ANNUAL REPORT
AUGUST 31, 1997
TEMPLETON CHINA
WORLD FUND, INC.
<PAGE>
[SEAL]
CELEBRATING 50 YEARS
This year marks 50 years of business for Franklin Templeton. Over these years,
we have experienced profound changes in technology, regulations and customer
expectations within the mutual fund industry. As one of the largest mutual fund
families, we're proud to be an innovative industry leader, providing people like
you with an opportunity to invest in companies and governments around the globe.
In addition, we want to stress that all securities markets move both up and
down. Mixed in with the good years can be some bad years. Accordingly, mutual
fund share prices also move up and down. Every investor should expect such
fluctuations, which can be wide. When markets are going down, as well as up, we
encourage investors to maintain a long-term perspective. We thank you for your
past support and look forward to serving your investment needs in the years
ahead.
[PHOTO OF J. MARK MOBIUS, PH.D.]
J. MARK MOBIUS, PH.D.
President
Templeton China World Fund, Inc.
Dr. Mobius has been living overseas since earning his Ph.D. in economics and
political science at Massachusetts Institute of Technology in 1964. During his
extensive travels, he has acquired a thorough knowledge of the business
practices and customs that are unique to developing nations. Together with his
team of Templeton analysts, Dr. Mobius currently oversees more than $15 billion
in emerging markets investments for the Templeton Group of Funds.
<PAGE>
SHAREHOLDER LETTER
- --------------------------------------------------------------------------------
Your Fund's Objective: The Templeton China World Fund, Inc. seeks long-term
capital appreciation through equity investments in "China companies."
- --------------------------------------------------------------------------------
Dear Shareholder:
We are pleased to bring you the fourth annual report for the Templeton China
World Fund, which covers the fiscal year ended August 31, 1997. During this
period, the Shenzhen, Shanghai, and Hong Kong stock exchanges performed
extremely well.
Many stock prices on the Shenzhen and Shanghai exchanges rose rapidly as
investors tried to guess which companies would become "red-chips" (companies
receiving special treatment from the government). Although in May 1997, the
Chinese government attempted to quell the speculative fervor that gripped
China's "A-share" market (shares available only to Chinese citizens), large
gains were still in place at the end of the reporting period. Prices of
"B-share" stocks (shares of the same companies that are available only to
foreign investors) followed a similar pattern.
CONTENTS
<TABLE>
<S> <C>
Shareholder Letter ....................................................... 1
Performance Summary ...................................................... 5
Travel Letter ............................................................ 7
Financial Highlights and
Statement of Investments ................................................. 9
Financial Statements ..................................................... 14
Notes to Financial
Statements ............................................................... 17
Independent Auditor's
Report ................................................................... 19
Tax Designation .......................................................... 22
</TABLE>
[PYRAMID GRAPHIC]
<PAGE>
GEOGRAPHIC DISTRIBUTION
Based on Total Net Assets
8/31/97
[PIE CHART]
<TABLE>
<S> <C>
Hong Kong 73.9%
China 17.9%
Other 0.3%
Short-Term Obligations & Other Net Assets 7.9%
</TABLE>
Hong Kong stocks were boosted sharply by capital inflows from mainland Chinese
investors both before and after the handover of the colony's sovereignty. Much
of this gain remained intact even after this market suffered a quick correction
in August 1997, when fears arose that currency crises in several smaller Asian
developing countries could spark a similar problem for the Hong Kong dollar.
Within this volatile environment, your Fund posted a one-year total return of
14.97% in market-price terms, and 35.33% in net asset value terms, as discussed
in the Performance Summary on page 5.
On August 31, 1997, 73.9% of the Fund's total net assets were invested in Hong
Kong, 17.9% in mainland China, 0.3% in other countries, and the remaining 7.9%
was held in cash and other liquid assets. The Fund's largest single position
continued to be its shares of HSBC Holdings Plc,(1) the holding company for the
Hongkong Bank. HSBC maintains over 400 offices worldwide and has major
subsidiaries in the U.S. and the U.K. We also maintained our significant
holdings of New World Development Co. Ltd. and Sun Hung Kai Properties Ltd.,
companies with large real estate holdings and commercial interests in Hong Kong
and mainland China.
As you know, China regained sovereignty over Hong Kong on July 1, 1997. Some
people believe the handover of Hong Kong could ultimately mean an end to
economic and personal freedom there. We think this is unlikely, but developments
following any major transfer of political power cannot be predicted. In our
opinion, China's leaders are pragmatic, and are likely to use Hong Kong as a
blueprint for a market economy, which could benefit its citizens immeasurably.
While we expect that problems will arise during this process, we are hopeful
they
1. A complete listing of all stocks in the portfolio as of August 31, 1997
begins on page 10.
2
<PAGE>
will be overcome. Although Hong Kong is likely to undergo vast changes, what
makes it special should remain the same. Under Chinese rule, the former British
colony has the chance to become much more than just an important island state.
Together, Hong Kong and China have the potential to become the largest economic
superpower the world has ever known.
We are optimistic about prospects for the Shenzhen, Shanghai, and Hong Kong
markets. In our view, share prices on the Shenzhen and Shanghai exchanges have
the potential to move higher due to strong economic fundamentals and solid
corporate earnings, while stocks in Hong Kong could perform well if the
post-handover political environment remains favorable and capital from mainland
Chinese continues to be invested in this market. A continued commitment by the
Hong Kong Monetary Authority to maintain the value of Hong Kong's dollar versus
the U.S. dollar could also help share prices.
This discussion reflects the strategies we employed for the Fund during the past
fiscal year, and includes our opinions as of the close of the period. Because
economic and market conditions are constantly changing, our strategies, and our
evaluations, conclusions and decisions regarding portfolio holdings may change
as new circumstances arise. All figures shown are as of August 31, 1997, and the
Fund's holdings can be expected to change with market developments and
management of the portfolio. Although past performance of a specific investment
or sector cannot guarantee future performance, such information can be useful in
analyzing securities we purchase or sell for the Fund.
TOP 10 HOLDINGS
8/31/97
<TABLE>
<CAPTION>
COMPANY, INDUSTRY, % OF TOTAL
COUNTRY NET ASSETS
------------------------------------------------------------------------------
<S> <C>
HSBC Holdings Plc
Banking, Hong Kong 11.2%
Cheung Kong Holdings Ltd.
Multi-Industry, Hong Kong 9.5%
New World
Development Co. Ltd.
Real Estate, Hong Kong 7.5%
Sun Hung Kai Properties Ltd.
Real Estate, Hong Kong 5.4%
Hang Lung
Development Co. Ltd.
Real Estate, Hong Kong 4.3%
K Wah International
Holdings Ltd.
Building Materials &
Components, Hong Kong 2.7%
Lai Sun Development Co. Ltd.
Real Estate, Hong Kong 2.5%
Shanghai Petrochemical
Co. Ltd., H
Chemicals, Hong Kong 2.2%
Wheelock & Co. Ltd.
Multi-Industry, Hong Kong 2.2%
Hopewell Holdings Ltd.
Construction &
Housing, Hong Kong 2.2%
</TABLE>
For a complete list of portfolio holdings, please see page 10 of this report.
3
<PAGE>
Of course, investing in emerging markets involves special considerations, which
may include risks related to market and currency volatility, adverse social,
economic, and political developments, and the relatively small size and lesser
liquidity of these markets. While short-term volatility can be disconcerting,
declines of as much as 40% to 50% are not unusual in emerging markets. For
example, the Hong Kong market has increased 1,089% in the last 15 years, but has
suffered five declines of more than 20% during that time.(2)
Thank you for investing in the Templeton China World Fund. We appreciate your
confidence and look forward to any comments you may have.
On July 1, 1997, Hong Kong reverted to the sovereignty of China. As with any
major political transfer of power, this could result in political, social,
economic, market or other developments in Hong Kong, China or other countries
that could affect the value of Fund investments.
(2) Source: Bloomberg. Based on quarterly percentage change over 15 years ended
June 30, 1997.
4
<PAGE>
PERFORMANCE SUMMARY
In market-price terms, the Templeton China World Fund produced a total return of
14.97% for the one-year period ended August 31, 1997. Based on the change in net
asset value (in contrast to market price), the Fund delivered a total return of
35.33% for the same period. Both total return figures assume reinvestment of
dividends and capital gains in accordance with the dividend reinvestment plan.
During the reporting period, the Fund's closing price on the New York Stock
Exchange increased $1.125 per share, from $11.375 on August 31, 1996, to $12.50
on August 31, 1997, while the net asset value increased $3.93 per share, from
$13.39 to $17.32.
Shareholders received combined distributions of 58.0 cents ($0.58) per share,
including long-term capital gains of 29.5 cents ($0.295), short-term capital
gains of 1 cent ($0.01) and dividend income totaling 27.5 cents ($0.275).
Distributions will vary depending on income earned by the Fund and any profits
realized from the sale of securities in the Fund's portfolio, as well as the
level of the Fund's operating expenses.
Past performance is not predictive of future results.
5
<PAGE>
TEMPLETON CHINA WORLD FUND
Periods ended 8/31/97
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR 3-YEAR (9/9/93)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1)
Based on change in net asset value 35.33% 37.63% 46.14%
Based on change in market price 14.97% -9.53% -0.89%
Average Annual Total Return(2)
Based on change in net asset value 35.33% 11.24% 10.01%
Based on change in market price 14.97% -3.28% -0.23%
</TABLE>
(1) Cumulative total returns represent the change in value of an investment over
the periods indicated.
(2) Average annual total returns represent the average annual change in value of
an investment over the periods indicated.
All calculations assume reinvestment of dividends and capital gains, either at
net asset value or at market price on the reinvestment date, in accordance with
the dividend reinvestment plan and do not reflect sales charges that would have
been paid at inception or brokerage commissions that would have been paid on
secondary market purchases. Investment return and principal value will change
with market conditions, currency fluctuations, and the economic, social, and
political climates of the countries where investments are made. Emerging markets
involve heightened risks related to the same factors, in addition to those
associated with the relatively small size and lesser liquidity of these markets.
You may have a gain or loss when you sell your shares.
Past performance is not predictive of future results.
6
<PAGE>
THE FOLLOWING LETTER WAS WRITTEN BY DR. MOBIUS AFTER A RECENT TRIP TO BEIJING.
[GLOBE AND MAP GRAPHIC OF CHINA]
Beijing, a metropolis of wide, sweeping avenues, majestic buildings and enormous
open spaces, is one of China's most architecturally attractive cities. The
Forbidden City, which houses the Imperial Palace, the Summer Palace and
Tiananmen Square, is quite staggering. Tiananmen Square, for example, is almost
incomprehensibly large. It spans 98 acres and can accommodate more than 1
million people.
A major industrial and commercial center, Beijing is the second-largest city in
China. It is now so big that many taxi drivers have trouble finding their way
around. However, government offices are still housed in large, run-down
buildings that remind one of India. As in India, it is not uncommon to have an
elevator door open onto an animated game of table tennis, which workers often
play in the corridors of office buildings. Privately run restaurants, serving
delicious, regional Chinese food for only a few dollars have sprung up
throughout the city. But government-owned eating establishments, patronized by
government officials, continue to charge hundreds of dollars for a Beijing Duck
banquet.
Beijing, a transportation hub for northern China, possesses important facilities
for processing petroleum, coal and iron ore. It is also home to many small
industries. One company we visited produces sheet-fed offset presses. Although
this company has a dominant position in China, it faces increasing competition
from major overseas producers because it cannot produce machines matching the
speed and quality of those
7
<PAGE>
manufactured abroad. Although this company has not achieved significant growth,
many other companies we visited were aggressively pursuing production and
earnings increases.
It is difficult to know which companies will survive the changes now taking
place in China. As a result of liberalized trade regulations, some businesses
are faced with stiff competition from abroad. Others may find themselves in
financial difficulty if the government follows through on its plan to stop
subsidizing enterprises they have subsidized in the past. But this is all part
of the move toward a market economy.
As I traveled to the airport, I thought about China's enormous potential to
become one of the most important economies in the world. If the Chinese
government drops restrictions on foreign exchange capital flows, and allows
locals and foreigners to own the same class of stock, foreigners would be able
to participate more actively in this potential, and Chinese companies could
benefit from the additional resources available to them. I believe that this day
will come soon.*
Sincerely,
/s/ J. Mark Mobius, Ph.D.
- ------------------------------------
J. Mark Mobius, Ph.D.
President
Templeton China World Fund, Inc.
*This letter reflects the strategies employed for the Fund during the past
fiscal year and includes our opinions as of the close of the period. Since
economic and market conditions are constantly changing, our strategies, and our
evaluations, conclusions and decisions regarding portfolio holdings may change
as new circumstances arise.
8
<PAGE>
<PAGE>
TEMPLETON CHINA WORLD FUND, INC.
Financial Highlights
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------------------------------
1997 1996 1995 1994+
-----------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year....................... $13.39 $12.07 $14.92 $14.10
---------------------------------------------------
Income from investment operations:
Net investment income................................... .24 .27 .33 .16
Net realized and unrealized gains (losses).............. 4.27 1.39 (1.91) .79
---------------------------------------------------
Total from investment operations......................... 4.51 1.66 (1.58) .95
---------------------------------------------------
Underwriting expenses deducted from capital.............. -- -- -- (.07)
---------------------------------------------------
Less distributions:
Dividends from net investment income.................... (.28) (.33) (0.20) (.06)
Distributions from net realized gains................... (.30) (.01) (1.07) --
---------------------------------------------------
Total distributions...................................... (.58) (.34) (1.27) (.06)
---------------------------------------------------
Net asset value, end of year............................. $17.32 $13.39 $12.07 $14.92
===================================================
Total return*
Based on market value per share.......................... 14.97% 11.75% (29.58)% 9.54%
Based on net asset value per share....................... 35.33% 14.44% (11.13)% 6.18%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000's).......................... $353,049 $272,996 $245,982 $297,835
Ratios to average net assets:
Expenses................................................ 1.65% 1.65% 1.65% 1.84%**
Net investment income................................... 1.55% 2.14% 2.77% 1.09%**
Portfolio turnover rate.................................. 19.51% 14.47% 3.01% 81.81%
Average commission rate paid***.......................... $.0016 $.0025 -- --
</TABLE>
*Total return is not annualized.
**Annualized.
***Relates to purchases and sales of equity securities. Prior to fiscal year end
1996 disclosure of average commission rate was not required.
+For the period September 9, 1993 (commencement of operations) to August 31,
1994.
See notes to financial statements.
9
<PAGE>
TEMPLETON CHINA WORLD FUND, INC.
STATEMENT OF INVESTMENTS, AUGUST 31, 1997
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 92.1%
APPLIANCES & HOUSEHOLD DURABLES 2.5%
Semi-Tech (Global) Co. Ltd. ..................................... Hong Kong 2,552,899 $ 3,821,360
*Semi-Tech (Global) Co. Ltd., wts. .............................. Hong Kong 241,263 58,530
*Shanghai Narcissus Electric Appliances Co. Ltd., B.............. China 2,522,800 348,146
*Shanghai Shangling Electric Appliance, B........................ China 5,851,280 1,743,681
*Shanghai Vacuum Electron Devices Co. Ltd., B.................... China 9,817,545 1,511,902
Shenzhen Huafa Electronics Co. Ltd., B........................... China 828,700 307,976
Shenzhen Konka Electronic Group Co. Ltd., B...................... China 638,300 1,017,228
------------
8,808,823
------------
AUTOMOBILES 0.8%
Jardine International Motor Holdings Ltd. ....................... Hong Kong 2,484,000 2,820,724
------------
BANKING 11.2%
HSBC Holdings Plc................................................ Hong Kong 1,300,619 39,608,502
------------
BUILDING MATERIALS & COMPONENTS 3.8%
*China Southern Glass Co. Ltd., B................................ China 5,488,703 2,471,846
K Wah International Holdings Ltd. ............................... Hong Kong 17,153,608 9,407,424
Shanghai Yaohua Pilkington Glass, B.............................. China 4,720,000 1,595,360
------------
13,474,630
------------
CHEMICALS 3.7%
*Beijing Yanhua Petrochemical Company Ltd., ADR.................. China 13,000 273,000
Shanghai Chlor-Alkali Chemical Co. Ltd., B....................... China 10,404,900 3,287,948
Shanghai Petrochemical Co. Ltd., H............................... China 19,184,000 7,921,647
*Shenzhen Petrochemical (Group) Shareholding Co. Ltd., B......... China 4,750,720 1,667,457
------------
13,150,052
------------
CONSTRUCTION & HOUSING 2.2%
Hopewell Holdings Ltd. .......................................... Hong Kong 12,836,579 7,661,033
------------
ELECTRICAL & ELECTRONICS 0.7%
Great Wall Electronic International Ltd. ........................ Hong Kong 16,347,018 2,172,712
*Shanghai Automation Instrumentation Co., B...................... China 860,580 144,577
------------
2,317,289
------------
ELECTRONIC COMPONENTS & INSTRUMENTS 0.2%
*S. Megga International Holdings Ltd............................. Hong Kong 4,731,200 763,146
------------
ENERGY SOURCES 0.2%
*Inner Mongolia Yitai Coal Co. Ltd., B........................... China 1,271,000 747,348
------------
FINANCIAL SERVICES 2.1%
JCG Holdings Ltd................................................. Hong Kong 813,000 624,214
Peregrine Investments Holdings Ltd............................... Hong Kong 1,430,000 2,657,204
Sun Hung Kai & Co. Ltd........................................... Hong Kong 6,852,200 3,647,374
*Sun Hung Kai & Co. Ltd, wts. ................................... Hong Kong 1,209,040 335,433
*Worldsec Limited................................................ United Kingdom 22,000 62,746
------------
7,326,971
------------
</TABLE>
10
<PAGE>
TEMPLETON CHINA WORLD FUND, INC.
STATEMENT OF INVESTMENTS, AUGUST 31, 1997 (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
FOOD & HOUSEHOLD PRODUCTS 0.8%
*Fairwood Holdings Ltd. ......................................... Hong Kong 6,795,000 $ 578,708
Golden Resources Development International Ltd. ................. Hong Kong 6,844,000 936,143
Shanghai New Asia Group Co. Ltd., B.............................. China 847,946 388,359
Tingyi (Cayman Islands) Holding Corp. ........................... Hong Kong 3,414,000 779,764
------------
2,682,974
------------
HEALTH & PERSONAL CARE 0.3%
*Zhuhai Sez Lizhu Pharmaceutical Group Inc., B................... China 2,135,600 1,099,561
------------
INDUSTRIAL COMPONENTS 1.5%
*Shanghai Refrigerator Compressor Co. Ltd., B.................... China 2,541,444 1,097,904
*+Shanghai Rubber Belt Co. Ltd., B............................... China 4,795,811 901,613
Shanghai Tyre & Rubber Co. Ltd., B............................... China 6,890,990 3,376,585
------------
5,376,102
------------
LEISURE & TOURISM 2.4%
HongKong & Shanghai Hotels Ltd. ................................. Hong Kong 6,127,000 7,511,001
*Lai Sun Hotels International Ltd., wts. ........................ Hong Kong 796,793 57,578
*Shanghai Jin Jiang Tower Co. Ltd., B............................ China 3,700,976 1,043,675
------------
8,612,254
------------
MACHINERY & ENGINEERING 1.5%
*+China Textile Machinery Co. Ltd., B............................ China 6,334,212 950,132
Guangzhou Shipyard International Co. Ltd., H..................... China 256,000 104,058
Northeast Electric Transmission & Transformation................. China 3,480,000 1,167,559
*Shanghai Erfangji Textile Machinery Co. Ltd., B................. China 12,919,787 1,653,733
*Shanghai Industrial Sewing Machine Corp......................... China 2,801,630 364,212
*Shanghai Steel Tube Co. Ltd., B................................. China 5,929,280 794,524
*Shanghai Zhenhua Port Machinery Co. Ltd., B..................... China 110,000 101,200
------------
5,135,418
------------
MERCHANDISING 4.0%
Dairy Farm International Holdings Ltd. .......................... Hong Kong 7,838,302 6,584,174
*A/S Det Ostasiatiske Kompagni................................... Denmark 55,349 845,195
Fortei Holdings Ltd.............................................. Hong Kong 9,582,000 890,256
Joyce Boutique Holdings Ltd...................................... Hong Kong 10,181,000 2,207,120
*Wo Kee Hong Holdings Ltd........................................ Hong Kong 26,187,200 3,108,875
*Yaohan Hongkong Corp. Ltd....................................... Hong Kong 6,906,000 427,754
------------
14,063,374
------------
METALS & MINING 0.8%
*Bengang Steel Plates Co. Ltd. .................................. China 4,982,000 1,806,493
Maanshan Iron & Steel Co. Ltd., H................................ China 3,733,000 1,180,186
------------
2,986,679
------------
MISCELLANEOUS MATERIALS & COMMODITIES 0.1%
*Luoyang Glass Co. Ltd., H....................................... China 1,656,000 507,517
------------
</TABLE>
11
<PAGE>
TEMPLETON CHINA WORLD FUND, INC.
STATEMENT OF INVESTMENTS, AUGUST 31, 1997 (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
MULTI-INDUSTRY 19.8%
Cheung Kong Holdings Ltd......................................... Hong Kong 3,168,000 $ 33,521,647
Jardine Matheson Holdings Ltd. (Singapore)....................... Hong Kong 621,186 4,348,302
Jardine Strategic Holdings Ltd. (Singapore)...................... Hong Kong 1,834,000 6,785,800
*Jardine Strategic Holdings Ltd., wts. .......................... Hong Kong 167,000 73,480
Lai Sun Garment International Ltd. .............................. Hong Kong 4,588,000 5,535,557
Swire Pacific Ltd., A............................................ Hong Kong 595,500 4,552,987
Swire Pacific Ltd., B............................................ Hong Kong 4,964,000 7,142,216
Wheelock & Co. Ltd. ............................................. Hong Kong 3,787,000 7,818,827
------------
69,778,816
------------
REAL ESTATE 21.4%
Hang Lung Development Co. Ltd. .................................. Hong Kong 8,347,000 15,079,425
Lai Sun Development Co. Ltd. .................................... Hong Kong 8,928,000 8,813,369
*Lai Sun Development Co. Ltd., wts. ............................. Hong Kong 2,183,800 163,443
New World Development Co. Ltd. .................................. Hong Kong 4,270,118 26,614,194
Shanghai Jinqiao Export Processing Zone Development, B........... China 3,961,828 2,392,944
*Shanghai Lujiaxui Finance & Trade Zone Development StockCo.
Ltd., B........................................................ China 586,920 692,566
Shanghai Waigaoqiao Free Trade Zone Development Co., B........... China 580,000 324,800
*Shenzhen Properties & Resources Development (Group) Ltd., B..... China 4,798,860 1,368,537
Shenzhen Vanke Co. Ltd., B....................................... China 244,000 201,195
Sun Hung Kai Properties Ltd. .................................... Hong Kong 1,665,100 18,908,162
Tian An China Investments Co. Ltd. .............................. Hong Kong 5,330,750 852,975
------------
75,411,610
------------
RECREATION & OTHER CONSUMER GOODS 4.4%
+China First Pencil Co. Ltd., B.................................. China 14,306,036 5,693,802
KTP Holdings Ltd................................................. Hong Kong 2,652,500 215,636
*Phoenix Co. Ltd................................................. China 6,148,280 774,683
*Shanghai Wingsung Co. Ltd., B................................... China 5,072,317 994,174
*Shenzhen China Bicycles Co. (Holdings) Ltd., B.................. China 7,520,400 2,299,935
Yue Yuen Industrial (Holdings) Ltd............................... Hong Kong 2,503,200 5,636,601
------------
15,614,831
------------
TEXTILES & APPAREL 1.6%
Goldlion Holdings Ltd. .......................................... Hong Kong 7,140,000 3,961,804
Laws International Holdings Ltd. ................................ Hong Kong 6,412,000 1,530,705
------------
5,492,509
------------
TRANSPORTATION 3.0%
Chiwan Wharf Holdings Ltd., B.................................... China 3,346,000 2,055,224
Cross Harbour Tunnel Co. Ltd. ................................... Hong Kong 1,191,000 2,443,629
Guangshen Railway Co. Ltd., ADR.................................. China 88,000 1,875,500
IMC Holdings Ltd. ............................................... Hong Kong 2,649,000 1,264,765
Orient Overseas International Ltd. .............................. Hong Kong 648,000 438,996
*Shanghai Dazhong Taxi Shareholding Co. Ltd., B.................. China 2,219,200 2,618,656
------------
10,696,770
------------
</TABLE>
12
<PAGE>
TEMPLETON CHINA WORLD FUND, INC.
STATEMENT OF INVESTMENTS, AUGUST 31, 1997 (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
UTILITIES ELECTRICAL & GAS 3.1%
Hong Kong Electric Holdings Ltd. ................................ Hong Kong 1,885,000 $ 6,591,845
Shandong Huaneng Power........................................... China 192,000 2,292,000
Wing Shan International Ltd. .................................... Hong Kong 5,544,000 2,199,858
------------
11,083,703
------------
TOTAL COMMON STOCKS (COST $273,171,600).......................... 325,220,636
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT**
----------------
<S> <C> <C> <C>
SHORT TERM OBLIGATIONS 6.3% (COST $22,062,352)
U.S. Treasury Bills, 4.87% to 5.14% with maturities to
11/28/97....................................................... United States $ 22,212,000 $ 22,066,567
------------
TOTAL INVESTMENTS 98.4% (COST $295,233,952)...................... 347,287,203
OTHER ASSETS, LESS LIABILITIES 1.6%.............................. 5,762,192
------------
TOTAL NET ASSETS 100.0%.......................................... $353,049,395
============
</TABLE>
*Non-income producing.
**Securities traded in U.S. dollars.
+The Investment Company Act of 1940 defines "affiliated companies" as
investments in portfolio companies in which the Fund owns 5% or more of the
outstanding voting securities. Investments in "affiliated companies" at August
31, 1997 were $7,545,547.
See notes to financial statements.
13
<PAGE>
TEMPLETON CHINA WORLD FUND, INC.
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1997
<TABLE>
<S> <C>
Assets:
Investments in securities, at value (cost $295,233,952)............................. $347,287,203
Cash................................................................................ 9,920,205
Dividends and interest receivable................................................... 478,236
Unamortized organization costs...................................................... 4,953
------------
Total assets.................................................................... 357,690,597
------------
Liabilities:
Payable for investment securities purchased......................................... 3,942,569
Accrued expenses.................................................................... 698,633
------------
Total liabilities............................................................... 4,641,202
------------
Net assets, at value............................................................ $353,049,395
============
Net assets consist of:
Undistributed net investment income................................................. $ 3,114,240
Net unrealized appreciation......................................................... 51,722,822
Accumulated net realized gain....................................................... 12,498,609
Capital shares...................................................................... 285,713,724
------------
Net assets, at value............................................................ $353,049,395
============
Net asset value per share ($353,049,395 / 20,383,771 shares outstanding)............ $17.32
============
</TABLE>
See notes to financial statements.
14
<PAGE>
TEMPLETON CHINA WORLD FUND, INC.
Financial Statements (continued)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED AUGUST 31, 1997
<TABLE>
<S> <C> <C>
Investment income:
(net of $54,174 foreign taxes withheld)
Dividends............................................................... $ 8,232,716
Interest................................................................ 2,037,084
-----------
Total investment income............................................. $10,269,800
Expenses:
Management fees (Note 3)................................................ 4,173,465
Administrative fees (Note 3)............................................ 642,072
Custodian fees.......................................................... 216,807
Transfer agent fees..................................................... 102,769
Reports to shareholders................................................. 45,600
Professional fees (note 3).............................................. 42,799
Directors' fees and expenses............................................ 31,027
Registration and filing fees............................................ 32,340
Amortization of organization costs...................................... 4,745
Other................................................................... 6,539
-----------
Total expenses...................................................... 5,298,163
-----------
Net investment income............................................... 4,971,637
-----------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments............................................................ 12,723,255
Foreign currency transactions.......................................... (12,726)
-----------
Net realized gain....................................................... 12,710,529
Net unrealized appreciation (depreciation) on:
Investments............................................................ 74,500,424
Translation of assets and liabilities denominated in foreign
currencies........................................................... (307,935)
-----------
Net unrealized appreciation............................................. 74,192,489
-----------
Net realized and unrealized gain......................................... 86,903,018
-----------
Net increase in net assets resulting from operations..................... $91,874,655
===========
</TABLE>
See notes to financial statements.
15
<PAGE>
TEMPLETON CHINA WORLD FUND, INC.
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED AUGUST 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
-------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income............................................... $ 4,971,637 $ 5,540,705
Net realized gain from investments and foreign currency
transactions...................................................... 12,710,529 6,381,237
Net unrealized appreciation on investments and translation of assets
and liabilities denominated in foreign currencies.................. 74,192,489 21,920,301
-------------------------------
Net increase in net assets resulting from operations............ 91,874,655 33,842,243
Distributions to shareholders from:
Net investment income............................................... (5,605,537) (6,624,726)
Net realized gains.................................................. (6,215,883) (203,838)
-------------------------------
Net increase in net assets...................................... 80,053,235 27,013,679
Net assets:
Beginning of year.................................................... 272,996,160 245,982,481
-------------------------------
End of year.......................................................... $353,049,395 $272,996,160
===============================
Undistributed net investment income included in net assets:
Beginning of year.................................................... $ 3,748,140 $ 4,832,161
===============================
End of year.......................................................... $ 3,114,240 $ 3,748,140
===============================
</TABLE>
See notes to financial statements.
16
<PAGE>
TEMPLETON CHINA WORLD FUND, INC.
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Templeton China World Fund, Inc. (the Fund), is registered under the Investment
Company Act of 1940 as a closed-end, non-diversified investment company. The
Fund seeks to achieve its objective by investing primarily in equity securities
of China companies. The following summarizes the Fund's significant accounting
policies.
a. SECURITY VALUATION:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Securities for which market quotations
are not readily available are valued at fair value as determined by management
in accordance with procedures established by the Board of Directors.
b. FOREIGN CURRENCY TRANSLATION:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date. When
the Fund purchases or sells foreign securities it will customarily enter into a
foreign exchange contract to minimize foreign exchange risk from the trade date
to the settlement date of such transactions.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes, and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign currency denominated assets and liabilities other than investments in
securities held at the end of the reporting period.
c. INCOME TAXES:
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute substantially all of its taxable income.
d. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES, AND DISTRIBUTIONS:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Certain income from foreign securities is recorded as soon as information is
available to the Fund. Interest income and estimated expenses are accrued daily.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date.
17
<PAGE>
TEMPLETON CHINA WORLD FUND, INC.
Notes to Financial Statements (cont.)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
e. ORGANIZATION COSTS:
Organization costs are amortized on a straight line basis over five years.
f. ACCOUNTING ESTIMATES:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. CAPITAL SHARES
At August 31, 1997, there were 100 million shares authorized ($0.01 par value).
During the years ended August 31, 1997 and 1996 there were no share
transactions.
3. TRANSACTIONS WITH AFFILIATED AND RELATED PARTIES
Certain officers of the Fund are also officers or directors of Templeton Asset
Management, Ltd. (TAML) and Franklin Templeton Services, Inc. (FT Services), the
Fund's investment manager and administrative manager, respectively.
The Fund pays an investment management fee to TAML of 1.25% per year the average
weekly net assets of the Fund. The Fund pays an administrative fee to FT
Services of 0.25% per year of the average weekly net assets, of which 0.20% is
paid to Princeton Administrators, L.P., for sub-administrative services.
During the year ended August 31, 1997, legal fees of $1,016 were paid to a law
firm in which an officer of the Company is a partner.
4. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended August 31, 1997 aggregated $54,744,330 and $61,929,766, respectively.
5. INCOME TAXES
At August 31, 1997, the net unrealized appreciation based on the cost of
investments for income tax purposes of $295,346,790 was as follows:
<TABLE>
<S> <C>
Unrealized appreciation................... $ 86,441,954
Unrealized depreciation................... (34,501,541)
--------------
Net unrealized appreciation............... $ 51,940,413
==============
</TABLE>
18
<PAGE>
TEMPLETON CHINA WORLD FUND, INC.
Independent Auditor's Report
THE BOARD OF DIRECTORS AND SHAREHOLDERS
TEMPLETON CHINA WORLD FUND, INC.
We have audited the accompanying statement of assets and liabilities, including
the statement of investments, of Templeton China World Fund, Inc., as of August
31, 1997, and the related statement of operations for the year then ended, the
statement of changes in net assets for each of the two years in the period then
ended, and the financial highlights for the periods indicated in the
accompanying financial statements. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
August 31, 1997, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Templeton China World Fund, Inc. as of August 31, 1997, the results of its
operations, the changes in its net assets and the financial highlights for the
periods indicated, in conformity with generally accepted accounting principles.
McGLADREY & PULLEN LLP
New York, New York
September 26, 1997
19
<PAGE>
TEMPLETON CHINA WORLD FUND, INC.
Annual Meeting of Shareholders, February 25, 1997
- --------------------------------------------------------------------------------
An Annual Meeting of Shareholders of the Fund was held at the Fund's offices,
500 E. Broward Blvd., Ft. Lauderdale, Florida, on February 25, 1997. The purpose
of the meeting was to elect five directors of the Fund, to ratify the selection
of McGladrey & Pullen, LLP, as the Fund's independent public accountants for the
fiscal year ending August 31, 1997 and in their discretion, to authorize the
proxyholders to vote upon such other matters which may legally come before the
meeting or any other adjournment thereof. At the meeting, the following persons
were elected by the shareholders to serve as directors of the Fund: John Wm.
Galbraith, Betty P. Krahmer, Gordon S. Macklin, Fred R. Millsaps and Edith E.
Holiday. The shareholders ratified the selection of McGladrey & Pullen, LLP, to
serve as the Fund's independent public accountants for the fiscal year ending
August 31, 1997. No other business was transacted at the meeting.
The results of the voting at the Annual Meeting are as follows:
1. Election of five (5) Directors for the terms set forth below:
<TABLE>
<CAPTION>
% OF % OF
OUTSTANDING OUTSTANDING
FOR SHARES WITHHELD SHARES
---------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Term Expiring 2000:
John Wm. Galbraith 13,272,241 65.11% 234,137 1.15%
Betty P. Krahmer 13,273,739 65.12% 232,639 1.14%
Gordon S. Macklin 13,275,448 65.13% 230,930 1.13%
Fred R. Millsaps 13,275,652 65.13% 230,726 1.13%
Term Expiring 1999:
Edith E. Holiday 13,207,070 64.79% 299,308 1.47%
</TABLE>
2. Ratification of the selection of McGladrey & Pullen, LLP, as independent
public accountants of the Fund for the fiscal year ending August 31, 1997:
<TABLE>
<CAPTION>
% OF % OF % OF
OUTSTANDING OUTSTANDING OUTSTANDING
FOR SHARES AGAINST SHARES ABSTAIN SHARES
---------- ----------- ------- ----------- ------- -----------
<C> <C> <C> <C> <C> <C>
13,247,106 64.99% 95,891 0.47% 163,381 0.80%
</TABLE>
20
<PAGE>
TEMPLETON CHINA WORLD FUND, INC.
DIVIDEND REINVESTMENT PLAN
The Fund offers a Dividend Reinvestment Plan (the "Plan") with the following
features: -- Shareholders must affirmatively elect to participate in the Plan;
Stock dividends and capital gains distributions will be reinvested
automatically; ChaseMellon Shareholders Services, Investor Services, P.O. Box
3338, So. Hackensack, NJ 07606-1938, will provide additional Plan information
upon request. -- Whenever the Fund declares dividends in either cash or common
stock of the Fund, if the market price is equal to or exceeds net asset value at
the valuation date, the participant will receive the dividends entirely in stock
at a price equal to the net asset value, but not less than 95% of the then
current market price of the Fund's shares. If the market price is lower than net
asset value and if dividends and/or capital gains distributions are payable only
in cash, the participant will receive shares purchased on the New York Stock
Exchange or otherwise on the open market. -- The automatic reinvestment of
dividends and/or capital gains does not relieve the participant of any income
tax which may be payable on dividends or distributions. -- The participant may
withdraw from the Plan without penalty at any time by written notice to Mellon
Securities Trust Company (the "Plan Agent") at the address above. Upon
withdrawal, the participant will receive, without charge, stock certificates
issued in the participant's name for all full shares; or, if the participant
wishes, Mellon Securities Trust Company will sell the participant's shares and
send the proceeds, less a service fee of $5.00 and less trading fees. --
Whenever shares are purchased on the New York Stock Exchange or otherwise on the
open market, each participant will pay a pro rata portion of trading fees.
Trading fees will be deducted from amounts to be invested.
SHAREHOLDER INFORMATION
Shares of Templeton China World Fund, Inc. are traded daily on the New York
Stock Exchange under the symbol "TCH". Information about the net asset value and
the market price is published each Monday in the Wall Street Journal, weekly in
Barron's and each Saturday in The New York Times and other newspapers. Daily
market prices for the Fund's shares are published in the New York Stock Exchange
Composite Transactions section of newspapers.
For current information about dividends and shareholder accounts, call
1-800-292-9293.
The daily closing net asset value may be obtained on a two business day delay
basis by calling Franklin Templeton's Fund Information Department after 10 a.m.
Eastern Time any business day at 1-800-DIAL BEN (1-800-342-5236).
If any shareholder is not receiving copies of the Reports to Shareholders
because shares are registered in a broker's name or in a custodian's name, he or
she can write and request that his or her name be added to the Fund's mailing
list, by writing Templeton China World Fund, Inc., 100 Fountain Parkway, P.O.
Box 33030, St. Petersburg, FL 33733-8030.
21
<PAGE>
TEMPLETON CHINA WORLD FUND, INC.
Tax Designation
Under Section 852(b)(3)(C) of the Internal Revenue Code, the Fund hereby
designates $10,400,000 as a capital gain dividend for the fiscal year ended
August 31, 1997.
22
<PAGE>
This page intentionally left blank
<PAGE>
This page intentionally left blank
LITERATURE REQUEST
For a free brochure and prospectus, which contain more complete information,
including charges and expenses, call Franklin Fund Information, toll free, at
1-800/DIAL BEN (1-800/342-5236). Please read the prospectus carefully before you
invest or send money. To ensure the highest quality of service, telephone calls
to or from our service departments may be monitored, recorded and accessed.
These calls can be determined by the presence of a regular beeping tone.
FRANKLIN TEMPLETON GROUP
GLOBAL GROWTH
Franklin Global Health Care Fund
Franklin Templeton Japan Fund
Templeton Developing
Markets Trust
Templeton Foreign Fund
Templeton Foreign Smaller
Companies Fund
Templeton Global
Infrastructure Fund
Templeton Global
Opportunities Trust
Templeton Global
Real Estate Fund
Templeton Global
Smaller Companies Fund
Templeton Greater European Fund
Templeton Growth Fund
Templeton Latin America Fund
Templeton Pacific Growth Fund
Templeton World Fund
GLOBAL GROWTH AND INCOME
Franklin Global Utilities Fund
Franklin Templeton German
Government Bond Fund
Franklin Templeton Global
Currency Fund
Mutual European Fund
Templeton Global Bond Fund
Templeton Growth and
Income Fund
GLOBAL INCOME
Franklin Global Government
Income Fund
Franklin Templeton Hard
Currency Fund
Franklin Templeton High Income
Currency Fund
Templeton Americas Government
Securities Fund
GROWTH
Franklin Biotechnology
Discovery Fund
Franklin Blue Chip Fund
Franklin California Growth Fund
Franklin DynaTech Fund
Franklin Equity Fund
Franklin Gold Fund
Franklin Growth Fund
Franklin MidCap Growth Fund
Franklin Small Cap
Growth Fund
Mutual Discovery Fund
GROWTH AND INCOME
Franklin Asset Allocation Fund
Franklin Balance Sheet
Investment Fund
Franklin Convertible
Securities Fund
Franklin Equity Income Fund
Franklin Income Fund
Franklin MicroCap Value Fund
Franklin Natural Resources Fund
Franklin Real Estate
Securities Fund
Franklin Rising Dividends Fund
Franklin Strategic Income Fund
Franklin Utilities Fund
Franklin Value Fund
Mutual Beacon Fund
Mutual Financial Services Fund
Mutual Qualified Fund
Mutual Shares Fund
Templeton American Trust, Inc.
Fund Allocator Series
Franklin Templeton Conservative
Target Fund
Franklin Templeton Moderate
Target Fund
Franklin Templeton Growth
Target Fund
INCOME
Franklin Adjustable Rate
Securities Fund
Franklin Adjustable U.S.
Government Securities Fund
Franklin's AGE High Income Fund
Franklin Investment Grade
Income Fund
Franklin Short-Intermediate
U.S. Government Securities Fund
Franklin U.S. Government
Securities Fund
Franklin Money Fund
Franklin Federal Money Fund
For Corporations
Franklin Corporate Qualified
Dividend Fund
FRANKLIN FUNDS SEEKING
TAX-FREE INCOME
Federal Intermediate-Term
Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund
Puerto Rico Tax-Free
Income Fund
Tax-Exempt Money Fund
FRANKLIN STATE-SPECIFIC
FUNDS SEEKING
TAX-FREE INCOME
Alabama
Arizona*
Arkansas**
California*
Colorado
Connecticut
Florida*
Georgia
Hawaii**
Indiana
Kentucky
Louisiana
Maryland
Massachusetts***
Michigan*
Minnesota***
Missouri
New Jersey
New York*
North Carolina
Ohio***
Oregon
Pennsylvania
Tennessee**
Texas
Virginia
Washington**
VARIABLE ANNUITIES+
Franklin Valuemark(R)
Franklin Templeton
Valuemark Income Plus
(an immediate annuity)
*Two or more fund options available: long-term portfolio, intermediate-term
portfolio, a portfolio of insured municipal securities, and/or a high yield
portfolio (CA) and a money market portfolio (CA and NY).
**The fund may invest up to 100% of its assets in bonds that pay interest
subject to the federal alternative minimum tax.
***Portfolio of insured municipal securities.
+Franklin Valuemark and Franklin Templeton Valuemark Income Plus are issued by
Allianz Life Insurance Company of North America or by its wholly owned
subsidiary, Preferred Life Insurance Company of New York, and distributed by
NALAC Financial Plans, LLC.
<PAGE>
PRINCIPAL UNDERWRITER
Franklin/Templeton Distributors, Inc.
100 Fountain Parkway
P.O. Box 33030
St. Petersburg, Florida 33733-8030
SHAREHOLDER SERVICES
1-800/632-2301
FUND INFORMATION
1-800/342-5236
This report must be preceded or accompanied by the current prospectus for the
Templeton China World Fund, Inc., which contains more complete information
including risk factors, charges and expenses. Like any investment in securities,
the Fund's portfolio will be subject to the risk of loss from market, currency,
economic, political and other factors, as well as investment decisions by the
Investment Manager, which will not always be profitable or wise. The Fund and
Fund investors are not protected from such losses by the Investment Manager.
Therefore, investors who cannot accept the risk of such losses should not invest
in shares of the Fund.
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded and accessed. These calls can be
determined by the presence of a regular beeping tone.
TLTCH A97 10/97 [RECYCLE LOGO] PRINTED ON RECYCLED PAPER
