Xinhua Far East Downgrades the Issuer Rating of Inner Mongolia Eerduosi Cashmere Products Co Ltd to BB+

Xinhua Far East Downgrades the Issuer Rating of Inner Mongolia Eerduosi Cashmere Products Co Ltd to BB+

December 21, 2006

    HONG KONG, Dec. 21 /Xinhua-PRNewswire/ -¨C Xinhua Far
East China Ratings 
("Xinhua Far East") today concluded its review on
Inner Mongolia Eerduosi 
Cashmere Products Co Ltd ("Erdos" or "the
Company", SH A 600295; SH B 900936) 
by downgrading its issuer credit rating to BB+ from BBB-. 
Its rating outlook 
is changed to stable from negative.

    (Logo:
http://www.xprn.com.cn:9080/xprn/sa/200611140926.gif )

    The downgrade was prompted by the Company's very high
debt levels after 
the acquisition of a 24% stake in Erdos Power Metallurgy Co
Ltd ("Power 
Metallurgy Company") and the possibility that its debt
levels may rise even 
further with its ongoing investments in power metallurgy
projects.  Xinhua 
Far East also notes the Company has shifted its focus to
the cyclical 
metallurgy industry, a move which has overshadowed its risk
profile, making 
it inconsistent with an investment-grade company.  We are
also concerned 
about its inexperience in the new industry and its
aggressive financial 
policy.

    When Erdos completed its acquisition of the 24% equity
stake in Power 
Metallurgy Company, it consolidated the latter company's
July to September 
results into its financial statements.  As expected by
Xinhua Far East, this 
significantly raised its debt levels and liquidity risks
and, at the end of 
the third quarter of 2006, Erdos' gross debt to total
capital was up 55.8% 
from 28.5% as of year-end 2005.  Its gross debt and net
debt rose to 
RMB6,139.3 million and RMB5,079.3 million respectively from
RMB1,358 million 
and RMB456.1 million as of year-end 2005.  Furthermore, 68%
of the gross debt 
was short-term in nature, indicating the Company is
probably using short-term 
debt to finance its long-term projects.

    Yet the Company's debt levels could rise even further,
with several power 
metallurgy projects still under construction or in planning
stage.  The 
budget for its coal-electricity-silicon alloy project and
associated 
equipment is RMB17.2 billion, according to figures from the
Power Metallurgy 
Company, with accumulative investments reaching RMB4.1
billion at the end of 
2005.  Although the company could turn to the equity
markets or joint 
ventures to partly finance the project, it could quite
possibly raise some 
funds through debt, given the large amount of investment
involved and its 
aggressive financial policies to date.

    At the same time, given the company's inexperience in
the metallurgy 
industry and given the fact that the industry is cyclical
in nature, Erdos' 
foray into this new industry has heightened its risk
profile.  Although power 
metallurgy sector sales accounted for just 13.3% of the
Company's total 
revenues of RMB2,169.9 million in the first three quarters
of 2006, this 
percentage is expected to rise substantially next year when
it incorporates 
Power Metallurgy Company's full-year results and when more
power metallurgy 
projects are completed and put into production in
succession.  As such, the 
challenges Erdos faces in managing a multi-industry
conglomerate are 
significant.

    Another factor overshadowing Erdos is that Power
Metallurgy Company's 
performance itself could be negatively affected by
oversupply and fierce 
competition, despite the cost advantages it holds in
respect to abundant coal 
resources.  Power metallurgy sector sales in the third
quarter of this year 
were RMB289.1 million, 46.1% of which derived from ferro
silicon products and 
16.7% of which were from electricity.  Although demand for
Ferro silicon has 
risen significantly in recent years with the rapid
development of the 
domestic steel industry, the market has encountered
oversupply, with 
production capacity rapidly expanding also.  There have
also been indications 
that the electricity market in Inner Mongolia has also been
in over-supply in 
recent years.  Overall, Xinhua Far East does not believe
Erdos' financial 
profile and risk structure will substantially improve over
the next few 
years. 

    Even so, as a leader of cashmere industry, Erdos is
nevertheless able to 
generate relatively stable income from cashmere, supporting
a stable ratings 
outlook. 

    In 2005, Erdos realized turnover of RMB2.9 billion and,
at the end of 
June 2006, Erdos Cashmere Group Co Ltd was the company's
largest shareholder, 
with a 40.7% stake. 

    Established in April 2003, Erdos Power Metallurgy Co
Ltd is based in the 
Qipanjing Industrial Park in Eerduosi of the Inner Mongolia
Autonomous 
Region.  Leveraging its access to the region's natural
resources, it engages 
primarily in power metallurgy projects.  It currently holds
a 54% share in 
Erdos Power Metallurgy Co Ltd and intends to increase its
stake to 85%. 

    Erdos is a constituent of both the Xinhua/FTSE China
200 and B35 Indices 
and, as of market close on December 20, 2006, its total
A-share market 
capitalization and investable capitalization were RMB3,005
million and RMB901 
million respectively.  Its B-share market cap totaled
US$172 million, all of 
which is investable.

    For the rating report summary, please visit 
http://www.xinhuafinance.com/creditrating .

    About Xinhua FTSE China 200 and B35 Indices

    Xinhua FTSE China 200 Index is the large cap index in
the Xinhua FTSE 
China A Share Index Series and includes the top 200
companies in China by 
market cap.  It is designed as a tradable index and is
calculated in real-
time every 15 seconds.  Xinhua FTSE China B 35 Index is the
large cap 
tradable index in the FTSE Xinhua China B Index Series,
covering `B' shares 
listed on the Shanghai and Shenzhen stock exchanges.  It
provides 
international investors with exposure to the mainland
Chinese market.  For 
daily data and further information, see
http://www.xinhuaftse.com .

    About Xinhua Far East China Ratings

    Xinhua Far East China Ratings (Xinhua Far East) is a
pioneering venture 
in China that aims to rank credit risks among corporations
in China.  It is a 
strategic alliance between Xinhua Finance (TSE Mothers:
9399), and Shanghai 
Far East Credit Rating Co., Ltd.  Shanghai Far East became
a Xinhua Finance 
partner company in 2003 and the first China member of The
Association of 
Credit Rating Agencies in Asia in December 2003.

    Capitalizing on the synergy between Xinhua Finance and
Shanghai Far East, 
Xinhua Far East's rating methodology and process blend
unique local market 
knowledge with international rating standards.  Xinhua Far
East is committed 
to provide investors with independent, objective, timely
and forward-looking 
credit opinions on Chinese companies.  It aims to help
investors 
differentiate the credit risks among the corporations in
China, thereby, 
cultivating their awareness and promoting information
disclosures and 
transparency in China market.  For more information, see 
http://www.xfn.com/creditrating .

    About Xinhua Finance Limited

    Xinhua Finance Limited is China's unchallenged leader
in financial 
information and media,  and is listed on the Mothers board
of the Tokyo Stock 
Exchange (symbol: 9399) (OTC ADRs: XHFNY).  Bridging
China's financial 
markets and the world, Xinhua Finance serves financial
institutions, 
corporations and re-distributors through four focused and
complementary 
service lines: Indices, Ratings, Financial News and
Investor Relations.   
Founded in November 1999, the Company is headquartered in
Shanghai with 20 
news bureaus and offices in 19 locations across Asia,
Australia, North 
America and Europe.  For more information, please visit 
http://www.xinhuafinance.com .  

    About Shanghai Far East Credit Rating Co., Ltd

    Shanghai Far East Credit Rating Co., Ltd. is the first
and leading 
professional credit rating company with comprehensive
business coverage in 
China.  It is an independent agency established by the
Shanghai Academy of 
Social Sciences with the mission to develop internationally
accepted 
standards for capital market in China.  The company is a
pioneer in 
conducting bond-rating business in China.  For years, it
has been authorized 
by the Shanghai branch of the PBOC to undertake loan
certificate credit 
rating.

    Since establishment, it has rated over 1,000 corporate
long-term bonds 
and commercial papers, based on the principles of
objectivity, fairness and 
independence.  The company has also maintained over 50%
market share in the 
loan certificate-rating sector in Shanghai for three
consecutive years.  With 
its strong local presence and knowledge, it provides
investors with unique 
and the most insightful credit opinion.  For more
information, see 
http://www.fareast-cr.com .



    For more information, please contact: 

    Hong Kong
     Joy Tsang
     Corporate & Investor Communications Director
     Xinhua Finance
     Tel:   [phone],
[phone]
     Email: [e-mail]

    US
     Ms. Ishviene Arora
     Taylor Rafferty (IR/PR Contact in US)
     Tel:   [phone]
     Email: [e-mail]


SOURCE  Xinhua Far East China Ratings