All of the global financial crisis, global stock markets experienced extreme price and volume fluctuations which had a significant effect on the market prices of securities issued by many companies for reasons unrelated to their operating performance. According to the World Bank’s report titled Global Economic Prospects 2011, most of the developing world weathered the financial crisis well and by the end of 2010, many emerging world economies had recovered or were close to resuming the growth potential they had attained prior to the crisis. The world economy is moving from a post — crisis bounce back phase of the recovery to slower but solid growth in 2011 to 2012 with developing countries contributing almost half of the global growth. However, the recent geopolitical unrest in the Middle East which has led to the United Nations approving of military action against Libya has raised fears over its impact on world oil production and the resultant volatility in oil prices has affected major stock markets around the world. A continued rise in oil prices could fuel further rises in inflation rates which could adversely impact corporate profits and curb economic growth. The continued unrest in the Middle East and its impact on oil prices threatening the momentum of economic recoveryabove factors working together with the renewal of concerns over the sovereign debt crisis in Europe with the downgrade of Spain’s and Portugal’s sovereign credit rating in March 2011 and the ongoing concerns over the economic impact of the natural disasters and resultant nuclear crisis in Japan may result in market fluctuations which may materially adversely affect our stock price.

A non-United States corporation is considered a passive foreign investment company, or PFIC, for United States federal income tax purposes for any taxable year if either (1) at least 75% of its gross income is passive income or (2) at least 50% of the total value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are held for the production of passive income (“passive assets”).income. For this purpose, the total value of our assets generally will be determined by reference to the market price of our shares. We believe that our shares should not be treated as stock of a PFIC for United States federal income tax purposes for the taxable year that ended on December 31, 2010.2013. However, there is no guarantee that the United States Internal Revenue Service will not take a contrary position or that our shares will not be treated as stock of a PFIC for any future taxable year. Our PFIC status will be affected by, among other things, the market value of our shares and the assets and operations of our Companycompany and subsidiaries. If we were to be treated as a PFIC for any taxable year during which a US Holder (defined below) holds our shares, certain adverse United States federal income tax consequences could apply to the US Holder. See “Item 1010. Additional Information — Taxation — United States Federal Income Taxation — PFIC Rules”.

Our operations and performance depend significantly on worldwide economic conditions. During periods of economic expansion, the demand for trucks, construction machinery and other applications of diesel engines generally increases. Conversely, uncertainty about current global economic conditions or adverse changes in the economy could lead to a significant decline in the diesel engine industry which is generally adversely affected by a decline in demand. As a result, the performance of the Chinese economy will likely affect, to a significant degree, our financial condition, results of operations, business and prospects. For example, the various austerity measures taken by the Chinese government from time to time to regulate economic growth and control inflation have in prior periods, significantly weakened demand for trucks in China, and may have a similar effect in the future. In particular, austerity measures that restrict access to credit and slow the rate of fixed investment (including infrastructure development) adversely affect demand for, and production of, trucks and other commercial vehicles. Uncertainty and adverse changes in the Chinese economy could also increase costs associated with developing our products, increase the cost and decrease the availability of potential sources of financing, and increase our exposure to material losses from our investments, any of which could have a material adverse impact on our financial condition and operating results.

According to the World Bank’s latest Global Economic Prospects issued on January 14, 2014, five years after the global financial marketscrisis, the world economy is showing signs of improvement in 2014 due to a recovery in the high income countries of the United States, the Euro Area and Japan and the firming of growth in developing countries. The world economy is expected to grow 3.2% in 2014 compared with 2.4% in 2013 and strengthening to 3.4% and 3.5% in 2015 and 2016 respectively. Much of the initial growth acceleration reflects a pick-up in high income country growth which, after years of extreme weakness and outright recession, appear to be finally emerging from the global financial crisis. However, growth prospects in 2014 is sensitive to the tapering of monetary stimulus in the United States Europebeginning in January 2014 and Asiathe structural shifts occurring in 2008 and 2009 experienced extreme disruption, including, among other things, extreme volatilityChina’s economy. Although growth in security prices, severely diminished liquidity and credit availability, rating downgradesthe Euro Area had turned positive in the second quarter of certain investments and declining valuations of others. A global recovery got underway2013 led by stronger growth in 2010 and according to the World Bank’s report titled Global Economic Prospects 2011, mostGermany, Euro Area output remains well below pre-crisis levels in some of the developing world weatheredhardest-hit countries of the financial crisis well and by the end of 2010, many emerging economies had recovered or were close to resuming the growth potential they had attained prior to the crisis.region. The worldglobal economy is moving fromrecovering but downside risks persist. These risks include a post — crisis bounce back phasederailment of the recovery in the Euro Area, ongoing debt and fiscal issues in the United States with a possibility of a debt default, a slowdown in China’s economy as its new leadership attempts to slower but solid growth in 2011rebalance its economy from investment and exports to 2012 with developing countries contributing almost halfincreased domestic consumption, an escalation of the global growth. However, the recent geopolitical unrestgeo-political crisis in Ukraine and increasing tensions relating to territorial disputes in the Middle East whichSouth China Sea without any immediate resolution. Further, in recent years, as a result of recurring liquidity tightening in the banking system, alternative lending and borrowing outside of traditional banking practices, generally known as “shadow banking”, has grown to become an integral and significant aspect of the Chinese economy. Such alternative lending is loosely regulated and has led to the United Nations approving of military action against Libya has raised fearsan increase in China’s debt levels leading to concern over its impact on world oil productionrising bad debts and the resultant volatility in oil prices has affected major stock markets across the world. A continued rise in oil prices could fuel further rises in inflation rates which could adversely impact corporate profits and curb economic growth. The continued unrest in the Middle East and the recurrence of concerns over the sovereign debt crisis in Europe with the downgrade of Spain and Portugal’s sovereign credit rating in March 2011 and uncertainty over the economic impactfinancial problems. As some of the earthquakefunds obtained from shadow banking are being used for investments in speculative and tsunami which hit Japan’s North-East coastrisky products, should a widespread default on March 11, 2011 causingsuch investments occur, this could harm the current nuclear crisis maygrowth prospects of the Chinese economy. Even if the Chinese government increases regulation over such alternative lending and borrowing, there is no assurance that such regulations will be successful, or that they would not have a negative effect on the global economy.

The pace of economic growth in China slowed from 9.2% in 2011 to 7.8% in 2012 to 7.7% in 2013 (Source: China’s National Bureau of Statistics). The World Bank has forecast China’s economy to expand in 2014 by 7.7%. On November 15, 2013, after the thirdclosure of the Third Plenum of the 18^th Chinese Communist Party Congress, the new government issued a comprehensive reform document detailing extensive new social and fourth quarterseconomic policies with the primary aim to restructure and rebalance the economy to a more sustainable model by focusing more on domestic consumption away from investment and export fuelled growth. On March 5, 2014, at the National People’s Congress in Beijing, Premier Li Keqiang in his first annual policy report announced that the growth target for China in 2014 would remain at 7.5%, the same level as that set for 2012 and 2013 in order to strengthen market confidence and improve the economic structure of 2008 and into early 2009. The measures adopted by the Chinese government in 2008 and 2009 to ensure continued economic growth hadChina. Premier Li also advocated a positive effect on the economy. On December 3, 2010, the Chinese government announced a shift in itsbalanced monetary policy fromand placed an emphasis on wide-ranging reforms in a moderately loose stance to counter the effectscontinuation of the global financial crisisgoals set out in 2008, to a prudent monetary policy in 2011the November reform document. On April 3, 2014, China’s State Council in an effort to rein in liquidity, combat accelerating inflation and limit the riskmaintain economic growth, unveiled a new stimulus package consisting of asset bubbles. Between October 2010 and February 2011, China raised interest ratestax breaks for small firms and the reserve requirements for banks a numberspeeding up of timesrailway investments and renovations of shanty towns. As the new Chinese government has stated that pursuing reforms stretching from finance to control rising inflationthe environment is its top priority, further changes to existing economic and soak up excess liquidity. As a result of thesocial policies, in addition to those already announced, change in monetary policyare expected to be implemented by the Chinese government and increases in lending interest rates, domestic spending may be curtailed which may adversely impact our business, operating results and financial condition in a number of ways, including longer sales cycles, lower prices for our products and reduced unit sales. Our revenues and gross margins are based on certain levels of consumer and corporate spending. The current conditions make it difficult for our customers, our vendors and us to accurately forecast and plan future business activities. If our projections of these expenditures fail to materialize due to reductions in consumer or corporate spending as a result of changes in the macroeconomic environment, our revenues and gross margins could be adversely affected. As a result of measures undertaken by the Chinese government to curb rising inflation, our customers and suppliers may reduce their spending and as a result, may modify, delay or cancel plans to purchase our products. Any inability of current and/or potential customers to pay us for our products may adversely affect our earnings and cash flow.

The government incentive schemes for agriculture machinery in 2013 resulted in an increase in the Chinesedemand for agricultural engines as a result of which Yuchai recorded a significant increase in agriculture engine sales in 2013. However, since the government hasincentive schemes may be changed from time to time, introduced measuresthere can be no assurance that our sales of agricultural engines will continue to avoid overheating in certain sectors ofgrow at the economy, including tighter bank lending policies and increases in bank interest rates. See “— Risks relating to Mainland China — Adverse changes in the economic policies of the Chinese government could have a material adverse effect on the overall economic growth of Mainland China, which could reduce the demand for our products and adversely affect our competitive position.”

We own 76.4% of the outstanding shares of Yuchai, and one of our primary sources of cash flow continues to be our share of the dividends, if any, paid by Yuchai and investment earnings thereon. As a result of the agreement reached with Yuchai and its related parties pursuant to the July 2003 Agreement, we discontinued legal and arbitration proceedings initiated by us in May 2003 relating to difficulties with respect to our investment in Yuchai. In furtherance of the terms of the July 2003 Agreement, we, Yuchai and Coomber Investments Limited, or Coomber, entered into the Reorganization Agreement in April 2005, as amended in December 2005 and November 2006, and agreed on a restructuring plan for our company intended to be beneficial to our shareholders. In June 2007, we, along with Yuchai, Coomber and the State Holding Company, entered into the Cooperation Agreement. The Cooperation agreement amends certain terms of the Reorganization Agreement and as so amended, incorporates the terms of the Reorganization Agreement. Pursuant to the amendments to the Reorganization Agreement, the Company has agreed that the restructuring and spin-off of Yuchai will not be effected, and, recognizing the understandings that have been reached between the Company and the State Holding Company to jointly undertake efforts to expand the business of Yuchai, the Company will not seek to recover the anti-dilution fee of US$20 million that was due from Yuchai. SeeFor more information on these agreements see “Item 4. Information on the Company — History and Development — Reorganization Agreement.Development.” No assurance can be given as to when the business expansion requirements relating to Yuchai as contemplated by the Reorganization Agreement and the Cooperation Agreement will be fully implemented, or that implementation of the Reorganization Agreement and the Cooperation Agreement will effectively resolve all of the difficulties faced by us with respect to our investment in Yuchai.

In addition, the Reorganization Agreement contemplates the continued implementation of our business expansion and diversification plan adopted in February 2005. One of the goals of this business expansion and diversification plan is to reduce our financial dependence on Yuchai. Subsequently, we acquired strategic stakes in TCL and HLGE. See “Item 5. Operating and Financial Review and Prospects — Business Expansion and Diversification Plan.” Nonetheless, no assurance can be given that we will be able to successfully expand and diversify our business. We may also not be able to continue to identify suitable acquisition opportunities, or secure funding to consummate such acquisitions or successfully integrate such acquired businesses within our operations. Any failure to implement the terms of the Reorganization Agreement and Cooperation Agreement, including our continued expansion and diversification, could have a material adverse effect on our financial condition, results of operations, business or prospects. Additionally, although the Cooperation Agreement amends certain provisions of the Reorganization Agreement and also acknowledges the understandings that have been reached between us and the State Holding Company to jointly undertake efforts to expand and diversify the business of Yuchai, no assurance can be given that we will be able to successfully implement those efforts or as to when the transactions contemplated therein will be consummated.

Although we own 76.4% of the outstanding shares of Yuchai, and believe we have proper legal ownership of our investment and a controlling financial interest in Yuchai, in the event there is a dispute with Yuchai’s Chinese shareholders regarding our investment in Yuchai, we may have to rely on the Chinese legal system for remedies. The Chinese legal system may not be as effective as compared to other more developed countries, such as the United States. See “—“Item 3. Key Information — Risk Factors — Risks relating to Mainland China — The Chinese legal system embodies uncertainties which could limit the legal protection available to foreign investors.” We have, in the past experienced problems from time to time in obtaining assistance and cooperation of Yuchai’s Chinese shareholders in the daily management and operation of Yuchai. We have, in the past also experienced problems from time to time in obtaining the assistance and cooperation of the State Holding Company in dealing with other various matters, including the implementation of corporate governance procedures, the payment of dividends, the holding of Yuchai board meetings and the resolution of employee-related matters. Examples of these problems are described elsewhere in this Annual Report. The July 2003 Agreement, the Reorganization Agreement and the Cooperation Agreement are intended to resolve certain issues relating to our share ownership in Yuchai and the continued corporate governance and other difficulties which we have had with respect to Yuchai. As part of the terms of the Reorganization Agreement, Yuchai agreed that it would seek the requisite shareholder approval prior to entering into any material transactions (including any agreements or arrangements with parties related to Yuchai or any of its shareholders) and that it would comply with its governance requirements. Yuchai also acknowledged and affirmed the Company’s continued rights as majority shareholder to direct the management and policies of Yuchai through Yuchai’s Board of Directors. Yuchai’s Articles of Association have been amended and such amended Articles of Association as approved by the Guangxi Department of Commerce on December 2, 2009, entitle the Company to elect nine of Yuchai’s 13 directors, thereby reaffirming the Company’s right to effect all major decisions relating to Yuchai. While Yuchai has affirmed the Company’s continued rights as Yuchai’s majority shareholder and authority to direct the management and policies of Yuchai, no assurance can be given that disagreements and difficulties with Yuchai’s management and/or Yuchai’s Chinese shareholders will not recur, including implementation of the Reorganization Agreement and the Cooperation Agreement, corporate governance matters or related party transactions. Such disagreements and difficulties could ultimately have a material adverse impact on our consolidated financial position, results of operations and cash flows.

We restated our consolidated financial statements for the year ended December 31, 2005, and reported material weaknesses in our internal control over financial reporting and concluded that as of December 31, 2005 to 2009,2011, our disclosure controls and procedures were not effective and as of December 31, 2006 to 2009,2011, our internal control over financial reporting was not effective. In addition, in connection with management’s assessment of the effectiveness of our internal control over financial reportingHowever, for the period covered by this Annual Report, management has identifiedyear ended December 31, 2012, no material weaknessesweakness in our internal control over financial reporting was identified and hasmanagement had concluded that as of December 31, 2010,2012, our disclosure controls and procedures and internal control over financial reporting were noteffective. During the period covered by this Annual Report, no material weakness in our internal control over financial reporting was identified and management has concluded that as of December 31, 2013, our disclosure controls and procedures and internal control over financial reporting were effective. Our current independent registered public accounting firm has expressed an adverseunqualified opinion on the effectiveness of our internal control over financial reporting as of December 31, 2010.2013. See “Item 15 —15. Controls and Procedures.”

Our sales are concentrated among the Dongfeng Group, which includes the Dongfeng Automobile Company, one of the largest state-owned automobile companies in China, and other major diesel truck manufacturers controlled by or affiliated with the Dongfeng Automobile Company. In 2010,2013, sales to the Dongfeng Group accounted for 20.5%20.7% of our total net revenues,revenue, of which sales to our two largest customers, Liuzhou Dongfeng Automobile and Hubei Dongfeng Automobile, accounted for 6.5%5.5% and 5.3%,3.3% respectively. In 2013, our sales to our top five customers including the Dongfeng Group accounted for 34.8% of our total revenue. Although we consider our relationship with the Dongfeng Group and the other top four customers to be good, the loss of one or more of the companies within the Dongfeng Group as a customer or any one of our other top four customers whether singly or combined together would have a material adverse effect on our financial condition, results of operations, business or prospects.

As we are dependent on the purchases made by the Dongfeng Group from us, andwe have exposure to their liquidity arising from the high level of accounts receivable from them. We cannot assure you that the Dongfeng Group will be able to repay all the money they owe to us. In addition, the Dongfeng Group may not be able to continue purchasing the same volume of products from us which would reduce our overall sales volume.

The Dongfeng Group also competes with us in the diesel engine market in China. Although we believe that the companies within the Dongfeng Group generally make independent purchasing decisions based on end-user preferences, we cannot assure you that truck manufacturers affiliated with the Dongfeng Automobile Company will not preferentially purchase diesel engines manufactured by companies within the Dongfeng Group over those manufactured by us.

The diesel engine industry in China is highly competitive. We compete with many other China domestic companies, most of which are state-owned enterprises. Some of our competitors have formed joint ventures with or have technology assistance relationships with foreign diesel engine manufacturers or foreign engine design consulting firms and use foreign technology that is more advanced than ours. We expect competition to intensify as a result of:

In addition, we believe there was excess capacity in the diesel engine industry in the past due to structural factors. The stimulus measures announced by the Chinese government in 2009 to counter the effects of the global financial crisis and maintain economic stability led to significantly increased demand for commercial vehicles in China in 2010, which we believe led our competitors to invest in significant capacity expansion. These investments significantly increased the overall capacity in the industry in 2012. The market for commercial vehicles in China softened in 2011 and this continued into 2012 due to a variety of factors including the phasing out of government incentives for car purchases, the introduction of policies to restrict automotive growth in Beijing and other major cities to curb emissions and ease traffic congestion and a slowdown in China’s economy. The market rebounded in 2013 mainly due to the pre-buying of commercial vehicles prior to the implementation of the National IV emission standards nationwide on July 1, 2013 and the uneven enforcement of the new emission standards by the authorities after July 1, 2013. Any excess capacity or decrease in demand in the diesel engine industry in the future could lead to a decrease in prices in the diesel engine market and as we and our competitors compete through lower prices, this could adversely impact our revenues, margins and overall profitability. Furthermore, if restrictions and tariffs on the import of motor vehicles and motor vehicle parts into China are reduced, foreign competition could increase significantly.

Our long-term business prospects will depend largely upon our ability to develop and introduce new or improved products at competitive prices. Our competitors in the diesel engine markets may be able to introduce new or improved engine models that are more favorably received by customers. Competition in the end-user markets, mainly the truck market, may also lead to technological improvements and advances that render our current products obsolete at an earlier than expected date, in which case we may have to depreciate or impair our production equipment more rapidly than planned. Failure to introduce or delays in the introduction of new or improved products at competitive prices could have a material adverse effect on our financial condition, results of operations, business or prospects.

In 2010, diesel powered commercial vehicles recorded sales of 3.5 million engines in China, as reported by the China Automobiles Association of Manufacturers. In 2011 and 2012, due to a softening in the commercial vehicle market in China, our net sales duringdecreased by 4.7% and 12.9%, respectively. In 2013, the fiscal year 2010 withmarket rebounded and our net sales increasingincreased by 23.0% in 2010. We18.2%. However, we cannot assure you that we can continuewill be able to increase our net sales or maintain our present level of net sales. For example, we may not be able to increase our net sales commensurate with our increased levels of production capacity. Moreover, our future growth is dependent in large part on factors beyond our control, such as the continued economic growth in China. Theand stability of the global and Chinese economies. According to the World Bank’s latest Global Economic Prospects issued on January 14, 2014, five years after the global financial crisis, the world economy is showing signs of improvement in 2014 due to a recovery in the high income countries of the United States, the Euro Area and Japan and the firming of growth in developing countries. The world economy is expected to grow 3.2% in 2014 compared with 2.4% in 2013 and strengthening to 3.4% and 3.5% in 2015 and 2016 respectively. Much of the initial growth acceleration reflects a pick-up in high income country growth which, after years of extreme weakness and outright recession, appear to be finally emerging from the global financial crisis. However, growth prospects in 2014 is sensitive to the tapering of monetary stimulus in the United States beginning in January 2014 and the structural shifts occurring in China’s economy. Although growth in the Euro Area had turned positive in the second quarter of 2013 led by stronger growth in Germany, Euro Area output remains well below pre-crisis levels in some of the hardest-hit countries of the region. The global economy is recovering but downside risks persist. These risks include a derailment of the recovery in the Euro Area, ongoing debt and fiscal issues in the United States with a possibility of a debt default, a slowdown in China’s economy as its new leadership attempts to rebalance its economy from investment and exports to increased domestic consumption, an escalation of the recent geo-political crisis in Ukraine and increasing tensions relating to territorial disputes in the South China Sea without any immediate resolution. The World Bank has forecast China’s economy to expand in 2014 by 7.7%. On November 15, 2013, after the closure of the Third Plenum of the 18^th Chinese Communist Party Congress, the new government issued a comprehensive reform document detailing extensive new social and economic policies with the primary aim to restructure and rebalance the economy to a more sustainable model by focusing more on domestic consumption away from investment and export fuelled growth. On March 5, 2014, at the National People’s Congress in Beijing, Premier Li Keqiang in his first annual policy report announced that the growth target for China in 2014 would remain at 7.5%, the same level as that set for 2012 and 2013 in order to strengthen market confidence and improve the economic structure of China. Premier Li also advocated a balanced monetary policy and placed an emphasis on wide-ranging reforms in a continuation of the goals set out in the November reform document. On April 3, 2014, China’s State Council in an effort to maintain economic growth, unveiled a new stimulus package consisting of tax breaks for small firms and the speeding up of railway investments and renovations of shanty towns. Any weakness or instability in the global or Chinese economies could, in turn, adversely impact the commercial vehicle market in China and our sales growth. Further, in recent years, as a result of recurring liquidity tightening in the banking system, alternative lending and borrowing outside of traditional banking practices, generally known as “shadow banking”, has grown to become an integral and significant aspect of the Chinese economy. Such alternative lending is loosely regulated and has led to an increase in China’s debt levels leading to concern over rising bad debts and financial problems. As some of the funds obtained from shadow banking are being used for investments in speculative and risky products, should a widespread default on such investments occur, this could harm the growth prospects of the Chinese economy. Even if the Chinese government increases regulation over such alternative lending and borrowing, there is no assurance that such regulations will be successful, or that they would not have an adverse impact on the economic growth outlook foroverall loan markets and liquidity in China, in 2008 and in response,which will negatively impact the Chinese government, on November 10, 2008 announced a 4 trillion yuan stimulus package with an aim to maintain economic stability and development through spending on infrastructure projects. In March 2009, at the 11^th National People’s Congress, the Chinese government further outlined a package of measures to drive economic growth. In addition, the Chinese government also announced that a total of Rmb 908 billion of the central government investments in 2009 would be spent on key infrastructure construction, technology innovation, environmental protection and low-income housing. The stimulus measures adopted by the Chinese government to ensure continued economic growth have had a positive effect on the economy. On December 3, 2010, the Chinese government announced a shift in its monetary policy to a prudent monetary policy in 2011 in an effort to rein in liquidity, combat accelerating inflation and limit the risk of asset bubbles. Between October 2010 and February 2011, China raised interest rates and the reserve requirements for banks a number of times to control rising inflation and soak up excess liquidity. According to the World Bank’s report titled Global Economic Prospects 2011, most of the developing world weathered the financial crisis well and by the end of 2010, many emerging world economies had recovered or were close to resuming the growth potential they had attained prior to the crisis. The world economy is moving from a post — crisis bounce back phase of the recovery to slower but solid growth in 2011 to 2012 with developing countries contributing almost half of the global growth. However, the recent geopolitical unrest in the Middle East which has led to the United Nations approving military action against Libya, the continued unresolved sovereign debt crisis in Europe and uncertainty over the economic impact of the earthquake and tsunami which hit Japan’s North-East coast on March 11, 2011 causing the current nuclear crisis have led to concerns over the sustainability of the global recovery.

In addition, we cannot assure you that we will be able to properly manage any future growth, including:

Furthermore, we have acquired in the past, and may acquire in the future, equity interests in engine parts suppliers and logistics and marketing companies. If we are unable to effectively manage or assimilate these acquisitions, our financial condition, results of operations, business or prospects could be adversely affected. See “Item 4. Information on the Company—Production.”

As the Chinese automotive industry continues to develop, we will have to continuously improve our existing engine products, develop new diesel engine products and enter into new market segmentsmarkets in order to remain competitive. As a result, our long-term business prospects will largely depend upon our ability to develop and introduce new or improved products at competitive prices and enter into new market segments.markets. Future products may utilize different technologies and may require knowledge of markets that we do not currently possess. Moreover, our competitors may be able to introduce new or improved engine models that are more favorably received by customers than our products or enter into new markets with an early-entrant advantage. Any failure by us to introduce, or any delays in the introduction of, new or improved products at competitive prices or entering into new market segmentsmarkets could have a material adverse effect on our financial condition, results of operations, business or prospects.

On December 11, 2009, Yuchai entered into a joint venture agreement with Caterpillar (China) Investment Co., Ltd. (“Caterpillar China”) to establish a new joint venture company in China to provide remanufacturing services for and relating to Yuchai’s diesel engines and components and certain Caterpillar diesel engines and components. The new joint venture company, Yuchai Remanufacturing Services (Suzhou) Co., Ltd. was incorporated on April 7, 2010 in Suzhou, Jiangsu province. Operations are expected to commence in early 2011 with an estimated total of 180,000 components to be remanufacturedat a temporary workshop commenced in 2011. The permanent factory located in the Suzhou Industrial Park was inaugurated on July 13, 2012 and full remanufacturing operations at the permanent factory have since commenced.

On August 11, 2009, Yuchai, pursuant to a Framework Agreement entered into with Jirui United Heavy Industry Co., Ltd. (“Jirui United”), a company jointly established by China International Marine Containers Group Ltd (“CIMC”) and Chery Automobile Co., Ltd. (“Chery”) (collectively referred to as “CIMC-Chery”), and Shenzhen City Jiusi Investment Management Co., Ltd (“Jiusi”) incorporated Y & C Engine Co., Ltd. in Wuhu City, Anhui Province (the “JV Company”) to produce heavy-duty vehicle engines with the displacement range from 10.5L to 14L. The key focus of the JV Companyjoint venture company is the production of YC6K diesel engines. The full production line commenced operations in December 20102010.

On June 4, 2013, Yuchai and 12,000 units of YC6K diesel engines are targetedYuchai’s joint venture company, Y&C Engine Co., Ltd entered into a framework agreement with Baotou Bei Ben Heavy Duty Truck Co., Ltd (“Bei Ben”) and Inner Mongolia First Machinery Group Co., Ltd (“First Machinery Group”) to establish a new joint venture company to be producedlocated in 2011. — See “Item 4. Information onBaotou, Inner Mongolia to produce diesel and gas engine models YC6A, YC6L, YC6MK and Y&C Power’s advanced diesel and gas engine model YC6K to meet the Company — New Products” for more information. needs of Bei Ben’s heavy-duty and medium-duty trucks and buses. On October 12, 2013, we announced that further to discussions between the joint venture parties, the First Machinery Group would exit from the joint venture and be replaced with Baotou Beifang Chuangye Co., Ltd., an entity affiliated with the First Machinery Group. The new joint venture company is expected to be established in 2014.

There can be no assurance that these joint ventures will be successful or profitable. We review our investments in these joint ventures on an ongoing basis and may take such action as is deemed strategically appropriate including but not limited to divestment and shareholding changes.

In March 2012, we announced that Yuchai will be constructing a new facility at its main manufacturing facility at Yulin City, Guangxi Province to develop and produce a full portfolio of natural gas engines to complement its existing suite of diesel engines. In December 2012, we announced that seven new models of natural gas engines would be launched in 2013 for both on-road and off-road applications, all of which would be compliant with China’s National V emission standards. The main applications of Yuchai’s natural gas engines are in the large bus, medium- to heavy-duty truck, power generator and marine sectors. The new facility was completed and has been in operations since the middle of 2013 to develop and manufacture a full portfolio of gas engines for all applications. See “Item 4. Information on the Company — Products and Product Development — Yuchai — Other products and services” for more information on Yuchai’s natural gas engines.

Natural gas engines represent an emerging market in China, as well as in other countries around the world, and the development of a sustainable market for natural gas engines may be affected by many factors, some of which are beyond our control, including:

There can be no assurance that a sustainable market for natural gas vehicles will develop in China or in other countries around the world or that our initiative to enter the natural gas engine market will be successful or profitable.

We may be unable to obtain sufficient financing to fund our capital requirements which could limit our growth potential.

We believe that our cash from operations, together with any necessary borrowings, will provide sufficient financial resources to meet our projected capital and other expenditure requirements. If we have underestimated our capital requirements or overestimated our future cash flows, additional financing may be required. Financing may not be available to us on acceptable terms or at all. Our ability to obtain external financing is subject to various uncertainties, including our results of operations, financial condition and cash flow, economic, political and other conditions in Mainland China, the Chinese government’s policies relating to foreign currency borrowings and the condition of the Chinese and international capital markets. If adequate capital is not available, our financial condition, results of operations, business and prospects could be adversely affected.

We may use borrowings from time to time to supplement our working capital requirements and to finance our business expansion and diversification plan. See “Item 5. Our Operating and Financial Review and Prospects — Liquidity and Capital Resources”.Resources.” A portion of our borrowings may be structured on a floating rate basis and denominated in US dollars, Singapore dollars or Renminbi. AnIn 2011, Yuchai issued Rmb-denominated unsecured short-term financing bonds (“STFBs”) in China amounting to Rmb 2.4 billion upon the receipt of approval from China’s National Association of Financial Market Institutional Investors (“NAFMII”), a self-regulatory association of institutional investors in the inter-bank market in China under the supervision of the PBOC, at interest rates ranging from 4.59% to 5.77% per annum. The STFBs were fully repaid on their respective maturity dates in 2012. In 2012, Yuchai issued STFBs amounting to RMB1.0 billion at an interest rate of 4.45% per annum which were fully repaid upon its maturity in August 2013. In 2013, Yuchai issued the first tranche of Rmb-denominated three year unsecured medium-term notes (“MTNs”) in China amounting to RMB 1.0 billion upon the receipt of approval from NAFMII, at an annual interest rate of 4.69%. The maturity date of the MTNs is May 30, 2016.

In 2013, as a result of a shortage of liquidity in China’s banking system, significant fluctuations in interest rates occurred notably in June and December necessitating an injection of funds by the PBOC on December 19, 2013 to stabilize the market. A shortage of liquidity in the banking system could increase the cost of borrowing which will affect our cost of business. Any fluctuations in interest rates, or fluctuations in exchange rates between the Renminbi or Singapore dollars and US dollars, may increase our borrowing costs or the availability of funding andfunding. This could affect our financial condition, results of operations, business or prospects. In particular, our financial condition, results of operations, business or prospects could be adversely affected by a devaluation of the Renminbi. In addition, an increase in interest rates may reduce the fair value of the debt securities issued by HLGE.

Economic growth in China has, in the past, been accompanied by periods of high inflation. The Chinese government has implemented various policies from time to time to control inflation. For example, the Chinese government has from time to timeperiodically introduced measures in certain sectors to avoid overheating of the economy, including tighter bank lending policies, increases in bank interest rates, and measures to curb inflation, which has resulted in a decrease in the rate of inflation. The global economic crisis resulted in a slowing of the rate of inflation in January 2009 and thereafter into negative territory until November and December 2009 according to the National Bureau of Statistics. In 2010, the annual inflation rate of inflation was 3.3% above the 3% target set bywhich increased to 5.4% in 2011 leading to the Chinese government and in January 2011, the inflation rate stood at 4.9%. The Chinese government recognized that one of its priorities in 2011 is to counter accelerating inflation and raisedraising lending interest rates and the reserve requirements for banks six times in 2011 to counter accelerating inflation. According to the National Bureau of Statistics, the annual inflation rate for 2012 and 2013 fell to 2.6% as a numberresult of times between October 2010the slowing economy which weakened further to 2.5% and 2.2% in January and February 2011.2014 respectively. China’s central bank, in its quarterly monetary policy report issued on February 8, 2014, noted that although prices were basically stable, there was a need to manage inflation expectations. On March 5, 2014, at Premier Wen Jiabao in hisLi Keqiang’s first annual address topolicy report presented at the National People’s Congress on March 5, 2011 has said thatin Beijing, he announced the government’s aim is to contain averagemaintenance of a steady inflation to 4%rate of 3.5% in 2011. The effects of2014, the stimulus measures implemented by the Chinese government have resultedsame as in inflationary pressures and an2013. An increase in energy prices generallyinflation could cause our costs for parts and components, labor costs, raw materials required for the production of productsand other operating costs to increase, which would adversely affect our financial condition and results of operations if we cannot pass these added costs on to customers.

We are subject to Chinese national and local environmental protection regulations which currently impose fees for the discharge of waste substances, require the payment of fines for pollution, and provide for the closure by the Chinese government of any facility that fails to comply with orders requiring us to cease or improve upon certain activities causing environmental damage. Due to the nature of our business, we produce certain amounts of waste water, gas, and solid waste materials during the course of our production. We believe our environmental protection facilities and systems are adequate for us to comply with the existing national, provincial and local environmental protection regulations. However, Chinese national, provincial or local authorities may impose additional or more stringent regulations which would require additional expenditure on environmental matters or changes in our processes or systems.

The amount of our insurance coverage for our buildings and equipment is at cost which could be less than replacement value, and we have no plans to increase the coverage. The amount of our insurance coverage for our inventory is at book value which could be less than replacement value, and we also have no plans to increase this coverage. In accordance with what we believe is customary practice among industrial equipment manufacturers in China, we insure only high risk assets, such as production property and equipment and certain inventory. However, our under insurance of other properties, facilities and inventory in accordance with this Chinese practice exposes us to substantial risks so that in the event of a major accident, our insurance recovery may be inadequate. We do not currently carry third party liability insurance to cover claims in respect of bodily injury, property or environmental damage arising from accidents on our property or relating to our operations. We also do not carry business interruption insurance as such coverage is not customary in China. Losses incurred or payments required to be made by us which are not fully insured could have a material adverse effect on our financial condition.

Substantially all of our assets are located in Mainland China, and substantially all of our revenue is derived from our operations in Mainland China. Accordingly, our financial condition, results of operations, business or prospects are subject, to a significant degree, to economic, political and legal developments in Mainland China. The economic system of Mainland China differs from the economies of most developed countries in many respects, including government investment, the level of development, control of capital investment, control of foreign exchange and allocation of resources.

Since the late 1970s, the Chinese government has been reforming the Chinese economic system from a planned economy to a market-oriented economy. In recent years, the Chinese government has implemented economic reform measures emphasizing decentralization, utilization of market forces in the development of the Chinese economy and a higher level of management autonomy. These reforms have resulted in significant economic growth and social progress, but the growth has been uneven both geographically and among various sectors of the economy. Economic growth has also been accompanied by periods of high inflation. The Chinese government has implemented various policies from time to time to restrain the rate of such economic growth, control inflation and otherwise regulate economic expansion. For example, the Chinese government has from time to time introduced measures in certain sectors to avoid overheating of the economy, including tighter bank lending policies, increases in bank interest rates, and measures to curb property, stock market speculation and inflation. Severe measures or other actions by the Chinese government, such as placing additional controls on the prices of diesel and diesel-using products, could restrict our business operations and adversely affect our financial position. Although we believe that the economic reforms and macroeconomic policies and measures adopted by the Chinese government will continue to have a positive effect in the longer term on economic development in Mainland China and that we will continue to benefit in the longer term from these policies and measures, these policies and measures may, from time to time, be modified or reversed. On March 5, 2013, at Premier Wen Jiabao’s last annual address to open the National People’s Congress in Beijing, he announced that the growth target for China in 2013 remained at 7.5%, the same level as that set for 2012, in part due to the continuing impact of the global financial crisis and the uncertain recovery of the world economy. Upon the completion of a once-in-a decade leadership change in China in mid-March 2013 whereby Xi Jinping and Li Keqiang officially succeeded Hu Jintao and Wen Jiabao as President and Premier, respectively, the new government at the Third Plenum of the 18^th Chinese Communist Party Central Committee held from November 9 to 12, 2013 issued a comprehensive reform document detailing extensive new social and economic policies with the primary aim to restructure and rebalance the economy to a more sustainable model by focusing more on domestic consumption away from investment and export fuelled growth. On March 5, 2014, at the National People’s Congress in Beijing, Premier Li Keqiang in his first annual policy report announced that the growth target for China in 2014 would remain at 7.5%, the same level as that set for 2012 and 2013 in order to strengthen market confidence and improve the economic structure of China. Premier Li also advocated a balanced monetary policy and placed an emphasis on wide-ranging reforms in a continuation of the goals set out in the November reform document. In view of the increased focus on domestic consumption, further changes to existing economic and social policies are expected to be announced and implemented by the new leadership. On April 3, 2014, China’s State Council in an effort to maintain economic growth, unveiled a new stimulus package consisting of tax breaks for small firms and the speeding up of railway investments and renovations of shanty towns. Adverse changes in economic and social conditions in Mainland China, in the policies of the Chinese government or in the laws and regulations in Mainland China, could have a material adverse effect on the overall economic growth of Mainland China and in infrastructure investment in Mainland China. These developments could adversely affect our financial condition, results of operations and business, by reducing the demand for our products.

Since the late 1990s, many Asian countries have experienced significant changes in economic conditions, including, for example, substantial depreciation in currency exchange rates, increased interest rates, reduced economic growth rates, corporate bankruptcies, volatility in the market values of shares listed on stock exchanges, decreases in foreign currency turnover and government-imposed austerity measures. To date, China’s economy has generally been affectedMany Asian governments have implemented and continue to a lesser extent than most other major Asian countries. However, we cannot assure you that China’s economy will not suffer difficulties in the future with the announcement on December 3, 2010 by the Chinese government of a shift in its monetaryimplement policy from a moderately loose stancemeasures to counter the effects of the global financial crisis tothat began in the third and fourth quarters of 2008 and maintain economic stability. For example, as a prudent monetary policyresult of China’s slowing growth in 20112012 amid weaknesses in the global economy, in particular the key export markets of the United States and Europe, the Chinese government quickened the approval process for infrastructure projects and cut interest rates in June and July 2012 and bank reserve requirements in February and May 2012 in an effort to reinavert a sharp slowdown in liquidity, combat accelerating inflationits economy. Although growth in China in the fourth quarter of 2012 improved to 7.9% after seven quarters of declining growth and limitwas 7.7% in 2013 according to the riskNational Bureau of asset bubblesStatistics, the Chinese government is forecasting growth in 2014 to remain at 7.5%, the same level as that set for 2012 and 2013. On March 5, 2013, in his last annual address to open the National People’s Congress in Beijing, Premier Wen Jiabao also noted that expanding domestic demand would be China’s long-term strategy for economic development and that a proper level of economic growth was required to be maintained in order to change the growth model and restructure the economy. The once-in-a-decade leadership change was completed in mid-March 2013 and the uncertainty overnew government at the financial fall-outThird Plenum of the 18^th Chinese Communist Party Central Committee held from November 9 to 12, 2013 issued a comprehensive reform document detailing extensive new social and effectseconomic policies with the primary aim to restructure and rebalance the economy to a more sustainable model by focusing more on domestic consumption away from investment and export fuelled growth. On March 5, 2014, at the earthquakeNational People’s Congress in Beijing, Premier Li Keqiang in his first annual policy report announced that the growth target for China in 2014 would remain at 7.5%, the same level as that set for 2012 and tsunami2013 in order to strengthen market confidence and improve the economic structure of China. Premier Li also advocated a balanced monetary policy and placed an emphasis on wide-ranging reforms in a continuation of the goals set out in the November reform document. In view of the increased focus on domestic consumption, further changes to existing economic and social policies are expected to be announced and implemented by the new leadership. There can be no assurance these, or other, policy measures will have their intended effect on economic growth in China which, hit Japan’s North-East coast on March 11, 2011 causingin turn, could impact the current nuclear crisis.commercial vehicle market in China and our sales growth.

The global economy is recovering but downside risks to the global economy persist. These risks include a derailment of the recovery in the Euro Area, ongoing debt and fiscal issues in the United States with a possibility of a debt default, a slowdown in China’s economy as its new leadership attempts to rebalance its economy from investment and exports to increased domestic consumption, an escalation of the recent geo-political crisis in Ukraine and increasing tensions relating to territorial disputes in the South China Sea without any immediate resolution. Demand for trucks, construction machinery and other applications of diesel engines generally increases during periods of economic expansion and decreases during periods of economic slowdown. In the event that adverse economic developments occur in China, our sales may decrease and our financial condition, results of operations, business or prospects could therefore suffer.

The Chinese legal system is a civil law system based on written statutes. Unlike common law systems, it is a system in which decided legal cases have little precedent value. In 1979, the Chinese government began to promulgate a comprehensive system of laws and regulations governing economic matters in general including, for example, with respect to corporate organization and governance, foreign investments, commerce, taxation and trade. Since China’s economic reform and opening-up in late 1970s, legislation has significantly enhanced the protection afforded to various forms of foreign investment in Mainland China. However, these laws, regulations and legal requirements are relatively recent, and their interpretation and enforcement involve uncertainties and may not be consistent or predictable as in other more developed jurisdictions which may limit the legal protection available to foreign investors.

Our operations in China are subject to PRC regulations governing PRC companies. These regulations contain provisions that are required to be included in the articles of association of PRC companies and are intended to regulate the internal affairs of these companies. The PRC Company Law and these regulations, in general, and the provisions for the protection of shareholders’ rights and access to information, in particular, are less developed than those applicable to companies incorporated in the United States, Hong Kong or other developed countries or regions. In addition, the interpretation of PRC laws may be subject to policy changes which reflect domestic political changes. As China’s legal system develops, the promulgation of new laws, changes to existing laws and the pre-emption of local regulations by national laws may have an adverse effect on our prospects, financial condition and results of operations.

Substantially all of our revenues and operating expenses are generated by our Chinese operating subsidiary, Yuchai, and are denominated in Renminbi, while a portion of our indebtedness is, or in the future may be, denominated in US dollars and other foreign currencies. The Renminbi is currently freely convertible under the “current account,” which includes dividends, trade and service-related foreign exchange transactions, but not under the “capital account,” which includes, among other things, foreign direct investment, overseas borrowings by Chinese entities and proceeds of overseas public offering by Chinese entities. Some of the conversions between Renminbi and foreign currency under capital account are subject to the prior approval of the State Administration for Foreign Exchange, or SAFE.

Our Chinese operating subsidiary, as a foreign invested enterprise, may purchase foreign currency without the approval of SAFE for settlement of “current account transactions,”transactions”, including payment of dividends, by providing commercial documents evidencing these transactions. Our Chinese operating subsidiary may also retain foreign exchange in its current account (subject to a cap approved by SAFE) to satisfy foreign currency liabilities or to pay dividends. However, the relevant Chinese government authorities may limit or eliminate our Chinese operating subsidiary’s ability to purchase and retain foreign currencies in the future. Our Chinese operating subsidiary, therefore, may not be able to obtain sufficient foreign currency to satisfy its foreign currency requirements to pay dividends to us for our use in making any future dividend payments or to satisfy other foreign currency payment requirements. Foreign currency transactions under the capital account are still subject to limitations and require approvals from SAFE. This could affect our Chinese operating subsidiary’s ability to obtain foreign currency through debt or equity financing, including by means of loans or capital contributions from us. Furthermore, the General Affairs Department of SAFE promulgated a new circularcirculars in August 2008 and July 2011, pursuant to which, Renminbi converted from capital contribution in foreign currency to a domestic enterprise in China can only be used for the activities that are within the approved business scope of such enterprise and cannot be used for China domestic equity investment, acquisition, giving entrusted loans or acquisition,repayment of intercompany loans, with limited exceptions. As a result, we may not be able to increase the capital contribution of our operating subsidiary, Yuchai and subsequently convert such capital contribution into Renminbi for equity investment or acquisition in China.

In April 2009, an outbreak of a new strain of influenza identified as the Influenza A (H1N1) virus occurred in Mexico resulting in a number of deaths. In a matter of weeks, the H1N1 virus had spread internationally but the symptoms in cases outside of Mexico were milder than world health officials had feared with fewer resulting deaths compared to Mexico, the epicentre of the epidemic. The spread of the virus worldwide caused the World Health Organization (“WHO”) to declare the H1N1 virus outbreak a global pandemic on June 11, 2009. However, the WHO in January 2010 said that the pandemic was easing although it warned of a possible new wave of infections in the northern hemisphere in late winter or early spring. In August 2010, the WHO declared the H1N1 pandemic officially over but anticipated that localized outbreaks with significant levels of H1N1 transmission might occur. The high unpredictability of the future evolution of this new virus and the possibility of a widespread re-occurrence may have a significant impact on global economic activity. In 2003, several countries, including China, experienced an outbreak of a highly contagious form of atypical pneumonia known as severe acute respiratory syndrome, or SARS, which severely restricted the level of economic activity in affected areas, including Beijing and Guangdong Province. The SARS epidemic in China had an adverse impact on the sale of engines, particularly during the second and third quarters in 2003. Although this SARS outbreak was brought under control during 2003, there have been a number of cases reported in China and elsewhere in the Asia region since that outbreak. In addition, an infectious strain of influenza known as the H5N1 Avian flu has also been reported from time to time in China, Hong Kong, Vietnam, and other parts of Asia. OutbreaksIn March 2013, there was an outbreak of a new strain of Avian flu (H7N9) in east China’s Anhui, Jiangsu and Zhejiang provinces which resulted in a number of deaths as reported by the Chinese authorities. In September 2012, WHO issued an international alert of a new virus known as the novel coronavirus, or NCoV. The virus first emerged in the Middle East and was discovered in September 2012 when the United Kingdom informed WHO of a case of acute respiratory syndrome. The NCoV virus belongs to the same family of virus as SARs. Since March 2013, China has reported more than 200 human cases of H7N9 and on January 20, 2014, WHO’s representative to China said that human-to-human transmission of the virus might occur on a limited scale in China and that there was no evidence that the virus will become sustained or widespread among humans. The potential outbreaks of other infectious diseases such as these could adversely affect general commercial activity, which could have a material adverse effect on our financial condition, results of operations, business or prospects.

The HLGE group operates hotels in the PRC and Malaysia. As of December 31, 2010,March 7, 2014, we had a 47.4% equity interest in HLGE. As of March 15, 2011, our48.9% shareholding interest in HLGE, remained unchanged. On March 24, 2011, our equity interest in HLGE increased to 48.4% as a resultcompany listed on the Main Board of the conversion of a certain number of Series B redeemable convertible preference shares held by us into HLGE ordinary shares.Singapore Exchange Securities Trading Limited (the “Singapore Exchange”). See “Item 5. Operating and Financial Review and Prospects — Business Expansion and Diversification Plan.”Plan” for further information on our investment in HLGE. Set forth below are risks related to our equity interest in HLGE.

The HLGE group’s financial performance is dependent on the performance of each of the hotels it operates. The HLGE group’s hotel ownership and management business are exposed to risks which are inherent in and/or common to the hotel industry and which may adversely affect the HLGE group’s financial performance, including the following: