UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-05749
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THE CHINA FUND, INC.
(Exact name of registrant as specified in charter)
C/O STATE STREET BANK & TRUST
2 AVENUE DE LAFAYETTE, 6TH FLOOR
P.O. BOX 5049
BOSTON, MA 02206-5049
(Address of principal executive offices)(Zip code)
Copy to:
Elizabeth A. Watson Leonard B. Mackey, Jr., Esq.
Secretary Clifford Chance US LLP
The China Fund, Inc. 31 West 52nd Street
2 Avenue de Lafayette, 6th Floor New York, New York 10019-6131
P.O. Box 5049
Boston, MA 02111
(Name and Address of Agent for Service)
Registrant's telephone number, including area code: (888) 246-2255
Date of fiscal year end: October 31
Date of reporting period: October 31, 2008
ITEM 1. REPORT TO STOCKHOLDERS.
THE CHINA FUND, INC.
ANNUAL REPORT
OCTOBER 31, 2008
THE CHINA FUND, INC.
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
Key Highlights 1
Asset Allocation 2
Industry Allocation 3
Chairman's Statement 4
Investment Manager's Statement 5
About the Portfolio Managers 7
Schedule of Investments 8
Financial Statements 14
Notes to Financial Statements 19
Report of Independent
Registered
Public Accounting Firm 26
Other Information 27
Dividends and Distributions;
Dividend Reinvestment
and Cash Purchase Plan 33
</Table>
THE CHINA FUND, INC.
KEY HIGHLIGHTS (UNAUDITED)
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<Table>
<Caption>
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FUND DATA
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NYSE STOCK SYMBOL CHN
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LISTING DATE JULY 10, 1992
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SHARES OUTSTANDING 18,153,741
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TOTAL NET ASSETS (10/31/08) US$394.4 MILLION
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NET ASSET VALUE PER SHARE (10/31/08) $21.72
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MARKET PRICE PER SHARE (10/31/08) $19.87
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</Table>
<Table>
<Caption>
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TOTAL RETURN(1)
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PERFORMANCE AS OF
10/31/08: NET ASSET VALUE MARKET PRICE
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1-Year (51.51)% (48.06)%
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3-Year Cumulative 57.08% 36.09%
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3-Year Annualized 16.25% 10.82%
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5-Year Cumulative 59.29% 12.96%
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5-Year Annualized 9.76% 2.47%
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10-Year Cumulative 313.62% 368.78%
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10-Year Annualized 15.26% 16.71%
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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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12/21/07 $0.2800 $11.8400
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12/21/06 $0.2996 $3.7121
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12/21/05 $0.2172 $2.2947
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12/22/04 $0.1963 $3.3738
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12/31/03 $0.0700 $1.7100
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12/26/02 $0.0640 $0.1504
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12/31/01 $0.1321 --
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12/31/00 -- --
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12/31/99 $0.1110 --
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12/31/98 $0.0780 --
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12/31/97 -- $0.5003
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12/31/96 $0.0834 --
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12/29/95 $0.0910 --
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12/30/94 $0.0093 $0.6006
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12/31/93 $0.0853 $0.8250
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12/31/92 $0.0434 $0.0116
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</Table>
(1) Total investment returns reflect changes in net asset value per share or
market price, as the case may be, during each period and assumes that dividends
and capital gains distributions, if any, were reinvested in accordance with the
dividend reinvestment plan. The net asset value per share percentages are not an
indication of the performance of a shareholder's investment in the Fund, which
is based on market price. Total investment returns do not reflect the deduction
of taxes that a stockholder would pay on Fund distributions or the sale of Fund
shares. Total investment returns are historical and do not guarantee future
results.
1
THE CHINA FUND, INC.
ASSET ALLOCATION AS OF OCTOBER 31, 2008 (UNAUDITED)
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<Table>
<Caption>
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TEN LARGEST LISTED EQUITY INVESTMENTS *
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1. China Huiyan Juice Group, Ltd. 4.08%
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2. Chaoda Modern Agriculture (Holdings), Ltd. 3.57%
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3. Wumart Stores, Inc. 3.02%
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4. Daqin Railway Co., Ltd. Access Product 2.98%
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5. Uni-President Enterprises Corp. 2.71%
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6. Shandong Weigao Group Medical Polymer Co., Ltd. 2.71%
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7. Yuanta Financial Holdings Co., Ltd. 2.62%
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8. Far Eastern Department Stores, Ltd. 2.10%
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9. Mindray Medical International, Ltd. 2.01%
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10. Xinao Gas Holdings, Ltd. 1.97%
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</Table>
<Table>
<Caption>
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DIRECT INVESTMENTS *
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1. Queenbury Investments, Ltd. (Huiyan) 9.75%
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2. Qingdao Bright Moon 1.78%
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3. China Silicon Corp., Series A Preferred 1.65%
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4. Highlight Tech Corp. 1.52%
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5. Wuxi PAIHO 0.93%
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6. HAND Enterprise Solutions, Ltd. 0.77%
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7. China Silicon Corp., Common Stock 0.11%
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8. teco Optronics Corp. 0.00%
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</Table>
* Percentages based on net assets at October 31, 2008.
2
INDUSTRY ALLOCATION (UNAUDITED)
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(Pie Chart)
<Table>
Consumer Discretionary 25.5
Financials 10.3
Consumer Staples 20.5
Industrials 10.6
Health Care 10.5
Information Technology 8.9
Materials 4.6
Energy 4.1
Utilities 2
Telecommunications 0.4
Others 2.6
</Table>
Fund holdings are subject to change and percentages shown above are based on
total net assets as of October 31, 2008. A complete list holdings as of October
31, 2008 is contained in the Schedule of Investments included in this report.
The most current available data regarding portfolio holdings can be found on our
website, www.chinafundinc.com. You may also obtain holdings by calling 1-800-
246-2255.
3
THE CHINA FUND, INC.
CHAIRMAN'S STATEMENT (UNAUDITED)
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Dear Stockholders,
In a savage year for the world's stock markets, Chinese markets were among the
poorest performing. Against such a background, the continued outperformance of
your Fund can offer only limited consolation. Nevertheless, I am pleased to
report the Fund remains well ahead of benchmark over one year and all longer
periods since launch.
At a time when many funds are damaged by cash outflow through redemptions, the
benefits of investing in a closed-end fund become clear. The nature of your Fund
allows us to take a longer-term approach and exploit the distressed valuations
at which many fine Chinese companies are now trading.
Over the past 12 months, we have developed the private equity part of the Fund
(now 16.5% of the net asset value) with investments including the world's
largest seaweed processor and an appliance retailer specializing in supply to
rural areas of China.
During a period of heightened financial uncertainty, our monitoring of counter-
party risk has led to a temporary halt in our stock-lending program, although we
hope to resume it soon.
With Chinese stocks -- and especially your Fund's portfolio of what we believe
are financially sound companies -- looking heavily oversold, we can look forward
with some optimism. The massive stimulus package announced by the Chinese
authorities should benefit the domestically focused companies in which your Fund
invests, with infrastructure and healthcare prominent themes.
In the near future, your manager expects a rally in China's domestic A-share
market. A longer-term recovery may be possible only once the extent of the
global recession is clear. But while the economic fundamentals may have been
disregarded during the sell-off, they will figure strongly in the recovery.
Yours truly,
James Lightburn
Chairman
4
THE CHINA FUND, INC.
INVESTMENT MANAGER'S STATEMENT (UNAUDITED)
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REVIEW OF LISTED AND DIRECT INVESTMENTS
This was a grisly year for equity investors. The strength of China's economy
provided no relief to its stock markets, which were among the world's weakest.
As the best-performing markets of the previous year, Hong Kong and China were
already vulnerable to profit-taking. With the global financial crisis
escalating, that profit-taking rapidly gave way to full-scale panic. Hong Kong
suffered on fears that its relatively small, open economy would be vulnerable to
the slowdown in the rest of the world. The Chinese companies listed in Hong
Kong -- primarily banks, insurers and commodity-related groups -- were also
vulnerable to the global financial turmoil and, in the latter part of the year,
to falling commodity prices.
On the mainland, the dominant theme in the domestic A-share market was the
threat of inflation and the credit-tightening measures used to combat it. The
global financial meltdown exacerbated these local concerns. But after peaking in
February, the rate of inflation has been falling steadily. This has allowed
policymakers to shift their focus from curbing inflation to promoting growth.
And after watching the A-share market tumble for most of the year, the
authorities finally took some supportive action in September. This included
abolishing the stamp duty on stock purchases and encouraging state-owned
companies to buy more shares in their listed subsidiaries. Meanwhile, the
People's Bank of China has repeatedly cut rates and lowered the banks' reserve
requirements. With real returns on bank deposits still negative, we expect
investors to return to the A-share market in the near future.
In Taiwan, the political progress has been all that we had hoped for. The
Kuomintang took power in landslide elections in January and March, and Ma Ying-
Jeou's administration has introduced direct flights to the mainland, allowed
Chinese tourists to visit Taiwan, and removed the investment restrictions on
Taiwanese companies operating in China. Ma has also announced a substantial
program of infrastructure projects, to begin in 2009. But, frustratingly, the
market has ignored this progress. A brief rally collapsed as soon as Ma was
inaugurated as president on 20 May, and the stock market has since fallen to the
levels of May 2003.
With a return of -51.51% against the Fund's benchmark's (the MSCI Golden Dragon
Index) -58.0%, your Fund outperformed the benchmark. Our concentration on
domestically oriented stocks was helpful. The largest single contribution to our
performance was CHINA HUIYAN JUICE GROUP, China's largest manufacturer of orange
juice, which received a takeover bid from Coca-Cola. Other positives were food
stocks CHAODA MODERN AGRICULTURE and UNI-PRESIDENT ENTERPRISES, which benefited
from rising food prices. Meanwhile, our focus on consumer brands was rewarded
with relatively resilient showings from WUMART STORES and Taiwan's FAMILYMART.
Healthcare was also a positive theme -- this sector is set to do well whatever
happens to the global economy -- with SHANGDONG WEIGAO GROUP MEDICAL POLYMER and
CHINA MEDICAL SYSTEM HOLDINGS among our best performers over the 12 months.
Elsewhere, HUABAO INTERNATIONAL HOLDINGS, which makes flavors and fragrances for
the tobacco and food industries, and TAIWAN SECOM, which provides security
systems, also helped our relative performance.
As the prices of oil and other commodities fell steeply from July, energy-
related stocks were among the principal negatives over the year. Here, ZIJIN
MINING, FAR EAST ENERGY and CHINA OILFIELD SERVICES all performed poorly. Other
detractors included TIANJIN DEVELOPMENT (port operations) and SGP LAND
(property).
Over the past year, we have increased our direct-investment portfolio to 16.5%
of the Fund. The most significant development here was our purchase of HUIYIN, a
rapidly expanding retailer of home appliances. Other unlisted
5
THE CHINA FUND, INC.
INVESTMENT MANAGER'S STATEMENT (CONTINUED) (UNAUDITED)
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- --------------------------------------------------------------------------------
REVIEW OF LISTED AND DIRECT INVESTMENTS
holdings include QINGDAO BRIGHT MOON (the world's largest processor of seaweed)
and fast-growing IT group HAND (which specializes in enterprise resource
planning).
As recession in the West makes an impact, China's growth is certainly slowing.
The official GDP growth number (9.0% growth in the third quarter) lags many more
worrying indicators. The 2% fall in throughput at Shenzhen port in September was
the worst ever. Electricity consumption growth has stalled. China's official
export figures have held up well (September recorded +21.5% year on year, with a
US$29.3 billion surplus), but these contrast sharply with gloomy news from the
exporting hub of Guangdong. Taiwan's exports in September fell by 1.6% year on
year, the first fall since 2002, and consumer confidence in Taiwan hit a seven-
year low.
But despite all this gloom, the worst of the financial crisis seems to be over,
as governments around the world show that they will do what they have to in
order to support major financial institutions and protect the depositor. The
effects of the recession will not be pretty, and companies that have borrowed
not wisely but too well will go bust, but this is susceptible to company
analysis.
We should also remember that consumers in China have a lot less debt than those
in the West. The state-owned banking system is at least safe in its lack of
sophistication and relative conservatism. Corporate debt levels are also low
(the net gearing of all stocks in the A-share and Taiwanese stock markets
averages 23% and 28%, respectively).
In November, the Chinese government announced a stimulus package to the value of
some four trillion yuan (US$584.8 billion). Although a sizeable portion of the
headline figure was already on the table, this spending has been brought
forward. The package focuses on infrastructure, rural develoment and
healthcare -- areas that your domestically focused Fund favors -- and
underline's the government's intention of keeping growth close to the 'magic'
figure of 8%. The relative health of China's economy hasn't helped Chinese
markets in 2008. But while economic fundamentals may matter little during an
indiscriminate global sell-off, they will matter a great deal during the
recovery.
6
THE CHINA FUND, INC.
ABOUT THE PORTFOLIO MANAGER (UNAUDITED)
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LISTED AND DIRECT INVESTMENT MANAGER
Mr. Chris Ruffle serves as the portfolio manager for the Fund's portfolio of
listed and direct securities. Mr. Ruffle joined Martin Currie in 1994. He is a
Chinese and Taiwanese equity specialist with over 15 years investment experience
in Asia. Fluent in Mandarin 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.
7
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS
OCTOBER 31, 2008
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- --------------------------------------------------------------------------------
<Table>
<Caption>
NAME OF ISSUER AND TITLE OF ISSUE SHARES VALUE (NOTE A)
- --------------------------------- ------ --------------
COMMON STOCK AND OTHER EQUITY INTERESTS
HONG KONG
CONSUMER DISCRETIONARY -- (8.2%)
Anta Sports Products, Ltd. ...................... 11,072,000 $ 3,928,546
China Travel International Investment Hong Kong,
Ltd. .......................................... 10,982,000 1,516,137
FU JI Food & Catering Services(1)#............... 8,689,000 4,484,385
Huabao International Holdings, Ltd. ............. 9,135,000 5,834,274
Intime Department Store Group Co., Ltd.(1)#...... 12,568,629 3,632,528
Ports Design, Ltd.(1)............................ 3,933,500 4,440,791
Shangri-La Asia, Ltd.(1)......................... 4,755,555 6,577,624
Yorkey Optical International Cayman, Ltd.#....... 16,424,000 1,960,170
-----------
32,374,455
-----------
CONSUMER STAPLES -- (7.7%)
Chaoda Modern Agriculture (Holdings), Ltd.(1).... 20,633,998 14,083,550
China Huiyuan Juice Group, Ltd.(1)............... 14,059,500 16,108,530
-----------
30,192,080
-----------
ENERGY -- (1.7%)
China Rare Earth Holdings, Ltd. ................. 15,064,000 1,379,977
Fushan International Energy Group, Ltd.*......... 10,740,000 1,953,874
Honghua Group, Ltd. ............................. 21,902,000 3,278,044
-----------
6,611,895
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FINANCIALS -- (0.6%)
SPG Land (Holdings), Ltd.(1)#.................... 11,037,000 697,783
Tianjin Development Holdings, Ltd. .............. 6,756,000 1,839,269
-----------
2,537,052
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HEALTH CARE -- (3.4%)
China Shineway Pharmaceutical Group, Ltd.#....... 11,184,000 4,184,738
Golden Meditech Co., Ltd.(1)*#................... 35,040,000 4,973,131
Natural Beauty Bio-Technology, Ltd.#............. 32,780,000 4,440,903
-----------
13,598,772
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INDUSTRIALS -- (0.6%)
TPV Technology, Ltd.(1).......................... 12,728,000 2,463,341
-----------
INFORMATION TECHNOLOGY -- (0.3%)
Chinasoft International, Ltd.#................... 19,230,000 1,054,487
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MATERIALS -- (0.7%)
Sinofert Hong Kong Holdings, Ltd.(1)............. 4,860,000 2,652,465
-----------
</Table>
See notes to financial statements and notes to schedule of investments.
8
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2008
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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)
UTILITIES -- (2.0%)
Xinao Gas Holdings, Ltd.(1)#..................... 9,286,000 $ 7,787,806
------------
TOTAL HONG KONG -- (Cost $119,027,477) 25.2% 99,272,353
---- ------------
HONG KONG -- "H" SHARES
CONSUMER STAPLES -- (3.0%)
Wumart Stores, Inc.(1)#.......................... 15,126,000 11,904,935
------------
ENERGY -- (1.0%)
China Oilfield Services, Ltd.(1)................. 7,132,000 3,800,445
------------
HEALTH CARE -- (2.7%)
Shandong Weigao Group Medical Polymer Co.,
Ltd.#.......................................... 9,004,000 10,687,999
------------
INDUSTRIALS -- (0.0%)
China Railway Group, Ltd.*....................... 504 286
Sichuan Expressway Co., Ltd. .................... 742,000 112,969
------------
113,255
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MATERIALS -- (0.8%)
Zijin Mining Group Co., Ltd.(1).................. 10,408,000 3,088,646
------------
TELECOMMUNICATIONS -- (0.4%)
ZTE Corp.(1)..................................... 760,759 1,668,665
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TOTAL HONG KONG -- "H" SHARES -- (Cost
$40,750,977) 7.9% 31,263,945
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TOTAL HONG KONG (INCLUDING "H"
SHARES) -- (Cost $159,778,454) 33.1% 130,536,298
---- ------------
SINGAPORE
CONSUMER STAPLES -- (2.9%)
China Fishery Group, Ltd.#....................... 12,050,000 4,222,657
China Milk Products Group, Ltd.(1)............... 11,607,000 2,463,916
Hsu Fu Chi International, Ltd.#.................. 9,484,000 4,665,624
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11,352,197
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INFORMATION TECHNOLOGY -- (0.4%)
CDW Holding, Ltd.#+(2)........................... 60,000,000 1,415,190
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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, 2008
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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)
SINGAPORE (CONTINUED)
MATERIALS -- (0.2%)
China Energy, Ltd.(1)*............................ 12,199,000 $ 945,404
-----------
TOTAL SINGAPORE -- (Cost $29,567,423) 3.5% 13,712,791
--- -----------
TAIWAN
CONSUMER DISCRETIONARY -- (6.2%)
FamilyMart Co., Ltd.#............................. 3,777,652 5,154,077
Far Eastern Department Stores, Ltd. .............. 18,511,584 8,278,507
Merry Electronics Co., Ltd. ...................... 3,584,340 3,075,474
Synnex Technology International Corp. ............ 5,937,855 7,777,316
-----------
24,285,374
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CONSUMER STAPLES -- (4.0%)
Lien Hwa Industrial Corp.#........................ 15,919,692 5,261,113
Uni-President Enterprises Corp. .................. 12,593,581 10,691,132
-----------
15,952,245
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FINANCIALS -- (8.9%)
Cathay Financial Holding Co., Ltd. ............... 5,993,788 6,405,852
China Development Financial Holding Corp. ........ 27,751,738 5,477,566
Fubon Financial Holdings Co., Ltd. ............... 12,603,000 7,642,235
Ruentex Development Co., Ltd. .................... 12,694,000 5,234,242
Yuanta Financial Holdings Co., Ltd. .............. 26,635,545 10,336,845
-----------
35,096,740
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INDUSTRIALS -- (1.0%)
Wah Lee Industrial Corp.#......................... 4,118,821 3,871,248
-----------
INFORMATION TECHNOLOGY -- (5.7%)
Asustek Computer, Inc. ........................... 248,000 357,911
Cyberlink Corp. .................................. 1,183,000 4,716,577
Powertech Technology Inc. ........................ 4,439,210 6,251,840
Taiwan Secom Co., Ltd.#........................... 4,738,000 5,846,634
Tripod Technology Corp. .......................... 4,402,867 5,393,036
-----------
22,565,998
-----------
</Table>
See notes to financial statements and notes to schedule of investments.
10
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2008
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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)
MATERIALS -- (1.3%)
China Metal Products Co., Ltd.#.................. 9,019,881 $ 4,990,914
Yieh United Steel Corp.#......................... 568,980 155,259
------------
5,146,173
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TOTAL TAIWAN -- (Cost $136,498,134) 27.1% 106,917,778
---- ------------
UNITED KINGDOM
HEALTH CARE -- (1.7%)
China Medical System Holdings, Ltd.#+(2)......... 3,623,188 6,820,099
------------
TOTAL UNITED KINGDOM -- (Cost $9,940,990) 1.7% 6,820,099
---- ------------
UNITED STATES
CONSUMER DISCRETIONARY -- (1.3%)
The9, Ltd., ADR(1)*#............................. 356,200 5,065,164
------------
ENERGY -- (0.4%)
Far East Energy Corp.*#+......................... 10,478,634 1,467,009
------------
HEALTH CARE -- (2.7%)
Mindray Medical International, Ltd., ADR(1)...... 367,000 7,912,520
WuXi PharmaTech Cayman Inc., ADR(1)*............. 310,190 2,903,378
------------
10,815,898
------------
TOTAL UNITED STATES -- (Cost $32,555,981) 4.4% 17,348,071
---- ------------
TOTAL COMMON STOCK AND OTHER EQUITY
INTERESTS -- (Cost $368,340,982) 69.8% 275,335,037
---- ------------
EQUITY LINKED SECURITIES
CONSUMER STAPLES -- (2.9%)
Dalian Zhangzidao Fishery Group Co., Ltd. Access
Product (expiration 01/17/12) 144A,(2)(3)...... 2,270,000 4,374,290
Shenzhen Agricultural Products Co., Ltd. Access
Product (expiration 01/17/12)*(2)(3)........... 4,000,000 6,918,634
------------
11,292,924
------------
ENERGY -- (1.0%)
China Yangtze Power Co., Ltd. Access Product
(expiration 10/26/10) 144A,(2)(4)*............. 4,169,077 3,888,986
------------
</Table>
See notes to financial statements and notes to schedule of investments.
11
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2008
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- --------------------------------------------------------------------------------
<Table>
<Caption>
NAME OF ISSUER AND TITLE OF ISSUE SHARES VALUE (NOTE A)
- --------------------------------- ------ --------------
EQUITY LINKED SECURITIES (CONTINUED)
FINANCIALS -- (0.8%)
Zhejiang Guyuelongshan Access Product (expiration
10/07/13)(2)(4)................................. 3,582,000 $ 3,095,199
-----------
INDUSTRIALS -- (4.8%)
Daqin Railway Co., Ltd. Access Product (expiration
11/02/11) 144A,(2)(4)*.......................... 8,307,000 11,754,405
Shanghai International Airport Co., Ltd. Access
Product (expiration 01/20/10) 144A,(2)(3)....... 1,816,700 2,834,052
Shanghai Zhenhua Port Machinery Co., Ltd. Access
Product (expiration 10/26/10) 144A,(2)(4)*...... 4,462,752 4,373,497
-----------
18,961,954
-----------
MATERIALS -- (1.6%)
Qinghai Salt Lake Potash Co., Ltd. Access Product
(expiration 10/26/10) 144A,(2)(4)*.............. 887,909 6,409,250
-----------
TOTAL EQUITY LINKED SECURITIES -- (Cost
$39,174,452) 11.1% 43,648,313
---- -----------
DIRECT INVESTMENTS
CONSUMER DISCRETIONARY -- (9.8%)
Queenbury Investments, Ltd., (Huiyan) (acquired
05/06/08)(2)(5)*#+.............................. 450 38,459,700
-----------
INDUSTRIALS -- (4.2%)
Highlight Tech Corp., (acquired
09/11/07)(2)(5)*#+.............................. 3,366,893 5,993,070
Qingdao Bright Moon, (acquired
02/28/08)(2)(5)*#+.............................. 31,827,172 7,001,978
Wuxi PAIHO, (acquired 09/17/07)(2)(5)*#+.......... 11,734,701 3,679,990
-----------
16,675,038
-----------
INFORMATION TECHNOLOGY -- (2.5%)
China Silicon Corp. Common Stock (acquired
09/23/08) (2)(5)*#+............................. 183,396 436,482
China Silicon Corp. Warrants (expiration 11/30/10)
(acquired 11/30/07)(2)(5)*#+.................... 685,450 --
China Silicon Corp., Series A Preferred (acquired
11/30/07)(2)(5)#+............................... 27,418 6,525,484
HAND Enterprise Solutions, Ltd., (acquired
05/02/07)(2)(5)*# +............................. 500,000 3,050,000
teco Optronics Corp., (acquired 04/26/04)(5)*#+... 1,861,710 --
-----------
10,011,966
-----------
TOTAL DIRECT INVESTMENTS -- (Cost
$66,123,383) 16.5% 65,146,704
---- -----------
</Table>
See notes to financial statements and notes to schedule of investments.
12
THE CHINA FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2008
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Table>
<Caption>
PRINCIPAL
NAME OF ISSUER AND TITLE OF ISSUE AMOUNT VALUE (NOTE A)
- --------------------------------- --------- --------------
COLLATERAL FOR SECURITIES ON LOAN -- (10.6%)
Securities Lending Quality Trust................ 41,715,721 $ 41,715,721
------------
TOTAL COLLATERAL FOR SECURITIES ON
LOAN -- (Cost $41,715,721) 10.6% 41,715,721
----- ------------
TOTAL INVESTMENTS -- (Cost $515,354,538) 108.0% 425,845,775
----- ------------
OTHER ASSETS AND LIABILITIES (8.0%) (31,488,328)
----- ------------
NET ASSETS 100.0% $394,357,447
===== ============
</Table>
Notes to Schedule of Investments
* Denotes non-income producing security.
# Illiquid security.
+ Affiliated issuer (see Note F).
(1) A portion or all of the security was held on loan. As of October 31, 2008,
the market value of the securities loaned was $38,596,614.
(2) Security valued at fair value using methods determined in good faith by or
at the direction of the Board of Directors.
(3) Equity linked securities issued by Citigroup Global Markets Holdings.
(4) Equity linked securities issued by Credit Lyonnais (CLSA).
(5) Direct investments are generally restricted as to resale and do not have a
readily available resale market. On the date of acquisition of each direct
investment, there were no market quotations on similar securities, and such
investments were therefore valued in good faith by the Board of Directors at
fair market value.
144A Securities restricted for resale to Qualified Institutional Buyers.
ADR American Depositary Receipt.
See notes to financial statements and notes to schedule of investments.
13
THE CHINA FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2008
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Table>
ASSETS
Investments in securities, at value (cost $386,379,645) (Note A).. $309,281,052
Investments in affiliated investments, at value (cost $87,259,172)
(Notes A and F)................................................ 74,849,002
Collateral for securities loaned.................................. 41,715,721
Cash.............................................................. 7,804,157
Foreign currency, at value (cost $3,199,893)...................... 3,141,363
Receivable for securities lending income.......................... 105,309
Dividends receivable.............................................. 929,489
Prepaid expenses.................................................. 46,293
Miscellaneous assets.............................................. 1,555
------------
TOTAL ASSETS........................................................ 437,873,941
------------
LIABILITIES
Payable for investments purchased................................. 278,713
Payable upon return of collateral for securities loaned........... 41,715,721
Investment management fee payable (Note B)........................ 360,529
Administration and custodian fees payable (Note B)................ 136,956
Directors fee payable (Note B).................................... 58,742
Contingent liability (Note A)..................................... 717,795
Accrued expenses and other liabilities............................ 248,038
------------
TOTAL LIABILITIES................................................... 43,516,494
------------
TOTAL NET ASSETS.................................................... $394,357,447
============
COMPOSITION OF NET ASSETS:
Paid in capital (Note C).......................................... 380,196,385
Undistributed net investment income............................... 8,736,686
Accumulated net realized gain on investments and foreign currency
transactions................................................... 94,991,467
Net unrealized depreciation on investment and foreign currency
translations................................................... (89,567,091)
------------
TOTAL NET ASSETS.................................................... $394,357,447
============
NET ASSETS VALUE PER SHARE
($394,357,447/18,153,741 shares of common stock outstanding)...... $21.72
======
</Table>
See notes to financial statements.
14
THE CHINA FUND, INC.
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 2008
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Table>
INVESTMENT INCOME:
Dividend income -- (including dividends of $1,279,960 from non-
controlled affiliates, net of tax withheld of $1,534,605)
(Note F)...................................................... $ 14,356,086
Interest income.................................................. 678,537
Securities lending income........................................ 1,373,455
-------------
TOTAL INVESTMENT INCOME....................................... 16,408,078
-------------
EXPENSES
Investment Management fees (Note B).............................. 4,536,209
Custodian fees (Note B).......................................... 1,033,117
Administration fees (Note B)..................................... 586,137
Directors' fees and expenses (Note B)............................ 401,386
Stock dividend tax expense....................................... 592,213
Legal fees....................................................... 214,522
Printing and postage............................................. 120,815
Shareholder service fees......................................... 181,017
Chief Compliance Officer fee..................................... 56,226
Insurance........................................................ 47,451
Audit and tax service fees....................................... 113,640
Stock exchange listing fee....................................... 27,518
Transfer agent fees.............................................. 34,076
Miscellaneous expenses........................................... 170,056
-------------
TOTAL EXPENSES................................................ 8,114,383
-------------
Expense reduction (Note B)....................................... (187,405)
-------------
NET EXPENSES.................................................. 7,926,978
-------------
NET INVESTMENT INCOME.............................................. 8,481,100
-------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY
Net realized gain on investment transactions..................... 95,339,880
Net realized loss on non-controlled affiliate transactions (Note
F)............................................................ (348,413)
Net realized gain on foreign currency transactions............... 333,105
-------------
95,324,572
-------------
Net change in unrealized depreciation on investments and foreign
currency transactions............................................ (538,291,891)
-------------
(538,291,891)
-------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS............................................ (442,967,319)
-------------
NET DECREASE IN NET ASSETS FROM OPERATIONS......................... $(434,486,219)
=============
</Table>
See notes to financial statements.
15
THE CHINA FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED YEAR ENDED
OCTOBER 31, 2008 OCTOBER 31, 2007
---------------- ----------------
(DECREASE)/INCREASE IN NET ASSETS FROM OPERATIONS
Net investment income................................ $ 8,481,100 $ 4,118,400
Net realized gain on investments and foreign currency
transactions...................................... 95,324,572 172,697,839
Net (decrease)/increase in unrealized appreciation on
investments and foreign currency translations..... (538,291,891) 305,398,733
------------- ------------
Net (decrease)/increase in net assets from
operations........................................ (434,486,219) 482,214,972
------------- ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income................................ (4,080,764) (4,343,068)
Capital gains........................................ (172,579,378) (53,811,419)
------------- ------------
Total dividends and distributions to shareholders.... (176,660,142) (58,154,487)
------------- ------------
CAPITAL SHARE TRANSACTIONS:
Fund shares sold (Note C)............................ -- --
Reinvestment of dividends and distributions
(3,577,780 and 79,741 shares, respectively)....... 123,648,061 2,589,184
------------- ------------
Net increase in net assets from capital share
transactions...................................... 123,648,061 2,589,184
------------- ------------
NET (DECREASE)/INCREASE IN NET ASSETS.................. (487,498,300) 426,649,669
NET ASSETS:
Beginning of year.................................... 881,855,747 455,206,078
------------- ------------
End of period........................................ $ 394,357,447 $881,855,747
============= ============
Undistributed net investment income, end of period..... $ 8,736,686 $ 4,022,954
============= ============
</Table>
See notes to financial statements.
16
THE CHINA FUND, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED OCTOBER 31, 2008
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Table>
<Caption>
INCREASE (DECREASE) IN CASH -
- -----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net decrease in net assets resulting from operations............. $(434,486,219)
Adjustments to reconcile net decrease in net assets from
operations to net cash provided from operating activities:
Purchases of investment securities............................ (316,774,637)
Proceeds from disposition of investment securities............ 336,191,770
Proceeds from cash transactions............................... 147,532
Decrease in collateral for securities loaned.................. 108,362,719
Increase in dividends receivable.............................. (386,709)
Decrease in receivable for securities lending income.......... 4,611
Decrease in receivable for investments sold................... 3,805,960
Decrease in prepaid expenses and miscellaneous assets......... 107,053
Decrease in payable for securities purchased.................. (1,904)
Decrease in payable upon return of collateral for securities
loaned...................................................... (108,362,719)
Decrease in accrued expenses and other liabilities............ (564,639)
Unrealized appreciation/depreciation on investments and
foreign currency............................................ 538,291,891
Net realized gain/loss from investments and currencies........ (95,324,572)
-------------
Net cash provided from operating activities................. 31,010,137
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions paid....................................... (53,012,081)
-------------
Net cash used for financing activities...................... (53,012,081)
-------------
NET DECREASE IN CASH............................................... (22,001,944)
CASH AT BEGINNING OF PERIOD........................................ 32,947,464
-------------
CASH AT END OF PERIOD.............................................. $ 10,945,520
=============
Noncash financing activities not included herein consist of:
Reinvestment of distributions............................ $ 123,648,061
</Table>
See notes to financial statements.
17
THE CHINA FUND, INC.
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OF COMMON STOCK OUTSTANDING FOR THE YEARS INDICATED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED OCTOBER 31,
----------------------------------------------------
2008 2007 2006 2005 2004*
-------- -------- -------- -------- --------
PER SHARE OPERATION PERFORMANCE
Net asset value, beginning of year....... $ 60.50 $ 31.40 $ 23.25 $ 26.27 $ 26.93
-------- -------- -------- -------- --------
Net investment income.................... 0.49 0.28 0.30 0.21 0.21
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions........................... (25.66) 32.83 10.36 0.34 0.91
-------- -------- -------- -------- --------
Total income (loss) from investment
operations............................. (25.17) 33.11 10.66 0.55 1.12
-------- -------- -------- -------- --------
Less dividends and distributions:
Dividend from net investment income.... (0.28) (0.30) (0.22) (0.20) (0.07)
Distributions from net realized capital
gains............................... (11.84) (3.71) (2.29) (3.37) (1.71)
-------- -------- -------- -------- --------
Total dividends and distributions........ (12.12) (4.01) (2.51) (3.57) (1.78)
-------- -------- -------- -------- --------
Capital Share Transactions:
(Dilution) to net asset value,
resulting from issuance of shares in
stock dividend...................... (1.49) (0.00) (0.00) (0.00) (0.00)
======== ======== ======== ======== ========
Net asset value, end of year............. $ 21.72 $ 60.50 $ 31.40 $ 23.25 $ 26.27
======== ======== ======== ======== ========
Per share market price, end of year...... $ 19.87 $ 51.67 $ 30.40 $ 24.55 $ 29.15
======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN (BASED ON MARKET
PRICE)................................. (48.06)% 90.97% 37.20% (5.50)% (12.16)%
======== ======== ======== ======== ========
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of year (000's).......... $394,357 $881,856 $455,206 $334,496 $264,886
Ratio of net expenses to average net
assets................................. 1.20% 1.08% 1.26% 1.44% 1.41%
Ratio of gross expenses to average net
assets................................. 1.23% 1.08% 1.26% 1.44% 1.41%
Ratio of net expenses to average net
assets, excluding stock dividend tax
expense................................ 1.11% 1.04% 1.23% 1.38% 1.34%
Ratio of net investment income to average
net assets............................. 1.28% 0.67% 1.09% 1.04% 0.78%
Portfolio turnover rate.................. 49% 46% 50% 26% 40%
</Table>
* Financial highlights were audited by a previous audit firm.
See notes to financial statements.
18
THE CHINA FUND, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2008
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The China Fund, Inc. (the "Fund") was incorporated under the laws of the State
of Maryland on April 28, 1992, and is a non-diversified, closed-end management
investment company registered under the Investment Company Act of 1940, as
amended (the "1940 Act"). The Fund's investment objective is long-term capital
appreciation through investments in the equity securities of companies engaged
in a substantial amount of business in the People's Republic of China. The
following is a summary of significant accounting policies followed by the Fund
in the preparation of its financial statements.
USE OF ESTIMATES: The preparation of financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
income and expenses for the period. Actual results could differ from these
estimates. The significant estimates made as of, and for the twelve months
ended, October 31, 2008 relate to Direct Investments and to the contingent
liability resulting from the sale of Captive Finance in March 2007. A reserve of
10% of the net sale proceeds was established to cover any potential liabilities
from the representation and warranties provided by the Fund in the transaction.
SECURITY VALUATION: Portfolio securities listed on recognized United States or
foreign securities exchanges are valued at the last quoted sales price in the
principal market where they are traded. Listed securities with no such sales
price and unlisted securities are valued at the mean between the current bid and
asked prices, if any, of two brokers. Short-term investments having maturities
of sixty days or less are valued at amortized cost (original purchase cost as
adjusted for amortization of premium or accretion of discount) which when
combined with accrued interest approximates market value. Open end investment
companies are valued at net asset value per share. 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 at fair value
using methods determined in good faith by or at the direction of the Board of
Directors considering relevant factors, data and information including, if
relevant, the market value of freely tradable securities of the same class in
the principal market on which such securities are normally traded. Direct
Investments not traded on an exchange are valued at fair value as determined by
the Board of Directors based on financial and other information supplied by the
Direct Investment Manager regarding each Direct Investment.
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.
SECURITIES LENDING: The Fund may lend any of its securities held by State
Street Bank and Trust Company ("State Street") as custodian to certain qualified
brokers, except those securities which the Fund or the Investment Manager
specifically identifies as not being available. By lending its investment
securities, the Fund attempts to increase its net investment income through the
receipt of interest on the loan. Any gain or loss in the market price of the
securities loaned that might occur and any interest or dividends declared during
the term of the loan would accrue to the account of the Fund. Risks of delay in
recovery of the securities or even loss of rights in the collateral may occur
should the borrower of the securities fail financially. Risks may also arise to
the extent that the value of the collateral decreases below the value of the
securities loaned.
19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Upon entering into a securities lending transaction, the Fund receives cash or
other securities as collateral in an amount equal to or exceeding 100% of the
current market value of the loaned securities with respect to securities of the
U.S. government or its agencies, 102% of the current market value of the loaned
securities with respect to U.S. securities and 105% of the current market value
of the loaned securities with respect to foreign securities. Any cash received
as collateral is generally invested by State Street, acting in its capacity as
securities lending agent (the "Agent"), in the Securities Lending Quality Trust.
A portion of the dividends received on the collateral is rebated to the borrower
of the securities and the remainder is split between the Agent and the Fund.
As of October 31, 2008, the Fund had loaned securities which were collateralized
by cash and short term investments. The value of the securities on loan and the
value of the related collateral were as follows:
<Table>
<Caption>
VALUE OF VALUE OF CASH VALUE OF NON- TOTAL
SECURITIES COLLATERAL CASH COLLATERAL* COLLATERAL
- ----------- ------------- ---------------- -----------
$38,596,614 $41,715,721 $142,778 $41,858,499
</Table>
* The Fund cannot repledge or resell this collateral. The non-cash collateral is
comprised of U.S. government securities.
In light of worldwide economic conditions and related market disruptions, the
board elected to temporarily curtail the fund's securities lending program. The
effects of such limitations are not anticipated to have a material impact on the
fund's NAV per share or results of operations. The Board expects to re-evaluate
whether to reinstate securities lending at some point in the future, when market
conditions return to what is considered a more normal state.
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.
OPTION CONTRACTS: The Fund may purchase and write (sell) call options and put
options provided the transactions are for hedging purposes and the initial
margin and premiums do not exceed 5% of total assets. Option contracts are
valued daily and unrealized gains or losses are recorded based upon the last
sales price on the principal exchange on which the options are traded. The Fund
will realize a gain or loss upon the expiration or closing of the option
contract. When an option is exercised, the proceeds on sales of the underlying
security for a written call option, the purchase cost of the security for a
written put option, or the cost of the security for a purchased put or call
option is adjusted by the amount of premium received or paid.
The risk in writing a call option is that the Fund gives up the opportunity for
profit if the market price of the security increases and the option is
exercised. The risk in writing a put option is that the Fund may incur a loss if
the market price of the security decreases and the option is exercised. The risk
in buying an option is that the Fund pays a premium
20
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
whether or not the option is exercised. Risks may also arise from an illiquid
secondary market or from the inability of counter parties to meet the terms of
the contract.
EQUITY LINKED SECURITIES: The Fund may invest in equity-linked securities such
as linked participation notes, equity swaps and zero-strike options and
securities warrants. Equity-linked securities currently held by the Fund,
identified as "Access Products" in the Schedule of Investments, are privately
issued securities whose investment results are designed to correspond generally
to the performance of a specified stock index or "basket" of stocks, or a single
stock. Access Products may be used by the Fund to gain exposure to countries
that place restrictions on investments by foreigners. To the extent that the
Fund invests in Access Products whose return corresponds to the performance of a
foreign securities index or one or more foreign stocks, investing in Access
Products will involve risks similar to the risks of investing in foreign
securities. In addition, the Fund bears the risk that the issuer of an Access
Product may default on its obligation under the terms of the arrangement with
the counterparty. Access Products are often used for many of the same purposes
as, and share many of the same risks with, derivative instruments. In addition,
Access Products may be considered illiquid.
At October 31, 2008, the Fund held equity-linked Access Product warrants through
Credit Lyonnais ("CLSA") and Citigroup Global Markets Holdings, the issuers.
Under the terms of the agreements, each warrant entitles the Fund to receive
from the issuers an amount in U.S. dollars linked to the performance of specific
equity shares.
DIRECT INVESTMENTS: The Fund may invest up to 25% of the net proceeds from its
offering of its outstanding common stock in direct investments. Direct
investments are generally restricted and do not have a readily available resale
market. The value of these securities at October 31, 2008 was $65,146,704 or
16.5% of the Fund's net asset value. The table below details the acquisition
date, cost, and value of the Fund's direct investments as determined by the
Board of Director's of the Fund. The Fund does not have the right to demand that
such securities be registered.
<Table>
<Caption>
SECURITY ACQUISITION DATE COST VALUE
- -------- ---------------- ----------- -----------
China Silicon Corp., Series A Preferred*........ 11/30/2007 $ 6,552,874 $ 6,525,484
China Silicon Corp. Common Stock................ 09/23/2008 $ 436,482 $ 436,482
HAND Enterprise Solutions, Ltd. ................ 05/02/2007 $ 3,164,274 $ 3,050,000
Highlight Tech. Corp. .......................... 09/11/2007 $ 6,025,894 $ 5,993,070
Queenbury Investments, Ltd., (Huiyan)........... 05/06/2008 $38,515,190 $38,459,700
Qingdao Bright Moon............................. 02/28/2008 $ 7,116,942 $ 7,001,978
teco Optronics Corp. ........................... 04/26/2004 $ 567,320 $ --
Wuxi PAIHO...................................... 09/17/2007 $ 3,744,407 $ 3,679,990
----------- -----------
$66,123,383 $65,146,704
=========== ===========
</Table>
* The purchase of China Silicon Corp., Series A Preferred resulted in the Fund
receiving 685,450 shares of China Silicon Corp. common stock warrants. Each
warrant entitles the Fund to purchase twenty five shares of common stock at an
exercise price of USD$2.98 per share, subject to adjustment.
21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INDEMNIFICATION OBLIGATIONS: Under the Fund's organizational documents, its
Officers and Directors are indemnified against certain liabilities arising out
of the performance of their duties to the Fund. In addition, in the normal
course of business the Fund enters into contracts that provide general
indemnifications to other parties. The Fund's maximum exposure under these
arrangements is unknown as this would involve future claims that may be made
against the Fund that have not yet occurred.
SECURITY TRANSACTIONS AND INVESTMENT INCOME: Security transactions are recorded
as of the trade date. Realized gains and losses from securities sold are
recorded on the identified cost basis. Dividend income is recorded on the ex-
dividend date, or, in the case of dividend income on foreign securities, on the
ex-dividend date or when the Fund becomes aware of its declaration. Interest
income is recorded on the accrual basis. All premiums and discounts are
amortized/accreted for both financial reporting and federal income tax purposes.
Dividend and interest income generated in Taiwan is subject to a 20% withholding
tax. Stock dividends received (except those which have resulted from
Capitalization of capital surplus) are taxable at 20% of the par value of the
stock dividends received. The Fund records the taxes paid on stock dividends as
an operating expense.
DIVIDENDS AND DISTRIBUTIONS: The Fund intends to distribute to its
shareholders, at least annually, substantially all of its net investment income
and any net realized capital gains. Income and capital gains distributions are
determined in accordance with U.S. income tax regulations, which may differ from
generally accepted accounting principles. These differences are primarily due to
differing book and tax treatments for foreign currency transactions.
The Fund made distribution of $45,470,844 from Ordinary Income and $131,189,298
from Long-Term Capital Gains during the year ended October 31, 2008. For the
year ended October 31, 2007 the Fund made distributions of $18,566,759 from
Ordinary Income and $39,587,728 from Long-Term Capital Gains. As of October 31,
2008 the components of distributable earnings on a tax basis were $8,736,686 for
undistributed ordinary income and $96,868,587 for undistributed capital gains.
At that date, the Fund had $91,444,211 of net unrealized depreciation on a tax
basis. Income and capital gains distributions are determined in accordance with
U.S. income tax regulations, which may differ from generally accepted accounting
principles. These differences are primarily due to differing book and tax
treatments for foreign currency transactions.
FEDERAL INCOME TAXES: The Fund has qualified and intends to qualify in the
future as a regulated investment company by complying with the provisions of
Subchapter M of the Internal Revenue Code available to certain investment
companies, including making distributions of taxable income and capital gains
sufficient to relieve it from all, or substantially all, federal income and
excise taxes.
NOTE B -- ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Martin Currie Inc. is the investment manager for the Fund's listed assets (the
"Listed Assets"). Martin Currie Inc. receives a fee, computed weekly and payable
monthly, at the following annual rates: 0.70% of the first US$315 million of the
Fund's average weekly net assets invested in Listed Assets; and 0.50% of the
Fund's average weekly net assets invested in Listed Assets in excess of US$315
million. It also receives a fee computed weekly and payable monthly, at an
annual rate of 2.0% of the average weekly value of the Fund's assets invested in
direct investments.
22
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 $15,000 respectively, plus
$3,000 for each Board of Directors', or Audit and Nominating Committee meeting
attended, $2,000 for each telephonic meeting attended and $1,000 for each
Valuation Committee teleconference 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.
State Street provides, or arranges for the provision of certain administrative
services for the Fund, including preparing certain reports and other documents
required by federal and/or state laws and regulations. The Fund pays State
Street a fee at an annual rate of 0.13% of the Fund's average daily net assets
up to $150 million, 0.11% of the next $150 million and 0.06% of those assets in
excess of $300 million subject to certain minimum requirements for fund
administration services. On March 6, 2008 the Board approved an amendment to the
fee schedule as follows: the Fund pays State Street a fee at an annual rate of
0.13% of the Fund's average daily net assets up to $150 million, 0.11% of the
next $150 million, 0.06% of the next $400 million and 0.05% of those in excess
of $400 million subject to certain minimum requirements for fund administration
services. The Fund also pays State Street $100,000 per year for certain legal
administration services, including corporate secretarial services and preparing
regulatory filings.
The Fund also has a contract with State Street to provide custody and fund
accounting services to the Fund. For these services, the Fund pays State Street
asset-based fees that vary according to the number of positions and transactions
plus out of pocket expenses. In 2008 State Street provided the Fund with
earnings credits for overnight cash balances left on account. These credits are
reflected as an expense reduction in the Statement of Operations.
NOTE C -- CAPITAL STOCK
The Board of Directors of the Fund has approved a share repurchase plan. Under
the program, the Fund will repurchase shares at management's discretion at times
when it considers the repurchase to be consistent with the objectives of the
program. For the year ended October 31, 2008, the Fund did not participate in
this program. At October 31, 2008, 100,000,000 shares of $.01 par value common
stock were authorized.
NOTE D -- INVESTMENT TRANSACTIONS
For the year ended October 31, 2008, the Fund's cost of purchases and proceeds
from sales of investment securities, other than short-term securities, were
$315,702,873 and $336,479,915, respectively. At October 31, 2008, the cost of
investments for federal income tax purposes was $517,231,658. Gross unrealized
appreciation of investments was $43,472,203, while gross unrealized depreciation
of investments was $134,858,086, resulting in net unrealized depreciation of
investments of $91,385,883.
23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE E -- INVESTMENTS IN CHINA
The Fund's investments in China companies involve certain risks not typically
associated with investments in securities of U.S. companies or the U.S.
Government, including risks relating to (1) social, economic and political
uncertainty; (2) price volatility, lesser liquidity and smaller market
capitalization of securities markets in which securities of China companies
trade; (3) currency exchange fluctuations, currency blockage and higher rates of
inflation; (4) controls on foreign investment and limitations on repatriation of
invested capital and on the Fund's ability to exchange local currencies for U.S.
dollars; (5) governmental involvement in and control over the economy; (6) risk
of nationalization or expropriation of assets; (7) the nature of the smaller,
less seasoned and newly organized China companies, particularly in China; and
(8) the absence of uniform accounting, auditing and financial reporting
standards, practices and disclosure requirements and less government supervision
and regulation.
NOTE F -- INVESTMENTS IN NON-CONTROLLED AFFILIATES*:
<Table>
<Caption>
LOSS REALIZED
DIVIDENDS ON SALE OF
BALANCE OF GROSS GROSS BALANCE OF INCLUDED IN SHARES FOR
SHARES HELD PURCHASES SALES SHARES HELD VALUE DIVIDEND INCOME THE FISCAL
OCTOBER 31, AND AND OCTOBER 31, OCTOBER 31, NON-CONTROLLED YEAR ENDED
NAME OF ISSUER 2007 ADDITIONS REDUCTIONS 2008 2008 AFFILIATES OCTOBER 31, 2008
- ------------------------- ----------- ---------- ---------- ----------- ----------- --------------- ----------------
CDW Holding, Ltd. ....... 60,000,000 -- -- 60,000,000 $ 1,415,190 $300,000 $ --
China Medical System
Holdings, Ltd. ........ 3,623,188 -- -- 3,623,188 $ 6,820,099 $543,478 $ --
China Silicon Corp.
Common Stock........... -- 183,396 -- 183,396 $ 436,482 $ -- $ --
China Silicon Corp.,
Series A Preferred..... -- 27,418 -- 27,418 $ 6,525,484 $436,482 $ --
China Silicon Corp.
Warrants............... -- 685,450 -- 685,450 $ -- $ -- $ --
Far East Energy Corp. ... 11,111,111 -- 632,477 10,478,634 $ 1,467,009 $ -- $(348,413)
HAND Enterprise
Solutions, Ltd. ....... 500,000 -- -- 500,000 $ 3,050,000 $ -- $ --
Highlight Tech Corp. .... 3,366,893 -- -- 3,366,893 $ 5,993,070 $ -- $ --
Qingdao Bright Moon...... -- 31,827,172 -- 31,827,172 $ 7,001,978 $ -- $ --
Queenbury Investments,
Ltd (Huiyan)........... -- 450 -- 450 $38,459,700 $ -- $ --
teco Optronics Corp. .... 1,861,710 -- -- 1,861,710 $ -- $ -- $ --
Wuxi PAIHO............... 11,734,701 -- -- 11,734,701 $ 3,679,990 $ -- $ --
</Table>
* Affiliated issuers, as defined in the 1940 Act as amended, include issuers in
which the Fund held 5% or more of the outstanding voting securities.
24
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE G -- NEW ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board (FASB) released FASB
Interpretation No. 48 (FIN 48) "Accounting for Uncertainty in Income Taxes". FIN
48 provides guidance for how uncertain tax positions should be recognized,
measured, presented and disclosed in the financial statements. FIN 48 requires
the evaluation of tax positions taken in the course of preparing the Fund's tax
return to determine whether the tax positions are "more-likely-than-not" of
being sustained by the applicable tax authority. Tax benefits of positions not
deemed to meet the more-likely-than-not threshold would be booked as a tax
expense in the current year and recognized as: a liability for unrecognized tax
benefits; a reduction of an income tax refund receivable; a reduction of
deferred tax asset; an increase in deferred tax liability; or a combination
thereof. The Fund adopted the provisions of FIN 48 on November 1, 2007 and the
adoption did not have a material effect on the net asset value, financial
condition or results of operations of the Fund. As of October 31, 2008, the Fund
had no uncertain tax positions that would require financial statement
recognition or disclosure. The Fund's federal tax returns filed for the fiscal
years ended October 31, 2005, October 31, 2006 and October 31, 2007 remain
subject to examination by the Internal Revenue Service.
NOTE H -- RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 157, "Fair Value Measurements"
("FAS 157"). FAS 157 defines fair value, establishes a framework for measuring
fair value and expands disclosures about fair value measurements. FAS 157 is
effective for fiscal years beginning after November 15, 2007. As of October 31,
2008, management does not believe the adoption of FAS 157 will impact the
amounts reported in the financial statements; however, additional disclosures
may be required about the inputs used to develop the measurements of fair value
and the effect of certain of the measurements on changes in net assets for the
period.
In addition, in March 2008, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 161, "Disclosures about
Derivative Instruments and Hedging Activities" ("SFAS 161"). SFAS 161 is
effective for fiscal years and interim periods beginning after November 15,
2008. SFAS 161 requires enhanced disclosures about the Fund's derivative and
hedging activities. Management is currently evaluating the impact the adoption
of SFAS 161 will have on the Fund's financial statement disclosures.
25
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of the China Fund, Inc.:
We have audited the accompanying statement of assets and liabilities of The
China Fund, Inc. (the "Fund"), including the schedule of investments, as of
October 31, 2008, and the related statements of operations and cash flows for
the year then ended, the statements of changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
four years in the 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. The financial highlights for the year in the period ended
October 31, 2004 were audited by other auditors whose report, dated December 10,
2004, expressed an unqualified opinion on those highlights.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of October 31, 2008, by correspondence with the custodian
and brokers; where replies were not received from brokers, we performed other
auditing procedures. 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, 2008, the results of its operations and its
cash flows for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the four years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
December 29, 2008
26
THE CHINA FUND, INC.
OTHER INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RESULTS OF ANNUAL STOCKHOLDER MEETING VOTING HELD MARCH 6, 2008
1.) Election of Directors -- The stockholders of the Fund elected Nigel
Tulloch and William Kirby as Class III directors to serve for a term
expiring on the date on which the annual meeting of stockholders is
held in 2011.
<Table>
<Caption>
FOR AGAINST ABSTAIN
--------- ------- ---------
Nigel Tulloch 7,187,567 0 1,779,213
William Kirby 8,765,368 0 201,411
</Table>
2.) To approve the elimination of the Fund's fundamental investment policy
requiring at least 65% of the Fund's assets to be invested in the
equity securities of China companies.
<Table>
<Caption>
FOR AGAINST ABSTAIN
--------- ------- -------
6,181,086 236,621 77,023
</Table>
TAX INFORMATION
CAPITAL GAINS DISTRIBUTIONS: $131,189,298 has been designated as capital gains
dividends for the purpose of the dividends paid deduction, of which 100%
represents 15% rate gains.
FOREIGN TAXES CREDIT: The Fund designates $2,126,818 as foreign taxes paid and
$15,890,690 as foreign source income earned for regular Federal income tax
purposes.
QUALIFIED DIVIDEND INCOME: For the fiscal year ended October 31, 2008, the Fund
will designate up to the maximum amount allowable pursuant to the Internal
Revenue Code, as qualified dividend income eligible for reduced tax rates. These
lower rates range from 5% to 15% depending on an individual's tax bracket.
Complete information will be reported in conjunction with Form 1099-DIV.
PRIVACY POLICY
PRIVACY NOTICE
The China Fund, Inc. collects nonpublic personal information about its
shareholders from the following sources:
[ ] Information it receives from shareholders on applications or other
forms; and
[ ] Information about shareholder transactions with the Fund.
THE FUND'S POLICY IS TO NOT DISCLOSE NONPUBLIC PERSONAL INFORMATION ABOUT ITS
SHAREHOLDERS TO NONAFFILIATED THIRD PARTIES (other than disclosures permitted by
law).
The Fund restricts access to nonpublic personal information about its
shareholders to those agents of the Fund who need to know that information to
provide products or services to shareholders. The Fund maintains physical,
electronic and procedural safeguards that comply with federal standards to guard
its shareholders' nonpublic personal information.
27
THE CHINA FUND, INC.
OTHER INFORMATION (CONTINUED) (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that are used by the Fund's
investment advisers to vote proxies relating to the Fund's portfolio securities
is available (1) without charge, upon request, by calling 1-888-CHN-CALL (246-
2255); and (2) as an exhibit to the Fund's annual report on Form N-CSR which is
available on the website of the Securities and Exchange Commission (the
"Commission") at http://www.sec.gov. Information regarding how the investment
advisers vote these proxies is now available by calling the same number and on
the Commission's website. The Fund has filed its report on Form N-PX covering
the Fund's proxy voting record for the 12 month period ending June 30, 2008.
QUARTERLY PORTFOLIO OF INVESTMENTS
A Portfolio of Investments will be filed as of the end of the first and third
quarter of each fiscal year on Form N-Q and will be available on the Securities
and Exchange Commission's website at http://www.sec.gov. Form N-Q has been filed
as of July 31, 2008 for the third quarter of this fiscal year and is available
on the Securities and Exchange Commission's website at http://www.sec.gov.
Additionally, the Portfolio of Investments may be reviewed and copied at the
Commission's Public Reference Room in Washington, DC. Information on the
operation of the Public Reference Room may be obtained by calling 1-800-SEC-
0330. The quarterly Portfolio of Investments will be made available with out
charge, upon request, by calling 1-888-246-2255.
CERTIFICATIONS
The Fund's chief executive officer has certified to the New York Stock Exchange
that, as of June 10, 2008, he was not aware of any violation by the Fund of
applicable New York Stock Exchange corporate governance listing standards. The
Fund also has included the certifications of the Fund's chief executive officer
and chief financial officer required by Section 302 and Section 906 of the
Sarbanes-Oxley Act of 2002 in the Fund's Form N-CSR filed with the Securities
and Exchange Commission, for the period of this report.
28
BOARD DELIBERATIONS REGARDING APPROVAL OF
INVESTMENT MANAGEMENT AGREEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GENERAL BACKGROUND
Martin Currie Inc. ("Martin Currie") acts as the Fund's investment manager, with
exclusive investment discretion over the Fund's assets pursuant to two
investment management and advisory agreements with the Fund: a "Listed
Management Agreement" and a "Direct Management Agreement" (as defined below).
Martin Currie is a registered investment adviser under the U.S. Investment
Advisers Act of 1940, as amended (the "Advisers Act").
The Fund may invest up to 100% of the portion of the Fund's assets allocated for
investment in listed securities (the "Listed Investments") pursuant to the
Listed Management Agreement. The Fund pays Martin Currie a fee for its
investment management of the Fund's Listed Investments that is computed weekly
and payable monthly, at an annual rate of 0.70% of the Fund's average weekly net
assets consisting of Listed Investments up to US$315 million and 0.50% of the
Fund's average weekly net assets consisting of Listed Investments in excess of
US$315 million (the "Listed Investment Management Fee").
The Fund may invest up to 25% of the net proceeds of its offerings of its
outstanding common stock in direct equity investments (the "Direct Investments")
pursuant to the Direct Management Agreement. The Fund pays Martin Currie a fee
for its investment management of the Fund's Direct Investments that is computed
weekly and payable monthly at an annual rate of 2.00% of the Fund's average
weekly value of the Fund's assets consisting of Direct Investments (the "Direct
Investment Management Fee").
ANNUAL APPROVAL PROCESS
The Fund's Board of Directors (the "Board") is legally required to review and
re-approve the Listed Management Agreement and the Direct Management Agreement
(together, the "Advisory Agreements") once a year. Throughout the year, the
Board considers a wide variety of materials and information about the Fund,
including, for example, the Fund's investment performance, adherence to stated
investment objectives and strategies, assets under management, expenses,
regulatory compliance and management. The Board periodically meets with senior
management and portfolio managers of Martin Currie and reviews and evaluates
Martin Currie's professional experience, credentials and qualifications. This
information supplements the materials the Board received in preparation for the
Meeting described below.
In determining whether it was appropriate to approve the Advisory Agreements
during fiscal 2008, the Board requested from Martin Currie information that the
Board believed to be reasonably necessary to reach its conclusion. This
information together with the information provided to the Directors throughout
the course of year formed the primary basis for the Directors' determinations.
The Board met in executive session for the purpose of considering the approval
of the Advisory Agreements. During the executive session, the Directors reviewed
a memorandum which detailed the duties and responsibilities of the Directors
with respect to their consideration of the Advisory Agreements. The Directors
reviewed the contract renewal materials provided by Martin Currie, including,
but not limited to (1) an organizational overview of Martin Currie and
biographies of those personnel providing services to the Fund, (2) copies of the
Listed Management Agreement, Amendment No. 1 to the Listed Management Agreement
and the Direct Management Agreement, (3) a profitability
29
BOARD DELIBERATIONS REGARDING APPROVAL OF
INVESTMENT MANAGEMENT AGREEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
analysis of Martin Currie, (4) financial statements of Martin Currie, (5) Form
ADV of Martin Currie, and (6) performance and fee comparison data provided by
Fundamental Data, an independent third party vendor of such information.
The Board, consisting entirely of "independent directors" within the meaning of
the Investment Company Act of 1940, unanimously approved the Advisory Agreements
at an "in person" meeting held on June 12, 2008 (the "Meeting"). In evaluating
the Advisory Agreements, the Directors drew on materials provided to them by
Martin Currie. In deciding whether to renew the Advisory Agreements, the
Directors considered various factors, including (1) the nature, extent and
quality of the services provided by Martin Currie under the Listed Management
Agreement, (2) the investment performance of the Fund's Listed Investments and
Direct Investments (together, the "Fund's Investments"), (3) the costs to Martin
Currie of its services and the profits realized by Martin Currie from its
relationship with the Fund, and (4) the extent to which economies of scale might
be realized if and as the Fund grows and whether the fee levels in the Advisory
Agreements reflect these economies of scale.
1. Nature, Extent and Quality of the Services provided by Martin Currie
In considering the nature, extent and quality of the services provided by Martin
Currie, the Directors relied on their prior experience as Directors of the Fund
as well as on the materials provided at the Meeting. They noted that under the
Advisory Agreements Martin Currie is responsible for managing the Fund's
Investments in accordance with the Fund's investment objective and policies,
applicable legal and regulatory requirements, and any instructions of the
Directors, for providing necessary and appropriate reports and information to
the Directors, for maintaining all necessary books and records pertaining to the
Fund's transactions in the Fund's Investments, and for furnishing the Fund with
the assistance, cooperation, and information necessary for the Fund to meet
various legal requirements regarding registration and reporting. They noted the
distinctive nature of the Fund as investing primarily in equity securities (i)
of companies for which the principal securities trading market is in China, (ii)
of companies for which the principal securities trading market is outside of
China, or constituting direct equity investments in companies organized outside
of China, that in both cases derive at least 50% of their revenues from goods or
services sold or produced or have at least 50% of their assets, in China or
(iii) constituting direct equity investments in companies organized in China.
They also noted the experience and expertise of Martin Currie as appropriate for
an adviser to the Fund.
The Directors reviewed the background and experience of Martin Currie's senior
management, including those individuals responsible for the investment and
compliance operations with respect to the Fund's Investments, and the
responsibilities of the investment and compliance personnel with respect to the
Fund. They also considered the resources, operational structures and practices
of Martin Currie in managing the Fund's portfolio, in monitoring and securing
the Fund's compliance with its investment objective and policies and with
applicable laws and regulations, and in seeking best execution of portfolio
transactions. Drawing upon the materials provided and their general knowledge of
the business of Martin Currie, the Directors took into account the fact that
Martin Currie's experience, resources and strength in these areas are deep,
extensive and of high quality. On the basis of this review, the Directors
determined that the nature and extent of the services provided by Martin Currie
to the Fund were appropriate, had been of high quality, and could be expected to
remain so.
30
BOARD DELIBERATIONS REGARDING APPROVAL OF
INVESTMENT MANAGEMENT AGREEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2. Performance of the Fund's Investments
The Directors noted that, in view of the distinctive investment objective of the
Fund, the Fund's investment performance was satisfactory. Of importance to the
Directors was the extent to which the Fund achieved its objective. Drawing upon
information provided at the Meeting and upon reports provided to the Directors
by Martin Currie throughout the preceding year, the Directors determined that
the Fund outperformed the MSCI Golden Dragon Index for the one-, three-, five-
and ten-year periods ending April 30, 2008 (at both net asset value and market
price). The Board noted that the Fund's performance was driven by the Fund's
Listed Investments which had outperformed the MSCI Golden Dragon Index for the
one-, three- and five- year periods ending April 30, 2008. The Board also noted
that Martin Currie began managing the Fund's Direct Investments on April 16,
2007 and that the Fund's Direct Investments had underperformed the MSCI Golden
Dragon Index for the one-, three- and five-year periods ending April 30, 2008.
They further concluded, on the basis of the limited universe of comparable
funds, that the expense ratio of the Fund was as low as, or lower than, those of
the Fund's direct competitors. Accordingly, the Directors concluded that the
performance of the Fund was satisfactory.
3. The Costs to Martin Currie of its Services and the Profits Realized by Martin
Currie from its Relationship with the Fund
The Directors considered the profitability of the advisory arrangement with the
Fund to Martin Currie. The Directors had been provided with data on the Fund's
profitability to Martin Currie. They first discussed with representatives of
Martin Currie the methodologies used in computing the costs that formed the
bases of the profitability calculations. Concluding that these methodologies
were reasonable, they turned to the data provided. After extensive discussion
and analysis they concluded that, to the extent that Martin Currie's
relationship with the Fund had been profitable, the profitability was in no case
such as to render the advisory fee excessive.
In considering whether Martin Currie benefits in other ways from its
relationship with the Fund, the Directors noted that other than the advisory
fees payable to Martin Currie under the Advisory Agreements, there is no other
investment advisory, brokerage, or other fee received or receivable by Martin
Currie or its affiliates from the Fund. The Directors concluded that, to the
extent that Martin Currie derives other benefits from its relationship with the
Fund, those benefits are not so significant as to render the adviser's fees
excessive.
4. The Extent to which Economies of Scale would be Realized if and as the Fund
Grows and Whether the Fee Levels in the Listed Management Agreement Reflect
these Economies of Scale
On the basis of their discussions with Martin Currie's management and their
analysis of information provided at the Meeting, the Directors determined that
the nature of the Fund and its operations is such that Martin Currie was likely
to realize economies of scale in the management of the Fund as it grows in size.
The Board noted that, in contemplation of these likely economies of scale, this
fee structure with Martin Currie for the Fund's Listed Investments provides for
breakpoints above which the fee rate declines. It was noted in the Board's
discussion with representatives of Martin Curie that Martin Currie's assets
under management from its China business had increased substantially and that
Martin Currie had realized economies of scale from managing more China
portfolios for more clients. It was noted that these economies of scale were
shared with the Fund because they had enabled Martin Currie to develop
centralized
31
BOARD DELIBERATIONS REGARDING APPROVAL OF
INVESTMENT MANAGEMENT AGREEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
dealing facilities that pool transactions across all of its clients. However,
Martin Currie had noted in its materials provided to the Board that these
economies of scale were not infinite and that managing too much money may impair
performance.
In order to better evaluate the Fund's advisory fee, the Directors had requested
comparative information with respect to fees paid by similar funds, i.e., public
funds that invest primarily in China. The Directors found that, because of the
distinctive nature of the Fund, the universe of similar funds was limited; the
total number of comparable funds, which included the Fund, was eighteen. They
also noted that there are no other public funds with a dedicated direct
investment component that provide a fee comparison. It was noted that the
closest comparison were private equity funds and those funds generally charge a
base fee of 2% of assets plus an incentive based fee based on gains realized on
portfolio investments, and on such information, the Directors determined that
the Direct Investment Management Fee compares favorably with the fees of private
equity funds. It was also noted that, while the Direct Investment Management Fee
is higher than the fees paid by other public funds, the Listed Investment
Management Fee compared favorably with management fees of other similar public
funds and the effective combined fees under the Listed Management Agreement and
the Direct Management Agreement were lower than the fees for most other similar
public funds. The Directors noted that the Fund's total expense ratio was lower
than most of the comparable funds' total expense ratios. The Directors concluded
that the limited data available provided some indirect confirmation of the
reasonableness of Martin Currie's fee.
APPROVAL OF THE ADVISORY AGREEMENTS
The Directors approved the continuance of the Fund's Advisory Agreements with
Martin Currie after weighing the foregoing factors. They reasoned that,
considered in themselves, the nature and extent of the services provided by
Martin Currie were appropriate, that the performance of the Fund had been
satisfactory, and that Martin Currie could be expected to provide services of
high quality. As to Martin Currie's fees for the Fund, the Directors determined
that the fees, considered in relation to the services provided, were fair and
reasonable, that the Fund's relationship with Martin Currie was not so
profitable as to render the fees excessive, that any additional benefits to
Martin Currie were not of a magnitude materially to affect the Directors'
deliberations, and that the fees adequately reflected shared economies of scale
with the Fund.
32
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 Computershare 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 Computershare Trust Company,
N.A., as paying agent. Shareholders who do not wish to have distributions
automatically reinvested should notify the Fund by contacting Computershare c/o
The China Fund, Inc. at P.O. Box 43010, Providence, Rhode Island 02940-3011.
Phone: 1-800-426-5523.
Computershare Trust Company, N.A. and Computershare Shareholder Services, Inc.
(collectively, "Computershare" or the "Plan Administrator"), acts as Plan
Administrator and Service Agent. If the Directors of the Fund declare an income
dividend or a capital gains distribution payable either in the Fund's Common
Stock or in cash, 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 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.
33
DIVIDENDS AND DISTRIBUTIONS;
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
Computershare c/o The China Fund, Inc. at P.O. Box 43011, Providence, Rhode
Island 02940-3011.Phone: 1-800-426-5523.
The plan will not apply to any dividend or capital gain distribution declared
payable in the Fund's common stock, as was the case with the Fund's declaration
of dividends and distributions in December 2007 and December 2008.
34
DIRECTORS AND OFFICERS (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The following table provides information concerning each of the Directors of the
Fund. The Board of Directors is comprised of Directors who are not interested
persons of the Fund, as that term is defined in Section 2(a)(19) of the
Investment Company Act of 1940, as amended. The Directors are divided into three
classes, designated as Class I, Class II and Class III. The Directors in each
such class are elected for a term of three years to succeed the Directors whose
term of office expires. Each Director shall hold office until the expiration of
his term and until his successor shall have been elected and qualified. The Fund
Complex consists of one series.
<Table>
<Caption>
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT
OFFICE DURING PAST FIVE YEARS AND
NAME (AGE) AND WITH THE DIRECTORSHIPS IN PUBLICLY HELD DIRECTOR
ADDRESS OF DIRECTOR FUND COMPANIES SINCE
- ------------------- ----------- -------------------------------------- --------
James J. Lightburn Chairman of Chairman of the Board of the Fund; 1992
(65).............. the Board Attorney, Nomos, (2004-present);
13, Rue Alphonse and Attorney, member of Hughes Hubbard &
de Neuville Director Reed (1993-2004).
75017 Paris,
France
Michael F. Holland Director Chairman, Holland & Company L.L.C. 1992
(64).............. (1995- present); Director, The Holland
375 Park Avenue Balanced Fund, Inc., Reaves Utility
New York, New York Income Fund, Scottish Widows
10152 Investment Partnership Trust and the
Taiwan Fund, Inc.; Trustee, State
Street Master Funds and State Street
Institutional Investment Trust.
William Kirby (58).. Director Director, John K. Fairbank Center for 2007
Harvard University Chinese Studies Harvard University
CGIS Building (2006-present); Chairman, Harvard
1730 Cambridge China Fund (2006-present); Harvard
Street Cambridge University Distinguished Service
MA 02138 Professor (2006-present); Visiting
Professor of Business Administration
Harvard Business School (2006-
present); Dean of the Faculty of Arts
and Sciences Harvard University (2002-
2006)
Joe O. Rogers (59).. Director The Rogers Team LLC, organizing member 1992
2477 Foxwood Drive (July 2001-present); Manager, The J-
Chapel Hill, NC Squared Team LLC (April 2003-May
27514 2004); Director, The Taiwan Fund, Inc.
(1986-present).
Nigel S. Tulloch Director Chief Executive, HSBC Asset Management 1992
(62).............. Bahamas Limited (1986-1992); Director,
7, Circe Circle The HSBC China Fund Limited (1992-
Dalkeith 2005).
WA6009
Australia
Paul Hahesy (36).... Chief Compliance Manager, Foreside 2007
Foreside Compliance Compliance Services, LLC. (2005-
Compliance Officer present); Compliance Consultant,
Services, LLC. Metlife (2002-2005).
Two Portland
Square Portland ME
04101
Gary L. French President Senior Vice President, State Street
(57).............. Bank and Trust Company (2002-present);
2 Avenue de Managing Director, Deutsche Asset
Lafayette Management, Inc. and Zurich Scudder
Boston, MA 02111 Investments (acquired by Deutsche Bank
in 2002) (2001-2002).
</Table>
35
DIRECTORS AND OFFICERS (CONTINUED) (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Table>
<Caption>
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT
OFFICE DURING PAST FIVE YEARS AND
NAME (AGE) AND WITH THE DIRECTORSHIPS IN PUBLICLY HELD DIRECTOR
ADDRESS OF DIRECTOR FUND COMPANIES SINCE
- ------------------- ----------- -------------------------------------- --------
William C. Cox Treasurer Vice President, State Street Bank and
(42).............. Trust Company.
2 Avenue de
Lafayette
Boston, MA 02111
Mary Moran Zeven Secretary Senior Vice President and Senior
(46).............. Counsel, State Street Bank and Trust
2 Avenue de Company.
Lafayette
Boston, MA 02111
</Table>
Alan Tremain (70), Placido Mer 5200 North Flagler #25, West Palm Beach Florida
33408, served as Director from 1992 until his retirement on March 6, 2008.
36
THE CHINA FUND, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES ADDRESS
The China Fund, Inc.
c/o State Street Bank and Trust Company
2 Avenue de Lafayette, 6th Floor
P.O. Box 5049
Boston, MA 02206-5049
1-888-CHN-CALL (246-2255)
DIRECTORS AND OFFICERS
James J. Lightburn, Chairman of the Board and Director
Michael F. Holland, Director
William Kirby, Director
Joe O. Rogers, Director
Nigel S. Tulloch, Director
Paul Hahesy, Chief Compliance Officer of the Fund
Gary L. French, President
William C. Cox, Treasurer
Mary Moran Zeven, Secretary
INVESTMENT MANAGER
Martin Currie Inc.
SHAREHOLDER SERVICING AGENT
The Altman Group
ADMINISTRATOR AND CUSTODIAN
State Street Bank and Trust Company
TRANSFER AGENT, DIVIDEND PAYING AGENT AND REGISTRAR
Computershare Trust Company, N.A.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche, 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 this 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 this Form N-CSR.
(f) A copy of the Fund's Code of Ethics is attached as exhibit 12(a)(1) to this
Form N-CSR.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
(a) (1) The Board of Directors of the Fund has determined that the Fund 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, 2008, Deloitte & Touche LLP
("Deloitte"), the Fund's independent registered public accounting firm, billed
the Fund aggregate fees of US$58,800 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 years ended October 31, 2007, Deloitte billed the Fund
aggregate fees of US$54,000 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, 2008, Deloitte 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, 2007, Deloitte 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, 2008, Deloitte billed the Fund
aggregate fees of US$11,000 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.
For the fiscal year ended October 31, 2007, Deloitte billed the Fund
aggregate fees of US$10,000 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 years ended October 31, 2008 and October 31, 2007, Deloitte
did not bill the Fund for the provision of security counts.
(e) 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 registered public accounting firm; provided, however, that
the preapproval requirement with respect to the provision of non-auditing
services to the Fund by the Fund's independent accountants may be waived by the
Audit Committee under the circumstances described in the Securities Exchange Act
of 1934, as amended (the "1934 Act"). All of the audit and tax services
described above for which Deloitte billed the Fund fees for the fiscal years
ended October 31, 2008 and October 31, 2007, respectively, were pre-approved by
the Audit Committee.
For the fiscal years ended October 31, 2008 and October 31, 2007, the
Fund's Audit Committee did not waive the pre-approval requirement of any
non-audit services to be provided to the Fund by Deloitte.
(f) Not applicable.
(g) Not applicable.
(h) The Fund's Audit Committee has determined that the provision of non-audit
services by Deloitte to State Street Bank and Trust Company is compatible with
maintaining Deloitte'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 Exchange Act. The members of the
Fund's audit committee are James J. Lightburn, Nigel Tulloch, Joe O. Rogers,
William Kirby and Michael F. Holland.
ITEM 6. SCHEDULE OF INVESTMENTS.
Schedule of Investments is included as part of Item 1.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
INVESTMENT COMPANIES.
Attached to this Form N-CSR as exhibit 12(a)(4) are copies of the proxy voting
policies and procedures of the Fund and its investment adviser, Martin Currie,
Inc.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(a)(1) As of January 13, 2009, the portfolio manager of the registrant is as
follows:
CHRIS RUFFLE
Mr. Ruffle joined Martin Currie Investment Management Ltd ("MCIM") in 1994 and
is currently a director. MCIM provides investment research and administration
services to the Investment Manager. Mr. Ruffle, who is a Chinese and Taiwanese
equity specialist, has 21 years investment experience in Asia. Fluent in
Mandarin and Japanese, Mr. Ruffle has worked in Asia 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 (1990 to 1993). Mr. Ruffle also
manages The Martin Currie China Hedge Fund, the Martin Currie China "A" Share
Fund Limited, the China Development Capital Partnership and the Taiwan
Opportunities Fund.
(a)(2)
As of October 31, 2008, Chris Ruffle managed 6 mutual funds with a total of
approximately US$640 million in assets; 5 pooled investment vehicles other than
mutual funds with a total of approximately US$707 million in assets; and 11
other accounts with a total of approximately US$842 million in assets.
Of these other mutual funds, 1 fund with a total of approximately US$85 million
in assets, had performance based fees.
Of these other pooled investment vehicles, 1 pooled investment vehicle with a
total of approximately US$84 million in assets, had performance based fees.
CONFLICTS OF INTEREST:
Mr. Ruffle's simultaneous management of the Fund and the other accounts noted
above may present actual or apparent conflicts of interest with respect to the
allocation and aggregation of securities orders placed on behalf of the Fund and
the other accounts. The Investment Manager, however, believes that sufficient
controls, policies and systems are in place which address such conflicts.
The Investment Manager has adopted several policies that address potential
conflicts of interest, including best execution and trade allocation policies
that are designed to ensure (1) that portfolio management is seeking the best
price for portfolio securities under the circumstances, (2) fair and equitable
allocation of investment opportunities among accounts over time and (3)
compliance with applicable regulatory requirements. All accounts are to be
treated in a non-preferential manner, such that allocations are not based upon
account performance, fee structure or preference of the portfolio manager. In
addition, the Investment Manager has adopted a Code of Conduct that sets forth
policies regarding conflicts of interest.
COMPENSATION:
Mr. Ruffle's compensation consists of a base salary together with an additional
element of remuneration dependent upon the performance of the accounts that he
manages.
OWNERSHIP OF SECURITIES: The following table sets forth, for each portfolio
manager, the aggregate dollar range of the registrant's equity securities
beneficially owned as of October 31, 2008.
Portfolio Manager Dollar Range of Fund Shares Beneficially Owned
- ----------------- ----------------------------------------------
Chris Ruffle $500,001 - $1,000,000
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which shareholders may
recommend nominees to the registrant's Board of Directors during the period
covered by this Form N-CSR filing.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers have
concluded that the registrant's disclosure controls and procedures (as
defined in Rule 30a-3(c) under the Investment Company Act of 1940, as
amended (the "1940 Act") (17 CFR 270.30a-3(c))) are effective, as of a date
within 90 days of the filing date of this Form N-CSR based on their
evaluation of these controls and procedures required by Rule 30a-3(b) under
the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under
the 1934 Act (17 CFR 240.13a-15(b) or 240.15d-15(b)).
(b) There were no changes in the registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR
270.30a-3(d))) that occurred during the registrant's second fiscal quarter
that has materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Code of Ethics is attached hereto in response to Item 2(f).
(a)(2) The certifications required by Rule 30a-2 of the 1940 Act are attached
hereto.
(a)(3) Not applicable.
(a)(4) Proxy voting policies and procedures of the Fund and its investment
adviser are attached hereto in response to Item 7.
(b) The certifications required by Rule 30a-2(b) of the 1940 Act and Section
906 of the Sarbanes-Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
THE CHINA FUND, INC.
By: /s/ Gary L. French
---------------------------------
Gary L. French
President of The China Fund, Inc.
Date: January 13, 2009
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.
Date: January 13, 2009
By: /s/ Laura F. Healy
---------------------------------
Laura F. Healy
Treasurer of The China Fund, Inc.
Date: January 13, 2009