China Finance (CHFI) 10QSB 2007 Q1 Quarterly report (small business)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

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

For the quarterly period ended March 31, 2007

¨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 March 31, 2007.

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

TABLE OF CONTENTS

ACCOUNTANTS’ REVIEW REPORT		1
PART I - FINANCIAL INFORMATION		1
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	14
PART II - OTHER INFORMATION		15
Item 6.	Exhibits	15

PART I - FINANCIAL INFORMATION

Item 1.Condensed Financial Statements and Notes thereto

China Finance, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

For the Quarter Ended March 31, 2007 (Unaudited) and Year Ended December 31, 2006 (Audited)

	March 31, 2007 (Unaudited)		December 31, 2006 (Audited)
ASSETS
Current Assets
Cash and Cash Equivalents	$	3,805,654	$	53,674
Marketable Securities		26,158,264		16,080,061
Loan Receivable - Current Portion		—		396,336
Prepaid Expenses		16,430		53,398
Total Current Assets		29,980,348		16,583,469
Property and Equipment - Net		455,758		479,328
Loans Receivable - Long term		9,346,113		10,094,596
Real Estate Held for Investment		1,364,497		1,350,799
Other Assets		29,726		29,428
Total Assets	$	41,176,442	$	28,537,620
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Other Payables		20,704		16,436
Accrued Expenses		71,104		71,164
				—
Total Current Liabilities		91,808		87,600
Stockholders’ Equity
Common Stock - 100,000,000 shares Authorized; Par Value $.001; 57,671,744 Issued and Outstanding at March 31, 2007 and December 31, 2006		57,672		57,672
Additional Paid-In Capital		13,078,373		13,078,373
Retained earnings		5,959,381		3,579,182
Accumulated Other Comprehensive Income		21,989,208		11,734,793
Total Stockholders’ Equity		41,084,634		28,450,020
Total Liabilities and Stockholders’ Equity	$	41,176,442	$	28,537,620

1

China Finance, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Income

For the Quarters Ended March 31, 2007 (Unaudited) and March 31, 2006 (Unaudited)

	March 31, 2007 (Unaudited)			March 31, 2006 (Unaudited)
Revenue	$	200,325		$	28,292
Operating Expenses:
General and Administrative		407,478			200,518
Operating Loss		(207,153	)		(172,226	)
Other income Realized Gain on Marketable Securities		2,587,352			—
Net Income (Loss) Before Provision for Income Taxes		2,380,199			(172,226	)
Provision for Income Taxes		—			—
Net Income (Loss)		2,380,199			(172,226	)
Other Comprehensive Income
Unrealized Gain on Marketable Securities		10,130,692			5,056,119
Foreign Currency Translation Adjustment		123,723			76,928
Comprehensive Income	$	12,634,614		$	4,960,821
Earnings Per Share
Basic and Diluted	$	0.04		$	(0.003	)
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.

2

China Finance, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Stockholders’ Equity

For the Period from December 31, 2004 Through March 31, 2007

							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 Year		—		—		—		(4,149,379	)		—			(4,149,379	)
Other Comprehensive Income: Reclassification adjustment for Loss Included in Accumulated Other Comprehensive Income—CHID		—		—		—		—			1,129,402			1,129,402
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 income for the Year		—		—		—		4,222,760			—			4,222,760
Other Comprehensive Income: Unrealized Gains on Marketable Securities		—		—		—		—			11,007,556			11,007,556
Foreign Currency Translation Adjustments											416,511			416,511
Balance - December 31, 2006		57,671,744	$	57,672	$	13,078,373	$	3,579,182		$	11,734,793		$	28,450,020
Net Income for the period Ended March 31, 2007								2,380,199						2,380,199
Other Comprehensive Income: Unrealized Gains on Marketable Securities											10,130,692			10,130,692
Foreign Currency Translation Adjustments											123,723			123,723
Balance - March 31, 2007		57,671,744	$	57,672	$	13,078,373	$	5,959,381		$	21,989,208		$	41,084,634

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 Quarters Ended March 31, 2007 (Unaudited) and March 31, 2006 (Unaudited)

	March 31, 2007 (Unaudited)			March 31, 2006 (Unaudited)
Cash Flows from Operating Activities
Net Income (Loss)	$	2,380,199		$	(172,226	)
Non-Cash Revenue and Expenses
Depreciation and Amortization		58,963			3,598
Changes in Operating Assets and Liabilities
(Increase) decrease in Loans Receivable		1,144,819			(11,190,674	)
(Increase) decrease in Other Receivable		—			580,481
(Increase) decrease in Prepaid Expenses		36,670			(17,730	)
Increase (decrease) in Accrued Expense		(60	)		12,572
Increase (decrease) in Tax Payable		—			65
Net Cash Flows from Operating Activities		3, 620,591			(10,783,914	)
Cash Flows from Investing Activities
Acquisition of Property 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		131,389			28,169
Change in Cash and Cash Equivalents		3,751,980			(10,846,154	)
Cash and Cash Equivalents - Beginning of Period		53,674			11,331,650
Cash and Cash Equivalents - End of Period	$	3,805,654		$	485,496
Supplementary Cash Flow Disclosures:
Interest Paid	$	—		$	—
Taxes Paid	$	—		$	—

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

4

China Finance, Inc. and Subsidiaries

Notes to Condensed Financial Statements (Unaudited)

For the Quarter Ended March 31, 2007

Note A - Organization and Principal Activities

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

The Company’s principal business, which is primarily conducted through its wholly-owned subsidiary Shenzhen Hua Yin Guaranty and Investment Limited Liability Corporation (“SHY”), is (i) providing surety guarantees for privately-owned small and medium enterprises (“SMEs”) in the People’s Republic of China’s (“PRC” or “China”) entering into transactions whereby the SME will be acquired by a publicly-traded United States reporting company in a “reverse merger” or other merger and acquisition (“M&A”) transaction; (ii) providing loan guarantees to assist SMEs and individuals in the PRC in obtaining loans from Chinese banks for business operations and/or personal use; and (iii) making direct loans to SMEs for business operations.

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 February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115”. SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value at specified election dates. This Statement applies to all entities, including not-for-profit organizations. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. As such, the Company is required to adopt these provisions at the beginning of the fiscal year ended December 31, 2008. The Company is currently evaluating the impact of SFAS 159 on its consolidated financial statements.

Note D - Cash and Cash Equivalents

The Company considers cash and cash equivalents to include cash on hand and demand deposits with banks with an original maturity of three months or less.

	March 31, 2007
Cash and cash equivalents	$	1,349,039
Restricted Cash		2,456,615
Total	$	3,805,654

Restricted cash is in the form of bank demand deposits that are being used by the Company to secure loans made by banks to the Company’s loan guarantee clients.

5

On February 7, 2007, the Company entered into a loan guarantee agreement with Shenzhen YuZhiLu (“SYZL”) to guarantee a loan from Shenzhen Commercial Bank to SYZL in the amount of $500,000 with a term of six months. The Company waived its guarantee fee for this transaction. The Company deposited $500,000 (RMB3,870,000) in Shenzhen Commercial Bank on February 9, 2007 to secure the loan made by Shenzhen Commercial Bank to SYZL.

On March 30, 2007, the Company entered into a loan guarantee agreement with ShouGuang QingHe (“SGOH”) to guarantee a loan from Shenzhen Commercial Bank to SGOH in the amount of $1,295,000(RMB10,000,000) with a term of six months. The Company charged a loan guarantee fee of $38,345 (RMB296,100) for this transaction. The Company deposited $1,278,165 (RMB9, 870,000) in Shenzhen Commercial Bank on March 30, 2007 to secure the loan made by Shenzhen Commercial Bank to SGOH.

On April 12, 2007, the Company entered into another loan guarantee agreement with SYZL to guarantee a loan from Shenzhen Commercial Bank to SYZL in the amount of $660,450 (RMB 5,100,000) with a term of six months. The Company charged a loan guarantee fee of $19,814 (RMB153,000) for this transaction. The Company deposited $660,450 (RMB 5,100,000) in Shenzhen Commercial Bank on March 19, 2007 to secure the second loan made by Shenzhen Commercial Bank to SYZL.

Note E - Loan Receivable

The Company and Hong Kong TianYi Investment, Ltd. entered into a loan agreement on October 25, 2005. The original amount of the loan is $370,000 at the annual rate of 6% and the obligation unsecured had a term of one year, which was due on October 24, 2006. The full principal amount of the loan was paid in February 2007.

On March 31, 2006, the Company entered into a loan agreement with Shenzhen Kaibite Ltd. (“Kaibite”) pursuant to which the Company loaned Kaibite US$11,538,000 (RMB 90,000,000) for a period of two years at the annual interest rate of 9% (the “March 2006 Loan”). The March 2006 Loan is due on March 31, 2008. The Company will be repaid the principal together with accrued interest upon the due date. A portion of the loan with Kaibite ($1,144,819) was repaid in advance.

Note F - Property, Plant and Equipment

Property, plant and equipment consisted of the following as of March. 31, 2007:

	March 31, 2007
Electronic Equipment and Office Furniture, at Cost	$	55,556
Automobile		291,116
Less: Accumulated Depreciation		(30,157	)
PPE, net		316,515
Leasehold Improvement, Net		139,243
Net Property, Plant and Equipment		455,758

Note G - Marketable Securities

As of March 31, 2007, the marketable securities of the Company consisted of shares the Company has received as payment for providing surety guarantee services to five SMEs including 2,431,906 shares of China 3C Group (“CHCG”), 1,200,000 shares of Universal Travel Group (“UTVG”), 480,000 shares of Home System Group (“HSYT”), 1,669,500 shares of Gulf Resources, Inc. (formerly DiversiFax, Inc.) (“GUFR”) and 3,480,750 shares of China Ivy School, Inc. (“CIVY”).

6

China 3C Group. The 2,431,906 shares of CHCG represent approximately a 5% interest in the current issued and outstanding common shares of CHCG. The CHCG shares were received as payment for surety guarantee services provided for CHCG’s December 21, 2005 merger transaction with Capital Future Development Limited. The closing price of the CHCG shares was $0.10 per share on December 21, 2005. In March 2007, the Company sold 524,889 shares of CHCG. As of March 31, 2007, the closing price of shares of CHCG common stock was $6.29 per share. Since the remaining 1,907,017 shares of CHCG shares are reasonably expected to qualify for sale within one year, the securities are not considered restricted for the purposes of SFAS No. 115, and, accordingly, quoted market prices have been used to determine fair value.

Universal Travel Group. The 1,200,000 shares of UTVG represent approximately a 6% interest in the current issued and outstanding common shares of UTVG. The UTVG shares were received as payment for surety guarantee services provided for UTVG’s July 12, 2006 merger transaction with Full Power Enterprise Global Limited. The closing price of the UTVG shares was $0.60 per share on July 12, 2006. As of March 31, 2007, the closing price of shares of UTVG common stock was $1.74 per share. Since the UTVG shares are reasonably expected to qualify for sale within one year, the securities are not considered restricted for the purposes of SFAS No. 115, and, accordingly, quoted market prices have been used to determine fair value.

Home Systems Group. The 480,000 shares of HSYT represent approximately a 6% interest in the current issued and outstanding common shares of HSYT. The HSYT shares were received as payment for surety guarantee services provided for HSYT’s August 4, 2006 merger transaction with Oceanic International (Hong Kong) Limited. The closing price of the HSYT shares was $1.00 per share on August 4, 2006. As of March 31, 2007, the closing price of shares of HSYT common stock was $4.10 per share. Since the HSYT shares are reasonably expected to qualify for sale within one year, the securities are not considered restricted for the purposes of SFAS No. 115, and, accordingly, quoted market prices have been used to determine fair value.

Gulf Resources, Inc.The 1,669,500, shares of GUFR represent approximately a 6% interest in the current issued and outstanding common shares of GUFR. The GUFR shares were received as payment for surety guarantee services provided for GUFR’s December 10, 2006 merger transaction with Haoyuan Chemical Company Limited. The closing price of the GUFR shares was $1.10 per share on December 8, 2006. As of March 31, 2007, the closing price of shares of GUFR common stock was $2.20 per share. Since the GUFR shares are reasonably expected to qualify for sale within one year, the securities are not considered restricted for the purposes of SFAS No. 115, and, accordingly, quoted market prices have been used to determine fair value.

China Ivy School.The 3,480,750 shares of CIVY represent approximately a 6% interest in the current issued and outstanding common shares of CIVY. The CIVY shares were received as payment for surety guarantee services provided for CIVY’s October 12, 2006 share exchange transaction with Brighter International Limited (“BIL”). Pursuant to the share exchange agreement between CIVY and BIL shareholders, the BIL shareholders will receive 55,250,000 newly issued common shares of CIVY valued at approximately USD$27,625,000 in exchange for surrendering all their ownership in BIL. Therefore, CIVY shares were valued as $0.50 per share on October 12, 2006 even though the closing price on that date was $1.50 per share. As of March 31, 2007, the closing price of shares of CIVY common stock was $0.90 per share. Since the CIVY shares are reasonably expected to qualify for sale within one year, the securities are not considered restricted for the purposes of SFAS No. 115, and, accordingly, quoted market prices have been used to determine fair value.

The basis and fair market value of marketable securities as of March 31, 2007 consisted of the following: 

	March 31,2007
Basis: CHCG	$	243,191
HSYT	$	480,000
UTVG	$	720,000
CIVY	$	1,740,375
GUFR	$	1,836,450
Add: Unrealized Gain	$	21,138,248
Fair Market Value	$	26,158,264

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Note H - 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, 2007	Surety Guarantee			Loan Guarantee			General Unallocated			Consolidated
	$			$			$			$
Revenue					200,325			-			200,325
Operating Expenses		50,136			195,925			161,417			407,478
Other Income		2,587,352									2,587,352
Net Income(Loss)		2,537,216			4,400			(161,417	)		2,380,199
Total Assets		26,168,195			14,921,406			86,841			41,176,442
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

All of the Company’s revenues were generated from the PRC for the period ended March 31, 2007. Revenues are attributed to countries based on the location of the clients. All long term assets are located in the PRC.

Note I - Other Matters

The Company has historically accepted shares of stock from its client corporations as payment for surety guarantee services in lieu of cash (the “Payment Securities”). The value of the Payment Securities in relation to the Company’s total assets is a factor in whether or not the Company would become subject to the Investment Company Act of 1940, as amended (the “1940 Act”). The 1940 Act generally defines “investment companies” as those companies (i) whose investments and other securities exceed 40% of total assets (excluding cash and government securities) and (ii) who are in the business of investing, reinvesting, owning, holding, or trading in securities. Companies that meet the definition of “investment company” under the 1940 Act are required to register as such under the 1940 Act, and to conduct their business pursuant to the regulations of the 1940 Act. Due to the growth in the value of the Payment Securities and, therefore, a growth in income from the Payment Securities, the percentage of the value of the Company’s assets and income that is a result of the Payment Securities has increased and may continue, from time to time, to exceed the limits set by the 1940 Act. The Company’s management has, therefore, determined that it is in the best interests of the Company and shareholders to register as an investment company and is in the process of preparing to do so.

8

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.

Background and General

The Company’s principal business is providing financial support and services - primarily in the form of surety guarantees, loan guarantees, or short-term loans - to privately owned small and medium sized enterprises in China (“SMEs”) when they seek access to capital or to be acquired by a United States reporting company. In a typical transaction, the Company provides surety guarantee services that seek to reduce or eliminate the financial risks associated with the substantial expenses an SME incurs in pursuing a merger or other transaction with a U.S. reporting company or otherwise seeking entry into the U.S. capital markets system.

The Company is a Utah corporation with its principal place of business in New Jersey; however, the Company provides its services through its wholly-owned subsidiary, Shenzhen Hua Yin Guaranty and Investment Limited Liability Corporation (“SHY”), which is located in the Shenzhen region of China. Shenzhen has been designated as one of the three high-tech development centers, along with Shanghai and Beijing, and, with a population of about 53 million, Shenzhen has become a manufacturing and exporting center in China, specializing in technology. We believe that SHY’s location in this fast growing region of China presents the Company with unique opportunities for the development of its business.

SMEs are becoming an important part of China’s economy, and the growth of SMEs has generated a demand for capital, which we believe provides us with a significant business opportunity. The financial guarantee industry in China is relatively new but has been growing due to the lack of a standardized, easily accessible credit system and increasing demand for capital from China’s SMEs. Recognizing the limited financial opportunities available to SMEs, the Chinese central government created a network of credit guarantee agencies in the late 1990s under the auspices of the SME Bureau of the State Economic and Trade Commission (“SETC”). The SETC maintains a listing of the types of companies that can apply for a guarantee. After checking a company’s financial background using data provided by the State Administration for Industry and Commerce and reviewing the proposed project, a Chinese guarantee agency uses the SETC’s money to guarantee the SME’s bank loan.

Under the SETC’s criteria, we believe that only a small number of China’s SMEs actually qualify for a guarantee. We believe that the difficulty of qualifying for support under the presently established SETC criteria creates an opportunity for private financial guarantee providers to better serve SMEs in this sector.

Products and Services

The financial guarantee and loan services that the Company provides through its wholly-owned subsidiary, SHY, are described more fully below.

9

Surety Guarantees. The Company provides surety guarantee services to Chinese SMEs seeking to become publicly-traded companies in the United States by being acquired by a United States reporting company in a “reverse merger” or other M&A transaction. The surety guarantee business generates revenues through fees, which typically are based on a percentage of the transaction. Although the Company may be paid in cash for its surety guarantee services, the Company generally expects that it will receive compensation for its surety guarantee services in the form of stock from our client companies (“Payment Securities”). Our clients generally pay for our surety guarantee services with Payment Securities because they do not have sufficient cash flow at the time the services are rendered to pay for the surety guarantee services. To the extent that the Company receives Payment Securities as compensation, the Company generally allows the Payment Securities to mature in the market for a period of time (normally, about one year), then typically will strategically sell the Payment Securities taking into consideration the performance of the SME and whether the Payment Securities are accurately priced in the market. Some stock may be restricted for up to one year, so the Payment Securities that the company receives as compensation will rarely be sold before about two years from the date the Company acquires them.

Loan Guarantees. We also provide guarantees to SMEs and individuals obtaining loans from Chinese banks for their business operations and/or personal use. In exchange for the Company’s guarantee services, the borrower pays the Company a certain percentage of the loan amount as an upfront loan guarantee fee. Loan maturities for loans guaranteed by the Company generally range from one to five years, and are secured by bank deposits made by the Company. If a borrower fails to fulfill its obligations to a lender, the bank will take possession of the Company’s deposit.

Loans. The Company may make Loans to SMEs from time to time. In general, the Company expects its loans will typically be made to SMEs to which it has provided or will provide surety guarantee services. Loans may be made to SMEs that the Company determines have been profitable in the past and have attractive prospects for future profitability, have experienced or are experiencing or projected to experience growth, and have an attractive credit profile. To the extent Loans are made to SMEs to which the Company provides guarantee services, the Loans may be made before or after the Reverse Merger Transactions are consummated. The Company evaluates the creditworthiness of the SMEs to which it considers making loans using a number of criteria related to the strength of the SMEs management, employees, financial status and overall performance.

General and Trend Information

The Company’s revenues are generated primarily from surety guarantees, loan guarantees, and loans. There are several principal factors affecting the revenue and financial status of the Company:

1. The Company’s overall financial status and revenue will be affected by the ability of the Company to find suitable candidates for its surety guarantee and loan guarantee services.

2. The overall financial status and revenue of the Company will be adverselyaffected if its clients default on loans guaranteed by the Company, or if the transactions guaranteed by the Company pursuant to its surety services fail to be completed.

3. The financial status of the Company will be adversely affected if the debtor of the March 2006 Loan defaults on the loan.

4. To the extent the Company receives securities as payment for the performance of surety guarantee services, the financial status of the Company will be affected by the volatility of these securities for as long as they are held by the Company.

With the increasing difficulty of obtaining both indirect and direct financing in China, an increasing number of Chinese SMEs, especially private enterprises, opt to go overseas to become publicly-traded companies. If this trend holds true, the Company may experience an increase in the number of surety guarantee clients it serves, and, subsequently, a growth in its revenues and income from its surety guarantee business.

10

As discussed above, there are currently a limited number of similar surety guarantee providers in the market, but, in the future, there might be other new players that enter into the surety guarantee business and compete with us despite the high intellectual and financial capital required. Currently, our loan guarantee business does compete with several loan guarantee providers in the Shenzhen financial guarantee market, which are larger in size and have greater financial resources than we do. In order to better compete, the Company has determined to allocate additional resources toward evaluating additional loan guarantee customers and expanding the loan guarantee business.

As discussed above, the Company’s management is monitoring and evaluating the Company’s status under the 1940 Act, and the Company is in the process of preparing to register under the 1940 Act.

Net Revenues

The Company’s net revenue for the quarters ended March 31, 2007 and 2006 was $200,325 and $28,292, respectively.  The revenue for the quarters ended March 31, 2007 and 2006 were derived primarily from our loan guarantee and loan transactions, respectively. The increase in net revenues between the two quarters is the result of receiving interest payments on the March 2006 Loan in March 2007.

Net Income

Net income for the quarters ended March 31, 2007 and 2006 were 2,380,199 and ($172,226), respectively.

Liquidity and Capital Resources

As of March 31, 2007, we had cash and cash equivalents of $3,805,654 as compared to $485,496 as of March 31, 2006. Cash flow from operating activities was $3, 620,591 for the quarter ended March 31, 2007 as compared to (10,783,914) for the same period in 2006. The large increase in cash flow is a result of selling 524,889 shares of CHCG in March 2007 and receiving a $1,144,819 portion of the loan with Kaibite in February 2007.

We expect that our cash and cash equivalents will be sufficient to satisfy our cash requirements for the next twelve months because (i) we anticipate being able to sell our CHCG Payment Securities; (ii) we plan to collect on the March 2006 Loan; and (iii) if needed, we could obtain a line of credit from a bank. In the long run, our liquidity will be dependent on our successful execution of 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.

There are several factors affecting the Company’s cash flows:

1. The number and total value of (a) loans for which the Company provides guarantee services, and (b) reverse merger and M&A transactions for which the Company provides surety services.

2. The amount of time it takes to complete the reverse merger and M&A transactions for which the Company provides surety guarantees.

3. The amount of time it takes for the Company to dispose of any securities received by the Company as compensation for its surety services, which may depend, in part, on the growth and development of the companies to which we provide surety guarantee services and the market for their common shares.

Operating 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 quarters ended March 31, 2007 and March 31, 2006 were $407,478 and $200,518, respectively. We incurred these selling, general and administrative expenses in connection with executing our business plan. We are subject to all of the risks, expenses, delays, problems and difficulties frequently encountered in the establishment of a business. The causes of the increase in SG&A include amortization increases and the depreciation of the Company’s automobile.

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The Company may incur significant costs to the extent that it continues to take steps to avoid investment company status and may suffer other adverse consequences if it is deemed to be an “investment company” under the 1940 Act and does not register. The Company’s management has determined that it is in the best interests of the Company and its shareholders to register as an investment company under the 1940 Act, and the Company is in the process of preparing to register under the 1940 Act.

Tax Implications of the Company’s Business

Taxes on profits earned by our wholly owned subsidiary, SHY, are calculated in accordance with taxation principles currently effective in the PRC. We expect that the Chinese government will continue its stable financial policy, move forward with its reform of its tax system, and continue to emphasize financial and economic efficiency. The essential aim of the tax policy of China is to sustain current stable economic and social development pace. Specifically, in terms of the reform of the tax collection policy, the principles underlying such reform include simplifying the tax system, expanding the tax foundation, lowering the tax rate, and implementing a strict collection system. These principles are aimed at immediate and efficient economic development, the development of science and technology, and economic usage of energy and resources. We expect that the Add-Value Tax system will be continued in China.

We account for income taxes paid to tax authorities 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 and is exempt from all taxes and withholding taxes in the British Virgin Islands, paying only registration fees and annual license fees which amount to $1,300 per annum.

We account for income taxes payable on U.S. taxable income in accordance with SFAS No. 109, “Accounting for Income Taxes,” 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 (“GAAP”). 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 as of 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.

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 adopted SEC Release No. 33-8098 requires us to identify accounting estimates we make in applying our accounting policies and any accounting policy that we adopt 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 were to adopt an accounting policy that would materially impact our financial disclosures, we would have to disclose certain information with respect to such newly adopted accounting policy, including: the accounting principle adopted and method of applying it; the reasons giving rise to the adoption; the impact of the adoption; and the choices of accounting principles that the Company examined.

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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 both the debtor and creditor in a troubled debt restructuring. FAS 15 requires adjustments in payment terms from a troubled debt restructuring, generally, to be considered adjustments of the yield (effective interest rate) of the loan. To the extent that 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. FIN 45 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 has assumed 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.

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 SMEs. 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 arrangements, which, under GAAP, 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 off-balance sheet arrangements would result, primarily, 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.

Arrangements such as those described above would require accounting treatment under FIN 45, pursuant to which we would be required to recognize: (i) the fair value of guarantees issued or modified after December 31, 2002 for non-contingent guaranty obligations, and (ii) 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 as of March 31, 2007 requiring recognition or disclosure under FIN 45. As of March 31, 2007, we have guaranteed the timely re-payment of principal and interest to a bank by two of our clients on three loans, 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.

Investment Company Act Considerations

If the Company were to be deemed an investment company, the Company would become subject to registration under and compliance with the Investment Company Act of 1940 (the “1940 Act”) unless an exclusion or safe harbor provision applied. As a consequence, the Company would be prohibited from engaging in certain activities including issuing securities as it has in the past and might be subject to civil and criminal penalties for noncompliance if it is not registered. 

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The Company has taken steps in the past in an effort to avoid being deemed an “investment company” under the 1940 Act. Whether or not a company is in the business of investing, reinvesting, owning, holding, or trading in securities is primarily a facts and circumstances test. Among the factors considered in making this determination are: (i) the company's historical development, (ii) its public representations of policy, (iii) the activities of its officers and directors, (iv) the nature of its present assets, and (v) the sources of its present income. While the Company, after considering these factors, does not believe that its current business plan would cause it to be in the business of investing, reinvesting, owning, holding or trading in securities, the Company, due to the nature of its current assets and income, has determined to register as an “investment company” under the 1940 Act. Previously, the Company has taken affirmative steps to avoid being deemed to be an “investment company”. For example, the Company has been relying on Rule 3a-2 under the 1940 Act (the “Transient Investment Company Rule”) for a safe harbor exemption from the definition of “investment company” under the 1940 Act because appreciation in the value of the Company’s Payment Securities and the March 2006 Loan had caused the Company’s “investment securities” to exceed 40% of its total assets (excluding cash and government securities).  A company may rely on the Transient Investment Company Rule for a period of up to one year once during any three year period.

The Company’s management has been monitoring its business, the composition of its assets, sources of its income and its business prospects and has determined that it is in the best interests of the Company and its shareholders to register as an investment company under the 1940 Act. The Company’s securities holdings constitute “investment securities” under the 1940 Act. A company may be deemed to be an investment company if: (i) its “investments securities” exceed 40% of its total assets (excluding cash and government securities) and (ii) it is in the business of investing, reinvesting, owning, holding, or trading in securities.  Due to the value of the Company’s Payment Securities and the value of the March 2006 Loan, the Company’s “investment securities” have exceeded 40% of its total assets (excluding cash and government securities) as of December 31, 2006. Therefore, the Company may be deemed to be an “investment company” if it is deemed to be in the business of investing, reinvesting, owning, holding, or trading in securities. Because the Company’s business plan may result in the continued receipt of securities as payment for its surety guarantee services, the Company’s assets and income are likely to cause it to be deemed to be an “investment company”, and it can no longer rely on the Transient Investment Company Rule.

The Company’s management has considered the implications of registering the Company under the 1940 Act and has determined that it is in the best interest of the Company and its shareholders to register. The Company is in the process of preparing to file a registration statement under the 1940 Act, which will subject the Company to additional regulation under the 1940 Act.

Item 3. Controls and Procedures

Our management has evaluated, with the participation of our principal executive and financial officers, the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based on this evaluation, these officers have concluded that, as of March 31, 2007, our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by our company in reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

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PART II - OTHER INFORMATION

Item 6. Exhibits

Exhibits

2.1	Agreement for the Sale and Purchase of Shares in Value Global International Limited, dated as of August 5, 2004, between Kubla Khan, Incorporated and Juxiang Ruan, Top Interest International Limited, Zuhong Xu, and Zaozhen Fang, the shareholders of Value Global International Limited, Value Global International Limited and Qian Fan and Huan Ya Tong Investment Development Co., Limited. (Incorporated herein by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on August 20, 2004).
3.1.1	Articles of Incorporation (Incorporated herein by reference to Exhibit 3.1.1 to the Registrant’s Registration Statement on Form SB-2, filed with the SEC on September 19, 2000)
3.1.2	Amendment Articles of Incorporation (Incorporated herein by reference to Exhibit 3.1.2 to the Registrant’s Registration Statement on Form SB-2, filed with the SEC on September 19, 2000)
3.2	Bylaws (Incorporated herein by reference to Exhibit 3.2 to the Registrant’s Registration Statement on Form SB-2, filed with the SEC on September 19, 2000)
4.1*	Kubla Khan, Inc. 2004 Equity Incentive Plan (Incorporated herein by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form S-8, filed with the SEC on June 10, 2004).
10.1	Strategic Partnership Agreement, dated as of December 15, 2004, between Onanma Services Limited and China Finance, Inc. (Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Annual Report on Form 10-KSB, filed with the SEC on March 28, 2005).
10.2*	Employment Agreement, dated as of October 12, 2004, between China Finance, Inc. and Zhiyong Xu (Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K/A, filed with the SEC on November 8, 2004).
10.3	Noncompetition, Nonsolicitation and Nondisclosure Agreement dated as of October 12, 2004, between China Finance, Inc. and Zhiyong Xu (Incorporated herein by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K/A, filed with the SEC on November 8, 2004).
10.4*	Employment Agreement, dated as of October 12, 2004, between China Finance, Inc. and Alex Hu (Incorporated herein by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K/A, filed with the SEC on November 8, 2004).
10.5	Noncompetition, Nonsolicitation and Nondisclosure Agreement dated as of October 12, 2004, between China Finance, Inc. and Alex Hu (Incorporated herein by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K/A, filed with the SEC on November 8, 2004).
10.6*	Employment Agreement, dated as of October 12, 2004, between China Finance, Inc. and Charles Wang (Incorporated herein by reference to Exhibit 10.6 to the Registrant’s Current Report on Form 8-K/A, filed with the SEC on November 8, 2004)
10.7	Noncompetition, Nonsolicitation and Nondisclosure Agreement dated as of October 12, 2004, between China Finance, Inc. and Charles Wang (Incorporated herein by reference to Exhibit 10.7 to the Registrant’s Current Report on Form 8-K/A, filed with the SEC on November 8, 2004)
10.8	Resignation letter of Xiaohin Liu dated October 11, 2004 (Incorporated herein by reference to Exhibit 10.10to the Registrant’s Current Report on Form 8-K/A, filed with the SEC on November 8, 2004)
10.9	Resignation letter of ZhongPing Wang dated October 11, 2004 (Incorporated herein by reference to Exhibit 10.11 to the Registrant’s Current Report on Form 8-K/A, filed with the SEC on November 8, 2004)
10.10*	Employment Agreement and Noncompetition, Nonsolicitation and Nondisclosure Agreement, dated as of March 17, 2005, between the Registrant and Liang Liao (Incorporated herein by reference to Exhibit 10.12 to the Registrant’s Current Report on Form 8-K, filed with the SEC on March 17, 2005).
10.11*	Employment Agreement and Noncompetition, Nonsolicitation and Nondisclosure Agreement, dated as of March 17, 2005, between the Registrant and Li Guo (Incorporated herein by reference to Exhibit 10.13 to the Registrant’s Current Report on Form 8-K, filed with the SEC on March 17, 2005).
10.12	Stock Sales Agreement dated as of October 5, 2005, between Value Global International Ltd and Galaxy View International Ltd. (Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-QSB, filed with the SEC on November 14, 2005).
31.1†	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2†	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32†	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 ____________________________

† Filed herewith.

* Represents a management contract or compensatory plan or arrangement.

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SIGNATURES

In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	CHINA FINANCE, INC. (Registrant)
Date: May 14, 2007	By:/s/ Zhiyong Xu                                                                 Name: Zhiyong Xu Title: Chief Executive Officer and Chairman of the Board (Principal Executive Officer)
Date: May 14, 2007	By:/s/ Liang Liao                                                                     Name: Liang Liao Title: Chief Financial Officer (Principal Financial Officer)

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