China Fund Inc 8-k (events Or Changes Between Quarterly Reports) 2009-02-24
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 January 31, 2009 Date of Report (Date of Earliest Event Reported)
The China Fund, Inc. (Exact Name of Registrant as Specified in Its Charter) Maryland (State or Other Jurisdiction of Incorporation)
811-05749 (Commission File Number)
c/o State Street Bank and Trust Company 2 Avenue de Lafayette, P.O. Box 5049, Boston, Massachusetts (Address of Principal Executive Offices)
000000000 (IRS Employer Identification Number)
02206-5049 (Zip Code)
1(888) 246-2255 (Registrant’s Telephone Number, Including Area Code) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the Registrant under any of the following provisions: o Written communications pursuant to Rule 425 under the Securities Act o Soliciting material pursuant to Rule 14a-12 under the Exchange Act o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act
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TABLE OF CONTENTS Item 7.01. Regulation FD Disclosure Item 9.01. Financial Statements and Exhibits SIGNATURES EXHIBIT INDEX January 2009 Monthly Insight Report
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Item 7.01. Regulation FD Disclosure. Pursuant to Regulation FD Rules 100-103, The China Fund, Inc. (the “Fund”) furnishes the Monthly Insight Report of the Fund’s Investment Manager. Item 9.01. Financial Statements and Exhibits. (d) Exhibits Exhibit No.
Description
99
January 2009 Monthly Insight Report of the Fund’s Investment Manager
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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Dated: February 24, 2009
By: /s/ Elizabeth A. Watson Name: Elizabeth A. Watson Title: Secretary
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EXHIBIT INDEX Exhibit No.
Description
99
January 2009 Monthly Insight Report of the Fund’s Investment Manager
(GRAPHIC)
THE CHINA FUND, INC. (CHN) (GRAPHIC)
IN BRIEF Net asset value per share Market price Premium/(discount) Fund size
US$ 16.38 US$ 14.65 (10.62%) US$373.2m
Source: State Street Bank and Trust Company At 31 January 2009
US$ returns China Fund NAV %
One month Year to date One year Three years %pa
(5.8) (5.8) (41.2) 9.8
MSCI Golden Dragon* %
(6.7) (6.7) (43.9) (5.1)
Past performance is not a guide to future returns. Source: State Street Bank and Trust Company. NAV performance. *
Source for index data: MSCI.
MANAGER’S COMMENTARY Amid dire economic statistics, corporate profit warnings and frenzied government activity to support rapidly slowing growth, Chinese markets stumbled into their New Year holidays with a sigh of relief. The Fund managed to outperform the MSCI Golden Dragon Index by 0.9%. Perhaps the most shocking among the statistics was December’s 41.9% fall in Taiwanese exports, which included a 54% fall in exports to China/Hong Kong — for long the fastest-growing segment. Also notable was the fourth-quarter increase in foreign-exchange reserves from US$1.9 trillion to ‘only’ US$1.95 trillion. Given a US$100.5 billion trade surplus (not to mention US$25 billion or so in earned interest), the significance of this is the swing to net capital outflow from China. Growing unemployment in China received a lot of press in January and is clearly a key concern of the government. The impact of the collapse in foreign demand has been concentrated in those areas with large export industries, such as Guangdong and Zhejiang, but the knock-on effect is already being felt in some of the poorest regions, which supplied the export factories with migrant labour. To list the government counter-initiatives, issuing daily from politicians in Beijing, Taipei and Hong Kong, not to mention various provincial capitals, would fill the page. Rate cuts continued (Taiwan cut its benchmark rate by 50 basis points to 1.5%) but policies are becoming increasingly industry-specific; the tax on buying cars was cut on both sides of the straits. The Chinese government gave large cash injections to China’s faltering airlines (these were already state-owned, of course, so they just became more so). The effectiveness with which the government can lean on the state-owned banks to increase lending was indicated by the jump in M2 growth in December from 14.8% to 17.8% (good for the economy, perhaps, but slightly worrying if you are a bank shareholder). The company meetings we held in January were not wholly negative. Companies with some control over product pricing (some consumer brands) are enjoying a sharp fall in costs. Difficult times are promoting rationalisation. Good progress has been made in running down inventories, even to the extent of some suppliers receiving rush orders. Companies did not seem to be under particular pressure from banks on the mainland or Taiwan regarding credit lines, although the same could not be said in Hong Kong. In terms of negative surprises, losses from hedging and foreign-exchange exposure were the most common.
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Until ugly 2008 results are safely out of the way, it seems too early to become too positive. With economists now competing with each other in pessimism, most economic risks should already be priced into the market. As the year wears on, the prospect for earnings will become clearer, and investors will get bored holding cash deposits offering almost zero interest. But political risks remain. Under stress, dictatorships tend to turn to nationalism and developed countries to protectionism and isolation.
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INVESTMENT STRATEGY Your Fund is 98.5% invested with holdings in 69 companies. Our exposure to the A-share market is now 14.4%, to Taiwan 19.6% and to unlisted equities 17.5%. In January we continued to raise cash to pay the dividend, the cash element of which was US$31.6 million. Stocks sold included China Development Financial and Fubon Financial Holding in Taiwan, and China Travel, which issued a profit warning for FY2008. We took some more profits on outperfomers, including ZTE (telecom equipment), Mindray (medical devices), Xinao Gas (gas distribution) and Huabao (tobacco flavours). On the buy side, we continue to sift through the wreckage for industries or stocks that we think will still manage to grow in 2009. In January, we added to Financial One, a financial services provider for small and medium-sized businesses. We also started investing into Sina. Sina was punished for its acquisition of Focus Media’s out-of-home advertising network, but should become a dominant force in the high-end media market. Chris Ruffle, Martin Currie Inc* *
Martin Currie Ltd and Heartland Capital Management Ltd (HCML) have established MC China Ltd (MCCL), as a joint venture company, to provide investment management or investment advisory services to the range of China investment products managed by Martin Currie.
MCCL has appointed Martin Currie Investment Management Ltd (MCIM), or its affiliates, as investment manager of Martin Currie’s China investment products. HCML has seconded both Chris Ruffle and Shifeng Ke to MCIM, or its affiliates, on a full time basis with the same roles and responsibilities as if they were full time employees.
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31 JANUARY 2009 FUND DETAILS
Market cap Shares outstanding Exchange listed Listing date Listed and direct investment manager
US$333.76m 22,781,762 NYSE July 10, 1992 Martin Currie Inc
Source: State Street Bank and Trust Company. SECTOR ALLOCATION T he China Fund, Inc
Consumer discretionary Consumer staples Industrials Healthcare Financials Information technology Materials Energy Utilities Telecommunications Other assets & liabilities
25.6% 22.6% 12.2% 11.1% 7.8% 7.0% 5.5% 4.7% 1.4% 0.9% 1.2%
MSCI Golden Dragon
4.2% 2.5% 8.4% — 33.9% 16.5% 6.2% 8.8% 6.1% 13.2% —
Source: State Street Bank and Trust Company. Source for index data: MSCI ASSET ALLOCATION (PERFORMANCE GRAPH)
Source: State Street Bank and Trust Company PERFORMANCE
(US$ RETURNS) NAV %
One month Year to date Three years %pa Past performance is not a guide to future returns. Three year returns are annualised. Source: State Street Bank and Trust Company 15 LARGEST HOLDINGS (46.1% )
(5.8) (5.8) 9.8
Market price %
(11.4) (11.4) 1.3
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Queenbury Investment (Huiyan) China Huiyuan Juice Shandong Weigao Group Chaoda Modern Agriculture Wumart Stores Daqin Railway Yuanta Financial Far Eastern Department Stores Shenzhen Agricultural Products Qingdao Bright Moon Uni-President Enterprises Synnex Technology International China Silicon China Medical China Shineway Pharmaceutical
Consumer discretionary Consumer staples Healthcare Consumer staples Consumer staples Industrials Financials Consumer discretionary Consumer staples Industrials Consumer staples Information technology Information technology Healthcare Healthcare
10.3% 4.9% 4.1% 3.7% 2.8% 2.8% 2.6% 2.2% 2.1% 1.9% 1.8% 1.8% 1.7% 1.7% 1.7%
Consumer discretionary Industrials Information technology Industrials Industrials Information technology Information technology Information technology
10.3% 1.9% 1.7% 1.6% 1.0% 0.8% 0.2% 0.0%
DIRECT INVESTMENTS (17.5% ) Queenbury Investment (Huiyan) Qingdao Bright Moon China Silicon (Series A Preferred) Highlight Tech Wuxi Paiho HAND Enterprise Solutions China Silicon TECO Optronics Source: State Street Bank and Trust Company. FUND PERFORMANCE (BASED ON NET ASSET VALUE) One month %
The China Fund, Inc. MSCI Golden Dragon Hang Seng China Enterprise Shanghai Stock Exchange 180
(5.8) (6.7) (9.7) 12.1
T hree months %
3.0 (1.7) 7.8 21.6
(US$ RETURNS) Calendar year to date %
(5.8) (6.7) (9.7) 12.1
One year %
(41.2) (43.9) (42.6) (53.3)
T hree years % pa
9.8 (5.1) 4.4 31.6
Five years % pa
Since launch % pa
9.1 1.4 9.2 12.8
8.9 3.8 16.1 n/a
Past performance is not a guide to future returns. Source: State Street Bank and Trust Company. Launch date 10 July 1992. Three year, five year and since launch returns are all annualised. Source for index data: MSCI for the MSCI Golden Dragon and Copyright 2009 Bloomberg LP for the Hang Seng China Enterprise and the Shanghai Stock Exchange 180. For a full description of each index please see the index descriptions section.
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PERFORMANCE IN PERSPECTIVE (PERFORMANCE GRAPH)
Past performance is not a guide to future returns. Source: Martin Currie Inc as at 31 January 2009. THE CHINA FUND INC. PREMIUM/DISCOUNT (PERFORMANCE GRAPH)
Past performance is not a guide to future returns. Source: Martin Currie Inc as at 31 January 2009. 10 YEAR DIVIDEND HISTORY CHART (PERFORMANCE GRAPH)
Total Income Long-term capital Short-term capital
0.11 0.11 0.00 0.00
0.00 0.00 0.00 0.00
Past performance is not a guide to future returns. Source: State Street Bank and Trust Company.
0.13 0.13 0.00 0.00
0.21 0.06 0.00 0.15
1.78 0.07 0.67 1.04
3.58 0.20 3.27 0.11
2.51 0.22 2.29 0.00
4.01 0.30 2.73 0.98
12.12 0.28 9.00 2.84
5.82 0.48 5.34 0.00
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31 JANUARY 2009 Sector
Company (BBG ticker)
P rice
Holding
Value US$
% of portfolio
1886HK 682 HK 2877 HK 0069 HK 2688 HK 2020 HK 157 HK 297HK 589 HK 1175HK 336 HK 1833 HK SINA US 8180 HK 903 HK 196 HK 639 HK 2788 HK 1688 HK 8216 HK 0308 HK 769 HK
HK$10.2 HK$5.0 HK$4.4 HK$9.2 HK$7.0 HK$3.6 HK$1.1 HK$4.5 HK$7.9 HK$3.6 HK$5.0 HK$2.2 US$20.5 HK$0.7 HK$1.8 HK$0.9 HK$1.8 HK$0.9 HK$0.9 HK$0.5 HK$1.2 HK$0.7
14,059,500 21,459,357 11,184,000 4,755,555 5,680,000 11,072,000 32,780,000 7,216,000 3,933,500 8,689,000 5,500,000 12,568,629 162,700 35,040,000 12,728,000 21,902,000 10,740,000 16,424,000 11,037,000 19,230,000 6,024,000 9,144,000
18,420,617 13,725,842 6,317,014 5,611,292 5,127,279 5,125,794 4,818,972 4,150,228 4,012,326 4,011,377 3,546,282 3,484,713 3,328,842 3,208,212 2,888,773 2,626,681 2,465,272 1,821,453 1,266,723 1,140,717 932,195 837,212
26.5% 4.9% 3.7% 1.7% 1.5% 1.4% 1.4% 1.3% 1.1% 1.1% 1.1% 1.0% 0.9% 0.9% 0.8% 0.8% 0.7% 0.7% 0.5% 0.3% 0.3% 0.2% 0.2%
HFCI SP CFG SP CMILK SP FIN SP CDW SP CEGY SP
SG$1.0 SG$0.6 SG$0.4 SG$0.3 SG$0.1 SG$0.2
9,484,000 12,050,000 11,607,000 12,030,000 59,708,000 12,199,000
4,943,670 4,506,537 2,919,517 2,229,621 1,679,689 1,332,341
4.7% 1.3% 1.2% 0.8% 0.6% 0.4% 0.4%
Hong Kong ‘H’ shares Shandong Weigao Group Wumart Stores Zijin Mining China Oilfield Services ZTE Corp Sichuan Expressway
8199 HK 995 HK 2899 HK 2883 HK 763 HK 107 HK
HK$13.3 HK$5.5 HK$4.2 HK$6.2 HK$22.5 HK$1.3
9,004,000 15,126,000 10,408,000 6,388,000 1,124,559 742,000
15,442,860 10,689,201 5,596,853 5,132,082 3,255,661 124,391
10.8% 4.1% 2.9% 1.5% 1.4% 0.9% 0.0%
Taiwan Yuanta Financial Far Eastern Department Stores Uni-President Enterprises Synnex Technology Ruentex Development Taiwan Secom Cathay Financial FamilyMart Lien Hwa Industrial China Metal Products Cyberlink Merry Electronics Wah Lee Industrial
2885 TT 2903 TT 1216 TT 2347 TT 9945 TT 9917 TT 2882 TT 5903 TT 1229 TT 1532 TT 5203 TT 2439 TT 3010 TT
NT$12.2 NT$15.1 NT$26.1 NT$37.5 NT$16.7 NT$42.2 NT$32.2 NT$48.2 NT$11.3 NT$15.7 NT$111.0 NT$23.3 NT$19.9
26,635,545 18,511,584 8,728,581 5,937,855 12,694,000 4,738,000 5,993,788 3,777,652 15,919,692 9,019,881 1,183,000 3,584,340 4,118,821
9,674,839 8,322,290 6,769,767 6,620,697 6,311,568 5,945,864 5,737,262 5,477,385 5,355,936 4,202,788 3,909,579 2,486,494 2,434,197
19.7% 2.6% 2.2% 1.8% 1.8% 1.7% 1.6% 1.5% 1.5% 1.4% 1.1% 1.1% 0.7% 0.7%
CMSH LN
£1.2
3,623,188
6,398,624
1.7% 1.7%
Hong Kong China Huiyuan Juice Chaoda Modern Agriculture China Shineway Pharmaceutical Shangri-La Asia Xinao Gas Anta Sports Natural Beauty Bio-Technology Sinofert Ports Design FU JI Food & Catering Services Huabao International Intime Department Store Group Sina Corp Golden Meditech TPV Technology Honghua Group Fushan International Energy Yorkey Optical International SPG Land Chinasoft International China Travel International China Rare Earth Singapore Hsu Fu Chi International China Fishery Group China Milk Products Group Financial One Corp CDW China Energy
United Kingdom China Medical System Holdings United States
3.5%
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The9 Mindray Medical International Far East Energy WuXi PharmaTech Cayman Equity linked securities (‘A’ shares) Daqin Railway Shenzhen Agricultural Shanghai Zhenhua Port Machinery Dalian Zhangzidao Fishery Qinghai Salt Lake Potash China Yangtze Power Zhejiang Guyuelongshan Suning Appliance Shanghai International Airport Wuliangye Yibin
CMED US MR US FEEC US WX US
US$15.1 US$20.7 US$0.2 US$5.4
356,200 191,700 10,478,634 310,190
5,385,744 3,960,522 2,011,898 1,681,230
1.4% 1.1% 0.5% 0.5% 14.4%
US$1.2 US$2.0 US$1.3 US$2.4 US$5.8 US$1.1 US$1.2 US$2.3 US$1.8 US$2.1
8,307,000 4,000,000 4,462,752 2,270,000 887,909 4,169,077 3,582,000 1,599,909 1,816,700 1,546,007
10,289,598 8,002,340 5,867,234 5,470,700 5,113,463 4,651,952 4,237,843 3,676,591 3,359,078 3,194,050
2.8% 2.1% 1.6% 1.5% 1.4% 1.2% 1.1% 0.9% 0.9% 0.9%
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Sector
Company (BBG ticker)
Direct Queenbury Investment (Huiyan) Qingdao Bright Moon China Silicon (Series A Preferred) Highlight Tech Wuxi Paiho HAND Enterprise Solutions China Silicon teco Optronics Other assets & liabilities
P rice
Holding
Value US$
% of portfolio
US$85466.7 US$0.2 US$238.0 US$1.8 US$0.3 US$6.1 US$2.4 —
450 31,827,172 27,418 3,366,893 11,734,701 500,000 238,232 1,861,710
38,459,700 7,001,978 6,525,484 5,993,070 3,679,990 3,050,000 566,992 —
17.5% 10.3% 1.9% 1.7% 1.6% 1.0% 0.8% 0.2% —
4,628,274
1.2%
INDEX DESCRIPTIONS MSCI Golden Dragon Index The MSCI Golden Dragon is a free float-adjusted market capitalisation index that is designed to measure equity market performance in the China region. As of May 2005 the MSCI Golden Dragon Index consisted of the following country indices: China, Hong Kong and Taiwan. Hang Seng China Enterprise Index The Hang Seng China Enterprise Index is a capitalisation-weighted index comprised of state-owned Chinese companies (H-shares) listed on the Hong Kong Stock Exchange and included in Hans Seng Mainland China index. Shanghai Stock Exchange 180 Index The Shanghai Stock Exchange 180 ‘A’ Share Index is a capitalisation-weighted index. The index tracks the daily price performance of the 180 most representative ‘A’ share stocks listed on the Shanghai Stock Exchange. OBJECTIVE The investment objective of the Fund is to achieve long term capital appreciation. The Fund seeks to achieve its objective through investment in the equity securities of companies and other entities with significant assets, investments, production activities, trading or other business interests in China or which derive a significant part of their revenue from China. The Board of Directors of the Fund has adopted an operating policy of the Fund, effective 30 June 2001, that the Fund will invest at least 80% of its assets in China companies. For this purpose, “China companies” are (i) companies for which the principal securities trading market is in China; (ii) companies for which the principal securities trading market is outside of China or in companies organised outside of China, that in both cases derive at least 50% of their revenues from goods or services sold or produced, or have a least 50% of their assets in China; or (iii) companies organised in China. Under the policy, China will mean the People’s Republic of China, including Hong Kong, and Taiwan. The Fund will provide its stockholders with at least 60 days’ prior notice of any change to the policy described above. The Fund is subject to the Investment Company Act of 1940 which limits the means in which it can access the ‘A’ share market. The Fund will continue to seek the most efficient way in which to increase its ‘A’ share exposure ensuring ongoing compliance with its legal and regulatory obligations. CONTACTS The China Fund, Inc. c/o State Street Bank and Trust Company 2 Avenue de Lafayette PO Box 5049 Boston, MA 02206-5049 Tel: (1) 888 CHN-CALL (2462255) www.chinafundinc.com
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Important information: This document is issued and approved by Martin Currie Inc (MC Inc), as investment adviser of The China Fund Inc (the Fund). MC Inc is authorised and regulated by the Financial Services Authority (FSA) and incorporated under limited liability in New York, USA. Registered in Scotland (No BR2575), registered address Saltire Court, 20 Castle Terrace, Edinburgh, EH1 2ES. Information herein is believed to be reliable but has not been verified by MC Inc. MC Inc makes no representation or warranty and does not accept any responsibility in relation to such information or for opinion or conclusion which the reader may draw from the newsletter. Martin Currie Ltd and Heartland Capital Management Ltd (HCML) have established MC China Ltd (MCCL), as a joint venture company, to provide investment management or investment advisory services to our China product. MCCL has appointed Martin Currie Investment Management Ltd (MCIM), or its affiliates, as investment manager of our China funds. HMCL has seconded both Chris Ruffle and Shifeng Ke to MCIM or its affiliates on a full time basis with the same roles and responsibilities as if they were full time employees. The Fund is classified as a ‘non-diversified’ investment company under the US Investment Company Act of 1940 as amended. It meets the criteria of a closed ended US mutual fund and its shares are listed on the New York Stock Exchange. MC Inc has been appointed investment adviser to the Fund. Investors are advised that they will not generally benefit from the rules and regulations of the United Kingdom Financial Services and Markets Act 2000 and the FSA for the protection of investors, nor benefit from the United Kingdom Financial Services Compensation Scheme, nor have access to the Financial Services Ombudsman in the event of a dispute. Investors will also have no rights of cancellation under the FSA’s Conduct of Business Sourcebook of the United Kingdom. This newsletter does not constitute an offer of shares. MC Inc, its ultimate and intermediate holding companies, subsidiaries, affiliates, clients, directors or staff may, at any time, have a position in the market referred to herein, and may buy or sell securities, currencies, or any other financial instruments in such markets. The information or opinion expressed in this newsletter should not be construed to be a recommendation to buy or sell the securities, commodities, currencies or financial instruments referred to herein. The information provided in this report should not be considered a recommendation to purchase or sell any particular security. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased. It should not be assumed that any of the securities transactions or holdings discussed here were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein. Investing in the Fund involves certain considerations in addition to the risks normally associated with making investments in securities. The value of the shares issued by the Fund, and the income from them, may go down as well as up and there can be no assurance that upon sale, or otherwise, investors will receive back the amount originally invested. There can be no assurance that you will receive comparable performance returns, or that investments will reflect the performance of the stock examples contained in this document. Movements in foreign exchange rates may have a separate effect, unfavorable as well as favorable, on the gain or loss otherwise experienced on an investment. Past performance is not a guide to future returns. Accordingly, the Fund is only suitable for investment by investors who are able and willing to withstand the total loss of their investment. In particular, prospective investors should consider the following risks: • The companies quoted on Greater Chinese stock exchanges are exposed to the risks of political, social and religious instability, expropriation of assets or nationalisation, rapid rates of inflation, high interest rates, currency depreciation and fluctuations and changes in taxation, which may affect income and the value of investments. • At present, the securities market and the regulatory framework for the securities industry in China is at an early stage of development. The China Securities Regulatory Commission (CSRC) is responsible for supervising the national securities markets and producing relevant regulations. The Investment Regulations, under which the Fund invests in the People’s Republic of China (PRC) and which regulate repatriation and currency conversion, are new. The Investment Regulations give CSRC and State Administration of Foreign Exchange (SAFE) wide discretions and there is no precedent or certainty as to how these discretions might be exercised, either now or in the future. The Fund may, from time to time, obtain access to the securities markets in China via Access Products. Such products carry additional risk and may be less liquid than the underlying securities which they represent. • During the past 15 years, the PRC government has been reforming the economic and political systems of the PRC, and these reforms are expected to continue, as evidenced by the recently announced changes. The Fund’s operations and financial results could be adversely affected by adjustments in the PRC’s state plans, political, economic and social conditions, changes in the policies of the PRC government such as changes in laws and regulations (or the interpretation thereof), measures which may be introduced to control inflation, changes in the rate or method of taxation, imposition of additional restrictions on currency conversion and the imposition of additional import restrictions. • PRC’s disclosure and regulatory standards are in many respects less stringent than standards in certain Organisation for Economic Cooperation and Development (OECD) countries, and there may be less publicly available or less reliable information about PRC companies than is regularly published by or about companies from OECD countries. • The Shanghai Stock Exchange and Shenzhen Stock Exchange have lower trading volumes than most OECD exchanges and the market capitalisations of listed companies are small compared to those on more developed exchanges in developed markets. The listed equity securities of many companies in the PRC are accordingly materially less liquid, subject to greater dealing spreads and experience materially greater volatility than those of OECD countries. These factors could negatively affect the Fund’s NAV.
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• The Fund invests primarily in securities denominated in other currencies but its NAV will be quoted in US dollars. Accordingly, a change in the value of such securities against US dollars will result in a corresponding change in the US dollar NAV. • The marketability of quoted shares may be limited due to foreign investment restrictions, wide dealing spreads, exchange controls, foreign ownership restrictions, the restricted opening of stock exchanges and a narrow range of investors. Trading volume may be lower than on more developed stockmarkets, and equities are less liquid. Volatility of prices can also be greater than in more developed stockmarkets. The infrastructure for clearing, settlement and registration on the primary and secondary markets may be underdeveloped. Under certain circumstances, there may be delays in settling transactions in some of the markets. • The value of the Fund’s investment in any Quota will be affected by taxation levied against the relevant Qualified Foreign Institutional Investors (QFIIs) or in respect of investments held in the relevant Quotas. The PRC taxation regime that will apply to QFIIs and investments made in or through QFII quotas is not clear. The Investment Regulations are new and do not currently expressly contemplate the treatment of QFIIs and investment made through QFII Quotas. Martin Currie Inc, registered in Scotland (no BR2575) Registered office: Saltire Court, 20 Castle Terrace, Edinburgh EH11 2ES Tel: 44 (0) 131 229 5252 Fax: 44 (0) 131 228 5959 www.martincurrie.com/china North American office: 1350 Avenue of the Americas, Suite 3010, New York, NY 10019, USA Tel: (1) 212 258 1900 Fax: (1) 212 258 1919 Authorised and registered by the Financial Services Authority and incorporated with limited liability in New York, USA. Please note: calls to the above numbers may be recorded.
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 January 31, 2009 Date of Report (Date of Earliest Event Reported)
The China Fund, Inc. (Exact Name of Registrant as Specified in Its Charter) Maryland (State or Other Jurisdiction of Incorporation)
811-05749 (Commission File Number)
c/o State Street Bank and Trust Company 2 Avenue de Lafayette, P.O. Box 5049, Boston, Massachusetts (Address of Principal Executive Offices)
000000000 (IRS Employer Identification Number)
02206-5049 (Zip Code)
1(888) 246-2255 (Registrant’s Telephone Number, Including Area Code) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the Registrant under any of the following provisions: o Written communications pursuant to Rule 425 under the Securities Act o Soliciting material pursuant to Rule 14a-12 under the Exchange Act o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act
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TABLE OF CONTENTS Item 7.01. Regulation FD Disclosure Item 9.01. Financial Statements and Exhibits SIGNATURES EXHIBIT INDEX January 2009 Monthly Insight Report
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Table of Contents
Item 7.01. Regulation FD Disclosure. Pursuant to Regulation FD Rules 100-103, The China Fund, Inc. (the “Fund”) furnishes the Monthly Insight Report of the Fund’s Investment Manager. Item 9.01. Financial Statements and Exhibits. (d) Exhibits Exhibit No.
Description
99
January 2009 Monthly Insight Report of the Fund’s Investment Manager
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Table of Contents
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Dated: February 24, 2009
By: /s/ Elizabeth A. Watson Name: Elizabeth A. Watson Title: Secretary
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Table of Contents
EXHIBIT INDEX Exhibit No.
Description
99
January 2009 Monthly Insight Report of the Fund’s Investment Manager
(GRAPHIC)
THE CHINA FUND, INC. (CHN) (GRAPHIC)
IN BRIEF Net asset value per share Market price Premium/(discount) Fund size
US$ 16.38 US$ 14.65 (10.62%) US$373.2m
Source: State Street Bank and Trust Company At 31 January 2009
US$ returns China Fund NAV %
One month Year to date One year Three years %pa
(5.8) (5.8) (41.2) 9.8
MSCI Golden Dragon* %
(6.7) (6.7) (43.9) (5.1)
Past performance is not a guide to future returns. Source: State Street Bank and Trust Company. NAV performance. *
Source for index data: MSCI.
MANAGER’S COMMENTARY Amid dire economic statistics, corporate profit warnings and frenzied government activity to support rapidly slowing growth, Chinese markets stumbled into their New Year holidays with a sigh of relief. The Fund managed to outperform the MSCI Golden Dragon Index by 0.9%. Perhaps the most shocking among the statistics was December’s 41.9% fall in Taiwanese exports, which included a 54% fall in exports to China/Hong Kong — for long the fastest-growing segment. Also notable was the fourth-quarter increase in foreign-exchange reserves from US$1.9 trillion to ‘only’ US$1.95 trillion. Given a US$100.5 billion trade surplus (not to mention US$25 billion or so in earned interest), the significance of this is the swing to net capital outflow from China. Growing unemployment in China received a lot of press in January and is clearly a key concern of the government. The impact of the collapse in foreign demand has been concentrated in those areas with large export industries, such as Guangdong and Zhejiang, but the knock-on effect is already being felt in some of the poorest regions, which supplied the export factories with migrant labour. To list the government counter-initiatives, issuing daily from politicians in Beijing, Taipei and Hong Kong, not to mention various provincial capitals, would fill the page. Rate cuts continued (Taiwan cut its benchmark rate by 50 basis points to 1.5%) but policies are becoming increasingly industry-specific; the tax on buying cars was cut on both sides of the straits. The Chinese government gave large cash injections to China’s faltering airlines (these were already state-owned, of course, so they just became more so). The effectiveness with which the government can lean on the state-owned banks to increase lending was indicated by the jump in M2 growth in December from 14.8% to 17.8% (good for the economy, perhaps, but slightly worrying if you are a bank shareholder). The company meetings we held in January were not wholly negative. Companies with some control over product pricing (some consumer brands) are enjoying a sharp fall in costs. Difficult times are promoting rationalisation. Good progress has been made in running down inventories, even to the extent of some suppliers receiving rush orders. Companies did not seem to be under particular pressure from banks on the mainland or Taiwan regarding credit lines, although the same could not be said in Hong Kong. In terms of negative surprises, losses from hedging and foreign-exchange exposure were the most common.
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Until ugly 2008 results are safely out of the way, it seems too early to become too positive. With economists now competing with each other in pessimism, most economic risks should already be priced into the market. As the year wears on, the prospect for earnings will become clearer, and investors will get bored holding cash deposits offering almost zero interest. But political risks remain. Under stress, dictatorships tend to turn to nationalism and developed countries to protectionism and isolation.
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INVESTMENT STRATEGY Your Fund is 98.5% invested with holdings in 69 companies. Our exposure to the A-share market is now 14.4%, to Taiwan 19.6% and to unlisted equities 17.5%. In January we continued to raise cash to pay the dividend, the cash element of which was US$31.6 million. Stocks sold included China Development Financial and Fubon Financial Holding in Taiwan, and China Travel, which issued a profit warning for FY2008. We took some more profits on outperfomers, including ZTE (telecom equipment), Mindray (medical devices), Xinao Gas (gas distribution) and Huabao (tobacco flavours). On the buy side, we continue to sift through the wreckage for industries or stocks that we think will still manage to grow in 2009. In January, we added to Financial One, a financial services provider for small and medium-sized businesses. We also started investing into Sina. Sina was punished for its acquisition of Focus Media’s out-of-home advertising network, but should become a dominant force in the high-end media market. Chris Ruffle, Martin Currie Inc* *
Martin Currie Ltd and Heartland Capital Management Ltd (HCML) have established MC China Ltd (MCCL), as a joint venture company, to provide investment management or investment advisory services to the range of China investment products managed by Martin Currie.
MCCL has appointed Martin Currie Investment Management Ltd (MCIM), or its affiliates, as investment manager of Martin Currie’s China investment products. HCML has seconded both Chris Ruffle and Shifeng Ke to MCIM, or its affiliates, on a full time basis with the same roles and responsibilities as if they were full time employees.
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31 JANUARY 2009 FUND DETAILS
Market cap Shares outstanding Exchange listed Listing date Listed and direct investment manager
US$333.76m 22,781,762 NYSE July 10, 1992 Martin Currie Inc
Source: State Street Bank and Trust Company. SECTOR ALLOCATION T he China Fund, Inc
Consumer discretionary Consumer staples Industrials Healthcare Financials Information technology Materials Energy Utilities Telecommunications Other assets & liabilities
25.6% 22.6% 12.2% 11.1% 7.8% 7.0% 5.5% 4.7% 1.4% 0.9% 1.2%
MSCI Golden Dragon
4.2% 2.5% 8.4% — 33.9% 16.5% 6.2% 8.8% 6.1% 13.2% —
Source: State Street Bank and Trust Company. Source for index data: MSCI ASSET ALLOCATION (PERFORMANCE GRAPH)
Source: State Street Bank and Trust Company PERFORMANCE
(US$ RETURNS) NAV %
One month Year to date Three years %pa Past performance is not a guide to future returns. Three year returns are annualised. Source: State Street Bank and Trust Company 15 LARGEST HOLDINGS (46.1% )
(5.8) (5.8) 9.8
Market price %
(11.4) (11.4) 1.3
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Queenbury Investment (Huiyan) China Huiyuan Juice Shandong Weigao Group Chaoda Modern Agriculture Wumart Stores Daqin Railway Yuanta Financial Far Eastern Department Stores Shenzhen Agricultural Products Qingdao Bright Moon Uni-President Enterprises Synnex Technology International China Silicon China Medical China Shineway Pharmaceutical
Consumer discretionary Consumer staples Healthcare Consumer staples Consumer staples Industrials Financials Consumer discretionary Consumer staples Industrials Consumer staples Information technology Information technology Healthcare Healthcare
10.3% 4.9% 4.1% 3.7% 2.8% 2.8% 2.6% 2.2% 2.1% 1.9% 1.8% 1.8% 1.7% 1.7% 1.7%
Consumer discretionary Industrials Information technology Industrials Industrials Information technology Information technology Information technology
10.3% 1.9% 1.7% 1.6% 1.0% 0.8% 0.2% 0.0%
DIRECT INVESTMENTS (17.5% ) Queenbury Investment (Huiyan) Qingdao Bright Moon China Silicon (Series A Preferred) Highlight Tech Wuxi Paiho HAND Enterprise Solutions China Silicon TECO Optronics Source: State Street Bank and Trust Company. FUND PERFORMANCE (BASED ON NET ASSET VALUE) One month %
The China Fund, Inc. MSCI Golden Dragon Hang Seng China Enterprise Shanghai Stock Exchange 180
(5.8) (6.7) (9.7) 12.1
T hree months %
3.0 (1.7) 7.8 21.6
(US$ RETURNS) Calendar year to date %
(5.8) (6.7) (9.7) 12.1
One year %
(41.2) (43.9) (42.6) (53.3)
T hree years % pa
9.8 (5.1) 4.4 31.6
Five years % pa
Since launch % pa
9.1 1.4 9.2 12.8
8.9 3.8 16.1 n/a
Past performance is not a guide to future returns. Source: State Street Bank and Trust Company. Launch date 10 July 1992. Three year, five year and since launch returns are all annualised. Source for index data: MSCI for the MSCI Golden Dragon and Copyright 2009 Bloomberg LP for the Hang Seng China Enterprise and the Shanghai Stock Exchange 180. For a full description of each index please see the index descriptions section.
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PERFORMANCE IN PERSPECTIVE (PERFORMANCE GRAPH)
Past performance is not a guide to future returns. Source: Martin Currie Inc as at 31 January 2009. THE CHINA FUND INC. PREMIUM/DISCOUNT (PERFORMANCE GRAPH)
Past performance is not a guide to future returns. Source: Martin Currie Inc as at 31 January 2009. 10 YEAR DIVIDEND HISTORY CHART (PERFORMANCE GRAPH)
Total Income Long-term capital Short-term capital
0.11 0.11 0.00 0.00
0.00 0.00 0.00 0.00
Past performance is not a guide to future returns. Source: State Street Bank and Trust Company.
0.13 0.13 0.00 0.00
0.21 0.06 0.00 0.15
1.78 0.07 0.67 1.04
3.58 0.20 3.27 0.11
2.51 0.22 2.29 0.00
4.01 0.30 2.73 0.98
12.12 0.28 9.00 2.84
5.82 0.48 5.34 0.00
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31 JANUARY 2009 Sector
Company (BBG ticker)
P rice
Holding
Value US$
% of portfolio
1886HK 682 HK 2877 HK 0069 HK 2688 HK 2020 HK 157 HK 297HK 589 HK 1175HK 336 HK 1833 HK SINA US 8180 HK 903 HK 196 HK 639 HK 2788 HK 1688 HK 8216 HK 0308 HK 769 HK
HK$10.2 HK$5.0 HK$4.4 HK$9.2 HK$7.0 HK$3.6 HK$1.1 HK$4.5 HK$7.9 HK$3.6 HK$5.0 HK$2.2 US$20.5 HK$0.7 HK$1.8 HK$0.9 HK$1.8 HK$0.9 HK$0.9 HK$0.5 HK$1.2 HK$0.7
14,059,500 21,459,357 11,184,000 4,755,555 5,680,000 11,072,000 32,780,000 7,216,000 3,933,500 8,689,000 5,500,000 12,568,629 162,700 35,040,000 12,728,000 21,902,000 10,740,000 16,424,000 11,037,000 19,230,000 6,024,000 9,144,000
18,420,617 13,725,842 6,317,014 5,611,292 5,127,279 5,125,794 4,818,972 4,150,228 4,012,326 4,011,377 3,546,282 3,484,713 3,328,842 3,208,212 2,888,773 2,626,681 2,465,272 1,821,453 1,266,723 1,140,717 932,195 837,212
26.5% 4.9% 3.7% 1.7% 1.5% 1.4% 1.4% 1.3% 1.1% 1.1% 1.1% 1.0% 0.9% 0.9% 0.8% 0.8% 0.7% 0.7% 0.5% 0.3% 0.3% 0.2% 0.2%
HFCI SP CFG SP CMILK SP FIN SP CDW SP CEGY SP
SG$1.0 SG$0.6 SG$0.4 SG$0.3 SG$0.1 SG$0.2
9,484,000 12,050,000 11,607,000 12,030,000 59,708,000 12,199,000
4,943,670 4,506,537 2,919,517 2,229,621 1,679,689 1,332,341
4.7% 1.3% 1.2% 0.8% 0.6% 0.4% 0.4%
Hong Kong ‘H’ shares Shandong Weigao Group Wumart Stores Zijin Mining China Oilfield Services ZTE Corp Sichuan Expressway
8199 HK 995 HK 2899 HK 2883 HK 763 HK 107 HK
HK$13.3 HK$5.5 HK$4.2 HK$6.2 HK$22.5 HK$1.3
9,004,000 15,126,000 10,408,000 6,388,000 1,124,559 742,000
15,442,860 10,689,201 5,596,853 5,132,082 3,255,661 124,391
10.8% 4.1% 2.9% 1.5% 1.4% 0.9% 0.0%
Taiwan Yuanta Financial Far Eastern Department Stores Uni-President Enterprises Synnex Technology Ruentex Development Taiwan Secom Cathay Financial FamilyMart Lien Hwa Industrial China Metal Products Cyberlink Merry Electronics Wah Lee Industrial
2885 TT 2903 TT 1216 TT 2347 TT 9945 TT 9917 TT 2882 TT 5903 TT 1229 TT 1532 TT 5203 TT 2439 TT 3010 TT
NT$12.2 NT$15.1 NT$26.1 NT$37.5 NT$16.7 NT$42.2 NT$32.2 NT$48.2 NT$11.3 NT$15.7 NT$111.0 NT$23.3 NT$19.9
26,635,545 18,511,584 8,728,581 5,937,855 12,694,000 4,738,000 5,993,788 3,777,652 15,919,692 9,019,881 1,183,000 3,584,340 4,118,821
9,674,839 8,322,290 6,769,767 6,620,697 6,311,568 5,945,864 5,737,262 5,477,385 5,355,936 4,202,788 3,909,579 2,486,494 2,434,197
19.7% 2.6% 2.2% 1.8% 1.8% 1.7% 1.6% 1.5% 1.5% 1.4% 1.1% 1.1% 0.7% 0.7%
CMSH LN
£1.2
3,623,188
6,398,624
1.7% 1.7%
Hong Kong China Huiyuan Juice Chaoda Modern Agriculture China Shineway Pharmaceutical Shangri-La Asia Xinao Gas Anta Sports Natural Beauty Bio-Technology Sinofert Ports Design FU JI Food & Catering Services Huabao International Intime Department Store Group Sina Corp Golden Meditech TPV Technology Honghua Group Fushan International Energy Yorkey Optical International SPG Land Chinasoft International China Travel International China Rare Earth Singapore Hsu Fu Chi International China Fishery Group China Milk Products Group Financial One Corp CDW China Energy
United Kingdom China Medical System Holdings United States
3.5%
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The9 Mindray Medical International Far East Energy WuXi PharmaTech Cayman Equity linked securities (‘A’ shares) Daqin Railway Shenzhen Agricultural Shanghai Zhenhua Port Machinery Dalian Zhangzidao Fishery Qinghai Salt Lake Potash China Yangtze Power Zhejiang Guyuelongshan Suning Appliance Shanghai International Airport Wuliangye Yibin
CMED US MR US FEEC US WX US
US$15.1 US$20.7 US$0.2 US$5.4
356,200 191,700 10,478,634 310,190
5,385,744 3,960,522 2,011,898 1,681,230
1.4% 1.1% 0.5% 0.5% 14.4%
US$1.2 US$2.0 US$1.3 US$2.4 US$5.8 US$1.1 US$1.2 US$2.3 US$1.8 US$2.1
8,307,000 4,000,000 4,462,752 2,270,000 887,909 4,169,077 3,582,000 1,599,909 1,816,700 1,546,007
10,289,598 8,002,340 5,867,234 5,470,700 5,113,463 4,651,952 4,237,843 3,676,591 3,359,078 3,194,050
2.8% 2.1% 1.6% 1.5% 1.4% 1.2% 1.1% 0.9% 0.9% 0.9%
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Sector
Company (BBG ticker)
Direct Queenbury Investment (Huiyan) Qingdao Bright Moon China Silicon (Series A Preferred) Highlight Tech Wuxi Paiho HAND Enterprise Solutions China Silicon teco Optronics Other assets & liabilities
P rice
Holding
Value US$
% of portfolio
US$85466.7 US$0.2 US$238.0 US$1.8 US$0.3 US$6.1 US$2.4 —
450 31,827,172 27,418 3,366,893 11,734,701 500,000 238,232 1,861,710
38,459,700 7,001,978 6,525,484 5,993,070 3,679,990 3,050,000 566,992 —
17.5% 10.3% 1.9% 1.7% 1.6% 1.0% 0.8% 0.2% —
4,628,274
1.2%
INDEX DESCRIPTIONS MSCI Golden Dragon Index The MSCI Golden Dragon is a free float-adjusted market capitalisation index that is designed to measure equity market performance in the China region. As of May 2005 the MSCI Golden Dragon Index consisted of the following country indices: China, Hong Kong and Taiwan. Hang Seng China Enterprise Index The Hang Seng China Enterprise Index is a capitalisation-weighted index comprised of state-owned Chinese companies (H-shares) listed on the Hong Kong Stock Exchange and included in Hans Seng Mainland China index. Shanghai Stock Exchange 180 Index The Shanghai Stock Exchange 180 ‘A’ Share Index is a capitalisation-weighted index. The index tracks the daily price performance of the 180 most representative ‘A’ share stocks listed on the Shanghai Stock Exchange. OBJECTIVE The investment objective of the Fund is to achieve long term capital appreciation. The Fund seeks to achieve its objective through investment in the equity securities of companies and other entities with significant assets, investments, production activities, trading or other business interests in China or which derive a significant part of their revenue from China. The Board of Directors of the Fund has adopted an operating policy of the Fund, effective 30 June 2001, that the Fund will invest at least 80% of its assets in China companies. For this purpose, “China companies” are (i) companies for which the principal securities trading market is in China; (ii) companies for which the principal securities trading market is outside of China or in companies organised outside of China, that in both cases derive at least 50% of their revenues from goods or services sold or produced, or have a least 50% of their assets in China; or (iii) companies organised in China. Under the policy, China will mean the People’s Republic of China, including Hong Kong, and Taiwan. The Fund will provide its stockholders with at least 60 days’ prior notice of any change to the policy described above. The Fund is subject to the Investment Company Act of 1940 which limits the means in which it can access the ‘A’ share market. The Fund will continue to seek the most efficient way in which to increase its ‘A’ share exposure ensuring ongoing compliance with its legal and regulatory obligations. CONTACTS The China Fund, Inc. c/o State Street Bank and Trust Company 2 Avenue de Lafayette PO Box 5049 Boston, MA 02206-5049 Tel: (1) 888 CHN-CALL (2462255) www.chinafundinc.com
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Important information: This document is issued and approved by Martin Currie Inc (MC Inc), as investment adviser of The China Fund Inc (the Fund). MC Inc is authorised and regulated by the Financial Services Authority (FSA) and incorporated under limited liability in New York, USA. Registered in Scotland (No BR2575), registered address Saltire Court, 20 Castle Terrace, Edinburgh, EH1 2ES. Information herein is believed to be reliable but has not been verified by MC Inc. MC Inc makes no representation or warranty and does not accept any responsibility in relation to such information or for opinion or conclusion which the reader may draw from the newsletter. Martin Currie Ltd and Heartland Capital Management Ltd (HCML) have established MC China Ltd (MCCL), as a joint venture company, to provide investment management or investment advisory services to our China product. MCCL has appointed Martin Currie Investment Management Ltd (MCIM), or its affiliates, as investment manager of our China funds. HMCL has seconded both Chris Ruffle and Shifeng Ke to MCIM or its affiliates on a full time basis with the same roles and responsibilities as if they were full time employees. The Fund is classified as a ‘non-diversified’ investment company under the US Investment Company Act of 1940 as amended. It meets the criteria of a closed ended US mutual fund and its shares are listed on the New York Stock Exchange. MC Inc has been appointed investment adviser to the Fund. Investors are advised that they will not generally benefit from the rules and regulations of the United Kingdom Financial Services and Markets Act 2000 and the FSA for the protection of investors, nor benefit from the United Kingdom Financial Services Compensation Scheme, nor have access to the Financial Services Ombudsman in the event of a dispute. Investors will also have no rights of cancellation under the FSA’s Conduct of Business Sourcebook of the United Kingdom. This newsletter does not constitute an offer of shares. MC Inc, its ultimate and intermediate holding companies, subsidiaries, affiliates, clients, directors or staff may, at any time, have a position in the market referred to herein, and may buy or sell securities, currencies, or any other financial instruments in such markets. The information or opinion expressed in this newsletter should not be construed to be a recommendation to buy or sell the securities, commodities, currencies or financial instruments referred to herein. The information provided in this report should not be considered a recommendation to purchase or sell any particular security. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased. It should not be assumed that any of the securities transactions or holdings discussed here were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein. Investing in the Fund involves certain considerations in addition to the risks normally associated with making investments in securities. The value of the shares issued by the Fund, and the income from them, may go down as well as up and there can be no assurance that upon sale, or otherwise, investors will receive back the amount originally invested. There can be no assurance that you will receive comparable performance returns, or that investments will reflect the performance of the stock examples contained in this document. Movements in foreign exchange rates may have a separate effect, unfavorable as well as favorable, on the gain or loss otherwise experienced on an investment. Past performance is not a guide to future returns. Accordingly, the Fund is only suitable for investment by investors who are able and willing to withstand the total loss of their investment. In particular, prospective investors should consider the following risks: • The companies quoted on Greater Chinese stock exchanges are exposed to the risks of political, social and religious instability, expropriation of assets or nationalisation, rapid rates of inflation, high interest rates, currency depreciation and fluctuations and changes in taxation, which may affect income and the value of investments. • At present, the securities market and the regulatory framework for the securities industry in China is at an early stage of development. The China Securities Regulatory Commission (CSRC) is responsible for supervising the national securities markets and producing relevant regulations. The Investment Regulations, under which the Fund invests in the People’s Republic of China (PRC) and which regulate repatriation and currency conversion, are new. The Investment Regulations give CSRC and State Administration of Foreign Exchange (SAFE) wide discretions and there is no precedent or certainty as to how these discretions might be exercised, either now or in the future. The Fund may, from time to time, obtain access to the securities markets in China via Access Products. Such products carry additional risk and may be less liquid than the underlying securities which they represent. • During the past 15 years, the PRC government has been reforming the economic and political systems of the PRC, and these reforms are expected to continue, as evidenced by the recently announced changes. The Fund’s operations and financial results could be adversely affected by adjustments in the PRC’s state plans, political, economic and social conditions, changes in the policies of the PRC government such as changes in laws and regulations (or the interpretation thereof), measures which may be introduced to control inflation, changes in the rate or method of taxation, imposition of additional restrictions on currency conversion and the imposition of additional import restrictions. • PRC’s disclosure and regulatory standards are in many respects less stringent than standards in certain Organisation for Economic Cooperation and Development (OECD) countries, and there may be less publicly available or less reliable information about PRC companies than is regularly published by or about companies from OECD countries. • The Shanghai Stock Exchange and Shenzhen Stock Exchange have lower trading volumes than most OECD exchanges and the market capitalisations of listed companies are small compared to those on more developed exchanges in developed markets. The listed equity securities of many companies in the PRC are accordingly materially less liquid, subject to greater dealing spreads and experience materially greater volatility than those of OECD countries. These factors could negatively affect the Fund’s NAV.
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• The Fund invests primarily in securities denominated in other currencies but its NAV will be quoted in US dollars. Accordingly, a change in the value of such securities against US dollars will result in a corresponding change in the US dollar NAV. • The marketability of quoted shares may be limited due to foreign investment restrictions, wide dealing spreads, exchange controls, foreign ownership restrictions, the restricted opening of stock exchanges and a narrow range of investors. Trading volume may be lower than on more developed stockmarkets, and equities are less liquid. Volatility of prices can also be greater than in more developed stockmarkets. The infrastructure for clearing, settlement and registration on the primary and secondary markets may be underdeveloped. Under certain circumstances, there may be delays in settling transactions in some of the markets. • The value of the Fund’s investment in any Quota will be affected by taxation levied against the relevant Qualified Foreign Institutional Investors (QFIIs) or in respect of investments held in the relevant Quotas. The PRC taxation regime that will apply to QFIIs and investments made in or through QFII quotas is not clear. The Investment Regulations are new and do not currently expressly contemplate the treatment of QFIIs and investment made through QFII Quotas. Martin Currie Inc, registered in Scotland (no BR2575) Registered office: Saltire Court, 20 Castle Terrace, Edinburgh EH11 2ES Tel: 44 (0) 131 229 5252 Fax: 44 (0) 131 228 5959 www.martincurrie.com/china North American office: 1350 Avenue of the Americas, Suite 3010, New York, NY 10019, USA Tel: (1) 212 258 1900 Fax: (1) 212 258 1919 Authorised and registered by the Financial Services Authority and incorporated with limited liability in New York, USA. Please note: calls to the above numbers may be recorded.
