THE GREATER CHINA FUND, INC.
================================================================================
REPORT OF THE INVESTMENT MANAGER
Performance
The Greater China Fund's (the "Fund") net asset value appreciated $6.57 during
the six months ended June 30, 1997, increasing from $19.49 to $26.06. In
addition, a dividend of $0.1219 was declared on March 25, 1997 and paid on April
18, 1997.
CHINA
Market Review
During the six month period under review, the Chinese stock markets have
experienced a somewhat volatile environment. Share prices rose sharply in the
early months of the year on the back of buoyant domestic liquidity conditions
and the prospect of an improving economic outlook. Nevertheless, administrative
measures adopted by the government to cool down "excessive" speculation in the
market, led to a drastic retreat of both 'A' and 'B' share values.
Shenzhen-listed shares, in particular, were hardest hit due to greater
participation by domestic retail investors than on the Shanghai Exchange.
Despite this volatility, the 'B' share markets continued to expand. During the
period under review, eight new 'B' shares were listed in Shanghai and Shenzhen,
some of which the Fund participated in.
Prospects
The outlook for China stocks remains positive, given the prospect of a recovery
in the domestic economy, and hence corporate earnings, as well as a stable
political environment. Government policy towards the stock markets, however, is
expected to remain a source of volatility.
The Chinese economy appears to be moving out of its cyclical trough and entering
a phase of disinflationary recovery. The economy registered steady growth in the
first few months of 1997. In May, consumer price inflation was only 2.8%, the
lowest level since 1990, indicating that inflation has been kept under control.
This has created a favorable environment for the government to ease credit
further in order to counter the problems of mounting inventory and unemployment.
While a substantial reduction in interest rates is not expected, given its
stimulative impact on stock market speculation, an effort to make more credit
available is likely.
The external sector of the Chinese economy has achieved encouraging performance.
For the first five months of 1997, a trade surplus of $13.9 billion was
recorded, surpassing the $12.2 billion trade surplus for all of 1996. This can
be attributed to a strong recovery in exports (which surged 27% in the first
five months of the year) and a weakening of imports. Taking into consideration
the sustained strength in developed economies and the renewal of China's
Most-Favored-Nation status by the U.S., China's trade should continue to
recover.
On the political front, little has changed in the last six months with the
important exception of the death of paramount leader Deng Xiaoping. While this
caused some initial concern, the impact on the collective leadership centered
around Deng's successor Jiang Zemin appears to be minimal and it is anticipated
that its power will be further confirmed at the forthcoming Party Congress.
================================================================================
<PAGE>
THE GREATER CHINA FUND, INC.
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REPORT OF THE INVESTMENT MANAGER (continued)
HONG KONG
Review
The Hang Seng Index gained 13% during the first half of 1997, closing the period
at a record high of 15,197. Contrary to conventional rallies, utilities and
banks proved to be the best performing sectors, outperforming the benchmark
index by 22.7% and 19.8%, respectively. Surprisingly, however, the property
sector experienced a poor start to the year, losing 5.2% during the six month
period. Red Chip companies, (broadly defined as Hong Kong listed companies with
mainland Chinese parents), however, performed well, as asset acquisitions at
attractive valuations enhanced earnings growth and shareholder value.
The remarkable performance of utilities can almost certainly be attributed to
recent shareholding changes and "China fever" which has dominated the market
since the beginning of the year. The potential for growth of both Hong Kong
Telecom and China Light & Power were much enhanced by increased investment from
mainland organizations. The euphoria towards China plays spread quickly to the
banking sector. For example, Hang Seng Bank (a separately listed subsidiary of
Hong Kong and Shanghai Bank Corporation) was the latest candidate believed to
have "Red Chip" potential. As a result of this forecast, the bank staged a
strong comeback in June--rising 19%, but still has a long way from catching up
to its parent, which gained 41% during the first half of the year. The share
price was bid up by the British investment community, which in our view, finally
appreciated the company's excellent Asian growth prospects.
The poor performance of the property sector, which traditionally leads Hong
Kong's bull market runs, was due to concerns regarding the overheating of the
residential property market and potential government intervention.
Prospects
In the future, China's influence will inevitably play an increasing role in the
Hong Kong market. Following a lengthy build-up, China finally resumed
sovereignty over Hong Kong on June 30th and established it as a Special
Administrative Region. While Hong Kong's way of life should be preserved under
the one-country two systems framework, subtle changes have already begun to take
place. From an investor's point of view, the most prominent of these is the
increased control over many of the territory's strategic assets. Evidence of
this is perhaps best seen in the increased holdings of mainland interests in
companies such as Cathay Pacific. This process is likely to persist and
predictions are that the media and banking sectors are likely to be targeted
next. Fortunately, this trend appears to be commercially rather than politically
driven and the corporate restructuring involved should serve to maintain the
upward movement of the Hang Seng Index. The inevitable result of this process is
increased value for shareholders.
In view of the territory's close trade relationship with the mainland, the
current revival of the Chinese economy bodes well for Hong Kong. Despite
somewhat lackluster year-to-date-performance from Hong Kong's exports, primarily
due to the changing local trade structure (from re-export to trans-shipment),
container throughout recorded growth of 13.2% during the first five months of
the year. This implies that a surplus in the service trade account is offsetting
a deficit in the manufacturing trade account. Economic data for the six month
period ending June 30, 1997, indicates an acceleration in the local economy,
providing a favorable business outlook for the second half of the year.
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2
<PAGE>
THE GREATER CHINA FUND, INC.
================================================================================
REPORT OF THE INVESTMENT MANAGER (continued)
Hong Kong's newly appointed Chief Executive, C.H. Tung, has expressed a
commitment to curb excessive speculation in the residential property sector.
This commitment has taken the form of threatened short-term measures, such as
the imposition of higher registration or capital gains taxes. These measures
would certainly lead to a further correction of the property market. While this
scenario may indicate a rather bleak outlook for the property market, C.H.
Tung's intention is to not damage the market, but rather to tackle the
long-standing supply bottleneck. This most likely signifies that property shares
will remain volatile in the short-term, however, the long-term outlook for the
sector remains bright.
OTHER MARKETS
Taiwan
The Taiwanese market continued its rally and ended the period at a seven-year
high. Having bottomed in 1996, there are signs that the Taiwanese economy is
shifting from its early recovery phase to the expansion phase of the business
cycle. Economic figures, which were rather mixed earlier this year, have
gradually strengthened in the second quarter. For example, solid increases in
industrial production and export orders during the period indicate a revival of
domestic as well as export demand. In addition, the unemployment rate, a lagging
economic indicator, fell from a high of 3.0% in February 1997 to 2.5% in May
1997. This data signifies that Taiwan's economy has moved out of the trough of
1996 and that prospects are good for healthy economic growth during the second
half of this year.
While the outlook for Taiwan remains positive, it is possible, however, that the
potential for growth may be less robust than expected in the second half of 1997
as the market is likely to turn from being liquidity-driven to
fundamental-driven.
- --------------------------------------------------------------------------------
CONCLUSION
The modest recoveries in China and Hong Kong appear set to continue into 1998
while inflation remains under control. Hence, the positive outlook for earnings
in both markets remain intact. The increased presence of Chinese interests in
Hong Kong businesses could be seen as either a threat to, or an opportunity for,
investors. Overall, the Investment Manager interprets this development as
beneficial for the Fund. For Hong Kong companies, there will be improved
opportunities to expand relationships in mainland China. Red Chip companies
through the nature of their ownership, will continue to benefit from the
advantageous position they hold for acquiring good quality mainland assets at
attractive valuations.
The downside to the strong performance of Chinese shares and Red Chips is that
it is likely to lead to increased volatility. This forecast should not however
distract those investors looking to take advantage of the long-term perspective.
We maintain a positive stance on these stocks, but remain cautious of the
divergence in both their operating environment and management strength.
Baring International Investment (Far East) Limited
Hong Kong
July 21, 1997
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3
<PAGE>
THE GREATER CHINA FUND, INC.
================================================================================
PORTFOLIO OF INVESTMENTS
June 30, 1997
(Unaudited)
Value
Shares Description (Note 1)
------ ----------- --------
EQUITIES AND EQUITY EQUIVALENTS -- 95.9%
CHINA -- 24.9%
BUILDING MATERIALS -- 1.0%
2,908,828 China Southern Glass Co. "B" $ 1,520,627
1,250,000 Shanghai Yaohua Pilkington Glass "B" 452,500
800,000 Shenzhen Fangda Co. "B" 1,161,695
------------
3,134,822
------------
CONSUMPTION -- 0.1%
2,580,000 Shanghai Narcissus Electric "B" 366,360
------------
INFRASTRUCTURE -- 0.8%
450,000 Gauangdong Prov. Express
Development Share Co. 284,615
10,074,000 Zhejiang Expressway "H"* 2,444,609
------------
2,729,224
------------
MANUFACTURING -- 10.9%
2,525,536 China International Marine
Containers "B" 2,982,801
11,400,000 First Tractor Co. "H"* 7,430,976
19,800,000 Harbin Power Equipment "H" 4,370,297
800,000 Hubei Sawonda Co. Ltd. "B"* 453,319
4,953,200 Inner Mongolia Erdos Cashmere
Products Co. "B" 4,160,688
5,830,000 Qingling Motor Cos. "H" 3,010,081
8,464,080 Shanghai Diesel Engine Co. Ltd. "B" 2,877,787
3,070,000 Wafangdian Bear "B"* 1,989,261
3,522,300 Weifu Fuel Injection "B" 2,091,384
12,540,000 Yizheng Chemical Fibre Co. Ltd. "H" 2,233,707
11,124,000 Zhenhai Refining & Chemical Co. "H" 4,163,980
------------
35,764,281
------------
METAL -- 0.5%
1,800,000 Bengang Steel Plates "B"* 552,967
3,652,000 Jiangxi Copper Co. "H"* 1,001,704
------------
1,554,671
------------
SERVICES -- 7.4%
2,737,680 China Merchant Shekou
Port Service Co. Ltd. "B" 1,501,832
1,000,000 Chiwsan Wharf Holdings Ltd. "B" 611,826
3,460,000 Nanjing Posts & Tel. "B"* 1,670,311
11,446,160 Shanghai Dazhong Taxi Co. Ltd. "B" 10,164,190
16,224,000 Shanghai Haixing Shipping "H"* 9,109,548
228,155 Shanghai New Asia Group "B" 124,573
2,000,000 Tietsen Marine Shipping "B"* 1,144,000
------------
24,326,280
------------
UTILITIES -- 4.2%
11,500,000 Beijing Datang Power Co. "H"* 5,306,688
334,100 Huaneng Power International ADR "N"* 8,519,550
------------
13,826,238
------------
Total China 81,701,876
------------
Value
Shares Description (Note 1)
------ ----------- --------
HONG KONG -- 70.8%
BANKING -- 6.5%
360,000 Hang Seng Bank $ 5,134,692
132,800 HSBC Holdings 3,993,959
5,276,697 The Ka Wah Bank Ltd. 6,776,959
1,860,000 Union Bank of Hong Kong 5,401,882
------------
21,307,492
------------
CONGLOMERATE -- 21.8%
5,860,000 China Resources Enterprise 28,742,917
2,418,000 Citic Pacific Ltd. 15,137,274
3,844,000 Guangdong Investment Ltd. 5,805,222
684,400 Guangdong Investment Ltd. Warrants,
expiring 7/30/99* 322,443
2,145,000 Hutchison Whampoa Ltd. 18,619,551
312,500 Swire Pacific, Class A 2,823,564
------------
71,450,971
------------
CONSTRUCTION -- 1.1%
5,600,000 Hopewell Holdings 3,541,879
------------
CONSUMPTION -- 4.3%
3,410,000 Giordano International Ltd. 2,310,805
5,514,000 NG Fung Hong Ltd. 8,256,089
14,046,000 Tingyi Holding Corp. 3,499,126
------------
14,066,020
------------
INFRASTRUCTURE -- 8.8%
2,113,000 Cheung Kong Infra. Holdings 6,123,017
4,664,000 Cosco Pacific Ltd. 10,806,191
4,148,574 New World Infrastructure* 11,780,701
------------
28,709,909
------------
MANUFACTURING -- 0.8%
1,410,000 VTech Holdings Ltd. 2,657,184
------------
REAL ESTATE DEVELOPMENT -- 15.9%
1,200,000 Cheung Kong Holdings 11,849,289
5,000,000 Concord Land Development 5,485,782
12,000,000 Far East Hotels & Entertainment* 5,382,520
1,791,802 Henderson China Holdings Ltd. 3,018,215
3,000,000 Lai Sun Development 3,368,916
2,200,000 New World Development Co. Ltd. 13,204,600
833,000 Sun Hung Kai Properties Ltd. 9,999,484
------------
52,308,806
------------
SERVICES -- 0.8%
5,856,000 Chu Kong Shipping Development Co.* 2,740,051
------------
TRADING -- 2.9%
1,517,000 Shanghai Industrial Holdings 9,438,049
------------
UTILITIES -- 0.1%
180,000 Hong Kong & China Gas 360,126
------------
================================================================================
4
<PAGE>
THE GREATER CHINA FUND, INC.
================================================================================
Value
Shares Description (Note 1)
------ ----------- --------
HONG KONG -- (continued)
MISCELLANEOUS -- 7.8%
3,614,000 China Everbright IHD Pacific Ltd.* $ 10,799,130
3,598,000 China Merchant Hai Hong
Holdings Co. Ltd. 11,169,298
16,140,000 CNPC Hong Kong Ltd.* 3,583,287
------------
25,551,715
------------
Total Hong Kong 232,132,202
------------
KOREA -- 0.0%
MANUFACTURING -- 0.0%
652 Samsung Electronics 51,764
------------
TAIWAN -- 0.2%
MISCELLANEOUS -- 0.2%
52 Taipei Fund IDR 659,308
------------
Total Equities and Equity Equivalents
(cost $194,910,822) 314,545,150
------------
Principal
Amount Value
(000) Description (Note 1)
----- ----------- --------
FIXED INCOME -- 1.5%
CHINA
MANUFACTURING -- 1.3%
US$ 4,500 Qingling, Convertible Bonds
3.5%, due 1/22/2002 $ 4,422,600
------------
HONG KONG
REAL ESTATE DEVELOPMENT -- 0.2%
HK$ 5,250 Hong Kong Resort International Ltd.,
6.00%, due 6/26/2000 626,831
------------
Total Fixed Income
(cost $4,954,318) 5,049,431
------------
TIME DEPOSITS -- 3.4%
US$ 89 Brown Brothers Harriman & Co.,
Grand Cayman, 4.50%** 89,000
11,200 Rabo Bank,
Grand Cayman, 4.50%** 11,200,000
------------
Total Time Deposits
(cost $11,289,000) 11,289,000
------------
TOTAL INVESTMENTS -- 100.8%
(cost $211,154,140) 330,883,581
Liabilities in excess of other
assets -- (0.8%) (2,749,018)
------------
NET ASSETS -- 100.0% $328,134,563
============
- ----------
* Non-income producing security.
** Variable rate account -- rate resets on a monthly basis; amount available
upon 48 hours' notice.
ADR -- American Depositary Receipt
IDR -- International Depositary Receipt
See Notes to Financial Statements.
================================================================================
5
<PAGE>
THE GREATER CHINA FUND, INC.
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1997
(Unaudited)
ASSETS
Investments, at value (cost $211,154,140) $330,883,581
Cash (including foreign currency of $883,707 with a
cost of $883,478) 948,304
Receivable for investments sold 13,282,558
Dividends and interest receivable 590,937
Deferred organizational expenses and other assets 84,847
------------
Total assets 345,790,227
------------
LIABILITIES
Payable for investments purchased 16,849,522
Investment management fee payable 311,283
Administration fee payable 51,038
Accrued expenses and other liabilities 443,821
------------
Total liabilities 17,655,664
------------
NET ASSETS $328,134,563
============
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 (2,236,107)
Accumulated net realized gain on investments 40,210,128
Net unrealized appreciation of investments and other
assets and liabilities denominated in foreign currency 119,728,922
------------
NET ASSETS $328,134,563
============
Shares Outstanding 12,593,049
------------
NET ASSET VALUE PER SHARE $26.06
============
See Notes to Financial Statements.
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6
<PAGE>
THE GREATER CHINA FUND, INC.
================================================================================
STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1997
(Unaudited)
INVESTMENT INCOME
Dividends (net of foreign withholding taxes of $28,737) $ 2,424,298
Interest 129,338
-----------
Total investment income 2,553,636
-----------
EXPENSES
Investment management fees 1,608,721
Administration fees 264,834
Custodian and accounting fees 250,517
Directors' fees and expenses 114,048
Shareholder reports expense 50,802
Legal fees and expenses 50,766
Audit fees and expenses 22,839
Amortization of organizational expenses 12,140
New York Stock Exchange listing fee 12,127
Transfer agent's fees and expenses 4,587
Miscellaneous expenses 1,791
-----------
Total expenses 2,393,172
-----------
Net investment income 160,464
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS
Net realized gain (loss) on:
Investments 45,307,339
Foreign currency transactions (36,642)
-----------
45,270,697
-----------
Net change in unrealized appreciation/depreciation of:
Investments 38,856,100
Other assets and liabilities denominated in
foreign currency (1,065)
-----------
38,855,035
-----------
Net realized and unrealized gain on investments
and foreign currency transactions 84,125,732
NET INCREASE IN NET ASSETS FROM INVESTMENT OPERATIONS $84,286,196
===========
See Notes to Financial Statements.
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7
<PAGE>
THE GREATER CHINA FUND, INC.
================================================================================
STATEMENT OF CHANGES IN NET ASSETS
For the
Six Months
Ended For the Year
June 30, 1997 Ended
(Unaudited) December 31, 1996
------------- -----------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income $ 160,464 $ 1,190,587
Net realized gain on investments
and foreign currency transactions 45,270,697 2,051,827
Net change in unrealized appreciation/
depreciation of investments and
other assets and liabilities
denominated in foreign currency 38,855,035 69,206,724
------------ ------------
Total from investment operations 84,286,196 72,449,138
------------ ------------
DIVIDENDS TO SHAREHOLDERS
From net investment income -- (1,141,575)
In excess of net investment income (1,535,093) (369,591)
------------ ------------
Total dividends to shareholders (1,535,093) (1,511,166)
------------ ------------
FUND SHARE TRANSACTIONS
Proceeds from dividends reinvested -- 84,972
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
------------ ------------
Net increase in net assets 82,751,103 106,137,518
NET ASSETS
Beginning of period 245,383,460 139,245,942
------------ ------------
End of period $328,134,563 $245,383,460
============ ============
See Notes to Financial Statements.
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8
<PAGE>
THE GREATER CHINA FUND, INC.
================================================================================
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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 Fund 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 having a
maturity of 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
determines that such value does 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.
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.
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9
<PAGE>
THE GREATER CHINA FUND, INC.
================================================================================
The resulting net foreign currency gain or loss is 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 exchange 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 considered either 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 or 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 gain on investments. To the extent they exceed net investment income or
net realized capital gains for tax purposes, they are reported as distributions
of paid-in capital in excess of par.
On March 25, 1997, the Board of Directors declared an ordinary income dividend
of $0.1219 per share. The dividend was paid on April 18, 1997 to shareholders of
record on April 4, 1997.
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 tax is
required. In addition, by distributing during each calendar year substantially
all of its ordinary income, long-term 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
================================================================================
10
<PAGE>
THE GREATER CHINA FUND, INC.
================================================================================
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.
- --------------------------------------------------------------------------------
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, computed weekly, at an annual rate of 1.25% 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, computed weekly, at an annual rate of 0.22% 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.
================================================================================
11
<PAGE>
THE GREATER CHINA FUND, INC.
================================================================================
NOTE 3 TRANSACTIONS WITH AFFILIATES
The Investment Manager, out of its own assets, pays PaineWebber a quarterly fee
at an annual rate of 0.10% 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
investments). For the six months endedJune 30, 1997, $128,698 was paid or
accrued by the Investment Manager to PaineWebber for such services.
- --------------------------------------------------------------------------------
NOTE 4 PORTFOLIO SECURITIES
For U.S. federal income tax purposes, the cost of securities owned at June 30,
1997 was substantially the same as the cost of securities for financial
statement purposes. Accordingly, net unrealized appreciation of $119,729,441 was
composed of gross appreciation of $126,851,724 for those securities having an
excess of value over cost and gross depreciation of $7,122,283 for those
securities having an excess of cost over value.
For the six months ended June 30, 1997, aggregate purchases and sales of
portfolio securities, excluding short-term securities, were $119,237,682 and
$128,044,203, respectively.
In accordance with U.S. Treasury regulations, the Fund elected to defer realized
foreign currency lossesoccurring 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 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.
- --------------------------------------------------------------------------------
NOTE 5 CAPITAL STOCK
Of the 12,593,049 shares outstanding at June 30, 1997, the Investment Manager
owned 7,663 shares. There were no transactions in shares of common stock for the
six months ended June 30, 1997. Transactions in shares of common stock for the
year ended December 31, 1996 were as follows:
For the Year
Ended
December 31, 1996
-----------------
Shares outstanding, beginning of period 9,589,377
Shares issued resulting from dividend reinvestment 5,327
Shares issued in connection with rights offering 2,998,345
----------
Net increase in shares outstanding 3,003,672
----------
Shares outstanding, end of period 12,593,049
==========
================================================================================
12
<PAGE>
THE GREATER CHINA FUND, INC.
================================================================================
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.
- --------------------------------------------------------------------------------
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 they received approximately $585,000 and
$112,500 in dealer manager and soliciting fees, respectively, in connection with
its participation in the rights offering.
- --------------------------------------------------------------------------------
NOTE 8 ANNUAL SHAREHOLDERS' MEETING
The Fund's annual meeting of shareholders was held on April 22, 1997.
Shareholders voted to re-elect Richard Graham, John A. Hawkins and Tak Lung Tsim
as Directors, and to ratify the appointment of Price Waterhouse LLP as the
Fund's independent accountants for the fiscal year ending December 31, 1997. The
resulting vote count for each proposal is indicated below:
For Withheld Authority
--------- ------------------
1. Election of Directors:
Richard Graham 9,753,064 126,932
John A. Hawkins 9,747,986 132,010
Tak Lung Tsim 9,762,291 117,705
In addition to the above re-elected Directors, Mr. Richard B. Bradley, Mr.
Edward Y. Baker, Mr. John A. Bult,Mr. Don G. Hoff and Mr. Jonathan J.K. Taylor
continue to serve as Directors of the Fund.
Withheld
For Against Authority
--- ------- ---------
2. Ratification of the appointment of
Price Waterhouse LLP as the Fund's
independent accountants 9,780,042 72,130 27,824
================================================================================
13
<PAGE>
<TABLE>
THE GREATER CHINA FUND, INC.
=================================================================================================================================
FINANCIAL HIGHLIGHTS
Selected data for a share of common stock outstanding throughout each period is presented below:
<CAPTION>
For the For the Period
Six Months July 23, 1992+
Ended For the Year Ended December 31, through
June 30, 1997 --------------------------------------------- December 31,
(Unaudited) 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 19.49 $ 14.52 $ 14.29 $ 23.79 $ 13.40 $ 13.95++
-------- -------- -------- --------- -------- --------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (loss) 0.01 0.10* 0.20 0.12* 0.02 (0.00)
Net realized and unrealized gain (loss) on investments
and foreign currency transactions 6.68 5.93* 0.29 (8.92)* 11.00 (0.38)
-------- -------- -------- --------- -------- --------
Total from investment operations 6.69 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 (0.12) (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) (0.12) (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 $26.06 $19.49 $14.52 $14.29 $23.79 $13.40
======== ======== ======== ========= ======== ========
Market value, end of period $21.31 $15.63 $14.13 $12.13 $26.75 $12.38
======== ======== ======== ========= ======== ========
TOTAL INVESTMENT RETURN (1)(2) 37.46% 15.53% 18.48% (52.01)% 122.01% (11.29)%
======== ======== ======== ========= ======== ========
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $328,135 $245,383 $139,246 $ 136,994 $160,783 $ 90,543
Ratio of expenses to average net assets 1.86%** 2.07% 2.36% 2.08% 2.22% 2.43%**
Ratio of net investment income (loss) to
average net assets 0.12%** 0.65% 1.39% 0.63% 0.11% (0.04)%**
Portfolio turnover 45% 37% 32% 22% 31% 1%
Average commission rate paid per share of common
stock investments purchased/sold (3) $ 0.0023 $ 0.0015 -- -- -- --
- ----------------
+ Commencement of investment operations.
++ Initial public offering price of $15.00 per share of 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.
=================================================================================================================================
</TABLE>
<PAGE>
GCH
LISTED
NYSE
LOGO
<PAGE>
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 and 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
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 financial information included herein is taken from the records of the
Fund without examination by independent accountants, who did not express an
opinion hereon.
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.
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.
THE GREATER CHINA
FUND, INC.
----------------------------
SEMI-ANNUAL REPORT
JUNE 30, 1997
