==============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-05749
-----------------------------------------
THE CHINA FUND, INC.
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
C/O STATE STREET BANK AND TRUST COMPANY
2 AVENUE DE LAFAYETTE
P.O. BOX 5049
BOSTON, MA 02206-5049
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(Address of principal executive offices)(Zip code)
Copy to:
Elizabeth A. Watson Leonard B. Mackey, Jr., Esq.
Secretary Clifford Chance US LLP
The China Fund, Inc. 31 West 52nd Street
4 Copley Place, 5th Floor New York, New York 10019-6131
CPH-0326
Boston, MA 02116
(Name and Address of Agent for Service)
Registrant's telephone number, including area code: (888) 246-2255
Date of fiscal year end: October 31
Date of reporting period: April 30, 2010
==============================================================================
ITEM 1. REPORT TO STOCKHOLDERS.
THE CHINA FUND, INC.
SEMI-ANNUAL REPORT
APRIL 30, 2010
(UNAUDITED)
THE CHINA FUND, INC.
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
Key Highlights 1
Asset Allocation 2
Industry Allocation 3
Chairman's Statement 4
Investment Manager's Statement 5
About the Portfolio Manager 7
Schedule of Investments 8
Financial Statements 14
Notes to Financial Statements 19
Other Information 30
Dividends and Distributions;
Dividend Reinvestment
and Cash Purchase Plan 32
</Table>
THE CHINA FUND, INC.
KEY HIGHLIGHTS (UNAUDITED)
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<Table>
<Caption>
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FUND DATA
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NYSE STOCK SYMBOL CHN
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LISTING DATE JULY 10, 1992
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SHARES OUTSTANDING 22,781,762
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TOTAL NET ASSETS (04/30/10) US$743.2 MILLION
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NET ASSET VALUE PER SHARE (04/30/10) $32.62
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MARKET PRICE PER SHARE (04/30/10) $28.54
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</Table>
<Table>
<Caption>
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TOTAL RETURN(1)
- -----------------------------------------------------------------------------------------------
PERFORMANCE AS OF
04/30/10: NET ASSET VALUE MARKET PRICE
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1-Year 71.55% 63.19%
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3-Year Cumulative 51.32% 57.03%
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3-Year Annualized 14.81% 16.23%
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5-Year Cumulative 195.80% 140.26%
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5-Year Annualized 24.22% 19.16%
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10-Year Cumulative 615.11% 783.57%
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10-Year Annualized 21.74% 24.34%
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</Table>
<Table>
<Caption>
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DIVIDEND HISTORY
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RECORD DATE INCOME CAPITAL GAINS
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12/24/09 $0.2557 --
- -----------------------------------------------------------------------------------------------
12/24/08 $0.4813 $5.3361
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12/21/07 $0.2800 $11.8400
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12/21/06 $0.2996 $3.7121
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12/21/05 $0.2172 $2.2947
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12/22/04 $0.1963 $3.3738
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12/31/03 $0.0700 $1.7100
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12/26/02 $0.0640 $0.1504
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12/31/01 $0.1321 --
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12/31/00 -- --
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12/31/99 $0.1110 --
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12/31/98 $0.0780 --
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12/31/97 -- $0.5003
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12/31/96 $0.0834 --
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12/29/95 $0.0910 --
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12/30/94 $0.0093 $0.6006
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12/31/93 $0.0853 $0.8250
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12/31/92 $0.0434 $0.0116
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</Table>
(1) Total investment returns reflect changes in net asset value per share or
market price, as the case may be, during each period and assumes that dividends
and capital gains distributions, if any, were reinvested in accordance with the
dividend reinvestment plan. The net asset value per share percentages are not an
indication of the performance of a shareholder's investment in the Fund, which
is based on market price. Total investment returns do not reflect the deduction
of taxes that a stockholder would pay on Fund distributions or the sale of Fund
shares. Total investment returns are historical and do no guarantee future
results.
1
THE CHINA FUND, INC.
ASSET ALLOCATION AS OF APRIL 30, 2010 (UNAUDITED)
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<Table>
<Caption>
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TEN LARGEST LISTED EQUITY INVESTMENTS *
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1. Huiyin Household Appliances Holdings Co., Ltd. 7.31%
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2. Sinopharm Medicine Holding Co., Ltd. 4.82%
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3. China Medical System Holdings, Ltd. 4.76%
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4. Wumart Stores, Inc. 4.33%
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5. Ping An Insurance (Group) Company of China, Ltd. 4.21%
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6. China Shineway Pharmaceutical Group, Ltd. 3.07%
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7. Shandong Weigao Group Medical Polymer Co., Ltd. 2.94%
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8. China Fishery Group, Ltd. 2.88%
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9. Ruentex Development Co., Ltd. 2.82%
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10. Far Eastern Department Stores, Ltd. 2.32%
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</Table>
<Table>
<Caption>
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DIRECT INVESTMENTS *
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1. Ugent Holdings, Ltd. 3.07%
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2. HAND Enterprise Solutions, Ltd. Preferred 1.71%
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3. Qingdao Bright Moon Seaweed Group Co., Ltd. 1.24%
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4. China Silicon Corp., Series A Preferred 0.00%
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5. China Silicon Corp., Common Stock 0.00%
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6. China Silicon Corp., Warrants 0.00%
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7. HAND Enterprise Solutions, Ltd., Common Stock 0.00%
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</Table>
* Percentages based on net assets at April 30, 2010.
2
INDUSTRY ALLOCATION (UNAUDITED)
- --------------------------------------------------------------------------------
(Pie Chart)
<Table>
Health Care 21.4
Consumer Discretionary 16.3
Consumer Staples 17.7
Financials 15.6
Industrials 9.6
Information Technology 8.5
Other 3.2
Energy 2.0
Materials 2.5
Utilities 2.1
Telecommunications 1.1
</Table>
Fund holdings are subject to change and percentages shown above are based on
total net assets as of April 30, 2010. A complete list of holdings as of April
30, 2010 is contained in the Schedule of Investments included in this report.
The most current available data regarding portfolio holdings can be found on our
website, www.chinafundinc.com. You may also obtain holdings by calling 1-888-
246-2255.
3
THE CHINA FUND, INC.
CHAIRMAN'S STATEMENTS (UNAUDITED)
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- --------------------------------------------------------------------------------
Dear Stockholders,
After the very strong recovery of the preceding period, the past six months were
a more muted period for the Greater China markets. I am pleased to report,
however, that the Fund's performance was in no way muted. With a return of
21.2%, the Fund outperformed the MSCI Golden Dragon by almost 18 percentage
points on an arithmetic basis.
The Fund's strong performance owed a great deal to its focus on healthcare and
domestic consumption -- two themes for which your manager has repeatedly made
the case in his reports. As the Chinese government's healthcare reforms advance,
your Fund's early investments in this sector are bearing abundant fruit. So too
with the domestic theme: the rising domestic consumption that is accompanying
China's growing urbanization and expanding middle class is benefiting a broad
range of the fund's consumer-oriented holdings. The Chinese government is
continuing to support consumers through various subsidy programs; and we believe
that the portfolio is positioned to benefit.
Another particularly gratifying element in the Fund's success was the
contribution from the direct-investment segment of the portfolio. During the
period, Huiyin Household Appliances completed its listing on the Hong Kong Stock
Exchange. Its performance since the listing made it one of the Fund's best
performers over the past six months. Unfortunately the portfolio's worst
performer was also an unlisted company, China Silicon, which we have decided to
mark to zero, after evidence emerged of gross mismanagement by local partners. A
new management has been introduced, and the company is re-organizing under the
Chinese equivalent of chapter 11. Your manager is confident that the Fund's
remaining unlisted holdings are progressing well.
Since the start of this year, Chinese markets have been prone to fits of anxiety
over the first signs of monetary tightening and the various measures taken by
the government to cool the housing market in the biggest cities. Your manager
expects confidence to return when it becomes apparent that inflation is not
likely to run out of control and thus that harsh tightening measures will not be
required. I therefore look forward to the rest of the year with considerable
confidence. I hope to be reporting on another strong period of absolute and
relative returns in six months' time.
Yours sincerely,
James Lightburn
Chairman
4
THE CHINA FUND, INC.
INVESTMENT MANAGERS' STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
REVIEW OF LISTED AND DIRECT INVESTMENTS
REVIEW
The six months to the end of April constituted a volatile period for Chinese
markets, which produced a small positive return. Happily, though, this was a
very strong period for the Fund, in both relative and absolute terms. A positive
return of 21.2% represented considerable outperformance of the Fund's benchmark.
Chinese markets rallied hard into the end of 2009, before falling sharply in
January. The ostensible cause of the decline was the first sign of monetary
tightening, when the authorities raised the banks' reserve-requirement ratio by
50 basis points in both January and February. But these measures were mild, and
profit-taking ahead of the Chinese New Year holiday appears to have been the
main factor. Thereafter, a revival on thin volumes allowed the index to eke out
a modestly positive return by the end of the period, despite further losses in
April. Overall, the MSCI Golden Dragon rose by 3.9%.
The domestic A-share market was significantly weaker, falling by 7.1%. The
Shanghai 180 is now down by 17.5% from its peak last August, since when the S&P
500 is up 18%. This poor performance seems at odds with strong earnings growth
(total profits for all A-share listed stocks in the first quarter of 2010
increased by 67% year on year), and a buoyant economy (first-quarter GDP up
11.9% and retail sales up 17.9% year on year) with limited inflation (March CPI
+2.4%).
With a rise of 11.4% over the six months, the Taiwanese market outperformed the
rest of the Greater China region. The island's economic data was stronger than
expected. Earnings for all of Taiwan's listed companies bounced back to NT$330
billion in the first quarter of 2010, up some 17 times from the same period in
2009 (a bleak time, admittedly). More surprisingly, profits also grew by 9%
quarter on quarter, thanks to buoyant demand from mainland China over the
Chinese New Year, as well as a recovery in orders from developed countries.
Exports in the first quarter grew by 50% year on year, but exports to China grew
by 62%, helped by preferential treatment from Beijing, which is keen to improve
cross-strait ties. Although the ruling Kuomintang Party has encountered some
difficulties over the past six months, progress in the rapprochement with the
mainland continued, with the signing of a cross-strait memorandum of
understanding for the financial industry and progress towards a free-trade
agreement, which may be signed as early as the summer.
In the portfolio, healthcare remains one of the main themes. The Fund's top
performer was traditional-medicine group China Shineway, which continues to reap
the benefits of having some of its products included in the government's
'essential drug list' for hospitals and clinics. Another portfolio stalwart,
Shandong Weigao, which makes medical consumables, has also been profiting from
the government's increased spending on healthcare, as have drug distributors
Sinopharm and China Medical System.
Domestic consumption was another successful theme over the period. Huiyin
Household Appliances completed its listing and made a strong debut on the Hong
Kong market; government subsidies for the purchase of home appliances are
continuing to benefit companies that sell them. Our H-shares in Wuhan retailer
Wumart Stores also performed well, as did two Singapore-listed stocks,
confectioner Hsu Fu Chi and China Fishery. Abalone farmer Zhangzidao Fishery
5
THE CHINA FUND, INC.
INVESTMENT MANAGERS' STATEMENTS (CONTINUED) (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
REVIEW OF LISTED AND DIRECT INVESTMENTS
did well too. In Taiwan, the pick of our holdings was Ruentex Development, which
is a beneficiary of the island's booming property market.
Negatives included Taiwan's Far Eastern Department Store. The shares performed
poorly because of an outstanding court case -- which we expect to be soon
resolved. We continue to hold the stock. Otherwise, many of the main detractors
from relative performance were strong stocks that we didn't hold over the
period.
OUTLOOK
There have been some interesting economic developments recently. China's export
performance in March (up 24% year on year) was rather flattered by comparison
with the dark period at the start of 2009. More notable was the 66% year-on-year
growth in imports, which resulted in China's first trade deficit since May 2004.
Economists were quick to dismiss this as a temporary aberration, but, with
Western demand likely to remain constrained, Chinese costs rising and the
government keen to boost domestic consumption, it seems to me to be a sign of
things to come.
Overall, the first-quarter trade surplus collapsed by 77% year on year to
US$14.5 billion. Such a trend, if it continued, would reframe the debate on
renminbi appreciation. But for now, the government continues to be fixated with
holding down the yuan, which will lead to lower-than-required interest rates.
And with negative real rates, money will find its way into asset markets,
administrative measures against property speculation notwithstanding.
The Fund is now 97% invested with holdings in 59 companies. After the successful
listing of Huiyin Appliances, our direct investments now make up just 6% of the
portfolio. Some substantial new private-equity investments are in the pipeline,
mostly in the food & beverage sector, but none seem likely to conclude before
the third quarter.
6
THE CHINA FUND, INC.
ABOUT THE PORTFOLIO MANAGER (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LISTED AND DIRECT INVESTMENT MANAGER
Mr. Chris Ruffle serves as the portfolio manager for the Fund's portfolio of
listed and direct securities. Mr. Ruffle joined Martin Currie in 1994. He is a
Chinese and Taiwanese equity specialist with over 15 years investment experience
in Asia. Fluent in Mandarin, Mr. Ruffle has worked in the Far East since 1983.
He worked originally in Beijing and Shanghai and then in Australia for a metal
trading company. He then moved to Warburg Securities in 1987 as an analyst in
Tokyo, before establishing Warburg's office in Taiwan. Mr. Ruffle also manages
The Martin Currie China Hedge Fund and the China "A" Share Fund.
Mr. Shifeng Ke serves as the portfolio manager for the Fund's portfolio of
listed and direct securities. Mr. Ke joined Martin Currie's Asia team in 1997
and, until 2002, co-managed the China Heartland Fund, which at that time was the
only offshore fund to access China's A-share market. In 2006, Martin Currie,
Chris Ruffle and Shifeng established MC China Limited: a joint venture dedicated
to running our range of specialist China strategies. He is co-manager of the
Fund, Martin Currie's A-share products, Martin Currie's China hedge fund and the
micro-cap China Development Capital Partnership. Shifeng practiced law before
moving to China's ministry of labour and social security in 1990, where he
worked to develop an investment policy for pension funds.
7
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS
APRIL 30, 2010 (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Table>
<Caption>
NAME OF ISSUER AND TITLE OF ISSUE SHARES VALUE (NOTE A)
- --------------------------------- ------ --------------
COMMON STOCK AND OTHER EQUITY INTERESTS
HONG KONG
CONSUMER DISCRETIONARY -- (11.5%)
FU JI Food & Catering Services*#(2)............ 5,462,000 $ --
Huiyin Household Appliances Holdings Co.,
Ltd.*+....................................... 160,413,750 54,338,322
Intime Department Store Group Co., Ltd.(1)..... 12,568,629 12,141,100
Ports Design, Ltd.(1).......................... 4,549,500 11,344,305
Shangri-La Asia, Ltd.(1)....................... 3,061,555 5,993,694
Yorkey Optical International Cayman, Ltd.#..... 7,758,926 1,648,900
------------
85,466,321
------------
CONSUMER STAPLES -- (2.8%)
Chaoda Modern Agriculture (Holdings), Ltd.(1).. 10,507,357 12,179,932
Natural Beauty Bio-Technology, Ltd.#........... 47,710,000 8,602,929
------------
20,782,861
------------
ENERGY -- (1.1%)
Fushan International Energy Group, Ltd.(1)..... 12,018,000 8,606,288
------------
HEALTH CARE -- (5.5%)
China Pharmaceutical Group, Ltd.(1)............ 12,918,000 9,533,641
China Shineway Pharmaceutical Group, Ltd. ..... 7,372,000 22,787,960
Golden Meditech Co., Ltd.*#(1)................. 35,040,000 8,349,197
------------
40,670,798
------------
UTILITIES -- (2.1%)
Xinao Gas Holdings, Ltd.(1).................... 5,084,000 15,649,927
------------
TOTAL HONG KONG -- (Cost $91,985,641) 23.0% 171,176,195
----- ------------
HONG KONG -- "H" SHARES
CONSUMER STAPLES -- (4.3%)
Wumart Stores, Inc.#........................... 14,888,000 32,214,732
------------
FINANCIALS -- (0.8%)
China Pacific Insurance Group Co., Ltd.*....... 1,463,442 6,116,445
------------
HEALTH CARE -- (7.8%)
Shandong Weigao Group Medical Polymer Co.,
Ltd.#(1)..................................... 4,588,000 21,864,221
Sinopharm Medicine Holding Co., Ltd.*(1)....... 7,786,000 35,800,698
------------
57,664,919
------------
INDUSTRIALS -- (0.4%)
Anhui Expressway Co., Ltd.(1).................. 5,226,300 3,379,146
------------
</Table>
See notes to financial statements and notes to schedule of investments.
8
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
APRIL 30, 2010 (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Table>
<Caption>
NAME OF ISSUER AND TITLE OF ISSUE SHARES VALUE (NOTE A)
- --------------------------------- ------ --------------
COMMON STOCK AND OTHER EQUITY INTERESTS (CONTINUED)
HONG KONG -- "H" SHARES (CONTINUED)
MATERIALS -- (0.7%)
Zijin Mining Group Co., Ltd.(1)................ 6,402,000 $ 5,095,808
------------
TELECOMMUNICATIONS -- (1.1%)
ZTE Corp.(1)................................... 2,192,889 8,007,162
------------
TOTAL HONG KONG -- "H" SHARES -- (Cost
$51,791,534) 15.1% 112,478,212
----- ------------
TOTAL HONG KONG (INCLUDING "H" SHARES) --
(Cost $143,777,175) 38.1% 283,654,407
----- ------------
SINGAPORE
CONSUMER STAPLES -- (5.2%)
China Fishery Group, Ltd.#(1).................. 13,255,000 21,377,472
Hsu Fu Chi International, Ltd.#................ 9,484,000 17,095,147
------------
38,472,619
------------
FINANCIALS -- (0.5%)
Financial One Corp.*........................... 12,030,000 4,170,072
------------
INFORMATION TECHNOLOGY -- (0.5%)
CDW Holding, Ltd.# +........................... 53,208,000 3,494,651
------------
TOTAL SINGAPORE -- (Cost $22,801,778) 6.2% 46,137,342
----- ------------
TAIWAN
CONSUMER DISCRETIONARY -- (4.5%)
FamilyMart Co., Ltd.#.......................... 4,501,652 9,696,264
Far Eastern Department Stores, Ltd. ........... 19,066,931 17,218,526
Synnex Technology International Corp. ......... 2,809,240 6,750,136
------------
33,664,926
------------
CONSUMER STAPLES -- (2.6%)
Lien Hwa Industrial Corp. ..................... 16,476,881 9,464,033
Uni-President Enterprises Corp. ............... 9,112,638 10,192,034
------------
19,656,067
------------
FINANCIALS -- (7.0%)
Cathay Financial Holding Co., Ltd.*............ 6,454,000 10,400,377
Fubon Financial Holdings Co., Ltd.*............ 4,948,000 6,078,818
KGI Securities Co., Ltd. ...................... 16,984,780 7,858,807
Ruentex Development Co., Ltd. ................. 12,694,000 20,941,981
</Table>
See notes to financial statements and notes to schedule of investments.
9
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
APRIL 30, 2010 (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Table>
<Caption>
NAME OF ISSUER AND TITLE OF ISSUE SHARES VALUE (NOTE A)
- --------------------------------- ------ --------------
COMMON STOCK AND OTHER EQUITY INTERESTS (CONTINUED)
TAIWAN (CONTINUED)
Yuanta Financial Holdings Co., Ltd. ........... 10,520,593 $ 6,328,201
------------
51,608,184
------------
<Caption>
FACE
AMOUNT
------
FINANCIALS -- (1.0%)
Taiwan Life Insurance Co., Ltd. 4.0%
12/28/14+@................................... $200,000,000 7,639,288
------------
<Caption>
SHARES
------
INFORMATION TECHNOLOGY -- (4.4%)
HTC Corp. ..................................... 1,027,900 13,890,984
Taiwan Secom Co., Ltd.#........................ 3,673,000 5,977,503
WPG Holdings Co., Ltd. ........................ 6,320,000 13,108,686
------------
32,977,173
------------
MATERIALS -- (1.8%)
China Metal Products Co., Ltd.#................ 9,200,278 13,049,728
------------
TOTAL TAIWAN -- (Cost $105,258,670) 21.3% 158,595,366
----- ------------
UNITED KINGDOM
HEALTH CARE -- (4.8%)
China Medical System Holdings, Ltd.#+.......... 3,623,188 35,356,968
------------
TOTAL UNITED KINGDOM -- (Cost $9,940,990) 4.8% 35,356,968
----- ------------
UNITED STATES
CONSUMER DISCRETIONARY -- (0.3%)
The9, Ltd., ADR*#(1)........................... 358,900 2,314,905
------------
ENERGY -- (0.9%)
Far East Energy Corp.*#+....................... 14,565,477 6,335,983
------------
HEALTH CARE -- (3.3%)
Mindray Medical International, Ltd., ADR(1).... 191,700 7,322,940
WuXi PharmaTech Cayman, Inc., ADR*(1).......... 883,490 16,963,008
------------
24,285,948
------------
INFORMATION TECHNOLOGY -- (1.9%)
Hollysys Automation Technologies, Ltd.*(1)..... 808,200 8,381,034
</Table>
See notes to financial statements and notes to schedule of investments.
10
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
APRIL 30, 2010 (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Table>
<Caption>
NAME OF ISSUER AND TITLE OF ISSUE SHARES VALUE (NOTE A)
- --------------------------------- ------ --------------
COMMON STOCK AND OTHER EQUITY INTERESTS (CONTINUED)
UNITED STATES (CONTINUED)
Sina Corp.*(1)................................. 162,700 $ 5,971,090
------------
14,352,124
------------
TOTAL UNITED STATES -- (Cost $45,613,027) 6.4% 47,288,960
----- ------------
TOTAL COMMON STOCK AND OTHER EQUITY
INTERESTS -- (Cost $327,391,640) 76.8% 571,033,043
----- ------------
EQUITY LINKED SECURITIES
CONSUMER STAPLES -- (2.8%)
Shenzhen Agricultural Products Co., Ltd. Access
Product (expiration 01/17/12) 144A,(3)....... 6,800,000 14,924,688
Wuliangye Yibin Co., Ltd. Access Product
(expiration 01/20/15) 144A,(3)............... 1,403,507 5,404,905
------------
20,329,593
------------
FINANCIALS -- (6.3%)
Ping An Insurance (Group) Company of China,
Ltd. Access Product (expiration 01/17/12)
144A,(3)..................................... 1,665,600 12,055,418
Ping An Insurance (Group) Company of China,
Ltd. Access Product (expiration 04/01/13)
144A,(4)..................................... 2,661,500 19,263,625
Shanghai Yuyuan Tourist Mart Co., Ltd. Access
Product (expiration 03/26/14) 144A,(4)....... 238,502,000 9,606,195
Zhejiang Guyuelongshan Access Product
(expiration 10/07/13) 144A,*(4).............. 3,658,900 6,030,976
------------
46,956,214
------------
INDUSTRIALS -- (4.9%)
Daqin Railway Co., Ltd. Access Product
(expiration 11/02/11) 144A,(4)............... 4,807,000 6,402,102
Shanghai International Airport Co., Ltd. Access
Product (expiration 01/20/15) 144A,*(3)...... 2,526,700 5,937,745
Shanghai International Airport Co., Ltd. Access
Product (expiration 10/26/10) 144A,(4)....... 1,800,000 4,230,205
Shanghai Qiangsheng Holding Co., Ltd. Access
Product (expiration 11/13/14) 144A,(4)....... 4,800,000 6,160,699
Suning Appliance Co., Ltd. Access Product
(expiration 01/20/15) 144A,*(3).............. 4,311,020 7,074,384
</Table>
See notes to financial statements and notes to schedule of investments.
11
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
APRIL 30, 2010 (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Table>
<Caption>
NAME OF ISSUER AND TITLE OF ISSUE SHARES VALUE (NOTE A)
- --------------------------------- ------ --------------
EQUITY LINKED SECURITIES (CONTINUED)
INDUSTRIALS -- (4.9%) (CONTINUED)
Xinjiang Tebian Electric Apparatus Stock Co.,
Ltd. Access Product (expiration 10/26/10)
144A,(4)..................................... 2,335,140 $ 6,555,308
------------
36,360,443
------------
TOTAL EQUITY LINKED SECURITIES --
(Cost $85,324,399) 14.0% 103,646,250
----- ------------
DIRECT INVESTMENTS
INDUSTRIALS -- (1.2%)
Qingdao Bright Moon Seaweed Group Co., Ltd.,
(acquired 02/28/08)*#+(2)(5)(6).............. 31,827,172 9,198,053
------------
9,198,053
------------
INFORMATION TECHNOLOGY -- (1.7%)
China Silicon Corp. Common Stock, (acquired
01/08-01/10)*#+(2)(5)........................ 1,234,405 --
China Silicon Corp. Warrants (expiration
11/30/10), (acquired 11/30/07)*#+(2)(5)...... 685,450 --
China Silicon Corp., Series A Preferred
(acquired 11/30/07)#+(2)(5).................. 27,418 --
HAND Enterprise Solutions, Ltd., Preferred
(acquired 02/11/10)#+(2)(5).................. 8,027,241 12,734,977
HAND Enterprise Solutions, Ltd., Common Stock
(acquired 02/01/07)*#+(2)(5)................. 500,000 --
------------
12,734,977
------------
<Caption>
FACE
AMOUNT
------
INDUSTRIALS -- (3.1%)
Ugent Holdings, Ltd., 12.0% 06/04/12 (acquired
04/06/09)*#+@(2)(5).......................... $177,000,000 22,797,233
------------
TOTAL DIRECT INVESTMENTS --
(Cost $40,794,341) 6.0% 44,730,263
----- ------------
<Caption>
SHARES
------
COLLATERAL FOR SECURITIES ON LOAN -- (8.4%)
State Street Navigator Prime Portfolio......... 62,474,628 62,474,628
------------
TOTAL COLLATERAL FOR SECURITIES ON
LOAN -- (Cost $62,474,628) 8.4% 62,474,628
----- ------------
</Table>
See notes to financial statements and notes to schedule of investments.
12
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
APRIL 30, 2010 (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Table>
<Caption>
FACE
NAME OF ISSUER AND TITLE OF ISSUE AMOUNT VALUE (NOTE A)
- --------------------------------- ------ --------------
SHORT TERM INVESTMENTS
UNITED STATES
Repurchase Agreement with State Street Bank and
Trust, 0.01%, 04/30/10(7).................... $ 21,866,000 $ 21,866,000
------------
TOTAL UNITED STATES -- (Cost $21,866,000) 2.9% 21,866,000
----- ------------
TOTAL INVESTMENTS -- (Cost $537,851,008) 108.1% 803,750,184
----- ------------
OTHER ASSETS AND LIABILITIES (8.1)% (60,539,114)
----- ------------
NET ASSETS 100.0% $743,211,070
===== ============
</Table>
Notes to Schedule of Investments
Security is deemed worthless.
* Denotes non-income producing security.
# Illiquid security.
+ Affiliated issuer (see Note F).
@ The bond contains a feature or option to be converted into common stock.
(1) A portion or all of the security was held on loan. As of April 30, 2010, the
market value of the securities loaned was $56,933,214.
(2) Security valued at fair value using methods determined in good faith by or
at the direction of the Board of Directors.
(3) Equity linked securities issued by Citigroup Global Markets Holdings.
(4) Equity linked securities issued by Credit Lyonnais (CLSA).
(5) Direct investments are generally restricted as to resale and do not have a
readily available resale market. On the date of acquisition of each direct
investment, there were no market quotations on similar securities, and such
investments were therefore valued in good faith by the Board of Directors at
fair market value. The securities continue to be valued in good faith by
Board of Directors at fair market value as of April 30, 2010.
(6) The Fund holds a put option which allows the Fund to sell the investment for
a value at least equal to the purchase price under certain circumstances.
(7) Repurchase agreement, dated 04/30/10, due 05/03/10 with repurchase proceeds
of $21,866,018 is collateralized by US Treasury Bill 0.01% due 09/09/10 with
a market value of $22,305,604.
144A Securities restricted for resale to Qualified Institutional Buyers. At
April 30, 2010, these restricted securities amounted to $103,646,250, which
represented 14.00% of total net assets.
ADR American Depositary Receipt.
FORWARD FOREIGN CURRENCY CONTRACTS:
<Table>
<Caption>
SETTLEMENT UNREALIZED
CURRENCY DATE LOCAL AMOUNT BASE AMOUNT MARKET VALUE (DEPRECIATION)
- --------------------------------------------------------------------------------------------------------
CNY (Buy) 05/26/2010 222,608,981 $32,841,200 $32,652,412 $(188,788)
</Table>
CNY -- Chinese Yuan
See notes to financial statements and notes to schedule of investments.
13
THE CHINA FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2010 (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Table>
ASSETS
Investments in securities, at value (cost $430,110,826)
(securities on loan $56,933,214) (Note A)...................... $651,854,709
Investments in affiliated investments, at value
(cost $107,740,182) (Notes A and F)............................ 151,895,475
------------
Total Investments................................................. 803,750,184
Cash.............................................................. 925
Foreign currency, at value (cost $1,925,503)...................... 1,930,371
Receivable for investments sold................................... 143,965
Receivable for fund shares sold................................... 632
Receivable for securities lending income.......................... 70,501
Dividends and interest receivable................................. 1,524,401
Prepaid expenses.................................................. 21,548
------------
TOTAL ASSETS........................................................ 807,442,527
------------
LIABILITIES
Payable upon return of collateral for securities loaned........... 62,474,628
Payable for open forward currency contracts....................... 188,788
Investment management fee payable (Note B)........................ 466,367
Administration and custodian fees payable (Note B)................ 218,754
Contingent liability (Note A)..................................... 717,795
Accrued expenses and other liabilities............................ 165,125
------------
TOTAL LIABILITIES................................................... 64,231,457
------------
TOTAL NET ASSETS.................................................... $743,211,070
============
COMPOSITION OF NET ASSETS:
Paid in capital (Note C).......................................... 454,105,882
Undistributed net investment income............................... 1,198,831
Accumulated net realized gain on investments and foreign currency
transactions................................................... 22,189,594
Net unrealized appreciation on investment and foreign currency
translations................................................... 265,716,763
------------
TOTAL NET ASSETS.................................................... $743,211,070
============
NET ASSET VALUE PER SHARE
($743,211,070/22,781,762 shares of common stock outstanding)...... $32.62
======
</Table>
See notes to financial statements.
14
THE CHINA FUND, INC.
STATEMENT OF OPERATIONS
FOR SIX MONTHS ENDED APRIL 30, 2010 (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Table>
INVESTMENT INCOME:
Dividend income -- (including dividends of $1,735,007 from non-
controlled affiliates, net of tax withheld of $92,366)
(Note F)....................................................... $ 3,007,442
Interest income................................................... 1,462,846
Securities lending income......................................... 506,233
------------
TOTAL INVESTMENT INCOME........................................ 4,976,521
------------
EXPENSES
Investment Management fees (Note B)............................... 2,610,599
Custodian fees (Note B)........................................... 503,485
Administration fees (Note B)...................................... 292,022
Directors' fees and expenses (Note B)............................. 173,010
Stock dividend tax expense........................................ 611
Legal fees........................................................ 83,458
Printing and postage.............................................. 45,462
Shareholder service fees.......................................... 15,726
Insurance......................................................... 26,578
Audit and tax service fees........................................ 70,069
Stock exchange listing fee........................................ 20,959
Transfer agent fees............................................... 21,292
Chief Compliance Officer fee...................................... 26,818
Miscellaneous expenses............................................ 43,384
------------
TOTAL EXPENSES................................................. 3,933,473
------------
NET INVESTMENT INCOME............................................... 1,043,048
------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS
Net realized gain on investments.................................. 34,759,056
Net realized gain on non-controlled affiliate transactions
(Note F)....................................................... 64,802
Net realized loss on foreign currency transactions................ (765,851)
------------
34,058,007
------------
Net change in unrealized appreciation/(depreciation) on
investments.................................................... 92,912,082
Net change in unrealized appreciation/(depreciation) on foreign
currency transactions.......................................... 556,235
------------
93,468,317
------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN CURRENCY
TRANSACTIONS...................................................... 127,526,324
------------
NET INCREASE IN NET ASSETS FROM OPERATIONS.......................... $128,569,372
============
</Table>
See notes to financial statements.
15
THE CHINA FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Table>
<Caption>
SIX MONTHS ENDED YEAR ENDED
APRIL 30, 2010 OCTOBER 31, 2009
---------------- ----------------
(UNAUDITED)
INCREASE IN NET ASSETS FROM OPERATIONS
Net investment income................................ $ 1,043,048 $ 6,205,278
Net realized gain/(loss) on investments and foreign
currency transactions............................. 34,058,007 (10,213,191)
Net increase in unrealized
appreciation/(depreciation) on investments and
foreign currency transactions..................... 93,468,317 261,815,537
------------ -------------
Net increase/(decrease) in net assets from
operations........................................ 128,569,372 257,807,624
------------ -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income................................ (5,825,297) (8,737,395)
Capital gains........................................ -- (96,870,178)
------------ -------------
Total distributions to shareholders.................. (5,825,297) (105,607,573)
------------ -------------
CAPITAL SHARE TRANSACTIONS: (NOTE C)
Reinvestment of dividends and distributions (0 and
4,628,021 shares, respectively)................... -- 73,909,497
------------ -------------
Net increase in net assets from capital share
transactions...................................... -- 73,909,497
------------ -------------
NET INCREASE IN NET ASSETS............................. 122,744,075 226,109,548
------------ -------------
NET ASSETS:
Beginning of year.................................... 620,466,995 394,357,447
------------ -------------
End of period........................................ $743,211,070 $ 620,466,995
============ =============
Undistributed net investment income, end of period..... $ 1,198,831 $ 5,981,080
============ =============
</Table>
See notes to financial statements.
16
THE CHINA FUND, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD ENDED APRIL 30, 2010 (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Table>
<Caption>
INCREASE (DECREASE) IN CASH -
- -----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase in net assets resulting from operations............. $ 128,569,372
Adjustments to reconcile net increase in net assets from
operations to net cash provided from operating activities:
Purchases of investment securities............................ (128,755,411)
Proceeds from disposition of investment securities............ 117,847,907
Net purchases of short-term investments....................... 11,335,000
Proceeds from foreign cash transactions....................... (668,698)
Decrease in collateral for securities loaned.................. (32,180,582)
Increase in dividends and interest receivable................. (563,000)
Decrease in receivable for securities lending income.......... (51,199)
Increase in receivable for investments sold................... (144,597)
Decrease in prepaid expenses and miscellaneous assets......... 26,578
Decrease in payable for securities purchased.................. (169,302)
Decrease upon return of collateral for securities loaned...... 32,180,582
Decrease in accrued expenses and other liabilities............ (95,552)
Net change in unrealized (appreciation)/depreciation on (642,260)
foreign currency contracts..................................
Net change in unrealized (appreciation)/depreciation on (92,912,082)
investments.................................................
Net realized loss from investments............................ (34,824,660)
-------------
Net cash provided by operating activities................... (1,047,904)
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions paid....................................... (5,825,297)
-------------
Net cash used for financing activities...................... (5,825,297)
-------------
NET DECREASE IN CASH............................................... (6,873,201)
CASH AT BEGINNING OF PERIOD........................................ 8,804,497
-------------
CASH AT END OF PERIOD.............................................. $ 1,931,296
=============
Noncash financing activities not included herein consist of:
Reinvestment of distributions................................. $ 0
</Table>
17
THE CHINA FUND, INC.
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OF COMMON STOCK OUTSTANDING FOR THE PERIOD(S)
INDICATED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Table>
<Caption>
SIX
MONTHS
ENDED YEAR ENDED OCTOBER 31,
APRIL 30, ----------------------------------------------------
2010 2009(1) 2008 2007(2) 2006 2005
----------- -------- -------- -------- -------- --------
(UNAUDITED)
PER SHARE OPERATION PERFORMANCE*
Net asset value, beginning of
period........................... $ 27.24 $ 21.72 $ 60.50 $ 31.40 $ 23.25 $ 26.27
Net investment income.............. 0.05 0.29 0.49 0.28 0.30 0.21
Net realized and unrealized gain
(loss) on investments and foreign
currency transactions............ 5.59 11.24 (25.66) 32.83 10.36 0.34
-------- -------- -------- -------- -------- --------
Total income (loss) from investment
operations....................... 5.64 11.53 (25.17) 33.11 10.66 0.55
-------- -------- -------- -------- -------- --------
Less dividends and distributions:
Dividend from net investment
income........................... (0.26) (0.48) (0.28) (0.30) (0.22) (0.20)
Distributions from net realized
capital gains.................... 0.00 (5.34) (11.84) (3.71) (2.29) (3.37)
-------- -------- -------- -------- -------- --------
Total dividends and distributions.. (0.26) (5.82) (12.12) (4.01) (2.51) (3.57)
-------- -------- -------- -------- -------- --------
Capital Share Transactions:
(Dilution) to net asset value,
resulting from issuance of shares
in stock dividend................ 0.00 (0.19) (1.49) 0.00 0.00 0.00
-------- -------- -------- -------- -------- --------
Net asset value, end of period..... $ 32.62 $ 27.24 $ 21.72 $ 60.50 $ 31.40 $ 23.25
======== ======== ======== ======== ======== ========
Per share market price, end of
period........................... $ 28.54 $ 25.25 $ 19.87 $ 51.67 $ 30.40 $ 24.55
======== ======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN
(BASED ON MARKET PRICE).......... 14.07%(3) 73.37% (48.06)% 90.97% 37.20% (5.50)%
======== ======== ======== ======== ======== ========
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000's).. $743,211 $620,467 $394,357 $881,856 $455,206 $334,496
Ratio of net expenses to average
net assets....................... 1.16%(4) 1.44% 1.20% 1.08% 1.26% 1.44%
Ratio of gross expenses to average
net assets....................... 1.16%(4) 1.44% 1.23% 1.08% 1.26% 1.44%
Ratio of net expenses to average
net assets, excluding stock
dividend tax expense............. 1.16%(4) 1.42% 1.11% 1.04% 1.23% 1.38%
Ratio of net investment income to
average net assets............... 0.31%(4) 1.36% 1.28% 0.67% 1.09% 1.04%
Portfolio turnover rate............ 18%(3) 34% 49% 46% 50% 26%
</Table>
* Per share amounts have been calculated using the average share method.
(1) The fund was audited by Ernst & Young LLP for the year ended October 31,
2009. The previous periods were audited by another independent registered
public accounting firm.
(2) The Fund's Direct Investment Advisor changed as of June 2007.
(3) Not Annualized.
(4) Annualized.
See notes to financial statements.
18
THE CHINA FUND, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 2010 (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The China Fund, Inc. (the "Fund") was incorporated under the laws of the State
of Maryland on April 28, 1992, and is a non-diversified, closed-end management
investment company registered under the Investment Company Act of 1940, as
amended (the "1940 Act"). The Fund's investment objective is long-term capital
appreciation through investments in the equity securities of companies engaged
in a substantial amount of business in the People's Republic of China. The
following is a summary of significant accounting policies followed by the Fund
in the preparation of its financial statements.
USE OF ESTIMATES: The preparation of financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
income and expenses for the period. Actual results could differ from these
estimates. The significant estimates made as of, and for the six months ended,
April 30, 2010 relate to Direct Investments and to the contingent liability
resulting from the sale of Captive Finance in March 2007. A reserve of 10% of
the net sale proceeds was established to cover any potential liabilities from
the representation and warranties provided by the Fund in the transaction.
SECURITY VALUATION: Portfolio securities listed on recognized United States or
foreign securities exchanges are valued at the last quoted sales price in the
principal market where they are traded. Listed securities with no such sales
price and unlisted securities are valued at the mean between the current bid and
asked prices, if any, of two brokers. Short-term investments having maturities
of sixty days or less are valued at amortized cost (original purchase cost as
adjusted for amortization of premium or accretion of discount) which when
combined with accrued interest approximates market value. Securities for which
market quotations are not readily available are valued at fair value using
methods determined in good faith by or at the direction of the Board of
Directors considering relevant factors, data and information including, if
relevant, the market value of freely tradable securities of the same class in
the principal market on which such securities are normally traded. Direct
Investments not traded on an exchange are valued at fair value as determined by
or at the direction of the Board of Directors based on financial and other
information supplied by the Direct Investment Manager regarding each Direct
Investment. Forward currency contracts are valued at the current cost of
offsetting the contract.
Factors used in determining value may include, but are not limited to, the type
of security, the size of the holding, the initial cost of the security, the
existence of any contractual restrictions on the security's disposition, the
price and extent of public trading in similar securities of the issuer or of
comparable companies, the availability of quotations from broker-dealers, the
availability of values of third parties other than the Investment Manager or
Direct Investment Manager, information obtained from the issuer, analysts,
and/or the appropriate stock exchange (if available), an analysis of the
company's financial statements, an evaluation of the forces that influence the
issuer and the market(s) in which the security is purchased and sold and with
respect to debt securities, the maturity, coupon, creditworthiness, currency
denomination, and the movement of the market in which they trade.
REPURCHASE AGREEMENTS: In connection with transactions in repurchase
agreements, it is the Fund's policy that its custodian take possession of the
underlying collateral securities, the fair value of which exceeds the principal
amount
19
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
of the repurchase transaction, including accrued interest, at all times. If the
seller defaults, and the fair value of the collateral declines, realization of
the collateral by the Fund may be delayed or limited.
SECURITIES LENDING: The Fund may lend up to 33 1/3% of the Fund's total assets
held by State Street Bank and Trust Company ("State Street") as custodian to
certain qualified brokers, except those securities which the Fund or the
Investment Manager specifically identifies as not being available. By lending
its investment securities, the Fund attempts to increase its net investment
income through the receipt of interest on the loan. Any gain or loss in the
market price of the securities loaned that might occur and any interest or
dividends declared during the term of the loan would accrue to the account of
the Fund. Risks of delay in recovery of the securities or even loss of rights in
the collateral may occur should the borrower of the securities fail financially.
Risks may also arise to the extent that the value of the collateral decreases
below the value of the securities loaned. Upon entering into a securities
lending transaction, the Fund receives cash or other securities as collateral in
an amount equal to or exceeding 100% of the current market value of the loaned
securities with respect to securities of the U.S. government or its agencies,
102% of the current market value of the loaned securities with respect to U.S.
securities and 105% of the current market value of the loaned securities with
respect to foreign securities. Any cash received as collateral is generally
invested by State Street, acting in its capacity as securities lending agent
(the "Agent"), in the State Street Navigator Securities Lending Prime Portfolio.
A portion of the dividends received on the collateral is rebated to the borrower
of the securities and the remainder is split between the Agent and the Fund.
As of April 30, 2010, the Fund had loaned securities which were collateralized
by cash and short term investments. The value of the securities on loan and the
value of the related collateral were as follows:
<Table>
<Caption>
VALUE OF
VALUE OF CASH TOTAL
SECURITIES COLLATERAL COLLATERAL
- ----------- ----------- -----------
$56,933,214 $62,474,628 $62,474,628
</Table>
FOREIGN CURRENCY TRANSLATIONS: The records of the Fund are maintained in U.S.
dollars. Foreign currencies, investments and other assets and liabilities are
translated into U.S. dollars at the current exchange rates. Purchases and sales
of investment securities and income and expenses are translated on the
respective dates of such transactions. Net realized gains and losses on foreign
currency transactions represent net gains and losses from the disposition of
foreign currencies, currency gains and losses realized between the trade dates
and settlement dates of security transactions, and the difference between the
amount of net investment income accrued and the U.S. dollar amount actually
received. The effects of changes in foreign currency exchange rates on
investments in securities are not segregated in the Statement of Operations from
the effects of changes in market prices of those securities, but are included in
realized and unrealized gain or loss on investments. Net unrealized foreign
currency gains and losses arise from changes in the value of assets and
liabilities, other than investments in securities, as a result of changes in
exchange rates.
FORWARD FOREIGN CURRENCY CONTRACTS: A forward currency contract is an agreement
between two parties to buy or sell currency at a set price on a future date.
Upon entering into these contracts, risks may arise from the potential inability
of counterparties to meet the terms of their contracts and from unanticipated
movements in the value of the foreign currency relative to the U.S. dollar. The
U.S. dollar value of forward currency contracts is determined using
20
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
forward exchange rates provided by quotation services. Daily fluctuations in the
value of such contracts are recorded as unrealized gain or loss. When the
contract is closed, the Fund records a realized gain or loss equal to the
difference between the value at the time it was opened and the value at the time
it was closed. Such gain or loss is disclosed in the realized and unrealized
gain or loss on foreign currency in the Fund's accompanying Statement of
Operations.
OPTION CONTRACTS: The Fund may purchase and write (sell) call options and put
options provided the transactions are for hedging purposes and the initial
margin and premiums do not exceed 5% of total assets. Option contracts are
valued daily and unrealized gains or losses are recorded based upon the last
sales price on the principal exchange on which the options are traded. The Fund
will realize a gain or loss upon the expiration or closing of the option
contract. When an option is exercised, the proceeds on sales of the underlying
security for a written call option, the purchase cost of the security for a
written put option, or the cost of the security for a purchased put or call
option is adjusted by the amount of premium received or paid.
The risk in writing a call option is that the Fund gives up the opportunity for
profit if the market price of the security increases and the option is
exercised. The risk in writing a put option is that the Fund may incur a loss if
the market price of the security decreases and the option is exercised. The risk
in buying an option is that the Fund pays a premium whether or not the option is
exercised. Risks may also arise from an illiquid secondary market or from the
inability of counter parties to meet the terms of the contract.
EQUITY LINKED SECURITIES: The Fund may invest in equity-linked securities such
as linked participation notes, equity swaps and zero-strike options and
securities warrants. Equity-linked securities currently held by the Fund,
identified as "Access Products" in the Schedule of Investments are privately
issued securities whose investment results are designed to correspond generally
to the performance of a specified stock index or "basket" of stocks, or a single
stock. Access Products may be used by the Fund to gain exposure to countries
that place restrictions on investments by foreigners. To the extent that the
Fund invests in Access Products whose return corresponds to the performance of a
foreign securities index or one or more foreign stocks, investing in Access
Products will involve risks similar to the risks of investing in foreign
securities. In addition, the Fund bears the risk that the issuer of an Access
Product may default on its obligation under the terms of the arrangement with
the counterparty. Access Products are often used for many of the same purposes
as, and share many of the same risks with, derivative instruments. In addition,
Access Products may be considered illiquid.
At April 30, 2010, the Fund held equity-linked Access Product warrants through
Credit Lyonnais ("CLSA") and Citigroup Global Markets Holdings, the issuers.
Under the terms of the agreements, each warrant entitles the Fund to receive
from the issuers an amount in U.S. dollars linked to the performance of specific
equity shares.
DIRECT INVESTMENTS: The Fund may invest up to 25% of the net proceeds from its
offering of its outstanding common stock in direct investments. Direct
investments are generally restricted and do not have a readily available resale
market. The value of these securities at April 30, 2010 was $44,730,263 or 6.00%
of the Fund's net asset value. The
21
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
table below details the acquisition date, cost, and value of the Fund's direct
investments as determined by the Board of Directors of the Fund. The Fund does
not have the right to demand that such securities be registered.
<Table>
<Caption>
SECURITY ACQUISITION DATE COST VALUE
- -------- ---------------- ----------- -----------
China Silicon Corp., Series A Preferred*........ 11/30/2007 $ 6,552,874 $ --
China Silicon Corp. Common Stock................ 01/08 - 01/10 1,110,784 --
HAND Enterprise Solutions, Ltd. Common Stock.... 02/01/2007 -- --
HAND Enterprise Solutions, Ltd. Preferred....... 02/11/2010 3,164,275 12,734,977
Qingdao Bright Moon Seaweed Group Co., Ltd...... 02/28/2008 7,121,480 9,198,053
Ugent Holdings, Ltd. ........................... 04/06/2009 22,844,928 22,797,233
----------- -----------
$40,794,341 $44,730,263
=========== ===========
</Table>
* The purchase of China Silicon Corp., Series A Preferred resulted in the
Fund receiving 748,283 shares of China Silicon Corp. common stock warrants.
Each warrant entitles the Fund to purchase twenty five shares of common
stock at an exercise price of USD$2.98 per share, subject to adjustment.
INDEMNIFICATION OBLIGATIONS: Under the Fund's organizational documents, its
Officers and Directors are indemnified against certain liabilities arising out
of the performance of their duties to the Fund. In addition, in the normal
course of business the Fund enters into contracts that provide general
indemnifications to other parties. The Fund's maximum exposure under these
arrangements is unknown as this would involve future claims that may be made
against the Fund that have not yet occurred.
SECURITY TRANSACTIONS AND INVESTMENT INCOME: Security transactions are recorded
as of the trade date. Realized gains and losses from securities sold are
recorded on the identified cost basis. Dividend income is recorded on the ex-
dividend date, or, in the case of dividend income on foreign securities, on the
ex-dividend date or when the Fund becomes aware of its declaration. Interest
income is recorded on the accrual basis. All premiums and discounts are
amortized/accreted for both financial reporting and federal income tax purposes.
Dividend and interest income generated in Taiwan is subject to a 20% withholding
tax. Stock dividends received (except those which have resulted from
Capitalization of capital surplus) are taxable at 20% of the par value of the
stock dividends received. The Fund records the taxes paid on stock dividends as
an operating expense.
DIVIDENDS AND DISTRIBUTIONS: The Fund intends to distribute to its
shareholders, at least annually, substantially all of its net investment income
and any net realized capital gains. Income and capital gains distributions are
determined in accordance with U.S. income tax regulations, which may differ from
generally accepted accounting principles. These differences are primarily due to
differing book and tax treatments for foreign currency transactions.
The Fund made distributions of $5,825,297 from Ordinary Income during the six
months ended April 30, 2010. For the year ended October 31, 2009 the Fund made
distributions of $8,737,395 from Ordinary Income and $96,870,178 from Long-Term
Capital Gains.
FEDERAL INCOME TAXES: The Fund has qualified and intends to qualify in the
future as a regulated investment company by complying with the provisions of
Subchapter M of the Internal Revenue Code available to certain investment
companies, including making distributions of taxable income and capital gains
sufficient to relieve it from all, or substantially all, federal income and
excise taxes.
22
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE B -- ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Martin Currie Inc. is the investment manager for the Fund's listed assets (the
"Listed Assets"). Martin Currie Inc. receives a fee, computed weekly and payable
monthly, at the following annual rates: 0.70% of the first US$315 million of the
Fund's average weekly net assets invested in Listed Assets; and 0.50% of the
Fund's average weekly net assets invested in Listed Assets in excess of US$315
million. Martin Currie Inc. is also the investment manager for the Fund's direct
investments. Martin Currie Inc. receives a fee computed weekly and payable
monthly, at an annual rate of 2.00% of the average weekly value of the Fund's
assets invested in direct investments.
No director, officer or employee of the Investment Manager or Direct Investment
Manager or any affiliates of those entities will receive any compensation from
the Fund for serving as an officer or director of the Fund. The Fund pays the
Chairman of the Board and each of the directors (who is not a director, officer
or employee of the Investment Manager or Direct Investment Manager or any
affiliate thereof) an annual fee of $35,000 and $15,000 respectively, plus
$3,000 for each Board of Directors' meeting or Audit and Nominating Committee
meeting attended, $2,000 for each telephonic meeting attended and $2,000 for
each Valuation Committee teleconference. In addition, the Fund will reimburse
each of the directors for travel and out-of-pocket expenses incurred in
connection with attending Board of Directors' meetings.
State Street provides, or arranges for the provision of certain administrative
services for the Fund, including preparing certain reports and other documents
required by federal and/or state laws and regulations. The Fund pays State
Street a fee at an annual rate of 0.13% of the Fund's average daily net assets
up to $150 million, 0.11% of the next $150 million and 0.06% of the next $400
million and 0.05% of those in excess of $400 million subject to certain minimum
requirements for fund administration services. The Fund also pays State Street
$100,000 per year for certain legal administration services, including corporate
secretarial services and preparing regulatory filings.
The Fund has also contracted with State Street to provide custody and fund
accounting services to the Fund. For these services, the Fund pays State Street
asset-based fees that vary according to the number of positions and transactions
plus out-of-pocket expenses.
NOTE C -- CAPITAL STOCK
The Board of Directors of the Fund has approved a share repurchase plan. Under
the program, the Fund will repurchase shares at management's discretion at times
when it considers the repurchase to be consistent with the objectives of the
program. For the six months ended April 30, 2010, the Fund did not participate
in this program. At April 30, 2010, 100,000,000 shares of $.01 par value common
stock were authorized.
NOTE D -- INVESTMENT TRANSACTIONS
For the six months ended April 30, 2010, the Fund's cost of purchases and
proceeds from sales of investment securities, other than short-term securities,
were $128,755,411 and $117,224,973, respectively. At April 30, 2010, the cost of
investments for federal income tax purposes was $537,851,008. Gross unrealized
appreciation of investments was $293,751,196 while gross unrealized depreciation
of investments was $27,852,020, resulting in net unrealized appreciation of
investments of $265,899,176.
23
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE E -- INVESTMENTS IN CHINA
The Fund's investments in China companies involve certain risks not typically
associated with investments in securities of U.S. companies or the U.S.
Government, including risks relating to (1) social, economic and political
uncertainty; (2) price volatility, lesser liquidity and smaller market
capitalization of securities markets in which securities of China companies
trade; (3) currency exchange fluctuations, currency blockage and higher rates of
inflation; (4) controls on foreign investment and limitations on repatriation of
invested capital and on the Fund's ability to exchange local currencies for U.S.
dollars; (5) governmental involvement in and control over the economy; (6) risk
of nationalization or expropriation of assets; (7) the nature of the smaller,
less seasoned and newly organized China companies, particularly in China; and
(8) the absence of uniform accounting, auditing and financial reporting
standards, practices and disclosure requirements and less government supervision
and regulation.
NOTE F -- INVESTMENTS IN NON-CONTROLLED AFFILIATES*:
<Table>
<Caption>
GAIN
BALANCE OF GROSS GROSS BALANCE OF INCOME REALIZED
SHARES HELD PURCHASES SALES SHARES HELD VALUE FROM ON SALE OF
OCTOBER 31, AND AND APRIL 30, APRIL 30, NON-CONTROLLED SHARES AS OF
NAME OF ISSUER 2009 ADDITIONS REDUCTIONS 2010 2010 AFFILIATES APRIL 30, 2010
- ------------------------- ----------- ----------- ---------- ----------- ----------- -------------- --------------
CDW Holding, Ltd. ....... 54,708,000 -- 1,500,000 53,208,000 $ 3,494,651 $ -- $64,802
China Medical System
Holdings, Ltd. ........ 3,623,188 -- -- 3,623,188 35,356,968 840,580 --
China Silicon Corp.
Common Stock........... 1,171,572 62,833 -- 1,234,405 -- -- --
China Silicon Corp.,
Series A Preferred..... 27,418 -- -- 27,418 -- 149,542 --
China Silicon Corp.
Warrants............... 685,450 -- -- 685,450 -- -- --
Far East Energy Corp. ... 14,565,477 -- -- 14,565,477 6,335,983 -- --
HAND Enterprise
Solutions, Ltd. Common
Stock.................. 500,000 -- -- 500,000 -- -- --
HAND Enterprise
Solutions, Ltd.
Preferred.............. -- 8,027,241 -- 8,027,241 12,734,977 -- --
Highlight Tech. Corp.+ .. 2,525,170 -- 2,525,170 -- -- 60,164 --
Huiyin Household
Appliances Holdings
Co., Ltd.**............ 450 160,413,300 -- 160,413,750 54,338,322 -- --
Qingdao Bright Moon...... 31,827,172 -- -- 31,827,172 9,198,053 -- --
Taiwan Life Insurance
Co., Ltd. ............. -- 200,000,000 -- 200,000,000 7,639,288 -- --
teco Optronics Corp+..... 1,861,710 -- 1,861,710 -- -- -- --
Ugent Holdings, Ltd. .... 177,000,000 -- -- 177,000,000 22,797,233 684,721 --
</Table>
* Affiliated issuers, as defined in the 1940 Act as amended, include
issuers in which the Fund held 5% or more of the outstanding voting
securities.
** Resulting security of a corporate action from Queensbury Investments,
Ltd. (Huiyin).
+ No Longer Affiliate
24
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE G -- NEW ACCOUNTING PRONOUNCEMENTS
Beginning with the 2009 annual financial statements, the Fund adopted the
authoritative guidance for uncertainty in income taxes included in FASB ASC 740,
Income Taxes (formerly Financial Accounting Standards Board ("FASB")
Interpretation No. 48), as amended by Accounting Standards Update ("ASU") 2009-
06, Implementation Guidance on Accounting for Uncertainty in Taxes and
Disclosures Amendments for Nonpublic Entities. This guidance requires the Fund
to recognize a tax benefit from an uncertain position only if it is more likely
than not that the position is sustainable, based solely on its technical merits
and consideration of the relevant taxing authority's widely understood
administrative practices and precedents. If this threshold is met, the Fund
should measure the tax benefit as the largest amount of benefit that is greater
than fifty percent likely of being realized upon ultimate settlement. As of
April 30, 2010, the Fund had no uncertain tax positions that would require
financial statement recognition or disclosure. The Fund's federal tax returns
filed for the fiscal years ended October 31 2007, October 31, 2008 and October
31, 2009 remain subject to examination by the Internal Revenue Service.
The Fund adopted the FASB amendments to general standards, Subsequent Events, on
accounting for and disclosures of events that occur after balance sheet date but
before financial statements are issued or are available to be issued. Management
has evaluated events and has determined that there are no material events that
would require disclosure in the Fund's financial statement through June 25,
2010, the date the financial statements were issued.
NOTE H -- FAIR VALUE MEASUREMENT
In accordance with FASB ASC 820-10, Fair Value Measurements and Disclosures, the
Fund discloses the fair value of its investments in a hierarchy that prioritizes
the inputs to valuation techniques used to measure the fair value. The hierarchy
gives the highest priority to valuations based upon unadjusted quoted prices in
active markets for identical assets or liabilities (level 1 measurement) and the
lowest priority to valuations based upon unobservable inputs that are
significant to the valuation (level 3 measurements). FASB ASC 820-10-35-39 to 55
provides three levels of the fair value hierarchy as follows:
- Level 1 -- Inputs that reflect unadjusted quoted prices in active markets
for identical assets or liabilities that the Fund has the ability to access
at the measurement date;
- Level 2 -- Inputs other than quoted prices that are observable for the asset
or liability either directly or indirectly, including inputs in markets that
are not considered to be active;
- Level 3 -- Inputs that are unobservable.
25
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The following is a summary of the inputs used as of April 30, 2010 in valuing
the Fund's investments carried at value:
<Table>
<Caption>
ASSETS VALUATION INPUT
- ------------------------------------------------------------------------------------------------
DESCRIPTION LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
- ----------- ------------ ----------- ------------ ------------
COMMON STOCK AND OTHER EQUITY
INTERESTS
Hong Kong
Consumer Discretionary........... $ 31,127,999 $ -- $ 54,338,322 $ 85,466,321
Consumer Staples................. 20,782,861 -- -- 20,782,861
Energy........................... 8,606,288 -- -- 8,606,288
Health Care...................... 40,670,798 -- -- 40,670,798
Utilities........................ 15,649,927 -- -- 15,649,927
------------ ----------- ------------ ------------
Total Hong Kong..................... 116,837,873 -- 54,338,322 171,176,195
------------ ----------- ------------ ------------
Hong Kong -- "H" Shares
Consumer Staples................. 32,214,732 -- -- 32,214,732
Financials....................... 6,116,445 -- -- 6,116,445
Health Care...................... 57,664,919 -- -- 57,664,919
Industrials...................... 3,379,146 -- -- 3,379,146
Materials........................ 5,095,808 -- -- 5,095,808
Telecommunications............... 8,007,162 -- -- 8,007,162
------------ ----------- ------------ ------------
Total Hong Kong -- "H" Shares....... 112,478,212 -- -- 112,478,212
------------ ----------- ------------ ------------
Singapore
Consumer Staples................. 38,472,619 -- -- 38,472,619
Financials....................... 4,170,072 -- -- 4,170,072
Information Technology........... 3,494,651 -- -- 3,494,651
------------ ----------- ------------ ------------
Total Singapore..................... 46,137,342 -- -- 46,137,342
------------ ----------- ------------ ------------
Taiwan
Consumer Discretionary........... 33,664,926 -- -- 33,664,926
Consumer Staples................. 19,656,067 -- -- 19,656,067
Financials....................... 51,608,184 -- 7,639,288 59,247,472
Information Technology........... 32,977,173 -- -- 32,977,173
Materials........................ 13,049,728 -- -- 13,049,728
------------ ----------- ------------ ------------
Total Taiwan........................ 150,956,078 -- 7,639,288 158,595,366
------------ ----------- ------------ ------------
United Kingdom
Health Care...................... 35,356,968 -- -- 35,356,968
------------ ----------- ------------ ------------
Total United Kingdom................ 35,356,968 -- -- 35,356,968
------------ ----------- ------------ ------------
</Table>
26
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Table>
<Caption>
ASSETS VALUATION INPUT
- ------------------------------------------------------------------------------------------------
DESCRIPTION LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
- ----------- ------------ ----------- ------------ ------------
United States
Consumer Discretionary........... $ 2,314,905 $ -- $ -- $ 2,314,905
Energy........................... 6,335,983 -- -- 6,335,983
Health Care...................... 24,285,948 -- -- 24,285,948
Information Technology........... 14,352,124 -- -- 14,352,124
------------ ----------- ------------ ------------
Total United States................. 47,288,960 -- -- 47,288,960
------------ ----------- ------------ ------------
TOTAL COMMON STOCK AND OTHER EQUITY
INTERESTS........................... 509,055,433 -- 61,977,610 571,033,043
------------ ----------- ------------ ------------
EQUITY LINKED SECURITIES
Consumer Staples.................... 20,329,593 -- -- 20,329,593
Financials.......................... 46,956,214 -- -- 46,956,214
Industrials......................... 36,360,443 -- -- 36,360,443
------------ ----------- ------------ ------------
TOTAL EQUITY LINKED SECURITIES........ 103,646,250 -- -- 103,646,250
------------ ----------- ------------ ------------
DIRECT INVESTMENTS
Consumer Discretionary.............. -- -- -- --
Industrials......................... -- -- 31,995,286 31,995,286
Information Technology.............. -- -- 12,734,977 12,734,977
------------ ----------- ------------ ------------
TOTAL DIRECT INVESTMENTS.............. -- -- 44,730,263 44,730,263
------------ ----------- ------------ ------------
COLLATERAL FOR SECURITIES ON LOAN..... -- 62,474,628 -- 62,474,628
SHORT TERM INVESTMENTS
UNITED STATES....................... -- 21,866,000 -- 21,866,000
------------ ----------- ------------ ------------
TOTAL INVESTMENTS..................... $612,701,683 $84,340,628 $106,707,873 $803,750,184
------------ ----------- ------------ ------------
LIABILITIES
FORWARD FOREIGN CURRENCY CONTRACTS.... 188,788 -- -- 188,788
------------ ----------- ------------ ------------
</Table>
27
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The following is a reconciliation of the fair valuations using significant
unobservable inputs (Level 3) for the fund during the period ending April 30,
2010:
<Table>
<Caption>
CHANGE IN
BALANCE AS OF NET ACCRUED REALIZED UNREALIZED NET TRANSFERS
INVESTMENTS IN OCTOBER 31, PURCHASES DISCOUNTS GAIN APPRECIATION IN AND/OR OUT BALANCE AS OF
SECURITIES 2009 (SALES) (PREMIUMS) (LOSS) (DEPRECIATION) TO LEVEL 3 APRIL 30, 2010
- -------------- ------------- ------------ ---------- --------- -------------- ------------- --------------
COMMON STOCK AND OTHER EQUITY INTERESTS
Consumer
Discretion-
ary........... $ -- $ 38,458,859 $-- $ -- $15,879,463 $ -- $ 54,338,322
Financials....... -- 6,178,274 -- -- 1,461,014 -- 7,639,288
Health Care...... 27,918,189 (15,300) -- -- 7,897,809 (35,800,698) --
------------ ------------ --- --------- ----------- ------------ ------------
27,918,189 44,621,833 -- -- 25,238,286 (35,800,698) 61,977,610
------------ ------------ --- --------- ----------- ------------ ------------
DIRECT INVESTMENTS
Consumer
Discretion-
ary........... 47,108,700 (38,515,190) -- -- (8,593,510) -- --
Industrials...... 34,180,814 (4,489,023) -- (19,421) 2,322,916 -- 31,995,286
Information
Technology.... 13,437,401 149,543 -- (567,320) (284,647) -- 12,734,977
------------ ------------ --- --------- ----------- ------------ ------------
94,726,915 (42,854,670) -- (586,741) (6,555,241) -- 44,730,263
============ ============ === ========= =========== ============ ============
$122,645,104 $ 1,767,163 $-- $(586,741) $18,683,045 $(35,800,698) $106,707,873
============ ============ === ========= =========== ============ ============
<Caption>
CHANGE IN
UNREALIZED
APPRECIATION
(DEPRECIATION)
FROM
INVESTMENTS
HELD AT
INVESTMENTS IN APRIL 30,
SECURITIES 2010
- -------------- --------------
COMMON STOCK AND OTHER EQUITY
INTERESTS
Consumer
Discretion-
ary........... $15,879,463
Financials....... 1,461,014
Health Care...... --
-----------
17,340,477
-----------
DIRECT INVESTMENTS
Consumer
Discretion-
ary........... --
Industrials...... 2,303,495
Information
Technology.... 9,570,703
-----------
11,874,198
===========
$29,214,675
===========
</Table>
NOTE I -- DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Effective January 1, 2009, the Fund adopted amendments to authoritative guidance
related to Derivatives and Hedging, which require enhanced disclosures
addressing: a) how and why an entity uses derivative instruments, b) how
derivative instruments and related hedged items are accounted for and c) how
derivative instruments and related hedged items affect an entity's financial
position, financial performance and cash flows. The adoption of the additional
disclosure requirements did not materially impact the Fund's financial
statements. The following table, grouped into
28
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
appropriate risk categories, discloses the amounts related to the Funds use of
derivative instruments and hedging activities at April 30, 2010:
<Table>
<Caption>
FOREIGN
EXCHANGE
DERIVATIVES NOT ACCOUNTED FOR AS HEDGING INSTRUMENTS CONTRACTS RISK TOTAL
- ---------------------------------------------------- -------------- --------
LIABILITY DERIVATIVES(1)
Forward Contracts...................................... $188,788 $188,788
-------- --------
</Table>
(1) Statements of Assets and Liabilities location: Payable for open forward
currency contracts.
Transactions in derivative instruments during the six months ended April 30,
2010, were as follows:
<Table>
<Caption>
FOREIGN
EXCHANGE
DERIVATIVES NOT ACCOUNTED FOR AS HEDGING INSTRUMENTS CONTRACTS RISK TOTAL
- ---------------------------------------------------- -------------- ---------
REALIZED GAIN (LOSS)(1)
Forward Contracts..................................... $(765,851) $(765,851)
--------- ---------
CHANGE IN APPRECIATION (DEPRECIATION)(2)
Forward Contracts..................................... (187,280) (187,280)
--------- ---------
</Table>
(1) Statements of Operations location: Net realized loss on foreign currency
transactions.
(2) Statements of Operations location: Net change in unrealized depreciation
on foreign currency transactions.
All open derivative positions for the period ended April 30, 2010 are reflected
on the Fund's Schedule of Investments and the volume of these open positions
relative to the net assets of the Fund is generally representative of open
positions throughout the Fund's reporting period.
29
THE CHINA FUND, INC.
OTHER INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RESULTS OF ANNUAL STOCKHOLDER MEETING HELD ON MARCH 4, 2010
1.) Election of Directors -- The stockholders of the Fund elected Michael
F. Holland as a Class II director to serve for a team expiring on the
date on which the annual meeting of stockholders is held in 2013.
<Table>
<Caption>
FOR WITHHELD
---------- --------
Michael F. Holland 16,933,637 276,129
</Table>
PRIVACY POLICY
PRIVACY NOTICE
The China Fund, Inc. collects nonpublic personal information about its
shareholders from the following sources:
[ ] Information it receives from shareholders on applications or other
forms; and
[ ] Information about shareholder transactions with the Fund.
THE FUND'S POLICY IS TO NOT DISCLOSE NONPUBLIC PERSONAL INFORMATION ABOUT ITS
SHAREHOLDERS TO NONAFFILIATED THIRD PARTIES (other than disclosures permitted by
law).
The Fund restricts access to nonpublic personal information about its
shareholders to those agents of the Fund who need to know that information to
provide products or services to shareholders. The Fund maintains physical,
electronic and procedural safeguards that comply with federal standards to guard
its shareholders' nonpublic personal information.
30
THE CHINA FUND, INC.
OTHER INFORMATION (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that are used by the Fund's
investment advisers to vote proxies relating to the Fund's portfolio securities
is available (1) without charge, upon request, by calling 1-888-CHN-CALL (246-
2255); and (2) as an exhibit to the Fund's annual report on Form N-CSR which is
available on the website of the Securities and Exchange Commission (the
"Commission") at http://www.sec.gov. Information regarding how the investment
advisers vote these proxies is now available by calling the same number and on
the Commission's website. The Fund has filed its report on Form N-PX covering
the Fund's proxy voting record for the 12 month period ending June 30, 2009.
QUARTERLY PORTFOLIO OF INVESTMENTS
A Portfolio of Investments will be filed as of the end of the first and third
quarter of each fiscal year on Form N-Q and will be available on the Securities
and Exchange Commission's website at http://www.sec.gov. Form N-Q has been filed
as of January 31, 2010 for the first quarter of this fiscal year and is
available on the Securities and Exchange Commission's website at
http://www.sec.gov. Additionally, the Portfolio of Investments may be reviewed
and copied at the Commission's Public Reference Room in Washington, DC.
Information on the operation of the Public Reference Room may be obtained by
calling 1-800-SEC-0330. The quarterly Portfolio of Investments will be made
available with out charge, upon request, by calling 1-888-246-2255.
CERTIFICATIONS
The Fund's chief executive officer has certified to the New York Stock Exchange
that, as of April 7, 2010, he was not aware of any violation by the Fund of
applicable New York Stock Exchange corporate governance listing standards. The
Fund also has included the certifications of the Fund's chief executive officer
and chief financial officer required by Section 302 and Section 906 of the
Sarbanes-Oxley Act of 2002 in the Fund's Form N-CSR filed with the Securities
and Exchange Commission, for the period of this report.
31
DIVIDENDS AND DISTRIBUTIONS;
SUMMARY OF DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Fund will distribute to shareholders, at least annually, substantially all
of its net investment income from dividends and interest earnings and expects to
distribute any net realized capital gains annually. Pursuant to the Dividend
Reinvestment and Cash Purchase Plan (the "Plan"), adopted by the Fund, each
shareholder will automatically be a participant (a "Participant") in the Plan
unless Computershare Trust Company, N.A., the Plan Agent, is otherwise
instructed by the shareholder in writing, to have all distributions, net of any
applicable U.S. withholding tax, paid in cash. Shareholders who do not
participate in the Plan will receive all distributions in cash paid by check in
U.S. dollars mailed directly to the shareholder by Computershare Trust Company,
N.A., as paying agent. Shareholders who do not wish to have distributions
automatically reinvested should notify the Fund by contacting Computershare
Trust Company, N.A. c/o The China Fund, Inc. at P.O. Box 43078, Providence,
Rhode Island 02940-3078, by telephone at 1-800-426-5523 or via the Internet at
www.computershare.com/investor.
The Plan will operate whenever a dividend or distribution is declared payable
only in cash or in cash or shares of the Fund's common stock, but it will not
operate with respect to a dividend or distribution declared payable only in
shares of the Fund's common stock (including such a declaration that provides an
option to receive cash).
Computershare Trust Company, N.A ("Computershare" or the "Plan Agent") act as
Plan Agent. If the Directors of the Fund declare an income dividend or a capital
gains distribution payable either in the Fund's Common Stock or in cash, non-
participants in the Plan will receive cash and participants in the Plan will
receive Common Stock. The shares of common stock issued by the Fund will be
valued at net asset value or, if the net asset value is less than 95% of the
market price on the valuation date, then shares will be valued at 95% of the
market price. If the net asset value per share of the common stock on the
valuation date exceeds the market price, participants will be issued shares at
market price. The valuation date will be the dividend or distribution payment
date or, if that date is not a trading day on the exchange on which the Fund's
shares are then listed, the next preceding trading day. If the Fund should
declare a dividend or capital gains distribution payable only in cash, the Plan
Agent will, as purchasing agent for the participants, buy shares of common stock
in the open market, on the New York Stock Exchange or elsewhere, with the cash
in respect of such dividend or distribution, for the participant's accounts on,
or shortly after, the payment date.
Participants in the Plan have the option of making additional payments to the
Plan Agent annually, in any amount from $100 to $3,000 for investment in the
Fund's Common Stock. The Plan Agent will use all funds received from
participants (as well as any dividends and capital gains distributions received
in cash) to purchase Fund shares in the open market on January 15 of each year
or the next trading day if January 15th is not a trading day. Participants may
make voluntary cash payments by sending a check (in U.S. dollars and drawn on a
U.S. Bank) made payable to "Computershare" along with a completed transaction
form which is attached to each statement a Participant receives. The Plan Agent
will not accept cash, traveler's checks, money orders or third party checks. Any
voluntary cash payments received more than thirty-five days prior to such date
will be returned by the Plan Agent, and interest will not be paid on any such
amounts. To avoid unnecessary cash accumulations, and also to allow ample time
for receipt and processing by the Plan Agent, participants should send in
voluntary cash payments to be received by the Plan Agent approximately two days
before January 15. A participant may withdraw a voluntary cash payment by
written notice, if the notice is received by the Plan Agent not less than 48
hours before such payment is to be invested. In the event that a Participant's
check for a voluntary cash payment is returned unpaid for any reason, the Plan
Agent will consider the request for investment of such funds null and void, and
shall immediately remove from the Participant's account those
32
DIVIDENDS AND DISTRIBUTIONS;
SUMMARY OF DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
shares, if any, purchased upon the prior credit of such funds. The Plan Agent
shall be entitled to sell shares to satisfy any uncollected amount plus any
applicable fees. If the net proceeds of the sale of such shares are insufficient
to satisfy the balance of such uncollected amounts, the Plan Agent shall be
entitled to sell such additional shares from the Participant's account as may be
necessary to satisfy the uncollected balance.
The Plan Agent will confirm in writing, each trade for a Participant's account
and each share deposit or share transfer promptly after the account activity
occurs. The statement will show the number of shares held, the number of shares
for which dividends are being reinvested, any cash received for purchase of
shares, the price per share for any purchases or sales, and any applicable fees
for each transaction charged the Participant. In the event the only activity in
a Participant's account is the reinvestment of dividends, this activity will be
confirmed in a statement on at least a quarterly basis. If the Fund pays an
annual dividend and the only activity in a Participant's account for the
calendar year is the reinvestment of such dividend, the Participant will receive
an annual statement. These statements are a Participant's continuing record of
the cost basis of purchases and should be retained for income tax purposes.
The Plan Agent will hold shares of common stock acquired pursuant to the Plan in
non-certificated form in the name of the Participant for whom such shares are
being held and each Participant's proxy will include those shares of common
stock held pursuant to the Plan. The Plan Agent will forward to each Participant
any proxy solicitation material received by it. In the case of shareholders,
such as banks, brokers or nominees, which hold shares for others who are the
beneficial owners, the Plan Agent will administer the Plan on the basis of the
number of shares certified from time to time by the shareholder as representing
the total amount registered in the name of such Participants and held for the
account of beneficial owners who participate in the Plan. Upon a Participant's
Internet, telephone or written request, the Plan Agent will deliver to her or
him, without charge, a certificate or certificates representing all full shares
of common stock held by the Plan Agent pursuant to the Plan for the benefit of
such Participant.
Participants will not be charged a fee in connection with the reinvestment of
dividends or capital gains distributions. The Plan Agent's transaction fees for
the handling of the reinvestment of dividends and distributions will be paid by
the Fund. However, Participants will be charged a per share fee (currently
$0.05) incurred with respect to the Plan Agent's open market purchases in
connection with the reinvestment of dividends or capital gains distributions and
with purchases from voluntary cash payments made by the Participant. A $2.50
transaction fee and a per share fee of $0.15 will also be charged by the Plan
Agent upon any request for sale. Per share fees include any brokerage
commissions the Plan Agent is required to pay.
The automatic reinvestment of dividends and distributions will not relieve
participants of any income tax which may be payable on such dividends and
distributions. Participants will receive tax information annually for their
personal records and to help them prepare their federal income tax return. For
further information as to tax consequences of participation in the Plan,
Participants should consult with their own tax advisors.
These terms and conditions may be amended or supplemented by the Plan Agent or
the Fund at any time or times but, except when necessary or appropriate to
comply with applicable law or the rules or policies of the Securities and
Exchange Commission or any other regulatory authority, only by mailing to the
Shareholders appropriate written notice at least 30 days prior to the effective
date thereof. The amendment or supplement shall de deemed to be accepted
33
DIVIDENDS AND DISTRIBUTIONS;
SUMMARY OF DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
by the Participants unless, prior to the effective date thereof, the Plan Agent
receives written notice of the termination of a Participant's account under the
Plan. Any such amendment may include an appointment by the Plan Agent in its
place and stead of a successor Plan Agent under these terms and conditions, with
full power and authority to perform all or any of the acts to be performed by
the Plan Agent under these terms and conditions. Upon any such appointment of a
successor Plan Agent for the purposes of receiving dividends and distributions,
the Fund will be authorized to pay to such successor Plan Agent, for the
Participants' accounts, all dividends and distributions payable on the shares of
common stock held in the Participants' name or under the Plan for retention or
application by such successor Plan Agent as provided in these terms and
conditions.
Requests for copies of the Plan, which sets forth all of the terms of the Plan,
and all correspondence concerning the Plan should be directed to Computershare
Trust Company, N.A., the Plan Agent for The China Fund, Inc., in writing at P.O.
Box 43078, Providence, Rhode Island, 02940-3078, by telephone at 1-800-426-5523
or via the Internet at www.computershare.com/investor.
34
DIRECTORS AND OFFICERS (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The following table provides information concerning each of the Directors of the
Fund. The Board of Directors is comprised of Directors who are not interested
persons of the Fund, as that term is defined in Section 2(a)(19) of the
Investment Company Act of 1940, as amended. The Directors are divided into three
classes, designated as Class I, Class II and Class III. The Directors in each
such class are elected for a term of three years to succeed the Directors whose
term of office expires. Each Director shall hold office until the expiration of
his term and until his successor shall have been elected and qualified.
<Table>
<Caption>
NUMBER OF
NAME (AGE) AND POSI- DIREC- FUNDS IN THE OTHER
ADDRESS OF TION(S) TOR COMPLEX(1) DIRECTORSHIPS/
DIRECTORS OR HELD SINCE PRINCIPAL OCCUPATION(S) OVERSEEN BY TRUSTEESHIPS IN
NOMINEES WITH (TERM OR EMPLOYMENT DURING THE DIRECTOR PUBLICLY HELD
FOR DIRECTOR FUND ENDS) PAST FIVE YEARS OR NOMINEE COMPANIES
- -------------- ------- ------ ----------------------------- ------------ -------------------
James J. Chair- 1992 Attorney, Nomos (law firm) 1 Fromageries Bel
Lightburn man of (2012) (2004-2006); Attorney, member S.A.
(66)......... the of Hughes Hubbard & Reed (law
13, Rue Board firm) (1993-2004).
Alphonse de and
Neuville Direc-
75017 tor
Paris, France
Michael F. Direc- 1992 Chairman, Holland & Company 1 The Holland
Holland tor (2013) L.L.C. (investment adviser) Balanced Fund,
(65)......... (1995-present). Inc.; Reaves
375 Park Utility Income
Avenue New Fund; The Taiwan
York, New Fund, Inc.; State
York 10152 Street Master Funds
and State Street
Institutional
Investment Trust
William C. Direc- 2007 Director, John K. Fairbank 1
Kirby (59)... tor (2011) Center for Chinese Studies,
Harvard Harvard University (2006-
University present); Chairman, Harvard
CGIS South China Fund (2006-present);
Building 1730 Harvard University
Cambridge Distinguished Service
Street Professor (2006-present);
Cambridge, MA Dean of the Faculty of Arts
02138 and Sciences Harvard
University (2002-2006).
Joe O. Rogers Direc- 1992 The Rogers Team LLC (real 1 The Taiwan Fund,
(61)......... tor (2010) estate), organizing member Inc. (1986-present)
2477 Foxwood (July 2001-present); Manager,
Drive Chapel The J-Squared Team LLC (real
Hill, NC estate) (April 2003-May
27514 2004).
Nigel S. Direc- 1992 Director, The HSBC China Fund 1
Tulloch tor (2011) Limited (1992-2005).
(64).........
7 Circe
Circle
Dalkeith
WA6009
Australia
</Table>
(1) The term "Fund Complex" means two or more registered investment companies
that share the same investment adviser or principal underwriter or hold
themselves out to investors as related companies for the purposes of
investment and investor services.
35
DIRECTORS AND OFFICERS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OFFICERS OF THE FUND
The following table provides information concerning each of the officers of the
Fund.
<Table>
<Caption>
POSI-
TION(S)
HELD
NAME (AGE) AND WITH OFFICER PRINCIPAL OCCUPATION(S) OR
ADDRESS OF OFFICERS FUND SINCE EMPLOYMENT DURING PAST FIVE YEARS
- ------------------- -------- ------- -----------------------------------
Jamie Skinner (48)....... Presi- Septem- Director, Head of Client Services,
Martin Currie dent ber Martin Currie Investment Management
Investment Management 2009 Limited (October 2004-present).
Saltire Court
20 Castle Terrace
Edinburgh
EH1 2ES Scotland United
Kingdom
Chris Ruffle (51)........ Vice Decem- Director, MC China Limited (2006-
Martin Currie Presi- ber present); Director, Heartland
Investment Advisers dent 2008 Capital Management Limited, (2006-
Saltire Court present); Director, Martin Currie
20 Castle Terrace Investment Management Limited
Edinburgh, EH12ES (1995-2006).
Scotland
Shifeng Ke (44).......... Vice Decem- Director, MC China Limited, (2006-
Martin Currie Presi- ber present); Director, Heartland
Investment Advisers dent 2008 Capital Management Limited, (2006-
Saltire Court present); Director, Martin Currie
20 Castle Terrace Investment Management Limited
Edinburgh, EH12ES (2004-2006).
Scotland
Bill Royer (44).......... Chief January Managing Director, Alternative
Foreside Compliance Compli- 2010 Investments and Chief Compliance
Services, LLC ance Officer Services, Foreside
Three Canal Plaza, Officer Compliance Services, LLC (November
Suite 100, 2009-present); Acting General
Portland, ME 04101 Counsel, Baring Asset Management,
Inc. (December 2007-May 2008) and
General Counsel and Member,
Grantham, Mayo, Van Otterloo & Co.,
LLC (February 1995-March 2005).
Laura F. Healy (46)...... Trea- Decem- Vice President, State Street Bank
2 Avenue de Lafayette, surer ber and Trust Company (July 2007-
Boston, MA 02111 2008 present); Senior Director,
Investors Bank and Trust Company
(January 2002-July 2007).
Brian O'Sullivan (35).... Assis- March Vice President, State Street Bank
801 Pennsylvania Ave tant 2009 and Trust Company (December 2006-
Kansas City, MO 64105 Trea- present); Assistant Vice President,
surer State Street Bank and Trust Company
(March 2004-December 2006).
</Table>
36
DIRECTORS AND OFFICERS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Table>
<Caption>
POSITIO-
N(S)
HELD
NAME (AGE) AND WITH OFFICER PRINCIPAL OCCUPATION(S) OR
ADDRESS OF OFFICERS FUND SINCE EMPLOYMENT DURING PAST FIVE YEARS
- ------------------- -------- ------- -----------------------------------
Elizabeth A. Watson Secre- Decem- Vice President and Managing
(55)................... tary ber Counsel, State Street Bank and
4 Copley Place, 2008 Trust Company (August 2007-
Boston, MA 02116 present); Vice President and
General Counsel (May 2004-July
2007) and Chief Compliance Officer
(July 2004-October 2006),
Quantitative Investment Advisors,
Inc.; Clerk (July 2004-July 2007),
Chief Legal Officer (January 2007-
July 2007), Chief Compliance
Officer (July 2004-December 2005),
Quantitative Group of Funds;
President and General Counsel, U.S.
Boston Capital Corporation (May
2004-July 2007); Principal, Watson
& Associates (2002-2004).
Tracie A. Coop (33)...... Assis- June Vice President and Senior Counsel,
4 Copley Place, tant 2010 State Street Bank and Trust Company
Boston, MA 02116 Secre- (October 2007-present); Associate
tary Counsel and Manager, Natixis Asset
Management Advisors L.P. (2006-
2007); Associate Counsel, Natixis
Asset Management Advisors L.P.
(2005-2006).
Francine S. Hayes (42)... Assis- June Vice President and Managing
4 Copley Place, tant 2005 Counsel, State Street Bank and
Boston, MA 02116 Secre- Trust Company (2004-present);
tary Assistant Vice President and
Counsel, State Street Bank and
Trust Company (2001-2004).
</Table>
37
THE CHINA FUND, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES ADDRESS
The China Fund, Inc.
c/o State Street Bank and Trust Company
2 Avenue de Lafayette
P.O. Box 5049
Boston, MA 02206-5049
1-888-CHN-CALL (246-2255)
DIRECTORS AND OFFICERS
James J. Lightburn, Chairman of the Board and Director
Michael F. Holland, Director
William Kirby, Director
Joe O. Rogers, Director
Nigel S. Tulloch, Director
Jamie Skinner, President
Chris Ruffle, Vice President
Shifeng Ke, Vice President
Bill Royer, Chief Compliance Officer of the Fund
Laura Healy, Treasurer
Elizabeth A. Watson, Secretary
Brian O'Sullivan, Assistant Treasurer
Tracie A. Coop, Assistant Secretary
Francine Hayes, Assistant Secretary
INVESTMENT MANAGER
Martin Currie Inc.
SHAREHOLDER SERVICING AGENT
The Altman Group
ADMINISTRATOR AND CUSTODIAN
State Street Bank and Trust Company
TRANSFER AGENT, DIVIDEND PAYING AGENT AND REGISTRAR
Computershare Trust Company, N.A.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young, LLP
LEGAL COUNSEL
Clifford Chance US LLP
ITEM 2. CODE OF ETHICS.
Not required for this filing.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not required for this filing.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not required for this filing.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not required for this filing.
ITEM 6. SCHEDULE OF INVESTMENTS.
a. Schedule of Investments is included as part of Item 1 of the Form
N-CSR.
b. Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
INVESTMENT COMPANIES.
Not required for this filing.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which shareholders may
recommend nominees to the registrant's Board of Directors during the period
covered by this Form N-CSR filing.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers have
concluded that the registrant's disclosure controls and procedures (as
defined in Rule 30a-3(c) under the Investment Company Act of 1940, as
amended (the "1940 Act") (17 CFR 270.30a-3(c))) are effective, as of a
date within 90 days of the filing date of this Form N-CSR based on their
evaluation of these controls and procedures required by Rule 30a-3(b)
under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b)
under the 1934 Act (17 CFR 240.13a-15(b) or 240.15d-15(b)).
(b) There were no changes in the registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR
270.30a-3(d))) that occurred during the registrant's second fiscal quarter
that has materially affected, or is reasonably likely to materially
affect, the
registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Not required for this filing.
(a)(2) The certifications required by Rule 30a-2 of the Investment Company Act
of 1940, as amended (the "1940 Act") are attached hereto.
(a)(3) Not required for this filing.
(b) The certifications required by Rule 30a-2(b) of the 1940 Act and Section
906 of the Sarbanes-Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
THE CHINA FUND, INC.
By: Jamie Skinner
---------------------------------
Jamie Skinner
President of The China Fund, Inc.
Date: July 1, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: Jamie Skinner
---------------------------------
Jamie Skinner
President of The China Fund, Inc.
Date: July 1, 2010
By: Laura F. Healy
---------------------------------
Laura F. Healy
Treasurer of The China Fund, Inc.
Date: July 1, 2010