AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 8, 1996
SECURITIES ACT FILE NO. 333-00691
INVESTMENT COMPANY ACT FILE NO. 811-6674
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
(Check appropriate box or boxes)
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 ( )
Pre-Effective Amendment No. 1 (x)
Post-Effective Amendment No. __ ( )
and/or
REGISTRATION STATEMENT UNDER
THE INVESTMENT
COMPANY ACT OF 1940 ( )
Amendment No. 7 (x)
THE GREATER CHINA FUND, INC.
(Exact name of Registrant as specified in Charter)
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
(Address of Principal Executive Offices)
(212) 713-3589
(Registrant's Telephone Number, including Area Code)
C. WILLIAM MAHER
MITCHELL HUTCHINS ASSET MANAGEMENT INC.
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
(Name and Address of Agent for Service)
with copies to:
<TABLE>
<C> <C>
<PAGE>
JOHN M. DONOVAN, ESQ. THOMAS A. HALE, ESQ.
WHITE & CASE SKADDEN, ARPS, SLATE, MEAGHER & FLOM
1155 AVENUE OF THE AMERICAS 333 WEST WACKER DRIVE
NEW YORK, NEW YORK 10036 CHICAGO, ILLINOIS 60606
</TABLE>
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable
after the effective date of this Registration Statement.
If any securities being registered on this form will be offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities
Act of 1933, other than securities offered in connection with a dividend
reinvestment plan, check the following box. ( )
It is proposed that this filing will become effective (check appropriate
box)
( ) when declared effective pursuant to section 8(c)
If appropriate, check the following box:
( ) this [post-effective] amendment designates a new effective date
for a previously filed [post-effective amendment] [registration statement].
( ) This form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act and the
Securities Act registration statement number of the earlier effective
registration statement for the same offering is -___.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that
this Registration Statement shall thereafter become effective in accordance
with Section 8(a) of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as the
Commission, acting pursuant to said Section 8(a), may determine.
<TABLE>
THE GREATER CHINA FUND, INC.
CROSS REFERENCE SHEET
BETWEEN ITEMS OF REGISTRATION STATEMENT (FORM N-2) AND PROSPECTUS
PURSUANT TO RULE 495(A)
<CAPTION>
Item
No. Caption Location in Prospectus
PART A
<S> <C> <C>
1. Outside Front Cover . . . . . . . . . . Outside Front Cover
2. Inside Front and Outside Back Cover
Page . . . . . . . . . . . . . . . . . Inside Front and Outside Back Cover Page
3. Fee Table and Synopsis . . . . . . . . . Expense Information
4. Financial Highlights . . . . . . . . . . Financial Highlights
5. Plan of Distribution . . . . . . . . . . The Offer; Distribution Arrangements
6. Selling Shareholders . . . . . . . . . . Not Applicable
7. Use of Proceeds . . . . . . . . . . . . Use of Proceeds
<PAGE>
8. General Description of the Registrant Cover Page of Prospectus; The Fund; Net Asset Value and Market Price
Information; Investment Objective and Policies; Special Considerations and
Risk Factors; Description of Common Stock
9. Management Management of the Fund; Custodian, Transfer Agent, Dividend Paying Agent
and Registrar
10. Capital Stock, Long-Term Debt, and Other
Securities . . . . . . . . . . . . . . Description of Common Stock; Dividends and Distributions;
Dividend Reinvestment Plan; Taxation
11. Defaults and Arrears on Senior
Securities . . . . . . . . . . . . . . Not Applicable
12. Legal Proceedings . . . . . . . . . . . Not Applicable
13. Table of Contents of the Statement of
Additional Information . . . . . . . . Table of Contents of the Statement of Additional Information
PART B
14. Cover Page . . . . . . . . . . . . . . . Cover Page
15. Table of Contents . . . . . . . . . . . Cover Page
16. General Information and History . . . . Not Applicable
17. Investment Objective and Policies . . . Investment Objective and Policies; Investment Restrictions;
Portfolio Transactions and Brokerage
18. Management . . . . . . . . . . . . . . . Management of the Fund
19. Control Persons and Principal Holders of
Securities . . . . . . . . . . . . . . Management of the Fund
20. Investment Advisory and Other Services . Management of the Fund
21. Brokerage Allocation and Other
Practices . . . . . . . . . . . . . . Portfolio Transactions and Brokerage
22. Tax Status . . . . . . . . . . . . . . . Taxation
23. Financial Statements . . . . . . . . . . Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this Registration Statement.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MARCH 8, 1996
THE GREATER CHINA FUND, INC.
2,397,344 Shares of Common Stock
Issuable Upon Exercise of
9,589,377 Rights to Subscribe for such Shares
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell
or the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
The Greater China Fund, Inc. (the "Fund") is issuing to its shareholders
of record as of the close of business on March __, 1996 (the "Record Date")
non-transferable rights ("Rights") entitling the holders thereof to
subscribe for an aggregate of 2,397,344 shares of the Fund's Common Stock
(the "Shares") at the rate of one share of Common Stock for each four
Rights held (the "Offer"). Shareholders of record will receive one Right
<PAGE>
for each whole share of Common Stock held on the Record Date. Shareholders
who fully exercise their Rights will be entitled to subscribe for
additional shares of Common Stock pursuant to the Over-Subscription
Privilege described herein. The Fund may increase the number of Shares of
Common Stock subject to subscription by up to 25% of the Shares, or 599,336
shares of Common Stock, for an aggregate total of 2,996,680 Shares.
Fractional shares will not be issued upon the exercise of Rights. The
Rights are non-transferable and will not be admitted for trading on the New
York Stock Exchange (the "NYSE") or any other exchange and accordingly, may
not be purchased or sold. See "The Offer." THE SUBSCRIPTION PRICE PER
SHARE (THE "SUBSCRIPTION PRICE") WILL BE __% OF THE LOWER OF (i) THE
AVERAGE OF THE LAST REPORTED SALE PRICE OF A SHARE OF THE FUND'S COMMON
STOCK ON THE NYSE ON THE EXPIRATION DATE OF THE OFFER (THE "PRICING DATE")
AND THE FOUR PRECEDING BUSINESS DAYS AND (ii) THE NET ASSET VALUE PER SHARE
OF THE FUND'S COMMON STOCK AS OF THE CLOSE OF BUSINESS ON THE PRICING DATE.
THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON APRIL __, 1996
(THE "EXPIRATION DATE") UNLESS EXTENDED AS DESCRIBED HEREIN.
The Fund announced the Offer before the opening of trading on the NYSE on
March 1, 1996. Shares of the Common Stock trade on the NYSE under the
symbol "GCH." The net asset value per share of Common Stock at the close
of business on March 1, 1996 and on March __, 1996 were $16.31 and $_____,
respectively, and the last reported sale prices of a share of the Fund's
Common Stock on the NYSE on those dates were $15.50 and $_____,
respectively.
The Fund is a non-diversified, closed-end management investment company
which seeks long-term capital appreciation through investment of
substantially all of its assets in listed equity securities of companies
which derive, or which are expected to derive, a significant proportion (at
least 50%) of their revenues from goods produced or sold, investments made
or services performed in The People's Republic of China ("China
companies"). Under normal market conditions, at least 65% of the Fund's
total assets is invested in equity securities of China companies listed on
stock exchanges in China and Hong Kong. The Fund may also invest in equity
securities of China companies listed on stock exchanges located elsewhere,
such as Korea, Singapore or Taiwan, in unlisted equity securities of China
companies and in debt securities of China companies. There can be no
assurance that the Fund's investment objective will be realized. See
"Investment Objective and Policies" and "Investment Restrictions" in the
Statement of Additional Information referred to below. INVESTMENT IN THE
FUND INVOLVES SPECIAL CONSIDERATIONS THAT ARE NOT NORMALLY ASSOCIATED WITH
INVESTMENTS IN UNITED STATES ISSUERS. SEE "RISK FACTORS AND SPECIAL
CONSIDERATIONS."
This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing and should be retained
for future reference. A Statement of Additional Information dated March
__, 1996 (the "SAI"), containing additional information about the Fund, has
been filed with the Securities and Exchange Commission and is incorporated
by reference in its entirety into this Prospectus. A copy of the SAI, the
table of contents of which appears on page 33 of this Prospectus, may be
obtained without charge by calling Shareholder Communications Corporation
at (800) 221-5724, extension 322.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
<PAGE>
THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
ESTIMATED
SUBSCRIPTION PRICE ESTIMATED PROCEEDS
(1) ESTIMATED SALES LOAD(2) TO FUND(3)(4)
<S> <C> <C> <C>
Per Share . . . . . . . . ____________ ____________ ____________
Total Maximum(5) . . . . ____________ ____________ ____________
(1) Estimated on the basis of __% of the market price per share on March __, 1996. See "The Offer -- Subscription
Price."
(2) In connection with the Offer, the Dealer Manager and other broker-dealers soliciting the exercise of Rights will
receive soliciting fees equal to 2.50% of the Subscription Price per Share for each Share issued pursuant to the
exercise of Rights and the Over-Subscription Privilege. The Fund has also agreed to pay the Dealer Manager a fee
for financial advisory services in connection with the Offer equal to 1.25% of the Subscription Price per Share for
Shares issued pursuant to the Offer and has agreed to indemnify the Dealer Manager against certain liabilities under
the Securities Act of 1933, as amended.
(3) Before deduction of offering expenses incurred by the Fund, estimated at $530,000, including an aggregate of up to
$100,000 to be paid to the Dealer Manager as partial reimbursement for its expenses.
(4) Funds received by check prior to the final due date of this Offer will be deposited into a segregated interest
bearing account (which interest will be paid to the Fund) pending proration and distribution of Shares.
(5) Assumes all Rights are exercised at the Estimated Subscription Price. Pursuant to the Over-Subscription Privilege,
the Fund may at the discretion of the Board of Directors increase the number of Shares subject to subscription by up
to 25% of the Shares offered hereby. If the Fund increases the number of shares subject to subscription by 25%, the
maximum Estimated Subscription Price (as hereinafter defined), Estimated Sales Load and Estimated Proceeds to the
Fund will be $___________, $__________ and $__________, respectively.
</TABLE>
PAINEWEBBER INCORPORATED
The date of this Prospectus is March __, 1996.
Upon completion of the Offer, shareholders who do not fully exercise their
Rights will own a smaller proportional interest in the Fund than would
otherwise be the case. In addition, because the Subscription Price per
share will be less than the net asset value per share, the Offer will
result in a dilution of net asset value per share for all shareholders.
Such dilution will disproportionately affect non-exercising shareholders.
If the Subscription Price per share is substantially less than the current
net asset value per share, such dilution could be substantial. See "Risk
Factors and Special Considerations-Dilution and Effect of Non-Participation
in the Offer." EXCEPT AS DESCRIBED HEREIN, SHAREHOLDERS WILL HAVE NO RIGHT
TO RESCIND THEIR SUBSCRIPTIONS AFTER RECEIPT OF THEIR PAYMENT FOR SHARES BY
THE SUBSCRIPTION AGENT.
The Fund's investment manager is Baring International Investment (Far
East) Limited (the "Investment Manager"), an indirect wholly-owned
subsidiary of Baring Asset Management Limited. The Fund's administrator is
Mitchell Hutchins Asset Management Inc. (the "Administrator"), an affiliate
of PaineWebber Incorporated (the "Dealer Manager") referred to herein. The
Fund's Investment Manager, as well as the Administrator, will benefit from
the Offer because their fees are based on the average net assets of the
Fund. The address of the Fund is 1285 Avenue of the Americas, New York,
New York 10019, and its telephone number is (212) 713-3589.
Unless otherwise specified, all references in this Prospectus to "U.S.
dollars," "dollars," "US$" or "$" are to United States dollars, all
<PAGE>
references to "RMB" or "Renminbi" are to renminbi which is the legal tender
currency of The People's Republic of China ("PRC" or "China") and all
references to "HK$" are to Hong Kong dollars which are the legal tender
currency of Hong Kong. On March 7, 1996, the RMB-U.S. dollar exchange rate
as published in The Asian Wall Street Journal was RMB 8.288 per U.S.
dollar. On March 7, 1996, the HK$-U.S. dollar exchange rate as published
in The Asian Wall Street Journal was HK$7.733 per U.S. dollar. See "Risk
Factors and Special Considerations -- Currency Fluctuations" herein and "The
People's Republic of China" in the SAI for additional information on the
historical rate of exchange between the dollar and the RMB.
Unless otherwise indicated, U.S. dollar equivalent information in RMB for
a period is based on the foreign exchange adjustment center rate on the
last day in the period, U.S. dollar information for RMB as of a specified
date is based on the official exchange rate for that date, U.S. dollar
equivalent information in HK$ for a period is based on the average of the
daily exchange rates for such period and U.S. dollar information for HK$ as
of a specified date is based on the exchange rate for such date. No
representation is made that the RMB, HK$, or US$ in this Prospectus could
be converted into any other currency, at any particular rate or at all.
EXPENSE INFORMATION
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales load (as a percentage of the Subscription Price per Share)(1) . . . . . . . . . . 3.75%
ANNUAL EXPENSES (as a percentage of net assets attributable
to Common Stock)(2)
Management fees(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.25%
Administration fees(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.21%
Other operating expenses(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.90%
Total annual expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.36%
______________
(1) The Dealer Manager and the other broker-dealers soliciting the exercise of Rights will receive soliciting fees equal to
2.50% of the Subscription Price per Share for each Share issued pursuant to the exercise of Rights and the Over-
Subscription Privilege. The Fund has also agreed to pay the Dealer Manager a fee for financial advisory services in
connection with the Offer equal to 1.25% of the Subscription Price per Share for Shares issued pursuant to the Offer and
to reimburse the Dealer Manager for its out-of-pocket expenses up to an aggregate of $100,000. In addition, the Fund has
agreed to pay fees to the Subscription Agent and the Information Agent estimated to be $25,000 and $10,000, respectively,
in connection with their expenses related to the Offer and to reimburse them for their out-of-pocket expenses, estimated
to be approximately $5,000 and $40,000, respectively. These fees shall be borne by all of the Fund's shareholders,
including those shareholders who do not exercise their Rights.
(2) Amounts are based on the Fund's most recently completed fiscal year, except that "Other Expenses" are based on estimated
amounts for the Fund's current fiscal year and assume that (i) all of the Rights are exercised and (ii) the Fund does not
increase the number of Shares subject to subscription pursuant to the Over-Subscription Privilege.
(3) See "Management of the Fund -- Management and Administration Agreements" herein and in the SAI.
(4) See "Management of the Fund -- Administrator" herein and in the SAI.
</TABLE>
The foregoing table is intended to assist investors in understanding the
costs and expenses that an investor in the Fund will bear directly or
indirectly.
<TABLE>
EXAMPLE
An investor would pay the following expenses on a $1,000 investment, assuming a 5% annual return throughout the periods:
<PAGE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
<S> <C> <C> <C>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$61 $108 $159 $297
</TABLE>
The above example assumes reinvestment of all dividends and
distributions at net asset value and an expense ratio of 2.36%. The table
above and the assumption in the example of a 5% annual return are required
by Securities and Exchange Commission regulations applicable to all
investment companies. The example should not be considered a
representation of past or future expenses or rate of return; the actual
expenses of the Fund may be greater or less than those shown. For more
complete descriptions of certain of the Fund's costs and expenses, see
"Management of the Fund" herein and in the SAI.
FINANCIAL HIGHLIGHTS
The following information has been audited by Price Waterhouse LLP,
independent accountants, as stated in their report included in the SAI.
This information should be read in conjunction with the financial
statements and notes thereto included in the SAI.
<TABLE>
<CAPTION>
For the Year For the Period
Ended December 31, July 23, 1992* through
1995 1994 1993 December 31, 1992
<S> <C> <C> <C> <C>
Net asset value, beginning of period . . . . . . $14.29 $23.79 $13.40 $13.95****
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (loss) . . . . . . . . . . 0.20 0.12** 0.02 ---
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 0.29 (8.92)** 11.00 (0.38)
Total from investment operations . . . . . . . . 0.49 (8.80) 11.02 (0.38)
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income . . . . . . . . . . . (0.20) (0.09) (0.01) ---
From net realized gain on investments . . . . . . (0.01) (0.06) (0.62) ---
In excess of net realized gain on investments . . (0.05) --- --- ---
Total dividends and distributions to
shareholders . . . . . . . . . . . . . . . . . (0.26) (0.15) (0.63) ---
FUND SHARE TRANSACTIONS:
Dilutive effect of rights offering . . . . . . . --- (0.46) --- ---
Offering costs charged to
paid-in-capital in excess of par . . . . . . . --- (0.09) --- (0.17)
Total Fund share transactions: . . . . . . . . . --- (0.55) --- (0.17)
Net asset value, end of period . . . . . . . . . $ 14.52 $ 14.29 $ 23.79 $ 13.40
Market value, end of period . . . . . . . . . . . $ 14.13 $ 12.13 $ 26.75 $ 12.38
<PAGE>
TOTAL INVESTMENT RETURN (1)(2) . . . . . . . . . 18.48% (52.01)% 122.01% (11.29%)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) . . . . . $139,246 $136,994 $160,783 $90,543
Ratio of expenses to average net assets . . . . . 2.36% 2.08% 2.22% 2.43%***
Ratio of net investment income (loss) to
average net assets . . . . . . . . . . . . . . 1.39% 0.63% 0.11% (0.04)%***
Portfolio turnover . . . . . . . . . . . . . . . 32% 22% 31% 1%
___________________
* Commencement of investment operations.
** Based on average shares outstanding.
*** Annualized.
**** Initial public offering price of $15.00 per share net of underwriting discount of $1.05 per share.
(1) Total investment return is calculated assuming a purchase of common stock at the current market price on the first
day, the purchase of common stock pursuant to any rights offering occurring in the period, and a sale at the current
market price on the last day of each period reported. Dividends and distributions, if any, are assumed, for purposes
of this calculation, to be reinvested at prices obtained under the Fund's dividend reinvestment plan. Total
investment return does not reflect sales charges or brokerage commissions.
(2) Total investment return for a period of less than one year is not annualized.
</TABLE>
THE OFFER
PURPOSE OF THE OFFER
As a consideration to making the Offer, the Board of Directors of the
Fund has determined that it is in the best interest of the Fund and its
shareholders to increase the assets of the Fund available for investment,
thereby enabling the Fund to take advantage more fully of available
existing and future investment opportunities consistent with the Fund's
investment objective of long-term capital appreciation through investment
primarily in listed equity securities of China companies. The Fund's Board
of Directors has voted to approve the Offer.
In reaching its decision, the Board of Directors considered, among
other matters, advice by the Investment Manager that new funds would permit
the Fund to take advantage of available investment opportunities without
having to sell portfolio securities that the Investment Manager believes
should be held and that potentially beneficial investment opportunities are
expected to arise in connection with future "H" share offerings on the
Stock Exchange of Hong Kong and improving performance of "H" shares
currently listed on such exchange. It is also expected that new investment
opportunities will become available as a result of China and Hong Kong
infrastructure development projects, spin-offs of Chinese operating
subsidiaries or divisions by certain companies listed on the Stock Exchange
of Hong Kong, and new issues in other industry sectors such as aviation.
In the Investment Manager's view, additional assets would also permit the
Fund to make portfolio rebalancing adjustments without the expense of
selling securities in its present portfolio. Furthermore, the Offer
provides an exclusive opportunity to existing shareholders to purchase
Shares at a discount to both the market price and net asset value. The
Board of Directors also took into account that a well-subscribed rights
offering would marginally reduce the Fund's expense ratio, which would be
of long-term benefit to the Fund, and could increase liquidity on the NYSE
where shares of the Fund's Common Stock are listed and traded.
The Fund's Investment Manager, as well as the Administrator, will
benefit from the Offer because their fees are based on the average net
assets of the Fund. See "Management of the Fund" herein and in the SAI.
The Fund may, in the future and at its discretion, choose to make
additional rights offerings from time to time for a number of shares and on
terms which may or may not be similar to this Offer. Any such future
<PAGE>
rights offering will be made in accordance with the requirements of the
Investment Company Act of 1940, as amended (the "1940 Act").
TERMS OF THE OFFER
The Fund is issuing to holders of its common stock (the "Common
Stock") of record as of the close of business on March __, 1996, the Record
Date for the Offer, non-transferable Rights to subscribe for an aggregate
of 2,397,344 Shares (2,996,680 Shares if the Fund increases the number of
shares subject to the Over-Subscription Privilege by 25%). Each
shareholder is being issued one Right for each share of Common Stock owned
on the Record Date. The Rights entitle the holders thereof to subscribe
for one Share for every four Rights held (1 for 4). Fractional shares will
not be issued upon the exercise of Rights; accordingly, Rights may be
exercised only in integral multiples of four. Rights are evidenced by
subscription certificates ("Subscription Certificates"), which will be
mailed to Shareholders of record, except as described below under "Foreign
Restrictions." A shareholder's right to acquire during the Subscription
Period at the Subscription Price one additional Share for every four Rights
held is hereinafter referred to as the "Primary Subscription."
Rights may be exercised at any time during the Subscription Period,
which commences on March __, 1996 and ends at 5:00 p.m. New York City time,
on April __, 1996 (referred to herein as the "Expiration Date"), unless
extended by the Fund until 5:00 p.m., New York City time, to a date not
later than April __, 1996. See "-- Expiration of the Offer."
Any shareholder who fully exercises all Rights issued to such
shareholder pursuant to the Primary Subscription will be entitled to
subscribe for additional Shares at the Subscription Price (the "Over-
Subscription Privilege"). Shares available, if any, pursuant to the Over-
Subscription Privilege are subject to allotment and may be subject to
increase, as more fully discussed below under "Over-Subscription
Privilege." For purposes of determining the maximum number of Shares a
shareholder may acquire pursuant to the Offer, broker-dealers whose Shares
are held of record by Cede & Co. Inc. ("Cede") or by any other depository
or nominee will be deemed to be the holders of the Rights that are issued
to Cede or such other depository or nominee on their behalf.
Since fractional Shares will not be issued, shareholders who receive
or have remaining fewer than four Rights will be unable to exercise such
Rights and will not be entitled to receive any cash in lieu thereof,
although such shareholders may request Shares pursuant to the Over-
Subscription Privilege as described below.
OVER-SUBSCRIPTION PRIVILEGE
To the extent shareholders do not exercise all of the Rights issued to
them pursuant to the Primary Subscription, any underlying Shares
represented by such Rights will be offered to those shareholders who
exercise all the Rights issued to them. Pursuant to the Over-Subscription
Privilege, shareholders who exercise all the Rights issued to them will be
asked to indicate, on the Subscription Certificate as discussed herein, how
many additional Shares they would like to purchase pursuant to the Offer.
If sufficient Shares remain, all over-subscription requests will be honored
in full. If sufficient Shares are not available to honor all over-
subscription requests, the Fund may, at the discretion of the Board of
Directors, issue up to an additional 25% of the Shares available pursuant
to the Offer (an additional 599,336 Shares) in order to cover such over-
subscription requests. Regardless of whether the Fund issues such
additional Shares, to the extent sufficient Shares are not available to
honor all over-subscription requests, any available Shares will be
allocated among those shareholders who over-subscribe based on the number
<PAGE>
of shares owned by them on the Record Date. The allocation process may
involve a series of allocations in order to assure that the total number of
Shares available for over-subscription is distributed on a pro rata basis.
The Fund will not offer or sell any Shares which are not subscribed
for pursuant to the Primary Subscription or the Over-Subscription
Privilege.
SUBSCRIPTION PRICE
The Subscription Price for the Shares to be issued pursuant to the
exercise of Rights and the Over-Subscription Privilege will be __% of the
lower of (i) the average of the last reported sale price of a share of the
Fund's Common Stock on the NYSE on the Pricing Date (the date of the
expiration of the Offer) and the four preceding business days and (ii) the
net asset value per share of the Fund's Common Stock as of the close of
business on the Pricing Date. For example, if the average of the last
reported sale price on the NYSE on the Pricing Date and the four preceding
business days of a share of the Fund's Common Stock is $_____, and the net
asset value per share of the Fund's Common Stock on the Pricing Date is
$_____, the Subscription Price will be $______ (__% of $_____). If,
however, the average of the last reported sale price on the NYSE on the
Pricing Date and the four preceding business days is $_____, and the net
asset value is $______, the Subscription Price will be $_____ (__% of
$_____). See "Net Asset Value and Market Price Information" herein.
The Fund announced the Offer before the opening of trading on the NYSE
on March 1, 1996. The net asset values per share of the Fund's Common
Stock at the close of business on March 1, 1996 and on March __, 1996 were
$16.31 and $_____, respectively, and the last reported sale prices of a
share of the Fund's Common Stock on the NYSE on those dates were $15.50 and
$_____, respectively.
NON-TRANSFERABILITY OF RIGHTS
The Rights are non-transferable and, therefore, may not be purchased
or sold. The Rights will not be listed for trading on the NYSE. However,
the Shares to be issued pursuant to the Rights will be listed for trading
on the NYSE.
EXPIRATION OF THE OFFER
The Offer will expire at 5:00 p.m., New York City time, on April __,
1996, unless extended by the Fund until 5:00 p.m., New York City time, to a
date not later than April __, 1996. See "Notice of Net Asset Value Decline
-- Extending the Expiration of the Offer" below.
Rights will expire on the Expiration Date and thereafter may not be
exercised. Any extension of the Offer will be followed as promptly as
practical by announcement thereof. Such announcement shall be issued no
later than 9:00 a.m., New York City time, on the next business day
following the previously scheduled Expiration Date. Without limiting the
manner in which the Fund may choose to make such announcement, the Fund
will not, unless otherwise required by law, have any obligation to publish,
advertise or otherwise communicate any such announcement other than by
making a release to the Dow Jones News Service or such other means of
announcement as the Fund deems appropriate. Since the Expiration Date and
the Pricing Date will be the same date, shareholders who decide to acquire
Shares in the Primary Subscription or pursuant to the Over-Subscription
Privilege will not know when they make such decision the purchase price of
such Shares.
NOTICE OF NET ASSET VALUE DECLINE -- EXTENDING THE EXPIRATION OF THE OFFER
<PAGE>
The Fund has, pursuant to the Securities and Exchange Commission's
regulatory requirements, undertaken to suspend the Offer until it amends
this Prospectus if, subsequent to March __, 1996, the effective date of the
Fund's Registration Statement, the Fund's net asset value declines more
than 10% from its net asset value as of that date. Accordingly, the Fund
will notify shareholders of any such decline and thereby permit them to
cancel their exercise of Rights.
METHOD OF EXERCISE OF RIGHTS
Rights are evidenced by Subscription Certificates which will be mailed
to shareholders or, if a shareholder's shares are held by Cede or any other
depository or nominee on their behalf, to Cede or such depository or
nominee, except as discussed below under "Foreign Restrictions." Rights
may be exercised by completing the Subscription Certificate which
accompanies this Prospectus and mailing it in the envelope provided, or
otherwise delivering the completed Subscription Certificate to the
Subscription Agent, together with payment in full for the Shares at the
Estimated Subscription Price (the "Estimated Subscription Price") as
described below under "Payment for Shares." Rights may also be exercised
by contacting your broker, banker or trust company, which can arrange, on
your behalf, to guarantee delivery of payment and of a properly completed
Subscription Certificate ("Notice of Guaranteed Delivery"). A fee may be
charged for this service. Fractional Shares will not be issued, and
shareholders who receive or who have remaining fewer than four Rights will
not be able to exercise such Rights (although such shareholders may
subscribe for Shares pursuant to the Over-Subscription Privilege).
Completed Subscription Certificates must be received by the Subscription
Agent prior to 5:00 p.m., New York City time, on the Expiration Date
(unless the guaranteed delivery procedures are complied with as described
below under "Payment for Shares") at the offices of the Subscription Agent
at the address set forth below under "Subscription Agent."
Shareholders Who Are Record Owners. Shareholders who are record
owners can choose between either option set forth under "Payment for
Shares" below. If time is of the essence, option (2) will permit delivery
of the Subscription Certificate and payment after the Expiration Date.
Investors Whose Shares Are Held By A Nominee. Shareholders whose
shares are held by a nominee, such as a broker or trustee, must contact
that nominee to exercise their Rights. In that case, the nominee will
complete the Subscription Certificate on behalf of the investor and arrange
for proper payment by one of the methods set forth under "Payment for
Shares" below.
Nominees. Nominees who hold shares for the account of others should
notify the beneficial owners of such shares as soon as possible to
ascertain such beneficial owners' intentions and to obtain instructions
with respect to the Rights. If the beneficial owner so instructs, the
nominee should complete the Subscription Certificate and submit it to the
Subscription Agent with the proper payment described under "Payment for
Shares" below.
FOREIGN RESTRICTIONS
Subscription Certificates will not be mailed to shareholders
whose addresses are outside the United States (for these purposes the
United States includes its territories and possessions and the District of
Columbia). The Rights to which those Subscription Certificates relate will
be held by the Subscription Agent for such shareholders' accounts until
instructions are received to exercise the Rights, subject to applicable
law. If no instructions are received prior to the Expiration Date, such
Rights will expire.
<PAGE>
SUBSCRIPTION AGENT
The Subscription Agent is PNC Bank, National Association, which will
receive a fee estimated to be $_______ for its administrative, processing,
invoicing and other services, plus reimbursement for its out-of-pocket
expenses related to the Offer. The Subscription Agent is also the Fund's
Transfer Agent, Dividend Paying Agent and Registrar with respect to the
Common Stock. SIGNED SUBSCRIPTION CERTIFICATES TOGETHER WITH PAYMENT OF
THE ESTIMATED SUBSCRIPTION PRICE MUST BE SENT TO PNC BANK, NATIONAL
ASSOCIATION by one of the methods described below. The Fund will accept
only Subscription Certificates actually received on a timely basis at any
of the addresses listed.
(1) BY FIRST CLASS MAIL, EXPRESS MAIL OR OVERNIGHT COURIER:
PNC Bank, National Association
c/o ACS
915 Broadway, 5th Floor
New York, New York 10010
(2) BY HAND:
PNC Bank, National Association
c/o PNC Trust Company
40 Broad Street, 5th Floor
New York, New York 10004
(3) BY FACSIMILE (TELECOPIER), with the original Subscription Certificate
to be sent by one of the methods described above:
PNC Bank, N.A.
c/o ACS
Facsimile number: (212) 505-4576
Confirm by telephone (212) 505-4559
DELIVERY TO AN ADDRESS OTHER THAN THOSE LISTED ABOVE WILL NOT
CONSTITUTE VALID DELIVERY.
INFORMATION AGENT
Any questions or requests for assistance may be directed to the
information agent (the "Information Agent") at its telephone number and
address listed below:
The Information Agent for the Offer is:
Shareholder Communications Corporation
17 State Street
New York, New York 10004
Telephone: (800) 221-5724, extension 322
or call collect: (212) 805-7000
Shareholders may also contact their brokers or nominees for
information with respect to the Offer.
The Information Agent will receive a fee estimated to be $50,000
including reimbursement for its out-of-pocket expenses related to the
Offer.
PAYMENT FOR SHARES
<PAGE>
Shareholders who acquire Shares on Primary Subscription and pursuant
to the Over-Subscription Privilege may choose between the following methods
of payment:
(1) A shareholder can send the Subscription Certificate together
with payment for the Shares acquired on Primary Subscription and for
additional Shares subscribed for pursuant to the Over-Subscription
Privilege to the Subscription Agent, calculating the total payment on
the basis of the Estimated Subscription Price of $_____ per share (__%
of the market price per share on March __, 1996). To be accepted,
such payment, together with the completed Subscription Certificate,
must be received by the Subscription Agent at one of the Subscription
Agent's offices at the addresses set forth above prior to 5:00 p.m.,
New York City time, on the Expiration Date. The Subscription Agent
will deposit all checks and money orders received by it prior to the
final payment date into a segregated interest-bearing account (which
interest will be paid to the Fund) pending proration and distribution
of Shares. A PAYMENT PURSUANT TO THIS METHOD MUST BE IN UNITED STATES
DOLLARS BY MONEY ORDER OR CHECK DRAWN ON A BANK LOCATED IN THE UNITED
STATES, MUST BE PAYABLE TO THE GREATER CHINA FUND, INC. AND MUST
ACCOMPANY AN EXECUTED SUBSCRIPTION CERTIFICATE FOR SUCH SUBSCRIPTION
CERTIFICATE TO BE ACCEPTED. BECAUSE UNCERTIFIED PERSONAL CHECKS MAY
TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR, YOU ARE STRONGLY URGED TO
PAY, OR ARRANGE FOR PAYMENT, BY MEANS OF A CERTIFIED OR CASHIER'S
CHECK OR MONEY ORDER.
(2) Alternatively, a subscription will be accepted by the
Subscription Agent if, prior to 5:00 p.m., New York City time, on the
Expiration Date, the Subscription Agent has received a Notice of
Guaranteed Delivery by facsimile (telecopy) or otherwise from a bank,
a trust company, or a NYSE member guaranteeing delivery of (i) payment
of the Estimated Subscription Price of $_____ per share for the Shares
subscribed for in the Primary Subscription and for any additional
Shares subscribed for pursuant to the Over-Subscription Privilege, and
(ii) a properly completed Subscription Certificate. The Subscription
Agent will not honor a Notice of Guaranteed Delivery unless a properly
completed Subscription Certificate and full payment for the Shares are
received by the Subscription Agent by the close of business on the
third business day after the Expiration Date (April __, 1996).
Within eight business days following the Pricing Date (the
"Confirmation Date") (April __, 1996), a confirmation will be sent by the
Subscription Agent to each subscribing shareholder (or, if the
shareholder's Shares are held by Cede or any other depository or nominee,
to Cede or such depository or nominee), showing (i) the number of Shares
acquired pursuant to the Primary Subscription, (ii) the number of Shares,
if any, acquired pursuant to the Over-Subscription Privilege, (iii) the per
Share and total purchase price for the Shares, and (iv) any additional
amount payable by such shareholder to the Fund or any excess to be refunded
by the Fund to such shareholder, in each case based on the Subscription
Price as determined on the Pricing Date. If any shareholder exercises his
or her right to acquire Shares pursuant to the Over-Subscription Privilege,
any such excess payment which would otherwise be refunded to such
shareholder will be applied by the Fund toward payment for additional
Shares acquired pursuant to exercise of the Over-Subscription Privilege.
Any additional payment required from a shareholder must be received by the
Subscription Agent within ten business days after the Confirmation Date
(May __, 1996). Any excess payment to be refunded by the Fund to a
shareholder will be mailed by the Subscription Agent to such shareholder as
promptly as possible. All payments by a shareholder must be in United
States dollars by money order or check drawn on a bank located in the
United States of America and payable to THE GREATER CHINA FUND, INC.
<PAGE>
The Subscription Agent will deposit all checks received by it prior to
the final date into a segregated interest bearing account (which interest
will accrue to the benefit of the Fund) pending distribution of the Shares.
Whichever of the two methods described above is used, issuance and
delivery of certificates for the Shares purchased are subject to collection
of checks and actual payment pursuant to any Notice of Guaranteed Delivery.
SHAREHOLDERS WILL HAVE NO RIGHT TO RESCIND THEIR SUBSCRIPTION AFTER
RECEIPT OF THEIR PAYMENT FOR SHARES BY THE SUBSCRIPTION AGENT, EXCEPT AS
PROVIDED ABOVE UNDER "NOTICE OF NET ASSET VALUE DECLINE-EXTENDING THE
EXPIRATION OF THE OFFER."
If a shareholder who acquires Shares pursuant to the Primary
Subscription or Over-Subscription Privilege does not make payment of any
additional amounts due, the Fund reserves the right to take any or all of
the following actions: (i) sell such subscribed and unpaid-for Shares to
other shareholders, (ii) apply any payment actually received by it toward
the purchase of the greatest whole number of Shares which could be acquired
by such holder upon exercise of the Primary Subscription and/or Over-
Subscription Privilege, and/or (iii) exercise any and all other rights or
remedies to which it may be entitled.
THE METHOD OF DELIVERY OF SUBSCRIPTION CERTIFICATES AND PAYMENT OF THE
SUBSCRIPTION PRICE TO THE FUND WILL BE AT THE ELECTION AND RISK OF THE
RIGHTS HOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT SUCH
CERTIFICATES AND PAYMENT BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH
RETURN RECEIPT REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED
TO ENSURE DELIVERY TO THE FUND AND CLEARANCE OF PAYMENT PRIOR TO 5:00 P.M.,
NEW YORK CITY TIME, ON THE EXPIRATION DATE. BECAUSE UNCERTIFIED PERSONAL
CHECKS MAY TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR, YOU ARE STRONGLY
URGED TO PAY, OR ARRANGE FOR PAYMENT, BY MEANS OF CERTIFIED OR CASHIER'S
CHECK OR MONEY ORDER.
All questions concerning the timeliness, validity, form and
eligibility of any exercise of Rights will be determined by the Fund, whose
determinations will be final and binding. The Fund in its sole discretion
may waive any defect or irregularity, or permit a defect or irregularity to
be corrected within such time as it may determine, or reject the purported
exercise of any Right. Subscriptions will not be deemed to have been
received or accepted until all irregularities have been waived or cured
within such time as the Fund determines in its sole discretion. The Fund
will not be under any duty to give notification of any defect or
irregularity in connection with the submission of Subscription Certificates
or incur any liability for failure to give such notification.
DELIVERY OF SHARE CERTIFICATES
Participants in the Fund's Dividend Reinvestment Plan (the "Plan")
will have any Shares acquired in the Primary Subscription and pursuant to
the Over-Subscription Privilege credited to their shareholder dividend
reinvestment accounts in the Plan. Participants in the Plan wishing to
exercise Rights for the shares of Common Stock held in their accounts in
the Plan must exercise them in accordance with the procedures set forth
above. Shareholders whose shares of Common Stock are held of record by
Cede or by any other depository or nominee on their behalf or their broker-
dealers' behalf will have any Shares acquired in the Primary Subscription
credited to the account of Cede or such other depository or nominee.
Shares acquired pursuant to the Over-Subscription Privilege will be
certificated and stock certificates representing such Shares will be sent
directly to Cede or such other depository or nominee. Stock certificates
will be issued for Shares credited to Plan accounts. Stock certificates
for all Shares acquired on Primary Subscription will be mailed promptly
<PAGE>
after full payment for the Shares subscribed has cleared. Certificates
representing Shares acquired pursuant to the Over-Subscription Privilege
will be mailed as soon as practicable after full payment has been received
and cleared and all allocations have been effected.
FEDERAL INCOME TAX CONSEQUENCES
The U.S. Federal income tax consequences to holders of Common Stock
with respect to the Offer will be as follows:
The distribution of Rights will not result in taxable income to a
shareholder nor will the Rights holder realize taxable income as a result
of the exercise of the Rights. If a Right is allowed to expire, there will
be no loss realized.
The basis of a Right will be (a) to a holder of Common Stock to whom
it is issued and who exercises the Right (i) if the market value of the
Right upon the date of distribution is less than 15% of the market value of
the Common Stock with regard to which it is issued, zero (unless the holder
elects, by filing a statement with his timely filed federal income tax
return of the year in which the Rights are received, to allocate the basis
of the Common Stock between the Right and the Common Stock based on their
respective market values on the date of distribution), and (ii) if the
market value of the Right on the date of distribution is 15% or more of the
fair market value on such date of the Common Stock with regard to which it
is issued, a portion of the basis in the Common Stock based upon their
respective market values on the date of distribution; and (b) to a holder
of Common Stock to whom it is issued and who allows the Right to expire,
zero.
If the Right is exercised by the holder of Common Stock, the basis of
the Common Stock received will include the basis, if any, allocated to the
Right and the Subscription Price.
If the Right is exercised, the holding period of the Common Stock
acquired begins on the date the Right is exercised.
The foregoing is only a general summary of the applicable U.S. Federal
income tax law and does not include any state, local or foreign tax
consequences of the Offer. Such applicable U.S. Federal income tax law is
subject to change by legislative or administrative action. Shareholders
should consult their tax advisers concerning the tax consequences of the
Offer. See "Taxation" in the SAI.
EMPLOYEE PLAN CONSIDERATIONS
Shareholders that are employee benefit plans subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") (including
corporate savings and 401(k) plans), Keogh Plans of self-employed
individuals and Individual Retirement Accounts (collectively, "Benefit
Plans") should be aware of the complexity of the rules and regulations
governing Benefit Plans and the penalties for noncompliance, and should
consult with their counsel regarding the consequences of their exercise of
Rights under ERISA and the Internal Revenue Code of 1986, as amended (the
"Code").
DILUTION AND EFFECT OF NON-PARTICIPATION IN THE OFFER
Upon the completion of the Offer, shareholders who do not exercise
their Rights fully will own a smaller proportional interest in the Fund
than would be the case if the Offer had not been made. In addition,
because the Subscription Price of each Share will be less than the net
asset value per share of the Fund's Common Stock, the Offer will result in
<PAGE>
a dilution of net asset value per share for all shareholders, which will
disproportionately affect shareholders who do not exercise their Rights.
Although it is not possible to state precisely the amount of such decrease
in net asset value because it is not known at the date of this Prospectus
how many Shares will be subscribed for, or what the Subscription Price will
be, such dilution could be substantial. For example, assuming all of the
Shares are sold at the Estimated Subscription Price and after deducting all
expenses related to the issuance of the Shares, the Fund's current net
asset value per share would be reduced by approximately $_____ or ____%
(or, in the event that all of the Rights are exercised and the Fund
increases the number of Shares subject to subscription by 25% pursuant to
the Over-Subscription Privilege, by approximately $____ or _____%).
<TABLE>
IMPORTANT DATES TO REMEMBER
<CAPTION>
EVENT DATE
<S> <C>
Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . March __, 1996
Subscription Period . . . . . . . . . . . . . . . . . . . . . . . . March __, 1996- April __, 1996*
Expiration Date and Pricing Date . . . . . . . . . . . . . . . . . April __, 1996*
Payment for Shares or Notice of Guaranteed Delivery Due** . . . . . April __, 1996*
Payment for Guarantees of Delivery Due . . . . . . . . . . . . . . April __, 1996*
Confirmation to Participants . . . . . . . . . . . . . . . . . . . April __, 1996*
Final Payment for Shares . . . . . . . . . . . . . . . . . . . . . May __, 1996*
* Unless the Offer is extended to a date not later than April __, 1996.
** A shareholder exercising Rights must deliver either (i) a Subscription Certificate with payment for the Shares subscribed
or (ii) a Notice of Guaranteed Delivery to the Subscription Agent by the Expiration Date.
</TABLE>
THE FUND
The Fund has been engaged in business as a non-diversified, closed-end
management investment company since July 23, 1992. The Fund was
incorporated under the laws of the State of Maryland on May 11, 1992, and
is registered under the 1940 Act. The Fund seeks long-term capital
appreciation through investment of substantially all of its assets in
listed equity securities of companies which derive, or which are expected
to derive, a significant proportion (at least 50%) of their revenues from
goods produced or sold, investments made or services performed in China,
referred to herein as China companies. Under normal market conditions, at
least 65% of the Fund's total assets is invested in equity securities of
China companies listed on stock exchanges in China and Hong Kong. The Fund
may also invest in equity securities of China companies listed on stock
exchanges located elsewhere, such as Korea, Singapore or Taiwan, in
unlisted equity securities of China companies and in debt securities of
China companies. See "Investment Objective and Policies," "Investment
Restrictions," "The Securities Markets in China and Hong Kong," and "The
People's Republic of China" in the SAI. The Fund completed an initial
public offering of 6,750,000 shares of its Common Stock in July 1992. The
net proceeds to the Fund from such offering were approximately $93.1
million. As of March 1, 1996, the net assets of the Fund were $156,410,126
and the Fund had paid or declared since inception dividends and capital
gains distributions aggregating $8,168,688. The increase in the Fund's net
assets since inception is primarily attributable to appreciation in the
value of its portfolio securities and the receipt of net proceeds of $42.5
million from the Fund's June 1994 rights offering. The Fund's principal
office is located at 1285 Avenue of the Americas, New York, New York 10019
and its telephone number is (212) 713-3589.
<PAGE>
USE OF PROCEEDS
If 2,397,344 Shares are sold at an assumed Subscription Price of
$______ per share, net proceeds of the Offer are estimated to be
approximately $___________, after deducting estimated expenses payable by
the Fund, including the fees and expenses of the Dealer Manager named on
the cover page hereof and other offering expenses estimated to be
$__________. If the Fund increases the number of Shares subject to
subscription by up to 25%, or 599,336 Shares, in order to satisfy over-
subscription requests, the additional net proceeds will be approximately
$__________.
The Investment Manager has advised the Fund that it anticipates that
the net proceeds will be invested in accordance with its investment
objective and the policies set forth under "Investment Objective and
Policies" within three months of the date of this Prospectus (but in no
event later than six months from the date of this Prospectus), depending on
market conditions and the availability of appropriate securities. Pending
such investment, the proceeds will be invested in certain high quality
short-term debt instruments, as described below under "Investment Objective
and Policies."
NET ASSET VALUE AND MARKET PRICE INFORMATION
The shares of Common Stock of the Fund are listed and traded on
the NYSE. The average weekly trading volume of the Common Stock on the
NYSE during the fiscal year ended December 31, 1995 was approximately
109,900 shares. The following table shows, for each calendar quarter since
the quarter ended March 31, 1993, (i) the high and low net asset values per
share of the Fund, (ii) the high and low sale prices per share of Common
Stock of the Fund, as reported in the consolidated transaction reporting
system, and (iii) the percentage by which the shares of Common Stock of the
Fund traded at a premium over, or discount from, the Fund's high and low
net asset values per share. Net asset value of the Fund is determined on
the last business day of each week.
<TABLE>
<CAPTION>
Premium or (Discount)
Quarter Ended Net Asset Value Market Price Percentage
High Low High Low High Low
<S> <C> <C> <C> <C> <C> <C>
March 31, 1993 $14.89 $13.40 $14.25 $12.25 (4.3)% (8.6)%
June 30, 1993 15.51 14.78 16.88 13.50 8.8 (8.7)
September 30, 1993 15.48 14.42 17.13 14.25 10.6 (1.2)
December 31, 1993 23.21 16.05 28.00 16.25 20.6 1.3
March 31, 1994 23.79 17.06 26.50 17.63 11.4 3.3
June 30, 1994 18.08 16.47 20.00 17.63 10.6 7.0
September 30, 1994 18.21 15.77 18.75 16.38 3.0 3.9
December 31, 1994 17.28 13.79 17.13 12.63 (0.9) (8.4)
March 31, 1995 13.76 12.46 12.88 12.25 (6.4) (1.7)
<PAGE>
June 30, 1995 14.90 13.15 14.63 12.13 (1.8) (7.8)
September 30, 1995 15.39 14.45 13.38 12.25 (13.1) (15.2)
December 31, 1995 15.29 13.68 14.00 13.75 (8.4) 0.5
</TABLE>
At the close of business on December 31, 1995, the Fund's net
asset value was $14.52 per share while the closing market price of the
Common Stock on the NYSE was $14.125 per share. As of December 31, 1995,
the Fund had 9,589,377 shares of Common Stock outstanding and the net
assets of the Fund were $139,245,942.
The net asset values per share of the Fund's Common Stock at the
close of business on March 1, 1996 and on March __, 1996 were $16.31 and
$______, respectively, and the last reported sales prices of a share of the
Fund's Common Stock on the New York Stock Exchange on those dates were
$15.50 and $______, respectively.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to achieve long-term capital
appreciation. The Fund seeks to achieve its investment objective by
investing substantially all of its assets in listed equity securities of
companies which derive, or which are expected to derive, a significant
proportion (at least 50%) of their revenues from goods produced or sold,
investments made or services performed in China, referred to herein as
China companies. Under normal market conditions, as a fundamental policy,
the Fund invests at least 65% of its total assets in equity securities of
China companies listed on stock exchanges in China or Hong Kong. The Fund
may also invest in equity securities of China companies listed on stock
exchanges located elsewhere, including, but not limited to, exchanges in
Korea, Singapore or Taiwan. The Investment Manager anticipates that, under
normal market conditions, at least 80% of the Fund's assets will be
invested in listed equity securities of China companies. Up to 15% of the
Fund's total assets may be invested in unlisted equity securities of China
companies for which there is no public trading market. The Fund may also
invest to a limited degree (up to 20% of its total assets) in debt obliga-
tions of China companies, which may be lower-rated or non-rated. Although,
in general, the Fund's equity investments consist primarily of common stock
of China companies, the Fund may also invest in other equity securities,
including preferred stock, rights or warrants to purchase common stock or
preferred stock and debt securities convertible into common stock or
preferred stock. See "Investment Objective and Policies" in the SAI.
During periods in which the Investment Manager believes changes in
economic, financial or political conditions make it advisable, the Fund
may, for temporary defensive purposes, reduce its holdings in China
companies and invest in certain short-term (less than twelve months to
maturity) debt securities. The short-term debt securities in which the
Fund may invest consist of (1) bank deposits and bank obligations
(including certificates of deposit, time deposits and bankers' acceptances)
of U.S. or foreign banks denominated in any currency; (2) commercial paper
and other short-term debt obligations of U.S. and foreign corporate or
governmental entities; and (3) repurchase agreements with respect to such
securities. The Fund may invest only in short-term debt securities that
the Investment Manager determines to be of high quality, i.e., rated in one
of the two highest rating categories by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Ratings Group ("S&P") or, if unrated,
determined by the Investment Manager or the Fund's Board of Directors to be
comparable in credit quality. The Fund will also invest in the instruments
described above pending investment of the net proceeds of the offering made
<PAGE>
hereby and at any other time reserves are required for expenses or dividend
and other distributions to shareholders, provided that all such investments
made as reserves for expenses or dividend and other distributions to share-
holders may not exceed 35% of the Fund's total assets. Under the 1940 Act,
the Fund may invest up to 10% of its assets in the aggregate in shares of
other investment companies and up to 5% of its assets in any one investment
company, as long as that investment does not represent more than 3% of the
voting stock of the acquired investment company at the time such shares are
purchased. The Fund reserves the right to invest in other investment
companies to the full extent permitted by the 1940 Act, as it may be
amended. As a shareholder in any investment company, the Fund will bear
its ratable share of that investment company's expenses, and would remain
subject to payment of the Fund's investment management, administrative,
custodial and other fees with respect to assets so invested.
The Investment Manager seeks to identify and invest in China companies
it believes offer potential for long-term capital appreciation. In
evaluating prospective investments, the Investment Manager utilizes its own
internal financial, economic and credit analysis resources as well as
information obtained from other sources. The Fund invests and intends to
invest in China companies involved in a broad spectrum of categories,
including, as conditions warrant or permit from time to time, automotive,
chemicals, consumer products, construction, electric generating, elec-
tronics, shipping, electricity, finance, food and beverage, household
goods, international trading, machinery, mining, real estate development,
retail trade, tourism and textiles. The Fund may not invest 25% or more of
its total assets in the securities of companies in the same industry. In
selecting industries and companies for investment, the Investment Manager
seeks investments in industries and companies that it believes to have
overall growth prospects and a strong competitive position in domestic
and/or export markets. In evaluating whether industries and companies meet
these criteria, the Investment Manager considers factors such as
technology, research and development, productivity, capital resources,
labor costs, raw material costs and sources, profit margins, return on
investment, government regulation, management and price of the securities,
among other factors. In particular, securities of China companies that are
believed to be the likely beneficiaries of China's increased economic
contacts with foreign markets will be identified for investment by the
Fund.
In determining whether companies derive, or are expected to derive, at
least 50% of their revenues from goods produced or sold, investments made
or services performed in China, the Investment Manager utilizes information
contained in financial statements, economic reports and analyses and other
available information, which may include information obtained directly from
or in discussions with the issuers of securities in which the Fund is
considering an investment. In certain instances, the available information
with respect to issuers of securities may not provide a quantitative
breakdown of the issuer's China-related revenues and the Investment Manager
is required to make a qualitative determination as to whether or not the
issuer is a China company for the purposes of the Fund's investment
objective.
While the Fund invests a substantial portion of its assets in
securities issued by established China companies, the Investment Manager
also seeks to identify and invest in securities issued by certain smaller,
less seasoned China companies which the Investment Manager believes offer
potential for long-term capital appreciation. Investments in securities
issued by these China companies may present greater opportunities for
growth but also involve greater risks than customarily are associated with
investments in securities issued by more established companies. The Fund
has not established any minimum capitalization or length of operating
history for the smaller, less seasoned issuers in whose securities the Fund
<PAGE>
may invest. See "Risk Factors and Special Considerations -- Investments in
Unseasoned Companies."
Foreign investment in securities listed on Chinese stock exchanges,
such as is undertaken by the Fund, is currently restricted to "B" shares
listed on the Shenzhen Stock Exchange and the Shanghai Securities Exchange.
These are currently the only stock exchanges in China officially recognized
by the PRC government to conduct trading. As of March 7, 1996, there were
70 "B" share issues listed on such exchanges in China. Although additional
Chinese stock exchanges have been proposed and may be recognized by the PRC
government in the future and additional China companies have applied to
have "B" shares listed, opportunities to invest in China companies whose
shares are listed on exchanges in China are expected to be limited for the
next few years to a significant extent. In July 1993, a new class of
equity securities of Chinese companies, "H" shares, began trading on the
Stock Exchange of Hong Kong. "H" shares are listed and traded only on the
Stock Exchange of Hong Kong and may be held only by non-PRC individuals and
entities as described in "The Securities Markets in China and Hong Kong" in
the SAI. As of March 7, 1996, there were 18 "H" share issues listed in
Hong Kong. Due to the limited number of "B" and "H" share issues currently
available, a high proportion of the Fund's total assets are and will likely
continue to be invested in China companies incorporated outside of China
and listed on the Stock Exchange of Hong Kong, at least until such time, if
any, as there are further issues of "B" shares or "H" shares available for
purchase by foreign investors such as the Fund. Although additional issues
of "B" shares and "H" shares are anticipated, there can be no assurance
that the volume of such issues will be substantial or that such issues will
occur at all. See "Risk Factors and Special Considerations -- Market
Characteristics" and "The Securities Markets in China and Hong Kong" in the
SAI.
The Fund's investment objective and its fundamental policy of
investing at least 65% of its total assets in equity securities of China
companies listed on stock exchanges in China or Hong Kong may not be
changed without the approval of the holders of a majority of the Fund's
outstanding voting securities. As used in this Prospectus, a "majority of
the Fund's outstanding voting securities" means the lesser of (i) 67% of
the shares represented at a meeting at which more than 50% of the
outstanding shares are represented or (ii) more than 50% of the outstanding
shares. The Fund's other investment policies described herein are not
fundamental and may be changed by the Board of Directors of the Fund
without shareholder approval, but the Fund will not effectuate change in
its investment policies without prior or contemporaneous notice to its
shareholders.
The Fund is designed primarily for long-term investment and investors
should not consider it a trading vehicle. There can be no assurance that
the Fund's investment objective will be achieved.
The Fund may also engage in other investment practices, such as
borrowing, repurchase agreements, when-issued securities and delayed
delivery transactions, hedging instruments and lending of its portfolio
securities. See "Investment Objective and Policies -- Other Investment
Practices" in the SAI.
RISK FACTORS AND SPECIAL CONSIDERATIONS
The following discusses risks and special considerations with respect
to the Offer and with respect to investment in the Fund.
DILUTION AND EFFECT OF NON-PARTICIPATION IN THE OFFER
<PAGE>
As a result of the Offer, shareholders who do not fully exercise their
Rights will, at the completion of the Offer, own a smaller proportional
interest in the Fund than would otherwise be the case. In addition, an
immediate dilution of the net asset value per share will be experienced by
all shareholders as a result of the Offer because the Subscription Price
will be less than the net asset value per share, and the number of shares
outstanding after the Offer will have increased proportionately more than
the increase in the size of the Fund's net assets. Although it is not
possible to state precisely the amount of such a decrease in value, because
it is not known at this time how many Shares will be subscribed for or what
the Subscription Price will be, such dilution could be substantial. This
dilution of net asset value per share will disproportionately affect
shareholders who do not exercise their Rights.
POLITICAL AND ECONOMIC FACTORS
The economy of China differs, often unfavorably, from the United
States economy in such respects as general development, wealth
distribution, rate of inflation, volatility of the rate of growth of gross
national product, capital reinvestment and balance of payments position,
among others. Under China's communist political and economic system, the
central government has historically exercised substantial control over vir-
tually every sector of the Chinese economy through administrative
regulation and/or state ownership. However, as a result of economic reform
policies instituted by the PRC government in the 1980s and 1990s direct
central and local government control over the business and production
activities of China enterprises and companies has diminished. Current
economic reforms, embodied in the "socialist market economy" program of the
Chinese Communist Party ("CCP"), seek to further reduce state involvement
in the Chinese economy. Under the "socialist market economy" program, the
CCP has announced its plans to reduce substantially state ownership and
management of the assets of all state-owned companies. Consequently, the
business autonomy of China companies currently in the public sector may be
increased significantly and such companies are expected to become
responsible to a considerable extent for their own profits and losses. If
these policies are fully implemented, many China companies may be expected
to apply for listings on stock exchanges in China. However, the lack of
state support implicit in such policies may lead to situations in which
some of these China companies face potential or actual insolvency,
particularly as comprehensive price de-regulation is also contemplated
under the "socialist market economy" program. However, for political
reasons, it remains uncertain whether and to what extent the CCP and the
PRC government will implement the "socialist market economy" program.
Notwithstanding the economic reforms instituted by the PRC government
and the CCP, actions of the PRC central and local government authorities
continue to have a substantial effect on economic conditions in China,
which could affect the public and private sector companies in which the
Fund invests. The PRC government has from time to time in the past taken,
and may in the future take, actions that influence the prices at which
certain goods may be sold, encourage companies to invest or concentrate in
particular industries, induce mergers between companies in certain
industries and induce private companies to publicly offer their securities.
Such actions and a variety of other centrally planned or determined
activities by the Chinese government could have a significant adverse
effect on economic conditions in China, the economic prospects for, and the
market prices and liquidity of, the securities of China companies and the
payments of dividends and interest by China companies. In addition,
expropriation, including nationalization, confiscatory taxation, political,
economic or social instability or other developments could adversely affect
the assets of the Fund held in China. The Chinese government has, in the
past, expropriated large amounts of private property. Since the CCP, which
was responsible for such prior expropriations, continues to be the ruling
<PAGE>
party in China there can be no assurance that further expropriation will
not occur again in the future. Such expropriation could result in
investors losing all or substantially all of their investment in the Fund.
Although the Chinese economy has experienced substantial growth in the
past five years, such growth has not been balanced in all sectors of the
economy. Continued economic growth and development in China is dependent
in many respects on the further implementation of the economic reform
programs begun in 1978 and reiterated in China's Ninth Five-Year Plan (for
the period 1996-2000). There can be no assurance that the Chinese
government will continue to actively pursue such economic reform programs
(including recognition of any additional Chinese stock exchanges) or, if it
does, that such economic policy initiatives will be successful. Many
observers have attributed the Chinese government's current commitment to
such economic policy initiatives to the personal influence of the 91 year
old senior Chinese leader Deng Xiaoping. There can be no assurance that
current or future Chinese government leaders will continue to promote such
initiatives. A return to the entirely centrally planned economy that
existed prior to 1978 or a renewal of past adverse economic conditions or
stagnant economic development could adversely affect the value of the
Fund's investments in the securities of China companies.
At present, much of the private sector activity in China is export
driven and, therefore, affected by developments in the economies of China's
principal trading partners. Accordingly, adverse publicity relating to
human rights issues or revocation by the United States of China's "most
favored nation" trading status, which the U.S. Congress currently considers
on an annual basis, could adversely affect the trade and economic
development of China and, indirectly, the economy of Hong Kong, as such
action could reduce the volume of trade flowing through Hong Kong.
Sovereignty over Hong Kong will be transferred from Great Britain to
China on July 1, 1997 at which time Hong Kong will become a Special
Administrative Region ("SAR") of China. Under the agreements providing for
such transfer (known as the "Joint Declaration"), and the Chinese law
implementing its commitments thereunder (the "Basic Law"), the current
social and economic systems in Hong Kong are to remain unchanged for at
least 50 years and Hong Kong is to enjoy a high degree of autonomy except
in foreign and defense affairs. The SAR will be vested with executive,
legislative and judicial power. Laws currently in force, as they may be
amended by the SAR legislature, are to remain in force except to the extent
they contravene the Basic Law (and published opinions differ as to the
degree to which certain portions of the Basic Law are consistent with the
provisions of the Joint Declaration). China may not levy taxes on the SAR,
the Hong Kong dollar is to remain fully convertible, and Hong Kong is to
remain a free port. Hong Kong's current social freedoms, including
freedoms of speech, press, assembly, travel and religion, are not to be
affected.
There can be no assurance that the commitments made by China regarding
Hong Kong will be maintained. The 1993-94 implementation of British
proposals to extend limited democracy in Hong Kong caused a political rift
with the Chinese government which led to a series of threats from China
that current and future commercial contracts would be invalidated. British
and Chinese officials engaged in a series of rounds of talks related to
these proposals. The crux of the impasse between Britain and China related
to certain proposals for electoral change in Hong Kong introduced by the
governor of Hong Kong and the British decision to implement such electoral
reforms over China's vehement opposition. The Hong Kong Legislative
Council approved several bills incorporating the electoral reform measures
proposed by the governor of Hong Kong. The PRC government has expressed
its strong dissatisfaction with such unilateral political actions and vowed
to overturn these electoral arrangements, to abolish Hong Kong's
<PAGE>
Legislative Council and restructure the governmental system when it resumes
sovereignty in July 1997.
Sino-British relations improved in 1995, although the PRC government
denounced the results of Legislative Council elections which resulted in
sweeping victories for the Democratic Party. On January 1, 1996, the
Preparatory Committee, the new PRC-approved vehicle for transitional
preparations, came into existence. Although the Preparatory Committee
appears to be more representative than its predecessor, the Preliminary
Working Committee, and includes a number of prominent Hong Kong
businessmen, political tensions between China and Britain are likely to
continue through 1996 as preparations continue for the 1997 handover.
There can be no assurance that the continuing political frictions between
China and Britain will not have a material adverse effect on the stock
markets of Hong Kong and China.
Political friction between China and Taiwan has increased during the
past six months as a result of Taiwanese President Lee Teng-hui's visit to
the United States in June 1995, China's recent conduct of military
exercises in the waters near Taiwan, which have increased in the period
preceding Taiwan's first direct Presidential elections scheduled for March
23, 1996, and concerns that China may refocus on its desire for
reunification of Taiwan with China. Further deterioration in relations
between China and Taiwan could have a material adverse effect on the stock
markets in China, Hong Kong and Taiwan.
MARKET CHARACTERISTICS
The Chinese, Hong Kong and other foreign securities markets on which
the securities of China companies are traded are not as large as the U.S.
securities markets and have substantially less trading volume, resulting in
a lack of liquidity and high price volatility relative to the U.S.
securities markets. There is also a high concentration of market
capitalization and trading volume in a small number of issuers representing
a limited number of industries, as well as a high concentration of
investors (including investment funds and other institutional investors),
particularly in the Chinese securities markets.
<TABLE>
The following table sets forth certain market capitalization and average daily trading value figures:
<CAPTION>
Average Daily
Aggregate Market Trading Value (for
Capitalization period January 1, 1995
(at December 31, 1995) to December 31, 1995)
<S> <C> <C>
Combined Shenzhen Stock Exchange and
Shanghai Stock Exchange for "B" shares HK$16.9 billion HK$27.1 million
New York Stock Exchange for
all equity securities $6,014.0 billion $346.1 million
Stock Exchange of Hong Kong for
"H" shares HK$16.4 billion HK$64.9 million
Stock Exchange of Hong Kong for
all equity shares HK$2,348.3 billion HK$3,347.0 million
</TABLE>
<PAGE>
In addition to their smaller size and lesser liquidity, the Chinese,
Hong Kong and other foreign securities markets in which the Fund may invest
are less developed than U.S. securities markets. Regulatory standards are,
in many respects, less stringent than U.S. standards. There generally is
less government supervision and regulation of exchanges, brokers and
issuers in China, Hong Kong and such other securities markets than there is
in the United States. Furthermore, there is a lower level of monitoring
and oversight of the markets and the activities of investors in such
markets, and enforcement of existing regulations has been extremely
limited. Consequently, the prices at which the Fund may acquire
investments may be affected by other market participants' anticipation of
the Fund's investing, by trading by persons with material non-public
information ("insider trading") and by securities transactions by brokers
in anticipation of transactions by the Fund in particular securities.
Certain of these practices would generally be considered unlawful if
conducted in the U.S. securities markets.
The Chinese securities markets are in the earliest stages of
development and are undergoing a period of rapid growth and regulatory
reforms which may lead to difficulties in settlement and recording of
transactions and in interpreting and applying the relevant regulations.
See "The Securities Markets in China and Hong Kong" in the SAI.
LIMITATIONS ON INVESTMENT
There are currently two stock exchanges in China which have been
approved by the PRC government to conduct trading, the Shenzhen Stock
Exchange and the Shanghai Securities Exchange. See "The Securities Markets
in China and Hong Kong" in the SAI. Shares which are listed on those stock
exchanges are divided into two categories, "A" shares and "B" shares. "A"
shares are traded in RMB and are available only to Chinese citizens or
institutions and may not be acquired by the Fund. "B" shares or "renminbi
special shares," are denominated in RMB, and currently are issued only to
foreign investors (including overseas PRC citizens) for payment in foreign
currencies and may only be traded in foreign currencies (currently Hong
Kong dollars and U.S. dollars). Apart from those distinctions, "B" shares
carry the same rights and obligations as "A" shares. As of March 7, 1996,
there were 70 "B" share issues listed on these exchanges. Consequently,
currently and possibly for an indefinite period, opportunities for the Fund
to invest in companies whose shares are listed in China will be limited.
The relatively limited number of issuers of "B" shares available to foreign
investors may impair the Fund's ability to diversify its investments among
certain sectors of the economy. Since "B" shares are not intended to be
issued to Chinese citizens residing in China, national legislation, as well
as local regulations in Shanghai and Shenzhen, establish trading procedures
intended to ensure that "B" shares should not be purchased by domestic
Chinese buyers.
CHINESE CORPORATE LAW
Corporate law in China is developing rapidly, but still does not
provide a systematic and comprehensive legal framework for the regulation
of corporations comparable to that which exists in the United States. In
December 1993, the PRC enacted its first national company law ("Company
Law") which became effective on 1st July 1994. The PRC Company Law
provides for two corporate forms: the limited liability company and the
company limited by shares, and aims to re-organize existing state-owned
enterprises into either one of these two corporate forms. Foreign invested
companies limited by shares, however, are governed by the "Provisional
Regulations on Several Issues Concerning the Establishment of Foreign
Invested Companies Limited by Shares" (the "Regulations"). The Regulations
make clear that the Company Law governs such companies only with respect to
matters not covered in the Regulations and the Special Regulations on
<PAGE>
Foreign Offerings and Listings of Companies Limited by Shares. The Company
Law is also generally applicable to foreign invested enterprises to the
extent regulations relating more specifically to foreign investment
enterprises are silent. The Company Law covers many of the issues
addressed in corporate legislation in the United States, including
provisions on the fiduciary responsibility of directors and officers and
the rights of shareholders, but this legal protection has yet to be tested
in practice. It is unclear what effect the PRC Company Law will have on
prior national enactments, such as the Opinion on Standards for Companies
Limited by Shares and Opinion on Standards for Limited Liability Companies
("Standards Opinions"), promulgated in May 1992, and local company law
regulations which exist in the Shenzhen Special Economic Zone and Shanghai.
Indications are that the Shenzhen and Shanghai regulations will continue in
force in so far as they do not conflict with the national Company Law. The
legal status of companies limited by shares established pursuant to the
Standards Opinions are preserved and these companies are required within a
specified period of time to conform to the provisions of the Company Law.
REPORTING STANDARDS
Accounting, auditing and financial reporting standards and
requirements in China, Hong Kong and the other foreign securities markets
in which the Fund may invest are different from, and in many respects
(particularly in the case of China) less stringent than those applicable to
U.S. companies, and less information is available to investors investing in
the securities of China companies listed in Hong Kong, China or such other
foreign markets than to investors investing in securities of U.S.
companies. The items appearing on the financial statements of a company
listed in such foreign markets may not reflect its financial position or
results of operations in the way they would be reflected had such financial
statements been prepared in accordance with U.S. generally accepted
accounting principles.
CURRENCY FLUCTUATIONS
The Fund invests principally in securities denominated in HK$ and RMB,
holds cash and cash equivalents denominated in such currencies and most of
the Fund's income is received or realized in such currencies, although the
Fund is required to compute its net asset value and to compute and
distribute its income in U.S. dollars. Accordingly, changes in the value
of the Hong Kong dollar, the RMB or any other currency in which the Fund's
investments are denominated against the U.S. dollar result in corresponding
changes in the U.S. dollar value of the Fund's assets denominated in such
currencies and the Fund's net asset value, and changes the U.S. dollar
value of income and gains derived in such currencies. If the value of the
Hong Kong dollar, in which the Fund receives income, falls relative to the
U.S. dollar between accrual of the income and the making of Fund
distributions, the amount of Hong Kong dollars required to be converted
into U.S. dollars by the Fund to pay distributions will increase and the
Fund could be required to liquidate portfolio securities to make such
distributions. In addition, if such exchange rates change adversely on the
sale date and the settlement date of a portfolio security, the Fund may
incur losses. Similarly, if such exchange rates decline between the time
the Fund incurs expenses in U.S. dollars and the time such expenses are
paid, the amount of such currencies required to be converted into U.S.
dollars to pay such expenses in U.S. dollars will be greater than the Hong
Kong dollar equivalent of such expenses at the time they were incurred.
There can be no assurance that the Fund will be able to liquidate
securities in order to meet such distribution requirements. The Fund is
permitted to borrow money to make distributions required to maintain its
status as a regulated investment company for U.S. tax purposes. The
Renminbi has experienced significant devaluations relative to the U.S.
dollar in the past.
<PAGE>
The Investment Manager generally does not seek to hedge against a
decline in the value of the Fund's non-dollar-denominated portfolio
securities resulting from a currency devaluation or fluctuation. As a
consequence, the Fund will be subject to the risk of changes in value of
foreign currencies affecting the value of its portfolio assets, as well as
the value of the amounts of interest, dividends and net realized capital
gains received or to be received in foreign currencies. Therefore, the
risk of currency devaluations and fluctuations and the effect these may
have on the Fund should be carefully considered by investors in determining
whether to purchase shares of the Fund.
EXCHANGE CONTROLS
There is centralized control and unified management of foreign
exchange in the PRC. The legal framework for foreign exchange control in
the PRC is based on the Provisional Regulations for Foreign Exchange
Control of the People's Republic of China, promulgated on December 18,
1980, the Implementing Rules of the Foreign Exchange Control Regulations
relating to Overseas Chinese-Invested Enterprises, Foreign Investment
Enterprises and Sino-foreign Equity Joint Venture Enterprises, promulgated
on August 1, 1983, and the Provisional Regulations on Foreign Exchange
Sales, Purchases and Payments ("Foreign Exchange Provisions"), promulgated
on March 26, 1994. The State Administration of Exchange Control (the
"SAEC") is responsible for matters relating to foreign exchange
administration, while the People's Bank Of China ("PBOC") is in charge of
foreign exchange operations. The PBOC sets the daily exchange rate of RMB
against major foreign currencies with reference to the trading price of the
Renminbi on the previous day at the China Foreign Exchange Trading Center
based in Shanghai ("CFETC"). The Foreign Exchange Provisions prohibit the
circulation, use or pledging of foreign currency within China and the sale
or purchase of foreign currency without SAEC authorization.
RMB are not at present freely convertible into foreign currencies,
although the PRC government has declared its intention to make RMB a fully
convertible currency within the next five years. The first step towards
eventual convertibility of RMB occurred in January 1994, when the PRC
government unified the official exchange rate and the foreign exchange
adjustment center ("swap center") rate, by adopting a managed floating
exchange rate system. The unification of exchange rates is intended to
harmonize the PRC's foreign exchange system with free market policies
rather than socialist central planning. However, the PBOC has indicated
that it will continue to intervene in the foreign exchange markets and to
use monetary policy and interest rates to stabilize the RMB exchange rate.
The unification of exchange rates is linked to the eventual
convertibility of the Renminbi, which the PRC has officially declared will
occur by 2000. China recently announced that it might be able to introduce
the convertibility of the Renminbi as early as later this year but with
respect to current account items only. Capital account items will continue
to be technically inconvertible for the foreseeable future.
As part of the process leading to convertibility of the Renminbi, the
CFETC was formally established and came into operation in April 1994.
CFETC has set up a computerized network with sub-centers in several major
cities, thereby forming an interbank market in which designated PRC banks
can trade and settle their foreign currencies. The establishment of CFETC
was originally intended to coincide with the abolition of swap centers.
The swap centers have, however, been retained as an interim measure and
foreign investment enterprises are currently required to enter into foreign
exchange transactions only through the swap centers. Under the Foreign
Exchange Provisions, all PRC enterprises with the exception of foreign
investment enterprises are required to sell their foreign exchange income
to designated banks authorized in dealing foreign exchange. Chinese
<PAGE>
enterprises that sell their foreign exchange receipts to such banks may
apply to the SAEC to open foreign exchange accounts at designated foreign
exchange banks and to handle foreign exchange settlement in accordance with
the Foreign Exchange Provisions. It is expected that foreign investment
enterprises in the PRC will be allowed access to CFETC for certain foreign
exchange transactions upon the abolition of the swap centers in the near
future.
Although issuers of "B" shares currently pay dividends and
distributions thereon in U.S. dollars or Hong Kong dollars, the ability of
such issuers to pay dividends and distributions in such currencies is
related to their ability to generate from their operations revenues
denominated in such currencies or in currencies freely convertible into
such currencies, which may in turn be dependent upon the ability of such
issuers to export their goods or services for payment in such currencies.
Issuers of "B" shares may also be able to convert RMB revenues derived from
the domestic operations into U.S. dollars or Hong Kong dollars at the PRC
"swap centers" or through CFETC's interbank market to pay dividends or
distributions in such currencies.
Issuers of "H" shares currently pay dividends and distributions
thereon in Hong Kong dollars. The ability of such issuers to pay dividends
and distributions in Hong Kong dollars is related to their ability to
generate from their operations revenues denominated in Hong Kong dollars or
in currencies freely convertible into Hong Kong dollars, which may in turn
be dependent upon the ability of such issuers to export their goods or
services for payment in such currencies. Issuers of "H" shares may also be
able to convert RMB revenues derived from their domestic operations into
Hong Kong dollars in order to pay dividends and distributions in Hong Kong
dollars to foreign investors in "H" shares. Although settlement of
purchases and sales of "H" shares may be made in Hong Kong dollars, "H"
shares are denominated in RMB and all Hong Kong dollar payments to foreign
investors are based on the applicable exchange rate.
INVESTMENTS IN UNLISTED SECURITIES
The Fund is permitted to invest up to 15% of its total assets in
equity securities of China companies that are not listed on a securities
exchange. The risk of investing in such companies generally is greater
than the risk of investing in publicly traded companies. Companies whose
securities are not publicly traded are not subject to the same disclosure
and other legal requirements that are applicable to companies with publicly
traded securities. While some of them are large, companies whose
securities are not publicly traded tend to be smaller than publicly traded
companies and generally have smaller capitalizations and fewer resources,
and therefore often are more vulnerable to financial failure. Because of
the absence of a trading market for these investments, the Fund may not be
able to realize their value upon sale. See "Investment Objective and
Policies" in the SAI.
INVESTMENTS IN UNSEASONED COMPANIES
While the Fund invests a substantial portion of its assets in the
securities of established China companies, the Fund also may invest in the
securities of smaller, less seasoned China companies. Investments in the
securities of these less seasoned China companies may present greater
opportunities for growth but also involve greater risks than customarily
are associated with investments in securities of more established
companies. The securities of smaller, less seasoned China companies may be
subject to more abrupt and erratic market price movements than larger, more
established companies. The Fund has not established any minimum
capitalization or length of operating history for the smaller, less
seasoned issuers in whose securities the Fund may invest. Additionally,
<PAGE>
these companies may have limited product lines, markets or financial
resources, or they may be dependent upon a limited management group.
Investments in larger companies present certain advantages in that such
companies generally have greater financial resources, more extensive
research and development, manufacturing, marketing and service
capabilities, more stability and greater depth of management and technical
personnel.
LOWER-RATED (HIGH RISK) AND NON-RATED SECURITIES
The Fund may invest to a limited degree (up to 20% of its total
assets) in debt securities of China companies that are in the lower rating
categories of recognized rating agencies or are non-rated. There is no
minimum rating required for the debt securities in which the Fund may
invest; however the Fund may not invest in debt securities that are in
default. The debt securities in which the Fund may invest may be listed or
unlisted on any public trading market. These lower-rated securities and
non-rated securities of comparable quality to such lower-rated securities,
referred to herein as lower grade securities, entail high risks and are
commonly referred to as "junk bonds." Lower grade securities are
considered, on balance, as predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with the terms
of the obligation and involve more credit risk than securities in the
higher rating categories.
The market values of lower grade securities tend to reflect individual
corporate developments to a greater extent than do those of higher-rated
securities, which react primarily to fluctuations in the general level of
interest rates. Such lower grade securities also tend to be more sensitive
to economic conditions than are higher-rated securities. Adverse publicity
and investor perceptions, whether or not based on fundamental analysis,
regarding lower grade securities may depress the prices for such
securities. Such lower grade securities are dependent upon favorable
business, financial or economic conditions, may be subordinated to senior
debt and can be regarded as having extremely poor prospects of ever
attaining any real investment standing. These and other factors adversely
affecting the market value of such lower grade securities will adversely
affect the Fund's net asset value. Although some risk is inherent in all
securities ownership, holders of fixed income securities have a claim on
the assets of the issuer prior to the holders of common stock. Therefore,
an investment in fixed income securities generally entails less risk than
an investment in common stock of the same issuer.
Lower grade securities frequently are issued by corporations in the
growth stage of their development. They may also be issued in connection
with a corporate reorganization or a corporate takeover. Companies that
issue such securities often are highly leveraged and may not have available
to them more traditional methods of financing. Therefore, the risk
associated with acquiring lower grade securities of such issuers generally
is greater than is the case with higher-rated securities. For example,
during an economic downturn or recession, highly leveraged issuers of such
securities may experience financial stress. During such periods, such
issuers may not have sufficient revenues to meet their interest payment
obligations. The issuer's ability to service its debt obligations may also
be adversely affected by specific corporate developments, or the issuer's
inability to meet specific projected business forecasts, or the
unavailability of additional financing. The risk of loss from default by
the issuer is significantly greater for the holders of lower grade
securities because such securities are generally unsecured and are often
subordinated to other obligations of the issuer.
The Fund will have relatively greater difficulty disposing of lower
grade securities because they will likely not have an active trading
<PAGE>
market. The lack of an active secondary market may also have an adverse
effect on market prices and will make it more difficult for the Fund to
obtain accurate market quotations for purposes of valuing these assets.
The credit ratings issued with respect to lower grade securities evaluate
only the safety of principal and interest in respect of such securities and
not the risk of changes in market value. In addition, credit rating
agencies may not make timely changes in the applicable credit ratings to
reflect subsequent events. To the extent that the Fund invests in
non-rated securities, whether or not such securities are lower grade
securities, the Fund will be more dependent upon the credit analysis of the
Investment Manager with respect to such securities than would be the case
with investments in securities rated by a recognized rating agency.
INVESTMENT AND REPATRIATION RESTRICTIONS
Foreign investment in the securities of China companies is restricted
or controlled to varying degrees. These restrictions or controls may at
times limit or preclude foreign investment in certain China companies and
increase the costs and expenses of the Fund. The PRC may require prior
government approval for foreign investment, or limit the amount of
investment by foreign persons in a particular company, or limit investment
by foreign persons to only a specific class of securities of a company.
Taiwan currently imposes significant limitations on investment of foreign
equity capital in companies in Taiwan. In addition, Taiwan and the PRC
restrict investment opportunities in issuers or industries deemed important
to national interests. In Taiwan, government approval is required for the
repatriation of investment income and capital, and the proceeds of sales of
securities by foreign investors. In the PRC, government approval is
required for the repatriation of capital following the liquidation of an
investment. In addition, if there is a deterioration in China's balance of
payments or for other reasons, China may impose temporary restrictions on
foreign capital remittances abroad. Currently, capital invested in Taiwan
cannot be repatriated for at least three months, while earnings from Taiwan
may be repatriated only once each fiscal year. The Taiwan government
recently announced proposals to relax certain of Taiwan's foreign
investment restrictions. It is not known whether, or when, such proposals
will be adopted. The Fund could be adversely affected by delays in, or a
refusal to grant, any required governmental approval for repatriation of
capital or income, as well as by the application to the Fund of any
additional restrictions on investments. If for any reason the Fund were
unable to distribute an amount equal to substantially all of its investment
company taxable income (as defined for U.S. tax purposes) within applicable
time periods, the Fund would cease to qualify for the favorable tax
treatment afforded to regulated investment companies under the Code. See
"Taxation" and "Taxation" in the SAI.
CERTAIN ANTI-TAKEOVER PROVISIONS
The Fund's Articles of Incorporation and Bylaws (together, the
"Charter Documents") contain provisions that could have the effect of
limiting (i) the ability of any party to acquire control of the Fund, (ii)
the Fund's freedom to engage in certain transactions, (iii) the ability of
the Board of Directors or shareholders of the Fund to amend the Charter
Documents or effect changes in the Fund's management or (iv) the conversion
of the Fund to an open-end investment company. The Board of Directors of
the Fund is divided into three classes, each having a term of three years.
Such system of electing directors may have the effect of maintaining
continuity of management and, thus, make it more difficult for the Fund's
shareholders to change the majority of directors. Certain actions require
the affirmative vote of the holders of 75% of the Fund's shares. These
provisions of the Charter Documents may be regarded as "anti-takeover"
provisions. See "Description of Common Stock -- Certain Anti-Takeover
Provisions of the Fund's Articles of Incorporation and Bylaws."
<PAGE>
OPERATING EXPENSES
The Fund's annual operating expenses are higher than those of U.S.
investment companies investing exclusively in the securities of U.S.
issuers, primarily because of the additional time and expense required in
investing in equity securities of China companies. Investing in equity
securities of China companies entails additional time and expense because
available public information concerning such securities is limited in
comparison to, and is not as comprehensive as, that available for U.S.
equity securities. As a result of the relatively high expected operating
expenses, the Fund needs to generate higher relative returns to provide
investors with an equivalent economic return.
NET ASSET VALUE DISCOUNT
The Fund is a closed-end investment company. Shares of closed-end
investment companies frequently trade at a discount from net asset value.
This characteristic is a risk separate and distinct from the risk that the
Fund's net asset value will decrease. See "Net Asset Value and Market
Price Information." The Fund cannot predict whether its shares will trade
at, below or above net asset value in the future. The Fund's shares are
not subject to redemption. Investors desiring liquidity may, subject to
applicable securities laws, trade their shares in the Fund on any exchange
where such shares are then listed at the then current market value, which
may differ from the then current net asset value.
NON-DIVERSIFICATION
The Fund is classified as a "non-diversified" investment company under
the 1940 Act, which means that the Fund is not limited by the 1940 Act in
the proportion of its assets that may be invested in the obligations of a
single issuer. As a non-diversified investment company, the Fund may
invest a greater proportion of its assets in the obligations of a smaller
number of issuers and, as a result, may be subject to greater risk with
respect to portfolio securities than a diversified investment company.
However, the Fund intends to comply with the diversification requirements
imposed by the Code for qualification as a regulated investment company.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The management of the Fund, including general supervision of the
duties performed by the Investment Manager under the Management Agreement
(as defined herein), is the responsibility of its Board of Directors. For
certain information regarding the Directors and officers of the Fund, see
"Management of the Fund -- Directors and Officers" in the SAI.
Certain of the directors of the Fund reside outside the United States
and substantially all the assets of such persons are located outside the
United States. None of the Directors of the Fund who reside outside the
United States have appointed an agent for service of process in the United
States. It may not be possible, therefore, for investors to effect service
of process within the United States upon such persons or to enforce against
them, in United States courts or foreign courts, judgments obtained in
United States courts predicated upon the civil liability provisions of the
Federal securities laws of the United States. In addition, it is not
certain that a foreign court would enforce, in original actions,
liabilities against such persons predicated solely upon the U.S. securities
laws.
INVESTMENT MANAGER
<PAGE>
Baring International Investment (Far East) Limited serves as the
Investment Manager of the Fund. The Investment Manager is a United Kingdom
corporation which was organized in 1982 to advise U.S. institutional
clients with respect to investments in Asia. It is an indirect wholly-
owned subsidiary of Baring Asset Management Limited ("BAM"), which is an
indirect wholly-owned subsidiary of Internationale Nederlande Groep N.V.
("ING"). ING acquired substantially all of the businesses, assets and
liabilities of the asset management, banking and securities operations of
the Barings group of companies in March 1995.
BAM is a leading international investment manager and, through its
subsidiaries, had approximately $40 billion in assets under management for
pension funds, corporations, government agencies, charitable organizations,
investment companies and private individuals as of December 31, 1995. BAM
had approximately $6 billion invested in Asian securities markets
(excluding Japan) as of December 31, 1995.
Subject to the supervision of the Fund's Board of Directors and
pursuant to a management agreement (the "Management Agreement"), the
Investment Manager manages the Fund's investments, in accordance with the
Fund's investment objective, policies and restrictions, and makes
investment decisions on behalf of the Fund, including the selection of, and
placing of orders with, brokers and dealers to execute portfolio
transactions on behalf of the Fund. The Fund pays the Investment Manager a
monthly fee at the annual rate of 1.25% of the Fund's average weekly net
assets. The fees payable to the Investment Manager are higher than those
paid to the managers of U.S. investment companies investing exclusively in
securities of U.S. issuers, primarily because of the additional time and
expense required in connection with investing in equity securities of China
companies. Investing in equity securities of China companies entails
additional time and expense because available public information concerning
such securities is limited in comparison to, and is not as comprehensive
as, that available for U.S. equity securities. The Investment Manager
received fees equal to $1,703,414 for the year ended December 31, 1995.
Portfolio Manager. The name of the person associated with the
Investment Manager who is primarily responsible for the day-to-day
management of the Fund's portfolio, his title and business experience
during the past five years is as follows:
Thomas Walker -- Portfolio Manager -- Director of Baring International
Asset Administration Limited since November 1993; Fund Manager for
Edinburgh Fund Managers PLC from November 1987 to October 1993 and was an
assistant director for such fund from July 1991 to October 1993.
Certain directors and officers of the Fund are also directors or
officers of the Investment Manager or affiliates of the Investment Manager
as indicated under "Management of the Fund -- Directors and Officers"
included in the SAI. The Investment Manager's offices are located at 1901
Edinburgh Tower, 15 Queen's Road Central, Hong Kong.
ADMINISTRATOR
The Administrator of the Fund is Mitchell Hutchins Asset Management
Inc., a Delaware corporation and an affiliate of PaineWebber Incorporated,
the Dealer Manager. The Administrator's principal offices are located at
1285 Avenue of the Americas, New York, New York.
Under an administration agreement with the Fund (the "Administration
Agreement"), the Administrator agrees to perform or arrange for the
performance of the following services for the Fund: maintenance of the
books and records of the Fund required under the 1940 Act; preparation of
the Fund's federal, state and local income tax returns; preparation of
<PAGE>
financial information for the Fund's proxy statements and semiannual and
annual reports to shareholders; responding to inquiries from Fund
shareholders; calculation of the net asset value of the Fund's shares;
oversight of the performance of administrative and professional services
rendered to the Fund by others, including its custodian, registrar,
dividend paying agent, transfer agent, as well as accounting, auditing and
other services; providing the Fund with administrative office space and
preparation of the Fund's reports to the Securities and Exchange
Commission. For these services, the Administrator receives a monthly fee
at an annual rate of 0.22% of the Fund's average weekly net assets of up to
$75 million and 0.20% of such net assets in excess of $75 million, subject
to a minimum annual fee of $150,000. The Administrator received fees equal
to $287,546 for the year ended December 31, 1995.
MANAGEMENT AND ADMINISTRATION AGREEMENTS
The Management Agreement and the Administration Agreement
(collectively referred to herein as the "Agreements") set forth the
services to be provided by and the fees to be paid to each party, as
described above. Neither the Investment Manager nor the Administrator
shall be liable for any error of judgment or for any loss suffered by the
Fund in connection with the matters to which their respective Agreements
relate, except a loss resulting from willful misfeasance, bad faith or
gross negligence on its part in the performance of, or from reckless
disregard by it of, its obligations and duties under, such Agreements or,
in the case of the Investment Manager, a loss resulting from a breach of
fiduciary duty with respect to receipt of compensation for services (in
which case any award or damages shall be limited to the period and the
amount set forth in Section 36(b)(3) of the 1940 Act). The Fund has agreed
to indemnify the Investment Manager and its directors, officers and
controlling persons against reasonable legal expenses incurred in the
successful defense against any claim arising out of or based upon the
performance of the Management Agreement.
The Agreements provide that the Investment Manager and the
Administrator will bear all expenses of their employees and overhead
incurred by them in connection with their duties under such Agreements.
The Investment Manager and the Administrator further agree to pay all
salaries and fees of the Fund's directors and officers who are interested
persons (as such term is defined in the 1940 Act) of such party. The Fund
will bear all of its own expenses, including expenses of organizing the
Fund; fees of the Fund's directors who are not interested persons (as such
term is defined in the 1940 Act) of any other party to the Agreements;
out-of-pocket travel expenses for all directors and officers and other
expenses incurred by the Fund in connection with directors' meetings;
interest expense; taxes and governmental fees; brokerage commissions and
other expenses incurred in acquiring or disposing of the Fund's portfolio
securities; expenses of preparing stock certificates; expenses in
connection with the issuance, offering, distribution, sale or underwriting
of securities issued by the Fund; expenses of registering and qualifying
the Fund's shares for sale with the Securities and Exchange Commission and
in various states and foreign jurisdictions; auditing, accounting,
insurance and legal costs; custodian, dividend disbursing and transfer
agent expenses; expenses of obtaining and maintaining stock exchange
listings of the Fund's shares; and the expenses of shareholders' meetings
and preparing and distributing proxies and reports to shareholders.
It is not possible to state precisely the amount of additional
compensation the Investment Manager and the Administrator will receive as a
result of the Offer because it is not known how many Shares will be
subscribed for and because the proceeds of the Offer will be invested in
additional portfolio securities which will fluctuate in value. Assuming
that all of the Rights are exercised, the Fund increases the number of
<PAGE>
Shares subject to subscription by 25% pursuant to the Over-Subscription
Privilege and the net asset value per Share remains at its current level,
the Investment Manager would receive annual fees equal to $____________ and
the Administrator will receive annual fees equal to $____________.
The services of the Investment Manager and the Administrator are not
deemed to be exclusive, and nothing in the Agreements will prevent either
of them or their affiliates, from providing similar services to other
investment companies and other clients (whether or not their investment
objectives and policies are similar to those of the Fund) or from engaging
in other activities. See "Management of the Fund -- Management and
Administration Agreements" in the SAI.
DISTRIBUTION ARRANGEMENTS
PaineWebber Incorporated, 1285 Avenue of the Americas, New York, New
York will act as dealer manager for the Offer. Under the terms and subject
to the conditions contained in a Dealer Manager Agreement dated the date
hereof, the Dealer Manager will provide financial advisory services and
marketing assistance in connection with the Offer and will solicit the
exercise of Rights by Record Date shareholders. The Offer is not
contingent upon any number of Rights being exercised. The Fund has agreed
to pay the Dealer Manager a fee for financial advisory services equal to
1.25% of the Subscription Price per Share for Shares issued pursuant to the
Offer and to pay broker-dealers, including the Dealer Manager, fees for
their soliciting efforts (the "Solicitation Fees") of 2.50% of the
Subscription Price per Share for each Share issued pursuant to the exercise
of Rights and the Over-Subscription Privilege. Solicitation Fees will be
paid to the broker-dealer designated on the applicable portion of the
Subscription Certificates.
In addition, the Fund has agreed to reimburse the Dealer Manager up to
$100,000 for its reasonable expenses incurred in connection with the Offer.
The Fund has agreed to indemnify the Dealer Manager or contribute to losses
arising out of certain liabilities including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). The Dealer
Manager Agreement also provides that the Dealer Manager will not be subject
to any liability to the Fund in rendering the services contemplated by the
Agreement except for any act of bad faith, willful misconduct, or gross
negligence of the Dealer Manager or reckless disregard by the Dealer
Manager of its obligations and duties under the Agreement.
The Fund has agreed not to offer or sell, or enter into any agreement
to sell, any equity or equity related securities of the Fund or securities
convertible into such securities for a period of 180 days after the date of
the Dealer Manager Agreement without the prior consent of PaineWebber
Incorporated, as Dealer Manager, except for the Shares and Common Stock
issued in reinvestment of dividends or distributions.
DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN
The Fund intends to distribute to shareholders, at least annually,
substantially all of its net investment income and net realized capital
gains, if any. Pursuant to the Fund's Dividend Reinvestment Plan (the
"Plan"), each shareholder will be deemed to have elected, unless PNC Bank,
National Association (the "Plan Agent") is otherwise instructed by the
shareholder in writing, to have all distributions, net of any applicable
U.S. withholding tax, automatically reinvested in additional shares of the
Fund by the Plan Agent. Shareholders who do not participate in the Plan
will receive all dividends and distributions in cash, net of any applicable
U.S. withholding tax, paid in U.S. dollars by check mailed directly to the
<PAGE>
shareholder by PNC Bank, National Association, as dividend-paying agent.
Shareholders who do not wish to have dividends and distributions
automatically reinvested should notify the Plan Agent c/o PNC Bank,
National Association, 103 Bellevue Parkway, Wilmington, Delaware 19809.
Dividends and distributions with respect to shares registered in the name
of a broker-dealer or other nominee (in "street name") will be reinvested
under the Plan unless such service is not provided by the broker or nominee
or the shareholder elects to receive dividends and distributions in cash.
A shareholder whose shares are held by a broker or nominee that does not
provide a dividend reinvestment program may be required to have his shares
registered in his own name to participate in the Plan. Investors who own
shares of the Fund's Common Stock registered in street name should contact
their broker or nominee for details concerning participation in the Plan.
The Plan Agent serves as agent for the shareholders in administering
the Plan. If the Board of Directors of the Fund declares an income
dividend or a capital gains distribution payable either in the Fund's
Common Stock or in cash, as shareholders 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 valued at net asset
value or, if the net asset value is less than 95% of the market price on
the valuation date, then valued at 95% of the market price. If net asset
value per share on the valuation date exceeds the market price per share on
that date, the Plan Agent, as agent for the participants will buy shares of
Common Stock on the open market, on the NYSE or elsewhere, for the
participants' accounts. If, before the Plan Agent has completed its
purchases, the market price exceeds the net asset value of shares, the
average per share purchase price paid by the Plan Agent may exceed the net
asset value of shares, resulting in the acquisition of fewer shares than if
the dividend or distribution had been paid in shares issued by the Fund at
net asset value. Additionally, if the market price exceeds the net asset
value of shares before the Plan Agent has completed its purchases, the Plan
Agent is permitted to cease purchasing shares and the Fund may issue the
remaining shares at a price equal to the greater of (a) net asset value or
(b) 95% of the then current market price. In a case where the Plan Agent
has terminated open market purchases and the Fund has issued the remaining
shares, the number of shares received by the participant in respect of the
cash dividend or distribution will be based on the weighted average of
prices paid for shares purchased in the open market and the price at which
the Fund issues the remaining shares. The valuation date is the dividend
or distribution payment date or, if that date is not a NYSE trading day,
the next preceding trading day. If the Fund should declare an income
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 NYSE or elsewhere, for the participants' accounts on, or shortly after,
the payment date.
The Plan Agent maintains all shareholder accounts in the Plan and
furnishes written confirmations of all transactions in the account,
including information needed by shareholders 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
shareholder's proxy will include those shares purchased pursuant to the
Plan.
In the case of shareholders, 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 shareholders as representing the total amount
registered in the shareholder's name and held for the account of beneficial
owners who are to participate in the Plan.
<PAGE>
There is no charge to participants for reinvesting dividends or
capital gains distributions. The Plan Agent's fees for the handling of
reinvestment of dividends and distributions are paid by the Fund. There is
no brokerage charge with respect to shares issued directly by the Fund as a
result of dividends or capital gains distributions payable either in shares
or in cash. However, each participant pays 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.
The automatic reinvestment of dividends and distributions will not
relieve participants of any U.S. income tax that may be payable on such
dividends or distributions. See "Taxation" in the SAI.
Experience under the Plan may indicate that changes in the Plan are
desirable. Accordingly, the Fund and the Plan Agent reserve the right to
terminate the Plan as applied to any dividend or distribution paid
subsequent to notice of the termination sent to the members of the Plan at
least 30 days before the record date for dividends or distributions. The
Plan also may be amended by the Fund or the Plan Agent, but (except when
necessary or appropriate to comply with applicable law, rules or policies
of a regulatory authority) only by at least 30 days' written notice to
members of the Plan. All correspondence concerning the Plan should be
directed to the Plan Agent c/o PNC Bank, National Association, 400 Bellevue
Parkway, Wilmington, Delaware 19809.
DESCRIPTION OF COMMON STOCK
The Fund is authorized to issue 100,000,000 shares of Common Stock,
$0.001 par value per share. The Fund's shares have no preemptive,
conversion, exchange or redemption rights. Each share has equal voting,
dividend, distribution and liquidation rights. The shares outstanding are,
and the shares issued pursuant to this Offer when issued will be, fully
paid and nonassessable. Shareholders are entitled to one vote per share.
All voting rights for the election of Directors are noncumulative, which
means that the holders of more than 50% of the shares can elect 100% of the
Directors then nominated for election if they choose to do so and, in such
event, the holders of the remaining shares will not be able to elect any
Directors. The foregoing description and the description under "Certain
Anti-Takeover Provisions of the Articles of Incorporation and Bylaws" are
subject to the provisions contained in the Fund's Articles of Incorporation
and Bylaws.
Set forth below is information with respect to the Common Stock as of
March 1, 1996:
<TABLE>
<CAPTION>
AMOUNT OUTSTANDING EXCLUSIVE
AMOUNT HELD BY FUND OF SHARES HELD BY FUND FOR
AMOUNT AUTHORIZED FOR ITS ACCOUNT ITS OWN ACCOUNT
<S> <C> <C>
100,000,000 shares . . . . . . . . . . . 0 shares 9,589,377 shares
</TABLE>
CERTAIN ANTI-TAKEOVER PROVISIONS OF THE ARTICLES OF INCORPORATION AND
BYLAWS
<PAGE>
The Fund presently has provisions in its Charter Documents that are
intended to limit (i) the ability of other entities or persons to acquire
control of the Fund, (ii) the Fund's freedom to engage in certain
transactions or (iii) the ability of the Fund's Directors or shareholders
to amend the Charter Documents or effect changes in the Fund's management.
These provisions of the Charter Documents may be regarded as
"anti-takeover" provisions. Commencing with the first annual meeting of
shareholders, the Board of Directors was divided into three classes. Such
system of electing Directors is intended to have the effect of maintaining
the continuity of management and, thus, make it more difficult for the
Fund's shareholders to change the majority of Directors. Under Maryland
law and the Fund's Articles of Incorporation, the affirmative vote of the
holders of a majority of the votes entitled to be cast is required for the
consolidation of the Fund with another corporation, a merger of the Fund
with or into another corporation (except for certain mergers in which the
Fund is the successor), a statutory share exchange in which the Fund is not
the successor, a sale or transfer of all or substantially all of the Fund's
assets, the dissolution of the Fund and any amendment to the Fund's
Articles of Incorporation. For the full text of these provisions,
reference is made to the Articles of Incorporation and Bylaws of the Fund,
on file with the Securities and Exchange Commission. See "Additional
Information" below.
The provisions of the Charter Documents described above could have the
effect of depriving the owners of shares of opportunities to sell their
shares at a premium over prevailing market prices by discouraging a third
party from seeking to obtain control of the Fund in a tender offer or
similar transaction. The overall effect of these provisions is to render
more difficult the accomplishment of a merger or the assumption of control
by a principal shareholder. The Board of Directors of the Fund has
considered the foregoing anti-takeover provisions and concluded that they
are in the best interests of the Fund and its shareholders.
REPURCHASE OF SHARES
Shares of closed-end investment companies frequently trade at a
discount from net asset value. In recognition of the possibility that the
Fund's shares might similarly trade at a discount, the Fund's Board of
Directors has determined that it would be in the interest of shareholders
for the Fund to consider action to attempt to reduce or eliminate any
market value discount from net asset value. To that end, the Board
contemplates that the Fund may from time to time take action either to
repurchase in the open market or to make a tender offer for its shares at
net asset value. The Board, in consultation with the Investment Manager,
will review on a periodic basis the desirability of open market repurchases
and/or tender offers for the Fund's Common Stock. The Board may at any
time, however, decide that the Fund should not make any such repurchase or
tender offer. Although the Board of Directors believes that share
repurchases and tenders generally would have a favorable effect on the
market price of the Fund's shares, it should be recognized that the
acquisition of shares by the Fund will decrease the total assets of the
Fund and therefore have the effect of increasing the Fund's expense ratio.
If the Fund borrows to effect any such acquisition of shares, the interest
payments in respect of such borrowings will also increase the Fund's
expense ratio. See "Description of Common Stock -- Repurchase of Shares"
in the SAI.
TAXATION
The Fund intends to continue to qualify, and elect to be treated, as a
regulated investment company under the Code. The Fund intends to
distribute substantially all its net investment income and net capital
<PAGE>
gains each year (thereby avoiding the imposition of federal income and
excise taxes on such distributed income and gain in the Fund). Such
distributions will be taxable as ordinary income and long-term capital
gains, respectively, to shareholders of the Fund who are subject to tax.
After the end of each taxable year, the Fund will notify shareholders of
the federal income tax status of any distributions, or deemed
distributions, made by the Fund during such year. For a discussion of
certain United States, Hong Kong and China income tax consequences to
shareholders of the Fund see "Taxation" in the SAI.
CUSTODIAN, TRANSFER AGENT, DIVIDEND PAYING AGENT AND REGISTRAR
Brown Brothers Harriman & Co. ("Brown Brothers"), 59 Wall Street, New
York, New York 10005, serves as custodian for the Fund. Rule 17f-5 adopted
under the 1940 Act permits the Fund to maintain its non-U.S. securities and
cash in the custody of certain eligible non-U.S. subcustodians. Under the
terms of subcustodial agreements between Brown Brothers and each of Hong
Kong and Shanghai Banking Corporation ("HKSB"), Standard Chartered Bank and
Citibank, N.A., the Fund's assets in Hong Kong, China and Korea are held by
HKSB, Standard Chartered Bank and Citibank, N.A. The Custodian may,
subject to the approval of the Fund's Board of Directors and the provisions
of Rule 17f-5, employ other subcustodians for assets of the Fund held
outside the United States. The majority of the Fund's assets are held in
Hong Kong.
Selection of HKSB, Standard Chartered Bank and Citibank, N.A. as the
Fund's subcustodians has been made by the Fund's Board of Directors
following consideration of a number of factors, including, but not limited
to, the reliability and financial stability of the institution, the ability
of the institution to perform custodial services for the Fund, the
reputation of the institution in its national market and the risks of
potential nationalization or expropriation of Fund assets.
The transfer agent, dividend paying agent and registrar for the Fund's
Common Stock is PNC Bank, National Association. The principal business
address of the transfer agent, dividend paying agent and registrar is c/o
PNC Bank, National Association, 103 Bellevue Parkway, Wilmington, Delaware
19809.
EXPERTS
The audited financial statements of the Fund included in the SAI have
been so included in reliance on the report of Price Waterhouse LLP,
independent accountants, New York, New York, given on the authority of said
firm as experts in auditing and accounting.
VALIDITY OF COMMON STOCK AND OTHER LEGAL MATTERS
With respect to matters of United States law, the validity of the
Common Stock offered hereby will be passed upon for the Fund by White &
Case, New York, New York. Certain legal matters will be passed upon for
the Dealer Manager by Skadden, Arps, Slate, Meagher & Flom, Chicago,
Illinois. White & Case and Skadden, Arps, Slate, Meagher & Flom will rely
on Piper & Marbury L.L.P., Baltimore, Maryland, with respect to matters of
Maryland law.
AVAILABLE INFORMATION
<PAGE>
The Fund is subject to the information requirements of the Securities
Exchange Act of 1934, as amended, and the 1940 Act, and in accordance
therewith is required to file reports, proxy statements and other
information with the Securities and Exchange Commission. Any such reports,
proxy statements and other information can be inspected and copied at the
public reference facilities of the Securities and Exchange Commission, Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at
the Securities and Exchange Commission's New York Regional Office, Seven
World Trade Center, 13th Floor, New York, New York 10048 and Chicago
Regional Office, Northwest Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2311. Copies of such materials can be
obtained from the public reference section of the Securities and Exchange
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. Reports, proxy statements and other information concerning the Fund
can also be inspected at the offices of the NYSE, 20 Broad Street, New
York, New York 10005.
Additional information regarding the Fund and the Shares is contained
in the Registration Statement on Form N-2, including amendments, exhibits
and schedules thereto, relating to such shares filed by the Fund with the
Securities and Exchange Commission, Washington, D.C. This Prospectus and
the SAI does not contain all of the information set forth in the
Registration Statement, including any amendments, exhibits and schedules
thereto. For further information with respect to the Fund and the shares
of Common Stock offered hereby, reference is made to the Registration
Statement. Statements contained in the Prospectus and the SAI as to the
contents of any contract or other document referred to are not necessarily
complete and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. A copy of the Registration Statement may be inspected without
charge at the Securities and Exchange Commission's principal office in
Washington, D.C., and copies of all or any part thereof may be obtained
from the Securities and Exchange Commission upon the payment of certain
fees prescribed by the Securities and Exchange Commission.
<TABLE>
TABLE OF CONTENTS
OF
STATEMENT OF ADDITIONAL INFORMATION
<CAPTION>
PAGE
<S> <C>
Investment Objective and Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-2
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-5
Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-6
Net Asset Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-11
Description of Common Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-11
The Securities Markets in China and Hong Kong . . . . . . . . . . . . . . . . . . . . . . B-14
Portfolio Transactions and Brokerage . . . . . . . . . . . . . . . . . . . . . . . . . . B-24
Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-25
The People's Republic of China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-32
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
</TABLE>
THE GREATER CHINA FUND, INC.
2,397,344 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF
9,589,377 RIGHTS TO SUBSCRIBE FOR SUCH SHARES
<PAGE>
PROSPECTUS
PAINEWEBBER INCORPORATED
_____________________
MARCH __, 1996
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
FUND, THE INVESTMENT MANAGER OR THE DEALER MANAGER. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIR-
CUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE FUND SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. HOWEVER, IF ANY
MATERIAL CHANGE OCCURS WHILE THIS PROSPECTUS IS REQUIRED BY LAW TO BE
DELIVERED, THIS PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED ACCORDINGLY.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY OF THE SECURITIES OTHER THAN THE SHARES OFFERED BY THIS
PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR AN OFFER TO BUY THE
SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS
NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION.
<TABLE>
_________________
TABLE OF CONTENTS
<CAPTION>
Page
<S> <C>
Expense Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Asset Value and Market Price Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment Objective and Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors and Special Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distribution Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends and Distributions;
Dividend Reinvestment Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Description of Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Custodian, Transfer Agent, Dividend Paying Agent
and Registrar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Validity of Common Stock and Other Legal
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Available Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Table of Contents of the Statement of
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MARCH 8, 1996
THE GREATER CHINA FUND, INC.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
The Greater China Fund, Inc. (the "Fund") has been engaged in business
as a non-diversified, closed-end management investment company since July
23, 1992. The Fund seeks long-term capital appreciation through investment
of substantially all of its assets in listed equity securities of companies
which derive, or which are expected to derive, a significant proportion (at
least 50%) of their revenues from goods produced or sold, investments made
or services performed in The People's Republic of China ("China" or the
"PRC"), referred to herein as China companies. Under normal market
conditions, at least 65% of the Fund's total assets is invested in equity
securities of China companies listed on stock exchanges in China and Hong
Kong. The Fund may also invest in equity securities of China companies
listed on stock exchanges located elsewhere, such as Korea, Singapore or
Taiwan, in unlisted equity securities of China companies and in debt
securities of China companies. The Fund's principal office is located at
1285 Avenue of the Americas, New York, New York 10019 and its telephone
number is (212) 713-3589.
This Statement of Additional Information is not a prospectus, but
should be read in conjunction with the Prospectus for the Fund dated March
__, 1996 (the "Prospectus"). This Statement of Additional Information does
not include all information that a prospective investor should consider
before purchasing shares of the Fund, and investors should obtain and read
the Prospectus prior to purchasing shares. A copy of the Prospectus may be
obtained without charge, by calling (800) 733-8481, extension 322. This
Statement of Additional Information incorporates by reference the entire
Prospectus.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell
or the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
<TABLE>
TABLE OF CONTENTS
<CAPTION>
PAGE
<S> . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . <C>
Investment Objective and Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-2
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-5
Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-6
Net Asset Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-11
Description of Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-11
The Securities Markets in China and Hong Kong . . . . . . . . . . . . . . . . . . . . . . . . . B-14
Portfolio Transactions and Brokerage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-24
Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-25
The People's Republic of China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-32
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
</TABLE>
The Prospectus and this Statement of Additional Information omit certain of
the information contained in the registration statement filed with the
<PAGE>
Securities and Exchange Commission, Washington, D.C. (the "SEC"). The
registration statement may be obtained from the SEC upon payment of the fee
prescribed, or inspected at the SEC's office at no charge.
The date of this Statement of Additional Information is March __, 1996.
INVESTMENT OBJECTIVE AND POLICIES
GENERAL
The Fund's investment objective is to achieve long-term capital
appreciation. The Fund seeks to achieve its investment objective by
investing substantially all of its assets in listed equity securities of
companies which derive, or which are expected to derive, a significant
proportion (at least 50%) of their revenues from goods produced or sold,
investments made or services performed in China, referred to herein as
China companies. Under normal market conditions, as a fundamental policy,
the Fund invests at least 65% of its total assets in equity securities of
China companies listed on stock exchanges in China or Hong Kong. The Fund
may also invest in equity securities of China companies listed on stock
exchanges located elsewhere, including, but not limited to, exchanges in
Korea, Singapore or Taiwan. The Investment Manager anticipates that, under
normal market conditions, at least 80% of the Fund's assets is invested in
listed equity securities of China companies. Up to 15% of the Fund's total
assets may be invested in unlisted equity securities of China companies for
which there is no public trading market. The Fund may also invest to a
limited degree (up to 20% of its total assets) in debt obligations of China
companies, which may be lower-rated or non-rated. Although, in general,
the Fund's equity investments consist primarily of common stock of China
companies, the Fund may also invest in other equity securities, including
preferred stock, rights or warrants to purchase common stock or preferred
stock and debt securities convertible into common stock or preferred stock.
See "Investment Objective and Policies" in the Prospectus.
During periods in which the Investment Manager believes changes in
economic, financial or political conditions make it advisable, the Fund may
for temporary defensive purposes reduce its holdings in China companies and
invest in certain short-term (less than twelve months to maturity) debt
securities. The short-term debt securities in which the Fund may invest
consist of (1) bank deposits and bank obligations (including certificates
of deposit, time deposits and bankers' acceptances) of U.S. or foreign
banks denominated in any currency; (2) commercial paper and other
short-term debt obligations of U.S. and foreign corporate or governmental
entities; and (3) repurchase agreements with respect to such securities.
The Fund intends to invest only in short-term debt securities that the
Investment Manager determines to be of high quality, i.e., rated in one of
the two highest rating categories by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Ratings Group ("S&P") or, if unrated,
determined by the Investment Manager or the Fund's Board of Directors to be
comparable in credit quality. The Fund will also invest in the instruments
described above pending investment of the net proceeds of the offering made
hereby and at any other time reserves are required for expenses or dividend
and other distributions to shareholders, provided that all such investments
made as reserves for expenses or dividend and other distributions to
shareholders may not exceed 35% of the Fund's total assets. Under the 1940
Act, the Fund may invest up to 10% of its assets in the aggregate in shares
of other investment companies and up to 5% of its assets in any one
investment company, as long as that investment does not represent more than
3% of the voting stock of the acquired investment company at the time such
shares are purchased. The Fund reserves the right to invest in other
investment companies to the full extent permitted by the 1940 Act, as it
<PAGE>
may be amended. As a shareholder in any investment company, the Fund will
bear its ratable share of that investment company's expenses, and would
remain subject to payment of the Fund's investment management, adminis-
trative, custodial and other fees with respect to assets so invested.
The Investment Manager seeks to identify and invest in China companies
it believes offer potential for long-term capital appreciation. In
evaluating prospective investments, the Investment Manager utilizes its own
internal financial, economic and credit analysis resources as well as
information obtained from other sources. The Fund invests and intends to
invest in China companies involved in a broad spectrum of categories,
including, as conditions warrant or permit from time to time, automotive,
chemicals, consumer products, construction, electric generating, elec-
tronics, finance, food and beverage, household goods, international
trading, machinery, mining, real estate development, retail trade, tourism
and textiles. The Fund does not invest 25% or more of its total assets in
the securities of companies in the same industry. In selecting industries
and companies for investment, the Investment Manager seeks investments in
industries and companies that it believes to have overall growth prospects
and a strong competitive position in domestic and/or export markets. In
evaluating whether industries and companies meet these criteria, the
Investment Manager considers factors such as technology, research and
development, productivity, capital resources, labor costs, raw material
costs and sources, profit margins, return on investment, government regu-
lation, management and price of the securities, among other factors. In
particular, securities of China companies that are believed to be the
likely beneficiaries of China's increased economic contacts with foreign
markets will be identified for investment by the Fund.
The Fund is designed primarily for long-term investment and investors
should not consider it a trading vehicle. There can be no assurance that
the Fund's investment objective will be achieved.
INVESTMENT IN CHINA COMPANIES
The Investment Manager believes that the potential for growth of the
Chinese economy and its securities markets offers investment opportunities
to investors seeking long-term capital appreciation who are willing to
assume the risks associated with an investment in the Fund.
For most of its history, the PRC has had a centrally planned economy
controlled by the Chinese Communist Party. In 1978, as part of the "Four
Modernizations" program, China began to implement a variety of economic
reform policies designed to, among other things, reduce the role of central
planning in the Chinese economy and to remove direct government control
over the business activities of Chinese enterprises and companies. This
process of economic reform accelerated during the 1980s and again in the
1990s after the Tiananmen Square incident. Consequently, at present the
Chinese economy may no longer be described simply as a centrally planned
economy as it features many characteristics of a mixed economy, including
significant free market elements. Central economic planning still affects
certain strategic or nationally important sectors of the Chinese economy,
as well as the pricing of goods and services generally, but most of the
PRC's current economic activity is planned or co-ordinated by local
governments or guided by free market considerations.
The other important aspect of the "Four Modernizations" program is the
"open-door" policy, also introduced in 1978. This policy has sought to
attract foreign capital technology and managerial expertise to assist in
the economic development and modernization of China. The "open-door"
policy has led to a proliferation of foreign investment enterprises in
China, including Sino-foreign joint ventures and wholly foreign-owned
<PAGE>
enterprises, as well as to the establishment of special investment zones
which offer investment incentives, including preferential tax treatment, to
foreign businesses. The "open-door" policy and the domestic economic
reform program are jointly responsible for the PRC government's
authorization of the listing and offering to foreign investors of "B"
shares and "H" shares in Chinese corporations.
During the period from 1981 to 1990, the annual growth rate of China's
gross national product ("GNP") averaged approximately 9%. In the past six
years, China's GNP has increased at the respective rates of approximately
4% in 1990, approximately 9.5% in 1991, approximately 14% in 1992,
approximately 13% in 1993, approximately 12% in 1994 and approximately 10%
in 1995.
China's securities markets are in the earliest stages of development.
As of December 31, 1995, the aggregate market capitalization of equity
securities listed on the Shanghai Securities Exchange and the Shenzhen
Stock Exchange was approximately RMB347.4 billion (less than 0.7% of the
market capitalization of the equity securities listed on the New York Stock
Exchange on such date) and for the year ended December 31, 1995 the total
turnover in value of equity securities listed on such exchanges was approx-
imately RMB5,534 billion. There were 19 new listings on the Shenzhen
Stock Exchange in 1995 (9 "A" share listings and 10 "B" share listings) for
a total of 149 listings on the exchange as of December 31, 1995. There
were 17 new listings on the Shanghai Securities Exchange in 1995 (15 "A"
share listings and 2 "B" share listings) for a total of 220 listings on the
exchange as of December 31, 1995. It is expected that recently announced
efforts by the PRC government to centralize the regulation of "B" shares at
the national level will precipitate an increase in listings in 1996.
Expected listings in 1996 could create opportunities for the Fund in new
industrial sectors, such as electronics, transportation, shipping,
electricity, chemical, computers and the retail trade. In addition to the
potential for growth of the Chinese securities markets, current PRC
government policies aimed at raising foreign investment capital,
particularly for the development of China's special investment zones, may
create increased investment opportunities for the Fund by expanding the
number of PRC-owned companies established and permitted to list on stock
exchanges outside of China. For example, there are currently 17 PRC-owned
companies with "H" share listings on the Stock Exchange of Hong Kong and 6
more are expected to list in the first half of 1996.
The table sets forth the number of listed companies as of December 31,
1995 and the market capitalizations in U.S. dollars as of December 31, 1994
and December 31, 1995 for each of the principal securities exchanges in
China and Hong Kong along with similar information for comparison for the
New York Stock Exchange.
<TABLE>
<CAPTION>
Market Market
Number of Capitalization Capitalization
Listed Companies December 31, 1994 December 31, 1995
Stock Exchange December 31, 1995 (US$ millions) (US$ millions)
<S> <C> <C> <C>
Shanghai Securities Exchange 220 30,164 30,320
Shenzhen Stock Exchange 149 12,413 11,375
Hong Kong Stock Exchange 542 267,331 301,065
New York Stock Exchange 2,675 4,448,705 6,013,991
Source: Shanghai Securities Exchange; Shenzhen Stock Exchange; The Stock Exchange of Hong Kong; New York Stock Exchange.
</TABLE>
OTHER INVESTMENT PRACTICES
<PAGE>
Currently, the Fund does not intend to invest more than five percent
of its net assets pursuant to any of the following investment practices.
Borrowing. The Fund is authorized to borrow money from banks for
temporary or emergency purposes, for the clearance of transactions, for the
payment of Fund expenses, for the purpose of obtaining amounts necessary to
make distributions for qualification as a regulated investment company or
to avoid imposition of an excise tax under the Internal Revenue Code of
1986, as amended (the "Code"), or for the purpose of repurchasing or
tendering for shares of the Fund's Common Stock, in an aggregate amount not
exceeding 10% of its total assets (not including the amount borrowed).
Borrowing creates an opportunity for the Fund to finance the limited
activities described above without the requirement that portfolio
securities be liquidated at a time when it might be disadvantageous to do
so. Borrowings by the Fund increase exposure to capital risk and are
subject to interest costs. The Fund may not borrow for the purpose of
leverage. Investments will not be made when borrowings exceed 5% of the
Fund's total assets.
Repurchase Agreements. The Fund may invest in securities pursuant to
repurchase agreements with parties that are approved by the Fund's Board of
Directors. These parties will consist primarily of financial institutions
such as U.S. or foreign banks and securities dealers. Under such
agreements, the seller agrees, upon entering into the contract, to
repurchase the security at a mutually agreed upon time and price in a
specified currency, thereby determining the yield during the term of the
agreement. This results in a fixed rate of return insulated from market
fluctuations during such period, although it may be affected by currency
fluctuations. The Fund will require the seller to provide additional
collateral if the market value of the securities falls below the repurchase
price at any time during the term of the repurchase agreement. In the
event of a default under a repurchase agreement, the rate of return to the
Fund will be dependent upon intervening fluctuations of the market value of
such security and the accrued interest on the security. In such event, the
Fund would have rights against the seller for breach of contract with
respect to any losses arising from market fluctuations following the
failure of the seller to perform.
When-Issued Securities and Delayed Delivery Transactions. The Fund
may purchase or sell portfolio securities on a delayed delivery basis or
purchase securities on a when-issued basis at fixed purchase or sale terms.
These transactions arise when securities are purchased or sold by the Fund
with payment and delivery taking place in the future. The purchase will be
recorded on the date the Fund enters into the commitment and the value of
the obligation will thereafter be reflected in the calculation of the
Fund's net asset value. The value of the obligation on the delivery date
may be more or less than its purchase price. A separate account of the
Fund will be established with its custodian consisting of cash or liquid,
high grade debt securities having a market value at all times at least
equal to the amount of the commitment. The Fund may make commitments to
purchase securities on such basis only with the intention of actually
acquiring the securities. To the extent the Fund engages in when-issued
and delayed delivery transactions, it does so for the purpose of acquiring
securities for the Fund's portfolio consistent with the Fund's investment
objectives and policies and not for the purpose of investment leverage.
Hedging Foreign Currency Risks. The Fund may engage in forward
foreign exchange contracts between the U.S. dollar and the foreign
currencies in which the Fund's assets are denominated in connection with
seeking to hedge possible variations in the exchange rate between these
currencies. This may be accomplished through agreements to purchase or
sell such foreign currencies for U.S. dollars, or U.S. dollars for such
foreign currencies, at specified future dates at prices fixed at the time
<PAGE>
of the contracts. Currency fluctuations may affect both the Fund's rate of
return and the volatility of such rate.
The Fund's dealings in forward foreign exchange are limited to hedging
involving either specific transactions or portfolio positions. The Fund
may not speculate in foreign currencies. Transaction hedging is the
purchase or sale of forward foreign currency with respect to specific
receivables or payables of the Fund accruing in connection with the
purchase and sale of its portfolio securities, the sale of shares of the
Fund or the payment of dividends and distributions by the Fund. Position
hedging is the sale of forward foreign currency with respect to portfolio
security positions denominated or quoted in such foreign currency. The
Fund has no limitation on transaction hedging. The Fund may not commit
more than 5% of its assets to position hedging contracts and does not enter
into foreign currency hedging transactions where the consummation of the
contracts would obligate the Fund to deliver an amount of foreign currency
in excess of the value of the Fund's assets denominated in that currency.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also limit the
opportunity for gain if the value of the hedged currency should rise.
Moreover, it may not be possible for the Fund to hedge against a
devaluation that is so generally anticipated that the Fund is not able to
contract to sell the currency at a price above the devaluation level it
anticipates. The Fund does not currently intend to utilize hedging
techniques to a significant extent.
Lending Portfolio Securities. In order to increase income, the Fund
may, from time to time, lend portfolio securities to brokers, dealers and
financial institutions and receive collateral in the form of cash or U.S.
government securities. Under the Fund's procedures, collateral for such
loans must be maintained at all times in an amount equal to at least 100%
of the current market value of the loaned securities (including interest
accrued on the loaned securities). The interest accruing on the loaned
securities will be paid to the Fund and the Fund will have the right, on
demand, to call back the loaned securities. The Fund may pay fees to
arrange the loans which will have the effect of reducing the net income
earned by the Fund from such transactions. The Fund will neither lend
portfolio securities in excess of 30% of the value of its total assets nor
lend its portfolio securities to any officer, director, employee or
affiliate of the Fund or the Investment Manager.
INVESTMENT RESTRICTIONS
The Fund has adopted certain fundamental investment restrictions that
may not be changed without the prior approval of the holders of a majority
of the Fund's outstanding voting securities. The percentage limitations
set forth below, as well as those described elsewhere in this document,
apply only at the time an investment is made by the Fund, and any
subsequent change in any applicable percentage resulting from market
fluctuations does not require elimination of any security from the Fund's
portfolio. The Fund may not:
1. Invest 25% or more of the total value of its assets in
securities of issuers in any one industry.
2. Make loans, except that the Fund may lend portfolio securities
and except to the extent that the purchase of portfolio securities
consistent with the Fund's investment objective and policies or the
acquisition of securities subject to repurchase agreements may be
deemed to be loans.
<PAGE>
3. Issue senior securities or borrow money, except that the Fund
may borrow (i) to finance repurchases of and/or tenders for its shares
or for the clearance or settlement of transactions, (ii) for temporary
or emergency purposes in amounts not exceeding 5% of its total assets
(not including the amount borrowed), or (iii) for the purpose of
obtaining amounts necessary to make distributions for qualification as
a regulated investment company or to avoid imposition of an excise tax
under the Code. The Fund's borrowings under clauses (i) and (iii) may
not in the aggregate result in there being asset coverage of less than
300% as defined in the 1940 Act, and the Fund will not make
investments while any such borrowings in excess of 5% of its total
assets are outstanding.
4. Make short sales of securities or maintain a short position in
any security.
5. Purchase securities on margin, except such short-term credits
as may be necessary or routine for the clearance or settlement of
transactions and the maintenance of margin with respect to forward
contracts or other hedging securities.
6. Underwrite securities of other issuers, except insofar as the
Fund may be deemed an underwriter under applicable securities laws in
selling portfolio securities.
7. Purchase or sell commodities, commodity contracts, futures
contracts, real estate or interests in real estate, except that the
Fund may invest in securities issued by companies, including real
estate investment trusts, that invest in real estate or interests in
real estate, and may purchase and sell forward contracts on foreign
currencies to the extent permitted under applicable law.
8. Make investments for the purpose of exercising control over,
or management of, the issuers of any securities.
PORTFOLIO TURNOVER
The Fund generally does not engage in the trading of securities for
the purpose of realizing short-term profits, but it adjusts its portfolio
as it deems advisable in view of prevailing or anticipated market
conditions to accomplish the Fund's investment objective and policies. For
example, the Fund may sell portfolio securities in anticipation of an
adverse market movement. Other than for tax purposes, frequency of
portfolio turnover will not be a limiting factor if the Fund considers it
advantageous to purchase or sell securities. The Fund anticipates that the
annual portfolio turnover rate of the Fund will not exceed 100%. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the
Fund's portfolio securities. For purposes of this calculation, portfolio
securities exclude securities having a maturity when purchased of one year
or less. A high rate of portfolio turnover involves correspondingly
greater brokerage commission expenses than a lower rate, which expenses
must be borne by the Fund and its shareholders. The portfolio turnover was
31%, 22% and 32% for the fiscal years ended December 31, 1993, December 31,
1994 and December 31, 1995, respectively.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The names of the directors and principal officers of the Fund are set
forth below, together with their positions and their principal occupations
<PAGE>
during the past five years. Directors who are "interested persons" of the
Fund, as defined by the 1940 Act, are indicated by an asterisk.
<TABLE>
Position Principal Occupation
Name (Age) and Address with the Fund and other Affiliations
<S> <C> <C>
Richard B. Bradley (58)
25 Saville Row Chairman and Chairman of Kroll Associates UK Limited; Director of
London W1X OAL Director Mohaiyani Securities SDN BHD; Director of The Abtrust
England Emergency Asia Investment Trust Limited; previously Group
Managing Director of Asia Equity Holdings.
Edward Y. Baker (61) Director President, Chief Executive Officer, HOOPP Investment
1 Toronto Street Management Limited; Director, Canada Life of America
Suite 1400 Series Fund, Inc.; Canadian Pencrown Resources Inc.;
Toronto previously Senior Vice-President, Investment, and Chief
Canada M5C 3B2 Investment Officer of Ontario Hospital Association.
John A. Bult* (59) Director Chairman of PaineWebber International Inc.; Director of
1285 Avenue of the Americas PaineWebber Group Inc.; The Germany Fund, Inc.; The New
New York, New York 10019 Germany Fund, Inc.; The Central European Equity Fund
Inc.; The France Growth Fund, Inc.; The Brazilian Equity
Fund, Inc.
Richard Graham* (37) Director Chief Representative of ING Barings Group in China;
The Business Centre Chairman of the British Chamber of Commerce in Shanghai;
4th Floor, The Portman Hotel Director of Children First International H.K. Ltd.;
1376 Nanjing West Road Director of Graham Montrose Co. Ltd.; previously British
Shanghai 200040 Trade Commissioner, China and H.M. Consul Macao.
China
John A. Hawkins (53) Director Executive Vice President and Executive Committee Member
39 Edinburgh Tower of The Bank of Bermuda Limited; Director of Bermuda Far
15 Queen's Road, Central East Properties Limited; Bermuda Trust (Far East)
Hong Kong Limited; MIL (Far East) Limited; Bermuda Trust (Cook
Islands) Limited; Bermuda Trust (International) Limited;
Bermuda Trust (Hong Kong) Limited; Casana Nominees
Limited; Somers Nominees (Far East) Limited; Universal
Corporate Services Limited; Bermuda Trust (Mauritius)
Limited; Bermuda Trust (Western Samoa) Limited; MIL
Properties (Cook Islands) Limited; Bermuda Asia Pacific
Holdings Limited; Bermuda Trust (South Pacific) Limited;
Bermuda Trust (New Zealand) Limited; Bermuda Trust
Holdings (South Pacific) Limited; Somers Services
Limited; S.R. Investment (L) Limited; Somers Nominees
Limited; Somers Administration Limited; Somers
Secretarial Limited; Bermuda Trust (Singapore) Limited;
Banco Nominees, Ltd.; MIL Corporate Services (Singapore)
Ltd; SR Global Fund Inc.; The Ki Asia Pacific Fund
Limited.
<PAGE>
Don G. Hoff (60) Director Chairman and Chief Executive Officer of Intertec Inc. and
25 Corte Madera Avenue EHS, Inc.; Director of Prudential Global Fund; Prudential
Mill Valley, California 94941 Short-Term Global Income Fund; Prudential Pacific Growth
Fund; The Asia Pacific Fund, Inc.; Trustee of Prudential
U.S. Government Fund; previously also Chairman and Chief
Executive Officer of AT&E Corporation.
Jonathan J.K. Taylor* (52) President and Director Director of Baring Asset Management Limited; Director of
155 Bishopsgate Baring Asset Management (Holdings) Limited; Chairman of
London EC2M 3XY, Baring International Investment (Australia) Limited;
England Director of Onyx Country Estates Limited; Onyx Town
Estates Limited.
Tak Lung Tsim (49) Director Fellow of Shaw College, the Chinese University of Hong
#906-907 Sun Hung Kai Centre Kong; Trustee of Yale China Association; Member of Li Po
30 Harbour Road Chun United World College of Hong Kong; Principal, T.L.
Hong Kong Tsim & Associates, Ltd.
Michael D. Clegg (42) Secretary Director of Baring International Investment (Far East)
1901 Edinburgh Tower Limited; Baring International Investment Management (HK)
15 Queen's Road, Central Holdings Limited; Baring Pacific Investments Limited;
Hong Kong Trophon Limited; China Investment Fund (BVI) Limited;
previously Assistant Director of Barings plc.
Thomas M. Walker (36) Vice President Director of The Institutional Group, Baring Asset
1902 Edinburgh Tower Management (Asia) Limited; previously assistant director
The Landmark of Edinburgh Fund Managers PLC.
15 Queens Road, Central
Hong Kong
Julian F. Sluyters (35) Vice President Senior Vice President of Mitchell Hutchins Asset
1285 Avenue of the Americas Management Inc.; Vice President/Treasurer to the
New York, New York 10019 investment companies for which Mitchell Hutchins or
PaineWebber serves as investment advisor; previously an
Audit Senior Manager with Ernst & Young.
C. William Maher (35) Treasurer and First Vice President of Mitchell Hutchins Asset Manage-
1285 Avenue of the Americas Assistant Secretary ment Inc.; Treasurer/Assistant Treasurer to the
New York, New York 10019 investment companies for which PaineWebber serves as
investment adviser and other investment companies for
which Mitchell Hutchins serves as administrator.
* Director who is an "interested person" within the meaning of the 1940 Act.
</TABLE>
COMPENSATION OF DIRECTORS AND OFFICERS
The Fund pays each of its directors who is not a director, officer or
employee of the Investment Manager, the Administrator or any affiliate
thereof an annual fee of $8,000 plus up to $2,000 for each Board of
Directors meeting attended. In addition, the Fund reimburses directors for
travel and out-of-pocket expenses incurred in connection with attending
Board of Directors meetings.
<PAGE>
The officers of the Fund receive no compensation from the Fund. The
Directors of the Fund who are "interested persons" of the Fund or of the
Fund's Investment Manager receive no compensation from the Fund. The
following table provides information regarding the compensation paid by the
Fund to the Fund's noninterested Directors for the fiscal year ended
December 31, 1995:
<TABLE>
<CAPTION>
Name of Director Aggregate Pension or Estimated Annual Total Compensation
Compensation Retirement Benefits Benefits Upon From Fund and Fund
From Fund Accrued As Part Retirement Complex Paid to
of Fund Expenses Directors
<C> <S> <S> <S> <S>
Edward Y. Baker . . . . . $17,000 --- --- $17,000
Richard B. Bradley . . . $17,000 --- --- $17,000
John A. Hawkins . . . . . $17,000 --- --- $17,000
Don G. Hoff . . . . . . . $17,000 --- --- $30,625
T.L. Tsim . . . . . . . . $15,000 --- --- $15,000
</TABLE>
OTHER
The Articles of Incorporation and Bylaws of the Fund provide that the
Fund shall indemnify directors and officers and may indemnify employees or
agents of the Fund against liabilities and expenses incurred in connection
with litigation in which they may be involved because of their positions
with the Fund to the fullest extent permitted by law. In addition, the
Fund's Articles of Incorporation provide that the Fund's directors and
officers shall not be liable to shareholders for money damages, except in
limited instances. However, nothing in the Articles of Incorporation or
the Bylaws of the Fund protects or indemnifies a director, officer,
employee or agent against any liability to which such person would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of
such person's office. No insurance obtained by the Fund shall protect or
purport to protect officers or directors, the investment adviser or
co-advisers or any principal underwriter of the Fund against any liability
to the Fund or its shareholders to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of their obligations and duties.
The Board of Directors is divided into three classes, having terms of
one, two and three years, respectively. At each annual meeting of
shareholders, the term of one class expires and directors are elected to
serve in that class for terms of three years. See "Description of Common
Stock -- Certain Anti-Takeover Provisions of the Articles of Incorporation
and Bylaws."
OWNERSHIP OF COMMON STOCK
All the directors and officers of the Fund, as a group, own 7,485
shares of Common Stock, which amount represents less than 1% of the Common
Stock outstanding.
INVESTMENT MANAGER
Baring International Investment (Far East) Limited ("BII"), the Fund's
Investment Manager, is a Hong Kong corporation which was organized in 1982
to advise U.S. institutional clients with respect to investments in Asia.
BII is a part of the Barings group of companies formerly controlled by
Barings plc ("Barings"). Effective March 8, 1995, ING Groep N.V. ("ING")
<PAGE>
acquired substantially all of the business assets and liabilities of the
asset management, banking and securities operations of Barings, including
the outstanding stock of Baring Asset Management Holdings Limited ("BAM
Holdings") of which BII is an indirect wholly-owned subsidiary (the "ING
Acquisition"). The ING Acquisition followed the February 1995 petition by
Barings, Baring Brothers & Co. Ltd. ("Baring Brothers") and certain other
affiliates of Barings for court appointment of administrators as a result
of significant losses suffered by Baring Brothers in connection with
trading of equity and bond futures and options by an employee in Singapore.
The basis of the current ownership of BII by ING is as follows: BII is a
wholly-owned direct subsidiary of Baring Asset Management (Asia) Holdings
Limited, which in turn is a wholly-owned direct subsidiary of Baring Asset
Management UK Holdings Limited. Baring Asset Management UK Holdings
Limited is a wholly-owned direct subsidiary of Baring International
Investment Management Holdings Limited. Baring International Investment
Management Holdings Limited is a wholly-owned direct subsidiary of Baring
Asset Management Limited ("BAM"), which in turn is a wholly-owned direct
subsidiary of BAM Holdings. Baring Asset Management Holdings Limited is a
wholly-owned subsidiary of ING Barings Holdings Limited, which in turn is a
wholly-owned subsidiary of ING Baring Holdings Nederlande B.V. This
company is a wholly-owned subsidiary of ING Bank N.V., which is wholly
owned by ING.
BAM is a leading international investment manager and, through its
subsidiaries, had approximately $40 billion in assets under management for
pension funds, corporations, government agencies, charitable organizations,
investment companies and private individuals as of December 31, 1995. BAM
had approximately $6 billion invested in Asian securities markets
(excluding Japan) as of December 31, 1995.
Subject to the supervision of the Fund's Board of Directors and
pursuant to a management agreement (the "Management Agreement"), the
Investment Manager manages the Fund's investments, in accordance with the
Fund's investment objectives, policies and restrictions, and makes
investment decisions on behalf of the Fund, including the selection of, and
placing of orders with, brokers and dealers to execute portfolio
transactions on behalf of the Fund. The Fund pays the Investment Manager a
monthly fee at the annual rate of 1.25% of the Fund's average weekly net
assets. The fees payable to the Investment Manager are higher than those
paid to the managers of U.S. investment companies investing exclusively in
securities of U.S. issuers, primarily because of the additional time and
expense required in connection with investing in equity securities of China
companies. Investing in equity securities of China companies entails
additional time and expense because available public information concerning
such securities is limited in comparison to, and is not as comprehensive
as, that available for U.S. equity securities. The Investment Manager
received fees equal to $1,359,048 for the year ended December 31, 1993,
$1,789,782 for the year ended December 31, 1994 and $1,703,414 for the year
ended December 31, 1995.
Certain directors and officers of the Fund are also directors or
officers of the Investment Manager or affiliates of the Investment Manager
as indicated under "-- Directors and Officers" above. The Investment
Manager's offices are located at Edinburgh Tower, 15 Queen's Road Central,
Hong Kong.
ADMINISTRATOR
The Administrator of the Fund is Mitchell Hutchins Asset Management
Inc., a Delaware corporation and an affiliate of PaineWebber Incorporated,
the Dealer Manager. The Administrator's principal offices are located at
1285 Avenue of the Americas, New York, New York.
<PAGE>
Under an administration agreement with the Fund (the "Administration
Agreement"), the Administrator agrees to perform or arrange for the
performance of the following services for the Fund: maintenance of the
books and records of the Fund required under the 1940 Act; preparation of
the Fund's federal, state and local income tax returns; preparation of
financial information for the Fund's proxy statements and semiannual and
annual reports to shareholders; responding to inquiries from Fund
shareholders; calculation of the net asset value of the Fund's shares;
oversight of the performance of administrative and professional services
rendered to the Fund by others, including its custodian, registrar,
dividend paying agent, transfer agent, as well as accounting, auditing and
other services; providing the Fund with administrative office space and
preparation of the Fund's reports to the Securities and Exchange
Commission. For these services, the Administrator receives a monthly fee
at an annual rate of 0.22% of the Fund's average weekly net assets of up to
$75 million and 0.20% of such net assets in excess of $75 million, subject
to a minimum annual fee of $150,000. The Administrator received fees equal
to $301,365 for the year ended December 31, 1994 and $287,546 for the year
ended December 31, 1995.
MANAGEMENT AND ADMINISTRATION AGREEMENTS
The Management Agreement and the Administration Agreement (the
"Agreements") set forth the services to be provided by and the fees to be
paid to each party, as described above. Neither the Investment Manager nor
the Administrator shall be liable for any error of judgment or for any loss
suffered by the Fund in connection with the matters to which their
respective Agreements relate, except a loss resulting from willful
misfeasance, bad faith or gross negligence on its part in the performance
of, or from reckless disregard by it of, its obligations and duties under,
such Agreements or, in the case of the Investment Manager, a loss resulting
from a breach of fiduciary duty with respect to receipt of compensation for
services (in which case any award or damages shall be limited to the period
and the amount set forth in Section 36(b)(3) of the 1940 Act). The Fund
has agreed to indemnify the Investment Manager and its directors, officers
and controlling persons against reasonable legal expenses incurred in the
successful defense against any claim arising out of or based upon the
performance of the Management Agreement.
The Agreements provide that the Investment Manager and the
Administrator will bear all expenses of their employees and overhead
incurred by them in connection with their duties under such Agreements.
The Investment Manager and the Administrator further agree to pay all
salaries and fees of the Fund's directors and officers who are interested
persons (as such term is defined in the 1940 Act) of such party. The Fund
will bear all of its own expenses, including expenses of organizing the
Fund; fees of the Fund's directors who are not interested persons (as such
term is defined in the 1940 Act) of any other party to the Agreements;
out-of-pocket travel expenses for all directors and officers and other
expenses incurred by the Fund in connection with directors' meetings;
interest expense; taxes and governmental fees; brokerage commissions and
other expenses incurred in acquiring or disposing of the Fund's portfolio
securities; expenses of preparing stock certificates; expenses in
connection with the issuance, offering, distribution, sale or underwriting
of securities issued by the Fund; expenses of registering and qualifying
the Fund's shares for sale with the Securities and Exchange Commission and
in various states and foreign jurisdictions; auditing, accounting,
insurance and legal costs; custodian, dividend disbursing and transfer
agent expenses; expenses of obtaining and maintaining stock exchange
listings of the Fund's shares; and the expenses of shareholders' meetings
and preparing and distributing proxies and reports to shareholders.
<PAGE>
The services of the Investment Manager and the Administrator are not
deemed to be exclusive, and nothing in the Agreements will prevent either
of them or their affiliates from providing similar services to other
investment companies and other clients (whether or not their investment
objectives and policies are similar to those of the Fund) or from engaging
in other activities. If other clients of the Investment Manager desire to
purchase or sell a security at the same time the security is purchased for
or sold by the Fund, purchases and sales will be allocated among the
clients of each in a manner believed by the Investment Manager to be
equitable to each client.
The Administration Agreement will continue in effect until July 22,
1997 and the Management Agreement will continue in effect until March 13,
1997. If not sooner terminated, both Agreements will continue in effect
for successive periods of 12 months thereafter, provided that such
continuance is specifically approved annually by (i) the vote of a majority
of the Fund's Board of Directors who are not parties to such Agreement or
interested persons (as such term is defined in the 1940 Act) of any such
party, cast in person at a meeting called for the purpose of voting on such
approval and (ii) either (a) the vote of a majority of the outstanding
voting securities of the Fund, or (b) the vote of a majority of the Fund's
Board of Directors. Each of the Agreements may be terminated at any time
by the Fund, without penalty, upon vote of a majority of the Fund's Board
of Directors or a majority of the outstanding voting securities of the Fund
on 60 days' written notice. Each of the Agreements will terminate
automatically as to any party in the event of its assignment (as such term
is defined in the 1940 Act) by that party. In addition, the Investment
Manager may terminate the Management Agreement on 90 days' written notice,
and the Administrator may terminate the Administration Agreement on 120
days' written notice.
NET ASSET VALUE
Net asset value per each share of the Fund's Common Stock is
determined (a) at least weekly, (b) on the last business day of each month
and (c) at such other times as the Fund's Board of Directors may determine
in each case by dividing the value of the net assets of the Fund (the value
of its total assets less its liabilities) by the total number of shares of
Common Stock outstanding. In valuing the Fund's assets, quotations of
foreign securities in a foreign currency are converted to U.S. dollar
equivalents at the then current currency value. All securities for which
market quotations are readily available are valued at the last sale price
on the day of valuation or, if there was no such sale on such day, the last
bid price quoted on such day. Forward contracts are valued at the current
cost of covering or offsetting the contracts. Short-term debt securities
that mature in less than 60 days are valued at amortized cost. Securities
and assets for which market quotations are not readily available (including
investments which are subject to limitations as to their sale) are valued
at fair value as determined in good faith by or under the direction of the
Board of Directors of the Fund. In instances where the price determined
above is deemed not to represent fair market value (for example, if the
price of a security listed on the stock exchange was fixed by reason of a
limit on the daily price change, and the Fund's management determined that,
because of unusual and material changes affecting the issuer, the quoted
price did not reflect the value of the security), the price is determined
in such manner as the Board may prescribe.
DESCRIPTION OF COMMON STOCK
The Fund is authorized to issue 100,000,000 shares of Common Stock,
$0.001 par value per share. The Fund's shares have no preemptive,
<PAGE>
conversion, exchange or redemption rights. Each share has equal voting,
dividend, distribution and liquidation rights. The shares outstanding are,
and the shares issued pursuant to this Offer when issued will be, fully
paid and nonassessable. Shareholders are entitled to one vote per share.
All voting rights for the election of Directors are noncumulative, which
means that the holders of more than 50% of the shares can elect 100% of the
Directors then nominated for election if they choose to do so and, in such
event, the holders of the remaining shares will not be able to elect any
Directors. The foregoing description and the description under "Certain
Anti-Takeover Provisions of the Articles of Incorporation and Bylaws" are
subject to the provisions contained in the Fund's Articles of Incorporation
and Bylaws.
Set forth below is information with respect to the Common Stock as of
March 1, 1996:
<TABLE>
<CAPTION>
AMOUNT OUTSTANDING EXCLUSIVE
AMOUNT HELD BY FUND OF SHARES HELD BY FUND FOR
AMOUNT AUTHORIZED FOR ITS ACCOUNT ITS OWN ACCOUNT
<S> <C> <C>
100,000,000 shares . . . . . . . . . . . 0 shares 9,589,377 shares
</TABLE>
CERTAIN ANTI-TAKEOVER PROVISIONS OF THE ARTICLES OF INCORPORATION AND
BYLAWS
The Fund presently has provisions in its Articles of Incorporation and
Bylaws (together, the "Charter Documents") that are intended to limit (i)
the ability of other entities or persons to acquire control of the Fund,
(ii) the Fund's freedom to engage in certain transactions or (iii) the
ability of the Fund's Directors or shareholders to amend the Charter
Documents or effect changes in the Fund's management. These provisions of
the Charter Documents may be regarded as "anti-takeover" provisions.
Commencing with the 1994 annual meeting of shareholders, the Board of
Directors was divided into three classes. Currently, the term of office of
one class will expire on the date of the 1996 annual meeting of
shareholders, the term of office of the second class will expire on the
date of the 1997 annual meeting of shareholders and the term of office of
the third class will expire on the date of the 1998 annual meeting of
shareholders. Upon the expiration of the term of office of each class as
set forth above, the Directors in such class will be elected for a term of
three years to succeed the Directors whose terms of office expire.
Accordingly, only those Directors in one class may be changed in any one
year, and it would require two years to change a majority of the Board of
Directors (although under Maryland law procedures are available for the
removal of Directors even if they are not then standing for re-election,
and under Securities and Exchange Commission regulations, procedures are
available for including shareholder proposals in management's annual proxy
statement). Such system of electing Directors is intended to have the
effect of maintaining the continuity of management and, thus, make it more
difficult for the Fund's shareholders to change the majority of Directors.
A Director may be removed from office only for cause and only by a vote of
at least 75% of the outstanding shares of the Fund entitled to vote for the
election of Directors. Under Maryland law and the Fund's Articles of
Incorporation, the affirmative vote of the holders of a majority of the
votes entitled to be cast is required for the consolidation of the Fund
with another corporation, a merger of the Fund with or into another corpor-
ation (except for certain mergers in which the Fund is the successor), a
statutory share exchange in which the Fund is not the successor, a sale or
transfer of all or substantially all of the Fund's assets, the dissolution
of the Fund and any amendment to the Fund's Articles of Incorporation. The
<PAGE>
affirmative vote of 75% (which is higher than that required under Maryland
law or the 1940 Act) of the outstanding shares of Common Stock of the Fund
is required to authorize the liquidation or dissolution of the Fund in the
absence of approval of the liquidation or dissolution by a majority of the
Continuing Directors of the Fund (defined for this purpose as those
Directors who are either members of the Board of Directors on the date of
closing of the offering of the shares of the Fund's Common Stock or
subsequently become Directors and whose election is approved by a majority
of the Continuing Directors then on the Board). In addition, the
affirmative vote of 75% (which is higher than that required under Maryland
law or the 1940 Act) of the outstanding shares of Common Stock of the Fund
is required generally to authorize any of the following transactions
involving a corporation, person or entity that is directly, or indirectly
through affiliates, the beneficial owner of more than 5% of the outstanding
shares of the Fund, or to amend the provisions of the Articles of
Incorporation relating to such transactions:
(i) merger, consolidation or statutory share exchange of
the Fund with or into any other corporation;
(ii) issuance of any securities of the Fund to any person or
entity for cash;
(iii) sale, lease or exchange of all or any substantial part
of the assets of the Fund to any entity or person (except assets having an
aggregate market value of less than $1,000,000); or
(iv) sale, lease or exchange to the Fund, in exchange for
securities of the Fund, of any assets of any entity or person (except
assets having an aggregate fair market value of less than $1,000,000).
However, such vote would not be required when, under certain
conditions, the Continuing Directors approve the transactions described in
(i)-(iv) above, although in certain cases involving merger, consolidation
or statutory share exchange or sale of all or substantially all of the
Fund's assets, the affirmative vote of a majority of the outstanding shares
of the Fund would nevertheless be required. The affirmative vote of 75%
(which is higher than that required under Maryland law or the 1940 Act) of
the outstanding shares of Common Stock of the Fund is required to convert
the Fund to an open-end investment company and to amend the Fund's Articles
of Incorporation to effect any such conversion unless, in each case, such
conversion or amendment has been approved by a majority of the Continuing
Directors. For the full text of these provisions, reference is made to the
Articles of Incorporation and Bylaws of the Fund, on file with the
Securities and Exchange Commission. See "Additional Information."
The provisions of the Charter Documents described above could have the
effect of depriving the owners of shares of opportunities to sell their
shares at a premium over prevailing market prices by discouraging a third
party from seeking to obtain control of the Fund in a tender offer or
similar transaction. The overall effect of these provisions is to render
more difficult the accomplishment of a merger or the assumption of control
by a principal shareholder. The Board of Directors of the Fund has
considered the foregoing anti-takeover provisions and concluded that they
are in the best interests of the Fund and its shareholders.
REPURCHASE OF SHARES
Shares of closed-end investment companies frequently trade at a
discount from net asset value. In recognition of the possibility that the
Fund's shares might similarly trade at a discount, the Fund's Board of
Directors has determined that it would be in the interest of shareholders
for the Fund to consider action to attempt to reduce or eliminate any
<PAGE>
market value discount from net asset value. To that end, the Board
contemplates that the Fund may from time to time take action either to
repurchase in the open market or to make a tender offer for its shares at
net asset value. The Board, in consultation with the Investment Manager,
will review on a periodic basis the desirability of open market repurchases
and/or tender offers for the Fund's Common Stock. The Board may at any
time, however, decide that the Fund should not make any such repurchase or
tender offer.
Subject to the Fund's investment restrictions with respect to
borrowings, the Fund may incur debt to finance repurchases and tenders.
The Fund will comply with the 1940 Act asset coverage requirements. See
"Investment Objective and Policies--Other Investment Practices -- Borrowing"
and "Investment Restrictions" in the SAI. Interest on such borrowings will
be a Fund expense and will reduce the Fund's net income.
The Fund anticipates that the market price of its shares will
generally vary from net asset value. The market price of the Fund's shares
will, among other things, be determined by the relative demand for and
supply of such shares in the market, the Fund's investment performance and
yield, the Fund's distributions, and investor perception of the Fund's
overall attractiveness as an investment as compared with other investment
alternatives. The fact that the Fund's shares may be the subject of tender
offers at net asset value from time to time may reduce the spread between
market price and net asset value that might otherwise exist. There can be
no assurance that open market shares repurchases or tender offers will
result in shares of the Fund's Common Stock trading at a price which is
equal or close to their net asset value.
Although the Board of Directors believes that share repurchases and
tenders generally would have a favorable effect on the market price of the
Fund's shares, it should be recognized that the acquisition of shares by
the Fund will decrease the total assets of the Fund and therefore have the
effect of increasing the Fund's expense ratio. If the Fund borrows to
effect any such acquisition of shares, the interest payments in respect of
such borrowings will also increase the Fund's expense ratio.
Although it may be changed, it is the Board's present policy not to
authorize repurchases or accept tenders if (i) such transaction, if
consummated, would (a) result in the delisting of the Fund's shares from
the New York Stock Exchange (the New York Stock Exchange having advised the
Fund that it would consider delisting if the aggregate market value of the
Fund's outstanding publicly held Common Stock is less than $5,000,000, the
number of publicly held shares of Common Stock falls below 600,000 or the
number of round-lot holders falls below 1,200) or (b) impair the Fund's
status as a regulated investment company under the Code (which would make
the Fund a taxable entity, causing the Fund's income to be taxed at the
corporate level in addition to the taxation of shareholders who receive
dividends from the Fund); (ii) the liquidation of portfolio securities to
repurchase such shares would have a material adverse effect on the Fund or
its shareholders; or (iii) there is any (a) material legal action or
proceeding instituted or threatened which challenges, in the Board's
judgment, such transactions or otherwise materially adversely affects the
Fund, (b) suspension of or limitation on prices for trading securities
generally on the New York Stock Exchange or any foreign exchange on which
portfolio securities of the Fund are traded, (c) declaration of a banking
moratorium by foreign authorities or any suspension of payment by banks in
China or Hong Kong, (d) limitation which affects the Fund or the issuers of
its portfolio securities imposed by federal, state, Chinese or Hong Kong
authorities on the extension of credit by lending institutions or on the
exchange of foreign currency, (e) commencement of war, armed hostilities or
other international or national calamity directly or indirectly involving
China or Hong Kong, or (f) other event or condition which, in the Board's
<PAGE>
judgment, would have a material adverse effect on the Fund or its
shareholders if shares were repurchased. The Board may modify these condi-
tions in light of experience.
Any tender offer made by the Fund will be at a price equal to the net
asset value of the shares as of the close of business on the date the offer
ends. Each offer will be made and shareholders notified in accordance with
the requirements of the Securities Exchange Act of 1934 and the 1940 Act,
either by publication or mailing or both. Each offering document will
contain such information as is prescribed by such laws and the rules and
regulations promulgated thereunder. When a tender offer is authorized to
be made by the Board, a shareholder wishing to accept the offer will be
required to tender all (but not less than all) of the shares owned by such
shareholder (or attributed to the shareholder for federal income tax
purposes under section 318 of the Code). The Fund will purchase all shares
tendered by a holder of shares at any time during the period of the tender
offer in accordance with the terms of the offer unless it determines to
accept none of the shares tendered in the tender offer (based upon one of
the conditions set forth above). Each person tendering shares will be
required to submit a check in the amount of $25.00 payable to the Fund,
which will be used to help defray the costs associated with effecting the
tender offer. This $25.00 fee will be imposed upon each tendering
shareholder any of whose tendered shares are purchased in the tender offer
and will be imposed regardless of the number of shares purchased. The Fund
expects the cost to the Fund of effecting a tender offer will exceed the
aggregate of all service charges received from those who tender their
shares. Costs associated with the tender offer will be charged against
capital.
Shares that have been purchased by the Fund will be retired and will
be authorized but unissued shares. The purchase of shares by the Fund will
reduce the Fund's net asset value.
If the Fund must liquidate portfolio securities in order to purchase
Fund shares tendered, and if such securities have been held for less than
three months, such sales may jeopardize the Fund's tax status as a
regulated investment company under the Code because of the limitation
imposed thereunder that not more than 30% of the Fund's gross income may be
derived from the sale of securities held for less than three months. The
liquidation of securities held for less than three months to purchase Fund
shares tendered would reduce the ability of the Fund to sell other
securities held for less than three months. The inability of the Fund to
sell such securities in the ordinary course of its portfolio management may
adversely affect the Fund's return. See "Taxation -- United States Federal
Income Taxes -- General" in the SAI.
CONVERSION TO OPEN-END INVESTMENT COMPANY
If the Fund's shares are trading at a discount from net asset value,
the Board may consider whether to submit to shareholders a proposal that
the Fund be converted to an open-end investment company. Any such proposal
would be subject to the special voting requirements described above under
"Certain Anti-Takeover Provisions of the Articles of Incorporation and
Bylaws." Shareholders of an open-end investment company may require the
company to redeem their shares at any time (except in certain circumstances
as authorized by or under the 1940 Act) at their net asset value, less
redemption charge, if any, as might be in effect at the time of redemption.
The Board may, however, determine that the Fund should not take any action
to convert the Fund to an open-end investment company or that, due to the
characteristics of the Fund's portfolio securities, it may be inappropriate
to convert the Fund to an open-end investment company.
<PAGE>
THE SECURITIES MARKETS IN CHINA AND HONG KONG
The following information has been extracted from various government
and private publications. The Fund and its Board of Directors make no
representation as to the accuracy of the information, nor has the Fund or
its Board of Directors attempted to verify it; furthermore, no
representation is made that any correlation exists between the PRC and Hong
Kong or their respective economies in general and the performance of the
Fund.
Trade and investment between China and Hong Kong is facilitated by a
similar culture, a common written language and geographic proximity. In
1994, exports from the PRC to Hong Kong totalled US$32.4 billion, a 31.9%
increase over 1993 exports. Imports into the PRC from Hong Kong, however,
totalled only US$9.5 billion in 1994, a decrease of 9.5% from 1993. In
1994, foreign direct investment in the PRC totalled US$8.3 billion, of
which Hong Kong accounted for almost a quarter.
Many Hong Kong listed companies have substantial assets in, and derive
substantial revenues from, the PRC. Many PRC listed companies depend on
Hong Kong for distribution of their products and for managerial and
financial expertise. As of March 7, 1996, 18 PRC-owned companies had
listed special "H" shares in Hong Kong. Some "H" shares are also traded in
the United States in the form of American Depositary Receipts. These types
of listings are expected to increase. Moreover, a few of such PRC-owned
companies have organized off-shore holding companies whose assets are
principally investments in Chinese enterprises, and the holding companies
have listed their equity on other major stock exchanges, such as the New
York Stock Exchange.
The PRC and Hong Kong differ significantly with respect to historical
background, governmental systems, development and corporate regulation.
See "The People's Republic of China". The securities markets in these
jurisdictions also vary in their structure, operation and regulatory
environment, as indicated in the following discussion.
THE PEOPLE'S REPUBLIC OF CHINA
The first securities exchange in the PRC was established in Shanghai
in 1914 and focused principally on the trading of government bonds. In
1949, the Shanghai Securities Exchange, as well as exchanges in Beijing and
Tianjin, were closed by the communist government. Prior to the re-opening
of the Shanghai Securities Exchange in December 1990, securities,
consisting predominantly of government and state enterprise debt
securities, were traded on over-the-counter markets in various cities in
the PRC. The Shanghai Securities Exchange and the Shenzhen Stock Exchange,
which opened officially in 1990 and 1991, respectively, are currently the
only two approved securities markets for the trading of equity securities
in the PRC.
Equity securities of PRC companies consist of "A" shares, "B" shares
and "H" shares. "A" shares can be held only by PRC state-owned entities,
PRC non-state-owned entities and PRC individuals. "B" shares, which are
listed and traded on the Shanghai Securities Exchange or the Shenzhen Stock
Exchange, may be held only by non-PRC individuals and entities, including
overseas PRC citizens. "B" shares were first listed and traded on the
Shanghai Securities Exchange and the Shenzhen Stock Exchange in February
1992. "H" shares, which are listed and traded on the Stock Exchange of
Hong Kong, may be held only by non-PRC individuals and entities. "H"
shares were first listed on the Stock Exchange of Hong Kong in July 1993.
Shares of off-shore holding companies listed on the New York Stock
Exchange, may be held by any individual or entity. The indirect listing of
<PAGE>
a PRC enterprise on the New York Stock Exchange first appeared in late
1992.
"B" and "H" shares have the same rights and obligations as "A" shares,
except for the national status of the individuals and entities permitted to
own each class of shares and the currency in which they trade and settle.
The proportion of "B" or "H" shares to the total issued share capital of a
company is subject to the approval of the China Securities Regulatory
Commission. To date, voting control of all companies issuing "B" and "H"
shares has remained (and is expected to remain) in the hands of PRC
shareholders, most often governmental or quasi-governmental bodies.
Historically, "B" shares have traded at a discount to "A" shares of
the same issuer. Such discounts currently range between approximately 10%
and approximately 80% for shares listed on the Shenzhen Stock Exchange and
between approximately 47% and approximately 84% for shares listed on the
Shanghai Securities Exchange. Such discount is attributable in part to the
fact that ownership of "A" shares and "B" shares is legally mutually
exclusive, and thus the relative prices of each class of shares is affected
by, among other things, the substantial uninvested savings accumulated in
prior years and now available for individual investment in "A" shares
relative to the amount of "A" shares currently listed, the greater variety
of alternative investments available to non-PRC investors, the perception
of the PRC markets by non-PRC investors and the relative sophistication of
PRC and non-PRC investors. For the same reasons, the "H" shares of issuers
which also have an "A" share listing may trade at a discount to the "A"
shares.
Primary Markets. At December 31, 1995 there were 220 equity issues
listed on the Shanghai Securities Exchange, with a total market
capitalization of RMB252.6 billion, a 2.9% decrease from the total market
capitalization of RMB260 billion at December 31, 1994. The value of all
equity transactions effected on the Shanghai Securities Exchange at
December 31, 1995 and December 31, 1994 amounted to RMB310 billion and
RMB574 billion, respectively, with daily trading averages of RMB1.2 billion
and RMB2.3 billion, respectively.
At December 31, 1995 there were 149 equity issues listed on the
Shenzhen Stock Exchange, with a total market capitalization of
approximately RMB94,753 million, an 11.4% decrease from the total market
capitalization of RMB107,000 million at December 31, 1994. The value of
all "B" share transactions effected on the Shenzhen Stock Exchange at
December 31, 1995 and December 31, 1994 amounted to RMB1,616 million and
RMB1,586 million, respectively, with daily trading averages of RMB6 million
and RMB5.8 million, respectively.
Market Performance. "A" share prices on the Shanghai Securities
Exchange have increased substantially since the commencement of trading,
due principally to the limited supply of securities, a significant surplus
of personal savings in the PRC and the limited number of attractive
investments available to PRC residents. The Shanghai Securities Exchange
has experienced significant price volatility, however. The authorities
have in the past imposed limits on daily price movements in an effort to
curb volatility, these price movement restrictions were most recently
lifted for all listed shares on the Shanghai Securities Exchange in May
1992 but purchasing restrictions were imposed shortly thereafter.
"A" share prices and trading volumes on the Shenzhen Stock Exchange
have also experienced significant volatility. In late 1990, for example,
speculation caused share prices to rise sharply in response to the lowering
of bank interest rates and other factors. In order to curb speculation, a
series of restrictive measures were imposed in December 1990, including the
introduction of stamp duty, dividend withholding tax and daily price
<PAGE>
limits. Shortly thereafter, trading volume and share prices dropped
sharply and did not recover for nearly a year.
The performance of "B" Shares in the PRC can be illustrated by the
applicable stock price indices. The principal index calculated for "B"
shares listed on the Shanghai Securities Exchange is the Shanghai
Securities Exchange "B Share" Index. This Index adopts the weighted stock
price average of "B" shares, using listed volumes as the weight and taking
January 21, 1992 as the basis date. The Shanghai Securities Exchange "B"
Share Index reached a high in 1992 of 72.28 and a low of 57.43. The Index
reached a high of 94.92 and a low of 51.39 in 1993. The high in 1994 was
103.90 and the low 60.
The Shenzhen Stock Exchange "B" Share Index is a market-value weighted
index of all "B" shares listed on the Shenzhen Stock Exchange. The Index
had an initial value of 100 for February 28, 1992, the first trading date
of the first listed "B" share on the Shenzhen Stock Exchange. The Shenzhen
Stock Exchange "B" Share Index reached a high of 140.02 and a low of 105.72
in 1992. In 1993 the high was 185.44 and the low 80.63 and the Index
closed the year at 141.4. The high in 1994 was 142.85 and the low 85.07,
with the Index at 86.7 at year end.
Overall volatility of "B" share markets in the PRC is expected to
continue and various stabilizing measures are likely to be imposed by the
authorities from time to time. Such measures and the volatility of the
markets generally may adversely affect the prices of "B" shares.
The following table indicates the quarterly performance of the
Shanghai Securities Exchange "B" Share Index and the Shenzhen Stock
Exchange "B" Share Index for each of the four quarters of the year ended
December 31, 1995:
<TABLE>
Shenzhen Stock
Shanghai Securities Exchange "B"
End of Quarter Exchange "B" Share Index Share Index
<S> <C> <C>
March 31, 1995 57.17 74.1
June 30, 1995 53.43 66.4
September 30, 1995 58.32 70.8
December 31, 1995 47.69 59.5
___________________________
Source: Shanghai Securities Exchange and the Shenzhen Stock Exchange.
</TABLE>
Regulation and Supervision. The PRC does not yet have a comprehensive
body of national securities legislation, although a national securities law
is currently in draft form and is expected to be promulgated in 1996.
Overall responsibility for the formulation and development of securities
markets of the PRC has been delegated by the PRC State Council to the China
Securities Commission. Among other things, it has responsibility for
organizing the drafting of laws and regulations relating to the securities
markets and for formulating guiding policies, regulations and development
strategies for the PRC securities markets. The China Securities Commission
also has authority to supervise the operations of the China Securities
Regulatory Commission (the "CSRC"). The CSRC is described as the
securities regulatory executive organization of the China Securities
Commission. Under the authority of the China Securities Commission, the
CSRC's responsibilities include rulemaking for, and regulation of, the PRC
securities markets.
<PAGE>
The State Council has also determined, among other things, that the
securities exchanges in Shanghai and Shenzhen are to be governed by their
local governments and supervised by the CSRC. The People's Bank of China
(the "PBOC") is to examine, approve and govern securities institutions (and
report thereon to the China Securities Commission). The Shenzhen Stock
Exchange and the Shanghai Securities Exchange have historically operated
pursuant to locally promulgated rules and regulations, and, as a practical
matter, have functioned (and continue to function) as separate and distinct
markets.
A company seeking to issue and list "A" shares on the Shanghai
Securities Exchange or the Shenzhen Stock Exchange must obtain the approval
of the CSRC. Companies seeking to issue and list "B" shares on the
Shanghai Securities Exchange or the Shenzhen Stock Exchange, companies
seeking to issue and list "H" shares on the Stock Exchange of Hong Kong and
companies seeking to issue and list shares on other non-PRC exchanges
(including the New York Stock Exchange) must meet certain additional
financial and other requirements. In addition, the listing must also meet
and comply with the listing rules of the relevant exchange and obtain the
approval of the China Securities Commission.
Since early 1992 when "B" shares were introduced, a number of
regulations have been promulgated in relation to the issue of and trading
in securities and disclosure of information. On April 22, 1993, the State
Council promulgated the Provisional Regulations Concerning the Issue and
Trading of Shares. These regulations deal with, among other things, the
application and approval procedure for domestic public offerings of equity
securities, trading, deposit and settlement of equity securities,
acquisitions of listed companies and disclosure of information with respect
to listed companies. The regulations provide that separate provisions will
be promulgated in relation to the issue of and trading in "B" shares and
"H" shares. However, certain of the provisions of the regulations, such as
those relating to acquisitions of listed companies and disclosure of
information, apply to listed companies in general (without being confined
to companies listed on any particular stock exchange) and may be extended
to apply to PRC companies with shares listed on stock exchanges outside the
PRC.
On June 10, 1993, the CSRC, pursuant to the Provisional Regulations
Concerning the Issue and Trading of Shares, promulgated the Implementing
Measures (Provisional) on Disclosure of Information (the "Disclosure
Measures"). The Disclosure Measures apply primarily to "A" shares listed
on the Shanghai Securities Exchange or the Shenzhen Stock Exchange.
However, the Disclosure Measures contain provisions which apply generally
to companies with shares listed on both domestic stock exchanges and stock
exchanges outside the PRC. These provisions cover matters such as the
publication of interim and annual reports and the disclosure of material
events by way of public announcement.
On September 2, 1993, the China Securities Commission promulgated the
Provisional Measures on Prohibition of Fraudulent Conduct relating to
Securities which prohibit the use of insider information in connection with
the issue of or trading in securities, the use of funds or information or
the abuse of power in creating a false or disorderly market or influencing
the market price of securities, inducing investors to make investment
decisions without knowledge of actual circumstances, and the making of any
statement in connection with the issue of and trading in securities which
is false or materially misleading and in respect of which there is any
material omission.
On August 4, 1994, the PRC State Council promulgated the Special
Regulations on Foreign Offerings and Listings of Companies Limited by
Shares. These regulations govern the application for, and implementation
<PAGE>
of, the issue and listing of shares outside of China by companies limited
by shares and state-owned enterprises reorganized into companies limited by
shares. They also cover the articles of association and financial
management of such companies. The regulations stipulate that the
calculation of share dividends must be in Renminbi and payment of such
dividends must be in foreign currencies.
On December 25, 1995, the PRC State Council promulgated the
Regulations for Domestic Listed Foreign Shares of Companies Limited by
Shares. These regulations supersede local "B" share regulations issued by
Shanghai and Shenzhen in 1991 and transfer the power to approve the issue
of "B" shares from the Shanghai and Shenzhen securities commissions to the
China Securities Regulatory Commission. These regulations address the
issue, subscription, trading and declaration of dividends and other
distributions of "B" shares. They stipulate that the calculation of share
dividends must be in Renminbi and payment of such dividends must be in
foreign currencies. Dividends on "B" shares and gains from the trading of
"B" shares may be remitted abroad following the payment of PRC applicable
taxes, if any.
In addition, any company whose shares are listed on the Shanghai
Securities Exchange will be subject to the rules and regulations
promulgated by the Shanghai Securities Exchange.
PRC companies that list "H" shares on the Stock Exchange of Hong Kong
are subject to, among other things, the Rules Governing the Listing of
Securities on The Stock Exchange of Hong Kong Limited (the "Stock Exchange
of Hong Kong Rules"), the Securities (Disclosure of Interests) Ordinance of
Hong Kong and the Hong Kong Code on Takeovers and Mergers and Share
Repurchases. The Stock Exchange of Hong Kong Rules were recently amended
to include provisions specifically applicable to PRC companies which have
their primary international listing of shares on the Stock Exchange of Hong
Kong.
Corporate law in China is rapidly developing, but still does not
provide a systematic and comprehensive legal framework for the regulation
of corporations comparable to that which exists in the United States. In
December 1993, the PRC enacted its first national company law ("Company
Law") which became effective on 1st July 1994. The PRC Company Law
provides for two corporate forms: the limited liability company and the
company limited by shares, and aims to re-organize existing state-owned
enterprises into either one of these two corporate forms. Foreign invested
companies limited by shares, however, are governed by the "Provisional
Regulations on Several Issues Concerning the Establishment of Foreign
Invested Companies Limited by Shares" (the "Regulations"). The Regulations
make clear that the Company Law governs such companies only with respect to
matters not covered in the Regulations and the Special Regulations on
Foreign Offerings and Listings of Companies Limited by Shares. The Company
Law is also generally applicable to foreign invested enterprises to the
extent regulations relating more specifically to foreign investment
enterprises are silent. The Company Law covers many of the issues
addressed in corporate legislation in the United States, including
provisions on the fiduciary responsibility of directors and officers and
the rights of shareholders, but this legal protection has yet to be tested
in practice. It is unclear what effect the PRC Company Law will have on
prior national enactments, such as the Opinion on Standards for Companies
Limited by Shares and Opinion on Standards for Limited Liability Companies
("Standards Opinions"), promulgated in May 1992, and local company law
regulations which exist in the Shenzhen Special Economic Zone and Shanghai.
Indications are that the Shenzhen and Shanghai regulations will continue in
force in so far as they do not conflict with the national Company Law. The
legal status of companies limited by shares established pursuant to the
<PAGE>
Standards Opinions are preserved and these companies are required within a
specified period of time to conform to the provisions of the Company Law.
Trading and Settlement. Trading in "B" shares must be carried out on
the securities exchanges on which the shares are listed and is restricted
to non-PRC investors and PRC citizens residing outside China. Trades must
be executed through securities houses approved by the PBOC to trade in "B"
shares within the PRC. "B" shares are traded on the exchanges in book-
entry form using the automated settlement and transfer system of each
exchange, which effect each transaction based on price and time priority.
Trading in shares on the Shanghai Securities Exchange and the Shenzhen
Stock Exchange is scripless. Foreign securities houses acting as agents of
authorized domestic securities houses are required to maintain a designated
"B" shares trading account with the authorized domestic securities houses
for the settlement of any purchase or sale of "B" shares. Dividends on "B"
shares and gains from the trading of "B" shares may be remitted abroad
following payment of any applicable tax. See "Taxation -- China Taxes."
Trading of "B" shares off the stock exchanges, short selling, market
manipulation and trading on the basis of material non-public information
are prohibited.
The par value of "B" shares are denominated in Renminbi, but "B"
shares are quoted in U.S. dollars on the Shanghai Securities Exchange and
in Hong Kong dollars on the Shenzhen Stock Exchange. "B" share
transactions on the Shanghai Securities Exchange must be settled in U.S.
dollars, while transactions on the Shenzhen Stock Exchange must be settled
in Hong Kong dollars. In each case, settlement occurs on the third busi-
ness day after the transaction date.
The Shanghai Securities Central Clearing and Registration Company, a
company wholly owned by the Shanghai Securities Exchange, acts as the
depository for all "B" shares listed on that exchange. The clearing system
for the Shenzhen Securities Exchange was restructured in November 1995
whereupon the Shenzhen Securities Registrars Co., Ltd. was reorganized to
become the Shenzhen Securities Clearing Co., Ltd. (the "Clearing Company").
The Clearing Company, a wholly-owned subsidiary of the Shenzhen Securities
Exchange, operates a central clearing and settlement system for both A and
B shares listed on the Shenzhen Stock Exchange. The Clearing Company is
also the official institution for the registration of B shares in Shenzhen.
Foreign Investment Restrictions. As part of its overall plan of
economic liberalization, the PRC has increasingly opened its economy to
direct foreign investment. In the 1980s, the PRC created special economic
zones to attract foreign capital and technology and developed an extensive
set of rules and regulations governing direct foreign investment in joint
ventures and similar business arrangements. The introduction of "B" shares
and "H" shares and other non-PRC listings represents additional means of
attracting foreign capital. Despite this increasing openness, significant
deterrents to foreign investment exist. Direct foreign investment is
subject to approval from the relevant governmental authorities, which can
be a lengthy and complicated process. Moreover, in 1995, the PRC
government promulgated the Interim Provisions on Directing Foreign
Investment which indicate a tightening of control over the approval of
foreign investment projects in China and a more restrictive State policy
towards foreign investment generally. In addition, the Renminbi is not
freely convertible, although foreign investment enterprises may convert
Renminbi into U.S. dollars at official foreign exchange adjustment centers
("swap centers") or, in the near future through CFETC members on the PRC
interbank market for approved purposes and foreign investors are permitted
to repatriate earnings denominated in foreign currency. PRC government
authorities have recently announced that foreign investment enterprises may
be able to convert current account items denominated in Renminbi into
foreign currencies as early as later this year. However, capital account
<PAGE>
items denominated in Renminbi will remain technically inconvertible for the
foreseeable future.
HONG KONG
Formal trading of investment securities existed in Hong Kong prior to
1900. In 1986, the four stock exchanges in existence at that time were
merged to form the Stock Exchange of Hong Kong. The Stock Exchange of Hong
Kong had a total market capitalization as of December 31, 1995 of
approximately US$301 billion, a 13% increase from the total market
capitalization at December 31, 1994 and was the second largest stock market
by market capitalization in Asia, behind only that of Japan. As of
December 31, 1995, 542 companies and 1,033 securities were listed on the
Stock Exchange of Hong Kong. The securities listed include ordinary
shares, preference shares, debt securities, unit trusts, and warrants and
other rights. The value of all equity transactions effected on the Stock
Exchange of Hong Kong at December 31, 1995 and December 31, 1994 amounted
to HK$826,801 million and HK$1,137,414 million, respectively, with daily
trading averages of HK$3,347 million and HK$4,586 million, respectively.
In addition to an active stock market, Hong Kong has an active foreign
exchange market, an interbank money market, a large gold bullion market and
a futures exchange. Hong Kong is also one of the major Asian centers for
venture capital businesses, and many such businesses have their Asian
headquarters in Hong Kong.
Primary Market. Hong Kong has an active new issue market for equity
securities. The following table summarizes new issues listed on the Stock
Exchange of Hong Kong since 1986.
<TABLE>
<CAPTION>
Number Value of Value of
Year of Issues (1) Share Issues(2) Rights Issues
(HK$millions) (US$millions) (HK$millions) (US$millions)
<S> <C> <C> <C> <C> <C>
1986 15 2,032 261 6,515 835
1987 31 2,819 361 28,388 3,638
1988 38 1,301 167 5,122 657
1989 12 3,368 432 5,574 715
1990 17 1,577 202 2,511 322
1991 53 5,419 717 9,535 1,237
1992 64 8,676 1,112 9,933 1,273
1993 68 9,522 1,221 12,269 1,573
1994 53 17,051 2206 5644 730
1995 26 7,642 989 1290 167
__________________________
(1) Includes listings of shares not involving an offering.
(2) 1994 and 1995 figures are calculated as the sum of fees for subscription, offers for sale and investment company
securities; 1990-1993 figures are calculated as the sum of offers for subscription and offers for sale; prior to 1993, the
figures reflect new listings.
Source: Stock Exchange of Hong Kong; Stock Exchange of Hong Kong, Fact Book, 1986-1994.
</TABLE>
Secondary Market. The first table below sets out the number of
companies and securities listed and value of securities traded on the Stock
Exchange of Hong Kong during each year since 1986, and the total market
capitalization at the end of each such year. The second table lists the
<PAGE>
ten largest companies listed on the Stock Exchange of Hong Kong measured by
market capitalization at December 31, 1995.
<TABLE>
<CAPTION>
Listed Listed Value of
Year Companies Securities Securities Traded Market Capitalization
(HK$millions) (US$millions) (HK$millions) (US$millions)
<S> <C> <C> <C> <C> <C> <C>
1986 253 335 123,128 15,786 419,281 53,754
1987 276 412 371,406 47,616 419,612 53,796
1988 304 479 199,481 25,574 580,378 74,407
1989 298 479 299,147 38,352 605,010 77,565
1990 299 520 288,715 37,015 650,410 83,386
1991 357 597 334,104 42,834 949,172 122,791
1992 413 749 700,578 89,818 1,332,184 172,339
1993 477 891 1,222,675 157,561 2,975,379 381,459
1994 529 1,006 1,137,414 145,822 2,085,182 267,331
1995 542 1,033 826,801 106,001 2,348,310 301,065
__________________________
(1) Based on equity securities only.
Source: Stock Exchange of Hong Kong, Fact Book, 1986-1990; Securities Journal Trading Record January-December 1991, January-
December 1992, January-December 1993 and February 1996.
</TABLE>
<TABLE>
<CAPTION>
Percentage of
Shares Market Total Market
Listed Company Outstanding Capitalization Capitalization
(millions) (HK$millions) (US$millions) (%)
<S> <C> <C> <C> <C>
HSBC Holdings plc (HKD shares) 1,775 306,112 39,601 13.04
Hutchison Whampoa Ltd. 3,615 170,254 22,025 7.25
Hong Kong Telecommunications Ltd. 11,153 153,909 19,911 6.55
Sun Hung Kai Properties Ltd. 2,325 147,027 19,020 6.26
Hang Seng Bank Ltd. 1,932 133,757 17,304 5.70
Cheung Kong (Holdings) Ltd. 2,198 103,505 13,390 4.41
Swire Pacific Ltd. ("A" & "B") 4,047 87,891 11,370 3.74
Henderson Land Dev. Co. Ltd. 1,596 74,373 9,621 3.17
China Light & Power Co. Ltd. 1,991 70,867 9,168 3.02
New World Development Co. Ltd. 1,682 56,697 7,334 2.41
__________________________
Source: Stock Exchange of Hong Kong, The Securities Journal Trading Record, January 1994 and February 1996. US$ amounts have
been calculated at a rate of US$1 = HK$7.73, the rate quoted by the Asian Wall Street Journal on December 30, 1995.
</TABLE>
At December 31, 1995, in addition to 550 issues of ordinary shares,
other securities traded on the Stock Exchange of Hong Kong included 244
warrant issues and 184 debt issues. The table below shows a comparison of
annual trading volumes of these types of securities for the years 1986
through 1995.
<TABLE>
<CAPTION>
Year Equities Warrants Debt Securities
(HK$millions) (US$millions) (HK$millions) (US$millions) (HK$millions) (US$millions)
<S> <C> <C> <C> <C> <C> <C>
1986 119,386 15,306 3,397 436 345 44
1987 352,628 45,209 18,270 2,342 509 65
1988 184,352 23,635 14,695 1,884 434 56
<PAGE>
1989 269,910 34,604 28,933 3,709 303 39
1990 270,533 34,684 17,923 2,298 259 33
1991 300,578 38,536 33,198 4,256 242 31
1992 608,618 78,028 91,681 11,754 279 36
1993 1,022,966 131,826 126,243 16,268 57 7
1994 974,380 124,921 108,079 13,856 1.33 .17
1995 741,229 95,029 64,817 8,310 365 47
____________________
Source: Stock Exchange of Hong Kong; Stock Exchange of Hong Kong, Fact Book 1986-1994.
</TABLE>
Market Performance. The Hang Seng Index, based on the market value of
33 selected companies, is the most widely followed indicator of share price
performance in Hong Kong calculated by dividing the total market value of
the shares of the companies in the index by the market value of such
companies on July 31, 1984 (the base day), and multiplying the quotient by
100 (the index on the base day), with appropriate adjustments made for
capital changes. Since the Hang Seng Index is computed on an arithmetic
basis it is strongly influenced by the constituent companies with the
largest capitalization.
<TABLE>
<CAPTION>
Year High Low Period-End
<S> <C> <C> <C>
1986 2,568.3 1,559.9 2,568.3
1987 3,949.7 1,894.9 2,302.8
1988 2,772.5 2,223.0 2,687.4
1989 3,309.6 2,093.6 2,836.6
1990 3,559.9 2,736.6 3,024.6
1991 4,297.3 2,984.0 4,297.3
1992 6,447.1 4,301.8 5,512.4
1993 11,888.39 5,437.8 11,888.39
1994 12,201.1 7,707.8 8,191.04
1995 10,073.4 6,967.9 10,073.4
____________________
Source: Stock Exchange of Hong Kong, Securities Journal Trading Record.
</TABLE>
The Hang Seng China Enterprises Index ("HSCEI") was launched in 1994
to keep track of the performance of the increasing number of H shares
issued by PRC incorporated enterprises listed in Hong Kong. The base value
of the HSCEI was set at 1000 on July 8, 1994, the date on which the number
of H-share companies reached 10. The HSCEI series is backdated to July 15,
1993 when the first PRC enterprise was listed on the Stock Exchange of Hong
Kong. All H-share companies listed on the Stock Exchange of Hong Kong are
included in the Index. As with the Hang Seng Index, each constituent stock
is weighted so that it will influence the index in proportion to its
respective market value. The share price of a stock multiplied by the
number of shares outstanding gives the market value for that issue. The
current index for any day is calculated by multiplying that day's aggregate
market value of constituent stocks by the previous day's closing index and
dividing by the previous day's closing aggregate market value of
constituent stocks. No adjustment is made when constituent stocks go ex-
dividend.
The HSCEI reached a high for 1994 of 1947.43 on January 3 before
closing the year at 1069.67. In 1995 the index reached a high of 1098.58
on July 12 and a low of 684.85 on November 16 before closing the year at
757.12. The table below shows the highest and lowest values and the month
<PAGE>
end value of the HSCEI in each of the months from January 1994 to December
1995.
<TABLE>
<CAPTION>
MONTH HIGH LOW CLOSE
<S> <C> <C> <C>
1994 January 1947.43 1609.93 1663.38
February 1717.40 1538.54 1575.08
March 1542.21 1259.38 1294.27
April 1339.24 1240.21 1240.21
May 1246.86 1058.90 1236.36
June 1229.20 996.17 1012.26
July 1242.96 976.10 1242.96
August 1357.49 1193.10 1292.78
September 1516.61 1363.21 1376.09
October 1389.41 1284.69 1388.98
November 1369.29 1172.00 1172.00
December 1136.94 977.62 1069.67
1995 January 1021.68 864.28 895.58
February 1060.12 897.72 1027.29
March 1033.75 932.99 1026.11
April 1014.63 926.38 927.91
May 1089.80 920.38 1079.83
June 1081.79 1027.18 1030.47
July 1098.58 1017.16 1067.41
August 1077.34 918.37 927.68
September 978.52 897.14 897.14
October 920.26 850.55 855.74
November 859.56 672.70 783.22
December 794.61 684.85 757.12
_______________________
Source: Stock Exchange of Hong Kong, Fact Book 1994, Fact Sheet, 3rd Quarter 1995, Monthly Market Statistics (December 1995),
and Hang Seng Services Limited.
</TABLE>
The Hong Kong stock market can be volatile and is sensitive both to
developments in the PRC and to the strength of other world markets. For
example, in 1989, the Hang Seng Index rose to 3,310 in mid-May from its
previous year-end level of 2,687 but fell to 2,094 in early June following
the events in Tiananmen Square in Beijing. The Hang Seng Index gradually
climbed in subsequent months but fell by 181 points, or approximately 6.5%
on October 16, 1989 following a substantial fall in U.S. stock markets, and
at the year end closed at a level of 2,837. In late 1992 and early 1993,
the Hang Seng Index fluctuated significantly in reaction to the ongoing
disagreements between the PRC and Great Britain over the financing of the
construction of a new international airport in Hong Kong and democratic
reform proposals for Hong Kong suggested by Governor Patten of Hong Kong.
In 1993 and early 1994, the Hang Seng Index reached record highs before
dropping dramatically. The market remained weak throughout 1994, affected
by increases in interest rates in Hong Kong, government efforts to cool
down the overheated property market, and uncertainties regarding Chinese
economic development. Market capitalization was reduced by approximately
3% at the close of 1994 as a result of the delisting of Jardine Matheson
Holdings and Jardine Strategic Holdings. The primary market, however, was
relatively active in 1994, with an increase in total funds raised of
HK$345,888 million compared to HK$288,232 in 1993, with China incorporated
enterprises making significant contributions. The market rallied in 1995
with the Hang Seng Index 23% higher at the end of 1995 than at the end of
1994 (although still 15% below its 1993 close). H Shares, however, fared
<PAGE>
less well than others with prices affected by worries over China's
austerity measures and fears that trade and intellectual property frictions
with the United States might jeopardize China's global trading position.
Trading and Settlement. Trading on the Stock Exchange of Hong Kong is
conducted through a computerized system that conveys bid and asked prices
for securities. Trades are then effected on a matched trade basis directly
between buyers and sellers. All securities are traded in board lots. For
most companies a board lot is 2,000 shares; odd lots are traded separately,
usually at a small discount to the board lot prices. Settlement is made on
a 48-hour basis. Share certificates in board lots, together with transfer
deeds, must be delivered on the second day following the transaction.
Payment is due against delivery. Hong Kong has a central clearing and
settlement system for listed securities which provides for computerized
book-entry settlement of transactions by members of the system. The
central clearing and settlement system requires trades effected through the
system to be settled on the second day after the trade takes place. Where
the relevant shares are traded through the central clearing system, the
share certificates are kept at the central depository and settlement is
electronically recorded in stock accounts of participants held by the
depository. There are no market-makers in Hong Kong, but exchange dealers
may act as dual capacity broker-dealers. Short selling of securities at or
through the Stock Exchange of Hong Kong is currently proscribed.
Regulation and Supervision. The Securities and Futures Commission
("SFC"), an autonomous statutory body outside the civil service that
provides a general regulatory framework for the securities and futures
industries, was established by the Hong Kong Government in May 1989. The
SFC administers certain elements of Hong Kong securities law including
those ordinances governing the protection of investors, disclosure of
interests and insider dealing.
The Stock Exchange of Hong Kong promulgates its own rules governing
share trading and disclosure of information to shareholders and investors.
Companies listing on the Stock Exchange of Hong Kong enter into a listing
agreement with the Stock Exchange of Hong Kong which includes provisions
requiring that listed companies send interim and audited annual accounts to
shareholders and make prompt public disclosure of material transactions and
developments. In addition, the Hong Kong Codes on Takeovers and Mergers
and Share Repurchases (issued by the SFC but not having the force of law)
provides guidelines for the fair treatment of shareholders and the preser-
vation of an impartial trading market in connection with takeovers and
mergers involving listed companies in Hong Kong.
Foreign Investment Restrictions. There are no regulations governing
foreign investment in Hong Kong. There are no exchange control
regulations, and investors have freedom in the movement of capital and the
repatriation of profits. Funds invested in Hong Kong can be repatriated at
will; dividends and interest are freely remittable.
PORTFOLIO TRANSACTIONS AND BROKERAGE
In placing portfolio transactions, the Investment Manager uses its
best judgment to choose the broker most capable of providing the brokerage
services necessary to obtain the best available price and most favorable
execution. The full range and quality of brokerage services available is
considered in making these determinations. Currently, it is the Fund's
policy that the Investment Manager may, when it believes it to be in the
best interest of the Fund, pay higher commissions than might otherwise be
obtainable in recognition of brokerage services felt necessary for the
achievement of best available price and most favorable execution of certain
securities transactions.
<PAGE>
In those instances where it is reasonably determined that more than
one broker can offer the brokerage services needed to obtain the best
available price and most favorable execution, consideration may be given to
those brokers which supply investment research, market and statistical
information and other services related to investment research (such as
computer hardware and software or research seminars) to the Fund or the
Investment Manager. To the extent brokerage commissions are negotiated,
the Investment Manager may cause the Fund to pay a broker-dealer which
furnishes such research along with brokerage services a higher commission
than that which might be charged by another broker-dealer for effecting the
same transactions without providing research; provided that such commission
is deemed reasonable in terms of either that particular transaction or the
overall responsibilities of the Investment Manager to the Fund. The Fund
will not pay to any affiliate of the Investment Manager a higher commission
rate specifically for the purpose of obtaining research services. In
addition, the Fund will not, in connection with portfolio transactions in
which a broker-dealer acts as a principal, compensate such broker-dealer
for providing investment research or other non-execution services.
Although certain research, market and statistical information services from
brokers and dealers can be useful to the Fund and the Investment Manager,
the management of the Fund believes that such services are only
supplemental to the Investment Manager's own research efforts, since the
information must still be analyzed, weighed and reviewed by the Investment
Manager's staff. The Investment Manager may deem certain of these research
services useful in the performance of its obligations, but may be unable
and will not attempt to determine the amount by which such services may
reduce its expenses. Not all of these services may be useful to the Fund.
Certain of these services may be useful to other clients of the Investment
Manager.
Some securities considered for investment by the Fund may also be
appropriate for other funds and/or clients served by the Investment
Manager. If purchases or sales of securities for the Fund and one or more
of these other funds or clients served by the Investment Manager are
considered at or about the same time, transactions in such securities will
be allocated among the several funds and clients in a manner deemed
equitable by the Investment Manager.
The Fund anticipates that, in connection with the execution of
portfolio transactions on its behalf by the Investment Manager, certain
affiliated persons (as such term is defined in the 1940 Act) of the Fund,
or affiliated persons of such persons, including, but not limited to,
Baring Securities Limited and Dillon, Read & Co. Inc. may from time to time
be selected to perform brokerage services for the Fund, subject to the
considerations discussed above, but are prohibited by the 1940 Act from
dealing with the Fund as principal in the purchase or sale of securities.
In order for such an affiliated person to be permitted to effect any
portfolio transactions for the Fund, the commissions, fees or other
remuneration received by such affiliated person must be reasonable and fair
compared to the commissions, fees or other remuneration paid to other
brokers in connection with comparable transactions involving similar
securities being purchased or sold on a securities exchange during a
comparable period of time. This standard would allow such an affiliated
person to receive no more than the remuneration which would be expected to
be received by an unaffiliated broker in a commensurate arm's-length
transaction.
Under the 1940 Act, the Fund may not purchase any security of which
the Investment Manager or any of its affiliates is a principal underwriter
during the public offering of such security.
<PAGE>
The Fund's Board of Directors reviews periodically the commissions
paid by the Fund to determine if the commissions paid over representative
periods of time were reasonable in relation to the benefits realized by the
Fund. For the fiscal years ended December 31, 1993, 1994 and 1995, the
Fund paid commissions for the execution of its portfolio transactions
amounting in the aggregate to $398,815, $346,317 and $292,371,
respectively. For the fiscal year ended December 31, 1993, Asia Equity
(HK) Holdings Limited, a brokerage firm with whom one of the directors of
the Fund was an affiliate, received an aggregate of $7,536 (1.9% of the
1993 total brokerage commissions), in brokerage commissions as a result of
executing agency transactions in portfolio securities on behalf of the
Fund. For the year ended December 31, 1994, Asia Equity (HK) Holdings
Limited received no brokerage commissions from the Fund. For the year
ended December 31, 1995, the Fund paid brokerage commissions of $2,951
(1.0% of total 1995 brokerage commissions) to ING Barings Securities
Limited, an affiliate of the Investment Manager, in respect of agency
transactions executed on behalf of the Fund.
TAXATION
The following summary addresses the principal United States Federal,
Hong Kong and China income tax considerations regarding the purchase,
ownership and disposition of shares in the Fund. The Fund and its share-
holders may also be subject to other Federal, state, local and foreign
taxes.
IN VIEW OF THE INDIVIDUAL NATURE OF TAX CONSEQUENCES, SHAREHOLDERS ARE
ADVISED TO CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE SPECIFIC TAX
CONSEQUENCES OF BEING A SHAREHOLDER OF THE FUND, INCLUDING THE EFFECT AND
APPLICABILITY OF UNITED STATES FEDERAL, STATE AND LOCAL AND NON-UNITED
STATES TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES THEREIN.
The statements regarding taxation set out below are based on those
laws that are in force on the date of this document and are subject to any
subsequent changes therein.
UNITED STATES FEDERAL INCOME TAXES
The following discussion of United States Federal income tax
considerations is based upon the advice of White & Case, U.S. counsel for
the Fund.
General. The Fund intends to continue to qualify and elect to be
treated as a regulated investment company for each taxable year under the
Internal Revenue Code of 1986, as amended (the "Code"). Accordingly, the
Fund must, among other things, (a) derive at least 90% of its gross income
for each taxable year from dividends, interest, payments with respect to
securities loans, gains from the sale or other disposition of stock or
securities or foreign currencies, or other income (including, but not
limited to, gains from options, futures or forward contracts) derived with
respect to its business of investing in such stock, securities or
currencies; (b) derive less than 30% of its gross income for each taxable
year from the sale or other disposition of the following assets that have
been held for less than three months: stock, securities, options, futures,
forward contracts (other than options, futures or forward contracts on
foreign currencies) or foreign currencies (or options, futures or forward
contracts on foreign currencies) but only if such currencies (or options,
futures or forward contracts) are not directly related to the Fund's
principal business of investing in stock or securities (or options and
futures with respect to stock or securities); and (c) diversify its
holdings so that, at the end of each fiscal quarter for each taxable year,
<PAGE>
(i) at least 50% of the market value of the Fund's total assets is
represented by cash and cash items (including receivables), U.S. Government
securities, securities of other regulated investment companies and other
securities, with such other securities limited, in respect of any one
issuer, to an amount not greater in value than 5% of the Fund's total
assets and 10% of the outstanding voting securities of such issuer, and
(ii) not more than 25% of the value of its total assets is invested in the
securities of any one issuer (other than U.S. Government securities or
securities of other regulated investment companies) or of any two or more
issuers which the Fund controls and which are engaged in the same or
similar trades or businesses or related trades or businesses.
The U.S. Treasury Department is authorized to issue regulations to
provide that foreign currency gains that are "not directly related" to the
Fund's principal business of investing in stock or securities may be
excluded from the income which qualifies for purposes of the 90% gross
income requirement described above with respect to the Fund's qualification
as a "regulated investment company." No such regulations have been issued
by the Treasury Department. The Fund expects that all of its foreign
currency gains will be directly related to its principal business of
investing in stock or securities.
As a regulated investment company, the Fund generally will not be
subject to U.S. Federal income tax on its income and gains that it
distributes to shareholders if at least 90% of its investment company
taxable income (which includes, among other things, dividends, interest and
net short-term capital gains in excess of net long-term capital losses) for
the taxable year is distributed. The Fund intends to distribute to its
shareholders at least 90% of such income. However, the Fund will be
subject to tax at a rate of 35% on any income or gains that are not
distributed. Because net capital gains (which consist of the excess of net
long-term capital gains over net short-term capital losses) are not
included in the definition of investment company taxable income, however,
the Fund will determine once a year whether to distribute any net capital
gains. A determination by the Fund to retain net capital gains will not
affect the ability of the Fund to qualify as a regulated investment
company. If the Fund retains for investment its net capital gains, it will
be subject to U.S. Federal income tax at a rate of 35% on the amount
retained. In that event, the Fund expects to designate the retained amount
as undistributed capital gains in a notice to its shareholders who, if
subject to U.S. Federal income tax on long-term capital gains, (i) will be
required to include in income for U.S. Federal income tax purposes, as
long-term capital gain, their proportionate shares of such undistributed
amount, and (ii) will be entitled to credit their proportionate shares of
the U.S. Federal income tax paid by the Fund against their U.S. Federal
income tax liabilities and to claim refunds to the extent the credit
exceeds such liabilities. For U.S. Federal income tax purposes, the tax
basis of shares owned by a shareholder of the Fund will be increased by an
amount equal to 65% of the amount of undistributed capital gains included
in the shareholder's gross income.
The Fund will be able to avoid a nondeductible 4% U.S. Federal excise
tax that would otherwise apply to certain undistributed income for a given
calendar year if it makes timely distributions to the shareholders equal to
the sum of (i) 98% of its ordinary income (not taking into account any
capital gains or losses) for such year, (ii) 98% of its capital gain net
income (the latter of which is generally computed on the basis of the
twelve-month period ending on October 31 of such year), and (iii) any
ordinary income or capital gain net income from the preceding calendar year
that was not distributed during such year and upon which no U.S. Federal
income tax was imposed. For this purpose, income or gain retained by the
Fund that is subject to U.S. Federal income tax will be considered to have
been distributed by the Fund by year-end.
<PAGE>
There is a possibility that Chinese exchange control regulations may
restrict or limit the ability of the Fund to distribute net investment
income or the proceeds from the sale of its investments to its
shareholders. Any such restrictions or limitations could impact the Fund's
ability to meet the distribution requirements described above.
If, in any taxable year, the Fund fails to qualify as a regulated
investment company under the Code, the Fund would be taxed in the same
manner as an ordinary corporation and distributions to its shareholders
would not be deductible by the Fund in computing its taxable income. In
addition, in the event of a failure to qualify, the Fund's distributions,
to the extent derived from the Fund's current or accumulated earnings and
profits would constitute dividends (eligible for the corporate dividends-
received deduction) which are taxable to shareholders as ordinary income,
even though those distributions might otherwise (at least in part) have
been treated in the shareholders' hands as long-term capital gains. If the
Fund fails to qualify as a regulated investment company in any year, it
must pay out its earnings and profits accumulated in that year in order to
qualify again as a regulated investment company. In addition, if the Fund
failed to qualify as a regulated investment company for a period greater
than one taxable year, the Fund may be required to recognize any net built-
in gains (the excess of the aggregate gains, including items of income,
over aggregate losses that would have been realized if it had been
liquidated) in order to qualify as a regulated investment company in a
subsequent year.
Passive Foreign Investment Company Investments. If the Fund owns
shares in a foreign corporation that constitutes a "passive foreign
investment company" for U.S. Federal income tax purposes and the Fund does
not elect to treat the foreign corporation as a "qualified electing fund"
within the meaning of the Code, the Fund may be subject to U.S. Federal
income tax on a portion of any "excess distribution" it receives from the
foreign corporation or any gain it derives from the disposition of such
shares, even if such income is distributed as a taxable dividend by the
Fund to its U.S. shareholders. The Fund may also be subject to additional
tax in the nature of an interest charge with respect to deferred taxes
arising from such distributions or gains. Any tax paid by the Fund as a
result of its ownership of shares in a "passive foreign investment company"
will not give rise to any deduction or credit to the Fund or any
shareholder. If the Fund owns shares in a "passive foreign investment
company" and the Fund does elect to treat the foreign corporation as a
"qualified electing fund" under the Code, the Fund may be required to
include in its income each year a portion of the ordinary income and net
capital gains of the foreign corporation, even if this income is not
distributed to the Fund. Any such income would be subject to the
distribution requirements described above even if the Fund did not receive
any funds to distribute. In order to make this election, the Fund would be
required to obtain certain annual information from the passive foreign
investment companies in which it invests, which in many cases may be
difficult or not possible to obtain. If certain proposed regulations are
promulgated as final regulations in their current form, if the Fund does
not elect to treat certain passive foreign investment companies in which it
owns stock as "qualified electing funds," it may, if eligible, elect to
mark-to-market all the stock it owns in passive foreign investment
companies (i.e., treat the stock as if it had been sold at fair market
value at the end of the taxable year) and treat any gain recognized as the
result of such election as ordinary income. Unrealized losses, however,
will not be recognized. By making the mark-to-market election, the Fund
could ameliorate the adverse tax consequences with respect to its ownership
of shares in a passive foreign investment companies, but in any particular
year may be required to recognize income in excess of the distributions it
receives from passive foreign investment companies and its proceeds from
dispositions of passive foreign investment company stock.
<PAGE>
Currency Fluctuations -- "Section 988" Gains or Losses. Under the
Code, gains or losses attributable to fluctuations in exchange rates which
occur between the time the Fund accrues interest or other receivables or
accrues expenses or other liabilities denominated in a foreign currency
which is not a functional currency for the Fund and the time the Fund
actually collects such receivables or pays such liabilities are treated as
ordinary income or ordinary loss. Similarly, gains or losses from the
disposition of foreign currencies or from the disposition of debt
securities denominated in a foreign currency which is not a functional
currency for the Fund attributable to fluctuations in the value of the
foreign currency between the date of acquisition of the currency or
security and the date of disposition also are treated as ordinary gain or
loss. These gains or losses, referred to under the Code as "section 988"
gains or losses, increase or decrease the amount of the Fund's net
investment income (which includes, among other things, dividends, interest
and net short-term capital gains in excess of net long-term capital losses,
net of expenses) available to be distributed to its shareholders as
ordinary income, rather than increasing or decreasing the amount of the
Fund's net capital gain. If section 988 losses exceed such other net
investment income during a taxable year, any distributions made by the Fund
could be recharacterized as a return of capital to shareholders, rather
than as an ordinary dividend, reducing each shareholder's basis in his Fund
shares. To the extent that such distributions exceed such shareholder's
basis, they will be treated as a gain from the sales of shares. Certain
gains or losses with respect to forward foreign currency contracts, over-
the-counter options on foreign currencies and certain options traded on
foreign exchanges will also be treated as section 988 gains or losses.
Some of the Fund's investment practices, including those involving
certain risk management transactions and foreign currency transactions, may
be subject to special provisions of the Code that, among other things,
defer the use of certain losses of the Fund and affect the holding period
of the securities held by the Fund and the character of the gains or losses
realized by the Fund. The Fund may also be required to "mark-to-market"
certain positions in its portfolio (i.e., treat them as if they were sold
at year-end). This could cause the Fund to recognize income without having
the cash to meet the distribution requirements described above.
Distributions. Distributions of net investment income are taxable to
a U.S. shareholder as ordinary income, whether paid in cash or shares.
Distributions paid by the Fund will not qualify for the dividends received
deduction available to corporations. Distributions of net capital gains,
if any, are taxable as long-term capital gains, whether paid in cash or in
shares, regardless of how long the shareholder has held the Fund's shares
and are not eligible for the dividends received deduction. With respect to
distributions received in cash or reinvested in shares purchased on the
open market, the amount of the distribution is the amount of cash
distributed or allocated to the shareholder. A shareholder's basis in
these shares would be equal to their cost. Shareholders receiving a
distribution in the form of newly issued shares, pursuant to the Dividend
Reinvestment Plan, will be treated for U.S. Federal income tax purposes as
receiving a distribution in an amount equal to the fair market value,
determined as of the distribution date, of the shares received and will
have a cost basis in each share received equal to the fair market value of
a share of the Fund on the distribution date. Shareholders will be
notified annually as to the U.S. Federal income tax status of distributions
or deemed distributions, and shareholders receiving distributions in the
form of newly issued shares will receive a report as to the fair market
value of the shares received.
If the net asset value of shares is reduced below a shareholder's cost
as a result of a distribution by the Fund, such distribution will be
taxable even though it, in effect, represents a return of such
<PAGE>
shareholder's invested capital. Investors should be careful to consider
the tax implications of buying shares just prior to distribution. The
price of shares purchased at that time may reflect the amount of the
forthcoming distribution. Investors purchasing just prior to a
distribution will receive a distribution which will nevertheless be taxable
to them.
A distribution from the Fund will be treated as paid during a calendar
year if the Fund declares the dividend in October, November or December of
that year to holders of record in such a month and pays the dividend by
January 31 of the succeeding year. Such distributions will be taxable to
shareholders as if received on December 31 of the earlier year, rather than
in the year the Fund actually pays the dividend.
Sales of Shares. Upon a sale or exchange of his shares, a shareholder
will realize a taxable gain or loss depending upon his tax basis in his
shares. Such gain or loss will be treated as capital gain or loss if the
shares are capital assets in the shareholder's hands and will be long-term
or short-term, depending upon the shareholder's holding period for the
shares. Any loss realized on a sale or exchange will be disallowed to the
extent the shares disposed of are replaced within a period of 61 days
beginning 30 days before and ending 30 days after the shares are disposed
of, such as pursuant to the Dividend Reinvestment Plan. In such a case,
the basis of the shares acquired will be adjusted to reflect the disallowed
loss. Any loss realized by a shareholder on the sale or exchange of Fund
shares held by a shareholder for six months or less will be treated for
U.S. Federal income tax purposes as a long-term capital loss to the extent
of any distributions of long-term capital gains received by the shareholder
with respect to such shares and the amount of any undistributed capital
gain of the Fund required to be included in the income of the shareholder
with respect to such shares.
Foreign Taxes. Income received by the Fund from sources within China
and Hong Kong and any other countries in which the issuers of securities
purchased by the Fund are located may be subject to withholding and other
taxes imposed by such countries.
If the Fund is liable for foreign income and withholding taxes that
can be treated as income taxes under U.S. Federal income tax principles,
the Fund expects to meet the requirements of the Code for "passing-through"
to its shareholders such foreign taxes paid, but there can be no assurance
that the Fund will be able to do so. Under the Code, if more than 50% of
the value of the Fund's total assets at the close of its taxable year
consists of stocks or securities of foreign corporations, the Fund will be
eligible and intends to file an election with the Internal Revenue Service
to "pass-through" to the Fund's shareholders the amount of such foreign
income and withholding taxes paid by the Fund. Pursuant to this election a
shareholder will be required to: (i) include in gross income (in addition
to taxable dividends actually received) his pro rata share of such foreign
taxes paid by the Fund and (ii) treat his pro rata share of such foreign
taxes as having been paid by him. Each shareholder will be entitled,
subject to certain limitations, to either deduct his pro rata share of such
foreign taxes in computing his taxable income or use it as a foreign tax
credit against his U.S. Federal income taxes. No deduction for such
foreign taxes may be claimed by a shareholder who does not itemize
deductions. Each shareholder will be notified within 60 days after the
close of the Fund's taxable year whether the foreign taxes paid by the Fund
will "pass-through" for that year and, if so, such notification will
designate (a) the shareholder's portion of the foreign taxes paid to each
such country; and (b) the portion of dividends that represents income
derived from sources within each such country.
<PAGE>
The amount of foreign taxes for which a shareholder may claim a credit
in any year will be subject to an overall limitation such that the credit
may not exceed the shareholder's U.S. Federal income tax attributable to
the shareholder's foreign source taxable income. This limitation applies
separately to certain specific categories of foreign source income
including "passive income," which includes, among other types of income,
dividends and interest.
The foregoing is only a general description of the foreign tax credit
under current law. Because application of the credit depends on the
particular circumstances of each shareholder, shareholders are advised to
consult their own tax advisers.
Backup Withholding. The Fund may be required to withhold U.S. Federal
income tax at the rate of 31% on all taxable distributions, payable to
shareholders who fail to provide the Fund with their correct taxpayer
identification number or to make required certifications, or who have been
notified by the Internal Revenue Service that they are subject to backup
withholding. Corporate shareholders and certain other shareholders
specified in the Code are exempt from such backup withholding. Backup
withholding is not an additional tax. Any amounts withheld may be credited
against a shareholder's U.S. Federal income tax liability.
Foreign Shareholders. Taxation of a shareholder who, as to the United
States, is a foreign shareholder (i.e., a nonresident alien individual, a
foreign trust or estate, a foreign corporation or a foreign partnership)
depends, in part on whether the shareholder's income from the Fund is
"effectively connected" with a United States trade or business carried on
by the shareholder.
If the income from the Fund is not effectively connected with a United
States trade or business carried on by a foreign shareholder, distributions
of net investment income made to a foreign shareholder will be subject to
U.S. withholding tax at the rate of 30% (or lower treaty rate) upon the
gross amount of the dividend. Foreign shareholders may be subject to U.S.
withholding tax at a rate of 30% (or lower treaty rate) on the income
resulting from the Fund's election to treat any foreign income and
withholding taxes paid by it as paid by its shareholders, but they may not
be able to claim a credit or deduction with respect to the withholding tax
for the foreign taxes treated as having been paid by them. See "Foreign
Taxes."
A foreign shareholder generally will not be subject to U.S. Federal
income tax on gain realized upon the sale of shares of the Fund, on
distributions from the Fund of net long-term capital gains, or on amounts
retained by the Fund which are designated as undistributed capital gains.
In the case of a foreign shareholder who is a nonresident alien individual,
however, gain realized upon the sale of shares of the Fund, distributions
of net long-term capital gains and amounts retained by the Fund which are
designated as undistributed capital gains ordinarily will be subject to
U.S. Federal income tax at a rate of 30% (or lower treaty rate) if such
individual is physically present in the U.S. for 183 days or more during
the taxable year and, in the case of gain realized upon the sale of Fund
shares, either the gain is attributable to an office or other fixed place
of business maintained by the shareholder in the United States or the
shareholder has a "tax home" in the United States. The 183-day rule set
forth above only applies in exceptional cases because generally an
individual present in the U.S. for 183 days or more during the taxable year
will be treated as a resident for U.S. Federal income tax purposes and
consequently will be subject to U.S. Federal income tax on his worldwide
income at the rates applicable to U.S. citizens. In the case of a
shareholder who is a nonresident alien individual, the Fund may be required
<PAGE>
to withhold U.S. Federal income tax at the rate of 31% unless IRS Form W-8
is provided. See "Backup Withholding."
If distributions made by the Fund or gains realized upon the sale of
shares of the Fund are "effectively connected" with a U.S. trade or
business carried on by a foreign shareholder, then distributions (whether
received in cash or additional shares) of net investment income, net long-
term capital gains, amounts retained by the Fund which are designated as
undistributed capital gains and any gains realized upon the sale of the
Fund, will be subject to U.S. Federal income tax at the graduated rates
applicable to U.S. citizens or domestic corporations.
Transfers by gift of shares of the Fund by a foreign shareholder who
is a nonresident alien individual and who generally is not a former U.S.
citizen will not be subject to U.S. Federal gift tax, but the value of
shares of the Fund held by such a shareholder at his death will be
includible in his gross estate for U.S. Federal estate tax purposes.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are advised to consult their own tax advisers
with respect to the particular tax consequences to them of an investment in
the Fund.
CHINA TAXES
The following discussion is a summary of PRC tax laws relating to the
Fund and its shareholders and is based upon the advice of Great Wall
Foreign Economic Law Office, PRC legal counsel to the Fund. This
discussion is based upon the laws of the PRC, and the rules and regulations
implementing those laws, and is subject to any subsequent change in PRC
laws and regulations that may come into effect after the date hereof.
Background. The Fund will invest in companies classified under PRC
law as foreign investment enterprises, including Sino-foreign companies
limited by shares, and PRC domestic companies (collectively, "PRC
Companies"). PRC Companies are subject to certain taxes in the PRC that
may affect their profitability and their ability to generate dividends for
the Fund. These taxes include corporate or enterprise income tax and
value-added tax. In some circumstances, these PRC Companies may also be
required to pay business tax and consumption tax on particular
transactions.
Foreign investment enterprises, including those organized as Sino-
foreign companies limited by shares, and PRC domestic companies are
generally subject to corporate income tax imposed on net profits at a 33%
rate (the tax laws in the PRC applicable to foreign investment companies
differ, however, from those applicable to PRC domestic companies).
However, with respect to foreign investment enterprises located in any of
the PRC special economic zones or foreign investment enterprises engaged in
production (as opposed to those engaged in mere assembly or the provision
of services) located in the economic and technological development zones of
the 14 open coastal cities, this tax rate is reduced to 15%. The reduced
tax rate of 15% also applies to foreign investment enterprises engaged in
production that are situated in Shanghai's Pudong district as well as to
confirmed high technology foreign investment enterprises located in the
high and new technology industrial zones in the PRC. With respect to
foreign investment enterprises engaged in production and located in certain
areas of the 14 open coastal cities (but outside of the economic and
technological development zones) or in the coastal open economic zones, the
corporate income tax rate is 24%. In addition, foreign investment
enterprises engaged in production which have a term of over ten years are
<PAGE>
entitled to a 2 year tax exemption followed by a 3 year tax reduction,
beginning with the first profit-making year.
Tax Consequences to the Fund. Foreign enterprises that do not have an
establishment in the PRC, but nonetheless derive income from a PRC source
are ordinarily required to pay a 20% withholding tax on such income. The
Fund would qualify as a "foreign enterprise" not having an establishment in
the PRC for PRC income tax purposes. However, pursuant to the Agreement
between the Governments of the United States of America and the People's
Republic of China for the Avoidance of Double Taxation and the Prevention
of Tax Evasion with Respect to Taxes on Income (the "Income Tax Treaty"),
the maximum rate of withholding tax on dividends paid to the Fund should be
10%.
Pursuant to the Income Tax Treaty, interest received by the Fund with
respect to debt securities of PRC Companies owned by the Fund should also
be subject to withholding tax at a maximum rate of 10%.
At present, because of a ruling issued in July 1993 (the "July
Ruling"), the PRC State Tax Bureau has determined that dividends paid on
"B" shares and dividends received from a PRC Company the shares of which
are listed on non-PRC securities exchange, including dividends paid with
respect to "H" shares, will not for the time being be subject to the 20%
withholding tax if received by a foreign enterprise with no establishment
in the PRC. Thus, based on the July Ruling, dividends paid to the Fund
with respect to "B" shares, "H" shares and shares listed on other non-PRC
securities exchanges held by the Fund will not be subject to PRC
withholding tax. However, although the July Ruling is currently in force,
there is no assurance that it will remain in effect for the entire period
that such shares are held by the Fund, as it is intended to be a temporary
provision.
Normally, when a foreign enterprise with no establishment in the PRC
derives capital gains from the sale of shares in a PRC Company, the foreign
enterprise may be subject to the 20% withholding tax. As a result, the
Fund as a "foreign enterprise" not having an establishment in the PRC would
be liable to pay PRC withholding tax on any capital gains derived from the
sale of shares. However, based on the July Ruling, the PRC State Tax
Bureau has determined that capital gains from the sale of "B" shares and
shares of a PRC Company listed on a non-PRC securities exchange, including
"H" shares, will not for the time being be subject to the 20% withholding
tax if received by a foreign enterprise with no establishment in the PRC.
Consequently, capital gains attributable to the Fund on the sale of such
shares will not at present be subject to the PRC withholding tax.
Capital gains with respect to debt securities of PRC Companies are not
covered by the July Ruling and may be subject to the 20% withholding tax.
The purchase or sale of "B" shares listed on the Shanghai Securities
Exchange is subject to a stamp tax of 0.3% and a broker's commission of
0.6% on the price at which such shares are purchased or sold, payable by
each of the purchaser and seller. The broker's commission will be reduced
if the transaction exceeds the value of RMB 100,000, but in no case will
the broker's commission be less than 0.3%. The sale of "B" shares is also
subject to a transfer fee levied at 0.1% of the par value of such shares
sold, payable by each of the purchaser and seller. Accordingly, on each
sale and purchase of "B" shares, the Fund will be required to pay stamp
tax, a broker's commission and a transfer fee in accordance with PRC
regulations.
The purchase or sale of "B" shares listed on the Shenzhen Stock
Exchange is subject to a stamp tax of 0.3% and to transaction fees of .55%
<PAGE>
on the price at which such shares are purchased or sold, payable by each of
the purchaser and seller.
The purchase or sale of "H" shares listed on a stock exchange outside
of the PRC is subject to the applicable laws of the respective jurisdiction
where the stock exchange is situated and no PRC stamp tax is levied on such
transactions.
Tax Consequences to Fund Investors. As all purchases and sales of
shares in PRC Companies would be made by and in the name of the Fund, which
would qualify as a "foreign enterprise" according to PRC law, all dividends
paid on the shares and all capital gains derived from the sale of the
shares will be regarded as the income of the Fund for purposes of the PRC
withholding tax. As a result, dividends paid by the Fund to shareholders
of the Fund residing outside of the PRC and capital gains realized by such
shareholders on the sale of shares of the Fund outside of the PRC are not
subject to any PRC taxes.
HONG KONG TAXES
The following description of certain Hong Kong tax matters relating to
the Fund and its shareholders is based upon the advice of Grice & Co., Hong
Kong solicitors to the Fund.
Under current Hong Kong law, no income tax is chargeable on dividends
or other distributions received by any person in respect of investments in
securities (whether listed or not) in Hong Kong. There is also no tax in
Hong Kong on capital gains realized from the disposal of such securities.
However, income received and gains realized by any person in the course of
a trade, profession or business carried on in Hong Kong may be subject to
Hong Kong profits tax. It is the intention of the Fund to conduct its
affairs in such a manner that it will not be subject to such profits tax.
To the extent that the Fund were to derive any profit through such a trade,
profession or business, its profits from the trading of securities
(including interest, dividends and net capital gains) would be subject to
profits tax, which is currently chargeable at a flat rate of 16.5% for
corporations.
Any person who effects any sale or purchase of Hong Kong stock,
whether as principal or agent, is required to execute a contract note
evidencing such sale or purchase and to have the note stamped. Hong Kong
stock means stock the transfer of which is required to be registered in
Hong Kong. Contract notes attract stamp duty at the rate of HK$1.50 per
HK$1,000 or part thereof (i.e., 0.15%) each for the sale and for the
purchase by reference to the value of the consideration paid or payable, or
if greater, the value of the Hong Kong stock transferred.
Remittance of profits derived from investments in securities in Hong
Kong by the Fund is not subject to any withholding tax.
Dividends paid by the Fund to shareholders outside of Hong Kong and
capital gains realized by shareholders on the sale of shares of the Fund
outside of Hong Kong are not subject to any Hong Kong taxes.
OTHER TAXATION
Distributions also may be subject to additional state, local and other
foreign taxes (including non-U.S. taxes) depending on each shareholder's
particular situation. Shareholders are advised to consult their own tax
advisers with respect to the particular tax consequences to them of an
investment in the Fund.
<PAGE>
THE PEOPLE'S REPUBLIC OF CHINA
The following summary has been extracted from various government and
private publications. The Fund and its Board of Directors make no
representation as to the accuracy of the information, nor has the Fund or
its Board of Directors attempted to verify it; furthermore, no
representation is made that any correlation exists between The People's
Republic of China (the "PRC" or "China") or its economy in general and the
performance of the Fund.
GENERAL INFORMATION
Location and Geography. The PRC is the world's second largest country
in terms of land area and is the largest by population. The PRC is located
in the eastern part of Asia and extends over a distance of 5,500 kilometers
from north to south and 5,200 kilometers from east to west occupying
territory of 9.6 million square kilometers. China has a varied topography,
with mountain ranges, deserts and highlands in the west and plains in the
east. Mountain areas and highlands account for about two-thirds of the
Chinese territory. While these areas are thought to be rich in mineral
deposits, agriculture is limited. Of the 9% to 10% of the PRC's land area
which is under intensive cultivation, most of it lies in the eastern
coastal region. This dramatic variation in topography explains why over
80% of the PRC's population lives in the eastern coastal half of the
country and in the plains and valleys of the three river deltas--the Yellow
River (Huang He), the Yangtze River (Chang Jiang) and the Pearl River (Zhu
Jiang).
The country is divided into 23 provinces, three municipalities
(Beijing, Shanghai and Tianjin) and five autonomous regions (Guangxi
Zhuang, Nei Mongol, Ningxia Hui, Xinjiang Uygur and Xizang (Tibet)). The
capital and political center of China is Beijing. Shanghai is the largest
city and is also the commercial and financial capital.
Population. The PRC is the world's most populous nation, with an
estimated population of approximately 1.20 billion at December, 1994. The
population is homogenous, 92% of which is composed of the Han ethnic group
and lives mainly in the eastern part of the country. The remaining 8% of
the population accounts for the 55 minority nationalities, the majority of
whom live in the five autonomous regions of Inner Mongolia, Guangxi,
Ningxia, Xinjiang and Tibet. The national language is Putonghua which is
based on Mandarin and was simplified in 1945. Over 93% of the population
speaks one of the five main Sino-Tibetan dialects which are Mandarin,
Cantonese, Fukienese, Hakka and Wu. Religion is not a major source of
ethics for Chinese and is not a divisive force among its population. Some
20% of the population practice Confucianism and 8% are Buddhists.
The following table presents information regarding China's population
growth since 1980:
<TABLE>
<CAPTION>
Year
Item Unit 1980 1985 1988 1989
<S> <C> <C> <C> <C> <C>
Population of the PRC
by the end of the year . 10,000 Persons 98,705 105,851 111,026 112,704
Annual birth rate of
population. . . . . . . . . 0/00 18.21 21.04 22.37 21.58
Annual death rate of
population. . . . . . . . . 0/00 6.34 6.78 6.64 6.54
Annual natural growth
rate of population . . . . 0/00 11.87 14.26 15.73 15.04
<PAGE>
<CAPTION>
Year
Item 1990 1991 1992 1993 1994
<S> <C> <C> <C> <C> <C>
Population of the PRC
by the end of the year . 114,333 115,823 117,171 118,517 119,850
Annual birth rate of
population. . . . . . . . . 21.06 19.68 18.24 18.09 17.70
Annual death rate of
population. . . . . . . . . 6.67 6.7 6.64 6.64 6.49
Annual natural growth
rate of population . . . . 14.39 12.98 11.60 11.45 11.21
_______________
Source: Statistical Yearbook of China (1983-1994, Brief Statistics of China 1993).
</TABLE>
Political History and Government. China is one of the world's oldest
civilizations, with its origins in the second millennium B.C. Modern China
is considered to have begun in 1911, when a revolution led by Sun Yat-sen
overthrew the Qing Dynasty and founded the Republic of China. A period of
instability followed, as the party founded by Sun Yat-sen in 1924, the
Kuomintang, struggled to retain power against rival warlords, an insurgency
led by the Communist Party of China ("CPC") and Japanese invaders.
The CPC was founded in 1921. From the mid-1930s, the CPC and the
Kuomintang co-operated to oust the Japanese invaders from China. With the
surrender of Japan in 1945, civil war ensued, and in 1949, the CPC gained
control of mainland China and established the PRC.
The PRC has had four Constitutions. The current Constitution of the PRC
was adopted in 1982 and was most recently revised in 1993. Under the
Constitution, the National People's Congress ("NPC"), composed of
approximately 2,970 deputies elected from each of the PRC's 23 provinces,
three municipalities and five autonomous regions, is the highest ranking
legislative body. The NPC meets annually and when it is not in session, it
acts through its Standing Committee. Among the official functions of the
NPC are the formulation of state policies, the enactment of laws, the
examination and approval of state plans and budgets, the amending and
enforcement of the Constitution, and election of the head of state,
national government and State Council.
The State Council, composed of the Premier, Vice Premiers, State
Councillors and other heads of ministries and state commissions, is the
highest organ of state administration in the PRC. The State Council has
the power to enact administrative rules and regulations, issue orders,
appoint, remove and train administrative officers, supervise the ministries
and local governments, co-ordinate the work of the ministries and state
commissions, conduct foreign relations, conclude treaties and agreements
with foreign states, administer national defense and declare martial law.
The current Premier is Li Peng and the current President is Jiang Zemin,
who is also the Secretary-General of the CPC.
The CPC plays a leading role in formulating policies and in selecting and
providing personnel at all levels of the state structure. The organization
of the CPC parallels the government structure, with a Central Committee,
Politburo and Standing Committee. The Politburo, and particularly its
Standing Committee, are the highest policy-making organs of the CPC.
Membership in the CPC, which currently has over 50 million members, is
generally a prerequisite for holding important government posts, and the
legislative and executive organs of state power are generally subordinate
in practice to the will of the CPC.
<PAGE>
The PRC has diplomatic and trade relations with most of the nations of
the world. In the wake of the use of the military to break up
demonstrations in Tiananmen Square in June 1989, and the forceful
suppression of political dissent that followed, the PRC's diplomatic and
economic relations with many countries, including the United States,
suffered. Relations have continued to suffer due to accusations of human
rights violations and of suppressing nationalist aspirations in Tibet. The
PRC belongs to the United Nations, the International Monetary Fund and the
World Bank, and has submitted an application, currently under review, to
become a member of the World Trade Organization ("WTO").
THE CHINESE ECONOMY
Economic Overview. The PRC has been led by a centrally planned economy
since 1949. The PRC adopted its First Five-Year Plan in 1953, which plan
sets forth strategies for the PRC's economic growth and development.
Presently, China is in the first year of its Ninth Five-Year Plan
(1996-2000). In 1978, the PRC instituted an economic reform program to
shift from a completely centralized, planned economy to a more mixed
economy. In large part, the new policy was adopted to attract foreign
capital and technology to assist in strengthening the PRC's economic
position and raising the standard of living of its people. Recently, under
its "socialist market economy" program, the Chinese leadership has
accelerated the pace of economic reforms. Among the most important of
these reforms, which are designed to transform the PRC into a regulated
free-market economy, are moves to make PRC state-owned enterprises
relatively autonomous business entities, responsible for their own profits
and losses. To this end, managers of state-owned enterprises have been
granted more decision-making powers, including the planning of production,
marketing, use of funds and employment of staff. A related aspect of the
current economic reform program is price de-control. Since 1992, price
controls on a wide range of commodities have been partially lifted.
China will officially endorse in the March 1996 National People's
Congress its Ninth Five-Year Plan (1996-2000). It is anticipated that the
government will pledge to keep inflation below 8% and fixed asset
investment at 30%.
Apart from a high inflationary period in the late 1980's, economic growth
generally has been kept under control. During the period of 1989 to 1993,
growth in terms of GNP ranged between approximately 3.9% and 13%.
The following table sets forth selected data regarding the PRC economy:
<TABLE>
<CAPTION>
Major Economic Indicators 1990 1991 1992 1993 1994
% change % change % change % change % change
<S> <C> <C> <C> <C> <C>
Gross National Product*(1) . . . . 4.0% 8.0% 14.00 13.30 11.60
Agriculture(1) . . . . . . . . . . 6.9 3.0 6.40 7.80 8.60
Industry(1) . . . . . . . . . . . . 7.8 14.8 27.50 28.02 26.08
<CAPTION>
% of GDP % of GDP % of GDP % of GDP % GDP
<S> <C> <C> <C> <C> <C>
Gross Domestic Investment(2) . . . 35.5% 35.3% 38.2 42.1 39.5
Gross Domestic Savings . . . . . . 40.2 39.1 40.0 40.0 40.5
<CAPTION>
<PAGE>
% change % change % change % change % change
in RPI in RPI in RPI in RPI in RPI
<S> <C> <C> <C> <C> <C>
Inflation Rate(2) . . . . . . . . . 2.1% 2.9% 5.4% 13.2% 21.7%
<CAPTION>
US$ billion US$ billion US$ billion US$ billion US$ billion
<S> <C> <C> <C> <C> <C>
Total Exports(1) . . . . . . . . . 62.1 71.9 84.9 91.7 121.00
Total Imports(1) . . . . . . . . . 53.4 63.8 80.6 104.0 115.7
Trade Balance(1) . . . . . . . . . 8.7 8.1 4.3 (12.3) 5.3
Current Account Balance(1) . . . . 11.0 12.0 6.4 (11.9) 7.7
External Debt(1) . . . . . . . . . 52.5 60.6 69.3 83.6 92.8
Foreign Currency Reserves(1) . . . 11.1 21.7 19.4 21.2 51.6
<CAPTION>
RMB per US$ RMB per US$ RMB per US$ RMB per US$ RMB per US$
<S> <C> <C> <C> <C> <C>
Exchange Rate (end of year)(3) 5.22 5.43 5.75 5.78 8.62
_______________
Sources:
(1) Statistical Yearbook of China, 1994, and State Statistical Bureau of China
(2) Asian Development Bank
(3) China Daily, December 29, 1990, December 30, 1991, December 31, 1992, December 31, 1993 and December 31, 1994.
* Gross National Product refers to the added value of material-productive or nonmaterial-productive sectors as well as net
revenue from abroad.
</TABLE>
The PRC's economy currently consists of four important sectors: state,
collective, private and foreign investment sectors. The former two sectors
accounted in 1994 for 34% and 41%, respectively, of industrial output. The
proportion of industrial output represented by state-owned enterprises,
which are generally located in urban areas, declined significantly from
approximately 64.9% in 1985 to approximately 34% in 1994. The fastest
growing sector of the economy, concentrated on the eastern seaboard
provinces, is the foreign investment sector.
Beginning in 1978, the PRC instituted an economic reform program,
which has gradually reduced central control of the economy by granting
farmers greater economic incentives and industrial managers more decision
making authority. Between 1980 and 1990, GNP growth averaged 9.0%, making
the PRC economy one of the world's fastest growing. An austerity program
instituted in 1988 to dampen the overheating economy trimmed growth to 4.3%
in 1989. Growth rates remained fairly constant at 4% in 1990, and
increased to 7.7% in 1991, 12.7% in 1992 and 13% in 1993 then dropped
slightly to 11.6% by the end of 1994, again as the result of a centrally
mandated austerity program.
The PRC balance of payments has fluctuated over the years, from a
deficit of US$14.9 billion in 1985 to a surplus of US$4.4 billion in 1992
and to a trade deficit of almost US$12.2 billion in 1993. In 1994, there
was a trade surplus of US$5.3 billion.
Economic Plans and Development. The PRC government continues to exert
a significant degree of centralized control over the economy through State
Plans and other measures. The implementation of the plans is carried out
under the supervision of the State Planning Commission, which reports
directly to the State Council. Current PRC economic policies are set forth
<PAGE>
in the Ninth Five-Year Plan (1996-2000), which emphasizes further economic
reforms. The objective of the plan is to quadruple the PRC's GNP from its
1980 level by the end of this century, which would require average annual
growth of 8-9% per year during the 1990s. The Ninth Five-Year Plan
emphasizes expanded economic and technological exchanges with other
countries and further development of export-oriented industries and special
investment areas. In addition to the State Plans and as a result of
decentralization policies and regional economic prosperity, provinces and
municipalities in the PRC are formulating their own local developmental
plans and priorities, occasionally at odds with central government State
Plans and directives.
The PRC's attempt to attract foreign investment, gain access to new
technology and boost exports and employment has led to the establishment
since 1980 of five special economic zones, including three in Guangdong
province, one in Fujian province and one for all of Hainan province.
Investors in such zones benefit from tax concessions, exemptions from
import restrictions and favorable land and labor policies. In 1984, 14
cities along the eastern seaboard were designated as "open coastal cities"
and granted permission to offer incentives similar to those available in
the special economic zones. Moreover, in 1988, "coastal open economic
zones" were established in northern and southern China providing
preferential tax and other benefits to foreign investors. In addition, the
central government and provincial governments have offered tax and other
incentives to encourage foreign investment in selected "high-technology
development zones" elsewhere in the PRC. See "-- Direct Investments in
China -- Priority Investment Areas."
The following table sets out the average annual percentage growth in
certain measures of economic activity during the periods 1986-90 and 1991-
95 and as projected for the period 1996-2000 in the Ninth Five-Year Plan:
<TABLE>
AVERAGE ANNUAL PERCENTAGE GROWTH
<CAPTION>
1986-90 1991-95 1996-2000
ACTUAL ACTUAL PLAN
<S> <C> <C> <C>
Real GNP 7.7 11.3 8
Industrial Output 13.2 19.3 n.a.
Agricultural Output 4.7 n.a. n.a
Fixed Assets Investment 11.8 n.a. 30
Retail Sales 14.0 24.6 n.a
Retail Price Index 10.1 11.7 18
Consumption per capita 3.6 n.a. n.a
_______________
Source: People's Republic of China, State Statistical Bureau, Statistical Yearbook of China 1992 ("China Statistical Yearbook,
1992"); UBS Global Research, China Equities, December 1995 "Beijing Expects Sharp Growth in Economy", The Asian Wall
Street Journal, March 6, 1996.
</TABLE>
Principal Economic Sectors. Industry. In 1994, industry accounted for
approximately 49% of the PRC's national income. In the first three decades
under Communist rule, the PRC placed great emphasis on heavy industry.
This pattern was reversed after 1978 when the PRC embarked on its reform
program whereby much industrial growth was to come from the industrial
enterprises in rural townships which, for the most part, were engaged in
the processing and assembly of durable consumer goods. These operations
were concentrated in southern China, where a major light industrial base
developed. The PRC's industrial output, particularly in light industry,
has grown rapidly since 1979. Lack of equivalent growth in supporting
sectors such as energy and raw materials has, however, resulted in
bottle-necks and imbalances. A three-year industrial adjustment program
<PAGE>
aimed at improving the channelling of resources into developing basic
industries was adopted in late 1988. This program was officially ended by
Chinese Premier Li Peng's Politburo speech in September 1991, after retail
prices were successfully brought down from a high of 17.8% in 1989 to 5.4%
in 1992. Retail prices rose by 17.2% in 1993 and approximately 21.7% in
1994. In 1995, overall industrial output growth was approximately 13% in
real terms.
The PRC's current industrial policy also places emphasis on high-technology
industries to be supported by foreign technology, such as micro-electronics
and telecommunications. However, overstocking and poor economic results
continue to plague the PRC's industry. Continued growth has been hampered
by problems of access to raw materials and energy supplies.
Agriculture. Although long-term growth in agricultural production has
slowed, China remains one of the world's largest agricultural producers.
The government has emphasized diversification of production, and a
commitment to the maintenance of grain outputs. Other agricultural
products have also shown increases in production in recent years, with
cotton production at the forefront. With the dismantling of the commune
system and the implementation of the household contract responsibility
system whereby farmers are helped to improve their own production, the
agricultural sector has experienced rapid growth. The result of
agricultural reform raised agriculture output by 8% in 1979-1984. Between
1986 and 1994 there has been an average annual increase in agriculture
output of 5.6%.
Energy. Although the PRC has a vast potential for energy production,
this potential has been largely untapped. However, the PRC is the world's
largest producer of coal and the world's fifth largest oil producer. Until
recently, the PRC did not have the capacity to utilize its off-shore oil
fields due to the country's relatively low level of technology. Joint
ventures with foreign companies, however, have allowed the PRC to use the
fields, and further growth in oil production, both off-shore and on-shore,
is expected. The PRC also has significant potential for harnessing
hydroelectric power, but has utilized only a small portion of this
potential. The PRC is planning to make hydroelectric power a major source
of energy in the years ahead.
Foreign Exchange Reserves and Debt. The PRC's foreign debts in 1994
stood at US$92.8 billion or up 11% compared with 1993, whereas its foreign
debts in 1993 stood at US$83.6 billion, up 20.6% compared with 1992. Of
these debts, those classified as long- and medium-term came to US$82.4
billion, accounting for 88.8% of the total while the short-term debt came
to US$10.4 billion, accounting for 11.2% of the total.
<TABLE>
EXTERNAL DEBT PROFILE OF THE PRC
<CAPTION>
1987 1988 1989 1990 1991 1992 1993 1994
US$bn US$bn US$bn US$bn US$bn US$bn US$bn US$bn
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Medium-long $24.5 $32.7 $37.0 $45.8 $50.3 $58.5 70.0 82.4
term debt .
Short-term 5.7 7.3 4.3 6.8 10.3 10.9 13.6 10.4
debt . . .
Total debt 30.2 40.0 41.3 52.6 60.6 69.4 83.6 92.8
_______________
<PAGE>
Source: External Debt Management Division of the State Administration of Exchange Control of China, Statistical Yearbook of
China, 1994.
</TABLE>
After a sharp decline in 1989, the country's short-term foreign debt
increased somewhat in 1990, adding to the liquidity of the debt in general.
However, the proportion of the short-term debt is still far lower than the
international acceptance level, which is 25%. The PRC's foreign reserves
amounted to approximately US$51.6 billion in 1994, up substantially from
1993's US$21.2 billion. Gold reserves have remained at approximately 12.70
million fine troy ounces since 1981.
Inflation and Monetary Policy. Inflation is a major concern in the
PRC economy. In the mid-1980s, rapid economic growth combined with the
relaxation of credit controls resulted in an overheated economy and high
rates of inflation. In 1985 and 1989, the government attempted to slow the
pace of economic reforms, tightened credit policies and instituted an
austerity program, including a freeze of planned price increases. In 1993,
Vice-Premier Zhu Rongji launched a similar austerity program aimed at
cooling China's overheated economy, particularly through the imposition of
tight credit policies coupled with plans for the restructuring of the PRC
monetary and financial systems. During the past several years, China's
monetary policy has vacillated between expansionist and contractionist.
This varying monetary policy has contributed to a fundamental cycle of the
Chinese economy: reform and expansion leading to overheating of the
economy and tightening of control. The ongoing reform of the PRC monetary
and financial systems seeks to modulate this cycle and institute a regime
of managed growth for the Chinese economy in the future. Official
inflation rates as measured by the Consumer Price Index fell sharply from
27% in October 1994 to 11.4% in October 1995. The Retail Price Index
dropped from 21.7% in December 1994 to 10.3% in October 1995. The
government's target of 10% inflation for 1996 reflects its objective of
maintaining stable economic growth in the future. It is generally believed
that the actual rate of inflation, particularly in urban areas, exceeds the
officially reported rates. Inflationary pressure is likely to remain
strong for the foreseeable future.
The following table sets out the inflation rate as measured by the
percentage change in the retail price index since 1985:
<TABLE>
PERCENTAGE CHANGE IN RETAIL PRICE INDEX
<CAPTION>
PERCENTAGE
YEAR CHANGE
<S> <C> <C>
1985 8.8
1986 6.0
1987 7.3
1988 18.5
1989 17.8
1990 2.1
1991 2.9
1992 5.4
1993 13.2
1994 21.7
_______________
Source: China Statistical Yearbook, 1993 and 1994.
</TABLE>
The Financial System. The Ministry of Finance is responsible for
national fiscal management, state budgetary planning and supervision of the
PRC taxation system. The State Taxation Administration, co-operating
closely with the Ministry of Finance, oversees day-to-day tax
<PAGE>
administration, including tax assessments and the collection of revenue.
The banking system in the PRC is managed by the PRC's central bank, the
People's Bank of China ("PBOC"). The PBOC is a state administrative organ
under the leadership of the State Council. Its primary functions include:
the formation of national financial regulations and policies; the issuance
of currency and regulation of its circulation; the co-ordination and
implementation of credit plans; overseeing the establishment and operation
of financial institutions and financial markets; administration of the
PRC's foreign exchange and gold reserves; and adjustment of exchange rates
against foreign currencies.
There are currently five specialized banks, namely, the Industrial and
Commercial Bank of China, the China Investment Bank, the Agricultural Bank
of China, the People's Construction Bank of China, and the Bank of China
(the "BOC"). Trust and investment companies and credit cooperatives also
provide financial services in the PRC. Major trust and investment
corporations include China International Trust and Investment Corporation
("CITIC"), Shanghai Investment and Trust Corporation ("SITCO"), and
Guangdong International Trust and Investment Corporation ("GITIC").
Exchange Rate and Foreign Exchange Control. There is centralized
control and unified management of foreign exchange in the PRC. The legal
framework for foreign exchange control in the PRC is based on the
Provisional Regulations for Foreign Exchange Control of the People's
Republic of China, promulgated on December 18, 1980, the Implementing Rules
of the Foreign Exchange Control Regulations relating to Overseas Chinese-
Invested Enterprises, Foreign Investment Enterprises and Sino-foreign
Equity Joint Venture Enterprises, promulgated on August 1, 1983, and the
Provisional Regulations on Foreign Exchanges Sales, Purchases and Payments
("Foreign Exchange Provisions") promulgated on March 26, 1994. The State
Administration of Exchange Control (the "SAEC") is responsible for matters
relating to foreign exchange administration, while the PBOC is in charge of
foreign exchange operations. The PBOC sets the daily exchange rate of RMB
against major foreign currencies with reference to the trading price of the
Renminbi on the previous day at the China Foreign Exchange Trading Center
("CFETC"). The Foreign Exchange Provisions prohibit the circulation, use
or pledging of foreign currency within China and the sale or purchase of
foreign currency without SAEC authorization.
RMB are not at present freely convertible into foreign currencies,
although the PRC government has declared its intention to make RMB a fully
convertible currency within the next five years. The first step towards
eventual convertibility of RMB occurred in January 1994, when the PRC
government unified the official exchange rate and the foreign exchange
adjustment center ("swap center") rate, by adopting a managed floating
exchange rate system. The unification of exchange rates is intended to
harmonize the PRC's foreign exchange system with free market policies
rather than socialist central planning. However, the PBOC has indicated
that it will continue to intervene in the foreign exchange markets and to
use monetary policy and interest rates to stabilize the RMB exchange rate.
The unification of exchange rates is linked to the eventual
convertibility of the Renminbi, which the PRC has officially declared will
occur by 2000. China recently announced that it may introduce
convertibility of the Renminbi as early as later this year but with respect
to current account items only. However, capital account items,
particularly for foreign investment enterprises, will remain technically
inconvertible for the foreseeable future.
As part of the process leading to convertibility of the Renminbi, the
CFETC was formally established and came into operation in April 1994.
CFETC has set up a computerized network with sub-centers in several major
cities, thereby forming an interbank market in which designated PRC banks
<PAGE>
can trade and settle their foreign currencies. The establishment of CFETC
was originally intended to coincide with the abolition of swap centers.
The swap centers have, however, been retained as an interim measure and
foreign investment enterprises are currently required to enter into foreign
exchange transactions only through the swap centers. Under the Foreign
Exchange Provisions, all PRC enterprises with the exception of foreign
investment enterprises are required to sell their foreign exchange income
to designated banks authorized in dealing foreign exchange. Chinese
enterprises that sell their foreign exchange receipts to such banks may
apply to the SAEC to open foreign exchange accounts at designated foreign
exchange banks and to handle foreign exchange settlement in accordance with
the Foreign Exchange Provisions. It is expected that the foreign
investment enterprises will be allowed to use the CFETC interbank market
for their foreign exchange transactions upon the abolition of the swap
centers in the near future.
The following table sets out official exchange rates for the RMB
against some major currencies:
<TABLE>
<CAPTION>
AS AT YEAR-END
RMB PER UNIT 1988 1989 1990 1991 1992 1993 1994 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C>
US$ 3.72 4.72 5.22 5.43 5.75 5.78 8.62 8.34
DM 2.09 2.80 3.42 3.56 3.56 3.35 5.32 5.82
Pounds Sterling 6.69 7.58 9.88 10.16 8.67 8.55 13.20 13.00
Japanese Yen (1,000) 29.62 32.88 38.44 43.16 46.12 51.95 84.40 81.00
HK$ 0.48 0.60 0.67 0.69 0.74 0.75 1.11 1.08
_______________
Source: China Daily, December 30, 1988, December 29, 1989, December 29, 1990, December 30, 1991, December 31, 1992,
December 31, 1993, December 31, 1994, December 31, 1995.
</TABLE>
Foreign Trade. In parallel with other economic reforms initiated in
1978, a more decentralized foreign trade system has replaced the previous
highly centralized, state controlled structure. Since 1978, the PRC's
foreign trade has grown rapidly, both in absolute volume and product range.
From 1978 to 1993, total trade grew from US$20.6 billion to US$195.8
billion. Aided by an official policy of restraining imports and a series
of currency devaluations since 1985, the PRC registered its first trade
surplus in six years in 1990. In 1992, exports amounted to US$85 billion,
an increase of 18.3% over that of 1991, and the PRC's trade surplus reached
US$4.4 billion. In 1993, the PRC experienced a trade deficit of some
US$12.2 billion. In 1994, however, exports amounted to US$121 billion, an
increase of 32% over that of 1993 and the PRC's trade surplus reached
US$5.35 billion.
Hong Kong is the single largest market for PRC exports, many of which
are re-exported from Hong Kong to third countries. Hong Kong is also the
largest single source of the PRC's foreign exchange earnings. Following
the normalization of relations with the United States, the PRC was granted
most favored nation status ("MFN"), which is subject to annual renewal. In
the mid- and late-1980s PRC exports to the United States grew rapidly. In
1992, the PRC's trade surplus with the United States was US$18.3 billion,
according to the United States Department of Commerce. According to the
Statistical Yearbook of China, 1994, the PRC's trade surplus with the
United States was US$6.2 billion in 1993 and US$7.5 billion in 1994.
Since June 1989, concern over the PRC's human rights record and, more
recently, over the fairness of the terms of trade between the United States
and the PRC, have led to Congressional challenges to the annual renewal of
the PRC's MFN status. If the PRC were to lose MFN status, its foreign
<PAGE>
trade would be adversely affected. Guangdong province, in which a
substantial portion of PRC exports to the United States are manufactured,
would be most adversely affected.
China has applied to resume its status as a contracting state to the
General Agreement on Tariffs and Trade, and to join the WTO. As a WTO
member, China would obtain more preferential treatment for expanding its
foreign trade.
DIRECT INVESTMENTS IN CHINA
Since 1979, foreign direct investments in the PRC have increased and
have become an important element in the PRC's economy. Hong Kong and Macao
have been the most important sources of foreign direct investments in the
PRC, accounting for 61% in 1989, 55% in 1990, 70% in 1991 and 1992, 65% in
1993 and 60% in 1994 of total direct foreign investments. Since 1978, the
PRC government has made foreign direct investment more attractive with
preferential tax treatments by increasing the industries in which
investments can be made, making domestic markets more accessible and giving
greater latitude in the management of foreign investment enterprises.
Direct foreign investments in the PRC, by number of contracts and
contract value, during 1979 to 1994 were as follows:
<TABLE>
DIRECT FOREIGN INVESTMENT
<CAPTION>
1979-1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Number of Contracts
(in thousands) 3.25 3.07 1.50 2.23 5.95 5.78 7.27 12.98 48.76 83.44 47.50
Value of Contracts
(in U.S. $ billions) 10.4 5.93 2.83 3.71 5.30 5.60 6.60 11.98 58.12 111.44 82.70
__________________
Source: Ministry of Foreign Economic Relations and Trade and China Statistical Yearbook 1993, China Statistical Yearbook, 1993
and 1994.
</TABLE>
Forms of Direct Foreign Investments. Direct foreign investments in
China have taken a variety of forms, including:
Equity Joint Ventures. Equity joint ventures are principally governed
by The Law of the People's Republic of China on Joint Ventures Using
Foreign and Chinese Investment, promulgated in 1979 and the Regulations for
the Implementation of The Law of the People's Republic of China on Joint
Ventures Using Chinese and Foreign Investment, promulgated in 1983. This
law and its subordinate regulations were among the first principal pieces
of legislation relating to foreign direct investment in the PRC. They are
supplemented by rules and regulations governing taxation, labor and other
matters relating to equity joint ventures. Equity joint ventures are
limited liability companies in which Chinese and foreign partners hold
equity stakes.
Contractual or Cooperative Joint Ventures. Contractual or cooperative
joint ventures are governed by The Law of the People's Republic of China on
Chinese-Foreign Cooperative Joint Ventures of 1988 and the Regulations for
the Implementation of the Law of the People's Republic of China on Chinese-
Foreign Cooperation Joint Ventures promulgated in 1995. They are
established by contracts between a Chinese party and a foreign party.
Unlike equity joint ventures, in which the rights, liabilities, obligations
<PAGE>
and profit sharing arrangements between the joint venture partners are
usually defined by reference to their respective equity interests in the
joint venture, the rights, liabilities, obligations and profit sharing
arrangements between the parties in contractual or cooperative joint
ventures usually are specifically negotiated and set out in the joint
venture contract. This type of joint venture is generally perceived to
have a greater degree of flexibility than equity joint ventures.
Wholly Foreign-Owned Enterprises. Foreign companies are permitted to
establish wholly-owned subsidiaries in the PRC. Such wholly foreign-owned
enterprises are governed by The Law of the People's Republic of China on
Wholly Foreign-Owned Enterprises of 1986 and the Regulations for the
Implementation of the Law of the People's Republic of China on Wholly
Foreign-Owned Enterprises promulgated in 1990. These enterprises are
generally required to utilize advanced technology and equipment or to
export 50% or more of their finished products.
Sino-foreign Companies Limited by Shares. It is now permissible for
foreign companies to establish Sino-foreign companies limited by shares
with selected State-owned enterprises pursuant to the Provisional
Regulations for the Establishment of Foreign Investment Companies Limited
by Shares promulgated on January 10, 1995. Such companies may be
established by means of promotion or public offer. The minimum registered
capital requirement is RMB 30 million. Total value of the shares held by
the foreign shareholders can not be less than 25% of the company's total
registered capital. The company's shares may be traded publicly on the
Shenzhen Stock Exchange, the Shanghai Securities Exchange or the Hong Kong
Stock Exchange.
Holding Companies. Foreign companies are permitted to establish
holding companies in China pursuant to the Provisional Regulations on
Investment-oriented Companies in China Established by Foreign Companies
promulgated on April 4, 1995. The companies may be established either
solely by foreign investment or jointly by both Chinese and foreign
investment. There are substantial minimum total investment and registered
capital requirements that must be satisfied before such companies can be
approved.
Priority Investment Areas. In order to help modernize the Chinese
economy, China has established special zones in which foreign investment is
encouraged. It is anticipated that the Fund's direct investments will be
made primarily with respect to business operations in these zones.
Special Economic Zones. In 1980, China established special economic
zones to attract foreign capital, technology, and expertise by offering
investors in these zones tax incentives and other preferential treatment.
Four out of the five special economic zones in the PRC are located in the
Guangdong and Fujian Provinces, Shenzhen, Shantou and Zhuhai in Guangdong
Province and Xiamen in Fujian Province. Another special economic zone has
been established for all of Hainan province.
Open Coastal Cities. In April 1984, 14 areas were designated "open
coastal cities" where, like the special economic zones, preferential
investment terms are offered to investors. Most of these cities have
"economic and technological development zones" which afford the foreign
investor the same advantages as the special economic zones. These cities
are Qinhuangdao, Dalian, Tianjin, Yantai, Qingdao, Lianyungang, Nantong,
Shanghai, Ningbo, Wenzhou, Fuzhou, Guangzhou, Beihai and Zhanjiang.
Coastal Open Economic Zones. In the late 1980s, five areas were
designated coastal open economic zones: Liaodong Peninsula and Shangdong
Peninsula in northeast China, the Yangtze River Delta in the eastern
<PAGE>
Jiangsu Province, the Minnan Delta in Fujian Province and the Pearl River
Delta in southern Guangdong Province.
Shanghai's Pudong District. In 1990, the Pudong area of Shanghai was
also designated an open zone for foreign investments with autonomy
equivalent to that of a special economic zone.
High and New Technology Industrial Development Zones. High and new
technology industrial development zones were first introduced in 1988 to
offer preferential treatment to enterprises which have been confirmed as
technology intensive in accordance with the requirements formulated by the
State Science and Technology Commission. There are 27 high and new
technology industrial development zones which have been approved by the
State Council. These zones presently exist in Beijing, Changchun,
Changsha, Chengdu, Chongqing, Dalian, Fuzhou, Guangzhou, Guilin, Hainan,
Hangzhou, Harbin, Hefei, Jinan, Lanzhou, Nanjing, Shanghai, Shenyang,
Shenzhen, Shijiazhuang, Tianjin, Weihai, Wuhan, Xi'an, Xiamen, Zhengzhou
and Zhongshan.
THE GREATER CHINA FUND, INC.
Report of Independent Accountants
To the Shareholders and Board of Directors of
The Greater China Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of The
Greater China Fund, Inc. (the "Fund") at December 31, 1995, the results of
its operations for the year then ended, the changes in its net assets for
each of the two years in the period then ended and the financial highlights
for each of the three years in the period then ended and for the period
July 23, 1992 (commencement of investment operations) through December 31,
1992, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management;
our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these financial statements
in accordance with generally accepted auditing standards which require that
we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at December 31, 1995
by correspondence with the custodian, provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
February 5, 1996
<TABLE>
<PAGE>
PORTFOLIO OF INVESTMENTS
December 31, 1995
<CAPTION>
Shares Description Value
(Note 1)
<S> <C> <C>
EQUITIES AND EQUITY EQUIVALENTS - 100.0%
CHINA - 16.2%
BUILDING MATERIALS - 2.4%
2,237,560 China Southern Glass Co. "B" $ 607,679
6,782,000 Luoyang Glass Co. Ltd. "H" 1,745,384
1,200,000 Shanghai Yaohua Pilkington Glass "B" 1,056,000
3,409,063
CONSUMPTION - 0.9%
500,000 Shanghai Shangling Electrical Appliances "B"* 306,000
2,900,000 Shanghai Narcissus Electric "B" 493,000
1,650,000 Zhuhai Lizhu Pharmaceuticals "B" 490,786
1,289,786
MANUFACTURING - 7.3%
5,114,000 Chengdu Telecom Cable "H" 873,001
700,000 China International Marine Containers "B" 516,004
700,000 Erdos Cashmere Products Co. "B"* 261,800
9,000,000 Harbin Power Equipment "H" 1,350,145
4,500,000 Northeast Electric T&T Machine Manufacturing "H"* 733,269
4,050,000 Quingling Motor Cos. "H" 1,178,467
1,011,600 Shanghai Chlor-Alkali Chemical "B" 256,946
500,000 Shanghai Diesel Engine Co. Ltd. "B" 185,000
7,334,000 Shanghai Petrochemical Co. "H" 2,110,333
10,490,000 Yizheng Chemical Fibre Co. Ltd. "H" 2,360,504
1,730,000 Zhenhai Refining & Chemical Co. "H" 324,410
10,149,879
REAL ESTATE DEVELOPMENT - 1.3%
1,622,900 Shanghai Jinqiao Export Processing Zone "B" 606,965
2,100,000 Shanghai Lujiazui Finance & Trading "B" 1,192,800
1,799,765
Shares Description Value
(Note 1)
CHINA - (CONTINUED)
SERVICES - 4.3%
2,737,680 China Merchant Shekou Port Service Co. Ltd. "B" $ 991,336
1,000,000 Chiwan Wharf Holdings Ltd. "B" 376,334
5,171,600 Shanghai Dazhong Taxi Co. Ltd. "B" 3,775,268
10,388,000 Shanghai Haixing Shipping "H" 698,579
228,155 Shanghai New Asia Group "B"* 120,466
5,961,983
<PAGE>
Total China 22,610,476
HONG KONG - 75.5%
BANKING - 8.7%
220,000 Dao Heng Bank 792,370
387,800 Hang Seng Bank 3,473,023
300,000 HSBC Holdings 4,539,282
6,325,435 The Ka Wah Bank Ltd. 1,861,024
3,600,000 Min Xin Holdings Ltd. 512,124
1,000,000 Union Bank of Hong Kong 944,067
12,121,890
CONGLOMERATE - 20.0%
3,100,000 China Resources Enterprise 1,603,621
1,455,000 Citic Pacific Ltd. 4,977,013
1,800,000 First Pacific Co. 1,990,301
10,044,000 Guangdong Investment Ltd. 6,040,039
800,000 Hutchinson Whampoa Ltd. 4,862,593
550,000 Swire Pacific (A) 4,267,701
1,250,000 The Wharf Holdings Ltd. 4,162,625
27,903,893
CONSTRUCTION - 0.2%
366,000 Kumagai Gumi (Hong Kong) Ltd. 265,063
Shares Description Value
(Note 1)
HONG KONG - (CONTINUED)
CONSUMPTION - 4.4%
2,570,000 China-HK Photo $ 1,454,090
1,688,000 Giordano International Ltd. 1,440,776
1,213,000 Goldlion Holdings Ltd. 886,317
4,162,000 Hualing Holdings Ltd. 500,570
400,000 Jardine International Motor Holdings 455,221
3,500,000 Lam Soon Food Industries Ltd. 398,319
2,100,000 NG Fung Hong Ltd.* 923,375
6,058,668
INDUSTRIAL - 0.5%
410,000 Varitronix International 760,879
MANUFACTURING - 1.7%
4,000,000 Herald Holdings 204,332
1,852,000 Singamas Container 239,509
4,258,000 Sinocan Holdings Ltd. 1,514,323
3,044,160 World Houseware Holdings 452,736
<PAGE>
2,410,900
REAL ESTATE DEVELOPMENT - 22.4%
1,340,000 Cheung Kong Holdings 8,144,843
5,996,000 China Overseas Land & Investment Ltd. 1,062,337
500,000 Henderson Land Development 3,013,256
2,000,000 Hong Kong Resort International Ltd. 1,862,270
400,000 Hong Kong Resort International Ltd. Warrants,
expiring June 23, 2000*
130,617
2,200,000 New World Development Co. Ltd. 9,559,651
900,000 Sun Hung Kai Properties Ltd. 7,361,785
31,134,759
REAL ESTATE INVESTMENT - 1.4%
2,000,000 Amoy Properties 1,991,594
SERVICES - 1.7%
1,904,000 Shangri La Asia 2,314,594
TRADING - 1.3%
2,032,200 Li & Fung Ltd. 1,813,408
Shares Description Value
(Note 1)
HONG KONG - (CONTINUED)
UTILITIES - 6.8%
900,000 China Light & Power Co. Ltd. $ 4,143,550
1,852,631 Consolidated Electric Power Asia 3,366,242
1,200,000 Hong Kong & China Gas 1,932,105
9,441,897
MISCELLANEOUS - 6.4%
7,710,000 China Merchant Hai Hong Holdings Co. Ltd. 2,068,962
2,194,000 Fairyoung Holdings Ltd. 1,007,268
438,800 Fairyoung Holdings Ltd. Warrants,
expiring June 30, 1996*
13,790
1,400,000 Florens Group Ltd. 914,323
314,974 New World Infrastructure 602,860
1,200,000 Television Broadcasting 4,275,461
8,882,664
Total Hong Kong 105,100,209
KOREA - 3.1%
BUILDING MATERIALS - 2.0%
34,043 Dong Ah Construction 1,189,256
<PAGE>
9,048 Dong Ah Construction (New) 316,082
33,923 Dongkuk Steel Mill Co. (New) 804,619
7,930 Inchon Iron & Steel Co. Ltd. 300,537
2,290 Pohang Iron & Steel Co. 149,665
2,760,159
MANUFACTURING - 1.1%
7,200 Samsung Electronics* 1,308,669
1,424 Samsung Electronics (New)* 256,990
106 Samsung Electronics (New 3)* 19,198
1,584,857
Total Korea 4,345,016
Shares Description Value
(Note 1)
SINGAPORE - 2.9%
CONGLOMERATE - 2.1%
432,000 Jardine Matheson SGD $ 2,959,200
MANUFACTURING - 0.8%
397,000 Elec & Eltek International Co. Ltd. 1,067,930
Total Singapore 4,027,130
TAIWAN - 2.3%
MANUFACTURING - 0.3%
30,000 Advanced Semiconductor Engineering GDR* 396,750
MISCELLANEOUS - 2.0%
18 Taipei Fund IDR* 1,296,000
71,250 The Taiwan Fund, Inc. 1,460,625
2,756,625
Total Taiwan 3,153,375
Total Equities and Equity Equivalents 139,236,206
(cost $127,730,966)
Principal Description Value
Amount (Note 1)
FIXED INCOME - 0.4%
HONG KONG
REAL ESTATE DEVELOPMENT
HK$5,250,000 Hong Kong Resort International Ltd.,
6.00%, 6/26/2000
(cost $409,318) $ 571,169
TIME DEPOSIT - 1.1%
<PAGE>
US$1,525,000 Brown Brothers Harriman & Co.,
Grand Cayman, 4.75%** $ 1,525,000
(cost $1,525,000)
TOTAL INVESTMENTS - 101.5%
(cost $129,665,284) 141,332,375
Liabilities in excess of other assets - (1.5%) (2,086,433)
NET ASSETS - 100.0% $139,245,942
* Non-income producing security.
** Variable rate account -- rates reset on a monthly basis; amounts available upon 48 hours' notice.
GDR -- Global Depository Receipt.
IDR -- International Depository Receipt.
See Notes to Financial Statements
THE GREATER CHINA FUND, INC.
</TABLE>
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
<S> <C>
ASSETS
Investments, at value (cost $129,665,284) $141,332,375
Cash (including Hong Kong dollars of $18,540
with a cost of $18,546) 22,317
Dividends and interest receivable 263,047
Receivable for investments sold 129,294
Deferred organizational expenses and other assets 74,442
Total assets 141,821,475
LIABILITIES
Dividends payable 1,946,643
Investment management fee payable 148,038
Administration fee payable 24,960
Accrued expenses 455,892
Total liabilities 2,575,533
NET ASSETS 139,245,942
COMPOSITION OF NET ASSETS:
Common stock, $0.001 par value; 9,589,377 shares issued
and outstanding (100,000,000 shares authorized) $ 9,589
Paid-in capital in excess of par 135,222,485
Dividends in excess of net investment income (736)
<PAGE>
Accumulated net realized loss on investments and
distributions in excess of net realized gain (7,652,559)
Net unrealized appreciation of investments and other
assets and liabilities denominated in foreign currencies 11,667,163
NET ASSETS $139,245,942
Shares outstanding 9,589,377
NET ASSET VALUE PER SHARE $14.52
</TABLE>
See Notes to Financial Statements
<TABLE>
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
<S> <C>
INVESTMENT INCOME
Dividends (net of foreign withholding taxes of $5,719) $ 5,028,091
Interest 78,721
Total investment income 5,106,812
EXPENSES
Investment management fees 1,703,414
Custodian and accounting fees 464,223
Administration fees 287,546
Directors' fees and expenses 227,314
Reports and notices to shareholders 205,132
Legal fees and expenses 175,063
Audit fees and expenses 54,434
Amortization of organizational expenses 24,546
Insurance expense 20,018
NYSE listing fee 15,535
Transfer agent's fees and expenses 11,853
Miscellaneous expenses 25,763
Total expenses 3,214,841
Net investment income 1,891,971
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS
Net realized loss on:
Investments (7,115,671)
Foreign currency transactions (15,784)
(7,131,455)
Net change in unrealized appreciation/depreciation of:
Investments 9,902,481
Other assets and liabilities denominated in
foreign currencies
530
9,903,011
Net realized and unrealized gain on investments
and foreign currency transactions
2,771,556
NET INCREASE IN NET ASSETS
FROM INVESTMENT OPERATIONS
$ 4,663,527
See Notes to Financial Statements
</TABLE>
THE GREATER CHINA FUND, INC.
<TABLE>
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<CAPTION>
For the Year For the Year
Ended Ended
December 31, 1995 December 31, 1994
<S> <C> <C>
INCOME (LOSS) FROM INVESTMENT
OPERATIONS:
Net investment income $1,891,971 $908,243
Net realized gain (loss) on investments
and foreign currency transactions (7,131,455) 524,949
Net change in unrealized appreciation/
depreciation of investments and
other assets and liabilities
denominated in foreign currencies 9,903,011 (65,824,056)
Total from investment operations 4,663,527 (64,390,864)
DIVIDENDS AND DISTRIBUTIONS
TO SHAREHOLDERS:
From net investment income (1,871,084) (897,561)
In excess of net investment income (736) ---
From net realized gain on investments (65,351) (540,032)
In excess of net realized gain
on investments (536,888) ---
Total dividends and distributions
to shareholders
(2,474,059) (1,437,593)
FUND SHARE TRANSACTIONS:
Proceeds from dividends reinvested 62,701 192,930
Proceeds from the sale of shares in
rights offering --- 42,456,337
Offering costs charged to paid-in
capital in excess of par
--- (610,000)
Total Fund share transactions 62,701 42,039,267
Net increase (decrease) in net assets 2,252,169 (23,789,190)
NET ASSETS:
Beginning of year 136,993,773 160,782,963
End of year $139,245,942 $136,993,773
</TABLE>
See Notes to Financial Statements
THE GREATER CHINA FUND, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Greater China Fund, Inc. (the "Fund") was incorporated in Maryland on
May 11, 1992, as a non-diversified, closed-end management investment
company. The Fund's investment objective is to seek long-term capital
appreciation by investing substantially all of its assets in listed equity
securities of companies which derive or are expected to derive a
significant portion of their revenues from goods produced or sold,
investments made or services performed in China. The Fund had no
operations until July 7, 1992, when it sold 7,200 shares of common stock
for $100,440 to Baring International Investment (Far East) Limited (the
"Investment Manager"). Investment operations commenced on July 23, 1992.
<PAGE>
Organizational costs of $123,000 have been deferred and are being amortized
on a straight-line basis over a 60-month period from the date the Fund
commenced operations.
The following is a summary of significant accounting policies followed by
the Fund.
VALUATION OF INVESTMENTS
All securities for which market quotations are readily available are valued
at the last sales price on the day of valuation, or if there was no sale on
such day, the last bid price quoted on such day. Short-term debt
securities which mature in 60 days or less are valued at amortized cost, or
by amortizing their value on the 61st day prior to maturity if their term
to maturity from the date of purchase when acquired by the Fund was greater
than 60 days, unless the Fund's Board of Directors determines that such
values do not represent the fair value of such securities. Securities and
assets for which market quotations are not readily available (including
investments which are subject to limitations as to their sale) are valued
at fair value as determined in good faith by or under the direction of the
Board of Directors.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME
Investment transactions are recorded on the trade date (the date on which
the order to buy or sell is executed). Realized gains and losses on
investments and foreign currency transactions are calculated on the
identified cost basis. Interest income is recorded on the accrual basis.
Dividend income and other distributions are recorded on the ex-dividend
date, except for certain dividends which are recorded as soon after the ex-
dividend date as the Fund becomes aware of such dividends.
FOREIGN CURRENCY TRANSLATION
The books and records of the Fund are maintained in U.S. dollars. Foreign
currency amounts are translated into U.S. dollars on the following basis:
(i) the foreign currency market value of investment securities and other
assets and liabilities stated in foreign currencies at the closing rate of
exchange on the valuation date; and
(ii) purchases and sales of investment securities, income and expenses at
the rate of exchange prevailing on the respective dates of such
transactions.
The resulting foreign currency gains and losses are included in the
Statement of Operations.
The Fund does not generally isolate the effect of fluctuations in foreign
currency exchange rates from the effect of fluctuations in the market
prices of equity securities. Accordingly, realized and unrealized foreign
currency gains (losses) are included in net realized and unrealized gain
(loss) on investments. However, the Fund does isolate the effect of
fluctuations in foreign currency rates when determining the gain or loss
upon the sale or maturity of foreign currency denominated debt obligations
pursuant to U.S. federal income tax regulations; such amount is categorized
as foreign currency exchange gain or loss for both financial reporting and
income tax reporting purposes.
Net foreign currency gains (losses) from valuing foreign currency
denominated assets and liabilities at period end exchange rates are
reflected as a component of net unrealized appreciation of investments and
other assets and liabilities denominated in foreign currencies.
DIVIDENDS AND DISTRIBUTIONS
The Fund will distribute to shareholders, at least annually, substantially
all of its net investment income and net realized capital gains, if any.
Such dividends and distributions are recorded on the ex-dividend date. The
amount of the dividends and distributions from net investment income and
<PAGE>
net realized capital gains are determined in accordance with federal income
tax regulations, which may differ from generally accepted accounting
principles. These "book/tax" differences are either considered temporary
or permanent in nature. To the extent these differences are permanent in
nature, such amounts are reclassified within the capital accounts based on
their federal tax-basis treatment; temporary differences do not require
reclassification. Dividends and distributions which exceed net investment
income and net realized capital gains for financial reporting purposes but
not for tax purposes are reported as dividends in excess of net investment
income and distributions in excess of net realized gains. To the extent
they exceed net investment income and net realized gains for tax purposes,
they are reported as distributions of paid-in capital in excess of par.
Net realized foreign currency losses of $15,784 have been reclassified to
undistributed net investment income.
On December 19, 1995, the Fund's Board of Directors declared an ordinary
income dividend of $0.203 per share. The dividend was paid on January 12,
1996 to shareholders of record as of December 29, 1995.
TAX STATUS
United States
The Fund intends to distribute all of its taxable income and to comply with
the other requirements of the U.S. Internal Revenue Code applicable to
regulated investment companies. Accordingly, no provision for U.S. federal
income taxes is required. In addition, by distributing during each
calendar year substantially all of its net investment income, realized
capital gains and certain other amounts, if any, the Fund intends not to be
subject to a U.S. federal excise tax.
China
Presently, as a result of a ruling issued in July 1993 (the "July Ruling"),
The People's Republic of China ("PRC") State Tax Bureau has determined that
dividends paid on "B" shares and dividends received from a PRC company, the
shares of which are listed on non-PRC securities exchanges, including
dividends paid with respect to "H" shares, will not for the time being be
subject to PRC withholding tax. However, there is no assurance that the
July Ruling will remain in effect for the entire period that such shares
are held by the Fund, as it is a temporary provision. Based on the July
Ruling, capital gains from the sale of "B" shares and shares of a PRC
company listed on a non-PRC securities exchange, including "H" shares, will
not for the time being be subject to the 20% withholding tax.
Capital gains with respect to debt securities of PRC companies are not
covered by the July Ruling and may be subject to the 20% withholding tax.
In the future, were the July Ruling to be reversed, dividends received and
capital gains derived with respect to investments in securities of PRC
companies would be subject to withholding tax at a maximum rate of 20%.
Hong Kong
Under current Hong Kong law, no income tax is charged on dividends or other
distributions received by any person with respect to investments in Hong
Kong securities. Additionally, there is no tax in Hong Kong on capital
gains realized from the disposal of such securities. However, income
received and capital gains realized by any person in the course of a trade,
profession or business carried on in Hong Kong may be subject to Hong Kong
profits tax. It is the intention of the Fund to conduct its affairs in
such a manner that it will not be subject to such profits tax. To the
extent that the Fund were to derive any profit from such a trade,
profession or business, its profit from the trading of securities
(including interest, dividends and net capital gains) would be subject to
profits tax, which is currently a flat rate of 17.5% for corporations.
<PAGE>
NOTE 2
INVESTMENT MANAGEMENT AND ADMINISTRATION AGREEMENTS
Effective March 14, 1995, the Investment Manager entered into a new
investment management agreement ("Investment Management Agreement") on
terms which are not different from those of the previous agreement with the
Fund. In accordance with the Investment Management Agreement, the
Investment Manager manages the Fund's investments in accordance with the
Fund's investment objectives, policies and restrictions, and makes
investment decisions on behalf of the Fund, including the selection of, and
placing of orders with, brokers and dealers to execute portfolio
transactions on behalf of the Fund. As compensation for its services, the
Investment Manager receives a monthly fee at the annual rate of 1.25% of
the value of the Fund's average weekly net assets.
Mitchell Hutchins Asset Management Inc. (the "Administrator"), a wholly-
owned subsidiary of Paine Webber Inc. ("Paine Webber"), has an
administration agreement ("Administration Agreement") with the Fund. Under
the terms of the Administration Agreement, the Administrator provides
certain administrative services to the Fund. As compensation for its
services, the Administrator receives a monthly fee at the annual rate of
0.22% of the value of the Fund's average weekly net assets up to $75
million, and 0.20% of such net assets in excess of $75 million, subject to
a minimum annual fee of $150,000.
NOTE 3
TRANSACTIONS WITH AFFILIATES
Of the 9,589,377 shares outstanding at December 31, 1995, the Investment
Manager owned 7,485 shares.
For the year ended December 31, 1995, the Fund paid $2,951 in brokerage
commissions to Barings Securities, an affiliate of the Adviser.
NOTE 4
PORTFOLIO SECURITIES
For U.S. federal income tax purposes, the cost of securities owned at
December 31, 1995 was $130,157,399. Accordingly, net unrealized
appreciation of investments of $11,174,976 was composed of gross
appreciation of $26,344,635 for those securities having an excess of value
over cost, and gross depreciation of $15,169,659 for those securities
having an excess of cost over value.
For the year ended December 31, 1995, aggregate purchases and sales of
portfolio securities, excluding short-term securities, were $43,719,945 and
$43,319,909, respectively.
NOTE 5
CAPITAL STOCK
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
For the Year For the Year
Ended Ended
December 31, 1995 December 31, 1994
<S> <C> <C>
<PAGE>
Shares outstanding, beginning of year 9,584,377 6,757,200
Shares issued resulting from
dividend reinvestment 5,000 8,616
Shares issued in connection with
rights offering --- 2,818,561
Net increase in shares outstanding 5,000 2,827,177
Shares outstanding, end of year 9,589,377 9,584,377
</TABLE>
NOTE 6
CONCENTRATION OF RISK
The Fund may have elements of risk, not typically associated with
investment in the U.S., due to concentrated investments in specific
industries or investments in foreign issuer located in a specific country
or region. Such concentrations may subject the Fund to additional risks
resulting from future political or economic conditions in such country or
region and the possible imposition of adverse governmental laws of currency
exchange restrictions affecting such country or region.
NOTE 7
RIGHTS OFFERING
During the year ended December 31, 1994, the Fund issued 2,818,561 shares
in connection with a rights offering of the Fund's shares. Shareholders of
record on May 20, 1994 were issued one non-transferable right for each
share of common stock owned, entitling shareholders the opportunity to
acquire one newly issued share of common stock for every three rights held
at a subscription price of $15.65 per share. Offering costs of $610,000
were charged to paid-in capital in excess of par, including $100,000 paid
to Paine Webber, an affiliate of the Administrator, as partial
reimbursement for its expenses. Dealer manager and soliciting fees of
$1,654,143 were netted against the proceeds of the subscription. Paine
Webber earned approximately $936,000 of the aforementioned commissions with
respect to its participation in the offering.
NOTE 8
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Quarter ended Net investment Net realized Net increase Market price on
income (loss) and unrealized (decrease) NYSE
gain (loss) on in net assets
investments and from
foregin currency investment
transactions operations
Total Per Total Per Total Per High Low
(000) Share (000) Share (000) Share
<S> <C> <C> <C> <C> <C> <C> <C> <C>
<PAGE>
December 31, 1995 $ 359 $ 0.04 $ (3,363) $(0.35) $ (3,004) $(0.31) $14.625 $13.125
September 30, 1995 (95) (0.01) 6,059 0.63 5,964 0.62 14.375 12.250
June 30, 1995 1,741 0.18 5,031 0.53 6,772 0.71 14.875 11.750
March 31, 1995 (113) (0.01) (4,955) (0.52) (5,068) (0.53) 13.375 11.375
Totals $1,892 $ 0.20 $ 2,772 $ 0.29 $ 4,664 $ 0.49
December 31, 1994 $ 300 $ 0.03 $(30,903) $(3.22) $(30,603) $(3.19) $17.875 $11.750
September 30, 1994 (22) (0.00) 14,089 1.47 14,067 1.47 19.375 15.625
June 30, 1994 1,076 0.16 (3,382) (0.50) (2,306) (0.34) 20.750 16.375
March 31, 1994 (446) (0.07) (45,103) (6.67) (45,549) (6.74) 26.500 17.625
Totals $ 908 $ 0.12 $(65,299) $(8.92) $(64,391) $(8.80)
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
For the Period
July 23, 1992(3)
Selected data for a share of common stock outstanding For the Year Ended through
throughout each period is presented below: December 31, December 31,
<C> <C> <C> <C>
<S> 1995 1994 1993 1992
Net asset value, beginning of period $14.29 $23.79 $13.40 $13.95(4)
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.20 0.12* 0.02 (0.00)
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 0.29 (8.92)* 11.00 (0.38)
Total from investment operations 0.49 (8.80) 11.02 (0.38)
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income (0.20) (0.09) (0.01) ---
Net realized gain on investments (0.01) (0.06) (0.62) ---
In excess of net realized gain on investments (0.05) --- --- ---
Total dividends and distributions
to shareholders (0.26) (0.15) (0.63) ---
FUND SHARE TRANSACTIONS:
Dilutive effect of rights offering --- (0.46) --- ---
Offering costs charged to paid-in
capital in excess of par --- (0.09) --- (0.17)
Total Fund share transactions --- (0.55) --- (0.17)
Net asset value, end of period $14.52 $14.29 $23.79 $13.40
<PAGE>
Market value, end of period $14.13 $12.13 $26.75 $12.38
TOTAL INVESTMENT RETURN(1)(2) 18.48% (52.01)% 122.01% (11.29)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $139,246 $136,994 $160,783 $90,543
Ratio of expenses to average net assets 2.36% 2.08% 2.22% 2.43%**
Ratio of net investment income (loss)
to average net assets 1.39% 0.63% 0.11% (0.04)%**
Portfolio turnover 32% 22% 31% 1%
* Computed based on average shares outstanding.
** Annualized.
(1) Total investment return is calculated assuming a purchase of common stock at the current market price on the first
day, the purchase of common stock pursuant to any rights offering occurring in the period, and a sale at the current
market price on the last day of each period reported. Dividends and distributions, if any, are assumed, for purposes
of this calculation, to be reinvested at prices obtained under the Fund's dividend reinvestment plan. Total
investment return does not reflect sales charges or brokerage commissions.
(2) Total investment return for a period of less than one year is not annualized.
(3) Commencement of investment operations.
(4) Initial public offering price of $15.00 per share net of underwriting discount of $1.05 per share.
</TABLE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
<TABLE>
<CAPTION>
<S> <C>
1. Financial Statements (included in the Statement of Additional Information)
Report of Independent Accountants
Portfolio of Investments
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Assets
Notes to Financial Statements
Financial Highlights
<CAPTION>
2. Exhibits:
<S> <C> <C>
(a) -- Articles of Incorporation of the Registrant.(a)
(b) -- By-Laws of the Registrant.(b)
(c) -- Not applicable.
(d) -- (1) Specimen certificates for Common Stock.(c)
(2) Form of Subscription Certificate.*
(3) Form of Notice of Guaranteed Delivery.*
(4) Form of DTC Participant Oversubscription Form.*
(e) -- Dividend Reinvestment Plan.(d)
(f) -- Not applicable.
(g) -- Management Agreement between the Registrant and Baring International Investment (Far East) Limited.(e)
(h) -- (1) Form of Dealer Manager Agreement between the Registrant and PaineWebber Incorporated.*
-- (2) Form of Soliciting Dealer Agreement between the Registrant and Soliciting Dealers.*
(i) -- Not applicable.
<PAGE>
(j) -- (1) Custodian Agreement between the Registrant and Brown Brothers Harriman & Co.(f)
(2) Administration Agreement between the Registrant and Mitchell Hutchins Asset Management Inc.(g)
(k) -- (1) Paying and Transfer Agency Agreement between the Registrant and PNC Bank, National Association.(h)
(2) Form of Subscription Agency Agreement between the Registrant and PNC Bank, National Association.*
(l) -- (1) Opinion and Consent of White & Case.*
-- (2) Opinion and Consent of Piper & Marbury L.L.P.*
(m) -- Not applicable.
(n) -- Consent of Price Waterhouse LLP, independent accountants for the Registrant.*
(o) -- Not applicable.
(p) -- Not applicable.
(q) -- Not applicable.
(r) -- Financial Data Schedule.*
(s) -- Powers of Attorney.**
* Filed herewith.
** Previously filed.
________________
<CAPTION>
<S> <C>
(a) Incorporated by reference to Item 4, Exhibit number 1 filed with the Registrant's Registration Statement on Form N-2
(No. 33-47816).
(b) Incorporated by reference to Item 4, Exhibit number 2 filed with the Registrant's Registration Statement on Form N-2
(No. 33-47816) filed with the Commission.
(c) Incorporated by reference to Item 4, Exhibit number 4 filed with the Registrant's Registration Statement on Form N-2
(No. 33-47816).
(d) Incorporated by reference to Item 4, Exhibit number 10(C) filed with the Registrant's Registration Statement on Form
N-2 (No. 33-47816).
(e) Incorporated by reference to Exhibit A to the Registrant's Definitive Proxy Statement filed on May 9, 1995 pursuant to
Rule 14a-6(b) under the Securities Exchange Act of 1934.
(f) Incorporated by reference to Item 4, Exhibit number 9 filed with the Registrant's Registration Statement on Form N-2
(No. 33-47816).
(g) Incorporated by reference to Item 4, Exhibit number 10(A) filed with the Registrant's Registration Statement on Form
N-2 (No. 33-47816).
(h) Incorporated by reference to Item 4, Exhibit number 10(B) filed with the Registrant's Registration Statement on Form
N-2 (No. 33-47816).
</TABLE>
ITEM 25. MARKETING ARRANGEMENTS.
Not applicable.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses to be incurred
in connection with the offering described in this Registration Statement:
<TABLE>
<CAPTION>
<S> <C>
Registration fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,734
New York Stock Exchange listing fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,500
Printing and Postage (including subscription certificates) . . . . . . . . . . . . . . . . . . . $ 65,000
Fees and expenses of qualifications under state securities laws
<PAGE>
(including fees of counsel) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,000
Legal fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $200,000
Accounting fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,000
National Association of Securities Dealers fees . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,040
Reimbursement of Dealer Manager expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100,000
Subscription Agent fee and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,000
Information Agent fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50,000
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,726
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $530,000
_______
</TABLE>
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
<S> <C>
NUMBER OF
RECORD HOLDERS AT
TITLE OF CLASS DECEMBER 31, 1995
Common Stock, par value $0.001 per share 637
</TABLE>
ITEM 29. INDEMNIFICATION.
Section 2-418 of the General Corporation Law of the State of Maryland,
the state in which the Registrant was organized, empowers a corporation,
subject to certain limitations, to indemnify its directors, officers,
employees and agents against expenses (including attorneys' fees,
judgments, penalties, fines and settlements) actually and reasonably
incurred by them in connection with any suit or proceeding to which they
are a party so long as they acted in good faith or without active and
deliberate dishonesty, or they received no actual improper personal benefit
in money, property or services, if, with respect to any criminal
proceeding, so long as they had no reasonable cause to believe their
conduct to have been unlawful.
Article EIGHTH of the Registrant's Amended Articles of Incorporation
provides that the Registrant shall indemnify its directors and officers to
the fullest extent permitted by the Maryland General Corporation Law. The
Registrant's Board of Directors may make further provision for
indemnification of directors, officers, employees and agents to the fullest
extent permitted by Maryland law.
Article IX of the Registrant's By-Laws indemnifies current or former
directors and officers of the Registrant to the full extent permissible
under the Maryland General Corporation Law, and the Securities Act of 1933,
as amended. Employees and agents who are not officers or directors of the
Registrant may be indemnified in the same manner, and to such further
extent as may be provided by action of the Board of Directors or by
contract. In addition, the Registrant may purchase insurance on behalf of
any current or former director, officer, employee or agent of the fund with
respect to certain liabilities. The By-Laws provide, however, that the
Registrant's directors and officers shall not be indemnified against
liability arising from willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of their office.
The Registrant will comply with the indemnification requirements of
Investment Company Act Release No. 7221 (June 9, 1972) and Investment
Company Act Release No. 11330 (September 2, 1980).
<PAGE>
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers
and controlling persons of the Registrant, pursuant to the foregoing
provisions or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act of 1933, as
amended, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act of 1933, as amended, and
will be governed by the final adjudication of such issue.
Reference is made to Section 7(a) of the Dealer Manager Agreement, a
form of which will be filed as Exhibit (h)(1) hereto, for provisions
relating to the indemnification of the Dealer Manager.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISOR.
Information as to the directors and officers of Baring International
Investment (Far East) Limited is included in its Form ADV filed with the
Securities and Exchange Commission (SEC File No. 801-17838) and is
incorporated herein by reference thereto.
Set forth below is a list of each executive officer and director of
the Investment Manager (other than those listed in the ADV) indicating each
business, profession, vocation or employment of a substantial nature in
which each such person has been engaged since July 23, 1992 (commencement
of the Registrant's operations) for his own account or in the capacity of
director, officer, partner or trustee.
<TABLE>
<CAPTION>
<S> <C> <C>
Other Substantial
Position with the Business, Profession
Name Investment Manager Vocation or Employment
Thomas Walker Portfolio Manager Director of The Institutional
Group, Baring Asset Management
(Asia Limited); previously
assistant director of Edinburgh
Fund Managers PLC.
</TABLE>
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS.
Certain accounts, books and other documents required to be maintained
pursuant to Section 31(a) of the Investment Company Act of 1940 and the
Rules promulgated thereunder are maintained by Mitchell Hutchins Asset
Management Inc., 1285 Avenue of the Americas, New York, New York. Records
relating to the duties of the Registrant's custodian are maintained by
Brown Brothers Harriman & Co., 59 Wall Street, New York, New York, and
those relating to the duties of the transfer agent, dividend paying agent
and registrar are maintained by PNC Bank, National Association, 103 Bellvue
Parkway, Wilmington, Delaware 19809.
ITEM 32. MANAGEMENT SERVICES.
<PAGE>
Not applicable.
ITEM 33. UNDERTAKINGS.
(1) Registrant undertakes to suspend offering of the shares of Common
Stock covered hereby until it amends its Prospectus contained herein if (a)
subsequent to the effective date of this Registration Statement, its net
asset value per share of Common Stock declines more than 10 percent from
its net asset value per share of Common Stock as of the effective date of
this Registration Statement, or (b) its net asset value per share of Common
Stock increases to an amount greater than its net proceeds as stated in the
Prospectus contained herein.
(2) Not applicable.
(3) Not applicable.
(4) Not applicable.
(5) Registrant undertakes that:
(a) For purposes of determining any liability under the
Securities Act of 1933, as amended, the information omitted from the
form of prospectus filed as part of the Registration Statement in
reliance upon Rule 430A and contained in the form of prospectus filed
by the Registrant pursuant to Rule 497(h) under the Securities Act of
1933, as amended, shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the
Securities Act of 1933, as amended, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(6) Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days of
receipt of a written or oral request, any Statement of Additional
Information.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Amendment to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, and State of New York on the 8th day
of March, 1996.
<TABLE>
<CAPTION>
<S> <C>
THE GREATER CHINA FUND, INC.
(Registrant)
By: *
Jonathan J.K. Taylor
President
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Amendment has been signed below by the following persons in the capacities
and on the date indicated.
<TABLE>
<PAGE>
<CAPTION>
Signatures Title Date
<S> <C> <C>
* President and Director
Jonathan J.K. Taylor (Principal Executive Officer) March 8, 1996
/s/ C. William Maher Treasurer and Assistant Secretary (Principal
C. William Maher Financial and Accounting Officer) March 8, 1996
*
Edward Y. Baker Director March 8, 1996
*
Richard B. Bradley Director March 8, 1996
*
John A. Bult Director March 8, 1996
*
Richard Graham Director March 8, 1996
*
John A. Hawkins Director March 8, 1996
*
Don G. Hoff Director March 8, 1996
*
Tak Lung Tsim Director March 8, 1996
*By: /s/ C. William Maher
C. William Maher March 8, 1996
Attorney-in-Fact
</TABLE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Page No.
<S> <C> <C>
(d)(2) Form of Subscription Certificate
(d)(3) Form of Notice of Guaranteed Delivery
(d)(4) Form of DTC Participant Oversubscription Form
(h)(1) Form of Dealer Manager Agreement between the Registrant and PaineWebber Incorporated
(h)(2) Form of Soliciting Dealer Agreement between the Registrant and Soliciting Dealers
(k)(2) Form of Subscription Agency Agreement
(l)(1) Opinion and Consent of White & Case
(e)(2) Opinion and Consent of Piper & Marbury L.L.P.
(n) Consent of Price Waterhouse LLP, independent accountants for the Registrant
(r) Financial Data Schedule
</TABLE>
<PAGE>
EXHIBIT (d)(2)
THE GREATER CHINA FUND, INC.
RIGHTS OFFERING
SHAREHOLDER SUBSCRIPTION CERTIFICATE AND EXERCISE FORM
VOID IF NOT RECEIVED BY THE SUBSCRIPTION AGENT
BEFORE 5:00 P.M. NEW YORK CITY TIME ON APRIL 12, 1996,
UNLESS THE OFFER IS EXTENDED BY THE FUND
As the registered owner of this Subscription Certificate, you have been
granted Rights, based on the number of shares you owned on March 18, 1996
(the "Record Date"), to subscribe for the number of Shares of the Fund's
common stock shown on the reverse of this Certificate. Under the Primary
Subscription, you may subscribe for one new Share for every four Rights
held. The Subscription Price per Share will be [90]% of the lower of (i)
the average of the last reported sale price of a share of the Fund's common
stock on the New York Stock Exchange on the expiration date of the Offer
(the "Pricing Date") and the four preceding business days and (ii) the net
asset value per share of the Fund's common stock as of the close of
business on the Pricing Date. Under the Over-Subscription Privilege, you
may subscribe for any number of additional Shares (to the extent
available), provided you have subscribed for the maximum number of Shares
for which you are eligible under the Primary Subscription.
<PAGE>
<TABLE>
SAMPLE CALCULATION
(FOR ILLUSTRATIVE PURPOSES ONLY)
- A shareholder who owns 100 shares on the Record Date would be issued 100 Rights.
- 100 Rights entitle the shareholder to subscribe for 25 new Shares at the rate of one new Share for
every four Rights held, after fractional Shares have been excluded. Fractional Shares will not be
issued.
- At the Estimated Subscription Price of $[13.95] per Share, the payment amount due for the 25 new
Shares would be $[348.75].
<S> <C> <C> <C>
100 / 4 = [25] x $[13.95] = $[348.75]
(No. of (No. of Shares, (Estimated (Payment to be
Rights) excluding Subscription Price per Remitted)
fractional Shares) Share)
* $[13.95] is the Estimated Subscription Price only. The final Subscription Price, which will be
determined on April 12, 1996, unless the Offer is extended by the Fund, could be higher or lower than
$[13.95], depending on movements in the net asset value and market price of the shares.
</TABLE>
<TABLE>
METHOD OF EXERCISE OF RIGHTS
To exercise your Rights, subscribe for Shares and calculate the payment amount for such Shares, you must either (i) complete
Sections 1 and 2 (and, if applicable, Section 3) of the Exercise Form on the reverse of this Certificate, and deliver the
Subscription Certificate and payment for the Shares to the Subscription Agent by one of the methods described below or (ii)
deliver a properly completed Notice of Guaranteed Delivery to the Subscription Agent by one of the methods described below, in
either case prior to 5:00 P.M., New York City Time, on the Expiration Date.
<S> <C> <C>
(1) BY FIRST CLASS MAIL, (2) BY HAND: (3) BY FACSIMILE:
EXPRESS MAIL OR (Original Subscription
OVERNIGHT COURIER: Certificate must be sent
by method (1) or (2))
PNC Bank, N.A. PNC Bank, N.A. PNC Bank, N.A.
c/o ACS c/o PNC Trust Company Fax to: (212) 505-4576
915 Broadway--5th Floor 40 Broad Street--5th Floor Confirm to: (212) 505-4416
New York, New York 10010 New York, New York 10004
DELIVERY TO AN ADDRESS OTHER THAN THAT LISTED ABOVE WILL NOT CONSTITUTE VALID DELIVERY.
Confirmation notices will be sent to shareholders by [April 24], 1996, unless the Offer is extended (the "Confirmation Date").
</TABLE>
RIGHTS TO PURCHASE SHARES ARE NON-TRANSFERABLE
Any questions regarding this Subscription Certificate and the Offer may be
directed to the Subscription Agent, PNC Bank, National Association, toll
free at (800) 852-4750.
<PAGE>
TAX ID
NUMBER:____________
Subscription Certificate
No.____________
Account
No.____________
Rights Represented by the
Certificate____________
Primary Subscription Shares
Available____________
<TABLE>
SECTION 1: DETAILS OF SUBSCRIPTION--PLEASE PRINT ALL INFORMATION CLEARLY AND LEGIBLY
IF YOU WISH TO SUBSCRIBE FOR ALL OF THE SHARES YOU ARE ENTITLED TO PURCHASE:
<S> <C> <C>
A. I wish to subscribe for all of ____________________ x $[13.95]* = $____________
the Shares I am entitled to (Total number of new Shares Payment Amount
purchase under the Primary entitled to be purchased)
Subscription.
B. I wish to subscribe for ____________________ x $[13.95]* = $____________
additional Shares, if available, (Number of over-subscription Payment Amount
pursuant to the Over-Subscription Shares subscribed for)
Privilege.**
TOTAL AMOUNT ENCLOSED = $____________
** You may only purchase additional Shares pursuant to the Over-Subscription Privilege if you have fully
exercised the Rights issued to you under the Primary Subscription.
IF YOU DO NOT WISH TO SUBSCRIBE FOR ALL OF THE SHARES YOU ARE ENTITLED TO PURCHASE:
<S> <C> <C>
C. I wish to subscribe only for the ____________________ x $[13.95]* = $____________
following number of Shares under (Number Payment Amount
the Primary Subscription. of new Shares to be
purchased)
TOTAL AMOUNT ENCLOSED = $____________
* Estimated Subscription Price only; the final Subscription Price may be higher or lower.
</TABLE>
<PAGE>
<TABLE>
SECTION 2: CERTIFICATION
I acknowledge that I have received the Prospectus for this Offer, and I hereby irrevocably
subscribe for the number of new Shares indicated above on the terms and conditions set forth in the
Prospectus. I understand and agree that I will be obligated to pay any additional purchase price amounts
for these new Shares to the Fund if the Subscription Price, as determined on the Expiration Date, is in
excess of the $[13.95] Estimated Subscription Price.
I hereby agree that if I fail to pay the full Subscription Price for the Shares I have subscribed
for, the Fund may exercise any of its remedies, as noted in the Prospectus.
<S> <C>
Name and Signature of Shareholder(s) _________________
_________________
_________________
Please provide your telephone number: ( )__________
If you wish to have your Shares and refund check (if any) delivered to an address other than the
address of record listed on the top of this card, you must have your signature guaranteed by a member of
the New York Stock Exchange or by a bank or trust company with an office or correspondent in the United
States and provide the delivery address below. Please check below if your address of record should be
changed to this address permanently:
<S> <C>
Delivery Address: Change my address of record ( )
to such delivery address
_________________________________
_________________________________
_________________________________
SECTION 3: DESIGNATION OF BROKER/DEALER
The following broker/dealer is hereby designated as having been instrumental in my exercise of Rights
pursuant to this Offer:
FIRM:_________________________________
BROKER/DEALER NAME:_________________________________
BROKER/DEALER NUMBER:_________________________________
</TABLE>
EXHIBIT (d)(3)
THE GREATER CHINA FUND, INC.
RIGHTS OFFERING
NOTICE OF GUARANTEED DELIVERY
TIME SENSITIVE --UNLESS EXTENDED, THIS OFFER EXPIRES
ON APRIL 12, 1996
As set forth in the prospectus under "THE OFFER -- Method of Exercise of
Rights" and "-- Payment for Shares," this form or one substantially equivalent
hereto may be used by a New York Stock Exchange member or a bank or trust
company with an office or correspondent in the United States as a means of
effecting a subscription on behalf of a shareholder pursuant to the rights
offering (the "Offer") of shares of the Fund's common stock. Such form must
be delivered by hand, sent by facsimile transmission, overnight courier or
first-class mail to the Subscription Agent prior to 5:00 P.M., New York City
time, on April 12, 1996, unless the Offer is extended by the Fund (the
"Expiration Date"). However, if sent by facsimile, the original executed form
must also be sent promptly thereafter by hand or mail delivery.
<TABLE>
The Subscription Agent Is:
PNC BANK, NATIONAL ASSOCIATION
<S> <C> <C>
By First Class Mail, Express Mail By Hand: By Facsimile:
or Overnight Courier: PNC Bank, N.A. PNC Bank, N.A.
PNC Bank, N.A. c/o PNC Trust Company (212) 505-4576
c/o ACS 40 Broad Street, 5th Floor
915 Broadway, 5th Floor New York, New York 10010 Facsimile Delivery Should be
New York, New York 10010 Confirmed by Telephone at:
(212) 505-4559
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION OF INSTRUCTIONS VIA
A TELECOPY FACSIMILE NUMBER, OTHER THAN AS SET FORTH ABOVE, DOES NOT
CONSTITUTE A VALID DELIVERY.
This notice specifies the number of shares subscribed for under both the
Primary Subscription and Over-Subscription Privilege, and guarantees payment
for all subscribed shares and delivery of confirmed exercise instructions
electronically or by a form of the enclosed Beneficial Owner Certificate, no
later than the close of business on April 17, 1996. Failure to deliver such
exercise instructions and payments will result in a shareholder's forfeiture
of the Rights. In the event the Subscription Price exceeds the Estimated
Subscription Price, an invoice for any additional amounts due will be sent by
April 24, 1996 (the "Confirmation Date"). Payment for such additional amount,
<PAGE>
if any, must be made by May 8, 1996. In the event the Subscription Price is
less than the Estimated Subscription Price, the Subscription Agent will mail a
refund to exercising shareholders.
<PAGE>
BROKER ASSIGNED CONTROL #
THE GREATER CHINA FUND, INC.
GUARANTEE
The undersigned, a member firm of the New York Stock Exchange or a bank
or trust company having an office or correspondent in the United States,
guarantees delivery to the Subscription Agent of (a) payment of the Estimated
Subscription Price of $[13.95] per share for the total number of shares
ordered under the Primary Subscription and the Over-Subscription Privilege, as
indicated herein, together with confirmed exercise instructions by the close
of business on April 17, 1996 and (b) payment of any additional invoiced
amounts, as described above, by the close of business on May 8, 1996.
<PAGE>
<TABLE>
<CAPTION>
Payment amount based on
the Estimated
Subscription
Price of $[13.95] per
Share*:
<S> <C> <C> <C>
1. Primary Subscription:
Number of Rights Number of Primary
to be exercised: Subscription Shares
subscribed for:
_______ Rights / 4 = ____ Shares x $[13.95] = $____________________
2. Over-Subscription
Privilege:
Number of Over-
Subscription
Shares subscribed for:
____ Shares x $[13.95] = $____________________
3. Total: Total number of Shares Total payment
subscribed for: amount:
____ Shares x $[13.95] = $____________________
*Estimated Subscription Price only; the final Subscription Price may be higher or lower.
How will you exercise the Rights on behalf of the beneficial owners? (circle one)
A. Through DTC or another depository OR B. By delivery of a Subscription Certificate directly to the Subscription Agent.
Indicate the Subscription Certificate Number for Each Applicable Shareholder:
______________________
______________________
______________________
_______________________________ _______________________________
Name of Firm Authorized Signature
_______________________________ _______________________________
DTC Participant Number Title
_______________________________ _______________________________
Address Name (Please Type or Print)
_____________________________________________________ _______________________________
City State Zip Code Phone Number
_______________________________ _______________________________
Contact Name Date
<PAGE>
</TABLE>
Nominee Holder Over-Subscription Form EXHIBIT (d)(4)
THE GREATER CHINA FUND, INC.
RIGHTS OFFERING
DTC PARTICIPANT OVER-SUBSCRIPTION FORM
NOMINEE HOLDER OVER-SUBSCRIPTION FORM
PLEASE COMPLETE ALL APPLICABLE INFORMATION
<TABLE>
<S> <C> <C>
BY FIRST CLASS MAIL, EXPRESS BY HAND: BY FACSIMILE:
MAIL OR OVERNIGHT COURIER:
PNC Bank, N.A. PNC Bank, N.A.
c/o ACS c/o PNC Trust Company PNC Bank, N.A.
915 Broadway, 5th Floor 40 Broad Street, 5th Floor Fax to: (212) 505-4576
New York, New York 10010 New York, New York 10004 Confirm to: (212) 505-4416
THIS FORM IS TO BE USED ONLY BY NOMINEE HOLDERS TO EXERCISE THE OVER-SUBSCRIPTION PRIVILEGE IN RESPECT OF RIGHTS WITH
RESPECT TO WHICH THE OVER-SUBSCRIPTION PRIVILEGE WAS EXERCISED AND DELIVERED THROUGH THE FACILITIES OF A COMMON DEPOSITORY. ALL
OTHER EXERCISES OF OVER-SUBSCRIPTION PRIVILEGES MUST BE EFFECTED BY DELIVERY OF THE SUBSCRIPTION CERTIFICATE.
_________________
THE TERMS AND CONDITIONS OF THE RIGHTS OFFERING ARE SET FORTH IN THE FUND'S PROSPECTUS DATED MARCH 8, 1996 (THE
"PROSPECTUS") AND ARE INCORPORATED HEREIN BY REFERENCE. COPIES OF THE PROSPECTUS ARE AVAILABLE UPON REQUEST FROM THE INFORMATION
AGENT.
_________________
VOID UNLESS RECEIVED BY THE SUBSCRIPTION AGENT WITH PAYMENT IN FULL BY 5:00 P.M., NEW YORK CITY TIME, ON APRIL 12, 1996,
UNLESS EXTENDED BY THE FUND (THE "EXPIRATION DATE").
_________________
1. The undersigned hereby certifies to the Subscription Agent that it is a participant in _______________________ [Name
of Depository] (the "Depository") and that is has either (i) exercised the Over-Subscription Privilege in respect of Rights and
delivered such exercised Rights to the Subscription Agent by means of transfer to the Depository Account of the Fund or (ii)
delivered to the Subscription Agent a Notice of Guaranteed Delivery in respect of the exercise of the Over-Subscription Privilege
and will deliver the Rights called for in such Notice of Guaranteed Delivery to the Subscription Agent by means of transfer to such
Depository Account of the Fund.
2. The undersigned hereby exercises the Over-Subscription Privilege to purchase, to the extent available, ______ Shares
of common stock and certifies to the Subscription Agent that such Over-Subscription Privilege is being exercised for the account or
accounts of persons (which may include the undersigned) on whose behalf all Primary Subscription rights have been exercised.(*)
<PAGE>
3. The undersigned understands that payment of the Subscription Price per share for each Share of common stock
subscribed for pursuant to the Over-Subscription Privilege must be received by the Subscription Agent at or before 5:00 P.M. New
York City time on the Expiration Date and represents that such payment, in the aggregate amount of $________________, either (check
appropriate box):
( ) has been or is being delivered to the Subscription Agent pursuant to the Notice of Guaranteed Delivery referred
to above,
or
( ) is being delivered to the Subscription Agent herewith,
or
( ) has been delivered separately to the Subscription Agent;
and, in the case of funds not delivered pursuant to a Notice of Guaranteed Delivery, is or was delivered in the
manner set forth below (check appropriate box and complete information relating thereto):
( ) uncertified check
( ) certified check
( ) bank draft
__________________________________________________ __________________________________________________
Over-Subscription Confirmation Number Name of Nominee Holder
__________________________________________________ __________________________________________________
Depository Participant Number Address
__________________________________________________
Contact Name:____________________________________ City State Zip Code
Phone Number:___________________________________ By:_______________________________________________
Name:
Title:
Dated:_____________________, 1996
(*) PLEASE ATTACH A BENEFICIAL OWNER CERTIFICATION CONTAINING THE RECORD DATE SHARE POSITION, THE NUMBER OF PRIMARY SHARES
SUBSCRIBED FOR AND THE NUMBER OF SHARES REQUESTED IN THE OVER-SUBSCRIPTION PRIVILEGE, BY EACH SUCH OWNER.
</TABLE>
<PAGE>
THE GREATER CHINA FUND, INC.
BENEFICIAL OWNER CERTIFICATION
The undersigned, a bank, broker or other nominee holder of Rights
("Rights") to purchase Shares of Common Stock, $0.001 par value ("Common
Stock"), of The Greater China Fund, Inc. (the "Fund") pursuant to the Rights
offering (the "Offer") described and provided for in the Fund's Prospectus
dated March 8, 1996 (the "Prospectus"), hereby certifies to the Fund and to
PNC Bank, National Association, as Subscription Agent for such Offer, that for
each numbered line filled in below the undersigned has exercised, on behalf of
the beneficial owner thereof (which may be the undersigned), the number of
Rights specified on such line pursuant to the Primary Subscription (as defined
in the Prospectus) and such beneficial owner wishes to subscribe for the
purchase of additional Shares of Common Stock pursuant to the
Over-Subscription Privilege (as defined in the Prospectus), in the amount set
forth in the third column of such line:
<PAGE>
<TABLE>
<S> <C> <C>
NUMBER OF SHARES
NUMBER OF RIGHTS REQUESTED
EXERCISED PURSUANT TO
PURSUANT TO PRIMARY OVER-SUBSCRIPTION
RECORD DATE SHARES SUBSCRIPTION PRIVILEGE
1) ____________________ ____________________ ____________________
2) ____________________ ____________________ ____________________
3) ____________________ ____________________ ____________________
4) ____________________ ____________________ ____________________
5) ____________________ ____________________ ____________________
6)
____________________ ____________________ ____________________
7) ____________________ ____________________ ____________________
8) ____________________ ____________________ ____________________
9) ____________________ ____________________ ____________________
10) ____________________ ____________________ ____________________
__________________________________________________
Name of Nominee Holder
By:_______________________________________________
Name:
Title:
Dated:_______________________________________, 1996
Provide the following information if applicable:
__________________________________________________ Name of Broker:___________________________________
Depository Trust Corporation ("DTC") Participant Number
__________________________________________________ Address:__________________________________________
DTC Primary Subscription Confirmation Number(s)
</TABLE>
EXHIBIT (h)(1)
THE GREATER CHINA FUND, INC.
________ Shares of Common Stock
Issuable Upon Exercise of ________
Non-Transferable Rights to Subscribe
for Such Shares of Common Stock
DEALER MANAGER AGREEMENT
New York, New York
March 8, 1996
PaineWebber Incorporated
1285 Avenue of the Americas
New York, New York 10019
Ladies and Gentlemen:
The Greater China Fund, Inc., a Maryland corporation (the "Com-
pany"), and Baring International Investment (Far East) Limited (the
"Investment Manager") each confirms its agreement with and appointment of
PaineWebber Incorporated (the "Dealer Manager") to act as dealer manager in
connection with the issuance by the Company to the holders of record at the
close of business on March 18, 1996, or such other date as is established as
the record date for such purpose (each a "Holder" and, collectively, the
"Holders") of ________ non-transferable rights entitling such Holders to sub-
scribe for ________ shares (each a "Share" and, collectively, the "Shares") of
common stock, par value $.001 per share (the "Common Stock"), of the Company
(collectively, the "Offer"). Pursuant to the terms of the Offer, the Company
is issuing each Holder one non-transferable right (each a "Right" and, collec-
tively, the "Rights") for each share of Common Stock held by such Holder on
the record date set forth in the Prospectus (the "Record Date"). Such Rights
entitle Holders to acquire during the subscription period set forth in the
Prospectus (the "Subscription Period"), at the price set forth in such Pro-
spectus (the "Subscription Price"), one Share for each ___ Rights exercised on
the terms and conditions set forth in such Prospectus. No fractional shares
will be issued. Any Holder who fully exercises all Rights initially issued to
such Holder will be entitled to subscribe for, subject to allotment, addi-
tional Shares (the "Over-Subscription Privilege"). Pursuant to the Over-
Subscription Privilege, the Company may, at its discretion, increase the
number of Shares subject to subscription by up to 25%, or ________ shares of
Common Stock, for an aggregate total of ________ Shares.
The Company has filed with the Securities and Exchange Commission
(the "Commission") a registration statement on Form N-2 (File Nos. 333-00691
and 811-6674) and a related preliminary prospectus and preliminary statement
<PAGE>
of additional information for the registration of the Shares under the Securi-
ties Act of 1933, as amended (the "Securities Act"), the Investment Company
Act of 1940, as amended (the "Investment Company Act"), and the rules and
regulations of the Commission under the Securities Act and Investment Company
Act (the "Rules and Regulations"), and has filed such amendments to such
registration statement on Form N-2, if any, and such amended preliminary pro-
spectuses and preliminary statements of additional information as may have
been required to the date hereof. If the registration statement has not
become effective, a further amendment to such registration statement,
including forms of a final prospectus and final statement of additional infor-
mation necessary to permit the registration statement to become effective will
promptly be filed by the Company with the Commission. If the registration
statement has become effective and any prospectus or statement of additional
information constituting a part thereof omits certain information at the time
of effectiveness pursuant to Rule 430A of the Rules and Regulations, a final
prospectus and final statement of additional information containing such
omitted information shall be filed by the Company with the Commission in
accordance with Rule 497(h) of the Rule and Regulations. The term "Registra-
tion Statement" means the registration statement, as amended (if applicable),
at the time it becomes or became effective, including financial statements and
all exhibits and all documents, if any, incorporated therein by reference, and
any information deemed to be included by Rule 430A. The term "Prospectus"
means the final prospectus and final statement of additional information in
the forms filed with the Commission pursuant to Rule 497(c), (h) or (j) of the
Rules and Regulations, as the case may be, as from time to time amended or
supplemented pursuant to the Securities Act. The Prospectus and letters to
beneficial owners of the shares of Common Stock of the Company, forms used to
exercise rights, any letters from the Company to securities dealers, commer-
cial banks and other nominees and any newspaper announcements, press releases
and other offering materials and information that the Company may use,
approve, prepare or authorize for use in connection with the Offer, are
collectively referred to hereinafter as the "Offering Materials".
1. Representations and Warranties.
(a) The Company represents and warrants to, and agrees with, the
Dealer Manager as of the date hereof, as of the date of the commencement of
the Offer (such later date being hereinafter referred to as the "Representa-
tion Date") and as of the Expiration Date (as defined below) that:
(i) The Company meets the requirements for use of Form N-2 under
the Securities Act and the Investment Company Act and the Rules and Regu-
lations. At the time the Registration Statement becomes effective, the
Registration Statement will contain all statements required to be stated
therein in accordance with and will comply in all material respects with
the requirements of the Securities Act, the Investment Company Act and
the Rules and Regulations and will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading. From
the time the Registration Statement becomes effective through the expira-
tion date of the Offer set forth in the Prospectus (the "Expiration
Date"), the Prospectus and the other Offering Materials then authorized
by the Company for use will not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that the representations and warranties in this subsection shall
not apply to statements in or omissions from the Registration Statement,
Prospectus or Offering Materials made in reliance upon and in conformity
with information furnished to the Company in writing by the Dealer
<PAGE>
Manager expressly for use in the Registration Statement, Prospectus or
Offering Materials.
(ii) The Company is registered with the Commission under the
Investment Company Act as a closed-end, non-diversified management
investment company, and no order of suspension or revocation of such
registration has been issued or proceedings therefor initiated or
threatened by the Commission.
(iii) Price Waterhouse LLP, the accountants who certified the
financial statements of the Company set forth or incorporated by
reference in the Registration Statement and the Prospectus, are indepen-
dent public accountants as required by the Securities Act and the Rules
and Regulations.
(iv) The financial statements of the Company set forth or
incorporated by reference in the Registration Statement and the
Prospectus present fairly in all material respects the financial condi-
tion of the Company as of the dates or for the periods indicated in con-
formity with generally accepted accounting principles applied on a
consistent basis; and the information set forth in the Prospectus under
the headings "Expense Information" and "Financial Highlights" presents
fairly in all material respects the information stated therein.
(v) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of
Maryland, has full power and authority (corporate and other) to conduct
its business as described in the Registration Statement and the Pro-
spectus and is duly qualified to do business in each jurisdiction,
whether foreign or domestic, in which it owns or leases real property or
in which the conduct of its business requires such qualification, except
where the failure to be so qualified would not result in a material
adverse effect upon the business, properties, financial position or
results of operations of the Company. The Company has no subsidiaries.
(vi) The Company has an authorized capitalization as set forth in
the Prospectus; the outstanding shares of Common Stock have been duly
authorized and are validly issued, fully paid and non-assessable and
conform in all material respects to the description thereof in the
Prospectus under the heading "Description of Common Stock"; the Rights
have been duly authorized by all requisite action on the part of the
Company for issuance pursuant to the Offer; the Shares have been duly
authorized by all requisite action on the part of the Company for
issuance and sale pursuant to the terms of the Offer and, when issued and
delivered by the Company pursuant to the terms of the Offer against
payment of the consideration set forth in the Prospectus, will be validly
issued, fully paid and non-assessable; the Shares and the Rights conform
in all material respects to all statements relating thereto contained in
the Registration Statement, Prospectus and Offering Materials; and the
issuance of each of the Rights and the Shares is not subject to any
preemptive rights.
(vii) Except as set forth in the Prospectus, subsequent to the
respective dates as of which information is given in the Registration
Statement and the Prospectus, (A) there has been no material adverse
change in the condition (financial or other), business or prospects of
the Company, not arising in the ordinary course of business, (B) there
have been no transactions entered into by the Company that are material
to the Company other than those in the ordinary course of business and
(C) there has been no dividend or distribution paid or declared in
respect of the Company's capital stock.
<PAGE>
(viii) Except as set forth in the Prospectus, there is no pending
or, to the knowledge of the Company, threatened action, suit or pro-
ceeding affecting the Company or to which the Company is a party before
or by any court or governmental agency or body, whether foreign or
domestic, which might result in any material adverse change in the condi-
tion (financial or other), business or prospects of the Company, or which
might materially and adversely affect the properties or assets of the
Company (taken as a whole).
(ix) There are no franchises, contracts or documents of the Company
that are required to be described in or filed as exhibits to the
Registration Statement by the Securities Act or the Investment Company
Act or by the Rules and Regulations that have not been so described in or
filed or incorporated by reference therein as permitted by the Securities
Act, Investment Company Act or the Rules and Regulations.
(x) Each of this agreement (the "Agreement"), the subscription
agency agreement (the "Subscription Agency Agreement") dated as of March
8, 1996 between the Company and PNC Bank, National Association (the "Sub-
scription Agent"), the management agreement dated as of March 14, 1995
between the Company and the Investment Manager (the "Management
Agreement"), the information agent agreement (the "Information Agent
Agreement") between the Company and Shareholder Communications Corpora-
tion dated as of March 8, 1996 (the "Information Agent"), the administra-
tion agreement dated as of July 14, 1992 between the Company and Mitchell
Hutchins Asset Management Inc. (the "Administration Agreement"), the
custodian agreement dated as of July 14, 1992 between the Company and
Brown Brothers Harriman & Co. (the "Custodian Ageement") and the transfer
agency and registrar agreement dated as of July 15, 1992 between the
Company and PNC Bank, National Association (the "Transfer Agency
Agreement") (collectively, all the foregoing are the "Company Agree-
ments") has been duly authorized, executed and delivered by the Company;
each of the Company Agreements is, assuming due authorization, execution
and delivery by the other parties thereto, legal, valid, binding and
enforceable obligation of the Company, except as to enforcement of rights
to indemnity and contribution under this Agreement may be limited by
Federal or state securities laws or principles of public policy and sub-
ject, as to enforcement, to bankruptcy, insolvency, reorganization,
moratorium and other laws of general applicability relating to or affect-
ing creditors' rights and to general principles of equity (regardless of
whether enforceability is considered in a proceeding in equity or at law)
and the issuance of the Rights, the issuance and sale of the Shares and
the performance of the Company Agreements, including any subcustodial
arrangements entered into pursuant to the Custodian Agreement, and the
consummation of the transactions contemplated therein or in the Regis-
tration Statement will not result in a conflict with or in a material
breach or violation of any of the material terms and provisions of,
constitute a default under, or result in the creation or imposition of
any material lien, charge or encumbrance upon any properties or assets of
the Company pursuant to any material agreement, indenture, mortgage,
lease or other instrument to which the Company is a party or by which it
may be bound or to which any of the property or assets of the Company is
subject, nor will such action result in any violation of the Company's
charter or by-laws, or, to the best knowledge of the Company, any order,
law, rule or regulation of any court or governmental agency or body,
whether foreign or domestic, having jurisdiction over the Company or any
of its properties, except, in each case, for such violations, defaults,
conflicts or breaches that would not have, individually or in the aggre-
gate, a material adverse effect on the Company; no consent, approval,
authorization, notification or order of, or filing with, any court or
governmental agency or body, whether foreign or domestic, is required for
<PAGE>
the consummation by the Company of the transactions contemplated by the
Company Agreements or the Registration Statement, except such as have
been obtained, or if the registration statement filed with respect to the
Shares is not effective under the Securities Act as of the time of execu-
tion hereof, such as may be required (and shall be obtained as provided
in this Agreement) under the Investment Company Act, the Securities Act,
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
state securities laws.
(xi) Each of the Company Agreements complies with all applicable
provisions of the Investment Company Act.
(xii) The Common Stock has been duly listed on the New York Stock
Exchange and prior to their issuance the Shares will have been approved
for listing, subject to official notice of issuance.
(xiii) The Company owns or possesses or has obtained all material
governmental licenses, permits, consents, orders or approvals and other
authorizations, whether foreign or domestic, necessary to lease or own,
as the case may be, and to operate its properties and to carry on its
business as contemplated in the Prospectus, except for such licenses,
permits, consents, orders or approvals and other authorizations which the
failure to obtain would not have, individually or in the aggregate, a
material adverse effect on the Company.
(xiv) The Company (A) has not taken, directly or indirectly, any
action designed to cause or to result in, or that has constituted or
which might reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of the Company to facilitate
the issuance of the Rights or the sale or resale of the Shares, (B) has
not since the filing of the Registration Statement sold, bid for or
purchased, or paid anyone any compensation for soliciting purchases of,
shares of Common Stock of the Company and (C) will not, until the later
of the expiration of the Rights or the completion of the distribution
(within the meaning of Rule 10b-6 under the Exchange Act) of the Shares,
sell, bid for or purchase, pay or agree to pay to any person any
compensation for soliciting another to purchase any other securities of
the Company (except for the solicitation of the exercises of Rights and
the Over-Subscription Privilege pursuant to this Agreement); provided
that any action in connection with the Company's dividend reinvestment
plan will not be deemed to be within the terms of this Section 1(a)(xiv).
(xv) The Company intends to direct the investment of the proceeds
of the offering described in the Registration Statement and the
Prospectus in such a manner as to comply with the requirements of Sub-
chapter M of the Internal Revenue Code of 1986, as amended ("Subchapter M
of the Code"), and is qualified and intends to continue to qualify as a
regulated investment company under Subchapter M of the Code.
(b) The Investment Manager represents and warrants to, and agrees
with, the Dealer Manager as of the date hereof, as of the Representation Date
and as of the Expiration Date that:
(i) The Investment Manager has been duly incorporated and is valid-
ly existing as a corporation under the laws of Hong Kong with full power
and authority to own its properties and conduct its business as described
in the Prospectus, and is duly qualified to do business in each juris-
diction, whether foreign or domestic, in which it owns or leases real
property or in which the conduct of its business requires such qualifica-
tion, except where the failure to be so qualified does not involve a
material adverse effect on the Investment Manager.
<PAGE>
(ii) The Investment Manager is duly registered as an investment
adviser under the Investment Advisers Act of 1940, as amended (the
"Advisers Act"), and is not prohibited by the Advisers Act or the Invest-
ment Company Act, or the rules and regulations under such Acts, from
acting under the Management Agreement for the Company as contemplated by
the Prospectus.
(iii) Each of this Agreement and the Management Agreement has been
duly authorized, executed and delivered by the Investment Manager; the
Management Agreement is, assuming due authorization, execution and deliv-
ery by the other parties thereto, a legal, valid, binding and enforceable
obligation of the Investment Manager, subject as to enforcement to
bankruptcy, insolvency, reorganization, moratorium and other laws of
general applicability relating to or affecting creditors' rights, and to
general principles of equity (regardless of whether enforceability is
considered in a proceeding in equity or at law), and the performance by
the Investment Manager of its obligations under such agreements and the
consummation of the transactions therein contemplated to be consummated
by the Investment Manager will not conflict with or result in a breach or
violation of any of the terms and provisions of, or constitute a default
under, any statute, any material agreement or instrument to which the
Investment Manager is a party or by which it is bound or to which any of
its property is subject, the Investment Manager's charter and by-laws, or
any order, rule or regulation of any court or governmental agency or
body, stock exchange or securities association, whether foreign or
domestic, having jurisdiction over the Investment Manager or any of its
properties or operations, except, in each case, for such conflicts,
breaches or violations that would not have, individually or in the
aggregate a material adverse effect on the Investment Manager.
(iv) Except as set forth in the Prospectus, there is no pending or,
to the knowledge of Investment Manager, threatened action, suit or
proceeding to which the Investment Manager is a party before or by any
court or governmental agency or body, whether foreign or domestic, which
is likely to have a material adverse effect upon the Investment Manager
or upon the ability of the Investment Manager to perform its contract
with the Company.
(v) The Investment Manager (A) has not taken, directly or indirect-
ly, any action designed to cause or to result in, or that has constituted
or which might reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of the Company to facilitate
the issuance of the Rights or the sale or resale of the Shares, (B) has
not since the filing of the Registration Statement sold, bid for or
purchased, or paid anyone any compensation for soliciting purchases of,
shares of Common Stock of the Company and (C) will not, until the later
of the expiration of the Rights or the completion of the distribution
(within the meaning of Rule 10b-6 under the Exchange Act) of the Shares,
sell, bid for or purchase, pay or agree to pay any person any compen-
sation for soliciting another to purchase any other securities of the
Company (except for the solicitation of exercises of Rights and the Over-
Subscription Privilege pursuant to this Agreement); provided that any
action in connection with the Company's dividend reinvestment plan will
not be deemed to be within the terms of this Section 1(b)(v).
(c) Any certificate required by this Agreement that is signed by
any officer of the Company or the Investment Manager and delivered to the
Dealer Manager or counsel for the Dealer Manager shall be deemed a repre-
sentation and warranty by the Company or the Investment Manager, as the case
may be, to the Dealer Manager, as to the matters covered thereby.
<PAGE>
2. Agreement to Act as Dealer Manager.
(a) On the basis of the representations and warranties contained
herein, and subject to the terms and conditions of the Offer:
(i) The Company hereby appoints the Dealer Manager and other
soliciting dealers entering into a Soliciting Dealer Agreement, in the
form attached hereto as Exhibit A, with the Dealer Manager (the "Solic-
iting Dealers"), to solicit, in accordance with the Securities Act, the
Investment Company Act and the Exchange Act, and their customary
practice, the exercise of the Rights and the Over-Subscription Privilege,
subject to the terms and conditions of this Agreement, the procedures de-
scribed in the Registration Statement and, where applicable, the terms
and conditions of such Soliciting Dealer Agreement; and
(ii) The Company agrees to furnish, or cause to be furnished, to
the Dealer Manager, lists, or copies of those lists, showing the names
and addresses of, and number of shares of Common Stock held by, Holders
as of the Record Date, and the Dealer Manager agrees to use such
information only in connection with the Offer, and not to furnish the
information to any other person except for securities brokers and dealers
that have been requested by the Dealer Manager to solicit exercises of
Rights and the Over-Subscription Privilege.
(b) The Dealer Manager agrees to provide to the Company, in
addition to the services described in paragraph (a) of this Section 2,
financial advisory and marketing services in connection with the Offer. No
advisory fee, other than the fees provided for in Section 3 of this Agreement
and the reimbursement of the Dealer Manager's out-of-pocket expenses as
described in Section 5 of this Agreement, will be payable by the Company to
the Dealer Manager in connection with the financial advisory and marketing
services provided by the Dealer Manager pursuant to this Section 2(b).
(c) The Company and the Dealer Manager agree that the Dealer
Manager is an independent contractor with respect to the solicitation of the
exercise of Rights and the Over-Subscription Privilege and the performance of
financial advisory and marketing services to the Company contemplated by this
Agreement.
(d) In rendering the services contemplated by this Agreement, the
Dealer Manager will not be subject to any liability to the Company or the
Investment Manager or any of their affiliates, for any act or omission on the
part of any soliciting broker or dealer (except with respect to the Dealer
Manager acting in such capacity) or any other person, and the Dealer Manager
will not be liable for acts or omissions in performing its obligations under
this Agreement, except for any losses, claims, damages, liabilities and
expenses that are finally judicially determined to have resulted primarily
from the bad faith, willful misconduct or gross negligence of the Dealer
Manager or by reason of the reckless disregard of the obligations and duties
of the Dealer Manager under this Agreement.
3. Dealer Manager and Solicitation Fees. In full payment for the
financial advisory and marketing services rendered and to be rendered hereun-
der by the Dealer Manager, the Company agrees to pay the Dealer Manager a fee
(the "Dealer Manager Fee"), equal to 1.25% of the aggregate Subscription Price
for the Shares issued pursuant to the exercise of Rights or the Over-Subscrip-
tion Privilege. The Company also agrees to pay Soliciting Dealers and the
Dealer Manager, in full payment for their soliciting efforts, fees (the "So-
licitation Fees") (such Solicitation Fees paid to the Dealer Manager are in
addition to the Dealer Manager Fee) equal to 2.50% of the Subscription Price
per Share for each Share issued pursuant to the exercise of Rights or the
<PAGE>
Over-Subscription Privilege solicited by such broker-dealer. The Company
agrees to pay the Solicitation Fees to the broker-dealer designated on the
applicable portion of the form used by the Holder to exercise Rights, and if
no broker-dealer is so designated or a broker-dealer is otherwise not entitled
to receive compensation pursuant to the terms of the Soliciting Dealer
Agreement, then to pay the Dealer Manager the Solicitation Fee for each Share
exercised pursuant to such exercise of Rights or the Over-Subscription
Privilege. Payment to the Dealer Manager by the Company will be in the form
of a wire transfer of same day funds to an account or accounts identified by
the Dealer Manager. Such payment will be made on each date on which the
Company issues Shares after the Expiration Date. Payment to a Soliciting
Dealer will be made by the Company directly to such Soliciting Dealer by check
to an address identified by such Soliciting Dealer. Such payments shall be
made by the tenth business day following the day of final payment for Shares
as set forth in the Prospectus.
4. Other Agreements.
(a) The Company covenants with the Dealer Manager as follows:
(i) The Company will use its best efforts to cause the Registration
Statement to become effective under the Securities Act, and will advise
the Dealer Manager promptly as to the time at which the Registration
Statement and any amendments thereto (including any post-effective
amendment) becomes so effective.
(ii) The Company will notify the Dealer Manager immediately, and
confirm the notice in writing, (A) of the effectiveness of the
Registration Statement and any amendment thereto (including any post-
effective amendment), (B) of the receipt of any comments from the
Commission, (C) of any request by the Commission for any amendment to the
Registration Statement or any amendment or supplement to the Prospectus
or for additional information, (D) of the issuance by the Commission of
any stop order suspending the effectiveness of the Registration Statement
or the initiation of any proceedings for that purpose, (E) of the suspen-
sion of the qualification of the Shares or the Rights for offering or
sale in any jurisdiction. The Company will make every reasonable effort
to prevent the issuance of any stop order described in subsection (D)
hereunder and, if any such stop order is issued, to obtain the lifting
thereof at the earliest possible moment.
(iii) The Company will give the Dealer Manager notice of its
intention to file any amendment to the Registration Statement (including
any post-effective amendment) or any amendment or supplement to the
Prospectus (including any revised prospectus which the Company proposes
for use by the Dealer Manager in connection with the Offer, which differs
from the prospectus on file at the Commission at the time the
Registration Statement becomes effective, whether or not such revised
prospectus is required to be filed pursuant to Rule 497(c) or Rule 497(h)
of the Rules and Regulations), whether pursuant to the Investment Company
Act, the Securities Act, or otherwise, and will furnish the Dealer Manag-
er with copies of any such amendment or supplement a reasonable amount of
time prior to such proposed filing or use, as the case may be, and will
not file any such amendment or supplement to which the Dealer Manager or
counsel for the Dealer Manager shall reasonably object.
(iv) The Company will, without charge, deliver to the Dealer
Manager, as soon as practicable, the number of copies of the Registration
Statement as originally filed and of each amendment thereto as it may
reasonably request, in each case with the exhibits filed therewith.
<PAGE>
(v) The Company will, without charge, furnish to the Dealer
Manager, from time to time during the period when the Prospectus is
required to be delivered under the Securities Act, such number of copies
of the Prospectus (as amended or supplemented) as the Dealer Manager may
reasonably request for the purposes contemplated by the Securities Act or
the Rules and Regulations.
(vi) If any event shall occur as a result of which it is necessary,
in the reasonable opinion of counsel for the Dealer Manager, to amend or
supplement the Registration Statement or the Prospectus in order to make
the Prospectus not misleading in the light of the circumstances existing
at the time it is delivered to a Holder, the Company will forthwith amend
or supplement the Prospectus by preparing and filing with the Commission
(and furnishing to the Dealer Manager a reasonable number of copies of)
an amendment or amendments of the Registration Statement or an amendment
or amendments of or a supplement or supplements to, the Prospectus (in
form and substance satisfactory to counsel for the Dealer Manager), at
the Company's expense, which will amend or supplement the Registration
Statement or the Prospectus so that the Prospectus will not contain an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances existing at the
time the Prospectus is delivered to a Holder, not misleading.
(vii) The Company will endeavor, in cooperation with the Dealer
Manager and its counsel, to assist such counsel to qualify the Rights and
the Shares for offering and sale under the applicable securities laws of
such states and other jurisdictions of the United States as the Dealer
Manager may designate and maintain such qualifications in effect for the
duration of the Offer; provided, however, that the Company will not be
obligated to file any general consent to service of process, or to
qualify as a foreign corporation or as a dealer in securities in any
jurisdiction in which it is not now so qualified. The Company will file
such statements and reports as may be required by the laws of each
jurisdiction in which the Rights and the Shares have been qualified as
above provided.
(viii) The Company will make generally available to its security
holders as soon as practicable, but no later than 60 days after the close
of the period covered thereby, an earnings statement (in form complying
with the provisions of Rule 158 of the Rules and Regulations of the
Securities Act) covering a twelve-month period beginning not later than
the first day of the Company's fiscal quarter next following the "effec-
tive" date (as defined in said Rule 158) of the Registration Statement.
(ix) For a period of 180 days from the date of this Agreement, the
Company will not, without the prior consent of the Dealer Manager, offer
or sell, or enter into any agreement to sell, any equity or equity
related securities of the Company or securities convertible into such
securities, other than the Rights and Shares and the Common Stock issued
in reinvestment of dividends or distributions.
(x) The Company will apply the net proceeds from the Offer as set
forth under "Use of Proceeds" in the Prospectus.
(xi) The Company will use its best efforts to cause the Shares to
be duly authorized for listing by the New York Stock Exchange prior to
the time the Shares are issued.
<PAGE>
(xii) The Company will use its best efforts to maintain its
qualification as a regulated investment company under Subchapter M of the
Code.
(xiii) The Company will advise or cause the Subscription Agent to
advise the Dealer Manager from day to day during the period of, and
promptly after the termination of, the Offer, as to the names and ad-
dresses of all Holders exercising Rights, the total number of Rights
exercised and the number of Shares, including Shares requested pursuant
to the Over-Subscription Privilege, related thereto by each Holder during
the immediately preceding day, indicating the total number of Rights
verified to be in proper form for exercise, rejected for exercise and
being processed and, for the Dealer Manager and each Soliciting Dealer,
the number of Rights exercised and the number of Shares, including Shares
requested pursuant to the Over-Subscription Privilege, related thereto on
subscription certificates indicating the Dealer Manager or such Solicit-
ing Dealer, as the case may be, as the broker-dealer with respect
thereto, such exercise, and as to such other information as the Dealer
Manager may reasonably request; and will notify the Dealer Manager, not
later than 5:00 P.M., New York City time, on the first business day fol-
lowing the Expiration Date, of the total number of Rights exercised and
the number of Shares, including Shares requested pursuant to the Over-
Subscription Privilege related thereto, the total number of Rights veri-
fied to be in proper form for exercise, rejected for exercise and being
processed and, for the Dealer Manager and each Soliciting Dealer, the
number of Rights exercised and the number of Shares, including Shares
requested pursuant to the over-Subscription Privilege related thereto on
subscription certificates indicating the Dealer Manager or such Solic-
iting Dealer, as the case may be, as the broker-dealer with respect
thereto, and as to such other information as the Dealer Manager may
reasonably request.
(b) The Company and the Investment Manager will not take, directly
or indirectly, any action designed to cause or to result in, or that has
constituted or which might reasonably be expected to constitute, the stabili-
zation or manipulation of the price of any security of the Company to
facilitate the issuance of the Rights or the sale or resale of the Shares;
provided that any action in connection with the Company's dividend rein-
vestment plan will not be deemed to be within the meaning of this Section
4(b).
5. Payment of Expenses.
(a) The Company will pay all expenses incident to the performance
of its obligations under this Agreement, including, but not limited to,
expenses relating to (i) the printing and filing of the Registration Statement
as originally filed and of each amendment thereto, (ii) the preparation,
issuance and delivery of the certificates for the Shares and subscription
certificates relating to the Rights, (iii) the fees and disbursements of the
Company's counsel (including the fees and disbursements of local counsel) and
accountants, (iv) the qualification of the Rights and the Shares under securi-
ties laws in accordance with the provisions of Section 4(a)(vii) of this
Agreement, including filing fees and the preparation of the Blue Sky Survey by
counsel to the Dealer Manager, (v) the printing or other production and deliv-
ery to the Dealer Manager of copies of the Registration Statement as origi-
nally filed and of each amendment thereto and of the Prospectus and any amend-
ments or supplements thereto, (vi) the printing and other production and
delivery of copies of the Blue Sky Survey, (vii) the fees and expenses
incurred with respect to filing with the National Association of Securities
Dealers, Inc., (viii) the fees and expenses incurred in connection with the
listing of the Shares on the New York Stock Exchange, (ix) the printing or
<PAGE>
other production, mailing and delivery expenses incurred in connection with
Offering Materials, and (x) the fees and expenses incurred with respect to the
Information Agent.
(b) In addition to any fees that may be payable to the Dealer
Manager under this Agreement, the Company agrees to reimburse the Dealer
Manager upon request made from time to time for its reasonable expenses
incurred in connection with its activities under this Agreement, including the
reasonable fees and disbursements of its legal counsel (excluding Blue Sky
fees and expenses which are paid directly by the Company), in an amount up to
$100,000.
(c) If this Agreement is terminated by the Dealer Manager in
accordance with the provisions of Section 6 or Section 9(a)(i), 9(a)(ii) or
9(a)(iii), the Company agrees to reimburse the Dealer Manager for all of its
reasonable out-of-pocket expenses incurred in connection with its performance
hereunder, including the reasonable fees and disbursements of counsel for the
Dealer Manager. In the event the transactions contemplated hereunder are not
consummated, the Company agrees to pay all of the costs and expenses set forth
in paragraphs (a) and (b) of this Section 5 which the Company would have paid
if such transactions had been consummated.
6. Conditions of the Dealer Manager's Obligations. The obligations
of the Dealer Manager hereunder are subject to the accuracy of the respective
representations and warranties of the Company and the Investment Manager con-
tained herein, to the performance by the Company and the Investment Manager of
their respective obligations hereunder, and to the following further condi-
tions:
(a) The Registration Statement shall have become effective not
later than 5:30 P.M., New York City time, on the Representation Date, or at
such later time and date as may be approved by the Dealer Manager; the Pro-
spectus and any amendment or supplement thereto shall have been filed with the
Commission in the manner and within the time period required by Rule 497(c),
(e) or (h), as the case may be, under the Securities Act; no stop order
suspending the effectiveness of the Registration Statement or any amendment
thereto shall have been issued, and no proceedings for that purpose shall have
been instituted or threatened or, to the knowledge of the Company, the
Investment Manager or the Dealer Manager, shall be contemplated by the
Commission; and the Company shall have complied with any request of the
Commission for additional information (to be included in the Registration
Statement or the Prospectus or otherwise).
(b) On the Representation Date and the Expiration Date, the Dealer
Manager shall have received:
(1) The favorable opinions, dated the Representation Date and the
Expiration Date, of White & Case, counsel to the Company, in form and
substance satisfactory to counsel for the Dealer Manager, to the effect
that:
(i) the Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
State of Maryland, has full power and authority (corpo-rate and
other) to conduct its business as described in the Registration
Statement and Prospectus, and is duly qualified to do business as a
foreign corporation in each jurisdiction wherein it owns or leases
real property or in which the conduct of its business requires such
qualification, except where the failure to be so qualified would not
result in a material adverse effect upon the business, properties,
financial position or results of operations of the Company;
<PAGE>
(ii) the Company's authorized capitalization is as set forth
in the Prospectus; the outstanding shares of Common Stock have been
duly authorized and are validly issued, fully paid and non-as-
sessable and conform in all material respects to the description
thereof in the Prospectus under the heading "Description of Common
Stock"; the Rights have been duly authorized by all requisite action
on the part of Company for issuance pursuant to the Offer; the
Shares have been duly authorized by all requisite action on the part
of the Company for issuance and sale pursuant to the terms of the
Offer and, when issued and delivered by the Company pursuant to the
terms of the Offer against payment of the consideration set forth in
the Prospectus, will be validly issued, fully paid and non-assess-
able; the Shares and the Rights conform in all material respects to
all statements relating thereto contained in the Registration
Statement, the Prospectus and the Offering Materials; and the issu-
ance of each of the Rights and the Shares is not subject to any
preemptive rights. The outstanding Common Stock has been duly listed
on the New York Stock Exchange and the Shares have been duly
approved for listing, subject to official notice of issuance, on the
New York Stock Exchange;
(iii) except as set forth in the Prospectus, to the best
knowledge of such counsel, there is no pending or threatened action,
suit or proceeding before any court or governmental agency, authori-
ty or body or any arbitrator involving the Company of a character
required to be disclosed in the Registration Statement or the
Prospectus, and there are no franchises, contracts or other docu-
ments of a character required to be described in the Registration
Statement or the Prospectus, or to be filed as an exhibit or
incorporated by reference which are not described or filed or
incorporated by reference as required;
(iv) the statements in Part A of the Prospectus under the
heading "Taxation" and the statements in the Statement of Additional
Information under the heading "Taxation -- United States Federal
Income Taxes" insofar as such statements describe or summarize
United States and Chinese tax laws, treaties, doctrines or practic-
es, fairly summarize the matters therein described;
(v) the Registration Statement has become effective under the
Securities Act; any required filing of the Prospectus or any supple-
ment thereto pursuant to Rule 497(c), (e) or (h) required to be made
to the date hereof has been made in the manner and within the time
period required by Rule 497(c), (e) or (h), as the case may be; to
the best knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement has been issued, and no
proceedings for that purpose have been instituted or threatened; and
the Registration Statement, the Prospectus and each amendment there-
of or supplement thereto (other than the financial statements and
the notes thereto and the schedules and other financial and
statistical data contained therein, as to which such counsel need
express no opinion) comply as to form in all material respects with
the applicable requirements of the Securities Act and the Investment
Company Act and the Rules and Regulations;
(vi) each of this Agreement, the Subscription Agency Agree-
ment, the Management Agreement, the Custodian Agreement, the Admin-
istration Agreement, the Information Agent Agreement, and the Trans-
fer Agency Agreement has been duly authorized, executed and deliv-
ered by the Company, complies with all applicable provisions of the
Investment Company Act and, assuming due authorization, execution
<PAGE>
and delivery by the other parties thereto, constitutes a legal,
valid, binding and enforceable obligation of the Company, except as
to enforcement of rights to indemnity under this agreement may be
limited by Federal or state securities laws or principles of public
policy and subject to the qualification that the enforceability of
the Company's obligations thereunder may be limited by bankruptcy,
insolvency, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights, and to
general principles of equity (regardless of whether enforceability
is considered in a proceeding in equity or at law);
(vii) no consent, approval, authorization, notification or or-
der of, or any filing with, any court or governmental agency or body
is required under the laws of New York or Federal law or, to the
best of such counsel's knowledge, the laws of any other jurisdiction
in the United States for the consummation by the Company of the
transactions contemplated by the Company Agreements, except (A) such
as have been obtained under the Securities Act, the Exchange Act and
the Investment Company Act and (B) such as may be required under the
blue sky laws of any jurisdiction in connection with the transac-
tions contemplated hereby;
(viii) neither the issuance of the Rights, nor the issuance
and sale of the Shares by the Company, nor the performance and con-
summation by the Company of any other of the transactions con-
templated in the Company Agreements or the Registration Statement
will conflict with, result in a breach or violation of, or consti-
tute a default under the charter or by-laws of the Company or, to
the knowledge of such counsel after due inquiry, the material terms
of any material agreement, indenture, mortgage, lease or other in-
strument to which the Company is a party or by which it may be bound
or to which any of the properties or assets of the Company is
subject, or any order, of which such counsel has knowledge after due
inquiry, law, rule or regulation of any court or governmental agency
or body having jurisdiction over the Company of the state of New
York or the United States, except, in each case, for such
violations, defaults, conflicts or breaches that would not have,
individually or in the aggregate, a material adverse effect on the
Company; and
(ix) the Company is registered with the Commission under the
Investment Company Act as a closed-end, non-diversified management
investment company, all required action has been taken under the
Securities Act and the Investment Company Act to make the public
offering and consummate the issuance of the Rights and the issuance
and sale of the Shares by the Company upon exercise of the Rights,
and the provisions of the Company's charter and by-laws comply as to
form in all material respects with the requirements of the Invest-
ment Company Act.
In rendering such opinion, such counsel may rely (A) as to matters involving
the application of laws of any jurisdiction other than the State of New York
or the United States, to the extent they deem proper and specified in such
opinion, upon the opinion of other counsel of good standing whom they believe
to be reliable and who are satisfactory to counsel for the Dealer Manager and
(B) as to matters of fact, to the extent they deem proper, on certificates of
responsible officers of the Company and public officials.
Such counsel shall also have stated that, while they have not
themselves checked the accuracy and completeness of or otherwise verified, and
are not passing upon and assume no responsibility for the accuracy or
<PAGE>
completeness of, the statements contained in the Registration Statement or the
Prospectus, except to the limited extent stated in paragraph (iv) above, in
the course of their review and discussion of the contents of the Registration
Statement and Prospectus with certain officers and employees of the Company
and its independent accountants, no facts have come to their attention which
cause them to believe that the Registration Statement as of the effective date
thereof contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the state-
ments contained therein not misleading, or that the Prospectus, as of its date
and the Representation Date or Expiration Date, as the case may be, contained
an untrue statement of a material fact or omitted to state a material fact re-
quired to be stated therein or necessary to make the statements contained
therein, in the light of the circumstances under which they were made, not
misleading (it being understood that such counsel need express no belief with
respect to the financial statements and the notes thereto and the schedules
and other financial and statistical data included in the Registration
Statement or the Prospectus).
(2) The favorable opinions, dated the Representation Date and the
Expiration Date, of Piper & Marbury L.L.P., special counsel to the
Company, in form and substance satisfactory to counsel for the Dealer
Manager, to the effect that:
(i) the Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
State of Maryland, has full power and authority (corporate and
other) to conduct its business as described in the Registration
Statement and Prospectus, and currently maintains all governmental
licenses, permits, consents, orders, approvals, and other
authorizations under he laws of the State of Maryland necessary to
carry on its business as contemplated in the Prospectus, except that
counsel expresses no opinion as to the securities or "blue sky" laws
of the State of Maryland;
(ii) the Company's authorized capitalization is as set forth
in the Prospectus; the outstanding shares of Common Stock have been
duly authorized and are validly issued, fully paid and non-as-
sessable and conform in all material respects to the description
thereof in the Prospectus under the heading "Description of Common
Stock"; the Rights have been duly authorized by all requisite action
on the part of Company for issuance pursuant to the Offer; the
Shares have been duly authorized by all requisite action on the part
of the Company for issuance and sale pursuant to the terms of the
Offer and, when issued and delivered by the Company pursuant to the
terms of the Offer against payment of the consideration set forth in
the Prospectus, will be validly issued, fully paid and non-assess-
able; the Shares and the Rights conform in all material respects to
all statements relating thereto contained in the Registration
Statement, the Prospectus and the Offering Materials; and the issu-
ance of each of the Rights and the Shares is not subject to any
preemptive rights;
(iii) except as set forth in the Prospectus, to the best
knowledge of such counsel, there is no pending or threatened action,
suit or proceeding before any court or governmental agency, authori-
ty or body or any arbitrator in the State of Maryland involving the
Company of a character required to be disclosed in the Registration
Statement or the Prospectus;
(iv) no consent, approval, authorization, notification or or-
der of, or any filing with, any court or governmental agency or body
<PAGE>
is required under the laws of Maryland for the consummation by the
Company of the transactions contemplated by the Company Agreements,
except (A) such as have been obtained and (B) such as may be re-
quired under the securities and "blue sky" of the State of Maryland
in connection with the transactions contemplated hereby; and
(v) neither the issuance of the Rights, nor the issuance and
sale of the Shares by the Company, nor the performance and consumma-
tion by the Company of any other of the transactions contemplated in
the Company Agreements or the Registration Statement will conflict
with, result in a breach or violation of, or constitute a default
under the charter or by-laws of the Company or any court or
governmental agency or body of the State of Maryland.
In rendering such opinion, such counsel may rely as to matters of fact, to the
extent they deem proper, on certificates of responsible officers of the Compa-
ny and public officials.
(3) The favorable opinions, dated the Representation Date and the
Expiration Date, of White & Case, counsel for the Investment Manager, in
form and substance satisfactory to counsel for the Dealer Manager, to the
effect that:
(i) the Investment Manager is duly registered as an investment
adviser under the Advisers Act and is not prohibited by the Advisers
Act or the Investment Company Act, or the rules and regulations
under such Acts, from acting as an investment manager for the Compa-
ny as contemplated in the Prospectus and the Management Agreement;
(ii) the Investment Manager is duly qualified as a foreign
corporation and is in good standing in each United States jurisdic-
tion in which the performance of its obligations under the
Management Agreement requires such qualification except where the
failure to be so qualified does not involve a material adverse ef-
fect on the Investment Manager; the Investment Manager has the
corporate power and authority to conduct its business as described
in the Registration Statement and the Prospectus;
(iii) this Agreement and the Management Agreement have been
duly authorized, executed and delivered by the Investment Manager
and comply with all applicable provisions of the Advisers Act, the
Investment Company Act and the rules and regulations under such
Acts, and is, assuming due authorization, execution and delivery by
the other parties thereto, a legal, valid, binding and enforceable
obligation of the Investment Manager, subject as to enforcement to
bankruptcy, insolvency, reorganization, moratorium and other laws of
general applicability relating to or affecting creditors' rights,
and to general principles of equity (regardless of whether enforce-
ability is considered in a proceeding in equity or at law);
(iv) neither the performance by the Investment Manager of its
obligations under this Agreement or the Management Agreement nor the
consummation of the transactions contemplated therein nor the ful-
fillment of the terms thereof will conflict with, or result in a
breach or violation of, or constitute a default under its memorandum
and articles of association or, to the knowledge of such counsel,
the terms of any material agreement or instrument to which the In-
vestment Manager is a party or by which it is bound or to which any
of its properties are subject, or any order of which such counsel
has knowledge after due inquiry, or other law, rule or regulation
applicable to the Investment Manager of any U.S. federal or New York
<PAGE>
court, governmental agency or body, stock exchange or securities
association having jurisdiction over the Investment Manager or its
properties or operations except for such conflicts, breaches or
defaults which would not have a material adverse effect on the
Investment Manager; and
(v) The description of the Investment Manager and its
businesses in the Prospectus complies in all material respects with
the requirements of the Securities Act, the Investment Company Act
and the Rules and Regulations.
In rendering such opinion, such counsel may rely (A) as to matters involving
the application of laws of any jurisdiction other than the State of New York
or the United States, to the extent such counsel deems proper and specified in
such opinion, upon the opinion of other counsel of good standing whom such
counsel believes to be reliable and who are satisfactory to counsel for the
Dealer Manager, and (B) as to matters of fact, to the extent such counsel
deems proper, on certificates of responsible officers of the Investment
Manager and public officials.
(4) The favorable opinions, dated the Representation Date and the
Expiration Date, of Grice & Co. (solicitors in association with White &
Case), Hong Kong counsel for the Company and the Investment Manager, in
form and substance satisfactory to counsel for the Dealer Manager, to the
effect that:
(i) the Investment Manager has been duly incorporated and is
validly existing as a corporation under the laws of Hong Kong, with
full power and authority to own its properties and conduct its busi-
ness as described in the Prospectus;
(ii) the Investment Manager has been issued with the license
necessary for it to carry on its business under Hong Kong law as an
investment adviser (as defined in the Securities Ordinance, Chapter
333 laws of Hong Kong) in Hong Kong in respect of securities of
China companies listed and traded in Hong Kong as contemplated in
the Prospectus and the Management Agreement;
(iii) this Agreement and the Management Agreement have been
duly authorized, executed and delivered by the Investment Manager
and comply with all applicable provisions of the laws of Hong Kong,
and as a matter of Hong Kong law are, assuming due authorization,
execution and delivery by the other parties thereto, legal, valid,
binding and enforceable obligations of the Investment Manager, sub-
ject as to enforcement to bankruptcy, insolvency, reorganization,
moratorium and other laws of general applicability relating to or
affecting creditors' rights, and to general principles of equity
(regardless of whether enforceability is considered in a proceeding
in equity or at law);
(iv) neither the execution or delivery by the Investment
Manager nor the performance by the Investment Manager of its obli-
gations under this Agreement or the Management Agreement will con-
flict with, or result in a breach or violation of, or constitute a
default under its memorandum and articles of association or any
order of which such counsel has knowledge after due inquiry, or
other Hong Kong law, rule or regulation applicable to the Investment
Manager of any Hong Kong court, governmental agency or body of Hong
Kong, the Stock Exchange of Hong Kong Limited or the Securities and
Futures Commission of Hong Kong except for such conflicts, breaches
<PAGE>
or defaults which would not have a material adverse effect on the
Investment Manager;
(v) the Company does not require any governmental licenses,
permits, consents, orders, approvals or other authorizations under
the laws of Hong Kong to enable the Company to continue to invest in
securities of China companies as contemplated in the Prospectus.
Neither the execution or delivery by the Company nor the performance
by the Company of any of its obligations under any of this Agreement
or the Management Agreement will contravene or constitute a default
under any provision contained in any Hong Kong law, rule or regula-
tion of any Hong Kong governmental or regulatory authority or any
order or regulation of any Hong Kong court by which the Company or
any of its assets in Hong Kong is bound or affected;
(vi) the issue and the sale by the Company of the Rights and
the subsequent issuance of the Shares pursuant to the Dealer Manager
Agreement will not contravene or constitute a default under any
provisions contained in any Hong Kong law or any rule, regulation or
order of any Hong Kong governmental authority;
(vii) no consent, approval, authorization or order of any
court or governmental body of Hong Kong is required in order for the
Company to perform its obligations referred to or contemplated by
the Dealer Manager Agreement;
(viii) the statements in the Statement of Additional
Information to the Prospectus and the Registration Statement as set
out under the captions "The Securities Markets in China and Hong
Kong -- Hong Kong" and "Taxation -- Hong Kong Taxes" to the extent
that they describe Hong Kong ordinances and regulations are accurate
in all material respects; and
(ix) no profits tax is or will be required to be paid by the
Dealer Manager or any of the Soliciting Dealers pursuant to the In-
land Revenue Ordinance (Chapter 112 of the laws of Hong Kong)
provided they do not carry on any business, trade or profession in
Hong Kong.
In rendering such opinion, such counsel may rely as to matters of fact, to the
extent such counsel deems proper, on certificates of responsible officers of
the Investment Manager and public officials.
(5) The favorable opinions, dated the Representation Date and the
Expiration Date, of Great Wall Law Office, Chinese counsel for the Compa-
ny and the Investment Manager, in form and substance satisfactory to
counsel for the Dealer Manager, to the effect that:
(i) the statements in the Statement of Additional Information
under the heading "China Taxes" in the Registration Statement and
Prospectus, insofar as such statements describe or summarize China
tax laws, treaties, doctrines or practices, fairly summarize the
matters therein described.
(c) The Dealer Manager shall have received from Skadden, Arps,
Slate, Meagher & Flom, counsel for the Dealer Manager, such opinion or
opinions, dated the Representation Date and the Expiration Date, with respect
to the Offer, the Registration Statement, the Prospectus and other related
matters as the Dealer Manager may reasonably require, and the Company shall
have furnished to such counsel such documents as they request for the purpose
of enabling them to pass upon such matters.
<PAGE>
(d) The Company shall have furnished to the Dealer Manager
certificates of the Company, signed by the Chairman of the Board, the
President or a Vice President of the Company, dated the Representation Date
and the Expiration Date, to the effect that the signers of such certificate
have carefully examined the Registration Statement, the Prospectus, any
supplement to the Prospectus and this Agreement and that, to the best of their
knowledge:
(i) the representations and warranties of the Company in this
Agreement are true and correct in all material respects on and as of the
Representation Date or the Expiration Date, as the case may be, with the
same effect as if made on the Representation Date or the Expiration Date,
as the case may be, and the Company has complied with all the agreements
and satisfied all the conditions on its part to be performed or satisfied
at or prior to the Representation Date or the Expiration Date, as the
case may be;
(ii) no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or, to the Company's knowledge, threatened; and
(iii) since the date of the most recent balance sheet included or
incorporated by reference in the Prospectus, there has been no material
adverse change in the condition (financial or other), earnings, business
or properties of the Company, whether or not arising from transactions in
the ordinary course of business, except as set forth in or contemplated
in the Prospectus.
(e) the Investment Manager shall have furnished to the Dealer
Manager certificates, signed by the Chairman or other senior officer, dated
the Representation Date and the Expiration Date, to the effect that the signer
of such certificate has read the Registration Statement, the Prospectus, any
supplement to the Prospectus and this Agreement and, to the best knowledge of
such signer, the representations and warranties of the Investment Manager in
this Agreement are true and correct in all material respects on and as of the
Representation Date or Expiration Date, as the case may be, with the same
effect as if made on the Representation Date or Expiration Date, as the case
may be.
(f) Price Waterhouse LLP shall have furnished to the Dealer Manager
letters, dated the Representation Date and the Expiration Date, in form and
substance satisfactory to the Dealer Manager, and stating in effect that:
(i) they are independent accountants with respect to the Company
within the meaning of the Securities Act and the applicable Rules and
Regulations;
(ii) in their opinion, the audited financial statements examined by
them and included or incorporated by reference in the Registration State-
ment comply as to form in all material respects with the applicable
accounting requirements of the Securities Act and the Investment Company
Act and the respective Rules and Regulations with respect to registration
statements on Form N-2;
(iii) they have performed specified procedures, not constituting an
audit, including a reading of the latest available interim financial
information of the Company, a reading of the minute books of the Company,
inquiries of officials of the Company responsible for financial or ac-
counting matters and such other inquiries and procedures which shall be
specified in such letter, and on the basis of such inquiries and
procedures nothing came to their attention that caused them to believe
<PAGE>
that at the date of the latest available financial information read by
such accountants, or at a subsequent specified date not more than five
business days prior to the Representation Date or Expiration Date, as the
case may be, there was any change in the capital stock, net assets or
long term debt of the Company as compared with amounts shown in the most
recent statement of assets and liabilities included or incorporated by
reference in the Registration Statement, except as the Registration
Statement discloses has occurred or may occur or as disclosed in their
letter;
(iv) In addition to the procedures referred to in clause (iii)
above, they have performed other specified procedures, not constituting
an audit, with respect to certain amounts, percentages, numerical data
and financial information appearing in the Registration Statement, which
have previously been specified by the Dealer Manager and which shall be
specified in such letter, and have compared such items with, and have
found such items to be in agreement with, the accounting and financial
records of the Company.
(g) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, there shall not have
been (i) any change or decrease specified in the letter or letters referred to
in paragraph (f) of this Section 6, or (ii) any change, or any development
involving a prospective change, in or affecting the business or properties of
the Company, the effect of which, in any case referred to in clause (i) or
(ii) above, is, in the reasonable judgment of the Dealer Manager, so material
and adverse as to make it impractical or inadvisable to proceed with the Offer
as contemplated by the Registration Statement and the Prospectus.
(h) Prior to the Representation Date, the Company shall have
furnished to the Dealer Manager such further information, certificates and
documents as the Dealer Manager may reasonably request.
If any of the conditions specified in this Section 6 shall not have
been fulfilled in all material respects when and as provided in this
Agreement, or if any of the opinions and certificates mentioned above or
elsewhere in this Agreement shall not be in all material respects satisfactory
in form and substance to the Dealer Manager and its counsel, this Agreement
and all obligations of the Dealer Manager hereunder may be canceled at, or at
any time prior to, the Representation Date by the Dealer Manager. Notice of
such cancellation shall be given to the Company in writing or by telephone or
telegraph confirmed in writing.
7. Indemnification and Contribution.
(a) The Company will indemnify and hold harmless the Dealer Manager
and each person, if any, who controls the Dealer Manager within the meaning of
Section 15 of the Securities Act against any and all losses, claims, damages
and liabilities, joint or several (including any investigation, legal and
other expenses reasonably incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claim asserted), to which
they, or any of them, may become subject under the Securities Act, the
Exchange Act, the Investment Company Act, the Advisers Act or other statutory
law or regulation, at common law or otherwise, insofar as such losses, claims,
damages or liabilities arise out of or are based on any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement or the Prospectus, and any amendment or supplement thereto, or the
omission or alleged omission to state in any or all such documents a material
fact required to be stated therein or necessary to make the statements in it
not misleading (in the case of the Prospectus, in light of the circumstances
under which such statements were made), provided the Company will be liable to
<PAGE>
the extent that such loss, claim, damage or liability arises from an untrue
statement or omission or alleged untrue statement or omission (1) made in
reliance on and in conformity with information furnished in writing to the
Company by the Dealer Manager expressly for use in the document, or (2) if a
copy of the Prospectus was not sent or given to such person at or before the
written confirmation of the sale to such person in any case where such
delivery is required by the Securities Act. This indemnity agreement will be
in addition to any liability that the Company might otherwise have.
(b) The Dealer Manager will indemnify and hold harmless the
Company, each person, if any, who controls the Company within the meaning of
Section 15 of the Securities Act, each director of the Company and each offi-
cer of the Company who signs the Registration Statement to the same extent as
the foregoing indemnity from the Company to the Dealer Manager, but only inso-
far as losses, claims, damages or liabilities arise out of or are based on any
untrue statement or omission or alleged untrue statement or omission made in
reliance on and in conformity with information furnished in writing to the
Company by the Dealer Manager expressly for use in preparation of the docu-
ments in which the statement or omission is made or alleged to be made. This
indemnity agreement will be in addition to any liability that the Dealer
Manager might otherwise have.
(c) Any party that proposes to assert the right to be indemnified
under this Section will, promptly after receipt of notice of commencement of
any action against such party in respect of which a claim is to be made
against an indemnifying party or parties under this Section 7, notify each
such indemnifying party of the commencement of such action, enclosing a copy
of all papers served, but the omission to notify such indemnifying party will
not, except to the extent set forth below, relieve it from liability that it
may have to any indemnified party. No indemnification provided for in Section
7(a) or (b) hereof shall be available to any party who shall fail to give
notice as provided in this Section 7(c) if the party to whom notice was not
given was unaware of the proceeding to which such notice would have related
and was prejudiced by the failure to give such notice, but the omission to
notify such indemnifying party of such action shall not relieve it from any
liability that it may have to any indemnified party for contribution or
otherwise on account of the provisions in Section 7(a) or (b). If any such
action is brought against any indemnified party and it notifies the indem-
nifying party of its commencement, the indemnifying party will be entitled to
participate in, and, to the extent that it elects by delivering written notice
to the indemnified party promptly after receiving notice of the commencement
of the action from the indemnified party, jointly with any other indemnifying
party similarly notified, to assume the defense of the action, with counsel
reasonably satisfactory to the indemnified party, and, after notice from the
indemnifying party to the indemnified party of its election to assume the
defense, the indemnifying party will not be liable to the indemnified party
for any legal or other expenses except as provided below and except for the
reasonable costs of investigation subsequently incurred by the indemnified
party in connection with the defense subject, however, to its obligations, if
any, to cooperate in such defense. The indemnified party will have the right
to employ its counsel in any such action, but the fees and expenses of such
counsel will be at the expense of such indemnified party unless (1) the
employment of counsel by the indemnified party has been authorized in writing
by the indemnifying party, (2) the indemnified party has reasonably concluded
that there may be legal defenses available to it or other indemnified parties
that are different from or in addition to those available to the indemnifying
party (in which case the indemnifying party will not have the right to direct
the defense of such action on behalf of the indemnified party) or (3) the
indemnifying party has not in fact employed counsel to assume the defense of
such action within a reasonable time after receiving notice of the
commencement of the action, in each of which cases the reasonable fees and
<PAGE>
expenses of counsel will be at the expense of the indemnifying party or
parties. All such fees and expenses will be reimbursed promptly as they are
incurred and if advanced to a person who is later determined not to be a
proper indemnitee, will be promptly refunded upon determination that such
person is not a proper indemnitee. An indemnifying party will not be liable
for any settlement of any action or claim effected without its written consent
or, in connection with any proceeding or related proceeding in the same
jurisdiction, for the fees and expenses of more than one separate counsel for
all indemnified parties except to the extent provided herein.
(d) In no case shall the indemnification provided in this Section 7
be available to protect any person against any liability to which any such
person would otherwise be subject by reason of willful misfeasance, bad faith
or gross negligence in the performance of its or his obligations or duties
hereunder, or by reason of its or his reckless disregard of its or his
obligations and duties hereunder.
(e) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in this Section 7 is
applicable in accordance with its terms but for any reason is held to be
unavailable from the Company or the Dealer Manager, the Company and the Dealer
Manager will contribute to the total losses, claims, damages and liabilities
(including any investigation, legal and other expenses reasonably incurred in
connection with, and any amount paid in settlement of, any action or any
claims asserted, but after deducting any contribution received by the Company
or the Dealer Manager from persons other than the Company and the Dealer
Manager, such as persons who control the Company, or the Dealer Manager within
the meaning of the Securities Act, officers of the Company who signed the
Registration Statement and directors of the Company, who may also be liable
for contribution) to which the Company or the Dealer Manager may be subject in
such proportion as is appropriate to reflect (i) the relative benefits
received by the indemnifying party or parties on the one hand and the indemni-
fied party on the other hand from the offering of the Shares or (ii) if the
allocation provided by the foregoing clause (i) is not permitted by applicable
law, not only such relative benefits but also the relative fault of the
indemnifying party or parties on the one hand and the indemnified party on the
other hand in connection with the statements or omissions or alleged
statements or omissions that resulted in the losses, claims, damages or
liabilities, joint or several (including any investigation, legal or other
expenses reasonably incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claim asserted), for
which contribution is sought. The relative benefits received by the Company
on the one hand and the Dealer Manager on the other hand shall be deemed to be
in the same proportion as the total proceeds from the offering (before
deducting expenses) received by the Company bear to the total fees received by
the Dealer Manager. The relative fault of the parties shall be determined by
reference to, among other things, whether the untrue or alleged untrue state-
ment of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company or the Dealer
Manager, the intent of the parties and their relative knowledge, access to
information and opportunity to correct or prevent such statement or omission
and any other equitable considerations appropriate in the circumstances.
Notwithstanding any other provisions of this Section 7, (1) the Dealer Manager
will not be responsible for any amount in excess of the fees paid by the
Company pursuant to Section 3 hereof and (2) no person found guilty of fraudu-
lent misrepresentation (within the meaning of Section 11(f) of the Securities
Act) will be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. For purposes of this Section 7, any person
who controls a party to this Agreement within the meaning of the Securities
Act will have the same rights to contribution as that party, and each officer
of the Company who signed the Registration Statement and each director of the
<PAGE>
Company will have the same rights to contribution as the Company, subject in
each case to clause (i) of the first sentence of this Subsection. Any party
entitled to contribution will, promptly after receipt of notice of
commencement of any action against such party in respect of which a claim for
contribution may be made under this Section 7, notify such party or parties
from whom contribution may be sought, but the omission so to notify will not
relieve the party or parties from whom contribution may be sought from any
other obligation it or they may have otherwise than under this Section 7. No
party will be liable for contribution with respect to any action or claim
settled without its written consent.
(f) The Company agrees to indemnify each Soliciting Dealer and
controlling persons to the same extent and subject to the same conditions and
to the same agreements, including with respect to contribution, provided for
in subsections (a), (b), (c), (d) and (e) of this Section 7.
(g) The Company and the Investment Manager acknowledge that the
statements under the caption "Distribution Arrangements" in the Prospectus
constitute the only information furnished in writing to the Company by the
Dealer Manager expressly for use in such document, and the Dealer Manager
confirms that such statements are correct.
8. Representations, Warranties and Agreements to Survive Delivery.
The respective agreements, representations, warranties, indemnities and other
statements of the Company or its officers, of the Investment Manager and of
the Dealer Manager set forth in or made pursuant to this Agreement shall
survive the Expiration Date and will remain in full force and effect, regard-
less of any investigation made by or on behalf of Dealer Manager or the
Company or any of the officers, directors or controlling persons referred to
in Section 7 hereof, and will survive delivery of and payment for the Shares
pursuant to the Offer. The provisions of Sections 5 and 7 hereof shall
survive the termination or cancellation of this Agreement.
9. Termination of Agreement. (a) This Agreement shall be subject
to termination in the absolute discretion of the Dealer Manager, by notice
given to the Company prior to the expiration of the Offer, if prior to such
time (i) financial, political, economic, currency, banking or social
conditions in the United States, China or Hong Kong shall have undergone any
material change the effect of which on the financial markets makes it, in the
Dealer Manager's judgment, impracticable or inadvisable to proceed with the
Offer, (ii) there has occurred any outbreak or material escalation of hostili-
ties or other calamity or crisis the effect of which on the financial markets
of the United States, China or Hong Kong is such as to make it, in the Dealer
Manager's judgment, impracticable or inadvisable to proceed with the Offer,
(iii) trading in the shares of Common Stock shall have been suspended by the
Commission or the New York Stock Exchange, (iv) trading in securities general-
ly on the New York Stock Exchange or the Stock Exchange of Hong Kong shall
have been suspended or limited or minimum prices shall have been established
on such exchanges, or (v) a banking moratorium shall have been declared either
by Federal or New York State authorities.
(b) If this Agreement is terminated pursuant to this Section, such
termination shall be without liability of any party to any other party except
as provided in Section 5.
10. Notices. All communications hereunder will be in writing and
effective only on receipt, and, if sent to the Dealer Manager, will be mailed,
delivered or telegraphed and confirmed to PaineWebber Incorporated, Attn:
_________, 1285 Avenue of the Americas, New York, New York 10019; or if sent
to the Company, will be mailed, delivered or telegraphed and confirmed to it
at 1285 Avenue of the Americas, New York, New York 10019.
<PAGE>
11. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and will inure
to the benefit of the officers and directors and controlling persons referred
to in Section 7 hereof, and no other person will have any right or obligation
hereunder.
12. Applicable Law. This Agreement will be governed by and
construed in accordance with the laws of the State of New York without
reference to choice of law principles thereof.
13. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of
which together shall constitute one and the same instrument.
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please so indicate in the space provided below for that purpose,
whereupon this letter shall constitute a binding agreement among the Company,
the Investment Manager and the Dealer Manager.
Very truly yours,
The Greater China Fund, Inc.
By:_________________________________
Name:
Title:
Baring International Investment
(Far East) Limited
By:_________________________________
Name: M. D. Clegg
Title: Director
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
PaineWebber Incorporated
By:__________________________________
Name:
Title:
<PAGE>
Exhibit A
THE GREATER CHINA FUND, INC.
Rights Offering for Shares of Common Stock
SOLICITING DEALER AGREEMENT
. . THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
April 12, 1996
UNLESS EXTENDED (THE "EXPIRATION DATE").
To Securities Dealers and Brokers:
The Greater China Fund, Inc. (the "Company") is issuing to its
shareholders of record ("Record Date Shareholders") as of the close of busi-
ness on March 18, 1996 (the "Record Date") non-transferable rights ("Rights")
to subscribe for an aggregate of up to ________ shares (the "Shares") of
common stock, par value $0.001 per share, of the Company ("Common Stock") upon
the terms and subject to the conditions set forth in the Company's Prospectus
(the "Prospectus") dated March 8, 1996 (the "Offer"). Each such Record Date
Shareholder is being issued one Right for each full share of Common Stock
owned on the Record Date. The Rights entitle the Record Date Shareholder,
during the Subscription Period (as hereinafter defined) to acquire at the Sub-
scription Price (as hereinafter defined), one Share for each ___ Rights held
in the primary subscription. No fractional Shares will be issued. The Sub-
scription Price will be __% of the lower of (i) the average of the last re-
ported sales price of a share of the Company's Common Stock on the New York
Stock Exchange on the date of the expiration of the Offer (the "Pricing Date")
and the four preceding business days and (ii) the net asset value per share as
of the Pricing Date. The Subscription Period will commence on March 18, 1996
and end on the Expiration Date. (With respect to the Offer, the term "Expira-
tion Date" means 5:00 p.m., New York City time, on April 12, 1996, unless and
until the Company shall, in its sole discretion, have extended the period for
which the Offer is open, in which event the term "Expiration Date" with
respect to the Offer will mean the latest time and date on which the Offer, as
so extended by the Company, will expire.) Any Record Date Shareholder who
fully exercises all Rights issued to such shareholder is entitled to subscribe
for Shares which were not otherwise subscribed for by others on primary sub-
scription (the "Over-Subscription Privilege"). Shares acquired pursuant to
the Over-Subscription Privilege are subject to allotment, as more fully dis-
cussed in the Prospectus.
For the duration of the Offer, the Company has agreed to pay
Solicitation Fees to any qualified broker or dealer executing a Soliciting
Dealer Agreement who solicits the exercise of Rights and the Over-Subscription
Privilege in connection with the Offer and who complies with the procedures
described below (a "Soliciting Dealer"). Upon timely delivery to PNC Bank,
National Association, the Company's Subscription Agent for the Offer, of
payment for Shares purchased pursuant to the exercise of Rights and the Over-
Subscription Privilege and of properly completed and executed documentation as
set forth in this Soliciting Dealer Agreement, a Soliciting Dealer will be
entitled to receive Solicitation Fees equal to 2.50% of the Subscription Price
per Share so purchased; provided, however, that no payment shall be due with
respect to the issuance of any Shares until payment therefor is actually
received. A qualified broker or dealer is a broker or dealer which is a
member of a registered national securities exchange in the United States or
the National Association of Securities Dealers, Inc. ("NASD") or any foreign
broker or dealer not eligible for membership who agrees to conform to the
<PAGE>
Rules of Fair Practice of the NASD, including Sections 8, 24, 25 and 36 there-
of, in making solicitations in the United States to the same extent as if it
were a member thereof.
The Company has agreed to pay the Solicitation Fees payable to the
undersigned Soliciting Dealer and to indemnify such Soliciting Dealer on the
terms set forth in the Dealer Manager Agreement, dated March 8, 1996 among
PaineWebber Incorporated as the Dealer Manager, the Company and the Investment
Manager, the Company's investment adviser (the "Dealer Manager Agreement").
Solicitation and other activities by Soliciting Dealers may be undertaken only
in accordance with the applicable rules and regulations of the Securities and
Exchange Commission and only in those states and other jurisdictions where
such solicitations and other activities may lawfully be undertaken and in
accordance with the laws thereof. Compensation will not be paid for solicita-
tions in any state or other jurisdiction in which the opinion of counsel to
the Company or counsel to the Dealer Manager, such compensation may not
lawfully be paid. No Soliciting Dealer shall be paid Solicitation Fees with
respect to Shares purchased pursuant to an exercise of Rights or the Over-
Subscription Privilege for its own account or for the account of any affiliate
of the Soliciting Dealer, except that the Dealer Manager shall receive the
Solicitation Fees with respect to Shares purchased pursuant to an exercise of
Rights or the Over-Subscription Privilege for its own account provided that
such Shares are offered and sold by the Dealer Manager to its clients. No
Soliciting Dealer or any other person is authorized by the Company or the
Dealer Manager to give any information or make any representations in connec-
tion with the Offer other than those contained in the Prospectus and other
authorized solicitation material furnished by the Company through the Dealer
Manager. No Soliciting Dealer is authorized to act as agent of the Company or
the Dealer Manager in any connection or transaction. In addition, nothing
herein contained shall constitute the Soliciting Dealers partners with the
Dealer Manager or with one another, or agents of the Dealer Manager or of the
Company, or create any association between such parties, or shall render the
Dealer Manager or the Company liable for the obligations of any Soliciting
Dealer. The Dealer Manager shall be under no liability to make any payment to
any Soliciting Dealer, and shall be subject to no other liabilities to any
Soliciting Dealer, and no obligations of any sort shall be implied.
In order for a Soliciting Dealer to receive Solicitation Fees, the
[Subscription Agent] must have received from such Soliciting Dealer no later
than 5:00 p.m., New York City time, on the Expiration Date, either (i) a
properly completed and duly executed Subscription Certificate with respect to
Shares purchased pursuant to the exercise of Rights or the Over-Subscription
Privilege and full payment Shares; or (ii) a Notice of Guaranteed Delivery
guaranteeing delivery to the Subscription Agent by close of business on the
third New York Stock Exchange trading day after the Expiration Date, of (a)
full payment with respect to Shares purchased pursuant to the exercise of
Rights or the Over-Subscription Privilege and (b) a properly completed and
duly executed Subscription Certificate with respect to such Shares. Solici-
tation Fees will only be paid after receipt by the Subscription Agent of a
properly completed and duly executed Soliciting Dealer Agreement (or a
facsimile thereof). In the case of a Notice of Guaranteed Delivery, Solicit-
ation Fees will only be paid after delivery in accordance with such Notice of
Guaranteed Delivery has been effected. Solicitation Fees will be paid by the
Company to the Soliciting Dealer by check to an address designated by the
Soliciting Dealer below by the tenth business day after final payment for the
Shares as set forth in the Prospectus.
All questions as to the form, validity and eligibility (including
time of receipt) of this Soliciting Dealer Agreement will be determined by the
Company, in its sole discretion, which determination shall be final and
binding. Unless waived, any irregularities in connection with a Soliciting
<PAGE>
Dealer Agreement or delivery thereof must be cured within such time as the
Company shall determine. None of the Company, the Dealer Manager,
Subscription Agent, the Information Agent for the Offer (Shareholder
Communications Corporation) or any other person will be under any duty to give
notification of any defects or irregularities in any Soliciting Dealer Agree-
ment or incur any liability for failure to give such notification.
The acceptance of Solicitation Fees from the Company by the
undersigned Soliciting Dealer shall constitute a representation by such Solic-
iting Dealer to the Company that: (i) it has received and reviewed the Pro-
spectus; (ii) in soliciting purchases of Shares pursuant to the exercise of
the Rights or the Over-Subscription Privilege, it has complied with the
applicable requirements of the Securities Exchange Act of 1934, as amended,
the applicable rules and regulations thereunder, any applicable securities
laws of any state or jurisdiction where such solicitations may lawfully be
made, and the applicable rules and regulations of any self-regulatory
organization or registered national securities exchange; (iii) in soliciting
purchases of Shares pursuant to the exercise of the Rights or the Over-
Subscription Privilege, it has not published, circulated or used any
soliciting materials other than the Prospectus and any other authorized solic-
itation material furnished by the Company through the Dealer Manager; (iv) it
has not purported to act as agent of the Company or the Dealer Manager in any
connection or transaction relating to the Offer; (v) the information contained
in this Soliciting Dealer Agreement is, to its best knowledge, true and com-
plete; (vi) it is not affiliated with the Company; (vii) it will not accept
Solicitation Fees paid by the Company pursuant to the terms hereof with
respect to Shares purchased by the Soliciting Dealer pursuant to an exercise
of Rights or the Over-Subscription Privilege for its own account; (viii) it
will not remit, directly or indirectly, any part of Solicitation Fees paid by
the Company pursuant to the terms hereof to any beneficial owner of Shares
purchased pursuant to the Offer; and (ix) it has agreed to the amount of the
Solicitation Fees and the terms and conditions set forth herein with respect
to receiving such Solicitation Fees. By returning a Soliciting Dealer
Agreement and accepting Solicitation Fees, a Soliciting Dealer will be deemed
to have agreed to indemnify the Company and the Dealer Manager against losses,
claims, damages and liabilities to which the Company may become subject as a
result of the breach of such Soliciting Dealer's representations made herein
and described above. In making the foregoing representations, Soliciting
Dealers are reminded of the possible applicability of Rule 10b-6 under the
Exchange Act if they have bought, sold, dealt in or traded in any Shares for
their own account since the commencement of the Offer.
Solicitation Fees due to eligible Soliciting Dealers will be paid
promptly after consummation of the Offer. Upon expiration of the Offer, no
Solicitation Fees will be payable to Soliciting Dealers with respect to Shares
purchased thereafter.
Capitalized terms not otherwise defined herein shall have the
meanings ascribed to them in the Dealer Manager Agreement or, if not defined
therein, in the Prospectus.
This Soliciting Dealer Agreement will be governed by the laws of the
State of New York without reference to the choice of law principles thereof.
Please execute this Soliciting Dealer Agreement below accepting the
terms and conditions hereof and confirming that you are a member firm of a
registered national securities exchange or of the NASD or a foreign broker or
dealer not eligible for membership who has conformed to the Rules of Fair
Practice of the NASD, including Sections 8, 24, 25 and 36 thereof, in making
solicitations of the type being undertaken pursuant to the Offer in the United
States to the same extent as if you were a member thereof, and certifying that
<PAGE>
you have solicited the purchase of the Shares pursuant to exercise of the
Rights or the Over-Subscription Agreement, all as described above, in ac-
cordance with the terms and conditions set forth in this Soliciting Dealer
Agreement. Please forward two executed copies of this Soliciting Dealer
Agreement to The Greater China Fund, Inc., c/o Mitchell Hutchins Asset Man-
agement Inc., 1285 Avenue of the Americas, New York, New York 10019,
Attention: C. William Maher (tel. number (212) 713-2421; fax. number (212)
713-4058). A signed copy of this Soliciting Dealer Agreement will be promptly
returned to the Soliciting Dealer at the address set forth below.
Very truly yours,
PaineWebber Incorporated
By:__________________________
Name:
Title:
PLEASE COMPLETE INFORMATION BELOW:
ACCEPTED AND CONFIRMED BY SOLICITING DEALER
Contact Name at Firm: __________________________________
______________________ ______________________________
Printed Firm Name Address
______________________ ______________________________
Authorized Signature Area Code and Telephone Number
______________________ ______________________________
Name and Title Fax Number
Dated:
Payment of the Solicitation Fee shall
be mailed by check to the following address:
___________________________
___________________________
___________________________
EXHIBIT (h)(2)
THE GREATER CHINA FUND, INC.
Rights Offering for Shares of Common Stock
SOLICITING DEALER AGREEMENT
. . THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
April 12, 1996
UNLESS EXTENDED (THE "EXPIRATION DATE").
To Securities Dealers and Brokers:
The Greater China Fund, Inc. (the "Company") is issuing to its
shareholders of record ("Record Date Shareholders") as of the close of busi-
ness on March 18, 1996 (the "Record Date") non-transferable rights ("Rights")
to subscribe for an aggregate of up to ________ shares (the "Shares") of
common stock, par value $0.001 per share, of the Company ("Common Stock") upon
the terms and subject to the conditions set forth in the Company's Prospectus
(the "Prospectus") dated March 8, 1996 (the "Offer"). Each such Record Date
Shareholder is being issued one Right for each full share of Common Stock
owned on the Record Date. The Rights entitle the Record Date Shareholder,
during the Subscription Period (as hereinafter defined) to acquire at the Sub-
scription Price (as hereinafter defined), one Share for each ___ Rights held
in the primary subscription. No fractional Shares will be issued. The Sub-
scription Price will be __% of the lower of (i) the average of the last re-
ported sales price of a share of the Company's Common Stock on the New York
Stock Exchange on the date of the expiration of the Offer (the "Pricing Date")
and the four preceding business days and (ii) the net asset value per share as
of the Pricing Date. The Subscription Period will commence on March 18, 1996
and end on the Expiration Date. (With respect to the Offer, the term "Expira-
tion Date" means 5:00 p.m., New York City time, on April 12, 1996, unless and
until the Company shall, in its sole discretion, have extended the period for
which the Offer is open, in which event the term "Expiration Date" with
respect to the Offer will mean the latest time and date on which the Offer, as
so extended by the Company, will expire.) Any Record Date Shareholder who
fully exercises all Rights issued to such shareholder is entitled to subscribe
for Shares which were not otherwise subscribed for by others on primary sub-
scription (the "Over-Subscription Privilege"). Shares acquired pursuant to
the Over-Subscription Privilege are subject to allotment, as more fully dis-
cussed in the Prospectus.
For the duration of the Offer, the Company has agreed to pay
Solicitation Fees to any qualified broker or dealer executing a Soliciting
Dealer Agreement who solicits the exercise of Rights and the Over-Subscription
Privilege in connection with the Offer and who complies with the procedures
described below (a "Soliciting Dealer"). Upon timely delivery to PNC Bank,
National Association, the Company's Subscription Agent for the Offer, of
payment for Shares purchased pursuant to the exercise of Rights and the Over-
Subscription Privilege and of properly completed and executed documentation as
<PAGE>
set forth in this Soliciting Dealer Agreement, a Soliciting Dealer will be
entitled to receive Solicitation Fees equal to 2.50% of the Subscription Price
per Share so purchased; provided, however, that no payment shall be due with
respect to the issuance of any Shares until payment therefor is actually
received. A qualified broker or dealer is a broker or dealer which is a
member of a registered national securities exchange in the United States or
the National Association of Securities Dealers, Inc. ("NASD") or any foreign
broker or dealer not eligible for membership who agrees to conform to the
Rules of Fair Practice of the NASD, including Sections 8, 24, 25 and 36 there-
of, in making solicitations in the United States to the same extent as if it
were a member thereof.
The Company has agreed to pay the Solicitation Fees payable to the
undersigned Soliciting Dealer and to indemnify such Soliciting Dealer on the
terms set forth in the Dealer Manager Agreement, dated March 8, 1996 among
PaineWebber Incorporated as the Dealer Manager, the Company and the Investment
Manager, the Company's investment adviser (the "Dealer Manager Agreement").
Solicitation and other activities by Soliciting Dealers may be undertaken only
in accordance with the applicable rules and regulations of the Securities and
Exchange Commission and only in those states and other jurisdictions where
such solicitations and other activities may lawfully be undertaken and in
accordance with the laws thereof. Compensation will not be paid for solicita-
tions in any state or other jurisdiction in which the opinion of counsel to
the Company or counsel to the Dealer Manager, such compensation may not
lawfully be paid. No Soliciting Dealer shall be paid Solicitation Fees with
respect to Shares purchased pursuant to an exercise of Rights or the Over-
Subscription Privilege for its own account or for the account of any affiliate
of the Soliciting Dealer, except that the Dealer Manager shall receive the
Solicitation Fees with respect to Shares purchased pursuant to an exercise of
Rights or the Over-Subscription Privilege for its own account provided that
such Shares are offered and sold by the Dealer Manager to its clients. No
Soliciting Dealer or any other person is authorized by the Company or the
Dealer Manager to give any information or make any representations in connec-
tion with the Offer other than those contained in the Prospectus and other
authorized solicitation material furnished by the Company through the Dealer
Manager. No Soliciting Dealer is authorized to act as agent of the Company or
the Dealer Manager in any connection or transaction. In addition, nothing
herein contained shall constitute the Soliciting Dealers partners with the
Dealer Manager or with one another, or agents of the Dealer Manager or of the
Company, or create any association between such parties, or shall render the
Dealer Manager or the Company liable for the obligations of any Soliciting
Dealer. The Dealer Manager shall be under no liability to make any payment to
any Soliciting Dealer, and shall be subject to no other liabilities to any
Soliciting Dealer, and no obligations of any sort shall be implied.
In order for a Soliciting Dealer to receive Solicitation Fees, the
[Subscription Agent] must have received from such Soliciting Dealer no later
than 5:00 p.m., New York City time, on the Expiration Date, either (i) a
properly completed and duly executed Subscription Certificate with respect to
Shares purchased pursuant to the exercise of Rights or the Over-Subscription
Privilege and full payment Shares; or (ii) a Notice of Guaranteed Delivery
guaranteeing delivery to the Subscription Agent by close of business on the
third New York Stock Exchange trading day after the Expiration Date, of (a)
full payment with respect to Shares purchased pursuant to the exercise of
Rights or the Over-Subscription Privilege and (b) a properly completed and
duly executed Subscription Certificate with respect to such Shares. Solici-
tation Fees will only be paid after receipt by the Subscription Agent of a
properly completed and duly executed Soliciting Dealer Agreement (or a
facsimile thereof). In the case of a Notice of Guaranteed Delivery, Solicit-
ation Fees will only be paid after delivery in accordance with such Notice of
Guaranteed Delivery has been effected. Solicitation Fees will be paid by the
<PAGE>
Company to the Soliciting Dealer by check to an address designated by the
Soliciting Dealer below by the tenth business day after final payment for the
Shares as set forth in the Prospectus.
All questions as to the form, validity and eligibility (including
time of receipt) of this Soliciting Dealer Agreement will be determined by the
Company, in its sole discretion, which determination shall be final and
binding. Unless waived, any irregularities in connection with a Soliciting
Dealer Agreement or delivery thereof must be cured within such time as the
Company shall determine. None of the Company, the Dealer Manager,
Subscription Agent, the Information Agent for the Offer (Shareholder
Communications Corporation) or any other person will be under any duty to give
notification of any defects or irregularities in any Soliciting Dealer Agree-
ment or incur any liability for failure to give such notification.
The acceptance of Solicitation Fees from the Company by the
undersigned Soliciting Dealer shall constitute a representation by such Solic-
iting Dealer to the Company that: (i) it has received and reviewed the Pro-
spectus; (ii) in soliciting purchases of Shares pursuant to the exercise of
the Rights or the Over-Subscription Privilege, it has complied with the
applicable requirements of the Securities Exchange Act of 1934, as amended,
the applicable rules and regulations thereunder, any applicable securities
laws of any state or jurisdiction where such solicitations may lawfully be
made, and the applicable rules and regulations of any self-regulatory
organization or registered national securities exchange; (iii) in soliciting
purchases of Shares pursuant to the exercise of the Rights or the Over-
Subscription Privilege, it has not published, circulated or used any
soliciting materials other than the Prospectus and any other authorized solic-
itation material furnished by the Company through the Dealer Manager; (iv) it
has not purported to act as agent of the Company or the Dealer Manager in any
connection or transaction relating to the Offer; (v) the information contained
in this Soliciting Dealer Agreement is, to its best knowledge, true and com-
plete; (vi) it is not affiliated with the Company; (vii) it will not accept
Solicitation Fees paid by the Company pursuant to the terms hereof with
respect to Shares purchased by the Soliciting Dealer pursuant to an exercise
of Rights or the Over-Subscription Privilege for its own account; (viii) it
will not remit, directly or indirectly, any part of Solicitation Fees paid by
the Company pursuant to the terms hereof to any beneficial owner of Shares
purchased pursuant to the Offer; and (ix) it has agreed to the amount of the
Solicitation Fees and the terms and conditions set forth herein with respect
to receiving such Solicitation Fees. By returning a Soliciting Dealer
Agreement and accepting Solicitation Fees, a Soliciting Dealer will be deemed
to have agreed to indemnify the Company and the Dealer Manager against losses,
claims, damages and liabilities to which the Company may become subject as a
result of the breach of such Soliciting Dealer's representations made herein
and described above. In making the foregoing representations, Soliciting
Dealers are reminded of the possible applicability of Rule 10b-6 under the
Exchange Act if they have bought, sold, dealt in or traded in any Shares for
their own account since the commencement of the Offer.
Solicitation Fees due to eligible Soliciting Dealers will be paid
promptly after consummation of the Offer. Upon expiration of the Offer, no
Solicitation Fees will be payable to Soliciting Dealers with respect to Shares
purchased thereafter.
Capitalized terms not otherwise defined herein shall have the
meanings ascribed to them in the Dealer Manager Agreement or, if not defined
therein, in the Prospectus.
This Soliciting Dealer Agreement will be governed by the laws of the
State of New York without reference to the choice of law principles thereof.
<PAGE>
Please execute this Soliciting Dealer Agreement below accepting the
terms and conditions hereof and confirming that you are a member firm of a
registered national securities exchange or of the NASD or a foreign broker or
dealer not eligible for membership who has conformed to the Rules of Fair
Practice of the NASD, including Sections 8, 24, 25 and 36 thereof, in making
solicitations of the type being undertaken pursuant to the Offer in the United
States to the same extent as if you were a member thereof, and certifying that
you have solicited the purchase of the Shares pursuant to exercise of the
Rights or the Over-Subscription Agreement, all as described above, in ac-
cordance with the terms and conditions set forth in this Soliciting Dealer
Agreement. Please forward two executed copies of this Soliciting Dealer
Agreement to The Greater China Fund, Inc., c/o Mitchell Hutchins Asset Man-
agement Inc., 1285 Avenue of the Americas, New York, New York 10019,
Attention: C. William Maher (tel. number (212) 713-2421; fax. number (212)
713-4058). A signed copy of this Soliciting Dealer Agreement will be promptly
returned to the Soliciting Dealer at the address set forth below.
Very truly yours,
PaineWebber Incorporated
By:
Name:
Title:
PLEASE COMPLETE INFORMATION BELOW:
ACCEPTED AND CONFIRMED BY SOLICITING DEALER
Contact Name at Firm: __________________________________
___________________ ______________________________
Printed Firm Name Address
___________________ ______________________________
Authorized Signature Area Code and Telephone Number
___________________ ______________________________
Name and Title Fax Number
Dated:_________________
Payment of the Solicitation Fee shall
be mailed by check to the following address:
___________________________
___________________________
___________________________
EXHIBIT (k)(2)
SUBSCRIPTION AGENCY AGREEMENT
This Subscription Agency Agreement (the "Agreement") is made as of
March 8, 1996 between The Greater China Fund, Inc., a Maryland corporation
(the "Fund"), and PNC Bank, National Association, as subscription agent (the
"Agent"). All terms not defined herein shall have the meaning given in the
prospectus filed by the Fund with the Securities and Exchange Commission
pursuant to Rule 497(b) under the Securities Act of 1933 (the "Prospectus")
relating to the Registration Statement on Form N-2 (File No. 333-00691) filed
by the Fund with the Securities and Exchange Commission on February 5, 1996,
as amended by any amendment filed with respect thereto (the "Registration
Statement").
WHEREAS, the Fund proposes to make a subscription offer by issuing
certificates or other evidences of subscription rights, in the form designated
by the Fund (the "Subscription Certificates") to shareholders of record (the
"Shareholders") of its common stock, par value $.001 per share ("Common
Stock"), as of a record date specified by the Fund (the "Record Date"),
pursuant to which each Shareholder will have certain rights (the "Rights") to
subscribe for shares of Common Stock, as described in and upon such terms as
are set forth in the Prospectus, a final copy of which has been or, upon
availability will promptly be, delivered to the Agent;
WHEREAS, the Fund wishes the Agent to perform certain acts on behalf
of the Fund, and the Agent is willing to so act, in connection with the
distribution of the Subscription Certificates and the issuance and exercise of
the Rights to subscribe therein set forth, all upon the terms and conditions
set forth herein;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
agreements set forth herein, the parties agree as follows:
Form and Execution of Subscription Certificates;
Appointment
1. The Fund hereby appoints the Agent to act as subscription agent
in connection with the distribution of the Subscription Certificates and the
issuance and exercise of the Rights, in accordance with the terms set forth in
this Agreement. Each Subscription Certificate shall be irrevocable and non-
transferable. The Agent shall, in its capacity as Transfer Agent of the Fund,
maintain a register of Subscription Certificates and the holders of record
thereof (each of whom shall be deemed a "Shareholder" hereunder for purposes
of determining the rights of holders of Subscription Certificates). Each
Subscription Certificate shall, subject to the provisions thereof, entitle the
Shareholder in whose name it is recorded to the following:
<PAGE>
(1) The right to acquire during the Subscription Period at the
Subscription Price a number of shares of Common Stock equal to one
share of Common Stock for every four Rights (the "Primary
Subscription Right"); and
(2) The right to subscribe for additional shares of Common
Stock, subject to the availability of such shares and to the
allotment of such shares as may be available among Shareholders who
exercise Over-Subscription Rights on the basis specified in the
Prospectus; provided, however, that such Shareholder has exercised
all Primary Subscription Rights issued to him (other than those
Rights which cannot be exercised because they represent the right to
acquire less than one share) (the "Over-Subscription Privilege").
Rights and Issuance of Subscription Certificates
2. (a) Each Subscription Certificate shall evidence the Rights of
the Shareholder therein named to purchase Common Stock upon the terms and
conditions therein and herein set forth.
(b) Upon the written advice of the Fund, signed by its Chairman,
President, Secretary or Assistant Secretary, the Agent shall, from a list of
the Fund Shareholders as of the Record Date to be prepared by the Agent in its
capacity as Transfer Agent of the Fund, prepare and record Subscription
Certificates in the names of the Shareholders, setting forth the number of
Rights to subscribe for the Fund's Common Stock calculated on the basis of one
Right for each share of Common Stock recorded on the books in the name of each
such Shareholder as of the Record Date. Each Subscription Certificate shall
be dated as of the Record Date. Upon the written advice, signed as aforesaid,
as to the effective date of the Registration Statement, the Agent shall
promptly deliver the Subscription Certificates, together with a copy of the
Prospectus and instruction letter, to all Shareholders with record addresses
within the United States (including its territories and possessions and the
District of Columbia). Delivery shall be by first class mail (without
registration or insurance).
Exercise
3. (a) Shareholders may acquire shares on Primary Subscription and
pursuant to the Over-Subscription Privilege by delivery to the Agent at its
Corporate Stock Transfer Department specified in the Prospectus (i) the
Subscription Certificate with respect thereto, duly executed by such
Shareholder in accordance with and as provided by the terms and conditions of
the Subscription Certificate, together with (ii) payment of the full estimated
subscription price for the shares subscribed for on Primary Subscription and
any additional shares subscribed for pursuant to the Over-Subscription
Privilege, in U.S. dollars in cash, by check, or bank draft drawn on a bank in
the continental United States or by postal, telegraphic, or express money
order, in each case payable to the order of the Fund.
(b) Rights may be exercised at any time after the date of issuance
of the Subscription Certificates with respect thereto but no later than 5:00
p.m. New York time on such date as the Fund shall designate to the Agent in
writing (the "Expiration Date"). For the purpose of determining the time of
the exercise of any Rights, delivery of any material to the Agent shall be
deemed to occur when such materials are received at the Corporate Stock
Transfer Department of the Agent specified in the Prospectus.
(c) Notwithstanding the provisions of Section 3(a) and 3(b) regard-
ing delivery of an executed Subscription Certificate to the Agent prior to
5:00 p.m. New York time on the Expiration Date, if prior to such time the
<PAGE>
Agent receives a notice of guaranteed delivery by telegram or otherwise from a
bank, a trust company or a New York Stock Exchange member guaranteeing
delivery of (i) payment of the estimated subscription price for the shares
subscribed for in the Primary Subscription and for any additional shares
subscribed for pursuant to the Over-Subscription Privilege and (ii) a properly
completed and executed Subscription Certificate, then such exercise of Primary
Subscription Rights and Over-Subscription Rights shall be regarded as timely,
subject, however, to receipt of the duly executed Subscription Certificate and
full payment for the Shares are received by the Subscription Agent by the
close of business on the third business day after the Expiration Date.
(d) Within eight (8) business days following the Pricing Date (the
"Confirmation Date"), the Agent shall send to each exercising rights holder
(or, if shares of Common Stock on the Record Date are held by Cede & Co. or
any other depository or nominee, to Cede & Co. or such other depository or
nominee), confirmation showing (i) the number of Shares acquired pursuant to
the Primary Subscription, (ii) the number of Shares, if any, acquired pursuant
to the Over-Subscription Privilege, (iii) the per Share and total purchase
price for the Shares, and (iv) any additional amount payable by such
exercising rights holder to the Fund or any excess to be refunded by the Fund
to such exercising rights holder, in each case based on the Subscription Price
as determined on the Expiration Date. Any additional payment required from an
exercising rights holder must be received by the Agent within ten (10)
business days after the Confirmation Date. Any excess payment to be refunded
by the Fund to an exercising rights holder shall be mailed by the Agent to him
as promptly as possible.
(e) In the event the Agent does not receive, within ten business
days after the Confirmation Date, any amount due from an exercising rights
holder as specified in (d) above, then it shall take such action with respect
to such exercising rights holder's Rights as may be instructed by the Fund,
including, without limitation, (i) applying any payment actually received by
it toward the purchase of the greatest whole number of shares that could be
acquired with such payment, (ii) allocating the shares subject to such Rights
to one or more other Shareholders, and (iii) selling all or a portion of the
shares deliverable upon exercise of such Rights on the open market, and
applying the proceeds thereof to the amount owed.
Validity of Subscriptions
4. Irregular subscriptions not otherwise covered by specific
instructions herein shall be submitted to an appropriate Officer of the Fund
and handled in accordance with his instructions. Such instructions will be
documented by the Agent indicating the instructing officer and the date
thereof.
Over-subscription
5. If, after allocation of shares of Common Stock to persons
exercising Primary Subscription Rights, there remain unexercised Rights, then
the Agent shall allot the shares issuable upon exercise of such unexercised
Rights (the "Remaining Shares") to persons exercising Over-Subscription
Privileges, in the amounts of such over-subscriptions. If the number of shares
for which the Over-Subscription Privilege has been exercised is greater than
the Remaining Shares, the Agent shall allocate the Remaining Shares to the
persons exercising Over-Subscription Privilege pro rata based generally on the
number of shares of Common Stock owned by them on the Record Date. The per-
centage of Remaining Shares each oversubscribing Shareholder may acquire may
be rounded up or down to result in delivery of whole shares. The Agent shall
advise the Fund immediately upon the completion of the allocation set forth
above as to the total number of shares subscribed and distributable.
<PAGE>
Delivery of Certificates
6. The Agent will deliver (i) certificates representing those
shares purchased pursuant to exercise of Primary Subscription Rights as soon
as practicable after the corresponding Rights have been validly exercised and
full payment for such shares have been received and cleared and (ii)
certificates representing those shares purchased pursuant to the exercise of
Over-Subscription Privilege as soon as practicable after the Expiration Date
and after all allocations have been effected.
Holding Proceeds of Rights Offering in Escrow
7. (a) All proceeds received by the Agent from Shareholders in
respect of the exercise of Rights shall be held by the Agent, on behalf of the
Fund, in a segregated, interest-bearing escrow account (the "Escrow Account").
Pending disbursement in the manner described in Section 3(d) above, funds held
in the Escrow Account shall be invested by the Agent at the direction of the
Fund.
(b) The Agent shall deliver all proceeds received in respect of the
Rights (including interest earned thereon) to the Fund as promptly as
practicable, but in no event later than __ business days after the
Confirmation Date. Proceeds held in respect of Excess Payments (including
interest earned thereon) shall be refunded to Shareholders entitled to such a
refund within __ business days after the Expiration Date.
Reports
8. (a) Daily, during the period commencing March __, 1996 until
April 12, 1996 (or such later date if the Subscription Period is extended),
the Agent shall report by telephone by 5:00 p.m., New York time, to the Dealer
Manager (PaineWebber Incorporated) and to Mitchell Hutchins Asset Management
Inc., the Fund's Administrator (the "Administrator"), the following
information: the total number of Rights exercised, the total number of new
shares subscribed for, payments received therefor, together with such other
information as may be mutually determined by the Fund and the Agent. In
addition, the Agent shall also report to the Dealer Manager and the
Administrator, based on a review of Subscription Certificates received, the
number of shares subscribed for through Subscription Certificates which
designate the Dealer Manager as a soliciting dealer, the number of shares
subscribed for through Subscription Certificates which designate a broker
dealer other than the Dealer Manager as a soliciting dealer (specifying the
name and number of shares subscribed for through each such designee) and the
number of shares subscribed for through Subscription Certificates which do not
designate a soliciting dealer. Such information shall be promptly confirmed
by facsimile transmission from the Agent to the Dealer Manager and the
Administrator. On _________ __, 1996, the Agent shall provide to the Dealer
Manager and the Administrator by facsimile transmission (and confirm by
letter), a final report setting forth the aforementioned information.
(b) Information to be transmitted to the Dealer Manager pursuant to
this Section 8, shall be directed to:
PaineWebber Incorporated
1285 Avenue of the Americas
New York, New York 10105
Attention: Susan L. Matteson
Telephone: (212) 713-3218
Facsimile: (212) 713-1042
<PAGE>
(c) Information to be transmitted to the Administrator pursuant to
this Section 8, shall be directed to:
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
Attention: C. William Maher
Telephone: (212) 713-2421
Facsimile: (212) 713-4058
Loss or Mutilation
9. If any Subscription Certificate is lost, stolen, mutilated, or
destroyed the Agent may, on such terms which will indemnify and protect the
Fund and the Agent as the Agent may in its discretion impose (which shall, in
the case of a mutilated Subscription Certificate include the surrender and
cancellation thereof), issue a new Subscription Certificate of like
denomination in substitution for the Subscription Certificate so lost, stolen,
mutilated or destroyed.
Compensation for Services
10. The Fund agrees to pay to the Agent $________ for all services
rendered by it hereunder and also its reasonable out-of-pocket expenses and
other disbursements incurred in the administration and execution of this
Agreement and the exercise and performance of its duties hereunder.
Instructions and Indemnification
11. The Agent undertakes the duties and obligations imposed by this
Agreement upon the following terms and conditions:
(a) The Agent shall be entitled to rely upon any instructions or
directions furnished to it by an appropriate Officer of the Fund, whether
in conformity with the provisions of this Agreement or constituting a
modification hereof or a supplement hereto. Without limiting the
generality of the foregoing or any other provision of this Agreement, the
Agent, in connection with its duties hereunder, shall not be under any
duty or obligation to inquire into the validity or invalidity or
authority or lack thereof of any instruction or direction from an Officer
of the Fund which conforms to the applicable requirements of this
Agreement and which the Agent reasonably believes to be genuine and shall
not be liable for any delays, errors or loss of data occurring by reason
of circumstances beyond the Agent's control, including without limitation
acts of civil or military authority, national emergencies, labor
difficulties, fire, flood, catastrophe, acts of God, insurrection, war,
riots or failure of the mails, transportation, communication or power
supply.
(b) The Fund will indemnify the Agent and its nominees against, and
hold it harmless from, all liability and expense which may arise out of
or in connection with the services described in this Agreement or the
instructions or directions furnished to the Agent relating to this
Agreement by an appropriate Officer of the Fund, except for any liability
or expense which shall arise out of the gross negligence, bad faith or
willful misconduct of the Agent or such nominee.
Changes in Subscription Certificate
<PAGE>
12. The Agent may, without the consent or concurrence of the
Shareholders in whose names Subscription Certificates are registered, by
supplemental agreement or otherwise, concur with the Fund in making any
changes or corrections in a Subscription Certificate that it shall have been
advised by counsel (who may be counsel for the Fund) is appropriate to cure
any ambiguity or to correct any defective or inconsistent provision or
clerical omission or mistake or manifest error therein or herein contained,
and which shall not be inconsistent with the provision of the Subscription
Certificate except insofar as any such change may confer additional rights
upon the Shareholders.
Assignment; Delegation
13. (a) Neither this Agreement nor any rights or obligations
hereunder may be assigned or delegated by either party without the written
consent of the other party.
(b) This Agreement shall inure to the benefit of and be binding
upon the parties and their respective permitted successors and assigns.
Nothing in this Agreement is intended or shall be construed to confer upon any
other person any right, remedy or claim or to impose upon any other person any
duty, liability or obligation.
Governing Law
14. The validity, interpretation and performance of this Agreement
shall be governed by the law of the State of New York.
Entire Agreement
15. This Agreement contains the entire agreement among the parties
hereto with respect to the matters contemplated herein, and supersedes all
prior agreements, representations and understandings of the parties. As to
matters or provisions which are not reasonably the subject of instructions or
directions from an Officer of the Fund, this Agreement may not be
supplemented, modified or amended except by a writing executed by all of the
parties to this Agreement.
Severability
16. The parties hereto agree that if any of the provisions
contained in this Agreement shall be determined invalid, unlawful or
unenforceable to any extent, such provisions shall be deemed modified to the
extent necessary to render such provisions enforceable. The parties hereto
further agree that this Agreement shall be deemed severable, and the
invalidity, unlawfulness or unenforceability of any term or provision thereof
shall not affect the validity, legality or enforceability of this Agreement or
of any other term or provision hereof.
Counterparts
17. This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original and all of which together shall be
considered one and the same agreement.
Captions
18. The captions and descriptive headings herein are for the
convenience of the parties only. They do not in any way modify, amplify,
alter or give full notice of the provisions hereof.
<PAGE>
Facsimile Signatures
19. Any facsimile signature of any party hereto shall constitute a
legal, valid and binding execution hereof by such party.
Further Actions
20. Each party agrees to perform such further acts and execute such
further documents as are necessary to effect the purposes of this Agreement.
<PAGE>
Additional Provisions
21. Except as specifically modified by this Agreement, the Agent's
rights and responsibilities set forth in the Transfer Agency Services
Agreement between the Fund and the Agent are hereby ratified and confirmed and
continue in effect.
PNC BANK, NATIONAL ASSOCIATION THE GREATER CHINA FUND, INC.
By:__________________________ By:_____________________
Vice President Authorized Officer
Dated:_______________________ Dated:__________________
EXHIBIT (l)(1)
March 8, 1996
The Greater China Fund, Inc.
1285 Avenue of the Americas
New York, New York 10019
re: The Greater China Fund, Inc.
2,996,680 Shares of Common Stock
Dear Sirs:
We are familiar with the proceedings taken and proposed to be taken
by The Greater China Fund, Inc., a Maryland corporation (the "Company"), in
connection with the registration pursuant to the Registration Statement on
Form N-2 (the "Registration Statement") filed by the Company with the
Securities and Exchange Commission under the Securities Act of 1933, as
amended, and the Investment Company Act of 1940, as amended, of non-
transferable rights (the "Rights") entitling the holders thereof to subscribe
for an aggregate 2,397,344 shares of its Common Stock, $.01 par value (the
"Firm Shares"), at the rate of one share of Common Stock for each four Rights
held (the "Offer"), plus an additional 599,336 shares of Common Stock (the
"Additional Shares") pursuant to a over-subscription privilege available to
shareholders who fully exercise their Rights.
We have examined such documents, certificates, records,
authorizations and proceedings and have made such investigations as we have
deemed necessary or appropriate in order to give the opinion expressed herein.
Based on the foregoing, it is our opinion that:
1. The Firm Shares and Additional Shares have been duly authorized
for issuance by the Company and, when issued and paid for as described in the
Offer, will be validly issued, fully paid and nonassessable shares of Common
Stock of the Company.
2. The statements contained under the caption "Taxation--United
States Federal Income Taxes" in the Statement of Additional Information
included as part of the Registration Statement, to the extent that they
constitute matters of law or legal conclusions with respect thereto, are
accurate in all material respects.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to our firm under the caption
"Taxation--United States Federal Income Taxes" in the Statement of Additional
Information included therein, and under the caption "Validity of Common Stock
and Other Legal Matters" in the Prospectus included therein.
Very truly yours,
<PAGE>
White & Case
EXHIBIT l(2)
Piper & Marbury L.L.P.
Charles Center South
35 South Charles Street
Baltimore, Maryland 21201-3018
410-539-2530
Fax 410-539-0489
March 8, 1996
The Greater China Fund, Inc.
1285 Avenue of the Americas
New York, New York 10019
Ladies and Gentlemen:
As special Maryland counsel to The Greater China Fund, Inc., a Maryland
corporation (the "Corporation"), in connection with a rights offering pursuant
to which holders of the outstanding shares of common stock, par value $.01 per
share (the "Common Stock"), will be issued non-transferable rights (the
"Rights") entitling the holders to purchase one new share of Common Stock for
each four Rights held and the registration under the Securities Act of 1933,
as amended (the "Act"), of 2,996,680 shares of Common Stock of the Corporation
(the "Shares") issuable upon the exercise of the Rights, we have examined the
Articles of Incorporation of the Corporation filed with the Maryland State
Department of Assessments and Taxation (the "SDAT") on May 11, 1992, the
Amended Articles of Incorporation filed with the SDAT on June 25, 1992, the
By-Laws of the Corporation and minutes of the proceedings of the Corporation's
Board of Directors authorizing the organization of the Corporation, the
issuance of its outstanding capital stock and the issuance of the Rights and
the Shares issuable upon exercise of the Rights. We have additionally examined
the Certificate of Corporate Officer dated March 8, 1995, including all
exhibits attached thereto (the "Certificate"). In rendering our opinion, we
are relying on the Certificate and have made no independent investigation or
inquiries as to the matters set forth therein.
Based on our examination, we advise you that in our opinion: the Shares to
be issued by the Corporation upon the exercise of the Rights have been duly
and validly authorized and; when issued upon the terms set forth in the
Registration Statement on Form N-2 of the Corporation filed with the
Securities and Exchange Commission (the "Commission") will be legally issued;
fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the heading "Validity
of Common Stock and Other Legal Matters" in the Prospectus.
Very truly yours,
Piper & Marbury L.L.P.
<PAGE>
EXHIBIT (n)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Pre-Effective Amendment No. 1 to the registration
statement on Form N-2 (the "Registration Statement") of our report dated
February 5, 1996, relating to the financial statements and financial
highlights of The Greater China Fund, Inc., which appears in such Statement of
Additional Information, and to the incorporation by reference of our report
into the Prospectus which constitutes part of this Registration Statement. We
also consent to the references to us under the headings "Financial Highlights"
and "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
March 6, 1996
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 129,665,284
<INVESTMENTS-AT-VALUE> 141,332,375
<RECEIVABLES> 392,341
<ASSETS-OTHER> 96,759
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 141,821,475
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,575,533
<TOTAL-LIABILITIES> 2,575,533
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 135,232,074
<SHARES-COMMON-STOCK> 9,589,377
<SHARES-COMMON-PRIOR> 9,584,377
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 736
<ACCUMULATED-NET-GAINS> (7,115,671)
<OVERDISTRIBUTION-GAINS> 536,888
<ACCUM-APPREC-OR-DEPREC> 11,667,163
<NET-ASSETS> 139,245,942
<DIVIDEND-INCOME> 5,028,091
<INTEREST-INCOME> 78,721
<OTHER-INCOME> 0
<EXPENSES-NET> 3,214,841
<NET-INVESTMENT-INCOME> 1,891,971
<REALIZED-GAINS-CURRENT> (7,131,455)
<APPREC-INCREASE-CURRENT> 9,903,011
<NET-CHANGE-FROM-OPS> 4,663,527
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,871,820
<DISTRIBUTIONS-OF-GAINS> 602,239
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 5,000
<NET-CHANGE-IN-ASSETS> 2,252,169
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 60,248
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,703,414
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,214,841
<AVERAGE-NET-ASSETS> 136,272,684
<PER-SHARE-NAV-BEGIN> 14.29
<PER-SHARE-NII> .20
<PER-SHARE-GAIN-APPREC> .29
<PER-SHARE-DIVIDEND> .203
<PER-SHARE-DISTRIBUTIONS> .055
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.52
<EXPENSE-RATIO> 2.36
<PAGE>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
