China Stimulus Package

1. www.stoel.com China Stimulus Package Geoffrey G. Revelle Stoel Rives LLP O r e g o n W a s h I n g t o n C a l I f o r n I a U t a h I d a h o

2. Summary • $586 billion announced 11/2008 over the next 2 years • Part of “proactive fiscal policy” to create jobs and maintain 8% GDP growth • Main beneficiaries – government owned and private Chinese companies, provincial governments • High-tech and other foreign products and services not available in China also will benefit

3. Chinese Business Entities • State-owned enterprises (“SOE”) • Provincial Investment Vehicle (“PIV”) • Domestic Private Enterprise (“DPE”) • Foreign Invested Enterprises

4. Foreign Invested Enterprise (“FIE”) • Wholly Foreign-Owned Enterprises (“WFOE”) • 100% foreign-owned • Only engage in business in China when foreign investment permitted or encouraged • Typically in manufacturing, consulting, trading, wholesale and retail • Limited liability

5. FIE’s (cont.) • Equity Joint Venture (“EJV”) • Chinese and foreign ownership • Commonly used to invest in restricted areas of Chinese economy • Limited liability

6. FIE’s (cont.) • Cooperative Joint Ventures (“CJV”) • Can be limited liability company or an unincorporated entity • Engage in restricted activities • Foreign invested companies limited by shares (“FICLS”) • Stock exchange company • Representative office: conduct research, establish contacts, cannot engage in profit-making activities

7. Prohibited Foreign Investment • Arms and munitions • Construction and operation of power grids • Motion picture distribution

8. Restricted Activity • Requires participation of Chinese company • Categories • Outdated technology • Harmful to environment • Protected economic sectors • Examples • Gold, silver, and platinum mining • Mobile and data telecom services • Grain production

9. Encouraged Activities • No participation by Chinese company required • Examples: • Development of agricultural technologies • Production of engineering plastics and plastic alloys • Software • Construction of large thermal power stations

10. Stimulus Package Goals • Maintain GDP gross at or near 8% and create jobs (6.1% first quarter) • Focus on 10 sectors of the economy • In line with latest Five-Year Plan • Boost domestic demand (spending) to counter export losses

11. Focus Areas Rural Infrastructure • Roads • Power grid • Drinking water safety and conservation • $54 billion

12. Focus Areas Transportation • Rail • extending lines, more passenger links, coal routes • $147 billion in 2009, $147 billion in 2010 • Airports in central and western regions • $30 billion in 2009, $37 billion in 2010

13. Focus Areas Environment • Water safety and conservation • Expand recycling • Energy and clean energy technologies • $31 billion 2009/10

14. Focus Areas Power Grid • $175 billion on grid structure 2009/10 • Goal to address grid bottlenecks and add renewables to system • Wind and solar investment – energy stimulus, plan coming later – $290 billion in alternative energy industry through 2020 – replace coal with clean energy

15. Focus Areas Finance • Likely remove previously imposed loan quotas – lending has increased • Increase bank credit for key stimulus projects • State owned banks • Various tax incentives being put in place

16. Focus Areas 5/2/08 Earthquake Reconstruction • $146 billion

17. Focus Areas Housing, Health Care & Education, Industry • $58 billion for low rent housing and slum clearance • $27 billion – health care and education project • $53 billion in modernizing aging industries and high tech

18. February National People’s CongressChanged Priorities • No new money

19. Approval Process for Funding • Approval by central government for all projects, National Development and Reform Commission (“NDRC”) • Projects all implemented at the provincial level • Provinces and municipalities apply to central government for funds (NDRC and other Ministries) • Not much visibility on the process at this point

20. Factors • Fit the Stimulus Package Criteria • Create jobs, bolster GDP • Applicant province’s ability to secure all of the funds needed to complete the project • Vague standards but predicted 25-30% from central government, the rest from provincial governments (PIV’s), banks, SOE’s and private companies (DPE’s mostly)

21. FIE Opportunities • Subcontractors only • Focus on advanced IP and value added services that DPE’s and SOE’s can’t provide

22. FIE Opportunity Examples • Clean energy technologies, solar, wind • Technical systems like control and automation processes for machinery used in railway and other infrastructure projects • Logistics and project management services in rural infrastructure development and earthquake reconstruction efforts • High-tech equipment in all areas • Medical equipment

23. Foreign Investment Process • Need to be approved or licensed by government pursuant to Administrative Permissions Law • Complex process to approve projects with foreign investment • Both national and provincial approval required

24. Factors for Success • Understand and keep track of changes in bureaucracy • Understand national and provincial procedures and guidelines • Understand the Foreign Investment Industrial Guidance Catalogue – prohibited, restricted, encouraged or permitted

25. Factors for Success (cont.) • Policy changes and priorities as they change • Understand needs of each province • As economy’s conditions change, so will the package (GDP drops, more spending likely quickly)

26. Factors for Success (cont.) • Understand what services and technologies Chinese companies can and cannot provide • Hire good consultants