China Rightson Shen Zi [2007] No.12158

To CITIC Group:

We have audited the accompanying financial statements of CITIC Group (referred to as “the Company”), consisting of balance sheet and consolidated balance sheet as at 31 December 2006, income statement and consolidated income statement, cash flow statement and con- solidated cash flow statement for the year then ended, and notes to the financial statements.

Management’s Responsibility for the Financial Statements The Company’s Management is responsible for the preparation of these financial statements in accordance with the Accounting Standards for Business Enterprises and the Accounting Regulations for Business Enterprises. This responsibility includes: designing, implementing and maintaining internal controls relevant to the preparation of financial statements that are free from material misstatement, whether caused by fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditor’s Responsibilities Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with China’s Auditing Standards for Certified Public Accountants. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’ s judgment, including the assessments of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor con- siders internal control relevant to the entity’s preparation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

CITIC Group 46 AUDITORS’ REPORT CITIC Group

Opinion In our opinion, the financial statements are accordance with the Accounting Standards for Business Enterprises and the Accounting Regulations for Business Enterprises and, in all ma- terial respects, give a fair view of the Company’s financial position and consolidated financial position as at 31 December 2006, the results of operations and consolidated results of opera- tions, and cash flows and consolidated cash flows for the year then ended.

China Rightson Certified Public Accountants Certified Public Accountants Beijing, China Registered in the People’s Republic of China Name of CPA: Zhang Fugen Name of CPA: Zhang Zubin

Date: 5 June 2007

47 ANNUAL REPORT 2006 CONSOLIDATED BALANCE SHEET

As at 31 December 2006 Expressed in thousands of RMB

ASSETS Note 2006 2005

Current Assets:

Cash and deposits 5 109,825,275 91,983,546

Short-term loans 6 293,432,976 239,003,380

Receivables 7 18,459,378 18,424,637

Short-term investments 8 78,338,564 70,597,973

Other current assets 9 13,784,944 12,584,154

Total Current Assets 513,841,137 432,593,690

Long-term Assets:

Medium and long-term loans 6 218,070,842 162,370,603

Long-term investments 8 155,515,311 143,156,095

Fixed assets 10 39,219,341 34,257,174

Other long-term assets 11 9,073,850 10,309,779

Total Long-term Assets 421,879,344 350,093,651

Total Assets 935,720,481 782,687,341

CITIC Group 48 CONSOLIDATED BALANCE SHEET CITIC Group

CONSOLIDATED BALANCE SHEET (Continued)

As at 31 December 2006 Expressed in thousands of RMB LIABILITIES AND Note 2006 2005 INVESTOR’S EQUITY

Current Liabilities:

Short-term deposits from customers 12 414,273,544 341,919,322

Short-term financing 13 20,202,325 17,250,002

Payables 14 33,016,822 42,576,941

Other current liabilities 15 3,230,276 2,731,907

Total Current Liabilities 470,722,967 404,478,172

Long-term Liabilities:

Long-term deposits from customers 16 299,694,017 260,034,123

Medium and long-term borrowings 43,481,491 19,143,073

Long-term bond payables 17 47,394,183 42,523,486

Other long-term liabilities 18 4,571,297 2,548,532

Total Long-term Liabilities 395,140,988 324,249,214

Total Liabilities 865,863,955 728,727,386

Minority Interests 15,713,771 10,534,913

Investor’s Equity

Capital 19 32,335,295 32,333,331

Reserves 20 15,343,274 6,244,288

Profit for the year 6,464,186 4,847,423

Total Investor’s Equity 54,142,755 43,425,042

Total Liabilities and Investor’s Equity 935,720,481 782,687,341

49 ANNUAL REPORT 2006 CONSOLIDATED INCOME STATEMENT

For the year ended 31 December 2006 Expressed in thousands of RMB

Note 2006 2005

Operating income 21 80,634,563 65,261,984

Operating costs 22 57,294,987 47,440,901

Operating expenses 23 12,529,890 9,651,001

Investment income 5,160,890 2,309,498

Business taxes and surcharges 2,076,931 1,446,204

Operating Profit 13,893,645 9,033,376

Add: non-operating income 430,432 868,182

Less: non-operating expenses 153,376 130,689

Profit before provision for impairment losses 14,170,701 9,770,869

Less: provision for impairment losses 24 4,198,588 2,101,076

Profit after provision for impairment losses 9,972,113 7,669,793

Less: income tax 2,547,333 1,998,444

Less: Minority interests 975,791 816,087

Add: unrealised investment losses 15,197 -7,839

Net Profit 6,464,186 4,847,423

CITIC Group 50 CONSOLIDATED CASH FLOW STATEMENT CITIC Group

CONSOLIDATED CASH FLOW STATEMENT

For the year ended 31 December 2006 Expressed in thousands of RMB Item Amount 1. Cash Flows from Operating Activities: Cash received from rendering of financial services 185,689,716 Cash received from sales of goods or rendering of other services 32,091,537 Refund of taxes 316,647 Other cash received relating to operating activities 14,001,707 Sub-total of cash inflows 232,099,607 Cash paid for financial services 179,731,051 Cash paid for goods and services 25,873,156 Cash paid to and on behalf of employees 5,110,636 Cash paid for all types of taxes 4,460,397 Other cash paid relating to operating activities 15,324,951 Sub-total of cash outflows 230,500,191 Net cash flows from operating activities 1,599,416

2. Cash flows from investing activities: Cash received from disposal of equity investments 214,080,934 Cash received from return on equity investments 1,701,291 Cash received from return on debt investments 1,368,484 Interests received 338,427 Net cash received from disposal of fixed assets, 579,444 intangible assets and other long-term assets Other cash received relating to investing activities 15,836,086 Sub-total of cash inflows 233,904,666 Cash paid to acquire fixed assets, intangible assets and other 4,760,123 long-term assets Cash paid on equity investments 18,319,803 Cash paid on debt investments 231,358,462 Cash paid on other investing activities 18,937,451 Sub-total of cash outflows 273,375,839 Net cash flows from investing activities -39,471,173

51 ANNUAL REPORT 2006 3. Cash flows from financing activities: Proceeds from equity investments 2,564,740 Inc: cash received from equity investments from subsidiaries’ minority interests 200 Proceeds from bonds issued 6,018,866 Proceeds from borrowings 47,725,499 Proceeds from other financing activities 1,394,376 Sub-total of cash inflows 57,703,481 Cash payments of registered capital’s withdrawal - Cash repayments of borrowings 22,986,674 Cash payments of financing expenses 18,180 Cash payments for distribution of dividends or profits 1,018,527 Inc: cash payments of dividends owned by 26,672 subsidiaries’ minority interests Cash payments for interests 3,477,480 Cash payments on other financing activities 778,374 Sub-total of cash outflows 28,279,235 Net cash flows from financing activities 29,424,246

4. Effect of foreign exchange rate fluctuation on cash -767,685

5. Net increase in cash and cash equivalents -9,215,196

CITIC Group 52 BALANCE SHEET CITIC Group

BALANCE SHEET

As at 31 December 2006 Expressed in thousands of RMB

ASSETS Note 2006 2005

Current Assets:

Cash and deposits 5,416,735 2,553,845

Short-term loans 897,882 1,018,359

Receivables 6,798,918 6,668,802

Short-term investments 2,337,769 2,947,564

Other current assets - -

Total Current Assets 15,451,304 13,188,570

Long-term Assets:

Medium and long-term loans 2,278,185 3,852,265

Long-term investments 8 100,697,472 67,530,201

Fixed assets 524,178 745,598

Other long-term assets 702,800 658,984

Total Long-term Assets 104,202,635 72,787,048

Total Assets 119,653,939 85,975,618

53 ANNUAL REPORT 2006 BALANCE SHEET (Continued)

As at 31 December 2006 Expressed in thousands of RMB

LIABILITIES AND INVESTOR’S EQUITY Note 2006 2005

Current Liabilities:

Short-term deposits from customers - -

Short-term financing 4,704,505 5,562,896

Payables 3,266,369 845,650

Other current liabilities 3,102,381 24,025

Total Current Liabilities 11,073,255 6,432,571

Long-term Liabilities:

Long-term deposits from customers 45,253 45,183

Medium and long-term borrowings 24,472,132 6,537,603

Long-term bond payables 17 27,766,469 27,795,884

Other long-term liabilities 2,418,808 2,079,717

Total Long-term Liabilities 54,702,662 36,458,387

Total Liabilities 65,775,917 42,890,958

Investor’s Equity

Capital 32,335,295 32,333,331

Reserves 15,081,869 5,903,906

Profit for the year 6,460,858 4,847,423

Total Investor’s Equity 53,878,022 43,084,660

Total Liabilities and Investor’s Equity 119,653,939 85,975,618

CITIC Group 54 INCOME STATEMENT CITIC Group

INCOME STATEMENT

For the year ended 31 December 2006 Expressed in thousands of RMB

Note 2006 2005

Operating income 1,059,398 792,436

Operating costs 2,237,672 1,714,690

Operating expenses 425,789 312,871

Investment income 9,971,451 6,614,068

Business taxes and surcharges 12,820 7,889

Operating Profit 8,354,568 5,371,054

Add: non-operating income 6,077 4,825

Less: non-operating expenses 16,623 18,583

Profit before provision for impairment losses 8,344,022 5,357,296

Less: provision for impairment losses 1,814,246 489,990

Profit after provision for impairment losses 6,529,776 4,867,306

Less: income tax 68,918 19,883

Net Profit 6,460,858 4,847,423

55 ANNUAL REPORT 2006 CASH FLOW STATEMENT

For the year ended 31 December 2006 Expressed in thousands of RMB Item Amount 1. Cash Flows from Operating Activities: Cash received from rendering of financial services 4,269,107 Cash received from sales of goods or rendering of other services - Refund of taxes - Other cash received relating to operating activities 3,089,543 Sub-total of cash inflows 7,358,650 Cash paid for financial services 13,686 Cash paid for goods and services - Cash paid to and on behalf of employees 108,742 Cash paid for all types of taxes 29,910 Other cash paid relating to operating activities 115,899 Sub-total of cash outflows 268,237 Net cash flows from operating activities 7,090,413

2. Cash flows from investing activities: Cash received from disposal of equity investments 274,783 Cash received from return on equity investments - Cash received from return on debt investments 608,179 Interests received - Net cash received from disposal of fixed assets, - intangible assets and other long-term assets Other cash received relating to investing activities - Sub-total of cash inflows 882,962 Cash paid to acquire fixed assets, intangible assets and other 3,718 long-term assets Cash paid on equity investments 21,642,253 Cash paid on debt investments 177,000 Cash paid on other investing activities - Sub-total of cash outflows 21,822,971 Net cash flows from investing activities -20,940,009

CITIC Group 56 CASH FLOW STATEMENT CITIC Group

3. Cash flows from financing activities: Proceeds from equity investments - Inc: cash received from equity investments from subsidiaries’ minority interests - Proceeds from bonds issued - Proceeds from borrowings 23,693,986 Proceeds from other financing activities - Sub-total of cash inflows 23,693,986 Cash payments of registered capital’s withdrawal - Cash repayments of borrowings 4,858,231 Cash payments of financing expenses - Cash payments for distribution of dividends or profits - Inc: cash payments of dividends owned by subsidiaries’ minority interests - Cash payments for interests 1,994,970 Cash payments on other financing activities - Sub-total of cash outflows 6,853,201 Net cash flows from financing activities 16,840,785

4. Effect of foreign exchange rate fluctuation on cash -128,299

5. Net increase in cash and cash equivalents 2,862,890

57 ANNUAL REPORT 2006 1 Company Status CITIC Group (referred to as “the Company”), established originally in 1979 in Peoples’ Republic of China (PRC) upon ap- proval of State Council of the People’s Republic of China, is a multi-business group company. As at 31 December 2006, the registered capital of the Company is RMB 30 billion. The legal representative of the Company is Mr. Kong Dan. The registered address of the Company is 6 Xinyuannanlu, Chaoyang District, Beijing. Principal activities of the Company and its subsidiaries (referred to as “the Group”) is provision of financial services, investment holding, regional development and real estate, manufacturing, resources, trading and services, information industry and project contracting business.

2 Basis of Preparation of Financial Statements The principal accounting policies adopted in the preparation of the financial statements are in conformity with the Accounting Standards for Business Enterprises and the Accounting Regulations for Business Enterprises issued by the Ministry of Finance of the PRC (MOF).

3 Principal Accounting Policies and Estimates (A) Accounting Year The accounting year of the Group is the calendar year from 1 January to 31 December. (B) Basis of Preparation and Measurement The financial statements have been prepared on an accrual basis. Unless otherwise stated, the measurement basis used is historical cost. (C) Reporting Currency The reporting currency of the Group, the Company and its subsidiaries in mainland of PRC is RMB. The reporting currency of the Company’s subsidiaries out of mainland of PRC is adopted in accordance with the local accounting standards. (D) Translation of Foreign Currency Transactions and Financial Statements Non-financial institution entities record foreign currency transactions in a unified ledger. Foreign currency transactions during the year are translated into RMB at the exchange rates ruling at the transaction dates. At year end, monetary assets and lia- bilities in foreign currencies are translated into RMB at the exchange rates, quoted by the People’s Bank of China (the “PBOC”), ruling at the balance sheet date. Financial institutions record foreign currency transactions in multi-currency ledgers. The ledgers denominated in foreign currencies are translated into USD at the exchange rates quoted in the New York market, which is announced by the PBOC, ruling on the last day of the accounting year, and then translated from USD to RMB at the exchange rate quoted by the PBOC ruling on the same day. Except for the exchange gains and losses relating directly to the construction of fixed assets [see note 3(L)], exchange differ- ences arising from foreign currency transactions and exchanges are dealt with as foreign exchange gains and losses for the current period. The financial statements of oversea subsidiaries are translated into RMB by current exchange rate method in accordance with the Provisional Regulations on Consolidated Financial Statements. Financial statements of foreign currencies are translated into RMB at year end exchange rates. Year end exchange rates are the exchange rates quoted in the New York market, which is announced by the PBOC, ruling on the last day of the accounting year, and the exchange rate quoted by the PBOC ruling on the same day for the translation from USD to RMB. The exchange differences are recorded as differences from translation of financial statements denominated in foreign currencies. (E) Cash and Cash Equivalents Cash and cash equivalents include: cash, deposits, short-term inter-bank placements and highly liquid investments that are ca- pable of being converted into known amounts of cash and are subject to an insignificant risk of change in value. (F) Provision for Bad Debts Provision for bad debts is estimated by management based on the general consideration of aging analysis, recoverability of receivables (including accounts receivable and other receivables), and individual measurements. (G) Loans, Provision for Loan Losses and Writing Off of Loans (1) Loan classification - Short-term, medium and long-term loans: loans are classified according to their original maturity terms. Loans originally maturing within one year (including one year) are classified as short-term loans, and loans originally maturing over one year are classified as medium and long-term loans.

CITIC Group 58 NOTES TO FINANCIAL STATEMENTS CITIC Group

- Overdue loans: loans not repaid on maturity or rescheduled maturity dates; advances arising from discounted bills or bill acceptances with insufficient collateralized deposits and not yet repaid until the due dates; overdue trade finance for inward and outward bills, and advances arising from off balance sheet credit facilities such as letters of credit and guaran- tees. - Discounted bills: not-yet-matured bills discounted by the Group for customers or other financial institutions; rediscount- ed received from the central bank, other inter-banks or financial institutions. (2) Loans are initially recognized at the amounts actually drawn. Discounted bills are initially recognized at the face value. Interest income from discounted bills is recognized on an accrual basis on amounts provided and at an applicable interest rate over the terms of the bills. As at the balance sheet date, the face value of the discounted bills and the relevant unre- alized interest income are separately shown in the balance sheet. (3) Provision for loan losses and writing off of loans. Loans are classified into five categories: normal, special-mention, substandard, doubtful and loss. When there is objective evidence that a loan is impaired, provision for loan losses is made based on the estimated loss covering specific losses, non-individually identified potential losses, and potential losses arising from sovereignty risk, geographic risk, industry risk, or particular types of loans. At the end of each year, the Group assesses the recoverability of each type of loans and estimates potential losses. The provision for loan losses is measured as the difference between the carrying amounts of the loan and its estimated recoverable amount. Provision for loan losses is made based on risk grading, while other factors such as the borrowers’ solvency, willingness to repay and past repayment records, market value of the collateral and support from the guarantors are also taken into account when assessing the overall risk and recoverability, and determing whether a loan is impaired and provision is properly made. When a borrower or guarantor fails to repay his loan principal or interest, and uses the collateral to settle the debt, the re- spective loan principal together with the recognized interest, is transferred to repossessed assets with the corresponding provision for loan losses transferred to provision for impairment on repossessed assets at the same time. When a loan is considered uncollectable after the Group has completed all the necessary legal procedures, upon approval from managements, the loan is written off against the provision for loan losses. If in a subsequent period the loan previously written off is recovered, the provision for the loan losses against the loan in the amount of the recovery will be reversed. (H) Entrusted Loans and Investments Entrusted loans are funded by the customers who entrust the Group to grant loans to designated borrowers for specific pur- poses at terms (such as maturity period and interest rate) specified by the customers. The Group is responsible for granting and monitoring the usage and repayment of entrusted loans. Entrusted investments are also funded by the customers who entrust the Group to invest in accordance with the defined scopes. Balances of entrusted loans and entrusted investments are represented at the amounts granted or invested. (I) Derivative Financial Instruments The Group’s derivatives include spot foreign exchange, forward foreign exchange, currency swaps, interest rate swaps and options, which are undertaken in response to customers’ needs or for the Group’s risk management purposes. In order to hedge potential risks associated with derivative transactions with customers, the Group entered into similar derivative con- tracts with other banks and financial institutions, under the approval of the PBOC. The Group earns commissions on such transactions. (J) Inventories Inventories include assets held for sale in the ordinary course of business (goods or finished goods), assets in the production process for sale in the ordinary course of business (work in process), and materials and supplies that are consumed in pro- duction (raw materials). Inventories of the Group mainly consist of raw material, work-in progress, finished goods, goods, and self-developed prod- ucts. They are stated at actual cost and managed by perpetual inventory system. (K) Investments (1) Short-term investments The initial cost of a short-term investment is the total consideration paid on acquisition of the investment, exclud- ing cash dividends which have been declared but unpaid or unpaid interests on debentures which were due at the time of acquisition.

59 ANNUAL REPORT 2006 Except for cash dividends which have been declared but unpaid at the time of acquisition and interest on debentures which is due but not yet paid at the time of acquisition, cash dividends and interest are set off against the carrying amount of short-term investments when actually received by the Group. Upon the disposal or recovery of a short-term investment, the difference between the carrying amount and the actual amount received is recognized as profit or loss for the current period. Short-term investments are carried at the lower of their cost and market value, and a provision for diminution in value is made for any excess of the cost over the market value at the year end. (2) Long-term equity investments Where the Company controls, jointly controls or exercise significant influence over an investee enterprise, the long-term eq- uity investment is accounted for under the equity method whereby the investment is initially recorded at cost and adjusted thereafter for any post- acquisition change in the Company’s share of the shareholders’ equity in the investee enterprise. The difference between the initial investment cost and the Group’s share of shareholders’ equity in the investee enter- prise is accounted for as the difference in equity investment.Positive differences are amortised in stages. For investments with contractual terms, it will be amortised according to the contractual terms of the investments. For investments without contractual terms, it will normally be amortised within a period of 10 years. Negative differences are directly taken into the capital surplus of the Group. Where the Group does not control, jointly control or exercise significant influence over an investee enterprise, the long- term equity investment is accounted for under the cost method by stating it at the initial investment cost. Investment in- come is recognized when the investee enterprise declares a cash dividend or distributes its earnings. Upon the disposal of long-term equity investments, the difference between the proceeds received and the carrying amount of the investments is recognized as profit or loss for the period. (3) Long-term debt investments The initial investment cost of a long-term debt investment is the total consideration amount paid for acquisition of the in- vestment, but excludes any unpaid interest that was due at the time of acquisition. Such interest receivable is separately accounted for under receivables. Where the total consideration paid includes accrued interest that is not yet due at the time of acquisition, such interest is separately accounted for under long-term debt investments. The premium or discount on debentures represents the difference between the nominal value and the initial investment cost of the debenture after the deduction of relevant taxes and accrued interests which are not yet due for payments. The premium (discount) on investments in long-term debentures is amortized on a straight-line basis over the holding pe- riod, and is treated as an adjustment to the interest income. (L) Fixed Assets and Construction in Progress Fixes assets are assets with comparatively high unit values held by the Group for producing products or rendering service. They are expected to be used for more than one year. Fixed assets are stated in the balance sheet at cost less accumulated depreciation and provision for impairment. Construction in progress is stated in the balance sheet at cost less provision for impairment. All direct and indirect costs that are related to the construction of fixed assets and incurred before the assets are ready for their intended uses are capitalized as construction in progress. Those costs include borrowing costs (including foreign ex- change differences arising from the loan principal and the related interests) of specific borrowings for the construction of the fixed assets during the construction period. Construction in progress is transferred to fixed assets when it is ready for its intended use. Fixed assets are depreciated by using the straight-line method over their estimated useful lives. The estimated useful lives and the estimated rates of net residual value on cost adopted for the Group’s fixed assets are as follows:

Classification Estimated useful Life Residual Value (% of cost) Land Use Rights Terms of the land lease -- Plant and Buildings 15-40 years 3%-5% Transportation Equipment 6-8 years 3%-5% Machinery and Equipment 5-15 years 3%-5% Others 3-10 years 3%-5%

CITIC Group 60 NOTES TO FINANCIAL STATEMENTS CITIC Group

(M) Intangible Assets Intangible assets are long-lived assets that do not have physical appearance, held by the Group for producing products, ren- dering services, leasing, or operation management. Intangible assets are stated in the balance sheet at the actual cost inc- cured at the time of acquisition and are amortized on a straight-line basis over the beneficial periods. (N) Long-term Deferred Expenses Long-term deferred expenses represents expenses already paid but are amortized over a period of more than one year. Long-term deferred expenses are stated at the actual payments and subsequently amortized as follows: (1) Operating lease payments are amortized on a straight-line basis over the actual terms of the respective leases. (2) Other expenses paid are amortized on a straight-line basis over their respective beneficial periods. When the long-term deferred expenses which are unlikely to be able to bring economic benefit to the Group in the subse- quent periods, the balances will be charged to the income statement upon recognition. (O) Pre-operating Expenses Except for the expenditure incurred for acquiring or constructing the fixed assets, other expenses incurred during the start-up period are aggregated in long-term deferred expenses and then fully charged to the income statement in the month opera- tions commence. (P) Provision for Impairment of Assets The carrying amounts of assets (including loans, entrusted loans, inventories, long-term investments, fixed assets, construction in progress, intangible assets, and other assets) are reviewed regularly for whether their recoverable amounts have declined below their carrying amounts. The Group will perform an impairment test if there are signs indicating that the carrying amount of an asset is concerned to be difficult to recover. When impairment has occurred, the carrying amount is reduced to the recoverable amount. The amount of deduction is recognized to be the impairment loss of the asset. The recoverable amount is the value of an asset treated as the greater of its net realizable value and the present value of the esti- mated future cash flows obtainable from the asset’s continuous use including the disposal at the end of its useful life. Provision for impairment loss is measured on an item by item basis and recognized in the income statement for the current period. If a negative difference between the initial investment cost and the Group’s share of the shareholders’ equity of the in- vestee enterprise has been credited to the capital surplus, any impairment losses for the long-term equity investment should firstly set off against the difference initially recognized in the capital surplus relating to the investment and any excessive im- pairment losses are then recognized in the income statement for the current period. If there has been a change in the estimates used to determine the recoverable amount and as a result the estimated recover- able amount is greater than the carrying amount of the asset, the impairment loss recognized in prior years is reversed. Re- versals of impairment losses are recognized in the income statement for the current period. Impairment losses are reversed to the extent of the asset’s carrying amount that would have been determined had no impairment loss been recognized in prior years.In respect of the reversal of an impairment loss for a long-term equity investment, the reversal starts with the im- pairment losses that had previously been recognized in the income statement and then the impairment losses that had been charged to the capital surplus. (Q) Repossessed Assets (1) Repossessed assets are the assets repossessed by the Group through debt restructuring or effective control and the Group can legally realize through auction, transfer or any other procedures. (2) Repossessed assets are recorded at the value of the collateralized portion of the loan principal and the recognized interest income. At the same time, all the corresponding loan provisions are transferred to provisions for impairment on repossessed assets. (3) Provision for impairment on repossessed assets Repossessed assets are stated at the lower of their carrying amounts and recoverable amounts at the end of each ac- counting period. Provision for impairment is measured as the difference between the recoverable amounts and the carry- ing amounts of repossessed assets. (4) Disposal of repossessed assets If the proceeds from the disposal of repossessed assets exceed their carrying amounts, the difference will be recognized as non-operat- ing revenue. If the amount is less than the carrying amount, the difference will be recognized as non-operating expenses.

61 ANNUAL REPORT 2006 (R) Issued Bonds Issued bonds are recognized as liabilities at the total amount received upon issuance. The difference between the total amount of issuance and the total face value is treated as the bonds discount or premium, and is amortized on a straight-line basis throughout the terms of the bonds. Interest expenses are accrued based on the coupons. Interest expenses plus amortization of discount or premium and the is- suance costs together, are charged to income statement as financal costs in the period incurred. (S) Income Tax Income tax is recognized by using the tax-effect accounting method. Income tax for the year consists of current tax paid and payable, and the movement of deferred tax assets and liabilities. Current tax is calculated by applicable tax rate on the taxable income. Deferred tax is measured for the differences between the accounting income and the taxable income arising from the timing differences in recognizing income, expenses or losses between the accounting and tax regulations. Income tax expense for the year is recorded into income statements; tax payable is provided by applicable tax rate on taxable income; deferred tax assets or liabilities are recorded at applicable tax rate on timing differences. The Company and some of its subsidairies have adopted a consolidated tax filing policy and calculated tax payable with 33% of taxable income. According to the Notice on Enterprise Income Tax Filing of CITIC Group (Guo Shui Han [2005] No. 1005) issued by the State Administration of Taxation, the Company and those subsidiaries mentioned above should prepare corpo- rate income tax filing on a consolidation basis since 2005. (T) Revenue Recognition When it is probable that the economic benefits will flow to the Group, the amount of revenue and relevant costs can be mea- sured reliably, revenue is recognized as follows: (1) Interest income Interest income from loans is recognized on an accrual basis on the time-proportion with reference to the principal out- standing and the interest rates applicable. For loans overdue (including rescheduled loans) and not yet recovered for more than 90 days, or loans with interest overdue for more than 90 days, the accrual interest is discontinued and is ac- counted for as an off-balance sheet item. Recognized interest receivables of such loans set off against interest income in the income statement, and turn to be accounted for as an off-balance sheet item. Repayment for a non-accrual loan will be firstly set off against the outstanding loan principal. It is only when the loan principal is fully recovered that any excess amount received can be recognized as interest income for the period. (2) Rendering of services When the outcome of a transaction involving the rendering of services can be reliably measured, revenue is recognized in the income statement by reference to the completion stage of the transaction. When the outcome of the transaction involving the rendering of services cannot be reliably measured, revenue is recognized only to the extent of the costs in- curred that are expected to be recoverable. Income from property management service is recognized when the service is rendered; it is probable that the economic benefits will flow to the Group; and the revenue and costs can be reliably measured. (3) Insurance income Insurance income is recognized on an accrual basis, starting from the time when the related insurance obligation be- comes effective in accordance with agreed terms of signed insurance contract. (4) Sale of goods Revenue from sale of goods is recognized when the significant risks and rewards of ownership of the goods has been transferred to the buyer; the Group retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; the economic benefits associated with the transaction will be re- ceived by the Group; and the relevant amount of revenue and costs can be reliably measured.

CITIC Group 62 NOTES TO FINANCIAL STATEMENTS CITIC Group

Revenue from sale of properties is recognized when the construction is completed; the completion certificate is issued by the relevant government authorities; the sales agreement is signed; and the evidence of the customer payment in accordance with the term of the sales agreement is received. Usually, the evidence of the customer payment is the receipt of deposit of over 20% of the agreement amount or the payment schedule of the remaining amount being confirmed. (5) Revenue from Contracts of construction When the outcome of a construction contract can be reliably measured, revenue associated with the construction contract is recog- nized at the balance sheet date by using the percentage-of-completion method. When the outcome of a construction contract cannot be reliably measured, revenue is recognized only to the extent of the contract costs incurred that are recoverable. (6) Other revenue Other revenue is recognized on an accrual basis. (U) Borrowing Costs Borrowing costs incurred on specific borrowings for the construction of fixed assets are capitalized into the cost of the fixed assets during the construction period until the fixed assets are ready for their intended uses, when expenditures for the as- sets are being incurred; borrowing costs are being incurred; and activities that are necessary to prepare the asset for their intended uses are in progress. Except for the specific borrowings for the construction of fixed assets, other borrowings are recognized as expenses for the period and charged to the income statement as part of the financial costs. (V) Employee Benefits According to the relevant regulations in PRC, the Company and its domestic subsidiaries established basic pension schemes in 1998. For each employee, the basic pension cost is accrued based on 28% of the total salary, of which 8% is borne by the employee and 20% is borne by the Company and its domestic subsidiaries. By the end of 2006, the Company and its domes- tic subsidiaries have made adequate accrual for this basic pension. The Company and certain of its domestic subsidiaries also established annuity schemes, the related cost is accrued based on 6% of the total salaray of an employee, of which 3% is borne by the employee and 3% is borne by the Company and these subsidiaries. By the end of 2006, the Company and these subsidiaries have made adequate accrual for the annuity. (W) Provisions and Contingent Liabilities Provisions are made when the Group has a present obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation and the amount of outflow can be reliably estimated. When the possibility of an outflow of economic benefits caused by the settlement of the above obligation is low, or the outflow amount cannot be reliably measured, this obligation is disclosed as a contingent liability. (X) Related Parties Two or more parties are considered to be related parties when at any time during the relevant financial period: if one party has the power, directly or indirectly, to control, jointly control or exercise significant influence over another party, or vice versa, or where one or more parties are subject to common control from another party, they are considered to be related parties. (Y) Segmental Reporting A segment is a distinguishable component of the Group that is engaged either in providing distinguished products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments. During the represented period, the business segments of the Group include: financial services, regional development and real estate, manufacturing, resources, trading and services, information industry, project contracting and unallocated.

63 ANNUAL REPORT 2006 4 Basis of Preparation of the Consolidated Financial Statements (A) The Group prepared its consolidated financial statements in accordance with the Provisional Regulations on Consolidated Financial Statements (Cai Kuai Zi [1995] No.11) issued by the Ministry of Finance and in accordance with the Official Reply on the Issues Relating to the Scope of Consolidated Financial Statements (Cai Kuai Zi [1996] No.2). The consolidated financial statements are consolidated by the financial statements of the Company and all of its principal subsidiaries as at 31 December 2006. Subsidiaries are those entities controlled by the Company directly or indirectly: hold- ing 50% or above equity shares directly or indirectly; carrying more than half of the voting rights; controlling the composition of the board of directors; or governing the financial and operating policies of an entity so as to obtain benefits from its activi- ties. The investments in subsidiaries are accounted under equity method in the Company’s financial statements, and these subsidaries are consolidated at the end of the accounting year. The consolidated financial statements of the Group are prepared base on the individual financial statements of the Com- pany and its consolidated subsidiaries. Material intra-group transactions, including any intra-group unrealized profits and balances, are eliminated through the preparation of the Group’s consolidated financial statements. (B) Principal subsidiaries (included in the consolidation of the Group for year 2006) are as follows:

Name Shares held Registration Principal Type (%) location activities CITIC Holdings 100% Beijing Financial services Limited liabilities company China CITIC Bank Corporation Ltd. 84.83% Beijing Financial services Listed company CITIC Prudential Life Insurance Co., Ltd. 50% Guangzhou Financial services Limited liabilities company CITIC Trust & Investment Co., Ltd. 100% Beijing Financial services Limited liabilities company CITIC Asset Management Corporation Ltd. 100% Beijing Financial services Limited liabilities company CITIC Guoan Group 100% Beijing Investment holding Limited liabilities company CITIC Investment Holdings Ltd. 100% Beijing Investment holding Limited liabilities company CITIC East China Group 100% Shanghai Regional development Limited liabilities company and real estate CITIC South China Group 100% Guangzhou Regional development Limited liabilities company and real estate CITIC Shenzhen Group 100% Shenzhen Regional development Limited liabilities company and real estate CITIC Tianjin Industrial Development Co., Ltd. 100% Tianjin Regional development Limited liabilities company and real estate CITIC Construction 100% Beijing Project contracting Limited liabilities company Central and Southern China Municipal 100% Wuhan Project contracting Limited liabilities company Engineering Design & Research Institute CITIC International Cooperation Co., Ltd. 100% Beijing Project contracting Limited liabilities company CITIC Qinhuangdao Co., Ltd. 100% Qinhuangdao Project contracting Limited liabilities company CITIC International Contracting Inc. 100% Beijing Project contracting Limited liabilities company Wuhan Architectural Design Institute 100% Wuhan Project contracting Limited liabilities company CITIC Metal Co., Ltd. 100% Beijing Resources Limited liabilities company CITIC Bohai Aluminium Industries Holding Co., Ltd. 100% Qinhuangdao Manufacturing Limited liabilities company CITIC Heavy Machinery Co., Ltd. 100% Luoyang Manufacturing Limited liabilities company

CITIC Group 64 NOTES TO FINANCIAL STATEMENTS CITIC Group

Name Shares held Registration Principal Type (%) location activities CITIC Machinery Manufacturing Co., Ltd. 100% Beijing Manufacturing Limited liabilities company CITIC Application Service Provider Co., Ltd. 70% Beijing Information industry Listed company CITIC Digital Technology Co., Ltd. 100% Beijing Information industry Limited liabilities company China Enterprise Communications Ltd. 51% Beijing Information industry Limited liabilities company CITIC Networks Co., Ltd. 100% Shenzhen Information industry Limited liabilities company Beijing Capital Mansion 100% Beijing Services Limited liabilities company Beijing Daxing Capital Golf Club 80% Beijing Services Limited liabilities company CITIC Automobile Co., Ltd. 100% Beijing Trading Limited liabilities company China CITIC Press 100% Beijing Publishing Limited liabilities company CITIC International Economic Consultants Co., Ltd. 100% Beijing Services Limited liabilities company CITIC Ningbo Group 100% Ningbo Services Limited liabilities company CITIC Travel Co., Ltd. 100% Beijing Services Limited liabilities company CITIC Technology Co., Ltd. 100% Beijing Trading Limited liabilities company China Zhonghaizhi Corporation 51.03% Shenzhen Services Limited liabilities company Ningbo Xinning Industry Investment Co., Ltd. 100% Ningbo Trading Limited liabilities company Shantou Gulf Golf Co., Ltd. 75% Shantou Services Limited liabilities company Xinyi Services Center Co., Ltd. 80% Beijing Services Limited liabilities company CITIC International Financial Holdings Limited 66.56% Hong Kong Financial services Limited liabilities company CITIC Hong Kong (Holdings) Ltd. 100% Hong Kong Investment holding Limited liabilities company CITIC USA Holdings Inc. 100% USA Investment holding Limited liabilities company CITIC Power Investment Co., Ltd. 100% Hong Kong Regional development Limited liabilities company and real estate CITIC Australia Pty. Limited 100% Australia Resources Limited liabilities company CITIC United Asia Investments Ltd. 100% Hong Kong Resources Limited liabilities company Keentech Group Ltd. 100% British Virgin Resources Limited liabilities company Islands Macau Cement Manufacturing Co., Ltd. 67.68% Macau Manufacturing Limited liabilities company Sundance Forest Industries Ltd 100% Canada Manufacturing Limited liabilities company CITIC Asia Limited 100% British Virgin Information industry Limited liabilities company Islands

65 ANNUAL REPORT 2006 5 Cash and Deposits 2006 2005 Deposits with the central bank 72,060,587 55,335,506 Others 37,764,688 36,648,040

Total 109,825,275 91,983,546

6 Loans to Customers 2006 2005 Short-term loans Short-term loans to customers 242,461,046 183,966,419 Discounted bills 46,203,285 50,333,285 Trade finance for inward and outward bills 4,798,805 4,703,676 Less: provision for short-term loans 30,160 Total short-term loans 293,432,976 239,003,380 Medium and long-term loans Medium and long-term loans to customers 218,653,066 160,792,007 Overdue loans 11,865,885 15,248,445 Less:provision for medium and long-term loans 12,448,109 13,669,849 Total medium and long-term loans to customers 218,070,842 162,370,603 Total loans to customers 511,503,818 401,373,983

(1) Analysis by categories (short-term loans to customers, medium and long-term loans to customers and overdue loans): Short-term loans to customers

By nature: 2006 2005 Unsecured loans 38,461,696 61,867,713 Loans with guarantees 139,603,994 71,560,808 Loans secured by properties 45,479,164 30,866,323 Loans pledged by monetary assets 18,916,192 19,671,575 Total 242,461,046 183,966,419

CITIC Group 66 NOTES TO FINANCIAL STATEMENTS CITIC Group

Medium and long-term loans (not including overdue loans) By nature and original maturity: 2006 1-5 years over 5 years Total Unsecured loans 57,949,391 27,735,198 85,684,589 Loans with guarantees 31,004,097 11,853,424 42,857,521 Loans secured by properties 31,487,644 40,018,868 71,506,512 Loans pledged by monetary assets 6,353,874 12,250,570 18,604,444 Total 126,795,006 91,858,060 218,653,066

2005 1-5 years over 5 years Total Unsecured loans 38,986,481 22,459,505 61,445,986 Loans with guarantees 22,298,140 8,824,110 31,122,250 Loans secured by properties 15,659,165 31,231,459 46,890,624 Loans pledged by monetary assets 9,193,955 12,139,192 21,333,147 Total 86,137,741 74,654,266 160,792,007

Overdue loans

By nature: 2006 2005 Unsecured loans 3,824,103 3,229,704 Loans with guarantees 2,050,187 7,051,181 Loans secured by properties 5,546,409 4,532,123 Loans pledged by monetary assets 445,186 435,437 Total 11,865,885 15,248,445

(2) Analysis by risk grading (short-term loans to customers, medium and long-term loans to customers and over due loans):

2006 2005 Normal 445,736,063 326,034,861 Special-mention 13,533,258 16,460,011 Total performing loans 459,269,321 342,494,872 Substandard 2,596,558 3,960,814 Doubtful 7,936,628 9,255,093 Loss 3,177,490 4,296,092 Total non-performing loans 13,710,676 17,511,999 Total 472,979,997 360,006,871

67 ANNUAL REPORT 2006 By the nature of non-performing loans:

2006 2005 Unsecured loans 4,499,142 4,659,370 Loans with guarantees 5,681,685 7,540,408 Loans secured by properties 3,177,113 4,846,572 Loans pledged by monetary assets 352,736 465,649 Total 13,710,676 17,511,999

(3) Analysis by industry (including short-term loans to customers, medium and long-term loans to customers, overdue loans and discounted bills): 2006 2005 Manufacturing 118,494,653 89,420,411 Trading and services 57,891,716 76,463,565 Resources 38,545,330 28,408,609 Regional development and real estate 35,679,029 28,425,254 Project contracting 27,605,891 16,870,632 Investment holding 23,761,709 16,161,886 Financial services 26,217,866 35,279,083 Information industry 18,007,562 12,605,491 Others 95,127,062 54,985,660 Total corporate loans 441,330,818 358,620,591 Total individual loans 77,852,464 51,719,565 Gross amount of loans 519,183,282 410,340,156 Less: provision for loan losses 12,478,269 13,669,849 Net carrying amount of loans 506,705,013 396,670,307

(4) Analysis by geographical spread (including short-term loans to customers, medium and long-term loans to customers, overdue loans and discounted bills): 2006 2005 Domestic 473,145,335 341,030,774 Overseas 46,037,947 69,309,382 including: Hong Kong SAR 40,245,447 65,823,595 Others 5,792,500 3,485,787 Gross amount of loans 519,183,282 410,340,156 Less: provision for loan losses 12,478,269 13,669,849 Net carrying amount of loans 506,705,013 396,670,307

CITIC Group 68 NOTES TO FINANCIAL STATEMENTS CITIC Group

(5) Provision for Loans Losses Total provision for impairment losses Value Movement due Opening Charge for the Closing recovery- Subtotal to other balance period balance written back reasons Provision for short- - 30,160 - 30,160 - 30,160 term loans Provision for medium 13,669,849 1,983,712 152,765 1,830,947 -3,052,687 12,448,109 and long-term loans Total 13,669,849 2,013,872 152,765 1,861,107 -3,052,687 12,478,269

7 Receivables 2006 2005 Other receivables 9,740,932 8,954,726 Accounts receivable 6,398,720 4,385,126 Prepayments 2,293,424 2,321,843 Interests receivables 2,021,538 3,935,710 Subtotal 20,454,614 19,597,405 Less: provision for bad debts 1,995,236 1,172,768 Total 18,459,378 18,424,637

8 Investments 2006 2005 Short-term investments 33,391,909 30,267,113 Securities held under resale agreements 44,946,655 40,330,860 Total short-term investments 78,338,564 70,597,973 Long-term debt investments 98,800,383 109,748,066 Long-term equity investments 56,714,928 33,408,029 Total long-term investments 155,515,311 143,156,095 Total investments 233,853,875 213,754,068

69 ANNUAL REPORT 2006 (1) Short-term investments 2006 Gross Provision Net Bonds issued by PBOC 16,284,754 - 16,284,754 Government bonds 3,483,114 - 3,483,114 Bonds issued by domestic financial institutions 3,254,406 - 3,254,406 Corporate bonds 1,332,259 12,035 1,320,224 Debt securities issued by PRC policy banks 1,065,919 - 1,065,919 Debt securities issued by international institutions 740,563 - 740,563 Total bonds 26,161,015 12,035 26,148,980 Fund 3,692,989 - 3,692,989 Entrusted loans and investments 1,994,968 273,606 1,721,362 Others 1,828,578 - 1,828,578 Total 33,677,550 285,641 33,391,909

2005 Gross Provision Net Bonds issued by PBOC 1,932,688 - 1,932,688 Government bonds 7,716,484 - 7,716,484 Bonds issued by domestic financial institutions 3,454,569 - 3,454,569 Corporate bonds 6,432,465 - 6,432,465 Debt securities issued by PRC policy banks 2,606,830 - 2,606,830 Debt securities issued by international institutions 1,301,518 - 1,301,518 Total bonds 23,444,554 - 23,444,554 Fund 4,665,630 5,151 4,660,479 Entrusted loans and investments 1,441,460 314,768 1,126,692 Others 1,053,343 17,955 1,035,388 Total 30,604,987 337,874 30,267,113

(a) The government bonds, the PBOC bills and the debt securities issued by PRC policy banks held by the Group are traded in the interbank bond market. As at December 31, 2006, the Group considered that there was no more impairment of the short- term investments except for the provision recognized.

CITIC Group 70 NOTES TO FINANCIAL STATEMENTS CITIC Group

(b) Analysis by market value

2006 2005 Net book value Market value Net book value Market value Bonds issued by PBOC 16,284,754 16,311,378 1,932,688 1,932,688 Government bonds 3,483,114 3,487,688 7,716,484 7,716,671 Bonds issued by domestic financial institutions 3,254,406 3,254,406 3,454,569 3,512,686 Corporate bonds 1,320,224 1,440,192 6,432,465 6,438,564 Debt securities issued by PRC policy banks 1,065,919 1,083,619 2,606,830 2,642,512 Debt securities issued by international institutions 740,563 743,265 1,301,518 1,329,006 Total bonds 26,148,980 26,320,548 23,444,554 23,572,127 Fund 3,692,989 3,695,448 4,660,479 4,660,555 Entrusted loans and investments 1,721,362 1,721,362 1,126,692 1,126,692 Other 1,828,578 1,832,949 1,035,388 1,040,558 Total 33,391,909 33,570,307 30,267,113 30,399,932

(2) Long-term debt investments 2006 Gross Provision Net Bonds issued by domestic financial institutions 45,237,529 168,000 45,069,529 Debt securities issued by international institutions 17,564,700 49,515 17,515,185 Government bonds 14,220,233 - 14,220,233 Debt securities issued by PRC policy banks 13,638,027 - 13,638,027 Corporate bonds 6,151,526 76,526 6,075,000 Bonds issued by PBOC 1,894,122 - 1,894,122 Others 388,287 - 388,287 Total 99,094,424 294,041 98,800,383

2005 Gross Provision Net Bonds issued by domestic financial institutions 47,010,356 169,000 46,841,356 Debt securities issued by international institutions 25,784,477 50,896 25,733,581 Government bonds 15,117,786 - 15,117,786 Debt securities issued by PRC policy banks 12,287,060 - 12,287,060 Corporate bonds 8,249,813 3,200 8,246,613 Bonds issued by PBOC 1,026,649 - 1,026,649 Others 495,021 - 495,021 Total 109,971,162 223,096 109,748,066

71 ANNUAL REPORT 2006 (3) Long-term equity investments The Group

2006 2005 Investments in: Listed companies 15,020,624 12,745,153 Unlisted companies 43,180,518 21,001,025 Associated companies 1,085,725 1,411,854 Total gross balance 59,286,867 35,158,032 Less: provision for impairment 2,571,939 1,750,003 Total carrying amount 56,714,928 33,408,029

The Company

2006 2005 Investments in: Listed companies 18,896,599 9,249,504 Unlisted companies 82,373,935 57,701,744 Associated companies 961,375 906,357 Total gross balance 102,231,909 67,857,605 Less: provision for impairment 1,854,437 747,404 Total carrying amount 100,377,472 67,110,201

(4) Provision for investments: Total provision for impairment losses Value Movement due Opening Charge for the Closing recovery- Subtotal to other balance period balance written back reasons Provision for 337,874 - 83,911 -83,911 31,678 285,641 short-term investments

Provision for long-term 223,096 23,821 - 23,821 47,124 294,041 debt investments

Provision for long-term 1,750,003 1,248,078 13,639 1,234,439 -412,503 2,571,939 equity investments Total 2,310,973 1,271,899 97,550 1,174,349 -333,701 3,151,621

9 Other Current Assets 2006 2005 Inventories 12,852,183 11,583,100 Deferred expenses 244,245 162,649 Other current assets 718,878 863,554 Less: provision for inventories 30,362 25,149 Total 13,784,944 12,584,154

CITIC Group 72 NOTES TO FINANCIAL STATEMENTS CITIC Group

Provision for inventories: Total provision for impairment losses Value Movement due Opening Charge for the Closing recovery- Subtotal to other balance period balance written back reasons Provision for 25,149 31,061 28 31,033 -25,820 30,362 inventories Total 25,149 31,061 28 31,033 -25,820 30,362

10 Fixed Assets 2006 2005 Fixed assets, net 32,528,008 28,315,354 Construction in progress 6,731,620 5,873,327 Fixed assets pending disposal 14,876 69,647 Less: provision for impairment 52,179 1,154 Less: provision for construction in progress 2,984 - Total 39,219,341 34,257,174

Costs of the fixed assets:

Opening balance Additions Disposals Closing balance Land use rights 2,152,017 52,279 161,778 2,042,518 Plant and buildings 18,132,053 2,570,076 1,914,044 18,788,085 Transportation equipment 1,066,315 332,162 325,492 1,072,985 Machinery & equipment 9,618,867 4,402,529 1,075,155 12,946,241 Others 6,219,498 3,155,036 742,906 8,631,628

Total 37,188,750 10,512,082 4,219,375 43,481,457

Accumulated depreciation:

Opening balance Additions Written back Closing balance Land use rights 110,860 - 110,860 - Plant and buildings 2,445,470 774,109 620,417 2,599,162 Transportation equipment 532,104 265,011 238,071 559,044 Machinery & equipment 3,516,516 1,923,915 406,799 5,033,632 Others 2,268,446 935,893 442,728 2,761,611

Total 8,873,396 3,898,928 1,818,875 10,953,449

73 ANNUAL REPORT 2006 Provision for impairment: Total provision for impairment losses Value Movement due Opening Charge for the Closing recovery- Subtotal to other balance period balance written back reasons Provision for fixed 1,154 22,606 - 22,606 28,419 52,179 assets Including: Plant and buildings - - - - 18,491 18,491 Machinery & equipment 1,115 - - - -1,115 - Others 39 22,606 - 22,606 11,043 33,688 Provision for construction - 2,984 - 2,984 - 2,984 in progress Total 1,154 25,590 - 25,590 28,419 55,163

11 Other Long-term Assets 2006 2005 Intangible assets 2,644,157 2,001,685 Less: provision for intangible assets 354 177 Deferred tax assets 2,389,064 4,346,339 Long-term deferred expenses 1,106,594 1,095,492 Repossessed assets 1,848,747 2,056,473 Less: provision for repossessed assets 1,055,057 935,921 Other long-term assets 2,140,699 1,745,888 Total 9,073,850 10,309,779

Provision for impairment: Total provision for impairment losses Value Movement due Opening Charge for the Closing recovery- Subtotal to other balance period balance written back reasons Provision for 177 177 - 177 - 354 intangible assets Provision for 935,921 180,564 1,620 178,944 -59,808 1,055,057 repossessed assets Total 936,098 180,741 1,620 179,121 -59,808 1,055,411

CITIC Group 74 NOTES TO FINANCIAL STATEMENTS CITIC Group

12 Short-term Deposits from Customers 2006 2005 Short-term deposits 266,495,498 228,548,752 Short-term savings deposits 96,028,079 68,269,476 Deposits from banks and other financial institutions 28,945,107 27,818,767 Short-term pledged deposits 22,804,860 17,282,327 Total 414,273,544 341,919,322

13 Short-term Financing 2006 2005 Short-term loans 16,457,008 11,329,290 Amounts of securities sold under repurchase agreements 2,579,174 1,749,629 Current portion of long-term liabilities 964,943 3,852,514 Borrowings from the central bank 160,000 243,500 Financing through bills discounted 41,200 75,069 Total 20,202,325 17,250,002

14 Payables 2006 2005 Accounts payable 12,793,102 8,910,525 Other payables 7,365,523 5,655,074 Receipts in advance 4,906,579 5,894,323 Outward remittances 3,437,504 18,156,340 Accrued payroll 1,605,054 1,142,937 Tax payable 1,124,742 927,540 Bills payable 775,725 917,548 Inward remittances 647,535 713,075 Welfare payable 361,058 259,579 Total 33,016,822 42,576,941

75 ANNUAL REPORT 2006 15 Other Current Liabilities 2006 2005 Accrued expenses 741,547 510,474 Other current liabilities 2,488,729 2,221,433 Total 3,230,276 2,731,907

16 Long-term Deposits from Customers 2006 2005 Long-term deposits 162,876,176 145,364,338 Long-term savings deposits 75,358,083 59,320,651 Long-term pledged deposits 61,459,758 55,349,134 Total 299,694,017 260,034,123

17 Long-term Bond Payables The Group

2006 2005 Total long-term bond payables 47,394,183 42,523,486 Inc: the Company 27,429,321 26,813,493 China CITIC Bank 11,990,000 6,000,000 International Financial Holdings Limited 6,474,862 8,209,993 CITIC Guoan Group 1,500,000 1,500,000

The Company

By maturity 2006 2005 1 to 5 years 3,504,580 - over 5 years 24,261,889 27,795,884 Total 27,766,469 27,795,884 Elimination through consolidation 337,148 982,391

CITIC Group 76 NOTES TO FINANCIAL STATEMENTS CITIC Group

18 Other Long-term Liabilities 2006 2005 Long-term payables 1,004,433 500,672 Long-term reserves 2,024,756 1,101,044 Deferred tax liabilities 1,152,370 728,327 Other long-term liabilities 389,738 218,489 Total 4,571,297 2,548,532

19 Capital This item represents the paid-in capital of the Company from the Ministry of Finance of the People’s Republic of China (MOF). As at 31December 2006, the balance of this item was 32,335,295 (Expressed in thousands of RMB).

20 Reserves 2006 2005 Capital surplus 13,991,933 10,457,665 Surplus reserves 8,611,153 7,106,030 Opening balance of retained income/(loss) -6,353,211 -11,183,744 Difference from translation of financial statements dominated in foreign currencies -714,381 -112,031 Less: unrecognized investment losses 192,220 23,632 Total 15,343,274 6,244,288

Retained earnings:

Amount Closing balance of 2005 -6,970,053 Add: adjustments of opening balance 633,732 Other adjustment -16,890 Opening balance of 2006 -6,353,211 Transferred from net profit of 2006 6,464,186 Closing balance of 2006 110,975

77 ANNUAL REPORT 2006 21 Operating Income 2006 2005 Income of products sold 41,859,376 36,376,504 Interests 27,825,756 21,146,054 Interests from financial institutions 2,051,270 1,373,241 Fee and commission 1,716,859 1,124,267 Insurance income 1,613,724 1,059,451 Other operating income 5,567,578 4,182,467 Total 80,634,563 65,261,984

22 Operating Cost 2006 2005 Cost of goods sold 35,054,983 30,660,550 Interest costs 16,914,592 13,256,851 Interest costs to financial institutions 1,744,061 953,235 Cost of insurance business 1,540,607 990,689 Other operating costs 1,585,203 1,208,591 Commission costs 233,973 213,070 Loss of foreign currency translation 221,568 157,915 Total 57,294,987 47,440,901

23 Operating Expenses 2006 2005 Staff costs 5,426,150 3,818,101 Depreciation 1,261,424 908,430 Expenses of reception 574,851 480,350 Rents 551,945 478,521 Amortisation 384,788 301,428 Sundry expenses 329,619 254,162 Publicity expenses of operation 302,625 280,140 Travel fees 273,466 234,051 Charges of mail & telephone 226,028 173,296 Running costs of eletrical equipments 224,305 149,282 Other operating expenses 2,974,689 2,573,240 Total 12,529,890 9,651,001

CITIC Group 78 NOTES TO FINANCIAL STATEMENTS CITIC Group

24 Provisions for Impairment Losses Charge for Value recovery- Total provision the period written back for 2006 Provision for shor-term investments - 83,911 -83,911 Provision for bad debts 739,991 3,814 736,177 Provision for inventories 31,061 28 31,033 Provision for loan losses 2,013,872 152,765 1,861,107 Provision for long-term investments 1,271,899 13,639 1,258,260 Provision for fixed assets 22,606 - 22,606 Provision for construction in process 2,984 - 2,984 Provision for intangible assets 177 - 177 Provision for repossessed assets 180,564 1,620 178,944 Writing off of non-performing assets 191,211 - 191,211 Total 4,454,365 255,777 4,198,588

25 Cash and Cash Equivalents 2006 2005 Amount of cash and cash equivalents in balance sheet: Deposits with central bank 30,138,000 25,779,000 Cash and deposits (excluding deposits with central bank) 35,484,352 34,801,250 Inter-bank placements 4,688,000 485,000 Short-term investments 7,350,488 25,810,786 Total 77,660,840 86,876,036 Corresponding amount in balance sheet: Deposits with central bank 72,060,587 55,335,506 Cash and deposits (excluding deposits with central bank) 37,764,688 36,648,040 Inter-bank placements 5,153,667 823,822 Short-term investments 33,391,909 30,267,113 Total 148,370,851 123,074,481 Less: short-term investments (maturity more than 3 months) 70,710,011 36,198,445 Cash and cash equivalents 77,660,840 86,876,036

79 ANNUAL REPORT 2006 26 Segmental Reporting (1) Business segments

2006

Regional Head Financial development Trading Information Project office services and real Manufacturing Resources and industry contracting Unallocated Elimination Total estate services

Operating 1,059,398 38,771,136 7,215,160 8,459,463 16,001,191 5,250,079 2,136,976 3,127,870 398,441 -1,785,151 80,634,563 income Operating costs 2,237,672 18,288,064 5,086,735 7,641,506 14,590,474 4,360,524 2,057,526 2,262,630 93,949 675,907 57,294,987 Operating 425,789 9,629,935 788,646 690,427 527,353 844,310 484,611 262,971 1,234,402 -2,358,554 12,529,890 expenses Investment 9,971,451 381,337 1,480,375 559,634 380,019 1,075,230 623,037 197,232 -906,753 -8,600,672 5,160,890 income Business taxes 12,820 1,423,986 431,787 26,685 6,422 64,936 57,384 52,902 9 - 2,076,931 and surcharges Operating profit 8,354,568 9,810,488 2,388,367 660,479 1,256,961 1,055,539 160,492 746,599 -1,836,672 -8,703,176 13,893,645

2006

Regional Head Financial development Trading Information Project office services and real Manufacturing Resources and industry contracting Unallocated Elimination Total estate services

Assets 119,653,938 816,077,137 29,447,097 14,276,056 20,994,774 15,947,043 18,217,394 6,240,349 2,049,829 -107,183,136 935,720,481 Liabilities 65,775,917 759,765,784 18,619,750 8,716,628 10,165,811 8,262,075 8,434,640 4,921,234 4,995,017 -23,792,901 865,863,955

2005

Regional Head Financial development Trading Information Project office services and real Manufacturing Resources and industry contracting Unallocated Elimination Total estate services

Operating 792,436 28,839,599 5,499,499 7,529,307 13,517,964 4,963,423 1,546,819 2,673,274 669,222 -769,559 65,261,984 income Operating costs 1,714,690 13,079,622 4,413,083 6,705,257 12,712,742 4,199,300 1,649,830 2,276,329 1,210,394 -520,346 47,440,901 Operating 312,871 7,503,807 363,595 460,580 220,945 590,960 377,270 130,594 -160,408 -149,213 9,651,001 expenses Investment 6,614,068 108,229 929,265 383,787 303,803 493,833 63,668 177,125 -712,767 -6,051,513 2,309,498 income Business taxes 7,889 1,000,264 235,967 18,782 4,602 74,700 48,338 55,662 - - 1,446,204 and surcharges Operating profit 5,371,054 7,364,135 1,416,119 728,475 883,478 592,296 -464,951 387,814 -1,093,531 -6,151,513 9,033,376

2005

Regional Head Financial development Trading Information Project office services and real Manufacturing Resources and industry contracting Unallocated Elimination Total estate services

Assets 85,975,618 687,364,462 28,357,705 12,560,494 14,339,523 16,753,769 13,494,931 3,949,721 1,336,567 -81,445,449 782,687,341 Liabilities 42,890,958 653,640,876 17,040,113 7,294,230 5,742,455 8,258,569 7,557,501 2,739,459 5,414,473 -21,851,248 728,727,386

CITIC Group 80 NOTES TO FINANCIAL STATEMENTS CITIC Group

(2) Geographical segments

2006 2005

HongKong HongKong Domestic Others Elimination Total Domestic Unallocated Elimination Total SAR SAR Operating 62,630,059 18,636,743 1,152,912 -1,785,151 80,634,563 49,006,142 15,335,291 -769,559 65,261,984 income 1,690,110

Operating costs 40,397,554 15,402,501 819,025 675,907 57,294,987 33,760,313 12,925,127 -520,346 47,440,901 1,275,807 Operating 12,600,955 2,133,355 154,134 -2,358,554 12,529,890 8,085,675 1,638,804 75,735 -149,213 9,651,001 expenses Investment 10,657,908 3,064,659 38,995 -8,600,672 5,160,890 6,799,531 1,520,358 41,122 -6,051,513 2,309,498 income Business taxes 2,075,190 1,741 - - 2,076,931 1,444,764 1,440 - - 1,446,204 and surcharges Operating profit 18,214,268 4,163,805 218,748 -8,703,176 13,893,645 12,514,921 2,290,278 379,690 -6,151,513 9,033,376

2006 2005

HongKong HongKong Domestic Others Elimination Total Domestic Unallocated Elimination Total SAR SAR

Assets 902,385,878 136,473,293 4,044,446 -107,183,136 935,720,481 743,961,550 117,067,250 3,103,990 -81,445,449 782,687,341 Liabilities 793,228,987 95,525,131 902,738 -23,792,901 865,863,955 660,304,746 89,825,618 448,270 -21,851,248 728,727,386

27 Related Party Transactions The transactions with related parties of the Group in 2006 included transactions in operating activities with those associates and joint ventures of the Group. These transactions were in terms of normal business contracts and lines, and traded at maket prices. All the intra-group transactions of the Group are not disclosed since they have been eliminated in the preparation of the consoli- dated financial statements. (1) Transactions with related parties (income statement items)

With related Total amount As percentage of parties in 2006 incurred in 2006 the total amount (%) (1) (2) (1) / (2) Interest income 10,432 27,825,756 0.04% Other operating income 36,969 5,567,578 0.66% Interest costs 246,923 16,914,592 1.46% Interest costs to financial institutions 83,010 1,744,061 4.76% Other operating costs 2,399 1,585,203 0.15%

81 ANNUAL REPORT 2006 (2) Balances of receivables and payables arising from related parties (balance sheet items) 2006 2005 As percentage As percentage With related Total balance in With related par- Total balance in of the total of the total parties balance sheet ties balance sheet amount (%) amount (%) (1) (2) (1) / (2) (3) (4) (3) / (4) Assets: Other receivables 754,100 9,740,932 7.74% 389,972 8,954,726 4.35% Overdue loans 317,800 11,865,885 2.68% 48,300 15,248,445 0.32% Short-term loans to 224,563 242,461,046 0.09% 2,083,700 183,966,419 1.13% customers Account receivables 7,877 6,398,720 0.12% 7,761 4,385,126 0.18% Liabilities: Shor-term deposits 4,530,678 266,495,498 1.70% 1,192,422 228,548,752 0.52% Deposits from banks 772,871 28,945,107 2.67% 288,652 27,818,767 1.04% and other financial institutions Other payables 290,806 7,365,523 3.95% 207,119 5,655,074 3.66% Accured expenses 35,807 741,547 4.83% 17,670 510,474 3.46% Short-term loans 5,000 16,457,008 0.03% - 11,329,290 - Account payables 2,946 12,793,102 0.02% 59 8,910,525 0.00%

28 Contingencies (1) Off-balance sheet items (a) Derivative financial instruments Derivative financial instruments are off-balance sheet instruments, including forward, swaps, and option contracts conduct- ed in exchange and interest market. The following tables provide an analysis of the notional amounts of derivatives of the Group at the balance sheet date. The notional amounts of the derivatives indicate the volume of transactions outstanding at the balance sheet date; they do not represent amounts at risk. 2006 2005 Interest rate contracts 113,957,737 82,076,485 Exchange contracts 78,652,125 67,818,520 Total 192,609,862 149,895,005

(b) Irrevocable off-balance sheet credit Acceptances comprise undertakings by the Group to pay bills of exchange drawn on customers.

CITIC Group 82 NOTES TO FINANCIAL STATEMENTS CITIC Group

Value of guarantees and letters of credit presented below represents the maximum potential loss the Group would bear if the corresponding counter party failed to exercise completely as contracted. 2006 2005 Consolidated The Company Consolidated The Company Direct credit substitutes 183,269,829 - 106,796,706 - Trade-related contingencies 1,850,269 - 19,432,224 - Other commitments 48,178,370 356,990 15,191,315 982,470 Guarantees 2,204,845 16,380 20,160,027 165,780 Loan guarantees 6,183,224 10,027,260 7,171,114 8,358,330 Total 241,686,537 10,400,630 168,751,386 9,506,580

The above credit businesses are those which expose the Group to credit risk.

(2) Contingent liabilities Outstanding litigations As at 31 December 2006, some subsidaries of the Group were the defendants in certain pending litigations. The total amount involved in these litigations was approximately RMB 250 million.

(3) Commitments (a) Operating lease commitments The future minimum lease payments under non-cancellable operating leases in respect of the premises were payable as follows: 2006 2005 Within 1 year 500,543 370,583 After 1 year but within 5 years 1,179,470 923,442 After 5 years 568,114 540,712 Total 2,248,127 1,834,737

(b) Capital commitments 2006 2005 Authorized and contracted 256,954 164,926 Authorized but not contracted 181,538 1,407 Total 438,492 166,333

29 Comparative figures The financial statements of China CITIC Bank (one of the subsidiaries of the Company, see note 4(b)) for the accounting year from 1 January to 31 December 2006 are prepared in accordance with the Accounting Standards for Business Enterprises (2006) released by Ministry of Finance of PRC on 15 February 2006 and have adjusted the relevant comparative figures of year 2005. When preparing the consolidated financial statements of the Group for the accounting year of 2006, the opening balances such as investor’s equity and other related figures are adjusted regarding to the adjustments of China CITIC Bank’s opening financial figures mentioned above. These adjustments of the consolidated financial statements include a decrease of RMB 16,742.103 mil- lion in the opening balance of total assets, a decrease of RMB 19,120.014 million in the opening balance of total liabilities, an in- crease of RMB 2,373.216 million in the opening balance of investor’s equity, and an increase of RMB 168.321 million in net profit for year 2005.

83 ANNUAL REPORT 2006