<PAGE>
THE GREATER CHINA FUND INC.
ANNUAL REPORT
December 31, 1998
[DRAGON LOGO]
<PAGE>
THE GREATER CHINA FUND, INC.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
The Fund's Management 2
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Letter to Shareholders 3
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Report of the Investment Manager 5
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Portfolio of Investments 10
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Statement of Assets and Liabilities 13
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Statement of Operations 14
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Statement of Changes in Net Assets 15
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Notes to Financial Statements 16
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Financial Highlights 22
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Report of Independent Accountants 24
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Dividend Reinvestment Plan 25
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Other Information 26
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Year 2000 Processing Issue 27
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</TABLE>
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.
[LOGO]
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1
<PAGE>
THE GREATER CHINA FUND, INC.
- --------------------------------------------------------------------------------
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
EXECUTIVE OFFICERS
Ronald G.M. Watt, PRESIDENT
Peter Cairns, SECRETARY
Henry Ho, VICE PRESIDENT
Julian F. Sluyters, VICE PRESIDENT
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 LLP
1155 Avenue of the Americas
New York, New York 10036
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2
<PAGE>
THE GREATER CHINA FUND, INC.
- --------------------------------------------------------------------------------
LETTER TO SHAREHOLDERS
February 3, 1999
Dear Shareholder,
The Asian crisis, which began towards the end of 1997, continued through the
first three quarters of 1998. China, which had been remarkably immune during
1997, was affected by a worsening domestic economy, capital flight and
eventually a turndown in exports. Not surprisingly, its publicly quoted
companies, many of them listed in Hong Kong (which has its own problems),
produced disappointing earnings. Consequently, the Fund's net asset value fell
from US$13.46 at the beginning of the year, to a low of US$5.44 at the end of
August. Fortunately, the fourth quarter of 1998 saw an upturn in the markets
(although much of this rise has already been eroded during January 1999) and the
Fund's net asset value ended the year at US$8.43. Taking into consideration the
distribution of US$0.92, paid on June 12, 1998, the Fund's performance for the
year (based on net asset value) was negative 31.3%. This can be measured against
its benchmark, the MSCI China Index, which fell 42.4% during the same period.
The Fund's portfolio was restructured to take a more defensive stance at the
beginning of the year. The weighting in China 'H' shares, in particular, sectors
such as telecommunications, utilities and infrastructure, was increased. These
sectors all benefited from the sharp rise in state spending on infrastructure.
This policy proved comparatively successful, although it could not totally
protect the Fund from the systemic influences of the market.
China's economy did not suffer as much in 1998 as some of its regional
neighbors. Gross Domestic Product ("GDP") growth, if it is to be believed, of
7.8% was impressive and not far short of the Government's forecast of 8.0%.
However, the economy has been under ever increasing pressure. The factors that
caused and have sustained the Asian crisis, such as overcapacity, currency
devaluation and recession have taken their toll on Chinese exports, with export
growth turning negative during the latter half of 1998. Consumer demand has also
fallen dramatically, due in large part to the process of reform of the
state-owned-enterprises ("SOE"), which has increased unemployment and reduced
job security in the country.
The Government's refusal to intervene in support of the Guangdong International
Trust and Investment Corporation ("GITIC") investment scheme and its decision to
reflate domestic demand has illustrated their understanding of the situation and
the need to instigate painful measures to avoid future problems. Of course,
taking such a stance has its own risks and the Government will need to exercise
caution in the coming months; nonetheless it is promising to see that the
Government has the courage to pursue a difficult, but necessary path.
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3
<PAGE>
THE GREATER CHINA FUND, INC.
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LETTER TO SHAREHOLDERS
CONTINUED
Hong Kong, a much more open economy than China, was less able to avoid the
fall-out of the Asian crisis, as was reflected in the large degree of volatility
in its market throughout the year. Indeed, at one point, currency and stock
speculation caused the Hong Kong Monetary Authority to take the brave, but
ultimately successful decision, to purchase approximately 10% of the stocks in
the market and to introduce various measures which were designed to protect the
currency peg. The strengthening of the Asian currencies and reductions in U.S.
interest rates prompted an upturn in the stock market in the final quarter of
1998.
Hong Kong stands to benefit from the forecasted Asian recovery, when it comes,
although it is more than likely that the economy will suffer further negative
movement before then. This should, however, provide solid investment
opportunities as companies which have been forced to re-structure and improve
efficiency, will be available at historically low valuations. China's outlook is
perhaps less bright in the short term, as both external and internal pressures
appear set to continue eating away at the country's economic stability. As the
Brazilian fiscal crisis is played out, one possible effect may be a further test
of confidence in the Hong Kong Dollar peg, and the level of the Renminbi versus
the Dollar. In the longer term, however, we believe that both countries will
benefit from the necessary re-structuring and efficiencies that the Asian crisis
has forced upon them.
The Fund will continue to be defensively positioned during stormy times, but
will be ready to take advantage of any upturn in the general outlook.
Sincerely,
Richard B. Bradley
Chairman
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4
<PAGE>
THE GREATER CHINA FUND, INC.
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REPORT OF THE INVESTMENT MANAGER
OVERVIEW
A downward trend among the stock markets of the 'Greater China' region in 1998
served as evidence that any hope for a quick recovery from the Asian crisis were
unrealistic. While some stability returned to the region relative to the end of
1997, volatility nonetheless remained high, as lower interest rates and improved
financial liquidity were offset by depressed economic conditions and corporate
profits. Consequently, the occasional upsurges in the markets during 1998 were
not sufficient to outweigh the general downward movement, resulting in negative
returns for calendar year 1998.
China continued to generate high absolute GDP growth, achieving a growth rate of
7.8% for 1998. Domestic demand, pricing and corporate margins were all sharply
down. The balance of trade was positive, but deteriorated sharply during the
last few months of 1998. Hong Kong's situation was even more difficult: negative
growth, considerable pressure on assets (property and stocks) and volatile
interest rates reflecting greater concern regarding the U.S. Dollar peg. Amidst
such gloom, the Fund adopted a defensive approach, focusing on sectors such as
electricity, telecommunications, toll roads and food. This strategy proved
successful, although de-rating of the markets and a severely weakened investment
sentiment left little opportunity for gains. The last quarter of 1998 witnessed
more positive results, which the Fund was able to take advantage of, although
many of the gains achieved towards the end of the year were eroded in the first
few weeks of 1999.
The table below portrays the net asset value performance of the Fund compared
with the relevant market indices over the last three years:-
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
The Greater China Fund -31.3% -12.4% +35.1%
China - MSCI -42.4% -26.4% +37.5%
Hong Kong - All Ordinary Index -18.3% -19.3% +36.9%
</TABLE>
Source: Datastream/BAM
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5
<PAGE>
THE GREATER CHINA FUND, INC.
- --------------------------------------------------------------------------------
REPORT OF THE INVESTMENT MANAGER
CONTINUED
PERFORMANCE OF NET ASSET VALUE PER SHARE
[GRAPH]
<TABLE>
<CAPTION>
1998 1998
- ------------------------------------------------------ ------
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year
- ------------------------------------------------------ ------
<S> <C> <C> <C> <C>
0.8% -35.5% -8.3% 14.9% -31.3%
</TABLE>
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.
ASSET ALLOCATION
There have been a number of major changes in asset allocation, most
significantly, the increase in weighting to China 'H' shares, which at December
31, 1998 account for 32% of net asset value, having represented only 15% at the
end of 1997. This increase has been funded by further reductions in the
positions in Hong Kong shares and a reduced weighting to China 'N' and 'B'
shares. The improving situation in Taiwan during the period is reflected in the
addition of a Taiwan holding which currently composes 2% of the net asset value.
Sectorially, we have continued to reduce the Fund's exposure to real estate and
banking. The Fund's weightings in utilities, consumption and manufacturing have
been increased as these sectors contain a number of companies with stable
earnings and healthy balance sheets.
<TABLE>
<CAPTION>
ASSET ALLOCATION DECEMBER 31, 1998 DECEMBER 31, 1997
<S> <C> <C>
China 'H' Shares 32% 15%
Red Chips 29% 27%
Other (Hong Kong) 21% 26%
China 'N' and 'B' Shares 11% 17%
Taiwan 2% --
Korea and Singapore -- --
Cash 5% 15%
</TABLE>
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6
<PAGE>
THE GREATER CHINA FUND, INC.
- --------------------------------------------------------------------------------
[GRAPHIC]
CHINA
MARKET REVIEW
1998 witnessed a bear market for China stocks as the MSCI China Index declined
42.4%. Financial crisis in the region, reduced product prices, along with
economic recession in most of Asia, contributed to poor corporate profitability
and severely weakened investment sentiment. Despite a recovery in the fourth
quarter of the year as U.S. interest rates fell and Asian currencies
strengthened, this upturn was insufficient to recoup the losses suffered during
the first three quarters. The collapse of GITIC in the fourth quarter added
further gloom to the prospects for China stocks.
PROSPECTS
The Chinese economy was able to maintain a relatively high rate of GDP growth of
7.8% and a stable currency throughout the year. External trade was healthy as
China registered a trade surplus of US$43.6 billion. The one-year working
capital lending rate was reduced from 8.64% to 6.39%.
However, these broad figures hide the fact that China's economy is going through
a very difficult period. Prices have been falling, as is illustrated by the
retail price index and consumer price index, which have fallen 2.5% and 0.8%
(estimated), respectively. Furthermore, exports peaked during the first half of
the year, indeed export growth turned negative from August 1998 through the end
of the year. Overcapacity, currency devaluation and recession in Asia, have
combined to hinder demand for Chinese exports. Within this already negative
environment, the reform of the SOE has continued with shedding of excess
capacity and labor trimming. Actual job losses and, indeed, forecasted
reductions, are widely believed to be much more severe than official
unemployment figures suggest. This increased level of employment insecurity has,
inevitably, resulted in a negative impact on consumer spending. The strong GDP
growth figure was primarily achieved by a major increase in State investment in
fixed assets (particularly infrastructure), which is estimated to have grown 20%
during the year.
The Chinese economy was able to 'muddle through' 1998, but the coming year will
provide an even bigger test to an already weakened economy. In December 1998,
its annual Central Economic Work Conference adopted a policy of reflating
domestic demand in order to achieve a growth target of 7% for 1999. Domestic
demand will be stimulated by active fiscal policy and appropriate monetary
policy. The Government will also be taking a more risk-averse attitude, as has
already been witnessed by their actions towards various Investment Trust
Corporations when these Trusts experienced recent financial difficulties. The
Government has also stipulated its intention to place more focus on rural growth
and agriculture.
- --------------------------------------------------------------------------------
7
<PAGE>
THE GREATER CHINA FUND, INC.
- --------------------------------------------------------------------------------
REPORT OF THE INVESTMENT MANAGER
CONTINUED
While these are steps in the right direction, they are not without risk
themselves. The strengthening of financial order, such as the bankruptcy of
GITIC, is positive for the long-term health of the system, but bankers'
reactions could turn out to be stronger than expected, possibly resulting in a
credit crunch in 1999. The ongoing restructuring of the SOE's will improve
return on capital, as inefficient government administration is being replaced by
enterprise management and corporations shedding surplus labor. However, with job
insecurity and the resulting effect on consumer spending increasing, the worst
case scenario could be a triggering of social instability. Skilful balancing and
control of these risks by policy makers are vital if these hypothesis are not to
become reality. Against this back-drop, we anticipate economic growth and
corporate profitability to likely remain subdued.
[GRAPHIC]
HONG KONG
MARKET REVIEW
The Hong Kong stock market experienced a rollercoaster ride during 1998. A panic
fall in January 1998 was swiftly followed by a sharp recovery in February. Since
March, continued asset deflation, a collapse in domestic consumption, concern
over the currency peg and higher interest rates all conspired to force the index
down to its lowest point in August. The Hong Kong Monetary Authority stepped in
to curb speculative activities on the currency and on the stock market in August
by buying a large quantity of stocks (approximately 10% of the market) and also
introduced new measures to strengthen the currency link system. These measures
stabilized both markets, and with the subsequent reduction in U.S. interest
rates, along with the strengthening of the Yen and other Asian currencies, the
stockmarket rallied to the end of the year.
PROSPECTS
There are two main factors which will govern the prospects for Hong Kong in the
coming months. First, as the most open economy in Asia, Hong Kong will benefit
from the expected recovery in other Asian economies and also from stronger
growth in the OECD countries. The other factor centers on the currency peg and
the fact that under such a system, it is the other parts of the economy, rather
than the exchange rate, which have to adjust. It therefore follows that, in
theory, in order for the system to work successfully, various other elements of
the economy have to adjust sufficiently - in reality, this remains to be seen.
- --------------------------------------------------------------------------------
8
<PAGE>
THE GREATER CHINA FUND, INC.
- --------------------------------------------------------------------------------
The timing of the forecast Asian recovery remains uncertain, with some
economists suggesting late 1999 or early 2000, but regardless of the timeframe
it is unlikely that the recovery will be anything more than mild. In the first
half of 1999, downward adjustments will most likely continue in Hong Kong,
despite the already depressed economic state. Looking forward, however, this
scenario could give rise to interesting investment opportunities. It is possible
that due to the traditional flexibility of the private sector, this painful
adjustment could result in more efficient and productive businesses. This will
bode well for returns on investment after the necessary restructuring is
complete.
OUTLOOK
The near-term outlook for the 'Greater China' stock markets remains difficult.
Further economic adjustments in Hong Kong, continuing reforms in China, and
general price deflation are maintaining negative pressure on corporate
profitability. However, by comparison to the beginning of 1998, when the Asian
financial crisis was still young, investors should now be looking towards the
beginning of an economic recovery.
In the longer term, the measures currently being taken in Hong Kong and China to
address the economic problems should create a better investment environment. The
painful experience of restructuring will eventually bear its fruit in more
competitive and productive enterprises. While it is still too early to ascertain
the length of time required to achieve such an outcome, the news coming out of
China and Hong Kong indicates that they are on the right course. Once again,
however, it is important to note, that although the potential rewards are high,
there remain certain risks associated with these developments, such as a credit
crunch and social instability.
The Fund's portfolio remains defensively structured with a focus on utilities
and stable earnings companies with an emphasis on the relative strength of
balance sheets and return on equity. This cautious and selective approach will
continue in the current economic environment until the emergence of clearer
signs of recoveries in economic activities and rates of return.
BARING INTERNATIONAL INVESTMENT (FAR EAST) LIMITED
HONG KONG
February 3, 1999
- --------------------------------------------------------------------------------
9
<PAGE>
THE GREATER CHINA FUND, INC.
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
December 31, 1998
<TABLE>
<CAPTION>
Shares Description Value
(Note1)
<S> <C> <C>
EQUITIES -- 96.6%
CHINA -- 42.0%
BUILDING MATERIALS -- 0.8%
7,882,000 Anhui Conch Cement $ 885,092
------------
CONSUMPTION -- 0.8%
8,480,000 Guangzhou Pharmaceutical "H" 853,735
------------
INFRASTRUCTURE -- 4.8%
9,244,000 Jiangsu Expressway "H" 2,028,344
15,172,000 Zhejiang Expressway "H" 3,074,506
------------
5,102,850
------------
MANUFACTURING -- 14.4%
3,674,618 China International Marine Containers "B" 1,735,906
11,656,000 First Tractor "H" 2,662,905
1,948,000 Guangdong Kelon Electrical Holdings "H" 1,734,886
19,800,000 Harbin Power Equipment "H" 1,456,709
8,880,000 Qingling Motor "H"+ 1,558,779
13,840,000 Shanghai Petrochemical 1,250,452
3,937,000 Shanghai Zhenhua Port Machinery "B" 1,393,698
3,770,000 Wafangdian Bearing "B" 525,530
2,687,199 Weifu Fuel Injection "B" 596,570
9,780,000 Yizheng Chemical Fibre "H" 896,252
9,404,000 Zhenhai Refining & Chemical "H" 1,444,416
------------
15,256,103
------------
SERVICES -- 1.6%
4,013,160 Shanghai Dazhong Taxi "B"* 1,693,554
------------
UTILITIES -- 13.7%
12,968,000 Beijing Datang Power "H" 3,891,605
14,832,000 Huaneng Power International "H"* 5,264,598
180,800 Huaneng Power International ADR "N"* 2,621,600
13,000,000 Zhejiang Southeast Electric Power "B" 2,730,000
------------
14,507,803
------------
------------------------------------------------------------
10
<PAGE>
THE GREATER CHINA FUND, INC.
- --------------------------------------------------------------------------------
<CAPTION>
Shares Description Value
(Note1)
<S> <C> <C>
MISCELLANEOUS -- 5.9%
25,980,000 Anhui Expressway "H" $ 2,950,901
4,037,300 Inner Mongolia Yitai "B" 500,625
16,890,000 Yanzhou Coal Mining "H" 2,834,039
------------
6,285,565
------------
Total China 44,584,702
------------
HONG KONG -- 52.3%
CONGLOMERATES -- 19.5%
6,580,000 China Resources Enterprise 10,234,008
7,000,000 Guangdong Investment Ltd 1,400,434
1,286,000 Hutchison Whampoa 9,087,782
------------
20,722,224
------------
CONSUMPTION -- 7.5%
2,850,000 Hengan International Group* 1,039,193
6,740,000 NG Fung Hong 6,046,130
355,000 Television Broadcasting 916,413
------------
8,001,736
------------
INFRASTRUCTURE -- 5.3%
807,000 Cheung Kong Infrastructure Holdings 1,801,990
2,556,774 New World Infrastructure+* 3,762,097
------------
5,564,087
------------
MANUFACTURING -- 0.4%
162,000 Johnson Electric Holdings 416,103
------------
REAL ESTATE DEVELOPMENT -- 5.3%
543,000 Cheung Kong Holdings 3,907,307
12,000,000 Far East Hotels & Entertainment* 1,316,537
7,910,000 Sinolink Worldwide Holdings* 439,013
------------
5,662,857
------------
SERVICES -- 9.4%
4,751,000 China Telecom+* 8,217,177
649,000 Smartone Telecommunications Holdings 1,801,009
------------
10,018,186
------------
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11
<PAGE>
THE GREATER CHINA FUND, INC.
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
CONTINUED
<CAPTION>
Shares Description Value
(Note1)
<S> <C> <C>
HONG KONG -- (continued)
TRADING -- 1.8%
2,798,000 Tianjin Development Holdings $ 1,877,949
------------
MISCELLANEOUS -- 3.1%
5,044,000 China Merchants Holdings International 3,238,926
------------
Total Hong Kong 55,502,068
------------
TAIWAN-- 2.3%
MANUFACTURING -- 2.3%
448,000 Hon Hai Precision Industry* 2,474,984
------------
Total Equities
(cost $143,143,916) 102,561,754
------------
Principal Amount FIXED INCOME -- 0.6%
CHINA
MANUFACTURING - 0.6%
$2,000,000 Qingling Motors, 3.50% due 1/22/02 607,600
(cost $691,381) ------------
TIME DEPOSITS -- 3.0%
3,200,000 Bank of Montreal, 3.75%**, 1/4/99 3,200,000
39,000 Brown Brothers Harriman & Co.,
Grand Cayman, 3.75%**, 1/4/99 39,000
------------
Total Time Deposits (cost $3,239,000) 3,239,000
------------
TOTAL INVESTMENTS -- 100.2%
(cost $147,074,297) 106,408,354
Liabilities in excess of other
assets -- (0.2%) (225,376)
------------
NET ASSETS -- 100.0% $106,182,978
------------
------------
</TABLE>
--------------------
* Non-income producing security.
+ Security, or a portion thereof, was on loan at
December 31, 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.
-----------------------------------------------------------
12
<PAGE>
THE GREATER CHINA FUND, INC.
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
<TABLE>
<S> <C>
ASSETS
Investments at value (cost $147,074,297) $106,408,354
Investments of collateral received for securities
on loan, at value (cost $2,227,490) 2,227,490
Cash (including Hong Kong dollars with a cost
and value of $10,848) 21,369
Dividends and interest receivable 181,319
------------
Total assets 108,838,532
------------
LIABILITIES
Collateral for securities on loan 2,227,490
Investment management fee payable 114,580
Administration fee payable 19,607
Accrued expenses 293,877
------------
Total liabilities 2,655,554
------------
Net Assets $106,182,978
------------
------------
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 168,504,749
Accumulated net realized loss on investments (21,668,439)
Net unrealized depreciation of investments and other
assets and liabilities denominated in foreign currency (40,665,925)
------------
NET ASSETS $106,182,978
------------
------------
Shares Outstanding 12,593,049
------------
NET ASSET VALUE PER SHARE $8.43
-----
-----
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
13
<PAGE>
THE GREATER CHINA FUND, INC.
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME
Dividends $ 2,273,195
Interest 801,784
------------
Total investment income 3,074,979
------------
EXPENSES
Investment management fees 1,516,818
Directors' fees and expenses 382,438
Excise tax 371,019
Custodian and accounting fees 283,354
Administration fees 257,677
Shareholder reports expense 108,487
Legal fees 80,261
Audit fees 54,580
Insurance expense 36,328
New York Stock Exchange listing fee 25,629
Transfer agent fees and expenses 6,815
Miscellaneous expenses 23,576
------------
Total expenses 3,146,982
------------
Net investment loss (72,003)
------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS
Net realized loss on:
Investments (21,668,439)
Foreign currency transactions (54,601)
------------
(21,723,040)
------------
Net change in unrealized appreciation/depreciation of:
Investments (29,954,060)
Other assets and liabilities denominated in
foreign currency (20)
------------
(29,954,080)
------------
Net realized and unrealized loss on investments
and foreign currency transactions (51,677,120)
------------
NET DECREASE IN NET ASSETS
FROM INVESTMENT OPERATIONS $(51,749,123)
------------
------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
14
<PAGE>
THE GREATER CHINA FUND, INC.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year For the Year
Ended Ended
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
INCOME (LOSS) FROM INVESTMENT
OPERATIONS
Net investment loss $ (72,003) $ (1,137,719)
Net realized gain (loss) on investments
and foreign currency transactions (21,723,040) 62,468,461
Net change in unrealized appreciation/
depreciation of investments and
other assets and liabilities
denominated in foreign currency (29,954,080) (91,585,732)
----------------- -----------------
Total from investment operations (51,749,123) (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 (63,334,728) (75,865,754)
NET ASSETS
Beginning of year 169,517,706 245,383,460
----------------- -----------------
End of year $ 106,182,978 $ 169,517,706
----------------- -----------------
----------------- -----------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
15
<PAGE>
THE GREATER CHINA FUND, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Greater China Fund (the "Fund") was incorporated in the State of 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 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 denominated in foreign currency are translated at the
closing rate of exchange on the valuation date; and
- --------------------------------------------------------------------------------
16
<PAGE>
THE GREATER CHINA FUND, INC.
- --------------------------------------------------------------------------------
(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.
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
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 (loss) for income tax reporting purposes.
SECURITY LENDING
The Fund may lend securities 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 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
year ended December 31, 1998, net earnings to the Fund from investment of cash
collateral was $453,516, after deducting the borrowers' rebate of $1,041,935 and
PaineWebber fees of $243,162, $4,843 of which were due at December 31, 1998. At
December 31, 1998, the market value of the securities on loan and the cash
collateral received with respect to such loans were $2,056,927 and $2,227,490,
respectively.
- --------------------------------------------------------------------------------
17
<PAGE>
THE GREATER CHINA FUND, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
CONTINUED
At December 31, 1998, the Fund's investments from cash collateral for securities
on loan were as follows:
<TABLE>
<CAPTION>
SHARES MONEY MARKET FUNDS
<S> <C> <C>
330,009 AIM Liquid Asset Portfolio $ 330,009
1,747,433 AIM Prime Portfolio 1,747,433
54,207 Provident Institutional Temporary
Investment Cash Fund 54,207
95,841 Provident Institutional Temporary
Investment Fund 95,841
------------
$ 2,227,490
------------
------------
</TABLE>
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. As a result of permanent book/tax differences
primarily attributable to sales of investments in passive foreign investment
companies, $1,844,771 and $69,507 have been reclassified from accumulated net
investment loss and accumulated net realized loss, respectively, to additional
paid-in capital in excess of par. Net assets were not affected by these
reclassifications.
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. In certain circumstances, the Fund may be subject to a 4% excise
tax.
- --------------------------------------------------------------------------------
18
<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% 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.
- --------------------------------------------------------------------------------
19
<PAGE>
THE GREATER CHINA FUND, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
CONTINUED
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 $75million and 0.20% of such net assets in excess of $75 million,
subject to a minimum annual fee of $150,000.
- --------------------------------------------------------------------------------
NOTE 3. TRANSACTIONS WITH AFFILIATES
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 year ended December 31, 1998, $121,346 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 December
31, 1998 was $148,573,540. Accordingly, net unrealized depreciation of
$42,165,186 was composed of gross appreciation of $4,886,856 for those
securities having an excess of value over cost and gross depreciation of
$47,052,042 for those securities having an excess of cost over value.
For the year ended December 31, 1998, aggregate purchases and sales of portfolio
securities, excluding short-term securities, were $48,901,396 and $72,675,173,
respectively.
At December 31, 1998, the Fund had a capital loss carryforward of $20,169,196,
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 2006.
To the extent that these losses are used to offset future realized capital
gains, such gains will not be distributed.
- --------------------------------------------------------------------------------
20
<PAGE>
THE GREATER CHINA FUND, INC.
- --------------------------------------------------------------------------------
NOTE 5. CAPITAL STOCK
There were no transactions in shares of common stock for the years ended
December 31, 1998 and 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.
- --------------------------------------------------------------------------------
21
<PAGE>
THE GREATER CHINA FUND, INC.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SELECTED DATA FOR A SHARE OF COMMON STOCK FOR THE YEAR ENDED
OUTSTANDING THROUGHOUT EACH YEAR DECEMBER 31,
IS PRESENTED BELOW: ------------
1998
------------
<S> <C>
Net asset value, beginning of year $ 13.46
------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (loss) (0.01)
Net realized and unrealized gain (loss) on
investment and foreign currency transactions (4.10)
------------
Total from investment operations (4.11)
------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
From net investment income --
In excess of net investment income --
From net realized gain on investments (0.92)
In excess of net realized gain on investments --
------------
Total dividends and distributions to shareholders (0.92)
------------
FUND SHARE TRANSACTIONS
Dilutive effect of rights offering --
Offering costs charged to paid-in capital
in excess of par --
------------
Total Fund share transactions --
------------
Net asset value, end of year $8.43
------------
------------
Market value, end of year $6.13
------------
------------
TOTAL INVESTMENT RETURN (1) (36.35)%
------------
------------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000 omitted) $106,183
Ratio of expenses to average net assets 2.59%(2)
Ratio of net investment income (loss)
to average net assets (0.06)%
Portfolio turnover 41%
</TABLE>
* Based on average shares outstanding.
(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 year, and a sale at the
current market price on the last day of each year 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) The ratio of expenses to average net assets excluding excise taxes was
2.29%.
See Notes to Financial Statements
- --------------------------------------------------------------------------------
22
<PAGE>
THE GREATER CHINA FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SELECTED DATA FOR A SHARE OF COMMON STOCK FOR THE YEAR ENDED
OUTSTANDING THROUGHOUT EACH YEAR DECEMBER 31,
IS PRESENTED BELOW: -----------------------------------------------
1997 1996 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $ 19.49 $ 14.52 $ 14.29 $ 23.79
-------- -------- -------- --------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (loss) (0.09) 0.10* 0.20 0.12*
Net realized and unrealized gain (loss) on
investment and foreign currency transactions (2.32) 5.93* 0.29 (8.92)*
-------- -------- -------- --------
Total from investment operations (2.41) 6.03 0.49 (8.80)
-------- -------- -------- --------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
From net investment income -- (0.09) (0.20) (0.09)
In excess of net investment income (0.13) (0.03) -- --
From net realized gain on investments (3.49) -- (0.01) (0.06)
In excess of net realized gain on investments -- -- (0.05) --
-------- -------- -------- --------
Total dividends and distributions to shareholders (3.62) (0.12) (0.26) (0.15)
-------- -------- -------- --------
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 year $13.46 $19.49 $14.52 $14.29
-------- -------- -------- --------
-------- -------- -------- --------
Market value, end of year $10.88 $15.63 $14.13 $12.13
-------- -------- -------- --------
-------- -------- -------- --------
TOTAL INVESTMENT RETURN (1) (7.29)% 15.53% 18.48% (52.01)%
-------- -------- -------- --------
-------- -------- -------- --------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000 omitted) $169,518 $245,383 $139,246 $136,994
Ratio of expenses to average net assets 1.88% 2.07% 2.36% 2.08%
Ratio of net investment income (loss)
to average net assets (0.41)% 0.65% 1.39% 0.63%
Portfolio turnover 82% 37% 32% 22%
</TABLE>
- --------------------------------------------------------------------------------
23
<PAGE>
THE GREATER CHINA FUND, INC.
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
The Greater China Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of The Greater China Fund, Inc. (the
"Fund") at December 31, 1998, 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 five years in the period
then ended, 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, 1998 by correspondence with the custodian, provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
February 10, 1999
- --------------------------------------------------------------------------------
24
<PAGE>
THE GREATER CHINA FUND, INC.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
25
<PAGE>
THE GREATER CHINA FUND, INC.
- --------------------------------------------------------------------------------
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
Since December 31, 1997, 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, (iii) material changes in the principal risk factors associated with
investment in the Fund and (iv) change in the person primarily responsible for
the day-to-day management of the Fund's portfolio.
- --------------------------------------------------------------------------------
26
<PAGE>
THE GREATER CHINA FUND, INC.
- --------------------------------------------------------------------------------
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 has developed
contingency plans intended to ensure that third-party noncompliance will not
materially affect the Fund's operations. Based on reports provided by its
service providers, the Fund does not currently anticipate that the Year 2000
issue will have an adverse effect on its ability to continue its operations.
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.
- --------------------------------------------------------------------------------
27
<PAGE>
SBP (City) Ltd - London - 0171-378 6932
<PAGE>
[GRAPHIC]
155 Bishopsgate, London EC2M 3XY
Telephone +44 (0) 171 628 6000
Facsimile +44 (0) 171 638 7928
Internet www.baring-asset.com
- LONDON - BAHRAN - BOSTON -
- DUBLIN - FRANKFURT - GUERNSEY -
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[LOGO]
BARING ASSET
MANAGEMENT
MEMBER OF ING GROUP
