UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-05749
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THE CHINA FUND, INC.
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(Exact name of registrant as specified in charter)
C/O STATE STREET BANK & TRUST
2 AVENUE DE LAFAYETTE, 6TH FLOOR
P.O. BOX 5049
BOSTON, MA 02206-5049
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(Address of principal executive offices)(Zip code)
Copy to:
Mary Moran Zeven Leonard B. Mackey, Jr., Esq.
Secretary Clifford Chance US LLP
The China Fund, Inc. 31 West 52nd Street
2 Avenue de Lafayette, 2nd Floor New York, New York 10019-6131
Boston, MA 02111
(Name and Address of Agent for Service)
Registrant's telephone number, including area code: (888) 246-2255
Date of fiscal year end: October 31
Date of reporting period: April 30, 2007
1
ITEM 1. REPORT TO STOCKHOLDERS.
2
THE CHINA FUND, INC.
SEMI-ANNUAL REPORT
APRIL 30, 2007
(UNAUDITED)
THE CHINA FUND, INC.
TABLE OF CONTENTS
PAGE
----
Key Highlights 1
Asset Allocation 2
Industry Allocation 3
Chairman's Statement 4
Investment Managers' Statements 5
About the Portfolio Managers 7
Schedule of Investments 8
Financial Statements 13
Notes to Financial Statements 17
Other Information 22
Dividends and Distributions;
Dividend Reinvestment
and Cash Purchase Plan 24
THE CHINA FUND, INC.
KEY HIGHLIGHTS (UNAUDITED)
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FUND DATA
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NYSE STOCK SYMBOL CHN
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LISTING DATE JULY 10, 1992
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SHARES OUTSTANDING 14,575,961
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TOTAL NET ASSETS (04/30/07) US$584.4 MILLION
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NET ASSET VALUE PER SHARE (04/30/07) $40.09
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MARKET PRICE PER SHARE (04/30/07) $33.80
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TOTAL RETURN(1)
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PERFORMANCE AS OF
04/30/07: NET ASSET VALUE MARKET PRICE
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6 MONTHS 43.45% 24.92%
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3-YEAR CUMULATIVE 119.94% 76.56%
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3-YEAR ANNUALIZED 30.05% 20.86%
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5-YEAR CUMULATIVE 254.51% 237.08%
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5-YEAR ANNUALIZED 28.80% 27.51%
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10-YEAR CUMULATIVE 245.22% 260.32%
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10-YEAR ANNUALIZED 13.19% 13.68%
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DIVIDEND HISTORY
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RECORD DATE INCOME CAPITAL GAINS
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12/21/06 $0.2996 $3.7121
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12/21/05 $0.2172 $2.2947
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12/22/04 $0.1963 $3.3738
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12/31/03 $0.0700 $1.7100
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12/26/02 $0.0640 $0.1504
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12/31/01 $0.1321 --
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12/31/00 -- --
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12/31/99 $0.1110 --
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12/31/98 $0.0780 --
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12/31/97 -- $0.5003
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12/31/96 $0.0834 --
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12/29/95 $0.0910 --
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12/30/94 $0.0093 $0.6006
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12/31/93 $0.0853 $0.8250
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12/31/92 $0.0434 $0.0116
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(1) Total investment returns reflect changes in net asset value per share or
market price, as the case may be, during each period and assume that dividends
and capital gains distributions, if any, were reinvested in accordance with the
dividend reinvestment plan. The net asset value per share percentages are not an
indication of the performance of a shareholder's investment in the Fund, which
is based on market price. Total investment returns are historical and do not
guarantee future results.
1
THE CHINA FUND, INC.
ASSET ALLOCATION AS OF APRIL 30, 2007 (UNAUDITED)
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TEN LARGEST LISTED EQUITY INVESTMENTS*
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1. Shanghai International Airport Co., Ltd. Access
Product 4.46%
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2. Chaoda Modern Agriculture (Holdings) Ltd. 3.76%
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3. China Merchants Bank Co., Ltd. Access Product 3.57%
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4. Daqin Railway Co., Ltd. Access Product 3.17%
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5. Shanghai Zhenhua Port Machinery Co., Ltd. Access
Product 3.03%
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6. Golden Meditech Co., Ltd. 2.61%
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7. Finance Street Holding Co., Ltd. Access Product 2.28%
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8. Xinjiang Tebian Electric Apparatus Stock Co.,
Ltd. Access Product 2.12%
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9. China Yangtze Power Co., Ltd. Access Product 2.09%
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10. Baoding Tianwei Baobian Electric Co., Ltd. Access
Product 2.02%
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DIRECT INVESTMENTS*
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1. Sino-Twinwood Pte. Ltd. 0.52%
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2. teco Optronics Corp. 0.03%
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* Percentages based on net assets at April 30, 2007.
2
INDUSTRY ALLOCATION (UNAUDITED)
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(PIE CHART)
INDUSTRY ALLOCATION (AS A PERCENTAGE OF NET ASSETS)
Information Technology.................. 6.5%
Industrials............................. 24.8%
Consumer Discretionary.................. 13.4%
Financials.............................. 14.0%
Materials............................... 4.7%
Energy.................................. 11.4%
Consumer Staples........................ 7.3%
Utilities............................... 2.7%
Health Care............................. 6.2%
Telecommunications...................... 2.5%
Total Net Assets........................ 93.5%
Fund holdings are subject to change and percentages shown above are based on
total net assets as of April 30, 2007. A complete list of holdings as of April
30, 2007 is contained in the Schedule of Investments included in this report.
The most current available data regarding portfolio holdings can be found on our
website, www.chinafundinc.com. You may also obtain holdings by calling
1-800-246-2255.
3
THE CHINA FUND, INC.
CHAIRMAN'S STATEMENT (UNAUDITED)
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Dear Stockholders,
I am pleased to report that the Fund's net asset value per share increased by
43.45% over the past six months. The total net asset value also increased by
US$129.2 million to US$584.4 million, despite the payment in December of a
substantial cash dividend (US$4.01 per share) for the fourth successive year.
Despite some significant volatility, China's markets have made good progress
over the quarter. The Fund's concentration on entrepreneurial companies -- which
tend to be domestically focused -- has enabled it to benefit from the Renminbi's
appreciation and the broadening market.
The outlook for growth in China remains good, although the Renminbi's gradual
appreciation and slower growth in the United States are likely to shift the
focus of growth from exports and investment towards consumption. We continue to
find attractive investment opportunities in the A-share market and especially in
Taiwan, where we have increased the Fund's weighting significantly.
With respect to the Fund's direct investments, after a difficult 2006, the
environment for private equity investing in China is improving. During the
National Peoples Congress meetings held in March, the Central Government
re-emphasized its commitment to strengthening private property rights,
rebalancing the economy in favor of domestic consumption and correcting the
effects of excessive growth. The various legal and regulatory issues which
adversely affected private equity investing in 2006 are now being resolved.
In April 2007, Fund shareholders approved the appointment of Martin Currie as a
direct investment manager for the Fund. In addition, at the June 2007 board
meeting, the Board of Directors determined not to renew the direct investment
management agreement with Asian Direct Capital Management. The Board is
appreciative of the assistance that Asian Direct Capital Management provided the
Fund since its appointment as direct investment manager.
For monthly updates detailing the Fund's investments, please consult
www.chinafundinc.com.
Thank you for your continued interest in The China Fund, Inc.
Sincerely,
James J. Lightburn
Chairman
4
THE CHINA FUND, INC.
INVESTMENT MANAGERS' STATEMENTS (UNAUDITED)
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REVIEW OF LISTED INVESTMENTS
Over the past six months, the Fund has outperformed the MSCI Golden Dragon index
by 22.73% in relative terms, enjoying net asset value growth of 43.45%.
The region's markets finished 2006 strongly. In January, however, there was
notable profit-taking, especially in large-cap Chinese financial stocks. Markets
then recovered into February before a sharp one-day correction in China's
A-share market caused a global sell-off on the last day of the month. The
A-share market made an immediate recovery; the region's other markets appeared
less resilient, but eventually resumed their upward trend. Taiwan remains the
regional laggard, with Hong Kong not far ahead, and both significantly behind
mainland stocks.
Over the period, Martin Currie Inc. ("Martin Currie"), the Fund's listed
portfolio manager, has maintained our focus on smaller, management-owned
companies with an emphasis on growth and entrepreneurship. These are the
companies that are best placed to benefit from China's continuing economic
growth. But while we invest in Chinese companies that fit our process wherever
they are listed, we have been increasing the Fund's weighting to Taiwan. Towards
the end of the period under review, we accelerated this process by substantially
reducing the Fund's exposure to the mainland's A-share market (to 24.1%) and
switching into some of our Taiwanese favorites (taking the Fund's Taiwan
weighting to 29.4%).
While we believe that the A-share market has further to run, Taiwan's stocks
look more attractive when risk is balanced against potential reward. Martin
Currie believes that there is striking value locked up in the island's stocks
and we await political progress to release it. With a general election at the
end of this year and a presidential election in 2008, we are hoping for positive
developments in the near future, particularly in regard to cross-straits
relations.
In a period in which the A-share market saw record highs (despite February's
dramatic yet fleeting correction) and record trading volumes, the strongest
performances in our portfolio came, unsurprisingly, from the mainland. In
particular, the Fund enjoyed outstanding performance from SHANGHAI ZHENHUA PORT
MACHINERY, the world's largest manufacturer of port machinery. In April, the
company announced a five-year contract with AP Moeller-Maersk, the international
shipping group. The stock has reached new heights in May.
After announcing strong profits, SHANGHAI INTERNATIONAL AIRPORT made a
significant contribution. The YOUNGOR GROUP, which makes China's leading brand
of men's clothes and also runs real estate businesses, also performed well,
after acquiring new land through its subsidiaries. In addition, the Fund saw a
good showing from our participation notes in CHINA MERCHANTS BANK.
Power companies HUANENG POWER INTERNATIONAL and CHINA YANGTZE POWER provided
further positives, along with TIANWEI BAOBIAN ELECTRIC, YUYUAN TOURIST and
property group SHANGHAI LUJIAZUI FINANCE & TRADE ZONE DEVELOPMENT.
On the negative side, LENOVO, the Hong Kong PC manufacturer, struggled to make
headway in overseas markets. We sold the Fund's holding. Also in Hong Kong, TPV
TECHNOLOGY was another negative. In Taiwan, CHENG UEI PRECISION and CHINA METAL
PRODUCTS struggled. We have since sold the former, but added to the latter over
the period. As with our entire Taiwanese portfolio, we eagerly await signs of
the political progress needed to realise the value here.
5
THE CHINA FUND, INC.
INVESTMENT MANAGERS' STATEMENTS (CONTINUED)(UNAUDITED)
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REVIEW OF DIRECT INVESTMENTS
In March 2007 Asian Direct Capital Management ("ADCM") completed the sale of the
Fund's entire share in Captive Finance Limited, as part of a 100% sale of
Captive Finance to Fortis, a leading European financial services group. Net sale
proceeds to the Fund were approximately US$7.1 million, against the investment
cost of US$3.05 million. 10% of the proceeds was established as reserve to cover
any potential liabilities from the representations and warranties provided by
the Fund in the transaction.
As of April 30, 2007, the Fund's Direct Investment portfolio comprised the
following investments:
SINO-TWINWOOD PTE. LTD. (HAND ENTERPRISE SOLUTIONS LTD. ("HAND")
The Fund has invested US$3.05 million to acquire a 11% shareholding in HAND as
part of a management buyout. This is one of the first management buyouts
executed in the PRC.
HAND started in 1996 as one of the first local Enterprise Resources Planning
software (ERP) consulting and implementation firms in China and has since
developed into a leading ERP service provider. Its clients include many major
PRC companies and foreign multinational companies. HAND is an important
distributor of Oracle's and SAP's products in China.
HAND is developing an ERP outsourcing business in Japan and in 2006 won its
first outsourcing contract in the United States. This product line will provide
additional growth potential.
CDW HOLDING LIMITED ("CDW")
CDW manufactures a range of component parts for mobile telephones, office
equipment and household appliances. Its fastest growing business is the assembly
of backlight unit components (BLU) for the mobile phone industry. The company is
listed on the Singapore Stock Exchange.
The holding was transferred to the Listed Portfolio of the Fund in April 2007,
as the Fund is no longer represented on the board of the company.
TECO OPTRONICS CORP. ("TECO")
The teco investment was written down to zero on May 7, 2007 due to slow progress
of selling the company to a PRC competitor.
6
THE CHINA FUND, INC.
ABOUT THE PORTFOLIO MANAGERS (UNAUDITED)
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LISTED AND DIRECT INVESTMENT MANAGER
Mr. Chris Ruffle serves as the portfolio manager for the Fund's portfolio of
listed securities and will also oversee any direct investments made for the Fund
by Martin Currie. Mr. Ruffle joined Martin Currie in 1994. He is a Chinese and
Taiwanese equity specialist with over 15 years investment experience in Asia.
Fluent in Mandarin and Japanese, Mr. Ruffle has worked in the Far East since
1983. He worked originally in Beijing and Shanghai and then in Australia for a
metal trading company. He then moved to Warburg Securities in 1987 as an analyst
in Tokyo, before establishing Warburg's office in Taiwan. Mr. Ruffle also
manages The Martin Currie China Hedge Fund and the China "A" Share Fund.
DIRECT INVESTMENT MANAGER
Mr. KOH Kuek Chiang is the Executive Director of Asian Direct Capital Management
("ADCM") and is the portfolio manager of the Fund's current portfolio of direct
investments. Mr. Koh joined ADCM in 1998. Mr. Koh has over ten years of private
equity investment experience in the United States, Europe and Asia working for
the Government of Singapore Investment Corporation, Union Bank of Switzerland
and private interests. His investment experience covers a wide range of
industries, including telecommunications equipment, biotechnology, media,
financial services and basic materials. Mr. Koh graduated with an engineering
degree from the University of Western Australia and has a post-graduate Diploma
in Business Administration from the National University of Singapore. He is a
Chartered Financial Analyst and is fluent in English and Mandarin.
7
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS
APRIL 30, 2007 (UNAUDITED)
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NAME OF ISSUER AND TITLE OF ISSUE SHARES VALUE (NOTE A)
--------------------------------- ------ --------------
COMMON STOCK AND OTHER EQUITY INTERESTS
CHINA
FINANCIALS -- (1.9%)
Shanghai Lujiazui Finance & Trade Zone Development Co.,
Ltd. ................................................ 5,804,366 $ 10,796,121
------------
TOTAL CHINA -- (Cost $4,881,621) 1.9% 10,796,121
----- ------------
HONG KONG
CONSUMER DISCRETIONARY -- (7.1%)
China Travel International Investment Hong Kong,
Ltd. ................................................ 18,148,000 7,842,516
Huabao International Holdings Ltd. .................... 12,790,000 7,358,563
Parkson Retail Group Ltd. ............................. 1,111,500 7,929,643
Ports Design Ltd. ..................................... 2,678,500 7,533,977
Shangri-La Asia Ltd. .................................. 2,678,000 6,573,880
Yorkey Optical International Cayman Ltd.#.............. 12,628,000 4,117,036
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41,355,615
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CONSUMER STAPLES -- (3.7%)
Chaoda Modern Agriculture (Holdings) Ltd. ............. 26,407,900 21,946,091
------------
ENERGY -- (0.6%)
China Rare Earth Holdings, Ltd. ....................... 15,254,000 3,568,985
------------
FINANCIALS -- (1.0%)
Tianjin Development Holdings Ltd. ..................... 6,836,000 5,724,707
------------
HEALTH CARE -- (5.2%)
China Shineway Pharmaceutical Group Ltd.#.............. 11,184,000 7,864,476
Golden Meditech Co., Ltd.*#............................ 35,040,000 15,231,861
Natural Beauty Bio-Technology, Ltd.#................... 32,780,000 7,543,821
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30,640,158
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INDUSTRIALS -- (2.1%)
China Fire Safety Enterprise Group Holdings Ltd. ...... 50,380,000 3,800,320
TPV Technology, Ltd. .................................. 12,728,000 8,559,647
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12,359,967
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INFORMATION TECHNOLOGY -- (0.0%)
Arcontech Corp.*(1).................................... 18,386,000 --
------------
MATERIALS -- (0.9%)
Fountain Set (Holdings) Ltd. .......................... 13,026,000 4,546,568
Ocean Grand Chemicals Holdings Ltd.*#(1)............... 17,379,000 688,805
------------
5,235,373
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UTILITIES -- (1.8%)
Xinao Gas Holdings, Ltd. .............................. 9,286,000 10,566,439
------------
TOTAL HONG KONG -- (Cost $62,427,346) 22.4% 131,397,335
----- ------------
See notes to financial statements and notes to schedule of investments
8
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
APRIL 30, 2007 (UNAUDITED)
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NAME OF ISSUER AND TITLE OF ISSUE SHARES VALUE (NOTE A)
--------------------------------- ------ --------------
COMMON STOCK AND OTHER EQUITY INTERESTS (CONTINUED)
HONG KONG -- "H" SHARES
ENERGY -- (5.1%)
China Oilfield Services Ltd. .......................... 12,650,000 $ 10,836,157
China Petroleum & Chemical Corp. ...................... 11,696,000 10,273,160
China Shenhua Energy Co., Ltd. ........................ 3,435,000 8,607,812
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29,717,129
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INDUSTRIALS -- (3.4%)
Beiren Printing Machinery Holdings Ltd. ............... 7,000,000 2,461,165
BYD Co., Ltd.*......................................... 1,368,500 8,494,620
Zhejiang Expressway Co., Ltd. ......................... 10,304,000 8,497,194
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19,452,979
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UTILITIES -- (0.9%)
Anhui Expressway Co., Ltd. ............................ 6,780,000 5,391,753
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TOTAL HONG KONG -- "H" SHARES -- (Cost
$32,485,150) 9.4% 54,561,861
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TOTAL HONG KONG (INCLUDING "H" SHARES) -- (Cost
$94,912,496) 31.8% 185,959,196
----- ------------
SINGAPORE
CONSUMER STAPLES -- (1.3%)
Hsu Fu Chi International Ltd.*......................... 8,409,000 7,635,240
------------
INDUSTRIALS -- (0.4%)
Yangzijiang Shipbuilding Holdings Ltd.*................ 3,078,000 2,673,264
------------
INFORMATION TECHNOLOGY -- (1.1%)
CDW Holding Ltd.+#..................................... 60,000,000 6,316,413
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TOTAL SINGAPORE -- (Cost $9,664,290) 2.8% 16,624,917
----- ------------
TAIWAN
CONSUMER DISCRETIONARY -- (6.0%)
Far Eastern Department Stores Ltd. .................... 16,952,000 10,685,477
Merry Electronics Co., Ltd. ........................... 3,260,507 11,059,035
Synnex Technologies International, Corp. .............. 8,481,000 10,729,965
Taiwan FamilyMart Co., Ltd.#........................... 1,787,895 2,736,944
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35,211,421
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See notes to financial statements and notes to schedule of investments
9
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
APRIL 30, 2007 (UNAUDITED)
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NAME OF ISSUER AND TITLE OF ISSUE SHARES VALUE (NOTE A)
--------------------------------- ------ --------------
COMMON STOCK AND OTHER EQUITY INTERESTS (CONTINUED)
TAIWAN (CONTINUED)
CONSUMER STAPLES -- (2.4%)
Lien Hwa Industrial Corp. ............................. 10,732,616 $ 5,396,026
Uni-President Enterprises Corp. ....................... 8,347,000 8,242,899
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13,638,925
------------
ENERGY -- (1.9%)
Formosa Petrochemical Corp. ........................... 5,085,000 10,913,164
------------
FINANCIALS -- (5.3%)
Cathay Financial Holding Co., Ltd. .................... 5,708,370 11,617,040
Fubon Financial Holdings Co., Ltd. .................... 10,387,000 9,041,527
Fuhwa Financial Holdings Co., Ltd.*.................... 23,749,545 10,265,295
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30,923,862
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INDUSTRIALS -- (4.0%)
Asia Optical Co., Inc. ................................ 1,917,000 8,170,791
Cheng Uei Precision Industry Co., Ltd. ................ 1,531,000 4,209,440
China Synthetic Rubber Corp. .......................... 5,294,000 5,402,771
Wah Lee Industrial Corp. .............................. 2,755,000 5,532,245
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23,315,247
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INFORMATION TECHNOLOGY -- (4.9%)
Data Systems Consulting Co., Ltd.#..................... 4,566,813 4,496,149
Powertech Technology Inc. ............................. 3,114,000 11,683,751
Taiwan Secom Co., Ltd.#................................ 1,610,000 2,778,737
Tripod Technology Corp. ............................... 2,608,845 9,788,405
------------
28,747,042
------------
MATERIALS -- (2.4%)
China Metal Products Co., Ltd. ........................ 4,625,123 8,204,733
Yieh United Steel Corp.#............................... 9,483,000 6,000,259
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14,204,992
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TELECOMMUNICATIONS -- (2.5%)
Chunghwa Telecom Co., Ltd. ............................ 4,490,880 8,505,786
Wistron NeWeb Corp. ................................... 2,440,000 6,042,233
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14,548,019
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TOTAL TAIWAN -- (Cost $136,154,395) 29.4% 171,502,672
----- ------------
See notes to financial statements and notes to schedule of investments
10
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
APRIL 30, 2007 (UNAUDITED)
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--------------------------------------------------------------------------------
NAME OF ISSUER AND TITLE OF ISSUE SHARES VALUE (NOTE A)
--------------------------------- ------ --------------
COMMON STOCK AND OTHER EQUITY INTERESTS (CONTINUED)
UNITED STATES
CONSUMER DISCRETIONARY -- (0.3%)
Chindex International, Inc.*........................... 69,987 $ 1,406,039
------------
ENERGY -- (1.7%)
Far East Energy Corp.*#................................ 11,111,111 10,111,111
------------
HEALTH CARE -- (1.0%)
Mindray Medical International Ltd., ADR................ 259,900 5,980,299
------------
TOTAL UNITED STATES -- (Cost $15,019,661) 3.0% 17,497,449
----- ------------
TOTAL COMMON STOCK AND OTHER EQUITY
INTERESTS -- (Cost $260,632,463) 68.9% 402,380,355
----- ------------
EQUITY LINKED SECURITIES
ENERGY -- (2.1%)
China Yangtze Power Co., Ltd. Access Product
(expiration 1/20/10) 144A,(1)(2)..................... 6,441,077 12,205,841
------------
FINANCIALS -- (5.8%)
China Merchants Bank Co., Ltd. Access Product
(expiration 10/26/10) 144A,(1)(2).................... 8,254,855 20,843,509
Finance Street Holding Co., Ltd. Access Product
(expiration 2/13/12) 144A,(1)(2)..................... 5,439,953 13,306,125
------------
34,149,634
------------
INDUSTRIALS -- (14.8%)
Baoding Tianwei Baobian Electric Co., Ltd. Access
Product (expiration 01/20/10) 144A,(1)(3)............ 1,761,193 11,823,570
Daqin Railway Co., Ltd. Access Product* (expiration
11/02/11) 144A,(1)(2)................................ 9,710,000 18,516,970
Shanghai International Airport Co., Ltd. Access
Product* (expiration 1/20/10) 144A,(1)(3)............ 5,662,300 26,074,892
Shanghai Zhenhua Port Machinery Co., Ltd. Access
Product (expiration 10/26/10) 144A,(1)(2)............ 7,454,352 17,681,723
Xinjiang Tebian Electric Apparatus Stock Co., Ltd.
Access Product (expiration 10/26/10) 144A,(1)(2)..... 4,676,642 12,379,071
------------
86,476,226
------------
See notes to financial statements and notes to schedule of investments
11
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
APRIL 30, 2007 (UNAUDITED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NAME OF ISSUER AND TITLE OF ISSUE SHARES VALUE (NOTE A)
--------------------------------- ------ --------------
COMMON STOCK AND OTHER EQUITY INTERESTS (CONTINUED)
EQUITY LINKED SECURITIES (CONTINUED)
MATERIALS -- (1.4%)
Qinghai Salt Lake Potash Co., Ltd. Access Product
(expiration 10/26/10) 144A,(1)(2).................... 1,725,209 $ 8,105,032
------------
TOTAL EQUITY LINKED SECURITIES -- (Cost
$54,218,097) 24.1% 140,936,733
----- ------------
DIRECT INVESTMENTS
INFORMATION TECHNOLOGY -- (0.5%)
Sino-Twinwood Pte. Ltd.* (acquired 5/2/07)(1)(4)....... 500,000 3,050,000
teco Optronics Corp.* (acquired 4/26/04)(1)(4)......... 1,861,710 150,000
------------
TOTAL DIRECT INVESTMENTS -- (Cost $3,617,320) 0.5% 3,200,000
----- ------------
TOTAL INVESTMENTS -- (Cost $318,467,880) (Note D) 93.5% 546,517,088
----- ------------
OTHER ASSETS AND LIABILITIES 6.5% 37,896,312
----- ------------
NET ASSETS 100.0% $584,413,400
===== ============
Notes to Schedule of Investments
# Illiquid security
* Denotes non-income producing security
+ Affiliated issuer (see Note F)
(1) Security valued at fair value using methods determined in good faith by or
at the direction of the Board of Directors
(2) Equity linked securities issued by Credit Lyonnais (CLSA)
(3) Equity linked securities issued by Citigroup Global Markets Holdings
(4) Direct investments are generally restricted as to resale and do not have a
readily available resale market. On the date of acquisition of each direct
investment, there were no market quotations on similar securities, and such
investments were therefore initially valued at acquisition cost. These
direct investments are valued at fair value as determined by the Board of
Directors as discussed in Note A to the Financial Statements.
ADR American Depositary Receipt
144A Securities restricted for resale to Qualified Institutional Buyers
See notes to financial statements and notes to schedule of investments
12
THE CHINA FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2007 (UNAUDITED)
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ASSETS
Investments in listed investments, at value (cost
$313,086,532) (Note A)................................. $537,000,675
Investments in direct investments, at value (cost
$3,617,320) (Note A)................................... 3,200,000
Investments in affiliated investments, at value (cost
$1,764,028) (Notes A and F)............................ 6,316,413
Cash...................................................... 28,678,986
Foreign currency, at value (cost $11,324,652)............. 11,264,317
Receivable for fund shares sold........................... 632
Dividends receivable...................................... 772,388
Prepaid expenses.......................................... 37,273
Miscellaneous assets...................................... 3,050,001
------------
TOTAL ASSETS................................................ $590,320,685
============
LIABILITIES
Payable for investments purchased......................... 3,444,158
Investment management fee payable (Note B)................ 216,432
Administration and custodian fees payable (Note B)........ 150,630
Directors fee payable (Note B)............................ 62,879
Contingent liability (Note F)............................. 1,937,954
Accrued expenses and other liabilities.................... 95,232
------------
TOTAL LIABILITIES........................................... 5,907,285
------------
TOTAL NET ASSETS............................................ $584,413,400
============
COMPOSITION OF NET ASSETS:
Paid in capital (Note C).................................. 256,548,319
Undistributed net investment loss......................... (787,587)
Accumulated net realized gain on investments and foreign
currency transactions.................................. 100,661,598
Net unrealized appreciation on investments and foreign
currency translation................................... 227,991,070
------------
TOTAL NET ASSETS............................................ $584,413,400
============
NET ASSETS VALUE PER SHARE
($584,413,400/14,575,961 shares of common stock
outstanding)........................................... $40.09
============
See notes to financial statements
13
THE CHINA FUND, INC.
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 2007 (UNAUDITED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividend income -- listed investments (net of tax withheld
of $7,958)............................................. $ 1,848,107
Interest income -- listed investments..................... 3,675
------------
TOTAL INVESTMENT INCOME................................ 1,851,782
------------
EXPENSES
Investment Management fees (Note B)....................... 1,664,182
Custodian fees (Note B)................................... 331,751
Administration fees (Note B).............................. 196,058
Directors' fees and expenses (Note B)..................... 136,599
Legal fees................................................ 94,698
Printing and postage...................................... 49,797
Shareholder service fees.................................. 39,174
Insurance................................................. 23,304
Audit and tax service fees................................ 40,528
Stock exchange listing fee................................ 14,844
Transfer agent fees....................................... 10,033
Miscellaneous expenses.................................... 14,623
------------
TOTAL EXPENSES............................................ 2,615,591
------------
NET INVESTMENT LOSS......................................... (763,809)
------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY
Net realized gain on listed investment transactions....... 98,705,909
Net realized gain on direct investment transactions....... 2,194,999
Net realized loss on foreign currency transactions........ (29,472)
------------
100,871,436
------------
Net change in unrealized appreciation on listed
investments and foreign currency transactions.......... 90,028,009
Net change in unrealized depreciation on direct
investments............................................ (5,363,006)
------------
84,665,003
------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS..................................... 185,536,439
------------
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $184,772,630
============
See notes to financial statements
14
THE CHINA FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
APRIL 30, 2007 OCTOBER 31, 2006
---------------- ----------------
(UNAUDITED)
INCREASE IN NET ASSETS FROM OPERATIONS
Net investment income (loss).............................. $ (763,809) $ 4,395,225
Net realized gain on investments and foreign currency
transactions........................................... 100,871,436 54,704,912
Net increase in unrealized appreciation on investments and
foreign currency translations.......................... 84,665,003 95,242,230
------------ ------------
Net increase in net assets from operations................ 184,772,630 154,342,367
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income..................................... (4,343,068) (3,124,848)
Capital gains............................................. (53,811,419) (33,017,522)
------------ ------------
Total dividends and distributions to shareholders......... (58,154,487) (36,142,370)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Fund shares sold (Note C)................................. -- --
Reinvestment of dividends and distributions (79,741 and
107,933 shares, respectively).......................... 2,589,179 2,510,507
------------ ------------
Net increase in net assets from capital share
transactions........................................... 2,589,179 2,510,507
NET INCREASE IN NET ASSETS.................................. 129,201,322 120,710,504
------------ ------------
NET ASSETS:
Beginning of year......................................... 455,206,078 334,495,574
------------ ------------
End of period............................................. $584,413,400 $455,206,078
============ ============
Undistributed net investment income (loss), end of period... $ (787,587) $ 4,319,290
============ ============
See notes to financial statements
15
THE CHINA FUND, INC.
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OF COMMON STOCK OUTSTANDING FOR THE PERIOD(S)
INDICATED
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SIX MONTHS ENDED
APRIL 30, 2007 2006 2005 2004* 2003* 2002*
---------------- -------- -------- -------- -------- --------
(UNAUDITED)
PER SHARE OPERATION PERFORMANCE
Net asset value, beginning of
year.......................... $ 31.40 $ 23.25 $ 26.27 $ 26.93 $ 14.92 $ 13.19
Net investment income (loss).... (0.05) 0.30 0.21 0.21 0.06 0.11
Net realized and unrealized gain
on investments and foreign
currency transactions......... 12.75 10.36 0.34 0.91 12.16 1.75
-------- -------- -------- -------- -------- --------
Total income from investment
operations.................... 12.70 10.66 0.55 1.12 12.22 1.86
-------- -------- -------- -------- -------- --------
Less dividends and
distributions:
Dividend from net investment
income...................... (0.30) (0.22) (0.20) (0.07) (0.06) (0.13)
Distributions from net
realized capital gains...... (3.71) (2.29) (3.37) (1.71) (0.15) 0.00
-------- -------- -------- -------- -------- --------
Total dividends and
distributions................. (4.01) (2.51) (3.57) (1.78) (0.21) (0.13)
-------- -------- -------- -------- -------- --------
Net asset value, end of year.... $ 40.09 $ 31.40 $ 23.25 $ 26.27 $ 26.93 $ 14.92
======== ======== ======== ======== ======== ========
Per share market price, end of
year.......................... $ 33.80 $ 30.40 $ 24.55 $ 29.15 $ 34.74 $ 12.61
======== ======== ======== ======== ======== ========
TOTAL INVESTMEST RETURN
(BASED ON MARKET PRICE)....... 24.92%(2) 37.20% (5.50)% (12.16)% 179.41% 18.63%
======== ======== ======== ======== ======== ========
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of year
(000's)....................... $584,413 $455,206 $334,496 $264,886 $271,278 $150,319
Ratio of expenses to average net
assets........................ 1.04%(1) 1.26% 1.44% 1.41% 1.76% 1.97%
Ratio of expenses to average net
assets, excluding stock
dividend tax expense.......... 1.04%(1) 1.23% 1.38% 1.34% 1.68% 1.85%
Ratio of net investment income
to average net assets......... (0.30)%(1) 1.09% 1.04% 0.78% 0.32% 0.72%
Portfolio turnover rate......... 27% 50% 26% 40% 55% 68%
* Financial highlights were audited by a previous audit firm.
(1) Annualized.
(2) Not Annualized.
See notes to financial statements
16
THE CHINA FUND, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 2007 (UNAUDITED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The China Fund, Inc. (the "Fund") was incorporated under the laws of the State
of Maryland on April 28, 1992, and is a non-diversified, closed-end management
investment company registered under the Investment Company Act of 1940, as
amended. The Fund's investment objective is long-term capital appreciation
through investments in the equity securities of companies engaged in a
substantial amount of business in the People's Republic of China. The following
is a summary of significant accounting policies followed by the Fund in the
preparation of its financial statements.
USE OF ESTIMATES: The preparation of financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
income and expenses for the period. Actual results could differ from these
estimates. The significant estimates made as of, and for the six months ended,
April 30, 2007 relate to the valuation of the Fund's Direct Investments, as
further discussed below.
SECURITY VALUATION: Portfolio securities listed on recognized United States or
foreign securities exchanges are valued at the last quoted sales price in the
principal market where they are traded. Listed securities with no such sales
price and unlisted securities are valued at the mean between the current bid and
asked prices, if any, of two brokers. Short-term investments having maturities
of sixty days or less are valued at amortized cost (original purchase cost as
adjusted for amortization of premium or accretion of discount) which when
combined with accrued interest approximates market value. Securities for which
market quotations are readily available are valued at current market value.
Securities for which market quotations are not readily available are valued in
good faith at fair value using methods determined by the Board of Directors.
Direct Investments not traded on an exchange are valued at fair value as
determined by the Board of Directors based on advice from Direct Investment
Manager.
REPURCHASE AGREEMENTS: In connection with transactions in repurchase
agreements, it is the Fund's policy that its custodian take possession of the
underlying collateral securities, the fair value of which exceeds the principal
amount of the repurchase transaction, including accrued interest, at all times.
If the seller defaults, and the fair value of the collateral declines,
realization of the collateral by the Fund may be delayed or limited.
FOREIGN CURRENCY TRANSLATIONS: The records of the Fund are maintained in U.S.
dollars. Foreign currencies, investments and other assets and liabilities are
translated into U.S. dollars at the current exchange rates. Purchases and sales
of investment securities and income and expenses are translated on the
respective dates of such transactions. Net realized gains and losses on foreign
currency transactions represent net gains and losses from the disposition of
foreign currencies, currency gains and losses realized between the trade dates
and settlement dates of security transactions, and the difference between the
amount of net investment income accrued and the U.S. dollar amount actually
received. The effects of changes in foreign currency exchange rates on
investments in securities are not segregated in the Statement of Operations from
the effects of changes in market prices of those securities, but are included in
realized and unrealized gain or loss on investments.
17
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
OPTION CONTRACTS: The Fund may purchase and write (sell) call options and put
options provided the transactions are for hedging purposes and the initial
margin and premiums do not exceed 5% of total assets. Option contracts are
valued daily and unrealized gains or losses are recorded based upon the last
sales price on the principal exchange on which the options are traded. The Fund
will realize a gain or loss upon the expiration or closing of the option
contract. When an option is exercised, the proceeds on sales of the underlying
security for a written call option, the purchase cost of the security for a
written put option, or the cost of the security for a purchased put or call
option is adjusted by the amount of premium received or paid.
The risk in writing a call option is that the Fund gives up the opportunity for
profit if the market price of the security increases and the option is
exercised. The risk in writing a put option is that the Fund may incur a loss if
the market price of the security decreases and the option is exercised. The risk
in buying an option is that the Fund pays a premium whether or not the option is
exercised. Risks may also arise from an illiquid secondary market or from the
inability of counter parties to meet the terms of the contract.
EQUITY LINKED SECURITIES: The Fund may invest in equity-linked securities such
as linked participation notes, equity swaps and zero-strike options and
securities warrants. Equity-linked securities currently held by the fund,
identified as "Access Products" in the Schedule of Investments are privately
issued securities whose investment results are designed to correspond generally
to the performance of a specified stock index or "basket" of stocks, or a single
stock. Access Products may be used by the Fund to gain exposure to countries
that place restrictions on investments by foreigners. To the extent that the
Fund invests in Access Products whose return corresponds to the performance of a
foreign securities index or one or more foreign stocks, investing in Access
Products will involve risks similar to the risks of investing directly in such
foreign securities. In addition, the Fund bears the risk that the issuer of an
Access Product may default on its obligation under the terms of the arrangement
with the counterparty. Access Products are often used for many of the same
purposes as, and share many of the same risks with, other forms of derivative
instruments. In addition, Access Products may be considered illiquid and subject
to the Fund's restrictions on investments in illiquid securities.
At April 30, 2007, the Fund held equity-linked securities through Credit
Lyonnais ("CLSA") and Citigroup Global Markets Holdings, the issuers. Under the
terms of the agreements, each warrant entitles the Fund to receive from the
issuers an amount in U.S. dollars linked to the performance of specific equity
shares.
INDEMNIFICATION OBLIGATIONS: Under the Fund's organizational documents, its
Officers and Directors are indemnified against certain liabilities arising out
of the performance of their duties to the Fund. In addition, in the normal
course of business the Fund enters into contracts that provide general
indemnifications to other parties. The Fund's maximum exposure under these
arrangements is unknown as this would involve future claims that may be made
against the Fund that have not yet occurred.
SECURITY TRANSACTIONS AND INVESTMENT INCOME: Security transactions are recorded
as of the trade date. Realized gains and losses from securities sold are
recorded on the identified cost basis. Dividend income is recorded on the
ex-dividend date, or, in the case of dividend income on foreign securities, on
the ex-dividend date or when the
18
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Fund becomes aware of its declaration. Interest income is recorded on the
accrual basis. All premiums and discounts are amortized/accreted for both
financial reporting and federal income tax purposes.
Dividend and interest income generated in Taiwan is subject to a 20% withholding
tax. Stock dividends received (except those which have resulted from
Capitalization of capital surplus) are taxable at 20% of the par value of the
stock dividends received. The Fund records the taxes paid on stock dividends as
an operating expense.
DIVIDENDS AND DISTRIBUTIONS: The Fund intends to distribute to its
shareholders, at least annually, substantially all of its net investment income
and any net realized capital gains. Income and capital gains distributions are
determined in accordance with U.S. income tax regulations, which may differ from
generally accepted accounting principles. These differences are primarily due to
differing book and tax treatments for foreign currency transactions.
The Fund made distribution of $4,343,068 from Ordinary Income and $53,811,419
from Long-Term Capital Gains during the six months ended April 30, 2007. For the
year ended October 31, 2006 the Fund made distributions of $3,124,848 from
Ordinary Income and $33,017,522 from Long-Term Capital Gains. Income and capital
gains distributions are determined in accordance with U.S. income tax
regulations, which may differ from generally accepted accounting principles.
These differences are primarily due to differing book and tax treatments for
foreign currency transactions.
FEDERAL INCOME TAXES: The Fund has qualified and intends to qualify in the
future as a regulated investment company by complying with the provisions of
Subchapter M of the Internal Revenue Code available to certain investment
companies, including making distributions of taxable income and capital gains
sufficient to relieve it from all, or substantially all, federal income and
excise taxes.
NOTE B -- ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Martin Currie Inc. is the investment manager for the Fund's listed assets (the
"Listed Assets"). Martin Currie Inc. receives a fee, computed weekly and payable
monthly, at the following annual rates: 0.70% of the first US$315 million of the
Fund's average weekly net assets invested in Listed Assets; and 0.50% of the
Fund's average weekly net assets invested in Listed Assets in excess of US$315
million. In April 2007, Martin Currie was also appointed as an investment
manager for the Fund's assets allocated to Direct Investments. For this they
will receive a fee computed weekly and payable monthly, at an annual rate of
2.0% of the average weekly value of the Fund's assets invested in the investment
manager's Direct Investments.
Asian Direct Capital Management ("ADCM") is an investment manager for the Fund's
assets allocated to direct investments. ADCM receives a fee, computed weekly and
payable monthly at an annual rate equal to the greater of $300,000 or 2.2% of
the average weekly value of the net assets of the Fund invested in the
investment manager's Direct Investments.
No director, officer or employee of the Investment Manager or Direct Investment
Manager or any affiliates of those entities will receive any compensation from
the Fund for serving as an officer or director of the Fund. The
19
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Fund pays the Chairman of the Board and each of the directors (who is not a
director, officer or employee of the Investment Manager or Direct Investment
Manager or any affiliate thereof) an annual fee of $27,500 and $10,000,
respectively, plus $2,000 for each Board of Directors' meeting or Audit
Committee meeting attended. In addition, the Fund will reimburse each of the
directors for travel and out-of-pocket expenses incurred in connection with
attending Board of Directors' meetings.
State Street Bank and Trust Company ("State Street") provides, or arranges for
the provision of certain administrative services for the Fund, including
preparing certain reports and other documents required by federal and/or state
laws and regulations. The Fund pays State Street a fee at an annual rate of .13%
of the Fund's average daily net assets up to $150 million, .11% of the next $150
million and .06% of those assets in excess of $300 million subject to certain
minimum requirements for fund administration services. The Fund also pays State
Street $100,000 per year for certain legal administration services, including
corporate secretarial services and preparing regulatory filings.
The Fund also has a contract with State Street to provide custody and fund
accounting services to the Fund. For these services, the Fund pays State Street
asset-based fees that vary according to the number of positions and transactions
plus out of pocket expenses.
NOTE C -- CAPITAL STOCK
The Board of Directors of the Fund has approved a share repurchase plan. Under
the program, the Fund will repurchase shares at management's discretion at times
when it considers the repurchase to be consistent with the objectives of the
program. For the six months ended April 30, 2007, the Fund did not participate
in this program.
NOTE D -- INVESTMENT TRANSACTIONS
For the six months ended April 30, 2007, the Fund's cost of purchases and
proceeds from sales of investment securities, other than short-term securities,
were $130,626,771 and $200,128,091, respectively. At April 30, 2007, the cost of
investments for federal income tax purposes was $318,467,880. Gross unrealized
appreciation of investments was $236,648,133, while gross unrealized
depreciation of investments was $8,598,925, resulting in net unrealized
appreciation of investments of $228,049,208.
NOTE E -- INVESTMENTS IN CHINA
The Fund's investments in China companies involve certain risks not typically
associated with investments in securities of U.S. companies or the U.S.
Government, including risks relating to (1) social, economic and political
uncertainty; (2) price volatility, lesser liquidity and smaller market
capitalization of securities markets in which securities of China companies
trade; (3) currency exchange fluctuations, currency blockage and higher rates of
inflation; (4) controls on foreign investment and limitations on repatriation of
invested capital and on the Fund's ability to exchange local currencies for U.S.
dollars; (5) governmental involvement in and control over the economy; (6) risk
of nationalization or expropriation of assets; (7) the nature of the smaller,
less seasoned and newly organized China companies, particularly in China; and
(8) the absence of uniform accounting,
20
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
auditing and financial reporting standards, practices and disclosure
requirements and less government supervision and regulation.
NOTE F -- INVESTMENTS IN NON-CONTROLLED AFFILIATES*:
DIVIDENDS
INCLUDED IN
BALANCE OF BALANCE OF DIVIDEND
SHARES HELD GROSS SHARES HELD VALUE INCOME -
OCTOBER 31, PURCHASES GROSS SALES APRIL 30, APRIL 30, NON-CONTROLLED
NAME OF ISSUER 2006 AND ADDITIONS AND REDUCTIONS 2007 2007 AFFILIATES
-------------- ----------- ------------- -------------- ----------- -------------- --------------
Captive Finance,
Ltd.(1)............... 2,000,000 $ -- $2,000,000 -- $ -- $ --
CDW Holdings Ltd........ 60,000,000 -- -- 60,000,000 $6,316,413 --
* Affiliated issuers, as defined in the 1940 Act as amended, include issuers
in which the Fund held 5% or more of the outstanding voting securities.
As of April 30, 2007 Beiren Printing Machinery Holdings Ltd. and Far East
Energy Corp. are no longer considered affiliates.
(1) The Fund sold Captive Finance in March 2007, to which a reserve of 27% of
the net proceeds was established to cover any potential liabilities from the
representations and warranties provided by the Fund in the transaction. In
May 2007, the reserve was reduced to 10% of net sale proceeds.
NOTE G -- CAPITAL STOCK
On August 3, 2005, the Fund had completed the rights offering of a total of 4
million shares of its common stock. Proceeds to the Fund, before expenses of
$1,339,771, amounted to $111,647,500. At April 30, 2007, 100,000,000 shares of
$.01 par value common stock were authorized.
NOTE H -- NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, Financial Accounting Standards Board Interpretation No. 48,
Accounting for Uncertainty in Income Taxes -- an interpretation of FASB
Statement 109 (FIN 48), was issued and is effective for fiscal years beginning
after December 15, 2006. FIN 48 sets forth a threshold for financial statement
recognition, measurement and disclosure of a tax position taken or expected to
be taken on a tax return. Management is currently evaluating the impact, if any,
the adoption of FIN 48 will have on the Fund's net assets, results of operations
and financial statement disclosures.
In addition, in September 2006, Statement of Financial Accounting Standards No.
157, Fair Value Measurements (SFAS 157), was issued and is effective for fiscal
years beginning after November 15, 2007. SFAS 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. Management is currently evaluating the impact, if any,
the adoption of SFAS 157 will have on the Fund's financial statement
disclosures.
21
THE CHINA FUND, INC.
OTHER INFORMATION (UNAUDITED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTE I -- RESULTS OF ANNUAL STOCKHOLDER MEETING
RESULTS OF ANNUAL STOCKHOLDER MEETING VOTING HELD MARCH 22, 2007 AND APRIL 13,
2007
1.) Election of Directors - The stockholders of the Fund elected Michael F.
Holland as a Class II director to serve for a term expiring on the date
on which the annual meeting of stockholders is held in 2010.
FOR WITHHELD
--- --------
Michael F. Holland 8,581,238 287,230
2.) Approval or Rejection of a Direct Investment Management Agreement
between the Fund and Martin Currie Inc - The stockholders of the Fund
approved a Direct Investment Management Agreement between the Fund and
Martin Currie Inc.
FOR AGAINST ABSTAIN NON-VOTES
--------- ------- ------- ---------
Approve or Reject a Direct Investment 6,182,912 221,793 278,813 2,613,042
Management Agreement between the Fund and
Martin Currie Inc.
NOTE J -- SUBSEQUENT EVENTS
In April 2007, Fund shareholders approved appointment of Martin Currie Inc. as a
direct investment manager for the China Fund, Inc. Fees for their services will
be 2.00% of average direct investment assets. In addition, at the June 2007
board meeting, the Board of Directors determined not to renew the direct
investment management agreement with Asian Direct Capital Management. Changes in
arrangements with the direct investment managers are not expected to have a
material impact on Fund expenses.
PRIVACY POLICY
--------------------------------------------------------------------------------
PRIVACY NOTICE
The China Fund, Inc. collects nonpublic personal information about its
shareholders from the following sources:
[ ] Information it receives from shareholders on applications or other
forms; and
[ ] Information about shareholder transactions with the Fund.
THE FUND'S POLICY IS TO NOT DISCLOSE NONPUBLIC PERSONAL INFORMATION ABOUT ITS
SHAREHOLDERS TO NONAFFILIATED THIRD PARTIES (other than disclosures permitted by
law).
The Fund restricts access to nonpublic personal information about its
shareholders to those agents of the Fund who needs to know that information to
provide products or services to shareholders. The Fund maintains physical,
electronic and procedural safeguards that comply with federal standards to guard
its shareholders' nonpublic personal information.
--------------------------------------------------------------------------------
22
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that are used by the Fund's
investment advisers to vote proxies relating to the Fund's portfolio securities
is available (1) without charge, upon request, by calling 1-888-CHN-CALL
(246-2255); and (2) as an exhibit to the Fund's annual report on Form N-CSR
which is available on the website of the Securities and Exchange Commission (the
"Commission") at http://www.sec.gov. Information regarding how the investment
advisers vote these proxies is now available by calling the same number and on
the Commission's website. The Fund has filed its report on Form N-PX covering
the Fund's proxy voting record for the 12 month period ending June 30, 2006.
QUARTERLY PORTFOLIO OF INVESTMENTS
A Portfolio of Investments will be filed as of the end of the first and third
quarter of each fiscal year on Form N-Q and will be available on the Securities
and Exchange Commission's website at http://www.sec.gov. Form N-Q has been filed
as of March 30, 2007 for the first quarter of this fiscal year and is available
on the Securities and Exchange Commission's website at http://www.sec.gov.
Additionally, the Portfolio of Investments may be reviewed and copied at the
Commission's Public Reference Room in Washington, DC. Information on the
operation of the Public Reference Room may be obtained by calling
1-800-SEC-0330. The quarterly Portfolio of Investments will be made available
with out charge, upon request, by calling 1-888-246-2255.
CERTIFICATIONS
The Fund's chief executive officer has certified to the New York Stock Exchange
that, as of May 14, 2007, he was not aware of any violation by the Fund of
applicable New York Stock Exchange corporate governance listing standards. The
Fund also has included the certifications of the Fund's chief executive officer
and chief financial officer required by Section 302 and Section 906 of the
Sarbanes-Oxley Act of 2002 in the Fund's Form N-CSR filed with the Securities
and Exchange Commission, for the period of this report.
23
DIVIDENDS AND DISTRIBUTIONS;
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
The Fund will distribute to shareholders, at least annually, substantially all
of its net investment income from dividends and interest earnings and expects to
distribute any net realized capital gains annually. Pursuant to the Dividend
Reinvestment and Cash Purchase Plan (the "Plan"), adopted by the Fund, each
shareholder will be deemed to have elected, unless Computershare Trust Company,
N.A., the Plan Administrator, is otherwise instructed by the stockholder in
writing, to have all distributions automatically reinvested by the Plan
Administrator in Fund shares pursuant to the Plan. Shareholders who do not
participate in the Plan will receive all distributions in cash paid by check in
U.S. dollars mailed directly to the stockholder by Computershare Trust Company,
N.A., as paying agent. Shareholders who do not wish to have distributions
automatically reinvested should notify the Fund by contacting Computershare c/o
The China Fund, Inc. at P.O. Box 43010, Providence, Rhode Island 02940-3011.
Phone: 1-800-426-5523.
Computershare Trust Company, N.A. and Computershare Shareholder Services, Inc.
(collectively, "Computershare" or the "Plan Administrator"), acts as Plan
Administrator and Service Agent. If the Directors of the Fund declare an income
dividend or a capital gains distribution payable either in the Fund's Common
Stock or in cash, as shareholders may have elected, non-participants in the Plan
will receive cash and participants in the Plan will receive Common Stock, to be
issued by the Fund. If the market price per share on the valuation date equals
or exceeds net asset value per share on that date, the Fund will issue new
shares to participants at net asset value or, if the net asset value is less
than 95% of the market price on the valuation date, then at 95% of the market
price. The valuation date will be the dividend or distribution payment date or,
if that date is not a trading day on the exchange on which the Fund's shares are
then listed, the next preceding trading day. If net asset value exceeds the
market price of Fund shares at such time, participants in the Plan will be
deemed to have elected to receive shares of stock from the Fund, valued at
market price on the valuation date. If the Fund should declare a dividend or
capital gains distribution payable only in cash, the Plan Administrator will, as
administrator for the participants, buy Fund shares in the open market, on the
New York Stock Exchange or elsewhere, with the cash in respect of such dividend
or distribution, for the participant's account on, or shortly after, the payment
date.
Participants in the Plan have the option of making additional payments to the
Plan Administrator, annually, in any amount from $100 to $3,000 for investment
in the Fund's Common Stock. The Plan Administrator will use all funds received
from participants (as well as any dividends and capital gains distributions
received in cash) to purchase Fund shares in the open market on or about January
15 of each year. Any voluntary cash payments received more than thirty days
prior to such date will be returned by the Plan Administrator, and interest will
not be paid on any uninvested cash payments. To avoid unnecessary cash
accumulations, and also to allow ample time for receipt and processing by the
Plan Administrator, it is suggested that participants send in voluntary cash
payments to be received by the Plan Administrator approximately ten days before
January 15. A participant may withdraw a voluntary cash payment by written
notice, if the notice is received by the Plan Agent not less than 48 hours
before such payment is to be invested.
The Plan Administrator maintains all stockholder accounts in the Plan and
furnishes written confirmations of all transactions in the account, including
information needed by shareholders for personal and tax records. Shares in
24
DIVIDENDS AND DISTRIBUTIONS;
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN (CONTINUED)
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the account of each Plan participant will be held by the Plan Administrator in
non-certificated form in the name of the participant, and each stockholder's
proxy will include those shares purchased pursuant to the Plan.
In the case of shareholders, such as banks, brokers or nominees, which hold
shares for others who are the beneficial owners, the Plan Administrator will
administer the Plan on the basis of the number of shares certified from time to
time by the stockholder as representing the total amount registered in the
stockholder's name and held for the account of beneficial owners who are
participating in the Plan.
There is no charge to participants for reinvesting dividends or capital gains
distributions. The Plan Administrator's fees for the handling of the
reinvestment of dividends and distributions will be paid by the Fund. However,
each participant's account will be charged a pro rata share of brokerage
commissions incurred with respect to the Plan Administrator's open market
purchases in connection with the reinvestment of dividends or capital gains
distributions. A participant will also pay brokerage commissions incurred in
purchases from voluntary cash payments made by the participant. Brokerage
charges for purchasing small amounts of stock for individual accounts through
the Plan are expected to be less than the usual brokerage charges for such
transactions, because the Plan Administrator will be purchasing stock for all
participants in blocks and prorating the lower commission thus attainable.
The automatic reinvestment of dividends and distributions will not relieve
participants of any income tax which may be payable on such dividends and
distributions.
Experience under the Plan may indicate that changes are desirable. Accordingly,
the Fund reserves the right to amend or terminate the Plan as applied to any
voluntary cash payment made and any dividend or distribution paid subsequent to
notice of the change sent to all shareholders at least 90 days before the record
date for such dividend or distribution. The Plan also may be amended or
terminated by the Plan Administrator by at least 90 days' written notice to all
shareholders. All correspondence concerning the Plan should be directed to
Computershare c/o The China Fund, Inc. at P.O. Box 43011, Providence, Rhode
Island 02940-3011. Phone: 1-800-426-5523.
25
DIRECTORS AND OFFICERS (UNAUDITED)
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The following table provides information concerning each of the Directors of the
Fund. The Board of Directors is comprised of Directors who are not interested
persons of the Fund, as that term is defined in Section 2(a)(19) of the
Investment Company Act of 1940, as amended. The Directors are divided into three
classes, designated as Class I, Class II and Class III. The Directors in each
such class are elected for a term of three years to succeed the Directors whose
term of office expires. Each Director shall hold office until the expiration of
his term and until his successor shall have been elected and qualified. The Fund
Complex consists of one series.
PRINCIPAL OCCUPATION OR EMPLOYMENT
NAME (AGE) AND PRESENT OFFICE DURING PAST FIVE YEARS AND DIRECTOR
ADDRESS OF DIRECTOR WITH THE FUND DIRECTORSHIPS IN PUBLICLY HELD COMPANIES SINCE
------------------- --------------- -------------------------------------------------- --------
James J. Lightburn (63)........ Chairman of the Chairman of the Board of the Fund; Attorney, 1992
13, Rue Alphonse de Neuville Board and Nomos, (2004-present); Attorney, member of Hughes
75017 Paris, France Director Hubbard & Reed (1993-2004).
Alan Tremain (70).............. Director Chairman, Hotels of Distinction Ventures, Inc. 1992
366 Marters Cove (1989- 2005); Chairman, Hotels of Distinction
Saugutuck, MI 49406 (International), Inc. (1974-present).
Michael F. Holland (62)........ Director Chairman, Holland & Company L.L.C. (1995-present); 1992
375 Park Avenue Director, The Holland Balanced Fund, Inc., Reaves
New York, New York 10152 Utility Income Fund and Scottish Widows Investment
Partnership Trust; Trustee, State Street Master
Funds and State Street Institutional Investment
Trust.
Joe O. Rogers (57)............. Director The Rogers Team LLC, organizing member (July 2001- 1992
2477 Foxwood Drive present); Manager, The J-Squared Team LLC (April
Chapel Hill, NC 27514 2003-May 2004); Director, The Taiwan Fund, Inc.
(1986-present).
Nigel S. Tulloch (61).......... Director Chief Executive, HSBC Asset Management Bahamas 1992
7, Circe Circle Limited (1986-1992); Director, The HSBC China Fund
Dalkeith Limited (1992-2005).
WA6009
Australia
Peter A. Ambrosini (61)........ Chief Chief Compliance Officer of the Fund since
1 Lincoln Street Compliance September 30, 2004, also serves as a Senior
Boston, MA 02111 Officer of the Principal and Chief Compliance and Risk Management
Fund Officer, SSgA Funds Management, Inc. and State
Street Global Advisors.
Gary L. French (55)............ President Senior Vice President, State Street Bank and Trust
2 Avenue de Lafayette Company (2002-present); Managing Director,
Boston, MA 02111 Deutsche Asset Management, Inc. and Zurich Scudder
Investments (acquired by Deutsche Bank in 2002)
(2001-2002); President, UAM Fund Services, Inc.
(1995-2001).
William C. Cox (40)............ Treasurer Vice President, State Street Bank and Trust
2 Avenue de Lafayette Company.
Boston, MA 02111
Mary Moran Zeven (45).......... Secretary Senior Vice President and Senior Counsel, State
2 Avenue de Lafayette Street Bank and Trust Company.
Boston, MA 02111
26
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27
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28
THE CHINA FUND, INC.
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UNITED STATES ADDRESS
The China Fund, Inc.
c/o State Street Bank and Trust Company
2 Avenue de Lafayette, 6th Floor
P.O. Box 5049
Boston, MA 02206-5049
1-888-CHN-CALL (246-2255)
DIRECTORS AND OFFICERS
James J. Lightburn, Chairman of the Board and Director
Alan Tremain, O.B.E., Director
Michael F. Holland, Director
Joe O. Rogers, Director
Nigel S. Tulloch, Director
Peter A. Ambrosini, Chief Compliance Officer of the Fund
Gary L. French, President
William C. Cox, Treasurer
Mary Moran Zeven, Secretary
INVESTMENT MANAGER
Martin Currie Inc.
DIRECT INVESTMENT MANAGER
Asian Direct Capital Management
SHAREHOLDER SERVICING AGENT
The Altman Group
ADMINISTRATOR AND CUSTODIAN
State Street Bank and Trust Company
TRANSFER AGENT, DIVIDEND PAYING AGENT AND REGISTRAR
Computershare Trust Company, N.A.
INDEPENDENT AUDITORS
Deloitte & Touche, LLP
LEGAL COUNSEL
Clifford Chance US LLP
ITEM 2. CODE OF ETHICS.
Not required for this filing.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not required for this filing.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not required for this filing.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not required for this filing.
ITEM 6. SCHEDULE OF INVESTMENTS.
Schedule of Investments is included as part of Item 1 of the Form N-CSR.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
INVESTMENT COMPANIES.
Not required for this filing.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(b) On June 15, 2007, the Board of Directors of the China Fund, Inc.
determined not to renew the direct investment management agreement with Asian
Direct Capital Management. As a result of this determination, Mr. Koh Kuek
Chiang, who is an employee of Asian Direct Capital Management, is no longer a
Portfolio Manager of the Fund.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which shareholders may
recommend nominees to the registrant's Board of Directors during the period
covered by this Form N-CSR filing.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers
have concluded that the registrant's disclosure controls and procedures
(as defined in Rule 30a-3(c) under the Investment Company Act of 1940,
as amended (the "1940 Act") (17 CFR 270.30a-3(c))) are effective, as of
a date within 90 days of the filing date of this Form N-CSR based on
their evaluation of these controls and procedures required by Rule
30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b)
or 15d-15(b) under the 1934 Act (17 CFR 240.13a-15(b) or
240.15d-15(b)).
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17
CFR 270.30a-3(d))) that occurred during the registrant's
3
second fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Not required for this filing.
(a)(2) The certifications required by Rule 30a-2 of the Investment Company Act
of 1940, as amended (the "1940 Act") are attached hereto.
(a)(3) Not required for this filing.
(b) The certifications required by Rule 30a-2(b) of the 1940 Act and
Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto.
4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
THE CHINA FUND, INC.
By: /s/ Gary L. French
---------------------
Gary L. French
President of The China Fund, Inc.
Date: July 3, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Gary L. French
---------------------
Gary L. French
President of The China Fund, Inc.
Date: July 3, 2007
By: /s/ William C. Cox
---------------------
William C. Cox
Treasurer of The China Fund, Inc.
Date: July 3, 2007
5