EX-99.1 3 b44233dkexv99w1.htm INSIGHT NEWSLETTER

INSIGHT NEWSLETTER

Insight

The China Fund, Inc. (CHN)
September 2002

In brief at August 31, 2002

Net Asset Value per share*		US$15.45
Market Price*		US$12.65
Premium/Discount*			-18.12	%
Fund size*		US$155.64

*Source: State Street Corporation/Martin Currie Inc

		China Fund NAV				MSCI Golden Dragon
1 month return*			-2.2	%			-4.4	%
1 year return*			12.3	%			-4.5	%

Manager’s commentary

I have found the source of global deflation. He sells watches on a corner stall of the Xiangyang market in Shanghai — a Gucci watch, or frankly almost any brand required, at RMB19 (US$2.30) each. On a scorching afternoon, shaded only by a plastic awning, business was good. Now your correspondent would not dream of purchasing such an item, knowing the threat that this presents to the world economic order. I have been told, however, by a couple of ladies who were misguided enough to buy them, that they go well and are, in fact, still going.

China’s commitment to pin the renminbi at RMB8.3 to US$1 was welcomed in the dark days of 1997 and the Asian financial crisis. But now that the US dollar’s tide appears to be ebbing, who can live with a pegged currency which makes China’s exports even more competitive? China comprised the largest component of the US deficit in the first six months of this calendar year (US$43.1bn). China’s foreign exchange reserves have increased by US$60bn to US$242bn over the same period. Your manager expects China’s main customers eventually to put pressure on China to allow its currency to appreciate substantially, just as happened with Japan in the 1980s. A new ‘Plaza Accord’ would be accompanied by a sigh of relief from competitors around Asia. Due to the appreciation in the US$ value of RMB assets and our focus on domestic consumption, we would expect investors in the Fund to be net beneficiaries of such a move. For US investors considering buying back into the Nasdaq, may I suggest increased exposure to the RMB and offer the advice of Malevole from the Jacobean tragedy The Malcontent: “Climb not a falling tower, Celso/It is hopeless to strive with fate.”

Interim results were perhaps a little better than expected although, as typical in bear markets, the sinners were punished more heavily than the saints were rewarded. Of our holdings there were good numbers from the leading TV maker TCL, cell phone battery maker BYD, Anhui Expressway and Yanzhou Coal. Outside our portfolio, the Chinese airlines disappointed (as they tend to). So did many technology stocks in Taiwan, where the effect of NT$ appreciation has been underestimated and where the hope of a pick up in the PC cycle always lies just over the horizon.

Source: Martin Currie Inc

Investment strategy

Your fund is 97.7% invested with holdings in 59 companies. There are reasons for nervousness — the anniversary of September 11 and threat of war on Iraq. However, these fears are not new. Chinese stocks remain cheap relative to growth prospects, and domestic liquidity is good, so we plan to remain fully invested.

During the month, we added to our holdings in Anhui Conch, China’s largest cement maker with its increasing market share, and Kaulin, the leading maker of industrial sewing machines. As we believe the growth in wireless broadband will reveal the value of its 35 million internet customers, we also added to our position in Sina.com. Meanwhile, we have sold Pacific Construction, the leading foreign operator of department stores in China, which has run into cash flow problems. To offset capital gains ahead of the financial year-end, we have also cut loss-making positions in China Rare Earth and Asia Satellite.

Chris Ruffle

No new direct investments were closed in August. The Direct Investment Manager has been reviewing potential investments which are in the sectors of pharmaceutical manufacturing, consumer electronics manufacturing and retailing.

Koh Kuek Chiang

at August 31, 2002

Fund details*

Market cap				$127.43m
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* (48.7%)

TCL International		Information Technology					6.5	%
Taipei Bank		Financials					6.0	%
Brilliance China		Consumer Discretionary					4.4	%
Fountain Set Holdings		Materials					3.5	%
Synnex Technologies		Consumer Discretionary					2.9	%
Sinopac Holdings		Financials					2.8	%
Ho Tung Chemical		Materials					2.7	%
Wah Sang Gas Holdings		Energy					2.7	%
BYD Co		Industrials					2.7	%
Phoenixtec Power		Information Technology					2.6	%
Shanghai Friendship Group		Diversified					2.6	%
Cheng Shin Ind		Industrials					2.5	%
Zhejiang Expressway		Utilities					2.4	%
Yanzhou Coal Mining		Energy					2.3	%
TPV Technology		Information Technology					2.1	%

Sector allocation*

		% of				MSCI Golden
		net assets				Dragon %
Information Technology			18.6				22.2
Financials			16.5				30.5
Industrials			16.1				15.0
Consumer Discretionary			10.2				5.5
Consumer Staples			9.6				0.6
Materials			7.9				5.7
Utilities			7.7				9.6
Health Care			5.5				0.1
Telecommunications			3.3				7.5
Energy			2.3				3.3
Cash			2.3				—
Total			100.0				100.0

Asset allocation* (%)

Direct investments* (7.4%)

A-S China Plumbing Products		Consumer Disc					2.0	%
Captive Finance		Financials					2.0	%
Kowloon Development (34 HK)		Real Estate					1.9	%
Moulin International (2004 CB		Manufacturing					1.3	%
New World Sun City		Real Estate					0.2	%

Performance* (in US$ terms)

		NAV				Market price
		%				%
One month			-2.2				1.5
Calendar year to date			2.4				1.9
3 years **			3.8				5.7

Fund performance

		One				Three				Year				One				Three**				Five**				Since#**
		month				months				to date				year				years				years				launch
The China Fund, Inc.			-2.2				-10.3				2.4				12.3				3.8				-6.6				2.9**
MSCI Golden Dragon			-4.4				-15.0				-13.4				-4.5				-13.9				-10.8				—
Hang Seng Chinese Enterprise Index			-6.0				-9.7				9.4				5.6				-8.6				-21.4				—

Source: * State Street Corporation/Martin Currie 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 August 31, 2002.

*Source: State Street Corporation

The portfolio — in full at August 31, 2002

Sector		Company (code)				Price				Holding				Value $				% of portfolio
Hong Kong 43.6%
TCL International Holdings Ltd		1070 HK				HK$2.10					37,318,000				10,166,893				6.5	%
Brilliance China Automotive Holdings, Ltd		1114 HK				HK$1.09					48,758,000				6,813,705				4.4	%
Fountain Set (Holdings) Ltd		420 HK				HK$2.90					14,750,000				5,484,045				3.5	%
Wah Sang Gas		8035 HK				HK$1.09					29,778,000				4,199,515				2.7	%
BYD Co		1211 HK				HK$14.7					2,200,000				4,146,207				2.7	%
Zhejiang Expressway Co., Ltd		576 HK				HK$2.53					11,864,000				3,802,613				2.5	%
Yanzhou Coal Mining Co.		1171 HK				HK$2.75					10,286,000				3,593,553				2.3	%
TPV Technology, Ltd		903 HK				HK$2.60					9,968,000				3,322,709				2.1	%
China Rare Earth		0769 HK				HK$1.16					17,284,000				2,570,474				1.7	%
Asia Satellite Telecommunications Holdings		1135 HK				HK$11.6					1,631,500				2,426,364				1.6	%
Anhui Expressway		955 HK				HK$1.70					9,568,000				2,073,093				1.3	%
LifeTec Group, Ltd		1180 HK				HK$0.20					77,408,000				2,014,619				1.3	%
Geomaxima		702 HK				HK$0.74					20,900,000				1,982,846				1.3	%
Anhui Conch Cement		914 HK				HK$2.30					6,076,000				1,791,664				1.1	%
Mainland Headwear Holdings		1100 HK				HK$2.73					5,000,000				1,746,817				1.1	%
Natural Beauty Bio-Technology Ltd		157 HK				HK$0.69					19,220,000				1,700,252				1.1	%
Tack Fat Group International Ltd		928 HK				HK$0.49					25,296,000				1,589,128				1.0	%
China Overseas Land & Investment, Ltd		688 HK				HK$0.79					14,200,000				1,438,224				0.9	%
Kerry Properties		0683 HK				HK$6.85					1,548,000				1,369,402				0.9	%
Essex Bio-Technology Ltd		8151 HK				HK$0.37					25,418,166				1,205,749				0.8	%
Chen Hsong Holding, Ltd		57 HK				HK$1.38					6,630,000				1,173,015				0.8	%
Arcontech, Corp		8097 HK				HK$0.49					18,386,000				1,155,033				0.7	%
Sino Golf Holdings Ltd		361 HK				HK$0.73					7,404,000				702,440				0.5	%
Leefung-Asco Printers Holdings Ltd		623 HK				HK$0.85					3,602,000				392,531				0.2	%
Hong Kong Pharmaceuticals Holdings Ltd		182 HK				HK$0.95					3,200,000				389,749				0.2	%
Jackin International		630 HK				HK$0.19					16,192,000				384,046				0.2	%
Technology Venture Holdings Ltd		61 HK				HK$0.30					6,528,000				251,080				0.2	%
Taiwan 35.6%
Taipei Bank		2830 TT				NT$31.6					10,115,400				9,349,127				6.0	%
Synnex Technologies International, Corp		2347 TT				NT$45.1					3,392,400				4,474,912				2.9	%
Sinopac Holdings Co		2890 TT				NT$15.0					9,746,754				4,276,142				2.8	%
Ho Tung Chemical, Corp		1714 TT				NT$16.7					8,660,904				4,230,392				2.7	%
Phoenixtec Power Co., Ltd		2411 TT				NT$23.8					5,843,000				4,067,370				2.6	%
Cheng Shin Rubber		2105 TT				NT$41.4					3,180,000				3,850,600				2.5	%
Polaris Securities Co., Ltd		6011 TT				NT$12.9					7,850,164				2.950.413				1.9	%
Chunghwa Telecom Co., Ltd		2412 TT				NT$44.0					2,146,000				2,761,743				1.8	%
Choice Lithograph, Inc		9929 TT				NT$13.9					6,712,110				2,719,003				1.7	%
Tong Yang		1319 TT				NT$23.3					3,620,300				2,467,183				1.6	%
Merry Electronics		2439 TT				NT$45.0					1,651,400				2,173,530				1.4	%
Advantech Co., Ltd		2395 TT				NT$62.5					1,150,920				2,103,905				1.4	%
Premier Image Technology		2394 TT				NT$48.0					1,224,800				1,719,520				1.1	%
Elan Microelectronics		2458 TT				NT$29.0					1,984,860				1,683,561				1.1	%
Kaulin Manufacturing		1531 TT				NT$33.2					1,600,000				1,553,671				1.0	%
Ability Enterprise Corp		2374 TT				NT$28.0					1,802,000				1,475,753				0.9	%
Tainan Enterprises		1473 TT				NT$40.0					1,259,000				1,472,946				0.9	%
Lian Hwa Foods		1231 TT				NT$15.4					3,259,000				1,467,932				0.9	%
Pacific Construction Co., Ltd		2506 TT				NT$1.53					13,448,000				601,797				0.4	%
B shares 4.8%
Shanghai Friendship Group Co., Inc		900923 CH				US$0.96					4,143,132				3,969,120				2.6	%
Luthai Textile Co., Ltd		200726 CH				HK$6.19					2,599,829				2,063,224				1.3	%
Shanghai Matsuoka, Co		900955 CH				US$1.49					981,850				1,462,957				0.9	%
New York 2.8%
Chinadotcom, Corp		China US				US$2.18					1,284,400				2,928,432				1.9	%
Sina.Com		Sina US				US$2.30					574,900				1,402,756				0.9	%
Singapore 3.5%
People’s Food Holding		PFH SP					S$1.09				4,400,000				2,740,806				1.7	%
Want Want Holdings, Ltd		WANT SP				US$0.54					4,800,000				2,592,000				1.7	%
Asia Dekor Holdings, Ltd		ADH SP				US$0.035					3,036,000				106,260				0.1	%
Direct 7.4%
A-S China Plumbing Products, Ltd											450				3,199,999				2.0	%
Captive Finance Ltd											2,000,000				3,045,000				2.0	%
Kowloon Development 34 HK											6,520,000				2,967,474				1.9	%
Moulin International Holdings, Ltd (2004 CB)											2,000,000				2,003,922				1.3	%
New World Sun City, Ltd											83				299,908				0.2	%
Cash 2.3%

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.