<PAGE> 1
=============================================
THE CHINA FUND, INC.
=============================================
ANNUAL REPORT
OCTOBER 31, 1997
-------------------------------------
THE CHINA FUND, INC.
TABLE OF CONTENTS
PAGE
Key Highlights 1
Asset Allocation 2
Chairman's Statement 3
Investment Managers' Statement 5
About the Portfolio Managers 13
Schedule of Investments 14
Financial Statements 20
Notes to Financial Statements 24
Report of Independent Auditors 27
Dividends and Distributions;
Dividend Reinvestment
and Cash Purchase Plan 28
-------------------------------------
<PAGE> 2
THE CHINA FUND, INC.
KEY HIGHLIGHTS
================================================================================
<TABLE>
================================================================================
FUND DATA
- --------------------------------------------------------------------------------
<S> <C>
NYSE STOCK SYMBOL CHN
- --------------------------------------------------------------------------------
LISTING DATE JULY 10, 1992
- --------------------------------------------------------------------------------
SHARES OUTSTANDING 10,844,937
- --------------------------------------------------------------------------------
TOTAL NET ASSETS (10/31/97) US$184.0 MILLION
- --------------------------------------------------------------------------------
NET ASSET VALUE (10/31/97) $16.97
- --------------------------------------------------------------------------------
MARKET PRICE (10/31/97) $13.31
================================================================================
</TABLE>
<TABLE>
================================================================================
TOTAL RETURN
- --------------------------------------------------------------------------------
<CAPTION>
PERFORMANCE AS OF
10/31/97: NET ASSET VALUE(1) MARKET PRICE
- --------------------------------------------------------------------------------
<S> <C> <C>
1-Year 28.4% 13.9%
- --------------------------------------------------------------------------------
3-Year Cumulative 18.1% (17.8)%
- --------------------------------------------------------------------------------
3-Year Annualized 5.7% (6.3)%
- --------------------------------------------------------------------------------
5-Year Cumulative 39.3% 15.0%
- --------------------------------------------------------------------------------
5-Year Annualized 6.9% 2.8%
================================================================================
</TABLE>
<TABLE>
================================================================================
DIVIDEND HISTORY
- --------------------------------------------------------------------------------
<CAPTION>
RECORD DATE INCOME CAPITAL GAINS
- --------------------------------------------------------------------------------
<S> <C> <C>
12/31/96 $0.0834 --
- --------------------------------------------------------------------------------
12/29/95 $0.0910 --
- --------------------------------------------------------------------------------
12/30/94 $0.0093 $0.6006
- --------------------------------------------------------------------------------
12/31/93 $0.0853 $0.8250
- --------------------------------------------------------------------------------
12/31/92 $0.0434 $0.0116
================================================================================
</TABLE>
(1) Total investment returns reflect changes in net asset value per share during
each period and assumes that dividends and capital gains distributions, if any,
were reinvested. The net asset value percentages are not an indication of the
performance of a shareholder's investment in the Fund, which is based on market
price.
1
<PAGE> 3
THE CHINA FUND, INC.
ASSET ALLOCATION AS OF OCTOBER 31, 1997
================================================================================
<TABLE>
================================================================================
TEN LARGEST LISTED INVESTMENTS
- --------------------------------------------------------------------------------
<S> <C>
1. China Resources Enterprise, Ltd. 4.5%
- --------------------------------------------------------------------------------
2. Shanghai Industrial Holdings, Ltd. 4.4%
- --------------------------------------------------------------------------------
3. Hutchison Whampoa, Ltd. 3.6%
- --------------------------------------------------------------------------------
4. Citic Pacific, Ltd. 3.4%
- --------------------------------------------------------------------------------
5. Ng Fung Hong, Ltd. 3.3%
- --------------------------------------------------------------------------------
6. Leading Spirit Holdings Co., Ltd. 3.0%
- --------------------------------------------------------------------------------
7. First Tractor Co., Ltd. 2.9%
- --------------------------------------------------------------------------------
8. Qingling Motors Co., Ltd. 2.8%
- --------------------------------------------------------------------------------
9. Zhenhai Refining & Chemical Co., Ltd. 2.8%
- --------------------------------------------------------------------------------
10. Cheung Kong Infrastructure 2.7%
================================================================================
</TABLE>
<TABLE>
================================================================================
TEN LARGEST DIRECT INVESTMENTS
- --------------------------------------------------------------------------------
<S> <C>
1. Guangdong Kelon Electrical Holdings Co., Ltd. 11.4%
- --------------------------------------------------------------------------------
2. A-S China Plumbing Products Ltd. 2.4%
- --------------------------------------------------------------------------------
3. CM Telecom International, Ltd. 2.1%
- --------------------------------------------------------------------------------
4. China Southern Glass Holding Co., Ltd. 1.3%
- --------------------------------------------------------------------------------
5. New World Sun City, Ltd. 1.3%
- --------------------------------------------------------------------------------
6. Wai Kee China Investments (BVI) Co., Ltd. 1.1%
- --------------------------------------------------------------------------------
7. Road King Infrastructure, Ltd. 0.7%
- --------------------------------------------------------------------------------
8. Shanghai Links Executive Community
Class A preference shares 0.5%
- --------------------------------------------------------------------------------
9. Companion Marble Holdings, Ltd. 0.4%
- --------------------------------------------------------------------------------
10. Shanghai Links Executive Community 0.1%
================================================================================
</TABLE>
2
<PAGE> 4
THE CHINA FUND, INC.
CHAIRMAN'S STATEMENT
================================================================================
Dear Stockholders: December 12, 1997
This has been quite an eventful year for China and Hong Kong, bringing added
attention and interest in the region. I am pleased to report that despite the
difficulties in the Asian markets, the China Fund provided shareholders with a
strong performance for the 1997 fiscal year ended October 31, 1997. For the
fiscal year, the China Fund's Net Asset Value (NAV) and market price increased
by 28.4% and 13.9%, respectively.
CHINA AND HONG KONG MARKETS OVERVIEW
The stock markets of both China and Hong Kong reflected solid growth over the
first three quarters of the fiscal year. Although the Asian currency crisis
dampened investor sentiment and triggered a steep market correction in the
fourth quarter of the fiscal year, most of the China markets closed Fiscal 1997
on a positive note. The Shanghai "B" index rose 35.9% and Shenzhen "B" advanced
24.2% for the 12 months ended October 31, 1997. While the Hang Seng index fell
14.9%, the Hong Kong Stock Exchange "H" share index gained 21.8%.
Growing investor interest in China and Hong Kong was demonstrated clearly by the
significant increase in primary market activity over the fiscal year. The
Shanghai and Shenzhen markets each listed an additional nine "B" shares to their
respective markets, expanding the number of companies available to foreign
investors. The number of companies with listed "H" shares nearly doubled,
further broadening investor access to China companies listed in Hong Kong.
Although the number of "N" shares, companies listed in the United States,
remained unchanged, market capitalization of the "B", "H", and "N" shares more
than doubled to US$14.7 billion during the fiscal year.
LISTED INVESTMENTS
During the year, the China Fund reduced its weighting in Hong Kong companies.
The Fund has more than doubled its exposure in "H" shares, expecting a further
earnings recovery in China as the economy continues to improve. The Fund reduced
its holdings in the property sector as the government introduced measures to
cool down the real estate market. Further, in light of the uncertain market
outlook brought about by the currency crisis in Asia, it also liquidated
holdings in the banking sector and raised its cash level to 6.7%.
DIRECT INVESTMENTS
During the year, the Fund's direct investment portfolio was approximately 95%
invested with a total value of US$39.0 million. Its holdings included private
companies conducting business in telecommunications, property development,
refrigerator manufacturing, sanitaryware manufacturing and distribution,
textiles, glass, tollroad operations and granite and marble products.
3
<PAGE> 5
THE CHINA FUND, INC.
CHAIRMAN'S STATEMENT
================================================================================
In October 1997, one of the Fund's direct investments, CM Telecom International
Limited ("CM Telecom") transferred its primary listing from Singapore to Hong
Kong. The shares of CM Telecom are currently trading on both the Singapore Stock
Exchange and The Stock Exchange of Hong Kong Limited. The Direct Investment
Manager continues to review new investment opportunities in China.
LOOKING TO 1998
As the currency crisis in Asia continued into November and December, the stock
markets throughout Asia remained volatile. In tandem, the Fund's net asset value
declined approximately 8% from October 31, 1997 to December 12, 1997. We believe
that China can weather the financial storm better than most other countries in
Asia as its economy has remained stable in comparison to its neighbors. China's
outlook remains strong, with high foreign exchange reserves of US$134.1 billion,
a record trade surplus of US$40.24 billion, low foreign debt at US$116.3
billion, an inflation rate of 1.1% and a 9.9% economic growth rate. Further,
given China's low labor cost advantage and a large domestic consumer market, we
expect to see increased foreign direct investment.
We believe China will face major challenges as the country strives to maintain
high economic growth of between 8% and 9% amid the current economic
uncertainties in Asia. Additionally, we see the economic plan to implement large
scale reforms of China's inefficient state-owned sector, as announced at the
15th Party Congress in September as another test of China's leadership. The risk
of rising unemployment, if not properly addressed, may lead to lower consumer
spending and slower domestic economic growth. Nonetheless, we view the strong
improvements in China's infrastructure and service sectors as instrumental in
the long run.
Finally, we want to thank you, our shareholders, for your continued interest in
the China Fund. We believe promising long-term growth of China's economy will
remain intact and will continue to provide excellent investment opportunities
for 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
4
<PAGE> 6
THE CHINA FUND, INC.
INVESTMENT MANAGERS' STATEMENT
================================================================================
Dear Stockholders: December 12, 1997
REVIEW OF LISTED INVESTMENTS
MARKET REVIEW
The Hong Kong equity market closed the twelve-month period under review 14.9%
lower with a high degree of volatility. The market started the period positively
amid optimism over an improved economic outlook and a buoyant property market.
The Hang Seng Index quickly surged through the 13,000 level and finished 1996 at
13,451. The optimism continued into the new year and the Hang Seng Index
exceeded the historic 14,000 mark in mid-January. Subsequently, worries about
possible overheating in the property market and the death of senior Chinese
leader Deng Xiaoping in February initiated some profit-taking. More selling was
triggered by the Financial Secretary's budget speech which outlined a large
increase in land supply for housing developments. This led to concern about an
over supply of residential properties and dampened share prices of property
stocks. This, coupled with the increase in US interest rates, caused the Hang
Seng Index to trade as low as 11,952 in early April, despite satisfactory
corporate results. Towards the end of April, amid better sentiment in the US
financial markets and signs of stability in property prices, the equity market
began to recover. The Hang Seng Index enjoyed a liquidity-driven rally starting
in May which continued through June in the run-up to China's resumption of
sovereignty over Hong Kong. However, the looming currency crisis which started
in Thailand where the country's currency was forced to devalue on pressure from
speculative attacks in early July impacted Hong Kong a few months later. By
early October, the fact that the Hong Kong dollar was the only currency in Asia
that did not devalue drew increasing speculative pressure which took its toll on
the stock market. The Hong Kong government, with the support of China, was
determined to defend its 14 year peg to the US dollar at the HK$7.8 to the US$1
level. As a result, in October alone, the Hang Seng Index lost 29.4% of its
value. As of October 31, 1997, the Hang Seng Index stood at 10,624, representing
a decline of 1,854 points or 14.9% during the Fund's fiscal year.
The Chinese equity markets posted better performances during the fiscal year but
also experienced a sharp pullback during the last quarter. The "H" shares
rallied towards the end of 1996 due to a combination of capital inflow from
China and overseas and the general expectation of an earnings turnaround in
1997. Rumors of Deng Xiaoping's poor health dampened investors' sentiment in
early 1997. However, with the official news of Deng's death on February 20th,
the "H" share market rebounded as the market did not expect any major challenge
to President Jiang Zemin's leadership after Deng's death. The "H" share market
consolidated briefly in March but investors returned to the market in April and
May as the outlook for China's economy improved which led to a better earnings
outlook. However, the market retreated in June in response to the government's
crackdown on state-owned enterprises that misappropriated funds for unauthorized
uses. Negative sentiment prevailed when the senior management of a large listed
"H" share company was dismissed for diverting a large sum of money into the
stock market. In addition, the disappointing performance of four new "H" share
listings in June added to the weak market sentiment during the month. In July
and August, rumors of asset restructuring and mergers and acquisitions amongst
"H" share companies boosted share prices. Buying interest was strong as
investors anticipated that some of these stocks will be likely candidates for
mergers and acquisitions. In mid-September, China held its 15th Party Congress,
which is an important political meeting of senior government officials held once
every five
5
<PAGE> 7
THE CHINA FUND, INC.
INVESTMENT MANAGERS' STATEMENT (CONTINUED)
================================================================================
REVIEW OF LISTED INVESTMENTS (CONTINUED)
years. The general outcome of the meeting was positive, with President Jiang
Zemin endorsing the continuation of market reforms and promising to accelerate
the privatization of state-owned enterprises. However, the "H" shares
subsequently fell as investors increasingly believed that the benefits from such
reforms will only be seen over a longer time horizon. The overall negative
sentiment in Asia also impacted "H" share price performance towards the end of
the fiscal year. After reaching a high of 1,727 in late August, the "H" share
index fell sharply over the subsequent two months to close at 965 at the end of
October 1997 which still represented a gain of 21.8% from a year earlier.
The "B" share markets in Shanghai and Shenzhen were quite volatile during the
Fund's fiscal year. Share prices rallied in late 1996 driven by the news that
local investors would be allowed to buy "B" shares. Speculation that the
government would further implement measures to stimulate the "B" share markets
also boosted sentiment. In early December, the market consolidated briefly in
response to the implementation of a 10% daily price fluctuation limit on both
the Shanghai and Shenzhen stock markets. However, the strong market liquidity
created by the steep reduction in bank deposit rates by an average of 2.5% in
1996 and the improved outlook for China's economy soon led to a price recovery.
We saw a slight correction during January but the market managed to regain its
earlier losses towards the end of February as political stability was expected
to be maintained after Deng's death. The "B" share markets continued their
upward momentum in March and April. Rumours of interest rate and reserve
requirement ratio cuts in April, coupled with high dividends payout and
potential asset injection stories further lifted investors' sentiment. Following
the sharp rise in share prices of China's domestic stock markets over the first
four months of 1997, the Chinese government introduced measures to stabilize the
market in early May. These new measures included increasing stamp duties and
quotas for new listings, banning state owned enterprises and banks from
speculating in the stock market as well as replacing several senior officials at
the Chinese Securities Regulatory Commission and local brokerage houses
suspected of illegal stock trading. As a result, the "B" share markets gradually
fell on reduced turnover starting from May 1997 and extending to the end of
October 1997. For the year ending October 1997, the Shanghai and Shenzhen "B"
share indices still registered gains of 35.9% and 24.2% respectively.
On the economic front, China continued to post healthy GDP growth of 9.0% over
the first nine months of 1997 as compared with 9.7% in 1996 while inflation, as
measured by the National Retail Price Index, fell to 1.1% over this period from
6.1% last year. Money supply growth, measured by M2, decreased significantly
from 25.3% at the end of 1996 to 17.1% by September 1997. Given the low
inflation rate and moderate money supply growth, the Chinese central bank
announced a round of interest rate cuts on October 23 with deposit and lending
rates reduced by an average of 1.1% and 1.5% respectively. Following the
interest rate cuts, one year time deposits fell from 7.47% to 5.67%. The move
should be positive for the economy as it will ease interest payment burdens on
companies operating in China, stimulate consumer spending and improve overall
market liquidity. In the meantime, export growth was strong at 23.2% during the
first ten months of 1997 giving rise to a record
6
<PAGE> 8
THE CHINA FUND, INC.
INVESTMENT MANAGERS' STATEMENT (CONTINUED)
================================================================================
REVIEW OF LISTED INVESTMENTS (CONTINUED)
cumulative trade surplus of US$35.6 billion. China's foreign exchange reserve
also grew rapidly in 1997, up 27.7% to US$134.1 billion by the end of September
1997 from US$105.0 billion registered at year-end 1996. Despite the economic
turmoil affecting most of Asia which triggered sharp depreciation of their
currencies, the Chinese official currency, renminbi (RMB), was stable at RMB8.3
to US$1.
On July 1, 1997, China officially resumed sovereignty over Hong Kong following
156 years of British rule. The transition was smooth and orderly. There was a
high degree of continuity as most senior government officials and civil servants
under the previous administration retained their posts after July 1st. Public
confidence in the future of Hong Kong was also high as was reflected by the
buoyant local stock and property markets before and after the historic event.
The 15th party congress held in mid-September was an important milestone for
political and economic development in China. During the meeting, the political
position of the current leadership under President Jiang Zemin was further
solidified. Jiang endorsed the continuation of market reforms initiated by Deng
Xiaoping in 1978 and took a major, bold step in accelerating the privatization
of the state-owned enterprises. Vice Premier Zhu Rongji, the engineer of China's
economic soft-landing, has emerged as the most likely candidate to become
Premier next year and oversee the continued liberalization of the Chinese
economy. In late October, China's President Jiang Zemin made an official state
visit to the US. The visit was considered a success as several agreements were
signed which helped to improve relations between the two countries. Cross-strait
relations between China and Taiwan improved from last year's tense military
stand-off as both sides focused on economic co-operation and peaceful solutions
to their political differences.
7
<PAGE> 9
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, 1997
and October 31, 1996:
<TABLE>
<CAPTION>
10/31/97 10/31/96
-------- --------
<S> <C> <C> <C>
HONG KONG Conglomerate 26.4% 19.4%
Industrial 11.8 20.9
Infrastructure 6.4 3.4
Property 4.0 21.9
Service 0.0 2.8
Utility 0.0 2.9
Transportation 3.1 2.0
----- -----
51.7 73.3
===== =====
"H" SHARES Industrial 16.0 6.4
Utility 2.9 0.0
Transportation 5.5 3.3
----- -----
24.4 9.7
===== =====
HONG KONG SUB-TOTAL 76.1 83.0
===== =====
SHANGHAI "B" SHARES Industrial 3.7 5.4
Property 1.5 0.0
Service 1.8 1.6
Transportation 2.4 1.4
Utility 2.8 0.9
----- -----
12.2 9.3
===== =====
SHENZHEN "B" SHARES Industrial 1.1 2.7
Property 0.8 0.0
Transportation 0.0 1.1
----- -----
1.9 3.8
===== =====
"N" SHARES Power 2.9 2.8
===== =====
CHINA SUB-TOTAL 17.0 15.9
===== =====
SINGAPORE Service 0.7 1.0
===== =====
CASH 6.2 0.1
===== =====
TOTAL 100.0% 100.0%
===== =====
</TABLE>
8
<PAGE> 10
THE CHINA FUND, INC.
INVESTMENT MANAGERS' STATEMENT (CONTINUED)
================================================================================
REVIEW OF LISTED INVESTMENTS (CONTINUED)
During the Fund's fiscal year, the Fund reduced its weighting in Hong Kong,
bringing the exposure down to 51.7% from 73.3%. We have increase the Fund's "H"
share holding from 9.7% to 24.4%. The exposure to Shanghai "B" shares was
increased to 12.2% from 9.3% while the weighting in the Shenzhen "B" shares was
cut from 3.8% to 1.9%. The weighting in "N" shares remained mostly unchanged at
2.9%. In light of the uncertain market outlook brought about by the currency
crisis in Asia, cash position was raised to 6.2% from 0.1%.
Over the period, the Listed Investment Manager consolidated the portfolio by
reducing the number of stock holdings from 72 to 43. In Hong Kong, weighting in
the property sector was significantly reduced. Positions in several property
companies such as Cheung Kong Holdings, China Overseas Land, Henderson
Investment, Sun Hung Kai Properties and Wharf Holdings were eliminated. We grew
more cautious on the property sector as the government introduced measures to
cool the property market. However, we have increased our holding in Cheung Kong
Infrastructure on the belief that the company's strong reputation will enable it
to tap into lucrative projects across China. In the conglomerate sector, we have
eliminated our position in Swire Pacific on slower earnings growth outlook and
added to Hutchison Whampoa, a major conglomerate with expanding operations in
China, as the company is well-positioned to benefit from the improvements in the
Chinese economy with their multi-facet business reach in China. Exposure to the
utility sector has been eliminated as a result of our disposal of Hong Kong
Telecom and Consolidated Electric Power Asia. We have also cleared some small
industrial holdings such as Fountain Set, Hung Hing Printing, Kingboard
Chemical, MC Packaging, Yip's Hang Cheung and Tingyi over the period. Shanghai
Industrial Holdings has been re-classified in the conglomerate sector from the
industrial sector. The company has been transformed from a pure industrial
company into a conglomerate with a diversified range of business. This change
accounted for most of the increase in the conglomerate sector from 19.4% to
26.4%.
The weighting in "H" shares has been increased substantially on the expectation
of earnings recoveries as the Chinese economy improves. The Fund has increased
holding in Qingling Motors in anticipation of strong earnings growth as the
company had successfully gained market share and achieved higher profit margins
with the introduction of a new truck model last year. The Fund also built a
position in First Tractor, China's leading manufacturer of farm tractor
equipment on strong growth prospects on the back of China's push to modernize
the rural economy and Beijing Datang, a major power producer in Northern China.
In addition, the Fund acquired a position in China Eastern Airline, one of
China's three largest airlines with a base in Shanghai, a major business center
of China. Moreover, the Fund has increased exposure to Zhenhai Refining, one of
China's largest oil refining plants benefiting from rising demand as Chinese
economic growth recovers. The Fund has sold its position in Chengdu Telecom,
Jilin Chemical, Luoyang Glass, Maanshan Iron & Steel and Guangshan Railway on
weak earnings outlooks for these companies.
The weighting in the Shanghai "B" share market has been increased. The Fund
bought Shanghai Lujiazui, a major land developer in the Shanghai Pudong area,
which will be the new business center of Shanghai over the next few years. The
Fund also built a position in Inner Mongolia Yitai Coal, a coal mining and
distribution company that would benefit from
9
<PAGE> 11
THE CHINA FUND, INC.
INVESTMENT MANAGERS' STATEMENT (CONTINUED)
================================================================================
REVIEW OF LISTED INVESTMENTS (CONTINUED)
China's strong coal demand for power generation. We have also added Zhejiang
Southeast Electric Power, a power producer located in one of China's fastest
growing provinces. The Fund has disposed of its holdings in Eastern
Communication, Shanghai Diesel Engine, Shanghai Huaxin Cement, Shanghai Post and
Telecom, Shanghai Refrigerator Compressor and Shanghai New Asia as we expect the
earnings momentum for these companies to decelerate. In Shenzhen, we have added
Shenzhen Fangda, a profitable manufacturer of quality construction materials
while eliminating small positions in Anhui Gujing Distillery, Changchai Diesel,
China Southern Glass, China Merchant Sekou Port and Guangdong Provincial
Expressway.
REVIEW OF DIRECT INVESTMENTS
As of October 31, 1997, approximately 95% of the Fund's direct investment assets
were committed for investment in eleven companies. A description of the direct
investments is set forth 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 is being developed in phases over a
period of six to eight years. At October 31, 1997, NWSC had completed
construction of Phases 1 to 4 and Phase 5 was under construction. NWSC had sold
100% of Phases 1 to 4, and 63% of Phase 5 as of October 31, 1997. The Fund's
investment is valued at cost.
GUANGDONG KELON ELECTRICAL HOLDINGS COMPANY LIMITED ("KELON"),
Kelon is engaged in the manufacture and sale of refrigerators in China. It has
been the market leader in the PRC refrigerator market in terms of both
production and sales volume since 1991. Kelon is currently listed, as a Hong
Kong "H" share, on The Stock Exchange of Hong Kong Limited. The value of the
Fund's Kelon shares as of October 31, 1997 was US$21.0 million compared with a
cost of US$5.5 million.
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. China Motion is currently listed on the Stock Exchange of
Singapore and on The Stock Exchange of Hong Kong Limited. The value of the
Fund's investment in China Motion as of October 31, 1997 was US$3.9 million
compared with a cost of US$2.9 million.
10
<PAGE> 12
THE CHINA FUND, INC.
INVESTMENT MANAGERS' STATEMENT (CONTINUED)
================================================================================
REVIEW OF DIRECT INVESTMENTS (CONTINUED)
A-S CHINA PLUMBING PRODUCTS LIMITED ("ASPPL")
ASPPL was established to produce and distribute a complete line of high quality
sanitaryware for 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. The Fund's investment is valued at cost.
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 (the "HKSE"), which is engaged primarily in marketing and manufacturing
production equipment for ceramic products.
Due to the cash flow shortage experienced by Siu Fung and other companies within
the SFH group, the company has been unable to service its debt obligations as
they have come due. In addition, Siu Fung has been unable to generate sufficient
funds from its operations to fund its working capital requirements. The trading
in the shares of SFH on the HKSE has been suspended since October 28, 1996.
Although a number of parties have expressed an interest in acquiring the assets
of Siu Fung or investing in SFH, in light of the uncertainty over the recovery
of the Fund's investment in Siu Fung, in October 1996, the Board of Directors
decreased the value of the Fund's direct investment in Siu Fung from US$8.0
million 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 it's fiscal year ending 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. In 1996 the Board of
Directors decreased the value of Fund's direct investment in Wing Hong from
US$3.75 million 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. China Southern Glass is
expanding through the establishment of a float glass production plant utilizing
western technologies and equipment. The value of the Fund's investment in China
Southern Glass as of October 31, 1997 was US$2.4 million compared with a cost of
US$2.3 million.
11
<PAGE> 13
THE CHINA FUND, INC.
INVESTMENT MANAGERS' STATEMENT (CONTINUED)
================================================================================
REVIEW OF DIRECT INVESTMENTS (CONTINUED)
WAI KEE CHINA INVESTMENTS (BVI) COMPANY LIMITED ("WAI KEE")
Wai Kee is an investment holding company that 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 operations. The Group has concessions to operate eighteen tollroads
in China. Wai Kee's major shareholder is Wai Kee Holding Limited, a listed
company on the HKSE, which is engaged in quarrying, civil engineering and
dredging in Hong Kong. The Fund's investment is valued at cost. However, the
Fund is expected to be able to exercise a right to convert its investment in Wai
Kee into the listed shares of Wai Kee's parent, Wai Kee Holdings Limited ("WKH")
at a conversion price of HK$1.34 in July 2000. The share price of WKH as of
October 31, 1997 was HK$1.51.
ROAD KING INFRASTRUCTURE LIMITED ("ROAD KING")
Road King holds interests in and operates twenty-six tollroads located in China
with a combined length of approximately 820 kilometers. Road King is a 44%
subsidiary of Wai Kee China Investments (BVI) Company Limited, a company in
which the Fund has an existing investment. Road King is currently listed on the
HKSE. The value of the Fund's Road King shares as of October 31, 1997 was US$1.3
million compared with a cost of US$1.9 million.
COMPANION MARBLE (HOLDINGS) LIMITED ("CML")
CML, through its various subsidiaries, is engaged in the processing, wholesaling
and retailing of and the provision of installation services for granite and
marble products in Hong Kong and China. CML operates three granite and marble
processing workshops two located in Hong Kong and one in Dongguan that commenced
operations at a new 30,000 square meters block cutting factory in October 1996.
The Fund's investment is valued at cost. However, the Convertible Bond held by
the Fund is convertible into the listed shares of CML at a pre-determined
conversion price.
SHANGHAI LINKS EXECUTIVE COMMUNITY LIMITED ("SLEC")
SLEC is a company incorporated to develop and manage a high quality, western
style residential community providing residences, school, healthcare and
recreational facilities in Shanghai. SLEC owns the land use rights for a sight
of 1.4 million square meters where a total of 474 custom-built detached villas
and 326 apartments will be constructed. The villas and apartments will be leased
mainly to the expatriate employees of multinational corporations. The Fund's
investment is valued at cost
Sincerely,
Stella S.M. Yiu, Listed Investment Manager
David F.J. Paterson, Direct Investment Manager
12
<PAGE> 14
THE CHINA FUND, INC.
ABOUT THE PORTFOLIO MANAGERS
================================================================================
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.
13
<PAGE> 15
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1997
<TABLE>
==================================================================================================================
<CAPTION>
NAME OF ISSUER
AND TITLE OF ISSUE SHARES VALUE (NOTE A)
------------------ ------ --------------
<S> <C> <C> <C>
COMMON STOCK AND OTHER EQUITY INTERESTS
CHINA - SHANGHAI "B" SHARES
COAL - (0.8%)
Inner Mongolia Yitai Coal *......................................... 3,281,000 $ 1,469,888
------------
ELECTRIC UTILITIES - (2.1%)
Heilongjiang Electric Power Co., Ltd................................ 3,035,500 2,276,625
Zhejiang Southeast Electric Power Co., Ltd. *....................... 5,229,000 1,670,148
------------
3,946,773
------------
PROPERTY DEVELOPER - (1.1%)
Shanghai Lujiazui Finance and Trade Zone Development Co., Ltd....... 2,336,181 2,102,563
------------
TEXTILE - (2.1%)
Inner Mongolia Erdos Cashmere Products Co., Ltd..................... 2,702,100 1,551,005
Shanghai Worldbest Co., Ltd......................................... 3,985,000 2,223,630
------------
3,774,635
------------
TRANSPORTATION - (1.8%)
Shanghai Dazhong Taxi Co., Ltd...................................... 1,986,140 1,569,051
Tientsin Marine Shipping Co., Ltd................................... 3,463,000 1,779,982
------------
3,349,033
------------
TRAVEL & TOURISM - (1.4%)
Huangshan Tourism Development Co., Ltd.............................. 2,826,000 2,526,444
------------
TOTAL SHANGHAI "B" SHARES - (Cost $12,181,787) 9.3% 17,169,336
----- ------------
CHINA - SHENZHEN "B" SHARES
HOUSEHOLD APPLIANCES - (0.8%)
Wuxi Little Swan Co., Ltd........................................... 1,343,082 1,528,697
------------
INDUSTRIALS - (0.7%)
Shenzhen Fangda Building Material Co., Ltd.......................... 900,000 1,204,811
------------
TOTAL SHENZHEN "B" SHARES - (Cost $1,780,050) 1.5% 2,733,508
----- ------------
TOTAL CHINA - (Cost $13,961,837) 10.8% 19,902,844
----- ------------
</TABLE>
See notes to financial statements.
14
<PAGE> 16
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 1997
<TABLE>
=================================================================================================================
<CAPTION>
NAME OF ISSUER
AND TITLE OF ISSUE SHARES VALUE (NOTE A)
------------------ ------ --------------
<S> <C> <C> <C>
COMMON STOCK AND OTHER EQUITY INTERESTS (CONTINUED)
HONG KONG
CONTAINERS & PACKAGING - (0.6%)
Sinocan Holdings, Ltd............................................... 3,000,000 $ 1,057,363
------------
DIVERSIFIED - (17.0%)
China Resources Enterprise, Ltd..................................... 3,000,000 8,226,088
Citic Pacific, Ltd.................................................. 1,300,000 6,221,303
Guangdong Investment, Ltd........................................... 3,206,000 2,042,236
Hutchison Whampoa, Ltd.............................................. 960,000 6,642,954
Shanghai Industrial Holdings, Ltd................................... 1,820,000 8,097,782
------------
31,230,363
------------
ELECTRONICS - (3.0%)
Leading Spirit Holdings Co., Ltd.................................... 23,465,600 5,463,116
------------
FINANCE - (1.4%)
China Everbright, Ltd............................................... 2,362,000 2,535,679
------------
FOOD & BEVERAGES - (5.0%)
China Food Holdings, Ltd............................................ 7,318,000 3,218,159
Ng Fung Hong, Ltd................................................... 6,476,000 6,072,690
------------
9,290,849
------------
HOUSEHOLD APPLIANCES - (0.0%)
Hualing Holdings, Ltd. (warrants expiring on March 31,1999)*........ 1,420,000 31,957
------------
INFRASTRUCTURE - (4.9%)
Cheung Kong Infrastructure.......................................... 1,889,000 4,886,503
New World Infrastructure, Ltd....................................... 2,100,000 4,155,727
------------
9,042,230
------------
OFFICE FURNISHINGS & SUPPLIES - (0.4%)
Lamex Holdings, Ltd................................................. 3,600,000 838,130
------------
PROPERTY DEVELOPER - (3.1%)
China Resources Beijing Land Co..................................... 5,200,000 2,118,606
New World Development Co., Ltd...................................... 1,000,000 3,518,075
------------
5,636,681
------------
</TABLE>
See notes to financial statements.
15
<PAGE> 17
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 1997
<TABLE>
===================================================================================================================
<CAPTION>
NAME OF ISSUER
AND TITLE OF ISSUE SHARES VALUE (NOTE A)
------------------ ------ --------------
<S> <C> <C> <C>
COMMON STOCK AND OTHER EQUITY INTERESTS (CONTINUED)
HONG KONG (CONTINUED)
TRANSPORTATION - (4.3%)
China Merchants Holdings Co., Ltd................................... 2,500,000 $ 3,621,548
Cosco Pacific, Ltd.................................................. 3,713,000 4,322,188
------------
7,943,736
------------
TOTAL HONG KONG - (Cost $54,732,771) 39.7% 73,070,104
----- ------------
HONG KONG - "H" SHARES
AGRICULTURAL MACHINERY - (2.9%)
First Tractor Co., Ltd. * .......................................... 6,900,000 5,354,718
------------
CHEMICALS - (4.2%)
Shanghai Petrochemical Co., Ltd..................................... 9,500,000 2,549,635
Zhenhai Refining & Chemical Co., Ltd................................ 11,130,000 5,182,435
------------
7,732,070
------------
ELECTRIC UTILITIES - (3.9%)
Beijing Datang Power Generation Co., Ltd. * ........................ 8,044,000 4,057,634
Harbin Power Equipment Co., Ltd..................................... 10,292,000 1,970,143
Northeast Electrical Transmission & Transformation
Machinery Manufacturing Co., Ltd. ................................ 6,108,000 1,082,321
------------
7,110,098
------------
HOUSEHOLD APPLIANCES - (1.5%)
Guangdong Kelon Electronic Holdings Co., Ltd........................ 2,120,000 2,687,189
------------
STEEL - (1.6%)
Angang New Steel Co., Ltd. * ....................................... 13,552,000 2,997,338
------------
TEXTILE - (0.5%)
Jingwei Machinery Co., Ltd.......................................... 6,000,000 892,453
------------
TRANSPORTATION - (4.2%)
China Eastern Airlines, Corp. * .................................... 11,200,000 2,535,084
Qingling Motors Co., Ltd............................................ 8,006,000 5,229,295
------------
7,764,379
------------
TOTAL HONG KONG - "H" SHARES - (Cost $29,629,460) 18.8% 34,538,245
----- ------------
TOTAL HONG KONG (INCLUDING
"H" SHARES) - (Cost $84,362,231) 58.5% 107,608,349
----- ------------
</TABLE>
See notes to financial statements.
16
<PAGE> 18
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 1997
<TABLE>
===================================================================================================================
<CAPTION>
NAME OF ISSUER
AND TITLE OF ISSUE SHARES VALUE (NOTE A)
------------------ ------ --------------
<S> <C> <C> <C>
COMMON STOCK AND OTHER EQUITY INTERESTS (CONTINUED)
SINGAPORE
ELECTRONICS - (0.5%)
Thakral Corporation, Ltd. (Cost $1,067,259)......................... 1,568,600 $ 941,160
------------
UNITED STATES - "N" SHARES
ELECTRIC UTILITIES - (2.2%)
Huaneng Power International, Inc. *................................. 97,000 2,134,000
Shandong Huaneng Power Development, Ltd............................. 265,000 1,970,938
------------
TOTAL UNITED STATES - "N" SHARES - (Cost $4,179,272) 2.2% 4,104,938
----- ------------
TOTAL COMMON STOCK AND OTHER
EQUITY INTERESTS - (Cost $103,570,599) 72.0% 132,557,291
----- ------------
</TABLE>
<TABLE>
<CAPTION>
NAME OF ISSUER PAR VALUE/
AND TITLE OF ISSUE SHARES VALUE (NOTE A)
------------------ ------ --------------
<S> <C> <C> <C>
DIRECT INVESTMENTS (NOTE B)
CERAMIC PRODUCTS - (0.0%)
Siu Fung Ceramics Concept Company, Ltd. (acquired 11/30/94)* (1) 8,000 0
------------
CONSTRUCTION - (1.1%)
Wai Kee China Investments (BVI) Company Ltd.
(acquired 10/23/95) (1) .......................................... 180 2,000,000
------------
GRANITE AND MARBLE PRODUCTS - (0.4%)
Companion Marble Holdings, Ltd., convertible bond,
6.00%, 2/2/00 (acquired 2/20/97)(1) .............................. HK $5,000,000 645,203
------------
HOUSEHOLD APPLIANCES - (11.4%)
Guangdong Kelon Electrical Holdings Co., Ltd. (acquired 12/1/94).... 16,585,682 21,023,046
------------
</TABLE>
See notes to financial statements.
17
<PAGE> 19
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 1997
<TABLE>
===================================================================================================================
<CAPTION>
NAME OF ISSUER PAR VALUE/
AND TITLE OF ISSUE SHARES VALUE (NOTE A)
------------------ ------ --------------
<S> <C> <C> <C>
DIRECT INVESTMENTS (CONTINUED)
INDUSTRIALS - (1.3%)
China Southern Glass Co., Ltd....................................... 149,559 $ 59,967
China Southern Glass Holding Co., Ltd., convertible bond,
5.25%, 7/17/00 (acquired 4/7/95)(2)............................... US$2,250,000 2,340,604
------------
2,400,571
------------
INFRASTRUCTURE - (0.7%)
Road King Infrastructure, Ltd. (acquired 3/29/96)................... 1,969,200 1,273,492
------------
PLUMBING - (2.4%)
A-S China Plumbing Products Ltd. (acquired 4/14/94)* (1)............ 450 4,500,300
------------
REAL ESTATE - (1.3%)
New World Sun City Ltd. (acquired 12/12/92)*(1)..................... 83 2,311,321
------------
TELECOMMUNICATIONS - (2.1%)
CM Telecom International, Ltd., ordinary shares
(acquired 1/11/94 and 11/10/94)................................... 15,309,760 3,861,351
------------
TEXTILE - (0.0%)
Wing Hong Holdings Ltd. (acquired 5/31/95)* (1)..................... 150 0
------------
PROPERTY DEVELOPER - (0.5%)
Shanghai Links Executive Community (acquired 3/12/97)* (1).......... 100,000 100,000
Shanghai Links Executive Community Class A preference shares
(acquired 3/12/97)* (1) .......................................... 900,000 900,000
------------
1,000,000
------------
TOTAL DIRECT INVESTMENTS - (Cost $34,906,286) 21.2% 39,015,284
----- ------------
</TABLE>
See notes to financial statements.
18
<PAGE> 20
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 1997
<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> <C>
SHORT TERM INVESTMENTS
UNITED STATES
U.S. GOVERNMENT SECURITIES - (7.9%)
United States Treasury Bills............... 4.659% 11/13/97 $7,330,000 $ 7,318,772
United States Treasury Bills............... 5.069% 01/08/98 3,750,000 3,714,583
United States Treasury Bills............... 4.917% 12/26/97 3,420,000 3,394,659
------------
TOTAL UNITED STATES - (Cost $14,428,014) 7.9% 14,428,014
----- ------------
TOTAL INVESTMENTS - (Cost $152,904,899) 101.1% 186,000,589
OTHER ASSETS AND LIABILITIES (1.1)% (1,965,160)
----- ------------
NET ASSETS 100.0% $184,035,429
===== ============
=================================================================================================================
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS
* Denotes non-income producing security
(1) These direct investments are restricted as to resale and do not have a
readily available resale market. On the date of acquisition for each of
these direct investments, there were no market quotations on similar
securities, and such investments were therefore initially valued at
acquisition cost. These direct investments are valued at fair value as
determined by the Board of Directors as discussed in Notes A, B and E to
the financial statements.
(2) The Fund's investment in China Southern Glass Holding Co., Ltd.,
convertible bond, is being valued by dividing the par value by the
conversion rate of HK$2.98 and then valuing the converted par value at the
current stock price for China Southern Glass Co., Ltd.
See notes to financial statements.
19
<PAGE> 21
THE CHINA FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1997
<TABLE>
===================================================================================================================
<S> <C>
ASSETS
Investments in listed investments, at value (cost $117,998,613) (Notes A and E)..... $146,985,305
Investments in direct investments, at value (cost $34,906,286) (Notes A,B and E).... 39,015,284
Cash, including foreign currency, at value (cost $2,901,427)........................ 2,901,460
Receivable for investments sold..................................................... 4,057
Dividends and interest receivable................................................... 548,568
Prepaid expenses.................................................................... 63,493
------------
TOTAL ASSETS............................................................................ 189,518,167
------------
LIABILITIES
Payable for investments purchased................................................... 4,964,322
Advisory fee payable (Note C)....................................................... 223,958
Administration, custodian and transfer agent fees payable........................... 161,062
Accrued expenses and other liabilities.............................................. 133,396
------------
TOTAL LIABILITIES....................................................................... 5,482,738
------------
TOTAL NET ASSETS........................................................................ $184,035,429
============
COMPOSITION OF NET ASSETS:
Common stock, at par value.......................................................... $ 108,449
Capital paid in excess of par....................................................... 145,464,116
Accumulated net realized gain on investments and
foreign currency transactions................................................... 5,366,354
Net unrealized appreciation on investments
and foreign currency transactions............................................... 33,096,510
------------
TOTAL NET ASSETS........................................................................ $184,035,429
============
NET ASSET VALUE PER SHARE............................................................... $16.97
($184,035,429 / 10,844,937 shares of common stock outstanding) ======
</TABLE>
See notes to financial statements.
20
<PAGE> 22
THE CHINA FUND, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1997
<TABLE>
==============================================================================================================
<S> <C>
INVESTMENT INCOME
Dividend income - listed investments................................................ $ 2,533,700
Dividend income - direct investments................................................ 1,006,773
Interest income - listed investments................................................ 197,627
Interest income - direct investments................................................ 399,070
-----------
TOTAL INVESTMENT INCOME......................................................... 4,137,170
-----------
EXPENSES
Investment Management fee (Note C).................................................. 3,023,863
Administration, custodian and transfer agent fees................................... 742,100
Directors' fees and expenses (Note C)............................................... 260,000
Legal fees.......................................................................... 160,000
Shareholder services fee............................................................ 94,000
Insurance........................................................................... 74,000
Printing and postage................................................................ 72,000
Audit and tax service fees.......................................................... 65,000
Amortization of deferred organization expenses (Note A)............................. 21,292
Miscellaneous expenses.............................................................. 44,094
-----------
Total Expenses.................................................................. 4,556,349
Fees waived by the Investment Manager (Note C).................................. (201,165)
-----------
NET EXPENSES.................................................................... 4,355,184
-----------
NET INVESTMENT LOSS..................................................................... (218,014)
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCY
Net realized gain on listed investment transactions................................. 16,242,727
Net realized gain on direct investment transactions................................. 1,377,536
Net realized loss on foreign currency transactions.................................. (23,056)
-----------
17,597,207
-----------
Net change in unrealized appreciation on listed investments and
foreign currency translations................................................... 10,452,231
Net change in unrealized appreciation on direct investments......................... 13,510,288
-----------
23,962,519
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS....................................................... 41,559,726
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS.............................................. $41,341,712
===========
</TABLE>
See notes to financial statements.
21
<PAGE> 23
THE CHINA FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
============================================================================================================
<CAPTION>
Year Ended Year Ended
October 31, 1997 October 31, 1996
---------------- ----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income (loss)................................... $ (218,014) $ 685,856
Net realized gain on investment and
foreign currency transactions............................... 17,597,207 323,589
Net change in unrealized appreciation on
investments and foreign currency translations............... 23,962,519 4,020,517
------------ ------------
Net increase in net assets resulting from operations........... 41,341,712 5,029,962
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income.......................................... (848,349) (986,629)
Net realized gain on investments and foreign
currency transactions....................................... (56,651) -
------------ ------------
Total dividends and distributions to shareholders.............. (905,000) (986,629)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Reinvestment of distributions to shareholders.................. - 42,382
------------ ------------
Total increase in net assets from capital
stock transactions.......................................... - 42,382
------------ ------------
NET INCREASE IN NET ASSETS......................................... 40,436,712 4,085,715
------------ ------------
NET ASSETS:
Beginning of period................................................ 143,598,717 139,513,002
------------ ------------
End of period, including undistributed net
investment income of $0 and $633,085, respectively............. $184,035,429 $143,598,717
============ ============
</TABLE>
See notes to financial statements.
22
<PAGE> 24
THE CHINA FUND, INC.
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OF COMMON STOCK OUTSTANDING FOR THE PERIOD INDICATED
<TABLE>
==========================================================================================================================
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE (1)
Net asset value, beginning of period .................. $ 13.24 $ 12.87 $ 15.26 $ 17.35 $ 14.22
Net investment income (loss) .......................... (.02) .06 .10 (.03) .04
Net realized and unrealized gain (loss)
on investment and foreign currency
transactions ..................................... 3.83 .40 (1.88) (.39) 3.14
-------- -------- -------- -------- --------
Total from investment operations ...................... 3.81 .46 (1.78) (.42) 3.18
-------- -------- -------- -------- --------
Less distributions:
Dividends from net investment income ............. (.08) (.09) (.01) (.02) (.04)
Dividends in excess of net investment income ..... -- -- -- (.07) --
Distributions from net realized capital gains .... -- -- (.60) (.82) (.01)
-------- -------- -------- -------- --------
Total distributions ................................... (.08) (.09) (.61) (.91) (.05)
-------- -------- -------- -------- --------
Dilution due to rights offering ....................... -- -- -- (.76) --
-------- -------- -------- -------- --------
Net asset value, end of period ........................ $ 16.97 $ 13.24 $ 12.87 $ 15.26 $ 17.35
======== ======== ======== ======== ========
Per share market value, end of period ................. $ 13.31 $ 11.75 $ 11.75 $ 17.25 $ 18.50
======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN
(BASED ON MARKET VALUE) .......................... 13.88% 0.74% (28.39)% 5.38% 32.66%
======== ======== ======== ======== ========
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000's) ..................... $184,035 $143,599 $139,513 $165,102 $138,932
Ratio of expenses to average net assets ............... 2.15%(2) 2.56% 2.55% 2.49% 2.67%
Ratio of net investment income (loss)
to average net assets ............................ (0.11)%(2) 0.49% 0.78% (0.11)% 0.24%
Portfolio turnover rate ............................... 39% 41% 43% 58% 85%
Average commission rate(3) ............................ $ 0.0017 $ 0.0017 -- -- --
</TABLE>
(1) Based on average shares outstanding during the period.
(2) The ratios of expenses to average net assets and net investment income
(loss) to average net assets is after the waiver of a portion of the
Investment Manager Fee by the Investment Manager (Note C). Had the
Investment Manager not waived these fees, the ratio of expenses to average
net assets and the ratio of net investment income (loss) would have been
2.25% and (0.21)%, respectively
(3) 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.
23
<PAGE> 25
THE CHINA FUND, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
================================================================================
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 Fund's investment objective is long-term capital appreciation
through investments in the equity securities of companies engaged in a
substantial amount of business in the People's Republic of China. 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, 1997, 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 direct investment 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.
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.
24
<PAGE> 26
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 holdings in 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, 1997, Direct Investments amounting to $10,456,824 (5.7% 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 remaining Direct
Investments are being valued at current market values (See Note A - Security
Valuation). The procedures applied by the Board of Directors in arriving at its
estimate of value of securities without ready market values comply with the
Fund's policies for valuing Direct Investments at original cost unless the Board
of Directors, based on advice from 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. The Investment
Manager has proposed to reduce the Investment Management Fee from 1.50% to 1.25%
of the Fund's weekly net assets. The proposed fee reduction needs to be approved
by the Fund's shareholders at the next shareholder meeting. Until such time, the
Investment Manager has agreed to waive 0.25% of the fee. From the period July 1,
1997 through October 31, 1997 the total amount of Investment Management Fees
waived was $201,165. 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.
25
<PAGE> 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
For the year ended October 31, 1997, the Fund incurred commissions on the
purchase and sale of securities of $512,855, of which $1,819 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 $10,000, respectively, plus
$2,000 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 -- INVESTMENT TRANSACTIONS
For the year ended October 31, 1997, the Fund's cost of purchases and proceeds
from sales of investment securities, other than short-term securities, were
$77,474,705 and $88,724,364, respectively. At October 31, 1997, the cost of
investments for book and federal income tax purposes was substantially the same.
Gross unrealized appreciation of investments was $52,460,535, while gross
unrealized depreciation of investments was $19,364,845, resulting in net
unrealized appreciation of investments of $33,095,690.
NOTE E -- 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.
NOTE F -- 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
received proceeds and dividends totaling HK$10,629,814 (US$1,375,050) through
October 31, 1997. The Fund has received the final proceeds and dividend payments
from this transaction. During 1996 and 1997, after reducing the original cost of
Hollco by the proceeds received, to zero, the Fund recognized a gain of
US$220,910 and US$138,802, respectively.
26
<PAGE> 28
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, 1997,
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 five-year period then
ended. 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 of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures include confirmation of
securities owned as of October 31, 1997, 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, 1997, the results of its operations for the
year then ended, the changes in its net assets for each of the years in the
two-year period then ended and the financial highlights for each of the years in
the five-year period then ended, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Boston Massachusetts
December 12, 1997
27
<PAGE> 29
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.
28
<PAGE> 30
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.
29
<PAGE> 31
(This page has been left blank intentionally.)
<PAGE> 32
(This page has been left blank intentionally.)
<PAGE> 33
(This page has been left blank intentionally.)
<PAGE> 34
(This page has been left blank intentionally.)
<PAGE> 35
THE CHINA FUND, INC.
================================================================================
UNITED STATES ADDRESS
The China Fund, Inc.
140 Broadway, 5th Floor
New York, NY 10005
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
