facilities are adequate for us to comply with current applicable national and local environmental protection regulations. The PRC government, however, may impose stricter regulations which require additional expenditure on compliance with environmental regulations.
 
We paid pollutant discharge fees of approximately RMB 2.1 billion in 2007, RMB 2.3 billion in 2008 and RMB 3.2 billion in 2009.
 
Insurance
 
In respect of our refining, petrochemical production, and marketing and sales operations, we currently maintain with Sinopec Group Company, under the terms of its Safety Production Insurance Fund ("SPI Fund"), approximately RMB 456.3 billion of coverage on our property and plants and approximately RMB 71.2 billion of coverage on our inventory. In 2009, we paid an insurance premium of approximately RMB 1.87 billion to Sinopec Group Company for such coverage.  Transportation vehicles and products in transit are not covered by Sinopec Group Company and we maintain insurance policies for those assets with insurance companies in the PRC.
 
The insurance coverage under SPI Fund applies to all enterprises controlled by Sinopec Group Company under regulations published by the Ministry of Finance. We believe that, in the event of a major accident, we will be able to recover most of our losses from insurance proceeds paid under the SPI Fund or by insurance companies.
 
Pursuant to an approval of the Ministry of Finance, Sinopec Group Company entered into an agreement with China People's Insurance Company on January 29, 2002 to purchase a property and casualty policy which would also cover our assets. The policy provides for an annual maximum cumulative claim amount of RMB 4.0 billion and a maximum of RMB 2.36 billion per occurrence.

 
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Consistent with what we believe to be customary practice among PRC enterprises, we do not currently carry any third party liability insurance to cover claims in respect of personal injury, environmental damage arising from accidents on our property or relating to our operations other than on our transportation vehicles. We have not had a third party liability claim filed against us during the past three years. We do not carry business interruption insurance, as such coverage is not customary in the PRC.
 
ITEM 4A.
UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 
 
A.
GENERAL
 
The following discussion and analysis should be read in conjunction with our audited consolidated financial statements. Our consolidated financial statements have been prepared in accordance with IFRS. Certain financial information presented in this section is derived from our audited consolidated financial statements. Unless otherwise indicated, all financial data presented on a consolidated basis or by segment, are presented net of inter-segment transactions (i.e., inter-segment and other intercompany transactions have been eliminated).
 
Critical Accounting Policies
 
Our reported consolidated financial condition and consolidated results of operations are sensitive to accounting methods, assumptions and estimates that underlie the preparation of our financial statements.  We base our assumptions and estimates on historical experience and on various other assumptions that we believe to be reasonable and which form the basis for making judgments about matters that are not readily apparent from other sources.  On an on-going basis, our management evaluates its estimates.  Actual results may differ from those estimates as facts, circumstances and conditions change.
 
The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors to be considered when reviewing our financial statements.  Our principal accounting policies are set forth in Note 2 to the consolidated financial statements.  We believe the following critical accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements.
 
Oil and gas properties and reserves
 
The accounting for our upstream oil and gas activities is subject to special accounting rules that are unique to the oil and gas business.  There are two methods to account for oil and gas business activities, the successful efforts method and the full cost method.  We have elected to use the successful efforts method.
 
The successful efforts method reflects the volatility that is inherent in exploring for mineral resources in that costs of unsuccessful exploratory efforts are charged to expense as they are incurred.  These costs primarily include dry hole costs, seismic costs and other exploratory costs.  Under the full cost method, these costs are capitalized and written-off (depreciation) over time.
 
Engineering estimates of our oil and gas reserves are inherently imprecise and represent only approximate amounts because of the subjective judgments involved in developing such information.  There are authoritative guidelines regarding the engineering criteria that have to be met before estimated oil and gas reserves can be designated as “proved”.  Proved and proved developed reserves estimates are updated at least annually and take into account recent production and technical information about each field.  In addition, as prices and cost levels change from year to year, the estimate of proved and proved developed reserves also changes.  This change is considered a change in estimate for accounting purposes and is reflected on a prospective basis in related depreciation rates.
 
Future dismantlement costs for oil and gas properties are estimated with reference to engineering estimates after taking into consideration the anticipated method of dismantlement required in accordance with industry practices in similar geographic area, including estimation of economic life of oil and gas properties, technology and price level.  The present values of these estimated future dismantlement costs are capitalized as oil and gas properties with equivalent amounts recognized as provision for dismantlement costs.

 
31
 

Despite the inherent imprecision in these engineering estimates, these estimates are used in determining depreciation expense, impairment expense and future dismantlement costs, and in disclosing the supplemental standardized measure of discounted future net cash flows relating to proved oil and gas properties.  Depreciation rates are determined based on estimated proved developed reserve quantities (the denominator) and capitalized costs of producing properties (the numerator).  Producing properties’ capitalized costs are amortized based on the units of oil or gas produced.  Therefore, assuming all other variables are held constant, an increase in estimated proved developed reserves decreases our depreciation, depletion and amortization expense.  Also, estimated reserves are often used to calculate future cash flows from our oil and gas operations, which serve as an indicator of fair value in determining whether a property is impaired or not. The larger the estimated reserves, the less likely the property is impaired.  There have been no significant changes to the original reserve estimates during any of the three years ended December 31, 2007, 2008 and 2009.
 
Impairment for long-lived assets
 
If circumstances indicate that the net book value of a long-lived asset, including oil and gas properties, may not be recoverable, the asset may be “impaired”, and an impairment loss may be recognized.  The carrying amounts of long-lived assets are reviewed periodically in order to assess whether the recoverable amounts have declined below the carrying amounts. For goodwill, the recoverable amount is estimated annually. These assets are tested for impairment whenever events or changes in circumstances indicate that their recorded carrying amounts may not be recoverable. When such a decline has occurred, the carrying amount is reduced to recoverable amount. The recoverable amount is the greater of the net selling price and the value in use.  It is difficult to precisely estimate selling price because quoted market prices for our assets or cash-generating units are not readily available. In determining the value in use, expected cash flows generated by the asset or the cash-generating unit are discounted to their present value, which requires significant judgment relating to level of sales volume, selling price and amount of operating costs. We use all readily available information in determining an amount that is a reasonable approximation of recoverable amount, including estimates based on reasonable and supportable assumptions and projections of reserve quantities, sales volume, selling price and amount of operating costs.
 
Impairment losses recognized for each of the three years ended December 31, 2007, 2008 and 2009 in our statement of income on long-lived assets are summarized as follows:
 
   
Years ended December 31,
 
   
2007
   
2008
   
2009
 
   
RMB
   
RMB
   
RMB
 
   
(in millions)
 
Exploration and production
    481       5,991       1,595  
Refining
    1,070       270       396  
Marketing and distribution
    1,237       709       1,479  
Chemicals
    318       1,511       3,807  
Corporate and others
    —       19       8  
Total
    3,106       8,500       7,285  

Depreciation
 
Property, plant and equipment (other than oil and gas properties) are depreciated on a straight-line basis over the estimated useful lives of the assets, after taking into account the estimated residual value. We review the estimated useful lives of the assets regularly in order to determine the amount of depreciation expense to be recorded during any reporting period. The useful lives are based on our historical experience with similar assets and take into account anticipated technological changes. The depreciation expense for future periods is adjusted if there are significant changes from previous estimates.  There have been no changes to the estimated useful lives and residual values during each of the three years ended December 31, 2007, 2008 and 2009.
 
Impairment of accounts receivable for bad and doubtful debts
 
We estimate impairment of accounts receivable for bad and doubtful debts resulting from the inability of our customers to make the required payments. We base our estimates on the aging of our accounts receivable balance, customer credit-worthiness, and historical write-off experience. If the financial condition of our customers were to deteriorate, actual write-offs would be higher than estimated.  The changes in the impairment losses for bad and doubtful accounts are as follows:

 
32
 
 
   
Years ended December 31,
 
 
 
2007
   
2008
   
2009
 
   
RMB
   
RMB
   
RMB
 
   
(in millions)
 
Balance as of January 1 .
    3,373       2,909       2,406  
Impairment losses recognized for the year .
    295       143       70  
Reversal of impairment losses
    (204 )     (254 )     (245 )
Written off
    (555 )     (392 )     (310 )
Balance as of December 31
    2,909       2,406       1,921  
 
Allowance for diminution in value of inventories
 
If the costs of inventories fall below their net realizable values, an allowance for diminution in value of inventories is recognized.  Net realizable value represents the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale.  We base the estimates on all available information, including the current market prices of the finished goods and raw materials, and historical operating costs.  If the actual selling prices were to be lower or the costs of completion were to be higher than estimated, the actual allowance for diminution in value of inventories could be higher than estimated.  Allowance for diminution in value of inventories is analyzed as follows:
 
   
Years ended December 31,
 
   
2007
   
2008
   
2009
 
   
RMB
   
RMB
   
RMB
 
   
(in millions)
 
Balance as of January 1
    871       4,572       9,189  
Allowance for the year 
    3,962       8,777       401  
Reversal of allowance on disposal 
    (131 )     (64 )     (185 )
Written off 
    (130 )     (4,096 )     (8,367 )
Balance as of December 31
    4,572       9,189       1,038  

Recently Pronounced International Financial Reporting Standards
 
Information relating to the recently pronounced IFRS is presented in Note 37 to the consolidated financial statements.
 
Overview of Our Operations
 
We are the largest integrated petroleum and petrochemical company in China and one of the largest in Asia in terms of operating revenues. We engage in exploring for, developing and producing crude oil and natural gas, operating refineries and petrochemical facilities and marketing crude oil, natural gas, refined petroleum products and petrochemicals. We have reported our consolidated financial results according to the following four principal business segments and the corporate and others segment.
 
 
·
Exploration and Production Segment , which consists of our activities related to exploring for and developing, producing and selling crude oil and natural gas;
     
 
·
Refining Segment , which consists of purchasing crude oil from our exploration and production segment and from third parties, processing of crude oil into refined petroleum products, selling refined petroleum products principally to our marketing and distribution segment;
     
 
·
Marketing and Distribution Segment , which consists of purchasing refined petroleum products from our refining segment and third parties, and marketing, selling and distributing refined petroleum products by wholesale to large customers and independent distributors and retail through our retail network;
     
 
·
Chemicals Segment , which consists of purchasing chemical feedstock principally from the refining segment and producing, marketing, selling and distributing chemical products; and
     
 
·
Corporate and Others Segment , which consists principally of trading activities of the import and export subsidiaries and our research and development activities.

 
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B.
CONSOLIDATED RESULTS OF OPERATIONS
 
The following table sets forth certain income and expense items from our consolidated statements of income for the periods indicated.
 
   
Years Ended December 31,
 
   
2007
   
2008
   
2009
 
   
RMB
   
RMB
   
RMB
 
   
(in billions)
 
Operating revenues
                 
   Sales of goods
    1,170.0       1,413.2       1,315.9  
   Other operating revenues
    31.0       31.1       29.1  
   Total operating revenues
    1,201.0       1,444.3       1,345.0  
Other income
    4.9       50.9       -  
Operating expenses
                       
        Purchased crude oil, products and operating supplies and expenses
    (971.7 )     (1,286.1 )     (990.5 )
Selling, general and administrative expenses
    (32.8 )     (39.4 )     (40.5 )
Depreciation, depletion and amortization
    (43.6 )     (46.4 )     (50.5 )
Exploration expenses, including dry holes
    (11.1 )     (8.3 )     (10.5 )
Personnel expenses
    (22.9 )     (23.4 )     (28.8 )
Taxes other than income tax 
    (34.7 )     (57.2 )     (132.9 )
Other operating expenses, net 
    (3.6 )     (8.1 )     (6.9 )
     Total operating expenses
    (1,120.4 )     (1,468.9 )     (1,260.6 )
Operating income
    85.5       26.3       84.4  
Net finance costs
    (8.4 )     (5.2 )     (7.2 )
Income from investments
    5.7       1.0       3.4  
Earnings before income tax 
    82.8       22.1       80.6  
Tax (expense)/benefit                                                                   
    (24.7 )     2.9       (16.1 )
Net income
    58.1       25.0       64.5  
Attributable to:
                       
Equity shareholders of the Company
    55.9       28.5       61.8  
Minority interests
    2.2       (3.5 )     2.7  
      58.1       25.0       64.5  
 
Year Ended December 31, 2009 Compared with Year Ended December 31, 2008
 
In 2009, our total operating revenues were RMB 1,345.0 billion, representing a decrease of 6.9% over the year of 2008. Our operating income was RMB 84.4 billion, representing an increase of 220.9% over the year of 2008. The increase in our operating income was primarily due to our efforts to respond to the international financial crisis, including our development in the markets we compete, enhancement in marketing and services quality, improvement of our raw material structure and further leveraging on our strength in business scale and integration. These efforts were coupled with the reform on pricing mechanism and taxation and fee policies for refined oil products by the PRC government and the increase in demand for chemical products in domestic market.
 
Operating Revenues
 
In 2009, our operating revenues from sales of goods were RMB 1,315.9 billion, representing a decrease of 6.9% over 2008. This was mainly due to the decrease in the price of crude oil, refined oil and petrochemical products over 2008. In addition, in 2008, we received RMB 50.9 billion of government subsidy as a result of the PRC government’s tight control over refined petroleum products prices in 2008 (categorized as other income), and we did not receive any such subsidy as a result of the reform on pricing mechanism and taxation and fee policies for refined oil products by the PRC government in 2009.
 
The following table sets forth our external sales volume, average realized prices and the respective rates of change from 2008 to 2009 for our major products:

 
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Average Realized Price
   
Rate of Change from
   
Sales Volume
   
Rate of Change from
 
   
2008
   
2009
   
2008 to 2009
   
2008
   
2009
   
2008 to 2009
 
   
(RMB)
   
(RMB)
   
(%)
               
(%)
 
                                     
Crude Oil
    4,190 (1)     2,303 (1)     (45.0 )     4.39 (2)     4.92 (2)     12.1  
Natural Gas
    911 (3)     933 (3)     2.4       6.28 (4)     6.49 (4)     3.3  
Gasoline
    6,409 (1)     6,367 (1)     (0.7 )     37.73 (2)     39.04 (2)     3.5  
Diesel
    5,629 (1)     5,092 (1)     (9.5 )     80.24 (2)     82.34 (2)     2.6  
Kerosene
    6,063 (1)     3,918 (1)     (35.4 )     9.22 (2)     11.35 (2)     23.1  
    Basic chemical  feedstock
    6,238 (1)     4,359 (1)     (30.1 )     10.67 (2)     13.27 (2)     24.4  
Synthetic Resin
    10,094 (1)     8,072 (1)     (20.0 )     7.83 (2)     8.67 (2)     10.7  
Synthetic Fiber
    10,488 (1)     9,140 (1)     (12.9 )     1.35 (2)     1.42 (2)     5.2  
Synthetic Rubber
    16,160 (1)     11,448 (1)     (29.2 )     0.98 (2)     1.12 (2)     14.3  
 Synthetic Fiber Monomer and Polymer
    8,054 (1)     6,530 (1)     (18.9 )     3.99 (2)     4.65 (2)     16.5  
 Chemical fertilizer
    1,729 (1)     1,657 (1)     (4.2 )     1.66 (2)     1.77 (2)     6.6  
____________
 
(1)
per tonne
   
(2)
million tonnes
   
(3)
per thousand cubic meters
   
(4)
billion cubic meters
 
Sales of crude oil and natural gas
 
Most of crude oil and a small portion of natural gas we produced were internally used for refining and chemical production and the remaining were sold to other customers. In 2009, the total revenue from crude oil, natural gas and other upstream products that were sold externally amounted to RMB 19.3 billion, representing a decrease of 26.7% over 2008. The change was mainly due to the decrease in the price of crude oil.
 
Sales of refined petroleum products
 
In 2009, our refining segment and marketing and distribution segment sell petroleum products (mainly consisting of gasoline, diesel and kerosene which are referred to as the refined oil products and other refined petroleum products) to external parties. The external sales revenue realized by these two segments were RMB 874.2 billion, accounting for 65.0% of our operating revenues and representing a decrease of 6.5% over 2008. The decrease was mainly due to the decrease in price of refined oil products. The sales revenue of gasoline, diesel and kerosene was RMB 712.3 billion, accounting for 81.5% of the total revenue of petroleum products and representing a decrease of 5.0% over 2008. Sales revenue of other refined petroleum products was RMB 161.9 billion, accounting for 18.5% of the total turnover of petroleum products and representing a decrease of 12.8% over 2008.
 
Sales of chemical products
 
Our external sales revenue of chemical products was RMB 192.7 billion, accounting for 14.3% of our operating revenues and representing a decrease of 12.3% over 2008. This was mainly due to the decrease in the price of chemical products.
 
Other income
 
In 2008, we received RMB 50.9 billion of government subsidy as a result of the PRC government’s tight control over refined petroleum products prices in 2008. We did not receive any such subsidy as a result of the reform on pricing mechanism and taxation and fee policies for refined oil products by the PRC government in 2009.

 
35
 

Operating expenses
 
In 2009, our operating expenses were RMB 1,260.6 billion, representing a decrease of 14.2% over 2008, among which:
 
Purchased crude oil, products and operating supplies and expenses were RMB 990.5 billion, representing a decrease of 23.0% over 2008, accounting for 78.6% of the total operating expenses, of which:
 
Crude oil purchase expenses were RMB 405.4 billion, representing a decrease of 41.3% over 2008. In 2009, the total throughput of crude oil that was purchased externally was 135.14 million tonnes (excluding the amount processed for third parties), representing an increase of 0.2% over 2008; the average unit processing cost for crude oil purchased externally was RMB 3,000 per tonne, representing a decrease of 41.5% over 2008.
 
In 2009, our other purchasing expenses were RMB 585.1 billion, representing a decrease of 1.7% over 2008. This was mainly due to the decrease in the cost of gasoline, diesel, kerosene and other feedstock purchased externally.
 
Selling, general and administrative expenses totaled RMB 40.5 billion, representing an increase of 2.8% over 2008. This was mainly due to the increase in the expenses of community services and culture, education and healthcare and the increase in rental charges of some gas stations.
 
Depreciation, depletion and amortization was RMB 50.5 billion, representing an increase of 8.8% over 2008. This was mainly due to the depreciation resulting from the our continuous capital expenditure on property, plant and equipment.
 
Exploration expenses were RMB 10.5 billion, representing an increase of 26.5% over 2008, reflecting our enhanced exploration activities in northeastern Sichuan, west Sichuan and Erdos regions.
 
Personnel expenses were RMB 28.8 billion, representing an increase of 23.1% compared with 2008, reflecting our accrual of staff annuity and housing subsidy.
 
Taxes other than income tax were RMB 132.9 billion, representing an increase of 132.3% compared with 2008. This was mainly due to the reform on pricing mechanism and taxation and fee policies for refined oil products by the PRC government, which led to the increase in the consumption tax, urban construction tax and educational surcharge by RMB 101.4 billion over 2008. In addition, the special oil income levy decreased by RMB 25.7 billion compared to 2008 as a result of the decrease in the price of crude oil in 2009.
 
Other operating expenses were RMB 6.9 billion, representing a decrease of 14.8% over 2008.
 
Operating income
 
In 2009, our operating income was RMB 84.4 billion, representing an increase of 220.9% over 2008.
 
Net finance costs
 
In 2009, our net finance costs were RMB 7.2 billion, representing an increase of 38.5% over 2008. Our interest expenses in 2009 were RMB 7.4 billion, representing a decrease of RMB 4.5 billion over 2008; our foreign currency exchange gains were RMB 0.4 billion, representing a decrease of RMB 2.9 billion over 2008. We also incurred a loss of RMB 0.2 billion with respect to the fair value change of embedded financial derivative instruments in convertible bonds as a result of the change in our H share’s trading price, compared with a gain of RMB 3.9 billion with respect to the fair value change of embedded financial derivative instruments in convertible bonds in 2008.
 
Earnings before income tax
 
In 2009, our earnings before income tax were RMB 80.6 billion, representing an increase of 264.7% over 2008.

 
36
 

Income tax
 
In 2009,   we recognized an income tax expense of RMB 16.1 billion, increased by RMB 19.0 billion. The increase was mainly due to substantial growth of earnings before income taxes over 2008.
 
Net income attributable to minority interests
 
In 2009, our net income attributable to minority interests was RMB 2.7 billion, representing an increase of RMB 6.2 billion compared with 2008.
 
Net income attributable to equity shareholders of the Company
 
In 2009, our net income attributable to our equity shareholders was RMB 61.8 billion, representing an increase of 116.8% over 2008.
 
Year Ended December 31, 2008 Compared with Year Ended December 31, 2007
 
In 2008, our sales of goods, other operating revenues and other income were RMB 1,495.2 billion, representing an increase of 24.0% over 2007. Our operating income in 2008 was RMB 26.3 billion, representing a decrease of 69.2% over 2007. This was primarily due to the losses suffered by our refining segment due to the distortion of the correlation of domestic refined petroleum product prices and the international crude oil prices.
 
Operating Revenues
 
In 2008, our sales of goods and other operating revenues were RMB 1,444.3 billion, of which sales of goods were RMB 1,413.2 billion, representing an increase of 20.8% over 2007. The increase was primarily due to the increase in our sales of goods, which was the result of our increased average realized price and sales volume of refined oil products and the increase in volume of our trading business. In 2008, our other operating revenues were RMB 31.1 billion, representing an increase of 0.3% over 2007.
 
The following table sets forth our external sales volume, average realized prices and the respective rates of change from 2007 to 2008 for our major products:
 
   
Average Realized Price
   
Rate of Change from
   
Sales Volume
   
Rate of Change from
 
   
2007
   
2008
   
2007 to 2008
   
2007
   
2008
   
2007 to 2008
 
   
(RMB)
   
(RMB)
   
(%)
               
(%)
 
                                     
Crude Oil
    3,110 (1)     4,190 (1)     34.7       4.43 (2)     4.39 (2)     (0.9 )
Natural Gas
    811 (3)     911 (3)     12.3       5.82 (4)     6.28 (4)     7.9  
Gasoline
    5,408 (1)     6,409 (1)     18.5       35.18 (2)     37.73 (2)     7.2  
Diesel
    4,724 (1)     5,629 (1)     19.2       76.92 (2)     80.24 (2)     4.3  
Kerosene
    4,728 (1)     6,063 (1)     28.2       7.05 (2)     9.22 (2)     30.8  
    Basic chemical  feedstock
    6,182 (1)     6,238 (1)     0.9       10.57 (2)     10.67 (2)     0.9  
Synthetic Resin
    10,204 (1)     10,094 (1)     (1.1 )     7.88 (2)     7.83 (2)     (0.6 )
Synthetic Fiber
    11,605 (1)     10,488 (1)     (9.6 )     1.50 (2)     1.35 (2)     (10.0 )
Synthetic Rubber
    13,763 (1)     16,160 (1)     17.4       0.96 (2)     0.98 (2)     2.1  
 Synthetic Fiber Monomer and Polymer
    9,112 (1)     8,054 (1)     (11.6 )     4.07 (2)     3.99 (2)     (2.0 )
 Chemical fertilizer
    1,659 (1)     1,729 (1)     4.2       1.58 (2)     1.66 (2)     5.1  
____________
 
(1)
per tonne
   
(2)
million tonnes
   
(3)
per thousand cubic meters
   
(4)
billion cubic meters

 
37
 
 
Sales of crude oil and natural gas
 
Most of the crude oil and a small portion of natural gas produced by us were internally used for refining and chemicals production and the remaining were sold to other customers. In 2008, the total revenue of crude oil, natural gas and other upstream products that were sold externally amounted to RMB 26.4 billion, representing an increase of 29.2% over 2007 and accounting for 1.8% of the sales of goods and other operating revenues. The increase was mainly due to the increase in the price of crude oil and the expansion of our natural gas business.
 
Sales of refined petroleum products
 
Our refining segment and marketing and distribution segment sell petroleum products (mainly consisting of gasoline, diesel and kerosene which are referred to as the refined oil products and other refined petroleum products) to external parties. In 2008, the external sales revenue of petroleum products by these two segments were RMB 935.0 billion, accounting for 64.7% of our sales of goods and other operating revenues, and representing an increase of 19.9% over 2007. This was primarily the result of the increased selling price of refined petroleum products, expansion of the sales volume of our petroleum products, and the optimizing of our sales structure. The sales revenue of gasoline, diesel and kerosene was RMB 749.3 billion, accounting for 80.1% of the total turnover of refined petroleum products, and representing an increase of 27.7% over 2007. The turnover of other refined petroleum products was RMB 185.7 billion, representing a decrease of 3.7% compared with 2007, and accounting for 19.9% of the total turnover of the refined petroleum products .
 
Sales of chemical products
 
Our external sales revenue of chemical products was RMB 219.7 billion, accounting for 14.7% of our sales of goods and other operating revenues, and representing a decrease of 0.2% over 2007. This was primarily due to the general decrease in the selling prices and sales volume of our chemical products (other than synthetic rubber and chemical fertilizer).
 
Other income
 
In 2008, we recognized grant income of RMB 50.9 billion compared to RMB 4.9 billion in 2007 for compensation of losses incurred due to the distortion of the correlation of domestic refined petroleum product prices and the international crude oil prices, and the measures we took to stabilize the supply in the PRC refined petroleum product market during the year.  There are no unfulfilled conditions and other contingencies attached to the receipts of the grant. There is no assurance that we will continue to receive such grant in the future.
 
Operating expenses
 
In 2008, our operating expenses were RMB 1,468.9 billion, representing an increase of 31.1% over 2007, among which:
 
Purchased crude oil, products and operating supplies and expenses were RMB 1,286.1 billion, representing an increase of 32.4% over 2007, accounting for 87.6% of the total operating expenses, of which:
 
Crude oil purchase expense was RMB 691.1 billion, representing an increase of 40.1% over 2007. This expense accounted for 47.1% of the total operating expense, representing an increase of 3.1 percentage points. With the rapid economic development in China and the expanded market demand, we increased the amount of crude oil that was purchased externally. In 2008, the total throughput of crude oil purchased externally reached 134.8 million tonnes (excluding the amounts processed for third parties), representing an increase of 6.6%. The average unit processing cost for crude oil purchased externally was RMB 5,126 per tonne, representing an increase of 31.4% over 2007.
 
In 2008, our other purchasing expenses reached RMB 595.0 billion, accounting for 40.5% of the total operating expenses, representing an increase of 24.3%. The increase was mainly due to the increased volume in our trading business and the increased cost for other outsourcing materials.
 
Selling, general and administrative expenses totaled RMB 39.4 billion, representing an increase of 20.1% over 2007. This was primarily due to the RMB 2.6 billion increase in products delivering costs and other

 
38
 

miscellaneous charges caused by the increased sales volume of our refined petroleum products as well as the increased unit transportation costs.
 
Depreciation, depletion and amortization was RMB 46.4 billion, representing an increase of 6.4% over 2007, mainly due to the increased depreciation resulted from our continuous capital expenditures on property, plant and equipment in recent years.
 
Exploration expenses reached RMB 8.3 billion, representing a decrease of 25.2%. This was mainly due to the decrease in upstream exploration activities over last year.
 
Personnel expenses were RMB 23.4 billion, representing an increase of 2.2% over 2007.
 
Taxes other than income tax were RMB 57.2 billion, representing an increase of 64.8% over 2007. The increase was mainly due to the increase of the special oil income levy in the amount of RMB 21.6 billion as a result of the high crude oil price in 2008 .
 
Other operating expenses were RMB 8.1 billion in 2008 compared to RMB 3.6 billion in 2007, that are primarily due to impairment losses on long-lived assets, which were  RMB 8.5 billion in 2008 compared with RMB 3.1 billion in 2007. The impairment losses were caused by the lower price of crude oil which led to the decrease in reserves estimated and higher production and development cost in certain field blocks.
 
Operating income
 
In 2008, our operating income was RMB 26.3 billion, representing a decrease of 69.2% over 2007.
 
Net finance costs
 
In 2008, our net finance costs were RMB 5.2 billion, representing a decrease of 38.1% over 2007. The decrease was mainly attributable to the increase in unrealized gain on embedded derivative component of convertible bonds by RMB 7.1 billion, partially offset by the increase in interest expense by RMB 4.2 billion.
 
Earnings before income tax
 
In 2008, our earnings before income tax were RMB 22.1 billion, representing a decrease of 73.3% over 2007.
 
Income tax
 
In 2008, we recognized an income tax benefit of RMB 2.9 billion compared to income tax expense of RMB 24.7 billion in 2007. See Note 10 to our consolidated financial statements for a reconciliation between the actual income tax benefit and the expected income tax expense at the applicable statutory tax rate.
 
Net income attributable to minority interests
 
In 2008, loss for the year attributable to the minority interests of our Company was RMB 3.5 billion. This was primarily due to the losses incurred by our subsidiaries shared by the minority shareholders.
 
Net income attributable to equity shareholders of the Company
 
In 2008, net income attributable to our equity shareholders was RMB 28.5 billion, representing a decrease of 49.0% compared with 2007.
 
 
C.
DISCUSSIONS ON RESULTS OF SEGMENT OPERATIONS
 
We divide our operations into four business segments (exploration and production segment, refining segment, marketing and distribution segment and chemicals segment) and corporate and others. Unless otherwise specified, the inter-segment transactions have not been eliminated in the financial data discussed in this section. In addition, the operating revenue d­ata of each segment have included the “other operating revenues” of the segment.

 
39
 

The following table sets forth the operating revenues by each segment, the contribution of external sales and inter-segment sales as a percentage of operating revenues before elimination of inter-segment sales, and the contribution of external sales as a percentage of consolidated operating revenues (i.e. after elimination of inter-segment sales) for the periods indicated.
 
    Years Ended December 31,    
As a Percentage of
Consolidated Operating
Revenues Before
Elimination
of Inter-segment Sales
   
As a Percentage of
Consolidated
Operating Revenues
After Elimination of
Inter-segment Sales
 
   
2007
   
2008
   
2009
   
2008
   
2009
   
2008
   
2009
 
   
RMB
   
RMB
   
RMB
   
(%)
   
(%)
   
(%)
   
(%)
 
   
(in billions)
                         
                                     
Exploration and Production
    External sales (1)
    38.2       45.1       36.8       1.6       1.6       3.0       2.7  
Inter-segment sales
    107.5       151.4       87.0       5.3       3.7                  
Total operating revenue
    145.7       196.5       123.8       6.9       5.3                  
Refining
                                                       
External sales (1)    
    127.2       178.2       99.7       6.2       4.2       11.9       7.4  
Inter-segment sales
    541.6       692.5       603.9       24.3       25.7                  
Total operating revenue
    668.8       870.7       703.6       30.5       29.9                  
Marketing and distribution
                                                       
External sales (1)
    663.0       813.6       780.7       28.5       33.2       54.4       58.0  
Inter-segment sales
    2.8       3.2       2.4       0.1       0.1                  
Total operating revenue
    665.8       816.8       783.1       28.6       33.3                  
Chemicals
                                                       
External sales (1)  
    227.5       226.2       197.3       7.9       8.4       15.1       14.7  
Inter-segment sales
    16.5       27.3       21.1       1.0       0.9                  
Total operating revenue
    244.0       253.5       218.4       8.9       9.3                  
Corporate and others
                                                       
External sales (1)
    150.0       232.1       230.5       8.1       9.8       15.6       17.2  
Inter-segment sales
    303.6       484.3       291.4       17.0       12.4                  
Total operating revenue
    453.6       716.4       521.9       25.1       22.2                  
Total operating revenue
   before inter-segment
   eliminations
    2,177.9       2,853.9       2,350.8       100.0       100.0                  
Elimination of inter-segment
     sales
    (972.0 )     (1,358.7 )     (1,005.8 )                                
Consolidated operating
     revenues
    1,205.9       1,495.2       1,345.0                       100.0       100.0  
__________
 
 (1)
include other operating revenues.  See Note 33 to the consolidated financial statements for other operating revenues of each of our operating segments.
 
The following table sets forth the operating revenues, operating expenses and operating income/(loss) by each segment before elimination of the inter-segment transactions for the periods indicated, and the rate of changes from 2007 to 2009.

 
40
 


   
Years Ended December 31,
   
Rate of Change from 2008 to 2009
 
   
2007
   
2008
   
2009
       
   
(RMB in billions)
   
(%)
 
Exploration and Production
                       
Total operating revenues
    145.7       196.5       123.8       (37.0 )
Total operating expenses
    (96.9 )     (129.9 )     (104.2 )     (19.8 )
Total operating income
    48.8       66.6       19.6       (70.6 )
Refining
                               
Total operating revenues
    666.9       829.7       703.6       (15.2 )
Other income
    1.9       41.0       —       (100.0 )
Total operating expenses
    (679.8 )     (934.3 )     (680.5 )     (27.2 )
Total operating income/(loss)
    (11.0 )     (63.6 )     23.1       —  
Marketing and distribution
                               
Total operating revenues
    662.8       806.9       783.1       (2.9 )
Other income
    3.0       9.9       —       (100.0 )
Total operating expenses
    (629.9 )     (778.3 )     (752.8 )     (3.3 )
Total operating income
    35.9       38.5       30.3       (21.3 )
Chemicals
                               
Total operating revenues
    244.0       253.4       218.4       (13.8 )
Total operating expenses
    (230.7 )     (266.4 )     (204.8 )     (23.1 )
Total operating income/(loss)
    13.3       (13.0 )     13.6       —  
Corporate and others
                               
Total operating revenues
    453.6       716.5       521.9       (27.2 )
Total operating expenses
    (455.1 )     (718.7 )     (524.1 )     (27.1 )
Total operating loss
    (1.5 )     (2.2 )     (2.2 )     0.0  

Exploration and Production Segment
 
Most of the crude oil and a small portion of the natural gas produced by the exploration and production segment were used for our refining and chemicals operations. Most of our natural gas and a small portion of crude oil were sold to other customers.
 
Year Ended December 31, 2009 Compared with Year Ended December 31, 2008
 
In 2009, the operating revenues of this segment were RMB 123.8 billion, representing a decrease of 37.0% over 2008.This is mainly attributable to the decrease in the selling price of crude oil.
 
The segment sold 40.24 million tonnes of crude oil and 7.03 billion cubic meters of natural gas in 2009, representing an increase of 2.1% and 2.2% respectively over 2008. The average realized price of crude oil and natural gas were RMB 2,409 per tonne and RMB 959 per thousand cubic meters respectively, representing a decrease of 43.6% and an increase of 1.9% respectively over 2008.
 
In 2009, the operating expenses of this segment were RMB 104.2 billion, representing a decrease of 19.8% over 2008. The was mainly due to the decrease of special oil income levy by RMB 25.7 billion over 2008, which reflected the decrease in crude oil price.
 
The lifting cost for oil and gas was RMB 90.51 per BOE in 2009, representing an increase of 1.9% over 2008.
 
The segment’s operating income was RMB 19.6 billion in 2009, representing a decrease of 70.6% over 2008, which was mainly caused by substantial decline in prices of crude oil in 2009.
 
Year Ended December 31, 2008 Compared with Year Ended December 31, 2007
 
In 2008, the operating revenues of this segment were RMB 196.5 billion, representing an increase of 34.9% over 2007. The increase was mainly attributable to the increase in the sales volume and sales price of crude oil and natural gas.
 
In 2008, this segment sold 39.41 million tonnes of crude oil and 6.9 billion cubic meters of natural gas, representing an increase of 1.4% and 9.5% respectively over 2007. The average realized price of crude oil was RMB 4,269 per tonne, representing an increase of 37.9%. The average realized price of natural gas was RMB 941 per thousand cubic meters, representing an increase of 14.4% over 2007.
 
In 2008, the operating expenses of this segment were RMB 129.9 billion, representing an increase of 34.1% over 2007. The increase was mainly due to the following reasons:

 
41
 
 
 
·
The purchased raw materials, products and operating supplies and expenses increased by RMB 2 billion, which was primarily caused by the increased price of raw materials and fuels.
     
 
·
The impairment losses increased by RMB 5.5 billion over 2007, attributable to the lower in price of crude oil which led to the decrease in reserves estimated and higher production and development cost in certain field blocks.
     
 
·
The increase in depreciation, depletion and amortization amounted to RMB 3.9 billion was primarily due to the continuous investment in oil and gas assets.
     
 
·
Special oil income levy increased by RMB 21.6 billion, primarily due to the high crude oil price in 2008.
 
In light of the high crude oil price in 2008, we developed more marginal oil reserves to increase oil and gas production. Water and electricity charges associated with oil and gas production increased from RMB 601 per tonne in 2007 to RMB 630 per tonne in 2008, or an increase of 4.8%, due to our development of marginal oil reserves.
 
In 2008, the operating income of the segment was RMB 66.6 billion, representing an increase of 36.5% over 2007.
 
Refining Segment
 
Business activities of the refining segment consist of purchasing crude oil from third parties or from our exploration and production segment, processing crude oil into refined petroleum products, selling gasoline, diesel and kerosene to the marketing and distribution segment, selling a portion of chemical feedstock to our chemicals segment, and selling other refined petroleum products to the domestic and overseas customers.
 
Year Ended December 31, 2009 Compared with Year Ended December 31, 2008
 
In 2009, the operating revenues of this segment were RMB 703.6 billion, representing a decrease of 15.2% over 2008. This was mainly attributable to the decrease in prices of the refined petroleum products.
 
The table below sets forth sales volume and average realized prices by product for 2008 and 2009, as well as the percentage changes in sales volume and average realized prices for the periods shown.
 
   
Sales volume
   
Rate of change from
   
Average realized prices
   
Rate of change from
 
   
2008
   
2009
   
2008 to 2009
   
2008
   
2009
   
2008 to 2009
 
   
(million tonnes)
   
(%)
   
(RMB per tonne)
   
(%)
 
Gasoline
    28.73       31.34       9.1       5,586       5,591       0.1  
Diesel
    68.73       63.10       (8.2 )     4,934       4,646       (5.8 )
Chemical feedstock
    23.60       26.98       14.3       5,983       3,333       (44.3 )
Kerosene and other refined petroleum products
    41.90       44.08       5.2       4,391       3,208       (26.9 )
 
In 2009, the segment’s sales revenues of gasoline were RMB 175.2 billion, representing an increase of 9.2% over 2008; the sales revenues of diesel were RMB 293.2 billion, representing a decrease of 13.6% against 2008; the sales revenues of chemical feedstock were RMB 89.9 billion, representing a decrease of 36.3% against 2008; and the sales revenues of other refined petroleum products were RMB 141.4 billion, representing a decrease of 23.1% against 2008.
 
The segment’s operating expenses were RMB 680.5 billion in 2009, representing a decrease of 27.2% against 2008, which is mainly attributable to the decrease of crude oil processing cost caused by decrease of crude oil sales price.
 
In 2009, the average unit cost of crude oil processed was RMB 2,911 per tonne, representing a decrease of 41.9% against 2008. Refining throughput were 167.08 million tonnes (excluding the volume processed for third

 
42
 

parties), representing an increase of 0.9% over 2008. In 2009, the total costs of crude oil processed were RMB 486.3 billion, representing a decrease of 41.4% against 2008.
 
The refining margin was RMB 309 per tonne in 2009, an increase of RMB 722 per tonne over 2008, primarily reflecting the reform on pricing mechanism and taxation and fee policies for refined oil products by the PRC government, and our optimization of production scheme, adjustment in product mix as well as our higher load operations.
 
In 2009, the unit refining cash operating cost (defined as operating expenses less the purchase cost of crude oil and refining feedstock, depreciation and amortization, taxes other than income tax and other operating expenses, and divided by the throughput of crude oil and refining feedstock) was RMB 136 per tonne, representing an increase of RMB 6.4 per tonne, i.e. 4.9% compared with 2008. This was mainly due to lower quality of crude oil and the higher cost in upgrading oil products quality.
 
The segment’s operating income was RMB 23.1 billion in 2009, an increase of RMB 86.7 billion compared with 2008.
 
Year Ended December 31, 2008 Compared with Year Ended December 31, 2007
 
In 2008, the operating revenues of this segment were RMB 829.7 billion, representing an increase of 24.4% over 2007. The increase was mainly attributable to the increase in the price and sales volume of each refined petroleum products.
 
The table below sets forth sales volume and average realized prices by product for 2007 and 2008, as well as the percentage changes in sales volume and average realized prices for the periods shown.
 
   
Sales volume
   
Rate of change from
   
Average realized prices
   
Rate of change from
 
   
2007
   
2008
   
2007 to 2008
   
2007
   
2008
   
2007 to 2008
 
   
(million tonnes)
   
(%)
   
(RMB per tonne)
   
(%)
 
Gasoline
    24.54       28.73       17.1       4,640       5,586       20.4  
Diesel
    62.48       68.73       10.0       4,057       4,934       21.6  
Chemical feedstock
    25.67       23.60       (8.1 )     4,986       5,983       20.0  
Kerosene and other refined petroleum products
    42.62       41.90       (1.7 )     3,903       4,391       12.5  
 
In 2008, the sales revenues of gasoline by the segment were RMB 160.5 billion, representing an increase of 40.9% over 2007 and accounting for 19.3% of this segment’s operating revenues. The sales revenues of diesel by the segment were RMB 339.1 billion, representing an increase of 33.8% over 2007 and accounting for 40.9% of this segment’s operating revenues. In 2008, the sales revenues of chemical feedstock by the segment were RMB 141.2 billion, representing an increase of 10.3% over 2007 and accounting for 17.0% of this segment’s operating revenues. The sales revenues of refined petroleum products other than gasoline, diesel and chemical feedstock were RMB 184.0 billion, representing an increase of 10.6% over 2007 and accounting for 22.2% of this segment’s operating revenues.
 
In 2008, this segment’s operating expenses were RMB 934.3 billion, representing an increase of 37.4% over 2007. The increase was mainly attributable to the increase of raw materials prices.
 
The average cost of crude oil processed was RMB 5,008 per tonne, representing an increase of 33.1% over 2007. Refining throughput were 165.6 million tonnes (excluding the volume processed for third parties), representing an increase of 5.0% over 2007. In 2008, the total costs of crude oil processed were RMB 829.3 billion, representing an increase of 39.7%, and accounting for 88.8% of the segment’s operating expenses, up by 1.5 percentage points over 2007.
 
In 2008, due to the high international crude oil price and the PRC government’s tight control over refined petroleum products prices, our refining segment incurred significant losses. The refining margin was negative RMB 414 per tonne in 2008, a decrease of RMB 519 per tonne over RMB 105 per tonne in 2007.

 
43
 

In 2008, the unit refining cash operating cost was RMB 129 per tonne, representing a decrease of RMB 3 per tonne, i.e. 3% compared with 2007. This reflects the segment’s effort to reduce the costs and expenses coupled with the increase in production volume.
 
After recognizing the subsidy of RMB 41.0 billion received by this segment, the operating losses for the segment was RMB 63.6 billion, representing an increase in loss of RMB 52.6 billion over 2007.
 
Marketing and Distribution Segment
 
The business activities of the marketing and distribution segment include purchasing refined oil products from our refining segment and third parties, making wholesale and direct sales to domestic customers, and retail of the refined oil products through the segment’s retail distribution network, as well as providing related services.
 
Year Ended December 31, 2009 Compared with Year Ended December 31, 2008
 
In 2009, the operating revenues of this segment were RMB 783.1 billion, representing a decrease of 2.9% compared with 2008.
 
In 2009, the sales revenues of gasoline, diesel and kerosene were RMB 248.7 billion, RMB 421.0 billion and RMB 44.4 billion, representing an increase of 2.9% and a decrease of 7.3% and 20.3% respectively compared with 2008.
 
The following table sets forth the sales volumes, average realized prices and the respective rates of changes of the four major product categories in 2008 and 2009 in different forms of sales channels.
 
   
Sales Volume
   
Rate of Change from
   
Average   Realized Prices
   
Rate of Change from
 
   
2008
   
2009
   
2008 to 2009
   
2008
   
2009
   
2008 to 2009
 
   
(million tonnes)
   
(%)
   
(RMB per tonne)
   
(%)
 
Gasoline
    37.71       39.07       3.6       6,410       6,366       (0.7 )
Retail sale
    29.83       31.47       5.5       6,524       6,540       0.2  
Direct sale
    2.61       2.38       (8.8 )     6,013       5,554       (7.6 )
Wholesale
    5.27       5.22       (0.9 )     5,964       5,687       (4.6 )
Diesel
    80.65       82.70       2.5       5,629       5,091       (9.6 )
Retail sale
    48.90       41.94       (14.2 )     5,704       5,374       (5.8 )
Direct sale
    22.31       28.14       26.1       5,561       4,844       (12.9 )
Wholesale
    9.44       12.62       33.7       5,402       4,697       (13.1 )
Kerosene including jet fuel
    9.19       11.33       23.3       6,065       3,919       (35.4 )
Fuel Oil
    11.46       17.89       56.1       3,692       2,952       (20.0 )

The operating expenses of the segment in 2009 was RMB 752.8 billion, representing a decrease of 3.3% over 2008, which was mainly attributable to the decrease in purchasing costs of gasoline and diesel.
 
In 2009, the segment’s unit cash selling expenses of refined oil products per tonne (defined as the operating expenses less the purchasing costs, taxes other than income tax, depreciation and amortization and divided by the sales volume) was RMB 163.6 per tonne, representing an increase of 6.8% over 2008. This was primarily attributable to the repair and maintenance expenses for gas station and increase of rental and storage charges.
 
The operating income of the segment in 2009 was RMB 30.3 billion, a decrease of 21.3% over 2008, which was primarily attributable to the smaller price gap resulting from the reform on pricing mechanism and taxation and fee policies for refined oil products by the PRC government as well as high level of supply and severe competition in the refined oil products market.
 
Year Ended December 31, 2008 Compared with Year Ended December 31, 2007
 
In 2008, the operating revenues of this segment were RMB 806.9 billion, up by 21.7% over 2007. The increase was mainly attributable our adjustment of sales policy and expansion in sales volume.
 
In 2008, the operating revenues from sales of gasoline and diesel were RMB 695.7 billion, accounting for 86.2% of the operating revenues of this segment. The percentage of retail in the total sales volume of gasoline and

 
44
 

diesel increased to 68.1% from 65.9% in 2007. The percentage of direct sales in the total sales volume increased to 20.1% from 16.9% in 2007. The percentage of wholesale volume in the total sales volume of gasoline and diesel decreased from 17.2% in 2007 to 11.8% in 2008.
 
The following table sets forth the sales volumes, average realized prices and the respective rates of changes of the four major product categories in 2007 and 2008 in different forms of sales channels.
 
   
Sales Volume
   
Rate of Change from
   
Average   Realized Prices
   
Rate of Change from
 
   
2007
   
2008
   
2007 to 2008
   
2007
   
2008
   
2007 to 2008
 
   
(million tonnes)
   
(%)
   
(RMB per tonne)
   
(%)
 
Gasoline
    35.12       37.71       7.4       5,410       6,410       18.5  
Retail sale
    26.73       29.83       11.6       5,542       6,524       17.7  
Direct sale
    2.61       2.61       0.0       5,036       6,013       19.4  
Wholesale
    5.79       5.27       (9.0 )     4,967       5,964       20.1  
Diesel
    77.29       80.65       4.3       4,723       5,629       19.2  
Retail sale
    44.99       48.90       8.7       4,832       5,704       18.0  
Direct sale
    17.03       22.31       31.0       4,742       5,561       17.3  
Wholesale
    15.26       9.44       (38.1 )     4,381       5,402       23.3  
Kerosene including jet fuel
    7.01       9.19       31.1       4,729       6,065       28.3  
Fuel Oil
    13.16       11.46       (12.9 )     2,923       3,692       26.3  

In 2008, the subsidy income recognized by the segment was RMB 9.9 billion.
 
In 2008, the operating expenses of the segment were RMB 778.3 billion, representing an increase of 23.6% compared with 2007. The increase was mainly due to the increase in the purchasing cost of refined oil products.
 
In 2008, the segment’s unit cash selling expenses of refined oil products per tonne was RMB 153.0 per tonne, representing an increase of 10.2% over 2007. This was primarily attributable to the increase in repairing expenses and rental and employment expenses resulting from the increase in consumer price.
 
In 2008, the operating income of the segment was RMB 38.5 billion, representing an increase of 7.2% over 2007.
 
Chemicals Segment
 
The business activities of the chemicals segment include purchasing chemical feedstock from our refining segment and third parties, producing, marketing and distributing petrochemical and inorganic chemical products.
 
Year Ended December 31, 2009 Compared with Year Ended December 31, 2008
 
The operating revenues of the chemicals segment in 2009 were RMB 218.4 billion, representing a decrease of 13.8% against 2008, which was mainly attributable to the dramatic drop in chemical product sales prices.
 
The sales revenues of our six major categories of chemical products (namely basic organic chemicals, synthetic fiber monomers and polymers for synthetic fiber, synthetic fiber, synthetic rubber and chemical fertilizer) of the segment in 2009 were approximately RMB 201.0 billion, representing a decrease of 12.8% compared with 2008, accounting for 92.0% of the operating revenues of the segment.
 
The following table sets forth the sales volume, average realized price and the respective rates of changes for each of these six categories of chemical products of this segment from 2008 to 2009.
 
   
Sales Volume
   
Rate of Change from
   
Average   Realized Prices
   
Rate of Change from
 
   
2008
   
2009
   
2008 to 2009
   
2008
   
2009
   
2008 to 2009
 
   
(million tonnes)
   
(%)
   
(RMB per tonne)
   
(%)
 
Basic organic chemicals
    13.39       16.66       24.4       6,392       4,296       (32.8 )
Synthetic resins
    7.85       8.68       10.6       10,097       8,073       (20.0 )
Synthetic fiber monomers  and polymers
    4.02       4.69       16.7       8,052       6,519       (19.0 )
Synthetic rubber
    0.99       1.12       13.1       16,180       11,448       (29.2 )
Synthetic fiber
    1.35       1.42       5.2       10,488       9,140       (12.9 )
Chemical fertilizer
    1.66       1.77       6.6       1,729       1,657       (4.2 )

 
45
 

 
The operating expenses of the segment in 2009 were RMB 204.8 billion, representing a decrease of 23.1% over 2008, which was mainly attributable to the decrease of the unit cost of raw materials, resulting in the decrease of raw material costs by RMB 60.1 billion.
 
The segment proactively expanded the market in 2009, strengthened the integration of manufacturing, sales and research operations, improved customer services and strengthened strategic alliance with key customers and hence achieved operating income of RMB 13.6 billion, an increase of RMB 26.6 billion over 2008.
 
Year Ended December 31, 2008 Compared with Year Ended December 31, 2007
 
In 2008, operating revenues of this segment were RMB 253.4 billion, representing an increase of 3.9% over the year of 2007.
 
In 2008, the sales revenues of our six major categories of chemical products (namely basic organic chemicals, monomers and polymers for synthetic fiber, synthetic resin, synthetic fiber, synthetic rubber and chemical fertilizer) totaled approximately RMB 230.4 billion and accounting for 90.9% of the operating revenues of this segment.
 
The following table sets forth the sales volume, average realized price and the respective rates of changes for each of these six categories of chemical products of this segment from 2007 to 2008.
 
   
Sales Volume
   
Rate of Change from
   
Average
 Realized Prices
   
Rate of Change from
 
   
2007
   
2008
   
2007 to 2008
   
2007
   
2008
   
2007 to 2008
 
   
(million tonnes)
   
(%)
   
(RMB per tonne)
   
(%)
 
Basic organic chemicals
    12.95       13.39       3.4       5,999       6,392       6.6  
Synthetic resins
    7.90       7.85       (0.6 )     10,205       10,097       (1.1 )
Synthetic fiber monomers and polymers
    4.21       4.02       (4.5 )     9,130       8,052       (11.8 )
Synthetic rubber
    0.97       0.99       2.1       13,760       16,180       17.6  
Synthetic fiber
    1.50       1.35       (10.0 )     11,605       10,488       (9.6 )
Chemical fertilizer
    1.59       1.66       4.4       1,659       1,729       4.2  
 
In 2008, operating expenses of the chemicals segment were RMB 266.4 billion, representing an increase of 15.5% over 2007. This was primarily due to the increase in the prices of feedstock and ancillary materials, which, together, contributed to an increase of RMB 33.4 billion in operating expenses over 2007.
 
In 2008, operating loss of the chemicals segment was RMB 13.0 billion, compared to the operating income of RMB 13.3 billion in 2007.
 
Corporate and others
 
The business activities of corporate and others mainly consist of the import and export operations, international trading, research and development activities of us and managerial activities of our headquarters.
 
Year Ended December 31, 2009 Compared with Year Ended December 31, 2008
 
In 2009, the operating revenue generated from corporate and others was RMB 521.9 billion, representing a decrease of 27.2% over 2008, which was mainly attributable to the decrease in petroleum and petrochemical product prices, leading to the decrease of revenues from crude oil and refined oil trading business of the trading  subsidiaries. The operating revenue from trading companies was RMB 520.5 billion.
 
In 2009, the operating expenses of this segment was RMB 524.1 billion, representing a decrease of 27.1% over 2008, which was mainly attributable to the decrease in its trading companies’ purchasing costs. The operating expense from the trading companies was RMB 519.3 billion.

 
46
 

In 2009, the operating loss of this segment were RMB 2.2 billion, flat with that of 2008. This includes operating income from trading companies which amounted to RMB 1.2 billion and the operating loss from research affiliates, headquarters and donation activities which amounted to RMB 3.4 billion.
 
Year Ended December 31, 2008 Compared with Year Ended December 31, 2007
 
In 2008, the operating revenues generated from corporate and others were RMB 716.5 billion, representing an increase of 58.0% over 2007. The increase was mainly due to the increase in the trading volume of crude oil and refined oil products.
 
In 2008, the operating expenses of this segment were RMB 718.7 billion, representing an increase of 57.9% over 2007. This increase was mainly due to the increase in the purchasing costs of the trading business in line the increase in its operating revenue.
 
In 2008, the operating loss of this segment was RMB 2.2 billion, compared to the operating loss of RMB 1.5 billion in 2007.
 
 
D.
LIQUIDITY AND CAPITAL RESOURCES
 
Our primary sources of funding have been cash provided by our operating activities, short-term and long-term loans. Our primary uses of cash have been for working capital, capital expenditures and repayment of short-term and long-term loans. We arrange and negotiate financing with financial institutions to finance our capital resource requirement, and maintain a certain level of standby credit facilities to reduce liquidity risk. We believe that our current cash on hand, expected cash flows from operations and available standby credit facilities from financial institutions will be sufficient to meet our working capital requirements and repay our short term debts and obligations when they become due.
 
The following table sets forth a summary of our consolidated cash flows for the years ended December 31, 2008 and 2009.
 
   
For the Years Ended December 31,
 
Cash flow data
 
2008
   
2009
 
   
(in RMB billions)
 
Net cash generated from operating activities                                                                                
    66.5       152.1  
Net cash used in investing activities                                                                                
    (110.0 )     (116.1 )
Net cash generated from / (used in) financing activities
    42.8       (34.3 )
Net (decrease) / increase in cash and cash equivalents
    (0.7 )     1.7  

The net cash generated from our operating activities in 2009 was RMB 152.1 billion, an increase of RMB 85.6 billion compared with the end of the previous year, which reflected: (i) our earnings before taxation of RMB 80.6 billion, representing an increase of RMB 58.5 billion over 2008, (ii) our depreciation, depletion and amortization of RMB 50.5 billion, representing an increase of RMB 4.1 billion over 2008; and (iii) a decrease of our income tax payment by RMB 17 billion from 2008.
 
The net cash used in our investing activities was RMB 116.1 billion, an increase of RMB 6.1 billion over 2008. This was mainly attributable to the year-on-year increase of the capital expenditures pursuant to our annual investment plan.
 
The net cash outflow from our financing activities was RMB 34.3 billion, an increase of RMB 77.1 billion over 2008. This reflected our enhancement in capital management and liquidity in resources and reduction in level of indebtedness.
 
Contractual Obligations and Commercial Commitments
 
The following table sets forth our obligations and commitments to make future payments under contracts and commercial commitments as of December 31, 2009.

 
47
 
 
         
As of December 31, 2009
 
         
Payment due by period
 
   
Total
   
less than 1 year
   
1-3 years
   
4-5 years
   
After 5 years
 
         
(RMB millions)
 
Contractual obligations (1)
                             
Short-term debt                                                 
    66,866       66,866       -       -       -  
Long-term debt                                                 
    174,642       10,077       53,175       55,433       55,957  
                                         
Total contractual obligations
    241,508       76,943       53,175       55,433       55,957  
                                         
Other commercial commitments
                                       
Operating lease commitments                                                 
    174,487       6,084       11,739       11,326       145,338  
Capital commitments                                                 
    183,362       100,256       83,106       -       -  
Exploration and production licenses
    1,004       136       139       40       689  
Guarantees (2)                                                  
    14,996       14,996       -       -       -  
                                         
Total commercial commitments
    373,849       121,472       94,984       11,366       146,027  
_________
 
(1)
Contractual obligations include the contractual obligations relating to interest payments.
   
(2)
Guarantee is not limited by time, therefore specific payment due period is not applicable. As of December 31, 2009, we have not entered into any off-balance sheet arrangements other than guarantees given to banks in respect of banking facilities granted to certain parties. As of December 31, 2009, the maximum amount of potential future payments under the guarantees was RMB 15 billion.  See Note 30 to the consolidated financial statements for further information of the guarantees.
 
Historical and Planned Capital Expenditure
 
The following table sets forth our capital expenditure by segment for the years ended December 31, 2007, 2008 and 2009 and the capital expenditure in each segment as a percentage of our total capital expenditure for such year.
 
   
2007
   
2008
   
2009
   
Total
 
   
RMB
   
Percent
   
RMB
   
Percent
   
RMB
   
Percent
   
RMB
   
Percent
 
   
(in billions, except percentage data)
 
Exploration and production
    54.5       49       57.7       53       51.5       47       163.7       49  
Refining
    23.0       21       12.8       12       15.5       14       51.3       16  
Marketing and distribution
    14.6       13       14.8       14       16.3       15       45.7       14  
Chemicals 
    16.2       14       20.6       19       25.2       23       62.0       19  
Corporate 
    3.3       3       2.4       2       1.5       1       7.2       2  
Total 
    111.6       100       108.3       100       110.0       100       329.9       100  
 
In 2009, our total capital expenditure amounted to RMB 110.0 billion, among which:
 
 
·
Exploration and production . RMB 51.5 billion was used in exploration and development segment to enhance our oil and gas exploration, expand our production capacity and increase the scale of our producing reserve. The newly-built crude oil production capacity was 5.7 million tonnes per year, and newly-built natural gas capacity was 1.205 billion cubic meters per year in 2009.
     
 
·
Refining . RMB 15.5 billion was used in our refining segment for quality upgrade of our refined oil product and crude oil adaptability restructuring project in some refineries, as well as construction of new storage facilities and pipeline.
     
 
·
Marketing and distribution . RMB 16.3 billion was used in this segment to add 1,229 petrol and gas stations in key areas including highways, major cities and newly planned regions, and accelerate the construction of oil products storage facilities and pipeline.
     
 
·
Chemicals . RMB 25.2 billion was spent in this segment, including investments on Fujian, Tianjin and Zhenhai ethylene projects. Our SBR unit of Sinopec Qilu Company and ethylbenzene/styrene complex unit of Sinopec Anqing Company were completed and put into production in 2009.
     
 
·
Corporate and Others . RMB 1.5 billion was used for scientific research, construction of ancillary projects and further application of information systems focused on ERP.

 
48
 
 
In 2010, we will continue to focus on investments into our most profitable and core projects. We will strictly manage our investment procedures and project construction process. The total planned capital expenditure in 2010 amounts to RMB 112 billion, including:
 
 
·
Exploration and production . The planned capital expenditure in 2010 for this segment is RMB 53.3 billion. We expect to commence commissioning of Puguang Gas Field and manage the operation of the Sichuan-to-East China Gas Project, as well as to continue the exploration and capacity buildup of Tahe and Shengli oil fields and Puguang and Erdos gas fields.
     
 
·
Refining . The planned capital expenditure in 2010 for this segment is RMB 22.3 billion. We will continue to focus on building-up our refining capacity at strategic locations. We also expect to continue our revamping projects to use lower quality crude oil as feedstock, to enhance oil products with high quality and low cost, and to improve the construction of crude oil dock and transportation and delivery system.
     
 
·
Marketing and distribution . The planned capital expenditure in 2010 for this segment is RMB 14 billion. W expect to focus on the construction and acquisition of petrol and gas stations in key areas including highways, major cities and newly planned zones. We will continue to accelerate our pipeline construction and to improve our sales network of oil products.
     
 
·
Chemicals . The planned capital expenditure in 2010 for this segment is RMB 20 billion. The construction of Zhenhai ethylene project is expected to be completed in 2010. We will continue to make investment for the construction of Wuhan ethylene, Yanshan butyl rubber and other projects.
     
 
·
Corporate and Others . The planned capital expenditure in 2010 for this segment is RMB 2.4 billion.
 
Consumer Price Index
 
According to the data provided by the National Bureau of Statistics, the consumer price index in the PRC decreased by 0.7% in 2009, compared with increases of 5.9% in 2008 and 4.8% in 2007.  According to China's official analysis, the deflation in the PRC during 2009 was due to the impact of global financial crisis, decreases in export and lower level of demand in domestic market. Deflation has not had a significant impact on our results of operations in the previous year.
 
ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 
 
A.
DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
 
Directors
 
The table and discussion below set forth certain information concerning our directors. The current term for all our directors is three years, which will expire in May 2012.
 
Name
 
Age
 
Positions with Sinopec Corp.
         
Su Shulin
 
47
 
Chairman
Wang Tianpu
 
47
 
Vice Chairman, President
Zhang Yaocang
 
56
 
Vice Chairman
Zhang Jianhua
 
45
 
Director, Senior Vice President
Wang Zhigang
 
52
 
Director, Senior Vice President
Cai Xiyou
 
48
 
Director, Senior Vice President
Cao Yaofeng
 
56
 
Director
Li Chunguang
 
54
 
Director
Dai Houliang
 
46
 
Director, Senior Vice President
Liu Yun
 
53
 
Director
Liu Zhongli
 
75
 
Independent Non-executive Director
Ye Qing
 
76
 
Independent Non-executive Director
Li Deshui
 
65
 
Independent Non-executive Director
Xie Zhongyu
 
66
 
Independent Non-executive Director
Chen Xiaojin
 
65
 
Independent Non-executive Director


 
49
 
 
Su Shulin , 47, Chairman of the Board of Directors of Sinopec Corp. and President of Sinopec Group Company. He received his Bachelor Degree from Daqing Petroleum Institute in July 1983, and obtained a Master Degree from Harbin Engineering University in March 1999. He is a professor level senior engineer. From March 1996 to January 1997, Mr. Su acted as Assistant to the Director of CNPC Daqing Petroleum Administration Bureau.  From January to November 1997, Mr. Su served as Head of the No. 1 Oil and Gas Development Department and Assistant to the Director of CNPC Daqing Petroleum Administration Bureau from November 1997 to January 1999, Mr. Su was Deputy Director and member of the Party Committee of CNPC Daqing Petroleum Administration Bureau. From January to September 1999, Mr. Su was Director and Vice Secretary to the Party Committee of CNPC Daqing Petroleum Administration Bureau. From September 1999 to August 2000, Mr. Su Shulin was served as Vice President of PetroChina Company Limited and Chairman, General Manager and Secretary to the Party Committee of Daqing Oilfield Company Limited and Vice Secretary to Party Committee of CNPC Daqing Petroleum Administration Bureau. From August 2000 to March 2001, Mr. Su acted as Deputy General Manager and member of the Party Committee of China National Petroleum Corporation, Vice President of PetroChina Company Limited, Chairman, General Manager and Secretary to the Party Committee of Daqing Oilfield Company Limited as well as Vice Secretary to the Party Committee of CNPC Daqing Petroleum Administration Bureau. From March 2001 to December 2002, Mr. Su served as Deputy General Manager and member of the Party Committee of China National Petroleum Corporation, Vice President of PetroChina Company Limited and Chairman and General Manager of Daqing Oilfield Company Limited. From December 2002 to December 2003, Mr. Su acted as Deputy General Manager and member of the Party Committee of China National Petroleum Corporation, Director and Senior Vice President of PetroChina Company Limited as well as Chairman and General Manager of Daqing Oilfield Company Limited. From December 2003 to September 2006, Mr. Su acted as Deputy General Manager and member of the Party Committee of China National Petroleum Corporation, Director and Senior Vice President of PetroChina Company Limited. From September 2006 to October 2006, Mr. Su was elected as a member of the Standing Committee of the provincial Party Committee of Liaoning Province. In October 2006, Mr. Su was appointed as a member of the Standing Committee and Head of the Organization Department of Liaoning Provincial Committee. In June 2007 he was appointed as President and Secretary of the Party Leadership Group of Sinopec Group Company. Mr. Su was elected as Director and Chairman on Third Session of the Board of Directors of Sinopec Corp. in August 2007.

Wang Tianpu , 47, Vice Chairman of the Board of Directors and President of Sinopec Corp. Mr. Wang graduated from Qingdao Chemical Institute in July 1985 majoring in basic organic chemistry. He obtained his MBA degree in Dalian University of Science & Technology in July 1996 and Ph.D. degree in Zhejiang University in August 2003 majoring in chemical engineering. He is a professor level senior engineer and well-experienced in the production and management in petrochemical industry. From March 1999 to February 2000, Mr. Wang was Vice President of Qilu Petrochemical Company of Sinopec Group. From February 2000 to September 2000, he was Vice President of Sinopec Corp Qilu Company. From September 2000 to August 2001, he was President of Sinopec Corp Qilu Company. Mr. Wang was Vice President of Sinopec Corp from August 2001 to April 2003 and was Senior Vice President of Sinopec Corp from April 2003 to March 2005. Mr. Wang has been President of Sinopec Corp since March 2005. Mr. Wang was elected as Director of the Third Session of the Board of Directors of Sinopec Corp. in May 2006 and has been President of Sinopec Corp. In May 2009, Mr. Wang was elected as Vice Chairman of Board of Directors.

Zhang Yaocang , 56, Vice Chairman of the Board of Directors and Vice President of Sinopec Group Company. Mr. Zhang is a professor level senior engineer and obtained a graduate degree of Graduate School. In November 1990, he was appointed as Deputy Director General of Bureau of Petroleum Geology and Marine Geology, Ministry of Geology and Mineral Resources (MGMR); in February 1994, he was appointed as Secretary of CPC Committee and Deputy Director General of Bureau of Petroleum Geology and Marine Geology, Ministry of Geology and Mineral Resources (MGMR); in June 1997, he was appointed as Deputy Secretary of CPC Leading Group and Executive Vice President of Sinopec Star Petroleum Co. Ltd; in April 2000, he was appointed as Assistant to President of Sinopec Group Company and concurrently as President of Sinopec Star Petroleum Co., Ltd.; in August 2000, he was appointed concurrently as Secretary of CPC Committee of Sinopec Star Petroleum Co. Ltd; in July 2001, he was appointed as Vice President of Sinopec Group Company; in May 2009, he was elected as Vice Chairman of the Board of Directors of Sinopec Corp.

Zhang Jianhua , 45, Director of the Board of Directors and Senior Vice President of Sinopec Corp. Mr. Zhang graduated from East China Chemical Institute in July 1986 majoring in petroleum refining, and obtained a master’s

 
50
 

degree from East China University of Science and Technology in December 2000 majoring in chemical engineering. He is a professor level senior engineer. From April 1999 to February 2000, Mr. Zhang was Vice President of Shanghai Gaoqiao Petrochemical Company of Sinopec Group. From February 2000 to September 2000, he was Vice President of Sinopec Corp. Shanghai Gaoqiao Company. He was President of Sinopec Corp. Shanghai Gaoqiao Company from September 2000 to June 2003. Mr. Zhang served as Vice President of Sinopec Corp. from April 2003 to March 2005. He was also the Director General of Sinopec Production & Operation Management Dept. from November 2003 to November 2005. He has been Senior Vice President of Sinopec Corp. since March 2005; Mr. Zhang was elected as Director of the Third Session of the Board of Directors of Sinopec Corp. in May 2006 and has been Senior Vice President of Sinopec Corp.
 
Wang Zhigang , 52, Director of the Board of Directors of Sinopec Corp. and Senior Vice President of Sinopec Corp. Mr. Wang graduated from East China Petroleum Institute in January 1982, majoring in oil production, and then obtained a master’s degree from University of Petroleum in June 2000, majoring in oil and gas development engineering. He obtained a Ph.D. degree from Geology and Geo-physics Research Institute of the China Academy of Sciences in September 2003 majoring in geology. He is a professor level senior engineer. From February 2000 to June 2000, he was Vice President of Sinopec Shengli Oilfield Company Limited. From June 2000 to December 2001, Mr. Wang served as Director and President of Sinopec Shengli Oilfield Company Limited. He was appointed as honorary Deputy Director-General of the Economic and Trade Committee of Ningxia Hui Autonomous Region from November 2001 to May 2003. He was Vice President of Sinopec Corp. from April 2003 to March 2005. He was also the Director General of Sinopec Exploration and Production Dept. since June 2003 to November 2005. He has been Senior Vice President of Sinopec Corp. since March 2005. Mr. Wang was elected as Director of the Third Session of the Board of Directors of Sinopec Corp. in May 2006 and has been Senior Vice President of Sinopec Corp.

Cai Xiyou , 48, Director of the Board of Directors of Sinopec Corp. and Senior Vice President of Sinopec Corp. Mr. Cai graduated from Fushun Petroleum Institute in August 1982 majoring in petroleum refining automation, and obtained a MBA degree from China Industry and Science Dalian Training Center in October 1990. He is a senior economist. From June 1995 to May 1996, he was Deputy General Manager of Jinzhou Petrochemical Company of the former Sinopec Group Company. From May 1996 to December 1998, he was Deputy General Manager of Dalian Western Pacific Petrochemical Co., Ltd (WEPEC). From December 1998 to June 2001, he was Deputy General Manager of Sinopec Sales Co., Ltd, and from June 2001 to December 2001, he was Executive Deputy Manager of Sinopec Sales Co., Ltd. He has been Director and General Manager of China International United Petrochemical Company Limited (UNIPEC) from December 2001 to December 2005. He was Vice President of Sinopec Corp. from April 2003 to November 2005. Mr. Cai has been Senior Vice President of Sinopec Corp. since November 2005. He was elected as Director of the Fourth Session of the Board of Directors of Sinopec Corp. in May 2009.

Cao Yaofeng , 56, Director of the Board of Directors of Sinopec Corp. and Vice President of Sinopec Group Company. Mr. Cao is a professor level senior engineer and obtained a master degree. In April 1997, he was appointed as Deputy Director General of Shengli Petroleum Administration Bureau; in May 2000, he served as concurrently as Vice Chairman of Board of Directors of Sinopec Shengli Oilfield Co., Ltd.; in December 2001, he served as Board Director and President of Sinopec Shengli Oilfield Co., Ltd.; in December 2002, he served as Director Genaral of Shengli Petroleum Administration Bureau of Sinopec Group Company and Chairman of Board of Directors of Shengli Oilfield Company Limited; from April 2003 to May 2006, he served as Employee Representative Board Director of Sinopec Corp.; in October 2004, he was appointed as Assistant to President of Sinopec Group Company; in November 2005, he was appointed as Vice President of Sinopec Group Company; in May 2009, he was elected as Board Director of Sinopec Corp.

Li Chunguang , 54, Director of the Board of Directors of Sinopec Corp. and Vice President of Sinopec Group Company. Mr. Li is a professor level senior engineer and obtained a university diploma. In August 1991, he was appointed as Deputy General Manager of Sinopec Sales Company North China Branch; in October 1995, he was appointed as Deputy General Manager of Sinopec Sales Company; in June 2001, he was appointed as General Manager of Sinopec Sales Co., Ltd.; in December 2001, he was appointed as Director General of Oil Product Sales Department of Sinopec Corp.; in April 2002 he was elected as Chairman of Board of Directors and General Manager of Sinopec Sales Co., Ltd.; in April 2003, he was appointed as Vice President of Sinopec Corp.; in November 2005, he was appointed as Vice President of Sinopec Group Company; in May 2009, he was elected as Board Director of Sinopec Corp.

Dai Houliang , 46, Director of the Board of Directors of Sinopec Corp. and Senior Vice President of Sinopec Corp. Mr. Dai graduated from Jiangsu Chemical Institute in July 1985, specializing in organic chemical engineering. From September 1997 to July 1999, he participated in the MBA training program in Nanjing University. He is a professor level senior engineer. He was Deputy Manager of Sinopec Yangzi Petrochemical Company from December

 
51
 

1997 to April 1998. He served as Director and Deputy General Manager of Sinopec Yangzi Petrochemical Co., Ltd. from April 1998 to July 2002. He was Vice Chairman and General Manager of Sinopec Yangzi Petrochemical Co., Ltd. and Director of Sinopec Yangzi Petrochemical Company from July 2002 to December 2003. He was Chairman and President of Sinopec Yangzi Petrochemical Co., Ltd. and Chairman of Sinopec Yangzi Petrochemical Company from December 2003 to September 2005. He also served as Chairman of BASF-YPC Company Limited from December 2004 to October 2006. He has been the Deputy CFO of Sinopec Corp. from September 2005 to May 2006. Mr. Dai has been Vice President of Sinopec Corp. from November 2005 to May 2006. In May 2006, he was elected as Director of the Third Session of the Board of Directors, Senior Vice President and CFO of Sinopec Corp. Mr. Dai was elected as Director of the Fourth Session of the Board of Directors and appointed as Senior Vice President of Sinopec Corp. in May 2009.
 
Liu Yun , 53, Director of the Board of Directors of Sinopec Corp. and Chief Accountant of Sinopec Group Company. Mr. Liu is a senior accountant and obtained a master degree. In December 1998, he was appointed as Deputy Director General of Financial Department of Sinopec Group Company; in February 2000, he was appointed as Deputy Director General of Financial Department of Sinopec Corp.; in January 2001, he was appointed as Director General of Financial Department of Sinopec Corp.; in June 2006, he was appointed as Deputy CFO of Sinopec Corp.; in February 2009, he was appointed as Chief Accountant of Sinopec Group Company; and in May 2009, he was elected as Board Director of Sinopec Corp.

Liu Zhongli , 75, Independent Non-Executive Director of Sinopec Corp. He graduated from the training course of the Training Department of Central Communist Party School (undergraduate course) in July 1982. He is a senior economist engaging in treasury finance administration and government work for a long time, and has extensive experience in macro-economics, financial and treasury administration. He was working in Commerce Bureau of Heilongjiang Province in 1952 and in Planning Commission of Heilongjiang Provincial Government in 1963. He had served as Deputy Division Director of the General Affairs Office of Planning Commission of Heilongjiang Provincial Government and Deputy Secretary General of Planning Commission of Heilongjiang Provincial Government since September 1973. He was Deputy Director General of Planning Commission of Heilongjiang Provincial Government and a member of Party Committee of Planning Commission of Heilongjiang Provincial Government from July 1982 to May 1983. From May 1983 to May 1985, he was Director General of Planning Commission (Planning & Economics Department) of Heilongjiang Provincial Government and Secretary of Party Committee of Planning Commission (Planning & Economics Department) of Heilongjiang Provincial Government. He served as Deputy Governor of Heilongjiang Province from May 1985 to January 1988. He was Vice Minister of the Ministry of Finance and Deputy Secretary of Party Committee of the Ministry of Finance from February 1988 to July 1990. He served as Deputy Secretary General of the State Council and Deputy Secretary of Party Committee of the State Council from July 1990 to September 1992. From September 1992 to March 1998, he was Minister of the Ministry of Finance and Secretary of Party Committee of the Ministry of Finance and, from February 1994, concurrently Director-General of State Administration of Taxation. From March 1998 to November 2000, he was Head of Economic System Reform Office of the State Council and Secretary of Party Committee of the Economic System Reform Office of the State Council. From August 2000 to March 2003, he was Chairman of National Council for Social Security Fund and Secretary of Party Committee of the National Council for Social Security Fund. He has been a member of the Standing Committee of the Tenth Session of the Chinese People’s Political Consultative Conference (CPPCC) and Director-General of the Economics Committee of CPPCC since March 2003. Since October 2004, he has concurrently been Chairman of the Chinese Institute of Certified Public Accountants. Mr. Liu was elected as Independent Non-Executive Director of the Third Session of the Board of Directors of Sinopec Corp. in May 2006.

Ye Qing , 76, Independent Non-executive Director of Sinopec Corp. Mr. Ye is a senior engineer and obtained a college diploma. Mr. Ye is a senior engineer and obtained a college diploma. In January 1976, he was appointed as Deputy Director of Revolutionary Committee and Chief Engineer of Jixi Mining Bureau; in March 1982, he was appointed as Vice Minister, Member of CPC Leading Group, Chief Engineer and Secretary of CPC Leading Group of Ministry of Coal Industry; in August 1986, he was appointed as Deputy Director General and Member of CPC Leading Group of National Economy Commission; in May 1988, he was successively appointed as Deputy Director General, Member of CPC Leading Group and Deputy Secretary of CPC Leading Group of State Planning Commission, as well as Director General of State Council Production Commission; in July 1991, he was appointed as Deputy Director and Member of CPC Leading Group of State Planning Commission; from April 1998 to July 2003, he served as Chairman of Board of Directors and Secretary of CPC Leading Group of Shenhua Group Company Limited; from February 1999 to December 2000, he served concurrently as President of Shenhua Group Company Limited; in May 2009, he was elected as Independent Non-executive Director of Sinopec Corp. Mr. Ye was elected as Alternate Member of 14th Session of CPC Central Committee and Standing Committee Member of 9th and 10th Session of CPPCC.

 
52
 

Li Deshui , 65, Independent Non-Executive Director of Sinopec Corp. Mr. Li graduated from university in 1967. He is a senior engineer, researcher, part-time professor of the Economics School of Peking University and the Economics School of Renmin University of China. After graduating from university, he was assigned to work at Maanshan Steel Company and has acted as Workshop Section Head and Dispatch Head. In 1977 he worked at the Planning Institute of the Metallurgy Department. In 1984 he worked at the Raw Materials Bureau of the State Planning Commission. In 1988 he acted as Deputy Division Director of the First Industrial Planning Division of the Long-term Planning Department of the State Planning Commission. In 1989 he was Division Director of the First Industrial Planning Division of the Long-term Planning Department and Division Director of the First Industrial Planning Division of the Long-term Planning and Industrial Policy Department. In 1992 he acted as Deputy Director of the National Economy Comprehensive Department of the State Planning Commission. In May 1996 he was Director of the National Economy Comprehensive Department of the State Planning Commission. In November 1996, he acted as Vice Mayor of Chongqing in Sichuan Province. In March 1997 he acted as Vice Mayor of Chongqing Municipality. In November 1999 he worked as Deputy Director of the Research Office of the State Council and a member of the Party Committee. In April 2002, he served as Secretary of the Party Committee and Deputy General Manager of China International Engineering Consultancy Company. In March 2003 he served as Secretary of the Party Committee and Head of the State Statistics Bureau, a member of the Monetary Policy Committee of the People’s Bank of China and Chairman of China Statistics Institute. In March 2005, he was elected as Vice Chairman of the Thirty-sixth Statistics Commission of the United Nations. In March 2005 he served as a member of the Tenth Session of the Chinese People’s Political Consultative Conference. In April 2006 he acted as a member of the Economic Commission. In March 2006, he was the consultant of the State Statistics Bureau. Mr. Li was elected as Independent Non-Executive Director of the Fourth Session of the Board of Directors of Sinopec Corp. in May 2009.

Xie Zhongyu ,   66, Independent Non-executive Director of Sinopec Corp. Mr. Xie is a senior engineer and obtained a university diploma. In May 1986, he was appointed as Deputy Director General for both Investigation and Research Office and Policy Research Office in Ministry of Chemical Industry; in November 1988, he was appointed as Director General of Department of Policy, Laws & Regulations of Ministry of Chemical Industry; in December 1991, he was appointed as Director General of Department of Policy, Laws & Regulations of Ministry of Chemical Industry; in September 1993, he was appointed as Director General of General Office of Ministry of Chemical Industry; in June 1998, he was appointed as Deputy Director General, Member of CPC Leading Group of State Petroleum and Chemical Industry Bureau; from June 2000 to December 2006, he served as Chairman of the Board of Supervisors for Key Large-scaled State Owned Enterprises; in October 2007, he was elected as Board Director of Nuclear Power Technology Corporation; and in May 2009, he was elected as Independent Non-executive Director of Sinopec Corp.

Chen Xiaojin , 65, Independent Non-executive Director of Sinopec Corp. Mr. Chen is a senior engineer (research fellow level) and obtained a university diploma. In December 1982, he was appointed as President of Tianjin Ship Industry Corporation; in January 1985, he was appointed successively as Vice President and President of CNOOC Platform Corporation; in February 1987, he was appointed successively as Director General of Operation Department, Director General of Foreign Affairs Bureau, Director General of International Affairs Department in China State Shipbuilding Corporation and Deputy President of China State Shipbuilding Trading Company; in December 1988, he was appointed as Vice President of China State Shipbuilding Corporation; in January 1989, he was appointed concurrently as President of China State Shipbuilding Trading Company; in October 1996, he was elected as concurrently as Chairman of Board of Directors of China State Shipbuilding Trading Company; from June 1996 to July 2008, he served as President and Secretary of CPC Leading Group of China State Shipbuilding Corporation; in May 2009, he was elected as Independent Non-executive Director of Sinopec Corp.
 
Supervisors
 
The table and discussion below set forth certain information concerning our supervisors. The current term of our supervisors is three years, which will expire in May 2012.
 
Name
 
Age
 
Position with the Company 
         
Wang Zuoran
 
59
 
Chairman of the Board of Supervisors
Zhang Youcai
 
68
 
Vice Chairman, Independent Supervisor
Geng Limin
 
55
 
Supervisor
Zou Huiping
 
49
 
Supervisor
Li Yonggui
 
69
 
Independent Supervisor
Liu Xiaohong
 
55
 
Employee Representative Supervisor
Zhou Shiliang
 
52
 
Employee Representative Supervisor
Chen Mingzheng
 
52
 
Employee Representative Supervisor
Su Wensheng
 
53
 
Employee Representative Supervisor

 
53
 
 
Wang Zuoran , 59, Chairman of the Supervisory Board of Sinopec Corp. Mr. Wang graduated from Shandong Economic Administration Institute in September 1994 specializing in economic administration. Mr. Wang is a professor level senior economist and has extensive experience in the management of petroleum industry. From October 1994 to February 2000, Mr. Wang served as Deputy Director and Party Secretary of Shengli Petroleum Administration Bureau. From February 2000 to July 2001, Mr. Wang was the Assistant to the President of Sinopec Group Company. Mr. Wang has been Director of Disciplinary Supervision Committee of Sinopec Group Company since July 2001. Mr. Wang served as Supervisor of the First Session of the Supervisory Board of Sinopec Corp. from February 2000 to April 2003. From April 2003 to May 2006, Mr. Wang served as Supervisor and Chairman of the Second Session of the Supervisory Board of Sinopec Corp.; he was elected as Supervisor and Chairman of the Third Session of the Supervisory Board of Sinopec Corp. in May 2006.

Zhang Youcai , 68, Independent Supervisor and Vice Chairman of the Supervisory Board of Sinopec Corp. Mr. Zhang graduated from Nanjing Industrial University in August 1965 majoring in inorganic chemistry. He is a professor and has long been engaged in business administration, financial management and government affairs, and has extensive experience in industrial, economic, financial and accounting management. From January 1968 to August 1980, he served as a technician, Vice-President, Deputy Secretary of the Party Committee and President of Nantong Chemical Fertilizer Plant. From August 1980 to January 1982, he was Deputy Director-General and member of the Party Committee of the Industrial Bureau of Nantong Region. From January 1982 to February 1983, he served as Deputy Director - General of Planning Commission of Nantong Region. From February 1983 to November 1989, he served as Deputy Mayor, Deputy Secretary of the Party Committee and Mayor of Nantong City. He was Vice Minister and member of the Party Committee of Ministry of Finance from December 1989 to July 2002 (from May 1994 to March 1998, he served concurrently as Director-General of State-owned Assets Administration Bureau). He has been Chairman of the Chinese Institute of Chief Accountants since November 2002. He has been a member of the Standing Committee of the Tenth National People’s Congress (NPC) and Deputy Director of its Financial and Economic Committee of NPC from March 2003. Mr. Zhang served as an Independent Non-Executive Director of the Second Session of Board of Directors of Sinopec Corp. from April 2003 to May 2006; he was elected as Independent Supervisor and Vice Chairman of the Third Session of the Supervisory Board of Sinopec Corp. in May 2006.

Geng Limin , 55, Supervisor of Sinopec Corp., Director General of Supervision Department of Sinopec Corp., Vice Leader of Discipline Inspection Group for CPC Leading Group of Sinopec Group Company, Director General of Supervision Bureau of Sinopec Group Company. Mr. Geng is a senior administration engineer and obtained a college diploma. In February 2000, he was appointed as Deputy Director General of Supervision Department of Sinopec Corp. and Deputy Director General of Supervision Bureau of Sinopec Group Company; in January 2007, he was appointed as Deputy Secretary of CPC Committee, Secretary of Discipline Inspection Committee as well as Trade Union Chairman of Sinopec Chemical Products Sales Company; in August 2008, he was appointed as Director General of Supervision Department of Sinopec Corp. and Vice Leader of Discipline Inspection Group for CPC Leading Group of Sinopec Group Company and Director General of Supervision Bureau of Sinopec Group Company; and in May 2009, he was elected as Supervisor of Sinopec Corp.

Zou Huiping , 48, Supervisor of Sinopec Corp. Mr. Zou graduated from Jiangxi Institute of Finance and Economics in July 1986 specializing in trade economics. He is a professor level senior accountant. From November 1998 to February 2000, he served as Chief Accountant of Sinopec Group Guangzhou Petrochemical Company. From February 2000 to December 2001, he was Deputy Director General of Financial Assets Department of Sinopec Group Company. From December 2001 to March 2006, he was Deputy Director General of Finance Planning Department of Sinopec Group Company. In March 2006, he was Director General of Financial Assets Department of Sinopec Assets Management Co., Ltd. Since March 2006, he has been Director General of Audit Department of Sinopec Corp. Mr. Zou was elected as Supervisor of the Third Session of the Supervisory Board of Sinopec Corp. in May 2006.

Li Yonggui , 68, Independent Supervisor of Sinopec Corp. Mr. Li graduated from Shandong Institute of Finance and Economics in July 1965, majoring in treasury finance. He is a senior economist and CPA, and has long been engaged in tax management with extensive management experience in taxation. From February 1985 to December 1988, he was Deputy Director-General of Taxation Bureau of Ministry of Finance. He served as Chief Economist of State Administration of Taxation from December 1988 to April 1991. From April 1991 to February 1995, he served as Deputy Director-General of State Administration of Taxation. He was Chief Economist of State Administration of Taxation from February 1995 to September 2001. Mr. Li has been Chairman of Chinese Association of Certified Public Taxation Experts since April 2000. He has served as Vice Chairman of Chinese Association of Certified Accountants since November 2004. In July 2008, he was appointed as consultant of Chinese Association of Certified Public Taxation Experts. Mr. Li served as Independent Supervisor of the Second Session of Supervisory Board of Sinopec Corp. from April 2003 to May 2006; he was elected as Independent Supervisor of the Third Session of Supervisory Board of Sinopec Corp. in May 2006.

 
54
 
 
Liu Xiaohong ,   55, Employee Representative Supervisor of Sinopec Corp. and Sinopec General Representative of Sinopec Corp. based in Hong Kong. Mr. Liu is a senior administration engineer and obtained a graduate degree from Graduate School. In February 1992, he was appointed as Deputy Director General of General Office of the former Sinopec Group Company; in December 1998, he was appointed as Deputy Director General of General Office of Sinopec Group Company; in December 2001, he was appointed as Director General of President’s Office of Sinopec Corp.; in February 2005, he was appointed as Director General of General Office of Sinopec Group Company; in September 2005, he was appointed again as Director General of President’s Office of Sinopec Corp.; in September 2009, he was appointed as General Representative of Sinopec Corp. based in Hong Kong; in May 2009, he was elected as Employee Representative Supervisor of Sinopec Corp.

Zhou Shiliang , 52, Employee Representative Supervisor of Sinopec Corp. and Director General of Personnel Departments of both Sinopec Corp. and Sinopec Group Company. Mr. Zhou is a professor level senior engineer and obtained a master degree. In February 2000, he was appointed as Deputy Director General of Yunnan-Guizhou-Guangxi Petroleum Exploration Bureau; in September 2000, he was appointed as President of Sinopec Yunnan-Guizhou-Guangxi Oilfield Company;in April 2002, he was appointed as Secretary of CPC Committee and Vice President in Sinopec South Exploration & Development Company; in April 2006, he was appointed as Secretary of CPC Committee and Deputy Director General in Sinopec Henan Petroleum Exploration Bureau; in November 2007, he was appointed as Director General of Sinopec Personnel Department of both Sinopec Corp. and Sinopec Group Company; and in May 2009, he was elected as Employee Representative Supervisor of Sinopec Corp.

Chen Mingzheng , 52, Employee Representative Supervisor of Sinopec Corp., Vice President of Sinopec Northwest Oilfield Company and Secretary of CPC Committee of Northwest Petroleum Bureau of Sinopec Group Company. Mr. Chen is a senior engineer and obtained a graduate degree from Graduate School. In November 2000, he was appointed as Deputy Director General of North China Petroleum Bureau under Sinopec Star Petroleum Co. Ltd.; in June 2003, he was appointed as Deputy Director General of North China Petroleum Bureau under Sinopec Group Company; in October 2004, he was appointed as Secretary of CPC Committee in North China Petroleum Bureau under Sinopec Group Company; in March 2008, he was appointed as Secretary of CPC Committee in Southwest Petroleum Bureau of Sinopec Group Company and Vice President of Sinopec Northwest Oilfield Company; in May 2009, he was elected as Employee Representative Supervisor of Sinopec Corp.

Su Wensheng , 53, Employee Representative Supervisor of Sinopec Corp. Mr. Su is a senior engineer and obtained a master degree. In September 1986, he was appointed as Deputy Secretary of CPC Committee and Secretary of Discipline Inspection Commission of Beijing Design Institute of former Sinopec Group Company; in November 1996, he was appointed as Secretary of CPC Committee of Beijing Design Institute of former Sinopec Group Company; in December 1998, he was appointed as Director General of Political and Ideological Department, and Deputy Secretary of CPC Committee directly affiliated to Sinopec Group Company; in December 2001, he was appointed concurrently as Executive Deputy Secretary of CPC Work Committee in Sinopec West New Region Exploration Headquarters; in October 2007, he serverd as Secretary of CPC Committee and Vice Chairman of Directors of Beijing Yanshan Petrochemical Company; and in April 2003, he was elected as Employee Representative Supervisor of Sinopec Corp.

Other Executive Officers

Name
 
Age
 
Positions with Sinopec Corp.
         
Wang Xinhua
 
54
 
CFO
Zhang Kehua
 
56
 
Vice President
Zhang Haichao
 
52
 
Vice President
Jiao Fangzheng
 
47
 
Vice President
Lei Dianwu
 
47
 
Vice President
Chen Ge
 
47
 
Secretary of the Board of Directors

Wang Xinhua ,   54, CFO of Sinopec Corp. and Director General of Financial Department of Sinopec Corp. Mr. Wang is a professor level Senior accountant and obtained a university diploma. In January 2001, he was appointed as Deputy Director General of Finance & Assets Department of Sinopec Group Company; in December 2001, he was appointed as Deputy Director General of Finance & Planning Department of Sinopec Group Company; in October

 
55
 

2004, he was appointed as Director General of Finance & Planning Department of Sinopec Group Company; in May 2008, he was appointed as Director General of Financial Department of Sinopec Group Company; in March 2009, he was appointed as Director General of Financial Department of Sinopec Corp.; in May 2009, he was appointed as CFO of Sinopec Corp.
 
Zhang Kehua , 56, Vice President of Sinopec Corp. Mr. Zhang graduated from Shanghai Chemical Engineering University in January 1980 majoring in chemical and mechanical engineering. He is a senior engineer and had his master’s degree from University of Petroleum majoring in management science and engineering in December 2000. He was Deputy Manager of No. 3 Construction Company of the former Sinopec Group Company from February 1994 to April 1996. From April 1996 to December 1998, he was Deputy Director General (Deputy Manager of Sinopec Engineering Incorporation) of the Engineering Department of the former Sinopec Group Company. He was Deputy Director General of the former Engineering Department of Sinopec Group Company from December 1998 to December 2001 and was Deputy Director General of Engineering Department of Sinopec Group Company from December 2001 to September 2002. Mr. Zhang was Director General of Engineering Department of Sinopec Group Company from September 2002 to October 2004. Mr. Zhang has served as the Assistant to the President of Sinopec Group Company and Director General of Engineering Department since October 2004. Mr. Zhang has been Vice President of Sinopec Corp. since May 2006. From June 2007 to Present, he has been Director General of Engineering Dept. of Sinopec Corp.

Zhang Haichao , 52, Vice President of Sinopec Corp. Mr. Zhang graduated from Zhoushan Commercial and Technical School in December 1979, specializing in oil storage and transportation. He also graduated from Jilin Petrochemical Institute in July 1985 specializing in recycling of lubricating oil. From January 2001 to June 2002, he participated in the business administration program at Macau Science & Technology University. He is an economist. He served as Deputy General Manager of Zhejiang Petroleum Company from March 1998 to September 1999. He served as General Manager of Zhejiang Petroleum Company from September 1999 to February 2000, and has served as Manager of Sinopec Zhejiang Petroleum Company from February 2000 to September 2005. He has been Chairman of Sinopec-BP Zhejiang Petroleum Sales Co., Ltd. since April 2004. He was Secretary of the  Party Committee, Vice Chairman and Deputy General Manager of Sinopec Sales Co., Ltd. from October 2004 to November 2005. He was Secretary of Party Committee, Chairman and General Manager of Sinopec Sales Co., Ltd. from November 2005 to June 2006. He has been Chairman and General Manager of Sinopec Sales Co., Ltd. since June 2006. From December 2008, he acted as Chairman and President of Sinopec Sales Co., Ltd. He served as Employee Representative Supervisor of the Second Session of the Supervisory Board of Sinopec Corp. from April 2003 to November 2005. Mr. Zhang has been Vice President of Sinopec Corp. since November 2005.

Jiao Fangzheng , 47, Vice President of Sinopec Corp. Mr. Jiao won his bachelor’s degree in petroleum exploration and won his doctoral degree in natural gas engineering from Southwest Petroleum Institute respectively in July 1983 and November 2000. Mr. Jiao is a professor level senior engineer. From January 1999 to February 2000, he was Chief Geologist of Zhongyuan Petroleum Exploration Bureau of Sinopec Group Company. He then served as Deputy Manager and Chief Geologist of Zhongyuan Oilfield Company of Sinopec Group Company from February 2000 to February 2001. He was Vice President of Sinopec Exploration and Production Research Institute from July 2000 to March 2001. He then served as Deputy Director General of Sinopec Oilfield E & P Department from March 2001 to June 2004. Since June 2004, he served as Manager of the Northwest Company of Sinopec Group Company. Mr. Jiao has served as Vice President of Sinopec Corp. since October 2006.

Lei Dianwu , 47, Vice President of Sinopec Corp, Director General of Development & Planning Department of Sinopec Corp. Mr. Lei is a senior engineer and obtained a university diploma. In October 1995, he was appointed as Vice President of Yangzi Petrochemical Corporation; in December 1997, he was appointed as Director of Planning & Development Department in China Donglian Petrochemical Co., Ltd.; in May 1998, he was appointed as Vice President of Yangzi Petrochemical Corporation; in August 1998 he was appointed as Vice President in Yangzi Petrochemical Co., Ltd.; in March 1999, he was appointed temporarily as Deputy Director General of Development & Planning Department of Sinopec Group Company; in February 2000, he was appointed as Deputy Director General of Development & Planning Department of Sinopec Corp.; in March 2001, he was appointed as Director General of Development & Planning Department of Sinopec Corp.; in May 2009, he was appointed as Vice President of Sinopec Corp.

Chen Ge , 47, Secretary to the Board of Directors of Sinopec Corp. Mr. Chen graduated from Daqing Petroleum Institute in July 1983 majoring in petroleum refining, and then obtained his MBA degree from Dalian University of Science and Technology in July 1996. He is a senior economist. From July 1983 to February 2000, he worked in Beijing Yanshan Petrochemical Company. From February 2000 to December 2001, he was Deputy Director General of the Board Secretariat of Sinopec Corp. Mr. Chen has been Director General of the Board Secretariat since December 2001. Mr. Chen has been the Secretary to the Board of Directors of Sinopec Corp. since April 2003.

 
56
 
 
 
B.
COMPENSATION
 
Salaries of Directors, Supervisors and Members of the Senior Management
 
Our directors and supervisors who hold working posts with us and other senior management members receive their remuneration in the form of basic salary and performance rewards.
 
The following table sets forth the compensation on individual basis for our directors, supervisors and executive officers who receive compensation from us in 2009.
 
Name
 
Position with the Company
 
Remuneration paid by the Company in 2009
       
(RMB in thousand)
Directors
       
Su Shulin
 
Chairman
 
─
Wang Tianpu
 
Vice Chairman, President
 
726
Zhang Yaocang
 
Vice Chairman
 
─
Zhang Jianhua
 
Director, Senior Vice President
 
721
Wang Zhigang
 
Director, Senior Vice President
 
721
Cai Xiyou
 
Director, Senior Vice President
 
721
Cao Yaofeng
 
Director
 
─
Li Chunguang
 
Director
 
─
Dai Houliang
 
Director, Senior Vice President
 
721
Liu Yun
 
Director
 
─
Liu Zhongli
 
Independent Non-executive Director
 
240
Ye Qing
 
Independent Non-executive Director
 
140
Li Deshui
 
Independent Non-executive Director
 
240
Xie Zhongyu
 
Independent Non-executive Director
 
140
Chen Xiaojin
 
Independent Non-executive Director
 
140
         
Supervisors
       
Wang Zuoran
 
Chairman of the Board of Supervisors
 
─
Zhang Youcai
 
Vice Chairman, Independent Supervisor
 
240
Geng Limin
 
Supervisor
 
─
Zou Huiping
 
Supervisor
 
447
Li Yonggui
 
Independent Supervisor
 
240
Liu Xiaohong
 
Employee Representative Supervisor
 
318
Zhou Shiliang
 
Employee Representative Supervisor
 
322
Chen Mingzheng
 
Employee Representative Supervisor
 
387
Su Wensheng
 
Employee Representative Supervisor
 
450
         
Other Executive officers
       
Wang Xinhua
 
CFO
 
355
Zhang Kehua
 
Vice President
 
539
Zhang Haichao
 
Vice President
 
525
Jiao Fangzheng
 
Vice President
 
525
Lei Dianwu
 
Vice President
 
362
Chen Ge
 
Secretary of the Board of Directors
 
440

 
57
 
 
 
C.
BOARD PRACTICE
 
We have three special board committees, namely, the audit committee, the strategy committee and the remuneration and evaluation committee. The majority of the members of the strategy committee and the remuneration and evaluation committee, and all members of the audit committee, are independent directors.  In addition, the audit committee shall have at least one independent director who is a financial expert.
 
The main responsibilities of the audit committee include:
 
 
·
to propose the appointment or replacement of the independent auditor;
     
 
·
to oversee the internal auditing system and its implementation;
     
 
·
to coordinate the communication between the internal auditing department and the independent auditor;
     
 
·
to examine and approve financial information and it disclosure; and
     
 
·
to examine the internal control system.
 
The main responsibilities of the strategy committee are to conduct research and put forward proposals on the long-term development strategy and significant investments.
 
The main responsibilities of the remuneration and evaluation committee include:
 
 
·
to research on evaluation criteria for directors and the president, to conduct their evaluations and make necessary suggestions; and
     
 
·
to research on and review the policies and proposals in respect of the remuneration of directors, supervisors, president, vice-president, Chief Financial Officer and secretary of the board of directors.
 
The members of our audit committee are Liu Zhongli, Li Deshui and Xie Zhongyu, all of whom are our Independent Non-executive Directors. Our Board has determined that Liu Zhongli qualifies as an audit committee financial expert.  The members of our strategy committee are Wang Tianpu, Ye Qing, Zhang Yaocang, Zhang Jianhua, Wang Zhigang, Dai Houliang, Li Deshui and Xie Zhongyu.  The members of our remuneration and evaluation committee are Ye Qing, Li Deshui, Chen Xiaojin and Li Chunguang.
 
Our directors have entered into directors service contracts with us and under such contracts, there is no severance pay arrangements for our directors.
 
 
D.
EMPLOYEES
 
As of December 31, 2007, 2008 and 2009, we had approximately 334,377, 358,304 and 371,333 employees, respectively. The following table sets forth the number of our employees by our business segments, their scope of work and their education as of December 31, 2009.
 
By Segment
 
Number of Employees
 
Percentage of Total Number of Employees (%)
         
Exploration and Production 
 
142,869
 
38.4
Refining
 
83,511
 
22.5
Marketing and Distribution 
 
66,424
 
17.9
Chemicals
 
68,991
 
18.6
Corporate and Others 
 
9,538
 
2.6
Total
 
371,333
 
100.0

 
58
 
 
By Employee's Scope of Work
 
Number of Employees
 
Percentage of Total Number of Employees (%)
         
Production
 
192,752
 
51.9
Sales
 
58,269
 
15.7
Technical
 
49,181
 
13.2
Finance
 
9,847
 
2.7
Administration
 
29,706
 
8.0
Others
 
31,578
 
8.5
Total
 
371,333
 
100.0

By Education
 
Number of Employees
 
Percentage of Total Number of Employees (%)
Master's degree and above
 
7,718
 
2.1
University
 
73,176
 
19.7
Tertiary education
 
78,055
 
21.0
Technical/polytechnic school
 
33,002
 
8.9
Secondary, technical/polytechnic school or below
 
179,382
 
48.3
Total
 
371,333
 
100.0

We have trade unions that protect employee rights, organize educational programs, assist in the fulfillment of economic objectives, encourage employee participation in management decisions, and assist in mediating disputes between us and individual employees. We have not been subject to any strikes or other labor disturbances that have interfered with our operation, and we believe that our relations with our employees are good.
 
The total remuneration of our employees includes salary, performance bonuses and allowances. Employees also receive certain subsidies in housing, health services, education and other miscellaneous items.
 
Since 2001, we have implemented an employee reduction plan by means of retirement, voluntary resignation and/or redundancy to enhance our efficiency and operating income, and by December 31, 2009, a total of 167,817 employees have retired.
 
 
E.
SHARE OWNERSHIP
 
Our directors, supervisors and senior officers do not have share ownership in us.
 
ITEM 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 
 
A.
MAJOR SHAREHOLDERS
 
The following table sets forth information regarding our 5% or more shareholders as of April 23, 2010.
 
Shareholder
 
Number of
Shares Owned
(in millions)
 
Percentage of Ownership (%)
Sinopec Group Company .
 
65,758.04
 
75.84

As of April 23, 2010, 1,015,144,800 H shares were registered in the name of a nominee of Citibank, N.A., the depositary under our ADS deposit agreement. Citibank, N.A. has advised us that, as of April 23, 2010, 10,151,488 ADSs, representing 1,015,144,800 H shares, were held of record by Cede & Co. and 49 other registered shareholders domiciled in and outside of the United States. We have no further information as to our shares held, or beneficially owned, by U.S. persons.
 
59
 
 
 
B.
RELATED PARTY TRANSACTIONS
 
Sinopec Group Company owns 75.84% of our outstanding equity as of April 23, 2010. Sinopec Group Company will be able to exercise all the rights of a controlling shareholder, including the election of directors and voting in respect of amendments to our articles of association. Sinopec Group Company, as our controlling shareholder, will be subject to certain minority shareholder protection provisions under our articles of association.
 
We have engaged from time to time and will continue to engage in a variety of transactions with Sinopec Group Company, which provide a number of services to us, including ancillary supply, transport, educational and community services. The nature of our transactions with Sinopec Group Company is governed by a number of service and other contracts between Sinopec Group Company and us.  A discussion of these agreements and arrangements is set forth under the heading “Item 7 - Major Shareholders and Related Party Transactions - Related Party Transactions” in our annual report on Form 20-F filed with the Securities and Exchange Commission on October 10, 2000, April 13, 2007 and May 20, 2009, respectively, and under the heading “Item 4 – Information on the Company – History and Development of the Company” of this annual report.
 
On August 21, 2009, we entered into certain agreements with Sinopec Group Company, pursuant to which certain related party transaction agreements between the parties were amended. Pursuant to the Continuing Connected Transactions Second Supplemental Agreement dated August 21, 2009 between Sinopec Group Company and us, the term of each of the Mutual Supply Agreement, the Community Services Agreement and the Intellectual Property License Agreements, dated June 3, 2000 and as amended and supplemented from time to time, was extended to December 31, 2012, December 31, 2012 and December 31, 2019, respectively. Pursuant to the Land Use Rights Leading Agreement Second Amendment Memo dated August 21, 2009 between Sinopec Group Company and us, , the members of Sinopec Group Company agreed to lease to us certain parcels of land with an area of approximately 416 million square meters.
 
Please also see Note 31 of our consolidated financial statements included elsewhere in this annual report for a detailed discussion of our related party transactions. The aggregate amount of connected transactions we actually incurred during 2009 was RMB 297.7 billion, of which, expenses amounted to RMB 135.0 billion, and revenues amounted to RMB 162.8 billion (including RMB 162.7 billion of sales of goods and services, RMB 38 million of interest income, RMB 45 million of agency commission receivable). In 2009, the products and services provided by Sinopec Group Company and its subsidiaries, including procurement, storage, exploration and production and other services to us amounted to RMB 96.2 billion, representing 7.63% of our operating expenses for 2009. The auxiliary and community services provided by Sinopec Group Company to us amounted to RMB 3.3 billion, representing 0.26% of our operating expenses for 2009. In 2009, our product sales to Sinopec Group Company amounted to RMB 49.6 billion, representing 3.69% of our operating revenues. We also paid rentals of RMB 419 million to Sinopec Group Company in 2009 pursuant to the Leasing Agreement for Properties.
 
 
C.
INTERESTS OF EXPERTS AND COUNSEL
 
Not applicable.
 
ITEM 8.
FINANCIAL INFORMATION
 
 
A.
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
 
See F-pages following Item 19.
 
Legal Proceedings
 
We are involved in certain judicial and arbitral proceedings before Chinese courts or arbitral bodies concerning matters arising in connection with the conduct of our businesses. We believe, based on currently available information, that the results of such proceedings, in the aggregate, will not have a material adverse effect on our financial condition or results of operations.
 
Dividend Distribution Policy
 
Our board of directors will determine the payment of dividends, if any, with respect to our shares on a per share basis. Any final dividend for a financial year shall be subject to shareholders' approval. The board may declare interim and special dividends at any time under general authorization by a shareholders' ordinary resolution. A decision to declare or to pay any dividends in the future, and the amount of any dividends, will depend on our results

 
60
 

of operations, cash flows, financial condition, the payment by our subsidiaries of cash dividends to us, future prospects and other factors which our directors may determine are important.
 
For holders of our H shares, cash dividend payments, if any, shall be declared by our board of directors in Renminbi and paid in HK dollars. The depositary will convert the HK dollar dividend payments and distribute them to holders of ADSs in US dollars, less expenses of conversion.
 
In addition to cash, dividends may be distributed in the form of shares. Any distribution of shares, however, must be approved by special resolution of the shareholders. Dividends in the form of shares will be distributed to the depositary and, except as otherwise described in the Deposit Agreement, will be distributed by the depositary in the form of additional ADSs, to holders of ADSs.
 
Dividends may be paid only out of our distributable profits (less allocations to the statutory surplus reserve funds which are 10% of our net income determined in accordance with the PRC Accounting Standards for Business Enterprises ("ASBE") and the discretionary surplus reserve funds) and may be subject to PRC withholding tax. Our articles of association limit our distributable profits to the lower of the amount determined in accordance with the ASBE and IFRS. Subject to the above, we currently expect that we will distribute as dividends up to 40% of our distributable profits.
 
In accordance with the board resolution adopted on March 26, 2010, our board has proposed dividend of RMB 0.18 per ordinary share for the year ended December 31, 2009. After deducting the interim dividends distribution of RMB 0.07 per ordinary share, the year end dividend is RMB 0.11 per ordinary share. The total dividend to be paid amounted to approximately RMB 9.54 billion. The resolution is subject to the approval by the general shareholders’ meeting.
 
 
B.
SIGNIFICANT CHANGES
 
None.
 
ITEM 9.
THE OFFER AND LISTING
 
 
A.
OFFER AND LISTING DETAILS
 
Not applicable, except for Item 9A (4) and Item 9C.
 
Our H Shares have been listed on the Hong Kong Stock Exchange (Code: 0386), and our ADSs, each representing 100 H Shares, have been listed on the New York Stock Exchange and the London Stock Exchange under the symbol "SNP", since we completed our initial public offering on October 19, 2000. Prior to that time, there was no public market for our H Shares. The Hong Kong Stock Exchange is the principal non-U.S. trading market for our H Shares.  Our publicly traded domestic shares, or A shares, are listed on the Stock Exchange of Shanghai since August 8, 2001 (Code: 600028).
 
The following table sets forth, for the periods indicated, the high and low closing prices per H Share, as reported on the Stock Exchange of Hong Kong, per ADS, as reported on the New York Stock Exchange and per A share, as reported on the Stock Exchange of Shanghai.
 
   
The Stock Exchange of Hong Kong
   
The New York Stock Exchange
   
The Shanghai Stock Exchange
 
Period
 
High
   
Low
   
High
   
Low
   
High
   
Low
 
Past 6 months
 
(HK dollar per H share)
   
(US dollar per ADS)
   
(RMB per A share)
 
    April (up to April 23)  
6 .70
   
6.35
   
87.40
   
82.27
   
12.00
   
10.33
 
    March  
6.38
   
6.07
   
82.34
   
78.72
   
12.00
   
11.04
 
    February     6.23       5.75       80.51       73.86       11.34       10.82  
2010
  January     6.82       6.08       88.20       77.69       13.90       11.42  
    December     6.91       6.40       88.30       82.95       14.14       12.10  
    November     6.89       6.35       90.80       83.68       12.76       11.73  
2009
  October     7.06       6.37       92.16       82.05       12.19       11.46  


 
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Quarterly Data
                                   
2009
  Fourth Quarter     7.06       6.35       92.16       82.05       14.14       11.46  
    Third Quarter     7.15       5.87       93.50       74.76       15.42       10.78  
    Second Quarter     6.50       5.15       85.82       67.45       10.84       8.78  
    First Quarter     5.26       3.65       67.70       47.08       9.27       7.06  
2008
  Fourth Quarter     6.24       3.76       78.35       50.57       10.19       6.67  
    Third Quarter     8.38       5.89       110.36       73.26       11.88       8.7  
    Second Quarter     8.71       6.78       112.56       86.65       13.81       9.91  
    First Quarter     11.66       6.14       146.28       81.43       24.38       11.38  
2007
  Fourth Quarter     12.96       9.18       178.83       118.19       28.49       19.23  
    Third Quarter     9.71       6.93       124.90       90.00       18.99       12.33  
    Second Quarter     9.18       6.63       117.44       85.78       15.20       10.04  
    First Quarter     7.32       5.67       92.23       72.92       11.20       8.37  
 
Annual Data
                                   
2009
    7.15       3.65       93.50       47.08       15.42       7.06  
2008
    11.66       3.76       146.28       50.57       24.38       6.67  
2007
    12.96       5.67       178.83       72.92       28.49       8.37  
2006
    7.20       3.775       92.64       47.40       9.15       4.58  
2005
    3.90       2.75       50.58       35.55       4.66       3.25  
___________
 
Source: Bloomberg

ITEM 10.
ADDITIONAL INFORMATION
 
 
A.
SHARE CAPITAL
 
Not applicable.
 
 
B.
MEMORANDUM AND ARTICLES OF ASSOCIATION
 
The following is a summary of certain provisions of our articles of association and its appendices, as amended,   the Company Law of the PRC (2006) and certain other applicable laws and regulations of the PRC. You and your advisors should refer to the text of our articles of association, as amended, and to the texts of applicable laws and regulations for further information.
 
Objects and Purposes
 
We are a joint stock limited company established in accordance with the Company Law and certain other laws and regulations of the PRC. We are registered with the PRC State Administration of Industry and Commerce with business license number 100000000032985. Article 12 of our articles of association provides that our scope of businesses includes, among other things, exploration, exploitation, storage, pipeline transportation, land transportation, water transportation, sales of oil and natural gas; oil refining; wholesaling and retailing of gasoline, kerosene and diesel oil(for subsidiaries only); sales of lubricant, liquid gas, fuel oil, solvent naphtha and asphalt; the production, sales, storage land transportation and water transportation of ethylene, propylene, butadiene, naphtha, heavy oil, ethylene glycol, PTA, beta-lactam, dacron, nitrilon, rubber and other chemical raw materials and products; production of chemical fertilizer; production of electricity; operation of 24-hour stores; shaped packing foods, retailing of cigarettes, automobile decorations (for subsidiaries only), automobile cleaning; production, supervision of manufacturing, installation of oil and petrochemical machinery and equipment; purchase and sales of oil and petrochemical raw and auxiliary materials, equipment and parts; technology and information, research, development,

 
62
 

application and consultation of alternative energy products; self-operation of and acting as agency for the import and export of various commodities and technologies other than those restricted or prohibited by the state from import and export; contractor of overseas mechanical, electronics, petrochemical projects and domestic international bid-inviting projects; export of equipments and materials required for the aforementioned overseas projects; dispatch of labor required for the aforementioned overseas projects.
 
Directors
 
Our directors shall be elected at our shareholders' general meeting. Cumulative voting shall be adopted for the election of directors if a controlling shareholder controls 30% or more of our shares. Details of the cumulative voting mechanism are set forth in Article 59 of the Rules and Procedures for the Shareholders' General Meetings that is an appendix to, and forms an integral part of, our articles of association. Our directors shall be elected for a term of three years and may serve consecutive terms upon re-election, except that independent directors may only serve a maximum of two terms. Our directors are not required to hold any shares in us, and there is no age limit requirement for the retirement or non-retirement of our directors.
 
Where a director is materially interested, directly or indirectly, in a contract, transaction or arrangement (including any proposed contract, transaction or arrangement) with us, he or she shall declare the nature and extent of his or her interests to the board of directors at the earliest opportunity, whether or not such contract, transaction or arrangement is otherwise subject to the approval of the board. A director shall not vote, and shall not be counted in the quorum of the meeting, on any resolution concerning any contract, transaction or arrangement where the director owns material rights or interests therein. A director is deemed to be interested in a contract, transaction or arrangement in which his associate (as defined by the Listing Rule of the Hong Kong Stock Exchange) is interested.
 
Unless the interested director discloses his interests to the board and the contract, transaction or arrangement in which the director is materially interested is approved by the board at a meeting in which the director neither votes nor is not counted in the quorum, such contract, transaction or arrangement shall be voidable by us except with respect to a bona fide party thereto who does not have notice of the director's interests.
 
We are prohibited from making loans or providing guarantees to our directors and their associates except where such loan or guarantee is to meet expenditure requirement incurred or to be incurred by the director for the purposes of the company or for the purpose of enabling the director to perform his or her duties properly in accordance with the terms of a service contract approved by the shareholders in a general meeting.
 
The board of directors shall examine and approve the amount of the long-term loans for the current year according to the annual investment plan as approved by the shareholders’ general meeting. The chairman of the board of directors is authorized to make adjustments of no more than 10% of the total amount of the long-term loans as approved by the board of directors for the current year. Within the total amount of the long-term loans as approved by the board of directors, the chairman of the board of directors is authorized to approve and execute individual long-term loan agreement with the loan amount exceeding RMB1 billion, and the president is authorized to approve and execute individual long-term loan agreement with the loan amount not exceeding RMB1 billion. Within the total amount of the working capital loans for the current year as approved by the board of directors, the chairman of the board of directors is authorized to execute the overall short-term loan facility agreement for raising working capitals as we need.
 
Matters relating to the remuneration of our directors shall be determined by the shareholders' general meeting.
 
Dividends
 
A distribution of final dividends for any financial year is subject to shareholders’ approval. Except as otherwise decided by Shareholders’ meeting, the board of directors may make decision on the distribution of interim dividends.  Except as otherwise provided by laws and regulations, the sum of interim dividends shall not exceed 50 percents of the net profit for the half year interim period. Dividends may be distributed in the form of cash or shares. A distribution of shares, however, must be approved by special resolution of the shareholders.
 
Dividends may only be distributed after allowance has been made for:
 
 
·
recovery of losses, if any;
     
 
·
allocations to the statutory surplus  reserve fund; and
     
 
·
allocations to a discretionary surplus reserve fund if approved by the shareholders.

 
63
 
 
The allocations to the statutory surplus reserve fund shall be 10% of our after-tax profits of the current year determined in accordance with ASBE.
 
The articles of association require us to appoint on behalf of the holders of H shares a receiving agent which is registered as a trust corporation under the Trustee Ordinance of Hong Kong to receive dividends declared by us in respect of the H shares on behalf of such shareholders. The articles of association require that cash dividends in respect of H shares be declared in Renminbi and paid by us in HK dollars. The depositary of our ADSs will convert such proceeds into U.S. dollars and will remit such converted proceeds to our holders of ADSs. If we record no profit for the year, we may not normally distribute dividends for the year.
 
Dividend payments may be subject to PRC withholding tax.
 
Voting Rights and Shareholders’ Meetings
 
Our board of directors shall convene a shareholders’ annual general meeting once every year and within six months from the end of the preceding financial year. Our board shall convene an extraordinary general meeting within two months of the occurrence of any one of the following events:
 
 
·
where the number of directors is less than the number stipulated in the PRC Company Law or two-thirds of the number specified in our articles of association;
     
 
·
where our unrecovered losses reach one-third of the total amount of our actually paid-in share capital;
     
 
·
where shareholder(s) holding 10% or more of our issued and outstanding voting shares request(s) in writing the convening of an extraordinary general meeting;
     
 
·
whenever our board deems necessary or our board of supervisors so requests; or
     
 
·
circumstances provided in the articles of association.
 
Meetings of a special class of shareholders must be called in certain enumerated situations when the rights of the holders of such class of shares may be modified or adversely affected as discussed below. Proposals made by the board of directors, the board of supervisors or shareholder(s) holding 3% or more of the total number of voting shares shall be included in the agenda for the relevant general meeting if they are matters which fall within the scope of the functions and powers of shareholders in general meeting. Shareholder(s) holding 3% or more of the total shares of the Company may put forward interim motions by written proposals to the convener 10 days before the shareholders’ general meeting. The convenor shall publish supplementary notice to announce the interim motion within two days upon receiving.
 
All shareholders’ meetings must be convened by our board of directors by written notice given to shareholders no less than 45 days before the meeting, by our board of supervisors or certain qualified shareholders in case a shareholders’ meeting is not convened by our board of directors and board of supervisors. Shareholder(s) holding 10% or more the total number of shares of the Company have the right to convene and chair the interim shareholders' general meeting or class shareholders' meeting in accordance with the provisions in laws, administrative rules and the articles of association, in the event that the board of directors and the board of supervisors fail to convene and chair such meeting upon demand made by such shareholders. Based on the written replies received by us 20 days before a shareholders’ meeting, we shall calculate the number of voting shares represented by shareholders who have indicated that they intend to attend the meeting. Where the number of voting shares represented by those shareholders amount to more than one-half of our total voting shares, we may convene the shareholders’ general meeting (regardless of the number of shareholders who actually attend). Otherwise, we shall, within five days, inform the shareholders again of the motions to be considered and the date and venue of the meeting by way of public announcement. After the announcement is made, the shareholders’ meeting may be convened. The accidental omission by us to give notice of a meeting to, or the non-receipt of notice of a meeting by, a shareholder will not invalidate the proceedings at that shareholders’ meeting.

 
64
 

Shareholders at meetings have the power, among other things, to approve or reject our profit distribution plans, annual budget, financial statements, increase or decrease in share capital, issuance of debentures, merger or liquidation and any amendment to our articles of association.  Shareholders of the shares which the Company issues to foreign investors for subscription in foreign currencies possess the same rights and undertake the same obligations as those of the shares which the Company issues to domestic investors for subscription in Renminbi.  In addition, the rights of a class of shareholders may not be modified or abrogated, unless approved by a special resolution of all shareholders at a general shareholders’ meeting and by a special resolution of shareholders of that class of shares at a separate meeting. Our articles of association enumerate, without limitation, certain amendments which would be deemed to be a modification or abrogation of the rights of a class of shareholders, including increasing or decreasing the number of shares of a class disproportionate to increases or decreases of other classes of shares, removing or reducing rights to receive dividends in a particular currency or creating shares with voting or equity rights superior to shares of such class.
 
Cumulative voting in accordance with the relevant laws and regulations in effect is adopted for the election of directors and supervisors. For all other matters, each share is entitled to one vote on all such matters submitted to a vote of our shareholders at all shareholders’ meetings, except for meetings of a special class of shareholders where only holders of shares of the affected class are entitled to vote on the basis of one vote per share of the affected class.
 
Shareholders are entitled to attend and vote at meetings either in person or by proxy. Proxies must be in writing and deposited at our legal address, or such other place as is specified in the meeting notice, no less than 24 hours before the time for holding the meeting at which the proxy proposes to vote or the time appointed for the passing of the relevant resolution(s). When the instrument appointing a proxy is executed by the shareholder’s attorney-in-fact, such proxy when deposited must be accompanied by a notary certified copy of the relevant power of attorney or other authority under which the proxy was executed.
 
Except for those actions discussed below which require supermajority votes (‘‘special resolutions’’), resolutions of the shareholders are passed by a simple majority of the voting shares held by shareholders who are present in person or by proxy. Special resolutions must be passed by or more than two-thirds of the voting rights represented held by shareholders who are present in person or by proxy.
 
The following decisions must be adopted by special resolution:
 
 
·
an increase or reduction of our share capital or the issue of shares, including stock distributions, of any class, warrants and other similar securities;
     
 
·
issuance of debentures;
     
 
·
our division, merger, dissolution and liquidation; (Shareholders who object to a proposed division or merger are entitled to demand that either we or the shareholders who approved the merger purchase their shares at a fair price.)
     
 
·
amendments to our articles of association and its appendices;
     
 
·
change of our company form;
     
 
·
acquisition or disposal of material assets or provision of material guarantee within one year, with the value exceeding 30% of our latest audited total assets;
     
 
·
any stock incentive plan;
     
 
·
any other matters required by laws and regulations or our articles of association and its appendices or considered by the shareholders in a general meeting and which they have resolved by way of an ordinary resolution to be of a nature which may have a material impact on us and should be adopted by special resolution.
 
All other actions taken by the shareholders, including the appointment and removal of our directors and supervisors and the declaration of cash dividend payments, will be decided by an ordinary resolution of the shareholders. The listing agreement between us and the Hong Kong Stock Exchange (the ‘‘Listing Agreement’’)

 
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provided that we may not permit amendments to certain sections of the articles of association which have been mandated by the Hong Kong Stock Exchange. These sections include provisions relating to:
 
 
·
varying the rights of existing classes of shares;
     
 
·
voting rights;
     
 
·
our power to purchase our own shares;
     
 
·
rights of minority shareholders; and
     
 
·
procedure on liquidation.
 
In addition, certain amendments to the articles of association require the approval and consent of the relevant PRC authorities.
 
Any shareholder resolution which is in violation of any laws or administrative regulations of the PRC will be null and void subject to statutory procedures.
 
Liquidation Rights
 
In the event of our liquidation, the H shares will rank pari passu with the domestic ordinary shares, and payment of debts out of our remaining assets shall be made in the order of priority prescribed by applicable laws and regulations or, if no such standards exist, in accordance with such procedure as the liquidation committee which has been appointed either by us or the People’s Court of the PRC may consider to be fair and reasonable. After payment of debts, we shall distribute the remaining property to shareholders according to the class and proportion of their shareholders.
 
Further Capital Call
 
Shareholders are not liable to make any further contribution to the share capital other than according to the terms, which were agreed by the subscriber of the relevant shares at the time of subscription.
 
Increases in Share Capital and Preemptive Rights
 
The articles of association require the approval by a special resolution of the shareholders and by special resolution of holders of domestic ordinary shares and oversea-listed foreign invested shares at separate shareholder class meetings be obtained prior to authorizing, allotting, issuing or granting shares, securities convertible into shares or options, warrants or similar rights to subscribe for any shares or such convertible securities. No such approval is required if, but only to the extent that:
 
 
·
we issue domestic ordinary shares and/or overseas-listed foreign-invested shares, either separately or concurrently, in numbers not exceeding 20% of the number of domestic ordinary shares and overseas-listed foreign-invested shares then in issue, respectively, in any 12-month period, as approved by a special resolution of the shareholders; or
     
 
·
if our plans for issuing domestic ordinary shares and overseas-listed foreign-invested sharesupon its establishment are implemented within fifteen months of the date of approval by the China Securities Regulatory Commission.
 
New issues of shares must also be approved by the relevant PRC authorities.
 
Reduction of Share Capital and Purchase by Us of Our Shares and General Mandate to Repurchase Shares
 
We may reduce our registered share capital only upon obtaining the approval of the shareholders by a special resolution and, in certain circumstances, of relevant PRC authorities. The number of H shares, which may be purchased is subject to the Hong Kong Takeovers and Share Repurchase Codes.

 
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Restrictions on Large or Controlling Shareholders
 
Our articles of association provide that, in addition to any obligation imposed by laws and administration regulations or required by the listing rules of the stock exchanges on which our H shares are listed, a controlling shareholder shall not exercise his voting rights in a manner prejudicial to the interests of the shareholders generally or of some part of the shareholders:
 
 
·
to relieve a director or supervisor from his or her duty to act honestly in our best interests;
     
 
·
to approve the expropriation by a director or supervisor (for his or her own benefit or for the benefit of another person) of our assets in any way, including, without limitation, opportunities which may benefit us; or
     
 
·
to approve the expropriation by a director or supervisor (for his or her own benefit or for the benefit of another person) of the individual rights of other shareholders, including, without limitation, rights to distributions and voting rights (save according to a restructuring of our company which has been submitted for approval by the shareholders in a general meeting in accordance with our articles of association and its appendices).
 
A controlling shareholder, however, will not be precluded by our articles of association or any laws and administrative regulations or the listing rules of the stock exchanges on which our H shares are listed from voting on these matters.
 
A controlling shareholder is defined by our articles of association as any person who acting alone or in concert with others:
 
 
·
is in a position to elect half or more of the board of directors;
     
 
·
has the power to exercise, or to control the exercise of, 30% or more of our voting rights;
     
 
·
acting separately or in concert with others, holds 30% or more of our issued and outstanding shares,; or
     
 
·
acting separately or in concert with others, has de facto control of us in any other way.
 
As of the date of this annual report, Sinopec Group Company is and will be our only controlling shareholder.
 
Disclosure
 
The Listing Agreement imposes a requirement on us to keep the Hong Kong Stock Exchange, our shareholders and other holders of our listed securities informed as soon as reasonably practicable of any information relating to us and our subsidiaries, including information on any major new developments which are not public knowledge, which:
 
 
·
is necessary to enable them and the public to appraise the position of us and our subsidiaries;
     
 
·
is necessary to avoid the establishment of a false market in its securities; and
     
 
·
might be reasonably expected materially to affect market activity in and the price of its securities.
 
There are also requirements under the Listing Rules for us to obtain prior shareholders’ approval and/or to disclose to shareholders details of certain acquisitions or disposals of assets and other transactions (including transactions with controlling shareholders).
 
Sources of Shareholders’ Rights
 
The PRC’s legal system is based on written statutes and is a system in which decided legal cases have little precedent value. The PRC’s legal system is similar to civil law systems in this regard. In 1979, the PRC began the process of developing its legal system by undertaking to promulgate a comprehensive system of laws. In December 1993, the Standing Committee of the 8th National People’s Congress adopted the PRC Company Law. On October 27,

 
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2005, the PRC Company law was amended by the Standing Committee of the 10 th National People’s Congress, and came into force on January 1, 2006. The amended PRC Company Law enhanced the protection of shareholders’ rights primarily in the following regards:
 
 
·
Shareholders holding 10 percent or more of the shares of the company are entitled to petition the court to dissolve the company if (i) the company is in serious operational difficulties; (ii) its continuing existence will seriously prejudice the interests of the shareholders; and (iii) such difficulties cannot be resolved through any other means;
     
 
·
Shareholders holding 1 percent or more of the shares of the company for more than 180 consecutive days are entitled to request the board of supervisors (in terms of directors and senior management) or the board of directors (in terms of supervisors) to bring legal proceedings, or bring legal proceedings in their own name on behalf of the company where it is in emergency and the company will be subject to irreparable loss if not to do so, against directors, supervisors or senior management who fail to comply with the laws and regulations or the company’s articles of association in the course of performing their duties and cause loss to the company;
     
 
·
Shareholders who oppose the company’s decision on merger or separation are entitled to request the company to repurchase their shares; and
     
 
·
Shareholders holding 10 percent or more of the voting rights of the company are entitled to convene a shareholders’ meeting.
 
Currently, the primary sources of shareholder rights are our articles of association, as amended, the PRC Company Law and the Listing Rules of the Hong Kong Stock Exchange, which, among other things, impose certain standards of conduct, fairness and disclosure on us, our directors and our controlling shareholder, i.e., Sinopec Group Company. To facilitate the offering and listing of shares of PRC companies overseas, and to regulate the behavior of companies whose shares are listed overseas, the State Council Securities Committee and the State Commission for Restructuring the Economic System issued on August 27, 1994 the Mandatory Provisions for articles of association of Company Listing Overseas (the ‘‘Mandatory Provisions’’). These Mandatory Provisions become entrenched in that, once they are incorporated into the articles of association of a PRC company, any amendment to those provisions will only become effective after approval by the State-owned Assets Supervision and Administration Commission of the State Council. The Listing Rules require a number of additional provisions to the Mandatory Provisions to be included in the articles of association of PRC companies listing H shares on the Hong Kong Stock Exchange (the ‘‘Additional Provisions’’). The Mandatory Provisions and the Additional Provisions have been incorporated into our articles of association.
 
In addition, upon the listing of and for so long as the H shares are listed on the Hong Kong Stock Exchange, we will be subject to those relevant ordinances, rules and regulations applicable to companies listed on the Hong Kong Stock Exchange, including the Listing Rules of the Hong Kong Stock Exchange, the Securities (Disclosure of Interests) Ordinance (the ‘‘SDI Ordinance’’), the Securities (Insider Dealing) Ordinance and the Hong Kong Codes on Takeovers and Mergers and Share Repurchases (the ‘‘Hong Kong Takeovers and Repurchase Codes’’).
 
Unless otherwise specified, all rights, obligations and protections discussed below derive from our articles of association and/or the PRC Company Law.
 
Enforceability of Shareholders’ Rights
 
There has not been any public disclosure in relation to the enforcement by holders of H shares of their rights under constitutive documents of joint stock limited companies or the PRC Company Law or in the application or interpretation of the PRC or Hong Kong regulatory provisions applicable to PRC joint stock limited companies.
 
In most states of the United States, shareholders may sue a corporation ‘‘derivatively’’. A derivative suit involves the commencement by a shareholder of a corporate cause of action against persons (including corporate officers, directors or controlling shareholders) who have allegedly wronged the corporation, where the corporation itself has failed to enforce such claim against such persons directly. Such action is brought based upon a primary right of the corporation, but is asserted by a shareholder on behalf of the corporation. The PRC company law as amended in October 2005 and effective in January 2006 has also granted shareholders with the rights to bring such derivative suits.

 
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Our articles of association provide that all differences or claims, arising from any provision of our articles of association, any right or obligation conferred or imposed by the PRC Company Law or any other relevant law or administrative regulation which concerns our affairs:
 
 
·
between a holder of overseas-listed foreign-invested shares and us;
     
 
·
between a holder of overseas-listed foreign-invested shares and any of our directors, supervisors, general managers, deputy general managers or other senior officers; or
     
 
·
between a holder of overseas-listed foreign-invested shares and a holder of domestic ordinary shares
 
must be referred to arbitration at either the China International Economic and Trade Arbitration Commission in the PRC or the Hong Kong International Arbitration Center, and the laws of the PRC shall apply, save as otherwise provided in the laws and administrative regulations. Our articles of association provide that such arbitration will be final and conclusive. In June 1999, an arrangement was made between the People’s Courts of the PRC and the courts of Hong Kong to mutually enforce arbitration rewards rendered in the PRC and Hong Kong according to their respective laws. This new arrangement was approved by the Supreme Court of the PRC and the Hong Kong Legislative Council and became effective on February 1, 2000. We have provided an undertaking to the United States Securities and Exchange Commission that, at such time, if any, as all applicable laws and regulations of the PRC and (unless our H shares are no longer listed on the Hong Kong Stock Exchange) all applicable regulations of the Stock Exchange of Hong Kong Ltd. shall not prohibit, and to the extent Section 14 under the United States Securities Act of 1933, as amended, so requires, our board of directors shall propose an amendment to the articles of association which would permit shareholders to adjudicate disputes arising between our shareholders and us, our directors, supervisors or officers by means of judicial proceedings.
 
The holders of H shares will not be able to bring actions on the basis of violations of the Listing Rules and must rely on the Hong Kong Stock Exchange to enforce its rules. The SDI Ordinance establishes certain obligations in relation to disclosure of shareholder interests in Hong Kong listed companies, the violation of which is subject to prosecution by the Securities and Futures Commission of Hong Kong. The Hong Kong Takeovers and Repurchase Codes do not have the force of law and are only standards of commercial conduct considered acceptable for takeover and merger transactions and share repurchases in Hong Kong as established by the Securities and Futures Commission and the securities and futures industry in Hong Kong.
 
We have appointed our subsidiary in the U.S., SINOPEC-USA Co., Ltd., 410 Park Avenue, 22nd Fl., New York, NY 10022, USA, as our agent to receive service of process with respect to any action brought against us in certain courts in New York under the United States federal and New York State’s securities laws. However, as the PRC does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts within the United States, the United Kingdom, Japan or most other the Organization for Economic Cooperation and Development countries, administrative actions brought by regulatory authorities, such as the Commission, and other actions which result in foreign court judgments, could (assuming such actions are not required by PRC law and the articles of association to be arbitrated) only be enforced in the PRC on a reciprocal basis or according to relevant international treaty to which China is a party if such judgments or rulings do not violate the basic principles of the law of the PRC or the sovereignty, security and public interest of the society of the PRC, as determined by a People’s Court of the PRC which has the jurisdiction for recognition and enforcement of judgments. We have been advised by our PRC counsel, Haiwen & Partners, that there is certain doubt as to the enforceability in the PRC of actions to enforce judgments of United States courts arising out of or based on the ownership of H shares or ADSs, including judgments arising out of or based on the civil liability provisions of United States federal or state securities laws.
 
Restrictions on Transferability and the Share Register
 
Our H shares shall only be traded among investors who are not PRC persons and may not be sold to PRC investors. There are no restrictions on the ability of investors who are not PRC residents to hold our H shares.
 
As provided in the articles of associations we may refuse to register a transfer of H shares unless:
 
 
·
any relevant transfer fee is paid;
     
 
·
the instrument of transfer is only related to H shares listed in Hong Kong;

 
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·
the instrument of transfer is accompanied by the share certificates to which it relates, or such other evidence is given as may be reasonably necessary to show the right of the transferor to make the transfer;
     
 
·
the stamp duty which is chargeable on the instrument of transfer has already been paid;
     
 
·
if it is intended that the shares be transferred to joint owners, the maximum number of joint owners shall not be more than four (4); and
     
 
·
the Company does not have any lien on the relevant shares.
 
We are required to keep a register of our shareholders which shall be comprised of various parts, including one part which is to be maintained in Hong Kong in relation to H shares to be listed on the Hong Kong Stock Exchange. Shareholders have the right to inspect and, for a nominal charge, to copy the share register. No transfers of ordinary shares shall be recorded in our share register within 30 days prior to the date of a shareholders’ general meeting or within 5 days prior to the record date established for the purpose of distributing a dividend.
 
We have appointed HKSCC Registrars Limited to act as the registrar of our H shares. This registrar maintains our register of holders of H shares at our offices in Hong Kong and enters transfers of shares in such register upon the presentation of the documents described above.
 
 
C.
MATERIAL CONTRACTS
 
We have not entered into any material contracts other than in the ordinary course of business and other than those described under Item 4.  Information on the Company, Item 7 - Major Shareholders and Related Party Transactions or elsewhere in this Form 20-F.
 
 
D.
EXCHANGE CONTROLS
 
The existing foreign exchange regulations have significantly reduced government foreign exchange controls for transactions under the current account, including trade and service related foreign exchange transactions and payment of dividends. We may undertake current account foreign exchange transactions without prior approval from the State Administration of Foreign Exchange by producing commercial documents evidencing such transactions, provided that they are processed through Chinese banks licensed to engage in foreign exchange transactions. The PRC government has stated publicly that it intends to make the Renminbi freely convertible in the future. However, we cannot predict whether the PRC government will continue its existing foreign exchange policy and when the PRC government will allow free conversion of Renminbi to foreign currency.
 
Foreign exchange transactions under the capital account, including principal payments in respect of foreign currency-denominated obligations, continue to be subject to significant foreign exchange controls and require the approval of the State Administration of Foreign Exchange. These limitations could affect our ability to obtain foreign exchange through debt or equity financing, or to obtain foreign exchange for capital expenditures.
 
On July 21, 2005, the PRC government changed its policy of pegging the value of the Renminbi to the U.S. dollar.  Under the new policy, the Renminbi is permitted to fluctuate within a band against a basket of certain foreign currencies.  This change in policy resulted initially in an approximately 2.0% appreciation in the value of the Renminbi against the U.S. dollar.  Since the adoption of this new policy, the value of Renminbi against the U.S. dollar has fluctuated on a daily basis within narrow ranges, but overall has further strengthened against the U.S. dollar.  On January 4, 2006, the PBOC authorized the China Foreign Exchange Trade System to publish the exchange rate of the RMB against the US dollar, the euro, the Japanese yen, and the HK dollar at 9:15 am of each business day, which would be the medium exchange rate of RMB for transactions on the interbank spot foreign exchange market (over-the-counter transactions and automatic price-matching transactions) as well as transactions over bank counters. We cannot assure that such exchange rate would not fluctuate greatly. In addition, any significant revaluation of the Renminbi may have a material adverse effect on our revenues and financial condition, and the value of, and any dividends payable on, our ADSs in foreign currency terms. We do not currently and will not plan to hedge against the risk of exchange rate fluctuation. Information relating to the exchange risk, exchange rate and hedging activities is presented in “Item 11. Qualitative and Quantitative Disclosures about Market risk ¾ Foreign Exchange Rate Risk”.

 
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E.
TAXATION
 
PRC Taxation
 
The following discussion addresses the principal PRC tax consequences of investing in the H shares or ADSs.
 
Taxation of Dividends
 
Individual Investors
 
According to the PRC Individual Income Tax Law, as amended, dividends paid by Chinese companies are ordinarily subject to a Chinese withholding tax levied at a flat rate of 20%. For a foreign individual who has no domicile and does not stay in the territory of China or who has no domicile but has stayed in the territory of China for less than one year, the receipt of dividends from a company in China is normally subject to a withholding tax of 20% unless reduced or exempted by an applicable tax treaty. However, the Chinese State Administration of Taxation, or the SAT, the Chinese central government tax authority which succeeded the State Tax Bureau, issued, on July 21, 1993, the Notice of the Chinese State Administration of Taxation Concerning the Taxation of Gains on Transfer and Dividends from Share (Equities) Received by Foreign Investment Enterprises, Foreign Enterprises and Foreign Individuals, or the Tax Notice, which states that dividends paid by a Chinese company to individuals with respect to overseas-listed shares, such as H shares, are temporarily not subject to Chinese withholding tax.
 
In a letter dated July 26, 1994 to the former State Commission for Restructuring the Economic System, the former State Council Securities Commission and the China Securities Regulatory Commission, the SAT reiterated the temporary tax exemption stated in the Tax Notice for dividends received from a Chinese company listed overseas. In the event that the exemption is withdrawn, a 20% tax may be withheld on dividends in accordance with the PRC Individual Income Tax Law and its implementation rules, as amended. The withholding tax may be reduced or exempted under an applicable double taxation treaty. To date, the relevant tax authorities have not collected withholding tax from dividend payments on the shares exempted under the Tax Notice.
 
Foreign Enterprises
 
In accordance with the new Enterprise Income Tax Law and its implementation rules that became effective on January 1, 2008, dividends derived from the revenues accumulated from January 1, 2008 and are paid by PRC companies to non-resident enterprises, which are established under the laws of non-PRC jurisdictions and have no establishment or place of business in China or whose dividends from China do not relate to their establishment or place of business in China, are generally subject to a PRC withholding tax levied at a rate of 10% unless exempted or reduced pursuant to an applicable double-taxation treaty or other exemptions. Dividends paid by PRC companies to resident enterprises, including enterprises established under the laws of non-PRC jurisdictions but whose “de facto management body” is located in the PRC, are not subject to any PRC withholding tax, unless the dividends are derived from the publicly traded shares which have been held continuously by the resident enterprises for less than twelve months. Dividends, bonuses and other return based on equity investment that a non-resident enterprise with establishment or place of business in China receives from a resident enterprise and that have actual connection with such establishment or place of business are also exempted from any PRC withholding tax, except of those derived from the publicly traded shares which have been held continuously by the non-resident enterprises for less than 12 months. Chinese resident enterprises are required to withhold PRC enterprise income tax at the rate of 10% on dividends paid for 2008 and later years’ earnings payable to their respective H Shares holders that are “non-resident enterprises,” except for those holders whose dividend income is not subject to PRC enterprise income tax pursuant to PRC governmental approval.
 
Tax Treaties
 
Holders resident in countries which have entered into avoidance of double taxation treaties or arrangements with the PRC may be entitled to a reduction or exemption of the withholding tax imposed on the payment of dividends. The PRC currently has avoidance of double taxation treaties or arrangements with a number of other countries/jurisdictions, which include Australia, Canada, France, Germany, Hong Kong, Japan, Malaysia, the Netherlands, Singapore, the United Kingdom and the United States.
 
Under a tax treaty between United States and China, China may tax dividends paid by Sinopec Corp. to eligible US Holders up to a maximum of 10% of the gross amount of such dividend. Under the tax treaty, an eligible US Holder is a person who, by reason of domicile, residence, place of head office, place of incorporation or any other criterion of similar nature is liable to tax in the United States, subject to a detailed "treaty shopping" provision.

 
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Taxation of Capital Gains
 
According to the Tax Notice, gains realized upon the sale of overseas-listed shares issued by PRC companies by foreign individual investors are not subject to tax on capital gains.
 
In accordance with the new Enterprise Income Tax Law and its implementation rules, capital gains realized by foreign enterprises which are non-resident enterprises in China upon the sale of overseas-listed shares are generally subject to a PRC withholding tax levied at a rate of 10%, unless exempted or reduced pursuant to an applicable double-taxation treaty or other exemptions. The capital gains realized by resident enterprises, including enterprises established under the laws of non-PRC jurisdictions but whose “de facto management body” is located in the PRC, upon the sales of overseas-listed shares are subject to the PRC enterprise income tax. Before the effectiveness of the new Enterprise Income Tax Law, gains realized by foreign enterprises that are holders of overseas-listed shares of a PRC company excluding the shares held through their PRC domestic establishment or place of business were exempted from the withholding tax according to the Tax Notice. However, the effectiveness of such exemption granted by the Tax Notice becomes uncertain in light of the provisions under the new Enterprise Income Tax Law and its implementation rules.
 
PRC Stamp Tax Considerations
 
Under the Provisional Regulations of The People's Republic of China Concerning Stamp Tax, which became effective in October, 1988, PRC stamp tax should not be imposed on the transfer of shares of H Shares or ADSs of PRC publicly traded companies..
 
United States Federal Income Tax Considerations
 
The following is a summary of United States federal income tax considerations that are anticipated to be material for US Holders (as defined below) who hold H shares or ADSs. This summary is based upon existing United States federal income tax law, which is subject to change, possibly with retroactive effect. This summary does not discuss all aspects of United States federal income taxation which may be important to particular investors in light of their individual investment circumstances, such as investors subject to special tax rules including: financial institutions, insurance companies, broker-dealers, tax-exempt organizations, non-US Holders, investors who own (directly, indirectly, or constructively) 10% or more of our voting stock, investors that will hold H shares or ADSs as part of a straddle, hedge, conversion, constructive sale, or other integrated transaction for United States federal income tax purposes, or US Holders that have a functional currency other than the United States dollar, all of whom may be subject to tax rules that differ significantly from those summarized below. In addition, this summary does not discuss any foreign, state, local or alternative minimum tax considerations. This summary only addresses investors that will hold their H shares or ADSs as "capital assets" (generally, property held for investment) under the United States Internal Revenue Code (the "Code"). Each holder is urged to consult its tax advisor regarding the United States federal, state, local, and foreign income and other tax considerations of an in vestment in H shares or ADSs.
 
For purposes of this summary, a US Holder is a beneficial owner of H shares or ADSs that is for United States federal income tax purposes:
 
 
·
an individual who is a citizen or resident of the United States;
     
 
·
a corporation created in or organized under the laws of, the United States or any State or political subdivision thereof;
     
 
·
an estate the income of which is includible in gross income for United States federal income tax purposes regardless of its source;
     
 
·
a trust the administration of which is subject to the primary supervision of a United States court and which has one or more United States persons who have the authority to control all substantial decisions of the trust; or
     
 
·
a trust that has elected to be treated as a United States person under the Code.
 
If a partnership (including any entity treated as a partnership for United States federal income tax purposes) holds H shares or ADSs, the tax treatment of a partner in such partnership will depend upon the status of the partner

 
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and the activities of the partnership.  Partners in a partnership holding our H shares or ADSs are urged to consult their tax advisors as to the particular United States federal income tax consequences applicable to them.
 
A foreign corporation will be treated as a "passive foreign investment company" (a "PFIC"), for United States federal income tax purposes, if 75% or more of its gross income consists of certain types of "passive" income or 50% or more of its assets are passive. Sinopec Corp. presently does not believe that it is a PFIC and does not anticipate becoming a PFIC. This is, however, a factual determination made on an annual basis and is subject to change. The following discussion is based on the belief that Sinopec Corp. will not be classified as a PFIC for United States federal income tax purposes.  See the discussion below under the heading “PFIC Considerations” for a brief summary of the PFIC rules.
 
General
 
For United States federal income tax purposes, a US Holder of an ADS will be treated as the owner of the proportionate interest of the H shares held by the depositary that is represented by an ADS and evidenced by such ADS. Accordingly, no gain or loss will be recognized upon the exchange of an ADS for the holder's proportionate interest in the H shares. A US Holder's tax basis in the withdrawn H shares will be the same as the tax basis in the ADS surrendered therefor, and the holding period in the withdrawn H shares will include the period during which the holder held the surrendered ADS.
 
Dividends
 
Any cash distributions paid by Sinopec Corp. out of earnings and profits, as determined under United States federal income tax principles, will be subject to tax as dividend income and will be includible in the gross income of a US Holder upon receipt.  Because we do not intend to determine our earnings and profits on the basis of United States federal income tax principles, any distribution paid will generally be treated as a "dividend" for United States federal income tax purposes.  A non-corporate recipient of dividend income will generally be subject to tax on dividend income from a "qualified foreign corporation" at a maximum U.S. federal tax rate of 15% rather than the marginal tax rates generally applicable to ordinary income so long as certain holding period requirements are met.  A non-U.S. corporation (other than a passive foreign investment company) generally will be considered to be a qualified foreign corporation (i) if it is eligible for the benefits of a comprehensive tax treaty with the United States which the Secretary of Treasury of the United States determines is satisfactory for purposes of this provision and which includes an exchange of information program or (ii) with respect to any dividend it pays on stock which is readily tradable on an established securities market in the United States.  There is currently a tax treaty in effect between the United States and the People's Republic of China which the Secretary of Treasury of the United States determined is satisfactory for these purposes and Sinopec Group, presently believes that it is eligible for the benefits of such treaty.  Additionally, our ADSs trade on the New York Stock Exchange, an established securities market in the United States.  Dividends paid in Hong Kong dollars will be includible in income in a United States dollar amount based on the United States dollar - Hong Kong dollar exchange rate prevailing at the time of receipt of such dividends by the depositary, in the case of ADSs, or by the US Holder, in the case of H shares held directly by such US Holder.  Gain or loss, if any, recognized on a subsequent sale, conversion or other disposition of Hong Kong dollars generally will be U.S. source income or loss.  Dividends received on H shares or ADSs will not be eligible for the dividends received deduction allowed to corporations.
 
Dividends received on H shares or ADSs will be treated, for United States federal income tax purposes, as foreign source income. A US Holder may be eligible, subject to a number of complex limitations, to claim a foreign tax credit in respect of any foreign withholding taxes imposed on dividends received on H shares or ADSs. US Holders who do not elect to claim a foreign tax credit for foreign income tax withheld may instead claim a deduction, for United States federal income tax purposes, in respect of such withholdings, but only for a year in which the US Holder elects to do so for all creditable foreign income taxes.
 
A distribution of additional shares of Sinopec Corp.'s stock to US Holders with respect to their H shares or ADSs that is pro rata to all Sinopec Corp.'s shareholders may not be subject to United States federal income tax. The tax basis of such additional shares will be determined by allocating the US Holders' adjusted tax basis in the H shares or ADSs between the H shares or ADSs and the additional shares, based on their relative fair market values on the date of distribution.

 
73
 

Sale or Other Disposition of H shares or ADSs
 
A US Holder will recognize capital gain or loss upon the sale or other disposition of H shares or ADSs in an amount equal to the difference between the amount realized upon the disposition and the US Holder's adjusted tax basis in such H shares or ADSs, as each is determined in US dollars. Any capital gain or loss will be long-term if the H shares or ADSs have been held for more than one year and may be, under the income tax treaty between the People's Republic of China and the United States, foreign source gain or loss. The claim of a deduction in respect of a capital loss, for United States federal income tax purposes, may be subject to limitations.
 
PFIC Considerations
 
If Sinopec Corp. were to be classified as a PFIC in any taxable year, a U.S. Holder would be subject to special rules generally intended to reduce or eliminate any benefits from the deferral of United States federal income tax that a U.S. Holder could derive from investing in a foreign company that does not distribute all of its earnings on a current basis. In such event, a U.S. Holder of the H shares or ADSs may be subject to tax at ordinary income tax rates on (i) any gain recognized on the sale of the H shares or ADSs and (ii) any "excess distribution" paid on the H shares or ADSs (generally, a distribution in excess of 125% of the average annual distributions paid by Sinopec Corp. in the three preceding taxable years). In addition, a U.S. Holder may be subject to an interest charge on such gain or excess distribution.
 
The above results may be eliminated if a “mark-to-market” election is available and a US Holder validly makes such an election. If the election is made, such holder generally will be required to take into account the difference, if any, between the fair market value and its adjusted tax basis in H shares or ADSs at the end of each taxable year as ordinary income or ordinary loss (to the extent of any net mark-to-market gain previously included in income). In addition, any gain from a sale or other disposition of H shares or ADSs will be treated as ordinary income, and any loss will be treated as ordinary loss (to the extent of any net mark-to-market gain previously included in income).
 
Withholding Tax, Backup Withholding, and Information Reporting
 
Pursuant to recently enacted legislation, U.S. Holders may be required to submit to the Internal Revenue Service certain information with respect to an investment in the H shares or ADSs not held through an account with a "financial institution."  This new legislation also imposes penalties if a U.S. Holder is required to submit such information to the Internal Revenue Service and fails to do so.  In addition, U.S. Holders may be subject to information reporting to the Internal Revenue Service with respect to dividends on and proceeds from the sale or other disposition of our H shares or ADSs.  Dividend payments with respect to our H shares or ADSs and proceeds from the sale or other disposition of our H shares or ADSs are not generally subject to U.S. withholding tax or backup withholding (provided that certain certification requirements are satisfied).  U.S. Holders should consult their tax advisors regarding the application of the United States information reporting and backup rules.
 
 
F.
DIVIDENDS AND PAYING AGENTS
 
Not applicable.
 
 
G.
STATEMENT BY EXPERTS
 
Not applicable.
 
 
H.
DOCUMENTS ON DISPLAY
 
We filed with the Securities and Exchange Commission in Washington, D.C. a Registration Statement on Form F-1 (Registration No. 333-12502) under the Securities Act in connection with the ADSs offered in the global offering. The Registration Statement contains exhibits and schedules. Any statement in this annual report about any of our contracts or other documents is not necessarily complete. If the contract or document is filed as an exhibit to the Registration Statement, the contract or document is deemed to modify the description contained in this annual report. You must review the exhibits themselves for a complete description of the contract or documents.
 
You may inspect and copy our registration statements, including their exhibits and schedules, and the reports and other information we file with the Securities and Exchange Commission in accordance with the Exchange Act at the public reference facilities maintained by the Securities and Exchange Commission at Judiciary Plaza, 450 Fifth

 
74
 

Street, Room 1024, N.W., Washington, D.C. 20549 and at the regional offices of the Securities and Exchange Commission located at 233 Broadway, New York, NY 10279 and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may also inspect the registration statements, including their exhibits and schedules, at the office of the New York Stock Exchange, Wall Street, New York, New York 10005. Copies of such material may also be obtained from the Public Reference Section of the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. You may obtain information regarding the Washington D.C. Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330 or by contacting the Securities and Exchange Commission over the internet at its website at http://www.sec.gov.
 
 
I.
SUBSIDIARY INFORMATION
 
Not applicable.
 
ITEM 11.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
 
Our primary market risk exposures are to fluctuations in oil and gas prices, exchange rates and interest rates.
 
Commodity Price Risk
 
We engage in oil and gas operations and is exposed to commodity price risk related to price volatility of crude oil and refined oil products. The fluctuations in prices of crude oil and refined oil products could have significant impact on us. We use derivative financial instruments, including commodity futures and swaps, to manage a portion of this risk. As of December 31, 2009, we had certain commodity contracts of crude oil and refined oil products designated as qualified cash flow hedges and economic hedges. As of December 31, 2009, the fair value assets and fair value liabilities of these derivative financial instruments were RMB 321 and RMB 587, respectively. We did not enter into any derivative financial instruments for trading purposes.
 
As of December 31, 2009, it is estimated that a general increase/decrease of USD 10 per barrel in crude oil and refined oil products, with all other variables held constant, would decrease/increase our net income and retained earnings by approximately RMB 215, and increase/decrease our other reserves by approximately RMB 1,991. This sensitivity analysis has been determined assuming that the change in prices had occurred at the balance sheet date and the change was applied to our derivative financial instruments at that date with exposure to commodity price risk.
 
Foreign Exchange Rate Risk
 
The Renminbi is not a freely convertible currency. With the authorization from the PRC government, the PBOC announced that the PRC government reformed the exchange rate regime by moving into a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies on July 21, 2005. Actions taken by the PRC government could cause future exchange rates to vary significantly from current or historical exchange rates. Fluctuations in exchange rates may adversely affect the value, translated or converted into US dollars or Hong Kong dollars, of our net assets, earnings and any declared dividends. We cannot give any assurance that any future movements in the exchange rate of the Renminbi against the US dollar and other foreign currencies will not adversely affect our results of operations and financial condition.
 
The following presents various market risk information regarding market-sensitive financial instruments that we held or issued as of December 31, 2009 and 2008. We conduct our business primarily in Renminbi, which is also our functional and reporting currency.
 
The following tables provide information regarding instruments that are sensitive to foreign exchange rates as of December 31, 2009 and 2008. For debt obligations, the table presents cash flows and related weighted average rates by expected maturity dates.

 
75
 

As of December 31, 2009:

   
Expected maturity
             
 
 
2010
   
2011
   
2012
   
2013
   
2014
   
thereafter
   
Total
   
Fair value
 
   
(RMB equivalent in millions, except interest rates)
             
                                                 
Assets
                                               
                                                 
Cash and cash equivalents
                                               
In United States dollar
    2,155       -       -       -       -       -       2,155       2,155  
In Hong Kong dollar
    146       -       -       -       -       -       146       146  
In Japanese yen
    14       -       -       -       -       -       14       14  
In Euro
    129       -       -       -       -       -       129       129  
                                                                 
Time deposits with financial institutions
                                                               
In United States dollar
    4       -       -       -       -       -       4       4  
                                                                 
Liabilities
                                                               
                                                                 
Debts in United States dollar
                                                               
Fixed rate
    1,108       71       57       57       57       279       1,629       1,644  
Average interest rate
    1.0 %     1.5 %     1.4 %     1.4 %     1.4 %     1.4 %                
Variable rate
    15,541       3       4       3       4       2       15,557       15,557  
Average interest rate (1)
    0.9 %     4.9 %     4.9 %     4.9 %     4.9 %     4.9 %                
                                                                 
Debts in Japanese yen
                                                               
Fixed rate
    104       74       74       74       74       654       1,054       1,172  
Average interest rate
    2.6 %     2.6 %     2.6 %     2.6 %     2.6 %     2.6 %                
Variable rate
    202       202       202       -       -       -       606       606  
Average interest rate (1)
    2.9 %     2.9 %     2.9 %     -       -       -                  
                                                                 
Debts in Hong Kong dollar
                                                               
Fixed rate
    -       -       -       -       10,371       -       10,371       10,371  
Average interest rate
    -       -       -       -       4.2 %     -                  
Variable rate
    -       -       -       -       -       -       -       -  
Average interest rate (1)
    -       -       -       -       -       -                  
                                                                 
Debts in Euro
                                                               
Fixed rate
    85       31       -       -       -       -       116       120  
Average interest rate
    6.6 %     6.6 %     -       -       -       -                  
___________
 
(1)
The average interest rates for variable rate loans are calculated based on the rates reported as of December 31, 2009.
 
 
76
 

As of December 31, 2008:
 
   
Expected maturity
             
 
 
2009
   
2010
   
2011
   
2012
   
2013
   
thereafter
   
Total
   
Fair value
 
   
(RMB equivalent in millions, except interest rates)
             
                                                 
Assets
                                               
                                                 
Cash and cash equivalents
                                               
In United States dollar
    1,259       -       -       -       -       -       1,259       1,259  
In Hong Kong dollar
    109       -       -       -       -       -       109       109  
In Japanese yen
    5       -       -       -       -       -       5       5  
In Euro
    43       -       -       -       -       -       43       43  
                                                                 
Time deposits with financial institutions
                                                               
In United States dollar
    91       -       -       -       -       -       91       91  
                                                                 
Liabilities
                                                               
                                                                 
Debts in United States dollar
                                                               
Fixed rate
    3,074       114       71       57       57       336       3,709       3,702  
Average interest rate
    4.0 %     2.0 %     1.5 %     1.4 %     1.4 %     1.4 %                
Variable rate
    4,948       3       3       4       4       7       4,969       4,969  
Average interest rate (1)
    4.5 %     4.9 %     4.9 %     4.9 %     4.9 %     4.9 %                
                                                                 
Debts in Japanese yen
                                                               
Fixed rate
    110       110       79       79       79       734       1,191       1,233  
Average interest rate
    2.6 %     2.6 %     2.6 %     2.6 %     2.6 %     2.6 %                
Variable rate
    309       207       207       207       -       -       930       930  
Average interest rate (1)
    2.8 %     2.9 %     2.9 %     2.9 %     -       -                  
                                                                 
Debts in Hong Kong dollar
                                                               
Fixed rate
    -       -       -       -       -       9,870       9,870       9,870  
Average interest rate
    -       -       -       -       -       4.2 %                
Variable rate
    265       -       -       -       -       -       265       265  
Average interest rate (1)
    0.9 %     -       -       -       -       -                  
                                                                 
Debts in Euro
                                                               
Fixed rate
    84       84       29       -       -       -       197       206  
Average interest rate
    6.6 %     6.6 %     6.6 %     -       -       -                  
___________
 
(1)
The average interest rates for variable rate loans are calculated based on the rates reported as of December 31, 2008.
 
 
77
 
 
Interest Rate Risk
 
We are exposed to interest rate risk resulting from fluctuations in interest rates on our short- and long-term debts. Upward fluctuations in interest rates increase the cost of new debt and the interest cost of outstanding floating rate borrowings.
 
Our debts consist of fixed and variable rate debt obligations with original maturities ranging from 1 to 25 years. Fluctuations in interest rates can lead to significant fluctuations in the fair values of our debt obligations.
 
The following tables present principal cash flows and related weighted average interest rates by expected maturity dates of our interest rate sensitive financial instruments as of December 31, 2009 and 2008.

 
78
 

As of December 31, 2009:
 
   
Expected maturity
                 
 
 
2010
   
2011
   
2012
   
2013
   
2014
   
thereafter
   
Total
   
Fair value
     
   
(RMB equivalent in millions, except interest rates)
                 
                                                     
Assets
                                                   
                                                     
Cash and cash equivalents
                                                   
In Renminbi
    6,306       -       -       -       -       -       6,306       6,306      
In United States dollar
    2,155       -       -       -       -       -       2,155       2,155      
In Hong Kong dollar
    146       -       -       -       -       -       146       146      
In Japanese yen
    14       -       -       -       -       -       14       14      
In Euro
    129       -       -       -       -       -       129       129      
                                                                     
Time deposits with financial institutions
                                                             
In Renminbi
    1,232       -       -       -       -       -       1,232       1,232      
In United States dollar
    4       -       -       -       -       -       4       4      
                                                                     
Liabilities
                                                                   
                                                                     
Debts in Renminbi
                                                                   
Fixed rate
    50,947       192       38,580       60       28,392       52,364       170,535       169,730     (1)
Average interest rate
    2.8 %     2.8 %     2.8 %     2.5 %     2.5 %     1.6 %                    
Variable rate
    4,554       3,513       4,108       5,200       1,126       -       18,501       18,501      
Average interest rate (2)
    5.4 %     5.2 %     5.2 %     5.3 %     5.2 %     -                      
                                                                     
Debts in United States dollar
                                                                   
Fixed rate
    1,108       71       57       57       57       279       1,629       1,644      
Average interest rate
    1.0 %     1.5 %     1.4 %     1.4 %     1.4 %     1.4 %                    
Variable rate
    15,541       3       4       3       4       2       15,557       15,557      
Average interest rate (2)
    0.9 %     4.9 %     4.9 %     4.9 %     4.9 %     4.9 %                    
                                                                     
Debts in Japanese yen
                                                                   
Fixed rate
    104       74       74       74       74       654       1,054       1,172      
Average interest rate
    2.6 %     2.6 %     2.6 %     2.6 %     2.6 %     2.6 %                    
Variable rate
    202       202       202       -       -       -       606       606      
Average interest rate (2)
    2.9 %     2.9 %     2.9 %     -       -       -                      
                                                                     
Debts in Hong Kong dollar
                                                                   
Fixed rate
    -       -       -       -       10,371       -       10,371       10,371      
Average interest rate
    -       -       -       -       4.2 %     -                      
Variable rate
    -       -       -       -       -       -       -       -      
Average interest rate (2)
    -       -       -       -       -       -                      
                                                                     
Debts in Euro
                                                                   
Fixed rate
    85       31       -       -       -       -       116       120      
Average interest rate
    6.6 %     6.6 %     -       -       -       -                      
___________
(1)
Carrying amounts are used for loans from Sinopec Group Company and its affiliates as it is not practicable to estimate their fair values because the cost of obtaining discount and borrowing rates for comparable borrowings would be excessive.
   
(2)
The average interest rates for variable rate loans are calculated based on the rates reported as of December 31, 2009.
 
 
79
 
 
As of December 31, 2008:

   
Expected maturity
                 
 
 
2009
   
2010
   
2011
   
2012
   
2013
   
thereafter
   
Total
   
Fair value
     
   
(RMB equivalent in millions, except interest rates)
                 
                                                     
Assets
                                                   
                                                     
Cash and cash equivalents
                                                   
In Renminbi
    5,592       -       -       -       -       -       5,592       5,592      
In United States dollar
    1,259       -       -       -       -       -       1,259       1,259      
In Hong Kong dollar
    109       -       -       -       -       -       109       109      
In Japanese yen
    5       -       -       -       -       -       5       5      
In Euro
    43       -       -       -       -       -       43       43      
                                                                     
Time deposits with financial institutions
                                                             
In Renminbi
    661       -       -       -       -       -       661       661      
In United States dollar
    91       -       -       -       -       -       91       91      
                                                                     
Liabilities
                                                                   
                                                                     
Debts in Renminbi
                                                                   
Fixed rate
    78,395       1,550       382       8,580       60       79,705       168,672       172,273     (1)
Average interest rate
    3.7 %     3.0 %     3.0 %     2.9 %     2.5 %     1.5 %                    
Variable rate
    11,300       7,923       5,034       2,974       6,139       2,454       35,824       35,824      
Average interest rate (2)
    6.3 %     6.7 %     6.7 %     6.7 %     6.7 %     6.8 %                    
                                                                     
Debts in United States dollar
                                                                   
Fixed rate
    3,074       114       71       57       57       336       3,709       3,702      
Average interest rate
    4.0 %     2.0 %     1.5 %     1.4 %     1.4 %     1.4 %                    
Variable rate
    4,948       3       3       4       4       7       4,969       4,969      
Average interest rate (2)
    4.5 %     4.9 %     4.9 %     4.9 %     4.9 %     4.9 %                    
                                                                     
Debts in Japanese yen
                                                                   
Fixed rate
    110       110       79       79       79       734       1,191       1,233      
Average interest rate
    2.6 %     2.6 %     2.6 %     2.6 %     2.6 %     2.6 %                    
Variable rate
    309       207       207       207       -       -       930       930      
Average interest rate (2)
    2.8 %     2.9 %     2.9 %     2.9 %     -       -                      
                                                                     
Debts in Hong Kong dollar
                                                                   
Fixed rate
    -       -       -       -       -       9,870       9,870       9,870      
Average interest rate
    -       -       -       -       -       4.2 %                    
Variable rate
    265       -       -       -       -       -       265       265      
Average interest rate (2)
    0.9 %     -       -       -       -       -                      
                                                                     
Debts in Euro
                                                                   
Fixed rate
    84       84       29       -       -       -       197       206      
Average interest rate
    6.6 %     6.6 %     6.6 %     -       -       -                      
___________
 
(1)
Carrying amounts are used for loans from Sinopec Group Company and its affiliates as it is not practicable to estimate their fair values because the cost of obtaining discount and borrowing rates for comparable borrowings would be excessive.
   
(2)
The average interest rates for variable rate loans are calculated based on the rates reported as of December 31, 2008.
 
 
80
 
ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
 
Not Applicable.
 
ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
 
None.
 
ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
 
 
A.
MATERIAL MODIFICATIONS TO THE RIGHTS TO SECURITIES HOLDERS
 
None.
 
 
B.
USE OF PROCEEDS
 
Not applicable.
 
ITEM 15.
CONTROLS AND PROCEDURES
 
Disclosure Controls and Procedures
 
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of December 31, 2009 (the "Evaluation Date"), the end of the fiscal year covered by this annual report. Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective.
 
Management’s Report on Internal Control over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) of the Securities Exchange Act of 1934). The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards.
 
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
Our management assessed the effectiveness of our internal control over financial reporting based upon the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission as of December 31, 2009. Based on that evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2009 based on these criteria.
 
KPMG, an independent registered public accounting firm, has audited the consolidated financial statements included in this annual report on Form 20-F and, as part of the audit, has issued a report, included herein, on the effectiveness of our internal control over financial reporting.
 
Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Shareholders of China Petroleum & Chemical Corporation:

 
81
 

We have audited China Petroleum & Chemical Corporation's internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. China Petroleum & Chemical Corporation's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, China Petroleum & Chemical Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of China Petroleum & Chemical Corporation and subsidiaries as of December 31, 2008 and 2009, and the related consolidated statements of income, comprehensive income, cash flows and equity for each of the years in the three-year period ended December 31, 2009, and our report dated March 26, 2010 expressed an unqualified opinion on those consolidated financial statements.
 
/S/ KPMG
Hong Kong, China
March 26, 2010

Changes in Internal Control over Financial Reporting
 
During the year ended December 31, 2009, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
82
 
 
ITEM 16.
RESERVED
 
ITEM 16A.
AUDIT COMMITTEE FINANCIAL EXPERT
 
The board of directors has determined that Mr. Liu Zhongli qualifies as an audit committee financial expert in accordance with the terms of Item 16.A of Form 20-F.  Mr. Liu was appointed as an independent non-executive director and a member of the audit committee of the fourth board of our company in May 2009. For Mr. Liu’s biographical information, see "Item 6 Directors, Senior Management and Employees – A. Directors, members of the supervisory committee and senior management."
 
ITEM 16B.
CODE OF ETHICS
 
As of the date of this annual report, we do not have, in form, a code of ethics that applies to our principal executive officer, principal financial officer and principal accounting officer.  Our principal executive officers, Mr. Su Shulin (Chairman) and Mr. Wang Tianpu (Vice Chairman and President), currently also serve as our directors and are thus subject to the director service contracts that they have with us. Our principal financial officer, Mr. Wang Xinhua (CFO) is subject to the employment contract that he has with us. Under such contracts, each of them agrees that he owes a fiduciary and diligence obligation to our company and that he shall not engage in any activities in competition with our business or carry any activities detrimental to the interests of our company.  Each of them also agrees to perform his respective duties as a director and senior officer in accordance with the Company Law of the PRC, relevant rules and regulations promulgated by China Securities Regulatory Commission and the Mandatory Provisions of Articles of Association of Overseas Listed Companies.
 
ITEM 16C.
 PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
The following table sets forth the aggregate audit fees, audit-related fees, tax fees of our principal accountants and all other fees billed for products and services provided by our principal accountants other than the audit fees, audit-related fees and tax fees for each of the fiscal years 2008 and 2009:
 
 
Audit Fees
 
Audit-Related Fees
   
Tax Fees
   
Other Fees
 
2008
RMB 81 million
    —       —       —  
2009
RMB 84 million
    —       —       —  

Before our principal accountants were engaged by our company or our subsidiaries to render audit or non-audit services, the engagement has been approved by our audit committee.
 
ITEM 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
 
Not applicable.
 
ITEM 16E.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
 
None.
 
ITEM 16F.
CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
 
Not applicable.
 
ITEM 16G.
COMPARISON OF NEW YORK STOCK EXCHANGE CORPORATE GOVERNANCE RULES AND CHINA CORPORATE GOVERNANCE RULES FOR LISTED COMPANIES
 
Under the amended Corporate Governance Rules of New York Stock Exchange (NYSE), foreign issuers (including the Company) listed on the NYSE are required to disclose a summary of the significant differences between their domestic corporate governance rules and NYSE corporate governance rules that would apply to a U.S. domestic issuer. A summary of such differences is listed below:

 
83
 
 
NYSE corporate governance rules
 
Corporate governance rules applicable to the
domestically listed companies in China and the
Company’s governance practices
 
Corporate governance guidelines
   
Listed companies must adopt and disclose corporate governance guidelines, involving director qualification standards, director compensation, director continuing education, annual performance evaluation of the board of directors, etc.
 
CSRC (China Securities Regulatory Commission) has issued the Corporate Governance Rules, prescribing detailed guidelines on directors of the listed companies, including director selection, the structure of the board of directors and director performance evaluation etc. The Company Law of PRC has specific regulations on the directors’ qualification. Furthermore, CSRC promulgates the guidelines on the senior management training and organizes the relevant training.
The Company has complied with the above mentioned laws or rules.
Director Independence
   
A listed company must have a majority of independent directors on its board of directors. No director qualifies as “independent’’ unless the board of directors affirmatively determines that the director has no material relationship with the listed company (either directly or as a partner, shareholder or officer of an organization that has a relationship with the company). In addition, a director must meet certain standards to be deemed independent. For example, a director is not independent if the director is, or has been within the last three years, an employee of the listed company, or if the director has received, during any twelve-month period within the last three years, more than US$120,000 in direct compensation from the listed company.
 
To empower non-management directors to serve as a more effective check on management, the non-management directors of each listed company must meet at regularly scheduled executive sessions without management.
 
It is required in China that any listed company must establish an independent director system and set forth specific requirements for the qualification of independent directors. For example, an independent director shall not hold any other position in the listed company other than being a director and shall not be influenced by the main shareholders or the controlling persons of the listed company, or by any other entities or persons with whom the listed company has a significant relationship.
The Company has complied with the relevant Chinese corporate governance rules and has implemented internal rules governing the independence and responsibilities of independent directors. The Company determines the independence of independent directors every year.
 
No similar requirements.
     
Nominating/Corporate Governance Committee
   
Listed companies must have a nominating/corporate governance committee composed entirely of independent directors.
 
It is stipulated in China that the board of directors of a listed company may, through the resolution of the shareholders’ meeting, establish a nominating committee composed entirely of directors, of which the independent directors shall be the majority and the convener. Up to now, the Company has not set up any nominating committee.
     
The nominating/corporate governance committee must have a written charter that addresses the committee’s purposes and responsibilities which, at minimum, must be to: search for eligible people for the board of directors, select and nominate directors for the next session of the shareholders’ annual meeting, study and propose corporate governance guidelines, supervise the evaluation of the board of directors and management, and evaluate the performance of the committee every year.
 
Relevant responsibilities of the nominating committee are similar to those stipulated by the NYSE rules, but the main responsibilities do not include the research and recommendation of corporate governance guidelines, the supervision of the evaluation of the board of directors and management, or the annual evaluation of the committee.

 
84
 
 
Compensation Committee
   
Listed companies must have a compensation committee composed entirely of independent directors.
 
It is stipulated in China that the board of directors of a listed company should, through the resolution of shareholders’ meeting, have a compensation and assessment committee composed entirely of directors, of whom the independent directors are the majority and act as the convener.
 
The written charter of the compensation committee must state, at least, the following purposes and responsibilities:
(1) review and approve the corporate goals associated with CEO’s compensation, evaluate the performance of the CEO in fulfilling these goals, and based on such evaluation determine and approve the CEO’s compensation level;
(2) make recommendations to the board with respect to non-CEO executive officer compensation, and incentive-compensation and equity-based plans that are subject to board approval;
(3) produce a committee report on executive compensation as required by the SEC to be included in the annual proxy statement or annual report filed with the SEC.
The charter must also include the requirement for an annual performance evaluation of the compensation committee.
 
It is stipulated in China that the responsibilities of the compensation committee are:
(1) to study evaluation standards on the performance of directors and the senior management and submit suggestion to the board of directors;
(2) to study and review the compensation policies on the directors and the senior management.
It is also stipulated that the committee shall produce a report about the committee’s performance in the annual report.
But the committee is not required to produce a report on the executive compensation or make an annual performance evaluation of the committee.
 
The board of directors of the Company has established a compensation and performance evaluation committee composed mainly of independent directors who act as the convener, and the committee has established a written charter complying with the domestic corporate governance rules.
     
Audit Committee
   
Listed companies must have an audit committee that satisfies the requirements of Rule 10A-3 of Securities Exchange Act of 1934 (the “Exchange Act”). It must have a minimum of three members, and all audit committee members must satisfy the requirements for independence set forth in Section 303A.02 of NYSE Corporate Governance Rules as well as the requirements of Rule 10A-3b (1) of the Exchange Act.
 
It is stipulated in China that the board of directors of a listed company should, through the resolution of the shareholders’ meeting, establish an audit committee composed entirely of directors, of which the independent directors are the majority and act as the convener, and, at minimum, one independent director is an accounting professional.
     
The written charter of the audit committee must specify that the purpose of the audit committee is to assist the board oversight of the integrity of financial statements, the company’s compliance with legal and regulatory requirements, qualifications and independence of independent auditors and the performance of the listed company’s internal audit function and independent auditors.
 
The written charter must also require the audit committee to prepare an audit committee report as required by the SEC to be included in the listed company’s annual proxy statement as well as an annual performance evaluation of the audit committee.
 
 
Each listed company must have an internal audit department.
 
Shareholders must be given the opportunity to vote on equity-compensation plans and material revisions thereto, except for employment incentive plans, certain awards and plans in the context of mergers and acquisitions.
 
The responsibilities of the audit committee are similar to those stipulated by the NYSE rules. It is also stipulated that the committee shall produce a report about the committee’s performance in the annual report.
But according to the domestic practices, the company is not required to make an annual performance evaluation of the audit committee, and the audit committee is not required to prepare an audit report to be included in the company’s annual proxy statement.
 
The Board of Directors of the Company has established an audit committee that satisfies relevant domestic and overseas requirements and the audit committee has a written charter.
 
China has a similar regulatory provision, and the Company has an internal audit department.
 
The relevant regulations of China require the board of directors propose plans on the amount and types of director compensation for the shareholders’ meeting to approve. The compensation plan of executive officers shall be approved by the board and disclosed to the public upon the approval of the board of directors.

 
85
 
 
Code of ethics for directors, officers and employees
   
Listed companies must adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers.
 
China does not have such requirement for a code for ethics. But, since the directors and officers of the Company have all signed the Director Service Agreement or employment agreement, as applicable, they are bound by their fiduciary duties to the Company. In addition, the directors and officers must perform their legal responsibilities in accordance with the Company Law of PRC, relative requirements of CSRS and Mandatory Provisions to the Charter of Companies Listed Overseas. Meanwhile, the Company establishes The Model Code of Securities Transactions by Corporate Employees and The Rules of The Company’s Shares Transactions by Corporate Directors, Superiors and Senior Managements to regulate the above mentioned people when transacting related securities. In 2008, the Company promulgated the Code for Employees of the Company as the standards of business conduct and ethics of the employees.
     
Each listed company CEO must certify to the NYSE each year that he or she is not aware of any violation by the company of NYSE corporate governance listing standards and he or she must promptly notify the NYSE on writing of any material non-compliance with any applicable provisions of Section 303A.
 
No similar requirements.

ITEM 17.
FINANCIAL STATEMENTS
 
Not applicable.
 
ITEM 18.
FINANCIAL STATEMENTS
 
See F-pages following Item 19.
 
ITEM 19.
EXHIBITS

1 **
Articles of Association of the Registrant, amended and adopted by the shareholders' meeting on May 24, 2006 (English translation), incorporated by reference to Exhibit 1 to our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 13, 2007 (File Number: 001-15138).
   
1.1 **
Amendment to the Articles of Association of China Petroleum & Chemical Corporation, adopted by the shareholders’ meeting on May 26, 2008 (English translation), incorporated by reference to Exhibit 1.1 to our Annual Report on Form 20-F filed with the Securities and Exchange Commission on May 20, 2009 (File Number: 001-15138).
   
1.2 *
Articles of Association of the Registrant, amended and adopted by the shareholders’ meeting on May 22, 2009 (English translation).
   

 
86
 
 
4.1**
Forms of Director Service Contracts dated May 24, 2006 (English translation), incorporated by reference to Exhibit 4.1 to our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 13, 2007  (File Number: 001-15138).
   
4.2**
Forms of Supervisor Service Contracts dated May 24, 2006 (English translation), incorporated by reference to Exhibit 4.2 to our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 13, 2007  (File Number: 001-15138).
   
4.3**
Reorganization Agreement between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated June 3, 2000 (including English translation), incorporated by reference to Exhibit 10.1 to our Registration Statement on Form F-1 filed with the Securities and Exchange Commission on October 10, 2000 (File Number: 333-12502).
   
4.4**
Agreement for Mutual Provision of Products and Ancillary Services between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated June 3, 2000 (including English translation), incorporated by reference to Exhibit 10.3 to our Registration Statement on Form F-1 filed with the Securities and Exchange Commission on October 10, 2000 (File Number: 333-12502).
   
4.5**
Agreement for Provision of Cultural, Educational, Hygiene and Community Services between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated June 3, 2000 (including English translation), incorporated by reference to Exhibit 10.4 to our Registration Statement on Form F-1 filed with the Securities and Exchange Commission on October 10, 2000 (File Number: 333-12502).
   
4.6**
Trademark License Agreement between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated June 3, 2000 (including English translation), incorporated by reference to Exhibit 10.6 to our Registration Statement on Form F-1 filed with the Securities and Exchange Commission on October 10, 2000 (File Number: 333-12502).
   
4.7**
Patents and Proprietary Technology License Contract between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated June 3, 2000 (including English translation), incorporated by reference to Exhibit 10.7 to our Registration Statement on Form F-1 filed with the Securities and Exchange Commission on October 10, 2000 (File Number: 333-12502).
   
4.8**
Computer Software License Contract between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated June 3, 2000 (including English translation), incorporated by reference to Exhibit 10.8 to our Registration Statement on Form F-1 filed with the Securities and Exchange Commission on October 10, 2000 (File Number: 333-12502).
   
4.9**
Assets Swap Contract between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated June 3, 2000 (including English translation), incorporated by reference to Exhibit 10.9 to our Registration Statement on Form F-1 filed with the Securities and Exchange Commission on October 10, 2000 (File Number: 333-12502).
   
4.10**
Land Use Rights Leasing Contract between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated June 3, 2000 (including English translation), incorporated by reference to Exhibit 10.10 to our Registration Statement on Form F-1 filed with the Securities and Exchange Commission on October 10, 2000 (File Number: 333-12502).
   
4.12**
Property Leasing Contract between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated June 3, 2000 (including English translation), incorporated by reference to Exhibit 10.11 to our Registration Statement on Form F-1 filed with the Securities and Exchange Commission on October 10, 2000 (File Number: 333-12502).
   
4.13**
Accounts Collectable Contract between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated August 16, 2000 (including English translation), incorporated by reference to Exhibit 10.17 to our Registration Statement on Form F-1 filed with the Securities and Exchange Commission on October 10, 2000 (File Number: 333-12502).
   

 
87
 
 
4.14**
Loan Transfer and Adjustment Contract between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated August 16, 2000 (including English translation), incorporated by reference to Exhibit 10.18 to our Registration Statement on Form F-1 filed with the Securities and Exchange Commission on October 10, 2000 (File Number: 333-12502).
   
4.15**
Agreement on Adjustment to Related Party Transactions between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated June 11, 2001 (English translation), incorporated by reference to Exhibit 4.15 to our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 13, 2007 (File Number: 001-15138).
   
4.16**
Land Use Right Leasing Agreement between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated August 22, 2003 (English translation), incorporated by reference to Exhibit 4.16 to our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 13, 2007  (File Number: 001-15138).
   
4.17**
2004 Agreement on Adjustment to Related Party Transactions between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated October 31, 2004 (English translation) , incorporated by reference to Exhibit 4.17 to our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 13, 2007  (File Number: 001-15138).
   
4.18**
Memorandum on Adjustment of Rent of Land Use Rights between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated March 31, 2006 (English translation) , incorporated by reference to Exhibit 4.18 to our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 13, 2007  (File Number: 001-15138).
   
4.19**
Supplemental Agreement on  Related Party Transactions between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated March 31, 2006 (English translation) , incorporated by reference to Exhibit 4.19 to our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 13, 2007  (File Number: 001-15138).
   
4.20**
Memorandum on Adjustment of Rent of Land Use Rights between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated August 22, 2008 (English Translation), incorporated by reference to Exhibit 4.20 to our Annual Report on Form 20-F filed with the Securities and Exchange Commission on May 20, 2009 (File Number: 001-15138).
   
4.21*
Continuing Connected Transactions Second Supplemental Agreement between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated August 21, 2009 (English translation).
   
4.22* Memorandum on Adjustment of Rent of Land Use Rights between China Petrochemical Corporation and China Petroleum & Chemical Corporation dated August 21, 2009 (English translation).
   
8*
A list of the Registrant's subsidiaries.
   
12.1*
Certification of Chairman pursuant to Rule 13a-14(a).
   
12.2*
Certification of President pursuant to Rule 13a-14(a).
   
12.3*
Certification of CFO pursuant to Rule 13a-14(a).
   
13*
Certification of CEO and CFO pursuant to 18 U.S.C. §1350, and Rule 13a-14(b).
___________
 
*
Filed herewith.
**
Incorporated by reference.

 
88
 
 

CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


 
Page
   
Report of independent registered public accounting firm
F-2
   
Consolidated statements of income for the years ended December 31, 2007, 2008 and 2009
F-3
   
Consolidated statements of comprehensive income for the years ended December 31, 2007, 2008 and 2009
F-4
   
Consolidated balance sheets as of December 31, 2008 and 2009
F-5
   
Consolidated statements of equity for the years ended December 31, 2007, 2008 and 2009
F-6
   
Consolidated statements of cash flows for the years ended December 31, 2007, 2008 and 2009
F-9
   
Notes to consolidated financial statements
F-11
   
Supplemental information on oil and gas producing activities (unaudited)
F-67


 
F-1
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


The Board of Directors and Shareholders of
China Petroleum & Chemical Corporation:

We have audited the accompanying consolidated balance sheets of China Petroleum & Chemical Corporation and subsidiaries as of December 31, 2008 and 2009, and the related consolidated statements of income, comprehensive income, cash flows and equity for each of the years in the three-year period ended December 31, 2009. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of China Petroleum & Chemical Corporation and subsidiaries as of December 31, 2008 and 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2009, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), China Petroleum & Chemical Corporation's internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 26, 2010 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

 
/S/ KPMG
Hong Kong, China
March 26, 2010

 
F-2
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(Amounts in millions, except per share data)

         
Years ended December 31,
 
   
Note
   
2007
   
2008
   
2009
 
         
RMB
   
RMB
   
RMB
 
Operating revenues
                       
Sales of goods
          1,169,984       1,413,203       1,315,915  
Other operating revenues
    3       31,013       31,088       29,137  
              1,200,997       1,444,291       1,345,052  
                                 
Other income
    4       4,863       50,857       —  
                                 
Operating expenses
                               
Purchased crude oil, products and operating supplies and expenses
            (971,670 )     (1,286,106 )     (990,459 )
Selling, general and administrative expenses
    5       (32,811 )     (39,392 )     (40,500 )
Depreciation, depletion and amortization
            (43,648 )     (46,321 )     (50,487 )
Exploration expenses, including dry holes
            (11,105 )     (8,310 )     (10,545 )
Personnel expenses
    6       (22,829 )     (23,381 )     (28,836 )
Taxes other than income tax
    7       (34,665 )     (57,214 )     (132,884 )
Other operating expenses, net
    8       (3,636 )     (8,088 )     (6,910 )
Total operating expenses
            (1,120,364 )     (1,468,812 )     (1,260,621 )
Operating income
            85,496       26,336       84,431  
                                 
Finance costs
                               
Interest expense
    9       (7,690 )     (11,907 )     (7,382 )
Interest income
            407       446       277  
Unrealized (loss) / gain on embedded derivative component of the Convertible Bonds
    24(c)       (3,211 )     3,947       (218 )
Foreign currency exchange losses
            (311 )     (954 )     (327 )
Foreign currency exchange gains
            2,442       3,278       416  
Net finance costs
            (8,363 )     (5,190 )     (7,234 )
Investment income
            1,670       390       374  
Income from associates and jointly controlled entities
            4,044       580       2,997  
Earnings before income tax
            82,847       22,116       80,568  
Tax (expense) / benefit
    10       (24,723 )     2,840       (16,084 )
Net income
            58,124       24,956       64,484  
                                 
Attributable to:
                               
Equity shareholders of the Company
            55,914       28,525       61,760  
Non-controlling interests
            2,210       (3,569 )     2,724  
Net income                                                                      
            58,124       24,956       64,484  
                                 
Earnings per share:
                               
Basic
    12       0.64       0.33       0.71  
Diluted
    12       0.64       0.29       0.71  
                                 
Weighted average number of shares
    12       86,702       86,702       86,702  
 
See accompanying notes to consolidated financial statements.

 
F-3
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(Amounts in millions)

         
Years ended December 31,
 
   
Note
   
2007
   
2008
   
2009
 
         
RMB
   
RMB
   
RMB
 
                         
Net income
          58,124       24,956       64,484  
                               
Other comprehensive income for the year (after tax and reclassification adjustments)
    11                          
Cash flow hedges
            —       —       54  
Available-for-sale securities
            326       (232 )     (175 )
Share of other comprehensive income of associates
            2,711       (2,206 )     806  
Effect of change in tax rate
            (37 )     —       —  
Total other comprehensive income
            3,000       (2,438 )     685  
                                 
Total comprehensive income for the year
            61,124       22,518       65,169  
                                 
Attributable to:
                               
Equity shareholders of the Company
            58,752       26,205       62,482  
Non-controlling interests
            2,372       (3,687 )     2,687  
Total comprehensive income for the year
            61,124       22,518       65,169  


 
F-4
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2008 AND 2009
(Amounts in millions)
 
         
December 31,
 
 
 
Note
   
2008
   
2009
 
         
RMB
   
RMB
 
ASSETS
                 
Current assets
                 
Cash and cash equivalents
          7,008       8,750  
Time deposits with financial institutions
          752       1,236  
Trade accounts receivable, net
    13       12,990       26,592  
Bills receivable
            3,660       2,110  
Inventories
    14       95,979       141,611  
Prepaid expenses and other current assets
    15       35,225       20,981  
Income tax receivable
            9,784       —  
Total current assets
            165,398       201,280  
Non-current assets
                       
Property, plant and equipment, net
    16       411,939       465,182  
 Construction in progress
    17       122,121       119,786  
Goodwill
    18       14,237       14,072  
Interest in associates
    19       15,595       18,162  
Interest in jointly controlled entities
    20       11,781       13,928  
Investments
    21       1,483       2,174  
Deferred income tax assets
    23       13,768       13,975  
Lease prepayments
            11,165       16,238  
Long-term prepayments and other assets
    22       11,685       13,045  
Total non-current assets
            613,774       676,562  
Total asset
            779,172       877,842  
LIABILITIES AND EQUITY
                       
Current liabilities
                       
Short-term debts
    24       75,516       58,898  
Loans from Sinopec Group Company and its affiliates
    24       33,410       13,643  
Trade accounts payable
    25       56,464       97,749  
Bills payable
    25       18,753       23,111  
Accrued expenses and other payables
    26       102,497       117,272  
Income tax payable
            16       2,746  
Total current liabilities
            286,656       313,419  
Non-current liabilities
                       
Long-term debts
    24       90,254       108,828  
Loans from Sinopec Group Company and its affiliates
    24       36,890       37,000  
Deferred income tax liabilities
    23       5,235       4,979  
Provisions
    27       9,280       11,529  
Other liabilities
            2,315       3,234  
Total non-current liabilities
            143,974       165,570  
Total liabilities
            430,630       478,989  
Equity
                       
Share capital
    28       86,702       86,702  
Reserves
    29       241,187       288,959  
Total equity attributable to equity shareholders of the Company
            327,889       375,661  
Non-controlling interests
            20,653       23,192  
Total equity
            348,542       398,853  
Total liabilities and equity
            779,172       877,842  

See accompanying notes to consolidated financial statements.

 
F-5
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF EQUITY
(Amounts in millions)


   
Share
capital
   
Capital
reserve
   
Share
premium
   
Re-valuation
reserve
   
Statutory
surplus
reserve
   
Dis-
cretionary
surplus
reserve
   
Other
reserves
   
Retained
earnings
   
Total equity attributable
to equity shareholders of
the Company
   
 
Non-controlling interests
   
Total equity
 
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
 
Balance as of January 1, 2007, as previously reported
    86,702       (21,590 )     18,072       24,752       32,094       27,000       1,758       95,546       264,334       22,323       286,657  
Adjustment for the Acquisition of the Acquired Group (Note 1)
    —       —       —       —       —       —       577       —       577       —       577  
Change of accounting policy (Note 1)
    —       —       —       (24,752 )     —       —       —       24,752       —       —       —  
Balance as of January 1, 2007, as adjusted
    86,702       (21,590 )     18,072       —       32,094       27,000       2,335       120,298       264,911       22,323       287,234  
Net income
    —       —       —       —       —       —       —       55,914       55,914       2,210       58,124  
Other comprehensive income:
                                                                                       
Available-for-sale securities
    —       —       —       —       —       —       181       —       181       145       326  
Share of other comprehensive income of associates
    —       —       —       —       —       —       2,711       —       2,711       —       2,711  
Effect of change in tax rate
    —       —       —       —       —       —       (54 )     —       (54 )     17       (37 )
Total other comprehensive income
    —       —       —       —       —       —       2,838       —       2,838       162       3,000  
Total comprehensive income for the year
    —       —       —       —       —       —       2,838       55,914       58,752       2,372       61,124  
Transactions with owners, recorded directly in equity:
                                                                                       
Contributions by and distributions to owners:
                                                                                       
Final dividend for 2006
    —       —       —       —       —       —       —       (9,537 )     (9,537 )     —       (9,537 )
Interim dividend for 2007
    —       —       —       —       —       —       —       (4,335 )     (4,335 )     —       (4,335 )
Adjustment of statutory surplus reserve (Note 29 (d))
    —       —       —       —       235       —       —       (235 )     —       —       —  
Appropriation (Note 29 (d))
    —       —       —       —       5,468       —       —       (5,468 )     —       —       —  
Realization of deferred tax on lease prepayments
    —       —       —       —       —       —       (7 )     7       —       —       —  
Transfer from retained earnings to other reserves
    —       —       —       —       —       —       (770 )     770       —       —       —  
Transfer from other reserves to capital reserve
    —       (1,062 )     —       —       —       —       1,062       —       —       —       —  
Contribution from Sinopec Group Company
    —       —       —       —       —       —       574       —       574       —       574  
Consideration for the Acquisition of Refinery Plants (Note 1)
    —       —       —       —       —       —       (2,468 )     —       (2,468 )     —       (2,468 )
Contributions to subsidiaries from non-controlling interests net of distributions
    —       —       —       —       —       —       —       —       —       630       630  
Total transactions with owners:
    —       (1,062 )     —       —       5,703       —       (1,609 )     (18,798 )     (15,766 )     630       (15,136 )
Balance as of December 31, 2007
    86,702       (22,652 )     18,072       —       37,797       27,000       3,564       157,414       307,897       25,325       333,222  
 
See accompanying notes to consolidated financial statements.

 
F-6
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF EQUITY (CONTINUED)
(Amounts in millions)

 
   
Share capital
   
Capital reserve
   
Share premium
   
Statutory surplus reserve
   
Discretionary surplus reserve
   
Other reserves
   
Retained earnings
   
Total equity attributable to equity shareholders of the Company
   
Non-controlling interests
   
Total equity
 
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
 
                                                             
Balance as of January 1, 2008
    86,702       (22,652 )     18,072       37,797       27,000       3,564       157,414       307,897       25,325       333,222  
Net income
    —       —       —       —       —       —       28,525       28,525       (3,569 )     24,956  
Other comprehensive income:
                                                                               
Available-for-sale securities
    —       —       —       —       —       (114 )     —       (114 )     (118 )     (232 )
Share of other comprehensive income of associates
    —       —       —       —       —       (2,206 )     —       (2,206 )     —       (2,206 )
Total other comprehensive income
    —       —       —       —       —       (2,320 )     —       (2,320 )     (118 )     (2,438 )
Total comprehensive income for the year
    —       —       —       —       —       (2,320 )     28,525       26,205       (3,687 )     22,518  
Transactions with owners, recorded directly in equity:
                                                                               
Contributions by and distributions to owners:
                                                                               
Issuance of the Bonds with Warrants (Note 24 (d))
    —       6,879       —       —       —       —       —       6,879       —       6,879  
Final dividend for 2007
    —       —       —       —       —       —       (9,971 )     (9,971 )     —       (9,971 )
Interim dividend for 2008
    —       —       —       —       —       —       (2,601 )     (2,601 )     —       (2,601 )
Adjustment of statutory surplus reserve (Note 29 (d))
    —       —       —       1,189       —       —       (1,189 )     —       —       —  
Appropriation (Note 29 (d) and (e))
    —       —       —       4,092       20,000       —       (24,092 )     —       —       —  
Realization of deferred tax on lease prepayments
    —       —       —       —       —       (6 )     6       —       —       —  
Transfer from retained earnings to other reserves
    —       —       —       —       —       (1,244 )     1,244       —       —       —  
Distribution to Sinopec Group Company (Note 29 (b))
    —       (202 )     —       —       —       —       —       (202 )     —       (202 )
Distributions by subsidiaries to non-controlling interests net of contributions
    —       —       —       —       —       —       —       —       (368 )     (368 )
Total contributions by and distributions to owners
    —       6,677       —       5,281       20,000       (1,250 )     (36,603 )     (5,895 )     (368 )     (6,263 )
Changes in ownership interests in subsidiaries that do not result in a loss of control:
                                                                               
Acquisitions of non-controlling interests of subsidiaries
    —       (318 )     —       —       —       —       —       (318 )     (617 )     (935 )
Total transactions with owners:
    —       6,359       —       5,281       20,000       (1,250 )     (36,603 )     (6,213 )     (985 )     (7,198 )
Balance as of December 31, 2008
    86,702       (16,293 )     18,072       43,078       47,000       (6 )     149,336       327,889       20,653       348,542  

See accompanying notes to consolidated financial statements.

 
F-7
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF EQUITY (CONTINUED)
(Amounts in millions)

   
Share
capital
   
Capital
reserve
   
Share
premium
   
Statutory
surplus
reserve
   
Dis-
cretionary
surplus
reserve
   
Other
reserves
   
Retained
earnings
   
Total equity attributable
to equity shareholders of
the Company
   
 
Non-controlling interests
   
Total equity
 
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
 
Balance as of January 1, 2009
    86,702       (16,293 )     18,072       43,078       47,000       (6 )     149,336       327,889       20,653       348,542  
Net income
    —       —       —       —       —       —       61,760       61,760       2,724       64,484  
Other comprehensive income:
                                                                               
Cash flow hedges
    —       —       —       —       —       54       —       54       —       54  
Available-for-sale securities
    —       —       —       —       —       (138 )     —       (138 )     (37 )     (175 )
Share of other comprehensive income of associates
    —       —       —       —       —       806       —       806       —       806  
Total other comprehensive income
    —       —       —       —       —       722       —       722       (37 )     685  
Total comprehensive income for the year
    —       —       —       —       —       722       61,760       62,482       2,687       65,169  
Transactions with owners, recorded directly in equity:
                                                                               
Contributions by and distributions to owners:
                                                                               
Final dividend for 2008
    —       —       —       —       —       —       (7,803 )     (7,803 )     —       (7,803 )
Interim dividend for 2009
    —       —       —       —       —       —       (6,069 )     (6,069 )     —       (6,069 )
Appropriation (Note 29 (d) and (e))
    —       —       —       4,953       20,000       —       (24,953 )     —       —       —  
Realization of deferred tax on lease prepayments
    —       —       —       —       —       (8 )     8       —       —       —  
Transfer from other reserves to capital reserve
    —       (1,551 )     —       —       —       1,551       —       —       —       —  
Consideration for the Acquisition of the Acquired Group (Note 1)
    —       —       —       —       —       (771 )     —       (771 )     —       (771 )
Distribution to Sinopec Group Company
    —       (49 )     —       —       —       —       —       (49 )     —       (49 )
Distributions by subsidiaries to non-controlling interests net of contributions
    —       —       —       —       —       —       —       —       (144 )     (144 )
Total contributions by and distributions to owners
    —       (1,600 )     —       4,953       20,000       772       (38,817 )     (14,692 )     (144 )     (14,836 )
Changes in ownership interests in subsidiaries that do not result in a loss of control:
                                                                               
Acquisitions of non-controlling interests of subsidiaries
    —       (18 )     —       —       —       —       —       (18 )     (4 )     (22 )
Total transactions with owners
    —       (1,618 )     —       4,953       20,000       772       (38,817 )     (14,710 )     (148 )     (14,858 )
Balance as of December 31, 2009
    86,702       (17,911 )     18,072       48,031       67,000       1,488       172,279       375,661       23,192       398,853  
 
See accompanying notes to consolidated financial statements.

 
F-8
 
 CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(Amounts in millions)


 
   
Years ended December 31,
 
 
Note
 
2007
   
2008
   
2009
 
     
RMB
   
RMB
   
RMB
 
                     
Net cash generated from operating activities
(a)
    118,612       66,517       152,075  
Investing activities
                         
 Capital expenditure
      (101,113 )     (100,544 )     (104,761 )
Exploratory wells expenditure
      (9,913 )     (8,380 )     (8,708 )
Purchase of investments, investments in associates and investments in jointly controlled entities
      (1,581 )     (3,089 )     (3,240 )
Purchase of subsidiaries, net of cash acquired
      (3,968 )     —       —  
Proceeds from disposal of investments and investments in associates
      1,441       1,366       504  
Proceeds from disposal of property, plant and equipment
      413       265       594  
Purchase of time deposits with financial institutions
      (3,373 )     (1,442 )     (2,304 )
Proceeds from maturity of time deposits with financial institutions
      3,340       1,358       1,820  
Payments for derivative financial instruments
      —       (5,490 )     (3,197 )
Proceeds from derivative financial instruments
      —       5,921       3,253  
Net cash used in investing activities
      (114,754 )     (110,035 )     (116,039 )
Financing activities
                         
Proceeds of issuance of corporate bonds
      35,000       15,000       61,000  
Proceeds of issuance of convertible bonds, net of issuance costs
      11,368       29,850       —  
Proceeds from bank and other loans
      779,252       1,182,908       779,987  
Repayments of corporate bonds
      (12,000 )     (10,000 )     (15,000 )
Repayments of bank and other loans
      (798,398 )     (1,159,321 )     (845,103 )
Distributions by subsidiaries to non-controlling interests
      (593 )     (1,404 )     (858 )
Contributions from non-controlling interests
      1,223       1,137       714  
Acquisitions of non-controlling interests of subsidiaries
      —       (598 )     (213 )
 Dividend paid
      (13,872 )     (12,572 )     (13,559 )
Distributions to Sinopec Group Company
      (5,176 )     (2,180 )     (1,262 )
Net cash (used in) / generated from financing activities
      (3,196 )     42,820       (34,294 )
Net increase / (decrease) in cash and cash equivalents
      662       (698 )     1,742  
Cash and cash equivalents as of January 1
      7,187       7,785       7,008  
Effect of foreign currency exchange rate changes
      (64 )     (79 )     —  
Cash and cash equivalents as of December 31
      7,785       7,008       8,750  
 
See accompanying notes to consolidated financial statements.

 
F-9
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(Amounts in millions)


(a) 
Reconciliation of earnings before income tax to net cash generated from operating activities

   
Years ended December 31,
 
   
2007
   
2008
   
2009
 
   
RMB
   
RMB
   
RMB
 
Operating activities
                 
Earnings before income tax
    82,847       22,116       80,568  
Adjustment for:
                       
Depreciation, depletion and amortization
    43,648       46,321       50,487  
Dry hole costs
    6,060       4,236       4,761  
Income from associates and jointly controlled entities
    (4,044 )     (580 )     (2,997 )
Investment income
    (1,670 )     (390 )     (374 )
Interest income
    (407 )     (446 )     (277 )
Interest expense
    7,690       11,907       7,382  
Unrealized gain on foreign currency exchange rate changes and derivative financial instruments
    (1,575 )     (2,394 )     (86 )
Loss / (gain) on disposal of property, plant and equipment, net
    585       (231 )     (211 )
Impairment losses on long-lived assets
    3,106       8,500       7,285  
Gain on non-monetary contribution to a jointly controlled entity
    (1,315 )     —       —  
Unrealized loss / (gain) on embedded derivative component of the Convertible Bonds
    3,211       (3,947 )     218  
      138,136       85,092       146,756  
(Increase) / decrease in trade accounts receivable
    (6,557 )     10,818       (13,467 )
(Increase) / decrease in bills receivable
    (4,191 )     9,273       1,568  
(Increase) / decrease in inventories
    (20,387 )     20,996       (45,508 )
(Increase) / decrease in prepaid expenses and other current assets
    (2,724 )     (10,790 )     13,963  
Increase in lease prepayments
    (4,220 )     (2,600 )     (5,073 )
Decrease in long-term prepayments and other assets
    3,261       1,930       4,378  
Increase / (decrease) in trade accounts payable
    39,004       (37,400 )     41,249  
(Decrease) / increase in bills payable
    (9,750 )     6,323       4,353  
Increase in accrued expenses and other payables
    18,202       11,035       13,605  
(Decrease) / increase in other liabilities
    (215 )     444       503  
      150,559       95,121       162,327  
Interest received
    406       447       277  
Interest paid
    (7,347 )     (11,660 )     (7,635 )
Investment and dividend income received
    2,670       3,682       1,133  
Income tax paid
    (27,676 )     (21,073 )     (4,027 )
Net cash generated from operating activities
    118,612       66,517       152,075  
 
See accompanying notes to consolidated financial statements.
 
 
F-10
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data and except otherwise stated)
 
 
1          PRINCIPAL ACTIVITIES, ORGANIZATION AND BASIS OF PRESENTATION

Principal activities

  China Petroleum & Chemical Corporation (the “Company”) is an energy and chemical company that, through its subsidiaries (hereinafter collectively referred to as the “Group”), engages in oil and gas and chemical operations in the People’s Republic of China (the “PRC”). Oil and gas operations consist of exploring for, developing and producing crude oil and natural gas; transporting crude oil and natural gas by pipelines; refining crude oil into finished petroleum products; and marketing crude oil, natural gas and refined petroleum products. Chemical operations include the manufacture and marketing of a wide range of chemicals for industrial uses.

Organization

  The Company was established in the PRC on February 25, 2000 as a joint stock limited company as part of the reorganization (the “Reorganization”) of China Petrochemical Corporation (“Sinopec Group Company”), the ultimate holding company of the Group and a ministry-level enterprise under the direct supervision of the State Council of the PRC. Prior to the incorporation of the Company, the oil and gas and chemical operations of the Group were carried on by oil administration bureau, petrochemical and refining production enterprises and sales and marketing companies of Sinopec Group Company.

  As part of the Reorganization, certain of Sinopec Group Company’s core oil and gas and chemical operations and businesses together with the related assets and liabilities were transferred to the Company. On February 25, 2000, in consideration for Sinopec Group Company transferring such oil and gas and chemical operations and businesses and the related assets and liabilities to the Company, the Company issued 68.8 billion domestic state-owned ordinary shares with a par value of RMB 1.00 each to Sinopec Group Company. The shares issued to Sinopec Group Company on February 25, 2000 represented the entire registered and issued share capital of the Company as of that date. The oil and gas and chemical operations and businesses transferred to the Company related to (i) the exploration, development and production of crude oil and natural gas, (ii) the refining, transportation, storage and marketing of crude oil and petroleum products, and (iii) the production and sale of chemicals.

Basis of preparation
 
  Pursuant to the resolution passed at the Directors’ meeting on December 28, 2007, the Group acquired the controlling equity interests of Zhanjiang Dongxing Petrochemical Company Limited, Sinopec Hangzhou Oil Refinery Plant, Yangzhou Petrochemical Plant, Jiangsu Taizhou Petrochemical Plant and Sinopec Qingjiang Petrochemical Company Limited (collectively “Refinery Plants”) from Sinopec Group Company (hereinafter referred to as the “Acquisition of Refinery Plants”). In accordance with the acquisition agreement with Sinopec Group Company, the Group paid a cash consideration of RMB 2,468 to Sinopec Group Company during the year ended December 31, 2007, which is subject to further adjustment, if any, made by State-owned Assets Supervision and Administration Commission of the State Council (“SASAC”). During the year ended December 31, 2008, the consideration was adjusted by SASAC and the Group paid an additional cash consideration of RMB 96 to Sinopec Group Company.

  Pursuant to the resolution passed at the Directors’ meeting on March 27, 2009, the Group acquired the entire equity interests of Sinopec Qingdao Petrochemical Company Limited and certain storage and distribution operations (collectively “the Acquired Group”) from Sinopec Group Company for total cash considerations of RMB 771 (hereinafter referred to as the “Acquisition of the Acquired Group”).

 As the Group, Refinery Plants and the Acquired Group are under the common control of Sinopec Group Company, the Acquisition of Refinery Plants and the Acquisition of the Acquired Group have been reflected in the accompanying consolidated financial statements as combination of entities under common control in a manner similar to a pooling-of-interests. Accordingly, the assets and liabilities of Refinery Plants and the Acquired Group have been accounted for at historical cost and the consolidated financial statements of the Company prior to these acquisitions have been restated to include the results of operations and the assets and liabilities of Refinery Plants and the Acquired Group on a combined basis. The differences between the total considerations paid over the amounts of the net assets of Refinery Plants and the Acquired Group were accounted for as equity transactions.

  The financial condition and the results of operation previously reported by the Group as of and for the years ended December 31, 2007 and 2008 have been restated to include the results of operations and the assets and liabilities of the Acquired Group on a combined basis as set out below.

 
F-11
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


   
The Group,
as previously reported
   
The
Acquired Group
   
Elimination*
   
 
The Group,
as restated
 
   
RMB
   
RMB
   
RMB
   
RMB
 
2007
                       
Results of operation:
                       
Operating revenues
    1,204,843       10,304       (14,150 )     1,200,997  
Net income/(loss) attributable to the equity shareholders of the Company
    56,533       (619 )     —       55,914  
Basic and diluted earnings per share
    0.65       —       —       0.64  
                                 
2008
                               
Results of operation:
                               
Operating revenues
    1,452,101       11,781       (19,591 )     1,444,291  
Net income/(loss) attributable to the equity shareholders of the Company
    29,769       (1,244 )     —       28,525  
Basic earnings per share
    0.34       —       —       0.33  
Diluted earnings per share
    0.30       —       —       0.29  
                                 
Financial condition:
                               
Current assets
    164,311       1,549       (462 )     165,398  
Total assets
    767,827       11,807       (462 )     779,172  
Current liabilities
    274,537       12,581       (462 )     286,656  
Total liabilities
    418,505       12,587       (462 )     430,630  
Total equity attributable to equity shareholders of the Company
    328,669       (780 )     —       327,889  

*
The Acquired Group sold its petroleum products primarily to the Group as well as purchasing crude oil primarily from the Group. These transactions between the Group and the Acquired Group have been eliminated on combination, resulting in a reduction in the operating revenue.  All other significant balances and transactions between the Group and the Acquired Group have been eliminated on combination.

  The accompanying financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). IFRS includes International Accounting Standards (“IAS”) and related interpretations. A summary of the significant accounting policies adopted by the Group are set out in Note 2.
 
  The IASB has issued certain new and revised IFRS that are first effective for the current accounting period of the Group. The new accounting policies and new disclosures resulting from the initial application of these standards or developments to the extent that they are relevant to the Group are summarized as follows:

(i)
As a result of the adoption of revised IAS 1 “Presentation of Financial Statements” (“revised IAS 1”), details of changes in equity during the year arising from transactions with equity shareholders in their capacity as such have been presented separately from all other income and expenses in a revised consolidated statement of equity. All other items of income and expense are presented in the consolidated statements of income, if they are recognized as part of profit or loss for the year, or otherwise in a new primary statement, the consolidated statements of comprehensive income. Corresponding amounts have been restated to conform to the new presentation.

 
F-12
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)

(ii)
IFRS 8, Operating segments (“IFRS 8”), requires segment disclosure to be based on the way that the Group’s chief operating decision maker manages the Group, with the amounts reported for each reportable segment being the measures reported to the Group’s chief operating decision maker for the purposes of allocating resources to, and assessing the performance of the Group’s various lines of business. The adoption of IFRS 8 has not resulted in any significant changes to the presentation of segment information since the identification and presentation of reportable segments in prior periods were consistent with IFRS 8.
   
(iii)
As a result of the adoption of the amendments to IFRS 7, the financial statements include expanded disclosures in Note 35 about the fair value measurement of the Group’s financial instruments, categorizing these fair value measurements into a three-level fair value hierarchy according to the extent to which they are based on observable market data. The Group has taken advantage of the transitional provisions set out in the amendments to IFRS 7, under which comparative information for the newly required disclosures about the fair value measurements of financial instruments has not been provided.
 
  The adoption of revised IAS 1, IFRS 8 and the amendments to IFRS 7 did not have any impact on the classification, recognition and measurement of the amounts recognized in the financial statements.
 
  The Group has not adopted any other new standard or interpretation that is not yet effective for the current accounting period (Note 37).
 
  In prior years, property, plant and equipment were carried at revalued amount, being the fair value at the date of the revaluation less any subsequent accumulated depreciation and impairment losses. In 2009, property, plant and equipment are accounted for using the cost model, being the cost less any accumulated depreciation and impairment losses. This change is to align the Group’s accounting policy with industry peers to provide more relevant financial information to the users of the Group’s financial statements. This change has been applied retrospectively.  Other than the elimination of the revaluation reserve by transferring the balance to retained earnings, this change in accounting policy has no effect on the financial condition as of December 31, 2007, 2008 and 2009, and the results of operation for the years then ended. Therefore, no comparative balance sheet as of January 1, 2008 was presented.
 
  The accompanying financial statements are prepared on the historical cost basis except for the remeasurement of available-for-sale securities (Note 2(k)), derivative financial instruments (Note 2(l) and (m)) and derivative component of the convertible bonds (Note 2(q)) to their fair values.

  The preparation of the financial statements in accordance with IFRS requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

  The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.
 
  Key assumptions and estimation made by management in the application of IFRS that have significant effect on the financial statements and the major sources of estimation uncertainty are disclosed in Note 36.

 
F-13
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


2         SIGNIFICANT ACCOUNTING POLICIES

(a)      Basis of consolidation

The consolidated financial statements comprise the Company and its subsidiaries, and the Group’s interest in associates and jointly controlled entities.

 
(i)      Subsidiaries and non-controlling interests

 Subsidiaries are those entities controlled by the Group. Control exists when the Group has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

 The financial statements of subsidiaries are included in the consolidated financial statements from the date that control effectively commences until the date that control effectively ceases.

 Non-controlling interests at the balance sheet date, being the portion of the net assets of subsidiaries attributable to equity interests that are not owned by the Company, whether directly or indirectly through subsidiaries, are presented in the consolidated balance sheet and consolidated statements of equity within equity, separately from equity attributable to the equity shareholders of the Company. Non-controlling interests in the results of the Group are presented on the face of the consolidated statements of income and consolidated statements of comprehensive income as an allocation of the total net income or loss and total comprehensive income for the year between non-controlling interests and the equity shareholders of the Company.

 The particulars of the Group’s principal subsidiaries are set out in Note 34.

(ii)     Associates and jointly controlled entities

 An associate is an entity, not being a subsidiary, in which the Group exercises significant influence over its management. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.

 A jointly controlled entity is an entity which operates under a contractual arrangement between the Group and other parties, where the contractual arrangement establishes that the Group and one or more of the other parties share joint control over the economic activity of the entity.

Investments in associates and jointly controlled entities are accounted for in the consolidated financial statements using the equity method from the date that significant influence or joint control commences until the date that significant influence or joint control ceases. Under the equity method, the investment is initially recorded at cost and adjusted thereafter for the post acquisition change in the Group’s share of the investee’s net assets and any impairment loss relating to the investment (Note 2(j) and (n)).

 The Group’s share of the post-acquisition, post-tax results of the investees and any impairment losses for the year are recognized in the consolidated statements of income, whereas the Group’s share of the post-acquisition post-tax items of the investees’ other comprehensive income is recognized in the consolidated statements of comprehensive income.

(iii)     Transactions eliminated on consolidation

Inter-company balances and transactions and any unrealized gains arising from inter-company transactions are eliminated on consolidation.  Unrealized gains arising from transactions with associates and jointly controlled entities are eliminated to the extent of the Group’s interest in the entity.  Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment.


 
F-14
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


(b)       Translation of foreign currencies

  The presentation currency of the Group is Renminbi. Foreign currency transactions during the year are translated into Renminbi at the applicable rates of exchange quoted by the People’s Bank of China (‘‘PBOC’’) prevailing on the transaction dates. Foreign currency monetary assets and liabilities are translated into Renminbi at the PBOC’s rates at the balance sheet date.

  Exchange differences, other than those capitalized as construction in progress, are recognized as income or expenses in the “finance costs” section of the consolidated statements of income.

(c)       Cash and cash equivalents

  Cash equivalents consist of time deposits with financial institutions with an initial term of less than three months when purchased. Cash equivalents are stated at cost, which approximates fair value.

(d)      Trade, bills and other receivables

Trade, bills and other receivables are initially recognized at fair value and thereafter stated at amortized cost less impairment losses for bad and doubtful debts (Note 2(n)). Trade, bills and other receivables are derecognized if the Group’s contractual rights to the cash flows from these financial assets expire or if the Group transfers these financial assets to another party without retaining control or substantially all risks and rewards of the assets.

(e)      Inventories

  Inventories, other than spare parts and consumables, are stated at the lower of cost and net realizable value. Cost includes the cost of purchase computed using the weighted average method and, in the case of work in progress and finished goods, direct labor and an appropriate proportion of production overheads. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale.

  Spare parts and consumables are stated at cost less any provision for obsolescence.

(f)       Property, plant and equipment

  An item of property, plant and equipment is recorded at cost, less accumulated depreciation and impairment losses (Note 2(n)). The cost of an asset comprises its purchase price, any directly attributable costs of bringing the asset to working condition and location for its intended use. The Group recognizes in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred, it is probable that the future economic benefits embodied with the item will flow to the Group and the cost of the item can be measured reliably. All other expenditure is recognized as an expense in the consolidated statements of income in the year in which it is incurred.

Gains or losses arising from the retirement or disposal of an item of property, plant and equipment, other than oil and gas properties, are determined as the difference between the net disposal proceeds and the carrying amount of the item and are recognized as income or expense in the consolidated statements of income on the date of retirement or disposal.

Depreciation is provided to write off the cost amount of items of property, plant and equipment, other than oil and gas properties, over its estimated useful life on a straight-line basis, after taking into account its estimated residual value, as follows:

Buildings
15 to 45 years
Plant, machinery, equipment, and others
4 to 18 years
Oil depots, storage tanks and service stations
8 to 25 years

  Where parts of an item of property, plant and equipment have different useful lives, the cost of the item is allocated on a reasonable basis between the parts and each part is depreciated separately. Both the useful life of an asset and its residual value, if any, are reassessed annually.


 
F-15
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


(g)      Oil and gas properties

  The Group uses the successful efforts method of accounting for its oil and gas producing activities. Under this method, costs of development wells and the related support equipment are capitalized. The cost of exploratory wells is initially capitalized as construction in progress pending determination of whether the well has found proved reserves. The impairment of exploratory well costs occurs upon the determination that the well has not found proved reserves. Exploratory wells that find oil and gas reserves in any area requiring major capital expenditure are expensed unless the well has found a sufficient quantity of reserves to justify its completion as a producing well if the required capital expenditure is made, and drilling of the additional exploratory wells is under way or firmly planned for the near future. However, in the absence of a determination of the discovery of proved reserves, exploratory well costs are not carried as an asset for more than one year following completion of drilling. If, after one year has passed, a determination of the discovery of proved reserves cannot be made, the exploratory well costs are impaired and charged to expense. All other exploration costs, including geological and geophysical costs, other dry hole costs and annual lease rentals, are expensed as incurred. Capitalized costs relating to proved properties are amortized at the field level on a unit-of-production method. The amortization rates are determined based on oil and gas reserves estimated to be recoverable from existing facilities over the shorter of the economic lives of crude oil and natural gas reservoirs and the terms of the relevant production licenses.

  Gains and losses on the disposal of proved oil and gas properties are not recognized unless the disposal encompasses an entire property. The proceeds on such disposals are credited to the carrying amounts of oil and gas properties.

  Management estimates future dismantlement costs for oil and gas properties with reference to engineering estimates after taking into consideration the anticipated method of dismantlement required in accordance with the industry practices. These estimated future dismantlement costs are discounted at a credit-adjusted risk-free rate and are capitalized as oil and gas properties, which are subsequently amortized as part of the costs of the oil and gas properties.

(h)      Lease prepayments

Lease prepayments represent land use rights paid to the relevant government authorities. Land use rights are carried at cost less the accumulated amount charged to expense and impairment losses (Note 2(n)). The cost of lease prepayments is charged to expense on a straight-line basis over the respective periods of the rights.

(i)
Construction in progress

Construction in progress represents buildings, oil and gas properties, various plant and equipment under construction and pending installation, and is stated at cost less impairment losses (Note 2(n)). Cost comprises direct costs of construction as well as interest charges, and foreign exchange differences on related borrowed funds to the extent that they are regarded as an adjustment to interest charges, during the periods of construction.

Construction in progress is transferred to property, plant and equipment when the asset is substantially ready for its intended use.

No depreciation is provided in respect of construction in progress.

(j)
Goodwill

Goodwill represents amounts arising on acquisition of subsidiaries, associates or jointly controlled entities.  Goodwill represents the difference between the cost of acquisition and the fair value of the net identifiable assets acquired.

Prior to January 1, 2008, the acquisition of the non-controlling interests of a consolidated subsidiary was accounted for using the acquisition method whereby the difference between the cost of acquisition and the fair value of the net identifiable assets acquired (on a proportionate share) was recognized as goodwill. From January 1, 2008, any difference between the amount by which the non-controlling interest is adjusted (such as through an acquisition of the non-controlling interests) and the cash or other considerations paid is recognized in equity.


 
F-16
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


Goodwill is stated at cost less accumulated impairment losses. Goodwill arising on a business combination is allocated to cash-generating units, or groups of cash generating units, that is expected to benefit the synergies of the combination and is tested annually for impairment (Note 2(n)). In respect of associates and jointly controlled entities, the carrying amount of goodwill is included in the carrying amount of the interest in the associates or jointly controlled entities and the investment as a whole is tested for impairment whenever there is objective evidence of impairment (Note 2(n)).

(k)
Investments

Investments in available-for-sale securities are carried at fair value with any change in fair value recognized in other comprehensive income and accumulated separately in equity in other reserves.  When these investments are derecognized or impaired, the cumulative gain or loss is reclassified from equity to the consolidated statements of income. Investments in equity securities, other than investments in associates and jointly controlled entities, that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are recognized in the balance sheet at cost less impairment losses (Note 2(n)).

(l)       Derivative financial instruments

Derivative financial instruments are recognized initially at fair value.  At each balance sheet date the fair value is remeasured. The gain or loss on re-measurement to fair value is recognized immediately in the consolidated statements of income, except where the derivatives qualify for cash flow hedge accounting or the hedge of the net investment in a foreign operation, in which case recognition of any resultant gain or loss depends on the nature of the item being hedged (Note 2(m)).

(m)     Hedging

(i)       Cash flow hedges

Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognized asset or liability or a highly probable forecast transaction or the foreign currency risk of a committed future transaction, the effective portion of any gains or losses on re-measurement of the derivative financial instrument to fair value are recognized in other comprehensive income and accumulated separately in equity in other reserves. The ineffective portion of any gain or loss is recognized immediately in the consolidated statements of income.

If a hedge of a forecast transaction subsequently results in the recognition of a non-financial asset or non-financial liability, the associated gain or loss is reclassified from equity to be included in the initial cost or other carrying amount of the non-financial asset or liability.

If a hedge of a forecast transaction subsequently results in the recognition of a financial asset or a financial liability, the associated gain or loss is reclassified from equity to the consolidated statements of income in the same period or periods during which the asset acquired or liability assumed affects the consolidated statements of income (such as when interest income or expense is recognized).

For cash flow hedges, other than those covered by the preceding two policy statements, the associated gain or loss is reclassified from equity to the consolidated statements of income in the same period or periods during which the hedged forecast transaction affects the consolidated statements of income.

When a hedging instrument expires or is sold, terminated, exercised, or the entity revokes designation of the hedge relationship but the hedged forecast transaction is still expected to occur, the cumulative gain or loss at that point remains in equity until the transaction occurs and it is recognized in accordance with the above policy. If the hedged transaction is no longer expected to take place, the cumulative unrealized gain or loss is reclassified from equity to the consolidated statements of income immediately.


 
F-17
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


(ii)      Hedge of net investments in foreign operations

The portion of the gain or loss on re-measurement to fair value of an instrument used to hedge a net investment in a foreign operation that is determined to be an effective hedge is recognized in other comprehensive income and accumulated separately in equity in the exchange reserve until the disposal of the foreign operation, at which time the cumulative gain or loss is reclassified from equity to the consolidated statements of income. The ineffective portion is recognized immediately in the consolidated statements of income.

(n)
Impairment of assets

(i)       Trade accounts receivable, other receivables and investment in equity securities that do not have an quoted market price in an active market are reviewed at each balance sheet date to determine whether there is objective evidence of impairment.  If any such evidence exists, an impairment loss is determined and recognized.

 The impairment loss is measured as the difference between the asset’s carrying amount and the estimated future cash flows, discounted at the current market rate of return for a similar financial asset where the effect of discounting is material, and is recognized as an expense in the consolidated statements of income.  Impairment losses for trade and other receivables are reversed through the consolidated statements of income if in a subsequent period the amount of the impairment losses decreases. Impairment losses for equity securities carried at cost are not reversed.

    For investments in associates and jointly controlled entities accounted under the equity method (Note 2(a)(ii)), the impairment loss is measured by comparing the recoverable amount of the investment as a whole with its carrying amount in accordance with the accounting policy set out in Note 2(n)(ii). The impairment loss is reversed if there has been a favorable change in the estimates used to determine the recoverable amount in accordance with the accounting policy set out in Note 2(n)(ii).

(ii)      Impairment of other long-lived assets is accounted for as follows:

  The carrying amounts of other long-lived assets, including property, plant and equipment, construction in progress, lease prepayments and investments in associates and jointly controlled entities, are reviewed at each balance sheet date to identify indicators that the assets may be impaired. These assets are tested for impairment whenever events or changes in circumstances indicate that their recorded carrying amounts may not be recoverable. When such a decline has occurred, the carrying amount is reduced to the recoverable amount.  For goodwill, the recoverable amount is estimated at each balance sheet date.

  The recoverable amount is the greater of the fair value less costs to sell and the value in use. In determining the value in use, expected future cash flows generated by the asset are discounted to their present value using a pre-tax discount rate that reflects current market assessments of time value of money and the risks specific to the asset. Where an asset does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that generates cash inflows independently (i.e. a cash-generating unit).

The amount of the reduction is recognized as an expense in the consolidated statements of income. Impairment losses recognized in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit and then, to reduce the carrying amount of the other assets in the unit on a pro rata basis, except that the carrying value of an asset will not be reduced below its individual fair value less costs to sell, or value in use, if determinable.

Management assesses at each balance sheet date whether there is any indication that an impairment loss recognized for a long-lived asset, except in the case of goodwill, in prior years may no longer exist. An impairment loss is reversed if there has been a favorable change in the estimates used to determine the recoverable amount. A subsequent increase in the recoverable amount of an asset, when the circumstances and events that led to the write-down or write-off cease to exist, is recognized as an income. The reversal is reduced by the amount that would have been recognized as depreciation had the write-down or write-off not occurred.  An impairment loss in respect of goodwill is not reversed.


 
F-18
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


(o)       Trade, bills and other payables

Trade, bills and other payables are initially recognized at fair value and thereafter stated at amortized cost unless the effect of discounting would be immaterial, in which case they are stated at cost.

(p)       Interest-bearing borrowings

Interest-bearing borrowings are recognized initially at fair value less attributable transaction costs.  Subsequent to initial recognition, interest-bearing borrowings are stated at amortized cost with any difference between cost and redemption value being recognized in the consolidated statements of income over the period of borrowings using the effective interest method.

(q)       Convertible bonds

(i)       Convertible bonds that contain an equity component

Convertible bonds that can be converted to equity share capital at the option of the holder, where the number of shares that would be issued on conversion and the value of the consideration that would be received at that time do not vary, are accounted for as compound financial instruments that contain both a liability component and an equity component.

At initial recognition, the liability component of the convertible bonds is measured as the present value of the future interest and principal payments, discounted at the market rate of interest applicable at the time of initial recognition to similar liabilities that do not have a conversion option. Any excess of proceeds over the amount initially recognized as the liability component is recognized as the equity component. Transaction costs that relate to the issuance of the convertible bonds are allocated to the liability and equity components in proportion to the allocation of proceeds.

The liability component is subsequently carried at amortized cost. The interest expense on the liability component is calculated using the effective interest method. The equity component is recognized in the capital reserve until the bond is converted or redeemed.

If the bond is converted, the capital reserve, together with the carrying amount of the liability component at the time of conversion, is transferred to share capital and share premium as consideration for the shares issued. If the bond is redeemed, the capital reserve is transferred to retained earnings.

(ii)       Other convertible bonds

Convertible bonds issued with a cash settlement option and other embedded derivative features are accounted for as compound financial instruments that contain a liability component and a derivative component.

At initial recognition, the derivative component of the convertible bonds is measured at fair value.  Any excess of proceeds over the amount initially recognized as the derivative component is recognized as the liability component.  Transaction costs that relate to the issuance of the convertible bonds are allocated to the liability and derivative components in proportion to the allocation of proceeds.  The portion of the transaction costs relating to the liability component is recognized initially as part of the liability.  The portion relating to the derivative component is recognized immediately as an expense in the consolidated statements of income.

The derivative component is subsequently remeasured at each balance sheet date and any gains or losses arising from change in the fair value are recognized in the consolidated statements of income. The liability component is subsequently carried at amortized cost until extinguished on conversion or redemption.  The interest expense recognized in the consolidated statements of income on the liability component is calculated using the effective interest method.  Both the liability and the related derivative components are presented together for financial statements reporting purposes.

If the convertible bonds are converted, the carrying amounts of the derivative and liability components are transferred to share capital and share premium as consideration for the shares issued.  If the convertible bonds are redeemed, any difference between the amount paid and the carrying amounts of both components is recognized in the consolidated statements of income.


 
F-19
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


(r)       Provisions and contingent liability

A provision is recognized for liability of uncertain timing or amount when the Group has a legal or constructive obligation arising as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made.

When it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote.  Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.

Provisions for future dismantlement costs are initially recognized based on the present value of the future costs expected to be incurred in respect of the Group’s expected dismantlement and abandonment costs at the end of related oil and gas exploration and development activities. Any subsequent change in the present value of the estimated costs, other than the change due to passage of time which is regarded as interest cost, is reflected as an adjustment to the provision and oil and gas properties.

A provision for onerous contracts is recognized when the expected economic benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract.

(s)      Revenue recognition

  Revenues associated with the sale of crude oil, natural gas, petroleum and chemical products and ancillary materials are recorded when the customer accepts the goods and the significant risks and rewards of ownership and title have been transferred to the buyer. Revenue from the rendering of services is recognized in the consolidated statements of income upon performance of the services. No revenue is recognized if there are significant uncertainties regarding recovery of the consideration due, the possible return of goods, or when the amount of revenue and the costs incurred or to be incurred in respect of the transaction cannot be measured reliably.

  Interest income is recognized on a time apportioned basis that takes into account the effective yield on the asset.

  A government grant that becomes receivable as compensation for expenses or losses already incurred with no future related costs is recognized as income in the period in which it becomes receivable.

(t)       Borrowing costs

  Borrowing costs are expensed in the consolidated statements of income in the period in which they are incurred, except to the extent that they are capitalized as being attributable to the construction of an asset which necessarily takes a period of time to get ready for its intended use.

(u)      Repairs and maintenance expenditure

  Repairs and maintenance expenditure is expensed as incurred.

(v)       Environmental expenditures

  Environmental expenditures that relate to current ongoing operations or to conditions caused by past operations are expensed as incurred.

  Liabilities related to future remediation costs are recorded when environmental assessments and / or cleanups are probable and the costs can be reasonably estimated. As facts concerning environmental contingencies become known to the Group, the Group reassesses its position both with respect to accrued liabilities and other potential exposures.


 
F-20
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


(w)      Research and development expense

  Research and development expenditures are expensed in the period in which they are incurred.  Research and development expense amounted to RMB 3,419, RMB 3,427 and RMB 3,816 for the years ended December 31, 2007, 2008 and 2009, respectively.

(x)      Operating leases

  Operating lease payments are charged to the consolidated statements of income on a straight-line basis over the period of the respective leases.

(y)      Employee benefits

  The contributions payable under the Group’s retirement plans are recognized as an expense in the consolidated statements of income as incurred and according to the contribution determined by the plans. Further information is set out in Note 32.

  Termination benefits, such as employee reduction expenses, are recognized when, and only when, the Group demonstrably commits itself to terminate employment or to provide benefits as a result of voluntary redundancy by having a detailed formal plan which is without realistic possibility of withdrawal.

(z)      Income tax

  Income tax comprises current and deferred tax. Current tax is calculated on taxable income by applying the applicable tax rates. Deferred tax is provided using the balance sheet liability method on all temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes only to the extent that it is probable that future taxable income will be available against which the assets can be utilized. Deferred tax is calculated on the basis of the enacted tax rates or substantially enacted tax rates that are expected to apply in the period when the asset is realized or the liability is settled.  The effect on deferred tax of any changes in tax rates is charged or credited to the consolidated statements of income, except for the effect of a change in tax rate on the carrying amount of deferred tax assets and liabilities which were previously charged or credited to other comprehensive income or directly in equity.

  The tax value of losses expected to be available for utilization against future taxable income is set off against the deferred tax liability within the same legal tax unit and jurisdiction to the extent appropriate, and is not available for set off against the taxable profit of another legal tax unit. The carrying amount of a deferred tax asset is reviewed at each balance sheet date and is reduced to the extent that it is no longer probable that the related tax benefit will be realized.

(aa)     Dividends

Dividends are recognized as a liability in the period in which they are declared.

(bb)    Segment reporting

  Operating segments, and the amounts of each segment item reported in the financial statements, are identified from the financial information provided regularly to the Group’s chief operating decision maker for the purposes of allocating resources to, and assessing the performance of the Group’s various lines of business.


 
F-21
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


3.       OTHER OPERATING REVENUES

   
Years ended December 31,
 
 
 
2007
   
2008
   
2009
 
   
RMB
   
RMB
   
RMB
 
Sale of materials, service and others
    30,643       30,597       28,749  
Rental income
    370       491       388  
      31,013       31,088       29,137  

4.       OTHER INCOME

  During the years ended December 31, 2007 and 2008, the Group recognized grant income of RMB 4,863 and RMB 50,857, respectively. These government grants were for compensation of losses incurred due to the distortion of the correlation of domestic refined petroleum product prices and the crude oil prices, and the measures taken by the Group to stabilize the supply in the PRC refined petroleum product market during the respective years. There were no unfulfilled conditions and other contingencies attached to the receipts of these grants. The Group did not receive such government grant during the year ended December 31, 2009.

5.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

The following items are included in selling, general and administrative expenses:

   
Years ended December 31,
 
 
 
2007
   
2008
   
2009
 
   
RMB
   
RMB
   
RMB
 
Operating lease charges
    5,897       6,986       7,555  
Impairment losses
                       
- trade accounts receivable
    295       143       70  
- other receivables
    143       85       222  

6.
PERSONNEL EXPENSES

   
Years ended December 31,
 
 
 
2007
   
2008
   
2009
 
   
RMB
   
RMB
   
RMB
 
Wages and salaries
    17,829       17,741       21,057  
Staff welfare
    886       1,277       1,345  
Contributions to retirement schemes (Note 32)
    2,817       2,873       4,647  
Social security contributions
    1,297       1,490       1,787  
      22,829       23,381       28,836  

7.
TAXES OTHER THAN INCOME TAX

   
Years ended December 31,
 
 
 
2007
   
2008
   
2009
 
   
RMB
   
RMB
   
RMB
 
Consumption tax (i)
    16,636       17,868       110,206  
Special oil income levy (ii)
    11,208       32,823       7,145  
City construction tax  (iii)
    3,691       3,363       9,212  
Education surcharge
    1,931       1,838       5,043  
Resources tax
    882       857       857  
Business tax
    317       465       421  
      34,665       57,214       132,884  

 
F-22
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


Note:

(i)
Before January 1, 2009, consumption tax is levied on gasoline, diesel, naphtha, solvent oil, lubricant oil, fuel oil and jet fuel oil at a rate of RMB 277.6 per tonne, RMB 117.6 per tonne, RMB 277.0 per tonne, RMB 256.4 per tonne, RMB 225.2 per tonne, RMB 101.5 per tonne and RMB 124.6 per tonne, respectively. Effective from January 1, 2009, the consumption tax rates of on gasoline, diesel, naphtha, solvent oil, lubricant oil, fuel oil and jet fuel oil changed to RMB 1,388.0 per tonne, RMB 940.8 per tonne, RMB 1,385.0 per tonne, RMB 1,282.0 per tonne, RMB 1,126.0 per tonne, RMB 812.0 per tonne and RMB 996.8 per tonne, respectively.
   
(ii)
Special oil income levy is levied on oil exploration and production entities based on the progressive rates ranging from 20% to 40% on the portion of the monthly weighted average sales price of the crude oil produced in the PRC exceeding USD 40 per barrel.
   
(iii)
City construction tax is levied on an entity based on its total amount of value-added tax, consumption tax and business tax.
 
8.       OTHER OPERATING EXPENSES, NET

   
Years ended December 31,
 
 
 
2007
   
2008
   
2009
 
   
RMB
   
RMB
   
RMB
 
Fines, penalties and compensations
    73       106       159  
Donations
    158       104       174  
Loss / (gain) on disposal of property, plant and equipment, net
    585       (231 )     (211 )
Impairment losses on long-lived assets (i)
    3,106       8,500       7,285  
Gain on non-monetary contribution to a jointly controlled entity (ii)
    (1,315 )     —       —  
Net realized and unrealized losses on derivative financial instruments not qualified as hedging
    —       (776 )     (82 )
Ineffective portion of change in fair value of cash flow hedges
    —       54       16  
Others
    1,029       331       (431 )
      3,636       8,088       6,910  

Note:

(i)
The factor resulting in the exploration and production (“E&P”) segment impairment losses of RMB 481 and RMB 1,595 of property, plant and equipment for the years ended December 31, 2007 and 2009, respectively, was unsuccessful development drilling and high operating and development costs for certain small oil fields. The E&P segment impairment losses of RMB 5,991 for the year ended December 31, 2008 comprised of impairment losses on RMB 4,600 of property, plant and equipment in the E&P segment (Note 16) and RMB 1,391 of goodwill in respect of Sinopec Zhongyuan (Note 18) and was primarily due to downward reserves estimation for certain oil fields resulting from lower oil and gas pricing. The carrying values of these E&P properties and associated goodwill were written down to respective recoverable amounts which were determined based on the present values of the expected future cash flows of the assets. The oil and gas pricing was a factor used in the determination of the present values of the expected future cash flows of the assets and had an impact on the recognition of the asset impairment.
 

 
F-23
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)
 

 
Impairment losses recognized for the chemicals segment were RMB 318, RMB 1,511 and RMB 3,807 for the years ended December 31, 2007, 2008 and 2009, respectively and comprised of impairment losses of RMB 318, RMB 1,511 and RMB 3,728 on property, plant and equipment for the years ended December 31, 2007, 2008 and 2009, respectively, and impairment losses of RMB 79 on other long-term assets for the year ended December 31, 2009. Impairment losses recognized for refining segment were RMB 1,070, RMB 270 and RMB 396 for the years ended December 31, 2007, 2008 and 2009, respectively, comprised of impairment losses of RMB 916, RMB 270 and RMB 377 on property, plant and equipment for the years ended December 31, 2007, 2008 and 2009, respectively, and impairment losses of RMB 154, RMB nil and RMB 19 on construction in progress for the years ended December 31, 2007, 2008 and 2009, respectively. These impairment losses relate to certain refining and chemicals production facilities that are held for use. The carrying values of these facilities were written down to their recoverable amounts that were primarily determined based on the asset held for use model using the present value of estimated future cash flows of the production facilities.  The primary factor resulting in the impairment losses on long-lived assets of the refining and chemicals segments was due to higher operating and production costs caused by the increase in the prices of raw materials that are not expected to be covered through an increase in selling price.
   
 
Impairment losses recognized on long-lived assets of the marketing and distribution segment of RMB 1,237, RMB 709 and RMB 1,479 for the years ended December 31, 2007, 2008 and 2009, respectively, and comprised of impairment losses of RMB 1,194, RMB 698 and RMB 1,425 of property, plant and equipment for the years ended December 31, 2007, 2008 and 2009, respectively, and impairment losses of RMB 43, RMB 11 and RMB 54 of construction in progress for the years ended December 31, 2007, 2008 and 2009, respectively, primarily relate to certain service stations and certain construction in progress that were closed or abandoned during respective years.  In measuring the amounts of impairment charges, the carrying amounts of these assets were compared to the present value of the expected future cash flows of the assets, as well as information about sales and purchases of similar properties in the same geographic area.
   
(ii)
During the year ended December 31, 2007, the Group contributed certain property, plant and equipment and construction in progress, respectively, in exchange for a 50% equity interest in a newly set up jointly controlled entity and recognized a gain of RMB 1,315, representing the portion of the difference between the carrying amount of these assets and their fair value attributable to the equity interests of the other venturer.  The other venturer contributed the other 50% equity interest in cash representing the fair values of the property, plant and equipment and construction in progress as determined by a valuation performed by an independent valuer.
 
9.       INTEREST EXPENSE

   
Years ended December 31,
 
 
 
2007
   
2008
   
2009
 
   
RMB
   
RMB
   
RMB
 
Interest expense incurred
    8,303       13,046       9,574  
Less: Interest expense capitalized*
    (966 )     (1,569 )     (2,621 )
      7,337       11,477       6,953  
Accretion expenses (Note 27)
    353       430       429  
Interest expense
    7,690       11,907       7,382  
* Interest rates per annum at which borrowing costs were Capitalized for construction in progress
 
3.6% to 7.1%
   
3.8% to 7.1%
   
3.0% to 6.8%
 


 
F-24
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


10.      INCOME TAX

Income tax in the consolidated statements of income represents:

   
Years ended December 31,
 
 
 
2007
   
2008
   
2009
 
   
RMB
   
RMB
   
RMB
 
Current tax
                 
- Provision for the year
    28,630       610       17,042  
- Under/(over)-provision in prior years
    249       216       (512 )
Deferred taxation (Note 23)
    (4,156 )     (3,666 )     (446 )
      24,723       (2,840 )     16,084  

  Reconciliation between actual income tax expense / (benefit) and the expected income tax at applicable statutory tax rates is as follows:

   
Years ended December 31,
 
 
 
2007
   
2008
   
2009
 
   
RMB
   
RMB
   
RMB
 
Earnings before income tax
    82,847       22,116       80,568  
Expected PRC income tax expense at statutory tax rates of 33%, 25% and 25% in 2007, 2008 and 2009, respectively
    27,340       5,529       20,142  
Tax effect of differential tax rate (i)
    (1,959 )     1,212       (1,621 )
Tax effect of non-deductible expenses
    1,413       865       326  
Tax effect of non-taxable income (iii)
    (3,767 )     (11,209 )     (1,686 )
Tax effect of utilization of previously unrecognized tax losses
    —       (401 )     (683 )
Tax effect of tax losses not recognized
    295       948       118  
Under/(over)-provision in prior years
    249       216       (512 )
Tax credit for domestic equipment purchases
    (500 )     —       —  
Effect of change in tax rate on deferred tax (ii)
    1,652       —       —  
Actual income tax expense / (benefit).
    24,723       (2,840 )     16,084  

  Substantially all earnings before income tax and related tax expense / (benefit) are from PRC sources.

Note:

(i)
During the years ended December 31, 2007, 2008 and 2009, the provision for PRC current income tax is based on statutory income tax rates of 33%, 25% and 25%, respectively, of the assessable income of the Group as determined in accordance with the relevant income tax rules and regulations of the PRC, except for certain entities of the Group, which are taxed at preferential rates ranging from 15% to 20%.
   
(ii)
On March 16, 2007, the Fifth Plenary Session of the Tenth National People’s Congress passed the Corporate Income Tax Law of the People’s Republic of China (“new tax law”), which took effect on January 1, 2008. According to the new tax law, a unified corporate income tax rate of 25% is applied to PRC entities; however certain entities previously taxed at a preferential rate are subject to a transition period during which their tax rate will gradually be increased to the unified rate of 25% over a five-year period starting from January 1, 2008.
   
 
Based on the new tax law, the income tax rate applicable to the Group, except for certain entities of the Group, is reduced from 33% to 25% from January 1, 2008. Based on a tax notice issued by the State Council on December 26, 2007, the applicable tax rates for entities operating in special economic zones, which were previously taxed at the preferential rate of 15%, are 18%, 20%, 22%, 24% and 25% in 2008, 2009, 2010, 2011 and 2012 onward, respectively. According to the same notice, the applicable tax rate for entities operating in the western region of the PRC which were granted a preferential tax rate of 15% from 2004 to 2010, remains at 15% in 2008, 2009 and 2010 and will be increased to 25% from January 1, 2011.
   
(iii)
The tax effect of non-taxable income for the year ended December 31, 2008 primarily related to the grant income.



 
F-25
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


11       OTHER COMPREHENSIVE INCOME

  (a)      Tax effects relating to each component of other comprehensive income

   
Years ended December 31,
 
   
2007
   
2008
   
2009
 
   
Before-tax amount
   
Tax expense
   
Net-of-tax amount
   
Before-tax amount
   
Tax benefit
   
Net-of-tax amount
   
Before-tax amount
   
Tax (expense)/benefit
   
Net-of-tax amount
 
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
 
                                                       
Cash flow hedges
    —       —       —       —       —       —       65       (11 )     54  
Available-for-sale securities
    438       (112 )     326       (296 )     64       (232 )     (227 )     52       (175 )
Share of other comprehensive income of associates
    2,711       —       2,711       (2,206 )     —       (2,206 )     806       —       806  
Effect of change in tax rate
    —       (37 )     (37 )     —       —       —       —       —       —  
Other comprehensive income
    3,149       (149 )     3,000       (2,502 )     64       (2,438 )     644       41       685  

  (b)      Reclassification adjustments relating to components of other comprehensive income

   
Years ended December 31,
 
   
2007
   
2008
   
2009
 
   
RMB
   
RMB
   
RMB
 
Cash flow hedges:
                 
Effective portion of changes in fair value of hedging instruments recognized during the year
    —       662       (2,058 )
Amounts transferred to initial carrying amount of hedged items
            —       257  
Reclassification adjustments for amounts transferred to the cost of inventories for the year
    —       (662 )     1,866  
Net deferred tax expense recognized in other comprehensive income
    —       —       (11 )
Net movement during the year recognized in other comprehensive income
    —       —       54  
                         
Available-for-sale securities:
                       
Changes in fair value recognized during the year
    1,209       (132 )     (1 )
Gain on disposal transferred to the consolidated statements of income
    (771 )     (164 )     (226 )
Net deferred tax (expense)/benefit recognized in other comprehensive income
    (112 )     64       52  
Net movement during the year recognized in other comprehensive income
    326       (232 )     (175 )
                         
Share of other comprehensive income of associates:
                       
Net movement during the year recognized in other comprehensive income
    2,711       (2,206 )     806  
                         
Effect of change in tax rate:
                       
Net movement during the year recognized in other comprehensive income (Note)
    (37 )     —       —  

Note:
 The amount recognized in other comprehensive income represents the effect of change in tax rate on deferred tax assets previously recognized directly in equity as a result of the new tax law.


 
F-26
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


12.      BASIC AND DILUTED EARNINGS PER SHARE

The calculation of basic and diluted earnings per share is based on the net income attributable to ordinary equity shareholders of the Company of RMB 55,914 and the weighted average number of shares of 86,702,439,000 for the year ended December 31, 2007. For the year ended December 31, 2007, diluted earnings per share was calculated on the same basis as basic earnings per share, since the effect of the Convertible Bonds (Note 24(c)) was anti-dilutive for that year.

The calculation of basic earnings per share is based on the net income attributable to ordinary equity shareholders of the Company of RMB 28,525 and RMB 61,760 for the years ended December 31, 2008 and 2009, respectively, and the weighted average number of the shares of 86,702,439,000 for each of the years ended December 31, 2008 and 2009. The calculation of diluted earnings per share for the years ended December 31, 2008 and 2009 is based on the net income attributable to ordinary equity shareholders of the Company of RMB 25,348 and RMB 62,136, respectively, and the weighted average number of the shares of 87,789,799,595 for each of the years ended December 31, 2008 and 2009 calculated as follows:

(i)        Net income attributable to ordinary equity shareholders of the Company (diluted)

   
2008
   
2009
 
   
RMB
   
RMB
 
Net income attributable to ordinary equity shareholders of the Company
    28,525       61,760  
After tax effect of interest expense (net of exchange gain) of the Convertible Bonds
    (217 )     212  
After tax effect of unrealized (gain)/loss on embedded derivative component of the Convertible Bonds
    (2,960 )     164  
Net income attributable to ordinary equity shareholders of the Company (diluted)
    25,348       62,136  

(ii)       Weighted average number of shares (diluted)

   
2008
   
2009
 
   
Number of
   
Number of
 
   
shares
   
shares
 
Weighted average number of shares as of December 31
    86,702,439,000       86,702,439,000  
Effect of conversion of the Convertible Bonds
    1,087,360,595       1,087,360,595  
Weighted average number of shares (diluted) as of December 31
    87,789,799,595       87,789,799,595  

The calculation of diluted earnings per share for the years ended December 31, 2008 and 2009 excludes the effect of the Warrants (Note 24(d)), since it did not have any dilutive effect.


 
F-27
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


13.      TRADE ACCOUNTS RECEIVABLE, NET

 
 
December 31,
 
   
2008
   
2009
 
   
RMB
   
RMB
 
Amounts due from third parties
    11,318       27,481  
Amounts due from Sinopec Group Company and its affiliates
    2,670       697  
Amounts due from associates and jointly controlled entities
    1,408       335  
      15,396       28,513  
Less: Impairment losses for bad and doubtful debts
    (2,406 )     (1,921 )
Trade accounts receivable, net
    12,990       26,592  

  Impairment losses for bad and doubtful debts are analyzed as follows:

   
2007
   
2008
   
2009
 
   
RMB
   
RMB
   
RMB
 
Balance as of January 1
    3,373       2,909       2,406  
Impairment losses recognized for the year
    295       143       70  
Reversal of impairment losses
    (204 )     (254 )     (245 )
Written off
    (555 )     (392 )     (310 )
Balance as of December 31
    2,909       2,406       1,921  

  Sales are generally on a cash term. Credit is generally only available for major customers with well-established trading records. Amounts due from Sinopec Group Company and its affiliates are repayable under the same terms.

  Trade accounts receivable (net of impairment losses for bad and doubtful debts) primarily represents receivable that is neither past due nor impaired. This receivable relates to a wide range of customers for whom there is no recent history of default.


 
F-28
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)



14.      INVENTORIES

   
December 31,
 
 
 
2008
   
2009
 
   
RMB
   
RMB
 
Crude oil and other raw materials
    54,085       87,471  
Work in progress
    10,745       11,609  
Finished goods
    35,858       39,737  
Spare parts and consumables
    4,480       3,832  
      105,168       142,649  
Less: Allowance for diminution in value of inventories
    (9,189 )     (1,038 )
      95,979       141,611  

  Allowance for diminution in value of inventories is analyzed as follows:

   
2007
   
2008
   
2009
 
   
RMB
   
RMB
   
RMB
 
Balance as of January 1
    871       4,572       9,189  
Allowance for the year
    3,962       8,777       401  
Reversal of allowance on disposal
    (131 )     (64 )     (185 )
Written off
    (130 )     (4,096 )     (8,367 )
Balance as of December 31
    4,572       9,189       1,038  
 
  During the years ended December 31, 2007, 2008 and 2009, the cost of inventories recognized as an expense in the consolidated statements of income of RMB 1,009,489, RMB 1,329,637 and RMB 1,039,685, respectively, which includes the write-down of inventories, that primarily related to the refining and chemicals segment, of RMB 3,962, RMB 8,777 and RMB 401, respectively, and the reversal of write-down of inventories made in prior years of RMB 261, RMB 4,160 and RMB 8,552, respectively, that mainly was due to the sales of inventories.  The write-down of inventories and the reversal of write-down of inventories were recorded in purchased crude oil, products and operating supplies and expenses in the consolidated statements of income.

15      PREPAID EXPENSES AND OTHER CURRENT ASSETS

   
December 31,
 
 
 
2008
   
2009
 
   
RMB
   
RMB
 
Advances to third parties
    1,257       1,214  
Amounts due from Sinopec Group Company and its affiliates
    3,889       787  
Amounts due from associates and jointly controlled entities
    654       23  
Other receivables
    3,538       1,130  
Loans and receivables
    9,338       3,154  
                 
Purchase deposits and other assets
    4,104       2,320  
Prepayments in connection with construction work and equipment purchases
    3,176       1,906  
Prepaid value-added tax and customs duty
    17,740       12,577  
Available-for-sale financial assets
    —       700  
Derivative financial instruments – hedging
    224       142  
Derivative financial instruments – non-hedging
    643       182  
      35,225       20,981  


 
F-29
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


16.      PROPERTY, PLANT AND EQUIPMENT

By segment:
 
 
 
Exploration
and
production
   
 
Refining
   
Marketing
and
distribution
   
 
Chemicals
   
Corporate
and
others
   
 
Total
 
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
 
Cost:
                                   
Balance as of January 1, 2008
    284,183       159,959       97,704       181,124       6,198       729,168  
Additions
    1,598       536       592       688       162       3,576  
Transferred from construction in progress
    35,701       23,444       10,994       4,683       2,605       77,427  
Acquisitions (ii)
    17,943       —       —       —       —       17,943  
Reclassification
    (105 )     (3,603 )     (250 )     3,952       6       —  
Reclassification to lease prepayments and other assets
    —       (247 )     (314 )     (41 )     (202 )     (804 )
Disposals
    (198 )     (538 )     (1,069 )     (928 )     (28 )     (2,761 )
Balance as of December 31, 2008
    339,122       179,551       107,657       189,478       8,741       824,549  
                                                 
Balance as of January 1, 2009
    339,122       179,551       107,657       189,478       8,741       824,549  
Additions
    2,141       178       693       754       20       3,786  
Transferred from construction in progress
    61,111       18,291       9,690       15,146       1,170       105,408  
Acquisitions (ii)
    60       999       —       —       1,722       2,781  
Reclassification
    —       6,008       214       (6,089 )     (133 )     —  
Reclassification to lease prepayments and other assets
    —       —       (663 )     —       (20 )     (683 )
Disposals
    (606 )     (1,812 )     (1,511 )     (4,333 )     (192 )     (8,454 )
Balance as of December 31, 2009
    401,828       203,215       116,080       194,956       11,308       927,387  
                                                 
Accumulated depreciation:
                                               
Balance as of January 1, 2008
    130,683       76,073       24,009       112,782       2,378       345,925  
Depreciation charge for the year
    22,040       9,576       4,934       8,234       716       45,500  
Acquisitions (ii)
    16,401       —       —       —       —       16,401  
Impairment losses for the year (Note 8 (i))
    4,600       270       698       1,511       19       7,098  
Reclassification
    (194 )     (499 )     13       686       (6 )     —  
Reclassification to lease prepayments and other assets
    —       —       (73 )     (1 )     (16 )     (90 )
Written back on disposals
    (182 )     (444 )     (766 )     (809 )     (23 )     (2,224 )
Balance as of December 31, 2008
    173,348       84,976       28,815       122,403       3,068       412,610  
                                                 
Balance as of January 1, 2009
    173,348       84,976       28,815       122,403       3,068       412,610  
Depreciation charge for the year
    24,546       10,212       5,578       8,313       866       49,515  
Acquisitions (ii)
    —       591       —       —       159       750  
Impairment losses for the year (Note 8 (i))
    1,595       377       1,425       3,728       8       7,133  
Reclassification
    —       (44 )     91       2       (49 )     —  
Reclassification to lease prepayments and other assets
    —       —       (83 )     —       (2 )     (85 )
Written back on disposals
    (590 )     (1,693 )     (1,346 )     (3,906 )     (183 )     (7,718 )
Balance as of December 31, 2009
    198,899       94,419       34,480       130,540       3,867       462,205  
                                                 
Net book value:
                                               
Balance as of January 1, 2008
    153,500       83,886       73,695       68,342       3,820       383,243  
Balance as of December 31, 2008
    165,774       94,575       78,842       67,075       5,673       411,939  
Balance as of December 31, 2009
    202,929       108,796       81,600       64,416       7,441       465,182  

 
F-30
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


By asset class:
 
 
 
 
Buildings
   
 
Oil and
gas
properties
   
Oil depots,
storage tanks
and service
stations
   
Plant,
machinery,
equipment
and others
   
 
 
Total
 
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
 
Cost:
                             
Balance as of January 1, 2008
    46,641       259,373       103,845       319,309       729,168  
Additions
    206       1,482       329       1,559       3,576  
Transferred from construction in progress
    5,891       32,218       13,492       25,826       77,427  
Acquisitions (ii)
    548       —       —       17,395       17,943  
Reclassification
    49       (176 )     363       (236 )     —  
Reclassification to lease prepayments and other assets
    (543 )     —       (27 )     (234 )     (804 )
Disposals
    (231 )     —       (1,236 )     (1,294 )     (2,761 )
Balance as of December 31, 2008
    52,561       292,897       116,766       362,325       824,549  
                                         
Balance as of January 1, 2009
    52,561       292,897       116,766       362,325       824,549  
Additions
    372       2,022       413       979       3,786  
Transferred from construction in progress
    6,847       38,737       23,840       35,984       105,408  
Acquisitions (ii)
    1,912       —       342       527       2,781  
Reclassification
    (63 )     —       (2,505 )     2,568       —  
Reclassification to lease prepayments and other assets
    (98 )     —       (585 )     —       (683 )
Disposals
    (389 )     —       (1,565 )     (6,500 )     (8,454 )
Balance as of December 31, 2009
    61,142       333,656       136,706       395,883       927,387  
                                         
Accumulated depreciation:
                                       
Balance as of January 1, 2008
    25,082       119,057       23,601       178,185       345,925  
Depreciation charge for the year
    2,037       20,254       5,380       17,829       45,500  
Acquisitions (ii)
    236       —       —       16,165       16,401  
Impairment losses for the year
    522       4,530       632       1,414       7,098  
Reclassification
    (124 )     (231 )     265       90       —  
Reclassification to lease prepayments and other assets
    (76 )     —       (6 )     (8 )     (90 )
Written back on disposals
    (170 )     —       (992 )     (1,062 )     (2,224 )
Balance as of December 31, 2008
    27,507       143,610       28,880       212,613       412,610  
                                         
Balance as of January 1, 2009
    27,507       143,610       28,880       212,613       412,610  
Depreciation charge for the year
    2,309       22,402       5,936       18,868       49,515  
Acquisitions (ii)
    213       —       292       245       750  
Impairment losses for the year
    579       1,553       1,076       3,925       7,133  
Reclassification
    (63 )     —       (505 )     568       —  
Reclassification to lease prepayments and other assets
    (13 )     —       (72 )     —       (85 )
Written back on disposals
    (340 )     —       (1,401 )     (5,977 )     (7,718 )
Balance as of December 31, 2009
    30,192       167,565       34,206       230,242       462,205  
                                         
Net book value:
                                       
Balance as of January 1, 2008
    21,559       140,316       80,244       141,124       383,243  
Balance as of December 31, 2008
    25,054       149,287       87,886       149,712       411,939  
Balance as of December 31, 2009
    30,950       166,091       102,500       165,641       465,182  

Notes:

(i)
The additions to the E&P segment and oil and gas properties of the Group for the years ended December 31, 2008 and 2009 included RMB 1,482 and RMB 2,013, respectively, of the estimated dismantlement costs for site restoration (Note 27).
   
(ii)
During the year ended December 31, 2008, the Group acquired certain assets and liabilities, including the oilfield downhole operation (the “Downhole Assets”) from Sinopec Group Company. During the year ended December 31, 2009, the Group acquired certain property, plant and equipment from Sinopec Group Company (Note 31).
 

 
F-31
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


17.     CONSTRUCTION IN PROGRESS

 
 
Exploration
and
production
   
 
Refining
   
Marketing
and
distribution
   
 
Chemicals
   
Corporate
and
others
   
 
Total
 
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
 
Balance as of January 1, 2008
    34,441       25,992       13,504       16,752       5,236       95,925  
Additions
    61,750       12,897       13,435       20,536       2,073       110,691  
Dry hole costs written off
    (4,236 )     —       —       —       —       (4,236 )
Transferred to property, plant and equipment
    (35,701 )     (23,444 )     (10,994 )     (4,683 )     (2,605 )     (77,427 )
Reclassification to lease prepayments and other assets
    (154 )     (200 )     (1,340 )     (108 )     (1,019 )     (2,821 )
Reclassification
    97       2,846       (292 )     (2,732 )     81       —  
Impairment losses for the year (Note 8 (i))
    —       —       (11 )     —       —       (11 )
Balance as of December 31, 2008
    56,197       18,091       14,302       29,765       3,766       122,121  
                                                 
Balance as of January 1, 2009
    56,197       18,091       14,302       29,765       3,766       122,121  
Additions
    56,162       14,600       15,547       25,083       1,379       112,771  
Dry hole costs written off
    (4,761 )     —       —       —       —       (4,761 )
Transferred to property, plant and equipment
    (61,111 )     (18,291 )     (9,690 )     (15,146 )     (1,170 )     (105,408 )
Reclassification to lease prepayments and other assets
    (190 )     (744 )     (2,773 )     (1,113 )     (44 )     (4,864 )
Impairment losses for the year (Note 8 (i))
    —       (19 )     (54 )     —       —       (73 )
Balance as of December 31, 2009
    46,297       13,637       17,332       38,589       3,931       119,786  

Net changes in capitalized cost of exploratory wells included in the Group’s construction in progress in the E&P segment are analyzed as follows:

   
2007
   
2008
   
2009
 
   
RMB
   
RMB
   
RMB
 
At beginning of year.
    4,771       6,294       7,833  
Additions, net of amount that were capitalized and subsequently expensed in the same year, pending the determination of proved reserves.
    4,874       4,613       5,008  
Transferred to oil and gas properties based on the determination of proved reserves.
    (568 )     (1,008 )     (1,072 )
Dry hole costs written off
    (2,783 )     (2,066 )     (2,946 )
At end of year.
    6,294       7,833       8,823  

Aging of capitalized exploratory well costs based on the date the drilling was completed are analyzed as follows:

   
December 31,
 
   
2007
   
2008
   
2009
 
   
RMB
   
RMB
   
RMB
 
One year or less
    5,701       7,113       7,625  
Over one year
    593       720       1,198  
      6,294       7,833       8,823  

Capitalized exploratory wells costs aged over one year are related to wells for which the drilling results are being further evaluated or the development plans are being formulated.

The geological and geophysical costs paid during the years ended December 31, 2007, 2008 and 2009 amounted to RMB 4,640, RMB 3,789 and RMB 5,437, respectively.

On January 21, 2010, the Group contributed certain construction in progress of approximately RMB 17,459 of the chemicals segment into a new jointly controlled entity.

 
F-32
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


18.      GOODWILL

 
 
2008
   
2009
 
   
RMB
   
RMB
 
Cost:
           
Balance as of January 1
    15,490       15,628  
Additions
    225       241  
Disposals
    (87 )     (406 )
Balance as of December 31
    15,628       15,463  
                 
Accumulated impairment losses:
               
Balance as of January 1
    —       (1,391 )
Impairment losses for the year
    (1,391 )     —  
Balance as of December 31
    (1,391 )     (1,391 )
                 
Net book value
               
Balance as of December 31
    14,237       14,072  
 
Impairment tests for cash-generating units containing goodwill

Goodwill is allocated to the following Group’s cash-generating units:

   
December 31,
 
 
 
2008
   
2009
 
   
RMB
   
RMB
 
Sinopec Beijing Yanshan Branch (“Sinopec Yanshan”)
    1,157       1,157  
Sinopec Zhenhai Refining and Chemical Branch (“Sinopec Zhenhai”)
    3,952       3,952  
Sinopec Qilu Branch (“Sinopec Qilu”)
    2,159       2,159  
Sinopec Yangzi Petrochemical Company Limited (“Sinopec Yangzi”)
    2,737       2,737  
Sinopec Shengli Oil Field Dynamic Company Limited (“Dynamic”)
    1,361       1,361  
Hong Kong service stations
    924       926  
Multiple units without individually significant goodwill
    1,947       1,780  
      14,237       14,072  

Goodwill represents the excess of the cost of purchase over the fair value of the underlying assets and liabilities. The recoverable amounts of Sinopec Yanshan, Sinopec Zhenhai, Sinopec Qilu, Sinopec Yangzi, Dynamic and Hong Kong service stations are determined based on value in use calculations. These calculations use cash flow projections based on financial budgets approved by management covering a one-year period and pre-tax discount rates primarily ranging from 10.0%  to 12.8% and 11.2% to 13.6% for the years ended December 31, 2008 and 2009, respectively. Cash flows beyond the one-year period are maintained constant. Management believes any reasonably possible change in the key assumptions on which these entities’ recoverable amounts are based would not cause these entities’ carrying amounts to exceed their recoverable amounts.

Key assumptions used for the value in use calculations for these entities are the gross margin and sales volume. Management determined the budgeted gross margin based on the gross margin achieved in the period immediately before the budget period and management’s expectation on the future trend of the prices of crude oil and petrochemical products. The sales volume was based on the production capacity and / or the sales volume in the period immediately before the budget period.


 
F-33
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


19.     INTEREST IN ASSOCIATES

   
December 31,
 
 
 
2008
   
2009
 
   
RMB
   
RMB
 
Share of net assets
    15,595       18,162  


  The Group’s investments in associates are with companies primarily engaged in the oil and gas, petrochemical, and marketing and distribution operations in the PRC. These investments are individually and in aggregate not material to the Group’s financial condition or results of operations for all periods presented. The principal investments in associates, all of which are incorporated in the PRC, are as follows:

Name of company
 
Form of business structure
 
Particulars of issued
and paid up capital
 
Percentage of equity held by the Company
 
Percentage of equity held by the Company’s subsidiaries
 
Principal activities
           
%
 
%
   
Sinopec Finance Company Limited
 
Incorporated
 
Registered capital
 RMB 8,000,000,000
 
49.00
 
—
 
Provision of non-banking financial services
                     
China Aviation Oil Supply Company Limited
 
Incorporated
 
Registered capital
 RMB 3,800,000,000
 
—
 
29.00
 
Marketing and distribution of refined petroleum products
                     
Shanghai Petroleum Company Limited
 
Incorporated
 
Registered capital
RMB 900,000,000
 
30.00
 
—
 
Exploration and production of crude oil and natural gas
                     
Shanghai Chemical Industry Park Development Company Limited
 
Incorporated
 
Registered capital
RMB 2,372,439,000
 
—
 
38.26
 
Planning, development and operation of the Chemical Industry Park in Shanghai, the PRC
                     
China Shipping & Sinopec Suppliers Company Limited
 
Incorporated
 
Registered capital
RMB 876,660,000
 
—
 
50.00
 
Transportation of petroleum products
 

 
F-34
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


20.      INTEREST IN JOINTLY CONTROLLED ENTITIES

   
December 31,
 
 
 
2008
   
2009
 
   
RMB
   
RMB
 
Share of net assets
    11,781       13,928  

The Group’s principal interests in jointly controlled entities are primarily engaged in the refining and chemical operations in the PRC as follows:

Name of company
 
Form of business structure
 
Particulars of issued and paid up capital
 
Percentage of equity held by the Company
 
Percentage of equity held by the Company’s subsidiaries
 
Principal activities
           
%
 
%
   
Shanghai Secco Petrochemical Company Limited
 
Incorporated
 
Registered capital
USD 901,440,964
 
30.00
 
20.00
 
Manufacturing and distribution of petrochemical products
                     
BASF-YPC Company Limited
 
Incorporated
 
Registered capital
RMB 8,793,000,000
 
30.00
 
10.00
 
Manufacturing and distribution of petrochemical products
                     
Fujian Refining and Petrochemical  Company Limited
 
Incorporated
 
Registered capital
RMB 12,806,000,000
 
—
 
50.00
 
Manufacturing and distribution of petrochemical products
 
The Group’s effective interest share of the jointly controlled entities’ results of operation, financial condition and cash flows are as follows:

   
Years ended December 31,
 
 
 
2007
   
2008
   
2009
 
   
RMB
   
RMB
   
RMB
 
Results of operation:
                 
Operating revenue
    23,085       27,417       25,141  
Expenses
    (20,378 )     (28,371 )     (23,901 )
Net income / (loss)
    2,707       (954 )     1,240  

   
December 31,
 
 
 
2008
   
2009
 
   
RMB
   
RMB
 
Financial condition:
           
Current assets
    6,691       9,857  
Non-current assets
    28,430       32,353  
Current liabilities
    (6,413 )     (9,038 )
Non-current liabilities
    (16,927 )     (19,244 )
Net assets
    11,781       13,928  

   
Years ended December 31,
 
 
 
2007
   
2008
   
2009
 
   
RMB
   
RMB
   
RMB
 
Cash flows:
                 
Net cash generated from / (used in) operating activities
    5,079       (2,046 )     345  
Net cash used in investing activities
    (13,238 )     (5,872 )     (3,905 )
Net cash generated from financing activities
    7,143       7,999       3,911  
Net (decrease) / increase in cash and cash equivalents
    (1,016 )     81       351  

 
F-35
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


21.      INVESTMENTS

   
December 31,
 
 
 
2008
   
2009
 
   
RMB
   
RMB
 
Available-for-sale financial assets
           
- Equity securities, listed and at quoted market price
    154       61  
- Investment in other available-for-sale security
    —       700  
Other investments in equity securities, unlisted and at cost
    1,562       1,610  
      1,716       2,371  
Less: Impairment losses for investments
    (233 )     (197 )
      1,483       2,174  

  Unlisted investments represent the Group’s interests in PRC privately owned enterprises which are mainly engaged in non-oil and gas activities and operations.

  The impairment losses relating to investments for the years ended December 31, 2008 and 2009 amounted to RMB 9 and RMB 5, respectively.

22.      LONG-TERM PREPAYMENTS AND OTHER ASSETS

Long-term prepayments and other assets primarily represent prepaid rental expenses over one year, computer software, catalysts and operating rights of service stations.

23.      DEFERRED TAX ASSETS AND LIABILITIES

  Deferred tax assets and deferred tax liabilities are attributable to the items detailed in the table below:

   
Assets
   
Liabilities
   
Net balance
 
   
December 31,
   
December 31,
   
December 31,
 
   
2008
   
2009
   
2008
   
2009
   
2008
   
2009
 
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
 
Current
                                   
Receivables and inventories
    4,434       3,207       —       —       4,434       3,207  
Accruals
    261       815       —       —       261       815  
Cash flow hedges
    —       7       —       (18 )     —       (11 )
Non-current
                                               
Property, plant and equipment
    3,891       5,601       (1,286 )     (1,178 )     2,605       4,423  
Accelerated depreciation
    —       —       (3,716 )     (3,682 )     (3,716 )     (3,682 )
Tax value of losses carried forward
    4,796       3,954       —       —       4,796       3,954  
Lease prepayments
    300       292       —       —       300       292  
Available-for-sale securities
    —       —       (52 )     —       (52 )     —  
Embedded derivative component of the Convertible Bonds
    —       —       (151 )     (96 )     (151 )     (96 )
Others
    86       99       (30 )     (5 )     56       94  
Deferred tax assets / (liabilities)
    13,768       13,975       (5,235 )     (4,979 )     8,533       8,996  

As of December 31, 2008 and 2009, certain subsidiaries of the Company did not recognize the tax value of losses carried forward of RMB 7,975 and RMB 5,555, respectively, of which RMB 3,762 and RMB 472 were incurred for the years ended December 31, 2008 and 2009, respectively, because it was not probable that the related tax benefit will be realized. The tax value of these losses carried forward of RMB 928, RMB 1,231, RMB 392, RMB 2,532 and RMB 472 will expire in 2010, 2011, 2012, 2013 and 2014, respectively.

Periodically, management performed assessment on the probability that taxable profit will be available over the period which the deferred tax assets can be realized or utilized. In assessing the probability, both positive and negative evidence was considered, including whether it is probable that the operations will have future taxable profits over the periods which the deferred tax assets are deductible or utilized and whether the tax losses result from identifiable causes which are unlikely to recur.

 
F-36
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


Movements in deferred tax assets and liabilities are as follows:
 
   
Balance as of
January 1,
2007
   
Recognized in
consolidated
statements of income
   
Acquisitions
of
subsidiaries
   
Recognized in
other comprehensive
income
   
Balance as of
December 31,
2007
 
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
 
Current
                             
Receivables and inventories
    3,532       309       —       —       3,841  
Accruals
    865       1,748       —       —       2,613  
Non-current
                                       
Property, plant and equipment
    601       711       (47 )     —       1,265  
Accelerated depreciation
    (4,657 )     513       —       —       (4,144 )
Tax value of losses carried forward
    105       71       —       —       176  
Lease prepayments
    351       (8 )     —       (37 )     306  
Available-for-sale securities
    (4 )     —       —       (112 )     (116 )
Embedded derivative component of the Convertible Bonds
    —       803       —       —       803  
Others
    50       9       —       —       59  
Net deferred tax assets
    843       4,156       (47 )     (149 )     4,803  


   
Balance as of
January 1,
2008
   
Recognized in
consolidated
statements of income
   
Recognized in
other comprehensive
income
   
Balance as of
December 31,
2008
 
   
RMB
   
RMB
   
RMB
   
RMB
 
Current
                       
Receivables and inventories
    3,841       593       —       4,434  
Accruals
    2,613       (2,352 )     —       261  
Non-current
                               
Property, plant and equipment
    1,265       1,340       —       2,605  
Accelerated depreciation
    (4,144 )     428       —       (3,716 )
Tax value of losses carried forward
    176       4,620       —       4,796  
Lease prepayments
    306       (6 )     —       300  
Available-for-sale securities
    (116 )     —       64       (52 )
Embedded derivative component of the Convertible Bonds
    803       (954 )     —       (151 )
Others
    59       (3 )     —       56  
Net deferred tax assets
    4,803       3,666       64       8,533  


 
F-37
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)

 
   
Balance as of
January 1,
2009
   
Recognized in
consolidated
statements of income
   
Recognized in
other comprehensive
income
   
Acquisition
   
Balance as of
December 31,
2009
 
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
 
                               
Current
                             
Receivables and inventories
    4,434       (1,227 )     —       —       3,207  
Accruals
    261       554       —       —       815  
Cash flow hedges
    —       —       (11 )             (11 )
Non-current
                                       
Property, plant and equipment
    2,605       1,844       —       (26 )     4,423  
Accelerated depreciation
    (3,716 )     34       —       —       (3,682 )
Tax value of losses carried forward
    4,796       (842 )     —       —       3,954  
Lease prepayments
    300       (8 )     —       —       292  
Available-for-sale securities
    (52 )     —       52       —       —  
Embedded derivative component of the Convertible Bonds
    (151 )     55       —       —       (96 )
Others
    56       36       —       2       94  
Net deferred tax assets
    8,533       446       41       (24 )     8,996  
 
24.
SHORT-TERM AND LONG-TERM DEBTS AND LOANS FROM SINOPEC GROUP COMPANY AND ITS AFFILIATES

  Short-term debts represent:

   
December 31,
 
 
 
2008
   
2009
 
   
RMB
   
RMB
 
Third parties’ debts
           
Short-term bank loans
    41,355       21,587  
                 
Current portion of long-term bank loans
    17,109       6,234  
Current portion of long-term other loans
    2,052       77  
      19,161       6,311  
                 
Corporate bonds (Note (a))
    15,000       31,000  
      75,516       58,898  
Loans from Sinopec Group Company and its affiliates
               
Short-term loans
    33,060       13,313  
Current portion of long-term loans
    350       330  
      33,410       13,643  
      108,926       72,541  

 The Group’s weighted average interest rates on short-term loans were 4.8% and 2.5% as of December 31, 2008 and 2009, respectively.


 
F-38
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


Long-term debts comprise:

   
Interest rate and final maturity
 
December 31,
 
     
2008
 
2009
       
RMB
 
RMB
Third parties’ debts
           
             
Long-term bank loans
           
             
Renminbi denominated
 
Interest rates ranging from interest free to 7.6% per annum as of December 31, 2009 with maturities through 2013
 
42,036
 
18,869
             
Japanese Yen denominated
 
Interest rates ranging from 2.6% to 3.0% per annum as of December 31, 2009 with maturities through 2024
 
2,121
 
1,660
             
US Dollar denominated
 
Interest rates ranging from interest free to 7.9% per annum as of December 31, 2009 with maturities through 2031
 
746
 
629
             
Euro denominated
 
Interest rate ranging from 6.6% to 6.7% per annum as of December 31, 2009 with maturities through 2011
 
     197
 
     116
             
       
45,100
 
21,274
             
Long-term other loans
           
             
Renminbi denominated
 
Interest free as of December 31, 2009 with maturities through 2011
 
2,075
 
73
             
US Dollar denominated
 
Interest rates ranging from interest free to 4.9% per annum as of December 31, 2009 with maturities through 2015
 
        33
 
    29
             
       
   2,108
 
  102

Corporate bonds
           
             
Renminbi denominated
 
Fixed interest rate at 4.61% per annum as of December 31, 2009 with maturity in February 2014 (Note (b))
 
3,500
 
3,500
             
   
Fixed interest rate at 4.20% per annum as of December 31, 2009 with maturity in May 2017 (Note (b))
 
5,000
 
5,000
             
   
Fixed interest rate at 5.40% per annum as of December 31, 2009 with maturity in November 2012 (Note (b))
 
8,500
 
8,500
             
   
Fixed interest rate at 5.68% per annum as of December 31, 2009 with maturity in November 2017 (Note (b))
 
11,500
 
11,500
             
   
Fixed interest rate at 2.25% per annum as of December 31, 2009 with maturity in March 2012 (Note (b))
 
—
 
10,000
             
   
Fixed interest rate at 2.48% per annum as of December 31, 2009 with maturity in June 2012 (Note (b))
 
       —
 
20,000
       
28,500
 
58,500


 
F-39
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)

 
   
Interest rate and final maturity
 
December 31,
   
 
 
2008
 
2009
       
RMB
 
RMB
             
Convertible bonds
           
             
Hong Kong Dollar denominated
 
Zero coupon convertible bonds with maturity in April 2014 (Note (c))
 
 9,870
 
10,371
             
Renminbi denominated
 
Bonds with Warrants with fixed interest rate at 0.8% per annum and maturity in February 2014 (Note (d))
 
23,837
 
24,892
       
33,707
 
35,263
             
Total third parties’ long-term debts
 
109,415
 
115,139
             
Less: Current portion
     
(19,161)
 
 (6,311)
       
 90,254
 
108,828
Long-term loans from Sinopec Group Company and its affiliates
             
Renminbi denominated
 
Interest rates ranging from interest free to 7.3% per annum as of December 31, 2009 with maturities through 2020
 
37,240
 
37,330
             
Less: Current portion
     
     (350)
 
     (330)
       
  36,890
 
  37,000
       
    127,144
 
145,828

Short-term and long-term debts and loans from Sinopec Group Company and its affiliates, other than the Convertible Bonds, are primarily unsecured and carried at amortized cost.

Notes:

(a)
The Company issued six-month corporate bonds of face value RMB 15,000 to corporate investors in the PRC debenture market on December 22, 2008 at par value of RMB 100. The effective yield of the six-month corporate bonds is 2.30% per annum. The Company redeemed the corporate bonds in June 2009.
   
 
A subsidiary of the Company issued 330-day corporate bonds of face value RMB 1,000 to corporate investors in the PRC debenture market on April 3, 2009 at par value of RMB 100. The effective yield of the 330-day corporate bonds is 2.05% per annum. The corporate bonds mature in March 2010.
   
 
The Company issued one-year corporate bonds of face value RMB 15,000 to corporate investors in the PRC debenture market on July 16, 2009 at par value of RMB 100. The effective yield of the one-year corporate bonds is 1.88% per annum. The corporate bonds mature in July 2010.
   
 
The Company issued one-year corporate bonds of face value RMB 15,000 to corporate investors in the PRC debenture market on November 12, 2009 at par value of RMB 100. The effective yield of the one-year corporate bonds is 2.30% per annum. The corporate bonds mature in November 2010.
   
(b)
These corporate bonds are guaranteed by Sinopec Group Company.
 

 
F-40
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)

 
(c)
On April 24, 2007, the Company issued zero coupon convertible bonds due 2014 with an aggregate principal amount of HK$11,700 (the “Convertible Bonds”).  The holders can convert the Convertible Bonds into shares of the Company from June 4, 2007 onwards at a price of HK$10.76 per share, subject to adjustment for, amongst other things, subdivision or consolidation of shares, bonus issues, rights issues, capital distribution, change of control and other events, which have a dilutive effect on the issued share capital of the Company (the “Conversion component”).  Unless previously redeemed, converted or purchased and cancelled, the Convertible Bonds will be redeemed on the maturity date at 121.069% of the principal amount.  The Company has an early redemption option at any time after April 24, 2011 (subject to certain criteria) (the “Early Redemption Option”) and a cash settlement option when the holders exercise their conversion right (the “Cash Settlement Option”).  The holders also have an early redemption option to require the Company to redeem all or some of the Convertible Bonds as of April 24, 2011 at an early redemption amount of 111.544% of the principal amount.
   
 
As of December 31, 2008, the carrying amount of the liability component and the derivative component, representing the Conversion component, the Early Redemption Option and the Cash Settlement Option, of the Convertible Bonds were RMB 9,870 and RMB nil, respectively. No conversion of the Convertible Bonds has occurred up to December 31, 2008.
   
 
As of December 31, 2009, the carrying amount of the liability component and the derivative component, representing the Conversion component, the Early Redemption Option and the Cash Settlement Option, of the Convertible Bonds were RMB 10,153 and RMB 218, respectively. No conversion of the Convertible Bonds has occurred up to December 31, 2009.
   
 
As of December 31, 2008 and 2009, the fair value of the derivative components of the Convertible Bonds was calculated using the Black-Scholes Model. The following are the major inputs used in the Black-Scholes Model:
 
   
2008
   
2009
 
             
Stock price of underlying shares
 
HKD 4.69
   
HKD 6.91
 
Conversion price
 
HKD 10.76
   
HKD 10.76
 
Option adjusted spread
 
450 basis points
   
150 basis points
 
Average risk free rate
    1.64%       0.87%  
Average expected life
 
3.8 years
   
2.8 years
 

 
Any change in the major inputs into the Black-Scholes Model will result in changes in the fair value of the derivative component. The change in the fair value of the conversion option from December 31, 2007 to December 31, 2008 and from December 31, 2008 to December 31, 2009 resulted in an unrealized gain of RMB 3,947 and an unrealized loss of RMB 218, respectively, which have been recorded in the “finance costs” section of the consolidated statements of income.
   
 
The initial carrying amount of the liability component of the Convertible Bonds is the residual amount, which is after deducting the allocated issuance cost of the Convertible Bonds relating to the liability component and the fair value of the derivative component as of April 24, 2007. Interest expense is calculated using the effective interest method by applying the effective interest rate of 4.19% to the adjusted liability component. Should the aforesaid derivative components not been separated out and the entire Convertible Bonds been considered as the liability component, the effective interest rate would have been 3.03%.
   
(d)
On February 26, 2008, the Company issued bonds with stock warrants due 2014 with an aggregate principal amount of RMB 30,000 in the PRC (the “Bonds with Warrants”). The Bonds with Warrants, which bear a fixed interest rate of 0.80% per annum payable annually, were issued at par value of RMB 100. The Bonds with Warrants are guaranteed by Sinopec Group Company. Every ten Bonds with Warrants are entitled to warrants to subscribe 50.5 A shares of the Company during the 5 trading days prior to March 3, 2010 at an initial exercise price of RMB 19.68 per share (the “Warrants”), subject to adjustment for, amongst other things, cash dividends, subdivision or consolidation of shares, bonus issues, rights issues, capital distribution, change of control and other events which have a dilutive effect on the issued share capital of the Company.

 
F-41
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)



 
On December 31, 2009, the exercise price of the Warrants was adjusted to RMB 19.15 per share as a result of the final dividend in respect of the year ended December 31, 2008 and the interim dividend in respect of the year ended December 31, 2009 declared and paid during the year ended December 31, 2009.
   
 
The initial recognition of the liability component of the Bond with Warrants is measured as the present value of the future interest and principal payments, discounted at the market rate of interest applicable at the time of initial recognition to similar liabilities that do not have a conversion option (“market interest rate”). Interest expense is calculated using the effective interest method by applying the market interest rate of 5.40% to the liability component. The excess of proceeds from the issuance of the Bonds with Warrants, net of issuance costs, over the amount initially recognized as the liability component is recognized as the equity component in capital reserve until either the Warrants is exercised or expired. Should the equity component not have been separated out and the entire Bonds with Warrants been considered as the liability component, the effective interest rate would have been 0.80%. The initial carrying amounts of liability and equity components of the Bonds with Warrants were RMB 22,971 and RMB 6,879 upon issuance, respectively.
 
25       TRADE ACCOUNTS AND BILLS PAYABLES
 
   
December 31,
 
 
 
2008
   
2009
 
   
RMB
   
RMB
 
Amounts due to third parties
    53,112       92,949  
Amounts due to Sinopec Group Company and its affiliates
    1,522       3,114  
Amounts due to associates and jointly controlled entities
    1,830       1,686  
      56,464       97,749  
Bills payable
    18,753       23,111  
Trade accounts and bills payables measured at amortized cost
    75,217       120,860  


26.      ACCRUED EXPENSES AND OTHER PAYABLES

   
December 31,
 
 
 
2008
   
2009
 
   
RMB
   
RMB
 
Accrued expenditures
    31,635       35,465  
Advances from third parties
    1,822       2,796  
Amounts due to Sinopec Group Company and its affiliates
    12,740       11,925  
Others
    6,365       5,834  
Financial liabilities measured at amortized costs
    52,562       56,020  
                 
Taxes other than income tax
    21,560       24,178  
Receipts in advance
    27,829       36,316  
Derivative financial instruments – hedging
    122       319  
Derivative financial instruments – non-hedging
    424       439  
      102,497       117,272  


 
F-42
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


27.     PROVISIONS

  Provisions primarily represent provision for future dismantlement costs of oil and gas properties.  The Group has committed to the PRC government to establish certain standardized measures for the dismantlement of its oil and gas properties by making reference to the industry practices and is thereafter constructively obligated to take dismantlement measures of its oil and gas properties.

  Movement of provision of the Group’s obligations for the dismantlement of its oil and gas properties is as follows:

 
 
2008
   
2009
 
   
RMB
   
RMB
 
Balance as of January 1
    7,544       9,234  
Provision for the year
    1,482       2,013  
Accretion expenses
    430       429  
Utilized
    (222 )     (218 )
Balance as of December 31
    9,234       11,458  


 
F-43
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


28.      SHARE CAPITAL

   
December 31,
 
 
 
2008
   
2009
 
   
RMB
   
RMB
 
Registered, issued and fully paid
           
69,921,951,000 domestic listed A shares of RMB 1.00 each
    69,922       69,922  
16,780,488,000 overseas listed H shares of RMB 1.00 each
    16,780       16,780  
      86,702       86,702  

The Company was established on February 25, 2000 with a registered capital of 68.8 billion domestic state-owned shares with a par value of RMB 1.00 each. Such shares were issued to Sinopec Group Company in consideration for the assets and liabilities of the Predecessor Operations transferred to the Company (Note 1).

Pursuant to the resolutions passed at an Extraordinary General Meeting held on July 25, 2000 and approvals from relevant government authorities, the Company is authorized to increase its share capital to a maximum of 88.3 billion shares with a par value of RMB 1.00 each and offer not more than 19.5 billion shares with a par value of RMB 1.00 each to investors outside the PRC. Sinopec Group Company is authorized to offer not more than 3.5 billion shares of its shareholdings in the Company to investors outside the PRC. The shares sold by Sinopec Group Company to investors outside the PRC would be converted into H shares.

In October 2000, the Company issued 15,102,439,000 H shares with a par value of RMB 1.00 each, representing 12,521,864,000 H shares and 25,805,750 American Depositary Shares (“ADSs”, each representing 100 H shares), at prices of HK$ 1.59 per H share and US$ 20.645 per ADS, respectively, by way of a global initial public offering to Hong Kong and overseas investors. As part of the global initial public offering, 1,678,049,000 domestic state-owned ordinary shares of RMB 1.00 each owned by Sinopec Group Company were converted into H shares and sold to Hong Kong and overseas investors.

In July 2001, the Company issued 2.8 billion domestic listed A shares with a par value of RMB 1.00 each at RMB 4.22 by way of a public offering to natural persons and institutional investors in the PRC.

On September 25, 2006, the shareholders of listed A shares accepted the proposal offered by the shareholders of state-owned A shares whereby the shareholders of state-owned A shares agreed to transfer 2.8 state-owned A shares to shareholders of listed A shares for every 10 listed A shares they held, in exchange for the approval for the listing of all state-owned A shares. In October 2006, the 67,121,951,000 domestic state-owned A shares became listed A shares.

All A shares and H shares rank pari passu in all material aspects.

Capital management

  Management optimizes the structure of the Group’s capital, which comprises of equity and loans. In order to maintain or adjust the capital structure of the Group, management may cause the Company to issue new shares, adjust the capital expenditure plan, sell assets to reduce debt, or adjust the proportion of short-term and long-term loans. Management monitors capital on the basis of debt-to-equity ratio, which is calculated by dividing long-term loans (excluding current portion), including long-term debts and loans from Sinopec Group Company and its affiliates, by the total of equity attributable to equity shareholders of the Company and long-term loans (excluding current portion), and liability-to-asset ratio, which is calculated by dividing total liabilities by total assets. Management’s strategy is to make appropriate adjustments according to the Group’s operating and investment needs and the changes of market conditions, and to maintain the debt-to-equity ratio and the liability-to-asset ratio of the Group at a range considered reasonable. The debt-to-equity ratio of the Group was 27.9% and 28.0% as of December 31, 2008 and 2009, respectively. The liability-to-asset ratio of the Group was 55.3% and 54.6% as of December 31, 2008 and 2009, respectively.

  The schedule of the contractual maturities of loans and commitments are disclosed in Notes 24 and 30, respectively.

There were no changes in the management’s approach to capital management of the Group during the year. Neither the Company nor any of its subsidiaries are subject to externally imposed capital requirements.

 
F-44
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


29.      RESERVES

 
 
2008
   
2009
 
   
RMB
   
RMB
 
Capital reserve (Note (a))
           
Balance as of January 1
    (22,652 )     (16,293 )
Transfer from other reserves to capital reserve
    —       (1,551 )
Issuance of the Bonds with Warrants (Note 24(d))
    6,879       —  
Distributions to Sinopec Group Company (Note (b))
    (202 )     (49 )
Acquisitions of non-controlling interests of subsidiaries
    (318 )     (18 )
Balance as of December 31
    (16,293 )     (17,911 )
                 
Share premium (Note (c))
               
Balance as of January 1 / December 31
    18,072       18,072  
                 
Statutory surplus reserve (Note (d))
               
Balance as of January 1
    37,797       43,078  
Adjustment of statutory surplus reserve
    1,189       —  
Appropriation
    4,092       4,953  
Balance as of December 31
    43,078       48,031  
                 
Discretionary surplus reserve (Note (e))
               
Balance as of January 1
    27,000       47,000  
Appropriation
    20,000       20,000  
Balance as of December 31
    47,000       67,000  
                 
Other reserves
               
Balance as of January 1
    3,564       (6 )
Change in fair value of cash flow hedge, net of deferred tax
 
___
      54  
Change in fair value of available-for-sale financial assets, net of deferred tax
    (114 )     (138 )
Share of other comprehensive income of associates
    (2,206 )     806  
Realization of deferred tax on lease prepayments
    (6 )     (8 )
Transfer from retained earnings to other reserves
    (1,244 )  
___
 
Transfer from other reserves to capital reserve
 
___
      1,551  
Consideration for the Acquisition of the Acquired Group (Note 1)
    —       (771 )
Balance as of December 31
    (6 )     1,488  
                 
Retained earnings (Note (f))
               
Balance as of January 1
    157,414       149,336  
Net income attributable to equity shareholders of the Company
    28,525       61,760  
Final dividend inspect of the previous year, approved and paid during the year (Note (g))
    (9,971 )     (7,803 )
Interim dividend (Note (h))
    (2,601 )     (6,069 )
Adjustment of statutory surplus reserve
    (1,189 )  
___
 
Appropriation
    (24,092 )     (24,953 )
Realization of deferred tax on lease prepayments
    6       8  
Transfer from retained earnings to other reserves
    1,244       —  
Balance as of December 31
    149,336       172,279  
      241,187       288,959  


 
F-45
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


Notes:

(a)
The capital reserve represents (i) the difference between the total amount of the par value of shares issued and the amount of the net assets transferred from Sinopec Group Company in connection with the Reorganization (ii) the difference between the considerations paid over the amount of the net assets of entities and related operations acquired from Sinopec Group Company and non-controlling interests and (iii) the equity component of the Bonds with Warrants.
   
(b)
During the year ended December 31, 2008, the Group paid additional consideration of RMB 96 for the Acquisition of Refinery Plants (Note 1) to Sinopec Group Company, which was accounted for as an equity transaction. In addition, the Group acquired Downhole Assets from Sinopec Group Company.  The difference between the consideration paid over the carrying value of these net assets acquired was RMB 106, which was accounted for as an equity transaction.
   
(c)
The application of the share premium account is governed by Sections 168 and 169 of the PRC Company Law.
   
(d)
According to the Company’s Articles of Association, the Company is required to transfer 10% of its net income in accordance with the PRC accounting policies adopted by the Group to statutory surplus reserve until the reserve balance reaches 50% of the registered capital. The transfer to this reserve must be made before distribution of a dividend to shareholders.  Statutory surplus reserve can be used to make good previous years’ losses, if any, and may be converted into share capital by the issue of new shares to shareholders in proportion to their existing shareholdings or by increasing the par value of the shares currently held by them, provided that the balance after such issue is not less than 25% of the registered capital.
   
 
On January 1, 2007, the Group adopted the accounting policies complying with the Accounting Standards for Business Enterprises (“ASBE”) issued by the Ministry of Finance of the PRC (“MOF”) on February 15, 2006, which resulted in certain PRC accounting policies being changed and applied retrospectively.  The statutory surplus reserve, amounting to RMB 235, has been adjusted accordingly.  The adjustment to the statutory surplus reserve was reflected as a movement for the year ended December 31, 2007.
   
 
Pursuant to the requirement in Cai Kuai [2008] No. 11 “Interpretation of ASBE No. 2” issued by the MOF on August 7, 2008, for statutory financial statement purposes, the Group adopted certain PRC accounting policies that were applied retrospectively.  The statutory surplus reserve, amounting to RMB 1,189, has been adjusted accordingly.  The adjustment to statutory surplus reserve was reflected as a movement for the year ended December 31, 2008.  During the years ended December 31, 2007, 2008 and 2009, the Company transferred RMB 5,468, RMB 4,092 and 4,953, respectively, being 10% of the net income determined in accordance with the PRC accounting policies, to this reserve.
   
(e)
For the year ended December 31, 2008, the directors authorized the transfer of RMB 20,000, which was approved by the shareholders at the Annual General Meeting on May 22, 2009, to discretionary surplus reserve. For the year ended December 31, 2009, the directors authorized the transfer of RMB 20,000, subject to the shareholders’ approval at the Annual General Meeting, to discretionary surplus reserve. The usage of the discretionary surplus reserve is similar to that of statutory surplus reserve.
   
(f)
According to the Company’s Articles of Association, the amount of retained earnings available for distribution to equity shareholders of the Company is the lower of the amount determined in accordance with the accounting policies complying with ASBE and the amount determined in accordance with the accounting policies complying with IFRS. As of December 31, 2008 and 2009, the amount of retained earnings available for distribution was RMB 82,147 and RMB 91,772, respectively, being the amount determined in accordance with the accounting policies complying with IFRS. Final dividend for the year ended December 31, 2009 of RMB 9,537 proposed after the balance sheet date has not been recognized as a liability at the balance sheet date.
   
(g)
Pursuant to the shareholders’ approval at the Annual General Meeting on May 26, 2008, a final dividend of RMB 0.115 per share totaling RMB 9,971 in respect of the year ended December 31, 2007 was declared and paid on June 30, 2008.

 
F-46
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)

 
 
Pursuant to the shareholders’ approval at the Annual General Meeting on May 22, 2009, a final dividend of RMB 0.09 per share totaling RMB 7,803 in respect of the year ended December 31, 2008 was declared and paid on June 30, 2009.
   
(h)
Pursuant to the Company’s Articles of Association and a resolution passed at the Directors’ meeting on August 22, 2008, the directors authorized to declare an interim dividend for the year ended December 31, 2008 of RMB 0.03 per share totaling RMB 2,601, which was paid on September 19, 2008.
   
 
Pursuant to the Company’s Articles of Association and a resolution passed at the Director’s meeting on August 21, 2009, the directors authorized to declare an interim dividend for the year ended December 31, 2009 of RMB 0.07 per share totaling RMB 6,069, which was paid on October 15, 2009.
 
30.      COMMITMENTS AND CONTINGENT LIABILITIES
Operating lease commitments

The Group leases land and buildings, service stations and other equipment through non-cancellable operating leases. These operating leases do not contain provisions for contingent lease rentals. None of the rental agreements contain escalation provisions that may require higher future rental payments.

As of December 31, 2008 and 2009, the future minimum lease payments under operating leases are as follows:

   
December 31,
 
 
 
2008
   
2009
 
   
RMB
   
RMB
 
Within one year
    6,066       6,084  
Between one and two years
    5,750       5,905  
Between two and three years
    5,655       5,834  
Between three and four years
    5,595       5,722  
Between four and five years
    5,519       5,604  
Thereafter
    149,893       145,338  
      178,478       174,487  


 
F-47
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


Capital commitments

As of December 31, 2008 and 2009, capital commitments are as follows:

   
December 31,
 
 
 
2008
   
2009
 
   
RMB
   
RMB
 
Authorized and contracted for
    120,773       124,403  
Authorized but not contracted for
    49,931       58,959  
      170,704       183,362  

  These capital commitments relate to oil and gas exploration and development, refining and petrochemical production capacity expansion projects and the construction of service stations and oil depots.

Exploration and production licenses

  Exploration licenses for exploration activities are registered with the Ministry of Land and Resources. The maximum term of the Group’s exploration licenses is 7 years, and may be renewed twice within 30 days prior to expiration of the original term with each renewal being for a two-year term.  The Group is obligated to make progressive annual minimum exploration investment relating to the exploration blocks in respect of which the license is issued. The Ministry of Land and Resources also issues production licenses to the Group on the basis of the reserve reports approved by relevant authorities. The maximum term of a full production license is 30 years unless a special dispensation was given by the State Council. The maximum term of production licenses issued to the Group is 80 years as a special dispensation was given to the Group by the State Council. The Group’s production license is renewable upon application by the Group 30 days prior to expiration.

  The Group is required to make payments of exploration license fees and production right usage fees to the Ministry of Land and Resources annually which are expensed as incurred. Payments incurred were approximately RMB 303, RMB 437 and RMB 395 for the years ended December 31, 2007, 2008 and 2009, respectively.

  Estimated future annual payments are as follows:

   
December 31,
 
 
 
2008
   
2009
 
   
RMB
   
RMB
 
Within one year
    123       136  
Between one and two years
    118       118  
Between two and three years
    20       21  
Between three and four years
    20       20  
Between four and five years
    19       20  
Thereafter
    651       689  
      951       1,004  


 
F-48
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


Contingent liabilities

  As of December 31, 2008 and 2009, guarantees given to banks in respect of banking facilities granted to the parties below were as follows:

   
December 31,
 
 
 
2008
   
2009
 
   
RMB
   
RMB
 
Jointly controlled entities
    11,223       14,815  
Associates
    181       181  
      11,404       14,996  

As of December 31, 2009, the Company and a subsidiary have guaranteed to a jointly controlled entity in relation to the bank loans drawn down by the jointly controlled entity. The guarantees expire on December 31, 2015.

Management monitors the conditions that are subject to the guarantees to identify whether it is probable that a loss has occurred, and recognize any such losses under guarantees when those losses are estimable. As of December 31, 2008 and 2009, it is not probable that the Group will be required to make payments under the guarantees. Thus no liability has been accrued for the Group’s obligation under these guarantee arrangements.

Environmental contingencies

  Under existing legislation, management believes that there are no probable liabilities that will have a material adverse effect on the financial position or operating results of the Group. The PRC government, however, has moved, and may move further towards more rigorous enforcement of applicable laws, and towards the adoption of more stringent environmental standards. Environmental liabilities are subject to considerable uncertainties which affect management’s ability to estimate the ultimate cost of remediation efforts. These uncertainties include i) the exact nature and extent of the contamination at various sites including, but not limited to refineries, oil fields, service stations, terminals and land development areas, whether operating, closed or sold, ii) the extent of required cleanup efforts, iii) varying costs of alternative remediation strategies, iv) changes in environmental remediation requirements, and v) the identification of new remediation sites. The amount of such future cost is indeterminable due to such factors as the unknown magnitude of possible contamination and the unknown timing and extent of the corrective actions that may be required. Accordingly, the outcome of environmental liabilities under proposed or future environmental legislation cannot reasonably be estimated at present, and could be material. The Group paid normal routine pollutant discharge fees of approximately RMB 2,085, RMB 2,284 and RMB 3,196 for the years ended December 31, 2007, 2008 and 2009, respectively.

Legal contingencies

The Group is a defendant in certain lawsuits as well as the named party in other proceedings arising in the ordinary course of business. Management has assessed the likelihood of an unfavourable outcome of such contingencies, lawsuits or other proceedings and believes that any resulting liabilities will not have a material adverse effect on the financial position, operating results or cash flows of the Group.


 
F-49
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


31.     RELATED PARTY TRANSACTIONS

  Parties are considered to be related to the Group if the Group has the ability, directly or indirectly, to control or jointly control the party or exercise significant influence over the party in making financial and operating decisions, or vice versa, or where the Group and the party are subject to common control. Related parties may be individuals (being members of key management personnel, significant shareholders and / or their close family members) or other entities and include entities which are under the significant influence of related parties of the Group where those parties are individuals, and post-employment benefit plans which are for the benefit of employees of the Group or of any entity that is a related party of the Group.

(a)       Transactions with Sinopec Group Company and its affiliates, associates and jointly controlled entities

  The Group is part of a larger group of companies under Sinopec Group Company, which is owned by the PRC government, and has significant transactions and relationships with Sinopec Group Company and its affiliates. Because of these relationships, it is possible that the terms of these transactions are not the same as those that would result from transactions among wholly unrelated parties.

  The principal related party transactions with Sinopec Group Company and its affiliates, associates and jointly controlled entities, which were carried out in the ordinary course of business, are as follows:

     
Years ended December 31,
 
 
 Note
 
2007
   
2008
   
2009
 
     
RMB
   
RMB
   
RMB
 
Sales of goods
(i)
    138,258       186,381       162,671  
Purchases
(ii)
    57,090       56,516       75,521  
Transportation and storage
(iii)
    1,151       1,206       1,251  
Exploration and development services
(iv)
    32,121       33,034       31,343  
Production related services
(v)
    19,892       14,133       17,603  
Ancillary and social services
(vi)
    1,621       1,611       3,329  
Operating lease charges
(vii)
    3,967       4,897       4,866  
Agency commission income
(viii)
    60       78       45  
Interest received
(ix)
    34       19       38  
Interest paid
(x)
    979       1,725       1,045  
Net deposits withdrawn from /(placed with) related parties
(xi)
    359       (353 )     (4,640 )
Net loans obtained from/(repaid to) related parties
(xii)
    8,787       10,754       (19,657 )

   The amounts set out in the table above in respect of each of the years in the three-year period ended December 31, 2009 represent the relevant costs to the Group and income from related parties as determined by the corresponding contracts with the related parties.

  There were no guarantees given to banks by the Group in respect of banking facilities to Sinopec Group Company and its affiliates as of December 31, 2008 and 2009. Guarantees given to banks by the Group in respect of banking facilities to associates and jointly controlled entities are disclosed in Note 30.

The directors of the Company are of the opinion that the above transactions with related parties were conducted in the ordinary course of business and on normal commercial terms or in accordance with the agreements governing such transactions, and this has been confirmed by the independent non-executive directors.

Notes:

(i)
Sales of goods represent the sale of crude oil, intermediate petrochemical products, petroleum products and ancillary materials.
   
(ii)
Purchases represent the purchase of materials and utility supplies directly related to the Group’s operations such as the procurement of raw and ancillary materials and related services, supply of water, electricity and gas.
   
(iii)
Transportation and storage represent the cost for the use of railway, road and marine transportation services, pipelines, loading, unloading and storage facilities.

 
 
F-50
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)

 
(iv)
Exploration and development services comprise direct costs incurred in the exploration and development such as geophysical, drilling, well testing and well measurement services.

(v)
Production related services represent ancillary services rendered in relation to the Group’s operations such as equipment repair and general maintenance, insurance premium, technical research, communications, fire fighting, security, product quality testing and analysis, information technology, design and engineering, construction which includes the construction of oilfield ground facilities, refineries and chemical plants, manufacture of replacement parts and machinery, installation, project management and environmental protection.
   
(vi)
Ancillary and social services represent expenditures for social welfare and support services such as educational facilities, media communication services, sanitation, accommodation, canteens, property maintenance and management services.
   
(vii)
Operating lease charges represent the rental paid to Sinopec Group Company for operating leases in respect of land, buildings and equipment.
   
(viii)
Agency commission income represents commission earned for acting as an agent in respect of sales of products and purchase of materials for certain entities owned by Sinopec Group Company.
   
(ix)
Interest received represents interest received from deposits placed with Sinopec Finance Company Limited and Sinopec Century Bright Capital Investment Limited, finance companies controlled by Sinopec Group Company. The applicable interest rate is determined in accordance with the prevailing saving deposit rate. The balance of deposits as of December 31, 2008 and 2009 were RMB 696 and RMB 5,336, respectively.
   
(x)
Interest paid represents interest charges on the loans and advances obtained from Sinopec Group Company and its affiliates.
   
(xi)
Deposits placed with / withdrawn from related parties represent net deposits placed with / withdrawn from Sinopec Finance Company Limited and Sinopec Century Bright Capital Investment Limited.
   
(xii)
The Group obtained or repaid loans from or to Sinopec Group Company and its affiliates.
 
In connection with the Reorganization, the Company and Sinopec Group Company entered into a number of agreements under which 1) Sinopec Group Company will provide goods and products and a range of ancillary, social and supporting services to the Group and 2) the Group will sell certain goods to Sinopec Group Company. The terms of these agreements are summarized as follows:

(a)
The Company has entered into a non-exclusive Agreement for Mutual Provision of Products and Ancillary Services (“Mutual Provision Agreement”) with Sinopec Group Company effective from January 1, 2000 in which Sinopec Group Company has agreed to provide the Group with certain ancillary production services, construction services, information advisory services, supply services and other services and products. While each of Sinopec Group Company and the Company is permitted to terminate the Mutual Provision Agreement upon giving at least six months notice, Sinopec Group Company has agreed not to terminate the agreement if the Group is unable to obtain comparable services from a third party. The pricing policy for these services and products provided by Sinopec Group Company to the Group is as follows:
     
  ●
the government-prescribed price;
     
  ● 
where there is no government-prescribed price, the government-guidance price;
     
  ● 
where there is neither a government-prescribed price nor a government-guidance price, the market price; or
     
  ● 
where none of the above is applicable, the price to be agreed between the parties, which shall be based on a reasonable cost incurred in providing such services plus a profit margin not exceeding 6%.
 

 
F-51
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)

 
(b)
The Company has entered into a non-exclusive Agreement for Provision of Cultural and Educational, Health Care and Community Services with Sinopec Group Company effective from January 1, 2000 in which Sinopec Group Company has agreed to provide the Group with certain cultural, educational, health care and community services on the same pricing terms and termination conditions as agreed to in the above Mutual Provision Agreement.
   
(c)
The Company has entered into a series of lease agreements with Sinopec Group Company to lease certain land at a rental of approximately RMB 4,234 and RMB 4,225  per annum for the years ended December 31, 2008 and 2009, respectively, and certain buildings at a rental of approximately RMB 568 and RMB 568 per annum for the years ended December 31, 2008 and 2009, respectively. The Company and Sinopec Group Company can renegotiate the rental amount every three years for land and every year for buildings, however such amount cannot exceed the market price as determined by an independent third party. The Group has the option to terminate these leases upon six months notice to Sinopec Group Company.
   
(d)
The Company has entered into agreements with Sinopec Group Company effective from January 1, 2000 under which the Group has been granted the right to use certain trademarks, patents, technology and computer software developed by Sinopec Group Company.
   
(e)
The Company has entered into a service stations franchise agreement with Sinopec Group Company effective from January 1, 2000 under which its service stations and retail stores would exclusively sell the refined products supplied by the Group.
 
Pursuant to the resolutions passed at the Directors’ meeting held on June 26, 2008, the Group acquired the Downhole Assets from Sinopec Group Company, primarily property, plant and equipment, for a cash consideration of RMB 1,624, which approximated the net carrying value of the assets and liabilities of the Downhole Assets.

Pursuant to the resolutions passed at the Directors’ meeting held on March 27, 2009, the Group acquired the entire equity interests of Sinopec Qingdao Petrochemical Company Limited and certain storage and distribution operations from Sinopec Group Company for total cash consideration of RMB 771 (Note 1). In addition, the Group acquired certain operating assets related to the E&P and refining segments from Sinopec Group Company, for total cash consideration of RMB 1,068.

Pursuant to the resolutions passed at the Directors’ meeting held on August 21, 2009, the Group acquired certain operating assets related to the corporate and others business segment from a subsidiary of Sinopec Group Company for total cash consideration of RMB 3,946.

  Amounts due from / to Sinopec Group Company and its affiliates, associates and jointly controlled entities included in the following accounts captions are summarized as follows:

   
December 31,
 
 
 
2008
   
2009
 
   
RMB
   
RMB
 
Trade accounts receivable
    4,078       1,032  
Prepaid expenses and other current assets
    4,543       810  
Total amounts due from Sinopec Group Company and its affiliates, associates and jointly controlled entities
    8,621       1,842  
                 
Trade accounts payable
    3,352       4,800  
Accrued expenses and other payables
    12,740       11,925  
Short-term loans and current portion of long-term loans from Sinopec Group Company and its affiliates
    33,410       13,643  
Long-term loans excluding current portion from Sinopec Group Company and its affiliates
    36,890       37,000  
Total amounts due to Sinopec Group Company and its affiliates, associates and jointly controlled entities
    86,392       67,368  


 
F-52
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


Amounts due from / to Sinopec Group Company and its affiliates, associates and jointly controlled entities, other than short-term loans and long-term loans, bear no interest, are unsecured and are repayable in accordance with normal commercial terms.  The terms and conditions associated with short-term loans and long-term loans payable to Sinopec Group Company and its affiliates are set out in Note 24.

As of and for the years ended December 31, 2008 and 2009, no individually significant impairment losses for bad and doubtful debts were recognized in respect of amounts due from Sinopec Group Company and its affiliates, associates and jointly controlled entities.

(b)       Key management personnel emoluments

Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Group, directly or indirectly, including directors and supervisors of the Group.  The key management personnel compensations are as follows:

   
Years ended December 31,
 
   
2007
   
2008
   
2009
 
   
RMB’000
   
RMB’000
   
RMB’000
 
Short-term employee benefits
    5,896       6,530       7,664  
Retirement scheme contributions
    184       198       287  
      6,080       6,728       7,951  

Total emoluments are included in “personnel expenses” as disclosed in Note 6.

(c)       Contributions to defined contribution retirement plans

  The Group participates in various defined contribution retirement plans organized by municipal and provincial governments for its staff.  The details of the Group’s employee benefits plan are disclosed in Note 32. As of December 31, 2008 and 2009, the accrual for the contribution to post-employment benefit plans was not material.

(d)       Transactions with other state-controlled entities in the PRC

  The Group is a state-controlled energy and chemical enterprise and operates in an economic regime currently dominated by entities directly or indirectly controlled by the PRC government through its government authorities, agencies, affiliations and other organizations (collectively referred as “state-controlled entities”).

  Apart from transactions with Sinopec Group Company and its affiliates, the Group has transactions with other state-controlled entities include but not limited to the following:

  ·       sales and purchase of goods and ancillary materials;
  ·       rendering and receiving services;
  ·       lease of assets;
  ·       depositing and borrowing money; and
  ·       use of public utilities.

  These transactions are conducted in the ordinary course of the Group’s business on terms comparable to those with other entities that are not state-controlled. The Group has established procurement policies, pricing strategy and approval process for purchases and sales of products and services which do not depend on whether the counterparties are state-controlled entities or not.

  Having considered the transactions potentially affected by related party relationships, the Group’s pricing strategy, procurement policies and approval processes, and the information that would be necessary for an understanding of the potential effect of the related party relationship on the financial statements, the directors are of the opinion that the following related party transactions require disclosure of numeric details:

 
F-53
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)

 
(i)
Transactions with other state-controlled energy and chemical companies

The Group’s major domestic suppliers of crude oil and refined petroleum products are China National Petroleum Corporation and its subsidiaries (“CNPC Group”) and China National Offshore Oil Corporation and its subsidiaries (“CNOOC Group”), which are state-controlled entities.

  During the years ended December 31, 2007, 2008 and 2009, the aggregate amount of crude oil purchased by the Group’s refining segment from CNPC Group and CNOOC Group and refined petroleum purchased by the Group’s marketing and distribution segment from CNPC Group was RMB 70,341, RMB 113,612 and RMB 100,641, respectively.

  The aggregate amounts due from / to CNPC Group and CNOOC Group included in the following accounts captions are summarized as follows:

   
December 31,
 
 
 
2008
   
2009
 
   
RMB
   
RMB
 
Trade accounts receivable
    292       318  
Prepaid expenses and other current assets
    113       17  
Total amounts due from CNPC Group and CNOOC Group
    405       335  
                 
Trade accounts payable
    2,045       3,628  
Accrued expenses and other payables
    433       361  
Total amounts due to CNPC Group and CNOOC Group
    2,478       3,989  

(ii)
Transactions with state-controlled banks
 
The Group deposits its cash with several state-controlled banks in the PRC. The Group also obtains short-term and long-term loans from these banks in the ordinary course of business. The interest rates of the bank deposits and loans are regulated by the PBOC. The Group’s interest income from and interest expense to these state-controlled banks in the PRC are as follows:

   
Years ended December 31,
 
   
2007
   
2008
   
2009
 
   
RMB
   
RMB
   
RMB
 
Interest income
    227       413       238  
Interest expense
    5,450       7,262       2,770  

The amounts of cash deposited at and loans from state-controlled banks in the PRC included in the following accounts captions are summarized as follows:

   
December 31,
 
   
2008
   
2009
 
   
RMB
   
RMB
 
Cash and cash equivalents
    5,725       3,046  
Time deposits with financial institutions
    449       1,236  
Total deposits at state-controlled banks in the PRC
    6,174       4,282  
                 
Short-term loans and current portion of long-term loans
    56,461       22,629  
Long-term loans excluding current portion of long-term loans
    27,844       14,893  
Total loans from state-controlled banks in the PRC
    84,305       37,522  


 
F-54
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)
 
32.     EMPLOYEE BENEFITS PLAN

  As stipulated by the regulations of the PRC, the Group participates in various defined contribution retirement plans organized by municipal and provincial governments for its staff. The Group is required to make contributions to the retirement plans at rates ranging from 18.0% to 23.0% of the salaries, bonuses and certain allowances of its staff. In addition, the Group provides a supplementary retirement plan benefit plan for its staff at rates not exceeding 5% of the salaries. A member of the above plans is entitled to a pension equal to a fixed proportion of the salary prevailing at his or her retirement date. The Group has no other material obligation for the payment of pension benefits associated with these plans beyond the annual contributions described above. The Group’s contributions for the years ended December 31, 2007, 2008 and 2009 were RMB 2,817, RMB 2,873 and RMB 4,647, respectively.

33.      SEGMENT REPORTING

  Segment information is presented in respect of the Group’s business segments.  The format is based on the Group’s management and internal reporting structure.  In view of the fact that the Company and its subsidiaries operate mainly in the PRC, no geographical segment information is presented.

  In a manner consistent with the way in which information is reported internally to the Group’s chief operating decision maker for the purposes of resource allocation and performance assessment, the Group has identified the following five reportable segments. No operating segments have been aggregated to form the following reportable segments.

 
(i)
Exploration and production, which explores and develops oil fields, produces crude oil and natural gas and sells such products to the refining segment of the Group and external customers.
     
 
(ii)
Refining, which processes and purifies crude oil, that is sourced from the exploration and production segment of the Group and external suppliers, and manufactures and sells petroleum products to the chemicals and marketing and distribution segments of the Group and external customers.
     
 
(iii)
Marketing and distribution, which owns and operates oil depots and service stations in the PRC, and distributes and sells refined petroleum products (mainly gasoline and diesel) in the PRC through wholesale and retail sales networks.
     
 
(iv)
Chemicals, which manufactures and sells petrochemical products, derivative petrochemical products and other chemical products mainly to external customers.
     
 
(v)
Corporate and others, which largely comprise the trading activities of the import and export companies of the Group and research and development undertaken by other subsidiaries.
 
The reportable segments are each managed separately because they manufacture and/or distribute distinct products with different production processes and due to their distinct operating and gross margin characteristics.

Group’s chief operating decision maker evaluates the performance and allocates resources to its operating segments on an operating income basis, without considering the effects of finance costs or investment income. Inter-segment transfer pricing is based on cost plus an appropriate margin, as specified by the Group’s policy.

Assets dedicated to a particular segment’s operations are included in that segment’s total assets, which include all tangible and intangible assets, except for cash and cash equivalents, time deposits with financial institutions, investments, deferred tax assets and other non-current assets.


 
F-55
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


  Information on the Group’s reportable segments is as follows:

   
Years ended December 31,
 
 
 
2007
   
2008
   
2009
 
   
RMB
   
RMB
   
RMB
 
Sales of goods
                 
Exploration and production
                 
External sales
    20,437       26,403       19,342  
Inter-segment sales
    107,473       151,393       87,008  
      127,910       177,796       106,350  
Refining
                       
External sales
    120,171       132,209       95,792  
Inter-segment sales
    541,647       692,520       603,870  
      661,818       824,729       699,662  
Marketing and distribution
                       
External sales
    659,552       802,817       778,417  
Inter-segment sales
    2,841       3,200       2,372  
      662,393       806,017       780,789  
Chemicals
                       
External sales
    220,239       219,723       192,735  
Inter-segment sales
    16,529       27,303       21,125  
      236,768       247,026       213,860  
Corporate and others
                       
External sales
    149,585       232,051       229,629  
Inter-segment sales
    303,571       484,343       291,396  
      453,156       716,394       521,025  
Elimination of inter-segment sales
    (972,061 )     (1,358,759 )     (1,005,771 )
Sales of goods
    1,169,984       1,413,203       1,315,915  
                         
Other operating revenues
                       
Exploration and production
    17,757       18,705       17,485  
Refining
    5,035       4,957       3,909  
Marketing and distribution
    461       906       2,302  
Chemicals
    7,298       6,430       4,597  
Corporate and others
    462       90       844  
Other operating revenues
    31,013       31,088       29,137  
                         
Other income
                       
Refining
    1,926       41,017       —  
Marketing and distribution
    2,937       9,840       —  
Total other income
    4,863       50,857       —  
                         
Sales of goods, other operating revenues and other income
    1,205,860       1,495,148       1,345,052  

 
F-56
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)

 
   
Years ended December 31,
 
   
2007
   
2008
   
2009
 
Result
 
RMB
   
RMB
   
RMB
 
Operating income / (loss)
                 
By segment
                 
- Exploration and production
    48,766       66,569       19,644  
- Refining
    (10,997 )     (63,635 )     23,077  
- Marketing and distribution
    35,904       38,519       30,300  
- Chemicals
    13,303       (12,950 )     13,615  
- Corporate and others
    (1,480 )     (2,167 )     (2,205 )
Total segment operating income
    85,496       26,336       84,431  
Net finance costs
    (8,363 )     (5,190 )     (7,234 )
Investment income
    1,670       390       374  
Income from associates and jointly controlled entities
    4,044       580       2,997  
Earning before income tax
    82,847       22,116       80,568  


   
December 31,
 
 
 
2007
   
2008
   
2009
 
   
RMB
   
RMB
   
RMB
 
Assets
                 
Segment assets
                 
- Exploration and production
    198,998       235,866       263,041  
- Refining
    198,222       184,531       213,027  
- Marketing and distribution
    138,398       144,139       153,777  
- Chemicals
    121,716       121,964       128,322  
- Corporate and others
    34,282       31,120       60,433  
Total segment assets
    691,616       717,620       818,600  
                         
Interest in associates and jointly controlled entities
    29,588       27,376       32,090  
Investments
    3,195       1,483       2,174  
Deferred tax assets
    10,439       13,768       13,975  
Cash and cash equivalents and time deposits with financial institutions
    8,453       7,760       9,986  
Income tax receivable
    —       9,784       —  
Other unallocated assets
    80       1,381       1,017  
Total assets
    743,371       779,172       877,842  


 
F-57
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


  Segment capital expenditure is the total cost incurred during the year to acquire segment assets that are expected to be used for more than one year.

   
Years ended December 31,
 
 
 
2007
   
2008
   
2009
 
   
RMB
   
RMB
   
RMB
 
Capital expenditure
                 
Exploration and production
    54,498       57,646       51,550  
Refining
    22,964       12,793       15,468  
Marketing and distribution
    14,671       14,796       16,283  
Chemicals
    16,184       20,622       25,207  
Corporate and others
    3,289       2,393       1,505  
      111,606       108,250       110,013  
Depreciation, depletion and amortization
                       
Exploration and production
    18,216       22,115       24,648  
Refining
    9,177       9,658       10,330  
Marketing and distribution
    6,208       5,270       5,999  
Chemicals
    8,977       8,463       8,574  
Corporate and others
    1,070       815       936  
      43,648       46,321       50,487  
Impairment losses on long-lived assets
                       
Exploration and production
    481       5,991       1,595  
Refining
    1,070       270       396  
Marketing and distribution
    1,237       709       1,479  
Chemicals
    318       1,511       3,807  
Corporate and others
    —       19       8  
      3,106       8,500       7,285  

 
F-58
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


34.     PRINCIPAL SUBSIDIARIES

  As of December 31, 2009, the following list contains the particulars of subsidiaries which principally affected the results, assets and liabilities of the Group.
 
Name of company
 
Particulars
of issued
  capital
 
 
Type of
legal entity
 
Percentage of equity
 
  Principal activities
                 
China Petrochemical International Company Limited
 
RMB 1,400
 
Limited company
 
100.00
 
Trading of petrochemical products
Sinopec Sales Company Limited
 
RMB 1,700
 
Limited company
 
100.00
 
Marketing and distribution of refined petroleum products
Sinopec Yangzi Petrochemical Company Limited
 
RMB 16,337
 
Limited company
 
100.00
 
Manufacturing of intermediate petrochemical products and petroleum products
Fujian Petrochemical Company  Limited (i)
 
RMB 4,769
 
Limited company
 
50.00
 
Manufacturing of plastics, intermediate petrochemical products and petroleum products
Sinopec Shanghai Petrochemical Company Limited
 
RMB 7,200
 
Limited company
 
55.56
 
Manufacturing of synthetic fibres, resin and plastics, intermediate petrochemical products and petroleum products
Sinopec Kantons Holdings Limited
 
HKD 104
 
Limited company
 
72.34 
 
Trading of crude oil and petroleum products
Sinopec Yizheng Chemical Fibre Company Limited (i)
 
RMB 4,000
 
Limited company
 
42.00
 
Production and sale of polyester chips and polyester fibres
Sinopec Zhongyuan Petrochemical Company Limited
 
RMB 2,400
 
Limited company
 
93.51
 
Manufacturing of chemical products
Sinopec Shell (Jiangsu) Petroleum Marketing Company Limited
 
RMB 830
 
Limited company
 
60.00
 
Marketing and distribution of refined petroleum products
BP Sinopec (Zhejiang) Petroleum Company Limited
 
RMB 800
 
Limited company
 
60.00
 
Marketing and distribution of refined petroleum products
Sinopec Qingdao Refining and Chemical Company Limited
 
RMB 5,000
 
Limited company
 
85.00
 
Manufacturing of intermediate petrochemical products and petroleum products
China International United Petroleum and Chemical Company Limited
 
RMB 3,040
 
Limited company
 
100.00
 
Trading of crude oil and petrochemical products
Sinopec Hainan Refining and Chemical Company Limited
 
RMB 3,986
 
Limited company
 
75.00
 
Manufacturing of intermediate petrochemical products and petroleum products
Sinopec (Hong Kong) Limited
 
HKD 5,477
 
Limited company
 
100.00
 
Trading of crude oil and petrochemical products
Sinopec Senmei (Fujian) Petroleum Ltd.
 
RMB 1,840
 
Limited company
 
55.00
 
Marketing and distribution of refined petroleum products
Sinopec Qingdao Petrochemical Company Limited
 
RMB 1,595
 
Limited company
 
100.00
 
Manufacturing of intermediate petrochemical products and petroleum products
Sinopec Chemical Sales Company Limited
 
RMB 1,000
 
Limited company
 
100.00
 
Trading of petrochemical products
Sinopec International Petroleum Exploration and Production Limited
 
RMB 4,500
 
Limited company
 
100.00
 
Investment in exploration, production and sales of petroleum and natural gas
                 

  Except for Sinopec Kantons Holdings Limited and Sinopec (Hong Kong) Limited, which are incorporated in Bermuda and Hong Kong respectively, all of the above principal subsidiaries are incorporated in the PRC.

(i)
The Company consolidated the financial statements of the entity because it controlled the board of this entity and had the power to govern its financial and operating policies.
 

 
F-59
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


35.      FINANCIAL RISK MANAGEMENT AND FAIR VALUES

Overview

  Financial assets of the Group include cash and cash equivalents, time deposits with financial institutions, investments, trade accounts receivable, bills receivable, amounts due from Sinopec Group Company and its affiliates, advances to third parties, amounts due from associates and jointly controlled entities, derivative financial instruments and other receivables. Financial liabilities of the Group include short-term and long-term debts, loans from Sinopec Group Company and its affiliates, trade accounts payable, bills payable, amounts due to Sinopec Group Company and its affiliates, derivative financial instruments and advances from third parties.
 
 
The Group has exposure to the following risks from its use of financial instruments:

 
·
credit risk;
 
·
liquidity risk;
 
·
market risk; and
 
·
equity price risk.

The Board of Directors has overall responsibility for the establishment, oversight of the Group’s risk management framework, and developing and monitoring the Group’s risk management policies.

The Group’s risk management policies are established to identify and analyze the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group’s activities. The Group, through its training and management controls and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. Internal audit department undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the Group’s audit committee.

Credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s deposits placed with financial institutions and receivables from customers. To limit exposure to credit risk relating to deposits, the Group primarily places cash deposits only with large financial institution in the PRC with acceptable credit ratings. The majority of the Group’s trade accounts receivable relate to sales of petroleum and chemical products to related parties and third parties operating in the petroleum and chemical industries. Management performs ongoing credit evaluations of its customers’ financial condition and generally does not require collateral on trade accounts receivable. The Group maintains an impairment loss for doubtful accounts and actual losses have been within management’s expectations. No single customer accounted for greater than 10% of total trade accounts receivable.  The details of the Group’s credit policy and quantitative disclosures in respect of the Group’s exposure on credit risk for trade receivables are set out in Note 13.

The carrying amounts of cash and cash equivalents, time deposits with financial institutions, trade accounts and bills receivables, derivative financial instruments and other receivables, represent the Group’s maximum exposure to credit risk in relation to financial assets.

 
F-60
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


Liquidity risk

Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group’s approach in managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. Management prepares monthly cash flow budget to ensure that the Group will always have sufficient liquidity to meet its financial obligation as they fall due.  The Group arranges and negotiates financing with financial institutions and maintains a certain level of standby credit facilities to reduce the Group’s liquidity risk.

As of December 31, 2008 and 2009, the Group has standby credit facilities with several PRC financial institutions which provide borrowings up to RMB 185,000 and RMB 159,500 on an unsecured basis, at a weighted average interest rate of 4.65% and 3.33% per annum, respectively. As of December 31, 2008 and 2009, the Group’s outstanding borrowings under these facilities were RMB 33,484 and RMB 9,361 and were included in short-term debts, respectively.

The following table sets out the remaining contractual maturities at the balance sheet date of the Group’s financial liabilities, which are based on contractual undiscounted cash flows (including interest payments computed using contractual rates or, if floating, based on prevailing rates current at the balance sheet date) and the earliest date the Group would be required to repay:

   
December 31, 2008
 
   
 
Carrying amount
   
Total contractual undiscounted cash flow
   
Within 1 year or on demand
   
More than 1 year but less than 2 years
   
More than 2 years but less than 5 years
   
More than 5 years
 
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
 
                                     
Short-term debts
    75,516       77,303       77,303       —       —       —  
Long-term debts
    90,254       115,721       3,442       12,712       30,013       69,554  
Loans from Sinopec Group Company and its affiliates
    70,300       71,774       34,618       509       627       36,020  
Trade accounts payable
    56,464       56,464       56,464       —       —       —  
Bills payable
    18,753       18,768       18,768       —       —       —  
Accrued expenses and other payables
    53,108       53,108       53,108       —       —       —  
      364,395       393,138       243,703       13,221       30,640       105,574  

Derivatives settled gross:
 
Forward exchange contracts
 
- outflow
    (4,366 )     (4,415 )     (4,415 )     —       —       —  
- inflow
    4,480       4,531       4,531       —       —       —  

   
December 31, 2009
 
   
 
Carrying amount
   
Total contractual undiscounted cash flow
   
Within 1 year or on demand
   
More than 1 year but less than 2 years
   
More than 2 years but less than 5 years
   
More than 5 years
 
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
   
RMB
 
                                     
Short-term debts
    58,898       59,835       59,835       —       —       —  
Long-term debts
    108,828       130,424       3,081       7,004       99,942       20,397  
Loans from Sinopec Group Company and its affiliates
    50,643       51,249       14,027       222       1,440       35,560  
Trade accounts payable
    97,749       97,749       97,749       —       —       —  
Bills payable
    23,111       23,114       23,114       —       —       —  
Accrued expenses and other payables
    56,778       56,778       56,778       —       —       —  
      396,007       419,149       254,584       7,226       101,382       55,957  

Management believes that the Group’s current cash on hand, expected cash flows from operations and available standby credit facilities from financial institutions will be sufficient to meet the Group’s working capital requirements and repay its short term debts and obligations when they become due.

 
F-61
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


Currency risk

  Currency risk arises on financial instruments that are denominated in a currency other than the functional currency in which they are measured.  The Group’s currency risk exposure primarily relates to short-term and long-term debts and loans from Sinopec Group Company and its affiliates denominated in US dollars, Japanese Yen and Hong Kong dollars. The Group enters into a number of foreign exchange contracts to manage such exposure.

The changes in the fair value of forward exchange contracts that economically hedge monetary assets and liabilities in foreign currencies are recognized as finance costs in the consolidated statements of income. As of December 31, 2008, the net fair value of forward exchange contracts used by the Group as economic hedges of monetary assets and liabilities in foreign currencies was RMB 114, and the notional amounts of these contracts held by the Group were USD 660. There was no forward exchange contract held by the Group as of December 31, 2009.

Included in short-term and long-term debts and loans from Sinopec Group Company and its affiliates of the Group are the following amounts denominated in a currency other than the functional currency of the entity to which they relate:

   
December 31,
 
Gross exposure arising from loans and borrowings
 
2008
   
2009
 
US Dollars
    USD    1,232       USD    1,341  
Japanese Yen
    JPY   28,037       JPY   22,500  
Hong Kong Dollars.
    HKD 11,192       HKD 11,779  
 
  A 5 percent strengthening of Renminbi against the following currencies as of December 31 would have increased net income and retained earnings of the Group by the amounts shown below. This analysis has been determined assuming that the change in foreign exchange rates had occurred at the balance sheet date and had been applied to the foreign currency balances to which the Group has significant exposure as stated above, and that all other variables, in particular interest rates, remain constant.  The analysis is performed on the same basis for 2008.

   
December 31,
 
 
 
2008
   
2009
 
US Dollars
    147       343  
Japanese Yen
    80       62  
Hong Kong Dollars
    370       389  

  Other than the amounts as disclosed above, the amounts of other financial assets and liabilities of the Group are substantially denominated in the functional currency of respective entity of the Group.

Interest rate risk

  The Group’s interest rate risk exposure arises primarily from its short-term and long-term debts.  Debts carrying interest at variable rates and at fixed rates expose the Group to cash flow interest rate risk and fair value interest rate risk respectively. The interest rates of short-term and long-term debts, and loans from Sinopec Group Company and its affiliates of the Group are disclosed in Note 24.

  As of December 31, 2008 and 2009, it is estimated that a general increase / decrease of 100 basis points in variable interest rates, with all other variables held constant, would decrease / increase the Group’s net income and retained earnings by approximately RMB 263 and RMB 194, respectively. This sensitivity analysis has been determined assuming that the change in interest rates had occurred at the balance sheet date and the change was applied to the Group’s debts outstanding at that date with exposure to cash flow interest rate risk.  The analysis is performed on the same basis for 2008.


 
F-62
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


Commodity price risk

  The Group engages in oil and gas operations and is exposed to commodity price risk related to price volatility of crude oil and refined oil products. The fluctuations in prices of crude oil and refined oil products could have significant impact on the Group. The Group uses derivative financial instruments, including commodity futures and swaps, to manage a portion of this risk. As of December, 31 2009, the Group had certain commodity contracts of crude oil and refined oil products designated as qualified cash flow hedges and economic hedges. The fair values of these derivative financial instruments as of December 31, 2009 are set out in Notes 15 and 26.

  As of December 31, 2008, it is estimated that a general increase/decrease of USD 10 per barrel in crude oil and refined oil products, with all other variables held constant, would have no effect to the Group’s net income and retained earnings, and decrease/increase the Group’s other reserves by approximately RMB 200. As of December 31, 2009, it is estimated that a general increase/decrease of USD 10 per barrel in crude oil and refined oil products, with all other variables held constant, would decrease/increase the Group’s net income and retained earnings by approximately RMB 215, and increase/decrease the Group’s other reserves by approximately RMB 1,991. This sensitivity analysis has been determined assuming that the change in prices had occurred at the balance sheet date and the change was applied to the Group’s derivative financial instruments at that date with exposure to commodity price risk. The analysis was performed on the same basis for 2008.

Equity price risk

  The Group is exposed to equity price risk arising from changes in the Company’s own share price to the extent that the Company’s own equity instruments underlie the fair values of derivatives of the Group. As of December 31, 2009, the Group’s exposure to equity price risk is the derivative embedded in the Convertible Bonds issued by the Company as disclosed in Note 24(c).

  As of December 31, 2008, it is estimated that an increase of 20% in the Company’s own share price would decrease the Group’s net income and retained earnings by approximately RMB 62 while a decrease of 20% in the Company’s own share price would have no effect to the Group’s net income and retained earnings. As of December 31, 2009, it is estimated that an increase of 20% in the Company’s own share price would decrease the Group’s net income and retained earnings by approximately RMB 306 while a decrease of 20% in the Company’s own share price would increase the Group’s net income and retained earnings by approximately RMB 156. The sensitivity analysis has been determined assuming that the changes in the Company’s own share price had occurred at the balance sheet date and that all other variables remain constant. The analysis was performed on the same basis for 2008.

Fair values

(i)        Financial instruments carried at fair value

  The following table presents the carrying value of financial instruments measured at fair value at the balance sheet date across the three levels of the fair value hierarchy defined in IFRS 7, Financial Instruments: Disclosures , with the fair value of each financial instrument categorized in its entirety based on the lowest level of input that is significant to that fair value measurement. The levels are defined as follows:

·
Level 1 (highest level): fair values measured using quoted prices (unadjusted) in active markets for identical financial instruments.
   
·
Level 2: fair values measured using quoted prices in active markets for similar financial instruments, or using valuation techniques in which all significant inputs are directly or indirectly based on observable market data.
   
·
Level 3 (lowest level): fair values measured using valuation techniques in which any significant input is not based on observable market data.

 
F-63
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)



   
December 31, 2009
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
   
RMB
   
RMB
   
RMB
   
RMB
 
Assets
                       
Available-for-sale financial assets:
                       
- Listed
    61       —       —       61  
- Unlisted
    —       1,400       —       1,400  
Derivative financial instruments:
                               
- Derivative financial assets
    17       307       —       324  
      78       1,707       —       1,785  
                                 
Liabilities
                               
Derivative financial instruments:
                               
- Derivative components of the Convertible Bonds
    —       218       —       218  
- Other derivative financial liabilities
    4       754       —       758  
      4       972       —       976  

  During the year there were no transfers between instruments in Level 1 and Level 2.

(ii)       Fair values of financial instruments carried at other than fair value

  The disclosures of the fair value estimates, and their methods and assumptions of the Group’s financial instruments, are made to comply with the requirements of IFRS 7 and IAS 39 and should be read in conjunction with the Group’s consolidated financial statements and related notes. The estimated fair value amounts have been determined by the Group using market information and valuation methodologies considered appropriate. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Group could realize in a current market exchange. The use of different market assumptions and / or estimation methodologies may have a material effect on the estimated fair value amounts.

  The fair values of the Group’s financial instruments (other than long-term indebtedness and investment in unquoted equity securities) approximate their carrying amounts due to the short-term maturity of these instruments.  The fair values of long-term indebtedness are estimated by discounting future cash flows using current market interest rates offered to the Group for debt with substantially the same characteristics and maturities ranging 3.58% to 5.94% and 4.18% to 5.94% for the years ended December 31, 2008 and 2009, respectively. The following table presents the carrying amount and fair value of the Group’s long-term indebtedness other than loans from Sinopec Group Company and its affiliates as of December 31, 2008 and 2009:

   
December 31,
 
 
 
2008
   
2009
 
   
RMB
   
RMB
 
Carrying amount
    109,415       115,139  
Fair value
    113,060       114,471  

  The Group has not developed an internal valuation model necessary to make the estimate of the fair value of loans from Sinopec Group Company and its affiliates as it is not considered practicable to estimate their fair value because the cost of obtaining discount and borrowing rates for comparable borrowings would be excessive based on the Reorganization of the Group, its existing capital structure and the terms of the borrowings.

  Investments in unquoted equity securities are individually and in aggregate not material to the Group’s financial condition or results of operations. There are no listed market prices for such interests in the PRC and, accordingly, a reasonable estimate of fair value could not be made without incurring excessive costs. The Group intends to hold these unquoted equity securities for long term purpose.


 
F-64
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


36.      ACCOUNTING ESTIMATES AND JUDGMENTS

  The Group’s financial condition and results of operations are sensitive to accounting methods, assumptions and estimates that underlie the preparation of the financial statements.  Management bases the assumptions and estimates on historical experience and on various other assumptions that it believes to be reasonable and which form the basis for making judgments about matters that are not readily apparent from other sources.  On an on-going basis, management evaluates its estimates.  Actual results may differ from those estimates as facts, circumstances and conditions change.

  The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors to be considered when reviewing the financial statements.  The significant accounting policies are set forth in Note 2.  Management believes the following critical accounting policies involve the most significant judgments and estimates used in the preparation of the financial statements.

Oil and gas properties and reserves

  The accounting for the exploration and production’s oil and gas activities is subject to accounting rules that are unique to the oil and gas industry.  There are two methods to account for oil and gas business activities, the successful efforts method and the full cost method.  The Group has elected to use the successful efforts method.  The successful efforts method reflects the volatility that is inherent in exploring for mineral resources in that costs of unsuccessful exploratory efforts are charged to expense as they are incurred.  These costs primarily include dry hole costs, seismic costs and other exploratory costs.  Under the full cost method, these costs are capitalized and written-off or depreciated over time.

  Engineering estimates of the Group’s oil and gas reserves are inherently imprecise and represent only approximate amounts because of the subjective judgments involved in developing such information.  There are authoritative guidelines regarding the engineering criteria that have to be met before estimated oil and gas reserves can be designated as “proved”.  Proved and proved developed reserves estimates are updated at least annually and take into account recent production and technical information about each field.  In addition, as prices and cost levels change from year to year, the estimate of proved and proved developed reserves also changes.  This change is considered a change in estimate for accounting purposes and is reflected on a prospective basis in related depreciation rates.

  Future dismantlement costs for oil and gas properties are estimated with reference to engineering estimates after taking into consideration the anticipated method of dismantlement required in accordance with industry practices in similar geographic area, including estimation of economic life of oil and gas properties, technology and price level.  The present values of these estimated future dismantlement costs are capitalized as oil and gas properties with equivalent amounts recognized as provision for dismantlement costs.

  Despite the inherent imprecision in these engineering estimates, these estimates are used in determining depreciation expense, impairment expense and future dismantlement costs.  Depreciation rates are determined based on estimated proved developed reserve quantities (the denominator) and capitalized costs of producing properties (the numerator).  Producing properties’ capitalized costs are amortized based on the units of oil or gas produced.

Impairment for long lived assets

  If circumstances indicate that the net book value of a long-lived asset may not be recoverable, the asset may be considered “impaired”, and an impairment loss may be recognized in accordance with IAS 36 “Impairment of Assets”.  The carrying amounts of long-lived assets are reviewed periodically in order to assess whether the recoverable amounts have declined below the carrying amounts. These assets are tested for impairment whenever events or changes in circumstances indicate that their recorded carrying amounts may not be recoverable. When such a decline has occurred, the carrying amount is reduced to recoverable amount.  For goodwill, the recoverable amount is estimated annually.  The recoverable amount is the greater of the net selling price and the value in use.  It is difficult to precisely estimate selling price because quoted market prices for the Group’s assets or cash-generating units are not readily available. In determining the value in use, expected cash flows generated by the asset or the cash-generating unit are discounted to their present value, which requires significant judgment relating to level of sale volume, selling price and amount of operating costs. Management uses all readily available information in determining an amount that is a reasonable approximation of recoverable amount, including estimates based on reasonable and supportable assumptions and projections of sale volume, selling price and amount of operating costs.


 
F-65
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(All amounts in millions, except per share data and except otherwise stated)


Depreciation

  Property, plant and equipment, other than oil and gas properties, are depreciated on a straight-line basis over the estimated useful lives of the assets, after taking into account the estimated residual value. Management reviews the estimated useful lives of the assets regularly in order to determine the amount of depreciation expense to be recorded during any reporting period. The useful lives are based on the Group’s historical experience with similar assets and take into account anticipated technological changes. The depreciation expense for future periods is adjusted if there are significant changes from previous estimates.

Impairment for bad and doubtful debts

  Management estimates impairment losses for bad and doubtful debts resulting from the inability of the Group’s customers to make the required payments. Management bases the estimates on the aging of the accounts receivable balance, customer credit-worthiness, and historical write-off experience. If the financial condition of the customers were to deteriorate, actual write-offs would be higher than estimated.

Allowance for diminution in value of inventories

  If the costs of inventories fall below their net realizable values, an allowance for diminution in value of inventories is recognized.  Net realizable value represents the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale.  Management bases the estimates on all available information, including the current market prices of the finished goods and raw materials, and historical operating costs.  If the actual selling prices were to be lower or the costs of completion were to be higher than estimated, the actual allowance for diminution in value of inventories could be higher than estimated.

37.     POSSIBLE IMPACT OF AMENDMENTS, NEW STANDARDS AND INTERPRETATIONS ISSUED BUT NOT YET EFFECTIVE FOR THE ANNUAL ACCOUNTING PERIOD ENDED DECEMBER 31, 2009

  Up to the date of issue of these financial statements, the IASB has issued a number of amendments, new standards and interpretations which are not yet effective for the annual accounting period ended December 31, 2009 and which have not been adopted in these financial statements.

  Management is in the process of making an assessment of what the impact of these amendments, new standards and new interpretations is expected to be in the period of initial application and has so far concluded that the adoption of these amendments, new standards and new interpretations is unlikely to have a significant impact on the Group’s results of operations and financial position.

38.       POST BALANCE SHEET EVENT

Pursuant to the resolution passed at the Directors’ meeting on March 26, 2010, the Group entered into an agreement with Sinopec Overseas Oil & Gas Limited (“SOOGL”), a subsidiary of Sinopec Group Company, to acquire 55% equity interests of Sonangol Sinopec International Limited (“SSI”) and to acquire the shareholder’s loans of USD 779 provided by SOOGL to SSI, at a total cash consideration of USD 2,457. SSI is engaged in the oil and gas operations in Angola. The transaction is subject to the approval from the shareholders’ meeting, the relevant governmental bodies or the relevant creditor.

39.      PARENT AND ULTIMATE HOLDING COMPANY

  The directors consider the parent and ultimate holding company of the Group as of December 31, 2009 is Sinopec Group Company, a state-owned enterprise established in the PRC. This entity does not produce financial statements available for public use.

 
F-66
 
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED)
(All currency amounts in millions)

  In accordance with the Accounting Standards Update 2010-03, Extractive Activities - Oil and Gas (Topic 932): Oil and Gas Reserve Estimation and Disclosures , ("ASU 2010-03"), issued by the Financial Accounting Standards Board of the United States, this section provides supplemental information on oil and gas exploration and producing activities of the Group as of December 31, 2007, 2008 and 2009, and for the years then ended in the following six separate tables. Tables I through III provide historical cost information under IFRS pertaining to capitalized costs related to oil and gas producing activities; costs incurred in oil and gas exploration and development; and results of operations related to oil and gas producing activities. Tables IV through VI present information on the Group’s estimated net proved reserve quantities; standardized measure of discounted future net cash flows; and changes in the standardized measure of discounted future net cash flows.

Table I:        Capitalized costs related to oil and gas producing activities

   
Years ended December 31,
 
   
2007
   
2008
   
2009
 
   
RMB
   
RMB
   
RMB
 
Property cost
 
___
   
___
   
___
 
Wells and related equipment and facilities
    259,373       292,897       333,656  
Supporting equipment and facilities
    25,145       46,717       68,779  
Uncompleted wells, equipment and facilities
    34,441       56,197       46,297  
Total capitalized costs
    318,959       395,811       448,732  
Accumulated depreciation, depletion, amortization and impairment losses
    (130,837 )     (173,551 )     (199,182 )
Net capitalized costs
    188,122       222,260       249,550  

Table II:       Cost incurred in oil and gas exploration and development

   
Years ended December 31,
 
   
2007
   
2008
   
2009
 
   
RMB
   
RMB
   
RMB
 
Exploration
    15,774       12,947       14,572  
Development
    49,829       53,009       47,523  
Total costs incurred
    65,603       65,956       62,095  

Table III:      Results of operations for oil and gas producing activities

   
Years ended December 31,
 
   
2007
   
2008
   
2009
 
   
RMB
   
RMB
   
RMB
 
Revenues
                 
Sales
    20,092       26,192       19,114  
Transfers
    107,473       151,051       86,828  
      127,565       177,243       105,942  
Production costs excluding taxes
    (28,855 )     (30,837 )     (31,948 )
Exploration expenses
    (11,105 )     (8,310 )     (10,545 )
Depreciation, depletion, amortization and impairment losses
    (18,697 )     (26,715 )     (26,243 )
Taxes other than income tax
    (13,604 )     (35,980 )     (9,188 )
Income before income tax
    55,304       75,401       28,018  
Income tax expense
    (18,250 )     (18,850 )     (7,005 )
Results of operation from producing activities
    37,054       56,551       21,013  

 
F-67
 
 CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED) – (Continued)
(All currency amounts in millions)
 

The results of operations for producing activities for the years ended December 31, 2007, 2008 and 2009 are shown above. Revenues include sales to unaffiliated parties and transfers (essentially at third-party sales prices) to other segments of the Group. All revenues reported in this table do not include royalties to others as there were none. Income taxes are based on statutory tax rates, reflecting allowable deductions and tax credits. General corporate overhead and interest income and expense are excluded from the results of operations.
 
Table IV:     Reserve quantities information

  The Group’s estimated net proved underground oil and gas reserves and changes thereto for the years ended December 31, 2007, 2008 and 2009 are shown in the following table.

  Proved oil and gas reserves are those quantities of oil and gas, which by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulation before the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether the estimate is a deterministic estimate or probabilistic estimate. Due to the inherent uncertainties and the limited nature of reservoir data, estimates of underground reserves are subject to change as additional information becomes available.

  Proved developed oil and gas reserves are proved reserves that can be expected to be recovered through existing wells with existing equipment and operating methods or in which the cost of the required equipment is relatively minor compared with the cost of a new well.

  “Net” reserves exclude royalties and interests owned by others and reflect contractual arrangements in effect at the time of the estimate.

  Year-end reserves quantities for the year ended December 31, 2009 shown in the following tables were calculated using the average, first-day-of-the-month price for oil and gas during the twelve-month period before the ending date of the period covered by the report. Year-end reserves quantities for the years ended December 31, 2007 and 2008 shown in the following tables were calculated using year-end price. The estimated impact of changing to the average, first-day-of-the-month price for oil and gas during the twelve-month period before the ending date of the period was not significant on the Group’s proved reserves for the year ended December 31, 2009.

   
Years ended December 31,
 
 
 
2007
   
2008
   
2009
 
Proved developed and undeveloped reserves (oil) (million barrels)
                 
Beginning of year
    3,293       3,024       2,841  
Revisions of previous estimates
    (250 )     (94 )     80  
Improved recovery
    125       98       131  
Extensions and discoveries
    148       110       69  
Production
    (292 )     (297 )     (301 )
End of year
    3,024       2,841       2,820  
Proved developed reserves
                       
Beginning of year
    2,903       2,651       2,451  
End of year
    2,651       2,451       2,513  
Proved undeveloped reserves
                       
Beginning of year
    390       373       390  
End of year
    373       390       307  
Proved developed and undeveloped reserves (gas) (billion cubic feet)
                       
Beginning of year
    2,856       6,331       6,959  
Revisions of previous estimates
    222       203       52  
Extensions and discoveries
    3,536       718       27  
Production
    (283 )     (293 )     (299 )
End of year
    6,331       6,959       6,739  
 

 
F-68
 
 CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED) – (Continued)
(All currency amounts in millions)
 
 
Proved developed reserves
                       
Beginning of year
    1,472       1,518       1,571  
End of year
    1,518       1,571       1,727  
Proved undeveloped reserves
                       
Beginning of year
    1,384       4,813       5,388  
End of year
    4,813       5,388       5,012  
 
Table V:      Standardized measure of discounted future net cash flows

  The standardized measure of discounted future net cash flows, related to the above proved oil and gas reserves, is calculated in accordance with the requirements of ASU 2010-03. Estimated future cash inflows from production are computed by applying the year-end prices for oil and gas for the years ended December 31, 2007 and 2008 and the average, first-day-of-the-month price for oil and gas during the twelve-month period before the ending date of the period covered by the report for the year ended December 31, 2009 to year-end quantities of estimated net proved reserves. Future price changes are limited to those provided by contractual arrangements in existence at the end of each reporting year. Future development and production costs are those estimated future expenditures necessary to develop and produce year-end estimated proved reserves based on year-end cost indices, assuming continuation of year-end economic conditions. Estimated future income taxes are calculated by applying appropriate year-end statutory tax rates to estimated future pre-tax net cash flows, less the tax basis of related assets. Discounted future net cash flows are calculated using 10% midperiod discount factors. This discounting requires a year-by-year estimate of when the future expenditure will be incurred and when the reserves will be produced.

  The information provided does not represent management’s estimate of the Group’s expected future cash flows or value of proved oil and gas reserves. Estimates of proved reserve quantities are imprecise and change over time as new information becomes available. Moreover, probable and possible reserves, which may become proved in the future, are excluded from the calculations. The arbitrary valuation requires assumptions as to the timing and amount of future development and production costs. The calculations are made for the years ended December 31, 2007, 2008 and 2009 and should not be relied upon as an indication of the Group’s future cash flows or value of its oil and gas reserves.

   
Years ended December 31,
 
 
 
2007
   
2008
   
2009
 
   
RMB
   
RMB
   
RMB
 
                   
Future cash flows
    1,835,471       977,904       1,207,127  
Future production costs
    (799,408 )     (536,442 )     (546,590 )
Future development costs
    (68,970 )     (42,207 )     (32,895 )
Future income tax expenses
    (196,103 )     (44,249 )     (94,523 )
Undiscounted future net cash flows
    770,990       355,006       533,119  
10% annual discount for estimated timing of cash flows
    (349,987 )     (113,367 )     (228,932 )
Standardized measure of discounted future net cash flows
    421,003       241,639       304,187  
                         


 
F-69
 
 CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED) – (Continued)
(All currency amounts in millions)

 
Table VI:     Changes in the standardized measure of discounted future net cash flows

   
Years ended December 31,
 
 
 
2007
   
2008
   
2009
 
   
RMB
   
RMB
   
RMB
 
                   
Sales and transfers of oil and gas produced, net of production costs.
    (77,522 )     (112,424 )     (55,429 )
Net changes in prices and production costs.
    165,191       (231,578 )     62,417  
Net change due to extensions, discoveries and improved recoveries
    68,788       32,011       35,009  
Revisions of previous quantity estimates
    (46,980 )     (8,298 )     9,897  
Previously estimated development costs incurred during the year
    8,783       27,578       13,531  
Accretion of discount
    23,726       36,031       20,627  
Net change in income taxes
    (4,716 )     76,964       (23,814 )
Others
    272       352       310  
Net change for the year
    137,542       (179,364 )     62,548  
 

 
F-70
 
 
SIGNATURE

 
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
 
 
China Petroleum & Chemical Corporation
     
     
 
By
/s/ Chen Ge
   
Name:
Chen Ge
   
Title:
Secretary to the Board of Directors
       

 
Date: April 30, 2010
 
Exhibit 1.2



Articles of Association
 
of
 
China Petroleum & Chemical Corporation














Revised at the Annual General Meeting for the Year 2008 on May 22, 2009
Approved by the SASAC on September 2, 2009


 
 
 

CHAPTER 1  GENERAL PROVISIONS
 
Article 1
These Articles of Association are drawn up in accordance with the “Company Law of the People’s Republic of China” (the “Company Law”), the "Securities Law of the People's Republic of China" ("Securities Law"), “Special regulations of the State Council regarding the issue of shares overseas and the listing of shares overseas by companies limited by share” (the “Special Regulations”), “Mandatory provisions for the Articles of Association of the Company to be Listed Overseas” (“Mandatory Provisions”), “Guidelines for Articles of Association of Listed Companies” ("Guidelines on Articles"), “Standards for the Governance of Listed Companies” and other relevant laws and regulations to maintain the legitimate interests of China Petroleum & Chemical Corporation (the “Company”) and its shareholders and creditors, and to regulate the organization and conducts of the Company.
   
Article 2
These Articles of Association and its appendices of the Company are effective on the date of incorporation of the Company.
   
 
From the date on which the Articles of Association and its appendices come into effect, the Articles of Association and its appendices shall constitute a legally binding document regulating the Company’s organization and activities, and the rights and obligations between the Company and its shareholders and among the shareholders inter se.
   
Article 3
These Articles of Association and its appendices are binding on the Company, its shareholders, directors, supervisors and senior management personnel; all of whom are entitled, according to these Articles of Association and its appendices, to make claims concerning the affairs of the Company.
   
 
A shareholder may take action against the Company ， other shareholders, directors, supervisors or senior management personnel of the Company pursuant to these Articles of Association and its appendices; the Company may take action against its shareholders, directors, supervisors or senior management personnel pursuant to these Articles of Association and its appendices.
   
 
The actions referred to in the preceding paragraph include court proceedings and arbitration proceedings.
   
 
Unless otherwise defined in the contexts, senior management personnel referred to in the Articles of Association and its appendices means the president, senior vice-president, chief financial officer, vice president, the secretary to the Board and any other person designated by the Company.
   
Article 4
The Company is a joint stock limited company established in accordance with the Company Law, the Special Regulations and other relevant laws and administrative regulations of the State.
   
 
The Company was established by way of promotion with the approval of the State Economic and Trade Commission of the People’s Republic of China, as evidenced by approval document "Approval in relation to the Agreement to Establish China Petroleum and Chemical " (Guo Jing Mao Qi Gai [2000] No. [154]). It was registered with and has obtained a business license from China’s State Administration Bureau of Industry and Commerce on 25 February 2000 in the People's Republic of China (The " PRC ", for the purpose of this Articles of Association and its appendices, excluding Hong Kong Special Administrative Region, Macau Special Administrative Region and Taiwan). The Company’s business license number is: 100000000032985.
   
 
The promoter of the Company is: China Petrochemical Corporation.
   
Article 5
The registered name of the Company is:
     
 
In Chinese:
中国石油化工股份有限公司
     
 
Abbreviation:
“ 中国石化 ”
     
 
In English:
China Petroleum & Chemical Corporation
 
 
 
1
 
 
 
 
Abbreviation:
SINOPEC Corp.
     
Article 6
The address of the Company:
22 Chaoyangmen North Street, Chaoyang District, Beijing, China.
     
 
Zip:
100728
     
 
Tel:
(86-10) 59969999
     
 
Fax:
(86-10) 59760111
     
 
Website:
WWW.SINOPEC.COM.CN
   
Article 7
The Company’s legal representative is the Chairman of the board of directors of the Company.
   
Article 8
The Company is a joint stock limited company which has perpetual existence.
   
 
The capital of the Company is divided into shares of equal value. The rights and responsibilities of the Company’s shareholders shall only be limited to the proportion of the shares as subscribed by them; the Company shall be responsible for the Company’s debts by all of its assets.
   
 
The Company is an independent legal person, subject to the governance and protection of the laws and administrative rules of the PRC.
   
Article 9
The Company may set up wholly-owned or controlled branch organizations such as subsidiaries, branches, representative offices and offices according to its business development needs. The wholly-owned or  controlled subsidiaries may be named with China Petroleum & Chemical Corporation’s abbreviation “SINOPEC”. The branches, representative offices and offices are non-legal person branch organizations and shall be named with the full name of China Petroleum & Chemical Corporation.
   
 
The Company may set up branch organizations (whether or not wholly-owned) outside the PRC and in the Hong Kong SAR, Macau SAR and Taiwan according to its business development needs and subject to the approval of the relevant government body.
   
Article 10
The Company may invest in other limited liability companies or joint stock limited companies. The Company’s liabilities to the companies it invest shall be limited to the amount of its respective capital contribution to the companies it invest.
   
 
The Company may invest in other enterprises. However, unless it is otherwise provided for by any law, it shall not be become a capital contributor that shall bear several and joint liabilities for the debts of the enterprises in which it invests.
 
 
CHAPTER 2  THE COMPANY’S OBJECTIVES AND SCOPE OF BUSINESS
 
Article 11
The operation objectives of the Company are: to develop the enterprise, reward shareholders, contribute to the society and benefit the employees.
   
Article 12
The Company’s scope of business shall be consistent with and subject to the scope of business approved by the authority responsible for the registration of the Company.
   
 
The Company’s scope of business includes: the exploration, exploitation, storage, pipeline transportation, land transportation, water transportation, sales of oil and natural gas; oil refining; wholesaling and retailing of gasoline, kerosene and diesel oil(for branches only); sales of lubricant, liquid gas, fuel oil, solvent naphtha and asphalt; the production, sales, storage land transportation and water transportation of ethylene, propylene, butadiene, naphtha, heavy oil, ethylene glycol, PTA, beta-lactam, dacron, nitrilon, rubber and
 
 
 
2
 
 
 
 
other chemical raw materials and products; production of chemical fertilizer; production of electricity; operation of convenient stores; shaped packing foods, retailing of cigarettes, automobile decorations(for branches only), automobile cleaning; production, supervision of manufacturing, installation of oil and petrochemical machinery and equipment; purchase and sales of oil and petrochemical raw and auxiliary materials, equipment and parts; technology and information, research, development, application and consultation of alternative energy products; Self-operation of and acting as agency for the import and export of various commodities and technologies other than those restricted or prohibited by the state from import and export; contractor of overseas mechanical, electronics, petrochemical projects and domestic international bid-inviting projects; export of equipment and materials required for the aforementioned overseas projects; dispatch of labour required for the aforementioned overseas projects.
 
 
CHAPTER 3  SHARES AND REGISTERED CAPITAL
 
Article 13
The Company shall, at all times, create ordinary shares, which include the “domestic-invested shares” and the “foreign-invested shares”. Subject to the approval of the companies approving department authorized by the State Council, the Company may, according to its requirements, create different classes of shares.
   
Article 14
The shares issued by the Company shall each have a par value of Renminbi one yuan.
   
 
“Renminbi” as mentioned above means the legal currency of the PRC.
   
Article 15
Shares of the Company are in the form of share certificates. Subject to the approval of the securities authority of the State Council, the Company may issue shares to Domestic Investors and Foreign Investors. The issue of shares by the Company shall adhere to the principle of openness , fairness and impartiality.  Each of the shares of the same class shall have the same rights. Each of the shares of the same class issued at the same time shall be subject to the same issue conditions and shall be equal in price. The price paid for each share of the same class issued at the same time purchased by any organization or individual shall be the same.
   
 
“Foreign Investors” referred to in the preceding paragraph means those investors who subscribe for the Company’s shares and are located in foreign countries or in the regions of Hong Kong, Macau and Taiwan. “Domestic Investors” means those investors who subscribe for the Company’s shares and are located within the territory of the PRC (excluding the regions referred to above).
   
Article 16
Shares which the Company issues to domestic investors for subscription in Renminbi are called “Domestic-Invested Shares”. Domestic-invested shares listed domestically are called “Domestic-Listed Domestic-Invested shares” and hereinafter referred to as "A shares".
   
 
Shares which the Company issues to foreign investors for subscription in foreign currencies are called “Foreign-Invested Shares”. Foreign-invested shares which are listed overseas are called “Overseas-Listed Foreign-Invested Shares”.
   
 
“Foreign currencies” referred to in the preceding paragraph means the legal currencies of countries or regions outside the PRC which are recognized by the foreign exchange authority of the State and which can be used to pay the share price to the Company.
   
 
The shareholders of “A Shares” and the shareholders of “Overseas-Listed Foreign-Invested Shares” shall be shareholders of ordinary shares, possessing the same rights and undertaking the same obligations.
   
Article 17
Foreign-Invested Shares issued by the Company and  listed in Hong Kong shall be referred to as “H Shares”. “H Shares” means the shares which have been admitted for listing on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”), the par value of which is denominated in Renminbi and which are subscribed for and traded in Hong Kong dollars.
   
Article 18
The Company’s A shares are held in trust by the Shanghai branch of  China Securities Depository and Clearing Company Limited. The Company’s H shares are mainly held in trust by the Hong Kong Securities Clearing Company Limited.
 
 
 
3
 
 
 
Article 19
With the approval of the examination and approval department authorized by the State Council, upon its incorporation, the Company may issue 68,800,000,000 shares, all of which were issued to China Petrochemical Corporation, the promoter of the Company, representing 100% of the issued ordinary shares of the Company at that time. China Petrochemical Corporation satisfied its capital contribution by its assessed assets, and such capital contribution was made upon the establishment of the Company.
   
Article 20
The Company, with the approval of China Securities Regulatory Commission on 24 August 2000,  issued to the overseas investors 16,780,488,000 H shares (out of these, 15,102,439,000 shares are new issue shares of the Company and 1,678,049,000 shares are stock shares sold by the promoter, China Petrochemical Corporation) for the first time, and got listed on The Stock Exchange of Hong Kong Limited on 19 October 2000;  on 20 June 2001, with the approval of China Securities Regulatory Commission, the Company issued to the domestic investors 2,800,000,000 A shares for the first time and got listed on The Shanghai Stock Exchange on 8 August 2001.
   
 
The existing structure of the Company’s share capital is as follows: all shares issued by the Company  are ordinary shares, totaled 86,702,439,000 shares, out of these, 65,758,044,493 shares representing 75.84   % of the total number of issued ordinary shares of the Company are held by the promoter, China Petrochemical Corporation; 4,163,906,507 shares representing 4.81% are held by other domestic-listed A Shares shareholders; and 16,780,488,000 shares representing 19.35% are held by foreign-listed foreign-invested shareholders.
   
Article 21
The Company’s board of directors may implement the arrangement of the issuance of the Overseas-Listed Foreign-Invested Shares and A Shares respectively after the proposals for issuance of the same have been approved by the securities regulatory authority of the State Council.
   
 
The Company may implement its proposal to issue Overseas-Listed Foreign-Invested Shares and A Shares pursuant to the preceding paragraph within fifteen (15) months from the date of approval by the securities regulatory organ of the State Council.
   
Article 22
As to the total number of shares determined in the issue plan , Overseas-Listed Foreign-Invested Shares and A Shares issued respectively shall be fully subscribed for in their respective offerings. If the shares cannot be fully subscribed for in one  offering due to special circumstances, the shares may, subject to the approval of the securities regulatory organ of the State Council, be issued on separate occasions.
   
Article 23
The registered capital of the Company is RMB86,702,439,000.
   
Article 24
The Company may, based on its operating and development needs, approve the increase of its capital pursuant to the Company’s Articles of Association and its appendices.
   
 
The Company may increase its capital in the following ways:
   
 
(1)
by offering new shares for subscription by unspecified investors;
     
 
(2)
by placing new shares to its existing shareholders;
     
 
(3)
by allotting bonus shares to its existing shareholders;
     
 
(4)
by transferring common reserve fund into the share capital ;
     
 
(5)
by any other means permitted by the laws, administrative regulations and authorized by the securities regulatory authorities of the State Council.
   
 
After the Company’s increase of share capital by means of the issuance of new shares has been approved in accordance with the provisions of the Articles of Association and its appendices, the issuance thereof should be made in accordance with the procedures set out in the relevant laws and administrative regulations of the State.
 
 
 
4
 
 
 
Article 25
Unless otherwise stipulated in the relevant laws or administrative regulations, shares in the Company shall be freely transferable and are not subject to any lien.
 
 
CHAPTER 4  REDUCTION OF CAPITAL AND REPURCHASE OF SHARES
 
Article 26
According to the provisions of the Articles of Association and its appendices, the Company may reduce its registered capital. In so doing, it shall act according to the Company Law, other relevant provisions and these Articles of Association and its appendices.
   
Article 27
The Company must prepare a balance sheet and an inventory of property when it reduces its registered capital.
   
 
The Company shall notify its creditors within ten (10) days of the date of the Company’s resolution for reduction of capital and shall publish an announcement in the newspaper(s) designated by the relevant securities regulatory authority in the jurisdiction where the securities of the Company are listed within thirty (30) days of the date of such resolution. A creditor has the right within thirty (30) days of receipt of the notice from the Company or, in the case of a creditor who does not receive such notice, within forty-five (45) days of the date of the announcement, to require the Company to repay its debts or to provide a corresponding guarantee for such debt.
   
 
The Company’s registered capital may not, after the reduction in capital, be less than the minimum amount prescribed by law.
   
 
The Company shall, in case of reducing registered capital, handle the alteration registration in the registration organs in accordance with the law.
   
Article 28
The Company may, in accordance with the procedures set out in the Company’s Articles of Association and its appendices and with the approval of the relevant governing authority of the State, repurchase its outstanding shares under the following circumstances:
   
 
(1)
cancellation of shares for the purposes of reducing its capital;
     
 
(2)
merging with another company that holds shares in the Company;
     
 
(3)
rewarding the employees of the Company with shares;
     
 
(4)
requested by any shareholder to purchase his shares because the shareholder objects to the Company's resolution on merger or division made in a general meeting of  shareholders;
     
 
(5)
other circumstances required by laws, administrative regulations and permitted by the State's competent authorities
   
 
Apart from the foregoing, the Company shall not purchase its own shares.
   
 
The Company shall repurchase its outstanding shares in accordance with the stipulations of Article 29 to Article 32.
   
Article 29
The Company may repurchase shares in one of the following ways, with the approval of the relevant governing authority of the State:
   
 
(1)
by making an offer for the repurchase of shares to all its shareholders on a pro rata basis;
     
 
(2)
by repurchasing shares through public dealing on a stock exchange;
     
 
(3)
by repurchasing shares outside of the stock exchange by means of an off-market agreement;
 
 
 
5
 
 
 
 
(4)
by any other means which is permitted by the State's competent authorities.
   
Article 30
The Company must obtain the prior approval of the shareholders in a general meeting in the manner stipulated in the Company’s Articles of Association and its appendices before it repurchases shares outside the stock exchange by means of an off-market agreement. The Company may, by obtaining the prior approval of the shareholders in a general meeting (in the same manner), rescind or vary any contract which has been so entered into or waive any right thereof.
   
 
A contract for the repurchase of shares referred to in the preceding paragraph includes (without limitation) an agreement to assume obligation  to repurchase shares and obtain the right to repurchase shares.
   
 
The Company may not assign any contract for the repurchase of its shares or any right contained in such contract.
   
Article 31
If the Company purchases shares of the Company due to reasons provided in Articles 28 (I) to (III), such purchase shall be approved in the general meeting of shareholders pursuant to the Articles of Association and its appendices.
   
 
After the Company purchases its own shares in accordance with the provisions of Article 28, it shall, under the circumstance as mentioned in Item (I), cancel them within ten days after the purchase; while under the circumstance as mentioned either in Item (II) or (IV), it shall transfer or cancel them within six months after the purchase.
   
 
The shares purchased by the company in accordance with Item (III) of Article 28 shall not exceed 5% of the total shares already issued by the Company; the capital used for the share acquisition shall be paid from the after-tax profit hereof; the shares purchased shall be transferred to the staff of the Company within one year.
In the event of shares cancellation, the Company shall apply to the original companies registration authority for registration of the change in its registered capital.
   
 
The aggregate par value of the cancelled shares shall be deducted from the Company’s registered capital.
   
Article 32
Unless the Company is in the course of liquidation, it must comply with the following provisions in relation to repurchase of its outstanding shares:
   
 
(1)
where the Company repurchases shares at par value, payment shall be made out of book surplus distributable profits of the Company or out of proceeds of a new issue of shares made for that purpose;
     
 
(2)
where the Company repurchases shares of the Company at a premium to its par value, payment up to the par value may be made out of the book surplus of distributable profits of the Company or out of the proceeds of a new issue of shares made for that purpose. Payment of the portion in excess of the par value shall be effected as follows:
     
   
1.
if the shares being repurchased were issued at par value, payment shall be made out of the book surplus of distributable profits of the Company;
       
   
2.
if the shares being repurchased were issued at a premium to its par value, payment shall be made out of the book surplus of distributable profits of the Company or out of the proceeds of a new issue of shares made for that purpose, provided that the amount paid out of the proceeds of the new issue shall not exceed the aggregate amount of premiums received by the Company on the issue of the shares repurchased nor shall it exceed the book value of the Company’s capital common reserve fund account (including the premiums on the new issue) at the time of the repurchase;
   
 
(3)
the Company shall make the following payments out of the Company’s distributable profits:
     
   
1.
payment for the acquisition of the right to repurchase its own shares;
 
 
 
6
 
 
 
   
2.
payment for variation of any contract for the repurchase of its shares;
       
   
3.
payment for the release of its obligation(s) under any contract for the repurchase of itsshares;
     
 
(4)
after the Company’s registered capital has been reduced by the aggregate par value of the cancelled shares in accordance with the relevant provisions, the amount deducted from the distributable profits of the Company for payment of the par value of shares which have been repurchased shall be transferred to the Company’s capital common reserve fund account.
 
 
CHAPTER 5  FINANCIAL ASSISTANCE FOR ACQUISITION OF SHARES
 
Article 33
The Company or its subsidiaries shall not, at any time, provide any form of financial assistance to a person who is acquiring or is proposing to acquire shares in the Company. This includes any person who directly or indirectly assumes any obligations as a result of the acquisition of shares in the Company.
   
 
The Company or its subsidiaries shall not, at any time, provide any form of financial assistance to the said  obligor for the purposes of reducing or discharging the obligations assumed by such person.
   
 
This Article shall not apply to the circumstances specified in Article 35 of this Chapter.
   
Article 34
For the purposes of this Chapter, “financial assistance” includes (without limitation) the following:
   
 
(1)
gift;
     
 
(2)
guarantee (including the assumption of liability by the guarantor or the provision of assets by the guarantor to secure the performance of obligations by the obligor), compensation (other than compensation in respect of the Company’s own default) or release or waiver of any rights;
     
 
(3)
provision of loan or the making of an contract under which the obligations of the Company are to be fulfilled before the obligations of another party, and the change in parties to, or the assignment of rights under, such loan or contract;
     
 
(4)
any other form of financial assistance given by the Company when the Company is insolvent or has no net assets or when its net assets would thereby be reduced to a material extent.
   
 
For the purposes of this Chapter, “assumption of obligations” includes the assumption of obligations by way of contract or by way of arrangement (irrespective of whether such contract or arrangement is enforceable or not and irrespective of whether such obligation is to be borne solely by the Obligor or jointly with other persons) or by any other means which results in a change in his financial position.
   
Article 35
The following acts shall not be deemed to be acts prohibited by Article 33 of this Chapter:
   
 
(1)
the provision of financial assistance by the Company where the financial assistance is given in good faith in the interests of the Company, and the principal purpose of which is not for the acquisition of shares in the Company, or the giving of the financial assistance is an incidental part of a master plan of the Company;
     
 
(2)
the lawful distribution of the Company’s assets as dividend;
     
 
(3)
the distribution of dividends in the form of shares;
     
 
(4)
a reduction of registered capital, a repurchase of shares of the Company or a reorganization of the share holding structure of the Company effected in accordance with the Articles of Association and its appendices;
 
 
 
7
 
 
 
 
(5)
the provision of loans by the Company within its scope of business and in the ordinary course of its business, where the provision of loans falls within part of the scope of business of the Company (provided that the net assets of the Company are not thereby reduced or that, to the extent that the assets are thereby reduced, the financial assistance is provided out of distributable profits);
     
 
(6)
contributions made by the Company to the employee share ownership schemes (provided that the net assets of the Company are not thereby reduced or that, to the extent that the assets are thereby reduced, the financial assistance is provided out of distributable profits).
 
 
CHAPTER 6  SHARE CERTIFICATES AND REGISTER OF SHAREHOLDERS
 
Article 36
Share certificates of the Company shall be in registered form.
   
 
The shares of the Company shall indicate the following main items:
   
 
(1)
Name of the Company;
     
 
(2)
Date of registration and establishment of the Company;
     
 
(3)
Type of shares, par value and the number of shares it represents;
     
 
(4)
Code of share certificates;
     
 
(5)
Other matters as required by the Company Law, Special Regulations and the stock exchange on which the shares of the Company are listed.
   
Article 37
The shares of the Company may be transferred, donated, inherited and pledged in accordance with the relevant laws, administrative rules, regulations of the competent department(s) as well as these Articles of Association and its appendices.
   
 
The transfer of shares shall be registered with the share registration organization appointed by the Company.
   
Article 38
The Company does not accept any subject matter which  pledges its shares.
   
Article 39
Share certificates of the Company shall be signed by the Chairman of the Company’s board of directors. Where the stock exchange(s) on which the Company’s shares are listed require other directors and/or supervisors, and senior management personnel of the Company to sign on the share certificates, the share certificates shall also be signed by such officer(s). The share certificates shall take effect after being sealed or imprinted with the seal of the Company (or the Company's specific security seal), or with the seal sign (or the Company's specific security seal) in printed form. The share certificate shall only be sealed with the Company’s seal or securities chop under the authorization of the board of directors. The signatures of the Chairman of the board of directors or other officer(s) of the Company may be in printed form.
   
 
Where the stock of the Company is issued and traded without share certificate in printed form, it shall be in accordance with the regulations otherwise provided by the securities regulatory and management institutions of the Company's listing place.
   
Article 40
The Company shall keep a register of shareholders which shall contain the following particulars:
   
 
(1)
the name (title) and address (residence), the occupation or nature of each shareholder;
     
 
(2)
the class and quantity of shares held by each shareholder;
     
 
(3)
the amount paid-up on or agreed to be paid-up on the shares held by each shareholder;
 
 
 
8
 
 
 
 
(4)
the share certificate number(s) of the shares held by each shareholder;
     
 
(5)
the date on which each shareholder was registered as a shareholder;
     
 
(6)
the date on which any shareholder ceased to be a shareholder.
   
 
Unless there is evidence to the contrary, the register of shareholders shall be sufficient evidence of the shareholders’ shareholdings in the Company.
   
Article 41
The Company may, in accordance with the mutual understanding and agreements made between the securities regulatory organ of the State Council and overseas securities regulatory organizations, maintain the register of shareholders of Overseas-Listed Foreign-Invested Shares overseas and appoint overseas agent(s) to manage such register of shareholders. The original register of shareholders of the Company for holders of H Shares shall be maintained in Hong Kong.
   
 
A duplicate register of shareholders for the holders of Overseas-Listed Foreign-Invested Shares shall be maintained at the Company’s residence. The appointed overseas agent(s) shall ensure consistency between the original and the duplicate register of shareholders at all times.
   
 
If there is any inconsistency between the original and the duplicate register of shareholders for the holders of Overseas-Listed Foreign-Invested Shares, the original register of shareholders shall prevail.
   
Article 42
The Company shall have a complete register of shareholders which shall comprise the following parts:
   
 
(1)
the register of shareholders which is maintained at the Company’s residence (other than those share registers which are described in sub-paragraphs (2) and (3) of this Article);
     
 
(2)
the register of shareholders in respect of the holders of Overseas-Listed Foreign-Invested Shares of the Company which is maintained in the same place as the overseas stock exchange on which the shares are listed; and
     
 
(3)
the register of shareholders which is maintained in such other place as the board of directors decide for the purposes of the listing of the Company’s shares.
   
Article 43
Different parts of the register of shareholders shall not overlap. No transfer of any shares registered in any part of the register shall, during the continuance of that registration, be registered in any other part of the register. Amendments or rectification of each part of the register of shareholders shall be made in accordance with the laws of the place where the register of shareholders is maintained.
   
 
All H Shares which have been fully paid-up may be freely transferred in accordance with the Articles of Association and its appendices. However, unless such transfer complies with the following requirements, the board of directors may refuse to recognize any document of transfer and would not need to provide any reason therefor:
   
 
(1)
a fee of HK$2.50 or such higher amount agreed by the Stock Exchange has been paid to the Company for registration of the instrument of transfer and other documents relating to or which will affect the right of ownership of the shares;
     
 
(2)
the document of transfer only relates to Overseas-Listed Foreign-Invested Shares listed in Hong Kong;
     
 
(3)
the stamp duty which is chargeable on the document of transfer has already been paid;
     
 
(4)
the relevant share certificate(s) and evidence which the board of directors may reasonably require to show that the transferor has the right to transfer the shares shall be provided;
     
 
(5)
if it is intended that the shares be transferred to joint owners, the maximum number of joint owners shall not be more than four (4); and
 
 
 
9
 
 
 
 
(6)
the Company does not have any lien on the relevant shares.
   
 
All H Shares listed in Hong Kong shall be transferred by an instrument in writing in any usual or common form or any other form which the directors may accept. The instrument of transfer of any share may be executed by hand without seal, or if the assignor or the assignee is the recognized clearing house as defined in the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) ("Recognized Clearing house") or its nominee, the instrument of transfer may be executed by hand or in mechanically-printed form.
   
Article 44
No change may be made in the register of shareholders as a result of a transfer of shares within thirty (30) days prior to the date of a shareholders’ general meeting or within five (5) days before the determination date for the Company’s distribution of dividends. Amendments or rectification of the A share register of shareholders shall be made in accordance with the domestic laws and regulations.
   
Article 45
When the Company needs to convene a shareholders’ general meeting, distribute dividend liquidate or conduct any other matters which need to determine shareholdings, the convenor of the board of directors or shareholders' general meeting shall determine a record date for the determination of shareholdings. The shareholders of the Company shall be such persons who appear in the register of shareholders at the close of such record date.
   
Article 46
Any person who disputes the register of shareholders and asks for inclusion of his name (title)  in or removal of his name from the register of shareholders may apply to a court of competent jurisdiction for rectification of the register.
   
Article 47
For any person who is a registered shareholder or asks for inclusion of his name (title) entered in the register of shareholders may, if his share certificate (the “original certificate”) relating to the shares is lost, he may apply to the Company for a replacement share certificate in respect of such shares (the “Relevant Shares”).
   
 
Application by a holder of A Shares, who has lost his share certificate, for a replacement share certificate shall be dealt with in accordance with Article 144 of the Company Law.
   
 
Application by a holder of Overseas-Listed Foreign-Invested Shares, who has lost his share certificate, for a replacement share certificate may be dealt with in accordance with the law of the place where the original register of shareholders of holders of Overseas-Listed Foreign-Invested Shares is maintained, the rules of the stock exchange or other relevant regulations.
   
 
The issue of a replacement share certificate to a holder of H Shares, who has lost his share certificate, shall comply with the following requirements:
   
 
(1)
The applicant shall submit an application to the Company in a prescribed form accompanied by a notarial certificate or a statutory declaration, of which the contents shall include the grounds upon which the application is made and the circumstances and evidence of the loss, and the declaration showing that no other person is entitled to have his name entered in the register of shareholders in respect of the Relevant Shares.
     
 
(2)
The Company has not received any declaration made by any person other than the applicant declaring that his name shall be entered in the register of shareholders in respect of such shares before it decides to issue a replacement share certificate to the applicant.
     
 
(3)
The Company shall, if it intends to issue a replacement share certificate, publish a notice of its intention to do so at least once every thirty (30) days within a period of ninety (90) consecutive days in such newspapers as may be prescribed by the board of directors.
     
 
(4)
The Company shall, prior to publication of its intention to issue a replacement share certificate, deliver to the stock exchange on which its shares are listed, a copy of the notice to be published and may publish the notice upon receipt of confirmation from such stock exchange that the notice has been exhibited in the premises of the stock exchange. Such notice shall be exhibited in the premises of the stock exchange for a period of ninety (90) days. In the case of an application which is made without
 
 
 
10
 
 
 
   
the consent of the registered holder of the Relevant Shares, the Company shall deliver by mail to such registered shareholder a copy of the notice to be published.
     
 
(5)
If, by the expiration of the 90-day period referred to in paragraphs (3) and (4) of this Article, the Company has not received any objection from any person in respect of the issuance of the replacement share certificate, it may issue a replacement share certificate to the applicant pursuant to his application.
     
 
(6)
Where the Company issues a replacement share certificate pursuant to this Article, it shall forthwith cancel the original share certificate and document the cancellation of the original share certificate and issuance of a replacement share certificate in the register of shareholders accordingly.
     
 
(7)
All expenses relating to the cancellation of an original share certificate and the issuance of a replacement share certificate shall be borne by the applicant and the Company is entitled to refuse to take any action until reasonable guarantee is provided by the applicant therefor.
   
Article 48
Where the Company issues a replacement share certificate pursuant to the Articles of Association and its appendices , as for a bona fide purchaser obtaining new share certificates referred to above or a shareholder registered as a owner of the shares (in case of a bona fide purchaser), his name (title) shall not be removed from the register of shareholders.
   
Article 49
The Company shall not be liable for any damages sustained by any person by reason of the cancellation of the original share certificate or the issuance of the replacement share certificate unless the claimant is able to prove that the Company has acted in a deceitful manner.
 
 
CHAPTER 7  SHAREHOLDERS’ RIGHTS AND OBLIGATIONS
 
Article 50
A shareholder of the Company is a person who lawfully holds shares in the Company and whose name (title) is entered in the register of shareholders.
   
 
A shareholder shall enjoy rights and assume obligations according to the class and amount of shares held by him; shareholders who hold shares of the same class shall enjoy the same rights and assume the same obligations.
   
 
For the joint shareholders, if one of the joint shareholders has passed away, the surviving shareholder shall be deemed by the Company to have the ownership of the related shares, but the Board of Directors is entitled to ask for the provision of the suitable death certificate for the purpose of revision of the shareholders’ register. For the joint shareholders of any shares, only the first named shareholder in the shareholders’ register has the right to receive the share certificates of the related shares, receive the notice of the Company, attend the shareholders’ general meeting and exercise his voting right; while, any notice delivered to the said shareholder shall be deemed as if the notice has been delivered to all of the joint shareholder of the related shares.
   
Article 51
The shareholders of ordinary shares of the Company shall enjoy the following rights:
   
 
(1)
the right to receive dividends and other distributions in proportion to the amount of shares held by them;
     
 
(2)
the right to require, convene, preside, attend or appoint a proxy to attend shareholders’ general meetings and to performing the relevant voting rights ;
     
 
(3)
the right to supervise and manage the Company’s business operations, the right to present proposals or to raise queries;
     
 
(4)
the right to transfer, donate and pledge shares in accordance with laws, administrative regulations and
 
 
 
11
 
 
 
     
   
provisions of the Articles of Association and its appendices ;
     
 
(5)
subject to provision of the relevant instrument in writing of the type and quantity of shares that they are holding to the Company and verification of their identities of shareholders by the Company, the right to obtain relevant information in accordance with laws, administrative regulations and provisions of these Articles of Association and its appendices , which includes:
     
   
i.
the right to obtain a copy of the Articles of Association and its appendices , subject to payment of costs;
       
   
ii.
the right to inspect and copy, subject to payment of a reasonable fee:
       
     
(i)
all parts of the register of shareholders;
         
     
(ii)
personal particulars of each of the Company’s directors, supervisors, senior management personnel including:
         
       
(a)
present and former name and alias;
           
       
(b)
principal address (place of residence);
           
       
(c)
nationality;
           
       
(d)
primary and all other part-time occupations and titles;
           
       
(e)
identification documents and the numbers thereof;
         
     
(iii)
the state of the Company’s share capital;
         
     
(iv)
counterfoil of the Company's debenture;
         
     
(v)
reports showing the aggregate par value, quantity, highest and lowest price paid in respect of each class of shares repurchased by the Company since the last accounting year and the aggregate amount paid by the Company for this purpose;
         
     
(vi)
minutes of shareholders’ general meetings, resolutions of the directors meetings and supervisors meetings, and financial statements;
     
 
(6)
in the event of the termination or liquidation of the Company, the right to participate in the distribution of remaining assets of the Company in accordance with the number of shares held;
     
 
(7)
the right to demand the Company to purchase the shares of the shareholder who raise an objection to the merger and division resolution made in the shareholders' general meeting;
     
 
(8)
in the event that the resolution of a shareholders’ general meeting or board meeting is against the law or administrative rules and has infringed the legitimate interest of a shareholder, the shareholder shall have the right to commence legal proceedings to stop the illegal or infringing act and to ask the Company to bring a claim for compensation; and
     
 
(9)
other rights conferred by laws, administrative regulations and the Articles of Association and its appendices .
   
Article 52
The shareholders of ordinary shares of the Company shall assume the following obligations:
   
 
(1)
to comply with these Articles of Association and its appendices ;
 
 
 
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(2)
to pay subscription money according to the number of shares subscribed and the method of subscription;
     
 
(3)
not to retire from being a shareholder unless required by law or administrative regulations;
     
 
(4)
not to abuse the shareholder's right to infringe the interest of the Company or other shareholders; not to abuse the independent position of the legal person of the Company and the limited liability of the shareholder to impair the interest of the creditor of the Company; where the shareholder's abuse of its power has caused damage to the Company or other shareholders, it shall honor its compensation obligations in accordance with the law; where the shareholder's abuse of the  independent position of the Company and shareholder's limited liability and evasion of its debt have caused serious damage to the creditor's interest, it shall bear joint liability upon the debt of the company; and
     
 
(5)
other obligations imposed by laws, administrative regulations and the Articles of Association and its appendices.
   
 
Shareholders are not liable to make any further contribution to the share capital other than according to the terms which were agreed by the subscriber of the relevant shares at the time of subscription.
   
Article 53
In addition to the obligations imposed by laws and administrative regulations or required by the listing rules of the stock exchange on which the Company’s shares are listed, while exercising his rights, a controlling shareholder shall not make any decision in respect of the following matters to damage the interests of all or part of the shareholders of the Company due to exercising his voting rights:
   
 
(1)
act honestly in the best interests of the Company in removing a director or supervisor;
     
 
(2)
to approve the expropriation by a director or supervisor (for his own benefit or for the benefit of another person) of the Company’s assets in any way, including (without limitation) opportunities which are beneficial to the Company; and
     
 
(3)
to approve the expropriation by a director or supervisor (for his own benefit or for the benefit of another person) of the individual interest of other shareholders, including (without limitation) any distribution rights s and voting rights (excluding a restructuring which has been submitted for approval by the shareholders in a general meeting in accordance with the Articles of Association and its appendices).
   
Article 54
For the purpose of the foregoing Article, a “controlling shareholder” means a person who satisfies any one of the following conditions:
   
 
(1)
a person who, acting alone or in concert with others, has the power to elect more than half of the board of directors;
     
 
(2)
a person who, acting alone or in concert with others, has the power to exercise 30% or more or has power to control the exercise of 30% or more of the voting rights in the Company;
     
 
(3)
a person who, acting alone or in concert with others, holds 30% or more of the issued and outstanding shares of the Company; and
     
 
(4)
a person who, acting alone or in concert with others, has de facto control of the Company in any other way.
   
Article 55
The controlling shareholders, the actual shareholding controllers, directors, supervisors and senior management personnel shall not abuse their correlative relationship to cause damage to the Company. Where they cause damage to the Company due to breach of rules, they shall bear their compensation obligations.
   
 
The controlling shareholders and the actual shareholding controllers shall act faithfully and assume responsibility to the company and other public shareholders of the Company. The controlling shareholders shall fulfil strictly the rights of subscriber and buyer in accordance with the laws, shall not impair lawful
 
 
 
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rights of the Company and other public shareholders of the Company by such means as profit distribution, assets reorganization, foreign investment, embezzlement of funds, loan guarantee, and shall not utilize its controlling position to cause damage to the interest of the Company and public shareholders of the Company.
   
 
An "actual controller" referred to in these Articles of Association and its appendices means anyone who is not a shareholder but is able to hold actual control of the acts of the Company by means of investment relations, agreements or any other arrangements.
   
 
"Connection relationship" referred to in these Articles of Association and its appendices means the relationship between the controlling shareholders, actual controllers, directors, supervisors, or senior management personnel of the Company and the enterprise directly or indirectly controlled thereby and any other relationship that may lead to the transfer of any interest of the Company. However, the enterprises controlled by the state do not incur a connection relationship simply because their shares are controlled by the state.
 
 
CHAPTER 8  SHAREHOLDERS’ GENERAL MEETINGS
 
Article 56
The shareholders’ general meeting is the organ of authority of the Company and shall exercise its functions and powers in accordance with law.
   
 
The Company shall formulate “Rules and Procedures for the Shareholders’ General Meetings” for implementation after being approved by the shareholders in a general meeting. The Rules and Procedures for the Shareholders’ General Meetings shall include the followings:
   
 
(1)
functions and powers of the shareholders general meetings;
     
 
(2)
authorities given by the shareholders’ general meetings to the board of directors;
     
 
(3)
procedures for the convening of a shareholders’ general meeting, which include the putting forward and collection of motions, and notices of meetings and any change thereto, registration of the meeting, convening of, voting and resolutions made in the meeting, adjournments, past-session matters and announcements, etc.; and
     
 
(4)
other matters deemed necessary by the shareholders’ general meeting.
   
 
The Rules and Procedures for the Shareholders’ General Meetings is an integral part of and has the same legal effect as these Articles of Association and its appendices , to be decided by the Board of Directors and approved at the Shareholders General Meetings.
   
Article 57
The shareholders’ general meeting shall have the following functions and powers:
   
 
(1)
to decide on the Company’s operational policies and investment plans;
     
 
(2)
to elect and replace directors and to decide on matters relating to the remuneration of directors;
     
 
(3)
to elect and replace supervisors assumed by non-representatives of the employees and to decide on matters relating to the remuneration of supervisors;
     
 
(4)
to examine and approve the board of directors’ reports;
     
 
(5)
to examine and approve the supervisory committee’s reports;
     
 
(6)
to examine and approve the Company’s profit distribution plans and loss recovery plans;
 
 
 
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(7)
to examine and approve the Company’s proposed annual preliminary and final financial budgets;
     
 
(8)
to pass resolutions on the increase or reduction of the Company’s registered capital;
     
 
(9)
to pass resolutions on matters such as merger, division, dissolution, liquidation or change of the corporate form of the Company;
     
 
(10)
to pass resolutions on the issue of debentures by the Company;
     
 
(11)
to pass resolutions on the appointment, dismissal and non-reappointment of the accountants of the Company;
     
 
(12)
to amend the Articles of Association and its appendices  and its appendices (including the Rules and Procedures for the Shareholders’ General Meetings, Rules and Procedures for the Board of Directors’ Meetings and Rules and Procedures for the Supervisors’ Meetings);
     
 
(13)
to consider motions raised by the board of directors, the supervisory committee or shareholders who represent 3% or more of the total number of voting shares of the Company;
     
 
(14)
to examine and approve the guarantee particulars prescribed in Article 58;
     
 
(15)
to examine such proceedings as the purchased and sold assets in one year by the Company exceed 30% of the audited total assets of the Company of the latest term;
     
 
(16)
to examine, approve and alter the proceedings for the usage of the collected fund;
     
 
(17)
to examine stock-based incentive plan; and
     
 
(18)
to decide on other matters which, according to laws, administrative regulations, regulations of the competent department(s) or the Articles of Association and its appendices , need to be approved by shareholders in general meetings;
   
Article 58
Any of the following external guarantee acts by the Company shall be approved by the shareholders' general meeting.
   
 
(1)
any guarantee after the total external guarantee volume of the Company and its controlled subsidiaries reaches or exceeds 50% of the latest audited net assets of the latest term;
     
 
(2)
any guarantee after the total external guarantee volume of the Company reaches or exceeds 30% of the latest audited net assets of the latest term;
     
 
(3)
the guarantee provided to the guarantee objective whose asset liability ratio exceeds 70%;
     
 
(4)
the single guarantee volume exceeds 5% of the latest audited net assets;
     
 
(5)
the guarantee provided to shareholders, the actual controller and connected persons; and
     
 
(6)
any other external guarantee regulated by laws, administrative regulations, rules of competent authorities and regulatory rules of the listing place.
   
Article 59
Matters which shall be determined by the shareholders in a general meeting according to the laws, administrative regulations, regulations of the competent departments or the Articles of Association and its appendices must be discussed by the shareholders in a general meeting in order to protect the shareholders’ right of decision on those matters. Where necessary and reasonable, the board of directors, directors or its secretary may be appointed in a shareholders’ general meeting to determine (if so authorized in the general meeting) specific matters which are related to the matters to be resolved and are not possible or not necessary to be determined in that general meeting. Please see the Rules and Procedures for the Shareholders’ General Meetings for the form of authorization by shareholders to the board of directors in a
 
 
 
15
 
 
 
 
shareholders’ general meeting to determine daily major matters of the Company.
   
 
If the shareholders authorize the board of directors, directors or its secretary in a general meeting to determine matters which shall be determined by ordinary resolutions, the matter should be resolved by more than one-half of the attending shareholders (including their proxy) who have voting rights; if the authorization relates to matters which shall be determined by special resolutions, the matter should be resolved by more than two-thirds of the attending shareholders (including their proxy) who have voting rights. The authorization should be clear and specific.
   
Article 60
Unless prior approval of shareholders in the form of a special resolution is obtained in a general meeting, the Company shall not enter into any contract with any person other than the directors, supervisors, senior management personnel pursuant to which such person shall be responsible for the management and administration of the whole or any substantial part of the Company’s business.
   
Article 61
Shareholders’ general meetings are divided into annual general meetings (“AGM”) and extraordinary general meetings (“EGM”). Unless otherwise provided in the Articles of Association and its appendices and the Rules and Procedures for the Shareholders’ General Meetings, shareholders’ general meetings shall be convened by the board of directors.
   
Article 62
AGMs are held once every year and within six (6) months from the end of the preceding accounting year. At least the following matters should be resolved in an AGM:
   
 
(1)
examination of the board of directors’ annual report;
     
 
(2)
examination of the supervisory committee’s annual report;
     
 
(3)
examination of the Company’s profit distribution proposal;
     
 
(4)
examination of the Company’s audited final budgets for the preceding year; and
     
 
(5)
engagement, removal or non-renewal of the appointment of the accounting firm by the Company and determination of the remuneration of the accounting firm so engaged.
   
 
Matters to be considered in an AGM including but without limitation to the above matters, and any matter that could be considered in a general meeting may be considered in an AGM.
   
Article 63
The board of directors shall convene an EGM within two (2) months after the occurrence of any one of the following events:
   
 
(1)
where the number of directors is less than the number stipulated in the Company Law or two-thirds of the number specified in the Articles of Association and its appendices ;
     
 
(2)
where the unrecovered losses of the Company amount to one-third of the total amount of its actually received share capital;
     
 
(3)
where shareholder(s) who individually or jointly hold 10% or more of the Company’s issued and  outstanding voting shares request(s) in writing for the convening of an EGM;
     
 
(4)
whenever the board of directors deems necessary or the supervisory committee so requests; and
     
 
(5)
other circumstances provided by laws, administrative regulations, regulations from competent authorities and the Articles of Association and its appendices
   
 
The shareholdings referred to in item (3) above shall be calculated on the basis of number of shares held as at the date of written request of the shareholders.
   
Article 64
The place for convention of the shareholders' general meeting shall be: city where the Company's registered address is or any other place designated by the board of directors. The shareholders' general meeting shall prepare the meeting place and be convened in the form of on-site meeting. The Company could also provide
 
 
 
16
 
 
 
 
Internet or other means for the convenient attendance of the shareholders, and clearly state the voting time, procedures and the means to identify the shareholders in the notice of the shareholders' general meeting if the Internet or other means is adopted as voting method. Such shareholders as attend the meeting by the aforesaid means shall be deemed presence.
   
Article 65
Any request for the board of directors to hold an AGM or class meeting made by the supervisory committee or shareholders who individually or jointly hold 10% of the Company’s voting shares entitling them to vote in that proposed meeting shall be dealt with according to the provisions of the Rules and Procedures for the Shareholders’ General Meetings.
   
 
If a meeting is lawfully convened by the shareholders themselves where the board of directors has not given the required consent under the Rules and Procedures for the Shareholders’ General Meetings to the same, the reasonable expenses thus incurred shall be borne by the Company and paid out of the money payable by the Company to the negligent director(s).
   
Article 66
When the Company convenes a shareholders’ general meeting, a notice of the meeting shall be given forty-five (45) days (including the date of the meeting) before the date of the meeting. The contents, form and issuing procedures of the notice shall comply with the requirements of the Rules and Procedures for the Shareholders’ General Meetings.
   
Article 67
All shareholders or their proxies registered on the stock registration date have the right to attend the shareholders' general meeting and exercise their voting rights in accordance with the relevant laws, rules and the Articles of Association and its appendices. Any shareholder who is entitled to attend and vote at a general meeting may attend the shareholders' general meeting of their own, or appoint one (1) or more persons (whether such person is a shareholder or not) as his proxy or proxies to attend and vote on his behalf, and a proxy so appointed shall be entitled to exercise the following rights pursuant to the authorization from that shareholder:
   
 
(1)
the shareholders’ right to speak at the shareholders' general meeting;
     
 
(2)
the right to demand or join in demanding a poll; and
     
 
(3)
the right to vote by hand or on a poll, but a proxy of a shareholder who has appointed more than one (1) proxy may only vote on a poll.
   
 
If the said shareholder is a Recognized Clearing House, the shareholder may authorize one or more suitable person to act as its representative at any shareholders’ general meeting or any kinds of shareholders’ meeting; however, if more than one person are authorized, the power of attorney shall clearly indicate the number and types of the stocks involved by way of the said authorization. The persons after such authorization may represent the recognized clearing house (or its “proxy”) to exercise the rights, as if they were the individual shareholders of the Company.
   
Article 68
The shareholder shall appoint a proxy to attend the general meeting  in writing, which shall clearly indicate the number of shares represented by the proxy and shall be under the hand of the appointor or his attorney duly authorized in writing, or if the appointor is a legal person, either under seal or under the hand of a director or a duly authorized attorney. If several proxies are appointed, such written instrument shall clearly indicate the number of shares represented by each proxy. The remaining contents and form of the instrument shall comply with the requirements of the Rules and Procedures for the Shareholders’ General Meetings.
   
Article 69
Any form given to a shareholder by the board of directors of the Company for use by such shareholder for the appointment of a proxy to attend and vote at meetings of the Company shall be such as to enable the shareholder to freely instruct the proxy to vote in favour of or against the motions, such instructions being given in respect of each individual matter to be voted on at the meeting. Such a form shall contain a statement that, in the absence of specific instructions from the shareholder, the proxy may vote as he thinks fit.
   
Article 70
A vote made in accordance with the terms of a proxy shall be valid notwithstanding the death or loss of capacity of the appointor or revocation of the proxy or the authority under which the proxy was executed, or the transfer of the shares in respect of which the proxy is given, provided that the Company did not receive
 
 
 
17
 
 
 
 
any written notice in respect of such matters before the commencement of the relevant meeting.
   
Article 71
The Company’s board of directors, independent directors and shareholders who meet the relevant requirements may collect from other shareholders of the Company the rights to vote in a shareholders’ general meeting. The collection of voting rights shall be without consideration with sufficient disclosure of information to the shareholders from whom voting rights are being collected.
   
Article 72
Where the shareholders' general meeting considers relevant connected transactions, the shareholders who are connected persons shall not participate in the vote, and the number of the voting shares it represents shall not be calculated into the total number of valid votes; the announcement of the shareholders' general meeting shall fully reveal the vote of the shareholders who are not connected persons.
   
 
If any shareholder are required to abstain from voting or may only vote for or against a matter according to the Rules Governing the Listing of Securities of the Hong Kong Stock Exchange Limited, any vote by such shareholder or his proxy in violation of the relevant rules or restrictions referred to above shall not be counted in the voting results.
   
Article 73
A shareholder (including a proxy), when voting at a shareholders’ general meeting, may exercise such voting rights as are attached to the number of voting shares which he represents except when the accumulated voting system under Article 102 hereof regarding election of directors is adopted in which case one (1) vote is attached to each share. Please refer to the Rules and Procedures for the Shareholders’ General Meetings for the implementation of the accumulated voting system.
   
 
Shares of the Company held by the Company shall not enjoy voting rights and shall not be calculated in the total number of shares with voting rights held by the present shareholders.
   
Article 74
At any shareholders’ general meeting, a resolution shall be decided on a show of hands unless a poll is demanded or otherwise required by the listing rules of the stock exchanges on which the Company’s shares are listed:
   
 
(1)
by the chairman of the meeting;
     
 
(2)
by at least two (2) shareholders present in person or by proxy entitled to vote thereat; and
     
 
(3)
by one (1) or more shareholders present in person or by proxy and representing 10 % or more of all shares carrying the right to vote at the meeting singly or in aggregate, before or after a vote is carried out by a show of hands.
   
 
Unless a poll is demanded, a declaration by the chairman that a resolution has been passed on a show of hands and the record of such in the minutes of the meeting shall be conclusive evidence of the fact that such resolution has been passed. There is no need to provide evidence of the number or proportion of votes in favour of or against such resolution.
   
 
The demand for a poll may be withdrawn by the person who demands the same.
   
Article 75
A poll demanded on the election of the chairman of the meeting, or on a question of adjournment of the meeting, shall be taken forthwith. A poll demanded on any other question shall be taken at such time as the chairman of the meeting directs, and any business other than that upon which a poll has been demanded may be proceeded with, pending the taking of the poll. The result of the poll shall be deemed to be a resolution of the meeting at which the poll was demanded.
   
Article 76
On a poll taken at a meeting, a shareholder (including a proxy) entitled to two (2) or more votes need not cast all his votes in the same way.
   
Article 77
In the case of an equality of votes, whether on a show of hands or on a poll, the chairman of the meeting at which the show of hands takes place or at which the poll is demanded shall have a casting vote.
   
Article 78
Resolutions of shareholders’ general meetings shall be divided into ordinary resolutions and special
 
 
 
18
 
 
 
 
resolutions.
   
 
An ordinary resolution must be passed by votes representing more than one-half of the voting rights represented by the shareholders (including their proxy) present at the meeting.
   
 
A special resolution must be passed by votes representing more than two-thirds of the voting rights represented by the shareholders (including their proxy) present at the meeting.
   
 
The shareholders (including their proxy) attending the meeting shall clearly show approval or objection to every matter to be voted on. As for the unpolled vote or abstention, the Company will not treat it as the vote with voting right when calculating the voting result of this matter.
   
Article 79
The following matters shall be resolved by an ordinary resolution at a shareholders’ general meeting:
   
 
(1)
work reports of the board of directors and the supervisory committee;
     
 
(2)
profit distribution plans and loss recovery plans formulated by the board of directors;
     
 
(3)
appointment and removal of members of the board of directors and supervisors assumed by non-representatives of the employees, their remuneration and manner of payment;
     
 
(4)
annual preliminary and final budgets, balance sheets and profit and loss accounts and other financial statements of the Company; and
     
 
(5)
matters other than those which are required by the laws and administrative regulations or by the Articles of Association and its appendices  to be adopted by special resolution.
   
Article 80
The following matters shall be resolved by a special resolution at a shareholders’ general meeting:
   
 
(1)
the increase or reduction in share capital and the issue of shares of any class, warrants and other similar securities;
     
 
(2)
the issue of debentures of the Company;
     
 
(3)
the division, merger, dissolution, liquidation and change of corporate form of the Company;
     
 
(4)
amendment of the Articles of Association and its appendices and its appendices;
     
 
(5)
where the purchase or sale of assets or amount of guarantee by the Company within one year exceeds 30% of the latest audited total assets;
     
 
(6)
stock incentive plan; and
     
 
(7)
any other matters required by laws, administrative regulations or the Articles of Association and its appendices , and those considered by the shareholders in general meeting, and resolved by way of an ordinary resolution, to be of a nature which may have a material impact on the Company and should be adopted by special resolutions.
   
Article 81
The chairman of the meeting shall be responsible for determining whether a resolution has been passed. His decision, which shall be final and conclusive, shall be announced at the meeting and recorded in the minutes.
   
Article 82
If the chairman of the meeting has any doubt as to the result of a resolution which has been put to vote at a shareholders’ meeting, he may have the votes counted. If the chairman of the meeting has not counted the votes, any shareholder who is present in person or by proxy and who objects to the result announced by the chairman of the meeting may, immediately after the declaration of the result, demand that the votes be counted and the chairman of the meeting shall have the votes counted immediately.
 
 
 
19
 
 
 
Article 83
If votes are counted at a shareholders’ general meeting, the result of the count shall be recorded in the minutes.
   
Article 84
The convenor should be responsible for the authenticity, accuracy and completeness of the minutes of meetings. The present directors, supervisors, secretary of the board of directors, the convener or its agent, and the presiding person shall sign their names in the minutes of the meeting. The contents and form of the records of meeting shall comply with the requirements of the Rules and Procedures for the Shareholders’ General Meetings.
   
 
The minutes of the shareholders' general meetings, together with the shareholders’ attendance lists and proxy forms, other valid information in relation to the voting by way of Internet or other means shall be treated as a Company file and kept by the secretary of the board of directors at the Company’s place of residence for at least 10 years.
   
Article 85
Copies of the minutes of proceedings of any shareholders’ meeting shall, during business hours of the Company, be open for inspection by any shareholder without charge. If a shareholder requests for a copy of such minutes from the Company, the Company shall send a copy of such minutes to him within seven (7) days after receipt of reasonable fees therefor.
   
Article 86
Where the shareholders' general meeting passes the resolutions including bonus in cash, bonus in shares or converted and increased capital stock of cumulative fund, the Company shall give effect to the detailed plan within two months after the conclusion of the shareholders' general meeting. If the aforesaid resolutions involves profit distribution plan, the board of directors of the Company shall complete the issue and distribution of dividend (or shares) within two months as of the convention of the shareholders' general meeting.
 
 
CHAPTER 9  SPECIAL PROCEDURES FOR VOTING BY A CLASS OF SHAREHOLDERS
 
Article 87
Those shareholders who hold different classes of shares are class shareholders.
   
 
Class shareholders shall enjoy rights and assume obligations in accordance with laws, administrative regulations and the Articles of Association and its appendices.
   
Article 88
Rights conferred on any class of shareholders (“class rights”) may not be varied or abrogated save with the approval of a special resolution of shareholders in a general meeting and the approval of the affected class  shareholders at a separate meeting conducted in accordance with Articles 90 to 94 hereof.
   
Article 89
The following circumstances shall be deemed to be variation or abrogation of the rights of certain class shareholders:
   
 
(1)
to increase or decrease the number of shares of that class, or to increase or decrease the number of shares of a class having voting or distribution rights or privileges equal  or superior to those of shares of that class;
     
 
(2)
to exchange all or part of the shares of that class for shares of another class or to exchange or to create a right to exchange all or part of the shares of another class for shares of that class;
     
 
(3)
to remove or reduce rights to accrued dividends or rights to cumulative dividends attached to shares of that class;
     
 
(4)
to reduce or remove preferential rights attached to shares of that class to receive dividends or to the distribution of assets in the event that the Company is liquidated;
     
 
(5)
to add, remove or reduce conversion privileges, options, voting rights, transfer or pre-emptive rights, or rights to acquire securities of the Company attached to shares of that class;
 
 
 
20
 
 
 
 
(6)
to remove or reduce rights to receive payment payable by the Company in specific currencies attached to shares of that class;
     
 
(7)
to create a new class of shares having voting or distribution rights or privileges equal or superior to those of the shares of that class;
     
 
(8)
to restrict the transfer or ownership of shares of that class or to increase the types of restrictions attaching thereto;
     
 
(9)
to issue rights to subscribe for, or to convert the existing shares into, shares in the Company of that class or another class;
     
 
(10)
to increase the rights or privileges of shares of another class;
     
 
(11)
to restructure the Company in such a way so as to result in the disproportionate distribution of obligations between the various classes of shareholders; and
     
 
(12)
to vary or abrogate the provisions of this Chapter.
   
Article 90
Affected class shareholders, whether or not otherwise having the right to vote at shareholders’ general meetings, have the right to vote at class shareholders' meetings in respect of matters concerning sub-paragraphs (2) to (8), (11) and (12) of Article 89 hereof, but interested shareholder(s) shall not be entitled to vote at such class shareholders' meetings.
   
 
“(An) interested shareholder(s)”, as such term is used in the preceding paragraph, means:
   
 
(1)
in the case of a repurchase of shares by way of a general offer to all shareholders of the Company or by way of public dealing on a stock exchange pursuant to Article 29 hereof, an interested shareholder is a “controlling shareholder” within the meaning of Article 54 hereof;
     
 
(2)
in the case of a repurchase of shares by an off-market agreement pursuant to Article 29 hereof, a holder of the shares to which the proposed agreement relates; and
     
 
(3)
in the case of a restructuring of the Company, a shareholder who assumes a relatively lower proportion of obligation than the obligations imposed on shareholders of that class under the proposed restructuring or who has an interest in the proposed restructuring different from the general interests of the shareholders of that class.
   
Article 91
Resolutions of a class shareholders' meeting shall be passed by votes representing more than two-thirds of the voting rights of shareholders of that class represented at the relevant meeting who, according to Article 90, are entitled to vote thereat.
   
Article 92
A written notice of a class shareholders' meeting shall be given to all shareholders who are registered as holders of that class in the register of shareholders forty-five (45) days before the date of the class meeting (not including the date of meeting) if the Company convenes a class shareholders' meeting. Such notice shall give such shareholders notice of the matters to be considered at such meeting, the date and the place of the class meeting. A shareholder who intends to attend the class meeting shall deliver his written reply in respect thereof to the Company twenty (20) days before the date of the class meeting.
   
 
If the number of the voting shares represented by the shareholders who intend to attend the meeting is more than half of the total number of shares of that class which have the right to vote at such meeting, the Company may hold the class shareholders' meeting; if not, the Company shall within five (5) days give the shareholders further notice of the matters to be considered, the date and the place of the class meeting by way of public announcement. The Company may then hold the class meeting after such public announcement has been made.
   
Article 93
Notice of class shareholders' meetings need only be served on shareholders entitled to vote thereat.
 
 
 
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Class shareholders' meetings shall be conducted in a manner which is as similar as possible to that of shareholders’ general meetings. The provisions of the Articles of Association and its appendices relating to the manner for the conduct of shareholders’ general meetings are also applicable to class shareholders' meetings.
   
Article 94
Apart from the holders of other classes of shares, the holders of the A Shares and holders of Overseas-Listed Foreign-Invested Shares shall be deemed to be holders of different classes of shares.
   
 
The special procedures for approval by a class of shareholders shall not apply in the following circumstances:
   
 
(1)
where the Company issues, upon the approval by special resolution of its shareholders in a general meeting, either separately or concurrently once every twelve (12) months, not more than 20% of each of its existing issued A Shares and Overseas-Listed Foreign-Invested Shares; or
     
 
(2)
where the Company’s plan to issue A Shares and Overseas-Listed Foreign-Invested Shares at the time of its establishment is carried out within fifteen (15) months from the date of approval of the securities regulatory organ of the State Council.
 
 
CHAPTER 10  BOARD OF DIRECTORS
 
Article 95
The Company shall have a board of directors which is accountable to shareholders.
   
 
The Company shall set forth Rules and Procedures for the Board of Directors’ Meetings for implementation after being approved by the shareholders in a general meeting. The Rules and Procedures for the Board of Directors’ Meetings shall include the following items:
   
 
(1)
functions and powers and authorizations of the board of directors;
     
 
(2)
establishment of the board of directors and its subordinated offices;
     
 
(3)
secretary of the board of directors;
     
 
(4)
discussion system of a board meeting;
     
 
(5)
discussion procedures of a board meeting;
     
 
(6)
disclosure of information of a board meeting;
     
 
(7)
implementation and feedback of resolutions of a board meeting; and
     
 
(8)
other matters deemed necessary by the shareholders’ general meeting.
   
 
The Rules and Procedures for the Board of Directors’ Meetings is an integral part of and shall have the same legal effect as these Articles of Association and its appendices.
   
Article 96
The board of directors shall consist of eleven (11) to fifteen (15) directors and there shall be one (1) Chairman and 1 to 2 Vice-chairman.
   
 
Directors can also act as senior management personnel, however, the number of directors who also act as senior management personnel shall not exceed on half of the total number of directors.
   
Article 97
Directors of the Company shall be natural persons and they are not required to hold any shares in the Company.
 
 
 
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Directors shall be elected at the shareholders’ general meeting and each Board has a term of three (3) years. The term of office of a director shall be calculated from the date of their assumption of office until the expiry of the term of the present session of the board of directors. At the expiry of the term of office of a director, the term is renewable upon re-election. The term of office of any independent director may not be renewed for more than 6 years.
   
 
Newly appointed directors, supervisors should assume their office immediately after the close of the relevant general meeting, or on the date specified in the resolution of the general meetings.
   
 
Where the directors are not reelected timely upon the expiry of the term, the original directors shall, prior to the assumption of the reelected directors, performs its director duties in accordance with laws, administrative rules, regulations and the provisions of the Articles of Association and its appendices.
   
Article 98
The list of candidates for directors shall be submitted to the shareholders’ general meeting in the form of motion for approval. The Board of Directors should inform the shareholders of the resume and basic profiles of the director candidates by way of announcement.
   
 
Candidates other than those for independent directors shall be nominated by the board of directors, the supervisory committee or shareholders who individually or jointly hold 3% or more of the Company’s voting shares and be elected by the shareholders in a general meeting.
   
 
Candidates for independent directors of the Company shall be nominated by the Company’s board of directors, the supervisory committee or shareholders who individually or jointly hold 1% or more of the Company’s voting shares and be elected by the shareholders in a general meeting.
   
Article 99
Independent directors shall be elected in the following manner:
   
 
(1)
the nominator of a candidate for independent director shall seek the consent of the nominee, find out the occupation, academic qualification, rank and detailed working experience including all part-time jobs of the nominee and provide written proofs of the same to the Company before making the nomination. The candidate shall give a written undertaking to the Company agreeing to be nominated, undertaking the truthfulness and completeness of his particulars disclosed and guaranteeing the performance of a director’s duties after being elected.
     
 
(2)
the nominator of an independent director shall give opinion on the qualification and independence of the nominee to act as an independent director. The nominee shall make an open announcement as to the absence of any relation between the Company and him which would affect his independent and objective judgment.
     
 
(3)
if the nomination of candidates for independent directors is made before the Company’s convening of a board meeting, the written proofs of the nominee referred to in sub-paragraphs (1) and (2) above shall be disclosed together with the board resolution or the notice of shareholders' general meeting.
     
 
(4)
if the shareholders who individually or jointly hold 3% or more of the Company’s total voting shares nominates in a general meeting of the Company according to law the independent directors' candidates, a written notice stating their intention to nominate a candidate for directors and the nominee’s consent to be nominated together with the written proofs and undertaking of the nominee referred to in sub-paragraphs (1) and (2) above shall be delivered to the Company not less than ten (10) days before the general meeting, and the period granted by the Company for lodging the above notice and documents by the relevant nominator (such period shall commence from the date after the issue of the notice of the general meeting) shall not be less than ten (10) days.
     
 
(5)
when issuing notice of shareholders' general meeting where independent directors are to be elected, the Company shall submit the relevant information of all nominees to the domestic stock exchange on which the Company’s shares are listed. The written opinions of the board of directors shall also be submitted in case the Company’s board has any dispute as to the particulars of the nominee. If the stock exchange on which the Company’s shares are listed opposes to the nomination of any nominee, this nominee may not be included as a candidate for independent directors. In convening a
 
 
 
23
 
 
 
   
general meeting to elect independent directors, the Company’s board shall specify if the stock exchange on which the Company’s shares are listed has any dispute as to the candidates for independent directors.
   
Article 100
Non-independent directors shall be elected in the following manner:
   
 
(1)
the nominator of a candidate for non-independent director shall seek the consent of the nominee, find out the occupation, academic qualification, rank and detailed working experience including all part-time jobs of the nominee and provide written proofs of the same to the Company before making the nomination. The candidate shall give a written undertaking to the Company agreeing to be nominated, undertaking the truthfulness and completeness of his particulars disclosed and guaranteeing the performance of a director’s duties after being elected.
     
 
(2)
if the nomination of candidates for non-independent directors is made before the Company’s convening of a board meeting, the written proofs of the nominee referred to in sub-paragraph (1) above shall be disclosed together with the board resolution or the notice of the shareholders' general meeting.
     
 
(3)
if the shareholders who individually or jointly hold 3% or more of the Company’s voting shares or nominates in a general meeting of the Company according to law the independent directors' candidates, a written notice stating their intention to nominate a candidate for directors and the nominee’s consent to be nominated together with the written proofs and undertaking of the nominee referred to in sub-paragraph (1) above shall be delivered to the Company not less than ten (10) days before the general meeting, and the period granted by the Company for lodging the above notice and documents by the relevant nominator (such period shall commence from the date after the issue of the notice of the general meeting) shall not be less than ten (10) days”.
   
Article 101
The following basic requirements shall be met in order to be an independent director:
   
 
(1)
qualified to be a director of a listed company under the laws, administrative regulations and other relevant provisions;
     
 
(2)
has basic knowledge of the operation of a listed company, familiar with the relevant laws, administrative rules, regulations and rules from competent authorities;
     
 
(3)
has 5 years or more of legal or financial experience or other experience in performing the duties of an independent director; and
     
 
(4)
independence and other requirements stipulated by laws, administrative rules, regulations of the competent authorities and the Articles of Association and its appendices .
   
Article 102
When voting on the election of directors and supervisors in a shareholders’ general meeting, cumulative voting system in accordance with the relevant laws and regulations in effect shall be adopted.  In the event of inconsistency between the laws and regulations and the Articles of Association and its appendices, the Board of the Directors may decide to adopt an appropriate cumulative voting system subject to laws and decrees.  Please refer to the Rules and Procedures for the Shareholders’ General Meetings for details of implementation of the accumulative voting system.
   
Article 103
Provided that the relevant laws and administrative rules are observed, a director whose term of office has not yet been expired may be removed in a general meeting by way of ordinary resolution (but the right to lodge a claim under a contract is not affected).
   
 
If a director has failed to attend a board meeting personally nor appoint a proxy to attend on his behalf on two consecutive occasions, it shall be treated as a failure to discharge his duties. The board of directors shall propose in a shareholders’ general meeting to remove and replace this director.
   
 
If an independent director has failed to attend a board meeting personally on three consecutive occasions, the board of directors shall propose in a shareholders’ general meeting to remove and replace this director. Unless in the above circumstances and in circumstances as provided in the Company Law where a person
 
 
 
24
 
 
 
 
is prohibited from acting as a director, no independent director may be removed before his term of office expires. In case of early removal, the Company shall disclose it by way of special disclosure. If the removed independent director considers that he is removed by the Company improperly, he may make an open declaration.
   
Article 104
A director may resign before his term of office expires. In resigning his duties, a director shall tender a resignation to the board in writing.
   
Article 105
If the resignation of a director causes the board members of the Company to fall below the minimum number of members to form a quorum, prior to the assumption of the re-elected directors, the former directors shall perform their directorship pursuant to laws, administrative rules, regulations and the Articles of Association and its appendices .
   
 
If the resignation of an independent director causes the proportion of independent directors in the board of the Company to fall below the minimum requirements of the relevant regulatory authorities, the resignation of this independent director shall be effective only after the succeeding independent director has filled his vacancy.
   
 
Notwithstanding the foregoing, the resignation of the directors shall take effect upon receipt of the resignation notification by the Board of Directors.
   
Article 106
The board of directors shall exercise the following functions and powers:
   
 
(1)
to be responsible for the convening of the shareholders’ general meeting and to report on its work to the shareholders in general meetings;
     
 
(2)
to implement the resolutions passed by the shareholders in general meetings;
     
 
(3)
to determine the Company’s business plans and investment proposals;
     
 
(4)
to formulate the Company’s annual preliminary and final financial budgets;
     
 
(5)
to formulate the Company’s profit distribution proposal and loss recovery proposal;
     
 
(6)
to formulate proposals for the credit and financial policies of the Company, the increase or reduction of the Company’s registered capital and for the issue of any kind of securities of the Company’s (including but without limitation to the Company’s debentures) and proposals for listing and repurchase of the Company’s shares;
     
 
(7)
to set forth plans for significant acquisition or disposal proposals, the merger, division, change of corporate form or dissolution of the Company;
     
 
(8)
to determine matters to the extent authorized by the shareholders' general meeting of the Company in relation to, external investment, purchase or sale of assets, pledge, entrusting financing, connected transaction;
     
 
(9)
to examine external guarantees of the Company in accordance with laws and the provisions of the Articles of Association and its appendices ;
     
 
(10)
to decide on the Company’s internal management structure;
     
 
(11)
to appoint or remove the Company’s president and to appoint or remove senior vice-president, the vice-president and Chief Financial Officer of the Company according to the recommendations of the president; to appoint or remove the secretary of the board of directors and to decide on their remuneration;
     
 
(12)
to appoint or replace the members of the board of directors and the supervisory committee of its wholly-owned subsidiary, appoint, replace or recommend the shareholders’ proxies, directors (candidates) and supervisors (candidates) of its subsidiary(ies) which are controlled or invested by
 
 
 
25
 
 
 
   
the Company.
     
 
(13)
to determine the establishment of Company’s branch offices;
     
 
(14)
to formulate proposals for any amendment of the Articles of Association and its appendices  and its appendices;
     
 
(15)
to set forth the Company’s basic management system;
     
 
(16)
to manage the disclosure of information of the Company;
     
 
(17)
to propose in a shareholders’ general meeting to engage or replace the accounting firm which undertakes auditing work of the Company;
     
 
(18)
to listen to the president’s work report and check the president’s work;
     
 
(19)
to determine important matters and administrative matters of the Company other than those which should be determined by resolution of a shareholders’ general meeting of the Company in accordance with law, administrative rules, regulations of the competent department(s) and these Articles of Association and its appendices , and to sign other important agreements; and
     
 
(20)
to exercise any other powers stipulated by laws, administrative rules, regulations of the competent department(s) or the Articles of Association and its appendices  and conferred by the shareholders in a general meeting.
   
 
Other than the board of directors’ resolutions in respect of the matters specified in sub-paragraphs (6), (7) and (14) of this Article which shall be passed by the affirmative vote of more than two-thirds of all the directors, the board of directors’ resolutions in respect of all other matters may be passed by the affirmative vote of over half of the directors (Item (9) should be approved by more than two-thirds of the directors attending the meeting.)
   
Article 107
The above functions and powers of board meetings may be authorized to one or more directors upon the agreement of all directors, but matters concerning material interests of the Company shall be determined by the board collectively. The authorization of the board shall be clear and specific.
   
Article 108
An independent director shall have the following special functions and powers in addition to those conferred by the Company Law, other relevant laws, administrative rules and the Articles of Association and its appendices :
   
 
(1)
material connected transactions (determined according to the standards issued from time to time by the relevant regulatory authorities in the place where the Company’s shares are listed) which should be approved by the board of directors or the shareholders’ general meeting according to law shall, upon the recognition of independent directors, be submitted to the board of directors for discussion. Any resolution made by the board of directors regarding the Company’s connected transactions must only be effective after it has been signed by the independent directors. The independent directors may, before making a judgment, engage an intermediary to issue an independent financial report for them to rely upon in making the judgment;
     
 
(2)
to propose to the board of directors to engage or remove an accounting firm;
     
 
(3)
two or more than one-half of the independent directors may propose to the board of directors to convene an EGM;
     
 
(4)
to propose the calling of a board meeting;
     
 
(5)
to engage an external auditing or advisory organ independently;
     
 
(6)
to collect voting rights from shareholders prior to the convening of a shareholders’ general meeting;
 
 
 
26
 
 
 
   
and
     
 
(7)
to report directly to the shareholders’ general meetings, securities regulatory organ under the State Council and other relevant departments.
   
 
The independent directors shall seek the consent of more than half of the independent directors in exercising their functions and powers other than sub-paragraphs (1) and (3) above.
   
 
If the above proposal is not accepted or the above functions and powers are not exercised properly, the Company shall disclose the same.
   
Article 109
In respect of approval authority of the board of directors in relation to external investment, purchase or sale of assets, pledge, external guarantee, entrusting financing, connected transaction, the Rules and Procedures for the Board of Directors’ Meetings shall provide with clear rules, the board of directors shall lay down strict procedures to inspect and decide on risks investments in respect of the aforesaid matters. For major investment projects in excess of the approval limit of the board of directors, it shall organize the relevant experts and professional officers to conduct assessment for approval of the shareholders in a general meeting.
   
Article 110
The Chairman and the Vice-Chairman shall be directors of the Company and be appointed and removed by affirmative vote of a simple majority of all directors. The term of office of the Chairman or the Vice-Chairman shall be three (3) years which term is renewable upon re-election.
   
Article 111
The Chairman of the board of directors shall exercise the following functions and powers:
   
 
(1)
to preside over shareholders’ general meetings and to convene and preside over meetings of the board of directors;
     
 
(2)
to co-ordinate and perform the responsibilities of the board of directors and review on the implementation of resolutions passed by the board of directors at directors’ meetings;
     
 
(3)
to sign the certificates of shares, debentures and other valuable securities issued by the Company;
     
 
(4)
to sign important documents of the board and other documents which should be signed by the Company’s legal representative;
     
 
(5)
to exercise the functions and powers of a legal representative;
     
 
(6)
where it is lawful and in the interest of the Company, to exercise the special right to deal with the Company’s affairs during emergency such as the occurrence of natural disasters, and to report to the Company’s board of directors and general meetings thereafter; and
     
 
(7)
to exercise other powers conferred by the board of directors.
   
 
The vice-chairman of the board of directors shall assist the chairman of the board with its work. Whenever the Chairman is unable to or fails to exercise his/her powers, the vice-chairman of the board shall perform the duties (if the Company has two or more vice chairman of the board, the vice-chairman voted by more than one half of the directors shall perform the duties); where the vice-chairman of the board is unable to or fails to fulfill his/'her duty, a director shall be elected by half of the total members of the board of directors to perform the duties.
   
Article 112
Board meetings shall be convened regularly at least 4 times a year. An EGM shall be called for on occurrence of any of the events set out in the Rules and Procedures for the Board of Directors’ Meetings.
   
 
The calling for a board meeting, and the contents and form of a notice of meeting shall comply with the requirements of the Rules and Procedures for the Board of Directors’ Meetings.
   
Article 113
Meetings of the board of directors shall be held only if more than half of all the directors (including any alternate director appointed) are present. Each director shall have one (1) vote. Where there is an equality
 
 
 
27
 
 
 
 
of votes cast both for and against a resolution, the Chairman of the board of directors shall have an additional vote.
   
Article 114
Directors shall attend the meetings of the board of directors in person. Where a director is unable to attend a meeting for any reason, he may by a written power of attorney appoint another director to attend the meeting on his behalf. The power of attorney shall set out the name of the proxy, the subject and scope of authorization and validity of the time limit of the proxy, which shall be signed or officially sealed by the authorizing party.
   
 
A director appointed as a representative of another director to attend the meeting shall exercise the rights of a director within the scope of authority conferred by the appointing director. Where a director is unable to attend a meeting of the board of directors and has not appointed a representative to attend the meeting on his behalf, he shall be deemed to have waived his right to vote at the meeting.
   
 
All expenses incurred by the directors for attending the board meeting shall be borne by the Company, including the traffic expense from the place where the director is located to the place where the meeting is convened, as well as the board and lodging expenses during the term of meeting. The miscellaneous expenses such as the rental of meeting room and the local traffic expenses etc. shall also be borne by the Company.
   
Article 115
Apart from meetings on site, interim meetings of the board of directors may take the form of video-teleconference, written communications over the resolutions, or any other methods, provided that directors are ensured to fully express their opinions.  In any event, such meetings are in compliance with the Rules and Procedures for the Board of Directors’ Meetings.
   
Article 116
Matters determined in a board meeting shall be recorded in Chinese in the form of Records of Meeting. The contents and form of Records of Board Meetings shall comply with the Rules and Procedures for the Board of Directors’ Meetings.
   
Article 117
Directors shall be liable for board resolutions. If a board resolution is against the law, administrative rules or the Articles of Association and its appendices and resolutions of the shareholders' general meetings, thus causes the Company to suffer any loss, the directors who participate in voting shall assume the liability to compensate to the Company); directors who are proved to have cast a dissenting vote against the motion during the voting as recorded in the records of meeting shall be exempted from liability.
 
 
CHAPTER 11  SECRETARY OF THE BOARD OF DIRECTORS
 
Article 118
The Company shall have one (1) secretary of the board of directors, being a senior management personnel, shall be accountable to the Company and the board of directors. The Company shall set forth regulations in relation to the work of the Secretary of the Board to promote the management of the Company and make provisions for disclosure of information and investor relations.
 
The board of directors may establish its secretarial department when necessary.
   
Article 119
A director or a member of the senior management personnel of the Company may concurrently act as the secretary of the Company’s board of directors. No accountant of the accounting firm engaged by the Company may concurrently act as the secretary of the Company’s board of directors.
   
 
The secretary of the Company’s board of directors shall be a natural person who has the requisite professional knowledge and experience, and shall be nominated by the Chairman of the Board and appointed by the board of directors. In the case of a director acting concurrently as the secretary of the board, if an act has to be performed by a director and the secretary of the board respectively, this director acting concurrently as the secretary of the board may not act in both identities.
   
Article 120
The main duties and responsibilities of the secretary of the board of directors include:
 
 
 
28
 
 
 
 
(1)
to assist directors to deal with the daily matters of the board of directors, continuously provide, remind and ensure directors and the president, etc. to be well informed of the laws, regulations, policies and requirements of both domestic and overseas regulatory organizations concerning the operation of the Company, and assist directors and the president to practically implement the domestic and foreign laws, regulations, the Articles of Association and its appendices and other regulations when performing their duties and powers;
     
 
(2)
to be responsible for the organization and preparation of the documents of the board of directors and shareholders’ general meeting, well prepare the meeting record work, ensure the meeting policies in conformity with the legal procedures, and to keep abreast of the execution of the resolutions of the board of directors;
     
 
(3)
to be responsible for the organization and coordination of information disclosure, to ensure of a timely, accurate, lawful, true and complete disclosure of information, coordination of the relationship with the investors, and enhancement of the transparency of the Company;
     
 
(4)
to participate in and organize the financing in capital market; and
     
 
(5)
to deal with the relationships with the intermediary organs, regulatory authorities and the Media.
   
Article 121
The secretary of the board of directors shall discharge his duties diligently according to laws, administrative rules, regulations of the competent authorities and the Articles of Association and its appendices.
   
 
The secretary of the board of directors shall assist the Company to comply with the relevant PRC law and regulations of the securities regulatory organ of the place where the Company’s shares are listed.
 
 
CHAPTER 12  PRESIDENT
 
Article 122
The Company shall have a president who is accountable to the board of directors. The president shall be nominated by the Chairman of the board of directors and appointed or removed by the board of directors.
   
 
The Company shall have a senior vice president, several vice-presidents, and one Chief Financial Officer who shall assist the president in work. The senior vice president, Chief Financial Officer and the vice-presidents shall be nominated by the president and appointed or removed by the board of directors.
   
Article 123
The president shall exercise the following duties and powers:
   
 
(1)
to be in charge of the Company’s production, operation and management, to co-ordinate the implementation of the resolutions of the board of directors and to report his work to the board of directors;
     
 
(2)
to organize the implementation of the Company’s annual business plan and investment proposal;
     
 
(3)
to draft plans for the establishment of the Company’s internal management structure;
     
 
(4)
to draft plans for the establishment of the branch company of the Company;
     
 
(5)
to draft the Company’s basic management system;
     
 
(6)
to formulate specific rules and regulations for the Company;
     
 
(7)
to propose the appointment or dismissal of the Company’s senior vice president, vice-president(s) and Chief Financial Officer;
     
 
(8)
to appoint or dismiss management personnel other than those required to be appointed or dismissed
 
 
 
29
 
 
 
   
by the board of directors;
     
 
(9)
to determine the wages, fringe benefits, rewards and punishments of the Company’s staff, to determine the appointment and dismissal of the Company’s staff;
     
 
(10)
to propose the convening of extraordinary meetings of directors; and
     
 
(11)
other powers conferred by the Articles of Association and its appendices and the board of directors.
   
Article 124
The president and other senior officers who are not directors, have the right to attend board meetings and to receive notices of meetings and other relevant documents, but do not have any voting rights at board meetings.
   
Article 125
The president shall set forth “Work Regulations for the President” for implementation upon the approval of the board of directors.
   
Article 126
The Work Regulations for the President shall include:
   
 
(1)
requirements and procedures for the convening of a presidents’ meeting and the officers attending;
     
 
(2)
the president, senior vice-presidents, Chief Financial Officer and vice presidents shall divide their duties among themselves and perform their own duties;
     
 
(3)
use of the Company’s funds and assets, authority to sign major contracts and the system to report to the board of directors and to the supervisory committee at the request of the supervisory committee; and
     
 
(4)
other matters as the board of directors may consider necessary.
   
Article 127
In performing their functions and powers, the president, senior vice-presidents, the Chief Financial Officer and vice presidents shall act honestly and diligently and in accordance with laws, administrative regulations and the Articles of Association and its appendices. They may not alter the resolutions of a shareholders’ general meeting or of a board meeting nor act ultra vires .
 
 
CHAPTER 13  SUPERVISORY COMMITTEE
 
Article 128
The Company shall have a supervisory committee which is accountable to the shareholders’ general meetings.
   
 
The Company shall set forth “Rules and Procedures for the Supervisors’ Meetings” for implementation upon being approved by the shareholders in a general meeting. The Rules and Procedures for the Supervisors’ Meetings shall include the followings:
   
 
(1)
the formation and business system of the supervisory committee;
     
 
(2)
the functions and powers of the supervisory committee;
     
 
(3)
the system of discussion of the supervisors’ meetings;
     
 
(4)
the procedures of discussion of the supervisory committee;
     
 
(5)
the disclosure of information of the supervisors’ meetings;
     
 
(6)
implementation and feedback of resolutions of the supervisory committee; and
 
 
 
30
 
 
 
 
(7)
other matters as the shareholders’ general meetings may consider necessary.
   
 
The Rules and Procedures for the Supervisors’ Meetings shall be an integral part of and have the same legal effect as these Articles of Association and its appendices.
   
Article 129
The supervisory committee shall compose of 10 supervisors, six of which shall be assumed by non-representatives of the employees; and four of which shall be representatives of workers and staff of the Company. The supervisors assumed by non-representatives of the employees shall be elected and dismissed by shareholders' general meetings, and representatives of the employees shall be elected and dismissed through the employee representatives' general meetings, employee general meetings or other forms of democratic election.
   
 
Each supervisor shall serve for a term of three years, which term is renewable upon re-election and re-appointment.  The supervisor's term shall be calculated from the date of appointment to the expiration of the term of the relevant session of the supervisory committee. Where the supervisor fails to be re-elected upon the expiration of its term, the former supervisor shall, prior to the assumption of the reelected supervisor, perform the duty hereof in accordance with laws, administrative rules, regulations and the provisions in the Articles of Association and its appendices.
   
Article 130
The supervisory committee shall have one (1) Chairman, and may have a deputy Chairman, both of whom  shall be supervisors. The election or removal of the Chairman and deputy Chairman of the supervisory committee shall be determined by two-thirds or more of the members of the supervisory committee.
   
 
The Chairman of the supervisory committee shall exercise the duties and powers of the supervisory committee.
   
 
The Chairman of the supervisory committee shall convene and preside over the meetings.  In the event that the Chairman is unable to or fails to perform such duties, the deputy Chairman of the supervisory committee shall convene and preside over such meetings; if the deputy Chairman is unable to or fails to perform such duties, over half of the supervisors shall jointly recommend a supervisor, who shall convene and preside over the meetings.
   
Article 131
If necessary, the supervisory committee may establish its offices responsible for daily affairs of the supervisory committee.
   
Article 132
A director and senior management personnel may not act concurrently as a supervisor.
   
Article 133
The list of supervisors assumed by the non-representatives of the employees shall be submitted to the shareholders’ general meeting in the form of motion for approval.  The board of directors shall announce the resume and basic profile of the candidate supervisors to the shareholders.
   
 
The candidates for supervisors who are shareholder representatives shall be nominated by the Company’s board of directors, the supervisory committee or shareholders who individually or jointly hold 3% or more of the Company’s voting shares and be elected by the shareholders in a general meeting.
   
 
The candidates for independent supervisors shall be nominated by the Company’s board of directors, the supervisory committee or shareholders who individually or jointly hold 1% or more of the Company’s voting shares and be elected by the shareholders in a general meeting.
   
Article 134
The supervisors who are shareholders representatives and independent supervisors shall be elected in the following manner:
   
 
(1)
the nominator of a candidate for supervisor who is a shareholder representative or an independent supervisor shall seek the consent of the nominee, find out the occupation, academic qualification, rank and detailed working experience including all part-time jobs of the nominee and provide written proofs of the same to the Company before making the nomination. The candidate shall give a written undertaking to the Company agreeing to be nominated, undertaking the truthfulness and completeness of his particulars disclosed and guaranteeing the performance of a director’s duties
 
 
 
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after being elected.
     
 
(2)
If the nomination of a candidate for supervisor who is a shareholder representative or an independent supervisor is made before the Company’s convening of a board meeting, the written proofs of the nominee referred to in sub-paragraphs (1) above shall be disclosed together with the board resolution or the notice of the shareholders' general meeting.
     
 
(3)
If the shareholders who have the rights to nominate nominates in a shareholders' meeting of the Company a candidate for a supervisor who is a shareholder representative or a candidate for an independent supervisor, a written notice stating their intention to nominate a candidate for a supervisor and the nominee’s consent to be nominated together with the written proofs and undertaking of the nominee referred to in sub-paragraph (1) above shall be delivered to the Company ten (10) days before the AGM.
   
Article 135
A supervisor may resign before his term expires, and shall submit a written resignation report to the supervisor committee.
   
 
Where the resignation of supervisors within his (her) term has resulted in the number of the total member in supervisory committee is lower than the quorum, the former supervisor shall, prior to the assumption of the reelected supervisor, perform the duty hereof in accordance with laws, administrative rules, regulations and the provisions in the Articles of Association and its appendices . Apart from the aforesaid situation, the resignation of the supervisors shall be effective upon the receipt of the written resignation report by the supervisory committee.
   
Article 136
Supervisors’ meetings shall be convened regularly at least 4 times a year. An extraordinary supervisors’ meeting shall be convened on occurrence of any of the events specified in the Rules and Procedures for the Supervisors’ Meetings. The meetings shall be called upon by the Chairman of the supervisory committee.
   
 
A 10 days’ prior notice shall be given to all supervisors for the convening of a supervisors’ meeting. The convening of a supervisors’ meeting and the contents and form of the notice of meeting shall comply with the Rules and Procedures for the Supervisors’ Meetings.
   
Article 137
The supervisory committee shall exercise the following functions and powers in accordance with law:
   
 
(1)
to review the Company’s financial position; to appoint another accounting firm in the name of the Company to review the Company’s financial condition independently;
     
 
(2)
to supervise the directors, senior management personnel to ensure that they do not act in contravention of any law, regulation or the Articles of Association and its appendices , and to advise on dismissal of directors or senior management personnel who are in breach of laws, administrative rules, the Articles of Association and its appendices  or resolutions of the shareholders' general meetings;
     
 
(3)
to demand the directors or the senior management personnel to rectify their error if they have acted in a harmful manner to the Company’s interest;
     
 
(4)
to check and inspect the financial information such as the financial report, business report and plans for distribution of profits to be submitted by the board of directors to the shareholders’ general meetings and to authorize, in the Company’s name, publicly certified and practicing accountants to assist in the review on such information should any doubt arise in respect thereof, examine and opine in writing on the periodical reports of the Company prepared by the board of directors;
     
 
(5)
to make recommendations of accounting firms for engagement by the Company;
     
 
(6)
to make motions in a shareholders' general meeting;
     
 
(7)
to propose to convene an EGM, where the board of directors fails to perform the duties in relation to convene or preside a shareholders' general meeting as required by the Company Laws, to convene
 
 
 
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and preside the shareholders' general meeting;
     
 
(8)
to propose to convene an extraordinary board meeting;
     
 
(9)
to represent the Company in negotiations with or in bringing actions against a director or a senior management personnel;
     
 
(10)
to investigate into any abnormalities in operation of the Company; if necessary, to engage accounting firms, law firms and other professional institutions to assist its work, and the expenses shall be borne by the Company; and
     
 
(11)
other duties and powers as may be specified by the Articles of Association and its appendices .
   
 
Supervisors shall attend meetings of the board of directors, and may enquire or advise on matters in the resolutions of the board of directors.
   
Article 138
The supervisory committee may require the directors, senior management personnel, internal and external auditors to attend supervisors’ meetings and answer any question that the supervisory committee may have regarding matter it cares about.
   
Article 139
Resolutions of the supervisory committee shall be passed by the affirmative vote of more than two-thirds of all of its members.
   
Article 140
Records shall be made for all supervisors’ meetings and be signed by all attending supervisors and the recording person. Supervisors shall have the right to ask for the making of a descriptive record of what he speaks in the meeting. Records of supervisors’ meetings shall be treated as the Company’s files and kept at the Company’s domicile for at least 10 years.
   
Article 141
All reasonable fees incurred in respect of the employment of professionals (such as, lawyers, certified public accountants or practicing auditors) which are required by the supervisory committee in the exercise of its functions and powers shall be borne by the Company.
   
Article 142
A supervisor shall carry out his duties faithfully and bona fide in accordance with laws, administrative regulations and the Articles of Association and its appendices.
 
CHAPTER 14  QUALIFICATIONS AND OBLIGATIONS OF THE DIRECTORS, SUPERVISORS, SENIOR MANAGEMENT PERSONNEL OF THE COMPANY

Article 143
A person may not serve as a director and a senior management personnel of the Company if any of the following circumstances apply:
   
 
(1)
a person who does not have or who has limited capacity for civil conduct;
     
 
(2)
a person who has been found guilty of for corruption, bribery, infringement of property or misappropriation of property or other crimes which destroy the social economic order, and the sentence is enforced for less than five (5) years or a person who has been deprived of his political rights and not more than five (5) years have lapsed since the sentence was served;
     
 
(3)
a person who is a former director, factory manager or president of a company or enterprise which has been dissolved or put into liquidation as a result of mismanagement and who was personally liable for the winding up of such company or enterprise, where less than three (3) years have elapsed since the date of completion of the insolvent liquidation of the company or enterprise;


 
33
 


 
(4)
a person who is a former legal representative of a company or enterprise the business licence of which was revoked due to violation of law and who are personally liable therefor, where less than three (3) years have elapsed since the date of the cancellation of the business licence;
     
 
(5)
a person who has a relatively large amount of debts which have become due and outstanding;
     
 
(6)
a person who is currently under investigation by the judicial authorities for violation of criminal law;
     
 
(7)
a person who, according to laws and administrative regulations, or regulations of the competent authorities cannot act as a leader of an enterprise;
     
 
(8)
a person other than a natural person;
     
 
(9)
a person who has been adjudged by the competent authority for violation of relevant securities regulations and such conviction involves a finding that such person has acted fraudulently or dishonestly, where not more than five (5) years have lapsed from the date of such conviction;
     
 
(10)
a person who has been prohibited by the securities regulatory authority of the State Council to participate in market activities and the prohibition has still not been uplifted; and
     
 
(11)
other circumstances which are applicable according to laws and administrative regulations, or     regulations of the competent authorities.
   
 
The election of directors, supervisors or the engagement of senior management personnel in contravention to the provisions under this Article shall be null and void. Upon any contravention of (1) of this Article above by the directors, supervisors or senior management personnel during their term of office, the Company shall remove them from their position.
   
Article 144
The chairman, vice-chairman and directors of the Company’s controlling shareholder acting concurrently as the chairman, vice-chairman or director of the Company may not exceed 2 in number.
   
 
Personnel as acting on positions other than directors in the Company’s controlling shareholders or actual controllers shall not act as senior management personnel of the Company.
   
Article 145
The following people may not act as an independent director of the Company:
   
 
(1)
persons employed by the Company or its subsidiaries and their immediate family members and major social connections (immediate family members shall mean spouse, parents and issues, etc. and major social connections shall mean siblings, parents-in-law, sons/daughters-in-law, spouse of siblings, siblings of spouse, etc.);
     
 
(2)
natural person shareholders who directly or indirectly hold 1% or more of the Company’s issued shares or who are top 10 shareholders and their immediate family members;
     
 
(3)
persons employed by the shareholder company which directly or indirectly holds 5% or more of the Company’s issued shares or by the top five shareholder companies of the Company and their immediate family members;
     
 
(4)
persons who once belonged to categories (1) to (3) above in the past 3 years;
     
 
(5)
persons who provide financial or legal advice to the Company or its subsidiaries;
     
 
(6)
any independent director who is already the director of five listed companies; and
     
 
(7)
other persons determined by the securities regulatory authority of the State Council.
   
Article 146
The validity of an act carried out by a director, a supervisor, a senior management personnel of the Company on its behalf shall, as against a bona fide third party, not be affected by any irregularity in his


 
34
 


 
office, election or any defect in his qualification.
   
Article 147
Without the lawful authorization of the Articles of Association and its appendices or the board of directors, a director of the Company may not act personally on behalf of the Company or the board of directors. If he acts personally, he shall declare his own position and identity in advance where the acting would cause a third party to believe reasonably that he is acting on behalf of the Company or the board of directors.
   
Article 148
In addition to the obligations imposed by laws, administrative regulations or the listing rules of the stock exchange on which shares of the Company are listed, each of the Company’s directors, supervisors, president, and senior management personnel owes a duty to each shareholder, in the exercise of the duties and powers of the Company entrusted to him:
   
 
(1)
not to procure the Company to do anything ultra vires to the scope of business as stipulated in its business license;
     
 
(2)
to act honestly and in the best interests of the Company;
     
 
(3)
not to expropriate the Company’s property in any way, including (without limitation to) usurpation of opportunities which may benefit the Company; and
     
 
(4)
not to deprive of the individual interest of shareholders, including (without limitation to) rights to distribution and voting rights, save and except pursuant to a restructuring of the Company which has been submitted to the shareholders in general meeting for approval in accordance with the Articles of Association and its appendices .
   
Article 149
Each of the Company’s directors, supervisors, and senior management personnel owes a duty, in the exercise of his powers and in the discharge of his duties, to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
   
Article 150
The directors shall abide by laws, administrative rules and the Articles of Association and its appendices , bearing the following obligations to the Company:
   
 
(1)
in line with the national laws, administrative rules as well as the various requirements of the national economic policies, exercise meticulously, gravely and assiduously the rights authorized by the Company so as to ensure the Company's business act within the scope prescribed in the business license;
     
 
(2)
give fair treatment to all the shareholders;
     
 
(3)
investigate the performance of the Company;
     
 
(4)
report regularly to the Company and signing confirmation opinion in writing to ensure the sincerity, preciseness and integrity of the information revealed by the Company;
     
 
(5)
provide genuinely the relevant information and material to the supervisory committee, and not impede the supervisory committee to exercise its functional and powers; and
     
 
(6)
other obligations prescribed in relevant laws, administrative rules, regulations and Articles of Association and its appendices.
   
 
The obligations as stated in aforesaid (4) to (6) shall also be applicable to senior management personnel.
   
Article 151
Each of the Company’s directors, supervisors, and senior management personnel shall exercise his powers or perform his duties in accordance with the fiduciary principle, and shall not put himself in a position where his duty and his interest may conflict. This principle includes (without limitation to) discharging of the following obligations:


 
35
 


 
(1)
to act bona fide in the best interests of the Company;
     
 
(2)
to act within the scope of his powers and not to exceed such powers;
     
 
(3)
to exercise the discretion vested in him personally and not to allow himself to act under the control of another and, unless and to the extent permitted by laws, administrative regulations or with the informed consent of shareholders given in a general meeting, not to transfer the exercise of his discretion;
     
 
(4)
to treat shareholders of the same class equally and to treat shareholders of different classes fairly;
     
 
(5)
unless otherwise provided for in the Articles of Association and its appendices or except with the informed consent of the shareholders given in a general meeting, not to enter into any contract, transaction or arrangement with the Company;
     
 
(6)
not to use the Company’s property for his own benefit, without the informed consent of the shareholders given in a general meeting;
     
 
(7)
not to abuse his position to accept bribes or other illegal income or expropriate the Company’s property in any way, including (without limitation to) opportunities which benefit the Company;
     
 
(8)
not to accept commissions in connection with the Company’s transactions, without the informed consent of the shareholders given in a general meeting;
     
 
(9)
to comply with the Articles of Association and its appendices, to perform his official duties faithfully, to protect the Company’s interests and not to exploit his position and power in the Company to advance his own interests;
     
 
(10)
not to compete with the Company in any way, save with the informed consent of the shareholders given in a general meeting;
     
 
(11)
not to misappropriate the Company’s funds or to lend such funds to any other person, not to use the Company’s assets to set up deposit accounts in his own name or in the any other name or to use such assets to guarantee the debts of a shareholder of the Company or any other personal liabilities; and
     
 
(12)
not to divulge any confidential information which he has obtained during his term of office, without the informed consent of the shareholders in a general meeting; nor shall he use such information otherwise than for the Company’s benefit, unless disclosure of such information to the court or other governmental authorities is made in the following circumstances:
     
   
1.
disclosure is required by law;
       
   
2.
public interests so warrants;
       
   
3.
the interests of the relevant director, supervisor, or senior management personnel so requires.
   
Article 152
Each director, supervisor, senior management personnel of the Company shall not direct the following persons or institutions (“associates”) to act in a manner which a director, supervisor or senior management personnel is prohibited from so acting:
   
 
(1)
the spouse or minor children of the director, supervisor, or senior management personnel of the Company;
     
 
(2)
the trustee of the director, supervisor, senior management personnel or of any trustee described in sub-paragraph (1) above;
     
 
(3)
partners of directors, supervisors, senior management personnel or any person referred to in sub-paragraphs (1) and (2) of this Article;


 
36
 


 
(4)
a company in which a director, supervisor, senior management personnel, whether alone or jointly with one (1) or more of the persons referred to in sub-paragraphs (l), (2) and (3) of this Article and other directors, supervisors, senior management personnel, has de facto controlling interest; and
     
 
(5)
the directors, supervisors and senior management of a company which is being controlled in the manner set out in sub-paragraph (4) above.
   
Article 153
The directors, supervisors and senior management personnel of the Company, during their tenure, shall periodically report to the Company of the status on their holding of the Company's shares and any changes thereof; during their tenure the total number of shares transferred on an annual basis shall not exceed 25% of the total number of the shares of the Company held by them; the above personnel shall not transfer their shares of the Company they hold within one year from the listing of the relevant Company's shares. The aforesaid personnel shall not transfer the Company's shares held by them within six months after they leave their positions in the Company. The aforesaid shall not apply to the change in shareholding due to judicial enforcement, heritage, gift and distribution of estate by operation of laws.
The directors, supervisors and senior management personnel, who hold less than 1,000 shares of the Company, may transfer their shares once in all, but not subject to the aforesaid percentage restrictions.
   
Article 154
The duty of a director, supervisor, and the senior management personnel to act in good faith does not necessarily terminate on the expiration of their term of office. His duty of confidentiality in respect of trade secrets of the Company survives the termination of his tenure until the same has become open information. Other duties may continue for such period as the principle of fairness may require depending on the length of time which has lapsed between the termination and the act concerned and on the circumstances and the terms under which the relationship between the relevant director, supervisor, manager and the senior officer on one hand and the Company on the other hand was terminated.
   
Article 155
A director, supervisor, and a senior management personnel of the Company may be relieved of liability for specific breaches of his duty with the informed consent of the shareholders given at a general meeting, save under the circumstances of Article 53 hereof.
   
Article 156
Where a director, supervisor, senior management personnel of the Company is in any way, directly or indirectly, materially interested in a contract, transaction or arrangement or proposed contract, transaction or arrangement with the Company, (other than his contract of service with the Company), he shall declare the nature and extent of his interests to the board of directors at the earliest opportunity, whether or not the contract, transaction or arrangement or proposal therefor is otherwise subject to the approval of the board of directors.
   
 
If a director or his associate (as defined in the Rules Governing the Listing of Securities of the Hong Kong Stock Exchange Limited) have a material interest in any contract, transaction, arrangement or other matters that requires the approval of the board of directors, the relevant director shall not vote for the relevant matter at the meeting of the board of directors, and shall not be listed in the quorum of the meeting.
   
 
Unless the interested director, supervisor, senior management personnel discloses his interests in accordance with the preceding sub-paragraph of this Article and the contract, transaction or arrangement is approved by the board of directors at a meeting in which the director, supervisor, or senior management personnel is not counted as part of the quorum and refrains from voting, or from entering into a contract, transaction or arrangement in which that senior officer is materially interested is voidable at the instance of the Company except as against a bona fide party thereto who does not have notice of the breach of duty by the interested senior officer.
   
 
A director, supervisor, or senior management personnel of the Company is deemed to be interested in a contract, transaction or arrangement in which his associate is interested.
   
Article 157
Where a director, supervisor, senior management personnel of the Company gives to the board of directors a notice in writing stating that, by reason of the facts specified in the notice, he is interested in contracts, transactions or arrangements which may subsequently be made by the Company, that notice shall be deemed for the purposes of the preceding Article to be a sufficient disclosure of his interests, so


 
37
 


 
far as the content stated in such notice is concerned, provided that such notice shall have been given before the date on which the question of entering into the relevant contract, transaction or arrangement is first taken into consideration by the Company.
   
Article 158
The Company shall not pay taxes for or on behalf of a director, supervisor, senior management personnel in any manner.
   
Article 159
The Company shall not directly or indirectly make a loan to or provide any guarantee in connection with the making of a loan to a director, supervisor, senior management personnel of the Company or its holding company or any of their respective associates.
   
 
The foregoing prohibition shall not apply to the following circumstances:
   
 
(1)
provision of a loan or guarantee for a loan by the Company to its subsidiary;
     
 
(2)
the provision by the Company of a loan or a guarantee in connection with the making of a loan or any other funds available to its directors, supervisors, senior management personnel to meet expenditure incurred or to be incurred by him for the purposes of the Company or for the purpose of enabling him to perform his duties properly, in accordance with the terms of a service contract approved by the shareholders in a general meeting; or
     
 
(3)
if the ordinary course of business of the Company includes the lending of money or the giving of guarantees, the Company may make a loan to or provide a guarantee in connection with the making of a loan to a director, supervisor, senior management personnel or his associates in the ordinary course of its business on normal commercial terms.
   
Article 160
Any person who receives funds from a loan which has been made by the Company acting in breach of the preceding Article shall, irrespective of the terms of the loan, forthwith repay such funds.
   
Article 161
A guarantee for the repayment of a loan which has been provided by the Company acting in breach of Article 159(1) shall not be enforceable against the Company, save in respect of the following circumstances:
   
 
(1)
the guarantee was provided in connection with a loan which was made to an associate of a director, supervisor, and senior management personnel of the Company or the Company’s holding company and the lender of such funds did not know of the relevant circumstances at the time of the making of the loan; or
     
 
(2)
the collateral which has been provided by the Company has already been lawfully disposed of by the lender to a bona fide purchaser.
   
Article 162
For the purposes of the foregoing provisions of this Chapter, a “guarantee” includes an undertaking or property provided to secure the obligor’s performance of his obligations.
   
Article 163
In addition to any rights and remedies provided by the laws and administrative regulations, where a director, supervisor, and senior management personnel of the Company breaches the duties which he owes to the Company, the Company has a right:
   
 
(1)
to demand such a director, supervisor, or a senior management personnel to compensate it for losses sustained by the Company as a result of such breach;
     
 
(2)
to rescind any contract or transaction which has been entered into between the Company and such a director, supervisor, senior management personnel or between the Company and a third party (where such third party knows or should have known that such a director, supervisor, senior management personnel representing the Company has breached his duties owed to the Company);
     
 
(3)
to demand such a director, supervisor, or  senior management personnel to surrender the gains made as result of the breach of his obligations;


 
38
 


 
(4)
to recover any monies which should have been received by the Company and which were received by such a director, supervisor, or a senior management personnel instead, including (without limitation to) commissions; and
     
 
(5)
to demand repayment of interest earned or which may have been earned by a director, supervisor, or a senior management personnel on money that should have been paid to the Company.
   
Article 164
If a director, supervisor, or senior management personnel has violated the law, administrative rules, regulations of the competent authorities or the Articles of Association and its appendices in discharging his duties thereby causing losses to the Company, he shall be liable for compensation.
   
Article 165
The Company shall make written contract with a director or supervisor in relation to the rights and duties of the Company and the director/supervisor, emoluments and term of office of the director/supervisor, liability of the director/supervisor for breach of law, regulations and these Articles of Association and its appendices and compensation for early termination of the contract, etc. The emoluments shall be approved in advance by the shareholders in a general meeting. The aforesaid emoluments include:
   
 
(1)
emoluments in respect of his service as director, supervisor, or senior management personnel of the Company;
     
 
(2)
emoluments in respect of his acting as a director, supervisor or a senior management personnel of any subsidiary of the Company;
     
 
(3)
emoluments in respect of the provision of other services in connection with the management of the affairs of the Company and any of its subsidiaries; and
     
 
(4)
payment by way of compensation for loss of office, or as consideration for or in connection with his retirement from office.
   
 
No proceedings may be brought by a director or supervisor against the Company for anything due to him in respect of the matters mentioned in this Article except pursuant to the preceding contract.
   
Article 166
The contract concerning the emoluments between the Company and its directors or supervisors should provide that in the event that the Company is acquired, the Company’s directors and supervisors shall, subject to the prior approval of shareholders in a general meeting, have the right to receive compensation or other payment in respect of his loss of office or retirement. For the purposes of this paragraph, the acquisition of the Company includes any of the following:
   
 
(1)
an offer made by any person to the general body of shareholders; and
     
 
(2)
an offer made by any person with a view to the offeror becoming a “controlling shareholder” within the meaning of Article 54 hereof.
   
 
If the relevant director or supervisor does not comply with this Article, any sum so received by him shall belong to those persons who have sold their shares as a result of such offer. The expenses incurred in distributing such sum on a pro rata basis amongst such persons shall be borne by the relevant director or supervisor and shall not be paid out of such sum.
 
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CHAPTER 15  FINANCIAL AND ACCOUNTING SYSTEMS, PROFIT DISTRIBUTION AND AUDITING
Article 167
The Company shall establish its financial and accounting systems in accordance with laws, administrative regulations and PRC enterprise accounting standards formulated by the finance regulatory department of the State Council.
   
Article 168
The accounting year of the Company shall adopt the calendar year, i.e. starting from the 1 January of every calendar year and to 31 December of every calendar year.
   
 
The Company shall adopt Renminbi as its denominated currency for booking and accounting purposes , the account books shall be recorded in Chinese.
   
 
At the end of each fiscal year, the Company shall prepare a financial report which shall be examined and verified in a manner prescribed by law.
   
Article 169
The board of directors of the Company shall place before the shareholders at every annual general meeting such financial reports which the relevant laws, administrative regulations and directives promulgated by competent regional and central governmental authorities require the Company to prepare. These reports shall be verified.
   
Article 170
The Company’s financial reports shall be made available for shareholders’ inspection at the Company twenty (20) days before the date of every shareholders’ annual general meeting. Each shareholder shall be entitled to have a copy of the financial reports referred to in this Chapter.
   
 
The Company shall deliver or send to each shareholder of Overseas-Listed Foreign-Invested Shares by prepaid mail at the address registered in the register of shareholders the said reports not later than twenty-one (21) days prior to the date of every annual general meeting of the shareholders.
   
 
Subject to the laws, regulations and listing rules of the listing place, the aforesaid reports may be issued or provided by way of the methods provided in Article 219 of the Articles of Association and its appendices, but need not be issued or provided by the abovementioned ways.
   
Article 171
The financial statements of the Company shall, in addition to being prepared in accordance with PRC enterprise accounting standards and regulations, be prepared in accordance with either international accounting standards, or that of the place outside the PRC where the Company’s shares are listed. If there is any material difference between the financial statements prepared respectively in accordance with the two accounting standards, such difference shall be stated in the financial statements. In distributing its profits after tax, the lower of the two amounts shown in the financial statements shall be adopted.
   
Article 172
Any interim results or financial information published or disclosed by the Company must also be prepared and presented in accordance with PRC enterprise accounting standards and regulations, and also in accordance with either international accounting standards or that of the place overseas where the Company’s shares are listed.
   
Article 173
The Company shall publish its financial reports 4 times in each fiscal year, that is, the quarterly report shall be submitted to branch of China Securities Supervisory Committee and stock exchanges and published within one month after the expiration of the first 3 months and first 9 months of each fiscal year; the biannual financial report shall be submitted to branch of China Securities Supervisory Committee and stock exchanges and published within 60 days after the expiration of the first 6 months of each fiscal year; and the annual financial report shall be published within one 120 days after the expiration of each fiscal year.
   
Article 174
The Company shall not keep accounts other than those required by law. Assets of the Company will not be deposited into any account opened in the name of an individual.
   
Article 175
When allocating the after-tax profits of the current year, the Company shall allocate (10) ten percent of its profit to the statutory common reserve fund. In the event that the accumulated statutory common reserve fund of the Company has reached more than (50) fifty percent of the registered capital of the Company, no allocation is needed.


 
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In the event that the statutory common reserve fund of the Company is insufficient to make up the losses of the Company on the previous year, before allocating the statutory common reserve fund in accordance with the stipulations of the previous paragraph, the Company shall first make up the losses by using the profits of the current year.
   
 
After allocating the statutory common reserve fund from the after-tax profits of the Company, the Company can allocate the arbitrary common reserve fund according to the resolution of shareholders’ general meeting.
   
 
The profits distributable to the shareholders, upon the approval in the shareholders' general meeting,, shall be distributed in accordance with the proportion of shares held by the shareholders.
   
 
The profits distribution policy of the Company shall be durative and stable.
   
Article 176
Before making-up the losses, allocating the common reserve funds, the Company shall not allocate the dividends or carry out other allocations by way of bonus, where distribution had been completed, the shareholders shall return the profits distributed in breach of the regulations to the Company.
   
 
The Company holding its own shares shall not participate in the profit allocation.
   
Article 177
Capital common reserve fund includes the following items:
   
 
(1)
premium on shares issued at a premium price; and
     
 
(2)
any other income designated for the capital common reserve fund by the regulations of the finance regulatory department of the State Council.
   
Article 178
The common reserve fund of the Company shall be applied for compensating the losses, expansion of production and operation, or converting the common reserve fund into the capital of the Company.  However, the common reserve fund of the Company shall not be used to offset loss of the Company.
   
 
When the statutory common reserve fund is converted to capital nature, the balance of the statutory common reserve fund may not fall below 25% of the Company's registered capital prior to such conversions.
   
Article 179
The Company may distribute dividends in the form of:
   
 
(1)
cash;
     
 
(2)
shares; and
     
 
(3)
other means provided by laws, administrative rules, regulations of competent authorities and regulatory provisions in the place where the Company's shares is listed.
   
Article 180
The Company shall calculate, declare and pay dividends and other amounts which are payable to holders of A Shares in Renminbi. The Company shall calculate and declare dividends and other payments which are payable to holders of Overseas-Listed Foreign-Invested Shares in Renminbi, and shall pay such amounts in Hong Kong Dollars. As for the foreign currency needed by the Company for payment of cash dividends and other funds which are payable to the holders of the Overseas-Listed Foreign-Invested Shares, it shall be handled in accordance with any related national regulations on foreign exchange control.
   
Article 181
Unless otherwise provided by the relevant laws and administrative regulations, as regards dividends and other amounts payable in Hong Kong dollars, the applicable exchange rate shall be the average benchmark rate for the relevant foreign currency determined by the Peoples’ Bank of China and announced by the State Administration of Foreign Exchange during the week prior to the announcement of payment of dividend and other amounts.


 
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Article 182
Unless the shareholders have approved otherwise in a general meeting, the board of directors may determine to make half-yearly dividends distribution. Unless otherwise provided by the relevant laws and administrative regulations, the amount of the half-yearly dividends distribution shall not exceed 50% of net profit for the half year interim period.
   
Article 183
In the event of allocating the dividends to shareholders of the Company, the payable taxes on the dividend incomes of the shareholders shall be withdrawn in accordance with the requirements of Taxation Law of China and in consideration of the allocated sum.
   
Article 184
The Company shall appoint receiving agents for holders of the Overseas-Listed Foreign-Invested Shares. Such receiving agents shall receive dividends which have been declared by the Company and all other amounts which the Company should pay to holders of Overseas-Listed Foreign-Invested Shares on such shareholders’ behalf.
   
 
The receiving agents appointed by the Company shall meet the relevant requirements of the laws of the place at which the stock exchange on which the Company’s shares are listed or the relevant regulations of such stock exchange.
   
 
The receiving agents appointed for holders of Overseas-Listed Foreign-Invested Shares listed in Hong Kong shall each be a company registered as a trust company under the Trustee Ordinance of Hong Kong.
   
Article 185
The Company adopts the system of internal auditing and hires professional auditors to undertake internal auditing of the Company’s financial income and expenditure and economic activities.
   
Article 186
The Company’s internal auditing system and duties of the auditors shall be implemented after they have been approved by the board of directors. The person in charge of audit shall be responsible to and report to the board of directors.


CHAPTER 16  APPOINTMENT OF ACCOUNTING FIRMS

Article 187
The Company shall appoint an independent firm of accountants which is qualified under the relevant regulations of the State to audit the Company’s annual financial report and review other financial reports of the Company.
   
 
The first accounting firm of the Company may be appointed by the founders' meeting before the first annual shareholders' meeting. The term of appointment of the accounting firm shall terminate at the end of the first shareholders' annual meeting.
   
 
If the founders' meeting does not exercise its duties and powers according to the aforementioned provisions, then the board of directors shall exercise its duties and powers.
   
Article 188
The auditors appointed by the Company shall hold office from the conclusion of the annual general meeting of shareholders at which they were appointed until the conclusion of the next annual general meeting of shareholders.
   
Article 189
The auditors appointed by the Company shall enjoy the following rights:
   
 
(1)
a right to review to the books, records and vouchers of the Company at any time, the right to require the directors, supervisors, and senior management personnel of the Company to supply relevant information and explanations;
     
 
(2)
a right to require the Company to take all reasonable steps to obtain from its subsidiaries such information and explanation as are necessary for the discharge of its duties; and
     
 
(3)
a right to attend shareholders’ general meetings and to receive all notices of, and other communications relating to, any shareholders’ general meeting which any shareholder is entitled to


 
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receive, and to speak at any shareholders’ general meeting in relation to matters concerning its role as the Company’s accounting firm.
   
Article 190
If there is a vacancy in the position of the accounting firm, the board of directors may appoint an accounting firm to fill such vacancy before the convening of the shareholders’ general meeting. Any other accounting firm which has been appointed by the Company may continue to act during the period during which a vacancy arises.
   
Article 191
The shareholders in a general meeting may by ordinary resolution remove the accounting firm before the expiration of its term of office, irrespective of the provisions in the contract between the Company and the accounting firm. However, the right of the accounting firm in claiming for damages which arise from its removal shall not be affected thereby.
   
Article 192
The remuneration of an accounting firm or the manner in which such firm is to be remunerated shall be determined by the shareholders in a general meeting. The remuneration of an accounting firm appointed by the board of directors which is to fill the vacancy shall be determined by the board of directors.
   
Article 193
The Company’s appointment, removal or non-reappointment of an accounting firm shall be resolved by the shareholders in a general meeting. Such resolution shall be filed with the securities authority of the State Council.
   
 
Where a resolution at a general meeting of shareholders is passed to appoint an accounting firm other than an incumbent accounting firm, to fill a casual vacancy in the office of the accounting firm, to reappoint an accounting firm who was appointed by the board of directors to fill a casual vacancy or to remove an accounting firm before expiry of its term of office, the following provisions shall apply:
   
 
(1)
A copy of the appointment or removal proposal shall be sent (before issue of the notice of meeting) to the firm proposed to be appointed or proposing to leave its post or the firm which has left its post in the relevant fiscal year. Reference as leaving herein includes leaving by removal, resignation and retirement.
     
 
(2)
If the accounting firm leaving its post makes representations in writing and requests the Company to give the shareholders notice of such representations, the Company shall (unless the representations have been received too late) take the following measures:
     
   
(i)
in any notice of the resolution given to shareholders, state the fact of the representations having been made by the accounting firm leaving its post; and
       
   
(ii)
attach a copy of the representations to the notice and deliver it to the shareholders in the manner stipulated in the Company’s Articles of Association and its appendices.
     
 
(3)
If the Company fails to circulate the accounting firm’s representations in the manner set out in sub-paragraph (2) above, such accounting firm may (in addition to its right to be heard) require that the representations be read out at the meeting.
     
 
(4)
An auditor which is retired from its office shall be entitled to attend the following shareholders’ general meetings:
     
   
(i)
the general meeting at which its term of office would otherwise have expired;
       
   
(ii)
the general meeting at which it is proposed to fill the vacancy caused by its removal; and
       
   
(iii)
the general meeting which convened as a result of its voluntary resignation.
     
   
The leaving accounting firm has the right to receive all notices of, and other communications relating to, any such meeting, and to speak at any such meeting which it attends on any part of the business of the meeting which concerns it as the former accounting firm of the Company.


 
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Article 194
Prior notice should be given to the accounting firm 30 days in advance if the Company decides to remove such accounting firm or not to renew the appointment thereof. Such accounting firm shall be entitled to make representations at the shareholders’ general meeting. Where the accounting firm resigns from its position as the Company’s auditors, it shall make clear to the shareholders in a general meeting whether there has been any impropriety on the part of the Company.
   
 
An accounting firm may resign its office by depositing at the Company’s domicile a resignation notice which shall become effective on the date of such deposit or on such later date as may be stipulated in such notice. Such notice shall contain the following statements:
   
 
(1)
a statement to the effect that there are no circumstances connected with its resignation which it considers should be brought to the notice of the shareholders or creditors of the Company; or
     
 
(2)
a statement of any such circumstances.
   
 
Where a notice is deposited under the preceding sub-paragraph, the Company shall within fourteen (14) days send a copy of the notice to the relevant governing authority. If the notice contains a statement under the preceding sub-paragraph (2), a copy of such statement shall be placed at the Company for shareholders’ inspection. The Company should also send a copy of such statement by prepaid mail to every shareholder of Overseas-Listed Foreign Shares at the address registered in the register of shareholders.
   
 
Subject to the laws, regulations and listing rules of the listing place, the aforesaid copies may be issued or provided by way of the methods provided in Article 219 of the Articles of Association, but need not be issued or provided by the abovementioned ways.
   
 
Where the accounting firm’s notice of resignation contains a statement in respect of the above, it may require the board of directors to convene a shareholders’ extraordinary general meeting for the purpose of receiving an explanation of the circumstances connected with its resignation.


 
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CHAPTER 17  EMPLOYEES
Article 195
The Company perseveres in a human-centered principle and integrates the corporate development with a perpetual intention to return to shareholders, contribute to the society, and benefit the employees.  In compliance with the State's laws and regulations, the Company shall establish a healthy and complete employee's management system and effectively develop and utilize human resources.
   
Article 196
Based on its business needs subject to laws, regulations and corporate rules, the Company shall employ, dismiss or terminate employees labor contracts in its discretion.
   
Article 197
Pursuant to the State's regulations and the Articles of Association and its appendices, the Company shall establish the salary, insurance, benefits systems.  In light of the economic and social development and business operations of the Company, the Company shall make endeavors to enhance the overall benefits for its employees, and improve their working conditions.
   
Article 198
Pursuant to the State's laws and regulations, the Company shall develop an employees training system based on its business development and employees needs, to best pave the path for employees talent and professional development.

CHAPTER 18  THE UNION

Article 199
The employees of the Company shall duly organize the Union, develop its event programs, and hence, protect the employees' legitimate rights. The Company shall provide prerequisites for the Union to carry out its events.

CHAPTER 19  MERGER AND DIVISON

Article 200
The Company may carry out mergers or division in accordance with law.
   
 
In the case of merger or division of the Company, the board of directors shall provide the proposal, and, upon approval in accordance with the procedures under the Articles of Association and its appendices, deal with the relevant approval procedures pursuant to laws. The board of directors of the Company shall take necessary measures to protect the legitimate interests of the shareholders who object to the plan of merger or division. A shareholder who objects to the plan of merger or division shall have the right to demand the Company or the shareholders who consent to the plan of merger or division to acquire such dissenting shareholders’ shareholding at a fair price.
   
 
The contents of the resolution of merger or division of the Company shall constitute special documents which shall be available for inspection by the shareholders of the Company. Such special documents shall be sent by mail to holders of Overseas-Listed Foreign-Invested Shares.
   
 
Subject to the laws, regulations and listing rules of the listing place, the aforesaid documents may be issued or provided by way of the methods provided in Article 219 of the Articles of Association, but need not be issued or provided by the abovementioned ways.
   
Article 201
The merger of the Company may take the form of either merger by absorption or merger by the establishment of a new company.
   
 
The merger means that one company takes over other company(ies) and the company(ies) being taken over shall be dissolved. The consolidation means that at least two companies are merged into one and the existing companies shall be dissolved after their merger.
   
 
In the event of a merger, the merging parties shall execute a merger agreement and prepare a balance sheet and an inventory of assets. The Company shall notify its creditors within ten (10) days from the date of the Company’s merger resolution which is passed and shall publish a public notice in a newspaper designed by the regulatory institutions of the place where the Company's shares are listed within thirty (30) days of the date of the Company’s merger resolution. The creditor may, within 30 days as of its acknowledgement or within 45 days as of the date of announcement, ask the Company for settling of its


 
45
 


 
debt or providing relevant guarantee.
   
Article 202
Where there is a division of the Company, its assets shall be divided up accordingly.
   
 
In the event of division of the Company, the parties to such division shall execute a division agreement and prepare a balance sheet and an inventory of assets. The Company shall notify its creditors within ten (10) days from the date of the Company’s division resolution which is passed and shall publish a public notice in a newspaper designed by the regulatory institutions of the place where the Company's shares are listed within thirty (30) days of the date of the Company’s division resolution.
   
Article 203
After the merger, the rights against debtors and the indebtedness of each of the parties to the merger shall be inherited by the company which survives the merger or the newly established company.
   
 
Debts of the Company prior to division shall be severally and jointly assumed by the companies which exist after the division, provided that otherwise written agreements has been reached between the Company and the creditor upon the insolvency of debts.
   
Article 204
The Company shall, in accordance with law, apply for change in its registration with the companies registration authority where a change in any item in its registration arises as a result of any merger or division. Where the Company is dissolved, the Company shall apply for cancellation of its registration in accordance with law. Where a new company is established, the Company shall apply for registration thereof in accordance with law.


CHAPTER 20  DISSOLUTION AND LIQUIDATION

Article 205
The Company shall be dissolved and liquidated upon the occurrence of any of the following events:
   
 
(1)
a resolution regarding the dissolution is passed by shareholders at a general meeting;
     
 
(2)
dissolution is necessary due to a merger or division of the Company;
     
 
(3
the Company is legally declared insolvent due to its failure to repay debts as they become due; and
     
 
(4
business license is revoked lawfully and its operation is ceased or canceled by the relevant authorities; or
     
 
(5)
The company meets with great difficulties and its continuation may incur great loss to the interest of the shareholders, it cannot be resolved by other means and the shareholders holding more than 10% of the voting share may petition to the people's court for its dissolution.
   
Article 206
Where the Company is dissolved under sub-paragraph (1), (4) or (5) of the preceding paragraph, a liquidation committee shall be set up within fifteen (15) days thereafter and commence the liquidation proceedings, and the liquidation committee of the Company shall be composed of directors or any other persons determined by the shareholders' general meeting. Where a liquidation committee is not established according to schedule, the creditor may apply to the People’s Court to organize the relevant personnel to establish a liquidation committee to proceed the liquidation.
   
 
Where the Company is dissolved under sub-paragraph (3) of the preceding Article, the People’s Court shall in accordance with the provisions of relevant laws organize the shareholders, relevant organizations and relevant professional personnel to establish a liquidation committee to proceed the liquidation.
   
Article 207
Where the board of directors proposes to liquidate the Company for any reason other than the Company’s declaration of its own insolvency, the board shall include a statement in its notice convening a shareholders’ general meeting to consider the proposal to the effect that, after making full inquiry into the affairs of the Company, the board of directors is of the opinion that the Company will be able to pay its


 
46
 


 
debts in full within twelve (12) months from the commencement of the liquidation.
   
 
Upon the passing of the resolution by the shareholders in a general meeting in relation to the liquidation of the Company, all duties and powers of the board of directors shall cease.
   
 
The liquidation committee shall act in accordance with the instructions of the shareholders’ general meeting to make a report at least once every year to the shareholders’ general meeting on the committee’s income and expenses, the business of the Company and the progress of the liquidation; and to present a final report to the shareholders’ general meeting on completion of the liquidation.
   
Article 208
The liquidation committee shall, within ten (10) days of its establishment, send notices to creditors and shall, within sixty (60) days of its establishment, publish a public announcement in a newspaper designed by the regulatory institutions of the place where the Company's shares are listed. The creditors who have received the notice shall, within 30 days as of its acknowledgement of the receipt, and the creditors who fail to receive the notice shall within 45 days as of the date when the announcement was made, declare their creditor's right to the liquidation team.
   
 
The creditor who declares the creditor's right shall state the relevant matter in relation to the debt, and provide evidentiary materials.  The liquidation committee shall register the creditors’ rights.
   
 
During liquidation period, the liquidation committee shall not settle any debt with the creditor.
   
Article 209
During the liquidation period, the liquidation committee shall exercise the following functions and powers:
   
 
(1)
to categorise the Company’s assets and prepare a balance sheet and an inventory of assets respectively;
     
 
(2)
to notify the creditors or to publish public announcements;
     
 
(3
to dispose of and liquidate any unfinished businesses of the Company;
     
 
(4
to pay all outstanding taxes and taxes incurred during the liquidation proceedings;
     
 
(5)
to settle claims and debts;
     
 
(6
to deal with the surplus assets remaining after repayment by the Company of its debts; and
     
 
(7
to represent the Company in any civil proceedings.
   
Article 210
After it has categoried the Company’s assets and after it has prepared the balance sheet and an inventory of assets, the liquidation committee shall formulate a liquidation plan and present it to a shareholders’ general meeting or to the people's court for confirmation.
   
 
The remaining asset shall, after having paid the liquidation expense, salary of the staff, social insurance expense and the legal premium, the arrears and liquidated the Company's debt, be distributed  in accordance with the provisions of the fourth paragraph of this article..
   
 
The Company may, during the liquidation period, remain, but shall not carry out activities irrelevant to the liquidation. Where the Company's assets have been cleaned off without abiding by the preceding provisions, it shall be allocated to the shareholders.
     
 
Any surplus assets of the Company remaining after its debts have been repaid in accordance with the provisions of the second paragraph of this article shall be distributed to its shareholders according to the class of shares and the proportion of shares held:
 
   
 
(1)
In case of the preferred shares, the allocation shall be first given to the holders of the preferred shares in accordance with the face value of the preferred shares; if it is insufficient to repay the preferred shares, the allocation shall be carried out in accordance with the proportions of the


 
47
 


   
preferred shares held by them respectively; and
     
 
(2)
The allocation shall be carried out in accordance with proportions of shares held by the holders of ordinary shares.
   
Article 211
Upon completion of the categorization of the Company’s assets and preparation a balance sheet and an inventory of assets in connection with the liquidation of the Company, if the liquidation committee discovers that the Company’s assets are insufficient to repay the Company’s debts in full, the liquidation committee shall immediately apply to the People’s Court in accordance with laws for a declaration of insolvency.
   
 
After a Company is declared insolvent by a ruling of the People’s Court, the liquidation committee shall transfer all matters arising from the liquidation to the People’s Court.
   
 
Where a company is declared bankrupt according to law, it shall carry out bankruptcy liquidation according to the legal provisions concerning bankruptcy liquidation.
   
Article 212
Following the completion of the liquidation, the liquidation committee shall prepare a liquidation report, a statement of income and expenses received and made during the liquidation period and a financial report, which shall be verified by a Chinese registered accountant and submitted to the shareholders’ general meeting or the people's court for confirmation.
   
 
The liquidation committee shall, within thirty (30) days after the confirmation of the liquidation report by the shareholders' general meeting or the people's court, submit the documents referred to in the preceding paragraph to the companies registration authority and apply for cancellation of registration of the Company, and publish a public announcement relating to the termination of the Company.
   
Article 213
The member of the liquidation team shall be faithful to their duty and fulfill the liquidation obligation in accordance with the law.
   
 
The member of the liquidation team shall not abuse their authority to accept bribery or other illegal income, nor infringe the Company's assets.
   
 
Where the member of the liquidation team causes loss to the Company intentionally or because of gross negligence, he (she) shall bear the relevant compensation liability.

CHAPTER 21  PROCEDURES FOR AMENDMENT OF THE COMPANY’S ARTICLES OF ASSOCIATION
Article 214
The Company may amend its Articles of Association and its appendices in accordance with the requirements of laws, administrative regulations and the Articles of Association and its appendices.
   
Article 215
The Company shall amend these Articles of Association and its appendices on the occurrence of any of the following events:
   
 
(1)
the Company Law or the relevant laws or administrative regulations are amended and the Articles of Association and its appendices are in conflict with the amended laws or administrative regulations;
     
 
(2)
there is change to the Company which makes it not consistent with these Articles of Association and its appendices; and
     
 
(3
it has been approved by the shareholders in a general meeting to amend these Articles of Association and its appendices.
   
Article 216
Any amendment of the Articles of Association and its appendices shall be made in the following manner:


 
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(1)
The Board of Directors draw up a proposal for amendment of the Article of Association in accordance with these Articles of Association and its appendices;
     
 
(2)
The foregoing proposal shall be furnished to the shareholders in writing and a shareholders’ meeting shall be convened to vote on it; and
     
 
(3
The amendments shall be approved by a special resolution in a shareholders’ general meeting.
   
 
The board of directors shall amend the Articles of Association and its appendices pursuant to the resolution of shareholders in a general meeting for amendment of these Articles of Association and its appendices and the approval opinions of the competent authority.
   
 
Amendment of the Articles of Association and its appendices involving the contents of the Mandatory Provisions shall become effective upon receipt of approvals from the companies approving department authorized by the State Council.
   
Article 217
If there is any change relating to the registered particulars of the Company, application shall be made for change in registration in accordance with law. If the amendment to the Articles of Association and its appendices is a matter which is required by the relevant laws and regulations to be disclosed, an announcement shall be made in accordance with the provisions of those laws and regulations.


CHAPTER 22  NOTICE

Article 218
Unless otherwise provided by the Articles and its appendices, subject to laws, regulations and listing rules of the place where the Company's shares are listed, notices of the Company shall be issued in any of the following manner: (1) by hand; (2) by post; (3) by public announcement; (4) any other manner as recognized by securities regulatory institutions at the place where the Company's shares are listed or as provided in the Articles of Association and its appendices.
   
 
If a notice of the Company is issued by public announcement, it shall be deemed received by the relevant officers once announced.
   
 
Unless otherwise provided in the Articles of Association and the appendices, subject to laws, regulations and listing rules of the place where the Company's shares are listed, any requirement under the Articles of Association and its appendices in relation to the delivery, e-mailing, mailing, distribution, announcement or the provision of any corporate communications, may be sent out or provided via the Company's website or through electronic method.
   
 
'Corporate Communications' refers to any documents issued or to be issued by the Company for the information or action of holders of any of its securities, including but not limited to:
   
 
(1)
the directors' report, its annual accounts together with a copy of the auditors' report and , where applicable, its summary financial report;
     
 
(2)
the interim report and, where applicable, its summary interim report;
     
 
(3)
the notice of meeting;
     
 
(4)
listing documents;
     
 
(5)
a circular; and
     
 
(6)
a proxy form.
   
Article 219
If a notice of the Company is issued by hand, the date when the recipient signed or stamped to


 
49
 


 
acknowledge receipt of the same shall be regarded as the date of service of the notice.
   
 
If a notice of the Company is issued by public announcement, the date of the first publication of the announcement shall be regarded as the date of service of the announcement.
   
 
If the notice of the Company is sent out in electronic form, the sending date is deemed as the delivery date.
   
 
Subject to the laws, regulations and listing rules of the listing places, if a notice of the Company is sent by way of announcement via the website, the delivery date shall be regarded as follows:
   
 
(1)
on the date when the notice in accordance with the laws, regulations and listing rules of the listing places is sent to the intended recipient; and
     
 
(2)
if later, the date on which the corporate communication first appears on the website after that notice is sent.
   
 
All notices which are to be sent by mail shall be clearly addressed, postage pre-paid, and shall be put into envelopes before being posted by mail. Such letters of notice shall be deemed to have been received by shareholders on the third working day since it is left with the post office.
   
Article 220
If a notice of meeting is accidentally omitted to be sent to any person who is entitled to receive the same or that person has not received such a notice of meeting, it will not cause the meeting and any resolution made therein to be void.


CHAPTER 23  RESOLUTION OF DISPUTES

Article 221
The Company shall abide by the following principles for dispute resolution:
   
 
(1)
Whenever any disputes or claims arise between: holders of the Overseas-Listed Foreign-Invested Shares and the Company; holders of the Overseas-Listed Foreign-Invested Shares and the Company’s, directors, supervisors, senior management personnel; or holders of the Overseas-Listed Foreign-Invested Shares and holders of A Shares, in respect of any disputes or claims in relation to the affairs of the Company arising as a result of any rights or obligations arising from the Articles of Association and its appendices, the Company Law or other relevant laws and administrative regulations, such disputes or claims shall be referred by the relevant parties to arbitration.
     
   
Where a dispute or claim of rights referred to in the preceding paragraph is referred to arbitration, the entire claim or dispute must be referred to arbitration, and all persons who have a cause of action based on the same facts giving rise to the dispute or claim or whose participation is necessary for the resolution of such dispute or claim, shall, where such person is the Company or the Company’s shareholders, directors, supervisors, or senior management personnel, comply with the decisions made in the arbitration. Disputes in respect of the definition of shareholders and disputes in relation to the register of shareholders need not be resolved by arbitration.
     
 
(2)
A claimant may elect for arbitration to be carried out at either the China International Economic and Trade Arbitration Commission in accordance with its Rules or the Hong Kong International Arbitration Center in accordance with its Securities Arbitration Rules. Once a claimant refers a dispute or claim to arbitration, the other party must submit to the arbitral body elected by the claimant.
     
   
If a claimant elects for arbitration to be carried out at Hong Kong International Arbitration Center, any party to the dispute or claim may apply for a hearing to take place in Shenzhen in accordance with the Securities Arbitration Rules of the Hong Kong International Arbitration Center.


 
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(3)
If any disputes or claims of rights are settled by way of arbitration in accordance with sub-paragraph (1) of this Article, the laws of the PRC shall apply, save as otherwise provided in the laws and administrative regulations.
     
 
(4)
The judgement of an arbitral body shall be final and conclusive and binding on all parties.


CHAPTER 24  SUPPLEMENTARY

Article 222
The Articles of Association and its appendices are written in Chinese. Where versions in other languages or different versions have different interpretations or meanings, the latest verified Chinese version registered in the companies registration authority shall prevail.
   
Article 223
The expressions of “above”, “within”, “below” shall include the figures mentioned whilst the expressions of “short of”, "without" and “less than” shall not include the figures mentioned.
   
Article 224
The right to interpret the Articles of Association vests with the board of directors of the Company, and the right to revise the Articles of Association vests with shareholders’ general meeting.
   
Article 225
If the Articles of Association are in conflict with the laws, administrative regulations or provisions of other regulatory documents or regulatory provisions in the place where the Company's shares are listed promulgated from time to time, the laws, administrative regulations and provisions of other regulatory documents or regulatory provisions in the place where the Company's shares are listed shall prevail.
   
Article 226
In the Articles of Association and its appendices, references to “accounting firm” shall have the same meaning as “auditors”.
   
 
In the Articles of Association and its appendices, references to “president” shall have the same meaning as “manager” in the Company Law.



 
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Appendix I

Rules and Procedures
 for
Shareholders’ General Meetings
of
 China Petroleum & Chemical Corporation







Revised at the Annual General Meeting for the Year 2008 on May 22, 2009
Approved by the SASAC on September 2, 2009
 

 
 
 


CHAPTER 1  GENERAL PROVISIONS
 
 
Article 1
In order to safeguard the legitimate interests of China Petroleum & Chemical Corporation (the “Company”) and its shareholders, to specify the duties, responsibilities and authority of the shareholders’ general meetings, to ensure the proper, efficient and smooth operation of the shareholders’ general meeting and to ensure the shareholders’ general meeting exercises its functions and powers according to law, these Rules are formulated according to the “Company Law of the People’s Republic of China”, the "Securities Law of the People's Republic of China", “Mandatory Provisions for the Articles of Association of Companies to be Listed Overseas”, “Guidelines for the Articles of Association of Listed Companies”, “Standards for the Governance of Listed Companies” and “Regulations Regarding General Meetings of Listed Companies” and other relevant laws and regulations regulating listed companies inside and outside the PRC and the Articles of Association of China Petroleum & Chemical Corporation (“Articles of Association”).
Article 2
These Rules apply to the shareholders’ general meetings of the Company and shall be binding on the Company, all shareholders, authorized proxies of the shareholders, directors, supervisors,  senior management personnel and other relevant personnel present at the meeting.
Article 3
Shareholders’ general meetings are divided into annual general meetings (hereinafter referred to as “AGM”), extraordinary general meetings; or all shareholders’ general meetings or class shareholders’ general meetings.
Article 4
AGMs are held once every year within six months from the end of the previous accounting year.
Article 5
For the shareholders’ general meetings convened each year, all of them are extraordinary general meetings except the AGM. The extraordinary general meetings shall be arranged in the order of the year in which they are convened.
Article 6
Holders of different classes of shares are class shareholders. Except other class shareholders, holders of A shares and holders of H shares are deemed to be shareholders of different classes. If the Company intends to alter or annul the rights of class shareholders, it shall have such alteration or annulment approved by a special resolution at the shareholders’ general meeting and shall convene a class shareholders’ meeting in accordance with the provisions of the Articles of Association. Only class shareholders are entitled to attend class shareholders’ meetings.
Article 7
The Company shall strictly comply with laws, administrative rules, the Articles of Association and relevant regulations of these Rules to convene shareholders’ general meetings, and shall ensure shareholders can exercise their rights in accordance with laws. The board of directors of the Company shall duly perform its duties and properly organize the shareholders’ general meeting in a conscientious manner and on schedule. All directors of the Company shall perform their diligence to ensure the due convention of shareholders' general meetings and its lawful exercise of functions and powers.
Article 8
Any shareholder who holds the shares of the Company legally and validly are entitled to attend or authorize a proxy to attend the shareholders’ general meeting, and shall have the right to know the Company’s affairs, the right to speak, the right to raise questions and the right to vote and other rights pursuant to law and these Rules.
 
Shareholders and their proxies attending the shareholders’ general meeting shall comply with the provisions of the relevant laws and regulations, Articles of Association and these Rules, and shall take the initiative to maintain the order of the meeting and shall not infringe the legitimate rights and interests of other shareholders.
Article 9
The Secretary to the board of directors of the Company shall be responsible for implementing the preparatory and organization work for convening a shareholders’ general meeting.


 
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CHAPTER 2  FUNCTIONS AND POWERS OF THE SHAREHOLDERS’ GENERAL MEETING
 
 
Article 10
The shareholders’ general meeting is the authority organ of the Company and shall exercise the following functions and powers according to law:
 
(1)
to decide on the Company’s operational policies and investment plans;
 
(2)
to elect and replace directors and to decide on matters relating to the remuneration of directors;
 
(3)
to elect and replace supervisors assumed by non-representatives of the employees and to decide on matters relating to the remuneration of supervisors;
 
(4)
to examine and approve the board of directors’ reports;
 
(5)
to examine and approve the supervisory committee’s reports;
 
(6)
to examine and approve the Company’s profit distribution plans and loss recovery plans;
 
(7)
to examine and approve the Company’s proposed annual preliminary and final financial budgets;
 
(8)
to pass resolutions on the increase or reduction of the Company’s registered capital;
 
(9)
to pass resolutions on matters in relation to merger, division, dissolution, liquidation  and change of corporate form of the Company;
 
(10)
to pass resolutions on the issue of debentures by the Company;
 
(11)
to pass resolutions on the appointment, dismissal and non-reappointment of the accounting firm by the Company;
 
(12)
to amend the Articles of Association and its appendices (including the Rules and Procedures for the Shareholders’ General Meetings, Rules and Procedures for the Board of Directors’ Meetings and Rules and Procedures for the Supervisors’ Meetings);
 
(13)
to consider motions raised by the Company's board of directors, supervisory committee or shareholders who represent 3% or more of the total number of voting shares of the Company;
 
(14)
to examine and approve the matters in relation to guarantees regulated by Rule 12(3) of these Rules;
 
(15)
to examine the matters of purchase and/or sale by the Company within one year of significant assets exceeding thirty per cent (30%) of the latest audited total assets of the Company;
 
(16)
to examine and approve the change of the use of the raised funds;
 
(17)
to examine stock incentive plans; and
 
(18)
to decide on other matters which, according to laws, administrative regulations, rules of the competent authorities, the Articles of Association and these Rules, shall be approved by the shareholders’ general meetings.


 
2
 

 
CHAPTER 3  AUTHORITY OF THE SHAREHOLDERS’ GENERAL MEETINGS
 
 
Article 11
Matters which, in accordance with laws, administrative regulations, rules of the relevant government authorities, provisions of the Articles of Association and these Rules, fall within the scope of the authority of the shareholders’ general meeting must be examined at such meeting so as to protect the decision-making power of the shareholders of the Company on such matters.
Article 12
In order to ensure and increase the stability and efficiency of the daily operations of the Company, the shareholders’ general meeting authorizes the board of directors of the Company, on a partial basis, to exercise the following powers on investment plans, asset disposals and external guarantees:
 
(1)
Investment:
   
(i)
The shareholders’ general meetings shall examine and approve medium and long-term investment plans and annual investment plans of the Company. The board of directors is authorized to make adjustments of not more than 15% of the amount of the capital expenditure for the current year as approved at the shareholders’ general meeting.
   
(ii)
Individual project investments (including but not limited to exploration and development, fixed assets, external shareholdings) shall be approved by the shareholders’ general meeting if the investment amounts are more than 5% of the latest audited net asset value of the Company. The board of directors is authorized to examine and approve projects if the investment amount is not more than 5% of the latest audited net asset value of the Company.
   
(iii)
Where the Company uses its own assets to make risky investment in areas not related to the business of the Company (including but not limited to debentures, futures, shares), risky investments shall be approved by the shareholders’ general meeting if the amount of investment is more than 1% of the latest audited net asset value of the Company. The board of directors is authorized to examine and approve projects if the investment amount is not more than 1% of the latest audited net asset value of the Company.
 
(2)
Asset disposal:
   
(i)
When the Company acquires or sells assets, it has to take into account of the following 5 testing indices: (1) total asset ratio: the total amount of the assets in relation to the transaction (if both book value and valuation value exist, the higher one shall be applied) divided by the latest audited total asset value of the Company; (2) transaction amount ratio: the transaction amount (taking into account of the assumed liabilities and costs, etc) of the acquired assets divided by the total amount of the latest audited net asset value of the Company; (3) transaction net profit (loss) ratio: the absolute value of the net profit or loss relating to the assets of the transaction divided by the absolute value of the audited net profit or loss of the Company for the preceding financial year; (4) revenue ratio: the revenue for the preceding financial year relating to the subject matter of the transaction divided by the audited revenue of the Company for the preceding financial year; (5) object net profit (loss) ratio: the absolute value of the net profit or loss for the preceding financial year relating to the object of the transaction divided by the absolute value of the audited net profit or loss of the Company for the preceding financial year.
     
The shareholders’ general meeting shall examine and approve projects with a ratio of not less than 50% in any of the above 5 test indices. The board of directors is authorized to examine and approve projects with a ratio of less than 50% in all of the above 5 test indices .
   
(ii)
In disposing of fixed assets, where the total value of the expected value of the fixed assets to be disposed of and the value of the fixed assets which have been disposed of in the 4 months prior to such proposed disposal exceeds 33% of the value of the fixed assets as shown in the latest balance sheet considered by the shareholders’ general meeting, the shareholders’ general meeting shall examine and approve such disposal, the board of directors shall not dispose or agree to dispose such fixed assets without the approval at the shareholders' general meeting;

 
 
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and the board of directors is authorized to examine and approve those fixed asset disposals of less than 33%.
     
The disposal of fixed assets referred to in this Article includes the transfer of certain asset interests but excludes the provision of guarantee by way of fixed assets.
     
The validity of the transactions for disposal of fixed assets by the Company shall not be affected by any breach of paragraph (2)(i) of this Article.
   
(iii)
Regarding others (including but not limited to the entering into, varying and termination of important contracts relating to entrustment of operation, entrusted operation, entrusted financial management, contracting and leasing), the relevant amount shall be calculated according to one of five testing indices referred to in paragraph (2)(i) of this Article.
     
Projects with a ratio of more than 5% in any of the above 5 test indices shall be examined and approved by the shareholders’ general meeting. The board of directors is authorized to examine and approve projects with a ratio of not more than 5% in all of the above 5 test indices.
 
(3)
External guarantees
   
The Company shall not provide guarantees for personal liability.
   
Unless otherwise stipulated in the Articles of Association and its appendices, matters in relation to the Company's external guarantees shall be examined and approved by the board of directors of the Company, among which, the following matters in relation to the external guarantees shall be examined and approved at the shareholders' general meeting:
 
(1)any guarantee after the total external guarantee volume of the Company and its controlling subsidiaries reaches or exceeds 50% of the latest audited net assets;
 
(2)any guarantee after the total external guarantee volume of the Company reaches or exceeds 30% of the latest audited total assets;
 
(3)the guarantee provided to the guarantee objective whose asset liability ratio exceeds 70%;
 
(4)the single guarantee volume exceeds 5% of the latest audited net assets;
 
(5)the guarantee provided to shareholders, the actual controllers and the associated parties; and
 
(6)any other external guarantee regulated by laws, administrative regulations, rules of competent authorities and regulatory rules of the listing place.
 
(4)
If, when applying the relevant standards as set out above, the approving offices of any investment, asset disposal and external guarantee matters as referred to above include both shareholders’ general meeting and the board of directors, such matters shall be submitted to the shareholders’ general meeting for approval.
 
(5)
If the above investment, asset disposal and external guarantee matters constitute connected transactions according to the regulatory stipulations of the places where the Company is listed, the relevant matters shall be dealt with according to the relevant stipulations.
Article 13
Under necessary and reasonable circumstances, as regards specific matters related to the matters to be resolved and those which cannot or are not required to be decided at the shareholders’ general meeting, the shareholders’ general meeting may authorize the board of directors, directors or the secretary to the board of directors to decide within the scope of authority authorized by the shareholders’ general meeting.

 
 
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CHAPTER 4  PROCEDURES FOR CONVENING A SHAREHOLDERS’ GENERAL MEETING

 
Chapter 1
Putting Forward and Collecting Motions
Article 14
The contents of motions shall fall within the function and power of the shareholders' general meeting, and shall contain clear subjects for discussion and specific matters to be resolved and shall comply with relevant provisions of the laws, administrative rules, the Articles of Association and these Rules.
 
Where the Company convenes a shareholders' general meeting, the board of directors, the supervisory committee and shareholders individually or jointly holding more than 3% of the total voting shares of the Company are entitled to put forward motions to the Company.
 
Shareholders individually or together holding 3% of the total voting shares of the Company may put forward interim motions by written proposals to convenor 10 days before the shareholders’ general meeting. The convenor shall publish supplementary notice to announce the interim motion within 2 days upon receiving.
 
Unless as provided under the preceding paragraph, the existing motions listed in the notice of shareholder’s general meeting shall not be altered or added after the issue of such notice by the convenor.
Proposals or matters not listed on the notice of shareholders’ general meeting or not according to the first paragraph of this Article of these Rules shall not be voted or resolved in the shareholders’ general meeting.
Article 15
Motions at the shareholders’ general meeting are usually put forward by the board of directors.
Article 16
Where two or more than half of the independent directors request the board of directors to convene an extraordinary general meeting, they shall be responsible for putting forward the motions to be examined at the meeting.
Article 17
Where the supervisory committee proposes to convene a shareholders’ general meeting, it shall be responsible for putting forward motions.
Article 18
Where shareholders individually or jointly holding more than 10% of the Company’s voting shares propose to convene a shareholders’ general meeting, the proposing shareholders shall be responsible for putting forward the motions, whether or not the meeting is convened by the board of directors.
Article 19
Before the Chairman of the board of directors issues a notice of the board meeting relating to the convening of a shareholders’ general meeting, the secretary to the board of directors may collect motions from shareholders individually holding more than 3% of the Company’s voting shares, supervisors and independent directors and submit the same to the board of directors for examination and approval and subsequently submit the same as motions to the shareholders’ general meeting for examination.
Article 20
At least the following motions shall be put forward at the AGM for consideration:
 
(1)
to examine the board of directors’ annual reports, including the investment plans and operation strategy for the following year;
 
(2)
to examine the supervisory committee’s annual reports;
 
(3)
to examine the Company’s audited final budget proposal for the preceding year;
 
(4)
to examine and approve the Company’s profit distribution plans for the preceding year;
 
(5)
to appoint, dismiss or not to reappoint the accounting firm.

 
 
5
 


Article 21
Where the supervisory committee or shareholders individually or jointly holding more than 10% of the Company’s voting shares propose to convene an extraordinary general meeting or class shareholders’ general meeting, they may sign one or more written request(s) of identical form and contents stating the topics for discussion at the meeting, and at the same time submit motions complying with the above requirements of these Rules to the board of directors.
Article 22
Motions involving the following circumstances shall be deemed to lead to a change or abrogation of the rights of a class shareholder and the board of directors shall submit them to a class shareholders’ general meeting for examination:
 
(1)
to increase or decrease the number of shares of such class, or to increase or decrease the number of shares of a class having voting rights, distribution rights or other privileges equal or superior to those of the shares of such class;
 
(2)
to change all or part of the shares of such class into shares of another class or to change all or part of the shares of another class into shares of that class or to grant such conversion right;
 
(3)
to cancel or reduce rights to accrued dividends or cumulative dividends attached to shares of such class;
 
(4)
to reduce or remove preferential rights attached to shares of such class to receive dividends or to the distribution of assets in the event that the Company is liquidated;
 
(5)
to add, cancel or reduce share conversion rights, options, voting rights, transfer rights, pre-emptive placing rights, or rights to acquire securities of the Company attached to shares of such class;
 
(6)
to cancel or reduce rights to receive payment payable by the Company in a particular currency attached to shares of such class;
 
(7)
to create a new class of shares with voting rights, distribution rights or other privileges equal or superior to those of the shares of such class;
 
(8)
to restrict the transfer or ownership of shares of such class or to impose additional restrictions;
 
(9)
To issue rights to subscribe for, or to convert into, shares of such class or another class;
 
(10)
To increase the rights and privileges of shares of another class;
 
(11)
to plan restructuring of the Company in which the shareholders of different classes will bear liabilities in disproportion to their shareholding in connection with to the restructuring; and
 
(12)
to amend or abrogate the provisions of Chapter 9 of the Articles of Association “Special Procedures for Voting by a Class of Shareholders”.
Chapter 2
Notice of Meeting and its Alterations
Article 23
The notice of a shareholders’ general meeting shall be issued by the convenors of the meeting. Convenors of the meeting include the board of directors, the supervisory committee or shareholders individually or jointly holding more than 10% of the Company’s voting shares.
Article 24
A written notice shall be issued 45 days (excluding the date of the meeting) prior to the meeting, informing all registered shareholders of the matters to be considered at the meeting, and the date and place of the meeting.
 
The notice of a shareholders’ general meeting shall be delivered to the shareholders (whether or not such shareholders are entitled to vote at the meeting) by hand or by pre-paid mail to the addresses of the shareholders as shown in the register of shareholders of the Company. For the holders of A shares, the notice of the meeting may also be given by way of public announcement.


 
6
 


 
The public announcement referred to in the preceding paragraph shall be published in one or more newspapers designated by the securities regulatory authority of the State Council during the period between forty-five to fifty days before the date of the meeting. Once the announcement is made, the holders of A shares shall be deemed to have received the notice of the relevant shareholders’ general meeting.
 
Subject to the laws, regulations and the listing rules of the place where the Company's shares are listed, the Company may issue or provide the aforesaid notice of the shareholders' general meeting in accordance with Article 219 of the Articles of Association, instead of issuing or providing such notice in accordance with the above three paragraphs of this article.
Article 25
The notice of a class shareholders’ general meeting shall be delivered only to the shareholders who are entitled to vote at such meeting.
Article 26
The notice of a shareholders’ general meeting shall satisfy the following requirements:
 
(1)
as provided in Article 24 of these Rules;
 
(2)
specify the place, date, time and duration of the meeting;
 
(3)
set out the matters and proposals to be discussed at the meeting;
 
(4)
provide the shareholders with such information and explanation as necessary to enable the shareholders to make an informed decision on the proposals put before them. Such principle includes (but not limited to) where a proposal is made to amalgamate the Company with another, to repurchase shares of the Company, to reorganize its share capital, or to restructure the Company in any other way, the terms of the proposed transaction must be provided in detail together with contracts (if any) and the cause and effect of such proposal must be properly explained;
 
(5)
contain a disclosure of the nature and extent of the material interests of any director, supervisor, senior management personnel in the proposed transaction and the effect which the proposed transaction will have on them in their capacity as shareholders in so far as it is different from the effect on the interests of shareholders of the same class;
 
(6)
Where the proceedings of directors and supervisors election are scheduled to be discussed, the notice shall reveal the detailed information about the directors and supervisors, including at least the following contents:
 
(i)such personal information as education background, working experience and part-time job;
 
(ii)whether he/she has association with the Company and its controlling shareholders and the actual controller;
 
(iii)revealing the Company's share volume; and
 
(iv)whether he/she received punishment from the securities regulatory institution authorized by the State Council and its relevant authorities and the warning reprimand from the securities exchange.
 
Except the election of directors by means of cumulative voting, every director and supervisor candidate shall be raised in single resolution.
 
(7)
contain the full text of any special resolution to be proposed at the meeting;
 
(8)
contain a clear statement that a shareholder entitled to attend and vote at such meeting is entitled to appoint one or more proxies to attend and vote at such meeting on his behalf and that such proxy needs not be a shareholder;


 
7
 


 
(9)
specify the shareholding registration date for the shareholders who are entitled to attend the shareholders’ general meeting;
 
(10)
specify the time and place for lodging proxy forms for the meeting; and
 
(11)
state names and telephone numbers of the contact persons for the meeting.
 
The notice and supplementary notice of the shareholders' general meeting shall fully and completely reveal all the specific contents of the resolution. Where the independent directors are required to express their views on the matters to be discussed, the notice of the meeting shall also disclose the views and reasons of the independent directors.
Article 27
With regard to the proposal by the independent directors on convention of extraordinary shareholders' general meeting, the board of directors shall, in accordance with the provisions in laws, administrative rules and the Articles of Association, made feedback in written form concerning approval or disapproval of the convention within 10 days  after its receipt of the request; where the board of directors approves the convention of the extraordinary shareholders' general meeting, it shall distribute the notice thereof within 5 days after the decision has been made by the board of directors; where the board of directors disapproves the convention of the extraordinary shareholders' general meeting, it shall explain the reasons and announcement the same.
Article 28
The supervisory committee shall be entitled to propose in writing the convention of extraordinary shareholders' general meeting to the board of directors, who shall, subject to the laws, administrative rules and the Articles of Association, make feedback in writing concerning approval or disapproval of the convention within 10 days after its receipt of the request.
 
Where the board of directors approves the convention of the interim shareholders' general meeting, it shall distribute the notice thereof within 5 days after the decision has been made by the board of directors where the alteration upon the original request shall win the approval from the supervisory committee.
 
Where the board of directors disapproves the convention of the extraordinary shareholders' general meeting or fails to make feedback in writing within 10 days after its receipt of the request, the board of directors shall be deemed to be unable or fail to perform its duties on convention of shareholders' general meeting, and the supervisory committee shall convene and chair the meeting by itself.

 
 
8
 


Article 29
Shareholders singly or jointly hold more than 10% of the voting shares of the Company have the right to propose in written form the convention of interim shareholders' general meeting or class shareholders' meeting to the board of directors. The board of directors shall, in accordance with the provisions in laws, administrative rules and the Articles of Association, raise the feedback in written form concerning the approval or disapproval of the convention of the shareholders' general meeting or class shareholders' meeting within 10 days after its receipt of the request.
 
Where the board of directors approves the convention of interim shareholders' general meeting or class shareholders' meeting, it shall, within 5 days after the decision has been made by the board of director, issue a notice where the alteration upon the original request shall win the approval from the relevant shareholder.
 
Where the board of directors disapproves the convention of shareholders' general meeting or class shareholders' meeting or fails to make in written form feedback within 10 days after receipt of the request, such shareholders as singly or jointly hold more than 10% of the voting shares of the Company have the right to propose in written form the convention of interim shareholders' general meeting or class shareholders' meeting to the supervisory committee, and shall make such request to the supervisory committee in written form.
 
Where the supervisory committee approves the convention of interim shareholders' general meeting or class shareholders' meeting, it shall, within 5 days after receipt of the request, issue a notice of the shareholders' meeting where the alteration upon the original request shall win the approval from the relevant shareholder.
 
Where the supervisory committee fails to issue the notice of shareholders' general meeting within the required time limit, it shall be deemed to fail in convention and chairing the shareholders' meeting, such shareholders as singly or jointly hold more than 10% of the voting shares of the Company for continuous 90 days have the right to convene and chair the meeting by themselves.
Article 30
Where the supervisory committee or shareholders decide to convene the shareholders' meeting independently, they shall notify the board of directors in written form and put on record in the local branches of the securities regulatory institute authorized by the State Council and the stock exchange in the place of business of the Company.
 
Prior to the announcement of the resolutions of the shareholders' general meeting, shareholding percentage of the convening shareholders shall not be less than 10%.
 
The convening shareholders shall, at the time of issuing the notice of the shareholders' general meeting and the announcement of the resolutions of the shareholders' general meeting, provided relevant supporting documents to the local branches of the securities regulatory institute authorized by the State Council and the stock exchange in the place of business of the Company.
Article 31
With respect to the shareholders' meeting convened by the supervisory committee or the shareholders, the board of directors and its secretary shall coordinate. The board of directors shall provide the share ledger as at the share registration date.
Article 32
Where the shareholders' meeting is held independently by the supervisory committee or shareholders, the necessary cost of the meeting shall be borne by the Company.
Article 33
Shareholders intending to attend a shareholders’ general meeting shall deliver to the Company their written replies concerning their attendance at such meeting twenty days before the date of the meeting.
 
The Company shall, based on the written replies which it receives from the shareholders twenty days before the date of the shareholders’ general meeting, calculate the number of voting shares represented by the shareholders and the authorized proxies who intend to attend the meeting. If the number of voting shares represented by the shareholders who intend to attend the meeting amount to more than one-half of the Company’s total voting shares, the Company may hold the shareholders’ general meeting; if not, then the Company shall, within five days, notify the shareholders again by way of public announcement the matters to be considered at, and the place and date for, the meeting. The Company may then hold the shareholders’ general meeting after publication of such announcement.


 
9
 


Article 34
After the convenors of a meeting have issued the notice of the shareholders’ general meeting, the shareholders’ general meeting shall not be canceled or postponed without reasons. The proposals listed in the notice shall not be canceled. Where a shareholders’ general meeting has to be postponed or canceled for special reasons, the convenors of the meeting shall publish a announcement at least two working days before the original date of the shareholders’ general meeting and state the relevant reasons in the announcement.
Chapter 3
Registration of a Meeting
Article 35
A shareholder may attend the shareholders’ general meeting in person or appoint a proxy to attend and vote on his behalf.
 
In order to ensure the solemnity and proper order of the shareholders’ general meeting, the Company shall have the right to refuse persons other than those stated above to enter into the venue.
Article 36
The Company shall be responsible for preparing a shareholder attendance register, which will be signed by the shareholder and the authorized proxies attending the on-site meeting. The shareholder attendance register shall set out the names of persons present at the on-site meeting (and/or names of units), identification document numbers, information confirming the identities of the shareholders (such as shareholder account numbers), the number of voting shares held or represented, names of the proxies (or names of the units) and so on.
Article 37
The convenor and lawyer engaged by the Company, shall, in accordance with the register provided by the securities registration and clearing institutions, jointly verify the legality of the identification of the shareholders, register the full name (or the name of the unit) of the shareholders and the number of shares bearing voting rights held by such shareholders. Unless otherwise decided by the Company, prior to the announcement by the chairman of the meeting of the number of the shareholders and the authorized proxies attending the on-site meeting and the number of shares bearing voting rights held by such shareholders, the meeting registration shall be concluded.
Article 38
Apart from the aforesaid, the contents of registration for the shareholders or proxies attending the shareholders’ general meeting shall include:
 
(1)
request to speak and contents of the text (if any); and
 
(2)
collecting the voting slips according to the number of shares held/represented by the shareholders or proxies.
Article 39
The instrument appointing a proxy of a shareholder shall be in writing. Such written instrument shall state the following:
 
(1)
the name of the authorized proxy of the shareholder;
 
(2)
the number of shares of the principal represented by the authorized proxy;
 
(3)
whether or not the proxy has any voting right;
 
(4)
an indication to vote for or against each and every matter included in the agenda;
 
(5)
the date of issue and validity period of the proxy form; and
 
(6)
the signature (or seal) of the principal or its agent appointed in writing; if the principal is a legal person shareholder, the proxy form shall bear the seal of the legal person unit, or signed by its director or an agent duly appointed by it.
 
The proxy form shall state clearly that the proxy shall be entitled to vote at his discretion in the absence of specific instructions from the shareholder.


 
10
 


Article 40
The proxy form shall be lodged with the Company’s premises or such other place as specified in the notice convening the meeting at least twenty-four hours prior to the relevant meeting for which the proxy is appointed to vote or twenty-four hours prior to the scheduled voting time. Where the proxy form is signed by a person authorized by the principal, the power of attorney or other authorization documents shall be notarized. The notarized power of attorney and other authorization documents, together with the proxy form, shall be lodged with the Company’s premises or such other place as specified in the notice convening the meeting.
 
If the principal is a legal person, his legal representative or any representative authorized by the board of directors or by other decision making organs shall attend the shareholders' meeting of the Company on his behalf.
Article 41
Shareholders attending a shareholders’ general meeting shall fulfill registration procedures. Shareholders shall produce the following documents for registration purposes:
 
(1)
Natural person shareholders: an individual shareholder shall produce his valid identification documents, stock account card. Where a proxy is appointed to attend the meeting, the proxy shall produce his own valid identification documents and the proxy form, and provide the Company with information enabling the Company to confirm the identity of his principal as a shareholder.
 
(2)
Legal person shareholders: if a legal representative is appointed to attend the meeting, the legal representative shall produce his valid identification documents and proof of his qualification as a legal representative, and he shall provide the Company with the information enabling the Company to confirm the identity of the legal person shareholder. Where a proxy is appointed to attend the meeting, the proxy shall produce his own valid identification documents, the proxy form issued by the legal person shareholder pursuant to law, or a notarized copy of a resolution on authorization adopted by the board of directors of the legal person shareholder or other decision-making organs, and shall provide information enabling the Company to confirm the identity of the principal as a legal person shareholder.
Article 42
Where a shareholder or a proxy requests to speak at the shareholders’ general meeting, he shall register with the Company prior to the meeting. The number of speakers shall be limited to ten. If there are more than ten speakers, the first ten shareholders who have the largest shareholdings shall have the right to speak in an order according to their shareholdings.
Chapter 4
Convening a Meeting
Article 43
The board of directors and other convenor of the Company shall take necessary measures to ensure the normal order thereof. Any acts interfering with the shareholders' general meeting, provoking and infringing the lawful rights of the shareholders shall be prevented with precautions, stopped and reported to the relevant departments for investigation and prosecution.


 
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Article 44
A shareholders’ general meeting shall be chaired by the Chairman of the board of directors. If the Chairman is unable or fails to perform his duty, the Vice Chairman (if the Company has two or more vice chairmen, the one recommended by more than half of the total directors) shall chair the meeting, if the vice chairman is unable or fails to perform his duty, the director recommended by more than half of the total directors shall chair the meeting.
 
Where the shareholders' general meeting is convened by the supervisory committee, the meeting shall be chaired by the president of the supervisory committee. Where the president of the supervisory committee is unable or fails to perform his duty, the meeting shall be chaired by the vice president of the supervisory committee; where the vice president of the supervisory committee is unable or fails to perform his duty, the meeting shall be chaired by the supervisor recommended by more than half of all the supervisors.
 
Where the shareholders' general meeting is convened by the shareholders, the meeting shall be chaired by the person recommended by the convenor.
 
Where the presiding person on the occasion of the convention of the shareholders' general meting violates the rules of procedure so that the meeting is unable to continue, a presiding person may, with the approval of more than half of the votes from the shareholders attending the on-site meeting, be elected from and by the shareholders' meeting to continue the meeting.
Article 45
The chairman shall declare that the meeting commences at the scheduled time after he has been informed that the participants are in compliance with legal requirements and speakers are registered. In any of the following circumstances, the meeting may be declared to commence later than the time scheduled:
 
(1)
when any equipment of the venue is out of order so that the meeting cannot proceed as usual; and
 
(2)
when any matters of material importance take place affecting the proceeding of the meeting.
Article 46
After the chairman of the meeting has declared the official commencement of the meeting, he shall firstly announce that the number of shareholders attending the meeting and the number of shares represented by such shareholders are in compliance with the legal requirements. Subsequently he shall read out the agenda as stated in the notice of the meeting, and shall inquire whether any person present at the meeting has any objection to the voting order of the motions.
Article 47
After the chairman of the meeting has made inquires regarding the agenda, he shall read out the motions or appoint another person to read out the motions, and shall explain the motions according to the following requirements if necessary:
 
(1)
Where the motion is put forward by the board of directors, the motion shall be explained by the Chairman or other persons designated by the Chairman; and
 
(2)
Where the motion is put forward by the supervisory committee or shareholders individually or jointly holding more than 3% of the Company’s voting shares, the motion shall be explained by the person putting forward the motion or its legal representative or lawful and valid proxy.
Article 48
The board of directors and supervisory committee shall, in the annual general meeting, deliver a report on work of preceding year, and the independent director shall report his/her work.
Article 49
The board of directors of the Company shall explain to the shareholders' general meeting the non-standardized audit opinion issued by certified public accountant to the Company.
Article 50
Motions included in the agenda shall be examined before voting. Reasonable time shall be given at the shareholders’ general meeting for each motion to be discussed, and the chairman of the meeting shall orally ask the shareholders attending the meeting whether they have completed the examination procedures. Examination procedures shall be regarded as completed if there are no objections by shareholders attending the meeting.
Article 51
No shareholder shall speak for more than twice at the meeting without the consent of the chairman. A shareholder is allowed to speak for no more than five minutes for the first time, and no more than three


 
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minutes for the second time.
 
When a shareholder requests to speak, he shall only do so if he does not interrupt report which is being made by the meeting reporter or speeches which are being made by other shareholders.
Article 52
Shareholders may query the Company at the shareholders’ general meeting. The directors, supervisors or senior management personnel shall explain and interpret any queries and proposals raised by the shareholders unless they relates to the Company’s business secret and shall not be disclosed at the meeting.
Article 53
The chairman of the meeting shall, prior to the vote, announce the total number of the shareholders and the proxies attending the on-site meeting and the total number of the voting shares held by them according to the meeting registration.
Chapter 5
Voting and Resolution
Article 54
Shareholders’ general meeting shall resolve on any specific motion.
Article 55
Matters not included in the notice convening the shareholders’ general meeting shall not be resolved on at such a meeting. In approving the motions included in the notice of a general meeting, no alteration shall be made to such motions. Otherwise, any alteration shall be deemed to be a new motion and shall not be voted on at that shareholders’ general meeting.
Article 56
The Company shall, on the premise of the legality and validity of the shareholders' general meeting, use various means to facilitate participation of shareholders at shareholders meeting, including such modern information technology means as on-line vote platform.
Article 57
Except for the cumulative voting, the shareholders’ general meetings shall resolve on all motions included in the agenda one by one, and, unless the shareholders' general meeting is adjourned or fails to make any resolution due to force majeure matters or other special reasons, shall not delay in resolving, or fail to resolve, such motions. Where different motions are put forward at the shareholders' general meeting for the same matter, such motions shall be resolved on in the order of time in which they are put forward.
Article 58
The chairman of the meeting is obliged to request the shareholders to approve the motions by open ballot at the general meeting.
 
Each shareholder or proxy shall exercise his voting rights in accordance with the number of voting shares represented by him. Except for the circumstances where cumulative voting is applicable to the election of directors in accordance with the Articles of Association and these Rules, each share shall carry one voting right.
Article 59
Resolutions in respect of the election of directors shall be passed by a way of cumulative voting at shareholders’ general meeting in accordance with the Articles of Association or the resolutions passed by the shareholders' general meeting. Cumulative voting means that every share shall, on the occasion of electing directors in the shareholders' general meeting, have the same number of votes  as the number of the candidate directors and the voting power possessed by the shareholders may be exercised uniformly. The details of the cumulative voting are as follows:
 
(1)
Where the number of directors to be elected is more than two, the cumulative voting shall be adopted.
 
(2)
Where cumulative voting system is adopted, each of the shares held by a shareholder shall carry the same number of votes as the number of directors to be elected.
 
(3)
The notice of a shareholders’ general meeting shall notify the shareholders that a cumulative voting system will be adopted for the election of directors. The convenors of the shareholders’ general meeting shall prepare ballots suitable for cumulative voting, and shall give instructions and explanations in writing regarding the cumulative voting system, the completion of the ballots and the methods of counting the votes.


 
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(4)
In casting his votes for the director candidates at a shareholders’ general meeting, a shareholder may exercise his voting rights by spreading his votes evenly and cast for each of the candidates the number of votes corresponding to the number of shares he holds; or he may focus his votes on one candidate and cast for a particular candidate the total number of votes carried by all of his shares while the number of voting rights carried by each of his shares is the same as the number of directors to be elected; or he may spread his votes over several candidates and cast for each of them part of the total number of votes carried by the shares he holds while the number of voting rights carried by each of his shares is the same as the number of directors to be elected.
 
(5)
Upon the exercise of his voting rights by focusing his votes on one or several of the candidates while the number of voting rights carried by each of his shares is the same as the number of directors to be elected, a shareholder shall not have any right to vote for any other candidate.
 
(6)
Where the total number of votes cast by a shareholder for one or several of the candidates is in excess of the number of votes carried by the total number of shares held by him, the votes cast by the shareholder shall be invalid, and the shareholder shall be deemed to have waived his voting rights. Where the total number of votes cast for one or several candidates by a shareholder is less than the number of votes carried by the total number of shares held by such a shareholder, the votes cast by the shareholder shall be valid, and the voting rights attached to the shortfall between the votes actually cast and the votes which the shareholder is entitled to cast shall be deemed to have been waived by the shareholder.
 
(7)
Where the number of approval votes won by a director candidate exceeds one-half of the total voting rights (to be calculated according to the total number of shares if the cumulative voting is not adopted) represented by the shareholders present at the shareholders’ general meeting and the approval votes exceeds the objection votes, the candidate shall be the elected director candidate. If the number of the elected director candidates exceeds the total number of directors to be elected, those candidates who win the largest number of approval votes shall be elected as directors (however, if the elected director candidates whose approval votes are comparatively fewer win the same number of approval votes, and the election of such candidates as directors will give rise to the number of directors elected exceeding the number of directors to be elected, such candidates shall be deemed as having not been elected); if the number of directors elected at a shareholders’ general meeting is less than the number of directors to be elected, a new round of voting shall be carried out for the purpose of filling such directorship vacancies, until all the directors to be elected are validly elected.
 
(8)
Where a new round of voting is carried out according to the provisions of paragraph (7) of this Article at the shareholders’ general meeting, the number of votes casted by the shareholders in the cumulative voting shall be re-counted according to the number of directors to be elected in the new round of voting.
Article 60
In examining the motions on the election of directors and supervisors at a shareholders’ general meeting, shareholders shall vote on the candidates for the office of directors or supervisors one by one.
Article 61
The same voting power shall choose only one of such means as on site, Internet or otherwise. Where repeated voting arises in the same voting power, the power of such repeated voting should be examined according to the notice of the shareholders' general meeting.
Article 62
Resolutions of a shareholders’ general meeting shall be divided into ordinary resolutions and special resolutions.
 
(1)
Ordinary resolutions
   
(i)
Ordinary resolutions shall be passed by votes representing more than one-half of the voting rights represented by the shareholders (including proxies) present at the meeting.
   
(ii)
The following matters shall be approved by ordinary resolutions at shareholders’ general meetings:


 
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(a)
work reports of the board of directors and the supervisory committee;
     
(b)
profit distribution plans and loss recovery plans formulated by the board of directors;
     
(c)
appointment and removal of members of the board of directors and members of the supervisory committee assumed by non-representatives of the employees,  remuneration and manner of payment of all directors and supervisory members;
     
(d)
annual preliminary and final budgets, balance sheets and profit and loss accounts and other financial statements of the Company; and
     
(e)
matters other than those which are required by laws and regulations or by the Articles of Association and these Rules to be passed by special resolutions.
 
(2)
Special resolutions
   
(i)
Special resolutions shall be passed by votes representing more than two-thirds of the total amount of the voting rights represented by the shareholders (including proxies) present at the meeting.
   
(ii)
The following matters shall be approved by special resolutions at a shareholders’ general meetings:
     
(a)
increase or reduction in share capital and the issue of shares of any class, warrants and other similar securities;
     
(b)
issue of bonds of the Company;
     
(c)
division, merger, dissolution, liquidation and change of corporate form of the Company;
     
(d)
amendment to the Articles of Association and its appendices(including the Rules and Procedures for the Shareholders’ General Meetings, the Rules and Procedures for the Board of Directors’ Meetings and the Rules and Procedures for the Supervisors’ Meetings);
     
(e)
where the major assets acquired or disposed, or amount of guarantee exceeds 30% of the latest audited total assets;
     
(f)
share incentive plan; and
     
(g)
any other matters required by laws, regulations, Articles of Association and these Rules or approved by an ordinary resolution by the shareholders at a general meeting which may have material impacts on the Company and accordingly should be passed by special resolutions.
Article 63
As far as any matter relating to sub-paragraphs (2) to (8), (11) to (12) of Article 22 of these Rules, the affected class shareholders, whether or not such shareholders originally have the right to vote at shareholders’ general meetings, shall have the right to vote at the class meetings. However, interested shareholder(s) shall not be entitled to vote at such class meetings.
 
“(An) interested shareholder(s)”, as such term is used in the preceding paragraph, means:
 
(1)
in the case of a repurchase of shares by way of a general offer to all shareholders of the Company or by way of public dealing on a stock exchange pursuant to Article 29 of the Articles of Association, an interested shareholder is a controlling shareholder within the meaning of Article 54 of the Articles of Association;
 
(2)
in the case of a repurchase of shares by an off-market agreement pursuant to Article 29 of the Articles


 
15
 


   
of Association, a holder of the shares to which the proposed agreement relates; and
 
(3)
in the case of a restructuring of the Company, a shareholder who assumes a relatively lower proportion of obligation than the obligations imposed on shareholders of that class under the proposed restructuring or who has an interest in the proposed restructuring which is different from the general interests of the shareholders of that class.
Article 64
Resolutions of a class of shareholders shall be passed by votes representing more than two-thirds of the voting rights of shareholders of that class present at the relevant meeting who, according to Article 63, are entitled to vote at the meeting.
 
The special procedures for approval by a class of shareholders shall not apply in the following circumstance: (1) where the Company issues, upon the approval by special resolution of its shareholders in a general meeting, either separately or concurrently once every twelve months, not more than 20% of each of its existing issued A Shares and Overseas-Listed Foreign-Invested Shares; and (2) upon the establishment of the Company, a plan for an issuance of A shares and Overseas-Listed Foreign-Invested Shares shall be completed within 15 months from the date of approval by the Securities regulator of the State Council.
Article 65
Where a connected transaction is being considered at a shareholders’ general meeting, the connected shareholders shall abstain from voting, and the voting rights represented by the shares held by them shall not be counted towards the total number of valid votes. The voting result of the non-connected shareholders shall be fully disclosed in the announcement in relation to the resolutions passed at the shareholders’ general meeting.
 
If any shareholder are required to abstain from voting or may only vote for or against a matter according to the Rules Governing the Listing of Securities of the Hong Kong Stock Exchange Limited, any vote by such shareholder or his proxy in violation of the relevant rules or restrictions referred to above shall not be counted in the voting results.
Article 66
The present shareholders shall express their opinions on the resolutions: approval, disapproval.
Shareholders (and proxies) shall complete their ballot papers carefully as instructed and put the ballot papers into the ballot box. Any ballot paper containing uncompleted parts, false information, illegible writing and any uncast paper shall be deemed to be an abstention of voting by the shareholder, and such ballot papers shall not be counted towards the total number of valid votes.
Article 67
Prior to voting, the shareholders present at a shareholders’ general meeting shall nominate at least one supervisor and two shareholder representatives to participate in counting and supervising the voting. Where the shareholder has associated relations to the resolution to be approved, such associated shareholder or its proxy shall not participate in counting and supervising the voting.
When the shareholders' general meeting is voting, the lawyer, shareholder representative and supervisor  shall be jointly responsible for vote calculation and  supervision, and shall announce the vote result at the meeting. The vote results shall be recorded in the minutes of the meeting.
Such a shareholder or its proxy of the Company who cast vote via Internet or other mean shall be entitled to examine its voting result via the corresponding voting system.
 
If the votes for and against a resolution are equal, the chairman of the meeting shall be entitled to cast one more vote.
Article 68
Prior to the formal announcement of the voting result, the Company, vote counter, vote supervisor, major shareholders and Internet service provider as involved in the voting at on-site shareholders' general meeting, voting through Internet and by other means shall bear confidential obligations upon the voting.
Article 69
The shareholders’ general meeting shall have the minutes of the meeting. The directors, supervisors, secretary of the board of directors, convenor or its representative, presiding person present at the meeting shall sign on the minutes of the shareholders' general meeting. The secretary of the board of directors shall


 
16
 


 
be responsible for the minutes of the meeting which shall record the following matters:
 
(1)
time, place, agenda of the meeting, name of convenor;
 
(2)
name of the presiding person and the present directors, supervisors, and senior management personnel;
 
(3)
number of the attending shareholders and proxies, total number of their voting shares and the proportion of such shares in the total shares of the Company;
 
(4)
every motion’s deliberation procedure, main points of the speech and statement, and voting result;
 
(5)
inquiry opinion or proposal of the shareholders and the relevant reply or explanation;
 
(6)
name of the lawyer, vote counter and poll watcher; and
 
(7)
other matters in accordance with the provisions of the Articles of Association shall be recorded in the minutes of the meeting.
Article 70
In respect of convention of the shareholders' general meeting, the Company shall retain (a) PRC lawyer(s) to attend the shareholders’ general meeting in accordance with law to enable him(them) to give legal opinions on the following matters, and shall publish these legal opinions together:
 
(1)
whether the procedures for convening and holding the shareholders’ general meeting comply with the relevant laws and administrative regulations as well as the Articles of Association and these Rules;
 
(2)
verification of the legality and validity of the eligibility of the participants and convenor of the meeting;
 
(3)
whether the voting procedures and results of the shareholders’ general meeting are lawful and valid; and
 
(4)
the issue of any legal advice on any other matters requested by the Company.
 
Chapter 6
Adjournment of a Meeting
Article 71
If, in the course of the meeting, disputes arising out of the identity of any shareholder or the results of the calculation of the votes and so on cannot be resolved on site in such a way that the order of the meeting is affected and the meeting cannot proceed as usual, the chairman of the meeting shall declare an adjournment of the meeting.
 
If the foregoing circumstances cease to exist, the chairman of the meeting shall notify the shareholders of the resumption of the meeting as soon as possible.
Article 72
The convenor shall ensure the continuity of the shareholders' general meeting until the final decision is achieved. Where a shareholders’ general meeting is adjourned or fails to make any decision due to force majeure or any other extraordinary reasons, the convenor shall take all necessary measures to resume the shareholders’ general meeting as soon as possible or directly suspend such shareholders' general meeting, and shall announce it immediately. Meanwhile, the convenor shall report to the local branch of the securities regulatory institution authorized by the State Council and the securities exchange in the place where the Company's shares are listed.
Chapter 7
Post-meeting Affairs and Announcement
Article 73
The secretary to the board of directors shall be responsible for submitting the minutes of the meeting and the resolutions passed at the meeting and other relevant documentation to the relevant regulatory authorities in accordance with laws, regulations, the requirements of the securities regulatory authority of the State


 
17
 


 
Council and the stock exchanges on which the Company’s shares are listed after the meeting. He shall also be responsible for handling the announcement to be published in the designated media.
Article 74
The resolutions of the shareholders' general meeting shall be announced promptly, and the announcement shall state the number of the shareholders (or the proxies) present at the meeting, the number of shares casting voting rights held by them (or nominees) and the percentage of such shares out of the total voting shares of the Company, the method of voting, the voting result of each motion and the detailed content of each resolution passed.
Article 75
Where the resolutions are not passed or the previous resolutions are altered in the very shareholders' general meeting, it shall be specifically indicated in the announcement on the resolutions of the shareholders' general meeting.
 
The announcement of resolutions passed at shareholders’ general meetings shall be published in designated newspapers and on the Company’s website and the contents of the announcement shall fulfill the requirements of the relevant supervisory regulations.
Article 76
The secretary to the board of directors shall be responsible for keeping written information such as the register of shareholders, power of attorney, voting statistical sheet, minutes of the meeting, legal opinions endorsed by lawyer(s) and announcements of resolutions.
Article 77
Where the shareholders' general meeting approves the resolutions in relation to election of directors and supervisors, newly appointed directors and supervisors shall assumed their offices in accordance with the provisions of the Articles of Association.

CHAPTER 5  SUPPLEMENTARY ARTICLES
 
 
Article 78
These Rules shall come into effect upon the adoption by the shareholders’ general meeting by a special resolution and the approval by the relevant authorities in accordance with law.
Article 79
Any amendment to these Rules shall be proposed by the board of directors in the form of an amendment proposal, and shall be submitted to the shareholders’ general meeting for approval by a special resolution.
Article 80
The board of directors shall be responsible for interpreting these Rules.
Article 81
Where any relevant matters are not covered in these Rules or where these Rules fail to comply with the relevant laws, administrative rules and other relevant regulatory documents or regulatory provisions in the place where the Company's shares are listed as promulgated from time to time, those laws, administrative rules and other relevant regulatory documents or regulatory provisions in the place where the Company's shares are listed shall prevail.

 

 
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Appendix II



Rules and Procedures
for
Board of Directors’ Meetings
of
China Petroleum & Chemical Corporation








Revised at the Annual General Meeting for the Year 2008 on May 22, 2009
Approved by the SASAC on September 2, 2009


 
 
 
 

CHAPTER 1  GENERAL PROVISIONS
 
 
Article 1
In order to ensure that the board of directors of China Petroleum & Chemical Corporation (the “Company”) fulfils the duties and responsibilities conferred by all shareholders of the Company, conducts discussions efficiently, makes scientific, immediate and prudent decisions and standardizes the operation of the board of directors, these Rules are formulated according to the “Company Law of the People’s Republic of China” (the “Company Law”), the "Securities Law of the People's Republic of China", “Mandatory Provisions for the Articles of Association of Companies to be Listed Overseas”, “Guidelines for the Articles of Association of Listed Companies”, “Standards for the Governance of Listed Companies” and other governing regulations of the places of the Company’s listings inside and outside the PRC and the Articles of Association of China Petroleum & Chemical Corporation (“Articles of Association”).

 
CHAPTER 2  FUNCTIONS, POWERS AND AUTHORITY OF THE BOARD OF DIRECTORS
 
 
Article 2
The board of directors is accountable to the shareholders’ general meetings and shall exercise the following functions and powers:
 
(1)
to be responsible for convening shareholders’ general meetings and to report its work to the shareholders’ general meetings;
 
(2)
to implement the resolutions passed by shareholders’ general meetings;
 
(3)
to decide on the Company’s business plans and investment proposals;
 
(4)
to formulate the Company’s annual preliminary and final financial budgets;
 
(5)
to formulate the Company’s profit distribution proposals and loss recovery proposals;
 
(6)
to formulate proposals for the debts and financial policies of the Company, the increase or reduction of the registered capital of the Company and for the issue of debentures and securities of any kinds (including but without limitation to the debentures of the Company) and the listing or repurchase of the shares of the Company;
 
(7)
to draft plans for significant acquisition or disposal proposals, the merger, division, change of corporate form or dissolution of the Company;
 
(8)
to decide on such matters as external investment, acquisition or sale of assets, security interests on assets, entrusted financing, and connected transactions according to the authority given in the shareholders’ general meeting;
 
(9)
to determine matters relating to external guarantees of the Company according to law and the Articles of Association and its appendices;
 
(10)
to decide on the Company’s internal management structure;
 
(11)
to appoint or remove the Company’s president and to appoint or remove the senior vice-president, Chief Financial Officer and vice-president of the Company according to the nomination of the president; to appoint or remove the secretary of the board of directors; and to decide on their remuneration;
 
(12)
to appoint or replace the members of the board of directors and the supervisory committee of its wholly-owned subsidiaries; to appoint, replace or recommend the shareholders’ representatives, directors (candidates) and supervisors (candidates) of its subsidiaries which are controlled or invested
 
 
 
1
 
 
 
   
by the Company;
 
(13)
to decide on the establishment of the Company’s branch offices;
 
(14)
to formulate proposals for any amendment of the Articles of Association and its appendices;
 
(15)
to formulate the Company’s basic management system;
 
(16)
to manage the disclosure of information of the Company;
 
(17)
to propose in a shareholders’ general meeting to engage or replace the accounting firm which undertakes auditing work of the Company;
 
(18)
to hear and review the president’s work report;
 
(19)
to decide on important matters and administrative matters of the Company other than those which should be determined by resolutions of a shareholders’ general meeting of the Company in accordance with applicable law, administrative rules, regulations of the competent government department(s) and the Articles of Association (and its appendices), and to sign other important agreements;
 
(20)
to exercise any other power stipulated by laws, administrative rules, regulations of the competent government department(s) or the Articles of Association or these Rules, and any other function and power conferred by the shareholders’ general meetings.
Article 3
The necessary conditions for the board of directors to perform its duties shall include the following:
 
The president shall provide the directors with necessary information and data, enabling the board of directors to make scientific, immediate and prudent decisions.
 
A director may require the president or, through the president, require the relevant departments of the Company to provide information and explanations which are necessary for him to make scientific, immediate and prudent decisions.
 
Where the independent directors think necessary, they may engage (an) independent institution(s) to provide independent opinions to be relied upon by them in making decisions. The fees incurred in the engagement of such (an) independent institution(s) shall be borne by the Company.
Article 4
The board of directors shall examine and resolve on the matters which the board of directors is required by laws, administrative rules, regulations of the competent government department(s) and the Articles of Association (and its appendices) to submit to the shareholders in general meetings for determination (including matters proposed by two or more than half of the independent directors).
Article 5
In order to ensure and increase the stability and efficiency of the daily operation of the Company, the board of directors shall define its powers and provide limited mandate to the chairman, one or more directors or president on making decisions relating to investment plans, assets disposals, external guarantees, the debts and financial policies and the internal management structure of the Company according to the provisions of the Articles of Association (and its appendices) and the authorisation of the shareholders’ general meeting.
Article 6
The powers and authority of the board of directors on investments shall include the following:
 
(1)
The board of directors shall be responsible to review medium and long-term investment plans proposed by the president, and shall submit them to the shareholders’ general meetings for approval.


 
2
 


 
(2)
The board of directors shall be responsible to review the annual investment plans proposed by the president, and shall submit them to the shareholders’ general meetings for approval. The board of directors may make adjustments of not more than 15% of the amount of the capital expenditure for the current year as approved at the shareholders’ general meeting. The chairman of the board of directors is authorised to make adjustments of not more than 8% of the amount of the capital expenditure for the current year as approved at the shareholders’ general meeting.
 
(3)
Individual project investments (including but not limited to exploration and development, fixed assets, external shareholdings) shall be approved by the board of directors if the investment amounts are not more than 5% of the latest audited net asset value of the Company. The Chairman of the board of directors is authorised to examine and approve projects if the investment amount is not more than 3% of the latest audited net asset value of the Company.
 
(4)
Where the Company uses its own assets to make risk investment in areas not related to the business of the Company (including but not limited to bonds, futures, and shares), the risk investments shall be approved by the board of directors if the amount of the individual investment is not more than 1% of the latest audited net asset value of the Company. The chairman of the board of directors is authorised to examine and approve projects if the investment amount is not more than 0.5% of the latest audited net asset value of the Company.
Article 7
The powers and authority of the board of directors on asset disposals shall include the following:
 
(1)
When the Company acquires or sells assets, it has to take into account of the following five testing indices: (i) total asset ratio: the total amount of the assets in relation to the transaction (if both book value and valuation value exist, the higher one shall be applied) divided by the latest audited total asset value of the Company; (ii) transaction amount ratio: the transaction amount (taking into account of the assumed liabilities and costs) divided by the total amount of the latest audited net asset value of the Company; (iii) transaction net profit (loss) ratio: the absolute value of the net profit or loss relating to the assets of the transaction divided by the absolute value of the audited net profit or loss of the Company for the preceding financial year; (iv) revenue ratio: the revenue for the preceding financial year relating to the subject of the transaction divided by the audited revenue of the Company for the preceding financial year; (v) Subject net profit (loss) ratio: the absolute value of the net profit or loss for the preceding financial year relating to the subject of the transaction divided by the absolute value of the audited net profit or loss of the Company for the preceding financial year.
   
The board of directors shall examine and approve projects with a ratio of less than 50% in each of the five testing indices. The chairman of the board of directors is authorised to examine and approve projects with a ratio of less than 10% in each of the all the five testing indices.
 
(2)
In disposing of fixed assets, where the total sum of the expected value of the fixed assets to be disposed of and the value of the fixed assets which have been disposed of in the four months prior to such proposed disposal does not exceed 33% of the value of the fixed assets as shown in the latest balance sheet considered by the shareholders’ general meeting, the board of directors shall be authorized to examine and approve such disposal; and if it is less than 10%, the Chairman of the board of directors shall be authorised to examine and approve such disposal.
 
(3)
As regards others (including but not limited to the entering into, varying and termination of important contracts relating to entrustment of operation, entrusted operation, entrusted financial management, contracting and leasing), the relevant amount shall be calculated according to the five testing indices referred to in paragraph (1) of this Article.
   
Projects with a ratio of not more than 5% in all the above five testing indices shall be examined and approved by the board of directors. The chairman of the board of directors is authorised to examine and approve projects with a ratio of not more than 1% in all the above five testing indices.


 
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Article 8
The powers and authority of the board of directors on debt liabilities shall include the following:
 
(1)
The board of directors shall examine and approve the amount of the long-term loans for the current year according to the annual investment plan as approved by the shareholders’ general meeting. The chairman of the board of directors is authorised to make adjustments of not more than 10% of the total amount of the long-term loans for the current year as approved by the board of directors. Within the total amount of the long-term loans as approved by the board of directors, the chairman of the board of directors is authorised to approve and sign the contract for every single long-term loan for the amount exceeding RMB1 billion, and the president is authorised to approve and sign the contract for every single long-term loan for the amount not exceeding RMB1 billion.
 
(2)
Within the total amount of the working capital loans for the current year as approved by the board of directors, the Chairman of the board of directors is authorised to sign the overall short-term loan facility contracts for raising working capitals required by the operation and management of the Company according to the demand of the Company.
Article 9
If, when applying the relevant standards as set out above, the approving offices of any investment, asset disposal and debts matters as referred to above include the board of directors, chairman of the board of directors and/or president, such matters shall be submitted to the approving offices of the highest level for approval.
 
If the above investment, asset disposal and loan matters constitute connected transactions according to the regulatory stipulations of the places where the Company is listed, the relevant matters shall be dealt with according to the relevant stipulations.
Article 10
The powers and authority of the board of directors on corporate structure and human resources
The board of directors authorises the chairman to determine the following matters: (1) internal management structure of the Company; (2) the establishment of branch offices by the Company; (3) to appoint or replace the members of the board of directors and the members of the supervisory committee of the wholly-owned subsidiaries of the Company; and (4) to appoint, replace or recommend the shareholders’ representatives, director (candidates) and supervisors (candidates) of the subsidiaries which are controlled or invested by the Company.


CHAPTER 3  COMPOSITION OF THE BOARD OF DIRECTORS AND ITS SUBORDINATED OFFICES

 
Article 11
The board of directors shall consist of 11 to 15 directors. The board of directors shall have one chairman and one to two vice-chairmen.
The directors may serve concurrently as the senior management personnel, but the directors who concurrently acted as the senior management personnel shall not exceed one half of the total number of the board of directors.
Article 12
The board of directors shall establish strategy committee, audit committee, remuneration and evaluation committee and other special committees who shall be accountable to the board of directors. These special committees shall conduct research on specific matters and provide opinions and suggestions on these matters to the board of directors for reference.
 
Members of the special committees shall be directors of the Company. The majority of the membership of the audit committee, and remuneration and evaluation committee shall consist of the independent directors, who shall also act as conveners. The audit committee shall have at least one independent director who is also an accounting professional.


 
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Article 13
The major responsibilities of the strategy committee shall be to conduct research and put forward proposals on the long-term development strategy and significant investment decisions of the Company.
Article 14
The major responsibilities of the audit committee shall include the following:
 
(1)
to propose the appointment or replacement of the external auditor of the Company;
 
(2)
to oversee the Company’s internal auditing system and its implementation;
 
(3)
to be responsible for the communication between the internal auditing department of the Company and the external auditor;
 
(4)
to examine and approve the Company’s financial information and it disclosure; and
 
(5)
to examine the internal control system of the Company.
Article 15
The major responsibilities of the remuneration and evaluation committee shall include the following:
 
(1)
to research on the criteria for the evaluation of directors and the senior management personnel, to conduct evaluation of them and make necessary suggestions; and
 
(2)
to research on and review the policies and proposals in respect of the remuneration of directors, supervisors, and senior management personnel.
Article 16
The special committees of the board of directors shall formulate detailed working rules, which shall come into effect upon the submission to, and the approval of, the board of directors.


CHAPTER 4  SECRETARY OF THE BOARD OF DIRECTORS

 
Article 17
The Company shall have one secretary of the board of directors. The main duty of the secretary of the board of directors is to promote and improve the Company’s corporate governance standards and properly deal with the matters regarding disclosure of information.
Article 18
The secretary of the board of directors shall perform the main duties as follows:
 
(1)
to organize and arrange for board meetings and shareholders’ general meetings, prepare the meeting materials, handle the meeting related affairs, to be responsible for record of meetings, ensure the accuracy and completeness of records, keep the meeting documents and records and take initiative to keep abreast of the execution of the related resolutions; and submit reports to the board of directors and put forward the proposals for important issues arising during the implementation;
 
(2)
to ensure that the material issues concerning the resolutions of the board of directors be strictly implemented in accordance with the specified procedures; to participate and organize the consultation and analysis on the decision-making matters of the board in accordance with its requirements, and put forward the related opinions and suggestions; to deal with the daily matters of the board of directors and its related committees if authorised;
 
(3)
to be the contact person of the Company with the securities regulatory authorities, be responsible for organisation, preparation and timely submission of related documents as required by the regulatory authorities, and be responsible for related tasks assigned by the regulatory authorities and to organise and complete these tasks, and to ensure that the Company prepares and submits the reports and other documents as required by the regulatory authorities in accordance with law;
 
(4)
to be responsible for the co-ordination and organization of the matters on disclosure of information of the Company, establish and perfect the system concerning information disclosure, participate in all related meetings of the Company concerning information disclosure, and keep abreast of the


 
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important business policies and related information of the Company in a timely manner;
 
(5)
to be responsible for keeping confidential of the sensitive materials concerning the share price of the Company, and formulate effective and enforceable secrecy systems and measures. For the divulgence of the sensitive materials concerning the share price of the Company due to various reasons, he shall take necessary remedial measures, make timely explanation and clarification, and notify the regulatory organizations in the places where the shares of the Company are listed as well as the securities regulatory authority of the State Council;
 
(6)
to be responsible for the co-ordination and organization of market promotion, coordinate the visit and interview, deal with the relationship with investors, maintain the relationship with investors, intermediary organs and news agencies, be responsible for the co-ordination and explanation of the inquiries of the public, and ensure the investors to obtain the information as disclosed by the Company in a timely manner, organize and arrange the promotion and advertising activities of the Company inside and outside the PRC, prepare and work out the summary report on market promotion and other important visiting activities, and report the related matters to the securities regulatory authorities of the State Council; to establish effective communication channels between the Company and its shareholders, including designating a staff and/or establishing (a) special office(s) to keep sufficient and necessary contacts with the shareholders, and to relay, in a timely manner, all the feedbacks including opinions and suggestions of the shareholders to the board of directors or the management team of the Company;
 
(7)
to ensure the proper preparation of the register of shareholders, to be responsible for the management and proper maintenance of the materials concerning register of shareholders, directors’ register, quantity of shares held by majority shareholders and record of shares held by directors, as well as the name list of the beneficiaries of the outstanding debentures of the Company;
 
(8)
to assist directors and the president to practically implement the domestic and foreign laws, regulations, the Articles of Association (and its appendices) and other provisions in discharge of their duties and exercise of their powers; be liable to remind directors and the president timely on becoming aware that the Company passes or may pass resolutions which may breach the relevant regulations, and be entitled to report the related matters to securities regulatory authorities of the State Council and other regulatory authorities according to the facts;
 
(9)
to provide the related information necessary for the supervisory committee of the Company and other approving authorities to discharge their duties and to exercise their powers, assist the investigation on the Chief Financial Officer, directors and the president of the Company concerning the performance of their fiduciary duties;
 
(10)
to ensure the complete organizational documents and records of the Company are kept properly, and the persons who have access to the relevant documents and records of the Company obtain those documents and records in a timely manner; and
 
(11)
to discharge other duties and to exercise other powers as conferred by the board of directors, as well as other duties and powers as required by the listing rules of the stock exchanges on which the Company’s shares are listed.
Article 19
The board of directors of the Company shall have a secretarial office, which shall be a daily working body assisting the secretary of the board of directors in performing its duties.
Article 20
The Company shall formulate regulations in relation to the work of the secretary of the board, and perform the work for disclosure of information and investor relations. The relevant system shall be effective subject to the approval of board of directors.


CHAPTER 5  RULES OF THE BOARD OF DIRECTORS’ MEETING

 
 
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Article 21
The board of directors’ meetings shall be divided into regular meetings and extraordinary meetings according to the regularity of such meetings.
Article 22
The regular meetings of the board of directors shall include the following:
 
(1)
The board meetings approving financial reports of the Company:
   
(i)
The annual results meetings
     
The annual results meetings shall be convened within 120 days from the end of the accounting year of the Company. The directors shall approve the Company’s annual reports and deal with other relevant matters at such meetings. The timing of such meetings shall ensure that the annual reports of the Company will be despatched to the shareholders within the time limit specified by the relevant regulations, the Articles of Association and these Rules, and shall ensure that the preliminary annual financial results of the Company will be announced within the time limit specified by the relevant regulations of the Company, and shall ensure that the AGM will be convened within 180 days from the end of the accounting year of the Company.
   
(ii)
The interim results meetings
     
The interim results meetings shall be convened within 60 days from the end of the first six months of the accounting year of the Company. The directors shall approve the Company’s interim reports and deal with other relevant matters at such meetings.
   
(iii)
The quarterly results meetings
     
The quarterly results meetings shall be held in April and October of each calendar year. The directors shall approve the Company’s first and third quarterly reports at such meetings.
Article 23
The chairman of the board of directors shall approve the issue of a notice convening an extraordinary board of directors’ meeting within 10 days from the date of receipt of such proposal in any one of the following events:
 
(1)
where the chairman of the board of directors considers necessary;
 
(2)
where more than one-third of the directors jointly propose;
 
(3)
where more than one-half of the independent directors jointly propose;
 
(4)
where the supervisory committee proposes;
 
(5)
where the shareholders having 10% or more of the voting rights propose;
 
(6)
(7)
where the president proposes; and
any situation provided by the Articles of Association and these Rules.
Article 24
The board of directors’ meetings shall be divided into meetings at which all directors must be present in person and meetings which the directors may authorise other directors to attend on their behalf, according to whether the directors are physically present at the meetings.
 
The meetings which all directors must be present in person shall be held at least once every six months, and such meetings shall not be held by way of written resolutions or video-telephone meetings.
Article 25
The board of directors’ meetings shall be attended in person, by video conference or by way of written resolution.


 
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All the meetings of the board of directors may be attended in person.
 
The board of directors’ meetings may be held by the way of video-telephone meetings, provided that the attending directors are able to hear clearly the director who speaks at the meeting and communicate amongst themselves. The meetings convened by this way shall be recorded and videotaped. In the event that the attending directors are unable to sign for the resolutions on site, they shall express their opinions orally during the meeting and shall complete the signing procedures as soon as practicable. The verbal voting by a director shall have the same effect as signing in the voting sheet, provided that there is no discrepancy between the opinions expressed by such director in completing signing procedure and the opinions orally expressed by him during the meeting.
 
In the case where a meeting of board of directors can not be attended in person or by video conference, the meeting may be held by written resolutions, in which case the proposed matters for discussion and approval shall be sent in writing form to all of the directors for their approval. Unless otherwise expressed by the directors on such resolutions, signing on the written resolutions by the directors shall be sufficient evidence that they have agreed to the resolutions.


CHAPTER 6  PROCEEDINGS OF THE BOARD OF DIRECTORS’ MEETING

 
Article 26
Putting forward Motions
   
 
The motions of the board of directors’ meetings shall be put forward in the following circumstances:
 
(1)
matters proposed by the directors;
 
 
(2)
matters proposed by the supervisory committee;
 
 
(3)
motions from the special committees of the board of directors;
 
 
(4)
matters proposed by the president;
 
 
(5)
matters to be considered by the shareholders of the subsidiaries controlled or invested by the Company in their shareholders’ meetings (shareholders’ general meetings); and
 
(6)    other situations required by the Articles of Association and these Rules
Article 27
Collecting Motions
 
The secretary of the board of directors shall be responsible for organizing and collecting the draft motions in respect of the matters to be considered at the meeting. Each person who puts forward the relevant motion(s) shall submit the motions and relevant explanatory materials before the date of the meeting. Motions concerning material connected transactions (determined according to the standards promulgated by the relevant regulatory authorities from time to time) which shall be reviewed by board of directors’ meeting or shareholders’ general meeting as required by law shall first be consented by more than one half of all the independent directors. The relevant materials shall be submitted to the chairman of the board of directors after scrutiny by the secretary of the board of directors, who shall also set out the time, place and agenda of the meeting in the materials submitted.
Article 28
Convening the Meetings
   


 
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A board of directors’ meeting shall be convened by the chairman of the board of directors, who shall also approve the issue of the notice convening the meeting, and the vice-chairman shall assist chairman with his work. Where the chairman fails to convene a meeting for no reasons or is unable to convene a meeting for special reasons, the meeting shall be convened by the vice chairman (if the Company has two or more vice chairmen, the vice chairman recommended by more than half of all the directors shall convene the meeting); where vice chairman is unable to convene or fails to convene the meeting, the meeting shall be convened by the director recommended by more than half of all the directors.  The conveners of the meeting shall be responsible for approving the issue of the notice of the meeting.
Article 29
Notice of the Meetings
 
(1)
The notice of a board of directors’ meeting shall be delivered to all directors and supervisors before the date of the meeting. The notice of the meeting shall generally set out the following:
   
i.
the time and place of the meeting;
   
ii.
the duration of the meeting;
   
iii.
the agenda, reasons, subject matters and other relevant particulars of the meeting; and
   
iv.
the date of the issue of the notice.
   
The notice of meeting shall be copied to other non-voting attendees of the meeting.
 
(2)
The board of directors’ meetings shall be noticed according to the following requirements and form:
   
i.
the notice of the meeting may be served on the directors by courier, facsimile, telex, telegraph or mail;
   
ii.
the notice of the board of directors’ meeting shall be delivered to the directors ten days before the date of the meeting; in case of emergency, where an extraordinary meeting of the board needs to be held as soon as possible, notice may be sent by way of telephone communication or other oral methods at any time, provided that the convener shall explain in the meeting and record the same explanation in the minutes of the board meeting; and
   
iii.
the notice shall be written in Chinese and, if necessary, the English version can be attached.
 
Any director or supervisor may waive the right to receive the notice of board meeting sent by way of aforesaid methods.
 
Notice of a meeting shall be deemed to have been given to any director who attends the meeting without protesting against, before or at its commencement, any lack of notice.
Article 30
Communication before the Meetings
 
After the issue of the notice of a meeting and before the date of the meeting, the secretary of the board of the directors shall be responsible for or arrange for the communication and liaison with all directors, especially the external directors, to seek their opinions or suggestions in respect of the motions of the meeting, and shall pass on these opinions or suggestions to the persons who put forward the motions in a timely manner, so as to enable necessary amendments to be made to them. The secretary of the board of directors shall also, in a timely manner, arrange for the provision of the supplemental materials which are required for the directors to make decisions on the motions of the meeting, including the background information relating to the subject of the meeting and other information which will assist the directors in making scientific, immediate and prudent decisions.


 
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Where more than one-fourth of the directors or more than two external directors are of the opinion that the materials provided are insufficient or the reasoning is unclear, they may make a joint proposal concerning the postponement of holding of the board meeting or the postponement of discussions on the part of the issues put forward by the board of directors, and the board of directors shall adopt such a proposal. Unless such a proposal is put forward during the meeting, the secretary of the board of directors shall serve a notice on the directors, supervisors and other personnel attending the meeting upon receiving a written request by directors in joint names concerning the postponement of holding of the meeting or the postponement of discussions on part of the issues put forward by the board of directors.
Article 31
Attendance of the Meetings
 
Meetings of the board shall be held only if more than half of the directors are present.
 
Directors shall attend the meetings of the board of directors in person. Where a director is unable to attend a meeting for any reason, he may by a written power of attorney appoint another director to attend the meeting on his behalf (where an independent director is unable to attend in person, he shall appoint another independent director to attend on his behalf). The power of attorney shall set out the name of the attorney, the particulars and the scope of authorisation, duration of the validity of such authorisation, and shall be signed or sealed by the principal.
 
The board of directors’ meeting shall be chaired by the chairman of the board of directors, the vice chairman shall assist the chairman with his work; where the chairman fails to chair a meeting for no reasons or is unable to chair a meeting for special reasons, the meeting shall be chaired by the vice chairman (if the Company has two or more vice chairmen, the vice chairman recommended by more than half of all the directors shall chair the meeting), where vice chairman is unable to chair or fails to chair the meeting, the meeting shall be chaired by the director recommended by more than half of all the directors.
Article 32
Examining the Motions
 
The chairman of the meeting shall declare the commencement of the meeting as scheduled. The directors in presence shall firstly reach an agreement on the agenda of the meeting upon its commencement. Where more than one-fourth of the directors or more than two external directors are of the opinion that the materials of the meeting are insufficient or the reasoning is unclear, they may make a joint proposal concerning the postponement of holding of the board meeting or the postponement of discussions on the part of the issues put forward by the board of directors, and the chairman of the meeting shall adopt such a proposal.
 
When an agreement is reached in respect of the agenda of the meeting by the directors present at the meeting, the chairman of the meeting shall direct the motions to be examined one by one. Persons who put forward the motions or their attorneys shall first report to the board of directors their work or make statements in respect of the motions.
 
In reviewing the relevant proposals, motions and reports, in order to understand the main points and the background information of the motions in detail, the board of directors’ meeting may require the heads of the departments which are responsible for handling the motions to attend the meeting, to listen to and make inquiries of the relevant statements made at the meeting, so that proper decisions can be made at the meeting. If, in the course of the meeting, any motion examined is found to be unclear or infeasible, the board of directors shall require the departments which are responsible for handling the motions to give a statement at the meeting, and the motions can be returned to such departments for re-handling and their examination and approval shall be postponed.
 
The independent directors shall give their independent opinions to the board of directors on the following matters:
 
(1)
the nomination, appointment and removal of the directors;
 
(2)
the appointment and dismissal of the senior management personnel;


 
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(3)
the remuneration of the directors and senior management personnel;
 
(4)
the loans made by the Company to its shareholders, the person in actual control of the Company or the associated enterprises of the Company or other money transfer between them, the amounts of which are equivalent to or exceed the relevant thresholds of the Company’s material connected transactions (which shall be determined in accordance with the standards promulgated from time to time by the relevant regulatory authorities) which must be examined by the board of directors or shareholders’ general meeting according to law, and whether the Company has taken effective measures to recover such debts;
 
(5)
any matter which the independent shareholders consider to be detrimental to the interests of minority shareholders; and
 
( (6)   any matter required by law, administrative rules, regulations of the competent authorities, the Articles of Association and these Rules.
 
An independent director shall give his opinion explicitly on the above-mentioned matters in the following manner:
 
(1)
consent;
 
 
(2)
opinion reserved and reasons;
 
 
(3)
objection and its reasons;
 
 
(4)
failure to issue opinion and its causes.
 
Article 33
Voting on the Motions
 
In considering the motions at the board of directors’ meeting, all attending directors shall vote for, against or abstain from voting on such motions.
 
The directors who are acting as proxies of others shall exercise the rights within the authorisation.
 
Where a director is not present at a board of directors’ meeting and fails to appoint a proxy to act on his behalf, such director shall be deemed to have waived his rights to vote at that meeting.
 
In reaching resolutions by the board of directors, except the following matters the resolutions of which shall be passed by the consent of more than two-thirds of all the directors, the other matters shall be passed by the consent of more than one-half of all the directors (provided that the external guarantee should also be approved by more than two thirds of the presenting directors):
 
(1)
to formulate proposals for the debts and financial policies of the Company, the increase or reduction of the registered capital of the Company and the issuance of debentures and securities of any kind (including but without limitation to the debentures of the Company) and the listing or repurchase of the shares of the Company;
 
(2)
to formulate plans for significant acquisition or disposal proposals, the merger, division, change of corporate form or dissolution of the Company; and
 
(3)
to formulate proposals for any amendment to the Articles of Association and its schedules.
 
The resolutions of the board of directors may be decided on a poll or show of hands. Each director shall have one vote. Where the votes for and against a resolution are equal, the chairman of the board of directors is entitled to one more vote.


 
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Article 34
If a director or his associate (as defined in the Rules Governing the Listing of Securities of the Hong Kong Stock Exchange Limited) has a material interest in any contract, transaction, arrangement or other matters that requires the approval of the board of directors, the relevant director shall not vote for the relevant matter at the meeting of the board of directors, and shall not be counted in the quorum of the meeting.
Article 35
Where directors have connected relations with the enterprises mentioned in the matters to be decided by the board of directors, the directors shall neither vote on this motion nor act as proxy for other directors to exercise voting power. The board meeting may not be convened unless it has more than half of the non-connected directors presenting at the meeting and the decisions made by the board of directors requires the approval of half of the directors without connected relations. Where the present non-connected directors are less than three, the relevant motions shall be submitted directly to the shareholders' general meeting for examination.
Article 36
Liability of Directors in respect of Resolutions of the Board of Directors’ Meetings
 
The directors shall be responsible for the resolutions passed at the meetings of the board of directors. Any director participating in voting on a resolution which contravenes the laws, administrative regulations, the Articles of Association and its appendices or shareholders' general meeting resolutions, thus causing serious damages to the Company shall be directly liable (including the compensation of damages) for all the loss incurred by the Company as a result. A director who votes against the resolution, and who has been proved as having expressed dissenting opinions on the resolution and such opinions are recorded in the minutes of the meeting can be exempt from liability.
Article 37
Resolutions of the Meeting
 
Generally the board of directors’ meeting shall resolve on all the matters examined at the meeting.
 
A resolution on the Company’s connected transaction shall not be valid until it is consented by all independent directors.
 
The independent directors’ opinions shall be set out in the resolutions of the board of directors’ meetings.
Article 38
Minutes of the Meetings
 
Minutes of the board of directors’ meeting are official proof of the resolutions on the matters examined at the meeting. Detailed minutes in respect of the matters examined at the meeting shall be recorded by the board of directors’ meeting. The minutes of the board of directors’ meeting shall state the following:
 
(1)
the date, place, names of the conveners and chairman of the meeting;
 
(2)
the names of the attending directors and the names of appointing directors who have gone through proxy procedure and their proxies;
 
(3)
the agenda of the meeting;
 
(4)
the essential points of the directors’ presentations (for the written resolution meeting, the version containing the directors’ feedbacks in writing shall prevail);
 
(5)
the voting methods and result for each proposal (the result of the voting shall set out the respective number of assenting or dissenting votes or votes that were waived); and
 
(6)
the directors’ signature.
 


 
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The secretary of the board of directors shall make careful arrangement to record and compile the matters examined at the meeting. The minutes of each meeting shall be provided to all the attending directors for review without delay. Those directors who wish to make supplementary revision on the minutes shall report their opinions on the revision to the chairman of the board of directors in written form within one week after the receipts of the minutes of the board meeting. After the minutes of board meeting are finally determined, the attending directors, the secretary of the board of directors and the minute-taking officer shall sign the minutes of the board meeting. The secretary of the board of directors shall deliver the complete duplicate of the minutes to all directors without delay. The minutes of the board meeting, being an important document, shall be appropriately kept at the residence of the Company for at least 10 years.


CHAPTER 7  DISCLOSURE OF INFORMATION RELATING TO THE BOARD OF DIRECTORS’ MEETING

 
Article 39
The board of directors of the Company shall strictly comply with the requirements of the regulatory authorities and the stock exchanges on which the Company’s shares are listed in relation to the disclosure of information. It shall ensure that matters examined or resolutions passed at the board of directors’ meeting which are discloseable are disclosed completely, accurately and in a timely manner. Information relating to significant matters of the Company must be reported to the stock exchanges on which the Company’s shares are listed at the earliest opportunity, and shall be submitted to relevant regulatory authorities for filing.
Article 40
Where a matter which requires the independent opinions of the independent directors is discloseable, the Company shall disclose such opinions in the relevant announcement. If the independent directors are of divergent views and cannot reach any consensus, the board of directors shall disclose the respective opinions of each of the independent directors.
Article 41
Regarding confidential information, the attendees of the meeting must keep such information confidential. Punishment shall be imposed on those who are in breach of this duty.


CHAPTER 8  IMPLEMENTATION OF THE RESOLUTIONS OF THE BOARD OF DIRECTORS’ MEETING AND FEEDBACKS

 
Article 42
The following matters shall not be implemented until they are examined by the board of directors and approved by the shareholders' general meeting :
 
(1)
the formulation of the Company’s annual budget and final accounts;
 
(2)
the formulation of Company’s profit distribution proposals and loss recovery proposals;
 
(3)
the increase or reduction of the registered capital of the Company and the issue of debentures or other securities, as well as the listing or repurchase of the shares of the Company;
 
(4)
the formulation of plans for merger, division, change of corporate form or dissolution of the Company;
 
(5)
the formulation of proposals for any amendment to the Articles of Associations and its appendices;
 
(6)
proposal to be submitted to the shareholders in general meeting for the appointment or replacement of the accounting firm auditing the accounts of the Company; and
 
( (7)  any matters required by laws, administrative rules, regulations of the competent authorities, the Articles of Association and its appendices .


 
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Article 43
After resolutions are passed at a board of directors’ meeting, the president shall implement the resolutions which fall within the scope of the authority of the president, or which the board of directors authorises the president to handle, and shall report the status of implementation to the board of directors.
Article 44
The chairman of the board shall have the power to, or authorize the vice-chairman or the directors to, urge, examine and supervise the implementation of the resolutions of the meeting.
Article 45
At each board of directors’ meeting, the president shall deliver a written report to the meeting in relation to the status of implementation of the matters which, according to the resolutions of the previous meeting, must be implemented.
Article 46
Under the direction of the board of directors and the chairman, the secretary of the board of directors shall take initiative to obtain information in respect of the progress on the implementation of the resolutions, and shall, in a timely manner, report to and submit proposals to the board of directors and the chairman in relation to the important issues in the implementation process.


CHAPTER 9  SUPPLEMENTAL ARTICLES

 
Article 47
Where these Rules fail to comply with relevant laws, regulations ,other regulatory documents and regulatory provisions in the place where the Company's shares are listed as promulgated from time to time, these laws, regulations ,other regulatory documents and regulatory provisions in the place where the Company's shares are listed shall prevail.
Article 48
Upon the consensus of more than two thirds of all directors of the Company, the formulation of and the amendment to these Rules shall come into effect if they are adopted by the shareholders’ general meeting by a special resolution and approved by the relevant authorities.
Article 49
These Rules shall be interpreted by the board of directors.


 
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Appendix III
 

Rules and Procedures
for
Supervisory Committee’s Meetings
of
China Petroleum & Chemical Corporation




Revised at the Annual General Meeting for the Year 2008 on May 22, 2009
Approved by the SASAC on September 2, 2009

 
 
 
 
 

CHAPTER 1  GENERAL PROVISIONS

 
Article 1
In order to further regulate the discussion model and the voting procedures of the supervisory committee of China Petroleum & Chemical Corporation (the “Company”), and to perfect the corporate governance structure of Company, these Rules are formulated according to the “Company Law of the People’s Republic of China” (the “Company law”), the "Securities Laws of the People's Republic of China", “Mandatory Provisions for the Articles of Association of Companies to be Listed Overseas”, “Guidelines for the Articles of Association of Listed Companies” and “Standards for the Governance of Listed Companies” and other relevant laws and regulations regulating listed companies inside and outside the PRC and the Articles of Association of China Petroleum & Chemical Corporation (“Articles of Association”).
   
Article 2
The supervisory committee is accountable to the shareholders’ general meetings. It shall be responsible for supervising the financial affairs of the Company and the lawfulness of the performance of their duties by the directors, and the senior management personnel so as to safeguard the legitimate interests of the Company and its shareholders.
   
Article 3
The Company shall take measures to ensure the supervisors’ rights to know the Company’s affairs, and provide them with necessary information and materials in a timely manner, so as to enable the supervisory committee to conduct effective supervision, inspection and evaluation of the financial status and management situation of the Company.
   
 
The president shall report to the supervisory committee the entering into and the implementation material contracts by the Company, the use of capitals and the profitability of the Company upon the request of the supervisory committee. The president shall ensure the truthfulness of such report.


CHAPTER 2                                 FUNCTIONS AND POWERS OF THE SUPERVISORY COMMITTEE


Article 4
The supervisory committee shall exercise the following functions and powers in accordance with law:
   
 
(i)
to review the Company’s financial position;
     
 
(ii)
to supervise the directors, and the senior management personnel in order to ensure that they do not act in contravention of any law, regulation or the Articles of Association (and its appendices)in performing their duties, presenting suggestions regarding the removal of directors and senior management personnel who violates laws, administrative rules, the Articles of Association or the resolutions made by the shareholders' general meeting;
     
 
(iii)
to demand the directors, and the senior management personnel who acts in a manner which is harmful to the Company’s interest to rectify such acts;
     
 
(iv)
to check and inspect the financial information such as the financial report, business report and plans for distribution of profits to be submitted by the board of directors to the shareholders’ general meetings and to authorize, in the Company’s name, certified public accountants and practicing auditors to assist in reviewing such information should any doubt arise in respect thereof, to review and issue opinions in writing on the periodical reports of the Company prepared by the board of directors;
     
     
 
(v)
to propose to convene an extraordinary general meeting and where the board of directors fails to perform the duties in relation to convene or preside a shareholders’ meeting as required by the Company Law, to convene and preside the shareholders meeting;
 
     


 
1
 


 
(vi)
To put forward motions at the shareholders’ general meeting;
     
 
(vii)
to propose to convene extraordinary board meetings;
     
 
(viii)
to represent the Company in negotiations with or in bringing actions against a director or senior management personnel;
     
 
(ix)
to investigate into any abnormalities in operation of the Company; if necessary, to engage accounting firms, law firms and other professional institutions to assist its work, and the expenses shall be borne by the Company;
     
 
(x)
other duties and powers provided for in the Articles of Association and these Rules.
 
The supervisors shall attend meetings of the board of directors, and may enquire or advise on matters in the resolutions of the board of directors.
     
     
Article 5
All reasonable fees incurred in respect of the employment of professionals such as lawyers, certified public accountants or practicing auditors which are required by the supervisory committee in the exercise of its functions and powers shall be borne by the Company.
     
 
The expenses incurred by the supervisors in attending the supervisors’ meeting shall be borne by the Company. These expenses shall include the transport fares incurred by the supervisors in travelling from their own addresses to the places of the meetings, and expenses for the accommodation and meals during the meeting.
   
   
Article 6
The chairman of the supervisory committee shall exercise the following functions and powers:
     
 
(i)
to convene and chair the meetings of the supervisory committee;
     
 
(ii)
to organise and carry out the duties of the supervisory committee;
     
 
(iii)
to review and approve, and sign the reports of the supervisory committee and other important documents;
     
 
(iv)
to represent the supervisory committee to report to the shareholders’ general meetings;
     
 
(v)
other duties that shall be performed by him in accordance with law or the Articles of Association and these Rules.
     
     
Article 7
In performing its duties, the supervisory committee may report to the board of directors and the shareholders’ general meetings the breach of laws and rules relating to the Company’s financial affairs and the acts of the directors, and the senior management personnel which are in violation of laws, regulations or the Articles of Association and its appendices and these Rules. It may also directly report the same to the securities regulatory authorities of the State Council and other relevant authorities.
   
Article 8
A supervisor shall abide by the laws, administrative regulations, the Articles of Association and these Rules, and shall perform his supervisory duties truthfully, faithfully and diligently.

 
CHAPTER 3  COMPOSITION OF THE SUPERVISORY COMMITTEE AND ITS ADMINISTRATIVE OFFICE

 
 
2
 


Article 9
The supervisory committee shall compose of 10 supervisors. Of which, 6 shall be assumed by non-representatives of the employees; and 4 of them shall be representatives of the employees of the Company. The supervisory committee shall have one chairman and may have deputy chairman(s).
   
Article 10
Each supervisor shall serve for a term of 3 years, which term is renewable upon re-election and re-appointment. Within the supervisory committee, the supervisors assumed by non-representatives of the employees shall be elected and dismissed in the shareholders' meeting; supervisors assumed by representatives of employees shall be elected or dismissed by the employees of the Company through the employee representatives' meeting, employees' meeting or other democratic ways.
   
Article 11
Except for complying with the eligibility requirements as set out in the Company Law and the Articles of Association, the supervisors shall possess professional knowledge and work experience in the field such as  law or accounting.
   
   
Article 12
The supervisory committee shall have an administrative office responsible for handling daily affairs of the supervisory committee.

 
CHAPTER 4  RULES OF THE SUPERVISORS’ MEETINGS

 
Article 13
The supervisors’ meetings shall be divided into regular meetings and extraordinary meetings according to the regularity of such meetings.
   
Article 14
The regular meetings shall be convened at least four times each year, including the meeting examining the annual results, meeting approving interim results and meetings approving quarterly report.
     
 
The meeting examining annual results shall be convened within 120 days from the end of the accounting year of the Company, during which meeting the supervisors shall mainly hear and consider the Company’s annual reports, annual financial statements and transact other relevant matters.
   
 
The meeting examining interim results shall be convened within 60 days from the end of the first 6 months of the accounting year of the Company, during which meeting the supervisors shall hear and consider the Company’s interim reports, the interim financial statements and transact other relevant matters.
     
 
The meeting examining quarterly reports shall be convened respectively within 30 days from the end of the first 3 months and the end of the first 9 months of the accounting year of the Company, during which meetings the supervisors shall hear and consider the Company’s quarterly reports and transact other relevant matters.
 
Article 15
An extraordinary supervisors’ meeting shall be convened in any one of the following events:
   
 
(i)
Where the chairman of the supervisory committee considers necessary;
     
 
(ii)
where the supervisor(s) propose;
     
 
(iii)
where the Company has suffered or is suffering loss of substantial assets which has damaged the shareholders’ interests;
     
 
(iv)
where the directors, and senior management personnel act in a way which is in contravention of laws, regulations or the Articles of Association which has seriously damaged the Company’s interests.
     
 
(v)
where required by laws, administrative rules, regulations of competent authorities and the Articles of Association.
     
Article 16
The supervisors’ meetings may be attended in person, by video conference or by way of written resolutions.
     
 
All the meetings of the supervisory committee may be attended in person.
     


 
3
 


 
The meetings of the supervisory committee may be held by video conference provided that the attending supervisors are able to hear clearly the supervisor who speaks at the meeting and communicate amongst themselves. In the event that the attending supervisors are unable to sign for the resolutions on site, they shall adopt such resolutions by oral approval during the meeting and shall complete the signing procedures as soon as practicable.
     
 
Where a meeting can not be attended in person or by video conference for a reason, the supervisors’ meeting may be held by way of written resolutions, in which case details of the motions to be discussed and examined at the meeting, which are in the written form, shall be despatched to the supervisors for decision. Unless otherwise required according to the resolutions of the supervisors, signature on the written resolutions by the supervisors shall be sufficient evidence that they have agreed to the resolutions.
   
Article 17
A supervisors’ meeting shall be validly convened by the presence of more than two-thirds of the supervisors.
     
 
The supervisors shall attend the supervisors’ meetings in person. If for any reason a supervisor is unable to attend the meeting, he shall appoint another supervisor to act as his proxy to attend the meeting and exercise his functions and powers by way of a proxy letter. The proxy letter shall state the name of the proxy and  the matters, authority and the term under such proxy. It shall also be signed by the principal or affix the seal of the principal.
     


CHAPTER 5  PROCEEDINGS OF THE SUPERVISORS’ MEETING


Article 18
The supervisory committee shall put forward motions according to the matters to be examined by the board of directors and matters proposed by the supervisors.
   
Article 19
The administrative office of the supervisory committee shall be responsible for gathering the matters to be examined by the board of directors and the matters proposed by the supervisors, and shall submit these matters to the chairman of the supervisory committee in time. The chairman of the supervisory committee shall determine whether to submit these matters to the supervisory committee for review according to the importance and urgency of these matters.
   
Article 20
The chairman of the supervisory committee shall be responsible for convening the supervisors’ meeting, and shall sign the notice of the meeting. Such notice shall state the date, place, duration, agenda, reasons and subject matters of the meeting and other relevant information, as well as the date of the issuance of such notice.
   
 
The notice of a supervisors’ meeting shall be delivered to the supervisors ten days before the date of the meeting. Any supervisor may waive his right to demand the notice of the meeting.
   
 
The notice of the meeting may be served on the supervisors by courier, facsimile, telegraph or mail.
   
Article 21
The notice of the supervisory committee meeting shall include the followings:
   
 
(i)   date, place and time period of the meeting;
   
 
(ii)   reasons and agendas; and
   
 
(iii)  date of issuance of the notice.
   
Article 22
After the issue of the notice of a meeting and before the date of the meeting, the administrative office of the supervisory committee shall be responsible for, and shall communicate and liaise with all supervisors, to seek their opinions or suggestions in respect of the motions of the meeting, so as to enable necessary amendments to be made to them.
   
Article 23
The supervisors’ meeting shall be chaired by the chairman of the committee. If the chairman fails to chair the meeting, the deputy chairman of the supervisory committee shall chair the meetings; if the deputy


 
4
 


 
chairman fails to chair the meeting, over half of the supervisors may jointly recommend a supervisor who shall chair the meetings.
   
Article 24
The chairman of the meeting shall declare the commencement of the meeting as scheduled. The supervisors in presence shall reach an agreement on the agenda of the meeting thereafter.
   
 
Where more than one-fourth of the supervisors or two external supervisors are of the opinion that the information in respect of one specific motion is insufficient to allow judgment to be made, or the motion is not convincing, they may jointly propose to postpone the examination of such a motion, and the chairman of the meeting shall adopt their proposal.
   
 
Where an agreement is reached in respect of the agenda of the meeting by the supervisors present at the meeting, the chairman of the meeting shall direct the motions to be examined one by one.
   
Article 25
In reviewing the relevant motions and reports, the supervisors’ meeting may require the directors, and senior management personnel and the internal and external auditors of the Company to attend the meeting as non-voting members to give necessary explanations to the relevant matters, and to answer the questions for which the supervisory committee is concerned.
   
Article 26
In reviewing the motions at supervisors’ meetings, each attending supervisors shall vote for, against or abstain from voting such motion.
   
 
The supervisors who are acting as proxies of others shall exercise the rights of voting under the proxy letter.
   
 
Where a supervisor is not present at a supervisors’ meeting and fails to appoint a proxy to act on his behalf, such supervisor shall be deemed to have waived his rights to vote at the meeting.
   
Article 27
Generally resolutions shall be made on the matters examined at the supervisors’ meeting. Such resolutions shall be decided on a poll or show of hands, and each supervisor enjoys one vote. No resolution shall be effective unless approved by more than two-thirds of all the supervisors.
   
Article 28
Detailed minutes of a supervisors’ meeting shall be recorded by the supervisors’ meeting as official proof of the resolutions on the matters examined at the meeting.
   
 
The minutes of the meeting shall state the date and place of the meeting, name of the chairman of the meeting, names of the supervisors attending the meeting and names of the principals and proxies who have fulfilled the necessary procedures for attending the meeting, agenda of the meeting, main points of each supervisor’s speech, the methods of voting for each matter to be resolved on and the voting result (the result shall state the number of votes for approval or objection to the motion or abstention).
   
 
The administrative office of the supervisory committee shall arrange for the matters examined at the meeting to be recorded and organized. The minutes of each meeting shall be provided to the attending supervisors for review without delay. Supervisors present at the meeting and the minutes-taker shall sign the minutes of that meeting. A supervisor shall have the right to request an explanatory note be made on the minutes for his speech at the meeting.
   
Article 29
Minutes of a supervisors’ meeting and the resolutions passed at such meeting, being important documents, shall be properly kept by the administrative office of the supervisory committee at the Company’s residence for no less than 10 years.

 
CHAPTER 6  DISCLOSURE OF INFORMATION RELATING TO THE SUPERVISORS’ MEETING

 
Article 30
The Company shall comply with the requirements of the regulatory authorities and the stock exchanges on which the Company’s shares are listed in relation to the disclosure of information. It shall ensure that matters examined or resolutions passed at supervisors’ meetings which are required to disclose are disclosed accurately and in a timely manner.


 
5
 


Article 31
Regarding confidential information, the persons who possess relevant information must keep such information confidential. Punishment shall be imposed on those who are in breach of this duty.


CHAPTER 7  IMPLEMENTATION OF THE RESOLUTIONS OF THE SUPERVISORS’ MEETING AND FEEDBACKS


Article 32
The supervisory committee may pass resolutions and make proposals to the board of directors and the shareholders’ general meetings. These resolutions and proposals shall be implemented by the relevant departments of the Company under the direction of the board of directors.
   
Article 33
The administrative office of the supervisory committee shall, under the direction of the committee and its chairman, take initiative to obtain the information in respect of the implementation of the relevant resolutions, and shall report and make proposals to the supervisory committee and the chairman of the committee.
   
Article 34
In respect of resolutions concerning the proposals to convene an extraordinary board meeting or shareholders’ extraordinary general meeting, or the submission of motions to the shareholders' meeting are passed by the supervisory committee, the supervisory committee shall, within a specified period, submit to the board of directors or other conveners the subjects of such meetings and the detailed motions in writing, and shall ensure that the contents of the motions comply with relevant laws, regulations and the Articles of Association and its appendices.

 
CHAPTER 8  SUPPLEMENTARY ARTICLES


Article 35
These Rules shall be interpreted by the supervisory committee.
   
Article 36
Where these Rules conflict with relevant laws, administrative regulations and other regulatory documents or regulatory provisions where the Company's shares are listed as promulgated from time to time, these laws, administrative regulations and other regulatory documents or regulatory provisions in the place where the Company's shares are listed shall prevail.
 
 
 
 6

 
Exhibit 4.21
 
 
Continuing Connected Transactions Second Supplemental Agreement
 
 
This Agreement is made as of August 21, 2009, in Beijing, by and between ：

Party A:
China Petrochemical Corporation (“Sinopec Group Company”), a state-owned enterprise organized and validly existing under the Chinese laws, duly authorized to represent its subsidiaries and associates; and
Party B:
China Petroleum & Chemical Corporation (“Sinopec Corp.”), a joint stock company organized and validly existing under the Chinese laws, duly authorized to represent its subsidiaries and associates.

WHEREAS ：
 
1.
Party A, the controlling shareholder of Party B, has entered into certain mutual supply agreement, land use rights leasing agreement, community services agreement, safety production insurance fund documents, property leasing agreement, intellectual property license agreements and agency agreement (collectively, the “Continuing Connected Transaction Agreements”) with Party B on June 3, 2000; and
2.
The Parties have entered into a Continuing Connected Transaction First Supplemental Agreement on March 31, 2006, whereby certain terms and conditions of the Continuing Connected Transaction Agreements are amended.

NOW, THEREFORE, the Parties agree as follows:

1.
DEFINITIONS
   
 
Unless otherwise defined in the context, in this Agreement (including recitals hereof),

 
“associates”
 
has the meaning ascribed to it in the HK Listing Rules;


 
1
 


 
“HK Listing Rules”
 
means the Rules Governing the Listing of Securities on the Stock Exchange;
       
 
“Stock Exchange”
 
means The Stock Exchange of Hong Kong Limited;
       
 
“Mutual Supply Agreement”
 
means the mutual supply agreement dated June 3, 2000 (as amended) regarding the provision of a range of products and services from time to time;
       
 
“Land Use Rights Leasing Agreement”
 
means the land use rights leasing agreement dated June 3, 2000 (as amended) regarding the leasing of certain land use rights between the Parties;
       
 
“Land Use Rights Leasing (Additional) Agreement”
 
means the land use rights leasing agreement dated August 22, 2003 regarding the leasing of certain land use rights between the Parties;
       
 
“Community Services Agreement”
 
means the community services agreement dated June 3, 2000 (as amended) regarding the provision of certain cultural, educational, hygiene and community services between the Parties;
       
 
“SPI Fund Document”
 
means the document jointly issued in 1997 by the Ministry of Finance and the ministerial level enterprise of the Sinopec Group Company and its associates before the industry reorganization in 1998 (Cai Gong Zi [1997] No. 268) relating to the payment of insurance premium by Sinopec Corp. to Sinopec Group Company.
       
 
“Properties Leasing Agreement”
 
means the properties leasing agreement dated June 3, 2000 (as amended) regarding the leasing of certain properties between the Parties;
       
 
“Intellectual Property License Agreements”
 
means the Trademarks License Agreement, the Computer Software License Agreement and the


 
2
 


     
Patents and Proprietary Technology License Agreement;
       
 
“ Computer Software License Agreement ”
 
means the computer software license agreement dated June 3, 2000 between the Parties;
       
 
“Patents and Proprietary Technology License Agreement”
 
means the patents and proprietary technology license agreement dated June 3, 2000 between the Parties;
       
 
“ Trademarks License Agreement”
 
means the trademarks license agreement dated June 3, 2000 between the Parties; and
       
 
“Agency Agreement”
 
means the agency agreement dated June 3, 2000 (as amended) between the Parties.

2.
Conditions and effective date
   
2.1
Subject to Clause 2.2, this Agreement shall be effective upon signature and affixture of seals of the Parties.
   
2.2
Sections 3 (Supplement to Mutual Supply Agreement), 4 (Supplement to Community Services Agreement) and 5 (Supplement to Intellectual Property  License Agreements) shall not become effective without approval from independent shareholders of Party B required under the HK Listing Rules in connection with the transactions contemplated thereunder, and shall terminate automatically upon failure to secure such approval on or before October 30, 2009, upon which the duties of the Parties under these sections shall terminate accordingly (without regards to any breach liability arising prior to such termination).
   
3.
Supplement to Mutual Supply Agreement
   
 
It is agreed that on and from January 1, 2010, the term provided under Clause 6.4 of the Mutual Supply Agreement shall be amended to “until December 31, 2012”.
   
4.
Supplement to Community Services Agreement
   
 
It is agreed that on and from January 1, 2010, the term provided under Clause 6.4 of the Community Services Agreement shall be amended to “until December 31, 2012”.
   
5.
Supplement to Intellectual Property License Agreements
   
 
It is agreed that on and from January 1, 2010, the term provided under Clause 6.4 of each of the Intellectual Property License Agreements shall be amended to “until December 31, 2019”.
   
6.
Representations and warranties
 
 
 
3
 
 
 
6.1
Party A represents and warrants to Party B that:
   
 
6.1.1
Party A is an enterprise duly organized with valid business license.
     
 
6.1.2
Party A has been and is in compliance with laws and regulations in connection with its business operations.
     
 
6.1.3
Party A has obtained all government approvals, if applicable, and corporate authorities necessary for its legal representative to sign this Agreement, and is bound by this Agreement upon its signature.
     
 
6.1.4
Execution, delivery and performance of this Agreement is in no breach of any agreement to which Party A is a party or the articles of association of Party A.
     
6.2
Party B represents and warrants to Party A that:
   
 
6.2.1
Party B is a joint stock company duly organized with valid business license.
     
 
6.2.2
Party B has been and is in compliance with laws and regulations in connection with its business operations.
     
 
6.2.3
Except for the approval of independent directors provided hereunder, Party B has obtained all corporate authorities necessary for its legal representative to sign this Agreement, and is bound by this Agreement upon its signature.
     
 
6.2.4
Execution, delivery and performance of this Agreement is in no breach of any agreement to which Party B is a party or the articles of association of Party B.
   
7.
Governing laws and dispute resolution
   
7.1
This Agreement shall be governed by and interpreted in accordance with the laws of the People’s Republic of China.
   
7.2
Any dispute arising from or in connection with Agreement shall be resolved through negotiations.  If negotiations fail, any Party may submit such dispute to Beijing Arbitration Commission for arbitration in accordance with its rules then effect.  The arbitral award shall be final and binding the Parties.


(Signatures)


China Petrochemical Corporation
/s/ Su Shulin


China Petroleum & Chemical Corporation
/s/ Wang Tianpu
 
  4
 
 

 
Exhibit 4.22
 
 
Memorandum on Adjustment of Rent of Land Use Rights

Pursuant to the Notice on Adjustment of Rent of Land Use Rights (zhongguoshihuacaichan [2006] No. 22) in 2006, the Memorandum on Adjustment of Rent of Land Use Rights , dated March 31, 2006, and the Memorandum on Adjustment of Rent of Land Use Rights , dated July 28, 2008, each made by and between China Petrochemical Corporation ("Sinopec Group Company") and China Petroleum & Chemical Corporation ("Sinopec"), it is acknowledged that the total area of land leased from Sinopec Group Company by Sinopec is 416,713,522.44 square meters and the annual rent payable for the leased land is RMB 4,234,427,722.13.  Sinopec Group Company and Sinopec, after negotiations, hereby agree to adjust the rent of land use rights payable for 2010 as follows:

 
I.
 
Reduce the land leased by Sinopec from Sinopec Group Company by 452,268.09 square meters, as returned by Sinopec, and reduce rent of land use rights payable for the returned land by RMB 8,873,482.36.
       
 
II.
 
Increase the land leased by Sinopec from Sinopec Group Company by 11,526.55 square meters, and increase the rent of land use rights by RMB 226,150.91 (calculated based on the rent standard for land use rights in 2008).
       
 
III.
 
Increase the rent of land use rights payable for 2010 by RMB 2,492,540,417.21, and the rent of land use rights payable for 2010 is accordingly increased to RMB 6,726,968,139.34 from RMB 4,234,427,722.13.

After the adjustment, the total area of land leased by Sinopec is 416,272,780.90 square meters and the total rent of land use rights payable to Sinopec Group Company by Sinopec is RMB 6,726,968,139.34 (with an annual average rent of land use rights of RMB 16.16 per square meter).

China Petrochemical Corporation
 
/s/ Su Shulin
 
August 21, 2009
 

 
China Petroleum & Chemical Corporation
 
/s/ Wang Tianpu
 
August 21, 2009
 
1

Exhibit 8

LIST OF SUBSIDIARIES

A list of China Petroleum & Chemical Corporation's principal subsidiaries is provided in Note 34 to the consolidated financial statements included in this annual report following Item 19.
Exhibit 12.1
CERTIFICATIONS
 
I, Su Shulin, certify that:
 
1.
I have reviewed this annual report on Form 20-F of China Petroleum & Chemical Corporation;
   
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
   
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
   
4.
The company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
   
 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     
 
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
     
 
(c)
Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     
 
(d)
Disclosed in this report any change in the company's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting; and
     
5.
The company's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company's auditors and the audit committee of company's board of directors (or persons performing the equivalent function):
   
 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company's ability to record, process, summarize and report financial information; and
     
 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal control over financial reporting.

 
Date: April 30, 2010
 
 
By: /s/ Su Shulin
 
Su Shulin, Chairman

 
 
Exhibit 12.2
I, Wang Tianpu, certify that:
 
1.
I have reviewed this annual report on Form 20-F of China Petroleum & Chemical Corporation;
   
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
   
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
   
4.
The company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
   
 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     
 
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
     
 
(c)
Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     
 
(d)
Disclosed in this report any change in the company's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting; and
     
5.
The company's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company's auditors and the audit committee of company's board of directors (or persons performing the equivalent function):
   
 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company's ability to record, process, summarize and report financial information; and
     
 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal control over financial reporting.

 
Date: April 30, 2010
 
 
By: /s/ Wang Tianpu
 
Wang Tianpu, Vice Chairman and President
 
 
Exhibit 12.3
I, Wang Xinhua, certify that:
 
1.
I have reviewed this annual report on Form 20-F of China Petroleum & Chemical Corporation;
   
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
   
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
   
4.
The company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
   
 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     
 
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
     
 
(c)
Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     
 
(d)
Disclosed in this report any change in the company's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting; and
     
5.
The company's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company's auditors and the audit committee of company's board of directors (or persons performing the equivalent function):
   
 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company's ability to record, process, summarize and report financial information; and
     
 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal control over financial reporting.
     
 
Date: April 30, 2010
 
 
By: /s/ Wang Xinhua
 
Wang Xinhua, Chief Financial Officer

Exhibit 13
Certification of CEO and CFO Pursuant to
 
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
and Pursuant to Rule 13a-14(b)
 
under the Securities Exchange Act of 1934, as amended (the "Exchange Act")
 
In connection with the Annual Report on Form 20-F of China Petroleum & Chemical Corporation (the "Company") for the year ended December 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Su Shulin, as Chairman of the Company, Wang Tianpu, as Vice Chairman and President of the Company, and Wang Xinhua, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, and Rule 13a-14(b) under the Exchange Act, that, to the best of his knowledge:
 
(1)     The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Exchange Act; and
 
(2)     The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
By: /s/
Su Shulin
Name:
Su Shulin
Title:
Chairman
Date:
April 30, 2010
   
By: /s/
Wang Tianpu
Name:
Wang Tianpu
Title:
Vice Chairman and President
Date:
April 30, 2010
   
By: /s/
Wang Xinhua
Name:
Wang Xinhua
Title:
Chief Financial Officer
Date:
April 30, 2010
 
This certification accompanies the Report pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C. Section 1350 and shall not be deemed "filed" by the Company for purposes of §18 of the Exchange Act, or otherwise subject to the liability of that section.