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: October 31, 2007
ITEM 1. REPORT TO STOCKHOLDERS.
THE CHINA FUND, INC.
ANNUAL REPORT
OCTOBER 31, 2007
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 14
Notes to Financial Statements 19
Report of Independent
Registered
Public Accounting Firm 25
Other Information 26
Dividends and Distributions;
Dividend Reinvestment
and Cash Purchase Plan 33
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 (10/31/07) US$881.9 MILLION
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NET ASSET VALUE PER SHARE (10/31/07) $60.50
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MARKET PRICE PER SHARE (10/31/07) $51.67
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TOTAL RETURN(1)
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PERFORMANCE AS OF
10/31/07: NET ASSET VALUE MARKET PRICE
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1-Year 116.48% 90.97%
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3-Year Cumulative 221.68% 147.59%
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3-Year Annualized 47.62% 35.28%
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5-Year Cumulative 501.33% 507.64%
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5-Year Annualized 43.16% 43.46%
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10-Year Cumulative 470.09% 520.76%
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10-Year Annualized 19.01% 20.03%
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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 OCTOBER 31, 2007 (UNAUDITED)
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TEN LARGEST LISTED EQUITY INVESTMENTS *
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1. Daqin Railway Co., Ltd. Access Product 3.47%
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2. China Oilfield Services, Ltd. 3.47%
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3. Synnex Technology International Corp. 3.36%
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4. Chaoda Modern Agriculture (Holdings), Ltd. 2.71%
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5. China Shenhua Energy Co., Ltd. 2.47%
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6. Far Eastern Department Stores, Ltd. 2.44%
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7. China Petroleum & Chemical Corp. 2.41%
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8. Uni-President Enterprises Corp. 2.30%
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Shanghai International Airport Co., Ltd Access
9. Product 2.21%
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10. Yuanta Financial Holdings Co., Ltd. 2.20%
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LARGEST DIRECT INVESTMENTS *
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1. Highlight Tech Corp. 0.68%
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2. Wuxi PAIHO 0.42%
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3. Sino Twinwood Pte Ltd. 0.35%
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* Percentages based on net assets at October 31, 2007.
2
INDUSTRY ALLOCATION (UNAUDITED)
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(Pie Chart)
Industrials 22.70
Consumer
Discretionary 16.40
Financials 13.10
Energy 13.00
Health Care 8.70
Information
Technology 6.60
Consumer Staples 6.60
Materials 6.30
Utilities 2.60
Others 4.00
Fund holdings are subject to change and percentages shown above are based on
total net assets as of October 31, 2007. A complete list holdings as of October
31, 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 12-months ending October 31, 2007 was a highly
successful period for The China Fund, Inc. Over the year, the Fund achieved a
total return of over 116% with net assets increasing from US$455 million to
US$882 million after the payment in January 2006 of a cash dividend of US$58
million or US$4.01 per share.
It was a strong, if occasionally volatile, year for China's equity markets,
which shrugged off the global credit crunch afflicting other global equity
markets. The portfolio's performance was due to its focus on domestically-
listed, entrepreneurial companies. It benefited from both the strength of
markets in mainland China, and from the appreciation of the renminbi relative to
the US dollar.
Optimism about the pace of Chinese growth remains, although clouds are now
gathering. In August, inflation jumped to a 10-year high. While this was largely
due to food prices, there is a risk that this might develop into more broadly
based inflation. A slowdown in US growth ahead of the American presidential
election may produce an increase in protectionist sentiment and an acceleration
in renminbi appreciation.
In such an environment, the portfolio's concentration on domestically focused
companies should ensure its resilience. As the valuations of many large-cap
stocks now appear stretched, the managers believe that the portfolio is well
positioned in areas of value - including Taiwan, which remains the region's
laggard.
During the course of the year the Fund's investment manager decided to reduce
exposure in the Chinese mainland markets and to redeploy the proceeds in Taiwan,
which the manager feels offers better value. The repositioning of the Fund's
investments resulted in exceptionally large net realized gains for the year
which the Fund is required to distribute to its shareholders. Accordingly, at
its meeting on December 6(th), the Board of Directors declared a distribution of
US$12.12 per share, payable on January 25, 2008.
The extraordinary size of the distribution led the Board to break with tradition
by making the distribution payable in the Fund's common stock, unless individual
shareholders request cash in lieu of stock. Requests for cash distributions may
not, however, exceed 30% of the total amount to be distributed by the Fund.
Investors can learn more about this distribution in the 'Company Announcements'
area of the Fund's website. The arguments in favour of a distribution in common
stock are keeping expense ratios low, encouraging reinvestment in the Fund,
improving liquidity and allowing the investment manager a greater degree of
flexibility.
Martin Currie assumed management of the unlisted portfolio from the previous
manager, Asian Direct Capital Management, in June. This will bring a consistency
of investment approach to bear across the Fund' s investments. Martin Currie
will invest only in unlisted Chinese companies when they are cheaper than their
listed counterparts or where similar companies cannot be found in the listed
sector.
For monthly updates detailing your fund's investments, please consult
www.chinafundinc.com.
Yours truly,
J. Lightburn
Chairman
4
THE CHINA FUND, INC.
INVESTMENT MANAGERS' STATEMENTS (UNAUDITED)
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REVIEW OF LISTED AND DIRECT INVESTMENTS
Over the past 12 months, your fund has outperformed the MSCI Golden Dragon index
by 17.3% in relative terms, enjoying total return of 116.48%.
This was a strong year for most Chinese markets, though there was some
significant volatility along the way. February's dramatic one-day correction in
the A-share market sparked a global sell-off. Ironically, the reaction in most
of the world's equity markets far outweighed what proved to be merely a blip in
the long upward march of China's domestic stock market. As the government's
tightening measures finally had some impact, the A-share market saw further
volatility in the early summer. But in August, the sub-prime-related fears that
caused other markets to convulse left the A-share market untouched, and were
soon shrugged off by the H-share and Hang Seng indices.
Towards the end of the period, the momentum of the A-share market lessened
somewhat, while Hong Kong's markets surged ahead on hopes of massive inflows
from the mainland. These hopes arose as Beijing announced a pilot program that
would enable Chinese citizens to invest directly in Hong Kong. In September, the
launch -- and over-subscription -- of the first QDII funds also helped to
bolster the Hong Kong markets. Meanwhile, the Fed's rate cuts boosted Hong Kong
property stocks.
After years of stagnation, the Taiwanese market sprang to life in the early
summer. But this revival proved short-lived, and Taiwan was harder hit by sub-
prime worries than were other Chinese markets (despite the disclosed sub-prime
exposure of Taiwanese financial institutions being far less significant than
that of the soaring Hong Kong-listed Chinese banks). Nevertheless, there have
been some encouraging political developments in Taiwan, not least the acquittal
of Kuomintang presidential candidate Ma Jing-yeoh on corruption charges. With
presidential and legislative elections scheduled for early next year, we are
optimistic that we may see moves towards closer links with the mainland; moves
that could help to realize the dormant value in the island's stocks.
Among the major contributors to the portfolio's outperformance were the Fund's
A-share holdings, through access products, in CHINA MERCHANTS BANK CO., LTD. ,
SHANGHAI ZHENHUA PORT MACHINERY CO., LTD. , XINJIANG TEBIAN ELECTRIC APPARATUS
STOCK, CO., LTD. (where the Fund realized a gain), and the YOUNGOR GROUP CO.,
LTD. CHINA OILFIELD SERVICES, LTD. was the pick of the Fund's H-share holdings,
while in Taiwan we judiciously avoided index heavyweight Taiwan Semiconductor.
The principal negatives came from the Hong Kong and H-share markets,
particularly late in the period, when the Fund suffered from not holding major
index components such as CHINA LIFE, CHINA MOBILE, PING AN INSURANCE and HONG
KONG EXCHANGES & CLEARING.
In June, Martin Currie assumed control of the Fund's direct investment
portfolio. Besides the established holding in SINO-TWINWOOD PTE. LTD. (soon to
be renamed HAND), which manufactures ERP (enterprise resource planning)
software, we have invested in WUXI PAIHO and HIGHLIGHT TECH CORP. Both of these
are spin-offs of the Chinese operations of Taiwan-listed companies: WUXI PAIHO
makes Velcro and specialist accessories for sportswear manufacturers; HIGHLIGHT
TECH CORP. makes vacuum equipment. Both companies plan to list on the A-share
market within three years.
5
THE CHINA FUND, INC.
INVESTMENT MANAGERS' STATEMENTS (CONTINUED) (UNAUDITED)
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REVIEW OF LISTED AND DIRECT INVESTMENTS (CONTINUED)
As most Chinese markets have surged to remarkable levels during the past year,
the portfolio remains focused on the few areas in which real value is still to
be found: principally Taiwan and small-cap stocks in the A-share market. Over
the period, we reduced the Fund's weighting to Hong Kong significantly. We also
reduced the Fund's A-share exposure, adding to Taiwan. Although we missed most
of the autumn rally in H-shares, we believe that the portfolio is well
positioned; the valuations of the larger H-share and A-share stocks look
increasingly stretched.
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 Director and product manager for the Fund's
portfolio. Fluent in Mandarin and Japanese, Chris has worked in the Far East
since 1983. He initially worked in Beijing, Shanghai and Australia for Wogen
Resources. He moved to Tokyo in 1987 to work as an analyst for Warburg
Securities, and established their Taiwan office in 1990. Chris joined Martin
Currie in 1994, moving to work in Taipei in 2000 and Shanghai from 2002. In
2006, Chris, Shifeng Ke and Martin Currie established MC China Limited -- a
joint venture dedicated to running our range of specialist China strategies.
With Shifeng Ke, he co-manages the China Fund Inc, Martin Currie's China A-Share
products, Martin Currie's China Hedge fund and the micro-cap China Development
Capital Partnership. He is the lead manager of the Taiwan Opportunities Fund.
7
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS
OCTOBER 31, 2007
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NAME OF ISSUER AND TITLE OF ISSUE SHARES VALUE (NOTE A)
--------------------------------- ------ --------------
COMMON STOCK AND OTHER EQUITY INTERESTS
CHINA
FINANCIALS -- (1.0%)
Shanghai Lujiazui Finance & Trade Zone Development
Co., Ltd. ...................................... 3,530,706 $ 8,752,620
-----------
INDUSTRIALS -- (0.8%)
China International Marine Containers (Group) Co.,
Ltd. ........................................... 3,450,000 7,117,486
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TOTAL CHINA -- (Cost $10,507,450) 1.8% 15,870,106
--- -----------
HONG KONG
CONSUMER DISCRETIONARY -- (7.2%)
China Dongxiang Group Co.*........................ 894,000 683,992
China Travel International Investment Hong Kong,
Ltd.(1)......................................... 18,148,000 14,353,186
Huabao International Holdings, Ltd. .............. 12,790,000 12,112,274
Parkson Retail Group, Ltd.(1)..................... 1,111,500 12,626,934
Ports Design, Ltd. ............................... 2,678,500 10,021,868
Shangri-La Asia, Ltd.(1).......................... 2,975,555 9,424,939
Yorkey Optical International Cayman, Ltd.#........ 15,838,000 4,475,108
-----------
63,698,301
-----------
CONSUMER STAPLES -- (2.7%)
Chaoda Modern Agriculture (Holdings), Ltd.(1)#.... 26,407,900 23,884,214
-----------
ENERGY -- (0.5%)
China Rare Earth Holdings, Ltd. .................. 15,254,000 4,388,819
-----------
FINANCIALS -- (1.6%)
Tianjin Development Holdings, Ltd. ............... 8,440,000 14,134,362
-----------
HEALTH CARE -- (3.7%)
China Shineway Pharmaceutical Group, Ltd.#........ 11,184,000 8,181,620
Golden Meditech Co., Ltd.(1) #.................... 35,040,000 16,049,131
Natural Beauty Bio-Technology, Ltd.#.............. 32,780,000 8,162,540
-----------
32,393,291
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INDUSTRIALS -- (0.9%)
TPV Technology, Ltd. ............................. 12,728,000 8,522,884
-----------
INFORMATION TECHNOLOGY -- (0.4%)
Alibaba.com, Ltd.*................................ 159,500 280,617
Arcontech Corp.(2)*............................... 18,386,000 --
Chinasoft International, Ltd.#.................... 15,550,000 3,109,719
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3,390,336
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See notes to financial statements and notes to schedule of investments.
8
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2007
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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)
MATERIALS -- (0.5%)
Fountain Set (Holdings), Ltd.#................... 12,446,000 $ 3,693,318
Ocean Grand Chemicals Holdings, Ltd.(2)*#........ 17,379,000 695,097
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4,388,415
------------
UTILITIES -- (2.0%)
Xinao Gas Holdings, Ltd.(1)#..................... 9,286,000 17,420,161
------------
TOTAL HONG KONG -- (Cost $68,165,140) 19.5% 172,220,783
---- ------------
HONG KONG -- "H" SHARES
ENERGY -- (8.4%)
China Oilfield Services, Ltd.(1)................. 12,650,000 30,585,754
China Petroleum & Chemical Corp.(1).............. 14,120,000 21,241,848
China Shenhua Energy Co., Ltd.(1)................ 3,435,000 21,804,740
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73,632,342
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INDUSTRIALS -- (3.2%)
BYD Co., Ltd.(1)................................. 1,368,500 12,871,566
Zhejiang Expressway Co., Ltd.(1)................. 10,304,000 14,730,066
------------
27,601,632
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MATERIALS -- (2.0%)
Zijin Mining Group Co., Ltd.(1).................. 10,408,000 17,859,858
------------
UTILITIES -- (0.6%)
Anhui Expressway Co., Ltd.(1).................... 6,780,000 5,537,229
------------
TOTAL HONG KONG -- "H" SHARES -- (Cost
$39,462,127) 14.2% 124,631,061
---- ------------
TOTAL HONG KONG (INCLUDING "H"
SHARES) -- (Cost $107,627,267) 33.7% 296,851,844
---- ------------
SINGAPORE
CONSUMER DISCRETIONARY -- (1.0%)
China Hongxing Sports, Ltd.(1)................... 10,033,000 8,865,277
------------
CONSUMER STAPLES -- (0.8%)
Hsu Fu Chi International, Ltd.*#................. 8,409,000 6,965,898
------------
INDUSTRIALS -- (1.9%)
Yangzijiang Shipbuilding Holdings, Ltd.(1)*...... 9,546,000 16,738,120
------------
See notes to financial statements and notes to schedule of investments.
9
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2007
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--------------------------------------------------------------------------------
NAME OF ISSUER AND TITLE OF ISSUE SHARES VALUE (NOTE A)
--------------------------------- ------ --------------
COMMON STOCK AND OTHER EQUITY INTERESTS (CONTINUED)
SINGAPORE (CONTINUED)
INFORMATION TECHNOLOGY -- (0.6%)
CDW Holding, Ltd.#+............................... 60,000,000 $ 4,970,316
-----------
TOTAL SINGAPORE -- (Cost $25,141,695) 4.3% 37,539,611
--- -----------
TAIWAN
CONSUMER DISCRETIONARY -- (7.9%)
FamilyMart Co., Ltd.#............................. 3,557,652 6,091,306
Far Eastern Department Stores, Ltd. .............. 17,630,080 21,483,516
Merry Electronics Co., Ltd. ...................... 3,584,340 12,937,460
Synnex Technology International Corp. ............ 8,905,050 29,669,764
-----------
70,182,046
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CONSUMER STAPLES -- (3.1%)
Lien Hwa Industrial Corp. ........................ 11,161,855 7,093,451
Uni-President Enterprises Corp. .................. 14,137,220 20,258,333
-----------
27,351,784
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ENERGY -- (1.0%)
Formosa Petrochemical Corp. ...................... 2,658,000 8,609,903
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FINANCIALS -- (7.0%)
Cathay Financial Holding Co., Ltd. ............... 5,708,370 14,739,799
China Development Financial Holding Corp. ........ 36,871,940 15,299,324
Fubon Financial Holdings Co., Ltd. ............... 12,603,000 12,188,926
Yuanta Financial Holdings Co., Ltd.*.............. 26,413,545 19,393,564
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61,621,613
-----------
INDUSTRIALS -- (2.2%)
China Synthetic Rubber Corp. ..................... 5,294,000 7,398,371
Efun Technology Co., Ltd.#........................ 997,100 5,536,880
Wah Lee Industrial Corp. ......................... 2,838,856 6,384,471
-----------
19,319,722
-----------
INFORMATION TECHNOLOGY -- (5.3%)
Data Systems Consulting Co., Ltd.#................ 10,146,718 13,366,184
Powertech Technology Inc. ........................ 3,581,100 14,472,439
Taiwan Secom #.................................... 4,738,000 7,249,878
Tripod Technology Corp. .......................... 2,974,083 12,019,277
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47,107,778
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See notes to financial statements and notes to schedule of investments.
10
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2007
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--------------------------------------------------------------------------------
NAME OF ISSUER AND TITLE OF ISSUE SHARES VALUE (NOTE A)
--------------------------------- ------ --------------
COMMON STOCK AND OTHER EQUITY INTERESTS (CONTINUED)
TAIWAN (CONTINUED)
MATERIALS -- (1.9%)
China Metal Products Co., Ltd.#.................. 8,392,675 $ 11,599,316
Yieh United Steel Corp.#......................... 11,379,600 4,802,497
------------
16,401,813
------------
TOTAL TAIWAN -- (Cost $152,882,680) 28.4% 250,594,659
---- ------------
UNITED KINGDOM
HEALTH CARE -- (1.3%)
China Medical System Holdings, Ltd.*#............ 3,623,188 11,403,401
------------
TOTAL UNITED KINGDOM -- (Cost $9,940,990) 1.3% 11,403,401
---- ------------
UNITED STATES
CONSUMER DISCRETIONARY -- (0.3%)
Chindex International, Inc.(1)*.................. 69,987 2,383,757
------------
ENERGY -- (1.7%)
Far East Energy Corp.*#.......................... 11,111,111 15,222,222
------------
HEALTH CARE -- (3.7%)
China Medical Technologies Inc., ADR(1).......... 271,500 12,665,475
Mindray Medical International, Ltd., ADR(1)...... 367,000 14,591,920
WuXi PharmaTech Cayman Inc., ADR(1)*............. 145,600 5,604,144
------------
32,861,539
------------
TOTAL UNITED STATES -- (Cost $28,585,394) 5.7% 50,467,518
---- ------------
TOTAL COMMON STOCK AND OTHER EQUITY
INTERESTS -- (Cost $334,685,476) 75.2% 662,727,139
---- ------------
EQUITY LINKED SECURITIES
ENERGY -- (1.4%)
China Yangtze Power Co., Ltd. Access Product
(expiration 1/20/10) 144A,(2)(3)............... 4,169,077 11,994,434
------------
FINANCIALS -- (3.5%)
China Merchants Bank Co., Ltd. Access Product
(expiration 10/26/10) 144A,(2)(3).............. 3,033,555 18,477,384
See notes to financial statements and notes to schedule of investments.
11
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2007
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--------------------------------------------------------------------------------
NAME OF ISSUER AND TITLE OF ISSUE SHARES VALUE (NOTE A)
--------------------------------- ------ --------------
EQUITY LINKED SECURITIES (CONTINUED)
FINANCIALS (CONTINUED)
Finance Street Holding Co., Ltd. Access Product
(expiration 2/13/12) 144A,(2)(3)................ 2,736,453 $ 12,790,181
------------
31,267,565
------------
INDUSTRIALS -- (12.6%)
Baoding Tianwei Baobian Electric Co., Ltd. Access
Product
(expiration 1/20/10) 144A,(2)(4)................ 1,947,486 13,742,203
Daqin Railway Co., Ltd. Access Product (expiration
11/02/11) 144A,(2)(3)........................... 9,710,000 30,615,630
Shanghai International Airport Co., Ltd. Access
Product
(expiration 1/20/10) 144A,(2)(4)................ 4,066,100 19,488,817
Shanghai International Port (Group) Co., Ltd.
Access Product (expiration 8/28/12)
144A,(2)(3)..................................... 5,499,923 7,166,400
Shanghai Tunnel Engineering Co., Ltd. Access
Product
(expiration 1/17/12) 144A,(2)(4)................ 3,441,747 6,749,266
Shanghai Zhenhua Port Machinery Co., Ltd. Access
Product
(expiration 10/26/10) 144A,(2)(3)............... 4,462,752 16,677,304
Xinjiang Tebian Electric Apparatus Stock Co., Ltd.
Access Product (expiration 10/26/10)
144A,(2)(3)..................................... 4,741,284 16,575,529
------------
111,015,149
------------
MATERIALS -- (1.9%)
Qinghai Salt Lake Potash Co., Ltd. Access Product
(expiration 10/26/10) 144A,(2)(3)............... 1,725,209 16,927,751
------------
TOTAL EQUITY LINKED SECURITIES --
(Cost $49,967,413) 19.4% 171,204,899
---- ------------
DIRECT INVESTMENTS
INDUSTRIALS -- (1.1%)
Highlight Tech Corp., (acquired 9/11/07)(2)(5)*#.. 3,366,893 6,000,000
Wuxi PAIHO, (acquired 9/17/07)(2)(5)*#............ 876,190 3,680,000
------------
9,680,000
------------
INFORMATION TECHNOLOGY -- (0.3%)
Sino Twinwood Pte Ltd., (acquired
5/2/07)(2)(5)*#................................. 500,000 3,050,000
teco Optronics Corp., (acquired 4/26/04)(2)(5)*#.. 1,861,710 --
------------
3,050,000
------------
TOTAL DIRECT INVESTMENTS -- (Cost
$13,411,594) 1.4% 12,730,000
---- ------------
See notes to financial statements and notes to schedule of investments.
12
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2007
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--------------------------------------------------------------------------------
NAME OF ISSUER AND TITLE OF ISSUE SHARES VALUE (NOTE A)
--------------------------------- ------ --------------
COLLATERAL FOR SECURITIES ON LOAN -- (17.0%)
SHORT TERM -- (17.0%)
Securities Lending Quality Trust............... 150,078,440 $ 150,078,440
-------------
TOTAL COLLATERAL FOR SECURITIES ON
LOAN -- (Cost $150,078,440) 17.0% 150,078,440
----- -------------
TOTAL INVESTMENTS -- (Cost $548,142,923) 113.0% 996,740,478
----- -------------
OTHER ASSETS AND LIABILITIES (13.0%) (114,884,731)
----- -------------
NET ASSETS 100.0% $ 881,855,747
===== =============
Notes to Schedule of Investments
* Denotes non-income producing security
# Illiquid Security
+ Affiliated issuer (see Note F).
(1) A portion or all of the security was held on loan. As of October 31, 2007,
the market value of the securities loaned was $142,545,523.
(2) Security valued at fair value using methods determined in good faith by or
at the direction of the Board of Directors.
(3) Equity linked securities issued by Credit Lyonnais (CLSA).
(4) Equity linked securities issued by Citigroup Global Markets Holdings.
(5) 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 valued in good faith by the Board of Directors at
fair market value. The Fund does not have a right to demand that such
securities be registered.
ADR American Depositary Receipt
144A Securities restricted for resale to Qualified Institutional Buyers.
See notes to financial statements and notes to schedule of investments.
13
THE CHINA FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2007
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ASSETS
Investments in listed securities, at value (cost $382,888,861)
(Note A)...................................................... $ 828,961,722
Investments in direct securities, at value (cost $13,411,594)
(Note A)...................................................... 12,730,000
Investments in affiliated securities, at value (cost $1,764,028)
(Notes A & F)................................................. 4,970,316
Collateral for securities loaned................................. 150,078,440
Cash............................................................. 16,241,621
Foreign currency, at value (cost $16,586,479).................... 16,705,843
Receivable for investments sold.................................. 3,805,960
Receivable for securities lending income......................... 109,920
Dividends receivable............................................. 542,780
Prepaid expenses................................................. 1,644
Miscellaneous assets............................................. 153,257
--------------
TOTAL ASSETS....................................................... 1,034,301,503
--------------
LIABILITIES
Payable for investments purchased................................ 280,617
Payable upon return of collateral for securities loaned.......... 150,078,440
Investment management fee payable (Note B)....................... 829,472
Administration and custodian fees payable (Note B)............... 251,513
Directors fee payable (Note B)................................... 107,407
Contingent liability (Note F).................................... 717,795
Accrued expenses and other liabilities........................... 180,512
--------------
TOTAL LIABILITIES.................................................. 152,445,756
--------------
TOTAL NET ASSETS................................................... $ 881,855,747
==============
COMPOSITION OF NET ASSETS:
Paid in capital (Note C)......................................... 256,548,324
Undistributed net investment income.............................. 4,022,954
Accumulated net realized gain on investments and foreign currency
transactions.................................................. 172,559,669
Net unrealized appreciation on investments and foreign currency
translation................................................... 448,724,800
--------------
TOTAL NET ASSETS................................................... $ 881,855,747
==============
NET ASSETS VALUE PER SHARE
($881,855,747/14,575,961 shares of common stock outstanding)..... $60.50
======
See notes to financial statements.
14
THE CHINA FUND, INC.
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 2007
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividend income -- (including dividends of $180,000 from non-
controlled affiliates, net of tax withheld of $1,040,773)...... $ 10,587,503
Interest income................................................... 57,087
Securities lending income......................................... 148,201
------------
TOTAL INVESTMENT INCOME........................................ 10,792,791
------------
EXPENSES
Investment Management fees (Note B)............................... 4,012,381
Custodian fees (Note B)........................................... 866,349
Administration fees (Note B)...................................... 503,438
Directors' fees and expenses (Note B)............................. 351,920
Stock dividend tax expense........................................ 219,110
Legal fees........................................................ 180,163
Printing and postage.............................................. 131,276
Shareholder service fees.......................................... 225,361
Insurance......................................................... 52,959
Audit and tax service fees........................................ 68,660
Stock exchange listing fee........................................ 26,441
Transfer agent fees............................................... 19,280
Miscellaneous expenses............................................ 17,053
------------
TOTAL EXPENSES................................................. 6,674,391
------------
NET INVESTMENT INCOME............................................... 4,118,400
------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY
Net realized gain on listed investment transactions............... 169,354,349
Net realized gain on direct investment transactions............... 3,415,158
Net realized loss on foreign currency transactions................ (71,668)
------------
172,697,839
------------
Net change in unrealized appreciation on listed investments and
foreign currency transactions.................................. 310,458,693
Net change in unrealized depreciation on direct investments....... (5,059,960)
------------
305,398,733
------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN CURRENCY
TRANSACTIONS...................................................... 478,096,572
------------
NET INCREASE IN NET ASSETS FROM OPERATIONS.......................... $482,214,972
============
See notes to financial statements.
15
THE CHINA FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED
OCTOBER 31, 2007 OCTOBER 31, 2006
---------------- ----------------
INCREASE IN NET ASSETS FROM OPERATIONS
Net investment income................................ $ 4,118,400 $ 4,395,225
Net realized gain on investments and foreign currency
transactions...................................... 172,697,839 54,704,912
Net increase in unrealized appreciation on
investments and foreign currency translations..... 305,398,733 95,242,230
------------ ------------
Net increase in net assets from operations........... 482,214,972 154,342,367
------------ ------------
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)................. 2,589,184 2,510,507
------------ ------------
Net increase in net assets from capital share
transactions...................................... 2,589,184 2,510,507
------------ ------------
NET INCREASE IN NET ASSETS............................. 426,649,669 120,710,504
NET ASSETS:
Beginning of year.................................... 455,206,078 334,495,574
------------ ------------
End of year.......................................... $881,855,747 $455,206,078
============ ============
Undistributed net investment income, end of period..... $ 4,022,954 $ 4,319,290
============ ============
See notes to financial statements.
16
THE CHINA FUND, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED OCTOBER 31, 2007
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH -
-----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase in net assets resulting from operations............. $ 482,214,972
Adjustments to reconcile net increase in net assets from
operations to net cash provided from operating activities:
Purchases of investment securities............................ (278,787,516)
Proceeds from investments sold................................ 339,644,527
Increase in collateral for securities loaned.................. (150,078,440)
Increase in dividends receivable.............................. (412,278)
Increase in receivable for securities lending income.......... (109,920)
Increase in receivable for investments sold................... 1,342,868
Increase in prepaid expenses and miscellaneous assets......... (105,290)
Increase in payable for investments purchased................. (1,746,722)
Increase in payable upon return of collateral for securities
loaned...................................................... 150,078,440
Increase in accrued expenses and other liabilities............ 750,915
Unrealized appreciation/depreciation on investments and
foreign currency............................................ (305,398,733)
Net realized gain/loss from investments and foreign currency.. (172,697,839)
-------------
Net cash provided from operating activities................. 64,694,984
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions paid....................................... (55,565,303)
-------------
Net cash used for financing activities...................... (55,565,303)
-------------
NET INCREASE IN CASH............................................... 9,129,681
CASH AT BEGINNING OF PERIOD........................................ 23,817,783
-------------
CASH AT END OF PERIOD.............................................. $ 32,947,464
=============
Noncash financing activities not included herein consist of:
Reinvestment of dividends and distributions.............. $ 2,589,184
Contingent liability..................................... $ 717,795
17
THE CHINA FUND, INC.
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OF COMMON STOCK OUTSTANDING FOR THE YEARS INDICATED
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31
----------------------------------------------------
2007 2006 2005 2004* 2003*
-------- -------- -------- -------- --------
PER SHARE OPERATION PERFORMANCE
Net asset value, beginning of year....... $ 31.40 $ 23.25 $ 26.27 $ 26.93 $ 14.92
-------- -------- -------- -------- --------
Net investment income.................... 0.28 0.30 0.21 0.21 0.06
Net realized and unrealized gain on
investments and foreign currency
transactions........................... 32.83 10.36 0.34 0.91 12.16
-------- -------- -------- -------- --------
Total income from investment operations.. 33.11 10.66 0.55 1.12 12.22
-------- -------- -------- -------- --------
Less dividends and distributions:
Dividend from net investment income.... (0.30) (0.22) (0.20) (0.07) (0.06)
Distributions from net realized capital
gains............................... (3.71) (2.29) (3.37) (1.71) (0.15)
-------- -------- -------- -------- --------
Total dividends and distributions........ (4.01) (2.51) (3.57) (1.78) (0.21)
-------- -------- -------- -------- --------
Net asset value, end of year............. $ 60.50 $ 31.40 $ 23.25 $ 26.27 $ 26.93
======== ======== ======== ======== ========
Per share market price, end of year...... $ 51.67 $ 30.40 $ 24.55 $ 29.15 $ 34.74
======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN (BASED ON MARKET
PRICE)................................. 90.97% 37.20% (5.50)% (12.16)% 179.41%
======== ======== ======== ======== ========
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of year (000's).......... $881,856 $455,206 $334,496 $264,886 $271,278
Ratio of expenses to average net assets.. 1.08% 1.26% 1.44% 1.41% 1.76%
Ratio of expenses to average net assets,
excluding stock dividend tax expense... 1.04% 1.23% 1.38% 1.34% 1.68%
Ratio of net investment income to average
net assets............................. 0.67% 1.09% 1.04% 0.78% 0.32%
Portfolio turnover rate.................. 46% 50% 26% 40% 55%
* Financial highlights were audited by a previous audit firm.
See notes to financial statements.
18
THE CHINA FUND, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2007
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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 twelve months
ended, October 31, 2007 relate to the contingent liability resulting from the
sale of Captive Finance in March 2007. A reserve of 10% of the net sale proceeds
was established to cover any potential liabilities from the representation and
warranties provided by the Fund in the transaction.
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. Open end investment
companies are valued at net asset value per share. 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.
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.
SECURITIES LENDING: The Fund may lend any of its securities held by State
Street Bank and Trust Company ("State Street") as custodian to certain qualified
brokers, except those securities which the Fund or the Investment Manager
specifically identifies as not being available. By lending its investment
securities, the Fund attempts to increase its net investment income through the
receipt of interest on the loan. Any gain or loss in the market price of the
securities loaned that might occur and any interest or dividends declared during
the term of the loan would accrue to the account of the Fund. Risks of delay in
recovery of the securities or even loss of rights in the collateral may occur
should the borrower of the securities fail financially. Risks may also arise to
the extent that the value of the collateral decreases below the value of the
securities loaned.
Upon entering into a securities lending transaction, the Fund receives cash or
other securities as collateral in an amount equal to or exceeding 100% of the
current market value of the loaned securities with respect to securities of the
19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
U.S. government or its agencies, 102% of the current market value of the loaned
securities with respect to U.S. securities and 105% of the current market value
of the loaned securities with respect to foreign securities. Any cash received
as collateral is generally invested by State Street, acting in its capacity as
securities lending agent (the "Agent"), in the Securities Lending Quality Trust.
A portion of the dividends received on the collateral is rebated to the borrower
of the securities and the remainder is split between the Agent and the Fund.
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.
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 in 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
20
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
purposes as, and share many of the same risks with, derivative instruments. In
addition, Access Products may be considered illiquid.
At October 31, 2007, the Fund held equity-linked Access Product warrants 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.
DIRECT INVESTMENTS: The Fund may invest up to 25% of the net proceeds from its
offerings of its outstanding Common Stock in direct investments. Direct
investments are generally restricted and do not have a readily available resale
market. The value of these securities at October 31, 2007 was $12,730,000 or
1.4% of the Fund's net asset value. The table below details the acquisition
date, cost, and value of the Fund's direct investments as determined by the
Board of Director's of the Fund. The Fund does not have the right to demand that
such securities be registered.
SECURITY ACQUISITION DATE COST MARKET
-------- ---------------- ----------- -----------
Highlight Tech. Corp............................ 09/11/2007 $ 6,000,000 $ 6,000,000
Wuxi PAIHO...................................... 09/17/2007 $ 3,680,000 $ 3,680,000
Sino Twinwood Pte. Ltd. ........................ 05/02/2007 $ 3,164,274 $ 3,050,000
teco Optronics Corp. ........................... 04/26/2004 $ 567,320 $ --
----------- -----------
$13,411,594 $12,730,000
=========== ===========
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
21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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 distributions of $18,566,759 from Ordinary Income and $39,587,728
from Long-Term Capital Gains during the year ended October 31, 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. As of October 31,
2007 the components of distributable earnings on a tax basis were $45,393,325
for undistributed ordinary income and $131,189,298 for undistributed capital
gains. At that date the Fund had $448,724,800 of net unrealized appreciation on
a tax basis. 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
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") was an investment manager for the
Fund's assets allocated to direct investments through June 2007. ADCM received 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 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 $15,000 respectively ($27,500
and $12,000 prior to September 20, 2007), plus $3,000 ($2,000 prior to September
20, 2007) for each Board of Directors' meeting or Audit Committee meeting
attended as well as $1,000 for each Valuation Committee teleconference. 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.
22
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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
0.13% of the Fund's average daily net assets up to $150 million, 0.11% 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 year ended October 31, 2007, the Fund did not participate in
this program. At October 31, 2007, 100,000,000 shares of $.01 par value common
stock were authorized.
NOTE D -- INVESTMENT TRANSACTIONS
For the year ended October 31, 2007, the Fund's cost of purchases and proceeds
from sales of investment securities, other than short-term securities, were
$278,673,242 and $339,340,675, respectively. At October 31, 2007, the cost of
investments for federal income tax purposes was $398,064,483. Gross unrealized
appreciation of investments was $457,410,133, while gross unrealized
depreciation of investments was $8,812,578, resulting in net unrealized
appreciation of investments of $448,597,555.
NOTE E -- INVESTMENTS IN CHINA
The Fund's investments in the People's Republic of 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 People's Republic of
China companies, particularly in the People's Republic of China; and (8) the
absence of uniform accounting, auditing and financial reporting standards,
practices and disclosure requirements and less government supervision and
regulation.
23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTE F -- INVESTMENTS IN NON-CONTROLLED AFFILIATES*:
DIVIDENDS
BALANCE OF GROSS GROSS BALANCE OF INCLUDED IN
SHARES HELD PURCHASES SALES SHARES HELD VALUE DIVIDEND INCOME
OCTOBER 31, AND AND OCTOBER 31, OCTOBER 31, NON-CONTROLLED
NAME OF ISSUER 2006 ADDITIONS REDUCTIONS 2007 2007 AFFILIATES
------------------------- ----------- --------- ---------- ----------- ----------- ---------------
Captive Finance,
Ltd.(1)................ 2,000,000 $-- $2,000,000 -- -- --
CDW Holdings Ltd......... 60,000,000 -- -- 60,000,000 $4,970,316 $180,000
* 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.
(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 -- 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 the
adoption of SFAS 157 will have on the Fund's financial statement disclosures.
24
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
To the Board of Directors and Shareholders
of The China Fund, Inc.
We have audited the accompanying statement of assets and liabilities of The
China Fund, Inc. (the "Fund"), including the schedule of investments, as of
October 31, 2007, and the related statement of operations and cash flows for the
year then ended, the statement of changes in net assets for each of the two
years in the period then ended and the financial highlights for each of the
three years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audit. The financial highlights for each of the two years in the
period ended October 31, 2004 were audited by other auditors whose report, dated
December 10, 2004, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of October 31, 2007, by correspondence with the custodian
and brokers; where replies were not received from brokers, we performed other
auditing procedures. We believe that our audit provides a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights present
fairly, in all material respects, the financial position of the Fund as of
October 31, 2007, the results of its operations and cash flows, the changes in
its net assets for each of the two years in the period then ended and the
financial highlights for each of the three years in the period then ended, in
conformity with accounting principles generally accepted in the United States of
America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
December 21, 2007
25
THE CHINA FUND, INC.
OTHER INFORMATION (UNAUDITED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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.
TAX INFORMATION
CAPITAL GAINS DISTRIBUTIONS: $39,587,728 has been designated as capital
gains dividends for the purpose of the dividends paid deduction, of which 100%
represents 15% rate gains.
FOREIGN TAXES CREDIT: The Fund designates $1,259,883 as foreign taxes paid
and $11,628,276 as foreign source income earned for regular Federal income tax
purposes.
QUALIFIED DIVIDEND INCOME: For the fiscal year ended October 31, 2007, the
Fund will designate up to the maximum amount allowable pursuant to the Internal
Revenue Code, as qualified dividend income eligible for reduced tax rates.
These lower rates range from 5% to 15% depending on an individual's tax bracket.
Complete information will be reported in conjunction with Form 1099-DIV.
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 need 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.
26
THE CHINA FUND, INC.
OTHER INFORMATION (CONTINUED) (UNAUDITED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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, 2007.
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 July 31, 2007 for the third 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.
27
BOARD DELIBERATIONS REGARDING APPROVAL OF
INVESTMENT MANAGEMENT AGREEMENTS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
GENERAL BACKGROUND
Martin Currie Inc. ("Martin Currie") acts as the Fund's investment manager, with
exclusive investment discretion over the Fund's assets pursuant to two
investment management and advisory agreements with the Fund: a "Listed
Management Agreement" and a "Direct Investment Agreement" (as defined below).
Martin Currie is a registered investment adviser under the U.S. Investment
Advisers Act of 1940, as amended (the "Advisers Act").
The Fund may invest up to 100% of the portion of the Fund's assets allocated for
investment in listed securities (the "Listed Assets") pursuant to the Listed
Management Agreement. The Fund pays Martin Currie a fee for its investment
management of the Fund's Listed Assets that is computed weekly and payable
monthly, at an annual rate of 0.70% of the Fund's average weekly net assets
consisting of Listed Assets up to US$315 million and 0.50% of the Fund's average
weekly net assets consisting of Listed Assets in excess of US$315 million.
The Fund may invest up to 25% of the net proceeds of its offerings of its
outstanding common stock in direct equity investments ("Direct Investments")
pursuant to the Direct Management Agreement. The Fund pays Martin Currie a fee
for its investment management of the Fund's Direct Investments that is payable
monthly at an annual rate of 2.00% of the Fund's average weekly assets
consisting of Direct Investments.
ANNUAL APPROVAL PROCESS
The Fund's Board of Directors (the "Board") is legally required to review and
re-approve the Listed Management Agreement and the Direct Management Agreement
once a year. Throughout the year, the Board considers a wide variety of
materials and information about the Fund, including, for example, the Fund's
investment performance, adherence to stated investment objectives and
strategies, assets under management, expenses, regulatory compliance and
management. The Board periodically meets with senior management and portfolio
managers of Martin Currie and reviews and evaluates Martin Currie's professional
experience, credentials and qualifications. This information supplements the
materials the Board received in preparation for the Meeting described below.
In determining whether it was appropriate to approve the Listed Management
Agreement and the Direct Management Agreement during fiscal 2007, the Board
requested from Martin Currie information that the Board believed to be
reasonably necessary to reach its conclusion. At meetings held in 2006 and 2007,
as explained below, the Board discussed issues pertaining to the proposed
approval of the Listed Management Agreement and the Direct Management Agreement
with representatives from Martin Currie and with legal counsel. This information
together with the information provided to the Directors throughout the course of
year formed the primary basis for the Directors' determinations.
The Board met in executive sessions for the purpose of considering the approval
of the Listed Management Agreement and the Direct Management Agreement. During
the executive sessions, the Directors reviewed a memorandum which detailed the
duties and responsibilities of the Directors with respect to their consideration
of the Listed Management Agreement and the Direct Management Agreement. The
Directors reviewed the contract renewal materials provided by Martin Currie,
including, but not limited to (1) an organizational overview of Martin Currie
and biographies of those
28
BOARD DELIBERATIONS REGARDING APPROVAL OF
INVESTMENT MANAGEMENT AGREEMENTS (CONTINUED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
personnel providing services to the Fund, (2) a copy of the Listed Management
Agreement, Amendment No. 1 to the Listed Management Agreement and the Direct
Management Agreement, (3) a profitability analysis of Martin Currie, (4)
financial statements of Martin Currie, (5) Form ADV of Martin Currie, and (6)
performance and fee comparison data provided by Fundamental Data, a third party
vendor of such information.
A. LISTED MANAGEMENT AGREEMENT
The Board, consisting entirely of "independent directors" within the meaning of
the Investment Company Act of 1940, unanimously approved the Listed Management
Agreement at an "in person" meeting held on June 15, 2007. In evaluating the
Listed Management Agreement, as amended, the Directors drew on materials
provided to them by Martin Currie. In deciding whether to renew the Listed
Management Agreement, as amended, the Directors considered various factors,
including (1) the nature, extent and quality of the services provided by Martin
Currie under the Listed Management Agreement, (2) the investment performance of
the Fund's Listed Assets, (3) the costs to Martin Currie of its services and the
profits realized by Martin Currie from its relationship with the Fund and (4)
the extent to which economies of scale might be realized if and as the Fund
grows and whether the fee levels in the Management Agreement reflect these
economies of scale.
1. Nature, Extent and Quality of the Services provided by Martin Currie
In considering the nature, extent and quality of the services provided by Martin
Currie, the Directors relied on their prior experience as Directors of the Fund
as well as on the materials provided at the Meeting. They noted that under the
Listed Management Agreement Martin Currie is responsible for managing the Fund's
listed investments in accordance with the Fund's investment objective and
policies, applicable legal and regulatory requirements, and any instructions of
the Directors, for providing necessary and appropriate reports and information
to the Directors, for maintaining all necessary books and records pertaining to
the Fund's transactions in Listed Assets, and for furnishing the Fund with the
assistance, cooperation, and information necessary for the Fund to meet various
legal requirements regarding registration and reporting. They noted the
distinctive nature of the Fund as investing primarily in equity securities of
China companies. They also noted the experience and expertise of Martin Currie
as appropriate for an adviser to the Fund.
The Directors reviewed the background and experience of Martin Currie's senior
management, including those individuals responsible for the investment and
compliance operations with respect to the Fund's listed investments, and the
responsibilities of the latter with respect to the Fund. They also considered
the resources, operational structures and practices of Martin Currie in managing
the Fund's listed portfolio, in monitoring and securing the Fund's compliance
with its investment objective and policies and with applicable laws and
regulations, and in seeking best execution of portfolio transactions. Drawing
upon the materials provided and their general knowledge of the business of
Martin Currie, the Directors took into account the fact that Martin Currie's
experience, resources and strength in these areas are deep, extensive and of
high quality. On the basis of this review, the Directors determined that the
nature and extent
29
BOARD DELIBERATIONS REGARDING APPROVAL OF
INVESTMENT MANAGEMENT AGREEMENTS (CONTINUED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
of the services provided by Martin Currie to the Fund were appropriate, had been
of high quality, and could be expected to remain so.
2. Investment Performance of the Fund's Listed Assets
The Directors noted that, in view of the distinctive investment objective of the
Fund, the investment performance of the Fund's Listed Assets was satisfactory.
Of importance to the Directors was the extent to which the Fund achieved its
objective. Drawing upon information provided at the Meeting and upon reports
provided to the Directors by Martin Currie throughout the preceding year, the
Directors determined that the Fund's Listed Assets had outperformed the MSCI
Golden Dragon Index for the one and three-year periods ending April 30, 2007.
They further concluded, on the basis of the limited universe of comparable
funds, that the expense ratio of the Fund was as low as, or lower than, those of
the Fund's direct competitors. Accordingly, the Directors concluded that the
performance of the Fund was satisfactory.
3. The Costs to Martin Currie of its Services and the Profits Realized by
Martin Currie from its Relationship with the Fund
The Directors considered the profitability of the advisory arrangement with the
Fund to Martin Currie. The Directors had been provided with data on the Fund's
profitability to Martin Currie. They first discussed with representatives of
Martin Currie the methodologies used in computing the costs that formed the
bases of the profitability calculations. Concluding that these methodologies
were reasonable, they turned to the data provided. After extensive discussion
and analysis they concluded that, to the extent that Martin Currie's
relationship with the Fund had been profitable, the profitability was in no case
such as to render the advisory fee excessive.
In considering whether Martin Currie benefits in other ways from its
relationship with the Fund, the Directors noted that other than the advisory
fees payable to Martin Currie under the Management Agreement and the Direct
Management Agreement, there is no other investment advisory or brokerage fee
received or receivable by Martin Currie from the Fund. The Directors concluded
that, to the extent that Martin Currie derives other benefits from its
relationship with the Fund, those benefits are not so significant as to render
the adviser's fees excessive.
4. The Extent to which Economies of Scale would be Realized if and as the Fund
Grows and Whether the Fee Levels in the Listed Management Agreement Reflect
these Economies of Scale
On the basis of their discussions with management and their analysis of
information provided at the Meeting, the Directors determined that the nature of
the Fund and its operations is such that Martin Currie was likely to realize
economies of scale in the management of the Fund as it grows in size. The Board
noted that, in contemplation of these likely economies of scale, this fee
structure with Martin Currie provides for breakpoints above which the fee rate
declines. It was noted in the Board's discussion with representatives of Martin
Curie that Martin Currie's assets under management from its China business had
increased substantially and that Martin Currie had realized economies of scale
from managing more China portfolios for more clients. It was noted that these
economies of scale were shared with the Fund because they had enabled Martin
Currie to develop centralized dealing facilities that pool transactions
30
BOARD DELIBERATIONS REGARDING APPROVAL OF
INVESTMENT MANAGEMENT AGREEMENTS (CONTINUED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
across all of its clients. However, Martin Currie had noted in its materials
provided to the Board that these economies of scale were not infinite and that
managing too much money may impair performance.
In order to better evaluate the Fund's advisory fee, the Directors had requested
comparative information with respect to fees paid by similar funds, i.e., funds
that invest primarily in China. Because of the distinctive nature of the Fund,
the universe of similar funds was limited; the total number of comparable funds,
which included the Fund, was sixteen. Based on a review of this information, the
Directors found that the Fund's aggregate advisory fees were lower than many of
its competitors' fees. The Directors noted that the Fund's total expense ratio
was lower than most of the comparable funds' total expense ratios. The Directors
concluded that the limited data available provided some indirect confirmation of
the reasonableness of Martin Currie's fee.
APPROVAL OF LISTED MANAGEMENT AGREEMENT
The Directors approved the continuance of the Fund's Listed Management
Agreement, as amended, after weighing the foregoing factors. They reasoned that,
considered in themselves, the nature and extent of the services provided by
Martin Currie were appropriate, that the performance of the Fund had been
satisfactory, and that Martin Currie could be expected to provide services of
high quality. As to Martin Currie's fees for the Fund, the Directors determined
that the fees, considered in relation to the services provided, were fair and
reasonable, that the Fund's relationship with Martin Currie was not so
profitable as to render the fees excessive, that any additional benefits to
Martin Currie were not of a magnitude materially to affect the Directors'
deliberations, and that the fees adequately reflected shared economies of scale
with the Fund.
B. DIRECT MANAGEMENT AGREEMENT
The Board had previously considered and approved, for the first time and for an
initial two year period, the Direct Management Agreement at an "in person"
meeting held on December 7, 2006 to take effect at such time as the Direct
Management Agreement was approved by the Fund's Shareholders. The Direct
Management Agreement became effective on April 16, 2007. In addition, the Board,
consisting entirely of "independent directors" within the meaning of the
Investment Company Act of 1940, unanimously approved the Direct Management
Agreement at an "in person" meeting held on June 15, 2007.
At the December 7, 2006 meeting, the Board of Directors considered information
regarding Martin Currie's investment management capabilities, expertise and fees
previously reviewed in June 2006 when the Board reviewed the Fund's current
Listed Management Agreement with Martin Currie. In connection with their
consideration of the proposed Direct Management Agreement with Martin Currie,
the Directors, at a meeting held on December 7, 2006, the Board relied upon some
of the same factors that led to the continuation of the Fund's Listed Management
Agreement. At the meeting, the Directors were advised by counsel concerning
their duties in considering the Direct Management Agreement and the various
factors to be considered and standards to be applied.
31
BOARD DELIBERATIONS REGARDING APPROVAL OF
INVESTMENT MANAGEMENT AGREEMENTS (CONTINUED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
In addition, the Board had previously received and reviewed information relating
to the Fund's current investment management arrangements with Martin Currie,
including Martin Currie's presence and experience in China; information
regarding the number and types of clients advised by Martin Currie, including
other investment funds; the amount of assets under management; the number of
persons employed and information regarding the education and employment
experience of their principal investment officers; the compliance systems and
personnel; their affiliations; their performance; and the proposed fees.
APPROVAL OF DIRECT MANAGEMENT AGREEMENT
At the December 7, 2006 meeting, based on its conclusions, and with the
assistance of counsel, the Board of Directors determined that the proposed
agreement with Martin Currie was fair and reasonable. Accordingly, the Board of
Directors voted to unanimously approve the Direct Management Agreement. In
addition, the Board unanimously re-approved the Listed Management Agreement at
an "in person" meeting held on June 15, 2007.
32
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 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.
33
DIVIDENDS AND DISTRIBUTIONS;
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN (CONTINUED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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.
34
DIRECTORS AND OFFICERS (UNAUDITED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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
is the only Fund in the Fund Complex.
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT
OFFICE DURING PAST FIVE YEARS AND
NAME (AGE) AND WITH THE DIRECTORSHIPS IN PUBLICLY HELD DIRECTOR
ADDRESS OF DIRECTOR FUND COMPANIES SINCE
------------------- ----------- -------------------------------------- --------
James J. Lightburn Chairman of Chairman of the Board of the Fund; 1992
(64).............. the Board Attorney, Nomos, (2004-present);
13, Rue Alphonse and Attorney, member of Hughes Hubbard &
de Neuville Director Reed (1993-2004).
75017 Paris,
France
Alan Tremain (72)... Director Chairman, Hotels of Distinction 1992
Placido Mer Ventures, Inc. (1989-2005); Chairman,
5200 North Hotels of Distinction (International),
Flagler, #25 Inc. (1974-present).
West Palm Beach,
FL 33408
Michael F. Holland Director Chairman, Holland & Company L.L.C. 1992
(63).............. (1995- present); Director, The Holland
375 Park Avenue Balanced Fund, Inc., Reaves Utility
New York, New York Income Fund, Scottish Widows
10152 Investment Partnership Trust and the
Taiwan Fund, Inc.; Trustee, State
Street Master Funds and State Street
Institutional Investment Trust.
William Kirby (57).. Director Director, John K. Fairbank Center for 2007
Harvard University Chinese Studies Harvard University
CGIS South (2006-present); Chairman, Harvard
Building China Fund (2006-present); Harvard
1730 Cambridge University Distinguished Service
Street Professor (2006-present); Visiting
Cambridge, MA Professor of Business Administration
02138 Harvard Business School (2006-
present); Dean of the Faculty of Arts
and Sciences Harvard University (2002-
2006).
Joe O. Rogers (58).. Director The Rogers Team LLC, organizing member 1992
2477 Foxwood Drive (July 2001-present); Manager, The J-
Chapel Hill, NC Squared Team LLC (April 2003-May
27514 2004); Director, The Taiwan Fund, Inc.
(1986-present).
Nigel S. Tulloch Director Chief Executive, HSBC Asset Management 1992
(61).............. Bahamas Limited (1986-1992); Director,
7, Circe Circle The HSBC China Fund Limited (1992-
Dalkeith 2005).
WA6009
Australia
Paul Hahesy(35)..... Chief Compliance Manager, Foreside
2 Portland Square Compliance Compliance Services, LLC. (2005-
Portland, ME 04101 Officer present); Compliance Consultant,
Metlife (2002-2005).
35
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT
OFFICE DURING PAST FIVE YEARS AND
NAME (AGE) AND WITH THE DIRECTORSHIPS IN PUBLICLY HELD DIRECTOR
ADDRESS OF DIRECTOR FUND COMPANIES SINCE
------------------- ----------- -------------------------------------- --------
Gary L. French President Senior Vice President, State Street
(56).............. Bank and Trust Company (2002 -
2 Avenue de present); Managing Director, Deutsche
Lafayette Asset Management, Inc. and Zurich
Boston, MA 02111 Scudder Investments (acquired by
Deutsche Bank in 2002) (2001 -- 2002).
William C. Cox Treasurer Vice President, State Street Bank and
(41).............. Trust Company.
2 Avenue de
Lafayette
Boston, MA 02111
Mary Moran Zeven Secretary Senior Vice President and Senior
(45).............. Managing Counsel, State Street Bank
2 Avenue de and Trust Company.
Lafayette
Boston, MA 02111
36
THE CHINA FUND, INC.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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
William Kirby, Director
Joe O. Rogers, Director
Nigel S. Tulloch, Director
Paul Hahesy, Chief Compliance Officer
Gary L. French, President
William C. Cox, Treasurer
Mary Moran Zeven, Secretary
INVESTMENT MANAGER
Martin Currie Inc.
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.
(a) The China Fund, Inc. (the "Fund") has adopted a Code of Ethics that applies
to the Fund's principal executive officer and principal financial officer.
(c) There have been no amendments to the Fund's Code of Ethics during the
reporting period for this Form N-CSR.
(d) There have been no waivers granted by the Fund to individuals covered by
the Fund's Code of Ethics during the reporting period for this Form N-CSR.
(f) A copy of the Fund's Code of Ethics is attached as exhibit 12(a)(1) to this
Form N-CSR.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
(a) (1) The Board of Directors of the Fund has determined that the Fund has
one member serving on the Fund's Audit Committee that possesses the
attributes identified in Instruction 2(b) of Item 3 to Form N-CSR to
qualify as "audit committee financial expert."
(2) The name of the audit committee financial expert is Michael F.
Holland. Mr. Holland has been deemed to be "independent" as that term
is defined in Item 3(a)(2) of Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees
For the fiscal year ended October 31, 2007, Deloitte & Touche LLP
("Deloitte"), the Fund's independent registered public accounting firm, billed
the Fund aggregate fees of US$54,000 for professional services rendered for the
audit of the Fund's annual financial statements and review of financial
statements included in the Fund's annual report to shareholders.
For the fiscal years ended October 31, 2006, Deloitte billed the Fund
aggregate fees of US$53,000 for professional services rendered for the audit of
the Fund's annual financial statements and review of financial statements
included in the Fund's annual report to shareholders.
(b) Audit-Related Fees
For the fiscal year ended October 31, 2007, Deloitte did not bill the Fund
any fees for assurances and related services that are reasonably related to the
performance of the audit or review of the Fund's financial statements and are
not reported under the section Audit Fees above.
For the fiscal year ended October 31, 2006, Deloitte did not bill the Fund
any fees for assurances and related services that are reasonably related to the
performance of the audit or review of the Fund's financial statements and are
not reported under the section Audit Fees above.
(c) Tax Fees
For the fiscal year ended October 31, 2007, Deloitte billed the Fund
aggregate fees of US$9,500 for professional services rendered for tax
compliance, tax advice, and tax planning. The nature of the services comprising
the Tax Fees was the review of the Fund's income tax returns and tax
distribution requirements.
For the fiscal year ended October 31, 2006, Deloitte billed the Fund
aggregate fees of US$9,000 for professional services rendered for tax
compliance, tax advice, and tax planning. The nature of the services comprising
the Tax Fees was the review of the Fund's income tax returns and tax
distribution requirements.
(d) All Other Fees
For the fiscal year ended October 31, 2007, Deloitte did not bill the Fund
for the provision of security counts.
For the fiscal year ended October 31, 2006, Deloitte billed the Fund
US$15,000 for the provision of security counts.
(e) The Fund's Audit Committee Charter requires that the Audit Committee
pre-approve all audit and non-audit services to be provided to the Fund by the
Fund's independent registered public accounting firm; provided, however, that
the pre-approval requirement with respect to non-auditing services to the Fund
may be waived consistent with the exceptions provided for in the Securities
Exchange Act of 1934, as amended (the "1934 Act"). All of the audit and tax
services described above for which Deloitte billed the Fund fees for the fiscal
years ended October 31, 2007 and October 31, 2006, respectively, were
pre-approved by the Audit Committee.
For the fiscal years ended October 31, 2007 and October 31, 2006, the
Fund's Audit Committee did not waive the pre-approval requirement of any
non-audit services to be provided to the Fund by Deloitte.
(f) Not applicable.
(g) Not applicable.
(h) The Fund's Audit Committee has determined that the provision of non-audit
services by Deloitte to State Street Bank and Trust Company is compatible with
maintaining Deloitte's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
(a) The Fund has a separately-designated audit committee established in
accordance with Section 3(a)(58)(A) of the Exchange Act. The members of the
Fund's audit committee are Alan Tremain, James J. Lightburn, Nigel Tulloch, Joe
O. Rogers, William Kirby and Michael F. Holland.
ITEM 6. SCHEDULE OF INVESTMENTS.
Schedule of Investments is included as part of Item 1.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
INVESTMENT COMPANIES.
Attached to this Form N-CSR as exhibit 12(a)(4) are copies of the proxy voting
policies and procedures of the Fund and its investment advisers, Asian Direct
Capital Management and Martin Currie, Inc.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(a)(1) As of December 31, 2007, the portfolio managers of the registrant are as
follows:
CHRIS RUFFLE
Mr. Ruffle joined MCIM in 1994 and is currently a director. MCIM provides
investment research and administration services to the Investment Manager. Mr.
Ruffle, who is a Chinese and Taiwanese equity specialist, has over 13 years
investment experience in Asia. Fluent in Mandarin and Japanese, Mr. Ruffle has
worked in Asia 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
(1990 to 1993). Mr. Ruffle also manages The Martin Currie China Hedge Fund, the
Martin Currie China "A" Share Fund Limited and the Martin Currie Sino-American
"A" Share Corporation Limited.
(a)(2)
As of October 31, 2007, Chris Ruffle managed 6 mutual funds with a total of
approximately $714mn in assets; 5 pooled investment vehicles other than mutual
funds with a total of approximately $555mn in assets; and 12 other accounts with
a total of approximately $893 in assets.
Of these other mutual funds, 1 fund with a total of approximately $27.5mn in
assets, had performance based fees.
Of these other pooled investment vehicles, 1 pooled investment vehicle with a
total of approximately $53.5mn in assets, had performance based fees.
Of these other accounts, no other accounts had performance based fees.
CONFLICTS OF INTEREST:
Mr. Ruffle's simultaneous management of the Fund and the other accounts noted
above may present actual or apparent conflicts of interest with respect to the
allocation and aggregation of securities orders placed on behalf of the Fund and
the other accounts. The Investment Manager, however, believes that sufficient
controls, policies and systems are in place which address such conflicts.
The Investment Manager has adopted several policies that address potential
conflicts of interest, including best execution and trade allocation policies
that are designed to ensure (1) that portfolio management is seeking the best
price for portfolio securities under the circumstances, (2) fair and equitable
allocation of investment opportunities among accounts over time and (3)
compliance with applicable regulatory requirements. All accounts are to be
treated in a non-preferential manner, such that allocations are not based upon
account performance, fee structure or preference of the portfolio manager. In
addition, the Investment Manager has adopted a Code of Conduct that sets forth
policies regarding conflicts of interest.
COMPENSATION:
Mr. Ruffle's compensation consists of a base salary together with an additional
element of remuneration dependent upon the performance of the accounts that he
manages.
OWNERSHIP OF SECURITIES: The following table sets forth, for each portfolio
manager, the aggregate dollar range of the registrant's equity securities
beneficially owned as of October 31, 2007.
Portfolio Manager Dollar Range of Fund Shares Beneficially Owned
Chris Ruffle None
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) Code of Ethics is attached hereto in response to Item 2(f).
(a)(2) The certifications required by Rule 30a-2 of the 1940 Act are attached
hereto.
(a)(3) Not applicable.
(a)(4) Proxy voting policies and procedures of the Fund and its investment
adviser are attached hereto in response to Item 7.
(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: December 20, 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: December 20, 2007
By: /s/ William C. Cox
------------------
William C. Cox
Treasurer of The China Fund, Inc.
Date: December 20, 2007