|
Copy
to:
|
|
|
Tracie
A. Coop
|
Leonard
B. Mackey, Jr., Esq.
|
|
Secretary
|
Clifford
Chance US LLP
|
|
The
China Fund, Inc.
|
31
West 52nd
Street
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4
Copley Place, 5th
Floor
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New
York, New York 10019-6131
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CPH-0326
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Boston,
MA 02116
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|
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(Name
and Address of Agent for Service)
|
THE CHINA FUND, INC.
ANNUAL REPORT
OCTOBER 31, 2010
THE CHINA FUND, INC.
TABLE OF CONTENTS
PAGE
----
Key Highlights 1
Asset Allocation 2
Industry Allocation 3
Chairman's Statement 4
Investment Manager's Statement 5
About the Portfolio Manager 7
Schedule of Investments 8
Financial Statements 14
Notes to Financial Statements 19
Report of Independent Registered Public
Accounting Firm 30
Other Information 31
Board Deliberation Regarding
Approval of Investment
Management Agreements 33
Dividends and Distributions;
Dividend Reinvestment
and Cash Purchase Plan 37
Directors and Officers 40
THE CHINA FUND, INC.
KEY HIGHLIGHTS (UNAUDITED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
FUND DATA
--------------------------------------------------------------------------------------
NYSE STOCK SYMBOL CHN
--------------------------------------------------------------------------------------
LISTING DATE JULY 10, 1992
--------------------------------------------------------------------------------------
SHARES OUTSTANDING 22,781,762
--------------------------------------------------------------------------------------
TOTAL NET ASSETS (10/31/10) US$785.0 MILLION
--------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE (10/31/10) $34.46
--------------------------------------------------------------------------------------
MARKET PRICE PER SHARE (10/31/10) $33.45
--------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
TOTAL RETURN(1)
-----------------------------------------------------------------------------------------------
PERFORMANCE AS OF
10/31/10: NET ASSET VALUE MARKET PRICE
-----------------------------------------------------------------------------------------------
1-Year 27.67% 33.70%
-----------------------------------------------------------------------------------------------
3-Year Cumulative 5.92% 20.39%
-----------------------------------------------------------------------------------------------
3-Year Annualized 1.94% 6.38%
-----------------------------------------------------------------------------------------------
5-Year Cumulative 243.13% 215.44%
-----------------------------------------------------------------------------------------------
5-Year Annualized 27.97% 25.83%
-----------------------------------------------------------------------------------------------
10-Year Cumulative 676.21% 942.53%
-----------------------------------------------------------------------------------------------
10-Year Annualized 22.74% 26.42%
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
DIVIDEND HISTORY
-----------------------------------------------------------------------------------------------
RECORD DATE INCOME CAPITAL GAINS
-----------------------------------------------------------------------------------------------
12/24/09 $0.2557 --
-----------------------------------------------------------------------------------------------
12/24/08 $0.4813 $5.3361
-----------------------------------------------------------------------------------------------
12/21/07 $0.2800 $11.8400
-----------------------------------------------------------------------------------------------
12/21/06 $0.2996 $3.7121
-----------------------------------------------------------------------------------------------
12/21/05 $0.2172 $2.2947
-----------------------------------------------------------------------------------------------
12/22/04 $0.1963 $3.3738
-----------------------------------------------------------------------------------------------
12/31/03 $0.0700 $1.7100
-----------------------------------------------------------------------------------------------
12/26/02 $0.0640 $0.1504
-----------------------------------------------------------------------------------------------
12/31/01 $0.1321 --
-----------------------------------------------------------------------------------------------
12/31/00 -- --
-----------------------------------------------------------------------------------------------
12/31/99 $0.1110 --
-----------------------------------------------------------------------------------------------
12/31/98 $0.0780 --
-----------------------------------------------------------------------------------------------
12/31/97 -- $0.5003
-----------------------------------------------------------------------------------------------
12/31/96 $0.0834 --
-----------------------------------------------------------------------------------------------
12/29/95 $0.0910 --
-----------------------------------------------------------------------------------------------
12/30/94 $0.0093 $0.6006
-----------------------------------------------------------------------------------------------
12/31/93 $0.0853 $0.8250
-----------------------------------------------------------------------------------------------
12/31/92 $0.0434 $0.0116
-----------------------------------------------------------------------------------------------
(1) Total investment returns reflect changes in net asset value per share or
market price, as the case may be, during each period and assumes 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 do not reflect the deduction
of taxes that a stockholder would pay on Fund distributions or the sale of Fund
shares. Total investment returns are historical and do not guarantee future
results.
1
THE CHINA FUND, INC.
ASSET ALLOCATION AS OF OCTOBER 31, 2010 (UNAUDITED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
TEN LARGEST LISTED EQUITY INVESTMENTS *
-------------------------------------------------------------------------------
1. China Medical System Holdings, Ltd. 5.89%
-------------------------------------------------------------------------------
2. Huiyin Household Appliances Holdings Co., Ltd. 5.67%
-------------------------------------------------------------------------------
3. Wumart Stores, Inc. 3.59%
-------------------------------------------------------------------------------
4. Hsu Fu Chi International, Ltd. 3.22%
-------------------------------------------------------------------------------
5. Far Eastern Department Stores, Ltd. 3.09%
-------------------------------------------------------------------------------
6. Shandong Weigao Group Medical Polymer Co., Ltd. 3.06%
-------------------------------------------------------------------------------
7. Ping An Insurance (Group) Company of China, Ltd.
Access Product 3.05%
-------------------------------------------------------------------------------
8. Sinopharm Medicine Holding Co., Ltd. 3.02%
-------------------------------------------------------------------------------
9. Boshiwa International Holding, Ltd. 2.91%
-------------------------------------------------------------------------------
10. China Fishery Group, Ltd. 2.75%
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
DIRECT INVESTMENTS *
--------------------------------------------------------------------------------
1. China Bright 1.91%
--------------------------------------------------------------------------------
2. Zong Su Foods 1.91%
--------------------------------------------------------------------------------
3. HAND Enterprise Solutions, Co., Ltd. Common Stock 1.81%
--------------------------------------------------------------------------------
4. Qingdao Bright Moon Seaweed Group Co., Ltd. 1.18%
--------------------------------------------------------------------------------
5. Ugent Holdings, Ltd. 0.00%
--------------------------------------------------------------------------------
6. China Silicon Corp., Series A Preferred 0.00%
--------------------------------------------------------------------------------
7. China Silicon Corp., Common Stock 0.00%
--------------------------------------------------------------------------------
8. China Silicon Corp., Warrants 0.00%
--------------------------------------------------------------------------------
9. HAND Enterprise Solutions, Pte, Ltd. Preferred 0.00%
--------------------------------------------------------------------------------
* Percentages based on net assets at October 31, 2010.
2
INDUSTRY ALLOCATION (UNAUDITED)
--------------------------------------------------------------------------------
(Pie Chart)
Consumer Discretionary............................................. 19.3%
Financials......................................................... 15.2%
Consumer Staples................................................... 18.2%
Industrials........................................................ 8.0%
Health Care........................................................ 19.4
Information Technology............................................. 6.3%
Materials.......................................................... 3.9%
Energy............................................................. 2.2%
Utilities.......................................................... 1.9%
Telecommunications................................................. 1.5%
Others............................................................. 4.1%
Total Net Assets................................................... 100.0%
Fund holdings are subject to change and percentages shown above are based on
total net assets as of October 31, 2010. A complete list of holdings as of
October 31, 2010 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 1-888-246-2255.
3
THE CHINA FUND, INC.
CHAIRMAN'S STATEMENT (UNAUDITED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
THE CHINA FUND INC.
CHAIRMAN'S STATEMENT
TWELVE MONTHS TO OCTOBER 31, 2010
I am pleased to report a strong year for Chinese markets -- and a stronger
period still for your fund. With a return of over 30%, the fund outstripped the
16% return on the MSCI Golden Dragon index by a considerable margin.
Gratifyingly, your fund's outperformance stemmed from the long-term themes on
which your manager has placed heavy emphasis: China's burgeoning domestic
consumption, its far-reaching healthcare reforms and its increasingly amicable
relationship with Taiwan.
In the direct-investment portfolio, your manager completed two new investments
in the autumn. These were in China Bright Group, a medical-device-maker and
distributor spun out of Hong Kong-listed Golden Meditech, and Zong Su Foods,
which produces both traditional Chinese and Western-style hams. During the past
year, Chinese markets were distinctly out of favor for several months (although
your fund performed very well over that period). Investors worried first that
China's growth was too fast and then that it was slowing too much. In fact,
after the astonishing rates achieved by dint of Beijing's vast stimulus
packages, all the signs are that growth has now reached an appropriate -- and
sustainable -- level.
As the panic has abated, foreign capital has started to return to Greater China,
with huge inflows during the autumn. For investors with the foresight to have
remained invested in the region's best companies, this is a heartening
development. I therefore look forward with confidence to reporting another
period of strong performance in my next statement.
In conclusion, I draw your attention to Note I on page 29 of these accounts.
Under the Indemnity Agreement referred to in the Note and additional agreements
between the Fund and the Direct Investment Manager, The China Fund will be
compensated for any loss or expense associated with its investment in Ugent
Holdings, Ltd. The Board considers this a satisfactory resolution of the issues
described on page 29. The Board and the Direct Investment Manager are working
together to improve policies and procedures for direct investments made by the
Fund in the future.
Yours sincerely,
James Lightburn
Chairman
4
THE CHINA FUND, INC.
INVESTMENT MANAGER'S STATEMENT (UNAUDITED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
REVIEW OF LISTED AND DIRECT INVESTMENTS
REVIEW
Despite weakness in the first half of 2010, Chinese markets were strong over the
12 months to 31 October. The MSCI Golden Dragon index returned 16.1%. With a
gain of 31.5%, the fund did significantly better.
Although Chinese indices ended 2009 strongly, they were notably weak in the
first half of 2010, as investors fretted about government measures to cool the
property market. Later, concerns shifted to slowing growth and the possibility
of a 'hard landing'. But after the summer, it became increasingly clear that
China's growth was simply moderating from its stimulus-induced highs to a more
sustainable level. Huge inflows of foreign institutional capital helped to buoy
the market in the autumn.
In Taiwan, the key development was July's signing of the Economic Cooperation
Framework Agreement between the island and mainland China. The free-trade
agreement was approved by the Taiwan's Legislative Yuan in August. Although
tariff reductions do not come into effect until January, the increasing amount
of cross-strait M&A rumours show that companies are not waiting for the starting
gun. Another benefit that should not be overlooked is that it will allow
President Ma to sign free-trade agreements with other trading partners; this was
previously obstructed by Beijing. Also, we expect negotiations on round two,
which will broaden the agreement, to start within six months of the first stage
being implemented. In the meantime, Chinese tourists are arriving in ever-
greater numbers, boosting the island's already surging economy.
The fund's substantial outperformance owed a great deal to its heavy emphasis on
domestic consumption. Food-related holdings delivered some of the leading
performances, with confectioner Hsu Fu Chi, China Fishery and Zhangzidao Fishery
all to the fore. Liquor distillers Zhejiang Guyuelongshan and Wuliangye Yibin
also delivered good returns. And as retail sales continued to grow robustly, we
enjoyed strong showings from Intime Department Store, Wumart and cosmetics chain
Natural Beauty on the mainland, and from Familymart and Far Eastern Department
Store in Taiwan. Our cornerstone investment in childrenswear Boshiwa was also a
success.
The portfolio's overweight position in healthcare produced some standouts too.
The pick of these was China Shineway Pharmaceutical, with Shandong Weigao,
Sinopharm and WuXi PharmaTech also performing well. A number of healthcare
stocks were among the largest detractors from returns, however, after the
authorities tightened regulations on drug pricing. But as the government presses
ahead with its far-reaching healthcare reforms, the prospects for the sector
over the next few years remain bright.
OUTLOOK
There were no surprises from the central committee's October deliberations on
the next five-year plan -- which itself was not a surprise. The succession of Xi
Jinping to the top job from 2012 was confirmed. The Shanghai World Expo closed
after breaking all records (72 million attendees). The Asian Games, staged with
a budget larger than that for the London Olympics, took place in Guangzhou in
November. But amid all the triumphalism, a rather sour, defensive tone
5
THE CHINA FUND, INC.
INVESTMENT MANAGER'S STATEMENT (CONTINUED) (UNAUDITED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
REVIEW OF LISTED AND DIRECT INVESTMENTS
is developing in Chinese foreign policy (as reflected in the reaction to Liu
Xiaobo winning a Nobel prize). This is one potential threat to markets.
Another slightly worrying sign is the extremely busy IPO market, with untested
companies rapturously received. But there is probably still enough
pessimism/scepticism towards China investment to limit risks in the near term.
We are relatively sanguine about Taiwan's mayoral elections on 27 November; once
they are out of the way, we expect further progress in the cross-strait
rapprochement.
6
THE CHINA FUND, INC.
ABOUT THE PORTFOLIO MANAGERS (UNAUDITED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
LISTED AND DIRECT INVESTMENT MANAGERS
Mr. Chris Ruffle serves as the portfolio manager for the Fund's portfolio of
listed and direct securities. Mr. Ruffle joined Martin Currie in 1994. He is a
Chinese and Taiwanese equity specialist with over 15 years investment experience
in Asia. Fluent in Mandarin, Mr. Ruffle has worked in the Far East since 1983.
He worked originally in Beijing and Shanghai and then in Australia for a metal
trading company. He then moved to Warburg Securities in 1987 as an analyst in
Tokyo, before establishing Warburg's office in Taiwan. Mr. Ruffle also manages
The Martin Currie China Hedge Fund and the China "A" Share Fund.
Mr. Shifeng Ke serves as the portfolio manager for the Fund's portfolio of
listed and direct securities. Mr. Ke joined Martin Currie's Asia team in 1997
and, until 2002, co-managed the China Heartland Fund, which at that time was the
only offshore fund to access China's A-share market. In 2006, Martin Currie,
Chris Ruffle and Shifeng established MC China Limited: a joint venture dedicated
to running its range of specialist China strategies. He is co-manager of the
Fund, Martin Currie's A-share products, Martin Currie's China Hedge Fund and the
micro-cap China Development Capital Partnership. Shifeng practiced law before
moving to China's ministry of labour and social security in 1990, where he
worked to develop an investment policy for pension funds.
7
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS
OCTOBER 31, 2010
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NAME OF ISSUER AND TITLE OF ISSUE SHARES VALUE (NOTE A)
--------------------------------- ------ --------------
COMMON STOCK AND OTHER EQUITY INTERESTS
HONG KONG
CONSUMER DISCRETIONARY -- (9.7%)
FU JI Food & Catering Services*V#(2)............ 5,462,000 $ --
Huiyin Household Appliances Holdings Co.,
Ltd.*#+(2).................................... 160,413,750 44,491,832
Intime Department Store Group Co., Ltd.(1)...... 7,926,629 12,168,463
Ports Design, Ltd.(1)........................... 4,549,500 11,045,453
Shangri-La Asia, Ltd.(1)........................ 3,061,555 6,911,628
Yorkey Optical International Cayman, Ltd.#...... 6,142,926 1,101,515
------------
75,718,891
------------
CONSUMER STAPLES -- (3.1%)
Chaoda Modern Agriculture (Holdings), Ltd.(1)... 12,619,357 10,272,280
Natural Beauty Bio-Technology, Ltd.#............ 47,710,000 14,155,900
------------
24,428,180
------------
ENERGY -- (1.0%)
Fushan International Energy Group, Ltd.(1)...... 12,018,000 8,077,373
------------
HEALTH CARE -- (2.8%)
China Shineway Pharmaceutical Group, Ltd.(1).... 4,567,000 15,553,753
Golden Meditech Co., Ltd.*#(1).................. 35,040,000 6,509,188
------------
22,062,941
------------
UTILITIES -- (1.9%)
Enn Energy Holdings, Ltd.(1).................... 5,084,000 15,150,179
------------
TOTAL HONG KONG -- (Cost $80,403,265)......... 18.5% 145,437,564
---- ------------
HONG KONG -- "H" SHARES
CONSUMER DISCRETIONARY -- (2.9%)
Boshiwa International Holding, Ltd.*#........... 24,932,000 22,867,936
------------
CONSUMER STAPLES -- (3.6%)
Wumart Stores, Inc.#(1)......................... 12,018,000 28,185,537
------------
HEALTH CARE -- (12.0%)
China Medical System Holdings, Ltd.*#+.......... 72,353,760 46,202,614
Shandong Weigao Group Medical Polymer Co.,
Ltd.#(1)...................................... 9,176,000 24,029,774
Sinopharm Medicine Holding Co., Ltd. ........... 6,056,800 23,713,855
------------
93,946,243
------------
INDUSTRIALS -- (0.9%)
Fook Woo Group Holdings, Ltd.*.................. 19,836,000 7,011,403
------------
See notes to financial statements and notes to schedule of investments.
8
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2010
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NAME OF ISSUER AND TITLE OF ISSUE SHARES VALUE (NOTE A)
--------------------------------- ------ --------------
COMMON STOCK AND OTHER EQUITY INTERESTS (CONTINUED)
HONG KONG -- "H" SHARES (CONTINUED)
MATERIALS -- (1.4%)
Zijin Mining Group Co., Ltd.(1).................. 12,050,000 $ 11,347,760
------------
TELECOMMUNICATIONS -- (1.5%)
ZTE Corp.(1)..................................... 3,212,889 11,936,815
------------
TOTAL HONG KONG -- "H" SHARES --
(Cost $77,159,751)........................ 22.3% 175,295,694
---- ------------
TOTAL HONG KONG (INCLUDING "H" SHARES) --
(Cost $157,563,016)....................... 40.8% 320,733,258
---- ------------
SINGAPORE
CONSUMER STAPLES -- (6.0%)
China Fishery Group, Ltd.#(1).................... 13,255,000 21,601,120
Hsu Fu Chi International, Ltd.*#................. 9,484,000 25,271,133
------------
46,872,253
------------
FINANCIALS -- (0.5%)
Financial One Corp.*#............................ 12,030,000 3,809,461
------------
INFORMATION TECHNOLOGY -- (0.4%)
CDW Holding, Ltd.#+.............................. 51,458,000 3,179,487
------------
TOTAL SINGAPORE -- (Cost $22,750,327)....... 6.9% 53,861,201
---- ------------
TAIWAN
CONSUMER DISCRETIONARY -- (5.7%)
FamilyMart Co., Ltd.#............................ 4,501,652 12,922,137
Far Eastern Department Stores, Ltd. ............. 19,543,604 24,252,795
Synnex Technology International Corp. ........... 3,088,006 7,553,243
------------
44,728,175
------------
CONSUMER STAPLES -- (2.9%)
Lien Hwa Industrial Corp. ....................... 13,411,881 9,876,652
Uni-President Enterprises Corp. ................. 10,023,901 13,028,469
------------
22,905,121
------------
FINANCIALS -- (6.4%)
Cathay Financial Holding Co., Ltd. .............. 635,700 972,602
Chinatrust Financial Holding Co., Ltd. .......... 11,376,288 7,095,900
Fubon Financial Holdings Co., Ltd. .............. 5,195,134 6,362,116
KGI Securities Co., Ltd. ........................ 16,984,780 7,987,226
See notes to financial statements and notes to schedule of investments.
9
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2010
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NAME OF ISSUER AND TITLE OF ISSUE SHARES VALUE (NOTE A)
--------------------------------- ------ --------------
COMMON STOCK AND OTHER EQUITY INTERESTS (CONTINUED)
TAIWAN (CONTINUED)
FINANCIALS (CONTINUED)
Ruentex Development Co., Ltd. ................. 12,694,000 $ 21,058,903
Yuanta Financial Holdings Co., Ltd. ........... 10,520,593 6,613,700
------------
50,090,447
------------
FACE
AMOUNT
------
FINANCIALS -- (1.0%)
Taiwan Life Insurance Co., Ltd. 4.0%
12/28/14#+@(2)............................... NT$200,000,000 7,936,254
------------
SHARES
------
INFORMATION TECHNOLOGY -- (1.8%)
WPG Holdings Co., Ltd. ........................ 7,457,103 13,856,577
------------
MATERIALS -- (1.5%)
China Metal Products Co., Ltd.#................ 11,500,347 11,792,724
------------
TOTAL TAIWAN -- (Cost $82,494,083)........... 19.3% 151,309,298
---- ------------
UNITED STATES
CONSUMER DISCRETIONARY -- (0.1%)
The9, Ltd., ADR*(1)............................ 110,304 614,393
------------
ENERGY -- (1.2%)
Far East Energy Corp.*#+....................... 17,529,277 9,730,502
------------
HEALTH CARE -- (2.9%)
Mindray Medical International, Ltd., ADR(1).... 291,700 8,453,466
WuXi PharmaTech Cayman, Inc., ADR*(1).......... 883,490 14,559,915
------------
23,013,381
------------
INFORMATION TECHNOLOGY -- (2.5%)
Hollysys Automation Technologies, Ltd.*(1)..... 808,200 10,215,648
Sina Corp.*(1)................................. 162,700 9,160,010
------------
19,375,658
------------
TOTAL UNITED STATES -- (Cost
$43,752,907)............................ 6.7% 52,733,934
---- ------------
TOTAL COMMON STOCK AND OTHER EQUITY
INTERESTS -- (Cost $306,560,333)........ 73.7% 578,637,691
---- ------------
See notes to financial statements and notes to schedule of investments.
10
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2010
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NAME OF ISSUER AND TITLE OF ISSUE SHARES VALUE (NOTE A)
--------------------------------- ------ --------------
EQUITY LINKED SECURITIES
CONSUMER DISCRETIONARY -- (1.3%)
Shanghai Yuyuan Tourist Mart Co., Ltd. Access
Product (expiration 03/26/14) 144A,(4).......... 4,293,036 $ 9,942,946
------------
CONSUMER STAPLES -- (1.0%)
Wuliangye Yibin Co., Ltd. Access Product
(expiration 01/20/15) 144A,*(3)................. 1,403,507 7,656,131
------------
FINANCIALS -- (7.5%)
Citic Securities Co., Ltd. Access Product
(expiration 09/23/13) 144A,(4).................. 2,475,000 5,754,519
Ping An Insurance (Group) Company of China, Ltd.
Access Product (expiration 01/17/12) 144A,(3)... 1,114,259 10,008,753
Ping An Insurance (Group) Company of China, Ltd.
Access Product (expiration 04/01/13) 144A,(4)... 2,661,500 23,906,737
Zhejiang China Commodities City Group Co., Ltd.
Access Product (expiration 01/17/12) 144A,
*(3)............................................ 2,771,970 10,746,928
Zhejiang Guyuelongshan, Ltd. Access Product
(expiration 10/07/13) 144A,(4).................. 3,658,900 8,359,061
------------
58,775,998
------------
INDUSTRIALS -- (4.5%)
China Railway Construction Corp., Ltd. Access
Product (expiration 01/17/12) 144A,(3).......... 3,932,600 4,432,040
Shanghai International Airport Co., Ltd. Access
Product (expiration 01/20/15) 144A,(3).......... 2,526,700 5,323,757
Shanghai International Airport Co., Ltd. Access
Product (expiration 10/26/15) 144A,(4).......... 1,800,000 3,804,640
Shanghai Qiangsheng Holding Co., Ltd. Access
Product (expiration 01/17/12) 144A,(3).......... 4,237,252 5,018,029
Shanghai Qiangsheng Holding Co., Ltd. Access
Product (expiration 11/13/14) 144A,(4).......... 6,245,400 7,396,209
Suning Appliance Co., Ltd. Access Product
(expiration 01/20/15) 144A,*(3)................. 4,311,019 9,829,124
------------
35,803,799
------------
MATERIALS -- (1.0%)
Tangshan Jidong Cement Co., Ltd. Access Product
(expiration 08/11/15) 144A,*(4)................. 1,366,387 4,711,114
Tangshan Jidong Cement Co., Ltd. Access Product
(expiraton 01/20/15) 144A,*(3).................. 987,700 3,395,712
------------
8,106,826
------------
TOTAL EQUITY LINKED SECURITIES -- (Cost
$89,440,978)................................. 15.3% 120,285,700
---- ------------
See notes to financial statements and notes to schedule of investments.
11
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2010
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NAME OF ISSUER AND TITLE OF ISSUE SHARES VALUE (NOTE A)
--------------------------------- ------ --------------
DIRECT INVESTMENTS(5)
CONSUMER STAPLES -- (1.9%)
Zong Su Foods (acquired 09/21/10)*#+(2)......... 2,677 $15,000,034
-----------
15,000,034
-----------
HEALTH CARE -- (1.9%)
China Bright (acquired 08/27/10)*#+(2)(6)....... 14,665,617 15,021,769
-----------
15,021,769
-----------
INDUSTRIALS -- (1.2%)
Qingdao Bright Moon Seaweed Group Co., Ltd.,
(acquired 02/28/08)*#+(2)(6).................. 31,827,172 9,293,534
-----------
9,293,534
-----------
INFORMATION TECHNOLOGY -- (1.8%)
China Silicon Corp. Common Stock, (acquired
01/08-09/10)*#+(2)............................ 2,301,863 --
China Silicon Corp. Warrants (expiration
11/30/10), (acquired 11/30/07)*#+(2).......... 685,450 --
China Silicon Corp., Series A Preferred
(acquired 11/30/07)#+(2)...................... 27,418 --
HAND Enterprise Solutions Pte, Ltd. Preferred
(acquired 02/01/07)*#+(2)..................... 500,000 --
HAND Enterprise Solutions Co., Ltd. Common Stock
(acquired 02/11/10)#+(2)...................... 8,027,241 14,192,162
-----------
14,192,162
-----------
FACE
AMOUNT
------
INDUSTRIALS -- (0.0%)
Ugent Holdings, Ltd., 12.0% 04/06/12 (acquired
04/06/09)*#+@(2).............................. HK$177,000,000 --
-----------
TOTAL DIRECT INVESTMENTS -- (Cost
$71,111,838)............................. 6.8% 53,507,499
--- -----------
SHARES
------
COLLATERAL FOR SECURITIES ON LOAN-- (8.3%)
State Street Navigator Prime Portfolio.......... 64,819,389 64,819,389
-----------
TOTAL COLLATERAL FOR SECURITIES ON
LOAN -- (Cost $64,819,389)............... 8.3% 64,819,389
--- -----------
See notes to financial statements and notes to schedule of investments.
12
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2010
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NAME OF ISSUER AND TITLE OF ISSUE SHARES VALUE (NOTE A)
--------------------------------- ------ --------------
SHORT TERM INVESTMENTS UNITED STATES
Repurchase Agreement with State Street Bank and
Trust, 0.01%, 11/01/10(7)..................... 23,428,000 $ 23,428,000
------------
TOTAL UNITED STATES -- (Cost $23,428,000).. 3.0% 23,428,000
----- ------------
TOTAL INVESTMENTS -- (Cost $555,360,538)............. 107.1% 840,678,279
----- ------------
OTHER ASSETS AND LIABILITIES......................... (7.1)% (55,676,062)
----- ------------
NET ASSETS........................................... 100.0% $785,002,217
===== ============
Notes to Schedule of Investments
V Security is deemed worthless.
* Denotes non-income producing security.
# Illiquid security.
+ Affiliated issuer (see Note F).
@ The bond contains a feature or option to be converted into common stock.
(1) A portion or all of the security was held on loan. As of October 31, 2010,
the market value of the securities loaned was $64,499,371.
(2) Security valued at fair value in good faith by or at the direction of the
Board of Directors.
(3) Equity linked securities issued by Citigroup Global Markets Holdings.
(4) Equity linked securities issued by Credit Lyonnais (CLSA).
(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 securities continue to be valued in good faith by
Board of Directors at fair market value as of October 31, 2010.
(6) The Fund holds a put option which allows the Fund to sell the investment for
a value at least equal to the purchase price under certain circumstances.
(7) Repurchase agreement, dated 10/29/10, due 11/01/10 with repurchase proceeds
of $23,428,020 is collateralized by US Treasury Note 2.50% due 04/30/15 with
a market value of $23,900,402.
144A Securities restricted for resale to Qualified Institutional Buyers. At
October 31, 2010, these restricted securities amounted to $120,285,700, which
represented 15.32% of total net assets.
ADR American Depositary Receipt.
See notes to financial statements and notes to schedule of investments.
13
THE CHINA FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2010
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at value (cost $416,366,921)
(securities on loan $64,499,371) (Note A)...................... $675,630,091
Investments in affiliated investments, at value (cost
$138,993,617) (Notes A and F).................................. 165,048,188
------------
Total Investments................................................. 840,678,279
Cash.............................................................. 341,919
Foreign currency, at value (cost $9,402,250)...................... 9,725,731
Receivable for investments sold................................... 5,610,194
Receivable for securities lending income.......................... 62,104
Dividends and interest receivable................................. 614,929
Prepaid expenses.................................................. 51,288
------------
TOTAL ASSETS........................................................ 857,084,444
------------
LIABILITIES
Payable for investments purchased................................. 5,498,527
Payable upon return of collateral for securities loaned........... 64,819,389
Investment management fee payable (Note B)........................ 543,491
Administration and custodian fees payable (Note B)................ 262,569
Payable for taxes on dividends.................................... 44,694
Contingent liability (Note A)..................................... 717,795
Accrued expenses and other liabilities............................ 195,762
------------
TOTAL LIABILITIES................................................... 72,082,227
------------
TOTAL NET ASSETS.................................................... $785,002,217
============
COMPOSITION OF NET ASSETS:
Paid in capital (Note C).......................................... 454,100,635
Undistributed net investment income............................... 3,851,347
Accumulated net realized gain on investments and foreign currency
transactions................................................... 41,398,175
Net unrealized appreciation on investment and foreign currency
translations................................................... 285,652,060
------------
TOTAL NET ASSETS.................................................... $785,002,217
============
NET ASSET VALUE PER SHARE
($785,002,217/22,781,762 shares of common stock outstanding)...... $34.46
======
See notes to financial statements.
14
THE CHINA FUND, INC.
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 2010
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividend income -- (including dividends of $2,666,554 from non-
controlled affiliates, net of tax withheld of $888,694) (Note
F)............................................................. $ 10,394,790
Interest income -- (including interest of $1,346,704 from non-
controlled affiliates)......................................... 1,359,844
Securities lending income......................................... 943,479
------------
TOTAL INVESTMENT INCOME........................................ 12,698,113
------------
EXPENSES
Investment Management fees (Note B)............................... 5,127,620
Custodian fees (Note B)........................................... 966,705
Administration fees (Note B)...................................... 596,537
Directors' fees and expenses (Note B)............................. 357,893
Stock dividend tax expense........................................ 389,815
Legal fees........................................................ 131,461
Printing and postage.............................................. 87,030
Shareholder service fees.......................................... 5,438
Insurance......................................................... 48,125
Audit and tax service fees........................................ 105,762
Stock exchange listing fee........................................ 43,021
Transfer agent fees............................................... 24,679
Chief Compliance Officer fee...................................... 52,500
Miscellaneous expenses............................................ 73,442
------------
TOTAL EXPENSES................................................. 8,010,028
------------
NET INVESTMENT INCOME............................................... 4,688,085
------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS
Net realized gain on investments.................................. 53,652,407
Net realized loss on non-controlled affiliate transactions (Note
F)............................................................. (385,819)
Net realized loss on foreign currency transactions................ (997,768)
------------
52,268,820
------------
Net change in unrealized appreciation/(depreciation) on
investments.................................................... 112,330,648
Net change in unrealized appreciation/(depreciation) on foreign
currency transactions.......................................... 1,072,966
------------
113,403,614
------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN CURRENCY
TRANSACTIONS...................................................... 165,672,434
------------
NET INCREASE IN NET ASSETS FROM OPERATIONS.......................... $170,360,519
============
See notes to financial statements.
15
THE CHINA FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED
OCTOBER 31, 2010 OCTOBER 31, 2009
---------------- ----------------
INCREASE IN NET ASSETS FROM OPERATIONS
Net investment income................................ $ 4,688,085 $ 6,205,278
Net realized gain/(loss) on investments and foreign
currency transactions............................. 52,268,820 (10,213,191)
Net increase in unrealized
appreciation/(depreciation) on investments and
foreign currency transactions..................... 113,403,614 261,815,537
------------ -------------
Net increase/(decrease) in net assets from
operations........................................ 170,360,519 257,807,624
------------ -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income................................ (5,825,297) (8,737,395)
Capital gains........................................ -- (96,870,178)
------------ -------------
Total distributions to shareholders.................. (5,825,297) (105,607,573)
------------ -------------
CAPITAL SHARE TRANSACTIONS: (NOTE C)
Reinvestment of dividends and distributions.......... -- 73,909,497
------------ -------------
Net increase in net assets from capital share
transactions...................................... -- 73,909,497
------------ -------------
NET INCREASE IN NET ASSETS............................. 164,535,222 226,109,548
------------ -------------
NET ASSETS:
Beginning of year.................................... 620,466,995 394,357,447
------------ -------------
End of year.......................................... $785,002,217 $ 620,466,995
============ =============
Undistributed net investment income, end of year....... $ 3,851,347 $ 5,981,080
============ =============
See notes to financial statements.
16
THE CHINA FUND, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED OCTOBER 31, 2010
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH -
-----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase in net assets resulting from operations............. $ 170,360,519
Adjustments to reconcile net increase in net assets from
operations to net cash provided from operating activities:
Purchases of investment securities............................ (202,264,540)
Proceeds from disposition of investment securities............ 195,353,486
Net proceeds of short-term investments........................ 9,773,000
Proceeds from foreign cash transactions....................... (581,838)
Increase in collateral for securities loaned.................. (34,525,343)
Decrease in dividends and interest receivable................. 346,472
Increase in receivable for securities lending income.......... (42,802)
Increase in receivable for investments sold................... (5,610,194)
Increase in prepaid expenses and miscellaneous assets......... (3,162)
Increase in payable for securities purchased.................. 5,329,225
Increase in payable upon return of collateral for securities
loaned...................................................... 34,525,343
Increase in accrued expenses and other liabilities............ 100,718
Net change in unrealized (appreciation)/depreciation on
foreign currency contracts.................................. (1,072,966)
Net change in unrealized (appreciation)/depreciation on
investments................................................. (112,330,648)
Net realized gain from investments and foreign currency
transactions................................................ (52,268,820)
-------------
Net cash provided by operating activities................... 7,088,450
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions paid....................................... (5,825,297)
-------------
Net cash used for financing activities...................... (5,825,297)
-------------
NET INCREASE IN CASH............................................... 1,263,153
CASH AT BEGINNING OF YEAR.......................................... 8,804,497
-------------
CASH AT END OF YEAR................................................ $ 10,067,650
=============
See notes to financial statements.
17
THE CHINA FUND, INC.
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OF COMMON STOCK OUTSTANDING FOR THE YEARS INDICATED
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
----------------------------------------------------
2010(1) 2009(1) 2008 2007(2) 2006
-------- -------- -------- -------- --------
PER SHARE OPERATION PERFORMANCE*
Net asset value, beginning of year....... $ 27.24 $ 21.72 $ 60.50 $ 31.40 $ 23.25
-------- -------- -------- -------- --------
Net investment income.................... 0.21 0.29 0.49 0.28 0.30
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions........................... 7.27 11.24 (25.66) 32.83 10.36
-------- -------- -------- -------- --------
Total income (loss) from investment
operations............................. 7.48 11.53 (25.17) 33.11 10.66
-------- -------- -------- -------- --------
Less dividends and distributions:
Dividend from net investment income.... (0.26) (0.48) (0.28) (0.30) (0.22)
Distributions from net realized capital
gains............................... 0.00 (5.34) (11.84) (3.71) (2.29)
-------- -------- -------- -------- --------
Total dividends and distributions........ (0.26) (5.82) (12.12) (4.01) (2.51)
-------- -------- -------- -------- --------
Capital Share Transactions:
(Dilution) to net asset value,
resulting from issuance of shares in
stock dividend...................... 0.00 (0.19) (1.49) 0.00 0.00
-------- -------- -------- -------- --------
Net asset value, end of year............. $ 34.46 $ 27.24 $ 21.72 $ 60.50 $ 31.40
======== ======== ======== ======== ========
Per share market price, end of year...... $ 33.45 $ 25.25 $ 19.87 $ 51.67 $ 30.40
======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN (BASED ON MARKET
PRICE)................................. 33.70% 73.37% (48.06)% 90.97% 37.20%
======== ======== ======== ======== ========
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of year (000's).......... $785,002 $620,467 $394,357 $881,856 $455,206
Ratio of net expenses to average net
assets................................. 1.14% 1.44% 1.20% 1.08% 1.26%
Ratio of gross expenses to average net
assets................................. 1.14% 1.44% 1.23% 1.08% 1.26%
Ratio of net expenses to average net
assets, excluding stock dividend tax
expense................................ 1.08% 1.42% 1.11% 1.04% 1.23%
Ratio of net investment income to average
net assets............................. 0.67% 1.36% 1.28% 0.67% 1.09%
Portfolio turnover rate.................. 29% 34% 49% 46% 50%
* Per share amounts have been calculated using the average share method.
(1) The Fund was audited by Ernst & Young LLP for the years ended October 31,
2009 and 2010. The previous periods were audited by another independent
registered public accounting firm.
(2) The Fund's Direct Investment Manager changed as of June 2007.
See notes to financial statements.
18
THE CHINA FUND, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2010
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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 "1940 Act"). The Fund's investment objective is long-term capital
appreciation which it seeks to achieve by investing primarily in equity
securities (i) of companies for which the principal securities trading market is
the People's Republic of China ("China"), (ii) of companies for which the
principal securities trading market is outside of China, or constituting direct
equity investments in companies organized outside of China, that in both cases
derive at least 50% of their revenues from goods and services sold or produced,
or have at least 50% of their assets, in China and (iii) constituting direct
equity investments in companies organized in 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 year ended, October
31, 2010 relate to Direct Investments and 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, from brokers. Short-term investments having maturities of
sixty days or less are valued at amortized cost (original purchase cost as
adjusted for amortization of premium or accretion of discount) which when
combined with accrued interest approximates market value. Securities for which
market quotations are not readily available are valued at fair value in good
faith by or at the direction of the Board of Directors and considering relevant
factors, data and information including, if relevant, the market value of freely
tradable securities of the same class in the principal market on which such
securities are normally traded. Direct Investments are valued at fair value as
determined by or at the direction of the Board of Directors based on financial
and other information supplied by the Direct Investment Manager regarding each
Direct Investment. Forward currency contracts are valued at the current cost of
offsetting the contract. Equity linked securities are valued at fair value
primarily based on the value(s) of the security (or securities) underlying,
which normally follows the same methodology as the valuation of securities
listed on recognized exchanges.
Factors used in determining value may include, but are not limited to, the type
of security, the size of the holding, the initial cost of the security, the
existence of any contractual restrictions on the security's disposition, the
price and extent of public trading in similar securities of the issuer or of
comparable companies, the availability of quotations from broker-dealers, the
availability of values of third parties other than the Investment Manager or
Direct Investment Manager, information obtained from the issuer, analysts,
and/or the appropriate stock exchange (if available), an analysis of the
company's financial statements, an evaluation of the forces that influence the
issuer and the market(s) in which the security is purchased and sold and with
respect to debt securities, the maturity, coupon, creditworthiness, currency
denomination, and the movement of the market in which they trade.
19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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 up to 33 1/3% of the Fund's total assets
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 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 State Street Navigator Securities Lending Prime Portfolio.
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.
As of October 31, 2010, the Fund had loaned securities which were collateralized
by cash and short term investments. The value of the securities on loan and the
value of the related collateral were as follows:
VALUE OF VALUE OF CASH TOTAL
SECURITIES COLLATERAL COLLATERAL
---------- ------------- -----------
$64,499,371 $64,819,389 $67,103,921
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. Net unrealized foreign
currency gains and losses arise from changes in the value of assets and
liabilities, other than investments in securities, as a result of changes in
exchange rates.
FORWARD FOREIGN CURRENCY CONTRACTS: The Fund may enter into forward foreign
currency contracts to hedge against foreign currency exchange rate risks. A
forward currency contract is an agreement between two parties to buy
20
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
or sell currency at a set price on a future date. Upon entering into these
contracts, risks may arise from the potential inability of counterparties to
meet the terms of their contracts and from unanticipated movements in the value
of the foreign currency relative to the U.S. dollar. The U.S. dollar value of
forward currency contracts is determined using forward exchange rates provided
by quotation services. Daily fluctuations in the value of such contracts are
recorded as unrealized gain or loss on the Statement of Assets and Liabilities.
When the contract is closed, the Fund records a realized gain or loss equal to
the difference between the value at the time it was opened and the value at the
time it was closed. Such gain or loss is disclosed in the realized and
unrealized gain or loss on foreign currency in the Fund's accompanying Statement
of Operations. At October 31, 2010, The Fund did not hold open forward foreign
currency contracts.
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 on the Statement of
Assets and Liabilities 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. Such gain or loss is disclosed in
the realized and unrealized gain or loss on options in the Fund's accompanying
Statement of Operations. 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 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 purposes as, and share many of the same risks with, derivative
instruments. In addition, Access Products may be considered illiquid.
At October 31, 2010, the Fund held equity-linked Access Product warrants through
Credit Lyonnais 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.
21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
DIRECT INVESTMENTS: The Fund may invest up to 25% of the net proceeds from its
offering of its outstanding common stock in direct investments. Direct
investments are generally restricted and do not have a readily available resale
market. Because of the absence of any public trading market for these
investments, the Fund may take longer to liquidate these positions than would be
the case for publicly traded securities. Although these securities may be resold
in privately negotiated transactions, the prices on these sales could be less
than those originally paid by the Fund. Issuers whose securities are not
publicly traded may not be subject to public disclosure and other investor
protection requirements applicable to publicly traded securities. The value of
these securities at October 31, 2010 was $53,507,499 or 6.8% 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 Directors of the
Fund. The Fund does not have the right to demand that such securities be
registered.
SECURITY ACQUISITION DATE COST VALUE
-------- ---------------- ----------- -----------
China Bright.................................... 08/27/2010 $14,969,436 $15,021,769
China Silicon Corp., Series A Preferred*........ 11/30/2007 6,552,874 --
China Silicon Corp. Common Stock................ 01/08-09/10 1,458,811 --
HAND Enterprise Solutions, Ltd. Preferred....... 02/01/2007 -- --
HAND Enterprise Solutions, Ltd. Common Stock.... 02/11/2010 3,164,275 14,192,162
Qingdao Bright Moon Seaweed Group Co., Ltd. .... 02/28/2008 7,121,480 9,293,534
Ugent Holdings, Ltd. ........................... 04/06/2009 22,844,928 --
Zong Su Foods................................... 09/21/2010 15,000,034 15,000,034
----------- -----------
$71,111,838 $53,507,499
=========== ===========
* The purchase of China Silicon Corp., Series A Preferred resulted in the Fund
receiving 685,450 shares of China Silicon Corp. common stock warrants. Each
warrant entitles the Fund to purchase shares of common stock at an exercise
price of USD$2.98 per share, subject to adjustment.
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.
22
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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. Distributions to shareholders are recorded
on the ex-dividend date. Income and capital gain distributions are determined in
accordance with income tax regulations, which may differ from U.S. generally
accepted accounting principles. Certain capital accounts in the financial
statements are periodically adjusted for permanent differences in order to
reflect their tax character. These adjustments have no impact on net assets or
net asset value per share. Temporary differences which arise from recognizing
certain items of income, expense, gain or loss in different periods for
financial statement and tax purposes will reverse at some time in the future.
The Fund made distributions of $5,825,297 from Ordinary Income during the year
ended October 31, 2010. For the year ended October 31, 2009 the Fund made
distributions of $8,738,986 from Ordinary Income and $96,868,587 from Long-Term
Capital Gains. During the year ended October 31, 2010, the Fund utilized
$9,991,827 of capital loss carryforwards.
As of October 31, 2010, the components of distributable earnings on a tax basis
were $5,453,067 of undistributed ordinary income, $43,274,761 of undistributed
capital gains and $282,173,754 of unrealized appreciation, resulting in a total
of $330,901,582. Permanent book/tax differences relate to foreign currency gains
and losses and a 2009 excise tax paid.
FEDERAL TAXES: It is the Fund's policy to comply with the Subchapter M
provision of the Internal Revenue Code ("Code") and to distribute to
shareholders each year substantially all of its income. Accordingly, no
provision for federal income tax is necessary. As of and during the year ended
October 31, 2010, the Fund did not have a liability for any uncertain tax
positions. The Fund recognizes interest and penalties, if any, related to tax
liabilities as income tax expense in the Statement of Operations. As of October
31, 2010, tax years 2007 through 2010 remain subject to examination by the
Fund's major tax jurisdictions, which include the United States of America and
the state of Maryland. The Fund may be subject to taxes imposed by governments
of countries in which it invests. Such taxes are generally based on either
income or gains earned or repatriated. The Fund accrues and applies such taxes
to net investment income, net realized gains and net unrealized gains as income
and/or gains are earned.
NOTE B -- ADVISORY FEE AND OTHER TRANSACTIONS
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. Martin Currie Inc. is also the investment manager for the Fund's direct
investments. Martin Currie Inc. receives a fee computed weekly and payable
monthly, at an annual rate of 2.00% of the average weekly value of the Fund's
assets invested in direct investments.
No director, officer or employee of the Investment Manager or Direct Investment
Manager or any affiliates of those entities will receive any compensation from
the Fund for serving as an officer or director of the Fund. The Fund pays the
Chairman of the Board and each of the directors (who is not a director, officer
or employee of the Investment Manager or Direct
23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Investment Manager or any affiliate thereof) an annual fee of $35,000 and
$15,000 respectively, plus $3,000 for each Board of Directors' meeting or Audit
and Nominating Committee meeting attended, $2,000 for each telephonic meeting
attended and $2,000 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.
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 that is calculated daily
and paid monthly at an annual rate based on aggregate average daily assets of
the Fund. The Fund also pays State Street an annual fee for certain legal
administration services, including corporate secretarial services and preparing
regulatory filings.
The Fund has also contracted 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, 2010, the Fund did not repurchase any
shares under the plan. At October 31, 2010, 100,000,000 shares of $.01 par value
common stock were authorized.
NOTE D -- INVESTMENT TRANSACTIONS
For the year ended October 31, 2010, the Fund's cost of purchases and proceeds
from sales of investment securities, other than short-term securities, were
$202,264,540 and $195,489,909, respectively. At October 31, 2010, the cost of
investments for federal income tax purposes was $558,838,844. Gross unrealized
appreciation of investments was $325,910,182 while gross unrealized depreciation
of investments was $44,070,747, resulting in net unrealized appreciation of
investments of $281,839,435. The primary difference between book-basis and tax-
basis unrealized appreciation or unrealized depreciation of investments is the
tax deferral of losses on wash sales and income accruals from defaulted bonds.
NOTE E -- INVESTMENTS IN CHINA
The Fund's investments in China companies involve certain risks not typically
associated with investments in securities of U.S. companies or the U.S.
Government, including risks relating to (1) social, economic and political
uncertainty; (2) price volatility, lesser liquidity and smaller market
capitalization of securities markets in which securities of China companies
trade; (3) currency exchange fluctuations, currency blockage and higher rates of
inflation; (4) controls on foreign investment and limitations on repatriation of
invested capital and on the Fund's ability to exchange local currencies for U.S.
dollars; (5) governmental involvement in and control over the economy; (6) risk
of nationalization or expropriation of assets; (7) the nature of the smaller,
less seasoned and newly organized China companies, particularly in China; and
(8) the absence of uniform accounting, auditing and financial reporting
standards, practices and disclosure requirements and less government supervision
and regulation.
24
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTE F -- INVESTMENTS IN NON-CONTROLLED AFFILIATES*:
GAIN/(LOSS)
REALIZED
BALANCE OF GROSS GROSS BALANCE OF ON SALE OF
SHARES HELD PURCHASES SALES SHARES HELD VALUE INCOME FROM SHARES AS OF
OCTOBER 31, AND AND OCTOBER 31, OCTOBER 31, NON-CONTROLLED OCTOBER 31,
NAME OF ISSUER 2009 ADDITIONS REDUCTIONS 2010 2010 AFFILIATES 2010
---------------------------- ----------- ----------- ---------- ----------- ----------- -------------- ------------
CDW Holding, Ltd. .......... 54,708,000 -- 3,250,000 51,458,000 $ 3,179,487 $ 319,248 $ 133,445
China Bright................ -- 14,665,617 -- 14,665,617 15,021,769 -- --
China Medical System
Holdings, Ltd.(1)......... 3,623,188 68,840,572 110,000 72,353,760 46,202,614 1,202,898 67,476
China Silicon Corp. Common
Stock..................... 1,171,572 1,130,291 -- 2,301,863 -- -- --
China Silicon Corp., Series
A Preferred............... 27,418 -- -- 27,418 -- 497,570 --
China Silicon Corp.
Warrants.................. 685,450 -- -- 685,450 -- -- --
Far East Energy Corp. ...... 14,565,477 2,963,800 -- 17,529,277 9,730,502 -- --
HAND Enterprise Solutions,
Ltd. Common Stock......... 500,000 -- -- 500,000 -- -- --
HAND Enterprise Solutions,
Ltd. Preferred............ -- 8,027,241 -- 8,027,241 14,192,162 -- --
Highlight Tech. Corp. ...... 2,525,170 -- 2,525,170 -- -- 113,589 (19,421)
Huiyin Household Appliances
Holdings Co., Ltd.(2)..... 450 160,413,300 -- 160,413,750 44,491,832 533,249 --
Qingdao Bright Moon Seaweed
Group Co., Ltd. .......... 31,827,172 -- -- 31,827,172 9,293,534 -- --
Taiwan Life Insurance Co.,
Ltd. ..................... -- 200,000,000 -- 200,000,000 7,936,254 215,028 --
teco Optronics Corp......... 1,861,710 -- 1,861,710 -- -- -- (567,319)
Ugent Holdings, Ltd. ....... 177,000,000 -- -- 177,000,000 -- 1,131,676 --
Zong Su Foods............... -- 2,677 -- 2,677 15,000,034 -- --
* 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) Additional shares acquired resulting from a corporate action.
(2) Shares issued as a result of an IPO, formally Queensbury Investments,
Ltd. (Huiyin).
NOTE G -- FAIR VALUE MEASUREMENT
The fund has adopted fair valuation accounting standards which establish a
definition of fair value and set out a hierarchy for measuring fair value. These
standards require additional disclosures about the various inputs and valuation
techniques used to develop the measurements of fair value and a discussion in
changes in valuation techniques and related inputs during the period. These
inputs are summarized in the three broad levels listed below:
- Level 1 -- Inputs that reflect unadjusted quoted prices in active
markets for identical assets or liabilities that the Fund has the
ability to access at the measurement date;
25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
- Level 2 -- Inputs other than quoted prices that are observable for the
asset or liability either directly or indirectly, including inputs in
markets that are not considered to be active;
- Level 3 -- Inputs that are unobservable.
The following is a summary of the inputs used as of October 31, 2010 in valuing
the Fund's investments carried at value:
ASSETS VALUATION INPUT
DESCRIPTION LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
----------- ------------ ------------ ------------ ------------
COMMON STOCK AND OTHER EQUITY INTERESTS
Hong Kong
Consumer Discretionary............ $ 31,227,059 $ -- $ 44,491,832 $ 75,718,891
Consumer Staples.................. 24,428,180 -- -- 24,428,180
Energy............................ 8,077,373 -- -- 8,077,373
Health Care....................... 22,062,941 -- -- 22,062,941
Utilities......................... 15,150,179 -- -- 15,150,179
------------ ------------ ------------ ------------
Total Hong Kong...................... 100,945,732 -- 44,491,832 145,437,564
------------ ------------ ------------ ------------
Hong Kong -- "H" Shares
Consumer Discretionary............ 22,867,936 -- -- 22,867,936
Consumer Staples.................. 28,185,537 -- -- 28,185,537
Health Care....................... 93,946,243 -- -- 93,946,243
Industrials....................... 7,011,403 -- -- 7,011,403
Materials......................... 11,347,760 -- -- 11,347,760
Telecommunications................ 11,936,815 -- -- 11,936,815
------------ ------------ ------------ ------------
Total Hong Kong -- "H" Shares........ 175,295,694 -- -- 175,295,694
------------ ------------ ------------ ------------
Singapore
Consumer Staples.................. 46,872,253 -- -- 46,872,253
Financials........................ 3,809,461 -- -- 3,809,461
Information Technology............ 3,179,487 -- -- 3,179,487
------------ ------------ ------------ ------------
Total Singapore...................... 53,861,201 -- -- 53,861,201
------------ ------------ ------------ ------------
Taiwan
Consumer Discretionary............ 44,728,175 -- -- 44,728,175
Consumer Staples.................. 22,905,121 -- -- 22,905,121
Financials........................ 50,090,447 -- 7,936,254 58,026,701
Information Technology............ 13,856,577 -- -- 13,856,577
Materials......................... 11,792,724 -- -- 11,792,724
------------ ------------ ------------ ------------
Total Taiwan......................... 143,373,044 -- 7,936,254 151,309,298
------------ ------------ ------------ ------------
26
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
DESCRIPTION LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
----------- ------------ ------------ ------------ ------------
United States
Consumer Discretionary............ $ 614,393 $ -- $ -- $ 614,393
Energy............................ 9,730,502 -- -- 9,730,502
Health Care....................... 23,013,381 -- -- 23,013,381
Information Technology............ 19,375,658 -- -- 19,375,658
------------ ------------ ------------ ------------
Total United States.................. 52,733,934 -- -- 52,733,934
------------ ------------ ------------ ------------
TOTAL COMMON STOCK AND OTHER EQUITY
INTERESTS............................ 526,209,605 -- 52,428,086 578,637,691
------------ ------------ ------------ ------------
EQUITY LINKED SECURITIES
Consumer Discretionary............... -- 9,942,946 -- 9,942,946
Consumer Staples..................... -- 7,656,131 -- 7,656,131
Financials........................... -- 58,775,998 -- 58,775,998
Industrials.......................... -- 35,803,799 -- 35,803,799
Materials............................ -- 8,106,826 -- 8,106,826
------------ ------------ ------------ ------------
TOTAL EQUITY LINKED SECURITIES......... -- 120,285,700* -- 120,285,700
------------ ------------ ------------ ------------
DIRECT INVESTMENTS
Consumer Staples..................... -- -- 15,000,034 15,000,034
Health Care.......................... -- -- 15,021,769 15,021,769
Industrials.......................... -- -- 9,293,534 9,293,534
Information Technology............... -- -- 14,192,162 14,192,162
------------ ------------ ------------ ------------
TOTAL DIRECT INVESTMENTS............... -- -- 53,507,499 53,507,499
------------ ------------ ------------ ------------
COLLATERAL FOR SECURITIES ON LOAN...... -- 64,819,389 -- 64,819,389
SHORT TERM INVESTMENTS
UNITED STATES........................ -- 23,428,000 -- 23,428,000
------------ ------------ ------------ ------------
TOTAL INVESTMENTS...................... $526,209,605 $208,533,089 $105,935,585 $840,678,279
------------ ------------ ------------ ------------
The Fund's policy is to recognize transfers between levels at the end of the
reporting period
* For the year ended October 31, 2010, transfers from Level 1 to Level 2 are
due to changes in the Fund's policy regarding the classification of equity
linked securities.
27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
The following is a reconciliation of the fair valuations using significant
unobservable inputs (Level 3) for the fund during the year ended October 31,
2010:
CHANGE IN
UNREALIZED
APPRECIATION
(DEPRECIATION)
NET FROM
CHANGE IN TRANSFERS INVESTMENTS
BALANCE AS NET REALIZED UNREALIZED IN AND/OR BALANCE AS OF HELD AT
OF OCTOBER PURCHASES GAIN APPRECIATION OUT TO OCTOBER 31, OCTOBER 31,
INVESTMENTS IN SECURITIES 31, 2009 (SALES) (LOSS) (DEPRECIATION) LEVEL 3 2010 2010
------------------------- ------------ ------------ ---------- -------------- ------------ ------------- --------------
COMMON STOCK AND OTHER EQUITY INTERESTS
Consumer
Discretionary....... $ -- $ 38,458,859 $ -- $ 6,032,973 $ -- $ 44,491,832 $ 6,032,973
Financials............. -- 6,178,274 -- 1,757,980 -- 7,936,254 1,757,980
Health Care............ 27,918,189 (6,907,955) 3,286,548 (582,926) (23,713,856)* -- --
------------ ------------ ---------- ------------ ------------ ------------ ------------
27,918,189 37,729,178 3,286,548 7,208,027 (23,713,856) 52,428,086 7,790,953
------------ ------------ ---------- ------------ ------------ ------------ ------------
DIRECT INVESTMENTS
Consumer
Discretionary....... 47,108,700 (38,515,190) -- (8,593,510) -- -- --
Consumer Staples....... -- 15,000,034 -- -- -- 15,000,034 --
Health Care............ -- 14,969,436 -- 52,333 -- 15,021,769 52,333
Industrials............ 34,180,814 (4,489,024) (19,420) (20,378,836) -- 9,293,534 (20,398,256)
Information
Technology.......... 13,437,401 497,570 (567,319) 824,510 -- 14,192,162 257,191
------------ ------------ ---------- ------------ ------------ ------------ ------------
94,726,915 (12,537,174) (586,739) (28,095,503) -- 53,507,499 (20,088,732)
============ ============ ========== ============ ============ ============ ============
$122,645,104 $ 25,192,004 $2,699,809 $(20,887,476) $(23,713,856) $105,935,585 $(12,297,779)
============ ============ ========== ============ ============ ============ ============
* Sinopharm Medicine Holding Co., Ltd. no longer has a sale restriction, nor
is fair valued by the Board and is considered a Level 1 valued security.
NOTE H -- DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The following table, grouped into appropriate risk categories, discloses the
amounts related to the Fund's use of derivative instruments and hedging
activities at October 31, 2010:
FOREIGN
EXCHANGE
DERIVATIVES NOT ACCOUNTED FOR AS HEDGING INSTRUMENTS CONTRACTS RISK TOTAL
---------------------------------------------------- -------------- ---------
REALIZED GAIN (LOSS)(1)
Forward Contracts........................................... $(829,775) $(829,775)
CHANGE IN APPRECIATION (DEPRECIATION)(2)
Forward Contracts........................................... 831,048 831,048
(1) Statements of Operations location: Net realized loss on foreign currency
transactions.
(2) Statements of Operations location: Net change in unrealized
appreciation/(depreciation) on foreign currency transactions.
28
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
The volume of trading in derivative instruments was to close out prior year open
contracts for the year ended October 31, 2010.
NOTE I -- SUBSEQUENT EVENT
On November 19, 2010, the Fund determined, in conjunction with the Direct
Investment Manager that the valuation of the Ugent Holdings, Ltd., 12% bonds
purchased April 6, 2009, due April 6, 2012 (the "Bonds") held by the Fund,
should be adjusted to US$0.00. This zero valuation has been reflected in the
accompanying financial statements as of October 31, 2010. Additionally, the Fund
has asserted that the Direct Investment Manager breached certain duties and
obligations in causing the Fund to purchase the Bonds by participating in a
transaction in which another party advised by the Direct Investment Manager was
also involved. In order to resolve any potential claims or disputes regarding
the purchase of the Bonds, the Fund, the Direct Investment Manager and a
syndicate of insurance companies (acting on behalf of the Direct Investment
Manager) have entered into an agreement on December 30, 2010 for the insurance
companies, severally, to indemnify the Fund against any loss arising from the
sale or other disposition of the Bonds or, if no sale or disposition of the
Bonds takes place prior to April 6, 2012, to reimburse the Fund for the cost of
its investment, less any interest or other income received. The Direct
Investment Manager has agreed to reimburse the Fund for associated legal, audit,
management fees related to the Ugent investment previously paid by the Fund and
other costs. Because the agreement supporting this arrangement constitutes a
binding and legally enforceable commitment to the Fund, its value
(US$20,120,858) has been reflected in the net asset value of the Fund as of
December 30, 2010. The Board has suspended further direct investments until
improvements are made in the policies and procedures pursuant to which direct
investments are made.
29
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, 2010, and the related statements of operations and cash flows for
the year then ended, the statements of changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the two
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 audits. The financial highlights for each of the three years in the
period ended October 31, 2008 were audited by another independent registered
public accounting firm whose report, dated December 29, 2008, expressed an
unqualified opinion on the financial highlights.
We conducted our audits in accordance with the 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. We were
not engaged to perform an audit of the Fund's internal control over financial
reporting. Our audits 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 and financial highlights, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of October 31, 2010, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of The
China Fund, Inc. at October 31, 2010, the results of its operations and its cash
flows for the year then ended, 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 two
years in the period then ended, in conformity with U.S. generally accepted
accounting principles.
-s- Ernst & Young LLP
Boston, Massachusetts
December 30, 2010
30
THE CHINA FUND, INC.
OTHER INFORMATION (UNAUDITED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TAX INFORMATION
FOREIGN TAXES CREDIT: The Fund designates $1,264,800 as foreign taxes paid and
$10,436,119 as foreign source income earned for regular Federal income tax
purposes.
QUALIFIED DIVIDEND INCOME: For the fiscal year ended October 31, 2010, 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 the individual's tax bracket.
Complete information will be reported in conjunction with Form 1099-DIV. For the
year ended October 31, 2010, the Fund had $1,630,855 in Qualified Dividend
Income.
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.
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, 2010.
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, 2010 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
31
THE CHINA FUND, INC.
OTHER INFORMATION (CONTINUED) (UNAUDITED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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 April 7, 2010, 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.
32
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 Management Agreement". 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 Investments") pursuant to the
Listed Management Agreement. The Fund pays Martin Currie a fee for its
investment management of the Fund's Listed Investments 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 Investments up to US$315 million and 0.50% of the
Fund's average weekly net assets consisting of Listed Investments in excess of
US$315 million (the "Listed Investment Management Fee").
The Fund may invest up to 25% of the net proceeds of its offerings of its
outstanding common stock in direct equity investments (the "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 computed
weekly and payable monthly at an annual rate of 2.00% of the Fund's average
weekly value of the Fund's assets consisting of Direct Investments (the "Direct
Investment Management Fee").
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
(together, the "Advisory Agreements") 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 Advisory Agreements
during fiscal 2010, the Board requested from Martin Currie information that the
Board believed to be reasonably necessary to reach its conclusion. 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 session for the purpose of considering the approval
of the Advisory Agreements. During the executive session, the Directors reviewed
a memorandum which detailed the duties and responsibilities of the Directors
with respect to their consideration of the Advisory Agreements. 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 personnel providing services to the Fund, (2) copies of the
Listed Management Agreement, as amended, and the Direct Management Agreement,
(3) a profitability analysis of Martin Currie, (4) financial statements
33
BOARD DELIBERATIONS REGARDING APPROVAL OF
INVESTMENT MANAGEMENT AGREEMENTS (CONTINUED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
of Martin Currie, (5) Form ADV of Martin Currie, and (6) performance and fee
comparison data provided by Fundamental Data, an independent third party vendor
of such information on global closed-end funds.
The Board, consisting entirely of "independent directors" within the meaning of
the Investment Company Act of 1940, unanimously approved the Advisory Agreements
at an "in person" meeting held on June 17, 2010 (the "Meeting"). In evaluating
the Advisory Agreements, the Directors drew on materials provided to them by
Martin Currie. In deciding whether to renew the Advisory Agreements, the
Directors considered various factors, including (1) the nature, extent and
quality of the services provided by Martin Currie under the Advisory Agreements,
(2) the investment performance of the Fund's Listed Investments and Direct
Investments (together, the "Fund's Investments"), (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 Advisory Agreements
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
Advisory Agreements Martin Currie is responsible for managing the Fund's
Investments in accordance with the Fund's investment objective and policies,
applicable legal and regulatory requirements, and the 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 the Fund's Investments, 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 (i)
of companies for which the principal securities trading market is in China, (ii)
of companies for which the principal securities trading market is outside of
China, or constituting direct equity investments in companies organized outside
of China, that in both cases derive at least 50% of their revenues from goods or
services sold or produced, or have at least 50% of their assets, in China or
(iii) constituting direct equity investments in companies organized in China.
They also noted the experience and expertise of Martin Currie as appropriate as
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 Investments, and the
responsibilities of the investment and compliance personnel with respect to the
Fund. They also considered the resources, operational structures and practices
of Martin Currie in managing the Fund's 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 of the services provided by Martin Currie
to the Fund were appropriate, had been of high quality, and could be expected to
remain so.
34
BOARD DELIBERATIONS REGARDING APPROVAL OF
INVESTMENT MANAGEMENT AGREEMENTS (CONTINUED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
2. Performance of the Fund's Investments
The Directors noted that, in view of the distinctive investment objective of the
Fund, the Fund's investment performance was better than 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 outperformed the MSCI Golden Dragon Index for
the one-, three-, five- and ten-year periods ending April 30, 2010 (at both net
asset value and market price). 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 at least 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 general 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 acceptable, they turned to the data provided. After 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. The Directors also discussed whether the
compensation of Martin Currie personnel was at an appropriate level to retain
and motivate employees.
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 Advisory Agreements, there is no other
investment advisory, brokerage, or other fee received or receivable by Martin
Currie or its affiliates 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 Martin Currie's 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.
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 as such 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 across
all of its clients. In addition, the economies were reflected in the breakpoint
in the Fund's fee structure.
35
BOARD DELIBERATIONS REGARDING APPROVAL OF
INVESTMENT MANAGEMENT AGREEMENTS (CONTINUED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
In order to better evaluate the Fund's advisory fees, the Directors had
requested comparative information with respect to fees paid by similar funds,
i.e., public funds that invest in China. The Directors found that, 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 seventeen.
They also noted that there are no other public funds with a dedicated direct
investment component that provide a fee comparison. It was noted that the
closest comparison would be private equity funds and those funds normally have a
base fee of 2% of assets and an incentive based fee based on gains realized on
portfolio investments, and thus, the Directors determined that the Direct
Investment Management Fee compares favorably with the fees of private equity
funds. It was also noted that, while the Direct Investment Management Fee is
higher than the fees paid by other public funds, the Listed Investment
Management Fee compared favorably with management fees of other similar public
funds and the effective combined fees under the Listed Management Agreement and
the Direct Management Agreement were lower than the fees for most other similar
public funds. 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 fees.
APPROVAL OF THE ADVISORY AGREEMENTS
The Directors approved the continuance of the Fund's Advisory Agreements with
Martin Currie 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 at
least 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.
36
DIVIDENDS AND DISTRIBUTIONS;
SUMMARY OF 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 automatically be a participant (a "Participant") in the Plan
unless Computershare Trust Company, N.A., the Plan Agent, is otherwise
instructed by the shareholder in writing, to have all distributions, net of any
applicable U.S. withholding tax, paid in cash. 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 shareholder 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
Trust Company, N.A. c/o The China Fund, Inc. at P.O. Box 43078, Providence,
Rhode Island 02940-3078, by telephone at 1-800-426-5523 or via the Internet at
www.computershare.com/investor.
The Plan will operate whenever a dividend or distribution is declared payable
only in cash or in cash or shares of the Fund's common stock, but it will not
operate with respect to a dividend or distribution declared payable only in
shares of the Fund's common stock (including such a declaration that provides an
option to receive cash).
Computershare Trust Company, N.A ("Computershare" or the "Plan Agent") act as
Plan 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, non-
participants in the Plan will receive cash and participants in the Plan will
receive Common Stock. The shares of common stock issued by the Fund will be
valued at net asset value or, if the net asset value is less than 95% of the
market price on the valuation date, then shares will be valued at 95% of the
market price. If the net asset value per share of the common stock on the
valuation date exceeds the market price, participants will be issued shares at
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 the Fund should
declare a dividend or capital gains distribution payable only in cash, the Plan
Agent will, as purchasing agent for the participants, buy shares of common stock
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 accounts on,
or shortly after, the payment date.
Participants in the Plan have the option of making additional payments to the
Plan Agent annually, in any amount from $100 to $3,000 for investment in the
Fund's Common Stock. The Plan Agent 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 January 15 of each year
or the next trading day if January 15th is not a trading day. Participants may
make voluntary cash payments by sending a check (in U.S. dollars and drawn on a
U.S. Bank) made payable to "Computershare" along with a completed transaction
form which is attached to each statement a Participant receives. The Plan Agent
will not accept cash, traveler's checks, money orders or third party checks. Any
voluntary cash payments received more than thirty-five days prior to such date
will be returned by the Plan Agent, and interest will not be paid on any such
amounts. To avoid unnecessary cash accumulations, and also to allow ample time
for receipt and processing by the Plan Agent, participants should send in
voluntary cash payments to be received by the Plan Agent approximately two 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. In the event that a Participant's
check for a voluntary cash payment is returned unpaid for any reason, the Plan
Agent will consider the
37
DIVIDENDS AND DISTRIBUTIONS;
SUMMARY OF DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN (CONTINUED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
request for investment of such funds null and void, and shall immediately remove
from the Participant's account those shares, if any, purchased upon the prior
credit of such funds. The Plan Agent shall be entitled to sell shares to satisfy
any uncollected amount plus any applicable fees. If the net proceeds of the sale
of such shares are insufficient to satisfy the balance of such uncollected
amounts, the Plan Agent shall be entitled to sell such additional shares from
the Participant's account as may be necessary to satisfy the uncollected
balance.
The Plan Agent will confirm in writing, each trade for a Participant's account
and each share deposit or share transfer promptly after the account activity
occurs. The statement will show the number of shares held, the number of shares
for which dividends are being reinvested, any cash received for purchase of
shares, the price per share for any purchases or sales, and any applicable fees
for each transaction charged the Participant. In the event the only activity in
a Participant's account is the reinvestment of dividends, this activity will be
confirmed in a statement on at least a quarterly basis. If the Fund pays an
annual dividend and the only activity in a Participant's account for the
calendar year is the reinvestment of such dividend, the Participant will receive
an annual statement. These statements are a Participant's continuing record of
the cost basis of purchases and should be retained for income tax purposes.
The Plan Agent will hold shares of common stock acquired pursuant to the Plan in
non-certificated form in the name of the Participant for whom such shares are
being held and each Participant's proxy will include those shares of common
stock held pursuant to the Plan. The Plan Agent will forward to each Participant
any proxy solicitation material received by it. In the case of shareholders,
such as banks, brokers or nominees, which hold shares for others who are the
beneficial owners, the Plan Agent will administer the Plan on the basis of the
number of shares certified from time to time by the shareholder as representing
the total amount registered in the name of such Participants and held for the
account of beneficial owners who participate in the Plan. Upon a Participant's
Internet, telephone or written request, the Plan Agent will deliver to her or
him, without charge, a certificate or certificates representing all full shares
of common stock held by the Plan Agent pursuant to the Plan for the benefit of
such Participant.
Participants will not be charged a fee in connection with the reinvestment of
dividends or capital gains distributions. The Plan Agent's transaction fees for
the handling of the reinvestment of dividends and distributions will be paid by
the Fund. However, Participants will be charged a per share fee (currently
$0.05) incurred with respect to the Plan Agent's open market purchases in
connection with the reinvestment of dividends or capital gains distributions and
with purchases from voluntary cash payments made by the Participant. A $2.50
transaction fee and a per share fee of $0.15 will also be charged by the Plan
Agent upon any request for sale. Per share fees include any brokerage
commissions the Plan Agent is required to pay.
The automatic reinvestment of dividends and distributions will not relieve
participants of any income tax which may be payable on such dividends and
distributions. Participants will receive tax information annually for their
personal records and to help them prepare their federal income tax return. For
further information as to tax consequences of participation in the Plan,
Participants should consult with their own tax advisors.
These terms and conditions may be amended or supplemented by the Plan Agent or
the Fund at any time or times but, except when necessary or appropriate to
comply with applicable law or the rules or policies of the Securities and
Exchange Commission or any other regulatory authority, only by mailing to the
Shareholders appropriate written
38
DIVIDENDS AND DISTRIBUTIONS;
SUMMARY OF DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN (CONTINUED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
notice at least 30 days prior to the effective date thereof. The amendment or
supplement shall de deemed to be accepted by the Participants unless, prior to
the effective date thereof, the Plan Agent receives written notice of the
termination of a Participant's account under the Plan. Any such amendment may
include an appointment by the Plan Agent in its place and stead of a successor
Plan Agent under these terms and conditions, with full power and authority to
perform all or any of the acts to be performed by the Plan Agent under these
terms and conditions. Upon any such appointment of a successor Plan Agent for
the purposes of receiving dividends and distributions, the Fund will be
authorized to pay to such successor Plan Agent, for the Participants' accounts,
all dividends and distributions payable on the shares of common stock held in
the Participants' name or under the Plan for retention or application by such
successor Plan Agent as provided in these terms and conditions.
Requests for copies of the Plan, which sets forth all of the terms of the Plan,
and all correspondence concerning the Plan should be directed to Computershare
Trust Company, N.A., the Plan Agent for The China Fund, Inc., in writing at P.O.
Box 43078, Providence, Rhode Island, 02940-3078, by telephone at 1-800-426-5523
or via the Internet at www.computershare.com/investor.
39
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.
PRINCIPAL NUMBER OF
NAME (AGE) AND OCCUPATION(S) FUNDS IN THE
ADDRESS OF DIRECTOR OR EMPLOYMENT COMPLEX (1) OTHER DIRECTORSHIPS/
DIRECTORS POSITION(S) SINCE DURING OVERSEEN BY TRUSTEESHIPS IN
OR NOMINEES FOR HELD (TERM PAST FIVE THE DIRECTOR PUBLICLY HELD
DIRECTOR WITH FUND ENDS) YEARS OR NOMINEE COMPANIES
--------------- ----------- -------- ----------------------- ------------ -----------------------
James J. Chairman of 1992 Attorney, Nomos (law 1 Fromageries Bel S.A.
Lightburn the (2012) firm) (2004-2006);
(67)........... Board and Attorney, member of
13, Rue Director Hughes Hubbard & Reed
Alphonse de (law firm) (1993-2004).
Neuville 75017
Paris, France
Michael F. Director 1992 Chairman, Holland & 1 The Holland Balanced
Holland (66)... (2013) Company L.L.C. Fund, Inc.; Reaves
375 Park Avenue (investment adviser) Utility Income Fund;
New York, (1995-present). The Taiwan Fund, Inc.;
New York 10152 State Street Master
Funds and State Street
Institutional
Investment Trust
William C. Kirby Director 2007 Director, John K. 1
(60)........... (2011) Fairbank Center for
Harvard Chinese Studies,
University Harvard University
CGIS South (2006-present);
Building Chairman, Harvard China
1730 Cambridge Fund (2006-present);
Street Harvard University
Cambridge, MA Distinguished Service
02138 Professor (2006-
present); Dean of the
Faculty of Arts and
Sciences Harvard
University (2002-2006).
Joe O. Rogers Director 1992 Principal, Rogers 1 The Taiwan Fund, Inc.
(61)........... (2013) International LLC (1986-present)
2477 Foxwood (investment
Drive consultation) (July
Chapel Hill, NC 2001-present).
27514
Nigel S. Tulloch Director 1992 Director, The HSBC 1
(64)........... (2011) China Fund Limited
7 Circe Circle (1992-2005).
Dalkeith
WA6009
Australia
(1) The term "Fund Complex" means two or more registered investment companies
that share the same investment adviser or principal underwriter or hold
themselves out to investors as related companies for the purposes of
investment and investor services.
40
DIRECTORS AND OFFICERS (CONTINUED) (UNAUDITED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
OFFICERS OF THE FUND
The following table provides information concerning each of the officers of the
Fund.
POSITION(S)
NAME (AGE) AND HELD OFFICER PRINCIPAL OCCUPATION(S) OR EMPLOYMENT
ADDRESS OF OFFICERS WITH FUND SINCE DURING PAST FIVE YEARS
------------------- ----------- --------- -------------------------------------
Jamie Skinner (49).. President September Director, Head of Client Services,
Martin Currie 2009 Martin Currie Investment Management
Investment Limited (October 2004-present).
Management Saltire
Court
20 Castle Terrace
Edinburgh EH1 2ES
Scotland
United Kingdom
Chris Ruffle (52)... Vice December Director, MC China Limited (2006-
Martin Currie President 2008 present); Director, Heartland Capital
Investment Management Limited, (2006-present);
Advisers Saltire Director, Martin Currie Investment
Court Management Limited (1995-2006).
20 Castle Terrace
Edinburgh, EH12ES
Scotland
Shifeng Ke (45)..... Vice December Director, MC China Limited, (2006-
Martin Currie President 2008 present); Director, Heartland Capital
Investment Management Limited, (2006-present);
Advisers Saltire Director, Martin Currie Investment
Court Management Limited (2004-2006).
20 Castle Terrace
Edinburgh, EH12ES
Scotland
Bill Royer (44)..... Chief January Managing Director, Alternative
Foreside Compliance 2010 Investments and Chief Compliance
Compliance Officer Officer Services, Foreside Compliance
Services, LLC Services, LLC (November 2009-
Three Canal Plaza, present); Acting General Counsel,
Suite 100, Baring Asset Management, Inc.
Portland, ME 04101 (December 2007-May 2008) and General
Counsel and Member, Grantham, Mayo,
Van Otterloo & Co., LLC (February
1995-March 2005).
Laura F. Healy Treasurer December Vice President, State Street Bank and
(46).............. 2008 Trust Company (July 2007-present);
2 Avenue de Senior Director, Investors Bank and
Lafayette, Trust Company (January 2002-July
Boston, MA 02111 2007).
Brian O'Sullivan Assistant March Vice President, State Street Bank and
(36).............. Treasurer 2009 Trust Company (December 2006-
801 Pennsylvania present); Assistant Vice President,
Ave State Street Bank and Trust Company
Kansas City, MO (March 2004-December 2006).
64105
Tracie A. Coop Secretary June Vice President and Senior Counsel,
(33).............. 2010 State Street Bank and Trust Company
4 Copley Place, (October 2007-present); Associate
Boston, MA 02206 Counsel and Manager, Natixis Asset
Management Advisors L.P. (2006-2007);
Associate Counsel, Natixis Asset
Management Advisors L.P. (2005-2006).
Francine S. Hayes Assistant June Vice President and Managing Counsel,
(43).............. Secretary 2005 State Street Bank and Trust Company
4 Copley Place, (2004-present); Assistant Vice
Boston, MA 02206 President and Counsel, State Street
Bank and Trust Company (2001-2004).
41
THE CHINA FUND, INC. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- UNITED STATES ADDRESS The China Fund, Inc. c/o State Street Bank and Trust Company 2 Avenue de Lafayette 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 Michael F. Holland, Director William Kirby, Director Joe O. Rogers, Director Nigel S. Tulloch, Director Jamie Skinner, President Chris Ruffle, Vice President Shifeng Ke, Vice President Bill Royer, Chief Compliance Officer of the Fund Laura Healy, Treasurer Tracie A. Coop, Secretary Brian O'Sullivan, Assistant Treasurer Francine Hayes, Assistant 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 REGISTERED PUBLIC ACCOUNTING FIRM Ernst & Young, LLP LEGAL COUNSEL Clifford Chance US LLP
|
(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.
|
|
(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.
|
|
(a)
|
Audit
Fees
|
|
(b)
|
Audit-Related
Fees
|
|
(c)
|
Tax
Fees
|
|
(d)
|
All Other
Fees
|
|
Portfolio
Manager
|
Dollar
Range of Fund Shares Beneficially Owned
|
|
Chris
Ruffle
|
$500,001
- $1,000,000
|
|
Shifeng
Ke
|
$100,001
- $ 500,000
|
|
(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.
|
|
(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.
|
|
By:
|
/s/ Jamie Skinner
|
|
|
|
Jamie
Skinner
|
|
|
|
President
of The China Fund, Inc.
|
|
|
Date:
|
January
7, 2011
|
|
By:
|
/s/ Jamie Skinner
|
|
|
Jamie
Skinner
|
||
|
President
of The China Fund, Inc.
|
||
|
Date:
|
January
7, 2011
|
|
|
By:
|
/s/ Laura F. Healy
|
|
|
Laura
F. Healy
|
||
|
Treasurer
of The China Fund, Inc.
|
||
|
Date:
|
January
7, 2011
|