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.
(Exact name of registrant as specified in charter)
C/O State Street Bank & Trust
P.O. Box 5049
BOSTON, MA 02206-5049
(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 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, 2006
ITEM 1. REPORT TO STOCKHOLDERS.
THE CHINA FUND, INC.
SEMI-ANNUAL REPORT
APRIL 30, 2006
(UNAUDITED)
THE CHINA FUND, INC.
TABLE OF CONTENTS
PAGE
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Key Highlights 1
Asset Allocation 2
Industry Allocation 3
Chairman's Statement 4
Investment Managers' Statements 5
About the Portfolio Managers 8
Schedule of Investments 9
Financial Statements 15
Notes to Financial Statements 19
Other Information 23
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 14,496,220
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TOTAL NET ASSETS (04/30/06) US$443.3 MILLION
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NET ASSET VALUE PER SHARE (04/30/06) $30.58
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MARKET PRICE PER SHARE (04/30/06) $33.40
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TOTAL RETURN
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PERFORMANCE AS OF
04/30/06: NET ASSET VALUE(1) MARKET PRICE(2)
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6 MONTHS 45.73% 50.74%
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3-YEAR CUMULATIVE 138.73% 172.52%
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3-YEAR ANNUALIZED 33.65% 39.68%
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5-YEAR CUMULATIVE 179.69% 285.62%
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5-YEAR ANNUALIZED 22.84% 30.99%
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10-YEAR CUMULATIVE 244.71% 250.81%
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10-YEAR ANNUALIZED 13.17% 13.37%
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DIVIDEND HISTORY
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RECORD DATE INCOME CAPITAL GAINS
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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 $0.06397 $0.1504
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12/31/01 $0.1321 --
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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 is 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.
(2) Total investment returns are historical and do not guarantee future results.
1
THE CHINA FUND, INC.
ASSET ALLOCATION AS OF APRIL 30, 2006 (UNAUDITED)
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TEN LARGEST LISTED EQUITY INVESTMENTS*
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1. Chaoda Modern Agriculture (Holdings) Ltd. 5.36%
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2. China Life Insurance Co., Ltd. 4.12%
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3. Zijin Mining Group Co., Ltd. 3.88%
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4. Shanghai Zhenhua Port Machinery Co. Ltd. Access
Product 3.05%
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5. Tripod Technology Corp. 2.83%
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6. Cathay Financial Holding Co., Ltd. 2.75%
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7. Shanghai International Airport Access Product 2.67%
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8. Golden Meditech Co., Ltd 2.45%
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9. TPV Technology, Ltd. 2.44%
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10. Xinao Gas Holdings, Ltd. 2.41%
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LARGEST DIRECT INVESTMENTS*
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1. CDW Holding Ltd. 1.97%
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2. Global e-Business Services (BVI) Ltd. 0.69%
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3. Captive Finance, Ltd. 0.69%
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4. teco Optronics Corp. 0.03%
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* Percentages based on net assets at April 30, 2006.
2
INDUSTRY ALLOCATION (UNAUDITED)
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(PIE CHART)
Information Technology.................. 15.8%
Industrials............................. 15.1%
Consumer Discretionary.................. 13.1%
Financials.............................. 12.5%
Materials............................... 9.8%
Energy.................................. 9.6%
Consumer Staples........................ 7.5%
Utilities............................... 6.2%
Health Care............................. 4.5%
Telecommunications...................... 3.6%
Others.................................. 2.3%
Total Net Assets........................ 100.0%
Fund holdings are subject to change and percentages shown above are based on
total net assets as of April 30, 2006. A complete list holdings as of April 30,
2006 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
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I am extremely pleased to report that your Fund's total return, based on net
asset value per share, was 45.73% over the six month period ended April 30, 2006
and that its net asset value per share increased from $23.25 to $30.58 over the
same period. Your Fund's total net assets increased from US$334,495,574 million
to US$443,258,442 million, despite the payment in January of a substantial
dividend (US$2.51/share) for the third consecutive year. The Fund's average
annual total return for the 1-year, 3-year and 5-year periods ended April 30,
2006 amounted to 32.72%, 33.65%, and 22.84%, respectively, allowing it to
outpace the MSCI Golden Dragon Index returns of 30.98%, 31.95%, and 10.00% for
each of those periods.
Last summer's rights issue, which allowed a substantial new allocation of the
Fund's investments into China's domestic A-share market, proved well-timed.
Progress made by the government in reforming the market's structure subsequently
lifted the A-share market out of its five-year slump. Elsewhere, the broadening
of the market and the appreciation of the renminbi benefited your Fund, due to
its concentration on entrepreneurial companies, which at this stage of China's
economic development tend to be small companies with a domestic focus. Your
Fund's increased size has led to improved liquidity in its stock, and the stock
price has held a premium to net asset value per share for most of the period.
The outlook for Chinese economic growth remains good. The government appears to
be committed to tackling some of the main outstanding problems, such as the
wealth gap between rural and urban areas and the inefficiencies of the
state-owned banking system. At present, the greatest risks seem to be those
posed by inflation and the increased supply of equity. However, the Fund's
managers continue to report attractive investment opportunities, particularly in
the A-share and Taiwanese markets.
The strong People's Republic of China (PRC) economy and the resolution of some
of the regulatory issues relating to the offshore listing of PRC companies which
constrained private equity investing in 2005 are leading to a more active deal
market. The Direct Investment Manager is actively progressing a number of
investments for the Fund.
The main focus of the deal origination activity is PRC service companies with
high entry barriers. These companies have high growth rates and stable margins.
The Direct Investment Manager believes that such companies could generate higher
returns than companies in the export sector which are experiencing intensive
price competition and may be adversely affected by any revaluation of the
renminbi or trade restrictions.
Valuations for high quality PRC companies continue to rise which along with high
levels of liquidity potentially presents the Fund with an attractive exit
market. The Direct Investment Manager will continue to explore opportunities to
create value for the Fund from its existing investments. Though increasing
valuation is leading to a higher level of competition for transactions, it is
not yet excessive. For monthly updates detailing your Fund's investments, please
consult www.chinafundinc.com.
Thank you for your continued interest in The China Fund, Inc.
Yours truly,
/s/ Alan Tremain
Alan Tremain
Chairman
4
THE CHINA FUND, INC.
INVESTMENT MANAGERS' STATEMENTS (UNAUDITED)
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REVIEW OF LISTED INVESTMENTS
The portfolio of listed stocks performed well over the period. The portfolio of
listed stocks net asset value increased by 50.9% because the smaller,
entrepreneurial companies in which the Fund invests performed well.
By way of comparison, the benchmark MSCI Golden Dragon index returned 29.2% over
the same period. However, this figure masks the wide variance in returns among
markets across the greater China region. The HSCE index, which charts the
fortunes of Chinese H-shares listed and traded in Hong Kong was the star
performer, returning 43.3%, with most of the gains coming in January. Local
retail investor sentiment recovered strongly, helped by greater confidence in
the sustainability of economic and corporate profit growth. Meanwhile, other
investment options -- such as bank deposits and government bonds -- have
remained unattractive, particularly as the government of the People's Republic
seems to be trying to restrain property speculation.
Taiwan securities marginally outperformed the MSCI Golden Dragon index over the
six-month period as a whole, returning 31.8%. This slight outperformance was
despite a difficult start to 2006 for Taiwanese stocks, which reflected worries
over mounting credit card debt and cross-strait tensions.
The real laggard, however, has been MSCI Hong Kong, which returned just 17.4%
over the reporting period. The Hong Kong Monetary Authority continued to track
monetary tightening by the Federal Reserve and results announced were often
lackluster.
Turning to the Fund's portfolio of listed stocks, one of the Fund's largest
holdings, fruit and vegetable grower CHAODA MODERN AGRICULTURE, was one of the
star performers, rising by 84.6% in dollar terms over the period. The company
announced plans to co-operate with a Japanese trading company in the export of
produce to Japan. Other key holdings included ZIJIN MINING (China, up 255.0% on
the back of surging gold prices); and TRIPOD TECHNOLOGY (Taiwan, up 81.3% on the
strength of demand for LCD televisions).
In terms of activity, the Listed Investment Manager increased the Fund's
exposure to the A-share market, adding to holdings in leading garment maker
YOUNGOR GROUP, in CHINA YANGTZE POWER and in SHANGHAI ZHENHUA PORT
MACHINERY. More recently, the Listed Investment Manager added a holding in the
utility HUANENG POWER INTERNATIONAL, whose A-share is trading at a large
discount to its H-share. A January rumor about the merger of the B and A-share
markets (which will not be possible until the renminbi is convertible) presented
the Listed Investment Manager with the opportunity to sell CIMC, the Fund's only
remaining B-share.
The Fund had gains on small allocations of Initial Public Offerings ("IPOs") for
SUNTECH and AGILE. In the technology area, the Listed Investment Manager sold
the STN LCD maker WINTEK, as the Listed Investment Manager had doubts about its
future growth prospects, and bought RADIANT OPTO-ELECTRONICS, which could
benefit from a possible boom in sales of LCD televisions. The Listed Investment
Manager also invested in transformer manufacturer BAODING TIANWEI BAOBIAN
ELECTRIC, whose subsidiary is the first and largest producer of photovoltaic
cells in China. In Taiwan the Listed Investment Manager added a holding in
solder specialist SHENMAO.
5
THE CHINA FUND, INC.
INVESTMENT MANAGERS' STATEMENTS (CONTINUED)(UNAUDITED)
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REVIEW OF LISTED INVESTMENTS
The Listed Investment Manager invested in Taiwan-based food giant UNI-PRESIDENT,
which had been a chronic underperformer despite its strong brand name, and could
benefit from easing cost pressures and is showing a willingness to rationalize
its many product lines. The Listed Investment Manager added a holding in laggard
SHANGHAI INTERNATIONAL AIRPORT, which reported 24% growth in traffic in the
first quarter. On a similar theme, the Listed Investment Manager added a holding
in CHINA TRAVEL, ahead of the opening of its huge new spa resort in ZHUHAI, and
took the opportunity presented by avian flu-related weakness late last year to
add to the Fund's holding in SHANGRI-LA, the hotel operator.
Despite the gains enjoyed by a number of the Fund's holdings this year,
valuations generally remain low. The only areas where the Listed Investment
Manager has seen any degree of overvaluation has been in some Hong Kong-listed
China retail names, the state-owned banks and Hong Kong IPOs. The Listed
Investment Manager's main worries at the moment are: trade relations between the
US and China ahead of the mid-term elections, an expansion of equity supply and
a possible unpleasant surprise from Chinese inflation data.
Going forward, we expect particularly robust performance from the domestic,
renminbi-denominated A-share market -- valuations here are converging at a point
lower than those companies listed in Hong Kong, and the interest rate and
exchange rate environment is favorable. The Listed Investment Manager expects
the portfolio to remain biased towards management-owned companies, many of which
tend to be small caps with a domestic focus.
6
THE CHINA FUND, INC.
INVESTMENT MANAGERS' STATEMENTS (CONTINUED)(UNAUDITED)
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REVIEW OF DIRECT INVESTMENTS
As of April 30, 2006 the Fund's Direct Investment portfolio comprised the
following investments:
CAPTIVE FINANCE LIMITED ("CAPTIVE")
Captive is engaged in providing operating and financial leases for technology
products (PCs, servers, telecom equipment etc.). It has operations in Greater
China, Singapore, Malaysia and Europe. Apart from seeking leasing opportunities
within each of its national markets, there is active cross-selling of services
between the Asian and European operations.
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. For more than
a decade, CDW has been supplying parts and accessories for office and consumer
equipment to major Japanese manufacturers. CDW continues to expand its
production capacity to cope with increasing demand. The company is listed on the
Singapore Stock Exchange.
In 2005 the company reported revenue of US$106.2 mn (+7.8% year on year ("yoy"))
and net profit of US$8.9 mn (-41.4% yoy). The profit decline mainly reflected
continuous price pressure particularly in its BLU business and start-up costs
for the new plant in Dongguan. CDW has recently announced that it is exploring a
merger with the Japanese operations of its CEO which could facilitate the
development of higher margin products and capture more manufacturing outsourcing
business from Japanese multinationals.
TECO OPTRONICS CORP. ("TECO")
teco designs and manufactures organic light emitting diodes (OLED) displays. It
has a technology licensing agreement with Kodak. OLED is a new flat screen
display technology that is competing with liquid crystal displays (LCDs). teco
is a subsidiary of the TECO Group, a large Taiwanese business group.
On July 8, 2005, the carrying value of teco was reduced to US$150,000 from cost
of about US$590,000.
GLOBAL E-BUSINESS SERVICES (BVI) LTD. ("GO")
GO engages in operating e-commerce and e-government platforms and related
business opportunities. In March 2003, GO was awarded one of the two available
licenses in Hong Kong to provide and operate the front-end Government Electronic
Trading Services and related electronic processing services for the trading
community. GO is a subsidiary of Computer And Technologies Holdings Limited, a
listed company in Hong Kong.
7
THE CHINA FUND, INC.
ABOUT THE PORTFOLIO MANAGERS (UNAUDITED)
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LISTED INVESTMENT MANAGER
Mr. Chris Ruffle serves as the portfolio manager of the Fund's portfolio of
listed securities. Mr. Ruffle joined Martin Currie in 1994. He is a Chinese and
Taiwanese equity specialist with over 15 years of 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 portfolio of direct
securities. He 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.
8
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS
APRIL 30, 2006 (UNAUDITED)
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NAME OF ISSUER AND TITLE OF ISSUE SHARES VALUE (NOTE A)
--------------------------------- ------ --------------
COMMON STOCK AND OTHER EQUITY INTERESTS
HONG KONG
CONSUMER DISCRETIONARY -- (5.7%)
China Ting Group Holdings Ltd.*........................ 13,148,000 $ 3,688,423
China Travel International Investment Hong Kong,
Ltd. ................................................ 15,142,000 4,247,803
Parkson Retail Group Ltd. ............................. 1,080,500 3,539,813
Ports Design Ltd. ..................................... 3,956,500 6,251,282
Shangri-La Asia Ltd. .................................. 4,318,000 7,657,855
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25,385,176
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CONSUMER STAPLES -- (6.3%)
Chaoda Modern Agriculture (Holdings) Ltd. ............. 34,089,900 23,743,312
Li Ning Co. Ltd. ...................................... 3,726,000 4,181,036
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27,924,348
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ENERGY -- (0.8%)
China Rare Earth Holdings, Ltd. ....................... 15,254,000 3,443,052
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FINANCIALS -- (6.4%)
Agile Property Holdings Ltd.*.......................... 10,292,000 7,898,390
China Insurance International Holdings Co., Ltd.*...... 4,026,000 2,180,946
China Life Insurance Co., Ltd.*........................ 13,497,000 18,278,828
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28,358,164
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HEALTH CARE -- (4.5%)
China Shineway Pharmaceutical Group Ltd. .............. 7,615,000 6,285,961
Golden Meditech Co., Ltd. ............................. 35,040,000 10,846,688
Natural Beauty Bio-Technology, Ltd. ................... 32,780,000 2,875,012
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20,007,661
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INDEX FUND -- (0.9%)
Ishare Asia Trust...................................... 580,000 4,207,967
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INDUSTRIALS -- (4.2%)
Beiren Printing Machinery Holdings Ltd.+............... 7,000,000 1,480,689
China Fire Safety Enterprise Group Holdings Ltd. ...... 50,380,000 6,173,104
TPV Technology, Ltd. .................................. 9,968,000 10,799,636
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18,453,429
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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, 2006 (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 (CONTINUED)
INFORMATION TECHNOLOGY -- (4.2%)
Arcontech Corp.*(2).................................... 18,386,000 $ 237,142
Digital China Holdings Ltd. ........................... 10,692,000 3,585,536
Lenovo Group Ltd. ..................................... 15,858,000 5,931,551
Solomon Systech Ltd. .................................. 19,892,000 8,851,551
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18,605,780
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MATERIALS -- (7.1%)
Asia Aluminum Holdings Ltd.*........................... 23,250,000 4,228,281
Asia Zirconium Ltd. ................................... 13,196,000 1,702,018
Fountain Set (Holdings), Ltd. ......................... 6,714,000 2,684,509
Ocean Grand Chemicals Holdings Ltd. ................... 17,379,000 3,496,803
Sinochem Hong Kong Holdings Ltd.*...................... 5,000,000 2,112,045
Zijin Mining Group Co., Ltd. .......................... 30,662,000 17,203,292
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31,426,948
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TELECOMMUNICATIONS -- (2.9%)
China Netcom Group Corp. (Hong Kong) Ltd. ............. 4,078,000 7,442,614
Comba Telecom Systems Holdings Ltd. ................... 16,118,000 5,301,187
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12,743,801
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UTILITIES -- (2.4%)
Xinao Gas Holdings, Ltd. .............................. 11,560,000 10,660,699
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TOTAL HONG KONG -- (Cost $113,302,349) 45.4% 201,217,025
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HONG KONG -- "H" SHARES
CONSUMER DISCRETIONARY -- (0.8%)
Lianhua Supermarket Holdings Co., Ltd. ................ 2,859,000 3,337,218
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ENERGY -- (3.1%)
China Oilfield Services Ltd. .......................... 9,546,000 5,325,119
China Shenhua Energy Co., Ltd. ........................ 4,536,500 8,220,894
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13,546,013
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INDUSTRIALS -- (2.3%)
BYD Co., Ltd.*......................................... 3,225,000 6,509,774
Sinotrans Ltd. ........................................ 11,134,000 3,841,464
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10,351,238
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See notes to financial statements and notes to schedule of investments.
10
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
APRIL 30, 2006 (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 (CONTINUED)
UTILITIES -- (2.0%)
Anhui Expressway Co., Ltd.*............................ 12,406,000 $ 9,040,700
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TOTAL HONG KONG -- "H" SHARES --
(Cost $23,028,394) 8.2% 36,275,169
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TOTAL HONG KONG (INCLUDING "H" SHARES) --
(Cost $136,330,743) 53.6% 237,492,194
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SINGAPORE
UTILITIES -- (1.8%)
Bio-Treat Technology Ltd. ............................. 9,799,000 8,181,328
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TOTAL SINGAPORE -- (Cost $4,045,565) 1.8% 8,181,328
------------
TAIWAN
CONSUMER DISCRETIONARY -- (4.2%)
Merry Electronics Co., Ltd. ........................... 3,012,016 10,619,983
Premier Image Technology Corp. ........................ 3,371,000 5,219,150
Taiwan FamilyMart Co., Ltd. ........................... 1,645,592 2,604,519
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18,443,652
------------
CONSUMER STAPLES -- (1.2%)
Uni-President Enterprises Corp. ....................... 6,729,000 5,072,005
------------
FINANCIALS -- (4.3%)
Cathay Financial Holding Co., Ltd. .................... 5,438,000 12,185,947
Yuanta Core Pacific Securities Co. .................... 8,983,000 6,869,502
------------
19,055,449
------------
INDUSTRIALS -- (0.7%)
Cheng Shin Rubber Industry Co., Ltd. .................. 4,129,481 3,293,800
------------
See notes to financial statements and notes to schedule of investments.
11
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
APRIL 30, 2006 (UNAUDITED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NAME OF ISSUER AND TITLE OF ISSUE SHARES VALUE (NOTE A)
--------------------------------- ------ --------------
COMMON STOCK AND OTHER EQUITY INTERESTS (CONTINUED)
TAIWAN (CONTINUED)
INFORMATION TECHNOLOGY -- (8.9%)
Advanced Semiconductor Engineering Inc. ............... 5,698,000 $ 6,768,239
Data Systems Consulting Co., Ltd. ..................... 4,362,043 3,588,668
Radiant Opto-Electronics Corp. ........................ 1,500,000 3,431,849
Taiwan Green Point Enterprises Co., Ltd. .............. 1,286,783 3,718,350
Novatek Microelectronics Corp., Ltd. .................. 920,000 5,478,422
ShenMao Technology Inc. ............................... 948,000 3,832,764
Tripod Technology Corp. ............................... 3,334,095 12,539,298
------------
39,357,590
------------
MATERIALS -- (1.6%)
China Metal Products Co., Ltd. ........................ 3,584,000 4,347,033
Yieh United Steel Corp. ............................... 9,483,000 2,912,634
------------
7,259,667
------------
TOTAL TAIWAN -- (Cost $62,660,755) 20.9% 92,482,163
------------
UNITED STATES -- "N" SHARES
CONSUMER DISCRETIONARY -- (1.5%)
Chindex International, Inc.*........................... 69,987 873,438
The9 Ltd. ADR*......................................... 184,861 5,543,981
------------
6,417,419
------------
TELECOMMUNICATIONS -- (0.7%)
China Techfaith Wireless Communication Technology Ltd.
ADR*................................................. 233,338 3,175,730
------------
TOTAL UNITED STATES -- "N" SHARES -- (Cost
$8,638,774) 2.2% 9,593,149
------------
TOTAL COMMON STOCK AND OTHER EQUITY
INTERESTS -- (Cost $211,675,837) 78.5% 347,748,834
------------
WARRANTS
CONSUMER DISCRETIONARY -- (0.9%)
Youngor Group Co. Ltd. Access Product (expiration
10/26/10) 144A,(2)(4)................................ 7,562,730 3,766,240
------------
See notes to financial statements and notes to schedule of investments.
12
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
APRIL 30, 2006 (UNAUDITED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NAME OF ISSUER AND TITLE OF ISSUE SHARES VALUE (NOTE A)
--------------------------------- ------ --------------
WARRANTS (CONTINUED)
ENERGY -- (5.7%)
China Petroleum Access Product (expiration 01/20/10)
144A,(2)(3).......................................... 5,539,000 $ 4,193,023
China Petroleum Access Product (expiration 01/20/11)
144A,(2)(4).......................................... 7,016,997 5,311,867
China Yangtze Power Co. Ltd. Access Product (expiration
1/20/10) 144A,(2)(4)................................. 7,577,738 6,130,390
Huaneng Power International Inc. Access Product
(expiration 1/20/10) 144A,(2)(3)..................... 7,476,500 4,366,276
Huaneng Power International Inc. Access Product
(expiration 4/20/11) 144A,(2)(4)..................... 9,343,031 5,456,330
------------
25,457,886
------------
FINANCIALS -- (1.1%)
China Merchants Bank Co. Ltd. Access Product
(expiration 10/26/10) 144A,(2)(4).................... 5,290,408 4,745,496
------------
INDUSTRIALS -- (7.9%)
Baoding Tianwei Baobian Electric Co., Ltd. (expiration
01/20/10),(2)(3)..................................... 1,761,193 5,129,369
Shanghai International Airport Co. Access Product
(expiration 1/20/10) 144A,(2)(3)..................... 5,662,300 8,544,977
Shanghai International Airport Co. Ltd. Access Product
(expiration 10/26/10) 144A,(2)(4).................... 2,141,969 3,266,503
Shanghai Zhenhua Port Machinery Co. Ltd. Access Product
(expiration 10/26/10) 144A,(2)(4).................... 6,609,826 13,503,874
Xinjiang Tebian Electric Apparatus Stock Co. Ltd.
Access Product (expiration 10/26/10) 144A,(2)(4)..... 3,577,791 4,683,328
------------
35,128,051
------------
MATERIALS -- (1.1%)
Qinghai Salt Lake Potash Co. Ltd. Access Product
(expiration 10/26/10) 144A,(2)(4).................... 2,396,122 5,065,402
------------
TOTAL WARRANTS -- (Cost $58,363,259) 16.7% 74,163,075
------------
See notes to financial statements and notes to schedule of investments.
13
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
APRIL 30, 2006 (UNAUDITED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NAME OF ISSUER AND TITLE OF ISSUE SHARES VALUE (NOTE A)
--------------------------------- ------ --------------
DIRECT INVESTMENTS
FINANCIALS -- (0.7%)
Captive Finance, Ltd., (acquired 5/24/02),*+(1)(2)..... 2,000,000 $ 3,045,000
------------
INFORMATION TECHNOLOGY -- (2.7%)
CDW Holding Ltd., (acquired 1/26/05)+(5)............... 60,000,000 8,728,653
Global e-Business Services (BVI) Ltd., (acquired
6/18/04),*(1)........................................ 40,000 3,053,395
teco Optronics Corp., (acquired 4/26/04),*(1)(2)....... 1,861,710 150,000
------------
11,932,048
------------
TOTAL DIRECT INVESTMENTS -- (Cost $8,411,189) 3.4% 14,977,048
------------
TOTAL INVESTMENTS -- (Cost $278,450,285) (Note E) 98.6% 436,888,957
------------
OTHER ASSETS AND LIABILITIES 1.4% 6,369,485
------------
NET ASSETS 100.0% $443,258,442
------------
Notes to Schedule of Investments
* Denotes non-income producing security
+ Affiliated issuer (see Note G).
(1) 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 and B to the Financial Statements.
(2) Security valued at fair value using methods determined in good faith by or
at the direction of the Board of Directors.
(3) Warrants issues by Citigroup Global Markets Holdings.
(4) Warrants issued by Credit Lyonnais (CLSA)
(5) This investment is listed on the Singapore Stock Exchange; however, it is
still managed by ADCM.
See notes to financial statements and notes to schedule of investments.
14
THE CHINA FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2006 (UNAUDITED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ASSETS
Investments in listed investments, at value (cost
$267,548,242) (Note A)................................. $420,431,219
Investments in direct investments, at value (cost
$3,602,160) (Notes A and B)............................ 3,203,396
Investments in affiliated investments, at value (cost
$7,299,883) (Note A, B, and G)......................... 13,254,342
Cash...................................................... 13,176,468
Foreign currency, at value (cost $4,058,050).............. 4,059,836
Receivable for investments sold........................... 2,701,956
Receivable for fund shares sold........................... 632
Dividends receivable...................................... 1,124,575
Prepaid expenses and other assets......................... 85,822
------------
TOTAL ASSETS................................................ $458,038,246
============
LIABILITIES
Payable for investments purchased......................... 14,317,662
Investment management fee payable (Note C)................ 175,418
Administration, custodian and transfer agent fees
payable................................................ 234,621
Directors fee payable (Note C)............................ 27,730
Accrued expenses and other liabilities.................... 24,373
------------
TOTAL LIABILITIES........................................... 14,779,804
------------
TOTAL NET ASSETS............................................ $443,258,442
============
COMPOSITION OF NET ASSETS:
Paid in capital (Note D).................................. 253,959,142
Undistributed net investment loss......................... (9,874)
Accumulated net realized gain on investments and foreign
currency transactions.................................. 30,868,404
Net unrealized appreciation on investments and foreign
currency transactions.................................. 158,440,770
------------
TOTAL NET ASSETS............................................ $443,258,442
============
NET ASSETS VALUE PER SHARE
($443,258,442/14,496,220 shares of common stock
outstanding)........................................... $30.58
============
See notes to financial statements.
15
THE CHINA FUND, INC.
STATEMENT OF OPERATIONS
FOR SIX MONTHS ENDED APRIL 30, 2006 (UNAUDITED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividend income -- listed investments (net of tax withheld
of $445,278)........................................... $ 2,298,051
Interest income -- listed investments..................... 6,961
------------
TOTAL INVESTMENT INCOME................................ 2,305,012
------------
EXPENSES
Investment Management fees (Note C)....................... 1,316,409
Custodian fees............................................ 391,484
Administration fees....................................... 219,197
Directors' fees and expenses (Note C)..................... 107,585
Stock dividend tax expense................................ 352
Legal fees................................................ 65,558
Printing and postage...................................... 59,184
Shareholder service fees.................................. 19,093
Insurance................................................. 30,448
Audit and tax service fees................................ 24,183
Stock exchange listing fee................................ 12,297
Transfer agent fees....................................... 12,313
Miscellaneous expenses.................................... 998
------------
TOTAL EXPENSES......................................... 2,259,101
------------
NET INVESTMENT INCOME....................................... 45,911
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
AND FOREIGN CURRENCY
Net realized gain on listed investment and foreign
currency transactions.................................. 31,991,888
Net change in unrealized appreciation on listed
investments and foreign currency transactions.......... 108,872,632
Net change in unrealized appreciation on direct
investments............................................ 1,484,301
------------
110,356,933
------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS..................................... 142,348,821
------------
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $142,394,732
============
See notes to financial statements.
16
THE CHINA FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
APRIL 30, 2006 OCTOBER 31, 2005
---------------- ----------------
(UNAUDITED)
INCREASE IN NET ASSETS FROM OPERATIONS
Net investment income..................................... $ 45,911 $ 2,945,109
Net realized gain on investments and foreign currency
transactions........................................... 31,991,888 32,018,415
Net increase (decrease) in unrealized appreciation on
investments and foreign currency translations.......... 110,356,933 (41,317,713)
------------ ------------
Net increase (decrease) in net assets from operations..... 142,394,732 (6,354,189)
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income..................................... (3,124,848) (1,979,079)
Capital gains............................................. (33,017,522) (34,014,358)
------------ ------------
Total dividends and distributions to shareholders......... (36,142,370) (35,993,437)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Fund Shares sold.......................................... -- 110,307,729
Reinvestment of Dividends and Distributions
(56,374 and 8,740 shares, respectively)................ 2,510,506 1,649,496
------------ ------------
Net increase in net assets from capital share
transactions........................................... 2,510,506 111,957,225
NET INCREASE IN NET ASSETS.................................. 108,762,868 69,609,599
------------ ------------
NET ASSETS:
Beginning of year......................................... 334,495,574 264,885,975
------------ ------------
End of period............................................. $443,258,442 $334,495,574
============ ============
Undistributed net investment income (loss), end of period... $ (9,874) $ 3,069,063
============ ============
See notes to financial statements.
17
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, YEAR ENDED OCTOBER 31,
---------------- ----------------------------------------------------
2006 2005 2004 2003 2002 2001
---------------- -------- -------- -------- -------- --------
(UNAUDITED)
PER SHARE OPERATION PERFORMANCE
Net asset value, beginning of
year.......................... $ 23.25 $ 26.27 $ 26.93 $ 14.92 $ 13.19 $ 12.37
Net investment income........... 0.00 0.21 0.21 0.06 0.11 0.14
Net realized and unrealized gain
on investments and foreign
currency transactions......... 9.84 0.34 0.91 12.16 1.75 0.68
-------- -------- -------- -------- -------- --------
Total income from investment
operations.................... 9.84 0.55 1.12 12.22 1.86 0.82
-------- -------- -------- -------- -------- --------
Less dividends and
distributions:
Dividend from net investment
income........................ (0.22) (0.20) (0.07) (0.06) (0.13) 0.00
Distributions from net realized
capital gains................. (2.29) (3.37) (1.71) (0.15) 0.00 0.00
-------- -------- -------- -------- -------- --------
Total dividends and
distributions................. (2.51) (3.57) (1.78) (0.21) (0.13) 0.00
-------- -------- -------- -------- -------- --------
Net asset value, end of year.... $ 30.58 $ 23.25 $ 26.27 $ 26.93 $ 14.92 $ 13.19
======== ======== ======== ======== ======== ========
Per share market price, end of
year.......................... $ 33.40 $ 24.55 $ 29.15 $ 34.74 $ 12.61 $ 10.74
======== ======== ======== ======== ======== ========
TOTAL INVESTMEST RETURN
(BASED ON MARKET PRICE)....... 50.74%(2) (5.50)% (12.16)% 179.41% 18.63% 20.13%
======== ======== ======== ======== ======== ========
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of year
(000's)....................... $443,258 $334,496 $264,886 $271,278 $150,319 $132,912
Ratio of expenses to average net
assets........................ 1.22%(1) 1.44% 1.41% 1.76% 1.97% 2.39%
Ratio of expenses to average net
assets, excluding stock
dividend tax expense.......... 1.22%(1) 1.38% 1.34% 1.68% 1.85% 2.31%
Ratio of net investment income
to average net assets......... 0.02%(1) 1.04% 0.78% 0.32% 0.72% 1.09%
Portfolio turnover rate......... 28% 26% 40% 55% 68% 115%
(1) Annualized.
(2) Not Annualized.
See notes to financial statements.
18
THE CHINA FUND, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 2006 (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, 2006 relate to the valuation of the Fund's Direct Investments, as
further discussed below and in Note B.
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. The Direct Investment's original cost is considered to be fair value
unless the Board of Directors, based on such advice, concludes there has been a
material change of a long-term nature and sufficient reliable information is
available to revalue these investments.
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.
19
NOTES TO FINANCIAL STATEMENTS (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.
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 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 $3,124,848 from Ordinary Income and $33,017,522
from Long-Term Capital Gains during the six months ended April 30, 2006. For the
year ended October 31, 2005 the Fund made distributions of $3,061,875 from
Ordinary Income and $32,931,562 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.
20
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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 -- VALUATION OF DIRECT INVESTMENTS
At April 30, 2006, Direct Investments amounting to $14,977,048 (3.38% of net
assets) have been valued at fair value as determined by the Board of Directors
in the absence of readily ascertainable market values. The procedures applied by
the Board of Directors in arriving at its estimate of value of securities
without readily available market values comply with the Fund's policies for
valuing Direct Investments at original cost unless the Board of Directors, based
on advice from the Direct Investment Manager, concludes that there has been a
material change of a long-term nature and sufficient reliable information is
available to revalue these investments. Determination of fair values involves
subjective judgment and, because of the inherent uncertainty of valuation, the
Board of Directors' estimated values may differ significantly from the values
that would have been used had a ready market for the securities existed, and the
differences could be material.
NOTE C -- 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.
Asian Direct Capital Management ("ADCM") is the 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
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 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.
NOTE D -- 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, 2006, the Fund did not participate
in this program.
21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTE E -- INVESTMENT TRANSACTIONS
For the six months ended April 30, 2006, the Fund's cost of purchases and
proceeds from sales of investment securities, other than short-term securities,
were $103,409,424 and $100,095,928, respectively. At April 30, 2006, the cost of
investments for federal income tax purposes was $278,450,285. Gross unrealized
appreciation of investments was $168,927,142, while gross unrealized
depreciation of investments was $10,488,470, resulting in net unrealized
appreciation of investments of $158,438,672.
NOTE F -- 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, auditing and financial reporting
standards, practices and disclosure requirements and less government supervision
and regulation.
NOTE G -- 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 2005 AND ADDITIONS AND REDUCTIONS 2006 2006 AFFILIATES
-------------- ----------- ------------- -------------- ----------- ---------- --------------
Captive Finance,
Ltd. ................. 2,000,000 $ -- $ -- 2,000,000 $3,045,000 $ --
CDW Holdings Ltd........ 60,000,000 -- -- 60,000,000 8,728,653 --
Beiren Printing
Machinery Holdings
Ltd. ................. 7,000,000 -- -- 7,000,000 1,480,689 --
Nanjing Dahe Outdoor
Media Co., Ltd. ...... 37,500,000 -- (37,500,000) -- -- --
* Affiliated issuers, as defined in the 1940 Act, include issuers in which the
Fund held 5% or more of the outstanding voting securities.
NOTE H -- 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
$1,339,770, amounted to $111,647,500. At October 31, 2005, 100,000,000 shares of
$.01 par value common stock were authorized.
22
THE CHINA FUND, INC.
OTHER INFORMATION (UNAUDITED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
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, 2005.
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
Commission's website at http://www.sec.gov. Form N-Q has been filed as of March
30, 2006 for the third quarter of this fiscal year and is available on the
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.
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. (formerly, Equiserve 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
------------------- --------------- ----------------------------------------------------- --------
Alan Tremain (69).............. Chairman of the Chairman of the Board of the Fund; Chairman, Hotels 1992
58 Avenue de la Reale Board and of Distinction Ventures, Inc. (1989-2005); Chairman,
Port la Galere Director Hotels of Distinction (International), Inc.
Theoule-sur-Mer (1974-present).
06590 France
Michael F. Holland (61)........ Director Chairman, Holland & Company L.L.C. (1995-present); 1992
375 Park Avenue Director, The Holland Balanced Fund, Inc. and Reaves
New York, New York 10152 Utility Income Fund; Trustee, State Street Master
Funds and State Street Institutional Investment
Trust.
James J. Lightburn (62)........ Director Attorney, Nomos, (2004-present); Attorney, member of 1992
13, Rue Alphonse de Neuville Hughes Hubbard & Reed (1993-2004).
75017 Paris, France
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); Executive Vice President, Business
Development, PlanetPortal.com, Inc. (Sept. 1999-May
2001); Director, The Taiwan Fund, Inc.
(1986-present).
Nigel S. Tulloch (60).......... Director Chief Executive, HSBC Asset Management Bahamas 1992
7, Circe Circle Limited (1986-1992); Director, The HSBC China Fund
Dalkeith Limited.
WA6009
Australia
Gary L. French (53)............ President Senior Vice President, State Street Bank and Trust
225 Franklin Street Company (2002-present); Managing Director, Deutsche
Boston, MA 02110 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 (39)*........... Treasurer Vice President, State Street Bank and Trust Company.
225 Franklin Street
Boston, MA 02110
Mary Moran Zeven (44).......... Secretary Senior Vice President and Senior Counsel, State
225 Franklin Street Street Bank and Trust Company.
Boston, MA 02110
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
P.O. Box 5049
Boston, MA 02206-5049
1-888-CHN-CALL (246-2255)
DIRECTORS AND OFFICERS
Alan Tremain, O.B.E., Director and Chairman of the Board
Michael F. Holland, Director
James J. Lightburn, Director
Joe O. Rogers, Director
Nigel S. Tulloch, Director
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 this filing.
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.
Not applicable.
Required disclosure beginning with fiscal year ending after 12/31/05.
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
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.
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: June 28, 2006
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: June 28, 2006
By: /s/ William C. Cox
---------------------------------
William C. Cox
Treasurer of The China Fund, Inc.
Date: June 23, 2006