Th R t B k t Chi ?The Route Back to China? (China Market ... · Country Head, Securities & Fund...

Th R t B k t Chi ?The Route Back to China? (China Market and RQFII Update)

Dr. Minggao ShenHead of China Research

Citi852 2501 2485+852-2501-2485

[email protected]

Kevin WongKevin WongHead of Securities & Fund ServicesGlobal Transaction Services, China

+86 (21) 2896-6705 k i @ iti

29 February 2012

[email protected]

Table of Contents

1. China Economic & RMB Outlook 5

2. China QFII Update

Appendices

18

26Appendices 26

Dr Minggao ShenDr. Minggao Shen

Head of China Research

Dr. Shen, Managing Director based in Hong Kong, is an Economist.

Before joining Citigroup in 2005 in Beijing, Dr. Shen was an Associate Professor at the China Center for Economic Research, Peking University. He also served as a research fellow at the Research Center for Rural Development, and the Development Research Center, both under the State Council of China.

Dr. Shen specializes in economic and market analysis in China. During his 25+ years in the industry he has conducted collaborative research with or provided consulting services for the World Bank, Asia Development Bank, National Development and Reform Commission, and People's Bank of China.

Dr. Shen received his PhD in economics from Stanford University in 2001

See Appendix A-1 for Analyst Certification, Important Disclosures and non-US research analyst disclosures.Citi Investment Research & Analysis is a division of Citigroup Global Markets Inc. (the "Firm"), which does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in

3

result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Kevin WongKevin Wong

Country Head, Securities & Fund Services, China

Kevin joined Citi in August 2011 as Managing Director and Securities Country Manager for Citi’s Securities & Fund Services group in China and has over 16 years experience in the banking industry having worked in& Fund Services group in China and has over 16 years experience in the banking industry, having worked in Hong Kong, Singapore and Australia prior to his relocation to Shanghai.

Kevin is instrumental in communicating with regulators and infrastructures and is a seasoned professional with extensive experience in driving new business development activities, as well as dealing with institutional clients.

Kevin graduated from the University of Sydney in 1996 with a Bachelor of Commerce degree and started his career in 1996 in Sydney with Bankers Trust, which was acquired by Deutsche bank in late 90's, and moved to Singapore in 1999 Prior to joining Citibank China Kevin was the Managing Director with The Bank ofto Singapore in 1999. Prior to joining Citibank China, Kevin was the Managing Director with The Bank of New York Mellon, heading asset servicing sales team for Asia Pacific region based in Hong Kong.

4

Chi E i d RMB O tl kChina Economic and RMB Outlook:Slower Growth, Looser Policy

Citi’s Key Macro Forecasts

2011F 2012F 2013F 2011F 2012F 2013F 2011F 2012F 2013F 2011F 2012F 2013FGbbal 3.0 2.4 3.0 3.6 3.0 2.9 0.2 0.2 0.4 (4.9) (4.3) (3.3)Based on PPP Weights 3.7 3.0 3.5 4.2 3.5 3.3 0.5 0.3 0.5 (4.3) (3.9) (3.1)Industrial Countries 1 3 0 7 1 1 2 3 1 8 1 4 (0 8) (0 5) (0 4) (6 9) (5 7) (4 4)

GDP Growth (% YoY) CPI Inflation (% YoY) Current Balance (% ofGDP) Fiscal Balance (% ofGDP)

Industrial Countries 1.3 0.7 1.1 2.3 1.8 1.4 (0.8) (0.5) (0.4) (6.9) (5.7) (4.4)US 1.7 2.0 1.8 2.4 2.2 1.8 (3.1) (2.6) (2.5) (9.3) (7.3) (6.2)Japan (0.9) 1.2 1.4 (0.3) (0.4) (0.1) 2.1 1.5 2.0 (10.7) (10.9) (8.5)Euro Area 1.5 (1.3) (0.3) 2.7 2.3 1.4 (0.3) (0.3) (0.3) (4.3) (3.4) (2.2)Canada 2.4 1.9 2.3 2.9 2.0 1.8 (2.8) (2.7) (2.6) (1.8) (1.5) (0.9)Australia 1.9 3.4 3.8 3.4 2.2 3.1 (2.2) (3.0) (5.0) (3.4) (2.5) 0.1New Zealand 1.4 2.6 2.6 4.1 2.1 2.3 (3.9) (5.3) (7.2) (9.2) (5.8) (2.6)Germany 3.1 0.6 1.5 2.3 1.8 2.3 5.4 4.4 3.9 (1.0) (1.6) (1.1)France 1.7 (0.3) 0.5 2.3 2.3 1.6 (2.3) (2.0) (1.1) (5.5) (4.2) (2.8)Italy 0.4 (2.4) (0.5) 2.9 3.4 2.1 (3.2) (2.7) (2.2) (4.4) (3.0) (1.3)Spain 0.7 (2.8) (1.6) 3.1 2.3 1.7 (3.7) (2.9) (2.2) (8.0) (6.0) (3.7)Greece (7.0) (8.0) (2.6) 3.1 1.2 (0.4) (9.6) (8.3) (6.7) (14.1) (11.6) (8.7)Ireland 0.8 (0.7) 0.3 (0.8) 0.2 0.0 0.6 3.2 4.3 (9.9) (9.7) (10.0)Portugal (1.5) (5.5) (3.4) 3.6 3.0 1.9 (8.4) (5.2) (2.4) (5.9) (4.6) (4.1)Netherland 1.3 (1.2) 0.4 2.3 2.3 1.8 8.1 7.3 7.3 (4.1) (3.9) (3.5)Belgium 1.9 (0.5) 0.8 3.5 2.8 1.7 (0.7) (2.0) (1.3) (3.7) (2.5) (1.3)Denmark 1 0 0 9 1 2 2 7 2 0 1 4 6 7 5 7 5 5 (2 5) (5 2) (3 9)Denmark 1.0 0.9 1.2 2.7 2.0 1.4 6.7 5.7 5.5 (2.5) (5.2) (3.9)Norway 2.7 2.5 2.9 1.3 1.9 2.2 14.0 14.3 14.9 12.0 12.5 13.5Sweden 4.5 0.5 1.9 2.9 1.2 1.9 7.4 7.7 8.0 0.1 (0.4) (0.2)Switzerland 1.8 (0.2) (0.1) 0.2 (1.2) (1.3) 14.5 14.1 14.6 0.6 (0.2) (1.0)UK 0.9 0.2 1.0 4.5 2.4 1.9 (2.4) (0.1) 1.3 (8.0) (7.7) (6.8)Emerging Markets 6.1 5.3 5.9 6.1 5.1 5.2 2.1 1.5 1.7 (1.5) (1.8) (1.5)g g ( ) ( ) ( )China 9.2 8.4 8.6 5.4 3.5 3.9 2.8 2.0 1.5 (1.1) (2.0) (1.5)India 6.9 7.0 7.5 9.0 6.7 6.5 (3.5) (3.6) (3.2) (8.3) (8.0) (7.5)Russia 4.3 3.5 4.0 8.4 5.5 6.8 5.5 3.2 0.6 0.8 (0.3) (0.5)Brazil 2.9 3.3 4.5 6.6 5.5 5.1 (2.1) (2.1) (2.4) (2.7) (2.7) (2.9)

Source: Citi Investment Research and Analysis estimates.

6

Slowdown in Both External and Domestic Demands

China’s Export Growth is Sensitive to Growth in the US and Europe

Property Sector: Investment May Plunge

100 45506

60

80

30

35

40

30

40

2

4

20

40

(%Y-

o-Y)

20

25 (%Y-o-Y)

10

20

0 (% Y-oY-

o-Y)

(20)

0

10

15

0

(4)

(2)

o-Y)(% Y

(40)

( )

2006

2007

2008

2009

an-2

010

eb-2

010

ar-2

010

pr-2

010

ay-2

010

un-2

010

Jul-2

010

ug-2

010

ep-2

010

ct-2

010

ov-2

010

ec-2

010

an-2

011

eb-2

011

ar-2

011

pr-2

011

ay-2

011

un-2

011

Jul-2

011

ug-2

011

ep-2

011

ct-2

011

ov-2

011

ec-2

011

0

5

(20)

(10)

(6)

Ja Fe M Ap Ma Ju J Au Se O No

De Ja Fe M Ap Ma Ju J Au Se O No

De

Floor Area Started (LHS)

Real Estate Investment exEconomic Housing (RHS)

Real Estate Investment (RHS)

(30)(8)

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

US Real GDP EU27 Real GDP CH Export (RHS)

Source: CEIC, Haver and CIRA.

7

Domestic Demand: Infrastructure Investment by Region

Potential for Infrastructure Investment by Province

40

Gansu

Yunnan

30

35

InnerMongolia

Guangxi

Shaanxi

Sh i

Sichuan Guizhou

QinghaiChongqing

Ningxia

25

vest

men

t% G

DP)_

Heilongjiang

HunanHebei

Jiangx

JilinAnhui

HubeiXinjiang

ShanxiLiaoning

Fujian

Hainan

Tianjin

15

20

(Infra

stru

ctur

eIn

Henan

Shandong

Jiangsu

GuangdongZhejiang10

15

560 80 100 120 140 160 180

(Loan% GDP)

8

Source: CEIC and Citi Investment Research and Analysis.Note: Beijing (258.5% vs. 9.1% loan to GDP ratio), Shanghai (199% vs. 8.2%), and Tibet (59.5% vs. 51.2%) are not plotted here. Those blocked are coastal provinces.

Planned Investment In The 12th Five Year Plan

Projected Investments in 12th Five Year Plan

InvestmentProjected Investment in

12FYP (RMB tn)

Water Management Projects (Irrigation in the Countryside and Water Quality in Urban Areas) 2 0Water Management Projects (Irrigation in the Countryside and Water Quality in Urban Areas) 2.0

Environment Protection 3.1

Power Industry 5.3

Roads, Ports and Inland Rivers 6.2

Railway 2.8

Social Housing 5.0

Seven Strategic New Sectors (New-generation Information Technology, Energy-saving and Environment Protection, New Energy, Biology, High-end Equipment Manufacturing, New Materials and New-energy Cars) 10.0

Source: CIRA.

9

Fixed Asset Investment Growth: Key Sector Forecasts

Fixed-asset Investment by Key Sectors50

35

3231

41

37

3332

33

40

26

21

24

31

23

28

2224

28

2325

272626

25

30

(%Y-

o-Y)

1918

1719

12

17

2020

910

0Total FAI Infrastructure (23%) Property and Construction

(26%)Services (8%) Manufacturing (25%) Resources (13%)

2004–2008 2009 2010 2011 January–November 2012F

Source: CEIC and CIRA.Note: Numbers in parentheses are shares of total FAI in 2011.

10

Estimated Potential GDP Growth

Estimated Potential GDP Growth Rates, 2010–2020

Methodology 2001–2005 2006–2010 2011–2015 2016–2020 YearGDP per Capita

(1990 International dollars)National Data 9.8 11.2 9.7 6.5 2016 11,608

GDP Growth (Annual, %) Turning Point for Structural GDP Growth Slowdown

,

Aggregated Provincial Data 9.8 11.2 8.2 7.3 2014 10,680

Goods Based Electricity 9.8 11.2 9.0 7.2 2013 9,853

Automobile Stock 9.8 11.2 9.4 7.0 2017 12,967

Steel Stock 9.8 11.2 8.2 7.3 2017 12,514

Automobile Production 9.8 11.2 9.4 7.2 2017 12,320

Steel Production 9.8 11.2 9.7 6.7 2013 10,145

Average 9 8 11 2 9 1 7 1 11 441

Source: Development Research Center of the State Council, and Citi Investment Research and Analysis estimates.

Average 9.8 11.2 9.1 7.1 11,441

11

Further Policy Easing Likely

Key Policy Instruments

RRR Cuts: 3–7 times

Credit Easing: Rmb8tn New Loans and Rmb14tn Total

25 6

Financing expected

Proactive Fiscal Policy: Structural Tax Cut

Privatization: Infrastructure, Energy and Services

20

4

5

Key Indicators to Watch Before Further Easing

Rising unemployment after the Chinese New Year: Some 4m people could lose jobs in the export sector l

15

(%)

3

(%)

alone

Falling property sector investment: Growth may slow to below 10% Y-o-Y in 1Q

Collapsing power consumption: As we show below

10

2

Collapsing power consumption: As we show below, some experts only expect 5% in 1Q and 8.5% for the year

Deteriorating external demand: Export growth could h l i l di it

51

reach low single digits

Sluggish fiscal revenue: Possibly single-digit growth in 1Q

02004 2005 2006 2007 2008 2009 2010 2011 2012

0

RRR One-Year Deposit Rate

12

Capital Flight vs. Liquidity Condition

PBOC’s Purchase of Foreign Exchanges Liquidity has Reached its Turning Point

40

45 25

600

700

30

35

40

15

20

400

500

600

20

25

30

(%Y-

o-Y)

10

15

(%)

200

300

400

MB

bn)

10

15

20(

5

0

100

(RM

0

5

10

(5)

0

(200)

(100)

CIC Formed

0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

(5)

M1 M2-GDP-CPI (RHS)

(300)2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: CEIC and CIRA.

13

Major RMB/CNH Policy Changes in 2010–12Feb-10 HKMA expanded scope of RMB banking business & approved mainland’s non-financial firms to issue RMB bonds in HK

Jun Expanded RMB trade settlement to 20 mainland provinces with all foreign trade partnersJul HK banks can offer RMB a/c, loan & investment products to corporates. Eliminated limit on RMB conversion & corporate a/c

transfers Allowed authorized foreign central banks, HK & Macau RMB clearing centers, and other foreign banks participating in the

RMB trade settlement scheme to invest their RMB in onshore interbank bond marketOct HKMA taps PBOC's RMB swap lines to provide RMB conversion facilities to HK banks that have RMB trade settlement

needs, as the clearing bank BOC(HK) used up its RMB8bn conversion quotaNov SAFE tightens capital account rules causing significant disruption to on/off shore forward markets requiring banks toNov SAFE tightens capital account rules, causing significant disruption to on/off shore forward markets, requiring banks to

maintain long USD positions at the end of each day, among other measuresDec Expanded the list of eligible enterprises and participating locations in the RMB trade settlement scheme

HKMA requires HK banks to first square their own positions for RMB trade proceeds before purchasing RMB through the Clearing Bank, RMB purchases for trade transactions can only be for within three monthsg p y

HKMA requires banks to limit their RMB net (long/short) open positions to 10% of their RMB assets or liabilitiesJan11 PBOC allowed non-financial Mainland enterprises to settle overseas direct investment (ODI) in RMBApr PBOC cut the offshore Yuan deposit rate it offers to HK’s clearing bank (BOCHK) to 0.72% from 0.99%

Banks can deposit their excess RMB funds in a Fiduciary Account with the PBoC via the Clearing Bankp y gJun PBOC directive No.4 of document No.145 – requires Mainland importers to do FX conversion onshore for their trades with

offshore exportersOct PBOC and MOC jointly issued application guidelines for RMB settlement for FDI

Dec CSRC issued RQFII guidelines (initial scale: RMB20bn) & issued first batch of licenses; SFC subsequently approved 18Dec CSRC issued RQFII guidelines (initial scale: RMB20bn) & issued first batch of licenses; SFC subsequently approved 18 RQFII funds in Jan-12

NDRC approved 1st cross-border RMB mid-long term commercial loan (Guangdong Nuclear Power-BoCHK RMB3bn loan in HK)

Jan12 HKMA released more RMB working capital for banks (by allowing RMB sovereign bond holdings to be included as part of th i i 25% ithh ldi RMB t d it ) d i d RMB N t O P iti li it t 20% (f 10%the minimum 25% withholding RMB customer deposits) and raised RMB Net Open Position limit to 20% (from 10% previously)

14

RMB Deposits in HK

600

700 25

500

20

300

400

RM

B in

Billi

on

10

15

%

200

5

10

0

100

0

5

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

RMB Deposits in HK Share of Total Deposits (RHS) Share of Total Total Foreign Deposits (RHD)

15


RMB Appreciation May Continue But With a Slower Pace

10 (10)

Appreciation Against the Dollar, SelectedEmerging Market Currencies

RMB Appreciation vs. CPI Inflation

8 (8)

HUF

INR

ZAR

TRY

4

6 (6)

(4)RUB

BRL

MXN

HUF

2 (2)KRW

TWD

MYR

THB

`

0 0

HKD

PHP

IDR

SGD

Appreciation Depreciation

(2)02 03 04 05 06 07 08 09 10 11 12

2

CPI (% YoY) RMB / USD (% YoY, Reversed, RHS)

(10) 0 10 20 30 40

CNY

HKD

Since July 2011 2011

Source: Bloomberg and CIRA.

16


RMB Internationalization

RMB internationalization will likely be a gradual process

Key challenges: RMB asset markets, inflation-targeted monetary policy, and RMB revaluation

Interest rate liberalization: Wealth management products and informal lending Interest rate liberalization: Wealth management products and informal lending

Capital account liberalization (Sheng Songcheng, 2011)– In the near term (1–3 years), deregulating direct investment

In the medium term (3 5 years) deregulating commercial credit supported by trade– In the medium term (3–5 years), deregulating commercial credit supported by trade– In the longer term (5–10 years), deregulating capital inflows and outflows, and investment in real

estate, equity and bonds

17

China QFII Update

Qualification Requirements to become a QFII

Investor Years of Business Experience

Paid-in Capital

Assets under Management

Other Requirements

Fund Management Company

5 N/A No less than USD 5 billion N/A

Insurance Companies 5 N/A No less than USD 5 billion N/A

S iti Fi 30 No less than No less than N/ASecurities Firms 30 No less than USD 1 billion

No less than USD 10 billion N/A

Commercial Banks N/A N/A No less than USD 10 billion

Top 100 globally in terms of total assets

Other Institutional Investors* 5 N/A No less than

USD 5 billion N/A

MOU Between CSRC and Applicant’s financial regulator

* Including pension funds, charity funds, donation funds, trust companies & government investment management companies, etcg p , y , , p g g p ,

19

QFII Application - A Transparent Process2 Apply 3 CSRC1. Designate

Custodian

2. Apply through

Custodian

3. CSRC and SAFE Approval

4. Account Opening

5. Capital Injection

6. Start Trading

Approx. 6 - 9 months 3–5 weeks 2 weeks 6 months

Award mandate Prepare application CSRC reviews QFII Approval from PBOC Final quota Start trading Award mandateto custodian bank

Prepare application docs

Investment plan is the key document

Wording and format are important

CSRC reviews QFII application

CSRC approves Investment License

SAFE approves Investment Quota

Approval from PBOC for RMB Special A/C

Open securities a/c with CSDCC SH/SZ

Designate local broker (SH/SZ)

Final quota subject to actual amount paid-in

Start trading

Help to build Prepare a/c opening Handles FX Custodian

Apply to open special RMB and FX accts

Agreement among custodian /QFII/Broker

Open safekeeping A/C with Custodian

Guide on first Guide on QFII differentiated application strategy and working plan

Recommendation by Custodian to regulators

application to SAFE/PBOC

Prepare regulatory compliance reports

Provide tailored account structure for

conversion Tailored solution

to meet client’s cash mgmt preferences

Remind relevant

Guide on first trade execution and settlement

application process, market updates, and arrange meeting with regulators if necessary

Documents review and submit

Help clients to answer queries from CSRC/SAFE

client Coordinate

legal agreements with brokers

regulatory reporting

Monitor cash injection flow and transfer status

Provide QFII related market information

Assist in draft investment plan

Assist in i ti ith

Agreement among custodian /QFII/Broker

Confirm on trading & ops flow and system

System connection and trading test

Broker Provide trading & execution service

Provide research support and corp accessA i t i

20

communication with regulators

Consultancy

flow and system connectivity

Open QFII trading account

Assist in settlement

What’s New in China QFIIQFII License/Quota Approval Updates• In Q4 2011 & Jan 2012, CSRC approved 19 & 7 new QFIIs respectively,

Q4 2011– Monetary Authority of Singapore

• SAFE approved total 6 new quotas (each approval is USD$100 million ) and 2 incremental quotas:

– New quotas: Lyxor Asset Management US$100mn Polaris Inter. Securities Investment Co. Ltd. US$100mn

$y y g p

– China Life Insurance Co., Ltd. (Taiwan) – Shin Kong Life Insurance Co., Ltd. – The Trustees of Princeton University – Shinko Asset Management Co., Ltd.– Canada Pension Plan Investment Board

Assicurazioni Generali S.p.A. US$100mn Banco Bilbao Vizcaya Argentaria, S.A. US$100mn Cathay Securities Investment Trust Co. Ltd. US$100mn Fuh Hwa Securities Investment Trust Co. Ltd. US$100mn

– Incremental quotas: UBS Global Asset Management (Singapore) Ltd US$50mn

License ApprovalQFII Approval Process Expedited

– Van Eck Associates Corporation– Hansberger Global Investors, Inc.– EARNEST Partners LLC– Bank of Thailand– Kuwait Investment Authority– Northern Trust Global Investments Limited

UBS Global Asset Management (Singapore) Ltd. US$50mn Invesco Asset Management Limited US$100mn

• CSRC organized an urgent meeting on 14 Dec 2011 with all the QFII custodian banks and announced verbally they will expedite the QFII license review process.

• CSRC will shorten its approval process to 6 months.

• No additional PowerPoint material will be required

Northern Trust Global Investments Limited– Taiwan Life Insurance Co. Ltd– The Bank of Korea– Ontario Teachers’ Pension Plan Board– Korea Investment Corporation– Russell Investments Ireland Limited No additional PowerPoint material will be required.

• CSRC will no longer provide a quarterly shortlist of QFII applicants, therefore all applicants are encouraged to submit updated material as early as possible.

Quota Approval

– Metzler Asset Management GmbH– HI Asset Management Co. Limited

Jan 2012– Shinhan BNP Paribas Asset Management Co., Ltd.

Stichting Pensioenfonds voor Huisartsen (Netherlands)• During the first three quarters of 2011, only 4 panel meetings had been

arranged by SAFE, resulting in only 15 QFII quotas approved.

• In Nov 2011, with the easing of pressure on inflation and “hot money” inflow, SAFE reinstated its monthly panel meeting for QFII quota consideration. It is anticipated SAFE will approve 4-5 QFII quotas on

– Stichting Pensioenfonds voor Huisartsen (Netherlands) – National Pension Service (South Korea)– Mercuries Life Insurance Co, Ltd – Prudential Financial Securities Investment Trust Enterprise– Principal Global Investors LLC– Hospital Authority Provident Fund Scheme (HK) consideration. It is anticipated SAFE will approve 4 5 QFII quotas on

monthly basis. The Panel meeting held respectively in Nov and Dec 2011 had approved 8 quotas in total.

21

What’s New in China QFII

Multiple License Application

Until further notice, CSRC will no longer accept multiple applications from the same

QFII Off-shore ETF Fund On China A-share Index It is observed that recently more and more QFIIs are issuing ETF funds overseas on

China local A-share index. The most popular funds are SSE 50 Index fund and SSE 180 Index fund.A j i b h Sh h i S k E h d h Sh h S kapplications from the same

group company. As a joint venture between the Shanghai Stock Exchange and the Shenzhen Stock

Exchange, CSI is a professional business entity specializing in the creation and management of indices and index-related services. QFIIs can contact CSI Zhou Bing directly for index licensing. The information is as shown below:

Zh BiZhou BingAssistant Manager of Market Service Department China Securities Index Company Limited 13F South Securities Tower No. 528 South Pudong Road Shanghai 200120 P R China

Delayed Application

Until further notice, CSRC will no longer entertain extension of

Shanghai, 200120 P.R. ChinaTel 8621-6880 3988-122 Fax 8621-6882 9830Mobile 86138 0183 7080Email [email protected]

application beyond one-year period. The key guidance of CSI applying process for off-shore ETF index fund is as follows:

– Before obtaining the license and quota from CSRC and SAFE, QFII should contact China Securities Index Co., Ltd. (CSI) for the index licensing contract negotiation. CSI indicates the process will take 2-4 weeks to complete.Aft th t i d b SAFE CSI ill b it th i d li i– After the quota is approved by SAFE, CSI will submit the index licensing application to CSRC. The approval by CSRC will take one month according to the information provided by CSI.

– After the sign-off of the contract approved by CSRC, QFII can issue the ETF funds overseas.

22

New Market Development

CSRC released the pilot administration rules for securities finance business in Oct 2011.

SFC was formed in October 2011 Mr Xue Wenshi (previously Director of Shaanxi Province Securities Regulatory Bureau)

The Establishment of Securities Finance Company (SFC)

SFC was formed in October 2011. Mr. Xue Wenshi (previously Director of Shaanxi Province Securities Regulatory Bureau) was appointed as Chairman of SFC and Mr. Nie Qingping (previously Director of the Working Group for Margin Trading & Securities Lending in CSRC) was appointed as General Manager of SFC.

CSRC has assigned several senior officers to SFC with specific posting to be announced. In addition, SFC has began to recruit externally.recruit externally.

Some guiding principles that SFC will take in the future are as follows:

– SFC is the central counterparty in all securities financing transactions.

– SFC will only “deal” with securities companies as participants– SFC will only deal with securities companies as participants.

– Securities companies will firstly lend securities and cash to their clients. When these are insufficient, the securities companies can approach SFC to borrow.

– Upon receipt of the borrowing request, the SFC will issue feeds to other local securities firms to solicit interest to lend. Interested companies may reach out to their local client base (banks, pensions, insurance companies, trust companies and asset management companies) to solicit interest to lend. Whether QFII can participate in this market has not yet been finalized by CSRC.

– SFC will allocate the loan on a proportional basis. Rates paid to lenders and charged to borrowers will be fixed, and the level will vary depending on the term of the loan. The spread between rates paid to lenders and charged to borrowers will be the revenue of SFC.

SFC has not yet finalized the systems, working flows and working guidelines.

23

New Market Development

RQFII Scheme Announced CSRC, SAFE and PBOC jointly released the “RMB Qualified Foreign Institutional Investors (RQFII) Securities Investment Pilot

Regulation For Mutual Fund Companies and Securities Companies” (Circular No. 76) on 16 Dec 2011.

Following the circular No 76 CSRC SAFE and PBOC immediately issued the implementation rules respectively for “RMB Qualified Following the circular No. 76, CSRC, SAFE and PBOC immediately issued the implementation rules respectively for RMB Qualified Foreign Institutional Investors (RQFII) Securities Investment Pilot Regulation for Mutual Fund Companies and Securities Companies”.

CSRC and SAFE are proceeding the review process at amazing speed, such as CSRC and SAFE had approved the first batch of RQFII licenses and quotas for securities companies and asset management companies respectively on 26 and 30 Dec 2011, which is far beyond the market expectation.

The Approved 12 Securities Companies The Approved 9 Mutual Fund Companies

y p

For more information of our observation on regulation, kindly refer to the Appendix D, E and F.

pp p pp p China International Capital Co., Ltd. RMB 0.9 billion (1)

China Merchants Securities Co., Ltd. RMB 0.9 billion (1)

CITIC Securities Co., Ltd. RMB 0.9 billion (1)

Essence Inter. Financial Holdings Ltd RMB 0.9 billion

CSOP Asset Management Limited RMB 1.1 billion

China Asset Management Co., Ltd RMB 1.2 billion

China Universal Asset Management (Hong Kong) Co., Ltd RMB 1.1 billion

Bosera Asset Management (International) Co ., Ltd RMB 1.1 billion g

Ever Bright Securities Co., Ltd. RMB 0.9 billion (1)

GF Securities Co., Ltd. RMB 0.9 billion (1)

Guosen Securities Co., Ltd. RMB 0.9 billion (1)

Guotai Junan Securities Co., Ltd. RMB 0.9 billion (1)

g ( )

Da Cheng International Asset Management Co., Ltd RMB 1.1 billion

E Fund Management Co., Ltd RMB 1.1 billion (1)

Harvest Global Investments Limited RMB 1.1 billion

HFT Investment Management (HK) Co., Ltd RMB 1.1 billion

Guoyuan Securities Co., Ltd RMB 0.5 billion (1)

Haitong Securities Co., Ltd. RMB 0.9 billion (1)

Huatai Securities Co., Ltd RMB 0.5 billion (1)

Shenyin Wanguo (H.K.) Limited RMB 0.9 billion

Hua An Asset Management (Hong Kong) Limited RMB 1.1 billion

Note: (1) Source from regulatory website and industry participants.

24

Comparative Analysis of Capital Market Access

QFII RQFII Foreign Investor of Interbank Market

Regulator CSRC, SAFE CSRC, PBOC, SAFE, Hong Kong SFC PBOC

Criteria of applicant

Commercial bank:– Bank total assets: Top 100 globally;

Hong Kong subsidiaries of China securities companies

RMB clearing banks in Hong Kong and Macau

– Securities AUM : not less than US$10 billion

Securities Company:– Capital: not less than US$1 billion;– Operating more than 30 years;

S

Hong Kong subsidiaries of China mutual fund companies

RMB clearing participating banks (also referred to as business participating banks)

Offshore central banks and monetary authorities

– Securities AUM: not less than US$10 billion

AMC, Insurance and other institutions:– Business Experience of 5 Years, – Securities AUM: not less than

US$5 billionUS$5 billion

Regulations Administration measures of QFII’s domestic investment issued by PBOC, CSRC and SAFE in Aug 2006 and its related notice issued by CSRC; Administration rules on the FX control of

Administration measures of RMB QFII’s domestic investment issued by PBOC, CSRC and SAFE in Dec 2011 and its related implementation rules by CSRC and SAFE

PBOC’s notice on the Pilot Scheme for three types of offshore RMB clearing banks to participate in China interbank bond market issued on 18 August 2010

Administration rules on the FX control of QFII investment issued by SAFE in Sep 2009.

SAFE.

Investment instruments

Stock , bond, fund, warrant, IPO, bond issuance and financial futures

Stock, fund, warrant, IPO, convertible bonds, bonds in the exchange and interbank market, additional stock issuance and other

Bonds in Interbank Market

additional stock issuance and other instrument allowed

FX Required Not required Not required

Markets accessible

Stock Exchange Stock Exchange;Interbank Market

Interbank Market

25

Appendices

A. List of QFII with Approved Investment Quota

$

List of QFII with Approved Investment Quota

No. QFII NameQFII License

Approval DateQFII Quota

(US$100mn)

1 UBS AG 05/23/2003 7.90

142 QFIIs had been approved with a total investment quota of US$22.24 billion (as of Jan 2012)



(US$100mn)

22 Commerzbank (Dresdner Bank AG) 9/27/2004 0.75

2 Nomura Securities Co.,Ltd 05/23/2003 3.50

3 Morgan Stanley & Co. International Limited 06/05/2003 4.00

4 Citigroup Global Markets Limited 06/05/2003 5.50

5 Goldman, Sachs & Co. 07/04/2003 3.00

23 Fortis Bank SA/NV 9/29/2004 5.00

24 BNP Paribas 9/29/2004 2.00

25 Power Corporation of Canada 10/15/2004 0.50

26 Credit Agricole Corporate and Investment Bank 10/15/2004 0.75

Goldman Sachs Asset Management6 Deutsche Bank Aktiengesellschaft 07/30/2003 4.00

7 The Hongkong and Shanghai Banking Corporation Limited 08/04/2003 4.00

8 ING Bank N.V. 09/10/2003 4.00

9 JPMorgan Chase Bank, National Association 09/30/2003 1.50

27 Goldman Sachs Asset Management International 05/09/2005 5.00

28 Martin Currie Investment Management Ltd 10/25/2005 1.20

29 Government of Singapore Investment Corporation Pte Ltd 10/25/2005 3.00

30 Pi B id I t t LLC 11/14/2005 1 50g ,

10 Credit Suisse (HongKong) Limited 10/24/2003 5.00

11 Standard Chartered Bank (HongKong) Limited 12/11/2003 0.75

12 Nikko Asset Management Co.,Ltd 12/11/2003 4.50

13 Merrill Lynch International 04/30/2004 3.00

30 PineBridge Investment LLC 11/14/2005 1.50

31 Temasek Fullerton Alpha Investments Pte Ltd 11/15/2005 3.00

32 JF Asset Management Limited 12/28/2005 3.75

33 The Dai-ichi Mutual Life Insurance Company 12/28/2005 2.00

34 DBS Bank Ltd. 02/13/2006 1.003 e y c e a o a 3 00

14 Hang Seng Bank Limited 05/10/2004 1.00

15 Daiwa Securities SMBC Co.,Ltd. 05/10/2004 0.50

16 Lehman Brothers International (Europe) 07/06/2004 2.00

17 Bill & Melinda Gates Foundation 07/19/2004 3.00

34 DBS Bank Ltd. 0 / 3/ 006 1.00

35 AMP Capital Investors Ltd. 04/10/2006 3.00

36 The Bank of Nova Scotia 04/10/2006 1.50

37 KBC Financial Products UK Limited 04/10/2006 0.20

38 La Compagnie Financierr Edmond de R th hild B 04/10/2006 1.00

18 INVESCO Asset Management Limited 08/04/2004 3.50

19 ABN AMRO Bank N.V. 09/02/2004 1.75

20 Société Générale 09/02/2004 0.50

21 Barclays Bank PLC 09/15/2004 4.00

Rothschild Banque

39 Yale University 04/14/2006 1.50

40 Morgan Stanley Investment Management Inc. 07/07/2006 4.50

41 Prudential Asset Management (Hong Kong) Ltd 07/07/2006 3.00

y

Source: CSRC & SAFE.

42 Stanford University 08/05/2006 1.00

28

$

List of QFII with Approved Investment Quota (Cont’d)



(US$100mn)

43 GE Asset Management Incorporated 08/05/2006 3.50




(US$100mn)

64 Oversea-Chinese Banking Corporation Limited 08/28/2008 1.50

44 United Overseas Bank Limited 08/05/2006 0.50

45 Schroder Investment Management Limited 08/29/2006 3.00

46 HSBC Global Asset Management (Hong Kong) Limited 09/05/2006 3.50

47 Mizuho Securities Co.,Ltd 09/05/2006 0.50

65 First State Investment Management (UK) Limited 09/11/2008 1.20

66 DAIWA Asset Management Co. 09/11/2008 2.00

67 Shell Asset Management Company B.V. 09/12/2008 0.00

68 T. Rowe Price International, Inc. 09/12/2008 1.10

48 UBS Global Asset Management (Singapore) Ltd 09/25/2006 2.50

49 Sumitomo Mitsui Asset Management Company, Limited 09/25/2006 3.50

50 Norges Bank 10/24/2006 7.00

51 Pictet Asset Management Limited 10/25/2006 1 00

69 Credit Suisse AG 10/14/2008 2.00

70 UOB Asset Management Ltd 11/28/2008 0.50

71 ABU Dhabi Investment Authority 12/03/2008 2.00

72 Allianz Global Investors Luxembourg S.A. 12/16/2008 1.0051 Pictet Asset Management Limited 10/25/2006 1.00

52 The Trustees of Columbia University in the City of New York 03/12/2008 1.00

53 Prudential Asset Management Co.,Ltd. 04/07/2008 0.75

54 Robeco Institutional Asset management B.V. 05/05/2008 1.50

55 St t St t Gl b l Ad i A i Li it d 05/16/2008 0 50

73 Capital International, Inc. 12/18/2008 1.00

74 Mitsubishi UFJ Securities Co., Ltd. 12/29/2008 1.00

75 Hanwha Investment Trust Management Co. Ltd 02/05/2009 0.70

76 Emerging Markets Management, L.L.C. 02/10/2009 0.5055 State Street Global Advisors Asia Limited 05/16/2008 0.50

56 Platinum Investment Company Limited 06/02/2008 1.50

57 KBC Asset Management N.V. 06/02/2008 2.10

58 Mirae Asset Global Investments Co., Ltd. 07/25/2008 2.50

59 ACE INA International Holdings, Ltd. 08/05/2008 1.50

g g g

77 DWS Investment S.A. 02/24/2009 2.00

78 The Korea Development Bank 04/23/2009 1.00

79 Woori Bank Co., Ltd 05/04/2009 0.50

80 Bank Negara Malaysia 05/19/2009 2.00

60 Quebec Deposit and Investment Fund 08/22/2008 2.00

61 President and Fellows of Harvard College 08/22/2008 2.00

62 Samsung Investment Trust Management Co., Ltd. 08/25/2008 3.00

63 Alliance Bernstein Limited 8/28/2008 1.50

81 Lloyd George Management (Hong Kong) Limited 05/27/2009 0.50

82 Templeton Investment Counsel, LLC 06/05/2009 2.00

83 BEA Union Investment Management Limited 06/18/2009 1.00

84 The Sumitomo Trust & Banking Co., Ltd. 06/26/2009 0.50


84 The Sumitomo Trust & Banking Co., Ltd. 06/26/2009 0.50

29

$




(US$100mn)

85 Korea Investment Trust Management Co., Ltd 07/21/2009 1.00




(US$100mn)

104 BMO Investments Inc. 12/06/2010 1.00(unconfirmed)

86 Baring Asset Management Limited 08/06/2009 2.00

87 Ashmore Investment Management Limited 09/14/2009 2.00

88 BNY Mellon Asset Management International Limited 11/06/2009 1.50

89 Manulife Asset Management (Hong Kong) 11/20/2009 2 00

(unconfirmed)

105 Bank Julius Bear & Co.,Ltd 12/14/2010 1.00

106 KTB Asset Management Co.,Ltd 12/28/2010 1.00

107 Lyxor Asset Management 02/16/2011 1.00

108 Polaris International Securities Investment 03/04/2011 1 0089 g ( g g)Limited 11/20/2009 2.00

90 Nomura Asset Management CO., LTD 11/23/2009 2.00

91 Tongyang Asset Management Corp. 12/11/2009 1.00

108 Polaris International Securities Investment Co. Ltd. 03/04/2011 1.00

109 Assicurazioni Generali S.p.A. 03/18/2011 1.00

110 Banco Bilbao Vizcaya Argentaria, S.A. 05/06/2011 1.00

111 Cathay Securities Investment Trust Co., Ltd. 06/09/2011 1.00

92 Royal Bank of Canada 12/23/2009 1.00

93 Aviva Investors Global Services Limited 12/28/2009 1.00

94 Ivy Investment management Company 02/08/2010 1.00

95 DIAM Co., Ltd. 04/20/2010 1.00

112 Fuh Hwa Securities Investment Trust Co. Ltd. 06/09/2011 1.00

113 Comgest S.A. 06/24/2011 Pending

114 Amundi Hong Kong Limited 07/14/2011 Pending

115 Blackrock Global Investors 07/14/2011 Pending

96 OFI Asset Management 05/21/2010 1.50

97 Aberdeen Asset Management Asia Limited 07/06/2010 2.00

98 KB Asset Management Co., Ltd. 08/09/2010 1.00

99 Fidelity Investments Management (Hong Kong) Limited 09/01/2010 1.50

116 Grantham, Mayo, Van Otterloo & Co.LLC 08/09/2011 Pending

117 Monetary Authority of Singapore 10/08/2011 Pending

118 China Life Insurance Co., Ltd.（Taiwan） 10/26/2011 Pending

119 Shin Kong Life Insurance Co., Ltd. 10/26/2011 PendingLimited

100 Legg Mason Investments (Europe) Limited 10/08/2010 1.00

101 Hong Kong Monetary Authority 10/27/2010 3.00

102 Fubon Securities Investment Trust Co. Ltd. 10/29/2010 1.00

103 Capital Securities Investment Trust Co. Ltd. 10/29/2010 1.00

120 The Trustees of Princeton University 25/11/2011 Pending

121 Shinko Asset Management Co., Ltd 25/11/2011 Pending

122 Canada Pension Plan Investment Board 09/12/2011 Pending

123 Van Eck Associates Corporation 09/12/2011 Pending


30

$




(US$100mn)

124 Hansberger Global Investors, Inc. 13/12/2011 Pending




(US$100mn)

141 Principal Global Investors LLC 31/01/2012 Pending

125 EARNEST Partners LLC 13/12/2011 Pending

126 Bank of Thailand 16/12/2011 Pending

127 Kuwait Investment Authority 21/12/2011 Pending

142 Hospital Authority Provident Fund Scheme 31/01/2012 Pending

128 Northern Trust Global Investments Limited 21/12/2011 Pending

129 Taiwan Life Insurance Co., Ltd 21/12/2011 Pending

130 The Bank of Korea 21/12/2011 Pending

131 Ontario Teachers’ Pension Plan Board 22/12/2011 Pendingg

132 Korea Investment Corporation 28/12/2011 Pending

133 Russell Investments Ireland Limited 28/12/2011 Pending

134 Metzler Asset Management GmbH 31/12/2011 Pending

135 HI Asset Management Co., Limited. 31/12/2011 Pending

136 Shinhan BNP Paribas Asset Management Co., Ltd 05/01/2012 Pending

137 Stichting Pensioenfonds voor Huisartsen 05/01/2012 Pending

138 N ti l P i S i 05/01/2012 P di138 National Pension Service 05/01/2012 Pending

139 Mercuries Life Insurance Co, Ltd 30/01/2012 Pending

140 Prudential Financial Securities Investment Trust Enterprise 31/01/2012 Pending

Source: CSRC & SAFE.Note: Société Générale Asset Management SA returned its QFII License to CSRC in Jan 2010 due to M&A and re-organization and returned the US$100mn QFII quota in June 2010.

31

Appendix A-1

Analyst CertificationTh h l t( ) i il ibl f th ti d t t f thi h t d i b ld t t i th th bl k t th f t f th d t t f The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analyst's name appears in bold alongside content which is attributable to that analyst. Each of these analyst(s) certify, with respect to the section(s) of the report for which they are responsible, that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner, including with respect to Citigroup Global Markets Inc and its affiliates. No part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendation(s) or view(s) expressed by that research analyst in this report.

IMPORTANT DISCLOSURESAn employee of Citigroup Global Markets or its affiliates is an Independent Non-Executive Director, Chairman for the Audit Committee and a member of the Remuneration Committee of Fosun International.Paul Gong, Analyst, holds a long position in the securities of PetroChina.Citigroup Global Markets Inc. or its affiliates beneficially owns 1% or more of any class of common equity securities of Poly (Hong Kong) Investments, CITIC Pacific, Maanshan Iron and Steel, Angang Steel, Jiangxi Copper, Sinopec, China Railway Group, China High Speed Transmission Equipment Group, China Overseas Land & Investment, ZTE Corp., Shimao Property Holdings, Anhui Conch Cement Datang International Power Generation Anhui Expressway China CITIC Bank China Yurun Food Dongfang Electric Corporation Zoomlion Heavy Industry China Railway Anhui Conch Cement, Datang International Power Generation, Anhui Expressway, China CITIC Bank, China Yurun Food, Dongfang Electric Corporation, Zoomlion Heavy Industry, China Railway Construction, Minmetals Resources Limited, KWG Prop, China Minsheng Banking, Xinjiang Goldwind Science & Technology, Ping An Insurance, Weichai Power, China Power International, China Life Insurance, Guangzhou R&F Properties, China National Building Material, Bank of Communications, Lonking Holdings, GCL-Poly Energy Holdings, China Merchants Bank, Suntech Power. This position reflects information available as of the prior business day.Within the past 12 months, Citigroup Global Markets Inc. or its affiliates has acted as manager or co-manager of an offering of securities of Kunlun Energy, Jiangsu Expressway, Sinofert, Maanshan Iron and Steel, Sinopec Shanghai Petrochemical, China Railway Group, Guangshen Railway, China Agri-Industries Holdings, Beijing Capital International Airport, Tencent Holdings, Franshion Properties China Resources Power PetroChina China Longyuan Power Group China Construction Bank Longfor Properties Lenovo Group Dongfang Electric Corporation Franshion Properties, China Resources Power, PetroChina, China Longyuan Power Group, China Construction Bank, Longfor Properties, Lenovo Group, Dongfang Electric Corporation, Sinopharm, China Resources Land, Brilliance China, Qingling Motors, China Resources Gas, Minmetals Resources Limited, China Resources Cement Holdings, China Kingstone Mining, KWG Prop, Intime Department Store, PICC, China Power International, Guangzhou R&F Properties, China Oilfield Services, Sun Art Retail Group Limited, Qihoo 360 Technology.Citigroup Global Markets Inc. or its affiliates has received compensation for investment banking services provided within the past 12 months from Poly (Hong Kong) Investments, Kunlun Energy, China Merchants Holdings Int'l, Kingboard Chemical, Uni-President China, CITIC Pacific, Sinofert, Sinopec Shanghai Petrochemical, Angang Steel, Sinopec, China Railway Group, China Communications Services, China Agri-Industries Holdings, Sany Heavy Equipment International, China Eastern Airlines, China Overseas Land & Investment, Beijing Capital International Airport, China Telecom, Asia Cement China, Air China, China Unicom, Franshion Properties, China Resources Power, Leoch Int'l, PetroChina, CNOOC, Trinity, China Vanadium Titano-Magnetite Mining, China Telecom, Asia Cement China, Air China, China Unicom, Franshion Properties, China Resources Power, Leoch Int l, PetroChina, CNOOC, Trinity, China Vanadium TitanoMagnetite Mining, Huaneng Power International, China Longyuan Power Group, China Construction Bank, China Mobile, Longfor Properties, China Taiping Insurance, Datang International Power Generation, Lenovo Group, China CITIC Bank, China Southern Airlines, Huadian Power International, China Shenhua Energy, ChinaResources Land, China Railway Construction, China Resources Gas, COSCO Pacific, CITIC Resources Holdings, Minmetals Resources Limited, Agricultural Bank of China, SITC International, China Resources Cement Holdings, China Kingstone Mining, Hidili Industry, Industrial & Commercial Bank of China, China Communications Construction, KWG Prop, Intime Department Store, Kingboard Laminates Holdings, China Minsheng Banking, BBMG, China Gold International Resources, Xinjiang Goldwind Science & Technology, Ping An Insurance, PICC, Weichai Power, Aluminum Corporation of China, China Pacific Insurance, China Life

Insurance, Guangzhou R&F Properties, China Oilfield Services, China State Construction, Bank of Communications, Sinotruk (Hong Kong), China Merchants Bank, China BlueChemical, Bank of g p ( g g)China, Sun Art Retail Group Limited, HiSoft Technology International, Sky-mobi, Qihoo 360 Technology, Shangpharma, VanceInfo Technologies. Citigroup Global Markets Inc. or its affiliates expects to receive or intends to seek, within the next three months, compensation for investment banking services from Poly (Hong Kong) Investments, Kunlun Energy, China Merchants Holdings Int'l, CITIC Pacific, Sinofert, Sinopec Shanghai Petrochemical, Angang Steel, Sinopec, China Railway Group, China Communications Services, China Agri-Industries Holdings, Sany Heavy Equipment International, China Eastern Airlines, China Overseas Land & Investment, Beijing Capital International Airport, China Telecom, Air China, China Unicom, Franshion Properties, China Resources Power, PetroChina, CNOOC, Trinity, Huaneng Power International, China Longyuan Power Group, China Construction Bank, China Mobile, China Taiping Insurance, Datang International Power Generation, Lenovo Group, China CITIC Bank, China Southern Airlines, Huadian Power International, Dongfang Electric Corporation, China Shenhua Energy, China Resources Land, China Railway Construction, China Resources Gas, COSCO Pacific, CITIC Resources Holdings, Minmetals Resources Limited, Agricultural Bank of China, China Resources Cement Holdings, Industrial & Commercial Bank of China, China Communications Construction, Intime Department Store, BBMG, PICC, Weichai Power, Aluminum Corporation of China, China Life Insurance, China Oilfield Services, China State Construction, Sinotruk (Hong Kong), China Merchants Bank, China BlueChemical, Bank of China. Citigroup Global Markets Inc. or an affiliate received compensation for products and services other than investment banking services from Poly (Hong Kong) Investments, Kunlun Energy, China Merchants Holdings Int'l, Kingboard Chemical, Want Want China, Uni-President China, CITIC Pacific, Sinofert, Tingyi, Maanshan Iron and Steel, Huabao International Holdings, SPG Land, Sinopec Shanghai Petrochemical, Angang Steel, Sinopec, China Railway Group, Dongfeng Motor, China Communications Services, China Agri-Industries Holdings, Sany Heavy Equipment International, China High Speed Transmission Equipment Group, China Eastern Airlines, China Overseas Land & Investment, Beijing Capital International Airport, Tencent Holdings, China Telecom, Asia Cement China, Air China, China Unicom, ZTE Corp., Shimao Property Holdings, Franshion Properties, China Resources Power, Anhui Tianda Oil Pipe, Leoch Int'l, PetroChina, CNOOC, Trinity, China Vanadium Titano-Magnetite Mining, Huaneng Power International, Anhui Conch Cement, China Longyuan Power Group, China Construction Bank, China Mobile, Longfor Properties, China Taiping Insurance, Datang International Power Generation, Lenovo Group, China CITIC Bank, Hengan International, China Southern Airlines, Huadian Power International, Dongfang Electric Corporation, China Shenhua Energy, Sinopharm, China Resources Land, China Railway Construction, China Resources Gas, COSCO Pacific, CITIC Resources Holdings, Minmetals Resources Limited, Agricultural Bank of China, SITC International, China Resources Cement Holdings, China Kingstone Mining, Hidili Industry, Industrial & Commercial Bank of China, Metallurgical Corporation of China China Communications Construction KWG Prop Intime Department Store Belle Kingboard Laminates Holdings SINOMA Xingda International Holdings Metallurgical Corporation of China, China Communications Construction, KWG Prop, Intime Department Store, Belle, Kingboard Laminates Holdings, SINOMA, Xingda International Holdings, China Minsheng Banking, BBMG, AAC Acoustic Technologies Holdings, China Gold International Resources, Xinjiang Goldwind Science & Technology, Lee & Man Paper, Ping An Insurance, Mengniu Dairy, PICC, Li Ning, Weichai Power, Aluminum Corporation of China, China Pacific Insurance, China Life Insurance, Shanghai Electric Group, Guangzhou R&F Properties, China Oilfield Services, China State Construction, Bank of Communications, Lonking Holdings, Parkson, Agile Property Holdings, Chongqing Rural Commercial Bank, Sinotruk (Hong Kong), China Dongxiang Group, United Laboratories, China Merchants Bank, China BlueChemical, Bank of China, Sun Art Retail Group Limited, Baidu.com, Sky-mobi, Mindray, Qihoo 360 Technology, Simcere Pharmaceuticals, Shangpharma, Suntech Power, 7 Days Group, Yingli Green Energy in the past 12 months. Citigroup Global Markets Inc. currently has, or had within the past 12 months, the following as investment banking client(s): Xingda International Holdings, Qihoo 360 Technology, China Gold Citigroup Global Markets Inc. currently has, or had within the past 12 months, the following as investment banking client(s): Xingda International Holdings, Qihoo 360 Technology, China Gold International Resources, China Kingstone Mining, Sky-mobi, Poly (Hong Kong) Investments, Kunlun Energy, China Merchants Holdings Int'l, Kingboard Chemical, Uni-President China, CITIC Pacific, Sinofert, Sinopec Shanghai Petrochemical, Angang Steel, Sinopec, China Railway Group, China Communications Services, China Agri-Industries Holdings, Sany Heavy Equipment International, China Eastern Airlines, China Overseas Land & Investment, Beijing Capital International Airport, China Telecom, Asia Cement China, Air China, China Unicom, Franshion Properties, China Resources Power, Leoch Int'l, PetroChina, CNOOC, Trinity, China Vanadium Titano-Magnetite Mining, Huaneng Power International, China Longyuan Power Group, China Construction Bank, China Mobile, Longfor Properties, China Taiping Insurance, Datang International Power Generation, Lenovo Group, China CITIC Bank, China Southern Airlines, Huadian Power International, Dongfang Electric Corporation, China Shenhua Energy, China Resources Land, China Railway Construction, China Resources Gas, COSCO Pacific, CITIC Resources Holdings, Mi t l R Li it d A i lt l B k f Chi SITC I t ti l Chi R C t H ldi Hidili I d t I d t i l & C i l B k f Chi Chi C i ti Minmetals Resources Limited, Agricultural Bank of China, SITC International, China Resources Cement Holdings, Hidili Industry, Industrial & Commercial Bank of China, China Communications Construction, KWG Prop, Intime Department Store, Kingboard Laminates Holdings, China Minsheng Banking, BBMG, Xinjiang Goldwind Science & Technology, Ping An Insurance, PICC, Weichai Power, Aluminum Corporation of China, China Pacific Insurance, China Life Insurance, Guangzhou R&F Properties, China Oilfield Services, China State Construction, Bank of Communications, Sinotruk (Hong Kong), China Merchants Bank, China BlueChemical, Bank of China, Sun Art Retail Group Limited, HiSoft Technology International, Shangpharma, VanceInfo Technologies. Citigroup Global Markets Inc. currently has, or had within the past 12 months, the following as clients, and the services provided were non-investment-banking, securities-related: Poly (Hong Kong) Investments, Kunlun Energy, China Merchants Holdings Int'l, Kingboard Chemical, Want Want China, Uni-President China, CITIC Pacific, Sinofert, Tingyi, Sinopec Shanghai Petrochemical,

Angang Steel, Sinopec, China Railway Group, China Communications Services, China Agri-Industries Holdings, Sany Heavy Equipment International, China High Speed Transmission Equipment g g p y p g g y y q p g p q pGroup, China Eastern Airlines, China Overseas Land & Investment, Beijing Capital International Airport, China Telecom, Air China, China Unicom, ZTE Corp., Franshion Properties, China Resources Power, Anhui Tianda Oil Pipe, Leoch Int'l, PetroChina, CNOOC, Trinity, China Vanadium Titano-Magnetite Mining, Huaneng Power International, China Longyuan Power Group, China Construction Bank, China Mobile, China Taiping Insurance, Datang International Power Generation, Lenovo Group, China CITIC Bank, China Southern Airlines, Huadian Power International, Dongfang Electric Corporation, China Shenhua Energy, Sinopharm, China Resources Land, Brilliance China, China Railway Construction, China Resources Gas, CITIC Resources Holdings, Minmetals Resources Limited, Agricultural Bank of China, SITC International, China Resources Cement Holdings, China Kingstone Mining, Industrial & Commercial Bank of China, Metallurgical Corporation of China, China Communications Construction, KWG Prop, Intime Department Store, Kingboard Laminates Holdings, Xingda International Holdings, China Minsheng Banking, BBMG, China Gold International Resources Xinjiang Goldwind Science & Technology Lee & Man Paper Ping An Insurance PICC Aluminum Corporation of China China Pacific Insurance China Life China Gold International Resources, Xinjiang Goldwind Science & Technology, Lee & Man Paper, Ping An Insurance, PICC, Aluminum Corporation of China, China Pacific Insurance, China Life Insurance, Shanghai Electric Group, China Oilfield Services, Golden Eagle, China State Construction, Bank of Communications, Lonking Holdings, Chongqing Rural Commercial Bank, Sinotruk (Hong Kong), United Laboratories, China Merchants Bank, China BlueChemical, Bank of China, Sun Art Retail Group Limited, Baidu.com, Mindray, Qihoo 360 Technology, Shangpharma, Yingli Green Energy. Citigroup Global Markets Inc. currently has, or had within the past 12 months, the following as clients, and the services provided were non-investment-banking, non-securities-related: Poly (Hong Kong) Investments, Kunlun Energy, China Merchants Holdings Int'l, Kingboard Chemical, Want Want China, Uni-President China, CITIC Pacific, Sinofert, Tingyi, Maanshan Iron and Steel, Huabao International Holdings SPG Land Sinopec Shanghai Petrochemical Angang Steel Sinopec China Railway Group Dongfeng Motor China Communications Services China Agri-Huabao International Holdings, SPG Land, Sinopec Shanghai Petrochemical, Angang Steel, Sinopec, China Railway Group, Dongfeng Motor, China Communications Services, China Agri-Industries Holdings, Sany Heavy Equipment International, China High Speed Transmission Equipment Group, China Eastern Airlines, China Overseas Land & Investment, Beijing Capital International Airport, Tencent Holdings, China Telecom, Asia Cement China, Air China, China Unicom, ZTE Corp., Shimao Property Holdings, Franshion Properties, China Resources Power, Anhui Tianda Oil Pipe, Leoch Int'l, PetroChina, CNOOC, Trinity, China Vanadium Titano-Magnetite Mining, Huaneng Power International, Anhui Conch Cement, China Longyuan Power Group, China Construction Bank, China Mobile, Longfor Properties, China Taiping Insurance, Datang International Power Generation, Lenovo Group, China CITIC Bank, Hengan International, China Southern Airlines, Huadian Power International, Dongfang Electric Corporation, China Shenhua Energy, Sinopharm, China Resources Land, China Railway Construction, China Resources Gas, COSCO Pacific, CITIC Resources Holdings, Minmetals Resources Limited, Agricultural Bank of China, SITC International, China Resources Cement Holdings, China Kingstone Mining, Hidili Industry, Industrial & Commercial Bank of China, Metallurgical Corporation of China, China Communications Construction, KWG Prop, Intime Department Store, Belle, Kingboard Laminates Holdings, SINOMA, China Minsheng Banking, BBMG, AAC Acoustic Technologies Holdings, Xinjiang Goldwind Science & Technology, Lee & Man Paper, Ping An Insurance, Mengniu Dairy, PICC, Li Ning, Weichai Power, Aluminum Corporation of China, China Life Insurance, Shanghai Electric Group, Guangzhou R&F Properties, China Oilfield Services, China State Construction, Bank of Communications, Lonking Holdings, Parkson, Agile Property Holdings, Chongqing Rural Commercial Bank, Sinotruk (Hong Kong), China Dongxiang Group, United Laboratories, China Merchants Bank, China BlueChemical, Bank of China, Sun Art Retail Group Limited, Baidu.com, Sky-mobi, Mindray, Qihoo 360 Technology, Simcere Pharmaceuticals, Shangpharma, Suntech Power, 7 Days Group, Yingli Green Energy. Citi Gl b l M k t I ffili t i d ti i th t 12 th f Xi d I t ti l H ldi Citigroup Global Markets Inc. or an affiliate received compensation in the past 12 months from Xingda International Holdings. Analysts' compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc. and its affiliates ("the Firm"). Like all Firm employees, analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues. The Firm is a market maker in the publicly traded equity securities of Kunlun Energy, Tsingtao Brewery, CITIC Pacific, Tingyi, Maanshan Iron and Steel, Angang Steel, Jiangxi Copper, Sinopec, China Railway Group, Dongfeng Motor, China Agri-Industries Holdings, China High Speed Transmission Equipment Group, China Overseas Land & Investment, Tencent Holdings, China Telecom, Air China, China Unicom, ZTE Corp., Shimao Property Holdings, PetroChina, CNOOC, Anhui Conch Cement, China Longyuan Power Group, China Construction Bank, China Mobile, Datang , , p , p y g , , , , gy p, , , gInternational Power Generation, Lenovo Group, China CITIC Bank, Hengan International, Shandong Weigao Group Medical Polymer, China Yurun Food, China Shenhua Energy, Brilliance China, Zoomlion Heavy Industry, China Railway Construction, Agricultural Bank of China, Industrial & Commercial Bank of China, China Communications Construction, Belle, Kingboard Laminates Holdings, BBMG, AAC Acoustic Technologies Holdings, Anta Sports Products, Xinjiang Goldwind Science & Technology, Ping An Insurance, Mengniu Dairy, PICC, Weichai Power, Aluminum Corporation of China, China Pacific Insurance, China Life Insurance, Guangzhou R&F Properties, China Oilfield Services, China National Building Material, Bank of Communications, Lonking Holdings, GCL-Poly Energy Holdings, China Merchants Bank, Bank of China, China Molybdenum, Baidu.com, HiSoft Technology International, Sky-mobi, Sina Corp..

For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research & Analysis product ("the Product"), please p ( g p ) g g p j y p ( ) pcontact Citi Investment Research & Analysis, 388 Greenwich Street, 28th Floor, New York, NY, 10013, Attention: Legal/Compliance [E6WYB6412478]. In addition, the same important disclosures, with the exception of the Valuation and Risk assessments and historical disclosures, are contained on the Firm's disclosure website at www.citigroupgeo.com. Valuation and Risk assessments can be found in the text of the most recent research note/report regarding the subject company. Historical disclosures (for up to the past three years) will be provided upon request. Citi Investment Research & Analysis Ratings Distribution 12 Month Rating Relative Rating Data current as of 31 Dec 2011 Buy Hold Sell Buy Hold SellCiti Investment Research & Analysis Global Fundamental Coverage 57% 34% 9% 10% 79% 10%

% of companies in each rating category that are investment banking clients 45% 41% 40% 49% 43% 41%Guide to Citi Investment Research & Analysis (CIRA) Fundamental Research Investment Ratings: CIRA's stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks. Risk rating takes into account both price volatility and fundamental criteria. Stocks will either have no risk rating or a High risk rating assigned. Investment Ratings: CIRA's investment ratings are Buy, Neutral and Sell. Our ratings are a function of analyst expectations of expected total return ("ETR") and risk. ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months The Investment rating definitions are: Buy (1) ETR of 15% or more or 25% or more for forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months. The Investment rating definitions are: Buy (1) ETR of 15% or more or 25% or more for High risk stocks; and Sell (3) for negative ETR. Any covered stock not assigned a Buy or a Sell is a Neutral (2). For stocks rated Neutral (2), if an analyst believes that there are insufficient valuation drivers and/or investment catalysts to derive a positive or negative investment view, they may elect with the approval of CIRA management not to assign a target price and, thus, not derive an ETR. Analysts may place covered stocks "Under Review" in response to exceptional circumstances (e.g. lack of information critical to the analyst's thesis) affecting the company and / or trading in the company's securities (e.g. trading suspension). As soon as practically possible, the analyst will publish a note re-establishing a rating and investment thesis. To satisfy regulatory requirements, we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system. However, we reiterate that we do not consider Under Review to be a recommendation. Relative three-month ratings: CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period. The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company. Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration, explaining the basis for this short-term view. This three-month view may be different from and does not affect a stock's fundamental equity rating, which reflects a longer-term total absolute return expectation. For purposes of NASD/NYSE ratings-distribution-disclosure rules, most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation. Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR). For purposes of NASD/NYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system However we reiterate that we do not consider NRR to be a recommendation disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3 month relative rating system. However, we reiterate that we do not consider NRR to be a recommendation. Prior to October 8, 2011, the firm's stock recommendation system included a risk rating and an investment rating. Risk ratings, which took into account both price volatility and fundamental criteria, were: Low (L), Medium (M), High (H), and Speculative (S). Investment Ratings of Buy, Hold and Sell were a function of CIRA's expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating. Additionally, analysts could have placed covered stocks "Under Review" in response to exceptional circumstances (e.g. lack of information critical to the analyst's thesis) affecting the company and/or trading in the company's securities (e.g. trading suspension). Stocks placed "Under Review" were monitored daily by management and as practically possible, the analyst published a note re-establishing a rating and investment thesis. For securities in developed markets (US, UK, Europe, Japan, and Australia/New Zealand), investment ratings were:Buy (1) (expected total return of 10% or more for Low-Risk stocks, 15% or more for Medium-Risk stocks, 20% or more for High-Risk stocks, and 35% or more for investment ratings were:Buy (1) (expected total return of 10% or more for Low Risk stocks, 15% or more for Medium Risk stocks, 20% or more for High Risk stocks, and 35% or more for Speculative stocks); Hold (2) (0%-10% for Low-Risk stocks, 0%-15% for Medium-Risk stocks, 0%-20% for High-Risk stocks, and 0%-35% for Speculative stocks); and Sell (3) (negative total return). For securities in emerging markets (Asia Pacific, Emerging Europe/Middle East/Africa, and Latin America), investment ratings were:Buy (1) (expected total return of 15% or more for Low-Risk stocks, 20% or more for Medium-Risk stocks, 30% or more for High-Risk stocks, and 40% or more for Speculative stocks); Hold (2) (5%-15% for Low-Risk stocks, 10%-20% for Medium-Risk stocks, 15%-30% for High-Risk stocks, and 20%-40% for Speculative stocks); and Sell (3) (5% or less for Low-Risk stocks, 10% or less for Medium-Risk stocks, 15% or less for High-Risk stocks, and 20% or less for Speculative stocks).

Investment ratings are determined by the ranges described above at the time of initiation of coverage, a change in investment and/or risk rating, or a change in target price (subject to limited g y g g g g g g p ( jmanagement discretion). At other times, the expected total returns may fall outside of these ranges because of market price movements and/or other short-term volatility or trading patterns. Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management. Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stock's expected performance and risk. NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (i.e., all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc.) are not registered/qualified as research analysts with FINRA. Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. The legal entities employing the authors of this report are listed below: Citigroup Global Markets Asia Minggao Shen; Catherine Lim; Timothy Lam; Simon Ho, CFA; Jenny N Zhen; Eric Lau; Darwin Lam, CFA; Pierre

Lau, CFA; Jasmine Bai; Bin Liu; Vivian Tao; George Choi; Richard Yeh; Ravi Sarathy; Oscar Choi; Gerwin Ho; Marco Sze; Paddy Ran; Scarlett Y Chen, CFA; Hanzhi Ding; Aaron Ge, CFA; Graham Cunningham; Eddie Lau; Anil Daswani; Oscar Yee; Jimmy Wong; Rigan Wong; Paul Gong; Mark Liinamaa; Grace Lam

Citigroup Global Markets Taiwan Securities Co. Limited Kevin Chang; Wei Chen Citigroup Global Markets Inc Timothy M Arcuri

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© 2012 Citibank, N.A. All rights reserved. Citi and Citi and Arc Design are trademarks and service marks of Citigroup Inc. or its affiliates and are used and registered throughout the world.

© 2012 Citigroup Inc. All rights reserved. Citi and Citi and Arc Design are trademarks and service marks of Citigroup Inc. or its affiliates and are used and registered throughout the world.

any notice. We and/or our affiliates may make a market in these instruments for our customers and for our own account. Accordingly, we may have a position in any such instrument at any time.Although this material may contain publicly available information about Citi corporate bond research, fixed income strategy or economic and market analysis, Citi policy (i) prohibits employees from offering, directly or indirectly, a favorable or negative research opinion or offering to change an opinion as consideration or inducement for the receipt of business or for compensation; and (ii) prohibits analysts from being compensated for specific recommendations or views contained in research reports. So as to reduce the potential for conflicts of interest, as well as to reduce any appearance of conflicts of interest, Citi has enacted policies and procedures designed to limit communications between its investment banking and research personnel to specifically prescribed circumstances.

Citi b li th t t i bilit i d b i ti W k l l ith li t fi i l i tit ti NGO d th t t fi l ti t li t h d l i d t t d d

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Citi believes that sustainability is good business practice. We work closely with our clients, peer financial institutions, NGOs and other partners to finance solutions to climate change, develop industry standards,reduce our own environmental footprint, and engage with stakeholders to advance shared learning and solutions. Highlights of Citi’s unique role in promoting sustainability include: (a) releasing in 2007 a ClimateChange Position Statement, the first US financial institution to do so; (b) targeting $50 billion over 10 years to address global climate change: includes significant increases in investment and financing of renewableenergy, clean technology, and other carbon-emission reduction activities; (c) committing to an absolute reduction in GHG emissions of all Citi owned and leased properties around the world by 10% by 2011; (d)purchasing more than 234,000 MWh of carbon neutral power for our operations over the last three years; (e) establishing in 2008 the Carbon Principles; a framework for banks and their U.S. power clients to evaluateand address carbon risks in the financing of electric power projects; (f) producing equity research related to climate issues that helps to inform investors on risks and opportunities associated with the issue; and (g)engaging with a broad range of stakeholders on the issue of climate change to help advance understanding and solutions.

Citi works with its clients in greenhouse gas intensive industries to evaluate emerging risks from climate change and, where appropriate, to mitigate those risks.Citi works with its clients in greenhouse gas intensive industries to evaluate emerging risks from climate change and, where appropriate, to mitigate those risks.

efficiency, renewable energy & mitigation

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