EX-99.1 2 b50694cfexv99w1.htm INSIGHT NEWSLETTER

exv99w1

IN BRIEF

Net asset value per share			US$25.46
Market price			US$26.74
Premium/discount			5.03	%
Fund size			US$256.6m

At April 30, 2004 US$returns

		China Fund NAV				MSCI Golden Dragon*
		%				%
One month return			-9.7				-7.4
One year return			59.9				52.6

Source: State Street Corporation. *Source for index data: MSCI.
Past performance is not a guide to future returns.

MANAGER’S COMMENTARY

In the last few weeks I have read many media and broker reports about a slowdown in China’s economic growth, about the government’s credit-tightening measures and even an “austerity programme”. Your managers, based in Shanghai, travel extensively in China, and we just do not see it. We do not believe that there will be an appreciable slowdown in Chinese growth in the near term. Neither do we believe that this is what the government wants, given its desperate need to create employment. What is happening is that the government is trying to prevent the misallocation of capital to certain ‘hot’ industries — the four so-called ‘evil sectors’ — steel, aluminium, cement and luxury property development. This is a perennial problem in China, caused by the combination of an as yet unreformed, state-owned financial sector and, ironically for a dictatorship, weak central control over the provinces. There are other sectors where the government is keen to promote investment. In an interview with Reuters last week, Premier Wen Jia Bao said: “We are now faced with very serious shortages of coal, power, oil and transport”.

What seems to be happening is that investors in global equity and bond markets are now worrying about the end of the cheap money era. China, having been a hot market in 2003, has been affected the most. But it is not clear that a modest rise in interest rates in the US and China (the two seem likely to move in parallel given the current currency peg) will have as great an impact on the latter as the former. China has a high savings rate and consumer finance and mortgage lending are in their infancy here. Meanwhile, the listed Chinese companies, especially in the private sector, tend to have a low level of gearing. The more developed cities, such as Shanghai, would be more affected by higher rates than the rest of the country, but not as much as San Francisco, New York and London, the home towns of a number of the “China is slowing” commentators; still, as the saying goes “A worm in horseradish thinks the whole world horseradish”.

INVESTMENT STRATEGY

The recent sharp correction means that there are now many high growth companies which can be bought for a price earnings multiple of below 10. Recent Q1 results from portfolio companies, such as Sohu and Cathay Life, have been strong. The few disappointments, such as for Cheng Shin Tyre, have been caused by inflation in costs offsetting top-line growth. We plan to reduce our cash position, and increase the beta of the fund, as confidence returns.

During the month we raised cash in anticipation of new direct investments. We took decent profits from foundry maker Vanguard, STN-LCD panel maker Wintek and Yanzhou Coal. We also sold Taiwan Honchuan, after disappointing 1Q results, and Beijing Airport, as its valuation is expensive. On the buy side, we added to Weichai (diesel engines), Solomon Systech (IC design), the oversold Sinotrans (transportation) and Cheng Shin Rubber (tyres).

Chris Ruffle, Martin Currie Inc

DIRECT INVESTMENT MANAGER’S COMMENTARY

Market sentiment in the PRC has moved negatively over the last month as investors’ fears over the risks of economic overheating are now influencing market perceptions. The PRC government is implementing serious measures to achieve a soft, mid-cycle correction. There are some significant differences between the current economic circumstances and the “Zhu” crunch of 1994; this time the central government has acted earlier in the cycle while inflationary pressures are still modest, though the levels of debt are currently higher. The longer term growth dynamic of the PRC remains intact and this mid-cycle correction should provide, as in the past, opportunities to make private equity investments on attractive terms as liquidity pressures increase. Your Direct Investment Manager will be discerning when selecting new deals, but we will be aggressive and opportunistic when attractive investment prospects arise.

In April, we closed an investment of circa US$ 450,000 in Teco Optronics Corp, a Taiwan company that designs and manufactures organic light-emitting diodes (OLED) under license from Eastman Kodak. OLED is a new generation of flat screen display technology that many expect to replace liquid crystal displays (LCD). Industry estimates are that OLED shipments will increase at circa 70% annually to a market size of US$3.5 billion by 2008. Though this initial investment is small, we expect to participate in future funding rounds when the company invests in further production facilities as market acceptance of the product takes off.

KOH Kuek Chiang, Asian Direct Capital Management

FUND DETAILS

Market cap*		US$274.0m
Shares outstanding		10,081,913
Exchange listed		NYSE
Listing date		July 10, 1992
Investment adviser		Martin Currie Inc
Direct investment manager		Asian Direct Capital Management

Source: State Street Corporation. *Source: Copyright 2002 Bloomberg LP.

ASSET ALLOCATION

Source: State Street Corporation

SECTOR ALLOCATION

		The China				MSCI Golden
		Fund, Inc				Dragon*
Industrials			20.2	%			12.6	%
Information technology			16.0	%			20.9	%
Consumer discretionary			13.1	%			6.7	%
Materials			9.6	%			6.4	%
Telecommunications			8.9	%			7.2	%
Financials			7.7	%			31.0	%
Utilities			7.4	%			9.6	%
Consumer staples			6.1	%			0.6	%
Healthcare			3.1	%			0.1	%
Energy			1.9	%			4.9	%
Other assets & liabilities			6.0	%			—
Total			100.0	%			100.0	%

Source: State Street Corporation. *Source for index data: MSCI.

PERFORMANCE US$ RETURNS

		NAV				Market price
		%				%
One month			-9.7				-18.7
Year to date			-2.8				-34.4
Three years (annualized)			23.3				35.4

Source: State Street Corporation
Past performance is not a guide to future returns.

DIRECT INVESTMENTS (2.3%)

Captive Finance		Financials			1.2	%
Tomoike Industrial		Industrials			0.9	%
Teco Optronics		Information technology			0.2	%

15 LARGEST LISTED INVESTMENTS (46.1%)

Chaoda Modern Agriculture		Consumer staples			5.2	%
TCL International		Consumer discretionary			4.7	%
BYD		Industrials			3.7	%
Comba Telecom		Telecommunications			3.6	%
Sohu Com		Information technology			3.4	%
China Metal		Materials			2.9	%
Merry Electronics		Consumer discretionary			2.7	%
Cathay Financial		Financials			2.7	%
TPV Technology		Industrials			2.6	%
Anhui Expressway		Utilities			2.5	%
Shenzhen Expressway		Utilities			2.5	%
Fountain Set		Materials			2.5	%
Xinao Gas		Utilities			2.4	%
Taiwan Green Point		Information technology			2.4	%
Golden Meditech		Healthcare			2.3	%

Source: State Street Corporation

FUND PERFORMANCE US$ RETURNS

		One				Three				Calendar				One				Three				Five				Since
		month				months				year to date				year				years				years				launch
		%				%				%				%				% pa				% pa				% pa
The China Fund, Inc.			-9.7				-6.9				-2.8				59.9				23.3				18.7				8.0
MSCI Golden Dragon			-7.4				-8.7				-2.5				52.6				2.3				-2.2				n/a
Hang Seng Chinese Enterprise			-15.1				-12.0				-19.5				84.2				25.3				15.5				n/a

Source: State Street Corporation. Launch date July 10, 1992. Three year, five year and since launch returns are all annualized. Source for index data: MSCI for the MSCI Golden Dragon and Copyright 2002 Bloomberg LP for the Hang Seng Chinese Enterprise. Past performance is not a guide to future returns.

PERFORMANCE IN PERSPECTIVE

Source: Martin Currie Inc as of April 30, 2004. Past performance is not a guide to future returns.

THE CHINA FUND INC. PREMIUM/DISCOUNT

Source: Martin Currie Inc as of April 30, 2004. Past performance is not a guide to future returns.

DIVIDEND HISTORY CHART

Total			0.91				0.61				0.09				0.08				0.50				0.08				0.11				0.00				0.13				0.21				1.78
Income			0.09				0.01				0.09				0.08				0.50				0.08				0.11				0.00				0.13				0.06				0.07
Long term capital			0.04				0.24				0.00				0.00				0.00				0.00				0.00				0.00				0.00				0.00				0.67
Short term capital			0.79				0.36				0.00				0.00				0.00				0.00				0.00				0.00				0.00				0.15				1.04

Source: State Street Corporation. Past performance is not a guide to future returns.

THE PORTFOLIO — IN FULL AT APRIL 30, 2004

Sector		Company (BBG ticker)				Price				Holding				Value $			% of portfolio
Hong Kong																			52.2	%
Chaoda Modern Agriculture		682 HK				HK $2.45					43,089,900				13,397,055				5.2	%
TCL International		1070 HK				HK $2.88					32,318,000				12,119,716				4.7	%
BYD		1211 HK				HK$23.20					3,225,000				9,613,351				3.7	%
Comba Telecom Systems		2342 HK				HK$4.70					15,356,000				9,253,330				3.6	%
TPV Technology		903 HK				HK $5.20					9,968,000				6,645,589				2.6	%
Anhui Expressway		995 HK				HK $2.88					17,778,000				6,553,041				2.5	%
Shenzhen Expressway		548 HK				HK $2.30					21,494,000				6,338,218				2.5	%
Fountain Set		420 HK				HK $5.80					8,550,000				6,303,127				2.5	%
Xinao Gas		2688 HK				HK $3.38					13,976,000				6,047,540				2.4	%
Golden Meditech		8180 HK				HK $3.25					13,950,000				5,812,724				2.3	%
Yanzhou Coal Mining		1171 HK				HK $7.30					5,186,000				4,886,996				1.9	%
Sinotrans		598 HK				HK $2.68					12,835,000				4,401,916				1.7	%
Proview International		334 HK				HK $1.84					17,644,000				4,162,334				1.6	%
China Telecom		728 HK				HK $2.33					13,000,000				3,875,149				1.5	%
Weichai Power		2338 HK				HK$13.15					2,110,000				3,557,380				1.4	%
First Tractor		38 HK				HK $1.25					19,950,000				3,197,238				1.2	%
China Fire Safety		8201 HK				HK $0.49					50,380,000				3,165,019				1.2	%
Hong Kong.com		8006 HK				HK $0.72					30,232,000				2,829,514				1.1	%
Solomon Systech		2878 HK				HK $1.87					11,698,000				2,789,630				1.1	%
Ocean Grand Chemicals		2882 HK				HK $1.11					17,379,000				2,495,542				1.0	%
Sino Golf		361 HK				HK $1.53					11,835,000				2,321,570				0.9	%
Asia Zirconium		395 HK				HK $1.32					13,196,000				2,233,255				0.9	%
Sinopec Beijing Yanhou		325 HK				HK $2.28					7,328,000				2,137,416				0.8	%
Natural Beauty Bio-Technology		157 HK				HK $0.50					32,780,000				2,101,363				0.8	%
China Rare Earth		769 HK				HK $1.06					15,254,000				2,073,059				0.8	%
Beiren Printing Machinery		187 HK				HK $2.28					7,000,000				2,041,745				0.8	%
Beijing Capital International Airport		694 HK				HK $2.40					5,472,000				1,683,757				0.7	%
Jingwei Textile Machinery		350 HK				HK $2.08					5,936,000				1,560,163				0.6	%
Arcontech		8097 HK				HK $0.17					18,386,000				407,808				0.2	%
Taiwan																			34.3	%
China Metal Products		1532 TT				NT $42.0					5,873,408				7,425,742				2.9	%
Merry Electronics		2439 TT				NT $81.5					2,844,208				6,977,813				2.7	%
Cathay Financial		2882 TT				NT $59.0					3,862,000				6,859,061				2.7	%
Taiwan Green Point		3007 TT				NT$109.0					1,831,200				6,008,453				2.4	%
Fubon Financial		2881 TT				NT $31.7					5,453,952				5,204,403				2.0	%
Chicony Electronics		2385 TT				NT $65.5					2,500,960				4,931,152				1.9	%
ChungHwa Telecom		2412 TT				NT $53.5					3,055,000				4,920,003				1.9	%
Ability Enterprise		2374 TT				NT $28.2					5,614,840				4,766,360				1.9	%
Polaris Securities		2854 TT				NT $18.6					8,359,377				4,680,446				1.8	%
Synnex Technologies		2347 TT				NT $51.5					2,950,640				4,574,291				1.8	%
Wintek		2384 TT				NT $44.6					3,392,000				4,553,980				1.8	%
Vanguard International Semiconductor		5347 TT				NT $15.1					8,000,000				3,636,364				1.4	%
United Microelectronics		2303 TT				NT $29.8					4,000,000				3,588,200				1.4	%
Cheng Shin Rubber		2105 TT				NT $38.7					3,016,400				3,513,988				1.4	%
Data Systems Consulting		2477 TT				NT $24.3					3,968,339				2,902,789				1.1	%
CMC Magnetics		2323 TT				NT $27.6					3,100,000				2,575,557				1.0	%
Soft-World International		5478 TT				NT$106.5					790,000				2,532,661				1.0	%
Taiwan FamilyMart		5903 TT				NT $53.5					1,478,520				2,381,120				0.9	%
Tsann Kuen Enterprise		2430 TT				NT $45.5					1,700,000				2,328,417				0.9	%
Taiwan Hon Chuan Enterprise		9939 TT				NT $38.8					1,544,435				1,803,855				0.7	%
Yieh United Steel		9957 TT				NT $17.0					3,500,000				1,791,090				0.7	%
B shares																			1.8	%
China International Marine		200039 CH				HK$14.82					2,442,747				4,641,398				1.8	%
New York																			3.4	%
Sohu.com		Sohu US				US$16.74					526,286				8,810,028				3.4	%
Direct																			2.3	%
Captive Finance											2,000,000				3,045,000				1.2	%
Tomoike Industrial											825,000				2,351,932				0.9	%
Teco Optronics											1,500,000				451,535				0.2	%
Other assets & liabilities																			6.0	%

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 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)
www.chinafundinc.com

Important information: This newsletter is issued and approved by Martin Currie Inc (MC Inc), as investment adviser. MC Inc is authorised and regulated by the Financial Services Authority (FSA) and incorporated under limited liability in New York, USA. Registered in Scotland (No BR2575), registered address Saltire Court, 20 Castle Terrace, Edinburgh, EH1 2ES. Information herein is believed to be reliable but has not been verified by MC Inc. MC 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.

China Fund Inc (the fund) is classified as a ‘non-diversified’ investment company under the US Investment Company Act of 1940. It meets the criteria of a closed-ended US mutual fund and its shares are listed on the New York Stock Exchange. MC Inc has been appointed investment adviser to the listed equity portfolio of the fund. Asian Direct Capital Management is the direct investment manager to the fund.

This newsletter does not constitute an offer of shares. MC 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.

The information provided in this report should not be considered a recommendation to purchase or sell any particular security. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased.

It should not be assumed that any of the securities transactions or holdings discussed here were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed 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 FSA 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 a guide to the future. Markets and currency movements can 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.