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Morgan Stanley Smith Barney Investment Strategy

The Great of In c. 220 BC, under Shihuangdi (first emperor of the ), sections of earlier were joined together to form a united system to repel invasions from the north. Construction of the Great Wall continued for more than 16 centuries, up to the (1368–1644), National Emblem of China creating the world's largest defense structure. Source: About.com, travelchinaguide.com. The design of the national emblem of the People's Republic of China shows Tiananmen under the light of five stars, and is framed with ears of grain and a cogwheel. Tiananmen is the symbol of modern China because the May 4th Movement of 1919, which marked the beginning of the new- Portfolio Investment Opportunities in China democratic revolution in China, was launched there. The meaning of the word David M. Darst, CFA Tiananmen is “Gate of Heavenly Succession.” On the emblem, the cogwheel and the ears of grain represent the working June 2011 class and the peasantry, respectively, and the five stars symbolize the solidarity of the various nationalities of China. The nationality makes up 92 percent of China’s total population, while the remaining eight percent are represented by over 50 nationalities, including: Mongol, Hui, Tibetan, Uygur, Miao, Yi, Zhuang, Bouyei, Korean, Manchu, Kazak, and Dai.

Source: About.com, travelchinaguide.com.

Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney Investment Strategy Table of Contents

The Chinese Dynasties Section 1 Background Page 3 Length of Period Dynasty (or period) Extent of Period (Years) Section 2 Issues for Consideration Page 65 Xia c. 2070 - c. 1600 BC 470 Shang (Yin) P.8 1600 - 1046 BC 554 Section 3 Investing Background Page 95 Zhou P.9 1046 - 256 BC 790 Xi (Western) Zhou P.9 1046 - 771 BC 275 Section 4 Understanding China’s Investment Potential Page 126 Do (Eastern) Zhou P.9 770 – 256 BC 514 Spring and Autumn 770 – 476 BC 294 Warring States 475 – 221 BC 254 Section 5 Overview of the Investment Landscape Page 147 Qin () P.10 221 - 207 BC 14 Han P.11 206 BC - 220 AD 427 Section 6 Additional Sources and Disclosures Page 161 Three Kingdoms 220 - 265 AD 45 Jin (Tsin) 265 - 420 AD 155 Southern and Northern 420 - 580 AD 160 The Sui P.12 581 - 618 AD 37 Province or City Population Province or City Population Tang P.13 618 - 907 AD 289 2 2 District Capital Area (Km ) Area (Miles ) (MM) District Capital Area (Km2) Area (Miles2) (MM) Five Dynasties 907 - 960 AD 53 Anhui Hefei 140,000 54,054 61.2 166,600 64,325 43.7 (Sung) P.14 960 - 1279 AD 319 Beijing 16,808 6,490 16.3 Jilin Changchun 187,400 72,356 27.3 Yuan P.15 1280 - 1365 AD 85 Chongqing 82,300 31,776 28.2 Shenyang 146,000 56,371 43.0 Ming P.16 1368 - 1644 AD 276 Fujian 121,700 46,989 35.8 Nei Monggol 1,200,000 463,322 24.1 Qing (Ching) P.17 1644 - 1912 AD 268 454,000 175,290 26.2 66,400 25,637 6.1 Republic of China 1912 – 1949 AD 178,000 68,726 94.5 Qinghai Xining 720,000 277,993 5.5 People’s Republic of China 1949 – Present Nanning 236,660 91,375 47.7 Shaanxi Xi'an 205,600 79,383 37.5 Key Dynasty Guizhou Guiyang 174,000 67,182 37.6 156,700 60,502 93.7 Hainan Haikou 33,940 13,104 8.5 Source: Encyclopedia Britannica, www.britannica.com, Shanghai 6,340 2,448 18.6 www.chinaculture.org, www.artsmia.org. Shijiazhuang 187,700 72,471 69.4 156,000 60,232 33.9 Heilongjiang Harbin 469,000 181,082 38.2 Chengdu 487,700 188,302 81.3 167,000 64,479 93.6 Tianjin 11,303 4,364 11.2 185,900 71,776 57.0 Urumqi 1,600,000 617,763 21.0 Hunan Changsha 212,000 81,854 63.6 Xizang [] Lhasa 1,230,000 474,905 2.8 Jiangsu 102,600 39,614 76.3 Kunming 394,000 152,124 45.1 101,800 39,305 50.6

Source: The State of China Atlas, 2009. 2 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney Investment Strategy

As of early 2011, China had more people, more mega-cities, more skyscrapers, more internet users, more millionaires, and more greenhouse gas emissions than any country in the world. Despite significant differences in history, cultures, mores, and political evolution, China shares much in common with the West.

Source: Morgan Stanley Smith Barney Investment Strategy.

Section 1 Background

Origin of the word “China” Origin of the word “” Origin of the word “Sino” The origin of the word “China” dates to The word “Cathay,” a literary term for China, The word “Sino” means “Chinese.” This the Qin dynasty (pronounced Ch’in), can be traced to the Khitan ethnic group, an word is derived from the Latin word for which extended for 14 years, from 221 ancient nomadic tribe that lived in Northern China, “Sinae.” through 207 BC. The Qin dynasty China. Khitan, Khitai, and Khitay are all variant Source: www.etymonline.com. established the first centralized imperial spellings for the name of the people of this tribe. government in China. The word “Cathay” evolved as a European Source: www.etymonline.com. naming of Khitay. Source: www.etymonline.com.

3 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy China at a Glance

• China has undergone a significant Background transformation since it began moving toward a free market economy in • Since 1976, China’s real GDP growth has averaged 9.5% per year, three times the average of major industrialized 1976-1978. countries. The combination of one of the lowest-cost labor forces in the world, enlightened economic policies, • This transformation has been marked and increasing technological prowess has contributed to China’s economic rise. by substantial growth in China’s real • China’s transition from a centrally planned economy to a free market economy, which began in 1976 after the GDP. death of Mao Zedong, has transformed China into an important force in the global markets for trade and • China’s development has important implications for world trade, economic investment. growth, global prices, capital flows, • While China’s growth path in recent decades resembles Japan’s development from 1950-1990, due to the and geopolitics. country’s large population and geographic size, the global ramifications of China’s growth are especially • Recent developments in China’s profound and include China’s effects on world trade, economic growth, global prices, capital flows, and financial markets may open China further to foreign investment. geopolitics. • Since the 1990s, China has sustained positive trade and current account balances. China is an important Political Leaders of China, 1949 – Present participant in global financial markets through the investment of its substantial foreign reserves. Name Years in Office • China’s total exports exceeded those of the US in July 2006 and have continued to do so through 2010. Chairmen of CPC / General Secretary of the CPC Recent Developments Mao Zedong 1949-1976 Hua Guofeng 1976-1981 • China’s GDP growth rate has decelerated somewhat and may continue to slow as China experiences a soft Hu Yaobang 1981-1987 landing: a gradual, not-sharp decline in GDP growth to more long-term sustainable rates. As of June 2011, Ziyang 1987-1989 Morgan Stanley & Co. Inc. Research estimated that China’s GDP growth in 2011 and 2012 would be Jiang Zemin 1990-2002 approximately +9.0% and +9.0%, respectively. 2002-Present • Authorities in China have been asked by other developing countries to strengthen the . Xi Jinping Next In Line (2013) – On June 19, 2010, China discontinued its fixed exchange rate of 6.83 renminbi per US dollar. From June Premiers through December 2010, the renminbi appreciated +3.3%. As of June 2011, Morgan Stanley Research expected 1949-1976 the renminbi to appreciate, with a period-end renminbi per US dollar exchange rate of 6.20 in 2011 and of 5.82 Hua Guofeng 1976-1980 Zhao Ziyang 1980-1987 in 2012. Peng 1987-1998 • On October 18, 2010, China appointed Vice President Xi Jinping as Vice-Chairman of the Central Zhu Rongji 1998-2003 Commission, indicating that Mr. Xi may be the likely successor to Communist Party President Hu Jintao. Wen Jiabao 2003- Present • As of April 2011, China held the world’s largest foreign exchange reserves, US$3.0 trillion, or 32% of the Source: WorldRover.com. world’s total; Japan was second, with its US$1.0 trillion representing 11% of the world’s total.

Source: Bridgewater Associates; Bloomberg, LLC; Morgan Stanley & Co. Inc. Research; Global Insight. 4 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy Country Statistics

Top Nations by GDP per Capita General Information Purchasing Power Parity GDP per capita ($US) in 2010 • Language: Mandarin (other important Chinese dialects include: , Hakka, Hsiang, Wu, Min, and Kan) 1 Qatar 88,559 • Exchange Rate: Floating; US$1=Rmb 6.67 (as of Dec. 31, 2010) 2 Luxembourg 81,383 • 2010 Population: 1.34 billion 3 Singapore 56,522 4 Norway 52,013 • 2010E Economy by Sector (as % of GDP): Agriculture, 9.6%; Industry, 46.8%; and Services, 43.6% 5 Brunei Darussalam 48,892 • 2009 Main Cities and Populations: Shanghai (15.6 million), Beijing (13.1 million), Tianjin (5.2 million), Wuhan (4.9 million), Shenyang 6 United Arab Emirates 48,821 (4.4 million). 7 47,284 Source: The World Bank; One World Nations Online; CIA World Factbook; Economist Intelligence Unit. Data are as of December 31, 2010. 8 SAR 45,736 9 Switzerland 41,663 10 Netherlands 40,765 China: Economic Forecast Summary China Real Gross Domestic Product 11 Australia 39,699 Year-over-Year % Change 12 Austria 39,634 US$ Billion 2007 2008 2009 2010E 2011E 13 Canada 39,057 16.0% Nominal GDP 3,496 4,522 4,991 5,879 6,893 14 Ireland 38,550 15 Sweden 38,031 16 Kuwait 37,849 Domestic Demand 3,189 4,185 4,831 5,833 7,214 14.0% 17 Iceland 36,621 18 Denmark 36,450 Consumption 1,729 2,194 2,423 2,886 3,553 12.0% 19 Belgium 36,100 20 Germany 36,033 21 (Republic of China) 35,227 Private Consumption 1,257 1,592 1,773 2,147 2,663 10.0% 22 United Kingdom 34,920 23 Finland 34,585 Public Consumption 472 601 650 739 890 24 France 34,077 8.0% 25 Japan 33,805 94 China 7,519 Fixed Investment 1,367 1,844 2,294 2,788 3,450

Source: World Economic Outlook, by the International 6.0% Monetary Fund, April 2011. Current Account Balance 372 436 297 306 253

4.0% Trade Balance 264 298 196 183 169

Exports 1,220 1,431 1,202 1,578 1,815 2.0%

Imports 956 1,133 1,006 1,395 1,646 0.0% '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10E '11E '12E

Source: CEIC; Morgan Stanley & Co. Inc. Research. Estimates are as of June 2011. Source: Bloomberg; Morgan Stanley & Co. Inc. Research. Estimates are as of June 2011. Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. 5 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy Geography and Environment

Geographic Highlights

Mount Everest: Highe st P oint 8, 850 m (29,035 ft)

Turpan Pendi: Lowest Point 154 m (505 ft)

Yangt ze River: Longest River 6,300 km (3,915 mi)

Source: CIA World Factbook (June 2011). River, the world’s third longest river • China is the world’s most populated country, and is the world’s fourth largest country by geographic area, approximately the size of the United States. – The world’s four largest countries by geographic area are Russia, Canada, the United States, and China. • China extends over an area of 9,596,961 sq km (3,705,406 sq miles), of which barely 1% is covered by fresh water, including the Yellow and Yangtze rivers. – As of early 2011, China represented 20% of the world’s population, and it possessed 7% of the world’s freshwater supply. Mount Everest, located on the • China’s 14 bordering countries are: , Bhutan, Burma, , , North Korea, –China , Laos, , Nepal, , Russia, , and Vietnam.

Source: CIA World Factbook (June 2011). 6 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy Chinese

The Two Special Administrative Regions of the People’s Republic of China

Hong Kong

• The Chinese flag shown above was first flown in Tiananmen Square on October 1, 1949, the founding day of the People’s Republic of China. Macau • The flag was designed by Zeng Liansong, a citizen from Rui’an, Zhejiang, in response to a design solicitation for a by the sixth working group of the Preparatory Committee of the New Political Consultative Conference. • Symbolism in the Chinese flag includes: – The red color symbolizes revolution. – The four smaller yellow stars symbolize the four social classes: the working class; the Taiwan (Republic of China) peasantry; the urban petty bourgeoisie; and the national bourgeoisie (capitalists). Political disputes continue between the People’s Republic of China and the – The larger yellow star symbolizes the Communist Party of China, which unites the four social Republic of China over sovereignty and the classes. political status of Taiwan.

Source: CIA World Factbook (June 2011). 7 Please refer to important information, disclosures, and qualifications at the end of this material. Please See Page 2 for a Complete List of Dynasties

Morgan Stanley Smith Barney BACKGROUND Investment Strategy (1600 – 1046 BC) The First Documented Dynasty; the Bronze Age of China; and the Script

Brief History Symbols, , and Culture • The Shang dynasty, also called the Yin dynasty, was the first Chinese • The Beginning of the Bronze Age in China dynasty to leave historical records. The Shang dynasty marked the beginning of the Bronze Age in • The Shang dynasty is known for its bronze-age culture and written records China (1500 BC – 300 BC). Bronze castings were made into in the form of oracle bone scripts. ritual vessels used in worshipping ancestors, and into • Lasting nearly six centuries, the Shang dynasty is divided into three employed in warfare. periods: early, middle, and late. – The early Shang period was relatively undocumented, but is believed to • The be connected to the Erlitou culture, a neolithic culture of the central The oracle bone script is the oldest known form of the Chinese plains of northern China that is mainly associated with China’s first written language. The oracle bones, fashioned from cattle dynasty, the . scapulae or turtle plastrons, contained 10 – 60 characters, and – The middle Shang period was characterized by expansion into the were used for divination on topics relating to sacrifices, hunts, northwest, northeast, and south. This expansion, which continued weather, harvests, sickness, childbearing, dreams, divine through the late Shang period, created a widespread network of Shang assistance, and prayers to various spirits. cultural sites that shared in bronze-casting styles and mortuary practices. • , “Ruins of Yin” – The late Shang period is symbolized by the Yinxu, “Ruins of Yin,” which Yinxu, “Ruins of Yin,” best symbolizes the late period (1250 – served as the capital of the last nine Shang kings, from approximately 1046 BC) of the Shang dynasty as it served as the capital for the 1250 to 1046 BC. last nine Shang kings. Discovered in 1899, Yinxu contains sophisticated bronze, ceramic, stone, and bone artifacts, palaces, Important Personages shrines, tombs, and workshops of the Shang dynasty, and is considered one of China’s oldest and largest archeological sites. • Shang Tang (1675 – 1646 BC) The first ruling king of the Shang dynasty, Shang Tang Accomplishments overthrew Jie of the Xia dynasty after 11 wars by stirring • Bronze Age: The Shang engaged in large-scale production of bronze-ware vessels an internal rebellion amongst the Xia soldiers. His 13-year and weapons. Such production required a large labor force to carry out the mining, reign was well regarded by the Chinese citizenry as he refining, and transporting processes of copper, tin, and lead ores. lowered taxes and the rate of soldiers. • Writing System: The first known Chinese people to leave historical records, the Shang developed a comprehensive system of writing. By 1400 BC, the oracle scripts included some 2,500 to 3,000 characters, most of which can still be read today.

Source: Encyclopedia Britannica, www.britannica.com; www.chinatoursaffordable.com; www.artsmia.org. 8 Please refer to important information, disclosures, and qualifications at the end of this material. Please See Page 2 for a Complete List of Dynasties

Morgan Stanley Smith Barney BACKGROUND Investment Strategy (1046 – 256 BC) The Fall of Feudalism; the Rise of Monarchy; and the Golden Age of

Brief History Symbols, Art, and Culture • Encompassing over eight centuries, the Zhou dynasty represents the single • The Mandate of Heaven longest dynastic period in Chinese history. The Zhou dynasty replaced the Shang dynasty with the belief that • The Zhou dynasty was divided into two periods: Xi (Western) Zhou; and their reign was a “Mandate of Heaven” from the deity Tian, Dong (Eastern) Zhou. symbolized to the left. The Zhou replaced the Shang system of ancestor worship of the deity Di with heavenly worship of the deity – The Western Zhou Period (1046 – 771 BC) was the age of feudalism, in Tian. The residing king was called the “Son of the Heaven.” which states were ruled by lords who paid homage to the King of Zhou and recognized him as the “Son of the Heaven.” • The Zenith and End of the Bronze Age in China – The Eastern Zhou Period (770 – 256 BC) was the time of the Hundred Started by the Shang dynasty, the Bronze Age in China reached Schools of Thought, a collection of several intellectual ideologies that its zenith during and ended in the Zhou dynasty. Through blossomed and changed the culture and political system of China. technological advances and process refinements, the bronze castings were more elaborate and were used as ritual vessels, art • Although the Zhou dynasty officially ended in 256 BC, the succeeding Qin pieces, and musical bells. dynasty did not begin until 221 BC. • The Hundred Schools of Thought Important Personages Considered the golden age of Chinese philosophy, the Hundred • Confucius (551 – 479 BC) • Mozi (c. 470 – c. 390 BC) Schools of Thought emerged during the Eastern Zhou period and transformed the culture and political system in China. Renowned Confucius was a philo- Mozi was a philosopher thinkers included: Confucius who developed ; Mozi who sopher who developed an whose fundamental developed Mohism; Laozi who developed ; Shang who ethical, social, political, doctrine of undifferentiated developed legalism; and Mencius who expanded upon Confucianism. and quasi-religious belief love challenged Con- system based primarily on fucianism and became the Accomplishments humanity and righteous- basis of Mohism. • Agriculture: The Zhou improved soil quality, developed irrigation systems, and grew ness, called Confucianism. a variety of grains including millet, wheat, rice, and soybeans. • Metallurgy/Introduction of Iron: The Zhou practiced ferrous metallurgy that led to • Laozi (6th century BC) • Shang Yang (c. 390 – c. 340 BC) the earliest recorded blast furnaces and steel. With the introduction of iron, they Laozi was the first Shang Yang was a became skilled at making weapons and tools. philosopher of Taoism statesman and philosopher • Political/Socioeconomic Reformation: The Zhou adopted new philosophies that (Daoism), an ancient who believed in the rule of transitioned China away from a rigid feudal system to a new centralized monarchical Chinese religion mean- law and loyalty to the state, ing the “way of life.” doctrines that became the state. basis of legalism.

Source: Encyclopedia Britannica, www.britannica.com; www.artsmia.org. 9 Please refer to important information, disclosures, and qualifications at the end of this material. Please See Page 2 for a Complete List of Dynasties

Morgan Stanley Smith Barney BACKGROUND Investment Strategy Qin Dynasty (221 – 207 BC) The Beginnings of Imperial China; Authoritarian Rule; and Great Achievements

Brief History Symbols, Art, and Culture • The Qin dynasty was the first dynasty of imperial China. • The • Tracing its history to the early 8th century BC, the Qin served as a Although it originates in the of the Zhou ruling court during the Zhou dynasty, and through the leadership of Shang dynasty, the Great Wall of China is mainly associated with the Yang, developed its own pattern of government as feudalism declined. Qin dynasty, as emperor Qin Shi Huangdi connected the existing • Shang Yang, a bureaucrat in the court of , standardized the local parts of the wall to form a single system fortified by . administration by combining various localities into counties, which were then organized into prefectures under supervision of the court. This system • The Terra-Cotta was expanded to all of China after the unification of 221 BC. Discovered in 1974 by farmers digging for a water well, the Terra- Cotta Army was intended to protect emperor Qin Shi Huangdi in his • Qin Shi Huangdi, of the Qin dynasty, ruled strongly and accomplished much during his reign. Despite his many accomplishments, resting place. Buried in three pits covering over 42 square miles, the historians give mixed ratings to his reign as he imposed high taxes, banned army is estimated to number 8,000 soldiers, 130 with 520 all books that advocated other forms of government, and burned writings of horses, and 150 cavalry horses. The site now receives over two the great philosophers of the Hundred Schools of Thought. million Chinese and foreign visitors each year. Accomplishments Important Personages • A Unified China: The Qin dynasty was the first dynasty of imperial China. The Qin abolished the feudal system, and adopted the administrative system established by • Qin Shi Huangdi (Also known as Qin Shi ) (c. 260 – 210 BC) Shang Yang. Viewed as a strong and energetic ruler, Qin Shi Huangdi • Standardized Language and Writing System: The Qin unified China’s language was the first emperor of the Qin dynasty and imperial China. and writing system, which had varied between geographic areas during the Warring He made several pivotal reforms during his reign, and States Period of the Zhou dynasty. accomplished much for China. His most notable reform was the abolishment of the feudal system and adoption of the • Standardized Currency: The Qin used a circular copper coin with a square hole in administration system established by Shang Yang. the middle as its standardized currency. • Standardized Measurements: The Qin developed uniform measurements and axle • Shang Yang (c. 390 – c. 340 BC) lengths to improve transportation as the ruts formed by cartwheels needed to be Shang Yang flourished during the Zhou dynasty and uniform in order for multiple carts to travel down the same road. established the foundation of the Qin dynasty. The Qin • Great Wall of China: The Qin made significant progress in constructing the Great dynasty adopted legalism as China’s official philosophy. Wall of China, connecting existing from the Zhou dynasty into one unified system with watchtowers. • Weaponry: The Qin advanced military weaponry by creating crossbows and strengthening bronze and iron swords. Source: Encyclopedia Britannica, www.britannica.com; www.globalmountainsummit.org; www.chinaculture.org; www.artsmia.org. 10 Please refer to important information, disclosures, and qualifications at the end of this material. Please See Page 2 for a Complete List of Dynasties

Morgan Stanley Smith Barney BACKGROUND Investment Strategy (206 BC – 220 AD) Key Dynasty Legalism and Confucianism; Large Territorial Expansion; and the

Brief History Symbols, Art, and Culture • The Han dynasty, the second dynasty of imperial China, lasted for four • The Silk Road centuries and is considered the first of China’s four greatest dynasties: the The Han’s large territorial expansion led to trade with the Han; the Tang; the Song; and the Ming dynasties. people of inner that eventually developed into the Silk • The Han advanced China as a growing military, economic, and political Road. With multiple routes through the mountains, the Silk power throughout Asia and the eastern world. Road expanded to eventually connect Asia with th e • The Han dynasty can be divided into two dynasties, Western and Eastern, Mediterranean, North Africa, and Europe. In return for its separated by the rule of Emperor Wang Mang who declared his rule as the exports of silk and gold, China imported wine, spices, woolen Xin dynasty. The Xin dynasty was brief, only lasting from 9 to 23 AD after fabrics, grapes, pomegranates, sesame, broad beans, and alfalfa. Emperor Wang was overthrown by a secret society called the Red • Han Painting Eyebrows, a clan of peasants and descendants of the Han. Wang’s This mortuary vessel dates back to the Western Han dynasty (206 successor, Liu Xiu, who took the name Emperor Guang Wudi, restored the BC – 9AD) and represents an exquisite example of Han painting. Han dynasty in 25 AD. Decorated with a fanged blue beast lunging at a mounted archer, the • Although the Han successfully expanded its territory through military vessel symbolizes the bold character of the Western Han dynasty. prowess, economic and political struggles led to the rise of three kingdoms and the fall of the Han dynasty in 220 AD. • Han Architecture Important Personages The architectural model of a central shown here dates back to the Eastern Han dynasty (25 – 220 AD). Viewed as the • Gaozu (Liu Bang) (256 – 195 BC) most important manifestation of the Han imperial order, Han The founder and first emperor of the Han dynasty, Gaozu architecture consisted of towered gateways and palatial complexes. ruled strongly, and developed many aspects of the The city walls symbolized power, prestige, and defense. Chinese imperial system that endured until 1911-1912. Accomplishments • Expansion of Territory: During the rule of Emperor Wudi, the Han expanded their rule to the west and south. • Guang Wudi (Formerly Liu Xui) (c. 390 – c. 340 BC) • Development of the Civil Service: The Han established the civil service, and Defeating Emperor Wang Mang of the short-lived Xin structured a central and provincial government that laid the foundation for imperial dynasty, Guang Wudi restored the Han dynasty after China. many brutal, blood-shedding battles, which left the • Foreign Trade: With the development of the Silk Road, the Han engaged in trade country in an impoverished condition and in ruins. with the outside world. During his reign, Emperor Guang Wudi revitalized • Scientific/Technological Innovations: The Han invented the seismograph and China’s agricultural system and rebuilt its infrastructure. developed paper, water clocks, sundials, and astronomical instruments.

Source: Encyclopedia Britannica, www.britannica.com; www.chinaculture.org; www.absolutechinatours.com; www.metmuseum.org; www.artsmia.org. 11 Please refer to important information, disclosures, and qualifications at the end of this material. Please See Page 2 for a Complete List of Dynasties

Morgan Stanley Smith Barney BACKGROUND Investment Strategy (581 – 618 AD) A Reunified China; Political and Government Reform; and the

Brief History Symbols, Art, and Culture • Following three centuries of political fragmentation, the Sui dynasty • The Grand Canal reunified China and restored its imperial system. Ruled by Emperor The Sui constructed the Grand Canal, a water transport system that Wendi, the Sui dynasty reformed China’s political and government system, helped promote economic development and unify all of China. abolishing the six-officials system and establishing a new system with three Today, the Grand Canal is 1,776 km (1,103 miles) long and is the departments and six boards. world’s longest canal, connecting Beijing to Hangzhou. • Short-lived, yet well accomplished and foundational, the Sui dynasty in many ways resembled the Qin dynasty, China’s first imperial dynasty, as it • Porcelain set the course for subsequent dynasties of imperial China. The Sui crafted the world’s earliest known porcelain. Made from well-refined white kaolin clay, the porcelain was simple, pure, and • The Sui dynasty had two emperors, Wendi and his son, Yangdi. Emperor elegant, and was used for rituals and as eating and drinking ware. Wendi contributed to China’s political reform, while Emperor Yangdi The earliest known porcelain has been found in the Persian Gulf constructed the Grand Canal. Emperor Wendi was killed by his son, and Iraq, indicating the far-flung trading that occurred during the Yangdi, who became a cruel leader; he was later hanged in 618 AD, Sui period. marking the end of the Sui dynasty.

Important Personages • Wendi (541 – 604 AD) Accomplishments • A Reunified China: The Sui reunified China after three centuries of political and The founder and first emperor of the Sui dynasty, Emperor government incongruity. Wendi restored imperial China and laid the foundation for subsequent dynasties. He reformed China’s government • Centralized Government: The Sui abolished the six-officials system and established system and launched the construction of the Grand Canal, a new system of three departments and six boards. These changes structured a which was completed by his son and successor, Yangdi. process of bureaucratic promotion and made the civil service more homogeneous. • Art: The Sui developed the world’s earliest porcelain and traded these and other goods with the outside world. • Yangdi (569 – 618 AD) Viewed as an extravagant, cruel, and tyrannical leader, • Grand Canal: The Sui constructed the Grand Canal, a symbol of technological Emperor Yangdi acceded to the throne by killing his innovation and national unification as well as a catalyst for economic development. brothers and father, Emperor Wendi. Despite his cruelty, Emperor Yangdi was an accomplished leader as he expanded the Sui territory into the southern province and finished the construction of the Grand Canal.

Source: Encyclopedia Britannica, www.britannica.com; www.chinaculture.org; www.artsmia.org. 12 Please refer to important information, disclosures, and qualifications at the end of this material. Please See Page 2 for a Complete List of Dynasties

Morgan Stanley Smith Barney BACKGROUND Investment Strategy (618 – 907 AD) Key A Prosperous China; A Golden Age of Literature and Art; and A Clash Between and Taoism Dynasty

Brief History Symbols, Art, and Culture • The Tang dynasty lasted for three centuries and ranks as the second of • Literature – Poetry China’s four greatest dynasties: the Han; the Tang; the Song; and the Ming The Tang advanced classic Chinese poetry. , Du Fu, and Bai dynasties. Juyi were great Chinese poets who prospered during this dynasty. • The Tang dynasty can be divided into two periods, early Tang and late These writers combined realism and romanticism, treating topics Tang, separated by the eight-year rebellion of An Lushan. Early Tang is ranging from the darkness of feudalism, to spirituality, to the viewed as a period of prosperity and accomplishment, Late Tang as a celebration of natural beauty and splendor. The Complete Poetry of period of decline. Tang, a compilation of Tang poetry, contains more than 48,900 poems. • Although Taoism was declared the official religion, Buddhism flourished and remained influential through most of the Tang dynasty. Some • Visual Art – Floral Medallion emperors tried to suppress the practice of Buddhism, but were unsuccessful. The Tang aggrandized all forms of Chinese visual art, including sculpture, porcelain, painting, and textiles. The floral medallion Important Personages shown here was ubiquitous in Tang textiles and decorative . • Gauzo (566 – 635 AD) The medallion originated in the eastern Mediterranean, and likely made its way to eastern Central Asia via the Silk Road. The founder and first emperor of the Tang dynasty, Emperor Gauzo brought China out of bankruptcy, improved its • Woodblock Printing – The Diamond Sutra, the World’s First Printed Book military, expanded its territory, and standardized its coinage. The Tang invented woodblock printing, a technique using wooden blocks carved with characters and coated with ink to stamp or rub the intended text onto the surface of textiles or • Wuhou (Wu Zetian) (624 – 705 AD) paper. The Diamond Sutra depicted here was printed in 868 The first and only empress in Chinese history, Empress Wuhou AD and is considered the world’s first printed book. reigned for over half a century. Considered a ruthless ruler, she Accomplishments reformed China’s central government system and believed strongly in symbolism and religion. For symbolic reasons, she • Economic Growth: Spurred among other catalysts by population movement away changed the emperor’s title to “heavenly emperor.” from the north to more fertile land in the south, the Tang economy thrived as agricultural production and trade boomed and monetary usage increased in the forms • Xuanzong (685 – 762 AD) of coinage and silk. The seventh emperor of the Tang dynasty, Emperor Xuanzong • Art: Literature, printing, painting, pottery, and sculpture flourished during the Tang reigned during the most prosperous years (712 – 756 AD) of the dynasty, and established the course for subsequent dynasties. Tang dynasty. During Xuanzong’s reign, the Tang strengthened • Standardized Currency: Using copper coins, the Tang improved China’s coinage; the military, expanded the economy, and advanced the arts. standardized lengths of silk were also used.

Source: Encyclopedia Britannica, www.britannica.com; www.metmuseum.org; www.chinaculture.org; www.absolutechinatours.com; htttp://history.cultural-china.com; www.newworldencyclopedia.org; www.artsmia.org. 13 Please refer to important information, disclosures, and qualifications at the end of this material. Please See Page 2 for a Complete List of Dynasties

Morgan Stanley Smith Barney BACKGROUND Investment Strategy (960 – 1279 AD) Key An Age of Political Stability and Instability; An Age of Invention; and Dynasty An Age of Unparalleled

Brief History Symbols, Art, and Culture Northern Song Southern Song • Following the Five Dynasties and Ten Kingdoms Period, the Song dynasty • Song lasted for over three centuries and is considered the third of China’s four greatest dynasties: the Han; the Tang; the Song; and the Ming dynasties. • The Song dynasty was divided into two periods: the Northern Song (960 – 1127 AD); and the Southern Song (1127 – 1279 AD). The Northern Song was a tranquil time characterized by philosophical and artistic development, Song landscape painting is considered one of China’s greatest contributions to world political centralization, and economic growth; the Southern Song, a period art. The Northern Song used realism to depict nature by the , whereas of brutal invaders, political instability, and decline of power. the Southern Song used impressionism, which persisted through the 14th century. • China’s historic city Hangzhou served as the capital city during the • , China’s Porcelain Capital Southern Song period and by 1200 AD, had a population of approximately 400,000, compared with Paris and Venice whose populations were 100,000. Tracing back to the Han dynasty, Jingdezhen was founded in 1004 by Emperor Zhenzong and is China’s porcelain capital, with a porcelain- Important Personages making history of nearly two millennia. The Song reached unsurpassed • Taizu (927 – 976 AD) adroitness and aesthetic sublimity in their porcelain making. The founder and first emperor of the Song dynasty, Emperor Taizu reigned for 16 years. Emperor Taizu created the Song Ancestor • Wooden Sculpture and Chinese Buddhist Sculpture Rules and Policy, expanded the examination system, and created The Song increased the quantity and improved the quality of Chinese academies to promote discussion and thought. He also weakened the wooden sculpture. Many art historians maintain that Song wooden military to prevent anyone from rising to power as he did. sculpture is the best in the world. The last great movement of Chinese th • Zhenzong (968 – 1022 AD) Buddhist sculpture occurred during the late Song period, in the 12 and 13th centuries. The third emperor of the Northern Song dynasty, Emperor Zhenzong consolidated the power of and strengthened the rule of Accomplishments the Song dynasty. Emperor Zhenzong initiated foreign policy • Movable Type Printing: Song artisan invented movable type printing, with the resulting in the Shanyuan Treaty, and which supplanted woodblock printing developed during the Tang dynasty. founded Jingdezhen in 1004, China’s porcelain capital. • Architecture: Song architecture reached new heights of sophistication. The Song • Gaozong (1107 – 1187 AD) were the first to document construction methods and standard units of measurements. The 10th emperor of the Song dynasty and first emperor of • Banknote: The Song created the first banknote, or paper currency, and circulated it the Southern Song dynasty, Emperor Gaozong reigned for 35 alongside its coinage. years. He established Hangzhou (formerly known as • Gunpowder: The Song invented gunpowder and used it in rockets, guns, cannons, Lin’an) as the capital city of the Southern Song dynasty. and explosives.

Source: Encyclopedia Britannica, www.britannica.com; www.chinaculture.org; htttp://history.cultural-china.com; www.newworldencyclopedia.org; www.artsmia.org. 14 Please refer to important information, disclosures, and qualifications at the end of this material. Please See Page 2 for a Complete List of Dynasties

Morgan Stanley Smith Barney BACKGROUND Investment Strategy (1280 – 1365 AD) The Mongol Empire; Blue-and-White Porcelain; and

Brief History Symbols, Art, and Culture • Following the Song dynasty, the Yuan dynasty was first of two times in history • The Silk Road in which foreigners reigned over all of China: the reigned over China Tracing back to the Han dynasty (206 – 220 during the Yuan dynasty, and the Manchus during the . AD), the Silk Road reached its zenith • Mongol invader Genghis Khan conquered Asia and established the Great Khan during the Yuan dynasty. During the Yuan empire. Khan’s grandson, Kublai Khan founded the Yuan dynasty in 1280 AD dynasty, Europe, the Middle East, and Asia after the fall of the Song dynasty. traded goods with each other. Venetian merchant Marco Polo traveled the Silk • Despite conquering imperial China, the Mongols struggled to govern the Chinese as they held different political beliefs, spoke different languages, Road and helped spur trade between dressed differently, and followed different customs. Europe, the Middle East, and Asia. • Blue-and-White Porcelain Important Personages The Yuan were major producers of and the first to export blue- • Genghis Khan (1162 – 1227 AD) and-white porcelain via the Silk Road. The Yuan improved upon the techniques of past dynasties to advance the art of making Mongol invader Genghis Khan conquered Asia and established blue-and-white porcelain. Europeans and Middle Easterners the Great Khan empire. He reigned from 1206 – 1227 AD. prized blue-and-white porcelain and it continued to be produced The Great Khan empire covered a geographical area consisting and traded by the Chinese through the Qing dynasty. of over 20 modern-day countries, including Armenia, China, Iran, Iraq, Korea, Kuwait, Russia, and Turkey. • (also known as Dadu) Translated as “great capital” or “great residence of the Khan,” • Kublai Khan (1215 – 1294 AD) Khanbaliq, also known as Tadu, was the capital city of the Yuan A grandson of Genghis Khan, Kublai Khan was the fifth leader dynasty. Prior to serving as the capital city of the Yuan dynasty, of the Great Khan and founder and first emperor of the Yuan Khanbaliq (then known as Zhoudong) served as the capital city dynasty. The first non-ethnic Chinese emperor in Chinese of the Jin dynasty until it was burned down by the Mongols in history, Kublai Khan boosted agricultural output in southern 1215 AD. Khanbaliq is located in present-day Beijing, the China, rebuilt the Grand Canal, and extended existing highways. current capital city of the People’s Republic of China. • Marco Polo (1254 – 1324 AD) Accomplishments Venetian merchant Marco Polo traveled throughout Asia for 24 • Extension of the Grand Canal : During the reign of Emperor Kublai Khan, the years and served as an official in Kublai Khan’s administration Yuan rebuilt parts of and extended the Grand Canal, China’s largest water passage for over two decades. Marco Polo documented his travels in “Il system that was originally built during the Sui dynasty. Milione,” a collection of stories from his travels throughout • Increased Trade Activity: Via the Silk Road, the Yuan traded blue-and-white Asia, Persia, China, and Indonesia between 1271 and 1291 AD. porcelain and other goods with Europeans and Middle Easterners.

Source: Encyclopedia Britannica, www.britannica.com; www.chinaculture.org; htttp://history.cultural-china.com; www.newworldencyclopedia.org; www.artsmia.org; www.silk-road.com; www.historyforkids.org. 15 Please refer to important information, disclosures, and qualifications at the end of this material. Please See Page 2 for a Complete List of Dynasties

Morgan Stanley Smith Barney BACKGROUND Investment Strategy Ming Dynasty (1368 – 1644 AD) Key Dynasty A Restored Imperial China; A Revival of Chinese Art; and the

Brief History Symbols, Art, and Culture • Following the Yuan dynasty, the Ming dynasty lasted for nearly three • The Forbidden City centuries and is considered the last of China’s four greatest dynasties: the Covering over 178 acres, Han; the Tang; the Song; and the Ming dynasties. The Forbidden City served as the Chinese • The Ming dynasty restored imperial China as the ethnic Han supplanted the imperial palace of the Mongols and once again reigned over all of China. Ming and Qing dynasties, • The Ming dynasty can be divided into two periods, Early Ming and Late and is the world’s largest surviving palace complex. Located in Beijing, the Ming. Early Ming was characterized by a vibrant period that restored Forbidden City served as the home of the emperors for half a century, and as the imperial China and revived China’s cultural identity and respect for ceremonial and political center of the Chinese government. It was declared a World traditional artifacts and craftsmanship; late Ming was characterized by Heritage Site in 1987 by UNESCO and now houses the Palace Museum. internal discord and decline. • The Three Schools of Painting: Che, Wu, and the Eccentric During the Ming dynasty, three schools of Important Personages painting emerged: (i) the Che, a formal approach • The (Also Known as Zhu Yuanzhang) (1328 – 1398 AD) tracing back to the Song dynasty; (ii) the Wu, a The founder and first emperor of the Ming dynasty, the Hongwu style of the intelligentsia; and (iii) the Eccentric, a Emperor restored imperial China by overthrowing the Mongol form of spontaneity and freedom of expression. empire through the Red Turban Rebellion, an uprising staged by • The Great Wall of China Buddhist who were ethnic Han and were affiliated with the Originating in the Qin dynasty, the Great Wall of China was secret society, “White Lotus.” During his reign, the Hongwu further developed during the Ming dynasty. Most of the existing Emperor instituted military, administrative, and educationa l wall can be attributed to the work of the Ming; they redesigned the reforms that unified and centralized imperial China. watch towers, placed cannons along the walls, and used larger brick and granite rocks than used in previous dynasties. • The Yongle Emperor (Also Known as Zhu Di) (1360 – 1424 AD) Accomplishments The third emperor of the Ming dynasty, the Yongle Emperor • Strong Navy and Standing Army: The Ming commanded a strong naval fleet and a renamed Beijing as the capital city of imperial China and built powerful army. the Forbidden City, China’s imperial palace that remained the • World’s Largest Economy: The Ming had the world’s largest economy, primarily due capital city through the Qing dynasty. During his reign, the to increased trade overseas, technological advances, the privatization of the salt and tea Yongle Emperor repaired and reopened the Grand Canal, industries, and robust agriculture and manufacturing sectors. commissioned the exploratory sea voyages of , and • Sprouts of Capitalism: Historians believe the Ming dynasty witnessed the beginnings upheld the civil service examinations for drafting government of capitalism in China. The Ming invested capital into ventures, which were later officials instead of the recommendation-appointment process. suppressed by the Qing. Source: Encyclopedia Britannica, www.britannica.com; www.chinaculture.org; htttp://history.cultural-china.com; www.newworldencyclopedia.org; www.artsmia.org; www.travelchinaguide.com. 16 Please refer to important information, disclosures, and qualifications at the end of this material. Please See Page 2 for a Complete List of Dynasties

Morgan Stanley Smith Barney BACKGROUND Investment Strategy Qing Dynasty (1644 – 1912 AD) The Last Dynasty of China; the Zenith of Chinese Porcelain; and the

Brief History Symbols, Art, and Culture • The last dynasty in Chinese history, the Qing dynasty was reigned over by • The Flag of the Qing dynasty (1890 – 1912 AD) the Manchus and was the second of two times in history where foreigners The first and last dynastic flag in Chinese history, The exercised dominion in China, the first being the Mongols’ reign during the Dragon Flag of the Qing dynasty symbolized authority Yuan dynasty. and sovereignty and was the state flag and • Unlike the Mongols, the Manchus succeeded in governing China while through the latter part of the Qing dynasty. preserving their own cultural identity. The Manchus enacted firm policies to separate the two cultures while reigning over China; they prohibited • The Zenith of Chinese Porcelain Manchu-Chinese marriage, forced the Chinese to shave their heads and Chinese porcelain reached its zenith during the Qing wear the queue hairstyle, continued to speak the Manchu language, and dynasty. The Qin made blue-and-white porcelain, trained Manchu soldiers more intensively than Chinese soldiers. pictorial porcelain-oversized platters, and magnificent • The first two centuries of the Qing dynasty were a time of peace and porcelain vases, all of which were traded with the West. prosperity for China. The latter years were plagued with discord, including the Opium Wars, the first Sino-Japanese War, the , the • The Queue (Manchu Hairstyle) , and the Xinhai Revolution, all of which led to the As a political act of submission to the Manchu, Chinese downfall of the Qing dynasty and the end of dynastic China. males were forced to wear their hair in Manchu style, known in English as the “queue.” It consisted of a shaved Important Personages head with a long braided ponytail. Cutting or not wearing • Nurhaci Emperor (1559 – 1626 AD) • (1654 – 1722 AD) the queue was considered treason and was punished by The Nurhaci Emperor was the The fourth emperor of the death. The queue marked a symbolic point in Chinese first and founding emperor of Qing dynasty, the Kangxi history as it was only worn during the Qing dynasty. the Qing dynasty; he is Emperor reigned for 61 Accomplishments credited with the creation of a years, making him the • Strong, Organized, and Loyal Military: Building on the military written script for the Manchu longest-reigning Chinese accomplishments of the Ming, the Qing commanded a world-class military with language. emperor in history. superior organization and loyalty to the emperor. They organized their soldiers in • Qianlong (1711 – 1799 AD) • Yuan Shikai (1859 – 1916 AD) banners, each of which was a separate unit. The number of banners grew from The sixth emperor of the Yuan Shikai was a shrewd eight to 24. Qing dynasty, the general and politician who • : Under the reign of Kangxi Emperor, the Qin created the reigned contributed to the end of Kangxi Dictionary, the dictionary during the 18th and 19th for 60 years during a the Qing dynasty. He later centuries. It contained over 47,000 characters, some of which are used today. prosperous . became the first President of the Republic of China. Source: Encyclopedia Britannica, www.britannica.com; www.chinaculture.org; htttp://history.cultural-china.com; www.artsmia.org; www.east-asian-history.net; www.1uptravel.com. 17 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy Confucianism The Cornerstone of Traditional

Confucius (551 – 479 BC) Overview • The cornerstone of traditional Chinese culture, Confucianism is a belief system based on the Chinese cultures of the Xia, Shang, and Zhou dynasties. Confucianism was developed and elaborated by the Chinese philosopher Confucius. • Confucianism was further developed by the great Chinese philosophers Mencius (372 – 289 BC) and Xun Zi (313 – 238 BC). During the Han dynasty, the first of China’s four greatest dynasties, Emperor Wu made Confucianism the orthodox doctrine of Chinese society. Throughout the Han dynasty, Confucianism was recognized as the “Han State Cult,” adopting religious and ceremonial elements such as sacrifices to Confucius. • Confucianism struggled to co-exist with Buddhism and Taoism during the Sui and Tang dynasties, but was restored as the official philosophy of China and flourished throughout the Song and Ming dynasties. Throughout those two dynasties and the Republic of China, Confucianism abandoned the religious and ceremonial elements established in the Han dynasty and focused entirely on the teachings of Confucius. • A revival of Confucian thought in the 10th century produced “-Confucianism,” a major influence in Korea during the Choson dynasty and in Japan during the Tokugawa period. Confucius (551 – 479 BC) is considered one of the world’s greatest philosophers. He was born in Beliefs the feudal state of Lu, in the modern-day • The five principles that embody Confucianism are: Shandong Province. Distressed by the constant – (iii) Zhong, Loyalty to one’s true nature; – (v) Xiao, Filial piety. warfare between the Chinese states and by the – (i) Ren, Humaneness or benevolence; venality and tyranny of their rulers, he urged a – (ii) Li, Ritual norms; – (iv) Shu, Reciprocity; and system of and statecraft that would preserve peace and provide people with stable and • All five principles constitute , de. just government. Later tradition depicts Confucius The Five Classics as a person who made special study of ancient books, in an effort to restore an earlier social • The Five Classics are a collection of writings that represent the core of Confucianism education. They include: order. Among the many sayings attributed to – (i) Shu Ching (Classic of History), a collection of documents and speeches dating from the later Han dynasty; Confucius, two of the most widely known are: – (ii) Shih Ching (Classic of Odes), a collection of 300 poems and songs from the early Zhou dynasty; “Everything has beauty, but not everyone sees it;” and – (iii) I Ching (Classic of Changes), a collection of texts on divination based on a set of 64 hexagrams that reflect the relationship between in nature and society; “A journey of a thousand miles begins with a step.” – (iv) ’un Ching (), extracts from the history of the state of Lu, said to be compiled by Confucius; and Source: encyclopedia.com. – (v) Li Ching (Class of Rites), a collection of three books on Li (ritual norms or rites of propriety).

Source: wwww.regligionfacts.com, www.travelchinaguide.com. 18 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy

History of Chinese Literature Important Personages • Chinese literature can be divided into four main periods: – (i) Classical Literature, from ancient China through the Qing dynasty; – (ii) Modern Literature, from the Opium War in 1840 through the May Fourth Movement in Beijing in 1919; – (iii) Contemporary Literature, from 1919 to 1949; and – (iv) Present-Age Literature, from 1949 to the present. • Chinese literature has had a celebrated and struggle-filled past. The most celebrated times of Chinese literature began in 500 BC, with the writing of the Shijing; the most struggle-filled times began during the Qin dynasty, with the burning of books produced by the Hundred Schools of Thought. Li Bai, Du Fu, Poet from the Poet from the • The May Fourth Movement (1917 – 1921) represented an intellectual revolution and sociopolitical reform movement. Tang dynasty Tang dynasty Chinese students and faculty at the prestigious Peking University (colloquially known as Beida University) in Beijing abandoned the traditional Chinese literary language and created new popular fiction written in colloquial language. • During Mao Zedong’s rule of the People’s Republic of China, Chinese literature was scrutinized and freedom of expression was suppressed as Mao believed that all forms of art should serve politics. Chinese literature was not officially tolerated and celebrated again until the mid-1980s.

Renowned Literary Works • The Five Classics, a collection of five literary works pivotal to Confucianism, are: – (i) Shijing (Classic of Poetry); – (iii) I Ching (Classic of Changes); – (v) Li Ching (Class of Bai Juyi, , Rites). Poet from the Poet and Statesmen – (ii) Shujing (Classic of History); – (iv) Chu’un Ching (Spring and Autumn Annals); and Tang dynasty from the Song dynasty • The Complete Poetry of Tang is a compilation of Tang poetry containing over 48,900 poems. • The Four Great Classical Novels, the four novels considered the greatest and most influential literary works of classical Chinese fiction, are: – (i) Romance of the Three Kingdoms; – (iii) Journey to the West; and – (ii) Water Margin; – (iv) . • Other Classics include: Song Lian, Yuan Mei, – (iii) The Peony Pavilion; – (v) Jin Ping Mei; and Writer/Historian from Poet/Scholar/Artist – (i) The Romance of the Western Chamber the Ming dynasty from the Qing dynasty – (ii) The Injustice to Dou E – (iv) The Golden Lotus; – (vi) The Scholars.

Source: Encyclopedia Britannica, www.britannica.com; www.travelchinaguide.com; www.china-on-site.com; www.cultural-china.com. 19 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy Chinese

Overview of the Shaolin Martial Arts Wudang Martial Arts Existing for over four millennia, Chinese • Created by Buddhist monks at Shaolin Temple, Shaolin Martial Arts • Created by Taoist Sanfeng, Wudang Martial Arts is Martial Arts consist of various fighting styles represents a hard style of Chinese that includes , stick a soft style of Chinese kung fu that includes shadow boxing and created for self defense, hunting, and military art, and art. The Buddhist monks created this style based on the bare-hand fighting. Mr. Zhang created the style to use soft training. The four basic moves are kicking, movements of birds, beasts, and fish. movements to conquer the unyielding, and to strengthen and throwing, striking, and controlling. Chinese • Among the different art forms of , the most unify the mind and body Martial Arts are synonymous with “Kung Fu” prominent are: Shaolin boxing, an attack-and-defense style known • Among the different art forms of Wudang kung fu, the most and “,” but Kung Fu and Wushu have for its strong and powerful technique; and Shaolin Spear Art, a style renowned is Chuan, a style aimed to balance the body evolved into distinct forms. using the spear, one of China’s most ancient weapons. and mind through slow motions, deep breathing, and . Alhough many forms have developed over the Its philosophy is based on the principles of Yin and Yang. years, Chinese Martial Arts can be classified into two categories: hard style, and soft style. Hard style, known as “Shaolin Martial Arts,” was developed by Buddhist monks at Shaolin Temple in the region of Song Mountain. Soft style, known as “Wudang Martial Arts,” was developed by , a Taoist who Traditional Shaolin Martial Arts Tai Chi Chuan lived during the Song dynasty. Wudang kung fu grew in popularity during the Ming dynasty. Historic Sites Historic Personages • of Shaolin: The five survivors of the destruction of Today, Chinese Martial Arts are practiced Shaolin Temple is a Buddhist monastery on the by the Qing dynasty are Jee Sin, Pak Mei, worldwide as a hobby and profession through Mount Song in Henan province; it is the home Fong do Dak, Miu Hin, and . organizations or schools of martial arts. of Shaolin Martial Arts. For further Chinese martial artists participate in information, please see page 21. • Yim Wing-Chun: A kung fu master who was taught by Ng Mui. competition, focusing on empty-hand forms, • Ten Tigers of Canton: A group of Chinese martial artists from Shaolin Temple forms, choreographed forms, group Guangdong who lived during the late Qing dynasty and were practice, competition, and power are located in the considered the best fighters in southern China. demonstration. northwestern part of Hubei Province and are • Hung Hei-: Founder of the martial arts system, “Hung Gar the home of Taoist monasteries, where Kung Fu.” Wudang Martial Arts flourished during the Ming dynasty. • : Founder of the martial arts system, “Choy Li Wudang Mountains Fut.” • : Influential teacher of Tai Chi Chuan during the is located in the Sichuan late 19th Century. Province of and is home of Buddhist and Taoist monasteries that practice • : Famous Hong Kong actor and Chinese martial artist th Emei Martial Arts. from the late 20 century who founded the martial arts system, “.” Mount Emei Source: www.travelchinaguide.com, www.typesofmartialarts.com, http://kaleidoscope.cultural-china.com. 20 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy Shaolin Temple

Shaolin Through the Ages History and Recent Developments of Shaolin Temple • Founded by Indian Buddhist monks in the 5th century BC, Shaolin Temple is located in the Song Mountains in Henan province. As of early 11th century B.C. Oldest Chinese reference to 2011, approximately 150 monks lived at the temple, and visiting monks from across China and abroad came to study and meditate atthis martial arts. purported fountainhead of Buddhism. A.D. 495 Shaolin Temple founded by Indian Buddhist monks. • A popular myth holds that a fifth-century Indian mystic taught a series of exercises or forms that mimicked animal movements to the monks at the temple. The monks adapted the forms for self-defense and later modified them for warfare. Bare-handed martial arts existed in China 621 Thirteen Shaolin monks battle opponents of th Tang rule. long before the 5 century, and likely arrived at Shaolin with ex-soldiers seeking refuge. • The temple was sacked repeatedly during its history. The most devastating blow came in 1928, when a vengeful warlord burned downmost 1350s Temple sacked by marauders, one of many of the temple, including its library. such events in its history. • From 1999 through 2010, Shi Yongxin, the abbot of Shaolin Temple, built an international business empire, including touring kungfu 1553 Shaolin monks help fight off Japanese pirate troupes, film and television projects, an online store selling Shaolin-brand tea and soap, and franchised Shaolin temples abroad, which attacks on Chinese coast. include one planned as of early 2011 in Australia that would be attached to a golf resort. 1898–1901 Martial artists foment the Boxer • In addition to its successful commercial ventures, Shaolin Temple has helped foster an undeniable kung fu renaissance. In , a Rebellion to challenge Western influence. sprawling city of 650,000 just six miles from the temple gates, some 60 martial arts academies have sprouted in the 1990 to 2010 time period, boasting more than 50,000 students. 1928 Warlord Shi Yousan burns Shaolin Temple, obliterating its vast library, including ancient martial arts texts.

1940s Shaolin monks ambush Japanese soldiers patrolling near the temple.

1966 The 's Red Guards ravage the Shaolin Temple and beat the few remaining monks. Monks walking in succession to Monk seeking shelter from a snow Shaolin kung fu pupils forest in Shaolin Temple 1972 Kung Fu TV series begins, introducing the pray in the Shaolin Temple. shower in the Shaolin complex. learning to “eat bitterness.” containing the bones of virtuous monks. Shaolin Temple to Americans. Shaolin Temple’s Guiding Principles and Philosophy of Kung Fu 1982 Martial arts champ portrays a heroic • The three principles of Shaolin Temple are: (i) chan (Zen meditation); (ii) wu (martial arts); and (iii) yi (herbal medicine). monk in Shaolin Temple, a film that sets off a • Followers of traditional Shaolin kung fu believe that kung fu is not entirely about fighting adversaries, but about converting to force. Shaolin frenzy in China. They hold that absent an adversary, kung fu is a series of movements and explain that a practitioner’s physical and mental weaknesses can 1999 Shi Yongxin is installed as the 30th abbot of become his/her own adversary. As such, followers of Shaolin emphasize in their studies and teaching that traditional Shaolin kung fu forms the Shaolin Temple. are more about honor and responsibility than about and fighting. • Hu Zhengzsheng, a renowned instructor of traditional Shaolin kung fu, emphasizes respectfulness and a willingness to “eat bitterness,” 2010 The Shaolin Temple is named a UNESCO which he describes as learning to welcome hardship and using that hardship to discipline the will and forge character. World Heritage site. • Breathing is critical in harnessing one’s chi, or life force. “Breathe in through the navel, out through the nose,” the late master Yung Guiwu of Shaolin Temple advised his pupils. Learning to breathe properly was the initial step on the arduous path to tapping the wellspring of the Source: “Shaolin Kung Fu,” by Peter Gwin, National Geographic, March 2011. chi’s power and, in doing so, unlocking one of the universe’s hidden doors.

Source: “Shaolin Kung Fu,” by Peter Gwin, National Geographic, March 2011. 21 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy

Symbols of the Religions in China Overview • The five recognized religions in China are: Buddhism; Islam; Taoism; and Christianity, which in China is treated as two faiths, Catholicism and Protestantism. Each of the five has a central organization headquartered in Beijing and staffed with officials loyal to the Communist Party. All report to the State Administration for Religious Affairs, which in turn is under the central government’s State Council, or cabinet. This form of religious control has a long history in China. For hundreds of years, emperors sought to define orthodox belief and appointed many senior religious leaders. – Buddhism was introduced to China from India around the first century AD, gaining popularity and becoming the most influential religion in China after the fourth century. In the years after 2000, China had approximately 13,000 Buddhist Dharmacakra Holy Cross temples. A Symbol of Buddhism A Symbol of Christianity – Islam is estimated to have reached China in the mid-seventh century. The Yuan dynasty (1280-1368) witnessed the height of influence of Islam. By the year 2000, China had more than 30,000 mosques. – Catholicism was introduced into China after the seventh century, and Protestantism was introduced into China in the early 19th century. After 2000, there were more than 4,600 Catholic churches, 12,000 Protestant churches, and 25,000 other Christian places of worship in China. – Taoism took shape as a religion during the second century, based on the philosophy of Laozi and his work, De . As Crescent and Star Yin-Yang of early 2011, China had more than 5,000 Taoist temples, up from 1,500 in 1997. A Symbol of Islam A Symbol of Taoism • Religion has long played a central role in Chinese life, but for much of the 20th century, reformers and revolutionaries saw it as a hindrance holding the country back and a key reason for China’s “century of humiliation.” Taoism • The Chinese appear to be experiencing an awakening of religious belief. In cities, young urban professionals have been turning to Christianity. Buddhism attracts the middle class, while Taoism has rebounded in small towns and the countryside. Islam is also on the rise, not only in troubled minority areas but also among tens of millions elsewhere in China. • A survey in early 2011 showed that an estimated 300 million people in China claim a faith. A broader question in another poll showed that 85% of the population believes in religion of the supernatural. • In 2007, President Hu Jintao endorsed religious charities and their usefulness in solving social problems. The central government has also sponsored international conferences on Buddhism and Taoism. Taoism, China’s Only Indigenous Religion • As China’s only indigenous religion, Taoism’s influence is extends from and politics to medicine and poetry. The religion is loosely based on the writings of a mythical person named Laozi and calls for returning to the Dao, or Tao, the mystical way that unites all of creation. As in many other religions, Taoism encompasses a broad swath of practice, from Laozi’s Pa-kua, the eight trigrams high philosophy to a pantheon of deities: emperors, officials, thunder gods, wealth gods, and terrifying demons that punish the that form the content of wicked. the hexagrams in I Ching Laozi, • For much of the past two millennia, Taoism’s counterpart has been Confucianism, the ideology of China’s ruling elite and the Creator of Taoism closest China has to a second homegrown religion. Whereas Confucianism emphasizes moderation, harmony, and social structure, Taoism offers a refuge from society and the trappings of material success.

Source: China.org; “The Rise of the Tao,” by Ian Johnson, Magazine, November 7, 2010. 22 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy

Cantonese Opera History of Chinese Opera Developed during the Southern Song • A blend of , singing, martial arts, acrobatics, and acting, Chinese opera is one of the world’s three oldest forms of dynasty, Cantonese Opera is a form of dramatic art, the other two being Greek tragic comedy and Indian Sanskrit opera. Chinese Opera popular in Hong Kong, Shanghai, and the rest of southern China. • Chinese opera traces its roots to the third century, but was first organized by Emperor Taizong during the Tang dynasty (618 – 907 AD). Emperor Taizong founded Liyuan (Pear Garden), China’s first opera school. Students of Chinese opera were The two type of plays within Cantonese called, “Disciples of the Pear Garden.” During the Yuan dynasty, a contemporary form of opera called “Jingxi” emerged. Opera are: (i) Mo, literally meaning martial • During the Qing dynasty, the last dynasty of imperial China, Chinese opera became popular among the mainstream arts, a play with martial arts that emphasizes population, with performances in tearooms, restaurants, and even around makeshift stages. war; and (ii) Mun, literally meaning intellectual, polite, and cultured, a more • Different forms of Chinese opera have emerged over the years. Beijing Opera is a popular form in northern China; gentle and elegant play that emphasizes Cantonese Opera, a form developed during the Southern Song dynasty, is popular in southern China. poetry and culture. Main Roles in Beijing Opera The music of Cantonese Opera either • The three main roles in Beijing Opera are: (i) Sheng, the male character; (ii) Dan, the female character; and (iii) Jing, a classifies as “theatrical” or “singing stage.” painted-face character often played by a male. Each of these three characters has subtypes whose characters have different The four main roles in Cantonese Opera are: attributes and antics. (i) Sang, the male character; (ii) Daan, the female character; (iii) Zing, a painted-face character, usually a hero, general, villain, god, or demon; and (iv) Cau, a clown character.

Chinese Opera Today • Today, Chinese opera remains popular in China and around the world. Revered for its brilliant costumes, make-up, and theatrical performances, Chinese opera remains one of China’s most celebrated and admired forms of art. • The People’s Republic of China has actively encouraged Chinese opera, advocating the writing of operas recounting historical Chinese events. • Chinese opera is studied around the world by schools and organizations such as the Chinese Opera Institute, a non-profit Cau Zing organization based in Singapore intended to study, celebrate, and perpetuate Chinese opera. Source: www.pearlmagik.com.

Source: www.travelchinaguide.com, The Chinese Opera Institute, www.chineseoperainstitute.com. 23 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy Traditional Chinese Musical Instruments

• Traditional Chinese music can be i Chinese Drum ii (Lute) traced back 7,000 years, to the Neolithic age. • From the ancient imperial dynasties to the present day, music has been an integral part of Chinese art, culture, and expression. • Traditional Chinese musical instruments can be divided into four categories: • The Chinese drum is a percussion instrument that dates back • Originally named after the loquat fruit, the pipa is a plucked to the Xia dynasty, the first dynasty of China, approximately instrument that dates back to the Qin dynasty (221 – 206 BC), – (i) Percussion instruments; 4,000 years ago. the first imperial dynasty of China. – (ii) Stringed instruments; • Symbolizing the power of the ruler and the destiny of the • It is a popular instrument in China, known for its rapid and – (iii) Plucked instruments; and army, it is used during ceremonies, festivities, weddings, and soft notes. funerals. – (iv) Wind instruments. iii Erhu iv Xiao (Flute)

• The Erhu, also known as Huqin, is a stringed instrument that • The Xiao is a wind instrument that dates back to the Neolithic dates back to the Tang dynasty (618 – 907 AD). age, over 7,000 years ago. Konghou • It, along with other instruments in the same string family, is • It produces a soft but vibrantly moving sound. Harp-like instrument introduced to an important instrument in Beijing Opera. China during the Han dynasty • China is credited with creating the earliest form of the flute, a • Blind folk artist Liu Yanjun wrote “Two Springs Reflect the small six-holed instrument made from bird bone. Moon” on the erhu.

Source: www.chcp.org, www.travelchinaguide.com, www.beijingspectator.com.au. 24 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy Overview of the

The Chinese Calendar Sixty Year Cycle of the Chinese Calendar

The Chinese calendar dates back to 2637 1 2 3 4 5 6 7 8 9 10 BC and has been an important influence 甲子 乙丑 丙寅 丁卯 戊辰 己巳 庚午 辛未 壬申 癸酉 on China’s dynasties and culture through jiazi yichou bingyin dingmao wuchen jisi gengwu xinwei renshen guiyou the ages. Today, the 11 12 13 14 15 16 17 18 19 20 is used in the People’s Republic of China 甲戌 乙亥 丙子 丁丑 戊寅 己卯 庚辰 辛巳 壬午 癸未 for civil purposes, but the traditional jiaxu yihai bingzi dingchou wuyin jimao gengchen xinsi renwu guiwei Chinese calendar is still used fo r 21 22 23 24 25 26 27 28 29 30 celebrating festivals and timing 甲申 乙酉 丙戌 丁亥 戊子 己丑 庚寅 辛卯 壬辰 癸巳 agricultural activities. jiashen yiyou bingxu dinghai wuzi jichou gengyin xinmao renchen guisi The Chinese calendar is a combination of 31 32 33 34 35 36 37 38 39 40 甲午 乙未 丙申 丁酉 戊戌 己亥 庚子 辛丑 壬寅 癸卯 two cycles, the Ten Celestial Stems and jiawu yiwei bingshen dingyou wuxu jihai gengzi xinchou renyin guimao the Twelve Terrestrial Branches. Combining two characters from each of 41 42 43 44 45 46 47 48 49 50 甲辰 乙巳 丙午 丁未 戊申 己酉 庚戌 辛亥 壬子 癸丑 these cycles, years are enumerated and jiachen yisi bingwu dingwei wushen jiyou gengxu xinhai renzi guichou make up a cycle of sixty years. 51 52 53 54 55 56 57 58 59 60 Every year correlates with one of twelve 甲寅 乙卯 丙辰 丁巳 戊午 己未 庚申 辛酉 壬戌 癸亥 animals (2011 is the year of the jiayin yimao bingchen dingsi wuwu jiwei gengshen xinyou renxu guihai hare/rabbit, and the next year of the hare/rabbit will take place in 2023). The Chinese Year Zodiac Animal Gregorian Calendar Chinese Year Zodiac Animal Gregorian Calendar character of the animal is considered to 4709 Hare/Rabbit 3-Feb-11 4719 Ox 12-Feb-21 have an influence on the character of 4710 Dragon 23-Jan-12 4720 Tiger 1-Feb-22 people born during that year. 4711 Snake 10-Feb-13 4721 Hare/Rabbit 22-Jan-23 4712 Horse 31-Jan-14 4722 Dragon 10-Feb-24 4713 Ram/Sheep 18-Feb-15 4723 Snake 29-Jan-25 4714 Monkey 8-Feb-16 4724 Horse 17-Feb-26 4715 Rooster 28-Jan-17 4725 Ram/Sheep 6-Feb-27 4716 Dog 15-Feb-18 4726 Monkey 26-Jan-28 4717 Boar 5-Feb-19 4727 Rooster 13-Feb-29 4718 Rat 25-Jan-20 4728 Dog 3-Feb-30

Source: www.chinesenewyears.info. 25 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy The

History of the Chinese New Year Select Traditions And Crafts Food

According to tales and legends, the Chinese • New Year’s Eve Dinner: Normally a family-reunion dinner, the • Dumplings: Popular in northern China, dumplings are a main New Year started with the fight against the New Year’s dinner is one of the most important dinners of the dish served for New Year’s Eve dinner. mythical beast, “Year.” An ox-like creature year for the Chinese. Fish and dumplings are normally served, with a lion-shaped head, the “Year” came at symbolizing prosperity. nightfall on New Year’s Eve to harm people, animals, and property. The Chinese learned that the beast feared the color red, fire, and loud sounds. Therefore, for self protection, they started posting red Dui Lian in the front of their homes, launching fireworks, and Fireworks in Hong Kong Fireworks in Guiyang Dumplings New Year Cake hanging lanterns at year end, among other traditions. • Fireworks: Right after 12:00 pm on New Year’s Eve, fireworks • New Year Cake: A solid cake made with glutinous rice flour are launched to celebrate the coming year and drive away evil. and sugar, New Year Cake is a popular dish in Eastern China. Subject to some degree of debate, celebration A person who launches the first fireworks in the New Year is of the Chinese New Year originates in the believed to receive good luck. Shang dynasty (1766 BC – 1122 BC). Until • Upside-Down Fu: Arguably the most popular Chinese New the Han dynasty, the timing of the celebration Year craft, the upside-down “Fu” means luck, happiness, and varied from midwinter to early spring. prosperity. The Chinese post the “Fu” on the front door or on Emperor Wu (157 BC – 87 BC) of the Han the wall of the living room. dynasty (206 BC – 220 BC) is credited with establishing the New Year as the first day of the first month of the year.

Tangyuan Laba Congee Upside Down Fu Door God • Tangyuan: A Small ball of glutinous rice flour either unfilled or • The Door God: Believed to prevent evil from entering, the Door filled with sugarcane rock candy, sesame paste, red bean paste, God is placed on each side of an entry to temples, homes, and or chopped peanuts and sugar, Tang Yuan is eaten during Yuan th businesses. Xiao Festival, or the Lantern Festival, the 15 of the first month of the New Year. • Chinese Lantern: Decorated with a red-colored paper shell, the Chinese lantern is hung in the front of the door or inside the • LaBa Congee: A mixture of rice, nuts, and beans, LaBa th home; in some parts of China, the lantern is required for the Congree is usually served during the LaBa Festival, the 8 day th of the last month of the year. Chinese Lantern, Yuan Xiao Festival Yuan Xiao Festival, or Lantern Festival, occurring on the 15 of the first month of the New Year.

Source: www.chinesenewyears.info. 26 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy Lacquerware and Porcelain Two of the “Three Treasures” of Chinese Art

Lacquerware (Illustrated on the left) • Dating back to the Warring States Period (475 – 221 BC) of the Zhou dynasty (1046 – 256 BC), Chinese lacquerware includes household utensils, handicrafts, and artworks coated with varnish made from the sap of the lacquer tree. During the Han dynasty (206 – 220 AD), lacquerware was used primarily as household utensils made from wood or bamboo; by the Qing dynasty (1644 – 1912 AD), lacquerware production reached its zenith, with hundreds of varieties and more exquisite and complex techniques, such as inlaying, color painting, etching, coromandel, cover-coating, and wrapping with jades. • To make lacquerware, a base coat is applied to a core material, followed by extremely thin layers of the finest lacquer. After these layers dry, a final layer is added to make the lacquer strong and light, while maintaining elegant appearance and harmonious color. • Lacquerware types include: inlaid gold and silver lacquerware (Jinyin PingTuo) of the Tang dynasty; plan lacquerware (Yise Qiqi) of the Song dynasty; carved lacquerware of the Yuan dynasty; stone-decorated lacquerware (Baibao qian) of the Ming dynasty; and Fozhou bodiless lacquerware of the Qing dynasty. • Fuzhou, of the Fujian Province (Southeast China), has been considered the lacquerware capital.

Porcelain (Illustrated on the right) • Dating back to the Sui dynasty, Chinese porcelain, also called “fine china,” refers to a type of ceramic made of white kaolin clay, heated in a kiln to temperatures between 1,200 °C (2,192 °F) and 1,400 °C (2,552 °F). Porcelain is admired for its purity, elegance, and material characteristics, including tensile strength and toughness. • During the Sui dynasty, porcelain was primarily used for rituals and as eating ware. During the Song, Yuan, Ming, and Qing dynasties, porcelain was also collected as art. • Arguably the most popular and magnificent type of porcelain, blue-and-white porcelain was first exported to the western world via the Silk Road during the Yuan dynasty. Production of blue-and-white porcelain steadily continued through the Qing dynasty, as the western world, particularly the Europeans and Middle Easterners, avidly collected porcelain. • Among the most renowned kilns were Ru, Ding, Ge, and Jun, each with its own distinct style, craft, and class. For example, the Jun kiln was known for copper-red glazed porcelain, which contained large amounts of copper oxides. During the Northern Song dynasty, Emperor Huizong ordered that the Jun kiln be devoted exclusively to the royal family and commissioned the production of flower pots and other porcelain vessels for the imperial court. • Jingdezhen, in the Jiangxi Province (Southeast China), has been considered the porcelain capital.

Source: www.travelchinaguide.com, http://arts.cultural-china.com/en, www.chinatour360.com, The Metropolitan Museum of Art. 27 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy Cloisonné Enamels One of the “Three Treasures” of Chinese Art

• From January 26 through April 17, 2011, the Bard Graduate Center in New York, New York presented Cloisonné: Chinese Enamels from the Yuan, Ming, and Qing dynasties. • Displaying more than 160 items ranging from pocket- to armchair-size, the exhibition contained almost seven centuries’ worth of domestic and ceremonial enamelware. Bowls, vases, incense burners, jewelry boxes, and garden stools made of copper alloys have surfaces covered with intricate mosaic patterns and imagery in pure blues, reds, yellows, and greens. • Cloisonné, which literally means “divided into compartments” in French, entails the application of pastes made of ground colored glass into cells that are bounded by thin strips of metal standing on edge on flat or curved surfaces. Heated in a kiln, the paste melts into enamel; sanding and buffing results in glossy surfaces. • The Cloisonné enamel technique was most likely introduced from Byzantium into China during the Mongol Yuan dynasty (1280 – 1365 AD). • From the late Yuan dynasty to the early Ming dynasty, Buddhist temples were the primary patrons and/or intended recipients of cloisonné. The lotus flower, a Buddhist symbol of purity, was the most frequently used motif on Chinese enamels. • In the late 14th century and the 15th century, the schematic scrolling lotus designs of Buddhist origin were joined by more naturalistic depictions of flowers and fruit, including chrysanthemums, grapes, camellias, hibiscus, peonies, and lotuses, all of which were often used as symbols of the four seasons. • In the second half of the 16th century, during the reign of the Wanli Emperor (1573 – 1620 AD), a marked increase took place in enamel production, together with a decline in craftsmanship. The end of the 17th century brought a resurgence of enamel production. In the last sixty years of the 18th century, during the reign of the Qianlong Emperor (1736–96 AD), growing interest took place in the arts in general and the decorative arts in particular. The unprecedented variety of forms and decoration that resulted was accompanied by a resurgence of taste for many symbols prevalent in the Ming dynasty. • Beginning in the Yuan dynasty, Beijing has been considered the Cloisonné capital.

Source: Cloisonné: Chinese Enamels from the Yuan, Ming, and Qing Dynasties, by the Bard Graduate Center and the Musée des Arts Décoratifs, Yale University Press (2009); , “When Enamel Wares Adorned China’s Imperial Courts,” February 17, 2011; www.chinaculture.org; The Metropolitan Museum of Art. 28 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy Chinese Film

Grauman’s Chinese Theatre Brief ’s Film Industry • Motion pictures were introduced to China in 1896, but the film industry did not get under way in earnest until 1917. During the 1920s, film technicians from the United States trained Chinese technicians in Shanghai, which became an early filmmaking center. In the 1930s and 1940s, several socially and politically important films were produced. • During the Cultural Revolution, the film industry was severely restricted. Many earlier films were banned, and only a few new ones were produced. In the years immediately following the Cultural Revolution, the film industry again flourished as a medium of popular entertainment. • During the 1990s, the Hong Kong film industry experienced retrenchment, exacerbated by the Asian economic crisis which dried up several traditional sources of film finance. Grauman’s Chinese Theatre, located Select Chinese Cinema Classic Films in Hollywood, California, is one of the most famous theatres in the “The Peach Girl,” 1931 “Confucius,” 1940 world. The Chinese Theatre opened Bu Wancang’s The Peach Girl Fe Mu’s Confucius (1940) is a portrayal on May 18, 1927 and has hosted (1931) is considered one of early of Confucius’s thought and life. The more movie premieres than any Chinese cinema’s great classics. The film was lost following its brief re-run other theatre in the world. In 1968, life of a peach tree is used as a in 1948, but was found again in 2001. it was declared a historic cultural metaphor for the heroin e’s The Hong Kong Film Archive released landmark. development in this tragic love story. the film during the Hong Kong International Film Festival in 2009.

Famous Actors in Chinese Cinema “A Touch of Zen,” 1969 “Red Firecracker, Green • • Jet Li Firecracker,” 1994 King Hu’s A Touch of Zen (1971) • Maggie Cheung • Ge You is set during the Ming dynasty He Ping’s Red Firecracker, Green Firecracker (1994) is a tale of • Chow Yun-Fat • Michelle Yeoh (1368-1644) and is considered a martial arts classic. The movie is forbidden love set in China prior to the • Tony Leung • Zhang Ziyi also acknowledged for its heavy 1911 Chinese Revolution. The movie offers insights into Chinese traditions, • Gong Li • Liu Xiaqping influence on another hit film, “Crouching Tiger, Hidden Dragon,” love, and society. released in 2000.

Source: dGenerate Films, http://dgeneratefilms.com. 29 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy Sir Run Run Shaw

Sir Run Run Shaw

• Sir Run Run Shaw CBE, GBM, born on November 23, 1907, is a Hong Kong media mogul. In 1974, he was awarded the Commander of the Order of the British Empire (CBE). He received a knighthood in 1977 and the Grand Bauhinia Medial (GBM) from the Hong Kong Special Administration government in 1998. • He was born in Ningbo, Zhejiang, China, and received his education in American-run schools. He is the youngest of six sons of Shanghai textile merchant Shaw Yuh Hsuen (1867 – 1920). • He and his brother founded the South Seas Film studio in 1930, which later became Shaw Studios. In 1967, he launched TVB (Television Broadcasts Ltd.) in Hong Kong, developing it into a multi- billion dollar TV empire ranking in early 2011 as one of the top five television producers in the world. Sir Run Run Shaw • His first wife, Wong Me Chun, died at age 85 in 1987. Shaw stopped filming that year. He remarried in Las (1907 – ) Vegas in 1997 to Mona Shaw (formerly Fong Yat-wa and Deputy Chairman of TVB since 2000). • In 2000, through his company, Shaw Brothers (Hong Kong) Ltd., he sold his unique library of 760 classic titles to Celestial Pictures Ltd.. • Shaw Studios entered a new era with Run Run Shaw’s majority investment (through his various holding companies) in the US$180 million Hong Kong Movie City project, a 1,100,000 square feet (102,000 m2) studio and production facility in Tseung O (Hong Kong). The facility’s features include: one of the largest, fully air-conditioned and sound and vibration-insulated soundstages in Asia; a full-service color lab and digital imaging facility; over 20 sound and editing suites; a 400-seat dubbing and screening theatre; Shaw Studios’ Hong Kong Movie City executive and production office space; banqueting facilities; and visual effects and animation capabilities. This facility serves as the centerpiece of Shaw Studios and for the Chinese film industry as a whole. Well-known Films • Over the years, Shaw has donated billions of dollars to charity, schools, and hospitals. His name appears on • Runner (1982) many buildings in Hong Kong and on the China mainland. • The 36th Chamber of Shaolin (1978) • Meteor (1979) • Shaw’s daughter, Violet, lives in Hawaii and was married to the late Morgan Stanley Executive Director Paul Loo, manager of the firm’s Honolulu office for 47 years. • Five Deadly Venoms (1978) Source: IMDb.com, Inc. Source: Who’s Who 2007, by A&C Black, 2007; Shaw Studios, http://www.shawstudios.hk/who_we_are.htm.

30 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy Eight Traditional Cuisines

1 2 Guangdong Cuisine 3 Sichuan Cuisine 4 Hunan Cuisine • Rice and flour are of the two main staples in China. – Rice is the major food source for people rice farming in Southern China and can also be used to produce beers, wines, and vinegars. Shandong cuisine is known for its Guangdong cuisine is known for its Sichuan cuisine is known for its Hunan cuisine is known for its strong flavor, mainly from the use delicate balanced flavor, fine and spicy and pungent seasonings, and spicy and sour dishes, with a heavy – Flour is the major food source for of shallots and garlic. Seafood is a rare ingredients, and focus on dish its variety of cooking techniques. use of oil to produce crispness, people wheat farming in Northern delicacy. presentation. softness, and tenderness. China and can be used to produce Notable Dishes: Notable Dishes: noodles, breads, dumplings, and Notable Dishes: MaPo Tofu: Stir-fried Tofu with Notable Dishes: Chrysanthemum Fish: Cut in the steamed buns. Braised Abalone: Smooth, minced beef in spicy bean sauce Stewed Fins: Fins, chickens, and delicate, and savory shape of a chrysanthemum Gong Bao Ding: The inspiration pork stewed in chicken soup • Tofu is a popular soy product often used as a meat or cheese substitute. Sweet and Sour Carp: Crisp Braised Snake Porridge: Braised for modern day “kung pao Dong’an Chicken: Parboiled and exterior and tender fish interior meat of cobra, grimalkin, or pullet chicken” flavored with chilies, peppers, and • China’s eight regional cuisines vinegar evolved as a result of resources, climate, geography, history, and other 5 Jiangsu Cuisine 6 Zhejiang Cuisine 7 Fujian Cuisine 8 Anhui Cuisine lifestyle factors.

Shanghai Cuisine Popular in , Shanghai cuisine is not one of the eight traditional Chinese cuisines, but is a blend of Jiangsu, Jiangsu cuisine is known for its Zhejiang cuisine is known for its Fujian cuisine is known for its Anhui cuisine is composed of local Zhejiang, Fujian, and Anhui cuisines. braising and stewing, producing tender and soft taste. Cooking cutting techniques, alternative soups, flavors from the Yangtze and Huai light, mellow, and sweet tastes. It methods include frying, quick-fry, unique seasonings, and meticulous Rivers. Its delicacies include river Shanghai cuisine is known for its use of was developed from local recipes stir-fry, braising, and steaming. execution. Served in special creatures and fish. soy sauce, sugar, and wine. Wines are of Yangzhou, Suzhou, and Nanjing. Notable Dishes: dishware, Fjuian dishes are clear, Notable Dishes: used to marinate and favor meats, which Notable Dishes: Braised Fish in light, and slightly sweet and sour. Braised Turtle with Ham: Soft are renamed “drunken” (i.e., “drunken Three Sets of Ducks: A stewed Vinegar: Fish braised in vinegar Notable Dishes: shell turtle stewed with ham, chicken”). fowl duck stuffed with a wild duck and sugar Buddha Jumping Over the Wall: bamboo, garlic, ginger, and soy Shanghai cuisine also known for Dim stuffed with a pigeon Longjing Shrimp Meat: Shrimp Shark fin soup stewed with a large sauce, among other ingredients Sum, a Cantonese term for dishes of Braised Lions Head: Large stir-fried in Longjing tea (from variety of proteins and vegetables Fuliji Grilled Chicken: Tender, small portions of food. Dim Sum is also meatballs braised in clear or red Hangzhou) Jitangcuanhaibang: Clams cooked meat-falling-off-the-bone popular in Hong Kong. soup in chicken stock (jitang) braised chicken, influenced by Shandong cuisine Source: www.chinaassistor.com, www.pub.mtholyoke.edu, www.travelchinaguide.com. 31 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy “Yellow Mountain”

Huangshan, Anhui Province in Eastern China

Geographic Highlights Landscape

• Located in the southern Anhui province of eastern China, Huangshan is a mountain range well known for its Area 154 sq km (96 sq mi) scenery, sunsets, peculiarly-shaped granite peaks, Huangshan Pine trees, hot springs, and views above the clouds. Lotus Peak: Highest Point • Encompassing 154 sq. km. of scenic area, Huangshan Mountain has a well-preserved ecosystem, with plant life 1,864 m (6,115 ft) covering over 82% and forests covering 56% of the area.

• Among the many peaks at Huangshan, the tallest are: Lotus Peak, or Lian Hua Feng, standing 1,864 m tall; Bright Summit Peak, or Guang Ming Ding, standing 1,840 m tall; and Celestial Peak, or Tian Du Feng, standing 1,829 m tall. • Huangshan has been highly esteemed throughout Chinese history as the height of classic Chinese mountain scenery. The earliest reference to it, then known as San-Tianzi Du, is ascribed to Shanhai jin (The Book of Mountains and Seas). During the Tang dynasty, an imperial edict was issued to honor it with the name, Huangshan (yellow mountain), yellow being the color associated with the emperor. • During the Ming dynasty in 1606, the monk Pumen came to Huangshan and built Fahai Meditation Temple and Huangshan Pine Tree Wonshu Temple, connecting them by steps cut into the mountain. Native to mountains of eastern China, the • The mountain has about 140 sections open to visitors, and receives approximately 15 million visitors per year. Huangshan pine tree is considered one of the wonders at Huangshan. An evergreen reaching • The core area surrounding Huangshan is uninhabited, though there are monks in monasteries and the mountaintop 15 – 25 meters in height, Huangshan pine grows hotels are staffed. Approximately 1,600 people live in the Xianyao Ting residential area, most of whom are staff in little soil, in moderate to high altitudes, and on and their dependents. rocky crags. Source: www.china.org.cn., http://severnnaturalwonders.org, United Nations Environment Programme, www.enep-wcmc.org. 32 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy Panda Bears International Union for Conservation of Nature

Panda Bears are considered endangered species. Panda Bears are native to south- • The , or panda (Ailuropoda melanoleuca, literally “black and white cat-foot”) is a bear native to south-central China. It is easily recognized by its large distinct black patches around the eyes, over the ears, and across its round body. Although it belongs to the order Carnivora, the panda’s diet is 99% bamboo (the panda spends approximately 55% of its day feeding). • The giant panda lives in six isolated mountain ranges (Minshan, , Qionglai, Liangshan, Daxiangling, and Xiaoxiangling) inGansu, Shaanxi, and Sichuan provinces (about 75% of the panda bear population inhabits Sichuan province). • The panda does not hibernate, but it generally descends to lower elevations in the winter and may take temporary shelter in hollow trees, rock crevices, and caves. • The panda is an endangered species. A 2007 report showed that 239 pandas lived in captivity inside China and another 27 outside the country. A recent survey by the State Forestry Administration (SFA) of China and the World Wildlife Fund (WWF) indicated that approximately 1,600 pandas are living in the wild. • The greatest threat to the giant panda is restricted and degraded habitat. Population fragmentation exists on two scales: six mountain ranges separated by agricultural land; and bamboo patches of cleared lands and forest without a bamboo understory within those mountain ranges. Populations of pandas have become small and isolated, confined to high ridges, and hemmed in by cultivation. • No conclusive explanation exists of the origin of the word “panda.” The closest candidate is the Nepali word “ponya,” possibly referring to the bear’s wrist bone, which has evolved to hold bamboo shoots for eating. Since the earliest collection of Chinese writings, the has given the bear 20 different names, such as 大熊貓 (dà xióng māo), literally meaning "large bear cat," or 熊貓 (xióng māo), literally meaning "bear cat.” • Loans of giant pandas to American and Japanese zoos formed an important part of the of the People’s Republic of China in the 1970s, as it marked some of the first cultural exchanges between the PRC and the West. This practice has been termed “panda diplomacy.” • By 1984, however, pandas were no longer used as agents of diplomacy. Instead, China began to offer pandas to other nations only on 10- year loans. The standard loan terms include a fee of up to US$1,000,000 per year and a provision that any cubs born during the loan are the property of the People's Republic of China. Since 1998, due to a WWF lawsuit, the United States Fish and Wildlife Service only allows a US zoo to import a panda if the zoo can ensure that China will channel over half of its loan fee into conservation efforts for the giant panda and its habitat. • The giant panda is among the world’s most adored and protected rare animals, and it is one of the few in the world whose natural habitation site was able to gain a UNESCO World Heritage Site designation. The Sichuan Giant Panda Sanctuaries, located in southwest Sichuan province and covering seven natural reserves, were inscribed onto the World Heritage List in 2006.

Source: International Union for Conservation of Nature, http://www.iucnredlist.org; Giant Pandas, by Duncan Scheff (Heinemann/Raintree, 2002); “Global Species Programme–Giant Panda,” World Wildlife Fund, November 14, 2007; “Number of Pandas Successfully Bred in China Down from Last Year,” Xinhua News, August 11, 2007; “Pandas Gain World Heritage Status,” BBC News, July 12, 2006. 33 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy Historical Chinese Cities “In Heaven, there is paradise; on earth, Hangzhou and Suzhou.” Marco Polo (1254 – 1324)

Hangzhou Suzhou

Historical Significance Historical Significance • Founded approximately 2,200 years ago during the Qing • Dubbed the “Venice of the East,” or “Venice of China,” dynasty and through the centuries a center of meditative, poetic, Suzhou is one of the oldest towns in the Yangtze Basin. and spiritual significance, Hangzhou is one of the Seven • Suzhou dates back 2,500 years, to the late Zhou dynasty and Ancient Capitals of China. was established by the Wu, who formed villages along the • Hangzhou, whose city walls were not built until the Sui dynasty edges of hills above the wetlands surrounding Lake Tai. in 591 AD, sits at the southern end of China’s Grand Canal, the world’s longest canal. • In 514 BC, during the of the Zhou dynasty, King Helu • Hangzhou was the capital of several kingdoms, including the Kingdom during named Suzhou the “Great City of Helu,” and established it as his kingdom’s capital the Five Dynasties and Ten Kingdoms Period, and the Southern Song dynasty. city. Since then, historic Suzhou has mostly remained unchanged. • With its tea and silk industries, and its temples and adorning quiet hilltops, • Known as “Wu County” throughout the Qin dynasty, Suzhou served as the location of Hangzhou remained an important port through the middle of the Ming dynasty. Xiang Yu’s historical uprising that contributed to the overthrow of Qin. Suzhou’s name was later restored during the Sui dynasty in 589 AD. • Upon completion of the Grand Canal, Suzhou found itself strategically located on a major trade route, making Suzhou a hub of industry, trade and commerce.

Skyline of Modern Hangzhou West Lake Relevance Today • Hangzhou is a major city located in the Yangtze River Delta region, and it is the capital Xuanmiao Temple, Famous Canal Street, Gate, of Zheijiang province in eastern China. Taoist Temple Built in 276 Downtown Suzhou An Ancient City Wall Built in 514 BC • In 2009, Hangzhou had a population of 8,100,000. Relevance Today • In 1993, the Chinese government established the Hangzhou Economic and • A city within the Yangtze River Delta region, Suzhou has modernized while Technological Development Zone to encourage industries including electronic maintaining its cultural and historical significance in Chinese history. information, biological medicine, machinery manufacturing, and food processing. • In 2009, Suzhou had a population of 6,332,900. • Hangzhou operates an international airport, the Hangzhou Xiaoshan International • In the 1990s, the Chinese partnered with Singapore to establish several economic Airport and a thriving river port, the Hangzhou Port. development projects, including the Suzhou Hi-Tech Industrial Development Zone, • Possessing near mythical status in Chinese cultures, Hangzhou is a popular tourist which as of late 2010 hosted over 1,500 foreign companies, 40 of which are Fortune destination and it has been frequently ranked as one of China’s 10 most scenic cities. 500 companies. • Suzhou is a popular tourist destination and receives many visitors each year. Source: www.travelchinaguide.com, http://rightsite.asia/en. 34 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy , “The City of Ambition” One of the First Five Special Economic Zones of China

First Five Special Economic History of Shenzhen Zones of China • Literally meaning “deep drains,” Shenzhen was a nondescript fishing village located alongside several rivers and streams until Deng Xiaoping declared the city a Special Economic Zone (SEZ) on September 6, 1980. • Shenzhen, a Pearl River Delta city whose roots trace back to the Ming dynasty, was selected by Deng Xiaoping as a SEZ because of its close proximity to Hong Kong, a then-prosperous British territory. • Since 1980, Shenzhen has blossomed into one of China’s burgeoning economic power centers and has been called “The City of Ambition.” • In 2010, Shenzhen had a population of approximately 8.9 million and a gross domestic product of 950 billion yuan (US$144 Billion).

Following the end of the Mao era in 1978, Deng Xiaoping became the Paramount Leader of China and initiated broad economic reforms. He envisioned China as a country more open to the outside world and economically robust. He encouraged foreign trade and investment through joint ventures, and aimed to increase foreign investment. Relevance Today To accomplish this goal, he created Special • Shenzhen has evolved from a small fishing community into one of China’s most vibrant economic zones. Among several Economic Zones in southern China on September prominent economic developments, two of the most notable are: 6, 1980. The SEZ were Shenzhen, Xiamen, – The Shenzhen Stock Exchange (SZSE): Founded on December 1, 1990, 10 years after Shenzhen was declared a Special Shantou, Zhuhai, and the entire province of Hainan. Economic Zone, the Shenzhen Stock Exchange is one of China’s three stock exchanges and has ranked as the seventh Deng Xiaoping envisioned these SEZs as largest exchange by market capitalization out of the 16 major exchanges in the Asia Pacific region. As of December 31, incubators of capitalism. 2010, the SZSE had 1,174 companies listed on its exchange, with a stock market value of 8.7 trillion yuan (US$1.3 The key benefit of the SEZ to foreign investors was Trillion). The SZSE also operates the SME Board and ChiNext, two sub-exchanges catering to specific securities. favorable tax advantages and government regulations. In 2010 at the 30th Anniversary of the – Shenzhen Hi-Tech Industrial Park (SHIP): Founded in September 1996, the Shenzhen Hi-Tech Industrial Park covers SEZ, President Hu Jintao noted that “China will an area of 11.5 km2 and encourages the biotechnology/pharmaceutical, building and construction, chemicals, medical always support the SEZs and remember their roles equipment, telecommunications, and electronics industries. SHIP also established the Shenzhen Software Park to as ‘first movers.’” encourage the software industry. SHIP has attracted high-tech, multinational companies including IBM, Philips, Source: “Quick Guide: China’s Economic Reform,” BBC News, Olympus, Epson, Lucent, Harris, and Thomson. November 3, 2006, www.china.org.cn.

Source: www.szse.cn, www.world-exchanges.org, www.ship.gov.cn, http:/english.sz.gov.cn, www.scmp.com, www.trueknowledge.com. 35 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy Notable Chinese Cities

Chengdu (Sichuan Province) Chongqing (Direct-Controlled Municipality) • Population (2009): 11.0 million • Population (2009): 28.2 million • Dating back to the 4th Century BC, Chengdu was the • Chongqing served as China’s wartime capital during capital of several ancient dynastic kingdoms. the Second Sino-Japanese War. • In 1279, the Mongols sacked the city, killing 1.4 million • In 1997, Chongqing was named one of China’s four inhabitants. directly controlled municipalities (the highest ranking level for cities in China; the other three direct- • Chengdu was the birthplace of the first widely used paper money in the world. controlled municipalities are Beijing, Shanghai, and Tianjin). • Chengdu is the home of the Chengdu Research Base of Giant Panda Breeding. • In 2005, Chongqing was named one of China’s Five National Central Cities, the others being Beijing, • Chengdu’s main industries include food, medicine, Guangzhou, Shanghai, and Tianjin. machinery, and information technology. • The city serves as a manufacturing center and • Chengdu is one of the preferred cities for investment in transportation hub for , with its main western China; 133 of the world’s 500 largest companies industries including iron, steel, and aluminum multinational enterprises had subsidiaries or branch production, motor vehicle production, and mining. offices in Chengdu as of late 2009.

Dalian (Liaoning Province) Nanjing (Jiangsu Province) • Population (2009): 6.2 million • Population (2009): 7.7 million • Dalian has been controlled by several countries, • Meaning “Southern Capital,” Nanjing served as including: Britain in 1858; China in the 1880s; China’s economic, cultural, and political capital Japan in 1895 during the first Sino-Japanese War; through several modern historical periods, and the Soviet Union following World War II. including the period up to the in 1949. • One of China’s key ports located in Dalian is Port Arthur (now named Lushun), named after Prince • Surrounded by the Yangtze River (a strategic trade Arthur, Queen Victoria’s son. gateway) and mountains, Nanjing boasts beautiful natural scenery. • Dalian Beach in 31 kilometers (18 miles) in length and serves as a popular summer • During the Tang and Song dynasties, Nanjing was a destination. place where poets gathered and composed poems. • Dalian’s main industries include machine • Nanjing’s main industries include electronic manufacturing, petrochemicals, oil refining, and information, machinery, materials, bio- electronics. pharmaceuticals, and pharmaceuticals.

Source: ChinaToday. 36 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy Notable Chinese Cities

Harbin (Heilongjiang Province) Hohhot () • Population (2009): 9.9 million • Population (2009): 2.6 million • An extension of Russia’s Trans-Siberian Railway, the • Hohhot serves as the capital of the Inner Mongolia (constructed in 1898) Autonomous Region. connected Harbin to other port cities, transforming • The majority of Hohhot residents speak the Hohhot Harbin from a small fishing village into an industrial dialect and understand Mandarin. metropolis. • Tongdao Road, a major street in the area, is • Harbin became a major center of émigrés following the decorated with Islamic and Mongol exterior designs Russian Civil War and during Nazi Germany. on many of the buildings. • Known for its long winters, which usually last seven • A Mongolian summer festival held annually in mid- months from October to April, Harbin hosts the annual August, Naadam features traditional Mongolian Harbin International Ice and Snow Sculpture Festival. sports including , horse racing, camel • Called “black earth,” the soil of Harbin is among the racing, and . most nutrient-rich in China. • Hohhot’s main industries include wool and leather • Harbin’s main industries include textile related crops, goods, building materials, iron and steel products, and commodity grain production, and agricultural fertilizer. businesses. (Shandong Province) Xiamen (Fujian Province) • Population (2007): 7.6 million • Population (2008): 2.5 million • Due to its location on the Shandong • Also known as Amoy, Xiamen and the surrounding countryside are Peninsula, Qingdao is a major industrial city famous for being an ancestral home to many . and foreign trade port. It is also a popular • Xiamen was China’s main port for exporting tea in the 19th Century. location for health resorts, due to its mild climate, beaches, and lush hills. • The local dialect is Amoy, also known as , and has had a major influence on how certain Chinese terms were translated into • Identified as a strategic port, Qingdao was a western languages: tê known as “tea” in English; and kiô-chap known German colonial concession from 1898 to as “ketchup” in English. 1914, following a brief political conflict. • In 1980, Xiamen was named one of the five special economic zones • Upon gaining control of the area, the (SEZ) in China by the then Paramount Leader Deng Xiaoping. Germans outfitted the fishing village with wide streets, electrification, a sewer system, • As a likely result of being named an SEZ in 1980, Xiamen has built and safe drinking water supplies. up a highly-developed banking sector, with the presence of over 600 financial institutions. • Qingdao’s main industries include mineral water, wine, and Tsingtao Beer. • Xiamen’s main industries include financial services, fishing, shipbuilding, food processing, tanning, textiles, machine tool manufacturing, and telecommunications.

Source: ChinaToday. 37 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy China’s Five National Central Cities, Emerging Cities, and Growing Middle Class

China’s Five National Central Cities and Emerging Cities China’s Growing Middle Class

In 2005, the Ministry of Housing and Urban-Rural Development designated Beijing, In their study of emerging market cities in November 2010, “Winning in Chongqing, Guangzhou, Shanghai, and Tianjin as China’s Five National Central Cities. These Emerging Market Cities,” BCG reported that in 2005, a company had to cities are charged with leading and developing China economically, politically, and culturally. have operations in 60 Chinese cities to reach 80% of China’s middle China’s Five National Central Cities class, but by 2020, a company will have to have operations in 212 cities to reach 80% of China’s middle class. According to BCG, income levels 2009 GDP 2009 Population Area City (US$ Bn) (Million) (km2)Region of the residents living in these emerging cities will likely rise, leading to a growing middle class through 2015 and beyond. Beijing 173.7 16.3 16,808 North Middle-Class and Above-Middle-Class Populations (Millions) Chongqing 95.6 28.2 82,300 Southwest 400 366 Guangzhou 133.4 7.8 7,434 South Central 350 Shanghai 218.2 18.6 6,340 East 314 Tianjin 109.8 11.2 11,303 North 300 250 The Most Competitive Cities in the World The Global Urban Competitiveness Project, 2009 - 2010 2007 - 2008 186 a partnership between professors and 200 172 Ranking Ranking scholars in the US, Canada, China, Britain, City Hong Kong 10 11 150 123 the Netherlands, Mexico, Italy, and Japan, 103 among other countries, published the Shanghai 37 46 91 100 69 “Global Competitiveness Report 2009 – Beijing 59 68 48 48 2010” in July 2010, ranking the world’s top Shenzhen 71 69 50 500 cities in terms of competitiveness. Macao 93 98 Their metrics included: the size and growth 0 Guangzhou 120 119 of a city’s economy; output per person and IndiaChina RussiaIndonesiaBrazil per square kilometer; international patent Tianjin 165 185 applications; and the presence of Dongguan 195 214 multinational corporations. The top three Dalian 218 234 Middle-Class Population Increase From 2010 to 2015 (Millions) cities were New York, London, and Tokyo, Foshan 219 223 180 142 32 55 21 respectively. Of the 500 cities ranked, 65 Suzhou 221 243 were Chinese. As shown in the table, Chengdu 222 236 Chinese cities have been increasing in 2010 2015 global competitiveness. Hangzhou 223 222 Source: Economist Intelligence Unit; Brazilian Institute of Geography and Statistics (IBGE); Instituto Nacional de Esadistica y GeografÍa (INEGI); BCG China 2010 population and income forecast Source: Global Urban Competitiveness Report (2009 – 2010), www.gucp.org/cn. database; National Council of Applied Economic Research (NCAER); “The Great Indian Middle Class,” 2004 BCG Analysis.

38 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy Hukou System

The Hukou System of Registered Residency • The formal name of the hukou system is “huji.” Within the huji system, a “hukou” is the registered residency status of a specific individual in the system. • A hukou or huji refers to the system of residency permits that dates back to ancient China, where household registration was required by law in the People’s Republic of China and in the Republic of China (Taiwan). Similar household registration systems exist within the public administration structures of Japan (koseki), Vietnam (hô khâu), and North Korea (hoju). In South Korea, the hoju system was abolished on January 1, 2008. The “Household Register” Hukou Booklet • Family registers were in existence in China as early as the Xia dynasty, the first dynasty of China. In the centuries that followed, the family register developed into an organization of families and clans for purposes of taxation, conscription, and social control. • In 1958, the Chinese government officially promulgated the family register system to control the movement of people between urban and rural areas. With its large rural population of poor farm workers, hukou limited mass migration from rural towns to the urban cities to ensure some structural stability. Workers seeking to move from the country to urban areas to take up non-agricultural work would have to apply through the relevant bureaucracies. The number of workers allowed to make such moves was tightly controlled. Migrant workers were required to get six passes to work in provinces other than their own. • Although an individual is technically required to live in the area designated on his/her permit, in practice as of early 2011, the system has largely broken down. After the Chinese economic reforms that started in 1978, workers were allowed to unofficially migrate without a valid permit to get a job. • According to Chinese government statistics, the number of migrant workers in China as of late 2010 was estimated to be 120 million, approximately 9% of the population. As of late 2010, an estimated 230 million Chinese, approximately one-third of the population of the US, had left the countryside and migrated to the cities in recent years. That number was expected to reach 250 million by 2012 and surpass 300 million (and perhaps reach 400 million) by 2025. Most Chinese migrant workers come from Sichuan, Hunan, Henan, Anhui, and Jiangxi provinces. • From the 1980s onward, an estimated 200 million Chinese lived outside their officially registered areas, with considerably less access to education and government services, and occupied in several respects a social and economic status similar to illegal immigrants. The millions of peasants who have left the countryside remained stuck at the margins of urban society, and they have been blamed for rising crime and unemployment. • The hukou system has undergone further relaxation since the mid 1990s. The first relaxation allowed rural residents to buy temporary urban residency permits, meaning they could work legally; fees for these decreased gradually to a fairly affordable level. From 1998, hukou became inheritable through either the father’s or the mother’s line. From 2001 onwards, hukou controls were weakened. In 2003, the law on custody and repatriation were repealed.

Source: “China Reviews ‘Apartheid’ for 900 Million Peasants,” by Calum Macleod, The Independent, June 10, 2001; “China Rethinks Peasant ‘Apartheid,’” by Tim Luard, BBC News, November 10, 2005; “Women Migrant Workers under the Chinese Social Apartheid,” by Au Loong-yu, Nan Shan, and Zhang Ping, Committee for Asian Women, May 2007. 39 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy Contemporary

Beijing National Stadium, “Bird’s Nest” Terminal 3, Beijing Capital International Airport Tower (CCTV) • Built: 2003 • Built: 2004 • Built: 2004 • Architect(s): Herzog & De Meuron, Ai Weiwei • Architect(s): Foster and Partners, NACO, ARUP • Architect(s): Office for Metropolitan Architecture • Location: Beijing • Location: Beijing • Location: Beijing

The main stadium of the 2008 Beijing Olympics, the The fourth largest building in the world by area, A twisted covering over 385,000 square meters, Beijing National Stadium, also known as the “Bird’s Terminal 3 at the Beijing Capital International Airport the China Central Television Tower is known for its Nest,” covers a floor area of over 258,000 square covers over 1.5 million square meters, has state-of-the- anti-skyscraper design that has changed the meters and can accommodate 91,000 spectators. art facilities, and is one of China’s busiest terminals. architectural image of Beijing.

Nanjing Museum of Art and Architecture Guangzhou Opera House Chinese Pavilion, 2010 Shanghai World Expo • Built: 2003 (Still in Progress) • Built: 2003 • Built: 2007 • Architect(s): Steven Hull • Architect(s): Zaha Hadid Architects • Architect(s): He Jingtang • Location: Nanjing • Location: Guangzhou • Location: Shanghai

Located in Pearl Spring near Nanjing, The Nanjing With 1,800 seats and covering over 70,000 square Named the “Oriental Crown,” China’s pavilion at the Museum of Art and Architecture, designed by US meters, the Guangzhou Opera House is China’s third 2010 Shanghai World Expo was based on the concept of architect Steven Hull, aims to capture the shifting largest theatre. The opera house resembles a “twin “Oriental Crown, , Ample Barn, and Rich viewpoints, layers of space, and expanses of mist and boulder,” with two stones on a subdued massif. Plans People.” The Chinese national Pavilion resembles a huge water found in . called for an opening in 2011. sculpture-like crown made from layered traditional Dougong brackets symbolizing the Chinese spirit.

Source: “The Great Call of China,” Financial Times, January 7, 2011; http://en.beijing2008.cn; http://www.designbuild-network.com; http://www.stevenholl.com; http://www.architectsjournal.co.uk; http://en.expo2010.cn. 40 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy The Grand Canal The Longest Canal in the World

History of the Grand Canal • The Grand Canal in China is the longest canal or artificial river in the world. Beginning in Beijing, it passes through Tianjin and the provinces of Hebei, Shandong, Jiangsu, and Zhejiang to the city of Hangzhou. The Grand Canal was built during the Sui dynasty (581 – 618 AD), with various earlier sections dating back to the 5th century BC. • The Grand Canal’s total length is 1,776 km (1,103 miles). The canal’s highest elevation is 42 m (138 ft), located in the mountains of Shandong province. The Grand Canal During the Sui Dynasty • According to historians, the development of the Grand Canal during the Sui dynasty was attributed to the migration of China’s core economic and agricultural region, which moved from the valley to the present-day Jiangsu and Zhejiang provinces. As such, the Grand Canal’s main role throughout the Sui dynasty was the transport of grain from the agricultural region in southern China to China’s High-Speed Rail Network the capital-city region in northern China. • With the recorded labor of five million men and women under the supervision of Ma Shumou, the first major section of the Grand Canal was completed in the year 605 AD. The Grand Canal was fully completed under the second Sui emperor, from the years 604 to 609 AD. • Post offices supporting a courier system and an imperial roadway ran alongside the Grand Canal. The Grand Canal from the Tang to the Yuan Dynasties • Located near the Grand Canal, Yangzhou remained an economic zone through the Tang dynasty (618 – 907 AD), despite Chang’an serving as the dynasty’s capital city. Uses of the Grand Canal • From the Tang to the Qing dynasties, the Grand Canal transported mainly grain, among other commodities. As it served as the main artery between northern and southern China, the Grand Canal facilitated the development of an economic belt from northern to southern China. • From the founding of the People’s Republic of China (1949) to early 2011, the Grand Canal transported primarily bulk goods including bricks, gravel, sand, diesel, and coal. • The Grand Canal has also facilitated cultural exchange and political integration between northern and southern China.

Source: Encarta Encyclopedia; The Cambridge Illustrated History of China, by Patricia Buckley Ebrey (Cambridge University Press, 1999); China: A New History; Second Enlarged Edition, by John King Fairbank and Merle Goldman (Harvard University Press, 2006); China’s Golden Age: Everyday Life in the Tang Dynasty, by Charles Benn (Oxford University Press, 2011); and in China: Volume 4, Physicals and Physical Technology, Part 3, Civil Engineering and Nautics, by (Caves Books, 1986). 41 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy China’s High-Speed Rail Passenger System The World’s Fastest High-Speed Rail Train and Longest High-Speed Rail Network

China’s HSR Highlights

Railway Network 7,431 km (4,617 mi)

Operating Speed 350 km/h (217 mph)

Test Speed 486 km/h (302 mph)

Network by 2012 13,000 km (8,078 mi)

Network by 2020 16,000 km (9,942 mi) • Defined as a train traveling with an average speed of at least 200 km/h (124 mph), high-speed rail systems are used as means of faster travel, mainly throughout Europe – most notably in Spain, France, Germany, and Italy – and in Asia, most notably in China, Japan, and Taiwan. China’s High-Speed Rail Network • China’s high-speed rail network is considered the world’s most ambitious public-works project, a 21st century equivalent of the United States’ Interstate Highway System. • In 2008, China had only 649 km (403 mi) of high-speed railways; as of April 2011, China had 8,400 km (5,220 mi), four times as much as the next-largest work (Japan). China planned to expand the network to cover 13,000 km (8,078 mi) by 2012 and 16,000 km (9,942 mi) by 2020. • As of May 2011, China operated the world’s fastest high-speed rail train, reaching 350 km/h (217 mph) on parts of the country’s rail network. • In December 2010, China’s high-speed rail passenger train established a new world record, traveling at 486 km/h (302 mph) during a test run of a yet-to-be opened link between Beijing and Shanghai. • China’s network links Shanghai, China’s economic hub, to Hangzhou, the capital of east China’s Zhejiang Province, among other connections between cities. As of early 2011, the nine-stop trip from Shanghai to Hangzhou took 45 minutes and cost 98 yuan (US$14.73) for coach, and 156 yuan (US$23.45) for first class. • The Beijing-Shanghai line, a 1,318-km rail line that cost 220.9 billion yuan (US$33.2 billion) was scheduled to open in 2012. • Although the network provides affordable travel for some Chinese, tens of millions of poor migrants who work far afield and flock home for the Chinese new year cannot afford to travel via the rail system and instead use the bus system. • On May 15, 2011, Morgan Stanley Research published a 63-page report, “China High-Speed Rail: On the Economic Fast Track,” which provides an overview of the largest transportation infrastructure project in history and the implications for 12 industries within China: tourism; restaurants; hotels; budget hotels; consumer staples; consumer discretionary; property; Source: “Off the Rails?” The Economist, April 2, 2011. railway rolling stock; railway infrastructure; toll roads; aviation; and car rental.

Source: Morgan Stanley & Co. Inc. Research, “China High-Speed Rail: On the Economic Fast Track,” May 15, 2011; “Off the Rails?” The Economist, April 2, 2011; Time Magazine, www.time.com; “High Speed Around the World Maps,” International Union of Railways, December 2010, www.uic.org; “China Unveils Shanghai-Hangzhou High-Speed Railway; Eyes Network Extension,” Xinhua News Agency, October 26, 2010; “China Unveils World’s Fastest High Speed Train,” Huffington Post, December 3, 2010. 42 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy China’s Airports

Country Comparison: Airports Airports in China

Rank Country # of Airports • As of early 2011, China had approximately 500 airports, over 440 of which were paved. 1 United States 15,079 • In 2010, China ranked 15th in the world in the number of airports. 2 Brazil 4,072 3 Mexico 1,819 Beijing Capital International Airport, the 2nd Busiest Airport in the World 4 Canada 1,404 5 Russia 1,213 6 Argentina 1,141 7 Colombia 990 8 Bolivia 881 9 Paraguay 800 10 Indonesia 684 11 South Africa 578 12 Papua New Guinea 562 13 Germany 549 14 United Kingdom 505 15 China 502 • Ranked the 2nd busiest airport in the world as of May 2011, the Beijing Capital Airport served 11 domestic and Source: CIA World Factbook (June 2011). Data are as of 2010. 55 foreign airline companies. • As of early 2011, the airport’s current capacity was 78 million passengers per year. In 2009, it accommodated 65.3 million passengers, six years ahead of schedule. By 2012, the airport was projected to accommodate 90 million passengers. • Beijing Capital International Airport has operated since 1958 and as of May 2011 offered over 5,000 scheduled flights to 88 cities in China and 69 cities abroad. • The airport has three terminals: Terminal 1, opened in 1958; Terminal 2, in 1999; and Terminal 3, in 2008. • Terminal 1 was originally designed to serve 60 flights daily and 1,500 passengers at peak hours. It was expanded during the 1995 – 1998 time period. • Terminal 2 can accommodate 26,500,000 passengers annually and 9,210 passengers at peak hours. • Terminal 3 opened in 2008 to accommodate increased demand. It is the 4th largest building by floor space in the world; it is 17% larger than London’s Heathrow Airport’s five terminals combined. • The Beijing Capital Airport remains one of the world’s most technologically advanced airports, equipped with state-of-the-art systems, security, and baggage-handling facilities.

Source: CIA World Factbook (June 2011); www.chinahighlights.com, Airports Council International: “Final Airport Traffic Results for 2009,” March 2010; “Year to Date Passenger Traffic August 2010”, November 2010; www.travelchinaguide.com. 43 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy China’s Beijing Olympics and Shanghai Expo

2008 Beijing Olympics 2010 Shanghai Expo

History of the Summer

Year City Year City 1896 1960 Rome 1900 Paris 1964 Tokyo 1904 St. Louis 1968 Mexico City 1908 London 1972 Munich 1912 Stockholm 1976 Montreal 1916 - Canceled (World War I) 1980 Moscow China’s Pavilion, “Oriental Crown” Shanghai Expo 1920 Antwerp 1984 Los Angeles Opening Ceremony Theme: Chinese Wisdom in Urban Development Sports Arena and Performing Arts Center 1924 Paris 1988 Seoul 1928 Amsterdam 1992 Barcelona 1932 Los Angeles 1996 Atlanta 1936 Berlin 2000 Sydney 1940 - Canceled (World War II) 2004 Athens 1944 - Canceled (World War II) 2008 Beijing 1948 London 2012 London 1952 Helsinki 2016 Rio De Janeiro 1956 Melbourne Closing Ceremony Britain’s Pavilion, “Seed Cathedral” Saudi Arabia’s Pavilion, “Moon Boat” 2008 Beijing Olympics – Medal Standings Theme: Building on the Past, Shaping Our Future Theme: Vitality of Life

Number of Medals Gold Silver Bronze Total From May to October 2010, China hosted the Shanghai World Expo. Themed “Better City, USA 36 38 36 110 China 51 21 28 100 Better Life,” the Expo represented the common wish of humankind for better living in Russia 23 21 28 72 future urban environments. The expo featured themed pavilions of the Chinese provinces, Great Britain 19 13 15 47 countries, corporations, and organizations. Each pavilion celebrated architectural and Germany 16 10 15 41 scientific achievements and cultural progress while expressing the role of innovation and unity in improving living standards worldwide. In August 2008, China hosted the 29th Olympiad in Beijing. Themed “One World, One The Expo documented a world-record attendance of over 73 million visitors, surpassing the Dream,” the 2008 Beijing Olympics dazzled the world with its grand ceremonies and former world-record holder, Japan, whose Osaka Expo in 1970 recorded 64 million visitors. architecturally distinctive sports venues, and delineated China’s ascension as a global Approximately 5.2% of the Expo’s visitors were foreigners. economic and political power. In the words of Jacques Rogge, President of the International Olympic Committee, “the world has learned about China, and China has In addition to China’s widely acclaimed pavilion, other elaborate pavilions included those learned about the world, and I believe this is something that will have positive effects for of Britain, France, Germany, the United States, and Saudi Arabia, for several of which, the long term.” visitors sometimes waited in line for as long as three to eight hours.

Source: “Olympics Close With a Bang and a Double-Decker Bus,” The New York Times, August 24, 2008; Source: “Shanghai Expo Sets Record With 73 Million Visitors,” The New York Times, November 2, 2010, en.beijing2008.cn. www.archdaily.com; en.expo2010.cn; www.inhabitat.com.

44 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy in China

Brief History of Badminton Badminton in China Chinese Olympians in the 2008 Beijing Olympics The earliest form of Badminton originated in China • Given its rich historical experience with Badminton, in the 5th century BC and was called “Ti Zi.” China is considered one of, if not the best in the world, at The later forms of Badminton were: (i) “Battledore the sport. and Shuttlecock,” played in China, Japan, India, and • Badminton is one of the most popular sports in China, Greece during the 1st century AD; (ii) “Jeu de along with martial arts, basketball, football, and table Volant,” played throughout Europe; and (iii) “Poona,” played in India during the mid-19th century. tennis. Modern Badminton most resembles India’s “Poona,” Basic Rules of Badminton and was adopted and modified by Britain during the th mid-19 century. • A match consists of the best of three games of 21 points. , Gold Medalist In , Bronze Medalist Modern Badminton is known for its intense and fast- • A point is scored on every serve. Men’s Singles In Men’s Singles paced rallies, and fast-moving shuttlecock, which • Players rest for 60 seconds when the leading scorer has travels approximately 260 km/h (162 mph). 11 points. Badminton Compared to Tennis • In the third game, Players change sides when the leading Badminton is often compared to tennis. The statistics scorer has 11 points. shown here compare the championship games of the 1985 All England and 1985 World Badminton tournaments. Badminton in the Summer Category Badminton Tennis Olympic Medals Table Since Inception Match Time 1+ Hrs. 3+ Hrs. Country ‘92 ‘96 ‘00 ‘04 ‘08 Total Defending Women’s He Hanbin and , Bronze Singles Champion Medalists In Mixed Doubles Shuttle/Ball In Play 37 min. 18 min. China 5 4 8 5 8 30 Rallies 146 299 Shots 1,972 1,004 Indonesia 5 4 3 3 3 18 Shots Per Rally 13.5 3.4 South Korea 4 4 2 4 3 17 Distance Covered 4 mi. 2 mi. Denmark 1 1 1 1 4 Equipment of Badminton Malaysia 1 2 1 4

Great Britain 1 1 2 Hendra Setiwan and Markis Kido, and Yu Yang, Netherlands 1 1 Gold Medalists In Men’s Doubles Gold Medalists In Women’s Doubles Court Net and Post Racquet Shuttlecock

Source: The Beijing Organizing Committee, http://en.beijing.2008.cn; Badminton World Federation, www.bwfbadminton.org. 45 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy History of Modern Chinese Paper Currency

Qing Dynasty (c. 1740 AD) Vase First Series of Renminbi, Issued in 1948 Sold for Over US$86 Million The first series of the renminbi was introduced on December 1, 1948, the day the People’s Bank of China was established in Shijiazhuang, Hebei Province. The renminbi was titled “the People’s Currency.”

Second Series of Renminbi, Issued in 1955 The second series of the renminbi was introduced on March 1, 1955, bringing an end to the first series of the renminbi. With the introduction of the second series, the Chinese moved the decimal point of its currency four places to the left; as a result, a first series ¥10,000 note became equivalent to a second series ¥1 note. Found in an attic in West London, the important 18th century vase pictured here Third Series of Renminbi, Issued in 1962 was sold for US$70 million in November 2010, the final price being US$86 million The third series of the renminbi was introduced in 1962. Unlike the second series after adding the 20% buyer’s premium renminbi, the third series did not replace its predecessor, as the second series renminbi levied by the auction house and Britain’s continued to be used. The third series used vivid colors, was smaller in size than the value-added tax. Standing 16 inches tall, the second series, and had distinct national themes, an unconventional border design, and ovoid-shaped vase from the period ruled by embroidered Zhuang text. Emperor Qianlong is believed to originate from Jiangxi Province, China’s porcelain capital for 1,000 years. Fourth Series of Renminbi, Issued in 1987 The fourth series of the renminbi was introduced on April 27, 1987. The fourth series of Source: Financial Times, “House Clearance Vase Fetches £43m,” the renminbi circulated alongside the third series and its exchange rate with the third series November 12, 2010, www.ft.com; New York Times, “Qing Dynasty Relic Yields Record Price at Auction,” November was 1:1. It included security features such as watermarks, magnetic ink, and fluorescent 12, 2010, www.nytimes.com. ink.

Fifth Series of Renminbi, Issued in 1999 The fifth series of the renminbi was introduced on October 1, 1999. Initiated by Prime Minister Zhu Rongi, the introduction of the fifth series of the renminbi aimed to facilitate economic growth, provide better security, and commemorate the 50th anniversary of the People’s Republic of China. As of early 2011, the fifth series of the renminbi was the current currency in circulation throughout China.

Source: Show China, www.showchina.org. 46 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy The Long March October 1934 – October 1935

Community Party of China of China Leaders: Mao Zedong and Zhou Enlai Leader: Chiang Kai-shek

Map of the Long March History of the Long March • The Long March was a massive military retreat undertaken by the Red Army of the Communist Party of China, the predecessor of the People’s Liberation Army, to evade the pursuit of the Kuomintang (KMT or Chinese National Party) army. The march resulted in the relocation of the communist revolutionary base from southeastern to northwestern China and in the emergence of Mao Zedong as the undisputed leader of the Communist Party of China. • The march was not one long march, but a series of marches, as various communist in the south escaped to the north and west. The Long March commenced after a series of five attacks by the Chiang Kei-shek-led Kuomintang army, which attempted to obliterate the communist party base. On the fifth attack, Chiang Kai-shek mustered approximately 700,000 troops and established a series of cement blockhouses surrounding the communist party. The Chinese Communist Central Committee broke through a weak section of the Kuomintang Army’s barricade and fled westward, marking the beginning of the Long March in October 1934. • Fighting Kuomintang forces throughout their year-long journey, the Red Army soldiers and participants traversed approximately 8,000 miles, 18 mountain ranges, and 24 rivers to reach the northwestern province of Shaanxi. Of the 86,000 Red Army soldiers and participants who started the march in October 1934, 8,000 completed the journey in October 1935. Many troops and participants were lost along the way due to fighting, disease, and starvation. • The Long March established Mao Zedong as the decisive leader of the ; it also enabled the embattled communists to recuperate and rebuild in ; and it also helped the Communist Party of China to develop a positive reputation among the Chinese citizenry and to attract young Chinese citizens during the late 1930s and early 1940s. From their base at ’an in Shanxi province, the party grew in strength and eventually defeated the Nationalists in the struggle to control mainland China. • In 2006, the Chinese government produced a movie, My Long March, relating the personal experiences of a fictional participant in the Long March.

Source: Texas Education Agency; Encyclopedia Britannica, www.britannica.com; “From Revolution to Politics: Chinese Communists on the Long March,” by Benjamin Yang (Westview Press, 1990).

47 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy China’s Political System

People’s Republic of China

China’s Two Vertically integrated Political Institutions are Interconnected The Communist Party of China (CPC) The State Council (Chinese Government) • Formally established on July 20, 1921 in Shanghai, the Communist Party of China (CPC) • The State Council, along with its ministries, bureaus, commissions, and agencies, serves began as a Marxist-Leninist party organized into small groups that operated on the principle as the administrator and regulator of China’s day-to-day government functions. of “democratic centralism.” • The Premier of the CPC runs the State Council. The Premier is also a member of • The contemporary CPC is organized into a hierarchal network of organizations that the Politburo Standing Committee, emphasizing the interconnection between the CPC reaches into many aspects of Chinese society. The CPC has affiliations with universities and the Chinese government. As of early 2011, the Premier was Wen Jiabao. and schools, think tanks, state-owned enterprises, private corporations, and foreign-owned • China’s government is essentially divided into two parts: a system of ministerial companies, among other institutions. organizations, including the Ministry of Foreign Affairs, and the Ministry of Commerce, • The CPC’s most powerful policy-and decision-making entity is the Political Bureau among others; and a system of geographic organizations, including provincial, (Politburo). The Politburo Standing Committee consists of a smaller group of elite party municipal, county, and township and village governments. members that wields much of the political power in China. • As of early 2011, China had: 34 provincial-level governments(1); over 300 • The President and Vice President preside over China’s government. As of early 2011, the prefecture-level governments; over 3,000 county-level governments; and over President and Vice Present were Hu Jintao and Xi Jinping, respectively. 40,000 township-level governments. • The General Secretary has historically been the highest position in the CPC; generally, • Although China’s constitution does not outline the division of power among the various the General Secretary of the CPC is also the President of China. tiers of government, each tier of government reports to the tier of government above it.

Other Institutions (Interconnected with the CPC and the State Council) The People’s Liberation Army (PLA) The National People’s Congress (NPC) The Supreme People’s Court • Established on August 1, 1927, the People’s Liberation • The National People’s Congress (NPC) is China’s • The Supreme People’s Court is responsible for civil, Army (PLA) is China’s unified military organization, unicameral legislative body. The NPC meets annually for criminal, and administrative cases, as well as appeals. responsible for all air, land, and naval forces. about two weeks to officially set government policy and • It reports to the NPC and the NPC Standing Committee. select China’s leadership. • As of early 2011, the PLA was the largest military force in • The Chief Justice (also named the President) of the the world, with over two million citizens on active duty. • As of early 2011, the NPC had approximately 3,000 Supreme People’s Court is appointed by the NPC and can • The two Central Military Commissions (CMC), a state members, 70% of whom were in the CPC and 30% of remain in office for no more than two successive terms, entity and a party entity, are responsible for military policy whom were in in other parties including the each of which is five years. Democratic Party. As of early 2011, the NPC had a and decisions. • Other deputy presidents and judges are appointed by the standing committee of about 150 members. • The party CMC is chaired by the CPC General Secretary, NPC Standing Committee. • The CPC approves all selected, not popularly elected, NPC symbolizing the prerogative of military leadership. • Another judicial body, the Supreme People’s Procuratorate, candidates and overseas the election process. supervises the application and enforcement of the law. Note: 1. China’s 34 provincial-level governments include: 23 provinces; five autonomous regions; four municipalities; and two special administrative regions. Source: Morgan Stanley Smith Barney Investment Strategy; Congressional Research Archive, “Understanding China’s Political System,” by Michael F. Martin, April 14, 2010; US- China Business Council; the China Business Review; People’s Daily Online. 48 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy Past and Present Leaders of the Communist Party of China

Chairmen / General Secretaries of the Communist Party of China

Mao Zedong Hua Guofeng Hu Yaobang Zhao Ziyang Jiang Zemin Hu Jintao (1943 – 1976) (1976 – 1981) (1981 – 1987) (1987 – 1989) (1989 – 2002) (2002 – )

Premiers of the Communist Party of China

Zhou Enlai Hua Guofeng Zhao Ziyang Li Peng Zhu Rongji Wen Jiabao (1949 – 1976) (1976 – 1980) (1980 – 1987) (1987 – 1998) (1998 – 2003) (2003 – )

Source: China Online Encyclopedia. 49 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy Deng Xiaoping “The Maoist Who Reinvented Himself, Transformed A Nation, and Changed the World” Time Magazine

Deng Xiaoping

• Mr. Deng was the Paramount Leader of the People’s Republic of China from 1978 to 1992, and he is credited with steering China away from its Lenin-like, Maoist organizational philosophy into a wider world of technological growth and international trade. • Mr. Deng’s rise as a political figure in China was a long and trying one: he was purged twice by the Communist Party of China (CPC) during the Cultural Revolution for promoting economic policies that differed from those of Chairman Mao Zedong; and he later regained prominence when he was appointed the Paramount Leader of the CPC in 1978 by outmaneuvering Mao’s chosen successor, Hua Guofeng. • Despite serving as the Paramount Leader, Mr. Deng never held office as the head of state, head of government, or General Secretary of the Communist Party of China (historically the highest position in Communist China). • Mr. Deng believed: that China needed to separate from its Maoist mold of state control; that China needed to encourage its long-dormant entrepreneurial spirit; and that China needed to open up to capitalism, whatever the political fallout.

The Four Modernizations – Mr. Deng often said, “it does not matter if a cat is black or white, so long as it catches mice.” Pursued Under Mr. Deng’s Leadership • Under his leadership, China focused on the “Four Modernizations” set forth by Zhou Enlai in 1963; 1. Agriculture they included: agriculture; industry; national defense; and science and technology. 2. Industry • In addition to his policy changes in economics, Mr. Deng loosened the controls placed by Mao 3. National Defense Zedong on filmmaking, fashion, music, and the visual arts. 4. Science and Technology

Source: “60 Years of Asian Heroes,” Time Magazine, November 13, 2006.

Source: “60 Years of Asian Heroes,” Time Magazine, November 13, 2006. 50 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy Leaders of the Communist Party of China

President Hu Jintao’s President Hu Jintao “Eight Honors and Eight Shames” • Born in December 1942, President Hu Jintao, an ethnic Han native of Jixi, Anhui Province, joined the CPC in 1. Love the country; do it no harm. April 1964 and as of early 2011 was the Paramount Leader of the People’s Republic of China. 2. Serve the people; never betray them. • Mr. Hu’s political philosophy can be summarized by two phrases: “;” and “Peaceful 3. Follow science; discard ignorance. Development.” To achieve the former, Mr. Hu established the “Scientific Development Concept,” China’s official socio-economic ideology that aims to solve its economic, environmental, and social problems. 4. Be diligent, not indolent. • Mr. Hu also developed China’s Core Value System called, “Eight Honors and Eight Shames.” This moral code 5. Be united, help each other; make no gains is used as a guideline for the Chinese, and slightly differs from the ones established by Mao Zedong and Deng at others’ expense. Xiaoping, in that for the first time it focuses on codifying moral standards as opposed to setting social or 6. Be honest and trustworthy; do not sacrifice economic goals. ethics for profit. • One of Mr. Hu’s power-bases has been the Communist Youth League of China. 7. Be disciplined and law abiding, not chaotic and lawless. • Mr. Hu studied engineering at the Water Conservancy Engineering Department of . He is married to Liu Yongqing and they have two children together. 8. Live plainly, work hard; do not wallow in luxuries and pleasures. Prime Minister Wen Jiabao Source: Xinhua News Agency, www.chinaview.cn.

• Born in September 1942, Prime Minister Wen Jiabao, an ethnic Han native of Tianjin, joined the CPC in September 1967 and as of early 2011 was the sixth and current Premier of the State Council of the People’s Republic of China. An Ancient Chinese Proverb • Mr. Wen has been regarded as China’s leading figure behind its economic policy, as a member of the Politburo Standing Committee of the CPC. Chinese 龍游淺水被蝦戲 • Soft-spoken and known for his strong work ethic, Mr. Wen has advocated for a more balanced approach in characters: developing China’s hinterland regions, and he played a key role in China’s response to the 2007-2009 global financial crisis and its subsequent stimulus programs. English In shallow waters, • Mr. Wen accompanied former General Secretary Zhao Ziyang to Tiananmen Square during the 1989 Tiananmen Square Protests, and unlike Mr. Zhao who was punished by house arrest for the rest of his life, Mr. translation: shrimps make Wen was later promoted to Vice Premier under his mentor, Zhu Rongji. fools of . • Mr. Wen has been very popular of the senior CPC leaders among the public. He has consistently spent time Source: www.special-dictionary.com. over the New Year holidays in poor, rural areas, referring to himself as “Grandpa Wen.” • Mr. Wen studied geological surveying and prospecting at the Beijing Institute of Geology. He is married to Zhang Peili, a jewelry expert and investor, and they have a son together.

Source: Photos of Hu Jintao and Wen Jiabao, http://english.peopledaily.com; “Who will be China’s Next Leaders?” by Geoff Dyer, Financial Times, March 5-6, 2011; China Internet Information Center; www.china.org.cn; Hu’s Political Philosophies, by Robert Lawrence Kuhn, March 13, 2010. 51 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy China’s Likely Transition of Party Leaders

The Dance

President Hu Jintao’s Likely Transition Timeframe

2011 2012 2013 2014 2015

[Photo] • Likely to step • Presidential term • Likely to relinquish position as down as scheduled to end Supreme Military Commander Communist Party in March sometime in the 2014-2015 years Originating in the Han dynasty, the Chinese Chief late in the Dragon Dance shown here is performed to year celebrate the lunar new year. It is performed by a group of people operating different parts of the dragon costume. The Dragon Dance, however, was not always a celebration of the lunar new year; it originally was a prayer dance asking the Dragon deity for rain and good weather during farming season. The dance has evolved over Prime Minister Wen Jiabao’s Likely Transition Timeframe years and is now an expression of , pride, and wisdom. The dragon itself is symbolic to the Chinese, as 2011 2012 2013 2014 2015 they have often called themselves the “Descendants of the Dragon.” In ancient China, [Photo] • Likely to leave • Likely end of the dragon was considered a deity that brought the Communist Premiership good luck, power, dignity, fertility, wisdom, and Party’s Politburo term auspiciousness. During imperial China, it was Standing the emblem of imperial authority and appeared Committee on imperial robes, porcelain vases, paintings, and . Today, it is a symbol of traditional Chinese culture and serves as an integral element of the Chinese New Year celebration.

Source: Photo, www.imf.org, www.chinaculture.org, www.123chinesenewyear.com.

Source: Photos of Hu Jintao and Wen Jiabao, http://english.peopledaily.com.

52 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy Next Likely Leaders of the Communist Party of China

Vice President Xi Jinping: Likely Successor to President Hun Jintao The Window of the World (WOW) • Born in June 1953, Vice President Xi Jinping, son of a former revolutionary leader imprisoned by Mao Zedong, Founded in 2004 in Shenzhen, The Window of joined the CPC in 1974. the World is a 48,000-square-meter replica park • In October 2010, Vice President Xi Jinping was appointed Vice Chairman of the Central Military Commission that includes 130 reproductions of the world’s (CMC) of the CPC, solidifying Mr. Xi as the likely successor of the current party chief President Hu Jintao. most attractive tourist destinations, including the • Vice President Xi Jinping has been viewed as a moderate who appears to be particularly engaged on key Roman Colosseum, the Leaning Tower of Pisa, economic and strategic issues involving China and the world. the Tower of London, Niagara Falls, the Grand Canyon, the , and the Sphinx. Each • At age 15, he was sent to work among peasants in the yellow hills of Shaanxi province. He stayed seven years in the village of Liangjiahe, which eventually named him party secretary. replica is built at a ratio of 1:1, 1:5, or 1:15. • As party secretary in Guangdong province during the 1980s, he was instrumental in development of the special economic zone in Shenzhen, the city near Hong Kong that became the symbol of China’s economic take-off. • A self-confessed fan of American movies, particularly World War II movies, Mr. Xi was named one of the most influential people in the world in the 2009 Time 100 list. • Mr. Xi Jinping studied Chemical Engineering at Beijing’s prestigious Tsinghua University. • Mr. Xi is a so-called princeling, a descendant of a member of the revolutionary party elite, and his second marriage is to a celebrity folk singer and army major general, Pen Liyuan.

Niagara Falls at WOW • Mr. Xi was first married to Ke Xiaoming, the daughter of China’s ambassador to the United Kingdom in the late 1970s. They have a daughter enrolled at Harvard University as of early 2011.

Executive Vice–Premier Li Kequiang: Likely Successor to Premier Wen Jiabao

• Born in July 1955, Executive Vice-Premier Li Kequiang, an ethnic Han native of Dingyuan, Anhui Province, joined the CPC in March 1974. • As Premier Wen Jiabao’s top lieutenant, Mr. Li’s official portfolio has included responsibility for development, price controls, finance, climate change, and macroeconomic management. Taj Mahal at WOW • Mr. Xi made his first major appearance internationally at the 2010 World Economic Forum in Davos, Switzerland. At the Forum, Mr. Xi briefed the audience on China’s commitment to sustainable development, green energy, a decrease in the income gap, the modernization of key strategic industries, and peaceful development. • The son of a low-level official from the poor, rural province of Anhui, he was sent to work for four years as a farmer during the Cultural Revolution. During that time, China’s universities only admitted those with a suitable proletarian class background but in 1977, the competitive entrance exam was restored. A total of 11.6 million people applied. Li was one of 401,000 admitted, making him a member of the famous “Class of 1982.” • Mr. Li earned an LLB and PhD in Economics from Peking University (colloquially known as Beida University). The Sphinx at WOW • Mr. Li is married to Cheng Hong, a professor at the Capital University of Economics and Business in Beijing, and his father-in-law is a former vice-secretary of the Communist Youth League Central Committee. Source: www.travelchinaguide.com. Source: Photos of Xi Jinping and Li Keqiang, english.peopledaily.com.cn; “Who will be China’s Next Leaders?” by Geoff Dyer, Financial Times, March 5-6, 2011; Wall Street Journal, “China Grooms a New Leader, Politically Deft, if Little Known,” January 24, 2011; “China Anoints Its Next Leader,” October 17, 2010; “Xi’s Career Gives Few Clues to His Beliefs,” October 19, 2010; “China’s Li Delivers A Polished Future,” Forbes, January 28, 2010. 53 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy Five-Year Plans of the PRC

Emblem of the CPC Flag of the CPC • The Five-Year Plans of the People’s Republic of China represent a series of economic development initiatives. The Chinese economy has been influenced by the CPC through the plenary session of the Central Committee and national congresses. The party plays a leading role in establishing the foundations and principles of Chinese communism, mapping strategies for economic development, setting growth targets, and launching reforms. • Planning is a key characteristic of centralized economies, and one plan established for the entire country normally includes detailed economic development guidelines for all its regions. In order to more accurately reflect China’s transition from a Soviet-style planned economy to a socialist market economy, the name of the 11th five-year program was changed to “guideline” from “plan.” Plan or Years Guideline Covered Theme Key Features First 1953-1957 Stalinist Central Plan Industrialization and agricultural producers’ cooperatives

Second 1958-1962 Great Leap Forward Capital construction and heavy Industry expansion

Third 1966-1970 Agricultural Push Agricultural development and basic needs

Fourth 1971-1975 Cultural Revolution Infrastructure construction and agriculture

Fifth 1976-1980 Post-Mao (Reforms and Opening Up) Infrastructure construction, and expansion of the steel, petroleum, and agriculture industries

National defense industry, energy conservation and environmental protection, foreign trade and investment, technological Sixth 1981-1985 Readjustment and Recovery innovation, and cultural life improvement

Economic reform, openness to the outside world, construction of a socialist ideological civilization, development of science and Seventh 1986-1990 Socialism with Chinese Characteristics education, and development of the energy, communications, telecommunications, and raw materials industries

Expansion of economic development zones, foreign reserves growth, imports and exports growth, and the construction and Eighth 1991-1995 Technical Development development of transportation infrastructure, including ports, airports, railways, and highways

Ninth 1996-2000 Reform of State-Owned Enterprises Socialist market economy, modernization, population control, and poverty

National economy, social IT, infrastructure, population control, forest area coverage, high school and higher education enrollment, Tenth 2001-2005 Strategic Restructuring and medical and health services

Development of the services industry, research and development, urbanization, energy conservation, water conservation, pollution Eleventh 2006-2010 Rebalancing Alert control, pensions, and a rural cooperative medical care system

Higher wages, a social safety net, domestic consumption, large-scale transactions-intensive industries including wholesale and Twelfth 2011-2015 Pro-Consumption retail trade, domestic transport and supply-chain logistics, healthcare, and leisure and hospitality

Source: www.china.org.cn; Morgan Stanley Smith Barney Investment Strategy; Morgan Stanley & Co. Incorporated Research, “China’s 12th Five-Year Plan,” March 21, 2011. 54 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy China’s 12th Five-Year Plan (2011 – 2015) Focus on Social and Economic Development

Chinese Proverbs • One step at a time. • A bad word whispered will echo a hundred miles. • A courageous foe is better than a cowardly friend. • Whenever the water rises, the boat will rise too. • A smile will gain you ten more years of life. • With time and patience, the mulberry leaf becomes a silk gown. Source: China Economic Net, http://en.ce.cn/ • Beat your drum inside the house to spare th the neighbors. • In October 2010, China held its Fifth Plenum of the 17 CPC Central Committee. The Committee discussed th Source: www.worldofquotes.com. China’s 12 Five-Year Plan, which was officially released in two annual meetings in March 2011. • The March 2011 draft focused on social and economic development, emphasizing the transformation of China China’s Household Income Distribution into a consumer-driven, capital-intensive economy. % th 100 1.4 • Under the March 2011 draft of the 12 Five-Year Plan, China intended to provide 4 trillion yuan (US$600 3.9 5.7 17.5 13.5 22.1 billion) to emerging industries, including energy and environmental protection, information technology, 75 57.9 biotechnology, advanced manufacturing, alternative energy, new materials, and new-energy automobiles. 28.8 28.5 – China projected that the added value of these industries would reach 8% of GDP by 2015 and 15% by 2020. 50

77.1 27.9 • China remained focused on closing the income disparity between rich and poor, between urban and rural 21.0 25 52.1 populations, and between coastal and interior regions and provinces. 21.5 16.9 th 0 4.2 • Other priorities in the 12 Five-Year Plan included: preparing for an aging population; improving medical '00 '05 '10E '20E services; stabilizing property prices; maintaining prosperity and stability in Hong Kong; modernizing rural areas; Low Income Middle Income improving labor rights; boosting domestic demand; reforming the financial system; and opening up further to the Upper Middle Income High Income outside world. Source: Euromonitor, Morgan Stanley & Co. Inc. EM/Asia Equity Strategy Team. Estimates are as of March 2011. Source: “China Underlines Emerging Industries in 12th Five-Year Plan,” International Business Times, October 18, 2010; China Economic Net, http://en.ce.cn/. 55 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy Military Resources in East and Central Asia

Military Resources in East and Central Asia

Combat-Capable Surface Vessels Active Personnel Fixed-Wing Aircraft Submarines Above Corvette Size Missiles Full range of conventional and nuclear missiles, including the new China 2,300,000 1,998 71 80 Dong Feng "carrier killer" that can potentially hit a moving carrier 2,000 miles away

Conventional and nuclear medium-range missiles, including anti-ship India 1,300,000 691 16 47 and assorted anti-air missiles

North Korea 1,200,000 620 70 3 Conventional medium-range missiles and possible nuclear warheads

US Pacific Command 325,000 1,900 39 80 Full range of conventional and nuclear missiles

South Korea 655,000 498 23 47 Air and sea defense missiles

Pakistan 617,000 433 8 9 Conventional and nuclear short-range missiles

Vietnam 482,000 219 2 7 Air and sea defense missiles

Taiwan 290,000 509 4 26 Air and sea defense missiles

Japan 248,000 469 18 49 Coastal air and sea defense missiles

Russia 130,000 445 23 17 Full range of conventional and nuclear missiles

Malaysia 109,000 82 2 8 Air and sea defense missiles

Philippines 125,000 34 0 1 Anti-air missiles

Brunei 7,000 0 0 0 Air and sea defense missiles

Source: “The Military Balance 2011,” by the International Institute for Strategic Studies, March 8, 2011; Stockholm International Peace Research Institute.

56 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy China and Rare Earth Elements

• As defined by International Union of Pure Applied Chemistry (IUPAC), rare earth elements or rare earth metals represent a collection of seventeen chemical elements in the periodic table. Because of their geochemical properties, rare earth elements are not often found in concentrated and economically exploitable forms. Until 1948, most of the world’s rare earths were sourced from placer sand deposits in India and Brazil. Through the 1950s, South Africa emerged as the world’s primary rare earth source. Through the 1960s until the 1980s, the Mountain Pass rare earth mine in California was the leading producer. As of May 2011, concerns arose over a potential shortage of rare earths. Over the 2010-2020 time period, worldwide demand for rare earth elements was expected to exceed supply by 40,000 tonnes annually unless major new sources were developed. • As of January 2011, China produced over 95% of the world’s rare earth supply, mostly in Inner Mongolia, with only 48% of the world’s proven reserves. Rare earth metals are essential components of smartphones, electric cars, many computer parts, clean energy applications, and a range of military hardware. Uncertainty over supply disruptions, rules changes, export quotas, export taxes, and in some cases, targeted embargoes has raised concerns for countries and companies facing supply shortages and rising prices, and led to research and development into substitutes and plans to expand rare earths production outside China. China has also exerted important influence over the global supply of other elements, including antimony, bismuth, germanium, indium, magnesium, silicon, tin, tungsten, and vanadium.

Reserves As of January 2011 19,000,000 13,000,000 (Tons) 17% 55,000,000 11% 48% of the 3,100,000 world’s total 3% 1,600,000 48,000 22,000,000 30,000 1% <0.05% 19% <0.05% 0 China Russia(1) US India Australia Brazil Malaysia Japan(2) Other

2010 Production 130,000 2,500(3) 0 2,700 0 550 350 0 NA (Tons) % of Total 96% 2% 2% <0.5% <0.5%

2008 Consumption 74,000 0 18,500 0 0 0 0 23,500 8,000 (Tons) 60% 15% 19% 6% % of Total

Notes: 1. Data are for the Commonwealth of Independent States, which include: Azerbaijan, Armenia, Belarus, Georgia, Kazakhstan, Moldova, Russia, Tajikistan, Turkmenistan, Uzbekistan, and Ukraine. 2. The Japan category shown here includes Southeast Asia. 3. This total reflects 2009 Data. Source: IUPAC; www.iupac.org; The New York Times, “After China’s Rare Earth Embargo,” October 29, 2010; “Many Want Rare Earths, But Few Are Mining Them,” February 6, 2011; United States Geological Survey, www.usgs.gov; US Department of Energy, Molycorp Minerals; Riedel Research. 57 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy The 17 Rare Earth Elements

The IUPAC Periodic Table The 17 Rare Earth Elements Atomic Number Symbol Name Selected Usages

21 Sc Scandium Light Aluminium-Scandium alloy for aerospace components, and additive in Mercury-vapor lamps 39 Y Yttrium Yttrium-Aluminum garnet (“YAG’) laser, and YBCO high-temperature superconductors 57 La Lanthanum High-refractive index glass, flint, hydrogen storage, battery-electrodes, and camera lenses 58 Ce Cerium Chemical oxidizing agents, polishing powder, and yellow colors in glass and ceramics 59 Pr Praseodymium Rare-earth magnets, lasers, core materials for carbon-arc lighting, and colorants in glasses and enamels 60 Nd Neodymium Rare-earth magnets, lasers, violet colors in glass and ceramics, and ceramic capacitors 61 Pm Promethium Nuclear batteries 62 Sm Samarium Rare-earth magnets, lasers, neutron capture, and masers

The 17 Rare Earth Elements 63 Eu Europium Red and blue phosphors, lasers, and mercury-vapor lamps 64 Gd Gadolinium Rare-earth magnets, high-refractive index glass or garnets, lasers, x-ray tubes, and computer memories The 17 rare earth elements include: the lanthanoids 65 Tb Terbium Green phosphors, lasers, and fluorescent lamps (elements 57 to 71), Scandium, and Yttrium. Some versions of the Periodic Table often label the 66 Dy Dysprosium Rare-earth magnets and lasers lanthanoids and actinoids (elements 90 to 103) as “rare 67 Ho Holmium Lasers earth metals,” not to be confused with the 17 rare earth 68 Er Erbium Lasers and Vanadium Steel elements, which according to IUPAC only include the 69 Tm Thulium Portable X-ray machines lanthanoids, Scandium, and Yttrium. 70 Yb Ytterbium Infrared lasers and chemical reducing agents 71 Lu Lutetium PET Scan detectors and high-refractive index glass

Source: IUPAC, www.iupac.org; The New York Times, “After China’s Rare Earth Embargo,” October 29, 2010; United States Geological Survey, www.usgs.gov; www.periodictable.com. 58 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy China’s Nuclear Energy Industry

Overview of China’s Nuclear Energy Industry As of June 2011, almost half the nuclear • Prior to Japan’s Sendai Earthquake of March 11, 2011 (measuring 9.0 on the Richter Scale), the Chinese were prepared to spend US$511 reactors under construction in the world billion to build up to 245 reactors, according to Arthur D. Little, a management consulting firm. were in China. The Chinese utilize reactor • The Chinese have been rapidly developing self-sufficiency in reactor design and construction. They plan to use several suppliers, with designs from Russia, the US, France, and the goal of becoming a developer themselves. China itself. A key issue is whether foreign • As of December 2010, China operated 12 nuclear plants, having built one to two reactors per decade; by early 2011, 27 facilities were suppliers will be able to keep pace with under construction. Chinese demand for critical and scarce • As of June 2011, China’s energy planners aimed to have 96 reactors by 2020, and by 2030, enough additional reactors to generate more components. power than all 104 reactors in the US, the 2010 leader in nuclear reactor units. • The Chinese have planned for non-fossil fuels to produce 15% of China’s energy by 2020; although the Chinese have invested significant amounts on wind turbines and solar panels, nuclear power needs to be built up to reach that target. • The Chinese have been building reactors faster and at a lower cost than the rest of the world. State ownership of the industry guarantees capital and relatively quick approvals of new plants. Low-cost labor and experience in major infrastructure projects, such as power plants and rail and subway systems, also help. As a result, according to Areva, building a Western-designed reactor in China costs about US$4 billion, 40% less than one in Normandy, and can be completed in 46 months, versus 71 months in France. • Guangdong Nuclear has indicated its intention to sell its reactors abroad by 2013 (China has supplied commercial reactor technology only to Pakistan).

Source: Morgan Stanley Smith Barney Investment Strategy; “China Wants Nuclear Reactors–Fast,” Bloomberg Businessweek, December 2, 2010.

Top 10 Producers of Nuclear Energy by 2020 Where China is Building Its Reactors Tianwan Nuclear Power Station in the Estimates are as of March 2011 Jiangsu Province in Eastern China. 2010 2020E Reactor Net Capacity % of Reactor Net Capacity % of Country Units (MWe) World Units (MWe) World 1 China 12 9,706 3% 96 112,270 20% 2 United States 104 100,367 27% 111 109,183 19% 3 France 58 63,130 17% 60 66,370 12% 4 Japan 54 46,824 12% 59 53,589 9% 5 Russia 31 21,743 6% 43 32,289 6% 6 South Korea 21 18,460 5% 30 29,380 5% 7 Germany 17 20,379 5% 17 20,379 4% 8 India 20 4,388 1% 36 18,092 3%

A Nuclear Reactor Under Construction in the 9 Canada 18 12,652 3% 21 15,237 3% Zhejiang Province in Eastern China. 10 Ukraine 15 13,230 4% 17 15,130 3% Global Total 442 374,806 606 568,973

Source: The Ux Consulting Company; Morgan Stanley & Co. Inc. Research, “Global CleanTech: Tohoku Quake: Source: World Nuclear (December 2010). Implications for Clean Technology,” March 22, 2011. 59 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy China Investment Corporation (CIC) As of March 2011, the 5th Largest Sovereign Wealth Fund in the World

CIC’s Four Investing Principles Overview of the China Investment Corporation 1. Select investments based on economic and • China Investment Corporation (CIC) is an investment institution established as a wholly state-owned company under the Company Law of financial objectives, and an assessment of the People’s Republic of China. CIC is headquartered in Beijing and was established on September 29, 2007, with the issuance of special the commercial return. bonds worth Rmb 1.55 trillion by the Ministry of Finance. The issued bonds were used to acquire approximately US$200 billion of China’s 2. Allocate capital and assets within the given foreign exchange reserves, forming the foundation of its registered capital. risk tolerance of the owner to maximize • CIC’s overseas investment portfolio is mainly composed of equity, fixed income, and alternative investments, in developed and emerging shareholder value. markets. Its alternative investments include hedge funds, private equity, commodities, and real estate, among other asset classes. 3. Seek an inactive, passivist role in investing • CIC is one of four Chinese sovereign wealth funds, the others being the State Administration of Foreign Exchange (SAFE) Investment in companies. Company, the National Council for the Social Security Fund, and the China-Africa Development Fund. As of March 2011, CIC had US$332 4. Seek long-term, stable, sustainable, and billion in assets under management, making it the fifth largest sovereign wealth fund in the world. risk-adjusted return. – SAFE, which is primarily responsible for managing China’s foreign exchange reserves, had US$347 billion in assets as of March 2011, Source: China Investment Corp, www.china-inv.cn. making it the fourth largest sovereign wealth fund in the world. As of March 2011, the National Social Security Fund and the China-Africa Development fund had US$147 billion and US$5 billion in assets under management, respectively. – Aggregated together, China’s four sovereign wealth funds were worth US$831 billion as of March 2011. • For information on CIC’s US securities holdings, please go to www.sec.gov. Source: China Investment Corp, www.china-inv.cn, Sovereign Wealth Fund Institute, www.swfinstitute.org.

CIC’s Executive Team The Largest Sovereign Wealth Funds Lou Jiwei, Chairman & CEO As of March 2011 Previous Position: Deputy Secretary General of State Council Assets (US$ Billions) Education: Masters degree in Economics, and a Bachelors degree from Tsinghua 1,000 University. 831 709 750 557 Gao Xiqing, President & CIO 439 500 393 Previous Position: Deputy Chairman of the National Council for the Social 292 Security Fund 203 250 143 Education: JD degree from Duke University, and a Masters degree from the 85 73 70 48 University of International Business and Economics in Beijing. 0 China (1) UAE (2) Norway Saudi Singa- Hong Kuwait Russia Qatar Australia Libya Algeria Jin Liqun, Chairman of Board of Supervisors Arabia pore(3) Kong Previous Position: Vice President of Operations of the Asian Development Bank

Education: Masters degree from Beijing Foreign Studies University, and a Hubert Non-Oil Oil Humphrey Fellow in the Economics Graduate Program at Boston University. Source: Sovereign Wealth Fund Institute, www.swfinstitute.org. Data are as of March 2011. Source: China Investment Corp, www.china-inv.cn. Notes: 1. China data are estimated and include: (i) SAFE Investment Company, US$347.1 Billion; (ii) China Investment Corporation, US$332.4 Billion; (iii) National Social Security Fund, US$146.5 Billion; and (iv) China-Africa Development Fund, US$5.0 Billion. 2. UAE data include: (i) Abu Dhabi Investment Authority, US$627.0 Billion; (ii) International Petroleum Investment Company, US$48.2 Billion; (iii) Investment Corporation of Dubai, US$19.6 Billion; (iv) Mubadala Development Company, US$13.3 Billion; and (v) RAK Investment Authority, US$1.2 Billion. 3. Singapore data include: (i) Government of Singapore Investment Corporation, US$247.5 Billion; and (ii) Temasek Holdings, US$145.3 Billion. 60 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy China’s Foreign Exchange Reserves December 1995 ─ April 2011

• As of April 2011, China had US$3.0 trillion in China’s Foreign Exchange Reserves foreign exchange reserves, ranking number US$ Billion 3,500 one with 32% of the world’s total. 3,045 2,847 • From 1995 through 2010, China’s foreign 3,000 2,399 exchange reserves have grown at a 2,500 compound annual growth rate (CAGR) of 1,946 2,000 28%. 1,528 1,500 • The foreign exchange reserves of China, 1,066 819 Hong Kong, and Taiwan have more than 1,000 610 quadrupled from 2003 through 2009. 286 403 500 74 105 140 145 155 166 212 0 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 (1)

Source: Bloomberg, LLC. Data are as of April 2011.

Combined Foreign Exchange Reserves of China, Hong Kong, and Taiwan US$ Billion 4,000 3,717 3,498 3,500 3,003 3,000 The Summer Palace, or Yíhé Yuán (Gardens of 2,420 2,500 Nurtured Harmony), is an imperial garden in 1,957 Beijing mainly composed of Longevity Hill and 2,000 1,460 Kunmig Lake. First built in 1750, the palace 1,500 1,196 2 975 covers an area of 2.97 km , three-quarters of 725 which is covered by water. The palace served as a 1,000 557 316 325 357 380 446 summer residence and safe haven for emperors 500 219 257 during the Qing dynasty. 0 In 1998, UNESCO included the Summer Palace '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 (1) on its World Heritage List, calling the Summer China Hong Kong Taiwan Palace “a masterpiece of Chinese landscape garden design.” Source: Bloomberg, LLC. Note: Source: www.travelchinaguide.com; UNESCO World Heritage Centre. 1. Data are as of April 2011.

61 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy Foreign Direct Investment Flows

• Annual Foreign Direct Annual Foreign Direct Investment Flows into China, 1995 – 2009 Investment in China has more US$ Billions 120 than doubled over the 1999 – 92.4 2009 time frame. 100 90.0 74.8 80 69.5 • In the post-Millennium era, 60.6 60.3 52.7 53.5 investment flows into China 60 46.9 44.2 43.8 40.7 35.8 40.2 38.8 have exceeded the combined 40 flows into six other Asian 20 emerging market economies. 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: People’s Republic of China Ministry of Commerce; People’s Republic of China National Bureau of Statistics; China Statistical Yearbook 2009. Data are as of December 31, 2009.

US Direct Investment in China Foreign Direct Investment in China Compared With Six Other Asian Nations US$ Billions US$ Billions US$ Billions 100 7.0 90 80 80 6.0 5.4 70 4.9 60 60 5.0 4.4 4.2 50 39.3 3.9 34.4 35.4 4.0 3.6 40 30.2 40 24.2 3.1 3.0 2.9 30 19.3 20.0 21.6 19.0 2.6 15.4 16.8 17.5 20 3.0 20 10.5 12.1 11.6 10 2.0 0 0 1.0 (10) (20) 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 0.0 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 Indonesia Korea Malaysia Philippines Thailand Taiwan China

Source: People’s Republic of China Ministry of Source: Morgan Stanley & Co. Inc. Research; People’s Republic of China Ministry of Commerce; People’s Republic of China National Bureau of Statistics; China Statistical Yearbook 2009. Commerce. Data are as of December 31, 2009. Data are as of December 31, 2009.

62 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy China’s Trade Activity with the United States

• In 2010, China was the United States’ top trading partner, in part due to its fixed- China's Trade with the United States, 2001 – 2010 currency rate pegged to the US dollar for the first half of the year. (US$ Billion) or percentage change as indicated • Over the 2001 – 2010 time frame, China’s Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 total trade activity grew at a compound US Exports 19.2 22.1 28.4 34.7 41.8 55.2 65.2 71.5 69.6 91.9 annual growth rate of 15.9%.

Passenger Cars in Select Countries % Change YoY 17.8% 15.1% 28.5% 22.2% 20.5% 32.1% 18.1% 9.7% (2.7%) 32.0% Penetration of Passenger Cars Units per 100 Households (2009) US Imports 102.3 125.2 152.4 196.7 243.5 287.8 321.5 337.8 296.4 364.9 United States Japan % Change YoY 2.3% 22.4% 21.7% 29.1% 23.8% 18.2% 11.7% 5.1% (12.3%) 23.1% Germany United Kingdom Total Bilateral Trade 121.5 147.3 180.8 231.4 285.3 343.0 386.7 409.3 366.0 456.8 Korea US Balance (83.1) (103.1) (124.0) (162.0) (201.7) (232.6) (256.3) (266.3) (226.8) (273.0) Taiwan Mexico Source: US Department of Commerce; US International Trade Commission. Data are as of December 31, 2010. Brazil Argentina China Top US Exports to China Top US Imports from China 0 20406080100 2010 (US$ Billion) 2010 (US$ Billion) Source: CEIC, Euromonitor, Morgan Stanley & Co. Inc. Description 2009 2010 % Change Description 2009 2010 % Change Research. Data are as of November 2010. Electrical Machinery 9.4 11.5 21.9% Electrical Machinery 72.9 90.8 24.5% Annual Passenger Car Sales Power Generation Equipment 8.4 11.2 33.6% Power Generation Equipment 62.4 82.7 32.5% Million 20 Oil Seeds and Oleaginous Fruits 9.3 11.0 18.1% Apparel 24.4 28.8 18.1% Air and Spacecraft 5.4 5.8 8.0% Toys and Games 23.2 25.0 7.7% 16 Optics and Medical Equipment 4.0 5.2 31.2% Furniture 16.1 20.0 24.5% 12 Plastics 4.3 4.8 10.5% Footwear 13.3 15.9 19.4% 8 Inorganic and Organic Chemicals 3.4 4.5 34.2% Plastics 8.0 9.6 20.1% 4 Vehicles (Excluding Railway) 1.9 4.5 134.4% Iron and Steel 8.0 8.4 4.4% 0 Pulp and Paperboard 2.5 3.0 22.0% Leather and Travel Goods 6.0 7.5 24.4% 2005 2006 2007 2008 2009 2010 United States China Copper 1.8 2.9 62.0% Optics and Medical Equipment 5.6 7.0 25.7%

Source: Bloomberg, LLC. Data are as of December 31, 2010. Source: US International Trade Commission; The US-China Business Council. Data are Source: US International Trade Commission; The US-China Business Council. Data are as of December 31, 2010. as of December 31, 2010. 63 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney BACKGROUND Investment Strategy China’s Trade Activity with the World

• China’s global trade has increased China's Trade with the World dramatically in recent years. (US$ Billion) or percentage change as indicated • Over the 2001 – 2010 period, Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E China’s total trade activity grew at a compound annual growth rate of Exports 266.1 325.6 438.2 593.3 762.0 968.9 1,217.8 1,430.7 1,201.7 1,577.9 1,814.6 26.2%. % Change YoY 6.8% 22.4% 34.6% 35.4% 28.4% 27.2% 25.7% 17.5% (16.0%) 31.3% 15.0% • With imports up an estimated 39% in 2010, China became an Imports 243.6 295.2 412.8 561.2 660.0 791.5 956.0 1,132.6 1,005.9 1,394.8 1,645.9 important source of growth for its neighbors in Asia and elsewhere. % Change YoY 8.2% 21.2% 39.8% 36.0% 17.6% 19.9% 20.8% 18.5% (11.2%) 38.7% 18.0%

Tariff Rates in China Total Trade 509.7 620.8 851.0 1,154.6 1,422.0 1,760.4 2,173.8 2,563.3 2,207.6 2,972.7 3,460.5 Weighted Avg. of All Products Year Tariff (%) Balance 22.6 30.4 25.5 32.1 102.0 177.4 261.8 298.1 195.8 183.1 168.7 1992 32.2 Source: People’s Republic of China National Bureau of Statistics; Morgan Stanley & Co. Inc. Research. Data are as of December 31, 2010. Estimates are as of May 2011. 1993 30.3 1994 27.9 1995 NA China's Leading Import and Export Products China's Leading Import Suppliers and Export Destinations 1996 19.8 1997 15.8 2010 (US$ Billion) 2010 (US$ Billion) Description 2009 2010 % Change Economy 2009 2010 % Change 1998 15.6 Leading Imports Leading Import Suppliers 1999 14.5 Electrical Machinery 244 314 29.0% Japan 131 177 35.0% 2000 14.6 2001 14.1 Minerals, Fuels, and Oil 124 189 52.1% South Korea 103 138 35.0% 2002 NA Power Generation Equipment 124 172 39.4% Taiwan 86 116 35.0% 2003 6.5 Ores, Slag, and Ash 70 109 54.9% United States 70 92 32.0% 2004 6.0 Optics and Medical Equipment 67 90 34.1% Germany 56 74 33.4% 2005 4.8 Leading Exports Leading Export Destinations 2006 4.3 Electrical Machinery 301 389 29.1% United States 296 365 23.1% 2007 5.1 Power Generation Equipment 236 310 31.4% Hong Kong 166 218 31.3% 2008 4.7 Apparel 100 121 20.5% Japan 98 121 23.7% 2009 4.2 Iron and Steel 47 68 44.1% South Korea 54 69 28.1% Source: The World Bank. Data are as of December Furniture 39 52 34.0% Germany 50 68 36.3% 31, 2009. Source: China’s Customs Statistics, by the People’s Republic of China General Source: China’s Customs Statistics, by the People’s Republic of China General Administration of Customs. Data are as of December 31, 2010. Administration of Customs. Data are as of December 31, 2010. 64 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney Investment Strategy

Chinese Art at the Metropolitan Museum of Art in New York • From December 15, 2010 through May 1, 2011, the Metropolitan Museum of Art exhibited an extravagant display of Chinese Art from the 18th and 19th centuries (Qing dynasty). The art collection featured a variety of Chinese art including textiles, lacquers, ivories, jades, and porcelains. • The art of the Qing dynasty has informed Western perceptions of Chinese taste and imagery for centuries, beginning in the late 17th century with Europeans’ fascination for chinoiserie. • The museum’s February 2011 exhibition, “The Emperor’s Private Paradise: Treasuries from the Forbidden City,” included paintings, decorative works, architectural elements, and religious works from the elaborate two-acre private retreat constructed in 1771 deep within the Forbidden City in Beijing as the retirement residence of the Qianlong Emperor, who presided over the Qing dynasty during the zenith of its power and wealth.

Snuff Bottle with European Woman and Child, Qianlong Period (1736 – 1795 AD)

Section 2 Ivory Tablet with Design for a Carpet Qianlong Period (1736 – 1795 AD) Jade Figurine of A Temple Attendant Late 18th Century Issues for Consideration

Ornate Box with Landscape Scenes Lacquer Vase with Floral Background Woman’s Silk Theatrical Jacket Dish with Birds and Flowers on Fan and Auspicious Emblems, and Landscapes in Cartouches, 19th Century c.1730 – 1750 AD 18th Century 18th Century

Source: The Metropolitan Museum of Art. 65 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney ISSUES FOR CONSIDERATION Investment Strategy Select Forces Affecting China’s Securities Prices

• Among the key forces expected to affect China’s securities prices China’s Securities Prices over the near-to-intermediate term are: – Fundamental Factors Fundamental Factors Valuation Factors – Valuation Factors • Global, pan-Asian, and – Psychological, Technical, and • Price-Earnings indigenous Chinese Ratios Liquidity Factors economic and geopolitical conditions • Price-to-Sales Ratios • Technological progress • Price-to-Book Ratios The Five Hundred Lohans and innovation • Dividend Yields • Monetary, fiscal, and currency policies • Ratios relative to those in other • The degree of substantive progress in countries and to implementing historical levels in economic, political, and China Belonging to the Chi’ien-lung Emperor reform goals of the Qing dynasty, the fine silk weaving shown here illustrates the 500 Buddhist deities known as lohans. This hand scroll can be divided into nine pictorial segments, each reflecting one of the nine Buddhist poems; the topics include the Buddha descending from Psychological, Technical, and Liquidity Factors Western Paradise, and the proclaiming of the Law and the enlightenment of the • Domestic and foreign investors’ capital flows universe. • Consumer, business, and investor confidence Source: www.artsmia.org. • The degree of enlightenment in the authorities’ policies affecting the economy and financial markets

Source: Morgan Stanley Smith Barney Investment Strategy.

66 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney ISSUES FOR CONSIDERATION Investment Strategy Important Inputs to the Chinese Investment Outlook

Important Inputs to the Investment Outlook in China:

1. Investors may consider China as in a positive secular long-term trend that is also subject to short-term cycles.

2. As of April 2011, China had over US$3.0 trillion in foreign exchange reserves, the highest in the world and representing 31.6% of global reserves; “” (including China, Hong Kong, and Taiwan) possessed foreign exchange reserves of over US$3.7 trillion.

3. China’s real GDP has grown and is projected to grow rapidly: 2007, +13.0%; 2008, +9.6%; 2009, +9.1%; 2010E, +10.2%; 2011E, +9.0%; and 2012E, +9.0%.

4. Broad and narrow money supply growth in China was 25%, 26%, 28%, and 20% per annum for 2007, 2008, 2009, and 2010, respectively.

5. China’s economic growth has been largely driven by foreign direct investment, exports, capital inflows by overseas Chinese, and savings rates as high as 52%; domestic private consumption grew at 26.6% in 2008 and 11.4% in 2009.

6. As part of its 12th Five-Year Plan, officially released in March 2011, China laid out plans to provide 4 trillion yuan (US$600 billion) to financially support key emerging industries, including energy conservation and environmental protection, information technology, biology, advanced manufacturing, new energy, new materials, and new-energy automobiles.

7. China has continued as a significant consumer of the world’s basic materials: in 2009, China surpassed India and the European Union in coal imports, and accounted for 47% of the world’s steel consumption. China’s efforts to improve energy conservation has brought about and may lead to a further slowdown in imports of certain materials.

8. China’s fixed asset investment-to-GDP ratio amounted to 46% in 2009.

9. Employment in China rose by 5.9 million jobs in 2007, 4.9 million in 2008, and 5.2 million in 2009.

10. The industrial sector’s share of Chinese GDP rose from 41% in 1990 to 46% in 2009, accounting for 47% of the cumulative increase in China’s GDP over that same period. By comparison, in India the services sector’s share of GDP increased from 40% in 1990 to 55% in 2009, accounting for 60% of the cumulative increase in Indian GDP growth over that same period.

Source: Morgan Stanley Smith Barney Investment Strategy; Bloomberg, LCC; The Economist Intelligence Unit; “China Underlines Emerging Industries in 12th Five-Year Plan,” International Business Times, October 18, 2010; China Economic Net, http://en.ce.cn/. 67 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney ISSUES FOR CONSIDERATION Investment Strategy Investment Trends

• The Chinese economy has been among the fastest growing major economies in the world. This growth has • The Chinese economy has expanded primarily been driven by three sources: at a rapid pace due primarily to export i. Export activity, which has grown on average at approximately 22% per annum from 2001 through growth, foreign direct investment, and 2010, with exports growing 31% in 2010. state-sponsored infrastructure ii . Foreign direct investment (FDI), which totaled over US$600 billion from 2000 through 2009, investment. including US$90 billion in 2009; and • The Chinese government has iii . State-sponsored infrastructure spending, which has increased fixed investment dramatically. continued its strong commitment to • The Chinese government has renewed its commitment to reforms, many of which may also promote economic reforms. significant economic growth. These reforms include: • Chinese companies increasingly focus i. The restructuring of State-Owned Enterprises (SOEs) through improved corporate governance and on penetrating global markets. privatization; ii . The continued restructuring of SOEs’ non-performing loans; The Silk Road iii . The gradual opening of certain industries to foreign investment; and Beginning in the first millennium BC, a vast iv. The agreement by the China Securities Regulatory Commission (CSRC) to allow private and foreign network of trade routes known as the "Silk investors in appropriate cases to acquire controlling stakes in domestically-listed companies. Road" linked the people and traditions of China with those of Europe. The Silk Road • Unlike many other developing countries, China has not been materially affected by low capital intensivity, and contained three major routes: (i) the northern has entered high value-added industries, for three primary reasons: route ran westward from China to the Black i. China’s savings rate is exceptionally high for both demographic and historical reasons; Sea; (ii) the central route, to Persia and the ii . China can produce many investment goods at its own low cost; and Mediterranean Sea; and (iii) the southern iii . China has embraced globalization on both the supply and demand sides. route, to Afghanistan, Iran, and India. Ivory • Long-term investment themes include a focus on: (i) household consumption, culture and leisure, and and gold, food such as pomegranates, healthcare; (ii) the materials sector, mainly agrichemicals, chemicals, and shipping; and (iii) a continued safflowers, and carrots went east out of Rome; industrial upgrade, mainly in aerospace and defense, industrials, and machinery. from China and Asia came jade, furs, ceramics, and manufactured objects of bronze, • Chinese companies have gained market share from their non-Chinese competitors in China and continue to iron, and lacquer. These historic routes served move into the global marketplace. As part of the trend toward increasing globalization and global labor as major conduits for the transport of material arbitrage, China’s export-led growth has had deflationary implications for certain companies, sectors, and goods, and more importantly, of knowledge countries. and information, between East and West. • To continue growing, China has begun to: (i) focus on increasing domestic demand; (ii) draw somewhat less (Please also see pages 11 and 15.) support from externally-driven demand; and (iii) improve the efficiency of its capital allocation mechanisms. Source: www.travelchinaguide.com, encyclopedia.com.

Source: Morgan Stanley Smith Barney Investment Strategy; Morgan Stanley & Co. Inc. Research; “Surge in Exports From China Hits Global Industry,” The Wall Street Journal, October 10, 2002; “Real Trading Depends on Big Agenda for Change,” Financial Times, December 12, 2002; US-China Business Council. 68 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney ISSUES FOR CONSIDERATION Investment Strategy Intermediate Term Strengths and Hindrances in China

Strengths Hindrances

• China’s economic development has been driven by several • China needs to continue reducing the wide income and decades of steadfast commitment to wide-ranging reforms, wealth gaps between: rich and poor, urban and rural as China transitions from a state-owned to a market-driven populations, and coastal and interior regions and provinces. economy. • China has demonstrated prowess as a world-class and large- • China’s banking system and non-performing loans (NPLs) scale manufacturer. This reflects a judicious combination of may represent a hindrance to balanced growth in the Chinese high national saving, improvements in infrastructure, and economy. large inflows of foreign direct investment (FDI). • China’s competitiveness also draws successfully on its large • As in many countries, issues of transparency, censorship, reserves of inexpensive labor who are willing to learn and governance, and the rule of law need to be properly work hard. addressed. • China has invested significant sums in large infrastructure projects including roads, highways, port facilities, airports, • In the second half of the first decade of the 21st century, signs and telecommunications/internet resources. of a potential residential property bubble emerged in • China has ample financial resources: (i) a 52% savings rate, certain Chinese cities. one of the highest of any nation in the world; and (ii) (as of 1Q2011) US$3.0 trillion in foreign exchange reserves. • Ecological, environmental, and health challenges remain, • Economically progressive and intelligent leadership in China including China’s growing needs for food, oil, clean air and appears desirous of supporting growth. The mentality, pride, clean water; such factors may hold growth below China’s purposefulness, and sense of China’s past and future place in potential. history are important motivators of the Chinese population. • China is one of the world’s leading buyers of raw materials • China has a relatively undeveloped services sector, and suppliers of manufactured products, and is becoming an representing a source of future jobs creation. increasingly important investor in and contributor to Asian and global trade and economic development. • By eliminating millions of jobs per year due to reforms, China • Overseas Chinese, along with Chinese returnees who have needs to create jobs for displaced workers. a strong desire to see China succeed, are making important contributions to China’s economy and financial markets.

Source: Morgan Stanley Smith Barney Investment Strategy; Bloomberg, LCC (March 2011); The World Bank (May 2011). 69 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney ISSUES FOR CONSIDERATION Investment Strategy Potential Risks

Select Paintings by Baishi (1864-1957) • Some publicly-traded companies may lack transparency because of their ties to state-owned parent companies. In some cases, this may lead to complicated and somewhat opaque transactions involving the financial statements of such firms. • The China Securities Regulatory Commission (CSRC) has had relatively limited oversight and can change or amend its rules and regulations at any time. • China’s banks have at times had sizeable amounts of nonperforming loans (NPLs). • Loose credit can exacerbate the oscillations of cyclical boom-bust episodes. • Chinese economic policies have to balance continued economic reforms with the need to reduce domestic unemployment. • According to several Chinese economists, China needs to maintain more than 7% annual GDP growth to keep unemployment rates below 15-20% in rural areas. “Old Man,” circa 1945 • The Chinese legal system contains inherent uncertainties that could limit legal protections available to investors, including difficulties in effecting service of the legal process and enforcing judgments against Chinese companies’ managements. • Some analysts assert that China’s national economic statistics, including its economic growth rate, are not entirely accurate, as they are compiled from provincial data which may be subject to political revision. • China’s stock market may not be a representative indicator of the national economy due to variations in economic growth and changes in stock market regulations which may affect investor sentiment. “Shrimp,” circa 1950

Source: www.chinapage.com. Source: Morgan Stanley Smith Barney; “Outcasts From China’s Feast,” The Wall Street Journal, November 6, 2002; “China’s Bank-Loan Problems May Dwarf Japan’s,” Barron’s, November 11, 2002; “Beijing Rising,” Financial Times, December 3, 2002; “Asia Minor,” The New Republic, December 16, 2002; “China’s Success Doesn’t Lift Stocks,” The Wall Street Journal, December 27, 2002.

70 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney ISSUES FOR CONSIDERATION Investment Strategy Bullish Factors Affecting China’s Economy and Markets

Fundamental Factors

• Low labor costs and a large labor force; China is projected to benefit from a low demographic dependency ratio and abundant labor supply through 2020. • A high savings rate (gross domestic saving in China as a percentage of GDP reached 52% in 2009, one of the highest savings rates of any country in the world). China’s national savings exceeds national investment, as reflected in persistent and sizable current account surpluses. The availability of low-cost capital has been deemed by economists to be an unlikely binding constraint on capital formation until at least 2016. • Aggregate household indebtedness represented 18% of GDP as of early 2011, compared to 95% of GDP in the United States. • Continued population movement to urban centers. • Increasing emphasis on the development of domestic consumer spending and the raising of consumption as a percent of GDP. • Sources of consumption growth include: (i) rising income; (ii) a lower savings ratio; and (iii) consumption upgrades, suggesting that a “golden age of consumption” may continue to unfold in China. • Progress in building out and/or modernizing infrastructure, including airports, railways, highways, seaports, and telecommunications and internet resources. • China is continuing initiatives to implement planned reforms in social security, rural land management, recapitalization of state-owned banks, taxation, and capital markets oversight. • China is dedicating resources to improving schools, farm aid, rural social services, and healthcare. • China is focusing on strengthening its banking system, including capital infusions and the earmarking of foreign exchange reserves to fortify banks’ balance sheets. • Even as China’s GDP growth appears likely to decelerate somewhat through 2020, Morgan Stanley Asia/Pacific Research expects China to generate average gains of 8% per year as overall consumption, the service sector, and income rise relative to GDP. According to World Bank estimates, China’s potential GDP growth is likely to reach 8.4% over the 2011 to 2015 time period, and 7.0% over the 2016 to 2020 time period. • Consumption is projected to become a key driver of economic growth. By 2020, Morgan Stanley Asia/Pacific Research expects Chinese consumption to reach two-thirds of the US level and account for approximately 12% of global consumption. China’s private consumption appears to be substantially underestimated. • Important reforms, if carried out, could potentially generate substantial efficiency and productivity gains. Such reforms include improved financial intermediation by developing the indigenous bond market and/or deregulating interest rates, and improving access for private entrepreneurs to sectors currently subject to state monopoly (including health care, education, telecommunications, media, and transportation). • Morgan Stanley China economists originally forecast 9.0% GDP growth and 4.5% CPI inflation for 2011, with consumption and investment representing equally important contributors to growth. The lagged effect of massive monetary expansion in 2009 to 2010 was expected to continue to provide strong tailwinds for inflation, while the headwinds stemming from weak external demand were seen as weakening. CPI inflation was expected to rise in the first half of 2011, to peak at 5.5% year-over-year by mid year, and to decelerate to 4.0% year-over-year by year-end 2011. • As part of its “market-based reform” of interest rates, China expects that freer interest rates will better reward household savers, discourage excessive investment, and possibly allow private borrowers to obtain loans from state banks by offering to pay higher rates. • One estimate by The Economist magazine puts the share of GDP produced by enterprises that are not majority-owned by the state at 70%. According to Zheng Yumin, the CPC secretary for the Commerce Department of Zhejiang province, more than 90% of China’s 43 million companies are private. The heartland for entrepreneurial clusters centers in regions such as Zhejian, but entrepreneurial businesses have spread far and wide across the country. • In areas that include not only solar panels but also wind energy turbines, telecommunications networks, power transmission, and high-speed trains, as of early 2011 Chinese companies were already on a par with their Western counterparts. In other areas, such as construction machinery, machine tools, automobiles, and electrical engineering, companies were gearing up to compete.

Source: Morgan Stanley Smith Barney Investment Strategy; Morgan Stanley & Co. Inc. Research; Bloomberg, LLC; The World Bank; “China’s Economic Blueprint: Take Five,” The Economist, March 12, 2011; “Bamboo Capitalism,” The Economist, March 12, 2011; “Chinese and Germany: Reflected Glory,” Financial Times, January 19, 2011. 71 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney ISSUES FOR CONSIDERATION Investment Strategy Bullish Factors Affecting China’s Economy and Markets

Fundamental Factors

• China’s 12th Five-Year Plan is based on three legs to the consumer-led growth stool: boosting employment; raising wages; and shifting the allocation of the resulting increment in labor income away from saving toward spending. • China’s 12th Five-Year Plan focuses on the development and expansion of seven strategic emerging industries (SEIs): new-generation information technology; high-end equipment manufacturing; advanced materials; alternative-fuel cars; energy conservation and environmental protection; alternative energy; and biotechnology. • China has modernized its factories, infrastructure, shelter, and offices. It has educated its people. It has also built up an enormous reservoir of domestic saving and foreign exchange reserves. China has also broken the mold on poverty reduction and internal migration from the countryside to new cities.

Valuation Forces

• As of May 2011, select valuation measures for the MSCI China Index were: – 11.0x next-twelve-months Price-to-Earnings; 13.8x trailing Price-to-Earnings – 2.2x Price-to-Book value – 2.3% dividend yield

Psychological, Technical, and Liquidity Forces

• China continues to increase its participation in world trade, portfolio capital flows, and foreign direct investment. • Resources continue to be directed toward improving the position of low-income Chinese, including: (i) increasing urban and rural welfare payments; (ii) overhauling grain production; (iii) reducing rural and agricultural taxes; and (iv) improving education. • China’s increasing physical capital, particularly in machinery and equipment, and gains in human capital and education, represent long-term underpinnings of China’s continued progress and development. • Many government, monetary, and regulatory organizations have benefited and are continuing to benefit from innovative, energetic, and enlightened leadership. • China projected Rmb 7 trillion in new bank loans in 2011, representing a generous level of liquidity to fuel growth: at 16% of GDP in 2011, new bank loans were forecast to be well above the 13% “normal” new loans to GDP ratio that prevailed before the financial crisis (2005 to 2007 average). • Morgan Stanley China Economists forecast that renminbi strengthening would continue in 2011 at an annualized rate of 6.5%, implying strong re-rating potential in market valuation, given the strong correlation between renminbi appreciation expectations and Chinese market valuation. • China’s economic strength and corporate fundamentals may be the strongest in Asia, yet the country’s stock markets underperformed the region in 2009 and in 2010. Morgan Stanley Asia/Pacific Equity Strategists forecast that in 2011, such mispricing would be unlikely to continue given this fundamental backdrop. • As of May 2011, the price relationship of dual-listed domestic China A shares versus their Hong-Kong-listed H-share equivalents had moved from a premium to parity or in some cases, to a discount.

Source: Morgan Stanley Smith Barney Investment Strategy; Morgan Stanley & Co. Inc. Research; Bloomberg, LLC; FactSet. 72 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney ISSUES FOR CONSIDERATION Investment Strategy Bearish Factors Affecting China’s Economy and Markets

Fundamental Factors

• According to Prime Minister Wen Jiabao in his annual speech to China’s National People’s Congress on March 5, 2011, China’s development is neither balanced, coordinated nor sustainable. China relies too heavily on investment and on consuming natural resources and too little on consumer spending. The income generated is unevenly divided between: profits and wages, rich households and poor households, coastal provinces and inland regions, and the cities and the countryside. • Property, capital expenditures (capex), and lending bubbles have occasionally developed in the Chinese economy and managing the aftermath of bubbles can be a challenging process. • According to forecasts made by the United Nations, the average annual growth rate of the working-age population in China over the 2011 – 2020 time period has been projected to be about 0.13%, a significant slowdown from the average annual growth rate of 1.24% over the 1991 – 2010 time period. • As China’s population ages, the share of savers aged 34–59 in the population should decline and the share of dis-savers aged 65 and above should rise; these divergent trends should lower the average household savings ratio. • From 2011 onward, technological and factor productivity gains from structural reform are unlikely to be as strong as over the 1980 – 2010 period. This is because the most obvious distortions in the economy have already been largely removed, and as economic development reaches a higher level, it becomes increasingly difficult to effect more profound reforms to address deep-seated structural rigidities. • According to data compiled by OECD Analyst Angus Maddison, Japan and Korea reached the US$7,000 per-capita GDP level in the late 1960s and the late 1980s, respectively. As the Chinese economy reaches the US$7,000 per-capita GDP inflection point similar to that in the Japanese economy around 1969 and in the Korean economy around 1988, China’s overall GDP growth may be expected to decelerate and inflation to accelerate, in similar fashion to what occurred in Japan and Korea. • China’s average real GDP growth during 1970 –1990 was 8.4%, while the country’s average working-age population and employment growth was 2.58% and 2.55%, respectively, producing a growth rate versus employment gap of 5–6 percentage points. • China’s real GDP growth rate per annum between 1990 and 2010 was 10.5%, while the country’s average growth in working-age population and employment was 1.3% and 0.98%, respectively, producing a growth rate versus employment gap of 9–10 percentage points. • If official statistics are reliable, owing in part to the lack of a well-funded social safety net (such as social security, private pensions, Medicaid assistance, and unemployment insurance), the Chinese household sector generated a savings rate amounting to 52% of GDP in 2009, meaning the country had to rely on exports and fixed investment as primary sources of output and employment growth. • As of May 2011, it was posited that should economies in the developed world surprise on the upside and experience rapid economic growth in 2011, oil and food prices would rise globally, forcing China to tighten monetary policy aggressively. In such a scenario, stock prices could likely come under selling pressure. • If the Chinese authorities were to rely mainly on administrative controls over monetary aggregates instead of allowing price-based policy instruments such as interest rate hikes and appreciation of the renminbi to control inflation, the risk of a policy-induced boom (in 2010) and bust (2011) cycle would be expected to rise. • From close to 20% in 2003 to just above 10% in 1H 2010, operating profit margins were declining in China. Exporters’ profit margins were often less than 2%, according to China’s Minister of Commerce. The Chinese government has been phasing out subsidies to industry and relaxing energy price controls. Workers have been demanding higher salaries. Environmental standards have been tightened. Should China allow the interest rates that banks pay depositors to rise, the transfer of wealth from savers to well-positioned corporations would be reduced. • Growing evidence that credit growth in 2010 was much larger than the formal Rmb 7.95 trillion of loan growth reported by the banking sector may raise a medium-term inflation risk in China if the velocity of money in circulation rises. Thus, M2 rose by 27.5% year-over-year in 2009 and 19.7% year-over-year in 2010, while nominal GDP rose by only 8.6% in 2009 and 16.7% in 2010. • As migrant farmers’ pay rose 40% in 2010, and all 31 Chinese provinces and regions increased their minimum wages in 2011 and 2011, China appeared to be approaching the so-called Lewis Turning Point, a pivotal period during a developing country’s advance when demand for workers begins to outstrip supply, leading to higher wages, prices, inflation, and interest rates. • Excess capacity may represent a concern in several areas of the Chinese economy, including automobiles, steel, chemicals, and electronics. • Future leaders in China tend to be chosen by a relatively limited number of people and thus must not offend too many special interests if they hope to succeed; as a result, the political and economic reforms necessary to keep China stable may be delayed or watered down. • In China, all land is owned by the state. Local authorities rely on land sales for a majority of their revenues. Land appropriation, at times illegal, involuntary, inadequately compensated, and enforced by violence, may cause serious social unrest. Source: Morgan Stanley Smith Barney Investment Strategy; Morgan Stanley & Co. Inc. Research; Bloomberg, LLC; FactSet; “China’s Economic Blueprint: Take Five,” The Economist, March 12, 2011; “Where Are the Profits?,” The Economist, December 12, 2010; “China’s Opaque Ways of Finding New Leaders Are Threat to Reform,” The Economist, March 25, 2011; “Chinese Peasants Feel Bullied Over Land,” by Calum MacLeod, USA Today, March 25, 2011; “Greed and Fear,” CLSA Asia-Pacific Markets, February 24, 2011; “China Reaches Lewis Turning Point as Labor Costs Rise,” by Chris Ansty, Bloomberg Businessweek, June 11, 2010. 73 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney ISSUES FOR CONSIDERATION Investment Strategy Bearish Factors Affecting China’s Economy and Markets

Fundamental Factors (Continued)

• As of January 2011, the one-year time deposit rate in China was 3%, whereas the headline CPI inflation was 4.9%. Deposit growth had slowed sharply, albeit from very high levels: the total renminbi deposits growth rate had fallen from 29% year-over-year in June 2009 to 17.3% in January 2011. According to CLSA Asia-Pacific Markets Research, if deposit growth should drop below 12% year- over-year, a level not seen since the monthly data began in 1997, an inflationary pickup in the velocity of money in circulation could occur. • To continue growing rapidly, China needs to transition from its manufacturing, price-based competitive strengths to indigenous innovation and value-based strengths; among the factors needed for this transition are: (i) creative, entrepreneurial initiatives by companies, individuals, universities, and technical institutes; (ii) moving from highly centralized economic planning to an increasing degree of individual economic choice; (iii) improved management of boom-bust cycles in real estate and other asset categories; (iv) and market-based rather than controlled prices for wages, for interest rates, and for coal, oil, and other natural resources. • Even though a significant proposition of China’s residential property tends to be purchased with (or when a mortgage is taken out, with a downpayment of 25-50% of the price), as of May 2011 property values in numerous Chinese cities were significantly overvalued and faced the possibility of a serious correction. • China needs to productively employ 150-200 million workers (“another Europe”) within the 2010 – 2030 time period to help foster social stability. • Although shortages persisted as of May 2011 among low-skilled workers in China, more than seven million people were graduating from the country’s universities each year (up from less than one million per year in 1998), with many of them facing difficulty finding work commensurate with their self-perceived elevated status. • In order to increase household consumption’s share of China’s GDP, several structural reforms may be necessary through: (i) reducing the maximum personal income tax rate from 45% to 25% (equal to the corporate profit tax rate); (ii) lowering the Value Added Tax (VAT) to 12% from 17%, among the highest in the world; (iii) raising deposit rates to positive levels after inflation; and (iv) working to bring residential property prices down to the early 2011 global average of two months of after-tax salary per square meter. • A study by Qiao Liu, a professor at the University of Hong Kong, concluded that the average return on equity for companies wholly or partly owned by the state was barely 4%, despite the benefit of inexpensive leverage provided by government-controlled banks. • In 2009, total assets under management for the national social security fund, local government retirement plans, and private sector pensions totalled just Rmb 2.4 trillion. That amounts to only $470 of lifetime retirement benefits for the average Chinese worker, underscoring the inadequacy of China’s social safety net. • As of 2009, the Chinese urbanization ratio was 47%, roughly where Japan was in 1964. The floating population of unregistered urban migrants is estimated to be between 50 – 140 million people.

Valuation Forces

• With certain metropolitan areas’ housing prices in China selling at multiples of urban household incomes, affordability of home ownership has continued to be an issue. • On the cyclically adjusted “Shiller P/E,” which uses a 10-year average of earnings, the China equity market has in recent times been almost as expensive as the US stock market was in 1929.

Psychological, Technical, and Liquidity Forces

• Among the macro-level issues that have the potential to create uncertainty in China over the intermediate term are: (i) projected reform of China’s taxation system; (ii) the external value of the renminbi; and (iii) in the developed world, meaningfully slower consumption growth and/or protectionist measures affecting some of the main categories of Chinese exports. • Poverty, inequality, and urban labor displacement may present significant hindrances to social and economic progress. • China’s economy faces challenges in transitioning toward domestic consumption in order to rely less on exports and foreign direct investment. • Under Communist Party rule, China may continue to encounter political tradeoffs and potential pitfalls as it continues to evolve from a centrally planned economy to a more market-oriented economy. • Regional developmental gaps; air, water, and soil pollution; rural-urban income disparities; and the structure and efficacy of China’s public health system may add to social pressures. Source: Morgan Stanley Smith Barney Investment Strategy; Morgan Stanley & Co. Inc. Research; Bloomberg, LLC; FactSet; “Rising Wages Will Burst China’s Bubble,” by Peter Tasker, Financial Times, January 11, 2011; “Greed and Fear,” CLSA Asia-Pacific Markets, February 24, 2011; “Let A Million Flowers Bloom,” The Economist, March 12, 2011. 74 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney ISSUES FOR CONSIDERATION Investment Strategy China’s Economy in Context

Top 40 Largest Emerging Markets in 2010 % of World GDP at Market Prices 2005 2010 2015E The Five BRICI Markets in the Boxed Area Below Represent Almost 15 Percent of the World’s GDP and 45 1 China 5.0 9. 3 12.2 Percent of Its Population (1) 2Brazil 2 .0 3. 3 3 .4 3 Russia 1 .7 2. 4 3 .1 Real GDP, 2009 and 2015E, for Select Countries 4 India 1.8 2. 3 2 .9 (In Billions of US Dollars) 5Mexico 1 .9 1. 6 1 .6 6 Korea 1.9 1. 6 1 .7 18,000 7Turkey 1.1 1.1.23 8Indonesia 0.6 1.1.14 9Poland 0.7 0.0.77 14,980 10 Saudi Arabia0.7 0.0.78 11Taiwan 0.8 0.0.78 12,987 12 South Africa 0.5 0.0.66 13 Argentina 0 .4 0. 6 0 .5 14 Iran 0.4 0. 5 0 .5 12,000 15 Thailand 0.4 0. 5 0 .5 16 Venezuela 0.3 0. 5 0 .4 17 Colombia 0.3 0. 5 0 .5 18 UAE 0 .3 0. 4 0 .4 19 Hong Kong SAR 0.4 0. 4 0 .4 20 Malaysia 0.3 0. 4 0 .4 21 Singapore 0.3 0. 4 0 .3 5,601 22 Egypt0 .2 0. 4 0 .4 6,000 4,829 23 Nigeria 0.2 0. 3 0 .4 4,451 24 Israel 0.3 0. 3 0 .3 3,458 25 Chile 0 .3 0. 3 0 .4 26 Czech Republic 0.3 0. 3 0 .4 1,783 27 Philippines 0.2 0. 3 0 .3 1,349 28 Pakistan 0.2 0. 3 0 .3 1,127 1,020 866 1,111 29 Algeria 0.2 0. 3 0 .3 355 505 30 Romania 0 .2 0. 3 0 .3 0 31 Peru 0.2 0. 2 0 .3 32 Ukraine 0.2 0. 2 0 .2 China India Brazil Russia Indonesia U.S. Japan 33 Hungary 0.2 0.0.22 34 Kazakhstan 0.1 0.0.23 35 Qatar 0.1 0.0.23 36 Kuwait 0.2 0.0.22 37 Bangladesh 0.1 0. 2 0 .2 2009 Population (MM) 1,335 1,166 194 141 240 307 38 Vietnam 0.1 0. 2 0 .2 39 Morocco 0.1 0. 1 0 .2 40 Slovak Republic 0 .1 0. 1 0 .1 2009 Real Per Capita Average Disposable 1,134 810 3,881 3,970 563 32,592 Total 25.3 34. 1 39.6 Income ($) Emerging Markets 27.9 37. 4 43.3 EU15 28.5 24. 0 21.1 2009 2015E US 27.8 23. 6 22.0 Japan 10.0 8. 7 8 .0 Note: Source: Ashmore; World Economic Outlook, by the International 1. GDP and average disposable income are stated in 2005 US dollars. Monetary Fund, October 2010. Source: The Economist Intelligence Unit; “The Internet’s New Billion,” The Boston Consulting Group, September 2010.

75 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney ISSUES FOR CONSIDERATION Investment Strategy Three Scenarios for the Chinese Economy Through 2020

Three Morgan Stanley Research Scenarios for the Chinese Economy Through 2020 The Base Case Scenario 2010–2020E • The Base Case scenario projects that the Chinese economy can maintain an Actual Base Assuming Current Expected Growth Deceleration 2000–2009 Case Trends Continue & Structural Adjustment average of 8% growth per annum through 2020. Average CPI inflation through 2020 is projected at 3.5%, mainly reflecting an increasingly Probability (%) 70 20 10 normalized labor market.

Macro • Under the Base Case, China’s nominal GDP would triple from its 2009 size, reaching Rmb 103 trillion. Assuming an average 3% appreciation of the GDP growth (%) 10.3 8.0 9.5 6.5 renminbi against the US dollar per annum, Chinese nominal GDP in US dollar terms would quadruple from its 2009 size, reaching US$20 trillion by CPI Inflation (%) 1.9 3.5 2.5 4.0 2020.

Production The Current Trends Continue Scenario • In the Current Trends Continue scenario, the Chinese economy would Agriculture 17 15 15 15 basically continue as in the recent past, with no material change compared to the previous decade, featuring strong growth, modest inflation, and no Manufacturing 40 35 40 33 meaningful transformation of the economic structure. Services 43 50 45 52 • The Current Trends Continue scenario might occur if: (i) the global economy were to stage a strong recovery back to pre-crisis levels and sustain its pace Expenditure of expansion thereafter; or (ii) China’s economy remained so competitive that China’s export growth remained as strong as pre-crisis levels, without Consumption 49 54 47 58 causing a backlash of trade protectionism measures. Investment 48 43 50 41 The Growth Deceleration and Adjustments Scenario • In the Growth Deceleration and Adjustment scenario, the Chinese economy Income might undergo drastic growth deceleration and structural adjustment. Labor 40 45 40 52 • Such a scenario might materialize due to very proactive policy intervention to correct the structure of the economy or by external shocks such as a major Profits 31 30 35 20 decline in external demand and/or sustained surges in globally traded commodities prices due to supply shocks.

Source: Morgan Stanley & Co. Inc. Research, “The China Files: Chinese Economy through 2020,” November 8, 2010. 76 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney ISSUES FOR CONSIDERATION Investment Strategy The China Landscape: Megatrends

1 Demographics 2 Urbanization 3 Infrastructure

People born after 1980, the “Chinese baby Morgan Stanley China Economists expect that China has made significant strides in developing boomers,” are projected to represent more urbanization will remain China’s principal its infrastructure, with considerable scope for than 50% of China’s population by 2015. growth driver over the 2010–2020 period. This more economic expansion and rebalancing. view also holds that the rapid urbanization of the This demographic shift may have three investment 2000–2010 time period will likely continue or even The country plans further investment in its implications: (i) Chinese baby boomers tend to be accelerate between 2010 and 2020, lifting China’s national high-speed rail and highway grids, ultra- globally aware and optimistic about their urbanization ratio to the level of developed countries, high-voltage power transmission networks, economic future; (ii) Chinese baby boomers tend from the 47% in 2010 to 63% in the long term. nuclear power plants, gas distribution grids, and to be more financially secure than were past China’s Rate of Urbanization sewage and solid waste treatment facilities. generations; and (iii) Chinese baby boomers are Share of Urban Population (%) China intends to lengthen its total rail network likely to double the country’s birth rate. 70 US in 1900 US in 1960 from 86,000 kilometers to 120,000 by 2015, and at China’s Post–1980 Baby Boomers 60 least 60% of this system will be electrified, up Population in Millions 50 from 40%. By 2015, China’s high-speed 1,200 passenger rail system should reach 16,000 40 US in 1840 kilometers in length from 2010’s total of 8,400 30 1,000 kilometers, making it one of the most extensive Artificially Suppressed 20 high-speed rail networks in the world. By 2016,

800 10 China’s total roadway capacity, now at 70% of US capacity, will likely surpass that of the US. 0 600 1949 1979 2009 2039E 2069E Source: CEIC, Morgan Stanley & Co. Inc. Research, E = Morgan Stanley & Co. Inc. estimates as of September 2010. 400 As part of its initiative to support urbanization in midsize and small cities, particularly in the inland 200 provinces, the Chinese government has decided to speed up the reform of the household registration 0 system. 0 5 0 E E 0 0 1980 1985 199 1995 2000 2 015 This reform seeks to equalize rural and urban 2010E 2 202 Population born pre-1980 Population born post-1980 citizens’ entitlements to pension, education, and other social benefits, so that migrant workers from China’s High-Speed Passenger Rail System Source: CEIC, Morgan Stanley & Co. Inc. Research, E = Morgan Stanley & rural areas can more easily relocate to urban areas. Source: Time Magazine, www.time.com. Co. Inc. estimates as of September 2010.

Source: Morgan Stanley & Co. Inc. Research, “The China Files: US Corporates and China’s Megatransition,” September 20, 2010; “Off the Rails,” The Economist, April 2, 2011. 77 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney ISSUES FOR CONSIDERATION Investment Strategy The China Landscape: Megatrends

4 Completion of Public Services 5 Consumer Finance 6 Industrial Upgrades Network

China’s high rate of personal savings stems Consumer finance in China lags that of developed In the early 1990s, when China started to rise as a from individuals’ concerns about retirement economies such as the US and Europe: total credit global producer, only 3% of its working without a comprehensive, government-sponsored in China represents about 10% of consumers’ total population had college degrees. This lack of social security system in place. Morgan Stanley expenditure, compared with around 50% in more educated laborers forced Chinese companies to China Economists believe that an aggressive developed economies. Thus, as consumer credit adopt a low-quality, mass-production approach to reform and funding of the country’s pension, becomes more accessible in China, consumer their business models. Such conditions have been healthcare, and education systems will help spending is expected to increase. changing rapidly. unleash domestic demand, and that planned A thriving internet environment makes online As of 2010, approximately 10% of China’s reforms of China’s entitlement programs will push shopping possible and also drives consumer workforce had earned a college degree and consumer growth rates beyond levels previously credit. Since China has the highest number of Chinese companies were changing their business seen. internet users in the world, 390 million, as of models to employ this better-educated work force. September 2010 Morgan Stanley Economists China’s approach to production has been changing Online Shopping Transactions in China expected substantial upside for online settlement as a younger, college-educated population $ in Billions and credit cards as e-commerce continues to continues to enter the workforce. develop in China. As of 2010, about 20% of 25 Morgan Stanley Research estimates that by Chinese internet users shopped online, far below 2020, some 35% of China’s workforce will be the rate in developed countries, which is about 20 18.7 college educated. This level will match that of 60%. Should online shopping penetration rise to the US in 2010. A strong correlation exists 5% 50%, there could be as many as 120 million 11 between education and the value added of the 15 + additional credit users in China (in 2010, R: manufacturing and service sectors of an economy. G there were about 150 million cardholders). CA 10 8.2 Morgan Stanley China Economists estimate that China’s consumer credit spending as a percentage of total consumption will reach the 5 3.9 2.4 world average of 40% by 2020, boosting 0.2 0.3 0.7 consumers’ purchasing power by a dramatic 30%. 0 This is before taking into account the reduction in 2002 2003 2004 2005 2006 2007 2008 personal savings rates and the improved wage Source: “Chinese Consumer Report 2010,” by Roland Berger, July 2010. growth expected to take place across China.

Source: Morgan Stanley & Co. Inc. Research, “The China Files: US Corporates and China’s Megatransition,” September 20, 2010. 78 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney ISSUES FOR CONSIDERATION Investment Strategy The China Landscape: Megatransition

Obstacles to Growth The Megatransition: China by 2020 As the second decade of the 21st century continues to unfold, China is in the process of effecting a As China heads toward a megatransition, the country will undoubtedly face obstacles to its megatransition, from the world’s factory to an economic powerhouse on the global stage. The ongoing growth. It must therefore adjust its megatrends identified here, while facing some constraints, represent the push-and-pull factors to help growth model to address these obstacles if it China achieve such a megatransition. hopes to continue on a trajectory of expansion. Two main obstacles to ongoing growth are At macro levels, the Morgan Stanley Research China strategy team expects that by 2020: environmental issues and resource constraints. • China’s GDP share in the world economy will grow to 14% from 8% in 2010. Environmental Issues • China’s domestic Fixed Asset Investment (FAI) will keep growing at an 11.0% CAGR, to more than China, the world’s top carbon emitter, accounts double 2010 levels. for approximately 24% of global carbon emissions, and its emissions liability is growing • China’s private consumption will grow at a 12.6% CAGR, to more than triple 2010 levels. faster than that of any other nation. Further • China will have made its currency, the renminbi, freely convertible and its capital account open. industrialization, growing urbanization, and rising disposable income will drive up energy • China will become one of the largest outbound investors, in financial direct investment and in world consumption in 2010 – 2020, and the rate of capital markets. carbon emissions will multiply unless China makes a concerted effort to alter its current At micro levels, the Morgan Stanley Research China strategy team expects that by 2020: growth model. • China baby boomers, those born after 1980, will represent 45% of the workforce and will be the dominant Resource Constraints consumers. As of 2010, China consumed a significant share of the global supply of commodities and energy. • China will have deepened its urbanization ratio to 63%, having added 300 million people to its urban Given China’s high rate of growth, this rate of population, an increase of 50% from 2010. consumption cannot continue over the long term. China competes for coal, tin, lead, zinc, • China’s labor cost-to-GDP ratio will increase to 30%, with wages more than quadrupling. aluminum, crude oil, and many additional • Of Chinese workers, 35% will have college degrees. resources with other growing economies in a global market vastly different from the one that it • China will have developed a comprehensive consumer finance industry, driven by advances in e- entered as a rapidly developing economy in 1993. commerce and credit reporting. The credit consumption ratio could rise to 40% from 10% in 2010. Since then, other countries have begun to achieve significant growth – Brazil, Russia, and India, for • China will have in place a nationwide, world-class infrastructure, from ports to airports, highways to high- example – and demonstrate considerable demand speed rail lines, and power grids to gas distribution networks. for many of the same resources as China.

Source: Morgan Stanley & Co. Inc. Research, “The China Files: US Corporates and China’s Megatransition,” September 20, 2010. 79 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney ISSUES FOR CONSIDERATION Investment Strategy China: The Middle-Income Transition

China: The Middle-Income Transition

• As of April 2011, economists characterized China as entering a middle-income transition. Such a transition occurs when per capita income (on a nominal US dollar basis) reaches US$4,000-5,000 (approximately where China was in 2010) and ends when income levels reach US$10,000-12,000. The high economic growth rates that brought China to the threshold of this transition were often achieved through labor-intensive exports, which tend to gradually lose competitiveness in the global economy as surplus labor disappears and wages rise. Low-end manufacturing (e.g., textiles) may eventually migrate to lower-cost countries in earlier stages of economic development (e.g., Vietnam or India), leading to changes in China’s growth model and economic structure. Exports may change as well, as the value added per person rises for China to remain competitive. • Japan, South Korea, Taiwan, and Singapore managed to pass through the middle-income transition rather quickly. Brazil stalled at one point during its transition. As of early 2011, Thailand, Indonesia, and Malaysia have been less successful in making the transition. • A source of anxiety for central planners is that they must relinquish control over large swathes of the economy and allow market forces operate to a greater degree in order for the middle-income transition to succeed. • Following this advice would mean less government planning, less targeting, and less clarity. Moreover, after the government lets go of resource allocation and other matters best left to market forces, it should concentrate on infrastructure, human capital, education, social services, and health care. • By one estimate, China’s state-owned sector shrank from 77.6% in 1978, the year of Deng Xiaoping’s first economic reforms, to 29.5% in 2007. Significant governmental controls on the economy remained in place as of early 2011, including: (i) price controls on grain and gasoline; (ii) use controls on coal and other energy resources; (iii) industry consolidation; (iv) wage setting in the state-owned sector; and (v) ultimate control of a high percentage of listed companies. • China’s consumption patterns continued to evolve as of early 2011, with the emergence of status-conscious shoppers, notable online buying, widespread advertising, new businesses such as beauty parlors, and increased car ownership rates (which more than doubled from 2005 through 2010). As part of its 12th Five-Year Plan, China planned to employ several means to put more income into the hands of mainstream consumers, including: – (i) Raising Wages; – (iv) Reducing Income Taxes; – (vii) Increasing Social Spending; – (ii) Tapping State-Owned Entities (SOEs); – (v) Expanding Consumer Credit; – (viii) Developing the Services Sector; and – (iii) Raising Interest Rates; – (vi) Building Affordable Housing; – (ix) Introducing Modern Retail Methods.

Source: “A Middle-Class Dragon: As China Enters a Period of Middle-Income Transition, The Stakes Could not be Higher,” CFA Magazine, March-April 2011. 80 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney ISSUES FOR CONSIDERATION Investment Strategy China Nationally and Regionally Emulates Other Asian Nations

From Why The West Rules – For Now: The Patterns of History, and What They Reveal About the Future. By Ian Morris (Farrar, Straus & Different Economies in Asia Different Regions in China Giroux, 2010). Philippines, Indonesia, South Korea, Thailand, Pearl Central Taiwan, Provinces In Why The West Rules – For Now, Ian Morris explains the Malaysia Special River Delta / Singapore, Vietnam, Economic Yangtze Eastern Western rise-and-fall cycles in world history and suggests that Japan Hong Kong China India Zones River Delta Provinces Provinces “shift[s] of wealth and power [are] inexorable.” Morris contends that the East and the West are not “value judgments,” but merely “geographic labels” and argues that the patterns of world history along with present-day dynamics implicate that “the next 40 years will be the most important [years] in world history.” Morris shows how different , including the Roman Comparative Advantage Empire and the Song dynasty of China, climbed up the Comparative Advantage development ladder by periods of “axial thought,” only to fall, upon hitting a “hard ceiling,” usually inflicted by what he calls the Five Horsemen of the Apocalypse: climate Time Time change, migration, famine, epidemic, and state failure. What really concerns Morris, however, is not whether the East may outcompete the West, but whether the competition • “Asia’s Economic Miracle” can be illustrated by the “Flying Geese Paradigm.” This theory itself may be disrupted by a new set of forces: nuclear postulates that Asian nations will sequentially catch up with more advanced economies through a proliferation, population growth, and global epidemics. “We are approaching the greatest discontinuity in history,” regional rotation where the production of commoditized goods moves continuously from the more- explains Morris. to the less-advanced countries. The lead nation in this pattern is Japan, followed by the newly Morris suggests that we must decide between “the industrializing economies (South Korea, Taiwan, Singapore, and Hong Kong). After these groups Singularity,” salvation through the expansion of our collective technological abilities, and “Nightfall,” an come the Philippines, Indonesia, Thailand, and Malaysia. Finally, come the more recently apocalypse from the old Five Horsemen aided by the new set developing major nations in Asia, including China, Vietnam, and India. of forces. For the Singularity to win, “everything has to go right,” and “for Nightfall to win only one thing needs to go • It may be argued that, given the sheer size of the Chinese economy and population, and the wrong,” argues Morris. country’s vast regional disparities, China’s internal development may also in fact follow the Because distinctions of geography are becoming increasingly irrelevant, Morris believes that the dogma “East is East and “Flying Geese Paradigm,” in this case with the lead region being the Special Economic Zones, West is West” is a catastrophic view of current civilization followed by the Pearl River Delta and the Yangtze River Delta. After these regions come the other and that the several decades ahead are more important than we realize. Eastern provinces, with the Central and Western provinces following behind. Source: “The Final Conflict,” The New York Times Book Reviews, December 12, 2010. Source: Morgan Stanley & Co. Inc. Research, “The China Files: Chinese Economy through 2020,” November 8, 2010. 81 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney ISSUES FOR CONSIDERATION Investment Strategy Chinese Affluent Consumers From a Study Conducted by MasterCard and HSBC on Affluent Chinese Consumers

• In late 2006, MasterCard and HSBC conducted a Top Ten Values Priorities in Investing study of affluent Chinese consumers, defined as 1 Self-respect those whose annual household income is 1Property 7 Bonds between US$6,000 and US$25,000 per year. In five focus groups in Shanghai, Guangzhou, and 2 Fun and enjoyment in life Beijing; over 780 surveys were conducted. 3 Being well respected 2 Domestic stocks 8 Foreign stocks • Among their findings, they concluded in their 2007 report that affluent Chinese consumers: 4 Sense of accomplishment 3 Fixed deposits in RMB 9 Collectibles – (i) value self-respect and fun and enjoyment in 5 Financial security life; 6 Social security – (ii) view time constraint/convenience as a top 4 Insurance with investment 10 Bank investment products factor affecting buying decisions; 7 Good relations with others – (iii) view a senior job position as the top 8 Self-fulfillment 5 Investment funds 11 Gold perception of social status; and – (iv) view property and domestic stocks as the 9 Sense of belonging Financial company 6 Fixed foreign currency bonds 12 top assets in which to store wealth. 10 Having excitement investment products

Top Factors Affecting Buying Decisions Source: MasterCard and HSBC, “Understanding the Affluent Source: MasterCard and HSBC, “Understanding the Affluent Consumers of China,” Second Quarter Consumers of China,” Second Quarter 2007. 2007. 1 Time constraint/convenience 2 Being green Perceptions of Factors that Contribute to Social Status Percentage of those Polled in the 780-sample survey by HSBC 3Brand 50 4 Luxury 43 40 Source: MasterCard and HSBC, “Understanding the Affluent Consumers of China,” Second Quarter 2007. 30 30 29 30

Middle-Class and Affluent Consumers 20 (With Annual Household Income of Rmb 60,000 ~ 20 17 16 15 15 US$9,050) 14 13

Population (Millions) 2010 2020E 10 (1) Large Cities 65 127

(2) 0 Smaller Cities 83 288 Senior Job Private Club Property High Level Private Car Frequent Overseas Rare Overseas Branded Overseas Position Membership Ownership of Education Overseas Bank Account Collectibles Education Products Assets Total 148 415 Travel

Source: Big Prizes in Small Places: China’s Rapidly Multiplying Notes: Pockets of Growth, The Boston Consulting Group, 1. Large Cities include Chinese cities with a population of more than one million, as defined by The Boston Consulting Group. November 2010. 2. Small cities include Chinese cities with a population between 250,000 and one million, as defined by The Boston Consulting Group. Source: “Understanding the Affluent Consumers of China,” MasterCard and HSBC, Second Quarter 2007. 82 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney ISSUES FOR CONSIDERATION Investment Strategy China’s Gross Domestic Saving as a Percentage of GDP

Asia’s Shifting Demographic Profile: Gross Domestic Saving As a % of GDP Possible Investment Themes % • Healthcare: increased healthcare 55% spending as a share of GDP. Gross Domestic Product • Financial Services: Increased spending on financial services, particularly for Gross Domestic Product (GDP) is a retirement saving purposes. measure of a country’s or region’s 50% total output of goods and services for • Real Estate and Infrastructure final use occurring within its domestic Development: Rapid urbanization and territory, regardless of the allocation rising household wealth should drive to domestic and foreign claims. strong demand for private housing, and Source: The World Bank. associated urban infrastructure. 45% • The Aging Consumer: A declining share of children and youth in the population versus a rising elderly share will shift the mix of consumer spending. 40% • The Independent Female: Increasing education and job opportunities should lead to growing demand for female- focused brands and products.

35% Source: Morgan Stanley & Co. Inc. Research, “Investment Perspectives: US and the Americas,” December 3, 2008.

30% 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10E 11E

Source: The World Bank; Morgan Stanley & Co. Inc. Research. Data are as of December 31, 2010. Estimates are as of May 2011.

83 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney ISSUES FOR CONSIDERATION Investment Strategy China’s Consumption May Be Understated

China’s Under-Consumption China’s official statistics may substantially understate the true magnitude of consumption within the country, due to the Consumption as a Percentage of 2009 GDP following factors: (i) Chinese official data for personal consumption expenditures substantially underestimate the consumption

UK of services, especially housing and health care; (ii) comparing the consumption of non-services tradable goods between the US and China, the gap between the US and China is much smaller than suggested by overall consumption data, as shown below; US

Brazil Personal Consumption in 2008 % France 12 Canada 10.0

Poland 9

Japan 6 Mexico 3.2 Germany 3 1.6 1.2 World

Russia 0

Australia Total Overall Consumption Non-Services Tradable Goods

Taiwan US China Argentina and (iii) a like-for-like comparison of specific types of goods and services consumed by households in China and in the US Czech indicates that the magnitude of China’s personal consumption relative to that in the US may be much greater than is generally

S. Korea perceived, as shown below.

India Comparison of Personal Consumption: Ratio of China Compared to the US

Thailand % 200 Indonesia 158.0 Malaysia 150 China 100 69.0 40 50 60 70 80 90 59.0 50 30.0 38.0 38.0 Source: Euromonitor; CEIC; Morgan Stanley & Co. Inc. 16.0 23.0 Research. Data are as of 2009. 3.0 6.0 0 Housing Services Overall Financial Power Tradable Telecom Dairy Auto Sales Beer Services Usage Goods Products

Source: Morgan Stanley & Co. Inc. Research, “The China Files: Chinese Economy through 2020,” November 8, 2010.

84 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney ISSUES FOR CONSIDERATION Investment Strategy Three Pillars Underpin Rising Chinese Consumption through 2020

Consumption Drivers

• In August 2010, McKinsey & Company published its annual study of Chinese consumers. Among its findings were: Pillar I: Pillar II: Pillar III: Rising Income Lower Savings Ratio “Well-known brands are of better quality.” Consumption Upgrade (2008 Data) Percentage of those who strongly agreed or agreed 60 45 40

20 16 Income 9 8 Expenditure Government Urbanization Development Wage Increase Re-distribution Service Industry Service Development of Development Aging Population Economic Growth Economic 0 Economic of Level China US UK Japan

“Going Shopping with my Family is One of The first pillar of consumption growth is The second pillar of consumption growth The third pillar of consumption growth is a the Best Ways to Spend Time with Them.” rising income. Household income growth is is a lower savings ratio. The key drivers consumption upgrade, a fundamental and (2008 Data) the primary source of consumption growth, of a declining savings ratio are: (i) rapid change in the type of consumption. and is dependent on three factors: (i) overall government expenditures on public goods Consumers’ preferences tend to reflect the Percentage of those who Strongly agreed or agreed economic growth; (ii) labor concentration in (rail passenger transport, social housing) level of economic development of the state; 60 52 the economy; and (iii) total earnings of the and services (education, healthcare) to in other words, consumers’ taste for goods labor force. Morgan Stanley Research reduce households’ precautionary saving; and services adjusts with their standard of 40 believes these three factors will help (ii) income re-distribution to reduce the living; economic development and accelerate household income growth over overall savings ratio as the savings ratio of urbanization are thus expected to drive the next decade. low income households exceeds that of consumption trends in China through 2020. 20 15 9 higher income households; and (iii) an aging population as the savings ratio tends 0 to decline with an aging population. China US France

Source: McKinsey & Company, “2010 Annual Chinese Consumer Study,” August 2010, How the World Shops (2008). Source: Morgan Stanley & Co. Inc. Research, “The China Files: Chinese Economy through 2020,” November 8, 2010.

85 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney ISSUES FOR CONSIDERATION Investment Strategy Labor Supply and Workforce Trends in China

Key Trends in China GDP Growth Is Outpacing Employment Growth… …and the Working-age Population Growth is Slowing… • A disparity exists between GDP growth and employment growth. %, 3-Yr Moving Avg. %, 3-Yr Moving Avg. rhs % Growth, 5-Yr Period 18 4.0 20.0 • The growth rate of the working-age 16 3.5 15.0 population has been slowing. 14 3.0 10.0 – The total dependency ratio (1) 12 2.5 was expected to bottom in 2010. 10 2.0 5.0 8 1.5 0.0 • Wages are likely to increase as 6 1.0 China shifts away from a labor- 4 0.5 (5.0) driven economy to a capital-driven 2 0.0 (10.0) one. 1970 1980 1990 2000 2010 '80 '90 '00 '10 '20E '30E '40E '50E GDP Growth Employment Growth Population Growth Working-age Population Growth

Source: CEIC; Bloomberg, LLC; Morgan Stanley & Co. Inc. Research. Data are as of Source: “UN World Population Prospects: 2010 Revision,” by the United Nations December 2010. Population Division, May 3, 2011.

…Leading to an Declining Labor Supply… …and, Therefore, Increased Wages Total Dependency Ratio (1) % Growth, YoY Billions of Rmb % of GDP 0.9 2.5 0.8 21,000 35.0 2.0 0.7 18,000 30.0 0.6 1.5 15,000 25.0 0.5 1.0 Projected to bottom in 2010 12,000 20.0 0.4 0.5 9,000 15.0 0.3 0.2 0.0 6,000 10.0 0.1 (0.5) 3,000 5.0 0.0 '10E '11E '12E '13E '14E '15E '16E '17E '18E '19E '20E 0 0.0 '70 '80 '90 '00 '10E '20E '30E '40E '50E Working-age Population Labor Supply (Urban & Rural) '05 '07 '09 '11E '13E '15E '17E '19E

Source: “UN World Population Prospects: 2010 Revision,” by Total Wages Total Labor Cost the United Nations Population Division, May 3, 2011. Source: CEIC; Morgan Stanley & Co. Inc. Research; “UN World Population Prospects: Source: CEIC; Morgan Stanley & Co. Inc. Research. Data and estimates are as of 2010 Revision,” by the United Nations Population Division, May 3, 2011. November 2010. Note: 1. The dependency ratio represents the number of dependents, i.e., children and the elderly, compared to the working-age population. 86 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney ISSUES FOR CONSIDERATION Investment Strategy Demographic Trends in China

The Sixth National Population Census

• On April 28, 2011, the National Bureau of Statistics (NBS) released the results of the Sixth National Population Census. The census reported that China’s population in 2010 was 1.34 billion, up from 1.27 billion in 2000. The average annual growth rate during the 2000-2010 time period was 0.57%, down from 1.07% during the 1990-2000 time period. • Among the findings of the Census were: – Urban population in 2010 surged by more than 45%, leaving urban and rural China nearly equal in population. More than 261 million citizens, nearly one in five, were living in places other than where China’s household registration process (the Hukou System – please see page 39) indicated that they did. – The illiteracy ratio was 4.08% in 2010, down from 6.72% in 2000. University graduates in 2010 represented 8.9% of citizens, versus approximately 3.6% of citizens in 2000. – People over 60 accounted for 13.3% of China’s population, compared to 10.3% in 2000. People under 14 accounted for 16.6% of China’s population in 2010, down from 23% in 2000. – China in 2010 had approximately 120 males for every 100 females. Population experts have forecast that by 2020, 24 million Chinese single young men might have little prospect of marrying or having their own children.

China’s One-Child Policy

• China’s one-child policy has been enforced by the National Population and Family Planning Commission, which employed a half-million full-time staffers and six million part-timers as of early 2011. It has collected millions of dollars a year in fines from people who violate family-planning rules. • Under the one-child policy as of early 2011, many (but not all) couples who had more than one child could face fines of several months’ salary and could lose their jobs if they worked for the state. The policy exempted several groups, including ethnic minorities, rural couples whose first child is a girl, and couples in which both partners are only children. The commission was believed to be considering limited pilot plans to relax the policy as of early 2011. • Prior to the adoption of the one-child policy in 1980, China’s fertility rate, the average number of children born to each woman, was experiencing a decline. In 1979, the fertility rate was 2.7, down from 5.5 in 1970, due to a policy encouraging people to marry later, wait longer between children, and have fewer children. • In 2000, a group of 24 leading demographers, economists, and former Family Planning officials joined forces to advocate for the end of the one-child policy. By early 2011, the advocacy group had encouraged China to terminate the policy because China’s fertility rate was approximately 1.5 to 1.6 (by their calculation), as compared to the “replacement rate” of 2.1 children for every woman, which is generally required to keep a population stable. The advocacy group cautioned that China’s labor force might start to shrink by 2016. • The National Population and Family Planning Commission held a different view. In a report released in 2004, the commission noted that China’s fertility rate had been 1.8 from 1991 through 2003 and should remain at 1.8 through 2033. The commission credited the one-child policy with preventing 400 million births, based on the assumption that, without it, the fertility rate would have stayed where it was in 1970. The commission also predicted that China’s overall population would peak at 1.5 billion in 2033. • As of May 2011, the US Census Bureau and several Chinese demographers predicted that China’s population would peak at around 1.4 billion in 2026.

Source: “China’s Mainland Population Grows to 1.3397 Billion in 2010: Census Data,” Xinhua News Agency, April 28, 2011; “China’s One-Child Policy Faces New Fire,” The Wall Street Journal, April 29, 2011; “New Census Finds China’s Population Growth Has Slowed,” The New York Times, April 28, 2011. 87 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney ISSUES FOR CONSIDERATION Investment Strategy Demographic Trends in China

China’s Population Pyramid Millions of Persons

1970 2010 2020E

100+ 100+ 100+

90–94 90–94 90–94

80–84 80–84 80–84

70–74 70–74 70–74

60–64 60–64 60–64

50–54 50–54 50–54

40–44 40–44 40–44

30–34 30–34 30–34

20–24 20–24 20–24

10–14 10–14 10–14

0–4 0–4 0–4

(80)80 (60) 60 (40) 40 (20) 20 0 20 40 60 80 (80)80 (60)60 (40)40 (20)20 0 0 20 20 40 40 60 60 80 80 (80)80 (60)60 (40)40 (20) 20 00 20 40 60 80

Female Male

On May 3, 2011, the United Nations Population Division released the “World Population Prospects, the 2010 Revision,” a report that forecasts global demographics through 2100. As illustrated above, the UN Population Division forecasted that China’s aging population as a share of the total population would grow in the years ahead, due in part to the effects of the one-child policy. The division estimated that China’s fertility rate from 2005 through 2010 was 1.56, lower than that reported by China’s National Population and Family Planning Commission. The division also estimated that China’s fertility would trough out at 1.51 between 2015 and 2020. Demographers, economists, and policy experts noted that such demographic trends could represent headwinds to economic growth through 2020 and potentially beyond. Source: “UN World Population Prospects: 2010 Revision,” by the United Nations Population Division, May 3, 2011. Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. 88 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney ISSUES FOR CONSIDERATION Investment Strategy Increasing Urbanization Rates in China

China’s Urbanization Rate in Context Increasing Urbanization Rates in China

% (2009) %

Singapore 94 65

Argentina 92 Urbanization Rate

UK 90 The urbanization rate is the percentage 60 Brazil 85 of a country’s total population living in 58.5 Japan in 1964 South Korea 82 urban areas. The rate reflects migration patterns and the degree to which a US in 1900 US 80 country or region is developing or China in 2009 55 France 78 modernizing. 53.2 Mexico 78 Source: The Encyclopedia of Earth, United Nations. Germany 74 50.1 50 49.1 Russia 73 48.0 47.0 Japan 67 45.7 Philippines 65 44.9 45 44.0 Malaysia 64 42.9 41.7 Poland 62 40.5 Indonesia 53 40 China 47

Pakistan 37 Thailand 34 35 India 30

Vietnam 28

Sri Lanka 15 30 2003 2004 2005 2006 2007 2008 2009 2010E(1) 2011E(1) 2012E(1) 2015E(1) 2020E(1) 0 20406080100 % of the Population Living in Urban Centers Source: CEIC, Morgan Stanley & Co. Inc. Research. Data Note: are as of 2009. 1. The estimated years assume that the urbanization rate will increase by approximately 1.0% each year. If the urbanization rate were to increase by approximately 1.5% each year, China’s urbanization rate would reach 63.0% by 2020, according to Morgan Stanley & Co. Inc. Research. Source: National Bureau of Statistics, Ernst & Young Estimates, Morgan Stanley & Co. Inc. Research. Data and estimates are as of November 2010. 89 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney ISSUES FOR CONSIDERATION Investment Strategy China’s Demand for Industrial Commodities

Jade in Chinese Culture • China’s iron ore imports more than quadrupled from 2003 to 2009, as China overtook Japan and the The earliest findings of jade in Chinese culture European Union to become the world’s largest importer of iron ore. date back some 4,000 to 6,000 years. For millennia in China, jade has been viewed as a • In 2009, China produced 568 million metric tons of crude steel, 46% of the world’s production. symbol of virtue, power, sincerity, and as an emblem of status. In ancient times, only the aristocratic class owned jade wares and many China’s Consumption/Production of Materials as a % of World Aggregates: 2005, 2010E, and 2015E ancient Chinese believed jade had supernatural powers that could confer immortality. %

60.0

45.0 44.8 44.4 50.0 40.7 39.8 Jade Mandarin Duck 37.4 40.0 (Qing dynasty, 221-206 BC) 33.5

“The wise have likened jade to virtue. For them, its polish and brilliancy represent the whole of purity; its 30.0 perfect compactness and extreme hardness represent 22.6 the sureness of intelligence; its angles, which do not 21.9 cut, although they seem sharp, represent justice; the pure and prolonged sound which it gives forth when 20.0 one strikes it represents music. Its color represents loyalty; its interior flaws, always showing themselves through the transparency, call to mind sincerity; its 10.0 iridescent brightness represents heaven; its admirable substance, born of mountain and of water, represents the earth. Used alone without ornamentation it represents chastity. The price which all the world 0.0 attaches to it represents the truth.” 2005 2010E 2015E 2005 2010E 2015E 2005 2010E 2015E ─ Confucius (circa 550-480 BC) Aluminum Copper Steel

Source: http://chineseculture.about.com. Source: Morgan Stanley & Co. Inc. Research, “Global Metals Playbook: 2Q11: Growth Continues Amid Heightened Volatility,” April 8, 2011.

90 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney ISSUES FOR CONSIDERATION Investment Strategy Business-to-Consumer (B2C) e-Commerce and Growing Internet Usage in China

Business-to-Consumer (B2C) e-Commerce “Along the River During the Qingming • On April 15, 2011, Morgan Stanley Research published a 57-page report, “China Internet/Media: e-Commerce: Harvesting in Digital Festival,” by Zhang Zeduan China.” (1085 – 1145) • China online retailers have been rapidly capturing market share from fragmented offline rivals. China’s largest 20 retailers are estimated to represent less than 10% of total retail sales, versus 40-50% in the United States. • China’s e-commerce leaders tend to offer relatively cheaper goods (often at 30-40% discounts to offline products), convenience, and broader selections. • Critical success factors for future Chinese e-commerce leaders include: (i) scale; (ii) operating efficiency; (iii) capital efficiency; and (iv) cost leadership. • The report notes that e-commerce has become the fastest growing advertising category in China. Such robust demand should favor advertising leaders. • Page nine of the report contains a list of 15 Morgan Stanley Research reports published between April 2008 and January 2011 about China’s internet and media industry. Source: Morgan Stanley & Co. Inc. Research, “China Internet/Media: e-Commerce: Harvesting in Digital China,” April 15, 2011. “China’s Mona Lisa” (1) Source: “Along the River During the ,” The New York Internet Users in the Five BRICI Countries Should More Than Double to 1.2 Billion by 2015 Times, July 4, 2007. Number of Internet Users, 2009–2015E, for Select Countries Millions 750 650 “Night-Shining White,” by Han Gan (c. 705 – c. 785) 500 384

237 211 223 238 250 137 155 81 68 76 94 88 93 101 49 36 26 44 20 31 0 China India Brazil Russia Indonesia U.S. Japan

2009 Penetration (%) 28 7 33 31 12 70 74

2015E Penetration (%) 47 19 74 55 37 73 81

2006 2009 2015E

Source: The Metropolitan Museum of Art. Note: 1. An Internet user is defined as someone aged two years or older who went online in the past 30 days; penetration represents the number of Internet users divided by the population.

Source: Ministry of Industry and Information Technology; iResearch; Internet World Stats; Economist Intelligence Unit; “The Internet’s New Billion,” The Boston Consulting Group, September 2010. 91 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney ISSUES FOR CONSIDERATION Investment Strategy China and India: A Critical Global Relationship

History and Current Relations • Primarily in the Arunachal Pradesh region of the , China asserts claims to 90,000 square kilometers (55,923 square miles), over which India also claims ownership. In 2006, China’s ambassador to India declared that the entire state of Arunachal Pradesh is in Chinese territory. • As neighboring nations with immense populations, multi-thousand year-old cultures, and competing claims over disputed territory, China and India have extensive trade ties, with US$60 billion in bilateral trade in 2010, up from only US$270 million in 1990. • China and India fought a border war in 1962 and have not resolved their territorial disputes in Tibet and Kashmir, even though diplomatic ties were reestablished in 1976. • India shelters thousands of Tibetan refugees, and the 14th Dali Lama has lived in Dharamsala, located in northern India, from 1959 onward. • China has at times had close military ties with Pakistan. • Over a period of years, China and India have conducted a series of at times cordial but inconclusive border negotiations, which were in their 13th round as of August 2009. • A significantly contentious issue between China and India has been control of water resources, and inter-basin and inter-river water transfer projects; the is the origin of several major rivers in Asia, including the Yangtze, Yellow, Indus, Mekong, Brahmaputra (known in China as the Yalong Tsangpo, or the Yaluzangbu), and other rivers, all of which provide water to China, India, Bangladesh, Bhutan, Cambodia, Laos, Myanmar, Nepal, Pakistan, Thailand, and Vietnam. • For the Yalong Tsangpo (Brahmaputra), China has proposed, not without contention, dispute, and controversy: – (i) Constructing a canal to divert part of the river northward to supply water into arid regions, which account for 50% of the country’s total landmass but which have less than 10% of the country’s water resources; and – (ii) Building a 40,000 Megawatt hydroelectric dam on the so-called “Great Bend” of the river. If built, the dam would be the largest hydroelectric dam in the world, with over twice the capacity of the Three Gorges Dam, which is the located in Hubei Province of China and was the largest dam in the world as of May 2011.

Source: Morgan Stanley Smith Barney Investment Strategy

92 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney ISSUES FOR CONSIDERATION Investment Strategy China and India: Expanding Strengths

China’s Relative Strengths / India’s Relative Weaknesses India’s Relative Strengths / China’s Relative Weaknesses

• From the 1980 to 2010 time period, real GDP growth in China averaged 10.0% • As of early 2011, the Morgan Stanley India strategy team was projecting that India annually, as compared with 6.2% in India. would be the fastest growing economy from 2010 through 2030. • As of May 2011 according to the International Monetary Fund, China’s economy was • From 2010 to 2020, India was expected to contribute 136 million people to the global the second largest in the world, approximately four times larger than India’s labor pool, accounting for approximately 26% of the increase in global working-age economy. population. In comparison, China was expected to contribute 23 million people over the same period, down from 118 million during the 2000 to 2010 time period. The • From 2010 through 2020, China’s consumption was expected to rise, while India’s US, Japan, and Europe were forecasted to contribute 11 million, 8 million, and 21 consumption was expected to fall. According to Morgan Stanley Research, India million, respectively, from 2010 to 2020. lagged China in per-capita consumption of key items by a range of three to 13 years, depending on the product. • According to United Nations Population Estimates, India would be the only large country with favorable demographics after 2010. Japan, Europe, and the US (in that • According to United Nations World Population data, China’s urbanization rate is order) would have a significant rise in their aging population. Although China expected to reach 53% by 2020, up from 45% in 2010. By contrast, India’s benefited from a growing working-age population from 1980 to 2010, its aging urbanization rate is expected to reach 34% by 2020, approximately where China was population was expected to grow from 2010 to 2050. By contrast, India’s working- in 2000. age population was expected to grow steadily from 2010 through 2040. • China has superior infrastructure, including the world’s fastest and longest high- • Assuming supportive policy measures, the Morgan Stanley India strategy team speed rail network as of May 2011. India lacks many of the infrastructural elements believed that India would emerge as the global leader in producing secondary- and needed to foster economic growth and urbanization. China’s economic growth over tertiary-educated talent from 2010 to 2020. the 1985 to 2010 time period indicates that India would need to increase its infrastructure spending to 10% of GDP, up from the 2010 level of 7.5%, in order to • As of late 2010, India’s government appeared to be initiating extensive government achieve a 10% sustainable GDP growth rate. and economic reforms to improve the social well-being of its citizenry and to foster economic growth, with plans to: (i) reduce government subsidies; (ii) implement a • By 2020, China’s high class, classified as those earning over US$10,000 in annual Goods and Services Tax (GST) system, a tax initiative aimed at reforming the household income, is forecasted to account for 58% of China’s population, as existing tax laws, moving from the existing tax system that taxes goods based on compared with India’s high class, forecasted to account for 46% of India’s production to a new tax system that taxes goods based on consumption; (iii) improve population. the direct tax system to encourage long-term savings; (iv) consolidate the deficit of • In 2009, China’s total capital expenditures were more than fives times India’s capital the public sector; (v) reduce the government’s ownership in state-owned entities; (vi) expenditures. China’s investment-to-GDP ratio was 1.4 times that of India. accelerate spending on infrastructure; and (viii) allow foreign direct investment in retail marketing and distribution.

Source: Morgan Stanley Investment Strategy; Morgan Stanley & Co. Inc. Research, “India and China: New Tigers of Asia, Part III,” August 13, 2010; International Monetary Fund. 93 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney ISSUES FOR CONSIDERATION Investment Strategy China as a Superpower

Agenda Items for China Chinese J-20 Stealth Fighter Jet Chinese Aircraft Carrier • Managing the geopolitical agenda ( Sea; ; military resources; relations with North Korea and Taiwan)

• Exercising growing power and responsibility

• Respecting differences in culture, history, and political systems

• Achieving rapid, widely shared, and environmentally sustainable growth

• Sustaining prosperity and managing shared challenges

Source: “In China’s Orbit,” by Niall Ferguson, The Wall Street Journal, • Strengthening the legitimacy and effectiveness of global governance November 18, 2010. • Managing economic opportunities including: trade; currency adjustment; the structure and functioning of the international monetary system; climate change and the global commons; and conflicts over access to natural resources

• Managing mutual suspicions; managing constraints on freedom of action; managing acceptance and non-acceptance of certain aspects of other nations’ behavior; and avoiding “a drift into escalating reciprocal demonization”

Source: “Now Beijing Feels that Time is On its Side, “ by Gideon Rachman, Financial Times, January 18, 2011; “The New Era of US-China Rivalry,” by Aaron Friedberg, The Wall Street Journal, January 18, 2011; “China’s Best Way Forward,” by Yu Yongding; and “East and West Are in it Together,” by Martin Wolf, Financial Times, January 19, 2011.

94 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney Investment Strategy

China’s Three Stock Exchanges: the Shanghai Stock Exchange; the Shenzhen Stock Exchange; and the .

1 The Shanghai Stock Exchange (SSE) 2 The Shenzhen Stock Exchange (SZSE) 3 Hong Kong Stock Exchange (HKEx)

• Founding Date: 1990 • Founded: 1990 • Founded: 1891 • Total Companies Listed: 890 • Companies Listed: 1,174 • Total Companies Listed: 1,397 – Chinese: 890 – Chinese: 1,174 – Chinese: 1,381 – Non-Chinese: 0 – Non-Chinese: 0 – Non-Chinese: 16 • Stock Market Capitalization: US$1.3 Trillion • Stock Market Capitalization: US$1.3 Trillion • Stock Market Capitalization: US$2.7 Trillion • Rankings by Market Capitalization: • Rankings by Market Capitalization: • Rankings by Market Capitalization: – 6th largest in the world – 12th largest in the world – 5th largest in the world – 3rd largest in the Asia Pacific region – 7th largest in the Asia Pacific region – 2nd largest in the Asia Pacific region

Section 3 Investing Background

Shanghai Stock Exchange Shenzhen Stock Exchange Hong Kong Stock Exchange

Source: World Federation of Exchange Members, Hong Kong Stock Exchange, Shanghai Stock Exchange, Shenzhen Stock Exchange, www.asialynx.com. 95 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney INVESTING BACKGROUND Investment Strategy China’s GDP Relative to Four Other Large Emerging Market Economies 2009 (US$)

China’s Share of Various Countries’ Foreign Trade Gross Domestic Product (Total Imports From, Plus Exports To, Each Nation) US$ Billion (2009 US$) Country 1992 2010 (1) 11,000 South Korea 4.0 % 22.8 % China is the No.1 Trading Partner of: Taiwan 0.5 22.1 9,982 10,000 % Share of Countries’ Trade (Imports and Exports) in 2000 and 2009 Australia 3.7 20.6 South South Japan 5.0 20.4 25 Japan Korea Australia Russia Africa India Malaysia 2.2 16.3 9,000 United States 3.5 14.3 20 Brazil 0.9 14.0 8,000 South Africa 1.8(2) 13.1 15 Saudi Arabia 0.9 12.8 10 Indonesia 3.5 12.7 7,000

Thailand 2.2 12.0 5 India 0.4 10.5 6,000 5,745 Argentina 1.1 9.7 0 Egypt 1.6 9.0 2 → 1 3 → 1 3 → 1 6 → 1 10 → 1 10 → 1 (2) 5,000 Russia 3.8 8.9 Rank Among Trading Partners Canada 1.5 7.0 2000 2009 Nigeria 0.5 6.9 4,000 Source: International Monetary Fund Direction of Trade data via Karim Netherlands 0.5 6.5 Foda of the Brookings Institute. Annual data are as of 2009. 2,789 Turkey 0.7 6.4 3,000 United Kingdom 0.6 6.2 2,499 2,024 2,412 Germany 1.3 6.1 Mexico 0.1 5.7 2,000 1,4771,430 1,349 Italy 1.2 4.8 1,198 1,004 Spain 0.1 4.2 1,000 642 390 508 629 France 1.0 3.8 326 480 202 182 222 283 260 Sweden 1.1 3.8 163 NA NA Poland 0.7 3.4 0 Switzerland 0.8 3.3 1980 1990 2000 2010E 2015E Belgium 0.3 2.9 China Brazil Russia India Mexico Source: Financial Times, “A Strategy to Straddle the Planet,” January 28, 2011. Notes: 1. Data are for the twelve months through August 2010. 2. Data are for calendar year 1998. Source: World Economic Outlook, by the International Monetary Fund, April 2011. 96 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney INVESTING BACKGROUND Investment Strategy China GDP Per Capita Relative to Four Other Large Emerging Market Economies GDP Per Capita Adjusted to the Purchasing Power of 2009 (US$)

“Taiwan Eases Rules for Chinese Investors” GDP Per Capita of Select Emerging Market Economies By Robin Kwong of The Financial Times GDP Per Capita Adjusted to the Purchasing Power of 2009 (US$) US$ As of early 2011, Taiwan’s Ministry of Economic 22,500 Affairs proposed allowing the Chinese to invest up 21,337 to 10% in Taiwanese technology companies, and up to 50% in new technology-sector joint ventures. 20,000 If implemented, the new rule would give Chinese investors access to some of Taiwan’s most globally 18,106 competitive companies. As of early 2011, Taiwanese manufacturers made nine out of every 17,500 ten notebook computers in the world. As of early 15,807 2011, Taiwan Semiconductor Manufacturing 14,266 Company was the world’s largest contract 15,000 14,429 chipmaker and Hon Hai, also known as Foxconn, was the world’s largest electronics manufacturing 12,449 services provider. 12,500 The proposed rule showed that the Taiwanese had 11,289 10,673 become comfortable with establishing closer economic relations with mainland China. Prior to 10,000 the announcement of the proposed rule, the Taiwanese had been somewhat cautious about 7,737 7,518 Chinese involvement in Taiwan’s technology 7,281 sector, which the Taiwanese regarded as a national 7,500 champion. Chinese investment in Taiwan was prohibited until 4,927 4,914 5,000 2009, despite Taiwan’s long history of investing in China. In 2009, the Chinese were allowed to invest 2,376 3,291 in only 99 sectors, accounting for US$137 million of foreign investments in Taiwan, as compared 2,500 1,518 with over US$200 billion of Taiwanese investment 796 870 in mainland China. 251 416 0 Source: “Taiwan Eases Rules for Chinese Investors,” Financial Times, February 28, 2011. 1980 1990 2000 2010E 2015E China Brazil Russia India Mexico

Source: World Economic Outlook, by the International Monetary Fund, April 2011.

97 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney INVESTING BACKGROUND Investment Strategy China GDP Per Capita

China Nominal GDP Per Capita, 1981 – 2009 Six Key Components of Economic Takeoff in the West US$ 000s 5.0 1. Competition 4.0 3.7 2. Scientific Revolution 3.3 3.0 2.7 3. Rule of Law and 2.1 Representative Government 1.7 2.0 1.5 1.1 1.3 0.9 1.0 4. Modern Medicine 0.7 0.8 0.8 0.9 1.0 0.5 0.5 0.6 0.3 0.3 0.3 0.2 0.3 0.3 0.3 0.4 0.3 0.3 0.3 0.4 5. Consumer Demand 0.0 6. Work Ethic, Savings, and '81 '82 '83 '84 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 00 '01 '02 '03 '04 '05 '06 '07 '08 '09

Capital Accumulation Source: China Economic Information Network, Bloomberg. Data are as of 2009.

Source: Civilization: The West and the Rest, by Niall Ferguson (Allen Lane, 2011). China’s GDP Per Capita and Regional Disparities within a Global Context

2009 Nominal GDP Per Capita (US$ 000s) The “Four Mores” Elements of 50.0 Continued Growth in China 10.0 1. Consume More 8.0 6.0 2. Import More 4.0 3. Invest Abroad More 2.0 4. Innovate More .0 s a l a d a m e rn nd n n ia c rn a si cco i b rica e UK US Source: Civilization: The West and the Rest, by Niall Ferguson istan India n e te o la istan ila Peru Ri pin s zi Ch a Af laysia Brazil Korea Japan iet p a Centra en Russia (Allen Lane, 2011). V ili We Mor Th East Pak h Indon w m Colom Ma P S rk Costa South Tu

Source: CEIC, Morgan Stanley & Co. Inc. Research. Data are as of 2009. 98 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney INVESTING BACKGROUND Investment Strategy Countries Matching the GDP of Chinese Provinces From The Economist

Gross Domestic Product (GDP) 2010 (in US$ Billion)

Guangdong 665 Jiangsu 596 Shandong 574 Zhejiang 379 Henan 333 Ukraine Hebei 287 (Heilongjiang) Liaoning 260 Czech Republic Shanghai 250 (Inner Mongolia Sichuan 244 (Mongol Autonomous Region)) Qatar Hunan 232 (Jilin) Hubei 225 United Arab Emirates Hong Kong 220 Libya (Liaoning) Fujian 206 (Xinjiang (Uyghur Autonomous Region)) Philippines Beijing 201 Croatia Hungary (Gansu) (Beijing) Inner Mongolia 180 Colombia (Tianjin) Anhui 175 (Hebei) Shaanxi 148 Ethiopia Hungary Switzerland Heilongjiang 142 Bolivia (Ningxia) (Shanxi) (Shandong) Jiangxi 136 (Qinghai) Thailand Switzerland Algeria Guangxi 135 (Henan) (Jiangsu) (Shaanxi) Tianjin 133 Malta Finland Pakistan Shanxi 129 (Tibet Autonomous Region) Nigeria (Shanghai) (Anhui) Jilin 127 (Hubei) Malaysia Qatar Austria Chongqing 117 (Sichuan) (Chongqing) Kazakhstan( Zhejiang) Yunnan 110 Singapore (Jiangxi) Xinjiang 73 (Hunan) Libya Ireland Guizhou 72 (Guizhou) (Fujian) Gansu 60 GDP > US$400 Billion Indonesia Hainan 30 Vietnam US$200 Billion ≤ GDP < US$400 Billion (Yunnan) Kuwait (Guangdong) Macau 26 (Guangxi) Egypt Ningxia 26 US$120 Billion ≤ GDP < US$200 Billion (Hong Kong) Qinghai 19 Panama US$50 Billion ≤ GDP < US$120 Billion (Macau) Tibet 8 GDP < US$50 Billion Kenya 0 160 320 480 640 800 (Hainan)

Source: The Economist, Economist.com/chinacompare; Economist Intelligence Unit; CEIC; World Trade Organization. Data are as of 2010.

99 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney INVESTING BACKGROUND Investment Strategy Countries Matching the Population of Chinese Provinces From The Economist

Population 2010 (In Million)

Guangdong 98 Shandong 94 Henan 93 Sichuan 81 Jiangsu 78 Hebei 71 Poland (Heilongjiang) Hunan 64 Yemen Anhui 59 (Inner Mongolia (Mongol Autonomous Region)) Hubei 57 Saudi Arabia Zhejiang 53 (Jilin) Guangxi 48 Sudan Yunnan 46 Romania (Liaoning) Liaoning 43 (Xinjiang Ghana Jiangxi 43 (Uyghur Autonomous Region)) Chile (Gansu) Zimbabwe (Beijing) Guizhou 38 Congo (Tianjin) Heilongjiang 37 (Hebei) Fujian 37 Jordan Uganda Vietnam (Ningxia) (Shandong) Shaanxi 37 Denmark (Shanxi) (Qinghai) Shanxi 35 Iran Canada Ethiopia Chongqing 29 (Jiangsu) (Shaanxi) (Henan) Armenia Jilin 27 Britain Cameroon Gansu 26 (Tibet Autonomous Region) Italy (Anhui) (Shanghai) Inner Mongolia 24 Germany (Hubei) (Sichuan) Myanmar Xinjiang 22 Venezuela (Zhejiang) Kenya Shanghai 19 (Chongqing) France (Jiangxi) Beijing 17 (Hunan) Algeria Argentina Tianjin 12 (Fujian) (Guizhou) Hainan 9 Population > 80 Million Spain Philippines Hong Kong 7 60 Million ≤ Population < 80 Million (Yunnan) South Africa (Guangdong) Ningxia 6 (Guangxi) Papua New Guinea 40 Million ≤ Population < 60 Million Qinghai 6 (Hong Kong) Solomon Islands Tibet 3 20 Million ≤ Population < 40 Million (Macau) Macau 1 Population < 20 Million Burundi 020406080 100 (Hainan)

Source: The Economist, Economist.com/chinacompare; Economist Intelligence Unit; CEIC; World Trade Organization. Data are as of 2010.

100 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney INVESTING BACKGROUND Investment Strategy Countries Matching the Exports of Chinese Provinces From The Economist

Exports 2009, (In US$ Billion)

Guangdong 362 Jiangsu 208 Zhejiang 148 Shanghai 136 Shandong 83 Jordan Fujian 51 (Heilongjiang) Liaoning 33 El Salvador Tianjin 31 (Inner Mongolia Beijing 29 (Mongol Autonomous Region)) Botswana Hebei 19 (Jilin) Sichuan 12 Libya Xinjiang 11 Uzbekistan (Liaoning) Hubei 9 (Xinjiang (Uyghur Autonomous Region)) Nepal Oman Henan 9 Colombia (Gansu) (Beijing) Anhui 8 Greece( Tianjin) Jiangxi 8 (Hebei) Iceland Hong Kong(1 ) 8 Benin Hungary (Ningxia) (Shanxi) (Shandong) Heilongjiang 6 Rwanda (Qinghai) Hunan 6 Bosnia and Costa Rica Taiwan Herzegovina (Henan) (Jiangsu) Guangxi 5 Serbia Belize (Shaanxi) Shanxi 4 (Tibet Autonomous Region) (Anhui) Austria Trinidad and Chongqing 4 (Shanghai) Bahrain Tobago Shaanxi 4 (Sichuan) (Hubei) Thailand Inner Mongolia 4 Lebanon (Zhejiang) (Chongqing) Latvia Yunnan 4 Congo (Jiangxi) (Hunan) Jilin 3 North Korea Nigeria Hainan 2 (Guizhou) (Fujian) Guizhou 2 Exports > US$200 Billion Namibia Gabon South Korea Ningxia 1 (Yunnan) US$50 Billion ≤ Exports < US$200 Billion (Guangxi) (Guangdong) Macau 1 Sri Lanka US$10 Billion ≤ Exports < US$50 Billion Gansu 1 (Hong Kong) Panama Tibet 0 US$5 Billion ≤ Exports < US$10 Billion (Macau) Qinghai 0 Exports < US$5 Billion Mongolia 080 160 240 320 400 (Hainan)

Note: 1. Hong Kong excludes re-exports. Source: The Economist, Economist.com/chinacompare; Economist Intelligence Unit; CEIC; World Trade Organization. Data are as of 2009. 101 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney INVESTING BACKGROUND Investment Strategy China and Greater Asia Economic Forecast As of May 2011

Emperor Qin’s of Xian China, and Greater Asia Economic Forecast Calendar Years ending Dec. 31 2006 2007 2008 2009 2010 2011E 2012E Real GDP Growth (%) Asia Ex-Japan 10.0 % 10.8 % 7.2 % 6.2 % 9.3 % 7.7 % 7.9 % AXJ (Ex-China and India) 5.6 6.0 2.8 0.0 7.1 4.7 4.7 Asia Pacific(1) 9.6 10.5 7.0 6.0 9.0 7.5 7.8 China 12.7 14.2 9.6 9.2 10.3 9.0 9.0 Hong Kong 7.0 6.4 2.1 (2.7) 7.0 6.0 4.0 Taiwan 5.4 6.0 0.7 (1.9) 10.5 3.8 4.2 CPI Inflation (%, Period Average) Asia Ex-Japan 3.4 % 4.6 % 6.4 % 2.4 % 5.1 % 5.1 % 3.8 % Asia Pacific(1) 3.8 4.3 6.2 2.6 4.9 4.8 3.8 China 1.5 4.8 5.9 (0.7) 3.3 4.6 4.0 Hong Kong(2) 2.0 2.0 4.3 0.5 2.4 3.8 4.4 Taiwan 0.6 1.8 3.5 (0.9) 1.0 2.0 1.6 Current Account (% of GDP) Asia Ex-Japan 6.1 % 7.2 % 6.0 % 4.8 % 4.1 % 2.8 % 2.6 % China 9.1 10.1 9.1 5.2 5.2 3.0 2.8 Hong Kong 12.1 12.4 13.7 8.6 6.6 6.0 5.6 Taiwan 7.0 8.4 6.3 11.4 9.4 8.6 8.8 At the burial site of the first Chinese emperor Qin Interest Rates (Prime Lending Rate, %, Period End) Shihuangdi (circa 260-210 BC) stands an army of China(3) 6.1 % 7.5 % 5.3 % 5.3 % 5.8 % 6.6 % 6.8 % approximately 8,000 terracotta warriors. The Hong Kong (4) 5.3 4.1 3.5 2.3 2.0 2.3 3.8 Emperor ordered this massive clay army to be Taiwan(5) 4.0 4.4 4.5 2.5 2.6 3.1 3.5 produced for his protection in the afterlife. Prior Interest Rates (3-Month Interbank Rate, %, Period End) to Emperor Qin’s rule, it was tradition in China China(6) 1.8 % 3.3 % 1.7 % 1.7 % 2.3 % 3.0 % 3.3 % for slaves and soldiers to be buried alive in their Hong Kong 3.9 3.5 1.0 0.1 0.3 0.4 2.4 master’s tomb for service and protection in the Taiwan(7) 1.8 2.2 1.1 0.6 0.7 1.2 1.5 afterlife. During Qin’s reign, the burying of USD Exchange Rate (Period End) humans was abolished. To substitute for human China 7.81 7.31 6.83 6.83 6.60 6.20 5.82 soldiers, Qin summoned the creation of this Hong Kong 7.78 7.80 7.75 7.75 7.75 7.78 7.75 terracotta army. Emperor Qin’s tomb of terracotta Taiwan 32.60 32.40 32.90 33.00 30.10 28.60 27.00 soldiers was discovered in 1974 and attracts more Notes: than two million visitors a year. 1. Asia Pacific includes: China, Hong Kong, India, Indonesia, Korea, Malaysia, 5. Data represent the Taiwan First Commercial Bank Prime Lending Rate before 2003, and the the Philippines, Singapore, Taiwan, Thailand, and Australia. Base Lending Rate since 2003. Source: Encyclopedia Britannica, www.britannica.com, www.globalmountainsummit.org, www.chinaculture.org. 2. Represents the composite consumer price index. 6. Represents the three-month time deposit rate. 3. Represents the one-year working capital rate. 7. Represents the 90-day money market middle rate. 4. Represents the Hong Kong mortgage rate. Source: CEIC, Morgan Stanley & Co. Inc. Research. 102 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney INVESTING BACKGROUND Investment Strategy Asia Pacific Market Valuations As of December 31, 2010

Asia Pacific Market Data Sheet As of December 31, 2010 Mkt Cap Total Return (US$) 2005 – 2010 P/E EPS Growth Dividend US$Bn 2005 2006 2007 2008 2009 2010 CAGR 2010 2011E 2012E 2010 2011E 2012E P/B ROE Yield

MSCI Asia Pacific Ex Japan 6,206 23.3% 16.5% 14.3% -41.8% 37.6% 17.0% 4.4% 15.0 12.3 11.6 47.1% 14.3% 13.4% 1.6 10.3% 2.4%

Countries

Australia 973 16.0% 30.9% 28.3% -50.7% 76.4% 14.5% 6.9% 12.3 10.5 10.2 19.0% 12.6% 7.4% 2.1 8.3% 4.1%

China 676 19.8% 82.9% 66.2% -50.8% 62.3% 4.6% 11.8% 13.5 11.7 10.1 30.1% 15.4% 16.3% 2.3 6.3% 2.2%

Hong Kong 316 8.4% 30.4% 41.2% -51.2% 60.2% 23.2% 6.7% 13.1 12.0 10.7 28.0% 8.6% 12.5% 1.8 12.5% 2.4%

India 313 37.6% 51.0% 73.1% -64.6% 102.8% 20.9% 12.1% 13.5 11.0 9.3 22.2% 22.5% 19.0% 3.6 6.3% 0.9%

Indonesia 90 15.1% 73.8% 54.2% -56.5% 126.2% 33.9% 15.1% 3.2 2.6 2.2 18.7% 22.6% 16.8% 4.4 4.3% 2.2%

Korea 540 57.0% 12.6% 31.9% -55.3% 71.3% 26.7% 8.5% 8.0 7.1 6.3 50.1% 12.5% 12.7% 1.6 7.7% 1.1%

Malaysia 111 2.3% 37.1% 46.1% -41.2% 52.1% 37.0% 9.6% 14.0 12.0 10.7 29.6% 16.9% 11.8% 2.4 7.5% 2.3%

New Zealand 11 1.7% 16.6% 8.9% -53.8% 50.4% 8.3% -0.3% 17.4 13.5 12.7 4.9% 20.8% 12.9% 1.6 10.6% 5.2%

Philippines 20 22.6% 58.2% 40.4% -52.6% 65.6% 33.9% 11.1% 8.1 7.4 6.5 31.4% 9.5% 14.2% 2.9 6.1% 2.4%

Singapore 190 14.4% 46.7% 28.4% -47.4% 74.0% 22.1% 9.2% 37.4 34.2 31.1 23.4% 9.6% 9.8% 1.9 8.5% 2.8%

Taiwan 449 6.4% 20.0% 8.4% -46.5% 79.2% 21.8% 4.9% 14.5 13.1 11.6 91.4% 10.6% 13.2% 2.1 7.5% 3.2%

Thailand 66 8.7% 11.1% 46.0% -48.5% 76.6% 55.7% 9.6% 12.2 10.1 8.7 19.9% 21.0% 15.9% 2.4 6.3% 2.5%

Source: FactSet, I/B/E/S, MSCI, Morgan Stanley & Co. Inc. Research. Select Chinese Inventions Paper ─ Chinese legend indicates that the new invention of paper Gunpowder ─ Chinese scientists discovered that an Compass ─ By the third century AD, Chinese scientists had was presented to the Emperor in the year 105 AD. Archeological explosive mixture could be produced by combining sulfur, learned to make magnets by heating pieces of ore to high evidence, however, shows that paper was used in China two charcoal, and saltpeter (potassium nitrate). This invention temperatures and then cooling the pieces in a North/South hundred years before that time. Either way, the Chinese were provided the Chinese military with an advantage over its position. The magnet was then placed on a piece of reed significantly ahead of the rest of the world. The craft of adversaries. New weapons were rapidly developed, and floated in a bowl of water marked with directional papermaking utilized an abundance of bamboo fiber to produce a including rockets and other projectiles that could be bearings. These first navigational compasses were widely fine quality paper. launched from a bamboo tube. used on Chinese ships by the 11th century AD. Source: The Franklin Institute, Philadelphia, PA. Estimates of future performance are based on assumptions that may not be realized. The indexes are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Past performance is no guarantee of future results. International investing entails greater risk, as well as greater potential rewards compared to US investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economics. 103 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney INVESTING BACKGROUND Investment Strategy Emerging Market Relative Valuation: Equities and Currencies As of January 2011

• In January 2011, The Bank Credit Analyst Emerging Market Relative Valuation: Equities and Currencies (BCA) conducted an analysis of Emerging Market (EM) Valuation. BCA ranked EM 20 countries based on the valuation levels of their equities and currencies. Brazil Relatively • As of January 2011, they concluded that High Valuations EM countries with high valuations included Brazil, Chile, Colombia, Indonesia, and 16 South Africa; EM countries with low High Valuation valuations included Hungary, Malaysia, Russia Chile Poland, Russia, Taiwan, Thailand, and Turkey. (1) Indonesia The Czech Republic Tulou Turkey South Africa 12 Colombia

Hungary Thailand Poland 8

China Currency Valuation Ranking Ranking Valuation Currency Korea Malaysia Philippines A Tulou, or “earthen building,” is a traditional Relatively communal residence in the Fujian province of 4 Mexico southern China, usually of a circular Low Valuations configuration surrounding a central shrine. India These structures were occupied by clan groups. Taiwan

Some were constructed of cut granite or had Low Valuation substantial walls of fired brick. Most large- scale tulou seen today were built of a composite of earth, sand, and limestone known as sanhetu. 0 In 2008, the famous was 0 4 8 12 16 20 designated a UNESCO World Heritage site. Low Valuation Equity Valuation Ranking (2) High Valuation Source: World Heritage Convention. Notes: 1. Currency valuation are calculated as an average of: (i) Purchasing power parity (nominal GDP divided by GDP at PPP); and (ii) Real effective exchange rate deviation from its 10-year moving average. 2. Equity valuation are based on: (i) An average of trailing and forward price/earnings ratios; (ii) Price/book value ratios; and (iii) Dividend yields.

Source: The Bank Credit Analyst, “Outlook 2011: A Pivotal Year Ahead,” January 2011 – Volume 62, No.7. 104 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney INVESTING BACKGROUND Investment Strategy Chinese Initial Public Offering Activity Annual Initial Public Offering (IPO) Volume, 2000 – 2010

• By market capitalization, China’s stock exchanges accounted for 12% of the world’s total stock exchange market. Chinese IPO Priced Equity Offerings

Stock Exchanges Around the World US$ Billions By Stock Market Capitalization As of December 31, 2010 125 Market Cap. % of RankCompany Name (US$ Tn) World 1 NYSE Euronext 16.3 29.7% 104.4 2NASDAQ 3.9 7.1%

3 Tokyo SE Group 3.8 7.0% 100

4 London SE Group 3.6 6.6%

5 Shanghai SE 2.7 4.9%

6 Hong Kong Exchanges 2.7 4.9%

7 TSX Group (Canada) 2.2 4.0% 75 8 Bombay SE 1.6 3.0%

9 BOVESPA (Brazil) 1.5 2.8%

10 Australian SE 1.5 2.7%

11 Deutsche Börse 1.4 2.6% 50.6 50 45.6 12 Shenzhen SE 1.3 2.4% 41.5 13 SIX Swiss Exchange 1.2 2.2%

14 BME Spanish Exchanges 1.2 2.1%

15 Korea Exchange 1.1 2.0% 22.7 16 NASDAQ OMX Nordic Exchange 1.0 1.9% 25

17 MICEX (Russia) 0.9 1.7% 13.3 10.6 18 Johannesburg SE 0.9 1.7% 8.4 6.6 19 Taiwan SE Corp. 0.8 1.5% 2.5 2.5 20 Singapore Exchange 0.6 1.2% 0 Total 54.9 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Number of Denotes Chinese Stock Exchange 27 29 28 36 61 81 91 139 51 185 471 Transactions: Source: World Federation of Exchange Members. Data are as of December 2010. Note: 1. The equity offerings include all Chinese companies listed on stock exchanges globally. Source: Dealogic. Data are as of December 2010. 105 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney INVESTING BACKGROUND Investment Strategy Largest Chinese IPOs in 2010

Largest Chinese Initial Public Offerings in 2010 (1) Shanghai Emblem Hong Kong Emblem

Deal Size Offer Price Shares Offered Pricing Date Issuer Industry ($US MM) (US$) (MM) Bookrunners Exchange China Galaxy Securities, China International Capital, Hong Kong, 1 6-Jul-10 Agricultural Bank of China Ltd Financial Institutions 22,466 0.41 54,794 CITIC Securities, Guotai Junan Securities Shanghai

2 12-Aug-10 China Everbright Bank Co. Ltd Financial Institutions 3,220 0.46 7,000 China International Capital, JP Morgan Shanghai

3 11-Feb-10 Huatai Securities Co. Ltd Financial Institutions 2,299 2.93 785 Haitong Securities Shanghai

China Rongsheng Heavy Industries Group Holdings Bank of China, CCB International Capital, 411-Nov-10 Transportation 1,803 1.03 1,750 Hong Kong Ltd Deutsche Bank, JPMorgan, Morgan Stanley

5 3-Feb-10 China First Heavy Industries Machinery 1,660 0.83 2,000 Bank of China Ltd Shanghai

6 21-Jan-10 China XD Electric Co. Ltd Computers & Electronics 1,516 1.16 1,307 China International Capital Shanghai

7 9-Dec-10 Chongqing Rural Commercial Bank Co. Ltd Financial Institutions 1,486 0.68 2,186 Morgan Stanley, Nomura Hong Kong

8 16-Sep-10 Ningbo Port Co. Ltd Transportation 1,100 0.55 2,000 Bank of China Shanghai

9 23-Apr-10 Shenzhen Hepalink Pharmaceutical Co. Ltd Healthcare 869 21.68 40 China JianYin Investment Securities Shenzhen

10 21-May-10 Sichuan Kelun Pharmaceutical Co. Ltd Healthcare 733 12.21 60 Sinolink Shenzhen

11 30-Dec-10 China Hainan Rubber Industry Group Co. Ltd Chemicals 707 0.90 786 CITIC Securities Shanghai

China Everbright Sec.(HK), Cinda Int'l Capital, 12 13-Dec-10 China Datang Corp Renewable Power Co. Ltd Utility & Energy 643 0.30 2,143 Hong Kong Credit Suisse, JP Morgan, Macquarie Group, UBS

13 22-Oct-10 China South Publishing & Media Group Co. Ltd Media 637 1.60 398 Bank of China Shanghai

14 6-Aug-10 Jihua Group Corp Ltd Aerospace & Defense 602 0.52 1,157 UBS Shanghai

15 13-Oct-10 Springland International Holdings Ltd Retail 546 0.76 719 DBS, Morgan Stanley Hong Kong

Source: Dealogic; Bloomberg, LLC; Shanghai Expo; www.expo2010.china.hu. Data are as of December 2010.

The securities mentioned are provided for informational purposes only and should not be deemed as a recommendation to buy or sell. Returns do not include payment of any charges or fees an investor would pay to purchase the securities. Such costs would lower performance. 106 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney INVESTING BACKGROUND Investment Strategy Chinese M&A Activity Annual M&A Volume, 2000 – 2010

Chinese Cross-Border Acquisition Chinese M&A Transactions Activity Includes Domestic and International Transactions Involving Chinese Companies, As Acquirors or Targets • Motivated by a desire to attain global US$ Billions scale, acquire raw materials, obtain 200 187.1 187.2 technical innovation, and secure access to foreign markets, Chinese corporations accounted for approximately 10% of the value of cross-border acquisitions in 2010. 150 • As China’s enterprises invest abroad, 138.2 its interests should continue to align with global interests, increasing the country’s enthusiasm for and embrace 115.1 of international cooperation.

• As of late 2010, China (including 100 Macau and Hong Kong) owned approximately 6% of the world’s stock of Foreign Direct Investment. 66.7 • As of early 2011, stock exchange- 56.2 listed Chinese firms, many of which 48.4 are state-controlled, represented 50 approximately 13% of total global 34.1 equity capitalization. 31.5 31.1

14.7

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Number of 571 608 1,086 1,695 2,350 1,951 2,179 2,911 3,306 3,040 3,455 Transactions:

Source: Thomson Reuters. Data are as of December 2010.

107 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney INVESTING BACKGROUND Investment Strategy Largest Chinese M&A Transactions in 2010 Chinese Acquirors Accounted for All of the Top 15 Chinese M&A Transactions in 2010, Seven of Which Were Cross-Border

Largest Chinese M&A Transactions in 2010

Date Nationality of Nationality of Deal Size Announced Target Name Target Target Industry Target Business Description Acquiror Name Acquiror ($US MM)

1 10-Dec-10 Occidental Argentina Expl Argentina Energy Provides power generation services world wide Sinopec Group China 2,450

Henan Luohe Shuanghui 2 29-Nov-10 China Food & Beverage A congolomerate of various food & beverages companies Henan Shuanghui Invest & Dvlp. China 5,052 Ind. (Assets)

Henan Shuanghui Invest & 3 29-Nov-10 China Food & Beverage Produces meat and engages in wholesaling Rotary Vortex Ltd Hong Kong 2,474 Dvlp

4 22-Nov-10 Draka Holding NV Netherlands Metals/Mining/Coal Manufactures wire and cable products Tianjin Xinmao Science & Tech China 1,757

Shanghai Bailian Group Co. 5 4-Nov-10 China Retail Owns and operates shopping centers Shanghai Friendship Group China 2,536 Ltd

6 1-Oct-10 Repsol YPF Brasil SA Brazil Energy Engages in oil and gas exploration Sinopec Group China 7,111

7 27-Sep-10 Album Resources Pte Ltd Australia Metals/Mining/Coal Engages in the mining of minerals and metals Minmetals Resources Ltd China 2,818

Shenzhen Dvlp. Bank Co. 8 1-Sep-10 China Banking Provides local and foreign currency deposits and loan services Ping An Ins (Grp) Co. of China China 4,313 Ltd

Hangang Hanbao Iron & Manufactures steel sheets used in automobiles and pipe steels 9 9-Jun-10 China Metals/Mining/Coal Hebei Iron & Steel Co. Ltd China 2,345 Steel Co. used in the oil industry

Peregrino Project (Statoil 10 21-May-10 Brazil Energy Owns oil reserves in the Campos Basin area Sinochem Group China 3,070 ASA)

11 12-Apr-10 Syncrude Canada Ltd Canada Energy Engages in oil and gas exploration in Canada Sinopec International China 4,650

Engages in oil and gas exploration in South America, Central 12 14-Mar-10 Bridas Corp. Argentina Energy CNOOC Ltd China 3,100 Asia, and Middle East

Provides banking and financial services including deposits, 13 5-Mar-10 Shanghai Pudong Dvlp. Bk China Banking China Mobile Grp Guangdong Co. China 5,831 loans, settlements, and government bond trading

Yima Coal Ind Grp Co Ltd 14 3-Feb-10 China Metals/Mining/Coal Owns coal mining assets in China Nanjing Xinwang Tech Co. Ltd China 1,996 (Assets)

Manufactures motor vehicles, and automotive equipment and 15 22-Jan-10 Denway Motors Ltd Hong Kong Automotive China Lounge Investments Ltd Hong Kong 3,048 parts

Source: Thomson Reuters. Data are as of December 2010. The securities mentioned are provided for informational purposes only and should not be deemed as a recommendation to buy or sell. Returns do not include payment of any charges or fees an investor would pay to purchase the securities. Such costs would lower performance. 108 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney INVESTING BACKGROUND Investment Strategy Notable Resource-Related Transactions by China, 2005 – 2010

China's Wealthiest Individuals Notable Resource-Related Transactions by China, 2005 – 2010 As of March 2011 Net Worth Deal Size Name Business US$ Bn Date Investor (US$ Bn) Description 1 Robin Li Internet 9.4 2 Liang Wengen Construction 8.0 Aug. 2005 China National Petroleum 4.2 State-owned oil giant, parent of PetroChina, buys Calgary-based PetroKazakhstan 3 Zong Qinghou Food & Beverage 5.9 4 Li Li Pharmaceuticals 5.7 5 He Xiangjian Appliances 5.5 Sept. 2006 China National Machinery 3.0 State-owned consortium to develop iron ore in Gabon Republic 6 Wu Yajun Property 5.5 7 Hui Ka Yan Property 5.1 Nov. 2007 China Metallurgic Group 2.9 State-owned metal producer to develop Afghanistan's largest copper mine 8 Zhang Jindong Electronics 5.0 9 Ma Huateng Internet 5.0

10 Wang Jianlin Property 4.6 Feb. 2008 Aluminum Corp. of China 12.8 With Alcoa, buys 12% of Australia's mining giant Rio Tinto Source: Forbes; International Business Times, “Top 10 Richest People in China 2011,” March 10, 2011. June 2009 Sinopec 7.2 Petrochemical giant buys Switzerland's Addax Petroleum, a play on West Africa and Iraq Hong Kong's Wealthiest Individuals As of February 2011 Aug. 2009 Yanzhou Coal 3.0 China's fourth-largest coal producer buys Australian miner Felix Resources Net Worth Name Business US$ Bn 1 Li Ka-shing Property 24.0 2 Kwong Siu-hing Property 20.0 Dec. 2009 Shunde Rixin 1.9 Private, Guangdong-based conglomerate buys 70% of exploration rights to Chilean iron ore deposits 3 Robert Kuok Hotels 9.0 4 Cheng Yu-tung Jewellery and Property 9.0 March 2010 CNOOC 3.1 State-owned offshore oil giant buys a 50% stake in a unit of Bridas Energy 5 Stanley Ho Casinos and Hotels 3.1 6 Lui Chee-woo Casinos and Hotels 3.0

7 David Li Banking 1.9 May 2010 Sinochem 3.1 State's largest chemical trader buys 40% of Brazil's Peregrino field 8 Gordon Wu Property 0.9

Source: Forbes; The Economist, “Dusk for the Patriarchs,” February Source: Heritage Foundation; “China’s Sure Bet,” Barron’s, November 8, 2010. 5, 2011.

109 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney INVESTING BACKGROUND Investment Strategy Overview of China-Related Equities

• Chinese companies can issue A, Overview of China-Related Equities B, and H shares, and ADRs. While the different types of shares in the same company may trade

stors Domestic Investors Foreign Investors on different exchanges, and in e

some cases in different currencies, Inv their entitlement to dividends is essentially the same. Shanghai and Hong Kong Stock • The differences in valuation are Shenzhen Stock Exchanges Exchange Singapore, US, London… largely a result of differing profiles of buyers and sellers and liquidity on the various exchanges.

Behind China’s Boom H Shares Red Chips (HKD) (HKD) While China’s stock market has been

expanding, many companies remain et China– k A-Shares B Shares Related ADRs state-controlled. (CNY) (USD/HKD)

Mar Stocks Tradable vs, Non-tradable Shares US$ Billions P Chips 2,000 (HKD)

1,500 63% 1,000

500 62% 37% Domestic Companies Overseas-registered Mainland Companies 69% 66% 34% 38% Issues 0 31% 95 00 05 08 Tradable Shares • Qualified Domestic Institutional Investors (QDII) may invest in H Shares, Red Chips, P Chips, China-Related Stocks, and ADRs. Nontradable, State-Owned Shares • Qualified Foreign Institutional Investors (QFII), introduced in 2003, may invest in China A Shares. Source: Bloomberg, LLC. Data are as of 2008.

Source: Morgan Stanley & Co. Inc. Research; Morgan Stanley Smith Barney Investment Strategy; Blackrock. 110 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney INVESTING BACKGROUND Investment Strategy Historical Performance of China Shares 2010 Price Performance in US Dollar Terms

Tiananmen Square 2010 Performance 2008-2010 % Price Return in US$ Terms CAGR

Shanghai A-SharesShanghai Stock A-Shares Price Index Index -11.4 26.2%

Shenzhen A-SharesShenzhen Stock A-Shares Price Index Index 11.0 55.1%

Shanghai B-SharesShanghai Stock B-Shares Price Index Index 20.6 65.6%

Shenzhen B-SharesShenzhen Stock B-Shares Price Index Index 31.4 74.1%

Tiananmen Square, in the center of Beijing, is Hang Seng China Enterprises Index Hang Seng Enterprise Index -1.0 26.6% said to be the largest square in the world. It (H Shares) measures 880 meters (2,887 feet) from north Hang SengHang ChSengina AffiliatedChina Aff. 2.5 12.4% to south, and 500 meters (1,640 feet) from Company IndexCompany (Red IndexChips) east to west, has a total area of 440,000 square meters (4.7 million square feet) and can hold MSCI ChinaMSCI P Chip China Index P (PChip Chips) Index -0.2 51.9% one million people. Over several hundred years, in front of Tiananmen, many public MSCI ChinaMSCI Index China 2.3 27.5% meetings and demonstrations have been held. Tens of thousands of people visit daily. Standard & Poor’sS&P China China BMI BMI Index Index 6.9 33.3% Source: www.about.com.

Standard & Poor’s 500S&P Index 500 12.8 18.0%

Dow Jones IndustrialDow Average Jones 11.0 14.9%

NASDAQ CompositeNASDAQ Index 16.9 29.7%

-20-100 10203040

Source: Bloomberg, LLC. Data are as of December 31, 2010. Estimates of future performance are based on assumptions that may not be realized. The indexes are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Past performance is no guarantee of future results. International investing entails greater risk, as well as greater potential rewards compared to US investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economics. 111 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney INVESTING BACKGROUND Investment Strategy China’s Domestic Fund Management Industry and Chinese Individual Investors

China’s Growing Domestic Asset Management Industry Individual Investors’ Share of the China’s A-Shares Market

• From 1997 through 2010, China’s domestic asset management industry had grown at a 41% As of May 2011, individual investors were the leading holder of CAGR in assets under management. As of May 2011, Chinese fund managers owned 23% Chinese A-shares, despite the rapid growth in institutional investors. of the A-shares market and represented the core of institutional ownership of the A-share market. As of May 2011, over 750 Chinese domestic mutual funds were in operations, with Share of Investor Base by Free-float Market Capitalization a collective net asset value (NAV) per fund of US$0.5 billion. As of May 2011, fund managers were allowed to sell short, invest in index futures, and employ margin. Other Institutions 13% Aggregate Assets under Management (AuM) of Mutual Funds AuM of Mutual Funds (US$ Billions) Shanghai Composite Index (US Dollars) 400 800

300 600 Mutual Funds 23% 200 400

100 200 Individuals 0 0 64% '97'98 '99'00 '01'02 '03'04 '05'06 '07'08 '09'10 '11 (1) AuM of Mutual Funds, Equity Portion Shanghai Composite Index • Although institutional investors, mainly mutual funds, had flourished from 2002 Source: Wind, Morgan Stanley & Co. Inc. Research. Data are as of May 2011. to 2009, individual investors remained the majority holder of A-shares as of May 2011. Expansion of Fund Products • As of May 2011, the Morgan Stanley Research China strategy team estimated Number of Funds NAV per Fund (US$ Billions) that 65% of institutional funds had come from retail investors. 1,000 1.5 • From early 2001 to early 2011, retail investors tended to be momentum 800 1.2 investors. From November 2005 through September 2007, the Shanghai SE 600 0.9 Composite index rose 405%; during that same time period, the number of new 400 0.6 individual investment accounts grew at times at over 2,500% year-over-year. 200 0.3 From 2007 through October 2008, the Shanghai SE Composite index fell 68%; during that same time period, the number of new individual investment accounts 0 0.0 (1) shrank considerably as many investors withdrew funds from the stock market. '98'99 '00'01 '02'03 '04'05 '06'07 '08'09 '10'11 From 2008 to early 2011, the number of new individual investment accounts Number of Funds NAV per Fund grew in line with the performance of the Shanghai SE Composite index.

Source: Wind, Morgan Stanley & Co. Inc. Research. Data are as of May 2011. Source: CEIC, Morgan Stanley & Co. Inc. Research, Morgan Stanley Smith Barney Investment Strategy. Data are as of May 2011.

112 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney INVESTING BACKGROUND Investment Strategy China’s A-Shares Market

China’s A-Shares Market: the Fifth Overview of the A Shares Market Largest in the World • China’s A shares market was created in 1990, but remained a nascent market until the reform of non-tradable shares in 2005. Prior to Market Capitalization as of December 31, 2005, mainland Chinese companies had two share classes: tradable shares listed on the Shanghai and Shenzhen stock exchanges; and non- 2010 (US$ Trillion) tradable, non-listed shares with the same ownership rights and claims as tradable shares. In 2005, the China Securities Regulatory Commission (CSRC) launched a program to convert non-tradable shares into tradable shares by 2006, using bonus shares, cash, options, NYSE Euronext 16.3 and capital-raising incentives to help facilitate the conversion process. • In 2009, the CSRC launched the Growth Enterprise Market (GEM) board, a NASDAQ-style initiative to develop the equity market for NASDAQ 3.9 start-ups and growing businesses. As a result of the creation of the GEM board, the Shenzhen stock exchange launched the ChiNext market, a sub-exchange for domestic start-ups, with the intent of attracting more companies. Tokyo SE Group 3.8 • The CSRC’s initiatives produced results: from 2005 to 2010, the A shares market grew rapidly, with a CAGR of 53.4%. As of December 2010, the A shares market was China’s largest and primary stock market and represented the world’s fifth largest stock market, with London SE Group 3.6 US$3.3 trillion in market capitalization, or 55.4% of China’s 2010E GDP. • As of early 2011, the CSRC was in the process of launching the International Board, a sub-exchange of the Shanghai stock exchange that A Shares 3.3 would allow foreign companies and offshore Chinese companies that are technically based overseas to sell renminbi-denominated bonds (Shanghai & Shenzhen) and shares publicly in mainland China.

Source: The Asset Magazine, “GEM Board a New Test for China Market,” October 2009; Beltratti, Andrea and Bernardo Bortolotti, “The Non-tradable Share Reform in the Chinese Stock TSX Group (Canada) 2.2 Market,” Fondazione Eni Enrico Mattei, November 2006; Business China, “China Considering International Board,” November 29, 2010; , “ChiNext: to boom or to doom?” November 13, 2009; Economic Observer, “China’s International Board a Step Closer,” September 23, 2010.

Bombay SE 1.6 China’s A Shares Market Relative to Other Chinese Shares Markets Market Capitalization on December 31st of Every Year (US$ Billion) BOVESPA (Brazil) 1.5 5,000

Australian SE 1.5 2,500 2,000 Deutsche Börse 1.4 1,500 1,000 H-Shares (Hong Kong) 0.6 500

024625 0

Source: Bloomberg, LLC; World Federation of Exchanges. 2002 2003 2004 2005 2006 2007 2008 2009 2010 Data are as of December 31, 2010. A Shares H Shares Red-Chip Shares B Shares

A Shares Market as a 31.2% 30.6% 22.7% 17.2% 40.7% 122.0% 38.4% 65.6% 55.4% Percentage of China GDP

Source: Bloomberg, LLC. Data are as of December 31, 2010. 113 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney INVESTING BACKGROUND Investment Strategy Qualified Foreign Institutional Investors (QFII)

• Qualified Foreign Institutional Investors (QFII) are a group of investors allowed to invest in China’s domestic Select List of QFII A-shares stock market. Name Quota ($MM) • These QFII are subject to regulations by the Chinese government. UBS Ltd. 800 Citigroup Global Markets 550 • Since the inception of the QFII program in 2003, the number of OFII grew from zero to over a 100 as of April 2011. Credit Suisse 500 Fortis Bank 500 Qualified Foreign Institutional Investors in China Nikko Asset Management 450 QFII Approved Investment Funds (US$ Millions) Number of QFII Morgan Stanley International 450 25,000 120

HSBC 400 110 Deutsche Bank AG 400 20,690 100 Nomua Securities 350 20,000 17,720 90 ING Bank NV 350 16,570 Goldman Sachs & Co. 300 80 15,000 Merrill Lynch International 300 13,443 70 INVESCO 250 60 Source: Factiva, Morgan Stanley & Co. Inc. Research. Data are 9,995 50 as of April 2011. 10,000 9,045 40

5,645 30 5,000 3,425 20 1,700 10

0 0 2003 2004 2005 2006 2007 2008 2009 2010 2011(1) QFII Approved Investment Funds Number of QFII

Note: 1. Data for 2011 are as of April 29, 2011. Source: CEIC, Morgan Stanley & Co. Inc. Research. 114 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney INVESTING BACKGROUND Investment Strategy Performance of the Shanghai SE Composite Index (A & B Shares) 1994 Through 2010

Oracle Bone Script Shanghai SE Composite Index (A and B Shares) Chinese Renminbi 7,000

6,000 Oracle Bone Script is the oldest known form of Chinese written language. According to archeological research, it dates back as far as 4,800 years ago. The oracle bones, made of cattle 5,000 scapulae or turtle plastrons, were used in divination ceremonies during the Shang dynasty (1776 – 1122 BC). The Shang dynasty flourished in China for 4,000 over six centuries before being supplanted by the Zhou dynasty. The oracle bones were heated to produce cracks from which “yes” or “no” answers could be derived. 3,000 In the history of human civilization, is unique: a script whose fundamental structural principles have not changed for more than forty-five 2,000 centuries. Written Chinese evolved from a pictographic script (with each character representing a thing or idea) to a logographic one (with each character representing a spoken syllable). 1,000 Chinese is the only ancient logographic system that was never abandoned or converted to alphabet form. Source: “Letter From China – Oracle Bones,” The New Yorker, February 16, 2004, www.chinapage.com. 0 19941994 19951995 19961996 19971997 19981998 19991999 20002000 20012001 20022002 20032003 20042004 20052005 20062006 20072007 20082008 20092009 20102010 % Price Change Per Year: -16% -1% +71% +24% -6% +20% +35% -20% -9% 0% -20% -3% +113% +89% -58% +65% -6% Shanghai SE Composite

Source: FactSet. Data are as of December 31, 2010. Estimates of future performance are based on assumptions that may not be realized. The indexes are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Past performance is no guarantee of future results. International investing entails greater risk, as well as greater potential rewards compared to US investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economics. 115 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney INVESTING BACKGROUND Investment Strategy Performance of the Hang Seng China Enterprises Index (H Shares) 1994 Through 2010

The Archeological Site at Jiahu Hang Seng China Enterprises Index (H Shares)

Hong Kong Dollars 21,000

18,000

15,000

In 1999, Chinese archeologists unearthed what is believed to be the oldest known playable musical 12,000 instrument, a seven-holed flute fashioned 9,000 years ago from the hollow wing bone of a large bird. It is the best preserved of six intact flutes 9,000 found at Jiahu, an archeological site in the Yellow River valley in China’s Henan Province. Also at Jiahu, more than 40 house foundations have been discovered, as have 370 cellars and 9 6,000 pottery kilns. Jiahu has become an important site for understanding the early underpinnings of Chinese society, when humans left the caves of 3,000 the Stone Age and began practicing agriculture and establishing permanent settlements.

Source: The New York Times, September 28, 1999. 0 19941994 19951995 19961996 19971997 19981998 19991999 20002000 20012001 20022002 20032003 20042004 20052005 20062006 20072007 20082008 20092009 20102010 % Price Change Per Year: -36% -31% +34% -26% -45% +14% -18% +8% +13% +152% -6% +12% +94% +56% -51% +62% -1% Hang Seng China H-Shares Index

Source: FactSet. Data are as of December 31, 2010.

Estimates of future performance are based on assumptions that may not be realized. The indexes are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Past performance is no guarantee of future results. International investing entails greater risk, as well as greater potential rewards compared to US investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economics. 116 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney INVESTING BACKGROUND Investment Strategy Hang Seng China A/H Premium Index 2006 Through 2010

Definition of the Hang Seng China A/H Premium Index Hang Seng China A/H Premium Index Created by HSI Services Ltd. in 2006, the Index Level (Base = 100) Hang Seng China A/H Premium index 225 tracks the price premium (or discount) of A-shares to H-shares. The higher the index, the higher premium of A-shares over H-shares, and vice-versa. The index 200 is based to 100 and is denominated in US dollars.

Source: Bloomberg, LLC. 175 Chinese People’s Political Consultative Conference

150

125

The Chinese People’s Political Consultative Conference (CPPCC) is a political advisory 100 body of the People’s Republic of China. The organization consists of delegates from a range of political parties and organizations, as well as independent members, in China. 75 Source: www.china.org. 20072007 20072008 20092009 2010 2010 Annual Average Premium +48.4% +43.7% +31.1% +5.1% of A-Shares to H-Shares:

Hang Seng China A/H Premium Index Source: Bloomberg, LLC. Data are as of December 31, 2010. Estimates of future performance are based on assumptions that may not be realized. The indexes are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Past performance is no guarantee of future results. International investing entails greater risk, as well as greater potential rewards compared to US investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economics. 117 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney INVESTING BACKGROUND Investment Strategy Performance of the MSCI China Index 1993 Through 2010

MSCI China Constituents (As of Dec. 31, 2010) Index Sector Weight % MSCI China Index – Price Performance (Excluding Dividends) Financials 37.4 Index Level (Expressed in US Dollars) Energy 18.1 Telecom Services 11.3 150 Industrials 8.4 Materials 6.2 Consumer Discretionary 5.5 Information Technology 5.4 125 Consumer Staples 5.2 Utilities 1.8 Health Care 0.8 Total 100.0 100 Source: FactSet. Bank of China Tower

75

50

25 The Bank of China Tower houses the headquarters for the Bank of China in Hong Kong. It was designed by Ieoh Ming (I.M.) Pei. Born in China in 0 1917, Pei has lived many years in the 19921993 1993 1994 1994 1995 1995 1996 1996 1997 1997 1998 1998 1999 1999 2000 2000 2001 2001 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 2010 2010 US, and earned a Masters in % Price Change +34% -47% -23% +35% -26% -44% +10% -32% -26% -16% +81% -1% +16% +78% +63% -52% +59% +2% Architecture from Harvard University Per Year:

in 1944. In 1983, Mr. Pei was awarded Source: FactSet. Data are as of December 31, 2010. the Pritzker Architecture Prize. Estimates of future performance are based on assumptions that may not be realized. The indexes are unmanaged. An investor cannot invest directly in an index. They are shown Source: www.pcf-p.com. for illustrative purposes only and do not represent the performance of any specific investment. Past performance is no guarantee of future results. International investing entails greater risk, as well as greater potential rewards compared to US investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economics. 118 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney INVESTING BACKGROUND Investment Strategy Constituents of the MSCI China Index Performance Data in US Dollars as of December 31, 2010

YE2010 Value of US$1.00 Price Return (US$) (%) Company Name if Purchased on 1/1/05 Index weight 2005 2006 2007 2008 2009 2010 1 China Mobile Ltd 2.93 8.84% 39.6 82.5 104.7 (43.2) (6.4) 5.7 2 Industrial & Commercial Bank of China Ltd NA 6.69% NA NA 15.6 (26.7) 57.8 (8.6) 3 China Construction Bank Corp. NA 6.38% NA 82.8 34.5 (35.3) 56.9 7.4 4 CNOOC Ltd 4.42 6.27% 26.1 40.3 79.2 (45.1) 68.4 50.8 5 Bank of China Ltd NA 4.89% NA NA (11.7) (43.6) 98.0 1.5 6 China Life Insurance Co. Ltd (A Shares) 6.11 4.49% 32.1 286.4 51.6 (41.3) 62.8 (17.4) 7 PetroChina Co. Ltd 2.45 4.08% 53.4 73.0 25.8 (50.9) 37.2 8.7 8 Tencent Holdings Ltd 36.32 3.23% 78.9 232.7 112.6 (14.8) 236.8 (0.0) 9 Ping An Insurance (Group) Co. of China Ltd 6.58 2.83% 8.6 200.1 93.9 (54.9) 81.2 27.5 10 China Petroleum & Chemical Corp. 2.32 2.26% 20.6 86.4 63.2 (59.9) 47.3 7.4 11 China Shenhua Energy Co. Ltd NA 2.11% NA 118.3 148.3 (64.6) 131.6 (14.4) 12 China Merchants Bank Co. Ltd 'H' NA 1.46% NA NA 92.8 (54.6) 84.1 2.2 13 Agricultural Bank of China Ltd NA 1.25% NA NA NA NA NA NA 14 China Unicom (Hong Kong) Ltd 1.81 1.25% 2.7 80.4 56.6 (47.7) 10.5 7.9 15 China Overseas Land & Investment Ltd 7.57 1.12% 73.6 213.0 54.0 (32.0) 52.1 (12.5) 16 China Telecom Corp. Ltd 1.43 1.07% 0.2 49.0 45.2 (53.1) 12.1 25.3 17 Belle International Holdings Ltd NA 1.05% NA NA NA (71.0) 166.3 44.7 18 Bank of Communications Co. Ltd NA 0.99% NA 167.0 15.0 (48.3) 61.1 (8.6) 19 Hengan International Group Co. Ltd 13.15 0.94% 73.0 118.4 81.1 (28.4) 131.2 16.1 20 Yanzhou Coal Mining Co. Ltd 3.42 0.88% (28.1) 25.8 145.5 (63.0) 201.4 38.1 21 China Coal Energy Co. Ltd NA 0.81% NA NA 383.9 (74.7) 130.7 (15.0) 22 Want Want China Holdings Ltd NA 0.77% NA NA NA NA 69.4 24.9 23 China Resources Enterprise Ltd 2.62 0.73% 14.3 60.9 49.5 (59.4) 109.6 12.1 24 Dongfeng Motor Group Co. Ltd NA 0.69% NA 92.7 45.5 (54.3) 347.0 19.6 25 Jiangxi Copper Co. Ltd 5.77 0.67% (16.7) 114.6 141.3 (70.1) 223.1 38.8 26 China Yurun Food Group Ltd NA 0.64% NA 65.3 80.6 (29.4) 152.3 10.8 27 China Merchants Holdings (International) Co. Ltd 2.10 0.64% 15.3 88.7 51.6 (68.9) 68.5 21.3 28 Tingyi (Cayman Islands) Holding Corp. 11.84 0.63% 128.2 98.1 65.4 (28.3) 113.7 3.4 29 Inner Mongolia Yitai Coal Co. Ltd 33.11 0.63% 19.8 68.4 1,009.3 (74.5) 250.9 65.0 30 China CITIC Bank Corp. Ltd NA 0.59% NA NA NA (45.5) 150.1 (24.2) 31 Anhui Conch Cement Co. Ltd 8.63 0.57% 13.3 170.4 161.3 (47.1) 39.9 45.7 32 Kunlun Energy Co. Ltd 9.88 0.57% 40.5 150.7 15.7 (51.4) 328.0 16.6 33 GOME Electrical Appliances Holding Ltd 1.76 0.56% (25.3) 15.8 223.8 (77.2) 179.6 (1.0) 34 Zijin Mining Group Co. Ltd 10.23 0.55% 94.8 216.1 177.8 (60.9) 57.8 (3.1) 35 China Resources Land Ltd 10.76 0.54% 144.9 187.8 84.7 (44.6) 85.6 (19.7) Source: FactSet, MSCI. Estimates of future performance are based on assumptions that may not be realized. The indexes are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Past performance is no guarantee of future results. International investing entails greater risk, as well as greater potential rewards compared to US investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economics. 119 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney INVESTING BACKGROUND Investment Strategy Constituents of the MSCI China Index Performance Data in US Dollars as of December 31, 2010

YE2010 Value of US$1.00 Price Return (US$) (%) Company Name if Purchased on 1/1/05 Index weight 2005 2006 2007 2008 2009 2010 36 China Communications Construction Co. Ltd NA 0.54% NA NA 165.2 (53.0) (22.3) (8.7) 37 Aluminum Corp. of China Ltd 1.54 0.53% 28.6 21.7 123.0 (74.5) 109.5 (17.3) 38 Kingboard Chemical Holdings Ltd 2.83 0.53% 28.0 45.0 51.5 (69.9) 121.5 50.8 39 PICC Property and Casualty Company Ltd 4.17 0.52% (17.4) 78.8 179.0 (62.3) 67.4 60.5 40 China Pacific Insurance (Group) Co. Ltd NA 0.50% NA NA NA NA NA 4.3 41 China Minsheng Banking Corp. Ltd NA 0.50% NA NA NA NA NA (8.7) 42 China Oilfield Services Ltd 7.09 0.49% 31.9 72.3 228.8 (64.7) 48.7 80.6 43 China National Building Material Co. Ltd NA 0.49% NA NA 494.7 (68.8) 72.4 10.7 44 Beijing Enterprises Holdings Ltd 4.17 0.47% 13.7 26.5 122.3 (14.2) 77.9 (14.5) 45 Lenovo Group Ltd 2.14 0.46% 54.1 (11.9) 121.3 (69.7) 130.2 2.2 46 Guangzhou Automobile Group Co. Ltd 1.83 0.45% (7.0) 22.0 58.6 (51.6) 104.9 2.6 47 China Mengniu Dairy Co. Ltd 3.38 0.44% 8.5 208.9 39.5 (64.5) 175.2 (26.0) 48 China Resources Power Holdings Co. Ltd 3.39 0.44% 3.8 167.5 129.0 (44.4) 5.5 (9.0) 49 China Railway Group Ltd NA 0.43% NA NA NA (49.7) 12.4 (7.4) 50 CITIC Pacific Ltd 0.91 0.42% (2.7) 24.8 61.8 (80.6) 149.3 (3.6) 51 Cosco Pacific Ltd 0.84 0.42% (11.6) 28.2 13.6 (61.7) 25.5 36.0 52 China COSCO Holdings Co. Ltd NA 0.40% NA 47.6 387.5 (74.8) 77.1 (13.9) 53 BYD Co. Ltd 7.53 0.40% (41.8) 148.6 72.7 (5.9) 438.7 (40.5) 54 GCL-Poly Energy Holdings Ltd NA 0.38% NA NA NA (83.6) 280.1 23.0 55 Evergrande Real Estate Group Ltd NA 0.38% NA NA NA NA NA (12.1) 56 Huabao International Holdings Ltd 11.98 0.38% 14.6 250.6 84.4 (34.5) 64.7 49.9 57 CSR Corp. Ltd NA 0.37% NA NA NA NA 35.3 78.8 58 Weichai Power Co. Ltd 7.10 0.37% (39.1) 108.9 106.8 (58.7) 329.2 52.2 59 Ltd 2.91 0.37% (17.3) 69.6 175.3 (79.2) 152.8 43.5 60 Property Holdings Ltd NA 0.36% NA NA 36.1 (72.8) 173.5 (20.4) 61 China Taiping Insurance Holdings Co. Ltd 7.47 0.35% 3.4 196.1 117.8 (44.0) 110.5 (5.0) 62 Shanghai Industrial Holdings Ltd 2.02 0.35% (2.5) 2.2 104.8 (47.6) 123.9 (15.5) 63 Nine Dragons Paper Holdings Ltd NA 0.34% NA NA 46.8 (88.7) 465.3 (12.4) 64 Alibaba.com Ltd NA 0.33% NA NA NA (79.7) 222.4 (22.8) 65 China Railway Construction Corp. Ltd NA 0.33% NA NA NA NA (13.8) (6.2) 66 ENN Energy Holdings Ltd 5.24 0.33% 38.5 42.7 75.5 (46.9) 144.7 16.2 67 Chaoda Modern Agriculture (Holdings) Ltd 2.14 0.32% 12.5 54.9 42.3 (26.6) 67.6 (29.9) 68 Shandong Weigao Group Medical Polymer Co. Ltd 51.27 0.31% 98.2 385.6 116.8 (34.3) 120.1 69.8 69 Sinopharm Group Co. Ltd NA 0.30% NA NA NA NA NA (1.9) 70 Agile Property Holdings Ltd NA 0.30% NA 94.1 94.0 (71.4) 182.0 0.1 Source: FactSet, MSCI. Estimates of future performance are based on assumptions that may not be realized. The indexes are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Past performance is no guarantee of future results. International investing entails greater risk, as well as greater potential rewards compared to US investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economics. 120 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney INVESTING BACKGROUND Investment Strategy Constituents of the MSCI China Index Performance Data in US Dollars as of December 31, 2010

YE2010 Value of US$1.00 Price Return (US$) (%) Company Name if Purchased on 1/1/05 Index weight 2005 2006 2007 2008 2009 2010 71 Sino-Ocean Land Holdings Ltd NA 0.30% NA NA NA (63.5) 105.0 (29.3) 72 Fushan International Energy Group Ltd 13.66 0.30% 121.1 11.3 422.6 (61.2) 288.5 (29.5) 73 ZTE Corp. (H Shares) 3.35 0.29% 4.0 36.7 17.0 (31.9) 207.2 (3.7) 74 Parkson Retail Group Ltd NA 0.29% NA 174.2 143.4 (52.9) 55.4 (12.6) 75 China Everbright Ltd 4.45 0.29% (20.1) 188.0 171.3 (61.3) 101.6 (8.8) 76 Poly (Hong Kong) Investments Ltd 4.91 0.29% (21.7) 29.7 340.3 (73.4) 430.9 (22.0) 77 Shanghai Electric Group Co. Ltd NA 0.28% NA 23.0 101.3 (52.1) 14.3 42.5 78 China Agri-Industries Holdings Ltd NA 0.27% NA NA NA (25.8) 164.8 (13.7) 79 China High Speed Transmission Equipment Group Co. Ltd NA 0.27% NA NA NA (54.6) 102.0 (36.7) 80 Longfor Properties Co. Ltd NA 0.27% NA NA NA NA NA 23.3 81 Zhuzhou CSR Times Electric Co. Ltd NA 0.27% NA NA 6.6 (45.3) 154.3 91.7 82 Zhaojin Mining Industry Co. Ltd NA 0.26% NA NA 109.2 (62.9) 158.2 104.6 83 China Longyuan Power Group Corp. Ltd NA 0.26% NA NA NA NA NA (29.4) 84 China Shipping Development Co. Ltd 1.50 0.26% (17.2) 108.1 72.7 (62.4) 51.4 (11.4) 85 Brilliance China Automotive Holdings Ltd 3.90 0.25% (24.2) 14.4 31.5 (76.6) 440.5 170.1 86 Dongfang Electric Corp. Ltd 16.21 0.25% 66.7 162.5 215.5 (70.3) 114.3 84.6 87 Golden Eagle Retail Group Ltd NA 0.25% NA NA 17.5 (32.8) 191.0 20.7 88 Angang Steel Co. Ltd 3.34 0.25% 6.0 172.2 107.0 (59.1) 97.4 (30.7) 89 China International Marine Containers (Group) Co. Ltd 3.32 0.24% (12.4) 185.7 6.4 (70.8) 132.3 84.0 90 Huaneng Power International Inc. 0.71 0.24% (11.9) 35.9 17.8 (31.4) (21.6) (6.6) 91 Geely Automobile Holdings Ltd 9.31 0.24% (10.7) 136.2 14.0 (28.0) 577.4 (20.6) 92 Country Garden Holdings Co. Ltd NA 0.24% NA NA NA (78.8) 52.0 2.9 93 Tsingtao Brewery Co. Ltd 5.18 0.23% 4.7 59.5 99.2 (37.9) 165.6 (5.6) 94 Soho China Ltd NA 0.23% NA NA NA (58.4) 26.1 37.3 95 China Vanke Co. Ltd 7.82 0.23% 69.1 199.5 102.9 (52.5) 62.6 (1.6) 96 China Rongsheng Heavy Industries Group Holdings Ltd NA 0.22% NA NA NA NA NA NA 97 China Shipping Container Lines Co. Ltd 1.71 0.22% (13.4) (22.5) 237.9 (74.4) 139.2 22.5 98 China Resources Cement Holdings Ltd 0.45 0.22% (28.0) NA NA NA NA 52.9 99 Li Ning Co. Ltd 4.23 0.21% 41.4 125.9 132.5 (58.1) 143.7 (44.3) 100 Zhejiang Expressway Co. Ltd 1.43 0.21% (10.1) 23.8 108.9 (63.3) 57.9 6.3 101 Anta Sports Products Ltd NA 0.20% NA NA NA (67.2) 226.2 6.8 102 Guangzhou R&F Properties Co. Ltd NA 0.20% NA 148.1 65.0 (69.1) 60.2 (19.0) 103 Shui On Land Ltd NA 0.20% NA NA 33.7 (72.9) 106.4 (18.9) 104 Renhe Commercial Holdings Co. Ltd NA 0.20% NA NA NA NA 49.1 (22.9) 105 Jiangsu Expressway Co. Ltd 2.60 0.20% 28.1 11.4 73.4 (32.5) 21.3 28.3 Source: FactSet, MSCI. Estimates of future performance are based on assumptions that may not be realized. The indexes are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Past performance is no guarantee of future results. International investing entails greater risk, as well as greater potential rewards compared to US investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economics. 121 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney INVESTING BACKGROUND Investment Strategy Constituents of the MSCI China Index Performance Data in US Dollars as of December 31, 2010

YE2010 Value of US$1.00 Price Return (US$) (%) Company Name if Purchased on 1/1/05 Index weight 2005 2006 2007 2008 2009 2010 106 Wumart Stores Inc. 6.13 0.20% 19.5 84.1 (3.9) (12.6) 113.1 55.6 107 Hengdeli Holdings Ltd NA 0.19% NA 219.0 36.2 (72.4) 267.3 57.1 108 Semiconductor Manufacturing International Corp. 0.33 0.19% (37.7) (4.1) (19.0) (60.1) 53.8 11.7 109 Guangdong Investment Ltd 1.54 0.19% 11.8 20.7 26.5 (29.7) 45.6 (11.9) 110 China Dongxiang Group Co. Ltd NA 0.18% NA NA NA (67.4) 219.0 (44.1) 111 SINOPEC Shanghai Petrochemical Co. Ltd 1.39 0.18% 2.8 28.7 24.9 (58.4) 54.2 30.9 112 Lee & Man Paper Manufacturing Ltd 3.71 0.18% 35.8 121.4 78.9 (88.8) 461.4 9.8 113 China BlueChemical Ltd NA 0.18% NA NA 59.6 (36.5) 49.3 17.0 114 China Shanshui Cement Group Co. Ltd NA 0.18% NA NA NA NA 214.3 (2.2) 115 BBMG Corp. NA 0.18% NA NA NA NA NA 23.8 116 Fosun International Ltd NA 0.17% NA NA NA (65.0) 113.3 5.1 117 Great Wall Motor Co. Ltd 6.71 0.17% (28.5) 193.6 49.0 (75.8) 258.3 147.3 118 China Gas Holdings Ltd 3.46 0.17% 50.4 5.1 118.1 (66.2) 271.7 (20.2) 119 China Southern Airlines Co. Ltd 2.32 0.17% (27.5) 41.6 224.5 (81.1) 87.5 96.2 120 Yuexiu Property Co. Ltd 2.77 0.17% 2.8 172.9 4.3 (67.0) 193.2 (2.0) 121 Datang International Power Generation Co. Ltd 0.93 0.16% (2.3) 41.7 71.4 (40.7) (18.3) (18.7) 122 Franshion Properties (China) Ltd NA 0.16% NA NA NA (49.6) 30.4 (14.8) 123 Sinofert Holdings Ltd 0.87 0.16% (68.6) 123.6 124.8 (48.2) 15.7 (7.6) 124 Metallurgical Corp. of China Ltd NA 0.16% NA NA NA NA NA (25.5) 125 China Communications Services Corp. Ltd NA 0.16% NA NA 74.1 (36.9) (21.4) 20.9 126 China Shineway Pharmaceutical Group Ltd 5.16 0.16% (9.6) 15.0 25.2 (22.4) 233.3 53.0 127 Lonking Holdings Ltd NA 0.16% NA 503.4 33.8 (67.6) 171.4 57.3 128 Beijing Capital International Airport Co. Ltd 1.26 0.15% 7.8 71.0 116.8 (70.4) 32.1 (19.5) 129 KWG Property Holding Ltd NA 0.15% NA NA NA (79.9) 160.3 (1.4) 130 Bosideng International Holdings Ltd NA 0.14% NA NA NA (68.9) 138.2 77.7 131 Maanshan Iron & Steel Co. Ltd 1.38 0.14% (19.8) 77.4 20.8 (46.3) 105.7 (27.3) 132 Skyworth Digital Holdings Ltd 1.69 0.13% 0.2 (71.8) 52.9 (62.9) 1,733.6 (42.4) 133 China Zhongwang Holdings Ltd NA 0.13% NA NA NA NA NA (30.8) 134 China National Materials Co. Ltd NA 0.13% NA NA NA (50.8) 24.0 8.4 135 Hidili Industry International Development Ltd NA 0.13% NA NA NA (79.5) 300.2 (32.9) 136 Shanghai Lujiazui Finance & Trade Zone Dev. Co. Ltd 3.89 0.11% 1.0 157.3 119.1 (61.7) 115.1 (17.1) 137 Greentown China Holdings Ltd NA 0.11% NA NA (16.1) (73.2) 275.1 (29.5) 138 Sinotruk (Hong Kong) Ltd NA 0.11% NA NA NA (56.7) 73.7 (11.9) 139 Hopson Development Holdings Ltd 2.96 0.10% 237.1 130.9 (2.3) (73.9) 99.9 (25.5) 140 China Travel International Investment Hong Kong Ltd 0.70 0.09% (25.4) 36.1 101.8 (70.4) 53.6 (24.8) Source: FactSet, MSCI. Estimates of future performance are based on assumptions that may not be realized. The indexes are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Past performance is no guarantee of future results. International investing entails greater risk, as well as greater potential rewards compared to US investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economics. 122 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney INVESTING BACKGROUND Investment Strategy China’s Treasury Bond Market 1993 Through 2010

• China’s Treasury Bond market was in Year-end Balance of Outstanding Chinese Treasury Bonds its nascent stages pre-2004. Deal (Face) Value • As of 2010, China’s Treasury Bond US$ Billions market had grown twelvefold since 2004 1,000 in terms of dollar value, and sevenfold in terms of number of bonds outstanding. 900 • Sources of information on Chinese Treasury Bonds include: 800 – www.bloomberg.com – www.financeasia.com 700 The Yangtze River 600

500

400

300

Coursing over a distance of 6,380 200 kilometers (3,964 miles), the mighty Yangtze river is the longest river in China and the third longest in the world after the 100 Amazon in South America and the Nile in Africa. In China, the Yangtze is referred to as the Chang Jiang, meaning “long river.” 0 China’s second longest waterway, the 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Yellow River, extends 5,464 kilometers Number of Bonds (3,350 miles). 3 6 7 10 11 12 12 12 13 14 14 31 48 66 94 121 174 225 Outstanding: Source: www.travelchinaguide.com, www.chinaculture.org, www.china-tour.cn. Source: Dealogic. Data are as of December 31, 2010.

123 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney INVESTING BACKGROUND Investment Strategy China’s Corporate Bond Market 1993 Through 2010

Offshore Renminbi-Denominated Bonds Year-end Balance of Outstanding Chinese Corporate Bonds In February 2010, Chinese authorities allowed Deal (Face) Value foreign entities to issue bonds in RMB to US$ Billions offshore investors, primarily through the Hong 600 Kong market. Chinese entities have been able to issue offshore bonds since 2008. Since Panda Bonds are renminbi-denominated fixed income securities issued since then, a number of global enterprises have 2005 by non-Chinese borrowers to raise capital within China. As of early tapped into the market. International banks 500 2011, two foreign entities had each raised a total of RMB 2 billion through the HSBC and Standard Chartered were the first to issuance of Panda Bonds: (i) the International Finance Corporation, with a issue offshore bonds in June 2009, via their 10-year, 3.40% annual coupon bond and a seven-year, 3.20% coupon bond; on-shore Chinese subsidiaries. and (ii) the Asian Development Bank, with a 10-year, 3.34% annual coupon bond and a 10-year, 4.20% coupon bond. In 2010, the first international companies 400 entered the market. McDonald’s (ticker: MCD) was the first global company to issue an Renminbi (Yuan)–Denominated Chinese Share Trading in Hong Kong: offshore renminbi-denominated bond, with a Following an agreement on July 19, 2010 to relax certain restriction on RMB 200 million (US$29 million) three-year 300 Chinese currency transfers in Hong Kong and thereby allow more yuan- bond priced at 3%. Caterpillar (CAT) sold a denominated investment instruments to be traded there, in early 2011, RMB 1 billion (US$51 million) two-year issue Chinese officials announced plans to allow the listing of yuan-denominated in November, priced at 2%. shares of Chinese firms on the Hong Kong stock exchange. 200 In early 2011, the World Bank issued offshore renminbi-denominated bonds for RMB 500 million (US$75 million), as two-year notes yielding 0.95%. The World Bank bond was sold in lots of RMB 500,000 per note, putting 100 them out of reach of many retail investors. International investors have expressed interest in the bonds’ RMB currency denomination, 0 which was expected to appreciate between 4% 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 and 5% versus the US dollar in 2011. Number of Bonds 39 48 44 46 53 42 39 36 33 42 57 82 124 183 291 426 829 1,388 Source: “Renminbi Goes Offshore,” Barron’s, Outstanding: January 10, 2011.

Source: Dealogic. Data are as of December 31, 2010.

124 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney INVESTING BACKGROUND Investment Strategy Short-Term Interest Rates in China May 1996 through May 2011

The China’s One-Year Deposit Rate % 9.0 8.0 7.0 6.0 5.0 Tracing back more than 2,500 years, Chinese 4.0 landscape design has been a traditional 3.0 3.25% element of Chinese art and expression. 2.0 Emperors built simple gardens to blend 1.0 nature with the arts, creating an environment 0.0 to achieve spiritual harmony with nature. '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

Chinese gardens consist of traditional Source: People’s Bank of China; Bloomberg, LLC. Data are as of May 31, 2011. Chinese architectural design, lush but simple plant life, and elements of Chinese art and China’s One-Year Lending Rate poetry. Chinese Gardens serve as a personal retreat, a safe haven where one can flee from % the distractions of everyday life to harmonize 12.0 with and revel in the beauty and splendor of 11.0 nature. 10.0 The Chinese consider gardens a serious art 9.0 form and as with painting, sculpture, and 8.0 poetry, aim to attain in their design properties 7.0 of balance, harmony, proportion, and variety 6.0 6.31% ─ considered essential components of life. 5.0 Source: www.mobot.org. 4.0 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

Source: People’s Bank of China, Bloomberg, LLC. Data are as of May 31, 2011.

125 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney Investment Strategy

Chinese Pagodas Chinese pagodas represent an integral element of traditional Chinese architecture. The Pagoda evolved from the Indian stupa characterized by a dome-shaped steeple. Originally built to preserve Buddhist relics, Chinese pagodas were used by the ruling class to exemplify their power and wealth and were believed to house immortal spirits. In the Modern Era, pagodas are admired and celebrated for their unique and indispensable place in traditional Chinese architecture and Chinese history.

Liuhe Pagoda Built in 1165 AD during the Song dynasty

Songyue Pagoda Section 4 Built in 523 AD China’s Oldest Stone Pagoda Understanding China’s Investment Potential

Xumi Pagoda Small Wild Goose Pagoda, Xian Big Wild Goose Pagoda, Xian Built in 636 AD during the Tang dynasty Built in 707 AD during the Tang dynasty Built in 652 AD during the Tang dynasty

Source: www.china.org.cn, www.wikipedia.com, www.travelchinaguide.com. 126 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney UNDERSTANDING CHINA’S INVESTMENT POTENTIAL Investment Strategy Select Steps Toward Understanding China’s Investment Potential

Research & Development in Investors should devote thought and attention to: China Compared to the US • Developing comprehension of China’s demographic, environmental, savings, investment, In China and in the US, corporate entities political, innovation, productivity, and technological trends perform most research and development (R&D). The difference is that in China, the • Evaluating the development and potential of China’s energy, natural resources, agricultural, majority of those entities are owned by the communications, transportation and internet infrastructure state; in 2009, the government funded 69% of the R&D efforts in the country. By contrast, the • Examining China’s credit and capital markets and capital allocation strategies US government accounted for only 29% of America’s R&D expenditures that year. • Identifying catalysts and hindrances to growth US China • Exploring the status and role of China’s financial system 2009 R&D Among the issues that investors should consider in formulating investment strategies relating to China are: R&D Funding – Domestic Politics (Page 128) Government 29% 69% Industry 65% 21% – The Economy (Pages 129 and 130) Academic/Nonprofit 6% 10% – The Chinese Renminbi (Pages 131 and 132) R&D Execution – Credit and Capital Markets (Page 133) Government 10% 23% – Geopolitics (Page 134) Industry 71% 67% – China’s Maritime Positioning (Page 135) Academic/Nonprofit 19% 10%

Source: “China vs. the World: Whose Technology Is It?” Harvard – The Property Market (Page 136 and 137) Business Review, December 2010; “Global R&D Forecast,” Battelle Institute, December 22, 2009, China Economic Quarterly, 3Q2006; OECD R&D Statistics, 2009. – Inflation and Deflation (Pages 138 and 139) – Energy (Page 140) – Security (Page 141) – The Relationship Between the US and China (Page 142) – Other Issues (Pages 143, 144, 145, and 146)

Source: Morgan Stanley Smith Barney Investment Strategy. 127 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney UNDERSTANDING CHINA’S INVESTMENT POTENTIAL Investment Strategy Domestic Politics

China’s Growing R&D Domestic Political Issues for Consideration in China Include: Over the past decade, China has increased • The role, effectiveness, flexibility, and degree of independence of: its R&D expenditures by about 21% per year. During the same period, US R&D – The Head of State (President) spending grew by less than 4% per year. If these growth rates continue, China’s R&D – The Central Administrative System (including the State Council, the Premier, Vice Premiers, spending will catch up with that of the US by Ministers, and other officials) 2020. Factor in the belief that the renminbi is undervalued by 40%, and China’s R&D – The National People’s Congress spending could match that of the US by 2016. – The Communist Party

R&D Spending – The Military US$ Billions – The Civil Service 450 – The Judiciary 400 China Giant Dragon Stamps, 1878 350 – The Central Bank Source: www.chinesephilately.com. 300 – The Media;

250 • Maturation of civic polity, dissent, opposition views, and the political system (Please see page 48); 200 • Stipulations and guarantees of the Constitutional System; 150 • The degree of state intervention in and control over various economic sectors; 100 • Structuring and strengthening a social safety net; 50 • Investing in housing, healthcare, and education; 0 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 • Expanding the middle class; US China • Uses of the Sovereign Wealth Funds and Foreign Exchange Reserves; and

Source: “China vs. the World: Whose Technology Is It?” Harvard Business Review, December 2010; National Science • Populating, administering, and fostering the growth of underdeveloped provinces, autonomous Foundation; Ministry of Science and Technology of the People’s Republic of China. regions, and municipalities.

Source: Morgan Stanley Smith Barney Investment Strategy. 128 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney UNDERSTANDING CHINA’S INVESTMENT POTENTIAL Investment Strategy The Economy

Historical Backdrop

• Since World War II and particularly since 1978, the impressive growth of the manufacturing, mining, and service sectors has transformed China from a largely rural economy into an advanced, industrial, urbanized nation.

• In 2001 after 15 years of negotiations, China joined the World Trade Organization (WTO). The key turning point came in November 1999, when the US and China signed a trade treaty. China is also a member of the Asia Pacific Economic Cooperation (APEC) and the Group of Twenty Finance Ministers and Central Bank Governors (G-20). • In 2008 and early 2009, growth slowed sharply as a result of the global economic downturn, a contraction in world trade, China Economy Snapshot highly stressed international financial market conditions, and a dramatic decline in world commodity prices. • GDP (2010E): US$5.7 Trillion • As of May 2011, China’s economy in 2010 was estimated to be composed of 9.6% agriculture, 46.8% industrial goods, and • GDP Per Capita – Purchasing Power Parity (2010E): US$7,400 43.6% services. • Inflation YOY CPI (May 2011): +5.4% Source: BBC News, “China Joins the WTO – at last,” December 11, 2001, CIA World Factbook (May 2011). • Unemployment Rate (Dec. 2010): 4.1% • Labor Force (2010E): 780 million China’s Real GDP Growth Rate, 1980–2010 • Labor Force by Sector (2008): Year-over-Year Change agriculture 39.5%; industry 27.2%; % services 33.3% 18.0 • Industries: mining and ore processing; machine building; armaments; textiles and 15.0 apparel; petroleum; cement; chemicals; fertilizers; consumer products; food 12.0 processing; transportation equipment; telecommunications equipment; commercial space launch vehicles; and 9.0 satellites. • Agriculture: rice; wheat; potatoes; corn; 6.0 peanuts; tea; millet; barley; apples; cotton; oilseed; pork; and fish. 3.0 • Public Debt (2010E): 17.5% of GDP '80 '81 '82 '83 '84 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10

Source: CIA World Factbook (June 2011); Bloomberg, LLC. Source: Bloomberg, LLC. Data are as of December 31, 2010.

129 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney UNDERSTANDING CHINA’S INVESTMENT POTENTIAL Investment Strategy The Economy

Forecasts of Key Macroeconomic Indicators Economic Issues for Consideration by China’s Policymakers Include: % Y-o-Y Growth 2008 2009 2010E 2011E • Ensuring the quality, emphasis, and efficacy of economic policy; GDP 9.6 9.1 10.2 9.0 • Restructuring and diversifying the economy away from an emphasis on exports and inward foreign Consumption 8.6 8.4 9.8 10.0 investment toward appropriate development of domestic consumption of goods and services; Gross Capital Formation 11.0 20.5 12.0 10.0 • Productively using China’s significant infrastructure investments, including roads, ports, airports, Mining 15.4 7.7 7.3 6.0 telecommunications, and the internet, for commercial advantage;

Manufacturing 14.8 16.7 13.1 15.0 • Stimulating technological innovation and creativity; Real Estate 8.3 13.2 21.0 16.0 • Managing portfolio and direct investment flows into and out of China; Infrastructure 8.6 30.5 7.3 2.7 • Transforming the Chinese export economy into a high value-added products and services economy; and Other 11.6 26.5 5.0 3.6 • Creating national-champion companies to grow, acquire, and compete within global markets.

Net Exports (Cont, ppt) 0.8 -3.7 -0.2 -0.6 Source: Morgan Stanley Smith Barney Investment Strategy.

Trade Balance ($Bn) 297 198 191 179 Definition of the China Business China’s Business Cycle % of GDP 6.5 3.9 3.2 2.4 Cycle Signal Indicator Business Cycle Signal (Leading Indicator) Developed by the National Bureau of CPI (%) 5.9 -0.7 3.2 4.5 Indexed to a 100 Statistics and Goldman Sachs, the China 160 Source: CEIC, Morgan Stanley & Co. Inc. Research. Estimates Business Cycle Signal is a leading Overheating are as of June 2011. 140 Past performance is no guarantee of future results. economic indicator that aims to monitor the pace of China’s economy relative to macro- Estimates of future performance are based on 120 Increasing assumptions that may not be realized. This material is economic performance and trends. The not a solicitation of any offer to buy or sell any security indicator is based on: the Hang Seng 100 or other financial instrument or to participate in any Stable Mainland Free-float Index; industrial trading strategy. 80 product sales; M2 money supply, new Decreasing fixed-asset investment; the logistics index; 60 contract value of foreign direct investment; Overcooling the consumer expectations index; and yield 40 spreads versus Chinese government bonds. '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11

Source: Bloomberg, LLC. Source: CEIC, Morgan Stanley & Co. Inc. Research, Bloomberg, LLC. Data are as of April 30, 2011. 130 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney UNDERSTANDING CHINA’S INVESTMENT POTENTIAL Investment Strategy The Chinese Renminbi

October 1st, The National Day of the Historical Backdrop and Forecasts Chinese Renminbi per US Dollar Exchange Rate People’s Republic of China • From 1981 to 1993, the Chinese renminbi experienced six CNY/USD “China’s July 4th” currency devaluations versus the US dollar. These valuations ranged from 9.6 percent to 44.9 percent, and the 10 official exchange rate moved from 1.59 renminbi per US dollar to 5.82 renminbi per US dollar. 9 • On January 1, 1994, China devalued the official rate to 1 prevailing swap rate of 8.7 renminbi per US dollar, the 8 seventh devaluation of the renminbi. At the end of 1998, China’s foreign exchange reserves reached $US145 billion; 2 concurrently, China pegged its official exchange rate at 7 7 8.28 renminbi per US dollar and the exchange rate 3 remained essentially fixed through mid-2005. The National Day of the People’s Republic 6 • On July 21, 2005, China ended its fixed-rate currency of China is celebrated as a public holiday Morgan Stanley Research st every year on October 1 throughout regime, allowing the renminbi to strengthen through mid- 6 forecasts 5 5 mainland China, Hong Kong, and Macau, 2008. with a variety of government-organized • On July 21, 2008, China pegged its exchange rate at 6.83 4 festivities, including fireworks and 4 concerts. When the anniversary is a renminbi per US dollar, and its exchange rate remained multiple of five (e.g., the 50th, 55th, or 60th), fixed through mid-2010. 3 large scale official celebrations may be • Monetary authorities in China have been asked by other 3 held, including an inspection of military developing countries to allow the renminbi to appreciate. 2 resources on Tiananmen Square. • On June 19, 2010, China ended its fixed-rate currency 2 policy in effect from July 21, 2008; from June 19, 2010 to 1 December 31, 2010, the renminbi appreciated 3.3%. Denotes a devaluation of the renminbi 1 • A strengthening renminbi is considered one monetary tool Denotes a revaluation of the renminbi to help contain Chinese domestic inflation. 0 • As of June 2011, Morgan Stanley Research was '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '06 '08 '10 '12E forecasting a period-end renminbi per US dollar rate of 6.20 in 2011 and of 5.82 in 2012. Chinese Renminbi per US Dollar Exchange Rate

Source: www.chinatravel.com, www.chinahighlights.com. Source: Morgan Stanley Smith Barney Investment Strategy. Hong Kong Center for Economic Research; “China Ends Fixed-Rate Currency” Washington Post, July 22, 2005; Bloomberg; Morgan Stanley & Co. Inc. Research. Data are as of December 31, 2010. Estimates are as of June 2011.

Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. 131 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney UNDERSTANDING CHINA’S INVESTMENT POTENTIAL Investment Strategy The Chinese Renminbi

Trans-Siberian Railway Transforming the Renminbi into a Global Currency The Trans-Siberian Railway is a network • As of early 2011, the Bank of China Ltd. began allowing customers to trade the renminbi, also of railways connecting European Russia with Russia’s Far East provinces, known as the yuan, in the United States, thereby expanding the nascent offshore market for the Mongolia, and China. The main route, the currency, which began in Hong Kong in 2010. The Bank of China, 70%-owned by the Chinese Trans-Siberian, runs from Moscow to government, permitted companies and individuals to buy and sell the Chinese currency through Vladivostok via southern Siberia and was built between 1891 and 1916. At 9,288 accounts with its US branches. kilometers (5,772 miles) and spanning 8 time zones, it is the longest single • The decision represented another move by China to allow the renminbi, whose value had been continuous service in the world, and it tightly controlled by the government, to become an international currency that can be used for takes approximately seven days to trade and investment. complete its journey. • Until the middle of 2010, the buying and selling of the renminbi had largely been confined to mainland China by the country’s strict capital controls. In July 2010, China opened the currency to trading in Hong Kong. • The preparations for convertibility reflect Chinese strength, as China, the world’s second-largest national economy, has recognized that as a significant global power it must have a global currency. • In December 2010, Chinese regulators increased the number of exporters that could use yuan to settle international transactions from a few hundred to nearly 70,000. • A number of currency strategists and economists have predicted that by 2015 or thereafter, 20% to 30% of China’s US$2.3 trillion in annual imports could be conducted in yuan rather than dollars. As of January 2011, less than 1% was denominated in yuan.

Source: www.lonelyplanet.com. Source: “New Move to Make Yuan a Global Currency,” The Wall Street Journal, January 12, 2011.

132 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney UNDERSTANDING CHINA’S INVESTMENT POTENTIAL Investment Strategy Credit and Capital Markets

The Palace Museum in Beijing Credit and Capital Markets Issues for Consideration Include: • Developing reliable and liquid markets for bank credit, mortgage finance, public and private equity, venture capital, money market instruments, and fixed income securities; • Managing the internal and external value of the Chinese renminbi; • Structuring appropriate conditions affecting capital flows; • Channeling the contribution of foreign financial services and asset management firms; The Palace Museum, also known as the Forbidden City, was the imperial residence and center of the kingdom during the reign of 14 emperors in the • Broadening the institutional and individual investor base; Ming dynasty and 10 in the Qing dynasty until 1912, the year that last emperor of the Qing • Achieving a level playing field for investors, issuers, and intermediaries; and dynasty and of China was overthrown. Located in Beijing, the Palace Museum covers over • Strengthening and internationally advancing regulatory, legal, and accounting 720,000m2 (7.2 million square feet), with over safeguards and standards. 9,000 rooms and a layout following strict feudal code. It is divided into two main sections, the Front Source: Morgan Stanley Smith Barney Investment Strategy. Palace and the Inner Palace. In the center of the Front Palace stand the Hall of Supreme Harmony, the Hall of Complete Harmony, and the Hall of Preserving Harmony. The Inner Palace includes the Chinese Proverbs Palace of Heavenly Purity, the Hall of Prosperity, the Hall of Earthly Peace, and the Imperial Garden. • If you always give, you will always have. • If there is a wave, there must be a wind. More than an imperial palace, The Palace Museum • Better a diamond with a flaw than a pebble without. • Keep your chin up. is a treasure house of Chinese art, holding over 1.5 million Chinese relics, including paintings, • A thorn defends the rose, harming only those who • No wisdom like silence. calligraphy, porcelain, gold and silver wares, would steal the blossom. ancient books, imperial seals, and instruments. • Patience is a plaster for all sores. • A single conversation with a wise man is better than • The mind is the emperor of the body. Source: “Beijing – The Palace Museum,” WantChinaTimes, September 29, 2010, www.travelchinaguide.com. ten years of study.

Source: www.worldofquotes.com. 133 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney UNDERSTANDING CHINA’S INVESTMENT POTENTIAL Investment Strategy Geopolitics

The Golden Age of Poetry in China Geopolitical Issues for Consideration Include: During the period 713 – 756AD, the Tang dynasty reached its zenith. This era is also • China’s relations with: considered to be China's golden age of poetry, producing one of China’s greatest – India, Japan, Mongolia, and Korea poets, Li Bai (701 – 762 AD). – Other Neighboring Countries in Asia “Farewell to a Friend,” by Li Bai – The United States Blue mountains to the north of the walls, White river winding about them; – The European Union Here we must make separation and go Medallion Robe, Qing dynasty out through a thousand miles of still – Middle Eastern Countries grass. Source: www.artsmia.org. Mind like a floating wide cloud, – The United Nations; Sunset like the parting of old acquaintances who bow over their clasped hands at a distance; • China’s toward disputed territories and maritime zones; Our horses neigh to each other as we are departing. • The integration of China’s economy, natural resources, population, financial system, weltanschauung, and military capabilities into global frameworks; Source: www.chinapage.com. • China’s role in preventing the spread of nuclear, chemical, and biological weapons; and • China’s role in shaping and addressing global climatological, environmental, and ecological issues.

Source: Morgan Stanley Smith Barney Investment Strategy.

134 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney UNDERSTANDING CHINA’S INVESTMENT POTENTIAL Investment Strategy China’s Maritime Positioning

China’s Maritime Positioning In 2006 China Central Television showed a documentary series, Daguo Jueqi (The Rise of Great Powers). It included interviews with historians and international leaders and was considered accurate enough to be purchased by the History Channel and broadcast in the US. The twelve 50-minute episodes explained how the Portuguese, Spanish, Dutch, French, British, German, Japanese, Russian, and American empires rose, prospered, and fell. The series also examines the maritime achievements of the major powers in their rise to global dominance. Whatever the population, size or territory of the originating country, its strategy was always to open to the outside world, to control the principal sea lanes and deep-water bases, and to master technology, naval action, and influence. The documentary broke with decades of Chinese Communist Party historical ideology and revealed China's post-Millennium pragmatism as that of a rising power intent on avoiding its past political philosophy that left it in a long period of weakness during the 19th century. China's intentions appear to address two major issues: (i) China’s territorial claims on Taiwan and the extent of Chinese territorial waters in its exclusive economic zone (EEZ); and (ii) with China having become the world's second largest oil importer, the protection of its four energy corridors: (i) the Straits of Malacca; (ii) the Sundra and Gaspan Straits; (iii) passages through Filipino waters; and (iv) via rail/pipeline/potential canal networks involving Myanmar and Thailand. China has been in disputes with Japan over the Diaoyu Islands (Senkaku in Japanese) near Okinawa. Tokyo insists that its EEZ extends 450 km to the west of the archipelago, which Beijing contests by claiming the entire continental plateau that extends its own territory into the East China Sea. This area is estimated to contain a potential 200 billion cubic meters of natural gas. China is also in disputes with Taiwan, Vietnam, the Philippines, Malaysia, Brunei, and Indonesia over the Spratly Islands (Nansha in Chinese) and the Pratas Archipelago (Dongsha), and with Vietnam and Taiwan over the Paracel Islands (Xisha in Chinese). Beijing has been building a string of permanent Chinese bases along the shores of the Indian Ocean and the maritime routes to Malacca including: Marao in the Maldives; Coco Island in Myanmar; Hambatota in Sri Lanka; Woody Island 300 miles east of the Paracel Archipelago; Chittagong in Bangladesh; and Gwadar in the Baluchistan region of Pakistan; with consideration given to the construction of coastal bases in Africa, several of whose countries have opened to Chinese investment. The naval bases, river ports, sea walls, and protected submarine bases (including the new nuclear base on Hainan Island) have been expanded and modernized, as befits a nation whose foreign trade depends 90% on sea routes. In 2006 China’s sea-related industries accounted for 10% of GDP and seven of the world’s 20 leading ports were Chinese. China's fifth national defense white paper in 2006 transferred priority from the army, which traditionally held pride of place, to the navy and air force. The situation in the is not a declared arms race, but a variable geometry opposition between the Indian, US, Australian, and Japanese fleets, and the Chinese and Pakistani fleets. China’s history of naval action and influence and maritime positioning and technology dates back to the Ming dynasty. During the Ming dynasty, China commanded one of the world’s most advanced naval fleets and commissioned Admiral Zheng He to explore the seas of Southeast Asia. By the 15th and 16th centuries, China had mastered astronomic observation-based navigation and the compass, built multi-mast ships with pivotable rigging, and invented the anchor, the printing of marine navigation charts, the capstan, and the adjustable centre-board. Their junks had watertight compartments and stern-mounted rudders. Military Profile in Asia Sooner than previously expected, China has been significantly altering the balance of military power in the Pacific and challenging the other nations’ ability to project military power in Asia, through the Dongfeng 21D land-based anti-ship ballistic missile, designed to target aircraft carrier groups with the help of satellites, unmanned aerial vehicles, and over-the-horizon radar.

Source: Excerpted and adapted from “China’s Naval Ambitions,” by Olivier Zajec, Le Monde Diplomatique, September 2008; “China Flash of Maritime Muscle May Mean Power Push in Asia Seas,” Bloomberg, March 23, 2009. 135 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney UNDERSTANDING CHINA’S INVESTMENT POTENTIAL Investment Strategy China’s Property Market

National Property Prices Current Landscape Rmb per Square Meter • As of early 2011, concerns persisted over the state of China’s property market, in which property prices had risen 86% from 10,000 January 2006 through March 2011. Although some economists believed that China’s property prices had started to show signs of stabilizing, its sharp 53% rise from January 2009 through March 2011 inspired caution that a potential bubble- 9,000 bursting scenario was on the horizon. +53% • As a preferred way for individuals to store wealth and carrying minimal or no property taxes; with high savings rates, ample 8,000 bank liquidity, and low national indebtedness; and in view with local governments’ dependence on revenues from land redevelopment, housing prices in China have at times have reached excessive valuation levels and exorbitant multiples of 7,000 average annual earnings (for example, in Beijing in 2010, 18 times, compared to a 2006 US nationwide peak of 6.4 times).

6,000 • In addition to high property prices and high valuation levels, data as of early 2011 highlighted a vacancy issue: approximately 64 million apartments and houses had remained empty during the last six months of 2010, according to 5,000 Chinese media reports. – On the assumption that each apartment could serve as a home to a typical Chinese family of three (two parents and one 4,000 child), the vacant properties could accommodate 200 million people, representing more than 15% of the country’s early- '06 '07 '08 '09 '10 2011 1.3 billion population. If correct, the empty dwelling units would have been sufficient to house over half of the US

Source: Morgan Stanley & Co. Inc. Research, “China Property: population at the time. Transaction Tracker,” May 12, 2011. Data are as of March 2011. Source: Morgan Stanley Smith Barney; Morgan Stanley & Co. Inc. Research; SBS, “China’s Ghost Cities,” March 20, 2011.

President Hu Jintao on Social Housing Land and Property Prices Property Valuation at Very High Levels In a seminar in Zhongnanhai on November 30, Based on 70 Major Cities in China Property Price/Annual Income 2010, President Hu Jintao called for “accelerating % Year-over-Year (Monthly Data) x social housing construction and reinforcing 35 20 adjustments in the property market.” His speech 30 18 18.0x 16.4x highlighted the government’s determination to 25 16 meet the housing needs of the low-income 20 14 13.9x 12 population. 15 10 9.8x The Ministry of Housing and Urban-Rural 10 8 National Development had set a construction target for 5 6 Ave: 7.3x 2011 of 10 million units, 70% more than the 5.8 0 4 million units in 2010. Investments in social (5) 2 housing construction could therefore potentially Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 10 total more than Rmb 1,000 billion, or 20% of real Guangzho estate investments. Residential Land Price Property Price Beijing Shanghai Shenzhen

Source: Morgan Stanley & Co. Inc. Research, “From Goldilocks to Source: CEIC; Morgan Stanley & Co. Inc. Research; BIS; Bloomberg, LLC. Data are as Source: Morgan Stanley & Co. Inc. Research, “China Property: Transaction Tracker,” Reflation,” December 2010. of December 31, 2010. May 12, 2011. Data are as of December 31, 2010.

Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. 136 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney UNDERSTANDING CHINA’S INVESTMENT POTENTIAL Investment Strategy China’s Property Market

10 Leading Indicators China’s Property and Income Indices Chinese Property Market: Subsidized, not Subprime of Speculative Bubbles Index Level • In 2010, investment in residential real estate accounted 220 1. Great investment debacles generally start directly for 12% of China’s GDP, up from 10% in 2009 and out with a compelling growth story. a record. 2. A blind faith in the competence of the authorities is another typical feature of a 200 • By contrast, the peak of spending on US residential classic mania. investment in 2005 was equal to just 6% of GDP. 3. A general increase in investment is another leading indicator of financial • A larger role for real estate in the Chinese economy means distress. 180 the consequences of a bust could be more serious than in the 4. Great booms are invariably accompanied US. A crackdown on speculation saw growth in real-estate by a surge in corruption. investment fall from 31% a year at the end of 2007 to 3% at 5. Strong growth in the money supply is 160 the beginning of 2009. The hit to construction spending, as another robust leading indicator of financial fragility. much as the fall in exports, crunched China’s GDP growth 6. Fixed currency regimes often produce to a decade low of 6.5%. Data from Soufun Holdings, which inappropriately low interest rates, which 140 runs China’s leading property website, indicated that are liable to feed booms and end in busts. average prices in first-tier cities such as Beijing and 7. Crises generally follow a period of Shanghai were rising considerably faster than disposable rampant credit growth. incomes. 8. Moral hazard is another common feature 120 of great speculative mania, with a • Plans to build 10 million new budget residences in 2011 prevailing belief that the authorities will not let bad things happen to the financial were expected to somewhat cushion China’s economy from system. 100 a sharp slowdown in private-sector construction. 9. During period of prosperity, financial structures become precarious. • In the US, mortgage debt reached 103% of GDP in 2007. As of March 2011, in China, long-term loans to households, a 10. Questionable loans are generally secured 80 against collateral, most commonly real proxy for mortgage borrowing, was 16% of GDP. Including 2006 2007 2008 2009 2010 estate, with a combination of strong credit all loans to real-estate developers and a share of loans to growth and rapidly rising property Tier I Cities (Soufun Holdings) prices. Urban Per Capita Disposable Income local government investment vehicles (some of which were National Change (NBS) invested in property), the total would have been 50% of Source: “China’s Red Flags,” by Edward Chancellor, GMO White GDP. Paper, March 2010. Source: National Bureau of Statistics; Soufun Holdings; WSJ Reporting. Data are as of Source: “China: Subsidized, Not Subprime,” by Tom Orlik, The Wall Street Journal, March 2011. March 26-27, 2011. 137 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney UNDERSTANDING CHINA’S INVESTMENT POTENTIAL Investment Strategy Inflation and Deflation

Composition of China's PPI Index The Landscape

1 Industry • From January 2001 to December 2010, China’s CPI and PPI indices experienced significant episodes of inflation 2 Producer Goods and deflation, characterized by steep inclines and declines in price levels. Excavation • From April 2006 to April 2008, China’s CPI rose 12%; following that sharp rise in CPI levels, the CPI index fell Raw Materials Manufacturing 2% from April 2008 to October 2009. During these two periods from early 2006 to late 2009, China’s PPI also 3 Consumer Goods experienced volatile inflationary and deflationary price movements. Food • As of March 2011, Morgan Stanley Research China Economists believed that inflationary pressures would Clothing remain relatively muted in China as they forecast the CPI to increase 4.5% year-over-year in 2011. Uncertainty Daily-Use Articles Durable Goods surrounded the extent to which China’s potential strengthening of the renminbi might subdue inflationary

Source: Bloomberg, LLC. pressures. • In the absence of sufficiently assertive policy measures by the central government and the People’s Bank of China to address inflation expectations, cost of living increases, elevated money velocity, and bank lending, the authorities might have been expected to face: speculative purchases of property; mass hoarding of consumption goods (including grain, vegetables, and fuel); significant capital outflows; and possibly, some degree of social unrest.

Source: Morgan Stanley Smith Barney Investment Strategy; Morgan Stanley & Co. Inc. Research, “China Economics: China Inflation Tracker,” March 29, 2011.

The Chinese character for “Wealth” Consumer Price Index (CPI) Producer Price Index (PPI) % Change Year-Over-Year (Monthly Data) % Change Year-Over-Year (Monthly Data) 25 20 20 15 10 15 5 10 0 5 (5) 0 (10) Source: www.chineseculture.about.com. (5) (15) '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 CPI Food CPI Non-Food CPI PPI Producer Goods PPI Consumer Goods PPI

Source: Morgan Stanley & Co. Inc. Research. Data are as of December 31, 2010. Source: Bloomberg, LLC. Data are as of December 31, 2010. Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. 138 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney UNDERSTANDING CHINA’S INVESTMENT POTENTIAL Investment Strategy Inflation and Deflation

CPI Re-Weighting in 2011 The Consumer Pricing Index

Percentage Point Change vs. 2006 Weighting • Although CPI weights have generally been kept confidential in China, the National Bureau of Statistics (NBS) has been known to revise them every five years. The window of revision opened again in 2011 after the previous reweighting in 2006. Food 2.21  • In January 2011, the NBS released data regarding CPI weights. The food weighting in the CPI was cut by 2.21 percentage Non-food 2.21  points to allow more reflection of certain non-food components in the CPI. Changes in weightings of the non-food components included: residence, +4.22 percentage points; tobacco and beverages, -0.55 percentage points; clothing, +0.36 percentage Tobacco and Beverages 0.51  points; household facility and services, +0.36 percentage points; medicine, medicare, and articles, -0.36 percentage points; transportation and communication, +0.05 percentage points; and recreation, education, culture articles, and services, +0.25 Clothing 0.49  percentage points.

Household Facility and Services 0.36  • As of March 2011, Morgan Stanley Research estimated that the food weighting in the CPI could have been downsized to 30.3% after the re-weighting, and consequently, the non-food CPI could have risen to 69.7%. Medicine, Medicare, and Articles 0.36  • As of early 2011, the NBS had classified “property purchase” as an investment as opposed to a consumed good; as a result, property prices were not reflected in “residence,” nor in headline CPI. In 2009, the NBS reported that the residence portion of Transportation and Communication 0.05  the CPI accounted for 14.7% of the headline CPI. As of March 2011, Morgan Stanley Research estimated that the residence Recreation, Education, Culture 0.25  portion accounted for 18.9% of the headline CPI. Morgan Stanley Research’s detailed breakdown of the residence portion Articles, and Services consisted of: renting and private housing, 8.9%; water, electricity, and fuel, 6.0%; and building and decoration materials, 4.0%. Residence 4.22  Morgan Stanley Research Estimates for China’s Headline CPI

Source: National Bureau of Statistics; CEIC; Morgan Stanley & Co. As of March 2011 Inc. Research. Estimates are as of March 29, 2011. Estimated CPI Weights Estimated Residence Weights (18.9%) 2011 2011 Recreation, Education, Clothing Household Building and Decoration Culture Articles, and Services 8.5% Facility and Services Materials 14.2% 5.8% 4.0% Transportaion and Communication Renting and 9.3% Residence Private Housing 18.9% 8.9%

Water, Electricity, Tobacco and Beverages and Fuel Food 4.0% 6.0% 30.3% Medicine, Medicare, and Articles 9.0%

Source: Morgan Stanley & Co. Inc. Research, “China Economics: China Inflation Tracker,” March 29, 2011. 139 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney UNDERSTANDING CHINA’S INVESTMENT POTENTIAL Investment Strategy Energy

China’s Natural Resources Energy Issues for Consideration Include: China’s reserves of natural resources include coal, iron ore, petroleum, natural gas, mercury, tin, • China’s elasticity of oil, gas, and coal supply; tungsten, antimony, manganese, molybdenum, • China’s usage of hydro, solar, wind, nuclear, and biomass energy sources; vanadium, magnetite, aluminum, lead, zinc, rare earth elements, and uranium. • The structure, efficiency, and strategic positioning of China’s state-owned energy enterprises. Global % of World • China’s onshore and offshore oil-and-gas exploration activity and overall energy import infrastructure; Resource Ranking Reserves Coal 3 13.3 • New exploration and drilling activity in China and nearby territories; Natural Gas 14 1.5 • Price differentials for energy products sold in domestic compared to non-domestic markets; and Oil 14 1.1 • Pathways of China’s external investment in the energy sector, and the forms and degree of allowable Source: CIA Factbook, BP Global, BP Statistical Review of foreign investment in the energy sector. World Energy, June 2011.

Source: Morgan Stanley Smith Barney Investment Strategy.

China's Energy Consumption China Energy Economics The Ten Largest Oil Exporters to China Based on 2010 Data Global % Consumption Data are as of March 2011 (Twelve Months Ending November 2010) Energy Type Ranking of World Total Generation Costs (US$/MWh) Tonnes Barrels Coal 1 48.2 150 132.4 Country (Millions) (Millions) 5.0 1 Saudi Arabia 45.3 332 Oil 1 20.3 125 115.2 17.6 2 Angola 40.8 299 Hydroelectric 1 21.0 100 73.7 3 Iran 21.1 155 Wind 1 22.4 68.0 75 65.8 3.6 10.3 4 Russia 15.2 111 Natural Gas 4 3.4 4.1 127.4 50 41.2 97.6 5 Oman 15.2 111 45.6 Nuclear 9 2.7 11.8 55.0 63.4 25 7.0 6 Sudan 12.8 94 Solar 9 2.2 22.4 16.1 7 Iraq 10.6 78 0 9.4 Geothermal 18 0.2 (1) Nuclear CCGT Coal Onshore Offshore Solar PV 8 Kazakhstan 10.0 73 Wind Wind 9 Kuwait 9.7 71 Carbon Dioxide Emissions 1 25.1 Capital Costs Fuel Costs Operation Costs 10 Brazil 7.9 58 Source: CIA Factbook, BP Global, BP Statistical Review of Note: World Energy, June 2011. 1. CCGT stands for “combined cycle gas turbine,” a power generation method that uses Source: Haven Analytics; US Census Bureau, Foreign Trade Division. Data are as of natural gas to produce electricity. November 2010. Source: Morgan Stanley & Co. Inc. Research, “Global CleanTech,” March 22, 2011. 140 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney UNDERSTANDING CHINA’S INVESTMENT POTENTIAL Investment Strategy Security

The Abacus Security Issues for Consideration Include: • Achieving harmonization of laws and equitable law enforcement; • Enforcing anti-corruption initiatives; • Policing, counterterrorism activity, and cooperation with global antiterrorism agencies; Made by Qian Haosun, 1984

Dating back to 2700 – 2300 BC, the abacus • The position of the Chinese military and police forces in public opinion; and is a primitive calculator that was created by the Sumerians, a civilization of southern Mesopotamia, present-day Iraq. Throughout • Responsiveness to citizens’ concerns and dissent. history, the abacus has been used by the Source: Morgan Stanley Smith Barney Investment Strategy. Egyptians, Greeks, Persians, Romans, Chinese, Indians, Taiwanese, and Japanese, among others. In 300 BC, Chinese mathematicians developed a counting system based on the number 10, and they used the abacus to Excerpt from Chi’ing China Dream of The Red Chamber expedite calculations. An abacus is rectangular in shape, and it has beads Four thousand six hundred and twenty-three years ago the heavens were out of repair. So the Goddess of Works set suspended on a rod, with a beam running to work and prepared 36,501 blocks of precious jade, each 240 feet square by 120 feet in depth. Of these, however, from one end of the frame to the other. To she only used 36,500, and cast aside the single remaining block upon one of the celestial peaks. This stone, under use the abacus, the beads on the rods are the process of preparation, had become as it were spiritualized. It could expand or contract. It could move. It was moved towards and away from the beam. conscious of the existence of an eternal world, and it was hurt at not having been called upon to accomplish its In 1984, Taiwanese artist Qian Haosun divine mission. handcrafted this wooden-framed abacus, using metal rods and porcelain beads One day a Buddhist and a Taoist priest, who happened to be passing that way, sat down for a while to rest, and decorated with dragons. It now resides in noticed the disconsolate stone which lay there, no bigger than the pendant of a lady's fan. the British Museum in London. "Indeed, my friend, you are not wanting in spirituality," said the Buddhist priest to the stone, as he picked it up and Source: The British Museum, www.britishmuseum.org. laughingly held it forth upon the palm of his hand. "But we cannot be certain that you will ever prove to be of any real use; and, moreover, you lack an inscription, without which your destiny must necessarily remain unfulfilled."

Source: Cao Xueqin, The Dream of the Red Chamber. Translated by Henry Giles, http://www.wsu.edu/~dee/CHING/DREAM.htm.

141 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney UNDERSTANDING CHINA’S INVESTMENT POTENTIAL Investment Strategy The Relationship Between the US and China Four Potential Scenarios and Outcomes

Suboptimal Outcome Best Outcome 1 2

China’s Favorable Views of US US’s Unfavorable Views of China China’s Favorable Views of US US’s Favorable Views of China Entrepreneurial Inventive Repressive Arrogant Entrepreneurial Inventive Dedicated Historically Aware Idealistic Creative Authoritarian Nationalistic Idealistic Creative Driven Purposeful Freedom-loving Trusting Ambitious Imperialistic Freedom-loving Trusting Hard-working Goal-oriented Hard-working Charitable Unfair Cold-hearted Hard-working Charitable Disciplined Motivated Open Regimented Corrupt Open Pragmatic Persevering Copycat Duplicitous

Potential Outcome Potential Outcome

Disappointment Resentment Mistrust Harmony, Sharing, Cooperation, Mutual Trust, Symbiosis, Growth, Prosperity, and Global Affirmation

Worst Outcome Suboptimal Outcome 3 4

China’s Unfavorable Views of US US’s Unfavorable Views of China China’s Unfavorable Views of US US’s Favorable Views of China Hypocritical Xenophobic Repressive Arrogant Hypocritical Xenophobic Dedicated Historically Aware Meddling Obstructionist Authoritarian Nationalistic Meddling Obstructionist Driven Purposeful Naïve Arrogant Ambitious Imperialistic Naïve Arrogant Hard-working Goal-oriented Wasteful Hedonistic Unfair Cold-hearted Wasteful Hedonistic Disciplined Motivated Undisciplined Selfish Regimented Corrupt Undisciplined Selfish Pragmatic Persevering Imperialistic Profligate Copycat Duplicitous Imperialistic Profligate Short-Termist Short-Termist Potential Outcome Potential Outcome

Testing, Protectionism, Friction, Mutual Resentment Mistrust Disappointment Recrimination, Conflict, and Global Disruption

Source: Morgan Stanley Smith Barney Investment Strategy (June 2011). 142 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney UNDERSTANDING CHINA’S INVESTMENT POTENTIAL Investment Strategy Other Issues Classified by Subject Matter

• Central Bank Independence: Improved pricing of bank credit, more market-determined interest rates, and firmer control over inflationary forces might result from devolving more power and independence to China’s central bank, the People’s Bank of China, which as of May 2011 was one of 27 ministries and agencies under the direction of the State Council and the National Development and Reform Commission (formerly the highly powerful State Planning Commission). • Financial Market Liberalization: As China continues to open its markets, loosen controls on the renminbi, and gradually transform the nation into a more consumer-focused economy, the country’s financial importance has been growing to global commercial and investment banks, hedge funds, and private equity firms: (i) initial public offerings of Chinese companies reached US$104 billion in 2010 (US$124 billion including Hong Kong companies); (ii) equity trading volume on Chinese and Hong Kong stock exchanges rivaled aggregate US markets’ equity trading turnover; and (iii) Chinese companies completed 3,455 mergers and acquisitions worth US$190 billion, or 9% of global transactions in 2010. • Monetary Supply and Bank Lending Growth: M-2 rose 19.7% annualized in December 2010, considered quite high for an economy growing at a 10% rate; in fact, M-2 in China had risen from US$1.5 trillion in 2000 to US$11 trillion as of December 2010, larger than the US M-2 of US$9 trillion; in addition, as of May 2011, bank lending in China was larger than in the US, even though its economy was smaller.

• Fostering Innovation: In a document published by the State Intellectual Property Office of China called “National Patent Development Strategy (2011–2020),” China has identified innovation as a key to higher living standards and long-term growth and has set an ambitious goal of two million annual patent filings by 2015, up from 600,000 in 2009 (of which 300,000 were “utility-model patents,” which usually cover products’ engineering features and are less ambitious than the 300,000 invention patents–in the American patent system, there are no utility patents and in 2009 in the US, patent filings totaled approximately 500,000).

• Increased Foreign Investment Flexibility for Chinese Companies: With an effective date of January 1, 2011, China’s State Administration for Foreign Exchange (SAFE) ruled that Chinese companies were allowed to retain and invest export income outside of China; as a result: (i) the growth rate of China’s foreign exchange reserves appeared likely to diminish significantly; (ii) the likelihood of unduly restrictive Chinese monetary policy was expected to lessen; (iii) the rate of speculation in and appreciation of property prices in China appeared likely to slow; (iv) Chinese companies were deemed likely to increase their acquisitions and direct investment activity in the US and other countries, with special emphasis in sectors where China lacked sufficient domestic resources (including oil, uranium, iron ore, nickel, platinum, copper, titanium, chrome, lithium, manganese, and potash, among other areas).

• Increased Overseas Economic Presence: On February 14, 2011, assisted by a US$2.5 billion loan from the state-owned Export-Import Bank of China, the China State Construction Engineering Corporation (the country’s largest construction firm by revenue) broke ground on Baha Mar Resorts Ltd., a US$3.4 billion hotel, casino, and resort project slated to employ as many as 8,000 Chinese construction workers in Nassau, the Bahamas. This plan is part of the company’s initiative to showcase outside China its complex project management capabilities.

Financial System/ Economic Reform/ Central Government/ Commodities/ Socioeconomics Monetary Policy Technological Innovation Foreign Relations Natural Resources

Source: Morgan Stanley Smith Barney Investment Strategy. 143 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney UNDERSTANDING CHINA’S INVESTMENT POTENTIAL Investment Strategy Other Issues Classified by Subject Matter

• Intellectual Property: As China continues to more assertively address issues associated with compulsory disclosure, licensing and/or transfer of foreign technologies, and to vigilantly assure the protection of foreign innovation and intellectual property, including software, copyrights, patents, trademarks, trade secrets, and technical knowhow, in certain businesses including desktop computers, solar panels, wind turbines, high-speed trains, nuclear reactors, and biotechnology, Chinese companies have at times been perceived by foreign firms as acquiring advanced technology through strict local content requirements, preferential contracts favoring state-owned companies, and other means, and then using such knowledge, in addition to low-cost local labor, low-interest loans from state-owned banks and inexpensive government-supplied land, to pursue dominant Chinese global market positions for such products. • Transformation of Economic Priorities: Following an October 2010 four-day plenum meeting held in Beijing attended by all standing members of the Politburo, the 17th Central Committee of the Communist Party of China issued a communiqué focused on structural issues, reforms, and economic rebalancing in the nation’s 12th Five-Year Plan (2011–2015), for the first time prioritizing domestic consumption ahead of investments and exports. • Augmenting the Social Safety Net: As part of initiatives to continue funding the social security system, to broaden public confidence in government pension schemes, to foster a shift from very high savings rates to increased household consumption, and to extend the lockup period of the transferred equities by another three years, in June 2009, China transferred to the National Social Security Fund 8.4 billion shares in 131 companies listed on stock exchanges since 2005. • Empowering Rural Economic Growth: As of May 2011, urban wage levels in China’s inland provinces averaged 50–60% of urban wage levels in the coastal provinces, whereas inland per square meter property prices averaged 25–33% of coastal levels; in other words, migrant workers from the inland provinces could potentially double their wages by moving to a coastal province, with coastal property prices triple to quadruple inland property price levels; among the institutional reforms potentially capable of stimulating rural economic growth are: (i) granting full trading rights of land to rural residents; (ii) improving village governance and election procedures; (iii) eliminating the hukou restrictions (please see page 39) on rural migrants’ access to full urban residency and public services; (iv) providing automobile and home appliance subsidies; (v) improving local healthcare resources; and (vi) increasing financial support for small and mid-sized businesses in rural areas. • Public Reaction to Pollution: Especially in rural areas where environmental regulation and enforcement has at times been lax and where local officials, under pressure to generate economic growth, have encouraged the development of sometimes unlicensed factories, pollution problems including lead poisoning and toxic gas leaks have led to grass-roots dissatisfaction, public protests, and occasional civil unrest. • Securing Employment for University Graduates: From 800,000 university graduates annually in 1998 to more than 6 million per year in 2010, China’s large supply of higher-degree recipients trained in accounting, finance, computer programming, and other white-collar occupations has faced significant difficulty in securing challenging and rewarding work. Such difficulty represents a potential source of social instability.

Financial System/ Economic Reform/ Central Government/ Commodities/ Socioeconomics Monetary Policy Technological Innovation Foreign Relations Natural Resources

Source: Morgan Stanley Smith Barney Investment Strategy. 144 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney UNDERSTANDING CHINA’S INVESTMENT POTENTIAL Investment Strategy Other Issues Classified by Subject Matter

• Unleashing the Potential of Megacities: To reap the benefits of integration, efficiency, productivity, shared infrastructure, and sustainability, in January 2011, China announced plans to merge nine Pearl River Delta cities (Guangzhou, 12 million; Shenzhen, nine million; Dongquan, seven million; and six smaller cities with 14 million inhabitants) into a 41,000 square kilometer (14,000 square miles, roughly 25 times the surface area of London) metropolis with more than 42 million people accounting for approximately 10% of the country’s Gross Domestic Product. • Wage-Price Pressures: According to the International Labour Organisation and Morgan Stanley Economist Stephen Roach, partially reflecting annual productivity growth estimated at 10-15% annually from 1990 through 2010, Chinese workers received real wage increases averaging 12.6% a year from 2000 through 2009 (compared with 1.5% in Indonesia and 0% in Thailand); as of May 2011, Chinese workers were paid approximately US$400 per month, less than workers in Taiwan and Malaysia, but three times more than workers in Indonesia and five times more than workers in Vietnam; by continuing to raise minimum wages, Chinese officials have sought to avert labor unrest while setting in motion concerns about persistent and rising inflation. • China and Africa: In part due to China’s large foreign currency reserves, in part due to having avoided several developed western nations’ colonial heritage in Africa, and in part due to greater acceptance by China of the current political status quo in many African countries, in the post-2000 era, China has increased its direct investment, infrastructure development projects, and political influence on the African continent. To China, Africa offers not only import sources of significant natural resources, but also important markets for Chinese consumer, industrial, and technological exports. • China and Central Asia: Central Asia (consisting of Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan) has been increasingly viewed by Chinese officials as a critical frontier for the nation’s energy security, trade expansion, ethnic stability, and military defense. • China and North Korea: As North Korea’s principal supplier of food and fuel, China could use its leverage to rein in Pyongyang’s nuclear ambitions and exports of nuclear technology, in spite of two Chinese concerns if the Kim dynasty collapsed and the two Koreas (North and South) were reunified as one nation: (i) a large influx of North Korean refugees into China; and (ii) the resulting presence of American military resources close to the China-Korea border. • China and Southeast Asia: Following China’s 2010 free-trade agreement with the Association of South-East Asian Nations (ASEAN), China in late 2010 and early 2011 signed agreements to modernize and/or build new rail lines in Laos and Thailand, while extending its rail network from Kunming (capital of the Yunnan province) to the China-Laos border and conducting feasibility studies for rail upgrades in Myanmar, Vietnam, and Cambodia. • China and Taiwan: Between the March 22, 2008 election of Ma Ying-jeou as Taiwan’s president and early 2011, 15 cross-strait agreements were signed, including the 2010 Economic Cooperation Framework Agreement; China plus Hong Kong accounted for 40% of Taiwan’s exports and a 2010 Taiwanese bilateral trade surplus of US$70 billion; Taiwanese businesses had US$90 billion invested in China, where 800,000 Taiwanese lived as of early 2011; following the July 2008 inauguration of direct flights between Taiwan and China, more than 1.6 million Chinese tourists visited Taiwan in 2010.

Financial System/ Economic Reform/ Central Government/ Commodities/ Socioeconomics Monetary Policy Technological Innovation Foreign Relations Natural Resources

Source: Morgan Stanley Smith Barney Investment Strategy. 145 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney UNDERSTANDING CHINA’S INVESTMENT POTENTIAL Investment Strategy Other Issues Classified by Subject Matter

• Cyberwarfare: To varying degrees, the US, the UK, China, Russia, Israel and other world powers have considered established codes of conduct: (i) placing the onus for investigating aggressive acts on the countries where those attacks originated; (ii) banning behavior opposed by all countries (such as the disabling of networks and data theft); and (iii) clarifying what kinds of cyberactivity might trigger an armed cyber response to cyberwarfare, which aims to disrupt military and civilian networks. • Diffusion of Power: Unlike the eras of unquestioned centralized authority and consistent policies pursued under Mao Zedong, Jiang Zemin, or Deng Xiaoping, a number of rival power centers, including the military, ministries, and large state-owned corporate interests may have increased the difficulty of resolving bilateral disputes and pursuing China’s broad foreign policy goals. • Commodity Intensity: The International Monetary Fund has estimated that driven primarily by a less-rapid pace of investment growth, China’s potential growth rate would slow to approximately 7% per annum between 2016 and 2020, compared to an average annual growth of 9.6% for the 15-year period from 1995 through 2009; as China placed increased emphasis on energy efficiency, the country’s service sector was projected to expand relative to manufacturing and heavy industry and consequently, China’s demand for commodities was thought possibly likely to be significantly lower than consensus projections. • The Critical Importance of Water: As of early 2011, China had 20% of the world’s population, supported by 7% of the world’s fresh water supply (approximately the same as Canada, with China having 40 times Canada’s population); the per-capita volume of water consumption in China was 25% of the global average, projected to decline to 20%; one-third the length of China’s rivers, three-quarters of its principal lakes, and one-quarter of the country’s coastal waters were rated as “highly polluted;” in the Yellow River region and in much of the arid (including the provinces of Heilongjian, Jilin, Liaoning, Hebei, Shanxi, Beijing, and Tianjin – Northern China possesses only 18% of the country’s water, with 62% of its agricultural land) surface water supply has declined in the post-2000 era and due to exploitation, underground water levels fell as much as three feet annually over the 1975-2000 time period, necessitating the drilling of deep wells to reach water and highlighting the importance of agriculture and water infrastructure improvements, including reservoirs, embankments, pivot and drip irrigation systems, aqueducts, wastewater treatment plants, transfer tunnels, dams, pumping and recycling stations, and desalination facilities. • Increased Demand for Gold: With a limited number of instruments for investing in cash; when low interest rates produce low or negative real returns on bank deposits; and when real estate investment/speculation is curtailed by the Authorities; Chinese retail demand tends to rise for physical gold (in the form of jewelry, bullion, bars, and coin), gold mining shares, and other gold-linked investment vehicles; according to the World Gold Council, Chinese demand for gold for investment purposes rose 169% from 25.6 metric tons (823,040 troy ounces) in 2007 to 68.9 metric tons (2,215,135 troy ounces) in 2008. • Strategic Oil Reserves: As a buffer against sudden disruptions of oil supplies, in late 2008 and early 2009, China began building its strategic oil reserves toward a goal of 500 million barrels (equal to 60 days’ supply at 2009 demand levels); as of March 2011, the US’s strategic oil reserve held 727 million barrels.

Financial System/ Economic Reform/ Central Government/ Commodities/ Socioeconomics Monetary Policy Technological Innovation Foreign Relations Natural Resources

Source: Morgan Stanley Smith Barney Investment Strategy. 146 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney Investment Strategy The 12 Symbols of Chinese Authority Official costume in imperial China was highly regulated, and the decorative motifs of court costumes were specific to rank. Among the emblems employed for the emperor's ceremonial robes were the twelve imperial symbols: sun, moon, constellation, mountain, pair of dragons, pair of pheasants, libation cups, water weed, millet, fire, ax, and the symmetrical "fu" symbol. A bright yellow was reserved for the emperor, but for some Poem from the Shijing, c.300 BC ceremonies, the requisite color was blue. The “Guan! Guan! Cry the Fish Hawks” garment worn for actual rituals was the more formal court robe ("chao pao"), whereas the dragon robe ("qi fu") was used for the periods of Guan! Guan! Cry the fish hawks fasting that preceded the ceremony.

on sandbars in the river: Source: The Metropolitan Museum of Art. a mild-mannered good girl, fine match for the gentleman.

A ragged fringe is the floating-heart, Emperor's 12-Symbol Robe, Qing dynasty (1644 – 1912) left and right we trail it: that mild-mannered good girl, awake, asleep, I search for her. Section 5 I search but cannot find her, awake, asleep, thinking of her, endlessly, endlessly, Overview of the Investment Landscape turning, tossing from side to side. A ragged fringe is the floating-heart, left and right we pick it: the mild-mannered good girl, The Shijing or Book of Songs harp and lute make friends with her. The history of Chinese literature begins with the Shijing or Book of Songs, an anthology of 305 lyrics of various types, A ragged fringe is the floating-heart, compiled circa 300 BC. Most of the songs probably were composed and sung between 1000 and 700 BC. Some historians left and right we sort it: have suggested, however, that certain lyrics from the Book of Songs may represent much earlier work, dating from the the mild-mannered good girl, Shang dynasty (1766 – 1122 BC). According to the tunes they were sung by, the poems were divided into three categories, bell and drum delight her. namely, Feng (Ballads), Ya (Festal Odes), and Song (Sacrificial Songs). Feng consists of 160 poems, Ya consists of 105 poems, and Song consists of 40 poems.

Source: chinavisita.com. Source: chinavisita.com; The Penguin Book of Chinese Verse, by Robert Kotewell and Norman Smith (Penguin, 1962).

147 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney OVERVIEW OF THE INVESTMENT LANDSCAPE Investment Strategy Examples of Vehicles for Portfolio Investment in China

Type Exchange Listing Further Details Description Potential Issues Closed-End and Open- New York p. 149  Mutual funds that invest primarily in the equities of companies whose  Investors cannot actively manage the holdings in the End China/Taiwan principal business is based in China or the Greater China region, underlying mutual funds Mutual Funds including Hong Kong and Taiwan Private Equity/Venture Not applicable p. 150  Private equity and venture capital funds investing in China  Some degree of illiquidity and lack of transparency Capital Funds A Shares Shanghai, Shenzhen p. 151  A Shares are issued by Chinese companies and commenced trading in  Limited to domestic investors and qualified foreign 1990 institutional investors  The A Shares stock market is China’s largest stock market, and the fifth largest stock market in the world B Shares Shanghai, Shenzhen p. 152  B Shares are issued by Chinese companies and commenced trading in  Generally smaller, less liquid market 1991  Small-sized companies  Traded in foreign currencies (US and Hong Kong dollars)  Relatively narrow investor base H Shares Hong Kong p. 153  H Shares are issued by Chinese companies and commenced trading in  Companies with traditional management styles 1993  Relatively limited information access and disclosure  Generally intended to help restructure State-Owned Enterprises (SOEs) through debt reduction and higher levels of equity capital Red Chips Hong Kong p. 154  Red Chip shares are issued by Chinese companies that are incorporated  Relatively small-sized companies in Hong Kong and are owned directly or indirectly by the Chinese  Degree of core business focus government P Chips Hong Kong p. 155  P Chip shares are issued by overseas-registered Chinese companies that  Relatively small market are run by Chinese nationals and have no affiliations with the Chinese  Relatively limited information access and disclosure government Other China-Related Shanghai, Shenzhen, pp. 156-157  Indices that track various Chinese shares or US-listed companies with  Degree of core business focus Indices Hong Kong, United exposure to China that are available to domestic or foreign investors  Relatively limited information access and disclosure States ADRs United States, London p. 158  American Depository Receipts based on H shares or other non-U.S.  Limited number of China-based ADRs Chinese-related companies  May have limited liquidity  Used by foreign companies to increase liquidity and raise their investor profile Convertible Bonds Shanghai, Shenzhen, p. 159  A corporate bond issued by a Chinese-related company convertible into  Limited number of China-based convertible bonds (Primarily Traded Over- Hong Kong, and shares at a predetermined price the-Counter) Singapore US, European, and Asian United States, London, p. 160  US, European, and Asian corporations with exposure to China, through  Government regulations and degree of exposure to Corporations Paris, Tokyo, and subsidiaries, partnerships, ventures, or sales channels in China China Taiwan, among others  Economic conditions in domicile country or region may affect the realized exposure to China

Source: Morgan Stanley Smith Barney Investment Strategy, Morgan Stanley & Co. Inc. Research. 148 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney OVERVIEW OF THE INVESTMENT LANDSCAPE Investment Strategy Overview of Closed-End Funds with Exposure to Greater China

Overseas Chinese • Closed-end funds with exposure to the greater China region may trade at a premium or (Born Inside or Outside of China) 2005 Overseas at a discount to their Net Asset Value (NAV). Top 20 Countries Chinese Population 1 Indonesia 7,566,200 • Investors may also consider a range of open-end funds with exposure to the Greater 2 Thailand 7,053,240 China region and should consult funds’ prospectuses for details. 3 Malaysia 6,187,400

4 United States 3,376,031 • Investors may consider diversified emerging markets or Asia-Pacific funds as additional 5 Singapore 2,684,900 possibilities to obtain exposure to China. 6 Canada 1,612,173 • Sources of further information about closed-end funds include: 7 Peru 1,300,000 8 Vietnam 1,263,570 – www.cefconnect.com 9 Philippines 1,146,250 10 Myanmar 1,101,314 – www.bloomberg.com 11 Russia 998,000

12 Australia 614,694 – www.finance.yahoo.com

13 Japan 519,561

14 Cambodia 343,855

15 United Kingdom 296,623

16 France 230,515

17 India 189,470

18 Laos 185,765

19 Brazil 151,649

20 Netherlands 144,928

Top 20 Countries 36,966,138

Source: The Overseas Compatriot Affairs Commission of Taiwan.

149 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney OVERVIEW OF THE INVESTMENT LANDSCAPE Investment Strategy Overview of Private Equity/Venture Capital in China From Nascent Beginnings to Burgeoning Present Times

Private Equity Venture Capital

• As of late 2010, there were 167 registered foreign managers of private equity • Similar to private equity, venture capital in China was a verdant, nascent funds in China and 265 domestic ones, up from almost none in 2000, according industry pre-2004, but has since blossomed into a robust and growing industry. to Asia Private Equity Research. • Chinese and non-Chinese VC firms have been investing capital into growing • In August 2010, Chinese officials lifted a restriction on registered insurance businesses. companies placing money with private equity firms; they were allowed to invest • A significant portion of the funds raised in the 2009 and 2010 years by Chinese up to 5% of their assets. and non-Chinese VC firms were denominated in Chinese renminbi. • A typical Chinese private-equity investment is a non-controlling stake of 15– 40% in an operating company, with the money intended as growth capital. Venture Capital Fundraising in China • From 2005 through late 2010, private equity firms raised more than US$57 US$ Billions 4.5 billion for investment in China, but as of late 2010, much of that was thought 3.8 not to have been deployed, according to Preqin, a research firm. 4.0 3.5 3.0 Source: The Economist, “ In Love,” November 27, 2010. 3.0 2.5 2.3 2.0 1.8 Chinese PE Annual Fundraising Chinese PE Internal Rates of Return 2.0 1.7 1.4 1.4 1.3 US$ Billions By the Year the Deal was Struck 1.5 1.0 20 1.0 0.6 Year % Year % 0.5 15 1998 -5.9 2003 21.3 0.0 10 1999 -8.3 2004 32.6 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2000 16.1 2005 31.3 5 2008 2009 2010 2001 8.2 2006 25.9 0 Number of (1) 2002 8.6 2007 5.2 24 42 21 29 16 19 26 33 31 30 33 '98 '00 '02 '04 '06 '08 '10 New Funds: Source: Center for Asia Private Equity Research Source: Center for Asia Private Equity Research Source: Zero2IPO Group.

• Sources of further information about Chinese and non-Chinese private equity • Sources of further information about Chinese and non-Chinese venture capital firms with exposure to China include: firms with exposure to China include: – www.pedaily.cn/en/ – www.pedaily.cn/en/ – www.asiape.com – www.asiape.com – www.preqing.com – www.preqing.com

Note: 1. Chinese PE Annual Fundraising data are as of late 2010. 150 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney OVERVIEW OF THE INVESTMENT LANDSCAPE Investment Strategy Overview of Chinese A Shares

Select Famous Chinese Actors Overview of Chinese A Shares • A Shares are issued by Chinese companies and listed on the Shanghai and Shenzhen stock exchanges. A shares are Chow Yun-Fat (1955 – ) restricted to Chinese investors and qualified institutional foreign investors (Please see page 110). Born in Hong Kong, China, Chow Yun-Fat is a renowned Chinese actor. He has acted • The Shanghai Stock Exchange A-Share Stock Price Index is a capitalization-weighted index that includes all A-shares in Hong Kong and Hollywood, receiving listed on the Shanghai Stock Exchange. The index is denominated in yuan and had 876 constituents as of May 2011. The numerous awards for best actor and best index was inaugurated on February 21, 1992, with a base value of 100 on December 19, 1990. supporting actor. His most notable roles include Crouching Tiger, Hidden Dragon • The Shenzhen Stock Exchange A-Share Stock Price Index is a capitalization-weighted index that includes all A-shares in 2000, and A Better Tomorrow in 1986. listed on the Shenzhen Stock Exchange. The index is denominated in yuan and had 1,205 constituents as of May 2011. The index was inaugurated on October 4, 1991, with a base value of 100 on April 3, 1991. • Sources of further information about A-shares indices include: Michelle Yeoh (1962 – ) – www.sse.com – www.bloomberg.com Born in Ipoh, Malaysia, Michelle Yeoh is a successful Chinese actress. She has acted – www.szse.com in Hong Kong and Hong Kong, receiving critical acclaim. Her notable roles include Crouching Tiger, Hidden Dragon in 2000, Source: Bloomberg, LLC; Shanghai Stock Exchange; Shenzhen Stock Exchange; Asian Equity Research Institute; www.chinadaily.com. and Memoirs of a Geisha in 2005.

MSCI China A Index MSCI China A Index – Sector Breakdown As of May 2011 Bruce Lee (1940 – 1973) • The MSCI China A Index is a capitalization-weighted Index Weight (%) Born in San Francisco, California, Bruce index that seeks to represent the A-shares listed on the Energy Other Lee was a Chinese-American actor and Shanghai and Shenzhen stock exchanges. The index 5% 4% martial artist. He founded the martial art Industrials style, Jeet Kune Do. His famous roles provides Chinese investors with a benchmark of the A- Information Technology 24% include the in 1972, shares stock market. As of May 2011, the index had a 7% and Enter the Dragon in 1973. market capitalization of US$948 billion, with 599 Consumer Staples constituents. 8% Source: http://chinese-school.netfirms.com, Photos, wikipedia.com, Health Care http://idomartialarts.com. • For further information, please go to www.msci.com. 8% Materials 18% Financials 13% Consumer Discretionary 13%

Source: MSCI; FactSet. Source: MSCI; FactSet.

Estimates of future performance are based on assumptions that may not be realized. The indexes are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Past performance is no guarantee of future results. International investing entails greater risk, as well as greater potential rewards compared to US investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economics. 151 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney OVERVIEW OF THE INVESTMENT LANDSCAPE Investment Strategy Overview of Chinese B Shares

Yin and Yang Overview of Chinese B Shares • B Shares are issued by Chinese companies and listed on the Shanghai and Shenzhen stock exchanges. B shares are available to Chinese investors and foreign investors (Please see page 110). • The Shanghai Stock Exchange B-Share Stock Price Index is a capitalization-weighted index that includes all B-shares listed on the Shanghai Stock Exchange. The index is denominated in US dollars and had 53 constituents as of May 2011. The index was inaugurated on February 19, 2001, with a base value of 100 on February 21, 1992. • The Shenzhen Stock Exchange B-Share Stock Price Index is a capitalization-weighted index that includes all B-shares listed on the Shenzhen Stock Exchange. The index is denominated in Hong Kong dollars and had 53 constituents as of May 2011. The index was inaugurated on October 6, 1992, with a base value of 100 on February 28, 1992. The index has In Chinese culture, Yin and Yang represent been open to investors since February 19, 2001. the two opposite principles in nature. The yin- yang doctrine teaches that everything in the • Sources of further information about B-shares indices include: universe is the product of the yin and yang – www.sse.com – www.bloomberg.com principles. Yin, literally meaning “female, – www.szse.com night, lunar” in Mandarin, is characterized by darkness, passivity, and coldness. Yang, Source: Bloomberg, LLC; Shanghai Stock Exchange; Shenzhen Stock Exchange, Asian Equity Research Institute; www.chinadaily.com. literally meaning “male, daylight, solar” in Mandarin, is characterized by light, activity, and heat. Together, the yin and yang bring MSCI China B Index MSCI China B Index – Sector Breakdown forth changes in the universe through the five As of May 2011 • The MSCI China B Index is a capitalization-weighted Index Weight (%) material agents: water, wood, fire, earth, and index that seeks to represent the B-shares listed on the metal. The interaction of the yin and yang Shanghai and Shenzhen stock exchanges. As of May principles produces the five elements and Industrials 2011, the index had a market capitalization of US$8 25% enables change to take place within the world. billion, with four constituents. Source: www.168fengshui.com; www.etymonline.com. • For further information, please go to www.msci.com. Financials 50%

Energy 25%

Source: MSCI; FactSet. Source: MSCI; FactSet.

Estimates of future performance are based on assumptions that may not be realized. The indexes are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Past performance is no guarantee of future results. International investing entails greater risk, as well as greater potential rewards compared to US investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economics. 152 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney OVERVIEW OF THE INVESTMENT LANDSCAPE Investment Strategy Overview of Chinese H Shares

The Overview of Chinese H Shares • H shares are issued by Chinese companies that are incorporated in mainland China and listed on the Hong Kong Stock Exchange. H shares represent early-phase efforts by the Chinese government to reform and restructure state-owned enterprises (SOEs) through privatization. H shares are available for investment to foreign investors and qualified domestic institutional investors (Please see page 110). • Companies incorporated in mainland China can also issue A shares on the Shanghai and Shenzhen stock exchanges. These A shares are restricted to Chinese investors and qualified foreign institutional investors (Please also see pages 110 and 151). • The Hang Seng China Enterprises Index is a freefloat capitalization-weighted index that includes all H-shares listed on the Hong Kong Stock Exchange. The index is denominated in Hong Kong dollars and had 40 constituents as of May 2011. The current Hang Seng China Enterprises Index replaced its predecessor on October 3, 2001, with a base value of 100 on January 3, 2000. – www.hsi.com – www.bloomberg.com The Temple of Heaven was the place where the Source: Bloomberg, LLC; Hong Kong Stock Exchange; Asian Equity Research Institute. emperors of the Ming dynasty (1368 – 1644 AD) and the Qing dynasty (1644 – 1912 AD) MSCI China H Index MSCI China H Index – Sector Breakdown worshipped heaven, venerated their ancestors, As of May 2011 and prayed for good harvests. The emperors • The MSCI China H Index is a capitalization-weighted visited the temple twice a year: on the 15th day Index Weight (%) index that seeks to represent the H-shares listed on the Health Care Other of the first lunar month, to pray for a good Hong Kong Stock Exchange. As of May 2011, the index 3% 7% harvest; and during the Winter Solstice, to give Utilities had a market capitalization of US$390 billion, with 63 Industrials 5% thanks for a good harvest. constituents. 30% Consumer Discretionary Source: www.beijing-sightseeing.com. • For further information, please go to www.msci.com. 6% Energy 10%

Materials Financials 18% 21%

Source: MSCI; FactSet. Source: MSCI; FactSet.

Estimates of future performance are based on assumptions that may not be realized. The indexes are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Past performance is no guarantee of future results. International investing entails greater risk, as well as greater potential rewards compared to US investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economics. 153 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney OVERVIEW OF THE INVESTMENT LANDSCAPE Investment Strategy Overview of Chinese Red Chip Shares

Sacred Tai Shan Mountain Overview of Chinese Red Chip Shares • Red Chip shares are issued by overseas-registered Chinese companies listed on the Hong Kong Stock Exchange that have at least 30% of their shareholdings held by state-owned organizations or provincial/municipal governments in China. Red Chips are available to foreign investors and qualified domestic institutional investors (Please see page 110). • The primary difference between Red Chips and H shares is that Red Chips represent Chinese companies incorporated overseas, whereas H shares represent Chinese companies incorporated in mainland China (Please see page 110). • The Hang Seng China-Affiliated Corporations (Red Chip) Index is a capitalization-weighted index that includes Red Chips listed on the Hong Kong Stock Exchange. The index is denominated in Hong Kong dollars and had 25 constituents as of May 2011. The index replaced its predecessor in 2000, with a base value of 2000 on January 3, 2000. • Sources for further information about Red Chips include: – www.hsi.com – www.bloomberg.com

Located in Shandong Province, Tai Shan is not Source: Bloomberg, LLC; Hong Kong Stock Exchange; Asian Equity Research Institute. merely the mountain home of the gods; it is considered a deity itself and has been venerated by the Chinese as their most sacred peak since at MSCI China Red Chip Index MSCI China Red Chip Index – Sector Breakdown least the third millennium BC. Over 7,000 steps As of May 2011 lead to the summit, and the slopes are filled with • The MSCI China Red Chip Index is a capitalization- Index Weight (%) weighted index that seeks to represent the Red Chips Consumer Staples numerous temples. The emperors of ancient listed on the Hong Kong Stock Exchange. As of May Information Technology 7% China regarded Tai Shan as the actual son of the 7% Emperor of Heaven, from whom they received 2011, the index had a market capitalization of US$171 Financials their own authority to rule the people. At least billion, with 28 constituents. Health Care 29% 7% 72 legendary emperors are said to have visited • For further information, please go to www.msci.com. Tai Shan. Chinese legend says that those who Utilities climb the mountain will live until they are 100 7% years old. Consumer Discretionary 7% Source: sacredsites.com. Energy Industrials 7% Materials 22% 7%

Source: MSCI; FactSet. Source: MSCI; FactSet.

Estimates of future performance are based on assumptions that may not be realized. The indexes are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Past performance is no guarantee of future results. International investing entails greater risk, as well as greater potential rewards compared to US investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economics. 154 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney OVERVIEW OF THE INVESTMENT LANDSCAPE Investment Strategy Overview of Chinese P Chip Shares

National Museum of China Overview of Chinese P Chip Shares • P Chip (Private Chip) shares are issued by overseas-registered Chinese companies listed on the Hong Kong Stock Exchange that are privately run by Chinese nationals. As of early 2011, the P Chip market was relatively small, but it had been growing in light of the Chinese governments’ efforts to reform the restructure and expand the size of its capital markets. P Chips are available to foreign investors and qualified domestic institutional investors (Please see page 110). • The primary difference between P Chips and Red Chips is that P Chips represent Chinese companies that have no affiliations with the Chinese government, whereas Red Chips represent Chinese companies that are at least 30% owned by the Chinese government. Outside the National Inside the National • Due the relatively small size of the market, as of early 2011 the Hong Kong Stock Exchange had not constructed an index Museum of China Museum of China to represent P Chips. Covering two million square feet, the National Museum of China in Tiananmen Square is the Source: Bloomberg, LLC; Hong Kong Stock Exchange; Morgan Stanley & Co. Inc. Research; Asian Equity Research Institute. world’s largest museum under one roof and represents a leading showcase of Chinese history and culture. In the past, the site on Tiananmen Square housed two institutions: the Museum of Chinese History; and the Museum of the Chinese Revolution. In 2003, the two were combined and MSCI China P Index MSCI China P Index – Sector Breakdown renamed the National Museum of China. The As of May 2011 museum underwent seven major revisions and as of • The MSCI China P Chip Index is a capitalization- Index Weight (%) early 2011 featured a grand entrance hall, 850 feet weighted index that seeks to represent the P Chips listed Utilities Health Care on the Hong Kong Stock Exchange. As of May 2011, the 4% 2% long and 100 feet high, connecting the two earlier Industrials Financials museums. The centerpieces of the museum house index had a market capitalization of US$128 billion, 7% 24% with 46 constituents. two permanent exhibitions on Chinese history, one Information Technology focusing on ancient China and the other focusing • For further information, please go to www.msci.com. 9% on the modern era. Consumer Staples Source: “At China’s Grand New Museum, History Toes the Party 13% Line,” The New York Times, April 4, 2011. Consumer Discretionary 24% Materials 17%

Source: MSCI; FactSet. Source: MSCI; FactSet.

Estimates of future performance are based on assumptions that may not be realized. The indexes are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Past performance is no guarantee of future results. International investing entails greater risk, as well as greater potential rewards compared to US investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economics. 155 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney OVERVIEW OF THE INVESTMENT LANDSCAPE Investment Strategy Select China-Related Equity Indices

• The FTSE Group manages a family of China- FTSE China 25 Index FTSE China A50 Index related indices, including: • The FTSE China 25 Index includes the 25 largest and most • The FTSE China A50 Index includes the largest 50 A Shares – FTSE China 25 Index liquid Chinese companies (Red Chips or H Shares) listed and Chinese companies by total market capitalization that are listed – FTSE China A50 Index traded on the Hong Kong Stock Exchange. The index provides and traded on the Shanghai and Shenzhen stock exchanges. The foreign investors with a benchmark of the offshore Chinese stock index provides domestic investors and qualified foreign – FTSE China A All-Share Index markets and it can be used as a basis for index-linked investment institutional investors with a benchmark of the A shares market – FTSE China A 200 Index vehicles. and it can be used as a basis for index-linked investment vehicles.

– FTSE China A 200 Sector Indices Source: FTSE Group, Bloomberg, LLC. Source: FTSE Group, Bloomberg, LLC. – FTSE China A 200 Style Indices Price Performance Since Inception through 2010 Price Performance Since Inception through 2010 – FTSE China A Blue-Chip Value 100 Index $US Dollars $US Dollars – FTSE China A 400 Index 40,000 4,000 – FTSE China A 600 Index 30,000 3,000 – FTSE China A Small Cap Index 20,000 2,000 – FTSE China A Provincial Indices 10,000 1,000 – FTSE China A High Yield 150 Index 0 0 – FTSE China A Insurance Investment Index '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '04 '05 '06 '07 '08 '09 '10 – FTSE China Index Source: FactSet. Data are as of December 31, 2010. Source: Bloomberg, LLC. Data are as of December 31, 2010. – FTSE Hong Kong Index Sector Breakdown Sector Breakdown – FTSE China H Share Index As of March 31, 2011 As of March 31, 2011 – FTSE China B All-Share Index Index Weight (%) Index Weight (%) Other Other – FTSE China B 35 Index Insurance 4% Real Estate 13% – FTSE China Bond Index 11% 3% Banks – FTSE China A 200 Composite Index Food & Beverage 36% • For further information: Basic Resources 5% Banks 13% – http://www.ftse.com/Indices/FTSE_China_I 40% Construction ndex_Series/index.jsp 5% Industrial Goods 7% Oil & Gas Financial Services 16% 8% Insurance Telecommunications Basic Resources 12% 17% 11%

Source: FTSE Group. Data are as of March 31, 2011. Source: FTSE Group. Data are as of March 31, 2011. Estimates of future performance are based on assumptions that may not be realized. The indexes are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Past performance is no guarantee of future results. International investing entails greater risk, as well as greater potential rewards compared to US investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economics. 156 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney OVERVIEW OF THE INVESTMENT LANDSCAPE Investment Strategy Select China-Related Equity Indices

Meiyintang Chinese Porcelain Halter USX China Index Standard & Poor’s China BMI Index • The Halter USX China Index includes companies listed • The Standard & Poor’s China BMI Index includes on US exchanges that generate most of their revenues companies that are publicly traded and domiciled in from the People’s Republic of China. The index provides China, but legally available to foreign investors. The a benchmark for companies with exposure to China. index included 555 companies as of May 2011 and • The Halter USC China Index was created by the Halter provided foreign investors with an investable universe of Financial Group in response to economic trends taking publicly traded Chinese companies. place in China, as well as developments in US capital • Standard & Poor’s also maintains two other broad market markets. indices with exposure to China: the Standard & Poor’s • For a company to be included in the index, it must have an Greater China Ex-Taiwan Listed BMI Index; and the Source: The Economist; Image courtesy of Sotheby’s. average market capitalization of more than US$50 million Standard & Poor’s China Ex A-B Shares BMI Index. As for the preceding 40 days, must trade on the NYSE, of May 2011, the indices had 612 and 380 constituents, On April 7, 2011, Sotheby’s sold several lots of Nasdaq, or NYSE Arca exchanges, and must derive the respectively. imperial Chinese porcelain from the Meiyintang majority of its business from China. As of May 2011, the Source: Bloomberg, LLC. collection in Hong Kong. Meiyintang, literally index included 224 US-listed companies with exposure to meaning “hall among rosebeds” in Mandarin, has China. been considered one of the greatest collections of Chinese art privately owned in the West. Source: Bloomberg, LLC; www.usxchinaindex.com. Stephen Zuellig, a 93-year-old Swiss businessman, Price Performance Since Inception through 2010 Price Performance Since Inception through 2010 assembled the 2,000-piece collection. He and his late brother, Gilbert, began collecting Chinese US$ Dollars US$ Dollars porcelain in the early 1950s. The brothers sought 10,000 800 to collect Chinese porcelain from the Neolithic period to the Qing dynasty. Three fundamental 7,500 600 criteria guided their collecting: the rarity of the work; the quality of its decoration; and the condition of the piece. 5,000 400 The lots sold represented a microcosm of the entire 2,500 2,000-piece collection, ranging from the Yuan 200 dynasty to the Qing dynasty. The most treasured porcelains included the cobalt-blue and copper-red 0 0 early Ming wares, the monochrome Ming and '02 '03 '04 '05 '06 '07 '08 '09 '10 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 Qing pieces, and the Qing enamel-engraved porcelain. Source: Bloomberg, LCC. Data are as of December 31, 2010. Source: FactSet. Data are as of December 31, 2010. Estimates of future performance are based on assumptions that may not be realized. The indexes are unmanaged. An investor cannot invest directly in an index. They are Source: “Meiyintang Marvels,” The Economist, March 19, 2011. shown for illustrative purposes only and do not represent the performance of any specific investment. Past performance is no guarantee of future results. International investing entails greater risk, as well as greater potential rewards compared to US investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economics. 157 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney OVERVIEW OF THE INVESTMENT LANDSCAPE Investment Strategy Overview of China ADRs

• China ADRs represent American Depository(1) Receipts based on H shares, Red Chips, P Chips, or other non-US China-related companies. • Several Chinese companies were listed on the New York and the NASDAQ stock exchanges, and 15 Chinese companies were listed on the London Stock Exchange as of early 2011. United Nations Millennium Development Goals • Sources of further information about China ADRs include: 1. Eradicate extreme poverty and hunger. – www.bloomberg.com 2. Achieve universal primary – www.finance.yahoo.com education. – www.factset.com 3. Promote gender equality and empower women. – www.adrbnymellon.com 4. Reduce child mortality. 5. Improve maternal health. The Museum of Chinese in America (MOCA) 6. Combat HIV/AIDS, malaria, and other diseases. Founded in 1980 in New York City’s Chinatown, the Museum of Chinese in America seeks to preserve and present the history, heritage, culture, and 7. Ensure environmental diverse experiences of people of Chinese descent in the United States. The sustainability. museum began as a community-based organization launched by historian John Kuo Wei Tchen and community resident and activist Charles Lai, with 8. Develop a global partnership the mission of developing a better understanding of Chinese American for development. history. In 2005, the museum was among 400 New York City arts and social service institutions to receive a part of a $20 million grant from the Carnegie Source: The United Nations, September 2010. Corporation made possible through a donation by New York City mayor Michael Bloomberg. In 2009, the museum relocated to 215 Centre Street and was redesigned by architect Maya Lin.

Source: Museum of Chinese in America; The New York Times, “Reopened Museum Tells Chinese-American Stories,” September 21, 2009; “City Groups Get Bloomberg Gift of $20 Million,” July 6, 2005; “Maya Lin’s Big Dig,” New York Magazine, August 23, 2009. 158 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney OVERVIEW OF THE INVESTMENT LANDSCAPE Investment Strategy Overview of China Convertible Bonds

Hutongs • China convertible bonds are issued by China-related companies and trade either over- the-counter or on a stock exchange. • In terms of monetary amount outstanding, over 55% of the Chinese convertible bond market is represented by financial issuers.

Dating back to the Yuan, Ming, and Qing dynasties, hutongs are narrow streets or alleys • Sources of further information about China convertible bonds include: mainly located in Beijing, China, near the Forbidden City. – www.bloomberg.com Hutongs are formed by lines of siheyuan, traditional courtyard residences. Many – www.convertbond.com neighborhoods were formed by joining one siheyuan to another to form a hutong, and then – www.finance.yahoo.com joining one hutong to another. The word hutong is also used to refer to such neighborhoods. The Partly due to the modernization of Beijing, hutongs are fast disappearing, but represent a The Eight Immortals represent a group of legendary xian (immortals, transcendents, saints) in Chinese traditional aspect of Chinese cultural history. mythology. Each immortal’s power can be transferred to a power tool that can give life or destroy evil. Source: Discover China Tours. They are revered by the Taoists and are a popular element in the secular Chinese culture. They are said to live on a group of five islands in the . The immortals (in no special order) are: (i) Immortal Woman He (He Xiangu); (v) Lü Dongbin (the leader); (ii) Royal Uncle Cao (Cao Guojui); (vi) Philosopher Han Xiang (Han Xiang Zi); (iii) Iron-Crutch Li (Tieguai Li); (vii) Elder Zhang Guo (Zhang Guo Lao); and (iv) Lan Caihe; (viii) Hang Zhongli (Zhongli ). Considered signs of prosperity and longevity, the Eight Immortals appear in many forms of Chinese art, The Eight Immortals including silk paintings, wall murals, sculptures, and wood block prints. Crossing the Sea

Source: www.chinaculture.org. 159 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney OVERVIEW OF THE INVESTMENT LANDSCAPE Investment Strategy US, European, and Asian Corporations in China By the Morgan Stanley Research China Strategy Team

The Morgan Stanley Research China strategy team believes that China is poised for a “megatransition” between 2010 and 2020, from being a leading producer of globally distributed goods, to the world’s largest market for consumer and industrial products. For multinationals, competitive landscapes in specific industries are therefore likely to become more complex, reflecting powerful secular trends that are driving the megatransition: demographics; urbanization; infrastructure; the development of a social security network; consumer financing; and education.

US, European, and Asian Companies’ Opportunity Map in China Morgan Stanley Research Favorites

Apparel US Companies The Morgan Stanley Research China strategy team, together with industry Luxury Goods analysts from the US and China for 16 industries, systematically reviewed the Food and Beverage landscape of 16 US industries, evaluating companies’ current position, growth Household Retail strategy, and competitive headwinds. For further information, please refer to Consumption the Morgan Stanley Research report, “The China Files: US Corporates and Household Products China’s Megatransition,” published on September 20, 2010. Express Courier Auto and Auto Parts European Companies Advertising The Morgan Stanley Research China strategy team, together with industry Consumer Boom Culture and analysts from Europe and China, systematically reviewed the landscape of 18 Exhibitions Leisure European industries, evaluating companies’ current position, growth strategy, Leisure and Hotels and competitive headwinds. For further information, please refer to the Morgan Stanley Research report, “The China Files: European Corporates and Financial Asset Management China’s Megatransition,” published on October 29, 2010.

Medtech Healthcare Asian Companies Pharmaceuticals The Morgan Stanley Research China strategy team, together with industry Chemicals Materials and Utilities analysts from China and the Asia Pacific region, systematically reviewed the Water Treatment landscape of 14 industries, evaluating companies’ current position, growth strategy, and competitive headwinds. For further information, please refer to Aerospace/Defense the Morgan Stanley Research report, “The China Files: Asian Corporates and Industrial Upgrade Machinery China’s Megatransition,” published on November 8, 2010.

According to the Morgan Stanley Research China strategy team, winning strategies of multinationals in China should feature two elements: (i) a shift to franchise- building (establishing brands and distribution/service networks) over revenue generation (maximizing short-term sales); and (ii) a preference for integration (making China a second home market) rather than localization (treating China as another foreign market).

Source: Morgan Stanley & Co. Inc. Research: “The China Files: US Corporates and China’s Megatransition,” September 20, 2010; “The China Files: European Corporates and China’s Megatransition,” October 29, 2010; and “The China Files: Asian Corporates and China’s Megatransition,” November 8, 2010. 160 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney Investment Strategy

Ancient Chinese Scroll Paintings

Painted by Zhan Ziqian in the sixth century, “Spring Outing” is the earliest known scroll painting. Zhan Ziqian served in th e government of three historic periods: (550 – 577 AD); Northern Zhou (557 – 581 AD); and the Sui dynasty (581 – 618 AD). He is perhaps best known for his Painted in the tenth century by landscape paintings, but he also executed fine Hongzhong of the Tang dynasty (618 – Buddhist and Taoist paintings, human 907 AD), “Night Revels of Han Xizai” figures, and historic legends. is considered one of the most important Chinese scroll paintings. The scroll painting depicts Han Xizai, a minister of “Spring Outing,” by Zhan Ziqian of the Sui dynasty (581 – 618 AD). Li Yu, in five distinct scenes, in which he: (i) listens to the pipa; (ii) watches dancers; (iii) rests; (iv) plays a string instrument; and (v) bids farewell to his guests. As with most Chinese scroll Section 6 paintings, “Night revels of Han Xizai” views from right to left. The original painting no longer exists, but it is survived by the twelfth-century, Song- Additional Sources and Disclosures dynasty (960 – 1279 AD) remake shown below. The painting now resides in the Palace Museum in Beijing.

Scene v Scene iv Scene iii Scene ii Scene i

Twelfth-Century Remake of “Night Revels of Han Xizai,” by Gu Hongzhong of the Five Dynasties and Ten Kingdoms Period (907 – 960 AD).

Source: “A Visual Sourcebook of Chinese Civilization,” University of Washington, http://depts.washington.edu/chinaciv/; www.cultural-china.com. 161 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney ADDITIONAL SOURCES AND DISCLOSURES Investment Strategy For More Information

Select Websites Publications by David M. Darst, • CIA World Factbook: http://www.cia.org • UC Berkley Center for Chinese Studies: http://ieas.berkley.edu/ccs/ Chief Investment Strategist of • The World Bank: http://www.worldbank.org/cn • China Travel Guide: www.travelchinaguide.com Morgan Stanley Smith Barney. • International Monetary Fund: https://www.imf.org • China’s Largest E-Commerce Site: www.alibaba.com • World Atlas of China: http://www.worldatlas.com • China’s Three Largest Nasdaq-listed Internet Portals: www.sina.com, • China Market: www.chinamarket.com.cn/E www.sohu.com, www.chinese.ft.com • China Online: The Information Network for China. • China Securities Regulatory Commission: www.csrc.gov.cn www.chinaonline.com • China Today: www.chinatoday.com • National Geographic: http://nationalgeographic.com/ • China Trade World: www.chinatradeworld.com • Asia Society: http://asiasociety.org • Woodrow Wilson International Center for Scholars: Kissinger Institute on China and the United States: www.wilsoncenter.org Books • Apter, David E. and Tony Saich. Revolutionary Discourse in Mao’s Republic. Harvard University Press, 1998. • Baum, Richard. China Watcher: Confessions of a Peking Tom. University of Washington Press, 2010. • Bickers, Robert. The Scramble for China: Foreign Devils in the Qing Empire 1832–1914. Allen Lane, 2011. A Mandarin edition of The Art of Asset • Bremmer, Ian. The End of the Free Market: Who Wins the War Between States and Corporations. Portfolio, 2010. Allocation, published in March 2005. • Brezezinski, Zbigniew. The Grand Chessboard. Basic Books, 1998. • Chang, Iris. The Chinese in America: A Narrative History. Penguin, 2004. • Chang, Jung. Wild Swans: Three Daughters in China. Ancor, 1992. • Chow, Gregory C. Understanding China’s Economy. River Edge: World Scientific Publishing Company, 1994. • Chua, Amy. Battle Hymn of the Tiger Mother. Penguin Press, 2010. • Dikötter, Frank. Mao’s Great Famine: The History of China's Most Devastating Catastrophe, 1958–1962. Walker, 2011. • Ebrey, Patricia B. The Cambridge Illustrated History of China. Cambridge University Press, 1999. • Fairbank, John K., and Edwin O. Reischauer. China: Tradition and Transformation. Boston: Houghton Mifflin, 1979. • Fairbank, John K., and Merle Goldman. China: A New History. Cambridge: Harvard University Press, 1998. • Fallows, James. Postcards from Tomorrow Square: Reports from China. Vintage, 2008. • Ford, Christopher A. The Mind of Empire: China’s History and Modern Foreign Relations. University Press of Kentucky, 2010. • Friedberg, Aaron L. A Contest for Supremacy: China, America, and the Struggle for Mastery in Asia. W.W. Norton & Company, 2011. • Garner, Jonathan. The Rise of the Chinese Consumer: Theory and Evidence. Wiley, 2005. • Hessler, Peter. Country Driving: A Journey Through China from Farm to Factory. Harper, 2010. A Mandarin edition of The Little Book • Huang, Yasheng. Capitalism with : Entrepreneurship and the State. Cambridge University Press, 2008. That Saves Your Assets, published in • Jacques, Martin. When China Rules the World: The End of the Western World and the Birth of a New Global Order. Penguin, 2009. November 2009. • Kissinger, Henry A. On China. The Penguin Press, 2011. • Kuhn, Robert L. How China’s Leaders Think: The Inside Story of China’s Reform and What This Means for the Future. Wiley, 2009. • Kuhn, Robert L. The Man Who Changed China: The Life and Legacy of Jiang Zemin. Wiley, 2009. • Lampton, David M. The Three Forces of Chinese Power: Might, Money, and Minds. University of California Press, 2008. 162 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney ADDITIONAL SOURCES AND DISCLOSURES Investment Strategy For More Information

Books • Ling, Li. Tibet’s Waters Will Save China. The Chinese Ministry of Water Resources, 2005. • Liu, Warren. KFC in China: Secret Recipe for Success. Wiley, 2008. • Liu, Xiumei. Understanding The Chinese Consumer. VDM Verlag, 2008. • Mahbubani, Kishore. The New Asian Hemisphere: The Irresistible Shift of Global Power to the East. PublicAffairs, 2008. • Mann, James. The China Fantasy: Why Capitalism Will Not Bring Democracy to China. Penguin, 2008. • McGregor, James. One Billion Customers: Lessons From the Front Lines of Doing Business in China. Free Press, 2005. • Mingfu, Liu. The China Dream: The Great Power Thinking and Strategic Positioning of China in the Post-American Age. Beijing: Zhongguo Youyi Chuban Gongsi, 2010. • Nathan, Andrew J, and Bruce Gilley. China’s New Rulers: The Secret Files. New York Review of Books, 2003. • Pan, Philip P. Out of Mao’s Shadow: The Struggle for the Soul of a New China. Simon & Schuster, 2009. • Pehrson, Christopher. String of Pearls: Meeting the Challenge of China’s Rising Power Across the Asian Littoral. Strategic Studies Institute of the US Army War College (SSI), 2006. • Pei, Minxin. China’s Trapped Transition: The Limits of Developmental Autocracy. Harvard University Press, 2006. • Roach, Stephen. This China is Different: A Collection of Essays on China’s Growing Stature in the World Economy. Morgan Stanley Research, March 2002. • Shambaugh, David. China’s Communist Party: Atrophy and Adaption. Woodrow Wilson Center Press/University of California Press, 2008. • Spence, Jonathan. Search for Modern China. New York: Norton, 1990. • Studwell, Joe. The China Dream: The Elusive Quest for the Last Greatest Untapped Market on Earth. Grove Press, 2003. • Terrill, Ross. The New Chinese Empire: Beijing’s Political Dilemma and What It Means for the United States. Basic Books, 2003. • Tse, Edward. The China Strategy: Harnessing the Power of the World’s Fastest-Growing Economy. Basic Books, 2010. • Walder, Andrew G. Fractured Rebellion: The Beijing Red Movement. Harvard University Press, 2010. • Walter, Carl E. and Fraser J.T. Howie. Red Capitalism: The Fragile Foundation of China’s Extraordinary Rise. Wiley, 2011. • Wasserstrom, Jeffrey C. China in the 21st Century: What Everyone Needs to Know. Oxford University Press, 2010. • Whyte, Martin K. Myth of the Social Volcano: Perceptions of Inequality and Distributive Injustice in Contemporary China. Stanford University Press, 2010. • Whyte, Martin K. Two Societies: Rural-Urban Inequality in Contemporary China. Harvard University Press, 2010.

Morgan Stanley Research Publications • Ahya, Chetan, and Tanvee Gupta, “India and China: New Tigers of Asia, Part III,” Morgan Stanley Research, August 13, 2010. • Ahya, Chetan, and Andy Xie, et al., “India and China: New Tigers of Asia, Part II,” Morgan Stanley Research, June 2006. • Ahya, Chetan, and Andy Xie, et al., “India and China: New Tigers of Asia,” Morgan Stanley Research, July 2004. • Gupta, Sunil, Sophie Lu, and Bing Jiang, “China Clean Energy: What a Winner Looks Like,” Morgan Stanley Research, June 30, 2009. • Lou, Jerry, and Allen Gui, et al., “China High-Speed Rail: On the Economic Fast Track,” Morgan Stanley Research, May 15, 2011. • Lou, Jerry, and Allen Gui, “The China Files: US Corporates and China’s Megatransition,” Morgan Stanley Research, September 20, 2010. • Lou, Jerry, and Allen Gui, “China Portfolio Strategy: Tightening Over-discounted; Bottom-fishing Consumers,” Morgan Stanley Research, February 27, 2011. • Lou, Jerry, and Allen Gui, and Ronan Carr, “The China Files: European Corporates and China’s Megatransition,” Morgan Stanley Research, October 29, 2010. • Lou, Jerry, and Allen Gui, and Jonathan Garner, “The China Files: Asian Corporates and China’s Megatransition,” Morgan Stanley Research, November 8, 2010. • Lou, Jerry, Qing Wang, and Allen Gui, “China Trend-Spotting Weekly: Latest Industry and Macro Developments,” Morgan Stanley Research, weekly publication. • Wang, Qing, Steven Zhang, and Ernest Ho, “The China Files: Chinese Economy through 2020,” Morgan Stanley Research, November 8, 2010. • Wang, Qing, Denise Yam, Sharon Lam, Steven Zhang, Ernest Ho, and Jason Liu, “Greater China Economics: Issues in Focus,” Morgan Stanley Research, April 13, 2011.

163 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney ADDITIONAL SOURCES AND DISCLOSURES Investment Strategy For More Information

Periodicals • Chua, Amy, “Why Chinese Mothers Are Superior,” Wall Street Journal, January 8-9, 2011. • Chua, Amy, “Our Readers Roar: What Makes A Good Parent,” Wall Street Journal, January 15-16, 2011. • Chua, Amy, “The Tiger Mother Talks Back,” Wall Street Journal, January 15-16, 2011. • The Economist, “China and India: Contest of the Century,” August 19, 2010. • The Economist, “Friend or Foe? A Special Report on China’s Place in the World,” December 4, 2010. • Ferguson, Niall. “In China’s Orbit,” Wall Street Journal, November 18, 2010. • Financial Times, “Africa-China Trade,” June 14, 2010. • Gwin, Peter. “Shaolin Kung Fu,” National Geographic, March 2011. • Harrer, Heinrich. “My Life in Forbidden Lhasa,” National Geographic, May 2008. • Hessler, Peter. “China’s Instant Cities,” National Geographic, June 2007. • Hessler, Peter. “Restless Spirits,” National Geographic, January 2010. • Hoagland, Edward. “China’s Mystic Waters,” National Geographic, March 2009. • Jenkins, Mark. “Searching for Sahangri-La,” National Geographic, May 2009. • Jenkins, Mark. “The Forgotten Road: Tea Horse Road,” National Geographic, May 2010. • Larmer, Brook. “Caves of Faith: Chinese Caves,” National Geographic, June 2010. • Mazzatena, O. Louis, “Rising to Life: Treasures of Ancient China,” National Geographic, November 2001. • Teague, Matthew, “The Other Tibet: Uygurs,” National Geographic, December 2009. • Waldman, Ayelet, “In Defense of the Guilty, Ambivalent, Preoccupied Western Mom,” Wall Street Journal, January 15-16, 2011. • Warren, Lynne, “Panda, Inc.,” National Geographic, July 2006. • Wong, Edward, “Plan for China’s Water Crisis Spurs Concern,” The New York Times, June 1, 2011. • Worrall, Simon, “Made in China,” National Geographic, June 2009.

Publications • The Boston Consulting Group, “The Internet’s New Billion,” September 2010. • The Boston Consulting Group, “Winning in Emerging-Market Cities,” September 2010. • Roland Berger, “Chinese Consumer Report 2010,” July 2010. • Rosen, Daniel H., and Thilo Hanemann, “An American Open Door? Maximizing the Benefits of Chinese Foreign Direct Investment,” Asia Society, May 2011. • MasterCard and HSBC, “Understanding the Affluent Consumers of China,” Second Quarter 2007. • McKinsey Consumer & Shopper Insights, “2010 Annual Chinese Consumer Study,” McKinsey & Company, August 2010.

Television Broadcasts • “In Search of China,” PBS Broadcast in 2000. • “The Tank Man,” PBS Broadcast in 2006. http://www.pbs.org/wgbh/pages/frontline/tankman/

164 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney ADDITIONAL SOURCES AND DISCLOSURES Investment Strategy Index Glossary

Index Disclosure and Index Definitions The indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees, or sales charges, which would lower performance. Past performance is no guarantee of future results. Consumer Price Index: The Consumer Price Index is one of the most widely recognized price measure for tracking the price of a market basket of goods and services purchased by individuals. The weights of the components are based on consumer spending patterns. Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks traded on the New York Stock Exchange and the NASDAQ. The index is the oldest and single most watched index in the world. It was inaugurated in 1896. FTSE China 25 Index: The FTSE China 25 Index includes the 25 largest and most liquid Chinese companies (Red Chips or H Shares) listed and traded on the Hong Kong Stock Exchange. FTSE China A50 Index: The FTSE China A Index includes the largest 50 A Shares Chinese companies by total market capitalization that are listed and traded on the Shanghai and Shenzhen stock exchanges. Hang Seng China AH Premium Index: The Hang Seng China AH Premium Index tracks the price premium (or discount) of A-shares to H-shares. The higher the index, the higher the premium of A- shares over H-shares, and vice-versa. Hang Seng China-Affiliated Corporations (Red Chip) Index: The Hang Seng China-Affiliated Corporations (Red Chip) Index is a capitalization index comprised of stocked listed on the Hock Kong Stock Exchange. The companies have at least 30% of their shareholdings held by state-owned organizations or provincial/municipal governments in China. The index was inaugurated in 2000. Hang Seng China Enterprises (H Shares) Index: The Hang Seng China Enterprises Index is a free-float capitalization-weighted index of H-Shares listed on the Hong Kong Stock Exchange and included in the Hang Seng Mainland Composite Index. The index was inaugurated in 2001. Halter USX China Index: The Halter USX China Index includes companies listed on US exchanges that generate most of their revenues from the People’s Republic of China. The NASDAQ Composite Index: The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market, and Capital Market. The index contains over 3,000 securities and was inaugurated in 1971. Producer Price Index: The Producer Price Index prices received by producers at the first commercial sale. The report measures prices for goods at three stages of production: finished, intermediate, and crude. The index for finished goods generally receives the most attention. Change in this index is the first aggregate inflation measure available for the month. MSCI Asia Pacific Ex Japan: The MSCI Asia Pacific Ex Japan Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of Asia, excluding Japan. As of December 31, 2010, the MSCI AC Asia ex Japan Index consists of the following 10 developed and emerging market country indices: China, Hong Kong, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan, and Thailand. MSCI Australia: The MSCI Australia Index is a capitalization-weighted index that monitors the performance of stocks from the country of Australia. MSCI China : The MSCI China Index is a capitalization-weighted index designed to represent Chinese B-shares, Hong Kong H-Shares, Red Chip, and P Chip companies that are available to non-Chinese investors. The MSCI China Index is calculated in Hong Kong Dollars. MSCI China A Index: The MSCI China A Index is a capitalization-weighted index that seeks to represent the A-shares listed on the Shanghai and Shenzhen stock exchanges. MSCI China B Index: The MSCI China B Index is a capitalization-weighted index that seeks to represent the B-shares listed on the Shanghai and Shenzhen stock exchanges. MSCI China H Index: The MSCI China H Index is a capitalization-weighted index that seeks to represent the H-shares listed on the Hong Kong Stock Exchange.

165 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney ADDITIONAL SOURCES AND DISCLOSURES Investment Strategy Index Glossary

Index Disclosure and Index Definitions The indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees, or sales charges, which would lower performance. Past performance is no guarantee of future results. MSCI China P Chip Index: The MSCI China Red Chip Index is a capitalization-weighted index that seeks to represent the P Chips listed on the Hong Kong Stock Exchange. MSCI China Red Chip Index: The MSCI China Red Chip Index is a capitalization-weighted index that seeks to represent the Red Chips listed on the Hong Kong Stock Exchange. MSCI Hong Kong: The MSCI Hong Kong Index is a capitalization-weighted index that monitors the performance of stocks from the country of Hong Kong. MSCI India: The MSCI India Index is a capitalization-weighted index that monitors the performance of stocks from the country of India. MSCI Indonesia: The MSCI Indonesia Index is a capitalization-weighted index that monitors the performance of stocks from the country of Indonesia. MSCI Korea: The MSCI Korea Index is a capitalization-weighted index that monitors the performance of stocks from the country of Korea. MSCI Malaysia: The MSCI Malaysia Index is a capitalization-weighted index that monitors the performance of stocks from the country of Malaysia. MSCI New Zealand: The MSCI New Zealand Index is a capitalization-weighted index that monitors the performance of stocks from the country of New Zealand. MSCI Philippines: The MSCI Philippines Index is a capitalization-weighted index that monitors the performance of stocks from the country of Philippines. MSCI Singapore: The MSCI Singapore Index is a capitalization-weighted index that monitors the performance of stocks from the country of Singapore. MSCI Taiwan: The MSCI Taiwan Index is a capitalization-weighted index that monitors the performance of stocks from the country of Taiwan. MSCI Thailand: The MSCI Thailand Index is a capitalization-weighted index that monitors the performance of stocks from the country of Thailand. Shanghai A-Share Stock Price Index: The Shanghai A-Share Stock Price Index is a capitalization-weighted index that tracks the daily performance of all A-shares listed on the Shanghai Stock Exchange. A-shares are restricted to local investors and qualified institutional foreign investors. The index was inaugurated in 1990. Shanghai B-Share Stock Price Index: The Shanghai B-Share Stock Price Index is a capitalization-weighted index that tracks the daily performance of all B-shares listed on the Shanghai Stock Exchange. B-shares are restricted to local investors and qualified institutional foreign investors. The index was inaugurated in 1990. Shanghai Stock Exchange (SE) Composite Index: The Shanghai SE Composite Index is a capitalization-weighted index that tracks the daily performance of all A-shares and B-shares listed on the Shanghai Stock Exchange. The index was inaugurated in 1990. Shenzhen A-Share Stock Price Index: The Shenzhen A-Share Stock Price Index is a capitalization-weighted index that tracks the daily performance of all A-shares listed on the Shenzhen Stock Exchange. A-shares are restricted to local investors and qualified institutional foreign investors. The index was inaugurated in 1991. Shenzhen B-Share Stock Price Index: The Shenzhen B-Share Stock Price Index is a capitalization-weighted index that tracks the daily performance of all B-shares listed on the Shenzhen Stock Exchange. A-shares are restricted to local investors and qualified institutional foreign investors. The index was inaugurated in 1992. Standard & Poor’s 500 Index: The Standard & Poor’s 500 Index has been widely regarded as the best single gauge of the large cap US equities market since the index was first published in 1957. The index has over US$ 4.8 trillion benchmarked, with index assets comprising approximately US$ 1.1 trillion of this total. The index includes 500 leading companies in leading industries of the US economy, capturing 75% coverage of US equities. Standard & Poor’s China BMI Index: The Standard & Poor’s China BMI Index is a capitalization-weighted index that defines and measures investable universe of publicly traded companies domiciled in China, but legally available to foreign investors.

166 Please refer to important information, disclosures, and qualifications at the end of this material. Morgan Stanley Smith Barney ADDITIONAL SOURCES AND DISCLOSURES Investment Strategy Disclosures

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Value investing does not guarantee a profit or eliminate risk. Not all companies whose stocks are considered to be value stocks are able to turn their business around or successfully employ corrective strategies which would result in stock prices that do not rise as initially expected.

Growth investing does not guarantee a profit or eliminate risk. The stocks of these companies can have relatively high valuations. Because of these high valuations, an investment in a growth stock can be more risky than an investment in a company with more modest growth expectations.

Investing in foreign emerging markets entails greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks. Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.

The indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. REITs investing risks are similar to those associated with direct investments in real estate: property value fluctuations, lack of liquidity, limited diversification and sensitivity to economic factors such as interest rate changes and market recessions.

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Disclosures

Investing in commodities entails significant risks. Commodity prices may be affected by a variety of factors at any time, including but not limited to, (i) changes in supply and demand relationships, (ii) governmental programs and policies, (iii) national and international political and economic events, war and terrorist events, (iv) changes in interest and exchange rates, (v) trading activities in commodities and related contracts, (vi) pestilence, technological change and weather, and (vii) the price volatility of a commodity. In addition, the commodities markets are subject to temporary distortions or other disruptions due to various factors, including lack of liquidity, participation of speculators and government intervention.

Physical precious metals are non-regulated products. Precious metals are speculative investments, which may experience short-term and long term price volatility. The value of precious metals investments may fluctuate and may appreciate or decline, depending on market conditions. If sold in a declining market, the price you receive may be less than your original investment. Unlike bonds and stocks, precious metals do not make interest or dividend payments. Therefore, precious metals may not be suitable for investors who require current income. Precious metals are commodities that should be safely stored, which may impose additional costs on the investor. The Securities Investor Protection Corporation (“SIPC”) provides certain protection for customers’ cash and securities in the event of a brokerage firm’s bankruptcy, other financial difficulties, or if customers’ assets are missing. SIPC insurance does not apply to precious metals or other commodities. Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies. Principal is returned on a monthly basis over the life of the security. Principal prepayment can significantly affect the monthly income stream and the maturity of any type of MBS, including standard MBS, CMOs and Lottery Bonds. Yields and average lives are estimated based on prepayment assumptions and are subject to change based on actual prepayment of the mortgages in the underlying pools. The level of predictability of an MBS/CMO’s average life, and its market price, depends on the type of MBS/CMO class purchased and interest rate movements. In general, as interest rates fall, prepayment speeds are likely to increase, thus shortening the MBS/CMO’s average life and likely causing its market price to rise. Conversely, as interest rates rise, prepayment speeds are likely to decrease, thus lengthening average life and likely causing the MBS/CMO’s market price to fall. Some MBS/CMOs may have “original issue discount” (OID). OID occurs if the MBS/CMO’s original issue price is below its stated redemption price at maturity, and results in “imputed interest” that must be reported annually for tax purposes, resulting in a tax liability even though interest was not received. Investors are urged to consult their tax advisors for more information.

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168 Please refer to important information, disclosures, and qualifications at the end of this material.