EX-99.1 2 b50890chexv99w1.htm INSIGHT NEWSLETTER

exv99w1

IN BRIEF

Net asset value per share			US$26.11
Market price			US$29.40
Pemium/discount			12.60%
Fund size			US$263.2m

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

At May 31, 2004						US$ returns
		China Fund NAV				MSCI Golden Dragon*
		%				%
One month return			2.6				0.7
One year return			40.0				39.6

MANAGER’S COMMENTARY

In May, your management team went to see an Irish production of Waiting for Godot, staged in Shanghai. For those of you familiar with the play, this might seem to be a cruel and unusual punishment. I thought as I looked at my watch for the third time however, it certainly teaches the value of patience, a virtue when operating in a Chinese stockmarket battered by fears of credit tightening and economic slowdown.

Global uncertainties persist, but a high oil price and the prospect of higher US interest rates are no longer news. Here in China, our recent company visits have indicated some squeeze on the property sector from recent credit tightening measures. Consequently, we have been selling out of related stocks but we do not expect the government to rush to implement more severe measures. Creating employment is the government’s top priority (14 million new jobs is the target for 2004). Our assumption is that money supply figures for May, published in June, will show growth to be down sharply. The CPI figures for June, published in July, should also show a decline, as the large, new harvest comes in (CPI comprises 55% food here). The government will then declare victory and we can get back to business, albeit more geared to the consumer than capital goods this time. During the May holiday week, while portfolio managers were panicking, retail sales in Shanghai increased by 52.7% year-on-year. Even accounting for the SARS effect on the comparative period last year, this can be termed “robust”.

We have changed our thinking to become less bullish on the RMB in the short term because we believe China’s interest rates will now lag US rates. Our main risk, at the moment, is the revived supply of equity. As a result we will be choosy on IPOs. The on-line game company Shanda was our only subscription last month. We will also continue to avoid China’s state-owned financial sector, which is eager to sell shares to foreigners. As for a ‘hard landing’, or any landing at all, investors, like the tramps in Godot may be waiting some time.

INVESTMENT STRATEGY

Your fund is 94.6% invested with holdings in 56 companies.

During the month, we used the correction to offset earlier realised capital gains by booking some losses on China Telecom and First Tractor, where progress was slower than expected. We have also switched out of the defensive Chunghwa Telecom in Taiwan, because we are expecting the market to rally now that president Chen Shui-bian’s inauguration is out of the way. In their place we bought PCB manufacturer Tripod and IT distributor Synnex.

Our subscription to Shanda reflects our revived interest in Chinese internet stocks, some of which are once more looking to be good value. One of our larger holdings, Sohu, was buying back its own shares in May, as was its CEO.

Chris Ruffle, Martin Currie Inc

DIRECT INVESTMENT MANAGER’S COMMENTARY

The Chinese Government is adopting a series of measures to manage a mid-cycle slow down before an across-the-board overheating occurs. Current inflation is modest at circa 4% compared to 25% in 1994. This modest inflation suggests that a bumpy landing rather than a hard landing may be manageable, provided that China under similar circumstances continues to attract large amounts of foreign investments and other capital inflows. Your Direct Investment Manager believes that the secular story for China is still intact and this mid-cycle correction will present good opportunities for direct investments. We are actively building up a dealflow that could lead to closings of investments for the Fund.

KOH Kuek Chiang, Asian Direct Capital Management

FUND DETAILS

Market cap*		US$282.4m
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			19.3	%			12.2	%
Information technology			17.8	%			20.4	%
Consumer discretionary			16.3	%			6.9	%
Materials			7.5	%			6.5	%
Telecommunications			7.3	%			7.9	%
Financials			7.6	%			30.6	%
Utilities			7.9	%			8.9	%
Consumer staples			5.8	%			0.6	%
Healthcare			3.2	%			0.1	%
Energy			1.9	%			5.9	%
Other assets & liabilities			5.4	%			—
Total			100.0	%			100.0	%

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

PERFORMANCE US$ RETURNS

		NAV				Market price
		%				%
One month			2.6				10.0
Year to date			-0.3				-27.9
3 years (annualized)			19.8				33.1

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

DIRECT INVESTMENTS (2.2%)

Captive Finance		Financials			1.1	%
Tomoike Industrial (HK) Ltd		Industrials			0.9	%
Teco Optronics		Information technology			0.2	%

15 LARGEST LISTED INVESTMENTS (46.8%)

Chaoda Modern Agriculture		Consumer staples			5.1	%
BYD		Industrials			4.3	%
TCL International		Consumer discretionary			4.2	%
Sohu.com		Information technology			4.1	%
Comba Telecom Systems		Telecommunications			3.0	%
Merry Electronics		Consumer discretionary			2.9	%
Anhui Expressway		Utilities			2.8	%
TPV Technology		Industrials			2.7	%
Taiwan Green Point		Information technology			2.7	%
Cathay Financial		Financials			2.6	%
China Metal Products		Materials			2.6	%
Shenzhen Expressway		Utilities			2.6	%
Xinao Gas		Utilities			2.5	%
Synnex Technologies		Consumer discretionary			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.			2.6				-10.3				-0.3				40.0				19.8				20.0				8.1
MSCI Golden Dragon			0.7				-11.8				-1.8				39.6				3.4				-0.7				n/a
Hang Seng Chinese Enterprise			6.0				-15.8				-14.6				75.0				22.6				18.7				n/a

Past performance is not a guide to future returns.
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.

PERFORMANCE IN PERSPECTIVE

Past performance is not a guide to future returns.
Source: Martin Currie Inc as of May 31, 2004.

THE CHINA FUND INC. PREMIUM/DISCOUNT

Past performance is not a guide to future returns.
Source: Martin Currie Inc as of May 31, 2004.

DIVIDEND HISTORY CHART

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

THE PORTFOLIO — IN FULL AT MAY 31, 2004

Sector		Company (BBG ticker)				Price				Holding				Value $				% of portfolio
Hong Kong																			50.6	%
Chaoda Modern Agriculture		682 HK				HK$2.45					43,089,900				13,268,467				5.1	%
BYD		1211 HK				HK$26.90					3,225,000				11,275,356				4.3	%
TCL International		1070 HK				HK$2.85					32,318,000				11,091,807				4.2	%
Comba Telecom Systems		2342 HK				HK$4.00					15,356,000				7,831,578				3.0	%
Anhui Expressway		995 HK				HK$3.23					17,778,000				7,470,131				2.8	%
TPV Technology		903 HK				HK$5.5					9,968,000				7,097,984				2.7	%
Shenzhen Expressway		548 HK				HK$2.45					21,494,000				6,687,488				2.6	%
Xinao Gas		2688 HK				HK$3.60					13,976,000				6,545,002				2.5	%
Golden Meditech		8180 HK				HK$3.43					13,950,000				6,130,118				2.3	%
Fountain Set		420 HK				HK$5.65					6,714,000				4,867,028				1.8	%
Sinotrans		598 HK				HK$2.75					12,835,000				4,610,924				1.8	%
Solomon Systech		2878 HK				HK$1.84					20,698,000				4,833,189				1.8	%
Weichai Power		2338 HK				HK$14.45					2,536,000				4,701,659				1.8	%
Yanzhou Coal Mining		1171 HK				HK$7.40					5,186,000				4,890,507				1.8	%
China Telecom		728 HK				HK$2.45					13,000,000				4,086,424				1.5	%
Proview International		334 HK				HK$1.80					17,644,000				4,074,775				1.5	%
China Fire Safety		8201 HK				HK$0.46					50,380,000				2,908,739				1.1	%
Hong Kong.com		8006 HK				HK$0.72					30,232,000				2,831,547				1.1	%
Natural Beauty Bio-Technology		157 HK				HK$0.55					32,780,000				2,313,160				0.9	%
Asia Zirconium		395 HK				HK$1.15					13,196,000				2,014,760				0.8	%
Beiren Printing Machinery		187 HK				HK$2.23					7,000,000				1,998,306				0.8	%
China Rare Earth		769 HK				HK$1.08					15,254,000				2,054,977				0.8	%
Ocean Grand Chemicals		2882 HK				HK$1.04					17,379,000				2,229,763				0.8	%
Sino Golf		361 HK				HK$1.44					11,835,000				2,141,023				0.8	%
Nanjing Dahe Outdoor Media		8243 HK				HK$0.40					37,500,000				1,876,419				0.7	%
First Tractor		38 HK				HK$1.24					9,950,000				1,544,694				0.6	%
Jingwei Textile Machinery		350 HK				HK$1.88					5,936,000				1,424,195				0.5	%
Arcontech		8097 HK				HK$0.17					18,386,000				408,101				0.2	%
Taiwan																			33.8	%
Merry Electronics		2439 TT				NT$85.0					2,844,208				7,595,934				2.9	%
Taiwan Green Point		3007 TT				NT$130.0					1,831,200				6,978,617				2.7	%
Cathay Financial		2882 TT				NT$57.5					3,862,000				6,895,394				2.6	%
China Metal Products		1532 TT				NT$37.8					5,873,408				6,838,357				2.6	%
Synnex Technologies		2347 TT				NT$55.5					3,659,640				6,369,366				2.4	%
Fubon Financial		2881 TT				NT$32.0					5,453,952				5,433,495				2.1	%
Ability Enterprise		2374 TT				NT$27.3					5,614,840				4,700,796				1.8	%
Chicony Electronics		2385 TT				NT$62.5					2,500,960				4,690,472				1.8	%
CMC Magnetics		2323 TT				NT$21.1					7,100,000				4,772,393				1.8	%
Polaris Securities		2854 TT				NT$17.6					8,359,377				4,615,530				1.7	%
Cheng Shin Rubber		2105 TT				NT$42.3					3,016,400				3,864,975				1.4	%
United Microelectronics		2303 TT				NT$27.8					4,000,000				3,480,870				1.3	%
Data Systems Consulting		2447 TT				NT$23.1					3,968,339				2,762,654				1.1	%
Vanguard International Semiconductor		5347 TT				NT$15.8					6,000,000				2,862,716				1.1	%
ChungHwa Telecom		2412 TT				NT$54.0					1,549,000				2,556,489				1.0	%
Wintek		2384 TT				NT$43.0					2,048,000				2,734,764				1.0	%
Tsann Kuen Enterprise		2430 TT				NT$45.8					1,700,000				2,326,181				0.9	%
Soft-World International		5478 TT				NT$88.0					790,000				2,204,651				0.8	%
Taiwan FamilyMart		5903 TT				NT$50.0					1,478,520				2,218,335				0.8	%
Tripod Technology		3044 TT				NT$46.2					1,179,000				1,712,336				0.7	%
Yieh United Steel		9957 TT				NT$16.0					3,500,000				1,732,933				0.7	%
Taiwan Hon Chuan Enterprise		9939 TT				NT$32.5					1,544,435				1,557,180				0.6	%
B shares																			1.9	%
China International Marine		200039 CH				HK$16.7					2,442,747				5,008,288				1.9	%
New York																			6.1	%
Sohu.com		Sohu US				US$20.65					526,286				10,867,806				4.1	%
Shanda Interactive						US$16.33					324,300				5,195,286				2.0	%
Direct																			2.2	%
Captive Finance											2,000,000				3,045,000				1.1	%
Tomoike Industrial											825,000				2,353,622				0.9	%
Teco Optronics											1,500,000				450,113				0.2	%
Other assets & liabilities																			5.4	%

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 future returns. 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.