DISCLOSEABLE TRANSACTION

Air China Ld
12 July 2006

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

If you are in any doubt as to any aspect of this circular, you should 
consult a stockbroker or other registered dealer in securities, bank 
manager, solicitor, professional accountant or other professional 
adviser.

If you have sold or transferred all your shares of Air China Limited,
you should at once hand this circular to the purchaser or transferee 
or to the bank, stockbroker or other agent through whom the sale was
effected for transmission to the purchaser or the transferee.

The Stock Exchange of Hong Kong Limited takes no responsibility for 
the contents of this circular, makes no representation as to its 
accuracy or completeness and expressly disclaims any liability 
whatsoever for any loss however arising from or in reliance upon the
whole or any part of the contents of this circular.

                            AIR CHINA LIMITED

 (a joint stock limited company incorporated in the People's
            Republic of China with limited liability)

                          (Stock Code: 753)



             Proposed Pre-Conditional Privatisation of
               China National Aviation Company Limited
                    by way of a Scheme of Arrangement
            under Section 166 of the Companies Ordinance


                        DISCLOSEABLE TRANSACTION


          Exclusive financial advisers to Air China Limited



China International Capital         Merrill Lynch
Corporation (Hong Kong) Limited     (Asia Pacific) Limited




                                                 12 July 2006

                             CONTENTS
                                                         Page



Definitions...............................................  1

Letter from the Board
1.  Introduction........................................... 6
2.  The Share Proposal and the Option Proposal............. 7
3.  Pre-Condition to making the Proposals.................. 7
4.  Conditions of the Proposals............................10
5.  Information on the CNAC Group..........................12
6.  General Information....................................14
7.  Air China's Intention in relation to CNAC..............14
8.  Background to, Reasons for and Benefits
    of the Discloseable Transaction........................15
9.  Effect of the Proposals................................17
10. Additional Information.................................17
Appendix - General Information ............................18





                                  DEFINITIONS
In this circular, the following expressions have the meanings set out below
unless the context requires otherwise.

'acting in concert'                  has the meaning ascribed to it in the
                                     Takeovers Code;                      

'Air China' or the 'Company'         Air China Limited, a company         
                                     incorporated in the PRC with limited 
                                     liability whose shares are listed on 
                                     the Main Board of the Stock Exchange 
                                     under the stock code 753;            

'Air China Directors'                the directors of Air China;          

'Air China Group' or the 'Group'     Air China and its subsidiaries;      

'Business Day(s)'                    a day on which banks are opened for  
                                     business in Hong Kong (excluding     
                                     Saturdays, Sundays or public holidays
                                     in Hong Kong);                       

'Cathay'                             Cathay Pacific Airways Limited, a    
                                     company incorporated in Hong Kong    
                                     with limited liability, whose shares 
                                     are listed on the Main Board of the  
                                     Stock Exchange under the stock code  
                                     293;                                 

'CICC'                               China International Capital          
                                     Corporation (Hong Kong) Limited, a   
                                     licensed corporation for type 1      
                                     (dealing in securities), type 4      
                                     (advising on securities), type 6     
                                     (advising on corporate finance) and  
                                     type 9 (asset management) regulated  
                                     activities under the Securities and  
                                     Futures Ordinance, being an exclusive
                                     financial adviser to Air China in    
                                     relation to the Proposals;           

'CNAC'                               China National Aviation Company      
                                     Limited, a company incorporated in   
                                     Hong Kong with limited liability,    
                                     whose shares are listed on the Main  
                                     Board of the Stock Exchange under the
                                     stock code 1110;                     

'CNAC Board'                         the board of CNAC Directors;         

'CNAC Directors'                     the directors of CNAC;               

'CNAC Group'                         CNAC and its subsidiaries;           

'Companies Ordinance'                the Companies Ordinance (Chapter 32  
                                     of the Laws of Hong Kong);           
                                                                          
'Concert Parties'                    persons who are acting in concert    
                                     with Air China;                      

'Conditions'                         the conditions of the Proposals, as  
                                     set out under the paragraph headed   
                                     'Conditions of the Proposals' of this
                                     circular;                            

'Court Meeting'                      a meeting of the Independent Scheme  
                                     Shareholders to be convened at the   
                                     direction of the High Court at which 
                                     the Scheme will be voted upon;       

'Dragonair'                          Hong Kong Dragon Airlines Limited, a 
                                     private company incorporated in Hong 
                                     Kong;                                

'Effective Date'                     the date on which the Scheme, if     
                                     approved, becomes effective in       
                                     accordance with its terms, being the 
                                     date on which an official copy of the
                                     order of the High Court sanctioning  
                                     the Scheme together with the minutes 
                                     containing the particulars required  
                                     by Section 61 of the Companies       
                                     Ordinance are registered by the      
                                     Registrar of Companies in Hong Kong; 

'Extraordinary General Meeting'      the extraordinary general meeting of 
                                     CNAC to be held to consider and      
                                     approve, among other matters, the    
                                     capital reduction arising as a result
                                     of the Scheme, or any adjournment    
                                     thereof;                             

'High Court'                         the High Court of Hong Kong;         

'HK$'                                Hong Kong dollars, the lawful        
                                     currency of Hong Kong;               

'Hong Kong'                          the Hong Kong Special Administrative 
                                     Region of the PRC;                   

'Independent Scheme                  Scheme Shareholders other than       
Shareholders'                        Concert Parties and, in respect of   
                                     the Option Shares, the Optionholders;    

'Last Trading Date'                  2 June 2006, being the last day on   
                                     which Shares were traded prior to the
                                     publication of the Restructuring     
                                     Announcement;                        

'Latest Practicable Date'            6 July, 2006;                        

'Listing Rules'                      the Rules Governing the Listing of   
                                     Securities on The Stock Exchange of  
                                     Hong Kong Limited;                   
                                                                          
'Merrill Lynch'                      Merrill Lynch (Asia Pacific) Limited,
                                     a licensed corporation for type 1    
                                     (dealing in securities), type 4      
                                     (advising on securities), type 6     
                                     (advising on corporate finance) and  
                                     type 7 (providing automated trading  
                                     services) regulated activities under 
                                     the Securities and Futures Ordinance,
                                     being an exclusive financial adviser 
                                     to Air China in relation to the      
                                     Proposals;                           

'New Share'                          new Share(s) to be issued to Air     
                                     China or its nominees, credited as   
                                     fully paid, pursuant to the Share    
                                     Proposal;                            

'Operating Agreement'                the agreement entered into by Air    
                                     China and Cathay on 8 June 2006,     
                                     details of which are set out in the  
                                     joint announcement made by Air China 
                                     and Cathay on 8 June 2006;           

'Option Exercise Date'               the date which is fourteen days after
                                     the Effective Date;                  

'Option Proposal'                    the proposal to Optionholders for    
                                     cancellation of all Outstanding      
                                     Options (or, if Air China so elects  
                                     prior to the despatch of the Scheme  
                                     Document, a general offer by Air     
                                     China to acquire all of the          
                                     Outstanding Options not owned by Air 
                                     China at a price equal to the Option 
                                     Proposal Price);                     

'Option Proposal Price'              HK$1.66 per Outstanding Option       
                                     pursuant to the Option Proposal;     

'Option Shares'                      Shares that are subscribed for in    
                                     exercise of the Options pursuant to  
                                     the Share Option Scheme;             

'Optionholders'                      the holders of one or more Options,  
                                     and as at the date of this circular, 
                                     namely Chuang Shih Ping, Zhang       
                                     Xianlin, Tsang Hing Kwong, Thomas and
                                     Gu Tiefei, who altogether hold       
                                     104,378,000 Options (or, if Air China
                                     so elects prior to the Scheme lapsing
                                     or becoming ineffective, the offer by
                                     Air China to acquire all of the      
                                     Outstanding Options not owned by Air 
                                     China at a price equal to the Option 
                                     Proposal Price);                     

'Options'                            the share options granted pursuant to
                                     the Share Option Scheme;             

'Outstanding Options'                Options not exercised as at the      
                                     Option Exercise Date;                
                                                                          
'PRC'                                the People's Republic of China,      
                                     excluding, for the purpose of this   
                                     circular, Hong Kong, Macau and       
                                     Taiwan;                              

'Pre-Condition'                      the Pre-Condition to making the      
                                     Proposals, as set out under the      
                                     paragraph headed 'The Pre-Condition  
                                     to making the Proposals' of this     
                                     circular;                            

'Privatisation Announcement'         the joint announcement dated 21 June 
                                     2006 issued by Air China and CNAC in 
                                     relation to the Proposals;           

'Proposals'                          the Share Proposal and the Option    
                                     Proposal;                            

'Record Date'                        two Business Days prior to the Court 
                                     Meeting;                             

'Relevant Shareholders' Meetings'    the shareholders' meetings to be     
                                     convened by Air China, CNAC, Cathay, 
                                     CITIC Pacific Limited and Swire      
                                     Pacific Limited to approve the       
                                     Restructuring;                       

'Restructuring'                      the restructuring referred to in the 
                                     Restructuring Agreement;             

'Restructuring Agreement'            the restructuring agreement dated 8  
                                     June 2006 entered into by Swire      
                                     Pacific Limited, CITIC Pacific       
                                     Limited, CNAC, Air China and Cathay, 
                                     details of which are set out in the  
                                     Restructuring Announcement;          

'Restructuring Announcement'         the joint announcement dated 8 June  
                                     2006 published by Air China, CNAC,   
                                     Cathay, CITIC Pacific Limited and    
                                     Swire Pacific Limited;               

'Scheme'                             a scheme of arrangement under Section
                                     166 of the Companies Ordinance;      

'Scheme Document'                    the document to be issued to all     
                                     Shareholders and Optionholders       
                                     containing, among other things,      
                                     further details of the Proposals and 
                                     the Scheme, the recommendation of the
                                     Independent Board Committee (as      
                                     defined in the Privatisation         
                                     Announcement) in respect of the      
                                     Proposals, the letter of advice from 
                                     the independent financial adviser to 
                                     the Independent Board Committee, an  
                                     explanatory statement as required    
                                     under the Companies Ordinance, the   
                                     expected timetable, and the notices  
                                     convening the Court Meeting and the  
                                     Extraordinary General Meeting;       
                                                                          
'Scheme Share(s)'                    the Share(s) held by Scheme          
                                     Shareholders;                        

'Scheme Shareholders'                Shareholders except Air China, but   
                                     including the Concert Parties and    
                                     holders of Option Shares;            

'Share(s)'                           ordinary share(s) of HK$0.10 each in 
                                     the issued share capital of CNAC;    

'Share Option Scheme'                the share option scheme adopted by   
                                     CNAC on 29 May 2002, the major terms 
                                     of which are set out in the audited  
                                     annual report of CNAC for the year   
                                     ended 31 December 2005;              

'Share Proposal'                     the proposal to Scheme Shareholders  
                                     for the cancellation of all Scheme   
                                     Shares pursuant to the Scheme (or, if
                                     Air China so elects prior to the     
                                     despatch of the Scheme Document, a   
                                     general offer by Air China to acquire
                                     all of the Shares not owned by Air   
                                     China at a price equal to the Share  
                                     Proposal Price);                     

'Share Proposal Price'               HK$2.80 per Scheme Share pursuant to 
                                     the Share Proposal;                  

'Shareholders'                       registered holders for the time being
                                     of Shares;                           

'Shareholders Agreement'             the shareholders agreement referred  
                                     to in the Restructuring Announcement;

'Stock Exchange'                     The Stock Exchange of Hong Kong      
                                     Limited;                             

'subsidiaries'                       has the meaning ascribed to it in    
                                     Section 2 of the Companies Ordinance;

'Takeovers Code'                     The Hong Kong Code on Takeovers and  
                                     Mergers; and                         

'Voting Shares'                      Scheme Shares other than the Option  
                                     Shares and those held by Concert     
                                     Parties.                             




                                LETTER FROM THE BOARD

                                  AIR CHINA LIMITED
 (a joint stock limited company incorporated in the People's Republic of China
                            with limited liability)

                               (Stock Code: 753)




Directors:                                              Registered address:
                                                        9th Floor, Blue Sky Mansion
Non-executive Directors:                                28 Tianzhu Road
Li Jiaxiang (Chairman)                                  Zone A
Kong Dong (Vice Chairman)                               Tianzhu Airport Industrial Zone
Wang Shixiang (Vice Chairman)                           Shunyi District
Yao Weiting                                             Beijing
Christopher Dale Pratt                                  PRC

Executive Directors:                                    Principal place of business
Ma Xulun                                                  in Hong Kong:
Cai Jianjiang                                           5th Floor, CNAC House
Fan Cheng                                               12 Tung Fai Road
                                                        Hong Kong International Airport
Independent Non-executive Directors:                    Hong Kong
Hu Hung Lick, Henry
Wu Zhi Pan
Zhang Ke
Jia Kang

                                                        12 July 2006

To the Shareholders

Dear Sir or Madam,

                            DISCLOSEABLE TRANSACTION

1.      INTRODUCTION

On 21 June 2006, Air China and CNAC jointly announced that, subject to
satisfaction of the Pre-Condition, Air China will make the Proposals to
privatise CNAC by way of a scheme of arrangement under Section 166 of the
Companies Ordinance. The Proposals are made at the request of the CNAC Board who
believes the Proposals to be in the interest of CNAC.


If approved, the Scheme will be binding on all Scheme Shareholders, irrespective
of whether or not they attended or voted at the Court Meeting or the
Extraordinary General Meeting. 2,264,642,000 Shares held by Air China and its
Concert Parties, representing approximately 68.4% of the existing issued capital
as at the date of this letter, and 66.3% of the enlarged issued share capital,
assuming the Options are exercised in full prior to the Option Exercise Date,
will not form part of the Voting Shares. As such, Air China and its Concert
Parties are required to abstain from voting at the Court Meeting. The 14,000
Shares currently held by a Concert Party will however form part of the Scheme
Shares. In addition, an Optionholder, who exercised his or her Option prior to
the Record Date, would also be required to abstain from voting at the Court
Meeting for the reasons set out in the paragraph headed 'General Information',
but the Option Shares will form part of the Scheme Shares.

2.     THE SHARE PROPOSAL AND THE OPTION PROPOSAL

Subject to the satisfaction of the Pre-Condition, Air China will make the
Proposals on the following basis:

The Share Proposal

For each Scheme Share..........................................  HK$2.80 in cash

The Option Proposal
For each Outstanding Option....................................  HK$1.66 in cash

3.     PRE-CONDITION TO MAKING THE PROPOSALS

The making of the Proposals is conditional upon completion of the transactions
contemplated under the Restructuring Agreement, details of which are set out in
the Restructuring Announcement (the Pre-Condition).

If the Pre-Condition is not satisfied, the Proposals will not be made. Air China
will, to the extent that it is within its power to do so, use its reasonable
efforts to ensure that the Pre-Condition will be satisfied as soon as
practicable.

The Share Proposal

The Share Proposal involves the following principal steps, all of which will
occur on the Effective Date:

(a)           the share capital of CNAC will be reduced by canceling the Scheme
Shares;

(b)           CNAC will apply the credit arising in its books of account as a
result of the reduction of capital to pay up in full, at par, a number of New
Shares which is equal to the number of Scheme Shares cancelled, and the New
Shares will be allotted and issued, credited as fully paid, to Air China or its
nominees (which may include a subsidiary of Air China); and


(c)           in consideration for the cancellation of the Scheme Shares and the
allotment and issue of New Shares to Air China or its nominees, Scheme
Shareholders will receive HK$2.80 in cash per Scheme Share.

Comparisons of value

The Share Proposal

The Share Proposal Price represents:

(a)     a premium of approximately 65.9% over the average closing price of
approximately HK$1.69 per Share for the six months up to and including the Last
Trading Date;

(b)     a premium of approximately 50.3% over the average closing price of
approximately HK$1.86 per Share for the three months up to and including the
Last Trading Date;

(c)     a premium of approximately 49.8% over the average closing price of
approximately HK$1.87 per Share for the last 30 trading days up to and including
the Last Trading Date;

(d)     a premium of approximately 52.2% over the average closing price of
approximately HK$1.84 per Share for the last 10 trading days up to and including
the Last Trading Date;

(e)     a premium of approximately 45.8% over the average closing price of
HK$1.92 per Share for the last five trading days up to and including the Last
Trading Date;

(f)     a premium of approximately 42.1% over the closing price of HK$1.97 per
Share as quoted on the Stock Exchange on the Last Trading Date;

(g)     a premium of approximately 199.9% over the audited net asset value per
Share of approximately HK$0.93 as at 31 December 2005, equivalent to a multiple
of 3.0x net asset value (adjusted for year-end dividends and minority interests)
of CNAC of HK$3,092.7 million and 3,312,680,000 Shares in issue as at 31
December 2005; and

(h)     a price earnings multiple of approximately 41.2x based on the audited
net profit attributable to Shareholders of approximately HK$225 million for the
financial year ended 31 December 2005 and 3,312,680,000 Shares in issue as at 31
December 2005.


The Option Proposal

In accordance with the terms of the Share Option Scheme, Optionholders are
entitled to exercise their Options, which confer on them rights to subscribe for
Shares at a price of HK$1.14 per Share, in full or in part at any time up to the
Option Exercise Date. Shares issued upon exercise of the Options in accordance
with the terms of the Share Option Scheme prior to the Record Date will form
part of the Scheme Shares. If the Scheme becomes effective, Options which are
not exercised in accordance with the terms of the Share Option Scheme will
lapse.

Under the Option Proposal, Air China will offer to purchase Outstanding Options,
for cancellation in exchange for HK$1.66 in cash for each Outstanding Option,
subject to and conditional upon the Scheme becoming effective.

Total consideration

On the basis of the Share Proposal Price of HK$2.80 per Scheme Share and
3,312,680,000 Shares in issue of which 1,048,052,000 are Scheme Shares as at the
date of this letter, the Scheme Shares are valued at approximately HK$2,934.5
million.

There are 104,378,000 Options, giving rights to subscribe for 104,378,000
Shares, outstanding as at the date of this letter. There are no other
outstanding options, warrants, derivatives or other securities issued by CNAC
that carry a right to subscribe for or which are convertible into Shares.
Assuming that none of the Options is exercised prior to the Option Exercise Date
and the Option Proposal is accepted in full, on the basis of a consideration of
HK$1.66 payable for the cancellation of each of the 104,378,000 Outstanding
Options, the Option Proposal is valued at HK$173.3 million.

Assuming that all Options are exercised in full by Optionholders prior to the
Option Exercise Date in accordance with the terms of the Share Option Scheme,
the consideration payable by Air China pursuant to the Share Proposal will be
increased to approximately HK$3,226.8 million. No consideration for cancellation
will then be payable under the Option Proposal.

Air China intends to fund the cash required to effect the Proposals from
financing arranged through bank borrowings. The financing agreement for such
bank borrowings is governed by PRC law and the performance of such agreement may
be limited by force majeure provisions under the PRC Civil Code and the PRC
Contract Law.

4.     CONDITIONS OF THE PROPOSALS

The Scheme will become effective and binding on CNAC and all Scheme Shareholders
subject to satisfaction or waiver (as applicable) of the following conditions:

(a)     the approval of the Scheme by a majority in number of the Independent
Scheme Shareholders representing not less than three-fourths in value of the
Scheme Shares held by Independent Scheme Shareholders, present and voting either
in person or by proxy at the Court Meeting, provided that:

(i)      the Scheme is approved by at least 75% of the votes attaching to Scheme
Shares held by Independent Scheme Shareholders that are cast either in person or
by proxy at the Court Meeting (by way of poll); and

(ii)     the number of votes cast against the resolution to approve the Scheme
at the Court Meeting (by way of poll) is not more than 104,803,800, representing
10% of the votes attaching to all Scheme Shares held by Independent Scheme
Shareholders;

(b)     the passing of a special resolution to approve and give effect to the
cancellation of the Scheme Shares and the reduction of the relevant portion of
the issued share capital of CNAC by a majority of at least three-fourths of the
votes cast by Shareholders present and voting in person or by proxy, at the
Extraordinary General Meeting by way of poll;

(c)     the sanction of the Scheme (with or without modifications) by the High
Court and the delivery to the Registrar of Companies in Hong Kong of an official
copy of the order of the High Court for registration;

(d)     the compliance with the procedural requirements of Section 58 of the
Companies Ordinance in relation to the reduction of the issued share capital of
CNAC;

(e)     the receipts of all relevant authorisations, consents and/or approvals
from each of State Administration for Foreign Exchange of the PRC, National
Development and Reform Commission of the PRC, Ministry of Commerce of the PRC,
China Civil Aviation Authority, Ministry of Finance of the PRC, State Assets
Supervision and Administration Commission of the PRC, China Securities
Regulatory Commission, China Banking Regulatory Commission and Hong Kong and
Macau Affairs Department of the State Council necessary for the implementation
of the Proposals, and all such authorisations, consents and/or approvals
remaining in full force and effect;

(f)      no act referred to under Rule 4 of the Takeovers Code having been or
being proposed or threatened to be carried out by the CNAC Board;

(g)     since the date of the Privatisation Announcement, there having been no
force majeure event, including, without limitation, act of God, war, riot,
public disorder, civil commotion, economic sanctions, fire, flood, explosion,
epidemic, terrorism, labour dispute strike, lock-out, out-break, escalation,
declaration or threat of war or hostility, or disaster which is outside Air
China's control that would render it impossible for Air China to implement the
Proposals; and

(h)     save for the payment of a final dividend of HK cent 1.0 per Share as
approved by the Shareholders on the annual general meeting of CNAC held on 25
May 2006, since the date of the Privatisation Announcement and up to the
Effective Date, CNAC not having declared, made or paid any dividend or
distribution of any kind, and not agreeing or proposing to declare, make or pay
any dividend or distribution of any kind.

Air China will use its reasonable endeavours to fulfill the Conditions which are
reasonably within its powers in a timely manner. If the Conditions are not
satisfied on or before the specific date to be set out in the Scheme Document,
the Scheme will lapse.

The Option Proposal will be subject to and conditional upon the Share Proposal
becoming or being declared effective.

Air China reserves the right to implement the Proposals by way of a general
offer prior to the despatch of the Scheme Document. Air China also reserves the
right, at its absolute discretion, to waive, in whole or in part, any of the
Conditions referred to in paragraphs (f) to (h) above. Conditions (a) to (e)
cannot be waived by Air China. In the event that any of Conditions (a) to (e) is
not satisfied on or before the specific date to be set out in the Scheme
Document, the Scheme will lapse. Air China may only invoke any or all of
Conditions (a) to (h) as a basis for not proceeding with the Scheme if the
provisions of Note 2 to Rule 30.1 of the Takeovers Code are satisfied. Note 2 to
Rule 30.1 of the Takeovers Code provides that an offeror should not invoke any
condition (other than the acceptance condition) so as to cause the offer to
lapse unless the circumstances which give rise to the right to invoke the
condition are of material significance to the offeror in the context of the
offer.




5.     INFORMATION ON THE CNAC GROUP

Business of the CNAC Group


CNAC was incorporated in Hong Kong in 1997 and was listed on the Stock Exchange
on 17 December 1997, trading under the stock code 1110. The CNAC Groups'
principal activities are airline operations and aviation related businesses. The
principal business activity of CNAC is that of an investment holding company.
Following the completion of the Restructuring Agreement, the core businesses of
CNAC will include air transportation services (Air Macau, Macau Asia Express
Limited and a minority stake in Cathay), airline catering services (Beijing Air
Catering Co. Ltd., Southwest Air Catering Company Limited and LSG Lufthansa
Service Hong Kong Ltd.), airport ground handling services (Jardine Airport
Service Ltd. and Menzies Macau Airport Services Ltd.) and logistics services
(Tradeport Hong Kong Ltd.).

The number of Shares in issue is 3,312,680,000 as at the date of this letter and
Air China and its Concert Parties are interested in 2,264,642,000 Shares,
representing approximately 68.4% of the entire issued share capital in CNAC as
at the date of this letter.

Key financial information of the CNAC Group

For the purpose of this section, the definition of CNAC Group includes CNAC, its
subsidiaries and joint ventures.

A summary of the audited consolidated results and net asset value of the CNAC
Group for each of the two years ended 31 December 2004 and 31 December 2005 is
set out below:
                                                                             For the year ended
                                                                                 31 December
                                                                                  2004                2005
                                                                               HK$'000             HK$'000


Turnover                                                                     1,890,710           2,620,033
Operating profit/(loss)                                                         16,733            (52,317)
Profit before tax                                                              406,808             221,966
Profit after tax and extraordinary items but before                            394,464             211,924
  minority interests
Profit after tax and extraordinary items attributable to                       360,969             225,000
Shareholders
Net asset value (after deducting minority interests)                                             3,125,837
  as at 31 December 2005
Earnings per share (HK Cents)                                                                            7
Net asset per share (HK Cents)                                                                          94

The above financial information is extracted from the financial statements set
out in the CNAC 2005 annual report, which had been prepared in accordance with
Hong Kong Financial Reporting Standards and Hong Kong Accounting Standards and
interpretations issued by the Hong Kong Institute of Certified Public
Accountants.

Shareholding Structure of CNAC
Shareholders                          As at the date of      Immediately after the    Immediately after the
                                                             Effective Date and the  Effective Date and the
                                        this circular        Shares are delisted on  Shares are delisted on
                                                               the Stock Exchange      the Stock Exchange
                                                                    (Note 2)                (Note 3)
                                    Number of Shares      %  Number of Shares      % Number of Shares      %
Air China                              2,264,628,000   68.4     3,312,680,000  100.0    3,417,058,000  100.0
Concert Parties                               14,000      0               Nil    Nil              Nil    Nil
Subtotal for Air China and             2,264,642,000   68.4     3,312,680,000  100.0    3,417,058,000  100.0
  Concert Parties
Independent Scheme                     1,048,038,000   31.6               Nil    Nil              Nil    Nil
  Shareholders (Note 1)

Total                                  3,312,680,000  100.0     3,312,680,000  100.0    3,417,058,000  100.0

Optionholders
                                                                                  2004                 2005




Names of Optionholders (Note 4)                                            As at the date of this circular
                                                                         Number of Options                   %

Chuang Shih Ping                                                                33,126,000                31.7
Gu Tiefei                                                                        5,000,000                 4.8
Tsang Hing Kwong, Thomas                                                        33,126,000                31.7
Zhang Xianlin                                                                   33,126,000                31.7

Total                                                                          104,378,000               100.0

Note 1:    The Independent Scheme Shareholders include the non-profit
organisations who will receive the Shares from Cathay prior to the Court
Meeting.

Note 2:    Assuming no Options will be exercised before or on the Option
Exercise Date.

Note 3:    Assuming the Options will be exercised prior to the Record Date.

Note 4:    All the Optionholders are executive directors of CNAC.

The Options were granted on 25 July 2003 and are exercisable during the period
from 26 October 2003 to 25 October 2009 at an exercise price of HK$1.14 per
Share.


6.     GENERAL INFORMATION

Assuming the Proposals are implemented in full, the consideration ratio pursuant
to Rule 14.07 of the Listing Rules in connection with the issue of New Shares by
CNAC to Air China pursuant to the Scheme is expected to be 10.9% and therefore
would constitute a discloseable transaction for Air China under Chapter 14 of
the Listing Rules.

The Optionholders are all executive directors of CNAC, currently holding in
aggregate 104,378,000 Options in CNAC and are therefore deemed to have a
material interest in the Proposals. As such, an Optionholder who exercises his
or her Options prior to the Record Date would then be required to abstain from
voting at the Court Meeting in respect of the Option Shares. Assuming all the
Options are exercised in full prior to the Record Date, the issued share capital
of CNAC so enlarged will comprise 3,417,058,000 Shares, of which 104,378,000 are
Option Shares, representing approximately 3.05% of the enlarged issued capital
of CNAC.

Mr. Zhang Xianlin, an executive director of CNAC, is a supervisor of Air China
and therefore a connected person of Air China. As such, if Mr. Zhang Xianlin
accepts the Option Proposal from Air China or becomes a Scheme Shareholder, it
would constitute a connected transaction for Air China under Chapter 14A of the
Listing Rules. Air China will fully comply with the requirements under Chapter
14A of the Listing Rules if and when Mr. Zhang Xianlin accepts the Option
Proposal or the Share Proposal.

Save as disclosed above, neither the Proposals nor the issue of New Shares by
CNAC to Air China would constitute connected transactions for Air China under
Chapter 14A of the Listing Rules.

Air China is a company incorporated in the PRC on 30 September 2004, whose
shares were listed on the Main Board of the Stock Exchange on 15 December 2004
under the stock code 753. Air China's shares were also listed on the London
Stock Exchange in December 2004 by way of a secondary listing. As at the date of
this letter, China National Aviation Holding Company, a state-owned company
established under the laws of the PRC, directly and indirectly owns 65.80% of
Air China. Air China is a leading provider of air passenger, air cargo and
airline-related services in the PRC.

7.     AIR CHINA'S INTENTION IN RELATION TO CNAC

Intention regarding CNAC

It is the intention of Air China to apply for a withdrawal of the listing of the
Shares from the Stock Exchange pursuant to Rule 6.05 of the Listing Rules. Air
China has no current intention to introduce any major changes to the existing
operating and management structure of CNAC, nor does Air China have any current
intention to discontinue the employment of any employee of the CNAC Group as a
result of the implementation of the Proposals or the Scheme becoming effective.

Lapsing of the Scheme

The Scheme will lapse if it does not become effective on or before a date to be
set out in the Scheme Document, or such other later date as Air China and CNAC
may agree or as the High Court may direct. The listing of Shares will not be
withdrawn if the Scheme is not approved or lapses.


8.     BACKGROUND TO, REASONS FOR AND BENEFITS OF THE DISCLOSEABLE TRANSACTION


On 8 June 2006, Air China, Cathay, CNAC, CITIC Pacific Limited and Swire Pacific
Limited made a joint announcement that they had entered into the Restructuring
Agreement in respect of their shareholdings in Dragonair, Cathay and Air China.
Concurrent and conditional upon the Restructuring Agreement becoming effective,
Air China and Cathay also announced that they had entered into the Operating
Agreement which represents a far reaching agreement to enhance cooperation
between Air China and Cathay in a number of key operational areas. Air China
believes that the Restructuring Agreement and Operating Agreement represent an
extremely attractive package of initiatives that will bring substantial benefits
to the Air China Group as a whole.

Implementation of the Restructuring Agreement will involve the following
actions:

(i)      Air China acquiring a 10.16% shareholding in Cathay from CITIC Pacific
Limited and Swire Pacific Limited, at HK$13.50 per Cathay share;

(ii)     Cathay increasing its ownership in Air China from 10% to 20% through
the subscription of new Air China H-shares at HK$3.45 per Air China H-share;

(iii)    Cathay acquiring the remaining 82.21% shareholding in Dragonair that it
does not already own from CNAC (43.29%), CITIC Pacific Limited (28.50%) and
Swire Pacific Limited (7.71%) and others (2.71%) for a combination of equity
(548 million new Cathay shares at HK$13.50 per Cathay share) and cash (HK$822.1
million), valuing 100% of the equity of Dragonair at HK$10.0 billion; and

(iv)    Swire Pacific Limited and CITIC Pacific Limited further reducing their
shareholdings in Cathay to 40.00% and 17.50%, respectively.

Execution of the Operating Agreement will include:

(i)      implementing reciprocal sales representation for passenger services,
where Air China will be exclusively responsible for Cathay's passenger sales in
Mainland China, including those of Dragonair, while Cathay will be exclusively
responsible for Air China's passenger sales in Hong Kong, Macau and Taiwan;

(ii)     the extension of code share arrangements between Hong Kong and Mainland
China such that Air China and Cathay will operate all their passenger services
(including those of Dragonair) between Hong Kong and Mainland China under a
code-share arrangement;

(iii)    the operation of all shared routes between Hong Kong and Mainland China
as joint venture routes under revenue and cost pooling arrangements;


(iv)    the creation of a cargo joint venture based in Shanghai which will be
majority controlled by Air China;

(v)     maintaining Dragonair as a principal airline for at least six years; and

(vi)    the strengthening of business cooperation in a number of other areas.

Implementation of the Restructuring Agreement and the Operating Agreement will
bring significant benefits to Air China including the realisation of substantial
revenue and cost synergies by leveraging integration advantages including
improved load factors and better route management, sharing operating results,
creating economies of scale, optimising resource allocation and the transfer of
know-how between the airlines.

Furthermore, Air China believes that the HK$10.0 billion valuation achieved for
100% of the equity of Dragonair represents realisation of the full value of
CNAC's 43.29% shareholding in Dragonair, including a fair attribution of
expected synergies. This valuation represents a price-to-earnings ratio of 33.3
times Dragonair's reported earnings of HK$300.4 million for the year ended 31st
December 2005. In recent years the Chinese aviation industry has experienced
rapid growth and development: the creation of three Chinese airline groups, the
continuing liberalization of the market to international airlines and the
increasing internationalisation of the Chinese airlines' route networks. In the
context of these market developments, Air China Directors are of the view that
the competitive position of Dragonair has deteriorated (especially in the face
of intensive competition on its HK-Mainland routes) and the shareholding
structure of Dragonair has proved to be inefficient with the result that
Dragonair is unable to take full advantage of potential economies of scale and
the management of its business is not optimised. The rationalisation of the
shareholding structure of Dragonair will benefit all the companies that are
current shareholders of Cathay and Dragonair itself.

Upon completion of the Restructuring Agreement, CNAC will own a 7.34%
shareholding in Cathay. Air China wishes to rationalise its shareholding in
Cathay so that Air China Group directly controls a 17.5% shareholding in Cathay,
allowing Air China greater influence over Cathay and to equity account for a
higher percentage of Cathay's financial results. As a result, Air China wishes
to privatise CNAC so that CNAC becomes a wholly owned subsidiary of Air China.

For further details about the Transaction, please refer to the joint
announcement dated 8 June 2006 published by, among others, Air China, Cathay and
CNAC, and the circular dated 3 July 2006 issued by Air China.


9.     EFFECT OF THE PROPOSALS

For the purpose of this section, the definition of Air China Group includes Air
China, its subsidiaries and joint ventures.

(a)     Earnings

The net profit of Air China Group (excluding minority interests) for the year
ended 31 December 2005 was approximately RMB2,406 million. The costs and
expenses to be incurred in connection with the Proposals would have no
significant effect in relation to the net profit of Air China Group (excluding
net profit attributable to minority interests) for the year ended 31 December
2005 had the Proposals been implemented on 31 December 2005.

(b)     Net assets

Air China Group's audited consolidated net assets as at 31 December 2005 was
approximately RMB21,551 million. Had the Proposals been completed on 31 December
2005, the consolidated net asset value of Air China Group as at 31 December 2005
would have decreased by approximately RMB1,288 million assuming that (1) the
difference between the total consideration of the Proposals and the amount
attributable to the minority shareholders of CNAC as at 31 December 2005 would
be capitalised as goodwill in the consolidated balance sheet of Air China Group
and (2) the costs and expenses to be incurred in connection with the Proposals
would be insignificant.

The net asset value of CNAC may change over time before the completion of the
Proposals and as such, the actual amount of the reduction in the net asset value
of Air China Group may be different from the amount stated above upon completion
of the Proposals.

(c)     Gearing

The Air China Group's gearing ratio (calculated by dividing the total
liabilities by the total assets of Air China Group) was approximately 68% as at
31 December 2005. Had the Proposals been completed on 31 December 2005 and
assuming none of the Options was exercised prior to the Option Exercise Date,
Air China Group's gearing ratio would have been increased to approximately 70%
provided that the costs and expenses to be incurred in connection with the
Proposals would be insignificant.

10.   ADDITIONAL INFORMATION

Your attention is drawn to the additional information set out in the appendix to
this circular.

                             By Order of the Board

                                  Li Jiaxiang

                                    Chairman




Beijing, the PRC

APPENDIX                                                    GENERAL INFORMATION

1.     RESPONSIBILITY STATEMENT

This circular includes particulars given in compliance with the Listing Rules
for the purpose of giving information with regard to the Group. The Directors
collectively and individually accept full responsibility for the accuracy of the
information contained in this circular and confirm, having made all reasonable
enquiries, that to the best of their knowledge and belief there are no other
facts the omission of which would make any statement herein misleading.

2.     DISCLOSURE OF INTERESTS OF DIRECTORS AND SUPERVISORS

As at the Latest Practicable Date, Mr. Zhang Xianlin, a supervisor of the
Company, had interests in 33,126,000 Options, which represents approximately 1%
of the share capital of CNAC.

Save as disclosed above, as at the Latest Practicable Date, none of the
Directors, supervisors or chief executive of the Company has interests or short
positions in the shares, underlying shares and/or debentures (as the case may
be) of the Company or its associated corporations (within the meaning of Part XV
of the SFO) which were notified to the Company and the Stock Exchange pursuant
to SFO (including interests or short positions which he is taken or deemed to
have under such provisions of the SFO), or recorded in the register maintained
by the Company pursuant to Section 352 of the SFO, or which were notified to the
Company and the Stock Exchange pursuant to the Model Code for Securities
Transactions by Directors of the Listed Companies.

Mr. Christopher Dale Pratt is a non-executive director of the Company and Mr.
Zhang Xianlin is a supervisor of the Company. Concurrently, Mr. Christopher Dale
Pratt is chairman and executive director of Cathay whilst Mr. Zhang Xianlin is a
non-executive director of Cathay, a substantial shareholder of the Company, and
also a director of Dragonair. Cathay and Dragonair compete or are likely to
compete either directly or indirectly with some aspects of the business of the
Company as they operate airline services to certain destinations which are also
served by the Company.

Save as above, none of the Directors or supervisors of the Company and their
respective associates (as defined in the Listing Rules) has any competing
interests which would be required to be disclosed under Rule 8.10 of the Listing
Rules if each of them were a controlling shareholder of the Company.

3.     SUBSTANTIAL SHAREHOLDERS

As at the Latest Practicable Date, to the knowledge of the Directors,
supervisors and chief executive of the Company, the interests and short
positions of the following persons (other than a Director, supervisor or chief
executive of the Company) who have an interest or short position in the shares
and underlying shares of the Company which would fall to be disclosed to the
Company pursuant to the SFO, or who are, directly or indirectly, interested in
10% or more of the nominal value of any class of share capital carrying rights
to vote in all circumstances at general meetings of any members of the Group are
as follows:

(a)      Substantial interests in the Company

Name              Type of        Type and number   Percentage   Percentage   Percentage  Percentage       Short
                                 of shares of    of the total of the total of the total      of the    position
                  interests      the Company           issued       issued issued non-H       total
                                 concerned          shares of     domestic      foreign      issued
                                                  the Company    shares of    shares of H shares of
                                                               the Company  the Company the Company
                                                                                        

China National    Beneficial     4,826,195,989         51.16%         100%            -           -           -
Aviation            owner          domestic
  Holding Company                  shares
                                   

China National    Attributable   1,380,482,920         14.64%            -         100%           -           -
Aviation            interests      non-H foreign
  Holding Company                    shares
  (1)                                

China National    Beneficial     1,380,482,920         14.64%            -         100%           -           -
Aviation            owner          non-H foreign
  Corporation                      shares
(Group)                            
  Limited

Cathay Pacific    Beneficial     943,321,091 H         10.00%            -            -      29.24%           -
                  owner            shares
                                   

Swire Pacific     Attributable   943,321,091 H         10.00%            -            -      29.24%           -
Limited(2)        interests        shares
                                   

John Swire & Sons Attributable   943,321,091 H         10.00%            -            -      29.24%           -
  Limited(2)      interests        shares

John Swire & Son  Attributable   943,321,091 H         10.00%            -            -      29.24%           -
  (H.K.) Limited  interests        shares                 
  (2)

Temasek Holdings  Attributable   400,450,000 H          4.25%            -            -      12.41%           -
  (Private)       interest         shares                 
  Limited(3)

Wellington        Investment     226,208,500 H          2.40%            -            -       7.01%           -
Management        manager          shares
  Company, LLP




Name               Type of      Type and        Percentage   Percentage   Percentage   Percentage        Short
                                number of     of the total of the total of the total of the total     position
                   interests    shares of the       issued       issued issued non-H       issued
                                Company          shares of     domestic      foreign  H shares of
                                concerned      the Company    shares of    shares of  the Company
                                                            the Company  the Company  

JPMorgan Chase &   Investment   459,361,500          4.87%            -            -       14.24%            -
  Co. (4)            manager      H shares

                                113,358,000          1.20%            -            -        3.51%            -
                                  H shares
                                  (lending
                                  pool)

Morgan Stanley(5)  Investment   251,804,110          2.67%            -            -        7.80%            -
                     manager      H shares

                                40,223,485
                                  H shares           0.43%            -            -        1.25%            -
                                  (short
                                  position)



Note:

Based on the information available to the Directors, chief executive and
supervisors of the Company (including such information as was available on the
website of the Stock Exchange) and so far as the Directors, chief executive and
supervisors are aware, as at the Latest Practicable Date:

1.         By virtue of China National Aviation Holding Company's 100% interest
in China National Aviation Corporation (Group) Limited, China National Aviation
Holding Company is deemed to be interested in the 1,380,482,920 non-H foreign
shares of the Company directly held by China National Aviation Corporation
(Group) Limited.

2.         By virtue of John Swire & Sons Limited's 100% interest in John Swire
& Sons (H.K.) Limited and their approximately 30% equity interest and 53% voting
rights in Swire Pacific Limited, and Swire Pacific Limited's approximately 46%
interest in Cathay Pacific, John Swire & Sons Limited, John Swire & Sons (H.K.)
Limited and Swire Pacific Limited are deemed to be interested in the 943,321,091
H shares of the Company directly held by Cathay Pacific. Upon satisfaction of
the Pre-condition as described in this circular, Cathay will directly hold
2,122,472,455 H shares of the Company and its shareholding in the Company will
account for approximately 20% of the enlarged total issued shares of the Company
and 48.18% of the enlarged total issued H Shares of the Company.

3.         Temasek Holdings (Private) Limited, through its controlled entities,
had an attributable interest in 400,450,000 H shares of the Company, out of
which the interest in 292,500,000 H shares (representing approximately 9.07% of
the total issued H shares) was held directly by Aranda Investment (Mauritius)
Pte Ltd. and the interest in the remaining 107,950,000 H shares was held
directly by Dahlia Investments Ptd Ltd, FPL Alpha Investment Pte Ltd and
Fullerton (Private) Limited.

4.         JPMorgan Chase & Co, through its controlled entities, had an
attributable interest in 459,361,500 H shares of the Company and 113,358,000 H
shares of the Company as lending pool, out of which the interest in 113,358,000
H shares was held directly by JPMorgan Chase Bank, N.A., 295,154,000 H shares
was held directly by JF Asset Management Limited, 10,078,000 H shares was held
directly by JF International Management Inc., 1,441,500 H shares was held
directly by J.P. Morgan Whitefriars Inc., 12,000,000 H shares was held directly
by J.P. Morgan Securities Ltd., 26,266,000 H shares was held directly by
JPMorgan Asset Management (Japan) Limited and 1,064,000 H shares was held
directly by JF Asset Management (Singapore) Limited.


5.         Morgan Stanley, through its controlled entities, had an attributable
interest in 251,804,110 H shares of the Company and maintained a short position
of 40,223,485 H shares of the Company, out of which Morgan Stanley Investment
Management Company directly held 202,242,000 H shares, Morgan Stanley Uruguay
Ltd a directly held 1,000 H shares, Morgan Stanley & Co International Limited
directly held 6,729,721 H shares and maintained a short position of 2,926,372 H
shares, Morgan Stanley Dean Witter Hong Kong Securities Limited directly held
23,568 H shares and maintained a short position of 78,000 H shares, Morgan
Stanley Asset & Investment Trust Management Co., Limited directly held 5,134,000
H shares, Morgan Stanley Capital (Cayman Islands) Limited maintained a short
position of 1,302,000 H shares, Morgan Stanley Capital Services Inc. directly
held 271,355 H shares, Morgan Stanley Capital (Luxembourg) S.A. directly held
1,344,000 H shares, and Morgan Stanley & Co. Inc. directly held 36,058,466 H
shares and maintained a short position of 35,917,113 H shares.

(b)   Substantial interests in CNAC
                                    Capacity                         No. of shares             Percentage
                                                                                            of the issued
                                                                                            share capital
China National Aviation Holding     Attributable interest            2,264,628,000                  68.36
Company(1)
The Company(2)                      Beneficial owner                 2,264,628,000                  68.36
Best Strikes Limited                Beneficial owner                   187,656,000                   5.66
On Ling Investments Limited(3)      Attributable interest              322,856,000                   9.75
Novel Investments Holdings Limited  Attributable interest              322,856,000                   9.75
(3)
Novel Enterprises Limited(3)        Attributable interest              322,856,000                   9.75
Novel Enterprises (BVI) Limited(3)  Attributable interest              322,856,000                   9.75
Novel Credit Limited(3)             Attributable interest              322,856,000                   9.75
Novel Holdings (BVI) Limited(3)     Attributable interest              322,856,000                   9.75
Westleigh Limited(3)                Attributable interest              322,856,000                   9.75



Notes:

1.         China National Aviation Holding Company owns approximately 51.16% of
the total issued share capital of the Company and the entire issued share
capital of China National Aviation Corporation (Group) Limited, a company
incorporated in Hong Kong, which in turn owns approximately 14.64% of the total
issued share capital of the Company. Accordingly its interests in CNAC duplicate
with those interest of the Company.




2.         China National Aviation Corporation (Group) Limited, the former
immediate controlling shareholder of CNAC, transferred its approximately 69%
shareholding interest in CNAC to the Company in September 2004 by way of a
capital contribution in return for the Company's non-H foreign shares, as such
the Company becomes the immediate controlling shareholder of CNAC. Its interest
in CNAC duplicates with those interests of China National Aviation Holding
Company.

3.         5.6% of the interest held by each of these companies in CNAC
duplicates with Best Strikes Limited's interest in CNAC. The interests of these
companies in CNAC also duplicate each other.

(c)   Substantial interests in other members of the Group

                                                                                            Approximate %
Member of the Group                Name                                                  of share capital


Air Macau                          CNAC                                                               51%
Air Macau                          Sociedale de Turismo e Diversaes de Macau                          14%
Air Macau                          Servico, Administracao e Participacoes,                            20%
                                   Lda.
Ameco                              Deutsche Lufthansa AG                                              40%
Air China Cargo                    Capital Airport Holding Company                                    24%
Air China Cargo                    CITIC Pacific Limited                                              25%

Save as disclosed above, as at the Latest Practicable Date, to the knowledge of
the Directors, chief executive and supervisors of the Company, no other person
(other than a Director, supervisor or chief executive of the Company) had an
interest or short position in the shares and underlying shares of the Company
which would fall to be disclosed to the Company pursuant to the SFO, or
otherwise was, directly or indirectly, interested in 10% or more of the nominal
value of any class of share capital carrying rights to vote in all circumstances
at general meetings of any members of the Group.

4.     LITIGATION

As at the Latest Practical Date, the litigation or claims of material importance
pending or threatened against a member of the Group are as disclosed in the
section headed 'Contingent Liabilities' set out in the Company's 2005 annual
report dated 18 April 2006.

Except as disclosed above, there was no litigation or claims of material
importance pending or threatened against any member of the Group as at the
Latest Practicable Date.


5.     SERVICE CONTRACTS

Each of the Directors except Mr. Christopher Dale Pratt and Mr. Jia Kang has
entered into a service contract with the Company for a term of three years from
30 September 2004 other than Mr. Fan Cheng, whose service contract has a term of
three years from 18 October 2005 and the service contract is thereafter subject
to termination by either party giving written notice to the other party. Mr.
Christopher Dale Pratt and Mr. Jia Kang are going to enter into a service
contract with the Company with a term that shall begin as of 12 June 2006 and 5
June 2006 respectively and end on the expiry of the term of the current session
of the Board.

None of the Directors has any existing or proposed service contract with any
member of the Group which is not expiring or terminable by the Group within one
year without payment of compensation (other than statutory compensation).

6.     MISCELLANEOUS

(a)     The joint company secretaries of the Company are Zheng Baoan and Li Man
Kit. Mr. Li is an associate member of the Institute of Chartered Secretaries and
Administrators, UK and the Hong Kong Institute of Company Secretaries.

(b)     The qualified accountant of the Company is David Tze-kin Ng. Mr. Ng is a
member of the Hong Kong Institute of Certified Public Accountants.

(c)     The registered address of the Company is at 9th Floor, Blue Sky Mansion,
28 Tianzhu Road, Zone A, Tianzhu Airport Industrial Zone, Shunyi District,
Beijing, PRC. The head office of the Company is at South Terminal, Beijing
Capital International Airport, Chaoyang District, Beijing, PRC.

(d)     The Hong Kong branch share registrar and transfer office of the Company
is Computershare Hong Kong Investor Services Limited, Rooms 1712-1716, 17th
Floor, Hopewell Centre, 183 Queen's Road East, Wanchai, Hong Kong.


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