Manufacturing Joint Ventures currently are granted preferential treatment, and all Joint Ventures are free from certain other
restrictions currently imposed on purely domestic enterprises under various Chinese laws. These preferences are as follows:

(a) Currently, manufacturing Joint Ventures are entitled to a 2 year tax holiday followed by 3 years of 50% reduction in applicable tax rates starting from the first profit-making year. Service Joint Ventures are not entitled to similar tax breaks and are subject to the full
effective Chinese corporate income tax rate of 33%.

It has been long rumored that with China’s re-entry into the WTO, these standard two (2) year plus
three (3) year tax preferences for manufacturing Joint Ventures will be eliminated, and recently there was a
semi-official announcement to align the more favorable income tax treatment of Joint Ventures with the income tax
treatment of Chinese domestic companies by 2006. It is anticipated that the preferential tax treatment in its
current form will soon no longer be enjoyed by Joint Ventures. However, while details of this standardization initiative are yet unclear, it seems that certain incentives for Joint Ventures will remain. In the past changes in tax laws did not affect, or only marginally, affected Joint Ventures that had already successfully obtained tax incentives. Whether such "grandfathering" of status will also be granted for the
upcoming round of tax changes remains to be seen.

(b) Joint Ventures also may borrow foreign exchange loans without approval of the State Administration of Foreign Exchange
(“SAFE”). Joint Ventures are merely required to register such foreign exchange debts with the SAFE, which is a
perfunctory matter. In contrast, domestic enterprises are required to obtain SAFE approval for foreign
exchange debts, and such SAFE approval is often very difficult to obtain.

1.4 Scope of Business
Joint Ventures, like all other legal entities in China, have a limited scope of approved operation as set out in the
business license to be issued by the State Administration of Industry and Commerce or one of its
competent lower-level department ("SAIC"). It generally is not possible to obtain a general scope of business
for a company in China. The approved scope of business typically is restricted to a specific category
of manufacturing or service based on the contents of the feasibility study report . In many cases, the
approved capitalization of an Joint Venture will be evaluated to determine whether it matches the capital investment,
working capital and business operation requirements described in the Feasibility Study Report. If the scope of operation is to be
expanded in the future, then a separate Feasibility Study Report will typically be prepared and commitments for additional
capital funding may be required.

2. KEY ISSUES REGARDING A JOINT VENTURE

2.1 Nature of JV Project
The principal differences between an EJV and a CJV can be simply summarized as follows:

(i) For an EJV:
· each party must make cash or permitted in–kind contributions in proportion to its subscribed percentage
of the EJV’s registered capital.

· profit must be distributed strictly in accordance with the parties’ respective percentage shareholding of the
registered capital of the EJV. · upon dissolution of the EJV at the expiry of the term
of operation, the EJV’s net assets are to be distributed to each party in accordance with its respective
shareholding of the EJV’s registered capital.

(ii) For a CJV:

· a party (typically, but not always, the Chinese party) may contribute non-cash intangibles in the form of
“cooperative conditions”. Such “cooperative conditions” may consist of market access rights, rights to use
buildings or office space owned or leased by the party that are not subject to clear valuation. In exchange for
such “cooperative conditions”, the party is entitled to participate in the distributable earnings of the CJV.
· profit sharing in a CJV need not be made strictly in accordance with the parties’ respective percentage
shareholding of the registered capital of the CJV but can be made in accordance with the agreement of the
parties (e.g. the Chinese party may be entitled to a fixed profit share with the balance to be distributed to
the foreign party, or the parties may agree on a multi-tiered profit-sharing arrangement that permits the
foreign party to recover an amount equal to its capital investment on a priority basis, following which the
profit split will be changed, etc.).

· upon dissolution of the CJV at the expiry of the term of operation, the CJV’s net assets may be transferred to
the Chinese party without compensation (thus operating in many respects as a BOT project) so long as the
foreign party has been able to recoup its capital contribution during the term of the CJV. Such recoupment
typically is funded by excess cash flow generated by accelerated depreciation of the CJV’s assets. Such
arrangement requires approval of relevant finance and tax authorities in China. Note that this capital
recoupment is separate and distinct from possible priority rights to receive after-tax net profit
distributions as outlined in the bullet point above.

2.2 Capitalisation of JV
(a) The concepts of authorized and issued capital are not used in connection with Sino-foreign joint ventures.
Instead, the concepts of “registered capital” and “total investment” are employed. Under applicable Chinese law,
registered capital is defined as the total amount of capital contributions subscribed to by the parties and
registered with the Chinese authorities. Thus, the term “registered capital” refers to the parties’ equity in
the venture. The concept of “total investment”, on the other hand, includes both registered capital and
external borrowings.

(b) Chinese laws governing joint ventures require that the foreign party contribute no less than 25% of the
registered capital.

(c) The capital to be injected by the parties constituting their capital contribution may take a
variety of forms including cash, machinery, equipment and intangible property, such as proprietary technology,
trademarks and other industrial property rights.

Pursuant to a circular promulgated by SAFE and effective as of 1 April 2003, subject to SAFE's approval, a
foreign party may also use the assets obtained by way of early recoupment of investment, liquidation, share
transferring, capital reduction etc. from Joint Ventures it has previously invested in. In addition, the Chinese side
may contribute the right to use a site and count this as part of its contribution.

There are, however, certain restrictions on in-kind contribution by a party. For example, the technology
contributed as registered capital by a party generally should not exceed 20% of the total registered capital
(but this can be increased with approval for certain encouraged projects) or 50% of an individual investor’s
capital contribution. The issue of the appropriate valuation of in-kind contribution can often be a major
stumbling block in joint venture negotiations.