<PAGE> 1
THE CHINA FUND, INC.
ANNUAL REPORT
OCTOBER 31, 2000
THE CHINA FUND, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Key Highlights 1
Asset Allocation 2
Chairman's Statement 3
Investment Managers' Statements 5
About the Portfolio Managers 11
Schedule of Investments 12
Financial Statements 17
Notes to Financial Statements 21
Report of Independent Auditors 25
Dividends and Distributions; 26
Dividend Reinvestment
and Cash Purchase Plan
</TABLE>
<PAGE> 2
THE CHINA FUND, INC.
KEY HIGHLIGHTS
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<TABLE>
<CAPTION>
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FUND DATA
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<S> <C>
NYSE STOCK SYMBOL CHN
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LISTING DATE JULY 10, 1992
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SHARES OUTSTANDING 10,073,173
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TOTAL NET ASSETS (10/31/00) US$124.6 MILLION
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NET ASSET VALUE (10/31/00) $12.37
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MARKET PRICE (10/31/00) $8.94
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</TABLE>
<TABLE>
<CAPTION>
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TOTAL RETURN
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<S> <C> <C>
PERFORMANCE AS OF
10/31/00: NET ASSET VALUE(1) MARKET PRICE
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12 MONTHS -1.90% -9.14%
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3-YEAR CUMULATIVE -22.19% -28.35%
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3-YEAR ANNUALIZED -8.02% -10.52%
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5-YEAR CUMULATIVE 3.83% -17.84%
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5-YEAR ANNUALIZED 0.75% -3.85%
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</TABLE>
<TABLE>
<CAPTION>
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DIVIDEND HISTORY
-------------------------------------------------------------------------------
<S> <C> <C>
RECORD DATE INCOME CAPITAL GAINS
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12/31/99 $0.1110 --
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12/31/98 $0.0780 --
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12/31/97 -- $0.5003
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12/31/96 $0.0834 --
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12/29/95 $0.0910 --
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12/30/94 $0.0093 $0.6006
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12/31/93 $0.0853 $0.8250
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12/31/92 $0.0434 $0.0116
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</TABLE>
(1) Total investment returns reflect changes in net asset value per share during
each period and assumes that dividend and capital gain 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. Total investment returns are historical and do not guarantee future
results.
1
<PAGE> 3
THE CHINA FUND, INC.
ASSET ALLOCATION AS OF OCTOBER 31, 2000
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<TABLE>
<CAPTION>
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TEN LARGEST LISTED EQUITY INVESTMENTS*
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<C> <S> <C>
1. China Unicom, Ltd. 6.63%
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2. China Mobile (Hong Kong), Ltd. 5.97%
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3. Yizheng Chemical Fibre Co., Ltd. 4.78%
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4. Cosco Pacific, Ltd. 4.46%
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5. Hutchison Whampoa, Ltd. 4.46%
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6. Legend Holdings, Ltd. 3.99%
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7. China Merchants Holdings Co., Ltd. 3.75%
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8. China Shipping Co., Ltd. 3.38%
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9. Shanghai Industrial Holdings, Ltd. 3.16%
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10. Cheung Kong (Holdings), Ltd. 2.75%
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</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
FIVE LARGEST DIRECT INVESTMENTS*
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<C> <S> <C>
1. A-S China Plumbing Products, Ltd. 3.35%
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2. Moulin International Holdings, Ltd. 1.61%
---------------------------------------------------------------------------------
3. New World Sun City, Ltd. 0.87%
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4. Road King Infrastructure, Ltd. 0.67%
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5. Road King Infrastructure, Ltd. (Warrants) 0.01%
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</TABLE>
* Percentages based on net assets at October 31, 2000.
2
<PAGE> 4
THE CHINA FUND, INC.
CHAIRMAN'S STATEMENT
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--------------------------------------------------------------------------------
Dear Stockholders: November 10, 2000
I am pleased to present the annual report for The China Fund, Inc. ("The Fund")
for the fiscal year ended October 31, 2000. After taking into consideration the
US$0.111 per share distribution paid to shareholders in January 2000, the Fund's
Net Asset Value ("NAV") and market price decreased 1.90% and 9.14% respectively.
The Fund's NAV per share decreased to US$12.37 per share from US$12.74 per share
and its market price decreased to US$8.94 per share from US$9.94 per share for
the year ended October 31, 2000.
CHINA AND HONG KONG MARKETS OVERVIEW
Market sentiment improved over the course of the past year as the Chinese
economy strengthened. During this period, the Shanghai "B" share and Shenzhen
"B" share indices gained 71.9% and 44.2%, respectively due to speculation on the
introduction of government market boosting measures, and the Hang Seng Index
rose 12.4% following recovery in the local economy. The Hong Kong Stock Exchange
"H" shares indices, however, fell 17.0% as this market was negatively affected
by the listing of several large new issues.
Primary market activity increased significantly with several large companies
listing on the "H" share market during the year. The number of listings on the
Shanghai "B" and Shenzhen "B" share markets remained unchanged at 53 and 54,
respectively. The number of "H" shares, Chinese companies listed in Hong Kong,
rose from 43 to 47 and the number of "N" shares issued by companies listed in
the United States, increased from 6 to 7. Total combined market capitalization
of "B", "H" and "N" shares was US$18.9 billion as of October 31, 2000.
LISTED INVESTMENTS
The Fund has increased its investments in the telecommunications and electric
utilities sectors, which will likely benefit from a boost in domestic economic
activities. The Fund has also accumulated trade-related stocks in the
anticipation of higher export/import trade following China's imminent entry into
the World Trade Organization ("WTO"). The Fund has also increased its exposure
to China "B" shares in anticipation of further market boosting measures by the
Chinese stock market regulatory authorities.
DIRECT INVESTMENTS
During the year, the Fund sold two investments from its Direct Investment
portfolio. The Fund has fully realized its original investment in Skynet
(International Group) Holdings Limited ("Skynet"), generating a total gain of
US$0.55 million. In addition, as of October 31, 2000, the Fund held 247,142
bonus warrants, issued at no cost by Skynet.
On July 28, 2000, the Fund sold its investment in Wai Kee China Investments
(BVI) Company Limited ("WKC") for a total consideration of US$2.95 million. The
Fund received US$1.93 million on that date and received US$0.13 million in
October 2000. The balance of the consideration of US$0.89 million is scheduled
to be received in tranches until May 2001.
3
<PAGE> 5
THE CHINA FUND, INC.
CHAIRMAN'S STATEMENT (CONTINUED)
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--------------------------------------------------------------------------------
On June 9, 2000, the Fund announced that it had been advised by HSBC Private
Equity (Hong Kong) Limited, the Direct Investment Manager, that the Direct
Investment Manager would not undertake any new direct investments on behalf of
the Fund. However, the Direct Investment Manager would continue to oversee and
manage the Fund's existing direct investments. The Board of Directors of the
Fund has explored and is considering other options for management of the Fund's
assets allocated to direct investments.
As of October 31, 2000, the Fund held investments in six companies within its
Direct Investment portion.
LOOKING TO 2001
China's entry into the WTO seems all but certain following the endorsement from
some of the world's major economies, including the United States, the European
Union and Japan. We anticipate the timing of China's WTO membership to be in
early 2001. We believe China's entry into the WTO will open an exciting new
chapter in global trade. This historic event should have a very positive
long-term impact on China's economic growth as it is expected to boost the
country's external trade, attract a large inflow of foreign investments and
create employment opportunities. The greater integration of China's economy into
the global market would also complement the market liberalization reforms that
have already been taking place in China over the past few years.
In summary, we believe that China's long-term economic outlook remains promising
and will continue to provide excellent investment opportunities for the Fund. We
thank you for your continuing support and for your interest in the Fund. If you
have any questions, comments or would like additional information on the Fund's
holdings, we invite you to call (toll free) 1-888-CHN-CALL (246-2255).
Sincerely,
/s/ Alan Tremain
Alan Tremain
Chairman of the Board
4
<PAGE> 6
THE CHINA FUND, INC.
INVESTMENT MANAGERS' STATEMENTS
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--------------------------------------------------------------------------------
Dear Stockholders: November 10, 2000
REVIEW OF LISTED INVESTMENTS
MARKET REVIEW
The Hong Kong equity market gained 12.4% over the twelve-month period ended
October 31, 2000. In November 1999, the Hong Kong government concluded an
agreement with the Walt Disney Company to build a theme park in the territory by
2005, which along with the successful launch of the Tracker Fund of Hong Kong
("TraHK") led to market gains. The surge in global telecommunication valuations
has resulted in a re-rating of telecommunication/internet stocks during the
early part of the fiscal year. Towards the end of November, the launch of the
new Growth Enterprise Market ("GEM"), which focuses on the listing of hi-tech
companies based in Hong Kong and mainland China, captured much of investors'
attention. The Hong Kong stock market posted strong gains in December as
technology and telecommunications share prices rose sharply. Abundant liquidity
also helped market performance during the period. The Hong Kong market benefited
from large cash inflows during the past year, as Hong Kong was perceived as a
"safe haven" for investors over the millennium. The property sector, which had
lagged behind the broader market, witnessed increased buying during this period.
Good land auction results, a boost in property activities and the positive
wealth effect resulting from a turnaround in the local economy and buoyant stock
market have boosted sentiment.
After reaching an all time high of 17,426 points on the first trading day of the
New Year, the Hong Kong market succumbed to heavy profit taking. Increased
volatility in the U.S. market resulting from concerns over a possible hike in
U.S. interest rates resulted in a market consolidation. News of the AOL-Time
Warner merger stimulated interests in local media stocks while speculation on
the possible sale of Hong Kong Telecom by its holding company, Cable & Wireless,
also attracted some buying. However, the market consolidated in mid-March prior
to Taiwan's presidential election due to concerns over a possible escalation in
cross-strait tensions. In April, Hong Kong shares fell following a correction in
the U.S. market. In particular, heavy selling was seen in technology, media and
telecommunication stocks. Concerns over an aggressive tightening of fiscal
policies by the Federal Reserve Bank in response to threats of U.S. inflation
dragged the market down further. In May, share prices fell sharply following
increased volatility in the U.S. market and the de-rating of technology, media
and telecommunication stocks. The aggressive .50% hike in U.S. interest rates
with potential for further rises also triggered selling in the market. However,
the subsequent release of mild economic data in the U.S. alleviated concerns of
further interest rate hikes.
For the time being, Hong Kong government initiatives in June to boost the
residential property market by curtailing the supply of public housing led to a
recovery in share prices in this sector. Fund raising has been very active
during the year. China Unicom, China's second cellular phone service provider,
raised $5.6 billion from the market in June. The Hang Seng Index closed at
14,895 on October 31, 2000.
The Chinese stock market had mixed performances over the twelve-month period
ended October 31, 2000. On November 15, 1999, after lengthy negotiations, China
and the U.S. reached an agreement relating to China's admission into the WTO.
China's shares rallied on the news of this agreement, but quickly succumbed to
profit taking as a result of lingering concerns over China's Y2K readiness.
Share prices rebounded in early January with
5
<PAGE> 7
THE CHINA FUND, INC.
INVESTMENT MANAGERS' STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
REVIEW OF LISTED INVESTMENTS (CONTINUED)
China's smooth transition into the new millennium. However, buying interest in
technology stocks subsequently drew liquidity away from "H" shares. The
prevailing market focus on technology stocks in January and February led to the
weak performance of the "H" share companies, which are mainly focused in
traditional industries. Poor market response to the first "H" share new issue in
2000, Beijing Capital International Airport, which fell below its issue price on
its first trading day, further dampened market sentiment. Towards the end of
January 2000, reports of potential changes in the MSCI indices, a set of global
benchmark indices with a large institutional following, which would lower the
weighting of "H" share constituent stocks, triggered selling in the market. The
annual National People's Congress ("NPC") held in March reaffirmed the
government's commitment to the various reforms initiated two years ago by
Premier Zhu Rongji. The correction in technology stocks in April benefited the
"H" shares, which primarily operate in the traditional 'old economy' sectors.
The better-than-expected 1999 earnings results released in April attracted some
bargain hunting as investors refocused on the value stocks. In July 2000, the
surprise merger between two of China's largest independent power producers,
Huaneng Power International and Shandong Huaneng together with a report that
China plans to consolidate the nation's aviation industry was viewed favorably
by the market and led to market gains.
The China Securities Regulatory Commission (CSRC) relaxed listing rules to allow
Chinese companies to list on more than one stock market. This was perceived as
positive for the "H" shares as these companies will now be given greater
flexibility to raise funding for future expansions from the domestic "A" share
market which trades at higher earnings multiples. In addition, CSRC also allowed
listed companies greater autonomy in restructuring their assets. There were
positive developments with financial reforms with the central bank authority
stating that interest rate policies will be liberalized in three years and that
significant progress in the opening up of China's capital market will be
achieved over the next five years. The U.S. Senate's approval on the bill to
grant China Permanent Normal Trade Relations ("PNTR") status in September 2000
has paved the way for China's eventual entry into the WTO. Recently, a
correction in the global equity markets and massive cash calls by Chinese
companies in October 2000 put downward pressure on China shares. China Mobile
raised $4.7 billion from the market through a combination of convertible bond
($600 million) and equity placements ($4.1 billion) to investors. In addition,
China's largest oil exploration, refining and petrochemical company, China
Petroleum & Chemical Corporation, raised $3.4 billion from the market with its
initial public offering in October which triggered selling in existing Chinese
oil and petrochemical shares. High oil prices over the month arising from
tension in the Middle East triggered profit taking on aviation stocks due to
concern over surging fuel costs. The annual meeting of senior officials at the
Fifth Plenary Session of the 15th Central Committee held in October reinforced
the government's commitment to invigorating the country's state-owned
enterprises and improve China's overall economic efficiency ahead of more
competitive market environment in the future. The WTO talks progressed smoothly
with a working party meeting scheduled to be held in Geneva in November to
resolve the remaining technical issues regarding China's final entry. It is
anticipated that China will join the WTO by the first quarter of 2001. During
the twelve-month period ended October 31, 2000, the "H" share index declined by
17.0% to close at 412.
Over the twelve-month period, the "B" shares market surged on anticipation of
new regulations allowing the formation of sino-foreign joint-venture funds that
may invest in "B" shares. Sentiment was also boosted by
6
<PAGE> 8
THE CHINA FUND, INC.
INVESTMENT MANAGERS' STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
REVIEW OF LISTED INVESTMENTS (CONTINUED)
speculation that the "B" shares may be merged with the higher-priced domestic
"A" shares as a part of market liberalization following China's WTO entry. Over
the period, the Shanghai and Shenzhen "B" share markets gained 71.9% and 44.2%,
respectively.
Recent Chinese economic statistics were encouraging and indicate a recovery in
export growth and domestic consumption. China's economy grew 8.2% over the first
nine months of 2000 as compared with 7.1% during the 1999 calendar year.
Inflation, as measured by the Consumer Price Index, registered a 0.2% increase
in the nine-month period ended September 30, 2000, as compared with a decrease
of 1.4% during the nine-month period ended September 30, 1999. During the
nine-month period ended September 30, 2000, retail sales also rebounded
strongly, up 9.9%, as compared with a 6.8% growth last year. Money supply
growth, M2, fell from 14.7% growth at the end of 1999 to 13.4% by September
2000. During the nine-month period ended September 30, 2000, China's exports
surged 33.1% to $182.3 billion while imports rose 38.7% year-on-year to $163.1
billion giving rise to a cumulative trade surplus of $19.2 billion. As of the
end of September 2000, China's foreign exchange reserves stood at $160.0
billion, up $5.3 billion from year-end 1999. Contractual foreign direct
investment rose by 27.9% to $37.9 billion from January to September 2000 because
of optimism toward China's continuing market liberalization. However, utilized
foreign direct investment fell 8.7% to $26.6 billion during this period as
investment project implementations may be held back pending China's confirmed
WTO membership.
7
<PAGE> 9
THE CHINA FUND, INC.
INVESTMENT MANAGERS' STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PORTFOLIO REVIEW
The following table presents the Fund's portfolio allocation of listed
investments among the various sectors by market value as of October 31, 2000 and
October 31, 1999:
<TABLE>
<CAPTION>
HONG KONG 10/31/00 10/31/99
--------- -------- --------
<S> <C> <C> <C>
HONG KONG SHARES Conglomerate 11.3% 13.6%
Financial
1.8 0.0
Industrial
5.4 20.7
Infrastructure
4.6 0.0
Property
2.9 1.2
Service
9.0 0.0
Telecommunication
13.6 5.2
Transportation
2.0 4.3
----- -----
50.6 45.0
----- -----
"H" SHARES Industrial 9.5 22.6
Infrastructure
2.6 3.6
Transportation
10.1 7.6
Utility
7.1 6.8
----- -----
29.3 40.6
----- -----
HONG KONG SUB-TOTAL
79.9 85.6
----- -----
CHINA
SHANGHAI "B" SHARES Industrial 2.4 1.1
Property
1.3 1.0
Service
1.3 1.2
Transportation
3.8 0.7
Utility
3.5 1.6
----- -----
12.3 5.6
----- -----
SHENZHEN "B" SHARES Industrial 1.5 2.4
Property
0.0 1.1
Utility
0.0 1.2
----- -----
1.5 4.7
----- -----
"N" SHARES Utility 2.5 2.9
----- -----
CHINA SUB-TOTAL
16.3 13.2
----- -----
CASH
3.8 1.2
----- -----
TOTAL
100.0% 100.0%
===== =====
</TABLE>
During the period under review, the Fund has increased its weighting in Hong
Kong, bringing the exposure up to 50.6% from 45.0%. We have decreased the Fund's
"H" share holdings from 40.6% to 29.3%. Investment in "B" shares was increased
with the exposure to Shanghai "B" shares increased from 5.6% to 12.3%. Weighting
in the Shenzhen "B" shares was cut from 4.7% to 1.5%. The weighting in "N"
shares was cut from 2.9% to 2.5%. The cash level was increased to 3.8% from
1.2%.
8
<PAGE> 10
THE CHINA FUND, INC.
INVESTMENT MANAGERS' STATEMENTS (CONTINUED)
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--------------------------------------------------------------------------------
REVIEW OF DIRECT INVESTMENTS
As of October 31, 2000, the Fund's Direct Investment portfolio was comprised of
investments in six companies. A description of these investments is set out
below:
NEW WORLD SUN CITY LIMITED ("NWSC")
NWSC was established to develop Dongguan New World Gardens (the "Project") in
Dongguan, Guangdong Province. The Project involves the development and sale of
detached houses, semi-detached houses, low-rise and high-rise apartments and
93,000 square meters of commercial and retail space on a 466,666 square meter
site near Dongguan. The Project has a total permissible floor area of
approximately 1.12 million square meters and is being developed over several
phases. As of October 31, 2000, 80% of the total units offered for sale had been
sold. The Fund had received interest and repayments totalling US$3.25 million,
or 89% of its original investment cost.
A-S CHINA PLUMBING PRODUCTS LIMITED ("ASPPL")
ASPPL was established to produce and distribute a complete line of sanitaryware
products through the acquisition of seven joint ventures in China. The company
is a subsidiary of American Standard Inc. ("ASI"), a U.S. based international
manufacturer of plumbing products, air-conditioners, automobile and medical
systems products. ASI has granted to ASPPL the exclusive right to license
trademarks owned by ASI for plumbing products in China.
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. In December 1996, the Fund made a full provision against
the cost of its investment in Siu Fung. Despite numerous attempts to restructure
the company, no agreement was reached. Siu Fung is currently under compulsory
liquidation as a result of petitions to wind up Siu Fung and three other
companies within the Siu Fung Ceramics Holdings Group filed on March 26, 1999 by
The Hong Kong and Shanghai Banking Corporation ("HSBC"), a major creditor of Siu
Fung and of the Group. Winding-up orders were granted by the High Court of Hong
Kong SAR in respect of Siu Fung on May 9, 2000 and KPMG has been appointed Joint
Special Managers and Liquidators.
SHANGHAI LINKS EXECUTIVE COMMUNITY LIMITED ("SLEC")
SLEC is a company incorporated to develop and manage a high quality, western
style residential community that provides residences, school, healthcare and
recreational facilities in Shanghai. SLEC owns the land use rights for a site of
1.4 million square meters where a total of 474 custom-built detached villas and
326 apartments will be constructed. The company is facing a tight liquidity
situation and the investment is subject to litigation. The Fund made a full
provision against the cost of its investment in SLEC as of October 29, 1999.
ROAD KING INFRASTRUCTURE LIMITED ("ROAD KING")
Road King is an operator of toll roads in China and has interests in eighteen
toll roads with a combined length of approximately 610 kilometers. Road King
achieved a listing of its shares on the HKSE in 1996.
9
<PAGE> 11
THE CHINA FUND, INC.
INVESTMENT MANAGERS' STATEMENTS (CONTINUED)
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--------------------------------------------------------------------------------
REVIEW OF DIRECT INVESTMENTS (CONTINUED)
MOULIN INTERNATIONAL HOLDINGS, LIMITED ("MIH")
MIH is engaged in the manufacture, distribution and retailing of optical frames.
It is the largest manufacturer of optical frames in Asia and is one of the
largest manufacturers globally. The company has over 60 active ODM customers,
primarily authorized licensees of designer brands, leading distributors and
retail chains of optical frames. MIH has distribution offices in Hong Kong SAR,
the Chinese Mainland, Singapore, Malaysia, the Philippines, Taiwan, Germany and
the U.S. MIH operates the largest optical retail chain in Shanghai, America's
Eyes. The Fund's investment is valued at cost.
Sincerely,
Richard C. Wong, Listed Investment Manager
Vincent J. Warner, Direct Investment Manager
10
<PAGE> 12
THE CHINA FUND, INC.
ABOUT THE PORTFOLIO MANAGERS
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--------------------------------------------------------------------------------
LISTED INVESTMENT MANAGER
Mr. Richard C. Wong serves as the portfolio manager for the Fund's portfolio of
listed securities. Mr. Wong holds a BA in Economics and Computer Science from
Columbia University and an MBA in Finance from New York University. He is
currently an Associate Director at HSBC Asset Management (Hong Kong) Limited.
Mr. Wong first joined HSBC Asset Management (Hong Kong) Limited in 1993 as an
investment manager specializing in China and Taiwan equities. In 1995 he began
working for Nikko Capital Management in Hong Kong before returning to HSBC Asset
Management (Hong Kong) Limited in January of 1997.
DIRECT INVESTMENT MANAGER
Mr. Vincent J. Warner has served as the portfolio manager of the Fund's direct
investment portfolio since January 1999. He is a director of HSBC Private Equity
Management (Hong Kong) Limited.
Mr. Warner has had responsibility for the Fund's direct investment portfolio
since February 1998 and has been a member of the team managing the Fund's Direct
Investment Portion since July 1995. Prior to joining HSBC Private Equity
Management (Hong Kong) Limited, Mr. Warner worked for AusAsean Management
Limited, the direct investment subsidiary of the AusAsean Group in Australia and
Lloyds Development Capital Limited, the direct investment subsidiary of Lloyds
Bank plc in the U.K. Mr. Warner holds an MA in jurisprudence from Oriel College,
Oxford, England.
11
<PAGE> 13
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS
OCTOBER 31, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<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
COMMUNICATION SERVICES -- (1.2%)
Eastern Communications Co., Ltd. ...................... 1,519,150 $ 1,437,116
------------
ELECTRIC UTILITIES -- (3.2%)
Heilongjiang Electric Power Co., Ltd. ................. 2,800,000 1,394,400
Zhejiang Southeast Electric Power Co., Ltd. ........... 7,000,000 2,590,000
------------
3,984,400
------------
PROPERTY DEVELOPER -- (1.3%)
Shanghai Lujiazui Finance and Trade Zone Development
Co., Ltd. ........................................... 3,951,285 1,627,930
------------
TIRES & RUBBER -- (1.0%)
Shanghai Tyre & Rubber Co., Ltd.*...................... 3,600,000 1,260,000
------------
TRANSPORTATION -- (3.6%)
Shanghai Dazhong Taxi Co., Ltd. ....................... 6,530,000 3,382,540
Tianjin Marine Shipping Co., Ltd. ..................... 3,500,000 1,134,000
------------
4,516,540
------------
TRAVEL & TOURISM -- (1.3%)
Huangshan Tourism Development Co., Ltd. ............... 3,673,800 1,682,600
------------
TOTAL SHANGHAI "B" SHARES -- (Cost $14,829,849) 11.6% 14,508,586
---- ------------
CHINA -- SHENZHEN "B" SHARES
IRON AND STEEL -- (1.4%)
Bengang Steel Plates Co., Ltd.*........................ 7,309,600 1,752,654
------------
TOTAL SHENZHEN "B" SHARES -- (Cost $1,640,069) 1.4% 1,752,654
--- ------------
TOTAL CHINA -- (Cost $16,469,918) 13.0% 16,261,240
---- ------------
</TABLE>
See notes to financial statements.
12
<PAGE> 14
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<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
BANKS -- (1.7%)
Bank of East Asia, Ltd. ............................... 960,000 $ 2,166,432
------------
COMMERCIAL SERVICES -- (4.4%)
Cosco Pacific, Ltd. ................................... 7,533,000 5,553,885
------------
COMPUTERS & BUSINESS EQUIPMENT -- (4.0%)
Legend Holdings, Ltd. ................................. 5,880,000 4,976,022
------------
DIVERSIFIED -- (10.6%)
China Merchants Holdings Co., Ltd. .................... 6,740,000 4,666,752
Citic Pacific, Ltd. ................................... 750,000 3,010,002
Hutchison Whampoa, Ltd. ............................... 446,500 5,553,340
------------
13,230,094
------------
ELECTRONICS -- (1.0%)
TCL International Holdings, Ltd.*...................... 7,100,000 1,165,278
------------
INFRASTRUCTURE -- (4.3%)
New World Infrastructure, Ltd.*........................ 1,550,000 1,411,078
Shanghai Industrial Holdings, Ltd. .................... 2,090,000 3,939,351
------------
5,350,429
------------
PROPERTY DEVELOPER -- (2.7%)
Cheung Kong (Holdings), Ltd. .......................... 310,000 3,428,324
------------
RETAIL -- (2.4%)
Giordano International, Ltd. .......................... 5,000,000 2,933,068
------------
TELECOMMUNICATIONS -- (12.6%)
China Mobile (Hong Kong), Ltd.*........................ 1,160,000 7,436,851
China Unicom, Ltd.*.................................... 4,118,000 8,263,457
------------
15,700,308
------------
TRANSPORTATION -- (1.9%)
Cathay Pacific Airways................................. 1,280,000 2,322,349
------------
TRAVEL & TOURISM -- (1.5%)
China Travel International Investment Hong Kong,
Ltd. ................................................ 15,000,000 1,827,157
------------
TOTAL HONG KONG -- (Cost $62,979,008) 47.1% 58,653,346
---- ------------
</TABLE>
See notes to financial statements.
13
<PAGE> 15
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<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 -- "H" SHARES
CHEMICALS -- (7.0%)
PetroChina Co., Ltd. .................................. 13,060,000 $ 2,746,301
Yizheng Chemical Fibre Co., Ltd.*...................... 32,500,000 5,959,097
------------
8,705,398
------------
ELECTRIC UTILITIES -- (6.6%)
Beijing Datang Power Generation Co., Ltd. ............. 11,500,000 2,742,659
Huaneng Power International, Inc. ..................... 8,218,000 3,213,861
Shandong International Power Development Co., Ltd. .... 14,340,000 2,243,211
------------
8,199,731
------------
INFRASTRUCTURE -- (2.5%)
Zhejiang Expressway Co., Ltd. ......................... 19,814,000 3,201,134
------------
IRON AND STEEL -- (1.8%)
Angang New Steel Co., Ltd. ............................ 23,000,000 2,182,331
------------
TRANSPORTATION -- (9.4%)
Beijing Capital International Airport Co., Ltd. ....... 7,084,000 1,625,896
China Eastern Airlines, Corp., Ltd.*................... 21,600,000 3,129,632
China Shipping Co., Ltd.*.............................. 27,600,000 4,211,309
China Southern Airlines Co., Ltd.*..................... 11,000,000 2,708,039
------------
11,674,876
------------
TOTAL HONG KONG -- "H" SHARES -- (Cost
$35,689,477) 27.3% 33,963,470
---- ------------
TOTAL HONG KONG (INCLUDING "H" SHARES) -- (Cost
$98,668,485) 74.4% 92,616,816
---- ------------
UNITED STATES -- "N" SHARES
ELECTRIC UTILITIES -- (2.3%)
Huaneng Power International, Inc. ..................... 187,000 2,851,750
------------
TOTAL UNITED STATES -- "N" SHARES --
(Cost $2,531,425) 2.3% 2,851,750
---- ------------
TOTAL COMMON STOCK AND OTHER
EQUITY INTERESTS -- (Cost $117,669,828) 89.7% 111,729,806
---- ------------
</TABLE>
See notes to financial statements.
14
<PAGE> 16
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NAME OF ISSUER AND TITLE OF ISSUE SHARES VALUE (NOTE A)
--------------------------------- ------ --------------
<S> <C> <C> <C>
COMMON STOCK AND OTHER EQUITY INTERESTS (CONTINUED)
DIRECT INVESTMENTS
CERAMIC PRODUCTS -- (0.0%)
Siu Fung Ceramics Concept Company, Ltd. (acquired
11/30/94)*(1)........................................ 8,000 $ 0
------------
GRANITE AND MARBLE PRODUCTS -- (0.0%)
Skynet (International Group) Holdings Ltd. (warrants,
expiring on April 7, 2001)*.......................... 247,142 3,137
------------
INFRASTRUCTURE -- (0.7%)
Road King Infrastructure, Ltd. (acquired 3/29/96)...... 1,969,200 833,230
Road King Infrastructure, Ltd. (warrants, expiring on
September 5, 2003)*.................................. 393,840 15,150
------------
848,380
------------
PLUMBING -- (3.3%)
A-S China Plumbing Products, Ltd. (acquired
4/14/94)*(1)......................................... 450 4,178,520
------------
PROPERTY DEVELOPER -- (0.0%)
Shanghai Links Executive Community Ltd. (acquired
3/12/97)*(1)......................................... 100,000 0
Shanghai Links Executive Community Ltd. Class A
preference shares (acquired 3/12/97)*(1)............. 900,000 0
------------
0
REAL ESTATE -- (0.9%)
New World Sun City, Ltd. (acquired 12/12/92)*(1)....... 83 1,083,524
------------
RETAIL -- (1.6%)
Moulin International Holding, Ltd. (acquired
8/17/99)*(1)......................................... 2,000,000 2,002,750
------------
TOTAL DIRECT INVESTMENTS -- (Cost $18,213,792) 6.5% 8,116,311
----- ------------
PUT OPTIONS PURCHASED
Siu Fung Ceramics Concept, exercise price $1.00, no
expiration date...................................... 80 8,000
------------
TOTAL PUT OPTIONS PURCHASED -- (Cost $0) 0.0% 8,000
----- ------------
TOTAL INVESTMENTS -- (Cost $135,883,620) (Note E) 96.2% 119,854,117
----- ------------
OTHER ASSETS AND LIABILITIES 3.8% 4,765,257
----- ------------
NET ASSETS 100.0% $124,619,374
----- ============
</TABLE>
See notes to financial statements.
15
<PAGE> 17
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTES TO SCHEDULE OF INVESTMENTS
* Denotes non-income producing security
(1) Direct investments are generally 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. These
direct investments are valued at fair value as determined by the Board of
Directors as discussed in Note A and B to the Financial Statements.
Information concerning options written at October 31, 2000 is shown below:
<TABLE>
<CAPTION>
NO. OF EXERCISE EXPIRATION MARKET
CALL OPTIONS CONTRACTS PRICE DATE VALUE
------------ --------- -------- ---------- -------
<S> <C> <C> <C> <C>
Siu Fung Ceramics Concept............................ 80 $1.00 None $8,000
</TABLE>
See notes to financial statements.
16
<PAGE> 18
THE CHINA FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments in listed investments, at value (cost
$117,669,828) (Note A)................................. $111,729,806
Investments in direct investments, at value (cost
$18,213,792) (Notes A and B)........................... 8,124,311
Foreign currency, at value (cost $3,673,013).............. 3,611,292
Receivable for investments sold........................... 1,877,200
Dividends and interest receivable......................... 58,843
------------
TOTAL ASSETS................................................ 125,401,452
------------
LIABILITIES:
Payable to custodian...................................... 486,289
Investment management fee payable (Note C)................ 110,541
Administration, custodian and transfer agent fees
payable................................................ 31,480
Accrued expenses and other liabilities.................... 153,768
------------
TOTAL LIABILITIES........................................... 782,078
------------
TOTAL NET ASSETS............................................ $124,619,374
============
COMPOSITION OF NET ASSETS:
Common stock, at par value (Note D)....................... $ 100,732
Capital paid in excess of par (Note D).................... 138,773,049
Accumulated net realized gain on investments and foreign
currency transactions.................................. 1,845,619
Net unrealized depreciation on investments and foreign
currency transactions.................................. (16,100,026)
------------
TOTAL NET ASSETS............................................ $124,619,374
============
NET ASSET VALUE PER SHARE
($124,619,374 /10,073,173 shares of common stock
outstanding)........................................... $12.37
======
</TABLE>
See notes to financial statements.
17
<PAGE> 19
THE CHINA FUND, INC.
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividend income -- listed investments..................... $ 1,705,283
Dividend income -- direct investments..................... 616,559
Interest income -- listed and short-term investments...... 160,047
Interest income -- direct investments..................... 141,965
-----------
TOTAL INVESTMENT INCOME................................ 2,623,854
-----------
EXPENSES:
Investment management fee (Note C)........................ 1,658,470
Administration, custodian and transfer agent fees......... 509,278
Directors' fees and expenses (Note C)..................... 312,445
Legal fees................................................ 163,104
Audit and tax service fees................................ 69,342
Insurance................................................. 69,073
Shareholder services fee.................................. 57,501
Printing and postage...................................... 48,617
Miscellaneous expenses.................................... 30,864
-----------
TOTAL EXPENSES......................................... 2,918,694
-----------
NET INVESTMENT LOSS......................................... (294,840)
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY:
Net realized gain on listed investment transactions....... 7,651,532
Net realized loss on direct investment transactions....... (3,359,284)
Net realized gain on foreign currency transactions........ 7,951
-----------
4,300,199
-----------
Net change in unrealized depreciation on listed
investments and foreign currency transactions.......... (9,247,371)
Net change in unrealized appreciation on direct
investments............................................ 2,676,652
-----------
(6,570,719)
-----------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS..................................... (2,270,520)
-----------
NET DECREASE IN NET ASSETS FROM OPERATIONS.................. $(2,565,360)
===========
</TABLE>
See notes to financial statements.
18
<PAGE> 20
THE CHINA FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
OCTOBER 31, 2000 OCTOBER 31, 1999
---------------- ----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS:
Net investment income (loss).............................. $ (294,840) $ 1,130,248
Net realized gain on investment and foreign currency
transactions........................................... 4,300,199 6,213,756
Net change in unrealized appreciation (depreciation) on
investments and foreign currency translations.......... (6,570,719) 10,736,479
------------ ------------
Net increase (decrease) in net assets resulting from
operations............................................. (2,565,360) 18,080,483
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO STOCKHOLDERS FROM:
Net investment income..................................... (1,118,122) (816,647)
------------ ------------
Total dividends and distributions to shareholders......... (1,118,122) (816,647)
------------ ------------
CAPITAL STOCK TRANSACTIONS
Fund shares repurchased (Note D).......................... -- (5,852,335)
------------ ------------
Total decrease in net assets from capital stock
transactions........................................... -- (5,852,335)
------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS....................... (3,683,482) 11,411,501
------------ ------------
NET ASSETS:
Beginning of period......................................... 128,302,856 116,891,355
------------ ------------
End of period, including undistributed net investment income
of $0 and $1,116,171, respectively........................ $124,619,374 $128,302,856
============ ============
</TABLE>
See notes to financial statements.
19
<PAGE> 21
THE CHINA FUND, INC.
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OF COMMON STOCK OUTSTANDING FOR THE YEAR(S) INDICATED
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE(1)
Net asset value, beginning of period........ $ 12.74 $ 10.84 $ 16.97 $ 13.24 $ 12.87
Net investment income (loss)................ (0.03) 0.12 0.08(2) (0.02)(2) 0.06
Net realized and unrealized gain (loss) on
investment and foreign currency
transactions.............................. (0.23) 1.86 (5.71) 3.83 0.40
-------- -------- -------- -------- --------
Total from investment operations............ (0.26) 1.98 (5.63) 3.81 0.46
-------- -------- -------- -------- --------
Less distributions:
Dividends from net investment income...... (0.11) (0.08) -- (0.08) (0.09)
Distributions from net realized capital
gains................................... -- -- (0.50) -- --
-------- -------- -------- -------- --------
Total distributions......................... (0.11) (0.08) (0.50) (0.08) (0.09)
-------- -------- -------- -------- --------
Net asset value, end of period.............. $ 12.37 $ 12.74 $ 10.84 $ 16.97 $ 13.24
======== ======== ======== ======== ========
Per share market value, end of period....... $ 8.94 $ 9.94 $ 8.75 $ 13.31 $ 11.75
======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN (BASED ON MARKET
VALUE).................................... (9.14)% 14.65% (31.98)% 13.88% 0.74%
======== ======== ======== ======== ========
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000's)........... $124,619 $128,303 $116,891 $184,035 $143,599
Ratio of expenses to average net assets..... 2.12% 2.28% 2.22%(2) 2.15%(2) 2.56%
Ratio of net investment income (loss) to
average net assets........................ (0.21)% 0.95% 0.68% (0.11)% 0.49%
Portfolio turnover rate..................... 108% 75% 24% 39% 41%
</TABLE>
(1) Based on average shares outstanding during the period.
(2) The ratios of expenses to average net assets and the net investment income
(loss) per share is after the waiver of a portion of the Investment
Management 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 net investment income (loss) per share would have been as follows:
For the year ended October 31, 1998, 2.33% and $0.07, respectively and for
the year ended October 31, 1997, 2.25% and $(0.04), respectively.
See notes to financial statements.
20
<PAGE> 22
THE CHINA FUND, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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 following
is a summary of significant accounting policies followed by the Fund in the
preparation of its financial statements.
USE OF ESTIMATES: The preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America,
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, 2000, relate to the valuation of the Fund's Direct
Investments, as further discussed below and in Note B.
SECURITY VALUATION: Portfolio securities listed on 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 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. 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's 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. Currencies, investments and other assets and liabilities stated in
foreign currencies 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 securities 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.
21
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
OPTIONS CONTRACTS: The Fund may purchase and write (sell) call options and put
options provided the transactions are for hedging purposes and the initial
margin and premiums do not exceed 5% of total assets.
Option contracts are valued daily and unrealized gains or losses are recorded
based upon the last sales price on the principal exchange on which the options
are traded. The Fund will realize a gain or loss upon the expiration or closing
of the option contract. When an option is exercised, the proceeds on sales of
the underlying security for a written call option, the purchase cost of the
security for a written put option, or the cost of the security for a purchased
put or call option is adjusted by the amount of premium received or paid.
The risk in writing a call option is that the Fund gives up the opportunity for
profit if the market price of the security increases and the option is
exercised. The risk in writing a put option is that the Fund may incur a loss if
the market price of the security decreases and the option is exercised. The risk
in buying an option is that the Funds pay a premium whether or not the option is
exercised. Risks may also arise from an illiquid secondary market or from the
inability of counterparties to meet the terms of the contract.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities 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 any net
realized capital gains. 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, including
making distributions of taxable income and capital gains sufficient to relieve
it from all, or substantially all, federal income and excise taxes.
NOTE B -- VALUATION OF DIRECT INVESTMENTS
At October 31, 2000, Direct Investments amounting to $7,264,794 (5.83% 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 readily available market prices (See Note
A -- Security Valuation). The procedures applied by the Board of Directors in
arriving at its estimate of value of securities without readily available 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
22
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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 "Management Agreement"). Effective July 1, 2000, the
Management Agreement was amended to reduce the fee paid by the Fund to the
Investment Manager for its services to the annual rate of 1.15% of the Fund's
average weekly net assets. During the period from March 13, 1998 to July 1,
2000, the Investment Manager was entitled to receive a fee for its services at
the annual rate of 1.25% of the Fund's average weekly net assets. HSBC Private
Equity (Asia) 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 by the 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 -- CAPITAL STOCK
The Board of Directors of the Fund has approved a share repurchase plan. Under
the program, the Fund will repurchase shares at management's discretion at times
when it considers the repurchase to be consistent with the objectives of the
program. For the year ended October 31, 2000, the Fund did not participate in
this program. For the year ended October 31, 1999, the Fund repurchased 707,864
shares of its common stock. Proceeds paid by the Fund for the repurchase of its
shares, including commissions of $21,236, amounted to $5,852,335.
NOTE E -- INVESTMENT TRANSACTIONS
For the year ended October 31, 2000, the Fund's cost of purchases and proceeds
from sales of investment securities, other than short-term securities, were
$142,960,317 and $146,816,706, respectively. At October 31, 2000, the cost of
investments for federal income tax purposes was $136,042,032. Gross unrealized
appreciation of investments was $6,614,462, while gross unrealized depreciation
of investments was $22,810,377, resulting in net unrealized depreciation of
investments of $16,195,915. In addition, as of October 31, 2000 the Fund had a
capital loss carryforward of $6,291,943 for Federal income tax purposes which
may be utilized to offset future capital gains. Of this amount, $2,436,126 will
expire in 2006 and $3,855,817 will expire in 2008.
23
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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.
NOTE G -- OPTIONS
For the year ended October 31, 2000, the following reflects the written option
activity:
<TABLE>
<CAPTION>
CALL OPTIONS WRITTEN
-----------------------------
NUMBER OF CONTRACTS PREMIUM
------------------- -------
<S> <C> <C>
Balance as of October 31, 1999.............................. -- $ --
Written..................................................... 80 --
Closed...................................................... -- --
-- ------
Outstanding as of October 31, 2000.......................... 80 --
== ======
</TABLE>
24
<PAGE> 26
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., (the "Fund"), including the schedule of investments as of
October 31, 2000, 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 auditing standards generally accepted
in the United States of America. 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. Our procedures included confirmation of
securities owned as of October 31, 2000 by correspondence with the custodian. As
to securities purchased or sold but not yet received or delivered, we performed
other appropriate auditing procedures. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, 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, 2000, the results of its operations for the
year then ended, 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 accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
Boston, Massachusetts
December 8, 2000
25
<PAGE> 27
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 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.
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.
26
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DIVIDENDS AND DISTRIBUTIONS;
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN (CONTINUED)
--------------------------------------------------------------------------------
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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.
27
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28
<PAGE> 30
THE CHINA FUND, INC.
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UNITED STATES ADDRESS
The China Fund, Inc.
452 5th Avenue, 10th Floor
New York, NY 10018
1-888-CHN-CALL (246-2255)
DIRECTORS AND OFFICERS
Alan Tremain, O.B.E., Director and Chairman of the Board
Sir Alan Donald KCMG, Director
Paul C. Guidone, President and Director
Michael F. Holland, Director
Burton Levin, Director
James J. Lightburn, Director
Joe O. Rogers, Director
John W. English, 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
Corporate Investors Communications, Inc.
ADMINISTRATOR, CUSTODIAN, TRANSFER AGENT, DIVIDEND PAYING AGENT AND REGISTRAR
State Street Bank and Trust Company
INDEPENDENT AUDITORS
KPMG LLP
LEGAL COUNSEL
Clifford Chance Rogers & Wells LLP
