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[GRAPHIC]
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The Greater China Fund, Inc.
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TABLE OF CONTENTS
The Fund's Management 2
Letter to Shareholders 3
Report of the Investment Manager 4
Portfolio of Investments 10
Statement of Assets and Liabilities 15
Statement of Operations 16
Statement of Changes in Net Assets 17
Notes to Financial Statements 18
Financial Highlights 24
Report of Independent Accountants 26
Dividend Reinvestment Plan 27
Other Information 28
This report, including the financial statements herein, is sent to the
shareholders of The Greater China Fund, Inc. for their information. It is not a
prospectus, circular or representation intended for use in the purchase or sale
of shares of the Fund or any securities mentioned in this report.
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940, as amended, that from time to time the Fund may purchase at
market prices shares of its common stock in the open market.
The Greater China Fund, Inc.
1285 Avenue of the Americas
New York, New York 10019
For information call (212) 713-2848
Additional information (including updated net asset value and market price) may
be obtained through the Fund's dedicated toll-free number, 800-655-2599.
GCH
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Listed
NYSE
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1
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The Greater China Fund, Inc.
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THE FUND'S MANAGEMENT
Directors
Richard B. Bradley, Chairman
Edward Y. Baker
John A. Bult
Richard Graham
John A. Hawkins
Don G. Hoff
Jonathan J.K.Taylor
Tak Lung Tsim
Officers
David G. P. Scholfield, President
Peter Cairns, Secretary
Henry Ho, Vice President
Julian F. Sluyters, Vice President
C. William Maher, Treasurer & Assistant Secretary
Investment Manager
Baring International Investment (Far East) Limited
19th Floor
Edinburgh Tower
15 Queen's Road Central
Hong Kong
Administrator
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
Custodian
Brown Brothers Harriman & Co.
59 Wall Street
New York, New York 10005
Shareholder Servicing Agent
PNC Bank, National Association
400 Bellevue Parkway
Wilmington, Delaware 19809
Independent Accountants
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
Legal Counsel
White & Case
1155 Avenue of the Americas
New York, New York 10036
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2
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The Greater China Fund, Inc.
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LETTER TO SHAREHOLDERS
February 3, 1997
Dear Shareholder,
I am pleased to report that for the year ended December 31, 1996 your Fund has
achieved much stronger results than in the previous two years. The net asset
value per share increased by $4.97, from $14.52 at the beginning of 1996 to
$19.49 at year-end. An ordinary income dividend was declared on December 20,
1996. This overall result reflects net asset value performance of 35.1% on a
total return basis.
In my letter to Shareholders last year, I emphasized how important it was that
the Chinese government should bring inflation under control. As you will read in
the Investment Manager's Report, the Chinese authorities' success in achieving a
sharp reduction in the rate of inflation has been the key contributor to the
economic recovery which is now at an early stage.
This year will be especially interesting from an investment point of view. At
midnight on June 30, sovereignty over Hong Kong will be transferred from the
United Kingdom to China. From that moment onwards, Hong Kong will become a
"special administrative region" within China. This status is designed to allow
the territory to continue to operate a capitalist economy within a communist
country. This unique position should give Hong Kong businesses, in many of which
your Fund is invested, considerable advantage over foreign investors seeking to
benefit from the development of China.
A further benefit to the Fund which is expected to accrue from the change of
power, is the potential for its stock market to be re-rated as political
uncertainty diminishes. For many years the Hong Kong market has been rated at a
discount to other markets in the region, because of concerns over political
stability in the period leading up to China's assumption of sovereignty and
whether the capitalist nature of its economy will, in the event, be allowed to
survive. These doubts are now receding, especially in regard to stability during
the immediate run-up to the handover. As confidence improves for the future of
the capitalist system post-June 30, so Hong Kong's valuation should be brought
more into line with the ratings accorded to its neighboring Asian stock markets.
Although China's economy is recovering and its stock markets are buoyant, it is
important to remember that there is still the possibility of a power struggle
for the leadership. However, the likelihood of any serious political
dislocation or social turbulence diminishes as each month passes. Nevertheless,
this note of caution is necessary to put into perspective the highly optimistic
views currently being expressed by some commentators.
Sincerely,
Richard B. Bradley
Chairman
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3
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The Greater China Fund, Inc.
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REPORT OF THE INVESTMENT MANAGER
Overview
This latest year has seen an abrupt change of sentiment towards investment in
China. Investors' interest has been re-ignited after some unpleasant experiences
in 1994 and 1995 both in terms of prices and earnings. The belief that the
economy has achieved a soft landing, evidenced by a dramatic fall in inflation
and two interest rate cuts in 1996, has fueled investors' optimism.
In China, the 'A' share markets, which are restricted exclusively to domestic
investors, staged a dramatic bull run triggered by local liquidity. The Shanghai
and Shenzhen 'A' share markets performed more strongly than the 'B' share
markets, in which foreign investors may participate, and a wide disparity of
valuation opened up between the two classes of shares. Local investors, taking
advantage of this divergence, moved into the 'B' share markets in the fourth
quarter. The Chinese government was concerned over this phenomenon and warned in
a December article in the People's Daily newspaper that speculation had pushed
stock prices to irrational and abnormal levels.
With optimism over the Chinese economy, those Hong Kong-listed companies whose
major shareholders are Chinese government bodies or business entities (known as
"Red Chips") have performed strongly. They have been favored by investors mainly
because of the perceived advantage of their close relationship with the Chinese
authorities which, combined with management expertise derived from being Hong
Kong companies, has led to considerable success in business ventures with China.
The Hong Kong stock market generally has also benefited from the Chinese
economic recovery, demonstrating the increasingly close linkage between the two
economies.
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4
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The Greater China Fund, Inc.
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The much-improved investment conditions in the Greater China region is
illustrated in the table below which shows returns in U.S. dollar terms over the
last three years.
1994 1995 1996
The Greater China Fund -39.3% +3.4% +35.1%
China -- MSCI -47.0% -23.0% +37.5%
Hong Kong -- All Ordinary Index -35.2% +21.7% +36.9%
During the Fund's fiscal year ended December 31, 1996, the net asset value per
share appreciated by US$4.97, from US$14.52 at the beginning of the year to
US$19.49 at the year-end. On a dividend re-invested basis, this reflects
performance of 35.1% over the fiscal year.
Performance of Net Asset Value Per Share
[GRAPH]
Note: This information represents the historical performance of The Greater
China Fund, Inc. and assumes the reinvestment of all dividends and
distributions.
Past performance is not predictive of future returns.
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5
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The Greater China Fund, Inc.
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REPORT OF THE INVESTMENT MANAGER
continued
Asset Allocation
Although there was little change to the overall allocation to Hong Kong over the
year (up from 75.9% to 78.8%), the weightings within the Fund's portfolio of
Hong Kong investments were considerably changed. Exposure to Red Chips was
raised from 13% to 24% and to China-related infrastructure stocks from 1% to
10%. The additional weighting to Hong Kong (2.9%) was funded mainly by reducing
holdings in Korea and Singapore.
Asset Allocation December 31, 1996 December 31, 1995
Hong Kong 78.8% 75.9%
China 17.4% 16.2%
Taiwan 2.1% 2.3%
Korea 0.7% 3.1%
Singapore 0.5% 2.9%
Net Cash 0.5% (0.4%)
Note that holdings of 'H' and 'N' shares are included in China's allocation.
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6
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The Greater China Fund, Inc.
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CHINA
Market Review
The Chinese markets were volatile in 1996. After a rally at the beginning of the
year, on optimism that earnings would rebound from a low 1995 base and that
credit policy would be eased, they generally moved sideways in the second and
third quarters as corporate results continued to disappoint. However, there was
marked disparity in performances of the various markets. The Shenzhen 'B' market
performed outstandingly well, outperforming the Shanghai 'B' and the 'H' share
markets by a wide margin. This was largely a result of the spillover from a
dramatic bull run in the local 'A' share markets. Improved liquidity resulted in
a flood of money into the local markets, widening the price discrepancy between
the local 'A' and foreign 'B' shares. This encouraged local investors to acquire
'B' shares, although being officially prohibited from doing so and despite
sporadic warnings from the authorities.
Prospects
The austerity program has been successful in cooling the economy and reducing
inflation. As a result, gross domestic product ("GDP") grew only 9.7% in 1996,
compared with 10.2% in 1995 and 11.8% in 1994. Inflation has dramatically
improved. Whereas the nation-wide retail price index was 21.7% in 1994 and 14.6%
in 1995, it was down to 6.1% in 1996. Hence, the government was able to engineer
two cuts in interest rates during the year. However, credit policy remained
cautious to prevent a repetition of the previous "boom and bust" cycle.
Reportedly, credit allocation was selective and focused mainly on
infrastructure, utilities and housing.
China's full-year trade performance appears from the raw statistics to have been
weak. Imports in 1996 were up 5.1% against export growth of 1.5%, resulting in a
contraction of the trade surplus from last year's US $16.7 billion to US $12.2
billion. These figures, however, mask an important change in 1996 when import
tariffs were aggressively cut and the rebate of value added tax on exports was
reduced. Analysis of the monthly figures reveals a more positive trend; exports
recovered from a weak first half to a monthly average of 13% growth in the final
quarter of the year.
The forthcoming 15th Party Congress, the transfer of sovereignty of Hong Kong
from Britain to China and Jiang Zemin's need to further strengthen his power
base, combine to argue for a slightly pro-growth policy in 1997 despite the
cautious attitude toward credit policy. Balancing this is the need for further
relaxation of price controls, the restructuring of state-owned enterprises and
the need to contain the resultant bankruptcies and labor redundancies. Hence
economic growth, while generally beneficial, should not be so strong that it
acts to create social discontent at a time of political succession. Therefore,
the outlook is for stable but accelerating economic growth in 1997, which should
allow corporate earnings of Chinese companies to move upwards from the bottom of
the cycle.
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7
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The Greater China Fund, Inc.
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REPORT OF THE INVESTMENT MANAGER
continued
HONG KONG
Market Review
The Hong Kong stock market performed well during 1996. It was driven mainly by a
stable interest rate environment, the turnaround of the domestic economy and the
better outlook for the Chinese economy. The improvement in Sino-British
relations and the resolution of a number of outstanding issues related to the
handover also made a positive contribution.
Prospects
Hong Kong's economy has shown clear signs of recovery in recent months. GDP
growth picked up from 3.3% in the first quarter of the year to 4.3% in the
second quarter. The government is confident of the fulfilment of its 4.7% growth
forecast for the full year of 1996, implying that there was further acceleration
in the second half of the year. Indeed, retail sales demonstrated a significant
turnaround in the third quarter on the back of strong sales of durable goods,
indicating strengthening consumer confidence. Trade figures have also improved,
with exports accelerating and the trade deficit narrowing. In the real estate
market, prices of residential units recovered strongly and are challenging the
last peak established in early 1994. Office space rent levels have also
stabilized and capital values are actually rising, despite concern over the huge
increase in supply due in 1998. The acceleration of economic growth should
continue, based on increasing private consumption and trade, with the former
being boosted by the positive-wealth effect created by rising real estate and
stock prices, and the latter from the recovery of the Chinese economy.
Having rallied strongly in the past few months, the valuation of the Hong Kong
stock market must be less compelling than twelve months ago. However, as the
change-over of sovereignty approaches, there is the potential for a narrowing of
the discount at which its market trades relative to others in the region, since
the discount is mainly due to political uncertainty over the transition. With
the pick-up in earnings growth and the potential for re-rating, the prospects
for the Hong Kong market in 1997 appear to be good.
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OUTLOOK
Both China and Hong Kong are expected to continue to see modest recoveries in
their respective economies in 1997 and 1998, while inflation should remain
within comfortable zones, albeit slightly above the 1996 lows. This is a benign
background for corporate earnings. Hong Kong companies have the potential to
deliver strong earnings growth and Chinese companies should also see an increase
from present levels. The Chinese stock markets will remain especially sensitive
to liquidity conditions due to their small size relative to China's monetary
base.
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8
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The Greater China Fund, Inc.
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However, the transmission of buoyant economic activity into increased corporate
earnings is not straightforward in China. Many companies have yet to complete
their transformation from being subject to central planning to being
market-driven entities. Moreover, there is still a large inventory overhang in a
number of industries. Also, the Chinese government will influence the process
through its credit allocation policy. At present the policy is discriminatory
against less-efficient enterprises, while showing favor towards utilities,
infrastructure and housing-related industries. Finally, the group of Chinese
issuers listed in Hong Kong ('H' shares) comprises numerous companies in
cyclical industries, such as petrochemicals and building materials, which are
being challenged by increasing new supply. Hence, it is inevitable that the
profit recovery will be uneven and selective among companies and sectors.
Investors will tend to favor the Red Chips over 'H' shares, not only on account
of their greater transparency, but also because they have longer exposure to the
market forces of Hong Kong and do not suffer from the influence of
central-planning. Despite their high valuations, the Red Chips as a group have
good prospects for translating the improving operating environment in China into
enhanced profitability. However, henceforth the operational performance of the
Red Chips in an improving business outlook will be more closely monitored and
assessed individually to segregate the strong from the weak. In conclusion, the
earnings outlook should support higher China stock prices in 1997, despite
valuations having advanced so far since the beginning of last year. While Red
Chips will remain the investors' favorite, 'B' shares should benefit from strong
liquidity flows in China so long as the authorities do not take a more
determined stance against local investors participating in the 'B' share
markets. Overall, divergence in the performance of individual stocks is forecast
to widen, making investors increasingly selective.
China has stated repeatedly its intention to achieve a smooth transition of
power in Hong Kong. It has been supportive of Hong Kong's business sector and
the appointments to the Executive and Provisional Legislative Councils are
regarded as pro-business. However, interpretations of China's political
intentions are less positive, particularly in regard to the intended repeal of a
number of laws, including the Bill of Rights. Notwithstanding this unease over
the political complexion in the future, for an investor in China the key
consideration is the increasing number of Hong Kong companies rapidly expanding
their businesses in China. For example, they have secured more deals in the
priority sector of infrastructure in China than companies from any other
country. After the handover, Hong Kong will be in a special situation of being a
capitalist system within a communist country. As described above, this
combination should give its businesses a significant advantage in accessing the
opportunities arising from China's development into an even greater economic
power.
BARING INTERNATIONAL INVESTMENT (FAR EAST) LIMITED
HONG KONG
February 3, 1997
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9
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The Greater China Fund, Inc.
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PORTFOLIO OF INVESTMENTS
December 31, 1996
Shares Description Value
(Note1)
Equities and Equity Equivalents -- 98.9%
CHINA -- 17.4%
Building Materials -- 1.0%
2,908,828 China Southern Glass Co. "B" $ 1,805,207
1,250,000 Shanghai Yaohua Pilkington Glass "B" * 595,000
------------
2,400,207
------------
Consumption -- 0.2%
2,580,00 Shanghai Narcissus Electric "B" * 541,800
------------
Manufacturing -- 9.6%
1,942,720 China International Marine Containers "B" 2,260,583
2,000,000 Inner Mongolia Erdos Cashmere Products Co. "B" 1,260,000
2,700,000 Maanshan Iron & Steel "H" 579,482
11,530,000 Qingling Motor Cos. "H" 6,372,842
6,920,000 Shanghai Diesel Engine Co. Ltd. "B" 3,280,080
9,034,000 Shanghai Petrochemical Co. "H" 2,744,832
12,540,000 Yizheng Chemical Fibre Co. Ltd. "H" 3,031,844
11,124,000 Zhenhai Refining & Chemical Co. "H" 4,063,003
------------
23,592,666
------------
Services -- 4.9%
2,737,680 China Merchant Shekou Port Service Co. Ltd. "B" 1,822,878
1,000,000 Chiwsan Wharf Holdings Ltd. "B" 711,100
3,000,000 Guangshen Railway Co. "H" * 1,299,373
6,723,080 Shanghai Dazhong Taxi Co. Ltd. "B" 5,553,264
13,270,000 Shanghai Haixing Shipping "H" 1,544,121
228,155 Shanghai New Asia Group "B" 99,476
2,000,000 Tietsen Marine Shipping "B" 944,000
------------
11,974,212
------------
Utilities -- 1.6%
170,000 Huaneng Power International ADR "N" * 3,825,000
------------
Miscellaneous -- 0.1%
300,000 Gauangdong Prov Express Development Share Co. 290,904
------------
Total China 42,624,789
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10
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The Greater China Fund, Inc.
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Shares Description Value
(Note1)
HONG KONG -- 78.2%
Banking -- 10.2%
796,400 Bank of East Asia $ 3,542,073
325,000 Dao Heng Bank 1,558,924
360,000 Hang Seng Bank 4,375,202
459,600 HSBC Holdings 9,834,353
7,116,114 The Ka Wah Bank Ltd. 3,335,175
1,860,000 Union Bank of Hong Kong 2,344,689
------------
24,990,416
------------
Conglomerate -- 22.9%
5,448,00 China Resources Enterprise 12,256,151
1,892,000 Citic Pacific Ltd. 10,983,360
11,934,000 Guangdong Investment Ltd. 11,495,029
7,100,000 Guangzhou Investment Co. 3,396,470
1,539,000 Hutchison Whampoa Ltd. 12,087,950
441,500 Swire Pacific (A) 4,224,061
344,000 The Wharf Holdings Ltd. 1,716,776
------------
56,159,797
------------
Construction -- 0.8%
3,168,000 Hopewell Holdings 2,047,967
------------
Consumption -- 6.4%
1,124,000 Giordano International Ltd. 959,131
3,570,000 Goldlion Holdings Ltd. 2,930,959
7,644,000 NG Fung Hong Ltd. 6,868,679
2,660,000 Oriental Press Group 1,169,306
14,046,000 Tingyi Holding Corp. * 3,677,439
------------
15,605,514
------------
Manufacturing -- 1.6%
810,000 Varitronix International 1,466,158
1,410,000 VTech Holdings Ltd. 2,533,971
------------
4,000,129
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The Greater China Fund, Inc.
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PORTFOLIO OF INVESTMENTS
continued
Shares Description Value
(Note1)
HONG KONG -- (continued)
Real Estate Development -- 17.8%
1,268,000 Cheung Kong Holdings $ 11,270,929
2,696,000 China Overseas Land & Investment Ltd. 1,359,416
971,000 Henderson China Holdings 2,209,529
300,000 Henderson Land Development 3,025,406
2,200,000 New World Development Co. Ltd. 14,790,872
900,000 Sun Hung Kai Properties Ltd. 11,025,276
------------
43,681,428
------------
Real Estate Investment -- 1.0%
1,680,000 Amoy Properties 2,421,876
------------
Services -- 1.4%
1,904,000 Shangri La Asia 2,818,644
2,000,000 Star Telecom International * 646,454
------------
3,465,098
------------
Trading -- 1.1%
2,032,200 Li & Fung Ltd. 1,799,802
266,000 Shanghai Industrial Holdings * 969,836
------------
2,769,638
------------
Utilities -- 0.7%
900,000 Hong Kong & China Gas 1,727,972
90,000 Hong Kong & China Gas Warrants,
expiring 9/30/97 * 50,036
------------
1,778,008
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Miscellaneous -- 14.3%
3,749,000 Cheung Kong Infra Holdings * 9,936,583
6,210,000 China Merchant Hai Hong Holdings Co. Ltd. 2,729,847
43,760,000 CNPC Hong Kong Ltd. * 4,073,592
3,360,000 Cosco Pacific Ltd. 3,909,755
3,290,574 New World Infrastructure * 9,614,968
1,200,000 Television Broadcasting 4,732,045
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34,996,790
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Total Hong Kong 191,916,661
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The Greater China Fund, Inc.
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Shares Description Value
(Note1)
KOREA -- 0.7%
Banking -- 0.0%
2,740 Shinhan Bank $ 37,290
Building Materials -- 0.4%
43,091 Dong Ah Construction 917,915
3,797 Dong Ah Construction (New) 77,288
2,290 Pohang Iron & Steel Co. 98,917
------------
1,094,120
------------
Manufacturing -- 0.3%
8,981 Samsung Electronics 483,592
2,706 Samsung Electronics (New) 138,983
------------
622,575
------------
Total Korea 1,753,985
------------
SINGAPORE -- 0.5%
Manufacturing -- 0.5%
303,000 Elec & Eltek International Co. Ltd. 1,151,400
------------
TAIWAN -- 2.1%
Building Materials -- 0.0%
917 China Steel GDS 18,397
------------
Miscellaneous -- 2.1%
280 Taipei Fund IDR 2,520,000
78,000 The Formosa Growth Fund 1,170,000
71,250 The Taiwan Fund, Inc. 1,585,313
------------
5,275,313
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Total Taiwan 5,293,710
------------
Total Equities and Equity Equivalents
(cost $161,921,254) 242,740,545
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The Greater China Fund, Inc.
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PORTFOLIO OF INVESTMENTS
continued
Principal Description Value
Amount (Note 1)
(000)
Fixed Income -- 0.6%
HONG KONG
Real Estate Development
US$ 1,000 Henderson Capital International Ltd.,
5.00%, 3/28/1997 $ 865,000
HK$ 5,250 Hong Kong Resort International Ltd.,
6.00%, 6/26/2000 632,118
------------
Total Fixed Income
(cost $1,443,068) 1,497,118
------------
Time Deposits -- 0.3%
US$ 500 BK Tokyo-Mitsubishi GCT
4.75%** 500,000
80 Brown Brothers Harriman & Co.,
Grand Cayman, 4.25%** 80,000
------------
Total Time Deposits
(cost $580,000) 580,000
------------
Total Investments -- 99.8%
(cost $163,944,322) 244,817,663
Other assets less liabilities -- 0.2% 565,797
------------
Net Assets -- 100.0% $245,383,460
------------
------------
* Non-income producing security.
** Variable rate account -- rate resets on a monthly basis;
amount available upon 48 hours' notice.
ADR -- American Depositary Receipt.
GDS -- Global Depositary Security.
IDR -- International Depositary Receipt.
See Notes to Financial Statements.
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14
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The Greater China Fund, Inc.
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STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
Assets
Investments, at value (cost $163,944,322) $244,817,663
Cash (including Hong Kong dollars of $2,278,984
with a cost of $2,278,164) 2,287,663
Receivable for investments and foreign currency
sold 4,533,605
Dividends and interest receivable 275,551
Deferred organizational expenses and other assets 87,722
------------
Total assets 252,002,204
------------
Liabilities
Payable for investments and foreign currency
purchased 4,172,608
Dividend payable 1,511,166
Investment management fee payable 243,731
Administration fee payable 40,267
Accrued expenses and other liabilities 650,972
------------
Total liabilities 6,618,744
------------
Net Assets $245,383,460
------------
------------
Composition of Net Assets
Common stock, $0.001 par value; 12,593,049 shares issued
and outstanding (100,000,000 shares authorized) $ 12,593
Paid-in capital in excess of par 170,419,027
Dividends in excess of net investment income (861,478)
Accumulated net realized loss on investments (5,060,569)
Net unrealized appreciation of investments and other
assets and liabilities denominated in foreign currency 80,873,887
------------
Net Assets $245,383,460
------------
------------
Shares outstanding 12,593,049
------------
Net Asset Value Per Share $19.49
------
------
See Notes to Financial Statements.
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15
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The Greater China Fund, Inc.
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STATEMENT OF OPERATIONS
For the Year Ended December 31, 1996
Investment Income
Dividends (net of foreign withholding taxes of $17,695) $ 4,468,524
Interest 494,744
------------
Total investment income 4,963,268
------------
Expenses
Investment management fees 2,282,334
Custodian and accounting fees 483,742
Administration fees 380,173
Directors' fees and expenses 242,859
Legal fees and expenses 120,981
Shareholder reports expense 117,586
Insurance expense 39,786
Audit fees and expenses 38,815
Amortization of organizational expenses 24,631
New York Stock Exchange listing fee 16,022
Transfer agent's fees and expenses 13,604
Miscellaneous expenses 12,148
------------
Total expenses 3,772,681
------------
Net investment income 1,190,587
------------
Realized and Unrealized Gain (Loss) on Investments
and Foreign Currency Transactions
Net realized gain(loss) on:
Investments 2,100,103
Foreign currency transactions (48,276)
------------
2,051,827
------------
Net change in unrealized appreciation/depreciation of:
Investments 69,206,250
Other assets and liabilities denominated in
foreign currency 474
------------
69,206,724
------------
Net realized and unrealized gain on investments
and foreign currency transactions 71,258,551
------------
Net Increase in Net Assets
From Investment Operations $ 72,449,138
------------
------------
See Notes to Financial Statements.
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The Greater China Fund, Inc.
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STATEMENT OF CHANGES IN NET ASSETS
For the Year For the Year
Ended Ended
December 31, 1996 December 31, 1995
----------------- -----------------
Income (Loss) from Investment
Operations
Net investment income $ 1,190,587 $ 1,891,971
Net realized gain (loss) on investments
and foreign currency transactions 2,051,827 (7,131,455)
Net change in unrealized appreciation/
depreciation of investments and
other assets and liabilities
denominated in foreign currency 69,206,724 9,903,011
------------ ------------
Total from investment operations 72,449,138 4,663,527
------------ ------------
Dividends and Distributions
to Shareholders
From net investment income (1,141,575) (1,871,084)
In excess of net investment income (369,591) (736)
From net realized gain on investments -- (65,351)
In excess of net realized gain
on investments -- (536,888)
------------ ------------
Total dividends and distributions
to shareholders (1,511,166) (2,474,059)
------------ ------------
Fund Share Transactions
Proceeds from dividends reinvested 84,972 62,701
Proceeds from the sale of shares in
rights offering 35,640,952 --
Offering costs charged to paid-in
capital in excess of par (526,378) --
------------ ------------
Total Fund share transactions 35,199,546 62,701
------------ ------------
Net increase in net assets 106,137,518 2,252,169
Net Assets
Beginning of period 139,245,942 136,993,773
------------ ------------
End of period $ 245,383,460 $ 139,245,942
------------ ------------
------------ ------------
See Notes to Financial Statements.
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17
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The Greater China Fund, Inc.
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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"), an indirect wholly owned subsidiary of ING
Group. Investment operations commenced on July 23, 1992. 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 preparation of financial statements in accordance with generally accepted
accounting principles requires the Fund's management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
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 was greater than 60 days, unless the Fund's Board of Directors
determine 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
buy or sell order is executed). Realized gains and losses on investments and
foreign currency transactions are calculated on the identified cost basis.
Interest income is recorded on an 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, using
reasonable diligence, becomes aware of such dividends.
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The Greater China Fund, Inc.
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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 investments and other assets and
liabilities stated in foreign currency at the closing rate of exchange on
the valuation date; and
(ii) purchases and sales of investments, 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 that portion of the results of operations
arising as a result of changes in the foreign currency exchange rates from the
fluctuations arising from changes in the market prices of securities.
Accordingly, such foreign currency gain (loss) is 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 gain or loss for both financial reporting and income tax reporting
purposes.
Net foreign currency gain (loss) 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 currency. Net realized foreign currency gain (loss) is
treated as ordinary income for income tax reporting purposes.
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. Dividends and
distributions from net investment income and net realized capital gains,
respectively, 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
capital gains for tax purposes, they are reported as distributions of paid-in
capital in excess of par. Dividends in excess of net investment income during
the year ended December 31, 1996 result from temporary differences relating to
unrealized gains on investments in passive foreign investment companies.
On December 20, 1996, the Board of Directors declared an ordinary income
dividend of $0.12 per share. The dividend was paid on January 17, 1997 to
shareholders of record as of December 31, 1996.
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The Greater China Fund, Inc.
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NOTES TO FINANCIAL STATEMENTS
continued
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 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 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 disposition 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 from
such a trade, profession or business, its profit from the trading of securities
(including interest, dividends and capital gains) would be subject to profits
tax, which is currently a flat rate of 17.5% for corporations.
Other Foreign Countries
The Fund may be subject to certain taxes on dividends, capital gains and other
income imposed by the other foreign countries in which it invests.
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The Greater China Fund, Inc.
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Note 2
INVESTMENT MANAGEMENT AND ADMINISTRATION AGREEMENTS
The Fund has an investment management agreement ("Investment Management
Agreement") with the Investment Manager. 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
the 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 PaineWebber Inc. ("PaineWebber"), 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.
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Note 3
TRANSACTIONS WITH AFFILIATES
For the year ended December 31, 1996 the Fund paid $1,575 in brokerage
commissions to ING Barings Securities Limited, an affiliate of the Investment
Manager.
The Investment Manager, out of its own assets, pays PaineWebber a fee in an
amount equal to 0.10% of the value of the Fund's average weekly net assets in
consideration for certain consulting and shareholder support services (not
including advice or recommendations regarding the purchase or sale of investment
securities). For the year ended December 31, 1996, $182,587 was paid or accrued
by the Investment Manager to PaineWebber for such services.
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Note 4
PORTFOLIO SECURITIES
For U.S. federal income tax purposes, the cost of securities owned at December
31, 1996 was $166,598,493. Accordingly, net unrealized appreciation of
$78,219,170 was composed of gross appreciation of $81,246,874 for those
securities having an excess of value over cost, and gross depreciation of
$3,027,704 for those securities having an excess of cost over value.
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21
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The Greater China Fund, Inc.
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NOTES TO FINANCIAL STATEMENTS
CONTINUED
For the year ended December 31, 1996, aggregate purchases and sales of portfolio
securities, excluding short-term securities, were $98,924,942 and $65,844,467,
respectively.
In accordance with U.S. Treasury regulations, the Fund elected to defer realized
foreign currency losses occurring after October 31, 1996 in the amount of
$8,857. Such losses are treated for tax purposes as arising on January 1, 1997.
At December 31, 1996, the Fund had a capital loss carryforward of $4,829,037
available as a reduction, to the extent provided in the regulations, of any
future net realized capital gains realized before the end of fiscal year 2003.
To the extent that these losses are used to offset future realized capital
gains, such gains will not be distributed.
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Note 5
CAPITAL STOCK
Of the 12,593,049 shares outstanding at December 31, 1996, the Investment
Manager owned 7,566 shares.
Transactions in shares of common stock were as follows:
For the Year For the Year
Ended Ended
December 31, 1996 December 31, 1995
---------------- -----------------
Shares outstanding, beginning of period 9,589,377 9,584,377
---------------- -----------------
Shares issued resulting from
dividend reinvestment 5,327 5,000
Shares issued in connection with
rights offering 2,998,345 --
---------------- -----------------
Net increase in shares outstanding 3,003,672 5,000
---------------- -----------------
Shares outstanding, end of period 12,593,049 9,589,377
---------------- -----------------
---------------- -----------------
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The Greater China Fund, Inc.
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Note 6
CONCENTRATION OF RISK
The Fund may have elements of risk, not typically associated with investments in
the U.S., due to concentrated investments in specific industries or investments
in foreign issuers 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, which could cause the securities and their markets to be less
liquid and prices more volatile than those of comparable U.S. companies.
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Note 7
RIGHTS OFFERING
During the year ended December 31, 1996, the Fund issued 2,998,345 shares in
connection with a rights offering of the Fund's shares. Shareholders of record
on April 15, 1996 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 four rights held at a subscription price
of $12.35 per share. Offering costs of $526,378 were charged to paid-in capital
in excess of par, including $100,000 paid to PaineWebber, as partial
reimbursement for its expenses as dealer manager. Dealer manager and soliciting
fees of $1,388,609 were netted against the proceeds of the subscription.
PaineWebber informed the Fund that it received approximately $585,000 and
$112,500 in dealer manager and soliciting fees, respectively, in connection with
its participation in the rights offering.
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The Greater China Fund, Inc.
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FINANCIAL HIGHLIGHTS
Selected data for a share of common stock
outstanding throughout each period
is presented below:
<TABLE>
<CAPTION>
For the Period
July 23, 1992+
For the Year Ended For the Year Ended through
December 31, December 31, December 31,
------------ -------------------------------- ------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $14.52 $14.29 $23.79 $13.40 $13.95++
-------- -------- -------- -------- --------
Income (Loss) From Investment Operations
Net investment income (loss) 0.10* 0.20 0.12* 0.02 (0.00)
Net realized and unrealized gain (loss) on
investment and foreign currency transactions 5.93* 0.29 (8.92)* 11.00 (0.38)
-------- -------- -------- -------- --------
Total from investment operations 6.03 0.49 (8.80) 11.02 (0.38)
-------- -------- -------- -------- --------
Dividends and Distributions to Shareholders
From net investment income (0.09) (0.20) (0.09) (0.01) --
In excess of net investment income (0.03) -- -- -- --
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 (0.12) (0.26) (0.15) (0.63) --
-------- -------- -------- -------- --------
Fund Share Transactions
Dilutive effect of rights offering (0.89) -- (0.46) -- --
Offering costs charged to paid-in capital
in excess of par (0.05) -- (0.09) -- (0.17)
-------- -------- -------- -------- --------
Total Fund share transactions (0.94) -- (0.55) -- (0.17)
-------- -------- -------- -------- --------
Net asset value, end of period $19.49 $14.52 $14.29 $23.79 $13.40
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Market value, end of period $15.63 $14.13 $12.13 $26.75 $12.38
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Total Investment Return(1)(2) 15.53% 18.48% (52.01)% 122.01% (11.29)%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Ratios/Supplemental Data
Net assets, end of period (000 omitted) $245,383 $139,246 $136,994 $160,783 $90,543
Ratio of expenses to average net assets 2.07% 2.36% 2.08% 2.22% 2.43%**
Ratio of net investment income (loss)
to average net assets 0.65% 1.39% 0.63% 0.11% (0.04)%**
Portfolio turnover 37% 32% 22% 31% 1%
Average commission rate paid per share of common
stock investments purchased/sold(3) $0.0015 -- -- -- --
</TABLE>
+ Commencement of investment operations.
++ Initial public offering price of $15.00 per share net of underwriting
discount of $1.05 per share.
* 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) Disclosure effective for fiscal years beginning on or after September 1,
1995.
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The Greater China Fund, Inc.
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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, 1996, 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 four 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, 1996 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York
February 5, 1997
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The Greater China Fund, Inc.
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DIVIDEND REINVESTMENT PLAN
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 dollars by check
mailed directly to the 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. 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.
The Plan Agent serves as agent for the shareholders in administering the Plan.
If the Fund declares an income dividend or a capital gain 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.
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.
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The Greater China Fund, Inc.
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DIVIDEND REINVESTMENT PLAN
continued
There is no charge to participants for reinvesting dividends or capital gain
distributions. The Plan Agent's fee for handling the reinvestment of dividends
and distributions will be paid by the Fund. There will be no brokerage charge
with respect to shares issued directly by the Fund as a result of dividends or
capital gain distributions payable either in shares or in cash. However, each
participant will pay 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 and 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.
Experience under the Plan may indicate that changes 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.
OTHER INFORMATION
Effective August 1996, Henry Ho assumed responsibility as day-to-day portfolio
manager of the Fund. Mr. Ho is currently Director of the Institutional Group for
Barings Asset Management Asia Ltd., responsible for asset allocation in Asia,
specifically Hong Kong, China and Taiwan. Previously, he was an Assistant
Director at Schroders Asia Ltd., responsible for investments in Thailand,
Philippines and Taiwan from 1991-1994. From 1985-1991, Mr. Ho served as
Associate Director at James Capel Far East Ltd., responsible for global
portfolios with specialization in Asian markets.
Since December 31, 1995, there have been no (i) material changes in the Fund's
investment objectives or policies, (ii) changes to the Fund's charter or
by-laws, and (iii) material changes in the principal risk factors associated
with investment in the Fund.
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[GRAPHIC]
