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 Copy to:
Service)
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, Jr., Esq.
Clifford Chance U.S. LLP
31 West 52nd Street
New York, New York 10019
Registrant's telephone number, including area code: (888) 246-2255
Date of fiscal year end: October 31
Date of reporting period: April 30, 2004
ITEM 1: SHAREHOLDER REPORT
THE CHINA FUND, INC.
SEMI-ANNUAL REPORT
APRIL 30, 2004
(UNAUDITED)
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 7
Schedule of Investments 8
Financial Statements 12
Notes to Financial Statements 16
Other Information 21
Dividends and Distributions;
Dividend Reinvestment
and Cash Purchase Plan 22
</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 10,081,913
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TOTAL NET ASSETS (04/30/04) US$256.6 MILLION
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NET ASSET VALUE (04/30/04) $25.46
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MARKET PRICE (04/30/04) $26.74
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</Table>
<Table>
<Caption>
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TOTAL RETURN
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PERFORMANCE AS OF
04/30/04: NET ASSET VALUE(1) MARKET PRICE
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6 MONTHS -1.03% -19.42%
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3-YEAR CUMULATIVE 87.31% 148.34%
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3-YEAR ANNUALIZED 23.27% 35.42%
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5-YEAR CUMULATIVE 135.41% 206.97%
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5-YEAR ANNUALIZED 18.68% 25.15%
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10-YEAR CUMULATIVE 113.59% 103.58%
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10-YEAR ANNUALIZED 7.88% 7.37%
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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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12/29/03 $0.0700 $1.7100
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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 APRIL 30, 2004
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<Table>
<Caption>
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TEN LARGEST LISTED EQUITY INVESTMENTS*
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1. Chaoda Modern Agriculture (Holdings) Ltd. 5.22%
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2. TCL International Holdings, Ltd. 4.72%
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3. BYD Co., Ltd. 3.75%
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4. Comba Telecom Systems Holdings Ltd. 3.61%
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5. Sohu.com Inc. 3.43%
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6. China Metal Products Co., Ltd. 2.89%
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7. Merry Electronics Co., Ltd. 2.72%
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8. Cathay Financial Holding Co., Ltd. 2.67%
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9. TPV Technology, Ltd. 2.59%
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10. Anhui Expressway Co., Ltd. 2.55%
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</Table>
<Table>
<Caption>
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LARGEST DIRECT INVESTMENTS*
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1. Captive Finance, Ltd. 1.19%
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2. Tomoike Industrial (H.K.) Ltd. 0.92%
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3. teco Optronics Corp. 0.18%
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</Table>
* Percentages based on net assets at April 30, 2004.
2
THE CHINA FUND, INC.
CHAIRMAN'S STATEMENT
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Dear Stockholders:
During the six months ended April 30, 2004, your Fund's net asset value
decreased by -1.03% after taking into consideration the US$1.78 per share
distribution paid to shareholders in January 2004. Although the Chinese economy
continued to grow rapidly, it began to seem almost too rapid to some, most
notably the People's Bank of China (PBOC). Thus, as the PBOC introduced
tightening measures, China stocks were sold-off. This was despite continuing
strong results from Chinese corporations.
Worries that China's economy might not be able to achieve a 'soft landing' drove
the premium in the price of the Fund's Shares down from 29.00% to 5.03% as of
April 30, 2004, while the annualized expense ratio as of April 30, 2004, has
fallen to 1.36%.
China's economy made a rapid recovery from the SARS slow-down and some sectors
have started to overheat. The Central Government has taken steps to slow down
fixed investments in the steel, cement, and real estate industries. We believe
that this will lead to a mid-cycle correction and that the longer-term growth
trend will continue. Those sectors that have thrived on the successful
ingredients of low cost production, skilled labour and globalization of the
value chain should continue to maintain their impressive growth. Like the 1994
slowdown, we believe that this tightening of the economy should offer good
investment opportunities for the Direct Investment Portfolio. During the period
under review, the Direct Investment Manager added one investment, teco
Optronics, to the Direct Investment Portfolio. teco Optronics is a specialist
manufacturer of innovative organic light-emitting diode display ("OLED") panels.
The Board of Directors remains optimistic about the long-term growth prospects
for China. We believe that the Fund remains one of the best ways to access such
growth through investment in a selection of entrepreneurial Chinese companies.
The recent market sell-off means that there are now better values to be had. We
believe that China is making progress on some of its more pressing structural
problems, such as the reform of the state-owned sector, but more work needs to
be done, particularly on China's moribund financial system. Against this
background, investors should expect to see further volatility in Chinese
equities.
We thank you for your continuing support and for your interest in our Fund. 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
In the last few weeks there have been many media and broker reports about a
slowdown in China's economic growth, about the government's credit-tightening
measures and even an "austerity program". Your managers, based in Shanghai,
travel extensively in China, and we just do not see it. We do not believe that
there will be an appreciable slowdown in Chinese growth in the near term. We
also do not believe that this is what the government wants, given its desperate
need to create employment. What is happening is that the government is trying to
prevent the misallocation of capital to certain 'hot' industries - the four
so-called 'evil sectors' - steel, aluminium, cement and luxury property
development. This is a perennial problem in China caused by the combination of
an as yet unreformed, state-owned financial sector and, ironically for a
dictatorship, weak central control over the provinces. There are other sectors
where the government is keen to promote investment. In an interview with Reuters
last week, Premier Wen Jia Bao said, "We are now faced with very serious
shortages of coal, power, oil and transport."
It appears that investors in global equity and bond markets are now worrying
about the end of the cheap money era. China, having been a hot market in 2003,
has been affected the most. But, it is not clear if a modest rise in interest
rates in the United States and China (the two seem likely to move in parallel
given the current currency peg) will have as great an impact on the latter as
the former. China has a high savings rate and consumer finance and mortgage
lending are in their infancy here. Meanwhile, listed Chinese companies,
especially in the private sector, tend to have a low level of gearing. The more
developed cities, such as Shanghai, would be more affected by higher rates than
the rest of the country, but not as much as San Francisco, New York and London.
The recent sharp correction means that there are now many high growth companies
which can be bought for a price earnings multiple below 10x. We estimate that
the whole portfolio now trades on a price/earnings ratio of 12x, with earnings
growth of 21% and a yield of about 2.4%. Recent first quarter results from
portfolio companies, such as SOHU and CATHAY LIFE, have been strong; the few
disappointments, such as CHENG SHIN TYRE, have been caused by inflation in costs
offsetting top-line growth.
Over the past six months, we did more selling than buying, raising cash levels
and preparing money for new unlisted investments. We took profits on textile
stocks by selling long-term holdings FOUNTAIN SET, JINGWEI TEXTILE MACHINERY,
LUTHAI TEXTILE and TAINAN ENTERPRISES. This is an industry where we expect trade
conflict with the United States in early 2005. We also sold CHINA MOTOR and
BRILLIANCE CHINA because we are worried about plans for capacity expansion.
Towards the end of this quarter, we took decent profits from recovering foundry
maker VANGUARD, STN-LCD panel maker WINTEK as well as richly valued H-shares
such as ANHUI CONCH and YANZHOU COAL. We also sold TAIWAN HONCHUAN based on
disappointing first quarter results and BEIJING AIRPORT due to its expensive
valuation.
On the buy side, we added investments in some neglected technology stocks such
as COMBA, a well managed manufacturer of telecom infrastructure equipment,
foundry UMC, DVD maker CMC, China's leading electronics distributor, DIGITAL
CHINA, and 3C retailer TSANN KUENN. We added to our holding in CHINA RARE EARTH
as we expect rare earth and refractory prices to recover. We also bought YIEH
UNITED, the only integrated
4
THE CHINA FUND, INC.
INVESTMENT MANAGERS' STATEMENTS (CONTINUED)
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REVIEW OF LISTED INVESTMENTS (CONTINUED)
stainless steel mill in Taiwan. We subscribed to new listings of the diesel
engine maker WEICHAI and the IC designer SOLOMON SYSTECH. As confidence returns,
we plan to reduce our cash position and increase the beta of the Fund. For
monthly updates on our investment strategy, please see our website
www.chinafundinc.com
5
THE CHINA FUND, INC.
INVESTMENT MANAGERS' STATEMENTS (CONTINUED)
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REVIEW OF DIRECT INVESTMENTS
During the six months under review, market sentiment towards China investments
underwent a significant change. Investors' sentiment was initially buoyed by the
resilience of the Chinese economy in the wake of the SARS outbreak and the
launching of a number of successful China listings in Hong Kong and on the
NASDAQ. However, around March 2004, investors began to fret over the risks of
overheating. China has since announced a series of measures aimed at slowing
down the economy. The authorities acted relatively early in this cycle when
inflation was still at a modest level of around 4%. We believed that the secular
story for China is still intact and that this mid-cycle correction will present
good opportunities for direct investments.
The Fund added one new investment to its Direct Investment portfolio. We
invested in TECO OPTRONICS CORP., a Taiwanese company that designs and
manufactures organic light-emitting diode displays ("OLED").
As of April 30, 2004, the Fund's Direct Investment portfolio comprised the
following investments:
CAPTIVE FINANCE LIMITED ("CAPTIVE")
Captive is engaged in providing operating and financial leases for technology
products (PCs, servers, telecom equipment etc.). It has operations in Greater
China, Singapore, Malaysia and Europe. Apart from seeking leasing opportunities
within each of its national markets, Captive is also building cross-selling and
other synergies between the Asian and European operations.
TOMOIKE INDUSTRIAL (HK) 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 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 profit growth strongly above budget
as a result of robust demand for its products, especially the backlight units.
TECO OPTRONICS CORP. ("TECO")
teco designs and manufactures OLED displays and has a licensing agreement with
Kodak. OLED is a new flat screen display technology that is competing with
liquid crystal displays ("LCDs"). teco is a subsidiary of the TECO Group which
started out as an industrial motor manufacturer and has since diversified into
home appliances, information technology and many other business areas. Its
flagship company, TECO Electric and Machinery, has been listed on the Taiwan
Stock Exchange since 1973.
6
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 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 United States, 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.
7
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS
APRIL 30, 2004 (UNAUDITED)
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- --------------------------------------------------------------------------------
<Table>
<Caption>
NAME OF ISSUER AND TITLE OF ISSUE SHARES VALUE (NOTE A)
- --------------------------------- ------ --------------
COMMON STOCK AND OTHER EQUITY INTERESTS
CHINA -- SHENZHEN "B" SHARES
INDUSTRIALS -- (1.8%)
China International Marine Containers (Group) Co.,
Ltd.*................................................ 2,442,747 $ 4,641,398
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TOTAL CHINA -- SHENZHEN "B" SHARES -- (Cost
$2,735,768) 1.8% 4,641,398
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HONG KONG
CONSUMER DISCRETIONARY -- (4.7%)
TCL International Holdings, Ltd. ...................... 32,318,000 12,119,716
------------
CONSUMER STAPLES -- (6.1%)
Chaoda Modern Agriculture (Holdings) Ltd. ............. 43,089,900 13,397,055
Sino Golf Holdings, Ltd. .............................. 11,835,000 2,321,570
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15,718,625
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HEALTH CARE -- (3.1%)
Golden Meditech Co., Ltd. ............................. 13,950,000 5,812,724
Natural Beauty Bio-Technology, Ltd. ................... 32,780,000 2,101,363
------------
7,914,087
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INDUSTRIALS -- (7.5%)
Beiren Printing Machinery Holdings Ltd. ............... 7,000,000 2,041,745
China Fire Safety Enterprise Group Holdings Ltd. ...... 50,380,000 3,165,019
First Tractor Co., Ltd.*............................... 19,950,000 3,197,238
Proview International Holdings Ltd. ................... 17,644,000 4,162,335
TPV Technology, Ltd. .................................. 9,968,000 6,645,589
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19,211,926
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INFORMATION TECHNOLOGY -- (2.3%)
Arcontech Corp.*....................................... 18,386,000 407,808
Hongkong.Com Corp.*.................................... 30,232,000 2,829,514
Solomon Systech Ltd.*.................................. 11,698,000 2,789,630
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6,026,952
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MATERIALS -- (5.1%)
Asia Zirconium Ltd. ................................... 13,196,000 2,233,255
China Rare Earth Holdings, Ltd. ....................... 15,254,000 2,073,060
Fountain Set (Holdings), Ltd. ......................... 8,550,000 6,303,127
Ocean Grand Chemicals Holdings Ltd. ................... 17,379,000 2,495,542
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13,104,984
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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)
APRIL 30, 2004 (UNAUDITED)
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<Table>
<Caption>
NAME OF ISSUER AND TITLE OF ISSUE SHARES VALUE (NOTE A)
- --------------------------------- ------ --------------
COMMON STOCK AND OTHER EQUITY INTERESTS (CONTINUED)
HONG KONG (CONTINUED)
TELECOMMUNICATIONS -- (3.6%)
Comba Telecom Systems Holdings Ltd.*................... 15,356,000 $ 9,253,330
------------
UTILITIES -- (2.4%)
Xinao Gas Holdings, Ltd.*.............................. 13,976,000 6,047,540
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TOTAL HONG KONG -- (Cost $56,934,084) 34.8% 89,397,160
------------
HONG KONG -- "H" SHARES
CONSUMER DISCRETIONARY -- (1.4%)
Weichai Power Co. Ltd.*................................ 2,110,000 3,557,380
------------
ENERGY -- (1.9%)
Yanzhou Coal Mining Co. ............................... 5,186,000 4,886,996
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INDUSTRIALS -- (6.7%)
Beijing Capital International Airport Co., Ltd. ....... 5,472,000 1,683,757
BYD Co., Ltd. ......................................... 3,225,000 9,613,350
Jingwei Textile Machinery Co., Ltd. ................... 5,936,000 1,560,163
Sinotrans Limited...................................... 12,835,000 4,401,916
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17,259,186
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MATERIALS -- (0.9%)
Sinopec Beijing Yanhua Petrochemical Co., Ltd.*........ 7,328,000 2,137,415
------------
TELECOMMUNICATIONS -- (1.5%)
China Telecom Corporation Ltd. ........................ 13,000,000 3,875,149
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UTILITIES -- (5.0%)
Anhui Expressway Co., Ltd. ............................ 17,778,000 6,553,041
Shenzhen Expressway Co., Ltd. ......................... 21,494,000 6,338,218
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12,891,259
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TOTAL HONG KONG -- "H" SHARES -- (Cost $32,855,320) 17.4% 44,607,385
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TOTAL HONG KONG (INCLUDING "H" SHARES) -- (Cost
$89,789,404) 52.2% 134,004,545
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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)
APRIL 30, 2004 (UNAUDITED)
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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
CONSUMER DISCRETIONARY -- (7.0%)
Merry Electronics Co., Ltd. ........................... 2,844,208 $ 6,977,813
Synnex Technologies International, Corp. .............. 2,950,640 4,574,291
Taiwan FamilyMart Co., Ltd. ........................... 1,478,520 2,381,120
Taiwan Hon Chuan Enterprise Co., Ltd. ................. 1,544,435 1,803,856
Tsann Kuen Enterprise Co., Ltd. ....................... 1,700,000 2,328,417
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18,065,497
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FINANCIALS -- (6.5%)
Cathay Financial Holding Co., Ltd. .................... 3,862,000 6,859,061
Fubon Financial Holdings Co., Ltd. .................... 5,453,952 5,204,403
Polaris Securities Co., Ltd.*.......................... 8,359,377 4,680,446
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16,743,910
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INDUSTRIALS -- (3.3%)
Cheng Shin Rubber Industry Co., Ltd. .................. 3,016,400 3,513,988
Chicony Electronics Co., Ltd. ......................... 2,500,960 4,931,152
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8,445,140
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INFORMATION TECHNOLOGY -- (10.1%)
CMC Magnetics Corp.*................................... 3,100,000 2,575,557
Data Systems Consulting Co., Ltd. ..................... 3,968,339 2,902,789
Soft-World International Corp. ........................ 790,000 2,532,661
Taiwan Green Point Enterprises Co., Ltd. .............. 1,831,200 6,008,453
United Microelectronics Corp.*......................... 4,000,000 3,588,200
Vanguard International Semiconductor Corp.*............ 8,000,000 3,636,364
Wintek Corp. .......................................... 3,392,000 4,553,979
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25,798,003
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MATERIALS -- (3.6%)
China Metal Products Co., Ltd. ........................ 5,873,408 7,425,741
Yieh United Steel Corp.*............................... 3,500,000 1,791,090
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9,216,831
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</Table>
See notes to financial statements and notes to schedule of investments.
10
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
APRIL 30, 2004 (UNAUDITED)
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<Table>
<Caption>
NAME OF ISSUER AND TITLE OF ISSUE SHARES VALUE (NOTE A)
- --------------------------------- ------ --------------
COMMON STOCK AND OTHER EQUITY INTERESTS (CONTINUED)
TAIWAN (CONTINUED)
TELECOMMUNICATIONS -- (3.8%)
Ability Enterprise Co., Ltd. .......................... 5,614,840 $ 4,766,360
Chunghwa Telecom Co., Ltd. ............................ 3,055,000 4,920,003
------------
9,686,363
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TOTAL TAIWAN -- (Cost $60,818,909) 34.3% 87,955,744
------------
UNITED STATES -- "N" SHARES
INFORMATION TECHNOLOGY -- (3.4%)
Sohu.com Inc.*......................................... 526,286 8,810,028
------------
TOTAL UNITED STATES -- "N" SHARES -- (Cost $878,898) 3.4% 8,810,028
------------
TOTAL COMMON STOCK AND OTHER EQUITY
INTERESTS -- (Cost $154,222,979) 91.7% 235,411,715
------------
DIRECT INVESTMENTS
FINANCIALS -- (1.2%)
Captive Finance, Ltd., (acquired 5/24/02)(1)*+......... 2,000,000 3,045,000
------------
INDUSTRIALS -- (0.9%)
Tomoike Industrial (H.K.) Ltd., (acquired
2/21/03)(1)+......................................... 825,000 2,351,932
------------
INFORMATION TECHNOLOGY -- (0.2%)
teco Optronics Corp. (acquired 4/26/04)(1)*............ 1,500,000 451,535
------------
TOTAL DIRECT INVESTMENTS -- (Cost $5,851,239) 2.3% 5,848,467
------------
TOTAL INVESTMENTS -- (Cost $160,074,218)(Note E) 94.0% 241,260,182
------------
OTHER ASSETS AND LIABILITIES 6.0% 15,375,745
============
NET ASSETS 100.0% $256,635,927
============
</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 Note 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.
STATEMENTS OF ASSETS AND LIABILITIES
APRIL 30, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Table>
ASSETS:
Investments in listed investments, at value (cost
$154,222,979) (Note A)................................. $235,411,715
Investments in direct investments, at value (cost
$5,851,239) (Notes A and B)............................ 5,848,467
Cash...................................................... 1,178,694
Foreign currency, at value (cost $16,310,935)............. 16,274,705
Receivable for investments sold........................... 362,885
Dividends and interest receivable......................... 1,156,818
------------
TOTAL ASSETS................................................ 260,233,284
============
LIABILITIES:
Payable for investments purchased......................... 3,082,180
Investment management fee payable (Note C)................ 221,682
Administration and custodian fees payable................. 86,035
Accrued expenses and other liabilities.................... 207,460
------------
TOTAL LIABILITIES........................................... 3,597,357
------------
TOTAL NET ASSETS............................................ $256,635,927
============
COMPOSITION OF NET ASSETS:
Capital paid in excess of par (Note D).................... 139,491,406
Distributions in excess of net investment income.......... (243,592)
Accumulated net realized gain on investments and foreign
currency transactions.................................. 36,235,911
Net unrealized appreciation on investments and foreign
currency transactions.................................. 81,152,202
------------
TOTAL NET ASSETS............................................ $256,635,927
============
NET ASSETS VALUE PER SHARE
($256,635,927/10,081,913 shares of common stock
outstanding).............................................. $25.46
============
</Table>
See notes to financial statements and notes to schedule of investments.
12
THE CHINA FUND, INC.
STATEMENTS OF OPERATIONS
FOR SIX MONTHS ENDED APRIL 30, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Table>
INVESTMENT INCOME:
Dividend income -- listed investments (net of taxes
withheld of $175)...................................... $ 1,597,454
Interest income -- direct investments..................... 29,814
------------
TOTAL INVESTMENT INCOME................................ 1,627,268
------------
EXPENSES:
Investment management fees (Note C)....................... 1,013,867
Custodian fees............................................ 189,176
Directors' fees and expenses (Note C)..................... 181,147
Administration fees....................................... 230,388
Legal fees................................................ 69,692
Insurance................................................. 44,113
Audit and tax service fees................................ 29,959
Printing and postage...................................... 88,069
Stock exchange listing fee................................ 17,747
Transfer Agent fees....................................... 11,459
Shareholder service fees.................................. 10,705
Miscellaneous expenses.................................... 1,445
------------
TOTAL EXPENSES......................................... 1,887,767
------------
NET INVESTMENT LOSS......................................... (260,499)
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY:
Net realized gain on listed investment transactions....... 36,389,336
Net realized gain on foreign currency transactions........ 11,752
------------
36,401,088
------------
Net change in unrealized appreciation on listed
investments and foreign currency transactions.......... (33,172,566)
Net change in unrealized appreciation on direct
investments............................................ (12,263)
------------
(33,184,829)
------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS..................................... 3,216,259
------------
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 2,955,760
============
</Table>
See notes to financial statements and notes to schedule of investments.
13
THE CHINA FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Table>
<Caption>
SIX MONTHS ENDED YEAR ENDED
APRIL 30, 2004 OCTOBER 31, 2003
---------------- ----------------
(UNAUDITED)
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income (loss).............................. $ (260,499) $ 641,133
Net realized gain on investments and foreign currency
transactions........................................... 36,401,088 18,838,037
Net change in unrealized appreciation on investments and
foreign currency translations.......................... (33,184,829) 103,638,989
------------ ------------
Net increase in net assets from operations................ 2,955,760 123,118,159
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income..................................... (705,122) (644,376)
Capital gains............................................. (17,225,127) (1,514,948)
------------ ------------
Total dividends and distributions to shareholders......... (17,930,249) (2,159,324)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Reinvestment of Dividends and Distributions (8,739 and 0
shares, respectively).................................. 332,196 --
------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS....................... (14,642,293) 120,958,835
------------ ------------
NET ASSETS:
Beginning of year........................................... 271,278,220 150,319,385
------------ ------------
End of year................................................. $256,635,927 $271,278,220
============ ============
Undistributed/(Distributions in excess of) Net Investment
Income, end of period..................................... $ (243,592) $ 722,029
============ ============
</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>
SIX MONTHS ENDED
APRIL 30, YEAR ENDED OCTOBER 31,
---------------- ----------------------------------------------------
2004 2003 2002 2001 2000 1999
---------------- -------- -------- -------- -------- --------
(UNAUDITED)
PER SHARE OPERATION
PERFORMANCE(1)
Net asset value, beginning of
year.......................... $ 26.93 $ 14.92 $ 13.19 $ 12.37 $ 12.74 $ 10.84
Net investment income (loss).... (0.02) 0.06 0.11 0.14 (0.03) 0.12
Net realized and unrealized gain
(loss) on investment and
foreign currency
transactions.................. 0.33 12.16 1.75 0.68 (0.23) 1.86
-------- -------- -------- -------- -------- --------
Total income (loss) from
investment operations......... 0.31 12.22 1.86 0.82 (0.26) 1.98
-------- -------- -------- -------- -------- --------
Less distributions:
Dividend from net investment
income...................... (0.07) (0.06) (0.13) 0.00 (0.11) (0.08)
Distributions from net
realized capital gains...... (1.71) (0.15) 0.00 0.00 0.00 0.00
-------- -------- -------- -------- -------- --------
Total distributions............. (1.78) (0.21) (0.13) 0.00 (0.11) (0.08)
-------- -------- -------- -------- -------- --------
Net asset value, end of year.... $ 25.46 $ 26.93 $ 14.92 $ 13.19 $ 12.37 $ 12.74
======== ======== ======== ======== ======== ========
Per share market value, end of
year.......................... $ 26.74 $ 34.74 $ 12.61 $ 10.74 $ 8.94 $ 9.94
======== ======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN (BASED
ON MARKET VALUE).............. (19.42)% 179.41% 18.63% 20.13% (9.14)% 14.65%
======== ======== ======== ======== ======== ========
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of year
(000's)....................... $256,636 $271,278 $150,319 $132,912 $124,619 $128,303
Ratio of expenses to average net
assets........................ 1.36%(2) 1.76% 1.97% 2.39% 2.12% 2.28%
Ratio of expenses to average net
assets, excluding stock
dividend tax expense.......... 1.36%(2) 1.68% 1.85% 2.31% 2.12% 2.28%
Ratio of net investment income
(loss) to average net
assets........................ (0.19)%(2) 0.32% 0.72% 1.09% (0.21)% 0.95%
Portfolio turnover rate......... 19% 55% 68% 115% 108% 75%
</Table>
(1) Based on average shares outstanding during the period.
(2) Annualized.
See notes to financial statements and notes to schedule of investments.
15
THE CHINA FUND, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 2004
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 six months ended,
April 30, 2004 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 readily available are valued at current 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 Investment Manager
and 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.
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.
NOTE B -- VALUATION OF DIRECT INVESTMENTS
At April 30, 2004, Direct Investments amounting to $5,848,467 (2.3% 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
17
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 was paid a fee, computed weekly and payable monthly, at the
following annual rates from November 1, 2003 through March 18, 2004: 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.
Effective March 19, 2004, Martin Currie Inc. is paid a fee, computed weekly and
payable monthly at the following annual rates: 0.70% of the first US$400 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$400 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 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 $27,500 and $10,000, respectively, plus
$2,000 for each Board of Directors' meeting or Audit Committee meeting attended.
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.
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 six months ended April 30, 2004, the Fund did not participate
in this program.
18
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE E -- INVESTMENT TRANSACTIONS
For the six months ended April 30, 2004, the Fund's cost of purchases and
proceeds from sales of investment securities, other than short-term securities,
were $49,665,367 and $74,599,787, respectively. At April 30, 2004, the cost of
investments for federal income tax purposes was $160,074,218. Gross unrealized
appreciation of investments was $89,463,502, while gross unrealized depreciation
of investments was $8,277,538, resulting in net unrealized appreciation of
investments of $81,185,964.
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>
DIVIDENDS INTEREST
INCLUDED IN INCLUDED IN
DIVIDEND INTEREST
BALANCE OF BALANCE OF INCOME- INCOME-
SHARES HELD GROSS GROSS SALES SHARES HELD VALUE NON- NON-
OCTOBER 31, PURCHASES AND APRIL 30, APRIL 30, CONTROLLED CONTROLLED
NAME OF ISSUER 2003 AND ADDITIONS REDUCTIONS 2004 2004 AFFILIATES AFFILIATES
- -------------- ----------- ------------- ----------- ----------- ----------- ------------ -----------
Captive Finance,
Ltd. ................ 2,000,000 -- -- 2,000,000 $3,045,000 $ -- $ --
Tomoike Industrial
(H.K.) Ltd........... 825,000 -- -- 825,000 2,351,932 -- 28,937
<Caption>
PRINCIPAL
NAME OF ISSUER PAYMENTS
- -------------- ---------
Captive Finance,
Ltd. ................ $ --
Tomoike Industrial
(H.K.) Ltd........... --
</Table>
* Affiliated issuers, as defined in the 1940 Act, include issuers in which the
Fund holds 5% or more of the outstanding voting securities.
19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE H -- RESULTS OF ANNUAL STOCKHOLDER MEETING
ELECTION OF CLASS I DIRECTOR -- At the Fund's Annual Meeting of Stockholders
which convened on February 26, 2004 and adjourned to March 18, 2004, the
stockholders of the Fund elected Joe O. Rogers to the Board of Directors to hold
office until the Annual Meeting of Stockholders is held in 2006.
<Table>
<Caption>
SHARES VOTED SHARES
FOR ABSTAINED
------------- -----------
Election of Joe O. Rogers................................... 4,933,833.565 163,656.359
</Table>
ELECTION OF CLASS II DIRECTOR -- At the Fund's Annual Meeting of Stockholders
which convened on February 26, 2004 and adjourned to March 18, 2004, the
stockholders of the Fund elected Michael F. Holland to the Board of Directors to
hold office until the Annual Meeting of Stockholders is held in 2007.
<Table>
<Caption>
SHARES VOTED SHARES
FOR ABSTAINED
------------- -----------
Election of Michael F. Holland.............................. 4,933,790.728 163,699.196
</Table>
REVISION TO INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT -- At the Fund's Annual
Meeting of Stockholders which convened on February 26, 2004 and adjourned to
March 18, 2004, the stockholders of the Fund approved a revised Investment
Advisory and Management Agreement between the Fund and Martin Currie Inc.
<Table>
<Caption>
SHARES VOTED SHARES VOTED SHARES
FOR AGAINST ABSTAINED
- ------------ ------------ ---------
3,535,670.635 313,850.221 129,080.068
</Table>
20
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.
21
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
22
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.
23
DIRECTORS AND OFFICERS (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The following table sets forth information concerning each of the 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
4100 N. Ocean Drive #1001 Board and Distinction Ventures, Inc. (1989-present); Chairman,
Singer Island, FL 33404 Director Hotels of Distinction (International), Inc.
(1974-present).
Michael F. Holland(59)...... Director Director, Reaves Utility Income Fund (2004-present); 1992
375 Park Avenue Chairman, Holland & Company L.L.C. (1995-present);
New York, New York 10152 Director, The Holland Balanced Fund, Inc., State Street
Master Funds and State Street Institutional Investment
Trust.
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);
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
Gary L. French(52).......... President Senior Vice President, State Street Bank and Trust
Company.
225 Franklin Street
Boston, MA 02110
Ann M. Casey(37)............ Treasurer Vice President, State Street Bank and Trust Company.
225 Franklin Street
Boston, MA 02110
Mary Moran Zeven(43)........ Secretary Senior Vice President and Senior Managing Counsel, State
225 Franklin Street Street Bank and Trust Company.
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>
24
THE CHINA FUND, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES ADDRESS
The China Fund, Inc.
225 Franklin Street
Boston, MA 02110
1-888-CHN-CALL (246-2255)
www.chinafundinc.com
DIRECTORS AND OFFICERS
Alan Tremain, O.B.E., Director and Chairman of the Board
Michael F. Holland, Director
James J. Lightburn, Director
Joe O. Rogers, Director
Nigel S. Tulloch, Director
Gary L. French, President
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
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. DISCLOSURE OF AUDIT COMMITTEE FOR LISTED COMPANIES
Not required for this filing.
ITEM 6. SCHEDULE OF INVESTMENTS
Not required for this filing.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES
Not required for this filing.
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS
Not required for this filing.
ITEM 9. 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 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 that
includes the disclosure required by this paragraph based on their
evaluation of the 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 Securities Exchange Act of 1934 (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 most recent
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) Not required for this filing.
(a)(2) The certification required by Rule 30a-2 of the Investment Company Act
of 1940, as amended (the "1940 Act") is attached hereto.
(a)(3) Not required for this filing.
(b) The certification required by Rule 30a-2(b) of the 1940 Act and Section
906 of the Sarbanes-Oxley Act of 2002 is 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 and Chief Executive Officer
Date: July 1, 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/ Ann. M. Casey
-----------------
Ann M. Casey
Treasurer and Chief Financial Officer
Date: July 1, 2004
By: /s/ Gary L. French
------------------
Gary L. French
President and Chief Executive Officer
Date: July 1, 2004