<PAGE>
THE CHINA FUND, INC.
ANNUAL REPORT
OCTOBER 31, 1996
THE CHINA FUND, INC.
TABLE OF CONTENTS
Page
----
Chairman's Statement 1
Investment Managers' Statement 3
Schedule of Investments 11
Financial Statements 18
Notes to Financial Statements 22
Report of Independent Auditors 26
Dividends and Distributions;
Dividend Reinvestment
and Cash Purchase Plan 27
<PAGE>
THE CHINA FUND, INC.
CHAIRMAN'S STATEMENT
- --------------------------------------------------------------------------------
Dear Stockholders:
December 2, 1996
I am pleased to present the Annual Report of The China Fund, Inc. for the fiscal
year ended October 31, 1996. During 1996, the Net Asset Value (NAV) of the Fund
increased by 3.64%, (after adjusting for the US$0.091 dividend per share paid in
January), to US$13.24 per share.
The stock markets in China and Hong Kong were extremely volatile throughout the
year, with the Hang Seng Index and the Shenzhen "B" share markets increasing by
27.6% and 27.5%, respectively, while the Hong Kong "H" share and Shanghai "B"
share markets were decreasing by 7.4% and 14.5%, respectively.
During the 1996 fiscal year, the total number of "B" shares listed in Shanghai
and Shenzhen increased from 69 to 83. In addition, the number of "H" shares
(Chinese companies listed on the Hong Kong stock exchange) increased from 17 to
21. The number of "N" shares (Chinese companies listed in the United States)
remained unchanged at 6. The market capitalization of "B", "H" and "N" shares
was US$6.9 billion on October 31, 1996. The distribution of the Fund's Listed
Investments at the end of its 1995 and 1996 fiscal years was as follows:
1996 1995
---- ----
Hong Kong Companies 73.3% 62.3%
"H" Share Companies 9.7% 15.7%
Shanghai "B" Shares 9.3% 11.0%
Shenzhen "B" Shares 3.8% 3.8%
"N" Share Companies 2.8% 5.4%
Singapore Listed Chinese Company 1.0% 0.0%
Cash 0.1% 1.8%
------ ------
100.0% 100.0%
The Fund's Direct Investment Portfolio includes investments in
telecommunications, property development, refrigerator manufacturing,
sanitaryware manufacturing and distribution, textiles, glass and tollroad
companies. In July 1996, the Fund increased its investment in Hinca
International Holdings Limited ("Hinca") by US$0.5 million to a total of US$5.76
million. The additional investment in Hinca involved an exchange of the Fund's
Convertible Preference Shares for an interest in Ordinary Shares in its parent
company, Guandong Kelon Electrical Holdings Company Limited.
During the six month period ended October 31, 1996, three of the nine direct
investments held by the Fund were listed on international stock exchanges.
Guandong Kelon Electrical Holdings Company Limited and Road King Infrastructure
Limited were both listed on The Stock Exchange of Hong Kong Limited, and CM
Telecom International Limited was listed on the Foreign Board of the Stock
Exchange of Singapore.
1
<PAGE>
THE CHINA FUND, INC.
CHAIRMAN'S STATEMENT (CONTINUED)
- --------------------------------------------------------------------------------
On October 31, 1996, the Board of Directors approved a reduction in the
valuation of the Fund's direct investment in Siu Fung Ceramics Concept Company
Limited ("Siu Fung") from $8,000,000 to zero because of unsatisfactory
operational performance, financial difficulties of other companies in the Siu
Fung Group, and the suspension of trading of the listed shares of Siu Fung
Ceramic Holdings Limited, the parent company of Siu Fung, by the Stock Exchange
of Hong Kong Limited.
As noted in the Fund's April 30, 1996 Semi-Annual Report, the Board of Directors
approved a similar reduction in the valuation of the Fund's direct investment in
Wing Hong Holdings from $3,750,000 to zero.
The Direct Investment Manager is closely monitoring the Siu Fung and Wing Hong
situations and is working with interested parties to recover as much of the
value of the Fund's investments in these two companies as possible.
The objective of The China Fund, Inc. remains to achieve long-term capital
appreciation through investments in China companies and China-related projects.
Despite the volatility of the Hong Kong and China stock markets experienced over
the past year, the long-term outlook for the Chinese economy remains positive.
The Fund will continue to search for attractive investment opportunities in
order to capitalize on China's strong long-term economic growth potential.
We thank you for your continuing support and for your interest in the Fund. If
you have questions or comments concerning the Fund, we invite you to call (toll-
free) 1-888-CHN-CALL (246-2255).
Sincerely,
John W. English
Chairman
2
<PAGE>
THE CHINA FUND, INC.
INVESTMENT MANAGERS' STATEMENT
- --------------------------------------------------------------------------------
Dear Stockholders:
December 2, 1996
REVIEW OF LISTED INVESTMENTS
MARKET REVIEW
The Hong Kong market was on an upward trend during the period under review (from
October 31, 1995 to October 31, 1996). After a brief consolidation in November
1995, the continued stability of the property market and the reduction in US
interest rates resulted in strong liquidity inflow which helped push the Hang
Seng Index through the 10,000 level in December 1995. Positive investor
sentiment extended beyond the Chinese New Year before the political tension
between China and Taiwan triggered a sharp correction in March 1996. Despite
signs of a gradual recovery in China's economy, the possibility of higher US
interest rates kept the market within a narrow trading range until July. As the
market entered the interim earnings season, investors were encouraged by the
strong earnings reported by banks and property companies. In addition,
investment sentiment was encouraged by the improving economic conditions in
China. As a result, investors remained positive, undeterred by the US missile
attack on Iraq and fear of an oil price hike in September. Liquidity increased
as funds were diverted to Hong Kong from other Asian equity markets, many of
which were experiencing political instability or deteriorating economic and
corporate fundamentals. Consequently, the Hang Seng Index rose to the historic
intraday high of 12,602 in mid October. By the end of October 1996, the Hang
Seng Index stood at 12,477.6, representing a gain of 2,695.2 points or 27.6%
over the period under review.
The Chinese equity markets experienced substantial volatility during the period
under review. Rumors of an increase in interest rates charged on subsidized
bank loans and a corporate tax rate hike drove the "H" share index to a historic
low in December 1995. The announcement of a 30% tariff cut during early 1996
further dampened investor sentiment. The prices of "H" shares rebounded later
as a result of an influx of international funds into Hong Kong. The rally was
short-lived, however, with investors selling the market in June and July in
anticipation of poor interim earnings results. In the final quarter of the
Fund's fiscal year, the improved economic outlook for China, the reductions in
interest rates, and the expectation of further credit easing, combined to
reverse the selling trend. For the year as a whole, however, the "H" share
index decreased 7.4%.
The Shanghai "B" share market performed poorly during the period under review,
with the index decreasing 14.5%. Poor company results, continued operating
difficulties amongst listed companies and the Chinese Securities' Regulatory
Commission's official ban on local investor participation in the "B" share
markets accounted for the market's performance.
In contrast, the Shenzhen "B" share market posted impressive gains, with the
index rising by 27.5% during the period under review. The removal of inflation
subsidies on long-term deposits, a reduction in market transaction fees and
falling interest rates stimulated strong local interest. In June, the index
rallied through the 100 point level following strong local buying interest
following speculation that municipal governments would introduce new measures to
boost the Chinese equity market.
3
<PAGE>
THE CHINA FUND, INC.
INVESTMENT MANAGERS' STATEMENT (CONTINUED)
- --------------------------------------------------------------------------------
REVIEW OF LISTED INVESTMENTS (CONTINUED)
On the economic front, the release of third quarter 1996 figures indicated that
China's economy has continued to decelerate. GDP growth decreased to 9.6% for
the first nine months of 1996 compared to 10.2% for the full year of 1995.
Inflation, as measured by the National Retail Price Index, continued to decline
to 6.6% for the first nine months of this year. In the meantime, retail sales
in China remained strong with per capita income increasing, particularly in
rural areas. Money supply growth, measured by M2, decreased significantly from
30.6% to 26.8% by September 1996. Industrial production continued to weaken due
primarily to the operating difficulties in state-owned enterprises. Export
growth has also decreased due to the reduction of VAT rebates on exports in
early 1996. As a result of a more stable economic environment, the China
government has removed inflation subsidies long-term deposits starting in April
this year. Interest rates were also reduced in May and August, with the one
year working capital loan lowered from 12.06% to 10.08%. On the political
front, China's relationship with the United States has improved, especially
following Taiwan's presidential election. The US National Security Adviser,
Anthony Lake, visited China in July and more high level exchanges are expected
in the next twelve months. However, the cross-strait relationship between China
and Taiwan has remained tense throughout the year. Relations worsened at the
beginning of the year with China launching a series of military exercises prior
to Taiwan's first presidential election on the 23rd of March. Thereafter, the
situation improved with new developments in economic co-operation. However,
limited progress was made in other political issues and in direct transportation
links.
4
<PAGE>
THE CHINA FUND, INC.
INVESTMENT MANAGERS' STATEMENT (CONTINUED)
- --------------------------------------------------------------------------------
REVIEW OF LISTED INVESTMENTS (CONTINUED)
PORTFOLIO REVIEW
The following table presents the Fund's portfolio allocation of listed
investments between the various sectors by market value as of October 31, 1996
and October 31, 1995:
<TABLE>
<CAPTION>
10/31/96 10/31/95
-------- --------
<S> <C> <C> <C>
HONG KONG Conglomerate 19.39% 19.16%
Industrial 20.95 14.16
Property 25.29 17.18
Service 2.77 4.18
Utility 2.93 6.31
Transportation 1.97 1.28
-------- --------
73.30 62.27
-------- --------
"H" SHARES Industrial 6.44 14.26
Utility 0.00 0.00
Transportation 3.29 1.40
-------- --------
9.73 15.66
-------- --------
HONG KONG SUB-TOTAL 83.03 77.93
-------- --------
SHANGHAI "B" SHARES Industrial 5.41 6.75
Property 0.00 0.00
Service 1.56 2.99
Transportation 1.42 1.26
Utility 0.89 0.00
-------- --------
9.28 11.00
-------- --------
SHENZHEN "B" SHARES Industrial 2.74 1.92
Property 0.00 0.89
Transportation 1.08 1.04
-------- --------
3.82 3.85
-------- --------
"N" SHARES Power 2.80 2.59
Industrial 0.00 2.83
-------- --------
2.80 5.42
-------- --------
CHINA SUB-TOTAL 15.90 20.27
-------- --------
SINGAPORE Service 0.95 0.00
-------- --------
CASH 0.12 1.80
-------- --------
TOTAL 100.00% 100.00%
-------- --------
-------- --------
</TABLE>
5
<PAGE>
THE CHINA FUND, INC.
INVESTMENT MANAGERS' STATEMENT (CONTINUED)
- --------------------------------------------------------------------------------
REVIEW OF LISTED INVESTMENTS (CONTINUED)
During the period under review, the most notable changes to the Fund's listed
portfolio have been the increased allocations in the Hong Kong industrial and
property sectors; a reduction in the Fund's "H" share position; a decrease in
the Fund's New York "N" share position and the addition of a Singapore listed
China company.
In Hong Kong, the Investment Manager continued to restructure the portfolio in
order to better reflect the growing integration of the economies of China and
Hong Kong. While the Fund's weighting in the conglomerate sector remained
largely unchanged, more emphasis was placed on those conglomerates with strong
China exposure and market presence. In particular, the Fund has increased its
investment in China Resources, the listed vehicle of China Resources Holdings
which is involved in property, trading and industries; and Ng Fung Hong, the
food producer and distributor. In addition, the Fund has a position in Shanghai
Industrial, the investment arm of the Shanghai municipal government which is
expected to acquire more high quality projects located in the fast growing
Shanghai area. The Fund has also increased its weighting in the industrial
sector, emphasizing those companies with strong competitive positions in the
high growth sectors in China. As a result, the Fund has positions in First
Sign, which produces and distributes high quality premium brand menswear in
China, and Innovative International, a manufacturer and distributor of auto
accessories that is expected to enjoy strong growth due to consumer demand. In
addition, the Fund has eliminated positions in smaller companies that were
suffering declines in profit margins or financial distress. Such as Lam Soon, a
foodstuff trading company; Legend, a maker of computer software; Sing Tao, a
printed media publisher; and Siu Fung Ceramics, a manufacturer and distributor
of ceramic tiles. As the property markets in China and Hong Kong gradually
recovered, the Fund increased investment in property stocks. In particular, the
Fund has increased its holding in New World Development as the company realized
the value of its investments in China and Hong Kong.
In the "H" share sector, the Fund's position has been reduced significantly from
15.66% to 9.73% due to poor earnings performance. Partly due to the austerity
measures, most companies saw profit margins constrained by increased
competition, increases in raw material prices, further account receivables
build-up from triangular debt and foreign exchange losses from currency
appreciation.
The weightings in the Shenzhen "B" share market remained largely unchanged at
3.82%, although the Fund has reduced its exposure to the Shanghai market to
9.28% from 11.00%. In addition, the Fund has a position in Thakral Corp. Ltd.,
a Singapore listed China company that is the largest distributor of imported TVs
and VCRs in Hong Kong and China. With its strong distribution network, the
company is well positioned to benefit from the growing retail sector.
6
<PAGE>
THE CHINA FUND, INC.
INVESTMENT MANAGERS' STATEMENT (CONTINUED)
- --------------------------------------------------------------------------------
REVIEW OF LISTED INVESTMENTS (CONTINUED)
The following is a summary of the Fund's Top Ten Listed Investments at October
31, 1996:
<TABLE>
<CAPTION>
NUMBER MARKET PERCENT
OF SHARES VALUE (US$) OF NAV
--------- ---------- -------
<S> <C> <C> <C>
New World Development Co., Ltd. 1,405,000 $8,176,845 5.69%
Citic Pacific Ltd. 1,150,000 5,592,199 3.89%
Hutchinson Whampoa Co., Ltd. 760,000 5,307,674 3.70%
Cheung Kong Holdings, Ltd. 535,000 4,289,853 2.99%
First Sign International Holdings 12,000,000 4,073,873 2.84%
New World Infrastructure 1,615,000 4,020,686 2.80%
Ng Fung Hong, Ltd. 6,200,000 3,989,162 2.78%
Shanghai Industrial Holdings 1,625,000 3,688,310 2.57%
China Resources Enterprise 3,000,000 3,375,495 2.35%
Sun Hung Kai Properties, Ltd. 290,300 3,303,898 2.30%
</TABLE>
7
<PAGE>
THE CHINA FUND, INC.
INVESTMENT MANAGERS' STATEMENT (CONTINUED)
- --------------------------------------------------------------------------------
REVIEW OF DIRECT INVESTMENTS
At October 31, 1996, approximately 95% of the Fund's direct investment assets
were committed for investment in nine companies. A description of the direct
investments is set out below.
NEW WORLD SUN CITY LIMITED ("NWSC")
NWSC owns a property development project in Dongguan, Guangdong Province China.
Dongguan New World Gardens (the "Project") is engaged in the development and
sale of 10,000 units of detached houses, semi-detached houses, low-rise and
high-rise apartments and 93,000 square meters of commercial and retail space on
a site of 466,666 square meters. The Project, part of Fucheng New Town, is
situated close to the city center, and will be developed in phases over a period
of six to eight years. At October 31, 1996, the company had completed
construction of Phases 1 and 2 with Phases 3 and 4 still under construction.
The company has sold 100% of Phase 1, 100% of Phase 2, 92% of Phase 3 and 35% of
Phase 4.
GUANGDONG KELON ELECTRICAL HOLDINGS COMPANY LIMITED ("KELON"),
FORMERLY HINCA INTERNATIONAL HOLDINGS LIMITED ("HINCA")
Kelon is the parent company of Hinca, whose principal activities include the
manufacture and sale of refrigerators in China. The company has been the market
leader in China's refrigerator market in terms of both production and sales
volume since 1991.
In July, the Fund's shares in Hinca were exchanged for shares in Kelon. A
commitment to acquire additional shares in Kelon was completed in July 1996. On
July 23, 1996, Kelon obtained a listing of its shares, as Hong Kong "H" shares,
on The Stock Exchange of Hong Kong Limited.
CM TELECOM INTERNATIONAL LIMITED ("CHINA MOTION")
China Motion is engaged in the marketing of telecommunications related products
including paging systems, pagers, transmitters and cables, and the provision of
paging services in Hong Kong. China Motion owns a 30% interest in an associated
company which operates a cross-border paging service between Hong Kong and the
Province of Guangdong. On October 17, 1996, China Motion obtained a listing of
its shares on the Foreign Board of the Stock Exchange of Singapore.
A-S CHINA PLUMBING PRODUCTS LIMITED ("ASPPL")
ASPPL was established to produce and distribute the complete line of high
quality sanitaryware of American Standard Inc., ("ASI"), a US-based world leader
in the manufacturing of plumbing products, through the acquisition of majority
equity stakes in operating and newly established joint ventures in China. ASI
provides management support, technology know-how and the use of the American
Standard trade name.
8
<PAGE>
THE CHINA FUND, INC.
INVESTMENT MANAGERS' STATEMENT (CONTINUED)
- --------------------------------------------------------------------------------
REVIEW OF DIRECT INVESTMENTS (CONTINUED)
SIU FUNG CERAMICS CONCEPT COMPANY LIMITED ("SIU FUNG")
Siu Fung is an investment holding company which owns a group of joint ventures
in China engaged in the manufacture and sale of ceramic products, including
tiles and sanitaryware. Siu Fung's major shareholder is Siu Fung Ceramics
Holdings Limited ("SFH"), a listed company on The Stock Exchange of Hong Kong
Limited ("HKSE"), which is engaged primarily in marketing and manufacturing
production equipment for ceramic products.
Siu Fung's financial performance to date has been below management's projections
at the time of the Fund's investment primarily due to delays in the commencement
of commercial production in a number of its joint ventures. Other companies
within the Siu Fung group of companies have also suffered financial difficulties
and trading in the shares of SFH on the HKSE was suspended on October 28, 1996.
In light of the uncertainty over the Siu Fung group's ability to meet its
financial obligations as they become due, the Board of Directors wrote down the
value of the Fund's direct investment from $8,000,000 to zero.
WING HONG HOLDINGS LIMITED ("WING HONG")
Wing Hong was a vertically integrated cashmere yarn and knitwear manufacturer.
Wing Hong exported private-label knitwear through importers and wholesalers to
up-market retailers. During its financial year to March 31, 1996, Wing Hong
experienced a substantial downturn in sales. As a result, the main operating
subsidiary of Wing Hong went into liquidation in May 1996.
The Board of Directors has decreased the value of Fund's direct investment in
Wing Hong from $3,750,000 to zero.
CHINA SOUTHERN GLASS HOLDING COMPANY LIMITED ("CHINA SOUTHERN GLASS")
China Southern Glass is one of the leading processed glass manufacturers in
China and one of the first companies to issue "B" shares to foreign investors
for trading on the Shenzhen Stock Exchange in 1992. The company is expanding
through the establishment of a float glass production plant utilizing western
technologies and equipment.
WAI KEE CHINA INVESTMENTS (BVI) COMPANY LIMITED ("WAI KEE")
Wai Kee is an investment holding company which owns a group of companies and
joint ventures (the "Group") in China engaged in tollroad operations, building
materials manufacturing and trading, construction equipment trading and quarry
concession operation. The Group has concessions to operate ten tollroads in
China. Wai Kee's major shareholder is Wai Kee Holdings Limited, a listed
company on The Stock Exchange of Hong Kong Limited, which is engaged in
quarrying, civil engineering and dredging in Hong Kong.
9
<PAGE>
THE CHINA FUND, INC.
INVESTMENT MANAGERS' STATEMENT (CONTINUED)
- --------------------------------------------------------------------------------
REVIEW OF DIRECT INVESTMENTS (CONTINUED)
ROAD KING INFRASTRUCTURE LIMITED ("ROAD KING"), FORMERLY ROAD KING (CHINA)
INFRASTRUCTURE LIMITED
Road King holds interests in and operates ten tollroads
located in Southern and Eastern China with a combined length of approximately
320 kilometers. Road King is a 45% subsidiary of Wai Kee China Investments
(BVI) Company Limited, a company in which the Fund has an existing investment.
On July 4, 1996, Road King obtained a listing of its shares on The Stock
Exchange of Hong Kong Limited.
Sincerely,
Stella S.M. Yiu, Listed Investment Manager
David F.J. Paterson, Direct Investment Manager
LISTED INVESTMENT MANAGER
Ms. Stella S.M. Yiu has served as the portfolio manager for the Fund's portfolio
of listed securities since December 1993. Ms. Yiu holds a Bachelor of Arts
degree in economics from Saint Catharine's College, Cambridge University. She
is currently an executive director of HSBC Asset Management Hong Kong Limited
responsible for managing investments and formulating strategies for the Asia-
Pacific equity markets. She has had over eleven years of experience in
portfolio management in Asia. Prior to joining HSBC Asset Management Hong Kong
Limited, Ms. Yiu held a senior investment position at GT Management, with
responsibilities for Asian regional equity funds and dedicated country
portfolios.
DIRECT INVESTMENT MANAGER
Mr. David F.J. Paterson has served as the portfolio manager for the Fund's
direct investment portfolio since the Fund's inception. Mr. Paterson holds a MA
(Hons.) degree from Oriel College, Oxford, England. In addition to being a
director of the Fund, he is a director and 25% owner of HSBC Private Equity
Management Hong Kong Limited and has served as Managing Director of HSBC Private
Equity Management Limited since 1988. Over his 26 years of business experience,
he has also served as Managing Director of Bond Corporation International
Limited, Managing Director of Arabian Gulf Investments (Far East) Limited,
Finance Director of Swire Properties Limited, Finance Director of E.C.
(Holdings) Limited, a corporate finance executive with Samuel Montagu & Co.
Limited and a chartered accountant with Price Waterhouse & Co. Mr. Paterson is
also a Fellow of the Institute of Chartered Accountants in England and Wales and
a Fellow of the Hong Kong Society of Accountants.
10
<PAGE>
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NAME OF ISSUER
AND TITLE OF ISSUE SHARES VALUE (NOTE A)
------------------ ------ --------------
<S> <C> <C>
COMMON STOCK AND OTHER EQUITY INTERESTS
CHINA - SHANGHAI "B" SHARES
CEMENT - (0.6%)
Shanghai Huaxin Cement Co., Ltd. . . . . . . . . . . . . 3,903,450 $ 780,690
-----------
COMMUNICATION SERVICES - (1.3%)
Eastern Communications Co., Ltd. * . . . . . . . . . . . 1,835,000 1,247,800
Shanghai Posts & Telecom Equipment Co., Ltd. . . . . . . 1,818,640 654,710
-----------
1,902,510
-----------
ELECTRIC UTILITIES - (0.7%)
Heilongjiang Electric Power Co., Ltd.. . . . . . . . . . 2,694,500 1,045,466
-----------
ELECTRICAL EQUIPMENT - (0.4%)
Shanghai Refrigerator Compressor Co., Ltd. . . . . . . . 1,476,960 605,554
-----------
HOTELS - (0.8%)
Shanghai New Asia Group Co., Ltd.. . . . . . . . . . . . 2,298,100 1,103,088
-----------
INDUSTRIALS - (0.4%)
Shanghai Diesel Engine Co., Ltd. * . . . . . . . . . . . 1,473,360 615,864
-----------
TEXTILE - (1.7%)
Inner Mongolia Erdos Cashmere Products Co., Ltd. . . . . 2,963,600 1,410,674
Shanghai Worldbest Co., Ltd. . . . . . . . . . . . . . . 3,985,000 1,036,100
-----------
2,446,774
-----------
TRANSPORTATION - (1.2%)
Shanghai Dazhong Taxi Co., Ltd.. . . . . . . . . . . . . 993,070 605,773
Tientsin Marine Shipping Co., Ltd. * . . . . . . . . . . 3,463,000 1,059,678
-----------
1,665,451
-----------
TOTAL SHANGHAI "B" SHARES - (Cost $11,108,880) . . . 7.1% 10,165,397
--- -----------
CHINA - SHENZHEN "B" SHARES
ELECTRICAL EQUIPMENT - (0.6%)
Wuxi Little Swan Co., Ltd. * . . . . . . . . . . . . . . 1,343,082 937,979
-----------
</TABLE>
See notes to financial statements.
11
<PAGE>
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NAME OF ISSUER
AND TITLE OF ISSUE SHARES VALUE (NOTE A)
------------------ ------ --------------
<S> <C> <C>
COMMON STOCK AND OTHER EQUITY INTERESTS (continued)
CHINA - SHENZHEN "B" SHARES (continued)
FOOD & BEVERAGES - (0.9%)
Anhui Gujing Distillery Co., Ltd. * . . . . . . . . . . 1,650,900 $1,268,248
-----------
INDUSTRIALS - (0.7%)
Changchai Co., Ltd.*. . . . . . . . . . . . . . . . . . 1,137,000 732,296
China Southern Glass Co., Ltd.. . . . . . . . . . . . . 612,960 275,080
-----------
1,007,376
-----------
INFRASTRUCTURE - (0.7%)
Guangdong Province Expressway Development Co., Ltd. * . 1,705,800 1,036,866
-----------
TRANSPORTATION - (0.2%)
China Merchant Shekou Port Services Co., Ltd. . . . . . 532,000 232,555
-----------
TRAVEL & TOURISM - (0.5%)
Huangshan Tourism Development Co., Ltd.*. . . . . . . . 2,826,000 736,399
-----------
TOTAL SHENZHEN "B" SHARES - (Cost $5,229,446) . . 3.6% 5,219,423
---- -----------
TOTAL CHINA - (Cost $16,338,326) . . . . . . . . . 10.7% 15,384,820
---- -----------
HONG KONG
APPAREL & TEXTILES - (1.0%)
Fountain Set Holdings, Ltd. . . . . . . . . . . . . . . 6,848,000 1,434,748
-----------
AUTO PARTS - (1.8%)
Innovative International Holdings, Ltd. . . . . . . . . 6,300,000 2,566,540
-----------
CHEMICALS - (0.5%)
Yip's Hang Cheung Holdings, Ltd.. . . . . . . . . . . . 4,904,000 716,681
-----------
CONTAINERS & PACKAGING - (1.7%)
M C Packaging (Hong Kong), Ltd. . . . . . . . . . . . . 3,200,000 1,086,366
Sinocan Holdings, Ltd.. . . . . . . . . . . . . . . . . 3,000,000 1,425,855
-----------
2,512,221
-----------
</TABLE>
See notes to financial statements.
12
<PAGE>
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NAME OF ISSUER
AND TITLE OF ISSUE SHARES VALUE (NOTE A)
------------------ ------ --------------
<S> <C> <C>
COMMON STOCK AND OTHER EQUITY INTERESTS (CONTINUED)
HONG KONG (continued)
DIVERSIFIED - (17.1%)
China Resources Enterprise, Ltd.. . . . . . . . . . . . 3,000,000 $3,375,495
Citic Pacific, Ltd. . . . . . . . . . . . . . . . . . . 1,150,000 5,592,199
Guangdong Investment, Ltd.. . . . . . . . . . . . . . . 3,800,000 2,727,555
Guangzhou Investment Co., Ltd.. . . . . . . . . . . . . 6,430,000 2,078,968
Hutchison Whampoa, Ltd. . . . . . . . . . . . . . . . . 760,000 5,307,674
Shanghai Industrial Holdings, Ltd. *. . . . . . . . . . 1,625,000 3,688,310
Swire Pacific, Ltd. . . . . . . . . . . . . . . . . . . 200,000 1,765,345
-----------
24,535,546
-----------
DRUGS & HEALTH CARE - (0.8%)
China Pharmaceutical Enterprise & Investment Corp., Ltd. 8,300,000 1,180,777
-----------
ELECTRIC UTILITIES - (1.6%)
China Light & Power Co., Ltd. . . . . . . . . . . . . . 240,000 1,114,301
Consolidated Electric Power Asia, Ltd.. . . . . . . . . 530,037 1,233,888
-----------
2,348,189
-----------
ELECTRONICS - (2.7%)
Kingboard Chemical Holdings, Ltd. . . . . . . . . . . . 3,000,000 589,742
Leading Spirit Holdings Co., Ltd. . . . . . . . . . . . 4,549,800 3,236,323
-----------
3,826,065
-----------
FOOD & BEVERAGES - (3.9%)
China Food Holdings, Ltd. . . . . . . . . . . . . . . . 4,000,000 563,876
Ng Fung Hong, Ltd.. . . . . . . . . . . . . . . . . . . 6,200,000 3,989,162
Tingyi (Cayman Island) Holding Co., Ltd. *. . . . . . . 4,600,000 1,017,304
-----------
5,570,342
-----------
HOTELS - (0.7%)
Shangri-La Asia, Ltd. . . . . . . . . . . . . . . . . . 750,000 1,071,817
-----------
HOUSEHOLD APPLIANCES - (0.5%)
Hualing Holdings, Ltd.. . . . . . . . . . . . . . . . . 7,100,000 697,861
-----------
INFRASTRUCTURE - (2.8%)
New World Infrastructure, Ltd. *. . . . . . . . . . . . 1,615,000 4,020,686
-----------
OFFICE FURNISHINGS & SUPPLIES - (0.9%)
Lamex Holdings, Ltd.. . . . . . . . . . . . . . . . . . 3,600,000 1,268,720
-----------
</TABLE>
See notes to financial statements.
13
<PAGE>
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NAME OF ISSUER
AND TITLE OF ISSUE SHARES VALUE (NOTE A)
------------------ ------ --------------
<S> <C> <C>
COMMON STOCK AND OTHER EQUITY INTERESTS (CONTINUED)
HONG KONG (CONTINUED)
PRINTING - (0.5%)
Hung Hing Printing Group, Ltd.. . . . . . . . . . . . . 2,494,000 $669,286
-----------
PROPERTY DEVELOPER - (14.3%)
Cheung Kong Holdings, Ltd.. . . . . . . . . . . . . . . 535,000 4,289,853
China Overseas Land & Investment, Ltd.. . . . . . . . . 6,500,000 2,416,841
Henderson China Holding, Ltd. . . . . . . . . . . . . . 505,500 1,144,079
Henderson Investment, Ltd.. . . . . . . . . . . . . . . 1,100,000 1,202,116
New World Development Co., Ltd. . . . . . . . . . . . . 1,405,000 8,176,845
Sun Hung Kai Properties, Ltd. . . . . . . . . . . . . . 290,300 3,303,898
-----------
20,533,632
-----------
REAL ESTATE - (2.1%)
Wharf Holdings, Ltd.. . . . . . . . . . . . . . . . . . 740,000 3,052,948
-----------
RETAIL TRADE - (3.9%)
First Sign International Holdings, Ltd. . . . . . . . . 12,000,000 4,073,873
Goldlion Holdings, Ltd. . . . . . . . . . . . . . . . . 1,850,000 1,507,333
-----------
. . . . . . . . . . . . . . . . . . . . . . . . . 5,581,206
-----------
TELECOMMUNICATIONS - (0.8%)
Hong Kong Telecommunications, Ltd.. . . . . . . . . . . 620,000 1,094,514
-----------
TRANSPORTATION - (2.3%)
China Merchants Hai Hong Holdings Co., Ltd. . . . . . . 3,200,000 1,034,634
Cosco Pacific, Ltd. . . . . . . . . . . . . . . . . . . 2,413,000 2,309,330
-----------
3,343,964
-----------
TOTAL HONG KONG - (Cost $63,717,681) . . . . . . . 59.9% 86,025,743
---- -----------
HONG KONG - "H" SHARES
CHEMICALS - (2.2%)
Jilin Chemical Industrial Co., Ltd. . . . . . . . . . . 7,034,000 936,993
Shanghai Petrochemical Co., Ltd. . . . . . . . . . . . . 2,508,000 673,043
Zhenhai Refining & Chemical Co., Ltd. . . . . . . . . . 6,118,000 1,622,035
-----------
3,232,071
-----------
COMMUNICATION SERVICES - (0.2%)
Chengdu Telecom Cable Co., Ltd. . . . . . . . . . . . . 2,270,000 223,119
-----------
</TABLE>
See notes to financial statements.
14
<PAGE>
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NAME OF ISSUER
AND TITLE OF ISSUE SHARES VALUE (NOTE A)
------------------ ------ --------------
<S> <C> <C>
COMMON STOCK AND OTHER EQUITY INTERESTS (continued)
HONG KONG (continued)
CONSTRUCTION & MINING EQUIPMENT - (0.5%)
Luoyang Glass Co., Ltd. . . . . . . . . . . . . . . . . 4,000,000 $688,032
-----------
ELECTRIC UTILITIES - (1.1%)
Harbin Power Equipment Co., Ltd.. . . . . . . . . . . . 5,492,000 731,585
Northeast Electrical Transmission & Transformation
Machinery Manufacturing Co., Ltd. . . . . . . . . 6,108,000 884,736
-----------
1,616,321
-----------
ELECTRICAL EQUIPMENT - (0.4%)
Guangdong Kelon Electronic Holdings Co., Ltd. . . . . . 1,500,000 620,780
-----------
STEEL - (0.4%)
Maanshan Iron & Steel Co., Ltd. . . . . . . . . . . . 3,100,000 553,271
-----------
TEXTILE - (0.4%)
Jingwei Machinery Co., Ltd. . . . . . . . . . . . . . . 5,000,000 620,781
-----------
TRANSPORTATION - (2.7%)
Guangshen Railway Co., Ltd. * . . . . . . . . . . . . . 5,400,000 2,007,837
Qingling Motors Co., Ltd. . . . . . . . . . . . . . . . 4,408,000 1,852,772
-----------
3,860,609
-----------
TOTAL HONG KONG - "H" SHARES - (Cost $14,359,612). 7.9% 11,414,984
---- -----------
TOTAL HONG KONG (INCLUDING
"H" SHARES) - (Cost $78,077,293) . . . . . . 67.8% 97,440,727
---- -----------
SINGAPORE
ELECTRONICS - (0.8%)
Thakral Corporation, Ltd. (Cost $1,067,259) . . . . . . 1,568,600 1,113,707
-----------
UNITED STATES - "N" SHARES
ELECTRIC UTILITIES - (2.3%)
Huaneng Power International, Inc. * . . . . . . . . . . 57,000 869,250
Shandong Huaneng Power Development, Ltd.. . . . . . . . 265,000 2,418,125
-----------
TOTAL UNITED STATES - (Cost $3,208,520) . . . . . 2.3% 3,287,375
---- -----------
TOTAL COMMON STOCK AND OTHER
EQUITY INTERESTS - (Cost $98,691,398) . . . . 81.6% 117,226,629
---- -----------
</TABLE>
See notes to financial statements.
15
<PAGE>
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NAME OF ISSUER PAR VALUE/
AND TITLE OF ISSUE SHARES VALUE (NOTE A)
------------------ ------ --------------
<S> <C> <C>
DIRECT INVESTMENTS
CERAMIC PRODUCTS - (0.0%)
Siu Fung Ceramics Concept Company, Ltd.
(acquired 11/30/94) * (#) 8,000 $0
-----------
CONSTRUCTION - (1.4%)
Wai Kee China Investments (BVI) Company Ltd.
(acquired 10/23/95) (#) . . . . . . . . . . . . . 180 2,000,000
-----------
ELECTRICAL EQUIPMENT - (4.9%)
Guangdong Kelon Electrical Holdings Co., Ltd.
(acquired 12/1/94) (1) . . . . . . . . . . . . . . 17,359,518 7,023,373
-----------
INDUSTRIALS - (1.8%)
China Southern Glass Holding Co., Ltd., convertible
bond, 5.25%, 7/17/00 (acquired 4/7/95) . . . . . . $2,500,000 2,500,000
-----------
INFRASTRUCTURE - (1.0%)
Road King Infrastructure, Ltd. (acquired 3/29/96)* (2). 1,969,200 1,438,915
-----------
PLUMBING - (3.1%)
A-S China Plumbing Products Ltd.
(acquired 4/14/94) * (#) . . . . . . . . . . . . 450 4,500,300
-----------
REAL ESTATE - (2.0%)
New World Sun City Ltd. (acquired 12/12/92) (#) . . . . 83 2,958,000
-----------
TELECOMMUNICATIONS - (3.6%)
CM Telecom International Ltd., ordinary shares
(acquired 1/11/94 and 11/10/94) (3). . . . . . . . 15,309,760 4,220,273
CM Telecom International Ltd., convertible notes
(acquired 11/10/94) (#). . . . . . . . . . . . . . $586,093 894,058
-----------
5,114,331
TEXTILE - (0.0%)
Wing Hong Holdings Ltd. (acquired 5/31/95) * (#). . . . 150 0
-----------
TOTAL DIRECT INVESTMENTS - (Cost $34,936,209) . . 17.8% 25,534,919
---- -----------
</TABLE>
See notes to financial statements.
16
<PAGE>
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NAME OF ISSUER CURRENT MATURITY PRINCIPAL
AND TITLE OF ISSUE YIELD (MM/DD/YY) AMOUNT VALUE (NOTE A)
------------------ ------- ---------- --------- --------------
<S> <C> <C> <C> <C>
SHORT TERM INVESTMENT
UNITED STATES
U.S. GOVERNMENT SECURITY - (0.4%)
United States Treasury Bill
(Cost $487,295) 4.915% 12/12/96 $490,000 0.4% $487,295
---- ------------
TOTAL INVESTMENTS - (Cost $134,114,902) 99.8% 143,248,843
OTHER ASSETS AND LIABILITIES 0.2% 349,874
---- ------------
NET ASSETS 100.0% $143,598,717
---- ------------
---- ------------
</TABLE>
- -------------------------------------------------------------------------------
Notes to Schedule of Investments
* Denotes non-income producing security
(#) Direct investments are restricted as to resale and do not have a
readily available resale market. On the date of acquisition of each direct
investment, there were no market quotations on similar securities, and such
investments were therefore initially valued at acquisition cost. The Fund
can invest up to 25% of the proceeds from any offering of Fund shares in
direct investments. Direct investments are valued at fair value as
determined by the Board of Directors as discussed in Notes A, B and G to
the financial statements.
(1) During the year ended October 31, 1996, the Fund's investment in
Guangdong Kelon Electrical Holdings Co., Ltd. (formerly Hinca International
Holdings, Ltd.) became listed on the Hong Kong Stock Exchange. The shares
are not currently available for resale due to an agreed upon lock-up period
which expires on January 21, 1997.
(2) During the year ended October 31, 1996, the Fund's investment in Road
King Infrastructure, Ltd. became listed on the Hong Kong Stock Exchange.
(3) During the year ended October 31, 1996, 75% of the Fund's investment
in CM Telecom International, Ltd. became listed on the Singapore Stock
Exchange. The shares are not currently available for resale due to an
agreed upon lock-up period which expires on October 17, 1997.
See notes to financial statements.
17
<PAGE>
THE CHINA FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments in listed investments, at value (cost $99,178,693) (Notes A and F). . . . . $117,713,924
Investments in direct investments, at value (cost $34,936,209) (Notes A, B, F and G). . 25,534,919
Cash, including foreign currency, at value (cost $1,007,345). . . . . . . . . . . . . . 1,007,320
Dividends and interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . 352,310
Receivable for currency sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193,936
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,777
Deferred organization expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,293
------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144,892,479
------------
LIABILITIES
Payable for investments purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . 736,399
Advisory fee payable (Note C) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195,885
Payable for currency purchased. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193,936
Administration, custodian and transfer agent fees payable . . . . . . . . . . . . . . . 75,494
Accrued expenses and other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . 92,048
------------
TOTAL LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,293,762
------------
TOTAL NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $143,598,717
------------
COMPOSITION OF NET ASSETS:
Common stock, at par value (Note D) . . . . . . . . . . . . . . . . . . . . . . . . . . $ 108,449
Capital paid in excess of par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145,826,374
Undistributed net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . 633,085
Accumulated net realized loss on investments and
foreign currency transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,103,182)
Net unrealized appreciation on investments
and foreign currency transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,133,991
------------
TOTAL NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $143,598,717
------------
------------
NET ASSET VALUE PER SHARE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13.24
($143,598,717/10,844,937 shares of common stock outstanding) ------
------
</TABLE>
See notes to financial statements.
18
<PAGE>
THE CHINA FUND, INC.
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME
Dividend income - listed investments. . . . . . . . . . . . . . . . . . . . . . . . . . $3,115,517
Dividend income - direct investments. . . . . . . . . . . . . . . . . . . . . . . . . . 873,351
Interest income - listed investments. . . . . . . . . . . . . . . . . . . . . . . . . . 178,034
Interest income - direct investments. . . . . . . . . . . . . . . . . . . . . . . . . . 131,250
----------
TOTAL INVESTMENT INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,298,152
----------
EXPENSES
Advisory fee (Note C) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,111,245
Administration, custodian and transfer agent fees . . . . . . . . . . . . . . . . . . . 530,612
Directors' fees and expenses (Note C) . . . . . . . . . . . . . . . . . . . . . . . . . 260,000
Legal fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195,000
Shareholder services fee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154,450
Economic advisory fee (Note C). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92,351
Audit and tax service fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
Amortization of deferred organization expenses (Note A) . . . . . . . . . . . . . . . . 30,001
Miscellaneous expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198,637
----------
TOTAL EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,612,296
----------
NET INVESTMENT INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 685,856
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCY
Net realized gain on listed investment transactions . . . . . . . . . . . . . . . . . . 107,394
Net realized gain on direct investment transactions . . . . . . . . . . . . . . . . . . 220,910
Net realized loss on foreign currency transactions. . . . . . . . . . . . . . . . . . . (4,715)
----------
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 323,589
----------
Net change in unrealized appreciation (depreciation) on listed investments and
foreign currency translations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,533,104
Net change in unrealized appreciation (depreciation) on direct investments. . . . . . . (14,512,587)
----------
4,020,517
----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,344,106
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . $5,029,962
----------
----------
</TABLE>
See notes to financial statements.
19
<PAGE>
THE CHINA FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
OCTOBER 31, 1996 OCTOBER 31, 1995
---------------- ----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . $685,856 $1,042,160
Net realized gain (loss) on investment and
foreign currency transactions . . . . . . . . . . . . . . . . . . . 323,589 (12,295,946)
Net change in unrealized appreciation (depreciation) on
investments and foreign currency translations . . . . . . . . . . . 4,020,517 (8,014,550)
------------ -------------
Net increase (decrease) in net assets resulting from operations . . . 5,029,962 (19,268,336)
------------ -------------
DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . (986,629) (100,614)
Net realized gain on investment and foreign
currency transactions . . . . . . . . . . . . . . . . . . . . . . . . 0 (6,497,711)
------------ -------------
Total dividends and distributions to shareholders . . . . . . . . . . (986,629) (6,598,325)
------------ -------------
CAPITAL SHARE TRANSACTIONS (NOTE D):
Reinvestment of distributions to shareholders . . . . . . . . . . . . 42,382 277,488
------------ -------------
NET INCREASE (DECREASE) IN NET ASSETS. . . . . . . . . . . . . . . . . . . 4,085,715 (25,589,173)
------------ -------------
NET ASSETS:
Beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . 139,513,002 165,102,175
End of period, including undistributed net investment
income of $633,085 and $982,389, respectively . . . . . . . . . . . . $143,598,717 $139,513,002
------------ -------------
------------ -------------
</TABLE>
See notes to financial statements.
20
<PAGE>
THE CHINA FUND, INC.
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OF COMMON STOCK OUTSTANDING FOR THE PERIOD INDICATED
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1996 1995 1994 1993 1992 (1)
----------- ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE (2)
Net asset value, beginning of period . . . . . . . . . $12.87 $15.26 $17.35 $14.22 $13.83 (3)
Net investment income (loss) . . . . . . . . . . . . . .06 .10 (.03) .04 .02
Net realized and unrealized gain (loss) on investment.
and foreign currency transactions . . . . . . . . .40 (1.88) (.39) 3.14 .37
------ ------- ----- ------ -------
Total from investment operations . . . . . . . . . . . .46 (1.78) (.42) 3.18 .39
------ ------- ----- ------ -------
Less distributions:
Dividends from net investment income. . . . . . . (.09) (.01) (.02) (.04) --
Dividends in excess of net investment income. . . -- -- (.07) -- --
Distributions from net realized capital gains . . -- (.60) (.82) (.01) --
------ ------- ----- ------ -------
Total distributions. . . . . . . . . . . . . . . . . . (.09) (.61) (.91) (.05) --
------ ------- ----- ------ -------
Dilution due to rights offering. . . . . . . . . . . . -- -- (.76) -- --
------ ------- ----- ------ -------
Net asset value, end of period . . . . . . . . . . . . $13.24 $12.87 $15.26 $17.35 $14.22
------ ------- ----- ------ -------
------ ------- ----- ------ -------
Per share market value, end of period. . . . . . . . . $11.75 $11.75 $17.25 $18.50 $14.00
------ ------- ----- ------ -------
------ ------- ----- ------ -------
TOTAL INVESTMENT RETURN
(BASED ON MARKET VALUE) . . . . . . . . . . . . . 0.74% (28.39)% 5.38% 32.66% (6.67)%
---- ----- ---- ----- ----
---- ----- ---- ----- ----
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000's) . . . . . . . . $143,599 $139,513 $165,102 $138,932 $113,825
Ratio of expenses to average net assets . . . . . . . 2.56% 2.55% 2.49% 2.67% 2.34%(4)
Ratio of net investment income (loss)
to average net assets . . . . . . . . . . . . . . 0.49% 0.78% (0.11)% 0.24% 0.55%(4)
Portfolio turnover rate. . . . . . . . . . . . . . . . 41% 43% 58% 85% 18%
Average commission rate(5) . . . . . . . . . . . . . . $0.0017 -- -- -- --
</TABLE>
(1) The Fund commenced investment operations on July 17, 1992.
(2) Based on average shares outstanding during the period.
(3) Net of offering costs of ($0.12) per share.
(4) Annualized.
(5) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on
which commissions are charged.
- -------------------------------------------------------------------------------
See notes to financial statements.
21
<PAGE>
THE CHINA FUND, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1996
- -------------------------------------------------------------------------------
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The China Fund, Inc. (the "Fund") was incorporated under the laws of the
State of Maryland on April 28, 1992, and is a non-diversified, closed-end
management investment company registered under the Investment Company Act of
1940, as amended. The preparation of financial statements requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial statements and the
reported amounts of income and expenses for the period. Actual results could
differ from these estimates. The significant estimates made as of and for
the year ended October 31, 1996, relate to the valuation of the Fund's Direct
Investments, as further discussed below and in Note B. The following is a
summary of significant accounting policies followed by the Fund in the
preparation of its financial statements.
SECURITY VALUATION: Portfolio securities listed on recognized United States
or foreign securities exchanges are valued at the last quoted sales price in
the principal market where they are traded. Listed securities with no such
sales price and unlisted securities are valued at the mean between the
current bid and asked prices, if any, of two reputable brokers. Short-term
investments having maturities of sixty days or less are valued at amortized
cost (original purchase cost as adjusted for amortization of premium or
accretion of discount) which when combined with accrued interest approximates
market value. Other securities for which market quotations are readily
available are valued at current market value. Securities for which market
quotations are not readily available are valued in good faith at fair value
using methods determined by the Board of Directors. Direct investments are
valued at fair value as determined by the Board of Directors based on advice
from the Investment Manager and Direct Investment Manager. The original cost
is considered to be fair value unless the Board of Directors, based on such
advice, concludes there has been a material change of a long-term nature and
sufficient reliable information is available to revalue these investments.
All portfolio securities not denominated in United States (U.S.) dollars are
valued in the relevant foreign currency and translated into U.S. dollars at
the prevailing foreign exchange rate.
FOREIGN CURRENCY TRANSLATIONS: The records of the Fund are maintained in
U.S. dollars. Foreign currencies, investments and other assets and
liabilities are translated into U.S. dollars at the current exchange rates.
Purchases and sales of investment securities and income and expenses are
translated on the respective dates of such transactions. Net realized gains
and losses on foreign currency transactions represent net gains and losses
from the disposition of foreign currencies, currency gains and losses
realized between the trade dates and settlement dates of security
transactions, and the difference between the amount of net investment income
accrued and the U.S. dollar amount actually received. The effects of changes
in foreign currency exchange rates on investments in securities are not
segregated in the Statement of Operations from the effects of changes in
market prices of those securities, but are included in realized and
unrealized gain or loss on investments in securities.
22
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
SECURITY TRANSACTIONS AND INVESTMENT INCOME: Security transactions are
recorded as of the trade date. Realized gains and losses from securities
sold are recorded on the identified cost basis. Dividend income is recorded
on the ex-dividend date, or, in the case of dividend income on foreign
securities, on the ex-dividend date or when the Fund becomes aware of its
declaration. Interest income is recorded on the accrual basis. All premiums
and discounts are amortized/accreted for both financial reporting and federal
income tax purposes.
DIVIDENDS AND DISTRIBUTIONS: The Fund intends to distribute to its
stockholders, at least annually, all of its net investment income and will
distribute any net realized capital gains annually. Income and capital gains
distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. These differences
are primarily due to differing treatments of foreign currency transactions,
losses deferred due to wash sales and holding of passive foreign investment
companies.
FEDERAL INCOME TAXES: The Fund has qualified and intends to qualify in the
future as a regulated investment company by complying with the provisions of
the Internal Revenue Code available to certain investment companies, and to
make distributions of taxable income and capital gains sufficient to relieve
it from all, or substantially all, federal income and excise taxes.
DEFERRED ORGANIZATION EXPENSES: Expenses incurred in connection with the
organization of the Fund have been capitalized and are being charged to
operations ratably over a period of 60 months from the date that the Fund
commenced its investment operations.
NOTE B - VALUATION OF DIRECT INVESTMENTS
At October 31, 1996, non-listed Direct Investments amounting to $12,852,358
(9.0% of net assets) have been valued at fair value as determined by the
Board of Directors in the absence of readily ascertainable market values.
The procedures applied by the Board of Directors in arriving at its estimate
of value of such securities comply with the Fund's policies for valuing
Direct Investments at original cost unless the Board of Directors, based on
advice form the Investment Manager and Direct Investment Manager, concludes
that there has been a material change of a long-term nature and sufficient
reliable information is available to revalue these investments.
Determination of fair values involves subjective judgment and, because of the
inherent uncertainty of valuation, the Board of Directors' estimated values
may differ significantly from the values that would have been used had a
ready market for the securities existed, and the differences could be
material.
NOTE C -- ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
HSBC Asset Management Hong Kong Limited (the "Investment Manager") serves as
investment manager pursuant to an investment advisory and management
agreement with the Fund. The Fund pays the Investment Manager a fee for its
services at an annual rate of 1.50% of the Fund's average weekly net assets.
HSBC Private Equity Management Hong Kong Limited (the "Direct Investment
Manager") serves as investment manager for the direct investment portfolio
pursuant to a direct investment management agreement. For its services, the
Direct Investment Manager is paid a fee from the Investment Manager.
23
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
Under the terms of an economic advisory agreement, the Fund paid HongkongBank
China Services, Limited (the "Economic Adviser") an economic advisory fee at
an annual rate of 0.10% of the average weekly net assets of the Fund. The
Economic Adviser is an affiliate of the Investment Manager and the Direct
Investment manager. The economic advisory agreement was not renewed as of
July 1, 1996.
For the year ended October 31, 1996, the Fund incurred commissions on the
purchase and sale of securities of $427,249, of which $569 was paid to
affiliates of the Investment Manager and the Direct Investment Manager.
No director, officer or employee of the Investment Manager or Direct
Investment Manager or any affiliates of those entities will receive any
compensation from the Fund for serving as an officer or director of the Fund.
The Fund pays the Chairman of the Board and each of the directors (who is
not a director, officer or employee of the Investment Manager or Direct
Investment Manager or any affiliate thereof) an annual fee of $12,500 and
$7,500, respectively, plus $1,000 for each Board of Directors' meeting or
Audit Committee meeting attended. In addition, the Fund will reimburse each
of the directors for travel and out-of-pocket expenses incurred in connection
with attending Board of Directors' meetings.
NOTE D -- CAPITAL STOCK
On January 17, 1996, the Fund issued 2,855 shares valued at $42,382 to
shareholders reinvesting their dividends in the Fund's Dividend Reinvestment
and Cash Purchase Plan. At October 31, 1996, 100,000,000 shares of $.01 par
value common stock were authorized, of which 10,844,937 shares were issued
and outstanding.
NOTE E -- INVESTMENT TRANSACTIONS
For the year ended October 31, 1996, the Fund had purchases and sales of
investment securities, other than short-term securities, of $60,440,374 and
$56,535,686, respectively. At October 31, 1996, the cost of investments for
federal income tax purposes was $134,256,176. Accordingly, gross unrealized
appreciation of investments was $29,621,364, while gross unrealized
depreciation of investments was $20,628,697, resulting in net unrealized
appreciation of investments of $8,992,667. In addition, the Fund has a
capital loss carryforward of $12,055,981, which may be utilized to offset
capital gains through October 31, 2003.
NOTE F -- INVESTMENTS IN CHINA
The Fund's investments in China companies involve certain risks not typically
associated with investments in securities of U.S. companies or the U.S.
Government, including risks relating to (1) social, economic and political
uncertainty; (2) price volatility, lesser liquidity and smaller market
capitalization of securities markets in which securities of China companies
trade; (3) currency exchange fluctuations, currency blockage and higher
rates of inflation; (4) controls on foreign investment and limitations on
repatriation of invested capital and on the Fund's ability to exchange local
currencies for U.S. dollars; (5) governmental involvement in and control
over the economy; (6) risk of nationalization or expropriation of assets;
(7) the nature of the smaller, less seasoned and newly organized China
companies, particularly in China; and (8) the absence of uniform accounting,
auditing and financial reporting standards, practices and disclosure
requirements and less government supervision and regulation.
24
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
NOTE G -- INSTALLMENT SALE
On September 23, 1994, the Fund entered into an agreement to sell its direct
investment in Hollco International Holdings, Ltd. ("Hollco") on an
installment basis over a 27-month period. Under the terms of the agreement,
the Fund has received proceeds and dividends totaling HK$9,459,376
(US$1,223,725) through October 31, 1996. The Fund is scheduled to receive
the remaining proceeds of the sale of HK$1,073,563 in December 1996.
Utilizing the Hong Kong Dollar to US dollar exchange rate on October 31,
1996, the remaining proceeds from the sale equate to US$138,843. In
addition, the Fund is entitled to dividends on the outstanding proceeds if
Hollco has sufficient surplus to pay such dividends. During 1996, after
reducing the original cost of Hollco by the proceeds received, to zero, the
Fund recognized a gain of US$220,910. The Fund will recognize future
proceeds and dividends as gains and income, respectively. The Fund is
entitled to exercise an option to retain 25% of its original investment prior
to December 31, 1996.
25
<PAGE>
THE CHINA FUND, INC.
REPORT OF INDEPENDENT AUDITORS
- -------------------------------------------------------------------------------
The Stockholders and Board of Directors
The China Fund, Inc.:
We have audited the accompanying statement of assets and liabilities of The
China Fund, Inc., including the schedule of investments, as of October 31,
1996, and the related statement of operations for the year then ended,
statements of changes in net assets for each of the years in the two-year
period then ended and financial highlights for each of the years in the
four-year period then ended and for the period from July 17, 1992
(commencement of investment operations) to October 31, 1992. These financial
statements and financial highlights are the responsibility of the Fund'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 audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free from 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
securities owned as of October 31, 1996 by correspondence with the custodian
and brokers. 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, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of The
China Fund, Inc. as of October 31, 1996, the results of its operations for
the year then ended, the changes in net assets for each of the years in the
two-year period then ended and the financial highlights for the years or
periods specified in the first paragraph above, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
December 6, 1996
<PAGE>
THE CHINA FUND, INC.
DIVIDENDS AND DISTRIBUTIONS;
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
- -------------------------------------------------------------------------------
The Fund will distribute to stockholders, at least annually, substantially
all of its net investment income from dividends and interest earnings and
expects to distribute any net realized capital gains annually. Pursuant to
the Dividend Reinvestment and Cash Purchase Plan (the "Plan"), adopted by the
Fund, each stockholder will be deemed to have elected, unless State Street
Bank and Trust Company, the Plan Agent, is otherwise instructed by the
stockholder in writing, to have all distributions automatically reinvested by
the Plan Agent in Fund shares pursuant to the Plan. Stockholders who do not
participate in the Plan will receive all distributions in cash paid by check
in U.S. dollars mailed directly to the stockholder by State Street Bank and
Trust Company, as paying agent. Stockholders who do not wish to have
distributions automatically reinvested should notify the Fund, c/o the Plan
Agent for The China Fund, Inc. at P.O. Box 8200, Boston, Massachusetts
02266-8200.
The Plan Agent will serve as agent for the stockholders in administering the
Plan. If the Directors of the Fund declare an income dividend or a capital
gains distribution payable either in the Fund's Common Stock or in cash, as
stockholders may have elected, non-participants in the Plan will receive cash
and participants in the Plan will receive Common Stock, to be issued by the
Fund. If the market price per share on the valuation date equals or exceeds
net asset value per share on that date, the Fund will issue new shares to
participants at net asset value or, if the net asset value is less than 95%
of the market price on the valuation date, then at 95% of the market price.
The valuation date will be the dividend or distribution payment date or, if
that date is not a trading day on the exchange on which the Fund's shares are
then listed, the next preceding trading day. If net asset value exceeds the
market price of Fund shares at such time, participants in the Plan will be
deemed to have elected to receive shares of stock from the Fund, valued at
market price on the valuation date. If the Fund should declare a dividend or
capital gains distribution payable only in cash, the Plan Agent will, as
agent for the participants, buy Fund shares in the open market, on the New
York Stock Exchange or elsewhere, with the cash in respect of such dividend
or distribution, for the participant's account on, or shortly after, the
payment date.
Participants in the Plan have the option of making additional payments to the
Plan Agent, annually, in any amount from $100 to $3,000 for investment in the
Fund's Common Stock. The Plan Agent will use all funds received from
participants (as well as any dividends and capital gains distributions
received in cash) to purchase Fund shares in the open market on or about
January 15 of each year. Any voluntary cash payments received more than
thirty days prior to such date will be returned by the Plan Agent, and
interest will not be paid on any uninvested cash payments. To avoid
unnecessary cash accumulations, and also to allow ample time for receipt and
processing by the Plan Agent, it is suggested that participants send in
voluntary cash payments to be received by the Plan Agent approximately ten
days before January 15. A participant may withdraw a voluntary cash payment
by written notice, if the notice is received by the Plan Agent not less than
48 hours before such payment is to be invested.
27
<PAGE>
THE CHINA FUND, INC.
DIVIDENDS AND DISTRIBUTIONS;
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
(CONTINUED)
- -------------------------------------------------------------------------------
The Plan Agent maintains all stockholder accounts in the Plan and furnishes
written confirmations of all transactions in the account, including
information needed by stockholders for personal and tax records. Shares in
the account of each Plan participant will be held by the Plan Agent in
non-certificated form in the name of the participant, and each stockholder's
proxy will include those shares purchased pursuant to the Plan.
In the case of stockholders, such as banks, brokers or nominees, which hold
shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of shares certified from time
to time by the stockholder as representing the total amount registered in the
stockholder's name and held for the account of beneficial owners who are
participating in the Plan.
There is no charge to participants for reinvesting dividends or capital gains
distributions. The Plan Agent's fees for the handling of the reinvestment of
dividends and distributions will be paid by the Fund. However, each
participant's account will be charged a pro rata share of brokerage
commissions incurred with respect to the Plan Agent's open market purchases
in connection with the reinvestment of dividends or capital gains
distributions. A participant will also pay brokerage commissions incurred in
purchases from voluntary cash payments made by the participant. Brokerage
charges for purchasing small amounts of stock for individual accounts through
the Plan are expected to be less than the usual brokerage charges for such
transactions, because the Plan Agent will be purchasing stock for all
participants in blocks and prorating the lower commission thus attainable.
The automatic reinvestment of dividends and distributions will not relieve
participants of any income tax which may be payable on such dividends and
distributions.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan as
applied to any voluntary cash payment made and any dividend or distribution
paid subsequent to notice of the change sent to all shareholders at least 90
days before the record date for such dividend or distribution. The Plan also
may be amended or terminated by the Plan Agent by at least 90 days' written
notice to all shareholders. All correspondence concerning the Plan should be
directed to the Plan Agent for The China Fund, Inc. at P.O. Box 8200, Boston,
Massachusetts 02266-8200.
28
<PAGE>
THE CHINA FUND, INC.
- -------------------------------------------------------------------------------
UNITED STATES ADDRESS
The China Fund, Inc.
250 Park Avenue
New York, NY 10177
1-212-808-0500
1-888-CHN-CALL (246-2255)
DIRECTORS AND OFFICERS
John W. English, Director and Chairman of the Board
Bernard H. Asher, Director and President
Sir Alan Donald KCMG, Director
Michael F. Holland, Director
Burton Levin, Director
James J. Lightburn, Director
David F. J. Paterson, Director
Joe O. Rogers, Director
Alan Tremain, O.B.E., Director
Nigel S. Tulloch, Director
Thomas R. Callahan, Vice President, Treasurer and Secretary
Leonard B. Mackey, Jr., Assistant Secretary
INVESTMENT MANAGER
HSBC Asset Management Hong Kong Limited
DIRECT INVESTMENT MANAGER
HSBC Private Equity Management Hong Kong Limited
SHAREHOLDER SERVICING AGENT
Dewe Rogerson, Inc.
ADMINISTRATOR, CUSTODIAN, TRANSFER AGENT, DIVIDEND PAYING AGENT AND REGISTRAR
State Street Bank and Trust Company
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
LEGAL COUNSEL
Rogers & Wells
