<PAGE>
EV CLASSIC GREATER CHINA GROWTH FUND
SUPPLEMENT TO STATEMENT OF ADDITIONAL INFORMATION DATED JANUARY 1, 1995
The following supplements the information found under "Investment
Performance" in Part I of the Fund's Statement of Additional Information:
From time to time the Fund may provide investors with
information on global investing, which may include descriptions,
comparisons, charts and/or illustrations of: foreign and domestic
equity market capitalizations; returns obtained by foreign and domestic
securities; and the effects of globally diversifying an investment
portfolio (including volatility analysis and performance information).
Such information may be provided for a variety of countries over
varying time periods.
The tables below indicate the total return (capital changes plus
reinvestment of all distributions) and percentage changes on a hypothetical
investment of $1,000 in the Fund covering the life of the Fund through August
31, 1994. The tables replace the tables appearing under "Performance
Information" in Part II of the Statement of Additional Information. The total
return and percentage changes for the period prior to the Fund's commencement of
operations on December 28, 1993 reflect the Portfolio's total return and
percentage changes (or that of its predecessor) adjusted to reflect any
applicable Fund sales charge. Such performance has not been adjusted to reflect
the Fund's distribution fees and certain other expenses. If such an adjustment
were made, the performance would be lower.
VALUE OF A $1,000 INVESTMENT
<TABLE>
<CAPTION>
Value of Invest- Value of Invest-
ment before de- ment after deduct- Total Return before de- Total Return after de-
ducting the con- ing the contin- ducting the contingent ducting the contingent
tingent deferred gent deferred deferred sales charge deferred sales charge
Investment Investment Amount of sales charge sales charge ----------------------- -----------------------
Period Date Investment on 8/31/94 on 8/31/94 Cumulative Annualized Cumulative Annualized
---------- ---------- ---------- ---------------- ----------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Life of
Fund 10/28/92 $1,000.00 $1,551.35 $1,551.35 55.14% 26.94% 55.14% 26.94%
1 Year
Ended
8/31/94 8/31/93 $1,000.00 $1,246.06 $1,236.00 24.61% 24.61% 23.88% 23.61%
</TABLE>
PERCENTAGE CHANGES - 10/28/92-8/31/94
<TABLE>
<CAPTION>
Net asset value to net asset value Net asset value to net asset value
before deducting the contingent deferred after deducting the contingent deferred
sales charge with all distributions reinvested sales charge with all distributions reinvested
Fiscal Year ---------------------------------------------- ----------------------------------------------
Ended Annual Cumulative Average Annual Annual Cumulative Average Annual
----------- ------ ---------- -------------- ------ ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
8/31/93 --- 24.50% --- --- 23.50% ---
8/31/94 24.61% 55.14% 26.94% 23.88% 55.14% 26.94%
</TABLE>
Past performance is not indicative of future results. Investment return
and principal value will fluctuate; shares, when redeemed, may be worth more or
less than their original cost.
August 1, 1995 C-CGSAI
<PAGE>
STATEMENT OF
ADDITIONAL INFORMATION
January 1, 1995
EV CLASSIC GREATER CHINA GROWTH FUND
24 Federal Street
Boston, Massachusetts 02110
(800) 225-6265
This Statement of Additional Information consists of two parts. Part I
provides information about EV Classic Greater China Growth Fund (the "Fund") and
certain other series of Eaton Vance Growth Trust (the "Trust"). Part II provides
information solely about the Fund. Where appropriate, Part I includes
cross-references to the relevant sections of Part II that provide additional,
Fund-specific information.
TABLE OF CONTENTS Page
PART I
Investment Objective ...................................................... 2
Additional Information about Investment Policies .......................... 2
Investment Restrictions ................................................... 10
Trustees and Officers ..................................................... 13
Management of the Fund .................................................... 15
Custodian ................................................................. 17
Service for Withdrawal .................................................... 18
Determination of Net Asset Value .......................................... 18
Investment Performance .................................................... 19
Taxes ..................................................................... 20
Portfolio Security Transactions ........................................... 22
Other Information ......................................................... 24
Independent Certified Public Accountants .................................. 25
Appendix A -- The Securities Markets in China and Hong Kong ............... 26
Appendix B -- China Region Countries ...................................... 37
PART II
Fees and Expenses ......................................................... a-1
Performance Information ................................................... a-2
Principal Underwriter ..................................................... a-2
Distribution Plan ......................................................... a-2
Control Persons and Principal Holders of Securities ....................... a-4
Financial Statements ...................................................... a-5
Appendix C -- Statistical Information ..................................... C-1
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY THE FUND'S PROSPECTUS DATED JANUARY 1, 1995, AS SUPPLEMENTED FROM
TIME TO TIME. THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE READ IN
CONJUNCTION WITH SUCH PROSPECTUS, A COPY OF WHICH MAY BE OBTAINED WITHOUT CHARGE
BY CONTACTING EATON VANCE DISTRIBUTORS, INC. (THE "PRINCIPAL UNDERWRITER") (SEE
BACK COVER FOR ADDRESS AND PHONE NUMBER).
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PART I
The following provides information about the Fund and certain other
series of the Trust.
INVESTMENT OBJECTIVE
The investment objective of the Fund is to seek long-term capital
appreciation. It seeks to meet its investment objective by investing all of its
investable assets in the Greater China Growth Portfolio (the "Portfolio"), a
separate registered investment company which was organized as a trust under the
laws of the State of New York. The Portfolio invests in equity securities of
companies which, in the opinion of the investment adviser, will benefit from the
economic development and growth of the People's Republic of China ("China"). The
Portfolio has the same investment objective as the Fund.
Except for the fundamental investment restrictions and policies specifically
identified in the Prospectus or enumerated in this Statement of Additional
Information, the investment objective and policies of the Fund and the Portfolio
are not fundamental policies and accordingly may be changed by the Trustees of
the Trust and the Portfolio without obtaining the approval of the shareholders
of the Fund or the investors in the Portfolio. If any changes were made, the
Fund might have investment objectives different from the objectives which an
investor considered appropriate at the time the investor became a shareholder in
the Fund.
ADDITIONAL INFORMATION ABOUT INVESTMENT POLICIES
FOREIGN INVESTMENTS
Investing in securities issued by companies whose principal business
activities are outside the United States may involve significant risks not
present in domestic investments. For example, there is generally less publicly
available information about foreign companies, particularly those not subject to
the disclosure and reporting requirements of the U.S. securities laws. Foreign
issuers are generally not bound by uniform accounting, auditing, and financial
reporting requirements and standards of practice comparable to those applicable
to domestic issuers. Investments in foreign securities also involve the risk of
possible adverse changes in investment or exchange control regulations,
expropriation or confiscatory taxation, limitation on the removal of funds or
other assets of the Portfolio, political or financial instability or diplomatic
and other developments which could affect such investments. Further, economies
of particular countries or areas of the world may differ favorably or
unfavorably from the economy of the United States. It is anticipated that in
most cases the best available market for foreign securities will be on exchanges
or in over-the-counter markets located outside of the United States. Foreign
stock markets, while growing in volume and sophistication, are generally not as
developed as those in the United States, and securities of some foreign issuers
(particularly those located in developing countries) may be less liquid and more
volatile than securities of comparable U.S. companies. In addition, foreign
brokerage commissions are generally higher than commissions on securities traded
in the United States and may be non-negotiable. In general, there is less
overall governmental supervision and regulation of foreign securities markets,
broker-dealers, and issuers than in the United States.
FOREIGN CURRENCY TRANSACTIONS
Since investments in companies whose principal business activities are
located outside of the United States will frequently involve currencies of
foreign countries, and since assets of the Portfolio may temporarily be held in
bank deposits in foreign currencies during the completion of investment
programs, the value of the assets of the Portfolio as measured in U.S. dollars
may be affected favorably or unfavorably by changes in foreign currency exchange
rates and exchange control regulations. Currency exchange rates can also be
affected unpredictably by intervention by U.S. or foreign governments or central
banks, or the failure to intervene, or by currency controls or political
developments in the U.S. or abroad. The Portfolio may conduct its foreign
currency exchange transactions on a spot (i.e., cash) basis at the spot rate
prevailing in the foreign currency exchange market or through entering into
contracts to purchase or sell foreign currencies at a future date (i.e., a
"forward foreign currency" contract or "forward" contract). It may convert
currency on a spot basis from time to time, and bear the costs of such
conversion. Although foreign exchange dealers do not charge a fee for
conversion, they do realize a profit based on the difference (the "spread")
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to the Portfolio at one
rate, while offering a lesser rate of exchange should the Portfolio desire to
resell that currency to the dealer.
CURRENCY SWAPS
The Portfolio may enter into currency swaps for hedging purposes and non-
hedging purposes. Inasmuch as swaps are entered into for good faith hedging
purposes and are offset by a segregated account as described below, the
Portfolio and Lloyd George Management (Hong Kong) Limited (the "Adviser")
believe that swaps do not constitute senior securities as defined in the
Investment Company Act of 1940 (the "1940 Act") and, accordingly, will not treat
them as being subject to the Portfolio's borrowing restrictions. An amount of
cash or liquid high grade debt securities (i.e., securities rated in one of the
top three ratings categories by Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Ratings Group ("S&P"), or, if unrated, deemed by the Adviser
to be of comparable credit quality) having an aggregate net asset value at least
equal to the gross payments which the Portfolio is obligated to make under the
currency swap will be maintained in a segregated account by the Portfolio's
custodian. The Portfolio will not enter into any currency swap unless the credit
quality of the unsecured senior debt or the claims-paying ability of the other
party thereto is considered to be investment grade by the Adviser. If there is a
default by the other party to such a transaction, the Portfolio will have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid in comparison with the markets for other similar instruments
which are traded in the interbank market.
FORWARD FOREIGN CURRENCY EXCHANGE TRANSACTIONS
The Portfolio may enter into forward foreign currency exchange contracts. A
forward foreign currency exchange contract involves an obligation to purchase or
sell a specific currency at a future date, which may be any fixed number of days
from the date of the contract agreed upon by the parties, at a price set at the
time of entering into the contract. These contracts are traded in the interbank
market conducted directly between currency traders (usually large commercial
banks) and their customers. A forward contract generally has no deposit
requirement, and no commissions are charged at any stage for trades.
At the maturity of a forward contract the Portfolio may either accept or
make delivery of the currency specified in the contract or, at or prior to
maturity, enter into a closing purchase transaction involving the purchase or
sale of an offsetting contract. Closing purchase transactions with respect to
forward contracts are usually effected with the currency trader who is a party
to the original forward contract.
The Portfolio may enter into forward foreign currency exchange contracts in
several circumstances. First, when the Portfolio enters into a contract for the
purchase or sale of a security denominated in a foreign currency, or when the
Portfolio anticipates the receipt in a foreign currency of dividend or interest
payments on such a security which it holds, the Portfolio may desire to "lock
in" the U.S. dollar price of the security or the U.S. dollar equivalent of such
dividend or interest payment, as the case may be. By entering into a forward
contract for the purchase or sale, for a fixed amount of dollars, of the amount
of foreign currency involved in the underlying transactions, the Portfolio will
attempt to protect itself against an adverse change in the relationship between
the U.S. dollar and the subject foreign currency during the period between the
date on which the security is purchased or sold, or on which the dividend or
interest payment is declared, and the date on which such payments are made or
received.
Additionally, when management of the Portfolio believes that the currency of
a particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell, for a fixed amount of
dollars, the amount of foreign currency approximating the value of some or all
of the securities held by the Portfolio denominated in such foreign currency.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. The precise projection of
short-term currency market movements is not possible, and short-term hedging
provides a means of fixing the dollar value of only a portion of the Portfolio's
foreign assets.
The Portfolio's custodian will place cash or other high grade liquid debt
securities in a segregated account of the Portfolio in an amount equal to the
value of the Portfolio's total assets committed to the consummation of forward
foreign currency exchange contracts requiring the Portfolio to purchase foreign
currencies. If the value of the securities placed in the segregated account
declines, additional cash or securities will be placed in the account on a daily
basis so that the value of the account will equal the amount of the Portfolio's
commitments with respect to such contracts.
The Portfolio generally will not enter into a forward contract with a term
of greater than one year. The use of forward contracts to protect the value of
the Portfolio's portfolio securities against a decline in the value of a
currency does not eliminate fluctuations in the underlying prices of the
securities. It simply establishes a rate of exchange which the Portfolio can
achieve at some future point in time.
While the Portfolio will enter into forward contracts to reduce currency
exchange rate risks, transactions in such contracts involve certain other risks.
Thus, while the Portfolio may benefit from such transactions, unanticipated
changes in currency prices may result in a poorer overall performance for the
Portfolio than if it had not engaged in any such transactions. Moreover, there
may be imperfect correlation between the securities held by the Portfolio
denominated in a particular currency and forward contracts entered into by the
Portfolio. Such imperfect correlation may prevent the Portfolio from achieving a
complete hedge or expose the Portfolio to risk of foreign exchange loss.
REPURCHASE AGREEMENTS
Under a repurchase agreement the Portfolio buys a security at one price and
simultaneously promises to sell that same security back to the seller at a
higher price. At no time will the Portfolio commit more than 15% of its net
assets to repurchase agreements which mature in more than seven days and other
illiquid securities. The Portfolio's repurchase agreements will provide that the
value of the collateral underlying the repurchase agreement will always be at
least equal to the repurchase price, including any accrued interest earned on
the repurchase agreement, and will be marked to market daily.
REVERSE REPURCHASE AGREEMENTS
The Portfolio may enter into reverse repurchase agreements. Under a reverse
repurchase agreement, the Portfolio temporarily transfers possession of a
portfolio instrument to another party, such as a bank or broker-dealer, in
return for cash. At the same time, the Portfolio agrees to repurchase the
instrument at an agreed upon time (normally within seven days) and price, which
reflects an interest payment. The Portfolio expects that it will enter into
reverse repurchase agreements when it is able to invest the cash so acquired at
a rate higher than the cost of the agreement, which would increase the income
earned by the Portfolio. The Portfolio could also enter into reverse repurchase
agreements as a means of raising cash to satisfy redemption requests without the
necessity of selling portfolio assets.
When the Portfolio enters into a reverse repurchase agreement, any
fluctuations in the market value of either the securities transferred to another
party or the securities in which the proceeds may be invested would affect the
market value of the Portfolio's assets. As a result, such transactions may
increase fluctuations in the market value of the Portfolio's assets. While there
is a risk that large fluctuations in the market value of the Portfolio's assets
could affect the Portfolio's net asset value, this risk is not significantly
increased by entering into reverse repurchase agreements, in the opinion of the
Adviser. Because reverse repurchase agreements may be considered to be the
practical equivalent of borrowing funds, they constitute a form of leverage. If
the Portfolio reinvests the proceeds of a reverse repurchase agreement at a rate
lower than the cost of the agreement, entering into the agreement will lower the
Portfolio's yield.
At all times that a reverse repurchase agreement is outstanding, the
Portfolio will maintain cash or high grade liquid securities in a segregated
account at its custodian bank with a value at least equal to its obligation
under the agreement. Securities and other assets held in the segregated account
may not be sold while the reverse repurchase agreement is outstanding, unless
other suitable assets are substituted. While the Adviser does not consider
reverse repurchase agreements to involve a traditional borrowing of money,
reverse repurchase agreements will be included within the aggregate limitation
on "borrowings" contained in the Portfolio's investment restriction (1) set
forth below.
WRITING AND PURCHASING CALL AND PUT OPTIONS
A call option written by the Portfolio obligates the Portfolio to sell
specified securities to the holder of the option at a specified price at any
time before the expiration date. The Portfolio will write a covered call option
on a security for the purpose of increasing its return on such security and/or
to partially hedge against a decline in the value of the security. In
particular, when the Portfolio writes an option which expires unexercised or is
closed out by the Portfolio at a profit, it will retain the premium paid for the
option, which will increase its gross income and will offset in part the reduced
value of the portfolio security underlying the option, or the increased cost of
acquiring the security for its portfolio. However, if the price of the
underlying security moves adversely to the Portfolio's position, the option may
be exercised and the Portfolio will be required to purchase or sell the
underlying security at a disadvantageous price, which may only be partially
offset by the amount of the premium, if at all. The Portfolio does not intend to
write a covered option on any security if after such transaction more than 15%
of its net assets, as measured by the aggregate value of the securities
underlying all covered calls and puts written by the Portfolio, would be subject
to such options. The Portfolio will only write a put option on a security which
it intends to ultimately acquire for its portfolio. A put option written by the
Portfolio would obligate the Portfolio to purchase specified securities from the
option holder at a specified price upon exercise of the option at any time
before the expiration date.
The Portfolio may purchase put or call options on securities or securities
indices in anticipation of changes in the value of its existing portfolio
securities or in the prices of securities that the Portfolio intends to purchase
at a later date. In the event that the expected changes occur, the Portfolio may
be able to offset adverse changes in the value of its portfolio, in whole or in
part, through the options purchased. The premium paid for a put or call option
plus any transaction costs will reduce the benefit, if any, realized by the
Portfolio upon exercise or liquidation of the option. Unless the price of the
underlying security changes sufficiently, the option may expire without value to
the Portfolio.
The Portfolio may terminate its obligations under a call or put option by
purchasing an option identical to the one it has written. Such purchases are
referred to as "closing purchase transactions."
The Portfolio would normally purchase call options in anticipation of an
increase in the market value of securities of the type in which the Portfolio
may invest. The purchase of a call option would entitle the Portfolio, in return
for the premium paid, to purchase specified securities at a specified price
during the option period. The Portfolio would ordinarily realize a gain if,
during the option period, the value of such securities exceeded the sum of the
exercise price, the premium paid and transaction costs; otherwise, the Portfolio
would realize a loss on the purchase of the call option.
The Portfolio would normally purchase put options in anticipation of a
decline in the market value of securities in its portfolio ("protective puts")
or securities of the type in which it is permitted to invest. The purchase of a
put option would entitle the Portfolio, in exchange for the premium paid, to
sell specified securities at a specified price during the option period. The
purchase of protective puts is designed merely to offset or hedge against a
decline in the market value of the securities held by the Portfolio. The
Portfolio would ordinarily realize a gain if, during the option period, the
value of the underlying securities decreased below the exercise price
sufficiently to cover the premium and transaction costs; otherwise, the
Portfolio would realize a loss on the purchase of the put option. Gains and
losses on the purchase of protective put options would tend to be offset by
countervailing changes in the value of underlying portfolio securities.
The Portfolio would also be able to enter into closing sale transactions in
order to realize gains or minimize losses on options purchased by the Portfolio.
The Portfolio does not intend to purchase any options if after such transaction
more than 5% of its net assets, as measured by the aggregate of all premiums
paid for all such options held by the Portfolio, would be so invested.
The Portfolio would write and purchase put and call options on securities
indices for the same purposes as the writing and purchase of options on
securities. Options on securities indices are similar to options on securities,
except that the exercise of securities index options requires cash payments and
does not involve the actual purchase or sale of securities. In addition,
securities index options are designed to reflect price fluctuations in a group
of securities or segment of the securities market rather than price fluctuations
in a single security.
SPECIAL RISKS ASSOCIATED WITH OPTIONS ON SECURITIES
An options position may be closed out only on an options exchange which
provides a secondary market for an option of the same series. Although the
Portfolio will generally purchase or write only those options for which there
appears to be an active secondary market, there is no assurance that a liquid
secondary market on an exchange will exist for any particular option, or at any
particular time. For some options no secondary market on an exchange may exist.
In such event, it might not be possible to effect closing transactions in
particular options, with the result that the Portfolio would have to exercise
its options in order to realize any profit and would incur transaction costs
upon the sale of underlying securities pursuant to the exercise of put options.
If the Portfolio as a covered call option writer is unable to effect a closing
purchase transaction in a secondary market, it will not be able to sell the
underlying security until the option expires or it delivers the underlying
security upon exercise.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the facilities of an exchange,
the Options Clearing Corporation or another clearing organization may not at all
times be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that exchange that had been issued by the Options Clearing
Corporation or another clearing organization as a result of trades on that
exchange would continue to be exercisable in accordance with their terms.
The Portfolio will pay brokerage commissions in connection with writing
options and effecting closing purchase transactions, as well as for purchases
and sales of underlying securities. The writing of options could result in
significant increases in the portfolio turnover rate of the Portfolio,
especially during periods when market prices of the underlying securities
appreciate.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain of the facilities of the
Options Clearing Corporation or other clearing organization inadequate, and
thereby result in the institution by an exchange of special procedures which may
interfere with the timely execution of customers' orders.
The amount of the premiums which the Portfolio may pay or receive may be
adversely affected as new or existing institutions, including other investment
companies, engage in or increase their option purchasing and writing activities.
FUTURES TRANSACTIONS
Futures Contracts. A change in the level of currency exchange rates or
securities prices may affect the value of the securities held by the Portfolio
(or of securities that the Portfolio expects to purchase). To hedge against
changes in rates or prices or for non-hedging purposes, the Portfolio may enter
into (i) futures contracts for the purchase or sale of securities and currency,
(ii) futures contracts on securities indices and (iii) futures contracts on
other financial instruments and indices. In the United States futures contracts
are traded on exchanges or boards of trade that are licensed and regulated by
the Commodity Futures Trading Commission ("CFTC"), and must be executed through
a futures commission merchant or brokerage firm which is a member of the
relevant exchange. The Portfolio may also enter into futures contracts traded on
a foreign exchange if it is determined by the Adviser that trading on such
exchange does not subject the Portfolio to risks, including credit and liquidity
risks, that are materially greater than the risks associated with trading on
United States exchanges.
Futures Contracts on Securities and Currency. A futures contract on a
security or a currency is a binding contractual commitment which, if held to
maturity, will result in an obligation to make or accept delivery, during a
particular month, of securities having a standardized face value and rate of
return or of the specified currency. By purchasing futures on securities or
currencies, the Portfolio will legally obligate itself to accept delivery of the
underlying security or currency and pay the agreed price; by selling futures on
securities or currency, it will legally obligate itself to make delivery of the
security or currency against payment of the agreed price.
Positions taken in the futures markets are not normally held to maturity,
but are instead liquidated through offsetting transactions which may result in a
profit or a loss. While the Portfolio's futures contracts on securities or
currency will usually be liquidated in this manner, it may instead make or take
delivery of the underlying securities or currency whenever it appears
economically advantageous for the Portfolio to do so. A clearing corporation
associated with the exchange on which futures on securities or currency are
traded guarantees that, if still open, the sale or purchase will be performed on
the settlement date.
Futures Contracts on Securities Indices. Futures contracts on securities
indices or other indices do not require the physical delivery of securities, but
merely provide for profits and losses resulting from changes in the market value
of a contract to be credited or debited at the close of each trading day to the
respective accounts of the parties to the contract. On the contract's expiration
date a final cash settlement occurs and the futures position is simply closed
out. Changes in the market value of a particular futures contract reflect
changes in the level of the index on which the futures contract is based.
Hedging Strategies. Hedging by use of futures contracts seeks to establish
more certainly than would otherwise be possible the effective price of portfolio
securities or securities that the Portfolio proposes to acquire. The Portfolio
may, for example, take a "short" position in the futures market by selling
futures contracts in order to hedge against an anticipated decline in market
prices or foreign currency exchange rates that would adversely affect the value
of the securities held by the Portfolio. Such futures contracts may include
contracts for the future delivery of securities held by the Portfolio (or
currency held by the Portfolio in which such securities are denominated) or
securities with characteristics similar to those of the securities held by the
Portfolio. If, in the opinion of the Adviser, there is a sufficient degree of
correlation between price trends for the securities held by the Portfolio and
futures contracts based on other financial instruments, securities indices or
other indices, the Portfolio may also enter into such futures contracts as part
of its hedging strategy. Although under some circumstances prices of securities
may be more or less volatile than prices of such futures contracts, the Adviser
will attempt to estimate the extent of this difference in volatility based on
historical patterns and to compensate for it by having the Portfolio enter into
a greater or lesser number of futures contracts or by attempting to achieve only
a partial hedge against price changes affecting the securities held by the
Portfolio. When hedging of this character is successful, any depreciation in the
value of portfolio securities will substantially be offset by appreciation in
the value of the futures position.
On other occasions, the Portfolio may take a "long" position by purchasing
such futures contracts. This would be done, for example, when the Portfolio
anticipates the subsequent purchase of particular securities when it has the
necessary cash, but expects the prices then available in the securities market
or foreign currency exchange rates to be less favorable than prices or rates
that are currently available.
Options on Futures Contracts. The Portfolio may purchase and write call and
put options on futures contracts which are traded on a United States or foreign
exchange or board of trade. An option on a futures contract gives the purchaser
the right, in return for the premium paid, to assume a position in a futures
contract at a specified exercise price at any time during the option period.
Upon exercise of the option, the writer of the option is obligated to convey the
appropriate futures position to the holder of the option. If an option is
exercised on the last trading day before the expiration date of the option, a
cash settlement will be made in an amount equal to the difference between the
closing price of the futures contract and the exercise price of the option.
The Portfolio may use options on futures contracts solely for bona fide
hedging purposes as defined below or for non-hedging purposes subject to the
limitations imposed by CFTC regulations. If the Portfolio purchases a call (put)
option on a futures contract it benefits from any increase (decrease) in the
value of the futures contract, but is subject to the risk of decrease (increase)
in value of the futures contract. The benefits received are reduced by the
amount of the premium and transaction costs paid by the Portfolio for the
option. If market conditions do not favor the exercise of the option, the
Portfolio's loss is limited to the amount of such premium and transaction costs
paid by the Portfolio for the option.
If the Portfolio writes a call (put) option on a futures contract, the
Portfolio receives a premium but assumes the risk of a rise (decline) in value
in the underlying futures contract. If the option is not exercised, the
Portfolio gains the amount of the premium, which may partially offset
unfavorable changes in the value of securities (or the currency in which such
securities are denominated) held or to be acquired for the Portfolio. If the
option is exercised, the Portfolio will incur a loss, which will be reduced by
the amount of the premium it receives. However, depending on the degree of
correlation between changes in the value of its portfolio securities (or the
currency in which they are denominated) and changes in the value of futures
positions, the Portfolio's losses from writing options on futures may be
partially offset by favorable changes in the value of portfolio securities or in
the cost of securities to be acquired.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option of the same series. There
is no guarantee that such closing transactions can be effected. The Portfolio's
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
Limitations on the Use of Futures Contracts and Options on Futures
Contracts. The Portfolio will engage in futures and related options transactions
for bona fide hedging or non-hedging purposes as defined in or permitted by CFTC
regulations. The Portfolio will determine that the price fluctuations in the
futures contracts and options on futures used for hedging purposes are
substantially related to price fluctuations in securities (or the currency in
which they are denominated) held by the Portfolio or which it expects to
purchase. Except as stated below, the Portfolio's futures transactions will be
entered into for traditional hedging purposes -- i.e., futures contracts will be
sold to protect against a decline in the price of securities that the Portfolio
owns, or futures contracts will be purchased to protect the Portfolio against an
increase in the price of securities it intends to purchase.
As evidence of this hedging intent, the Portfolio expects that on 75% or
more of the occasions on which it takes a long futures (or option) position
(involving the purchase of futures contracts), the Portfolio will have
purchased, or will be in the process of purchasing, equivalent amounts of
related securities in the cash market at the time when the futures (or option)
position is closed out. However, in particular cases, when it is economically
advantageous for the Portfolio to do so, a long futures position may be
terminated (or an option may expire) without the corresponding purchase of
securities. As an alternative to compliance with the bona fide hedging
definition, a CFTC regulation permits the Portfolio to elect to comply with a
different test, under which the aggregate initial margin and premiums required
to establish non-hedging positions in futures contracts and options on futures
will not exceed 5% of the Portfolio's net asset value after taking into account
unrealized profits and losses on such positions and excluding the in-the-money
amount of such options.
The Portfolio will engage in transactions in futures contracts and related
options only to the extent such transactions are consistent with the
requirements of the Internal Revenue Code of 1986, as amended (the "Code") for
maintaining the qualification of an investor in the Portfolio, such as the Fund,
as a regulated investment company for Federal income tax purposes (see "Taxes").
The Portfolio will be required, in connection with transactions in futures
contracts and the writing of options on futures, to make margin deposits, which
will be held by the Portfolio's custodian for the benefit of the futures
commission merchant through whom the Portfolio engages in such futures and
options transactions. Cash or high grade liquid debt securities required to be
segregated in connection with a "long" futures position taken by the Portfolio
will also be held by the custodian in a segregated account and will be marked to
market daily.
SPECIAL RISKS ASSOCIATED WITH FORWARD CONTRACTS, FOREIGN CURRENCY FUTURES
CONTRACTS AND OPTIONS THEREON AND OPTIONS ON FOREIGN CURRENCIES
Transactions in forward contracts, as well as futures and options on foreign
currencies, are subject to the risk of governmental actions affecting trading in
or the prices of currencies underlying such contracts, which could restrict or
eliminate trading and could have a substantial adverse effect on the value of
positions held by the Portfolio. In addition, the value of such positions could
be adversely affected by a number of other complex political and economic
factors applicable to the countries issuing the underlying currencies.
Furthermore, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying forward contracts, futures contracts and options. As a
result, the available information on which the Portfolio's trading systems will
be based may not be as complete as the comparable data on which the Portfolio
makes investment and trading decisions in connection with securities and other
transactions. Moreover, because the foreign currency market is a global,
twenty-four hour market, events could occur on that market which will not be
reflected in the forward, futures or options markets until the following day,
thereby preventing the Portfolio from responding to such events in a timely
manner.
Settlements of over-the-counter forward contracts or of the exercise of
foreign currency options generally must occur within the country issuing the
underlying currency, which in turn requires parties to such contracts to accept
or make delivery of such currencies in conformity with any United States or
foreign restrictions and regulations regarding the maintenance of foreign
banking relationships, fees, taxes or other charges.
Unlike currency futures contracts and exchange-traded options, options on
foreign currencies and forward contracts are not traded on contract markets
regulated by the CFTC or (with the exception of certain foreign currency
options) the Securities and Exchange Commission (the "SEC"). To the contrary,
such instruments are traded through financial institutions acting as market-
makers. (Foreign currency options are also traded on the Philadelphia Stock
Exchange subject to SEC regulation). In an over-the-counter trading environment,
many of the protections associated with transactions on exchanges will not be
available. For example, there are no daily price fluctuation limits, and adverse
market movements could therefore continue to an unlimited extent over a period
of time. Although the purchaser of an option cannot lose more than the amount of
the premium plus related transaction costs, this entire amount could be lost.
Moreover, an option writer could lose amounts substantially in excess of its
initial investment due to the margin and collateral requirements associated with
such option positions. Similarly, there is no limit on the amount of potential
losses on forward contracts to which the Portfolio is a party.
In addition, over-the-counter transactions can only be entered into with a
financial institution willing to take the opposite side, as principal, of the
Portfolio's position unless the institution acts as broker and is able to find
another counterparty willing to enter into the transaction with the Portfolio.
Where no such counterparty is available, it will not be possible to enter into a
desired transaction. There also may be no liquid secondary market in the trading
of over-the-counter contracts, and the Portfolio may be unable to close out
options purchased or written, or forward contracts entered into, until their
exercise, expiration or maturity. This in turn could limit the Portfolio's
ability to realize profits or to reduce losses on open positions and could
result in greater losses.
Furthermore, over-the-counter transactions are not backed by the guarantee
of an exchange's clearing corporation. The Portfolio will therefore be subject
to the risk of default by, or the bankruptcy of, the financial institution
serving as its counterparty. One or more of such institutions also may decide to
discontinue its role as market-maker in a particular currency, thereby
restricting the Portfolio's ability to enter into desired hedging transactions.
A Portfolio will enter into over-the-counter transactions only with parties
whose creditworthiness has been reviewed and found satisfactory by the Adviser.
Over-the-counter options on foreign currencies, like exchange-traded
commodity futures contracts and commodity option contracts, are within the
exclusive regulatory jurisdiction of the CFTC. The CFTC currently permits the
trading of such options, but only subject to a number of conditions regarding
the commercial purpose of the purchaser of such options. The Portfolio is not
able to determine at this time whether or to what extent the CFTC may impose
additional restrictions on the trading of over-the-counter options on foreign
currencies at some point in the future, or the effect that any such restrictions
may have on the hedging strategies to be implemented by the Portfolio.
CFTC regulations require that the Portfolio not enter into non-hedging
transactions in commodity futures contracts or commodity option contracts for
which the aggregate initial margin and premiums exceed 5% of the fair market
value of the Portfolio's net assets. Premiums paid to purchase over-the-counter
options on foreign currencies, and initial margin deposited in connection with
the writing of such options, are required to be included in determining
compliance with this requirement. This could, depending upon the Portfolio's
existing positions in futures contracts and options on futures contracts, limit
the Portfolio's ability to purchase or write options on foreign currencies.
Conversely, the existence of open positions in options on foreign currencies
could limit the ability of the Portfolio to enter into desired transactions in
other options or futures contracts.
While forward contracts and currency swaps are not presently subject to
regulation by the CFTC, the CFTC may in the future assert or be granted
authority to regulate such instruments. In such event, the Portfolio's ability
to utilize forward contracts and currency swaps in the manner set forth above
and in the Prospectus could be restricted.
Options on foreign currencies traded on a national securities exchange are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In particular,
all foreign currency options positions entered into on a national securities
exchange are cleared and guaranteed by the Options Clearing Corporation ("OCC"),
thereby reducing the risk of counterparty default. Further, a liquid secondary
market in options traded on a national securities exchange may be more readily
available than in the over-the-counter market, potentially permitting the
Portfolio to liquidate open positions at a profit prior to exercise or
expiration, or to limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however,
are subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effect of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures for
exercise and settlement, such as technical changes in the mechanics of delivery
of currency, the fixing of dollar settlement prices or prohibitions on exercise.
PORTFOLIO TURNOVER
The Portfolio cannot accurately predict its portfolio turnover rate, but it
is anticipated that the annual turnover rate will generally not exceed 100%
(excluding turnover of securities having a maturity of one year or less). A 100%
annual turnover rate would occur, for example, if all the securities in the
portfolio were replaced once in a period of one year. A high turnover rate (100%
or more) necessarily involves greater expenses to the Portfolio. The Portfolio
engages in portfolio trading (including short-term trading) if it believes that
a transaction including all costs will help in achieving its investment
objective either by increasing income or by enhancing the Portfolio's net asset
value. High portfolio turnover may also result in the realization of substantial
net short-term capital gains. In order for the Fund to continue to qualify as a
regulated investment company for Federal tax purposes, less than 30% of the
annual gross income of the Fund must be derived from the sale of securities and
certain other investments (including its share of gains from the sale of
securities and certain other investments held by the Portfolio) held for less
than three months.
LENDING PORTFOLIO SECURITIES
If the Adviser decides to make securities loans, the Portfolio may seek to
increase its income by lending portfolio securities to broker-dealers or other
institutional borrowers. Under present regulatory policies of the SEC, such
loans are required to be secured continuously by collateral in cash, cash
equivalents or U.S. Government securities held by the Portfolio's custodian and
maintained on a current basis at an amount at least equal to market value of the
securities loaned, which will be marked to market daily. Cash equivalents
include certificates of deposit, commercial paper and other short-term money
market instruments. The financial condition of the borrower will be monitored by
the Adviser on an ongoing basis. The Portfolio would continue to receive the
equivalent of the interest or dividends paid by the issuer on the securities
loaned and would also receive a fee, or all or a portion of the interest on
investment of the collateral. The Portfolio would have the right to call a loan
and obtain the securities loaned at any time on up to five business days'
notice. The Portfolio would not have the right to vote any securities having
voting rights during the existence of a loan, but could call the loan in
anticipation of an important vote to be taken among holders of the securities or
the giving or holding of their consent on a material matter affecting the
investment. If the Adviser decides to make securities loans, it is intended that
the value of the securities loaned would not exceed one-third of the Portfolio's
total assets.
INVESTMENT RESTRICTIONS
Whenever an investment policy or investment restriction set forth in the
Prospectus or this Statement of Additional Information states a maximum
percentage of assets that may be invested in any security or other asset or
describes a policy regarding quality standards, such percentage limitation or
standard shall be determined immediately after and as a result of the Fund's or
the Portfolio's acquisition of such security or other asset. Accordingly, any
later increase or decrease resulting from a change in values, assets or other
circumstances, other than a subsequent rating change below investment grade made
by a rating service, will not compel the Fund or the Portfolio, as the case may
be, to dispose of such security or other asset.
The Fund and the Portfolio have each adopted the following investment
restrictions which may not be changed without the approval by the holders of a
majority of the outstanding voting securities of the Fund or the Portfolio, as
the case may be, which as used in this Statement of Additional Information means
the lesser of (a) 67% or more of the outstanding voting securities of the Fund
or the Portfolio, as the case may be, present or represented by proxy at a
meeting if the holders of more than 50% of the outstanding voting securities of
the Fund or the Portfolio are present or represented at the meeting or (b) more
than 50% of the outstanding voting securities of the Fund or the Portfolio.
Neither the Fund nor the Portfolio may:
(1) issue senior securities (as defined in the Investment Company Act of
1940 and rules thereunder) or borrow money, except that the Fund or the
Portfolio may borrow:
(i) from banks to purchase or carry securities, commodities,
commodities contracts or other investments;
(ii) from banks for temporary or emergency purposes not in excess
of 10% of its gross assets taken at market value; or
(iii) by entering into reverse repurchase agreements,
if, immediately after any such borrowing, the value of the Fund's or
Portfolio's total assets, including all borrowings then outstanding, is
equal to at least 300% of the aggregate amount of borrowings then
outstanding. Any such borrowings may be secured or unsecured. The Portfolio
or the Fund may issue securities (including senior securities) appropriate
to evidence such indebtedness, including reverse repurchase agreements.
(2) Pledge its assets, except that the Portfolio or the Fund may pledge
not more than one-third of its total assets (taken at current value) to
secure borrowings made in accordance with investment restriction (1) above;
for the purpose of this restriction the deposit of assets in a segregated
account with the Portfolio's or the Fund's custodian, as the case may be, in
connection with any of the Portfolio's or the Fund's respective investment
transactions is not considered to be a pledge.
(3) Purchase securities on margin (but the Portfolio or the Fund may
obtain such short-term credits as may be necessary for the clearance of
purchases and sales of securities).
(4) Make short sales of securities or maintain a short position, unless
at all times when a short position is open the Portfolio or the Fund either
owns an equal amount of such securities or owns securities convertible into
or exchangeable, without the payment of any additional consideration, for
securities of the same issue as, and equal in amount to, the securities sold
short.
(5) Purchase securities issued by any other open-end investment company
or investment portfolio, except as they may be acquired as part of a merger,
consolidation or acquisition of assets, except that the Fund may invest all
or substantially all of its assets in either the Portfolio or any other
registered investment company having substantially the same investment
objective as the Fund and except as otherwise permitted by the Investment
Company Act of 1940.
(6) Purchase or retain in its portfolio any securities issued by an
issuer any of whose officers, directors, trustees or security holders is an
officer or Trustee of the Portfolio or the Trust or is a member, officer,
director or trustee of any investment adviser of the Portfolio or the Fund,
if after the purchase of the securities of such issuer by the Portfolio or
the Fund one or more of such persons owns beneficially more than 1/2 of 1%
of the shares or securities or both (all taken at current value) of such
issuer and such persons owning more than 1/2 of 1% of such shares or
securities together own beneficially more than 5% of such shares or
securities or both (all taken at current value); provided, however, that the
Fund may invest all or substantially all of its assets in either the
Portfolio or any other registered investment company having substantially
the same investment objective as the Fund and having any officers,
directors, trustees or security holders who are officers or Trustees of the
Trust.
(7) Underwrite securities issued by other persons, except insofar as the
Fund or the Portfolio may technically be deemed to be an underwriter under
the Securities Act of 1933 in selling or disposing of a portfolio security,
and except that the Fund may invest all or substantially all of its assets
in either the Portfolio or any other registered investment company having
substantially the same investment objective as the Fund.
(8) Make loans to other persons, except by (a) the acquisition of money
market instruments, debt securities and other obligations in which the
Portfolio or the Fund is authorized to invest in accordance with their
respective investment objective and policies, (b) entering into repurchase
agreements and (c) lending their respective portfolio securities.
(9) Purchase the securities of any one issuer (other than obligations
issued or guaranteed by the U.S. Government or any of its agencies or
instrumentalities) if, with respect to 75% of its total assets and as a
result of such purchase (a) more than 5% of the total assets of the
Portfolio or the Fund, as the case may be (taken at current value), would be
invested in the securities of such issuer, or (b) the Fund or the Portfolio
would hold more than 10% of the outstanding voting securities of that
issuer, except that the Fund may invest all or substantially all of its
assets in, and may acquire up to 100% of the outstanding voting securities
of either the Portfolio or any other registered investment company having
substantially the same investment objectives as the Fund.
(10) Purchase any security if, as a result of such purchase, 25% or more
of the total assets of the Portfolio or the Fund, as the case may be (taken
at current value) would be invested in the securities of issuers having
their principal business activities in the same industry (the electric, gas
and telephone utility industries being treated as separate industries for
the purpose of this restriction); provided that there is no limitation with
respect to obligations issued or guaranteed by the U.S. Government or any of
its agencies or instrumentalities and except that the Fund may invest all or
substantially all of its assets in either the Portfolio or any other
registered investment company having substantially the same investment
objective as the Fund.
(11) Invest for the purpose of gaining control of a company's
management.
(12) Purchase or sell real estate, although the Fund or the Portfolio
may purchase and sell securities which are secured by interests in real
estate, securities of issuers which invest or deal in real estate and real
estate that is acquired as the result of the ownership of securities.
(13) Purchase or sell physical commodities (other than currency) or
contracts for the purchase or sale of physical commodities (other than
currency).
(14) Buy investment securities from or sell them to any of the
respective officers or Trustees of the Trust or the Portfolio, the
Portfolio's investment adviser or the Fund's principal underwriter, as
principal; provided, however, that any such person or firm may be employed
as a broker upon customary terms and that this restriction does not apply to
the Fund's investments in either the Portfolio or any other registered
investment company having substantially the same investment objective as the
Fund.
(15) Purchase oil, gas or other mineral leases or purchase partnership
interests in oil, gas or other mineral exploration or development programs.
For the purpose of investment restrictions (1), (2) and (3), the
arrangements (including escrow, margin and collateral arrangements) made by the
Portfolio or the Fund with respect to their respective transactions in all types
of options, futures contracts, options on futures contracts, forward contracts,
currencies, and commodities and options thereon shall not be considered to be
(i) a borrowing of money or the issuance of securities (including senior
securities) by the Portfolio or the Fund, as the case may be, (ii) a pledge of
its assets or (iii) the purchase of a security on margin.
The Fund and the Portfolio have each adopted the following investment
policies which may be changed without shareholder or investor approval. Neither
the Fund nor the Portfolio may invest more than 15% of its net assets in
investments which are not readily marketable, including restricted securities
and repurchase agreements with a maturity longer than seven days. Restricted
securities for the purposes of this limitation do not include securities
eligible for resale pursuant to Rule 144A under the Securities Act of 1933 that
the Board of Trustees of the Trust or the Portfolio, or its delegate, determine
to be liquid, based upon the trading markets for the specific security. Neither
the Fund nor the Portfolio intends to invest in Rule 144A securities or make
short sales of securities during the coming year. Except for obligations issued
or guaranteed by the U.S. Government or any of its agencies or
instrumentalities, neither the Fund nor the Portfolio will knowingly purchase a
security issued by a company (including predecessors) with less than three years
operating history (unless such security is rated at least B or a comparable
rating at the time of purchase by at least one nationally recognized rating
service) if, as a result of such purchase, more than 5% of the Portfolio's or
the Fund's total assets, as the case may be (taken at current value), would be
invested in such securities and except that the Fund may invest all or
substantially all of its assets in interests in the Portfolio or any other
registered investment company having substantially the same investment objective
as the Fund. Neither the Fund nor the Portfolio will purchase warrants if, as a
result of such purchase, more than 5% of the Portfolio's or the Fund's net
assets, as the case may be (taken at current value), would be invested in
warrants, and the value of such warrants which are not listed on the New York or
American Stock Exchange may not exceed 2% of the Portfolio's or the Fund's net
assets; this policy does not apply to or restrict warrants acquired by the
Portfolio or the Fund in units or attached to securities, inasmuch as such
warrants are deemed to be without value. Neither the Fund nor the Portfolio will
purchase any securities if at the time of such purchase, permitted borrowings
under investment restriction (1) above exceed 5% of the value of the Portfolio's
or the Fund's total assets, as the case may be.
In order to permit the sale of shares of the Fund in certain states, the
Fund and the Portfolio may make commitments more restrictive than the
fundamental policies described above. Should the Fund determine that any such
commitment is no longer in the best interests of the Fund and its shareholders,
it will revoke the commitment by terminating sales of its shares in the state(s)
involved.
Although permissible under the Fund's investment restrictions, the Fund has
no present intention during the coming fiscal year to: borrow money; pledge its
assets; underwrite securities issued by other persons; or make loans to other
persons.
TRUSTEES AND OFFICERS
The Trust's Trustees and officers are listed below. Except as indicated,
each individual has held the office shown or other offices in the same company
for the last five years. Unless otherwise noted, the business address of each
Trustee and officer is 24 Federal Street, Boston, Massachusetts 02110, which is
also the address of the Fund's sponsor and manager, Eaton Vance Management
("Eaton Vance"), of Eaton Vance's wholly-owned subsidiary, Boston Management and
Research ("BMR"), of Eaton Vance's parent, Eaton Vance Corp. ("EVC"), and of
Eaton Vance's trustee, Eaton Vance, Inc. ("EV"). Eaton Vance and EV are both
wholly-owned subsidiaries of EVC. Those Trustees who are "interested persons" of
the Trust, Eaton Vance, BMR, EVC or EV as defined in the 1940 Act, by virtue of
their affiliation with any one or more of the Trust, Eaton Vance, BMR, EVC or
EV, are indicated by an asterisk (*).
OFFICERS AND TRUSTEES OF THE TRUST
TRUSTEES
JAMES B. HAWKES, President and Trustee*
Executive Vice President of Eaton Vance, BMR, EVC and EV, and a Director of EVC
and EV. Director or Trustee and officer of various investment companies
managed by Eaton Vance or BMR.
LANDON T. CLAY, Vice President and Trustee*
Chairman of Eaton Vance, BMR, EVC and EV and a Director of EVC and EV. Director
or Trustee and officer of various investment companies managed by Eaton Vance
or BMR.
DONALD R. DWIGHT, Trustee
President of Dwight Partners, Inc. (a corporate relations and communications
company) founded in 1988. Director or Trustee of various investment
companies managed by Eaton Vance or BMR.
Address: Clover Mill Lane, Lyme, New Hampshire 03768
SAMUEL L. HAYES, III, Trustee
Jacob H. Schiff Professor of Investment Banking, Harvard University Graduate
School of Business Administration. Director or Trustee of various investment
companies managed by Eaton Vance or BMR.
Address: Harvard Business School, Soldiers Field Road, Boston, Massachusetts
02134
PETER F. KIELY, Vice President and Trustee*
Vice President of Eaton Vance, BMR and EV. Director or Trustee and officer of
various investment companies managed by Eaton Vance or BMR. Mr. Kiely was
elected Trustee of the Trust on June 14, 1993.
NORTON H. REAMER, Trustee
President and Director, United Asset Management Corporation (a holding company
owning institutional investment management firms); Chairman, President and
Director, The Regis Fund, Inc. (mutual fund). Director or Trustee of various
investment companies managed by Eaton Vance or BMR.
Address: One International Place, Boston, Massachusetts 02110
JOHN L. THORNDIKE, Trustee
Director, Fiduciary Trust Company. Director or Trustee of various investment
companies managed by Eaton Vance or BMR.
Address: 175 Federal Street, Boston, Massachusetts 02110
JACK L. TREYNOR, Trustee
Investment Adviser and Consultant. Director or Trustee of various investment
companies managed by Eaton Vance or BMR.
Address: 504 Via Almar, Palos Verdes Estates, California 90274
OFFICERS
M. DOZIER GARDNER, Vice President
President and Chief Executive Officer of Eaton Vance, BMR, EVC and EV, and
Director of EVC and EV. Director or Trustee and officer of various investment
companies managed by Eaton Vance or BMR.
JAMES L. O'CONNOR, Treasurer
Vice President of Eaton Vance, BMR and EV. Officer of various investment
companies managed by Eaton Vance or BMR.
THOMAS OTIS, Secretary
Vice President and Secretary of Eaton Vance, BMR, EVC and EV. Officer of various
investment companies managed by Eaton Vance or BMR.
JANET E. SANDERS, Assistant Secretary
Vice President of Eaton Vance, BMR and EV. Officer of various investment
companies managed by Eaton Vance or BMR.
Messrs. Thorndike (Chairman), Hayes and Reamer, are members of the Special
Committee of the Board of Trustees of the Trust. The Special Committee's
functions include a continuous review of the Fund's management contract with
Eaton Vance, making recommendations to the Board of Trustees regarding the
compensation of those Trustees who are not members of Eaton Vance's
organization, and making recommendations to the Board of Trustees regarding
candidates to fill vacancies, as and when they occur, in the ranks of those
Trustees who are not "interested persons" of the Trust or Eaton Vance.
Messrs. Treynor (Chairman) and Dwight are members of the Audit Committee of
the Board of Trustees. The Audit Committee's functions include making
recommendations to the Board of Trustees regarding the selection of the
independent certified public accountants, and reviewing with such accountants
and the Treasurer of the Trust matters relative to accounting and auditing
practices and procedures, accounting records, internal accounting controls, and
the functions performed by the custodian, transfer agent and dividend disbursing
agent of the Trust.
The fees and expenses of those Trustees of the Trust who are not members of
the Eaton Vance or BMR organizations are paid by the Fund and other series of
the Trust. The Trustees of the Trust also receive additional payments from other
investment companies for which Eaton Vance provides investment advisory,
administrative or management services or BMR provides investment advisory
services for serving in similar capacities. For information concerning the
compensation received by the Trustees of the Trust, see "Fees and Expenses" in
Part II of this Statement of Additional Information.
OFFICERS AND TRUSTEES OF THE PORTFOLIO
The Portfolio's Trustees and officers are listed below. Except as
indicated, each individual has held the office shown or other offices in the
same company for the last five years. The business address of the Adviser is
3808 One Exchange Square, Central, Hong Kong.Those Trustees who are "interested
persons" of the Portfolio, the Adviser, Eaton Vance, EVC or EV as defined in the
1940 Act by virtue of their affiliation with any one or more of the Portfolio,
the Adviser, Eaton Vance, BMR, EVC or EV, are indicated by an asterisk (*).
TRUSTEES
HON. ROBERT LLOYD GEORGE, President and Trustee*
Chairman and Chief Executive of Lloyd George Management (B.V.I.) Limited.
Chairman and Chief Executive Officer of the Adviser. Managing Director of
Indosuez Asia Investment Services, Ltd. from 1984 to 1991.
Address: 3808 One Exchange Square, Central, Hong Kong
JAMES B. HAWKES, Vice President and Trustee*
Executive Vice President of Eaton Vance, BMR, EVC and EV, and a Director of EVC
and EV. Director or Trustee and officer of various investment companies
managed by Eaton Vance or BMR.
Address: Eaton Vance Management, 24 Federal Street, Boston, Massachusetts 02110
SAMUEL L. HAYES, III, Trustee
Jacob H. Schiff Professor of Investment Banking, Harvard University Graduate
School of Business Administration. Director or Trustee of various investment
companies managed by Eaton Vance or BMR.
Address: Harvard Business School, Soldiers Field Road, Boston, Massachusetts
02134
STUART HAMILTON LECKIE, Trustee
Managing Director and Actuary of The Wyatt Company. Member of the Hong Kong
Government's Advisory Committee on Insurance.
Address: The Wyatt Company (HK) Ltd., Sun Hung Kai Centre, 27th Floor, 30
Harbour Road, Hong Kong
HON. EDWARD K.Y. CHEN, Trustee
Professor and Director of the Centre of Asian Studies, University of Hong
Kong. Director of First Pacific Bancshares Holdings Ltd. and a non-executive
Director of the Securities and Futures Commission. Vice-Chairman and
Consultant of ACL Consultants Ltd. from 1983 to 1989. Director of First
Pacific Bank Ltd. from 1986 to 1990. Director of Inc -- Asia from 1988 to
1991.
Address: University of Hong Kong, Centre of Asian Studies, Pokfulam Road, Hong
Kong
OFFICERS
SCOBIE DICKINSON WARD, Vice President, Assistant Secretary and Assistant
Treasurer
Director of Lloyd George Management (B.V.I.) Limited. Director of the Adviser.
Investment Manager of Indosuez Asia Investment Services, Ltd. from 1984 to
1991.
Address: 3808 One Exchange Square, Central, Hong Kong
WILLIAM WALTER RALEIGH KERR, Vice President, Secretary and Assistant Treasurer
Director, Finance Director and Chief Operating Officer of the Adviser.
Director of Lloyd George Management (B.V.I.) Limited.
Address: 3808 One Exchange Square, Central, Hong Kong
JAMES L. O'CONNOR, Vice President and Treasurer
Vice President of Eaton Vance, BMR and EV. Officer of various investment
companies managed by Eaton Vance or BMR.
Address: Eaton Vance Management, 24 Federal Street, Boston, Massachusetts 02110
THOMAS OTIS, Vice President and Assistant Secretary
Vice President and Secretary of Eaton Vance, BMR, EVC and EV. Officer of various
investment companies managed by Eaton Vance or BMR.
Address: Eaton Vance Management, 24 Federal Street, Boston, Massachusetts 02110
JANET E. SANDERS, Assistant Secretary
Vice President of Eaton Vance, BMR and EV. Officer of various investment
companies managed by Eaton Vance or BMR.
Address: Eaton Vance Management, 24 Federal Street, Boston, Massachusetts 02110
The Adviser is a subsidiary of Lloyd George Management (B.V.I.) Limited,
which is ultimately controlled by the Hon. Robert J.D. Lloyd George, President
and Trustee of the Portfolio and Chairman and Chief Executive Officer of the
Adviser. Mr. Hawkes is a Trustee and officer of the Trust and an officer of
the Fund's sponsor and manager. Mr. Hayes is a Trustee of the Trust.
The fees and expenses of those Trustees of the Portfolio who are not members
of the Adviser or Eaton Vance organizations are paid by the Portfolio. For
information concerning the compensation received by the Trustees of the
Portfolio, see "Fees and Expenses" in Part II of this Statement of Additional
Information.
While the Portfolio is a New York trust, the Adviser, together with Messrs.
Lloyd George, Leckie, Chen, Ward and Kerr, are not residents of the United
States, and substantially all of their respective assets may be located outside
of the United States. It may be difficult for investors to effect service of
process within the United States upon the individuals identified above, or to
realize judgments of courts of the United States predicated upon civil
liabilities of the Adviser and such individuals under the Federal securities
laws of the United States. The Portfolio has been advised that there is
substantial doubt as to the enforceability in the countries in which the Adviser
and such individuals reside of such civil remedies and criminal penalties as are
afforded by the Federal securities laws of the United States.
MANAGEMENT OF THE FUND
Eaton Vance acts as the sponsor and manager of the Fund and the
administrator of the Portfolio. The Portfolio has engaged Lloyd George
Management (Hong Kong) Limited (the "Adviser") as its investment adviser.
THE ADVISER
As investment adviser to the Portfolio, the Adviser manages the Portfolio's
investments, subject to the supervision of the Board of Trustees of the
Portfolio. The Adviser is also responsible for effecting all security
transactions on behalf of the Portfolio, including the allocation of principal
transactions and portfolio brokerage and the negotiation of commissions. See
"Portfolio Security Transactions." Under the investment advisory agreement, the
Adviser receives a monthly advisory fee computed by applying the annual asset
rate applicable to that portion of the average daily net assets of the Portfolio
throughout the month in each Category as indicated below:
ANNUAL
CATEGORY AVERAGE DAILY NET ASSETS ASSET RATE
-------- ------------------------ ----------
1 less than $500 million ..................................... 0.75%
2 $500 million but less than $1 billion ...................... 0.70
3 $1 billion but less than $1.5 billion ...................... 0.65
4 $1.5 billion but less than $2 billion ...................... 0.60
5 $2 billion but less than $3 billion ........................ 0.55
6 $3 billion and over ........................................ 0.50
For additional information about the Investment Advisory Agreement,
including the net assets of the Portfolio and the investment advisory fees that
the Portfolio paid the Adviser under the Investment Advisory Agreement, see
"Fees and Expenses" in Part II of this Statement of Additional Information.
The directors of the Adviser are the Honourable Robert Lloyd George,
William Walter Raleigh Kerr, Michael Tze-hau Lee, M.F. Tang and Scobie
Dickinson Ward. The Hon. Robert J.D. Lloyd George is Chairman and Chief
Executive Officer of the Adviser and Mr. Kerr is an officer of the Adviser.
The business address of these individuals is 3808 One Exchange Square,
Central, Hong Kong.
The Portfolio's investment advisory agreement with the Adviser remains in
effect until February 28, 1995; it may be continued indefinitely thereafter so
long as such continuance after February 28, 1995 is approved at least annually
(i) by the vote of a majority of the Trustees of the Portfolio who are not
interested persons of the Portfolio cast in person at a meeting specifically
called for the purpose of voting on such approval and (ii) by the Board of
Trustees of the Portfolio or by vote of a majority of the outstanding voting
securities of the Portfolio. The agreement may be terminated at any time without
penalty on sixty days' written notice by the Board of Trustees of either party
or by vote of the majority of the outstanding voting securities of the
Portfolio, and the agreement will terminate automatically in the event of its
assignment. The agreement provides that the Adviser may render services to
others. The agreement also provides that, in the absence of willful misfeasance,
bad faith, gross negligence or reckless disregard of obligations or duties under
the agreement on the part of the Adviser, the Adviser shall not be liable to the
Portfolio or to any shareholder for any act or omission in the course of or
connected with rendering services or for any losses sustained in the purchase,
holding or sale of any security.
MANAGER, SPONSOR AND ADMINISTRATOR
See "Management of the Fund and the Portfolio" in the Prospectus for a
description of the services Eaton Vance performs as manager and sponsor of the
Fund and administrator of the Portfolio. Under Eaton Vance's management contract
with the Fund and administration agreement with the Portfolio, Eaton Vance
receives a monthly management fee from the Fund and a monthly administration fee
from the Portfolio. Each fee is computed by applying the annual asset rate
applicable to that portion of the average daily net assets of the Fund or the
Portfolio throughout the month in each Category as indicated below:
ANNUAL
CATEGORY AVERAGE DAILY NET ASSETS ASSET RATE
-------- ------------------------ ----------
1 less than $500 million ..................................... 0.25%
2 $500 million but less than $1 billion ...................... 0.23333
3 $1 billion but less than $1.5 billion ...................... 0.21667
4 $1.5 billion but less than $2 billion ...................... 0.20
5 $2 billion but less than $3 billion ........................ 0.18333
6 $3 billion and over ........................................ 0.16667
For the administration and management fees that the Portfolio and the Fund
paid to Eaton Vance, see "Fees and Expenses" in Part II of this Statement of
Additional Information.
Eaton Vance's management contract with the Fund and administration agreement
with the Portfolio will each remain in effect until February 28, 1995. Each
agreement may be continued from year to year after February 28, 1995 so long as
such continuance is approved annually by the vote of a majority of the Trustees
of the Trust or the Portfolio, as the case may be. Each agreement may be
terminated at any time without penalty on sixty days' written notice by the
Board of Trustees of either party thereto, or by a vote of a majority of the
outstanding voting securities of the Fund or the Portfolio, as the case may be.
Each agreement will terminate automatically in the event of its assignment. Each
agreement provides that, in the absence of Eaton Vance's willful misfeasance,
bad faith, gross negligence or reckless disregard of its obligations or duties
to the Fund or the Portfolio under such contract or agreement, Eaton Vance will
not be liable to the Fund or the Portfolio for any loss incurred. Each agreement
was initially approved by the Trustees, including the non-interested Trustees,
of the Trust or the Portfolio which is a party thereto at meetings held on
September 8, 1992 and on October 8, 1992, respectively, of the Trust and the
Portfolio.
The Fund and the Portfolio, as the case may be, will each be responsible for
all of its respective costs and expenses not expressly stated to be payable by
Eaton Vance under the management contract or the administration agreement. Such
costs and expenses to be borne by each of the Fund or the Portfolio, as the case
may be, include, without limitation, custody and transfer agency fees and
expenses, including those incurred for determining net asset value and keeping
accounting books and records, expenses of pricing and valuation services; the
cost of share certificates; membership dues in investment company organizations;
brokerage commissions and fees; fees and expenses of registering under the
securities laws; expenses of reports to shareholders and investors; proxy
statements, and other expenses of shareholders' or investors' meetings;
insurance premiums, printing and mailing expenses; interest, taxes and corporate
fees; legal and accounting expenses; compensation and expenses of Trustees not
affiliated with Eaton Vance; distribution and service fees payable by the Fund
under its Rule 12b-1 distribution plan; and investment advisory, management and
administration fees. The Fund or the Portfolio will also each bear expenses
incurred in connection with litigation in which the Fund or the Portfolio, as
the case may be, is a party and any legal obligation to indemnify its respective
officers and Trustees with respect thereto.
Eaton Vance and EV are both wholly-owned subsidiaries of EVC. BMR is a
wholly-owned subsidiary of Eaton Vance. Eaton Vance and BMR are both
Massachusetts business trusts, and EV is the trustee of Eaton Vance and BMR. The
Directors of EV are Landon T. Clay, H. Day Brigham, Jr., M. Dozier Gardner,
James B. Hawkes and Benjamin A. Rowland, Jr. The Directors of EVC consist of the
same persons and John G.L. Cabot and Ralph Z. Sorenson. Mr. Clay is chairman and
Mr. Gardner is president and chief executive officer of EVC, Eaton Vance, BMR
and EV. All of the issued and outstanding shares of Eaton Vance and of EV are
owned by EVC. All of the issued and outstanding shares of BMR are owned by Eaton
Vance. All shares of the outstanding Voting Common Stock of EVC are deposited in
a Voting Trust which expires December 31, 1996, the Voting Trustees of which are
Messrs. Brigham, Clay, Gardner, Hawkes and Rowland. The Voting Trustees have
unrestricted voting rights for the election of Directors of EVC. All of the
outstanding voting trust receipts issued under said Voting Trust are owned by
certain of the officers of Eaton Vance and BMR who are also officers and
Directors of EVC and EV. As of November 30, 1994, Messrs. Clay and Gardner each
owned 24% of such voting trust receipts and Messrs. Roland and Brigham owned 15%
and 13%, respectively, of such voting trust receipts. Messrs. Clay, Gardner,
Hawkes and Otis, who are officers or Trustees of the Trust, are members of the
EVC, Eaton Vance, BMR and EV organizations. Messrs. Kiely, O'Connor and Otis and
Ms. Sanders, are officers of the Trust, and are also members of the Eaton Vance,
BMR and EV organizations. Eaton Vance will receive the fees paid under the
management agreement and its wholly-owned subsidiary, Eaton Vance Distributors,
Inc., as Principal Underwriter, will receive its portion of the sales charge on
shares of the Fund sold through investment dealers.
EVC and its affiliates and its officers and employees from time to time have
transactions with various banks, including the custodian of the Fund and the
Portfolio, Investors Bank & Trust Company. It is Eaton Vance's opinion that the
terms and conditions of such transactions will not be influenced by existing or
potential custodial or other relationships between the Fund and such banks.
Eaton Vance owns all of the stock of Energex Corporation which is engaged in
oil and gas operations. EVC owns all of the stock of Marblehead Energy Corp.
(which engages in oil and gas operations) and EVC owns 77.3% of the stock of
Investors Bank & Trust Company, which provides custodial, trustee and other
fiduciary services to investors, including individuals, employee benefit plans,
corporations, investment companies, savings banks and other institutions. In
addition, Eaton Vance owns all the stock of Northeast Properties, Inc., which is
engaged in real estate investment, consulting and management. EVC owns all the
stock of Fulcrum Management, Inc. and MinVen, Inc., which are engaged in the
development of precious metal properties. EVC also owns 2% of the A shares and
20% of the Preferred Shares issued by the parent of the Adviser. EVC, Eaton
Vance, BMR and EV may also enter into other businesses.
CUSTODIAN
Investors Bank & Trust Company ("IBT"), 24 Federal Street, Boston,
Massachusetts (a 77.3% owned subsidiary of EVC), acts as custodian for the Fund
and the Portfolio. IBT has the custody of all cash and securities of the Fund
and all securities of the Portfolio purchased in the United States, maintains
the Fund's and the Portfolio's general ledger and computes the Fund's and the
Portfolio's respective daily per share net asset value. In such capacities IBT
attends to details in connection with the sale, exchange, substitution, transfer
or other dealings with the Fund's and the Portfolio's respective investments,
receives and disburses all funds, and performs various other ministerial duties
upon receipt of proper instructions from the Fund and the Portfolio.
Portfolio securities, if any, purchased by the Portfolio in the U.S. are
maintained in the custody of IBT or of other domestic banks or depositories.
Portfolio securities purchased outside of the U.S. are maintained in the custody
of foreign banks and trust companies that are members of IBT's Global Custody
Network, or foreign depositories used by such foreign banks and trust companies.
Each of the domestic and foreign custodial institutions holding portfolio
securities has been approved by the Board of Trustees of the Portfolio in
accordance with regulations under the 1940 Act.
IBT charges fees which are competitive within the industry. These fees for
the Portfolio relate to: (1) custody services based upon a percentage of the
market values of Portfolio securities; (2) bookkeeping and valuation services
provided at an annual rate; (3) activity charges, primarily the result of the
number of portfolio transactions; and (4) reimbursement of out-of-pocket
expenses. These fees are then reduced by a credit for cash balances of the
Portfolio at the custodian equal to 75% of the 91-day U.S. Treasury Bill auction
rate applied to the Portfolio's average daily collected balances.
The portion of the fee for the Fund related to bookkeeping and pricing
services is based upon a percentage of the Fund's net assets and the portion of
the fee related to financial statement preparation is a fixed amount.
In view of the ownership of EVC in IBT, the Portfolio is treated as a self
custodian pursuant to Rule 17f-2 under the 1940 Act, and the Portfolio's
investments held by IBT as custodian are thus subject to the additional
examinations by the Portfolio's independent certified public accountants as
called for by such Rule.
For the custody fees that the Portfolio and the Fund paid to IBT, see "Fees
and Expenses" in Part II of this Statement of Additional Information.
SERVICE FOR WITHDRAWAL
By a standard agreement, the Fund's transfer agent will send to the
shareholder regular monthly or quarterly payments of any designated amount based
upon the value of the shares held. The checks will be drawn from share
redemptions, which may result in the realization of taxable gain or loss, and
hence are a return of principal. Income dividends and capital gain distributions
in connection with withdrawal accounts will be credited at net asset value as of
the record date for each distribution. Continued withdrawals in excess of
current income will eventually use up principal, particularly in a period of
declining market prices.
To use this service, at least $5,000 in cash or shares at the public
offering price must be deposited with the Fund's transfer agent. A shareholder
may not have a withdrawal plan in effect at the same time he has authorized Bank
Draft Investing or is otherwise making regular purchases of Fund shares. Either
the shareholder, the Fund's transfer agent or the Principal Underwriter will be
able to terminate the withdrawal plan at any time without penalty.
DETERMINATION OF NET ASSET VALUE
For a description of how the Fund and Portfolio value their respective
shares or interests, see "Valuing Fund Shares" in the Prospectus. The Fund and
Portfolio will be closed for business and will not price their shares on the
following business holidays: New Year's Day, Washington's Birthday, Good Friday
(a New York Stock Exchange holiday), Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
The Trustees of the Portfolio have established certain procedures for the
valuation of the Portfolio's assets under normal market conditions. Marketable
securities listed on foreign or U.S. securities exchanges or in the NASDAQ
National Market System generally are valued at closing sale prices or, if there
were no sales, at the mean between the closing bid and asked prices therefor on
the exchange where such securities are principally traded or in such National
Market System (such prices may not be used, however, where an active
over-the-counter market in an exchange listed security better reflects current
market value). Unlisted or listed securities for which closing sale prices are
not available are valued at the mean between the latest bid and asked prices. An
option is valued at the last sale price as quoted on the principal exchange or
board of trade on which such option or contract is traded, or in the absence of
a sale, the mean between the last bid and asked price. Futures positions on
securities or currencies are generally valued at closing settlement prices. All
other securities are valued at fair value as determined in good faith by or
pursuant to procedures established by the Trustees.
Short term debt securities with a remaining maturity of 60 days or less are
valued at amortized cost. If securities were acquired with a remaining maturity
of more than 60 days, their amortized cost value will be based on their value on
the sixty-first day prior to maturity. Other fixed income and debt securities,
including listed securities and securities for which price quotations are
available, will normally be valued on the basis of valuations furnished by a
pricing service.
Each investor in the Portfolio, including the Fund, may add to or reduce its
investment in the Portfolio on each day the New York Stock Exchange (the
"Exchange") is open for trading as of the close of regular trading on the
Exchange. The value of each investor's interest in the Portfolio will be
determined by multiplying the net asset value of the Portfolio by the
percentage, effective for that day, which represents that investor's share of
the aggregate interests in the Portfolio. Any additions or withdrawals, which
are to be effected on that day, will then be effected. The investor's percentage
of the aggregate interests in the Portfolio will then be recomputed as the
percentage equal to the fraction (i) the numerator of which is the value of such
investor's investment in the Portfolio as of the close of regular trading on the
Exchange (normally 4:00 p.m., New York time), on such day plus or minus, as the
case may be, that amount of any additions to or withdrawals from the investor's
investment in the Portfolio effected on such day, and (ii) the denominator of
which is the aggregate net asset value of the Portfolio as of the close of such
trading on such day plus or minus, as the case may be, the amount of the net
additions to or withdrawals from the aggregate investment in the Portfolio by
all investors in the Portfolio. The percentage so determined will then be
applied to determine the value of the investor's interest in the Portfolio.
Generally, trading in the foreign securities owned by the Portfolio is
substantially completed each day at various times prior to the close of the
Exchange. The values of these securities used in determining the net asset value
of the Portfolio's shares are computed as of such times. Occasionally, events
affecting the value of foreign securities may occur between such times and the
close of the Exchange which will not be reflected in the computation of the
Portfolio's net asset value (unless the Portfolio deems that such events would
materially affect its net asset value, in which case an adjustment would be made
and reflected in such computation). Foreign securities and currency held by the
Portfolio will be valued in U.S. dollars; such values will be computed by the
custodian based on foreign currency exchange rate quotations supplied by Reuters
Information Service.
INVESTMENT PERFORMANCE
The average annual total return is determined by multiplying a hypothetical
initial purchase order of $1,000 by the average annual compound rate of return
(including capital appreciation/depreciation, and distributions paid and
reinvested) for the stated period and annualizing the result. The calculation
assumes that all distributions are reinvested at net asset value on the
reinvestment dates during the period. For information concerning the total
return of the Fund, see "Performance Information" in Part II of the Statement of
Additional Information.
The Fund's total return may be compared to the Consumer Price Index and
various domestic and foreign securities indices, for example: Standard & Poor's
Index of 400 Common Stocks, Standard & Poor's Index of 500 Common Stocks,
Merrill Lynch U.S. Treasury (15-year plus) Index, Lehman Brothers
Government/Corporate Bond Index, the Dow Jones Industrial Average, Morgan
Stanley Pacific (Excluding Japan) Hang Seng, and FT Pacific (Excluding Japan).
The Fund's total return and comparisons with these indices may be used in
advertisements and in information furnished to present or prospective
shareholders. The Fund's performance may differ from that of other investors in
the Portfolio, including the other investment companies.
Information used in advertisements and in materials furnished to present or
prospective shareholders may include statistics, data and performance studies
prepared by independent organizations (e.g. Ibbotson Associates, Standard &
Poor's Ratings Group, Merrill Lynch, Pierce, Fenner & Smith, Inc., Bloomberg,
L.P., Dow Jones & Company, Inc., and The Federal Reserve Board) or included in
various publications (e.g. The Wall Street Journal, Barron's and The Decade:
Wealth of Investments in U.S. Stocks, Bonds, Bills & Inflation) reflecting the
investment performance or return achieved by various classes and types of
investments (e.g. common stocks, small company stocks, long-term corporate
bonds, long-term government bonds, intermediate-term government bonds, U.S.
Treasury bills) over various periods of time. This information may be used to
illustrate the benefits of long-term investments in common stocks.
From time to time, information about the allocation and holdings of
investments in the Portfolio may be included in advertisements and other
material furnished to present and prospective shareholders. The Portfolio's
investment allocation on November 30, 1994, was as follows:
GREATER CHINA GROWTH PORTFOLIO
PERCENT OF
COMMON STOCKS INVESTMENTS
-----------
Hong Kong ................................ 38.2%
Singapore ................................ 12.3
Thailand ................................. 10.6
Malaysia ................................. 10.6
South Korea .............................. 9.2
Taiwan ................................... 4.7
China .................................... 3.1
Philippines .............................. 8.4
Indonesia ................................ 2.4
United States ............................ 0.5
------
TOTAL ........................................ 100.0%
The Portfolio's ten largest common stock holdings on November 30, 1994,
were:
COMPANY SHARES VALUE
------- ------ -----
Hutchinson Whampoa Hong Kong ................ 4,673,000 $18,610,690
HSBC Holdings PLC ........................... 1,632,600 18,049,209
Siam Cement ................................. 318,400 17,664,545
Siam Commercial Bank ........................ 1,891,300 17,362,134
Yukong Ltd. ................................. 285,073 16,467,213
Land & General Berhard ...................... 3,562,000 16,432,218
Wharf (Holdings) Ltd. ....................... 4,620,000 16,069,746
Jardine Matheson HK Registry ................ 2,299,600 15,685,112
Cheung Kong ................................. 3,680,000 15,322,048
Hopewell Holdings ........................... 17,678,000 15,314,451
From time to time, evaluations of the Fund's performance made by independent
sources, such as Lipper Analytical Services, Inc., CDA/Weisenberger and
Morningstar, Inc. may be used in advertisements and in information furnished to
present or prospective shareholders. The Fund's performance may differ from that
of other investors in the Portfolio, including the other investment companies.
Information used in advertisements and materials furnished to present or
prospective shareholders may include examples and performance illustrations of
the cumulative change in various levels of investments in the Fund for various
periods of time and at various prices per share. Such examples and illustrations
may assume that all dividends and capital gain distributions are reinvested in
additional shares and may also show separately the value of shares acquired from
such reinvestments as well as the total value of all shares acquired for such
investments and reinvestments. Such information may also include statements or
illustrations relating to the appropriateness of types of securities and/or
mutual funds which may be employed to meet specific financial goals, such as (1)
funding retirement, (2) paying for children's education, and (3) financially
supporting aging parents. These three financial goals may be referred to in such
advertisements or materials as the "Triple Squeeze".
For additional information, charts and illustrations relating to the Fund's
investment performance, see "Performance Information" in Part II of this
Statement of Additional Information.
TAXES
See also "Distributions and Taxes" in the Fund's current prospectus.
The Fund, as a series of a Massachusetts business trust, will be treated as
a separate entity for accounting and tax purposes. The Fund has elected to be
treated, has qualified, and intends to continue to qualify each year as a
regulated investment company under the Internal Revenue Code (the "Code").
Accordingly, the Fund intends to satisfy certain requirements relating to
sources of its income and diversification of its assets and to distribute all of
its net investment income and net realized capital gains in accordance with the
timing requirements imposed by the Code, so as to avoid any Federal income or
excise tax on the Fund. Because the Fund invests all or substantially all of its
assets in the Portfolio, the Portfolio normally must satisfy the applicable
source of income and diversification requirements in order for the Fund to
satisfy them. The Portfolio will allocate at least annually among its investors,
including the Fund, each investor's distributive share of the Portfolio's net
investment income, net realized capital gains, and any other items of income,
gain, loss, deduction or credit. The Portfolio will make allocations to the Fund
in accordance with the Code and applicable regulations, rulings and revenue
procedures and will make moneys available for withdrawal at appropriate times
and in sufficient amounts to enable the Fund to satisfy the tax distribution
requirements that apply to the Fund and that must be satisfied in order to avoid
Federal income and/or excise tax on the Fund. For purposes of applying the
requirements of the Code regarding qualification as a regulated investment
company, the Fund will be deemed (i) to own its proportionate share of each of
the assets of the Portfolio and (ii) to be entitled to the gross income of the
Portfolio attributable to such share.
In order to avoid Federal excise tax, the Code requires that the Fund
distribute by December 31 of each calendar year at least 98% of its ordinary
income (not including tax-exempt income) for such year, at least 98% of the
excess of its realized capital gains over its realized capital losses, generally
computed on the basis of the one-year period ending on October 31 of such year,
after reduction by any available capital loss carryforwards, and 100% of any
income and capital gains from the prior year (as previously computed) that was
not paid out during such year and on which the Fund paid no Federal income tax.
Under current law, provided that the Fund qualifies as a regulated investment
company for Federal income tax purposes and the Portfolio is treated as a
partnership for Massachusetts and Federal tax purposes, neither the Fund nor the
Portfolio is liable for any income, corporate excise or franchise tax in the
Commonwealth of Massachusetts.
Foreign exchange gains and losses realized by the Portfolio and allocated to
the Fund in connection with the Portfolio's investments in foreign securities
and certain foreign currency related options, futures or forward contracts or
foreign currency may be treated as ordinary income and losses under special tax
rules. Certain options, futures or forward contracts of the Portfolio may be
required to be marked to market (i.e., treated as if closed out) on the last day
of each taxable year, and any gain or loss realized with respect to these
contracts may be required to be treated as 60% long-term and 40% short-term gain
or loss. Positions of the Portfolio in securities and offsetting options,
futures or forward contracts may be treated as "straddles" and be subject to
other special rules that may, upon allocation of the Portfolio's income, gain or
loss to the Fund, affect the amount, timing and character of the Fund's
distributions to shareholders. Certain uses of foreign currency and foreign
currency derivatives such as options, futures, forward contracts and swaps and
investment by the Portfolio in certain "passive foreign investment companies"
may be limited or a tax election may be made, if available, in order to preserve
the Fund's qualification as a regulated investment company or avoid imposition
of a tax on the Fund.
The Portfolio anticipates that it will be subject to foreign taxes on its
income (possibly including, in some cases, capital gains) from foreign
securities. Tax conventions between certain countries and the U.S. may reduce or
eliminate such taxes. If more than 50% of the Fund's total assets, taking into
account its allocable share of the Portfolio's total assets, at the close of any
taxable year of the Fund consists of stock or securities of foreign
corporations, the Fund may file an election with the Internal Revenue Service
pursuant to which shareholders of the Fund will be required to (i) include in
ordinary gross income (in addition to taxable dividends actually received) their
pro rata shares of foreign income taxes paid by the Portfolio and allocated to
the Fund even though not actually received, and (ii) treat such respective pro
rata portions as foreign income taxes paid by them. Shareholders may then deduct
such pro rata portions of foreign income taxes in computing their taxable
incomes, or, alternatively, use them as foreign tax credits, subject to
applicable limitations, against their U.S. income taxes. Shareholders who do not
itemize deductions for Federal income tax purposes will not, however, be able to
deduct their pro rata portion of foreign taxes deemed paid by the Fund, although
such shareholders will be required to include their shares of such taxes in
gross income. Shareholders who claim a foreign tax credit for such foreign taxes
may be required to treat a portion of dividends received from the Fund as a
separate category of income for purposes of computing the limitations on the
foreign tax credit. Tax-exempt shareholders will ordinarily not benefit from
this election. Each year that the Fund files the election described above, its
shareholders will be notified of the amount of (i) each shareholder's pro rata
share of foreign income taxes paid by the Portfolio and allocated to the Fund
and (ii) the portion of Fund dividends which represents income from each foreign
country. If the Fund does not make this election, it may deduct its allocated
share of such taxes in computing its investment company taxable income.
The Portfolio will allocate at least annually to the Fund and its other
investors their respective distributive shares of any net investment income and
net capital gains which have been recognized for Federal income tax purposes
(including unrealized gains at the end of the Portfolio's fiscal year on certain
options and futures transactions that are required to be marked-to- market).
Such amounts will be distributed by the Fund to its shareholders in cash or
additional shares, as they elect. Shareholders of the Fund will be advised of
the nature of the distributions.
Distributions by the Fund of the excess of net long-term capital gains over
net short-term capital losses (including any capital losses carried forward from
prior years) earned by the Portfolio and allocated to the Fund are taxable to
shareholders of the Fund as long-term capital gains, whether received in cash or
in additional shares and regardless of the length of time their shares have been
held. Certain distributions declared in October, November or December and paid
the following January will be taxed to shareholders as if received on December
31 of the year in which they are declared.
Any loss realized upon the redemption or exchange of shares with a tax
holding period of 6 months or less will be treated as a long-term capital loss
to the extent of any distribution of net long-term capital gains with respect to
such shares. All or a portion of a loss realized upon taxable disposition of
Fund shares may be disallowed under "wash sale" rules if other Fund shares are
purchased (whether through reinvestment of dividends or otherwise) within 30
days before or after the disposition.
Special tax rules apply to Individual Retirement Accounts ("IRAs") and
shareholders investing through IRAs, should consult their tax advisers for more
information. An individual may make an aggregate annual contribution to an IRA
in an amount equal to the lesser of his or her earned income or $2,000 ($2,250
for an individual and his or her nonearning spouse). The deductibility of such
contributions may be restricted or eliminated for particular shareholders.
The foregoing discussion does not describe many of the tax rules applicable
to IRAs nor does it address the special tax rules applicable to certain other
classes of investors, such as other retirement plans, tax-exempt entities,
insurance companies and financial institutions. Shareholders should consult
their own tax advisers with respect to these or other special tax rules that may
apply in their particular situations, as well as the state, local or foreign tax
consequences of investing in the Fund.
PORTFOLIO SECURITY TRANSACTIONS
Decisions concerning the execution of portfolio security transactions by the
Portfolio, including the selection of the market and the broker-dealer firm, are
made by the Adviser.
The Adviser places the portfolio security transactions of the Portfolio and
of certain other accounts managed by the Adviser for execution with many
broker-dealer firms. The Adviser uses its best efforts to obtain execution of
portfolio transactions at prices which are advantageous to the Portfolio and
(when a disclosed commission is being charged) at reasonably competitive
commission rates. In seeking such execution, the Adviser will use its best
judgment in evaluating the terms of a transaction, and will give consideration
to various relevant factors, including without limitation the size and type of
the transaction, the general execution and operational capabilities of the
broker-dealer, the nature and character of the market for the security, the
confidentiality, speed and certainty of effective execution required for the
transaction, the reputation, reliability, experience and financial condition of
the broker-dealer, the value and quality of services rendered by the
broker-dealer in other transactions, and the reasonableness of the commission,
if any. Transactions on stock exchanges and other agency transactions involve
the payment by the Portfolio of negotiated brokerage commissions. Such
commissions vary among different broker-dealer firms, and a particular
broker-dealer may charge different commissions according to such factors as the
difficulty and size of the transaction and the volume of business done with such
broker-dealer. Transactions in foreign securities usually involve the payment of
fixed brokerage commissions, which are generally higher than those in the United
States. There is generally no stated commission in the case of securities traded
in the over-the-counter markets, but the price paid or received by the Portfolio
usually includes an undisclosed dealer markup or markdown. In an underwritten
offering the price paid by the Portfolio includes a disclosed fixed commission
or discount retained by the underwriter or dealer. Although commissions paid on
portfolio transactions will, in the judgment of the Adviser, be reasonable in
relation to the value of the services provided, commissions exceeding those
which another firm might charge may be paid to broker-dealers who were selected
to execute transactions on behalf of the Portfolio and the Adviser's other
clients in part for providing brokerage and research services to the Adviser.
As authorized in Section 28(e) of the Securities Exchange Act of 1934, a
broker or dealer who executes a portfolio transaction on behalf of the Portfolio
may receive a commission which is in excess of the amount of commission another
broker or dealer would have charged for effecting that transaction if the
Adviser determines in good faith that such commission was reasonable in relation
to the value of the brokerage and research services provided. This determination
may be made on the basis of either that particular transaction or on the basis
of the overall responsibilities which the Adviser and its affiliates have for
accounts over which they exercise investment discretion. In making any such
determination, the Adviser will not attempt to place a specific dollar value on
the brokerage and research services provided or to determine what portion of the
commission should be related to such services. Brokerage and research services
may include advice as to the value of securities, the advisability of investing
in, purchasing, or selling securities, and the availability of securities or
purchasers or sellers of securities; furnishing analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts; and effecting securities transactions and
performing functions incidental thereto (such as clearance and settlement); and
the "Research Services" referred to in the next paragraph.
It is a common practice in the investment advisory industry for the advisers
of investment companies, institutions and other investors to receive research,
statistical and quotation services, data, information and other services,
products and materials which assist such advisers in the performance of their
investment responsibilities ("Research Services") from broker-dealers which
execute portfolio transactions for the clients of such advisers and from third
parties with which such broker-dealers have arrangements. Consistent with this
practice, the Adviser may receive Research Services from broker-dealer firms
with which the Adviser places the portfolio transactions of the Portfolio and
from third parties with which these broker-dealers have arrangements. These
Research Services may include such matters as general economic and market
reviews, industry and company reviews, evaluations of securities and portfolio
strategies and transactions, recommendations as to the purchase and sale of
securities and other portfolio transactions, financial, industry and trade
publications, news and information services, pricing and quotation equipment and
services, and research oriented computer hardware, software, data bases and
services. Any particular Research Service obtained through a broker-dealer may
be used by the Adviser in connection with client accounts other than those
accounts which pay commissions to such broker-dealer. Any such Research Service
may be broadly useful and of value to the Adviser in rendering investment
advisory services to all or a significant portion of its clients, or may be
relevant and useful for the management of only one client's account or of a few
clients' accounts, or may be useful for the management of merely a segment of
certain clients' accounts, regardless of whether any such account or accounts
paid commissions to the broker-dealer through which such Research Service was
obtained. The advisory fee paid by the Portfolio is not reduced because the
Adviser receives such Research Services. The Adviser evaluates the nature and
quality of the various Research Services obtained through broker-dealer firms
and attempts to allocate sufficient commissions to such firms to ensure the
continued receipt of Research Services which the Adviser believes are useful or
of value to it in rendering investment advisory services to its clients.
Subject to the requirement that the Adviser shall use its best efforts to
seek to execute portfolio security transactions of the Portfolio at advantageous
prices and at reasonably competitive commission rates or spreads, the Adviser is
authorized to consider as a factor in the selection of any broker-dealer firm
with whom Portfolio orders may be placed the fact that such firm has sold or is
selling shares of the Fund or of other investment companies sponsored by Eaton
Vance. This policy is not inconsistent with a rule of the National Association
of Securities Dealers, Inc., which rule provides that no firm which is a member
of the Association shall favor or disfavor the distribution of shares of any
particular investment company or group of investment companies on the basis of
brokerage commissions received or expected by such firm from any source.
Securities considered as investments for the Portfolio may also be
appropriate for other investment accounts managed by the Adviser or its
affiliates. The Adviser will attempt to allocate equitably portfolio
transactions among the Portfolio and the portfolios of its other investment
accounts whenever decisions are made to purchase or sell securities by the
Portfolio and one or more of such other accounts simultaneously. In making such
allocations, the main factors to be considered are the respective investment
objectives of the Portfolio and such other accounts, the relative size of
portfolio holdings of the same or comparable securities, the availability of
cash for investment by the Portfolio and such accounts, the size of investment
commitments generally held by the Portfolio and such accounts and the opinions
of the persons responsible for recommending investments to the Portfolio and
such accounts. While this procedure could have a detrimental effect on the price
or amount of the securities available to the Portfolio from time to time, it is
the opinion of the Trustees of the Portfolio that the benefits available from
the Adviser's organization outweigh any disadvantage that may arise from
exposure to simultaneous transactions. For the brokerage commissions paid by the
Portfolio on portfolio transactions, see "Fees and Expenses" in Part II of this
Statement of Additional Information.
OTHER INFORMATION
On August 18, 1992, the Trust changed its name from Eaton Vance Growth Fund
to Eaton Vance Growth Trust. The Trust is organized as a business trust under
laws of the Commonwealth of Massachusetts under a Declaration of Trust dated May
25, 1989, as amended. The Trust is the successor to a corporation which
commenced its investment operations in 1954.
Eaton Vance, pursuant to its agreement with the Trust, controls the use of
the words "Eaton Vance" in the Trust's name and may use the words "Eaton Vance"
in other connections and for other purposes.
The Trust's Declaration of Trust may be amended by the Trustees when
authorized by vote of a majority of the outstanding voting securities of the
Trust. The Trustees may also amend the Declaration of Trust without the vote or
consent of shareholders to change the name of the Trust or any series or to make
such other changes as do not have a materially adverse effect on the rights or
interests of shareholders or if they deem it necessary to conform the
Declaration to the requirements of applicable Federal laws or regulations. The
Trust's By-laws provide that the Trust will indemnify its Trustees and officers
against liabilities and expenses incurred in connection with any litigation or
proceeding in which they may be involved because of their offices with the
Trust. However, no indemnification will be provided to any Trustee or officer
for any liability to the Trust or its shareholders by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
Under Massachusetts law, if certain conditions prevail, shareholders of a
Massachusetts business trust (such as the Trust) could be deemed to have
personal liability for the obligations of the trust. Numerous investment
companies registered under the 1940 Act have been formed as Massachusetts
business trusts, and management is not aware of an instance where such liability
has been imposed. The Trust's Declaration of Trust contains an express
disclaimer of liability on the part of the Trust shareholders and the Trust's
By-laws provide that the Trust shall assume the defense on behalf of any Trust
shareholder. Moreover, the Trust's By-laws also provide for indemnification out
of the property of the Trust of any shareholder held personally liable solely by
reason of being or having been a shareholder for all loss or expense arising
from such liability. The assets directly held by the Trust are not registered
under the Securities Act of 1933 and are therefore not readily marketable. The
assets held by the Portfolio and indirectly held by the Trust are readily
marketable and will ordinarily substantially exceed the Trust's liabilities. In
light of the nature of the Trust's business and the nature of its assets,
management believes that the possibility of the Trust's liabilities exceeding
its assets, and therefore the shareholder's risk of personal liability, is
extremely remote.
As permitted by Massachusetts law, there will normally be no meetings of
shareholders for the purpose of electing Trustees unless and until such time as
less than a majority of the Trustees of the Trust holding office have been
elected by shareholders. In such an event the Trustees then in office will call
a shareholder's meeting for the election of Trustees. Except for the foregoing
circumstances and unless removed by action of the shareholders in accordance
with the Trust's By-Laws, the Trustees shall continue to hold office and may
appoint successor Trustees.
The Trust's By-Laws provide that no person shall serve a Trustee if
shareholders holding two-thirds of the outstanding shares have removed him from
that office either by a written declaration filed with the Trust's custodian or
by votes cast at a meeting called for that purpose. The By-Laws also provide
that the Trustees shall promptly call a meeting of shareholders for the purpose
of voting upon a question of removal of any such Trustee or Trustees when
requested so to do by the record holders of not less than 10 percentum of the
outstanding shares. The By-Laws further provide that under certain circumstances
the shareholders may call a meeting to remove a Trustee and that the Trust is
required to provide assistance in communicating with shareholders about such a
meeting.
In accordance with the Declaration of Trust of the Portfolio, there will
normally be no meetings of the investors for the purpose of electing Trustees
unless and until such time as less than a majority of the Trustees holding
office have been elected by investors. In such an event the Trustees of the
Portfolio then in office will call an investors' meeting for the election of
Trustees. Except for the foregoing circumstances and unless removed by action of
the investors in accordance with the Portfolio's Declaration of Trust, the
Trustees shall continue to hold office and may appoint successor Trustees.
The Declaration of Trust of the Portfolio provides that no person shall
serve as a Trustee if investors holding two-thirds of the outstanding interests
have removed him from that office either by a written declaration filed with the
Portfolio's custodian or by votes cast at a meeting called for that purpose. The
Declaration of Trust further provides that under certain circumstances the
investors may call a meeting to remove a Trustee and that the Portfolio is
required to provide assistance in communicating with investors about such a
meeting.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Deloitte & Touche LLP, 125 Summer Street, Boston, Massachusetts, are the
independent certified public accountants of the Fund and the Portfolio,
providing audit services, tax return preparation, and assistance and
consultation with respect to the preparation of filings with the SEC.
For the financial statements of the Fund and the Portfolio see "Financial
Statements" in Part II of this Statement of Additional Information.
<PAGE>
APPENDIX A
THE SECURITIES MARKETS IN CHINA AND HONG KONG
The information set forth in this Statement of Additional Information
("SAI") regarding China, its economy and the Stock Exchange of Hong Kong Ltd.
has been extracted from various government and private publications. The Fund
and the Trust's Board of Trustees make no representation as to the accuracy of
such information, nor has the Fund or the Trust's Board of Trustees attempted to
verify it.
In this SAI, unless otherwise specified, all references to "U.S. dollars,"
"U.S.$" or "$" are to United States dollars, to "RMB" or "renminbi" are to
Chinese renminbi and to "H.K. dollars" or "H.K.$" are to Hong Kong dollars. On
December 15, 1994, the exchange rate as published in The Asian Wall Street
Journal was 8.5113 renminbi = U.S. $1.00 and 7.7379 H.K. dollars = U.S. $1.00
and, unless otherwise specified, all renminbi and Hong Kong dollars have been
so converted at such exchange rates. No representation is made that the
renminbi, H.K. dollar or U.S. dollar amounts in this SAI could have been or
could be converted into U.S. dollars, renminbi or H.K. dollars, as the case
may be, at any particular rate or at all. See "Appendix B: People's Republic
of China--Exchange Rate" for information regarding historical rates of
exchange between the Chinese renminbi and the U.S. dollar.
HISTORY OF THE CHINESE SECURITIES MARKETS
The first securities exchange in China, the "Shanghai Gufen Gongsou"
(Shanghai Stock Confederation), was organized in the 1890s in Shanghai. The
first officially recognized exchange was established in 1914 in Shanghai, which
focused principally on the trading of government bonds. Additional exchanges
were opened in Beijing in 1918 and in Tianjin in 1921. By the period following
World War II, Shanghai had become one of the major financial centers in Asia.
However, when the Chinese communist party assumed power in 1949, China's
securities markets were closed and all securities were abolished.
The Beijing and Tianjin securities exchanges reopened in 1950 and 1949,
respectively, but were closed again in 1952. Securities markets were nonexistent
in China until the early 1980s when they reemerged in various cities following
initiation of China's economic reform program in 1978. There currently are two
officially recognized exchanges in China, the Shanghai Securities Exchange
("SHSE"), which commenced trading on December 19, 1990, and the Shenzhen Stock
Exchange ("SZSE"), which commenced trading on July 3, 1991. A number of
organized securities markets exist in other cities in China, but these are
primarily over-the-counter markets. Initially, shares on both exchanges were
made available only to Chinese investors and were traded only in RMB, thus
avoiding the issues of repatriation of profits and the remittance of foreign
currency that would arise with the participation of foreign investors in the
market. Recently, however, these issues have been addressed in legislation
concerning a special class of shares, commonly referred to as "B" shares, which
are denominated in RMB and are offered exclusively for investment by foreign
investors and such other investors as the authorities may approve. The first
issues of "B" shares were listed and traded on the SHSE on February 21, 1992,
and on the SZSE on February 28, 1992.
REGULATION AND OPERATION OF THE CHINESE SECURITIES MARKETS
Prior to the establishment of the SHSE and SZSE, trading of securities in
China was conducted in over-the-counter ("OTC") markets in a number of major
cities, including Shanghai, Chongqing, Wuhan, Guangzhou and Shenyang. The OTC
markets have no fixed location for trading; transactions are negotiated by
telephone or similar means. The SHSE and SZSE confine trading of listed shares
to the two exchanges, while unlisted stocks continue to be traded in the OTC
markets. In addition to the two exchanges and the OTC markets, a nationwide
computer system for trading of treasury bills and bonds, the Securities Trading
Automated Quotations System ("STAQ"), commenced operations on December 5, 1990
and currently links 54 licensed trading corporations in 16 cities.
Currently, trading of treasury bills constitutes the majority of the
activity in the Chinese securities markets, while trading of equity securities
constitutes only a small portion of the trading activity. The OTC markets trade
only treasury bills and equity securities that are not listed on the SHSE or the
SZSE. The SHSE and the SZSE trade both treasury bills and shares of listed
companies. Shares are divided into four types based on the type of entity
holding them: (1) State shares held by designated State entities on behalf of
the State; (2) shares held by Chinese corporations; (3) shares held by Chinese
individuals; and (4) shares held by foreign investors. The first three
categories are generally referred to as "A" shares. The fourth category is
referred to as "B" shares. State shares cannot be sold or transferred without
the approval of the State asset administrative departments. "A" shares are
quoted and traded in renminbi, while "B" shares are quoted in renminbi but
traded in foreign currencies (currently Hong Kong dollars and U.S. dollars).
China has not yet promulgated a national securities law. Although the State
Council has promulgated Interim Regulations for Administration of Enterprise
Bonds, these regulations apply only to bonds issued by State-owned enterprises.
At the local level, however, many cities and provinces have promulgated
securities rules and regulations.
The People's Bank of China (the "PBOC"), China's central bank, is authorized
to regulate stocks, bonds and other negotiable instruments and administer
China's financial markets, and it exercises this authority through its local
branches. The State Commission for Restructing the Economic System has, in
practice, assumed the principal role of formulating policies for the development
of the securities markets. In addition, the Stock Exchange Executive Council, a
nongovernmental organization, plays an important advisory role in the
formulation of a regulatory framework for the national securities markets.
CORPORATE LAW IN CHINA
There is no national legislative framework in China providing for
regulations governing joint stock companies. However, there have been in force
in Shenzhen since February 1992 the Provisional Rules for Joint Stock Companies
in Shenzhen (the "Shenzhen Provisional Rules"). The Shenzhen Provisional Rules
include provisions governing the formation in Shenzhen of joint stock companies,
issuance of shares and debentures, ownership and dealings in shares, reduction
of capital, shareholders' rights and obligations, meetings and resolutions,
directors, financial accounting, distribution and liquidation. More recently,
the Provisional Regulations for Shanghai Municipality Joint Stock Limited
Companies came into force on June 1, 1992, covering broadly the same areas as
the Shenzhen Provisional Rules.
SHENZHEN STOCK EXCHANGE
The SZSE was established in April 1991, and officially opened in July 1991.
As of December 15, 1994, 114 companies had shares listed on the SZSE, of which
22 also had "B" shares listed. Prices of "A" shares were subject to a price
fluctuation limit, but all such limits have been removed except for the Shenzhen
Champaign Company. The Shenzhen authorities have established a regulatory fund,
funded from proceeds of new issues of "A" shares, to buy and sell shares on the
open market in an attempt to minimize fluctuations of the prices of "A" shares.
In the issuance of "A" shares by Shenzhen Konka Electronics, the first case in
which this regulatory fund was introduced, an amount equal to 5% of the
aggregate "A" share premium was required to be paid into the fund. It is
expected that a similar percentage will be required for future new issues.
The following table provides selected information regarding "B" shares of
the companies listed on the SZSE as of December 15, 1994.
INVESTMENT STATISTICS FOR "B" SHARES OF COMPANIES LISTED ON
THE SHENZHEN STOCK EXCHANGE*
<TABLE>
<CAPTION>
"B" SHARES IN 12/15/94 MARKET 12/15/94
ISSUE PRICE CAPITALIZATION TURNOVER
COMPANY (MILLIONS) (HK$) (HK$ MILLIONS) (HK$ MILLIONS)
------- ---------- ----- -------------- --------------
<S> <C> <C> <C> <C>
China Bicycles ...................... 26 1.60 41 0.00
China Container ..................... 243 4.00 2 0.05
Chiwan Wharf ........................ 45 7.90 356 0.00
Flyte ............................... 44 2.86 126 0.01
Gintian ............................. 23 3.42 77 0.23
Health Water ........................ 52 3.70 131 0.00
Huafa ............................... 22 2.50 55 0.00
Konke ............................... 77 1.01 78 0.00
Lionde .............................. 118 5.20 615 0.06
Lizhu ............................... 36 2.48 89 0.00
Nanshan Power ....................... 79 3.70 293 1.26
SEZ Real Estate ..................... 81 3.00 244 0.31
Shekou Port ......................... 100 2.50 250 0.01
Shenbao ............................. 100 4.50 450 0.52
Southern Glass ...................... 20 1.51 30 0.00
SZ Petrochem ........................ 84 8.20 689 0.02
SZ Properties ....................... 27 3.37 92 0.00
SZ Textile .......................... 55 2.96 161 0.02
Tellus .............................. 25 3.30 83 0.00
Tsann Kuan .......................... 24 2.56 61 0.00
Vanke ............................... 148 3.10 459 0.00
Victor Onward ....................... 56 4.50 252 0.02
Zhonghao ............................ 63 1.80 114 0.07
Market .............................. 22 1.70 37 0.03
----- ----
TOTAL OF "B" SHARES ................................................ 4,841 2.60
===== ====
</TABLE>
---------
Source: Lloyd George Management
*On December 15, 1994 7.7379 Hong Kong dollars = U.S. $1.00.
Market Index. The performance of the "B" shares on SZSE is measured by the
CLSA Shenzhen B Index. This Index stood at 1,442.40 on December 31, 1993 and
closed at 933.4 on December 15, 1994.
Membership. The SZSE operates on a membership system. Membership is
restricted to securities institutions approved by the PBOC. As of March 31,
1992, there were 15 members admitted to the SZSE, consisting of banks, finance
companies, securities companies, insurance companies and trust and investment
companies. All are either Shenzhen local companies or Shenzhen branches of
national companies. Securities institutions in Shenzhen may join the Joint
Meeting of Shenzhen Securities Institutions, whether or not they are members of
the SZSE. This self-governing organization was formed in August of 1990 to
facilitate communication among securities institutions and to strengthen self-
discipline among members.
Regulation. The SZSE is regulated by the PBOC, Shenzhen Special Economic
Zone Branch and the local government in Shenzhen. The Shenzhen Municipal
People's Government promulgated the Provisional Measures of Shenzhen
Municipality for Administration of the Issue and Trading of Shares (the "SZSE
Measures"), which became effective on June 15, 1991 and govern the establishment
of the SZSE and the issuance and trading of shares in Shenzhen. The issuance and
trading of "B" shares in Shenzhen are governed by the Provisional Measures of
Shenzhen Municipality for Administration of Special Renminbi-denominated Shares,
which became effective on December 16, 1991. These measures are supplemented by
a set of Detailed Implementing Rules which also became effective on December 16,
1991. In addition, Provisional Rules of Shenzhen Municipality for Registration
of Special Renminbi-denominated Shares were promulgated by the Shenzhen
Securities Registrars Co., Ltd. on January 29, 1992, and Operating Rules of the
Shenzhen Securities Exchange for Trading and Clearing of "B" shares were
promulgated by the SZSE on January 31, 1992. These rules provide detailed
regulations relating to the issuance, trading, settlement and registration of
"B" shares.
New Issues and Listing Criteria. Shares of local Shenzhen companies may
either be listed on the SZSE or traded on the OTC markets. In accordance with
the SZSE Measures and the Shenzhen Provisional Rules, an issuer must meet the
following requirements when making a public share issue: (i) it must have
obtained prior approval from the relevant authorities to be and have been
established as or converted into a joint stock company; (ii) its production and
operations must comply with Shenzhen's industrial policies; (iii) it must have a
good financial and business record and net assets of at least RMB 10 million;
(iv) for the year prior to applying for authorization to issue shares, the value
of its net tangible assets must have accounted for no less than 25% of its gross
tangible assets; (v) its promoters must subscribe for at least RMB 5 million
worth of shares, representing no less than 35% of its total share capital; (vi)
the number of shares to be issued to the public, i.e., investors other than
specially designated individuals, must be equal to at least 25% of its total
share capital; (vii) it must have a minimum of 800 shareholders following the
issue; (viii) within three years prior to the proposed issue, neither the
company nor its promoters may have any record of illegal activities or
activities counter to the public interest; and (ix) the shares subscribed by the
employees of the company cannot exceed 10% of the shares issued to the public
and such shares are not assignable for a period of one year; thereafter,
assignment of such shares may not exceed 10% of the shareholder's holding during
any half year period.
All public share issues must be handled by securities distributors. Issues
of over RMB 30 million must be distributed by a syndicate made up of at least
three members. Issues of over RMB 50 million must be distributed by a syndicate
made up of at least five members.
In order to qualify for listing on the SZSE, companies must meet additional
requirements which are more stringent than those for public share issues. Such
additional requirements include: (i) the total par value of shares of common
stock actually issued must be more than RMB 20 million; (ii) there must have
been a minimum return on capital of more than 10% in the year preceding listing
and more than 8% over the two years prior to the year preceding the listing;
(iii) the number of registered shareholders must exceed 1,000, and the total
number of shares held by shareholders holding less than 0.5% of the company's
shares must account for more than 25% of the total paid-up share capital; (iv)
the company must have a continuous record of making profits and must have a
business record of more than three years; and (v) for the year prior to applying
for listing, the value of the net tangible assets must have accounted for more
than 38% of its gross tangible assets and there must be no accumulated losses.
Application for a public share issue must be made to the PBOC, Shenzhen
Special Economic Zone Branch. Application for listing on the SZSE must be made
to the PBOC, Shenzhen Special Economic Zone Branch and the SZSE. A company's
prospectus for initial share issue must be published in a newspaper or other
publication approved by the PBOC, Shenzhen Special Economic Zone Branch, ten
days prior to the scheduled issuance date, which must include: (i) the name and
domicile of the company; (ii) the scope of the company's production and
business; (iii) resumes of the promoters or directors and the managers; (iv) the
reason for and purpose of the share issue; (v) the total amount, class(es) and
number of shares to be issued, and the par value and selling price of each
share; (vi) the method of issue; (vii) the investors to whom the issue is
marketed; (viii) the name(s) of the securities distributor(s), the total value
of the shares to be distributed and the method of distribution; (ix) details of
the company's history and conditions for future development, its main business
and financial situation, and the total amount and composition of its assets and
liabilities; and (x) a certified profit forecast.
A company applying for a further issue of shares must satisfy the relevant
authorities that the following conditions have been met: (i) its business record
since the time of the last issue must have been good, and its utilization of
capital must be above average in its line of business; (ii) not less than one
year must have elapsed since its last share issue; (iii) the amount of shares it
is applying to issue must not exceed the amount of its existing shares; (iv) its
application of the proceeds of the issue must conform to the industrial policies
of Shenzhen; and (v) the issue will be beneficial to the healthy development of
the Shenzhen securities markets. Applications for approval to issue shares for
the purpose of attracting foreign investment are not bound by (ii) and (iii).
New Issues Criteria for "B" Shares in Shenzhen. A company wishing to issue
"B" shares in Shenzhen must comply with the following requirements: (i) it must
fulfill the issue requirements specified in the SZSE Measures; (ii) it must
obtain written consent from the relevant department of the State to utilize
foreign investment or to transform into a foreign investment enterprise, and its
use of proceeds from the "B" share issue must conform to the laws and
regulations of the State concerning the administration of foreign investment;
(iii) it must have a stable, adequate source of foreign exchange revenue
(sufficient to pay out the "B" share dividends and bonuses for each year); (iv)
the percentage of "B" shares (including promoters' shareholdings) to the total
shares of the company must not exceed the upper limit set by the PBOC, Shenzhen
Special Economic Zone Branch; and (v) the company must have a business record of
three years or more, or have received special permission from the PBOC, Shenzhen
Special Economic Zone Branch. (Companies in high technology industries or other
special industries are not bound by this restriction.)
Subscription for "B" shares is carried out through authorized securities
institutions within Shenzhen Municipality. These institutions may arrange for
the participation of overseas securities institutions approved by the PBOC,
Shenzhen Special Economic Zone Branch. The holding by any foreign investor of
"B" shares of a joint stock company accounting for more than 5% of such
company's total shares must be reported to the PBOC, Shenzhen Special Economic
Zone Branch. Domestic securities institutions are not allowed to trade "B"
shares for their own accounts unless approved by the PBOC, Shenzhen Special
Economic Zone Branch.
The issuance of "B" shares through a syndicate underwriting on behalf of the
issuer must be managed by at least one authorized domestic securities
institution. The issue price of "B" shares may not be lower than the issue price
of "A" shares of the same company. During the distribution period, distributors
must sell the shares at the same predetermined price.
An issuer may request private placement of its "B" shares with institutions
outside China with which it has close business connections, provided that such
institutions are approved by the PBOC, Shenzhen Special Economic Zone Branch and
the number of shares privately placed with them does not exceed 15% of the total
number of "B" shares in such issue.
Reporting Requirements. Within 60 days following the end of each half of the
fiscal year, an issuer is required to submit an interim financial report,
reviewed and approved by an accounting firm, or its annual financial report,
audited by an accounting firm, to the PBOC, Shenzhen Special Economic Zone
Branch and to publish the same in a newspaper or other publication approved by
the PBOC, Shenzhen Special Economic Zone Branch. Such financial reports must
also be submitted to the SZSE if the issuer's securities are already listed on
the SZSE.
Insider Trading Restrictions. All persons are prohibited from using
insider information when engaging in the purchase or sale of securities.
THE SHANGHAI SECURITIES EXCHANGE
The SHSE was established on November 26, 1990 and officially opened on
December 19, 1990. Prior to the establishment of SHSE, an active OTC market in
local stocks and bonds existed in Shanghai.
As of December 15, 1994, 171 companies had shares listed on the SHSE of
which 32 also had "B" shares listed. Shares listed on the SHSE currently are not
subject to any limit on daily price fluctuations.
The following table provides selected information regarding the "B" shares
of the companies listed on the SHSE as of December 15, 1994.
INVESTMENT STATISTICS FOR "B" SHARES OF COMPANIES LISTED ON
THE SHANGHAI SECURITIES EXCHANGE*
<TABLE>
<CAPTION>
"B" SHARES IN 12/15/94 MARKET 12/15/94
ISSUE PRICE CAPITALIZATION TURNOVER
COMPANY (MILLIONS) (HK$) (HK$ MILLIONS) (HK$ MILLIONS)
------- ---------- ----- -------------- --------------
<S> <C> <C> <C> <C>
Auto Instrument ..................... 70 0.198 14 0.02
China TM ............................ 109 0.152 17 0.03
Chior Alkali ........................ 336 0.246 83 0.12
Dajiang ............................. 252 0.480 121 0.00
Dazhong ............................. 60 1.000 60 0.00
Diesel Engine ....................... 110 0.800 88 0.16
Erfangji ............................ 175 0.198 35 0.07
First Pencil ........................ 55 0.336 18 0.00
Forever Bicycle ..................... 60 0.192 12 0.08
Friendship Store .................... 40 0.390 16 0.00
Haixin .............................. 84 0.650 55 0.00
Hero ................................ 35 0.292 10 0.01
Hua Xin Cement ...................... 87 0.186 16 0.05
Jin Jiang Tower ..................... 92 0.378 35 0.28
Jinqiao ............................. 143 0.694 98 0.59
Lian Hua Fibre ...................... 54 0.388 21 0.00
Lujiazui ............................ 200 0.704 141 0.52
Material Centre ..................... 50 0.258 13 0.02
Narcissus Electric .................. 100 0.222 22 0.22
New Asia ............................ 100 0.324 32 2.24
Outer Gaoqiao ....................... 166 0.560 93 0.45
Phoenix Bicycle ..................... 100 0.390 39 0.12
Pilkington Glass .................... 185 0.920 152 0.73
Post & Telecom ...................... 60 0.508 30 0.21
Refrigerator ........................ 50 0.358 18 0.00
Rubber Belt ......................... 33 0.148 5 0.00
Sanmao .............................. 33 0.418 14 0.00
Sewing Machine ...................... 75 0.440 33 0.00
Shanghai Travel ..................... 60 0.350 21 0.26
Shangling Electric .................. 70 0.738 52 0.25
Steel Tube .......................... 80 0.300 24 0.16
Tyre & Rubber ....................... 221 0.450 99 0.14
Vacuum .............................. 121 0.208 25 0.01
Wing Sung ........................... 30 0.220 7 0.00
----- ----
TOTAL OF "B" SHARES ................................................ 1,519 6.75
===== ====
</TABLE>
---------
Source: Lloyd George Management
Market Index. The performance of the "B" shares on the SHSE is measured by
the CLSA Shanghai B Index. This Index stood at 734.58 on December 31, 1993 and
closed at 674.04 on December 15, 1994.
Membership. The SHSE operates on a membership system. Membership is
restricted to securities institutions approved by the PBOC. As of March 31,
1992, there were 29 members admitted to the SHSE, 20 of which are local
institutions and 9 of which are from other provinces. The SHSE members are
comprised of securities companies, insurance companies, trust and investment
companies and open credit cooperatives. Members of the SHSE must join the
Securities Trade Association, which is a self-governing trade organization whose
articles of association specify such matters as the purpose, nature, conditions
for membership, rights and obligations of members and accounting of the
Association. The SHSE members may be classified as (1) members who trade for
others' accounts; (2) members who trade for their own accounts only; or (3)
members who trade both for their clients and for their own accounts. No member
may buy or sell any listed securities outside the SHSE without permission.
Regulation. The SHSE is regulated by the local branch of the PBOC and the
local government in Shanghai. The Shanghai Municipal People's Government adopted
the Measures of Shanghai Municipality for Administration of the Trading of
Securities (the "SHSE Measures"), which came into effect on December 1, 1990 and
govern the establishment of the SHSE and the issuance and trading of securities
in Shanghai. In November of 1991, special regulations contained in the Measures
of Shanghai Municipality for the Administration of Special Renminbi-denominated
Shares and their Detailed Implementing Rules were promulgated by the PBOC and
the Shanghai Municipal People's Government relating to the issue of "B" shares
in Shanghai. Special rules for the trading and settlement of "B" shares were
also enacted in February 1992.
New Issues and Listed Criteria. To issue new securities, an issuer must file
an application with the PBOC, Shanghai Branch, along with the issuer's articles
of association, a prospectus to be used in offering the securities which meets
the requirements of the SHSE Measures and other related documents. Issues of
shares, or bonds of a value of RMB 10 million or more, must be distributed by a
securities institution, unless otherwise provided by the State or placed
privately. Issues with a total distribution value of RMB 30 million or more must
be jointly distributed by a distribution syndicate formed and led by a
securities company. Distribution of securities includes the underwriting of
securities and the placement of securities by an agent.
Under the SHSE Measures, an issuer which intends to issue its shares must
submit: (i) the consent from the relevant authorities as to the establishment or
restructuring of the enterprise as a joint stock company; (ii) in the case of a
newly-established joint stock company, an investment certificate evidencing that
its organizers have subscribed for not less than 30% of the total amount of
shares; (iii) in the case of State-owned enterprise being restructured as a
joint stock company, a confirmation of asset valuation issued by the
Administration for State Assets with a report on the conclusions from the asset
valuation issued by the relevant asset valuation agency, or, in the case of a
non-State-owned enterprise being restructured as a joint stock company, a report
on the conclusions from the asset valuation issued by an accounting firm and a
registered accountant of that firm; (iv) in the case of an existing joint stock
company issuing shares in order to increase its capital, financial statements of
continuous profits during at least the preceding two years and the preceding
quarter of the current year, certified by an accounting firm and a certified
accountant of that firm, and a shareholders' resolution authorizing the issue;
and (v) an application for share issue to the PBOC, Shanghai Branch, along with
its articles of association, the prospectus to be used for the share issue, a
distribution contract entered into with a securities distributor and, if the
shares are to be issued to raise funds for fixed asset investment, the approval
document(s) from the relevant administrative department(s). In addition, where
the issuer also intends to list shares on the SHSE, it must submit (i) an
application for the listing of and permission to deal in securities; (ii) a
report on the listing of the securities; (iii) consent from at least one
securities house to assist in the trading of the securities; and (iv) financial
statements of continuous profits for at least two years, certified by an
accounting firm and a registered accountant of that firm.
New Issues and Listing Criteria for "B" Shares on the SHSE. A company
wishing to issue "B" shares to be listed on the SHSE must comply with the
following requirements: (i) it must be an approved joint stock company which has
been registered with the relevant State authority or whose establishment has
been approved and has met all the listing requirements set forth in the SHSE
Measures; (ii) the proceeds from the issuance of the "B" shares must be used in
accordance with State policies and regulations on the administration of foreign
investment; (iii) it must have a stable, adequate source of foreign exchange
revenue (i.e., sufficient to pay out the "B" share dividends); and (iv) the
percentage of "B" shares among the total shares of a former state- owned
enterprise reorganized as a joint stock company must not exceed the upper limit
set by the PBOC, Shanghai Branch.
Subscription for "B" shares is carried out through approved securities
institutions. Approved domestic securities institutions may arrange for
participation by foreign securities institutions approved by the PBOC, Shanghai
Branch. Approval by the Shanghai Branch of the PBOC is required for the
subscription by a single investor for "B" shares which exceed 5% of the total
issued share capital of a company. In addition, "B" share trading must be
carried out by approved securities institutions and be processed through a
domestic securities house which is in the business of dealing in "B" shares.
Every investor dealing in "B" shares must open a "B" share securities account
with the SHSE. Domestic securities dealing organizations may open such "B" share
securities accounts on behalf of individuals and institutional investors outside
of China. Domestic securities institutions may not engage in "B" share business
for their own account.
The issuance of "B" shares in Shanghai may be through a public offering or a
private placement. A public offering must be conducted on behalf of the issuer
by an approved securities institution. The issuance of "B" shares through a
distribution syndicate must be managed by a domestic securities institution. The
prospectus for an issue of "B" shares must be published in a newspaper or other
publication approved by and on dates designated by the PBOC, Shanghai Branch.
Reporting Requirements. Once securities are approved for listing on the
SHSE, the issuer must publish the report on the listing of the securities and
certified financial statements showing continuous profits for at least two years
preceding the listing. Issuers of listed securities are required to submit
interim financial reports to the PBOC, Shanghai Branch in the middle of each
fiscal year. Issuers of securities traded on the OTC markets or the SHSE are
required to submit certified financial reports at the end of each fiscal year.
Such reports are required to be submitted within 45 days after the end of the
relevant period.
Within 15 days after the occurrence of any of the following situations, an
issuer of securities must submit a status report to the PBOC, Shanghai Branch,
and the SHSE if the securities of such issuer are listed on the SHSE: (i) the
conclusion with another party of a contract or agreement that will have a
material effect on the assets or liabilities of the enterprise or the rights and
interests of its shareholders; (ii) a major change in the business items or
forms of business of the enterprise; (iii) the making of a decision on a major
or relatively long-term investment; (iv) the incurring of major debts or losses;
(v) major losses of the assets of the enterprise; (vi) a major change in the
production or business environment; (vii) a change in the members of the board
of directors or senior management personnel; (viii) a change in the
shareholdings of shareholders who hold 5% or more of the total amount of shares
or a change in the shareholdings in the company of the members of the board of
directors or senior management personnel; (ix) involvement in a major lawsuit;
(x) the making of such major policy decisions as on merger, consolidation, etc.;
and (xi) commencement of liquidation or bankruptcy reorganization.
The trading and registration of transfer of registered shares will be
suspended 10 days before each announced date for payment of dividends or bonuses
or the issuance of new shares. Under the SHSE Measures, if the transfer
registration procedures are not completed within the specified time limits, the
dividends, bonuses and newly issued shares will be issued to the persons in
whose name the securities were registered at the time of such distribution or
issuance.
Insider Trading Restrictions. Certain persons involved in the issuance of
shares, such as relevant personnel of the PBOC, Shanghai Branch, who are
involved in securities administration, management personnel of the SHSE,
personnel of a securities house who are directly connected with the issue and
trading of shares and other insiders connected with the issue and trading of
shares are prohibited from trading, directly or indirectly, for their own
account.
TRADING AND REGULATION OF "B" SHARES
Trading of "B" Shares on the SZSE. Trading on the SZSE is conducted in
blocks of 2,000 shares. Trading in "B" shares may only be conducted between
non-Chinese investors. Investors outside China must trade "B" Shares through
approved foreign brokers who in turn instruct approved Shenzhen brokers who
actually effect trades on the SZSE. All trades must be transacted on the trading
floor; no off-market transactions are allowed. Trading on the SZSE is carried
out through a computerized automatic matching system which effects each
transaction based on price and time priority. Investors subscribing for or
buying "B" shares are required to produce their individual or corporate
identification documents, while individual investors must also pay a deposit
equal to 60% of the market price of the shares to be bought.
Commissions for transactions in "B" shares are fixed at 0.6% of the purchase
price. A stamp duty of 0.3% of the purchase price is also payable. In addition,
the SZSE imposes a transaction levy of 0.1% of the actual transaction amount. A
share transfer registration fee of 0.3% of the face value of the "B" shares
transferred is also payable by the buyer to the official registrar of the "B"
shares. Certain other fees may also be payable to the clearing and settlement
bank and foreign brokers for their services.
Any single investor holding "B" shares amounting to more than 5% of the
total share capital of an issuer must report such holding to the PBOC, Shenzhen
Special Economic Zone Branch. Short selling of "B" shares is prohibited. Newly
purchased "B" shares may not be sold before the settlement and registration
procedures for their purchase are completed.
Trading of "B" Shares on the SHSE. In Shanghai, "B" shares are traded in
blocks having a total face value of RMB 1,000. "B" shares may only be traded
between non-Chinese investors. Investors outside of China must trade "B" shares
through approved foreign brokers who instruct approved Shanghai brokers who then
actually effect trades on the SHSE. All trades must be transacted on the trading
floor; no off-market transactions are allowed.
Brokerage commissions for "B" share transactions are fixed at 0.6% of the
total amount of the transaction, with reduced rates of 0.5%, for transactions
with a value of RMB 500,000 and 0.4% with a value exceeding RMB 5,000,000. A
stamp duty of 0.3% of the amount of the transaction is also charged. The SHSE
also levies a transaction fee on securities dealers equal to 0.03% of the amount
of the transaction. A transfer fee of 0.1% of the face value of the shares
transferred is also payable by the investor. Certain other fees may also be
payable to the banks appointed to coordinate primary and secondary clearing and
settlement and to foreign brokers for their services. Fees are calculated in
renminbi and payable in U.S. dollars.
Any single investor (individual or institutional) purchasing "B" shares of
an amount exceeding 5% of the issuer's total share capital must obtain approval
for such purchase from the PBOC. Newly purchased "B" shares cannot be sold
before the transfer procedures for their purchase are completed.
Trading in "B" shares is in a scripless manner using the automatic
book-entry transfer system. Orders are matched automatically by computer by
price and time priority. Market and trading information is transmitted through
telecommunication links by an international information agency from the SHSE to
overseas countries on a real time basis.
Clearing and Settlement of "B" shares. In both Shenzhen and Shanghai,
clearing and settlement of "B" share transactions are effected on the third day
after the trade date. All clearing and settlement of "B" shares are effected in
a scripless manner, through a book-entry clearinghouse system. No such
certificates are issued to investors. Cash settlement is effected on a broker to
broker, transaction by transaction basis.
Clearing and settlement of "B" share transactions are conducted at two
levels. The Bank of Communications is responsible for coordinating the primary
settlement, for both shares and cash, between the Shanghai or Shenzhen brokers
and the exchanges, which is effected through a book-entry system. Citibank, N.A.
coordinates the secondary settlement, for cash only, which takes place between
the Shanghai or Shenzhen brokers and the off-shore brokers. Clearing and
settlement of "B" share transactions are handled by three approved banks:
Citibank N.A., Standard Chartered Bank and HongkongBank.
All "B" share prices and all dividends, bonuses and other income on "B"
shares are calculated in RMB but paid in foreign currency (Hong Kong dollars or
U.S. dollars). RMB amounts are converted to Hong Kong dollars or U.S. dollars at
the weekly weighted average conversion rate as quoted by the Shanghai Foreign
Exchange Transaction Center or the Shenzhen Foreign Exchange Adjustment Center
(with the exception of share sale prices in Shenzhen, which are converted at the
prior working day's conversion rate).
THE HONG KONG SECURITIES MARKET
Formal trading of investment securities was established in Hong Kong in 1891
when the Association of Stockbrokers in Hong Kong was formed. It was renamed the
Hong Kong Stock Exchange in 1914. In 1969, the Far East Exchange was formed,
followed by the Kam Ngan Stock Exchange in 1971 and the Kowloon Stock Exchange
in 1972. These four exchanges merged to form The Stock Exchange of Hong Kong
Ltd. ("Hong Kong Stock Exchange" or "HKSE"), which commenced trading on April 2,
1986. The HKSE, with a total market capitalization as of October, 1994 of
approximately H.K. $2,476 billion (approximately U.S. $320.3 billion), is now
the second largest stock market in Asia, measured by market capitalization,
behind only that of Japan. As of that date, 520 companies and 908 securities
were listed on the Hong Kong Stock Exchange. The securities listed include
ordinary shares, warrants and other derivative instruments.
In addition to an active stock market, Hong Kong has an active foreign
exchange market, an interbank money market, a large gold bullion market and a
futures exchange. Hong Kong is also one of the major Asian centers for venture
capital businesses, many of such businesses having their Asian head office in
Hong Kong.
Primary Market. Hong Kong has an active new issue market for equity
securities. The following table summarizes the new issues on the Hong Kong
Stock Exchange since 1986.
<TABLE>
NEW ISSUES ON THE HKSE
<CAPTION>
VALUE OF VALUE OF
SHARE ISSUES RIGHTS ISSUES
-------------------------- --------------------------
NUMBER (H.K. $ (U.S. $ (H.K. $ (U.S. $
YEAR OF ISSUES MILLION) MILLION) MILLION) MILLION)
---- --------- -------- -------- -------- --------
<C> <C> <C> <C> <C> <C>
1986 ............................... 8 3,268 419 1,184 152
1987 ............................... 14 2,402 308 5,591 717
1988 ............................... 20 1,443 185 2,401 308
1989 ............................... 7 1,732 222 1,836 335
1990 ............................... 41 7,067 906 2,511 322
1991 ............................... 49 5,592 717 9,648 1,237
1992 ............................... 59 9,633 1,235 11,227 1,439
1993 ............................... 68 28,884 3,751 9,266 1,193
</TABLE>
--------------
Source: HKSE.
Secondary Market. The table below sets out selected data on the Hong Kong
Stock Exchange for each year since 1986, including the value of securities
traded during each year, and the number of companies and securities listed and
the total market capitalization as of December 31 of each year.
<TABLE>
SELECTED DATA ON THE HKSE
<CAPTION>
VALUE OF DECEMBER 31 MARKET
SECURITIES TRADED CAPITALIZATION
----------------------------------------- ------------------------------------------
(H.K. $ (U.S. $ LISTED LISTED (H.K. $ (U.S. $
YEAR MILLION) MILLION) COMPANIES SECURITIES MILLION) MILLION)
---- -------- -------- --------- ---------- -------- --------
<C> <C> <C> <C> <C> <C> <C>
1986 ........................ 123,128 15,786 253 335 419,281 53,754
1987 ........................ 371,406 47,616 276 412 419,612 53,796
1988 ........................ 199,481 25,574 304 479 580,378 74,446
1989 ........................ 299,147 38,352 298 479 605,010 77,565
1990 ........................ 288,715 37,015 299 520 650,410 83,386
1991 ........................ 334,104 42,834 357 597 1,052,012 134,873
1992 ........................ 700,577 90,569 413 749 1,332,184 172,221
1993 ........................ 1,149,265 148,670 477 891 2,975,379 381,459
</TABLE>
--------------
Source: HKSE.
Market Performance. The Hang Seng Index is the most widely followed
indicator of stock price performance in Hong Kong. The Hang Seng Index is an
arithmetic index based on the securities of 33 companies, weighted by their
respective market capitalizations, and is thus strongly influenced by large
capitalization stocks. The following table sets out high, low and end of year
close for the Hang Seng Index for each year since 1986.
HANG SENG INDEX
% CHANGE
FROM PRIOR
YEAR HIGH LOW YEAR-END PERIOD-END
---- ---- --- -------- ----------
1986 ...................... 2,568.3 1,559.4 2,568.3 --
1987 ...................... 3,949.7 1,894.7 2,302.8 (10.3)
1988 ...................... 2,772.5 2,223.0 2,687.4 16.7
1989 ...................... 3,309.6 2,093.6 2,836.5 5.5
1990 ...................... 3,559.9 2,736.6 3,024.6 6.6
1991 ...................... 4,297.3 2,984.0 4,297.3 42.1
1992 ...................... 6,447.1 4,301.8 5,512.4 28.3
1993 ...................... 11,888.0 5,438.0 11,888.0 115.7
--------------
Source: HKSE.
The Hong Kong stock market can be volatile and is sensitive both to
developments in China and to the strength of other world markets. As an example,
in 1989, the Hang Seng Index rose to 3,310 in May from its previous year-end
level of 2,687, but fell to 2,094 in early June following the events at
Tiananmen Square. See "Appendix A: People's Republic of China." The Hang Seng
Index gradually climbed in subsequent months, but fell by 181 points on October
13, 1989 (approximately 6.5%) following a substantial fall in the U.S. stock
market, and at the year end closed at a level of 2,837.
Trading. Trading on the HKSE is conducted through a computerized system to
convey bid and asked prices for securities. Trades are then effected on a
matched trade basis directly between buyers and sellers. All securities are
traded in board lots. For most companies a board lot is 1,000 shares, although
board lots can vary in size from 100 to 5,000 shares. Odd lots are traded
separately, usually at a small discount to the board lot prices. Share
certificates in board lots, together with transfer deed, must be delivered on
the day following the transaction. Payment is due against delivery. A brokerage
commission of 0.25% (with a minimum of H.K. $50) is standard. In addition,
trades are subject to a transaction levy of 0.025% payable equally to the HKSE
and the Hong Kong Securities and Futures Commission (the "SFC") and a special
levy of 0.03%. Finally, the Hong Kong government charges a stamp duty of H.K.
$2.50 for every H.K. $1,000 of the transaction price or any part thereof.
Regulation and Supervision. The SFC was established by the Hong Kong
government in May 1989 as an autonomous statutory body outside the civil service
which provides a general regulatory framework for the securities and futures
industries. The SFC administers certain elements of Hong Kong securities law
including those ordinances governing the protection of investors, disclosure of
interests and insider dealing.
The governing authority of the Hong Kong Stock Exchange is its Council,
which is comprised of 30 members. The Council is responsible for formulating
policies and oversees the operations of the HKSE through standing committees.
Eighteen Council members are representatives of the brokerage firms in Hong
Kong, nine are representatives of investment and merchant banking firms and two
are appointed by the Hong Kong government. The chief executive officer of the
HKSE serves on the Council on an ex-officio basis. Of the 18 broker
representatives on the Council, four are elected by the top 14 major brokers
which have the top third of market share, five are elected by the 51 middle tier
brokers having the middle third of market share, and nine are elected by the
entire brokerage community.
The HKSE promulgates its own rules governing share trading and disclosure of
information to shareholders and investors. Companies listed on the HKSE enter
into a listing agreement with the exchange which includes provisions requiring
that listed companies send interim and annual accounts to shareholders. In
addition, the Hong Kong Code on Takeovers and Mergers (used by the SFC) provides
guidelines for companies and their advisers contemplating, or becoming involved
in, takeovers and mergers.
Foreign Investment Restrictions. There are no regulations governing foreign
investment in Hong Kong. There are no exchange control regulations and investors
have total flexibility in the movement of capital and the repatriation of
profits. Funds invested in Hong Kong can be repatriated at will; dividends and
interest are freely remittable.
DIRECT INVESTMENTS IN CHINA
Since 1978, foreign direct investments in China have increased and have
become an important element in China's economy. Hong Kong and Macao have been
the most important source of foreign direct investments in China, accounting for
61% in 1989 and 55% in 1990 of total direct foreign investments.
Direct foreign investments in China, by number of contracts and contract
value, during 1979 to 1993 were as follows:
<TABLE>
DIRECT FOREIGN INVESTMENT
<CAPTION>
1979-
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Number of Contracts (in thousands) ........ 3.22 3.07 1.50 2.19 5.95 5.78 7.27 n.a. 48.0 83
Value of Contracts (in U.S. $ billion)
(pledged) ............................... 8.99 5.93 2.83 3.71 5.30 5.60 6.60 12.0 58.1 112.9
Actual Value of Contracts Utilized
(in U.S. $ billion) ..................... 1.8 2.3 3.2 3.4 3.4 4.4 11.0 20.0
--------------
</TABLE>
Source: figures for 1979 to 1990, Ministry of Foreign Economic Relations and
Trade; figures for 1991, State Statistical Bureau of the People's
Republic of China.
FORM OF DIRECT FOREIGN INVESTMENTS
Direct foreign investments in China have taken a variety of forms,
including:
(a) Equity Joint Ventures
Equity joint ventures are principally owned by The Law of the People's
Republic of China on Joint Ventures Using Foreign and Chinese Investment,
promulgated in 1979. This law is among the first principal pieces of legislation
relating to foreign direct investments in China. It is supplemented by rules and
regulations governing taxation, labor and other matters relating to equity joint
ventures. Equity joint ventures are limited liability legal entities in which
Chinese and foreign partners hold equity stakes.
(b) Contractual or Cooperative Joint Ventures
Contractual or cooperative joint ventures are governed by The Law of the
People's Republic of China on Chinese-Foreign Cooperative Joint Ventures of
1988. They are established by contracts between a Chinese party and a foreign
party. Unlike equity joint ventures, in which the rights, liabilities,
obligations and profit sharing arrangements between the joint venture partners
are usually defined by reference to their respective equity interests in the
joint venture, the rights, liabilities, obligations and profit sharing
arrangements between the parties in contractual or cooperative joint ventures
usually are specifically negotiated and set out in the joint venture contract.
This type of joint venture is generally perceived to have a greater degree of
flexibility than equity joint ventures.
(c) Wholly Foreign-Owned Enterprises
Foreign companies are permitted to establish wholly-owned subsidiaries in
China. Such wholly foreign-owned enterprises are governed by The Law of the
People's Republic of China on Wholly Foreign-Owned Enterprises of 1986. These
enterprises are required to utilize advanced technology and equipment or to
export 50% or more of their finished products.
(d) Processing and Assembly Agreements
In this form of investment, the Chinese party normally provides the factory,
power and other utilities, and labor, and the foreign party supplies the raw
materials. The foreign party pays a processing or assembling fee to the Chinese
party and has ownership of the finished products.
(e) Compensation Trade
In this form of investment, the foreign party provides services, equipment,
training and/or technical know-how to the Chinese party and, in exchange,
receives compensation in the form of finished products produced by the Chinese
party.
PRIORITY INVESTMENT AREAS
In order to help modernize the Chinese economy, China has established zones
in which foreign investment is encouraged.
(a) Special Economic Zones
In 1980, China established special economic zones to attract foreign
capital, technology, and expertise by offering investors in these zones tax
incentives and other preferential treatment. Four of the five special economic
zones in China are located in the Guangdong and Fujian Provinces, Shenzhen,
Shantou and Zhuhai in Guangdong Province and Xiamen in Fujian Province.
(b) Open Coastal Cities
In April 1984, 14 areas were designated "open coastal cities" where, like
the special economic zones, preferential investment terms are offered to
investors. These cities are Qinhuangdao, Dalian, Tianjin, Yantai, Qingdao,
Lianyungang, Nantong, Shanghai, Ningbo, Wenzhou, Fuzhou, Guangzhou, Beihai and
Zhanjiang.
(c) Coastal Open Economic Zones
In the late 1980s, five areas were designated coastal open economic zones:
Liaodong Peninsula and Shangdong Peninsula in northeast China, the Yangtze River
Delta in the eastern Jiangsu Province, the Minnan Delta in Fujian Province and
the Pearl River Delta in southern Guangdong Province.
(d) Shanghai's Pudong District
In 1990, the Pudong area of Shanghai was also designated an open zone for
foreign investments with autonomy equivalent to that of a special economic zone.
(e) High and New Technology Industrial Development Zones
High and new technology industrial development zones were first introduced
in 1988 to offer preferential treatment to enterprises which have been confirmed
as technology intensive in accordance with the requirements formulated by the
State Science and Technology Commission. There are 27 high and new technology
industrial development zones which have been approved by the State Council.
These zones presently exist in Beijing, Changchun, Changsha, Chengdu, Chongqing,
Dalian, Fuzhou, Guangzhou, Guilin, Hainan, Hangzhou, Harbin, Hefei, Jinan,
Lanzhou, Nanjing, Shanghai, Shenyang, Shenzhen, Shijiazhuang, Tianjin, Weihai,
Wuhaxn, Xi'an, Xiamen, Zhengzhou and Zhongshan.
<PAGE>
APPENDIX B
CHINA REGION COUNTRIES
The information set forth in this Appendix has been extracted from various
government and private publications. The Fund and the Trust's Board of Trustees
make no representation as to the accuracy of the information, nor has the Fund
or the Trust's Board of Trustees attempted to verify it.
PEOPLE'S REPUBLIC OF CHINA
GENERAL INFORMATION
LOCATION AND GEOGRAPHY
China is the world's third largest country occupying a region of 9.6 million
square kilometers. It borders Russia and Mongolia in the north and joins the
borders of Vietnam, Laos, Myanmar and Bhutan in the south. To the west and
northwest are states of Afghanistan, Pakistan, India and Nepal and to the east
is North Korea. The terrain in the west is dominated by steppes, vast deserts
and high mountain ranges. Mountain areas and highlands account for about
two-thirds of the Chinese territory. To the east, China has two of the world's
greatest rivers, Huang He (Yellow River) and Chang Jiang (Yangtze River).
Cultivation is concentrated in the north eastern half of the country where
flatter terrain and proximity to the coast and major river basins compensate for
lower rainfall.
The country is divided into 23 provinces, three municipalities (Beijing,
Shanghai and Tianjin) and five autonomous regions (Guangxi Xhuang, Nei Mongol,
Ningxia Hui, Xinjiang Uygur and Xizang (Tibet)). The capital and political
center of China is Beijing. Shanghai is the largest city and is also the
commercial and financial capital.
POPULATION
China is the world's most populous nation, consisting of more than one-fifth
of the human race. The estimated population was approximately 1.143 billion as
of December 1990. According to the government census, the figure represented an
average annual increase of 1.48 percent over 1982. China has engaged in a
20-year plan for restraining population growth as part of its economic
modernization program. Despite the plan, the population is likely to exceed
1.300 billion by the year 2000. Over 80 percent of the population is
concentrated in the eastern half of the country as a result of systematic
cultivation.
The following table presents information regarding China's population growth
since 1950.
POPULATION
TOTAL ANNUAL
POPULATION URBAN RURAL GROWTH RATE
YEAR (MILLION) % % (%)
---- ---------- ----- ----- -----------
1950 ............... 551.96 11.18 88.82 1.900
1955 ............... 614.65 13.48 86.52 2.032
1960 ............... 662.07 19.75 80.25 (.457)
1965 ............... 725.38 17.98 82.02 2.838
1970 ............... 829.92 17.38 82.62 2.583
1975 ............... 924.20 17.34 82.66 1.569
1980 ............... 987.05 19.39 80.61 1.187
1985 ............... 1,058.51 23.71 76.29 1.426
1990 ............... 1,143.33 26.41 73.59 1.439
Notes: (i) Population figures for 1985 and 1990 were estimated based on the
Fourth (1987) National Population Census.
(ii) The 1985 growth rate was estimated based on the Third (1982) and
Fourth (1990) National Population Census. The 1990 growth rate is
from the National Sample Survey on Population Change in 1990. The
earlier growth rates are from the Annual Report of the Ministry of
Public Security.
Source: China Statistical Yearbook 1991, State Statistical Bureau of the
People's Republic of China.
The population is homogeneous, composed of mostly the Han ethnic group. The
national language is Putonghua which is based on Mandarin and was simplified in
1945. Over 93 percent of the population speaks one of the five main Sino-Tibetan
dialects which are Mandarin, Cantonese, Fukienese, Hakka and Wu. Religion is not
a major source of ethics for Chinese and is not a divisive force among its
population. Some 20 percent of the population practice Confucianism and 8
percent are Buddhists.
POLITICAL HISTORY
The Chinese state has origins dating back to the second millennium BC. A
long history of feudalism existed before a single Chinese empire was created.
Gradually, an imperial system developed under the rule of successive Chinese and
non-Chinese dynasties. The Manchu Dynasty, the last ruling dynasty, came to an
end in 1911 as a result of both an erosion of power from unequal foreign
treaties and a coup. Following the collapse of the dynasty, a period of
political instability and power struggle ensued between the Kuomintang
(Nationalist Party) and the Chinese Communist Party. In 1945, with the Japanese
surrender, the Communist Party under Mao Zedong seized most of the formerly
occupied China, defeating the Nationalist Party forces in a civil war. With the
victory by the Communists, the Nationalists under the leadership of Chiang
Kaishek fled the mainland to Taiwan where they established a separate
government. In 1949, The Communist Party established the People's Republic of
China.
Since 1949, the Communist government engaged in numerous campaigns to
industrialize the country with programs such as the "Great Leap Forward", which
fell short of its goals to increase industrial production and gave rise to
famine. In 1966, the government launched the Cultural Revolution seeking to
purge many of its political dissidents in order to centralize the political
power within the Communist Party. The campaign failed to significantly restore
socialist ideals and the Party experienced a loss of credibility with the
masses. The failure of the Communist Party to achieve substantive economic
reform eventually led to political domination by the army.
In the 1970's, the Chinese government, which had remained isolated from the
world, opened its doors. President Nixon's historic visit to China in 1972
established diplomatic ties between China and the United States. China also
renewed diplomatic and trade relations with Western Europe, Japan and other
Asian nations such as Singapore, Indonesia and South Korea. Following Mao
Zedong's death in 1976, and the election of Deng Xiaoping as China's paramount
leader, China has continued to pursue an "Open Door Policy" encouraging foreign
investment and expertise inside its borders. Deng's leadership has emphasized
pragmatism rather than Party ideology.
In 1989, a growing dissatisfaction with the Communist government led to
anti-government student protests culminating in what is known as the Tiananmen
Square incident. The government's use of the military to suppress a peaceful
demonstration resulted in world-wide criticism. Currently, the leadership under
Deng Xiaoping remains committed to basic economic reforms but continues to
reject liberalization from the domination of the Communist Party in the
political decision-making process. The Chinese leadership still faces the
challenge of maintaining power under the Communist Party while fending off
Western political ideologies.
China currently has diplomatic ties with approximately 140 nations. It is a
charter member of the United Nations and a permanent member of the United
Nations Security Council. Currently, China is seeking admission to the General
Agreement on Tariffs and Trade.
GOVERNMENT
China is currently governed under a new Constitution adopted on December 4,
1982. The highest ranking organization in the state power hierarchy is the
National People's Congress (NPC) which is composed of deputies elected by all
the regions for a term of five years. The NPC has 2,970 members with extensive
powers to amend the constitution and make laws. However, many view the main
purpose of this law-making body to be solely to approve Party policy. When the
NPC is not in session, the NPC Standing Committee exercises its functions,
including formulation of state policy, enactment of laws, examination and
approval of state plans and budgets, and amending and enforcing the
Constitution. The NPC elects the head of state and the State Council. The State
Council is the highest executive body, composed of the Premier, Vice Premiers,
State Councilors, Ministers, the Auditor General and the Secretary General. The
State Council has the power to enact administrative rules and regulations, issue
orders, appoint, remove and train administrative officers, supervise the
ministries and local governments, coordinate the work of the ministries and
state commissions and declare martial law. The current Premier is Li Peng and
the current President is Yang Shangkun, a professional soldier from the Deng
faction.
The Chinese Communist Party was established in 1921 and has remained the
ruling party since 1949. The Party is hierarchically organized, with a
membership of over 48 million members. The Party's structure parallels that of
the Government with a National Party Congress, Central Committee and Standing
Committee. Because Party membership is a prerequisite for holding influential
government positions, a significant overlap between the two structures exists
which adds to administrative inefficiencies. Furthermore, the Party's close
alignment with the military is a great source of political power as evidenced by
the outcome of the Tiananmen incident. Efforts to reduce the Communist Party's
participation in commercial and administrative decision-making have so far been
largely unsuccessful.
THE CHINESE ECONOMY
OVERVIEW AND RECENT DEVELOPMENTS
China has operated a centrally planned economy since 1949. The First Five-
Year Economic Plan was set forth in 1953 to stimulate economic growth and
development. Currently, China is in its second year of its Eighth Five-Year
Economic Plan. In 1978, China instituted an economic reform program to shift
from a completely centrally planned economy to a more mixed economy. The program
liberalized China's economy and opened it to foreign investment. Currently,
under a system called "socialism with Chinese characteristics," these economic
reforms appear to continue in a more comprehensive manner. Managers of
enterprises have been granted more decision-making powers, including the
planning of production, marketing, use of funds and employment of staff. Goods
which are controlled and distributed by the state are still sold at planned
prices. However, the goods produced in excess of the state production plan may
be sold at floating prices, negotiated prices or free prices.
Over the past decade, China has achieved annual growth in real gross
national product (GNP) averaging 9%. GNP in 1991 had increased to over 2.5 times
the GNP in 1980. However, growth has been unsteady, with booms in 1984 and 1988
and downturns in 1981 and 1989. In 1988, the Chinese Government instituted an
austerity program which slowed the Chinese economy in the following year.
However, growth increased after 1989, achieving growth rates of 3.9% in 1989,
5.2% in 1990, and 7% in 1991, but has not returned to its previous levels.
The economy in China consists of three sectors: state, cooperative, and
private. The state sector, though decreasing from 76% of GNP in 1980 to
approximately 50% in 1991, continues to constitute the bulk of the economy. In
recent years, however, the economy has been significantly restructured through
the abolition of the commune system in rural areas and the relaxing of
government authority in the day to day operations in both agricultural and
industrial enterprises. As the government assumes more of a regulatory and
supervisory role and less of a direct management role, market forces have been
allowed to operate. This has resulted in increased productivity and rising
incomes.
China's economic policy is set out in two overlapping plans, the 20-Year
Plan (1981-2000) and the current Five-Year Economic Plan (1991-1995). The 20-
Year Plan calls for an average 7% growth in GNP over the entire 20-year period;
the initial decade was to be a period of reorganization, with the second decade
one of rapid economic progress. The 7% mark was exceeded in the initial decade,
with growth rates averaging 9.4%. The second decade growth, thus far, is in step
with the desired growth of the 20-Year Plan. The current Five-Year Economic Plan
calls for 6% annual growth, starting in 1991; this however, has been surpassed
in both 1991 and 1992, and 1993 is forecast to exceed 10%.
The following table sets forth selected data regarding the Chinese economy.
<TABLE>
MAJOR ECONOMIC INDICATORS
<CAPTION>
1988 1989 1990 1991 1992 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Gross National Product
(% annual real growth) ............................ 10.8 3.9 5.2 7.0 12.8 13.4
(nominal, RMB billion) ............................ 1,401.8 1,591.6 1,768.6 1,958.0 2,367.0 3,109.0
(nominal, U.S. $ billion)* ........................ 376.8 337.2 338.8 360.6 411.7 546.0
Per Capita GNP (U.S. $) ............................. 341.0 300.0 298.0 312.0 379.0 460.0
Industrial Production (% annual growth) ............. 17.9 6.8 6.0 14.2 20.4 23.6
Inflation (retail price index, % annual growth) ..... 18.6 17.8 2.1 3.0 6.2 13.2
Money Supply (M2, % annual growth) .................. 20.7 18.7 28.9 27.6 29.5 23.6
Government Budget Surplus/Deficit
(U.S. $ billion)* ................................. (2.1) (1.9) (2.7) (3.9) (7.8) (10.3)
Exports (U.S. $ billion) ............................ 47.6 52.5 62.1 71.9 85.1 91.7
(% annual growth) ................................. 20.8 10.2 17.9 15.8 18.3 7.93
Imports (U.S. $ billion) ............................ 55.3 59.1 53.3 63.8 80.8 103.9
(% annual growth) ................................. 28.0 6.8 (9.8) 19.5 26.6 28.9
Trade Balance (U.S. $ billion) ...................... (7.8) (6.6) 8.6 8.1 4.3 (12.2)
Exchange Rate (RMB/U.S. $) .......................... 3.72 4.72 5.22 5.43 5.8 5.8
</TABLE>
--------------
*Translated at the respective exchange rate for each year shown in the table.
Sources: China Statistical Yearbook, State Statistical Bureau of the People's
Republic of China, Baring Securities.
PRINCIPAL ECONOMIC SECTORS
Industry. In 1990, industry accounted for 45.8% of China's National Income.
In the first three decades under Communist rule, China placed great emphasis on
heavy industry. Since the reform program began in 1978, a much greater emphasis
has been placed on light industry. Considerable industrial growth has come from
industrial enterprises in rural townships which are engaged in the processing
and assembly of consumer goods. These operations are concentrated in southern
China, where a major light industrial base has developed. Industrial output has
grown rapidly and is increasingly important to the Chinese economy.
China's current industrial policy also places emphasis on high-technology
industries supported by foreign technology, such as micro-electronics and
telecommunications. However, overstocking and poor economic results continue to
plague Chinese industry. Continued growth has been hampered by problems of
access to raw materials and energy supplies.
The following table sets forth the quantities and total value of China's
major industrial products for selected years.
<TABLE>
INDUSTRIAL PRODUCTION
<CAPTION>
ITEM 1952 1978 1980 1985 1989 1990
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Gross Output Value of Industry (RMB
billions) ............................ 34.9 423.7 515.4 971.6 2,201.7 2,392.4
Output of Major Industrial Products
Cloth (meters billions) .............. 3.83 11.03 13.47 14.67 18.92 18.88
Machine-Made Paper and Paper boards
(metric tons millions) ............. 0.37 4.39 5.35 9.11 13.33 13.72
Sugar (metric tons millions) ......... 0.45 2.27 2.57 4.51 5.01 5.82
Bicycles (metric tons millions) ...... 0.08 8.54 13.02 32.28 36.77 31.42
Sewing Machines (thousands) .......... 66 4,865 7,678 9,912 9,563 7,610
Wrist Watches (thousands) ............ -- 13,511 22,155 54,311 72,756 83,526
Household Refrigerators (thousands) .. -- 28 49 1,448 6,708 4,631
Television Sets (thousands) .......... -- 517.3 2,492 16,676.6 27,665.1 26,847
Color Television Sets (thousands) .. -- 3.8 32 4,352,8 9,400.2 10,330.4
Household Washing Machines (thousands) -- 0.4 245 8,872 8,254.3 6,626.8
Cassette Recorders (thousands) ....... -- 47 743 13,931 23,490 30,235
Cameras (thousands) .................. -- 178.9 372.8 1,789.7 2,451.8 2,132.2
Coal (metric tons millions) .......... 66 618 620 872 1,054 1,080
Crude Oil (metric tons millions) ..... 0.44 104.05 105.95 124.90 137.64 138.31
Electricity (kilowatt hours billions) 7.3 256.6 300.6 410.7 584.8 621.2
Steel (metric tons millions) ......... 1.35 31.78 37.12 46.79 61.59 66.35
Rolled Steel (final products) (metric
tons millions) ..................... 1.06 22.08 27.16 36.93 48.59 51.53
Cement (metric tons millions) ........ 2.86 65.24 79.86 145.95 210.29 209.71
</TABLE>
--------------
Source: China Statistical Yearbook, 1991, State Statistical Bureau of the
People's Republic of China.
Agriculture. Although long term growth in agricultural production has
slowed, China remains one of the world's largest agricultural producers. The
government has emphasized diversification of production, and a commitment to the
maintenance of grain outputs. Other agricultural products have also shown
increases in production in recent years, with cotton production at the
forefront.
The following table sets forth the quantities and total value of China's
leading agricultural products for selected years.
<TABLE>
AGRICULTURAL PRODUCTION
<CAPTION>
ITEM 1952 1978 1980 1985 1989 1990
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Gross Output Value (RMB billions) .......... 46.1 139.7 192.3 361.9 653.5 766.2
Output of Major Farm Products
Grain (metric tons millions) ............. 163.92 304.77 320.56 379.11 407.55 446.24
Cotton (metric tons thousands) ........... 1,304 2,167 2,707 4,147 3,788 4,508
Oil-Bearing Crops (metric tons thousands) 4,193 5,218 7,691 15,784 12,952 16,132
Sugar Cane (metric tons thousands) ....... 7,116 21,116 22,807 51,549 48,795 57,620
Beet Roots (metric tons thousands) ....... 479 2,702 6,305 8,919 9,253 14,525
Tea (metric tons thousands) .............. 82 268 304 432 535 540
Fruits (metric tons thousands) ........... 2,443 6,570 6,793 11,639 18,319 18,744
Pork, Beef and Mutton (metric tons
thousands) ............................. 3,385 8,563 12,054 17,607 23,262 25,135
Aquatic Products (metric tons millions) .. 1.67 4.66 4.50 7.05 11.52 12.37
</TABLE>
--------------
Source: China Statistical Yearbook, 1991, State Statistical Bureau of the
People's Republic of China.
The following table provides a breakdown of the value of China's
agricultural production for 1989 and 1990.
VALUE OF AGRICULTURAL PRODUCTS(1)
1989 1990
(RMB MILLION) (RMB MILLION)
------------- -------------
Gross Output Value ......................... 653,473 766,209
Farming .................................... 367,446 448,174
Grain .................................. 219,551 270,492
Industrial Crops ....................... 64,661 83,842
Other Crops ............................ 83,234 93,840
Forestry ................................... 28,492 33,027
Animal Husbandry ........................... 179,741 196,407
Fishers .................................... 34,885 41,056
--------------
(1) At current prices.
Source: China Statistical Yearbook, 1991, State Statistical Bureau of the
People's Republic of China.
Energy. Although China has a vast potential for energy production, this
potential has been largely untapped. However, China is the world's largest
producer of coal and the world's fifth largest oil producer. Until recently,
China did not have the capacity to utilize its off-shore oil fields due to the
country's relatively low level of technology. Joint ventures with foreign
companies, however, have allowed China to use the fields, and further growth in
oil production, both off-shore and on-shore, is expected. China also has
significant potential for harnessing hydroelectric power, but has utilized only
a small portion of this potential. China is planning to make hydroelectric power
a major source of energy in the years ahead.
The following table sets forth China's energy production and consumption for
the years 1980 to 1990, as well as the percentage contributions of the key
energy sources.
<TABLE>
ENERGY PRODUCTION AND CONSUMPTION
<CAPTION>
TOTAL TOTAL
PRODUCTION % OF TOTAL PRODUCTION CONSUMPTION
(MILLION ----------------------------------------------- (MILLION
METRIC TONS NATURAL HYDRO- METRIC TONS
YEAR OF SCE)<F1> COAL OIL GAS ELECTRIC OF SCE)(1)
---- ---------- ---- --- ------- -------- ----------
<C> <C> <C> <C> <C> <C> <C>
1980 ........................ 637.35 69.4 23.8 3.0 3.8 602.75
1981 ........................ 632.27 70.2 22.9 2.7 4.2 594.47
1982 ........................ 667.78 71.3 21.8 2.4 4.5 620.67
1983 ........................ 712.70 71.6 21.3 2.3 4.8 660.40
1984 ........................ 778.55 72.4 21.0 2.1 4.5 709.04
1985 ........................ 855.46 72.8 20.9 2.0 4.3 766.82
1986 ........................ 881.24 72.4 21.2 2.1 4.3 808.50
1987 ........................ 912.66 72.6 21.0 2.0 4.4 866.32
1988 ........................ 958.01 73.1 20.4 2.0 4.5 929.97
1989 ........................ 1,016.39 74.1 19.3 2.0 4.6 969.34
1990 ........................ 1,039.22 74.2 19.0 2.0 4.8 980.00
<FN>
--------------
<F1> Excludes bio-energy, solar, geothermal and nuclear energy. All fuels
converted to Standard Coal Equivalent (SCE); 1 kg of coal = 0.714 kg of
SCE, 1 kg of oil = 14.6 kg of SCE, 1 cubic meter of natural gas = 1.33 kg
of SCE; Hydroelectric converted to SCE based on coal required to produce
equivalent thermal external-electric power.
</TABLE>
Source: China Statistical Yearbook, 1991, State Statistical Bureau of the
People's Republic of China.
ECONOMIC PLANS
China's Eighth Five-Year Economic Plan for national economic and social
development was adopted by the Standing Committee of the National People's
Congress for 1991-95, along with a ten-year development program which extends to
the year 2000. Included in both of these plans is an objective for China to
quadruple its gross national output by the end of this century. In addition, the
proposals emphasize a policy of opening to the outside world, expanded economic
and technological exchanges with other countries, and further development of the
export-oriented economy and the special investment areas. The basic guideline
for China's economic activities in 1992 is to continue on a path of economic
reform while following principles of socialism.
During 1980 to 1990, China had an average annual GNP growth rate of
approximately 9.0%, surpassing the 7.5% annual GNP growth rate target under the
Seventh Five-Year Economic Plan (1986-1990).
China's objective to quadruple the 1980 industrial and agricultural output
by the year 2000 requires the country's output to grow at an average annual rate
of growth of about 6% in the 1990's. To enable China to accomplish this growth
target under the prevailing economic environment, China's economic policy aims
to provide a stable and non-inflationary environment to revive growth. Another
prevailing goal is to relieve the supply bottlenecks arising from imbalanced
growth over the last 10 years with resources to be allocated to the priority
areas of agriculture, energy, transportation, telecommunications and basic
materials industries. Emphasis is also placed on export-oriented and
import-substitute production.
THE FINANCIAL SYSTEM
The Ministry of Finance is responsible for overseeing state finances and the
collection of revenue and taxation. The banking system is managed by China's
central bank, the People's Bank of China ("PBOC"). The PBOC, like the Ministry
of Finance, is a state administrative organ under the leadership of the State
Council. Its primary functions include: the formation of national financial
regulations and policies; the issuance of currency and regulation of its
circulation; the co-ordination and implementation of credit plans; overseeing
the establishment and operation of financial institutions and financial markets,
including stock exchanges; administration of China's foreign exchange and gold
reserves and adjustment of exchange rates against foreign currencies; and
administration of China's securities markets.
There are currently five specialized banks, namely, the Industrial and
Commercial Bank of China, the China Investment Bank, the Agricultural Bank of
China, the People's Construction Bank of China, and the Bank of China (the
"BOC"). Trust and investment companies and credit cooperatives also provide
financial services in China. Major trust and investment corporations include
China International Trust and Investment Corporation ("CITIC"), Shanghai
Investment and Trust Corporation ("SITCO"), and Guangdong International Trust
and Investment Corporation ("GITIC").
SAVINGS AND INVESTMENT
Historically, China has had a relatively high rate of national savings--
approximately 34% as of the end of 1990. The following table sets out the value
of savings deposit balances for selected years.
SAVINGS DEPOSIT BALANCES
(RMB BILLION)
YEAR-END TOTAL URBAN AREAS RURAL AREAS
-------- ------ ----------- -----------
1955 ..................... 1.99 1.69 0.30
1960 ..................... 6.63 5.11 1.62
1965 ..................... 6.52 5.23 1.29
1970 ..................... 7.95 6.45 1.50
1975 ..................... 14.96 11.46 3.50
1980 ..................... 39.95 28.25 11.70
1985 ..................... 162.26 105.78 56.48
1990 ..................... 703.42 519.26 184.16
--------------
Source: China Statistical Yearbook, 1991, State Statistical Balances of the
People's Republic of China.
The following table provides a breakdown of total fixed investment in China
for the years 1985 to 1990.
<TABLE>
TOTAL FIXED INVESTMENT
(RMB MILLION)
<CAPTION>
ITEM 1985 1986 1987 1988 1989<F1> 1990<F1>
---- ---- ---- ---- ---- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Total Investment .................... 254,319 301,962 364,086 449,654 413,773 444,929<F3>
Ownership
State-Owned Units ................. 168,051 197,850 229,799 276,276 253,548 291,864<F3>
Capital Construction ............ 107,437 117,611 134,310 157,431 155,174 170,381
Technical Updating and
Transformation ...................... 44,914 61,921 75,859 98,055 78,878 83,019
Other Investment in Fixed Assets<F2> 15,700 18,318 19,630 20,790 19,497 19,907
Collective -- Owned Units ......... 32,746 39,174 54,701 71,171 56,999 52,948
Urban ........................... 12,823 14,639 18,130 25,497 18,563 16,338
Rural ........................... 19,923 24,535 36,571 45,674 38,436 36,610
Individual Investment ............. 53,522 64,938 79,586 102,208 103,226 100,117
Urban ........................... 5,679 7,456 10,051 15,685 14,023 12,470
Rural ........................... 47,843 57,482 69,535 86,523 89,203 87,647
Source of Finance
State Appropriation ............... 40,780 44,063 47,554 41,001 34,162 38,765
Domestic Loans .................... 51,027 63,831 83,594 92,668 71,636 87,088
Foreign Investment ................ 9,148 13,216 17,537 25,899 27,415 27,826
Self-Raised Funds ................. 148,851 174,518 235,550 232,949
153,364 290,087
Others ............................ 32,000 40,883 45,009 58,301
<FN>
--------------
Notes: <F1> 1989 and 1990 figures exclude projects with value of RMB 20-50
thousand.
<F2> Includes investment in oilfield maintenance and development, mine
expansion projects, highway maintenance and bridge construction,
warehouse construction and projects valued RMB 20-50 thousand for
fixed asset construction or equipment purchase.
<F3> Includes RMB 18.557 billion investment to purchase buildings.
</TABLE>
Source: China Statistical Yearbook, 1991, State Statistical Bureau of the
People's Republic of China.
INFLATION AND MONETARY POLICY
Inflationary pressures are a major concern in the Chinese economy. While the
retail price index has been relatively stable in recent years, this figure
understates inflation, especially urban inflation. A more informative measure is
the cost of living index in 35 major cities, which has generally risen at a
higher rate. In light of the on-going reforms of price subsidies and continued
growth, relatively high inflation should be expected.
The following table provides information regarding wage and price inflation
in China during the years 1980 to 1991.
WAGE AND PRICE INFLATION (%)
GENERAL RETAIL COST OF NOMINAL
YEAR PRICES LIVING WAGES
---- -------------- ------- -------
1980 ........................... 6.0 7.5 4.1
1981 ........................... 2.4 2.5 1.3
1982 ........................... 1.9 2.0 3.4
1983 ........................... 1.5 2.0 3.5
1984 ........................... 2.8 2.7 17.9
1985 ........................... 8.8 11.9 17.9
1986 ........................... 6.0 7.0 15.8
1987 ........................... 7.3 8.8 9.8
1988 ........................... 18.5 20.7 19.7
1989 ........................... 17.8 16.3 10.8
1990 ........................... 2.1 1.3 10.6
--------------
Source: China Statistical Yearbook, 1991, State Statistical Bureau of the
People's Republic of China.
China's monetary policy has vacillated between expansionist and
contractionist. This varying monetary policy has contributed to a fundamental
cycle of the Chinese economy in recent years: reform and expansion leading to
overheating of the economy and tightening of control.
PUBLIC FINANCE
Persistent fiscal deficits have been a macroeconomic management problem in
China in recent years. Despite efforts by the government to increase revenues
and control spending, deficits continue to be a problem.
The following table illustrates the persistent budget deficits for the years
1980 to 1990.
GOVERNMENT BUDGET
TOTAL
TOTAL REVENUE EXPENDITURE BALANCE
YEAR (RMB BILLION) (RMB BILLION) (RMB BILLION)
---- ------------- ------------- -------------
1980 ..................... 108.52 121.27 (12.75)
1981 ..................... 108.95 111.50 (2.55)
1982 ..................... 112.40 115.33 (2.93)
1983 ..................... 124.90 129.25 (4.35)
1984 ..................... 150.19 154.64 (4.45)
1985 ..................... 186.64 184.48 2.16
1986 ..................... 226.03 233.08 (7.05)
1987 ..................... 236.89 244.85 (7.96)
1988 ..................... 262.80 270.66 (7.86)
1989 ..................... 294.79 304.02 (9.23)
1990 ..................... 331.26 345.22 (13.96)
--------------
Source: China Statistical Yearbook, 1991, State Statistical Bureau of the
People's Republic of China.
The following table provides information regarding how China finances its
deficit.
<TABLE>
GOVERNMENT DEBT
(RMB MILLION)
<CAPTION>
DEBT ISSUED DEBT RETIRED AND INTEREST PAID
-------------------------------------- ---------------------------------------------------
DOMESTIC
BONDS AND PEOPLE'S
TREASURY FOREIGN DOMESTIC FOREIGN BANK
YEAR TOTAL BILLS DEBT TOTAL BONDS DEBTS LOANS
---- ----- -------- ------- ----- -------- ------- -----
<C> <C> <C> <C> <C> <C> <C> <C>
1980 ........................... 4,301 -- 4,301 2,858 -- 2,440 418
1981 ........................... 7,308 -- 7,308 6,289 -- 5,780 500
1982 ........................... 8,386 4,383 4,003 5,552 -- 4,962 590
1983 ........................... 7,941 4,158 3,783 4,247 -- 3,656 591
1984 ........................... 7,734 4,253 3,481 2,891 -- 2,274 617
1985 ........................... 8,985 6,061 2,924 3,956 -- 3,259 697
1986 ........................... 13,825 6,251 7,574 5,016 798 3,449 769
1987 ........................... 16,955 6,307 10,648 7,983 2,318 5,196 469
1988 ........................... 27,078 13,217 13,861 7,675 2,844 4,258 573
1989 ........................... 28,297 13,891 14,406 7,236 1,930 4,583 723
1990 ........................... 37,545 19,724 17,821 19,040 11,375 6,821 844
</TABLE>
--------------
Source: China Statistical Yearbook, 1991, State Statistical Bureau of the
People's Republic of China.
FOREIGN TRADE
As a result of the economic reforms commenced in 1978, China's foreign trade
has grown considerably in value, range of products and number of trading
partners. A major goal of China's trade policy is to increase the percentage of
manufactured goods in the country's total exports. Gradual progress has been
made in recent years with the aid of the imported foreign technology. Textiles
and garments together form the single largest export category, representing 25%
of total export values.
China's trade balance has fluctuated over the last five years. In 1991
China's foreign trade yielded a foreign trade surplus of U.S. $8.1 billion.
Exports reached U.S. $71.9 billion, an increase of 15.8% over that of 1990, and
imports reached U.S. $63.8 billion, an increase of 19.5% over the 1990 figure.
Total trade for the year was approximately U.S. $135.7 billion, up 17.5% over
1990. In 1990, China experienced a trade surplus of $8.7 billion. In contrast,
the country experienced trade deficits of $7.8 billion and $6.6 billion,
respectively, in 1988 and 1989.
The following table provides information about China's total import and
export values for the years 1981 to 1991.
IMPORTS, EXPORTS AND TRADE BALANCE
(U.S. $ BILLION)
TRADE
YEAR TOTAL TRADE EXPORTS IMPORTS BALANCE
---- ----------- ------- ------- -------
1981 ................. 44.02 22.01 22.02 (0.01)
1982 ................. 41.61 22.32 19.26 3.04
1983 ................. 43.62 22.23 21.39 0.84
1984 ................. 53.55 26.14 27.41 (1.27)
1985 ................. 69.61 27.35 42.25 (14.90)
1986 ................. 73.85 30.94 42.90 (11.96)
1987 ................. 82.65 39.44 43.22 (3.78)
1988 ................. 102.78 47.52 55.27 (7.75)
1989 ................. 111.68 52.54 59.14 (6.60)
1990 ................. 115.41 62.06 53.35 8.71
1991 ................. 135.70 71.90 63.80 8.10
--------------
Sources: China's Customs Statistics, General Administration of Customs of the
People's Republic of China; China Statistical Yearbook, 1991, State
Statistical Bureau of the People's Republic of China.
Hong Kong is the leading destination for Chinese exports, accounting for
over 40% of total export volume. Hong Kong is also a major re-export center for
Chinese goods. Other large export markets for China include Japan, the United
States, and Germany. Over the past few years, China's imports have continued to
expand and diversify. Hong Kong, Japan and the United States are China's top
three suppliers. Other major suppliers include Germany and Italy.
The following table lists China's top-ten trading partners, along with the
U.S. dollar value of the trade between China and each country for the years
1989, 1990, and 1991.
<TABLE>
MAJOR TRADING PARTNERS
(U.S. $ MILLION)
<CAPTION>
TOTAL TRADE EXPORTS FROM CHINA IMPORTS TO CHINA
---------------------------------- ---------------------------------- ----------------------------------
1989 1990 1991 1989 1990 1991 1989 1990 1991
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Hong Kong ............. 34,456 40,907 49,600 21,915 26,650 32,137 12,540 14,257 17,146
Japan ................. 18,928 16,599 20,284 8,394 9,011 10,252 10,533 7,587 10,032
United States ......... 12,273 11,767 14,202 4,409 5,179 6,194 7,863 6,588 8,008
Germany ............... 4,987 4,971 5,405 1,608 2,034 2,356 3,379 2,936 3,049
U.S.S.R. .............. 3,995 4,379 3,904 1,849 2,239 1,823 2,146 2,139 2,081
Singapore ............. 3,190 2,882 3,077 1,692 1,974 2,014 1,498 857 1,063
Italy ................. 2,550 1,904 2,389 714 835 931 1,835 1,069 1,458
France ................ 1,948 2,308 2,306 528 645 734 1,420 1,663 1,572
Australia ............. 1,895 1,808 2,110 423 455 554 1,472 1,353 1,556
United Kingdom ........ 1,718 2,026 1,670 635 643 728 1,083 1,383 942
</TABLE>
--------------
Sources: China Statistical Yearbook, 1991, State Statistical Bureau of the
People's Republic of China; China's Customs Statistics, General
Administration of Customs of the People's Republic of China.
EXTERNAL DEBT AND FOREIGN CAPITAL UTILIZATION
China has traditionally adopted a policy of self-reliance when financing
development; overseas borrowings have been minimal. The country has remained a
conservative borrower but, since the early 1980s, has been making greater use of
foreign capital and financing, including government-assisted facilities and
project and trade financing.
The primary sources of foreign capital for China, in order of importance,
are as follows:
1) International Monetary Fund and World Bank loans and credits;
2) government low interest loans and credits; and
3) commercial loans and credits.
The following table shows the sources and types of foreign capital utilized
by China.
FOREIGN CAPITAL UTILIZATION
(U.S. $ MILLION)
ITEM 1985 1989 1990
---- ---- ---- ----
Total .................................... 9,867.42 11,478.78 12,085.69
Foreign Loans ............................ 3,534.21 5,184.69 5,099.37
Loans from International Monetary
Organizations ........................ 1,131.51 855.80 1,893.00
Governmental Loans ..................... 1,020.53 1,471.25 719.37
Other .................................. 1,382.17 2,857.64 2,487.00
Direct Investment by
Foreign Businesses ..................... 5,931.10 5,599.76 6,596.11
Joint Venture .......................... 2,029.70 2,659.02 2,703.95
Co-Operative Operation ................. 3,496.15 1,083.22 1,254.10
Co-Operative Development ............... 359.59 203.74 194.25
Foreign Enterprises(1) ................. 45.66 1,653.78 2,443.81
Other Foreign Investments ................ 402.11 694.33 390.21
Compensation Trade ..................... 260.34 474.75 202.65
Processing and Assembly ................ 141.77 147.60 136.48
International Rent ..................... -- 71.98 51.08
--------------
Note: (1) Includes equipment supplied by foreign businesses in transactions in
compensation trade, processing and assembly and value of equipment
supplied in financial leasing transactions.
Source: China Statistical Yearbook, 1991, State Statistical Bureau of the
People's Republic of China.
EXCHANGE RATE AND FOREIGN EXCHANGE CONTROL
There is centralized control and unified management of foreign exchange in
China. The State Administration of Exchange Control (the "SAEC") is responsible
for matters relating to foreign exchange administration, while the Bank of China
(the "BOC") is in charge of foreign exchange operations. Cooperating closely
with the BOC, the SAEC fixes the official daily exchange rate of RMB against
major foreign currencies.
There are two types of monetary instruments in China today, the RMB and
Foreign Exchange Certificates ("FEC"). The RMB is the official currency in China
and is currently not convertible into foreign exchange unless converted with
express written authorization from the SAEC. The FEC is a Chinese currency
established for use by foreigners in lieu of RMB and is convertible into hard
currency. Both RMB and FEC are denominated in the monetary unit of "yuan" and
are officially at par with each other. It is expected that FECs will be
withdrawn from circulation in the near future.
While foreign investment enterprises are able to remit from China any
profits earned in foreign exchange, RMB earnings within China cannot be freely
converted into foreign exchange except at the foreign exchange adjustment
("swap") centers established by the SAEC. In order to provide some relief from
the controls imposed by the earlier foreign exchange legislation, the State
Council promulgated on January 15, 1986 the "Regulations Concerning the Balance
of Foreign Exchange Income and Expenditure of Chinese-Foreign Equity Joint
Ventures," which provide for a number of mechanisms to allow foreign investment
enterprises to "balance" their foreign exchange income and expenditure. These
mechanisms include the sale of joint venture products within China for foreign
exchange, the export of products purchased with RMB from Chinese enterprises to
generate foreign exchange, short-term loans and the "swapping" of RMB for
foreign exchange with other foreign investment enterprises and Chinese
enterprises, among others.
The exchange rate fluctuates from time to time and from swap center to swap
center depending on supply and demand. The renminbi has been devalued
progressively in recent years, depreciating by almost 70% against the U.S.
dollar between 1981 and 1990.
The following chart lists comparative average exchange rates for the
renminbi and other selected currencies since 1986.
<TABLE>
EXCHANGE RATES
(CURRENCY UNITS PER U.S. $)
<CAPTION>
1986 1987 1988 1989 1990 1991 1992 1993
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Australia ....................... 1.491 1.472 1.275 1.262 1.280 1.284 1.363 1.974
New Zealand ..................... 1.872 1.613 1.563 1.693 1.675 1.774 1.881 1.806
China ........................... 3.7221 3.7222 3.7221 4.7221 5.2221 5.4000 5.8400 5.800
Hong Kong ....................... 7.8030 7.7980 7.8060 7.8000 7.7950 7.7780 7.7400 7.730
Singapore ....................... 2.1750 1.9985 1.9462 1.8944 1.7445 1.6190 1.6400 1.610
Korea ........................... 861.4000 792.3000 684.1000 679.6000 716.4000 756.3000 781.0800 808.100
Taiwan .......................... 35.5000 28.5500 28.1700 26.1600 27.1100 25.7475 25.2000 26.700
Malaysia ........................ 2.6030 2.4928 2.7153 2.7033 2.6980 2.7410 2.6700 2.700
Philippines ..................... 20.5300 20.8000 21.3350 22.4400 28.0000 26.0500 23.6000 27.100
Thailand ........................ 26.1300 25.0700 25.2400 25.6900 25.2900 25.2600 25.9900 25.300
Indonesia ....................... 1641.0000 1650.0000 1731.0000 1793.0000 1901.0000 1994.5000 2064.0000 2111.250
</TABLE>
--------------
Source: Wardley Investment Services, Baring Securities.
TAIWAN
Taiwan is the most invisible country on the planet, and Taiwan is recognized
by very few countries, mostly small island states like itself in the South
Pacific and the Caribbean. And yet it is an oriental paradox -- it has a
financial and diplomatic influence which is out of all proportion to its small
size. For historical and cultural reasons Taiwan stands between China and Japan.
(The slow pace of the Sino-Japanese relationship since 1972 may be partly caused
by this conundrum.)
Indeed, if Taiwan is now going to be brought back into the fold it is also
reasonable to expect the level of Japanese investment and trade in China to
accelerate. It is very probable that Japan will use Taiwan as a "middle-man" for
trade and investment in China.
Taiwan is dependent on its close relationship with the United States and its
very successful diplomacy and public relations campaign which, ever since Madame
Chiang Kai-Shek's days in the 1940s has sustained a high level of sympathy in
Washington for the Nationalist regime. Taiwan also has close relations with
South Africa, from which it buys essential raw materials such as coal, and also
with Israel, with whom it has had military as well as trade links.
For all these reasons, much of the real Taiwan has been hidden for many
years. It is misunderstood by Westerners -- the country has been the most
difficult of all Asian countries to follow and understand. However, since the
lifting of martial law in 1987 much of this has changed. People in Taipei are
again willing to talk openly and it is possible to begin to understand the sense
in which Taiwan has become a repository of much of the best of the old Chinese
traditions. In Taiwan can be found many of the old Chinese arts -- a strong
family life, Confucianism, a flourishing trade in traditional Chinese medicines,
the martial arts, an excellent standard of Chinese movies and television, and
the tradition of Chinese law.
Nevertheless, the basic geopolitical fact about Taiwan is that it sits under
the shadow of mainland China and under the threat of reunification, whether
peaceful or by military means. However in the last few years and especially
since June 1989, the leadership of the Communist Party in Peking and in Taipei
have begun, for the first time since 1949, to have serious talks and regular
communication. At the same time the flow of investment from Taiwan into mainland
China, especially into the neighbouring province of Fujian, has grown
dramatically and the two-way trade is now approaching US $4 billion annually. In
the early days of this two-way business, the authorities in Taipei turned a
blind eye to the many small projects that Taiwanese businesspeople were
embarking upon with PRC partners. Also, there was an enormous increase in the
number of annual visitors from Taiwan into China. Along with the travel and
tourism came the investment and it is now estimated that there is over US $500
million of direct Taiwanese capital in plants and small businesses in China.
Many of the most successful toy and electronics factories in Shenznen, across
the border from Hong Kong, are owned and managed by Taiwanese. Speaking Mandarin
or the Fujianese dialect, they have the same natural advantage in dealing with
mainland officials and businesspeople that the Hong Kong Cantonese have with the
inhabitants of Guangdong Province.
So the analysis of risk and reward in Taiwan must already take account of
this rapidly growing economic integration between Taiwan and China which, has
led to over 30 percent of Taiwan's trade being with the mainland and that the
total investment from Taiwan to China may approach US $5 billion or even US $10
billion. As with Hong Kong, increasingly an investment in Taiwan will be seen
indirectly as a "play" or an investment in China itself. Nevertheless, Taiwan
remains a free capitalist enclave with some very successful entrepreneurial and
export-oriented companies. The government's role in the economy is relatively
small. It has pursued consistently, since 1950, a laissez-faire policy which
allows small family run companies typically to change their product line every
two or three years to meet the demands of American or other international
clients. Statistics clearly indicate that the exports strengths, which have
powered the Taiwanese economic boom for thirty or forty years, remain intact
despite the shortage of skilled labour, the high cost of labour and the strong
New Taiwan dollar, which has impelled many Taiwanese businesspeople to shift
their production to Thailand, the Philippines, and Malaysia as well as China.
The best measure of Taiwan's economic success is in its US $80 billion of
foreign exchange reserves.
What then is the real risk to Taiwan? After Hong Kong is taken over in 1997
Taiwan will appear more isolated and it will have lost its neutral meeting point
with China which the British colony has represented. On the other hand, by that
time Taiwan and China may have grown sufficiently close in economic, if not in
political, terms that Hong Kong will have become unnecessary. Direct trade and
investment are already commencing. Some form of political agreement allowing for
Taiwan's autonomy, if not independence, may be worked out. The one country two
systems formula applied to Hong Kong and Macau was always designed by Peking
with the objective of regaining Taiwan in the long term. That long term may not
be as long as some observers have predicted. The passing away of the older
generation who fought in the bitter civil wars between the communists and the
KMT from 1927 to 1949 will remove much of the bitterness and open up the way for
a new dialogue between the younger leaders in the two Chinas.
The strongest argument for a political compromise and a formula for
coexistence is the natural complementarity of the two Chinese communities on an
economic basis. China has the labour, the land and the resources. Taiwan has the
capital, the technology and the trained entrepreneurs. A formidable Chinese
Economic Community could be a reality before the end of the century. However, a
more pessimistic view would be to see a return to ideological extremism in
Peking resulting in a renewed cold war across the Taiwan Straits, a cut off of
business and cultural links, and a potential military conflict. Even in this
very gloomy scenario Taiwan may be able to defend itself and maintain its
economic prosperity because it will still have the economic support of both
Japan and the United States.
The following table gives details of the overall economic performance of
Taiwan from 1987 to 1993.
--------------------------------------------------------------------------
EXCHANGE GDP TRADE MARKET MARKET
RATE GROWTH SURPLUS YEAR-END CAPITAL
AV. US $ (%) CPI (US $BN) P/E CLOSING (US $BN)
-------- ------ ----- ---------- ---- -------- --------
1987 31.85 12.3 0.5 18.7 28.7 2,339.26 48.45
1988 28.57 7.3 1.3 10.9 68.9 5,119.11 120.1
1989 26.41 7.6 4.4 14.0 92.0 9,624.18 240.0
1990 26.39 6.9 4.1 14.9 33.0 4,530.16 112.4
1991 25.50 7.3 3.6 15.7 28.0 4,600.67 123.7
1992 25.20 6.1 4.5 12.5 30.1 3,377.06 100.1
1993 27.00 6.2 2.9 7.8 30.3 6,071.00 191.0
1994* 26.30 6.2 4.0 -- 33.1 -- 242.1
*Estimate
The risks for an investor in The Taiwan Stock Exchange Corp. are
specifically those of a highly priced and highly volatile securities market with
very weak regulations and poor accounting standards. It was once estimated that,
out of 140 listed companies in Taiwan, perhaps twenty or thirty counters were
those of companies which were technically bankrupt. Investors take little
account of security analysis or of the investment fundamentals which might count
more for long-term Western investors. The speculative atmosphere of The Taiwan
Stock Exchange Corp. does, therefore, portray a high degree of risk. However,
the New Taiwan (NT) dollar is a very steady currency in relation to the U.S.
dollar. The economy of the island has shown a steady and non-inflationary growth
rate and savings are very high in relation to disposable income.
The most important risk to consider for a Western investor trying to get
into the Taiwanese market is the choice of a trustworthy and reliable local
partner. This is much more difficult to achieve in Taiwan than in, say Hong
Kong, where the British legal and commercial system and the educational system
are more familiar. Taiwan has a purely Chinese culture and way of life even
though most of the younger business people are educated in the universities of
the United States and many have PhDs. Nevertheless, the way of doing business
remains a traditional Chinese way. Therefore, nothing can be achieved by means
of legal contracts or agreements in the accepted Western sense. Even more than
in China, Taiwan depends on the personal contact and trust between the two
individuals involved. Many Western banks have come to grief in their pursuit of
the elusive Taiwan millionaires in the private banking sector and in their
corporate loans to apparently sound Taiwanese companies, which either cannot or
will not repay. Recourse is very hard to enforce and the legal system is
undeveloped. These are the major risks in doing business in Taiwan but the
potential rewards should not be underestimated. Those who have had a long-term
commitment to the island republic, have had good contacts with the government
and have done business in the Chinese way with a good local Chinese partner have
been able to demonstrate very good long-term returns on their investments. In
addition, the links that Taiwan business people have built around the globe, in
the United States in particular but also increasingly in Canada, where they have
followed Hong Kong investors into Bristish Columbia, in Australia, in the
Philippines and in Bangkok, are impressive.
KOREA
Political volatility has characterized the history of South Korea (referred
to as Korea throughout this section) during the past forty years, while at the
same time an extraordinary economic boom has occurred. Rigid discipline has been
characteristic of the military government under President Park during the 1960s
and 1970s, which were the most successful decades in economic terms particularly
in the growth of Korea's exports and in the per capita income. It is important
to remember how completely the cities and transport system of the southern part
of the Korean peninsula had been destroyed in the civil war of the 1950s. The
effort of reconstruction was, therefore, enormous. Living standards in the 1960s
were extremely low. The threat from North Korea has exerted a continuous
military pressure on the South in the past forty years which is probably unique
to any country in the world, even including West Germany or Taiwan. Seoul is
only 30 kilometers from the demilitarized zone and, therefore, lives in a
continuous state of tension and fear of an imminent invasion. This very real
threat is also translated into a very high percentage of military spending in
the national budget. If Korea is compared with Japan, the Koreans have had to
spend ten times more of their national income on defense than the Japanese and
yet have succeeded in recording higher rates of economic growth.
The fierce political in-fighting, which has been a constant characteristic
of Korean history, was suppressed for a period in the 1970s and 1980s, both
before and after the assassination of President Park. Since 1987 the opening up
of the democratic process has been smoothly handled despite the continuing
student riots and disturbances. In fact, stock market investors have generally
ignored the television images of riot police, tanks firing tear gas and students
throwing petrol bombs, to concentrate more on the continuous success of Korean
companies in their conquest of overseas export markets and their impressive
earnings growth. Nevertheless, the threat from the North and the fierceness of
the Korean political opposition do combine to give Korea a lower score for
political stability than its neighbours. We have the sense in Korea of a higher
risk but also a much greater potential should the rapprochement with the North
lead to a peaceful reunification.
The following table gives details of the overall economic performance of
South Korea from 1987 to 1993.
--------------------------------------------------------------------------
TRADE
EXCHANGE GDP SURPLUS/ MARKET MARKET
RATE GROWTH (DEFICIT) YEAR-END CAPITAL
AV. US $ % CPI (US $BN) P/E CLOSING (US $BN)
-------- ------ ----- ---------- ---- -------- --------
1987 822.57 13.0 3.0 7.7 10.6 525.1 33.0
1988 731.47 12.4 7.1 11.4 13.6 907.2 94.3
1989 671.46 6.7 5.7 4.6 22.9 909.7 140.9
1990 707.76 9.3 8.6 (2.0) 18.5 696.1 110.2
1991 731.60 8.3 9.7 (7.0) 15.0 610.9 96.4
1992 781.08 4.7 6.2 (2.1) 15.0 678.4 107.4
1993 808.10 5.5 6.5 (1.6) 17.5 866.0 139.0
1994* 775.00 7.9 6.2 -- 21.1 -- 190.0
*Estimate
South Korea has the highest overall score for economic growth in the world
over the past twenty years even when compared with the other Asian tigers. The
average growth over a twenty-year period has been close to 9 percent in real
terms, at certain times reaching even 13-14 percent. This means that the average
Korean today has a per capita income of nearly U.S. $6,000 per annum, an income
which has grown nearly thirty times in thirty years. There have been tremendous
social changes resulting from this economic boom, notably the shift of
population from the countryside into the cities and the shift in the economic
structure from agriculture to industry and, more recently, to the service
sector. This has all occurred in a shorter period of time than in almost any
other advanced economy. What took England one hundred years and Japan thirty
years, has taken Korea typically less than ten years. There has been some
slowing during the 1980s compared to the 1970s, but Korea still has among the
highest overall ratings for GNP growth. Its industrial workforce has not lost
its competitive edge and the average working week in Korea is still in excess of
fifty hours, the longest working week in the world. These are the foundations of
Korea's continued economic success. It is unlikely that such characteristics,
being social in origin, will disappoint us in the next decade. Therefore it is
reasonable to expect Korea's economy to continue to be one of Asia's most
succesful.
The flexibility of its large trading companies, the chaebol, has been
recently underlined again as they have shifted their emphasis from the United
States, Canada and Europe towards the new markets of China and the Soviet Union.
There is little doubt that Korean exporters will be leading the Japanese in
providing Russian consumers with basic consumer goods. The readiness to take
risks in new areas has continuously paid off for Korean companies just as it did
when they were able to grab the major construction contracts in the Middle East
during the oil boom of the 1970s. (These new trade links have also translated
into new diplomatic links with China, Hungary, Poland and the Soviet Union, thus
further isolating North Korea from its communist neighbours.)
Inflation in Korea has been higher than in Japan or Taiwan. In the 1970s,
Korea experienced an annual average inflation rate of nearly 15 percent.
Beginning in 1982, however, the tight monetary policy succeeded in bringing this
annual consumer price index down to single digits until 1990 when the rate
jumped again to 8.6 percent. The Korean export boom has led to a big inflow of
foreign exchange accompanying Korea's trade surpluses of the past five years.
This, in turn, has led to a sharp increase in money supply and a boom in real
estate prices in Seoul. Thus the rise of both the Korean share market and
property market since 1985 has in a sense been a lagging indicator of the
economic boom of earlier years with its inevitable build up of national and
personal wealth among the Korean population. Nowhere has the number of investors
grown faster than in The Korea Stock Exchange during the 1980s. Thus rising
prices have reflected rising national wealth. This inflation problem has been,
and can again be, tamed by a strong central bank response and this is what would
be expected in the 1990s.
The exchange rate of the Korean won against the U.S. dollar has reflected
both the relative inflation rates of Korea and its international trading
partners and also the more recent success of Korea in repaying much of its
foreign debt and building up its reserves. The won was held very steady during
the 1970s and then allowed to devalue between 1980 and 1985 from 484 won to the
dollar to its lowest level of 890 won to the dollar. With the sharp improvement
in Korea's overseas trade position the won started to appreciate from 1986
onwards. With the subsequent relapse of Korea into a new trade deficit in 1990
and the recovery of the dollar in world exchange markets, the Korean won has
again depreciated slightly. However, there is a high degree of stability and the
currency is managed by the central bank. A devaluation of more than 5 percent
per annum should not be expected unless Korea's trade or inflation problems
worsen significantly.
It is likely that Korea's foreign trade position will improve again thanks
to the country's competitive position in export markets. In a more liberated
domestic economy with lower tariffs on foreign goods, however, it will be more
difficult to restrain the growth of imports as Korean consumers demand a greater
choice. Korea's main deficit is with Japan and consists largely of capital
goods. This is likely to continue as long as Korean manufacturers wish to
maintain their competitive edge in the most modern plant and equipment.
THAILAND
Thailand is unique in South East Asia in that it has escaped the colonial
experience and maintained its freedom and independence. In addition, the
monarchy plays a key role in maintaining the country's political stability and
independence. It is, nevertheless, sobering to realize that since the absolute
monarchy was ended in 1932 there have been no less than twenty-one coup d'etats,
of which twelve have been successful. The recent international perception of
Thailand was very much coloured by the experience of the past fifteen years as
there had been no successful coup d'etat since 1977. Thus the one that took
place in February 1991 was a surprise to many foreign observers and investors,
although it had broad popular support and the tacit blessing of King Bhumibol
himself. The army was felt to be acting not only to further its own cause but to
stamp out political corruption and restore, within a period of six months, a
democratically elected government. The Cabinet, which was put in place
immediately after this coup, contained fifteen PhDs out of a total of
twenty-three ministers, and the generals were in a small minority compared to
the businesspeople, diplomats and civil servants with a record of disinterested
public service. Thus it seems that Thailand in the 1990s will remain democratic
but that the King and the army will continue to play a role which would be
described in a Western democracy as that of "checks and balances" on the
excesses of elected politicians.
Political risk in Thailand needs to be seen in this cultural context.
Thailand has been given a higher rating for political stability because of the
existence of the monarchy first of all. King Bhumibol, who has been on the
throne since 1946, commands enormous personal respect and popular reverence. It
is impossible, therefore, for any government or military group to gain power
without his tacit approval. This factor mitigates much of the instability which
may be suggested by the record for the past sixty years of attempted military
coups. At the same time Thailand has differed from its neighbours Burma and
Vietnam in possessing a free and independent peasant population which has, on
the whole, enjoyed a higher standard of living than their neighbours and,
therefore, the communist movement has never made much headway among the rural
people. On the other hand again, Thailand's extraordinary economic growth in the
1980s (averaging 10 percent per annum) has put great strains not only on the
urban environment because of traffic jams and pollution, but also on the social
and family system. Many rural families have been forced to send their teenage
children to the cities to find employment. The contrast of living standards
between Bangkok and the north east provinces (an estimated per capital income
would be perhaps US $2,500 per annum for the former and less than US $500 per
annum for the latter) must eventually create social tensions and potential
unrest. The laissez-faire policy of the Bangkok government has thus far worked
extremely well although the lack of planning, in terms of the proliferation of
factories around the capital, leaves something to be desired.
The fact that Thailand is a majority Buddhist country may do much to explain
the non-violent changes of power and exchanges of politically different views
which characterizes its public life. So, along with the monarchy, Buddhism must
be counted as a major factor of political stability. The army is the third
element which can be considered, on balance, to be a positive factor. During the
1970s when it seemed more than probable that Thailand would bear out the
Pentagon "domino theory" by which each country in succession -- China in 1949,
North Vietnam in 1954, South Vietnam in 1975, Laos, Cambodia in
1975-7...Thailand, Malaysia, Singapore -- would fall to the irresistible
southward movement of the communist militias. But Thailand was the point at
which communism stumbled and fell back. Much of this has to do with the
professionalism of the army and the basic resistance of the people to a foreign
ideology. As Siam had resisted British and French colonial pressure in the
nineteenth century, so Thailand in the twentieth century resisted the Marxist
Leninist dictatorship which engulfed its once prosperous neighbour, Vietnam.
Thailand is, finally, the most open country to foreigners and receives
almost 5 million tourists a year. The self-confidence and strong sense of
cultural identity of the Thai people is in no way diminished by the superlative
standards of service which characterize their hotels, tourist resorts and
airlines. Any independent observer or visitor to Thailand can, therefore, assess
the real nature of the underlying social stability of the country which supports
the high degree of political stability predicted for the country.
The following table gives details of the overall economic performance of
Thailand from 1987 to 1993.
--------------------------------------------------------------------------
TRADE
EXCHANGE GDP SURPLUS/ MARKET MARKET
RATE GROWTH (DEFICIT) YEAR-END CAPITAL
AV. US $ % CPI (US $BN) P/E CLOSING (US $BN)
--------- ------ ----- ---------- ---- -------- ----------
1987 25.72 9.5 2.5 (1.6) 9.3 284.99 5.4
1988 25.29 13.2 3.9 (3.9) 16.3 386.73 8.86
1989 25.70 12.2 5.4 (5.4) 26.4 879.19 25.67
1990 25.56 10.0 6.0 (9.9) 13.8 612.86 23.86
1991 25.05 8.2 5.7 (9.6) 15.6 711.40 35.7
1992 25.49 7.5 4.1 (8.5) 15.2 893.40 58.20
1993 25.50 7.8 4.8 (9.2) 27.6 1,183.00 130.0
1994* 25.30 8.2 5.1 -- 20.7 -- 150.0
*Estimate
Thailand's economy has been the fastest growing in the world for the past
three years. The take-off really began in 1986-7 with the flood of new foreign
investment into the country, largely from Japan and Taiwan. The rapid
appreciation of the Japanese yen against the dollar in 1985-6 forced many
Japanese manufacturers to consider moving some of the low technology, low labour
cost activities, such as textiles, consumer electronics and footwear, offshore.
Thailand was a natural destination for Japan's industrialists, made easier by
the low degree of red tape and bureaucratic delays. Hence as the figures
published by the Board of Investment between 1985 and 1992 show the rising tide
of foreign capital was a major cause of Thailand's economic boom. GDP growth
reached over 12 percent in 1988 and 1989 and it seems likely that in the 1990s
Thailand can sustain a medium-term growth of nearly 7 percent annually in real
terms.
There has been a large shift away from agriculture towards manufacturing. As
recently as 1980, 50 percent of Thailand's exports consisted of rice and tapioca
and other agricultural products. By 1990, 75 percent of the total volume of
exports were manufactured goods, mainly from the newly established assembly
plants in Bangkok and the south. This has resulted in large changes in
employment and moves of populations. Nevertheless, the profound change in the
structure of Thailand's economy has been well absorbed and sets the stage for a
move into higher value added products in the years up to 2000.
It is surprising, considering the very high rate of economic growth that the
economy has experienced, that prices, as measured by the consumer price index,
have been kept under control. The last serious bout of inflation in Thailand
occurred during the two oil crises, first in 1973-4 when the CPI touched 24
percent and then again in 1980-1 when there was a resurgence of inflation to
nearly 20 percent. In the later 1980s, and thanks largely to a more stable oil
price, inflation has been held in single digits and has not exceeded 6 percent.
Nevertheless, the boom of the past three years, particularly in Bangkok, has led
to a rapid escalation of real estate values and rents. It is likely that the
slowdown in the economy in 1991 will result in a lower inflation rate and,
therefore, it is expected that Thailand's inflation will be held at 5 percent or
below in the next few years.
Once again the record is one of extraordinary stability. The Thai baht has
been carefully managed by the Bank of Thailand against a basket of currencies
which is thought to be around 80 percent dollars and 20 percent yen. When
measured against the U.S. dollar it has resulted in a very small annual
variation of less than 3 or 4 percent. In fact, during the last six years there
has been virtually no change in the value of the baht compared with the dollar.
Clearly, the weaker dollar of the 1985-90 period has favoured Thailand's
exports. (The same effect is observable with the Hong Kong dollar which is also
pegged to the American unit.) Therefore, it is expected that Thailand's currency
will remain extremely stable in dollar terms in the future.
MALAYSIA
The central dilemma in assessing Malaysia's political risk is the perennial
question of relations between the Malay and Chinese communities representing as
they do about 60 percent and 30 percent of the population respectively. Since
the 1969 anti-Chinese riots in Kuala Lumpur the country has been unruffled by
any serious inter-racial violence and during this period a great deal has been
accomplished in transforming the economy and in transferring the wealth of the
country from foreign and Chinese hands into the hands of the bumiputra (or the
sons of the soil), which is the dominant Malay majority. The success of this New
Economic Policy is unquestioned and has given a great deal of legitimacy to the
continued run of the United Malay National Organisation (UMNO) under its
successive prime ministers and most recently under Dr. Mahathir Mohammed who has
now held power for a decade. This economic success has also done much to defuse
the threat from the Islamic fundamentalists who have tended to get co-opted into
the ruling party. The Chinese community has also done well in economic terms
although the political disunity in the Malay Chinese Association (MCA) has left
them somewhat leaderless in the political sphere.
Politics in Malaysia continues to be a question to revolve around its
leading personalities. It should also be noted, however, that Malaysia shares
one characteristic with Thailand, which is a strong monarchical system. In
Malaysia's case it is less visible because the kingship is shared on a five-year
revolving basis among the sultans of the various states of the federation. This
clear distinction of the British model between the head of state, or monarch,
and the prime minister, or political leader, is important to Malaysia's overall
stability.
The geographical divide between peninsular Malaysia and East Malaysia,
consisting of the states of Sabah and Sarawak, also underlines the need for a
great deal of political decentralization. Sabah and Sarawak have very different
histories from the other Malaysian states and can be examined for their
political make-up on a separate basis including the question of the Christian
minority in Sabah. Overall, however, it must be judged that Malaysia's economic
success has led to a far greater degree of political stability than was expected
following independence in 1963.
Malaysia's relations with its neighbours on the whole are excellent and, in
particular, the relationship with Singapore, which remains the largest investor
in the country, is a key one. The Singapore government is obviously enthusiastic
to diversify its industrial base across the causeway into Johore and further
north into peninsular Malaysia. This is good news for Malaysia's economic and
political stability.
The following table gives details of the overall economic performance of
Malaysia from 1987 to 1993.
--------------------------------------------------------------------------
TRADE
EXCHANGE GDP SURPLUS/ MARKET MARKET
RATE GROWTH (DEFICIT) YEAR-END CAPITAL
AV. US $ % CPI (US $BN) P/E CLOSING (US $BN)
-------- ------ ----- ---------- ---- -------- --------
1987 2.520 5.4 0.8 5.9 78.0 261.19 18.49
1988 2.619 8.9 2.5 5.6 36.0 357.38 29.05
1989 2.709 9.2 2.8 3.9 28.7 562.28 39.73
1990 2.705 9.8 3.1 1.9 39.8 505.9 48.81
1991 2.752 8.8 4.3 (6.4) 29.3 556.2 57.49
1992 2.620 8.0 4.7 2.8 21.0 644.0 92.20
1993 2.700 8.5 3.6 3.8 34.3 1,275.0 241.00
1994* 2.570 8.5 4.0 -- 26.5 -- 275.00
*Estimate
Malaysia, along with Singapore, experienced a sharp recession in 1985-6
owing to an excessive tight monetary policy in both countries. Since 1987
Malaysia has, however, returned to the path of high growth and low inflation.
Nevertheless, over a twenty year period Malaysia ranks behind Singapore,
Thailand and Hong Kong, although ahead of Indonesia in past overall economic
growth. The change in the past five years has also been accompanied by an
accelerated shift into manufacturing and away from the old dependence on the
plantation sector. This manufacturing growth has been led by investment from
Japan and Taiwan and notable national projects such as the Proton car. Malaysia
is attempting to move up market into the new product areas such as electronics,
car assembly and consumer goods. It is likely to be successful in doing so owing
to its literate and trainable workforce. Therefore, one can be fairly confident
that Malaysia's economic record will continue to be bright.
The exchange rate of the Malaysian ringgit has been closely tied to that of
the Singapore dollar which itself has been very stable if not strong against
other world currencies, expecially the US dollar. Therefore, the ringgit has had
a very stable record against the dollar and is likely to maintain this
stability. Malaysia's foreign trade has generally been in surplus, although
between 1990 and 1991 this figure fell sharply partly owing to fall-off in
Malaysia's energy exports. As manufactured goods assume a larger importance in
the composition of exports compared with crude oil, rubber and palm oil,
Malaysia's trade position should gradually become steadier. For an investor
Malaysia remains attractive although vulnerable to external shocks either in
terms of commodity prices or in a fall in export demand in its principal
markets. The infrastructure, high literacy rate and relative political stability
in recent years are all bonus points for the country's overall image.
SINGAPORE
"The silent success", in the words of a Singapore government minister, of
this region is based on a high literacy rate and a well-educated and trainable
workforce. The investment in human capital has proven to be more important to a
lasting economic growth success story than the availability of finance or
technology. The demise of communism is also promoting greater confidence and
political stability in the Association of South East Asian Nations (ASEAN)
region, of which Singapore is the de facto financial centre.
Essentially Singapore's aim in the 1990s will be to emulate what Hong Kong
has done in Guangdong Province and the hinterland of southern China. But in
Singapore's case its export of jobs and lower value added industries will be
mainly to neighbouring Malaysia and, to a lesser extent, to Indonesia. The
plantations in the southern part of the Malaysian peninsula depend almost
entirely on the large annual in-take of illegal workers from Indonesia. With 100
million people in Java alone, Indonesia needs to provide employment for 2-3
million a year. Thus mobility of labour within ASEAN is as important, if not
more so, than mobility of capital.
Singapore is aiming its investment at Johore in Malaysia and Batam Island in
Indonesia. This is the so-called growth triangle. There is a political aspect to
this. Singapore is a small Chinese island surrounded by a sea of Muslims. It
needs to ensure political stability among its neighbours. One of the best ways
of doing this (as Hong Kong has found in southern China) is to invest and create
jobs and raise per capita incomes from their present low level.
The other aspect of political risk when considering Singapore is, of course,
the handover of political power from one generation to another. Although Lee
Kwan Yew stepped down as Prime Minister in 1990, he continues to wield a large
influence and power behind the scenes. Nowhere in the world could it be truer to
say that the state is the creation of one man, thus his succession poses a very
real problem. His son, Lee Hsien Loong may not take up the post of Prime
Minister for three to five years. In any case, the question of dynastic
succession in a parliamentary democracy, even within a limited Confucian Chinese
democracy, is, to say the least, a questionable one. Many of the elder Lee's
policies, such as imposing the Mandarin Chinese language on the Singapore
educational system, have aroused fierce opposition among the older,
anti-communist generation of Singapore Chinese. The tight control of the media
and the suppression of all political opposition or criticism of the government,
the People's Action Party or the Prime Minister himself, has also aroused
criticism both at home and internationally.
But, on balance the enormous success of Lee Kwan Yew's achievement in
creating modern Singapore cannot be doubted. It is clean, efficient and notably
lacking in corruption compared to other Asian cities. The Central Provident
Fund, which takes 35 percent of every person's income as a compulsory savings
scheme, has built up an enormous reservoir of capital for future use in
Singapore. Notable public works such as Changi Airport or the transport system
have been the result. Long-term planning has not been as successful anywhere
else, with the possible exception of Japan. The paternalistic attitude of the
Singapore government towards its citizens is unlikely to change in the immediate
future especially since the younger generation of Singaporeans have been
thoroughly versed in the disciplined Confucian thinking and authoritarianism
which characterizes the school system as well as government. Singapore also has
a well run and modern citizens' army based, like the Swiss model, on an annual
call-up of every able-bodied man aged between 18 and 50. The city state is thus
well equipped to defend itself against any aggressor. Singapore will also
benefit from the inflow of human and financial capital from Hong Kong as 1997
approaches. In this sense it does not need to change but merely to retain its
present stability and attractive lifestyle in order to continue to prosper.
Thus, the conclusion to be drawn is that Singapore scores an equally high rating
in terms of very low political risk and a high degree of stability as Japan.
The following table gives details of the overall economic performance of
Singapore from 1987 to 1993.
--------------------------------------------------------------------------
TRADE
EXCHANGE GDP SURPLUS/ MARKET MARKET
RATE GROWTH (DEFICIT) YEAR-END CAPITAL
AV. US $ (%) CPI US $BN) P/E CLOSING (US $BN)
-------- ------ ----- ---------- ---- -------- --------
1987 2.106 9.4 0.5 (5.2) 17.8 270.34 17.86
1988 2.012 11.1 1.5 (4.7) 18.5 1,038.6 24.00
1989 1.950 9.2 2.4 (4.8) 18.3 1,481.3 35.95
1990 1.740 8.3 3.4 (5.3) 13.1 1,159.5 34.26
1991 1.620 6.7 3.4 (4.6) 18.5 1,490.7 51.20
1992 1.640 5.8 2.3 (4.9) 19.6 1,524.4 52.20
1993 1.616 9.9 2.4 (0.8) 36.0 2,426.0 132.05
1994* 1.490 9.2 4.0 -- 26.8 -- 170.00
*Estimate
Note: Market capital figures for Singapore for incorporated companies only.
The Singapore economy has been characterized by the highest degree of
government involvement and intervention outside of the socialist world.
Nevertheless, the growth rate has been quite impressive, averaging around 7-8
percent, except during the 1985-6 recession, and even more impressive has been
the tight control of inflation which, along with that of Japan, has remained
extremely low at below 3 percent for the past decade. The economic stability of
Singapore, therefore, scores high on a comparative basis although being a small
island state it is very sensitive to developments in its two main neighbours,
Indonesia and Malaysia, with their large commodity-based economies. Thus,
Singapore runs a regular trade deficit of around US $5 billion per annum which
is easily covered by its current account surplus on invisibles. Singapore's
foreign reserves held by the Monetary Authority of Singapore (MAS) and the
Government Investment Corporation of Singapore (GICS) are estimated to be in
excess of US $50 billion which would give this tiny Asian city state the third
highest foreign exchange reserves after Japan and Taiwan.
Thus, the overall management of "Singapore Inc." is extremely conservative,
with a very high degree of self-reliance, a high savings rate and an ample
cushion for unexpected global events. This financial conservatism has been
reflected in the strong performance of the Singapore dollar which has advanced
steadily against the US dollar during the past five years with an average
appreciation of 5 percent per annum. It is reasonable to expect these trends --
high economic growth, high savings rate, low inflation and steady currency
appreciation -- to continue during the 1990s.
INDONESIA
It can at least be argued that Indonesia has had fewer changes in its
political system than its Asian neighbours. In fact, there have been only two
rulers of Indonesia since independence was gained from the Dutch in 1948 --
Sukarno and Suharto. But equally it should not be forgotten that the two major
turning points in the country's modern history -- independence and the 1965
revolution -- were unusually violent episodes in the life of any country. The
stability which Indonesia has enjoyed during the past twenty-five years under
Suharto should, therefore, be placed against this background.
In many ways the same three pillars of stability which are found in Thailand
-- the army, the king and the national religion -- are present in Indonesia
except that the President, Suharto, stands in the place of the monarchy and the
national religion is Islam rather than Buddhism. The question of monarchical or
presidential succession remains perhaps the major political risk confronted by
the foreign investor as so many aspects of the business life of the country
relate directly to Suharto or his immediate family. The role of the army in
Indonesia is a great deal more clear cut and predictable than in either Thailand
or in the Philippines. In effect, there have been no attempted military coups
since 1966. The army remains wholly in support of Suharto. It has been
suggested, in fact, that anyone who might be considered as a candidate to
succeed Suharto must be Javanese and must be a general.
The role of Islam in the national life of Indonesia is a more complex
subject. The Mohammedan religion first reached the shores of western Sumatra
through the coming of the Arab traders around 1400. The western-most state of
Aceh has remained a stronghold of Islamic fundamentalist belief ever since.
Sumatra in general has remained restive and unwilling to bend to the yoke of a
tight central control from Java. In fact, this is also true of many other island
provinces of the huge Indonesian archipelago which will have, by the year 2000,
a population of over 200 million. Following the 1958 uprising in Sumatra and
Celebes (or Sulawesi) the Javanese policy was to plant more settlers in these
outlying islands from Java (where 80 percent of the population lives). Political
and religious factors, therefore, cannot be disentangled in the future horoscope
of Indonesian political life.
Fundamentalism is on the rise, as also in Malaysia, and politicians with
fundamentalist Islamic beliefs and supporters are likely to take a more active
role. However, the situation cannot be compared with Iran or Saudi Arabia. In
neither Indonesia nor Malaysia has Islam taken over all aspects of every day
life with its rules about the role of women or the consumption of alcohol or the
exaction of interest or usury on capital. In all these respects Indonesian life
is relatively "modern." There is a more easy-going Asian approach to matters of
religious belief.
However, the social question, which one cannot ignore, concerns the role of
the minority and non-Muslim peoples in Indonesia, in particular the Chinese
community in Java. Although the total Chinese population is less than 5 million,
or around 3 percent of the total, 80 percent of the commerce and much of the
capital wealth remains in the hands of this small but tight-knit Chinese
community. In 1966 there were violent anti-Chinese riots and killings in
Jakarta, Surabaya and other Javanese cities. Many thousands of Chinese fled to
Hong Kong and to China but this is a spectre which has been banished from the
life of the nation since Suharto came to power. He is well known to have close
links with the leading members of the Chinese business community.
The role of Chinese businesspeople in Indonesia has been brought into much
greater focus by the explosion of the Jakarta stock market in the late 1980's.
Much of the wealth which was rumoured to exist in the hands of the great Chinese
families is now visibly calculated on a daily basis in the large listed
capitalization of the Indonesian-Chinese industrial groups such as Indo-Cement
and Astra. There is, of course, a two-way flow of capital involved in this
process of the rapid evolution of the capital market in Jakarta, by which up to
U.S. $5 billion of foreign capital has entered the country in the form of equity
investment, largely from foreign fund managers, and a substantial amount of
Chinese capital has been able to leave the country in the opposite direction.
The enormous economic potential of Indonesia, its vast natural resources and
its large labour force being two principal attractions, cannot be doubted.
However, the main element of political risk is the possibility of a further
violent episode in the political life of the country when the next transfer of
power occurs at the top.
The following table gives details of the overall economic performance of
Indonesia from 1987 to 1993.
--------------------------------------------------------------------------
TRADE
EXCHANGE GDP SURPLUS/ MARKET MARKET
RATE GROWTH (DEFICIT) YEAR-END CAPITAL
AV. US $ (%) CPI (US $BN) P/E CLOSING (US $BN)
-------- ------ ----- ---------- ---- -------- --------
1987 1.720 3.6 9.0 4.6 83.0 0.07
1988 1.735 5.6 7.4 4.9 41.2 305.0 0.26
1989 1.784 7.4 6.0 5.8 24.7 399.0 2.42
1990 1.889 7.4 9.6 3.9 19.9 418.0 6.2
1991 1.984 6.5 9.5 5.5 17.1 247.0 8.1
1992 2.064 6.0 4.9 6.9 14.4 274.0 12.1
1993 2.110 6.5 7.0 9.0 27.4 589.0 43.0
1994* 2.200 6.8 9.0 -- 21.3 -- 52.0
*Estimate
Indonesia began the 1980s principally as an oil exporter. During the 1970s
it had a high rate of inflation but also a very rapid economic growth on the
back of the oil boom. The fall in oil prices in the early 1980s, which became
precipitate in the spring of 1986, therefore, forced a review of their
priorities. Reducing inflation, diversifying the economy away from oil and
maintaining a stable growth in the economy to provide as full employment as
possible for the large young population, were selected as the main objectives.
It is remarkable to see the extent to which these aims have been achieved during
1985-90. Inflation has been brought from 20 percent, at the beginning of the
decade, to around 6 percent in 1989-90. Economic growth, having fallen to 2.5
percent in 1985 regained the level of 7.4 percent by 1990. The rupiah, which had
undergone a 30 percent once-and-for-all evaluation in the autumn of 1985, had
stabilized on a "crawling peg" system with an annual devaluation of around 5
percent. The trade surplus continued at a healthy US $4-5 billion annually and
the inflow of foreign capital more than offset Indonesia's foreign debt
position. Therefore, it is possible to conclude that the good macroeconomic
management, which was achieved by the small group of technocrats employed by
Suharto to direct the economy, had been very successful in reducing the economic
risk of the country. The future path of the Indonesian economy will, therefore,
depend as much on the development of low wage manufacturing and the inflow of
Japanese capital, on the liberalization of the banking system and the capital
market, as on the price of basic commodities. This gives a much greater degree
of stability to the Indonesian economy as a whole.
THE PHILIPPINES
The Philippines is a special case in Asia. Culturally and politically it has
a very distinct national personality. The Roman Catholic Church plays a leading
role in its national life, not least in recent political changes. The fact that
the Philippines was the only American colony in Asia also gave it a very
different tradition from Indonesia or Malaysia, which had similar languages but
very different cultural traditions. The Spanish occupation of the previous four
hundred years also left some deeper traces than the Dutch did in Indonesia.
When speaking of political risk, however, the real problem in the
Philippines has been the lack of legitimacy which has plagued successive
governments and has led to the constant pendulum between dictatorship and weak
democratic governments.
The U.S. tutelage has left a lasting imprint on the country. The charismatic
leadership of Magsaysay in the 1950s also left a vivid example to his
successors. The attempts, in the 1960s, to solve the enormous economic problems
of the Philippines, especially the rural poverty and the rapid growth of
population, were not successful when pursued in a socialist direction. Marcos
arrived in power in 1965 and inherited a country which still had higher living
standards than most other Asian countries such as Hong Kong, Korea, Taiwan and
Singapore. Therefore, judgment on his twenty year rule must be very negative as
a result, if only judged as an economic failure.
The question most investors, therefore, raise is whether the Philippines is
capable of responsible government and economic planning which would give it a
GNP growth rate approaching that of its Asian tiger neighbours. Many observers
dismiss this prospect out of hand citing the endemic problems of corruption,
political in-fighting and the lack of Confucian work ethic present in North
Asia. However, there is no doubt that the Philippines possesses enormous natural
advantages and it would be wrong to generalize about the whole archipelago of
7,000 islands from the political life of Manila alone. The island of Cebu, for
example, has seen a successful economic transformation in the past twenty years.
Manufacturing investment has grown and has begun to replace agriculture as a
principal source of employment. The Philippines has a very high rate of literacy
and the work ethic cannot be doubted by anyone who has employed Filipino
domestic workers overseas. Their earnings are an important source of remittance
back to the Philippines each year. The Filipino population in the United States
is now the largest Asian ethnic group in that country approaching 2 million,
mainly in California. Both natural resources, therefore, and an intelligent,
hardworking population favour the country.
Unfortunately, the political system has never been able to maintain the
long-term stability for its promise to be fulfilled. The years of the Aquino
government, during which democratic procedures were restored to Philippine
political life, have also been disappointing in that many of the features of
Washington political life have been reproduced in Manila -- continuous discord
between Congress, Senate and the President, making important national decisions
extremely difficult to reach. On top of that, of course, there have been the
continuing attempts by the military to unseat the elected government. Although
all of these have failed they have, nevertheless, done much to undermine the
confidence of international investors in the political stability of the country.
In particular, the failed attempt of December 1989 led to a slump in the economy
and the stock market and scared away much needed foreign capital.
There are signs that Japanese and Taiwanese investors and banks are coming
back to the Philippines. Nevertheless, it can only be concluded that democracy
is a fragile plant in the Philippines which may be damaged in the future as it
has been in the past. There is continued rivalry for political and business
influence among a small group of leading Filipino families. The press, although
perhaps the freest in Asia, is considered to be irresponsible and corrupt and
does much to undermine the legitimacy of the ruling government. Political risk,
therefore, is judged to be higher here than in other Asian countries.
The following table gives details of the overall economic performance of the
Philippines from 1987 to 1993.
--------------------------------------------------------------------------
TRADE
EXCHANGE GDP SURPLUS/ MARKET MARKET
RATE GROWTH (DEFICIT) YEAR-END CAPITAL
AV. US $ (%) CPI (US $BN) P/E CLOSING (US $BN)
-------- ------ ----- ---------- ---- -------- --------
1987 20.568 4.8 3.8 (1.0) 15.9 642.72 2.97
1988 21.095 6.3 8.8 (1.1) 19.6 841.65 4.20
1989 21.737 5.0 10.6 (2.6) 16.8 1,145.45 11.82
1990 27.200 2.1 12.7 (4.0) 14.3 651.78 5.73
1991 26.200 (1.0) 17.7 (3.2) 12.7 1,152.00 11.10
1992 23.600 0.0 8.9 (4.7) 13.5 1,256.00 16.00
1993 27.100 1.7 9.8 (6.4) 29.4 3,196.00 39.00
1994* 26.700 5.2 9.8 -- 26.2 -- 42.00
*Estimate
The GDP growth, which had been running at 5.5 percent average for the
previous three years, fell to only 2 percent in 1990 and inflation rose to 12
percent. The peso was rather weak and the trade deficit doubled to nearly US $4
billion. The stock market tumbled by over 50 percent, from a high of 1,145 to
less than 600, and the overall value of listed Philippine shares fell from US
$12 billion to less than US $6 billion. Such is the real economic risk for
investors of this fragile political system. Nevertheless, the recovery of
confidence in early 1991 is testament to the long-term value that investors see
in the country. Even if relative to its Asian neighbours the Philippines
continues to have economic problems (and notably its high foreign debt), it will
benefit from regional trends and it will present, from time to time, very
interesting buying opportunities. The educated and literate labour force is a
major resource of wages and relatively low taxes.
At the worst point of the last years of the Marcos regime inflation in the
Philippines reached 50 percent, the highest recorded in Asia during the past
decade. With the strong support of the central bank under Governor Jobo
Fernandez, the money supply was reined in, the peso was stabilized and inflation
came down to single digits between 1986 and 1988. The tight monetary policy has
been maintained and interest rates have been as high as 35 percent to control
the supply of credit. Therefore, with good macroeconomic management the
inflation problems in the Philippines can be contained.
The same rule can be applied to the value of the peso which has had a poor
long-term record and, despite the efforts of a strong and independent central
bank, has again slid in value against the dollar in the past two years. With the
benefit of strict International Monetary Fund prescriptions it is hoped that the
Philippines will now be able to reschedule its foreign debt particularly with
the help of the Japanese banks, stabilize the currency and maintain a reasonable
growth in its export trade.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PART II
The following information relates to EV CLASSIC GREATER CHINA GROWTH FUND.
FEES AND EXPENSES
ADVISER
As of August 31, 1994, the Portfolio had net assets of $732,612,677. For
the fiscal year ended August 31, 1994, the Adviser earned advisory fees of
$4,100,334 (equivalent to 0.74% (annualized) of the Portfolio's average daily
net assets for such period). For the period from the start of business,
October 28, 1992, to the fiscal year ended August 31, 1993, the Adviser earned
advisory fees of $411,209 (equivalent to 0.75% (annualized) of the Portfolio's
average daily net assets for such period).
MANAGER AND ADMINISTRATOR
As of August 31, 1994, the Fund had net assets of $26,429,585. For the
period from the start of business, December 28, 1993, to the fiscal year ended
August 31, 1994, Eaton Vance earned management fees of $32,972 (equivalent to
0.25% (annualized) of the Fund's average daily net assets for such period). As
of August 31, 1994, the Portfolio had net assets of $732,612,677. For the
fiscal year ended August 31, 1994, Eaton Vance earned administration fees of
$1,383,471 (equivalent to 0.25% (annualized) of the Portfolio's average daily
net assets for such period). For the period from the start of business,
October 28, 1992, to the fiscal year ended August 31, 1993, Eaton Vance earned
administration fees of $137,070 (equivalent to 0.25% (annualized) of the
Portfolio's average daily net assets for such period).
DISTRIBUTION PLAN
The Distribution Plan and Distribution Agreement remain in effect until
April 28, 1995 and may be continued as described under "Distribution Plan" in
the Prospectus. For the period from the start of business, December 28, 1993
to August 31, 1994, the Fund accrued sales commission payments under the Plan
aggregating $98,915 of which $93,340 was paid to the Principal Underwriter.
The Principal Underwriter paid $90,997 as sales commissions to Authorized
Firms and the balance was retained by the Principal Underwriter. As at August
31, 1994, the outstanding uncovered distribution charges of the Principal
Underwriter calculated under the Plan amounted to approximately $2,079,000
(which amount was equivalent to 7.8% of the Fund's net assets on such day).
For the period from the start of business, December 28, 1993, to the fiscal
year ended August 31, 1994, the Fund accrued service fee payments under the
Plan aggregating $32,969, of which $30,919 was paid to the Principal
Underwriter. The Principal Underwriter paid $30,149 as service fee payments to
Authorized Firms and the balance was retained by the Principal Underwriter.
PRINCIPAL UNDERWRITER
For the fiscal year ended August 31, 1994, the Fund paid the Principal
Underwriter $477.50 for repurchase transactions handled by the Principal
Underwriter (being $2.50 for each such transaction).
CUSTODIAN
For the fiscal year ended August 31, 1994, the Portfolio paid IBT
$744,566. For the fiscal year ended August 31, 1994, the Fund paid IBT $5,910.
BROKERAGE
For the fiscal year ended August 31, 1994, the Portfolio paid brokerage
commissions of $4,177,780 with respect to portfolio transactions. Of the
brokerage commissions of $4,177,780 paid during this period, all of such
amount was paid in respect of portfolio security transactions aggregating
approximately $814,062,509 to firms which provided some Research Services to
the Adviser's organization. For the period from the start of business, October
28, 1992, to the fiscal year ended August 31, 1993, the Portfolio paid
brokerage commissions of $1,224,597 with respect to portfolio transactions. Of
the brokerage commission of $1,224,597 paid during this period, approximately
$1,218,619 was paid in respect of portfolio security transactions aggregating
approximately $180,689,369 to firms which provided some Research Services to
the Adviser's organization (although many such firms may have been selected in
any particular transaction primarily because of their execution capabilities).
TRUSTEES
For the fiscal year ended August 31, 1994, the Trustees of the Trust, as a
group earned aggregate fees of $288 from the Fund in their capacities as
Trustees of the Trust. For the fiscal year ended August 31, 1994, the Trustees
of the Portfolio as a group, earned aggregate fees of $16,250 from the
Portfolio in their capacities as Trustees of the Portfolio.
PERFORMANCE INFORMATION
The Tables below indicate the total return (capital changes plus reinvestment
of all distributions) on a hypothetical investment of $1,000 in the Fund
covering the life of the Fund from December 28, 1993 through August 31, 1994.
VALUE OF $1,000 INVESTMENT
VALUE OF TOTAL RETURN
INVESTMENT INVESTMENT AMOUNT OF INVESTMENT ----------------------
PERIOD DATE INVESTMENT ON 8/31/94 CUMULATIVE ANNUALIZED
---------- ---------- ---------- ---------- ---------- ----------
Life of the Fund* 12/28/93 $1,000 $903.00** -9.70% --
PERCENTAGE CHANGES 12/28/93 - 8/31/94
NET ASSET VALUE TO NET ASSET VALUE
WITH ALL DISTRIBUTIONS REINVESTED
----------------------------------------------
PERIOD ENDED ANNUAL CUMULATIVE AVERAGE ANNUAL
-------------------- ---------- -------------- ------------------
8/31/94 -- -9.70%** --
Past performance is not indicative of future results. Investment return
and principal value will fluctuate; shares, when redeemed, may be worth more
or less than their original cost.
----------
*Investment operations began on December 28, 1993.
**If the contingent deferred sales charge applicable to shares purchased on or
after January 30, 1995 had been imposed, the Fund would have had lower
returns.
PRINCIPAL UNDERWRITER
Under the Distribution Agreement the Principal Underwriter acts as
principal in selling shares of the Fund. The expenses of printing copies of
prospectuses used to offer shares to financial service firms or investors and
other selling literature and of advertising is borne by the Principal
Underwriter. The fees and expenses of qualifying and registering and
maintaining qualifications and registrations of the Fund and its shares under
Federal and state securities laws is borne by the Fund. In addition, the Fund
makes payments to the Principal Underwriter pursuant to its Distribution Plan
as described in the Fund's current prospectus; the provisions of the plan
relating to such payments are included in the Distribution Agreement. The
Distribution Agreement is renewable annually by the Trust's Board of Trustees
(including a majority of its Trustees who are not interested persons of the
Trust and who have no direct or indirect financial interest in the operation
of the Fund's Distribution Plan or the Distribution Agreement), may be
terminated on sixty days' notice either by such Trustees or by vote of a
majority of the outstanding voting securities of the Fund or on six months'
notice by the Principal Underwriter and is automatically terminated upon
assignment. The Principal Underwriter distributes Fund shares on a "best
efforts" basis under which it is required to take and pay for only such shares
as may be sold.
The Fund has authorized the Principal Underwriter to act as its agent in
repurchasing shares and will pay the Principal Underwriter $2.50 for each
repurchase transaction handled by the Principal Underwriter. The Principal
Underwriter estimates that the expenses incurred by it in acting as repurchase
agent for the Fund will exceed the amounts paid therefor by the Fund.
DISTRIBUTION PLAN
The Distribution Plan ("the Plan") is described in the prospectus and is
designed to meet the requirements of Rule 12b-1 under the 1940 Act and the
sales charge rule of the National Association of Securities Dealers, Inc. (the
"NASD Rule"). The purpose of the Plan is to compensate the Principal
Underwriter for its distribution services and facilities provided to the Fund
by paying the Principal Underwriter sales commissions and a separate
distribution fee in connection with sales of Fund shares. The following
supplements the discussion of the Plan contained in the Fund's prospectus.
In calculating daily, the amount of uncovered distribution charges,
distribution charges will include the aggregate amount of sales commissions
and distribution fees theretofore paid plus the aggregate amount of sales
commissions and distribution fees which the Principal Underwriter is entitled
to be paid under the Plan since its inception. Payments theretofore paid or
payable under the Plan by the Fund to the Principal Underwriter and contingent
deferred sales charges theretofore paid or payable to the Principal
Underwriter less all amounts theretofore paid or payable to the Principal
Underwriter by the Adviser in consideration of the former's distribution
efforts will be subtracted from such distribution charges; if the result of
such subtraction is positive, a distribution fee (computed at 1% over the
prime rate then reported in The Wall Street Journal) will be computed on such
amount and added thereto, with the resulting sum constituting the amount of
outstanding uncovered distribution charges with respect to such day. The
amount of outstanding uncovered distribution charges of the Principal
Underwriter calculated on any day does not constitute a liability recorded on
the financial statements of the Fund.
It is anticipated that the Eaton Vance organization will profit by reason
of the operation of the Plan through an increase in the Fund's assets (thereby
increasing the management fees payable to Eaton Vance by the Fund and the
administration fees payable to Eaton Vance by the Portfolio) resulting from
sale of Fund shares and through the amounts paid to the Principal Underwriter,
including contingent deferred sales charges, pursuant to the Plan. The Eaton
Vance organization may be considered to have realized a profit in distributing
shares of the Fund if at any point in time the aggregate amounts theretofore
received by the Principal Underwriter from the Fund pursuant to the Plan and
from contingent deferred sales charges have exceeded the total expenses
theretofore incurred by such organization in distributing shares of the Fund.
Total expenses for this purpose will include an allocable portion of the
overhead costs of such organization and its branch offices, which costs will
include without limitation leasing expense, depreciation of building and
equipment, utilities, communication and postage expense, compensation and
benefits of personnel, travel and promotional expense, stationery and
supplies, literature and sales aids, interest expense, data processing fees,
consulting and temporary help costs, insurance, taxes other than income taxes,
legal and auditing expense and other miscellaneous overhead items. Overhead is
calculated and allocated for such purpose by the Eaton Vance organization in a
manner deemed equitable to the Fund.
The amount of uncovered distribution charges of the Principal Underwriter
at any particular time depends upon various changing factors, including the
level and timing of sales of Fund shares, the nature of such sales (i.e.,
whether they result from exchange transactions, reinvestments or from cash
sales through Authorized Firms), the level and timing of redemptions of Fund
shares upon which a contingent deferred sales charge will be imposed, the
level and timing of redemptions of Fund shares (including redemptions
involving exchanges of Fund shares for shares of another fund in the Eaton
Vance Classic Group of Funds which result in a reduction of uncovered
distribution charges), changes in the level of the net assets of the Fund, and
changes in the interest rate used in the calculation of the distribution fee
under the Plan. (For shares sold prior to January 30, 1995, Plan payments are
as follows: the Principal Underwriter pays monthly sales commissions and
service fee payments to Authorized Firms equivalent to approximately .75% and
.25%, respectively, annualized of the assets maintained in the Fund by their
customers beginning at the time of sale. No payments were made at the time of
sale and there is no contingent deferred sales charge.) The Plan also
authorizes the Fund to make payments of service fees.
Pursuant to Rule 12b-1, the Plan has been approved by the Fund's initial
sole shareholder (Eaton Vance) and by the Board of Trustees of the Trust, as
required by Rule 12b-1. Under the Plan the President or a Vice President of
the Trust shall provide to the Trustees for their review, and the Trustees
shall review at least quarterly, a written report of the amount expended under
the Plan and the purposes for which such expenditures were made. The Plan may
not be amended to increase materially the payments described therein without
approval of the shareholders of the Fund, and all material amendments of the
Plan must also be approved by the Trustees as required by Rule 12b-1. So long
as the Plan is in effect, the selection and nomination of Trustees who are not
interested persons of the Trust shall be committed to the discretion of the
Trustees who are not such interested persons.
The Trustees believe that the Plan will be a significant factor in the
expected growth of the Fund's assets, and will result in increased investment
flexibility and advantages which will benefit the Fund and its shareholders.
Payments for sales commissions and distribution fees made to the Principal
Underwriter under the Plan will compensate the Principal Underwriter for its
services and expenses in distributing shares of the Fund. Service fee payments
made to the Principal Underwriter and Authorized Firms under the Plan provide
incentives to provide continuing personal services to investors and the
maintenance of shareholder accounts. By providing incentives to the
Principal Underwriter and Authorized Firms, the Plan is expected to result in
the maintenance of, and possible future growth in, the assets of the Fund.
Based on the foregoing and other relevant factors, the Trustees have
determined that in their judgment there is a reasonable likelihood that the
Plan will benefit the Fund and its shareholders.
A recent Internal Revenue Service ruling requires that sales commissions
paid by the Fund pursuant to its Distribution Plan be expensed for tax
purposes (rather than charged to paid-in capital as the Fund has done in the
past). The Fund changed its tax accounting practice to conform to the ruling
on November 16, 1994. The change will have no effect on the Fund's current
yield or total return.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As at November 30, 1994, the Trustees and officers of the Trust, as a group,
owned in the aggregate less than 1% of the outstanding shares of the Fund. As
of November 30, 1994, Merrill Lynch, Pierce, Fenner & Smith, Inc., New
Brunswick, NJ was the record owner of approximately 47.5% of the outstanding
shares, which it held on behalf of its customers who are the beneficial owners
of such shares, and as to which they had voting power under certain limited
circumstances. In addition, as of the same date, PaineWebber FBO World
Development Foundation, Coral Gables, FL 33134-2129 was the record owner of
approximately 6.1% of the outstanding shares. To the knowledge of the Trust,
no other person beneficially owns more than 5% of the Fund's outstanding
shares.
<PAGE>
EV CLASSIC GREATER CHINA GROWTH FUND
FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
August 31, 1994
ASSETS:
Investment in Greater China Growth
Portfolio, at value (Note 1A)
(identified cost, $25,639,741) $26,202,239
Receivable for Fund shares sold 629,781
Deferred organization expenses (Note 1D) 43,389
-----------
Total assets $26,875,409
LIABILITIES:
Payable for Fund shares redeemed $423,323
Payable to affiliates -
Trustees' fees 42
Custodian fee 500
Accrued expenses 21,959
--------
Total liabilities 445,824
-----------
NET ASSETS for 2,926,716 shares of
beneficial interest outstanding $26,429,585
===========
SOURCES OF NET ASSETS:
Paid-in capital $27,197,882
Undistributed net investment income 1,351
Net realized loss on investment transactions
from the Portfolio (1,332,146)
Unrealized appreciation of investments
from Portfolio (computed on the
basis of identified cost) 562,498
-----------
Total $26,429,585
===========
NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION
PRICE PER SHARE
($26,429,585 / 2,926,716 shares of beneficial
interest) $ 9.03
======
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
FINANCIAL STATEMENTS (CONTINUED)
-------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
For the period from December 28, 1993 (start of business) to August 31, 1994
INVESTMENT INCOME (Note 1B):
Investment income allocated from Portfolio $ 266,295
Expenses allocated from Portfolio (142,193)
---------
Net investment income from Portfolio $ 124,102
Expenses -
Management fee (Note 3) $ 32,972
Compensation of Trustees not members
of the Administrator's organization 288
Custodian fee (Note 3) 5,910
Distribution fees (Note 6) 131,884
Transfer and dividend disbursing agent fees 14,150
Printing and postage 13,476
Registration costs 10,947
Amortization of organization expenses
(Note 1D) 6,549
Legal and accounting services 1,652
Miscellaneous 3,838
-----------
Total expenses 221,666
-----------
Net investment loss $ (97,564)
REALIZED AND UNREALIZED GAIN (LOSS) FROM
PORTFOLIO:
Net realized loss from investment
transactions (identified cost basis) $(1,332,146)
Unrealized appreciation of investments 562,498
-----------
Net realized and unrealized loss (769,648)
-----------
Net decrease in net assets from operations $ (867,212)
===========
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
-------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
For the period from December 28, 1993 (start of business) to August 31, 1994
INCREASE (DECREASE) IN NET ASSETS:
From operations -
Net investment loss $ (97,564)
Net realized loss from Portfolio (1,332,146)
Unrealized appreciation from Portfolio 562,498
------------
Net decrease in net assets from operations $ (867,212)
------------
Transactions in shares of beneficial interest (Note 4)
Proceeds from sale of shares $ 35,927,111
Cost of shares redeemed (8,630,314)
------------
Increase in net assets from Fund share transactions $ 27,296,797
------------
Net increase in net assets $ 26,429,585
NET ASSETS:
At beginning of period --
------------
At end of period (including undistributed net investment
income of $1,351) $ 26,429,585
============
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
FINANCIAL STATEMENTS (CONTINUED)
-------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
For the period from December 28, 1993 (start of business) to August 31, 1994
NET ASSET VALUE, beginning of period $ 10.000
---------
Income (Loss) from Investment Operations:
Net investment loss $ (0.033)
Net realized and unrealized loss on investments (0.937)
---------
Total loss from investment operations $ (0.970)
---------
NET ASSET VALUE, end of period $ 9.030
=========
TOTAL RETURN (9.70)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $26,430
Ratio of net expenses to average daily net assets (1) 2.75%*
Ratio of net investment loss to average daily net assets (0.74)%*
(1) Includes the Fund's share of Greater China Growth Portfolio's allocated
expenses for the period from December 28, 1993 (start of business) to
August 31, 1994.
* Annualized
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
-------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(1) SIGNIFICANT ACCOUNTING POLICIES
EV Classic Greater China Growth Fund (the Fund) is a diversified series of Eaton
Vance Growth Trust (the Trust). The Trust is an entity of the type commonly
known as a Massachusetts business trust and is registered under the Investment
Company Act of 1940, as amended, as an open-end management investment company.
The Fund invests all of its investable assets in interests in Greater China
Growth Portfolio (the Portfolio), a New York Trust, having the same investment
objective as the Fund. The value of the Fund's investment in the Portfolio
reflects the Fund's proportionate interest in the net assets of the Portfolio
(3.6% at August 31, 1994). The performance of the Fund is directly affected by
the performance of the Portfolio. The financial statements of the Portfolio,
including the portfolio of investments, are included elsewhere in this report
and should be read in conjunction with the Fund's financial statements. The
following is a summary of significant accounting policies consistently followed
by the Fund in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles.
A. INVESTMENT VALUATIONS - Valuation of securities by the Portfolio is discussed
in Note 1 of the Portfolio's Notes to Financial Statements which are included
elsewhere in this report.
B. INCOME - The Fund's net investment income consists of the Fund's pro rata
share of the net investment income of the Portfolio, less all actual and accrued
expenses of the Fund determined in accordance with generally accepted accounting
principles.
C. FEDERAL TAXES - The Fund's policy is to comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies and to
distribute to shareholders each year all of its net investment income, and any
net realized capital gains. Accordingly, no provision for federal income or
excise tax is necessary. At August 31, 1994, the Fund, for federal income tax
purposes, had a capital loss carryover of $834,707 which will reduce the taxable
income arising from future net realized gain on investments, if any, to the
extent permitted by the Internal Revenue Code and thus will reduce the amount of
distributions to shareholders which would otherwise be necessary to relieve the
Fund of any liability for federal income or excise tax. Such capital loss
carryover will expire on August 31, 2002.
D. DEFERRED ORGANIZATION EXPENSES - Costs incurred by the Fund in connection
with its organization, including registration costs, are being amortized on the
straight-line basis over five years.
E. DISTRIBUTION COSTS - For book purposes, commissions paid on the sale of
shares and other distribution costs are charged to operations. For tax purposes,
commissions paid are charged to paid-in capital (Note 6).
-------------------------------------------------------------------------------
(2) DISTRIBUTIONS TO SHAREHOLDERS
It is the present policy of the Fund to make at least one distribution annually
(normally in December) of all or substantially all of the investment income
allocated to the Fund by the Portfolio, less the Fund's direct and allocated
expenses (other than sales commissions incurred on the sale of Fund shares,
which commissions are charged to the Fund's paid-in capital for tax purposes)
and at least one distribution annually of all or substantially all of the net
realized capital gains (reduced by any available capital loss carryforwards from
prior years) allocated by the Portfolio to the Fund, if any. Shareholders may
reinvest all distributions in shares of the Fund without a sales charge at the
per share net asset value as of the close of business on the record date. The
Fund distinguishes between distributions on a tax basis and a financial
reporting basis. Generally accepted accounting principles require that only
distributions in excess of tax basis earnings and profits be reported in the
financial statements as a return of capital. Differences in the recognition or
classification of income between the financial statements and tax earnings and
profits which result in temporary over distributions for financial statement
purposes are classified as distributions in excess of net investment income or
accumulated net realized gains. Permanent differences between book and tax
accounting relating to distributions are reclassified to paid-in capital. During
the eleven months ended August 31, 1994, $89,915 was reclassified from
undistributed net investment income to paid-in capital, due to permanent
differences between book and tax accounting for distribution costs being
considered as permanent differences. Net investment income, net realized gains
and net assets were not affected by this reclassification.
-------------------------------------------------------------------------------
(3) MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
The management fee is earned by Eaton Vance Management (EVM) as compensation for
management and administration of the business affairs of the Fund. The fee is
based on a percentage of average daily net assets. For the period from the start
of business, December 28, 1993, to August 31, 1994 the fee was equivalent to
0.25% of the Fund's average daily net assets for such period and amounted to
$32,972. Except as to Trustees of the Fund who are not members of EVM's
organization, officers and Trustees receive remuneration for their services to
the Fund out of such management fee. Investors Bank & Trust Company (IBT), an
affiliate of EVM, serves as custodian of the Fund. Pursuant to the custodian
agreement, IBT receives a fee reduced by credits which are determined based on
the average daily cash balances the Fund maintains with IBT. Certain officers
and Trustees of the Fund and the Portfolio are officers and directors/trustees
of the above organizations. In addition, investment adviser, administrative
fees, and custody fees are paid by the Portfolio to EVM and its affiliates. See
Note 2 of the Portfolio's Notes to Financial Statements which are included
elsewhere in this report.
-------------------------------------------------------------------------------
(4) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares from the start of business, December 28, 1993, to
August 31, 1994 were as follows:
Sales 3,928,422
Redemptions (1,001,706)
----------
Net increase 2,926,716
==========
-------------------------------------------------------------------------------
(5) INVESTMENT TRANSACTIONS
Increases and decreases in the Fund's investment in the Portfolio aggregated
$35,297,332 and $8,449,547, respectively.
-------------------------------------------------------------------------------
(6) DISTRIBUTION PLAN
The Fund has adopted a distribution plan (the "Plan") pursuant to Rule 12b-1
under the Investment Company Act of 1940. The Plan requires the Fund to pay the
Principal Underwriter, Eaton Vance Distributors, Inc. (EVD) amounts equal to
1/365 of 0.75% of the Fund's daily net assets, for providing ongoing
distribution services and facilities to the Fund. The Fund will automatically
discontinue payments to EVD during any period in which there are no outstanding
Uncovered Distribution Charges, which are equivalent to the sum of (i) 6.25% of
the aggregate amount received by the Fund for shares sold plus, (ii)
distribution fees calculated by applying the rate of 1% over the prevailing
prime rate to the outstanding balance of Uncovered Distribution Charges of EVD
reduced by amounts theretofore paid to EVD. The amount payable to EVD with
respect to each day is accrued on such day as a liability of the Fund and,
accordingly, reduces the Fund's net assets. The Fund paid or accrued $98,915 to
or payable to EVD for the period from the start of business, December 28, 1993,
to August 31, 1994, representing 0.75% of average daily net assets. At August
31, 1994, the amount of Uncovered Distribution Charges of EVD calculated under
the Plan was approximately $2,079,000.
In addition, the Plan permits the Fund to make monthly payments of service fees
to the Principal Underwriter in amounts not expected to exceed 0.25% of the
Fund's average daily net assets for any fiscal year. The Fund paid or accrued
service fees to or payable to EVD for the period from the start of business,
December 28, 1993, to August 31, 1994, in the amount of $32,969. EVD makes
monthly service fee payments to Authorized Firms in amounts anticipated to be
equivalent to 0.25%, annualized, of the assets maintained in the Fund by their
customers. Service fee payments are made for personal services and/or the
maintenance of shareholder accounts.
Certain officers and Trustees of the Fund are officers or directors of EVD.
<PAGE>
-------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
To the Trustees and Shareholders of
Eaton Vance Growth Trust:
We have audited the accompanying statement of assets and liabilities of EV
Classic Greater China Growth Fund (one of the series constituting Eaton Vance
Growth Trust) as of August 31, 1994, and the related statement of operations,
the statement of changes in net assets, and the financial highlights for the
period from the start of business, December 28, 1993, to August 31, 1994. These
financial statements and financial highlights are the responsibility of the
Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the EV Classic
Greater China Growth Fund series of the Eaton Vance Growth Trust at August 31,
1994, the results of its operations, the changes in its net assets and its
financial highlights for the period from the start of business, December 28,
1993, to August 31, 1994 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
October 7, 1994
<PAGE>
GREATER CHINA GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
August 31, 1994
-------------------------------------------------------------------------------
SHARES VALUE
-------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS - 99.0%
-------------------------------------------------------------------------------
CHINA, 3.3%
Dazhong Taxi 850,850 $ 918,918
Shanghai Diesel Engineering* 1,780,000 2,136,000
Shanghai Erfangji Co. Ltd. 5,595,160 2,036,638
Shanghai Industrial Sewing Machine* 740,000 389,240
Shanghai Jin Jiang Tower 2,054,000 1,503,528
Shanghai Phoenix Bicycle Co. 2,615,000 1,704,980
Shanghai Yaohua Pilkington* 4,620,500 5,923,481
Shenzhen China Bicycles Co. 6,996,000 6,020,058
Shenzhen Vanke Co. Ltd. 397,600 288,141
Tyre and Rubber 5,717,600 3,144,680
------------
$ 24,065,664
------------
HONG KONG, 42.5%
Bank of East Asia Hong Kong 1,292,614 $ 5,302,432
Beiren Printing 2,000,000 988,600
Chen Hsong Holdings 11,320,000 7,690,808
Cheung Kong Holdings Ltd. 3,680,000 18,619,696
Cim Company Ltd. 1,800,000 3,028,068
Citic Pacific Ltd. - New 4,570,000 14,577,386
Consolidated Electric Power* 3,738,180 7,231,883
Dah Sing Financial Holdings 2,667,000 7,955,128
Gold Lion Holdings Ltd. 537,000 143,164
Gold Lion Holdings 1995 Warrants* 170,000 5,933
Gold Lion Holdings 1996 Warrants* 170,000 7,701
Guangzhou Investment 12,592,000 3,911,075
Guangzhou Shipyard 3,570,000 1,598,289
Hong Kong Aircraft Engineering Co. Ltd. 853,600 4,042,820
Hong Kong Electric Co. 3,305,000 11,697,056
Hong Kong Land Holdings 2,016,000 5,334,941
Hong Kong Telecommunications Ltd. 6,958,000 15,306,904
Hong Kong & China Gas Co. Ltd. 1,036,000 1,964,049
Hong Kong & China Gas Co. Ltd. Warrants* 353,000 161,710
Hopewell Holdings 16,609,000 15,366,647
HSBC Holdings PLC 1,632,600 19,225,171
Hutchinson Whampoa Hong Kong 4,698,000 23,527,584
Jardine Matheson HK Registry 2,772,400 26,099,928
Johnson Electric Holdings 1,301,500 3,284,205
Li & Fung Ltd. 6,446,000 3,878,558
Maanshan Iron & Steel Co. 8,120,000 2,605,708
Ming Pao Enterprises 8,272,000 6,208,136
National Mutual Ltd. 8,926,000 5,891,160
New World Development Hong Kong 2,635,000 9,189,563
Peregrine Investments Holdings 4,452,666 8,095,392
CP Pokphand Co. Ltd. 4,750,000 1,598,375
S Megga International Ltd. 11,372,000 1,971,905
Shanghai Petrochemical 17,784,000 5,776,243
Shell Electric Manufacturing 6,000,000 3,820,200
Shell Electric Manufacturing 1996 Warrants* 700,000 79,730
Siu Fung Ceramics 24,084,000 5,922,256
South China Industries 5,930,000 767,342
South Sea Development Co. 6,184,464 464,453
Sun Hung Kai Properties Ltd. 1,693,000 12,487,737
Television Broadcasts Ltd. 2,088,000 9,862,250
Tem Fat Hing Fung 28,696,000 5,199,715
Tsingtao Brewery Co. Ltd. 2,248,000 1,898,211
Varitronix International Ltd. 3,482,000 5,226,830
Wharf Holdings 5,370,000 23,070,594
------------
$311,085,536
------------
INDONESIA, 2.7%
Bank International Indonesia 356,000 $ 1,310,187
Barito Pacific Timber 1,219,500 4,670,441
Gadjah Tunggal 2,253,000 4,275,388
PT Indah Kiat Pulp & Paper 6,434,400 7,400,203
PT Argha Karya Prima Ind. 1,303,000 2,023,038
------------
$ 19,679,257
------------
REPUBLIC OF KOREA, 8.2%
Daewoo Corp. 205,549 $ 4,054,741
Daewoo Heavy Industries 199,114 3,951,019
Dong Chang Paper Mfg.* 80,008 729,569
Korea Electric Power Corp. 406,200 16,571,742
Korea Exchange Bank* 509,380 5,790,224
Pohang Iron & Steel Co. Ltd. 45,060 5,904,153
Samsung Electronics 40,590 7,615,557
Samsung Fire & Marine Insurance* 3,920 852,611
Samsung Heavy Industries 67,800 3,719,034
Samwhan Ltd. 25,795 610,919
Yukong Ltd. 198,073 10,122,798
------------
$ 59,922,367
------------
MALAYSIA, 8.8%
Aokam Perdana Berhad 57,000 $ 394,178
Genting Berhad 1,179,000 11,055,247
Hong Leong Industries Berhad 1,357,000 7,422,519
Kim Hin Industry Berhad 1,105,000 6,432,647
Kim Hin Industry Berhad Warrants* 221,000 461,956
Land & General Berhad 3,562,000 15,308,408
Leader Universal Holdings Ltd. 1,375,000 8,058,188
Mulpha International Trading 2,966,666 5,030,278
Perlis Plantations Berhad 770,000 2,587,200
Sime Darby Berhad 2,500,000 7,814,000
------------
$ 64,564,621
------------
THE PHILIPPINES, 7.3%
Ayala Corp. Class B 6,365,760 $ 11,070,693
Bacnotan Consolidated Industries 152,234 1,690,447
Belle Resources Class B* 21,600,000 5,389,200
Philippine Long Distance Telephone 283,700 18,724,200
San Miguel Corporation 2,657,800 14,067,735
SM Prime Holdings* 9,300,000 2,390,927
------------
$ 53,333,202
------------
SINGAPORE, 9.9%
Cerebos Pacific Ltd. 1,249,000 $ 6,868,625
Clipsal Industries Holdings Ltd. 1,100,000 6,270,000
Clipsal Industries Warrants* 117,000 225,810
DBS Land 3,000,000 9,118,800
Development Bank of Singapore 1,140,000 11,778,480
Overseas Union Bank 1,020,000 5,371,320
Qaf Ltd. 5,500,000 5,169,450
Qaf Limited Warrants 1998* 840,000 498,372
Qaf Loan Stock 420,000 226,758
Sembawang Maritime 2,266,000 10,271,098
Singapore Airlines Ltd. 1,075,000 10,103,603
Straits Steamship Land 2,102,500 6,250,522
------------
$ 72,152,838
------------
TAIWAN, 5.0%
Cheng Shin Industries 371,040 $ 555,261
China Steel Corp. 2,500,000 2,701,000
China Steel Corp. GDR* 70,000 1,837,500
China Trust Business Bank 1,654,580 4,610,984
Formosa Chemical 1,387,360 2,134,453
Formosa Plastics 2,490,000 5,893,581
Nan Ya Plastic 3,067,085 6,966,884
Sampo 3,006,080 4,900,211
United Microelectronics Co. 2,500,000 5,297,000
Victor Taichung Machinery* 820,000 2,097,396
------------
$ 36,994,270
------------
THAILAND, 11.0%
Bangkok Bank 618,200 $ 6,666,669
NTS Steel Group 1,924,800 5,189,260
NTS Steel Group Co. (Local) 695,200 1,790,974
PTT Explo. & Produc. 93,000 794,904
Saha Union Corp. Ltd. (Ordinary) 5,890,240 6,940,467
Saha Union Corp. Ltd. (Foreign) 252,800 302,905
Siam Cement (Local) 343,400 19,064,813
Siam Cement (Foreign) 176,900 10,499,404
Siam Commercial Bank 1,891,300 19,640,394
Sri Trang Agro-Ind 125,000 307,048
Thailand Military Bank (Local) 300,000 1,156,290
Thailand Military Bank (Foreign) 2,021,500 8,477,767
------------
$ 80,830,895
------------
UNITED STATES, 0.3%
AES China Generating Co. Ltd.* 210,000 $ 2,493,750
------------
TOTAL INVESTMENTS (IDENTIFIED COST, $627,782,379) $725,122,400
Other Assets, 1.0% 7,490,277
------------
NET ASSETS, 100.0% $732,612,677
============
* Non-income producing security
GDR - Global depository receipt
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
August 31, 1994
ASSETS:
Investments, at value (Note 1A) (Identified
cost, $627,782,379) $725,122,400
Cash denominated in foreign currencies
(cost, $2,422,833) 2,423,448
Cash 21,161,317
Receivable for investments sold 4,647,731
Dividends and interest receivable 952,455
Deferred organization expenses (Note 1C) 91,869
------------
Total assets $754,399,220
LIABILITIES:
Payable for investments purchased $ 21,762,159
Payable to affiliates -
Custodian fee 22,000
Trustees' fees 1,250
Accrued expenses 1,134
------------
Total liabilities 21,786,543
------------
NET ASSETS applicable to investors'
interest in Portfolio $732,612,677
============
SOURCES OF NET ASSETS:
Net proceeds from capital contributions
and withdrawals $635,269,404
Net unrealized appreciation of investments
(computed on the basis of identified cost) 97,340,021
Net unrealized appreciation of foreign
currencies 3,252
------------
TOTAL $732,612,677
============
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
FINANCIAL STATEMENTS (CONTINUED)
-------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
For the year ended August 31, 1994
INVESTMENT INCOME:
Income -
Dividends (net of foreign taxes of $636,647) $ 9,767,109
Interest 625,928
------------
Total income $ 10,393,037
Expenses -
Investment adviser fee (Note 2) $4,100,334
Administration fee (Note 2) 1,383,471
Custodian fee (Note 2) 744,566
Legal & audit fees 41,393
Amortization of organization expense
(Note 1C) 28,638
Trustees' fees 16,250
Miscellaneous 53,671
----------
Total expenses 6,368,323
------------
Net investment income $ 4,024,714
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized loss on investment transactions
computed on the basis of identified cost $(11,068,453)
------------
Change in unrealized appreciation
Investments $ 79,234,677
Foreign currency 1,952
------------
Net unrealized appreciation $ 79,236,629
------------
Net realized and unrealized gain on investments $ 68,168,176
------------
Net increase in net assets from operations $ 72,192,890
============
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
-------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIOD
FOR THE YEAR OCTOBER 28, 1992
ENDED (START OF BUSINESS)
AUGUST 31, 1994 TO AUGUST 31, 1993
--------------- ------------------
INCREASE (DECREASE) IN NET ASSETS:
From operations -
Net investment income $ 4,024,714 $ 211,356
Net realized loss on investment
transactions (11,068,453) (6,065)
Net increase in unrealized appreciation
of investments 79,234,677 18,105,344
Net increase in unrealized appreciation
of foreign currency 1,952 1,300
------------- ------------
Increase in net assets from operations $ 72,192,890 $ 18,311,935
------------- ------------
Capital transactions:
Contributions $ 636,873,995 $195,865,086
Withdrawals (184,497,094) (6,234,145)
------------- ------------
Increase in net assets resulting from
capital transactions $ 452,376,901 $189,630,941
------------- ------------
Total increase in net assets $ 524,569,791 $207,942,876
NET ASSETS:
At beginning of period 208,042,886 100,010
------------- ------------
At end of period $ 732,612,677 $208,042,886
============= ============
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
FINANCIAL STATEMENTS (CONTINUED)
-------------------------------------------------------------------------------
SUPPLEMENTARY DATA
FOR THE PERIOD
FOR THE YEAR OCTOBER 28, 1992
ENDED (START OF BUSINESS)
AUGUST 31, 1994 TO AUGUST 31, 1993
--------------- ------------------
RATIOS (As a percentage of average net assets):
Expenses 1.15% 1.38%*
Net investment income 0.73% 0.38%*
PORTFOLIO TURNOVER 36% 18%
* Annualized
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
(1) SIGNIFICANT ACCOUNTING POLICIES
Greater China Growth Portfolio (the "Portfolio") is registered under the
Investment Company Act of 1940 as a diversified, open end investment company
which was organized as a trust under the laws of the State of New York on
September 1, 1992. The Declaration of Trust permits the Trustees to issue
interests in the Portfolio. The following is a summary of the significant
accounting policies of the Portfolio. The policies are in conformity with
generally accepted accounting principles.
A. INVESTMENT VALUATIONS - Marketable securities, including options, that are
listed on foreign or U.S. securities exchanges or in the NASDAQ National Market
System are valued at closing sale prices, on the exchange where such securities
are principally traded. Futures positions on securities or currencies are
generally valued at closing settlement prices. Unlisted or listed securities for
which closing sale prices are not available are valued at the mean between the
latest bid and asked prices. Short term debt securities with a remaining
maturity of 60 days or less are valued at amortized cost. Other fixed income and
debt securities, including listed securities and securities for which price
quotations are available, will normally be valued on the basis of valuations
furnished by a pricing service. Investments for which valuations or market
quotations are unavailable are valued at fair value using methods determined in
good faith by or at the direction of the Trustees.
B. FEDERAL TAXES - The Portfolio has elected to be treated as a partnership for
Federal tax purposes. No provision is made by the Portfolio for federal or state
taxes on any taxable income of the Portfolio because each investor in the
Portfolio is individually responsible for the payment of any taxes on its share
of such income. Since some of the Portfolio's investors are regulated investment
companies that invest all or substantially all of their assets in the Portfolio,
the Portfolio normally must satisfy the applicable source of income and
diversification requirements, (under the Internal Revenue Code), in order for
its investors to satisfy them. The Portfolio will allocate, at least annually
among its investors, each investor's distributive share of the Portfolio's net
investment income, net realized capital gains, and any other items of income,
gain, loss, deduction or credit. Withholding taxes on foreign dividends and
capital gains have been provided for in accordance with the Trust's
understanding of the applicable countries' tax rules and rates.
C. DEFERRED ORGANIZATION EXPENSES - Costs incurred by the Portfolio in
connection with its organization, including registration costs, are being
amortized on the straight-line basis over five years.
D. FUTURES CONTRACTS - Upon the entering of a financial futures contract, the
Portfolio is required to deposit ("initial margin") either in cash or securities
an amount equal to a certain percentage of the purchase price indicated in the
financial futures contract. Subsequent payments are made or received by the
Portfolio ("margin maintenance") each day, dependent on daily fluctuations in
the value of the underlying security, and are recorded for book purposes as
unrealized gains or losses by the Portfolio. The Portfolio's investment in
financial futures contracts is designed only to hedge against anticipated future
changes in interest or currency exchange rates. Should interest or currency
exchange rates move unexpectedly, the Portfolio may not achieve the anticipated
benefits of the financial futures contracts and may realize a loss. If the
Portfolio enters into a closing transaction, the Portfolio will realize, for
book purposes, a gain or loss equal to the difference between the value of the
financial futures contract to sell and financial futures contract to buy.
E. FOREIGN CURRENCY TRANSLATION - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investment securities and income and expenses are converted
into U.S. dollars based upon currency exchange rates prevailing on the
respective dates of such transactions. Recognized gains or losses on investment
transactions attributable to foreign currency rates are recorded for financial
statement purposes as net realized gains and losses on investments. That portion
of unrealized gains and losses on investments that result from fluctuations in
foreign currency exchange rates are not separately disclosed.
F. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS - The Portfolio may enter into
forward foreign currency exchange contracts for the purchase or sale of a
specific foreign currency at a fixed price on a future date. Risks may arise
upon entering these contracts from the potential inability of counter parties to
meet the terms of their contracts and from movements in the value of a foreign
currency relative to the U.S. dollar. The Portfolio will enter into forward
contracts for hedging purposes as well as non-hedging purposes. The forward
foreign currency exchange contracts are adjusted by the daily exchange rate of
the underlying currency and any gains or losses are recorded for financial
statement purposes as unrealized until such time as the contracts have been
closed or offset.
G. OTHER - Investment transactions are accounted for on the date the investments
are purchased or sold. Dividend income is recorded on the ex-dividend date.
However, if the ex-dividend date has passed, certain dividends from foreign
securities are recorded as the Portfolio is informed of the ex-dividend date.
Interest income is recorded on the accrual basis.
-------------------------------------------------------------------------------
(2) INVESTMENT ADVISER FEE AND OTHER TRANSACTIONS WITH AFFILIATES
The investment adviser fee is earned by Lloyd George Management (Hong
Kong)Limited (the Adviser) as compensation for management and investment
advisory services rendered to the Portfolio. Under the advisory agreement, the
Adviser receives a monthly fee of 0.0625% (0.75% annually) of the average daily
net assets of the Portfolio up to $500,000,000, and at reduced rates as daily
net assets exceed that level. For the year ended August 31, 1994 the adviser fee
was 0.74% of average net assets. In addition,an administrative fee is earned by
Eaton Vance Management (EVM) for managing and administering the business affairs
of the Portfolio. Under the administration agreement, EVM earns a monthly fee in
the amount of 1/48th of 1% (equal to 0.25% annually) of the average daily net
assets of the Portfolio up to $500,000,000, and at reduced rates as daily net
assets exceed that level. For the year ended August 31, 1994, the administration
fee was 0.25% of average net assets. Except as to Trustees of the Portfolio who
are not members of the Adviser or EVM's organization, officers and Trustees
receive remuneration for their services to the Portfolio out of such investment
adviser and administrative fees. Investors Bank &Trust Company (IBT), an
affiliate of EVM, serves as custodian of the Portfolio. Pursuant to the
custodian agreement, IBT receives a fee reduced by credits which are determined
based on the average daily cash balances the Portfolio maintains with IBT.
Certain of the officers and Trustees of the Portfolio are officers or
directors/trustees of the above organizations.
-------------------------------------------------------------------------------
(3) INVESTMENT TRANSACTIONS
Purchases and sales of investments, other than short-term obligations,
aggregated $658,786,181 and $191,100,296, respectively.
-------------------------------------------------------------------------------
(4) FEDERAL INCOME TAX BASIS OF INVESTMENTS
The cost and unrealized appreciation (depreciation) in value of the investments
owned at August 31, 1994, as computed on a federal income tax basis, are as
follows:
Aggregate cost $627,782,379
============
Gross unrealized appreciation $123,350,391
Gross unrealized depreciation 26,010,370
------------
Net unrealized appreciation $ 97,340,021
============
-------------------------------------------------------------------------------
(5) RISKS ASSOCIATED WITH FOREIGN INVESTMENTS
Investing in securities issued by companies whose principal business activities
are outside the United States may involve significant risks not present in
domestic investments. For example, there is generally less publicly available
information about foreign companies, particularly those not subject to the
disclosure and reporting requirements of the U.S. securities laws. Foreign
issuers are generally not bound by uniform accounting, auditing, and financial
reporting requirements and standards of practice comparable to those applicable
to domestic issuers. Investments in foreign securities also involve the risk of
possible adverse changes in investment or exchange control regulations,
expropriation or confiscatory taxation, limitation on the removal of funds or
other assets of the Portfolio, political or financial instability or diplomatic
and other developments which could affect such investments. Foreign stock
markets, while growing in volume and sophistication, are generally not as
developed as those in the United States, and securities of some foreign issuers
(particularly those located in developing countries) may be less liquid and more
volatile than securities of comparable U.S. companies. In general, there is less
overall governmental supervision and regulation of foreign securities markets,
broker-dealers, and issuers than in the United States.
-------------------------------------------------------------------------------
(6) LINE OF CREDIT
The Portfolio participates with other portfolios and funds managed by EVM and
its affiliates in a $120 million unsecured line of credit agreement with a bank.
The line of credit consists of a $20 million committed facility and a $100
million discretionary facility. Borrowings will be made by the Portfolio solely
to facilitate the handling of unusual and/or unanticipated short-term cash
requirements. Interest is charged to each portfolio based on its borrowings at
an amount above either the bank's adjusted certificate of deposit rate, a
variable adjusted certificate of deposit rate, or a federal funds effective
rate. In addition, a fee computed at an annual rate of 1/4 of 1% on the $20
million committed facility and on the daily unused portion of the $100 million
discretionary facility is allocated among the participating funds and portfolios
at the end of each quarter. The Portfolio did not have any significant
borrowings or allocated fees during the period.
<PAGE>
-------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
To the Trustees and Investors of
Greater China Growth Portfolio:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Greater China Growth Portfolio as of August 31,
1994, and the related statement of operations for the year then ended, the
statement of changes in net assets and the supplementary data for the year ended
August 31, 1994 and for the period from the start of business, October 28, 1992,
to August 31, 1993. These financial statements and supplementary data are the
responsibility of the Portfolio's management. Our responsibility is to express
an opinion on these financial statements and supplementary data based upon our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and supplementary
data are free of material misstatement. An audit includes examining on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at
August 31, 1994, by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and supplementary data present fairly,
in all material respects, the financial position of Greater China Growth
Portfolio at August 31, 1994, the results of its operations, the changes in its
net assets and its supplementary data for the respective stated periods, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
October 7, 1994
<PAGE>
APPENDIX C
EATON CLASSIC
VANCE [LOGO] FUND
{Picture)
EV Classic
Greater China
Growth
Fund
<PAGE>
Investing in China
For Long-Term Capital Appreciation
The People's Republic of China ("China") and the surrounding countries of the
China region have recently become one of the most exciting and potentially
profitable areas for investors seeking capital appreciation. But capturing the
investment opportunity in China is challenging.
EV Classic Greater China Growth Fund - is a mutual fund that seeks capital
appreciation by investing in interests in a Portfolio of equity securities of
companies that, in the opinion of the Portfolio's investment adviser, will
benefit from the economic development and growth of China. The Fund offers
investors the advantages and convenience of an open-end mutual fund and the
benefits of an experienced, Hong Kong-based investment adviser with specialized
knowledge of the emerging East Asian markets.
Of course, while Eaton Vance believes that the opportunities for long-term
capital appreciation are excellent, investors should consider carefully the
risks involved in committing a portion of their assets to the Fund.
Such risks, for example, may include fluctuations in foreign exchange rates,
political or economic instability in the country in which the security's issuer
is located, and the possible imposition of exchange controls or other laws or
restrictions. In addition, foreign securities markets may be less liquid, more
volatile and subject to less government supervision than in the United States.
Further, there is no guarantee that the economy or stock market of China will
continue to grow as it has in the past, or that EV Classic Greater China Growth
Fund will benefit from such growth. Share values will fluctuate and, when
redeemed, may be worth more or less than at the time of purchase.
(map of Southeast Asia)
Greater China And
China's Special Economic Zones
Greater China
No. Korea
Japan
South Korea
China
CHINA'S SPECIAL ECONOMIC ZONES
Fujian Prov.
Pacific Ocean
Taiwan
Burma
Hong Kong
Guangdong Prov.
Xiamen
Laos
Shantou
Taiwan
Thailand
Shenzhen
Zhuhai
Philippines
Kampuchea
Hong Kong
So. China Sea
Malaysia
Philippines
Hainan Island
Singapore
Indonesia
Indian Ocean
Australia
IN ORDER TO ATTRACT FOREIGN INVESTMENT, SINCE 1978 CHINA HAS DESIGNATED CERTAIN
AREAS OF THE COUNTRY WHERE OVERSEAS INVESTORS CAN RECEIVE SPECIAL INVESTMENT
INCENTIVES AND TAX CONCESSIONS. THERE ARE FIVE SPECIAL ECONOMIC ZONES (SHENZHEN,
SHANTOU AND ZHUHAI IN GUANGDONG PROVINCE, XIAMEN IN FUJIAN PROVINCE AND HAINAN
ISLAND, WHICH ITSELF IS A PROVINCE).
IN ADDITION, 14 COASTAL CITIES HAVE BEEN DESIGNATED AS "OPEN CITIES" AND CERTAIN
OPEN ECONOMIC ZONES HAVE BEEN ESTABLISHED IN COASTAL AREAS. SHANGHAI HAS
ESTABLISHED THE PUDONG NEW AREA. TWENTY-SEVEN HIGH AND NEW TECHNOLOGY INDUSTRIAL
DEVELOPMENT ZONES HAVE BEEN APPROVED WHERE PREFERENTIAL TREATMENT IS GIVEN TO
ENTERPRISES WHICH ARE CONFIRMED AS TECHNOLOGY-RELATED.
CHINA IS ONE OF THE WORLD'S FASTEST GROWING ECONOMIES
In recent years, China has undergone remarkable change. China has embraced
economic reforms that have turned it into one of the world's most spectacularly
growing economies. Following strong growth in recent years, Gross Domestic
Product (GDP) in 1995 is forecast to grow by more than 9 percent. China's
leadership has officially declared this rapid growth as China's principal
political objective, until at least the turn of the century. China is also
influencing the growth rates of its neighbors: the average real (inflation
adjusted) GDP growth rate of the China region has been over 7.0 percent annually
for the past 6 years, compared with just 3 percent or less in Europe and the
United States.
With 1.2 billion people, China houses one quarter of the world's population.
China's population is young - an average 15 years younger than that of developed
Western countries, and its work force of 600 million is five times the size of
the U.S. work force.
Source: Lloyd George Management Ltd.
China's Potential
For Growth
US VS. CHINA:
A FINANCIAL COMPARISON
The table below compares financial statistics and consumption of various
products in the U.S. and China (all figures are annual, per person, except where
otherwise noted).
U.S. CHINA
GROSS NATIONAL PRODUCT ($US) $21,665 $395
AVERAGE MONTHLY WAGE ($US) $ 1,919 $38
PRIMARY ENERGY (TONS OF OIL EQUIVALENT) 7.5 0.64
COPPER (POUNDS) 20.0 0.9
ALUMINUM (POUNDS) 40.7 1.5
RAW STEEL (POUNDS) 880.0 165.0
RICE (POUNDS) 15.5 775.0
MEAT (POUNDS) 245.0 50.0
SUGAR (POUNDS) 140.0 9.6
SOFT DRINKS (GALLONS) 96.0 1.0
TVSETS (PER 1,000 PEOPLE) 885.0 8.0
NEWSPRINT (POUNDS) 125.0 3.0
TELEPHONE LINES (PER 1,000 PEOPLE) 520.0 5.3
CARS (PER 1,000 PEOPLE) 525.0 1.4
REFRIGERATORS (PER 1,000 PEOPLE) 390.0 2.6
Source: Lloyd George Management Ltd.
1994 AVERAGE FACTORY
WAGES PER MONTH
$U.S.
(Horizontal Bar Chart)
$3,574 Japan
$2,041 United States
$1,247 South Korea
$1,208 Taiwan
$1,191 Singapore
$1,140 Hong Kong
$346 Malaysia
$225 Spec. Economic Zones
$156 Thailand
$124 Philippines
$82 China
$66 Indonesia
Source: Lloyd George Management Ltd.
AT PRESENT, THERE IS AN ENORMOUS DISPARITY IN LABOR COSTS BETWEEN THE EMERGING
ASIAN COUNTRIES (CHINA, INDONESIA, THE PHILIPPINES, THAILAND AND MALAYSIA) AND
THOSE THAT ARE MORE INDUSTRIALIZED. OVER THE NEXT DECADE THERE IS STRONG REASON
TO BELIEVE THAT THE EMERGING COUNTRIES WILL START TO MOVE THEIR MANUFACTURING
FOCUS UPSCALE, SHIFTING FROM SUCH GOODS AS PLASTIC FLOWERS, TEXTILES AND TOYS,
TO COLOR TELEVISION SETS AND COMPUTERS, EMULATING THE LEAD OF SOUTH KOREA AND
TAIWAN.
WHAT ALL COUNTRIES OF THE REGION SHARE IS AN EQUITABLE WAGE STRUCTURE. UNLIKE
THE UNITED STATES, FOR EXAMPLE, WHERE A CHIEF EXECUTIVE OFFICER COULD EASILY
EARN 100 TIMES MORE THAN WHAT A PRODUCTION-LINE WORKER IN THE SAME COMPANY
MAKES, THE WAGE DIFFERENTIAL WITHIN THE CHINA REGION IS FAR SMALLER. IN SOUTH
KOREA, FOR EXAMPLE, THE DIFFERENCE BETWEEN THE TWO AT THE COUNTRY'S LARGEST
COMPANY IS ONLY NINE-FOLD.
AVERAGE GROWTH IN GROSS NATIONAL
PRODUCT: 1989 - 1994
Percent
(Horizontal Bar Chart)
19.03% China/Spec. Economic Zones
9.25% Thailand
8.80% Malaysia
8.30% Singapore
7.21% South Korea
6.80% Indonesia
6.41% Taiwan
4.60% Hong Kong
2.60% Philippines
1.90% United States
Source: Lloyd George Management Ltd.
THE AVERAGE REAL (INFLATION-ADJUSTED) GROSS DOMESTIC PRODUCT GROWTH RATE IN ASIA
HAS BEEN 7.0 PERCENT ANNUALLY OVER THE PAST 6 YEARS COMPARED WITH 3 PERCENT OR
LESS IN EUROPE AND THE UNITED STATES. ALTHOUGH MUCH WILL DEPEND ON THE
PRESERVATION OF THE INTERNATIONAL FREE TRADE SYSTEM, INTER-REGIONAL GROWTH IN
ASIAN TRADE HAS BECOME A MAJOR FACTOR IN THE CONTINUING SUPERIOR PERFORMANCE OF
ASIAN COUNTRIES.
THE LINKS BETWEEN CHINA AND HONG KONG, BETWEEN CHINA AND TAIWAN AND BETWEEN
CHINA AND OTHER COUNTRIES WITHIN THE REGION, WHERE THERE IS A SIGNIFICANT
OVERSEAS CHINESE POPULATION, HAVE BY NOW BEEN STRENGTHENED TO A DEGREE WHICH
MAKES A REVERSAL UNLIKELY. MOREOVER, ALTHOUGH THESE LINKS HAVE BEEN DEVELOPED TO
A STAGE WHERE ECONOMIC COOPERATION IN TRADE OPERATES SMOOTHLY, THE FULL
POTENTIAL OF THE MARKET, BOTH IN TERMS OF DOMESTIC CONSUMPTION AND OF EXPORT
GROWTH, HAS HARDLY BEGUN TO BE REALIZED.
DESPITE LOWER WAGES, CHINA'S SAVINGS RATE IS MORE THAN THREE TIMES THAT OF THE
UNITED STATES
The average monthly wage is between 200 and 300 renminbi, or approximately $75 -
$85. This compares to an average U.S. monthly wage of nearly $2,050. China's
savings rate of 42 percent of Gross National Product (GNP) is more than three
times that of the U.S. China's savings pool currently exceeds $250 billion, and
savings rates throughout the China region are correspondingly high. In 1994 the
gross national savings rate (as a percentage of GNP) in Singapore was a
remarkable 47.5 percent, followed closely by 42 percent in China, 36.6 percent
in Indonesia, 35.6 percent in Korea, 32.5 percent in Hong Kong, 31.7 percent in
Thailand, 28 percent in Taiwan, 24 percent in India, and 21 percent in the
Philippines. By comparison, the savings rate in the United States was only 12
percent for the same period.
Source: Lloyd George Management Ltd.
Chinese society has been based on the tenets of Confucius, which advocate order,
respect, hierarchy, good manners and the sacrifice of the individual for the
greater good of the family and the community. Chinese culture has favored hard
work, achievement and thrift, which is reflected in China's high savings rate.
THE 'OVERSEAS' CHINESE ARE LEADING CHINA'S TRANSFORMATION FROM CENTRAL PLANNING
TOWARD A MARKET-DRIVEN ECONOMY
The "overseas" Chinese - those living outside China - are leading China's
transformation from central planning toward a market-driven economy by supplying
capital and management expertise to complement the low-cost labor and land
resources of mainland China. Eaton Vance Management estimates that 75 percent of
all trade in most of the China region today goes through firms controlled by
overseas Chinese.
By far the largest part of foreign direct investment, presently running at a
$68 billion annual rate, is coming from the overseas Chinese. It is this direct
foreign investment - with its technology, management skills and export potential
- that is transforming China's economy, leading many observers to believe that
China will assume the leadership in Asia within the next 20 years.
CHINA'S EXPORTS ARE ON THE RISE
$U.S. billion
(Horizontal Line Chart)
EXPORTS IMPORTS
1988 $44.6 $56.0
1989 $51.1 $59.0
1990 $61.9 $52.0
1991 $70.7 $62.5
1992 $84.9 $80.0
1993 $91.2 $104.7
1994E $111.2 $123.3
1995E $127.8 $137.9
Source: Lloyd George Management Ltd.
FOREIGN INVESTMENT IS
GROWING RAPIDLY
$U.S. billions
(Horizontal Bar Chart)
1994 $27.7
1993 $25.0
1992 $13.0
1991 $4.9
1990 $4.9
Source: Ministry of Foreign Economic Relations & Trade; State Statistical Bureau
of the People's Republic of China
ACTUAL FOREIGN INVESTMENT HAS GROWN TO $U.S. 27.7 BILLION IN 1994 FROM $U.S.
25.0 BILLION IN 1993 AND APPROXIMATELY $U.S. 13.0 BILLION IN 1992. FOREIGN
INVESTMENT IN 1991 AND 1990 WERE BELOW $U.S. 5.0 BILLION.
INVESTMENT IN TAIWAN AND CHINA'S FUJIAN PROVINCE CONTINUES TO GROW. MOST OF HONG
KONG'S MANUFACTURING INVESTMENT HAS BEEN IN CHINA'S GUANGDONG PROVINCE, AND MORE
THAN 3 MILLION WORKERS ARE NOW EMPLOYED IN THE PROVINCE, WORKING FOR HONG KONG
COMPANIES.
LLOYD GEORGE MANAGEMENT ESTIMATES THAT 75 PERCENT OF ALL TRADE IN MOST OF THE
CHINA REGION TODAY GOES THROUGH FIRMS CONTROLLED BY THE OVERSEAS CHINESE.
1994 GROSS NATIONAL
SAVINGS AS A % OF
GROSS NATIONAL PRODUCT
(Horizontal Bar Chart)
47.5% Singapore
42.0% China
36.6% Indonesia
35.6% Korea
32.5% Hong Kong
31.7% Thailand
28.0% Taiwan
24.0% India
21.0% Philippines
12.0% United States
Source: Lloyd George Management Ltd.
THE CITIZENS OF THE CHINA REGION ARE PRODIGIOUS SAVERS - AND INVESTORS. IN 1994,
THE GROSS NATIONAL SAVINGS RATE (AS A PERCENTAGE OF GROSS NATIONAL PRODUCT) IN
SINGAPORE WAS A REMARKABLE 47.5 PERCENT, FOLLOWED CLOSELY BY 42 PERCENT IN
CHINA, 36.6 PERCENT IN INDONESIA, 35.6 PERCENT IN KOREA, 32.5 PERCENT IN HONG
KONG, 31.7 PERCENT IN THAILAND, 28 PERCENT IN TAIWAN, 24 PERCENT IN INDIA AND 21
PERCENT IN THE PHILIPPINES. BY COMPARISON, THE SAVINGS RATE IN THE UNITED
STATES, AS A PERCENTAGE OF GNP, FOR THE SAME PERIOD WAS ONLY 12 PERCENT.
With the overseas Chinese leading the way, foreign trade now accounts for more
than 15 percent of China's GNP. The establishment of "Special Economic Zones"
along China's south coast, which welcomed foreign firms and foreign capital, has
fostered the rapid development of China's export markets. Comments by paramount
leader Deng Xiaoping early in 1992, holding up the experience of the Special
Economic Zones as the model on which China should base its future, form a basis
for confidence in the sustainability and growth of economic reform throughout
China.
ECONOMIC PLANS NOW INCLUDE OBJECTIVES TO FURTHER INCREASE THE EXPORT ELEMENT OF
THE ECONOMY
Economic plans covering the last decade of the 20th century now include
objectives to quadruple the country's 1980 industrial and agricultural output by
the year 2000...to further increase the export element of the economy...and to
continue to open the country with further development of the designated special
investment areas.
Over the past 20 years, the performance of the China region stock markets has
generally been better than those in the United States and Europe. In the past
five years, these newly emerging securities markets have demonstrated
significant growth in market capitalization, in the numbers of listed securities
and the volume of transactions. In addition, with price-to-earnings ratios in
the mid-to lower teens, the stock markets of the China region currently offer
excellent value compared to other countries.
Two stock exchanges have recently opened in China - the Shenzhen and the
Shanghai. Class "A" and Class "B" shares are traded on both. While only resident
Chinese can purchase Class "A" shares, foreign investors (such as EV Classic
Greater China Growth Fund) can purchase Class "B" shares.
The Shenzhen Stock Exchange, established in April 1991, officially opened in
July 1991 with 6 listed companies. By December 1994, 114 stocks were traded, of
which 22 were "B" shares.*
The Shanghai Stock Exchange, established in November 1990, officially opened in
December 1990 with 8 listed companies. By December 1994, 171 stocks were traded,
of which 32 were "B" shares.*
* Source: Lloyd George Management Ltd.
<PAGE>
EV Classic
Greater China Growth Fund
THE FUND OFFERS INVESTORS
THE POTENTIAL TO BENEFIT FROM
CHINA'S GROWTH
The investment objective of EV Classic Greater China Growth Fund is long-term
capital appreciation.
The Fund offers investors the potential to benefit from the economic development
and growth of China. It invests in interests in the Greater China Growth
Portfolio. The Portfolio invests primarily in equities traded on the securities
markets in the China region, including the two stock exchanges in China itself.
The Portfolio may invest in the common and preferred stocks of companies that
provide goods or services to, or from within, the People's Republic of China
(China), or have manufacturing or other operations in China - and that are
normally listed on Southeast Asian stock exchanges or traded on their
over-the-counter markets.
FUND SHARES ARE NOT INSURED BY THE FDIC AND ARE NOT DEPOSITS OR OTHER
OBLIGATIONS OF, OR GUARANTEED BY, ANY DEPOSITORY INSTITUTION. SHARES ARE SUBJECT
TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL INVESTED.
COMPARATIVE CHINA REGION
PRICE/EARNINGS RATIOS
Year end 1994
(Horizontal Bar Chart)
20.6 Thailand
21.7 Malaysia
22.2 Singapore
14.4 United States
25.8 Philippines
28.7 Taiwan
17.8 Indonesia
18.7 South Korea
11.0 Hong Kong
Source: Lloyd George Management Ltd.
MOST OF THE STOCK MARKETS OF THE CHINA REGION CURRENTLY OFFER EXCELLENT VALUES.
THE GROWTH OF THE CHINA
REGION'S EMERGING MARKETS
Percent change in market capitalization
1984 - 1994
(Horizontal Bar Chart)
Indonesia 79000
Philippines 19000
Korea 3200
Taiwan 2470
Hong Kong 1263
Singapore 1008
Malaysia 697
Thailand 167
Source: Lloyd George Management Ltd.
THE MAJOR ASIAN SECURITIES MARKETS HAVE GENERALLY OUTPERFORMED THOSE IN EUROPE
AND THE UNITED STATES OVER THE PAST 20 YEARS. IN THE PAST FIVE YEARS, THE CHINA
REGION'S NEWLY EMERGING MARKETS HAVE GROWN DRAMATICALLY IN MARKET
CAPITALIZATION, IN NUMBERS OF LISTED SECURITIES AND IN THE VOLUME OF
TRANSACTIONS.
<PAGE>
PORTFOLIO INVESTMENTS
INCLUDE COUNTRIES THROUGHOUT
THE CHINA REGION
The countries in which the Portfolio may invest include:
o China o Singapore
o Hong Kong o South Korea
o Indonesia o Taiwan
o Malaysia o Thailand
o Philippines
Any well-managed investment, be it a start-up portfolio or a billion-dollar
institutional account, requires in-depth knowledge of markets, products,
management styles and, to the extent possible, a keen sense of economic and
political trends - past, current and future.
But investing in emerging overseas markets calls for even more. And that is a
thorough understanding of the cultures, history and attitudes of the people and
countries in which assets will be placed.
While there is no shortage of expertise in the established markets of North
America, Japan and Europe, there are relatively few advisers dedicated to the
emerging markets of the China region.
<PAGE>
The Investment Adviser:
Lloyd George Management (Hong Kong) Limited
THE ADVISER, LLOYD GEORGE
MANAGEMENT, HAS EXTENSIVE, HANDS-
ON EXPERIENCE IN THE CHINA REGION
Lloyd George Management (Hong Kong) Limited, the Portfolio's investment adviser,
comprises a group of highly qualified and experienced investment professionals.
Individually and collectively, they have extensive hands-on experience in the
securities markets of the China region, including the management of several
regional mutual funds.
Based in Hong Kong, Lloyd George Management is ideally situated to monitor the
pulse of the China region, select the securities for the Portfolio and manage,
on a day-to-day basis, its assets.
EATON VANCE IS THE FUND'S
SPONSOR AND ADMINISTRATOR
The Fund's sponsor and administrator is Eaton Vance Management, a Boston-based
investment firm founded in 1924. Eaton Vance currently manages approximately $15
billion in assets for more than 140 mutual funds, whose investment objectives
range from tax free and taxable income to maximum capital appreciation, as well
as individual and institutional accounts for retirement plans, pension funds and
endowments.
No Initial Sales Charge
o Invest a minimum of $1,000. The minimum subsequent investment is only $50.
o All of your money goes to work for you immediately! (Please refer to a
prospectus for details of the Fund's CDSC and distribution plan.)
o You have access to your investment on any business day! (Shares redeemed may
be worth more or less than at time of purchase.)
o Dividends and capital gains distributions may be taken in cash, or reinvested
at net asset value in additional shares.
o Qualified plans, including Individual Retirement Accounts, are available.
o Free telephone exchange is available between a variety of Eaton Vance Funds.
Ask your financial adviser for details.
o Bank draft investing (minimum $50 per month or quarter) allows shareholders to
invest regularly.
Please see a prospectus for more information about any of these services.
For more complete information about EV Classic Greater China Growth Fund or any
other Eaton Vance fund, including distribution plans, charges and expenses,
please write or call your financial adviser for a prospectus. Read the
prospectus(es) carefully before you invest or send money.
[LOGO]
EATON VANCE DISTRIBUTORS, INC.
24 Federal Street
Boston, MA 02110
[LOGO]
LLOYD GEORGE MANAGEMENT
(HONG KONG) LIMITED
3808, One Exchange Square
Central, Hong Kong
30960 - 2/95 C - CGCB
<PAGE>
SPONSOR AND MANAGER OF
EV CLASSIC GREATER CHINA
GROWTH FUND
Administrator of Greater China
Growth Portfolio
Eaton Vance Management
24 Federal Street
Boston, MA 02110
ADVISER OF
GREATER CHINA GROWTH PORTFOLIO
Lloyd George Management
(Hong Kong) Limited
3808 One Exchange Square
Central, Hong Kong
PRINCIPAL UNDERWRITER
Eaton Vance Distributors, Inc.
24 Federal Street
Boston, MA 02110
(800) 225-6265
CUSTODIAN
Investors Bank & Trust Company
24 Federal Street
Boston, MA 02110
TRANSFER AGENT
The Shareholder Services Group, Inc.
BOS725
P.O. Box 1559
Boston, MA 02104
(800) 262-1122
AUDITORS
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110
EV CLASSIC GREATER CHINA
GROWTH FUND
24 FEDERAL STREET
BOSTON, MA 02110
C-CGSAI
[LOGO]
EV Classic
Greater China
Growth Fund
Statement of
Additional
Information
January 1, 1995
<PAGE>
EV MARATHON GREATER CHINA GROWTH FUND
SUPPLEMENT TO STATEMENT OF ADDITIONAL INFORMATION
DATED JANUARY 1, 1995
The following supplements the information found under "Investment
Performance" in Part I of the Fund's Statement of Additional Information:
From time to time the Fund may provide investors with
information on global investing, which may include descriptions,
comparisons, charts and/or illustrations of: foreign and domestic
equity market capitalizations; returns obtained by foreign and domestic
securities; and the effects of globally diversifying an investment
portfolio (including volatility analysis and performance information).
Such information may be provided for a variety of countries over
varying time periods.
The tables below indicate the total return (capital changes plus
reinvestment of all distributions) and percentage changes on a hypothetical
investment of $1,000 in the Fund covering the life of the Fund through August
31, 1994. The tables replace the tables appearing under "Performance
Information" in Part II of the Statement of Additional Information. The total
return and percentage changes for the period prior to the Fund's commencement of
operations on June 7, 1993 reflect the Portfolio's total return and percentage
changes (or that of its predecessor) adjusted to reflect any applicable Fund
sales charge. Such performance has not been adjusted to reflect the Fund's
distribution fees and certain other expenses. If such an adjustment were made,
the performance would be lower.
VALUE OF A $1,000 INVESTMENT
<TABLE>
<CAPTION>
Value of Invest- Value of Invest-
ment before de- ment after deduct- Total Return before de- Total Return after de-
ducting the con- ing the contin- ducting the contingent ducting the contingent
tingent deferred gent deferred deferred sales charge deferred sales charge
Investment Investment Amount of sales charge sales charge --------------------- ---------------------
Period Date Investment on 8/31/94 on 8/31/94 Cumulative Annualized Cumulative Annualized
---------- ----------- ---------- ---------------- ----------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Life of
Fund 10/28/92 $1,000.00 $1,589.95 $1,539.95 59.00% 28.64% 54.00% 26.43%
1 Year
Ended
8/31/94 8/31/93 $1,000.00 $1,250.82 $1,200.82 25.08% 25.08% 20.08% 20.08%
</TABLE>
PERCENTAGE CHANGES - 10/28/92-8/31/94
<TABLE>
<CAPTION>
Net asset value to net asset value Net asset value to net asset value
before deducting the contingent deferred after deducting the contingent deferred
sales charge with all distributions reinvested sales charge with all distributions reinvested
Fiscal Year --------------------------------------------------- -----------------------------------------------
Ended Annual Cumulative Average Annual Annual Cumulative Average Annual
----------- ------ ---------- -------------- ------ ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
8/31/93 --- 27.11% --- --- 22.11% ---
8/31/94 25.08% 59.00% 28.64% 20.08% 54.00% 26.43%
</TABLE>
Past performance is not indicative of future results. Investment
return and principal value will fluctuate; shares, when redeemed, may be worth
more or less than their original cost.
August 1, 1995 M-CGSAI
<PAGE>
STATEMENT OF
ADDITIONAL INFORMATION
January 1, 1995
EV MARATHON GREATER CHINA GROWTH FUND
24 Federal Street
Boston, Massachusetts 02110
(800) 225-6265
This Statement of Additional Information consists of two parts. Part I
provides information about EV Marathon Greater China Growth Fund (the "Fund")
and certain other series of Eaton Vance Growth Trust (the "Trust"). Part II
provides information solely about the Fund. Where appropriate, Part I includes
cross-references to the relevant sections of Part II that provide additional,
Fund-specific information.
TABLE OF CONTENTS Page
PART I
Additional Information about Investment Policies .......................... 2
Investment Restrictions ................................................... 10
Trustees and Officers ..................................................... 13
Management of the Fund .................................................... 15
Custodian ................................................................. 17
Service for Withdrawal .................................................... 18
Determination of Net Asset Value .......................................... 18
Investment Performance .................................................... 19
Taxes ..................................................................... 20
Portfolio Security Transactions ........................................... 22
Other Information ......................................................... 24
Independent Certified Public Accountants .................................. 25
Appendix A -- The Securities Markets in China and Hong Kong ............... 26
Appendix B -- China Region Countries ...................................... 37
PART II
Fees and Expenses ......................................................... a-1
Performance Information ................................................... a-2
Principal Underwriter ..................................................... a-2
Distribution Plan ......................................................... a-3
Control Persons and Principal Holders of Securities ....................... a-4
Financial Statements ...................................................... a-5
Appendix C -- Statistical Information ..................................... C-1
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY THE FUND'S PROSPECTUS DATED JANUARY 1, 1995, AS SUPPLEMENTED FROM
TIME TO TIME. THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE READ IN
CONJUNCTION WITH SUCH PROSPECTUS, A COPY OF WHICH MAY BE OBTAINED WITHOUT CHARGE
BY CONTACTING EATON VANCE DISTRIBUTORS, INC. (THE "PRINCIPAL UNDERWRITER") (SEE
BACK COVER FOR ADDRESS AND PHONE NUMBER).
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PART I
The following provides information about the Fund and certain other
series of the Trust.
INVESTMENT OBJECTIVE
The investment objective of the Fund is to seek long-term capital
appreciation. It seeks to meet its investment objective by investing all of its
investable assets in the Greater China Growth Portfolio (the "Portfolio"), a
separate registered investment company which was organized as a trust under the
laws of the State of New York. The Portfolio invests in equity securities of
companies which, in the opinion of the investment adviser, will benefit from the
economic development and growth of the People's Republic of China ("China"). The
Portfolio has the same investment objective as the Fund.
Except for the fundamental investment restrictions and policies specifically
identified in the Prospectus or enumerated in this Statement of Additional
Information, the investment objective and policies of the Fund and the Portfolio
are not fundamental policies and accordingly may be changed by the Trustees of
the Trust and the Portfolio without obtaining the approval of the shareholders
of the Fund or the investors in the Portfolio. If any changes were made, the
Fund might have investment objectives different from the objectives which an
investor considered appropriate at the time the investor became a shareholder in
the Fund.
ADDITIONAL INFORMATION ABOUT INVESTMENT POLICIES
FOREIGN INVESTMENTS
Investing in securities issued by companies whose principal business
activities are outside the United States may involve significant risks not
present in domestic investments. For example, there is generally less publicly
available information about foreign companies, particularly those not subject to
the disclosure and reporting requirements of the U.S. securities laws. Foreign
issuers are generally not bound by uniform accounting, auditing, and financial
reporting requirements and standards of practice comparable to those applicable
to domestic issuers. Investments in foreign securities also involve the risk of
possible adverse changes in investment or exchange control regulations,
expropriation or confiscatory taxation, limitation on the removal of funds or
other assets of the Portfolio, political or financial instability or diplomatic
and other developments which could affect such investments. Further, economies
of particular countries or areas of the world may differ favorably or
unfavorably from the economy of the United States. It is anticipated that in
most cases the best available market for foreign securities will be on exchanges
or in over-the-counter markets located outside of the United States. Foreign
stock markets, while growing in volume and sophistication, are generally not as
developed as those in the United States, and securities of some foreign issuers
(particularly those located in developing countries) may be less liquid and more
volatile than securities of comparable U.S. companies. In addition, foreign
brokerage commissions are generally higher than commissions on securities traded
in the United States and may be non-negotiable. In general, there is less
overall governmental supervision and regulation of foreign securities markets,
broker-dealers, and issuers than in the United States.
FOREIGN CURRENCY TRANSACTIONS
Since investments in companies whose principal business activities are
located outside of the United States will frequently involve currencies of
foreign countries, and since assets of the Portfolio may temporarily be held in
bank deposits in foreign currencies during the completion of investment
programs, the value of the assets of the Portfolio as measured in U.S. dollars
may be affected favorably or unfavorably by changes in foreign currency exchange
rates and exchange control regulations. Currency exchange rates can also be
affected unpredictably by intervention by U.S. or foreign governments or central
banks, or the failure to intervene, or by currency controls or political
developments in the U.S. or abroad. The Portfolio may conduct its foreign
currency exchange transactions on a spot (i.e., cash) basis at the spot rate
prevailing in the foreign currency exchange market or through entering into
contracts to purchase or sell foreign currencies at a future date (i.e., a
"forward foreign currency" contract or "forward" contract). It may convert
currency on a spot basis from time to time, and bear the costs of such
conversion. Although foreign exchange dealers do not charge a fee for
conversion, they do realize a profit based on the difference (the "spread")
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to the Portfolio at one
rate, while offering a lesser rate of exchange should the Portfolio desire to
resell that currency to the dealer.
CURRENCY SWAPS
The Portfolio may enter into currency swaps for hedging purposes and non-
hedging purposes. Inasmuch as swaps are entered into for good faith hedging
purposes and are offset by a segregated account as described below, the
Portfolio and Lloyd George Management (Hong Kong) Limited (the "Adviser")
believe that swaps do not constitute senior securities as defined in the
Investment Company Act of 1940 (the "1940 Act") and, accordingly, will not treat
them as being subject to the Portfolio's borrowing restrictions. An amount of
cash or liquid high grade debt securities (i.e., securities rated in one of the
top three ratings categories by Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Ratings Group ("S&P"), or, if unrated, deemed by the Adviser
to be of comparable credit quality) having an aggregate net asset value at least
equal to the gross payments which the Portfolio is obligated to make under the
currency swap will be maintained in a segregated account by the Portfolio's
custodian. The Portfolio will not enter into any currency swap unless the credit
quality of the unsecured senior debt or the claims-paying ability of the other
party thereto is considered to be investment grade by the Adviser. If there is a
default by the other party to such a transaction, the Portfolio will have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid in comparison with the markets for other similar instruments
which are traded in the interbank market.
FORWARD FOREIGN CURRENCY EXCHANGE TRANSACTIONS
The Portfolio may enter into forward foreign currency exchange contracts. A
forward foreign currency exchange contract involves an obligation to purchase or
sell a specific currency at a future date, which may be any fixed number of days
from the date of the contract agreed upon by the parties, at a price set at the
time of entering into the contract. These contracts are traded in the interbank
market conducted directly between currency traders (usually large commercial
banks) and their customers. A forward contract generally has no deposit
requirement, and no commissions are charged at any stage for trades.
At the maturity of a forward contract the Portfolio may either accept or
make delivery of the currency specified in the contract or, at or prior to
maturity, enter into a closing purchase transaction involving the purchase or
sale of an offsetting contract. Closing purchase transactions with respect to
forward contracts are usually effected with the currency trader who is a party
to the original forward contract.
The Portfolio may enter into forward foreign currency exchange contracts in
several circumstances. First, when the Portfolio enters into a contract for the
purchase or sale of a security denominated in a foreign currency, or when the
Portfolio anticipates the receipt in a foreign currency of dividend or interest
payments on such a security which it holds, the Portfolio may desire to "lock
in" the U.S. dollar price of the security or the U.S. dollar equivalent of such
dividend or interest payment, as the case may be. By entering into a forward
contract for the purchase or sale, for a fixed amount of dollars, of the amount
of foreign currency involved in the underlying transactions, the Portfolio will
attempt to protect itself against an adverse change in the relationship between
the U.S. dollar and the subject foreign currency during the period between the
date on which the security is purchased or sold, or on which the dividend or
interest payment is declared, and the date on which such payments are made or
received.
Additionally, when management of the Portfolio believes that the currency of
a particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell, for a fixed amount of
dollars, the amount of foreign currency approximating the value of some or all
of the securities held by the Portfolio denominated in such foreign currency.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. The precise projection of
short-term currency market movements is not possible, and short-term hedging
provides a means of fixing the dollar value of only a portion of the Portfolio's
foreign assets.
The Portfolio's custodian will place cash or other high grade liquid debt
securities in a segregated account of the Portfolio in an amount equal to the
value of the Portfolio's total assets committed to the consummation of forward
foreign currency exchange contracts requiring the Portfolio to purchase foreign
currencies. If the value of the securities placed in the segregated account
declines, additional cash or securities will be placed in the account on a daily
basis so that the value of the account will equal the amount of the Portfolio's
commitments with respect to such contracts.
The Portfolio generally will not enter into a forward contract with a term
of greater than one year. The use of forward contracts to protect the value of
the Portfolio's portfolio securities against a decline in the value of a
currency does not eliminate fluctuations in the underlying prices of the
securities. It simply establishes a rate of exchange which the Portfolio can
achieve at some future point in time.
While the Portfolio will enter into forward contracts to reduce currency
exchange rate risks, transactions in such contracts involve certain other risks.
Thus, while the Portfolio may benefit from such transactions, unanticipated
changes in currency prices may result in a poorer overall performance for the
Portfolio than if it had not engaged in any such transactions. Moreover, there
may be imperfect correlation between the securities held by the Portfolio
denominated in a particular currency and forward contracts entered into by the
Portfolio. Such imperfect correlation may prevent the Portfolio from achieving a
complete hedge or expose the Portfolio to risk of foreign exchange loss.
REPURCHASE AGREEMENTS
Under a repurchase agreement the Portfolio buys a security at one price and
simultaneously promises to sell that same security back to the seller at a
higher price. At no time will the Portfolio commit more than 15% of its net
assets to repurchase agreements which mature in more than seven days and other
illiquid securities. The Portfolio's repurchase agreements will provide that the
value of the collateral underlying the repurchase agreement will always be at
least equal to the repurchase price, including any accrued interest earned on
the repurchase agreement, and will be marked to market daily.
REVERSE REPURCHASE AGREEMENTS
The Portfolio may enter into reverse repurchase agreements. Under a reverse
repurchase agreement, the Portfolio temporarily transfers possession of a
portfolio instrument to another party, such as a bank or broker-dealer, in
return for cash. At the same time, the Portfolio agrees to repurchase the
instrument at an agreed upon time (normally within seven days) and price, which
reflects an interest payment. The Portfolio expects that it will enter into
reverse repurchase agreements when it is able to invest the cash so acquired at
a rate higher than the cost of the agreement, which would increase the income
earned by the Portfolio. The Portfolio could also enter into reverse repurchase
agreements as a means of raising cash to satisfy redemption requests without the
necessity of selling portfolio assets.
When the Portfolio enters into a reverse repurchase agreement, any
fluctuations in the market value of either the securities transferred to another
party or the securities in which the proceeds may be invested would affect the
market value of the Portfolio's assets. As a result, such transactions may
increase fluctuations in the market value of the Portfolio's assets. While there
is a risk that large fluctuations in the market value of the Portfolio's assets
could affect the Portfolio's net asset value, this risk is not significantly
increased by entering into reverse repurchase agreements, in the opinion of the
Adviser. Because reverse repurchase agreements may be considered to be the
practical equivalent of borrowing funds, they constitute a form of leverage. If
the Portfolio reinvests the proceeds of a reverse repurchase agreement at a rate
lower than the cost of the agreement, entering into the agreement will lower the
Portfolio's yield.
At all times that a reverse repurchase agreement is outstanding, the
Portfolio will maintain cash or high grade liquid securities in a segregated
account at its custodian bank with a value at least equal to its obligation
under the agreement. Securities and other assets held in the segregated account
may not be sold while the reverse repurchase agreement is outstanding, unless
other suitable assets are substituted. While the Adviser does not consider
reverse repurchase agreements to involve a traditional borrowing of money,
reverse repurchase agreements will be included within the aggregate limitation
on "borrowings" contained in the Portfolio's investment restriction (1) set
forth below.
WRITING AND PURCHASING CALL AND PUT OPTIONS
A call option written by the Portfolio obligates the Portfolio to sell
specified securities to the holder of the option at a specified price at any
time before the expiration date. The Portfolio will write a covered call option
on a security for the purpose of increasing its return on such security and/or
to partially hedge against a decline in the value of the security. In
particular, when the Portfolio writes an option which expires unexercised or is
closed out by the Portfolio at a profit, it will retain the premium paid for the
option, which will increase its gross income and will offset in part the reduced
value of the portfolio security underlying the option, or the increased cost of
acquiring the security for its portfolio. However, if the price of the
underlying security moves adversely to the Portfolio's position, the option may
be exercised and the Portfolio will be required to purchase or sell the
underlying security at a disadvantageous price, which may only be partially
offset by the amount of the premium, if at all. The Portfolio does not intend to
write a covered option on any security if after such transaction more than 15%
of its net assets, as measured by the aggregate value of the securities
underlying all covered calls and puts written by the Portfolio, would be subject
to such options. The Portfolio will only write a put option on a security which
it intends to ultimately acquire for its portfolio. A put option written by the
Portfolio would obligate the Portfolio to purchase specified securities from the
option holder at a specified price upon exercise of the option at any time
before the expiration date.
The Portfolio may purchase put or call options on securities or securities
indices in anticipation of changes in the value of its existing portfolio
securities or in the prices of securities that the Portfolio intends to purchase
at a later date. In the event that the expected changes occur, the Portfolio may
be able to offset adverse changes in the value of its portfolio, in whole or in
part, through the options purchased. The premium paid for a put or call option
plus any transaction costs will reduce the benefit, if any, realized by the
Portfolio upon exercise or liquidation of the option. Unless the price of the
underlying security changes sufficiently, the option may expire without value to
the Portfolio.
The Portfolio may terminate its obligations under a call or put option by
purchasing an option identical to the one it has written. Such purchases are
referred to as "closing purchase transactions."
The Portfolio would normally purchase call options in anticipation of an
increase in the market value of securities of the type in which the Portfolio
may invest. The purchase of a call option would entitle the Portfolio, in return
for the premium paid, to purchase specified securities at a specified price
during the option period. The Portfolio would ordinarily realize a gain if,
during the option period, the value of such securities exceeded the sum of the
exercise price, the premium paid and transaction costs; otherwise, the Portfolio
would realize a loss on the purchase of the call option.
The Portfolio would normally purchase put options in anticipation of a
decline in the market value of securities in its portfolio ("protective puts")
or securities of the type in which it is permitted to invest. The purchase of a
put option would entitle the Portfolio, in exchange for the premium paid, to
sell specified securities at a specified price during the option period. The
purchase of protective puts is designed merely to offset or hedge against a
decline in the market value of the securities held by the Portfolio. The
Portfolio would ordinarily realize a gain if, during the option period, the
value of the underlying securities decreased below the exercise price
sufficiently to cover the premium and transaction costs; otherwise, the
Portfolio would realize a loss on the purchase of the put option. Gains and
losses on the purchase of protective put options would tend to be offset by
countervailing changes in the value of underlying portfolio securities.
The Portfolio would also be able to enter into closing sale transactions in
order to realize gains or minimize losses on options purchased by the Portfolio.
The Portfolio does not intend to purchase any options if after such transaction
more than 5% of its net assets, as measured by the aggregate of all premiums
paid for all such options held by the Portfolio, would be so invested.
The Portfolio would write and purchase put and call options on securities
indices for the same purposes as the writing and purchase of options on
securities. Options on securities indices are similar to options on securities,
except that the exercise of securities index options requires cash payments and
does not involve the actual purchase or sale of securities. In addition,
securities index options are designed to reflect price fluctuations in a group
of securities or segment of the securities market rather than price fluctuations
in a single security.
SPECIAL RISKS ASSOCIATED WITH OPTIONS ON SECURITIES
An options position may be closed out only on an options exchange which
provides a secondary market for an option of the same series. Although the
Portfolio will generally purchase or write only those options for which there
appears to be an active secondary market, there is no assurance that a liquid
secondary market on an exchange will exist for any particular option, or at any
particular time. For some options no secondary market on an exchange may exist.
In such event, it might not be possible to effect closing transactions in
particular options, with the result that the Portfolio would have to exercise
its options in order to realize any profit and would incur transaction costs
upon the sale of underlying securities pursuant to the exercise of put options.
If the Portfolio as a covered call option writer is unable to effect a closing
purchase transaction in a secondary market, it will not be able to sell the
underlying security until the option expires or it delivers the underlying
security upon exercise.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the facilities of an exchange,
the Options Clearing Corporation or another clearing organization may not at all
times be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that exchange that had been issued by the Options Clearing
Corporation or another clearing organization as a result of trades on that
exchange would continue to be exercisable in accordance with their terms.
The Portfolio will pay brokerage commissions in connection with writing
options and effecting closing purchase transactions, as well as for purchases
and sales of underlying securities. The writing of options could result in
significant increases in the portfolio turnover rate of the Portfolio,
especially during periods when market prices of the underlying securities
appreciate.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain of the facilities of the
Options Clearing Corporation or other clearing organization inadequate, and
thereby result in the institution by an exchange of special procedures which may
interfere with the timely execution of customers' orders.
The amount of the premiums which the Portfolio may pay or receive may be
adversely affected as new or existing institutions, including other investment
companies, engage in or increase their option purchasing and writing activities.
FUTURES TRANSACTIONS
Futures Contracts. A change in the level of currency exchange rates or
securities prices may affect the value of the securities held by the Portfolio
(or of securities that the Portfolio expects to purchase). To hedge against
changes in rates or prices or for non-hedging purposes, the Portfolio may enter
into (i) futures contracts for the purchase or sale of securities and currency,
(ii) futures contracts on securities indices and (iii) futures contracts on
other financial instruments and indices. In the United States futures contracts
are traded on exchanges or boards of trade that are licensed and regulated by
the Commodity Futures Trading Commission ("CFTC"), and must be executed through
a futures commission merchant or brokerage firm which is a member of the
relevant exchange. The Portfolio may also enter into futures contracts traded on
a foreign exchange if it is determined by the Adviser that trading on such
exchange does not subject the Portfolio to risks, including credit and liquidity
risks, that are materially greater than the risks associated with trading on
United States exchanges.
Futures Contracts on Securities and Currency. A futures contract on a
security or a currency is a binding contractual commitment which, if held to
maturity, will result in an obligation to make or accept delivery, during a
particular month, of securities having a standardized face value and rate of
return or of the specified currency. By purchasing futures on securities or
currencies, the Portfolio will legally obligate itself to accept delivery of the
underlying security or currency and pay the agreed price; by selling futures on
securities or currency, it will legally obligate itself to make delivery of the
security or currency against payment of the agreed price.
Positions taken in the futures markets are not normally held to maturity,
but are instead liquidated through offsetting transactions which may result in a
profit or a loss. While the Portfolio's futures contracts on securities or
currency will usually be liquidated in this manner, it may instead make or take
delivery of the underlying securities or currency whenever it appears
economically advantageous for the Portfolio to do so. A clearing corporation
associated with the exchange on which futures on securities or currency are
traded guarantees that, if still open, the sale or purchase will be performed on
the settlement date.
Futures Contracts on Securities Indices. Futures contracts on securities
indices or other indices do not require the physical delivery of securities, but
merely provide for profits and losses resulting from changes in the market value
of a contract to be credited or debited at the close of each trading day to the
respective accounts of the parties to the contract. On the contract's expiration
date a final cash settlement occurs and the futures position is simply closed
out. Changes in the market value of a particular futures contract reflect
changes in the level of the index on which the futures contract is based.
Hedging Strategies. Hedging by use of futures contracts seeks to establish
more certainly than would otherwise be possible the effective price of portfolio
securities or securities that the Portfolio proposes to acquire. The Portfolio
may, for example, take a "short" position in the futures market by selling
futures contracts in order to hedge against an anticipated decline in market
prices or foreign currency exchange rates that would adversely affect the value
of the securities held by the Portfolio. Such futures contracts may include
contracts for the future delivery of securities held by the Portfolio (or
currency held by the Portfolio in which such securities are denominated) or
securities with characteristics similar to those of the securities held by the
Portfolio. If, in the opinion of the Adviser, there is a sufficient degree of
correlation between price trends for the securities held by the Portfolio and
futures contracts based on other financial instruments, securities indices or
other indices, the Portfolio may also enter into such futures contracts as part
of its hedging strategy. Although under some circumstances prices of securities
may be more or less volatile than prices of such futures contracts, the Adviser
will attempt to estimate the extent of this difference in volatility based on
historical patterns and to compensate for it by having the Portfolio enter into
a greater or lesser number of futures contracts or by attempting to achieve only
a partial hedge against price changes affecting the securities held by the
Portfolio. When hedging of this character is successful, any depreciation in the
value of portfolio securities will substantially be offset by appreciation in
the value of the futures position.
On other occasions, the Portfolio may take a "long" position by purchasing
such futures contracts. This would be done, for example, when the Portfolio
anticipates the subsequent purchase of particular securities when it has the
necessary cash, but expects the prices then available in the securities market
or foreign currency exchange rates to be less favorable than prices or rates
that are currently available.
Options on Futures Contracts. The Portfolio may purchase and write call and
put options on futures contracts which are traded on a United States or foreign
exchange or board of trade. An option on a futures contract gives the purchaser
the right, in return for the premium paid, to assume a position in a futures
contract at a specified exercise price at any time during the option period.
Upon exercise of the option, the writer of the option is obligated to convey the
appropriate futures position to the holder of the option. If an option is
exercised on the last trading day before the expiration date of the option, a
cash settlement will be made in an amount equal to the difference between the
closing price of the futures contract and the exercise price of the option.
The Portfolio may use options on futures contracts solely for bona fide
hedging purposes as defined below or for non-hedging purposes subject to the
limitations imposed by CFTC regulations. If the Portfolio purchases a call (put)
option on a futures contract it benefits from any increase (decrease) in the
value of the futures contract, but is subject to the risk of decrease (increase)
in value of the futures contract. The benefits received are reduced by the
amount of the premium and transaction costs paid by the Portfolio for the
option. If market conditions do not favor the exercise of the option, the
Portfolio's loss is limited to the amount of such premium and transaction costs
paid by the Portfolio for the option.
If the Portfolio writes a call (put) option on a futures contract, the
Portfolio receives a premium but assumes the risk of a rise (decline) in value
in the underlying futures contract. If the option is not exercised, the
Portfolio gains the amount of the premium, which may partially offset
unfavorable changes in the value of securities (or the currency in which such
securities are denominated) held or to be acquired for the Portfolio. If the
option is exercised, the Portfolio will incur a loss, which will be reduced by
the amount of the premium it receives. However, depending on the degree of
correlation between changes in the value of its portfolio securities (or the
currency in which they are denominated) and changes in the value of futures
positions, the Portfolio's losses from writing options on futures may be
partially offset by favorable changes in the value of portfolio securities or in
the cost of securities to be acquired.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option of the same series. There
is no guarantee that such closing transactions can be effected. The Portfolio's
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
Limitations on the Use of Futures Contracts and Options on Futures
Contracts. The Portfolio will engage in futures and related options transactions
for bona fide hedging or non-hedging purposes as defined in or permitted by CFTC
regulations. The Portfolio will determine that the price fluctuations in the
futures contracts and options on futures used for hedging purposes are
substantially related to price fluctuations in securities (or the currency in
which they are denominated) held by the Portfolio or which it expects to
purchase. Except as stated below, the Portfolio's futures transactions will be
entered into for traditional hedging purposes -- i.e., futures contracts will be
sold to protect against a decline in the price of securities that the Portfolio
owns, or futures contracts will be purchased to protect the Portfolio against an
increase in the price of securities it intends to purchase.
As evidence of this hedging intent, the Portfolio expects that on 75% or
more of the occasions on which it takes a long futures (or option) position
(involving the purchase of futures contracts), the Portfolio will have
purchased, or will be in the process of purchasing, equivalent amounts of
related securities in the cash market at the time when the futures (or option)
position is closed out. However, in particular cases, when it is economically
advantageous for the Portfolio to do so, a long futures position may be
terminated (or an option may expire) without the corresponding purchase of
securities. As an alternative to compliance with the bona fide hedging
definition, a CFTC regulation permits the Portfolio to elect to comply with a
different test, under which the aggregate initial margin and premiums required
to establish non-hedging positions in futures contracts and options on futures
will not exceed 5% of the Portfolio's net asset value after taking into account
unrealized profits and losses on such positions and excluding the in-the-money
amount of such options.
The Portfolio will engage in transactions in futures contracts and related
options only to the extent such transactions are consistent with the
requirements of the Internal Revenue Code of 1986, as amended (the "Code") for
maintaining the qualification of an investor in the Portfolio, such as the Fund,
as a regulated investment company for Federal income tax purposes (see "Taxes").
The Portfolio will be required, in connection with transactions in futures
contracts and the writing of options on futures, to make margin deposits, which
will be held by the Portfolio's custodian for the benefit of the futures
commission merchant through whom the Portfolio engages in such futures and
options transactions. Cash or high grade liquid debt securities required to be
segregated in connection with a "long" futures position taken by the Portfolio
will also be held by the custodian in a segregated account and will be marked to
market daily.
SPECIAL RISKS ASSOCIATED WITH FORWARD CONTRACTS, FOREIGN CURRENCY FUTURES
CONTRACTS AND OPTIONS THEREON AND OPTIONS ON FOREIGN CURRENCIES
Transactions in forward contracts, as well as futures and options on foreign
currencies, are subject to the risk of governmental actions affecting trading in
or the prices of currencies underlying such contracts, which could restrict or
eliminate trading and could have a substantial adverse effect on the value of
positions held by the Portfolio. In addition, the value of such positions could
be adversely affected by a number of other complex political and economic
factors applicable to the countries issuing the underlying currencies.
Furthermore, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying forward contracts, futures contracts and options. As a
result, the available information on which the Portfolio's trading systems will
be based may not be as complete as the comparable data on which the Portfolio
makes investment and trading decisions in connection with securities and other
transactions. Moreover, because the foreign currency market is a global,
twenty-four hour market, events could occur on that market which will not be
reflected in the forward, futures or options markets until the following day,
thereby preventing the Portfolio from responding to such events in a timely
manner.
Settlements of over-the-counter forward contracts or of the exercise of
foreign currency options generally must occur within the country issuing the
underlying currency, which in turn requires parties to such contracts to accept
or make delivery of such currencies in conformity with any United States or
foreign restrictions and regulations regarding the maintenance of foreign
banking relationships, fees, taxes or other charges.
Unlike currency futures contracts and exchange-traded options, options on
foreign currencies and forward contracts are not traded on contract markets
regulated by the CFTC or (with the exception of certain foreign currency
options) the Securities and Exchange Commission (the "SEC"). To the contrary,
such instruments are traded through financial institutions acting as market-
makers. (Foreign currency options are also traded on the Philadelphia Stock
Exchange subject to SEC regulation). In an over-the-counter trading environment,
many of the protections associated with transactions on exchanges will not be
available. For example, there are no daily price fluctuation limits, and adverse
market movements could therefore continue to an unlimited extent over a period
of time. Although the purchaser of an option cannot lose more than the amount of
the premium plus related transaction costs, this entire amount could be lost.
Moreover, an option writer could lose amounts substantially in excess of its
initial investment due to the margin and collateral requirements associated with
such option positions. Similarly, there is no limit on the amount of potential
losses on forward contracts to which the Portfolio is a party.
In addition, over-the-counter transactions can only be entered into with a
financial institution willing to take the opposite side, as principal, of the
Portfolio's position unless the institution acts as broker and is able to find
another counterparty willing to enter into the transaction with the Portfolio.
Where no such counterparty is available, it will not be possible to enter into a
desired transaction. There also may be no liquid secondary market in the trading
of over-the-counter contracts, and the Portfolio may be unable to close out
options purchased or written, or forward contracts entered into, until their
exercise, expiration or maturity. This in turn could limit the Portfolio's
ability to realize profits or to reduce losses on open positions and could
result in greater losses.
Furthermore, over-the-counter transactions are not backed by the guarantee
of an exchange's clearing corporation. The Portfolio will therefore be subject
to the risk of default by, or the bankruptcy of, the financial institution
serving as its counterparty. One or more of such institutions also may decide to
discontinue its role as market-maker in a particular currency, thereby
restricting the Portfolio's ability to enter into desired hedging transactions.
A Portfolio will enter into over-the-counter transactions only with parties
whose creditworthiness has been reviewed and found satisfactory by the Adviser.
Over-the-counter options on foreign currencies, like exchange-traded
commodity futures contracts and commodity option contracts, are within the
exclusive regulatory jurisdiction of the CFTC. The CFTC currently permits the
trading of such options, but only subject to a number of conditions regarding
the commercial purpose of the purchaser of such options. The Portfolio is not
able to determine at this time whether or to what extent the CFTC may impose
additional restrictions on the trading of over-the-counter options on foreign
currencies at some point in the future, or the effect that any such restrictions
may have on the hedging strategies to be implemented by the Portfolio.
CFTC regulations require that the Portfolio not enter into non-hedging
transactions in commodity futures contracts or commodity option contracts for
which the aggregate initial margin and premiums exceed 5% of the fair market
value of the Portfolio's net assets. Premiums paid to purchase over-the-counter
options on foreign currencies, and initial margin deposited in connection with
the writing of such options, are required to be included in determining
compliance with this requirement. This could, depending upon the Portfolio's
existing positions in futures contracts and options on futures contracts, limit
the Portfolio's ability to purchase or write options on foreign currencies.
Conversely, the existence of open positions in options on foreign currencies
could limit the ability of the Portfolio to enter into desired transactions in
other options or futures contracts.
While forward contracts and currency swaps are not presently subject to
regulation by the CFTC, the CFTC may in the future assert or be granted
authority to regulate such instruments. In such event, the Portfolio's ability
to utilize forward contracts and currency swaps in the manner set forth above
and in the Prospectus could be restricted.
Options on foreign currencies traded on a national securities exchange are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In particular,
all foreign currency options positions entered into on a national securities
exchange are cleared and guaranteed by the Options Clearing Corporation ("OCC"),
thereby reducing the risk of counterparty default. Further, a liquid secondary
market in options traded on a national securities exchange may be more readily
available than in the over-the-counter market, potentially permitting the
Portfolio to liquidate open positions at a profit prior to exercise or
expiration, or to limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however,
are subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effect of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures for
exercise and settlement, such as technical changes in the mechanics of delivery
of currency, the fixing of dollar settlement prices or prohibitions on exercise.
PORTFOLIO TURNOVER
The Portfolio cannot accurately predict its portfolio turnover rate, but it
is anticipated that the annual turnover rate will generally not exceed 100%
(excluding turnover of securities having a maturity of one year or less). A 100%
annual turnover rate would occur, for example, if all the securities in the
portfolio were replaced once in a period of one year. A high turnover rate (100%
or more) necessarily involves greater expenses to the Portfolio. The Portfolio
engages in portfolio trading (including short-term trading) if it believes that
a transaction including all costs will help in achieving its investment
objective either by increasing income or by enhancing the Portfolio's net asset
value. High portfolio turnover may also result in the realization of substantial
net short-term capital gains. In order for the Fund to continue to qualify as a
regulated investment company for Federal tax purposes, less than 30% of the
annual gross income of the Fund must be derived from the sale of securities and
certain other investments (including its share of gains from the sale of
securities and certain other investments held by the Portfolio) held for less
than three months.
LENDING PORTFOLIO SECURITIES
If the Adviser decides to make securities loans, the Portfolio may seek to
increase its income by lending portfolio securities to broker-dealers or other
institutional borrowers. Under present regulatory policies of the SEC, such
loans are required to be secured continuously by collateral in cash, cash
equivalents or U.S. Government securities held by the Portfolio's custodian and
maintained on a current basis at an amount at least equal to market value of the
securities loaned, which will be marked to market daily. Cash equivalents
include certificates of deposit, commercial paper and other short-term money
market instruments. The financial condition of the borrower will be monitored by
the Adviser on an ongoing basis. The Portfolio would continue to receive the
equivalent of the interest or dividends paid by the issuer on the securities
loaned and would also receive a fee, or all or a portion of the interest on
investment of the collateral. The Portfolio would have the right to call a loan
and obtain the securities loaned at any time on up to five business days'
notice. The Portfolio would not have the right to vote any securities having
voting rights during the existence of a loan, but could call the loan in
anticipation of an important vote to be taken among holders of the securities or
the giving or holding of their consent on a material matter affecting the
investment. If the Adviser decides to make securities loans, it is intended that
the value of the securities loaned would not exceed one-third of the Portfolio's
total assets.
INVESTMENT RESTRICTIONS
Whenever an investment policy or investment restriction set forth in the
Prospectus or this Statement of Additional Information states a maximum
percentage of assets that may be invested in any security or other asset or
describes a policy regarding quality standards, such percentage limitation or
standard shall be determined immediately after and as a result of the Fund's or
the Portfolio's acquisition of such security or other asset. Accordingly, any
later increase or decrease resulting from a change in values, assets or other
circumstances, other than a subsequent rating change below investment grade made
by a rating service, will not compel the Fund or the Portfolio, as the case may
be, to dispose of such security or other asset.
The Fund and the Portfolio have each adopted the following investment
restrictions which may not be changed without the approval by the holders of a
majority of the outstanding voting securities of the Fund or the Portfolio, as
the case may be, which as used in this Statement of Additional Information means
the lesser of (a) 67% or more of the outstanding voting securities of the Fund
or the Portfolio, as the case may be, present or represented by proxy at a
meeting if the holders of more than 50% of the outstanding voting securities of
the Fund or the Portfolio are present or represented at the meeting or (b) more
than 50% of the outstanding voting securities of the Fund or the Portfolio.
Neither the Fund nor the Portfolio may:
(1) issue senior securities (as defined in the Investment Company Act of
1940 and rules thereunder) or borrow money, except that the Fund or the
Portfolio may borrow:
(i) from banks to purchase or carry securities, commodities,
commodities contracts or other investments;
(ii) from banks for temporary or emergency purposes not in excess
of 10% of its gross assets taken at market value; or
(iii) by entering into reverse repurchase agreements,
if, immediately after any such borrowing, the value of the Fund's or
Portfolio's total assets, including all borrowings then outstanding, is
equal to at least 300% of the aggregate amount of borrowings then
outstanding. Any such borrowings may be secured or unsecured. The Portfolio
or the Fund may issue securities (including senior securities) appropriate
to evidence such indebtedness, including reverse repurchase agreements.
(2) Pledge its assets, except that the Portfolio or the Fund may pledge
not more than one-third of its total assets (taken at current value) to
secure borrowings made in accordance with investment restriction (1) above;
for the purpose of this restriction the deposit of assets in a segregated
account with the Portfolio's or the Fund's custodian, as the case may be, in
connection with any of the Portfolio's or the Fund's respective investment
transactions is not considered to be a pledge.
(3) Purchase securities on margin (but the Portfolio or the Fund may
obtain such short-term credits as may be necessary for the clearance of
purchases and sales of securities).
(4) Make short sales of securities or maintain a short position, unless
at all times when a short position is open the Portfolio or the Fund either
owns an equal amount of such securities or owns securities convertible into
or exchangeable, without the payment of any additional consideration, for
securities of the same issue as, and equal in amount to, the securities sold
short.
(5) Purchase securities issued by any other open-end investment company
or investment portfolio, except as they may be acquired as part of a merger,
consolidation or acquisition of assets, except that the Fund may invest all
or substantially all of its assets in either the Portfolio or any other
registered investment company having substantially the same investment
objective as the Fund and except as otherwise permitted by the Investment
Company Act of 1940.
(6) Purchase or retain in its portfolio any securities issued by an
issuer any of whose officers, directors, trustees or security holders is an
officer or Trustee of the Portfolio or the Trust or is a member, officer,
director or trustee of any investment adviser of the Portfolio or the Fund,
if after the purchase of the securities of such issuer by the Portfolio or
the Fund one or more of such persons owns beneficially more than 1/2 of 1%
of the shares or securities or both (all taken at current value) of such
issuer and such persons owning more than 1/2 of 1% of such shares or
securities together own beneficially more than 5% of such shares or
securities or both (all taken at current value); provided, however, that the
Fund may invest all or substantially all of its assets in either the
Portfolio or any other registered investment company having substantially
the same investment objective as the Fund and having any officers,
directors, trustees or security holders who are officers or Trustees of the
Trust.
(7) Underwrite securities issued by other persons, except insofar as the
Fund or the Portfolio may technically be deemed to be an underwriter under
the Securities Act of 1933 in selling or disposing of a portfolio security,
and except that the Fund may invest all or substantially all of its assets
in either the Portfolio or any other registered investment company having
substantially the same investment objective as the Fund.
(8) Make loans to other persons, except by (a) the acquisition of money
market instruments, debt securities and other obligations in which the
Portfolio or the Fund is authorized to invest in accordance with their
respective investment objective and policies, (b) entering into repurchase
agreements and (c) lending their respective portfolio securities.
(9) Purchase the securities of any one issuer (other than obligations
issued or guaranteed by the U.S. Government or any of its agencies or
instrumentalities) if, with respect to 75% of its total assets and as a
result of such purchase (a) more than 5% of the total assets of the
Portfolio or the Fund, as the case may be (taken at current value), would be
invested in the securities of such issuer, or (b) the Fund or the Portfolio
would hold more than 10% of the outstanding voting securities of that
issuer, except that the Fund may invest all or substantially all of its
assets in, and may acquire up to 100% of the outstanding voting securities
of either the Portfolio or any other registered investment company having
substantially the same investment objectives as the Fund.
(10) Purchase any security if, as a result of such purchase, 25% or more
of the total assets of the Portfolio or the Fund, as the case may be (taken
at current value) would be invested in the securities of issuers having
their principal business activities in the same industry (the electric, gas
and telephone utility industries being treated as separate industries for
the purpose of this restriction); provided that there is no limitation with
respect to obligations issued or guaranteed by the U.S. Government or any of
its agencies or instrumentalities and except that the Fund may invest all or
substantially all of its assets in either the Portfolio or any other
registered investment company having substantially the same investment
objective as the Fund.
(11) Invest for the purpose of gaining control of a company's
management.
(12) Purchase or sell real estate, although the Fund or the Portfolio
may purchase and sell securities which are secured by interests in real
estate, securities of issuers which invest or deal in real estate and real
estate that is acquired as the result of the ownership of securities.
(13) Purchase or sell physical commodities (other than currency) or
contracts for the purchase or sale of physical commodities (other than
currency).
(14) Buy investment securities from or sell them to any of the
respective officers or Trustees of the Trust or the Portfolio, the
Portfolio's investment adviser or the Fund's principal underwriter, as
principal; provided, however, that any such person or firm may be employed
as a broker upon customary terms and that this restriction does not apply to
the Fund's investments in either the Portfolio or any other registered
investment company having substantially the same investment objective as the
Fund.
(15) Purchase oil, gas or other mineral leases or purchase partnership
interests in oil, gas or other mineral exploration or development programs.
For the purpose of investment restrictions (1), (2) and (3), the
arrangements (including escrow, margin and collateral arrangements) made by the
Portfolio or the Fund with respect to their respective transactions in all types
of options, futures contracts, options on futures contracts, forward contracts,
currencies, and commodities and options thereon shall not be considered to be
(i) a borrowing of money or the issuance of securities (including senior
securities) by the Portfolio or the Fund, as the case may be, (ii) a pledge of
its assets or (iii) the purchase of a security on margin.
The Fund and the Portfolio have each adopted the following investment
policies which may be changed without shareholder or investor approval. Neither
the Fund nor the Portfolio may invest more than 15% of its net assets in
investments which are not readily marketable, including restricted securities
and repurchase agreements with a maturity longer than seven days. Restricted
securities for the purposes of this limitation do not include securities
eligible for resale pursuant to Rule 144A under the Securities Act of 1933 that
the Board of Trustees of the Trust or the Portfolio, or its delegate, determine
to be liquid, based upon the trading markets for the specific security. Neither
the Fund nor the Portfolio intends to invest in Rule 144A securities or make
short sales of securities during the coming year. Except for obligations issued
or guaranteed by the U.S. Government or any of its agencies or
instrumentalities, neither the Fund nor the Portfolio will knowingly purchase a
security issued by a company (including predecessors) with less than three years
operating history (unless such security is rated at least B or a comparable
rating at the time of purchase by at least one nationally recognized rating
service) if, as a result of such purchase, more than 5% of the Portfolio's or
the Fund's total assets, as the case may be (taken at current value), would be
invested in such securities and except that the Fund may invest all or
substantially all of its assets in interests in the Portfolio or any other
registered investment company having substantially the same investment objective
as the Fund. Neither the Fund nor the Portfolio will purchase warrants if, as a
result of such purchase, more than 5% of the Portfolio's or the Fund's net
assets, as the case may be (taken at current value), would be invested in
warrants, and the value of such warrants which are not listed on the New York or
American Stock Exchange may not exceed 2% of the Portfolio's or the Fund's net
assets; this policy does not apply to or restrict warrants acquired by the
Portfolio or the Fund in units or attached to securities, inasmuch as such
warrants are deemed to be without value. Neither the Fund nor the Portfolio will
purchase any securities if at the time of such purchase, permitted borrowings
under investment restriction (1) above exceed 5% of the value of the Portfolio's
or the Fund's total assets, as the case may be.
In order to permit the sale of shares of the Fund in certain states, the
Fund and the Portfolio may make commitments more restrictive than the
fundamental policies described above. Should the Fund determine that any such
commitment is no longer in the best interests of the Fund and its shareholders,
it will revoke the commitment by terminating sales of its shares in the state(s)
involved.
Although permissible under the Fund's investment restrictions, the Fund has
no present intention during the coming fiscal year to: borrow money; pledge its
assets; underwrite securities issued by other persons; or make loans to other
persons.
TRUSTEES AND OFFICERS
The Trust's Trustees and officers are listed below. Except as indicated,
each individual has held the office shown or other offices in the same company
for the last five years. Unless otherwise noted, the business address of each
Trustee and officer is 24 Federal Street, Boston, Massachusetts 02110, which is
also the address of the Fund's sponsor and manager, Eaton Vance Management
("Eaton Vance"), of Eaton Vance's wholly-owned subsidiary, Boston Management and
Research ("BMR"), of Eaton Vance's parent, Eaton Vance Corp. ("EVC"), and of
Eaton Vance's trustee, Eaton Vance, Inc. ("EV"). Eaton Vance and EV are both
wholly-owned subsidiaries of EVC. Those Trustees who are "interested persons" of
the Trust, Eaton Vance, BMR, EVC or EV as defined in the 1940 Act, by virtue of
their affiliation with any one or more of the Trust, Eaton Vance, BMR, EVC or
EV, are indicated by an asterisk (*).
OFFICERS AND TRUSTEES OF THE TRUST
TRUSTEES
JAMES B. HAWKES, President and Trustee*
Executive Vice President of Eaton Vance, BMR, EVC and EV, and a Director of EVC
and EV. Director or Trustee and officer of various investment companies
managed by Eaton Vance or BMR.
LANDON T. CLAY, Vice President and Trustee*
Chairman of Eaton Vance, BMR, EVC and EV and a Director of EVC and EV. Director
or Trustee and officer of various investment companies managed by Eaton Vance
or BMR.
DONALD R. DWIGHT, Trustee
President of Dwight Partners, Inc. (a corporate relations and communications
company) founded in 1988. Director or Trustee of various investment
companies managed by Eaton Vance or BMR.
Address: Clover Mill Lane, Lyme, New Hampshire 03768
SAMUEL L. HAYES, III, Trustee
Jacob H. Schiff Professor of Investment Banking, Harvard University Graduate
School of Business Administration. Director or Trustee of various investment
companies managed by Eaton Vance or BMR.
Address: Harvard Business School, Soldiers Field Road, Boston, Massachusetts
02134
PETER F. KIELY, Vice President and Trustee*
Vice President of Eaton Vance, BMR and EV. Director or Trustee and officer of
various investment companies managed by Eaton Vance or BMR. Mr. Kiely was
elected Trustee of the Trust on June 14, 1993.
NORTON H. REAMER, Trustee
President and Director, United Asset Management Corporation (a holding company
owning institutional investment management firms); Chairman, President and
Director, The Regis Fund, Inc. (mutual fund). Director or Trustee of various
investment companies managed by Eaton Vance or BMR.
Address: One International Place, Boston, Massachusetts 02110
JOHN L. THORNDIKE, Trustee
Director, Fiduciary Trust Company. Director or Trustee of various investment
companies managed by Eaton Vance or BMR.
Address: 175 Federal Street, Boston, Massachusetts 02110
JACK L. TREYNOR, Trustee
Investment Adviser and Consultant. Director or Trustee of various investment
companies managed by Eaton Vance or BMR.
Address: 504 Via Almar, Palos Verdes Estates, California 90274
OFFICERS
M. DOZIER GARDNER, Vice President
President and Chief Executive Officer of Eaton Vance, BMR, EVC and EV, and
Director of EVC and EV. Director or Trustee and officer of various investment
companies managed by Eaton Vance or BMR.
JAMES L. O'CONNOR, Treasurer
Vice President of Eaton Vance, BMR and EV. Officer of various investment
companies managed by Eaton Vance or BMR.
THOMAS OTIS, Secretary
Vice President and Secretary of Eaton Vance, BMR, EVC and EV. Officer of various
investment companies managed by Eaton Vance or BMR.
JANET E. SANDERS, Assistant Secretary
Vice President of Eaton Vance, BMR and EV. Officer of various investment
companies managed by Eaton Vance or BMR.
Messrs. Thorndike (Chairman), Hayes and Reamer, are members of the Special
Committee of the Board of Trustees of the Trust. The Special Committee's
functions include a continuous review of the Fund's management contract with
Eaton Vance, making recommendations to the Board of Trustees regarding the
compensation of those Trustees who are not members of Eaton Vance's
organization, and making recommendations to the Board of Trustees regarding
candidates to fill vacancies, as and when they occur, in the ranks of those
Trustees who are not "interested persons" of the Trust or Eaton Vance.
Messrs. Treynor (Chairman) and Dwight are members of the Audit Committee of
the Board of Trustees. The Audit Committee's functions include making
recommendations to the Board of Trustees regarding the selection of the
independent certified public accountants, and reviewing with such accountants
and the Treasurer of the Trust matters relative to accounting and auditing
practices and procedures, accounting records, internal accounting controls, and
the functions performed by the custodian, transfer agent and dividend disbursing
agent of the Trust.
The fees and expenses of those Trustees of the Trust who are not members of
the Eaton Vance or BMR organizations are paid by the Fund and other series of
the Trust. The Trustees of the Trust also receive additional payments from other
investment companies for which Eaton Vance provides investment advisory,
administrative or management services or BMR provides investment advisory
services for serving in similar capacities. For information concerning the
compensation received by the Trustees of the Trust, see "Fees and Expenses" in
Part II of this Statement of Additional Information.
OFFICERS AND TRUSTEES OF THE PORTFOLIO
The Portfolio's Trustees and officers are listed below. Except as
indicated, each individual has held the office shown or other offices in the
same company for the last five years. The business address of the Adviser is
3808 One Exchange Square, Central, Hong Kong.Those Trustees who are "interested
persons" of the Portfolio, the Adviser, Eaton Vance, EVC or EV as defined in the
1940 Act by virtue of their affiliation with any one or more of the Portfolio,
the Adviser, Eaton Vance, BMR, EVC or EV, are indicated by an asterisk (*).
TRUSTEES
HON. ROBERT LLOYD GEORGE, President and Trustee*
Chairman and Chief Executive of Lloyd George Management (B.V.I.) Limited.
Chairman and Chief Executive Officer of the Adviser. Managing Director of
Indosuez Asia Investment Services, Ltd. from 1984 to 1991.
Address: 3808 One Exchange Square, Central, Hong Kong
JAMES B. HAWKES, Vice President and Trustee*
Executive Vice President of Eaton Vance, BMR, EVC and EV, and a Director of EVC
and EV. Director or Trustee and officer of various investment companies
managed by Eaton Vance or BMR.
Address: Eaton Vance Management, 24 Federal Street, Boston, Massachusetts 02110
SAMUEL L. HAYES, III, Trustee
Jacob H. Schiff Professor of Investment Banking, Harvard University Graduate
School of Business Administration. Director or Trustee of various investment
companies managed by Eaton Vance or BMR.
Address: Harvard Business School, Soldiers Field Road, Boston, Massachusetts
02134
STUART HAMILTON LECKIE, Trustee
Managing Director and Actuary of The Wyatt Company. Member of the Hong Kong
Government's Advisory Committee on Insurance.
Address: The Wyatt Company (HK) Ltd., Sun Hung Kai Centre, 27th Floor, 30
Harbour Road, Hong Kong
HON. EDWARD K.Y. CHEN, Trustee
Professor and Director of the Centre of Asian Studies, University of Hong
Kong. Director of First Pacific Bancshares Holdings Ltd. and a non-executive
Director of the Securities and Futures Commission. Vice-Chairman and
Consultant of ACL Consultants Ltd. from 1983 to 1989. Director of First
Pacific Bank Ltd. from 1986 to 1990. Director of Inc -- Asia from 1988 to
1991.
Address: University of Hong Kong, Centre of Asian Studies, Pokfulam Road, Hong
Kong
OFFICERS
SCOBIE DICKINSON WARD, Vice President, Assistant Secretary and Assistant
Treasurer
Director of Lloyd George Management (B.V.I.) Limited. Director of the Adviser.
Investment Manager of Indosuez Asia Investment Services, Ltd. from 1984 to
1991.
Address: 3808 One Exchange Square, Central, Hong Kong
WILLIAM WALTER RALEIGH KERR, Vice President, Secretary and Assistant Treasurer
Director, Finance Director and Chief Operating Officer of the Adviser.
Director of Lloyd George Management (B.V.I.) Limited.
Address: 3808 One Exchange Square, Central, Hong Kong
JAMES L. O'CONNOR, Vice President and Treasurer
Vice President of Eaton Vance, BMR and EV. Officer of various investment
companies managed by Eaton Vance or BMR.
Address: Eaton Vance Management, 24 Federal Street, Boston, Massachusetts 02110
THOMAS OTIS, Vice President and Assistant Secretary
Vice President and Secretary of Eaton Vance, BMR, EVC and EV. Officer of various
investment companies managed by Eaton Vance or BMR.
Address: Eaton Vance Management, 24 Federal Street, Boston, Massachusetts 02110
JANET E. SANDERS, Assistant Secretary
Vice President of Eaton Vance, BMR and EV. Officer of various investment
companies managed by Eaton Vance or BMR.
Address: Eaton Vance Management, 24 Federal Street, Boston, Massachusetts 02110
The Adviser is a subsidiary of Lloyd George Management (B.V.I.) Limited,
which is ultimately controlled by the Hon. Robert J.D. Lloyd George, President
and Trustee of the Portfolio and Chairman and Chief Executive Officer of the
Adviser. Mr. Hawkes is a Trustee and officer of the Trust and an officer of
the Fund's sponsor and manager. Mr. Hayes is a Trustee of the Trust.
The fees and expenses of those Trustees of the Portfolio who are not members
of the Adviser or Eaton Vance organizations are paid by the Portfolio. For
information concerning the compensation received by the Trustees of the
Portfolio, see "Fees and Expenses" in Part II of this Statement of Additional
Information.
While the Portfolio is a New York trust, the Adviser, together with Messrs.
Lloyd George, Leckie, Chen, Ward and Kerr, are not residents of the United
States, and substantially all of their respective assets may be located outside
of the United States. It may be difficult for investors to effect service of
process within the United States upon the individuals identified above, or to
realize judgments of courts of the United States predicated upon civil
liabilities of the Adviser and such individuals under the Federal securities
laws of the United States. The Portfolio has been advised that there is
substantial doubt as to the enforceability in the countries in which the Adviser
and such individuals reside of such civil remedies and criminal penalties as are
afforded by the Federal securities laws of the United States.
MANAGEMENT OF THE FUND
Eaton Vance acts as the sponsor and manager of the Fund and the
administrator of the Portfolio. The Portfolio has engaged Lloyd George
Management (Hong Kong) Limited (the "Adviser") as its investment adviser.
THE ADVISER
As investment adviser to the Portfolio, the Adviser manages the Portfolio's
investments, subject to the supervision of the Board of Trustees of the
Portfolio. The Adviser is also responsible for effecting all security
transactions on behalf of the Portfolio, including the allocation of principal
transactions and portfolio brokerage and the negotiation of commissions. See
"Portfolio Security Transactions." Under the investment advisory agreement, the
Adviser receives a monthly advisory fee computed by applying the annual asset
rate applicable to that portion of the average daily net assets of the Portfolio
throughout the month in each Category as indicated below:
ANNUAL
CATEGORY AVERAGE DAILY NET ASSETS ASSET RATE
-------- ------------------------ ----------
1 less than $500 million ..................................... 0.75%
2 $500 million but less than $1 billion ...................... 0.70
3 $1 billion but less than $1.5 billion ...................... 0.65
4 $1.5 billion but less than $2 billion ...................... 0.60
5 $2 billion but less than $3 billion ........................ 0.55
6 $3 billion and over ........................................ 0.50
For additional information about the Investment Advisory Agreement,
including the net assets of the Portfolio and the investment advisory fees that
the Portfolio paid the Adviser under the Investment Advisory Agreement, see
"Fees and Expenses" in Part II of this Statement of Additional Information.
The directors of the Adviser are the Honourable Robert Lloyd George,
William Walter Raleigh Kerr, Michael Tze-hau Lee, M.F. Tang and Scobie
Dickinson Ward. The Hon. Robert J.D. Lloyd George is Chairman and Chief
Executive Officer of the Adviser and Mr. Kerr is an officer of the Adviser.
The business address of these individuals is 3808 One Exchange Square,
Central, Hong Kong.
The Portfolio's investment advisory agreement with the Adviser remains in
effect until February 28, 1995; it may be continued indefinitely thereafter so
long as such continuance after February 28, 1995 is approved at least annually
(i) by the vote of a majority of the Trustees of the Portfolio who are not
interested persons of the Portfolio cast in person at a meeting specifically
called for the purpose of voting on such approval and (ii) by the Board of
Trustees of the Portfolio or by vote of a majority of the outstanding voting
securities of the Portfolio. The agreement may be terminated at any time without
penalty on sixty days' written notice by the Board of Trustees of either party
or by vote of the majority of the outstanding voting securities of the
Portfolio, and the agreement will terminate automatically in the event of its
assignment. The agreement provides that the Adviser may render services to
others. The agreement also provides that, in the absence of willful misfeasance,
bad faith, gross negligence or reckless disregard of obligations or duties under
the agreement on the part of the Adviser, the Adviser shall not be liable to the
Portfolio or to any shareholder for any act or omission in the course of or
connected with rendering services or for any losses sustained in the purchase,
holding or sale of any security.
MANAGER, SPONSOR AND ADMINISTRATOR
See "Management of the Fund and the Portfolio" in the Prospectus for a
description of the services Eaton Vance performs as manager and sponsor of the
Fund and administrator of the Portfolio. Under Eaton Vance's management contract
with the Fund and administration agreement with the Portfolio, Eaton Vance
receives a monthly management fee from the Fund and a monthly administration fee
from the Portfolio. Each fee is computed by applying the annual asset rate
applicable to that portion of the average daily net assets of the Fund or the
Portfolio throughout the month in each Category as indicated below:
ANNUAL
CATEGORY AVERAGE DAILY NET ASSETS ASSET RATE
-------- ------------------------ ----------
1 less than $500 million ..................................... 0.25%
2 $500 million but less than $1 billion ...................... 0.23333
3 $1 billion but less than $1.5 billion ...................... 0.21667
4 $1.5 billion but less than $2 billion ...................... 0.20
5 $2 billion but less than $3 billion ........................ 0.18333
6 $3 billion and over ........................................ 0.16667
For the administration and management fees that the Portfolio and the Fund
paid to Eaton Vance, see "Fees and Expenses" in Part II of this Statement of
Additional Information.
Eaton Vance's management contract with the Fund and administration agreement
with the Portfolio will each remain in effect until February 28, 1995. Each
agreement may be continued from year to year after February 28, 1995 so long as
such continuance is approved annually by the vote of a majority of the Trustees
of the Trust or the Portfolio, as the case may be. Each agreement may be
terminated at any time without penalty on sixty days' written notice by the
Board of Trustees of either party thereto, or by a vote of a majority of the
outstanding voting securities of the Fund or the Portfolio, as the case may be.
Each agreement will terminate automatically in the event of its assignment. Each
agreement provides that, in the absence of Eaton Vance's willful misfeasance,
bad faith, gross negligence or reckless disregard of its obligations or duties
to the Fund or the Portfolio under such contract or agreement, Eaton Vance will
not be liable to the Fund or the Portfolio for any loss incurred. Each agreement
was initially approved by the Trustees, including the non-interested Trustees,
of the Trust or the Portfolio which is a party thereto at meetings held on
September 8, 1992 and on October 8, 1992, respectively, of the Trust and the
Portfolio.
The Fund and the Portfolio, as the case may be, will each be responsible for
all of its respective costs and expenses not expressly stated to be payable by
Eaton Vance under the management contract or the administration agreement. Such
costs and expenses to be borne by each of the Fund or the Portfolio, as the case
may be, include, without limitation, custody and transfer agency fees and
expenses, including those incurred for determining net asset value and keeping
accounting books and records, expenses of pricing and valuation services; the
cost of share certificates; membership dues in investment company organizations;
brokerage commissions and fees; fees and expenses of registering under the
securities laws; expenses of reports to shareholders and investors; proxy
statements, and other expenses of shareholders' or investors' meetings;
insurance premiums, printing and mailing expenses; interest, taxes and corporate
fees; legal and accounting expenses; compensation and expenses of Trustees not
affiliated with Eaton Vance; distribution and service fees payable by the Fund
under its Rule 12b-1 distribution plan; and investment advisory, management and
administration fees. The Fund or the Portfolio will also each bear expenses
incurred in connection with litigation in which the Fund or the Portfolio, as
the case may be, is a party and any legal obligation to indemnify its respective
officers and Trustees with respect thereto.
Eaton Vance and EV are both wholly-owned subsidiaries of EVC. BMR is a
wholly-owned subsidiary of Eaton Vance. Eaton Vance and BMR are both
Massachusetts business trusts, and EV is the trustee of Eaton Vance and BMR. The
Directors of EV are Landon T. Clay, H. Day Brigham, Jr., M. Dozier Gardner,
James B. Hawkes and Benjamin A. Rowland, Jr. The Directors of EVC consist of the
same persons and John G.L. Cabot and Ralph Z. Sorenson. Mr. Clay is chairman and
Mr. Gardner is president and chief executive officer of EVC, Eaton Vance, BMR
and EV. All of the issued and outstanding shares of Eaton Vance and of EV are
owned by EVC. All of the issued and outstanding shares of BMR are owned by Eaton
Vance. All shares of the outstanding Voting Common Stock of EVC are deposited in
a Voting Trust which expires December 31, 1996, the Voting Trustees of which are
Messrs. Brigham, Clay, Gardner, Hawkes and Rowland. The Voting Trustees have
unrestricted voting rights for the election of Directors of EVC. All of the
outstanding voting trust receipts issued under said Voting Trust are owned by
certain of the officers of Eaton Vance and BMR who are also officers and
Directors of EVC and EV. As of November 30, 1994, Messrs. Clay and Gardner each
owned 24% of such voting trust receipts and Messrs. Roland and Brigham owned 15%
and 13%, respectively, of such voting trust receipts. Messrs. Clay, Gardner,
Hawkes and Otis, who are officers or Trustees of the Trust, are members of the
EVC, Eaton Vance, BMR and EV organizations. Messrs. Kiely, O'Connor and Otis and
Ms. Sanders, are officers of the Trust, and are also members of the Eaton Vance,
BMR and EV organizations. Eaton Vance will receive the fees paid under the
management agreement and its wholly-owned subsidiary, Eaton Vance Distributors,
Inc., as Principal Underwriter, will receive its portion of the sales charge on
shares of the Fund sold through investment dealers.
EVC and its affiliates and its officers and employees from time to time have
transactions with various banks, including the custodian of the Fund and the
Portfolio, Investors Bank & Trust Company. It is Eaton Vance's opinion that the
terms and conditions of such transactions will not be influenced by existing or
potential custodial or other relationships between the Fund and such banks.
Eaton Vance owns all of the stock of Energex Corporation which is engaged in
oil and gas operations. EVC owns all of the stock of Marblehead Energy Corp.
(which engages in oil and gas operations) and EVC owns 77.3% of the stock of
Investors Bank & Trust Company, which provides custodial, trustee and other
fiduciary services to investors, including individuals, employee benefit plans,
corporations, investment companies, savings banks and other institutions. In
addition, Eaton Vance owns all the stock of Northeast Properties, Inc., which is
engaged in real estate investment, consulting and management. EVC owns all the
stock of Fulcrum Management, Inc. and MinVen, Inc., which are engaged in the
development of precious metal properties. EVC also owns 2% of the A shares and
20% of the Preferred Shares issued by the parent of the Adviser. EVC, Eaton
Vance, BMR and EV may also enter into other businesses.
CUSTODIAN
Investors Bank & Trust Company ("IBT"), 24 Federal Street, Boston,
Massachusetts (a 77.3% owned subsidiary of EVC), acts as custodian for the Fund
and the Portfolio. IBT has the custody of all cash and securities of the Fund
and all securities of the Portfolio purchased in the United States, maintains
the Fund's and the Portfolio's general ledger and computes the Fund's and the
Portfolio's respective daily per share net asset value. In such capacities IBT
attends to details in connection with the sale, exchange, substitution, transfer
or other dealings with the Fund's and the Portfolio's respective investments,
receives and disburses all funds, and performs various other ministerial duties
upon receipt of proper instructions from the Fund and the Portfolio.
Portfolio securities, if any, purchased by the Portfolio in the U.S. are
maintained in the custody of IBT or of other domestic banks or depositories.
Portfolio securities purchased outside of the U.S. are maintained in the custody
of foreign banks and trust companies that are members of IBT's Global Custody
Network, or foreign depositories used by such foreign banks and trust companies.
Each of the domestic and foreign custodial institutions holding portfolio
securities has been approved by the Board of Trustees of the Portfolio in
accordance with regulations under the 1940 Act.
IBT charges fees which are competitive within the industry. These fees for
the Portfolio relate to: (1) custody services based upon a percentage of the
market values of Portfolio securities; (2) bookkeeping and valuation services
provided at an annual rate; (3) activity charges, primarily the result of the
number of portfolio transactions; and (4) reimbursement of out-of-pocket
expenses. These fees are then reduced by a credit for cash balances of the
Portfolio at the custodian equal to 75% of the 91-day U.S. Treasury Bill auction
rate applied to the Portfolio's average daily collected balances.
The portion of the fee for the Fund related to bookkeeping and pricing
services is based upon a percentage of the Fund's net assets and the portion of
the fee related to financial statement preparation is a fixed amount.
In view of the ownership of EVC in IBT, the Portfolio is treated as a self
custodian pursuant to Rule 17f-2 under the 1940 Act, and the Portfolio's
investments held by IBT as custodian are thus subject to the additional
examinations by the Portfolio's independent certified public accountants as
called for by such Rule.
For the custody fees that the Portfolio and the Fund paid to IBT, see "Fees
and Expenses" in Part II of this Statement of Additional Information.
SERVICE FOR WITHDRAWAL
By a standard agreement, the Fund's transfer agent will send to the
shareholder regular monthly or quarterly payments of any designated amount based
upon the value of the shares held. The checks will be drawn from share
redemptions, which may result in the realization of taxable gain or loss, and
hence are a return of principal. Income dividends and capital gain distributions
in connection with withdrawal accounts will be credited at net asset value as of
the record date for each distribution. Continued withdrawals in excess of
current income will eventually use up principal, particularly in a period of
declining market prices.
To use this service, at least $5,000 in cash or shares at the public
offering price must be deposited with the Fund's transfer agent. A shareholder
may not have a withdrawal plan in effect at the same time he has authorized Bank
Draft Investing or is otherwise making regular purchases of Fund shares. Either
the shareholder, the Fund's transfer agent or the Principal Underwriter will be
able to terminate the withdrawal plan at any time without penalty.
DETERMINATION OF NET ASSET VALUE
For a description of how the Fund and Portfolio value their respective
shares or interests, see "Valuing Fund Shares" in the Prospectus. The Fund and
Portfolio will be closed for business and will not price their shares on the
following business holidays: New Year's Day, Washington's Birthday, Good Friday
(a New York Stock Exchange holiday), Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
The Trustees of the Portfolio have established certain procedures for the
valuation of the Portfolio's assets under normal market conditions. Marketable
securities listed on foreign or U.S. securities exchanges or in the NASDAQ
National Market System generally are valued at closing sale prices or, if there
were no sales, at the mean between the closing bid and asked prices therefor on
the exchange where such securities are principally traded or in such National
Market System (such prices may not be used, however, where an active
over-the-counter market in an exchange listed security better reflects current
market value). Unlisted or listed securities for which closing sale prices are
not available are valued at the mean between the latest bid and asked prices. An
option is valued at the last sale price as quoted on the principal exchange or
board of trade on which such option or contract is traded, or in the absence of
a sale, the mean between the last bid and asked price. Futures positions on
securities or currencies are generally valued at closing settlement prices. All
other securities are valued at fair value as determined in good faith by or
pursuant to procedures established by the Trustees.
Short term debt securities with a remaining maturity of 60 days or less are
valued at amortized cost. If securities were acquired with a remaining maturity
of more than 60 days, their amortized cost value will be based on their value on
the sixty-first day prior to maturity. Other fixed income and debt securities,
including listed securities and securities for which price quotations are
available, will normally be valued on the basis of valuations furnished by a
pricing service.
Each investor in the Portfolio, including the Fund, may add to or reduce its
investment in the Portfolio on each day the New York Stock Exchange (the
"Exchange") is open for trading as of the close of regular trading on the
Exchange. The value of each investor's interest in the Portfolio will be
determined by multiplying the net asset value of the Portfolio by the
percentage, effective for that day, which represents that investor's share of
the aggregate interests in the Portfolio. Any additions or withdrawals, which
are to be effected on that day, will then be effected. The investor's percentage
of the aggregate interests in the Portfolio will then be recomputed as the
percentage equal to the fraction (i) the numerator of which is the value of such
investor's investment in the Portfolio as of the close of regular trading on the
Exchange (normally 4:00 p.m., New York time), on such day plus or minus, as the
case may be, that amount of any additions to or withdrawals from the investor's
investment in the Portfolio effected on such day, and (ii) the denominator of
which is the aggregate net asset value of the Portfolio as of the close of such
trading on such day plus or minus, as the case may be, the amount of the net
additions to or withdrawals from the aggregate investment in the Portfolio by
all investors in the Portfolio. The percentage so determined will then be
applied to determine the value of the investor's interest in the Portfolio.
Generally, trading in the foreign securities owned by the Portfolio is
substantially completed each day at various times prior to the close of the
Exchange. The values of these securities used in determining the net asset value
of the Portfolio's shares are computed as of such times. Occasionally, events
affecting the value of foreign securities may occur between such times and the
close of the Exchange which will not be reflected in the computation of the
Portfolio's net asset value (unless the Portfolio deems that such events would
materially affect its net asset value, in which case an adjustment would be made
and reflected in such computation). Foreign securities and currency held by the
Portfolio will be valued in U.S. dollars; such values will be computed by the
custodian based on foreign currency exchange rate quotations supplied by Reuters
Information Service.
INVESTMENT PERFORMANCE
The average annual total return is determined by multiplying a hypothetical
initial purchase order of $1,000 by the average annual compound rate of return
(including capital appreciation/depreciation, and distributions paid and
reinvested) for the stated period and annualizing the result. The calculation
assumes that all distributions are reinvested at net asset value on the
reinvestment dates during the period. For information concerning the total
return of the Fund, see "Performance Information" in Part II of the Statement of
Additional Information.
The Fund's total return may be compared to the Consumer Price Index and
various domestic and foreign securities indices, for example: Standard & Poor's
Index of 400 Common Stocks, Standard & Poor's Index of 500 Common Stocks,
Merrill Lynch U.S. Treasury (15-year plus) Index, Lehman Brothers
Government/Corporate Bond Index, the Dow Jones Industrial Average, Morgan
Stanley Pacific (Excluding Japan) Hang Seng, and FT Pacific (Excluding Japan).
The Fund's total return and comparisons with these indices may be used in
advertisements and in information furnished to present or prospective
shareholders. The Fund's performance may differ from that of other investors in
the Portfolio, including the other investment companies.
Information used in advertisements and in materials furnished to present or
prospective shareholders may include statistics, data and performance studies
prepared by independent organizations (e.g. Ibbotson Associates, Standard &
Poor's Ratings Group, Merrill Lynch, Pierce, Fenner & Smith, Inc., Bloomberg,
L.P., Dow Jones & Company, Inc., and The Federal Reserve Board) or included in
various publications (e.g. The Wall Street Journal, Barron's and The Decade:
Wealth of Investments in U.S. Stocks, Bonds, Bills & Inflation) reflecting the
investment performance or return achieved by various classes and types of
investments (e.g. common stocks, small company stocks, long-term corporate
bonds, long-term government bonds, intermediate-term government bonds, U.S.
Treasury bills) over various periods of time. This information may be used to
illustrate the benefits of long-term investments in common stocks.
From time to time, information about the allocation and holdings of
investments in the Portfolio may be included in advertisements and other
material furnished to present and prospective shareholders. The Portfolio's
investment allocation on November 30, 1994, was as follows:
GREATER CHINA GROWTH PORTFOLIO
PERCENT OF
COMMON STOCKS INVESTMENTS
-----------
Hong Kong ................................ 38.2%
Singapore ................................ 12.3
Thailand ................................. 10.6
Malaysia ................................. 10.6
South Korea .............................. 9.2
Taiwan ................................... 4.7
China .................................... 3.1
Philippines .............................. 8.4
Indonesia ................................ 2.4
United States ............................ 0.5
------
TOTAL ........................................ 100.0%
The Portfolio's ten largest common stock holdings on November 30, 1994,
were:
COMPANY SHARES VALUE
------- ------ -----
Hutchinson Whampoa Hong Kong ................ 4,673,000 $18,610,690
HSBC Holdings PLC ........................... 1,632,600 18,049,209
Siam Cement ................................. 318,400 17,664,545
Siam Commercial Bank ........................ 1,891,300 17,362,134
Yukong Ltd. ................................. 285,073 16,467,213
Land & General Berhard ...................... 3,562,000 16,432,218
Wharf (Holdings) Ltd. ....................... 4,620,000 16,069,746
Jardine Matheson HK Registry ................ 2,299,600 15,685,112
Cheung Kong ................................. 3,680,000 15,322,048
Hopewell Holdings ........................... 17,678,000 15,314,451
From time to time, evaluations of the Fund's performance made by independent
sources, such as Lipper Analytical Services, Inc., CDA/Weisenberger and
Morningstar, Inc. may be used in advertisements and in information furnished to
present or prospective shareholders. The Fund's performance may differ from that
of other investors in the Portfolio, including the other investment companies.
Information used in advertisements and materials furnished to present or
prospective shareholders may include examples and performance illustrations of
the cumulative change in various levels of investments in the Fund for various
periods of time and at various prices per share. Such examples and illustrations
may assume that all dividends and capital gain distributions are reinvested in
additional shares and may also show separately the value of shares acquired from
such reinvestments as well as the total value of all shares acquired for such
investments and reinvestments. Such information may also include statements or
illustrations relating to the appropriateness of types of securities and/or
mutual funds which may be employed to meet specific financial goals, such as (1)
funding retirement, (2) paying for children's education, and (3) financially
supporting aging parents. These three financial goals may be referred to in such
advertisements or materials as the "Triple Squeeze".
For additional information, charts and illustrations relating to the Fund's
investment performance, see "Performance Information" in Part II of this
Statement of Additional Information.
TAXES
See also "Distributions and Taxes" in the Fund's current prospectus.
The Fund, as a series of a Massachusetts business trust, will be treated as
a separate entity for accounting and tax purposes. The Fund has elected to be
treated, has qualified, and intends to continue to qualify each year as a
regulated investment company under the Internal Revenue Code (the "Code").
Accordingly, the Fund intends to satisfy certain requirements relating to
sources of its income and diversification of its assets and to distribute all of
its net investment income and net realized capital gains in accordance with the
timing requirements imposed by the Code, so as to avoid any Federal income or
excise tax on the Fund. Because the Fund invests all or substantially all of its
assets in the Portfolio, the Portfolio normally must satisfy the applicable
source of income and diversification requirements in order for the Fund to
satisfy them. The Portfolio will allocate at least annually among its investors,
including the Fund, each investor's distributive share of the Portfolio's net
investment income, net realized capital gains, and any other items of income,
gain, loss, deduction or credit. The Portfolio will make allocations to the Fund
in accordance with the Code and applicable regulations, rulings and revenue
procedures and will make moneys available for withdrawal at appropriate times
and in sufficient amounts to enable the Fund to satisfy the tax distribution
requirements that apply to the Fund and that must be satisfied in order to avoid
Federal income and/or excise tax on the Fund. For purposes of applying the
requirements of the Code regarding qualification as a regulated investment
company, the Fund will be deemed (i) to own its proportionate share of each of
the assets of the Portfolio and (ii) to be entitled to the gross income of the
Portfolio attributable to such share.
In order to avoid Federal excise tax, the Code requires that the Fund
distribute by December 31 of each calendar year at least 98% of its ordinary
income (not including tax-exempt income) for such year, at least 98% of the
excess of its realized capital gains over its realized capital losses, generally
computed on the basis of the one-year period ending on October 31 of such year,
after reduction by any available capital loss carryforwards, and 100% of any
income and capital gains from the prior year (as previously computed) that was
not paid out during such year and on which the Fund paid no Federal income tax.
Under current law, provided that the Fund qualifies as a regulated investment
company for Federal income tax purposes and the Portfolio is treated as a
partnership for Massachusetts and Federal tax purposes, neither the Fund nor the
Portfolio is liable for any income, corporate excise or franchise tax in the
Commonwealth of Massachusetts.
Foreign exchange gains and losses realized by the Portfolio and allocated to
the Fund in connection with the Portfolio's investments in foreign securities
and certain foreign currency related options, futures or forward contracts or
foreign currency may be treated as ordinary income and losses under special tax
rules. Certain options, futures or forward contracts of the Portfolio may be
required to be marked to market (i.e., treated as if closed out) on the last day
of each taxable year, and any gain or loss realized with respect to these
contracts may be required to be treated as 60% long-term and 40% short-term gain
or loss. Positions of the Portfolio in securities and offsetting options,
futures or forward contracts may be treated as "straddles" and be subject to
other special rules that may, upon allocation of the Portfolio's income, gain or
loss to the Fund, affect the amount, timing and character of the Fund's
distributions to shareholders. Certain uses of foreign currency and foreign
currency derivatives such as options, futures, forward contracts and swaps and
investment by the Portfolio in certain "passive foreign investment companies"
may be limited or a tax election may be made, if available, in order to preserve
the Fund's qualification as a regulated investment company or avoid imposition
of a tax on the Fund.
The Portfolio anticipates that it will be subject to foreign taxes on its
income (possibly including, in some cases, capital gains) from foreign
securities. Tax conventions between certain countries and the U.S. may reduce or
eliminate such taxes. If more than 50% of the Fund's total assets, taking into
account its allocable share of the Portfolio's total assets, at the close of any
taxable year of the Fund consists of stock or securities of foreign
corporations, the Fund may file an election with the Internal Revenue Service
pursuant to which shareholders of the Fund will be required to (i) include in
ordinary gross income (in addition to taxable dividends actually received) their
pro rata shares of foreign income taxes paid by the Portfolio and allocated to
the Fund even though not actually received, and (ii) treat such respective pro
rata portions as foreign income taxes paid by them. Shareholders may then deduct
such pro rata portions of foreign income taxes in computing their taxable
incomes, or, alternatively, use them as foreign tax credits, subject to
applicable limitations, against their U.S. income taxes. Shareholders who do not
itemize deductions for Federal income tax purposes will not, however, be able to
deduct their pro rata portion of foreign taxes deemed paid by the Fund, although
such shareholders will be required to include their shares of such taxes in
gross income. Shareholders who claim a foreign tax credit for such foreign taxes
may be required to treat a portion of dividends received from the Fund as a
separate category of income for purposes of computing the limitations on the
foreign tax credit. Tax-exempt shareholders will ordinarily not benefit from
this election. Each year that the Fund files the election described above, its
shareholders will be notified of the amount of (i) each shareholder's pro rata
share of foreign income taxes paid by the Portfolio and allocated to the Fund
and (ii) the portion of Fund dividends which represents income from each foreign
country. If the Fund does not make this election, it may deduct its allocated
share of such taxes in computing its investment company taxable income.
The Portfolio will allocate at least annually to the Fund and its other
investors their respective distributive shares of any net investment income and
net capital gains which have been recognized for Federal income tax purposes
(including unrealized gains at the end of the Portfolio's fiscal year on certain
options and futures transactions that are required to be marked-to- market).
Such amounts will be distributed by the Fund to its shareholders in cash or
additional shares, as they elect. Shareholders of the Fund will be advised of
the nature of the distributions.
Distributions by the Fund of the excess of net long-term capital gains over
net short-term capital losses (including any capital losses carried forward from
prior years) earned by the Portfolio and allocated to the Fund are taxable to
shareholders of the Fund as long-term capital gains, whether received in cash or
in additional shares and regardless of the length of time their shares have been
held. Certain distributions declared in October, November or December and paid
the following January will be taxed to shareholders as if received on December
31 of the year in which they are declared.
Any loss realized upon the redemption or exchange of shares with a tax
holding period of 6 months or less will be treated as a long-term capital loss
to the extent of any distribution of net long-term capital gains with respect to
such shares. All or a portion of a loss realized upon taxable disposition of
Fund shares may be disallowed under "wash sale" rules if other Fund shares are
purchased (whether through reinvestment of dividends or otherwise) within 30
days before or after the disposition.
Special tax rules apply to Individual Retirement Accounts ("IRAs") and
shareholders investing through IRAs, should consult their tax advisers for more
information. An individual may make an aggregate annual contribution to an IRA
in an amount equal to the lesser of his or her earned income or $2,000 ($2,250
for an individual and his or her nonearning spouse). The deductibility of such
contributions may be restricted or eliminated for particular shareholders.
The foregoing discussion does not describe many of the tax rules applicable
to IRAs nor does it address the special tax rules applicable to certain other
classes of investors, such as other retirement plans, tax-exempt entities,
insurance companies and financial institutions. Shareholders should consult
their own tax advisers with respect to these or other special tax rules that may
apply in their particular situations, as well as the state, local or foreign tax
consequences of investing in the Fund.
PORTFOLIO SECURITY TRANSACTIONS
Decisions concerning the execution of portfolio security transactions by the
Portfolio, including the selection of the market and the broker-dealer firm, are
made by the Adviser.
The Adviser places the portfolio security transactions of the Portfolio and
of certain other accounts managed by the Adviser for execution with many
broker-dealer firms. The Adviser uses its best efforts to obtain execution of
portfolio transactions at prices which are advantageous to the Portfolio and
(when a disclosed commission is being charged) at reasonably competitive
commission rates. In seeking such execution, the Adviser will use its best
judgment in evaluating the terms of a transaction, and will give consideration
to various relevant factors, including without limitation the size and type of
the transaction, the general execution and operational capabilities of the
broker-dealer, the nature and character of the market for the security, the
confidentiality, speed and certainty of effective execution required for the
transaction, the reputation, reliability, experience and financial condition of
the broker-dealer, the value and quality of services rendered by the
broker-dealer in other transactions, and the reasonableness of the commission,
if any. Transactions on stock exchanges and other agency transactions involve
the payment by the Portfolio of negotiated brokerage commissions. Such
commissions vary among different broker-dealer firms, and a particular
broker-dealer may charge different commissions according to such factors as the
difficulty and size of the transaction and the volume of business done with such
broker-dealer. Transactions in foreign securities usually involve the payment of
fixed brokerage commissions, which are generally higher than those in the United
States. There is generally no stated commission in the case of securities traded
in the over-the-counter markets, but the price paid or received by the Portfolio
usually includes an undisclosed dealer markup or markdown. In an underwritten
offering the price paid by the Portfolio includes a disclosed fixed commission
or discount retained by the underwriter or dealer. Although commissions paid on
portfolio transactions will, in the judgment of the Adviser, be reasonable in
relation to the value of the services provided, commissions exceeding those
which another firm might charge may be paid to broker-dealers who were selected
to execute transactions on behalf of the Portfolio and the Adviser's other
clients in part for providing brokerage and research services to the Adviser.
As authorized in Section 28(e) of the Securities Exchange Act of 1934, a
broker or dealer who executes a portfolio transaction on behalf of the Portfolio
may receive a commission which is in excess of the amount of commission another
broker or dealer would have charged for effecting that transaction if the
Adviser determines in good faith that such commission was reasonable in relation
to the value of the brokerage and research services provided. This determination
may be made on the basis of either that particular transaction or on the basis
of the overall responsibilities which the Adviser and its affiliates have for
accounts over which they exercise investment discretion. In making any such
determination, the Adviser will not attempt to place a specific dollar value on
the brokerage and research services provided or to determine what portion of the
commission should be related to such services. Brokerage and research services
may include advice as to the value of securities, the advisability of investing
in, purchasing, or selling securities, and the availability of securities or
purchasers or sellers of securities; furnishing analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts; and effecting securities transactions and
performing functions incidental thereto (such as clearance and settlement); and
the "Research Services" referred to in the next paragraph.
It is a common practice in the investment advisory industry for the advisers
of investment companies, institutions and other investors to receive research,
statistical and quotation services, data, information and other services,
products and materials which assist such advisers in the performance of their
investment responsibilities ("Research Services") from broker-dealers which
execute portfolio transactions for the clients of such advisers and from third
parties with which such broker-dealers have arrangements. Consistent with this
practice, the Adviser may receive Research Services from broker-dealer firms
with which the Adviser places the portfolio transactions of the Portfolio and
from third parties with which these broker-dealers have arrangements. These
Research Services may include such matters as general economic and market
reviews, industry and company reviews, evaluations of securities and portfolio
strategies and transactions, recommendations as to the purchase and sale of
securities and other portfolio transactions, financial, industry and trade
publications, news and information services, pricing and quotation equipment and
services, and research oriented computer hardware, software, data bases and
services. Any particular Research Service obtained through a broker-dealer may
be used by the Adviser in connection with client accounts other than those
accounts which pay commissions to such broker-dealer. Any such Research Service
may be broadly useful and of value to the Adviser in rendering investment
advisory services to all or a significant portion of its clients, or may be
relevant and useful for the management of only one client's account or of a few
clients' accounts, or may be useful for the management of merely a segment of
certain clients' accounts, regardless of whether any such account or accounts
paid commissions to the broker-dealer through which such Research Service was
obtained. The advisory fee paid by the Portfolio is not reduced because the
Adviser receives such Research Services. The Adviser evaluates the nature and
quality of the various Research Services obtained through broker-dealer firms
and attempts to allocate sufficient commissions to such firms to ensure the
continued receipt of Research Services which the Adviser believes are useful or
of value to it in rendering investment advisory services to its clients.
Subject to the requirement that the Adviser shall use its best efforts to
seek to execute portfolio security transactions of the Portfolio at advantageous
prices and at reasonably competitive commission rates or spreads, the Adviser is
authorized to consider as a factor in the selection of any broker-dealer firm
with whom Portfolio orders may be placed the fact that such firm has sold or is
selling shares of the Fund or of other investment companies sponsored by Eaton
Vance. This policy is not inconsistent with a rule of the National Association
of Securities Dealers, Inc., which rule provides that no firm which is a member
of the Association shall favor or disfavor the distribution of shares of any
particular investment company or group of investment companies on the basis of
brokerage commissions received or expected by such firm from any source.
Securities considered as investments for the Portfolio may also be
appropriate for other investment accounts managed by the Adviser or its
affiliates. The Adviser will attempt to allocate equitably portfolio
transactions among the Portfolio and the portfolios of its other investment
accounts whenever decisions are made to purchase or sell securities by the
Portfolio and one or more of such other accounts simultaneously. In making such
allocations, the main factors to be considered are the respective investment
objectives of the Portfolio and such other accounts, the relative size of
portfolio holdings of the same or comparable securities, the availability of
cash for investment by the Portfolio and such accounts, the size of investment
commitments generally held by the Portfolio and such accounts and the opinions
of the persons responsible for recommending investments to the Portfolio and
such accounts. While this procedure could have a detrimental effect on the price
or amount of the securities available to the Portfolio from time to time, it is
the opinion of the Trustees of the Portfolio that the benefits available from
the Adviser's organization outweigh any disadvantage that may arise from
exposure to simultaneous transactions. For the brokerage commissions paid by the
Portfolio on portfolio transactions, see "Fees and Expenses" in Part II of this
Statement of Additional Information.
OTHER INFORMATION
On August 18, 1992, the Trust changed its name from Eaton Vance Growth Fund
to Eaton Vance Growth Trust. The Trust is organized as a business trust under
laws of the Commonwealth of Massachusetts under a Declaration of Trust dated May
25, 1989, as amended. The Trust is the successor to a corporation which
commenced its investment operations in 1954.
Eaton Vance, pursuant to its agreement with the Trust, controls the use of
the words "Eaton Vance" in the Trust's name and may use the words "Eaton Vance"
in other connections and for other purposes.
The Trust's Declaration of Trust may be amended by the Trustees when
authorized by vote of a majority of the outstanding voting securities of the
Trust. The Trustees may also amend the Declaration of Trust without the vote or
consent of shareholders to change the name of the Trust or any series or to make
such other changes as do not have a materially adverse effect on the rights or
interests of shareholders or if they deem it necessary to conform the
Declaration to the requirements of applicable Federal laws or regulations. The
Trust's By-laws provide that the Trust will indemnify its Trustees and officers
against liabilities and expenses incurred in connection with any litigation or
proceeding in which they may be involved because of their offices with the
Trust. However, no indemnification will be provided to any Trustee or officer
for any liability to the Trust or its shareholders by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
Under Massachusetts law, if certain conditions prevail, shareholders of a
Massachusetts business trust (such as the Trust) could be deemed to have
personal liability for the obligations of the trust. Numerous investment
companies registered under the 1940 Act have been formed as Massachusetts
business trusts, and management is not aware of an instance where such liability
has been imposed. The Trust's Declaration of Trust contains an express
disclaimer of liability on the part of the Trust shareholders and the Trust's
By-laws provide that the Trust shall assume the defense on behalf of any Trust
shareholder. Moreover, the Trust's By-laws also provide for indemnification out
of the property of the Trust of any shareholder held personally liable solely by
reason of being or having been a shareholder for all loss or expense arising
from such liability. The assets directly held by the Trust are not registered
under the Securities Act of 1933 and are therefore not readily marketable. The
assets held by the Portfolio and indirectly held by the Trust are readily
marketable and will ordinarily substantially exceed the Trust's liabilities. In
light of the nature of the Trust's business and the nature of its assets,
management believes that the possibility of the Trust's liabilities exceeding
its assets, and therefore the shareholder's risk of personal liability, is
extremely remote.
As permitted by Massachusetts law, there will normally be no meetings of
shareholders for the purpose of electing Trustees unless and until such time as
less than a majority of the Trustees of the Trust holding office have been
elected by shareholders. In such an event the Trustees then in office will call
a shareholder's meeting for the election of Trustees. Except for the foregoing
circumstances and unless removed by action of the shareholders in accordance
with the Trust's By-Laws, the Trustees shall continue to hold office and may
appoint successor Trustees.
The Trust's By-Laws provide that no person shall serve a Trustee if
shareholders holding two-thirds of the outstanding shares have removed him from
that office either by a written declaration filed with the Trust's custodian or
by votes cast at a meeting called for that purpose. The By-Laws also provide
that the Trustees shall promptly call a meeting of shareholders for the purpose
of voting upon a question of removal of any such Trustee or Trustees when
requested so to do by the record holders of not less than 10 percentum of the
outstanding shares. The By-Laws further provide that under certain circumstances
the shareholders may call a meeting to remove a Trustee and that the Trust is
required to provide assistance in communicating with shareholders about such a
meeting.
In accordance with the Declaration of Trust of the Portfolio, there will
normally be no meetings of the investors for the purpose of electing Trustees
unless and until such time as less than a majority of the Trustees holding
office have been elected by investors. In such an event the Trustees of the
Portfolio then in office will call an investors' meeting for the election of
Trustees. Except for the foregoing circumstances and unless removed by action of
the investors in accordance with the Portfolio's Declaration of Trust, the
Trustees shall continue to hold office and may appoint successor Trustees.
The Declaration of Trust of the Portfolio provides that no person shall
serve as a Trustee if investors holding two-thirds of the outstanding interests
have removed him from that office either by a written declaration filed with the
Portfolio's custodian or by votes cast at a meeting called for that purpose. The
Declaration of Trust further provides that under certain circumstances the
investors may call a meeting to remove a Trustee and that the Portfolio is
required to provide assistance in communicating with investors about such a
meeting.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Deloitte & Touche LLP, 125 Summer Street, Boston, Massachusetts, are the
independent certified public accountants of the Fund and the Portfolio,
providing audit services, tax return preparation, and assistance and
consultation with respect to the preparation of filings with the SEC.
For the financial statements of the Fund and the Portfolio see "Financial
Statements" in Part II of this Statement of Additional Information.
<PAGE>
APPENDIX A
THE SECURITIES MARKETS IN CHINA AND HONG KONG
The information set forth in this Statement of Additional Information
("SAI") regarding China, its economy and the Stock Exchange of Hong Kong Ltd.
has been extracted from various government and private publications. The Fund
and the Trust's Board of Trustees make no representation as to the accuracy of
such information, nor has the Fund or the Trust's Board of Trustees attempted to
verify it.
In this SAI, unless otherwise specified, all references to "U.S. dollars,"
"U.S.$" or "$" are to United States dollars, to "RMB" or "renminbi" are to
Chinese renminbi and to "H.K. dollars" or "H.K.$" are to Hong Kong dollars. On
December 15, 1994, the exchange rate as published in The Asian Wall Street
Journal was 8.5113 renminbi = U.S. $1.00 and 7.7379 H.K. dollars = U.S. $1.00
and, unless otherwise specified, all renminbi and Hong Kong dollars have been
so converted at such exchange rates. No representation is made that the
renminbi, H.K. dollar or U.S. dollar amounts in this SAI could have been or
could be converted into U.S. dollars, renminbi or H.K. dollars, as the case
may be, at any particular rate or at all. See "Appendix B: People's Republic
of China--Exchange Rate" for information regarding historical rates of
exchange between the Chinese renminbi and the U.S. dollar.
HISTORY OF THE CHINESE SECURITIES MARKETS
The first securities exchange in China, the "Shanghai Gufen Gongsou"
(Shanghai Stock Confederation), was organized in the 1890s in Shanghai. The
first officially recognized exchange was established in 1914 in Shanghai, which
focused principally on the trading of government bonds. Additional exchanges
were opened in Beijing in 1918 and in Tianjin in 1921. By the period following
World War II, Shanghai had become one of the major financial centers in Asia.
However, when the Chinese communist party assumed power in 1949, China's
securities markets were closed and all securities were abolished.
The Beijing and Tianjin securities exchanges reopened in 1950 and 1949,
respectively, but were closed again in 1952. Securities markets were nonexistent
in China until the early 1980s when they reemerged in various cities following
initiation of China's economic reform program in 1978. There currently are two
officially recognized exchanges in China, the Shanghai Securities Exchange
("SHSE"), which commenced trading on December 19, 1990, and the Shenzhen Stock
Exchange ("SZSE"), which commenced trading on July 3, 1991. A number of
organized securities markets exist in other cities in China, but these are
primarily over-the-counter markets. Initially, shares on both exchanges were
made available only to Chinese investors and were traded only in RMB, thus
avoiding the issues of repatriation of profits and the remittance of foreign
currency that would arise with the participation of foreign investors in the
market. Recently, however, these issues have been addressed in legislation
concerning a special class of shares, commonly referred to as "B" shares, which
are denominated in RMB and are offered exclusively for investment by foreign
investors and such other investors as the authorities may approve. The first
issues of "B" shares were listed and traded on the SHSE on February 21, 1992,
and on the SZSE on February 28, 1992.
REGULATION AND OPERATION OF THE CHINESE SECURITIES MARKETS
Prior to the establishment of the SHSE and SZSE, trading of securities in
China was conducted in over-the-counter ("OTC") markets in a number of major
cities, including Shanghai, Chongqing, Wuhan, Guangzhou and Shenyang. The OTC
markets have no fixed location for trading; transactions are negotiated by
telephone or similar means. The SHSE and SZSE confine trading of listed shares
to the two exchanges, while unlisted stocks continue to be traded in the OTC
markets. In addition to the two exchanges and the OTC markets, a nationwide
computer system for trading of treasury bills and bonds, the Securities Trading
Automated Quotations System ("STAQ"), commenced operations on December 5, 1990
and currently links 54 licensed trading corporations in 16 cities.
Currently, trading of treasury bills constitutes the majority of the
activity in the Chinese securities markets, while trading of equity securities
constitutes only a small portion of the trading activity. The OTC markets trade
only treasury bills and equity securities that are not listed on the SHSE or the
SZSE. The SHSE and the SZSE trade both treasury bills and shares of listed
companies. Shares are divided into four types based on the type of entity
holding them: (1) State shares held by designated State entities on behalf of
the State; (2) shares held by Chinese corporations; (3) shares held by Chinese
individuals; and (4) shares held by foreign investors. The first three
categories are generally referred to as "A" shares. The fourth category is
referred to as "B" shares. State shares cannot be sold or transferred without
the approval of the State asset administrative departments. "A" shares are
quoted and traded in renminbi, while "B" shares are quoted in renminbi but
traded in foreign currencies (currently Hong Kong dollars and U.S. dollars).
China has not yet promulgated a national securities law. Although the State
Council has promulgated Interim Regulations for Administration of Enterprise
Bonds, these regulations apply only to bonds issued by State-owned enterprises.
At the local level, however, many cities and provinces have promulgated
securities rules and regulations.
The People's Bank of China (the "PBOC"), China's central bank, is authorized
to regulate stocks, bonds and other negotiable instruments and administer
China's financial markets, and it exercises this authority through its local
branches. The State Commission for Restructing the Economic System has, in
practice, assumed the principal role of formulating policies for the development
of the securities markets. In addition, the Stock Exchange Executive Council, a
nongovernmental organization, plays an important advisory role in the
formulation of a regulatory framework for the national securities markets.
CORPORATE LAW IN CHINA
There is no national legislative framework in China providing for
regulations governing joint stock companies. However, there have been in force
in Shenzhen since February 1992 the Provisional Rules for Joint Stock Companies
in Shenzhen (the "Shenzhen Provisional Rules"). The Shenzhen Provisional Rules
include provisions governing the formation in Shenzhen of joint stock companies,
issuance of shares and debentures, ownership and dealings in shares, reduction
of capital, shareholders' rights and obligations, meetings and resolutions,
directors, financial accounting, distribution and liquidation. More recently,
the Provisional Regulations for Shanghai Municipality Joint Stock Limited
Companies came into force on June 1, 1992, covering broadly the same areas as
the Shenzhen Provisional Rules.
SHENZHEN STOCK EXCHANGE
The SZSE was established in April 1991, and officially opened in July 1991.
As of December 15, 1994, 114 companies had shares listed on the SZSE, of which
22 also had "B" shares listed. Prices of "A" shares were subject to a price
fluctuation limit, but all such limits have been removed except for the Shenzhen
Champaign Company. The Shenzhen authorities have established a regulatory fund,
funded from proceeds of new issues of "A" shares, to buy and sell shares on the
open market in an attempt to minimize fluctuations of the prices of "A" shares.
In the issuance of "A" shares by Shenzhen Konka Electronics, the first case in
which this regulatory fund was introduced, an amount equal to 5% of the
aggregate "A" share premium was required to be paid into the fund. It is
expected that a similar percentage will be required for future new issues.
The following table provides selected information regarding "B" shares of
the companies listed on the SZSE as of December 15, 1994.
INVESTMENT STATISTICS FOR "B" SHARES OF COMPANIES LISTED ON
THE SHENZHEN STOCK EXCHANGE*
<TABLE>
<CAPTION>
"B" SHARES IN 12/15/94 MARKET 12/15/94
ISSUE PRICE CAPITALIZATION TURNOVER
COMPANY (MILLIONS) (HK$) (HK$ MILLIONS) (HK$ MILLIONS)
------- ---------- ----- -------------- --------------
<S> <C> <C> <C> <C>
China Bicycles ...................... 26 1.60 41 0.00
China Container ..................... 243 4.00 2 0.05
Chiwan Wharf ........................ 45 7.90 356 0.00
Flyte ............................... 44 2.86 126 0.01
Gintian ............................. 23 3.42 77 0.23
Health Water ........................ 52 3.70 131 0.00
Huafa ............................... 22 2.50 55 0.00
Konke ............................... 77 1.01 78 0.00
Lionde .............................. 118 5.20 615 0.06
Lizhu ............................... 36 2.48 89 0.00
Nanshan Power ....................... 79 3.70 293 1.26
SEZ Real Estate ..................... 81 3.00 244 0.31
Shekou Port ......................... 100 2.50 250 0.01
Shenbao ............................. 100 4.50 450 0.52
Southern Glass ...................... 20 1.51 30 0.00
SZ Petrochem ........................ 84 8.20 689 0.02
SZ Properties ....................... 27 3.37 92 0.00
SZ Textile .......................... 55 2.96 161 0.02
Tellus .............................. 25 3.30 83 0.00
Tsann Kuan .......................... 24 2.56 61 0.00
Vanke ............................... 148 3.10 459 0.00
Victor Onward ....................... 56 4.50 252 0.02
Zhonghao ............................ 63 1.80 114 0.07
Market .............................. 22 1.70 37 0.03
----- ----
TOTAL OF "B" SHARES ................................................ 4,841 2.60
===== ====
</TABLE>
---------
Source: Lloyd George Management
*On December 15, 1994 7.7379 Hong Kong dollars = U.S. $1.00.
Market Index. The performance of the "B" shares on SZSE is measured by the
CLSA Shenzhen B Index. This Index stood at 1,442.40 on December 31, 1993 and
closed at 933.4 on December 15, 1994.
Membership. The SZSE operates on a membership system. Membership is
restricted to securities institutions approved by the PBOC. As of March 31,
1992, there were 15 members admitted to the SZSE, consisting of banks, finance
companies, securities companies, insurance companies and trust and investment
companies. All are either Shenzhen local companies or Shenzhen branches of
national companies. Securities institutions in Shenzhen may join the Joint
Meeting of Shenzhen Securities Institutions, whether or not they are members of
the SZSE. This self-governing organization was formed in August of 1990 to
facilitate communication among securities institutions and to strengthen self-
discipline among members.
Regulation. The SZSE is regulated by the PBOC, Shenzhen Special Economic
Zone Branch and the local government in Shenzhen. The Shenzhen Municipal
People's Government promulgated the Provisional Measures of Shenzhen
Municipality for Administration of the Issue and Trading of Shares (the "SZSE
Measures"), which became effective on June 15, 1991 and govern the establishment
of the SZSE and the issuance and trading of shares in Shenzhen. The issuance and
trading of "B" shares in Shenzhen are governed by the Provisional Measures of
Shenzhen Municipality for Administration of Special Renminbi-denominated Shares,
which became effective on December 16, 1991. These measures are supplemented by
a set of Detailed Implementing Rules which also became effective on December 16,
1991. In addition, Provisional Rules of Shenzhen Municipality for Registration
of Special Renminbi-denominated Shares were promulgated by the Shenzhen
Securities Registrars Co., Ltd. on January 29, 1992, and Operating Rules of the
Shenzhen Securities Exchange for Trading and Clearing of "B" shares were
promulgated by the SZSE on January 31, 1992. These rules provide detailed
regulations relating to the issuance, trading, settlement and registration of
"B" shares.
New Issues and Listing Criteria. Shares of local Shenzhen companies may
either be listed on the SZSE or traded on the OTC markets. In accordance with
the SZSE Measures and the Shenzhen Provisional Rules, an issuer must meet the
following requirements when making a public share issue: (i) it must have
obtained prior approval from the relevant authorities to be and have been
established as or converted into a joint stock company; (ii) its production and
operations must comply with Shenzhen's industrial policies; (iii) it must have a
good financial and business record and net assets of at least RMB 10 million;
(iv) for the year prior to applying for authorization to issue shares, the value
of its net tangible assets must have accounted for no less than 25% of its gross
tangible assets; (v) its promoters must subscribe for at least RMB 5 million
worth of shares, representing no less than 35% of its total share capital; (vi)
the number of shares to be issued to the public, i.e., investors other than
specially designated individuals, must be equal to at least 25% of its total
share capital; (vii) it must have a minimum of 800 shareholders following the
issue; (viii) within three years prior to the proposed issue, neither the
company nor its promoters may have any record of illegal activities or
activities counter to the public interest; and (ix) the shares subscribed by the
employees of the company cannot exceed 10% of the shares issued to the public
and such shares are not assignable for a period of one year; thereafter,
assignment of such shares may not exceed 10% of the shareholder's holding during
any half year period.
All public share issues must be handled by securities distributors. Issues
of over RMB 30 million must be distributed by a syndicate made up of at least
three members. Issues of over RMB 50 million must be distributed by a syndicate
made up of at least five members.
In order to qualify for listing on the SZSE, companies must meet additional
requirements which are more stringent than those for public share issues. Such
additional requirements include: (i) the total par value of shares of common
stock actually issued must be more than RMB 20 million; (ii) there must have
been a minimum return on capital of more than 10% in the year preceding listing
and more than 8% over the two years prior to the year preceding the listing;
(iii) the number of registered shareholders must exceed 1,000, and the total
number of shares held by shareholders holding less than 0.5% of the company's
shares must account for more than 25% of the total paid-up share capital; (iv)
the company must have a continuous record of making profits and must have a
business record of more than three years; and (v) for the year prior to applying
for listing, the value of the net tangible assets must have accounted for more
than 38% of its gross tangible assets and there must be no accumulated losses.
Application for a public share issue must be made to the PBOC, Shenzhen
Special Economic Zone Branch. Application for listing on the SZSE must be made
to the PBOC, Shenzhen Special Economic Zone Branch and the SZSE. A company's
prospectus for initial share issue must be published in a newspaper or other
publication approved by the PBOC, Shenzhen Special Economic Zone Branch, ten
days prior to the scheduled issuance date, which must include: (i) the name and
domicile of the company; (ii) the scope of the company's production and
business; (iii) resumes of the promoters or directors and the managers; (iv) the
reason for and purpose of the share issue; (v) the total amount, class(es) and
number of shares to be issued, and the par value and selling price of each
share; (vi) the method of issue; (vii) the investors to whom the issue is
marketed; (viii) the name(s) of the securities distributor(s), the total value
of the shares to be distributed and the method of distribution; (ix) details of
the company's history and conditions for future development, its main business
and financial situation, and the total amount and composition of its assets and
liabilities; and (x) a certified profit forecast.
A company applying for a further issue of shares must satisfy the relevant
authorities that the following conditions have been met: (i) its business record
since the time of the last issue must have been good, and its utilization of
capital must be above average in its line of business; (ii) not less than one
year must have elapsed since its last share issue; (iii) the amount of shares it
is applying to issue must not exceed the amount of its existing shares; (iv) its
application of the proceeds of the issue must conform to the industrial policies
of Shenzhen; and (v) the issue will be beneficial to the healthy development of
the Shenzhen securities markets. Applications for approval to issue shares for
the purpose of attracting foreign investment are not bound by (ii) and (iii).
New Issues Criteria for "B" Shares in Shenzhen. A company wishing to issue
"B" shares in Shenzhen must comply with the following requirements: (i) it must
fulfill the issue requirements specified in the SZSE Measures; (ii) it must
obtain written consent from the relevant department of the State to utilize
foreign investment or to transform into a foreign investment enterprise, and its
use of proceeds from the "B" share issue must conform to the laws and
regulations of the State concerning the administration of foreign investment;
(iii) it must have a stable, adequate source of foreign exchange revenue
(sufficient to pay out the "B" share dividends and bonuses for each year); (iv)
the percentage of "B" shares (including promoters' shareholdings) to the total
shares of the company must not exceed the upper limit set by the PBOC, Shenzhen
Special Economic Zone Branch; and (v) the company must have a business record of
three years or more, or have received special permission from the PBOC, Shenzhen
Special Economic Zone Branch. (Companies in high technology industries or other
special industries are not bound by this restriction.)
Subscription for "B" shares is carried out through authorized securities
institutions within Shenzhen Municipality. These institutions may arrange for
the participation of overseas securities institutions approved by the PBOC,
Shenzhen Special Economic Zone Branch. The holding by any foreign investor of
"B" shares of a joint stock company accounting for more than 5% of such
company's total shares must be reported to the PBOC, Shenzhen Special Economic
Zone Branch. Domestic securities institutions are not allowed to trade "B"
shares for their own accounts unless approved by the PBOC, Shenzhen Special
Economic Zone Branch.
The issuance of "B" shares through a syndicate underwriting on behalf of the
issuer must be managed by at least one authorized domestic securities
institution. The issue price of "B" shares may not be lower than the issue price
of "A" shares of the same company. During the distribution period, distributors
must sell the shares at the same predetermined price.
An issuer may request private placement of its "B" shares with institutions
outside China with which it has close business connections, provided that such
institutions are approved by the PBOC, Shenzhen Special Economic Zone Branch and
the number of shares privately placed with them does not exceed 15% of the total
number of "B" shares in such issue.
Reporting Requirements. Within 60 days following the end of each half of the
fiscal year, an issuer is required to submit an interim financial report,
reviewed and approved by an accounting firm, or its annual financial report,
audited by an accounting firm, to the PBOC, Shenzhen Special Economic Zone
Branch and to publish the same in a newspaper or other publication approved by
the PBOC, Shenzhen Special Economic Zone Branch. Such financial reports must
also be submitted to the SZSE if the issuer's securities are already listed on
the SZSE.
Insider Trading Restrictions. All persons are prohibited from using
insider information when engaging in the purchase or sale of securities.
THE SHANGHAI SECURITIES EXCHANGE
The SHSE was established on November 26, 1990 and officially opened on
December 19, 1990. Prior to the establishment of SHSE, an active OTC market in
local stocks and bonds existed in Shanghai.
As of December 15, 1994, 171 companies had shares listed on the SHSE of
which 32 also had "B" shares listed. Shares listed on the SHSE currently are not
subject to any limit on daily price fluctuations.
The following table provides selected information regarding the "B" shares
of the companies listed on the SHSE as of December 15, 1994.
INVESTMENT STATISTICS FOR "B" SHARES OF COMPANIES LISTED ON
THE SHANGHAI SECURITIES EXCHANGE*
<TABLE>
<CAPTION>
"B" SHARES IN 12/15/94 MARKET 12/15/94
ISSUE PRICE CAPITALIZATION TURNOVER
COMPANY (MILLIONS) (HK$) (HK$ MILLIONS) (HK$ MILLIONS)
------- ---------- ----- -------------- --------------
<S> <C> <C> <C> <C>
Auto Instrument ..................... 70 0.198 14 0.02
China TM ............................ 109 0.152 17 0.03
Chior Alkali ........................ 336 0.246 83 0.12
Dajiang ............................. 252 0.480 121 0.00
Dazhong ............................. 60 1.000 60 0.00
Diesel Engine ....................... 110 0.800 88 0.16
Erfangji ............................ 175 0.198 35 0.07
First Pencil ........................ 55 0.336 18 0.00
Forever Bicycle ..................... 60 0.192 12 0.08
Friendship Store .................... 40 0.390 16 0.00
Haixin .............................. 84 0.650 55 0.00
Hero ................................ 35 0.292 10 0.01
Hua Xin Cement ...................... 87 0.186 16 0.05
Jin Jiang Tower ..................... 92 0.378 35 0.28
Jinqiao ............................. 143 0.694 98 0.59
Lian Hua Fibre ...................... 54 0.388 21 0.00
Lujiazui ............................ 200 0.704 141 0.52
Material Centre ..................... 50 0.258 13 0.02
Narcissus Electric .................. 100 0.222 22 0.22
New Asia ............................ 100 0.324 32 2.24
Outer Gaoqiao ....................... 166 0.560 93 0.45
Phoenix Bicycle ..................... 100 0.390 39 0.12
Pilkington Glass .................... 185 0.920 152 0.73
Post & Telecom ...................... 60 0.508 30 0.21
Refrigerator ........................ 50 0.358 18 0.00
Rubber Belt ......................... 33 0.148 5 0.00
Sanmao .............................. 33 0.418 14 0.00
Sewing Machine ...................... 75 0.440 33 0.00
Shanghai Travel ..................... 60 0.350 21 0.26
Shangling Electric .................. 70 0.738 52 0.25
Steel Tube .......................... 80 0.300 24 0.16
Tyre & Rubber ....................... 221 0.450 99 0.14
Vacuum .............................. 121 0.208 25 0.01
Wing Sung ........................... 30 0.220 7 0.00
----- ----
TOTAL OF "B" SHARES ................................................ 1,519 6.75
===== ====
</TABLE>
---------
Source: Lloyd George Management
Market Index. The performance of the "B" shares on the SHSE is measured by
the CLSA Shanghai B Index. This Index stood at 734.58 on December 31, 1993 and
closed at 674.04 on December 15, 1994.
Membership. The SHSE operates on a membership system. Membership is
restricted to securities institutions approved by the PBOC. As of March 31,
1992, there were 29 members admitted to the SHSE, 20 of which are local
institutions and 9 of which are from other provinces. The SHSE members are
comprised of securities companies, insurance companies, trust and investment
companies and open credit cooperatives. Members of the SHSE must join the
Securities Trade Association, which is a self-governing trade organization whose
articles of association specify such matters as the purpose, nature, conditions
for membership, rights and obligations of members and accounting of the
Association. The SHSE members may be classified as (1) members who trade for
others' accounts; (2) members who trade for their own accounts only; or (3)
members who trade both for their clients and for their own accounts. No member
may buy or sell any listed securities outside the SHSE without permission.
Regulation. The SHSE is regulated by the local branch of the PBOC and the
local government in Shanghai. The Shanghai Municipal People's Government adopted
the Measures of Shanghai Municipality for Administration of the Trading of
Securities (the "SHSE Measures"), which came into effect on December 1, 1990 and
govern the establishment of the SHSE and the issuance and trading of securities
in Shanghai. In November of 1991, special regulations contained in the Measures
of Shanghai Municipality for the Administration of Special Renminbi-denominated
Shares and their Detailed Implementing Rules were promulgated by the PBOC and
the Shanghai Municipal People's Government relating to the issue of "B" shares
in Shanghai. Special rules for the trading and settlement of "B" shares were
also enacted in February 1992.
New Issues and Listed Criteria. To issue new securities, an issuer must file
an application with the PBOC, Shanghai Branch, along with the issuer's articles
of association, a prospectus to be used in offering the securities which meets
the requirements of the SHSE Measures and other related documents. Issues of
shares, or bonds of a value of RMB 10 million or more, must be distributed by a
securities institution, unless otherwise provided by the State or placed
privately. Issues with a total distribution value of RMB 30 million or more must
be jointly distributed by a distribution syndicate formed and led by a
securities company. Distribution of securities includes the underwriting of
securities and the placement of securities by an agent.
Under the SHSE Measures, an issuer which intends to issue its shares must
submit: (i) the consent from the relevant authorities as to the establishment or
restructuring of the enterprise as a joint stock company; (ii) in the case of a
newly-established joint stock company, an investment certificate evidencing that
its organizers have subscribed for not less than 30% of the total amount of
shares; (iii) in the case of State-owned enterprise being restructured as a
joint stock company, a confirmation of asset valuation issued by the
Administration for State Assets with a report on the conclusions from the asset
valuation issued by the relevant asset valuation agency, or, in the case of a
non-State-owned enterprise being restructured as a joint stock company, a report
on the conclusions from the asset valuation issued by an accounting firm and a
registered accountant of that firm; (iv) in the case of an existing joint stock
company issuing shares in order to increase its capital, financial statements of
continuous profits during at least the preceding two years and the preceding
quarter of the current year, certified by an accounting firm and a certified
accountant of that firm, and a shareholders' resolution authorizing the issue;
and (v) an application for share issue to the PBOC, Shanghai Branch, along with
its articles of association, the prospectus to be used for the share issue, a
distribution contract entered into with a securities distributor and, if the
shares are to be issued to raise funds for fixed asset investment, the approval
document(s) from the relevant administrative department(s). In addition, where
the issuer also intends to list shares on the SHSE, it must submit (i) an
application for the listing of and permission to deal in securities; (ii) a
report on the listing of the securities; (iii) consent from at least one
securities house to assist in the trading of the securities; and (iv) financial
statements of continuous profits for at least two years, certified by an
accounting firm and a registered accountant of that firm.
New Issues and Listing Criteria for "B" Shares on the SHSE. A company
wishing to issue "B" shares to be listed on the SHSE must comply with the
following requirements: (i) it must be an approved joint stock company which has
been registered with the relevant State authority or whose establishment has
been approved and has met all the listing requirements set forth in the SHSE
Measures; (ii) the proceeds from the issuance of the "B" shares must be used in
accordance with State policies and regulations on the administration of foreign
investment; (iii) it must have a stable, adequate source of foreign exchange
revenue (i.e., sufficient to pay out the "B" share dividends); and (iv) the
percentage of "B" shares among the total shares of a former state- owned
enterprise reorganized as a joint stock company must not exceed the upper limit
set by the PBOC, Shanghai Branch.
Subscription for "B" shares is carried out through approved securities
institutions. Approved domestic securities institutions may arrange for
participation by foreign securities institutions approved by the PBOC, Shanghai
Branch. Approval by the Shanghai Branch of the PBOC is required for the
subscription by a single investor for "B" shares which exceed 5% of the total
issued share capital of a company. In addition, "B" share trading must be
carried out by approved securities institutions and be processed through a
domestic securities house which is in the business of dealing in "B" shares.
Every investor dealing in "B" shares must open a "B" share securities account
with the SHSE. Domestic securities dealing organizations may open such "B" share
securities accounts on behalf of individuals and institutional investors outside
of China. Domestic securities institutions may not engage in "B" share business
for their own account.
The issuance of "B" shares in Shanghai may be through a public offering or a
private placement. A public offering must be conducted on behalf of the issuer
by an approved securities institution. The issuance of "B" shares through a
distribution syndicate must be managed by a domestic securities institution. The
prospectus for an issue of "B" shares must be published in a newspaper or other
publication approved by and on dates designated by the PBOC, Shanghai Branch.
Reporting Requirements. Once securities are approved for listing on the
SHSE, the issuer must publish the report on the listing of the securities and
certified financial statements showing continuous profits for at least two years
preceding the listing. Issuers of listed securities are required to submit
interim financial reports to the PBOC, Shanghai Branch in the middle of each
fiscal year. Issuers of securities traded on the OTC markets or the SHSE are
required to submit certified financial reports at the end of each fiscal year.
Such reports are required to be submitted within 45 days after the end of the
relevant period.
Within 15 days after the occurrence of any of the following situations, an
issuer of securities must submit a status report to the PBOC, Shanghai Branch,
and the SHSE if the securities of such issuer are listed on the SHSE: (i) the
conclusion with another party of a contract or agreement that will have a
material effect on the assets or liabilities of the enterprise or the rights and
interests of its shareholders; (ii) a major change in the business items or
forms of business of the enterprise; (iii) the making of a decision on a major
or relatively long-term investment; (iv) the incurring of major debts or losses;
(v) major losses of the assets of the enterprise; (vi) a major change in the
production or business environment; (vii) a change in the members of the board
of directors or senior management personnel; (viii) a change in the
shareholdings of shareholders who hold 5% or more of the total amount of shares
or a change in the shareholdings in the company of the members of the board of
directors or senior management personnel; (ix) involvement in a major lawsuit;
(x) the making of such major policy decisions as on merger, consolidation, etc.;
and (xi) commencement of liquidation or bankruptcy reorganization.
The trading and registration of transfer of registered shares will be
suspended 10 days before each announced date for payment of dividends or bonuses
or the issuance of new shares. Under the SHSE Measures, if the transfer
registration procedures are not completed within the specified time limits, the
dividends, bonuses and newly issued shares will be issued to the persons in
whose name the securities were registered at the time of such distribution or
issuance.
Insider Trading Restrictions. Certain persons involved in the issuance of
shares, such as relevant personnel of the PBOC, Shanghai Branch, who are
involved in securities administration, management personnel of the SHSE,
personnel of a securities house who are directly connected with the issue and
trading of shares and other insiders connected with the issue and trading of
shares are prohibited from trading, directly or indirectly, for their own
account.
TRADING AND REGULATION OF "B" SHARES
Trading of "B" Shares on the SZSE. Trading on the SZSE is conducted in
blocks of 2,000 shares. Trading in "B" shares may only be conducted between
non-Chinese investors. Investors outside China must trade "B" Shares through
approved foreign brokers who in turn instruct approved Shenzhen brokers who
actually effect trades on the SZSE. All trades must be transacted on the trading
floor; no off-market transactions are allowed. Trading on the SZSE is carried
out through a computerized automatic matching system which effects each
transaction based on price and time priority. Investors subscribing for or
buying "B" shares are required to produce their individual or corporate
identification documents, while individual investors must also pay a deposit
equal to 60% of the market price of the shares to be bought.
Commissions for transactions in "B" shares are fixed at 0.6% of the purchase
price. A stamp duty of 0.3% of the purchase price is also payable. In addition,
the SZSE imposes a transaction levy of 0.1% of the actual transaction amount. A
share transfer registration fee of 0.3% of the face value of the "B" shares
transferred is also payable by the buyer to the official registrar of the "B"
shares. Certain other fees may also be payable to the clearing and settlement
bank and foreign brokers for their services.
Any single investor holding "B" shares amounting to more than 5% of the
total share capital of an issuer must report such holding to the PBOC, Shenzhen
Special Economic Zone Branch. Short selling of "B" shares is prohibited. Newly
purchased "B" shares may not be sold before the settlement and registration
procedures for their purchase are completed.
Trading of "B" Shares on the SHSE. In Shanghai, "B" shares are traded in
blocks having a total face value of RMB 1,000. "B" shares may only be traded
between non-Chinese investors. Investors outside of China must trade "B" shares
through approved foreign brokers who instruct approved Shanghai brokers who then
actually effect trades on the SHSE. All trades must be transacted on the trading
floor; no off-market transactions are allowed.
Brokerage commissions for "B" share transactions are fixed at 0.6% of the
total amount of the transaction, with reduced rates of 0.5%, for transactions
with a value of RMB 500,000 and 0.4% with a value exceeding RMB 5,000,000. A
stamp duty of 0.3% of the amount of the transaction is also charged. The SHSE
also levies a transaction fee on securities dealers equal to 0.03% of the amount
of the transaction. A transfer fee of 0.1% of the face value of the shares
transferred is also payable by the investor. Certain other fees may also be
payable to the banks appointed to coordinate primary and secondary clearing and
settlement and to foreign brokers for their services. Fees are calculated in
renminbi and payable in U.S. dollars.
Any single investor (individual or institutional) purchasing "B" shares of
an amount exceeding 5% of the issuer's total share capital must obtain approval
for such purchase from the PBOC. Newly purchased "B" shares cannot be sold
before the transfer procedures for their purchase are completed.
Trading in "B" shares is in a scripless manner using the automatic
book-entry transfer system. Orders are matched automatically by computer by
price and time priority. Market and trading information is transmitted through
telecommunication links by an international information agency from the SHSE to
overseas countries on a real time basis.
Clearing and Settlement of "B" shares. In both Shenzhen and Shanghai,
clearing and settlement of "B" share transactions are effected on the third day
after the trade date. All clearing and settlement of "B" shares are effected in
a scripless manner, through a book-entry clearinghouse system. No such
certificates are issued to investors. Cash settlement is effected on a broker to
broker, transaction by transaction basis.
Clearing and settlement of "B" share transactions are conducted at two
levels. The Bank of Communications is responsible for coordinating the primary
settlement, for both shares and cash, between the Shanghai or Shenzhen brokers
and the exchanges, which is effected through a book-entry system. Citibank, N.A.
coordinates the secondary settlement, for cash only, which takes place between
the Shanghai or Shenzhen brokers and the off-shore brokers. Clearing and
settlement of "B" share transactions are handled by three approved banks:
Citibank N.A., Standard Chartered Bank and HongkongBank.
All "B" share prices and all dividends, bonuses and other income on "B"
shares are calculated in RMB but paid in foreign currency (Hong Kong dollars or
U.S. dollars). RMB amounts are converted to Hong Kong dollars or U.S. dollars at
the weekly weighted average conversion rate as quoted by the Shanghai Foreign
Exchange Transaction Center or the Shenzhen Foreign Exchange Adjustment Center
(with the exception of share sale prices in Shenzhen, which are converted at the
prior working day's conversion rate).
THE HONG KONG SECURITIES MARKET
Formal trading of investment securities was established in Hong Kong in 1891
when the Association of Stockbrokers in Hong Kong was formed. It was renamed the
Hong Kong Stock Exchange in 1914. In 1969, the Far East Exchange was formed,
followed by the Kam Ngan Stock Exchange in 1971 and the Kowloon Stock Exchange
in 1972. These four exchanges merged to form The Stock Exchange of Hong Kong
Ltd. ("Hong Kong Stock Exchange" or "HKSE"), which commenced trading on April 2,
1986. The HKSE, with a total market capitalization as of October, 1994 of
approximately H.K. $2,476 billion (approximately U.S. $320.3 billion), is now
the second largest stock market in Asia, measured by market capitalization,
behind only that of Japan. As of that date, 520 companies and 908 securities
were listed on the Hong Kong Stock Exchange. The securities listed include
ordinary shares, warrants and other derivative instruments.
In addition to an active stock market, Hong Kong has an active foreign
exchange market, an interbank money market, a large gold bullion market and a
futures exchange. Hong Kong is also one of the major Asian centers for venture
capital businesses, many of such businesses having their Asian head office in
Hong Kong.
Primary Market. Hong Kong has an active new issue market for equity
securities. The following table summarizes the new issues on the Hong Kong
Stock Exchange since 1986.
<TABLE>
NEW ISSUES ON THE HKSE
<CAPTION>
VALUE OF VALUE OF
SHARE ISSUES RIGHTS ISSUES
-------------------------- --------------------------
NUMBER (H.K. $ (U.S. $ (H.K. $ (U.S. $
YEAR OF ISSUES MILLION) MILLION) MILLION) MILLION)
---- --------- -------- -------- -------- --------
<C> <C> <C> <C> <C> <C>
1986 ............................... 8 3,268 419 1,184 152
1987 ............................... 14 2,402 308 5,591 717
1988 ............................... 20 1,443 185 2,401 308
1989 ............................... 7 1,732 222 1,836 335
1990 ............................... 41 7,067 906 2,511 322
1991 ............................... 49 5,592 717 9,648 1,237
1992 ............................... 59 9,633 1,235 11,227 1,439
1993 ............................... 68 28,884 3,751 9,266 1,193
</TABLE>
--------------
Source: HKSE.
Secondary Market. The table below sets out selected data on the Hong Kong
Stock Exchange for each year since 1986, including the value of securities
traded during each year, and the number of companies and securities listed and
the total market capitalization as of December 31 of each year.
<TABLE>
SELECTED DATA ON THE HKSE
<CAPTION>
VALUE OF DECEMBER 31 MARKET
SECURITIES TRADED CAPITALIZATION
----------------------------------------- ------------------------------------------
(H.K. $ (U.S. $ LISTED LISTED (H.K. $ (U.S. $
YEAR MILLION) MILLION) COMPANIES SECURITIES MILLION) MILLION)
---- -------- -------- --------- ---------- -------- --------
<C> <C> <C> <C> <C> <C> <C>
1986 ........................ 123,128 15,786 253 335 419,281 53,754
1987 ........................ 371,406 47,616 276 412 419,612 53,796
1988 ........................ 199,481 25,574 304 479 580,378 74,446
1989 ........................ 299,147 38,352 298 479 605,010 77,565
1990 ........................ 288,715 37,015 299 520 650,410 83,386
1991 ........................ 334,104 42,834 357 597 1,052,012 134,873
1992 ........................ 700,577 90,569 413 749 1,332,184 172,221
1993 ........................ 1,149,265 148,670 477 891 2,975,379 381,459
</TABLE>
--------------
Source: HKSE.
Market Performance. The Hang Seng Index is the most widely followed
indicator of stock price performance in Hong Kong. The Hang Seng Index is an
arithmetic index based on the securities of 33 companies, weighted by their
respective market capitalizations, and is thus strongly influenced by large
capitalization stocks. The following table sets out high, low and end of year
close for the Hang Seng Index for each year since 1986.
HANG SENG INDEX
% CHANGE
FROM PRIOR
YEAR HIGH LOW YEAR-END PERIOD-END
---- ---- --- -------- ----------
1986 ...................... 2,568.3 1,559.4 2,568.3 --
1987 ...................... 3,949.7 1,894.7 2,302.8 (10.3)
1988 ...................... 2,772.5 2,223.0 2,687.4 16.7
1989 ...................... 3,309.6 2,093.6 2,836.5 5.5
1990 ...................... 3,559.9 2,736.6 3,024.6 6.6
1991 ...................... 4,297.3 2,984.0 4,297.3 42.1
1992 ...................... 6,447.1 4,301.8 5,512.4 28.3
1993 ...................... 11,888.0 5,438.0 11,888.0 115.7
--------------
Source: HKSE.
The Hong Kong stock market can be volatile and is sensitive both to
developments in China and to the strength of other world markets. As an example,
in 1989, the Hang Seng Index rose to 3,310 in May from its previous year-end
level of 2,687, but fell to 2,094 in early June following the events at
Tiananmen Square. See "Appendix A: People's Republic of China." The Hang Seng
Index gradually climbed in subsequent months, but fell by 181 points on October
13, 1989 (approximately 6.5%) following a substantial fall in the U.S. stock
market, and at the year end closed at a level of 2,837.
Trading. Trading on the HKSE is conducted through a computerized system to
convey bid and asked prices for securities. Trades are then effected on a
matched trade basis directly between buyers and sellers. All securities are
traded in board lots. For most companies a board lot is 1,000 shares, although
board lots can vary in size from 100 to 5,000 shares. Odd lots are traded
separately, usually at a small discount to the board lot prices. Share
certificates in board lots, together with transfer deed, must be delivered on
the day following the transaction. Payment is due against delivery. A brokerage
commission of 0.25% (with a minimum of H.K. $50) is standard. In addition,
trades are subject to a transaction levy of 0.025% payable equally to the HKSE
and the Hong Kong Securities and Futures Commission (the "SFC") and a special
levy of 0.03%. Finally, the Hong Kong government charges a stamp duty of H.K.
$2.50 for every H.K. $1,000 of the transaction price or any part thereof.
Regulation and Supervision. The SFC was established by the Hong Kong
government in May 1989 as an autonomous statutory body outside the civil service
which provides a general regulatory framework for the securities and futures
industries. The SFC administers certain elements of Hong Kong securities law
including those ordinances governing the protection of investors, disclosure of
interests and insider dealing.
The governing authority of the Hong Kong Stock Exchange is its Council,
which is comprised of 30 members. The Council is responsible for formulating
policies and oversees the operations of the HKSE through standing committees.
Eighteen Council members are representatives of the brokerage firms in Hong
Kong, nine are representatives of investment and merchant banking firms and two
are appointed by the Hong Kong government. The chief executive officer of the
HKSE serves on the Council on an ex-officio basis. Of the 18 broker
representatives on the Council, four are elected by the top 14 major brokers
which have the top third of market share, five are elected by the 51 middle tier
brokers having the middle third of market share, and nine are elected by the
entire brokerage community.
The HKSE promulgates its own rules governing share trading and disclosure of
information to shareholders and investors. Companies listed on the HKSE enter
into a listing agreement with the exchange which includes provisions requiring
that listed companies send interim and annual accounts to shareholders. In
addition, the Hong Kong Code on Takeovers and Mergers (used by the SFC) provides
guidelines for companies and their advisers contemplating, or becoming involved
in, takeovers and mergers.
Foreign Investment Restrictions. There are no regulations governing foreign
investment in Hong Kong. There are no exchange control regulations and investors
have total flexibility in the movement of capital and the repatriation of
profits. Funds invested in Hong Kong can be repatriated at will; dividends and
interest are freely remittable.
DIRECT INVESTMENTS IN CHINA
Since 1978, foreign direct investments in China have increased and have
become an important element in China's economy. Hong Kong and Macao have been
the most important source of foreign direct investments in China, accounting for
61% in 1989 and 55% in 1990 of total direct foreign investments.
Direct foreign investments in China, by number of contracts and contract
value, during 1979 to 1993 were as follows:
<TABLE>
DIRECT FOREIGN INVESTMENT
<CAPTION>
1979-
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Number of Contracts (in thousands) ........ 3.22 3.07 1.50 2.19 5.95 5.78 7.27 n.a. 48.0 83
Value of Contracts (in U.S. $ billion)
(pledged) ............................... 8.99 5.93 2.83 3.71 5.30 5.60 6.60 12.0 58.1 112.9
Actual Value of Contracts Utilized
(in U.S. $ billion) ..................... 1.8 2.3 3.2 3.4 3.4 4.4 11.0 20.0
--------------
</TABLE>
Source: figures for 1979 to 1990, Ministry of Foreign Economic Relations and
Trade; figures for 1991, State Statistical Bureau of the People's
Republic of China.
FORM OF DIRECT FOREIGN INVESTMENTS
Direct foreign investments in China have taken a variety of forms,
including:
(a) Equity Joint Ventures
Equity joint ventures are principally owned by The Law of the People's
Republic of China on Joint Ventures Using Foreign and Chinese Investment,
promulgated in 1979. This law is among the first principal pieces of legislation
relating to foreign direct investments in China. It is supplemented by rules and
regulations governing taxation, labor and other matters relating to equity joint
ventures. Equity joint ventures are limited liability legal entities in which
Chinese and foreign partners hold equity stakes.
(b) Contractual or Cooperative Joint Ventures
Contractual or cooperative joint ventures are governed by The Law of the
People's Republic of China on Chinese-Foreign Cooperative Joint Ventures of
1988. They are established by contracts between a Chinese party and a foreign
party. Unlike equity joint ventures, in which the rights, liabilities,
obligations and profit sharing arrangements between the joint venture partners
are usually defined by reference to their respective equity interests in the
joint venture, the rights, liabilities, obligations and profit sharing
arrangements between the parties in contractual or cooperative joint ventures
usually are specifically negotiated and set out in the joint venture contract.
This type of joint venture is generally perceived to have a greater degree of
flexibility than equity joint ventures.
(c) Wholly Foreign-Owned Enterprises
Foreign companies are permitted to establish wholly-owned subsidiaries in
China. Such wholly foreign-owned enterprises are governed by The Law of the
People's Republic of China on Wholly Foreign-Owned Enterprises of 1986. These
enterprises are required to utilize advanced technology and equipment or to
export 50% or more of their finished products.
(d) Processing and Assembly Agreements
In this form of investment, the Chinese party normally provides the factory,
power and other utilities, and labor, and the foreign party supplies the raw
materials. The foreign party pays a processing or assembling fee to the Chinese
party and has ownership of the finished products.
(e) Compensation Trade
In this form of investment, the foreign party provides services, equipment,
training and/or technical know-how to the Chinese party and, in exchange,
receives compensation in the form of finished products produced by the Chinese
party.
PRIORITY INVESTMENT AREAS
In order to help modernize the Chinese economy, China has established zones
in which foreign investment is encouraged.
(a) Special Economic Zones
In 1980, China established special economic zones to attract foreign
capital, technology, and expertise by offering investors in these zones tax
incentives and other preferential treatment. Four of the five special economic
zones in China are located in the Guangdong and Fujian Provinces, Shenzhen,
Shantou and Zhuhai in Guangdong Province and Xiamen in Fujian Province.
(b) Open Coastal Cities
In April 1984, 14 areas were designated "open coastal cities" where, like
the special economic zones, preferential investment terms are offered to
investors. These cities are Qinhuangdao, Dalian, Tianjin, Yantai, Qingdao,
Lianyungang, Nantong, Shanghai, Ningbo, Wenzhou, Fuzhou, Guangzhou, Beihai and
Zhanjiang.
(c) Coastal Open Economic Zones
In the late 1980s, five areas were designated coastal open economic zones:
Liaodong Peninsula and Shangdong Peninsula in northeast China, the Yangtze River
Delta in the eastern Jiangsu Province, the Minnan Delta in Fujian Province and
the Pearl River Delta in southern Guangdong Province.
(d) Shanghai's Pudong District
In 1990, the Pudong area of Shanghai was also designated an open zone for
foreign investments with autonomy equivalent to that of a special economic zone.
(e) High and New Technology Industrial Development Zones
High and new technology industrial development zones were first introduced
in 1988 to offer preferential treatment to enterprises which have been confirmed
as technology intensive in accordance with the requirements formulated by the
State Science and Technology Commission. There are 27 high and new technology
industrial development zones which have been approved by the State Council.
These zones presently exist in Beijing, Changchun, Changsha, Chengdu, Chongqing,
Dalian, Fuzhou, Guangzhou, Guilin, Hainan, Hangzhou, Harbin, Hefei, Jinan,
Lanzhou, Nanjing, Shanghai, Shenyang, Shenzhen, Shijiazhuang, Tianjin, Weihai,
Wuhaxn, Xi'an, Xiamen, Zhengzhou and Zhongshan.
<PAGE>
APPENDIX B
CHINA REGION COUNTRIES
The information set forth in this Appendix has been extracted from various
government and private publications. The Fund and the Trust's Board of Trustees
make no representation as to the accuracy of the information, nor has the Fund
or the Trust's Board of Trustees attempted to verify it.
PEOPLE'S REPUBLIC OF CHINA
GENERAL INFORMATION
LOCATION AND GEOGRAPHY
China is the world's third largest country occupying a region of 9.6 million
square kilometers. It borders Russia and Mongolia in the north and joins the
borders of Vietnam, Laos, Myanmar and Bhutan in the south. To the west and
northwest are states of Afghanistan, Pakistan, India and Nepal and to the east
is North Korea. The terrain in the west is dominated by steppes, vast deserts
and high mountain ranges. Mountain areas and highlands account for about
two-thirds of the Chinese territory. To the east, China has two of the world's
greatest rivers, Huang He (Yellow River) and Chang Jiang (Yangtze River).
Cultivation is concentrated in the north eastern half of the country where
flatter terrain and proximity to the coast and major river basins compensate for
lower rainfall.
The country is divided into 23 provinces, three municipalities (Beijing,
Shanghai and Tianjin) and five autonomous regions (Guangxi Xhuang, Nei Mongol,
Ningxia Hui, Xinjiang Uygur and Xizang (Tibet)). The capital and political
center of China is Beijing. Shanghai is the largest city and is also the
commercial and financial capital.
POPULATION
China is the world's most populous nation, consisting of more than one-fifth
of the human race. The estimated population was approximately 1.143 billion as
of December 1990. According to the government census, the figure represented an
average annual increase of 1.48 percent over 1982. China has engaged in a
20-year plan for restraining population growth as part of its economic
modernization program. Despite the plan, the population is likely to exceed
1.300 billion by the year 2000. Over 80 percent of the population is
concentrated in the eastern half of the country as a result of systematic
cultivation.
The following table presents information regarding China's population growth
since 1950.
POPULATION
TOTAL ANNUAL
POPULATION URBAN RURAL GROWTH RATE
YEAR (MILLION) % % (%)
---- ---------- ----- ----- -----------
1950 ............... 551.96 11.18 88.82 1.900
1955 ............... 614.65 13.48 86.52 2.032
1960 ............... 662.07 19.75 80.25 (.457)
1965 ............... 725.38 17.98 82.02 2.838
1970 ............... 829.92 17.38 82.62 2.583
1975 ............... 924.20 17.34 82.66 1.569
1980 ............... 987.05 19.39 80.61 1.187
1985 ............... 1,058.51 23.71 76.29 1.426
1990 ............... 1,143.33 26.41 73.59 1.439
Notes: (i) Population figures for 1985 and 1990 were estimated based on the
Fourth (1987) National Population Census.
(ii) The 1985 growth rate was estimated based on the Third (1982) and
Fourth (1990) National Population Census. The 1990 growth rate is
from the National Sample Survey on Population Change in 1990. The
earlier growth rates are from the Annual Report of the Ministry of
Public Security.
Source: China Statistical Yearbook 1991, State Statistical Bureau of the
People's Republic of China.
The population is homogeneous, composed of mostly the Han ethnic group. The
national language is Putonghua which is based on Mandarin and was simplified in
1945. Over 93 percent of the population speaks one of the five main Sino-Tibetan
dialects which are Mandarin, Cantonese, Fukienese, Hakka and Wu. Religion is not
a major source of ethics for Chinese and is not a divisive force among its
population. Some 20 percent of the population practice Confucianism and 8
percent are Buddhists.
POLITICAL HISTORY
The Chinese state has origins dating back to the second millennium BC. A
long history of feudalism existed before a single Chinese empire was created.
Gradually, an imperial system developed under the rule of successive Chinese and
non-Chinese dynasties. The Manchu Dynasty, the last ruling dynasty, came to an
end in 1911 as a result of both an erosion of power from unequal foreign
treaties and a coup. Following the collapse of the dynasty, a period of
political instability and power struggle ensued between the Kuomintang
(Nationalist Party) and the Chinese Communist Party. In 1945, with the Japanese
surrender, the Communist Party under Mao Zedong seized most of the formerly
occupied China, defeating the Nationalist Party forces in a civil war. With the
victory by the Communists, the Nationalists under the leadership of Chiang
Kaishek fled the mainland to Taiwan where they established a separate
government. In 1949, The Communist Party established the People's Republic of
China.
Since 1949, the Communist government engaged in numerous campaigns to
industrialize the country with programs such as the "Great Leap Forward", which
fell short of its goals to increase industrial production and gave rise to
famine. In 1966, the government launched the Cultural Revolution seeking to
purge many of its political dissidents in order to centralize the political
power within the Communist Party. The campaign failed to significantly restore
socialist ideals and the Party experienced a loss of credibility with the
masses. The failure of the Communist Party to achieve substantive economic
reform eventually led to political domination by the army.
In the 1970's, the Chinese government, which had remained isolated from the
world, opened its doors. President Nixon's historic visit to China in 1972
established diplomatic ties between China and the United States. China also
renewed diplomatic and trade relations with Western Europe, Japan and other
Asian nations such as Singapore, Indonesia and South Korea. Following Mao
Zedong's death in 1976, and the election of Deng Xiaoping as China's paramount
leader, China has continued to pursue an "Open Door Policy" encouraging foreign
investment and expertise inside its borders. Deng's leadership has emphasized
pragmatism rather than Party ideology.
In 1989, a growing dissatisfaction with the Communist government led to
anti-government student protests culminating in what is known as the Tiananmen
Square incident. The government's use of the military to suppress a peaceful
demonstration resulted in world-wide criticism. Currently, the leadership under
Deng Xiaoping remains committed to basic economic reforms but continues to
reject liberalization from the domination of the Communist Party in the
political decision-making process. The Chinese leadership still faces the
challenge of maintaining power under the Communist Party while fending off
Western political ideologies.
China currently has diplomatic ties with approximately 140 nations. It is a
charter member of the United Nations and a permanent member of the United
Nations Security Council. Currently, China is seeking admission to the General
Agreement on Tariffs and Trade.
GOVERNMENT
China is currently governed under a new Constitution adopted on December 4,
1982. The highest ranking organization in the state power hierarchy is the
National People's Congress (NPC) which is composed of deputies elected by all
the regions for a term of five years. The NPC has 2,970 members with extensive
powers to amend the constitution and make laws. However, many view the main
purpose of this law-making body to be solely to approve Party policy. When the
NPC is not in session, the NPC Standing Committee exercises its functions,
including formulation of state policy, enactment of laws, examination and
approval of state plans and budgets, and amending and enforcing the
Constitution. The NPC elects the head of state and the State Council. The State
Council is the highest executive body, composed of the Premier, Vice Premiers,
State Councilors, Ministers, the Auditor General and the Secretary General. The
State Council has the power to enact administrative rules and regulations, issue
orders, appoint, remove and train administrative officers, supervise the
ministries and local governments, coordinate the work of the ministries and
state commissions and declare martial law. The current Premier is Li Peng and
the current President is Yang Shangkun, a professional soldier from the Deng
faction.
The Chinese Communist Party was established in 1921 and has remained the
ruling party since 1949. The Party is hierarchically organized, with a
membership of over 48 million members. The Party's structure parallels that of
the Government with a National Party Congress, Central Committee and Standing
Committee. Because Party membership is a prerequisite for holding influential
government positions, a significant overlap between the two structures exists
which adds to administrative inefficiencies. Furthermore, the Party's close
alignment with the military is a great source of political power as evidenced by
the outcome of the Tiananmen incident. Efforts to reduce the Communist Party's
participation in commercial and administrative decision-making have so far been
largely unsuccessful.
THE CHINESE ECONOMY
OVERVIEW AND RECENT DEVELOPMENTS
China has operated a centrally planned economy since 1949. The First Five-
Year Economic Plan was set forth in 1953 to stimulate economic growth and
development. Currently, China is in its second year of its Eighth Five-Year
Economic Plan. In 1978, China instituted an economic reform program to shift
from a completely centrally planned economy to a more mixed economy. The program
liberalized China's economy and opened it to foreign investment. Currently,
under a system called "socialism with Chinese characteristics," these economic
reforms appear to continue in a more comprehensive manner. Managers of
enterprises have been granted more decision-making powers, including the
planning of production, marketing, use of funds and employment of staff. Goods
which are controlled and distributed by the state are still sold at planned
prices. However, the goods produced in excess of the state production plan may
be sold at floating prices, negotiated prices or free prices.
Over the past decade, China has achieved annual growth in real gross
national product (GNP) averaging 9%. GNP in 1991 had increased to over 2.5 times
the GNP in 1980. However, growth has been unsteady, with booms in 1984 and 1988
and downturns in 1981 and 1989. In 1988, the Chinese Government instituted an
austerity program which slowed the Chinese economy in the following year.
However, growth increased after 1989, achieving growth rates of 3.9% in 1989,
5.2% in 1990, and 7% in 1991, but has not returned to its previous levels.
The economy in China consists of three sectors: state, cooperative, and
private. The state sector, though decreasing from 76% of GNP in 1980 to
approximately 50% in 1991, continues to constitute the bulk of the economy. In
recent years, however, the economy has been significantly restructured through
the abolition of the commune system in rural areas and the relaxing of
government authority in the day to day operations in both agricultural and
industrial enterprises. As the government assumes more of a regulatory and
supervisory role and less of a direct management role, market forces have been
allowed to operate. This has resulted in increased productivity and rising
incomes.
China's economic policy is set out in two overlapping plans, the 20-Year
Plan (1981-2000) and the current Five-Year Economic Plan (1991-1995). The 20-
Year Plan calls for an average 7% growth in GNP over the entire 20-year period;
the initial decade was to be a period of reorganization, with the second decade
one of rapid economic progress. The 7% mark was exceeded in the initial decade,
with growth rates averaging 9.4%. The second decade growth, thus far, is in step
with the desired growth of the 20-Year Plan. The current Five-Year Economic Plan
calls for 6% annual growth, starting in 1991; this however, has been surpassed
in both 1991 and 1992, and 1993 is forecast to exceed 10%.
The following table sets forth selected data regarding the Chinese economy.
<TABLE>
MAJOR ECONOMIC INDICATORS
<CAPTION>
1988 1989 1990 1991 1992 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Gross National Product
(% annual real growth) ............................ 10.8 3.9 5.2 7.0 12.8 13.4
(nominal, RMB billion) ............................ 1,401.8 1,591.6 1,768.6 1,958.0 2,367.0 3,109.0
(nominal, U.S. $ billion)* ........................ 376.8 337.2 338.8 360.6 411.7 546.0
Per Capita GNP (U.S. $) ............................. 341.0 300.0 298.0 312.0 379.0 460.0
Industrial Production (% annual growth) ............. 17.9 6.8 6.0 14.2 20.4 23.6
Inflation (retail price index, % annual growth) ..... 18.6 17.8 2.1 3.0 6.2 13.2
Money Supply (M2, % annual growth) .................. 20.7 18.7 28.9 27.6 29.5 23.6
Government Budget Surplus/Deficit
(U.S. $ billion)* ................................. (2.1) (1.9) (2.7) (3.9) (7.8) (10.3)
Exports (U.S. $ billion) ............................ 47.6 52.5 62.1 71.9 85.1 91.7
(% annual growth) ................................. 20.8 10.2 17.9 15.8 18.3 7.93
Imports (U.S. $ billion) ............................ 55.3 59.1 53.3 63.8 80.8 103.9
(% annual growth) ................................. 28.0 6.8 (9.8) 19.5 26.6 28.9
Trade Balance (U.S. $ billion) ...................... (7.8) (6.6) 8.6 8.1 4.3 (12.2)
Exchange Rate (RMB/U.S. $) .......................... 3.72 4.72 5.22 5.43 5.8 5.8
</TABLE>
--------------
*Translated at the respective exchange rate for each year shown in the table.
Sources: China Statistical Yearbook, State Statistical Bureau of the People's
Republic of China, Baring Securities.
PRINCIPAL ECONOMIC SECTORS
Industry. In 1990, industry accounted for 45.8% of China's National Income.
In the first three decades under Communist rule, China placed great emphasis on
heavy industry. Since the reform program began in 1978, a much greater emphasis
has been placed on light industry. Considerable industrial growth has come from
industrial enterprises in rural townships which are engaged in the processing
and assembly of consumer goods. These operations are concentrated in southern
China, where a major light industrial base has developed. Industrial output has
grown rapidly and is increasingly important to the Chinese economy.
China's current industrial policy also places emphasis on high-technology
industries supported by foreign technology, such as micro-electronics and
telecommunications. However, overstocking and poor economic results continue to
plague Chinese industry. Continued growth has been hampered by problems of
access to raw materials and energy supplies.
The following table sets forth the quantities and total value of China's
major industrial products for selected years.
<TABLE>
INDUSTRIAL PRODUCTION
<CAPTION>
ITEM 1952 1978 1980 1985 1989 1990
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Gross Output Value of Industry (RMB
billions) ............................ 34.9 423.7 515.4 971.6 2,201.7 2,392.4
Output of Major Industrial Products
Cloth (meters billions) .............. 3.83 11.03 13.47 14.67 18.92 18.88
Machine-Made Paper and Paper boards
(metric tons millions) ............. 0.37 4.39 5.35 9.11 13.33 13.72
Sugar (metric tons millions) ......... 0.45 2.27 2.57 4.51 5.01 5.82
Bicycles (metric tons millions) ...... 0.08 8.54 13.02 32.28 36.77 31.42
Sewing Machines (thousands) .......... 66 4,865 7,678 9,912 9,563 7,610
Wrist Watches (thousands) ............ -- 13,511 22,155 54,311 72,756 83,526
Household Refrigerators (thousands) .. -- 28 49 1,448 6,708 4,631
Television Sets (thousands) .......... -- 517.3 2,492 16,676.6 27,665.1 26,847
Color Television Sets (thousands) .. -- 3.8 32 4,352,8 9,400.2 10,330.4
Household Washing Machines (thousands) -- 0.4 245 8,872 8,254.3 6,626.8
Cassette Recorders (thousands) ....... -- 47 743 13,931 23,490 30,235
Cameras (thousands) .................. -- 178.9 372.8 1,789.7 2,451.8 2,132.2
Coal (metric tons millions) .......... 66 618 620 872 1,054 1,080
Crude Oil (metric tons millions) ..... 0.44 104.05 105.95 124.90 137.64 138.31
Electricity (kilowatt hours billions) 7.3 256.6 300.6 410.7 584.8 621.2
Steel (metric tons millions) ......... 1.35 31.78 37.12 46.79 61.59 66.35
Rolled Steel (final products) (metric
tons millions) ..................... 1.06 22.08 27.16 36.93 48.59 51.53
Cement (metric tons millions) ........ 2.86 65.24 79.86 145.95 210.29 209.71
</TABLE>
--------------
Source: China Statistical Yearbook, 1991, State Statistical Bureau of the
People's Republic of China.
Agriculture. Although long term growth in agricultural production has
slowed, China remains one of the world's largest agricultural producers. The
government has emphasized diversification of production, and a commitment to the
maintenance of grain outputs. Other agricultural products have also shown
increases in production in recent years, with cotton production at the
forefront.
The following table sets forth the quantities and total value of China's
leading agricultural products for selected years.
<TABLE>
AGRICULTURAL PRODUCTION
<CAPTION>
ITEM 1952 1978 1980 1985 1989 1990
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Gross Output Value (RMB billions) .......... 46.1 139.7 192.3 361.9 653.5 766.2
Output of Major Farm Products
Grain (metric tons millions) ............. 163.92 304.77 320.56 379.11 407.55 446.24
Cotton (metric tons thousands) ........... 1,304 2,167 2,707 4,147 3,788 4,508
Oil-Bearing Crops (metric tons thousands) 4,193 5,218 7,691 15,784 12,952 16,132
Sugar Cane (metric tons thousands) ....... 7,116 21,116 22,807 51,549 48,795 57,620
Beet Roots (metric tons thousands) ....... 479 2,702 6,305 8,919 9,253 14,525
Tea (metric tons thousands) .............. 82 268 304 432 535 540
Fruits (metric tons thousands) ........... 2,443 6,570 6,793 11,639 18,319 18,744
Pork, Beef and Mutton (metric tons
thousands) ............................. 3,385 8,563 12,054 17,607 23,262 25,135
Aquatic Products (metric tons millions) .. 1.67 4.66 4.50 7.05 11.52 12.37
</TABLE>
--------------
Source: China Statistical Yearbook, 1991, State Statistical Bureau of the
People's Republic of China.
The following table provides a breakdown of the value of China's
agricultural production for 1989 and 1990.
VALUE OF AGRICULTURAL PRODUCTS(1)
1989 1990
(RMB MILLION) (RMB MILLION)
------------- -------------
Gross Output Value ......................... 653,473 766,209
Farming .................................... 367,446 448,174
Grain .................................. 219,551 270,492
Industrial Crops ....................... 64,661 83,842
Other Crops ............................ 83,234 93,840
Forestry ................................... 28,492 33,027
Animal Husbandry ........................... 179,741 196,407
Fishers .................................... 34,885 41,056
--------------
(1) At current prices.
Source: China Statistical Yearbook, 1991, State Statistical Bureau of the
People's Republic of China.
Energy. Although China has a vast potential for energy production, this
potential has been largely untapped. However, China is the world's largest
producer of coal and the world's fifth largest oil producer. Until recently,
China did not have the capacity to utilize its off-shore oil fields due to the
country's relatively low level of technology. Joint ventures with foreign
companies, however, have allowed China to use the fields, and further growth in
oil production, both off-shore and on-shore, is expected. China also has
significant potential for harnessing hydroelectric power, but has utilized only
a small portion of this potential. China is planning to make hydroelectric power
a major source of energy in the years ahead.
The following table sets forth China's energy production and consumption for
the years 1980 to 1990, as well as the percentage contributions of the key
energy sources.
<TABLE>
ENERGY PRODUCTION AND CONSUMPTION
<CAPTION>
TOTAL TOTAL
PRODUCTION % OF TOTAL PRODUCTION CONSUMPTION
(MILLION ----------------------------------------------- (MILLION
METRIC TONS NATURAL HYDRO- METRIC TONS
YEAR OF SCE)<F1> COAL OIL GAS ELECTRIC OF SCE)(1)
---- ---------- ---- --- ------- -------- ----------
<C> <C> <C> <C> <C> <C> <C>
1980 ........................ 637.35 69.4 23.8 3.0 3.8 602.75
1981 ........................ 632.27 70.2 22.9 2.7 4.2 594.47
1982 ........................ 667.78 71.3 21.8 2.4 4.5 620.67
1983 ........................ 712.70 71.6 21.3 2.3 4.8 660.40
1984 ........................ 778.55 72.4 21.0 2.1 4.5 709.04
1985 ........................ 855.46 72.8 20.9 2.0 4.3 766.82
1986 ........................ 881.24 72.4 21.2 2.1 4.3 808.50
1987 ........................ 912.66 72.6 21.0 2.0 4.4 866.32
1988 ........................ 958.01 73.1 20.4 2.0 4.5 929.97
1989 ........................ 1,016.39 74.1 19.3 2.0 4.6 969.34
1990 ........................ 1,039.22 74.2 19.0 2.0 4.8 980.00
<FN>
--------------
<F1> Excludes bio-energy, solar, geothermal and nuclear energy. All fuels
converted to Standard Coal Equivalent (SCE); 1 kg of coal = 0.714 kg of
SCE, 1 kg of oil = 14.6 kg of SCE, 1 cubic meter of natural gas = 1.33 kg
of SCE; Hydroelectric converted to SCE based on coal required to produce
equivalent thermal external-electric power.
</TABLE>
Source: China Statistical Yearbook, 1991, State Statistical Bureau of the
People's Republic of China.
ECONOMIC PLANS
China's Eighth Five-Year Economic Plan for national economic and social
development was adopted by the Standing Committee of the National People's
Congress for 1991-95, along with a ten-year development program which extends to
the year 2000. Included in both of these plans is an objective for China to
quadruple its gross national output by the end of this century. In addition, the
proposals emphasize a policy of opening to the outside world, expanded economic
and technological exchanges with other countries, and further development of the
export-oriented economy and the special investment areas. The basic guideline
for China's economic activities in 1992 is to continue on a path of economic
reform while following principles of socialism.
During 1980 to 1990, China had an average annual GNP growth rate of
approximately 9.0%, surpassing the 7.5% annual GNP growth rate target under the
Seventh Five-Year Economic Plan (1986-1990).
China's objective to quadruple the 1980 industrial and agricultural output
by the year 2000 requires the country's output to grow at an average annual rate
of growth of about 6% in the 1990's. To enable China to accomplish this growth
target under the prevailing economic environment, China's economic policy aims
to provide a stable and non-inflationary environment to revive growth. Another
prevailing goal is to relieve the supply bottlenecks arising from imbalanced
growth over the last 10 years with resources to be allocated to the priority
areas of agriculture, energy, transportation, telecommunications and basic
materials industries. Emphasis is also placed on export-oriented and
import-substitute production.
THE FINANCIAL SYSTEM
The Ministry of Finance is responsible for overseeing state finances and the
collection of revenue and taxation. The banking system is managed by China's
central bank, the People's Bank of China ("PBOC"). The PBOC, like the Ministry
of Finance, is a state administrative organ under the leadership of the State
Council. Its primary functions include: the formation of national financial
regulations and policies; the issuance of currency and regulation of its
circulation; the co-ordination and implementation of credit plans; overseeing
the establishment and operation of financial institutions and financial markets,
including stock exchanges; administration of China's foreign exchange and gold
reserves and adjustment of exchange rates against foreign currencies; and
administration of China's securities markets.
There are currently five specialized banks, namely, the Industrial and
Commercial Bank of China, the China Investment Bank, the Agricultural Bank of
China, the People's Construction Bank of China, and the Bank of China (the
"BOC"). Trust and investment companies and credit cooperatives also provide
financial services in China. Major trust and investment corporations include
China International Trust and Investment Corporation ("CITIC"), Shanghai
Investment and Trust Corporation ("SITCO"), and Guangdong International Trust
and Investment Corporation ("GITIC").
SAVINGS AND INVESTMENT
Historically, China has had a relatively high rate of national savings--
approximately 34% as of the end of 1990. The following table sets out the value
of savings deposit balances for selected years.
SAVINGS DEPOSIT BALANCES
(RMB BILLION)
YEAR-END TOTAL URBAN AREAS RURAL AREAS
-------- ------ ----------- -----------
1955 ..................... 1.99 1.69 0.30
1960 ..................... 6.63 5.11 1.62
1965 ..................... 6.52 5.23 1.29
1970 ..................... 7.95 6.45 1.50
1975 ..................... 14.96 11.46 3.50
1980 ..................... 39.95 28.25 11.70
1985 ..................... 162.26 105.78 56.48
1990 ..................... 703.42 519.26 184.16
--------------
Source: China Statistical Yearbook, 1991, State Statistical Balances of the
People's Republic of China.
The following table provides a breakdown of total fixed investment in China
for the years 1985 to 1990.
<TABLE>
TOTAL FIXED INVESTMENT
(RMB MILLION)
<CAPTION>
ITEM 1985 1986 1987 1988 1989<F1> 1990<F1>
---- ---- ---- ---- ---- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Total Investment .................... 254,319 301,962 364,086 449,654 413,773 444,929<F3>
Ownership
State-Owned Units ................. 168,051 197,850 229,799 276,276 253,548 291,864<F3>
Capital Construction ............ 107,437 117,611 134,310 157,431 155,174 170,381
Technical Updating and
Transformation ...................... 44,914 61,921 75,859 98,055 78,878 83,019
Other Investment in Fixed Assets<F2> 15,700 18,318 19,630 20,790 19,497 19,907
Collective -- Owned Units ......... 32,746 39,174 54,701 71,171 56,999 52,948
Urban ........................... 12,823 14,639 18,130 25,497 18,563 16,338
Rural ........................... 19,923 24,535 36,571 45,674 38,436 36,610
Individual Investment ............. 53,522 64,938 79,586 102,208 103,226 100,117
Urban ........................... 5,679 7,456 10,051 15,685 14,023 12,470
Rural ........................... 47,843 57,482 69,535 86,523 89,203 87,647
Source of Finance
State Appropriation ............... 40,780 44,063 47,554 41,001 34,162 38,765
Domestic Loans .................... 51,027 63,831 83,594 92,668 71,636 87,088
Foreign Investment ................ 9,148 13,216 17,537 25,899 27,415 27,826
Self-Raised Funds ................. 148,851 174,518 235,550 232,949
153,364 290,087
Others ............................ 32,000 40,883 45,009 58,301
<FN>
--------------
Notes: <F1> 1989 and 1990 figures exclude projects with value of RMB 20-50
thousand.
<F2> Includes investment in oilfield maintenance and development, mine
expansion projects, highway maintenance and bridge construction,
warehouse construction and projects valued RMB 20-50 thousand for
fixed asset construction or equipment purchase.
<F3> Includes RMB 18.557 billion investment to purchase buildings.
</TABLE>
Source: China Statistical Yearbook, 1991, State Statistical Bureau of the
People's Republic of China.
INFLATION AND MONETARY POLICY
Inflationary pressures are a major concern in the Chinese economy. While the
retail price index has been relatively stable in recent years, this figure
understates inflation, especially urban inflation. A more informative measure is
the cost of living index in 35 major cities, which has generally risen at a
higher rate. In light of the on-going reforms of price subsidies and continued
growth, relatively high inflation should be expected.
The following table provides information regarding wage and price inflation
in China during the years 1980 to 1991.
WAGE AND PRICE INFLATION (%)
GENERAL RETAIL COST OF NOMINAL
YEAR PRICES LIVING WAGES
---- -------------- ------- -------
1980 ........................... 6.0 7.5 4.1
1981 ........................... 2.4 2.5 1.3
1982 ........................... 1.9 2.0 3.4
1983 ........................... 1.5 2.0 3.5
1984 ........................... 2.8 2.7 17.9
1985 ........................... 8.8 11.9 17.9
1986 ........................... 6.0 7.0 15.8
1987 ........................... 7.3 8.8 9.8
1988 ........................... 18.5 20.7 19.7
1989 ........................... 17.8 16.3 10.8
1990 ........................... 2.1 1.3 10.6
--------------
Source: China Statistical Yearbook, 1991, State Statistical Bureau of the
People's Republic of China.
China's monetary policy has vacillated between expansionist and
contractionist. This varying monetary policy has contributed to a fundamental
cycle of the Chinese economy in recent years: reform and expansion leading to
overheating of the economy and tightening of control.
PUBLIC FINANCE
Persistent fiscal deficits have been a macroeconomic management problem in
China in recent years. Despite efforts by the government to increase revenues
and control spending, deficits continue to be a problem.
The following table illustrates the persistent budget deficits for the years
1980 to 1990.
GOVERNMENT BUDGET
TOTAL
TOTAL REVENUE EXPENDITURE BALANCE
YEAR (RMB BILLION) (RMB BILLION) (RMB BILLION)
---- ------------- ------------- -------------
1980 ..................... 108.52 121.27 (12.75)
1981 ..................... 108.95 111.50 (2.55)
1982 ..................... 112.40 115.33 (2.93)
1983 ..................... 124.90 129.25 (4.35)
1984 ..................... 150.19 154.64 (4.45)
1985 ..................... 186.64 184.48 2.16
1986 ..................... 226.03 233.08 (7.05)
1987 ..................... 236.89 244.85 (7.96)
1988 ..................... 262.80 270.66 (7.86)
1989 ..................... 294.79 304.02 (9.23)
1990 ..................... 331.26 345.22 (13.96)
--------------
Source: China Statistical Yearbook, 1991, State Statistical Bureau of the
People's Republic of China.
The following table provides information regarding how China finances its
deficit.
<TABLE>
GOVERNMENT DEBT
(RMB MILLION)
<CAPTION>
DEBT ISSUED DEBT RETIRED AND INTEREST PAID
-------------------------------------- ---------------------------------------------------
DOMESTIC
BONDS AND PEOPLE'S
TREASURY FOREIGN DOMESTIC FOREIGN BANK
YEAR TOTAL BILLS DEBT TOTAL BONDS DEBTS LOANS
---- ----- -------- ------- ----- -------- ------- -----
<C> <C> <C> <C> <C> <C> <C> <C>
1980 ........................... 4,301 -- 4,301 2,858 -- 2,440 418
1981 ........................... 7,308 -- 7,308 6,289 -- 5,780 500
1982 ........................... 8,386 4,383 4,003 5,552 -- 4,962 590
1983 ........................... 7,941 4,158 3,783 4,247 -- 3,656 591
1984 ........................... 7,734 4,253 3,481 2,891 -- 2,274 617
1985 ........................... 8,985 6,061 2,924 3,956 -- 3,259 697
1986 ........................... 13,825 6,251 7,574 5,016 798 3,449 769
1987 ........................... 16,955 6,307 10,648 7,983 2,318 5,196 469
1988 ........................... 27,078 13,217 13,861 7,675 2,844 4,258 573
1989 ........................... 28,297 13,891 14,406 7,236 1,930 4,583 723
1990 ........................... 37,545 19,724 17,821 19,040 11,375 6,821 844
</TABLE>
--------------
Source: China Statistical Yearbook, 1991, State Statistical Bureau of the
People's Republic of China.
FOREIGN TRADE
As a result of the economic reforms commenced in 1978, China's foreign trade
has grown considerably in value, range of products and number of trading
partners. A major goal of China's trade policy is to increase the percentage of
manufactured goods in the country's total exports. Gradual progress has been
made in recent years with the aid of the imported foreign technology. Textiles
and garments together form the single largest export category, representing 25%
of total export values.
China's trade balance has fluctuated over the last five years. In 1991
China's foreign trade yielded a foreign trade surplus of U.S. $8.1 billion.
Exports reached U.S. $71.9 billion, an increase of 15.8% over that of 1990, and
imports reached U.S. $63.8 billion, an increase of 19.5% over the 1990 figure.
Total trade for the year was approximately U.S. $135.7 billion, up 17.5% over
1990. In 1990, China experienced a trade surplus of $8.7 billion. In contrast,
the country experienced trade deficits of $7.8 billion and $6.6 billion,
respectively, in 1988 and 1989.
The following table provides information about China's total import and
export values for the years 1981 to 1991.
IMPORTS, EXPORTS AND TRADE BALANCE
(U.S. $ BILLION)
TRADE
YEAR TOTAL TRADE EXPORTS IMPORTS BALANCE
---- ----------- ------- ------- -------
1981 ................. 44.02 22.01 22.02 (0.01)
1982 ................. 41.61 22.32 19.26 3.04
1983 ................. 43.62 22.23 21.39 0.84
1984 ................. 53.55 26.14 27.41 (1.27)
1985 ................. 69.61 27.35 42.25 (14.90)
1986 ................. 73.85 30.94 42.90 (11.96)
1987 ................. 82.65 39.44 43.22 (3.78)
1988 ................. 102.78 47.52 55.27 (7.75)
1989 ................. 111.68 52.54 59.14 (6.60)
1990 ................. 115.41 62.06 53.35 8.71
1991 ................. 135.70 71.90 63.80 8.10
--------------
Sources: China's Customs Statistics, General Administration of Customs of the
People's Republic of China; China Statistical Yearbook, 1991, State
Statistical Bureau of the People's Republic of China.
Hong Kong is the leading destination for Chinese exports, accounting for
over 40% of total export volume. Hong Kong is also a major re-export center for
Chinese goods. Other large export markets for China include Japan, the United
States, and Germany. Over the past few years, China's imports have continued to
expand and diversify. Hong Kong, Japan and the United States are China's top
three suppliers. Other major suppliers include Germany and Italy.
The following table lists China's top-ten trading partners, along with the
U.S. dollar value of the trade between China and each country for the years
1989, 1990, and 1991.
<TABLE>
MAJOR TRADING PARTNERS
(U.S. $ MILLION)
<CAPTION>
TOTAL TRADE EXPORTS FROM CHINA IMPORTS TO CHINA
---------------------------------- ---------------------------------- ----------------------------------
1989 1990 1991 1989 1990 1991 1989 1990 1991
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Hong Kong ............. 34,456 40,907 49,600 21,915 26,650 32,137 12,540 14,257 17,146
Japan ................. 18,928 16,599 20,284 8,394 9,011 10,252 10,533 7,587 10,032
United States ......... 12,273 11,767 14,202 4,409 5,179 6,194 7,863 6,588 8,008
Germany ............... 4,987 4,971 5,405 1,608 2,034 2,356 3,379 2,936 3,049
U.S.S.R. .............. 3,995 4,379 3,904 1,849 2,239 1,823 2,146 2,139 2,081
Singapore ............. 3,190 2,882 3,077 1,692 1,974 2,014 1,498 857 1,063
Italy ................. 2,550 1,904 2,389 714 835 931 1,835 1,069 1,458
France ................ 1,948 2,308 2,306 528 645 734 1,420 1,663 1,572
Australia ............. 1,895 1,808 2,110 423 455 554 1,472 1,353 1,556
United Kingdom ........ 1,718 2,026 1,670 635 643 728 1,083 1,383 942
</TABLE>
--------------
Sources: China Statistical Yearbook, 1991, State Statistical Bureau of the
People's Republic of China; China's Customs Statistics, General
Administration of Customs of the People's Republic of China.
EXTERNAL DEBT AND FOREIGN CAPITAL UTILIZATION
China has traditionally adopted a policy of self-reliance when financing
development; overseas borrowings have been minimal. The country has remained a
conservative borrower but, since the early 1980s, has been making greater use of
foreign capital and financing, including government-assisted facilities and
project and trade financing.
The primary sources of foreign capital for China, in order of importance,
are as follows:
1) International Monetary Fund and World Bank loans and credits;
2) government low interest loans and credits; and
3) commercial loans and credits.
The following table shows the sources and types of foreign capital utilized
by China.
FOREIGN CAPITAL UTILIZATION
(U.S. $ MILLION)
ITEM 1985 1989 1990
---- ---- ---- ----
Total .................................... 9,867.42 11,478.78 12,085.69
Foreign Loans ............................ 3,534.21 5,184.69 5,099.37
Loans from International Monetary
Organizations ........................ 1,131.51 855.80 1,893.00
Governmental Loans ..................... 1,020.53 1,471.25 719.37
Other .................................. 1,382.17 2,857.64 2,487.00
Direct Investment by
Foreign Businesses ..................... 5,931.10 5,599.76 6,596.11
Joint Venture .......................... 2,029.70 2,659.02 2,703.95
Co-Operative Operation ................. 3,496.15 1,083.22 1,254.10
Co-Operative Development ............... 359.59 203.74 194.25
Foreign Enterprises(1) ................. 45.66 1,653.78 2,443.81
Other Foreign Investments ................ 402.11 694.33 390.21
Compensation Trade ..................... 260.34 474.75 202.65
Processing and Assembly ................ 141.77 147.60 136.48
International Rent ..................... -- 71.98 51.08
--------------
Note: (1) Includes equipment supplied by foreign businesses in transactions in
compensation trade, processing and assembly and value of equipment
supplied in financial leasing transactions.
Source: China Statistical Yearbook, 1991, State Statistical Bureau of the
People's Republic of China.
EXCHANGE RATE AND FOREIGN EXCHANGE CONTROL
There is centralized control and unified management of foreign exchange in
China. The State Administration of Exchange Control (the "SAEC") is responsible
for matters relating to foreign exchange administration, while the Bank of China
(the "BOC") is in charge of foreign exchange operations. Cooperating closely
with the BOC, the SAEC fixes the official daily exchange rate of RMB against
major foreign currencies.
There are two types of monetary instruments in China today, the RMB and
Foreign Exchange Certificates ("FEC"). The RMB is the official currency in China
and is currently not convertible into foreign exchange unless converted with
express written authorization from the SAEC. The FEC is a Chinese currency
established for use by foreigners in lieu of RMB and is convertible into hard
currency. Both RMB and FEC are denominated in the monetary unit of "yuan" and
are officially at par with each other. It is expected that FECs will be
withdrawn from circulation in the near future.
While foreign investment enterprises are able to remit from China any
profits earned in foreign exchange, RMB earnings within China cannot be freely
converted into foreign exchange except at the foreign exchange adjustment
("swap") centers established by the SAEC. In order to provide some relief from
the controls imposed by the earlier foreign exchange legislation, the State
Council promulgated on January 15, 1986 the "Regulations Concerning the Balance
of Foreign Exchange Income and Expenditure of Chinese-Foreign Equity Joint
Ventures," which provide for a number of mechanisms to allow foreign investment
enterprises to "balance" their foreign exchange income and expenditure. These
mechanisms include the sale of joint venture products within China for foreign
exchange, the export of products purchased with RMB from Chinese enterprises to
generate foreign exchange, short-term loans and the "swapping" of RMB for
foreign exchange with other foreign investment enterprises and Chinese
enterprises, among others.
The exchange rate fluctuates from time to time and from swap center to swap
center depending on supply and demand. The renminbi has been devalued
progressively in recent years, depreciating by almost 70% against the U.S.
dollar between 1981 and 1990.
The following chart lists comparative average exchange rates for the
renminbi and other selected currencies since 1986.
<TABLE>
EXCHANGE RATES
(CURRENCY UNITS PER U.S. $)
<CAPTION>
1986 1987 1988 1989 1990 1991 1992 1993
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Australia ....................... 1.491 1.472 1.275 1.262 1.280 1.284 1.363 1.974
New Zealand ..................... 1.872 1.613 1.563 1.693 1.675 1.774 1.881 1.806
China ........................... 3.7221 3.7222 3.7221 4.7221 5.2221 5.4000 5.8400 5.800
Hong Kong ....................... 7.8030 7.7980 7.8060 7.8000 7.7950 7.7780 7.7400 7.730
Singapore ....................... 2.1750 1.9985 1.9462 1.8944 1.7445 1.6190 1.6400 1.610
Korea ........................... 861.4000 792.3000 684.1000 679.6000 716.4000 756.3000 781.0800 808.100
Taiwan .......................... 35.5000 28.5500 28.1700 26.1600 27.1100 25.7475 25.2000 26.700
Malaysia ........................ 2.6030 2.4928 2.7153 2.7033 2.6980 2.7410 2.6700 2.700
Philippines ..................... 20.5300 20.8000 21.3350 22.4400 28.0000 26.0500 23.6000 27.100
Thailand ........................ 26.1300 25.0700 25.2400 25.6900 25.2900 25.2600 25.9900 25.300
Indonesia ....................... 1641.0000 1650.0000 1731.0000 1793.0000 1901.0000 1994.5000 2064.0000 2111.250
</TABLE>
--------------
Source: Wardley Investment Services, Baring Securities.
TAIWAN
Taiwan is the most invisible country on the planet, and Taiwan is recognized
by very few countries, mostly small island states like itself in the South
Pacific and the Caribbean. And yet it is an oriental paradox -- it has a
financial and diplomatic influence which is out of all proportion to its small
size. For historical and cultural reasons Taiwan stands between China and Japan.
(The slow pace of the Sino-Japanese relationship since 1972 may be partly caused
by this conundrum.)
Indeed, if Taiwan is now going to be brought back into the fold it is also
reasonable to expect the level of Japanese investment and trade in China to
accelerate. It is very probable that Japan will use Taiwan as a "middle-man" for
trade and investment in China.
Taiwan is dependent on its close relationship with the United States and its
very successful diplomacy and public relations campaign which, ever since Madame
Chiang Kai-Shek's days in the 1940s has sustained a high level of sympathy in
Washington for the Nationalist regime. Taiwan also has close relations with
South Africa, from which it buys essential raw materials such as coal, and also
with Israel, with whom it has had military as well as trade links.
For all these reasons, much of the real Taiwan has been hidden for many
years. It is misunderstood by Westerners -- the country has been the most
difficult of all Asian countries to follow and understand. However, since the
lifting of martial law in 1987 much of this has changed. People in Taipei are
again willing to talk openly and it is possible to begin to understand the sense
in which Taiwan has become a repository of much of the best of the old Chinese
traditions. In Taiwan can be found many of the old Chinese arts -- a strong
family life, Confucianism, a flourishing trade in traditional Chinese medicines,
the martial arts, an excellent standard of Chinese movies and television, and
the tradition of Chinese law.
Nevertheless, the basic geopolitical fact about Taiwan is that it sits under
the shadow of mainland China and under the threat of reunification, whether
peaceful or by military means. However in the last few years and especially
since June 1989, the leadership of the Communist Party in Peking and in Taipei
have begun, for the first time since 1949, to have serious talks and regular
communication. At the same time the flow of investment from Taiwan into mainland
China, especially into the neighbouring province of Fujian, has grown
dramatically and the two-way trade is now approaching US $4 billion annually. In
the early days of this two-way business, the authorities in Taipei turned a
blind eye to the many small projects that Taiwanese businesspeople were
embarking upon with PRC partners. Also, there was an enormous increase in the
number of annual visitors from Taiwan into China. Along with the travel and
tourism came the investment and it is now estimated that there is over US $500
million of direct Taiwanese capital in plants and small businesses in China.
Many of the most successful toy and electronics factories in Shenznen, across
the border from Hong Kong, are owned and managed by Taiwanese. Speaking Mandarin
or the Fujianese dialect, they have the same natural advantage in dealing with
mainland officials and businesspeople that the Hong Kong Cantonese have with the
inhabitants of Guangdong Province.
So the analysis of risk and reward in Taiwan must already take account of
this rapidly growing economic integration between Taiwan and China which, has
led to over 30 percent of Taiwan's trade being with the mainland and that the
total investment from Taiwan to China may approach US $5 billion or even US $10
billion. As with Hong Kong, increasingly an investment in Taiwan will be seen
indirectly as a "play" or an investment in China itself. Nevertheless, Taiwan
remains a free capitalist enclave with some very successful entrepreneurial and
export-oriented companies. The government's role in the economy is relatively
small. It has pursued consistently, since 1950, a laissez-faire policy which
allows small family run companies typically to change their product line every
two or three years to meet the demands of American or other international
clients. Statistics clearly indicate that the exports strengths, which have
powered the Taiwanese economic boom for thirty or forty years, remain intact
despite the shortage of skilled labour, the high cost of labour and the strong
New Taiwan dollar, which has impelled many Taiwanese businesspeople to shift
their production to Thailand, the Philippines, and Malaysia as well as China.
The best measure of Taiwan's economic success is in its US $80 billion of
foreign exchange reserves.
What then is the real risk to Taiwan? After Hong Kong is taken over in 1997
Taiwan will appear more isolated and it will have lost its neutral meeting point
with China which the British colony has represented. On the other hand, by that
time Taiwan and China may have grown sufficiently close in economic, if not in
political, terms that Hong Kong will have become unnecessary. Direct trade and
investment are already commencing. Some form of political agreement allowing for
Taiwan's autonomy, if not independence, may be worked out. The one country two
systems formula applied to Hong Kong and Macau was always designed by Peking
with the objective of regaining Taiwan in the long term. That long term may not
be as long as some observers have predicted. The passing away of the older
generation who fought in the bitter civil wars between the communists and the
KMT from 1927 to 1949 will remove much of the bitterness and open up the way for
a new dialogue between the younger leaders in the two Chinas.
The strongest argument for a political compromise and a formula for
coexistence is the natural complementarity of the two Chinese communities on an
economic basis. China has the labour, the land and the resources. Taiwan has the
capital, the technology and the trained entrepreneurs. A formidable Chinese
Economic Community could be a reality before the end of the century. However, a
more pessimistic view would be to see a return to ideological extremism in
Peking resulting in a renewed cold war across the Taiwan Straits, a cut off of
business and cultural links, and a potential military conflict. Even in this
very gloomy scenario Taiwan may be able to defend itself and maintain its
economic prosperity because it will still have the economic support of both
Japan and the United States.
The following table gives details of the overall economic performance of
Taiwan from 1987 to 1993.
--------------------------------------------------------------------------
EXCHANGE GDP TRADE MARKET MARKET
RATE GROWTH SURPLUS YEAR-END CAPITAL
AV. US $ (%) CPI (US $BN) P/E CLOSING (US $BN)
-------- ------ ----- ---------- ---- -------- --------
1987 31.85 12.3 0.5 18.7 28.7 2,339.26 48.45
1988 28.57 7.3 1.3 10.9 68.9 5,119.11 120.1
1989 26.41 7.6 4.4 14.0 92.0 9,624.18 240.0
1990 26.39 6.9 4.1 14.9 33.0 4,530.16 112.4
1991 25.50 7.3 3.6 15.7 28.0 4,600.67 123.7
1992 25.20 6.1 4.5 12.5 30.1 3,377.06 100.1
1993 27.00 6.2 2.9 7.8 30.3 6,071.00 191.0
1994* 26.30 6.2 4.0 -- 33.1 -- 242.1
*Estimate
The risks for an investor in The Taiwan Stock Exchange Corp. are
specifically those of a highly priced and highly volatile securities market with
very weak regulations and poor accounting standards. It was once estimated that,
out of 140 listed companies in Taiwan, perhaps twenty or thirty counters were
those of companies which were technically bankrupt. Investors take little
account of security analysis or of the investment fundamentals which might count
more for long-term Western investors. The speculative atmosphere of The Taiwan
Stock Exchange Corp. does, therefore, portray a high degree of risk. However,
the New Taiwan (NT) dollar is a very steady currency in relation to the U.S.
dollar. The economy of the island has shown a steady and non-inflationary growth
rate and savings are very high in relation to disposable income.
The most important risk to consider for a Western investor trying to get
into the Taiwanese market is the choice of a trustworthy and reliable local
partner. This is much more difficult to achieve in Taiwan than in, say Hong
Kong, where the British legal and commercial system and the educational system
are more familiar. Taiwan has a purely Chinese culture and way of life even
though most of the younger business people are educated in the universities of
the United States and many have PhDs. Nevertheless, the way of doing business
remains a traditional Chinese way. Therefore, nothing can be achieved by means
of legal contracts or agreements in the accepted Western sense. Even more than
in China, Taiwan depends on the personal contact and trust between the two
individuals involved. Many Western banks have come to grief in their pursuit of
the elusive Taiwan millionaires in the private banking sector and in their
corporate loans to apparently sound Taiwanese companies, which either cannot or
will not repay. Recourse is very hard to enforce and the legal system is
undeveloped. These are the major risks in doing business in Taiwan but the
potential rewards should not be underestimated. Those who have had a long-term
commitment to the island republic, have had good contacts with the government
and have done business in the Chinese way with a good local Chinese partner have
been able to demonstrate very good long-term returns on their investments. In
addition, the links that Taiwan business people have built around the globe, in
the United States in particular but also increasingly in Canada, where they have
followed Hong Kong investors into Bristish Columbia, in Australia, in the
Philippines and in Bangkok, are impressive.
KOREA
Political volatility has characterized the history of South Korea (referred
to as Korea throughout this section) during the past forty years, while at the
same time an extraordinary economic boom has occurred. Rigid discipline has been
characteristic of the military government under President Park during the 1960s
and 1970s, which were the most successful decades in economic terms particularly
in the growth of Korea's exports and in the per capita income. It is important
to remember how completely the cities and transport system of the southern part
of the Korean peninsula had been destroyed in the civil war of the 1950s. The
effort of reconstruction was, therefore, enormous. Living standards in the 1960s
were extremely low. The threat from North Korea has exerted a continuous
military pressure on the South in the past forty years which is probably unique
to any country in the world, even including West Germany or Taiwan. Seoul is
only 30 kilometers from the demilitarized zone and, therefore, lives in a
continuous state of tension and fear of an imminent invasion. This very real
threat is also translated into a very high percentage of military spending in
the national budget. If Korea is compared with Japan, the Koreans have had to
spend ten times more of their national income on defense than the Japanese and
yet have succeeded in recording higher rates of economic growth.
The fierce political in-fighting, which has been a constant characteristic
of Korean history, was suppressed for a period in the 1970s and 1980s, both
before and after the assassination of President Park. Since 1987 the opening up
of the democratic process has been smoothly handled despite the continuing
student riots and disturbances. In fact, stock market investors have generally
ignored the television images of riot police, tanks firing tear gas and students
throwing petrol bombs, to concentrate more on the continuous success of Korean
companies in their conquest of overseas export markets and their impressive
earnings growth. Nevertheless, the threat from the North and the fierceness of
the Korean political opposition do combine to give Korea a lower score for
political stability than its neighbours. We have the sense in Korea of a higher
risk but also a much greater potential should the rapprochement with the North
lead to a peaceful reunification.
The following table gives details of the overall economic performance of
South Korea from 1987 to 1993.
--------------------------------------------------------------------------
TRADE
EXCHANGE GDP SURPLUS/ MARKET MARKET
RATE GROWTH (DEFICIT) YEAR-END CAPITAL
AV. US $ % CPI (US $BN) P/E CLOSING (US $BN)
-------- ------ ----- ---------- ---- -------- --------
1987 822.57 13.0 3.0 7.7 10.6 525.1 33.0
1988 731.47 12.4 7.1 11.4 13.6 907.2 94.3
1989 671.46 6.7 5.7 4.6 22.9 909.7 140.9
1990 707.76 9.3 8.6 (2.0) 18.5 696.1 110.2
1991 731.60 8.3 9.7 (7.0) 15.0 610.9 96.4
1992 781.08 4.7 6.2 (2.1) 15.0 678.4 107.4
1993 808.10 5.5 6.5 (1.6) 17.5 866.0 139.0
1994* 775.00 7.9 6.2 -- 21.1 -- 190.0
*Estimate
South Korea has the highest overall score for economic growth in the world
over the past twenty years even when compared with the other Asian tigers. The
average growth over a twenty-year period has been close to 9 percent in real
terms, at certain times reaching even 13-14 percent. This means that the average
Korean today has a per capita income of nearly U.S. $6,000 per annum, an income
which has grown nearly thirty times in thirty years. There have been tremendous
social changes resulting from this economic boom, notably the shift of
population from the countryside into the cities and the shift in the economic
structure from agriculture to industry and, more recently, to the service
sector. This has all occurred in a shorter period of time than in almost any
other advanced economy. What took England one hundred years and Japan thirty
years, has taken Korea typically less than ten years. There has been some
slowing during the 1980s compared to the 1970s, but Korea still has among the
highest overall ratings for GNP growth. Its industrial workforce has not lost
its competitive edge and the average working week in Korea is still in excess of
fifty hours, the longest working week in the world. These are the foundations of
Korea's continued economic success. It is unlikely that such characteristics,
being social in origin, will disappoint us in the next decade. Therefore it is
reasonable to expect Korea's economy to continue to be one of Asia's most
succesful.
The flexibility of its large trading companies, the chaebol, has been
recently underlined again as they have shifted their emphasis from the United
States, Canada and Europe towards the new markets of China and the Soviet Union.
There is little doubt that Korean exporters will be leading the Japanese in
providing Russian consumers with basic consumer goods. The readiness to take
risks in new areas has continuously paid off for Korean companies just as it did
when they were able to grab the major construction contracts in the Middle East
during the oil boom of the 1970s. (These new trade links have also translated
into new diplomatic links with China, Hungary, Poland and the Soviet Union, thus
further isolating North Korea from its communist neighbours.)
Inflation in Korea has been higher than in Japan or Taiwan. In the 1970s,
Korea experienced an annual average inflation rate of nearly 15 percent.
Beginning in 1982, however, the tight monetary policy succeeded in bringing this
annual consumer price index down to single digits until 1990 when the rate
jumped again to 8.6 percent. The Korean export boom has led to a big inflow of
foreign exchange accompanying Korea's trade surpluses of the past five years.
This, in turn, has led to a sharp increase in money supply and a boom in real
estate prices in Seoul. Thus the rise of both the Korean share market and
property market since 1985 has in a sense been a lagging indicator of the
economic boom of earlier years with its inevitable build up of national and
personal wealth among the Korean population. Nowhere has the number of investors
grown faster than in The Korea Stock Exchange during the 1980s. Thus rising
prices have reflected rising national wealth. This inflation problem has been,
and can again be, tamed by a strong central bank response and this is what would
be expected in the 1990s.
The exchange rate of the Korean won against the U.S. dollar has reflected
both the relative inflation rates of Korea and its international trading
partners and also the more recent success of Korea in repaying much of its
foreign debt and building up its reserves. The won was held very steady during
the 1970s and then allowed to devalue between 1980 and 1985 from 484 won to the
dollar to its lowest level of 890 won to the dollar. With the sharp improvement
in Korea's overseas trade position the won started to appreciate from 1986
onwards. With the subsequent relapse of Korea into a new trade deficit in 1990
and the recovery of the dollar in world exchange markets, the Korean won has
again depreciated slightly. However, there is a high degree of stability and the
currency is managed by the central bank. A devaluation of more than 5 percent
per annum should not be expected unless Korea's trade or inflation problems
worsen significantly.
It is likely that Korea's foreign trade position will improve again thanks
to the country's competitive position in export markets. In a more liberated
domestic economy with lower tariffs on foreign goods, however, it will be more
difficult to restrain the growth of imports as Korean consumers demand a greater
choice. Korea's main deficit is with Japan and consists largely of capital
goods. This is likely to continue as long as Korean manufacturers wish to
maintain their competitive edge in the most modern plant and equipment.
THAILAND
Thailand is unique in South East Asia in that it has escaped the colonial
experience and maintained its freedom and independence. In addition, the
monarchy plays a key role in maintaining the country's political stability and
independence. It is, nevertheless, sobering to realize that since the absolute
monarchy was ended in 1932 there have been no less than twenty-one coup d'etats,
of which twelve have been successful. The recent international perception of
Thailand was very much coloured by the experience of the past fifteen years as
there had been no successful coup d'etat since 1977. Thus the one that took
place in February 1991 was a surprise to many foreign observers and investors,
although it had broad popular support and the tacit blessing of King Bhumibol
himself. The army was felt to be acting not only to further its own cause but to
stamp out political corruption and restore, within a period of six months, a
democratically elected government. The Cabinet, which was put in place
immediately after this coup, contained fifteen PhDs out of a total of
twenty-three ministers, and the generals were in a small minority compared to
the businesspeople, diplomats and civil servants with a record of disinterested
public service. Thus it seems that Thailand in the 1990s will remain democratic
but that the King and the army will continue to play a role which would be
described in a Western democracy as that of "checks and balances" on the
excesses of elected politicians.
Political risk in Thailand needs to be seen in this cultural context.
Thailand has been given a higher rating for political stability because of the
existence of the monarchy first of all. King Bhumibol, who has been on the
throne since 1946, commands enormous personal respect and popular reverence. It
is impossible, therefore, for any government or military group to gain power
without his tacit approval. This factor mitigates much of the instability which
may be suggested by the record for the past sixty years of attempted military
coups. At the same time Thailand has differed from its neighbours Burma and
Vietnam in possessing a free and independent peasant population which has, on
the whole, enjoyed a higher standard of living than their neighbours and,
therefore, the communist movement has never made much headway among the rural
people. On the other hand again, Thailand's extraordinary economic growth in the
1980s (averaging 10 percent per annum) has put great strains not only on the
urban environment because of traffic jams and pollution, but also on the social
and family system. Many rural families have been forced to send their teenage
children to the cities to find employment. The contrast of living standards
between Bangkok and the north east provinces (an estimated per capital income
would be perhaps US $2,500 per annum for the former and less than US $500 per
annum for the latter) must eventually create social tensions and potential
unrest. The laissez-faire policy of the Bangkok government has thus far worked
extremely well although the lack of planning, in terms of the proliferation of
factories around the capital, leaves something to be desired.
The fact that Thailand is a majority Buddhist country may do much to explain
the non-violent changes of power and exchanges of politically different views
which characterizes its public life. So, along with the monarchy, Buddhism must
be counted as a major factor of political stability. The army is the third
element which can be considered, on balance, to be a positive factor. During the
1970s when it seemed more than probable that Thailand would bear out the
Pentagon "domino theory" by which each country in succession -- China in 1949,
North Vietnam in 1954, South Vietnam in 1975, Laos, Cambodia in
1975-7...Thailand, Malaysia, Singapore -- would fall to the irresistible
southward movement of the communist militias. But Thailand was the point at
which communism stumbled and fell back. Much of this has to do with the
professionalism of the army and the basic resistance of the people to a foreign
ideology. As Siam had resisted British and French colonial pressure in the
nineteenth century, so Thailand in the twentieth century resisted the Marxist
Leninist dictatorship which engulfed its once prosperous neighbour, Vietnam.
Thailand is, finally, the most open country to foreigners and receives
almost 5 million tourists a year. The self-confidence and strong sense of
cultural identity of the Thai people is in no way diminished by the superlative
standards of service which characterize their hotels, tourist resorts and
airlines. Any independent observer or visitor to Thailand can, therefore, assess
the real nature of the underlying social stability of the country which supports
the high degree of political stability predicted for the country.
The following table gives details of the overall economic performance of
Thailand from 1987 to 1993.
--------------------------------------------------------------------------
TRADE
EXCHANGE GDP SURPLUS/ MARKET MARKET
RATE GROWTH (DEFICIT) YEAR-END CAPITAL
AV. US $ % CPI (US $BN) P/E CLOSING (US $BN)
--------- ------ ----- ---------- ---- -------- ----------
1987 25.72 9.5 2.5 (1.6) 9.3 284.99 5.4
1988 25.29 13.2 3.9 (3.9) 16.3 386.73 8.86
1989 25.70 12.2 5.4 (5.4) 26.4 879.19 25.67
1990 25.56 10.0 6.0 (9.9) 13.8 612.86 23.86
1991 25.05 8.2 5.7 (9.6) 15.6 711.40 35.7
1992 25.49 7.5 4.1 (8.5) 15.2 893.40 58.20
1993 25.50 7.8 4.8 (9.2) 27.6 1,183.00 130.0
1994* 25.30 8.2 5.1 -- 20.7 -- 150.0
*Estimate
Thailand's economy has been the fastest growing in the world for the past
three years. The take-off really began in 1986-7 with the flood of new foreign
investment into the country, largely from Japan and Taiwan. The rapid
appreciation of the Japanese yen against the dollar in 1985-6 forced many
Japanese manufacturers to consider moving some of the low technology, low labour
cost activities, such as textiles, consumer electronics and footwear, offshore.
Thailand was a natural destination for Japan's industrialists, made easier by
the low degree of red tape and bureaucratic delays. Hence as the figures
published by the Board of Investment between 1985 and 1992 show the rising tide
of foreign capital was a major cause of Thailand's economic boom. GDP growth
reached over 12 percent in 1988 and 1989 and it seems likely that in the 1990s
Thailand can sustain a medium-term growth of nearly 7 percent annually in real
terms.
There has been a large shift away from agriculture towards manufacturing. As
recently as 1980, 50 percent of Thailand's exports consisted of rice and tapioca
and other agricultural products. By 1990, 75 percent of the total volume of
exports were manufactured goods, mainly from the newly established assembly
plants in Bangkok and the south. This has resulted in large changes in
employment and moves of populations. Nevertheless, the profound change in the
structure of Thailand's economy has been well absorbed and sets the stage for a
move into higher value added products in the years up to 2000.
It is surprising, considering the very high rate of economic growth that the
economy has experienced, that prices, as measured by the consumer price index,
have been kept under control. The last serious bout of inflation in Thailand
occurred during the two oil crises, first in 1973-4 when the CPI touched 24
percent and then again in 1980-1 when there was a resurgence of inflation to
nearly 20 percent. In the later 1980s, and thanks largely to a more stable oil
price, inflation has been held in single digits and has not exceeded 6 percent.
Nevertheless, the boom of the past three years, particularly in Bangkok, has led
to a rapid escalation of real estate values and rents. It is likely that the
slowdown in the economy in 1991 will result in a lower inflation rate and,
therefore, it is expected that Thailand's inflation will be held at 5 percent or
below in the next few years.
Once again the record is one of extraordinary stability. The Thai baht has
been carefully managed by the Bank of Thailand against a basket of currencies
which is thought to be around 80 percent dollars and 20 percent yen. When
measured against the U.S. dollar it has resulted in a very small annual
variation of less than 3 or 4 percent. In fact, during the last six years there
has been virtually no change in the value of the baht compared with the dollar.
Clearly, the weaker dollar of the 1985-90 period has favoured Thailand's
exports. (The same effect is observable with the Hong Kong dollar which is also
pegged to the American unit.) Therefore, it is expected that Thailand's currency
will remain extremely stable in dollar terms in the future.
MALAYSIA
The central dilemma in assessing Malaysia's political risk is the perennial
question of relations between the Malay and Chinese communities representing as
they do about 60 percent and 30 percent of the population respectively. Since
the 1969 anti-Chinese riots in Kuala Lumpur the country has been unruffled by
any serious inter-racial violence and during this period a great deal has been
accomplished in transforming the economy and in transferring the wealth of the
country from foreign and Chinese hands into the hands of the bumiputra (or the
sons of the soil), which is the dominant Malay majority. The success of this New
Economic Policy is unquestioned and has given a great deal of legitimacy to the
continued run of the United Malay National Organisation (UMNO) under its
successive prime ministers and most recently under Dr. Mahathir Mohammed who has
now held power for a decade. This economic success has also done much to defuse
the threat from the Islamic fundamentalists who have tended to get co-opted into
the ruling party. The Chinese community has also done well in economic terms
although the political disunity in the Malay Chinese Association (MCA) has left
them somewhat leaderless in the political sphere.
Politics in Malaysia continues to be a question to revolve around its
leading personalities. It should also be noted, however, that Malaysia shares
one characteristic with Thailand, which is a strong monarchical system. In
Malaysia's case it is less visible because the kingship is shared on a five-year
revolving basis among the sultans of the various states of the federation. This
clear distinction of the British model between the head of state, or monarch,
and the prime minister, or political leader, is important to Malaysia's overall
stability.
The geographical divide between peninsular Malaysia and East Malaysia,
consisting of the states of Sabah and Sarawak, also underlines the need for a
great deal of political decentralization. Sabah and Sarawak have very different
histories from the other Malaysian states and can be examined for their
political make-up on a separate basis including the question of the Christian
minority in Sabah. Overall, however, it must be judged that Malaysia's economic
success has led to a far greater degree of political stability than was expected
following independence in 1963.
Malaysia's relations with its neighbours on the whole are excellent and, in
particular, the relationship with Singapore, which remains the largest investor
in the country, is a key one. The Singapore government is obviously enthusiastic
to diversify its industrial base across the causeway into Johore and further
north into peninsular Malaysia. This is good news for Malaysia's economic and
political stability.
The following table gives details of the overall economic performance of
Malaysia from 1987 to 1993.
--------------------------------------------------------------------------
TRADE
EXCHANGE GDP SURPLUS/ MARKET MARKET
RATE GROWTH (DEFICIT) YEAR-END CAPITAL
AV. US $ % CPI (US $BN) P/E CLOSING (US $BN)
-------- ------ ----- ---------- ---- -------- --------
1987 2.520 5.4 0.8 5.9 78.0 261.19 18.49
1988 2.619 8.9 2.5 5.6 36.0 357.38 29.05
1989 2.709 9.2 2.8 3.9 28.7 562.28 39.73
1990 2.705 9.8 3.1 1.9 39.8 505.9 48.81
1991 2.752 8.8 4.3 (6.4) 29.3 556.2 57.49
1992 2.620 8.0 4.7 2.8 21.0 644.0 92.20
1993 2.700 8.5 3.6 3.8 34.3 1,275.0 241.00
1994* 2.570 8.5 4.0 -- 26.5 -- 275.00
*Estimate
Malaysia, along with Singapore, experienced a sharp recession in 1985-6
owing to an excessive tight monetary policy in both countries. Since 1987
Malaysia has, however, returned to the path of high growth and low inflation.
Nevertheless, over a twenty year period Malaysia ranks behind Singapore,
Thailand and Hong Kong, although ahead of Indonesia in past overall economic
growth. The change in the past five years has also been accompanied by an
accelerated shift into manufacturing and away from the old dependence on the
plantation sector. This manufacturing growth has been led by investment from
Japan and Taiwan and notable national projects such as the Proton car. Malaysia
is attempting to move up market into the new product areas such as electronics,
car assembly and consumer goods. It is likely to be successful in doing so owing
to its literate and trainable workforce. Therefore, one can be fairly confident
that Malaysia's economic record will continue to be bright.
The exchange rate of the Malaysian ringgit has been closely tied to that of
the Singapore dollar which itself has been very stable if not strong against
other world currencies, expecially the US dollar. Therefore, the ringgit has had
a very stable record against the dollar and is likely to maintain this
stability. Malaysia's foreign trade has generally been in surplus, although
between 1990 and 1991 this figure fell sharply partly owing to fall-off in
Malaysia's energy exports. As manufactured goods assume a larger importance in
the composition of exports compared with crude oil, rubber and palm oil,
Malaysia's trade position should gradually become steadier. For an investor
Malaysia remains attractive although vulnerable to external shocks either in
terms of commodity prices or in a fall in export demand in its principal
markets. The infrastructure, high literacy rate and relative political stability
in recent years are all bonus points for the country's overall image.
SINGAPORE
"The silent success", in the words of a Singapore government minister, of
this region is based on a high literacy rate and a well-educated and trainable
workforce. The investment in human capital has proven to be more important to a
lasting economic growth success story than the availability of finance or
technology. The demise of communism is also promoting greater confidence and
political stability in the Association of South East Asian Nations (ASEAN)
region, of which Singapore is the de facto financial centre.
Essentially Singapore's aim in the 1990s will be to emulate what Hong Kong
has done in Guangdong Province and the hinterland of southern China. But in
Singapore's case its export of jobs and lower value added industries will be
mainly to neighbouring Malaysia and, to a lesser extent, to Indonesia. The
plantations in the southern part of the Malaysian peninsula depend almost
entirely on the large annual in-take of illegal workers from Indonesia. With 100
million people in Java alone, Indonesia needs to provide employment for 2-3
million a year. Thus mobility of labour within ASEAN is as important, if not
more so, than mobility of capital.
Singapore is aiming its investment at Johore in Malaysia and Batam Island in
Indonesia. This is the so-called growth triangle. There is a political aspect to
this. Singapore is a small Chinese island surrounded by a sea of Muslims. It
needs to ensure political stability among its neighbours. One of the best ways
of doing this (as Hong Kong has found in southern China) is to invest and create
jobs and raise per capita incomes from their present low level.
The other aspect of political risk when considering Singapore is, of course,
the handover of political power from one generation to another. Although Lee
Kwan Yew stepped down as Prime Minister in 1990, he continues to wield a large
influence and power behind the scenes. Nowhere in the world could it be truer to
say that the state is the creation of one man, thus his succession poses a very
real problem. His son, Lee Hsien Loong may not take up the post of Prime
Minister for three to five years. In any case, the question of dynastic
succession in a parliamentary democracy, even within a limited Confucian Chinese
democracy, is, to say the least, a questionable one. Many of the elder Lee's
policies, such as imposing the Mandarin Chinese language on the Singapore
educational system, have aroused fierce opposition among the older,
anti-communist generation of Singapore Chinese. The tight control of the media
and the suppression of all political opposition or criticism of the government,
the People's Action Party or the Prime Minister himself, has also aroused
criticism both at home and internationally.
But, on balance the enormous success of Lee Kwan Yew's achievement in
creating modern Singapore cannot be doubted. It is clean, efficient and notably
lacking in corruption compared to other Asian cities. The Central Provident
Fund, which takes 35 percent of every person's income as a compulsory savings
scheme, has built up an enormous reservoir of capital for future use in
Singapore. Notable public works such as Changi Airport or the transport system
have been the result. Long-term planning has not been as successful anywhere
else, with the possible exception of Japan. The paternalistic attitude of the
Singapore government towards its citizens is unlikely to change in the immediate
future especially since the younger generation of Singaporeans have been
thoroughly versed in the disciplined Confucian thinking and authoritarianism
which characterizes the school system as well as government. Singapore also has
a well run and modern citizens' army based, like the Swiss model, on an annual
call-up of every able-bodied man aged between 18 and 50. The city state is thus
well equipped to defend itself against any aggressor. Singapore will also
benefit from the inflow of human and financial capital from Hong Kong as 1997
approaches. In this sense it does not need to change but merely to retain its
present stability and attractive lifestyle in order to continue to prosper.
Thus, the conclusion to be drawn is that Singapore scores an equally high rating
in terms of very low political risk and a high degree of stability as Japan.
The following table gives details of the overall economic performance of
Singapore from 1987 to 1993.
--------------------------------------------------------------------------
TRADE
EXCHANGE GDP SURPLUS/ MARKET MARKET
RATE GROWTH (DEFICIT) YEAR-END CAPITAL
AV. US $ (%) CPI US $BN) P/E CLOSING (US $BN)
-------- ------ ----- ---------- ---- -------- --------
1987 2.106 9.4 0.5 (5.2) 17.8 270.34 17.86
1988 2.012 11.1 1.5 (4.7) 18.5 1,038.6 24.00
1989 1.950 9.2 2.4 (4.8) 18.3 1,481.3 35.95
1990 1.740 8.3 3.4 (5.3) 13.1 1,159.5 34.26
1991 1.620 6.7 3.4 (4.6) 18.5 1,490.7 51.20
1992 1.640 5.8 2.3 (4.9) 19.6 1,524.4 52.20
1993 1.616 9.9 2.4 (0.8) 36.0 2,426.0 132.05
1994* 1.490 9.2 4.0 -- 26.8 -- 170.00
*Estimate
Note: Market capital figures for Singapore for incorporated companies only.
The Singapore economy has been characterized by the highest degree of
government involvement and intervention outside of the socialist world.
Nevertheless, the growth rate has been quite impressive, averaging around 7-8
percent, except during the 1985-6 recession, and even more impressive has been
the tight control of inflation which, along with that of Japan, has remained
extremely low at below 3 percent for the past decade. The economic stability of
Singapore, therefore, scores high on a comparative basis although being a small
island state it is very sensitive to developments in its two main neighbours,
Indonesia and Malaysia, with their large commodity-based economies. Thus,
Singapore runs a regular trade deficit of around US $5 billion per annum which
is easily covered by its current account surplus on invisibles. Singapore's
foreign reserves held by the Monetary Authority of Singapore (MAS) and the
Government Investment Corporation of Singapore (GICS) are estimated to be in
excess of US $50 billion which would give this tiny Asian city state the third
highest foreign exchange reserves after Japan and Taiwan.
Thus, the overall management of "Singapore Inc." is extremely conservative,
with a very high degree of self-reliance, a high savings rate and an ample
cushion for unexpected global events. This financial conservatism has been
reflected in the strong performance of the Singapore dollar which has advanced
steadily against the US dollar during the past five years with an average
appreciation of 5 percent per annum. It is reasonable to expect these trends --
high economic growth, high savings rate, low inflation and steady currency
appreciation -- to continue during the 1990s.
INDONESIA
It can at least be argued that Indonesia has had fewer changes in its
political system than its Asian neighbours. In fact, there have been only two
rulers of Indonesia since independence was gained from the Dutch in 1948 --
Sukarno and Suharto. But equally it should not be forgotten that the two major
turning points in the country's modern history -- independence and the 1965
revolution -- were unusually violent episodes in the life of any country. The
stability which Indonesia has enjoyed during the past twenty-five years under
Suharto should, therefore, be placed against this background.
In many ways the same three pillars of stability which are found in Thailand
-- the army, the king and the national religion -- are present in Indonesia
except that the President, Suharto, stands in the place of the monarchy and the
national religion is Islam rather than Buddhism. The question of monarchical or
presidential succession remains perhaps the major political risk confronted by
the foreign investor as so many aspects of the business life of the country
relate directly to Suharto or his immediate family. The role of the army in
Indonesia is a great deal more clear cut and predictable than in either Thailand
or in the Philippines. In effect, there have been no attempted military coups
since 1966. The army remains wholly in support of Suharto. It has been
suggested, in fact, that anyone who might be considered as a candidate to
succeed Suharto must be Javanese and must be a general.
The role of Islam in the national life of Indonesia is a more complex
subject. The Mohammedan religion first reached the shores of western Sumatra
through the coming of the Arab traders around 1400. The western-most state of
Aceh has remained a stronghold of Islamic fundamentalist belief ever since.
Sumatra in general has remained restive and unwilling to bend to the yoke of a
tight central control from Java. In fact, this is also true of many other island
provinces of the huge Indonesian archipelago which will have, by the year 2000,
a population of over 200 million. Following the 1958 uprising in Sumatra and
Celebes (or Sulawesi) the Javanese policy was to plant more settlers in these
outlying islands from Java (where 80 percent of the population lives). Political
and religious factors, therefore, cannot be disentangled in the future horoscope
of Indonesian political life.
Fundamentalism is on the rise, as also in Malaysia, and politicians with
fundamentalist Islamic beliefs and supporters are likely to take a more active
role. However, the situation cannot be compared with Iran or Saudi Arabia. In
neither Indonesia nor Malaysia has Islam taken over all aspects of every day
life with its rules about the role of women or the consumption of alcohol or the
exaction of interest or usury on capital. In all these respects Indonesian life
is relatively "modern." There is a more easy-going Asian approach to matters of
religious belief.
However, the social question, which one cannot ignore, concerns the role of
the minority and non-Muslim peoples in Indonesia, in particular the Chinese
community in Java. Although the total Chinese population is less than 5 million,
or around 3 percent of the total, 80 percent of the commerce and much of the
capital wealth remains in the hands of this small but tight-knit Chinese
community. In 1966 there were violent anti-Chinese riots and killings in
Jakarta, Surabaya and other Javanese cities. Many thousands of Chinese fled to
Hong Kong and to China but this is a spectre which has been banished from the
life of the nation since Suharto came to power. He is well known to have close
links with the leading members of the Chinese business community.
The role of Chinese businesspeople in Indonesia has been brought into much
greater focus by the explosion of the Jakarta stock market in the late 1980's.
Much of the wealth which was rumoured to exist in the hands of the great Chinese
families is now visibly calculated on a daily basis in the large listed
capitalization of the Indonesian-Chinese industrial groups such as Indo-Cement
and Astra. There is, of course, a two-way flow of capital involved in this
process of the rapid evolution of the capital market in Jakarta, by which up to
U.S. $5 billion of foreign capital has entered the country in the form of equity
investment, largely from foreign fund managers, and a substantial amount of
Chinese capital has been able to leave the country in the opposite direction.
The enormous economic potential of Indonesia, its vast natural resources and
its large labour force being two principal attractions, cannot be doubted.
However, the main element of political risk is the possibility of a further
violent episode in the political life of the country when the next transfer of
power occurs at the top.
The following table gives details of the overall economic performance of
Indonesia from 1987 to 1993.
--------------------------------------------------------------------------
TRADE
EXCHANGE GDP SURPLUS/ MARKET MARKET
RATE GROWTH (DEFICIT) YEAR-END CAPITAL
AV. US $ (%) CPI (US $BN) P/E CLOSING (US $BN)
-------- ------ ----- ---------- ---- -------- --------
1987 1.720 3.6 9.0 4.6 83.0 0.07
1988 1.735 5.6 7.4 4.9 41.2 305.0 0.26
1989 1.784 7.4 6.0 5.8 24.7 399.0 2.42
1990 1.889 7.4 9.6 3.9 19.9 418.0 6.2
1991 1.984 6.5 9.5 5.5 17.1 247.0 8.1
1992 2.064 6.0 4.9 6.9 14.4 274.0 12.1
1993 2.110 6.5 7.0 9.0 27.4 589.0 43.0
1994* 2.200 6.8 9.0 -- 21.3 -- 52.0
*Estimate
Indonesia began the 1980s principally as an oil exporter. During the 1970s
it had a high rate of inflation but also a very rapid economic growth on the
back of the oil boom. The fall in oil prices in the early 1980s, which became
precipitate in the spring of 1986, therefore, forced a review of their
priorities. Reducing inflation, diversifying the economy away from oil and
maintaining a stable growth in the economy to provide as full employment as
possible for the large young population, were selected as the main objectives.
It is remarkable to see the extent to which these aims have been achieved during
1985-90. Inflation has been brought from 20 percent, at the beginning of the
decade, to around 6 percent in 1989-90. Economic growth, having fallen to 2.5
percent in 1985 regained the level of 7.4 percent by 1990. The rupiah, which had
undergone a 30 percent once-and-for-all evaluation in the autumn of 1985, had
stabilized on a "crawling peg" system with an annual devaluation of around 5
percent. The trade surplus continued at a healthy US $4-5 billion annually and
the inflow of foreign capital more than offset Indonesia's foreign debt
position. Therefore, it is possible to conclude that the good macroeconomic
management, which was achieved by the small group of technocrats employed by
Suharto to direct the economy, had been very successful in reducing the economic
risk of the country. The future path of the Indonesian economy will, therefore,
depend as much on the development of low wage manufacturing and the inflow of
Japanese capital, on the liberalization of the banking system and the capital
market, as on the price of basic commodities. This gives a much greater degree
of stability to the Indonesian economy as a whole.
THE PHILIPPINES
The Philippines is a special case in Asia. Culturally and politically it has
a very distinct national personality. The Roman Catholic Church plays a leading
role in its national life, not least in recent political changes. The fact that
the Philippines was the only American colony in Asia also gave it a very
different tradition from Indonesia or Malaysia, which had similar languages but
very different cultural traditions. The Spanish occupation of the previous four
hundred years also left some deeper traces than the Dutch did in Indonesia.
When speaking of political risk, however, the real problem in the
Philippines has been the lack of legitimacy which has plagued successive
governments and has led to the constant pendulum between dictatorship and weak
democratic governments.
The U.S. tutelage has left a lasting imprint on the country. The charismatic
leadership of Magsaysay in the 1950s also left a vivid example to his
successors. The attempts, in the 1960s, to solve the enormous economic problems
of the Philippines, especially the rural poverty and the rapid growth of
population, were not successful when pursued in a socialist direction. Marcos
arrived in power in 1965 and inherited a country which still had higher living
standards than most other Asian countries such as Hong Kong, Korea, Taiwan and
Singapore. Therefore, judgment on his twenty year rule must be very negative as
a result, if only judged as an economic failure.
The question most investors, therefore, raise is whether the Philippines is
capable of responsible government and economic planning which would give it a
GNP growth rate approaching that of its Asian tiger neighbours. Many observers
dismiss this prospect out of hand citing the endemic problems of corruption,
political in-fighting and the lack of Confucian work ethic present in North
Asia. However, there is no doubt that the Philippines possesses enormous natural
advantages and it would be wrong to generalize about the whole archipelago of
7,000 islands from the political life of Manila alone. The island of Cebu, for
example, has seen a successful economic transformation in the past twenty years.
Manufacturing investment has grown and has begun to replace agriculture as a
principal source of employment. The Philippines has a very high rate of literacy
and the work ethic cannot be doubted by anyone who has employed Filipino
domestic workers overseas. Their earnings are an important source of remittance
back to the Philippines each year. The Filipino population in the United States
is now the largest Asian ethnic group in that country approaching 2 million,
mainly in California. Both natural resources, therefore, and an intelligent,
hardworking population favour the country.
Unfortunately, the political system has never been able to maintain the
long-term stability for its promise to be fulfilled. The years of the Aquino
government, during which democratic procedures were restored to Philippine
political life, have also been disappointing in that many of the features of
Washington political life have been reproduced in Manila -- continuous discord
between Congress, Senate and the President, making important national decisions
extremely difficult to reach. On top of that, of course, there have been the
continuing attempts by the military to unseat the elected government. Although
all of these have failed they have, nevertheless, done much to undermine the
confidence of international investors in the political stability of the country.
In particular, the failed attempt of December 1989 led to a slump in the economy
and the stock market and scared away much needed foreign capital.
There are signs that Japanese and Taiwanese investors and banks are coming
back to the Philippines. Nevertheless, it can only be concluded that democracy
is a fragile plant in the Philippines which may be damaged in the future as it
has been in the past. There is continued rivalry for political and business
influence among a small group of leading Filipino families. The press, although
perhaps the freest in Asia, is considered to be irresponsible and corrupt and
does much to undermine the legitimacy of the ruling government. Political risk,
therefore, is judged to be higher here than in other Asian countries.
The following table gives details of the overall economic performance of the
Philippines from 1987 to 1993.
--------------------------------------------------------------------------
TRADE
EXCHANGE GDP SURPLUS/ MARKET MARKET
RATE GROWTH (DEFICIT) YEAR-END CAPITAL
AV. US $ (%) CPI (US $BN) P/E CLOSING (US $BN)
-------- ------ ----- ---------- ---- -------- --------
1987 20.568 4.8 3.8 (1.0) 15.9 642.72 2.97
1988 21.095 6.3 8.8 (1.1) 19.6 841.65 4.20
1989 21.737 5.0 10.6 (2.6) 16.8 1,145.45 11.82
1990 27.200 2.1 12.7 (4.0) 14.3 651.78 5.73
1991 26.200 (1.0) 17.7 (3.2) 12.7 1,152.00 11.10
1992 23.600 0.0 8.9 (4.7) 13.5 1,256.00 16.00
1993 27.100 1.7 9.8 (6.4) 29.4 3,196.00 39.00
1994* 26.700 5.2 9.8 -- 26.2 -- 42.00
*Estimate
The GDP growth, which had been running at 5.5 percent average for the
previous three years, fell to only 2 percent in 1990 and inflation rose to 12
percent. The peso was rather weak and the trade deficit doubled to nearly US $4
billion. The stock market tumbled by over 50 percent, from a high of 1,145 to
less than 600, and the overall value of listed Philippine shares fell from US
$12 billion to less than US $6 billion. Such is the real economic risk for
investors of this fragile political system. Nevertheless, the recovery of
confidence in early 1991 is testament to the long-term value that investors see
in the country. Even if relative to its Asian neighbours the Philippines
continues to have economic problems (and notably its high foreign debt), it will
benefit from regional trends and it will present, from time to time, very
interesting buying opportunities. The educated and literate labour force is a
major resource of wages and relatively low taxes.
At the worst point of the last years of the Marcos regime inflation in the
Philippines reached 50 percent, the highest recorded in Asia during the past
decade. With the strong support of the central bank under Governor Jobo
Fernandez, the money supply was reined in, the peso was stabilized and inflation
came down to single digits between 1986 and 1988. The tight monetary policy has
been maintained and interest rates have been as high as 35 percent to control
the supply of credit. Therefore, with good macroeconomic management the
inflation problems in the Philippines can be contained.
The same rule can be applied to the value of the peso which has had a poor
long-term record and, despite the efforts of a strong and independent central
bank, has again slid in value against the dollar in the past two years. With the
benefit of strict International Monetary Fund prescriptions it is hoped that the
Philippines will now be able to reschedule its foreign debt particularly with
the help of the Japanese banks, stabilize the currency and maintain a reasonable
growth in its export trade.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PART II
The following information relates to EV MARATHON GREATER CHINA GROWTH FUND.
FEES AND EXPENSES
ADVISER
As of August 31, 1994, the Portfolio had net assets of $732,612,677. For
the fiscal year ended August 31, 1994, the Adviser earned advisory fees of
$4,100,334 (equivalent to 0.74% (annualized) of the Portfolio's average daily
net assets for such period). For the period from the start of business,
October 28, 1992, to the fiscal year ended August 31, 1993, the Adviser earned
advisory fees of $411,209 (equivalent to 0.75% (annualized) of the Portfolio's
average daily net assets for such period).
MANAGER AND ADMINISTRATOR
As of August 31, 1994, the Fund had net assets of $392,478,708. For the
fiscal year ended August 31, 1994, Eaton Vance earned management fees of
$698,780 (equivalent to 0.25% (annualized) of the Fund's average daily net
assets for such period). For the period from the start of business, June 7,
1993, to the fiscal year ended August 31, 1993, Eaton Vance earned management
fees of $16,092 (equivalent to 0.25% (annualized) of the Fund's average daily
net assets for such period). As of August 31, 1994, the Portfolio had net
assets of $732,612,677. For the fiscal year ended August 31, 1994, Eaton Vance
earned administration fees of $1,383,471 (equivalent to 0.25% (annualized) of
the Portfolio's average daily net assets for such period). For the period from
the start of business, June 7, 1993, to the fiscal year ended August 31, 1993,
Eaton Vance earned administration fees of $137,070 (equivalent to 0.25%
(annualized) of the Portfolio's average daily net assets for such period).
DISTRIBUTION PLAN
The Distribution Plan and Distribution Agreement remain in effect until
April 28, 1995 and may be continued as described under "Distribution Plan" in
the Prospectus. For the fiscal year ended August 31, 1994, the Fund made sales
commission payments to the Principal Underwriter under the Plan aggregating
$2,096,336, which amount was used by the Principal Underwriter to partially
defray sales commissions aggregating $13,448,240 paid during such period by
the Principal Underwriter to Authorized Firms on sales of Fund shares. During
such period, contingent deferred sales charges aggregating approximately
$1,269,000 were imposed on early redeeming shareholders and paid to the
Principal Underwriter to partially defray such sales commissions. As of August
31, 1994, the outstanding Uncovered Distribution Charges of the Principal
Underwriter calculated under the Plan amounted to approximately $16,523,000
(which amount was equivalent to 4.2% of the Fund's net assets on such day).
For the fiscal year ended August 31, 1994 the Fund made no service fee
payments under the Plan.
PRINCIPAL UNDERWRITER
For the fiscal year ended August 31, 1994, the Fund paid the Principal
Underwriter $5,377.50 for repurchase transactions handled by the Principal
Underwriter (being $2.50 for each such transaction).
CUSTODIAN
For the fiscal year ended August 31, 1994, the Portfolio paid IBT
$744,566. For the fiscal year ended August 31, 1994, the Fund paid IBT
$46,895.
BROKERAGE
For the fiscal year ended August 31, 1994, the Portfolio paid brokerage
commissions of $4,177,780 with respect to portfolio transactions. Of the
brokerage commissions of $4,177,780 paid during this period, all of such
amount was paid in respect of portfolio security transactions aggregating
approximately $814,062,509 to firms which provided some Research Services to
the Adviser's organization. For the period from the start of business, October
28, 1992, to the fiscal year ended August 31, 1993, the Portfolio paid
brokerage commissions of $1,224,597 with respect to portfolio transactions. Of
the brokerage commissions of $1,224,597 paid during this period, approximately
$1,218,619 was paid in respect of portfolio security transactions aggregating
approximately $180,689,369 to firms which provided some Research Services to
the Adviser's organization (although many such firms may have been selected in
any particular transaction primarily because of their execution capabilities).
TRUSTEES
For the fiscal year ended August 31, 1994, the Trustees of the Trust, as a
group, earned aggregate fees of $3,797 from the Fund in their capacities as
Trustees of the Trust. For the fiscal year ended August 31, 1994, the Trustees
of the Portfolio, as a group, earned aggregate fees of $16,250 from the
Portfolio in their capacities as Trustees of the Portfolio.
PERFORMANCE INFORMATION
The tables below indicate the total return on a hypothetical investment of
$1,000 in the Fund covering the life of the Fund from June 7, 1993 through
August 31, 1994 with a complete redemption at the end of the period.
<TABLE>
<CAPTION>
VALUE OF A $1,000 INVESTMENT
VALUE OF
INVESTMENT
BEFORE
DEDUCTING VALUE OF TOTAL RETURN TOTAL RETURN
CONTINGENT INVESTMENT BEFORE AFTER
DEFERRED AFTER DEDUCTING CONTINGENT DEDUCTING CONTINGENT
SALES DEDUCTING CONTINGENT DEFERRED SALES CHARGE DEFERRED SALES CHARGE**
INVESTMENT INVESTMENT AMOUNT OF CHARGE DEFERRED SALES CHARGE** ------------------------ ----------------------
PERIOD DATE INVESTMENT** ON 8/31/94 ON 8/31/94 CUMULATIVE ANNUALIZED CUMULATIVE ANNUALIZED
------ ------ ------ ------ ------ ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Life of the Fund* 6/7/93 $1,000 $1,318.37 $1,268.37 31.84% 25.13% 26.84% 21.27%
1 Year Ended
8/31/94 8/31/93 $1,000 $1,205.82 $1,200.82 25.08% 25.08% 20.08% 20.08%
<CAPTION>
PERCENTAGE CHANGES 6/7/93 - 8/31/94
NET ASSET VALUE TO NET ASSET VALUE NET ASSET VALUE TO NET ASSET VALUE
BEFORE DEDUCTING CONTINGENT DEFERRED SALES AFTER DEDUCTING CONTINGENT DEFERRED SALES
CHARGE WITH ALL DISTRIBUTIONS REINVESTED CHARGE** WITH ALL DISTRIBUTIONS REINVESTED
---------------------------------------------- ----------------------------------------------
PERIOD ENDED ANNUAL CUMULATIVE AVERAGE ANNUAL ANNUAL CUMULATIVE AVERAGE ANNUAL
-------------------- ---------- -------------- ------------------ ---------- -------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
8/31/93* -- 5.40% -- -- 0.40% --
8/31/94 25.08% 31.84% 25.13% 20.08% 26.84% 21.27%
Past performance is not indicative of future results. Investment return and principal value will fluctuate; shares, when
redeemed, may be worth more or less than their original cost.
----------
* Investment operations began on June 7, 1993.
** No contingent deferred sales charge is imposed on shares purchased more than six years prior to the redemption, shares acquired
through reinvestment of distributions and any appreciation in value of other shares in the account, and no such charge is
imposed on exchanges of Fund shares for shares of one or more other Funds listed under "The Eaton Vance Exchange Privilege" in
the Fund's current prospectus.
</TABLE>
PRINCIPAL UNDERWRITER
Under the Distribution Agreement the Principal Underwriter acts as
principal in selling shares of the Fund. The expenses of printing copies of
prospectuses used to offer shares to financial service firms or investors and
other selling literature and of advertising is borne by the Principal
Underwriter. The fees and expenses of qualifying and registering and
maintaining qualifications and registrations of the Fund and its shares under
Federal and state securities laws is borne by the Fund. In addition, the Fund
makes payments to the Principal Underwriter pursuant to its Distribution Plan
as described in the Fund's current prospectus; the provisions of the plan
relating to such payments are included in the Distribution Agreement. The
Distribution Agreement is renewable annually by the Trust's Board of Trustees
(including a majority of its Trustees who are not interested persons of the
Trust and who have no direct or indirect financial interest in the operation
of the Fund's Distribution Plan or the Distribution Agreement), may be
terminated on sixty days' notice either by such Trustees or by vote of a
majority of the outstanding voting securities of the Fund or on six months'
notice by the Principal Underwriter and is automatically terminated upon
assignment. The Principal Underwriter distributes Fund shares on a "best
efforts" basis under which it is required to take and pay for only such shares
as may be sold.
The Fund has authorized the Principal Underwriter to act as its agent in
repurchasing shares and will pay the Principal Underwriter $2.50 for each
repurchase transaction handled by the Principal Underwriter. The Principal
Underwriter estimates that the expenses incurred by it in acting as repurchase
agent for the Fund will exceed the amounts paid therefor by the Fund.
DISTRIBUTION PLAN
The Distribution Plan (the "Plan") is described in the prospectus and is
designed to meet the requirements of Rule 12b-1 under the 1940 Act and the
sales charge rule of the national Association of Securities Dealers, Inc. (the
"NASD Rule"). The purpose of the Plan is to compensate the Principal
Underwriter for its distribution services and facilities provided to the Fund
by paying the Principal Underwriter sales commissions and a separate
distribution fee in connection with sales of Fund shares. The following
supplements the discussion of the Plan contained in the Fund's prospectus.
In calculating daily the amount of uncovered distribution charges,
distribution charges will include the aggregate amount of sales commissions
and distribution fees theretofore paid plus the aggregate amount of sales
commissions and distribution fees which the Principal Underwriter is entitled
to be paid under the Plan since its inception. Payments theretofore paid or
payable under the Plan by the Fund to the Principal Underwriter and contingent
deferred sales charges theretofore paid or payable to the Principal
Underwriter less all amounts theretofore paid or payable to the Principal
Underwriter by the Adviser in consideration of the former's distribution
efforts, will be subtracted from such distribution charges; if the result of
such subtraction is positive, a distribution fee (computed at 1% over the
prime rate then reported in The Wall Street Journal) will be computed on such
amount and added thereto, with the resulting sum constituting the amount of
uncovered distribution charges with respect to such day. The amount of
outstanding uncovered distribution charges of the Principal Underwriter
calculated on any day does not constitute a liability recorded on the
financial statements of the Fund.
It is anticipated that the Eaton Vance organization will profit by reason
of the operation of the Plan through an increase in the Fund's assets (thereby
increasing the management fee payable to Eaton Vance by the Fund and the
administration fees payable to Eaton Vance by the Portfolio) resulting from
sale of Fund shares and through amounts paid to the Principal Underwriter,
including contingent deferred sales charges pursuant to the Plan. The Eaton
Vance organization may be considered to have realized a profit in distributing
shares of the Fund if at any point in time the aggregate amounts theretofore
received by the Principal Underwriter from the Fund pursuant to the Plan, from
the Adviser in consideration of the distribution efforts and from contingent
deferred sales charges have exceeded the total expenses theretofore incurred
by such organization in distributing shares of the Fund. Total expenses for
this purpose will include an allocable portion of the overhead costs of such
organization and its branch offices, which costs will include without
limitation leasing expense, depreciation of building and equipment, utilities,
communication and postage expense, compensation and benefits of personnel,
travel and promotional expense, stationery and supplies, literature and sales
ads, interest expense, data processing fees, consulting and temporary help
costs, insurance, taxes other than income taxes. legal and auditing expense
and other miscellaneous overhead items. Overhead is calculated and allocated
for such purpose by the Eaton Vance organization in a manner deemed equitable
to the Fund.
In a transaction involving a sale of Fund shares resulting from an
exchange of shares of another fund (Transferor Marathon Fund; in the Eaton
Vance Marathon Group of Funds (see "The Eaton Vance Exchange Privilege" in the
Prospectus), the Principal Underwriter will not pay a sales commission to an
Authorized Firm, inasmuch as the Principal Underwriter will have previously
paid a sales commission to the Firm when the shares of the Transferor Marathon
Fund were sold. In this type of transaction the Principal Underwriter will
waive an appropriate portion of the amounts otherwise payable by the Fund
under the Plan, and such waiver will be effected through deduction of an
appropriate amount from the uncovered distribution charges of the Principal
Underwriter calculated under the Plan. Similarly, the Principal Underwriter
will waive an appropriate portion of the amounts otherwise payable by the Fund
(through deduction of an appropriate amount from the uncovered distribution
charges of the Principal Underwriter calculated under the Plan) when Fund
shares are exchanged for shares of another fund in the Eaton Vance Marathon
Group of Funds. Notwithstanding such waiver and deduction, sales commissions
and distribution fees will continue to be paid to the Principal Underwriter so
long as there exist outstanding uncovered distribution charges of the
Principal Underwriter under the Plan.
The amount of uncovered distribution charges of the Principal Underwriter
at any particular time depends upon various changing factors, including the
level and timing of sales of Fund shares, the nature of such sales (i.e.,
whether they result from exchange transactions, reinvestments or from cash
sales through Authorized Firms), the level and timing of redemptions of Fund
shares upon which a contingent deferred sales charge will be imposed, the
level and timing of redemptions of Fund shares upon which no contingent
deferred sales charge will be imposed (including redemptions involving
exchanges of Fund shares for shares of another fund in the Eaton Vance
Marathon Group of Funds which result in a reduction of uncovered distribution
charges), changes in the level of the net assets of the Fund, and changes in
the interest rate used in the calculation of the distribution fee under the
the Plan. The Plan also authorizes the Fund to make payments of service fees.
Pursuant to Rule 12b-1, the Plan has been approved by the Fund's initial
sole shareholder (Eaton Vance) and by the Board of Trustees of the Trust, as
required by Rule 12b-1. Under the Plan the President or a Vice President of
the Trust shall provide to the Trustees for their review, and the Trustees
shall review at least quarterly, a written report of the amount expended under
the plan and the purposes for which such expenditures were made. The Plan may
not be amended to increase materially the payments described therein without
approval of the shareholders of the Fund, and all material amendments of the
plan must also be approved by the Trustees of the Trust in the manner
described above. The Plan and Distribution Agreement may be terminated by vote
of a majority of the Rule 12b-1 Trustees or by a vote of a majority of the
outstanding voting securities of the Fund. So long as the Plan is in effect,
the selection and nomination of Trustees who are not interested persons of the
Trust shall be committed to the discretion of the Trustees who are not such
interested persons.
The Trustees of the Trust believe that the Plan will be a significant
factor in the expected growth of the Fund's assets, and shall result in
increased investment flexibility and advantages which will benefit the Fund
and its shareholders. Payments for sales commissions and distribution fees
made to the Principal Underwriter under the Plan will compensate the
Principal Underwriter for its services and expenses in distributing shares of
the Fund. Service fee payments made to Authorized Firms under the Plan would
provide incentives to provide continuing personal services to investors and
the maintenance of shareholder accounts. By providing incentives to the
Principal Underwriter and Authorized Firms, the Plan is expected to result in
the maintenance of, and possible future growth in, the assets of the Fund.
Based on the foregoing and other relevant factors, the Trustees of the Trust
have determined that in their judgment there is a reasonable likelihood that
the Plan will benefit the Fund and its shareholders.
A recent Internal Revenue Service ruling requires that sales commissions
paid by the Fund pursuant to its Distribution Plan be expensed for tax
purposes (rather than charged to paid-in capital as the Fund has done in the
past). The Fund changed its tax accounting practice to conform to the ruling
on November 16, 1994. The change will have no effect on the Fund's current
yield or total return.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As at November 30, 1994, the Trustees and officers of the Trust, as a
group, owned in the aggregate less than 1% of the outstanding shares of the
Fund. As of November 30, 1994, Merrill Lynch, Pierce, Fenner & Smith, Inc.,
New Brunswick, NJ was the record owner of approximately 36.2% of the
outstanding shares, which it held on behalf of its customers who are the
beneficial owners of such shares, and as to which they had voting power under
certain limited circumstances. To the knowledge of the Trust, no other person
beneficially owns more than 5% of the Fund's outstanding shares.
<PAGE>
EV MARATHON GREATER CHINA GROWTH FUND
FINANCIAL STATEMENTS
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
August 31, 1994
<S> <C> <C>
ASSETS:
Investment in Greater China Growth Portfolio, at value (Note 1A)
(identified cost, $350,655,050) $390,813,453
Receivable for Fund shares sold 2,282,736
Deferred organization expenses (Note 1D) 36,953
------------
Total assets $393,133,142
LIABILITIES:
Payable for Fund shares redeemed $ 478,118
Payable to affiliates -
Trustees' fees 834
Custodian fee 500
Accrued expenses 174,982
-----------
Total liabilities 654,434
------------
NET ASSETS for 29,833,255 shares of beneficial interest outstanding $392,478,708
============
SOURCES OF NET ASSETS:
Paid-in capital $364,040,658
Accumulated net investment income 463,526
Accumulated undistributed net realized loss on investment transactions
from the Portfolio (12,183,879)
Unrealized appreciation of investments from Portfolio (computed on
the basis of identified cost) 40,158,403
------------
Total $392,478,708
============
NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PRICE (NOTE 6) PER SHARE
($392,478,708 / 29,833,255 shares of beneficial interest) $ 13.16
=======
SEE NOTES TO FINANCIAL STATEMENTS
</TABLE>
<PAGE>
FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
STATEMENT OF OPERATIONS
For the year ended August 31, 1994
<S> <C> <C>
INVESTMENT INCOME (Note 1B):
Investment income allocated from Portfolio $ 5,133,166
Expenses allocated from Portfolio (3,136,634)
------------
Net investment income from Portfolio $ 1,996,532
Expenses -
Management fee (Note 3) $ 698,780
Compensation of Trustees not members of the
Administrator's organization 3,797
Custodian fee (Note 3) 46,895
Distribution fees (Note 5) 2,110,038
Transfer and dividend disbursing agent fees 278,520
Registration costs 150,228
Printing and postage 121,009
Legal and accounting services 17,618
Amortization of organization expenses (Note 1D) 9,786
Miscellaneous 100,213
------------
Total expenses 3,536,884
------------
Net investment loss $ (1,540,352)
REALIZED AND UNREALIZED GAIN (LOSS) FROM PORTFOLIO:
Net realized loss from investment transactions (identified cost basis) $(11,727,498)
Change in unrealized appreciation of investments 37,116,048
------------
Net realized and unrealized gain 25,388,550
------------
Net increase in net assets from operations $ 23,848,198
============
SEE NOTES TO FINANCIAL STATEMENTS
</TABLE>
<PAGE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
FOR THE PERIOD FROM
FOR THE YEAR ENDED JUNE 7, 1993 (START OF
AUGUST 31, 1994 BUSINESS) TO AUGUST 31, 1993
------------------ ----------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
From operations -
Net investment loss $ (1,540,352) $ (92,458)
Net realized gain (loss) from Portfolio (11,727,498) 574
Change in unrealized appreciation from Portfolio 37,116,048 3,042,355
------------ ------------
Net increase in net assets from operations $ 23,848,198 $ 2,950,471
------------ ------------
Distributions to shareholders in excess of net realized gain
on investment transactions (Note 2) $ (456,955) $ --
------------ ------------
Transactions in shares of beneficial interest (Note 4)
Proceeds from sale of shares $370,568,876 $61,134,628
Net asset value of shares issued to shareholders in payment
of distributions declared 405,243 --
Cost of shares redeemed (65,558,628) (413,125)
------------ -----------
Increase in net assets from Fund share transactions $305,415,491 $60,721,503
------------ -----------
Net increase in net assets $328,806,734 $63,671,974
NET ASSETS:
At beginning of period 63,671,974 --
------------ ------------
At end of period (including accumulated net investment income (loss) of
$463,526 and $(92,458), respectively) $392,478,708 $ 63,671,974
============ ============
SEE NOTES TO FINANCIAL STATEMENTS
</TABLE>
<PAGE>
Financial Statements (continued)
<TABLE>
Financial Highlights
<CAPTION>
FOR THE PERIOD FROM
FOR THE YEAR ENDED JUNE 7, 1993 (START OF
AUGUST 31, 1994 BUSINESS) TO AUGUST 31, 1993
------------------ ----------------------------
<S> <C> <C>
NET ASSET VALUE, beginning of period $ 10.540 $ 10.000
--------- ---------
Income from Investment Operations:
Net investment loss $ (0.039) $ (0.015)
Net realized and unrealized gain on investments 2.684 0.555
--------- ---------
Total income from investment operations $ 2.645 $ 0.540
Less distributions:
Distributions in excess of net realized gain on investment transactions (0.025) --
--------- ---------
NET ASSET VALUE, end of period $ 13.160 $ 10.540
========= =========
TOTAL RETURN 25.08% 5.40%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $ 392,479 $ 63,672
Ratio of net expenses to average daily net assets <F1> 2.38% 2.21%<F2>
Ratio of net investment loss to average daily net assets (0.55)% (1.44)%<F2>
<FN>
<F1>Includes the Fund's share of Greater China Growth Portfolio's allocated
expenses.
<F2>Annualized
SEE NOTES TO FINANCIAL STATEMENTS
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) SIGNIFICANT ACCOUNTING POLICIES
EV Marathon Greater China Growth Fund (the Fund) is a diversified series of
Eaton Vance Growth Trust (the Trust). The Trust is an entity of the type
commonly known as a Massachusetts business trust and is registered under the
Investment Company Act of 1940, as amended, as an open-end management investment
company. The Fund invests all of its investable assets in interests in Greater
China Growth Portfolio (the Portfolio), a New York Trust, having the same
investment objective as the Fund. The value of the Fund's investment in the
Portfolio reflects the Fund's proportionate interest in the net assets of the
Portfolio (53.3% at August 31, 1994). The performance of the Fund is directly
affected by the performance of the Portfolio. The financial statements of the
Portfolio, including the Portfolio of investments, are included elsewhere in
this report and should be read in conjunction with the Fund's financial
statements. The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements. The policies are in conformity with generally accepted accounting
principles.
A. INVESTMENT VALUATIONS - Valuation of securities by the
Portfolio is discussed in Note 1 of the Portfolio's Notes to Financial
Statements which are included elsewhere in this report.
B. INCOME - The Fund's net investment income consists of the Fund's pro rata
share of the net investment income of the Portfolio, less all actual and accrued
expenses of the Fund determined in accordance with generally accepted accounting
principles.
C. FEDERAL TAXES - The Fund's policy is to comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies and to
distribute to shareholders each year all of its net investment income, and any
net realized capital gains. Accordingly, no provision for federal income or
excise tax is necessary. At August 31, 1994, net capital losses of $11,056,776
attributable to security and currency transactions incurred after October 31,
1993, are treated as arising on the first day of the Fund's next taxable year.
D. DEFERRED ORGANIZATION EXPENSES - Costs incurred by the Fund in connection
with its organization, including registration costs, are being amortized on the
straight-line basis over five years.
E. DISTRIBUTION COSTS - For book purposes, commissions paid on the sale of
shares and other distribution costs are charged to operations. For tax purposes,
commissions paid are charged to paid-in capital (Note 5).
F. RECLASSIFICATION - Certain prior year amounts have been reclassified to
conform to the current year presentation.
(2) DISTRIBUTIONS TO SHAREHOLDERS
It is the present policy of the Fund to make at least one distribution annually
(normally in December) of all or substantially all of the investment income
allocated to the Fund by the Portfolio, less the Fund's direct and allocated
expenses (other than sales commissions incurred on the sale of Fund shares,
which commissions are charged to the Fund's paid-in capital for tax purposes)
and at least one distribution annually of all or substantially all of the net
realized capital gains (reduced by any available capital loss carryforwards from
prior years) allocated by the Portfolio to the Fund, if any.
Shareholders may reinvest all distributions in shares of the Fund without a
sales charge at the per share net asset value as of the close of business on the
record date. The Fund distinguishes between distributions on a tax basis and a
financial reporting basis. Generally accepted accounting principles require that
only distributions in excess of tax basis earnings and profits be reported in
the financial statements as a return of capital. Differences in the recognition
or classification of income between the financial statements and tax earnings
and profits which result in temporary over distributions for financial statement
purposes are classified as distributions in excess of net investment income or
accumulated net realized gains. Permanent differences between book and tax
accounting relating to distributions are reclassified to paid-in capital. During
the year ended August 31, 1994, $2,096,336 was reclassified from distributions
in excess of net investment income to paid-in capital, due to permanent
differences between book and tax accounting for distribution costs being
considered as permanent differences. Net investment income, net realized gains
and net assets were not affected by this reclassification.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis. Generally accepted accounting principles require that only
distributions in excess of tax basis earnings and profits be reported in the
financial statements as a return of capital. Differences in the recognition or
classification of income between the financial statements and tax earnings and
profits which result in over distributions for financial statement purposes are
classified as distributions in excess of net investment income or accumulated
net realized gains. Permanent differences between book and tax accounting are
reclassified to paid-in capital. Net investment income, net realized gains and
net assets are not affected by this reclassification.
(3) MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
The management fee is earned by Eaton Vance Management (EVM) as compensation for
management and administration of the business affairs of the Fund. The fee is
based on a percentage of average daily net assets. For the year ended August 31,
1994 the fee was equivalent to 0.25% of the Fund's average net assets for such
period and amounted to $698,780. Except as to Trustees of the Fund who are not
members of EVM's organization, officers and Trustees receive remuneration for
their services to the Fund out of such management fee. Investors Bank & Trust
Company (IBT), an affiliate of EVM, serves as custodian of the Fund. Pursuant to
the custodian agreement, IBT receives a fee reduced by credits which are
determined based on the average daily cash balances the Fund maintains with IBT.
Certain officers and Trustees of the Fund and the Portfolio are officers and
directors/trustees of the above organizations. In addition, investment adviser,
administrative fees, and custodian fees are paid by the Portfolio to EVM and its
affiliates. See Note 2 of the Portfolio's Notes to Financial Statements which
are included elsewhere in this report.
(4) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
FOR THE YEAR FROM THE START OF
ENDED BUSINESS, JUNE 7, 1993
AUGUST 31, 1994 TO AUGUST 31, 1993
--------------- ----------------------
Sales 28,933,950 6,081,662
Issued to shareholders electing
to receive payments of
distributions in Fund shares 29,118 --
Redemptions (5,170,232) (41,243)
---------- ---------
Net increase 23,792,836 6,040,419
========== =========
(5) DISTRIBUTION PLAN
The Fund has adopted a distribution plan (the "Plan") pursuant to Rule 12b-1
under the Investment Company Act of 1940. The Plan requires the Fund to pay the
Principal Underwriter, Eaton Vance Distributors, Inc. (EVD) amounts equal to
1/365 of 0.75% of the Fund's daily net assets, for providing ongoing
distribution services and facilities to the Fund. The Fund will automatically
discontinue payments to EVD during any period in which there are no outstanding
Uncovered Distribution Charges, which are equivalent to the sum of (i) 5% of the
aggregate amount received by the Fund for the shares sold plus, (ii)
distribution fees calculated by applying the rate of 1% over the prevailing
prime rate to the outstanding balance of Uncovered Distribution Charges of EVD
reduced by the aggregate amount of contingent deferred sales charges (see Note
6) and daily amounts theretofore paid to EVD. The amount payable to EVD with
respect to each day is accrued on such day as a liability of the Fund and,
accordingly, reduces the Fund's net assets. The Fund accrued $2,096,336 as
payable to EVD for the year ended August 31, 1994, representing 0.75% of average
daily net assets. At August 31, 1994, the amount of Uncovered Distribution
Charges of EVD calculated under the Plan was approximately $16,523,000.
In addition, the Plan authorizes the Fund to make payments of service fees to
the Principal Underwriter, Authorized Firms and other persons in amounts not
exceeding 0.25% of the Fund's average daily net assets for each fiscal year. The
Trustees have initially implemented the Plan by authorizing the Fund to make
quarterly payments of service fees to the Principal Underwriter and Authorized
Firms in amounts not expected to exceed 0.25% per annum of the Fund's average
daily net assets based on the value of Fund shares sold by such persons and
remaining outstanding for at least one year. Service fee payments will be made
for personal services and/or the maintenance of shareholder accounts. Service
fees are separate and distinct from the sales commissions and distribution fees
payable by the Fund to EVD, and, as such, are not subject to automatic
discontinuance where there are no outstanding Uncovered Distribution Charges of
EVD. Distribution assistance payments for the year ended August 31, 1994
amounted to $13,702.
Certain officers and Trustees of the Fund are officers or directors of EVD.
(6) CONTINGENT DEFERRED SALES CHARGE
A contingent deferred sales charge (CDSC) is imposed on any redemption of Fund
shares made within six years of purchase. Generally, the CDSC is based upon the
lower of the net asset value at date of redemption or date of purchase. No
charge is levied on shares acquired by reinvestment of dividends or capital gain
distributions. The CDSC is imposed at declining rates that begin at 5% in the
first and second year of redemption after purchase, (6% and 5% respectively for
shares purchased prior to August 1, 1994) declining one percentage point each
year thereafter. No CDSC is levied on shares which have been sold to EVM or its
affiliates or to their respective employees or clients. CDSC charges are paid to
EVD to reduce the amount of Uncovered Distribution Charges calculated under the
Fund's Distribution Plan. CDSC charges received when no Uncovered Distribution
Charges exist will be retained by the Fund. EVD received approximately
$1,269,000 of CDSC paid by shareholders for the year ended August 31, 1994.
(7) INVESTMENT TRANSACTIONS
Increases and decreases in the Fund's investment in the Portfolio aggregated
$375,396,160 and $68,516,579, respectively.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees and Shareholders of
Eaton Vance Growth Trust:
We have audited the accompanying statement of assets and liabilities of EV
Marathon Greater China Growth Fund (one of the series constituting Eaton Vance
Growth Trust) as of August 31, 1994, and the related statement of operations for
the year then ended, the statements of changes in net assets, and the financial
highlights for the year ended August 31, 1994 and for the period from the start
of business, June 7, 1993, to August 31, 1993. These financial statements and
financial highlights are the responsibility of the Trust's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the EV Marathon
Greater China Growth Fund series of the Eaton Vance Growth Trust at August 31,
1994, the results of its operations, the changes in its net assets and its
financial highlights for the respective stated periods in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
October 7, 1994
<PAGE>
GREATER CHINA GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
August 31, 1994
-------------------------------------------------------------------------------
SHARES VALUE
-------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS - 99.0%
-------------------------------------------------------------------------------
CHINA, 3.3%
Dazhong Taxi 850,850 $ 918,918
Shanghai Diesel Engineering* 1,780,000 2,136,000
Shanghai Erfangji Co. Ltd. 5,595,160 2,036,638
Shanghai Industrial Sewing Machine* 740,000 389,240
Shanghai Jin Jiang Tower 2,054,000 1,503,528
Shanghai Phoenix Bicycle Co. 2,615,000 1,704,980
Shanghai Yaohua Pilkington* 4,620,500 5,923,481
Shenzhen China Bicycles Co. 6,996,000 6,020,058
Shenzhen Vanke Co. Ltd. 397,600 288,141
Tyre and Rubber 5,717,600 3,144,680
------------
$ 24,065,664
------------
HONG KONG, 42.5%
Bank of East Asia Hong Kong 1,292,614 $ 5,302,432
Beiren Printing 2,000,000 988,600
Chen Hsong Holdings 11,320,000 7,690,808
Cheung Kong Holdings Ltd. 3,680,000 18,619,696
Cim Company Ltd. 1,800,000 3,028,068
Citic Pacific Ltd. - New 4,570,000 14,577,386
Consolidated Electric Power* 3,738,180 7,231,883
Dah Sing Financial Holdings 2,667,000 7,955,128
Gold Lion Holdings Ltd. 537,000 143,164
Gold Lion Holdings 1995 Warrants* 170,000 5,933
Gold Lion Holdings 1996 Warrants* 170,000 7,701
Guangzhou Investment 12,592,000 3,911,075
Guangzhou Shipyard 3,570,000 1,598,289
Hong Kong Aircraft Engineering Co. Ltd. 853,600 4,042,820
Hong Kong Electric Co. 3,305,000 11,697,056
Hong Kong Land Holdings 2,016,000 5,334,941
Hong Kong Telecommunications Ltd. 6,958,000 15,306,904
Hong Kong & China Gas Co. Ltd. 1,036,000 1,964,049
Hong Kong & China Gas Co. Ltd. Warrants* 353,000 161,710
Hopewell Holdings 16,609,000 15,366,647
HSBC Holdings PLC 1,632,600 19,225,171
Hutchinson Whampoa Hong Kong 4,698,000 23,527,584
Jardine Matheson HK Registry 2,772,400 26,099,928
Johnson Electric Holdings 1,301,500 3,284,205
Li & Fung Ltd. 6,446,000 3,878,558
Maanshan Iron & Steel Co. 8,120,000 2,605,708
Ming Pao Enterprises 8,272,000 6,208,136
National Mutual Ltd. 8,926,000 5,891,160
New World Development Hong Kong 2,635,000 9,189,563
Peregrine Investments Holdings 4,452,666 8,095,392
CP Pokphand Co. Ltd. 4,750,000 1,598,375
S Megga International Ltd. 11,372,000 1,971,905
Shanghai Petrochemical 17,784,000 5,776,243
Shell Electric Manufacturing 6,000,000 3,820,200
Shell Electric Manufacturing 1996 Warrants* 700,000 79,730
Siu Fung Ceramics 24,084,000 5,922,256
South China Industries 5,930,000 767,342
South Sea Development Co. 6,184,464 464,453
Sun Hung Kai Properties Ltd. 1,693,000 12,487,737
Television Broadcasts Ltd. 2,088,000 9,862,250
Tem Fat Hing Fung 28,696,000 5,199,715
Tsingtao Brewery Co. Ltd. 2,248,000 1,898,211
Varitronix International Ltd. 3,482,000 5,226,830
Wharf Holdings 5,370,000 23,070,594
------------
$311,085,536
------------
INDONESIA, 2.7%
Bank International Indonesia 356,000 $ 1,310,187
Barito Pacific Timber 1,219,500 4,670,441
Gadjah Tunggal 2,253,000 4,275,388
PT Indah Kiat Pulp & Paper 6,434,400 7,400,203
PT Argha Karya Prima Ind. 1,303,000 2,023,038
------------
$ 19,679,257
------------
REPUBLIC OF KOREA, 8.2%
Daewoo Corp. 205,549 $ 4,054,741
Daewoo Heavy Industries 199,114 3,951,019
Dong Chang Paper Mfg.* 80,008 729,569
Korea Electric Power Corp. 406,200 16,571,742
Korea Exchange Bank* 509,380 5,790,224
Pohang Iron & Steel Co. Ltd. 45,060 5,904,153
Samsung Electronics 40,590 7,615,557
Samsung Fire & Marine Insurance* 3,920 852,611
Samsung Heavy Industries 67,800 3,719,034
Samwhan Ltd. 25,795 610,919
Yukong Ltd. 198,073 10,122,798
------------
$ 59,922,367
------------
MALAYSIA, 8.8%
Aokam Perdana Berhad 57,000 $ 394,178
Genting Berhad 1,179,000 11,055,247
Hong Leong Industries Berhad 1,357,000 7,422,519
Kim Hin Industry Berhad 1,105,000 6,432,647
Kim Hin Industry Berhad Warrants* 221,000 461,956
Land & General Berhad 3,562,000 15,308,408
Leader Universal Holdings Ltd. 1,375,000 8,058,188
Mulpha International Trading 2,966,666 5,030,278
Perlis Plantations Berhad 770,000 2,587,200
Sime Darby Berhad 2,500,000 7,814,000
------------
$ 64,564,621
------------
THE PHILIPPINES, 7.3%
Ayala Corp. Class B 6,365,760 $ 11,070,693
Bacnotan Consolidated Industries 152,234 1,690,447
Belle Resources Class B* 21,600,000 5,389,200
Philippine Long Distance Telephone 283,700 18,724,200
San Miguel Corporation 2,657,800 14,067,735
SM Prime Holdings* 9,300,000 2,390,927
------------
$ 53,333,202
------------
SINGAPORE, 9.9%
Cerebos Pacific Ltd. 1,249,000 $ 6,868,625
Clipsal Industries Holdings Ltd. 1,100,000 6,270,000
Clipsal Industries Warrants* 117,000 225,810
DBS Land 3,000,000 9,118,800
Development Bank of Singapore 1,140,000 11,778,480
Overseas Union Bank 1,020,000 5,371,320
Qaf Ltd. 5,500,000 5,169,450
Qaf Limited Warrants 1998* 840,000 498,372
Qaf Loan Stock 420,000 226,758
Sembawang Maritime 2,266,000 10,271,098
Singapore Airlines Ltd. 1,075,000 10,103,603
Straits Steamship Land 2,102,500 6,250,522
------------
$ 72,152,838
------------
TAIWAN, 5.0%
Cheng Shin Industries 371,040 $ 555,261
China Steel Corp. 2,500,000 2,701,000
China Steel Corp. GDR* 70,000 1,837,500
China Trust Business Bank 1,654,580 4,610,984
Formosa Chemical 1,387,360 2,134,453
Formosa Plastics 2,490,000 5,893,581
Nan Ya Plastic 3,067,085 6,966,884
Sampo 3,006,080 4,900,211
United Microelectronics Co. 2,500,000 5,297,000
Victor Taichung Machinery* 820,000 2,097,396
------------
$ 36,994,270
------------
THAILAND, 11.0%
Bangkok Bank 618,200 $ 6,666,669
NTS Steel Group 1,924,800 5,189,260
NTS Steel Group Co. (Local) 695,200 1,790,974
PTT Explo. & Produc. 93,000 794,904
Saha Union Corp. Ltd. (Ordinary) 5,890,240 6,940,467
Saha Union Corp. Ltd. (Foreign) 252,800 302,905
Siam Cement (Local) 343,400 19,064,813
Siam Cement (Foreign) 176,900 10,499,404
Siam Commercial Bank 1,891,300 19,640,394
Sri Trang Agro-Ind 125,000 307,048
Thailand Military Bank (Local) 300,000 1,156,290
Thailand Military Bank (Foreign) 2,021,500 8,477,767
------------
$ 80,830,895
------------
UNITED STATES, 0.3%
AES China Generating Co. Ltd.* 210,000 $ 2,493,750
------------
TOTAL INVESTMENTS (IDENTIFIED COST, $627,782,379) $725,122,400
Other Assets, 1.0% 7,490,277
------------
NET ASSETS, 100.0% $732,612,677
============
* Non-income producing security
GDR - Global depository receipt
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
August 31, 1994
ASSETS:
Investments, at value (Note 1A) (Identified
cost, $627,782,379) $725,122,400
Cash denominated in foreign currencies
(cost, $2,422,833) 2,423,448
Cash 21,161,317
Receivable for investments sold 4,647,731
Dividends and interest receivable 952,455
Deferred organization expenses (Note 1C) 91,869
------------
Total assets $754,399,220
LIABILITIES:
Payable for investments purchased $ 21,762,159
Payable to affiliates -
Custodian fee 22,000
Trustees' fees 1,250
Accrued expenses 1,134
------------
Total liabilities 21,786,543
------------
NET ASSETS applicable to investors'
interest in Portfolio $732,612,677
============
SOURCES OF NET ASSETS:
Net proceeds from capital contributions
and withdrawals $635,269,404
Net unrealized appreciation of investments
(computed on the basis of identified cost) 97,340,021
Net unrealized appreciation of foreign
currencies 3,252
------------
TOTAL $732,612,677
============
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
FINANCIAL STATEMENTS (CONTINUED)
-------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
For the year ended August 31, 1994
INVESTMENT INCOME:
Income -
Dividends (net of foreign taxes of $636,647) $ 9,767,109
Interest 625,928
------------
Total income $ 10,393,037
Expenses -
Investment adviser fee (Note 2) $4,100,334
Administration fee (Note 2) 1,383,471
Custodian fee (Note 2) 744,566
Legal & audit fees 41,393
Amortization of organization expense
(Note 1C) 28,638
Trustees' fees 16,250
Miscellaneous 53,671
----------
Total expenses 6,368,323
------------
Net investment income $ 4,024,714
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized loss on investment transactions
computed on the basis of identified cost $(11,068,453)
------------
Change in unrealized appreciation
Investments $ 79,234,677
Foreign currency 1,952
------------
Net unrealized appreciation $ 79,236,629
------------
Net realized and unrealized gain on investments $ 68,168,176
------------
Net increase in net assets from operations $ 72,192,890
============
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
-------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIOD
FOR THE YEAR OCTOBER 28, 1992
ENDED (START OF BUSINESS)
AUGUST 31, 1994 TO AUGUST 31, 1993
--------------- ------------------
INCREASE (DECREASE) IN NET ASSETS:
From operations -
Net investment income $ 4,024,714 $ 211,356
Net realized loss on investment
transactions (11,068,453) (6,065)
Net increase in unrealized appreciation
of investments 79,234,677 18,105,344
Net increase in unrealized appreciation
of foreign currency 1,952 1,300
------------- ------------
Increase in net assets from operations $ 72,192,890 $ 18,311,935
------------- ------------
Capital transactions:
Contributions $ 636,873,995 $195,865,086
Withdrawals (184,497,094) (6,234,145)
------------- ------------
Increase in net assets resulting from
capital transactions $ 452,376,901 $189,630,941
------------- ------------
Total increase in net assets $ 524,569,791 $207,942,876
NET ASSETS:
At beginning of period 208,042,886 100,010
------------- ------------
At end of period $ 732,612,677 $208,042,886
============= ============
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
FINANCIAL STATEMENTS (CONTINUED)
-------------------------------------------------------------------------------
SUPPLEMENTARY DATA
FOR THE PERIOD
FOR THE YEAR OCTOBER 28, 1992
ENDED (START OF BUSINESS)
AUGUST 31, 1994 TO AUGUST 31, 1993
--------------- ------------------
RATIOS (As a percentage of average net assets):
Expenses 1.15% 1.38%*
Net investment income 0.73% 0.38%*
PORTFOLIO TURNOVER 36% 18%
* Annualized
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
(1) SIGNIFICANT ACCOUNTING POLICIES
Greater China Growth Portfolio (the "Portfolio") is registered under the
Investment Company Act of 1940 as a diversified, open end investment company
which was organized as a trust under the laws of the State of New York on
September 1, 1992. The Declaration of Trust permits the Trustees to issue
interests in the Portfolio. The following is a summary of the significant
accounting policies of the Portfolio. The policies are in conformity with
generally accepted accounting principles.
A. INVESTMENT VALUATIONS - Marketable securities, including options, that are
listed on foreign or U.S. securities exchanges or in the NASDAQ National Market
System are valued at closing sale prices, on the exchange where such securities
are principally traded. Futures positions on securities or currencies are
generally valued at closing settlement prices. Unlisted or listed securities for
which closing sale prices are not available are valued at the mean between the
latest bid and asked prices. Short term debt securities with a remaining
maturity of 60 days or less are valued at amortized cost. Other fixed income and
debt securities, including listed securities and securities for which price
quotations are available, will normally be valued on the basis of valuations
furnished by a pricing service. Investments for which valuations or market
quotations are unavailable are valued at fair value using methods determined in
good faith by or at the direction of the Trustees.
B. FEDERAL TAXES - The Portfolio has elected to be treated as a partnership for
Federal tax purposes. No provision is made by the Portfolio for federal or state
taxes on any taxable income of the Portfolio because each investor in the
Portfolio is individually responsible for the payment of any taxes on its share
of such income. Since some of the Portfolio's investors are regulated investment
companies that invest all or substantially all of their assets in the Portfolio,
the Portfolio normally must satisfy the applicable source of income and
diversification requirements, (under the Internal Revenue Code), in order for
its investors to satisfy them. The Portfolio will allocate, at least annually
among its investors, each investor's distributive share of the Portfolio's net
investment income, net realized capital gains, and any other items of income,
gain, loss, deduction or credit. Withholding taxes on foreign dividends and
capital gains have been provided for in accordance with the Trust's
understanding of the applicable countries' tax rules and rates.
C. DEFERRED ORGANIZATION EXPENSES - Costs incurred by the Portfolio in
connection with its organization, including registration costs, are being
amortized on the straight-line basis over five years.
D. FUTURES CONTRACTS - Upon the entering of a financial futures contract, the
Portfolio is required to deposit ("initial margin") either in cash or securities
an amount equal to a certain percentage of the purchase price indicated in the
financial futures contract. Subsequent payments are made or received by the
Portfolio ("margin maintenance") each day, dependent on daily fluctuations in
the value of the underlying security, and are recorded for book purposes as
unrealized gains or losses by the Portfolio. The Portfolio's investment in
financial futures contracts is designed only to hedge against anticipated future
changes in interest or currency exchange rates. Should interest or currency
exchange rates move unexpectedly, the Portfolio may not achieve the anticipated
benefits of the financial futures contracts and may realize a loss. If the
Portfolio enters into a closing transaction, the Portfolio will realize, for
book purposes, a gain or loss equal to the difference between the value of the
financial futures contract to sell and financial futures contract to buy.
E. FOREIGN CURRENCY TRANSLATION - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investment securities and income and expenses are converted
into U.S. dollars based upon currency exchange rates prevailing on the
respective dates of such transactions. Recognized gains or losses on investment
transactions attributable to foreign currency rates are recorded for financial
statement purposes as net realized gains and losses on investments. That portion
of unrealized gains and losses on investments that result from fluctuations in
foreign currency exchange rates are not separately disclosed.
F. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS - The Portfolio may enter into
forward foreign currency exchange contracts for the purchase or sale of a
specific foreign currency at a fixed price on a future date. Risks may arise
upon entering these contracts from the potential inability of counter parties to
meet the terms of their contracts and from movements in the value of a foreign
currency relative to the U.S. dollar. The Portfolio will enter into forward
contracts for hedging purposes as well as non-hedging purposes. The forward
foreign currency exchange contracts are adjusted by the daily exchange rate of
the underlying currency and any gains or losses are recorded for financial
statement purposes as unrealized until such time as the contracts have been
closed or offset.
G. OTHER - Investment transactions are accounted for on the date the investments
are purchased or sold. Dividend income is recorded on the ex-dividend date.
However, if the ex-dividend date has passed, certain dividends from foreign
securities are recorded as the Portfolio is informed of the ex-dividend date.
Interest income is recorded on the accrual basis.
-------------------------------------------------------------------------------
(2) INVESTMENT ADVISER FEE AND OTHER TRANSACTIONS WITH AFFILIATES
The investment adviser fee is earned by Lloyd George Management (Hong
Kong)Limited (the Adviser) as compensation for management and investment
advisory services rendered to the Portfolio. Under the advisory agreement, the
Adviser receives a monthly fee of 0.0625% (0.75% annually) of the average daily
net assets of the Portfolio up to $500,000,000, and at reduced rates as daily
net assets exceed that level. For the year ended August 31, 1994 the adviser fee
was 0.74% of average net assets. In addition,an administrative fee is earned by
Eaton Vance Management (EVM) for managing and administering the business affairs
of the Portfolio. Under the administration agreement, EVM earns a monthly fee in
the amount of 1/48th of 1% (equal to 0.25% annually) of the average daily net
assets of the Portfolio up to $500,000,000, and at reduced rates as daily net
assets exceed that level. For the year ended August 31, 1994, the administration
fee was 0.25% of average net assets. Except as to Trustees of the Portfolio who
are not members of the Adviser or EVM's organization, officers and Trustees
receive remuneration for their services to the Portfolio out of such investment
adviser and administrative fees. Investors Bank &Trust Company (IBT), an
affiliate of EVM, serves as custodian of the Portfolio. Pursuant to the
custodian agreement, IBT receives a fee reduced by credits which are determined
based on the average daily cash balances the Portfolio maintains with IBT.
Certain of the officers and Trustees of the Portfolio are officers or
directors/trustees of the above organizations.
-------------------------------------------------------------------------------
(3) INVESTMENT TRANSACTIONS
Purchases and sales of investments, other than short-term obligations,
aggregated $658,786,181 and $191,100,296, respectively.
-------------------------------------------------------------------------------
(4) FEDERAL INCOME TAX BASIS OF INVESTMENTS
The cost and unrealized appreciation (depreciation) in value of the investments
owned at August 31, 1994, as computed on a federal income tax basis, are as
follows:
Aggregate cost $627,782,379
============
Gross unrealized appreciation $123,350,391
Gross unrealized depreciation 26,010,370
------------
Net unrealized appreciation $ 97,340,021
============
-------------------------------------------------------------------------------
(5) RISKS ASSOCIATED WITH FOREIGN INVESTMENTS
Investing in securities issued by companies whose principal business activities
are outside the United States may involve significant risks not present in
domestic investments. For example, there is generally less publicly available
information about foreign companies, particularly those not subject to the
disclosure and reporting requirements of the U.S. securities laws. Foreign
issuers are generally not bound by uniform accounting, auditing, and financial
reporting requirements and standards of practice comparable to those applicable
to domestic issuers. Investments in foreign securities also involve the risk of
possible adverse changes in investment or exchange control regulations,
expropriation or confiscatory taxation, limitation on the removal of funds or
other assets of the Portfolio, political or financial instability or diplomatic
and other developments which could affect such investments. Foreign stock
markets, while growing in volume and sophistication, are generally not as
developed as those in the United States, and securities of some foreign issuers
(particularly those located in developing countries) may be less liquid and more
volatile than securities of comparable U.S. companies. In general, there is less
overall governmental supervision and regulation of foreign securities markets,
broker-dealers, and issuers than in the United States.
-------------------------------------------------------------------------------
(6) LINE OF CREDIT
The Portfolio participates with other portfolios and funds managed by EVM and
its affiliates in a $120 million unsecured line of credit agreement with a bank.
The line of credit consists of a $20 million committed facility and a $100
million discretionary facility. Borrowings will be made by the Portfolio solely
to facilitate the handling of unusual and/or unanticipated short-term cash
requirements. Interest is charged to each portfolio based on its borrowings at
an amount above either the bank's adjusted certificate of deposit rate, a
variable adjusted certificate of deposit rate, or a federal funds effective
rate. In addition, a fee computed at an annual rate of 1/4 of 1% on the $20
million committed facility and on the daily unused portion of the $100 million
discretionary facility is allocated among the participating funds and portfolios
at the end of each quarter. The Portfolio did not have any significant
borrowings or allocated fees during the period.
<PAGE>
-------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
To the Trustees and Investors of
Greater China Growth Portfolio:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Greater China Growth Portfolio as of August 31,
1994, and the related statement of operations for the year then ended, the
statement of changes in net assets and the supplementary data for the year ended
August 31, 1994 and for the period from the start of business, October 28, 1992,
to August 31, 1993. These financial statements and supplementary data are the
responsibility of the Portfolio's management. Our responsibility is to express
an opinion on these financial statements and supplementary data based upon our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and supplementary
data are free of material misstatement. An audit includes examining on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at
August 31, 1994, by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and supplementary data present fairly,
in all material respects, the financial position of Greater China Growth
Portfolio at August 31, 1994, the results of its operations, the changes in its
net assets and its supplementary data for the respective stated periods, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
October 7, 1994
<PAGE>
APPENDIX C
[LOGO]
AN
EATON VANCE
MARATHON
FUND
EV MARATHON
GREATER CHINA
GROWTH FUND
<PAGE>
INVESTING IN CHINA FOR
LONG-TERM CAPITAL APPRECIATION
The People's Republic of China ("China") and the surrounding countries of
the China region have recently become one of the most exciting and potentially
profitable areas for investors seeking capital appreciation. But capturing the
investment opportunity in China is challenging.
EV Marathon Greater China Growth Fund is a mutual fund that seeks capital
appreciation by investing in interests in a Portfolio of equity securities of
companies that, in the opinion of the Portfolio's investment adviser, will
benefit from the economic development and growth of China. The Fund offers
investors the advantages and convenience of an open-end mutual fund and the
benefits of an experienced, Hong Kong-based investment adviser with specialized
knowledge of the emerging East Asian markets.
Of course, while Eaton Vance believes that the opportunities for long-term
capital appreciation are excellent, investors should consider carefully the
risks involved in committing a portion of their assets to the Fund.
Such risks, for example, may include fluctuations in foreign exchange rates,
political or economic instability in the country in which the security's issuer
is located, and the possible imposition of exchange controls or other laws or
restrictions. In addition, foreign securities markets may be less liquid, more
volatile and subject to less government supervision than in the United States.
Further, there is no guarantee that the economy or stock market of China will
continue to grow as it has in the past, or that EVMarathon Greater China Growth
Fund will benefit from such growth. Share values will fluctuate and, when
redeemed, may be worth more or less than at the time of purchase.
CHINA IS NOW ONE OF THE WORLD'S
FASTEST GROWING ECONOMIES
In recent years, China has undergone remarkable change. China has embraced
economic reforms that have turned it into one of the world's most spectacularly
growing economies. Following strong growth in recent years, (Gross Domestic
Product (GDP) in 1995 is forecast to grow by more than 9 percent.) China's
leadership has officially declared this rapid growth as China's principal
political objective, until at least the turn of the century. China is also
influencing the growth rates of its neighbors: the average real (inflation
adjusted) GDP growth rate of the China region has been over 7.0 percent annually
for the past 6 years, compared with just 3 percent or less in Europe and the
United States.
Source: Lloyd George Management Ltd.
<PAGE>
GREATER CHINA AND
CHINA'S SPECIAL ECONOMIC ZONES
IN ORDER TO ATTRACT FOREIGN INVESTMENT, SINCE 1978 CHINA HAS DESIGNATED CERTAIN
AREAS OF THE COUNTRY WHERE OVERSEAS INVESTORS CAN RECEIVE SPECIAL INVESTMENT
INCENTIVES AND TAX CONCESSIONS. THERE ARE FIVE SPECIAL ECONOMIC ZONES (SHENZHEN,
SHANTOU AND ZHUHI IN GUANGDONG PROVINCE, XIAMEN IN FUJIAN PROVINCE AND HAINAN
ISLAND, WHICH ITSELF IS A PROVINCE).
IN ADDITION, 14 COASTAL CITIES HAVE BEEN DESIGNATED AS "OPEN CITIES" AND CERTAIN
OPEN ECONOMIC ZONES HAVE BEEN ESTABLISHED IN COASTAL AREAS. SHANGHAI HAS
ESTABLISHED THE PUDONG NEW AREA. TWENTY-SEVEN HIGH AND NEW TECHNOLOGY INDUSTRIAL
DEVELOPMENT ZONES HAVE BEEN APPROVED WHERE PREFERENTIAL TREATMENT IS GIVEN TO
ENTERPRISES WHICH ARE CONFIRMED AS TECHNOLOGY-RELATED.
<PAGE>
CHINA'S POTENTIAL
FOR GROWTH
With 1.2 billion people, China houses one quarter of the world's population.
China's population is young - an average 15 years younger than that of developed
Western countries, and its work force of approximately 600 million is five times
the size of the U.S. work force.
Source: Lloyd George Management Ltd.
DESPITE LOWER WAGES, CHINA'S SAVINGS RATE IS MORE THAN THREE TIMES THAT OF
THE UNITED STATES
The average monthly wage is between 200 and 300 renminbi, or approximately
$75 - $85. This compares to an average U.S. monthly wage of nearly $2,050.
China's savings rate of 42 percent of Gross National Product (GNP) is more than
three times that of the U.S. China's savings pool currently exceeds $250
billion, and savings rates throughout the China region are correspondingly high.
In 1994 the gross national savings rate (as a percentage of GNP) in Singapore
was a remarkable 47.5 percent, followed closely by 42 percent in China, 36.6
percent in Indonesia, 35.6 percent in Korea, 32.5 percent in Hong Kong, 31.7
percent in Thailand, 28 percent in Taiwan, 24 percent in India, and 21 percent
in the Philippines. By comparison, the savings rate in the United States was
only 12 percent for the same period.
Source: Lloyd George Management Ltd.
US VS. CHINA:
A FINANCIAL COMPARISON
The table below compares financial statistics and consumption of various
products in the U.S. and China (all figures are annual, per person, except where
otherwise noted).
UNITED
STATES CHINA
GROSS NATIONAL PRODUCT ($US) $21,665 $395
AVERAGE MONTHLY WAGE ($US) $1,919 $38
PRIMARY ENERGY (TONS OF OIL EQUIVALENT) 7.5 0.64
COPPER (POUNDS) 20.0 0.9
ALUMINUM (POUNDS) 40.7 1.5
RAW STEEL (POUNDS) 880.0 165.0
RICE (POUNDS) 15.5 775.0
MEAT (POUNDS) 245.0 50.0
SUGAR (POUNDS) 140.0 9.6
SOFT DRINKS (GALLONS) 96.0 1.0
TV SETS (PER 1,000 PEOPLE) 885.0 8.0
NEWSPRINT (POUNDS) 125.0 3.0
TELEPHONE LINES (PER 1,000 PEOPLE) 520.0 5.3
CARS (PER 1,000 PEOPLE) 525.0 1.4
REFRIGERATORS (PER 1,000 PEOPLE) 390.0 2.6
Source: Lloyd George Management Ltd.
<PAGE>
(Horizontal Bar Chart)
1994 AVERAGE FACTORY WAGES PER MONTH
$US
$3,574 Japan
$2,041 USA
$1,247 South Korea
$1,208 Taiwan
$1,191 Singapore
$1,140 Hong Kong
$ 346 Malaysia
$ 225 Spec. Economic Zones
$ 156 Thailand
$ 124 Philippines
$ 82 China
$ 66 Indonesia
Source: Lloyd George Management Ltd.
AT PRESENT, THERE IS AN ENORMOUS DISPARITY IN LABOR COSTS BETWEEN THE EMERGING
ASIAN COUNTRIES (CHINA, INDONESIA, THE PHILIPPINES, THAILAND AND MALAYSIA) AND
THOSE THAT ARE MORE INDUSTRIALIZED. OVER THE NEXT DECADE THERE IS STRONG REASON
TO BELIEVE THAT THE EMERGING COUNTRIES WILL START TO MOVE THEIR MANUFACTURING
FOCUS UPSCALE, SHIFTING FROM SUCH GOODS AS PLASTIC FLOWERS, TEXTILES AND TOYS,
TO COLOR TELEVISION SETS AND COMPUTERS, EMULATING THE LEAD OF SOUTH KOREA AND
TAIWAN.
WHAT ALL COUNTRIES OF THE REGION SHARE IS AN EQUITABLE WAGE STRUCTURE. UNLIKE
THE UNITED STATES, FOR EXAMPLE, WHERE A CHIEF EXECUTIVE OFFICER COULD EASILY
EARN 100 TIMES MORE THAN WHAT A PRODUCTION-LINE WORKER IN THE SAME COMPANY
MAKES, THE WAGE DIFFERENTIAL WITHIN THE CHINA REGION IS FAR SMALLER. IN SOUTH
KOREA, FOR EXAMPLE, THE DIFFERENCE BETWEEN THE TWO AT THE COUNTRY'S LARGEST
COMPANY IS ONLY NINE-FOLD.
(Horizontal Bar Chart)
AVERAGE GROWTH IN GROSS NATIONAL PRODUCT: 1989-1994
Percent
19.03% China/Spec. Economic Zones
9.25% Thailand
8.80% Malaysia
8.30% Singapore
7.21% South Korea
6.80% Indonesia
6.41% Taiwan
4.60% Hong Kong
2.60% Philippines
1.90% United States
Source: Lloyd George Management Ltd.
THE AVERAGE REAL (INFLATION-ADJUSTED) GROSS DOMESTIC PRODUCT GROWTH RATE IN ASIA
HAS BEEN 7.0 PERCENT ANNUALLY OVER THE PAST 6 YEARS COMPARED WITH 3 PERCENT OR
LESS IN EUROPE AND THE UNITED STATES. ALTHOUGH MUCH WILL DEPEND ON THE
PRESERVATION OF THE INTERNATIONAL FREE TRADE SYSTEM, INTER-REGIONAL GROWTH IN
ASIAN TRADE HAS BECOME A MAJOR FACTOR IN THE CONTINUING SUPERIOR PERFORMANCE OF
ASIAN COUNTRIES.
THE LINKS BETWEEN CHINA AND HONG KONG, BETWEEN CHINA AND TAIWAN AND BETWEEN
CHINA AND OTHER COUNTRIES WITHIN THE REGION, WHERE THERE IS A SIGNIFICANT
OVERSEAS CHINESE POPULATION, HAVE BY NOW BEEN STRENGTHENED TO A DEGREE WHICH
MAKES A REVERSAL UNLIKELY. MOREOVER, ALTHOUGH THESE LINKS HAVE BEEN DEVELOPED TO
A STAGE WHERE ECONOMIC COOPERATION IN TRADE OPERATES SMOOTHLY, THE FULL
POTENTIAL OF THE MARKET, BOTH IN TERMS OF DOMESTIC CONSUMPTION AND OF EXPORT
GROWTH, HAS HARDLY BEGUN TO BE REALIZED.
<PAGE>
Chinese society has been based on the tenets of Confucius, which advocate order,
respect, hierarchy, good manners and the sacrifice of the individual for the
greater good of the family and the community. Chinese culture has favored hard
work, achievement and thrift, which is reflected in China's high savings rate.
THE 'OVERSEAS' CHINESE ARE LEADING CHINA'S TRANSFORMATION FROM CENTRAL
PLANNING TOWARD A MARKET-DRIVEN ECONOMY
The "overseas" Chinese - those living outside China - are leading the
Chinese economic miracle by supplying capital and management expertise to
complement the low-cost labor and land resources of mainland China. Eaton Vance
Management estimates that 75 percent of all trade in most of the China region
today goes through firms controlled by overseas Chinese.
By far the largest part of foreign contracted investment, presently running at a
$68 billion annual rate, is coming from the overseas Chinese. It is this direct
foreign investment - with its technology, management skills and export potential
- that is transforming China's economy, leading many observers to believe that
China will assume the leadership in Asia within the next 20 years.
With the overseas Chinese leading the way, foreign trade now accounts for more
than 15 percent of China's GNP. The establishment of "Special Economic Zones"
along China's south coast, which welcomed foreign firms and foreign capital, has
fostered the rapid development of China's export markets. Comments by paramount
leader Deng Xiaoping early in 1992, holding up the experience of the Special
Economic Zones as the model on which China should base its future, form a basis
for confidence in the sustainability and growth of economic reform throughout
China.
(Horizontal Line Chart)
CHINA'S EXPORTS ARE ON THE RISE
$U.S. billion
Exports Imports
1988 $ 44.6 $ 56.0
1989 $ 51.1 $ 59.0
1990 $ 61.9 $ 52.0
1991 $ 70.7 $ 62.5
1992 $ 84.9 $ 80.0
1993 $ 91.2 $104.7
1994E $111.2 $123.3
1995E $127.8 $137.9
Source: Lloyd George Management Ltd.
<PAGE>
(Horizontal Line Chart)
1994 GROSS NATIONAL SAVINGS AS A % OF
GROSS NATIONAL PRODUCT
47.5% Singapore
42.0% China
36.6% Indonesia
35.6% Korea
32.5% Hong Kong
31.7% Thailand
28.0% Taiwan
24.0% India
21.0% Philippines
12.0% United States
Source: Lloyd George Management Ltd.
THE CITIZENS OF THE CHINA REGION ARE PRODIGIOUS SAVERS - AND INVESTORS. IN 1994,
THE GROSS NATIONAL SAVINGS RATE (AS A PERCENTAGE OF GROSS NATIONAL PRODUCT) IN
SINGAPORE WAS A REMARKABLE 47.5 PERCENT, FOLLOWED CLOSELY BY 42 PERCENT IN
CHINA, 36.6 PERCENT IN INDONESIA, 35.6 PERCENT IN KOREA, 32.5 PERCENT IN HONG
KONG, 31.7 PERCENT IN THAILAND, 28 PERCENT IN TAIWAN, 24 PERCENT IN INDIA AND 21
PERCENT IN THE PHILIPPINES. BY COMPARISON, THE SAVINGS RATE IN THE UNITED
STATES, AS A PERCENTAGE OF GNP, FOR THE SAME PERIOD WAS ONLY 12 PERCENT.
(Horizontal Bar Chart)
FOREIGN INVESTMENT IS GROWING RAPIDLY
$U.S. billion
1994 $27.7
1993 $25.0
1992 $13.0
1991 $4.9
1990 $4.9
Source: Ministry of Foreign Economic Relations & Trade; State Statistical Bureau
of the People' Republic of China
ACTUAL FOREIGN INVESTMENT HAS GROWN TO $U.S. 27.7 BILLION IN 1994 FROM $U.S.
25.0 BILLION IN 1993 AND APPROXIMATELY $U.S. 13.0 BILLION IN 1992. FOREIGN
INVESTMENT IN 1991 AND 1990 WERE BELOW $U.S. 5.0 BILLION.
INVESTMENT IN TAIWAN AND CHINA'S FUJIAN PROVINCE CONTINUES TO GROW. MOST OF HONG
KONG'S MANUFACTURING INVESTMENT HAS BEEN IN CHINA'S GUANGDONG PROVINCE, AND MORE
THAN 3 MILLION WORKERS ARE NOW EMPLOYED IN THE PROVINCE, WORKING FOR HONG KONG
COMPANIES.
LLOYD GEORGE MANAGEMENT ESTIMATES THAT 75 PERCENT OF ALL TRADE IN MOST OF THE
CHINA REGION TODAY GOES THROUGH FIRMS CONTROLLED BY THE OVERSEAS CHINESE.
<PAGE>
ECONOMIC PLANS NOW INCLUDE OBJECTIVES TO FURTHER INCREASE THE EXPORT
ELEMENT OF THE ECONOMY
Economic plans covering the last decade of the 20th century now include
objectives to quadruple the country's 1980 industrial and agricultural output by
the year 2000...to further increase the export element of the economy...and to
continue to open the country with further development of the designated special
investment areas.
Over the past 20 years, the performance of the China region stock markets has
generally been better than those in the United States and Europe. In the past
five years, these newly emerging securities markets have demonstrated
significant growth in market capitalization, in the numbers of listed securities
and the volume of transactions. In addition, with reasonable price-to-earnings
ratios, the stock markets of the China region currently offer excellent value
compared to other countries.
Two stock exchanges have opened in China - the Shenzhen and the Shanghai. Class
"A" and Class "B" shares are traded on both. While only resident Chinese can
purchase Class "A" shares, foreign investors (such as EV Marathon Greater China
Growth Fund) can purchase Class "B" shares.
The Shenzhen Stock Exchange, established in April 1991, officially opened in
July 1991 with 6 listed companies. By December 1994, 114 stocks were traded, of
which 22 were "B" shares.*
The Shanghai Stock Exchange, established in November 1990, officially opened in
December 1990 with 8 listed companies. By December 1994, 171 stocks were traded,
of which 32 were "B"shares.*
* Source: Lloyd George Management Ltd.
(Horizontal Bar Chart)
Comparative China Region Price/Earnings Ratios
Year end 1994
20.6 Thailand
21.7 Malaysia
22.2 Singapore
14.4 United States
25.8 Philippines
28.7 Taiwan
17.8 Indonesia
18.7 South Korea
11.0 Hong Kong
Source: Lloyd George Management Ltd.
MOST OF THE STOCK MARKETS OF THE CHINA REGION CURRENTLY OFFER EXCELLENT VALUES.
<PAGE>
EV MARATHON
GREATER CHINA GROWTH FUND
THE FUND OFFERS INVESTORS
THE POTENTIAL TO BENEFIT
FROM CHINA'S GROWTH
The investment objective of EV Marathon Greater China Growth Fund is
long-term capital appreciation.
The Fund offers investors the potential to benefit from the economic development
and growth of China. It invests in interests in the Greater China Growth
Portfolio. The Portfolio invests primarily in equities traded on the securities
markets in the China region, including the two stock exchanges in China itself.
The Portfolio may invest in the common and preferred stocks of companies that
provide goods or services to, or from within, the People's Republic of China
(China), or have manufacturing or other operations in China - and that are
normally listed on Southeast Asian stock exchanges or traded on their
over-the-counter markets.
FUND SHARES ARE NOT INSURED BY THE FDIC AND ARE NOT DEPOSITS OR OTHER
OBLIGATIONS OF, OR GUARANTEED BY, ANY DEPOSITORY INSTITUTION. SHARES ARE SUBJECT
TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL INVESTED.
(Horizontal Bar Chart)
THE GROWTH OF THE CHINA REGION'S EMERGING MARKETS
Percent change in market capitalization 1984-1994
Indonesia 79000
Philippines 19000
Korea 3200
Taiwan 2470
Hong Kong 1263
Singapore 1008
Malaysia 697
Thailand 167
Source: Lloyd George Management Ltd.
THE MAJOR ASIAN SECURITIES MARKETS HAVE GENERALLY OUTPERFORMED THOSE IN EUROPE
AND THE UNITED STATES OVER THE PAST 20 YEARS. IN THE PAST FIVE YEARS, THE CHINA
REGION'S NEWLY EMERGING MARKETS HAVE GROWN DRAMATICALLY IN MARKET
CAPITALIZATION, IN NUMBERS OF LISTED SECURITIES AND IN THE VOLUME OF
TRANSACTIONS.
<PAGE>
PORTFOLIO INVESTMENTS
INCLUDE COUNTRIES THROUGHOUT
THE CHINA REGION
The countries in which the Portfolio may
invest include:
o China o Singapore
o Hong Kong o South Korea
o Indonesia o Taiwan
o Malaysia o Thailand
o Philippines
Any well-managed investment, be it a start- up portfolio or a billion-dollar
institutional account, requires in-depth knowledge of markets, products,
management styles and, to the extent possible, a keen sense of economic and
political trends - past, current and future.
But investing in emerging overseas markets calls for even more. And that is a
thorough understanding of the cultures, history and attitudes of the people and
countries in which assets will be placed.
While there is no shortage of expertise in the established markets of North
America, Japan and Europe, there are relatively few advisers dedicated to the
emerging markets of the China region.
<PAGE>
THE INVESTMENT ADVISER:
LLOYD GEORGE MANAGEMENT (HONG KONG) LIMITED
THE ADVISER, LLOYD GEORGE MANAGEMENT, HAS EXTENSIVE, HANDS-ON EXPERIENCE
IN THE CHINA REGION
Lloyd George Management (Hong Kong) Limited, the Portfolio's investment
adviser, comprises a group of highly qualified and experienced investment
professionals. Individually and collectively, they have extensive hands-on
experience in the securities markets of the China region, including the
management of several regional mutual funds.
Based in Hong Kong, Lloyd George Management is ideally situated to monitor the
pulse of the China region, select the securities for the Portfolio and manage,
on a day-to-day basis, its assets.
EATON VANCE IS THE FUND'S
SPONSOR AND ADMINISTRATOR
The Fund's sponsor and administrator is Eaton Vance Management, a
Boston-based investment firm founded in 1924. Eaton Vance currently manages
approximately $15 billion in assets for more than 140 mutual funds, whose
investment objectives range from tax free and taxable income to maximum capital
appreciation, as well as individual and institutional accounts for retirement
plans, pension funds and endowments.
<PAGE>
THE FUND HAS
NO INITIAL SALES CHARGE
o Invest a minimum of $1,000. The minimum subsequent investment is only $50.
o Dividends and capital gains distributions may be taken in cash, or
reinvested at net asset value in additional shares.
o Qualified plans, including Individual Retirement Accounts, are available.
o Free telephone exchange is available between a variety of Eaton Vance
Funds. Ask your investment adviser for details.
o Bank draft investing (minimum $50 per month or quarter) allows
shareholders to invest regularly.
Please see a prospectus for more information about any of these services.
For more complete information about EV Marathon Greater China Growth Fund or any
other Eaton Vance fund, including distribution plans, charges and expenses,
please write or call your financial adviser for a prospectus. Read the
prospectus(es) carefully before you invest or send money.
[LOGO]
EATON VANCE DISTRIBUTORS, INC.
24 Federal Street
Boston, MA 02110
[DRAGON LOGO]
LLOYD GEORGE MANAGEMENT
(HONG KONG) LIMITED
3808, One Exchange Square
Central, Hong Kong
<PAGE>
Page 1 photo courtesy of the Peabody Museum of Salem, from a painting of Hong
Kong, circa 1855-1860, attributed to Sunqua. Photo by Mark Sexton.
30962 - 3/95 M - CGCB
<PAGE>
SPONSOR AND MANAGER OF
EV MARATHON GREATER CHINA
GROWTH FUND
Administrator of Greater China Growth Portfolio
Eaton Vance Management
24 Federal Street
Boston, MA 02110
ADVISER OF GREATER CHINA
GROWTH PORTFOLIO
Lloyd George Management (Hong Kong) Limited
3808 One Exchange Square
Central, Hong Kong
PRINCIPAL UNDERWRITER
Eaton Vance Distributors, Inc.
24 Federal Street
Boston, MA 02110
(800) 225-6265
CUSTODIAN
Investors Bank & Trust Company
24 Federal Street
Boston, MA 02110
TRANSFER AGENT
The Shareholder Services Group, Inc.
BOS725
P.O. Box 1559
Boston, MA 02104
(800) 262-1122
AUDITORS
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110
EV MARATHON GREATER CHINA
GROWTH FUND
24 FEDERAL STREET
BOSTON, MA 02110
M-CGSAI
[LOGO]
EV MARATHON
GREATER CHINA
GROWTH FUND
STATEMENT OF
ADDITIONAL
INFORMATION
JANUARY 1, 1995
<PAGE>
EV TRADITIONAL GREATER CHINA GROWTH FUND
SUPPLEMENT TO STATEMENT OF ADDITIONAL INFORMATION
DATED JANUARY 1, 1995
The following supplements the information found under "Investment
Performance" in Part I of the Fund's Statement of Additional Information:
From time to time the Fund may provide investors with
information on global investing, which may include descriptions,
comparisons, charts and/or illustrations of: foreign and domestic
equity market capitalizations; returns obtained by foreign and domestic
securities; and the effects of globally diversifying an investment
portfolio (including volatility analysis and performance information).
Such information may be provided for a variety of countries over
varying time periods.
August 1, 1995 T-GCSAIS
<PAGE>
STATEMENT OF
ADDITIONAL INFORMATION
January 1, 1995
EV TRADITIONAL GREATER CHINA GROWTH FUND
24 Federal Street
Boston, Massachusetts 02110
(800) 225-6265
This Statement of Additional Information consists of two parts. Part I
provides information about EV Traditional Greater China Growth Fund (the "Fund")
and certain other series of Eaton Vance Growth Trust (the "Trust"). Part II
provides information solely about the Fund. Where appropriate, Part I includes
cross-references to the relevant sections of Part II that provide additional,
Fund-specific information.
TABLE OF CONTENTS Page
PART I
Investment Objective ...................................................... 2
Additional Information about Investment Policies .......................... 2
Investment Restrictions ................................................... 10
Trustees and Officers ..................................................... 13
Management of the Fund .................................................... 15
Custodian ................................................................. 17
Service for Withdrawal .................................................... 18
Determination of Net Asset Value .......................................... 18
Investment Performance .................................................... 19
Taxes ..................................................................... 20
Portfolio Security Transactions ........................................... 22
Other Information ......................................................... 23
Independent Certified Public Accountants .................................. 24
Appendix A -- The Securities Markets in China and Hong Kong ............... 25
Appendix B -- China Region Countries ...................................... 37
PART II
Fees and Expenses ......................................................... a-1
Performance Information ................................................... a-2
Services for Accumulation ................................................. a-2
Principal Underwriter ..................................................... a-3
Distribution Plan ......................................................... a-4
Control Persons and Principal Holders of Securities ....................... a-4
Financial Statements ...................................................... a-5
Appendix C -- Statistical Information ..................................... C-1
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY THE FUND'S PROSPECTUS DATED JANUARY 1, 1995, AS SUPPLEMENTED FROM
TIME TO TIME. THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE READ IN
CONJUNCTION WITH SUCH PROSPECTUS, A COPY OF WHICH MAY BE OBTAINED WITHOUT CHARGE
BY CONTACTING EATON VANCE DISTRIBUTORS, INC. (THE "PRINCIPAL UNDERWRITER") (SEE
BACK COVER FOR ADDRESS AND PHONE NUMBER).
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PART I
The following provides information about the Fund and certain other
series of the Trust.
INVESTMENT OBJECTIVE
The investment objective of the Fund is to seek long-term capital
appreciation. It seeks to meet its investment objective by investing all of its
investable assets in the Greater China Growth Portfolio (the "Portfolio"), a
separate registered investment company which was organized as a trust under the
laws of the State of New York. The Portfolio invests in equity securities of
companies which, in the opinion of the investment adviser, will benefit from the
economic development and growth of the People's Republic of China ("China"). The
Portfolio has the same investment objective as the Fund.
Except for the fundamental investment restrictions and policies specifically
identified in the Prospectus or enumerated in this Statement of Additional
Information, the investment objective and policies of the Fund and the Portfolio
are not fundamental policies and accordingly may be changed by the Trustees of
the Trust and the Portfolio without obtaining the approval of the shareholders
of the Fund or the investors in the Portfolio. If any changes were made, the
Fund might have investment objectives different from the objectives which an
investor considered appropriate at the time the investor became a shareholder in
the Fund.
ADDITIONAL INFORMATION ABOUT INVESTMENT POLICIES
FOREIGN INVESTMENTS
Investing in securities issued by companies whose principal business
activities are outside the United States may involve significant risks not
present in domestic investments. For example, there is generally less publicly
available information about foreign companies, particularly those not subject to
the disclosure and reporting requirements of the U.S. securities laws. Foreign
issuers are generally not bound by uniform accounting, auditing, and financial
reporting requirements and standards of practice comparable to those applicable
to domestic issuers. Investments in foreign securities also involve the risk of
possible adverse changes in investment or exchange control regulations,
expropriation or confiscatory taxation, limitation on the removal of funds or
other assets of the Portfolio, political or financial instability or diplomatic
and other developments which could affect such investments. Further, economies
of particular countries or areas of the world may differ favorably or
unfavorably from the economy of the United States. It is anticipated that in
most cases the best available market for foreign securities will be on exchanges
or in over-the-counter markets located outside of the United States. Foreign
stock markets, while growing in volume and sophistication, are generally not as
developed as those in the United States, and securities of some foreign issuers
(particularly those located in developing countries) may be less liquid and more
volatile than securities of comparable U.S. companies. In addition, foreign
brokerage commissions are generally higher than commissions on securities traded
in the United States and may be non-negotiable. In general, there is less
overall governmental supervision and regulation of foreign securities markets,
broker-dealers, and issuers than in the United States.
FOREIGN CURRENCY TRANSACTIONS
Since investments in companies whose principal business activities are
located outside of the United States will frequently involve currencies of
foreign countries, and since assets of the Portfolio may temporarily be held in
bank deposits in foreign currencies during the completion of investment
programs, the value of the assets of the Portfolio as measured in U.S. dollars
may be affected favorably or unfavorably by changes in foreign currency exchange
rates and exchange control regulations. Currency exchange rates can also be
affected unpredictably by intervention by U.S. or foreign governments or central
banks, or the failure to intervene, or by currency controls or political
developments in the U.S. or abroad. The Portfolio may conduct its foreign
currency exchange transactions on a spot (i.e., cash) basis at the spot rate
prevailing in the foreign currency exchange market or through entering into
contracts to purchase or sell foreign currencies at a future date (i.e., a
"forward foreign currency" contract or "forward" contract). It may convert
currency on a spot basis from time to time, and bear the costs of such
conversion. Although foreign exchange dealers do not charge a fee for
conversion, they do realize a profit based on the difference (the "spread")
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to the Portfolio at one
rate, while offering a lesser rate of exchange should the Portfolio desire to
resell that currency to the dealer.
CURRENCY SWAPS
The Portfolio may enter into currency swaps for hedging purposes and non-
hedging purposes. Inasmuch as swaps are entered into for good faith hedging
purposes and are offset by a segregated account as described below, the
Portfolio and Lloyd George Management (Hong Kong) Limited (the "Adviser")
believe that swaps do not constitute senior securities as defined in the
Investment Company Act of 1940 (the "1940 Act") and, accordingly, will not treat
them as being subject to the Portfolio's borrowing restrictions. An amount of
cash or liquid high grade debt securities (i.e., securities rated in one of the
top three ratings categories by Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Ratings Group ("S&P"), or, if unrated, deemed by the Adviser
to be of comparable credit quality) having an aggregate net asset value at least
equal to the gross payments which the Portfolio is obligated to make under the
currency swap will be maintained in a segregated account by the Portfolio's
custodian. The Portfolio will not enter into any currency swap unless the credit
quality of the unsecured senior debt or the claims-paying ability of the other
party thereto is considered to be investment grade by the Adviser. If there is a
default by the other party to such a transaction, the Portfolio will have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid in comparison with the markets for other similar instruments
which are traded in the interbank market.
FORWARD FOREIGN CURRENCY EXCHANGE TRANSACTIONS
The Portfolio may enter into forward foreign currency exchange contracts. A
forward foreign currency exchange contract involves an obligation to purchase or
sell a specific currency at a future date, which may be any fixed number of days
from the date of the contract agreed upon by the parties, at a price set at the
time of entering into the contract. These contracts are traded in the interbank
market conducted directly between currency traders (usually large commercial
banks) and their customers. A forward contract generally has no deposit
requirement, and no commissions are charged at any stage for trades.
At the maturity of a forward contract the Portfolio may either accept or
make delivery of the currency specified in the contract or, at or prior to
maturity, enter into a closing purchase transaction involving the purchase or
sale of an offsetting contract. Closing purchase transactions with respect to
forward contracts are usually effected with the currency trader who is a party
to the original forward contract.
The Portfolio may enter into forward foreign currency exchange contracts in
several circumstances. First, when the Portfolio enters into a contract for the
purchase or sale of a security denominated in a foreign currency, or when the
Portfolio anticipates the receipt in a foreign currency of dividend or interest
payments on such a security which it holds, the Portfolio may desire to "lock
in" the U.S. dollar price of the security or the U.S. dollar equivalent of such
dividend or interest payment, as the case may be. By entering into a forward
contract for the purchase or sale, for a fixed amount of dollars, of the amount
of foreign currency involved in the underlying transactions, the Portfolio will
attempt to protect itself against an adverse change in the relationship between
the U.S. dollar and the subject foreign currency during the period between the
date on which the security is purchased or sold, or on which the dividend or
interest payment is declared, and the date on which such payments are made or
received.
Additionally, when management of the Portfolio believes that the currency of
a particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell, for a fixed amount of
dollars, the amount of foreign currency approximating the value of some or all
of the securities held by the Portfolio denominated in such foreign currency.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. The precise projection of
short-term currency market movements is not possible, and short-term hedging
provides a means of fixing the dollar value of only a portion of the Portfolio's
foreign assets.
The Portfolio's custodian will place cash or other high grade liquid debt
securities in a segregated account of the Portfolio in an amount equal to the
value of the Portfolio's total assets committed to the consummation of forward
foreign currency exchange contracts requiring the Portfolio to purchase foreign
currencies. If the value of the securities placed in the segregated account
declines, additional cash or securities will be placed in the account on a daily
basis so that the value of the account will equal the amount of the Portfolio's
commitments with respect to such contracts.
The Portfolio generally will not enter into a forward contract with a term
of greater than one year. The use of forward contracts to protect the value of
the Portfolio's portfolio securities against a decline in the value of a
currency does not eliminate fluctuations in the underlying prices of the
securities. It simply establishes a rate of exchange which the Portfolio can
achieve at some future point in time.
While the Portfolio will enter into forward contracts to reduce currency
exchange rate risks, transactions in such contracts involve certain other risks.
Thus, while the Portfolio may benefit from such transactions, unanticipated
changes in currency prices may result in a poorer overall performance for the
Portfolio than if it had not engaged in any such transactions. Moreover, there
may be imperfect correlation between the securities held by the Portfolio
denominated in a particular currency and forward contracts entered into by the
Portfolio. Such imperfect correlation may prevent the Portfolio from achieving a
complete hedge or expose the Portfolio to risk of foreign exchange loss.
REPURCHASE AGREEMENTS
Under a repurchase agreement the Portfolio buys a security at one price and
simultaneously promises to sell that same security back to the seller at a
higher price. At no time will the Portfolio commit more than 15% of its net
assets to repurchase agreements which mature in more than seven days and other
illiquid securities. The Portfolio's repurchase agreements will provide that the
value of the collateral underlying the repurchase agreement will always be at
least equal to the repurchase price, including any accrued interest earned on
the repurchase agreement, and will be marked to market daily.
REVERSE REPURCHASE AGREEMENTS
The Portfolio may enter into reverse repurchase agreements. Under a reverse
repurchase agreement, the Portfolio temporarily transfers possession of a
portfolio instrument to another party, such as a bank or broker-dealer, in
return for cash. At the same time, the Portfolio agrees to repurchase the
instrument at an agreed upon time (normally within seven days) and price, which
reflects an interest payment. The Portfolio expects that it will enter into
reverse repurchase agreements when it is able to invest the cash so acquired at
a rate higher than the cost of the agreement, which would increase the income
earned by the Portfolio. The Portfolio could also enter into reverse repurchase
agreements as a means of raising cash to satisfy redemption requests without the
necessity of selling portfolio assets.
When the Portfolio enters into a reverse repurchase agreement, any
fluctuations in the market value of either the securities transferred to another
party or the securities in which the proceeds may be invested would affect the
market value of the Portfolio's assets. As a result, such transactions may
increase fluctuations in the market value of the Portfolio's assets. While there
is a risk that large fluctuations in the market value of the Portfolio's assets
could affect the Portfolio's net asset value, this risk is not significantly
increased by entering into reverse repurchase agreements, in the opinion of the
Adviser. Because reverse repurchase agreements may be considered to be the
practical equivalent of borrowing funds, they constitute a form of leverage. If
the Portfolio reinvests the proceeds of a reverse repurchase agreement at a rate
lower than the cost of the agreement, entering into the agreement will lower the
Portfolio's yield.
At all times that a reverse repurchase agreement is outstanding, the
Portfolio will maintain cash or high grade liquid securities in a segregated
account at its custodian bank with a value at least equal to its obligation
under the agreement. Securities and other assets held in the segregated account
may not be sold while the reverse repurchase agreement is outstanding, unless
other suitable assets are substituted. While the Adviser does not consider
reverse repurchase agreements to involve a traditional borrowing of money,
reverse repurchase agreements will be included within the aggregate limitation
on "borrowings" contained in the Portfolio's investment restriction (1) set
forth below.
WRITING AND PURCHASING CALL AND PUT OPTIONS
A call option written by the Portfolio obligates the Portfolio to sell
specified securities to the holder of the option at a specified price at any
time before the expiration date. The Portfolio will write a covered call option
on a security for the purpose of increasing its return on such security and/or
to partially hedge against a decline in the value of the security. In
particular, when the Portfolio writes an option which expires unexercised or is
closed out by the Portfolio at a profit, it will retain the premium paid for the
option, which will increase its gross income and will offset in part the reduced
value of the portfolio security underlying the option, or the increased cost of
acquiring the security for its portfolio. However, if the price of the
underlying security moves adversely to the Portfolio's position, the option may
be exercised and the Portfolio will be required to purchase or sell the
underlying security at a disadvantageous price, which may only be partially
offset by the amount of the premium, if at all. The Portfolio does not intend to
write a covered option on any security if after such transaction more than 15%
of its net assets, as measured by the aggregate value of the securities
underlying all covered calls and puts written by the Portfolio, would be subject
to such options. The Portfolio will only write a put option on a security which
it intends to ultimately acquire for its portfolio. A put option written by the
Portfolio would obligate the Portfolio to purchase specified securities from the
option holder at a specified price upon exercise of the option at any time
before the expiration date.
The Portfolio may purchase put or call options on securities or securities
indices in anticipation of changes in the value of its existing portfolio
securities or in the prices of securities that the Portfolio intends to purchase
at a later date. In the event that the expected changes occur, the Portfolio may
be able to offset adverse changes in the value of its portfolio, in whole or in
part, through the options purchased. The premium paid for a put or call option
plus any transaction costs will reduce the benefit, if any, realized by the
Portfolio upon exercise or liquidation of the option. Unless the price of the
underlying security changes sufficiently, the option may expire without value to
the Portfolio.
The Portfolio may terminate its obligations under a call or put option by
purchasing an option identical to the one it has written. Such purchases are
referred to as "closing purchase transactions."
The Portfolio would normally purchase call options in anticipation of an
increase in the market value of securities of the type in which the Portfolio
may invest. The purchase of a call option would entitle the Portfolio, in return
for the premium paid, to purchase specified securities at a specified price
during the option period. The Portfolio would ordinarily realize a gain if,
during the option period, the value of such securities exceeded the sum of the
exercise price, the premium paid and transaction costs; otherwise, the Portfolio
would realize a loss on the purchase of the call option.
The Portfolio would normally purchase put options in anticipation of a
decline in the market value of securities in its portfolio ("protective puts")
or securities of the type in which it is permitted to invest. The purchase of a
put option would entitle the Portfolio, in exchange for the premium paid, to
sell specified securities at a specified price during the option period. The
purchase of protective puts is designed merely to offset or hedge against a
decline in the market value of the securities held by the Portfolio. The
Portfolio would ordinarily realize a gain if, during the option period, the
value of the underlying securities decreased below the exercise price
sufficiently to cover the premium and transaction costs; otherwise, the
Portfolio would realize a loss on the purchase of the put option. Gains and
losses on the purchase of protective put options would tend to be offset by
countervailing changes in the value of underlying portfolio securities.
The Portfolio would also be able to enter into closing sale transactions in
order to realize gains or minimize losses on options purchased by the Portfolio.
The Portfolio does not intend to purchase any options if after such transaction
more than 5% of its net assets, as measured by the aggregate of all premiums
paid for all such options held by the Portfolio, would be so invested.
The Portfolio would write and purchase put and call options on securities
indices for the same purposes as the writing and purchase of options on
securities. Options on securities indices are similar to options on securities,
except that the exercise of securities index options requires cash payments and
does not involve the actual purchase or sale of securities. In addition,
securities index options are designed to reflect price fluctuations in a group
of securities or segment of the securities market rather than price fluctuations
in a single security.
SPECIAL RISKS ASSOCIATED WITH OPTIONS ON SECURITIES
An options position may be closed out only on an options exchange which
provides a secondary market for an option of the same series. Although the
Portfolio will generally purchase or write only those options for which there
appears to be an active secondary market, there is no assurance that a liquid
secondary market on an exchange will exist for any particular option, or at any
particular time. For some options no secondary market on an exchange may exist.
In such event, it might not be possible to effect closing transactions in
particular options, with the result that the Portfolio would have to exercise
its options in order to realize any profit and would incur transaction costs
upon the sale of underlying securities pursuant to the exercise of put options.
If the Portfolio as a covered call option writer is unable to effect a closing
purchase transaction in a secondary market, it will not be able to sell the
underlying security until the option expires or it delivers the underlying
security upon exercise.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the facilities of an exchange,
the Options Clearing Corporation or another clearing organization may not at all
times be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that exchange that had been issued by the Options Clearing
Corporation or another clearing organization as a result of trades on that
exchange would continue to be exercisable in accordance with their terms.
The Portfolio will pay brokerage commissions in connection with writing
options and effecting closing purchase transactions, as well as for purchases
and sales of underlying securities. The writing of options could result in
significant increases in the portfolio turnover rate of the Portfolio,
especially during periods when market prices of the underlying securities
appreciate.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain of the facilities of the
Options Clearing Corporation or other clearing organization inadequate, and
thereby result in the institution by an exchange of special procedures which may
interfere with the timely execution of customers' orders.
The amount of the premiums which the Portfolio may pay or receive may be
adversely affected as new or existing institutions, including other investment
companies, engage in or increase their option purchasing and writing activities.
FUTURES TRANSACTIONS
Futures Contracts. A change in the level of currency exchange rates or
securities prices may affect the value of the securities held by the Portfolio
(or of securities that the Portfolio expects to purchase). To hedge against
changes in rates or prices or for non-hedging purposes, the Portfolio may enter
into (i) futures contracts for the purchase or sale of securities and currency,
(ii) futures contracts on securities indices and (iii) futures contracts on
other financial instruments and indices. In the United States futures contracts
are traded on exchanges or boards of trade that are licensed and regulated by
the Commodity Futures Trading Commission ("CFTC"), and must be executed through
a futures commission merchant or brokerage firm which is a member of the
relevant exchange. The Portfolio may also enter into futures contracts traded on
a foreign exchange if it is determined by the Adviser that trading on such
exchange does not subject the Portfolio to risks, including credit and liquidity
risks, that are materially greater than the risks associated with trading on
United States exchanges.
Futures Contracts on Securities and Currency. A futures contract on a
security or a currency is a binding contractual commitment which, if held to
maturity, will result in an obligation to make or accept delivery, during a
particular month, of securities having a standardized face value and rate of
return or of the specified currency. By purchasing futures on securities or
currencies, the Portfolio will legally obligate itself to accept delivery of the
underlying security or currency and pay the agreed price; by selling futures on
securities or currency, it will legally obligate itself to make delivery of the
security or currency against payment of the agreed price.
Positions taken in the futures markets are not normally held to maturity,
but are instead liquidated through offsetting transactions which may result in a
profit or a loss. While the Portfolio's futures contracts on securities or
currency will usually be liquidated in this manner, it may instead make or take
delivery of the underlying securities or currency whenever it appears
economically advantageous for the Portfolio to do so. A clearing corporation
associated with the exchange on which futures on securities or currency are
traded guarantees that, if still open, the sale or purchase will be performed on
the settlement date.
Futures Contracts on Securities Indices. Futures contracts on securities
indices or other indices do not require the physical delivery of securities, but
merely provide for profits and losses resulting from changes in the market value
of a contract to be credited or debited at the close of each trading day to the
respective accounts of the parties to the contract. On the contract's expiration
date a final cash settlement occurs and the futures position is simply closed
out. Changes in the market value of a particular futures contract reflect
changes in the level of the index on which the futures contract is based.
Hedging Strategies. Hedging by use of futures contracts seeks to establish
more certainly than would otherwise be possible the effective price of portfolio
securities or securities that the Portfolio proposes to acquire. The Portfolio
may, for example, take a "short" position in the futures market by selling
futures contracts in order to hedge against an anticipated decline in market
prices or foreign currency exchange rates that would adversely affect the value
of the securities held by the Portfolio. Such futures contracts may include
contracts for the future delivery of securities held by the Portfolio (or
currency held by the Portfolio in which such securities are denominated) or
securities with characteristics similar to those of the securities held by the
Portfolio. If, in the opinion of the Adviser, there is a sufficient degree of
correlation between price trends for the securities held by the Portfolio and
futures contracts based on other financial instruments, securities indices or
other indices, the Portfolio may also enter into such futures contracts as part
of its hedging strategy. Although under some circumstances prices of securities
may be more or less volatile than prices of such futures contracts, the Adviser
will attempt to estimate the extent of this difference in volatility based on
historical patterns and to compensate for it by having the Portfolio enter into
a greater or lesser number of futures contracts or by attempting to achieve only
a partial hedge against price changes affecting the securities held by the
Portfolio. When hedging of this character is successful, any depreciation in the
value of portfolio securities will substantially be offset by appreciation in
the value of the futures position.
On other occasions, the Portfolio may take a "long" position by purchasing
such futures contracts. This would be done, for example, when the Portfolio
anticipates the subsequent purchase of particular securities when it has the
necessary cash, but expects the prices then available in the securities market
or foreign currency exchange rates to be less favorable than prices or rates
that are currently available.
Options on Futures Contracts. The Portfolio may purchase and write call and
put options on futures contracts which are traded on a United States or foreign
exchange or board of trade. An option on a futures contract gives the purchaser
the right, in return for the premium paid, to assume a position in a futures
contract at a specified exercise price at any time during the option period.
Upon exercise of the option, the writer of the option is obligated to convey the
appropriate futures position to the holder of the option. If an option is
exercised on the last trading day before the expiration date of the option, a
cash settlement will be made in an amount equal to the difference between the
closing price of the futures contract and the exercise price of the option.
The Portfolio may use options on futures contracts solely for bona fide
hedging purposes as defined below or for non-hedging purposes subject to the
limitations imposed by CFTC regulations. If the Portfolio purchases a call (put)
option on a futures contract it benefits from any increase (decrease) in the
value of the futures contract, but is subject to the risk of decrease (increase)
in value of the futures contract. The benefits received are reduced by the
amount of the premium and transaction costs paid by the Portfolio for the
option. If market conditions do not favor the exercise of the option, the
Portfolio's loss is limited to the amount of such premium and transaction costs
paid by the Portfolio for the option.
If the Portfolio writes a call (put) option on a futures contract, the
Portfolio receives a premium but assumes the risk of a rise (decline) in value
in the underlying futures contract. If the option is not exercised, the
Portfolio gains the amount of the premium, which may partially offset
unfavorable changes in the value of securities (or the currency in which such
securities are denominated) held or to be acquired for the Portfolio. If the
option is exercised, the Portfolio will incur a loss, which will be reduced by
the amount of the premium it receives. However, depending on the degree of
correlation between changes in the value of its portfolio securities (or the
currency in which they are denominated) and changes in the value of futures
positions, the Portfolio's losses from writing options on futures may be
partially offset by favorable changes in the value of portfolio securities or in
the cost of securities to be acquired.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option of the same series. There
is no guarantee that such closing transactions can be effected. The Portfolio's
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
Limitations on the Use of Futures Contracts and Options on Futures
Contracts. The Portfolio will engage in futures and related options transactions
for bona fide hedging or non-hedging purposes as defined in or permitted by CFTC
regulations. The Portfolio will determine that the price fluctuations in the
futures contracts and options on futures used for hedging purposes are
substantially related to price fluctuations in securities (or the currency in
which they are denominated) held by the Portfolio or which it expects to
purchase. Except as stated below, the Portfolio's futures transactions will be
entered into for traditional hedging purposes -- i.e., futures contracts will be
sold to protect against a decline in the price of securities that the Portfolio
owns, or futures contracts will be purchased to protect the Portfolio against an
increase in the price of securities it intends to purchase.
As evidence of this hedging intent, the Portfolio expects that on 75% or
more of the occasions on which it takes a long futures (or option) position
(involving the purchase of futures contracts), the Portfolio will have
purchased, or will be in the process of purchasing, equivalent amounts of
related securities in the cash market at the time when the futures (or option)
position is closed out. However, in particular cases, when it is economically
advantageous for the Portfolio to do so, a long futures position may be
terminated (or an option may expire) without the corresponding purchase of
securities. As an alternative to compliance with the bona fide hedging
definition, a CFTC regulation permits the Portfolio to elect to comply with a
different test, under which the aggregate initial margin and premiums required
to establish non-hedging positions in futures contracts and options on futures
will not exceed 5% of the Portfolio's net asset value after taking into account
unrealized profits and losses on such positions and excluding the in-the-money
amount of such options.
The Portfolio will engage in transactions in futures contracts and related
options only to the extent such transactions are consistent with the
requirements of the Internal Revenue Code of 1986, as amended (the "Code") for
maintaining the qualification of an investor in the Portfolio, such as the Fund,
as a regulated investment company for Federal income tax purposes (see "Taxes").
The Portfolio will be required, in connection with transactions in futures
contracts and the writing of options on futures, to make margin deposits, which
will be held by the Portfolio's custodian for the benefit of the futures
commission merchant through whom the Portfolio engages in such futures and
options transactions. Cash or high grade liquid debt securities required to be
segregated in connection with a "long" futures position taken by the Portfolio
will also be held by the custodian in a segregated account and will be marked to
market daily.
SPECIAL RISKS ASSOCIATED WITH FORWARD CONTRACTS, FOREIGN CURRENCY FUTURES
CONTRACTS AND OPTIONS THEREON AND OPTIONS ON FOREIGN CURRENCIES
Transactions in forward contracts, as well as futures and options on foreign
currencies, are subject to the risk of governmental actions affecting trading in
or the prices of currencies underlying such contracts, which could restrict or
eliminate trading and could have a substantial adverse effect on the value of
positions held by the Portfolio. In addition, the value of such positions could
be adversely affected by a number of other complex political and economic
factors applicable to the countries issuing the underlying currencies.
Furthermore, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying forward contracts, futures contracts and options. As a
result, the available information on which the Portfolio's trading systems will
be based may not be as complete as the comparable data on which the Portfolio
makes investment and trading decisions in connection with securities and other
transactions. Moreover, because the foreign currency market is a global,
twenty-four hour market, events could occur on that market which will not be
reflected in the forward, futures or options markets until the following day,
thereby preventing the Portfolio from responding to such events in a timely
manner.
Settlements of over-the-counter forward contracts or of the exercise of
foreign currency options generally must occur within the country issuing the
underlying currency, which in turn requires parties to such contracts to accept
or make delivery of such currencies in conformity with any United States or
foreign restrictions and regulations regarding the maintenance of foreign
banking relationships, fees, taxes or other charges.
Unlike currency futures contracts and exchange-traded options, options on
foreign currencies and forward contracts are not traded on contract markets
regulated by the CFTC or (with the exception of certain foreign currency
options) the Securities and Exchange Commission (the "SEC"). To the contrary,
such instruments are traded through financial institutions acting as market-
makers. (Foreign currency options are also traded on the Philadelphia Stock
Exchange subject to SEC regulation). In an over-the-counter trading environment,
many of the protections associated with transactions on exchanges will not be
available. For example, there are no daily price fluctuation limits, and adverse
market movements could therefore continue to an unlimited extent over a period
of time. Although the purchaser of an option cannot lose more than the amount of
the premium plus related transaction costs, this entire amount could be lost.
Moreover, an option writer could lose amounts substantially in excess of its
initial investment due to the margin and collateral requirements associated with
such option positions. Similarly, there is no limit on the amount of potential
losses on forward contracts to which the Portfolio is a party.
In addition, over-the-counter transactions can only be entered into with a
financial institution willing to take the opposite side, as principal, of the
Portfolio's position unless the institution acts as broker and is able to find
another counterparty willing to enter into the transaction with the Portfolio.
Where no such counterparty is available, it will not be possible to enter into a
desired transaction. There also may be no liquid secondary market in the trading
of over-the-counter contracts, and the Portfolio may be unable to close out
options purchased or written, or forward contracts entered into, until their
exercise, expiration or maturity. This in turn could limit the Portfolio's
ability to realize profits or to reduce losses on open positions and could
result in greater losses.
Furthermore, over-the-counter transactions are not backed by the guarantee
of an exchange's clearing corporation. The Portfolio will therefore be subject
to the risk of default by, or the bankruptcy of, the financial institution
serving as its counterparty. One or more of such institutions also may decide to
discontinue its role as market-maker in a particular currency, thereby
restricting the Portfolio's ability to enter into desired hedging transactions.
A Portfolio will enter into over-the-counter transactions only with parties
whose creditworthiness has been reviewed and found satisfactory by the Adviser.
Over-the-counter options on foreign currencies, like exchange-traded
commodity futures contracts and commodity option contracts, are within the
exclusive regulatory jurisdiction of the CFTC. The CFTC currently permits the
trading of such options, but only subject to a number of conditions regarding
the commercial purpose of the purchaser of such options. The Portfolio is not
able to determine at this time whether or to what extent the CFTC may impose
additional restrictions on the trading of over-the-counter options on foreign
currencies at some point in the future, or the effect that any such restrictions
may have on the hedging strategies to be implemented by the Portfolio.
CFTC regulations require that the Portfolio not enter into non-hedging
transactions in commodity futures contracts or commodity option contracts for
which the aggregate initial margin and premiums exceed 5% of the fair market
value of the Portfolio's net assets. Premiums paid to purchase over-the-counter
options on foreign currencies, and initial margin deposited in connection with
the writing of such options, are required to be included in determining
compliance with this requirement. This could, depending upon the Portfolio's
existing positions in futures contracts and options on futures contracts, limit
the Portfolio's ability to purchase or write options on foreign currencies.
Conversely, the existence of open positions in options on foreign currencies
could limit the ability of the Portfolio to enter into desired transactions in
other options or futures contracts.
While forward contracts and currency swaps are not presently subject to
regulation by the CFTC, the CFTC may in the future assert or be granted
authority to regulate such instruments. In such event, the Portfolio's ability
to utilize forward contracts and currency swaps in the manner set forth above
and in the Prospectus could be restricted.
Options on foreign currencies traded on a national securities exchange are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In particular,
all foreign currency options positions entered into on a national securities
exchange are cleared and guaranteed by the Options Clearing Corporation ("OCC"),
thereby reducing the risk of counterparty default. Further, a liquid secondary
market in options traded on a national securities exchange may be more readily
available than in the over-the-counter market, potentially permitting the
Portfolio to liquidate open positions at a profit prior to exercise or
expiration, or to limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however,
are subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effect of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures for
exercise and settlement, such as technical changes in the mechanics of delivery
of currency, the fixing of dollar settlement prices or prohibitions on exercise.
PORTFOLIO TURNOVER
The Portfolio cannot accurately predict its portfolio turnover rate, but it
is anticipated that the annual turnover rate will generally not exceed 100%
(excluding turnover of securities having a maturity of one year or less). A 100%
annual turnover rate would occur, for example, if all the securities in the
portfolio were replaced once in a period of one year. A high turnover rate (100%
or more) necessarily involves greater expenses to the Portfolio. The Portfolio
engages in portfolio trading (including short-term trading) if it believes that
a transaction including all costs will help in achieving its investment
objective either by increasing income or by enhancing the Portfolio's net asset
value. High portfolio turnover may also result in the realization of substantial
net short-term capital gains. In order for the Fund to continue to qualify as a
regulated investment company for Federal tax purposes, less than 30% of the
annual gross income of the Fund must be derived from the sale of securities and
certain other investments (including its share of gains from the sale of
securities and certain other investments held by the Portfolio) held for less
than three months.
LENDING PORTFOLIO SECURITIES
If the Adviser decides to make securities loans, the Portfolio may seek to
increase its income by lending portfolio securities to broker-dealers or other
institutional borrowers. Under present regulatory policies of the SEC, such
loans are required to be secured continuously by collateral in cash, cash
equivalents or U.S. Government securities held by the Portfolio's custodian and
maintained on a current basis at an amount at least equal to market value of the
securities loaned, which will be marked to market daily. Cash equivalents
include certificates of deposit, commercial paper and other short-term money
market instruments. The financial condition of the borrower will be monitored by
the Adviser on an ongoing basis. The Portfolio would continue to receive the
equivalent of the interest or dividends paid by the issuer on the securities
loaned and would also receive a fee, or all or a portion of the interest on
investment of the collateral. The Portfolio would have the right to call a loan
and obtain the securities loaned at any time on up to five business days'
notice. The Portfolio would not have the right to vote any securities having
voting rights during the existence of a loan, but could call the loan in
anticipation of an important vote to be taken among holders of the securities or
the giving or holding of their consent on a material matter affecting the
investment. If the Adviser decides to make securities loans, it is intended that
the value of the securities loaned would not exceed one-third of the Portfolio's
total assets.
INVESTMENT RESTRICTIONS
Whenever an investment policy or investment restriction set forth in the
Prospectus or this Statement of Additional Information states a maximum
percentage of assets that may be invested in any security or other asset or
describes a policy regarding quality standards, such percentage limitation or
standard shall be determined immediately after and as a result of the Fund's or
the Portfolio's acquisition of such security or other asset. Accordingly, any
later increase or decrease resulting from a change in values, assets or other
circumstances, other than a subsequent rating change below investment grade made
by a rating service, will not compel the Fund or the Portfolio, as the case may
be, to dispose of such security or other asset.
The Fund and the Portfolio have each adopted the following investment
restrictions which may not be changed without the approval by the holders of a
majority of the outstanding voting securities of the Fund or the Portfolio, as
the case may be, which as used in this Statement of Additional Information means
the lesser of (a) 67% or more of the outstanding voting securities of the Fund
or the Portfolio, as the case may be, present or represented by proxy at a
meeting if the holders of more than 50% of the outstanding voting securities of
the Fund or the Portfolio are present or represented at the meeting or (b) more
than 50% of the outstanding voting securities of the Fund or the Portfolio.
Neither the Fund nor the Portfolio may:
(1) issue senior securities (as defined in the Investment Company Act of
1940 and rules thereunder) or borrow money, except that the Fund or the
Portfolio may borrow:
(i) from banks to purchase or carry securities, commodities,
commodities contracts or other investments;
(ii) from banks for temporary or emergency purposes not in excess
of 10% of its gross assets taken at market value; or
(iii) by entering into reverse repurchase agreements,
if, immediately after any such borrowing, the value of the Fund's or
Portfolio's total assets, including all borrowings then outstanding, is
equal to at least 300% of the aggregate amount of borrowings then
outstanding. Any such borrowings may be secured or unsecured. The Portfolio
or the Fund may issue securities (including senior securities) appropriate
to evidence such indebtedness, including reverse repurchase agreements.
(2) Pledge its assets, except that the Portfolio or the Fund may pledge
not more than one-third of its total assets (taken at current value) to
secure borrowings made in accordance with investment restriction (1) above;
for the purpose of this restriction the deposit of assets in a segregated
account with the Portfolio's or the Fund's custodian, as the case may be, in
connection with any of the Portfolio's or the Fund's respective investment
transactions is not considered to be a pledge.
(3) Purchase securities on margin (but the Portfolio or the Fund may
obtain such short-term credits as may be necessary for the clearance of
purchases and sales of securities).
(4) Make short sales of securities or maintain a short position, unless
at all times when a short position is open the Portfolio or the Fund either
owns an equal amount of such securities or owns securities convertible into
or exchangeable, without the payment of any additional consideration, for
securities of the same issue as, and equal in amount to, the securities sold
short.
(5) Purchase securities issued by any other open-end investment company
or investment portfolio, except as they may be acquired as part of a merger,
consolidation or acquisition of assets, except that the Fund may invest all
or substantially all of its assets in either the Portfolio or any other
registered investment company having substantially the same investment
objective as the Fund and except as otherwise permitted by the Investment
Company Act of 1940.
(6) Purchase or retain in its portfolio any securities issued by an
issuer any of whose officers, directors, trustees or security holders is an
officer or Trustee of the Portfolio or the Trust or is a member, officer,
director or trustee of any investment adviser of the Portfolio or the Fund,
if after the purchase of the securities of such issuer by the Portfolio or
the Fund one or more of such persons owns beneficially more than 1/2 of 1%
of the shares or securities or both (all taken at current value) of such
issuer and such persons owning more than 1/2 of 1% of such shares or
securities together own beneficially more than 5% of such shares or
securities or both (all taken at current value); provided, however, that the
Fund may invest all or substantially all of its assets in either the
Portfolio or any other registered investment company having substantially
the same investment objective as the Fund and having any officers,
directors, trustees or security holders who are officers or Trustees of the
Trust.
(7) Underwrite securities issued by other persons, except insofar as the
Fund or the Portfolio may technically be deemed to be an underwriter under
the Securities Act of 1933 in selling or disposing of a portfolio security,
and except that the Fund may invest all or substantially all of its assets
in either the Portfolio or any other registered investment company having
substantially the same investment objective as the Fund.
(8) Make loans to other persons, except by (a) the acquisition of money
market instruments, debt securities and other obligations in which the
Portfolio or the Fund is authorized to invest in accordance with their
respective investment objective and policies, (b) entering into repurchase
agreements and (c) lending their respective portfolio securities.
(9) Purchase the securities of any one issuer (other than obligations
issued or guaranteed by the U.S. Government or any of its agencies or
instrumentalities) if, with respect to 75% of its total assets and as a
result of such purchase (a) more than 5% of the total assets of the
Portfolio or the Fund, as the case may be (taken at current value), would be
invested in the securities of such issuer, or (b) the Fund or the Portfolio
would hold more than 10% of the outstanding voting securities of that
issuer, except that the Fund may invest all or substantially all of its
assets in, and may acquire up to 100% of the outstanding voting securities
of either the Portfolio or any other registered investment company having
substantially the same investment objectives as the Fund.
(10) Purchase any security if, as a result of such purchase, 25% or more
of the total assets of the Portfolio or the Fund, as the case may be (taken
at current value) would be invested in the securities of issuers having
their principal business activities in the same industry (the electric, gas
and telephone utility industries being treated as separate industries for
the purpose of this restriction); provided that there is no limitation with
respect to obligations issued or guaranteed by the U.S. Government or any of
its agencies or instrumentalities and except that the Fund may invest all or
substantially all of its assets in either the Portfolio or any other
registered investment company having substantially the same investment
objective as the Fund.
(11) Invest for the purpose of gaining control of a company's
management.
(12) Purchase or sell real estate, although the Fund or the Portfolio
may purchase and sell securities which are secured by interests in real
estate, securities of issuers which invest or deal in real estate and real
estate that is acquired as the result of the ownership of securities.
(13) Purchase or sell physical commodities (other than currency) or
contracts for the purchase or sale of physical commodities (other than
currency).
(14) Buy investment securities from or sell them to any of the
respective officers or Trustees of the Trust or the Portfolio, the
Portfolio's investment adviser or the Fund's principal underwriter, as
principal; provided, however, that any such person or firm may be employed
as a broker upon customary terms and that this restriction does not apply to
the Fund's investments in either the Portfolio or any other registered
investment company having substantially the same investment objective as the
Fund.
(15) Purchase oil, gas or other mineral leases or purchase partnership
interests in oil, gas or other mineral exploration or development programs.
For the purpose of investment restrictions (1), (2) and (3), the
arrangements (including escrow, margin and collateral arrangements) made by the
Portfolio or the Fund with respect to their respective transactions in all types
of options, futures contracts, options on futures contracts, forward contracts,
currencies, and commodities and options thereon shall not be considered to be
(i) a borrowing of money or the issuance of securities (including senior
securities) by the Portfolio or the Fund, as the case may be, (ii) a pledge of
its assets or (iii) the purchase of a security on margin.
The Fund and the Portfolio have each adopted the following investment
policies which may be changed without shareholder or investor approval. Neither
the Fund nor the Portfolio may invest more than 15% of its net assets in
investments which are not readily marketable, including restricted securities
and repurchase agreements with a maturity longer than seven days. Restricted
securities for the purposes of this limitation do not include securities
eligible for resale pursuant to Rule 144A under the Securities Act of 1933 that
the Board of Trustees of the Trust or the Portfolio, or its delegate, determine
to be liquid, based upon the trading markets for the specific security. Neither
the Fund nor the Portfolio intends to invest in Rule 144A securities or make
short sales of securities during the coming year. Except for obligations issued
or guaranteed by the U.S. Government or any of its agencies or
instrumentalities, neither the Fund nor the Portfolio will knowingly purchase a
security issued by a company (including predecessors) with less than three years
operating history (unless such security is rated at least B or a comparable
rating at the time of purchase by at least one nationally recognized rating
service) if, as a result of such purchase, more than 5% of the Portfolio's or
the Fund's total assets, as the case may be (taken at current value), would be
invested in such securities and except that the Fund may invest all or
substantially all of its assets in interests in the Portfolio or any other
registered investment company having substantially the same investment objective
as the Fund. Neither the Fund nor the Portfolio will purchase warrants if, as a
result of such purchase, more than 5% of the Portfolio's or the Fund's net
assets, as the case may be (taken at current value), would be invested in
warrants, and the value of such warrants which are not listed on the New York or
American Stock Exchange may not exceed 2% of the Portfolio's or the Fund's net
assets; this policy does not apply to or restrict warrants acquired by the
Portfolio or the Fund in units or attached to securities, inasmuch as such
warrants are deemed to be without value. Neither the Fund nor the Portfolio will
purchase any securities if at the time of such purchase, permitted borrowings
under investment restriction (1) above exceed 5% of the value of the Portfolio's
or the Fund's total assets, as the case may be.
In order to permit the sale of shares of the Fund in certain states, the
Fund and the Portfolio may make commitments more restrictive than the
fundamental policies described above. Should the Fund determine that any such
commitment is no longer in the best interests of the Fund and its shareholders,
it will revoke the commitment by terminating sales of its shares in the state(s)
involved.
Although permissible under the Fund's investment restrictions, the Fund has
no present intention during the coming fiscal year to: borrow money; pledge its
assets; underwrite securities issued by other persons; or make loans to other
persons.
TRUSTEES AND OFFICERS
The Trust's Trustees and officers are listed below. Except as indicated,
each individual has held the office shown or other offices in the same company
for the last five years. Unless otherwise noted, the business address of each
Trustee and officer is 24 Federal Street, Boston, Massachusetts 02110, which is
also the address of the Fund's sponsor and manager, Eaton Vance Management
("Eaton Vance"), of Eaton Vance's wholly-owned subsidiary, Boston Management and
Research ("BMR"), of Eaton Vance's parent, Eaton Vance Corp. ("EVC"), and of
Eaton Vance's trustee, Eaton Vance, Inc. ("EV"). Eaton Vance and EV are both
wholly-owned subsidiaries of EVC. Those Trustees who are "interested persons" of
the Trust, Eaton Vance, BMR, EVC or EV as defined in the 1940 Act, by virtue of
their affiliation with any one or more of the Trust, Eaton Vance, BMR, EVC or
EV, are indicated by an asterisk (*).
OFFICERS AND TRUSTEES OF THE TRUST
TRUSTEES
JAMES B. HAWKES, President and Trustee*
Executive Vice President of Eaton Vance, BMR, EVC and EV, and a Director of EVC
and EV. Director or Trustee and officer of various investment companies
managed by Eaton Vance or BMR.
LANDON T. CLAY, Vice President and Trustee*
Chairman of Eaton Vance, BMR, EVC and EV and a Director of EVC and EV. Director
or Trustee and officer of various investment companies managed by Eaton Vance
or BMR.
DONALD R. DWIGHT, Trustee
President of Dwight Partners, Inc. (a corporate relations and communications
company) founded in 1988. Director or Trustee of various investment
companies managed by Eaton Vance or BMR.
Address: Clover Mill Lane, Lyme, New Hampshire 03768
SAMUEL L. HAYES, III, Trustee
Jacob H. Schiff Professor of Investment Banking, Harvard University Graduate
School of Business Administration. Director or Trustee of various investment
companies managed by Eaton Vance or BMR.
Address: Harvard Business School, Soldiers Field Road, Boston, Massachusetts
02134
PETER F. KIELY, Vice President and Trustee*
Vice President of Eaton Vance, BMR and EV. Director or Trustee and officer of
various investment companies managed by Eaton Vance or BMR. Mr. Kiely was
elected Trustee of the Trust on June 14, 1993.
NORTON H. REAMER, Trustee
President and Director, United Asset Management Corporation (a holding company
owning institutional investment management firms); Chairman, President and
Director, The Regis Fund, Inc. (mutual fund). Director or Trustee of various
investment companies managed by Eaton Vance or BMR.
Address: One International Place, Boston, Massachusetts 02110
JOHN L. THORNDIKE, Trustee
Director, Fiduciary Trust Company. Director or Trustee of various investment
companies managed by Eaton Vance or BMR.
Address: 175 Federal Street, Boston, Massachusetts 02110
JACK L. TREYNOR, Trustee
Investment Adviser and Consultant. Director or Trustee of various investment
companies managed by Eaton Vance or BMR.
Address: 504 Via Almar, Palos Verdes Estates, California 90274
OFFICERS
M. DOZIER GARDNER, Vice President
President and Chief Executive Officer of Eaton Vance, BMR, EVC and EV, and
Director of EVC and EV. Director or Trustee and officer of various investment
companies managed by Eaton Vance or BMR.
JAMES L. O'CONNOR, Treasurer
Vice President of Eaton Vance, BMR and EV. Officer of various investment
companies managed by Eaton Vance or BMR.
THOMAS OTIS, Secretary
Vice President and Secretary of Eaton Vance, BMR, EVC and EV. Officer of various
investment companies managed by Eaton Vance or BMR.
JANET E. SANDERS, Assistant Secretary
Vice President of Eaton Vance, BMR and EV. Officer of various investment
companies managed by Eaton Vance or BMR.
Messrs. Thorndike (Chairman), Hayes and Reamer, are members of the Special
Committee of the Board of Trustees of the Trust. The Special Committee's
functions include a continuous review of the Fund's management contract with
Eaton Vance, making recommendations to the Board of Trustees regarding the
compensation of those Trustees who are not members of Eaton Vance's
organization, and making recommendations to the Board of Trustees regarding
candidates to fill vacancies, as and when they occur, in the ranks of those
Trustees who are not "interested persons" of the Trust or Eaton Vance.
Messrs. Treynor (Chairman) and Dwight are members of the Audit Committee of
the Board of Trustees. The Audit Committee's functions include making
recommendations to the Board of Trustees regarding the selection of the
independent certified public accountants, and reviewing with such accountants
and the Treasurer of the Trust matters relative to accounting and auditing
practices and procedures, accounting records, internal accounting controls, and
the functions performed by the custodian, transfer agent and dividend disbursing
agent of the Trust.
The fees and expenses of those Trustees of the Trust who are not members of
the Eaton Vance or BMR organizations are paid by the Fund and other series of
the Trust. The Trustees of the Trust also receive additional payments from other
investment companies for which Eaton Vance provides investment advisory,
administrative or management services or BMR provides investment advisory
services for serving in similar capacities. For information concerning the
compensation received by the Trustees of the Trust, see "Fees and Expenses" in
Part II of this Statement of Additional Information.
OFFICERS AND TRUSTEES OF THE PORTFOLIO
The Portfolio's Trustees and officers are listed below. Except as
indicated, each individual has held the office shown or other offices in the
same company for the last five years. The business address of the Adviser is
3808 One Exchange Square, Central, Hong Kong.Those Trustees who are "interested
persons" of the Portfolio, the Adviser, Eaton Vance, EVC or EV as defined in the
1940 Act by virtue of their affiliation with any one or more of the Portfolio,
the Adviser, Eaton Vance, BMR, EVC or EV, are indicated by an asterisk (*).
TRUSTEES
HON. ROBERT LLOYD GEORGE, President and Trustee*
Chairman and Chief Executive of Lloyd George Management (B.V.I.) Limited.
Chairman and Chief Executive Officer of the Adviser. Managing Director of
Indosuez Asia Investment Services, Ltd. from 1984 to 1991.
Address: 3808 One Exchange Square, Central, Hong Kong
JAMES B. HAWKES, Vice President and Trustee*
Executive Vice President of Eaton Vance, BMR, EVC and EV, and a Director of EVC
and EV. Director or Trustee and officer of various investment companies
managed by Eaton Vance or BMR.
Address: Eaton Vance Management, 24 Federal Street, Boston, Massachusetts 02110
SAMUEL L. HAYES, III, Trustee
Jacob H. Schiff Professor of Investment Banking, Harvard University Graduate
School of Business Administration. Director or Trustee of various investment
companies managed by Eaton Vance or BMR.
Address: Harvard Business School, Soldiers Field Road, Boston, Massachusetts
02134
STUART HAMILTON LECKIE, Trustee
Managing Director and Actuary of The Wyatt Company. Member of the Hong Kong
Government's Advisory Committee on Insurance.
Address: The Wyatt Company (HK) Ltd., Sun Hung Kai Centre, 27th Floor, 30
Harbour Road, Hong Kong
HON. EDWARD K.Y. CHEN, Trustee
Professor and Director of the Centre of Asian Studies, University of Hong
Kong. Director of First Pacific Bancshares Holdings Ltd. and a non-executive
Director of the Securities and Futures Commission. Vice-Chairman and
Consultant of ACL Consultants Ltd. from 1983 to 1989. Director of First
Pacific Bank Ltd. from 1986 to 1990. Director of Inc -- Asia from 1988 to
1991.
Address: University of Hong Kong, Centre of Asian Studies, Pokfulam Road, Hong
Kong
OFFICERS
SCOBIE DICKINSON WARD, Vice President, Assistant Secretary and Assistant
Treasurer
Director of Lloyd George Management (B.V.I.) Limited. Director of the Adviser.
Investment Manager of Indosuez Asia Investment Services, Ltd. from 1984 to
1991.
Address: 3808 One Exchange Square, Central, Hong Kong
WILLIAM WALTER RALEIGH KERR, Vice President, Secretary and Assistant Treasurer
Director, Finance Director and Chief Operating Officer of the Adviser.
Director of Lloyd George Management (B.V.I.) Limited.
Address: 3808 One Exchange Square, Central, Hong Kong
JAMES L. O'CONNOR, Vice President and Treasurer
Vice President of Eaton Vance, BMR and EV. Officer of various investment
companies managed by Eaton Vance or BMR.
Address: Eaton Vance Management, 24 Federal Street, Boston, Massachusetts 02110
THOMAS OTIS, Vice President and Assistant Secretary
Vice President and Secretary of Eaton Vance, BMR, EVC and EV. Officer of various
investment companies managed by Eaton Vance or BMR.
Address: Eaton Vance Management, 24 Federal Street, Boston, Massachusetts 02110
JANET E. SANDERS, Assistant Secretary
Vice President of Eaton Vance, BMR and EV. Officer of various investment
companies managed by Eaton Vance or BMR.
Address: Eaton Vance Management, 24 Federal Street, Boston, Massachusetts 02110
The Adviser is a subsidiary of Lloyd George Management (B.V.I.) Limited,
which is ultimately controlled by the Hon. Robert J.D. Lloyd George, President
and Trustee of the Portfolio and Chairman and Chief Executive Officer of the
Adviser. Mr. Hawkes is a Trustee and officer of the Trust and an officer of
the Fund's sponsor and manager. Mr. Hayes is a Trustee of the Trust.
The fees and expenses of those Trustees of the Portfolio who are not members
of the Adviser or Eaton Vance organizations are paid by the Portfolio. For
information concerning the compensation received by the Trustees of the
Portfolio, see "Fees and Expenses" in Part II of this Statement of Additional
Information.
While the Portfolio is a New York trust, the Adviser, together with Messrs.
Lloyd George, Leckie, Chen, Ward and Kerr, are not residents of the United
States, and substantially all of their respective assets may be located outside
of the United States. It may be difficult for investors to effect service of
process within the United States upon the individuals identified above, or to
realize judgments of courts of the United States predicated upon civil
liabilities of the Adviser and such individuals under the Federal securities
laws of the United States. The Portfolio has been advised that there is
substantial doubt as to the enforceability in the countries in which the Adviser
and such individuals reside of such civil remedies and criminal penalties as are
afforded by the Federal securities laws of the United States.
MANAGEMENT OF THE FUND
Eaton Vance acts as the sponsor and manager of the Fund and the
administrator of the Portfolio. The Portfolio has engaged Lloyd George
Management (Hong Kong) Limited (the "Adviser") as its investment adviser.
THE ADVISER
As investment adviser to the Portfolio, the Adviser manages the Portfolio's
investments, subject to the supervision of the Board of Trustees of the
Portfolio. The Adviser is also responsible for effecting all security
transactions on behalf of the Portfolio, including the allocation of principal
transactions and portfolio brokerage and the negotiation of commissions. See
"Portfolio Security Transactions." Under the investment advisory agreement, the
Adviser receives a monthly advisory fee computed by applying the annual asset
rate applicable to that portion of the average daily net assets of the Portfolio
throughout the month in each Category as indicated below:
ANNUAL
CATEGORY AVERAGE DAILY NET ASSETS ASSET RATE
-------- ------------------------ ----------
1 less than $500 million ..................................... 0.75%
2 $500 million but less than $1 billion ...................... 0.70
3 $1 billion but less than $1.5 billion ...................... 0.65
4 $1.5 billion but less than $2 billion ...................... 0.60
5 $2 billion but less than $3 billion ........................ 0.55
6 $3 billion and over ........................................ 0.50
For additional information about the Investment Advisory Agreement,
including the net assets of the Portfolio and the investment advisory fees that
the Portfolio paid the Adviser under the Investment Advisory Agreement, see
"Fees and Expenses" in Part II of this Statement of Additional Information.
The directors of the Adviser are the Honourable Robert Lloyd George,
William Walter Raleigh Kerr, Michael Tze-hau Lee, M.F. Tang and Scobie
Dickinson Ward. The Hon. Robert J.D. Lloyd George is Chairman and Chief
Executive Officer of the Adviser and Mr. Kerr is an officer of the Adviser.
The business address of these individuals is 3808 One Exchange Square,
Central, Hong Kong.
The Portfolio's investment advisory agreement with the Adviser remains in
effect until February 28, 1995; it may be continued indefinitely thereafter so
long as such continuance after February 28, 1995 is approved at least annually
(i) by the vote of a majority of the Trustees of the Portfolio who are not
interested persons of the Portfolio cast in person at a meeting specifically
called for the purpose of voting on such approval and (ii) by the Board of
Trustees of the Portfolio or by vote of a majority of the outstanding voting
securities of the Portfolio. The agreement may be terminated at any time without
penalty on sixty days' written notice by the Board of Trustees of either party
or by vote of the majority of the outstanding voting securities of the
Portfolio, and the agreement will terminate automatically in the event of its
assignment. The agreement provides that the Adviser may render services to
others. The agreement also provides that, in the absence of willful misfeasance,
bad faith, gross negligence or reckless disregard of obligations or duties under
the agreement on the part of the Adviser, the Adviser shall not be liable to the
Portfolio or to any shareholder for any act or omission in the course of or
connected with rendering services or for any losses sustained in the purchase,
holding or sale of any security.
MANAGER, SPONSOR AND ADMINISTRATOR
See "Management of the Fund and the Portfolio" in the Prospectus for a
description of the services Eaton Vance performs as manager and sponsor of the
Fund and administrator of the Portfolio. Under Eaton Vance's management contract
with the Fund and administration agreement with the Portfolio, Eaton Vance
receives a monthly management fee from the Fund and a monthly administration fee
from the Portfolio. Each fee is computed by applying the annual asset rate
applicable to that portion of the average daily net assets of the Fund or the
Portfolio throughout the month in each Category as indicated below:
ANNUAL
CATEGORY AVERAGE DAILY NET ASSETS ASSET RATE
-------- ------------------------ ----------
1 less than $500 million ..................................... 0.25%
2 $500 million but less than $1 billion ...................... 0.23333
3 $1 billion but less than $1.5 billion ...................... 0.21667
4 $1.5 billion but less than $2 billion ...................... 0.20
5 $2 billion but less than $3 billion ........................ 0.18333
6 $3 billion and over ........................................ 0.16667
For the administration and management fees that the Portfolio and the Fund
paid to Eaton Vance, see "Fees and Expenses" in Part II of this Statement of
Additional Information.
Eaton Vance's management contract with the Fund and administration agreement
with the Portfolio will each remain in effect until February 28, 1995. Each
agreement may be continued from year to year after February 28, 1995 so long as
such continuance is approved annually by the vote of a majority of the Trustees
of the Trust or the Portfolio, as the case may be. Each agreement may be
terminated at any time without penalty on sixty days' written notice by the
Board of Trustees of either party thereto, or by a vote of a majority of the
outstanding voting securities of the Fund or the Portfolio, as the case may be.
Each agreement will terminate automatically in the event of its assignment. Each
agreement provides that, in the absence of Eaton Vance's willful misfeasance,
bad faith, gross negligence or reckless disregard of its obligations or duties
to the Fund or the Portfolio under such contract or agreement, Eaton Vance will
not be liable to the Fund or the Portfolio for any loss incurred. Each agreement
was initially approved by the Trustees, including the non-interested Trustees,
of the Trust or the Portfolio which is a party thereto at meetings held on
September 8, 1992 and on October 8, 1992, respectively, of the Trust and the
Portfolio.
The Fund and the Portfolio, as the case may be, will each be responsible for
all of its respective costs and expenses not expressly stated to be payable by
Eaton Vance under the management contract or the administration agreement. Such
costs and expenses to be borne by each of the Fund or the Portfolio, as the case
may be, include, without limitation, custody and transfer agency fees and
expenses, including those incurred for determining net asset value and keeping
accounting books and records, expenses of pricing and valuation services; the
cost of share certificates; membership dues in investment company organizations;
brokerage commissions and fees; fees and expenses of registering under the
securities laws; expenses of reports to shareholders and investors; proxy
statements, and other expenses of shareholders' or investors' meetings;
insurance premiums, printing and mailing expenses; interest, taxes and corporate
fees; legal and accounting expenses; compensation and expenses of Trustees not
affiliated with Eaton Vance; distribution and service fees payable by the Fund
under its Rule 12b-1 distribution plan; and investment advisory, management and
administration fees. The Fund or the Portfolio will also each bear expenses
incurred in connection with litigation in which the Fund or the Portfolio, as
the case may be, is a party and any legal obligation to indemnify its respective
officers and Trustees with respect thereto.
Eaton Vance and EV are both wholly-owned subsidiaries of EVC. BMR is a
wholly-owned subsidiary of Eaton Vance. Eaton Vance and BMR are both
Massachusetts business trusts, and EV is the trustee of Eaton Vance and BMR. The
Directors of EV are Landon T. Clay, H. Day Brigham, Jr., M. Dozier Gardner,
James B. Hawkes and Benjamin A. Rowland, Jr. The Directors of EVC consist of the
same persons and John G.L. Cabot and Ralph Z. Sorenson. Mr. Clay is chairman and
Mr. Gardner is president and chief executive officer of EVC, Eaton Vance, BMR
and EV. All of the issued and outstanding shares of Eaton Vance and of EV are
owned by EVC. All of the issued and outstanding shares of BMR are owned by Eaton
Vance. All shares of the outstanding Voting Common Stock of EVC are deposited in
a Voting Trust which expires December 31, 1996, the Voting Trustees of which are
Messrs. Brigham, Clay, Gardner, Hawkes and Rowland. The Voting Trustees have
unrestricted voting rights for the election of Directors of EVC. All of the
outstanding voting trust receipts issued under said Voting Trust are owned by
certain of the officers of Eaton Vance and BMR who are also officers and
Directors of EVC and EV. As of November 30, 1994, Messrs. Clay and Gardner each
owned 24% of such voting trust receipts and Messrs. Roland and Brigham owned 15%
and 13%, respectively, of such voting trust receipts. Messrs. Clay, Gardner,
Hawkes and Otis, who are officers or Trustees of the Trust, are members of the
EVC, Eaton Vance, BMR and EV organizations. Messrs. Kiely, O'Connor and Otis and
Ms. Sanders, are officers of the Trust, and are also members of the Eaton Vance,
BMR and EV organizations. Eaton Vance will receive the fees paid under the
management agreement and its wholly-owned subsidiary, Eaton Vance Distributors,
Inc., as Principal Underwriter, will receive its portion of the sales charge on
shares of the Fund sold through investment dealers.
EVC and its affiliates and its officers and employees from time to time have
transactions with various banks, including the custodian of the Fund and the
Portfolio, Investors Bank & Trust Company. It is Eaton Vance's opinion that the
terms and conditions of such transactions will not be influenced by existing or
potential custodial or other relationships between the Fund and such banks.
Eaton Vance owns all of the stock of Energex Corporation which is engaged in
oil and gas operations. EVC owns all of the stock of Marblehead Energy Corp.
(which engages in oil and gas operations) and EVC owns 77.3% of the stock of
Investors Bank & Trust Company, which provides custodial, trustee and other
fiduciary services to investors, including individuals, employee benefit plans,
corporations, investment companies, savings banks and other institutions. In
addition, Eaton Vance owns all the stock of Northeast Properties, Inc., which is
engaged in real estate investment, consulting and management. EVC owns all the
stock of Fulcrum Management, Inc. and MinVen, Inc., which are engaged in the
development of precious metal properties. EVC also owns 2% of the A shares and
20% of the Preferred Shares issued by the parent of the Adviser. EVC, Eaton
Vance, BMR and EV may also enter into other businesses.
CUSTODIAN
Investors Bank & Trust Company ("IBT"), 24 Federal Street, Boston,
Massachusetts (a 77.3% owned subsidiary of EVC), acts as custodian for the Fund
and the Portfolio. IBT has the custody of all cash and securities of the Fund
and all securities of the Portfolio purchased in the United States, maintains
the Fund's and the Portfolio's general ledger and computes the Fund's and the
Portfolio's respective daily per share net asset value. In such capacities IBT
attends to details in connection with the sale, exchange, substitution, transfer
or other dealings with the Fund's and the Portfolio's respective investments,
receives and disburses all funds, and performs various other ministerial duties
upon receipt of proper instructions from the Fund and the Portfolio.
Portfolio securities, if any, purchased by the Portfolio in the U.S. are
maintained in the custody of IBT or of other domestic banks or depositories.
Portfolio securities purchased outside of the U.S. are maintained in the custody
of foreign banks and trust companies that are members of IBT's Global Custody
Network, or foreign depositories used by such foreign banks and trust companies.
Each of the domestic and foreign custodial institutions holding portfolio
securities has been approved by the Board of Trustees of the Portfolio in
accordance with regulations under the 1940 Act.
IBT charges fees which are competitive within the industry. These fees for
the Portfolio relate to: (1) custody services based upon a percentage of the
market values of Portfolio securities; (2) bookkeeping and valuation services
provided at an annual rate; (3) activity charges, primarily the result of the
number of portfolio transactions; and (4) reimbursement of out-of-pocket
expenses. These fees are then reduced by a credit for cash balances of the
Portfolio at the custodian equal to 75% of the 91-day U.S. Treasury Bill auction
rate applied to the Portfolio's average daily collected balances.
The portion of the fee for the Fund related to bookkeeping and pricing
services is based upon a percentage of the Fund's net assets and the portion of
the fee related to financial statement preparation is a fixed amount.
In view of the ownership of EVC in IBT, the Portfolio is treated as a self
custodian pursuant to Rule 17f-2 under the 1940 Act, and the Portfolio's
investments held by IBT as custodian are thus subject to the additional
examinations by the Portfolio's independent certified public accountants as
called for by such Rule.
For the custody fees that the Portfolio and the Fund paid to IBT, see "Fees
and Expenses" in Part II of this Statement of Additional Information.
SERVICE FOR WITHDRAWAL
By a standard agreement, the Fund's transfer agent will send to the
shareholder regular monthly or quarterly payments of any designated amount based
upon the value of the shares held. The checks will be drawn from share
redemptions, which may result in the realization of taxable gain or loss, and
hence are a return of principal. Income dividends and capital gain distributions
in connection with withdrawal accounts will be credited at net asset value as of
the record date for each distribution. Continued withdrawals in excess of
current income will eventually use up principal, particularly in a period of
declining market prices.
To use this service, at least $5,000 in cash or shares at the public
offering price must be deposited with the Fund's transfer agent. A shareholder
may not have a withdrawal plan in effect at the same time he has authorized Bank
Draft Investing or is otherwise making regular purchases of Fund shares. Either
the shareholder, the Fund's transfer agent or the Principal Underwriter will be
able to terminate the withdrawal plan at any time without penalty.
DETERMINATION OF NET ASSET VALUE
For a description of how the Fund and Portfolio value their respective
shares or interests, see "Valuing Fund Shares" in the Prospectus. The Fund and
Portfolio will be closed for business and will not price their shares on the
following business holidays: New Year's Day, Washington's Birthday, Good Friday
(a New York Stock Exchange holiday), Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
The Trustees of the Portfolio have established certain procedures for the
valuation of the Portfolio's assets under normal market conditions. Marketable
securities listed on foreign or U.S. securities exchanges or in the NASDAQ
National Market System generally are valued at closing sale prices or, if there
were no sales, at the mean between the closing bid and asked prices therefor on
the exchange where such securities are principally traded or in such National
Market System (such prices may not be used, however, where an active
over-the-counter market in an exchange listed security better reflects current
market value). Unlisted or listed securities for which closing sale prices are
not available are valued at the mean between the latest bid and asked prices. An
option is valued at the last sale price as quoted on the principal exchange or
board of trade on which such option or contract is traded, or in the absence of
a sale, the mean between the last bid and asked price. Futures positions on
securities or currencies are generally valued at closing settlement prices. All
other securities are valued at fair value as determined in good faith by or
pursuant to procedures established by the Trustees.
Short term debt securities with a remaining maturity of 60 days or less are
valued at amortized cost. If securities were acquired with a remaining maturity
of more than 60 days, their amortized cost value will be based on their value on
the sixty-first day prior to maturity. Other fixed income and debt securities,
including listed securities and securities for which price quotations are
available, will normally be valued on the basis of valuations furnished by a
pricing service.
Each investor in the Portfolio, including the Fund, may add to or reduce its
investment in the Portfolio on each day the New York Stock Exchange (the
"Exchange") is open for trading as of the close of regular trading on the
Exchange. The value of each investor's interest in the Portfolio will be
determined by multiplying the net asset value of the Portfolio by the
percentage, effective for that day, which represents that investor's share of
the aggregate interests in the Portfolio. Any additions or withdrawals, which
are to be effected on that day, will then be effected. The investor's percentage
of the aggregate interests in the Portfolio will then be recomputed as the
percentage equal to the fraction (i) the numerator of which is the value of such
investor's investment in the Portfolio as of the close of regular trading on the
Exchange (normally 4:00 p.m., New York time), on such day plus or minus, as the
case may be, that amount of any additions to or withdrawals from the investor's
investment in the Portfolio effected on such day, and (ii) the denominator of
which is the aggregate net asset value of the Portfolio as of the close of such
trading on such day plus or minus, as the case may be, the amount of the net
additions to or withdrawals from the aggregate investment in the Portfolio by
all investors in the Portfolio. The percentage so determined will then be
applied to determine the value of the investor's interest in the Portfolio.
Generally, trading in the foreign securities owned by the Portfolio is
substantially completed each day at various times prior to the close of the
Exchange. The values of these securities used in determining the net asset value
of the Portfolio's shares are computed as of such times. Occasionally, events
affecting the value of foreign securities may occur between such times and the
close of the Exchange which will not be reflected in the computation of the
Portfolio's net asset value (unless the Portfolio deems that such events would
materially affect its net asset value, in which case an adjustment would be made
and reflected in such computation). Foreign securities and currency held by the
Portfolio will be valued in U.S. dollars; such values will be computed by the
custodian based on foreign currency exchange rate quotations supplied by Reuters
Information Service.
INVESTMENT PERFORMANCE
The average annual total return is determined by multiplying a hypothetical
initial purchase order of $1,000 by the average annual compound rate of return
(including capital appreciation/depreciation, and distributions paid and
reinvested) for the stated period and annualizing the result. The calculation
assumes that all distributions are reinvested at net asset value on the
reinvestment dates during the period. For information concerning the total
return of the Fund, see "Performance Information" in Part II of the Statement of
Additional Information.
The Fund's total return may be compared to the Consumer Price Index and
various domestic and foreign securities indices, for example: Standard & Poor's
Index of 400 Common Stocks, Standard & Poor's Index of 500 Common Stocks,
Merrill Lynch U.S. Treasury (15-year plus) Index, Lehman Brothers
Government/Corporate Bond Index, the Dow Jones Industrial Average, Morgan
Stanley Pacific (Excluding Japan) Hang Seng, and FT Pacific (Excluding Japan).
The Fund's total return and comparisons with these indices may be used in
advertisements and in information furnished to present or prospective
shareholders. The Fund's performance may differ from that of other investors in
the Portfolio, including the other investment companies.
Information used in advertisements and in materials furnished to present or
prospective shareholders may include statistics, data and performance studies
prepared by independent organizations (e.g. Ibbotson Associates, Standard &
Poor's Ratings Group, Merrill Lynch, Pierce, Fenner & Smith, Inc., Bloomberg,
L.P., Dow Jones & Company, Inc., and The Federal Reserve Board) or included in
various publications (e.g. The Wall Street Journal, Barron's and The Decade:
Wealth of Investments in U.S. Stocks, Bonds, Bills & Inflation) reflecting the
investment performance or return achieved by various classes and types of
investments (e.g. common stocks, small company stocks, long-term corporate
bonds, long-term government bonds, intermediate-term government bonds, U.S.
Treasury bills) over various periods of time. This information may be used to
illustrate the benefits of long-term investments in common stocks.
From time to time, information about the allocation and holdings of
investments in the Portfolio may be included in advertisements and other
material furnished to present and prospective shareholders. The Portfolio's
investment allocation on November 30, 1994, was as follows:
GREATER CHINA GROWTH PORTFOLIO
PERCENT OF
COMMON STOCKS INVESTMENTS
-----------
Hong Kong ................................ 38.2%
Singapore ................................ 12.3
Thailand ................................. 10.6
Malaysia ................................. 10.6
South Korea .............................. 9.2
Taiwan ................................... 4.7
China .................................... 3.1
Philippines .............................. 8.4
Indonesia ................................ 2.4
United States ............................ 0.5
------
TOTAL ........................................ 100.0%
The Portfolio's ten largest common stock holdings on November 30, 1994,
were:
COMPANY SHARES VALUE
------- ------ -----
Hutchinson Whampoa Hong Kong ................ 4,673,000 $18,610,690
HSBC Holdings PLC ........................... 1,632,600 18,049,209
Siam Cement ................................. 318,400 17,664,545
Siam Commercial Bank ........................ 1,891,300 17,362,134
Yukong Ltd. ................................. 285,073 16,467,213
Land & General Berhard ...................... 3,562,000 16,432,218
Wharf (Holdings) Ltd. ....................... 4,620,000 16,069,746
Jardine Matheson HK Registry ................ 2,299,600 15,685,112
Cheung Kong ................................. 3,680,000 15,322,048
Hopewell Holdings ........................... 17,678,000 15,314,451
From time to time, evaluations of the Fund's performance made by independent
sources, such as Lipper Analytical Services, Inc., CDA/Weisenberger and
Morningstar, Inc. may be used in advertisements and in information furnished to
present or prospective shareholders. The Fund's performance may differ from that
of other investors in the Portfolio, including the other investment companies.
Information used in advertisements and materials furnished to present or
prospective shareholders may include examples and performance illustrations of
the cumulative change in various levels of investments in the Fund for various
periods of time and at various prices per share. Such examples and illustrations
may assume that all dividends and capital gain distributions are reinvested in
additional shares and may also show separately the value of shares acquired from
such reinvestments as well as the total value of all shares acquired for such
investments and reinvestments. Such information may also include statements or
illustrations relating to the appropriateness of types of securities and/or
mutual funds which may be employed to meet specific financial goals, such as (1)
funding retirement, (2) paying for children's education, and (3) financially
supporting aging parents. These three financial goals may be referred to in such
advertisements or materials as the "Triple Squeeze".
For additional information, charts and illustrations relating to the Fund's
investment performance, see "Performance Information" in Part II of this
Statement of Additional Information.
TAXES
See also "Distributions and Taxes" in the Fund's current prospectus.
The Fund, as a series of a Massachusetts business trust, will be treated as
a separate entity for accounting and tax purposes. The Fund has elected to be
treated, has qualified, and intends to continue to qualify each year as a
regulated investment company under the Internal Revenue Code (the "Code").
Accordingly, the Fund intends to satisfy certain requirements relating to
sources of its income and diversification of its assets and to distribute all of
its net investment income and net realized capital gains in accordance with the
timing requirements imposed by the Code, so as to avoid any Federal income or
excise tax on the Fund. Because the Fund invests all or substantially all of its
assets in the Portfolio, the Portfolio normally must satisfy the applicable
source of income and diversification requirements in order for the Fund to
satisfy them. The Portfolio will allocate at least annually among its investors,
including the Fund, each investor's distributive share of the Portfolio's net
investment income, net realized capital gains, and any other items of income,
gain, loss, deduction or credit. The Portfolio will make allocations to the Fund
in accordance with the Code and applicable regulations, rulings and revenue
procedures and will make moneys available for withdrawal at appropriate times
and in sufficient amounts to enable the Fund to satisfy the tax distribution
requirements that apply to the Fund and that must be satisfied in order to avoid
Federal income and/or excise tax on the Fund. For purposes of applying the
requirements of the Code regarding qualification as a regulated investment
company, the Fund will be deemed (i) to own its proportionate share of each of
the assets of the Portfolio and (ii) to be entitled to the gross income of the
Portfolio attributable to such share.
In order to avoid Federal excise tax, the Code requires that the Fund
distribute by December 31 of each calendar year at least 98% of its ordinary
income (not including tax-exempt income) for such year, at least 98% of the
excess of its realized capital gains over its realized capital losses, generally
computed on the basis of the one-year period ending on October 31 of such year,
after reduction by any available capital loss carryforwards, and 100% of any
income and capital gains from the prior year (as previously computed) that was
not paid out during such year and on which the Fund paid no Federal income tax.
Under current law, provided that the Fund qualifies as a regulated investment
company for Federal income tax purposes and the Portfolio is treated as a
partnership for Massachusetts and Federal tax purposes, neither the Fund nor the
Portfolio is liable for any income, corporate excise or franchise tax in the
Commonwealth of Massachusetts.
Foreign exchange gains and losses realized by the Portfolio and allocated to
the Fund in connection with the Portfolio's investments in foreign securities
and certain foreign currency related options, futures or forward contracts or
foreign currency may be treated as ordinary income and losses under special tax
rules. Certain options, futures or forward contracts of the Portfolio may be
required to be marked to market (i.e., treated as if closed out) on the last day
of each taxable year, and any gain or loss realized with respect to these
contracts may be required to be treated as 60% long-term and 40% short-term gain
or loss. Positions of the Portfolio in securities and offsetting options,
futures or forward contracts may be treated as "straddles" and be subject to
other special rules that may, upon allocation of the Portfolio's income, gain or
loss to the Fund, affect the amount, timing and character of the Fund's
distributions to shareholders. Certain uses of foreign currency and foreign
currency derivatives such as options, futures, forward contracts and swaps and
investment by the Portfolio in certain "passive foreign investment companies"
may be limited or a tax election may be made, if available, in order to preserve
the Fund's qualification as a regulated investment company or avoid imposition
of a tax on the Fund.
The Portfolio anticipates that it will be subject to foreign taxes on its
income (possibly including, in some cases, capital gains) from foreign
securities. Tax conventions between certain countries and the U.S. may reduce or
eliminate such taxes. If more than 50% of the Fund's total assets, taking into
account its allocable share of the Portfolio's total assets, at the close of any
taxable year of the Fund consists of stock or securities of foreign
corporations, the Fund may file an election with the Internal Revenue Service
pursuant to which shareholders of the Fund will be required to (i) include in
ordinary gross income (in addition to taxable dividends actually received) their
pro rata shares of foreign income taxes paid by the Portfolio and allocated to
the Fund even though not actually received, and (ii) treat such respective pro
rata portions as foreign income taxes paid by them. Shareholders may then deduct
such pro rata portions of foreign income taxes in computing their taxable
incomes, or, alternatively, use them as foreign tax credits, subject to
applicable limitations, against their U.S. income taxes. Shareholders who do not
itemize deductions for Federal income tax purposes will not, however, be able to
deduct their pro rata portion of foreign taxes deemed paid by the Fund, although
such shareholders will be required to include their shares of such taxes in
gross income. Shareholders who claim a foreign tax credit for such foreign taxes
may be required to treat a portion of dividends received from the Fund as a
separate category of income for purposes of computing the limitations on the
foreign tax credit. Tax-exempt shareholders will ordinarily not benefit from
this election. Each year that the Fund files the election described above, its
shareholders will be notified of the amount of (i) each shareholder's pro rata
share of foreign income taxes paid by the Portfolio and allocated to the Fund
and (ii) the portion of Fund dividends which represents income from each foreign
country. If the Fund does not make this election, it may deduct its allocated
share of such taxes in computing its investment company taxable income.
The Portfolio will allocate at least annually to the Fund and its other
investors their respective distributive shares of any net investment income and
net capital gains which have been recognized for Federal income tax purposes
(including unrealized gains at the end of the Portfolio's fiscal year on certain
options and futures transactions that are required to be marked-to- market).
Such amounts will be distributed by the Fund to its shareholders in cash or
additional shares, as they elect. Shareholders of the Fund will be advised of
the nature of the distributions.
Distributions by the Fund of the excess of net long-term capital gains over
net short-term capital losses (including any capital losses carried forward from
prior years) earned by the Portfolio and allocated to the Fund are taxable to
shareholders of the Fund as long-term capital gains, whether received in cash or
in additional shares and regardless of the length of time their shares have been
held. Certain distributions declared in October, November or December and paid
the following January will be taxed to shareholders as if received on December
31 of the year in which they are declared.
Any loss realized upon the redemption or exchange of shares with a tax
holding period of 6 months or less will be treated as a long-term capital loss
to the extent of any distribution of net long-term capital gains with respect to
such shares. All or a portion of a loss realized upon taxable disposition of
Fund shares may be disallowed under "wash sale" rules if other Fund shares are
purchased (whether through reinvestment of dividends or otherwise) within 30
days before or after the disposition.
Special tax rules apply to Individual Retirement Accounts ("IRAs") and
shareholders investing through IRAs, should consult their tax advisers for more
information. An individual may make an aggregate annual contribution to an IRA
in an amount equal to the lesser of his or her earned income or $2,000 ($2,250
for an individual and his or her nonearning spouse). The deductibility of such
contributions may be restricted or eliminated for particular shareholders.
The foregoing discussion does not describe many of the tax rules applicable
to IRAs nor does it address the special tax rules applicable to certain other
classes of investors, such as other retirement plans, tax-exempt entities,
insurance companies and financial institutions. Shareholders should consult
their own tax advisers with respect to these or other special tax rules that may
apply in their particular situations, as well as the state, local or foreign tax
consequences of investing in the Fund.
PORTFOLIO SECURITY TRANSACTIONS
Decisions concerning the execution of portfolio security transactions by the
Portfolio, including the selection of the market and the broker-dealer firm, are
made by the Adviser.
The Adviser places the portfolio security transactions of the Portfolio and
of certain other accounts managed by the Adviser for execution with many
broker-dealer firms. The Adviser uses its best efforts to obtain execution of
portfolio transactions at prices which are advantageous to the Portfolio and
(when a disclosed commission is being charged) at reasonably competitive
commission rates. In seeking such execution, the Adviser will use its best
judgment in evaluating the terms of a transaction, and will give consideration
to various relevant factors, including without limitation the size and type of
the transaction, the general execution and operational capabilities of the
broker-dealer, the nature and character of the market for the security, the
confidentiality, speed and certainty of effective execution required for the
transaction, the reputation, reliability, experience and financial condition of
the broker-dealer, the value and quality of services rendered by the
broker-dealer in other transactions, and the reasonableness of the commission,
if any. Transactions on stock exchanges and other agency transactions involve
the payment by the Portfolio of negotiated brokerage commissions. Such
commissions vary among different broker-dealer firms, and a particular
broker-dealer may charge different commissions according to such factors as the
difficulty and size of the transaction and the volume of business done with such
broker-dealer. Transactions in foreign securities usually involve the payment of
fixed brokerage commissions, which are generally higher than those in the United
States. There is generally no stated commission in the case of securities traded
in the over-the-counter markets, but the price paid or received by the Portfolio
usually includes an undisclosed dealer markup or markdown. In an underwritten
offering the price paid by the Portfolio includes a disclosed fixed commission
or discount retained by the underwriter or dealer. Although commissions paid on
portfolio transactions will, in the judgment of the Adviser, be reasonable in
relation to the value of the services provided, commissions exceeding those
which another firm might charge may be paid to broker-dealers who were selected
to execute transactions on behalf of the Portfolio and the Adviser's other
clients in part for providing brokerage and research services to the Adviser.
As authorized in Section 28(e) of the Securities Exchange Act of 1934, a
broker or dealer who executes a portfolio transaction on behalf of the Portfolio
may receive a commission which is in excess of the amount of commission another
broker or dealer would have charged for effecting that transaction if the
Adviser determines in good faith that such commission was reasonable in relation
to the value of the brokerage and research services provided. This determination
may be made on the basis of either that particular transaction or on the basis
of the overall responsibilities which the Adviser and its affiliates have for
accounts over which they exercise investment discretion. In making any such
determination, the Adviser will not attempt to place a specific dollar value on
the brokerage and research services provided or to determine what portion of the
commission should be related to such services. Brokerage and research services
may include advice as to the value of securities, the advisability of investing
in, purchasing, or selling securities, and the availability of securities or
purchasers or sellers of securities; furnishing analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts; and effecting securities transactions and
performing functions incidental thereto (such as clearance and settlement); and
the "Research Services" referred to in the next paragraph.
It is a common practice in the investment advisory industry for the advisers
of investment companies, institutions and other investors to receive research,
statistical and quotation services, data, information and other services,
products and materials which assist such advisers in the performance of their
investment responsibilities ("Research Services") from broker-dealers which
execute portfolio transactions for the clients of such advisers and from third
parties with which such broker-dealers have arrangements. Consistent with this
practice, the Adviser may receive Research Services from broker-dealer firms
with which the Adviser places the portfolio transactions of the Portfolio and
from third parties with which these broker-dealers have arrangements. These
Research Services may include such matters as general economic and market
reviews, industry and company reviews, evaluations of securities and portfolio
strategies and transactions, recommendations as to the purchase and sale of
securities and other portfolio transactions, financial, industry and trade
publications, news and information services, pricing and quotation equipment and
services, and research oriented computer hardware, software, data bases and
services. Any particular Research Service obtained through a broker-dealer may
be used by the Adviser in connection with client accounts other than those
accounts which pay commissions to such broker-dealer. Any such Research Service
may be broadly useful and of value to the Adviser in rendering investment
advisory services to all or a significant portion of its clients, or may be
relevant and useful for the management of only one client's account or of a few
clients' accounts, or may be useful for the management of merely a segment of
certain clients' accounts, regardless of whether any such account or accounts
paid commissions to the broker-dealer through which such Research Service was
obtained. The advisory fee paid by the Portfolio is not reduced because the
Adviser receives such Research Services. The Adviser evaluates the nature and
quality of the various Research Services obtained through broker-dealer firms
and attempts to allocate sufficient commissions to such firms to ensure the
continued receipt of Research Services which the Adviser believes are useful or
of value to it in rendering investment advisory services to its clients.
Subject to the requirement that the Adviser shall use its best efforts to
seek to execute portfolio security transactions of the Portfolio at advantageous
prices and at reasonably competitive commission rates or spreads, the Adviser is
authorized to consider as a factor in the selection of any broker-dealer firm
with whom Portfolio orders may be placed the fact that such firm has sold or is
selling shares of the Fund or of other investment companies sponsored by Eaton
Vance. This policy is not inconsistent with a rule of the National Association
of Securities Dealers, Inc., which rule provides that no firm which is a member
of the Association shall favor or disfavor the distribution of shares of any
particular investment company or group of investment companies on the basis of
brokerage commissions received or expected by such firm from any source.
Securities considered as investments for the Portfolio may also be
appropriate for other investment accounts managed by the Adviser or its
affiliates. The Adviser will attempt to allocate equitably portfolio
transactions among the Portfolio and the portfolios of its other investment
accounts whenever decisions are made to purchase or sell securities by the
Portfolio and one or more of such other accounts simultaneously. In making such
allocations, the main factors to be considered are the respective investment
objectives of the Portfolio and such other accounts, the relative size of
portfolio holdings of the same or comparable securities, the availability of
cash for investment by the Portfolio and such accounts, the size of investment
commitments generally held by the Portfolio and such accounts and the opinions
of the persons responsible for recommending investments to the Portfolio and
such accounts. While this procedure could have a detrimental effect on the price
or amount of the securities available to the Portfolio from time to time, it is
the opinion of the Trustees of the Portfolio that the benefits available from
the Adviser's organization outweigh any disadvantage that may arise from
exposure to simultaneous transactions. For the brokerage commissions paid by the
Portfolio on portfolio transactions, see "Fees and Expenses" in Part II of this
Statement of Additional Information.
OTHER INFORMATION
On August 18, 1992, the Trust changed its name from Eaton Vance Growth Fund
to Eaton Vance Growth Trust. The Trust is organized as a business trust under
laws of the Commonwealth of Massachusetts under a Declaration of Trust dated May
25, 1989, as amended. The Trust is the successor to a corporation which
commenced its investment operations in 1954.
Eaton Vance, pursuant to its agreement with the Trust, controls the use of
the words "Eaton Vance" in the Trust's name and may use the words "Eaton Vance"
in other connections and for other purposes.
The Trust's Declaration of Trust may be amended by the Trustees when
authorized by vote of a majority of the outstanding voting securities of the
Trust. The Trustees may also amend the Declaration of Trust without the vote or
consent of shareholders to change the name of the Trust or any series or to make
such other changes as do not have a materially adverse effect on the rights or
interests of shareholders or if they deem it necessary to conform the
Declaration to the requirements of applicable Federal laws or regulations. The
Trust's By-laws provide that the Trust will indemnify its Trustees and officers
against liabilities and expenses incurred in connection with any litigation or
proceeding in which they may be involved because of their offices with the
Trust. However, no indemnification will be provided to any Trustee or officer
for any liability to the Trust or its shareholders by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
Under Massachusetts law, if certain conditions prevail, shareholders of a
Massachusetts business trust (such as the Trust) could be deemed to have
personal liability for the obligations of the trust. Numerous investment
companies registered under the 1940 Act have been formed as Massachusetts
business trusts, and management is not aware of an instance where such liability
has been imposed. The Trust's Declaration of Trust contains an express
disclaimer of liability on the part of the Trust shareholders and the Trust's
By-laws provide that the Trust shall assume the defense on behalf of any Trust
shareholder. Moreover, the Trust's By-laws also provide for indemnification out
of the property of the Trust of any shareholder held personally liable solely by
reason of being or having been a shareholder for all loss or expense arising
from such liability. The assets directly held by the Trust are not registered
under the Securities Act of 1933 and are therefore not readily marketable. The
assets held by the Portfolio and indirectly held by the Trust are readily
marketable and will ordinarily substantially exceed the Trust's liabilities. In
light of the nature of the Trust's business and the nature of its assets,
management believes that the possibility of the Trust's liabilities exceeding
its assets, and therefore the shareholder's risk of personal liability, is
extremely remote.
As permitted by Massachusetts law, there will normally be no meetings of
shareholders for the purpose of electing Trustees unless and until such time as
less than a majority of the Trustees of the Trust holding office have been
elected by shareholders. In such an event the Trustees then in office will call
a shareholder's meeting for the election of Trustees. Except for the foregoing
circumstances and unless removed by action of the shareholders in accordance
with the Trust's By-Laws, the Trustees shall continue to hold office and may
appoint successor Trustees.
The Trust's By-Laws provide that no person shall serve a Trustee if
shareholders holding two-thirds of the outstanding shares have removed him from
that office either by a written declaration filed with the Trust's custodian or
by votes cast at a meeting called for that purpose. The By-Laws also provide
that the Trustees shall promptly call a meeting of shareholders for the purpose
of voting upon a question of removal of any such Trustee or Trustees when
requested so to do by the record holders of not less than 10 percentum of the
outstanding shares. The By-Laws further provide that under certain circumstances
the shareholders may call a meeting to remove a Trustee and that the Trust is
required to provide assistance in communicating with shareholders about such a
meeting.
In accordance with the Declaration of Trust of the Portfolio, there will
normally be no meetings of the investors for the purpose of electing Trustees
unless and until such time as less than a majority of the Trustees holding
office have been elected by investors. In such an event the Trustees of the
Portfolio then in office will call an investors' meeting for the election of
Trustees. Except for the foregoing circumstances and unless removed by action of
the investors in accordance with the Portfolio's Declaration of Trust, the
Trustees shall continue to hold office and may appoint successor Trustees.
The Declaration of Trust of the Portfolio provides that no person shall
serve as a Trustee if investors holding two-thirds of the outstanding interests
have removed him from that office either by a written declaration filed with the
Portfolio's custodian or by votes cast at a meeting called for that purpose. The
Declaration of Trust further provides that under certain circumstances the
investors may call a meeting to remove a Trustee and that the Portfolio is
required to provide assistance in communicating with investors about such a
meeting.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Deloitte & Touche LLP, 125 Summer Street, Boston, Massachusetts, are the
independent certified public accountants of the Fund and the Portfolio,
providing audit services, tax return preparation, and assistance and
consultation with respect to the preparation of filings with the SEC.
For the financial statements of the Fund and the Portfolio see "Financial
Statements" in Part II of this Statement of Additional Information.
<PAGE>
APPENDIX A
THE SECURITIES MARKETS IN CHINA AND HONG KONG
The information set forth in this Statement of Additional Information
("SAI") regarding China, its economy and the Stock Exchange of Hong Kong Ltd.
has been extracted from various government and private publications. The Fund
and the Trust's Board of Trustees make no representation as to the accuracy of
such information, nor has the Fund or the Trust's Board of Trustees attempted to
verify it.
In this SAI, unless otherwise specified, all references to "U.S. dollars,"
"U.S.$" or "$" are to United States dollars, to "RMB" or "renminbi" are to
Chinese renminbi and to "H.K. dollars" or "H.K.$" are to Hong Kong dollars. On
December 15, 1994, the exchange rate as published in The Asian Wall Street
Journal was 8.5113 renminbi = U.S. $1.00 and 7.7379 H.K. dollars = U.S. $1.00
and, unless otherwise specified, all renminbi and Hong Kong dollars have been
so converted at such exchange rates. No representation is made that the
renminbi, H.K. dollar or U.S. dollar amounts in this SAI could have been or
could be converted into U.S. dollars, renminbi or H.K. dollars, as the case
may be, at any particular rate or at all. See "Appendix B: People's Republic
of China--Exchange Rate" for information regarding historical rates of
exchange between the Chinese renminbi and the U.S. dollar.
HISTORY OF THE CHINESE SECURITIES MARKETS
The first securities exchange in China, the "Shanghai Gufen Gongsou"
(Shanghai Stock Confederation), was organized in the 1890s in Shanghai. The
first officially recognized exchange was established in 1914 in Shanghai, which
focused principally on the trading of government bonds. Additional exchanges
were opened in Beijing in 1918 and in Tianjin in 1921. By the period following
World War II, Shanghai had become one of the major financial centers in Asia.
However, when the Chinese communist party assumed power in 1949, China's
securities markets were closed and all securities were abolished.
The Beijing and Tianjin securities exchanges reopened in 1950 and 1949,
respectively, but were closed again in 1952. Securities markets were nonexistent
in China until the early 1980s when they reemerged in various cities following
initiation of China's economic reform program in 1978. There currently are two
officially recognized exchanges in China, the Shanghai Securities Exchange
("SHSE"), which commenced trading on December 19, 1990, and the Shenzhen Stock
Exchange ("SZSE"), which commenced trading on July 3, 1991. A number of
organized securities markets exist in other cities in China, but these are
primarily over-the-counter markets. Initially, shares on both exchanges were
made available only to Chinese investors and were traded only in RMB, thus
avoiding the issues of repatriation of profits and the remittance of foreign
currency that would arise with the participation of foreign investors in the
market. Recently, however, these issues have been addressed in legislation
concerning a special class of shares, commonly referred to as "B" shares, which
are denominated in RMB and are offered exclusively for investment by foreign
investors and such other investors as the authorities may approve. The first
issues of "B" shares were listed and traded on the SHSE on February 21, 1992,
and on the SZSE on February 28, 1992.
REGULATION AND OPERATION OF THE CHINESE SECURITIES MARKETS
Prior to the establishment of the SHSE and SZSE, trading of securities in
China was conducted in over-the-counter ("OTC") markets in a number of major
cities, including Shanghai, Chongqing, Wuhan, Guangzhou and Shenyang. The OTC
markets have no fixed location for trading; transactions are negotiated by
telephone or similar means. The SHSE and SZSE confine trading of listed shares
to the two exchanges, while unlisted stocks continue to be traded in the OTC
markets. In addition to the two exchanges and the OTC markets, a nationwide
computer system for trading of treasury bills and bonds, the Securities Trading
Automated Quotations System ("STAQ"), commenced operations on December 5, 1990
and currently links 54 licensed trading corporations in 16 cities.
Currently, trading of treasury bills constitutes the majority of the
activity in the Chinese securities markets, while trading of equity securities
constitutes only a small portion of the trading activity. The OTC markets trade
only treasury bills and equity securities that are not listed on the SHSE or the
SZSE. The SHSE and the SZSE trade both treasury bills and shares of listed
companies. Shares are divided into four types based on the type of entity
holding them: (1) State shares held by designated State entities on behalf of
the State; (2) shares held by Chinese corporations; (3) shares held by Chinese
individuals; and (4) shares held by foreign investors. The first three
categories are generally referred to as "A" shares. The fourth category is
referred to as "B" shares. State shares cannot be sold or transferred without
the approval of the State asset administrative departments. "A" shares are
quoted and traded in renminbi, while "B" shares are quoted in renminbi but
traded in foreign currencies (currently Hong Kong dollars and U.S. dollars).
China has not yet promulgated a national securities law. Although the State
Council has promulgated Interim Regulations for Administration of Enterprise
Bonds, these regulations apply only to bonds issued by State-owned enterprises.
At the local level, however, many cities and provinces have promulgated
securities rules and regulations.
The People's Bank of China (the "PBOC"), China's central bank, is authorized
to regulate stocks, bonds and other negotiable instruments and administer
China's financial markets, and it exercises this authority through its local
branches. The State Commission for Restructing the Economic System has, in
practice, assumed the principal role of formulating policies for the development
of the securities markets. In addition, the Stock Exchange Executive Council, a
nongovernmental organization, plays an important advisory role in the
formulation of a regulatory framework for the national securities markets.
CORPORATE LAW IN CHINA
There is no national legislative framework in China providing for
regulations governing joint stock companies. However, there have been in force
in Shenzhen since February 1992 the Provisional Rules for Joint Stock Companies
in Shenzhen (the "Shenzhen Provisional Rules"). The Shenzhen Provisional Rules
include provisions governing the formation in Shenzhen of joint stock companies,
issuance of shares and debentures, ownership and dealings in shares, reduction
of capital, shareholders' rights and obligations, meetings and resolutions,
directors, financial accounting, distribution and liquidation. More recently,
the Provisional Regulations for Shanghai Municipality Joint Stock Limited
Companies came into force on June 1, 1992, covering broadly the same areas as
the Shenzhen Provisional Rules.
SHENZHEN STOCK EXCHANGE
The SZSE was established in April 1991, and officially opened in July 1991.
As of December 15, 1994, 114 companies had shares listed on the SZSE, of which
22 also had "B" shares listed. Prices of "A" shares were subject to a price
fluctuation limit, but all such limits have been removed except for the Shenzhen
Champaign Company. The Shenzhen authorities have established a regulatory fund,
funded from proceeds of new issues of "A" shares, to buy and sell shares on the
open market in an attempt to minimize fluctuations of the prices of "A" shares.
In the issuance of "A" shares by Shenzhen Konka Electronics, the first case in
which this regulatory fund was introduced, an amount equal to 5% of the
aggregate "A" share premium was required to be paid into the fund. It is
expected that a similar percentage will be required for future new issues.
The following table provides selected information regarding "B" shares of
the companies listed on the SZSE as of December 15, 1994.
INVESTMENT STATISTICS FOR "B" SHARES OF COMPANIES LISTED ON
THE SHENZHEN STOCK EXCHANGE*
<TABLE>
<CAPTION>
"B" SHARES IN 12/15/94 MARKET 12/15/94
ISSUE PRICE CAPITALIZATION TURNOVER
COMPANY (MILLIONS) (HK$) (HK$ MILLIONS) (HK$ MILLIONS)
------- ---------- ----- -------------- --------------
<S> <C> <C> <C> <C>
China Bicycles ...................... 26 1.60 41 0.00
China Container ..................... 243 4.00 2 0.05
Chiwan Wharf ........................ 45 7.90 356 0.00
Flyte ............................... 44 2.86 126 0.01
Gintian ............................. 23 3.42 77 0.23
Health Water ........................ 52 3.70 131 0.00
Huafa ............................... 22 2.50 55 0.00
Konke ............................... 77 1.01 78 0.00
Lionde .............................. 118 5.20 615 0.06
Lizhu ............................... 36 2.48 89 0.00
Nanshan Power ....................... 79 3.70 293 1.26
SEZ Real Estate ..................... 81 3.00 244 0.31
Shekou Port ......................... 100 2.50 250 0.01
Shenbao ............................. 100 4.50 450 0.52
Southern Glass ...................... 20 1.51 30 0.00
SZ Petrochem ........................ 84 8.20 689 0.02
SZ Properties ....................... 27 3.37 92 0.00
SZ Textile .......................... 55 2.96 161 0.02
Tellus .............................. 25 3.30 83 0.00
Tsann Kuan .......................... 24 2.56 61 0.00
Vanke ............................... 148 3.10 459 0.00
Victor Onward ....................... 56 4.50 252 0.02
Zhonghao ............................ 63 1.80 114 0.07
Market .............................. 22 1.70 37 0.03
----- ----
TOTAL OF "B" SHARES ................................................ 4,841 2.60
===== ====
</TABLE>
---------
Source: Lloyd George Management
*On December 15, 1994 7.7379 Hong Kong dollars = U.S. $1.00.
Market Index. The performance of the "B" shares on SZSE is measured by the
CLSA Shenzhen B Index. This Index stood at 1,442.40 on December 31, 1993 and
closed at 933.4 on December 15, 1994.
Membership. The SZSE operates on a membership system. Membership is
restricted to securities institutions approved by the PBOC. As of March 31,
1992, there were 15 members admitted to the SZSE, consisting of banks, finance
companies, securities companies, insurance companies and trust and investment
companies. All are either Shenzhen local companies or Shenzhen branches of
national companies. Securities institutions in Shenzhen may join the Joint
Meeting of Shenzhen Securities Institutions, whether or not they are members of
the SZSE. This self-governing organization was formed in August of 1990 to
facilitate communication among securities institutions and to strengthen self-
discipline among members.
Regulation. The SZSE is regulated by the PBOC, Shenzhen Special Economic
Zone Branch and the local government in Shenzhen. The Shenzhen Municipal
People's Government promulgated the Provisional Measures of Shenzhen
Municipality for Administration of the Issue and Trading of Shares (the "SZSE
Measures"), which became effective on June 15, 1991 and govern the establishment
of the SZSE and the issuance and trading of shares in Shenzhen. The issuance and
trading of "B" shares in Shenzhen are governed by the Provisional Measures of
Shenzhen Municipality for Administration of Special Renminbi-denominated Shares,
which became effective on December 16, 1991. These measures are supplemented by
a set of Detailed Implementing Rules which also became effective on December 16,
1991. In addition, Provisional Rules of Shenzhen Municipality for Registration
of Special Renminbi-denominated Shares were promulgated by the Shenzhen
Securities Registrars Co., Ltd. on January 29, 1992, and Operating Rules of the
Shenzhen Securities Exchange for Trading and Clearing of "B" shares were
promulgated by the SZSE on January 31, 1992. These rules provide detailed
regulations relating to the issuance, trading, settlement and registration of
"B" shares.
New Issues and Listing Criteria. Shares of local Shenzhen companies may
either be listed on the SZSE or traded on the OTC markets. In accordance with
the SZSE Measures and the Shenzhen Provisional Rules, an issuer must meet the
following requirements when making a public share issue: (i) it must have
obtained prior approval from the relevant authorities to be and have been
established as or converted into a joint stock company; (ii) its production and
operations must comply with Shenzhen's industrial policies; (iii) it must have a
good financial and business record and net assets of at least RMB 10 million;
(iv) for the year prior to applying for authorization to issue shares, the value
of its net tangible assets must have accounted for no less than 25% of its gross
tangible assets; (v) its promoters must subscribe for at least RMB 5 million
worth of shares, representing no less than 35% of its total share capital; (vi)
the number of shares to be issued to the public, i.e., investors other than
specially designated individuals, must be equal to at least 25% of its total
share capital; (vii) it must have a minimum of 800 shareholders following the
issue; (viii) within three years prior to the proposed issue, neither the
company nor its promoters may have any record of illegal activities or
activities counter to the public interest; and (ix) the shares subscribed by the
employees of the company cannot exceed 10% of the shares issued to the public
and such shares are not assignable for a period of one year; thereafter,
assignment of such shares may not exceed 10% of the shareholder's holding during
any half year period.
All public share issues must be handled by securities distributors. Issues
of over RMB 30 million must be distributed by a syndicate made up of at least
three members. Issues of over RMB 50 million must be distributed by a syndicate
made up of at least five members.
In order to qualify for listing on the SZSE, companies must meet additional
requirements which are more stringent than those for public share issues. Such
additional requirements include: (i) the total par value of shares of common
stock actually issued must be more than RMB 20 million; (ii) there must have
been a minimum return on capital of more than 10% in the year preceding listing
and more than 8% over the two years prior to the year preceding the listing;
(iii) the number of registered shareholders must exceed 1,000, and the total
number of shares held by shareholders holding less than 0.5% of the company's
shares must account for more than 25% of the total paid-up share capital; (iv)
the company must have a continuous record of making profits and must have a
business record of more than three years; and (v) for the year prior to applying
for listing, the value of the net tangible assets must have accounted for more
than 38% of its gross tangible assets and there must be no accumulated losses.
Application for a public share issue must be made to the PBOC, Shenzhen
Special Economic Zone Branch. Application for listing on the SZSE must be made
to the PBOC, Shenzhen Special Economic Zone Branch and the SZSE. A company's
prospectus for initial share issue must be published in a newspaper or other
publication approved by the PBOC, Shenzhen Special Economic Zone Branch, ten
days prior to the scheduled issuance date, which must include: (i) the name and
domicile of the company; (ii) the scope of the company's production and
business; (iii) resumes of the promoters or directors and the managers; (iv) the
reason for and purpose of the share issue; (v) the total amount, class(es) and
number of shares to be issued, and the par value and selling price of each
share; (vi) the method of issue; (vii) the investors to whom the issue is
marketed; (viii) the name(s) of the securities distributor(s), the total value
of the shares to be distributed and the method of distribution; (ix) details of
the company's history and conditions for future development, its main business
and financial situation, and the total amount and composition of its assets and
liabilities; and (x) a certified profit forecast.
A company applying for a further issue of shares must satisfy the relevant
authorities that the following conditions have been met: (i) its business record
since the time of the last issue must have been good, and its utilization of
capital must be above average in its line of business; (ii) not less than one
year must have elapsed since its last share issue; (iii) the amount of shares it
is applying to issue must not exceed the amount of its existing shares; (iv) its
application of the proceeds of the issue must conform to the industrial policies
of Shenzhen; and (v) the issue will be beneficial to the healthy development of
the Shenzhen securities markets. Applications for approval to issue shares for
the purpose of attracting foreign investment are not bound by (ii) and (iii).
New Issues Criteria for "B" Shares in Shenzhen. A company wishing to issue
"B" shares in Shenzhen must comply with the following requirements: (i) it must
fulfill the issue requirements specified in the SZSE Measures; (ii) it must
obtain written consent from the relevant department of the State to utilize
foreign investment or to transform into a foreign investment enterprise, and its
use of proceeds from the "B" share issue must conform to the laws and
regulations of the State concerning the administration of foreign investment;
(iii) it must have a stable, adequate source of foreign exchange revenue
(sufficient to pay out the "B" share dividends and bonuses for each year); (iv)
the percentage of "B" shares (including promoters' shareholdings) to the total
shares of the company must not exceed the upper limit set by the PBOC, Shenzhen
Special Economic Zone Branch; and (v) the company must have a business record of
three years or more, or have received special permission from the PBOC, Shenzhen
Special Economic Zone Branch. (Companies in high technology industries or other
special industries are not bound by this restriction.)
Subscription for "B" shares is carried out through authorized securities
institutions within Shenzhen Municipality. These institutions may arrange for
the participation of overseas securities institutions approved by the PBOC,
Shenzhen Special Economic Zone Branch. The holding by any foreign investor of
"B" shares of a joint stock company accounting for more than 5% of such
company's total shares must be reported to the PBOC, Shenzhen Special Economic
Zone Branch. Domestic securities institutions are not allowed to trade "B"
shares for their own accounts unless approved by the PBOC, Shenzhen Special
Economic Zone Branch.
The issuance of "B" shares through a syndicate underwriting on behalf of the
issuer must be managed by at least one authorized domestic securities
institution. The issue price of "B" shares may not be lower than the issue price
of "A" shares of the same company. During the distribution period, distributors
must sell the shares at the same predetermined price.
An issuer may request private placement of its "B" shares with institutions
outside China with which it has close business connections, provided that such
institutions are approved by the PBOC, Shenzhen Special Economic Zone Branch and
the number of shares privately placed with them does not exceed 15% of the total
number of "B" shares in such issue.
Reporting Requirements. Within 60 days following the end of each half of the
fiscal year, an issuer is required to submit an interim financial report,
reviewed and approved by an accounting firm, or its annual financial report,
audited by an accounting firm, to the PBOC, Shenzhen Special Economic Zone
Branch and to publish the same in a newspaper or other publication approved by
the PBOC, Shenzhen Special Economic Zone Branch. Such financial reports must
also be submitted to the SZSE if the issuer's securities are already listed on
the SZSE.
Insider Trading Restrictions. All persons are prohibited from using
insider information when engaging in the purchase or sale of securities.
THE SHANGHAI SECURITIES EXCHANGE
The SHSE was established on November 26, 1990 and officially opened on
December 19, 1990. Prior to the establishment of SHSE, an active OTC market in
local stocks and bonds existed in Shanghai.
As of December 15, 1994, 171 companies had shares listed on the SHSE of
which 32 also had "B" shares listed. Shares listed on the SHSE currently are not
subject to any limit on daily price fluctuations.
The following table provides selected information regarding the "B" shares
of the companies listed on the SHSE as of December 15, 1994.
INVESTMENT STATISTICS FOR "B" SHARES OF COMPANIES LISTED ON
THE SHANGHAI SECURITIES EXCHANGE*
<TABLE>
<CAPTION>
"B" SHARES IN 12/15/94 MARKET 12/15/94
ISSUE PRICE CAPITALIZATION TURNOVER
COMPANY (MILLIONS) (HK$) (HK$ MILLIONS) (HK$ MILLIONS)
------- ---------- ----- -------------- --------------
<S> <C> <C> <C> <C>
Auto Instrument ..................... 70 0.198 14 0.02
China TM ............................ 109 0.152 17 0.03
Chior Alkali ........................ 336 0.246 83 0.12
Dajiang ............................. 252 0.480 121 0.00
Dazhong ............................. 60 1.000 60 0.00
Diesel Engine ....................... 110 0.800 88 0.16
Erfangji ............................ 175 0.198 35 0.07
First Pencil ........................ 55 0.336 18 0.00
Forever Bicycle ..................... 60 0.192 12 0.08
Friendship Store .................... 40 0.390 16 0.00
Haixin .............................. 84 0.650 55 0.00
Hero ................................ 35 0.292 10 0.01
Hua Xin Cement ...................... 87 0.186 16 0.05
Jin Jiang Tower ..................... 92 0.378 35 0.28
Jinqiao ............................. 143 0.694 98 0.59
Lian Hua Fibre ...................... 54 0.388 21 0.00
Lujiazui ............................ 200 0.704 141 0.52
Material Centre ..................... 50 0.258 13 0.02
Narcissus Electric .................. 100 0.222 22 0.22
New Asia ............................ 100 0.324 32 2.24
Outer Gaoqiao ....................... 166 0.560 93 0.45
Phoenix Bicycle ..................... 100 0.390 39 0.12
Pilkington Glass .................... 185 0.920 152 0.73
Post & Telecom ...................... 60 0.508 30 0.21
Refrigerator ........................ 50 0.358 18 0.00
Rubber Belt ......................... 33 0.148 5 0.00
Sanmao .............................. 33 0.418 14 0.00
Sewing Machine ...................... 75 0.440 33 0.00
Shanghai Travel ..................... 60 0.350 21 0.26
Shangling Electric .................. 70 0.738 52 0.25
Steel Tube .......................... 80 0.300 24 0.16
Tyre & Rubber ....................... 221 0.450 99 0.14
Vacuum .............................. 121 0.208 25 0.01
Wing Sung ........................... 30 0.220 7 0.00
----- ----
TOTAL OF "B" SHARES ................................................ 1,519 6.75
===== ====
</TABLE>
---------
Source: Lloyd George Management
Market Index. The performance of the "B" shares on the SHSE is measured by
the CLSA Shanghai B Index. This Index stood at 734.58 on December 31, 1993 and
closed at 674.04 on December 15, 1994.
Membership. The SHSE operates on a membership system. Membership is
restricted to securities institutions approved by the PBOC. As of March 31,
1992, there were 29 members admitted to the SHSE, 20 of which are local
institutions and 9 of which are from other provinces. The SHSE members are
comprised of securities companies, insurance companies, trust and investment
companies and open credit cooperatives. Members of the SHSE must join the
Securities Trade Association, which is a self-governing trade organization whose
articles of association specify such matters as the purpose, nature, conditions
for membership, rights and obligations of members and accounting of the
Association. The SHSE members may be classified as (1) members who trade for
others' accounts; (2) members who trade for their own accounts only; or (3)
members who trade both for their clients and for their own accounts. No member
may buy or sell any listed securities outside the SHSE without permission.
Regulation. The SHSE is regulated by the local branch of the PBOC and the
local government in Shanghai. The Shanghai Municipal People's Government adopted
the Measures of Shanghai Municipality for Administration of the Trading of
Securities (the "SHSE Measures"), which came into effect on December 1, 1990 and
govern the establishment of the SHSE and the issuance and trading of securities
in Shanghai. In November of 1991, special regulations contained in the Measures
of Shanghai Municipality for the Administration of Special Renminbi-denominated
Shares and their Detailed Implementing Rules were promulgated by the PBOC and
the Shanghai Municipal People's Government relating to the issue of "B" shares
in Shanghai. Special rules for the trading and settlement of "B" shares were
also enacted in February 1992.
New Issues and Listed Criteria. To issue new securities, an issuer must file
an application with the PBOC, Shanghai Branch, along with the issuer's articles
of association, a prospectus to be used in offering the securities which meets
the requirements of the SHSE Measures and other related documents. Issues of
shares, or bonds of a value of RMB 10 million or more, must be distributed by a
securities institution, unless otherwise provided by the State or placed
privately. Issues with a total distribution value of RMB 30 million or more must
be jointly distributed by a distribution syndicate formed and led by a
securities company. Distribution of securities includes the underwriting of
securities and the placement of securities by an agent.
Under the SHSE Measures, an issuer which intends to issue its shares must
submit: (i) the consent from the relevant authorities as to the establishment or
restructuring of the enterprise as a joint stock company; (ii) in the case of a
newly-established joint stock company, an investment certificate evidencing that
its organizers have subscribed for not less than 30% of the total amount of
shares; (iii) in the case of State-owned enterprise being restructured as a
joint stock company, a confirmation of asset valuation issued by the
Administration for State Assets with a report on the conclusions from the asset
valuation issued by the relevant asset valuation agency, or, in the case of a
non-State-owned enterprise being restructured as a joint stock company, a report
on the conclusions from the asset valuation issued by an accounting firm and a
registered accountant of that firm; (iv) in the case of an existing joint stock
company issuing shares in order to increase its capital, financial statements of
continuous profits during at least the preceding two years and the preceding
quarter of the current year, certified by an accounting firm and a certified
accountant of that firm, and a shareholders' resolution authorizing the issue;
and (v) an application for share issue to the PBOC, Shanghai Branch, along with
its articles of association, the prospectus to be used for the share issue, a
distribution contract entered into with a securities distributor and, if the
shares are to be issued to raise funds for fixed asset investment, the approval
document(s) from the relevant administrative department(s). In addition, where
the issuer also intends to list shares on the SHSE, it must submit (i) an
application for the listing of and permission to deal in securities; (ii) a
report on the listing of the securities; (iii) consent from at least one
securities house to assist in the trading of the securities; and (iv) financial
statements of continuous profits for at least two years, certified by an
accounting firm and a registered accountant of that firm.
New Issues and Listing Criteria for "B" Shares on the SHSE. A company
wishing to issue "B" shares to be listed on the SHSE must comply with the
following requirements: (i) it must be an approved joint stock company which has
been registered with the relevant State authority or whose establishment has
been approved and has met all the listing requirements set forth in the SHSE
Measures; (ii) the proceeds from the issuance of the "B" shares must be used in
accordance with State policies and regulations on the administration of foreign
investment; (iii) it must have a stable, adequate source of foreign exchange
revenue (i.e., sufficient to pay out the "B" share dividends); and (iv) the
percentage of "B" shares among the total shares of a former state- owned
enterprise reorganized as a joint stock company must not exceed the upper limit
set by the PBOC, Shanghai Branch.
Subscription for "B" shares is carried out through approved securities
institutions. Approved domestic securities institutions may arrange for
participation by foreign securities institutions approved by the PBOC, Shanghai
Branch. Approval by the Shanghai Branch of the PBOC is required for the
subscription by a single investor for "B" shares which exceed 5% of the total
issued share capital of a company. In addition, "B" share trading must be
carried out by approved securities institutions and be processed through a
domestic securities house which is in the business of dealing in "B" shares.
Every investor dealing in "B" shares must open a "B" share securities account
with the SHSE. Domestic securities dealing organizations may open such "B" share
securities accounts on behalf of individuals and institutional investors outside
of China. Domestic securities institutions may not engage in "B" share business
for their own account.
The issuance of "B" shares in Shanghai may be through a public offering or a
private placement. A public offering must be conducted on behalf of the issuer
by an approved securities institution. The issuance of "B" shares through a
distribution syndicate must be managed by a domestic securities institution. The
prospectus for an issue of "B" shares must be published in a newspaper or other
publication approved by and on dates designated by the PBOC, Shanghai Branch.
Reporting Requirements. Once securities are approved for listing on the
SHSE, the issuer must publish the report on the listing of the securities and
certified financial statements showing continuous profits for at least two years
preceding the listing. Issuers of listed securities are required to submit
interim financial reports to the PBOC, Shanghai Branch in the middle of each
fiscal year. Issuers of securities traded on the OTC markets or the SHSE are
required to submit certified financial reports at the end of each fiscal year.
Such reports are required to be submitted within 45 days after the end of the
relevant period.
Within 15 days after the occurrence of any of the following situations, an
issuer of securities must submit a status report to the PBOC, Shanghai Branch,
and the SHSE if the securities of such issuer are listed on the SHSE: (i) the
conclusion with another party of a contract or agreement that will have a
material effect on the assets or liabilities of the enterprise or the rights and
interests of its shareholders; (ii) a major change in the business items or
forms of business of the enterprise; (iii) the making of a decision on a major
or relatively long-term investment; (iv) the incurring of major debts or losses;
(v) major losses of the assets of the enterprise; (vi) a major change in the
production or business environment; (vii) a change in the members of the board
of directors or senior management personnel; (viii) a change in the
shareholdings of shareholders who hold 5% or more of the total amount of shares
or a change in the shareholdings in the company of the members of the board of
directors or senior management personnel; (ix) involvement in a major lawsuit;
(x) the making of such major policy decisions as on merger, consolidation, etc.;
and (xi) commencement of liquidation or bankruptcy reorganization.
The trading and registration of transfer of registered shares will be
suspended 10 days before each announced date for payment of dividends or bonuses
or the issuance of new shares. Under the SHSE Measures, if the transfer
registration procedures are not completed within the specified time limits, the
dividends, bonuses and newly issued shares will be issued to the persons in
whose name the securities were registered at the time of such distribution or
issuance.
Insider Trading Restrictions. Certain persons involved in the issuance of
shares, such as relevant personnel of the PBOC, Shanghai Branch, who are
involved in securities administration, management personnel of the SHSE,
personnel of a securities house who are directly connected with the issue and
trading of shares and other insiders connected with the issue and trading of
shares are prohibited from trading, directly or indirectly, for their own
account.
TRADING AND REGULATION OF "B" SHARES
Trading of "B" Shares on the SZSE. Trading on the SZSE is conducted in
blocks of 2,000 shares. Trading in "B" shares may only be conducted between
non-Chinese investors. Investors outside China must trade "B" Shares through
approved foreign brokers who in turn instruct approved Shenzhen brokers who
actually effect trades on the SZSE. All trades must be transacted on the trading
floor; no off-market transactions are allowed. Trading on the SZSE is carried
out through a computerized automatic matching system which effects each
transaction based on price and time priority. Investors subscribing for or
buying "B" shares are required to produce their individual or corporate
identification documents, while individual investors must also pay a deposit
equal to 60% of the market price of the shares to be bought.
Commissions for transactions in "B" shares are fixed at 0.6% of the purchase
price. A stamp duty of 0.3% of the purchase price is also payable. In addition,
the SZSE imposes a transaction levy of 0.1% of the actual transaction amount. A
share transfer registration fee of 0.3% of the face value of the "B" shares
transferred is also payable by the buyer to the official registrar of the "B"
shares. Certain other fees may also be payable to the clearing and settlement
bank and foreign brokers for their services.
Any single investor holding "B" shares amounting to more than 5% of the
total share capital of an issuer must report such holding to the PBOC, Shenzhen
Special Economic Zone Branch. Short selling of "B" shares is prohibited. Newly
purchased "B" shares may not be sold before the settlement and registration
procedures for their purchase are completed.
Trading of "B" Shares on the SHSE. In Shanghai, "B" shares are traded in
blocks having a total face value of RMB 1,000. "B" shares may only be traded
between non-Chinese investors. Investors outside of China must trade "B" shares
through approved foreign brokers who instruct approved Shanghai brokers who then
actually effect trades on the SHSE. All trades must be transacted on the trading
floor; no off-market transactions are allowed.
Brokerage commissions for "B" share transactions are fixed at 0.6% of the
total amount of the transaction, with reduced rates of 0.5%, for transactions
with a value of RMB 500,000 and 0.4% with a value exceeding RMB 5,000,000. A
stamp duty of 0.3% of the amount of the transaction is also charged. The SHSE
also levies a transaction fee on securities dealers equal to 0.03% of the amount
of the transaction. A transfer fee of 0.1% of the face value of the shares
transferred is also payable by the investor. Certain other fees may also be
payable to the banks appointed to coordinate primary and secondary clearing and
settlement and to foreign brokers for their services. Fees are calculated in
renminbi and payable in U.S. dollars.
Any single investor (individual or institutional) purchasing "B" shares of
an amount exceeding 5% of the issuer's total share capital must obtain approval
for such purchase from the PBOC. Newly purchased "B" shares cannot be sold
before the transfer procedures for their purchase are completed.
Trading in "B" shares is in a scripless manner using the automatic
book-entry transfer system. Orders are matched automatically by computer by
price and time priority. Market and trading information is transmitted through
telecommunication links by an international information agency from the SHSE to
overseas countries on a real time basis.
Clearing and Settlement of "B" shares. In both Shenzhen and Shanghai,
clearing and settlement of "B" share transactions are effected on the third day
after the trade date. All clearing and settlement of "B" shares are effected in
a scripless manner, through a book-entry clearinghouse system. No such
certificates are issued to investors. Cash settlement is effected on a broker to
broker, transaction by transaction basis.
Clearing and settlement of "B" share transactions are conducted at two
levels. The Bank of Communications is responsible for coordinating the primary
settlement, for both shares and cash, between the Shanghai or Shenzhen brokers
and the exchanges, which is effected through a book-entry system. Citibank, N.A.
coordinates the secondary settlement, for cash only, which takes place between
the Shanghai or Shenzhen brokers and the off-shore brokers. Clearing and
settlement of "B" share transactions are handled by three approved banks:
Citibank N.A., Standard Chartered Bank and HongkongBank.
All "B" share prices and all dividends, bonuses and other income on "B"
shares are calculated in RMB but paid in foreign currency (Hong Kong dollars or
U.S. dollars). RMB amounts are converted to Hong Kong dollars or U.S. dollars at
the weekly weighted average conversion rate as quoted by the Shanghai Foreign
Exchange Transaction Center or the Shenzhen Foreign Exchange Adjustment Center
(with the exception of share sale prices in Shenzhen, which are converted at the
prior working day's conversion rate).
THE HONG KONG SECURITIES MARKET
Formal trading of investment securities was established in Hong Kong in 1891
when the Association of Stockbrokers in Hong Kong was formed. It was renamed the
Hong Kong Stock Exchange in 1914. In 1969, the Far East Exchange was formed,
followed by the Kam Ngan Stock Exchange in 1971 and the Kowloon Stock Exchange
in 1972. These four exchanges merged to form The Stock Exchange of Hong Kong
Ltd. ("Hong Kong Stock Exchange" or "HKSE"), which commenced trading on April 2,
1986. The HKSE, with a total market capitalization as of October, 1994 of
approximately H.K. $2,476 billion (approximately U.S. $320.3 billion), is now
the second largest stock market in Asia, measured by market capitalization,
behind only that of Japan. As of that date, 520 companies and 908 securities
were listed on the Hong Kong Stock Exchange. The securities listed include
ordinary shares, warrants and other derivative instruments.
In addition to an active stock market, Hong Kong has an active foreign
exchange market, an interbank money market, a large gold bullion market and a
futures exchange. Hong Kong is also one of the major Asian centers for venture
capital businesses, many of such businesses having their Asian head office in
Hong Kong.
Primary Market. Hong Kong has an active new issue market for equity
securities. The following table summarizes the new issues on the Hong Kong
Stock Exchange since 1986.
<TABLE>
NEW ISSUES ON THE HKSE
<CAPTION>
VALUE OF VALUE OF
SHARE ISSUES RIGHTS ISSUES
-------------------------- --------------------------
NUMBER (H.K. $ (U.S. $ (H.K. $ (U.S. $
YEAR OF ISSUES MILLION) MILLION) MILLION) MILLION)
---- --------- -------- -------- -------- --------
<C> <C> <C> <C> <C> <C>
1986 ............................... 8 3,268 419 1,184 152
1987 ............................... 14 2,402 308 5,591 717
1988 ............................... 20 1,443 185 2,401 308
1989 ............................... 7 1,732 222 1,836 335
1990 ............................... 41 7,067 906 2,511 322
1991 ............................... 49 5,592 717 9,648 1,237
1992 ............................... 59 9,633 1,235 11,227 1,439
1993 ............................... 68 28,884 3,751 9,266 1,193
</TABLE>
--------------
Source: HKSE.
Secondary Market. The table below sets out selected data on the Hong Kong
Stock Exchange for each year since 1986, including the value of securities
traded during each year, and the number of companies and securities listed and
the total market capitalization as of December 31 of each year.
<TABLE>
SELECTED DATA ON THE HKSE
<CAPTION>
VALUE OF DECEMBER 31 MARKET
SECURITIES TRADED CAPITALIZATION
----------------------------------------- ------------------------------------------
(H.K. $ (U.S. $ LISTED LISTED (H.K. $ (U.S. $
YEAR MILLION) MILLION) COMPANIES SECURITIES MILLION) MILLION)
---- -------- -------- --------- ---------- -------- --------
<C> <C> <C> <C> <C> <C> <C>
1986 ........................ 123,128 15,786 253 335 419,281 53,754
1987 ........................ 371,406 47,616 276 412 419,612 53,796
1988 ........................ 199,481 25,574 304 479 580,378 74,446
1989 ........................ 299,147 38,352 298 479 605,010 77,565
1990 ........................ 288,715 37,015 299 520 650,410 83,386
1991 ........................ 334,104 42,834 357 597 1,052,012 134,873
1992 ........................ 700,577 90,569 413 749 1,332,184 172,221
1993 ........................ 1,149,265 148,670 477 891 2,975,379 381,459
</TABLE>
--------------
Source: HKSE.
Market Performance. The Hang Seng Index is the most widely followed
indicator of stock price performance in Hong Kong. The Hang Seng Index is an
arithmetic index based on the securities of 33 companies, weighted by their
respective market capitalizations, and is thus strongly influenced by large
capitalization stocks. The following table sets out high, low and end of year
close for the Hang Seng Index for each year since 1986.
HANG SENG INDEX
% CHANGE
FROM PRIOR
YEAR HIGH LOW YEAR-END PERIOD-END
---- ---- --- -------- ----------
1986 ...................... 2,568.3 1,559.4 2,568.3 --
1987 ...................... 3,949.7 1,894.7 2,302.8 (10.3)
1988 ...................... 2,772.5 2,223.0 2,687.4 16.7
1989 ...................... 3,309.6 2,093.6 2,836.5 5.5
1990 ...................... 3,559.9 2,736.6 3,024.6 6.6
1991 ...................... 4,297.3 2,984.0 4,297.3 42.1
1992 ...................... 6,447.1 4,301.8 5,512.4 28.3
1993 ...................... 11,888.0 5,438.0 11,888.0 115.7
--------------
Source: HKSE.
The Hong Kong stock market can be volatile and is sensitive both to
developments in China and to the strength of other world markets. As an example,
in 1989, the Hang Seng Index rose to 3,310 in May from its previous year-end
level of 2,687, but fell to 2,094 in early June following the events at
Tiananmen Square. See "Appendix A: People's Republic of China." The Hang Seng
Index gradually climbed in subsequent months, but fell by 181 points on October
13, 1989 (approximately 6.5%) following a substantial fall in the U.S. stock
market, and at the year end closed at a level of 2,837.
Trading. Trading on the HKSE is conducted through a computerized system to
convey bid and asked prices for securities. Trades are then effected on a
matched trade basis directly between buyers and sellers. All securities are
traded in board lots. For most companies a board lot is 1,000 shares, although
board lots can vary in size from 100 to 5,000 shares. Odd lots are traded
separately, usually at a small discount to the board lot prices. Share
certificates in board lots, together with transfer deed, must be delivered on
the day following the transaction. Payment is due against delivery. A brokerage
commission of 0.25% (with a minimum of H.K. $50) is standard. In addition,
trades are subject to a transaction levy of 0.025% payable equally to the HKSE
and the Hong Kong Securities and Futures Commission (the "SFC") and a special
levy of 0.03%. Finally, the Hong Kong government charges a stamp duty of H.K.
$2.50 for every H.K. $1,000 of the transaction price or any part thereof.
Regulation and Supervision. The SFC was established by the Hong Kong
government in May 1989 as an autonomous statutory body outside the civil service
which provides a general regulatory framework for the securities and futures
industries. The SFC administers certain elements of Hong Kong securities law
including those ordinances governing the protection of investors, disclosure of
interests and insider dealing.
The governing authority of the Hong Kong Stock Exchange is its Council,
which is comprised of 30 members. The Council is responsible for formulating
policies and oversees the operations of the HKSE through standing committees.
Eighteen Council members are representatives of the brokerage firms in Hong
Kong, nine are representatives of investment and merchant banking firms and two
are appointed by the Hong Kong government. The chief executive officer of the
HKSE serves on the Council on an ex-officio basis. Of the 18 broker
representatives on the Council, four are elected by the top 14 major brokers
which have the top third of market share, five are elected by the 51 middle tier
brokers having the middle third of market share, and nine are elected by the
entire brokerage community.
The HKSE promulgates its own rules governing share trading and disclosure of
information to shareholders and investors. Companies listed on the HKSE enter
into a listing agreement with the exchange which includes provisions requiring
that listed companies send interim and annual accounts to shareholders. In
addition, the Hong Kong Code on Takeovers and Mergers (used by the SFC) provides
guidelines for companies and their advisers contemplating, or becoming involved
in, takeovers and mergers.
Foreign Investment Restrictions. There are no regulations governing foreign
investment in Hong Kong. There are no exchange control regulations and investors
have total flexibility in the movement of capital and the repatriation of
profits. Funds invested in Hong Kong can be repatriated at will; dividends and
interest are freely remittable.
DIRECT INVESTMENTS IN CHINA
Since 1978, foreign direct investments in China have increased and have
become an important element in China's economy. Hong Kong and Macao have been
the most important source of foreign direct investments in China, accounting for
61% in 1989 and 55% in 1990 of total direct foreign investments.
Direct foreign investments in China, by number of contracts and contract
value, during 1979 to 1993 were as follows:
<TABLE>
DIRECT FOREIGN INVESTMENT
<CAPTION>
1979-
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Number of Contracts (in thousands) ........ 3.22 3.07 1.50 2.19 5.95 5.78 7.27 n.a. 48.0 83
Value of Contracts (in U.S. $ billion)
(pledged) ............................... 8.99 5.93 2.83 3.71 5.30 5.60 6.60 12.0 58.1 112.9
Actual Value of Contracts Utilized
(in U.S. $ billion) ..................... 1.8 2.3 3.2 3.4 3.4 4.4 11.0 20.0
--------------
</TABLE>
Source: figures for 1979 to 1990, Ministry of Foreign Economic Relations and
Trade; figures for 1991, State Statistical Bureau of the People's
Republic of China.
FORM OF DIRECT FOREIGN INVESTMENTS
Direct foreign investments in China have taken a variety of forms,
including:
(a) Equity Joint Ventures
Equity joint ventures are principally owned by The Law of the People's
Republic of China on Joint Ventures Using Foreign and Chinese Investment,
promulgated in 1979. This law is among the first principal pieces of legislation
relating to foreign direct investments in China. It is supplemented by rules and
regulations governing taxation, labor and other matters relating to equity joint
ventures. Equity joint ventures are limited liability legal entities in which
Chinese and foreign partners hold equity stakes.
(b) Contractual or Cooperative Joint Ventures
Contractual or cooperative joint ventures are governed by The Law of the
People's Republic of China on Chinese-Foreign Cooperative Joint Ventures of
1988. They are established by contracts between a Chinese party and a foreign
party. Unlike equity joint ventures, in which the rights, liabilities,
obligations and profit sharing arrangements between the joint venture partners
are usually defined by reference to their respective equity interests in the
joint venture, the rights, liabilities, obligations and profit sharing
arrangements between the parties in contractual or cooperative joint ventures
usually are specifically negotiated and set out in the joint venture contract.
This type of joint venture is generally perceived to have a greater degree of
flexibility than equity joint ventures.
(c) Wholly Foreign-Owned Enterprises
Foreign companies are permitted to establish wholly-owned subsidiaries in
China. Such wholly foreign-owned enterprises are governed by The Law of the
People's Republic of China on Wholly Foreign-Owned Enterprises of 1986. These
enterprises are required to utilize advanced technology and equipment or to
export 50% or more of their finished products.
(d) Processing and Assembly Agreements
In this form of investment, the Chinese party normally provides the factory,
power and other utilities, and labor, and the foreign party supplies the raw
materials. The foreign party pays a processing or assembling fee to the Chinese
party and has ownership of the finished products.
(e) Compensation Trade
In this form of investment, the foreign party provides services, equipment,
training and/or technical know-how to the Chinese party and, in exchange,
receives compensation in the form of finished products produced by the Chinese
party.
PRIORITY INVESTMENT AREAS
In order to help modernize the Chinese economy, China has established zones
in which foreign investment is encouraged.
(a) Special Economic Zones
In 1980, China established special economic zones to attract foreign
capital, technology, and expertise by offering investors in these zones tax
incentives and other preferential treatment. Four of the five special economic
zones in China are located in the Guangdong and Fujian Provinces, Shenzhen,
Shantou and Zhuhai in Guangdong Province and Xiamen in Fujian Province.
(b) Open Coastal Cities
In April 1984, 14 areas were designated "open coastal cities" where, like
the special economic zones, preferential investment terms are offered to
investors. These cities are Qinhuangdao, Dalian, Tianjin, Yantai, Qingdao,
Lianyungang, Nantong, Shanghai, Ningbo, Wenzhou, Fuzhou, Guangzhou, Beihai and
Zhanjiang.
(c) Coastal Open Economic Zones
In the late 1980s, five areas were designated coastal open economic zones:
Liaodong Peninsula and Shangdong Peninsula in northeast China, the Yangtze River
Delta in the eastern Jiangsu Province, the Minnan Delta in Fujian Province and
the Pearl River Delta in southern Guangdong Province.
(d) Shanghai's Pudong District
In 1990, the Pudong area of Shanghai was also designated an open zone for
foreign investments with autonomy equivalent to that of a special economic zone.
(e) High and New Technology Industrial Development Zones
High and new technology industrial development zones were first introduced
in 1988 to offer preferential treatment to enterprises which have been confirmed
as technology intensive in accordance with the requirements formulated by the
State Science and Technology Commission. There are 27 high and new technology
industrial development zones which have been approved by the State Council.
These zones presently exist in Beijing, Changchun, Changsha, Chengdu, Chongqing,
Dalian, Fuzhou, Guangzhou, Guilin, Hainan, Hangzhou, Harbin, Hefei, Jinan,
Lanzhou, Nanjing, Shanghai, Shenyang, Shenzhen, Shijiazhuang, Tianjin, Weihai,
Wuhaxn, Xi'an, Xiamen, Zhengzhou and Zhongshan.
<PAGE>
APPENDIX B
CHINA REGION COUNTRIES
The information set forth in this Appendix has been extracted from various
government and private publications. The Fund and the Trust's Board of Trustees
make no representation as to the accuracy of the information, nor has the Fund
or the Trust's Board of Trustees attempted to verify it.
PEOPLE'S REPUBLIC OF CHINA
GENERAL INFORMATION
LOCATION AND GEOGRAPHY
China is the world's third largest country occupying a region of 9.6 million
square kilometers. It borders Russia and Mongolia in the north and joins the
borders of Vietnam, Laos, Myanmar and Bhutan in the south. To the west and
northwest are states of Afghanistan, Pakistan, India and Nepal and to the east
is North Korea. The terrain in the west is dominated by steppes, vast deserts
and high mountain ranges. Mountain areas and highlands account for about
two-thirds of the Chinese territory. To the east, China has two of the world's
greatest rivers, Huang He (Yellow River) and Chang Jiang (Yangtze River).
Cultivation is concentrated in the north eastern half of the country where
flatter terrain and proximity to the coast and major river basins compensate for
lower rainfall.
The country is divided into 23 provinces, three municipalities (Beijing,
Shanghai and Tianjin) and five autonomous regions (Guangxi Xhuang, Nei Mongol,
Ningxia Hui, Xinjiang Uygur and Xizang (Tibet)). The capital and political
center of China is Beijing. Shanghai is the largest city and is also the
commercial and financial capital.
POPULATION
China is the world's most populous nation, consisting of more than one-fifth
of the human race. The estimated population was approximately 1.143 billion as
of December 1990. According to the government census, the figure represented an
average annual increase of 1.48 percent over 1982. China has engaged in a
20-year plan for restraining population growth as part of its economic
modernization program. Despite the plan, the population is likely to exceed
1.300 billion by the year 2000. Over 80 percent of the population is
concentrated in the eastern half of the country as a result of systematic
cultivation.
The following table presents information regarding China's population growth
since 1950.
POPULATION
TOTAL ANNUAL
POPULATION URBAN RURAL GROWTH RATE
YEAR (MILLION) % % (%)
---- ---------- ----- ----- -----------
1950 ............... 551.96 11.18 88.82 1.900
1955 ............... 614.65 13.48 86.52 2.032
1960 ............... 662.07 19.75 80.25 (.457)
1965 ............... 725.38 17.98 82.02 2.838
1970 ............... 829.92 17.38 82.62 2.583
1975 ............... 924.20 17.34 82.66 1.569
1980 ............... 987.05 19.39 80.61 1.187
1985 ............... 1,058.51 23.71 76.29 1.426
1990 ............... 1,143.33 26.41 73.59 1.439
Notes: (i) Population figures for 1985 and 1990 were estimated based on the
Fourth (1987) National Population Census.
(ii) The 1985 growth rate was estimated based on the Third (1982) and
Fourth (1990) National Population Census. The 1990 growth rate is
from the National Sample Survey on Population Change in 1990. The
earlier growth rates are from the Annual Report of the Ministry of
Public Security.
Source: China Statistical Yearbook 1991, State Statistical Bureau of the
People's Republic of China.
The population is homogeneous, composed of mostly the Han ethnic group. The
national language is Putonghua which is based on Mandarin and was simplified in
1945. Over 93 percent of the population speaks one of the five main Sino-Tibetan
dialects which are Mandarin, Cantonese, Fukienese, Hakka and Wu. Religion is not
a major source of ethics for Chinese and is not a divisive force among its
population. Some 20 percent of the population practice Confucianism and 8
percent are Buddhists.
POLITICAL HISTORY
The Chinese state has origins dating back to the second millennium BC. A
long history of feudalism existed before a single Chinese empire was created.
Gradually, an imperial system developed under the rule of successive Chinese and
non-Chinese dynasties. The Manchu Dynasty, the last ruling dynasty, came to an
end in 1911 as a result of both an erosion of power from unequal foreign
treaties and a coup. Following the collapse of the dynasty, a period of
political instability and power struggle ensued between the Kuomintang
(Nationalist Party) and the Chinese Communist Party. In 1945, with the Japanese
surrender, the Communist Party under Mao Zedong seized most of the formerly
occupied China, defeating the Nationalist Party forces in a civil war. With the
victory by the Communists, the Nationalists under the leadership of Chiang
Kaishek fled the mainland to Taiwan where they established a separate
government. In 1949, The Communist Party established the People's Republic of
China.
Since 1949, the Communist government engaged in numerous campaigns to
industrialize the country with programs such as the "Great Leap Forward", which
fell short of its goals to increase industrial production and gave rise to
famine. In 1966, the government launched the Cultural Revolution seeking to
purge many of its political dissidents in order to centralize the political
power within the Communist Party. The campaign failed to significantly restore
socialist ideals and the Party experienced a loss of credibility with the
masses. The failure of the Communist Party to achieve substantive economic
reform eventually led to political domination by the army.
In the 1970's, the Chinese government, which had remained isolated from the
world, opened its doors. President Nixon's historic visit to China in 1972
established diplomatic ties between China and the United States. China also
renewed diplomatic and trade relations with Western Europe, Japan and other
Asian nations such as Singapore, Indonesia and South Korea. Following Mao
Zedong's death in 1976, and the election of Deng Xiaoping as China's paramount
leader, China has continued to pursue an "Open Door Policy" encouraging foreign
investment and expertise inside its borders. Deng's leadership has emphasized
pragmatism rather than Party ideology.
In 1989, a growing dissatisfaction with the Communist government led to
anti-government student protests culminating in what is known as the Tiananmen
Square incident. The government's use of the military to suppress a peaceful
demonstration resulted in world-wide criticism. Currently, the leadership under
Deng Xiaoping remains committed to basic economic reforms but continues to
reject liberalization from the domination of the Communist Party in the
political decision-making process. The Chinese leadership still faces the
challenge of maintaining power under the Communist Party while fending off
Western political ideologies.
China currently has diplomatic ties with approximately 140 nations. It is a
charter member of the United Nations and a permanent member of the United
Nations Security Council. Currently, China is seeking admission to the General
Agreement on Tariffs and Trade.
GOVERNMENT
China is currently governed under a new Constitution adopted on December 4,
1982. The highest ranking organization in the state power hierarchy is the
National People's Congress (NPC) which is composed of deputies elected by all
the regions for a term of five years. The NPC has 2,970 members with extensive
powers to amend the constitution and make laws. However, many view the main
purpose of this law-making body to be solely to approve Party policy. When the
NPC is not in session, the NPC Standing Committee exercises its functions,
including formulation of state policy, enactment of laws, examination and
approval of state plans and budgets, and amending and enforcing the
Constitution. The NPC elects the head of state and the State Council. The State
Council is the highest executive body, composed of the Premier, Vice Premiers,
State Councilors, Ministers, the Auditor General and the Secretary General. The
State Council has the power to enact administrative rules and regulations, issue
orders, appoint, remove and train administrative officers, supervise the
ministries and local governments, coordinate the work of the ministries and
state commissions and declare martial law. The current Premier is Li Peng and
the current President is Yang Shangkun, a professional soldier from the Deng
faction.
The Chinese Communist Party was established in 1921 and has remained the
ruling party since 1949. The Party is hierarchically organized, with a
membership of over 48 million members. The Party's structure parallels that of
the Government with a National Party Congress, Central Committee and Standing
Committee. Because Party membership is a prerequisite for holding influential
government positions, a significant overlap between the two structures exists
which adds to administrative inefficiencies. Furthermore, the Party's close
alignment with the military is a great source of political power as evidenced by
the outcome of the Tiananmen incident. Efforts to reduce the Communist Party's
participation in commercial and administrative decision-making have so far been
largely unsuccessful.
THE CHINESE ECONOMY
OVERVIEW AND RECENT DEVELOPMENTS
China has operated a centrally planned economy since 1949. The First Five-
Year Economic Plan was set forth in 1953 to stimulate economic growth and
development. Currently, China is in its second year of its Eighth Five-Year
Economic Plan. In 1978, China instituted an economic reform program to shift
from a completely centrally planned economy to a more mixed economy. The program
liberalized China's economy and opened it to foreign investment. Currently,
under a system called "socialism with Chinese characteristics," these economic
reforms appear to continue in a more comprehensive manner. Managers of
enterprises have been granted more decision-making powers, including the
planning of production, marketing, use of funds and employment of staff. Goods
which are controlled and distributed by the state are still sold at planned
prices. However, the goods produced in excess of the state production plan may
be sold at floating prices, negotiated prices or free prices.
Over the past decade, China has achieved annual growth in real gross
national product (GNP) averaging 9%. GNP in 1991 had increased to over 2.5 times
the GNP in 1980. However, growth has been unsteady, with booms in 1984 and 1988
and downturns in 1981 and 1989. In 1988, the Chinese Government instituted an
austerity program which slowed the Chinese economy in the following year.
However, growth increased after 1989, achieving growth rates of 3.9% in 1989,
5.2% in 1990, and 7% in 1991, but has not returned to its previous levels.
The economy in China consists of three sectors: state, cooperative, and
private. The state sector, though decreasing from 76% of GNP in 1980 to
approximately 50% in 1991, continues to constitute the bulk of the economy. In
recent years, however, the economy has been significantly restructured through
the abolition of the commune system in rural areas and the relaxing of
government authority in the day to day operations in both agricultural and
industrial enterprises. As the government assumes more of a regulatory and
supervisory role and less of a direct management role, market forces have been
allowed to operate. This has resulted in increased productivity and rising
incomes.
China's economic policy is set out in two overlapping plans, the 20-Year
Plan (1981-2000) and the current Five-Year Economic Plan (1991-1995). The 20-
Year Plan calls for an average 7% growth in GNP over the entire 20-year period;
the initial decade was to be a period of reorganization, with the second decade
one of rapid economic progress. The 7% mark was exceeded in the initial decade,
with growth rates averaging 9.4%. The second decade growth, thus far, is in step
with the desired growth of the 20-Year Plan. The current Five-Year Economic Plan
calls for 6% annual growth, starting in 1991; this however, has been surpassed
in both 1991 and 1992, and 1993 is forecast to exceed 10%.
The following table sets forth selected data regarding the Chinese economy.
<TABLE>
MAJOR ECONOMIC INDICATORS
<CAPTION>
1988 1989 1990 1991 1992 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Gross National Product
(% annual real growth) ............................ 10.8 3.9 5.2 7.0 12.8 13.4
(nominal, RMB billion) ............................ 1,401.8 1,591.6 1,768.6 1,958.0 2,367.0 3,109.0
(nominal, U.S. $ billion)* ........................ 376.8 337.2 338.8 360.6 411.7 546.0
Per Capita GNP (U.S. $) ............................. 341.0 300.0 298.0 312.0 379.0 460.0
Industrial Production (% annual growth) ............. 17.9 6.8 6.0 14.2 20.4 23.6
Inflation (retail price index, % annual growth) ..... 18.6 17.8 2.1 3.0 6.2 13.2
Money Supply (M2, % annual growth) .................. 20.7 18.7 28.9 27.6 29.5 23.6
Government Budget Surplus/Deficit
(U.S. $ billion)* ................................. (2.1) (1.9) (2.7) (3.9) (7.8) (10.3)
Exports (U.S. $ billion) ............................ 47.6 52.5 62.1 71.9 85.1 91.7
(% annual growth) ................................. 20.8 10.2 17.9 15.8 18.3 7.93
Imports (U.S. $ billion) ............................ 55.3 59.1 53.3 63.8 80.8 103.9
(% annual growth) ................................. 28.0 6.8 (9.8) 19.5 26.6 28.9
Trade Balance (U.S. $ billion) ...................... (7.8) (6.6) 8.6 8.1 4.3 (12.2)
Exchange Rate (RMB/U.S. $) .......................... 3.72 4.72 5.22 5.43 5.8 5.8
</TABLE>
--------------
*Translated at the respective exchange rate for each year shown in the table.
Sources: China Statistical Yearbook, State Statistical Bureau of the People's
Republic of China, Baring Securities.
PRINCIPAL ECONOMIC SECTORS
Industry. In 1990, industry accounted for 45.8% of China's National Income.
In the first three decades under Communist rule, China placed great emphasis on
heavy industry. Since the reform program began in 1978, a much greater emphasis
has been placed on light industry. Considerable industrial growth has come from
industrial enterprises in rural townships which are engaged in the processing
and assembly of consumer goods. These operations are concentrated in southern
China, where a major light industrial base has developed. Industrial output has
grown rapidly and is increasingly important to the Chinese economy.
China's current industrial policy also places emphasis on high-technology
industries supported by foreign technology, such as micro-electronics and
telecommunications. However, overstocking and poor economic results continue to
plague Chinese industry. Continued growth has been hampered by problems of
access to raw materials and energy supplies.
The following table sets forth the quantities and total value of China's
major industrial products for selected years.
<TABLE>
INDUSTRIAL PRODUCTION
<CAPTION>
ITEM 1952 1978 1980 1985 1989 1990
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Gross Output Value of Industry (RMB
billions) ............................ 34.9 423.7 515.4 971.6 2,201.7 2,392.4
Output of Major Industrial Products
Cloth (meters billions) .............. 3.83 11.03 13.47 14.67 18.92 18.88
Machine-Made Paper and Paper boards
(metric tons millions) ............. 0.37 4.39 5.35 9.11 13.33 13.72
Sugar (metric tons millions) ......... 0.45 2.27 2.57 4.51 5.01 5.82
Bicycles (metric tons millions) ...... 0.08 8.54 13.02 32.28 36.77 31.42
Sewing Machines (thousands) .......... 66 4,865 7,678 9,912 9,563 7,610
Wrist Watches (thousands) ............ -- 13,511 22,155 54,311 72,756 83,526
Household Refrigerators (thousands) .. -- 28 49 1,448 6,708 4,631
Television Sets (thousands) .......... -- 517.3 2,492 16,676.6 27,665.1 26,847
Color Television Sets (thousands) .. -- 3.8 32 4,352,8 9,400.2 10,330.4
Household Washing Machines (thousands) -- 0.4 245 8,872 8,254.3 6,626.8
Cassette Recorders (thousands) ....... -- 47 743 13,931 23,490 30,235
Cameras (thousands) .................. -- 178.9 372.8 1,789.7 2,451.8 2,132.2
Coal (metric tons millions) .......... 66 618 620 872 1,054 1,080
Crude Oil (metric tons millions) ..... 0.44 104.05 105.95 124.90 137.64 138.31
Electricity (kilowatt hours billions) 7.3 256.6 300.6 410.7 584.8 621.2
Steel (metric tons millions) ......... 1.35 31.78 37.12 46.79 61.59 66.35
Rolled Steel (final products) (metric
tons millions) ..................... 1.06 22.08 27.16 36.93 48.59 51.53
Cement (metric tons millions) ........ 2.86 65.24 79.86 145.95 210.29 209.71
</TABLE>
--------------
Source: China Statistical Yearbook, 1991, State Statistical Bureau of the
People's Republic of China.
Agriculture. Although long term growth in agricultural production has
slowed, China remains one of the world's largest agricultural producers. The
government has emphasized diversification of production, and a commitment to the
maintenance of grain outputs. Other agricultural products have also shown
increases in production in recent years, with cotton production at the
forefront.
The following table sets forth the quantities and total value of China's
leading agricultural products for selected years.
<TABLE>
AGRICULTURAL PRODUCTION
<CAPTION>
ITEM 1952 1978 1980 1985 1989 1990
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Gross Output Value (RMB billions) .......... 46.1 139.7 192.3 361.9 653.5 766.2
Output of Major Farm Products
Grain (metric tons millions) ............. 163.92 304.77 320.56 379.11 407.55 446.24
Cotton (metric tons thousands) ........... 1,304 2,167 2,707 4,147 3,788 4,508
Oil-Bearing Crops (metric tons thousands) 4,193 5,218 7,691 15,784 12,952 16,132
Sugar Cane (metric tons thousands) ....... 7,116 21,116 22,807 51,549 48,795 57,620
Beet Roots (metric tons thousands) ....... 479 2,702 6,305 8,919 9,253 14,525
Tea (metric tons thousands) .............. 82 268 304 432 535 540
Fruits (metric tons thousands) ........... 2,443 6,570 6,793 11,639 18,319 18,744
Pork, Beef and Mutton (metric tons
thousands) ............................. 3,385 8,563 12,054 17,607 23,262 25,135
Aquatic Products (metric tons millions) .. 1.67 4.66 4.50 7.05 11.52 12.37
</TABLE>
--------------
Source: China Statistical Yearbook, 1991, State Statistical Bureau of the
People's Republic of China.
The following table provides a breakdown of the value of China's
agricultural production for 1989 and 1990.
VALUE OF AGRICULTURAL PRODUCTS(1)
1989 1990
(RMB MILLION) (RMB MILLION)
------------- -------------
Gross Output Value ......................... 653,473 766,209
Farming .................................... 367,446 448,174
Grain .................................. 219,551 270,492
Industrial Crops ....................... 64,661 83,842
Other Crops ............................ 83,234 93,840
Forestry ................................... 28,492 33,027
Animal Husbandry ........................... 179,741 196,407
Fishers .................................... 34,885 41,056
--------------
(1) At current prices.
Source: China Statistical Yearbook, 1991, State Statistical Bureau of the
People's Republic of China.
Energy. Although China has a vast potential for energy production, this
potential has been largely untapped. However, China is the world's largest
producer of coal and the world's fifth largest oil producer. Until recently,
China did not have the capacity to utilize its off-shore oil fields due to the
country's relatively low level of technology. Joint ventures with foreign
companies, however, have allowed China to use the fields, and further growth in
oil production, both off-shore and on-shore, is expected. China also has
significant potential for harnessing hydroelectric power, but has utilized only
a small portion of this potential. China is planning to make hydroelectric power
a major source of energy in the years ahead.
The following table sets forth China's energy production and consumption for
the years 1980 to 1990, as well as the percentage contributions of the key
energy sources.
<TABLE>
ENERGY PRODUCTION AND CONSUMPTION
<CAPTION>
TOTAL TOTAL
PRODUCTION % OF TOTAL PRODUCTION CONSUMPTION
(MILLION ----------------------------------------------- (MILLION
METRIC TONS NATURAL HYDRO- METRIC TONS
YEAR OF SCE)<F1> COAL OIL GAS ELECTRIC OF SCE)(1)
---- ---------- ---- --- ------- -------- ----------
<C> <C> <C> <C> <C> <C> <C>
1980 ........................ 637.35 69.4 23.8 3.0 3.8 602.75
1981 ........................ 632.27 70.2 22.9 2.7 4.2 594.47
1982 ........................ 667.78 71.3 21.8 2.4 4.5 620.67
1983 ........................ 712.70 71.6 21.3 2.3 4.8 660.40
1984 ........................ 778.55 72.4 21.0 2.1 4.5 709.04
1985 ........................ 855.46 72.8 20.9 2.0 4.3 766.82
1986 ........................ 881.24 72.4 21.2 2.1 4.3 808.50
1987 ........................ 912.66 72.6 21.0 2.0 4.4 866.32
1988 ........................ 958.01 73.1 20.4 2.0 4.5 929.97
1989 ........................ 1,016.39 74.1 19.3 2.0 4.6 969.34
1990 ........................ 1,039.22 74.2 19.0 2.0 4.8 980.00
<FN>
--------------
<F1> Excludes bio-energy, solar, geothermal and nuclear energy. All fuels
converted to Standard Coal Equivalent (SCE); 1 kg of coal = 0.714 kg of
SCE, 1 kg of oil = 14.6 kg of SCE, 1 cubic meter of natural gas = 1.33 kg
of SCE; Hydroelectric converted to SCE based on coal required to produce
equivalent thermal external-electric power.
</TABLE>
Source: China Statistical Yearbook, 1991, State Statistical Bureau of the
People's Republic of China.
ECONOMIC PLANS
China's Eighth Five-Year Economic Plan for national economic and social
development was adopted by the Standing Committee of the National People's
Congress for 1991-95, along with a ten-year development program which extends to
the year 2000. Included in both of these plans is an objective for China to
quadruple its gross national output by the end of this century. In addition, the
proposals emphasize a policy of opening to the outside world, expanded economic
and technological exchanges with other countries, and further development of the
export-oriented economy and the special investment areas. The basic guideline
for China's economic activities in 1992 is to continue on a path of economic
reform while following principles of socialism.
During 1980 to 1990, China had an average annual GNP growth rate of
approximately 9.0%, surpassing the 7.5% annual GNP growth rate target under the
Seventh Five-Year Economic Plan (1986-1990).
China's objective to quadruple the 1980 industrial and agricultural output
by the year 2000 requires the country's output to grow at an average annual rate
of growth of about 6% in the 1990's. To enable China to accomplish this growth
target under the prevailing economic environment, China's economic policy aims
to provide a stable and non-inflationary environment to revive growth. Another
prevailing goal is to relieve the supply bottlenecks arising from imbalanced
growth over the last 10 years with resources to be allocated to the priority
areas of agriculture, energy, transportation, telecommunications and basic
materials industries. Emphasis is also placed on export-oriented and
import-substitute production.
THE FINANCIAL SYSTEM
The Ministry of Finance is responsible for overseeing state finances and the
collection of revenue and taxation. The banking system is managed by China's
central bank, the People's Bank of China ("PBOC"). The PBOC, like the Ministry
of Finance, is a state administrative organ under the leadership of the State
Council. Its primary functions include: the formation of national financial
regulations and policies; the issuance of currency and regulation of its
circulation; the co-ordination and implementation of credit plans; overseeing
the establishment and operation of financial institutions and financial markets,
including stock exchanges; administration of China's foreign exchange and gold
reserves and adjustment of exchange rates against foreign currencies; and
administration of China's securities markets.
There are currently five specialized banks, namely, the Industrial and
Commercial Bank of China, the China Investment Bank, the Agricultural Bank of
China, the People's Construction Bank of China, and the Bank of China (the
"BOC"). Trust and investment companies and credit cooperatives also provide
financial services in China. Major trust and investment corporations include
China International Trust and Investment Corporation ("CITIC"), Shanghai
Investment and Trust Corporation ("SITCO"), and Guangdong International Trust
and Investment Corporation ("GITIC").
SAVINGS AND INVESTMENT
Historically, China has had a relatively high rate of national savings--
approximately 34% as of the end of 1990. The following table sets out the value
of savings deposit balances for selected years.
SAVINGS DEPOSIT BALANCES
(RMB BILLION)
YEAR-END TOTAL URBAN AREAS RURAL AREAS
-------- ------ ----------- -----------
1955 ..................... 1.99 1.69 0.30
1960 ..................... 6.63 5.11 1.62
1965 ..................... 6.52 5.23 1.29
1970 ..................... 7.95 6.45 1.50
1975 ..................... 14.96 11.46 3.50
1980 ..................... 39.95 28.25 11.70
1985 ..................... 162.26 105.78 56.48
1990 ..................... 703.42 519.26 184.16
--------------
Source: China Statistical Yearbook, 1991, State Statistical Balances of the
People's Republic of China.
The following table provides a breakdown of total fixed investment in China
for the years 1985 to 1990.
<TABLE>
TOTAL FIXED INVESTMENT
(RMB MILLION)
<CAPTION>
ITEM 1985 1986 1987 1988 1989<F1> 1990<F1>
---- ---- ---- ---- ---- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Total Investment .................... 254,319 301,962 364,086 449,654 413,773 444,929<F3>
Ownership
State-Owned Units ................. 168,051 197,850 229,799 276,276 253,548 291,864<F3>
Capital Construction ............ 107,437 117,611 134,310 157,431 155,174 170,381
Technical Updating and
Transformation ...................... 44,914 61,921 75,859 98,055 78,878 83,019
Other Investment in Fixed Assets<F2> 15,700 18,318 19,630 20,790 19,497 19,907
Collective -- Owned Units ......... 32,746 39,174 54,701 71,171 56,999 52,948
Urban ........................... 12,823 14,639 18,130 25,497 18,563 16,338
Rural ........................... 19,923 24,535 36,571 45,674 38,436 36,610
Individual Investment ............. 53,522 64,938 79,586 102,208 103,226 100,117
Urban ........................... 5,679 7,456 10,051 15,685 14,023 12,470
Rural ........................... 47,843 57,482 69,535 86,523 89,203 87,647
Source of Finance
State Appropriation ............... 40,780 44,063 47,554 41,001 34,162 38,765
Domestic Loans .................... 51,027 63,831 83,594 92,668 71,636 87,088
Foreign Investment ................ 9,148 13,216 17,537 25,899 27,415 27,826
Self-Raised Funds ................. 148,851 174,518 235,550 232,949
153,364 290,087
Others ............................ 32,000 40,883 45,009 58,301
<FN>
--------------
Notes: <F1> 1989 and 1990 figures exclude projects with value of RMB 20-50
thousand.
<F2> Includes investment in oilfield maintenance and development, mine
expansion projects, highway maintenance and bridge construction,
warehouse construction and projects valued RMB 20-50 thousand for
fixed asset construction or equipment purchase.
<F3> Includes RMB 18.557 billion investment to purchase buildings.
</TABLE>
Source: China Statistical Yearbook, 1991, State Statistical Bureau of the
People's Republic of China.
INFLATION AND MONETARY POLICY
Inflationary pressures are a major concern in the Chinese economy. While the
retail price index has been relatively stable in recent years, this figure
understates inflation, especially urban inflation. A more informative measure is
the cost of living index in 35 major cities, which has generally risen at a
higher rate. In light of the on-going reforms of price subsidies and continued
growth, relatively high inflation should be expected.
The following table provides information regarding wage and price inflation
in China during the years 1980 to 1991.
WAGE AND PRICE INFLATION (%)
GENERAL RETAIL COST OF NOMINAL
YEAR PRICES LIVING WAGES
---- -------------- ------- -------
1980 ........................... 6.0 7.5 4.1
1981 ........................... 2.4 2.5 1.3
1982 ........................... 1.9 2.0 3.4
1983 ........................... 1.5 2.0 3.5
1984 ........................... 2.8 2.7 17.9
1985 ........................... 8.8 11.9 17.9
1986 ........................... 6.0 7.0 15.8
1987 ........................... 7.3 8.8 9.8
1988 ........................... 18.5 20.7 19.7
1989 ........................... 17.8 16.3 10.8
1990 ........................... 2.1 1.3 10.6
--------------
Source: China Statistical Yearbook, 1991, State Statistical Bureau of the
People's Republic of China.
China's monetary policy has vacillated between expansionist and
contractionist. This varying monetary policy has contributed to a fundamental
cycle of the Chinese economy in recent years: reform and expansion leading to
overheating of the economy and tightening of control.
PUBLIC FINANCE
Persistent fiscal deficits have been a macroeconomic management problem in
China in recent years. Despite efforts by the government to increase revenues
and control spending, deficits continue to be a problem.
The following table illustrates the persistent budget deficits for the years
1980 to 1990.
GOVERNMENT BUDGET
TOTAL
TOTAL REVENUE EXPENDITURE BALANCE
YEAR (RMB BILLION) (RMB BILLION) (RMB BILLION)
---- ------------- ------------- -------------
1980 ..................... 108.52 121.27 (12.75)
1981 ..................... 108.95 111.50 (2.55)
1982 ..................... 112.40 115.33 (2.93)
1983 ..................... 124.90 129.25 (4.35)
1984 ..................... 150.19 154.64 (4.45)
1985 ..................... 186.64 184.48 2.16
1986 ..................... 226.03 233.08 (7.05)
1987 ..................... 236.89 244.85 (7.96)
1988 ..................... 262.80 270.66 (7.86)
1989 ..................... 294.79 304.02 (9.23)
1990 ..................... 331.26 345.22 (13.96)
--------------
Source: China Statistical Yearbook, 1991, State Statistical Bureau of the
People's Republic of China.
The following table provides information regarding how China finances its
deficit.
<TABLE>
GOVERNMENT DEBT
(RMB MILLION)
<CAPTION>
DEBT ISSUED DEBT RETIRED AND INTEREST PAID
-------------------------------------- ---------------------------------------------------
DOMESTIC
BONDS AND PEOPLE'S
TREASURY FOREIGN DOMESTIC FOREIGN BANK
YEAR TOTAL BILLS DEBT TOTAL BONDS DEBTS LOANS
---- ----- -------- ------- ----- -------- ------- -----
<C> <C> <C> <C> <C> <C> <C> <C>
1980 ........................... 4,301 -- 4,301 2,858 -- 2,440 418
1981 ........................... 7,308 -- 7,308 6,289 -- 5,780 500
1982 ........................... 8,386 4,383 4,003 5,552 -- 4,962 590
1983 ........................... 7,941 4,158 3,783 4,247 -- 3,656 591
1984 ........................... 7,734 4,253 3,481 2,891 -- 2,274 617
1985 ........................... 8,985 6,061 2,924 3,956 -- 3,259 697
1986 ........................... 13,825 6,251 7,574 5,016 798 3,449 769
1987 ........................... 16,955 6,307 10,648 7,983 2,318 5,196 469
1988 ........................... 27,078 13,217 13,861 7,675 2,844 4,258 573
1989 ........................... 28,297 13,891 14,406 7,236 1,930 4,583 723
1990 ........................... 37,545 19,724 17,821 19,040 11,375 6,821 844
</TABLE>
--------------
Source: China Statistical Yearbook, 1991, State Statistical Bureau of the
People's Republic of China.
FOREIGN TRADE
As a result of the economic reforms commenced in 1978, China's foreign trade
has grown considerably in value, range of products and number of trading
partners. A major goal of China's trade policy is to increase the percentage of
manufactured goods in the country's total exports. Gradual progress has been
made in recent years with the aid of the imported foreign technology. Textiles
and garments together form the single largest export category, representing 25%
of total export values.
China's trade balance has fluctuated over the last five years. In 1991
China's foreign trade yielded a foreign trade surplus of U.S. $8.1 billion.
Exports reached U.S. $71.9 billion, an increase of 15.8% over that of 1990, and
imports reached U.S. $63.8 billion, an increase of 19.5% over the 1990 figure.
Total trade for the year was approximately U.S. $135.7 billion, up 17.5% over
1990. In 1990, China experienced a trade surplus of $8.7 billion. In contrast,
the country experienced trade deficits of $7.8 billion and $6.6 billion,
respectively, in 1988 and 1989.
The following table provides information about China's total import and
export values for the years 1981 to 1991.
IMPORTS, EXPORTS AND TRADE BALANCE
(U.S. $ BILLION)
TRADE
YEAR TOTAL TRADE EXPORTS IMPORTS BALANCE
---- ----------- ------- ------- -------
1981 ................. 44.02 22.01 22.02 (0.01)
1982 ................. 41.61 22.32 19.26 3.04
1983 ................. 43.62 22.23 21.39 0.84
1984 ................. 53.55 26.14 27.41 (1.27)
1985 ................. 69.61 27.35 42.25 (14.90)
1986 ................. 73.85 30.94 42.90 (11.96)
1987 ................. 82.65 39.44 43.22 (3.78)
1988 ................. 102.78 47.52 55.27 (7.75)
1989 ................. 111.68 52.54 59.14 (6.60)
1990 ................. 115.41 62.06 53.35 8.71
1991 ................. 135.70 71.90 63.80 8.10
--------------
Sources: China's Customs Statistics, General Administration of Customs of the
People's Republic of China; China Statistical Yearbook, 1991, State
Statistical Bureau of the People's Republic of China.
Hong Kong is the leading destination for Chinese exports, accounting for
over 40% of total export volume. Hong Kong is also a major re-export center for
Chinese goods. Other large export markets for China include Japan, the United
States, and Germany. Over the past few years, China's imports have continued to
expand and diversify. Hong Kong, Japan and the United States are China's top
three suppliers. Other major suppliers include Germany and Italy.
The following table lists China's top-ten trading partners, along with the
U.S. dollar value of the trade between China and each country for the years
1989, 1990, and 1991.
<TABLE>
MAJOR TRADING PARTNERS
(U.S. $ MILLION)
<CAPTION>
TOTAL TRADE EXPORTS FROM CHINA IMPORTS TO CHINA
---------------------------------- ---------------------------------- ----------------------------------
1989 1990 1991 1989 1990 1991 1989 1990 1991
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Hong Kong ............. 34,456 40,907 49,600 21,915 26,650 32,137 12,540 14,257 17,146
Japan ................. 18,928 16,599 20,284 8,394 9,011 10,252 10,533 7,587 10,032
United States ......... 12,273 11,767 14,202 4,409 5,179 6,194 7,863 6,588 8,008
Germany ............... 4,987 4,971 5,405 1,608 2,034 2,356 3,379 2,936 3,049
U.S.S.R. .............. 3,995 4,379 3,904 1,849 2,239 1,823 2,146 2,139 2,081
Singapore ............. 3,190 2,882 3,077 1,692 1,974 2,014 1,498 857 1,063
Italy ................. 2,550 1,904 2,389 714 835 931 1,835 1,069 1,458
France ................ 1,948 2,308 2,306 528 645 734 1,420 1,663 1,572
Australia ............. 1,895 1,808 2,110 423 455 554 1,472 1,353 1,556
United Kingdom ........ 1,718 2,026 1,670 635 643 728 1,083 1,383 942
</TABLE>
--------------
Sources: China Statistical Yearbook, 1991, State Statistical Bureau of the
People's Republic of China; China's Customs Statistics, General
Administration of Customs of the People's Republic of China.
EXTERNAL DEBT AND FOREIGN CAPITAL UTILIZATION
China has traditionally adopted a policy of self-reliance when financing
development; overseas borrowings have been minimal. The country has remained a
conservative borrower but, since the early 1980s, has been making greater use of
foreign capital and financing, including government-assisted facilities and
project and trade financing.
The primary sources of foreign capital for China, in order of importance,
are as follows:
1) International Monetary Fund and World Bank loans and credits;
2) government low interest loans and credits; and
3) commercial loans and credits.
The following table shows the sources and types of foreign capital utilized
by China.
FOREIGN CAPITAL UTILIZATION
(U.S. $ MILLION)
ITEM 1985 1989 1990
---- ---- ---- ----
Total .................................... 9,867.42 11,478.78 12,085.69
Foreign Loans ............................ 3,534.21 5,184.69 5,099.37
Loans from International Monetary
Organizations ........................ 1,131.51 855.80 1,893.00
Governmental Loans ..................... 1,020.53 1,471.25 719.37
Other .................................. 1,382.17 2,857.64 2,487.00
Direct Investment by
Foreign Businesses ..................... 5,931.10 5,599.76 6,596.11
Joint Venture .......................... 2,029.70 2,659.02 2,703.95
Co-Operative Operation ................. 3,496.15 1,083.22 1,254.10
Co-Operative Development ............... 359.59 203.74 194.25
Foreign Enterprises(1) ................. 45.66 1,653.78 2,443.81
Other Foreign Investments ................ 402.11 694.33 390.21
Compensation Trade ..................... 260.34 474.75 202.65
Processing and Assembly ................ 141.77 147.60 136.48
International Rent ..................... -- 71.98 51.08
--------------
Note: (1) Includes equipment supplied by foreign businesses in transactions in
compensation trade, processing and assembly and value of equipment
supplied in financial leasing transactions.
Source: China Statistical Yearbook, 1991, State Statistical Bureau of the
People's Republic of China.
EXCHANGE RATE AND FOREIGN EXCHANGE CONTROL
There is centralized control and unified management of foreign exchange in
China. The State Administration of Exchange Control (the "SAEC") is responsible
for matters relating to foreign exchange administration, while the Bank of China
(the "BOC") is in charge of foreign exchange operations. Cooperating closely
with the BOC, the SAEC fixes the official daily exchange rate of RMB against
major foreign currencies.
There are two types of monetary instruments in China today, the RMB and
Foreign Exchange Certificates ("FEC"). The RMB is the official currency in China
and is currently not convertible into foreign exchange unless converted with
express written authorization from the SAEC. The FEC is a Chinese currency
established for use by foreigners in lieu of RMB and is convertible into hard
currency. Both RMB and FEC are denominated in the monetary unit of "yuan" and
are officially at par with each other. It is expected that FECs will be
withdrawn from circulation in the near future.
While foreign investment enterprises are able to remit from China any
profits earned in foreign exchange, RMB earnings within China cannot be freely
converted into foreign exchange except at the foreign exchange adjustment
("swap") centers established by the SAEC. In order to provide some relief from
the controls imposed by the earlier foreign exchange legislation, the State
Council promulgated on January 15, 1986 the "Regulations Concerning the Balance
of Foreign Exchange Income and Expenditure of Chinese-Foreign Equity Joint
Ventures," which provide for a number of mechanisms to allow foreign investment
enterprises to "balance" their foreign exchange income and expenditure. These
mechanisms include the sale of joint venture products within China for foreign
exchange, the export of products purchased with RMB from Chinese enterprises to
generate foreign exchange, short-term loans and the "swapping" of RMB for
foreign exchange with other foreign investment enterprises and Chinese
enterprises, among others.
The exchange rate fluctuates from time to time and from swap center to swap
center depending on supply and demand. The renminbi has been devalued
progressively in recent years, depreciating by almost 70% against the U.S.
dollar between 1981 and 1990.
The following chart lists comparative average exchange rates for the
renminbi and other selected currencies since 1986.
<TABLE>
EXCHANGE RATES
(CURRENCY UNITS PER U.S. $)
<CAPTION>
1986 1987 1988 1989 1990 1991 1992 1993
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Australia ....................... 1.491 1.472 1.275 1.262 1.280 1.284 1.363 1.974
New Zealand ..................... 1.872 1.613 1.563 1.693 1.675 1.774 1.881 1.806
China ........................... 3.7221 3.7222 3.7221 4.7221 5.2221 5.4000 5.8400 5.800
Hong Kong ....................... 7.8030 7.7980 7.8060 7.8000 7.7950 7.7780 7.7400 7.730
Singapore ....................... 2.1750 1.9985 1.9462 1.8944 1.7445 1.6190 1.6400 1.610
Korea ........................... 861.4000 792.3000 684.1000 679.6000 716.4000 756.3000 781.0800 808.100
Taiwan .......................... 35.5000 28.5500 28.1700 26.1600 27.1100 25.7475 25.2000 26.700
Malaysia ........................ 2.6030 2.4928 2.7153 2.7033 2.6980 2.7410 2.6700 2.700
Philippines ..................... 20.5300 20.8000 21.3350 22.4400 28.0000 26.0500 23.6000 27.100
Thailand ........................ 26.1300 25.0700 25.2400 25.6900 25.2900 25.2600 25.9900 25.300
Indonesia ....................... 1641.0000 1650.0000 1731.0000 1793.0000 1901.0000 1994.5000 2064.0000 2111.250
</TABLE>
--------------
Source: Wardley Investment Services, Baring Securities.
TAIWAN
Taiwan is the most invisible country on the planet, and Taiwan is recognized
by very few countries, mostly small island states like itself in the South
Pacific and the Caribbean. And yet it is an oriental paradox -- it has a
financial and diplomatic influence which is out of all proportion to its small
size. For historical and cultural reasons Taiwan stands between China and Japan.
(The slow pace of the Sino-Japanese relationship since 1972 may be partly caused
by this conundrum.)
Indeed, if Taiwan is now going to be brought back into the fold it is also
reasonable to expect the level of Japanese investment and trade in China to
accelerate. It is very probable that Japan will use Taiwan as a "middle-man" for
trade and investment in China.
Taiwan is dependent on its close relationship with the United States and its
very successful diplomacy and public relations campaign which, ever since Madame
Chiang Kai-Shek's days in the 1940s has sustained a high level of sympathy in
Washington for the Nationalist regime. Taiwan also has close relations with
South Africa, from which it buys essential raw materials such as coal, and also
with Israel, with whom it has had military as well as trade links.
For all these reasons, much of the real Taiwan has been hidden for many
years. It is misunderstood by Westerners -- the country has been the most
difficult of all Asian countries to follow and understand. However, since the
lifting of martial law in 1987 much of this has changed. People in Taipei are
again willing to talk openly and it is possible to begin to understand the sense
in which Taiwan has become a repository of much of the best of the old Chinese
traditions. In Taiwan can be found many of the old Chinese arts -- a strong
family life, Confucianism, a flourishing trade in traditional Chinese medicines,
the martial arts, an excellent standard of Chinese movies and television, and
the tradition of Chinese law.
Nevertheless, the basic geopolitical fact about Taiwan is that it sits under
the shadow of mainland China and under the threat of reunification, whether
peaceful or by military means. However in the last few years and especially
since June 1989, the leadership of the Communist Party in Peking and in Taipei
have begun, for the first time since 1949, to have serious talks and regular
communication. At the same time the flow of investment from Taiwan into mainland
China, especially into the neighbouring province of Fujian, has grown
dramatically and the two-way trade is now approaching US $4 billion annually. In
the early days of this two-way business, the authorities in Taipei turned a
blind eye to the many small projects that Taiwanese businesspeople were
embarking upon with PRC partners. Also, there was an enormous increase in the
number of annual visitors from Taiwan into China. Along with the travel and
tourism came the investment and it is now estimated that there is over US $500
million of direct Taiwanese capital in plants and small businesses in China.
Many of the most successful toy and electronics factories in Shenznen, across
the border from Hong Kong, are owned and managed by Taiwanese. Speaking Mandarin
or the Fujianese dialect, they have the same natural advantage in dealing with
mainland officials and businesspeople that the Hong Kong Cantonese have with the
inhabitants of Guangdong Province.
So the analysis of risk and reward in Taiwan must already take account of
this rapidly growing economic integration between Taiwan and China which, has
led to over 30 percent of Taiwan's trade being with the mainland and that the
total investment from Taiwan to China may approach US $5 billion or even US $10
billion. As with Hong Kong, increasingly an investment in Taiwan will be seen
indirectly as a "play" or an investment in China itself. Nevertheless, Taiwan
remains a free capitalist enclave with some very successful entrepreneurial and
export-oriented companies. The government's role in the economy is relatively
small. It has pursued consistently, since 1950, a laissez-faire policy which
allows small family run companies typically to change their product line every
two or three years to meet the demands of American or other international
clients. Statistics clearly indicate that the exports strengths, which have
powered the Taiwanese economic boom for thirty or forty years, remain intact
despite the shortage of skilled labour, the high cost of labour and the strong
New Taiwan dollar, which has impelled many Taiwanese businesspeople to shift
their production to Thailand, the Philippines, and Malaysia as well as China.
The best measure of Taiwan's economic success is in its US $80 billion of
foreign exchange reserves.
What then is the real risk to Taiwan? After Hong Kong is taken over in 1997
Taiwan will appear more isolated and it will have lost its neutral meeting point
with China which the British colony has represented. On the other hand, by that
time Taiwan and China may have grown sufficiently close in economic, if not in
political, terms that Hong Kong will have become unnecessary. Direct trade and
investment are already commencing. Some form of political agreement allowing for
Taiwan's autonomy, if not independence, may be worked out. The one country two
systems formula applied to Hong Kong and Macau was always designed by Peking
with the objective of regaining Taiwan in the long term. That long term may not
be as long as some observers have predicted. The passing away of the older
generation who fought in the bitter civil wars between the communists and the
KMT from 1927 to 1949 will remove much of the bitterness and open up the way for
a new dialogue between the younger leaders in the two Chinas.
The strongest argument for a political compromise and a formula for
coexistence is the natural complementarity of the two Chinese communities on an
economic basis. China has the labour, the land and the resources. Taiwan has the
capital, the technology and the trained entrepreneurs. A formidable Chinese
Economic Community could be a reality before the end of the century. However, a
more pessimistic view would be to see a return to ideological extremism in
Peking resulting in a renewed cold war across the Taiwan Straits, a cut off of
business and cultural links, and a potential military conflict. Even in this
very gloomy scenario Taiwan may be able to defend itself and maintain its
economic prosperity because it will still have the economic support of both
Japan and the United States.
The following table gives details of the overall economic performance of
Taiwan from 1987 to 1993.
--------------------------------------------------------------------------
EXCHANGE GDP TRADE MARKET MARKET
RATE GROWTH SURPLUS YEAR-END CAPITAL
AV. US $ (%) CPI (US $BN) P/E CLOSING (US $BN)
-------- ------ ----- ---------- ---- -------- --------
1987 31.85 12.3 0.5 18.7 28.7 2,339.26 48.45
1988 28.57 7.3 1.3 10.9 68.9 5,119.11 120.1
1989 26.41 7.6 4.4 14.0 92.0 9,624.18 240.0
1990 26.39 6.9 4.1 14.9 33.0 4,530.16 112.4
1991 25.50 7.3 3.6 15.7 28.0 4,600.67 123.7
1992 25.20 6.1 4.5 12.5 30.1 3,377.06 100.1
1993 27.00 6.2 2.9 7.8 30.3 6,071.00 191.0
1994* 26.30 6.2 4.0 -- 33.1 -- 242.1
*Estimate
The risks for an investor in The Taiwan Stock Exchange Corp. are
specifically those of a highly priced and highly volatile securities market with
very weak regulations and poor accounting standards. It was once estimated that,
out of 140 listed companies in Taiwan, perhaps twenty or thirty counters were
those of companies which were technically bankrupt. Investors take little
account of security analysis or of the investment fundamentals which might count
more for long-term Western investors. The speculative atmosphere of The Taiwan
Stock Exchange Corp. does, therefore, portray a high degree of risk. However,
the New Taiwan (NT) dollar is a very steady currency in relation to the U.S.
dollar. The economy of the island has shown a steady and non-inflationary growth
rate and savings are very high in relation to disposable income.
The most important risk to consider for a Western investor trying to get
into the Taiwanese market is the choice of a trustworthy and reliable local
partner. This is much more difficult to achieve in Taiwan than in, say Hong
Kong, where the British legal and commercial system and the educational system
are more familiar. Taiwan has a purely Chinese culture and way of life even
though most of the younger business people are educated in the universities of
the United States and many have PhDs. Nevertheless, the way of doing business
remains a traditional Chinese way. Therefore, nothing can be achieved by means
of legal contracts or agreements in the accepted Western sense. Even more than
in China, Taiwan depends on the personal contact and trust between the two
individuals involved. Many Western banks have come to grief in their pursuit of
the elusive Taiwan millionaires in the private banking sector and in their
corporate loans to apparently sound Taiwanese companies, which either cannot or
will not repay. Recourse is very hard to enforce and the legal system is
undeveloped. These are the major risks in doing business in Taiwan but the
potential rewards should not be underestimated. Those who have had a long-term
commitment to the island republic, have had good contacts with the government
and have done business in the Chinese way with a good local Chinese partner have
been able to demonstrate very good long-term returns on their investments. In
addition, the links that Taiwan business people have built around the globe, in
the United States in particular but also increasingly in Canada, where they have
followed Hong Kong investors into Bristish Columbia, in Australia, in the
Philippines and in Bangkok, are impressive.
KOREA
Political volatility has characterized the history of South Korea (referred
to as Korea throughout this section) during the past forty years, while at the
same time an extraordinary economic boom has occurred. Rigid discipline has been
characteristic of the military government under President Park during the 1960s
and 1970s, which were the most successful decades in economic terms particularly
in the growth of Korea's exports and in the per capita income. It is important
to remember how completely the cities and transport system of the southern part
of the Korean peninsula had been destroyed in the civil war of the 1950s. The
effort of reconstruction was, therefore, enormous. Living standards in the 1960s
were extremely low. The threat from North Korea has exerted a continuous
military pressure on the South in the past forty years which is probably unique
to any country in the world, even including West Germany or Taiwan. Seoul is
only 30 kilometers from the demilitarized zone and, therefore, lives in a
continuous state of tension and fear of an imminent invasion. This very real
threat is also translated into a very high percentage of military spending in
the national budget. If Korea is compared with Japan, the Koreans have had to
spend ten times more of their national income on defense than the Japanese and
yet have succeeded in recording higher rates of economic growth.
The fierce political in-fighting, which has been a constant characteristic
of Korean history, was suppressed for a period in the 1970s and 1980s, both
before and after the assassination of President Park. Since 1987 the opening up
of the democratic process has been smoothly handled despite the continuing
student riots and disturbances. In fact, stock market investors have generally
ignored the television images of riot police, tanks firing tear gas and students
throwing petrol bombs, to concentrate more on the continuous success of Korean
companies in their conquest of overseas export markets and their impressive
earnings growth. Nevertheless, the threat from the North and the fierceness of
the Korean political opposition do combine to give Korea a lower score for
political stability than its neighbours. We have the sense in Korea of a higher
risk but also a much greater potential should the rapprochement with the North
lead to a peaceful reunification.
The following table gives details of the overall economic performance of
South Korea from 1987 to 1993.
--------------------------------------------------------------------------
TRADE
EXCHANGE GDP SURPLUS/ MARKET MARKET
RATE GROWTH (DEFICIT) YEAR-END CAPITAL
AV. US $ % CPI (US $BN) P/E CLOSING (US $BN)
-------- ------ ----- ---------- ---- -------- --------
1987 822.57 13.0 3.0 7.7 10.6 525.1 33.0
1988 731.47 12.4 7.1 11.4 13.6 907.2 94.3
1989 671.46 6.7 5.7 4.6 22.9 909.7 140.9
1990 707.76 9.3 8.6 (2.0) 18.5 696.1 110.2
1991 731.60 8.3 9.7 (7.0) 15.0 610.9 96.4
1992 781.08 4.7 6.2 (2.1) 15.0 678.4 107.4
1993 808.10 5.5 6.5 (1.6) 17.5 866.0 139.0
1994* 775.00 7.9 6.2 -- 21.1 -- 190.0
*Estimate
South Korea has the highest overall score for economic growth in the world
over the past twenty years even when compared with the other Asian tigers. The
average growth over a twenty-year period has been close to 9 percent in real
terms, at certain times reaching even 13-14 percent. This means that the average
Korean today has a per capita income of nearly U.S. $6,000 per annum, an income
which has grown nearly thirty times in thirty years. There have been tremendous
social changes resulting from this economic boom, notably the shift of
population from the countryside into the cities and the shift in the economic
structure from agriculture to industry and, more recently, to the service
sector. This has all occurred in a shorter period of time than in almost any
other advanced economy. What took England one hundred years and Japan thirty
years, has taken Korea typically less than ten years. There has been some
slowing during the 1980s compared to the 1970s, but Korea still has among the
highest overall ratings for GNP growth. Its industrial workforce has not lost
its competitive edge and the average working week in Korea is still in excess of
fifty hours, the longest working week in the world. These are the foundations of
Korea's continued economic success. It is unlikely that such characteristics,
being social in origin, will disappoint us in the next decade. Therefore it is
reasonable to expect Korea's economy to continue to be one of Asia's most
succesful.
The flexibility of its large trading companies, the chaebol, has been
recently underlined again as they have shifted their emphasis from the United
States, Canada and Europe towards the new markets of China and the Soviet Union.
There is little doubt that Korean exporters will be leading the Japanese in
providing Russian consumers with basic consumer goods. The readiness to take
risks in new areas has continuously paid off for Korean companies just as it did
when they were able to grab the major construction contracts in the Middle East
during the oil boom of the 1970s. (These new trade links have also translated
into new diplomatic links with China, Hungary, Poland and the Soviet Union, thus
further isolating North Korea from its communist neighbours.)
Inflation in Korea has been higher than in Japan or Taiwan. In the 1970s,
Korea experienced an annual average inflation rate of nearly 15 percent.
Beginning in 1982, however, the tight monetary policy succeeded in bringing this
annual consumer price index down to single digits until 1990 when the rate
jumped again to 8.6 percent. The Korean export boom has led to a big inflow of
foreign exchange accompanying Korea's trade surpluses of the past five years.
This, in turn, has led to a sharp increase in money supply and a boom in real
estate prices in Seoul. Thus the rise of both the Korean share market and
property market since 1985 has in a sense been a lagging indicator of the
economic boom of earlier years with its inevitable build up of national and
personal wealth among the Korean population. Nowhere has the number of investors
grown faster than in The Korea Stock Exchange during the 1980s. Thus rising
prices have reflected rising national wealth. This inflation problem has been,
and can again be, tamed by a strong central bank response and this is what would
be expected in the 1990s.
The exchange rate of the Korean won against the U.S. dollar has reflected
both the relative inflation rates of Korea and its international trading
partners and also the more recent success of Korea in repaying much of its
foreign debt and building up its reserves. The won was held very steady during
the 1970s and then allowed to devalue between 1980 and 1985 from 484 won to the
dollar to its lowest level of 890 won to the dollar. With the sharp improvement
in Korea's overseas trade position the won started to appreciate from 1986
onwards. With the subsequent relapse of Korea into a new trade deficit in 1990
and the recovery of the dollar in world exchange markets, the Korean won has
again depreciated slightly. However, there is a high degree of stability and the
currency is managed by the central bank. A devaluation of more than 5 percent
per annum should not be expected unless Korea's trade or inflation problems
worsen significantly.
It is likely that Korea's foreign trade position will improve again thanks
to the country's competitive position in export markets. In a more liberated
domestic economy with lower tariffs on foreign goods, however, it will be more
difficult to restrain the growth of imports as Korean consumers demand a greater
choice. Korea's main deficit is with Japan and consists largely of capital
goods. This is likely to continue as long as Korean manufacturers wish to
maintain their competitive edge in the most modern plant and equipment.
THAILAND
Thailand is unique in South East Asia in that it has escaped the colonial
experience and maintained its freedom and independence. In addition, the
monarchy plays a key role in maintaining the country's political stability and
independence. It is, nevertheless, sobering to realize that since the absolute
monarchy was ended in 1932 there have been no less than twenty-one coup d'etats,
of which twelve have been successful. The recent international perception of
Thailand was very much coloured by the experience of the past fifteen years as
there had been no successful coup d'etat since 1977. Thus the one that took
place in February 1991 was a surprise to many foreign observers and investors,
although it had broad popular support and the tacit blessing of King Bhumibol
himself. The army was felt to be acting not only to further its own cause but to
stamp out political corruption and restore, within a period of six months, a
democratically elected government. The Cabinet, which was put in place
immediately after this coup, contained fifteen PhDs out of a total of
twenty-three ministers, and the generals were in a small minority compared to
the businesspeople, diplomats and civil servants with a record of disinterested
public service. Thus it seems that Thailand in the 1990s will remain democratic
but that the King and the army will continue to play a role which would be
described in a Western democracy as that of "checks and balances" on the
excesses of elected politicians.
Political risk in Thailand needs to be seen in this cultural context.
Thailand has been given a higher rating for political stability because of the
existence of the monarchy first of all. King Bhumibol, who has been on the
throne since 1946, commands enormous personal respect and popular reverence. It
is impossible, therefore, for any government or military group to gain power
without his tacit approval. This factor mitigates much of the instability which
may be suggested by the record for the past sixty years of attempted military
coups. At the same time Thailand has differed from its neighbours Burma and
Vietnam in possessing a free and independent peasant population which has, on
the whole, enjoyed a higher standard of living than their neighbours and,
therefore, the communist movement has never made much headway among the rural
people. On the other hand again, Thailand's extraordinary economic growth in the
1980s (averaging 10 percent per annum) has put great strains not only on the
urban environment because of traffic jams and pollution, but also on the social
and family system. Many rural families have been forced to send their teenage
children to the cities to find employment. The contrast of living standards
between Bangkok and the north east provinces (an estimated per capital income
would be perhaps US $2,500 per annum for the former and less than US $500 per
annum for the latter) must eventually create social tensions and potential
unrest. The laissez-faire policy of the Bangkok government has thus far worked
extremely well although the lack of planning, in terms of the proliferation of
factories around the capital, leaves something to be desired.
The fact that Thailand is a majority Buddhist country may do much to explain
the non-violent changes of power and exchanges of politically different views
which characterizes its public life. So, along with the monarchy, Buddhism must
be counted as a major factor of political stability. The army is the third
element which can be considered, on balance, to be a positive factor. During the
1970s when it seemed more than probable that Thailand would bear out the
Pentagon "domino theory" by which each country in succession -- China in 1949,
North Vietnam in 1954, South Vietnam in 1975, Laos, Cambodia in
1975-7...Thailand, Malaysia, Singapore -- would fall to the irresistible
southward movement of the communist militias. But Thailand was the point at
which communism stumbled and fell back. Much of this has to do with the
professionalism of the army and the basic resistance of the people to a foreign
ideology. As Siam had resisted British and French colonial pressure in the
nineteenth century, so Thailand in the twentieth century resisted the Marxist
Leninist dictatorship which engulfed its once prosperous neighbour, Vietnam.
Thailand is, finally, the most open country to foreigners and receives
almost 5 million tourists a year. The self-confidence and strong sense of
cultural identity of the Thai people is in no way diminished by the superlative
standards of service which characterize their hotels, tourist resorts and
airlines. Any independent observer or visitor to Thailand can, therefore, assess
the real nature of the underlying social stability of the country which supports
the high degree of political stability predicted for the country.
The following table gives details of the overall economic performance of
Thailand from 1987 to 1993.
--------------------------------------------------------------------------
TRADE
EXCHANGE GDP SURPLUS/ MARKET MARKET
RATE GROWTH (DEFICIT) YEAR-END CAPITAL
AV. US $ % CPI (US $BN) P/E CLOSING (US $BN)
--------- ------ ----- ---------- ---- -------- ----------
1987 25.72 9.5 2.5 (1.6) 9.3 284.99 5.4
1988 25.29 13.2 3.9 (3.9) 16.3 386.73 8.86
1989 25.70 12.2 5.4 (5.4) 26.4 879.19 25.67
1990 25.56 10.0 6.0 (9.9) 13.8 612.86 23.86
1991 25.05 8.2 5.7 (9.6) 15.6 711.40 35.7
1992 25.49 7.5 4.1 (8.5) 15.2 893.40 58.20
1993 25.50 7.8 4.8 (9.2) 27.6 1,183.00 130.0
1994* 25.30 8.2 5.1 -- 20.7 -- 150.0
*Estimate
Thailand's economy has been the fastest growing in the world for the past
three years. The take-off really began in 1986-7 with the flood of new foreign
investment into the country, largely from Japan and Taiwan. The rapid
appreciation of the Japanese yen against the dollar in 1985-6 forced many
Japanese manufacturers to consider moving some of the low technology, low labour
cost activities, such as textiles, consumer electronics and footwear, offshore.
Thailand was a natural destination for Japan's industrialists, made easier by
the low degree of red tape and bureaucratic delays. Hence as the figures
published by the Board of Investment between 1985 and 1992 show the rising tide
of foreign capital was a major cause of Thailand's economic boom. GDP growth
reached over 12 percent in 1988 and 1989 and it seems likely that in the 1990s
Thailand can sustain a medium-term growth of nearly 7 percent annually in real
terms.
There has been a large shift away from agriculture towards manufacturing. As
recently as 1980, 50 percent of Thailand's exports consisted of rice and tapioca
and other agricultural products. By 1990, 75 percent of the total volume of
exports were manufactured goods, mainly from the newly established assembly
plants in Bangkok and the south. This has resulted in large changes in
employment and moves of populations. Nevertheless, the profound change in the
structure of Thailand's economy has been well absorbed and sets the stage for a
move into higher value added products in the years up to 2000.
It is surprising, considering the very high rate of economic growth that the
economy has experienced, that prices, as measured by the consumer price index,
have been kept under control. The last serious bout of inflation in Thailand
occurred during the two oil crises, first in 1973-4 when the CPI touched 24
percent and then again in 1980-1 when there was a resurgence of inflation to
nearly 20 percent. In the later 1980s, and thanks largely to a more stable oil
price, inflation has been held in single digits and has not exceeded 6 percent.
Nevertheless, the boom of the past three years, particularly in Bangkok, has led
to a rapid escalation of real estate values and rents. It is likely that the
slowdown in the economy in 1991 will result in a lower inflation rate and,
therefore, it is expected that Thailand's inflation will be held at 5 percent or
below in the next few years.
Once again the record is one of extraordinary stability. The Thai baht has
been carefully managed by the Bank of Thailand against a basket of currencies
which is thought to be around 80 percent dollars and 20 percent yen. When
measured against the U.S. dollar it has resulted in a very small annual
variation of less than 3 or 4 percent. In fact, during the last six years there
has been virtually no change in the value of the baht compared with the dollar.
Clearly, the weaker dollar of the 1985-90 period has favoured Thailand's
exports. (The same effect is observable with the Hong Kong dollar which is also
pegged to the American unit.) Therefore, it is expected that Thailand's currency
will remain extremely stable in dollar terms in the future.
MALAYSIA
The central dilemma in assessing Malaysia's political risk is the perennial
question of relations between the Malay and Chinese communities representing as
they do about 60 percent and 30 percent of the population respectively. Since
the 1969 anti-Chinese riots in Kuala Lumpur the country has been unruffled by
any serious inter-racial violence and during this period a great deal has been
accomplished in transforming the economy and in transferring the wealth of the
country from foreign and Chinese hands into the hands of the bumiputra (or the
sons of the soil), which is the dominant Malay majority. The success of this New
Economic Policy is unquestioned and has given a great deal of legitimacy to the
continued run of the United Malay National Organisation (UMNO) under its
successive prime ministers and most recently under Dr. Mahathir Mohammed who has
now held power for a decade. This economic success has also done much to defuse
the threat from the Islamic fundamentalists who have tended to get co-opted into
the ruling party. The Chinese community has also done well in economic terms
although the political disunity in the Malay Chinese Association (MCA) has left
them somewhat leaderless in the political sphere.
Politics in Malaysia continues to be a question to revolve around its
leading personalities. It should also be noted, however, that Malaysia shares
one characteristic with Thailand, which is a strong monarchical system. In
Malaysia's case it is less visible because the kingship is shared on a five-year
revolving basis among the sultans of the various states of the federation. This
clear distinction of the British model between the head of state, or monarch,
and the prime minister, or political leader, is important to Malaysia's overall
stability.
The geographical divide between peninsular Malaysia and East Malaysia,
consisting of the states of Sabah and Sarawak, also underlines the need for a
great deal of political decentralization. Sabah and Sarawak have very different
histories from the other Malaysian states and can be examined for their
political make-up on a separate basis including the question of the Christian
minority in Sabah. Overall, however, it must be judged that Malaysia's economic
success has led to a far greater degree of political stability than was expected
following independence in 1963.
Malaysia's relations with its neighbours on the whole are excellent and, in
particular, the relationship with Singapore, which remains the largest investor
in the country, is a key one. The Singapore government is obviously enthusiastic
to diversify its industrial base across the causeway into Johore and further
north into peninsular Malaysia. This is good news for Malaysia's economic and
political stability.
The following table gives details of the overall economic performance of
Malaysia from 1987 to 1993.
--------------------------------------------------------------------------
TRADE
EXCHANGE GDP SURPLUS/ MARKET MARKET
RATE GROWTH (DEFICIT) YEAR-END CAPITAL
AV. US $ % CPI (US $BN) P/E CLOSING (US $BN)
-------- ------ ----- ---------- ---- -------- --------
1987 2.520 5.4 0.8 5.9 78.0 261.19 18.49
1988 2.619 8.9 2.5 5.6 36.0 357.38 29.05
1989 2.709 9.2 2.8 3.9 28.7 562.28 39.73
1990 2.705 9.8 3.1 1.9 39.8 505.9 48.81
1991 2.752 8.8 4.3 (6.4) 29.3 556.2 57.49
1992 2.620 8.0 4.7 2.8 21.0 644.0 92.20
1993 2.700 8.5 3.6 3.8 34.3 1,275.0 241.00
1994* 2.570 8.5 4.0 -- 26.5 -- 275.00
*Estimate
Malaysia, along with Singapore, experienced a sharp recession in 1985-6
owing to an excessive tight monetary policy in both countries. Since 1987
Malaysia has, however, returned to the path of high growth and low inflation.
Nevertheless, over a twenty year period Malaysia ranks behind Singapore,
Thailand and Hong Kong, although ahead of Indonesia in past overall economic
growth. The change in the past five years has also been accompanied by an
accelerated shift into manufacturing and away from the old dependence on the
plantation sector. This manufacturing growth has been led by investment from
Japan and Taiwan and notable national projects such as the Proton car. Malaysia
is attempting to move up market into the new product areas such as electronics,
car assembly and consumer goods. It is likely to be successful in doing so owing
to its literate and trainable workforce. Therefore, one can be fairly confident
that Malaysia's economic record will continue to be bright.
The exchange rate of the Malaysian ringgit has been closely tied to that of
the Singapore dollar which itself has been very stable if not strong against
other world currencies, expecially the US dollar. Therefore, the ringgit has had
a very stable record against the dollar and is likely to maintain this
stability. Malaysia's foreign trade has generally been in surplus, although
between 1990 and 1991 this figure fell sharply partly owing to fall-off in
Malaysia's energy exports. As manufactured goods assume a larger importance in
the composition of exports compared with crude oil, rubber and palm oil,
Malaysia's trade position should gradually become steadier. For an investor
Malaysia remains attractive although vulnerable to external shocks either in
terms of commodity prices or in a fall in export demand in its principal
markets. The infrastructure, high literacy rate and relative political stability
in recent years are all bonus points for the country's overall image.
SINGAPORE
"The silent success", in the words of a Singapore government minister, of
this region is based on a high literacy rate and a well-educated and trainable
workforce. The investment in human capital has proven to be more important to a
lasting economic growth success story than the availability of finance or
technology. The demise of communism is also promoting greater confidence and
political stability in the Association of South East Asian Nations (ASEAN)
region, of which Singapore is the de facto financial centre.
Essentially Singapore's aim in the 1990s will be to emulate what Hong Kong
has done in Guangdong Province and the hinterland of southern China. But in
Singapore's case its export of jobs and lower value added industries will be
mainly to neighbouring Malaysia and, to a lesser extent, to Indonesia. The
plantations in the southern part of the Malaysian peninsula depend almost
entirely on the large annual in-take of illegal workers from Indonesia. With 100
million people in Java alone, Indonesia needs to provide employment for 2-3
million a year. Thus mobility of labour within ASEAN is as important, if not
more so, than mobility of capital.
Singapore is aiming its investment at Johore in Malaysia and Batam Island in
Indonesia. This is the so-called growth triangle. There is a political aspect to
this. Singapore is a small Chinese island surrounded by a sea of Muslims. It
needs to ensure political stability among its neighbours. One of the best ways
of doing this (as Hong Kong has found in southern China) is to invest and create
jobs and raise per capita incomes from their present low level.
The other aspect of political risk when considering Singapore is, of course,
the handover of political power from one generation to another. Although Lee
Kwan Yew stepped down as Prime Minister in 1990, he continues to wield a large
influence and power behind the scenes. Nowhere in the world could it be truer to
say that the state is the creation of one man, thus his succession poses a very
real problem. His son, Lee Hsien Loong may not take up the post of Prime
Minister for three to five years. In any case, the question of dynastic
succession in a parliamentary democracy, even within a limited Confucian Chinese
democracy, is, to say the least, a questionable one. Many of the elder Lee's
policies, such as imposing the Mandarin Chinese language on the Singapore
educational system, have aroused fierce opposition among the older,
anti-communist generation of Singapore Chinese. The tight control of the media
and the suppression of all political opposition or criticism of the government,
the People's Action Party or the Prime Minister himself, has also aroused
criticism both at home and internationally.
But, on balance the enormous success of Lee Kwan Yew's achievement in
creating modern Singapore cannot be doubted. It is clean, efficient and notably
lacking in corruption compared to other Asian cities. The Central Provident
Fund, which takes 35 percent of every person's income as a compulsory savings
scheme, has built up an enormous reservoir of capital for future use in
Singapore. Notable public works such as Changi Airport or the transport system
have been the result. Long-term planning has not been as successful anywhere
else, with the possible exception of Japan. The paternalistic attitude of the
Singapore government towards its citizens is unlikely to change in the immediate
future especially since the younger generation of Singaporeans have been
thoroughly versed in the disciplined Confucian thinking and authoritarianism
which characterizes the school system as well as government. Singapore also has
a well run and modern citizens' army based, like the Swiss model, on an annual
call-up of every able-bodied man aged between 18 and 50. The city state is thus
well equipped to defend itself against any aggressor. Singapore will also
benefit from the inflow of human and financial capital from Hong Kong as 1997
approaches. In this sense it does not need to change but merely to retain its
present stability and attractive lifestyle in order to continue to prosper.
Thus, the conclusion to be drawn is that Singapore scores an equally high rating
in terms of very low political risk and a high degree of stability as Japan.
The following table gives details of the overall economic performance of
Singapore from 1987 to 1993.
--------------------------------------------------------------------------
TRADE
EXCHANGE GDP SURPLUS/ MARKET MARKET
RATE GROWTH (DEFICIT) YEAR-END CAPITAL
AV. US $ (%) CPI US $BN) P/E CLOSING (US $BN)
-------- ------ ----- ---------- ---- -------- --------
1987 2.106 9.4 0.5 (5.2) 17.8 270.34 17.86
1988 2.012 11.1 1.5 (4.7) 18.5 1,038.6 24.00
1989 1.950 9.2 2.4 (4.8) 18.3 1,481.3 35.95
1990 1.740 8.3 3.4 (5.3) 13.1 1,159.5 34.26
1991 1.620 6.7 3.4 (4.6) 18.5 1,490.7 51.20
1992 1.640 5.8 2.3 (4.9) 19.6 1,524.4 52.20
1993 1.616 9.9 2.4 (0.8) 36.0 2,426.0 132.05
1994* 1.490 9.2 4.0 -- 26.8 -- 170.00
*Estimate
Note: Market capital figures for Singapore for incorporated companies only.
The Singapore economy has been characterized by the highest degree of
government involvement and intervention outside of the socialist world.
Nevertheless, the growth rate has been quite impressive, averaging around 7-8
percent, except during the 1985-6 recession, and even more impressive has been
the tight control of inflation which, along with that of Japan, has remained
extremely low at below 3 percent for the past decade. The economic stability of
Singapore, therefore, scores high on a comparative basis although being a small
island state it is very sensitive to developments in its two main neighbours,
Indonesia and Malaysia, with their large commodity-based economies. Thus,
Singapore runs a regular trade deficit of around US $5 billion per annum which
is easily covered by its current account surplus on invisibles. Singapore's
foreign reserves held by the Monetary Authority of Singapore (MAS) and the
Government Investment Corporation of Singapore (GICS) are estimated to be in
excess of US $50 billion which would give this tiny Asian city state the third
highest foreign exchange reserves after Japan and Taiwan.
Thus, the overall management of "Singapore Inc." is extremely conservative,
with a very high degree of self-reliance, a high savings rate and an ample
cushion for unexpected global events. This financial conservatism has been
reflected in the strong performance of the Singapore dollar which has advanced
steadily against the US dollar during the past five years with an average
appreciation of 5 percent per annum. It is reasonable to expect these trends --
high economic growth, high savings rate, low inflation and steady currency
appreciation -- to continue during the 1990s.
INDONESIA
It can at least be argued that Indonesia has had fewer changes in its
political system than its Asian neighbours. In fact, there have been only two
rulers of Indonesia since independence was gained from the Dutch in 1948 --
Sukarno and Suharto. But equally it should not be forgotten that the two major
turning points in the country's modern history -- independence and the 1965
revolution -- were unusually violent episodes in the life of any country. The
stability which Indonesia has enjoyed during the past twenty-five years under
Suharto should, therefore, be placed against this background.
In many ways the same three pillars of stability which are found in Thailand
-- the army, the king and the national religion -- are present in Indonesia
except that the President, Suharto, stands in the place of the monarchy and the
national religion is Islam rather than Buddhism. The question of monarchical or
presidential succession remains perhaps the major political risk confronted by
the foreign investor as so many aspects of the business life of the country
relate directly to Suharto or his immediate family. The role of the army in
Indonesia is a great deal more clear cut and predictable than in either Thailand
or in the Philippines. In effect, there have been no attempted military coups
since 1966. The army remains wholly in support of Suharto. It has been
suggested, in fact, that anyone who might be considered as a candidate to
succeed Suharto must be Javanese and must be a general.
The role of Islam in the national life of Indonesia is a more complex
subject. The Mohammedan religion first reached the shores of western Sumatra
through the coming of the Arab traders around 1400. The western-most state of
Aceh has remained a stronghold of Islamic fundamentalist belief ever since.
Sumatra in general has remained restive and unwilling to bend to the yoke of a
tight central control from Java. In fact, this is also true of many other island
provinces of the huge Indonesian archipelago which will have, by the year 2000,
a population of over 200 million. Following the 1958 uprising in Sumatra and
Celebes (or Sulawesi) the Javanese policy was to plant more settlers in these
outlying islands from Java (where 80 percent of the population lives). Political
and religious factors, therefore, cannot be disentangled in the future horoscope
of Indonesian political life.
Fundamentalism is on the rise, as also in Malaysia, and politicians with
fundamentalist Islamic beliefs and supporters are likely to take a more active
role. However, the situation cannot be compared with Iran or Saudi Arabia. In
neither Indonesia nor Malaysia has Islam taken over all aspects of every day
life with its rules about the role of women or the consumption of alcohol or the
exaction of interest or usury on capital. In all these respects Indonesian life
is relatively "modern." There is a more easy-going Asian approach to matters of
religious belief.
However, the social question, which one cannot ignore, concerns the role of
the minority and non-Muslim peoples in Indonesia, in particular the Chinese
community in Java. Although the total Chinese population is less than 5 million,
or around 3 percent of the total, 80 percent of the commerce and much of the
capital wealth remains in the hands of this small but tight-knit Chinese
community. In 1966 there were violent anti-Chinese riots and killings in
Jakarta, Surabaya and other Javanese cities. Many thousands of Chinese fled to
Hong Kong and to China but this is a spectre which has been banished from the
life of the nation since Suharto came to power. He is well known to have close
links with the leading members of the Chinese business community.
The role of Chinese businesspeople in Indonesia has been brought into much
greater focus by the explosion of the Jakarta stock market in the late 1980's.
Much of the wealth which was rumoured to exist in the hands of the great Chinese
families is now visibly calculated on a daily basis in the large listed
capitalization of the Indonesian-Chinese industrial groups such as Indo-Cement
and Astra. There is, of course, a two-way flow of capital involved in this
process of the rapid evolution of the capital market in Jakarta, by which up to
U.S. $5 billion of foreign capital has entered the country in the form of equity
investment, largely from foreign fund managers, and a substantial amount of
Chinese capital has been able to leave the country in the opposite direction.
The enormous economic potential of Indonesia, its vast natural resources and
its large labour force being two principal attractions, cannot be doubted.
However, the main element of political risk is the possibility of a further
violent episode in the political life of the country when the next transfer of
power occurs at the top.
The following table gives details of the overall economic performance of
Indonesia from 1987 to 1993.
--------------------------------------------------------------------------
TRADE
EXCHANGE GDP SURPLUS/ MARKET MARKET
RATE GROWTH (DEFICIT) YEAR-END CAPITAL
AV. US $ (%) CPI (US $BN) P/E CLOSING (US $BN)
-------- ------ ----- ---------- ---- -------- --------
1987 1.720 3.6 9.0 4.6 83.0 0.07
1988 1.735 5.6 7.4 4.9 41.2 305.0 0.26
1989 1.784 7.4 6.0 5.8 24.7 399.0 2.42
1990 1.889 7.4 9.6 3.9 19.9 418.0 6.2
1991 1.984 6.5 9.5 5.5 17.1 247.0 8.1
1992 2.064 6.0 4.9 6.9 14.4 274.0 12.1
1993 2.110 6.5 7.0 9.0 27.4 589.0 43.0
1994* 2.200 6.8 9.0 -- 21.3 -- 52.0
*Estimate
Indonesia began the 1980s principally as an oil exporter. During the 1970s
it had a high rate of inflation but also a very rapid economic growth on the
back of the oil boom. The fall in oil prices in the early 1980s, which became
precipitate in the spring of 1986, therefore, forced a review of their
priorities. Reducing inflation, diversifying the economy away from oil and
maintaining a stable growth in the economy to provide as full employment as
possible for the large young population, were selected as the main objectives.
It is remarkable to see the extent to which these aims have been achieved during
1985-90. Inflation has been brought from 20 percent, at the beginning of the
decade, to around 6 percent in 1989-90. Economic growth, having fallen to 2.5
percent in 1985 regained the level of 7.4 percent by 1990. The rupiah, which had
undergone a 30 percent once-and-for-all evaluation in the autumn of 1985, had
stabilized on a "crawling peg" system with an annual devaluation of around 5
percent. The trade surplus continued at a healthy US $4-5 billion annually and
the inflow of foreign capital more than offset Indonesia's foreign debt
position. Therefore, it is possible to conclude that the good macroeconomic
management, which was achieved by the small group of technocrats employed by
Suharto to direct the economy, had been very successful in reducing the economic
risk of the country. The future path of the Indonesian economy will, therefore,
depend as much on the development of low wage manufacturing and the inflow of
Japanese capital, on the liberalization of the banking system and the capital
market, as on the price of basic commodities. This gives a much greater degree
of stability to the Indonesian economy as a whole.
THE PHILIPPINES
The Philippines is a special case in Asia. Culturally and politically it has
a very distinct national personality. The Roman Catholic Church plays a leading
role in its national life, not least in recent political changes. The fact that
the Philippines was the only American colony in Asia also gave it a very
different tradition from Indonesia or Malaysia, which had similar languages but
very different cultural traditions. The Spanish occupation of the previous four
hundred years also left some deeper traces than the Dutch did in Indonesia.
When speaking of political risk, however, the real problem in the
Philippines has been the lack of legitimacy which has plagued successive
governments and has led to the constant pendulum between dictatorship and weak
democratic governments.
The U.S. tutelage has left a lasting imprint on the country. The charismatic
leadership of Magsaysay in the 1950s also left a vivid example to his
successors. The attempts, in the 1960s, to solve the enormous economic problems
of the Philippines, especially the rural poverty and the rapid growth of
population, were not successful when pursued in a socialist direction. Marcos
arrived in power in 1965 and inherited a country which still had higher living
standards than most other Asian countries such as Hong Kong, Korea, Taiwan and
Singapore. Therefore, judgment on his twenty year rule must be very negative as
a result, if only judged as an economic failure.
The question most investors, therefore, raise is whether the Philippines is
capable of responsible government and economic planning which would give it a
GNP growth rate approaching that of its Asian tiger neighbours. Many observers
dismiss this prospect out of hand citing the endemic problems of corruption,
political in-fighting and the lack of Confucian work ethic present in North
Asia. However, there is no doubt that the Philippines possesses enormous natural
advantages and it would be wrong to generalize about the whole archipelago of
7,000 islands from the political life of Manila alone. The island of Cebu, for
example, has seen a successful economic transformation in the past twenty years.
Manufacturing investment has grown and has begun to replace agriculture as a
principal source of employment. The Philippines has a very high rate of literacy
and the work ethic cannot be doubted by anyone who has employed Filipino
domestic workers overseas. Their earnings are an important source of remittance
back to the Philippines each year. The Filipino population in the United States
is now the largest Asian ethnic group in that country approaching 2 million,
mainly in California. Both natural resources, therefore, and an intelligent,
hardworking population favour the country.
Unfortunately, the political system has never been able to maintain the
long-term stability for its promise to be fulfilled. The years of the Aquino
government, during which democratic procedures were restored to Philippine
political life, have also been disappointing in that many of the features of
Washington political life have been reproduced in Manila -- continuous discord
between Congress, Senate and the President, making important national decisions
extremely difficult to reach. On top of that, of course, there have been the
continuing attempts by the military to unseat the elected government. Although
all of these have failed they have, nevertheless, done much to undermine the
confidence of international investors in the political stability of the country.
In particular, the failed attempt of December 1989 led to a slump in the economy
and the stock market and scared away much needed foreign capital.
There are signs that Japanese and Taiwanese investors and banks are coming
back to the Philippines. Nevertheless, it can only be concluded that democracy
is a fragile plant in the Philippines which may be damaged in the future as it
has been in the past. There is continued rivalry for political and business
influence among a small group of leading Filipino families. The press, although
perhaps the freest in Asia, is considered to be irresponsible and corrupt and
does much to undermine the legitimacy of the ruling government. Political risk,
therefore, is judged to be higher here than in other Asian countries.
The following table gives details of the overall economic performance of the
Philippines from 1987 to 1993.
--------------------------------------------------------------------------
TRADE
EXCHANGE GDP SURPLUS/ MARKET MARKET
RATE GROWTH (DEFICIT) YEAR-END CAPITAL
AV. US $ (%) CPI (US $BN) P/E CLOSING (US $BN)
-------- ------ ----- ---------- ---- -------- --------
1987 20.568 4.8 3.8 (1.0) 15.9 642.72 2.97
1988 21.095 6.3 8.8 (1.1) 19.6 841.65 4.20
1989 21.737 5.0 10.6 (2.6) 16.8 1,145.45 11.82
1990 27.200 2.1 12.7 (4.0) 14.3 651.78 5.73
1991 26.200 (1.0) 17.7 (3.2) 12.7 1,152.00 11.10
1992 23.600 0.0 8.9 (4.7) 13.5 1,256.00 16.00
1993 27.100 1.7 9.8 (6.4) 29.4 3,196.00 39.00
1994* 26.700 5.2 9.8 -- 26.2 -- 42.00
*Estimate
The GDP growth, which had been running at 5.5 percent average for the
previous three years, fell to only 2 percent in 1990 and inflation rose to 12
percent. The peso was rather weak and the trade deficit doubled to nearly US $4
billion. The stock market tumbled by over 50 percent, from a high of 1,145 to
less than 600, and the overall value of listed Philippine shares fell from US
$12 billion to less than US $6 billion. Such is the real economic risk for
investors of this fragile political system. Nevertheless, the recovery of
confidence in early 1991 is testament to the long-term value that investors see
in the country. Even if relative to its Asian neighbours the Philippines
continues to have economic problems (and notably its high foreign debt), it will
benefit from regional trends and it will present, from time to time, very
interesting buying opportunities. The educated and literate labour force is a
major resource of wages and relatively low taxes.
At the worst point of the last years of the Marcos regime inflation in the
Philippines reached 50 percent, the highest recorded in Asia during the past
decade. With the strong support of the central bank under Governor Jobo
Fernandez, the money supply was reined in, the peso was stabilized and inflation
came down to single digits between 1986 and 1988. The tight monetary policy has
been maintained and interest rates have been as high as 35 percent to control
the supply of credit. Therefore, with good macroeconomic management the
inflation problems in the Philippines can be contained.
The same rule can be applied to the value of the peso which has had a poor
long-term record and, despite the efforts of a strong and independent central
bank, has again slid in value against the dollar in the past two years. With the
benefit of strict International Monetary Fund prescriptions it is hoped that the
Philippines will now be able to reschedule its foreign debt particularly with
the help of the Japanese banks, stabilize the currency and maintain a reasonable
growth in its export trade.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PART II
The following information relates to EV TRADITIONAL GREATER CHINA GROWTH
FUND. On December 17, 1993, the Fund changed its name from Eaton Vance Greater
China Growth Fund to EV Traditional Greater China Growth Fund.
FEES AND EXPENSES
ADVISER
As of August 31, 1994, the Portfolio had net assets of $732,612,677. For
the fiscal year ended August 31, 1994, the Adviser earned advisory fees of
$4,100,334 (equivalent to 0.74% (annualized) of the Portfolio's average daily
net assets for such period). For the period from the start of business,
October 28, 1992, to the fiscal year ended August 31, 1993, the Adviser earned
advisory fees of $411,209 (equivalent to 0.75% (annualized) of the Portfolio's
average daily net assets for such period).
MANAGER AND ADMINISTRATOR
As of August 31, 1994, the Fund had net assets of $316,229,250. For the
fiscal year ended August 31, 1994, Eaton Vance earned management fees of
$674,153 (equivalent to 0.25% (annualized) of the Fund's average daily net
assets for such period). For the period from the Fund's start of business,
October 28, 1992, to the fiscal year ended August 31, 1993, Eaton Vance earned
management fees of $129,661 (equivalent to 0.25% (annualized) of the Fund's
average daily net assets for such period). As of August 31, 1994, the
Portfolio had net assets of $732,612,677. For the fiscal year ended August 31,
1994, Eaton Vance earned administration fees of $1,383,471 (equivalent to
0.25% (annualized) of the Portfolio's average daily net assets for such
period). For the period from the Portfolio's start of business, October 28,
1992, to the fiscal year ended August 31, 1993, Eaton Vance earned
administration fees of $137,070 (equivalent to 0.25% (annualized) of the
Portfolio's average daily net assets for such period).
DISTRIBUTION PLAN
For the fiscal year ended August 31, 1994, the Fund paid distribution fees
under the Plan to the Principal Underwriter aggregating $1,238,280. For the
fiscal year ended August 31, 1994, the Fund made service fee payments under
the Plan aggregating $67,652, of which $65,804 was paid to Authorized Firms
and the balance of which was retained by the Principal Underwriter.
PRINCIPAL UNDERWRITER
For the fiscal year ended August 31, 1994, the Fund paid the Principal
Underwriter $9,952.50 for repurchase transactions handled by the Principal
Underwriter (being $2.50 for each such transaction).
The total sales charges for sales of Fund shares for the fiscal year ended
August 31, 1994 were $7,694,630, of which $1,213,734 was paid to the Principal
Underwriter. The total sales charges for sale of shares of the Fund for the
period from the start of business, October 28, 1992, to the fiscal year ended
August 31, 1993 were $6,071,808, of which $417,015 was received by the
Principal Underwriter and Authorized Firms received $5,654,793 from the total
sales charges for the same period.
CUSTODIAN
For the fiscal year ended August 31, 1994, the Portfolio paid IBT
$744,566. For the fiscal year ended August 31, 1994, the Fund paid IBT
$21,315.
BROKERAGE
For the fiscal year ended August 31, 1994, the Portfolio paid brokerage
commissions of $4,177,780 with respect to portfolio transactions. Of the
brokerage commissions of $4,177,780 paid during this period, all of such
amount was paid in respect of portfolio security transactions aggregating
approximately $814,062,509 to firms which provided some Research Services to
the Adviser's organization. For the period from the Portfolio's start of
business, October 28, 1992, to the fiscal year ended August 31, 1993, the
Portfolio paid brokerage commissions of $1,224,597 with respect to portfolio
transactions. Of the brokerage commission of $1,224,597 paid during this
period, approximately $1,218,619 was paid in respect of portfolio security
transactions aggregating approximately $180,689,369 to firms which provided
some Research Services to the Adviser's organization (although many such firms
may have been selected in any particular transaction primarily because of
their execution capabilities).
TRUSTEES
For the fiscal year ended August 31, 1994, the Trustees of the Trust as a
group, earned aggregate fees of $14,705 from the Fund in their capacities as
Trustees of the Trust. For the fiscal year ended August 31, 1994, the Trustees
of the Portfolio as a group, earned aggregate fees of $16,250 from the
Portfolio in their capacities as Trustees of the Portfolio.
PERFORMANCE INFORMATION
The Tables below indicate the total return (capital changes plus
reinvestment of all distributions) on a hypothetical investment of $1,000 in
the Fund covering the life of the Fund from October 28, 1992 through August
31, 1994.
<TABLE>
<CAPTION>
VALUE OF $1,000 INVESTMENT
TOTAL RETURN TOTAL RETURN
VALUE OF EXCLUDING SALES CHARGE INCLUDING SALES CHARGE
INVESTMENT INVESTMENT AMOUNT OF INVESTMENT ---------------------- ----------------------
PERIOD DATE INVESTMENT** ON 8/31/94 CUMULATIVE ANNUALIZED CUMULATIVE ANNUALIZED
---------- ---------- ------------ ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Life of the Fund* 10/28/92 $952.38 $1,500.69 57.57% 28.02% 50.09% 24.68%
1 Year Ended
8/31/94 8/31/93 $952.56 $1,205.60 26.56% 26.56% 20.55% 20.55%
<CAPTION>
PERCENTAGE CHANGES 10/28/92 - 8/31/94
NET ASSET VALUE TO NET ASSET VALUE MAXIMUM OFFERING PRICE TO NET ASSET
WITH ALL DISTRIBUTIONS REINVESTED VALUE WITH ALL DISTRIBUTIONS REINVESTED
---------------------------------------------- ----------------------------------------------
PERIOD ENDED ANNUAL CUMULATIVE AVERAGE ANNUAL ANNUAL CUMULATIVE AVERAGE ANNUAL
------------ ---------- -------------- ------------------ ---------- -------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
8/31/93 -- 24.50% -- -- 18.59% --
8/31/94 26.56% 57.57% 28.02% 20.55% 50.09% 24.68%
Past performance is not indicative of future results. Investment return and principal value will fluctuate; share,
when redeemed, may be worth more or less than their original cost.
----------
* Investment operations began on October 28, 1992.
** Investment less the current maximum sales charge of 4.75%.
</TABLE>
SERVICES FOR ACCUMULATION
The following services are voluntary, involve no extra charge, other than
the sales charge included in the offering price, and may be changed or
discontinued without penalty at any time.
Invest-by-Mail -- for periodic share accumulation. Once the $1,000 minimum
investment has been made, checks of $50 or more payable to the order of the
Fund may be mailed directly to The Shareholder Services Group, Inc., BOS725,
P.O. Box 1559, Boston, MA 02104 at any time. The name of the shareholder and
his account number should accompany each investment.
Bank Draft Investing -- for regular share accumulation. Cash investments of
$50 or more made through the shareholder's checking account via bank draft
each month or quarter. The $1,000 minimum initial investment is waived for
Bank Draft Investing accounts.
Intended Quantity Investment -- Statement of Intention. If it is anticipated
that $100,000 or more of Fund shares and shares of the other continuously
offered open-end funds listed under "The Eaton Vance Exchange Privilege" in
the Prospectus will be purchased within a 13-month period, a Statement of
Intention should be signed so that shares may be obtained at the same reduced
sales charge as though the total quantity were invested in one lump sum.
Shares held under the Right of Accumulation (see below) as of the date of the
Statement will be included toward the completion of the Statement. The
Statement authorizes the Fund's transfer agent to hold in escrow sufficient
shares (5% of the dollar amount specified in the Statement) which can be
redeemed to make up any difference in sales charge on the amount intended to
be invested and the amount actually invested. Execution of a Statement does
not obligate the shareholder to purchase or the Fund to sell the full amount
indicated in the Statement, and should the amount actually purchased during
the 13-month period be more or less than that indicated on the Statement,
price adjustments will be made accordingly. For sales charges and other
information on quantity purchases, see "How to Buy Fund Shares" in the
Prospectus. Any investor considering signing a Statement of Intention should
read it carefully.
Right of Accumulation -- Cumulative Quantity Discount. The applicable sales
charge level for the purchase of Fund shares is calculated by taking the
dollar amount of the current purchase and adding it to the value (calculated
at the maximum current offering price) of the shares the shareholder owns in
his account(s) in the Fund and in the other continuously offered open-end
funds listed under "Exchange Privilege" in the Prospectus. The sales charge on
the shares being purchased will then be at the rate applicable to the
aggregate. For example, if the shareholder owned shares valued at $80,000 of
the Fund, and purchased an additional $20,000 of Fund shares, the sales charge
for the $20,000 purchase would be at the rate of 3.75% of the offering price
(3.90% of the net amount invested) which is the rate applicable to single
transactions of $100,000. For sales charges on quantity purchases, see "How to
Buy Fund Shares" in the Prospectus. Shares purchased (i) by an individual, his
spouse and their children under the age of twenty-one and (ii) by a trustee,
guardian or other fiduciary of a single trust estate or a single fiduciary
account, will be combined for the purpose of determining whether a purchase
will qualify for the Right of Accumulation and if qualifying, the applicable
sales charge level.
For any such discount to be made available, at the time of purchase a
purchaser or his Authorized Firm must provide Eaton Vance Distributors, Inc.
(the "Principal Underwriter") (in the case of a purchase made through an
Authorized Firm) or the Transfer Agent (in the case of an investment made by
mail) with sufficient information to permit verification that the purchase
order qualifies for the accumulation privilege. Confirmation of the order is
subject to such verification. The Right of Accumulation privilege may be
amended or terminated at any time as to purchases occurring thereafter.
PRINCIPAL UNDERWRITER
Shares of the Fund may be continuously purchased at the public offering
price through Authorized Firms which have agreements with Eaton Vance
Distributors, Inc., the Principal Underwriter. The Principal Underwriter is a
wholly-owned subsidiary of Eaton Vance.
The public offering price is the net asset value next computed after
receipt of the order, plus, where applicable, a variable percentage (sales
charge) depending upon the amount of purchase as indicated by the sales charge
table set forth in the Prospectus. Such table is applicable to purchases of
the Fund alone or in combination with purchases of the other funds offered by
the Principal Underwriter, made at a single time by (i) an individual, or an
individual, his spouse and their children under the age of twenty-one,
purchasing shares for his or their own account, and (ii) a trustee or other
fiduciary purchasing shares for a single trust estate or a single fiduciary
account.
The table is also presently applicable to (1) purchases of Fund shares,
alone or in combination with purchases of any of the other funds offered by
the Principal Underwriter through one dealer aggregating $100,000 or more made
by any of the persons enumerated above within a thirteen-month period starting
with the first purchase pursuant to a written Statement of Intention, in the
form provided by the Principal Underwriter, which includes provisions for a
price adjustment depending upon the amount actually purchased within such
period (a purchase not made pursuant to such Statement may be included
thereunder if the Statement is filed within 90 days of such purchase); or (2)
purchases of the Fund pursuant to the Right of Accumulation and declared as
such at the time of purchase (see "Services for Accumulation").
Subject to the applicable provisions of the 1940 Act, the Fund may issue
shares at net asset value in the event that an investment company (whether a
regulated or private investment company or a personal holding company) is
merged or consolidated with or acquired by the Fund. Normally no sales charges
will be paid in connection with an exchange of Fund shares for the assets of
such investment company. Shares may be sold at net asset value to any officer,
director, trustee, general partner or employee of the Fund, the Portfolio or
any investment company for which Eaton Vance acts as investment adviser, any
investment advisory, agency, custodial or trust account managed or
administered by Eaton Vance or by any parent, subsidiary or other affiliate of
Eaton Vance, or any officer, director, trustee or employee of any parent,
subsidiary or other affiliate of Eaton Vance. The terms "officer," "director,"
"trustee," "general partner" or "employee" as used in this paragraph include
any such person's spouse and minor children, and also retired officers,
directors, trustees, general partners and employees and their spouses and
minor children. Shares may also be sold at net asset value to registered
representatives and employees of certain investment dealers and to such
person's spouses and children under the age of 21 and their beneficial
accounts.
The Trust reserves the right to suspend or limit the offering of shares of
the Fund to the public at any time.
The Principal Underwriter acts as principal in selling shares of the Fund
under the distribution agreement with the Trust on behalf of the Fund. The
distribution agreement is renewable annually by the Trust's Board of Trustees
(including a majority of its Trustees who are not interested persons of the
Principal Underwriter or the Trust), may be terminated on six months' notice
by either party, and is automatically terminated upon assignment. The
Principal Underwriter distributes Fund shares on a "best efforts" basis under
which it is required to take and pay for only such shares as may be sold. The
Principal Underwriter allows Authorized Firms discounts from the applicable
public offering price which are alike for all Authorized Firms. See "How to
Buy Shares" in the Prospectus for the discounts allowed to Authorized Firms.
The Principal Underwriter may allow, upon notice to all Authorized Firms,
discounts up to the full sales charge during the periods specified in the
notice. During periods when the discount includes the full sales charge, such
Authorized Firms may be deemed to be underwriters as that term is defined in
the Securities Act of 1933.
The Fund has authorized the Principal Underwriter to act as its agent in
repurchasing shares and will pay the Principal Underwriter $2.50 for each
repurchase transaction handled by the Principal Underwriter. The Principal
Underwriter estimates that the expenses incurred by it in acting as repurchase
agent for the Fund will exceed the amounts paid therefor by the Fund.
DISTRIBUTION PLAN
As described in the Prospectus, in addition to the fees and expenses
described herein, the Fund finances distribution activities and bears expenses
associated with the distribution of its shares and the provision of certain
personal and account maintenance services to shareholders pursuant to a
distribution plan designed to meet the requirements of Rule 12b-1 under the
1940 Act (the "Plan").
Pursuant to such Rule, the Plan has been approved by the sole initial
shareholder of the Fund and by the Board of Trustees of the Trust (including a
majority of those Trustees who are not interested persons of the Trust and who
have no direct or indirect financial interest in the operation of the Plan).
Under the Plan, the President or a Vice President of the Trust shall provide
to the Trustees for their review, and the Trustees shall review at least
quarterly, a written report of the amount expended under the Plan and the
purposes for which such expenditures were made. The Plan remains in effect
through April 28, 1995 and from year to year thereafter, provided such
continuance is approved annually by a vote of the Board of Trustees and by a
majority of those Trustees who are not interested persons of the Trust and who
have no direct or indirect financial interest in the operation of the Plan.
The Plan may not be amended to increase materially the payments described
therein without approval of the shareholders of the Fund, and all material
amendments of the Plan must also be approved by the Trustees in the manner
described above. The Plan may be terminated at any time by vote of a majority
of the Trustees who are not interested persons of the Trust and who have no
direct or indirect financial interest in the operation of the Plan or by a
vote of a majority of the outstanding voting securities of the Fund. If the
Plan is terminated or not continued in effect, the Fund has no obligation to
reimburse the Principal Underwriter for amounts expended by the Principal
Underwriter in distributing shares of the Fund. So long as the Plan is in
effect, the selection and nomination of Trustees who are not interested
persons of the Trust shall be committed to the discretion of the Trustees who
are not such interested persons. The Trustees have determined that in their
judgment there is a reasonable likelihood that the Plan will benefit the Fund
and its shareholders.
The Plan is intended to compensate the Principal Underwriter for its
distribution services to the Fund by paying the Principal Underwriter monthly
distribution fees in connection with the sale of shares of the Fund. The
quarterly service fee paid by the Fund under the Plan is intended to
compensate the Principal Underwriter for its personal and account maintenance
services and for the payment by the Principal Underwriter of service fees to
Authorized Firms.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As at November 30, 1994, the Trustees and officers of the Trust, as a
group, owned in the aggregate less than 1% of the outstanding shares of the
Fund. As of November 30, 1994, Merrill Lynch, Pierce, Fenner & Smith, Inc.,
New Brunswick, NJ was the record owner of approximately 36.0% of the
outstanding shares, which it held on behalf of its customers who are the
beneficial owners of such shares, and as to which they had voting power under
certain limited circumstances. To the knowledge of the Trust, no other person
beneficially owns more than 5% of the Fund's outstanding shares.
<PAGE>
EV TRADITIONAL GREATER CHINA GROWTH FUND
FINANCIAL STATEMENTS
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
August 31, 1994
<S> <C> <C>
ASSETS:
Investment in Greater China Growth Portfolio, at value (Note 1A)
(identified cost, $258,864,405) $315,437,746
Receivable for Fund shares sold 1,429,776
Deferred organization expenses (Note 1D) 84,186
------------
Total assets $316,951,708
LIABILITIES:
Payable for Fund shares redeemed $ 590,336
Payable to affiliates -
Trustees' fees 834
Custodian fee 500
Accrued expenses 130,788
-----------
Total liabilities 722,458
------------
NET ASSETS for 20,134,752 shares of beneficial interest outstanding $316,229,250
============
SOURCES OF NET ASSETS:
Paid-in capital $258,540,509
Accumulated undistributed net realized gain on investment
transactions from Portfolio 1,115,400
Unrealized appreciation of investments from Portfolio
(computed on the basis of identified cost) 56,573,341
------------
Total $316,229,250
============
NET ASSET VALUE PER SHARE
($316,229,250 / 20,134,752 shares of beneficial interest) $ 15.71
=======
COMPUTATION OF OFFERING PRICE:
Offering Price per share (100 / 95.25 of $15.71) $ 16.49
=======
On sales of $100,000 or more, the offering price is reduced.
SEE NOTES TO FINANCIAL STATEMENTS
</TABLE>
<PAGE>
FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
STATEMENT OF OPERATIONS
For the year ended August 31, 1994
<S> <C> <C>
INVESTMENT INCOME (Note 1B):
Investment income allocated from Portfolio $ 4,987,254
Expenses allocated from Portfolio (3,087,783)
------------
Net investment income from Portfolio $ 1,899,471
Expenses:
Management fee (Note 3) $ 674,153
Compensation of Trustees not members
of the Administrator's organization 14,705
Custodian fee (Note 3) 21,315
Distribution fees (Note 5) 1,348,313
Transfer agent fee 248,472
Printing and postage 119,281
Registration fees 58,171
Amortization of organization expenses (Note 1D) 26,240
Legal and accounting fees 16,869
Miscellaneous 116,630
-----------
Total expenses 2,644,149
------------
Net investment loss $ (744,678)
REALIZED AND UNREALIZED GAIN FROM PORTFOLIO:
Net realized gain from investment transactions (identified cost basis) $ 1,982,514
Change in unrealized appreciation of investments 41,532,525
-----------
Net realized and unrealized gain 43,515,039
------------
Net increase in net assets from operations $ 42,770,361
============
SEE NOTES TO FINANCIAL STATEMENTS
</TABLE>
<PAGE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
FOR THE PERIOD FROM
FOR THE YEAR ENDED OCTOBER 28, 1992 (START OF
AUGUST 31, 1994 BUSINESS) TO AUGUST 31, 1993
------------------ ----------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
From operations -
Net investment loss $ (744,678) $ (355,452)
Net realized gain (loss) from Portfolio 1,982,514 (6,534)
Change in unrealized appreciation from Portfolio 41,532,525 15,040,816
------------- -------------
Increase in net assets from operations $ 42,770,361 $ 14,678,830
------------- -------------
Distributions to shareholders from net realized
gain on investment transactions (Note 2) $ (860,580) $ --
------------- -------------
Transactions in shares of beneficial interest (Note 4):
Proceeds from sales of shares $ 224,315,134 $ 145,260,065
Net asset value of shares issued to shareholders in payment
of distributions declared 764,871 --
Cost of shares redeemed (105,077,445) (5,621,996)
------------- -------------
Increase in net assets from Fund share transactions $ 120,002,560 $ 139,638,069
------------- -------------
Net increase in net assets $ 161,912,341 $ 154,316,899
NET ASSETS:
At beginning of period 154,316,909 10
------------- -------------
At end of period (including accumulated net investment loss of
$0 and $355,452, respectively) $ 316,229,250 $ 154,316,909
============= =============
SEE NOTES TO FINANCIAL STATEMENTS
</TABLE>
<PAGE>
FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
FOR THE PERIOD FROM
FOR THE YEAR ENDED OCTOBER 28, 1992 (START OF
AUGUST 31, 1994 BUSINESS) TO AUGUST 31, 1993
------------------ ----------------------------
<S> <C> <C>
NET ASSET VALUE, beginning of period $ 12.450 $ 10.000
--------- ---------
Income From Investment Operations:
Net investment loss $ (0.026) $ (0.029)
Net realized and unrealized gain on investments 3.336 2.479
--------- ---------
Total income from investment operations $ 3.310 $ 2.450
Less distributions:
Distributions in excess of net realized gain on investment
transactions (0.050) --
--------- ---------
NET ASSET VALUE, end of period $ 15.710 $ 12.450
========= =========
TOTAL RETURN 26.56% 24.50%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $ 316,229 $ 154,317
Ratio of net expenses to average net assets <F1> 2.12% 2.47%<F2>
Ratio of net investment loss to average net assets (0.28%) (0.69)%<F2>
<FN>
<F1>Annualized
<F2>Includes the Fund's share of Greater China Growth Portfolio's allocated
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) SIGNIFICANT ACCOUNTING POLICIES
EV Traditional Greater China Growth Fund (the Fund) is a diversified series of
Eaton Vance Growth Trust (the Trust). The Fund changed its name from Eaton Vance
Greater China Growth Fund to EV Traditional Greater China Growth Fund on
December 17, 1993. Theis an entity of the type commonly known as a Massachusetts
business trust and is registered under the Investment Company Act of 1940, as
amended, as an open-end management investment company. The Fund invests all of
its investable assets in interests in Greater China Growth Portfolio (the
Portfolio), a New York Trust, having the same investment objective as the Fund.
The value of the Fund's investment in the Portfolio reflects the Fund's
proportionate interest in the net assets of the Portfolio (43.1% at August 31,
1994). The performance of the Fund is directly affected by the performance of
the Portfolio. The financial statements of the Portfolio, including the
portfolio of investments, are included elsewhere in this report and should be
read in conjunction with the Fund's financial statements. The following is a
summary of significant accounting policies consistently followed by the Fund in
the preparation of its financial statements. The policies are in conformity with
generally accepted accounting principles.
A. INVESTMENT VALUATIONS - Valuation of securities by the Portfolio is discussed
in Note 1 of the Portfolio's Notes to Financial Statements which are included
elsewhere in this report.
B. INCOME - The Fund's net investment income consists of the Fund's pro rata
share of the net investment income of the Portfolio, less all actual and accrued
expenses of the Fund determined in accordance with generally accepted accounting
principles.
C. FEDERAL TAXES - The Fund's policy is to comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies and to
distribute to shareholders each year all of its net investment income, and any
net realized capital gains. Accordingly, no provision for federal income or
excise tax is necessary. At August 31, 1994, net capital losses of $74,268
attributable to currency transactions incurred after October 31, 1993, are
treated as arising on the first day of the Fund's next taxable year.
D. DEFERRED ORGANIZATION EXPENSES - Costs incurred by the Fund in connection
with its organization, including registration costs, are being amortized on the
straight-line basis over five years.
(2) DISTRIBUTIONS TO SHAREHOLDERS
It is the present policy of the Fund to make at least one distribution annually
(normally in December) of all or substantially all of the investment income
allocated to the Fund by the Portfolio, less the Fund's direct and allocated
expenses and at least one distribution annually of all or substantially all of
the net realized capital gains (reduced by any available capital loss
carryforwards from prior years) allocated by the Portfolio to the Fund, if any.
Shareholders may reinvest all distributions in shares of the Fund without a
sales charge at the per share net asset value as of the close of business on the
record date.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis. Generally accepted accounting principles require that only
distributions in excess of tax basis earnings and profits be reported in the
financial statements as a return of capital. Differences in the recognition or
classification of income between the financial statements and tax earnings and
profits which result in over distributions for financial statement purposes are
classified as distributions in excess of net investment income or accumulated
net realized gains. Permanent differences between book and tax accounting are
reclassified to paid-in capital. At August 31, 1994 $1,100,130 was reclassified
from accumulated net investment loss to paid-in capital due to the fact that net
investment losses are not available to reduce required tax distributions. Net
investment income, net realized gains and net assets are not affected by this
reclassification.
(3) MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
The management fee is earned by Eaton Vance Management (EVM) as compensation for
management and administration of the business affairs of the Fund. The fee is
based on a percentage of average daily net assets. For the year ended August 31,
1994 the fee was equivalent to 0.25% (annualized) of the Fund's average net
assets for such period and amounted to $674,153. Except as to Trustees of the
Fund who are not members of EVM's organization, officers and Trustees receive
remuneration for their services to the Fund out of such management fee. Eaton
Vance Distributors, Inc., (EVD), a subsidiary of EVM and the Fund's principal
underwriter, received approximately $1,214,000 as its portion of the sales
charge on sales of Fund shares for the year ended August 31, 1994. EVD also
receives a contingent deferred sales (CDSC) charge on shareholder redemptions
made within 18 months of purchase, where the initial investment in the Fund was
$1 million or more. EVD received $39,972 in CDSC during the period. Investors
Bank & Trust Company (IBT), an affiliate of EVM, serves as custodian of the
Fund. Pursuant to the custodian agreement, IBT receives a fee reduced by credits
which are determined based on the average daily cash balances the Fund maintains
with IBT. Certain officers and Trustees of the Fund and the Portfolio are
directors/trustees of the above organizations. In addition, investment adviser,
administrative fees, and custody fees are paid by the Portfolio to EVM and its
affiliates. See Note 2 of the Portfolio's Notes to Financial Statements which
are included elsewhere in this report.
(4) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
FOR THE YEAR FROM THE START OF BUSINESS
ENDED OCTOBER 28, 1992 TO
AUGUST 31, 1994 AUGUST 31, 1993
--------------- --------------------------
Sales 14,697,988 12,891,214
Issued to shareholders electing to
receive payments of distributions
in Fund shares 46,002 --
Redemptions (7,008,551) (491,902)
---------- --------
Net increase 7,735,439 12,399,312
========= ==========
(5) DISTRIBUTION PLAN
The Fund has adopted a distribution plan (the Plan) pursuant to Rule 12b-1 under
the Investment Company Act of 1940. The Plan requires the Fund to pay the
Principal Underwriter, Eaton Vance Distributors, Inc. (EVD) a monthly
distribution fee equal, on an annual basis, to the aggregate of (a) 0.50% of
that portion of the Fund's average daily net assets for any fiscal year which is
attributable to shares of the Fund which have remained outstanding for less than
one year and (b) 0.25% of that portion of the Fund's average daily net assets
for any fiscal year which is attributable to shares of the Fund which have
remained outstanding for more than one year. During the year ended August 31,
1994 the Fund paid distribution fees to EVD aggregating $1,238,280 representing
0.46% of average daily net assets. The Plan also provides that the Fund will pay
a quarterly service fee to EVD in an amount equal, on an annual basis, to 0.25%
of that portion of the Fund's average daily net assets for any fiscal year which
is attributable to shares of the Fund which have remained outstanding for more
than one year. Such payments are made for personal services and/or the
maintenance of shareholder accounts. The Fund accrued an aggregate of $110,033
for the year ended August 31, 1994 as service fees for EVD under the Plan. EVD
may pay up to the entire amount of the service fee to Authorized Firms through
which the Fund's shares are distributed.
(6) INVESTMENT TRANSACTIONS
Increases and decreases in the Fund's investment in the Portfolio aggregated
$226,184,064 and $107,530,968, respectively.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees and Shareholders of
Eaton Vance Growth Trust:
We have audited the accompanying statement of assets and liabilities of EV
Traditional Greater China Growth Fund (one of the series constituting Eaton
Vance Growth Trust) as of August 31, 1994, and the related statement of
operations for the year then ended, and the statements of changes in net assets,
and the financial highlights for the year ended August 31, 1994 and for the
period from the start of business, October 28, 1992, to August 31, 1993. These
financial statements and financial highlights are the responsibility of the
Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the EV Traditional
Greater China Growth Fund series of the Eaton Vance Growth Trust at August 31,
1994, the results of its operations, the changes in its net assets and its
financial highlights for the respective stated periods in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
October 7, 1994
<PAGE>
GREATER CHINA GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
August 31, 1994
-------------------------------------------------------------------------------
SHARES VALUE
-------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS - 99.0%
-------------------------------------------------------------------------------
CHINA, 3.3%
Dazhong Taxi 850,850 $ 918,918
Shanghai Diesel Engineering* 1,780,000 2,136,000
Shanghai Erfangji Co. Ltd. 5,595,160 2,036,638
Shanghai Industrial Sewing Machine* 740,000 389,240
Shanghai Jin Jiang Tower 2,054,000 1,503,528
Shanghai Phoenix Bicycle Co. 2,615,000 1,704,980
Shanghai Yaohua Pilkington* 4,620,500 5,923,481
Shenzhen China Bicycles Co. 6,996,000 6,020,058
Shenzhen Vanke Co. Ltd. 397,600 288,141
Tyre and Rubber 5,717,600 3,144,680
------------
$ 24,065,664
------------
HONG KONG, 42.5%
Bank of East Asia Hong Kong 1,292,614 $ 5,302,432
Beiren Printing 2,000,000 988,600
Chen Hsong Holdings 11,320,000 7,690,808
Cheung Kong Holdings Ltd. 3,680,000 18,619,696
Cim Company Ltd. 1,800,000 3,028,068
Citic Pacific Ltd. - New 4,570,000 14,577,386
Consolidated Electric Power* 3,738,180 7,231,883
Dah Sing Financial Holdings 2,667,000 7,955,128
Gold Lion Holdings Ltd. 537,000 143,164
Gold Lion Holdings 1995 Warrants* 170,000 5,933
Gold Lion Holdings 1996 Warrants* 170,000 7,701
Guangzhou Investment 12,592,000 3,911,075
Guangzhou Shipyard 3,570,000 1,598,289
Hong Kong Aircraft Engineering Co. Ltd. 853,600 4,042,820
Hong Kong Electric Co. 3,305,000 11,697,056
Hong Kong Land Holdings 2,016,000 5,334,941
Hong Kong Telecommunications Ltd. 6,958,000 15,306,904
Hong Kong & China Gas Co. Ltd. 1,036,000 1,964,049
Hong Kong & China Gas Co. Ltd. Warrants* 353,000 161,710
Hopewell Holdings 16,609,000 15,366,647
HSBC Holdings PLC 1,632,600 19,225,171
Hutchinson Whampoa Hong Kong 4,698,000 23,527,584
Jardine Matheson HK Registry 2,772,400 26,099,928
Johnson Electric Holdings 1,301,500 3,284,205
Li & Fung Ltd. 6,446,000 3,878,558
Maanshan Iron & Steel Co. 8,120,000 2,605,708
Ming Pao Enterprises 8,272,000 6,208,136
National Mutual Ltd. 8,926,000 5,891,160
New World Development Hong Kong 2,635,000 9,189,563
Peregrine Investments Holdings 4,452,666 8,095,392
CP Pokphand Co. Ltd. 4,750,000 1,598,375
S Megga International Ltd. 11,372,000 1,971,905
Shanghai Petrochemical 17,784,000 5,776,243
Shell Electric Manufacturing 6,000,000 3,820,200
Shell Electric Manufacturing 1996 Warrants* 700,000 79,730
Siu Fung Ceramics 24,084,000 5,922,256
South China Industries 5,930,000 767,342
South Sea Development Co. 6,184,464 464,453
Sun Hung Kai Properties Ltd. 1,693,000 12,487,737
Television Broadcasts Ltd. 2,088,000 9,862,250
Tem Fat Hing Fung 28,696,000 5,199,715
Tsingtao Brewery Co. Ltd. 2,248,000 1,898,211
Varitronix International Ltd. 3,482,000 5,226,830
Wharf Holdings 5,370,000 23,070,594
------------
$311,085,536
------------
INDONESIA, 2.7%
Bank International Indonesia 356,000 $ 1,310,187
Barito Pacific Timber 1,219,500 4,670,441
Gadjah Tunggal 2,253,000 4,275,388
PT Indah Kiat Pulp & Paper 6,434,400 7,400,203
PT Argha Karya Prima Ind. 1,303,000 2,023,038
------------
$ 19,679,257
------------
REPUBLIC OF KOREA, 8.2%
Daewoo Corp. 205,549 $ 4,054,741
Daewoo Heavy Industries 199,114 3,951,019
Dong Chang Paper Mfg.* 80,008 729,569
Korea Electric Power Corp. 406,200 16,571,742
Korea Exchange Bank* 509,380 5,790,224
Pohang Iron & Steel Co. Ltd. 45,060 5,904,153
Samsung Electronics 40,590 7,615,557
Samsung Fire & Marine Insurance* 3,920 852,611
Samsung Heavy Industries 67,800 3,719,034
Samwhan Ltd. 25,795 610,919
Yukong Ltd. 198,073 10,122,798
------------
$ 59,922,367
------------
MALAYSIA, 8.8%
Aokam Perdana Berhad 57,000 $ 394,178
Genting Berhad 1,179,000 11,055,247
Hong Leong Industries Berhad 1,357,000 7,422,519
Kim Hin Industry Berhad 1,105,000 6,432,647
Kim Hin Industry Berhad Warrants* 221,000 461,956
Land & General Berhad 3,562,000 15,308,408
Leader Universal Holdings Ltd. 1,375,000 8,058,188
Mulpha International Trading 2,966,666 5,030,278
Perlis Plantations Berhad 770,000 2,587,200
Sime Darby Berhad 2,500,000 7,814,000
------------
$ 64,564,621
------------
THE PHILIPPINES, 7.3%
Ayala Corp. Class B 6,365,760 $ 11,070,693
Bacnotan Consolidated Industries 152,234 1,690,447
Belle Resources Class B* 21,600,000 5,389,200
Philippine Long Distance Telephone 283,700 18,724,200
San Miguel Corporation 2,657,800 14,067,735
SM Prime Holdings* 9,300,000 2,390,927
------------
$ 53,333,202
------------
SINGAPORE, 9.9%
Cerebos Pacific Ltd. 1,249,000 $ 6,868,625
Clipsal Industries Holdings Ltd. 1,100,000 6,270,000
Clipsal Industries Warrants* 117,000 225,810
DBS Land 3,000,000 9,118,800
Development Bank of Singapore 1,140,000 11,778,480
Overseas Union Bank 1,020,000 5,371,320
Qaf Ltd. 5,500,000 5,169,450
Qaf Limited Warrants 1998* 840,000 498,372
Qaf Loan Stock 420,000 226,758
Sembawang Maritime 2,266,000 10,271,098
Singapore Airlines Ltd. 1,075,000 10,103,603
Straits Steamship Land 2,102,500 6,250,522
------------
$ 72,152,838
------------
TAIWAN, 5.0%
Cheng Shin Industries 371,040 $ 555,261
China Steel Corp. 2,500,000 2,701,000
China Steel Corp. GDR* 70,000 1,837,500
China Trust Business Bank 1,654,580 4,610,984
Formosa Chemical 1,387,360 2,134,453
Formosa Plastics 2,490,000 5,893,581
Nan Ya Plastic 3,067,085 6,966,884
Sampo 3,006,080 4,900,211
United Microelectronics Co. 2,500,000 5,297,000
Victor Taichung Machinery* 820,000 2,097,396
------------
$ 36,994,270
------------
THAILAND, 11.0%
Bangkok Bank 618,200 $ 6,666,669
NTS Steel Group 1,924,800 5,189,260
NTS Steel Group Co. (Local) 695,200 1,790,974
PTT Explo. & Produc. 93,000 794,904
Saha Union Corp. Ltd. (Ordinary) 5,890,240 6,940,467
Saha Union Corp. Ltd. (Foreign) 252,800 302,905
Siam Cement (Local) 343,400 19,064,813
Siam Cement (Foreign) 176,900 10,499,404
Siam Commercial Bank 1,891,300 19,640,394
Sri Trang Agro-Ind 125,000 307,048
Thailand Military Bank (Local) 300,000 1,156,290
Thailand Military Bank (Foreign) 2,021,500 8,477,767
------------
$ 80,830,895
------------
UNITED STATES, 0.3%
AES China Generating Co. Ltd.* 210,000 $ 2,493,750
------------
TOTAL INVESTMENTS (IDENTIFIED COST, $627,782,379) $725,122,400
Other Assets, 1.0% 7,490,277
------------
NET ASSETS, 100.0% $732,612,677
============
* Non-income producing security
GDR - Global depository receipt
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
August 31, 1994
ASSETS:
Investments, at value (Note 1A) (Identified
cost, $627,782,379) $725,122,400
Cash denominated in foreign currencies
(cost, $2,422,833) 2,423,448
Cash 21,161,317
Receivable for investments sold 4,647,731
Dividends and interest receivable 952,455
Deferred organization expenses (Note 1C) 91,869
------------
Total assets $754,399,220
LIABILITIES:
Payable for investments purchased $ 21,762,159
Payable to affiliates -
Custodian fee 22,000
Trustees' fees 1,250
Accrued expenses 1,134
------------
Total liabilities 21,786,543
------------
NET ASSETS applicable to investors'
interest in Portfolio $732,612,677
============
SOURCES OF NET ASSETS:
Net proceeds from capital contributions
and withdrawals $635,269,404
Net unrealized appreciation of investments
(computed on the basis of identified cost) 97,340,021
Net unrealized appreciation of foreign
currencies 3,252
------------
TOTAL $732,612,677
============
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
FINANCIAL STATEMENTS (CONTINUED)
-------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
For the year ended August 31, 1994
INVESTMENT INCOME:
Income -
Dividends (net of foreign taxes of $636,647) $ 9,767,109
Interest 625,928
------------
Total income $ 10,393,037
Expenses -
Investment adviser fee (Note 2) $4,100,334
Administration fee (Note 2) 1,383,471
Custodian fee (Note 2) 744,566
Legal & audit fees 41,393
Amortization of organization expense
(Note 1C) 28,638
Trustees' fees 16,250
Miscellaneous 53,671
----------
Total expenses 6,368,323
------------
Net investment income $ 4,024,714
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized loss on investment transactions
computed on the basis of identified cost $(11,068,453)
------------
Change in unrealized appreciation
Investments $ 79,234,677
Foreign currency 1,952
------------
Net unrealized appreciation $ 79,236,629
------------
Net realized and unrealized gain on investments $ 68,168,176
------------
Net increase in net assets from operations $ 72,192,890
============
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
-------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIOD
FOR THE YEAR OCTOBER 28, 1992
ENDED (START OF BUSINESS)
AUGUST 31, 1994 TO AUGUST 31, 1993
--------------- ------------------
INCREASE (DECREASE) IN NET ASSETS:
From operations -
Net investment income $ 4,024,714 $ 211,356
Net realized loss on investment
transactions (11,068,453) (6,065)
Net increase in unrealized appreciation
of investments 79,234,677 18,105,344
Net increase in unrealized appreciation
of foreign currency 1,952 1,300
------------- ------------
Increase in net assets from operations $ 72,192,890 $ 18,311,935
------------- ------------
Capital transactions:
Contributions $ 636,873,995 $195,865,086
Withdrawals (184,497,094) (6,234,145)
------------- ------------
Increase in net assets resulting from
capital transactions $ 452,376,901 $189,630,941
------------- ------------
Total increase in net assets $ 524,569,791 $207,942,876
NET ASSETS:
At beginning of period 208,042,886 100,010
------------- ------------
At end of period $ 732,612,677 $208,042,886
============= ============
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
FINANCIAL STATEMENTS (CONTINUED)
-------------------------------------------------------------------------------
SUPPLEMENTARY DATA
FOR THE PERIOD
FOR THE YEAR OCTOBER 28, 1992
ENDED (START OF BUSINESS)
AUGUST 31, 1994 TO AUGUST 31, 1993
--------------- ------------------
RATIOS (As a percentage of average net assets):
Expenses 1.15% 1.38%*
Net investment income 0.73% 0.38%*
PORTFOLIO TURNOVER 36% 18%
* Annualized
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
(1) SIGNIFICANT ACCOUNTING POLICIES
Greater China Growth Portfolio (the "Portfolio") is registered under the
Investment Company Act of 1940 as a diversified, open end investment company
which was organized as a trust under the laws of the State of New York on
September 1, 1992. The Declaration of Trust permits the Trustees to issue
interests in the Portfolio. The following is a summary of the significant
accounting policies of the Portfolio. The policies are in conformity with
generally accepted accounting principles.
A. INVESTMENT VALUATIONS - Marketable securities, including options, that are
listed on foreign or U.S. securities exchanges or in the NASDAQ National Market
System are valued at closing sale prices, on the exchange where such securities
are principally traded. Futures positions on securities or currencies are
generally valued at closing settlement prices. Unlisted or listed securities for
which closing sale prices are not available are valued at the mean between the
latest bid and asked prices. Short term debt securities with a remaining
maturity of 60 days or less are valued at amortized cost. Other fixed income and
debt securities, including listed securities and securities for which price
quotations are available, will normally be valued on the basis of valuations
furnished by a pricing service. Investments for which valuations or market
quotations are unavailable are valued at fair value using methods determined in
good faith by or at the direction of the Trustees.
B. FEDERAL TAXES - The Portfolio has elected to be treated as a partnership for
Federal tax purposes. No provision is made by the Portfolio for federal or state
taxes on any taxable income of the Portfolio because each investor in the
Portfolio is individually responsible for the payment of any taxes on its share
of such income. Since some of the Portfolio's investors are regulated investment
companies that invest all or substantially all of their assets in the Portfolio,
the Portfolio normally must satisfy the applicable source of income and
diversification requirements, (under the Internal Revenue Code), in order for
its investors to satisfy them. The Portfolio will allocate, at least annually
among its investors, each investor's distributive share of the Portfolio's net
investment income, net realized capital gains, and any other items of income,
gain, loss, deduction or credit. Withholding taxes on foreign dividends and
capital gains have been provided for in accordance with the Trust's
understanding of the applicable countries' tax rules and rates.
C. DEFERRED ORGANIZATION EXPENSES - Costs incurred by the Portfolio in
connection with its organization, including registration costs, are being
amortized on the straight-line basis over five years.
D. FUTURES CONTRACTS - Upon the entering of a financial futures contract, the
Portfolio is required to deposit ("initial margin") either in cash or securities
an amount equal to a certain percentage of the purchase price indicated in the
financial futures contract. Subsequent payments are made or received by the
Portfolio ("margin maintenance") each day, dependent on daily fluctuations in
the value of the underlying security, and are recorded for book purposes as
unrealized gains or losses by the Portfolio. The Portfolio's investment in
financial futures contracts is designed only to hedge against anticipated future
changes in interest or currency exchange rates. Should interest or currency
exchange rates move unexpectedly, the Portfolio may not achieve the anticipated
benefits of the financial futures contracts and may realize a loss. If the
Portfolio enters into a closing transaction, the Portfolio will realize, for
book purposes, a gain or loss equal to the difference between the value of the
financial futures contract to sell and financial futures contract to buy.
E. FOREIGN CURRENCY TRANSLATION - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investment securities and income and expenses are converted
into U.S. dollars based upon currency exchange rates prevailing on the
respective dates of such transactions. Recognized gains or losses on investment
transactions attributable to foreign currency rates are recorded for financial
statement purposes as net realized gains and losses on investments. That portion
of unrealized gains and losses on investments that result from fluctuations in
foreign currency exchange rates are not separately disclosed.
F. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS - The Portfolio may enter into
forward foreign currency exchange contracts for the purchase or sale of a
specific foreign currency at a fixed price on a future date. Risks may arise
upon entering these contracts from the potential inability of counter parties to
meet the terms of their contracts and from movements in the value of a foreign
currency relative to the U.S. dollar. The Portfolio will enter into forward
contracts for hedging purposes as well as non-hedging purposes. The forward
foreign currency exchange contracts are adjusted by the daily exchange rate of
the underlying currency and any gains or losses are recorded for financial
statement purposes as unrealized until such time as the contracts have been
closed or offset.
G. OTHER - Investment transactions are accounted for on the date the investments
are purchased or sold. Dividend income is recorded on the ex-dividend date.
However, if the ex-dividend date has passed, certain dividends from foreign
securities are recorded as the Portfolio is informed of the ex-dividend date.
Interest income is recorded on the accrual basis.
-------------------------------------------------------------------------------
(2) INVESTMENT ADVISER FEE AND OTHER TRANSACTIONS WITH AFFILIATES
The investment adviser fee is earned by Lloyd George Management (Hong
Kong)Limited (the Adviser) as compensation for management and investment
advisory services rendered to the Portfolio. Under the advisory agreement, the
Adviser receives a monthly fee of 0.0625% (0.75% annually) of the average daily
net assets of the Portfolio up to $500,000,000, and at reduced rates as daily
net assets exceed that level. For the year ended August 31, 1994 the adviser fee
was 0.74% of average net assets. In addition,an administrative fee is earned by
Eaton Vance Management (EVM) for managing and administering the business affairs
of the Portfolio. Under the administration agreement, EVM earns a monthly fee in
the amount of 1/48th of 1% (equal to 0.25% annually) of the average daily net
assets of the Portfolio up to $500,000,000, and at reduced rates as daily net
assets exceed that level. For the year ended August 31, 1994, the administration
fee was 0.25% of average net assets. Except as to Trustees of the Portfolio who
are not members of the Adviser or EVM's organization, officers and Trustees
receive remuneration for their services to the Portfolio out of such investment
adviser and administrative fees. Investors Bank &Trust Company (IBT), an
affiliate of EVM, serves as custodian of the Portfolio. Pursuant to the
custodian agreement, IBT receives a fee reduced by credits which are determined
based on the average daily cash balances the Portfolio maintains with IBT.
Certain of the officers and Trustees of the Portfolio are officers or
directors/trustees of the above organizations.
-------------------------------------------------------------------------------
(3) INVESTMENT TRANSACTIONS
Purchases and sales of investments, other than short-term obligations,
aggregated $658,786,181 and $191,100,296, respectively.
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(4) FEDERAL INCOME TAX BASIS OF INVESTMENTS
The cost and unrealized appreciation (depreciation) in value of the investments
owned at August 31, 1994, as computed on a federal income tax basis, are as
follows:
Aggregate cost $627,782,379
============
Gross unrealized appreciation $123,350,391
Gross unrealized depreciation 26,010,370
------------
Net unrealized appreciation $ 97,340,021
============
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(5) RISKS ASSOCIATED WITH FOREIGN INVESTMENTS
Investing in securities issued by companies whose principal business activities
are outside the United States may involve significant risks not present in
domestic investments. For example, there is generally less publicly available
information about foreign companies, particularly those not subject to the
disclosure and reporting requirements of the U.S. securities laws. Foreign
issuers are generally not bound by uniform accounting, auditing, and financial
reporting requirements and standards of practice comparable to those applicable
to domestic issuers. Investments in foreign securities also involve the risk of
possible adverse changes in investment or exchange control regulations,
expropriation or confiscatory taxation, limitation on the removal of funds or
other assets of the Portfolio, political or financial instability or diplomatic
and other developments which could affect such investments. Foreign stock
markets, while growing in volume and sophistication, are generally not as
developed as those in the United States, and securities of some foreign issuers
(particularly those located in developing countries) may be less liquid and more
volatile than securities of comparable U.S. companies. In general, there is less
overall governmental supervision and regulation of foreign securities markets,
broker-dealers, and issuers than in the United States.
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(6) LINE OF CREDIT
The Portfolio participates with other portfolios and funds managed by EVM and
its affiliates in a $120 million unsecured line of credit agreement with a bank.
The line of credit consists of a $20 million committed facility and a $100
million discretionary facility. Borrowings will be made by the Portfolio solely
to facilitate the handling of unusual and/or unanticipated short-term cash
requirements. Interest is charged to each portfolio based on its borrowings at
an amount above either the bank's adjusted certificate of deposit rate, a
variable adjusted certificate of deposit rate, or a federal funds effective
rate. In addition, a fee computed at an annual rate of 1/4 of 1% on the $20
million committed facility and on the daily unused portion of the $100 million
discretionary facility is allocated among the participating funds and portfolios
at the end of each quarter. The Portfolio did not have any significant
borrowings or allocated fees during the period.
<PAGE>
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INDEPENDENT AUDITORS' REPORT
To the Trustees and Investors of
Greater China Growth Portfolio:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Greater China Growth Portfolio as of August 31,
1994, and the related statement of operations for the year then ended, the
statement of changes in net assets and the supplementary data for the year ended
August 31, 1994 and for the period from the start of business, October 28, 1992,
to August 31, 1993. These financial statements and supplementary data are the
responsibility of the Portfolio's management. Our responsibility is to express
an opinion on these financial statements and supplementary data based upon our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and supplementary
data are free of material misstatement. An audit includes examining on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at
August 31, 1994, by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and supplementary data present fairly,
in all material respects, the financial position of Greater China Growth
Portfolio at August 31, 1994, the results of its operations, the changes in its
net assets and its supplementary data for the respective stated periods, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
October 7, 1994
<PAGE>
APPENDIX C
EV
Traditional
Greater AN
China EATON
Growth VANCE
Fund TRADITIONAL
FUND
<PAGE>
Investing in China
For Long-Term Capital Appreciation
The People's Republic of China ("China") and the surrounding countries of the
China region have recently become one of the most exciting and potentially
profitable areas for investors seeking capital appreciation. But capturing the
investment opportunity in China is challenging.
EV Traditional Greater China Growth Fund is a mutual fund that seeks capital
appreciation by investing in interests in a Portfolio of equity securities of
companies that, in the opinion of the Portfolio's investment adviser, will
benefit from the economic development and growth of China. The Fund offers
investors the advantages and convenience of an open-end mutual fund and the
benefits of an experienced, Hong Kong-based investment adviser with specialized
knowledge of the emerging East Asian markets.
Of course, while Eaton Vance believes that the opportunities for long-term
capital appreciation are excellent, investors should consider carefully the
risks involved in committing a portion of their assets to the Fund.
Such risks, for example, may include fluctuations in foreign exchange rates,
political or economic instability in the country in which the security's issuer
is located, and the possible imposition of exchange controls or other laws or
restrictions. In addition, foreign securities markets may be less liquid, more
volatile and subject to less government supervision than in the United States.
Further, there is no guarantee that the economy or stock market of China will
continue to grow as they have in the past, or that EV Traditional Greater China
Growth Fund will benefit from such growth. Share values will fluctuate and, when
redeemed, may be worth more or less than at the time of purchase.
CHINA IS NOW ONE OF THE WORLD'S FASTEST GROWING ECONOMIES
In recent years, China has undergone remarkable change. China has embraced
economic reforms that have turned it into one of the world's most spectacularly
growing economies. Following strong growth in recent years, Gross Domestic
Product (GDP) in 1995 is forecast to grow by more than 9 percent. China's
leadership has officially declared this rapid growth as China's principal
political objective, until at least the turn of the century. China is also
influencing the growth rates of its neighbors: the average real (inflation
adjusted) GDP growth rate of the China region has been over 7.0 percent annually
for the past 6 years, compared with just 3 percent or less in Europe and the
United States.
Source: Lloyd George Management Ltd.
<PAGE>
Greater China And
China's Special Economic Zones
IN ORDER TO ATTRACT FOREIGN INVESTMENT, SINCE 1978 CHINA HAS DESIGNATED CERTAIN
AREAS OF THE COUNTRY WHERE OVERSEAS INVESTORS CAN RECEIVE SPECIAL INVESTMENT
INCENTIVES AND TAX CONCESSIONS. THERE ARE FIVE SPECIAL ECONOMIC ZONES (SHENZHEN,
SHANTOU AND ZHUHAI IN GUANGDONG PROVINCE, XIAMEN IN FUJIAN PROVINCE AND HAINAN
ISLAND, WHICH ITSELF IS A PROVINCE).
IN ADDITION, 14 COASTAL CITIES HAVE BEEN DESIGNATED AS "OPEN CITIES" AND CERTAIN
OPEN ECONOMIC ZONES HAVE BEEN ESTABLISHED IN COASTAL AREAS. SHANGHAI HAS
ESTABLISHED THE PUDONG NEW AREA. TWENTY-SEVEN HIGH AND NEW TECHNOLOGY INDUSTRIAL
DEVELOPMENT ZONES HAVE BEEN APPROVED WHERE PREFERENTIAL TREATMENT IS GIVEN TO
ENTERPRISES WHICH ARE CONFIRMED AS TECHNOLOGY-RELATED.
<PAGE>
China's Potential
For Growth
With 1.2 billion people, China houses one quarter of the world's population.
China's population is young - an average 15 years younger than that of developed
Western countries, and its work force of approximately 600 million is five times
the size of the U.S. work force.
Source: Lloyd George Management Ltd.
DESPITE LOWER WAGES, CHINA'S SAVINGS RATE IS MORE THAN TWICE THAT OF THE UNITED
STATES
The average monthly wage is between 200 and 300 renminbi, or approximately $75 -
$85. This compares to an average U.S. monthly wage of nearly $2,050. China's
savings rate of 42 percent of Gross National Product (GNP) is more than three
times that of the U.S. China's savings pool currently exceeds $250 billion, and
savings rates throughout the China region are correspondingly high. In 1994 the
gross national savings rate (as a percentage of GNP) in Singapore was a
remarkable 47.5 percent, followed closely by 42 percent in China, 36.6 percent
in Indonesia, 35.6 percent in Korea, 32.5 percent in Hong Kong, 31.7 percent in
Thailand, 28 percent in Taiwan, 24 percent in India, and 21 percent in the
Philippines. By comparison, the savings rate in the United States was only 12
percent for the same period.
Source: Lloyd George Management Ltd.
US VS. CHINA:
A FINANCIAL COMPARISON
The table below compares financial statistics and consumption of various
products in the U.S. and China (all figures are annual, per person, except where
otherwise noted).
UNITED
STATES CHINA
GROSS NATIONAL PRODUCT ($US) $21,665 $395
AVERAGE MONTHLY WAGE ($US) $1,919 $38
PRIMARY ENERGY (TONS OF OIL EQUIVALENT) 7.5 0.64
COPPER (POUNDS) 20.0 0.9
ALUMINUM (POUNDS) 40.7 1.5
RAW STEEL (POUNDS) 880.0 165.0
RICE (POUNDS) 15.5 775.0
MEAT (POUNDS) 245.0 50.0
SUGAR (POUNDS) 140.0 9.6
SOFT DRINKS (GALLONS) 96.0 1.0
TV SETS (PER 1,000 PEOPLE) 885.0 8.0
NEWSPRINT (POUNDS) 125.0 3.0
TELEPHONE LINES (PER 1,000 PEOPLE) 520.0 5.3
CARS (PER 1,000 PEOPLE) 525.0 1.4
REFRIGERATORS (PER 1,000 PEOPLE) 390.0 2.6
Source: Lloyd George Management Ltd.
<PAGE>
(Horizontal Bar Chart)
1994 AVERAGE FACTORY WAGES PER MONTH
$U.S.
$3,574 Japan
$2,041 USA
$1,247 South Korea
$1,208 Taiwan
$1,191 Singapore
$1,140 Hong Kong
$ 346 Malaysia
$ 225 Spec. Economic Zones
$ 156 Thailand
$ 124 Philippines
$ 82 China
$ 66 Indonesia
Source: Lloyd George Management Ltd.
AT PRESENT, THERE IS AN ENORMOUS DISPARITY IN LABOR COSTS BETWEEN THE EMERGING
ASIAN COUNTRIES (CHINA, INDONESIA, THE PHILIPPINES, THAILAND AND MALAYSIA) AND
THOSE THAT ARE MORE INDUSTRIALIZED. OVER THE NEXT DECADE THERE IS STRONG REASON
TO BELIEVE THAT THE EMERGING COUNTRIES WILL START TO MOVE THEIR MANUFACTURING
FOCUS UPSCALE, SHIFTING FROM SUCH GOODS AS PLASTIC FLOWERS, TEXTILES AND TOYS,
TO COLOR TELEVISION SETS AND COMPUTERS, EMULATING THE LEAD OF SOUTH KOREA AND
TAIWAN.
WHAT ALL COUNTRIES OF THE REGION SHARE IS AN EQUITABLE WAGE STRUCTURE. UNLIKE
THE UNITED STATES, FOR EXAMPLE, WHERE A CHIEF EXECUTIVE OFFICER COULD EASILY
EARN 100 TIMES MORE THAN WHAT A PRODUCTION-LINE WORKER IN THE SAME COMPANY
MAKES, THE WAGE DIFFERENTIAL WITHIN THE CHINA REGION IS FAR SMALLER. IN SOUTH
KOREA, FOR EXAMPLE, THE DIFFERENCE BETWEEN THE TWO AT THE COUNTRY'S LARGEST
COMPANY IS ONLY NINE-FOLD.
(Horizontal Bar Chart)
AVERAGE GROWTH IN GROSS NATIONAL PRODUCT: 1989-1994
Percent
19.03% China/Spec. Economic Zones
9.25% Thailand
8.80% Malaysia
8.30% Singapore
7.21% South Korea
6.80% Indonesia
6.41% Taiwan
4.60% Hong Kong
2.60% Philippines
1.90% United States
Source: Lloyd George Management Ltd.
THE AVERAGE REAL (INFLATION-ADJUSTED) GROSS DOMESTIC PRODUCT GROWTH RATE IN ASIA
HAS BEEN 7.0 PERCENT ANNUALLY OVER THE PAST 6 YEARS COMPARED WITH 3 PERCENT OR
LESS IN EUROPE AND THE UNITED STATES. ALTHOUGH MUCH WILL DEPEND ON THE
PRESERVATION OF THE INTERNATIONAL FREE TRADE SYSTEM, INTER-REGIONAL GROWTH IN
ASIAN TRADE HAS BECOME A MAJOR FACTOR IN THE CONTINUING SUPERIOR PERFORMANCE OF
ASIAN COUNTRIES.
THE LINKS BETWEEN CHINA AND HONG KONG, BETWEEN CHINA AND TAIWAN AND BETWEEN
CHINA AND OTHER COUNTRIES WITHIN THE REGION, WHERE THERE IS A SIGNIFICANT
OVERSEAS CHINESE POPULATION, HAVE BY NOW BEEN STRENGTHENED TO A DEGREE WHICH
MAKES A REVERSAL UNLIKELY. MOREOVER, ALTHOUGH THESE LINKS HAVE BEEN DEVELOPED TO
A STAGE WHERE ECONOMIC COOPERATION IN TRADE OPERATES SMOOTHLY, THE FULL
POTENTIAL OF THE MARKET, BOTH IN TERMS OF DOMESTIC CONSUMPTION AND OF EXPORT
GROWTH, HAS HARDLY BEGUN TO BE REALIZED.
<PAGE>
Chinese society has been based on the tenets of Confucius, which advocate order,
respect, hierarchy, good manners and the sacrifice of the individual for the
greater good of the family and the community. Chinese culture has favored hard
work, achievement and thrift, which is reflected in China's high savings rate.
THE `OVERSEAS' CHINESE ARE LEADING CHINA'S TRANSFORMATION FROM CENTRAL PLANNING
TOWARD A MARKET-DRIVEN ECONOMY
The "overseas" Chinese - those living outside China - are leading China's
transformation from central planning toward a market-driven economy by supplying
capital and management expertise to complement the low-cost labor and land
resources of mainland China. Eaton Vance Management estimates that 75 percent of
all trade in most of the China region today goes through firms controlled by
overseas Chinese. By far the largest part of foreign contracted investment,
presently running at a $68 billion annual rate, is coming from the overseas
Chinese. It is this direct foreign investment - with its technology, management
skills and export potential - that is transforming China's economy, leading many
observers to believe that China will assume the leadership in Asia within the
next 20 years. With the overseas Chinese leading the way, foreign trade now
accounts for more than 15 percent of China's GNP. The establishment of "Special
Economic Zones" along China's south coast, which welcomed foreign firms and
foreign capital, has fostered the rapid development of China's export markets.
Comments by paramount leader Deng Xiaoping early in 1992, holding up the
experience of the Special Economic Zones as the model on which China should base
its future, form a basis for confidence in the sustainability and growth of
economic reform throughout China.
ECONOMIC PLANS NOW INCLUDE OBJECTIVES TO FURTHER INCREASE THE EXPORT ELEMENT OF
THE ECONOMY
Economic plans covering the last decade of the 20th century now include
objectives to quadruple the country's 1980 industrial and agricultural output by
the year 2000...to further increase the export element of the economy...and to
continue to open the country with further development of the designated special
investment areas.
(Horizontal Line Chart)
CHINA'S EXPORTS ARE ON THE RISE
$U.S. billion
Exports Imports
1988 $ 44.6 $ 56.0
1989 $ 51.1 $ 59.0
1990 $ 61.9 $ 52.0
1991 $ 70.7 $ 62.5
1992 $ 84.9 $ 80.0
1993 $ 91.2 $104.7
1994E $111.2 $123.3
1995E $127.8 $137.9
Source: Lloyd George Management Ltd.
<PAGE>
(Horizontal Bar Chart)
1994 GROSS NATIONAL SAVINGS AS A % OF
GROSS NATIONAL PRODUCT
47.5% Singapore
42.0% China
36.6% Indonesia
35.6% Korea
32.5% Hong Kong
31.7% Thailand
28.0% Taiwan
24.0% India
21.0% Philippines
12.0% United States
Source: Lloyd George Management Ltd.
THE CITIZENS OF THE CHINA REGION ARE PRODIGIOUS SAVERS - AND INVESTORS. IN 1994,
THE GROSS NATIONAL SAVINGS RATE (AS A PERCENTAGE OF GROSS NATIONAL PRODUCT) IN
SINGAPORE WAS A REMARKABLE 47.5 PERCENT, FOLLOWED CLOSELY BY 42 PERCENT IN
CHINA, 36.6 PERCENT IN INDONESIA, 35.6 PERCENT IN KOREA, 32.5 PERCENT IN HONG
KONG, 31.7 PERCENT IN THAILAND, 28 PERCENT IN TAIWAN, 24 PERCENT IN INDIA AND 21
PERCENT IN THE PHILIPPINES. BY COMPARISON, THE SAVINGS RATE IN THE UNITED
STATES, AS A PERCENTAGE OF GNP, FOR THE SAME PERIOD WAS ONLY 12 PERCENT.
(Horizontal Bar Chart)
FOREIGN INVESTMENT IS GROWING RAPIDLY
$U.S. billion
1994 $27.7
1993 $25.0
1992 $13.0
1991 $ 4.9
1990 $ 4.9
Source: Ministry of Foreign Economic Relations & Trade; State Statistical Bureau
of the People's Republic of China
ACTUAL FOREIGN INVESTMENT HAS GROWN TO $U.S. 27.7 BILLION IN 1994 FROM $U.S.
25.0 BILLION IN 1993 AND APPROXIMATELY $U.S. 13.0 BILLION IN 1992. FOREIGN
INVESTMENT IN 1991 AND 1990 WERE BELOW $U.S. 5.0 BILLION.
INVESTMENT IN TAIWAN AND CHINA'S FUJIAN PROVINCE CONTINUES TO GROW. MOST OF HONG
KONG'S MANUFACTURING INVESTMENT HAS BEEN IN CHINA'S GUANGDONG PROVINCE, AND MORE
THAN 3 MILLION WORKERS ARE NOW EMPLOYED IN THE PROVINCE, WORKING FOR HONG KONG
COMPANIES.
LLOYD GEORGE MANAGEMENT ESTIMATES THAT 75 PERCENT OF ALL TRADE IN MOST OF THE
CHINA REGION TODAY GOES THROUGH FIRMS CONTROLLED BY THE OVERSEAS CHINESE.
<PAGE>
Over the past 20 years, the performance of the China region stock markets has
generally been better than those in the United States and Europe. In the past
five years, these newly emerging securities markets have demonstrated
significant growth in market capitalization, in the numbers of listed securities
and the volume of transactions. In addition, with reasonable price-to-earnings
ratios, the stock markets of the China region currently offer excellent value
compared to other countries.
Two stock exchanges have opened in China - the Shenzhen and the Shanghai. Class
"A" and Class "B" shares are traded on both. While only resident Chinese can
purchase Class "A" shares, foreign investors (such as EV Traditional Greater
China Growth Fund) can purchase Class "B" shares.
The Shenzhen Stock Exchange, established in April 1991, officially opened in
July 1991 with 6 listed companies. By December 1994, 114 stocks were traded, of
which 22 were "B" shares.*
The Shanghai Stock Exchange, established in November 1990, officially opened in
December 1990 with 8 listed companies. By December 1994, 171 stocks were traded,
of which 32 were "B" shares.*
* Source: Lloyd George Management Ltd.
(Horizontal Bar Chart)
COMPARATIVE CHINA REGION PRICE/EARNINGS RATIOS
Year end 1994
20.6 Thailand
21.7 Malaysia
22.2 Singapore
14.4 United States
25.8 Philippines
28.7 Taiwan
17.8 Indonesia
18.7 South Korea
11.0 Hong Kong
Source: Lloyd George Management Ltd.
MOST OF THE STOCK MARKETS OF THE CHINA REGION CURRENTLY OFFER EXCELLENT VALUES.
<PAGE>
EV Traditional
Greater China Growth Fund
THE FUND OFFERS INVESTORS
THE POTENTIAL TO BENEFIT
FROM CHINA'S GROWTH
The investment objective of EV Traditional Greater China Growth Fund is
long-term capital appreciation.
The Fund offers investors the potential to benefit from the economic development
and growth of China. It invests in interests in the Greater China Growth
Portfolio. The Portfolio invests primarily in equities traded on the securities
markets in the China region, including the two stock exchanges in China itself.
The Portfolio may invest in the common and preferred stocks of companies that
provide goods or services to, or from within, the People's Republic of China
(China), or have manufacturing or other operations in China - and that are
normally listed on Southeast Asian stock exchanges or traded on their
over-the-counter markets.
FUND SHARES ARE NOT INSURED BY THE FDIC AND ARE NOT DEPOSITS OR OTHER
OBLIGATIONS OF, OR GUARANTEED BY, ANY DEPOSITORY INSTITUTION. SHARES ARE SUBJECT
TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL INVESTED.
PORTFOLIO INVESTMENTS
INCLUDE COUNTRIES THROUGHOUT
THE CHINA REGION
The countries in which the Portfolio may invest include:
o China o Singapore
o Hong Kong o South Korea
o Indonesia o Taiwan
o Malaysia o Thailand
o Philippines
<PAGE>
Any well-managed investment, be it a start-up portfolio or a billion-dollar
institutional account, requires in-depth knowledge of markets, products,
management styles and, to the extent possible, a keen sense of economic and
political trends - past, current and future.
But investing in emerging overseas markets calls for even more. And that is a
thorough understanding of the cultures, history and attitudes of the people and
countries in which assets will be placed.
While there is no shortage of expertise in the established markets of North
America, Japan and Europe, there are relatively few advisers dedicated to the
emerging markets of the China region.
(Horizontal Bar Chart)
THE GROWTH OF THE CHINA REGION'S EMERGING MARKETS
Percent change in market capitalization 1984-1994
Indonesia 79000
Philippines 19000
Korea 3200
Taiwan 2470
Hong Kong 1263
Singapore 1008
Malaysia 697
Thailand 167
Source: Lloyd George Management Ltd.
THE MAJOR ASIAN SECURITIES MARKETS HAVE GENERALLY OUTPERFORMED THOSE IN EUROPE
AND THE UNITED STATES OVER THE PAST 20 YEARS. IN THE PAST FIVE YEARS, THE CHINA
REGION'S NEWLY EMERGING MARKETS HAVE GROWN DRAMATICALLY IN MARKET
CAPITALIZATION, IN NUMBERS OF LISTED SECURITIES AND IN THE VOLUME OF
TRANSACTIONS.
<PAGE>
The Investment Adviser:
Lloyd George Management (Hong Kong) Limited
THE ADVISER, LLOYD GEORGE MANAGEMENT, HAS EXTENSIVE, HANDS-ON EXPERIENCE IN THE
CHINA REGION
Lloyd George Management (Hong Kong) Limited, the Portfolio's investment adviser,
comprises a group of highly qualified and experienced investment professionals.
Individually and collectively, they have extensive hands-on experience in the
securities markets of the China region, including the management of several
regional mutual funds.
Based in Hong Kong, Lloyd George Management is ideally situated to monitor the
pulse of the China region, select the securities for the Portfolio and manage,
on a day-to-day basis, its assets.
EATON VANCE IS THE FUND'S
SPONSOR AND ADMINISTRATOR
The Fund's sponsor and administrator is Eaton Vance Management, a Boston-based
investment firm founded in 1924. Eaton Vance currently manages approximately $15
billion in assets for more than 140 mutual funds, whose investment objectives
range from tax free and taxable income to maximum capital appreciation, as well
as individual and institutional accounts for retirement plans, pension funds and
endowments.
<PAGE>
Shareholder
Privileges
o Invest a minimum of $1,000. The minimum subsequent investment is only $50.
o Dividends and capital gains distributions may be taken in cash, or reinvested
at net asset value in additional shares.
o Reduced sales charges are available, through a Letter of Intention or Right
of Accumulation.
o No sales charges are applied to investments of $1 million or more. Please see
a prospectus for details of the Fund's contingent deferred sales charge,
applied to early withdrawals on these accounts.
o Qualified plans, including 401(k) and Individual Retirement Accounts are
available.
o Free telephone exchange is available between a variety of Eaton Vance Funds.
Ask your investment adviser for details.
o Bank draft investing (minimum $50 per month or quarter) allows shareholders
to invest regularly.
o Withdrawal plans (minimum account $5,000) allow shareholders to make regular,
automatic redemptions from their accounts.
Please see a prospectus for more information about any of these services.
For more complete information about EV Traditional Greater China Growth Fund or
any other Eaton Vance fund, including distribution plans, charges and expenses,
please write or call your financial adviser for a prospectus. Read the
prospectus(es) carefully before you invest or send money.
[LOGO]
EATON VANCE DISTRIBUTORS, INC.
24 Federal Street
Boston, MA 02110
[DRAGON LOGO]
LLOYD GEORGE MANAGEMENT
(HONG KONG) LIMITED
3808, One Exchange Square
Central, Hong Kong
<PAGE>
Cover photo courtesy of the Peabody Museum of Salem, from a painting of Hong
Kong, circa 1855-1860, attributed to Sunqua. Photo by Mark Sexton.
30888 - 3/95 T - CGCB
<PAGE>
SPONSOR AND MANAGER OF
EV TRADITIONAL GREATER CHINA
GROWTH FUND
Administrator of Greater China
Growth Portfolio
Eaton Vance Management
24 Federal Street
Boston, MA 02110
ADVISER OF GREATER CHINA
GROWTH PORTFOLIO
Lloyd George Management (Hong Kong) Limited
3808 One Exchange Square
Central, Hong Kong
PRINCIPAL UNDERWRITER
Eaton Vance Distributors, Inc.
24 Federal Street
Boston, MA 02110
(800) 225-6265
CUSTODIAN
Investors Bank & Trust Company
24 Federal Street
Boston, MA 02110
TRANSFER AGENT
The Shareholder Services Group, Inc.
BOS725
P.O. Box 1559
Boston, MA 02104
(800) 262-1122
AUDITORS
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110
EV TRADITIONAL GREATER CHINA GROWTH FUND
24 FEDERAL STREET
BOSTON, MA 02110
T-CGSAI
EV TRADITIONAL
GREATER CHINA
GROWTH FUND
STATEMENT OF
ADDITIONAL
INFORMATION
JANUARY 1, 1995
[LOGO]
