Changes of 2006 Industrial Competitiveness and Trends in 2007

   China's industrial competitiveness shifted to mid-stream and
downstream sectors in 2006, while competitiveness in the
upstream extractive sector weakened. Oil processing, iron and
steel, chemical and cement showed new vigor. The capital goods
sector, mainly including the equipment manufacturing sector,
developed steadily. The consumable goods sector saw further
stable growth. The basic factors promoting industrial growth
will not change much in 2007. The three "horse carts" of
investment, consumption and export will retain their power. The
automotive sector, the real estate sector and the infrastructure
sector will still have strong drive. Effect of slowing price
growth in upstream resource products spread. With the shift of
industrial competitiveness and the incentive factors for
industrial growth, it is expected that the consumption and
service sector, the equipment manufacturing sector and the
high-tech sector all have bright prospects for growth in 2007.
Upgrades in consumption and technology are the long-term firm
support to the growth of some major sectors. New factors include
the appreciation of RMB/USD and worldwide industrial shifts and
opportunities from 3G, and these will promote the competitive
advantages of these major sectors.

1 Major changes in China's industrial competitiveness in 2006

(1) The strong competitiveness in the upstream extractive sector
weakened

   Pushed by the sudden surge of demand in 2004 and 2005, both
at home and abroad, prices and profits in the upstream extractive
sector such as coal, metals and nonmetal minerals increased
dramatically and the competitiveness of the sector became
prominent. The profit in the nonmetal mineral mining/dressing
sector, the oil/gas recovery sector, the nonferrous metal
mineral mining/dressing sector, the coal mining sector and the
ferrous metal mineral mining/dressing sector was respectively
100.6%, 67.71%, 97.71%, 78.75% and 35.19% higher than the
previous year-profit growth much higher than the average in
industrial sectors. In the comprehensive indexes of
competitiveness calculated by the State Information Center,
these major sectors held 1st, 2nd, 3rd, 5th and 7th places.

   The mode of profit in industrial sectors being unduly
dominated by the upstream extractive sector changed somewhat in
2006. Competitiveness in the nonferrous metal mineral
mining/dressing sector, the nonmetal mineral mining/dressing
sector and oil/gas recovery sector dropped to 3rd, 6th and 8th
places. The position of competitiveness in the ferrous metal
mineral mining/dressing and the coal mining sector even dropped
to 21st and 31st places in the 39 industrial sectors. Profit
growth in these major upstream sectors was slowed down greatly.

   The slowdown in the price growth of products was the main
reason for the weakening advantage of the competitiveness in the
upstream extractive sector in 2006. The average ex-factory price
of industrial goods increased 3.0% in 2006, the growth being 1.9
percentage points lower. The ex-factory price of products in the
coal mining sector had an increase of 2.7% in 2006 whereas growth
reached 23.2% in 2005. The skyrocketing price of crude oil
started to drop in the second half of 2006 from nearly US$80 per
barrel in July to US$60-50 per barrel, the lowest being less than
US$50 per barrel in January 2007. The profit growth in the
oil/gas recovery sector therefore entered a sustained rapid
slowdown in 2006. Profits in the oil/gas recovery sector
increased only 23.9% compared with the previous year and the
growth was 25% lower than the first half of 2005 and 44% percent
lower than 2005.

(2) The raw material sector tended to rebound

   The raw material sector, including the oil processing sector,
the chemical and chemical fiber sector, the iron and steel sector
and the cement sector, recovered in 2006 from its all-time low
of 2005. The growth of profits was higher and losses were reduced.
The main reasons were the following two. (A) The slowdown in the
price growth of upstream resource products eased the increasing
pressure of the cost of raw materials in the industrial goods
sector. (B) Accelerated adjustment in sectors with surplus
capacity relieved the oversupply situation and strengthened the
profit-earning ability in the raw material sector.

   Due to the high crude oil price and the price of oil products
lagging behind the international oil price, the oil processing
sector suffered sustained losses over a year in 2005 and the
first half of 2006. With the drop of the crude oil price and the
rise of oil product prices in the second half of 2006, however,
the losses in refining enterprises soon changed. In November
2006 the oil processing sector terminated the overall loss that
had lasted for 20 months and started to gain profit. Despite a
net loss of nearly RMB40.0 billion for the whole of 2006, it was
RMB7.0 billion less than the amount in the first 3 quarters.

Profits in the chemical sector dropped 6.9% in the first quarter
of 2006. The price rise of chemical products in the second
quarter, however, led to a profit increase. With the crude oil
price drop and the cost pressure reduction from the third quarter,
the profit growth in the chemical sector was going up. The profit
in the chemical sector in the whole of 2006 increased 18.27%
compared with the previous year and growth was 7 percentage
points higher than 2005.

   Due to the high crude oil price, profits in the chemical fiber
sector were down by 20% in 2005. As the upstream cost was
gradually digested and the cost was reduced due to the crude oil
price drop in 2006, however, the chemical fiber sector realized
a profit growth of 41.56%. The competitiveness of the chemical
fiber sector rose from 38th place among the 39 industrial sectors
in 2005 to 28th place in 2006.

   The iron and steel sector was burdened by some unfavorable
circumstances in 2006, such as the high price of iron ores, the
price rise of power and the slowdown of investment growth due
to macro control. The structure of the sector however improved
in quite a few aspects. Greater efforts were made in eliminating
outdated iron and steel capacity. The upstream pressure of coal
prices was reduced. The iron and steel sector therefore
recovered in 2006 from the all-time low and achieved a profit
of RMB134.8 billion, an increase of 30.6% over the previous year.

   With impacts from the drastic capacity expansion, the
nonmetal mineral products sector, with cement as the lead
product, was slack for two consecutive years in 2004 and 2005.
The competitiveness of the sector dropped to 33rd place. The
readjustment focusing on eliminating outdated capacity and
increasing the proportion of new dry-process cement produced
positive results in 2006. Cost pressures also eased. Performance
in the sector therefore improved constantly and the
comprehensive competitiveness upgraded rapidly. The market
price of large-volume cement rose overall in 2006 and the profit
growth in the cement sector reached almost 105%. The price of
flat glass, which had been low for a long time, also started to
recover in the fourth quarter of 2006. The improvement in the
cement sector produced a considerable impact on the
profit-earning status of the entire nonmetal mineral pr