EX-99.1 3 b44060dbexv99w1.htm EX-99.1 NEWSLETTER

EX-99.1 NEWSLETTER

The China Fund, Inc. (CHN) August 2002

In brief... at July 31, 2002

Net Asset Value per share*		US$15.80
Market Price*		US$12.46
Premium/Discount*		-21.13%
Fund size*		US$159.12m

*Source: State Street Corporation/Martin Currie Inc

		China Fund NAV				MSCI Golden Dragon
1 month return*			-4.1	%			-4.9	%
1 year return*			11.9	%			-6.2	%

Manager’s commentary

Guano — that’s bird manure to you — was at the heart of the recent worsening in cross-strait relations. The sovereign state of Nauru and its 12,000 inhabitants are facing exhaustion of the guano reserves on which the island’s economy is based. They decided to accept a helping hand from Beijing, and switched recognition from the Republic of China on Taiwan to the People’s Republic of China. The timing of this announcement, July 20th, came the day before president Chen Shui-bian was due to be sworn in as the chairman of his party, the DPP. Angered at this snub, the president (or “president” as he is called in PRC newspapers) spoke of Taiwan “walking its own way” and is considering legislation that would allow a referendum on independence. It is hoped that this dispute will be short. The leadership in Beijing is preoccupied with delicate negotiations on the transfer of power to the next generation. Talk of the 16th party congress being delayed until November hints that this might not be going as smoothly as predicted.

Another group up to their knees in ordure was the management of the Hong Kong Stock Exchange. On July 24th, it published an ill-considered plan to de-list stocks priced under HK$0.50. This plan was hastily scrapped, but not before causing the collapse in the value of shares with low unit prices. This affected four stocks held by your Fund (Lifetec, Essex Biotech, Jackin and Technology Ventures), of which we can now buy more at bargain prices. Premier Zhu Rongji’s comments that the rich are not paying enough taxes were also not helpful to small cap, private sector stocks.

It will come as no surprise then that the Chinese markets and the net asset value of your Fund were unable to resist the gravitational pull of falling US markets. The NAV fell by 4.1%, while the MSCI Golden Dragon index fell by 4.9%. The Fund’s market price fell more sharply (by 9.5%) causing the discount to widen back to 21%.

There was some pressure from new equity supply during the month. We subscribed to the private sector, chargeable battery maker BYD. But we did not participate in Bank of China (too expensive, in our opinion, at 1.65x price-to-book) or in CK Life Sciences. Recent result announcements have been mixed.

There is a danger that managements will use the pervading atmosphere of irrational gloom and accounting worries to disguise poor results.

Investment strategy

As of July 31st, your Fund was 99.2% invested with holdings in 60 companies. Of the portfolio, 5.5% is invested in unlisted securities. Apart from the addition of BYD, we made little change to the composition of the Fund in July. We added to positions in Sina.com and Chinadotcom. Meanwhile, after disappointing results, we reduced our position in Asia Dekor. In Taiwan, where the price of electronic stocks has fallen sharply, we invested in the digital camera maker Premier Image.

In the Fund, we continue to concentrate on private sector companies geared to the health of the domestic economy; China Q2 GDP growth was recorded at 8%, compared to 1.1% in the US. One can quibble with the accuracy of Chinese statistics, but the gap is still a large one. Nevertheless, we do not expect the US economy to slip back into recession, and, with its undervalued currency, we expect China to increase its share of imports. For this reason, we have maintained holdings in a few of the most competitive exporters.

Chris Ruffle

No new direct investments were closed in July. The Direct Investment Manager has been reviewing potential investments which are in consumer electronics, fashion retailing and chemical fiber (for textile use) manufacturing.

KOH Kuek Chiang

Source: Martin Currie Inc

at July 31, 2002

Fund details*

Market cap		US$125.51m
Shares outstanding		10,073,173 shares
Exchange listed		NYSE
Listing date		July 10, 1992
Investment manager		Martin Currie Inc
Direct investment manager		Asian Direct Capital Management

15 largest listed investments* (49.3%)

TCL International		Information technology			7.1	%
Taipei Bank		Financials			5.1	%
Chunghwa Telecom		Telecommunications			4.4	%
Fountain Set Holdings		Materials			4.0	%
Wah Sang Gas Holdings		Energy			3.0	%
Zhejiang Expressway		Utilities			2.9	%
Yanzhou Coal Mining		Energy			2.8	%
Phoenixtec Power		Consumer staples			2.8	%
Synnex Technologies		Consumer discretionary			2.7	%
Brilliance China		Consumer discretionary			2.6	%
Ho Tung Chemical		Materials			2.5	%
Sinopac Holdings		Financials			2.5	%
Shanghai Friendship Group		Diversified			2.5	%
Want Want Holdings		Consumer staples			2.2	%
Cheng Shin Ind		Industrials			2.2	%

Sector allocation*

		% of				MSCI Golden
		net assets				Dragon %
Information technology			19.0				22.2
Industrials			14.2				15.0
Financials			14.0				30.5
Consumer discretionary			10.9				5.5
Consumer staples			9.9				0.6
Materials			8.2				5.7
Utilities			7.8				9.6
Telecommunications			7.3				7.5
Health care			5.1				0.1
Energy			2.8				3.3
Cash			0.8				—
Total			100.0				100.0

Asset allocation* (%)

Direct investments* (7.2%)

A-S China Plumbing Products		Consumer discretionary			2.0	%
Captive Finance		Financials			1.9	%
Kowloon Development (34 HK)		Real estate			1.7	%
Moulin International (2004 CB)		Manufacturing			1.3	%
New World Sun City		Real estate			0.3	%

Performance* (in US$ terms)

		NAV				Market price
		%				%
One month			-4.1	%			-9.5	%
Calendar year to date			4.7	%			0.3	%
3 years**			4.8	%			5.2	%

Fund performance

		One				Three				Year				One				Three**				Five**				Since#**
		month				months				to date				year				years				years				launch
The China Fund, Inc.			-4.1				-5.8				4.7				11.9				4.8				-5.8				3.2
MSCI Golden Dragon			-4.9				-13.9				-9.5				-6.2				-11.3				-11.9				—
Hang Seng Chinese Enterprise Index			-5.6				-0.4				16.4				3.2				-5.4				-17.9				—

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

Performance in perspective

The China Fund Inc.

The China Fund Inc. Premium/discount

Dividend History Chart*

All charts as of July 31, 2002.
*Source: State Street Corporation

The portfolio — in full at July 31, 2002

																		% of
Sector		Company (code)				Price				Holding				Value $				portfolio
Hong Kong 45.2%
TCL International Holdings Ltd		1070 HK				HK$2.35					37,318,000				11,362,925				7.1	%
Fountain Set (Holdings) Ltd		420 HK				HK$3.20					15,250,000				6,256,450				3.9	%
Wah Sang Gas		8035 HK				HK$1.21					30,998,000				4,808,695				3.0	%
Zhejiang Expressway Co., Ltd		576 HK				HK$2.58					13,864,000				4,532,490				2.8	%
Yanzhou Coal Mining Co.		1171 HK				HK$2.85					12,200,000				4,496,824				2.8	%
Brilliance China Automotive Holdings, Ltd		1114 HK				HK$1.16					23,300,000				4,172,463				2.6	%
BYD Co		1211 HK				HK$12.20					2,200,000				3,469,253				2.2	%
TPV Technology, Ltd		903 HK				HK$2.35					9,968,000				2,409,284				1.9	%
China Rare Earth		0769 HK				HK$1.57					13,900,000				2,797,839				1.8	%
Asia Satellite Telecommunications Holdings		1135 HK				HK$11.10					1,693,000				2,800,051				1.5	%
China Mobile (Hong Kong) Ltd		941 HK				HK$21.60					780,000				2,170,014				1.4	%
Sinopec Yizheng Chemical		1033 HK				HK$1.09					14,694,000				2,034,567				1.3	%
Shangri-La Asia, Ltd		69 HK				HK$5.55					2,544,000				1,810,165				1.1	%
LifeTec Group, Ltd		1180 HK				HK$0.18					77,408,000				1,786,350				1.1	%
Natural Beauty Bio-Technology Ltd		157 HK				HK$0.72					19,000,000				1,753,857				1.1	%
Tack Fat Group International Ltd		928 HK				HK$0.53					25,296,000				1,718,842				1.1	%
Mainland Headwear Holdings		1100 HK				HK$2.68					5,000,000				1,714,755				1.1	%
Geomaxima		702 HK				HK$0.78					15,900,000				1,590,010				1.0	%
Arcontech, Corp		8097 HK				HK$0.77					15,386,000				1,538,610				1.0	%
Anhui Expressway		955 HK				HK$1.56					7,568,000				1,513,610				0.9	%
China Overseas Land & Investment, Ltd		688 HK				HK$0.76					14,200,000				1,383,599				0.9	%
Anhui Conch Cement		914 HK				HK$2.38					4,250,000				1,294,079				0.8	%
Chen Hsong Holding, Ltd		57 HK				HK$1.45					6,630,000				1,232,508				0.8	%
Essex Bio-Technology Ltd		8151 HK				HK$0.32					25,418,166				977,628				0.6	%
Sino Golf Holdings Ltd		361 HK				HK$0.75					7,404,000				702,435				0.4	%
Leefung-Asco Printers Holdings Ltd		623 HK				HK$0.94					3,602,000				434,090				0.3	%
Hong Kong Pharmaceuticals Holdings Ltd		182 HK				HK$1.00					3,200,000				410,259				0.3	%
Jackin International		630 HK				HK$0.21					15,032,000				400,856				0.2	%
Technology Venture Holdings Ltd		61 HK				HK$0.28					6,528,000				234,3409				0.2	%
Taiwan 35.7%
Taipei Bank		2830 TT				NT$26.90					10,115,400				8,107,993				5.1	%
Chunghwa Telecom Co., Ltd		2412 TT				NT$47.80					4,908,000				6,990,537				4.4	%
Phoenixtec Power Co., Ltd		2411 TT				NT$25.30					5,843,000				4,404,884				2.8	%
Synnex Technologies International, Corp		2347 TT				NT$42.70					3,392,400				4,316,313				2.7	%
Ho Tung Chemical, Corp		1714 TT				NT$17.50					7,732,950				4,032,379				2.5	%
Sinopac Holdings Co		2890 TT				NT$14.60					9,186,991				3,996,724				2.5	%
Cheng Shin Rubber		2105 TT				NT$36.80					3,180,000				3,487,008				2.2	%
Pacific Construction Co., Ltd		2506 TT				NT$3.05					32,841,000				2,984,656				1.9	%
Choice Lithograph, Inc		9929 TT				NT$12.95					6,712,110				2,590,043				1.6	%
Polaris Securities Co., Ltd		6011 TT				NT$11.60					7,346,164				2,539,199				1.6	%
Tong Yang		1319 TT				NT$22.80					3,532,000				2,399,571				1.5	%
Advantech Co., Ltd		2395 TT				NT$64.50					1,150,920				2,211,989				1.4	%
Merry Electronics		2439 TT				NT$44.70					1,651,400				2,199,570				1.4	%
Elan Microelectronics		2458 TT				NT$33.60					1,800,000				1,802,145				1.1	%
Lian Hwa Foods		1231 TT				NT$16.60					3,259,000				1,612,020				1.0	%
Tainan Enterprises		1473 TT				NT$39.10					1,259,000				1,466,833				0.9	%
Ability Enterprise Corp		2374 TT				NT$26.30					1,802,000				1,412,175				0.9	%
Premier Image Technology		2394 TT				NT$46.30					190,800				263,231				0.2	%
B shares 4.7%
Shanghai Friendship Group Co., Inc		900923 CH				US$0.94					4,143,132				3,911,116				2.5	%
Luthai Textile Co., Ltd		200726 CH				HK$6.20					2,599,829				2,066,544				1.3	%
Shanghai Matsuoka, Co		900955 CH				US$1.53					981,850				1,501,249				0.9	%
New York 2.5%
Chinadotcom, Corp		China US				US$2.30					1,209,400				2,963,030				1.9	%
Sina.Com		Sina US				US$1.89					481,000				937,950				0.6	%
Singapore 3.9%
Want Want Holdings, Ltd		WANT SP				US$0.74					4,800,000				3,552,000				2.2	%
People’s Food Holding		PFH SP						S$0.99			4,400,000				2,483,126				1.6	%
Asia Dekor Holdings, Ltd		ADH SP				US$0.05					3,819,000				171,855				0.1	%
Direct 7.2%
A-S China Plumbing Products, Ltd											450				3,199,999				2.0	%
Captive Finance Ltd											2,000,000				3,045,000				1.9	%
Kowloon Development		34 HK									6,520,000				2,758,479				1.7	%
Moulin International Holdings, Ltd (2004 CB)											2,000,000				2,003,922				1.3	%
New World Sun City, Ltd											83				449,422				0.3	%
Cash 0.8%

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. Martin Currie Inc is 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.