-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Kx+/eQoltE+yH9MyhcbL2USB5lpYZu8HF1NA6z2f8B9gNtHy0fj0n0SZIs5/4nbL +9Psm+D4sVamouqC3goJ+w== 0000950135-06-000080.txt : 20060109 0000950135-06-000080.hdr.sgml : 20060109 20060109160821 ACCESSION NUMBER: 0000950135-06-000080 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20060105 FILED AS OF DATE: 20060109 DATE AS OF CHANGE: 20060109 EFFECTIVENESS DATE: 20060109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHINA FUND INC CENTRAL INDEX KEY: 0000845379 IRS NUMBER: 000000000 STATE OF INCORPORATION: MD FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-05749 FILM NUMBER: 06519359 BUSINESS ADDRESS: STREET 1: 225 FRANKLIN ST CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 6176622965 MAIL ADDRESS: STREET 1: 225 FRANKLIN ST CITY: BOSTON STATE: MA ZIP: 02110 N-CSR 1 b57924cfnvcsr.txt THE CHINA FUND, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number: 811-05749 ----------------------------------------- THE CHINA FUND, INC. ------------------------------------------------------------------------------ (Exact name of registrant as specified in charter) 225 FRANKLIN STREET BOSTON, MA 02110 ------------------------------------------------------------------------------ (Address of principal executive offices)(Zip code) Copy to: Mary Moran Zeven Leonard B. Mackey, Jr., Esq. Secretary Clifford Chance US LLP The China Fund, Inc. 31 West 52nd Street 225 Franklin Street New York, New York 10019-6131 Boston, MA 02110 (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, 2005 ITEM 1. REPORT TO STOCKHOLDERS. THE CHINA FUND, INC. ANNUAL REPORT OCTOBER 31, 2005 THE CHINA FUND, INC. TABLE OF CONTENTS
PAGE ---- Key Highlights 1 Asset Allocation 2 Industry Allocation 3 Chairman's Statement 4 Investment Managers' Statements 5 About the Portfolio Managers 9 Schedule of Investments 10 Financial Statements 16 Notes to Financial Statements 20 Report of Independent Registered Public Accounting Firm 25 Other Information 26 Dividends and Distributions; Dividend Reinvestment and Cash Purchase Plan 35
THE CHINA FUND, INC. KEY HIGHLIGHTS (UNAUDITED) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------- FUND DATA - -------------------------------------------------------------------------------------- NYSE STOCK SYMBOL CHN - -------------------------------------------------------------------------------------- LISTING DATE JULY 10, 1992 - -------------------------------------------------------------------------------------- SHARES OUTSTANDING 14,388,287 - -------------------------------------------------------------------------------------- TOTAL NET ASSETS (10/31/05) US$333.5 MILLION - -------------------------------------------------------------------------------------- NET ASSET VALUE PER SHARE (10/31/05) $23.25 - -------------------------------------------------------------------------------------- MARKET PRICE PER SHARE (10/31/05) $24.55 - --------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------- TOTAL RETURN - -------------------------------------------------------------------------------------------------------------- PERFORMANCE AS OF 10/31/05: NET ASSET VALUE(1) MARKET PRICE(2) - -------------------------------------------------------------------------------------------------------------- 12 Months (.70)% (5.50)% - -------------------------------------------------------------------------------------------------------------- 3-Year Cumulative 85.63% 131.92% - -------------------------------------------------------------------------------------------------------------- 3-Year Annualized 22.90% 32.37% - -------------------------------------------------------------------------------------------------------------- 5-Year Cumulative 126.21% 230.50% - -------------------------------------------------------------------------------------------------------------- 5-Year Annualized 17.73% 27.01% - -------------------------------------------------------------------------------------------------------------- 10-Year Cumulative 134.85% 171.62% - -------------------------------------------------------------------------------------------------------------- 10-Year Annualized 8.91% 10.51% - --------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------- DIVIDEND HISTORY - -------------------------------------------------------------------------------------------------------------- RECORD DATE INCOME CAPITAL GAINS - -------------------------------------------------------------------------------------------------------------- 12/22/04 $ 0.1963 $3.3738 - -------------------------------------------------------------------------------------------------------------- 12/31/03 $ 0.0700 $1.7100 - -------------------------------------------------------------------------------------------------------------- 12/26/02 $0.06397 $0.1504 - -------------------------------------------------------------------------------------------------------------- 12/31/01 $ 0.1321 -- - -------------------------------------------------------------------------------------------------------------- 12/31/99 $ 0.1110 -- - -------------------------------------------------------------------------------------------------------------- 12/31/98 $ 0.0780 -- - -------------------------------------------------------------------------------------------------------------- 12/31/97 -- $0.5003 - -------------------------------------------------------------------------------------------------------------- 12/31/96 $ 0.0834 -- - -------------------------------------------------------------------------------------------------------------- 12/29/95 $ 0.0910 -- - -------------------------------------------------------------------------------------------------------------- 12/30/94 $ 0.0093 $0.6006 - -------------------------------------------------------------------------------------------------------------- 12/31/93 $ 0.0853 $0.8250 - -------------------------------------------------------------------------------------------------------------- 12/31/92 $ 0.0434 $0.0116 - --------------------------------------------------------------------------------------------------------------
(1) Total investment returns reflect changes in net asset value per share during each period and assume that dividends and capital gains distributions, if any, were reinvested in accordance with the dividend reinvestment plan. The net asset value per share percentages is not an indication of the performance of a shareholder's investment in the Fund, which is based on market price. Total investment returns are historical and do not guarantee future results. (2) Total investment returns are historical and do not guarantee future results. 1 THE CHINA FUND, INC. ASSET ALLOCATION AS OF OCTOBER 31, 2005 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------- TEN LARGEST LISTED EQUITY INVESTMENTS* - --------------------------------------------------------------------------------- 1. Chaoda Modern Agriculture (Holdings) Ltd. 3.85% - --------------------------------------------------------------------------------- 2. China Netcom Group Corp. (Hong Kong) Ltd. 3.04% - --------------------------------------------------------------------------------- 3. China Life Insurance Co., Ltd. 2.97% - --------------------------------------------------------------------------------- 4. Cathay Financial Holding Co., Ltd. 2.86% - --------------------------------------------------------------------------------- 5. Xinao Gas Holdings, Ltd. 2.61% - --------------------------------------------------------------------------------- 6. China Minsheng Co. Access Product 2.50% - --------------------------------------------------------------------------------- 7. Zijin Mining Group Co., Ltd. 2.34% - --------------------------------------------------------------------------------- 8. Solomon Systech Ltd. 2.27% - --------------------------------------------------------------------------------- 9. TPV Technology, Ltd. 2.27% - --------------------------------------------------------------------------------- 10. Anhui Expressway Co., Ltd. 2.11% - ---------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- LARGEST DIRECT INVESTMENTS* - -------------------------------------------------------------------------------- 1. CDW Holding Ltd. 2.17% - -------------------------------------------------------------------------------- 2. Global e-Business Services (BVI) Ltd. 0.92% - -------------------------------------------------------------------------------- 3. Captive Finance, Ltd. 0.91% - -------------------------------------------------------------------------------- 4. teco Optronics Corp. 0.04% - --------------------------------------------------------------------------------
* Percentages based on net assets at October 31, 2005. 2 INDUSTRY ALLOCATION (UNAUDITED) - -------------------------------------------------------------------------------- INDUSTRY ALLOCATION (AS A PERCENTAGE OF NET ASSETS) (PIE CHART) Others 13.6% Information 12.9% Technology Financials 12.5% Industrials 12.4% Consumer 12.3% Discretionary Utilities 8.2% Materials 6.6% Energy 6.4% Consumer Staples 6.1% Health Care 4.3% Telecommunications 4.7%
Fund holdings are subject to change and percentages shown above are based on total net assets as of October 31, 2005. A complete list of holdings as of October 31, 2005 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 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Dear Stockholders, During the past year the Chinese economy continued to grow strongly, with year-on-year Gross Domestic Product (GDP) growth exceeding 9%. But as the period ended, there were some signs that this growth might be slowing slightly with some weakness in the area of fixed asset investments. The prices of domestic commodities such as steel and coal started to fall. In July, the renminbi was re-pegged from the U.S. dollar to a basket of currencies, of undisclosed composition, which resulted in slight currency appreciation. However, the trade surplus with the U.S. continued to grow. And, given the mid-term Congressional elections in the United States next year, and growth in protectionist sentiment, we expect further upward pressure on the renminbi. Consumer inflation in China has fallen to low levels, although this may pick up slightly in 2006 as the government allows the adjustment of gasoline, electricity and water prices. However, as the currency seems likely to firm, there is little immediate threat of higher interest rates. But this strong economic growth was not reflected in China's stock markets. A small number of large cap stocks, notably oils and telecoms, constituted most of what index gains there were. The entrepreneurial companies in which the Fund invests, many of them manufacturers, found their margins coming under pressure from rising costs. High levels of equity supply -- capped by the raising of US $9 billion for the listing of China Construction Bank -- was another burden on the market. Taiwan's market, to which the Fund had a large exposure, was held back by the political stalemate between a Democratic Progressive Party (DDP) president and Kuomintang (KMT) legislature. The domestic A-share market hit an eight-year low in the middle of the year, but we were heartened by the radical reform of the market undertaken by the Chinese authorities: in August the Fund completed a rights issue in excess of US$110 million in order to make a substantial asset allocation to the A-share market, which was previously closed to foreign investors. With building Renminbi liquidity, good progress in the reform of non-tradable shares and the increasing opening of the market to foreign investors, we hope that this pioneering move will show positive results in 2006. A major obstacle to private equity deal activity in China was removed following the issuance of Circular 75 by the State Administration of Foreign Exchange (SAFE). This Circular removes the regulatory uncertainty created by two earlier circulars. It marks a significant step towards a more transparent structure in the area of overseas investments by People's Republic of China (PRC) residents. Asian Direct Capital Management, the Fund's direct investment manager, expects a pickup in deal activity in the wake of the new SAFE circular. We thank you for your continuing support. If you have any questions, comments or would like additional information on the Fund's holdings, we invite you to visit the Fund's website at www.chinafundinc.com or call (toll free) 1-888-CHN-CALL (246-2255). Sincerely, /s/ Alan Tremain Alan Tremain Chairman of the Board 4 THE CHINA FUND, INC. INVESTMENT MANAGERS' STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- REVIEW OF LISTED INVESTMENTS We continued to invest in what we consider the best Chinese companies wherever they are listed. Our market coverage now includes: Hong Kong, Taipei, Singapore, the A-share and B-share markets in Shanghai and Shenzhen, and ADRs traded on the Nasdaq. In general, the key elements of the Fund's investment style remained: - An active, consistent and disciplined approach; - Bottom-up stock selection, recognizing the inefficiencies of the Chinese market; - A focus on growth; and - A strategic bias to entrepreneurial companies. When researching companies we continued to look for: - Credible managements, owning equity in the company; - High growth with sustainable margins; and - Balance sheets that are unhampered by high accounts receivables and intra-group transactions. Therefore, over the past year we have been focusing on privately-owned, entrepreneurial companies that are set to benefit from China's economic growth, developing infrastructure, rising demand for consumer products and the progressive liberalisation of markets. We remain convinced that, by emphasising these types of companies, the Fund will outperform over the longer term. Despite good business fundamentals and low valuations, the share prices of these companies have remained relatively becalmed. In part, the Fund's performance relative to the MSCI Golden Dragon index was held back by the Fund's exposure to the renminbi denominated A-share market, where the Fund began to invest from April. Over the 12 months to October 31 2005, the MSCI Golden Dragon index rose by 11.2% while the net asset value of the listed portfolio fell by 1.0%. Although the A-share market has certainly been weak, a liquidity-driven rally looks possible given the build-up in domestic liquidity and good progress in resolving the non-tradable share problem. We retained our reservations about investing in poorly-managed state-owned enterprises and took the view that the major oil companies in China are state-owned and therefore liable to act in national, rather than in shareholders', interests. As such, a second negative factor for performance in relative terms was the strong performance from the state-owned oil companies and telecoms stocks, such as PETROCHINA, CNOOC and CHINA MOBILE. But we are confident that our approach will prove to be the right one over the longer term. In the six months that have passed since our interim report, we have remained interested in consumer stocks. Some examples of recent additions include BIO-TREAT, which makes systems for the treatment of waste water (a huge problem in China) and the depressed SHANGHAI SEMICONDUCTOR, on signs of an upturn in the semiconductor 5 THE CHINA FUND, INC. INVESTMENT MANAGERS' STATEMENTS (CONTINUED) (UNAUDITED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- REVIEW OF LISTED INVESTMENTS (CONTINUED) cycle. Purchases in June included Radiant, the backlight module maker, which we expect to benefit from the growth in Liquid Crystal Displays (LCD) TV demand. Worried about the effect of the rising oil price on fuel costs, we took profits on EVA AIRWAYS. We took losses on the telecom equipment maker UTSTARCOM; debate on the restructuring of the Chinese telecom industry has caused confused operators to delay capital spending and postponed the issuance of 3G licences. We sold positions in WEICHAI POWER, on signs of a slow down in heavy truck demand, and GUANGSHEN RAILWAY, where funding from an A-share issue has been delayed indefinitely. We are positive about the A-share market, which is the midst of radical reform; 220 companies, representing 30% of free market capitalization, have already announced non-tradable share reform plans, clearing a long-term overhang. 6 THE CHINA FUND, INC. INVESTMENT MANAGERS' STATEMENTS (CONTINUED) (UNAUDITED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- REVIEW OF DIRECT INVESTMENTS China has continued to register strong economic growth. GDP increased by 9.4% in the nine months ended September 2005. Retail sales increased by 12.1% in the same period. We expect to increase the pace of direct investments following the issuance of Circular 75 by SAFE. The new rules set forth in the Circular clarify how Chinese residents can set up offshore vehicles to raise funds from foreign private equity investors. As of October 31, 2005 the Fund's Direct Investment portfolio comprised the following investments: CAPTIVE FINANCE LIMITED ("CAPTIVE") Captive is engaged in providing operating and financial leases for technology products (PCs, servers, telecom equipment etc.). It has operations in Greater China, Singapore, Malaysia and Europe. Apart from seeking leasing opportunities within each of its national markets, there is active cross-selling of services between the Asian and European operations. CDW HOLDING LIMITED ("CDW") CDW manufactures a range of component parts for mobile telephones, office equipment and household appliances. Its fastest growing business is the assembly of backlight unit components for the mobile phone industry. For more than a decade, CDW has been supplying parts and accessories for office and consumer equipment to major Japanese manufacturers. CDW continues to expand its production capacity to cope with increasing demand. CDW was listed on the Singapore Stock Exchange on January 26, 2005 and during the six month period ended October 31, 2005, CDW had paid a total dividend of US$0.61mn (2004 final and 2005 interim) to the Fund. For the nine months ended 2005, the company's revenue was US$75.3mn with a net profit after tax of US$7.6mn. Compared with same period last year, revenue increased by 3.9% while net profits dropped by 32.1%. TECO OPTRONICS CORP. ("TECO") teco designs and manufactures organic light emitting diodes (OLED) displays. It has a technology licensing agreement with Kodak. OLED is a new flat screen display technology that is competing with liquid crystal displays (LCDs). teco is a subsidiary of the TECO Group, a large Taiwanese business group. teco has seen difficult trading conditions. Adoption of organic light emitting diodes (OLED) is slower than forecast and the industry is still unable to bring down costs sufficiently to compete with LCD display. teco is considering a number of restructuring options. On July 8, 2005, the Fund's Board, in accordance with the Fund's valuation procedures, reduced teco's carrying value to US$150,000 from a cost of about US$590,000. 7 THE CHINA FUND, INC. INVESTMENT MANAGERS' STATEMENTS (CONTINUED) (UNAUDITED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- REVIEW OF DIRECT INVESTMENTS (CONTINUED) GLOBAL E-BUSINESS SERVICES (BVI) LTD. ("GO") GO engages in operating e-commerce and e-government platforms and related business opportunities. In March 2003, GO was awarded one of the two available licenses in Hong Kong to provide and operate the front-end Government Electronic Trading Services and related electronic processing services for the trading community. GO is a subsidiary of Computer And Technologies Holdings Limited, a listed company in Hong Kong. 8 THE CHINA FUND, INC. ABOUT THE PORTFOLIO MANAGERS (UNAUDITED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- LISTED INVESTMENT MANAGER Mr. Chris Ruffle serves as the portfolio manager for the Fund's portfolio of listed securities. Mr. Ruffle joined Martin Currie in 1994. He is a Chinese and Taiwanese equity specialist with over 15 years investment experience in Asia. Fluent in Mandarin and Japanese, Mr. Ruffle has worked in the Far East since 1983. He worked originally in Beijing and Shanghai and then in Australia for a metal trading company. He then moved to Warburg Securities in 1987 as an analyst in Tokyo, before establishing Warburg's office in Taiwan. Mr. Ruffle also manages The Martin Currie China Hedge Fund and the China "A" Share Fund. DIRECT INVESTMENT MANAGER Mr. Koh Kuek Chiang is the Executive Director of Asian Direct Capital Management ("ADCM") and is the portfolio manager of the Fund's portfolio of direct securities. Mr. Koh joined ADCM in 1998. Mr. Koh has over ten years of private equity investment experience in the United States, Europe and Asia working for the Government of Singapore Investment Corporation, Union Bank of Switzerland and private interests. His investment experience covers a wide range of industries, including telecommunications equipment, biotechnology, media, financial services and basic materials. Mr. Koh graduated with an engineering degree from the University of Western Australia and has a post-graduate Diploma in Business Administration from the National University of Singapore. He is a Chartered Financial Analyst and is fluent in English and Mandarin. 9 THE CHINA FUND, INC. SCHEDULE OF INVESTMENTS OCTOBER 31, 2005 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
NAME OF ISSUER AND TITLE OF ISSUE SHARES VALUE (NOTE A) - --------------------------------- ------ -------------- COMMON STOCK AND OTHER EQUITY INTERESTS CHINA -- SHENZHEN "B" SHARES INDUSTRIALS -- (0.9%) China International Marine Containers (Group) Co., Ltd. ................................................ 3,425,890 $ 2,850,416 ------------ TOTAL CHINA -- SHENZHEN "B" SHARES -- (Cost $1,215,941) 0.9% 2,850,416 ------------ HONG KONG CONSUMER DISCRETIONARY -- (4.6%) Fu JI Food & Catering Services......................... 2,844,000 3,228,400 Nanjing Dahe Outdoor Media Co., Ltd.+.................. 37,500,000 1,064,214 Ports Design Ltd. ..................................... 4,721,500 4,415,634 Shangri-La Asia Ltd. .................................. 3,100,000 4,338,768 TCL Multimedia Technology Holdings Ltd. ............... 15,988,000 2,412,987 ------------ 15,460,003 ------------ CONSUMER STAPLES -- (6.1%) Chaoda Modern Agriculture (Holdings) Ltd. ............. 34,089,900 12,862,537 Li Ning Co. Ltd. ...................................... 11,400,000 6,874,822 Sino Golf Holdings, Ltd. .............................. 6,837,000 590,902 ------------ 20,328,261 ------------ ENERGY -- (0.9%) China Power International Development Ltd. ............ 4,907,000 1,645,752 China Rare Earth Holdings, Ltd. ....................... 15,254,000 1,219,974 ------------ 2,865,726 ------------ FINANCIAL -- (3.0%) China Life Insurance Co., Ltd.*........................ 13,497,000 9,924,009 ------------ HEALTHCARE -- (4.3%) China Shineway Pharmaceutical Group Ltd. .............. 7,615,000 3,192,481 Global Bio-chem Technology Group Co. Ltd. ............. 9,518,000 3,775,425 Golden Meditech Co., Ltd. ............................. 27,900,000 4,894,611 Natural Beauty Bio-Technology, Ltd. ................... 32,780,000 2,431,374 ------------ 14,293,891 ------------ INDUSTRIALS -- (3.9%) Beiren Printing Machinery Holdings Ltd.+............... 7,000,000 1,155,801 China Fire Safety Enterprise Group Holdings Ltd. ...... 50,380,000 4,484,172 TPV Technology, Ltd. .................................. 9,968,000 7,586,388 ------------ 13,226,361 ------------
See notes to financial statements and notes to schedule of investments. 10 THE CHINA FUND, INC. SCHEDULE OF INVESTMENTS (CONTINUED) OCTOBER 31, 2005 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
NAME OF ISSUER AND TITLE OF ISSUE SHARES VALUE (NOTE A) - --------------------------------- ------ -------------- COMMON STOCK AND OTHER EQUITY INTERESTS (CONTINUED) HONG KONG (CONTINUED) INFORMATION TECHNOLOGY -- (3.2%) Arcontech Corp.(2)*.................................... 18,386,000 $ 237,171 Digital China Holdings Ltd. ........................... 10,692,000 2,792,923 Solomon Systech Ltd. .................................. 20,698,000 7,609,363 ------------ 10,639,457 ------------ MATERIALS -- (4.7%) Asia Aluminum Holdings Ltd. ........................... 23,250,000 1,889,464 Asia Zirconium Ltd. ................................... 13,196,000 1,191,558 Fountain Set (Holdings) Ltd. .......................... 6,714,000 2,598,230 Ocean Grand Chemicals Holdings Ltd. ................... 17,379,000 2,174,561 Zijin Mining Group Co., Ltd. .......................... 24,800,000 7,837,775 ------------ 15,691,588 ------------ TELECOMMUNICATIONS -- (4.1%) China Netcom Group Corp. (Hong Kong) Ltd. ............. 6,435,500 10,169,355 Comba Telecom Systems Holdings Ltd. ................... 16,118,000 3,638,516 ------------ 13,807,871 ------------ UTILITIES -- (2.6%) Xinao Gas Holdings Ltd. ............................... 11,560,000 8,723,459 ------------ INDEX FUND -- (0.9%) Ishare Asia Trust*..................................... 580,000 3,030,108 ------------ TOTAL HONG KONG -- (Cost $104,457,957) 38.3% 127,990,734 ------------ HONG KONG -- "H" SHARES CONSUMER DISCRETIONARY -- (0.3%) Lianhua Supermarket Holdings Ltd. ..................... 828,000 897,191 ------------ ENERGY -- (2.5%) China Oilfield Services Ltd. .......................... 9,546,000 3,509,468 China Shenhua Energy Co. Ltd.*......................... 4,536,500 4,974,104 ------------ 8,483,572 ------------ INDUSTRIALS -- (2.7%) BYD Co., Ltd. ......................................... 3,225,000 4,555,320 Sinotrans Ltd. ........................................ 12,835,000 4,470,279 ------------ 9,025,599 ------------
See notes to financial statements and notes to schedule of investments. 11 THE CHINA FUND, INC. SCHEDULE OF INVESTMENTS (CONTINUED) OCTOBER 31, 2005 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
NAME OF ISSUER AND TITLE OF ISSUE SHARES VALUE (NOTE A) - --------------------------------- ------ -------------- COMMON STOCK AND OTHER EQUITY INTERESTS (CONTINUED) HONG KONG -- "H" SHARES (CONTINUED) UTILITIES -- (4.1%) Anhui Expressway Co., Ltd. ............................ 13,938,000 $ 7,056,919 Shenzhen Expressway Co., Ltd. ......................... 21,494,000 6,792,949 ------------ 13,849,868 ------------ TOTAL HONG KONG -- "H" SHARES -- (Cost $26,307,905) 9.6% 32,256,230 ------------ TOTAL HONG KONG (INCLUDING "H" SHARES) -- (Cost $130,765,862) 47.9% 160,246,964 ------------ SINGAPORE UTILITIES -- (1.4%) Bio-Treat Technology Ltd. ............................. 9,799,000 4,796,491 ------------ TOTAL SINGAPORE -- (Cost $4,045,565) 1.4% 4,796,491 ------------ TAIWAN CONSUMER DISCRETIONARY -- (4.7%) Merry Electronics Co., Ltd. ........................... 3,012,016 6,643,196 Synnex Technologies International Corp. ............... 5,682,164 6,875,873 Taiwan FamilyMart Co., Ltd. ........................... 1,645,592 2,354,244 ------------ 15,873,313 ------------ FINANCIALS -- (5.2%) Cathay Financial Holding Co., Ltd. .................... 5,438,000 9,562,672 Fubon Financial Holdings Co., Ltd. .................... 7,180,952 6,206,805 SinoPac Financial Holdings Co. Ltd. ................... 3,996,000 1,572,127 ------------ 17,341,604 ------------ INDUSTRIALS -- (0.9%) Cheng Shin Rubber Industry Co., Ltd. .................. 4,129,481 2,978,509 ------------ INFORMATION TECHNOLOGY -- (6.6%) Advanced Semiconductor Engineering Inc. ............... 8,046,000 4,904,123 Data Systems Consulting Co., Ltd. ..................... 4,362,043 3,328,266 Taiwan Green Point Enterprises Co., Ltd. .............. 1,286,777 2,795,882 Tripod Technology Corp. ............................... 3,334,095 6,916,323 Wintek Corp. .......................................... 2,908,209 3,995,900 ------------ 21,940,494 ------------
See notes to financial statements and notes to schedule of investments. 12 THE CHINA FUND, INC. SCHEDULE OF INVESTMENTS (CONTINUED) OCTOBER 31, 2005 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
NAME OF ISSUER AND TITLE OF ISSUE SHARES VALUE (NOTE A) - --------------------------------- ------ -------------- COMMON STOCK AND OTHER EQUITY INTERESTS (CONTINUED) TAIWAN (CONTINUED) MATERIALS -- (0.9%) Yieh United Steel Corp. ............................... 9,483,000 $ 2,967,721 ------------ TOTAL TAIWAN -- (Cost $47,798,121) 18.3% 61,101,641 ------------ UNITED STATES -- "N" SHARES CONSUMER DISCRETIONARY -- (1.1%) Chindex International Inc.*............................ 69,987 257,552 The9 Ltd. ADR*......................................... 184,861 3,482,781 ------------ 3,740,333 ------------ TELECOMMUNICATIONS -- (0.6%) China Techfaith Wireless Communication Technology Ltd. ADR*................................................. 197,700 1,935,483 ------------ TOTAL UNITED STATES -- "N" SHARES -- (Cost $8,079,263) 1.7% 5,675,816 ------------ TOTAL COMMON STOCK AND OTHER EQUITY INTERESTS -- (Cost $191,904,752) 70.2% 234,671,328 ------------
See notes to financial statements and notes to schedule of investments. 13 THE CHINA FUND, INC. SCHEDULE OF INVESTMENTS (CONTINUED) OCTOBER 31, 2005 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
NAME OF ISSUER AND TITLE OF ISSUE SHARES VALUE (NOTE A) - --------------------------------- ------ -------------- WARRANTS CONSUMER DISCRETIONARY -- (1.5%) Kweichow Moutai Co. Ltd. Access Product (expiration 10/26/10) 144A, (2)(4)............................... 547,906 $ 3,213,445 Youngor Group Co. Ltd. Access Product (expiration 10/26/10) 144A, (2)(4)............................... 4,423,873 1,800,516 ------------ 5,013,961 ------------ ENERGY -- (2.9%) China Petroleum Access Product (expiration 01/20/10) 144A, (2)(3)......................................... 5,539,000 2,686,415 China Yangtze Power Co. Ltd. Access Product (expiration 10/26/10) 144A, (2)(4)................... 3,699,980 3,313,332 Shenergy Co. Ltd. Access Product 144A, (2)(3).......... 5,950,000 3,896,640 ------------ 9,896,387 ------------ FINANCIAL -- (4.5%) China Merchants Bank Co. Ltd. Access Product (expiration 10/26/10) 144A, (2)(4)................... 4,199,962 3,262,530 China Minsheng Banking Corp. Ltd. Access Product (expiration 01/17/06)(2)(3).......................... 18,401,722 8,354,382 Shanghai Zhenhua Port Machinery Co. Ltd. Access Product (expiration 10/26/10) 144A, (2)(4)................... 3,102,911 3,358,281 ------------ 14,975,193 ------------ INDUSTRIALS -- (3.0%) Shanghai International Airport Co. Ltd. Access Product (expiration 10/26/10) 144A, (2)(4)................... 1,799,974 3,306,192 Shanghai Port Container Co. Ltd. Access Product (expiration 10/26/10) 144A, (2)(4)................... 2,434,945 3,376,295 Xinjiang Tebian Electric Apparatus Stock Co. Ltd. Access Product (expiration 10/26/10) 144A, (2)(4).... 3,577,791 3,319,117 ------------ 10,001,604 ------------ MATERIALS -- (1.0%) Qinghai Salt Lake Potash Co. Ltd. Access Product (expiration 10/26/10) 144A, (2)(4)................... 2,396,122 3,325,338 ------------ TOTAL WARRANTS -- (Cost $42,990,388) 12.9% 43,212,483 ------------
See notes to financial statements and notes to schedule of investments. 14 THE CHINA FUND, INC. SCHEDULE OF INVESTMENTS (CONTINUED) OCTOBER 31, 2005 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
NAME OF ISSUER AND TITLE OF ISSUE SHARES VALUE (NOTE A) - --------------------------------- ------ -------------- DIRECT INVESTMENTS FINANCIAL -- (0.9%) Captive Finance, Ltd., (acquired 5/24/02)(1)(2)*+...... 2,000,000 $ 3,045,000 ------------ INFORMATION TECHNOLOGY -- (3.1%) CDW Holding Ltd., (acquired 1/26/05)(5)+............... 30,000,000 3,803,630 CDW Holding Ltd., (acquired 1/26/05)(2)(5)(6)+......... 30,000,000 3,441,379 Global e-Business Services (BVI) Ltd., (acquired 6/18/04)(1)*......................................... 40,000 3,052,738 teco Optronics Corp., (acquired 4/26/04)(1)(2)*........ 1,861,710 150,000 ------------ 10,447,747 ------------ TOTAL DIRECT INVESTMENTS -- (Cost $8,411,189) 4.0% 13,492,747 ------------ TOTAL INVESTMENTS -- (Cost $243,306,329) (Note E) 87.1% 291,376,558 ------------ OTHER ASSETS AND LIABILITIES 12.9% 43,119,016 ------------ NET ASSETS 100.0% $334,495,574 ===== ============
Notes to Schedule of Investments * Denotes non-income producing security. (1) Direct investments are generally restricted as to resale and do not have a readily available resale market. On the date of acquisition of each direct investment, there were no market quotations on similar securities, and such investments were therefore initially valued at acquisition cost. These direct investments are valued at fair value as determined by the Board of Directors as discussed in Notes A and B to the Financial Statements. (2) Security valued at fair value using methods as determined by or at the direction of the Board of Directors. (3) Warrants issued by Citigroup Global Markets Holdings. (4) Warrants issued by Credit Lyonnais (CLSA). (5) This investment is directly listed on the Singapore Stock Exchange, however is still managed by ADCM. (6) Restricted security; not readily marketable; security is valued at fair value as determined in good faith by, or under the direction of the Board of Directors. + Affiliated issuer (see Note G). See notes to financial statements and notes to schedule of investments. 15 THE CHINA FUND, INC. STATEMENT OF ASSETS AND LIABILITIES OCTOBER 31, 2005 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ASSETS: Investments in listed investments, at value (cost $230,544,908) (Note A)................................. $275,663,796 Investments in direct investments, at value (cost $3,602,160) (Notes A and B)............................ 3,202,738 Investments in affiliated investments, at value (cost $9,159,261) (Notes A, B and G)......................... 12,510,024 Cash...................................................... 62,649,307 Foreign currency, at value (cost $10,082,794)............. 10,094,824 Receivable for investments sold........................... 5,941,381 Receivable for fund shares sold........................... 632 Dividends receivable...................................... 114,142 ------------ TOTAL ASSETS................................................ $370,176,844 ------------ LIABILITIES: Payable for investments purchased......................... 35,285,645 Investment management fee payable (Note C)................ 198,343 Administration, custodian and transfer agent fees payable................................................ 92,811 Directors fee payable..................................... 45,317 Accrued expenses and other liabilities.................... 59,154 ------------ TOTAL LIABILITIES........................................... 35,681,270 ------------ TOTAL NET ASSETS............................................ $334,495,574 ============ COMPOSITION OF NET ASSETS: Paid in capital (Note D).................................. $251,448,636 Undistributed net investment income....................... 3,069,063 Accumulated net realized gain on investments and foreign currency transactions.................................. 31,894,038 Net unrealized appreciation on investments and foreign currency transactions.................................. 48,083,837 ------------ TOTAL NET ASSETS............................................ $334,495,574 ============ NET ASSET VALUE PER SHARE: ($334,495,574/14,388,287 shares of common stock outstanding)........................................... $23.25 ============
See notes to financial statements. 16 THE CHINA FUND, INC. STATEMENT OF OPERATIONS YEAR ENDED OCTOBER 31, 2005 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividend income -- listed investments (including dividends of $719,624 from non-controlled affiliates, net of tax withheld of $445,278).................................. $ 7,027,085 Interest income -- listed investments..................... 7,709 ------------ TOTAL INVESTMENT INCOME................................ 7,034,794 ------------ EXPENSES: Investment management fees (Note C)....................... 2,212,905 Custodian fees............................................ 561,909 Administration fees....................................... 368,344 Directors' fees and expenses (Note C)..................... 291,327 Stock dividend tax expense................................ 167,721 Legal fees................................................ 166,841 Printing and postage...................................... 90,022 Shareholder service fees.................................. 63,469 Insurance................................................. 57,978 Audit and tax service fees................................ 57,431 Stock exchange listing fee................................ 23,590 Transfer agent fees....................................... 22,696 Miscellaneous expenses.................................... 5,452 ------------ TOTAL EXPENSES......................................... 4,089,685 ------------ NET INVESTMENT INCOME....................................... 2,945,109 ------------ REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY: Net realized gain on listed investment transactions....... 31,894,268 Net realized gain on foreign currency transactions........ 124,147 ------------ 32,018,415 ------------ Net change in unrealized appreciation on listed investments and foreign currency transactions.......... (42,405,111) Net change in unrealized appreciation on direct investments............................................ 1,087,398 ------------ (41,317,713) ------------ NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS............................. (9,299,298) ------------ NET DECREASE IN NET ASSETS FROM OPERATIONS.................. $ (6,354,189) ============
See notes to financial statements. 17 THE CHINA FUND, INC. STATEMENTS OF CHANGES IN NET ASSETS - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED OCTOBER 31, 2005 OCTOBER 31, 2004 ---------------- ---------------- INCREASE IN NET ASSETS FROM OPERATIONS Net investment income..................................... $ 2,945,109 $ 2,087,971 Net realized gain on investments and foreign currency transactions........................................... 32,018,415 34,053,318 Net increase (decrease) in unrealized appreciation on investments and foreign currency translation........... (41,317,713) (24,935,481) ------------ ------------ Net increase (decrease) in net assets from operations..... (6,354,189) 11,205,808 ------------ ------------ DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income..................................... (1,979,079) (705,122) Capital gains............................................. (34,014,358) (17,225,127) ------------ ------------ Total dividends and distributions to shareholders......... (35,993,437) (17,930,249) ------------ ------------ CAPITAL SHARE TRANSACTIONS: Fund shares sold (Note D)................................. 110,307,729 -- Reinvestment of dividends and distributions (56,374 and 8,740 shares, respectively)............................ 1,649,496 332,196 ------------ ------------ Net increase in net assets from capital share transactions........................................... 111,957,225 332,196 ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS....................... 69,609,599 (6,392,245) NET ASSETS: Beginning of year......................................... 264,885,975 271,278,220 ------------ ------------ End of year............................................... $334,495,574 $264,885,975 ============ ============ Undistributed net investment income, end of year............ $ 3,069,063 $ 1,978,886 ============ ============
See notes to financial statements. 18 THE CHINA FUND, INC. FINANCIAL HIGHLIGHTS SELECTED DATA FOR A SHARE OF COMMON STOCK OUTSTANDING FOR THE PERIOD(S) INDICATED - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, ---------------------------------------------------- 2005 2004 2003 2002 2001 -------- -------- -------- -------- -------- PER SHARE OPERATION PERFORMANCE Net asset value, beginning of year.............. $ 26.27 $ 26.93 $ 14.92 $ 13.19 $ 12.37 -------- -------- -------- -------- -------- Net investment income........................... 0.21 0.21 0.06 0.11 0.14 Net realized and unrealized gain on investments and foreign currency transactions............. 0.34 0.91 12.16 1.75 0.68 -------- -------- -------- -------- -------- Total income from investment operations......... 0.55 1.12 12.22 1.86 0.82 -------- -------- -------- -------- -------- Less dividends and distributions: Dividend from net investment income........... (0.20) (0.07) (0.06) (0.13) 0.00 Distributions from net realized capital gains....................................... (3.37) (1.71) (0.15) 0.00 0.00 -------- -------- -------- -------- -------- Total dividends and distributions............... (3.57) (1.78) (0.21) (0.13) 0.00 -------- -------- -------- -------- -------- Net asset value, end of year.................... $ 23.25 $ 26.27 $ 26.93 $ 14.92 $ 13.19 ======== ======== ======== ======== ======== Per share market price, end of year............. $ 24.55 $ 29.15 $ 34.74 $ 12.61 $ 10.74 ======== ======== ======== ======== ======== TOTAL INVESTMENT RETURN (BASED ON MARKET PRICE)........................................ (5.50)% (12.16)% 179.41% 18.63% 20.13% ======== ======== ======== ======== ======== RATIOS AND SUPPLEMENTAL DATA Net assets, end of year (000's)................. $334,496 $264,886 $271,278 $150,319 $132,912 Ratio of expenses to average net assets......... 1.44% 1.41% 1.76% 1.97% 2.39% Ratio of expenses to average net assets, excluding stock dividend tax expense.......... 1.38% 1.34% 1.68% 1.85% 2.31% Ratio of net investment income to average net assets........................................ 1.04% 0.78% 0.32% 0.72% 1.09% Portfolio turnover rate......................... 26% 40% 55% 68% 115%
See notes to financial statements. 19 THE CHINA FUND, INC. NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2005 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The China Fund, Inc. (the "Fund") was incorporated under the laws of the State of Maryland on April 28, 1992, and is a non-diversified, closed-end management investment company registered under the Investment Company Act of 1940, as amended. The Fund's investment objective is long-term capital appreciation through investments in the equity securities of companies engaged in a substantial amount of business in the People's Republic of China. The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. USE OF ESTIMATES: The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses for the period. Actual results could differ from these estimates. The significant estimates made as of, and for the year ended, October 31, 2005 relate to the valuation of the Fund's Direct Investments, as further discussed below and in Note B. SECURITY VALUATION: Portfolio securities listed on recognized United States or foreign securities exchanges are valued at the last quoted sales price in the principal market where they are traded. Listed securities with no such sales price and unlisted securities are valued at the mean between the current bid and asked prices, if any, of two brokers. Short-term investments having maturities of sixty days or less are valued at amortized cost (original purchase cost as adjusted for amortization of premium or accretion of discount) which when combined with accrued interest approximates market value. Securities for which market quotations are readily available are valued at current market value. Securities for which market quotations are not readily available are valued in good faith at fair value using methods determined by the Board of Directors. Direct Investments not traded on an exchange are valued at fair value as determined by the Board of Directors based on advice from Direct Investment Manager. The Direct Investment's original cost is considered to be fair value unless the Board of Directors, based on such advice, concludes there has been a material change of a long-term nature and sufficient reliable information is available to revalue these investments. REPURCHASE AGREEMENTS: In connection with transactions in repurchase agreements, it is the Fund's policy that its custodian take possession of the underlying collateral securities, the fair value of which exceeds the principal amount of the repurchase transaction, including accrued interest, at all times. If the seller defaults, and the fair value of the collateral declines, realization of the collateral by the Fund may be delayed or limited. FOREIGN CURRENCY TRANSLATION: 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 20 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 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. INDEMNIFICATION OBLIGATIONS: Under the Fund's organizational documents, its Officers and Directors are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business the Fund enters into contracts that provide general indemnifications to other parties. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. SECURITY TRANSACTIONS AND INVESTMENT INCOME: Security transactions are recorded as of the trade date. Realized gains and losses from securities sold are recorded on the identified cost basis. Dividend income is recorded on the ex-dividend date, or, in the case of dividend income on foreign securities, on the ex-dividend date or when the Fund becomes aware of its declaration. Interest income is recorded on the accrual basis. All premiums and discounts are amortized/accreted for both financial reporting and federal income tax purposes. Dividend and interest income generated in Taiwan is subject to a 20% withholding tax. Stock dividends received (except those which have resulted from Capitalization of capital surplus) are taxable at 20% of the par value of the stock dividends received. The Fund records the taxes paid on stock dividends as an operating expense. DIVIDENDS AND DISTRIBUTIONS: The Fund intends to distribute to its shareholders, at least annually, substantially all of its net investment income and any net realized capital gains. Income and capital gains distributions are determined in accordance with U.S. income tax regulations, which may differ from generally accepted accounting principles. These differences are primarily due to differing book and tax treatments for foreign currency transactions. The Fund made distributions of $3,061,875 from Ordinary Income and $32,931,562 from Long-Term Capital Gains during the year ended October 31, 2005. For the year ended October 31, 2004, the Fund made distributions of $11,181,223 from Ordinary Income and $6,749,026 from Long-Term Capital Gains. As of 21 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- October 31, 2005, the components of distributable earnings on a tax basis were $3,069,063 for undistributed ordinary income, $33,017,519 for undistributed long-term capital gains. At that date, the Fund had $46,960,357 of net unrealized appreciation. There were no significant differences between the book basis and tax basis of components of net assets other than differences in the net unrealized appreciation (depreciation) in value of investments attributable to the tax deferral of losses on wash sales. FEDERAL INCOME TAXES: The Fund has qualified and intends to qualify in the future as a regulated investment company by complying with the provisions of 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 -- VALUATION OF DIRECT INVESTMENTS At October 31, 2005, Direct Investments amounting to $6,247,738 (1.87% of net assets) have been valued at fair value as determined by the Board of Directors in the absence of readily ascertainable market values. The procedures applied by the Board of Directors in arriving at its estimate of value of securities without readily available market values comply with the Fund's policies for valuing Direct Investments at original cost unless the Board of Directors, based on advice from the Direct Investment Manager, concludes that there has been a material change of a long-term nature and sufficient reliable information is available to revalue these investments. Determination of fair values involves subjective judgment and, because of the inherent uncertainty of valuation, the Board of Directors' estimated values may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material. NOTE C -- ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES Martin Currie Inc. is the investment manager for the Fund's listed assets (the "Listed Assets"). On August 3, 2005, the Fund completed a rights offering which permitted the Fund's stockholders to purchase one new share for each three shares of the Fund held. Prior to completion of the rights offering, Martin Currie Inc. received a fee, computed weekly and payable monthly, at the following annual rates: 0.70% of the first US$400 million of the Fund's average weekly net assets invested in Listed Assets; and 0.50% of the Fund's average weekly net assets invested in Listed Assets in excess of US$400 million. Effective as of the completion of the rights offering, 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. Asian Direct Capital Management ("ADCM") is the investment manager for the Fund's assets allocated to Direct Investments. ADCM receives a fee, computed weekly and payable monthly at an annual rate equal to the greater of $300,000 or 2.2% of the average weekly value of the net assets of the Fund invested in Direct Investments. No director, officer or employee of the Investment Manager or Direct Investment Manager or any affiliates of those entities will receive any compensation from the Fund for serving as an officer or director of the Fund. 22 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Effective October 1, 2005, 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 $12,000, respectively, plus $2,000 for each Board of Directors' meeting or Audit Committee meeting attended. In addition, the Fund will reimburse each of the directors for travel and out-of-pocket expenses incurred in connection with attending Board of Directors' meetings. NOTE D -- CAPITAL STOCK The Board of Directors of the Fund has approved a share repurchase plan. Under the program, the Fund will repurchase shares at management's discretion at times when it considers the repurchase to be consistent with the objectives of the program. For the year ended October 31, 2005, the Fund did not participate in this program. On August 3, 2005, the Fund completed a rights offering, permitting stockholders to purchase one new share for each three shares of the Fund held, for a total of 4 million shares of its common stock. Proceeds to the Fund, before expenses of $1,339,770, amounted to $111,647,500. At October 31, 2005, 100,000,000 shares of $.01 par value common stock were authorized. NOTE E -- INVESTMENT TRANSACTIONS For the year ended October 31, 2005, the Fund's cost of purchases and proceeds from sales of investment securities, other than short-term securities, were $67,608,894 and $166,389,632, respectively. At October 31, 2005, the cost of investments for federal income tax purposes was $244,429,809. Gross unrealized appreciation of investments was $67,670,065, while gross unrealized depreciation of investments was $20,723,316, resulting in net unrealized appreciation of investments of $46,946,749. NOTE F -- INVESTMENTS IN CHINA The Fund's investments in China companies involve certain risks not typically associated with investments in securities of U.S. companies or the U.S. Government, including risks relating to (1) social, economic and political uncertainty; (2) price volatility, lesser liquidity and smaller market capitalization of securities markets in which securities of China companies trade; (3) currency exchange fluctuations, currency blockage and higher rates of inflation; (4) controls on foreign investment and limitations on repatriation of invested capital and on the Fund's ability to exchange local currencies for U.S. dollars; (5) governmental involvement in and control over the economy; (6) risk of nationalization or expropriation of assets; (7) the nature of the smaller, less seasoned and newly organized China companies, particularly in China; and (8) the absence of uniform accounting, auditing and financial reporting standards, practices and disclosure requirements and less government supervision and regulation. 23 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE G -- INVESTMENTS IN NON-CONTROLLED AFFILIATES*:
DIVIDENDS INCLUDED IN DIVIDEND BALANCE OF BALANCE OF INCOME- SHARES HELD GROSS GROSS SALES SHARES HELD VALUE NON- OCTOBER 31, PURCHASES AND OCTOBER 31, OCTOBER 31, CONTROLLED NAME OF ISSUER 2004 AND ADDITIONS REDUCTIONS 2005 2005 AFFILIATES - -------------- ----------- ------------- ----------- ----------- ----------- ----------- Captive Finance, Ltd. ................ 2,000,000 -- -- 2,000,000 $ 3,045,000 $ -- CDW Holdings Ltd. ..... 80,000,000 20,000,000 60,000,000 7,245,009 615,489 Beiren Printing Machinery Holdings Ltd. ................ 7,000,000 -- 7,000,000 1,155,801 67,661 Nanjing Dahe Outdoor Media Co., Ltd. ..... 37,500,000 -- 37,500,000 1,064,214 36,474 ----------- -------- $12,510,024 $719,624 =========== ========
* Affiliated issuers, as defined in the 1940 Act, include issuers in which the Fund held 5% or more of the outstanding securities. NOTE H -- RESTRICTED SECURITIES: Certain investments of the Fund are restricted as to resale and are valued at fair value as determined in good faith by, or under the direction of, the Board of Directors under procedures established by the Board of Directors. The table below shows the number of shares held, the acquisition dates, aggregate costs, fair values as of October 31, 2005, the value per share of such securities, the percentage of net assets which the securities represent. The Fund does not have the right to demand that such securities be registered.
PERCENTAGE NUMBER OF ACQUISITION VALUE PER OF NET SECURITY SECURITY TYPE SHARES DATE COST FAIR VALUE SHARE ASSETS - --------------------- ----------------- ---------- ----------- -------- ---------- --------- ---------- CDW Holdings Ltd. Direct Investment 30,000,000 1/26/2005 $882,014 $3,441,379 $0.11 1.03%
24 THE CHINA FUND, INC. 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, including the portfolio of investments, of The China Fund, Inc. (the"Fund") as of October 31, 2005, and the related statement of operations, the statement of changes in net assets and the financial highlights for the year 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 audit. The financial statements of the Fund for the year ended October 31, 2004 were audited by other auditors whose report, dated December 10, 2004, expressed an unqualified opinion on those statements. We conducted our audit in accordance with 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 it's internal control over financial reporting. Our audit 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, 2005, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights present fairly, in all material respects, the financial position of the Fund as of October 31, 2005, the results of its operations, the changes in its net assets and the financial highlights for the year then ended in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP Boston, Massachusetts December 27, 2005 25 THE CHINA FUND, INC. OTHER INFORMATION (UNAUDITED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TAX INFORMATION CAPITAL GAINS DISTRIBUTIONS: $32,931,562 of distributions during the fiscal year ended October 31, 2005 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: With respect to distributions for the fiscal year ended October 31, 2005, the Fund designates $612,999 as foreign taxes paid and $7,472,363 as foreign source income earned for regular Federal income tax purposes. QUALIFIED DIVIDEND INCOME: For the fiscal year ended October 31, 2005, 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 needs to know that information to provide products or services to shareholders. The Fund maintains physical, electronic and procedural safeguards that comply with federal standards to guard its shareholders' nonpublic personal information. PROXY VOTING POLICIES AND PROCEDURES A description of the policies and procedures that are used by the Fund's investment advisers to vote proxies relating to the Fund's portfolio securities is available (1) without charge, upon request, by calling 1-888-CHN-CALL (246-2255); and (2) as an exhibit to the Fund's annual report on Form N-CSR which is available on the website of the Securities and Exchange Commission (the "Commission") at http://www.sec.gov. Information 26 THE CHINA FUND, INC. OTHER INFORMATION (CONTINUED) (UNAUDITED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- regarding how the investment advisers voted these proxies during the most recent 12-month period ended June 30th is available by calling the same number and on the Commission's website. QUARTERLY PORTFOLIO OF INVESTMENTS The Fund files with the Commission its complete schedule of portfolio holdings on Form N-Q for the first and third quarters of each fiscal year. The Fund's Form N-Qs are available on the 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 most recent Form N-Q is available without 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 October 31, 2005, 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. 27 BOARD DELIBERATIONS REGARDING APPROVAL OF INVESTMENT MANAGEMENT AGREEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- GENERAL BACKGROUND Martin Currie Inc. ("Martin Currie") acts as the Fund's investment manager, with exclusive investment discretion over the Fund's assets, other than those invested in direct investments (the "Listed Assets"), pursuant to a Management Agreement with the Fund. In August 2005, the Fund successfully completed a rights offering which increased the Fund's assets by over US$110 million. Prior to the rights offering, the Fund paid Martin Currie a fee for its investment management services, computed weekly and payable monthly, at an annual rate of 0.70% of the Fund's average weekly net assets consisting of Listed Assets up to US$400 million and 0.50% of the Fund's average weekly net assets consisting of Listed Assets in excess of US$400 million. Pursuant to an amendment to the Management Agreement ("Amendment No. 1 to the Management Agreement"), subsequent to completion of the rights offering, Martin Currie has reduced the levels of the Fund's assets consisting of Listed Assets at which the 0.50% of the Fund's weekly net assets rate applies from $400 million to $315 million. Martin Currie is a registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended (the "Advisers Act"). Asian Direct Capital Management ("ADCM") acts as investment manager to the Fund with exclusive investment discretion over the portion of the Fund's assets that is invested in direct investments pursuant to the terms of a Direct Investment Management Agreement between the Fund and ADCM (the "Direct Management Agreement"). The Fund may invest up to 25% of the net proceeds of its offerings of its outstanding common stock in direct equity investments. For its direct investment management services, ADCM receives from the Fund a fee, payable monthly, at an annual rate of the greater of US$300,000 or 2.2% of the average weekly assets of the Fund allocated to direct investments. ADCM is a registered investment adviser under the Advisers Act. ADCM is a wholly owned, indirect subsidiary of State Street Global Advisors ("SSgA"), the investment management division of State Street Corporation. State Street Bank and Trust Company ("State Street"), an affiliate of State Street Corporation, serves as administrator and custodian for the Fund. The Fund's Board of Directors (the "Board") is legally required to review and re-approve the Management Agreement and the Direct Management Agreement 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 both Martin Currie and ADCM and reviews and evaluates their professional experience, credentials and qualifications. This information supplements the materials the Board received in preparation for the Meeting described below. APPROVAL PROCESS The Board, consisting entirely of "independent directors" within the meaning of the Investment Company Act of 1940, unanimously approved the Management Agreement, Amendment No. 1 to the Management Agreement, and the Direct Management Agreement at an "in person" meeting held on June 9, 2005 (the "Meeting"). In determining whether it was appropriate to approve each of the Management Agreement, Amendment No. 1 to 28 BOARD DELIBERATIONS REGARDING APPROVAL OF INVESTMENT MANAGEMENT AGREEMENTS (CONTINUED) (UNAUDITED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- the Management Agreement and the Direct Management Agreement, the Board requested information, provided by Martin Currie and ADCM, that it believed to be reasonably necessary to reach its conclusion. At the Meeting, the Board discussed issues pertaining to the proposed approval of the Management Agreement, Amendment No. 1 to the Management Agreement, and the Direct Management Agreement with representatives from Martin Currie and ADCM and with legal counsel. This information together with the information provided to the Directors throughout the course of year formed the primary basis for the Directors' determinations. Prior to the Meeting, the Board met in an executive session for the purpose of considering the approval of the Management Agreement, Amendment No. 1 to the Management Agreement, and Direct Management Agreement. During that executive session, the Directors reviewed a memorandum which detailed the duties and responsibilities of the Directors with respect to their consideration of the Management Agreement and Direct Management Agreement. The Directors reviewed the contract renewal materials provided by Martin Currie and ADCM, including, but not limited to (1) an organizational overview of each of Martin Currie and ADCM and biographies of those personnel providing services to the Fund, (2) a copy of each of the Management Agreement, Amendment No. 1 to the Management Agreement, and the Direct Management Agreement, (3) a profitability analysis of each of Martin Currie and ADCM, (4) financial statements of each of Martin Currie and ADCM, including, with respect to ADCM, a letter of continuing financial support from SSgA, (5) Form ADV of each of Martin Currie and ADCM, and (6) performance and fee comparison data provided by Fundamental Data, a third party vendor of such information. MANAGEMENT AGREEMENT In evaluating the Management Agreement and Amendment to the Management Agreement, the Directors drew on materials provided to them by Martin Currie. In deciding whether to renew the Management Agreement and approve Amendment No. 1 to the Management Agreement, the Directors considered various factors, including (1) the nature, extent and quality of the services provided by Martin Currie under the Management Agreement, (2) the investment performance of the Fund's listed 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 would be realized if and as the Fund grows and whether the fee levels in the Management Agreement 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 Management Agreement Martin Currie is responsible for managing the Fund's listed investments in accordance with the Fund's investment objective and policies, applicable legal and regulatory requirements, and the 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 listed 29 BOARD DELIBERATIONS REGARDING APPROVAL OF INVESTMENT MANAGEMENT AGREEMENTS (CONTINUED) (UNAUDITED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 of China companies. They also noted the experience and expertise of Martin Currie as appropriate as 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 listed investments, and the responsibilities of the latter with respect to the Fund. They also considered the resources, operational structures and practices of Martin Currie in managing the Fund's listed portfolio, in monitoring and securing the Fund's compliance with its investment objectives 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, and could be expected to remain so. 2. Investment Performance of the Fund's Listed Investments The Directors noted that, in view of the distinctive investment objective of the Fund, the investment performance of the Fund's listed investments 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, while the Fund's listed investments had underperformed the MSCI Golden Dragon Index during recent periods, the listed investments had outperformed the Index for the three-year period ended April 30, 2005. The Directors discussed with the representatives of Martin Currie present at the Meeting the reasons for the recent underperformance. 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 for the Fund. 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. 30 BOARD DELIBERATIONS REGARDING APPROVAL OF INVESTMENT MANAGEMENT AGREEMENTS (CONTINUED) (UNAUDITED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- In considering whether Martin Currie benefits in other ways from its relationship with the Fund, the Directors noted that other than the advisory fee, there is no other investment advisory and brokerage fee received or receivable by Martin Currie 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 Management Agreement Reflect these Economies of Scale On the basis of their discussions with 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. 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 from US$200 million in March 2002 to US$1.2 billion currently and as such 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 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. Therefore, in August 2004, Martin Currie closed its Greater China product to new segregated institutional business to protect the interests of its existing clients so that the Fund would also benefit from Martin Currie's not seeking to further grow its number of China clients. The Directors also noted that the Management Agreement currently contemplates sharing economies of scale by providing for a lower fee rate at higher asset levels and that Martin Currie had agreed (in Amendment No. 1 to the Management Agreement) to lower the asset level at which the lower fee rate took affect if the Fund's rights offering was successful. 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., funds that invest in China. The Directors found that, because of the distinctive nature of the Fund, the universe of similar funds was limited. Moreover, the Fund's aggregate advisory fees were lower than several of its competitors'. The Directors noted that the Fund's total expense ratio was lower than most of the comparable funds' total expense ratio. The Directors concluded that the limited data available provided some indirect confirmation of the reasonableness of Martin Currie's fee. APPROVAL OF MANAGEMENT AGREEMENT The Directors approved the continuance of the Fund's Management Agreement 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 31 BOARD DELIBERATIONS REGARDING APPROVAL OF INVESTMENT MANAGEMENT AGREEMENTS (CONTINUED) (UNAUDITED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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. With respect to Amendment No. 1 to the Management Agreement, the Directors determined that the proposed advisory fee was fair and reasonable based on the information provided. It was noted that Amendment No. 1 would lower the level of the Fund's listed assets at which a lower fee rate would apply and was contingent upon the successful completion of the Fund's rights offering. Such revised advisory fee would be 0.70% of the first $315,000,000 of the Fund's average weekly net assets consisting of Listed Assets and 0.50% of the Fund's average weekly net assets consisting of Listed Assets in excess of $315,000,000. The details of such rights offering had been discussed earlier in the Meeting. DIRECT MANAGEMENT AGREEMENT In deciding whether to renew the Direct Management Agreement, the Directors considered various factors, including (1) the nature, extent and quality of the services provided by ADCM under the Direct Management Agreement, (2) the investment performance of the Fund's direct investments, (3) the costs to ADCM of its services and the profits realized by ADCM, from its relationship with the Fund, and (4) the extent to which economies of scale would be realized if and as the Fund grows and whether the fee levels in the Direct Management Agreement reflect these economies of scale. 1. Nature, Extent and Quality of the Services provided by ADCM In considering the nature, extent and quality of the services provided by ADCM, the Directors relied on their prior direct experience as Directors of the Fund as well as on the materials provided at the Meeting. They noted that under the Direct Management Agreement, ADCM is responsible for managing the direct investments of the Fund in accordance with the Fund's investment objective and policies, applicable legal and regulatory requirements, and the 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 direct 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 of China companies. They also noted the experience and expertise of ADCM in making direct investments as appropriate as an adviser to such Fund. The Directors reviewed the background and experience of ADCM's senior management, including those individuals responsible for the investment and compliance operations relating to the direct investments of the Fund, and the responsibilities of the latter with respect to the Fund. They also considered the resources, operational structures and practices of ADCM in managing the Fund's direct investments, in monitoring and securing the Fund's compliance with its investment objective and policies with respect to the Fund's direct 32 BOARD DELIBERATIONS REGARDING APPROVAL OF INVESTMENT MANAGEMENT AGREEMENTS (CONTINUED) (UNAUDITED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- investments and with applicable laws and regulations. The Directors also considered information about ADCM's overall investment management business, noting that ADCM manages funds in South Korea and Thailand that invest in the Asia Pacific region. In addition, ADCM, as a subsidiary of SSgA, has access to the international business network of State Street Corporation for investment opportunities. Drawing upon the materials provided and their general knowledge of the business of ADCM, the Directors took into account the fact that ADCM's experience, resources and strength in these areas are of high quality. On the basis of this review, the Directors determined that the nature and extent of the services provided by ADCM to the Fund were appropriate and could be expected to remain so. 2. Investment Performance of the Fund The Directors noted that, in view of the distinctive investment objective of the Fund, the investment performance of the Fund's direct investment portfolio 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 ADCM throughout the preceding year, they determined that the Fund's direct investment portfolio had outperformed the MSCI Golden Dragon Index for the year-to-date, one- and three-years periods ending April 30, 2005. 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 their direct competitors. Accordingly, they concluded that the performance of the Fund's direct investment portfolio was satisfactory. 3. The Costs to ADCM of its Services and the Profits realized by ADCM from its Relationship with the Fund The Directors considered the profitability of the advisory arrangement with the Fund to ADCM and of the Fund's relationship with ADCM's affiliate, State Street, in its role as administrator and custodian for the Fund. The Directors had been provided with data on the Fund's profitability to ADCM for the Fund's last two fiscal years, as well as data on the Fund's profitability to State Street for the last five years. They first discussed with representatives of ADCM and State Street 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 discussion and analysis they concluded that, to the extent that ADCM's and State Street's relationships with the Fund had been profitable to either or both of those entities, the profitability was in no case such as to render the advisory fee excessive. The Directors also noted SSgA's continuing support of ADCM as a subsidiary. In considering whether ADCM or its affiliates benefit in other ways from their relationship with the Fund, the Directors noted that other than the advisory fee, there is no other investment advisory and brokerage fee received or receivable by ADCM or its affiliates; however, an affiliate of ADCM serves as the Fund's administrator and custodian. The Directors noted that the fees reserved by the affiliate for administration and custodial services were reasonable in relation to the services provided. The Directors concluded that, to the extent that ADCM or 33 BOARD DELIBERATIONS REGARDING APPROVAL OF INVESTMENT MANAGEMENT AGREEMENTS (CONTINUED) (UNAUDITED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- its affiliates derive other benefits from their 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 Direct Management Agreement Reflect these Economies of Scale On the basis of their discussions with 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 ADCM would not at this time realize economies of scale in the management of the Fund. It was noted that the Directors had discussed the closure of the ADCM Pan Asia Investment Fund ("AAIF") with ADCM and that a first closing of this fund was anticipated in December 2005 and a final closing by June 2006. The Directors noted that ADCM expected that its assets under management would increase substantially and this may lead to the generation of some economies of scale, only if AAIF and the Fund have a number of similar investments. Further, these economies of scale would be greater than if there was no overlap between the funds. The Directors noted that there were no comparable funds investing in direct investments for purposes of comparing the fees paid by the Fund to ADCM to the fees paid by other funds. The Directors noted, however, that advisers to private funds that principally make direct investments (typically referred to as "private equity funds") typically pay their advisers an asset-based fee of 1% to 2% of the fund's assets plus a performance fee of 15% to 25% of the private fund's gains on its investments. Since the Fund is not permitted under the Investment Company Act of 1940 to pay a similar performance fee, the Directors concluded that the fee paid to ADCM of the greater of $300,000 and 2.2% of the Fund's daily net assets invested in direct investments was a reasonable fee to obtain the services of a direct investment manager such as ADCM. The Directors also noted that, notwithstanding this relatively high fee rate paid to ADCM, the Fund's overall advisory fees, combining the fees paid to ADCM with those paid to Martin Currie, were nevertheless lower than the fees paid by comparable funds, investing solely in listed investments and that the Fund's total expense ratio was lower than most of the comparable fund's total expense ratios. APPROVAL OF DIRECT MANAGEMENT AGREEMENT The Directors approved the continuance of the Fund's Direct Management Agreement after weighing the foregoing factors. They reasoned that, considered in themselves, the nature and extent of the services provided by ADCM were appropriate, that the performance of the Fund had been satisfactory, and that ADCM could be expected to provide services of high quality. As to ADCM'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 ADCM and State Street was not so profitable as to render the fees excessive, that any additional benefits to ADCM and/or State Street were not of a magnitude materially to affect the Directors' deliberations. 34 DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The Fund will distribute to shareholders, at least annually, substantially all of its net investment income from dividends and interest earnings and expects to distribute any net realized capital gains annually. Pursuant to the Dividend Reinvestment and Cash Purchase Plan (the "Plan"), adopted by the Fund, each shareholder will be deemed to have elected, unless Equiserve Trust Company, N.A., the Plan Administrator, is otherwise instructed by the stockholder in writing, to have all distributions automatically reinvested by the Plan Administrator in Fund shares pursuant to the Plan. Shareholders who do not participate in the Plan will receive all distributions in cash paid by check in U.S. dollars mailed directly to the stockholder by Equiserve Trust Company, N.A., as paying agent. Shareholders who do not wish to have distributions automatically reinvested should notify the Fund by contacting EquiServe c/o The China Fund, Inc. at P.O. Box 43010, Providence, Rhode Island 02940-3011. Phone: 1-800-426-5523. Equiserve Trust Company, N.A. ("EquiServe") or the ("Plan Administrator"), a federally chartered trust institution, acts as Plan Administrator. EquiServe, Inc. an affiliate of EquiServe and a transfer agent registered with the Securities and Exchange Commission, acts as Service Agent for EquiServe. If the Directors of the Fund declare an income dividend or a capital gains distribution payable either in the Fund's Common Stock or in cash, as shareholders may have elected, non-participants in the Plan will receive cash and participants in the Plan will receive Common Stock, to be issued by the Fund. If the market price per share on the valuation date equals or exceeds net asset value per share on that date, the Fund will issue new shares to participants at net asset value or, if the net asset value is less than 95% of the market price on the valuation date, then at 95% of the market price. The valuation date will be the dividend or distribution payment date or, if that date is not a trading day on the exchange on which the Fund's shares are then listed, the next preceding trading day. If net asset value exceeds the market price of Fund shares at such time, participants in the Plan will be deemed to have elected to receive shares of stock from the Fund, valued at market price on the valuation date. If the Fund should declare a dividend or capital gains distribution payable only in cash, the Plan Administrator will, as administrator for the participants, buy Fund shares in the open market, on the New York Stock Exchange or elsewhere, with the cash in respect of such dividend or distribution, for the participant's account on, or shortly after, the payment date. Participants in the Plan have the option of making additional payments to the Plan Administrator, annually, in any amount from $100 to $3,000 for investment in the Fund's Common Stock. The Plan Administrator will use all funds received from participants (as well as any dividends and capital gains distributions received in cash) to purchase Fund shares in the open market on or about January 15 of each year. Any voluntary cash payments received more than thirty days prior to such date will be returned by the Plan Administrator, and interest will not be paid on any uninvested cash payments. To avoid unnecessary cash accumulations, and also to allow ample time for receipt and processing by the Plan Administrator, it is suggested that participants send in voluntary cash payments to be received by the Plan Administrator approximately ten days before January 15. A participant may withdraw a voluntary cash payment by written notice, if the notice is received by the Plan Agent not less than 48 hours before such payment is to be invested. The Plan Administrator maintains all stockholder accounts in the Plan and furnishes written confirmations of all transactions in the account, including information needed by shareholders for personal and tax records. Shares in 35 DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN (CONTINUED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- the account of each Plan participant will be held by the Plan Administrator in non-certificated form in the name of the participant, and each stockholder's proxy will include those shares purchased pursuant to the Plan. In the case of shareholders, such as banks, brokers or nominees, which hold shares for others who are the beneficial owners, the Plan Administrator will administer the Plan on the basis of the number of shares certified from time to time by the stockholder as representing the total amount registered in the stockholder's name and held for the account of beneficial owners who are participating in the Plan. There is no charge to participants for reinvesting dividends or capital gains distributions. The Plan Administrator's fees for the handling of the reinvestment of dividends and distributions will be paid by the Fund. However, each participant's account will be charged a pro rata share of brokerage commissions incurred with respect to the Plan Administrator's open market purchases in connection with the reinvestment of dividends or capital gains distributions. A participant will also pay brokerage commissions incurred in purchases from voluntary cash payments made by the participant. Brokerage charges for purchasing small amounts of stock for individual accounts through the Plan are expected to be less than the usual brokerage charges for such transactions, because the Plan Administrator will be purchasing stock for all participants in blocks and prorating the lower commission thus attainable. The automatic reinvestment of dividends and distributions will not relieve participants of any income tax which may be payable on such dividends and distributions. Experience under the Plan may indicate that changes are desirable. Accordingly, the Fund reserves the right to amend or terminate the Plan as applied to any voluntary cash payment made and any dividend or distribution paid subsequent to notice of the change sent to all shareholders at least 90 days before the record date for such dividend or distribution. The Plan also may be amended or terminated by the Plan Administrator by at least 90 days' written notice to all shareholders. All correspondence concerning the Plan should be directed to EquiServe c/o The China Fund, Inc. at P.O. Box 43011, Providence, Rhode Island 02940-3011. Phone: 1-800-426-5523. 36 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.
PRINCIPAL OCCUPATION OR EMPLOYMENT NAME (AGE) AND PRESENT OFFICE DURING PAST FIVE YEARS AND DIRECTOR ADDRESS OF DIRECTOR WITH THE FUND DIRECTORSHIPS IN PUBLICLY HELD COMPANIES SINCE - ------------------- --------------- ------------------------------------------------------ -------- Alan Tremain (69).............. Chairman of the Chairman of the Board of the Fund; Chairman, Hotels of 1992 58 Avenue de la Reale Board and Distinction Ventures, Inc. (1989-2005); Chairman, Port la Galere Director Hotels of Distinction (International), Inc. Theoule-sur-Mer (1974-2005). 06590 France Michael F. Holland (61)........ Director Chairman, Holland & Company L.L.C. (1995-present); 1992 375 Park Avenue Director, The Holland Balanced Fund, Inc. and Reaves New York, New York 10152 Utility Income Fund; Trustee, State Street Master Funds and State Street Institutional Investment Trust. James J. Lightburn (62)........ Director Attorney, Nomos, (2004-present); Attorney, member of 1992 13, Rue Alphonse de Neuville Hughes Hubbard & Reed (1993-present). 75017 Paris, France Joe O. Rogers (56)............. Director The Rogers Team LLC, organizing member (July 2001- 1992 2477 Foxwood Drive present); Manager, The J-Squared Team LLC (April 2003- Chapel Hill, NC 27514 May 2004); Executive Vice President, Business Development, PlanetPortal.com, Inc. (Sept. 1999-May 2001); Director, The Taiwan Fund, Inc. (1986-present). Nigel S. Tulloch (59).......... Director Chief Executive, HSBC Asset Management Bahamas Limited 1992 7, Circe Circle (1986-1992); Director, The HSBC China Fund Limited. Dalkeith WA6009 Australia Gary L. French (54)............ President Senior Vice President, State Street Bank and Trust 225 Franklin Street Company (2002-present); Managing Director, Deutsche Boston, MA 02110 Asset Management, Inc. and Zurich Scudder Investments (acquired by Deutsche Bank in 2002) (2001-2002); President, UAM Fund Services, Inc. (1995-2001). William C. Cox (39)*........... Treasurer Vice President, State Street Bank and Trust Company. 225 Franklin Street Boston, MA 02110 Mary Moran Zeven (44).......... Secretary Senior Vice President and Senior Counsel, State Street 225 Franklin Street Bank and Trust Company. Boston, MA 02110
* Ann M. Carpenter resigned as the Fund's Treasurer effective April 29, 2005, and William C. Cox was elected by the Fund's Board of Directors as the new Treasurer of the Fund on June 9, 2005. 37 (This page has been left blank intentionally.) (This page has been left blank intentionally.) (This page has been left blank intentionally.) THE CHINA FUND, INC. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES ADDRESS The China Fund, Inc. 225 Franklin Street Boston, MA 02110 1-888-CHN-CALL (246-2255) DIRECTORS AND OFFICERS Alan Tremain, O.B.E., Director and Chairman of the Board Gary L. French, President Michael F. Holland, Director James J. Lightburn, Director Joe O. Rogers, Director Nigel S. Tulloch, Director William C. Cox, Treasurer Mary Moran Zeven, Secretary LISTED INVESTMENT MANAGER Martin Currie Inc. DIRECT INVESTMENT MANAGER Asian Direct Capital Management SHAREHOLDER SERVICING AGENT The Altman Group ADMINISTRATOR AND CUSTODIAN State Street Bank and Trust Company TRANSFER AGENT, DIVIDEND PAYING AGENT AND REGISTRAR Equiserve Trust Company, N.A. in care of Computershare Investor Services INDEPENDENT AUDITORS 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. The Fund changed independent registered public accounting firms for the fiscal year ended October 31, 2005. (a) Audit Fees For the fiscal year ended October 31, 2005, Deloitte & Touche LLP ("Deloitte"), the Fund's independent registered public accounting firm, billed the Fund aggregate fees of US$48,500 for professional services rendered for the audit of the Fund's annual financial statements and review of financial statements included in the Fund's annual report to shareholders. For the fiscal years ended October 31, 2004, KPMG LLP ("KPMG"), the Fund's previous independent public accounting firm, billed the Fund aggregate fees of US$48,500 for professional services rendered for the audit of the Fund's annual financial statements and review of financial statements included in the Fund's annual report to shareholders. (b) Audit-Related Fees For the fiscal year ended October 31, 2005, 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, 2004, KPMG did not bill the Fund any fees for assurances and related services that are reasonably related to the performance of the audit or review of the Fund's financial statements and are not reported under the section Audit Fees above. (c) Tax Fees For the fiscal year ended October 31, 2005, Deloitte billed the Fund aggregate fees of US$8,500 for professional services rendered for tax compliance, tax advice, and tax planning. The nature of the services comprising the Tax Fees was the review of the Fund's income tax returns and tax distribution requirements. For the fiscal year ended October 31, 2004, KPMG billed the Fund aggregate fees of US$8,500 for professional services rendered for tax compliance, tax advice, and tax planning. The nature of the services comprising the Tax Fees was the review of the Fund's income tax returns and tax distribution requirements. (d) All Other Fees For the fiscal year ended October 31, 2005, Deloitte billed the Fund US$13,500 for the provision of security counts. For the fiscal year ended October 31, 2004, KPMG did not bill the Fund any fees for products and services other than those disclosed above. (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 pre-approval requirement with respect to non-auditing services to the Fund may be waived consistent with the exceptions provided for in the Securities Exchange Act of 1934, as amended (the "1934 Act"). All of the audit and tax services described above for which Deloitte or KPMG billed the Fund fees for the fiscal years ended October 31, 2005 and October 31, 2004, respectively, were pre-approved by the Audit Committee. For the fiscal years ended October 31, 2005 and October 31, 2004, 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 or KPMG. (f) Not applicable. (g) For the fiscal year ended October 31, 2005, Deloitte did not bill the Fund any non-audit fees. During the same period, the aggregate non-audit fees billed by Deloitte for services rendered to State Street Bank and Trust Company, an affiliate of the Fund's direct investment manager, Asian Direct Capital Management, was approximately US$700,000. The non-audit services provided to State Street Bank and Trust Company were not related directly to the operations and financial reporting of the Fund. During this period, Deloitte did not provide any services to Martin Currie Inc. For the fiscal year ended October 31, 2004, KPMG did not bill the Fund any non-audit fees. During the same period, the aggregate non-audit fees billed by KPMG for services rendered to State Street Bank and Trust Company, an affiliate of the Fund's direct investment manager, Asian Direct Capital Management, was approximately US$14 million. The non-audit services provided to State Street Bank and Trust Company were not ongoing services and were not related directly to the operations and financial reporting of the Fund. During this period, KPMG did not provide any services to Martin Currie Inc. (h) The Fund's Audit Committee has determined that the provision of non- audit services by 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 Alan Tremain, James J. Lightburn, Nigel Tulloch, Joe O. Rogers 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 advisers, Asian Direct Capital Management and Martin Currie, Inc. ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. Required disclosure beginning with fiscal year ending after 12/31/05. 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 advisers 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 9, 2006 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 9, 2006 By: /s/William C. Cox --------------------- William C. Cox Treasurer of The China Fund, Inc. Date: January 9, 2006 EX-99.CODEETH 2 b57924cfexv99wcodeeth.txt CODE OF ETHICS EXHIBIT 12(a)(1) THE CHINA FUND, INC. CODE OF CONDUCT FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS I. COVERED OFFICERS/PURPOSE OF THE CODE This Code of Conduct (the "Code") shall apply to the China Fund, Inc.'s (the "Fund") Principal Executive Officer, Principal Financial Officer, Controller, Principal Accounting Officer and persons performing similar functions (the "Covered Officers," each of whom is named in Exhibit A attached hereto) for the purpose of promoting: o honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; o full, fair, accurate, timely and understandable disclosure in reports and documents that the Fund files with, or submits to, the Securities and Exchange Commission ("SEC") and in other public communications made by the Fund; o compliance with applicable laws and governmental rules and regulations; o the prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and o accountability for adherence to the Code. Each Covered Officer should adhere to a high standard of business ethics and should be sensitive to situations that may give rise to actual as well as apparent conflicts of interest. II. COVERED OFFICERS SHOULD HANDLE ETHICALLY ACTUAL AND APPARENT CONFLICTS OF INTEREST OVERVIEW. A "conflict of interest" occurs when a Covered Officer's private interest interferes with the interests of, or his service to, the Fund. For example, a conflict of interest would arise if a Covered Officer, or a member of his family, receives improper personal benefits as a result of his position with the Fund. Covered Officers must avoid conduct that conflicts, or appears to conflict, with their duties to the Fund. All Covered Officers should conduct themselves such that a reasonable observer would have no grounds for belief that a conflict of interest exists. Covered Officers are not permitted to self-deal or otherwise to use their positions with the Fund to further their own or any other related person's business opportunities. This Code does not, and is not intended to, repeat or replace the programs and procedures or codes of ethics of the Fund's investment adviser or distributor. 1 Although typically not presenting an opportunity for improper personal benefit, conflicts may arise from, or as a result of, the contractual relationship between the Fund and its service providers, including investment adviser or administrator, of which the Covered Officers may be officers or employees. As a result, this Code recognizes that the Covered Officers will, in the normal course of their duties (whether formally for the Fund, the investment adviser or administrator, or other service providers), be involved in establishing policies and implementing decisions that will have different effects on the service providers and the Fund. The participation of the Covered Officers in such activities is inherent in the contractual relationship between the Fund and its service providers and is consistent with the performance by the Covered Officers of their duties as officers of the Fund. Thus, if performed in conformity with the provisions of the Investment Company Act of 1940, as amended ("Investment Company Act") and the Investment Advisers Act of 1940, as amended ("Investment Advisers Act"), such activities will be deemed to have been handled ethically. In addition, it is recognized by the Fund's Board of Directors (the "Board") that the Covered Officers may also be officers or employees of one or more other investment companies covered by other codes. The following list provides examples of conflicts of interest under the Code, but Covered Officers should keep in mind that these examples are not exhaustive. The overarching principle is that the personal interest of a Covered Officer should not be placed improperly before the interest of the Fund. * * * * Each Covered Officer must not: o use his personal influence or personal relationship improperly to influence investment decisions or financial reporting by the Fund whereby the Covered Officer would benefit personally to the detriment of the Fund; o cause the Fund to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than the benefit of the Fund; or o retaliate against any other Covered Officer or any employee of the Fund or its affiliated persons for reports of potential violations by the Fund of applicable rules and regulations that are made in good faith. Each Covered Officer must discuss certain material conflict of interest situations with the Fund's Audit Committee. Examples of such situations include: o service as a Director, general partner, or officer of any unaffiliated business organization. This rule does not apply to charitable, civic, religious, public, political, or social organizations, the activities of which do not conflict with the interests of the Fund; o the receipt of any non-nominal gifts; 2 o the receipt of any entertainment from any company with which the Fund has current or prospective business dealings unless such entertainment is business-related, reasonable in cost, appropriate as to time and place, and not so frequent as raise any question of impropriety; o any ownership interest in, or any consulting or employment relationship with, any of the Fund's service providers, other than its investment adviser, administrator, transfer agent, custodian or any affiliated person thereof; and o a direct or indirect financial interest in commissions, transaction charges or spreads paid by the Fund for effecting portfolio transactions or for selling or redeeming shares other than an interest arising from the Covered Officer's employment, such as compensation or equity ownership. III. DISCLOSURE AND COMPLIANCE o Each Covered Officer will monitor the compliance of the Fund and the Fund's service providers with federal or state statutes, regulations or administrative procedures that affect the operation of the Fund. o Each Covered Officer should not knowingly misrepresent, or cause others to misrepresent, facts about the Fund to others, whether within or outside the Fund, including to the Fund's Board, Fund's Audit Committee and the Fund's independent auditors, and to governmental regulators and self-regulators and self-regulatory organizations. o Each Covered Officer should, to the extent appropriate within his or her area of responsibility, consult with other officers and employees of the Fund and its service providers with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the Fund files with, or submits to, the SEC and in other public communications made by the Fund. o It is the responsibility of each covered officer to promote and encourage professional integrity in all aspects of the Fund's operations. IV. REPORTING AND ACCOUNTABILITY Each Covered Officer must: o upon adoption of this Code (or thereafter as applicable, upon becoming a Covered Officer), sign and return a report in the form of Exhibit B to the Fund's compliance officer affirming that he or she has received, read, and understands the Code; o annually sign and return a report in the form of Exhibit C to the Fund's compliance officer as an affirmation that he or she has complied with the requirements of the Code; and 3 o notify the Fund's Audit Committee promptly if he or she knows of any violation of this Code. Failure to do so is itself a violation of this Code. The Fund's Audit Committee is responsible for applying this Code to specific situations in which questions are presented under it and has the authority to interpret this Code in any particular situation including any approvals or waivers sought by the Covered Persons. The Audit Committee will follow these procedures in investigating and enforcing this Code: o The Audit Committee will take all appropriate actions to investigate any potential violations reported to the Committee. o If, after such investigation, the Audit Committee believes that no violation has occurred, the Audit Committee is not required to take any further action. o Any matter that the Audit Committee believes is a violation of this Code will be reported to the full Board. o If the Board concurs that a violation has occurred, it will notify the appropriate personnel of the applicable service provider and may dismiss the Covered Officer as an officer of the Fund. o The Audit Committee will be responsible for granting waivers of provisions of this Code, as appropriate. o Any changes to or waivers of this Code will, to the extent required, be disclosed as provided by SEC rules. V. OTHER POLICIES AND PROCEDURES This Code shall be the sole code of ethics adopted by the Fund for purposes of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules and forms applicable to registered investment companies thereunder. Insofar as other policies or procedures of the Fund, the Fund's investment adviser, principal underwriter, or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code. The Fund's, investment adviser's and principal underwriter's codes of ethics under Rule 17j-1 under the Investment Company Act and the investment adviser's more detailed policies and procedures are separate requirements applying to the Covered Officers and others, and are not part of this Code. 4 VI. AMENDMENTS Any amendments to this Code, other than amendments to Exhibit A, must be approved or ratified by a majority vote of the Board, including a majority of Independent Directors. VII. CONFIDENTIALITY All reports and records prepared or maintained pursuant to this Code will be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law or this Code, such matters shall not be disclosed to anyone other than the Fund's Board or Audit Committee. VIII. INTERNAL USE The Code is intended solely for the internal use by the Fund and does not constitute an admission, by or on behalf of Fund, as to any fact, circumstance, or legal conclusion. Approved on: September 12, 2003 5 EXHIBIT A Persons Covered by this Code of Ethics:
TITLE NAME - ----------------------------------------------------------------------------------- --------------------- President, Chief Executive Officer and Principal Executive Officer Gary L. French - ----------------------------------------------------------------------------------- --------------------- Treasurer, Chief Financial Officer and Principal Financial Officer William C. Cox - ----------------------------------------------------------------------------------- ---------------------
6 EX-99.CERT 3 b57924cfexv99wcert.txt CERTIFICATIONS OF CEO AND CFO EXHIBIT 12(a)(2) I, Gary L. French, President of The China Fund, Inc., certify that: 1. I have reviewed this report on Form N-CSR of The China Fund, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal controls over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: January 9, 2006 By: /s/Gary L. French ------------------- President (principal executive officer) of The China Fund, Inc. I, William C. Cox, Treasurer of The China Fund, Inc., certify that: 1. I have reviewed this report on Form N-CSR of The China Fund, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting(as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: January 9, 2006 By: /s/William C. Cox ------------------- William C. Cox Treasurer (principal financial officer) of The China Fund, Inc. EX-99.(12)(A)(4) 4 b57924cfexv99wx12yxayx4y.txt PROXY VOTING RESULTS EXHIBIT 12(a)(4) THE CHINA FUND, INC. PROXY VOTING POLICY AND PROCEDURES The Board of Directors of The China Fund, Inc. (the "Fund") hereby adopts the following policy and procedures with respect to voting proxies relating to Fund securities managed by Martin Currie Inc. and Asian Direct Capital Management (the "Listed Investment Manager" and the "Direct Investment Manager", respectively and the "Investment Managers", collectively). I. POLICY It is the policy of the Board of Directors of the Fund (the "Board") to delegate the responsibility for voting proxies relating to securities held by the Fund to the Investment Managers as a part of the Managers' general management of the Fund's assets, subject to the Board's continuing oversight. The Board of Directors of the Fund hereby delegates such responsibility to the Investment Managers, and directs each Investment Manager to vote proxies relating to Fund portfolio securities managed by the Investment Manager consistent with the duties and procedures set forth below. The Investment Managers may retain one or more vendors to review, monitor and recommend how to vote proxies in a manner consistent with the duties and procedures set forth below, to ensure such proxies are voted on a timely basis and to provide reporting and/or record retention services in connection with proxy voting for the Fund. II. FIDUCIARY DUTY The right to vote a proxy with respect to securities held by the Fund is an asset of the Fund. Each Investment Manager, to which authority to vote on behalf of the Fund is delegated, acts as a fiduciary of the Fund and must vote proxies in a manner consistent with the best interest of the Fund and its shareholders. In discharging this fiduciary duty, each Investment Manager must maintain and adhere to its policies and procedures for addressing conflicts of interest and must vote in a manner substantially consistent with its policies, procedures and guidelines, as presented to the Board. III. PROCEDURES The following are the procedures adopted by the Board for the administration of this policy: A. Review of Investment Managers' Proxy Voting Procedures. The Investment Managers shall present to the Board their policies, procedures and other guidelines for voting proxies at least annually, and must notify the Board promptly of material changes to any of these documents, including changes to policies addressing conflicts of interest. B. Voting Record Reporting. Each Investment Manager shall provide the voting record information necessary for the completion and filing of Form-NPX to the Fund at least annually. Such voting record information shall be in a form acceptable to the Fund and shall be provided at such time(s) as are required for the timely filing of Form-NPX and at such additional time(s) as the Fund and the Investment Manager may agree from 1 time to time. With respect to those proxies that an Investment Manager has identified as involving a conflict of interest(1), the Investment Manager shall submit a separate report indicating the nature of the conflict of interest and how that conflict was resolved with respect to the voting of the proxy. C. Record Retention. The each Investment Manager shall maintain such records with respect to the voting of proxies as may be required by the Investment Advisers Act of 1940 and the rules promulgated thereunder or by the Investment Company Act of 1940 and the rules promulgated thereunder. D. Conflicts of Interest. Any actual or potential conflicts of interest between or an Investment Manager and the Fund's shareholders arising from the proxy voting process will be addressed by the relevant Investment Manager and the Investment Manager's application of its proxy voting procedures pursuant to the delegation of proxy voting responsibilities to the Investment Manager. In the event that the Investment Manager notifies the officer(s) of the Fund that a conflict of interest cannot be resolved under the Investment Manager's Proxy Voting Procedures, such officer(s) are responsible for notifying the Chairman of the Board of the Fund of the irreconcilable conflict of interest and assisting the Chairman with any actions he determines are necessary. IV. REVOCATION The delegation by the Board of the authority to vote proxies relating to securities of the Fund is entirely voluntary and may be revoked by the Board, in whole or in part, at any time. V. ANNUAL FILING The Fund shall file an annual report of each proxy voted with respect to securities of the Fund during the twelve-month period ended June 30 on Form N-PX not later than August 31 of each year.(2) VI. DISCLOSURES A. The Fund shall include in its annual report filed on Form N-CSR: 1. a description of this policy and of the policies and procedures used by the Fund and the Investment Managers to determine how to vote proxies relating to portfolio securities or copies of such policies and procedures; and - --------------- (1) As it is used in this document, the term "conflict of interest" refers to a situation in which the Investment Managers or affiliated persons of the Investment Managers have a financial interest in a matter presented by a proxy other than the obligation they incur as Investment Managers to the Fund which could potentially compromise the Investment Managers' independence of judgment and action with respect to the voting of the proxy. (2) The Fund must file its first report on Form N-PX not later than August 31, 2004, for the twelve-month period beginning July 1, 2003, and ending June 30, 2004. 2 2. a statement disclosing that a description of the policies and procedures used by or on behalf of the Fund to determine how to vote proxies relating to securities of the Fund is available without charge, upon request, by calling the Fund's toll-free telephone number; through a specified Internet address, if applicable; and on the SEC's website; and 3. a statement disclosing that information regarding how the Fund voted proxies relating to Fund securities during the most recent 12-month period ended June 30 is available without charge, upon request, by calling the Fund's toll-free telephone number; or through a specified Internet address; or both; and on the SEC's website. VII. REVIEW OF POLICY The Board shall review from time to time this policy to determine its sufficiency and shall make and approve any changes that it deems necessary from time to time. Adopted: September 12, 2003 3 PROXY VOTING POLICY ASIAN DIRECT CAPITAL MANAGEMENT INTRODUCTION Asian Direct Capital Management ("ADCM") seeks to vote proxies in the best interests of its clients. In the ordinary course, this entails voting proxies in a way which ADCM believes will maximize the monetary value of each portfolio's holdings. ADCM takes the view that this will benefit our direct clients (e.g. investment funds) and, indirectly, the ultimate owners and beneficiaries of those clients (e.g. fund shareholders). Oversight of the proxy voting process is the responsibility of the ADCM Investment Committee. ADCM's Compliance Officer is responsible for implementing processes and procedures to ensure the objectives of this policy are properly carried out. In addition to voting proxies, ADCM: 1) describes its proxy voting procedures to its clients in Part II of its Form ADV; 2) provides the client with this written proxy policy, upon request; 3) discloses to its clients how they may obtain information on how ADCM voted the client's proxies; 4) matches proxies received with holdings as of record date; 5) reconciles holdings as of record date and rectifies any discrepancies; 6) generally applies its proxy voting policy consistently and keeps records of votes for each client; 7) documents the reason(s) for voting for all non-routine items; and 8) keeps records of such proxy voting available for inspection by the client or governmental agencies. PROCESS All proxies received on behalf of ADCM clients are voted according to our guidelines listed below, as long as there are no special circumstances relating to that company or proxy request. However, from time to time, proxy votes will be solicited which (i) involve special circumstances and require additional research and discussion or (ii) are not directly addressed by our policies. These proxies are identified through a number of methods, including but not limited to concerns of clients, review by internal proxy specialists, and questions from consultants. In instances of special circumstances or issues not directly addressed by our policies, the Investment Team is consulted for a determination of the proxy vote. The first determination is whether there is a material conflict of interest between the interests of our client and those of ADCM. If the Investment Team determines that there is a material conflict, the process detailed below under "Potential Conflicts" is followed. If there is no material conflict, we examine each of the issuer's proposals in detail in seeking to determine what vote would be in the best interests of our clients. At this point, the Investment Committee makes a voting decision based on maximizing the monetary value of each portfolios' holdings. However, the Investment Committee may determine that a proxy involves the consideration of particularly significant issues and may seek additional guidance from ADCM's Compliance Officer, and SSgA Compliance personnel. ADCM also endeavors to show sensitivity to local market practices when voting proxies of non-U.S. issuers. 1 VOTING For most issues and in most circumstances, we abide by the following general guidelines. However, as discussed above, in certain circumstances, we may determine that it would be in the best interests of our clients to deviate from these guidelines. Management Proposals I. ADCM votes in support of management on the following ballot items, which are fairly common management sponsored initiatives. o Elections of directors who do not appear to have been remiss in the performance of their oversight responsibilities o Approval of auditors o Directors' and auditors' compensation o Directors' liability and indemnification o Discharge of board members and auditors o Financial statements and allocation of income o Dividend payouts that are greater than or equal to country and industry standards o Authorization of share repurchase programs o General updating of or corrective amendments to charter o Change in Corporation Name o Elimination of cumulative voting II. ADCM votes in support of management on the following items, which have potentially substantial financial or best-interest impact: o Capitalization changes which eliminate other classes of stock and voting rights o Changes in capitalization authorization for stock splits, stock dividends, and other specified needs which are no more than 50% of the existing authorization for U.S. companies and no more than 100% of existing authorization for non-U.S. companies o Elimination of pre-emptive rights for share issuance of less than a given percentage (country specific - ranging from 5% to 20%) of the outstanding shares o Elimination of "poison pill" rights o Stock purchase plans with an exercise price of not less that 85% of fair market value o Stock option plans which are incentive based and not excessive o Other stock-based plans which are appropriately structured 2 o Reductions in super-majority vote requirements o Adoption of anti-"greenmail" provisions III. ADCM votes against management on the following items, which have potentially substantial financial or best interest impact: o Capitalization changes that add "blank check" classes of stock or classes that dilute the voting interests of existing shareholders o Changes in capitalization authorization where management does not offer an appropriate rationale or which are contrary to the best interest of existing shareholders o Anti-takeover and related provisions that serve to prevent the majority of shareholders from exercising their rights or effectively deter appropriate tender offers and other offers o Amendments to bylaws which would require super-majority shareholder votes to pass or repeal certain provisions o Elimination of Shareholders' Right to Call Special Meetings o Establishment of classified boards of directors o Reincorporation in a state which has more stringent anti-takeover and related provisions o Shareholder rights plans that allow the board of directors to block appropriate offers to shareholders or which trigger provisions preventing legitimate offers from proceeding o Excessive compensation o Change-in-control provisions in non-salary compensation plans, employment contracts, and severance agreements which benefit management and would be costly to shareholders if triggered o Adjournment of Meeting to Solicit Additional Votes o "Other business as properly comes before the meeting" proposals which extend "blank check" powers to those acting as proxy o Proposals requesting re-election of insiders or affiliated directors who serve on audit, compensation, and nominating committees. IV. ADCM evaluates Mergers and Acquisitions on a case-by-case basis. Consistent with our proxy policy, we support management in seeking to achieve their objectives for shareholders. However, in all cases, ADCM uses its discretion in order to maximize shareholder value. ADCM, generally votes, as follows: o Against offers with potentially damaging consequences for minority shareholders because of illiquid stock, especially in some non-US markets o For offers that concur with index calculators treatment and our ability to meet our clients return objectives for passive funds o Against offers when there are prospects for an enhanced bid or other bidders 3 o For proposals to restructure or liquidate closed end investment funds in which the secondary market price is substantially lower than the net asset value SHAREHOLDER PROPOSALS Traditionally, shareholder proposals have been used to encourage management and other shareholders to address socio-political issues. ADCM believes that it is inappropriate to use client assets to attempt to affect such issues. Thus, we examine shareholder proposals primarily to determine their economic impact on shareholders. I. ADCM votes in support of shareholders on the following ballot items, which are fairly common shareholder-sponsored initiatives: o Requirements that auditors attend the annual meeting of shareholders o Establishment of an annual election of the board of directors o Mandates requiring a majority of independent directors on the Board of Directors and the audit, nominating, and compensation committees o Mandates that amendments to bylaws or charters have shareholder approval o Mandates that shareholder-rights plans be put to a vote or repealed o Establishment of confidential voting o Expansions to reporting of financial or compensation-related information, within reason o Repeals of various anti-takeover related provisions o Reduction or elimination of super-majority vote requirements o Repeals or prohibitions of "greenmail" provisions o "Opting-out" of business combination provisions o Proposals requiring the disclosure of executive retirement benefits if the issuer does not have an independent compensation committee II. In light of recent events surrounding corporate auditors and taking into account corporate governance provisions released by the SEC, NYSE, and NASDAQ, ADCM votes in support of shareholders on the following ballot items, which are fairly common shareholder-sponsored initiatives: o Disclosure of Auditor and Consulting relationships when the same or related entities are conducting both activities o Establishment of selection committee responsible for the final approval of significant management consultant contract awards where existing firms are already acting in an auditing function o Mandates that Audit, Compensation and Nominating Committee members should all be independent directors o Mandates giving the Audit Committee the sole responsibility for the selection and dismissal of the auditing firm and any subsequent result of audits are reported to the audit committee 4 III. ADCM votes against shareholders on the following initiatives, which are fairly common shareholder-sponsored initiatives: o Limits to tenure of directors o Requirements that candidates for directorships own large amounts of stock before being eligible to be elected o Restoration of cumulative voting in the election of directors o Requirements that the company provide costly, duplicative, or redundant reports; or reports of a non-business nature o Restrictions related to social, political, or special interest issues which affect the ability of the company to do business or be competitive and which have significant financial or best-interest impact o Proposals which require inappropriate endorsements or corporate actions o Requiring the company to expense stock options unless already mandated by FASB (or similar body) under regulations that supply a common valuation model. o Proposal asking companies to adopt full tenure holding periods for their executives. o Proposals requiring the disclosure of executive retirement benefits if the issuer has an independent compensation committee SHAREHOLDER ACTIVISM We at ADCM agree entirely with the United States Department of Labor's position that "where proxy voting decisions may have an effect on the economic value of the plan's underlying investment, plan fiduciaries should make proxy voting decisions with a view to enhancing the value of the shares of stock" (IB 94-2). Our proxy voting policy and procedures are designed to ensure that our clients receive the best possible returns on their investments. POTENTIAL CONFLICTS As discussed above under Process, from time to time, the Investment Committee will review a proxy which presents a potential material conflict. For example, ADCM or its affiliates may provide services to a company whose management is soliciting proxies, or to another entity which is a proponent of a particular proxy proposal. Another example could arise when ADCM has business or other relationships with participants involved in proxy contests, such as a candidate for a corporate directorship. As a fiduciary to its clients, ADCM takes these potential conflicts very seriously. While ADCM's only goal in addressing any such potential conflict is to ensure that proxy votes are cast in the clients' best interests and are not affected by ADCM's potential conflict, there are a number of courses ADCM may take. The final decision as to which course to follow shall be made by the Investment Committee. When the matter falls clearly within one of the proposals enumerated above, casting a vote which simply follows ADCM's pre-determined policy would eliminate ADCM's discretion on the particular issue and hence avoid the conflict. In other cases, where the matter presents a potential material conflict and is not clearly within one of the enumerated proposals, or is of such a nature that ADCM believes more active involvement is necessary, the Investment Committee will follow one of two courses of action. First, ADCM may employ the services 5 of a third party, wholly independent of ADCM, its affiliates and those parties involved in the proxy issue, to determine the appropriate vote. Second, in certain situations the Investment Committee may determine that the employment of a third party is unfeasible, impractical or unnecessary. In such situations, the Investment Committee shall make a decision as to the voting of the proxy. The basis for the voting decision, including the basis for the determination that the decision is in the best interests of ADCM's clients, shall be formalized in writing as a part of the minutes to the ADCM Investment Committee. As stated above, which action is appropriate in any given scenario would be the decision of the Investment Committee in carrying out its duty to ensure that the proxies are voted in the clients', and not ADCM's, best interests. RECORDKEEPING In accordance with applicable law, ADCM shall retain the following documents for not less than five years from the end of the year in which the proxies were voted, the first two years in ADCM's office: 1) ADCM's Proxy Voting Policy and any additional procedures created pursuant to such Policy; 2) a copy of each proxy statement ADCM receives regarding securities held by its clients (note: this requirement may be satisfied by a third party who has agreed in writing to do so or by obtaining a copy of the proxy statement from the EDGAR database); 3) a record of each vote cast by ADCM (note: this requirement may be satisfied by a third party who has agreed in writing to do so); 4) a copy of any document created by ADCM that was material in making its voting decision or that memorializes the basis for such decision; and 5) a copy of each written request from a client, and response to the client, for information on how ADCM voted the client's proxies. DISCLOSURE OF CLIENT VOTING INFORMATION Any client who wishes to receive information on how its proxies were voted should contact ADCM's Compliance Officer. 6 MARTIN CURRIE, INC. STATEMENT OF POLICIES AND PROCEDURES PROXY VOTING Martin Currie, Inc. ("Martin Currie") has adopted a Statement of Policies and Procedures for Voting Proxies (the "Policies and Procedures") designed to ensure that it votes proxies in the best interests of its Clients in accordance with its fiduciary duties, Rule 206(4)-6 under the Investment Advisers Act of 1940 and other applicable law. The Policies and Procedures do not apply to any Client who has retained authority and discretion to vote its own proxies or delegated such authority and discretion to a third party. PROXY VOTING POLICIES Martin Currie recognizes the importance of good corporate governance in ensuring that management and boards of directors fulfil their obligations to shareholders. As part of its investment process, it takes into account the attitudes of management and boards of directors on corporate governance issues when deciding whether to invest in a company. As set out in the Policies and Procedures, it is Martin Currie's general policy to support management of the companies in which it invests and it will generally cast votes in accordance with management's proposals. However, it reserves the right to depart from this policy in order to avoid voting decisions that it believes may be contrary to its Clients' best interests. The Policies and Procedures also contain proxy voting policies relating to specific issues, such as: the election of directors; the appointment of auditors; changes to a company's charter, articles of incorporation or bylaws; corporate restructurings, mergers and acquisitions; transparency and accountability in corporate governance; proposals regarding social, political and environmental issues; and executive compensation. Martin Currie applies these proxy-voting policies flexibly and reserves the right to vote contrary to the policies when it believes they may be contrary to its Clients' best interests. Martin Currie is a global investment manager, and it invests significantly in emerging markets. It should be noted that protection for shareholders may vary significantly from jurisdiction to jurisdiction, and in some cases may be substantially less than in the U.S. or developed countries. PROXY VOTING PROCEDURES Martin Currie's Market Data Team is responsible for the coordination of proxy voting and liaises with Product Managers and/or the Proxy Voting Committee. The Product Managers are responsible for evaluating proxies and determining voting decisions in accordance with the general principles of the Policies and Procedures. The Proxy Voting Committee, which comprises senior investment personnel and representatives of the Legal & Compliance Department, regularly reviews the proxy policies and considers specific proxy voting matters in certain situations. CONFLICTS OF INTEREST Martin Currie recognizes that there is a potential conflict of interest when it votes a proxy solicited by an issuer with whom it has a material business or personal relationship that may 1 affect how it votes on the issuer's proxy. Martin Currie believes that oversight by the Committee ensures that proxies are voted with only its Clients' best interests in mind. In order to avoid any perceived conflict of interests, procedures have been established for use when proxy votes are issued by existing Clients or where Martin Currie holds a significant voting percentage of the company. PROXIES OF CERTAIN NON-U.S. ISSUERS Proxy voting in certain countries requires "share blocking." That is, shareholders wishing to vote their proxies must deposit their shares shortly before the date of the meeting (usually one week) with a designated depositary. During this blocking period, shares that will be voted at the meeting cannot be sold until the meeting has taken place and the shares are returned to the Clients' custodian banks. Martin Currie may determine that the value of exercising the vote does not outweigh the detriment of not being able to transact in the shares during this period. In such cases, Martin Currie may abstain from voting the affected shares. AVAILABILITY OF POLICIES AND PROCEDURES AND PROXY VOTING RECORD Clients may obtain a copy of the Policies and Procedures and information on how Martin Currie voted with respect to their proxies by contacting the Client Services Team at Martin Currie, Inc., Saltire Court, 20 Castle Terrace, Edinburgh, Scotland, EH1 2ES, tel. 011-44-131-229-5252, fax 011-44-131-222-2527 or email Clientservices@martincurrie.com. 2 EX-99.906CERT 5 b57924cfexv99w906cert.txt CERTIFICATIONS PURSUANT TO SECTION 906 EXHIBIT 12(b) Gary L. French, Chief Executive Officer, and William C. Cox, Chief Financial Officer of The China Fund, Inc. (the "Fund"), each certify that: 1. This Form N-CSR filing for the Fund (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Fund. By: /s/Gary L. French ------------------- Gary L. French Chief Executive Officer of The China Fund, Inc. Date: January 9, 2006 By: /s/William C. Cox ------------------- William C. Cox Chief Financial Officer of the The China Fund, Inc. Date: January 9, 2006 -----END PRIVACY-ENHANCED MESSAGE-----