China Finance (CHFI) 10QSB 2006 Q1 Quarterly report (small business)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

x  Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2006

o  Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period  to  

Commission File Number 333-46114

______________________

CHINA FINANCE, INC.

(Exact name of small business issuer as specified in its charter)

Utah	87-0650976
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

111 Pavonia Avenue, Suite 615

Jersey City, New Jersey 07310

(Address of principal executive offices)

(201) 216-0880

(Issuer’s telephone number, including area code)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days

Yes x No ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) YES ¨ No x

There were 57,671,744 shares of the Company’s common stock outstanding as of May 10, 2006.

Transitional Small Business Disclosure Format (Check one): Yes ¨ No x

TABLE OF CONTENTS

		Page
Accountants’ Review Report
PART I - FINANCIAL INFORMATION
	Item 1. Condensed Financial Statements and Notes thereto	1
	Item 2. Management’s Discussion and Analysis or Plan of Operation	9
	Item 3. Controls and Procedures	15
PART II - OTHER INFORMATION		15
	Item 1. Legal Proceedings	15
	Item 2. Changes in Securities and Use of Proceeds	15
	Item 3. Defaults Upon Senior Securities	15
	Item 4. Submission of Matters To a Vote of Security Holders	15
	Item 5. Other Information	15
	Item 6. Exhibits	15

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PART I - FINANCIAL INFORMATION

Item 1.Condensed Financial Statements and Notes thereto

China Finance, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

March 31, 2006 (Unaudited) and December 31, 2005 (Audited)

	March 31, 2006 (Unaudited)			December 31, 2005 (Audited)
ASSETS
Current Assets
Cash and Cash Equivalents	$	485,496		$	11,331,650
Marketable Securities		5,351,799			295,680
Receivable from sale of marketable securities		—			580,481
Loans Receivable - Current Portion		629,210			622,136
Prepaid Expenses		17,938			133
Total Current Assets		6,484,443			12,830,080
Property, Plant and Equipment - Net		95,982			8,751
Loan Receivable - Long Term		11,232,000			—
Total Assets	$	17,812,425		$	12,838,831
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accrued Expenses	$	48,346		$	35,638
Tax Payable		65			—
Total Current Liabilities		48,411			35,638
Stockholders’ Equity
Common Stock - 100,000,000 Shares Authorized; Par Value $.001; 57,671,744 Issued and Outstanding
at March 31, 2006 and December, 31, 2005		57,672			57,672
Additional Paid-In Capital		13,078,373			13,078,373
Accumulated Deficit		(815,804	)		(643,578	)
Accumulated Other Comprehensive Income		5,443,773			310,726
Total Stockholders’ Equity		17,764,014			12,803,193
Total Liabilities and Stockholders’ Equity	$	17,812,425		$	12,838,831

The accompanying notes are an integral part of these condensed financial statements.

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China Finance, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

For the Three Months Ended March 31, 2006 and 2005 (Unaudited)

	For the three months ended March 31, 2006 (Unaudited)			For the three months ended March 31, 2005 (Unaudited)
Revenue	$	28,292		$	26,161
Operating Expenses:
General and Administrative		200,518			166,708
Consulting Fees		—			125,000
Total Operating Expenses		200,518			291,708
Net Income (Loss) Before Provision for Income Taxes		(172,226	)		(265,547	)
Provision for Income Taxes		—			—
Net Income (Loss)		(172,226	)		(265,547	)
Other Comprehensive Income (Loss)
Unrealized Loss on Marketable Securities-CHID		—			(1,488,486	)
Unrealized Gain on Marketable Securities-CHCG		5,056,119			—
Foreign Currency Translation		76,928			—
Comprehensive Income	$	4,960,821		$	(1,754,033	)
Earnings Per Share
Basic and Diluted	$	(0.00	)	$	(0.00	)
Weighted Average Shares Outstanding
Basic and Diluted		57,671,744			57,671,744

The accompanying notes are an integral part of these condensed financial statements.

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China Finance, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit)

For the Period from December 31, 2004 Through March 31, 2006

							Retained			Accumulated
	Number of				Additional		Earnings			Other			Total
	Common		Common		Paid-In		(Accumulated			Comprehensive			Stockholders’
	Shares		Stock		Capital		Deficit)			Income (Loss)			Equity
Balance - December 31, 2004		57,671,744	$	57,672	$	13,078,373	$	3,505,801		$	(1,129,402	)	$	15,512,444
Net Loss for the Period Ended March 31, 2005		—		—		—		(265,547	)		—			(265,547	)
Other Comprehensive Income (Loss): Unrealized Loss on Marketable Securities—CHID		—		—		—		—			(1,488,486	)		(1,488,486	)
Balance - March 31, 2005		57,671,744	$	57,672	$	13,078,373	$	3,240,254		$	(2,617,888	)	$	13,758,411
Net Loss for the Period Ended December 31, 2005		—		—		—		(3,883,832	)		—			(3,883,832	)
Other Comprehensive Income (Loss):
Reclassification adjustment for Loss Included in Accumulated Other Comprehensive Income—CHID		—		—		—		—			2,617,888			2,617,888
Foreign Currency Translation Adjustments											310,726			310,726
Balance - December 31, 2005		57,671,744	$	57,672	$	13,078,373	$	(643,578	)	$	310,726		$	12,803,193
Net loss for the period Ended March 31, 2006								(172,226	)					(172,226	)
Other Comprehensive Income:
Unrealized Gains on Marketable Securities—CHCG											5,056,119			5,056,119
Foreign Currency Translation											76,928			76,928
Balance - March 31, 2006		57,671,744	$	57,672	$	13,078,373		(815,804	)		5,443,773			17,764,014

The accompanying notes are an integral part of these condensed financial statements.

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China Finance, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the Three Months Ended March, 2006 and 2005 (Unaudited)

	For the three months ended March, 2006 (Unaudited)			For the three months ended March, 2005 (Unaudited)
Cash Flows from Operating Activities
Net Income (Loss)	$	(172,226	)	$	(265,547	)
Non-Cash Revenue and Expenses
Depreciation		3,598			1,505
Changes in Operating Assets and Liabilities
Loans Receivable		(11,190,674	)		(355	)
Other Receivable		580,481			—
Prepaid Expenses		(17,730	)		663
Deferred Compensation		—			125,000
Tax Payable		65			—
Accrued Expense		12,572			(7,884	)
Deferred Revenue		—			(3,481	)
Net Cash Flows from Operating Activities		(10,783,914	)		(150,099	)
Cash Flows from Investing Activities
Acquisition of Property, Plant and Equipment		(14,786	)		—
Leasehold Improvement		(75,623	)		—
Net Cash Flows from Investing Activities		(90,409	)		—
Cash Flows from Financing Activities		—			—
Effect on Change of Exchange Rates		28,169			—
Change in Cash and Cash Equivalents		(10,846,154	)		(150,099	)
Cash and Cash Equivalents - Beginning of Period		11,331,650			11,512,987
Cash and Cash Equivalents - End of Period	$	485,496		$	11,362,888
Supplementary Cash Flow Disclosures:
Interest Paid	$	—		$	—
Taxes Paid	$	—		$	—

The accompanying notes are an integral part of these condensed financial statements.

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China Finance, Inc. and Subsidiaries

Notes to Condensed Financial Statements (Unaudited)

For the three months ended March 31, 2006

Note A -Organization and Principal Activities

China Finance, Inc. (the “Company”), incorporated on March 28, 2000 in the state of Utah, with its principal office in Jersey City, New Jersey.

The Company’s principal business is, through its wholly-owned subsidiary Shenzhen Shiji Ruicheng Guaranty and Investment Co., Ltd., providing guarantees to the People’s Republic of China’s (PRC) privately owned small and medium enterprises (SMEs) when they seek access to capital or to be acquired by a United States reporting company in a merger.

Note B -BASIS OF PRESENTATION

The condensed consolidated financial statements of China Finance, Inc. and subsidiaries included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in conjunction with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the annual audited financial statements and the notes thereto included in the Company’s annual report on Form 10-KSB, and other reports filed with the SEC.

The accompanying unaudited interim financial statements reflect all adjustments of a normal and recurring nature which are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows of the Company for the interim periods presented. The results of operations for these periods are not necessarily comparable to, or indicative of, results of any other interim period or for the fiscal year taken as a whole.

Note C - Recent Pronouncements

In March 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 156, "Accounting for Servicing of Financial Assets - an amendment of FASB Statement No. 140" (“SFAS 156”). SFAS 156 amends FASB Statement No. 140 with respect to the accounting for separately recognized servicing assets and servicing liabilities. SFAS 156 requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practical. SFAS 156 is effective as of the beginning of the first fiscal year that begins after September 15, 2006. As such, the Company is required to adopt these provisions at the beginning of the fiscal year ended December 31, 2007. The Company is currently evaluating the impact of SFAS 156 on its consolidated financial statements.

Note D -Loan Receivable

The Company and Shenzhen Kaibite Ltd., an unrelated party, entered into a loan agreement on March 31 2006. The arranged amount of the loan is RMB90 million (US$11.232 million) and the obligation unsecured has a term of two years, which is due on March 31, 2008. The Company will be repaid the principal together with accrued interest at 9% per annum upon the due date. 

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CHINA FINANCE, INC. AND SUBSIDIARIES

Jersey City, New Jersey

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note E -Receivable from Sale of Marketable Securities

On October 5, 2005, the Company entered into a Stock Sales Agreement (the “Stock Sales Agreement”) with Galaxy view International Ltd. (the “Buyer”), pursuant to which the Company sold 1,222,065 restricted shares of CHID to the Buyer for an aggregate consideration of $580,481, which has been received by March 31, 2006.

Note F -Property, Plant and Equipment

Property, plant and equipment consisted of the following at March 31, 2006:

	March 31, 2006			December 31, 2005
Electronic Equipment and Office Furniture, at Cost	$	24,574		$	9,663
Less: Accumulated Depreciation		(3,265	)		(2,544	)
Electronic Equipment and Office Furniture, net		21,309			7,119
Leasehold Improvement, Net		74,673			1,632
Net Property, Plant and Equipment		95,982		$	8,751

Note G -Marketable Securities

On December 21, 2005, the Company performed surety guarantee service for the CHCG in a merger, which was consigned to Capital Future Developments Ltd. In exchange for the guarantee fees, the Company received 2,956,795 shares of stock by CHCG. Marketable Securities as of March 31, 2006 consists of 2,956,795 shares of China 3C Group (CHCG.OB) representing approximately 6% interest in the overall common shares outstanding. A summary is as follows:

March 31,	2006
Cost:	$	295,680
Add: Unrealized Gain		5,056,119
Fair Market Value		5,351,799

At March 31, 2006, the fair market value of marketable securities held was $1.81 per share. Since the marketable securities are reasonably expected to qualify for sale within one year, the securities are not considered restricted. In addition, the market price has been relatively stable since January 1, 2006.

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CHINA FINANCE, INC. AND SUBSIDIARIES

Jersey City, New Jersey

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

Note H - Reclassifications

Bank commission charges and currency translation expense in the prior year consolidated financial statements have been reclassified to general and administrative expenses conforming with the current year presentation. The reclassifications made to the prior year have no impact on the net income (loss), or overall presentation of the consolidated financial statements.

Note I -Information about Operating Segments

The Company’s reportable segments have been determined based upon the nature of the services offered, availability of discreet internal financial information and other factors:

March 31, 2006	Surety guarantee		Loan Guarantee			General Unallocated			Consolidated
	$		$			$			$
Revenue		5,474		22,818			―			28,292
Operating Expenses		-25		123,251			77,292			200,518
Net Income(Loss)		5,499		(100,433	)		(77,292	)		(172,226	)
Total Assets		5,741,475		12,034,385			35,565			17,812,425

March 31, 2005 Except for total assets	Surety guarantee		Loan Guarantee			General Unallocated			Consolidated
	$		$			$			$
Revenue		―		26,161			―			26,161
Operating Expenses		―		67,683			224,025			291,708
Net Income(Loss)		―		(41,522	)		(224,025	)		(265,547	)
Total Assets (December 31, 2005)		1,260,338		11,552,429			26,064			12,838,831

All of the Company’s revenues were generated from the PRC for the period ended March 31, 2006 and for the period ended March 31, 2005. Revenues are attributed to countries based on location of the customers. All long-lived assets are located in the PRC.

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CHINA FINANCE, INC. AND SUBSIDIARIES

Jersey City, New Jersey

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note J -Other Matters

The Company has historically accepted shares of stock from its client corporations as payment for services in lieu of cash. Depending on the significance of the value of the stock held by the Company in relation to the Company’s total assets, the Company may become subject to the Investment Company Act of 1990 (“Act”). The Act defines investment companies as those whose investments and other securities exceed 40% of total assets (excluding cash). Investment companies must register and conduct their business under the regulations of the Act. There can be no assurance at this time that the Company will be successful in attempting to register under the Act.

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Item 2.Management’s Discussion and Analysis or Plan of Operation

The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this quarterly report.

Forward Looking Statements

The information in this discussion contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties, including statements regarding our capital needs, business strategy and expectations. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “expect”, “plan”, “intend”, “anticipate”, “believe”, estimate”, “predict”, “potential” or “continue”, the negative of such terms or other comparable terminology. Actual events or results may differ materially. We disclaim any obligation to publicly update these statements, or disclose any difference between its actual results and those reflected in these statements.

Business Overview

  In June, 2004, our board of directors decided to enter into the surety guarantee business. Specifically, we decided to focus on providing surety guarantees to companies based in the People’s Republic of China (“PRC” or “China”) that were seeking to expand operations into the United States. On October 8, 2004, we completed the acquisition of all of the issued and outstanding equity securities of Value Global International Limited, a British Virgin Islands company (“Value Global”) and its wholly-owned subsidiary, Shenzhen Shiji Ruicheng Guaranty and Investment Co., Ltd. (“Shiji Ruicheng”).

Through Shiji Ruicheng, we operate two business lines:

Surety Guarantee. We provide surety guarantees to Chinese SMEs seeking to be acquired by a United States reporting company in a “reverse merger” or other merger and acquisition (“M&A”) transaction. The surety guarantee business generates revenues through fees, which typically are based on a percentage of the transaction. We provide contractual guarantees which help to facilitate the completion of a reverse merger or other merger and acquisition transaction entered into by Chinese companies desiring to become a publicly-traded company in United States. Since we typically get compensation in the form of stock from our client companies, we have a risk control department that frequently monitors the performance of our client companies and their stock to decide the right time to sell or hold the stocks and to minimize the impacts of their stock price fluctuations to our cash flows.

Loan Guarantee. We also provide guarantees to SMEs and individuals obtaining loans from a Chinese bank for their business operations and/or personal use. The corporate loan guarantee and the consumer loan guarantee businesses require that the borrower pay us a certain percentage of the loan amount as the upfront fee. Loan maturities are short, ranging from one to five years, and are guaranteed through a wide range of collateral of the borrower. We get collateral such as fixed assets, receivables, and inventory from corporate clients and personal properties from individual clients. If the clients failed to fulfill their obligations, we have the right to liquidate that collateral. In addition, our risk control department also frequently monitors the current value of the collateral that we get from our clients to make sure there is no material impairment to the collateral.

Principal Factors Affecting Our Results of Operations

There are three main factors affecting the revenue and financial status of the company:

 1. The revenue and financial status of our company will be affected if the clients we provide guarantee service have compensation situation.

2. The guarantee service our company provides is a kind of long-term investment. After the service transaction is finished, the financial status of our company will depend on how well development of the client is.

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3. The irrational status of the stock value issued by our client. In exchange for a partial guarantee service fee, we acquire a particular amount of stock shares from our client after the completion of the service, which is a substantial source of our future revenue. Therefore if the stock value irrational fluctuates, our results of operation and financial condition will accordingly be affected.

With the increasing threshold of indirect financing and difficulty of direct financing in China, more and more SMEs, especially private enterprises, opt to go overseas to become a publicly-traded company. In China, there’s about 17,000,000 SMEs, occupying 99% of the total of registered companies. They occupy 60% and 40% respectively of the domestic industrial production and profit, 60% of the domestic export as well. In such a huge potential market, despite millions of SMEs are qualified for going public, only a few hundreds of them are listed in the A Market and Medium &Small Capital. With no doubt, going public overseas becomes an extraordinarily meaningful alternative for Chinese SMEs exploring more financing solutions. “China Concept” will still be the focus of market within two to three years. It is estimated that about 1000 Chinese SMEs will go overseas to become a publicly-traded company in next 10 years.

Results of Operations

Net Revenues

The Company’s net revenue for the three-month period ended March 31, 2006 and 2005 was $28,292 and $26,161 respectively. The revenue for the period ended March 31, 2006 and 2005 were derived primarily from our loan guarantee transaction.

Net Income

Net income for the three-month period ended March 31, 2006 and 2005 were ($172,226) and ($265,547) respectively.

Liquidity and Capital Resources

 As of March 31, 2006, we had cash and cash equivalents of $485,496 as compared to $11,362,888 as of March 31, 2005. Cash flows from operating activities was ($10,783,914) for the three-month period ended March 31, 2006 as compared to ($150,099) for the period ended March 31, 2005. We expect that our cash and cash equivalents will be sufficient to satisfy our cash requirements for the next twelve months. On a long-term basis, our liquidity is dependent on our successfully executing our business plan, receipt of revenues, and additional infusions of capital through equity and debt financing. Any funds raised from an offering of our equity or debt will be used to continue to develop and execute our business plan. However, there can be no assurance that we will be able to obtain additional equity or debt financing on terms acceptable to us, if at all.

We do not currently own any plant or significant equipment, and during 2006, we do not anticipate purchasing any plant or significant equipment, except as may be required if we cannot or choose not to register as an investment company under the 1940 Act. For more information, see " About the Investment Company Act of 1940." We do not anticipate incurring significant changes in the number of our employees.

There are three main factors affecting the Company’s cash flows:

1. The pace of going public of the enterprise we provide surety guarantee.

2. The stock trading frequency of the enterprise we provide surety guarantee.

3. The development of the enterprise we provide surety guarantee

Operating Expenses

Selling, general and administrative expenses

Selling, General and administrative expenses (“G&A”) consist primarily of administrative fees, payroll costs and travel expenses. Selling, general and administrative expenses for the three-month period ended March 31, 2006 and the period ended March 31, 2005 were $200,518 and $166,708 respectively. We incurred these selling, general and administrative expenses in connection with executing our new business plan. We are subject to all of the risks, expenses, delays, problems and difficulties frequently encountered in the establishment of a new business.

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Consulting Fees

Comparing to $125,000 during the period ended March 31, 2005, we did not incur any consulting fees during the three-month period ended March 31, 2006. The decrease in consulting fees is primarily attributable to the $507,000 stock-based compensation cost has been amortized completely by December 31, 2005. 

Taxation

Taxes on profits earned by our wholly owned subsidiary Shiji Ruicheng are calculated in accordance with taxation principles currently effective in the PRC. (The current and future tax policy and system in China wouldn’t affect the business of our wholly-owned subsidiary, Shenzhen Shiji Ruicheng Guaranty and Investment Co., Ltd. (“Shiji Ruicheng”). Chinese government will continue its stable fiancé policy, move forward its reform on tax system, put emphasis on finance and economic efficiency. Its essential aim is to sustain current stable economic and social development pace. Specifically, in terms of the reform on tax collection policy, the principles are simplifying tax system, expanding tax foundation, lowering tax rate, having strict collection system, all of which are aimed to prompt efficiency of economic development, development of science and technology, and economic usage of energy and resources. The Add-Value Tax system will be continued. The main principle for the consuming tax reform is to broaden the tax range. Tax collection systems in different enterprises will be coordinated. For the Personal Income Tax, the reform will emphasize on combining comprehensive and categorized tax collection systems. The levied Natural Resource Tax will be re-adjusted and improved. The Upstream Oil Exploiters will be taxed. The national middle and long-term plan on development of sciences and technology will be continued with tax system aiming at promoting innovation. The Add-Value Tax system on produces collection and procession will be further improved. For the western and northeast under-developing regions, favorable tax systems will be practiced to promote economic development over there. Relevant favorable tax systems will be created to prompt natural resources conservation, economic usages and re-collection of recoverable resources and industrial wastes. Meanwhile, with aims to promote employment, relevant tax polices will be employed. Relevant studies are undergoing to explore suitable tax system to encourage development of non state-owned enterprises. )

We account for income taxes using the liability method. Taxes on profits earned by our wholly owned subsidiary Value Global are calculated in accordance with taxation principles currently effective in the British Virgin Islands. Value Global is an International Business Company (IBC) registered in the British Virgin Islands that is exempt from all taxes and withholding taxes in the British Virgin Islands and pays registration fees and annual license fees which amount to $1,300 per annum.

We account for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,” for taxes on U.S. taxable income, using the asset and liability approach, which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of such assets and liabilities. This method utilizes enacted statutory tax rates in effect for the year in which the temporary differences are expected to reverse and gives immediate effect to changes in income tax rates upon enactment. Deferred tax assets are recognized, net of any valuation allowance, for temporary differences and net operating loss and tax credit carryforwards. Deferred income tax expense represents the change in net deferred assets and liability balances.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations in this report are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expense and disclosures at the date of the financial statements. On an on-going basis, we evaluate our estimates, including, but not limited to, those related to revenue recognition, accounts receivables, inventories, and impairment of property and equipment and of intangibles. We use authoritative pronouncements, historical experience and other assumptions as the basis for making estimates. Actual results could differ from those estimates.

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We recognize revenue in accordance with Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements.” We will recognize revenue when realized or realizable and earned, which is when the following criteria are met: persuasive evidence of arrangement exists; delivery has occurred; the sales price is fixed and determinable; and the ability to collect is reasonably assured.

The recently announced Securities and Exchange Commission (the “SEC”) Release No. 33-8098 require us to identify accounting estimates we make in applying the accounting policies and the initial adoption by us of an accounting policy that has a material impact on our financial presentation. Under the first part of the proposals, we would have to identify the accounting estimates reflected in its financial statements that required us to make assumptions about matters that were highly uncertain at the time of estimation. Disclosure about those estimates would then be required if different estimates that we reasonably could have used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact on the presentation of the company's financial condition, changes in financial condition or results of operations. Our disclosure about these critical accounting estimates would include a discussion of: the methodology and assumptions underlying them; the effect the accounting estimates have on our financial presentation; and the effect of changes in the estimates. Under the second part of the proposals, if we initially adopted an accounting policy with a material impact, we would have to disclose information that includes: what gave rise to the initial adoption; the impact of the adoption; the accounting principle adopted and method of applying it; and the choices it had among accounting principles.

In June 1977, the FASB issued Statement No. 15, “Accounting by Debtors and Creditors for Troubled Debt Restructurings” (“FAS 15”). FAS 15 establishes standards of financial accounting and reporting by the debtor and by the creditor for a troubled debt restructuring. This Statement requires adjustments in payment terms from a troubled debt restructuring generally to be considered adjustments of the yield (effective interest rate) of the loan. So long as the aggregate payments (both principal and interest) to be received by the creditor are not less than the creditor's carrying amount of the loan, the creditor recognizes no loss, only a lower yield over the term of the restructured debt. Similarly, the debtor recognizes no gain unless the aggregate future payments (including amounts contingently payable) are less than the debtor's recorded liability.

In November 2002, the FASB issued Interpretation No. 45, “Guarantor”s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. It also clarifies that at the time a company issues a guarantee, the Company must recognize an initial liability of the fair market value of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions of FIN 45 apply on a prospective basis to guarantees issued or modified after December 31, 2002.

For a discussion of our critical accounting policies, please see Note 3 to our consolidated financial statements contained elsewhere in this report.

Off-Balance Sheet Arrangements

In the ordinary course of business, we enter into arrangements to facilitate our business purpose of providing surety and loan guarantees to small- and medium-sized enterprises. We structure transactions to meet the financial needs of our clients, manage credit, market or liquidity risks or to optimize our capital.

We may enter into these transactions which, under generally accepted accounting principles, may not be recorded on our balance sheet or which may be recorded in amounts different from the full contract or notional amount of the transaction. Our primary off-balance sheet arrangements would result from our providing surety and loan guaranties in which we would provide contractual assurance of the completion of a transaction or guaranty the timely re-payment of principal and interest of our client to a third party, all in exchange for a guaranty fee. In these transactions, we would have both a non-contingent obligation related to the compensation received for assuming the credit risk and a contingent obligation related to the guaranty of payment in the event the underlying loan to the borrower goes into default, or in the event that the parties fail to perform under the surety guarantee contract.

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Transactions described above would require accounting treatment under FASB Interpretation 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others ("FIN 45"). Under that standard, we would be required to recognize the fair value of guarantees issued or modified after December 31, 2002 for non-contingent guaranty obligations, and also a liability for contingent guaranty obligations based on the probability that the guaranteed party will not perform under the contractual terms of the guaranty agreement.

We did not have any non-contingent or contingent guaranty obligations at December 31, 2005 requiring recognition or disclosure under FIN 45. At December 31, 2005, we have guaranteed the timely re-payment of principal and interest of one party to a bank in exchange for a fee, whereby we have placed cash on deposit with the bank equal to the full amount of the loan outstanding to the borrower. The maximum amount of exposure to us is recorded on our balance sheet as "Loans Receivable" in the accompanying financial statements.

About the Investment Company Act of 1940 

In connection with its first surety guarantee transaction, Value Global, through Shiji Ruicheng, received as its fee certain shares of the common stock of China Digital Communication Group (“CHID”). As of October 5, 2005, we have sold all of the shares of common stock of CHID owned by Value Global International Ltd. Between August 24, 2005 and August 30, 2005, Value Global sold 959,508 freely tradable shares of CHID through its brokerage account with GunnAllen Financial. On October 5, 2005, we entered in a Stock Sales Agreement (the "Stock Sales Agreement") with Galaxy View International Ltd., pursuant to which we sold 1,222,065 restricted shares of CHID to Galaxy View International Ltd.

Under the terms of the Stock Sales Agreement, Galaxy View purchased the 1,222,065 restricted shares of CHID at a 5% discount from the closing high bid price for CHID common stock as of October 5, 2005, for an aggregate consideration of $580,480.87, to be paid as follows: $290,240.43 is payable on or before December 31, 2005, and the remainder is payable on or before March 31, 2006. We have received the full payment from Galaxy View. Any taxes applicable to the sale will be paid by the party responsible for such taxes under applicable law or split by both parties if the responsible party is not provided for under applicable law. The sale was exempt from registration under the Securities Act of 1933, as amended, by reason of the so-called "Section 4(1-1/2) exemption.

On December 21, 2005, the Company, through its wholly-owned subsidiary Shenzhen ShiJi Ruicheng Guaranty and Investment Co. Ltd, successfully performed surety guarantee services for China 3C Group (CHCG) in a merger, which was consigned to Capital Future Developments Ltd. In exchange for the guarantee fees, the Company received 2,956,795 shares of stock issued by CHCG valued at $295,680 which has been recorded as revenue in the accompanying financial statements. Marketable securities as of March 31, 2006 consist of 2,956,795 shares of China 3C Group (CHCG.OB).

As both Value Global and Shiji Ruicheng are our wholly owned subsidiaries, we might have been deemed an "investment company" pursuant to Section 3(a)(1) of the Investment Company Act of 1940, as amended (the "1940 Act"). Since October 8, 2004, we relied on Rule 3a-2 under the 1940 Act (the “Transient Investment Companies Rule”) for exemption from Section 3(a)(1) of the 1940 Act.

China Finance may incur significant costs to avoid investment company status and may suffer other adverse consequences if deemed to be an investment company under the Investment Company Act of 1940. Some of the Company’s equity investments may constitute investment securities under the Investment Company Act. A company may be deemed to be an investment company if it owns investment securities with a value exceeding 40% of its total assets, subject to certain exclusions. Investment companies are subject to registration under, and compliance with, the Investment Company Act unless a particular exclusion or safe harbor provision applies. If the Company were to be deemed an investment company, the Company would become subject to the requirements of the Investment Company Act. As a consequence, the Company would be prohibited from engaging in guaranty business or issuing securities as it has in the past and might be subject to civil and criminal penalties for noncompliance. 

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Although the Company’s investment securities currently comprise less than 40% of its total assets as of December 31, 2005, fluctuations in the value of these securities or of the Company's other assets may cause this limit to be exceeded. Unless an exclusion or safe harbor was available to the Company, the Company would have to attempt to reduce its investment securities as a percentage of its total assets. This reduction can be attempted in a number of ways, including the disposition of investment securities and the acquisition of non-investment security assets. If the Company were required to sell investment securities, the Company may sell them sooner than it otherwise would. These sales may be at depressed prices and the Company may never realize anticipated benefits from, or may incur losses on, these investments.

China Finance may be unable to sell some investments due to contractual or legal restrictions or the inability to locate a suitable buyer. Moreover, the Company may incur tax liabilities when selling assets. If the Company decides to acquire non-investment security assets, the Company may not be able to identify and acquire suitable assets and businesses or the terms on which the Company is able to acquire such assets may be unfavorable.

In fiscal 2006, we are focused on adjusting our business plan and implementing the following initiatives to avoid possibilities of becoming an investment company:

China Finance primary business will now strengthen our loan guarantee service. With the rapidly-growing number of loan guarantee competitors in China and higher demands from individuals or enterprises seeking access to capital, we are facing strong and powerful challenge and competition from other loan guarantee rivals who are larger in size and have greater financial resources than we do. After the due diligence of the market outlook and the long-term business development plan, our management team decides that we should strengthen and stand out our loan guarantee service to secure our superior status in the competition. Considering our current asset capability that the cash and cash equivalents of China Finance is $11,331,650, occupying 88.3% of the total asset $12,838,831 during the year ended December 31, 2005, and the well-developed relationship with our strategic partner-Hong Kong Onanma service, we believe we have sufficient funds to execute this plan and transforming most of our liquidities to loan receivables. The next loan receivables will be generated in April, 2006.

 As a Company regulated under the Securities Exchange Act of 1934, we are going to sell a particular amount of the stock shares we earned from surety guarantee in the past two years. Since the past two years, our clients paid a specific portion of their stock, instead of cash, for our services. According to the U.S. securities laws, if more than 40% of the Company’s assets, excluding cash, are comprised of investment securities, the Company, if regulated by the Securities Exchange Act of 1934, will be presumed to be an investment company and in violations of the Investment Company Act of 1940. Therefore, in order to maximum the feasibility to keep on carrying out our current business plan and to avoid risks of violating the Investment Company Act of 1940, we will sell the extra amount of our held common stocks that exceeds 40% of the whole assets, which will be then transformed from marketable securities to other forms of asset, such as cash, loan receivables, or real estate, etc.

We are going to provide surety guarantee service only to private companies from now on. As a financial intermediary, we used to provide surety guarantee services among Chinese private companies and U.S. public companies, and assisting Chinese private companies to go public in the U.S. through a “reverse merger” transaction. During which, we will help Chinese companies with compliance, locating U.S. attorneys or accountants, employees, office facilitates, etc before and after they become a U.S. public company. Our service-related activities may constitute the Company as an unlicensed broker-dealer. To prove our intention of being a well-developed financial intermediary instead of an unlicensed broker-dealer, our management team decides to adjust our scope of the business and provide surety guarantee services only to Chinese private companies before they go public, that is, we will enter into the agreement with only private companies and conduct due diligence or other supporting services but will never involve in any negotiation among the U.S. public companies and Chinese private companies. Our client, which is now the Chinese private company, will compensate our service with either cash or the shares ownership of the private company.

We believe that successful execution of these initiatives will enable the Company to increase its non-investment securities percentage to avoid investment company status.

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Item 3.Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. The evaluation was undertaken in consultation with our accounting personnel. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, given our limited operations, our disclosure controls and procedures are currently effective to ensure that information required to be disclosed by us in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. As we develop new business or if we engage in an extraordinary transaction we will review our disclosure controls and procedures and make sure that they are adequate.

We made no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation of those controls by the Chief Executive and Chief Financial officers. We have also undertaken to periodically review our disclosure controls and procedures and internal controls for adequacy and effectiveness.

PART II - OTHER INFORMATION

Item 1.Legal Proceedings

We are not presently involved in litigation that we expect individually or in the aggregate to have a material adverse effect on our financial condition, results of operation or liquidity.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3.Defaults Upon Senior Securities

None

Item 4.Submission of Matters To a Vote of Security Holders

Not applicable.

Item 5.Other Information

Not applicable.

Item 6.Exhibits

31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	CHINA FINANCE, INC. (Registrant)
Date:  May 18, 2006	By:	/s/  Zhiyong Xu
		Name: Zhiyong Xu
		Title: Chief Executive Officer and Chairman of the Board (Principal Executive Officer)

Date:  May 18, 2006	By:	/s/ Liang Liao
		Name: Liang Liao
		Title: Chief Financial Officer (Principal Financial Officer)

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