China Fund, Inc. (the) (NYSE:CHN)

BOSTON, March 23, 2020 /PRNewswire/ -- The Board of Directors of the China Fund, Inc. (NYSE: CHN) (the "Fund") announced today that it will continue the temporary suspension of the Fund's Discount Management Program ("DMP"), which was initiated on Monday, March 16, 2020.

At a meeting of the Board of Directors on Friday March 20, 2020 the effects of the COVID-19 pandemic were considered impactful to both global economies and stock markets and hence responsible for creating the present excessive volatility in stock prices. Under such conditions, the Board determined that the Discount Management Program is currently unable to provide cost-effective value to stockholders and thus, its continuation currently is not in the best interests of the Fund or its stockholders. The Board will continue to monitor the situation on a daily basis and look to reinstate the Discount Management Program as soon as it is in the best interests of the Fund and its stockholders to do so.

The Fund is a closed-end management investment company with the objective of seeking long-term capital appreciation by investing primarily in equity securities (i) of companies for which the principal securities trading market is the People's Republic of China ("China"), or (ii) of companies for which the principal securities trading market is outside of China, or constituting direct equity investments in companies organized outside of China, that in both cases derive at least 50% of their revenues from goods and services sold or produced, or have at least 50% of their assets, in China.

NEW YORK, March 13, 2020 /PRNewswire/ -- The China Fund, Inc. (NYSE: CHN) today announced its financial results for its first fiscal quarter ended January 31, 2020.  The Fund is a closed-end management investment company with the objective of seeking long-term capital appreciation by investing primarily in equity securities (i) of companies for which the principal securities trading market is the People's Republic of China ("China"), or (ii) of companies for which the principal securities trading market is outside of China, or constituting direct equity investments in companies organized outside of China, that in both cases derive at least 50% of their revenues from goods and services sold or produced, or have at least 50% of their assets, in China. Whilst the Fund is permitted to invest in direct equity investments of companies organized in China, it presently holds no such investments.

For the quarter ended January 31, 2020, the Fund recorded net investment loss of $644,789, or $0.06 per share, versus net investment loss of $821,390 or $0.05 per share, for the quarter ended January 31, 2019. Net realized and unrealized gains on investments and foreign currency transactions for the quarter ended January 31, 2020 was $6,774,596, or $0.64 per share, compared to net realized and unrealized gain on investments and foreign currency transactions of $35,731,602, or $2.27 per share, for the quarter ended January 31, 2019.

The Fund's total net assets on January 31, 2020 were $231,838,694 and its net asset value per share was $22.01 based on 10,533,371 shares outstanding. A combined distribution of $1.3843 per share from net investment income and realized gains was made in December 2019.

NEW YORK, March 13, 2019 /PRNewswire/ -- The China Fund, Inc. (NYSE: CHN) today announced its financial results for its first fiscal quarter ended January 31, 2019.  The Fund is a closed-end management investment company with the investment objective of long-term capital appreciation which it seeks to achieve by investing primarily in equity securities (i) of companies for which the principal securities trading market is the People's Republic of China ("China"), (ii) of companies for which the principal securities trading market is outside of China, or constituting direct equity investments in companies organized outside of China, that in both cases derive at least 50% of their revenues from goods and services sold or produced, or have at least 50% of their assets, in China and (iii) constituting direct equity investments in companies organized in China.

For the quarter ended January 31, 2019, the Fund recorded net investment loss from operations of $821,390 or $0.05 per share versus a net investment loss from operations of $662,981 or $0.04 per share for the quarter ended January 31, 2018. Net realized and unrealized gain on investments and foreign currency transactions, for the quarter ended January 31, 2019 was $35,731,602 or $2.27 per share compared to net realized and unrealized gain on investments and foreign currency transactions of $54,183,786 or $3.45 per share for the quarter ended January 31, 2018.

NEW YORK, Feb. 11, 2019 /PRNewswire/ -- The China Fund, Inc. (CHN) (the "Fund") announced today that, in accordance with its tender offer (the "Offer") to purchase up to 4,716,803 of the Fund's issued and outstanding shares of common stock, par value $0.01 (the "Shares"), which expired on February 5, 2019, the Fund has accepted 4,716,803 Shares for payment on or about February 12, 2019 at $20.61 per Share, which is equal to 99% of the Fund's net asset value per Share as of the close of regular trading on the New York Stock Exchange on February 6, 2019 (the "Purchase Price"). The Fund will make prompt payment to participating stockholders of the Purchase Price for Shares accepted in the tender offer. The 4,716,803 Shares represent 30% of the Fund's outstanding Shares as of January 4, 2019. A total of approximately 11,586,494 Shares were properly tendered and not withdrawn by February 5, 2019, the final date for withdrawals. Therefore, on a pro rata basis, approximately 40.71% of the Shares so tendered have been accepted for payment.

NEW YORK, Nov. 16, 2018 /PRNewswire/ -- The China Fund, Inc. (NYSE: CHN) today announced its financial results for its third fiscal quarter ended July 31, 2018.  The Fund is a closed-end management investment company with the investment objective of long-term capital appreciation which it seeks to achieve by investing primarily in equity securities (i) of companies for which the principal securities trading market is the People's Republic of China ("China"), (ii) of companies for which the principal securities trading market is outside of China, or constituting direct equity investments in companies organized outside of China, that in both cases derive at least 50% of their revenues from goods and services sold or produced, or have at least 50% of their assets, in China and (iii) constituting direct equity investments in companies organized in China.

For the nine months ended July 31, 2018, the Fund recorded net investment income of $2,826,495 or $0.18 per share versus a net investment income of $2,912,923 or $0.19 per share for the nine months ended July 31, 2017. Net realized and unrealized gain on investments and foreign currency transactions, for the nine months ended July 31, 2018 was $6,778,944 or $0.43 per share compared to net realized and unrealized gain on investments and foreign currency transactions of $50,920,838 or $3.24 per share for the nine months ended July 31, 2017.

The Fund's total net assets on July 31, 2018 were $353,952,117 and its net asset value per share was $22.51 based on 15,722,675 shares outstanding. A distribution of $0.5493 per share from net investment income was made in December 2017.

NEW YORK, April 27, 2018 /PRNewswire/ --

Re:  The China Fund, Inc. (the "Fund")

Dear Stockholders:

I am writing on behalf of the Board of Directors of the Fund regarding the Board's actions in countering the misstatements and omissions in proxy materials submitted by City of London Investment Management Company Limited ("CLIM").

It is the Board's view that these proxy materials not only misled stockholders but that they led to a flawed report and recommendation being issued by Institutional Shareholder Services ("ISS") which gave credibility to the materials.  As many institutional stockholders are bound by company policy to follow ISS recommendations, this essentially magnified the impact of CLIM's misleading materials.

The Board suggests that stockholders seriously consider the views of another prominent proxy advisor, Glass Lewis, which issued a report strongly in favor of the Board's position.  In its report, Glass Lewis noted that:

If the Dissident wishes to force a replacement of the Fund's investment advisor, it should identify its preferred replacement rather than simply proposing the termination of the existing manager…we believe stockholders should refrain from supporting the director nominations and the termination proposal brought by the Dissident at this year's annual meeting. Accordingly, we recommend that shareholders vote FOR both of the board's nominees and AGAINST the termination proposal.

Given the serious nature of the current situation, the Board concluded that it had a fiduciary obligation to the Fund and to its stockholders, both large and small, to authorize a suit in Federal court to assure that the future of the Fund would be decided only after CLIM had corrected its misleading proxy materials and stockholders had a reasonable opportunity to vote their shares after receiving corrected proxy materials.

Unfortunately, the federal district court where the Board's suit was brought decided that the Fund had not made a case for the emergency relief it was seeking.  The Fund's legal counsel advised the Board that the court's decision was not consistent with legal concepts developed by other courts in analyzing allegations of misleading disclosure.

After weighing the same factors considered in bringing the suit, as well as the uncertainty of a favorable outcome in an appeal, the Board concluded that it had a fiduciary obligation to authorize an appeal and that has been filed with the 2nd U.S. Circuit Court of Appeals.

This process necessitated the postponement of the Annual Meeting, now scheduled for May 23rd.   The postponements are unfortunate but are part and parcel of the Board's belief that all stockholders have a right to be fairly treated.

Shortly, before the Fund commenced its suit against CLIM, CLIM sued the Fund in Maryland seeking various orders regarding the Annual Meeting.  Although the Maryland court denied CLIM's request for a preliminary injunction, the Fund has notified the court that the Annual Meeting will be held on May 23 to hold the vote on directors.

The Board recognizes that Fund stockholders are concerned about the expense of the litigation and the delay in holding the Annual Meeting.  The Board shares these concerns.  It would prefer not to have the delay and not to involve the Fund in litigation, but it felt that its fiduciary obligations dictated otherwise.

The litigation could be brought to an abrupt end and the Annual Meeting held if CLIM simply provided the Fund's stockholders with additional proxy materials that addressed the misleading (i.e., undisclosed) aspects of the proxy materials it has already disseminated – that CLIM will be able to effectively control any vote on the future of the Fund and what future CLIM sees for the Fund, particularly given its past indications that it was seeking liquidation of the Fund.

The Board made some technical alterations to the Fund's by-laws.  These changes were to make clear in the by-laws the authority of the Board to change the date of the meeting and to move it to a date other than March.  These were already authorized under Maryland law and the changes made were simply to clarify the situation.

The Board appreciates the support of the Fund's stockholders in this unfortunate circumstance.  We assure you that we will always be diligent in our fiduciary duty to make certain that all stockholders are treated fairly and have all the information they require to make informed decisions regarding their investment in The China Fund Inc.

Sincerely,

/s/

Joe O. Rogers

Chairman

COATESVILLE, Pa., April 27, 2018 /PRNewswire/ -- City of London Investment Management Company Limited, which represents clients who are the beneficial owners of approximately 27.6% of the outstanding shares of common stock of The China Fund, Inc. (CHN), today commented on China Fund Board's continued waste of stockholder assets and actions to prevent stockholders from exercising their fundamental right to vote.

City of London believes the Board has breached their Fiduciary Duties by Preventing Valid Votes of Stockholders from being Counted.

The Board postponed China Fund's 2018 annual meeting of stockholders twice, just days before the scheduled meeting dates, and has publicly stated they may postpone the meeting again. Why else would the meeting be postponed except to prevent Joe Rogers and Richard Shore from losing their seats on the Board and preventing stockholders from exercising their statutory right to terminate the Investment Management Agreement?
We believe the Board is not acting in stockholders' best interests, but to preserve Joe Rogers' position as Chairman of the Board. Under Joe Rogers' leadership, China Fund has a lagging record of disappointing performance and bad Board decisions. It is time for new leadership.
It is imperative that the Board permit the votes to occur on May 23, 2018. If the City of London nominees are elected, Joe Rogers and Richard Shore should be replaced on the Board in accordance with the stockholder vote.
China Fund has Engaged in a Pattern of Wasting Stockholder Assets in an Unprecedented Manner with Litigation in Two Courts Designed to Block the Stockholder Vote. The Board is using fund assets for litigation expenses – these are your assets that they are spending to block your vote.

Wasteful Litigation in Federal Court in New York

After the first annual meeting postponement, the Board filed a lawsuit against City of London, China Fund's largest stockholder, in the United States District Court for the Southern District of New York (SDNY Court) in an apparent attempt to obstruct stockholders' rights and to further entrench themselves.
The SDNY Court denied in full China Fund's motion for a temporary restraining order, expedited discovery and preliminary injunction, finding China Fund's claims challenging City of London's proxy materials to be without merit.
China Fund then moved, in the appellate court, for an expedited review, which was denied. Despite this denial, China Fund prepared and filed a 57-page brief with the appellate court.
Despite two denials, China Fund submitted an "Emergency Motion" for reconsideration of the denial of the expedited review, which was denied. How much will stockholders be forced to pay for this frivolous litigation?
Wasteful Actions in Maryland State Court

To assure the votes are counted, after the March postponement we filed a Verified Complaint in the Circuit Court of Baltimore County, Maryland, bringing claims against China Fund and the members of the Board, with the goal of requiring the annual meeting to be held April 26, 2018. We should not have had to file this action.
The Board's response was to amend China Fund's bylaws in an attempt to retroactively permit its improper actions, and to delay the annual meeting for the second time, immediately prior to the Maryland court hearing in April, thus causing further wasteful legal costs and expenses for China Fund stockholders.
China Fund has notified the Maryland Court that under a specified condition (which was satisfied on April 26, 2018) China Fund will hold the vote for the election of directors on May 23, 2018. While this long overdue election would be welcome, we continue to be concerned that (i) China Fund Board will find another pretext for delay, (ii) if the City of London nominees are elected the Board will take some action to prevent the replacement of Joe Rogers and Richard Shore on the Board, and (iii) the Board will continue to prevent the counting of the stockholder vote on the termination of the investment manager.
We are Concerned the Board's Actions are Intended to Protect the Incumbents and the Status Quo, Not to Benefit Stockholders.

We have proposed two new Directors who have closed-end fund (CEF) experience, are fully independent and have committed to acting in the best interests of all stockholders.
We have proposed to terminate the investment management contract because the manager, Allianz, has performed poorly over the long-term.
The Board's ongoing posturing, multiple annual meeting postponements, entrenchment actions and never-ending litigation are extremely expensive and a waste of China Fund assets. These costs are reducing China Fund's NAV, with costs increasing on a daily basis as a result of the Board's actions, and gradually will erode the share price of China Fund. We believe these continued actions by the Board to block the stockholders' right to vote are undermining the quality and competitive position of China Fund in the marketplace to the detriment of the stockholders, the true owners of China Fund.
It is Time to End the Delays and Permit the Stockholders to Finally Vote on May 23, 2018 on the Election of Directors and to Terminate the Investment Manager.

No More Delays
No More Litigation
No More Waste of China Fund Assets
City of London is using all its efforts to compel China Fund to finally hold its annual meeting and count your votes! Stockholders are the true owners of China Fund, and we have the right to seek to improve our investment. You are being punished via the Board's endless litigation and legal fees seeking to prevent a stockholder vote. We question how many hundreds of thousands of dollars have been spent by the Board on legal fees and other expenses to prevent the stockholders' vote from being counted.

We continue to seek your support on the previously distributed BLUE proxy card (i) to elect two independent director nominees who will work to maximize the value of each stockholder's investment, and (ii) to terminate the investment advisory and management agreements with China Fund's current investment advisor. Your vote is crucial.

COATESVILLE, Pa., March 26, 2018 /PRNewswire/ -- City of London Investment Management Company Limited today issued a statement in response to The China Fund, Inc. (NYSE: CHN) announcement that it postponed the 2018 annual meeting of stockholders from March 27, 2018 to April 26, 2018.  City of London represents clients who are the beneficial owners of approximately 27.2% of the outstanding shares of common stock of The China Fund, Inc.

• We are disappointed that the CHN Board continues to exhibit self-serving behavior, highlighted by its decision to postpone the annual meeting to focus more on entrenchment than allowing stockholders to act as owners of the Fund.
• We believe that the results of the annual meeting, which was scheduled for tomorrow, were clear to the Board at the time it decided to postpone the meeting, and the postponement is a disturbing attempt to improperly influence the outcome of the election of directors and proposal to terminate the investment adviser.
• We believe that a quorum would have been present at the annual meeting, and that our two nominees have received overwhelming support from stockholders in opposition to Joe Rogers and Richard Shore, the two incumbent and entrenched Directors.
• This Board also denied its largest stockholder the right to directly contact many of the Fund's stockholders with the same shareholder list they themselves have been using.
• We urge the Board to add our two director nominees, Julian Reid and Rich Silver, to the Board immediately and for the two incumbent directors, Joe Rogers and Richard Shore, to resign.

We encourage all China Fund stockholders to vote their shares on the BLUE proxy card.  If stockholders have already voted China Fund's white proxy card, they can still vote the BLUE card.  Every vote counts. China Fund stockholders have an opportunity to effect meaningful change by rejecting the China Fund Board's affront to stockholder rights.

VANCOUVER, British Columbia, Feb. 01, 2018 (GLOBE NEWSWIRE) -- China Education Resources, Inc. ("CER") (TSXV:CHN) (OTC:CHNUF), an ed-tech company with leading technology of intelligent system and contents to provide online/offline learning, training courses and social media for teachers, students and education professionals, today provides shareholders and investors with an update on its business development.

CER has signed a Memorandum of Understanding (MOU) with World Book, Inc. The two parties are discussing cooperation opportunities in certain areas including: partnering together to create custom contents around CER’s programs such as soccer and K to 12 education resources; distribution of World Book’s books and digital products in English to schools and libraries in China; Licensing and translating into Chinese World Book’s titles and selling the books in China; Book club with the direct to consumer model, etc. World Book can also work with CER for the education programs of NBA, FIFA, NHL, NASA, STEM and provide content, books, pedagogical support.

World Book, Inc. is a part of Berkshire Hathaway and the publisher of the famous World Book Encyclopedia. It produces original non-fiction reference contents for children and young adults and has great STEM and Social Studies related contents. World Book can adopt existing programs to the needs of CER’s clients and China market.

“We are pleased to work together with World Book to develop China education market. This is a terrific opportunity to expand our current product lines via our existing K-12 channels. World Book is a leading publishing company that leverages cutting-edge technology to produce authoritative, trustworthy, and understandable educational and instructional content. CER knows the China market and has connections. We believe that there is a lot of potential for our partnership and together we can create great opportunities for both companies.” said Chengfeng Zhou, CEO, China Education Resources. For more information, please visit www.chinaeducationresources.com or Email: admin@chinaeducationresources.com.

According to research reports, China education market was estimated to be more than $1.4 trillion USD in 2017. The market size is continuing to increase with China’s economic growth. Asian parents spend seven times more money on their kids' education than American parents do. Since married Chinese couples can now have a second child, there will be about 3 to 5 million newborns annually and the domestic education demands are strong. We expect the partnership to generate more revenue for CER. We will continue to update shareholders on CER’s future development.

In collaboration with China's education administrators and experts, China Education Resources has been helping to transform the curriculum of the world's largest educational system. Recognizing the need to address education reform changes, China Education Resources has created educational tools and curriculum for China's entire kindergarten through twelfth grade system. The Company is playing an integral part in transforming China's educational system through helping to convert the existing educational system from a memory-based learning system to a creative thinking and interactive approach. Presently, China Education Resources has over 1 million kindergartens through twelfth grade teachers registered through its Web portal. For more information, please visit www.chinaeducationresoqnburces.com or call (604) 331-2388.

NEW YORK, March 11, 2016 /PRNewswire/ -- The China Fund, Inc. (NYSE: CHN) today announced its financial results for its first fiscal quarter ended January 31, 2016.  The Fund is a closed-end management investment company with the investment objective of long-term capital appreciation which it seeks to achieve by investing primarily in equity securities (i) of companies for which the principal securities trading market is the People's Republic of China ("China"), (ii) of companies for which the principal securities trading market is outside of China, or constituting direct equity investments in companies organized outside of China, that in both cases derive at least 50% of their revenues from goods and services sold or produced, or have at least 50% of their assets, in China and (iii) constituting direct equity investments in companies organized in China.

For the quarter ended January 31, 2016, the Fund recorded a net investment loss from operations of $726,395 or $0.05 per share versus a net investment loss from operations of $692,677 or $0.04 per share for the quarter ended January 31, 2015. Net realized and unrealized loss on investments and foreign currency transactions, for the three months ended January 31, 2016, was $45,642,786 or $2.90 per share compared to net realized and unrealized gain on investments and foreign currency transactions of $9,380,765 or $0.60 per share for the first quarter of the fiscal year ended October 31, 2015.

The Fund's total net assets on January 31, 2016 were $242,973,984 and its net asset value per share was $15.45 based on 15,722,675 shares outstanding. A combined distribution of $1.4958 per share from net investment income and net realized gains was made in December 2015.

NEW YORK, Sept. 15, 2015 /PRNewswire/ -- The China Fund, Inc. (NYSE: CHN) today announced its financial results for the third quarter ended July 31, 2015.  The Fund is a closed-end management investment company with the investment objective of long-term capital appreciation which it seeks to achieve by investing primarily in equity securities (i) of companies for which the principal securities trading market isthe People's Republic of China ("China"), (ii) of companies for which the principal securities trading market is outside of China, or constituting direct equity investments in companies organized outside of China, that in both cases derive at least 50% of their revenues from goods and services sold or produced, or have at least 50% of their assets, in China or (iii) constituting direct equity investments in companies organized in China.

For the nine months ended July 31, 2015, the Fund recorded net investment income of approximately $3,401,610 versus net investment income of approximately$4,958,895 for the nine months ended July 31, 2014.  Net realized and unrealized gains for the nine months ended July 31, 2015 were $4,690,258 or $0.30 per share compared to net realized and unrealized gains of $30,354,268 or $1.94 per share for the nine months ended July 31, 2014. 

The Fund's total net assets on July 31, 2015 were $328,739,482 and its net asset value per share was $20.96, based on 15,682,029 shares outstanding. A distribution of $3.7651 per share was paid on December 18, 2014. 

NEW YORK, April 29, 2015 /PRNewswire/ -- The China Fund, Inc. (NYSE: CHN) today announced that it has received from the China Construction Bank repatriated cash totaling $39,708,942.06 or approximately 10% of its net assets as of April 28, 2015. This represents the proceeds of the sale of the Fund's holdings of Hand Enterprise, a listed China A-Share.  Under the regulations and restrictions governing the Fund's right to hold Hand Enterprise as an A-share without the QFII quota normally required to hold A-shares, proceeds from the sale of the security could only be held in a special RMB cash custody account at China Construction Bank until repatriated.  The process to gain approval to repatriate the proceeds was long and complex and this was particularly due to the recapitalization that Hand Enterprise went through in connection with its redomicile from Singapore to China prior to its listing on the Shanghai Stock Exchange.

The Fund is a closed-end management investment company seeking long-term capital appreciation primarily through investment in the equity securities of companies engaged in a substantial amount of business in the People's Republic of China.

The China Fund, Inc. is listed on the New York Stock Exchange under the ticker symbol "CHN". 

This press release shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of the securities in any state in which such offer, solicitation or sale would be unlawful under the securities laws of any such state.

NEW YORK, March 17, 2015 /PRNewswire/ -- The China Fund, Inc. (NYSE: CHN) today announced its financial results for the first quarter ended January 31, 2015.  The Fund is a closed-end management investment company with the investment objective of long-term capital appreciation which it seeks to achieve by investing primarily in equity securities (i) of companies for which the principal  securities trading market is the People's Republic of China ("China"), (ii) of companies for which the principal securities trading market is outside of China, or constituting direct equity investments in companies organized outside of China, that in both cases derive at least 50% of their revenues from goods and services sold or produced, or have at least 50% of their assets, in China and (iii) constituting direct equity investments in companies organized in China.

On January 31, 2015, the Fund's total net assets were $329,335,702 and its net asset value per share was $21.00 based on 15,682,029 shares outstanding.  After taking into consideration the distribution of $3.7651 per share made in December 2014, the Fund's total return for the quarter ended January 31, 2015 was 4.25%.

For the quarter ended January 31, 2015, the Fund recorded a net investment loss of approximately $692,677 or $0.04 per share versus a net investment loss of approximately $6,797 or $0.00 per share for the quarter ended January 31, 2014.  Net realized and unrealized gains, for the three months ended January 31, 2015 were $9,380,765 or $0.60 per share compared to net realized and unrealized loss of$4,159,746 or $0.27 per share for the first quarter of fiscal year 2014. 

NEW YORK, Sept. 12, 2012 /PRNewswire/ -- The China Fund, Inc. (NYSE: CHN) today announced its financial results for the third quarter ended July 31, 2012. The Fund is a closed-end management investment company with the investment objective of long-term capital appreciation which it seeks to achieve by investing primarily in equity securities (i) of companies for which the principal securities trading market is the People's Republic of China ("China"), (ii) of companies for which the principal securities trading market is outside of China, or constituting direct equity investments in companies organized outside of China, that in both cases derive at least 50% of their revenues from goods and services sold or produced, or have at least 50% of their assets, in China and (iii) constituting direct equity investments in companies organized in China.

For the nine months ended July 31, 2012, the Fund reported a net investment income of approximately $3,888,072 versus a net investment income of approximately $2,266,519 for the nine months ended July 31, 2011.  Net realized and unrealized losses for the nine months ended July 31, 2012 were -$56,369,498 or -$3.34 per share compared to net realized and unrealized gains of $26,463,231 or $1.16 per share for the nine months ended July 31, 2011. 

The Fund's total net assets on July 31, 2012 were $403,266,268 and its net asset value per share was $23.92, based on 16,861,895 shares outstanding. After taking into consideration the distribution of $2.9964 per share paid on December 29, 2011, the Fund's total return for the nine months ended July 31, 2012 was -5.23%.

NEW YORK, June 22, 2012 /PRNewswire/ -- The China Fund, Inc. (NYSE: CHN) (the "Fund") announced today the commencement of a tender offer by the Fund to purchase up to 25% of the Fund's issued and outstanding shares of common stock, par value $0.01 per share (the "Shares"), or 5,662,664 Shares in the aggregate, for cash at a price per Share equal to 99% of the Fund's net asset value per Share as of the close of regular trading on the New York Stock Exchange on the business day immediately following the day the offer expires (the "Tender Offer").  The Tender Offer is being made on the terms and subject to the conditions set forth in the Offer to Repurchase and related Letter of Transmittal.  The Tender Offer will commence on June 22, 2012 and will expire at 11:59 p.m., New York time, on July 23, 2012, unless extended (the "Termination Date").

The Tender Offer is not conditioned upon the tender of any minimum number of Shares.  If more than 5,662,664 Shares are properly tendered and not withdrawn prior to the Termination Date, the Fund will purchase Shares from tendering stockholders on a pro rata basis in accordance with the number of shares tendered; however, the Fund will accept all Shares tendered by any stockholder who owns an aggregate of not more than 99 Shares and tenders all such Shares before pro rating the Shares tendered by other stockholders.

In connection with the Tender Offer, the Fund has temporarily suspended any repurchases of its shares of common stock in the open market pursuant to its discount management program until on or about 10 business days after the Termination Date, as required by the Securities Exchange Act of 1934, as amended.

This announcement is not a recommendation, an offer to purchase or a solicitation to sell any securities of the Fund.  The Tender Offer is being made only by an Offer to Repurchase, a related Letter of Transmittal and other documents, which will be filed with the Securities and Exchange Commission and mailed to record holders on or about May 15, 2012.  Stockholders of the Fund should read these documents carefully when they receive them, as they will contain important information about the Tender Offer.  These and other filed documents are available to investors for free both at the website of the Securities and Exchange Commission and from the Fund.

Excerpt From December 2011 Monthly Insight Report:

The divergence between different Chinese equity markets continued from December into the first week of 2012, with the MSCI China index up 0.4% while the CSI 300 lost 2.4%. Shares listed offshore were apparently helped by rising risk appetite and liquidity inflows, but this was not the case for the insulated A-share market. However, as strong economic data from China, the United States, Germany and the United Kingdom boosted sentiment, both the offshore and onshore markets rallied for the remainder of January. The MSCI Golden Dragon index finished the month 10.0% higher, with the CSI 300 up 4.8%.

As domestic inflation abates and uncertainties continue in Europe, there is growing consensus that the Chinese authorities’ tightening of monetary policy is coming to an end. But the market’s expectations of loosening have so far been disappointed. The CPI rose 4.1% year on year in December 2011, down 10 basis points from November 2011 and marking a straight five-month decline from the 37-month high of 6.5% last July. Following Premier Wen Jiabao’s comments on fine-tuning policy to deal with a tough first quarter of 2012, the China Securities Regulatory Commission encouraged state-owned companies to increase their stakes in their listed subsidiaries. After the central bank reduced the reserve-requirement ratio (RRR) by 50 basis points on December 5, 2011, the market expected further cuts at the end of the month and before the Chinese New Year. Neither materialized, which put some pressure on equities, in particular those traded in Shanghai and Shenzhen.

Recently released macroeconomic data were encouraging. GDP in the last quarter of 2011 was up 8.9% from a year ago, beating market expectations. The official Purchasing Managers’ Index (PMI) rose to 50.5 in January from 50.3 in the previous month. This surpassed expectations and is the highest reading since October, indicating that the economic slowdown is stabilizing and alleviating concerns about a ‘hard landing’ in the Chinese economy. Backing the official PMI reading, a similar HSBC survey showed that the PMI slowed the least in the last three months.

The Taiwan Stock Exchange index had a stellar start to the year. It rose 6.3% in January, even though the exchange was closed for 10 days for the Chinese New Year holiday. Recent developments in the Greek sovereign-debt negotiations have clearly eased some of the market’s concern over a disorderly default. Further boosted by increasing optimism about the US economy, capital began to flow back to emerging markets, including Taiwan. And President Ma Ying-Jeou was re-elected for a second term in office. His victory removes uncertainty over the future of his cross-strait policies, which affect the many Taiwanese businesses with key markets or production bases in mainland China. The Taiwan dollar appreciated by 2.3% in January.

Excerpt From December 2011 Monthly Insight Report:

As more positive macroeconomic data trickled in from the United States and anticipation built for China to fine-tune its monetary tightening, the Greater China equity markets diverged in December. The Chinese shares traded in Hong Kong did better than their A-share counterparts. Hong Kong, as an offshore market, benefited more from a slight increase in foreign investors’ risk appetite, given a rosier economic outlook in the United States and the European Central Bank’s indirect injection of liquidity into the system. The Hang Seng index ended the month 4.6% higher, while the Shanghai Composite retreated 4.6% in US dollar terms. The MSCI Golden Dragon rose 2.5%.

On the domestic front, there are tentative signs that the slowdown in China’s economic growth may be stabilizing, but the outlook for exports remains murky as a result of Europe’s debt crisis. The purchasing managers’ index compiled by the China Federation of Logistics and Purchasing showed an improvement of 1.3 percentage points in December, to 50.3% from November’s 49%. The festival effects of Western and Chinese New Year celebrations helped to boost this reading. A separate index released by HSBC indicated that manufacturing growth continued to slow in December, although the deceleration was less marked than in November.

China’s November macro data showed a sharp fall in CPI growth to 4.2%, from 5.5% in October. Containing inflation is a less urgent priority than it was at the beginning of 2011, so it appears that the central government’s focus is gradually shifting to maintaining growth. China’s Central Economic Working Conference emphasized growth stability while maintaining the authorities’ stance on monetary policy and property tightening. The People’s Bank of China said that monetary policy would remain flexible and forward-looking, implying that it would take any necessary action to keep growth stable.

Excerpt From November 2011 Monthly Insight Report:

Under sustained pressure from stubbornly negative global newsflow and sluggish Chinese economic indicators, equity markets in the Greater China region plummeted in November. Although sentiment improved slightly towards the end of the month, the late gains were wholly insufficient to offset the losses made earlier in the month. Hong Kong and Taiwanese stocks were hit particularly hard, as capital fled markets regarded as risky. The Chinese A-share market lost 5.5%. Overall, the MSCI Golden Dragon index fell 8.5%. Although the Fund could not avoid this downturn, it did manage to outperform its benchmark by 1.3 percentage points.
 
On the domestic front, the main development was November’s HSBC purchasing managers’ index, which came in at 47.7. This indicates a sharp deterioration in business conditions. After October’s reading of 51, this was the biggest monthly fall since August 2008 and the lowest figure since March 2009.
 
With reduced export orders from the United States and Europe, as well as a very tight credit environment, many of China’s small and medium-sized enterprises are experiencing the toughest conditions they have ever faced. Factories have been cautious about expanding, and consumers are much less ready to open their wallets for discretionary items. Feedback from manufacturers of factory-automation equipment shows that new orders have been slowing since the third quarter. Meanwhile, China’s department-store operators have been reporting decelerating same-store sales growth since September.
 
The government’s unprecedented tightening measures in the property market are also working. More cities are reporting shrinking transaction volumes and lower house prices compared with a year ago. Now that inflation appears to have peaked, there is mounting speculation that the authorities will adjust their policy stance, given the increasing concerns about China’s economic growth and the uncertain global environment.
 
Indeed, in November, the People’s Bank of China announced a 50-basis-point cut in the required-reserve ratio for the country’s commercial banks. This will take effect from December 5, 2011. The earlier-than-expected move is the clearest signal so far that there will be a change in monetary policy.
 
Meanwhile, Taiwan’s heavily export-oriented economy looks set to remain volatile, given the uncertainties in the export market. The third-quarter GDP growth rate dropped to 3.2%, far below the 5.57% posted in the first half of the year. Economists are becoming more conservative in their estimates for growth next year.
 
Among the main contributors to the Fund’s outperformance in November were China Medical System Holdings, VanceInfo Technologies and Ports Design. China Medical System Holdings outperformed after the company announced that it was testing its new liver-cancer drug at 26 hospitals in China. VanceInfo Technology’s shares enjoyed a recovery after the firm revised up its fourth-quarter guidance by 7%. The main factor in fashion retailer Port Design’s outperformance was the good visitor numbers announced by the Hong Kong Tourism Board for October.
 
Negatives included Far Eastern Department Stores, which fell on weaker consumption data from Taiwan. The company’s anniversary sales promotions generated only 2% sales growth, with year-to-date revenue up just 4%. On the mainland, another significant detractor from returns was Huiyin Household Appliances, which declined on worries about the expiry of the government’s old-for-new subsidy program at the end of the year. Huiyin’s competitors have also reported weaker sales, leading to concerns about a shrinking appetite for electrical products. Finally, Shandong Weigao Group Medical Polymer, which makes medical consumables, weakened after disappointing the market’s high expectations in its third-quarter results.

Excerpt From October 2011 Monthly Insight Report:

It appears that the Chinese economy is achieving a soft landing. Gross domestic product (GDP) grew 9.1% from a year ago in the third quarter of the year, a deceleration from the 9.7% expansion in the first quarter of the year and 9.5% in the second. Despite the drag from weaker exports, industrial production picked up from 13.5% year on year in August to 13.8% last month. Fixed-asset investment growth came in at 24.9% year on year in the first nine months of the year, down slightly from 25% in the first eight months. Retail sales provided a positive surprise, rising 17.7% year on year in September, faster than the 17% growth in August, bolstered by sales of cars, food and drink, household appliances and construction materials. Power generation rebounded in September too, up 11.5% year on year. Inflationary pressures eased marginally in September, with the consumer price index (CPI) rising 6.1% year on year, down from 6.2% a month earlier. The key driver of CPI remains food prices, which surged 13.4% year on year. These days, it seems more useful when seeking to predict the trend in inflation to talk to a pig breeder than an economist (the former tells me that pig prices will fall after Chinese New Year). In Taiwan, September’s export orders were weak, down 1.3% month on month, but inflation remains low with the CPI climbing only 1.3% in August. The unemployment rate edged down to 4.3% in September.

During Chinese Premier Wen Jiabao’s visit to Tianjin, he indicated that the central government would ‘fine-tune and preemptively adjust policies at a proper time and by a suitable degree’. Accordingly, the State Council decided to allow four local governments – Shanghai, Shenzhen, Zhejiang province and Guangdong province – to issue bonds independently, with the Ministry of Finance repaying the principal and interest. In addition, the central government is set to launch a trial value-added tax for business next year, to eventually replace the existing business tax regime. This is seen as indicating that the leadership wants to support growth by easing the tax burden on business. We expect that these signals of selective easing sent by the top leadership will support a stockmarket rebound into the year-end.

Excerpt From September 2011 Monthly Insight Report:

Chinese equity markets plunged again in September, taking all benchmark indices into bear-market territory. Volatility spiked too, as investors engaged in another round of panic selling. Turnover in stocks fell, indicating weak liquidity in the stockmarkets.
 
The more the market fell, the more bearish the newsflow became. China’s inflation is proving resistant to official remedies; although the consumer price index slowed to 6.2% in August, down from a three-year high of 6.5% in July, it is still too high for comfort. Liquidity is getting tighter. In August, total new loans declined to Rmb548 billion. Borrowing costs for small and medium-sized companies are rising sharply, with local media reporting that the ‘underground’ lending rate in Wenzhou (the Chinese city with the most highly developed private economy) had hit 69% in September, with around 30 local entrepreneurs either fleeing or committing suicide over the past four months. Mounting concern over China’s underground banking system has translated into a general sell-off in offshore Chinese equities.
 
Meanwhile, constrained liquidity caused the volume of property transactions in first-tier cities to fall sharply in August. In Shanghai, home sales fell to a six-year low; in Beijing, they fell 22.9% year on year, to their lowest since 1999. Nevertheless, as the prices of new homes rose in August in all 70 of the major cities monitored by the authorities, the central government will continue to take measures to keep prices at reasonable levels. The home-appliance sector underperformed in September, on the news that the ‘go rural’ policy would be withdrawn at the end of this year. Shares of Huiyin Household (1280 HK) suffered, but our contacts with the company suggest that the impact will be negligible.
 
Further bad news came in the form of the large number of big IPOs being pumped out to suck up liquidity. In the A-share markets, Sinohydro, the mainland’s largest dam builder, reduced the size of its IPO on the Shanghai Stock Exchange. It now expects to raise US$2.7 billion, but could be eclipsed by China Communications Construction, the country’s largest constructor of ports, which plans to raise US$3 billion. In Hong Kong, the IPO market almost ground to a halt as XCMG Construction Machinery, China’s biggest crane-maker, scrapped plans to raise about US$1.1 billion. Construction-equipment firm Sany Heavy Industry has postponed the launch of a US$3.3 billion listing, and Xiao Nan Guo Restaurant Holdings said that it would pull its US$75 million offering.
 
Lastly, in this febrile market, the reaction to rumors is overwhelming: Chaoda, China’s largest vegetable grower, dropped 26% in one day on fears of misconduct; meanwhile, Ping An Insurance sold off in both the H-share and A-share markets on rumors of huge losses at Hong Kong property developer Greentown and Fortis Group. The rumors were denied by both companies.
 
There was, however, some encouraging news. Inflation may have already peaked, although it will not decline swiftly. Export growth accelerated to 24.5% year on year in August, up from 20.4% in July, while import growth rebounded strongly to 30.2%. China’s official purchasing managers’ index rose to 51.2%, which suggests that growth in manufacturing activity remained stable on a sequential basis. Inflation in Taiwan is still low, with the island’s consumer price index up just 1.34% in August. Taiwan’s unemployment rate edged down to 4.4% in August, and total employment continued to rise. And the Greater China stockmarkets are now very cheap!

Excerpt From August 2011 Monthly Insight Report:

Economic growth in China continues to moderate from a high level. Industrial production grew 14% (year on year) in July, which was weaker than expected. Meanwhile, retail sales showed steady growth of 17.2%, while fixed-asset investment grew at 25.4%. Our recent company visits in the Greater China region show that Chinese exporters are feeling the squeeze from the rising costs of labor and material, the yuan’s recent strength and destocking as customers worry about a slide into recession. As liquidity deteriorates, property transactions in first-tier cities are shrinking rapidly. Inflation remains challenging. The CPI reached a new cycle-high at 6.5% in July, mainly driven by food prices (up 14.8% in July and contributing 4.4% CPI growth). Inflation might retreat in August, thanks to stabilizing food prices and a favorable base effect, which would boost sentiment. The central bank’s continued vigilance is illustrated by its move to freeze some Rmb900 billion of liquidity in the banking system by broadening the base for the reserve-requirement ratio. Bank stocks, to which the Fund has little exposure, declined on fears that the continued tightening would hurt the banks’ profits. The positive news is that earnings growth for Chinese companies has held up better than expected. For MSCI China constituents, earnings growth reached 23% in the first half of 2011, while our A-share portfolio achieved earnings growth of 32.9%. Foreign direct investment continued to pour into China in July, rising 19.8% from the same month a year earlier. With next year’s political handover approaching, it seems as though the government would need evidence of a widespread slowdown or a major foreign shock to start loosening policy.

Taiwan looks more encouraging. Its second-quarter real GDP rose by 5% year-on-year, driven by solid gains in private consumption (+4.1% quarter on quarter) and by newly launched infrastructure projects ahead of next year’s presidential election. The unemployment rate stood at just 4.4% in June, and inflation dropped to 1.3% in July from 1.9% in June. Even export orders enjoyed a recovery in July, rising 11.1% year-on-year, compared with year-on-year growth of 9.2% in June, though clearly the outlook for Western demand is weakening.

Excerpt From July 2011 Monthly Insight Report:

Rattled by the prospect of further monetary tightening, given record-high inflation (6.4% in June), the A-share market was the weakest of the Chinese stockmarkets in July. The high-speed train collision that killed 40 people at the month-end was the final straw, and the Shanghai Exchange finished July down 2.8%. The unedifying sight of US political leaders squabbling about a new debt ceiling further undermined confidence in financial markets.

In contrast, the Taiwanese and Hong Kong markets closed flat, despite Taiwan’s weaker-than-expected export numbers and the fact that some Hong Kong-listed companies were negatively affected by Moody’s ‘red flag’ report.

The Fund’s performance in July was hampered by our large exposure (21.8%) to the healthcare sector, which remained under pressure from concerns about drug-price cuts. But our substantial exposure to the consumer sector (about 35.1%) has started to perform well again.

China’s economy performed better than expected in the second quarter, with year-on-year GDP growth at 9.5%, versus 9.7% in the first quarter. In the first half of 2011, industrial profits jumped 28.7% year on year, to Rmb2.4 trillion. June’s retail sales were up 17.7% against 16.9% in May, while industrial output rose 15.1% against May’s 13.3%. This data has confounded forecasts that Beijing’s anti-inflationary policies would cause a ‘hard landing’; this year’s 8% GDP growth target looks eminently achievable.
 
As the pork price has been stubbornly resilient during the summer, inflation remains the key short-term challenge. Given the stronger-than-expected economic growth and persistently high inflation, any relaxation of policy in the near future looks unlikely. Another risk is deteriorating liquidity, which is spreading from small and medium-sized enterprises to local governments. The Chinese government seems to have no intention of stopping new share issues. Of the 164 new listings between January and June, 66 crashed below their offer prices.
 
As rising incomes create a growing appetite for packaged foods, China’s food market is becoming a hot target for foreign investment. Nestlé, the Swiss food giant, is set to acquire one of the fund’s holdings, Chinese confectioner Hsu Fu Chi, for US$1.7 billion, in a deal that marks one of the largest foreign acquisitions in China and underscores the race to capture a share of the country’s food sector. This follows Chinese regulators’ approval of Diageo’s acquisition of a stake in Chinese liquor brand Swellfun in June.

Excerpt From June 2011 Monthly Insight Report:

The Hong Kong and Taiwanese markets lurched downwards in June. Headlines about possible Greek default and slowing US growth were unhelpful, but the key source of worry remains inflation. The official CPI number was 6.4% in June, which includes a year-on-year increase in food inflation of 14.4%. (Pork alone accounted for 1.4 percentage points of the 6.4%!) Credit remains tight, especially to the private sector. The fifth interest-rate hike since October took one-year deposits to 3.5% and loans to 6.6%, but to most private enterprises, loan availability is a bigger problem than cost. A less conventional initiative to tackle inflation was the announcement of the removal of import tariffs on 33 raw materials from July 1

Further news about local government debt (27% of GDP, based on official figures, of which over half derived from the stimulus) also weighed on China’s banking sector. This helped the Fund’s relative performance, as we maintain a zero weighting to mainland Chinese banks.

In Taiwan, where inflation is much lower (just 1.7%), worries centered more on weakening demand for tech exporters. This outweighed further good news on cross-strait relations; the first wave of individual mainland tourists arrived on June 28. As in Hong Kong, these mainland tourists are helping to boost consumption. Interestingly, the A-share market ended slightly up for the month, helped by Premier Wen’s confident (albeit premature) comments about inflation, and the central bank’s ceasing to issue bills. The first-ever failure of an A-share IPO – a company called Baling could not list because of lack of interest – also hinted at a possible reduction in equity supply. As A-shares appear to be a better leading indicator than the offshore markets, this is encouraging.

Excerpt From May 2011 Monthly Insight Report:

In Shanghai today it is raining cats and dogs. As we have so far endured the driest year since 1873, this is a good thing. Stockmarket investors have developed an unusual interest in the weather as the drought in the lower Yangzi area reversed perceptions that the summer would bring a decline in food prices, easing inflationary pressure in the process. At the same time, the China bears latched onto signs of slowing growth (weaker PMI, decelerating import growth) as apparent proof that China was facing a ‘hard landing' (though this seems rather at odds with last week’s ‘China is overheating’ story). Worries about power shortages during the summer, caused by government suppression of electricity prices, added to the bearish mix. The reality, as we have witnessed in our constant company visiting around China, is that growth remains robust and somewhat higher than the government’s 7% target.

One additional problem, especially in the A-share market, has been the huge and constant supply of new equity. The government’s announcement of progress on the international board in Shanghai (the listing of foreign blue-chips in renminbi) was seen as a further draw on liquidity. A couple of state-owned enterprises, including Petrochina and Shenhua, have announced plans to buy back stock. A government announcement to curtail this, especially if it coincides with signs of a levelling-off of inflation late in the summer, could spark a sharp rally. Amid the bearishness, we should not lose sight of the strong liquidity flows resulting from negative real rates (try walking into a smart restaurant in Hong Kong or attending a Chinese fine-art auction...).

Small-cap stocks were harshly dealt with, especially those listed in New York, as accounting scandals, both real and imagined, caused a widespread sell-off. Although the quality of these smaller offshore listings is often questionable, there are some gems now available at bargain prices. We added to our holding in control-systems engineer Hollysys. The Fund’s worst-performing stock in May was Chaoda, which fell after a magazine article alleging accounting irregularities. We have now held this large­scale vegetable producer for several years, and have discovered nothing untoward during our visits, including one last month. The stock now trades on less than 4 times prospective earnings, so we continue to hold.

Excerpt From April 2011 Monthly Insight Report:

Inflation remains the bull in the China shop. The official CPI number rose to 5.4% in March, though the reality feels faster. Some food prices have fallen in the past couple of weeks, but non-food inflation is accelerating. The side-effects of price controls, be they a shortage of diesel or (likely this summer in some provinces) electricity, are starting to be felt. The response has been one 25-basis-point rise in interest rates and another 50-basis-point rise in reserve-ratio requirements (meaning that 20.5% of the big banks’ deposit base is now locked away with the central bank). The government remains reluctant to use the currency to stem inflation; despite local paper headlines shouting ‘renminbi hits new highs’, this is entirely a function of US dollar weakness. So far this year, the yuan is actually down by 9.4% against the euro and 5.8% against that other strong currency, the British pound! One hint as to the reason can be found in the news that China recorded a first-quarter trade deficit of US$1.02 billion. This was immediately dismissed as a blip by economists, but seems to the managers to be the natural result of rising costs, a tough environment for exports and booming domestic consumption. Perhaps the biggest risk in China investment is what happens when the ‘one-way bet’ on the renminbi suddenly becomes less certain. The hot pursuit of renminbi-denominated ‘dim sum’ bonds reflects this mentality; why buy a bond yielding 1.5% unless you expect the currency to appreciate at least 5%? There is nothing worse than cold dim sum...

Excerpt From February 2011 Monthly Insight Report:

Chinese markets varied widely in February: the Shanghai 180 gained 4.5% while Taiwan fell 6%, with Hong Kong down slightly. The effect of Middle Eastern troubles on oil prices exacerbated already heightened fears of inflation. China raised interest rates for the third time in four months, increasing the rate on one-year deposits by 25 basis points to 3.0% and that on longer-term deposits by more. To restrain house prices, Beijing announced that buyers now have to be resident for a year before purchasing property. January’s trade surplus fell by 54% year on year to US$6.5 billion, reflecting rising commodity prices and buoyant domestic consumption.
 
Profit-taking on currency appreciation and the market’s outperformance partly explained Taiwan’s sharp fall. But alarmist media reports about the threat of a ‘jasmine revolution’ undermined ‘China concept’ shares, and a proposed ‘luxury tax’ on houses sold within two years hurt property developers. More positively (though investors were in no mood for it), the government opened further sectors to Chinese investment. Chinese companies can now own 10% of Taiwanese IC foundries, DRAM manufacturers, semiconductor packagers and testers, and panel-makers, and up to 20% of pharmaceutical companies. And in contrast to some other developing economies, Taiwan’s rate of consumer price inflation fell back to 1.1% year on year in January, helped by currency strength.
 
In mainland China the corresponding number was 4.9%, below expectations of 5.4%. But this wasn’t a like-for-like comparison; the authorities have changed the way they calculate CPI, decreasing the weighting of food and increasing that of housing expenses. The extent to which this contributed to the softened figure is as yet uncertain, but we fear inflationary pressures will prove resilient. Rain and snow partially relieved the drought in northern China, but there were no other positive signs.
 
March’s main event is the National People’s Congress meeting. This usually proves anticlimactic, but the agenda seems sensible. The government appears to have decided on a 70% increase in this year’s affordable-housing target, to 10 million units – almost the same as last year’s volume of commercial houses. Meanwhile, the number of state-owned houses for rent will reach 2 million, six times last year’s figure. This indicates that the project goes far beyond merely controlling property-price expectations, to stimulating domestic consumption, restructuring the pattern of economic growth and reallocating social wealth. One local newspaper estimates that total investment will reach Rmb1.4 trillion in 2011. We remain cautious on the funding and speed of execution, but expect the project to play a key role in China’s economic development.

Excerpt From January 2011 Monthly Insight Report:

The mainland stockmarkets remained queasy in January. The Shanghai Composite fell a further 0.8%, but its sister A-share market in Shenzhen was even worse hit, reflecting its greater weighting of small-cap stocks. Investors are concerned about food inflation, which fell in December but is expected to rebound into the Chinese New Year, given the drought conditions in some of China’s most important agricultural provinces. The reserve-requirement ratio was raised by another 50 basis points – it is now 19.5% for some state-owned banks – and finally seemed to bite as the interbank rate jumped to nearly 8%. Noise about government restrictions on the banks’ loan quota led investors to worry that an even greater emphasis would be placed on equity financing; 16 of January’s 30 A-share IPOs finished the month under water. The authorities fired off another salvo of measures to restrain the property market, and Shanghai, Chongqing and Qingdao introduced recurring taxes on ‘luxury’ or investment property. The direct cost of these measures is very limited, but it emphasized the government’s continued vigilance towards the sector.

Taiwan was again the star performer as the consumer-confidence index hit a 10-year high in January and the currency reached its strongest level in 13 years. After many years of decline, the container throughput at Taiwan’s largest port, Kaohsiung, grew by 22% year on year in 2010. Not all was gloom on the mainland either; export growth remained good (+17.9% year on year in December), but the even more rapid increase in imports (+25.6%) meant that the monthly surplus was ‘only’ US$13 billion, down 29% year on year. Otherwise, for light relief, we had to turn to politics and the ‘coincidence’ of Secretary of Defences Gate’s visit with the unveiling of China’s stealth fighter. We also watched Mr Hu Goes To Washington (even for a Chinese politician, the number of platitudes which he managed to work into his White House address was impressive).

Among the smaller news items, there are three which I think worth highlighting, in that they illustrate potential trends. As one step in the ongoing tax reforms, state-owned enterprises will be asked to hand over an additional 5% of profits to the government. As a step towards the gradual internationalization of the renminbi, citizens of Wenzhou will be allowed to invest up to US$20 million abroad (but not in stocks or property). And at the month-end, two owners of Hong Kong-listed Chinese property developers (Shanghai Forte and Shui On Land) bid for stock at a 25% premium to the heavily discounted market price.

Excerpt From December 2010 Monthly Insight Report:

 
The Fund had a good 2010, finishing the year up 27.3% against a benchmark return of 13.6%. We were not helped by our speciality in A-shares; the Shanghai Composite index fell 14.3% in 2010, dragged down by government controls on the property market and the huge issuance of new equity. Some 349 new companies listed in the A-share markets in 2010, raising US$67 billion in capital, which compares with US$42 billion over the same period in the United States. Our outperformance was driven by our long-running bias towards domestic consumer and healthcare stocks. One example, China Medical Systems, in which we first invested in June 2007 as an AIM-listed ‘orphan stock’, enjoyed a particularly strong finish to the year and is now our largest holding. We were also helped by our investments in Taiwan, which was the best-performing Chinese market in 2010 (TWSE +9%).
 
We think there is more to come from Taiwan, which has just entered its Year 100 (the founding of the Republic of China is conventionally dated to an army mutiny in Wuchang on 10 October 1910). The first day of 2011 also saw the cross-straits free-trade agreement come into effect. Anyone doubting the revival of Taiwanese consumption should have accompanied me to the Leofoo Village theme park in central Taiwan at the holiday weekend, along with 30,000 other people (never again!). The consumer stocks, however, represent one of our main challenges in 2011: although we remain bullish on the prospects for the growth of Chinese consumption, many stocks we would like to own are now too expensive. The Chinese market’s inefficiencies still yield some interesting, cheap stocks, but to locate them we find ourselves being pushed towards seriously out-of-favour sectors (property, solar, utilities) and the obscure.
 
The main macroeconomic threat in 2011 is still inflation; attention so far has focused on food inflation, which was +11.7% in November, compared with non-food inflation of +1.9%. This was caused largely by bad weather and should ease with the spring. The danger is that non-food inflation, as represented in fast-rising wages and resurgent material prices, may prove more intractable. Beijing city raised its minimum wage by 20.8% and Moutai raised its vodka price by 20% (these two events are not necessarily related). National monetary policy was officially changed from ‘appropriately loose’ to ‘moderate’, which in real terms meant a 25-basis-point rise in interest rates on Christmas Day, a 50-basis-point increase in the reserve-requirement ratio (now 19% for big banks) and the removal of some stimulus measures, such as the tax break on small cars. This being the case, the ‘renminbi appreciation/hot money’ story will probably remain in play for a while. The politicians may have been emboldened by the strong export figures (+34.9% year on year in November) to allow a slight quickening in the glacial pace of the yuan’s appreciation against the US dollar.

Excerpt From November Monthly Insight Report:

It has been a while since I played Snakes & Ladders, my children having long moved on to more vivid games such as Xbox Zombie Massacre IV. However, managing a fund in China this year has brought this old favorite back to mind. In November the main snake was inflation; food inflation above 10% is not something that a Communist politician can ignore. Although I think there is an understanding in Beijing about the limitations of any counter-measures, expect crowd-pleasing initiatives – and the market remaining choppy – until food prices are safely under control. The reserve-requirement ratio at the big state banks was raised twice and now stands at an all-time high of 18.5%. The authorities also increased fees and the cost of margin on domestic commodity markets. Meanwhile, the State Council has exempted trucks carrying agricultural products from any highway tolls. There were smaller vipers too: Uncle Kim was up to his old tricks again (according to Chinese papers the exchange of fire between North and South Korea was simultaneous…). The investment banks are in a lather of excitement to place out as much paper as the market will bear before Christmas. Whole new sectors are springing into existence: Chinese e-commerce; car retailers; baby-formula producers. As for the ladders, these were the old combination of strong earnings growth, sensible infrastructure planning and high savings (renminbi deposits in October rose by 19.8%, despite real deposit rates of about -2% p.a.). The managers had a chance to greet many Western fund managers in November. They arrived depressed and nervous but could be seen, after a couple of days of decent food and confident corporate presentations, to blossom in the warmth of the Chinese economic miracle, before heading back to the economic arctic of London and New York. This gap between Chinese realities and Western perceptions will continue to throw up investment opportunities. The Western media continues to feature stories about a ‘China bubble’, which I just don’t see – not yet at least…

Excerpt From October Monthly Insight Report:

The September rally in Chinese stockmarkets stalled in mid-October; only the underperforming A-share market was able to hold on to all of its gains. Taiwan was the worst performer, finishing flat, though the shops in downtown Taipei last weekend were bustling and looked more like Nanjing Road in Shanghai (the manager escaped with a minimal contribution to Taiwanese GDP).
 
China showed itself willing to start to adjust monetary policy that is unsuitably loose in the face of continued quantitative easing in the West. Interest rates were increased by 25 basis points, though this means the one-year renminbi deposit rate (2.5%) still substantially lags official inflation numbers (CPI 3.6%). The reserve ratio was revised up 50 basis points to 17.5% for just six banks (ah, the joys of a state-controlled banking system). Economic statistics continued to indicate robust growth: exports +29% year on year (compared with +32.9% in August); industrial production growth +13.3% (August +13.9%); retail sales growth +18.8% (August +18.4%). Although politicians worry about inflation in public statements, the government clearly felt sanguine enough to adjust up fuel prices (diesel +3.4%). There was also little movement in the renminbi. Despite China’s racking up US$2.65 trillion in foreign-exchange reserves, the currency effectively depreciated as its dirty peg to the weak US dollar was maintained.
 
There were no surprises from the central committee’s deliberations on the next five-year plan – which was not a surprise. The succession of Xi Jinping to the top job from 2012 was confirmed. The Shanghai World Expo closed after breaking all records (72 million attendees). The Asian Games, staged with a budget larger than that for the London Olympics, will take place in Guangzhou this month. But amid all the triumphalism, a rather sour, defensive tone is developing in Chinese foreign policy (as reflected in the spat over the Senkaku – I mean the Diaoyu – Islands, not to mention Nobel prize-winner Liu Xiaobo). This is one potential threat to markets. Another slightly worrying sign is the extremely busy IPO market, with untested companies rapturously received. But there is probably still enough pessimism/skepticism towards China investment to limit risks in the near term. We are relatively sanguine about Taiwan’s mayoral elections on 27 November; once they are out of the way, we expect further progress in the cross-strait rapprochement.

Excerpt From September Monthly Insight Report:

That the Hang Seng (+9.1%) hugely outperformed China’s domestic market (Shanghai 180 +2.1%) is an indication that September’s strong rally was more about foreign institutions starting to move back from the sidelines than any fundamental change in the Chinese economy. This was supported by the degree of excitement in the busy offshore IPO market. Both the Hang Seng and the Taiwanese index are at the top of the trading range that has been in place since mid-2009. But we expect them to break higher as international institutional cash is squeezed back into the market. The domestic market is, however, likely to be hindered by its heavy bank weighting (interest margins to contract) and collapsing Chinext small-caps (stock unlocks acting upon an expensive market).

Politics will loom large in the last quarter, with the mid-term elections in the US favoring protectionist rhetoric, and hard-fought mayoral elections in Taiwan creating some uncertainty. (We are less worried about the result than most, as we expect the strength of the economy, falling taxes, buoyant property market and declining unemployment to act in favor of the ruling party). In China, where the people’s representatives are less troubled by such matters, we will be contemplating the 12th five-year plan. Here are some of the catchphrases you will hear: ‘quality of growth over quantity’ (6% is the new 8% as the labor force peaks), ‘addressing inequalities’ (west over east, rural over urban, improved social security) and ‘energy efficiency’ (let’s limit dependence on Middle East supply.)
 
The Chinese economy appears robust. August’s power consumption grew by 14.7% year on year, up from +2% in July. September’s production managers’ index came in at 53.8, ahead of expectations and up from 51.7 in August. And the consumer price index in August increased by 3.5% year on year, the highest inflation rate in 22 months, thanks to a rise in prices of agricultural products. However, the producer price index fell for the third consecutive month, helping to convince investors that CPI will peak out soon. Although inflationary expectations are easing, rumors circulate of an asymmetric interest rate hike (i.e. for deposits only). We feel the likelihood is high, as this would help alleviate the negative real interest rate and the state-owned banks, now all safely listed, are still making handsome profits. We note that bank shares in the A-share market now trade at a discount of up to 20% against the same banks’ Hong Kong-listed shares. Who do you think is more familiar with the workings of these banks, local investors or foreign?

Profiled Companies:

China Bright

China Bright is a leading manufacturer and distributor of medical devices. It is well positioned to benefit from China’s healthcare reforms. We have been investors in Golden Meditech, the parent company, for a few years; its management has a good record.
 
China Bright has two major businesses: manufacture of medical devices through Jingjing (its 100%-owned mainland subsidiary) and distribution of medical devices through Union Medical Equipment (a joint venture with Sinopharm, in which China Bright holds a 37% stake). Jingjing’s core products are autologous blood-recovery systems (ABRS) – both ABRS machines and disposable chambers. It has around an 80% market share in top-tier hospitals.
 
China Bright is now pursuing an aggressive pricing strategy to increase its presence in mid-tier hospitals. Two new products – plasma exchange and accelerated-infusion pumps – are still in the promotion stage, but should begin to make a contribution to profit this year. China’s ongoing healthcare reforms provide the company with significant opportunities, and it plans to increase its product penetration in all levels of Chinese hospitals.
 
The device-distribution business, through Union Medical, is the largest of its kind in China. Its distribution network covers all levels of hospitals and provides over 2,000 different products. These cover radiation diagnosis, anaesthesia, patient monitoring and lab testing equipment. Sinopharm is to inject further assets into Union Medical.
 
China Bright is forming a partnership with a global leader in blood technologies, to develop a presence in China’s blood-collection and transfusion market. This joint venture should soon be established, and will combine Jingjing’s knowhow with the foreign partner’s advanced technology. The new venture will sell both companies’ medical products in China.
 
Zongsu Food

Zongsu Food makes traditional Chinese ham, Western-style ham and ‘snack sausages’. The company is based in Jinghua, Zhejiang province, the home of traditional Chinese ham. It has an experienced management team and is wholly owned by Mr Ma Zongsu and his family.
 
Traditional Chinese ham accounts for almost half of the company’s revenue. Making a good traditional Chinese ham takes about three years on average, so the inventories of maturing hams are very valuable. The company also makes Western-style ham, but this business makes only a negligible contribution to revenues.
 
The snack-sausage business is growing very fast and already accounts for about half the group’s revenue. The sausages are manufactured in a new factory, which started production in September 2009. The main market is young adults, but the company is now developing snack sausages for children.
 
The company purchases pork from meat processors, including People’s Food, Yurun Food and Shuanghui Development. Zongsu is also planning to establish a pig-breeding farm in Jiangxi province, which should guarantee its supply of pork. The company sells most of its products through agents, but also

 Excerpt From August Monthly Insight Report

After a bright start to August, China’s stockmarkets soured on thin volume as evidence of the fearsome US ‘double dip’ increased. Both Hong Kong and Taiwan ended down 3% on the month. The A-share market closed flat, but is still down 19% this year. The manager spent the first part of the month in Scotland and, given Western press coverage, returned to China expecting to find the country teetering on the brink of economic collapse. But this seems slightly wide of the mark:

• Power generation in July grew by 11.5% year on year (and 9% month on month);
• Year-on-year auto sales rose by 55.7% in August, and Shanghai’s new-home sales jumped by 70% from July with the average price rising 10%.
• Year-on-year exports grew by ‘only’ 38.1% in July, compared with 43.9% in June. A funny kind of collapse.

There are signs that growth is slowing slightly:

• Import growth in July decelerated to 22.7% from 34.1% in June;
• Retail sales slowed to 14.6% from 15.4%;
• The producer price index rose by only 4.8% from 6.4%.

But this ‘slowdown’ barely merits the name when set against what is happening in the developed economies.
 
In the latter half of the month, we were knee-deep in interim results. The final score for the 1,947 A-share-listed companies was net profit growth of 42% year on year. The general impression was of results slightly beating expectations, but where they did not, especially in the case of expensive consumer stocks, heavy punishment was meted out. Our large holding in rural appliance distributor Huiyin was marked down after achieving 45% top-line growth, because listing and option costs left earnings flat. The high-fashion retailer Ports Design was also marked down for flat earnings, despite 15.5% same-store sales growth, because of the net closure of 7% of its stores and option expenses. The portfolio’s worst performance during the month, however, had nothing to do with results: the vegetable producer Chaoda Modern Agriculture, never known for its finesse in investor relations, chose the wrong moment to announce a substantial equity fundraising, and now trades on 4 times earnings. On our honor roll for especially impressive interim results were the hotel operator Shangri-La Asia, Xinao Gas, Intime Department Stores and Suning Appliance.
 
For a quiet August, there were a surprising number of small but significant policy initiatives. A trial was announced whereby exporters from four provinces can hold foreign currency offshore; foreign banks were allowed into the renminbi-bond interbank market; the Ministry of Industry and Information Technology became increasingly specific in its attempt to close outdated capacity, naming 2,087 companies in 18 sectors and giving a deadline of the end of September; the importance given to the social-housing program was underlined in two separate statements by the premier-to-be Li Keqiang. The next event to watch is the October plenum of the CCP, which will determine the outlines of the 12th five-year plan (2011–2015) and seems likely to focus on the quality of economic growth. One potential threat comes from the US mid-term elections and the temptation to make China a scapegoat.

The Fund is 93% invested with holdings in 61 companies. Of the portfolio, 14.3% is invested in A-shares, 19.7% in Taiwan and 6.3% in unlisted securities.
 
We took some profits on the Beijing supermarket operator Wumart. This has been an excellent investment, bought when the company was in crisis after the imprisonment of its Taiwanese founder. Now, however, like a number of the most popular Chinese retail and consumer names, its rating of over 30 times prospective earnings looks rich. In Taiwan we switched our financial exposure from the largest life-insurance company, Cathay Financial, which is struggling with persistently low interest rates and threatened by currency appreciation, to the recovering Chinatrust Bank, the island’s leading consumer bank. In the A-share market we took profits on the transformer-maker TBEA as capital spending by the state grid has stalled. Instead we bought Tangshan Jidong Cement, a cheap stock which will benefit from a recovery in cement demand and pricing in Hebei.

 Excerpt From June Monthly Insight Report:

An attempt by markets to rally proved abortive as investors focused on the negative, worried by the crowding-out effect of Western governments’ desperate need to cut budget deficits. The domestic A-share market continued to be the worst performer, falling 7% during June. It is now down almost 25% since mid-April.
 
Last month, investors chose to ignore the following good news:

→ Signs that inflation is peaking (China’s CPI was 3.1%, but -0.1% month on month; Taiwan’s CPI was just 0.7%);

 
→ The continued strength of China’s exports (+48.5% year on year in May, surplus US$19.5 billion; Taiwan’s exports hit a record high of US$25.5 billion, +57% year on year); 


→ China’s decision to re-peg its currency to a basket of currencies. This was clearly a ploy ahead of the G20 meeting, and the currency appreciated just 0.5%, but taken with the abolition of VAT rebates on 406 export items, it shows a willingness by the government to push ahead with an economic restructuring that favors domestic consumption;  

 
→ Domestic consumption remains strong (retail sales +18.7% year on year), though there were signs of a slowdown in sales of some items (such as small cars);  

 
→ The signing on 29 June of a cross-strait free-trade agreement (ECFA) between former arch-enemies. Claims that this was already ‘in the price’ would seem reasonable, were the Taiwanese index not back at the levels of February and various other points since July 1988.

 
Instead, markets focused on the following bad news:

→ No signs of Beijing ending its squeeze on liquidity, and Taiwan’s first step in normalizing interest rates (+0.125 basis points);  

 
→ Rising wage costs (true, though not as dramatic as the Foxconn and Honda incidents might suggest; allowing these events so much publicity also indicates the government’s new willingness to allow economic restructuring);  

 
→ The government’s commitment to listing the Agricultural Bank of China and raising about US$20 billion. (This is the worst of the big state-owned enterprises, but at least it is the last; once this is listed, the government has no need to maintain high interest-rate spreads at the expense of the consumer.)

China Fund Manager Still Bullish:

In May the managers visited the Shanghai Expo. Some gluttons for punishment visited it more than once. The main feature is very large crowds of bemused visitors, uncertain why they are there and forming long queues to see they know not what. Chinese markets seem similarly clueless. Are we really still panicking about South European sovereign debt? (A beneficial side-effect is that a whole generation of Chinese investors can now point to Greece on the map.) Or is the mad Dear Leader finally about to push the button? (The managers visited the North Korean pavilion, which is positioned in a kind of rogue’s alley alongside Iran and Lebanon; one of the Expo planners clearly had a sense of humour.) Certainly, the main topic of conversation among the chattering classes of Shanghai is the government’s attitude to the property market. But after the initial announcement of administrative measures against property speculation in Beijing, things have gone rather quiet, with local governments announcing watered-down measures. And, after all, interest rates have not been raised, and the real return on a Chinese bank deposit is still negative. At the end of the month there were already signs of a change in the government’s tone, as shown in news releases about the seven million welfare houses to be built at a cost of Rmb430 billion by the year-end (subtext: ‘so don’t worry about construction demand’) and insurance companies being allowed to hold an increased amount of equity (20% excluding funds).

Inflation has so far this year been led by food prices (CPI in April +2.8%, food +5.9%). The retreat in food and commodity prices indicates that inflationary pressures may have peaked. This would remove the main reason a Chinese leader would have for allowing the currency to appreciate against the US dollar, especially given what has happened to the euro. In April, import growth (+49.7% year on year) once more outpaced export growth (+30.5%), leading to an 87% fall in the trade surplus. Perhaps by this autumn the talk will be about renminbi depreciation? Not that we expect them to do this either, but that does not stop people talking (or companies with large US dollar debt positions shuffling nervously…).

There were some interesting noises on the tax front. The Ministry of Finance indicated that it would be increasing the tax that state-owned companies pay to the government (currently 10% for monopolies and just 5% for other state-owned enterprises). A resources tax was also announced, though details remain unclear (a pilot scheme of 5% of revenue is being started in Xinjiang). Yet at the same time, the 3.3% business tax on airlines’ international flights was abolished as a further bailout to this sector. Given that the government wishes to list the horrible Agricultural Bank in July, I would not bet against a similar, auspiciously timed reduction in bank business tax.

Excerpt from the company's monthly Insight Report

Stock market volumes remained thin in March, but there was a sense of confidence returning by the month-end. The National People’s Congress concluded safely, without any new measures to curb the property market. Cross-strait free-trade talks resumed, with every sign of a successful conclusion by the summer. The results season has so far featured more pleasant surprises than unpleasant. Economic statistics have reflected the strong start to the year that we also hear about in our company visits, albeit somewhat flattered by the low-base comparison with the bleak start to 2009. House prices in 70 cities rose by 10.7% in January and February, and the gross floor area of new starts rose by 37.5%. Electricity consumption rose by 26% year on year. Exports soared 45.7%, though it should be noted that the trade surplus has halved this year and it looks as though China ran a trade deficit in March. The timing of the deficit will, we hope, help China to escape being named a ‘currency manipulator’ by the US in mid-April.

Trade protectionism seems to be the main risk to the China story at this time, rather than the domestic ‘bubble’ so beloved of Western commentators. A small revaluation of the yuan, just after the ‘currency manipulator’ deadline has passed, would be timely. Chinese business is now surely well prepared for such a move, which would help to remove the dangerous temptation for companies to borrow in US dollars and lend in renminbi.

We expect the fear of inflation (2.7% in February) and a harsh government reaction to diminish once the low-base effect fades into the summer. There are already signs of a loosening of the labor market in China’s coastal exporting areas after the Chinese New Year, which may be an indication of the slowing of stimulus spending in inland provinces.

China Fund Management Remains Confident:

Excerpt from monthly insight report from China Fund Inc.

During the short month of February (only 15 trading days in Shanghai), we circled the globe talking to investors. In each location there were questions about the ‘China Bubble’, with experts in the media predicting its imminent demise. Like Cassandra, they will be right eventually, but I see no evidence on the ground of a bubble about to burst. Some of the stimulus cash will have gone astray, and non-performing loans are doubtless forming in the banking system as I write. But the loan-to-deposit ratio in the banking system was just 66.9% at the end of 2009, and the general lack of leverage at any level of the economy – personal, corporate or governmental – does not speak to me of bubbles. The main distortion, caused by the currency peg, will dissipate as currency appreciation returns and the policy initiatives to boost consumption cause the trade surplus to disappear. In January exports rose 21% year on year, but imports 85%. Retail sales during the Chinese New Year holiday were up by 17.2% year on year.

Once the misleading low-base effect fades and inflation is seen to stabilize at an unthreatening 3–4%, we expect markets to rally. The ending of the National People’s Congress (last day 13 March) will also allay fears of aggressive government counter-measures. For the first time, we have initiated a 5% long position in renminbi non-deliverable futures, in anticipation of a resumption in the yuan’s appreciation.

More evidence that supports our point of view that China is not dead.

Excerpt from monthly insight report from China Fund Inc.

During January, the Fund’s managers organized a conference on Chinese healthcare in Lijiang, Yunnan province. Regular readers of this report will know that healthcare is a sector about which we have been – and remain – bullish. Between sessions, we ascended to 4,500 metres on the highest local peak, Jade Dragon Snow Mountain. Towards the top there was much stopping to admire the view (not that we were tired or out of breath, you understand). Chinese stockmarkets also paused for breath in January as the government reacted to a revival of inflation (CPI in December reached +1.9%). The actual measures taken were mild – a 50-basis-point rise in the reserve-requirement ratio, a few money-market operations and a lot of hot air – but the markets took the moves as an inflection point and decided to book profits ahead of the Chinese New Year holiday. Continued heavy equity supply and unhelpful background noise from US politics contributed to the turn in sentiment.

The low base effect, which is boosting all kinds of statistics, including exports, production and inflation, should last through March. Thereafter, when it is clear that inflation is not going to race away and that the government is not about to stamp on the brakes, we expect the markets to rally. Many doom-laden comments about the ‘China bubble’ and its imminent demise, have caught media attention recently. We believe this is wide off the mark in a society which lacks leverage, at the individual, corporate, banking and national levels. China faces many challenges, but we believe the domestic-consumption growth story remains intact.

In certain respects, the public-spending stimulus is already being withdrawn; there has been recent news about funding difficulties for railway and electricity grid projects, and the tax break for buying small cars ended on 1 January. But the government continues to give benefits to certain areas, such as the rural economy (a new initiative helps farmers to rebuild their homes) and the service sector. There is also clear evidence of a pick-up in private investment, which should help mask the winding down of the public stimulus. Chinese exports rebounded strongly in December (+17.7% year on year), though this was largely due to the low base effect. The situation remains tough, especially as wages are again on the rise. The sharp jump in imports (+56% year on year) is, perhaps, an indicator of the future as the emphasis on domestic consumption gradually erodes the trade surplus (not great news for US bonds...).

September Monthly Insight Report: Optimism Expressed.

The fund had a pretty good month. The main contributor was the strong performance of our exposure to Taiwan (20.8% net), whose currency is appreciating as expatriate Taiwanese capital flows back home, thanks to the effective abolition of cross-strait investment restrictions and the cut in inheritance tax from 50% to 10%. Elsewhere, there were signs of money looking for value in small-caps after the big-cap rally (our Singapore-listed leasing company, Financial One, for example, was ‘discovered’)

Economic indicators continued to be positive (car sales in August were up 90% year on year!) but we note that current growth remains heavily dependent on government largesse (if there was a corruption index, it would be through the roof). Life remains grim for China’s exporters. Nevertheless, labour shortages are starting to recur in Guangdong (one of our invested companies in Dongguan claims to be short of about 500 staff); one-time immigrant workers are deciding to stay home on the farm or take advantage of improved opportunities in local towns. This trend, taken together with the return of food inflation, will strengthen the hand of the central bankers against the politicians. The appreciation of the renminbi is therefore likely to resume in the New Year, and credit growth should be dialled back from its current ‘moderately loose’ setting.

Source: SEC Form 8K (September 19 ,2009)

Monthly Insight Report

Interim results did not really weigh on the market, generally beating low expectations due to cost-cutting. Also, implied in the interim results was a sharp improvement of the second quarter over the first. In the real economy:

• retail sales growth remained steady at 15.2% year on year, with rural consumption holding up better than urban.
•  Power output (one of the macro figures less prone to massaging) turned positive in July, with a year-on-year increase of 4.2%.
• The key will be whether the return of private investment can take up the running once the effects of the public spending stimulus start to fade.
• The return of property developers to land auctions is a positive sign, as are indications of a tighter labour market in coastal cities, with the re-opening of some export-oriented factories.

Source: SEC Form 8K (September 15, 2009)

Excerpt from the company's monthly Insight Report:

The main Chinese markets headed in different directions in June. Taiwan was the first into a summer correction, falling 8.5% on worries about demand for technology products and some impatience at the pace of signing the cross-straits memorandum of understanding for the financial industry. After early strength, Hong Kong snaked sideways, gaining just 0.9%. With ugly interims ahead, it is better to travel hopefully than arrive. Only the A-shares maintained their majestic progress, with the Shanghai 180 rising by 15.6%, based on huge credit growth; new loans worth 5.8 trillion yuan were made in the first half, more than in the whole of 2008 and already ahead of the government’s budget for the whole of 2009. With no one keen to build new factories at present, it is little wonder that money continues to flow into asset markets. It’s a confidence trick on a huge scale, but it seems to be working.

Retail sales continue to grow steadily (passenger car sales, for instance, grew by 37% year on year in May, up from 33% in April). One of the portfolio companies, the upmarket retailer Ports Design, reported particularly strong sales of store vouchers, used widely, apparently, to ‘reward’ government officials — an indication that the government is now, even more than before, the fount of most good things. Retail cash is clearly flowing into the asset markets (41 new mutual funds raised US$14 billion between January and May). The property market is heating up, but buyers remain sensitive on price. The government is using the period of deflation (CPI -1.4% in May) to raise prices: gasoline and diesel prices were increased by 10% and jet fuel by 25%; Shanghai recently raised water by 25%, with the promise of a further 21.7% rise in November 2010. We expect electricity prices to be next. We also expect inflation to return towards the year-end.

In Hong Kong, the clamouring for new issues has reached a pitch not seen for more than a year.

Source: SEC form 8k (July, 20 2009)

Excerpt from the company's Semi Annual Insight Report:

The six months under review were a much brighter period for investors in the Greater China region, with the A-share market the standout performer. How things have turned around since October. Six months ago, I was reporting that the Chinese markets were among the worst hit in a savage year for the world's stockmarkets. Now, the region is among the world's strongest. Against this backdrop, the Fund produced a positive return of 20.6%, lagging the benchmark MSCI Golden Dragon index, which rose 24%. Over longer periods, however, your portfolio is still comfortably ahead of its benchmark.

It took several months and a host of industry-specific stimulus measures but, towards the end of the period, we finally saw underlying macroeconomic data start to live up to the markets' bullish billing. While US GDP fell by 6.1% for the first quarter of this year, China posted an eerily symmetrical GDP rise of 6.1%. And Taiwan -- whose stocks were up 46% since end-October -- was also able to boast a 24% month-on-month rise in exports in March. As relations between Taiwan and its giant neighbour continue to improve, your managers have positioned the Fund to take advantage of increased cross-strait investment, with a 19.3% weighting to the Taiwan market.

With the ever-increasing array of government stimulus plans in both China and Taiwan, and the beginning of cross-strait investment starting to have a real effect on the underlying economics, your managers are expecting domestic sentiment in particular to improve and are looking forward to the remainder of the year with confidence.

 Yours truly,

 James Lightburn Chairman

Source: SEC form N-CSRS  (June 29, 2009)

Excerpt from the company's Monthly Insight Report:

According to the Chinese lunar calendar, 2009 is the Year of the Bull. The first month will certainly be an eventful one. We expect more supportive news from the government side: healthcare system reform, an increase in personal income tax allowances, and a further loosening of monetary policy. We will also start to see the preview and publications of annual results, which will help investors to adjust expectations.

Source: SEC form 8k (January 30, 2009)