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: 811-6651
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THE CHINA FUND, INC.
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(Exact name of registrant as specified in charter)
225 FRANKLIN STREET
BOSTON, MA 02110
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(Address of principal executive offices)(Zip code)
(Name and Address of Agent for Service) Copy to:
Mary Moran Zeven State Street Bank and Trust Company
Secretary Daniel P. Bulger, Esq.
The China Fund, Inc. One Federal Street, 9th Floor
225 Franklin Street Boston, Massachusetts 02110
Boston, MA 02110
and
Leonard B. Mackey, Esq.
Clifford Chance US LLP
200 Park Avenue
New York, New York 10166 0153
Registrant's telephone number, including area code: (888) 246-2255
Date of fiscal year end: October 31, 2003
Date of reporting period: October 31, 2003
ITEM 1: SHAREHOLDER REPORT
THE CHINA FUND, INC.
ANNUAL REPORT
OCTOBER 31, 2003
THE CHINA FUND, INC.
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
Key Highlights 1
Asset Allocation 2
Chairman's Statement 3
Investment Managers' Statements 4
About the Portfolio Managers 6
Schedule of Investments 7
Financial Statements 12
Notes to Financial Statements 16
Report of Independent Auditors 21
Other Information 22
Dividends and Distributions;
Dividend Reinvestment
and Cash Purchase Plan 23
</Table>
THE CHINA FUND, INC.
KEY HIGHLIGHTS
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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 10,073,173
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TOTAL NET ASSETS (10/31/03) US$271.3 MILLION
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NET ASSET VALUE PER SHARE (10/31/03) $26.93
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MARKET PRICE (10/31/03) $34.74
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</Table>
<Table>
<Caption>
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TOTAL RETURN
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PERFORMANCE AS OF
10/31/03: NET ASSET VALUE(1) MARKET PRICE
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12 MONTHS 83.06% 179.41%
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3-YEAR CUMULATIVE 123.08% 298.18%
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3-YEAR ANNUALIZED 30.66% 58.50%
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5-YEAR CUMULATIVE 159.67% 314.99%
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5-YEAR ANNUALIZED 21.03% 32.93%
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10-YEAR CUMULATIVE 97.82% 139.23%
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10-YEAR ANNUALIZED 7.06% 9.11%
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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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12/26/02 $0.06397 $0.1504
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12/31/01 $0.1321 --
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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 during
each period and assumes that dividends and capital gains distributions, if any,
were reinvested. The net asset value 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 are historical and do not guarantee future
results.
1
THE CHINA FUND, INC.
ASSET ALLOCATION AS OF OCTOBER 31, 2003
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<Table>
<Caption>
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TEN LARGEST LISTED EQUITY INVESTMENTS*
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1. Sohu.com Inc. 9.0%
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2. TCL International Holdings, Ltd. 4.4%
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3. Chaoda Modern Agriculture (Holdings) Ltd. 3.8%
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4. Yanzhou Coal Mining Co. 3.7%
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5. Sinotrans Limited 3.7%
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6. Chinadotcom, Corp. 3.3%
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7. Anhui Conch Cement Co., Ltd. 3.3%
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8. Fountain Set (Holdings) Ltd. 3.3%
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9. Xinao Gas Holdings, Ltd. 2.8%
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10. Shenzhen Expressway Co., Ltd. 2.6%
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</Table>
<Table>
<Caption>
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LARGEST DIRECT INVESTMENTS*
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1. Captive Finance, Ltd. 1.1%
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2. Tomoike Industrial (H.K.) Ltd. 0.9%
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</Table>
* Percentages based on net assets at October 31, 2003.
2
THE CHINA FUND, INC.
CHAIRMAN'S STATEMENT
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Dear Stockholders:
The Fund enjoyed a successful year (net asset value per share increased 83.06%
after taking into consideration the US$0.21 per share distribution paid to
shareholders in January 2003) as the Chinese economy continued to grow at above
7% per annum and Chinese corporations showed strong earnings growth. This was
achieved despite the disruption of SARS in mid-year. Growing interest in China
by Western investors was reflected in the improvement in the Fund's share price,
which moved from a 15% discount to net asset value at the start of the financial
year to a 29% premium by the end. This means that long-term investors in the
Fund achieved a 179.41% return over the year. As the size of the Fund has grown,
average daily liquidity on the New York stock exchange has improved to US$2.2M
and the expense ratio has fallen to 1.76%.
The combination of China's continuing strong economic growth, regulatory reform
to favor private businesses, and capital market development are benefiting
financial investors in China. We expect these conditions to continue into 2004
aided by recent moves by the Central Government to curb excessive lending that
was beginning to distort asset markets.
The Direct Investment Manager has exited several of the Fund's direct
investments in the last six months. The Direct Investment Manager will focus on
realizing value from the new investments it has made and on closing new deals.
The Board of Directors remains optimistic about the long-term prospects for
economic growth in China, and believes that the Fund remains one of the best
ways to access such growth through investment in a spread of the best
entrepreneurial Chinese companies. However, we are aware of several structural
problems that China needs to overcome, such as reform of the state-owned sector,
particularly the financial system and under-funding of its social security
system. China also faces political tensions both domestically and in foreign
relations. Investors should therefore be aware that returns from China
investments are likely to be volatile.
We thank you for your continuing support. If you have any questions, comments or
would like additional information on our Fund's holdings, we invite you to visit
the Fund's website at www.chinafundinc.com or call (toll free) 1-888-CHN-CALL
(246-2255).
Sincerely,
/s/ Alan Tremain
Alan Tremain
Chairman of the Board
3
THE CHINA FUND, INC.
INVESTMENT MANAGERS' STATEMENTS
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REVIEW OF LISTED INVESTMENTS
There was a low level of turnover in our Fund's portfolio last year - we retain
significant positions in eight of our top ten holdings from a year ago. Our most
successful investment theme over the past year was Chinese internet portfolios,
which achieved dramatic earnings growth after discovering they could charge for
internet services using the billing systems of the mobile phone companies. We
also made good money by investing in textile companies and textile machinery
makers, as the industry ramped up capacity in anticipation of the ending of the
Multi-Fibre Agreement in 2005. Our least successful investment theme was health
care, where Chinese participants lack scale and a period of consolidation has
still some time to run. We were also relatively underweight in the commodity
sector, which has been the best performing sector in 2003. Most of this sector
consists of state-owned companies (we prefer management-owned companies
believing that their shared interest with us, as shareholders, makes for better
corporate governance and investor returns in the long run). We did, however,
make money in Chinese cement and coal stocks. The "H" shares (Chinese companies,
mostly state-owned corporations, listed in Hong Kong with the People's Republic
of China government approval) were the best performing sub-sector within the
Chinese stock markets. We are now reducing our weighting in this area,
preferring laggards which offer better value, such as private-sector companies
in Hong Kong, China plays listed in Taipei and the newly-opened "A" share market
(stocks denominated in Renminbi listed in Shanghai and Shenzhen). The "A" share
market recently hit a four-year low.
The main investment themes that we hope to profit from in 2004 are recovery of
the rural economy (based on the new Rural Land Contract law and increasing grain
prices) and growing US protectionism in a presidential election year, plus a
return of inflation, which may cause the government to revalue the Renminbi.
From the point of view of demand for equities, the situation in Taiwan appears
particularly favorable; there are signs that local investors are starting to
move assets from the shelter of bond funds and foreign exchange deposits into
the asset markets, and that the lengthy bear market in property is coming to an
end. The main point of caution here is the presidential election to take place
in March 2004. Sentiment in Hong Kong has perked up after the massive
demonstration in July prompted the Central Government to initiate several
preferential measures for the territory. In China, the authorities have moved to
tighten credit on signs of over-investment in several sectors. Foreign capital
flows into China, both direct and portfolio, are likely to remain positive. For
monthly updates on our investment strategy, please see our website
www.chinafundinc.com.
4
THE CHINA FUND, INC.
INVESTMENT MANAGERS' STATEMENTS (CONTINUED)
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REVIEW OF DIRECT INVESTMENTS
The Direct Investment market in China is beginning to become more active. Higher
than anticipated growth and profitability is increasing the confidence of
business managers to raise capital rather than merely testing market interest on
a contingency basis. The buoyant equity and credit markets, while increasing
competition for new deals, are leading to favorable opportunities to exit and
realize value for existing investments.
Our new deal origination focuses on established companies in need of expansion
finance to fund a proven business model. Such companies can generate profit
rapidly from incremental investment and are in a position to realize value for
their investors, via an IPO or other mechanisms, in a relatively short time.
Over the last 6 months, we reached an agreement with MOULIN INTERNATIONAL to
redeem the convertible bond held by the Fund. The sale of NEW WORLD SUN CITY was
also completed. Both of these transactions generated substantial gains for the
Fund. Finally, the Fund sold its entire holding in A-S CHINA PLUMBING following
the company's recent IPO and listing on the GEM market in Hong Kong.
We profitably disposed of the Fund's remaining shares of KOWLOON DEVELOPMENT,
taking advantage of the recovery in property stocks of Hong Kong.
As of October 31, 2003, the Fund's Direct Investment portfolio consisted of the
following holdings:
CAPTIVE FINANCE LIMITED ("CAPTIVE")
Captive is engaged in providing operating and financial leases for technology
products (PC, servers, telecom equipment, etc.). It has operations in Greater
China, Singapore, Malaysia and Europe. The company has experienced good growth
in Greater China and South East Asia following the end of the SARS outbreak. It
is actively involved in developing the leasing market in China. Captive is also
building a platform to promote cross-selling and other synergies between its
Asia and Europe operations.
TOMOIKE INDUSTRIAL (H.K.) LIMITED ("TOMOIKE")
Tomoike manufactures a wide range of sheet materials such as labels, speaker
cushions, and cushion materials for office equipment and household appliances.
Its fastest growing business line is the assembly of backlight unit components
for the mobile phone industry. For more than a decade, Tomoike has been
supplying parts and accessories for office and consumer equipment of major
Japanese manufacturers. Its business is experiencing strong growth as a result
of robust demand for its products, especially the backlight units.
5
THE CHINA FUND, INC.
ABOUT THE PORTFOLIO MANAGERS
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LISTED INVESTMENT MANAGER
Mr. Chris Ruffle serves as the portfolio manager for the Fund's portfolio of
listed 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 and Japanese, 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.
DIRECT INVESTMENT MANAGER
Mr. Koh Kuek Chiang is the Executive Director of Asian Direct Capital Management
("ADCM") and is the portfolio manager of the Fund's portfolio of direct
securities. Mr. Koh joined ADCM in 1998. Mr. Koh has over ten years of private
equity investment experience in the U.S., Europe and Asia working for the
Government of Singapore, Union Bank of Switzerland and private interests. His
investment experience covers a wide range of industries, including
telecommunications equipment, biotechnology, media, financial services and basic
materials. Mr. Koh graduated with an engineering degree from the University of
Western Australia and has a post-graduate Diploma in Business Administration
from the National University of Singapore. He is a Chartered Financial Analyst
and is fluent in English and Mandarin.
6
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS
OCTOBER 31, 2003
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<Table>
<Caption>
NAME OF ISSUER AND TITLE OF ISSUE SHARES VALUE (NOTE A)
- --------------------------------- ------ --------------
COMMON STOCK AND OTHER EQUITY INTERESTS
CHINA -- SHANGHAI "B" SHARES
CONSUMER STAPLES -- (0.1%)
Shanghai Friendship Group Co., Inc. ................... 300,000 $ 232,200
------------
TOTAL CHINA -- SHANGHAI "B" SHARES -- (Cost
$277,476) 0.1% 232,200
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CHINA -- SHENZHEN "B" SHARES
INDUSTRIALS -- (1.9%)
China International Marine Containers (Group) Co.,
Ltd. ................................................ 2,442,747 4,188,644
Luthai Textile Co., Ltd. .............................. 1,237,886 897,181
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5,085,825
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TOTAL CHINA -- SHENZHEN "B" SHARES -- (Cost
$3,504,986) 1.9% 5,085,825
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TOTAL CHINA -- (Cost $3,782,462) 2.0% 5,318,025
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HONG KONG
CONSUMER DISCRETIONARY -- (6.4%)
Brilliance China Automotive Holdings, Ltd. ............ 12,882,000 5,431,070
TCL International Holdings, Ltd. ...................... 32,318,000 11,961,154
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17,392,224
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CONSUMER STAPLES -- (6.3%)
Chaoda Modern Agriculture (Holdings) Ltd.*............. 41,038,000 10,407,423
Mainland Headwear Holding, Ltd. ....................... 1,626,000 544,233
Sino Golf Holdings, Ltd. .............................. 10,953,000 2,129,123
Tack Fat Group International, Ltd. .................... 37,296,000 3,985,026
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17,065,805
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HEALTH CARE -- (2.2%)
Golden Meditech Co., Ltd. ............................. 13,950,000 3,501,866
Natural Beauty Bio-Technology, Ltd. ................... 32,780,000 2,531,926
------------
6,033,792
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</Table>
See notes to financial statements and notes to schedule of investments.
7
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2003
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<Table>
<Caption>
NAME OF ISSUER AND TITLE OF ISSUE SHARES VALUE (NOTE A)
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COMMON STOCK AND OTHER EQUITY INTERESTS (CONTINUED)
HONG KONG (CONTINUED)
INDUSTRIALS -- (5.3%)
Proview International Holdings Ltd. ................... 17,644,000 $ 4,826,661
TPV Technology, Ltd. .................................. 9,968,000 5,229,094
Wanyou Fire Safety..................................... 53,565,000 4,413,182
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14,468,937
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INFORMATION TECHNOLOGY -- (0.1%)
Arcontech Corp. ....................................... 18,386,000 409,472
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MATERIALS -- (3.9%)
Fountain Set (Holdings), Ltd. ......................... 12,750,000 8,863,285
Ocean Grand Chemicals Holdings Ltd. ................... 9,861,000 1,637,576
------------
10,500,861
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TELECOMMUNICATIONS -- (2.1%)
Comba Telecom Systems Holdings Ltd.*................... 13,174,000 5,596,576
------------
UTILITIES -- (2.8%)
Xinao Gas Holdings, Ltd.*.............................. 13,976,000 7,466,581
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TOTAL HONG KONG -- (Cost $43,335,850) 29.1% 78,934,248
------------
HONG KONG -- "H" SHARES
ENERGY -- (3.7%)
Yanzhou Coal Mining Co. ............................... 13,786,000 10,115,886
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INDUSTRIALS -- (8.2%)
Beijing Capital International Airport Co., Ltd. ....... 7,520,000 2,783,213
BYD Co., Ltd. ......................................... 2,525,000 6,582,293
Jingwei Textile Machinery Co., Ltd. ................... 7,436,000 2,943,576
Sinotrans Limited...................................... 20,065,000 10,009,253
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22,318,335
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MATERIALS -- (3.3%)
Anhui Conch Cement Co., Ltd. .......................... 7,726,000 8,901,609
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TELECOMMUNICATIONS -- (1.7%)
China Telecom Corporation Ltd. ........................ 14,000,000 4,640,834
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</Table>
See notes to financial statements and notes to schedule of investments.
8
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2003
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<Table>
<Caption>
NAME OF ISSUER AND TITLE OF ISSUE SHARES VALUE (NOTE A)
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COMMON STOCK AND OTHER EQUITY INTERESTS (CONTINUED)
HONG KONG -- "H" SHARES (CONTINUED)
UTILITIES -- (4.7%)
Anhui Expressway Co., Ltd. ............................ 17,778,000 $ 5,721,550
Shenzhen Expressway Co., Ltd. ......................... 21,494,000 6,986,657
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12,708,207
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TOTAL HONG KONG -- "H" SHARES -- (Cost $32,041,336) 21.6% 58,684,871
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TOTAL HONG KONG (INCLUDING "H" SHARES) -- (Cost
$75,377,186) 50.7% 137,619,119
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SINGAPORE
CONSUMER STAPLES -- (1.0%)
People's Food Holdings, Ltd. .......................... 4,400,000 2,807,139
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TOTAL SINGAPORE -- (Cost $2,221,014) 1.0% 2,807,139
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TAIWAN
CONSUMER DISCRETIONARY -- (8.6%)
Altek Corp. ........................................... 1,430,000 2,718,391
China Motor Co., Ltd. ................................. 2,140,000 4,068,081
Merry Electronics Co., Ltd. ........................... 3,254,208 5,275,020
Synnex Technologies International, Corp. .............. 2,950,640 4,348,129
Tainan Enterprises Co., Ltd. .......................... 1,546,000 2,064,067
Taiwan FamilyMart Co., Ltd. ........................... 1,478,520 1,908,611
Taiwan Hon Chuan Enterprise Co., Ltd. ................. 2,345,520 3,055,467
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23,437,766
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FINANCIALS -- (5.4%)
Cathay Financial Holding Co., Ltd. .................... 3,862,000 6,374,064
Fubon Financial Holdings Co., Ltd. .................... 3,953,952 4,171,868
Polaris Securities Co., Ltd.*.......................... 8,359,377 4,163,674
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14,709,606
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INDUSTRIALS -- (3.0%)
Cheng Shin Rubber Industry Co., Ltd. .................. 2,516,400 3,522,812
Chicony Electronics Co., Ltd. ......................... 2,500,960 4,643,692
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8,166,504
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</Table>
See notes to financial statements and notes to schedule of investments.
9
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2003
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<Table>
<Caption>
NAME OF ISSUER AND TITLE OF ISSUE SHARES VALUE (NOTE A)
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COMMON STOCK AND OTHER EQUITY INTERESTS (CONTINUED)
TAIWAN (CONTINUED)
INFORMATION TECHNOLOGY -- (6.8%)
Data Systems Consulting Co., Ltd. ..................... 3,968,339 $ 3,087,655
Soft-World International Corp. ........................ 790,000 2,724,138
Taiwan Green Point Enterprises Co., Ltd. .............. 1,831,200 4,182,670
Vanguard International Semiconductor Corp.*............ 14,000,000 4,765,694
Wintek Corp. .......................................... 5,040,000 3,668,966
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18,429,123
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MATERIALS -- (2.0%)
China Metal Products Co., Ltd. ........................ 5,473,408 5,307,254
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TELECOMMUNICATIONS -- (3.1%)
Ability Enterprise Co., Ltd. .......................... 3,714,840 3,481,636
Chunghwa Telecom Co., Ltd. ............................ 3,055,000 4,817,050
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8,298,686
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TOTAL TAIWAN -- (Cost $57,552,634) 28.9% 78,348,939
------------
UNITED STATES -- "N" SHARES
INFORMATION TECHNOLOGY -- (12.3%)
Chinadotcom, Corp.*.................................... 973,654 8,947,880
Sohu.com Inc.*......................................... 711,586 24,549,717
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33,497,597
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TOTAL UNITED STATES -- "N" SHARES -- (Cost $4,319,653) 12.3% 33,497,597
------------
TOTAL COMMON STOCK AND OTHER EQUITY
INTERESTS -- (Cost $143,252,949) 94.9% 257,590,819
------------
DIRECT INVESTMENTS
FINANCIALS -- (1.1%)
Captive Finance, Ltd., (acquired 5/24/02)(1)*+......... 2,000,000 3,045,000
------------
</Table>
See notes to financial statements and notes to schedule of investments.
10
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2003
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<Table>
<Caption>
NAME OF ISSUER AND TITLE OF ISSUE SHARES VALUE (NOTE A)
- --------------------------------- ------ --------------
COMMON STOCK AND OTHER EQUITY INTERESTS (CONTINUED)
DIRECT INVESTMENTS (CONTINUED)
INDUSTRIALS -- (0.9%)
Tomoike Industrial (H.K.) Ltd., (acquired
2/21/03)(1)+......................................... 825,000 $ 2,361,530
------------
TOTAL DIRECT INVESTMENTS -- (Cost $5,397,038) 2.0% 5,406,530
------------
TOTAL INVESTMENTS -- (Cost $148,649,987) (Note E) 96.9% 262,997,349
------------
OTHER ASSETS AND LIABILITIES 3.1% 8,280,871
============
NET ASSETS 100.0% $271,278,220
============
</Table>
Notes to Schedule of Investments
* Denotes non-income producing security
(1) 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 initially valued at acquisition cost. These
direct investments are valued at fair value as determined by the Board of
Directors as discussed in Notes A and B to the financial statements.
+ Affiliated issuer (see Note G)
See notes to financial statements and notes to schedule of investments.
11
THE CHINA FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2003
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- --------------------------------------------------------------------------------
<Table>
ASSETS:
Investments in listed securities, at value (cost
$143,252,949) (Note A)................................. $257,590,819
Direct investments, at value (cost $5,397,038) (Notes A
and B)................................................. 5,406,530
Cash...................................................... 4,152,044
Foreign currency, at value (cost $2,856,999).............. 2,846,990
Receivable for investments sold........................... 1,796,999
Dividends and interest receivable......................... 119,392
------------
TOTAL ASSETS................................................ 271,912,774
------------
LIABILITIES:
Payable for investments purchased......................... 122,880
Investment management fee payable (Note C)................ 185,210
Administration, custodian and transfer agent fees
payable................................................ 190,099
Accrued expenses and other liabilities.................... 136,365
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TOTAL LIABILITIES........................................... 634,554
------------
TOTAL NET ASSETS............................................ $271,278,220
============
COMPOSITION OF NET ASSETS:
Paid-in Capital (Note D).................................. 139,159,210
Accumulated undistributed net investment income........... 722,029
Accumulated net realized gain on investments and foreign
currency transactions.................................. 17,059,950
Net unrealized appreciation on investments and foreign
currency transactions.................................. 114,337,031
------------
TOTAL NET ASSETS............................................ $271,278,220
============
NET ASSETS VALUE PER SHARE
($271,278,220/10,073,173 shares of common stock
outstanding).............................................. $26.93
============
</Table>
See notes to financial statements and notes to schedule of investments.
12
THE CHINA FUND, INC.
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 2003
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- --------------------------------------------------------------------------------
<Table>
INVESTMENT INCOME:
Dividend income -- listed investments (net of taxes
withheld of $317,523).................................. $ 4,022,856
Interest income -- direct investments..................... 84,304
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TOTAL INVESTMENT INCOME................................ 4,107,160
------------
EXPENSES:
Investment Management fees (Note C)....................... 1,535,917
Custodian fees............................................ 659,022
Directors' fees and expenses (Note C)..................... 358,610
Administration fees....................................... 343,364
Stock dividend tax expense................................ 146,627
Legal fees................................................ 127,989
Insurance................................................. 88,469
Audit and tax service fees................................ 59,247
Printing and postage...................................... 66,619
Stock exchange listing fee................................ 35,591
Transfer Agent fees....................................... 23,302
Shareholder service fees.................................. 20,070
Miscellaneous expenses.................................... 1,200
------------
TOTAL EXPENSES......................................... 3,466,027
------------
NET INVESTMENT INCOME....................................... 641,133
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY:
Net realized gain on listed investment transactions....... 19,483,948
Net realized loss on direct investment transactions....... (726,807)
Net realized gain on foreign currency transactions........ 80,896
------------
18,838,037
------------
Net change in unrealized appreciation on listed
investments and foreign currency transactions.......... 102,626,012
Net change in unrealized depreciation on direct
investments............................................ 1,012,977
------------
103,638,989
------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS..................................... 122,477,026
------------
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $123,118,159
============
</Table>
See notes to financial statements and notes to schedule of investments.
13
THE CHINA FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
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<Table>
<Caption>
YEAR ENDED YEAR ENDED
OCTOBER 31, 2003 OCTOBER 31, 2002
---------------- ----------------
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income..................................... $ 641,133 $ 1,132,163
Net realized gain/(loss) on investments and foreign
currency transactions.................................. 18,838,037 (7,425,274)
Net change in unrealized appreciation on investments and
foreign currency translations.......................... 103,638,989 25,031,092
------------ ------------
Net increase in net assets from operations................ 123,118,159 18,737,981
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income..................................... (644,376) (1,330,135)
Capital gains............................................. (1,514,948) --
------------ ------------
Total dividends and distributions to shareholders......... (2,159,324) (1,330,135)
------------ ------------
NET INCREASE IN NET ASSETS.................................. 120,958,835 17,407,846
------------ ------------
NET ASSETS:
Beginning of year........................................... 150,319,385 132,911,539
------------ ------------
End of year................................................. $271,278,220 $150,319,385
============ ============
UNDISTRIBUTED NET INVESTMENT INCOME, END OF YEAR............ $ 722,029 $ 644,376
============ ============
</Table>
See notes to financial statements and notes to schedule of investments.
14
THE CHINA FUND, INC.
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OF COMMON STOCK OUTSTANDING FOR THE PERIOD(S)
INDICATED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED OCTOBER 31,
--------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
PER SHARE OPERATION PERFORMANCE(1)
Net asset value, beginning of year........... $ 14.92 $ 13.19 $ 12.37 $ 12.74 $ 10.84
Net investment income (loss)................. 0.06 0.11 0.14 (0.03) 0.12
Net realized and unrealized gain (loss) on
investment and foreign currency
transactions............................... 12.16 1.75 0.68 (0.23) 1.86
-------- -------- -------- -------- --------
Total income (loss) from investment
operations................................. 12.22 1.86 0.82 (0.26) 1.98
-------- -------- -------- -------- --------
Less distributions:
Dividend from net investment income........ (0.06) (0.13) 0.00 (0.11) (0.08)
Distributions from net realized capital
gains.................................... (0.15) 0.00 0.00 0.00 0.00
-------- -------- -------- -------- --------
Total distributions.......................... (0.21) (0.13) 0.00 (0.11) (0.08)
-------- -------- -------- -------- --------
Net asset value, end of year................. $ 26.93 $ 14.92 $ 13.19 $ 12.37 $ 12.74
======== ======== ======== ======== ========
Per share market value, end of year.......... $ 34.74 $ 12.61 $ 10.74 $ 8.94 $ 9.94
======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN (BASED ON MARKET
VALUE)..................................... 179.41% 18.63% 20.13% (9.14)% 14.65%
======== ======== ======== ======== ========
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of year (000's).............. $271,278 $150,319 $132,912 $124,619 $128,303
Ratio of expenses to average net assets...... 1.76% 1.97% 2.39% 2.12% 2.28%
Ratio of expenses to average net assets,
excluding stock dividend tax expense....... 1.68% 1.85% 2.31% 2.12% 2.28%
Ratio of net investment income (loss) to
average net assets......................... 0.32% 0.72% 1.09% (0.21)% 0.95%
Portfolio turnover rate...................... 55% 68% 115% 108% 75%
</Table>
(1) Based on average shares outstanding during the period.
See notes to financial statements and notes to schedule of investments.
15
THE CHINA FUND, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2003
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 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 year ended, October
31, 2003 relate to the valuation of the Fund's Direct Investments, as further
discussed below and in Note B.
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 in good faith at fair
value using methods determined by the Board of Directors. Direct Investments not
traded on an exchange are valued at fair value as determined by the Board of
Directors based on advice from the Direct Investment Manager. The Direct
Investment's original cost is considered to be fair value unless the Board of
Directors, based on such advice, concludes there has been a material change of a
long-term nature and sufficient reliable information is available to revalue
these investments.
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 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.
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.
16
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OPTIONS 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.
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 income tax regulations, which may differ from
generally accepted accounting principles. These differences are primarily due to
differing treatments of foreign currency transactions, and losses deferred due
to wash sales.
The Fund paid $2,152,414 from Ordinary Income and $6,910 from Long-Term Capital
Gains during the year ended October 31, 2003. As of October 31, 2003 the
components of distributable earnings on a tax basis were $11,145,972 for
Undistributed Ordinary Income, $6,736,584 for Undistributed Long-Term Capital
Gains, and $114,236,452 for Unrealized Appreciation.
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 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.
17
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE B -- VALUATION OF DIRECT INVESTMENTS
At October 31, 2003, Direct Investments amounting to $5,406,530 (2.0% of net
assets) have been valued at fair value as determined by the Board of Directors
in the absence of readily ascertainable market values. The procedures applied by
the Board of Directors in arriving at its estimate of value of securities
without readily available market values comply with the Fund's policies for
valuing Direct Investments at original cost unless the Board of Directors, based
on advice from the Direct Investment Manager, concludes that there has been a
material change of a long-term nature and sufficient reliable information is
available to revalue these investments. Determination of fair values involves
subjective judgment and, because of the inherent uncertainty of valuation, the
Board of Directors' estimated values may differ significantly from the values
that would have been used had a ready market for the securities existed, and the
differences could be material.
NOTE C -- ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Martin Currie Inc. is the investment manager for the Fund's listed assets (the
"Listed Assets") and is paid a fee, computed weekly and payable monthly, at the
following annual rates: 1.00% of the first US$25 million of the Fund's average
weekly net assets invested in Listed Assets; 0.90% of the next US$25 million of
the Fund's average weekly net assets invested in Listed Assets; 0.70% of the
next US$25 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$75 million.
Asian Direct Capital Management ("ADCM") is the investment manager for the
Fund's assets allocated to Direct Investments. ADCM receives a fee, computed
weekly and payable monthly at an annual rate equal to the greater of $300,000 or
2.2% of the average weekly value of the net assets of the Fund invested in
Direct Investments.
No director, officer or employee of the Investment Manager or Direct Investment
Manager or any affiliates of those entities receives 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 $27,500 and $10,000, respectively, plus
$2,000 for each Board of Directors' meeting or Audit Committee meeting attended.
In addition, the Fund reimburses each of the directors and officers for travel
and out-of-pocket expenses incurred in connection with attending Board of
Directors' meetings.
NOTE D -- 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 year ended October 31, 2003, the Fund did not participate in
this program.
NOTE E -- INVESTMENT TRANSACTIONS
For the year ended October 31, 2003, the Fund's cost of purchases and proceeds
from sales of investment securities, other than short-term securities, were
$104,029,958 and $110,071,986, respectively. At October 31, 2003, the cost of
investments for federal income tax purposes was $148,750,566. Gross unrealized
appreciation of investments was $117,290,535, while gross unrealized
depreciation of investments was $3,043,752, resulting in net unrealized
appreciation of investments of $114,246,783.
18
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE F -- 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 G -- INVESTMENTS IN NON-CONTROLLED AFFILIATES*:
<Table>
<Caption>
INTEREST
DIVIDENDS INCLUDED IN
INCLUDED IN INTEREST
BALANCE OF BALANCE OF DIVIDEND INCOME-
SHARES HELD GROSS GROSS SALES SHARES HELD VALUE INCOME- NON- NON-
OCTOBER 31, PURCHASES AND OCTOBER 31, OCTOBER 31, CONTROLLED CONTROLLED
NAME OF ISSUER 2002 AND ADDITIONS REDUCTIONS 2003 2003 AFFILIATES AFFILIATES
- -------------- ----------- ------------- ----------- ----------- ----------- ------------ -----------
Captive Finance,
Ltd................ 2,000,000 -- -- 2,000,000 $3,045,000 $ -- $ --
LifeTec Group Ltd.... 79,708,000 88,784,000 168,492,000 -- -- -- --
Tomoike Industrial
(H.K.) Ltd......... -- 825,000 -- 825,000 2,361,530 -- 40,119.54
<Caption>
PRINCIPAL
NAME OF ISSUER PAYMENTS
- -------------- ---------
Captive Finance,
Ltd................ $ --
LifeTec Group Ltd.... --
Tomoike Industrial
(H.K.) Ltd......... --
</Table>
* Affiliated issuers, as defined in the 1940 Act, include issuers in which the
Fund held 5% or more of the outstanding voting securities.
NOTE H -- BENEFICIAL INTEREST
As of October 31, 2003, the Fund had one shareholder owning beneficially or of
record 7.70% shares of the Fund.
NOTE I -- INSTALLMENT SALE
On October 26, 2002, the Fund entered into an agreement to sell its direct
investment in New World Sun City Ltd. on an installment basis over a 14-month
period. Under the terms of the agreement, the Fund has received proceeds and
interest totaling HK$12,227,988 (US$1,612,964) through October 31, 2003. The
Fund has received the final proceeds and dividend payments from this
transaction.
NOTE J -- PROPOSED REVISION TO INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
(UNAUDITED)
The Board of Directors of the Fund has approved, subject to the approval of the
Fund's stockholders, a proposed revised Investment Advisory and Management
Agreement between the Fund and Martin Currie Inc. The proposed changes to the
advisory fee are as follows: Martin Currie Inc. will receive a fee, computed
weekly and payable monthly, at the following annual rates: 0.70% of the first
US$400,000,000 of the Fund's average weekly net assets consisting of Listed
Assets; and 0.50% of the Fund's average weekly net assets for all listed assets
in
19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
excess of US$400,000,000. Refer to Note C in the Notes to Financial Statements
for details of the current fee structure. The Fund's stockholders will have an
opportunity to vote on this proposal at the Fund's 2004 Annual Meeting of
Stockholders, and a proxy statement prepared for the meeting will contain
further information regarding the proposal.
20
THE CHINA FUND, INC.
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Shareholders and Board of Directors of
The China Fund, Inc.:
We have audited the accompanying statement of assets and liabilities of The
China Fund, Inc., including the schedule of investments, as of October 31, 2003,
and the related statement of operations for the year then ended, the statements
of changes in net assets for each of the years in the two-year period then ended
and financial highlights for each of the years in the five-year period then
ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2003, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of The
China Fund, Inc. as of October 31, 2003, the results of its operations for the
year then ended, changes in its net assets for each of the years in the two-year
period then ended and financial highlights for each of the years in the five
year period then ended, in conformity with accounting principles generally
accepted in the United States of America.
[KPMG LOGO]
Boston, Massachusetts
December 5, 2003
21
THE CHINA FUND, INC.
OTHER INFORMATION
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 needs 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.
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 will become available by calling the same number and
on the Commission's website when the Fund files its first report on Form N-PX
which is due by August 31, 2004 covering the Fund's proxy voting record for the
12 month period ending June 30, 2004.
22
DIVIDENDS AND DISTRIBUTIONS;
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 be deemed to have elected, unless Equiserve Trust Company,
N.A., the Plan Administrator, is otherwise instructed by the stockholder in
writing, to have all distributions automatically reinvested by the Plan
Administrator in Fund shares pursuant to the Plan. 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 stockholder by Equiserve Trust Company,
N.A., as paying agent. Shareholders who do not wish to have distributions
automatically reinvested should notify the Fund by contacting EquiServe c/o The
China Fund, Inc. at P.O. Box 43010, Providence, Rhode Island 02940-3010. Phone:
1-800-426-5523.
Equiserve Trust Company, N.A. ("EquiServe") or the ("Plan Administrator"), a
federally chartered trust institution, acts as Plan Administrator. EquiServe,
Inc. an affiliate of EquiServe and a transfer agent registered with the
Securities and Exchange Commission, acts as Service Agent for EquiServe. 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, as shareholders may have
elected, non-participants in the Plan will receive cash and participants in the
Plan will receive Common Stock, to be issued by the Fund. If the market price
per share on the valuation date equals or exceeds net asset value per share on
that date, the Fund will issue new shares to participants at net asset value or,
if the net asset value is less than 95% of the market price on the valuation
date, then at 95% of the 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 net asset value exceeds the market price of Fund shares at such time,
participants in the Plan will be deemed to have elected to receive shares of
stock from the Fund, valued at market price on the valuation date. If the Fund
should declare a dividend or capital gains distribution payable only in cash,
the Plan Administrator will, as administrator for the participants, buy Fund
shares 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 account
on, or shortly after, the payment date.
Participants in the Plan have the option of making additional payments to the
Plan Administrator, annually, in any amount from $100 to $3,000 for investment
in the Fund's Common Stock. The Plan Administrator 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 or about January
15 of each year. Any voluntary cash payments received more than thirty days
prior to such date will be returned by the Plan Administrator, and interest will
not be paid on any uninvested cash payments. To avoid unnecessary cash
accumulations, and also to allow ample time for receipt and processing by the
Plan Administrator, it is suggested that participants send in voluntary cash
payments to be received by the Plan Administrator approximately ten 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.
The Plan Administrator maintains all stockholder accounts in the Plan and
furnishes written confirmations of all transactions in the account, including
information needed by shareholders for personal and tax records. Shares in
23
DIVIDENDS AND DISTRIBUTIONS;
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
the account of each Plan participant will be held by the Plan Administrator in
non-certificated form in the name of the participant, and each stockholder's
proxy will include those shares purchased pursuant to the Plan.
In the case of shareholders, such as banks, brokers or nominees, which hold
shares for others who are the beneficial owners, the Plan Administrator will
administer the Plan on the basis of the number of shares certified from time to
time by the stockholder as representing the total amount registered in the
stockholder's name and held for the account of beneficial owners who are
participating in the Plan.
There is no charge to participants for reinvesting dividends or capital gains
distributions. The Plan Administrator's fees for the handling of the
reinvestment of dividends and distributions will be paid by the Fund. However,
each participant's account will be charged a pro rata share of brokerage
commissions incurred with respect to the Plan Administrator's open market
purchases in connection with the reinvestment of dividends or capital gains
distributions. A participant will also pay brokerage commissions incurred in
purchases from voluntary cash payments made by the participant. Brokerage
charges for purchasing small amounts of stock for individual accounts through
the Plan are expected to be less than the usual brokerage charges for such
transactions, because the Plan Administrator will be purchasing stock for all
participants in blocks and prorating the lower commission thus attainable.
The automatic reinvestment of dividends and distributions will not relieve
participants of any income tax which may be payable on such dividends and
distributions.
Experience under the Plan may indicate that changes are desirable. Accordingly,
the Fund reserves the right to amend or terminate the Plan as applied to any
voluntary cash payment made and any dividend or distribution paid subsequent to
notice of the change sent to all shareholders at least 90 days before the record
date for such dividend or distribution. The Plan also may be amended or
terminated by the Plan Administrator by at least 90 days' written notice to all
shareholders. All correspondence concerning the Plan should be directed to
EquiServe c/o The China Fund, Inc. at P.O. Box 43010, Providence, Rhode Island
02940-3010. Phone: 1-800-426-5523.
24
DIRECTORS AND OFFICERS (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The following table sets forth information concerning directors and officers of
the Fund.
<Table>
<Caption>
PRINCIPAL OCCUPATION OR EMPLOYMENT
NAME (AGE) AND PRESENT OFFICE DURING PAST FIVE YEARS AND DIRECTOR
ADDRESS OF DIRECTOR WITH THE FUND DIRECTORSHIPS IN PUBLICLY HELD COMPANIES SINCE
- ------------------- --------------- ---------------------------------------------------------- --------
Alan Tremain(68)............ Chairman of the Chairman of the Board of the Fund; Chairman, Hotels of 1992
380 South County Road Board and Distinction Ventures, Inc. (1989-present); Chairman,
Suite 200 Director Hotels of Distinction (International), Inc.
Palm Beach, Florida 33480 (1974-present).
Gary L. French(52).......... President Senior Vice President, State Street Bank and Trust Company
225 Franklin Street (2002-present); Managing Director, Deutsche Asset
Boston, MA 02110 Management, Inc. and Zurich Scudder Investments (acquired
by Deutsche Bank in 2002) (2001-2002); President UAM Fund
Services, Inc. (1995-2001); Treasurer, Fidelity Group of
Funds (1991-1995); Senior Vice President, Fidelity
Accounting and Custody Services (1990-1991)
Michael F. Holland(59)...... Director Chairman, Holland & Company L.L.C. (1995-present); 1992
375 Park Avenue Director, The Holland Balanced Fund, Inc., State Street
New York, New York 10152 Master Funds and State Street Institutional Investment
Trust.
Burton Levin(73)............ Director Visiting Professor Carleton College (1995-present); 1992
18 Page Farm Road Co-Chairman, Hopkins-Nanjing Center (1999-present);
Sherborn, MA 01770 Director, Noble Ltd. (1997-present); U.S. Ambassador to
Burma (1987-1990).
James J. Lightburn(60)...... Director Attorney, member of Hughes Hubbard & Reed (1993-present). 1992
47, Avenue Georges Mandel
Paris, France 75116
Joe O. Rogers(55)........... Director Manager, The J-Squared Team LLC (2003-present); 1992
2247 Foxwood Drive The Rogers Team LLC, organizing member (July
Chapel Hill, NC 27514 2001-present); Executive Vice President, Business
Development, PlanetPortal.com, Inc. (Sept. 1999-May 2001);
President, Rogers International, Inc. (1986-1998); Vice
President of Business Development, Thomson Consulting
(1998-May 1999); Director, The Taiwan Fund, Inc.
(1986-present).
Nigel S. Tulloch(57)........ Director Chief Executive, HSBC Asset Management Bahamas Limited 1992
7, Circe Circle (1986-1992); Director, The HSBC China Fund Limited.
Dalkeith
WA6009
Australia
Ann M. Casey(37)............ Treasurer Vice President, State Street Bank and Trust Company.
225 Franklin Street
Boston, MA 02110
Mary Moran Zeven(42)........ Secretary Senior Vice President and Senior Managing Counsel, State
225 Franklin Street Street Bank and Trust Company (2000-present).
Boston, MA 02110
Julie A. Tedesco(46)........ Assistant Vice President and Counsel, State Street Bank and Trust
225 Franklin Street Secretary Company.
Boston, MA 02110
</Table>
25
THE CHINA FUND, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES ADDRESS
The China Fund, Inc.
225 Franklin Street
Boston, MA 02110
1-888-CHN-CALL (246-2255)
DIRECTORS AND OFFICERS
Alan Tremain, O.B.E., Director and Chairman of the Board
Gary L. French, President
Michael F. Holland, Director
Burton Levin, Director
James J. Lightburn, Director
Joe O. Rogers, Director
Nigel S. Tulloch, Director
Ann M. Casey, Treasurer
Mary Moran Zeven, Secretary
Julie A. Tedesco, Assistant Secretary
INVESTMENT MANAGER
Martin Currie Inc.
DIRECT INVESTMENT MANAGER
Asian Direct Capital Management
SHAREHOLDER SERVICING AGENT
Georgeson Shareholder
ADMINISTRATOR AND CUSTODIAN
State Street Bank and Trust Company
TRANSFER AGENT, DIVIDEND PAYING AGENT AND REGISTRAR
Equiserve Trust Company, N.A.
INDEPENDENT AUDITORS
KPMG LLP
LEGAL COUNSEL
Clifford Chance US LLP
ITEM 2: CODE OF ETHICS
(a) The China Fund, Inc. (the "Fund") has adopted a Code of Ethics that
applies to the Fund's principal executive officer and principal
financial officer.
(c) There have been no amendments to the Fund's Code of Ethics during the
reporting period for Form N-CSR.
(d) There have been no waivers granted by the Fund to individuals covered
by the Fund's Code of Ethics during the reporting period for Form
N-CSR.
(f) A copy of the Fund's Code of Ethics is attached as an exhibit to this
Form N-CSR.
ITEM 3: AUDIT COMMITTEE FINANCIAL EXPERT
(a) (1) The Board of Directors of The China Fund, Inc. (the "Fund")
has determined that the Company has one member serving on the
Fund's Audit Committee that possesses the attributes
identified in Instruction 2(b) of Item 3 to Form N-CSR to
qualify as "audit committee financial expert."
(2) The name of the audit committee financial expert is Michael F.
Holland. Mr. Holland has been deemed to be "independent" as
that term is defined in Item 3(a)(2) of Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees
For the fiscal year ended October 31, 2003, KPMG billed the Fund
aggregate fees of US$48,500 for professional services rendered for the audit of
the Fund's annual financial statements and review of financial statements
included in the Fund's annual report to shareholders.
For the fiscal year ended October 31, 2002, KPMG billed the Fund
aggregate fees of US$47,000 for professional services rendered for the audit of
the Fund's annual financial statements and review of financial statements
included in the Fund's annual report to shareholders.
(b) Audit-Related Fees
For the fiscal year ended October 31, 2003, KPMG did not bill the Fund
any fees for assurances and related services that are reasonably related to the
performance of the audit or review of the Fund's financial statements and are
not reported under the section Audit Fees above.
For the fiscal year ended October 31, 2002, KPMG did not bill the Fund
any fees for assurances and related services that are reasonably related to the
performance of the audit or review of the Fund's financial statements and are
not reported under the section Audit Fees above.
(c) Tax Fees
For the fiscal year ended October 31, 2003, KPMG billed the Fund
aggregate fees of US$8,500 for professional services rendered for tax
compliance, tax advice, and tax planning. The nature of the
services comprising the Tax Fees was the review of the Fund's income tax returns
and tax distribution requirements.
For the fiscal year ended October 31, 2002, KPMG billed the Fund
aggregate fees of US$8,000 for professional services rendered for tax
compliance, tax advice, and tax planning. The nature of the services comprising
the Tax Fees was the review of the Fund's income tax returns and tax
distribution requirements.
(d) All Other Fees
For the fiscal year ended October 31, 2003, KPMG did not bill the Fund
any fees for products and services other than those disclosed above.
For the fiscal year ended October 31, 2002, KPMG did not bill the Fund
any fees for products and services other than those disclosed above.
(e) (1) The Fund's Audit Committee Charter requires that the Audit
Committee pre-approve all audit and non-audit services to be provided to the
Fund by the Fund's independent accountants; provided, however, that the
pre-approval requirement with respect to non-auditing services to the Fund may
be waived consistent with the exceptions provided for in the Securities Exchange
Act of 1934, as amended (the "1934 Act"). All of the audit and tax services
described above for which KPMG billed the Fund fees for the fiscal years ended
October 31, 2003 and October 31, 2002 were pre-approved by the Audit Committee.
For the fiscal years ended October 31, 2003 and October 31, 2002, the
Fund's Audit Committee did not waive the pre-approval requirement of any
non-audit services to be provided to the Fund by KPMG.
(g) For the fiscal year ended October 31, 2003, the aggregate non-audit
fees billed by KPMG for services rendered to the Fund were US$8,500. During the
same period, the aggregate non-audit fees billed by KPMG for services rendered
to State Street Bank and Trust Company, the parent company of the Fund's direct
investment manager, Asian Direct Capital Management, was US$440,000. The
non-audit services provided to State Street Bank and Trust Company were not
ongoing services and were not related directly to the operations and financial
reporting of the Fund. During this period, KPMG did not provide any services to
Martin Currie Inc.
For the fiscal year ended October 31, 2002, the aggregate non-audit
fees billed by KPMG for services rendered to the Fund were US$8,000. During the
same period, the aggregate non-audit fees billed by KPMG for services rendered
to State Street Bank and Trust Company, an affiliate of the Fund's direct
investment manager, Asian Direct Capital Management, was US$50,000. The
non-audit services provided to State Street Bank and Trust Company were not
ongoing services and were not related directly to the operations and financial
reporting of the Fund. During this period, KPMG did not provide any services to
Martin Currie Inc.
(h) The Fund's Audit Committee has determined that the provision of
non-audit services by KPMG to State Street Bank and Trust is compatible with
maintaining KPMG's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
(a) The Fund has a separately-designated audit committee established in
accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as
amended. The members of the Fund's audit committee are Alan Tremain, James J.
Lightburn, Nigel Tulloch, Joe O. Rogers, Michael F. Holland, and Burton Levin.
ITEM 6. [RESERVED]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
INVESTMENT COMPANIES.
Attached to this Form N-CSR as exhibits are copies of the proxy voting policies
and procedures of the Fund and its investment advisers.
ITEM 8. PURCHASE OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT COMPANY AND
AFFILIATED PURCHASERS
NOT APPLICABLE
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NOT APPLICABLE
ITEM 10. 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 Exchange 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
half-year that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting.
ITEM 11. EXHIBITS
(a)(1) Code of Ethics is attached hereto.
(a)(2) The certifications required by Rule 30a-2 of the 1940 Act are attached
hereto.
(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.
(c) Proxy voting policies and procedures of the Fund and its investment
advisers 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: /s/Gary L. French
----------------------------------
Gary L. French
President of The China Fund, Inc.
By: /s/Ann M. Casey
----------------------------------
Ann M. Casey
Treasurer of The China Fund, Inc.
Date: January 9, 2004
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: /s/Gary L. French
----------------------------------
Gary L. French
President of The China Fund, Inc.
By: /s/Ann M. Casey
----------------------------------
Ann M. Casey
Treasurer of The China Fund, Inc.
Date: January 9, 2004