EX-99.1 3 b43648dbexv99w1.htm EX-99.1 NEWSLETTER

EX-99.1 NEWSLETTER

The China Fund, Inc. (CHN)
July 2002

In brief... at June 30, 2002

Net Asset Value per share*		US$16.48				China Fund NAV		MSCI Golden Dragon
Market Price*		US$13.77		1 month return*		-4.3%		-6.5%
Premium/Discount*		-16.44%		1 year return*		4.7%		-7.6%
Fund size*		US$166m

*  Source: State Street Corporation/Martin Currie Inc

Manager’s commentary

In June, bearish sentiment in the US markets inflicted collateral damage on Chinese stocks. The net asset value of your fund fell by slightly less than the MSCI Golden Dragon index (-4.3% compared to -6.5%), but the discount also widened. All this contrasted with the economic figures coming out of China. Industrial production grew by 12.9% for the period from June 2001 to June 2002, the fastest rate since 1997. Base money, a reflection of local liquidity, also increased at a rate last seen in September 1997 (+19.4% during the past 12 months). This conundrum — good economic numbers and weak stock prices — is not, of course, limited to China. But in China generally the ratings on stocks are low, yields high and profits are growing. We estimate that the portfolio of your fund has an average prospective price-to-earnings ratio of 10.1x and yield of 1%.

We are entering into a political closed season in China. The party leaders will head off for their annual vacation at Beidaihe in August (talk about a busman’s holiday — this is akin to President Bush taking his inner cabinet for a week at Coney Island). They will then convene for the 16th party conference in late September or October. A change of leadership, with Jiang Zemin stepping down as president and general secretary in favour of Hu Jintao, is expected at this conference. So it is a sensitive time and we do not expect any ‘courageous’ political initiatives. But there are still plenty of rule changes arising from WTO entry to keep the administrators busy. Last month, detailed rules were announced regarding Sino-foreign joint ventures for stockbrokers and fund managers, and the foreign ownership limit on local airline companies was raised to 49%.

The Chinese authorities are clearly keen to induce a ‘feel good factor’ in the Shanghai and Shenzhen markets ahead of the political hand-over. This was reflected in the announcement last week that the government was permanently suspending the sale of state shares into the domestic A-share market. I think a few people must have had fingers crossed behind their backs, but the short-term import of the announcement is clear. In contrast, the Hong Kong market is faced in the second half of 2002 with the planned listings of two huge State Owned Enterprises, Bank of China (HK) and China Telecom Fixed Line. Regular readers will know that it will take truly bargain basement pricing to induce your managers to invest any money in companies outside the private sector.

Source: Martin Currie Inc

Investment strategy

As of 30 June 2002 our fund was 98.8% invested with holdings in 54 companies. Of the portfolio, 7.2% is invested in unlisted securities. Your manager believes that all the bad press on telecom companies in the West provides a buying opportunity for telecom-related companies in the East. In contrast to Western telecom companies, those in greater China have low debt, paid little for 3G licences, and still enjoy dominant shares in regulated markets. 8.7% of the fund is now in telecom related companies. The latest addition is Sina.com, the largest portal in China, with over 30 million users, which trades below cash on Nasdaq. Fee-based services, mostly short messaging, now represent about 30% of revenues, and growth will be accelerated by the introduction of GPRS and 3G.

Our other acquisitions in Hong Kong in June include Anhui Conch Cement, a play on the property boom in the Shanghai area. We also added to holdings in China Rare Earth, which we believe will emerge as a world leader in this industry, Sino-golf and Tack Fat, the world’s largest swimwear maker.

In Taiwan, we took some profits on Phoenixtec and Polaris Securities, switching into Sinopac Financial Holding Company and Merry Electronics, a maker of handset receivers and microphones.

Chris Ruffle

No new direct investments were closed in June. The manager is in various stages of due diligence and negotiations for several investments. These are in capital goods manufacturing, retailing, semiconductors and consumer electronics.

There has been a slowdown in direct investments in China in the second quarter of the year. Only a few investments have been closed. Due to uncertainty over the recovery in the US economy, export-oriented companies have been cautious in their plans for expansion and their use of capital. However, companies targeting China’s domestic market have still been growing.

ADCM

at June 30, 2002

Fund details*				Asset allocation* (%)
Market cap Shares outstanding Exchange listed Listing date Investment manager Direct investment manager		US$135.48m 10,073,173 shares NYSE July 10, 1992 Martin Currie Inc Asian Direct Capital Management

15 largest listed investments* (48.5%)

TTCL International		Information technology			6.3	%
Taipei Bank		Financials			4.9	%
Chunghwa Telecom		Telecommunications			4.8	%
Zhejiang Expressway		Utilities			4.1	%
Fountain Set Holdings		Materials			3.5	%
Wah Sang Gas Holdings		Energy			3.0	%
Want Want Holdings		Consumer staples			2.8	%
Phoenixtec Power		Consumer staples			2.7	%
Yanzhou Coal Mining		Energy			2.7	%
Ho Tung Chemical		Materials			2.5	%
Sinopac Holdings		Financials			2.4	%
Synnex Technologies		Consumer discretionary			2.3	%
Shanghai Friendship Group		Diversified			2.3	%
TPV Technology		Information technology			2.2	%
Pacific Construction		Consumer discretionary			2.0	%

Sector allocation*

		% of				MSCI Golden
		net assets				Dragon %
Information technology			17.9				23.5
Financials			14.2				30.6
Industrials			11.4				14.7
Consumer staples			10.8				0.5
Consumer discretionary			9.8				5.7
Utilities			9.2				9.3
Telecommunications			8.7				7.4
Materials			7.9				5.0
Healthcare			6.2				0.1
Energy			2.7				3.2
Cash			1.2				—
Total			100.0				100.0

Direct investments* (7.2%)

Kowloon Development		Real Estate			2.0	%
A-S China Plumbing Products		Consumer discretionary			1.9	%
Captive Finance		Financials			1.8	%
Moulin International (2004 CB)		Manufacturing			1.2	%
New World Sun City		Real estate			0.3	%

Performance* (in US$ terms)

		NAV				Market price
		%				%
One month			-4.3	%			-8.3	%
Calendar year to date			9.2	%			10.9	%
3 years**			3.1	%			4.9	%

Fund performance

		One				Three				Year				One				Three**				Five**				Since#**
		month				months				to date				year				years				years				launch
The China Fund, Inc.			-4.3				1.9				9.2				4.7				3.1				-3.8				3.6
MSCI Golden Dragon			-6.5				-7.4				-4.8				-7.6				-11.8				-9.8				—
Hang Seng Chinese Enterprise Index			1.7				6.5				23.3				-6.2				-7.1				-13.4				—

  Source: * State Street Corporation/MC Inc.   # The Fund was launched on July 10, 1992   ** Annualized Return

Performance in perspective

The China Fund Inc. Premium/discount

Dividend History Chart*

All charts as of 30 June, 2002.
*Source: State Street Corporation

The portfolio — in full at June 30, 2002

																		% of
Sector	Company (code)					Price				Holding				Value $				portfolio
Hong Kong 44.6%
TCL International Holdings Ltd		1070  HK				HK$2.20					37,318,000				10,406,314				6.3	%
Zhejiang Expressway Co., Ltd		576  HK				HK$2.65					19,814,000				6,731,895				4.1	%
Fountain Set (Holdings) Ltd		420  HK				HK$3.00					15,250,000				5,865,572				3.5	%
Wah Sang Gas		8035  HK				HK$1.25					30,998,000				4,967,787				3.0	%
Yanzhou Coal Mining Co.		1171  HK				HK$2.88					12,200,000				4,457,835				2.7	%
TPV Technology, Ltd		903  HK				HK$2.83					9,968,000				3,578,371				2.2	%
Brilliance China Automotive Holdings, Ltd		1114  HK				HK$1.06					24,300,000				3,302,413				2.0	%
LifeTec Group, Ltd		1180  HK				HK$0.32					77,408,000				3,175,814				1.9	%
China Rare Earth Holdings, Ltd		769  HK				HK$1.77					13,900,000				3,154,332				1.9	%
Asia Satellite Telecommunications Holdings		1135  HK				HK$12.90					1,693,000				2,800,051				1.7	%
China Mobile (Hong Kong) Ltd		941  HK				HK$23.10					780,000				2,305,074				1.4	%
Sinopec Yizheng Chemical		1033  HK				HK$1.21					14,694,000				2,279,527				1.4	%
Natural Beauty Bio-Technology Ltd		157  HK				HK$0.90					19,000,000				2,192,378				1.3	%
Shangri-La Asia, Ltd		69  HK				HK$6.50					2,544,000				2,103,760				1.3	%
Geomaxima		702  HK				HK$0.98					15,900,000				2,018,142				1.2	%
Tack Fat Group International Ltd		928  HK				HK$0.55					25,296,000				1,783,749				1.1	%
Mainland Headwear Holdings		1100  HK				HK$2.70					5,000,000				1,730,825				1.0	%
Arcontech, Corp		8097  HK				HK$0.85					15,386,000				1,676,733				1.0	%
China Overseas Land & Investment, Ltd		688  HK				HK$0.88					14,200,000				1,602,103				1.0	%
Anhui Expressway		955  HK				HK$1.68					6,950,000				1,496,971				0.9	%
Anhui Conch Cement		914  HK				HK$2.53					4,250,000				1,375,846				0.8	%
Essex Bio-Technology Ltd		8151  HK				HK$0.39					25,418,166				1,205,772				0.7	%
Chen Hsong Holding, Ltd		57  HK				HK$1.39					6,630,000				1,173,038				0.7	%
Sino Golf Holdings Ltd		361  HK				HK$0.79					7,346,000				744,042				0.5	%
Hong Kong Pharmaceuticals Holdings Ltd		182  HK				HK$1.16					3,200,000				475,913				0.3	%
Leefung-Asco Printers Holdings Ltd		623  HK				HK$1.01					3,602,000				461,810				0.3	%
Jackin International		630  HK				HK$0.22					15,032,000				423,993				0.2	%
Technology Venture Holdings Ltd		61  HK				HK$0.43					6,528,000				359,889				0.2	%
Taiwan 35.2%
Taipei Bank		2830  TT				NT$26.70					10,115,400				8,083,842				4.9	%
Chunghwa Telecom Co., Ltd		2412  TT				NT$54.00					4,908,000				7,932,715				4.8	%
Phoenixtec Power Co., Ltd		2411  TT				NT$25.90					5,843,000				4,529,593				2.7	%
Ho Tung Chemical, Corp		1714  TT				NT$17.90					7,732,950				4,143,065				2.5	%
Sinopac Holdings Co		2890  TT				NT$14.60					9,186,991				4,014,668				2.4	%
Synnex Technologies International, Corp		2347  TT				NT$38.30					3,392,400				3,888,923				2.3	%
Pacific Construction Co., Ltd		2506  TT				NT$3.42					32,841,000				3,361,755				2.0	%
Polaris Securities Co., Ltd		6011  TT				NT$15.50					6,642,000				3,081,443				1.9	%
Choice Lithograph, Inc		9929  TT				NT$14.90					6,273,000				2,797,597				1.7	%
Cheng Shin Rubber		2105  TT				NT$31.00					3,000,000				2,783,598				1.7	%
Tong Yang		1319  TT				NT$21.50					3,532,000				2,272,912				1.4	%
Advantech Co., Ltd		2395  TT				NT$73.50					959,100				2,109,962				1.3	%
Lian Hwa Foods		1231  TT				NT$20.40					3,259,000				1,989,931				1.2	%
Merry Electronics		2439  TT				NT$44.00					1,220,000				1,606,705				1.0	%
Elan Microelectronics		2458  TT				NT$35.30					1,500,000				1,584,855				0.9	%
Tainan Enterprises		1473  TT				NT$41.00					1,259,000				1,545,016				0.9	%
Ability Enterprise Corp		2374  TT				NT$26.90					1,700,000				1,368,752				0.8	%
DBTEL, Inc		5304  TT				NT$22.00					2,000,000				1,316,971				0.8	%
B shares 4.7%
Shanghai Friendship Group Co., Inc		900923  CH				US$1.08					3,530,000				3,815,930				2.3	%
Luthai Textile Co., Ltd		200726  CH				HK$8.90					1,999,869				2,281,975				1.4	%
Shanghai Matsuoka, Co		900955  CH				US$1.68					981,850				1,705,473				1.0	%
New York 2.2%
Chinadotcom, Corp		China   US				US$2.37					1,097,500				2,985,200				1.8	%
Sina.Com		Sina   US				US$1.75					430,500				753,375				0.4	%
Singapore 4.9%
Want Want Holdings, Ltd		WANT   SP				US$0.80					4,800,000				4,632,000				2.8	%
People’s Food Holding		PFH   SP				US$1.16					4,400,000				3,138,854				1.9	%
Asia Dekor Holdings, Ltd		ADEK   SP				US$0.08					7,374,000				405,570				0.2	%
Direct 7.2%
Kowloon Development											6,520,000				3,260,105				2.0	%
A-S   China Plumbing Products, Ltd											450				3,200,000				1.9	%
Captive Finance Ltd											2,000,000				3,045,000				1.8	%
Moulin International Holdings, Ltd (2004 CB)											2,000,000				2,003,922				1.2	%
New World Sun City, Ltd											83				449,421				0.3	%
Cash 1.2%

Objective

The investment objective of the Fund is to achieve long term capital appreciation through investment in companies and other entities with significant assets, investments, production activities, trading or other business interests in China or which derive a significant part of their revenue from China.

The Board of Directors of the Fund has adopted an operating policy of the Fund, effective June 30, 2001, that the Fund will invest at least 80% of its assets in China companies. For this purpose, “China companies” are (i) companies for which the principal securities trading market is in China; (ii) companies for which the principal securities trading market is outside of China or in companies organised outside of China, that in both cases derive at least 50% of their revenues from goods or services sold or produced, or have a least 50% of their assets in China; and (iii) companies organized in China. Under the new policy, China will mean the People’s Republic of China, including Hong Kong, and Taiwan. The Fund will provide its stockholders with at least 60 days’ prior notice of any change to the policy described above.

The fundamental policy, which applies to not less than 65% of the Fund’s assets as set out in the Fund’s prospectus dated July 10, 1992, remains in place. The fundamental policy is the same as the operating policy set out above, except that China only includes the People’s Republic of China.

Contacts

The China Fund, Inc.
c/o State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Tel: (1) 888 CHN-CALL (246 2255)
http://www.chinafundinc.com

Important Information: This newsletter is issued by Martin Currie Inc, Saltire Court, 20 Castle Terrace, Edinburgh, Scotland. Regulated by the FSA and registered with the Securities Exchange Commission as an investment adviser. Information herein is believed to be reliable but has not been verified by Martin Currie Inc. Martin Currie Inc makes no representation or warranty and does not accept any responsibility in relation to such information or for opinion or conclusion which the reader may draw from the newsletter. This newsletter does not constitute an offer of shares. Martin Currie Inc, its ultimate and intermediate holding companies, subsidiaries, affiliates, clients, directors or staff may, at any time, have a position in the market referred to herein, and may buy or sell securities, currencies, or any other financial instruments in such markets. The information or opinion expressed in this newsletter should not be construed to be a recommendation to buy or sell the securities, commodities, currencies, or financial instruments referred to herein. Investors are advised that they will not generally benefit, from the rules and regulations of the United Kingdom Financial Services and Markets Act 2000 and the Financial Services Authority for the protection of investors nor benefit from the United Kingdom Financial Services Compensation Scheme nor have access to the Financial Services Ombudsman in the event of a dispute. Investors will also have no rights of cancellation under the FSA’s Conduct of Business Sourcebook of the United Kingdom. Please remember that past performance is not necessarily a guide to the future. Market and currency movements may cause the value of the shares and the income from them to fluctuate and you may get back less than you invested when you decide to sell your shares.