THE GREATER CHINA FUND, INC.
================================================================================
REPORT OF THE INVESTMENT MANAGER
PERFORMANCE
The Greater China Fund's (the "Fund") net asset value depreciated $5.45 during
the six months ended June 30, 1998, decreasing from $13.46 to $8.01. In
addition, a dividend of $0.92 was declared on May 18, 1998 and paid on June 12,
1998.
CHINA
MARKET REVIEW
During the six month period under review, share prices of China stocks including
"B", "H" and Red Chips (broadly defined as Hong Kong listed companies with
mainland Chinese parents) declined sharply. The MSCI China Index decreased 36%.
Investment sentiment was weak on the back of the continued financial crisis in
the region. Concerns over the domestic economy and speculation on the
devaluation of the Chinese Renminbi ("RMB") also fueled the sell-off. Corporate
earnings were generally weak, excluding Red Chips and new listings. However, Red
Chips experienced their premium rating evaporate as asset injections slowed and
a reshuffling at the central government created uncertainties.
The expansion of the market has slowed significantly for both "B" and "H"
shares. This can be partly attributed to the lack of foreign demand for equities
in Asia as a whole, and partly due to buoyant domestic "A" share markets. The
Shanghai "A" Share Index rose 13% during the six month period and attracted many
domestic companies for listing offering less stringent regulatory control, solid
demand and higher valuations.
PROSPECTS
In China, the outlook remains that of sluggish growth. The economy is
experiencing slowdowns in both export and consumption growth. Although,
reform-oriented government policies were publicized subsequent to the March 1998
National People's Congress whereby housing and investment spending will be
stimulated to compensate for the slowdown. The impact of these policies may not
be seen until late this year. The end result is expected to be a year of slow
progress in the overall economy but large divergence in sector performance.
There were heightened concerns regarding the question of an RMB devaluation as
the Japanese Yen weakened and China's export growth decelerated. However,
looking into the breakdown of China's exports, it appears that the slowdown came
largely from sluggish demand in Asian countries, particularly Japan and Korea.
These demand-side problems cannot be solved simply by an RMB devaluation.
Meanwhile, repeated commitments from China's leaders indicated the significance
of political considerations in maintaining a stable exchange rate in the
near-term.
================================================================================
<PAGE>
THE GREATER CHINA FUND, INC.
================================================================================
REPORT OF THE INVESTMENT MANAGER
continued
HONG KONG
MARKET REVIEW
During the six month period under review, the Hong Kong stock market extended
its losses. The blue-chip Hang Seng Index fell 15.1%. The market followed
closely the rise-and-fall in the Asian markets. A panic in early January was
followed by a sharp recovery in February that later fizzled. Continued
deterioration of the economic environment in the region, as evidenced by riots
in Indonesia and the weakening Japanese Yen, did not provide support. The sharp
decline in asset prices in Hong Kong and the slowdown of domestic consumption
also caused concerns regarding the health of financial systems and corporations.
As a result, the market drifted lower from March to June.
In terms of sectors, utility counters that are defensive in nature outperformed
the market. Banks led by HSBC Holdings, which has a diversified earnings base
around the world, also performed well. Property companies and conglomerates
experienced the hardest hit with declining asset prices and slowing trading
activities.
PROSPECTS
The outlook for the Hong Kong stock market remains uncertain. As the most open
economy in Asia, Hong Kong is vulnerable to further deterioration of economic
conditions in the region. A market recovery should not be expected without the
regional markets stabilizing. In addition, there is risk of a downward spiral in
domestic asset prices as interest rates remain high. However, valuation of the
market is on the low-end of its historic trading range and appears attractive at
current levels.
The Hong Kong economy is adjusting around the peg exchange rate quickly. Gross
domestic product growth during the first quarter of 1998 was disappointing at
- -2%, the first negative figure in fourteen years. The fall in domestic
consumption was the key reason behind this, as the negative wealth effect from
falling property and stock prices dampened consumer confidence. There was also a
severe credit crunch experienced by local corporates, with the withdrawal of
Japanese and European banks from the credit market and local banks aggressively
bidding deposits to maintain a high level of liquidity. The adjustment is
expected to continue until a balance of payments surplus is reached and
consequently, liquidity is achieved.
In the residential property market, aggressive price discounting by the major
developers has exacerbated both the magnitude and pace of the property price
fall. The positive sign is that the underlying demand appears to be strong as
evidenced by the overwhelming response to a number of project pre-sales. The
government has also adopted a more flexible approach towards its long-term
housing supply target. This should help stabilize the residential property
market where prices have fallen approximately 40-45%. On the other hand, the
commercial property market is still undergoing consolidation and the prospects
are not positive in light of continuing economic contraction and upcoming
substantial increases in supply.
================================================================================
2
<PAGE>
THE GREATER CHINA FUND, INC.
================================================================================
REPORT OF THE INVESTMENT MANAGER
continued
CONCLUSION
The crisis in Asia has worsened during the first half of this year. Hong Kong,
as the most open economy in Asia, continues to be vulnerable to deteriorating
economic conditions in Asia and its domestic economy is still undergoing a
downward adjustment. In China, the policymakers' decision to uphold the RMB
exchange rate at the time when demand in Asia is weakening places the burden of
growth stimulation on domestic consumption and investment demand. The net effect
is likely to be sluggish growth in China for 1998 as deflationary pressure
remains. Corporate earnings will remain weak as earnings acceleration is not
expected to arrive near-term.
The near-term investment approach of the Fund will continue to be cautious and
selective in view of the current economic conditions. However, the March 1998
National People's Congress confirmed the continuation of a reform-oriented
government. Reforms of the government, banks, housing policy and state-owned
enterprises remain a commitment from the central government. President Clinton's
recent trip to China strengthened China's ties and openness to foreign trade and
investment. The reforms and continued opening of China augur well for the
long-term case of sustainable growth and the improved quality of corporate
earnings.
BARING INTERNATIONAL INVESTMENT (FAR EAST) LIMITED
Hong Kong
July 15, 1998
================================================================================
3
<PAGE>
THE GREATER CHINA FUND, INC.
================================================================================
PORTFOLIO OF INVESTMENTS
June 30, 1998
(Unaudited)
Value
Shares Description (Note 1)
------ ----------- -----------
EQUITIES -- 98.0%
CHINA -- 38.5%
BUILDING MATERIALS -- 1.1%
7,882,000 Anhui Conch Cement $ 1,098,678
------------
CONSUMPTION -- 0.6%
5,152,000 Guangzhou Pharmaceutical "H"* 598,451
------------
INFRASTRUCTURE -- 1.6%
9,672,000 Zhejiang Expressway "H" 1,622,819
------------
MANUFACTURING -- 15.3%
3,674,618 China International Marine
Containers "B" 1,897,067
10,196,000 First Tractor "H"+ 2,664,804
3,175,000 Guangdong Kelon Electronic
Holdings "H" 2,561,145
19,800,000 Harbin Power Equipment "H" 1,788,849
8,430,000 Qingling Motor "H"+ 2,339,249
3,770,000 Wafangdian Bearing "B"* 973,154
2,687,199 Weifu Fuel Injection "B" 932,959
6,214,000 Zhenhai Refining & Chemical "H"+ 802,013
3,937,000 Zhenhua Port Machinery "B" 1,464,564
------------
15,423,804
------------
SERVICES -- 2.6%
4,013,160 Shanghai Dazhong Taxi "B"* 2,191,185
4,300,000 Shanghai Haixin Shipping "H"*+ 488,384
------------
2,679,569
------------
UTILITIES -- 12.2%
10,608,000 Beijing Datang Power "H" 2,977,852
1,296,000 Huaneng Power International "H"*+ 430,718
388,800 Huaneng Power International
ADR "N"*+ 5,224,500
13,000,000 Zhejiang Southeast Electric "B" 3,640,000
------------
12,273,070
------------
Value
Shares Description (Note 1)
------ ----------- -----------
MISCELLANEOUS -- 5.1%
25,980,000 Anhui Expressway "H" $ 2,615,436
4,037,300 Inner Mongolia Yitai "B" 1,130,444
7,322,000 Yanzhou Coal Mining "H "* 1,398,627
------------
5,144,507
------------
Total China 38,840,898
------------
HONG KONG -- 59.5%
BANKING -- 0.3%
500,000 Union Bank of Hong Kong 316,211
------------
CONGLOMERATES -- 18.2%
988,000 Beijing Enterprises+ 1,491,946
5,550,000 China Resources Enterprise+ 5,730,511
2,112,000 Hutchison Whampoa 11,121,528
------------
18,343,985
------------
CONSUMPTION -- 3.9%
740,000 Guangnan Holdings+ 248,322
5,404,000 NG Fung Hong+ 3,731,466
------------
3,979,788
------------
INFRASTRUCTURE -- 10.5%
2,013,000 Cheung Kong Infrastructure
Holdings 3,806,202
2,628,000 Cosco Pacific+ 932,757
5,048,574 New World Infrastructure*+ 5,831,794
------------
10,570,753
------------
REAL ESTATE DEVELOPMENT-- 6.2%
386,000 Cheung Kong Holdings 1,903,098
12,000,000 Far East Hotels & Entertainment 1,827,568
973,000 New World Development 1,883,712
7,910,000 Sun Hung Kai Properties 602,336
------------
6,216,714
------------
=================================================================
4
<PAGE>
THE GREATER CHINA FUND, INC.
================================================================================
Value
Shares Description (Note 1)
------ ----------- -----------
HONG KONG -- (continued)
SERVICES -- 11.4%
5,681,000 China Telecom*+ $ 9,898,490
649,000 Smartone Telecom Holdings 1,583,131
------------
11,481,621
------------
TRADING -- 5.9%
1,517,000 Shanghai Industrial Holdings+ 3,573,212
2,798,000 Tianjin Development Holdings* 2,383,428
------------
5,956,640
------------
MISCELLANEOUS -- 3.1%
5,044,000 China Merchants Holdings
International+ 3,076,007
------------
Total Hong Kong 59,941,719
------------
Total Equities
(cost $162,204,133) 98,782,617
------------
Value
Shares Description (Note 1)
------ ----------- -----------
TIME DEPOSITS -- 1.5%
US$ 89 Brown Brothers Harriman & Co.,
Grand Cayman, 4.50%++ $ 89,000
1,500 First Nations Bank Chicago,
Grand Cayman, 4.50%++ 1,500,000
------------
Total Time Deposits
(cost $1,589,000) 1,589,000
------------
TOTAL INVESTMENTS -- 99.5%
(cost $163,793,133) 100,371,617
Other assets less
liabilities -- 0.5% 470,934
------------
NET ASSETS -- 100.0% $100,842,551
============
- ----------
* Non-income producing security.
+ Security, or a portion thereof, was on loan at June 30, 1998.
++ Variable rate account -- rate resets on a monthly basis;
amount available upon 48 hours' notice.
ADR-American Depositary Receipt
See Notes to Financial Statements.
================================================================================
5
<PAGE>
THE GREATER CHINA FUND, INC.
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1998
(Unaudited)
ASSETS
Investments, at value (cost $163,793,133) $100,371,617
Investments of collateral received for securities on loan,
at value (cost $39,755,194) 39,755,194
Cash (including Hong Kong dollars with a cost of $48,968
and value of $48,947) 94,527
Dividends and interest receivable 715,165
Prepaid expenses 22,270
------------
Total assets 140,958,773
------------
LIABILITIES
Collateral for securities on loan 39,755,194
Investment management fee payable 112,378
Administration fee payable 19,213
Accrued expenses 229,437
------------
Total liabilities 40,116,222
------------
NET ASSETS $100,842,551
============
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 (1,472,559)
Accumulated net realized loss on investments (4,736,175)
Net unrealized depreciation of investments and other
assets and liabilities denominated in foreign currency (63,380,335)
------------
NET ASSETS $100,842,551
============
Shares Outstanding 12,593,049
------------
NET ASSET VALUE PER SHARE $8.01
=====
See Notes to Financial Statements.
================================================================================
6
<PAGE>
THE GREATER CHINA FUND, INC.
================================================================================
STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1998
(Unaudited)
INVESTMENT INCOME
Dividends $ 1,688,361
Interest 461,985
--------------
Total investment income 2,150,346
--------------
EXPENSES
Investment management fees 910,055
Administration fees 153,047
Custodian and accounting fees 136,140
Directors' fees and expenses 126,924
Shareholder reports expense 51,241
Legal fees 32,825
Insurance expense 25,787
Audit fees 25,060
New York Stock Exchange listing fee 13,900
Transfer agent fees and expenses 2,511
Miscellaneous expenses 1,628
--------------
Total operating expenses 1,479,118
--------------
Net investment income before excise tax 671,228
Excise tax 371,019
--------------
Net investment income 300,209
--------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS
Net realized loss on:
Investments (4,673,911)
Foreign currency transactions (47,358)
--------------
(4,721,269)
--------------
Net change in unrealized appreciation/depreciation of:
Investments (52,709,633)
Other assets and liabilities denominated in
foreign currency 41,143
--------------
(52,668,490)
--------------
Net realized and unrealized loss on investments
and foreign currency transactions (57,389,759)
--------------
NET DECREASE IN NET ASSETS FROM INVESTMENT OPERATIONS $(57,089,550)
==============
See Notes to Financial Statements.
================================================================================
7
<PAGE>
THE GREATER CHINA FUND, INC.
================================================================================
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
For the
Six Months
Ended For the Year
June 30, 1998 Ended
(Unaudited) December 31, 1997
------------- -----------------
INCOME (LOSS) FROM INVESTMENT
OPERATIONS
<S> <C> <C>
Net investment income (loss) $ 300,209 $ (1,137,719)
Net realized gain (loss) on investments
and foreign currency transactions (4,721,269) 62,468,461
Net change in unrealized appreciation/
depreciation of investments and
other assets and liabilities
denominated in foreign currency (52,668,490) (91,585,732)
------------ ------------
Total from investment operations (57,089,550) (30,254,990)
------------ ------------
DIVIDENDS AND DISTRIBUTIONS
TO SHAREHOLDERS
In excess of net investment income -- (1,635,864)
From net realized gain on investments (11,585,605) (43,974,900)
------------ ------------
Total dividends and distributions
to shareholders (11,585,605) (45,610,764)
------------ ------------
Net decrease in net assets (68,675,155) (75,865,754)
NET ASSETS
Beginning of period 169,517,706 245,383,460
------------ ------------
End of period $100,842,551 $169,517,706
============ ============
</TABLE>
See Notes to Financial Statements.
================================================================================
8
<PAGE>
THE GREATER CHINA FUND, INC.
================================================================================
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited)
NOTE 1 ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Greater China Fund (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 Groep NV.
Investment operations commenced on July 23, 1992.
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 investments 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
investments. 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 denominated in foreign currency are translated at the closing
rate of exchange on the valuation date; and
(ii) purchases and sales of investments, income and expenses are translated at
the rate of exchange prevailing on the respective dates of such
transactions.
The resulting net foreign currency gain or loss is included in the Statement of
Operations.
================================================================================
9
<PAGE>
THE GREATER CHINA FUND, INC.
================================================================================
The Fund does not generally isolate that portion of the results of operations
arising as a result of changes in 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 is reflected as a component
of net unrealized depreciation 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.
SECURITY LENDING
The Fund may lend up to 30% of its total assets to qualified institutions. When
the Fund lends its securities, it continues to earn dividends and other income
on such securities. Under the terms of the securities lending agreement, the
securities on loan are to be secured at all times by cash or liquid securities
in an amount at least equal to 105% of the market value of the securities on
loan that are foreign securities, which are marked to market daily. The Fund
bears the risk of delay in recovery of, or even loss of rights in, the
securities on loan should the borrower fail financially. The Fund's lending
agent is PaineWebber Incorporated ("PaineWebber") who administers the Fund's
lending program. PaineWebber is authorized to invest the cash collateral
received in short-term securities, including investments in affiliated mutual
funds. Any income from investments of cash collateral in excess of agency fees
and of a predetermined rebate to the borrowers is retained by the Fund and is
included in interest income. For non-cash collateral, the Fund earns a net fee,
after the payment of the lending agents' fees paid by the borrowers. For the six
months ended June 30, 1998, net earnings to the Fund from investment of cash
collateral was $280,421, after deducting the borrowers' rebate of $826,718 and
PaineWebber fees of $150,900, $24,688 of which were due at June 30, 1998. At
June 30, 1998, the market value of the securities on loan and the cash
collateral received with respect to such loans were $36,693,787 and $39,755,194,
respectively.
At June 30, 1998, the Funds' investments from cash collateral for securities on
loan were as follows:
Shares
(000) Money Market Funds
------ ------------------
4,306 AIM Liquid Asset Portfolio $ 4,305,805
6,585 AIM Prime Portfolio 6,584,764
67 Provident Institutional Temporary
Investment Fund--Class B 67,304
37 Provident Institutional Temporary
Investment Fund--Class C 37,321
-----------
10,995,194
===========
================================================================================
10
<PAGE>
THE GREATER CHINA FUND, INC.
================================================================================
Principal
Amount
(000) Discount Notes
--------- --------------
$3,000 Cargill Incorporated $ 3,000,000
4,000 Caterpillar Financial 4,000,000
3,000 Falcon Asset Securities 3,000,000
3,000 Hoechst Corporation 3,000,000
3,000 Merrill Lynch Inc. 3,000,000
3,000 Met Life Funding Inc. 3,000,000
3,000 Mobil Credit Finance 3,000,000
2,810 Preferred Receivables Funding 2,810,000
3,950 Rubbermaid Incorporated 3,950,000
-----------
28,760,000
-----------
Total investments from cash collateral
for securities on loan $39,755,194
===========
DIVIDENDS AND DISTRIBUTIONS
Dividends and distributions are recorded on the ex-dividend date. Dividends and
distributions from net investment income and net realized capital gains are
determined in accordance with federal income tax regulations, which may differ
from generally accepted accounting principles. These "book/tax" differences are
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 or 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 May 18, 1998, the Board of Directors declared an ordinary income and
long-term capital gain dividend aggregating $0.92 per share. The dividend was
paid on June 12, 1998 to shareholders of record on May 28, 1998.
TAX STATUS
United States
The Fund generally intends to distribute all or substantially 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. The Fund's Board of Directors, under
certain circumstances, may determine to retain a portion of the Fund's taxable
income, if such retention is in the best interest of the Fund and its
shareholders.
================================================================================
11
<PAGE>
THE GREATER CHINA FUND, INC.
================================================================================
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 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 16.5% 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. Under the terms of 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, 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.
================================================================================
12
<PAGE>
THE GREATER CHINA FUND, INC.
================================================================================
NOTE 3 TRANSACTIONS WITH AFFILIATES
The Investment Manager, not the Fund, 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 investment securities). For
the six months ended June 30 1998, $72,804 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,
1998 was substantially the same as the cost of securities for financial
statement purposes. Accordingly, net unrealized depreciation of $63,421,516 was
composed of gross appreciation of $1,583,298 for those securities having an
excess of value over cost and gross depreciation of $65,004,814 for those
securities having an excess of cost over value.
For the six months ended June 30, 1998, aggregate purchases and sales of
portfolio securities, excluding short-term securities, were $17,170,464 and
$39,478,553, respectively.
During the year ended December 31, 1997, the Fund utilized $4,829,037 of capital
loss carryforwards.
- --------------------------------------------------------------------------------
NOTE 5 CAPITAL STOCK
There were no transactions in shares of common stock for the six months ended
June 30, 1998 or for the year ended December 31, 1997.
- --------------------------------------------------------------------------------
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.
The Fund invests in fixed income securities issued by banks and other
corporations, the market values of which may change in response to interest rate
changes. The ability of the issuers of such fixed income securities to meet
their obligations may be affected by changing business and economic conditions
in a specific state, industry or region.
================================================================================
13
<PAGE>
THE GREATER CHINA FUND, INC.
================================================================================
NOTE 7 YEAR 2000 PROCESSING ISSUE
Many computer programs employed throughout the world use two digits rather than
four to identify the year. These programs, if not adapted, may not correctly
handle the change from "99" to "00" on January 1, 2000, and may not be able to
perform necessary functions. The Year 2000 issue affects virtually all companies
and organizations.
The Investment Manager has advised the Fund that it is implementing steps
intended to ensure that its computer systems are capable of Year 2000
processing. In addition, the Fund is inquiring with third parties to assess the
adequacy of their Year 2000 compliance efforts. The Fund intends to develop
contingency plans intended to ensure that third-party noncompliance will not
materially affect the Fund's operations. The Fund does not currently anticipate
that the Year 2000 issue will have an adverse effect on the Investment Manager's
ability to continue to provide the services currently provided to the Fund.
Companies in which the Fund invests could be adversely affected by the Year 2000
issue, but the Fund cannot predict the consequential effect on its investment
return. To the extent the impact on a portfolio holding is negative, the Fund's
investment return could be adversely affected.
- --------------------------------------------------------------------------------
NOTE 8 ANNUAL SHAREHOLDERS' MEETING
The Fund's annual meeting of shareholders was held on April 22, 1998.
Shareholders voted to: 1) re-electEdward Y. Baker, John A. Bult and Jonathan
J.K. Taylor as Directors, and, 2) ratify the appointment of
PricewaterhouseCoopers LLP (successor firm to Price Waterhouse LLP) as the
Fund's independent accountants for the fiscal year ending December 31, 1998. The
resulting vote count for each proposal is indicated below:
For Withheld Authority
--------- ------------------
1. Election of Directors:
Edward Y. Baker 8,670,669 134,998
John A. Bult 8,676,202 129,465
Jonathan J.K. Taylor 8,670,604 135,063
In addition to the above re-elected Directors, Mr. Richard B. Bradley, Mr.
Richard Graham, Mr. John A. Hawkins,Mr. Don G. Hoff and Mr. Tak Lung Tsim
continue to serve as Directors of the Fund.
<TABLE>
<CAPTION>
For Against Withheld Authority
--------- ------- ------------------
<S> <C> <C> <C>
2. Ratification of the appointment of
PricewaterhouseCoopers LLP as the
Fund's independent accountant 8,327,778 234,296 243,593
</TABLE>
================================================================================
14
<PAGE>
THE GREATER CHINA FUND, INC.
================================================================================
FINANCIAL HIGHLIGHTS
Selected data for a share of common stock outstanding throughout each period is
presented below:
<TABLE>
<CAPTION>
For the
Six Months
Ended For the Year Ended December 31,
June 30, 1998 -----------------------------------------------------
(Unaudited) 1997 1996 1995 1994 1993
------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 13.46 $ 19.49 $ 14.52 $ 14.29 $ 23.79 $ 13.40
-------- -------- -------- -------- -------- --------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (loss) 0.02 (0.09) 0.10* 0.20 0.12* 0.02
Net realized and unrealized gain (loss) on
investments and foreign currency transactions (4.55) (2.32) 5.93* 0.29 (8.92)* 11.00
-------- -------- -------- -------- -------- --------
Total from investment operations (4.53) (2.41) 6.03 0.49 (8.80) 11.02
-------- -------- -------- -------- -------- --------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
From net investment income -- -- (0.09) (0.20) (0.09) (0.01)
In excess of net investment income -- (0.13) (0.03) -- -- --
From net realized gain on investments (0.92) (3.49) -- (0.01) (0.06) (0.62)
In excess of net realized gain on investments -- -- -- (0.05) -- --
-------- -------- -------- -------- -------- --------
Total dividends and distributions to
shareholders (0.92) (3.62) (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) --
-------- -------- -------- -------- -------- --------
Total Fund share transactions -- -- (0.94) -- (0.55) --
-------- -------- -------- -------- -------- --------
Net asset value, end of period $ 8.01 $ 13.46 $ 19.49 $ 14.52 $ 14.29 $ 23.79
======== ======== ======== ======== ======== ========
Market value, end of period $ 6.69 $ 10.88 $ 15.63 $ 14.13 $ 12.13 $ 26.75
======== ======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN**+ (30.51)% (7.29)% 15.53% 18.48% (52.01)% 122.01%
======== ======== ======== ======== ======== ========
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $100,843 $169,518 $245,383 $139,246 $136,994 $160,783
Ratio of expenses to average net assets 2.54%#++ 1.88% 2.07% 2.36% 2.08% 2.22%
Ratio of net investment income (loss) to
average net assets 0.41%# (0.41)% 0.65% 1.39% 0.63% 0.11%
Portfolio turnover 12% 82% 37% 32% 22% 31%
</TABLE>
- ----------
* Based on average shares outstanding.
** 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.
+ Total investment return for a period of less than one year is not
annualized.
# Annualized.
++ The ratio of expenses to average net assets excluding excise taxes was
2.03% (annualized).
================================================================================
15
<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
EXECUTIVE OFFICERS
Ronald G.M. Watt, 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.
40 Water Street
Boston, Massachusetts 02109
SHAREHOLDER SERVICING AGENT
PNC Bank, National Association
400 Bellevue Parkway
Wilmington, Delaware 19809
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers 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
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 financial information included herein is taken from the records of the Fund
without examination by independent accountants, who did not express an opinion
hereon.
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.
THE GREATER CHINA
FUND, INC.
==============================
SEMI-ANNUAL REPORT
JUNE 30, 1998
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