ANNUAL REPORT 2008 17

Management Discussion and Analysis

As at 31 December 2008, the Group’s borrowings totalled RMB54,545 million, representing an increase of RMB4,788 million from RMB49,757 million at 31 December 2007 which included borrowings of fixed interest rates amounted to RMB11,417 million (2007: RMB9,446 million). Such borrowings were denominated, to a larger extent, in US dollar and, to a smaller extent, in Renminbi, Japanese Yen and Hong Kong dollars. Of such borrowings, RMB25,959 million, RMB7,319 million, RMB9,818 million, RMB1,895 million and RMB9,554 million will be repayable in 2009, 2010, 2011, 2012, 2013 and thereafter respectively. As at 31 December 2008, cash and cash equivalents of the Group totalling RMB4,649 million, of which 11.3% were denominated in foreign currencies, increased by 21.6% from RMB3,824 million at 31 December 2007.
Net debts (aggregate of short-term financing bills, bank and other loans, obligations under finance leases, trade and bills payables, sales in advance of carriage, amounts due to related companies, accrued expenses and other liabilities less cash and cash equivalents and pledged bank deposits) increased by 7.9% to RMB64,927 million at 31 December 2008.
As at 31 December 2008, total equity attributable to equity shareholders of the Company amounted to RMB7,021 million, representing a decrease of RMB4,842 million from RMB11,863 million at 31 December 2007. Total equity at 31 December 2008 amounted to RMB9,479 million (2007: RMB14,310 million).
Ratio of net debt to total equity of the Group at 31 December 2008 was 685%, as compared to 420% at 31 December 2007.

FINANCIAL RISK MANAGEMENT POLICY
Foreign currency risk
Renminbi is not freely convertible into foreign currencies. All foreign exchange transactions involving Renminbi must take place either through the People’s Bank of China (“PBOC”) or other institutions authorised to buy and sell foreign exchange or at a swap centre.
The Group has significant exposure to foreign currency risk as substantially all of the Group’s obligations under finance leases and bank and other loans are denominated in foreign currencies, principally US dollars and Japanese Yen. Depreciation or appreciation of the Renminbi against foreign currencies affects the Group’s results significantly because the Group’s foreign currency payments generally exceed its foreign currency receipts. The Group is not able to hedge its foreign currency exposure effectively other than by retaining its foreign currency denominated earnings and receipts to the extent permitted by the State Administration of Foreign Exchange, or subject to certain restrictive conditions, entering into forward foreign exchange contracts with authorised banks.
As at 31 December 2008, the Group had two outstanding forward option contracts of notional amount ranging from USD64 million to USD128 million. The contracts are to buy US Dollars by selling Japanese Yen at certain specified rates on monthly settlement dates until the maturity of the contracts in 2011. At 31 December 2008, the fair value of these currency forward option contracts was liabilities of approximately RMB116 million.

18 ANNUAL REPORT 2008

Management Discussion and Analysis

The exchange rate of Renminbi to US dollar was set by the PBOC and had fluctuated within a narrow band prior to 21 July 2005. Since then, a managed floating exchange rate regime based on market supply and demand with reference to a basket of foreign currencies has been used and the US dollar exchange rate has gradually declined against the Renminbi.
Jet fuel price risk
The Group uses approved derivative instruments such as swaps and options with approved counter-parties and within approved limits to manage the risk of fluctuations of jet fuel price. In addition, counter-party credit risk is generally restricted to any gains on changes in fair value at any time, and not the principal amount of the instruments. Therefore, the possibility of material loss arising in the event of non-performance by counter-party is considered to be unlikely.
　
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