Case For China[1]

A CASE FOR INVESTING IN CHINA Rising Productivity, Higher Valuations and Strategic Imperatives for Investors

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A CASE FOR INVESTING IN CHINA Rising Productivity, Higher Valuations and Strategic Imperatives for Investors Table of Contents

Introduction....................................................................................................................................................1 The End of the Beginning ……………………………………………………………………..….2 Growth Above all Else ………………………………………………………………………..…..2 Not All News Is Good………………………………………………………………………..……3 A Stock-Picker's Paradise ……………………………………………………………………..…..3 China's Rise - Phase II: An Evolving Market................................................................................................4 Beijing Takes Action………………..……………………………………………………………..5 Will The Stimulus Work?.................................................................................................................6 A US$586 Billion Stimulus Package …...…………………………………………………………7 Driving Domestic Demand and Consumption…...…….………………………..…………………9 While Consumer Confidence Around the World Falls Chinese Retail Sales Remain Positive ............................................................................................10 More to Come..................................................................................................................................12 Unexpected Consequences (Rising Productivity)........................................................................................13 China Outbound (International M&A)........................................................................................................14 The China Boom Revisited .........................................................................................................................14 Evolution of Chinese Domestic Stock Markets..............................................................................14 Chinamerica and the APO...............................................................................................................15 Lessons Learned…..........................................................................................................................16 Investment Criteria……………......................................................................................................17 Financial Engineering......................................................................................................................18 Reversal of Fortune..........................................................................................................................19 The Fundamentals......................................................................................................................................20 Geography........................................................................................................................................20 A Brief History of China..................................................................................................................20 Investing in Post Reform China.......................................................................................................21 Centralized Political Power……......................................................................................................21 Foreign Direct Investment……………............................................................................................22 Dynamic Private Enterprise..............................................................................................................22 China's Rising Middle Class.............................................................................................................23 Strong Infrastructural Development - Expanding Logistics.............................................................24 International Business Environment…….........................................................................................25

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Economic Overview................................................................................................................................26 Public Market Overview..................................................................................................................28 Total Foreign Direct Investment and Major Sectors........................................................................29 Private Equity Investment Overview...............................................................................................30 Investment Thesis.....................................................................................................................................32 China Is Our Favorite Emerging Market…………………………………………………………..32 Growth Above All Else - Restated ………………………………………………………………34 Unprecedented Opportunities…… ………………………………………………………………..34 About the Authors ……………………………………………………………………………………….35 Disclaimer ………………………………………………………………………………………………..35

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A CASE FOR INVESTING IN CHINA Rising Productivity, Higher Valuations and Strategic Imperatives for Investors

Introduction The cradle of one of the oldest civilizations on earth is the scene of the most extraordinary economic and financial transformation in history. In the last 30 years, the People's Republic of China has been home to the fastest growing major economy the world has ever seen. This is a country where change is taking place on an unprecedented scale and at an unprecedented rate, where people are living lives unimaginable just a few years ago. This communist nation has learned how to cash in on capitalism and private enterprise. China and its people are growing richer and more powerful every day. It is impossible to ignore the economic growth phenomenon that has unfolded in China over the past three decades. In 1978, Chairman Deng Xiaoping, the architect of "The New Socialist Market Economy", initiated an unprecedented social and economic transformation that ended Chairman Mao Zedong's devastating Cultural Revolution. The successful implementation of this ambitious and revolutionary social experiment laid the foundation for what has become the world’s most dynamic economy. With average annual growth rates of approximately 10% since 1992 (hailed by The Economist in 2005 as "The Great Leap Forward” and “A Model of Reform”), China has emerged as an economic powerhouse. It has grown faster for longer than any country in history. The People's Republic now accounts for 13% of global gross domestic product (GDP), based on purchasing power parity (PPP) exchange rates, and most economists agree that soon, China will surpass Japan in GDP making it the second largest economy on earth behind the United States. China's economy is already second when evaluated based on purchasing power and it has been suggested that China could reach parity with the U.S. by 2020. China's accession to the World Trade Organization and the overwhelming success of the 2008 Olympics attest to China's growing importance on the world economic stage.

The End of the Beginning China's economy continues to expand in all directions and the country's emergence as an economic superpower is a success story in and of itself. But it is only the end of the beginning. As global economies falter under the weight of what is now widely considered to be the most severe worldwide financial crisis and deepest global recession since the 1930s, China is uniquely positioned to weather the economic storm. With the strongest balance sheet on earth, Beijing has put the world on notice that the PRC is ready, willing, able and anxious to take their "rightful" place as leaders of a global economy. History suggests that the Golden Rule will prove itself once again. Like it or not, world leaders are coming to grips with the fact that China is in much better shape than any other major economy. As a result, they will increasingly be setting global economic agendas. And the citizens of the Peoples' Republic truly believe doing so is their destiny. Even in the face of global economic uncertainty, these are exciting times for China. China is certainly not immune to the global economic downturn. However, as the rest of the world slips into a deep recession, China continues to experience impressive economic growth. The PRC is fiscally sound and, as the country evolves, huge budget surpluses expand and enormous trade surpluses grow. Further, China is not burdened by debt and has the largest FOREX reserves in the world. But most importantly, due to the closed nature of their financial markets, China has not suffered from the illiquidity and deleveraging dynamics that currently plague most major economies. As the rest of the world scrambles to navigate their ways through tough times, China is setting a new course for its future once again. With record foreign reserves of nearly US$2 trillion, China is in an excellent position to bring its financial firepower to bear on the growing global financial crisis. By using its considerable resources to sustain growth, create employment, and dramatically increase domestic consumption in ways that significantly reduce reliance on exports, the China miracle continues. Growth Above All Else In an authoritarian political society, Chinese leaders have the ability to adjust fiscal and monetary policy quickly. In response to the global financial meltdown in the fall of 2008, Chinese leaders made a dramatic macroeconomic shift away from preventing economic overheating and controlling inflation to insuring "stable and relatively fast growth". The official proclamation was, "Growth Above All Else" and this new policy has become the nation's top economic agenda. It will certainly be the major driver of the next phase of China's evolution. To prime the pump, Beijing announced it would spend an estimated 4 trillion yuan, about $586 billion U.S. dollars, over the next two years in 10 major areas, with US$15 billion being spent in the last six weeks of 2008. This new stance focuses on "proactive fiscal policy and an appropriately accommodative monetary policy." It is the largest economic stimulus package in China's history and, in relation to total GDP, the largest stimulus package ever initiated by a major economy. The two year Chinese stimulus is 13% of GDP compared to 1% to 2% in the 2

U.S. and E.U. Chinese state media called the plan "a wide-ranging effort to offset adverse global economic conditions by boosting domestic demand." On December 10, 2008, Bloomberg reported, "The government will increase spending by a 'relatively big margin' and cut taxes next year to increase support for job creation, agriculture, social security, education, energy conservation and small and medium-sized enterprises. It will also seek to insure 'healthy and stable' growth of the nation's capital and property markets." A Merrill Lynch report that was outlined on November 10th in the Wall Street Journal stated "Beijing further emphasized that fiscal stimulus be implemented fast and the scale of the stimulus be large. We reiterated our view that despite the rapidly slowing aggregate demand (both domestic and external) in China, expansionary fiscal policies could prevent growth from falling below 8.0% in 2009." In Merrill's "GEM, 2009 Year Ahead" forecast, analysts opined; "China accounts for +80% of global growth in 2009; big policy stimulus; consumer not constrained by debt; valuations cheaper, renmibi stable." Historically, deep worldwide recessions redirect sovereign wealth homeward. Unlike the U.S. and Europe that are forced to initiate tax and spend policies, work overtime printing money and borrow unprecedented sums from nations like China to stimulate their economies, Beijing is awash in cash. Going forward, if domestic demand falters, Beijing can use their huge surpluses to support their economy with even higher spending and lower taxes. Not All News is Good As spectacular as China's rise has been, it has not been all good news for investors. From 2003 to 2007, Chinese equities enjoyed an historic rally. In 2008, China outperformed in the first part of the year but then viciously collapsed in the second half. As global stock markets declined, risk appetite dramatically reversed. In times of economic downturn, it is not uncommon for markets to experience a flight to safety where cash becomes king. Investors tend to withdraw from foreign markets to concentrate on the home scene they know best. Therefore, Global Emerging Markets are often the first to suffer: investors tend to sell anything they can't pronounce. Further, as Small Cap Global Emerging Markets (including China) were dominated by alternative investments of leveraged hedge funds, unprecedented redemptions and margin calls led to forced liquidations that fueled an overall deterioration of the China equities space. It is our belief that Chinese equities have been severely oversold. In 2007, valuations of Chinese equities were some of the highest in the world. However, by the end of 2008 they were among the lowest. The best performing market in 2007 was the worst performing market in 2008. Today, Chinese companies with solid balance sheets, seasoned management teams and high rates of growth trade at deep discounts to similar companies in more developed markets. As the world works its way out of the current mess, China will emerge much stronger, wiser and wealthier. When investors return to the markets, the fundamental strengths in China will be obvious. A Stock-Picker's Paradise In the short and mid-term, we believe that when the investment mood changes, Chinese equities will be among the first to break out because they have been so drastically oversold. In a report 3

this fall entitled "China's New Deal: Beijing announces sweeping stimulus program," JP Morgan suggested, "In view of these significant announcements, we believe sentiment towards China stocks will improve significantly". In the aforementioned Merrill Lynch report, analysts opined that "Next year promises to be a stock-picker's paradise once volatility and correlation abates." The bottom line is that the People's Republic is better positioned to survive the global economic storm than any nation on earth. Flush with cash, credit and the ambition to become global players sooner than later, China is uniquely positioned to take advantage of the fear and tumbling stock markets in America and Europe to increase its international presence. We believe that China is on the brink of a long-term economic and stock market boom—driven by rising levels of productivity and dramatic increases in domestic consumption—which will provide investment opportunities within and beyond its public equity markets.

China's Rise - Phase II: An Evolving Market China is transitioning into its next phase of growth and the dynamics unfolding today are creating a new era of investment opportunity. To capitalize on these conditions, it is imperative for investors to understand the fundamentals underlying China's evolution. This requires some insight into the economic transformation underway in China today. Ever since China moved away from a centrally planned, controlled economy and gained entry as a full member of the World Trade Organization (WTO), it has become obvious that the Chinese market has huge potential. With more than 1.3 billion people looking to buy, sell, manufacture and consume, the opportunities in trade, investments, import/export, retail/wholesale, services and manufacturing are immense. Although the U.S. and Europe have been the custodians of the free market economy for the last 200 years, in the past few decades, the Chinese have been its biggest believers. China has emerged as a trade giant for imports and exports - and the two are closely interconnected. When considering exports, China has long claimed success as the world's manufacturing floor for light industrial goods. However, today, China is in the process of transforming its focus to high value-added products for domestic consumption and for export. This transformation is reflected in the significant shift in China's exports away from basic manufactured items and textiles into electronics and high tech products, which now account for over one third of China's exports. This move is further strengthened by China's low cost production as a foundation for high-tech manufacturing. As China continues to evolve, the future promises an ever increasing outflow of high-value products, goods and services.

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Beijing Takes Action Amid global market turmoil and clear signs of decelerating economic growth in late 2008, a series of measures confirm that China has reached a turning point in macro policy. It is clear that Beijing is taking a more proactive stance in supporting domestic markets. Measures to boost disposable income, higher levels of infrastructure investment, agricultural land reform, further interest rate cuts and credit easing, accelerated tax relief, increases to the value added tax rebate program and a more moderate pace of currency appreciation are all being implemented to sustain growth and to dramatically increase domestic consumption. It's important to note that even prior to the announcement of the largest economic stimulus plan in China's long history, government spending accounted for 25% of GDP. State-ownedenterprises accounted for 33% of industrial value added and 45% of urban fixed investment. State Owned Enterprises owned or firmly controlled almost all strategic sectors; commercial and investment banking; petroleum drilling; processing and refining; chemicals; power supply and transmission; railway transportation and construction; airlines; major equipment manufacturing; telecoms; major highways and ports. The government also owns almost all the universities, schools and hospitals. Despite extensive reforms over the past 30 years, the state remains a key shareholder in banks and major enterprises. The government still has a great deal of control over management. Even though many of the SOEs are now listed in onshore and offshore stock markets, the government generally owns the absolute majority of shares and wields effective control. Therefore, the unprecedented economic stimulus commitment to invest 13% of GDP over the next two years is, in many ways, investing in themselves. This may not be optimal in the long run, but for now, it facilitates the task of implementing the stimulus and mobilizing domestic consumption. In spite of global financial turmoil, substantial growth momentum is likely to continue. Rational for this expectation includes: •

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Continuing progress on structural reform lays the foundation for an increasingly marketoriented economy that can look to the government to sustain growth through quick and efficient adjustments to monetary and regulatory policy and the willingness to provide appropriate (and sometimes significant) fiscal spending. The government supports the acceleration of reform, particularly within state-owned enterprises and the financial sector. The Constitution has been amended to encourage entrepreneurship and the creation of free enterprise. Growth of the private sector allows government to reduce policy lending to state-owned enterprises thus lowering contingent liabilities while increasing credit to consumers and small and medium sized business in order to stimulate entrepreneurial enterprises and job creation with an emphasis on significantly expanding domestic consumption while reducing reliance on exports. The government's debt burden is being alleviated by financial sector reform and improved revenue collection. Falling inflation leaves the government more room to implement accommodative monetary policy and step up fiscal stimulus. 5

In an increasingly global economy, Chinese markets offer the largest growth potential. In December, 2008, Goldman Sachs and JP Morgan estimated that China would account for over 60% of global growth in 2009. Merrill Lynch provided a more aggressive 80%+ estimate. The reasons for this phenomenon are the availability of relatively cheap land combined with low cost skilled labor, the increased earning power of consumers and the targeting by multinational corporations of China's increasingly affluent local markets - the largest consumer market on earth. A defining difference between China and other major economies is its solvency, a reality that gives China the ability to tap into its huge reserves to stimulate and sustain growth. There is a clear indication that this is a resurgent market with enormous potential and investment opportunity. Will the Stimulus Work? On December 10, 2008, Newsweek, in its article "What Can We Do With $586 Billion?" reported; "China is likely to pull out all the stops to maintain growth. 'We believe the government has totally changed its policy stance and will aggressively take all measures to stimulate the economy,' said Ting Lu, an economist at Merrill Lynch in Hong Kong. 'We believe the government could maintain economic growth at about 8 percent in 2009 with [these] policies', he said. "There may be more to come. Jing Ulrich, head of China equities at JP Morgan in Hong Kong, believes that China has the will and the capacity to further buttress its economy. 'This broad-based fiscal stimulus program will emerge as the government's front line of defense against an excessive economic slowdown,' Ulrich said. 'With nearly US$2 trillion in foreign reserves and a budget surplus, China has wider scope for fiscal stimulus than governments in many developing economies that face big external deficits and high debt burdens." For the last several years, the global economy has been running on two engines: The U.S. on the consumption side and China on the production side, both lifting the entire global economy. But at least in the near term, it seems the party in the U.S. is over. John Mauldin's "Outside the Box" of January 8, 2009, distributed by InvestorsInsight Publishing, quoted Bennet Sedacca of Atlantic Advisors; "Ever since 1995, the Federal Reserve and other authorities have been assisting in the birth of the largest debt bubble in our nation's history. Money supply has grown exponentially, weak businesses have been formed and failed, the consumer is leveraged up to their eyeballs, regulation is poor, and savings have dried up. Further, the brokerage/investment banking industry has been pummeled beyond recognition; lifelines have been given to everyone from poorly run banks to poorly run auto manufacturers. Esoteric securities have been relocated from the balance sheets of reckless banks and brokers to the U.S. Treasury, FDIC and Federal Reserve. Investors worldwide watched $30 trillion of stock market equity disappear in the past year while home prices have cratered by better than 25%. What other goodies do we have? 6

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Unemployment on every front is rising. A market that has bottomed. Tax receipts are down and State Governments are suffering. The debt market, except that which is artificially supported by the Government, is closed. Earnings estimates for the S&P 500 are down 60% year-over-year. Stocks (using the Dow as a proxy) are at the same level they were 10 years ago. Industrial Production around the globe is imploding."

In a global economy, China also faces challenges. The social and political legitimacy of the Communist Party's regime rests on it ability to continue to deliver a high-growth transformation of the economy. It's important to note that China needs to maintain high single digit growth to absorb over 20 million people who are joining the work force annually. It also needs to relocate 12 to 14 million poor rural farmers to cities each year and integrate them into the modern industrial and manufacturing urban sector. Good news for China is that unlike the U.S. and most other major economies of the world, the PRC has abundant resources at their disposal to effect needed change. •

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The country is fiscally strong. They are sitting on almost US$2 trillion in cash. China has little foreign debt (unlike the U.S. that stands at 360% of GDP). The Chinese government operates on huge budget surpluses. China enjoys the largest FOREX reserves on earth and by far the highest Foreign Direct Investment (FDI) of all nations. Chinese citizens are also unconstrained by debt - they are excessive savers. Credit card usage is almost non-existent. The world's largest market has come of age. A rising middle class is projected to number 700 million by 2020. Per capital GDP is already the highest in Asia. Incomes are rising, inflation is falling. Consumer confidence has been resilient even in the face of a falling stock market and property values. Domestic retail sales were up approximately 22% in 2008 over 2007. As Chinese financial markets are closed, the nation is unconstrained by banks. Chinese banks are now among the most profitable in the world. The country has not suffered from illiquidity and deleveraging that is crippling the international banking system. China’s policymakers are flooding the economy with liquidity through bank loans. As most economies struggle with credit growth that is either too low or frozen despite having slashed rates aggressively, the soaring credit growth in China means that China’s economic stimulus plan is leading other economies not only on the fiscal front, but also on the monetary and credit front.

A US$586 Billion Stimulus Package As demand for exports and the momentum for fixed-asset investment slows, China's authorities are pushing forward measures to rebalance the sources of economic development in favor of domestic consumption. With concern mounting over the impact of a global recession and financial market turmoil on the Chinese economy, China's State Council announced an aggressive fiscal program in November 2008 that includes CNY4 trillion, (US$586 billion), in investment spending. This is the biggest onetime effort ever mounted by the Chinese government, focusing entirely on the next two years, particularly the next two quarters. 7

Local officials are also racing to roll out more aggressive fiscal stimulus. The central bank is expected to further loosen its monetary reins and it is widely expected that more measures to stimulate consumption, including policies to support domestic stock markets and property transactions, and increased social infrastructure spending to boost disposable income will be implemented in the future. To support economic growth and lend support to domestic markets, China’s policy-makers are taking a three-pronged approach using monetary policy, fiscal policy, and direct market intervention as their primary tools to stimulate domestic consumption. The stimulus program focuses on transportation infrastructure, environmental projects and housing. These are productive investments that will boost growth while increasing efficiency and productivity. These investments are in stark contrast to much of the investment in overcapacity made in the private sector that caused China to overheat in 2007. Forty-five percent of the stimulus is earmarked for investment in high-speed railways, highways, airports and power grids. Health and education services will be expanded to low-income households and unemployment allowance will be increased to help ease social pressure and increase consumption. Policy makers are considering raising the threshold of personal income tax. The move, combined with tax cuts already announced for domestic businesses, is expected to boost domestic consumption further. The nation will strive to reduce the dependence on foreign trade, as a share of GDP, from 60% in 2007, to 40% in 2020 and, eventually, to less than 25%. Recent policy actions include: Changes in Monetary Policy Out of concern that the economy may be slowing more sharply than previously anticipated, the People’s Bank of China cut interest rates three times in September 2008; the first interest rate cuts in over six years. They also reduced the reserve requirement ratio for most banks. The combined actions marked the first easing of monetary policy since 2002. In June, the government moved to increase banks’ loan limits, aiming to provide more credit to small businesses and consumers. Changes in Fiscal Policy With export-oriented industries accounting for 11% of China's total employment and 12% of fixed-asset investment, Beijing is showing an inclination to support the sector. In October 2008, the value added tax rebate for over 3,000 product items was raised resulting in a boost to the bottom line, especially important for low-margin manufacturers. The government has also called on banks to increase credit to small and medium-sized businesses and to significantly expand consumer credit. China’s infrastructure expansion is entering an accelerated growth phase, with massive investments planned. The Chinese government is in a position of fiscal strength; it can tap into extensive resources to achieve defined objectives.

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Direct Intervention in Domestic Stock Markets Announcements from Beijing reflect a coordinated effort by various government agencies to lend support to the stock market through direct market intervention. The Ministry of Finance announced reform of the stamp duty on stock trading and according to the official Xinhua News Agency, China’s sovereign wealth fund, China Investment Corporation (CIC), intends to purchase equity stakes in leading Chinese banks. The Chairman of China’s State-owned Assets Supervision and Administration Commission stated that the agency will continue to promote stable development of China’s capital markets and supports the practice of State Owned Enterprise holding companies' buying-back shares of their listed subsidiaries in the open market. Unlike most international stock markets, China's domestic stock markets are dominated by retail investors - thus authorities have been eager to restore local investor confidence. Supporting the Property Sector Stimulating self-use housing demand and strengthening low-cost housing demand will be a major government focus in stabilizing the property market going forward. To accomplish this objective, the government has already taken meaningful measures to boost consumers' demand, such as property tax cuts and the central bank's biggest slash in interest rates in 11 years. Beijing announced that it would increase the supply of affordable housing and reduce property transaction fees. This was followed by the announcement of a comprehensive set of measures aimed at stimulating affordable mass-market housing and improving the social safety net for the country's low income population. Specific measures include further lowering of interest rates and down-payment requirements for owner-occupied housing, a waiver of stamp duties for individual homebuyers and a reduction in the deed tax for apartments under 90 square meters. Driving Domestic Demand and Consumption The government will continue to unveil measures to encourage consumption, which should account for 75% to 80% of the GDP by 2020. Final consumption, including household and community spending, currently only makes up about half of the nation's economy compared with an average of 70% to 80% in developing countries and 80% in developed nations. In the U.S., consumer spending alone accounts for 71% of GDP. Even with a population 4 1/2 times that of the U.S., most recent estimates show that today, consumer spending in China amount to only 36% of GDP. To dramatically expand domestic demand, China can tap into its massive surpluses and ramp up fiscal spending in a short period of time. Beijing announced 10 areas to stimulate domestic consumption. Initiatives include: •

Accelerating building of economic housing (subsidized flats) in the urban areas and renovating housing in the rural areas. The government has already taken meaningful measures to boost consumers' housing demand, such as a tax cut on property transactions and the central bank's biggest slash in interest rates in 11 years. Accelerating infrastructure investment in the rural areas including water, power, natural gas and paved highways. 9

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Accelerating investment in railways, highways and airports. Emphasis will be on passenger railway, coal transportation railway, railway in the western areas and power grids. Expanding and accelerating post-earthquake reconstruction projects. Total spending on post-quake reconstruction in 2009 will be RMB400billion. Accelerating development of the healthcare system and accelerating projects for environmental protection. Raising minimum purchase prices of grains and increases in agricultural subsidies. Raising subsidies to low-income people including raising retirement incomes. The elimination of loan quotas and the acceleration of credit growth. Pushing forward Value Added Tax reform from production-based to consumption-based (allow deduction of capital goods and R&D) By doing so, the government cuts enterprise tax significantly. Supporting domestic economies. The government can intervene in foreign exchange markets to support their currency, channel some of their reserves into other domestic uses such as to support domestic equity markets or the domestic banking sector. Capital can be injected directly in U.S. dollars or converted first to local currency. We expect aggressive measures on all fronts. An ambitious goal is to double the per capita income of rural residents while eliminating absolute poverty in China's rural areas by 2020.

Of course, China's continued transformation necessitates the continued rapid development of its infrastructure. China has already experienced an unprecedented increase in infrastructure related imports as it modernized across the transportation, power, shipping/logistics, telecom industries, etc. that fostered the development of industry and has stoked economic growth. As world economies slow, China's massive stimulus will kick in. Infrastructure development will expand and China's evolution will accelerate. There is an abundance of engineered projects on the shelves where dirt is ready to fly. Capitalizing these projects creates immediate employment that translates into an immediate increase in disposable income that in turn stimulates domestic demand and consumption. While Consumer Confidence Around The World Falls, Chinese Retail Sales Remain Positive There are already strong tailwinds behind the Chinese consumer. Retail sales growth, the best proxy for domestic demand, has been surprising resilient. While inflation moderated, wages continued to increase and strong household balance sheets supported increased domestic consumption (total household debt in China amounts to only 13% of GDP). The Ministry of Commerce announced that the retail sales of consumer goods in China had topped 10 trillion yuan by mid-December 2008. It also forecasts that the retail sales of consumer goods will reach 10.8 trillion yuan for the whole year of 2008, up by approximately 21% over last year. The increase is even faster than the 16.8% rise in 2007 - a banner year. Further, business and consumer confidence should get a lift after the RMB4.0 trillion stimulus plan kicks in.

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There are six drivers to Chinese consumer spending that the government believes sets the stage for a dramatic increase in domestic consumption - rising incomes, urbanization, increased availability of credit, a rising middle class, demographics (China's Gen Y) and government policy. •

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Rising Incomes. Following years of strong job creation, income in China continues to rise, both in urban and rural areas. In the cities, consumption is likely to catch up with wages. In rural areas, farmers will also spend more as migrant workers send money back home. Urbanization. A rapidly expanding urban population continues to support increases in consumption. The urban population expanded to 45% in 2007 from 36% of China's total population in 2000. According to the China National Bureau of Statistics, urban per capita disposable income is about 3 times higher than that of the rural population. Consumer spending within the urban population has experienced double digit growth. Increased availability of credit. Due to extensive banking sector reforms, banks in China appear better placed to extend consumer credit (housing, auto and credit card loans) than in any other major economy. Credit cards are still a relatively new phenomenon in China, although debit card use is very popular. In 2002, with a population of approximately 1.3 billion people, there were only 25 million credit cards issued. In 2007, the number of credit cards rose to 90 million. This still represents credit card usage by only a small percentage of China's population. Historically, Chinese citizens tend to save excessively. However, as younger Chinese westernize, credit card usage is becoming a popular means of raising their standards of living. With household debt so low, there is a lot of room to drive domestic consumption by dramatically increasing and encouraging the use of consumer credit. A rising middle class. A growing middle class population should support consumer spending and fuel growth, especially in China's second and third tier cities. In 2006, roughly 134 million households had middle class incomes. This number rose to 180 million in 2008 and is projected to hit 222 million by the end of 2010 when nearly half of Chinese households will enjoy a middle class lifestyle. Demographics - China's Generation Y. While China is experiencing a rapidly aging population and concerns have been raised on the country's need to save for retirement, there is an offsetting trend in the emergence of Generation Y - people born after 1978. Despite the one-child policy, the population of Generation Y is projected to increase from 314 million to 500 million by 2015. This represents the same number of consumers that exist in the entire population of the E.U. The Generation Y population grew up during a period of strong growth and rising consumerism and are not psychologically burdened by the country's previous economic hardships. They are typically college educated and exhibit much higher rates of consumer confidence supported by their future earnings potential and, as a result, are much more likely to consume using credit. Favorable government policy. Continued moves by the government to stimulate consumption in concert with the massive stimulus plan, and investment in the 10 areas defined above, we believe that even despite the slowing aggregate demand in China, expansionary fiscal policies can sustain the highest rate of growth in the world.

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More to Come The greater the global downturn, the more likely China's huge reserves are drawn down. Central banks around the world accumulated reserves for a rainy day and that day has now arrived. The People's Bank of China is likely to use these resources as part of their arsenal in dealing with the global financial and economic crisis. Although a significant and bold move, the Chinese stimulus could be but a beginning. Going forward, with an abundance of tools to work with, policymakers can consider further interest rate cuts in concert with a more proactive fiscal policy. We are likely to see targeted relief measures in the export sector, massive post earthquake reconstruction spending, high levels of infrastructure investment, increased investments in R&D and accelerated reforms in the land and agricultural sectors. Additional measures could include the establishment of a stabilization fund for the domestic stock markets and further reform of the rules pertaining to the sale of previously non-tradable shares. It is probable that further capital market reforms, such as the introduction of financial futures, securities lending and margin trading will be introduced in the near to midterm. In addition to direct stock market intervention, federal and provincial governments can increase their support of the ailing housing market. Recent interest rate cuts offered the property sector a measure of relief. Beyond the immediate impact of the rate cuts, expectations of further monetary easing and measures to stabilize property prices may improve sentiment towards the sector. Plans to significantly increase fiscal spending were primarily initiated to create employment that, in turn, increases disposable income of its citizenry that, in turn, expands domestic consumption. It is important to note that accomplishing these ambitious objectives could pull millions of China's citizens out of poverty while raising the standard of living in all segments of Chinese society. China has already had the fastest and largest poverty reduction in history and it has been estimated that China's middle class will grow to 700 million during the next phase of China's evolution. The world's largest consumer market has come of age and it is reasonable to expect that over time, these dynamics will significantly reduce reliance on exports as domestic consumption becomes the driver of future growth in China. On January 12, 2009, in a report titled "Stimulus Plan Working," Investor's Business Daily reported; "China's domestic consumption and intraregional trade will accelerate despite a prolonged slowdown in the U.S. and Europe, according to SPARX Investment and Research...The sheer size of the Chinese market and rising domestic prosperity seems likely to lead to a steady increase in internal Chinese demand." Will the fiscal stimulus work? Time will tell, but odds are that China will emerge from the current cycle, stronger, wiser and wealthier than at any time in their long history.

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Unexpected Consequences (Rising Productivity) No doubt the rise of the Chinese consumer is significant. But equally important are the dramatic gains in productivity that huge investments in infrastructure bring. These advancements add up to one key take-away for investors: increases in productivity should ignite a new cycle of investment, economic growth, and prosperity in China. Historically, productivity is a catalyst for investment and rising equity returns. In the West, especially in the U.S., rising productivity resulted in rapid economic expansion and was a primary driver of the resulting stock market and financing boom for new and expanding businesses. Impressive productivity gains since initiating reforms in 1978 are compelling evidence that the productivity dynamic experienced in the West is exactly what is taking place in China today. Moreover, we believe that the PRC can expect accelerated productivity gains in the near term as the huge government stimulus takes hold. Forty-five percent of the US$582 billion stimulus (or 6.75% of GDP), will go to the construction of high-speed railways, highways, power grids and airports, all productivity enhancing investments. This could set the stage for rising equity valuations in the midterm. Investors in search of a viable investment thesis for China need look no further than the impressive gains in productivity in the region. China's productivity gains are driven by a wide range of factors, including: • •

•

Investment in infrastructure and other productivity-supporting initiatives. In addition, competition with foreign producers has driven greater efficiency and lowered prices for domestic production, which has further contributed to increases in productivity. Macro-political, fiscal, monetary and economic trends. This includes accommodative fiscal and monetary policies, trade liberalization, privatization of state-owned enterprises, and the movement of labor from predominantly rural agricultural production to urban industrial manufacturing, technology development and services sectors. Targeted investment in “intangibles” through higher R&D and technology spending. Historically, this has been an pivotal driver for productivity growth. In China, there has been an historic trend of rising investment, as well as projected rising growth rates for medium-term R&D spending. Chinese leaders have committed to 21% per annum R&D spending growth over the next three years. This represents an increase from 1.5% of GDP in 2007 to 2.1% by 2010. This is dramatic as China’s growth in R&D expenditures is expected to outstrip nominal GDP growth over the next several years. Technologically, China already has one of the highest numbers of research and development institutes in the world that are spearheading much of the technological advancement in the country. But China's technology policy is evolving. Previously, the Chinese strategy was to rely on foreign investors and transfer of technologies through joint-ventures rather than on development of core technologies at home. Considering the current competitive environment around the world, Beijing has reviewed its policies and has decided to shift the focus from JVs and transfers to independent innovation. It is now Beijing's intention that the overall focus in R&D is to emerge as an equal player among other leading countries in global technological innovation. Beijing's objective is clear - to become a globally competent scientific, technological and economic power by creating indigenous technology and being less reliant on the importation of innovation. 13

It is reasonable to assume the next stage of China's rise will feature a long-term stock market boom and revaluation, as well as a financing boom—an overall dynamic that will allow China to shift to a new strategic regime of economic expansion, featuring higher economic output, employment, investment, and wages that drives domestic consumption in the world's largest market.

China Outbound (International M&A) It's not just the government that has a strong balance sheet. Benefiting from access to international financing and 30 years of profitable growth, Chinese firms are on the hunt to use their cash to make acquisitions both in China and overseas. Direct investment by Chinese companies abroad is growing at breakneck speed to US$19.34 billion, in the first quarter of 2008, up 353% over the same quarter of 2007. With plummeting valuations and weakened Western firms slashing payrolls and marketing budgets, we look for the trend to continue. Many companies have had considerable success becoming international players by carving out niches and competing on brand value. While most Chinese firms have focused on expanding first into emerging markets in the Middle East and Africa, as valuations have collapsed in the West, they are now looking to seize opportunities in North America and Europe. Most of the success in overseas expansions is a result of strategic mergers and acquisitions (M&A). For many Chinese companies, not only can M&A be a quick way to capture international market share, but a means of accessing expertise and state-of-the-art technologies. With the financial crisis today creating buying opportunities in undervalued companies with good talent, M&A can also be used to overcome the difficulty of finding the right mix of talent to lead the company in its push to grow over-seas. As growth slows in the West, we expect growing numbers of Chinese companies to aggressively expand their international presence by becoming increasingly active players in global M&A. Publicly traded Chinese companies can use cash surpluses and listed shares to buy Western assets on the cheap. This not only propels growth, it creates significant opportunities for investors capable of identifying strong Chinese companies with the management expertise and resources to implement a global M&A strategy.

The China Boom Revisited Evolution of Chinese Domestic Stock Markets Over the past 30 years, as the Chinese economy soared, Beijing recognized that in order for the country to takes its "rightful place" as a leader in a global economy, China needed to have mature capital markets. However, by comparison to the major markets of the world, even by 2005, the Shanghai and Shenzhen exchanges were illiquid and bloated with inefficient State Owned Enterprises (SOEs). Domestic markets were virtually closed to international investors. Transparency and regulatory oversight was effectively non-existent. Valuations were among the lowest in the world. Price to earnings ratios of 2x, 3x, and 4x were common when markets in 14

developed nations enjoyed valuations several times those in China. To correct obvious inadequacies, Beijing launched a series of programs to accelerate the growth and respect for its domestic stock markets. Once again, with unprecedented speed, things changed. Compared to consumers in other developed nations, Chinese citizens are excessive savers. It is not uncommon to see household savings rates of 40%+. To dramatically accelerate the evolution of its capital markets, the government encouraged its citizenry to invest a small portion of their household savings in domestic stock markets. Within 18 months, with the migration of only 2% of household savings from low interest savings accounts into stocks, the domestic stock markets soared. By the end of 2007, the Shanghai and Shenzhen exchanges were among the top performing stock markets in the world. During this same time, China was attracting far more Foreign Direct Investment than any country and Chinese regulators began to initiate a series of reforms that lead to an unprecedented change in the way Chinese business owners capitalized the expansion of their private enterprises. In a move to encourage entrepreneurship, Chinese businesses were allowed (and even encouraged) to list their shares in Western Capital Markets. From 2002 through 2008, hundreds of Chinese companies entered U.S. public equity markets through reverse merger or reverse take-over transactions (RTOs) and eventually raised billions of dollars through simultaneous and follow-on PIPEs (Private Investment In Public Equity). By October 2007, valuations of these companies were among the highest in the world as well. Chinamerica and the APO Chinamerica Fund, LP (the Fund) was a pilot project initiated to evaluate an investment thesis of capturing the arbitrage between the acquisition cost of equity investments in private Chinese companies and the valuation of those same securities when sold subsequent to the company's listing in U.S. equity markets. Managers of the Fund were very early movers in the APO (Alternative Public Offering) market, having been closely involved in some of the first Chinese RTO transactions in early 2003. Chinamerica management was not aware of a fund dedicated exclusively to this space and launched Chinamerica Fund, LP in January of 2004. Chinamerica management has been intimately involved in thirteen transactions and was lead or co-lead investor in nine. Audited financial statements through December 31, 2007 documented an overall 69.1% internal net rate of return to investors from the Fund's inception with a total expense ratio of 2.9%, which included a 2% management fee. Not only did the pilot fund achieve proof of concept, but eventually, the model was adopted successfully by several money management companies that also enjoyed success. Because Chinamerica pioneered investing in Chinese PIPE transactions that closed simultaneously with RTO transactions, and was lead or co-lead investor in several high profile Chinese transactions, the Fund and its management enjoy an excellent reputation in the U.S. and China. This is due in large part to the fact that Chinamerica has been extremely proactive with portfolio companies, both before and after transaction closings.

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To insure that Chinese management teams became good corporate citizens in U.S. public equity markets, Chinamerica developed a full range of unique contractual provisions designed to protect investors and motivate management. Many have become standard operating procedure, not just in Chinese transactions, but in the U.S. and international PIPE space as well. Make-good provisions, special purpose escrows with meaningful hold-backs from funding for the hiring of suitable CFOs, the establishment of appropriate independent board of directors, IR/PR and financial communications and market awareness campaigns, etc., are all provisions developed and initiated by Chinamerica. Chinamerica was one of the first to coin the term Alternative Public Offering (APO) to identify a transaction combing a reverse merger with the closing of a PIPE transaction and a simultaneous filing of a registration statement with the SEC that registers the shares and/or warrants in the PIPE. By 2007, due in part to the success of the financial engineering initially developed by Chinamerica management in the early days of the Chinese RTO space, the APO has dominated the international small cap equity market while small cap IPOs have all but disappeared. Lessons Learned Investing directly in China is not an activity for the faint of heart and the past six years has been an in-depth learning experience for Chinamerica management. In addition to all of the fundamental and technical analysis, due diligence and financial engineering that goes into complex transactions, come the very real risks of investing in companies domiciled on the other side of the globe. Cultural and language barriers are significant and dealing with different and sometimes conflicting legal structures, regulatory systems and currencies is challenging. The evolution of the Chinese economy has required Beijing to make rapid and sometimes dramatic changes in the rules and regulations regarding expatriation of Chinese assets (the bottom line of what happens when a Chinese company goes public in the U.S.) To remain successful, it has been necessary for Chinamerica to be nimble and responsive to changing conditions and to adapt to the traditional vagaries common in Chinese law. It is important to understand that in the PRC, relationships are everything - culturally, much more important to Chinese entrepreneurs than contracts. Therefore, successful investing in Chinese companies that have listed their shares in U.S. capital markets requires spending a lot of personal time with management - nurturing, preparing and bringing a deal to closing, and even more importantly, assisting management in adapting to the significant changes in basic business cultures once portfolio companies are listed in the U.S. To accomplish our objectives, from inception, collectively, Chinamerica management has spent a considerable amount of time onthe-ground in China. The Cultural Revolution has left its scars on China. An equivalent to the American Baby Boomer Generation is nowhere to be seen. It is rare to find business professionals in their 50s and 60s. So, as investors, we are generally dealing with entrepreneurs in their mid 30s and early 40s that have been amazingly successful in a very competitive landscape. They are very much used to getting their way and are often resistant to changing what has worked so well for them. Operating a public company in the U.S. is difficult, even for Americans. For Chinese management teams, understanding how to be good corporate citizens in U.S. capital markets is 16

extremely challenging as the rules of engagement are often at odds with the way things work in China. It is critical that Chinese management teams are ready, willing and able to adapt and are prepared to stay in compliance with the SEC and national exchanges. At Chinamerica, we have spent considerable time working with the management teams of our portfolio companies to help them come to grips with these new realities. The Bottom Line is that when investing in China, it is imperative to understand that one invests in people as much as one invests in a company. Finding the right management team is as important as finding the right enterprise. Investment Criteria Chinamerica has evaluated a wide range of investment opportunities in diverse industries whose primary business operations are in the People's Republic of China. Chinamerica Management spent considerable time interviewing candidate companies, making site inspections, performing due diligence and fundamental analysis of operations and in evaluating hundreds of companies' current and future earnings. Chinamerica Fund, LP acted as lead or co-lead investor in most of the transactions that met our investment criteria. Each potential investment was evaluated on its individual merits. However, Chinamerica focused above all on the quality, experience and the successful track record of the management team and its willingness to embrace the challenging transition from being a private Chinese enterprise to becoming a successful U.S. public company. We looked for management teams that had a deep commitment to creating value for shareholders. Chinamerica invested in organizations with the following characteristics: • • • • • • • • •

Established and profitable companies that demonstrated a strong earnings history and growth potential. Dominant entrenched businesses within growth industries that maintained leading market positions. Companies with a sustainable competitive advantage. Companies having impressive long-term business models with strong products, services and strategies. Companies with competent, independent-thinking, ethical and entrepreneurial management teams. Companies with a solid balance sheet and good cash flow. Companies that could be audited using generally accepted international accounting standards (US GAAP). Companies that could stand the acid test of comprehensive legal diligence in the PRC. Companies with the ability and willingness to communicate their corporate story to the international investment community using proven strategies designed to optimize liquidity and shareholder value.

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Financial Engineering Over the past five years, Chinamerica has visited hundreds of Chinese firms. We have also spent considerable time with Chinese officials (both federal and provincial), financial services professionals, auditors, legal counsel and the media. We have yet to meet a Chinese entrepreneur that was not genuinely excited and extremely optimistic about their company's future. Although this is generally a very positive dynamic, from the early days of Chinamerica, we knew that it was imperative to engineer protective measures in transactions that motivated management teams to meet (and hopefully exceed) their projected success in a manner where failure was financially painful to the CEO. It was equally imperative that management teams lived up to their regulatory responsibilities of being a U.S. public company. We had to ensure that management, thorough a comprehensive market awareness strategy, branded their stock in U.S. capital markets with aggressive (but compliant) investor relations and financial communications programs. To accomplish these and other defined objectives, Chinamerica developed a series of contractual conditions where meaningful percentages of the eventual fundings were held back in escrow accounts until specific milestones were met. Additionally, a block of the CEO's stock was placed in an escrow account to be distributed prorata to investors if specific performance fell below negotiated thresholds. Make-Good Provisions have become standard practice in the international PIPE space and Chinamerica was one of the first investors to employ this practice. To set such standards, the company is asked for a conservative projection of future net income, generally for the next two years. Because negotiated valuations are in part based on these assumptions, the CEO of the company is asked to guarantee that performance. A meaningful percentage of his or her shares (not newly issued company shares) is placed with a third party escrow agent including written instructions to release all or a portion of those shares prorata to investors if the agreed-upon net income thresholds are not met. This practice makes the CEO personally accountable for his company's performance. It also eliminates irrational exuberance and much of the bravado in negotiations. It is critical for the Company to employ an appropriately experienced Chief Financial Officer that is (i) bi-lingual at a business level in Mandarin and English, (ii) has a thorough understanding of U.S. GAAP accounting, and (iii) can and will effectively communicate with the U.S. investment community. In China, the CFO position does not hold the same level of importance or respect that it has in the U.S. It is often difficult for Chinese management teams to come to grips with this reality. To insure that this is a high priority for the company post funding, meaningful cash escrows are held back until an appropriate CFO is approved by an investor's representative and retained by the company. Independent Boards of Directors are an absolute necessity for reporting exchange based companies. In most Chinese enterprises, the CEO is the major shareholder. Known as "the Big Boss", these individuals run the business. The idea of an independent board of directors is often foreign to many CEOs, even unacceptable in practice to some. However, it is a requirement of major U.S. exchanges. CEOs that refuse to empower an independent board of directors are not 18

funded. To ensure that those that are funded install an independent board, cash escrow accounts with meaningful holdbacks are utilized to motivate CEOs to address and satisfy this critical issue. The vast majority of Chinese management teams have no practical understanding of U.S. capital markets. Most believe that once public, investors will rush in to buy shares of their wonderful companies. Few recognize the importance of market awareness and financial branding in U.S. capital markets, of investor relations or financial communications. Few have any understanding of the critical nature of timely regulatory compliance. To ensure that management devotes appropriate resources to these important corporate responsibilities, cash escrows are established with meaningful holdbacks from funding until the company retains appropriate professionals to manage this part of the business. Initial Chinese APOs were sometimes burdened by large positions of zero basis stock granted to shell promoters and/or boutique investment bankers involved in the transactions. At times, especially in some early transactions, unsuspecting management teams were abused. Transactions were structured with huge overhangs of promoter stock. This made it almost impossible for the securities to gain traction in the aftermarket and trade at or near intrinsic value. Further, even for companies with exceptional fundamentals, the huge overhang made it almost impossible to secure follow-on rounds of financing to expand operations. To manage this dynamic, investors like Chinamerica insisted (i) that the size of the zero basis position be appropriate, (ii) that shares of zero basis stock be locked up for a reasonable period of time and (iii) that shares of zero basis promoter stock not be included in PIPE registration statements filed with the SEC. In follow-on financings for companies that were taken advantage of by unscrupulous promoters, it was necessary to correct this problem before financing the Company. Therefore it became a condition of funding that investors were able to acquire and/or lock up zero basis stock overhangs simultaneous or prior to funding PIPE transactions. Reversal of Fortune Eventually, over 400 Chinese companies employed the RTO and/or APO process to list their shares in U.S. capital markets. As China's economy continued to post unprecedented GDP growth, record amounts of Foreign Direct Investment poured into China. Valuations of shares listed on Chinese domestic exchanges approached price to earnings multiples of 100 to 1. At the same time, valuations of Chinese companies listed in the U.S. were among the highest of all equities listed in America. The market peaked in the fall of 2007. As the world came to understand the realities facing our international financial systems, global markets started to melt down. Historically, times of global economic crisis result in a flight to safety where professional and retail investors build defensive investment positions at home in markets they best understand. Cash becomes king. Global Emerging Markets, like China, are generally the first to take the hit. The recent downturn was no exception. In the summer of 2008, things changed. Chinese equities, the hottest market on earth in 2007, became one of the worst performing markets of 2008. Valuations deteriorated even though the macro economic conditions in China were strong and companies continue to outperform. We 19

believe, for reasons detailed in this report, that China will continue to grow at higher rates than any major economy. Proactive expansionary fiscal policy, an appropriately flexible monetary policy, and continued economic stimulus packages will drive the next phase of China's evolution. Major international investment banking firms and respected analysts expect China to dominate global growth in the short, mid and long- term. We believe that Chinese companies listed in the U.S. have been dramatically oversold. Merrill Lynch recently referred to current dynamics as "a stock picker's paradise". JP Morgan recently opined, "Sentiment towards China stocks will improve significantly." These dynamics have created a new era of investment opportunity for investors with an in-depth understanding of the space.

The Fundamentals Geography The People’s Republic of China is the third largest country in the world with total land area of 9,596,960 sq. km. It's about the same size as the lower 48 states of the U.S. China is located in Eastern Asia, bordering the East China Sea, Korea Bay, Yellow Sea, and South China Sea, between North Korea and Vietnam. With 1.32 billion people, China is the most populous country in the world and the population has grown constantly through the 1990s. The population growth issue has long been a cause for concern for policy makers and introduction of the one-child policy is one of the most stringent measures taken against it. As a result of this policy, China successfully achieved its goal of a more stable and much-reduced fertility rate. A Brief History of China China is the oldest continuous major world civilization with a recorded history of more than 3,700 years. Prior to the early 20th century, China was ruled by dozens of successive dynasties. On October 10, 1911, a revolutionary military uprising led to the downfall of the Qing Dynasty, thus ending the monarchy system in China. After the fall of the Qing Dynasty, China was ruled by numerous warlords competing to control various provinces. In October 1949 the Chinese Communist Party (CCP) founded the People's Republic of China on the mainland. After assuming power, the CCP started a massive economic and social reconstruction of the country. Deng Xiaoping was appointed vice premier as well as a member of the politburo standing committee in 1973. Deng leadership adopted a series of economic reform policies after the Third Plenum of the 11th Party Congress meeting in December 1978. The reform policies were aimed at loosening restrictions on private companies, increasing rural incomes, enhancing incentives to improve the operating efficiency of state owned enterprises, encouraging experiments in enterprise autonomy, and reducing central planning. Economic reform brought along reforms in other areas, including the legal system, literature and the arts. Chinese citizens were given more freedom; public criticism leveled at party and state was affirmed. China's economic development progressed quickly. During this period, China was governed under a collective leadership centered around President Jiang Zemin. Known as the 20

"third generation" leadership, it governed for the ailing Deng Xiaoping. Xiaoping died in early 1997, and the "third generation" leadership continued economic reforms. In 2003, Hu Jintao became the country's new president and Wen Jiabao was appointed China's new premier and head of the State Council which is equivalent to a cabinet. Current leadership is firmly committed to economic and political reform. China has furthered efforts to open its economy to the outside world and has demonstrated that commitment by joining the World Trade Organization (WTO). Comprehensive reform aimed at modernizing and improving efficiencies of SOEs through privatization is a high priority on the government’s agenda. Further, legal reform is accelerating as economic reform deepens. A series of laws, rules and regulations have been passed to promote foreign investments and trade. Investing in Post Reform China The open door policy including market and legal reforms implemented by the Chinese government over the past 30 years have greatly impacted the country and the world as a whole. With consistent growth and development, China has become one of the largest economies in the world and the leading force in global emerging markets. China's economy has changed from a centrally planned system to an increasingly market-oriented economy with a rapidly expanding private sector. Since China’s entry to the WTO in 2001, China’s favorable policy and improving investment environment has attracted the largest foreign direct investments (FDI) inflows in the world. Huge inflows of FDI over the period has had an unprecedented influence on the country’s economy. Increased access to the foreign capital enhanced the competitiveness of its products in the global arena; provided learning opportunities for the workforce; and narrowed the technology gap between China and major economies in the West. Going forward, Beijing has vowed to strengthen its effort to optimize the country’s economic structure; enhance investments in infrastructure; boost domestic consumption; achieve a more equitable distribution of wealth; and realize a high growth rate that is less dependent on exports. We believe that the future development of China will continue to be characterized by high growth (compared to rest of the world), an expanded domestic market, and an improving investment environment with the world's most dynamic non-state-owned, private, small to medium enterprises (SMEs). China is expected to maintain its position as the most attractive investment market in the short and mid-terms. We believe the country will maintain an annual economic growth rate around 8% to 9% in the near term. In our view, growth drivers that will likely keep comparative growth higher than any major economy over the short and mid-term include current and future stimulus programs from the central government, increasingly favorable policies, continuous foreign investments inflow, growing dynamic private enterprises, robust infrastructure investments, and growing domestic demand due to the increasing wealth and a rising middle class. Centralized Political Power China’s economic policies have been fairly consistent because of the heavily centralized political power of the country. Economic reform began in late 1970s and accelerated in mid-1980s, which 21

resulted in China's transformation into one of the largest economies in the world. The country is now a “market economy with socialist characteristics” - a socialist government using capitalistic policies to support economic growth and development. Even though China’s per-capita GNP is one of the highest in Asia, it is lower than developed Western nations. A high priority with Chinese officials is to drive the per-capita GNP to a level consistent with more developed countries. Stimulated by the success of China’s economic reform, the Chinese government continues to adopt economic liberalization policies, which have resulted in the expansion of its economic and trade relations with the rest of the world. Its major trading partners include Japan, Singapore, Malaysia, South Korea, the U.S., Germany, and Russia. The United States has become China's third largest trading partner behind Japan and Hong Kong. China accounted for 7.7% of total world trade in 2007 from just 0.8% in 1978. With global trade exceeding $3.4 trillion in 2008, China is the world’s third largest trading nation behind the U.S. and Japan. China also has strong economic and political relationships with many African countries. Economic relations with Russia, India and Pacific Rim countries are also growing. Foreign Direct Investments China remains the preferred destination for Foreign Direct Investments (FDI). FDI has been a strong element in China’s rapid expansion and a driving force in its economic growth engine. Prior to 2007, FDI was primarily directed to low end manufacturing, real estate and the service sectors. The Chinese government is now encouraging foreign companies to invest in high-valueadded manufacturing, energy conservation, high-tech product development, environmental protection and in modern service sectors. China’s policy has been revised to provide incentives for the deployment of foreign funds from ‘quantity’ to ‘quality’ in ways that encourage foreign investors to optimize the foreign funds utilization structure. According to the Chinese Ministry of Commerce, even in light of the global economic crisis, China attracted US$92.3 billion of FDI in 2008, a 10.5% increase over 2007. This is by far the largest amount of FDI of any country. As world economies are affected by the financial crisis sweeping the globe, it is expected that the FDI will slow in the next two years. However, as the China will likely become the only major market in the world to sustain a relatively high rate of growth, the country is expected to remain the world's top destination for multi-national investment. Dynamic Private Enterprise China’s economic reform provides excellent opportunities for the growth of non-state-owned private enterprises. China continues to implement reforms and is accelerating the privatization of the state-owned enterprises in non-strategic sectors. In 2008, Beijing also allowed sales of equity in China’s largest banks to foreign investors. The refinement of an integrated financial market has been moved to the top of the government’s agenda. Restructuring of the economy and an improving legal structure have contributed to a more efficient and dynamic system that has given birth to thriving private companies that did not exist at all prior to reforms.

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And the private sector continues to expand. The number of non-state-owned enterprises increased to 5.5 million by June, 2007 with an average annual growth rate of 20% over the past 20 plus years. According to the National Bureau of Industry and Commerce Administration, in 2007, there were 2,950 private enterprises with revenues of more than US$40 million. In 2007, larger companies enjoyed an average revenue growth rate of 29.37%, a 30% increase in total assets and a 47% increase in net income. Non-state-owned companies, especially privately held companies, show tremendous potential as the country’s economy continues to evolve. They are characterized by expanding size of operation, improving profitability, rising productivity, standardizing management and fast developing innovation. The industrial manufacturing sector is experiencing particularly impressive growth both in number of private companies and output contribution to the economy. It is expected that the Chinese government will deregulate more sectors as the economic reforms deepen, which will provide an excellent opportunity for the privatization of a large number of lower performing state-owned-enterprises (SOEs). Even though private companies typically outperform SOEs, they have been dealing with the challenge of limited sources of funding. Inefficient state enterprises account for almost 70% of bank lending, which resulted in overproduction, inefficiency, and wasted capital. As the government gradually removes special privileges given to SOEs, private companies are expected to become more competitive and achieve higher rates of growth.

Figure: Growth of Private Sector Source: National Bureau of Statistics of China

China's Rising Middle Class, a Powerful Market China’s sustained growth since 1978 has reduced poverty levels in the country by increasing the per capita income and offering more opportunities through a diversified economic structure. By international standards, the percentage of the population below the poverty line came down from 23

approximately 53% in 1981 to around 10% in 2006 (3.5% by domestic standards). China’s per capita income is presently $1,740 which is one of the highest in Asia. The Chinese government adopted the “household responsibility system” in early 1981. This reform provided strong motivation and more freedom for peasants. These reforms resulted in a significant increase in agricultural output. In the short period of time from 1981 to 1987, poverty in China was cut in half. The government is expanding reform in the land and agricultural industries, and has committed to make massive investments in basic infrastructure in rural areas. It is expected that we will see significant improvement in the standard of living of the rural population going forward. China’s middle class has grown from 65.5 million in January 2005 to 80 million in January 2007. Driven by continued economic growth, it is expected that the middle class population will expand to 700 million by 2020. Personal consumption in China’s total GDP was 38% in 2006 compared with the world average of 59% (71% in the U.S.). An annual growth rate of 12% in private banking provides an indication of the potential domestic market in China. We believe that the rising middle class will boost domestic consumption and reduce the country’s reliance on export for economic expansion.

Figure: Per Capital Annual Disposable Income Source: National Bureau of Statistics of China

Strong Infrastructural Development - Expanding Logistics The Chinese government is committed to accelerating its investments in infrastructure. Investments in this sector have maintained an average rate of 25% growth in the past 5 years and a high growth rate is expected to continue: a trend that will be supercharged by the recently announced stimulus package. Infrastructural development is not only expected to sustain economic growth, but become an increasingly important driver for accelerated growth in the future. Examples include: 24

• •

• • •

China’s transportation system has evolved. In 2007, the rail network within China was expanded to 78,000km. The PRC is now home to the world’s largest rail system. China is also set to establish one of the largest highway networks in the world. To enable faster movement of goods, under the ‘national trunk highway system’, roads were expanded to cover more than 53,000km. With this expansion, China has the second largest express highway system in the world after the U.S. China has excellent air and shipping links supporting the business activities of the country. There are about 500 airports and 2,000 seaports spread across the country. Plans to construct an additional 31 nuclear power stations by 2020 have been announced. China is exploring a program to allow public-private ownership, which could draw serious attention from investors around the world.

Figure: Investment in Infrastructure/Fixed Asset Source: National Bureau of Statistics of China

The International Business Environment Since the country’s entry into the WTO, and its agreement regarding Trade Related Aspects for Intellectual Property Rights (TRIPS), China’s business environment has matured and liberalized. According to the "Doing Business Survey" by the World Bank, the processes of doing business in China have improved substantially. The government intends to free the market further and streamline investment processes to make the investment climate even more attractive. Years of international trade experience and the operational expertise of foreign funded enterprises has helped develop a liberalized business environment. Many general rules and common practices in international business settings have been accepted by Chinese officials, businessmen and the work force alike. As China’s economy continues to expand, the country becomes more attractive to tens of thousands of talented Chinese students who receive their education in Western countries each 25

year. The trend of returning to China will further increase the competitiveness of China's businesses and the economy as a whole.

Economic Overview China’s tremendous success in economic development is due to favorable government policies that stimulated rapid industrialization and urbanization. The economy has evolved from a highly regulated and centrally-planned structure to an open and liberalized system with a rapidly growing private sector. Although a considerable part of China’s economy remains controlled by large state-owned enterprises, China is experiencing rapid privatization. As reforms deepen, the private sector will increasingly become a larger part of the economy and remain the strongest growth driver for the country. Measured on a purchasing power parity (PPP) basis, China was the second-largest economy in the world behind the United States in 2006. Benefiting from the open door policy and increased access to foreign markets since joining the WTO, China has become the largest recipient of Foreign Direct Investment and one of the world's largest trading countries. It has become a global economic force. The Chinese economy is largely dependent on its industrial sector, which accounted for 46% of GDP in 2007. Services and agriculture accounted for 43% and 11%, respectively. The industrial sector and service sector grew approximately 12% YOY between 1997 and 2007. Total industrial output increased 13.5% in 2007. Private companies outperformed SOEs with an average growth rate of 26.7%. In 2000, total Foreign Direct Investment (FDI) was US$40.7 billion. It increased to US$72.4 billion in 2005, with a CAGR of 12.2%. FDI in China was US$72.7 billion in 2006; US$83.5 billion in 2007 and US$92.3 billion in 2008.

Figure: Total Industrial Output of China Source: China National Bureau of Statistics

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The service sector has been growing rapidly since 1990, also due to privatization. In 1990, it accounted for 31% of GDP. This increased to almost 43% by 2007. Following the referenced reforms, as the sector started to evolve, tourism became China's biggest service sector earner. It now accounts for more than 6% of GDP. Another growing sector in China is Information Technology (IT). In 2006, the IT services market reached US$6.2 billion and clocked an impressive growth rate of 18.7%. The market grew consistently at a rate of more than 40% annually from 1997 and 20% growth is expected through 2010. Key Indicators: China 2001 Year

2002

2003

Year

2004

Year

Year

2005 Year

2006 Year

2007 Year

2008*

2009*

Year

Year

Output, Employment and Prices GDP ( % change previous year)

8.3

9.1

10.0

10.1

10.4

11.1

11.4

9.4

9.2

Industrial production index

8.7

10.0

12.8

11.5

11.6

12.5

10.5

10.0

8.0

Unemployment rate (%)

3.6

4.0

4.3

4.2

4.2

4.1

4.2

4.2

4.2

Consumer price index (% change)

0.7

-0.8

1.2

3.9

1.8

1.5

4.8

4.6

4.0

Public Sector Government balance (% GDP)

-2.8

-3.0

-2.5

-1.5

-1.3

-0.5

-0.6

-0.9

-1.4

Domestic public sector debt (% GDP)

16.9

18.3

18.6

18.0

17.5

16.1

14.2

13.2

12.8

Foreign Trade, BOP and External Debt Trade balance ($US billion)

34.0

44.1

44.8

59.0

134.2

170.0

262.0

270.0

239.0

Exports of goods ($US billion)

266.1

325.6

438.4

593.4

762.5

969.1

1218.0

1449.0

1708.0

(% change, previous year)

6.8

22.4

34.6

35.4

28.4

27.1

25.7

18.9

17.9

Key export (% change) Imports of goods ($US billion) (% change, previous year) Current account balance ($US billion ) (% GDP)

7.2

23.9

35.8

37.0

29.0

29.1

27.1

19.6

18.4

232.1

281.5

393.6

534.4

628.3

754.0

956.0

1179.0

1469.0

8.2

21.2

39.8

35.8

17.6

17.9

20.8

23.2

24.6

17.4

35.4

45.9

68.7

160.8

230.0

359.0

378.0

339.0

1.3

2.4

2.8

3.6

7.2

8.7

11.0

9.3

6.8

Foreign direct investment ($US billion)

47.1

49.3

47.1

54.9

79.1

78.1

85.4

85.0

87.0

Total external debt ($US billion)

184.8

186.4

208.7

248.9

281.6

322.8

350.9

410.2

470.4 9.9

(% GDP) Short-term debt ($US billion)

13.9

13.0

12.6

12.8

12.2

11.6

10.8

10.3

56.3

65.7

88.1

115.8

148.3

173.4

..

..

Debt service ratio (% exports of g&s)

7.4

7.8

7.1

3.3

3.0

2.5

3.0

1.6

1.6

Reserves, including gold ($US billion)

216.3

292.0

409.2

615.5

822.5

1074.0

1533.0

1991.0

2345.5

Total reserves excl. gold ($US billion)

215.6

291.1

408.2

614.5

821.5

1070.0

1529.2

1987.2

2341.4

Domestic credit (% change, nominal)

13.6

29.3

19.6

8.8

10.7

16.3

..

..

..

Short-term interest rate

3.2

2.7

2.7

3.3

3.3

3.3

3.3

3.3

3.3

Financial Markets

Exchange rate (end-period) Memo: GDP ($US billion)

8.3

8.3

8.3

8.3

8.2

7.8

7.3

6.8

6.4

1324.8

1453.8

1641.0

1931.7

2243.9

2645.0

3378.0

4182.0

5080.0

* = projection Source: The World Bank

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Public Market Overview The Shanghai Stock Exchange, based in the city of Shanghai, is the largest stock exchange in mainland China and fifth largest in the world with a 2007 market capitalization of nearly USD$3.7 trillion. The current exchange was re-established on November 26, 1990 and was in operation by December 19 of the same year. It is a non-profit organization directly administered by the China Securities Regulatory Commission (CSRC).

Source: www.world-exchanges.org

The Shenzhen Stock Exchange is a smaller, secondary stock exchange located in the City of Shenzhen, Guangdong province in the south. The distinction is made for mainland China because the Hong Kong Stock Exchange, located in the special administrative region of Hong Kong, is the largest stock exchange in China. It has a long and established history. The company stocks listed on the two mainland exchanges are divided into two classes of shares called “A shares” and “B shares”; and those on the Hong Kong Stock Exchange are called “H shares”. One hundred percent of foreign investment is limited to B and H class shares and the international trading of B shares is severely restricted. It is basically closed to all international traders except for a handful of extremely large multinational organizations that qualify under the Qualified Foreign Institutional Investor (QFII) Act. And these organizations are subject to significant limitations. 2007 witnessed a dramatic increase both in the number of IPOs and funds raised in Chinese domestic stock markets. One hundred twenty IPOs raised US$63 billion in 2007, averaging an all time high of US$529 million.

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Source: Shanghai Stock Exchange, Shenzhen Stock exchange and Hong Kong Stock Exchange

Total Foreign Direct Investment and Major Sectors Receiving Funds The United Nations Conference on Trade and Development (“UNCTAD”) in its World Investment Report 2008 indicates that China is the most preferred investment location, followed by India, the United States, the Russian Federation and Brazil. Foreign investment remains a strong element in China’s rapid expansion and has been a significant driver in its economic growth. According to UNCTAD, China’s overall FDI inflow totaled $83.5 billion in 2007, a 14.8% increase from 2006. FDI inflows increased in 2008 to a record level of US$92.3 billion. China has subsequently adjusted its FDI policies from focusing on quantity to quality, and is endeavoring to create new ways of utilizing foreign funds. Looking at prospects by sector, FDI in natural resources is expected to pick up significantly. High demand for natural resources, partly caused by China’s growing economy, and the opening up of new, potentially profitable opportunities in the primary industries will attract more FDI into this sector. FDI in commodity-dependent emerging countries is expected to rise more than other emerging countries (IIF, 2008a). Current high food prices may also affect investment decisions in agriculture and related industries. Data from China’s National Statistics Bureau shows that 23.86% of the total FDI was in the mining industry in 2007; 26% in the service sector, 17% in wholesale and retail and 10% in the manufacturing and transportation sectors respectively. FDI inflows to China increasingly target services, high-tech industries and high value-added activities. The cumulative number of foreign-invested R&D centers in China exceeded 1,200 in 2008, up from 700 in 2004; and the number of transnational corporations (TNC) with regional headquarters in Beijing and Shanghai reached more than 220 in 2007. This development reflects both a shift of TNCs’ strategy from viewing China primarily as a low-cost production base to focusing on the country as a large and 29

competitive market with a pool of knowledgeable manpower as well as the Chinese Government’s growing policy emphasis on attracting quality FDI.

Source: China National Bureau of Statistics

Factors contributing to growth of FDI included a favorable business sentiment about the region’s economies, the significant rise in cross-border M&A, progress towards further regional economic integration and country-specific attributes.

Figure: China’s FDI Flow (source: UNCTAD, World Investment Report 2008)

Private Equity Investment Overview China's private equity (PE) investment market has increased rapidly since 2005. In 2007, a total of 177 major transactions funded by private equity took place in mainland China, up 59% yearover-year, and the total investment scale reached USD $12.8 billion, up 8.9% year-over-year.

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In the first half of 2008, an investment strategy of raising growth capital still dominated the market, but its percentage of funds raised was on a downward trend. However, an investment strategy of bridge and PIPE transactions increased. In 2007 the number of bridge capital financings doubled to 22 from 11 in 2006, and the number of PIPE transactions rose 15.8% to 22 from 19 in 2006. This indicates that China's private equity market tends to be diversified in terms of investment strategies. Private equity fund raising and investment activities experienced a brief downturn mid-year 2008, but started to recover slightly in September/October. According to Jinrong Street (JRSPE), a leading private equity and venture capital intelligence portal in China, 31 China-specific domestic private equity and venture capital funds were capitalized in October 2008 with total capital under management of US$ 2.587 billion. Forty-one transactions were closed in October 2008, 34 of which had total disclosed investments of US$1.377 billion.

Source: Jinrong Street

Even as the global financial crisis deepens, fund raising activities in China's PE space have started to rebound. We believe that several factors are contributing to this correction including a shift of investors' attention from battered Western markets to the emerging Chinese market; and specifically, the more favorable policies by the Chinese government and much lowered valuations. Recent closed deals showed that the average P/E in the growth stage investments has come down from around 12 in year 2007 to 7. Local Renminbi funds will gain momentum as the government establishes the legal framework for private equity investment activities, which did not exist in earnest in China’s legal system before 2008. It is expected that domestic private equity funds will become a mainstream source of financing for private and public Chinese enterprises in the future. Twelve investments of at least US$10 million were reported in October and November of 2008. This indicates top PE and VC firms’ increasing interests in infrastructure, new energy, IT, healthcare and education. Top Chinese Private Equity Firms include:

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Name

Investments Made in Last 3 years, In US$ millions 930 699 645 395 297 290 273

1 2 3 4 5 6 7

Morgan Stanley Temasek Holdings Pte. Ltd Macquarie Capital Alliance Group New Horizon Pacific Alliance Group AIG Global Investment Group The Government of Singapore Investment Corp. 8 The Carlyle Group 9 Hope Investments Management Co.,Ltd. 10 New World Development Company

242 200 193

According to a survey by China Venture, a leading Chinese private equity research company, over the last 3 years, Morgan Stanley led private equity investments in China with US$930 million. They were followed by the Temacek, a Singapore sovereign fund with US$699 million. Softbank led venture capital investments with US$419 million; and IDGVC took second place.

Investment Thesis 2008 saw a spectacular reversal of fortune in global emerging markets. For investors in Chinese equities, these have been tough times with markets down 70% from their peak in October of 2007. Today's price to earnings ratios are compressed and we believe the market has been severely oversold. Yet, China's economy is in much better shape than it was a decade ago. On December 9, 2008, in a report entitled "2009 Year Ahead" Merrill Lynch predicted the lowest global growth since 1982 (1.2%) and the lowest inflation rate since the 1960s. At the same time, Merrill predicted a second half recovery in Chinese GDP, back above 8%. Analyst opined that recovery in the G7 will be significantly weaker than in China. China Is Our Favorite Emerging Market Bloomberg reported, in an article entitled "China is Merrill Lynch's Favorite Emerging Market for 2009 , that "China's expansion will still be faster than the rest of the world, with Morgan Stanley predicting global growth of 0.9 percent in 2009". Merrill went on to say; "Stocks are 'cheap' and this Asian country will account for 80 percent of the world's economic growth...China is our favorite emerging market, until the global economic cycle turns." Merrill also opined in the 2009 Year Ahead piece, "Expect investors to turn more positive on Emerging Markets (EM) by mid-year."

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In the next several quarters, the market will separate the men from the boys. As the Chinese stimulus package kicks in, with fundamentals improving in the second half of 2009, we believe the probability of a rebound in Chinese companies listed in the U.S. is high. Fear of further redemptions and margin calls meant "cash was king" going into 2009. As the Chinese equity space deteriorated in the fall of 2008, valuations grew markedly cheaper. Today, this is where the "sweet spot" of opportunity resides. When U.S. money market funds pay less than 1%, it takes almost 100 years to double ones money. Eventually, cash will come off the sidelines and fast growing Chinese companies with solid fundamentals, excellent balance sheets, seasoned management teams and good earnings visibility will stand out. As these companies go on an M&A shopping spree in the West, acquiring assets and market share on the cheap, valuations could break out significantly. There is clear indication that this is a resurgent market with enormous potential and investment opportunity. The economic fundamentals are clear too. China has enormous excess savings as shown by its massive current account surplus - the country is swimming in cash. We are witnessing a complete reversal from the global dynamics of 1997. Today, Western economies are in a liquidity crisis and China is flush. Chinese consumers are unconstrained by debt and the economy is unconstrained by banks. Household debt is low, savings high and credit card use is almost nonexistent. The US$2 trillion in foreign assets Beijing controls leaves plenty of leeway to expand credit to businesses and consumers alike. The global growth slowdown means big policy stimulus programs in China - and they can afford them. The current plan, the largest stimulus in China's long history, focuses on transportation infrastructure, environmental projects, and housing; productive investments that will boost growth and create employment that can drive domestic consumption. This is an environment that is in stark contrast to much of the investment in overcapacity by the private sector that caused China to overheat in 2007. Expect more measures to stimulate consumption, including policies to support domestic stock markets and property transactions. Look for massive spending in infrastructure development and increased spending in social services that boost disposable income. Further, lower commodity prices, lower inflation and lower interest rates in 2009 are a bullish combination for China domestic demand themes. No doubt, the rise of the Chinese consumer is significant. But equally important are the dramatic gains in productivity that huge investments in infrastructure bring. These advancements add up to one key take-away for investors: productivity increases should kick off a new cycle of investment, economic growth, and prosperity that will benefit all participants, public and private. Historically, productivity is a catalyst for investment and higher stock market returns. In the West, especially in the U.S., rising productivity resulted in rapid economic expansion that led to a stock market and financing boom for new and expanding businesses. China's stock market was the first to tank last fall and Chinese equities currently trade at a steep discount to similar companies in Western markets. As China implements the most meaningful stimulus package in its history, growth will continue. As the rest of the world works its way out of the worst global financial crisis since the 1930s, China will redirect its huge surpluses away 33

from building FOREX reserves to investing in its people. Chinese companies will leverage their strong balance sheets to acquire assets and market share abroad at ridiculously low values. Proactive public and private investments will dynamically increase productivity that will in turn bring an overall rise in the standard of living of across all sectors of Chinese society. These investments will create employment that, in turn, generates disposable income that, in turn, drives domestic consumption. Growth Above All Else - Restated With a population that is unconstrained by debt, with a closed banking system flush with cash, and with a government that has adopted a "Growth above all else" policy, Chinese companies are uniquely positioned to grow faster than their Western counterparts. Dynamics are in place for the next boom in Chinese equities and, with solid fundamentals and sustained growth, China could lead the way to an international recovery. In December, 2009, Merrill Lynch reported in their "GEM (Global Emerging Market) 2009 Ahead -Investment Strategy, "Looking for a reasonably cheap market with a chunky current account surplus, stimulus in the offing and a stable exchange rate? China's got all that. In addition, our Global Economic Team forecasts China will account for over 80% of global growth in 2009; the consumer is unconstrained by debt; the economy is unconstrained by banks. China is thus our favorite EM, at least until the global cycle turns." Unprecedented Opportunities Although macro economic conditions in China are stronger than any major economy on earth, valuations of Chinese companies listed on U.S. exchanges are severely depressed - the space is dramatically oversold. Current dynamics offer investors experienced in the space an unprecedented opportunity to exploit inequalities in the market to generate superior returns. At Chinamerica, with six years of boots on-the-ground in the PRC, management has developed significant direct investment experience. In addition to being lead investor in multiple high profile transactions in the Chinese APO space, we have helped portfolio companies secure hundreds of millions of dollars in follow-on financings. We have helped companies recruit CFOs and independent boards of directors and helped management teams navigate their way from the OTCBB to major U.S. stock exchanges. We have engineered financial structures that have been adopted internationally. We have developed deep and valuable relationships in China and the U.S. that uniquely position Chinamerica to exploit what is certain to be the next investment cycle in China's rise. As the China miracle moves into its next phase of evolution, Chinamerica stands ready, willing, able and anxious to capitalize on the significant investment opportunities at hand.

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About the Authors Beau Johnson is Founder and Managing Director of Chinamerica Holdings, LLC an SEC Registered Investment Adviser and is General Partner of Chinamerica Fund, LP. Since 1985, Mr. Johnson has also been CEO of Executech Financial Advisors, LLC, a financial publishing firm that was also registered with the SEC as Registered Investment Adviser. He has over 30 years’ experience in general securities, investment banking, capital formation, mergers and acquisitions, venture capital, corporate development, financial publishing and sales and marketing management. Mr. Johnson has been publisher, co-publisher and/or senior editor of Small Cap Manager, Analysts Spotlight, The Dutton Report and The Momentum Investor, online publications with one of the financial newsletter industry's largest circulations. Mr. Johnson provides editorial commentary on China and the Small Cap segments of U.S. capital markets to a readership of over 1,000,000 retail investors and 75,000 institutional and professional investors. He has held executive and board level positions in both high growth and turnaround environments and founded, developed and sold several oil and gas exploration/development companies. Mr. Johnson served as President of two NASD (now FINRA) member Broker Dealers, has owned and/or controlled franchise offices of three national NASD (now FINRA) member firms and currently maintains registrations with FINRA, including General Securities Principal, Financial and Operations Principal and Registered Investment Adviser. Haiping Ni is the Director of Asian Investment for Access America Global Investments. He joined Access America after graduating from the Jones School of Business at Rice University with an MBA. Prior to his graduate studies, Mr. Ni was the Vice Director of the Shanghai, China office of the Tianjin Economic-Technological Development Area (TEDA), a special foreign direct investment industrial zone in China. While at TEDA, he was instrumental in establishing the Shanghai office and was in charge of sourcing and negotiating transactions originated from North America and Europe. He represented TEDA as a member at the Economist Intelligence Unit (Shanghai), built TEDA's Shanghai network and increased investment deal flow, provided consulting service for potential investors, conducted research on emerging industries and investment trends, analyzed the competitive advantages of peer industrial zones, and provided strategic advice to TEDA's executive management. Prior to his promotion to Vice Director, Mr. Ni was the Team Leader and Project Manager of the Overseas Investment Section where he closed direct foreign investment transactions valued at over $120 million with three Fortune 500 companies. In addition to the MBA from Rice, Mr. Ni has a Bachelor of Arts Degree from Tianjin Foreign Studies University, Tianjin, China. He is fluent in English and Mandarin Chinese. Disclaimer Opinions expressed in this report may change without prior notice. Investment recommendations may change and readers are urged to check with their investment counselors before making any investment decisions. InvestorsInsight Publishing, Inc. (IIP), respective staffs and associates, and the authors may or may not have investments in any companies, stocks or funds cited herein, may or may not have long or short positions and/or options and warrants relating thereto and may purchase and/or sell these securities or options at any time in the open market or otherwise without further notice. IIP, its Officers, Directors, Employees and Affiliates may receive compensation for the dissemination of this information.

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Communications from IIP are intended solely for informational purposes, and are not intended to be a solicitation, offering or recommendation of any security, investment management service or advisory service. Statements made by various contributors do not necessary reflect the opinions of IIP and should not be construed as an endorsement either expressed or implied. IIP is not responsible for typographic errors or other inaccuracies in the content. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided "AS IS" without any warranty of any kind. Past results are not necessarily indicative of further performance.

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