Manager's Commentary
Market Review
The Greater China equity markets rebounded in November 2018, posting healthy gains. Sentiment was lifted by hopes for a thawing in trade tensions between the United States and China, as well as speculation that the US Federal Reserve may not raise interest rates as much as previously thought. On balance, economic data indicated that China's economy was on more stable ground and overcoming the ongoing trade rift with the United States. While both the official and Caixin Markit purchasing managers' indices of manufacturing activity came in close to 50 - a level which indicates the economy is neither expanding or contracting - exports picked up, despite higher tariffs, rising 15.6% year-on-year in October, and imports also increased.
Within the Greater China region, China and Hong Kong equities led the rally while Taiwan stocks lagged, a result of the technology sector remaining under pressure. Elsewhere, interest rate sensitive sectors such as real estate led the gains.
Fund Review
The China Fund Inc. (the “Fund”) perfromed in line with its benchmark in November 2018. Overall stock selection was a positive factor which more than offset a negative sector allocation effect. In particular stock selection within consumer staples and financials were the main contributors.
At a stock level, a top contributor was our holding in China State Construction International Holdings Ltd., which is the largest construction contractor in Hong Kong. The expected increase in infrastructure spending in China as a result of government initiatives to support the economy should lead to an increase in the order backlog over time. Combined with a rights issue earlier this year which has reduced the company's gearing, we believe the stock is positioned for a turnaround into the New Year. In the consumer sector, MGM China Holdings Ltd., a Macau-based resort operator was another contributor on the back of an industry-wide recovery in revenues after a period of softness related to the China economic slowdown.
In contrast the Fund's overweight position in Petrochina Co. Ltd., which is China's second biggest oil producer, was a detractor. The stock fell in line with other global energy names with the weakness in oil prices. We trimmed our holding during the month and have a slightly overweight position in the sector as a whole.
Outlook
The outcome of the G20 meeting between President Trump and President Xi, with an agreement on a temporary truce to tariff escalations, was better than expected. Combined with the US Federal Reserve signaling a more dovish tone on future interest rates, some of the macro headwinds that have impacted Greater China equities this year are set to ease, at least for the time being. As a result, in our view the recovery we have seen in markets over recent weeks now has an improved chance of continuing into the year end.
As we look to 2019, our view is that a stabilization in China's economic outlook will be important to maintain a more sustained equity market recovery. In recent weeks, earnings downgrades have been increasingly widespread. Much of this has already been discounted in the severe market derating this year. Any signs that corporate earnings are starting to recover would therefore be the catalyst for a more positive market environment. We continue to prefer companies that should experience earnings tailwinds from policy stimulus measures, including infrastructure related names. The correction in the technology sector has also allowed us to buy quality names on weakness.
| In Brief | |
| Fund Data | |
| Description | Seeks to achieve long-term capital appreciation through investments in China companies. |
| Listing Date (NYSE) | July 10, 1992 |
| Total Fund Assets (millions) | $314.8 |
| Median Market Cap (in billions) | $12.2 |
| Distribution Frequency | Annual |
| Management Firm | Allianz Global Investors U.S. LLC |
| Portfolio Management | Christina Chung, CFA, CMA Lead Portfolio Manager |
|
Performance (US$ Rreturns) (as of 11/30/2018) |
||
| Fund | Benchmark1 | |
| One Month | 5.48% | 5.48% |
| Three Month | -7.31% | -7.37% |
| One Year | -12.51% | -9.39% |
| Three Year | 5.99% | 10.42% |
| Net Asset Value / Market Price | |
| Net Asset Value (NAV) /Market Price at Inception | $13.15 / $14.26 |
| NAV / Market Price (as of 11/30/2018) | $20.02 / $18.06 |
| High / Low Ranges (52-Week) | |
| High / Low NAV | $26.38 / $18.45 |
| High / Low Market Price | $24.70 / $16.63 |
| Premium/Discount to NAV (as of 11/30/2018) | -9.79% |
| Fund Data (Common Shares) | |
| Shares Outstanding | 15,722,675 |
| Average Daily Volume | 25,246 |
| Expense Ratio | 1.49% |
Fund Manager
Christina Chung,
CFA, CMA
Lead Portfolio
Manager
| 1. | MSCI Golden Dragon Index. |
Investment Products: NOT FDIC INSURED | MAY LOSE VALUE | NOT BANK GUARANTEED
1
Monthly Insights | As of 11/30/2018 | The China Fund, Inc.
Investment Objective
The investment objective of The China Fund, Inc. (the "Fund") is to achieve long-term capital appreciation. The Fund seeks to achieve its objective through investment in the equity securities of companies and other entities with significant assets, investments, production activities, trading or other business interests in China or which derive a significant part of their revenue from China.
The Fund has an operating policy that the Fund will invest at least 80% of its assets in China companies. For this purpose, ‘China companies' are (i) companies for which the principal securities trading market is in China; (ii) companies for which the principal securities trading market is outside of China or in companies organized outside of China, that in both cases derive at least 50% of their revenues from goods or services sold or produced, or have at least 50% of their assets in China; or (iii) companies organized in China. Under the policy, China means the People's Republic of China, including Hong Kong, and Taiwan. The Fund will provide its stockholders with at least 60 days' prior notice of any change to this policy.
| Returns For Periods Ended November 30, 2018* | ||||||||
| 1 Month | 3 Month | YTD | 1 Year | 3 Year | 5 Year | 10 Year | Inception | |
| NAV | 5.48% | -7.31% | -14.55% | -12.51% | 5.99% | 4.02% | 11.30% | 9.72% |
| Market Price | 6.36% | -8.97% | -16.58% | -13.83% | 7.19% | 4.39% | 11.56% | 8.96% |
| MSCI Golden Dragon Index | 5.48% | -7.37% | -11.08% | -9.39% | 10.42% | 6.09% | 11.52% | — |
| Calendar Year Returns | ||||||||
| 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | |
| NAV | 27.26% | -24.37% | 12.12% | 18.31% | 7.82% | -5.51% | 0.60% | 37.92% |
| Market Price | 23.60% | -27.51% | 20.52% | 12.70% | 5.29% | -6.38% | -0.47% | 47.41% |
| MSCI Golden Dragon Index | 13.60% | -18.35% | 22.65% | 7.25% | 8.06% | -7.12% | 5.75% | 44.19% |
Past performance is not a guide to future returns.
* Annualized for periods greater than one year.
Source: State Street Bank and Trust Company. Source for index data: MSCI as at November 30, 2018. Investment returns are historical and do not guarantee future results. Investment returns reflect changes in net asset value and market price per share during each period and assumes that dividends and capital gains distributions, if any, were reinvested. The net asset value (NAV) percentages are not an indication of the performance of a shareholder's investment in the Fund, which is based on market price. NAV performance includes the deduction of management fees and other expenses. Market price performance does not include the deduction of brokerage commissions and other expenses of trading shares and would be lower had such commissions and expenses been deducted. It is not possible to invest directly in an index.
Premium/Discount
| Sector Allocation | ||
| Fund | Benchmark1 | |
| Financials | 23.81% | 23.98% |
| Consumer Discretionary | 14.29% | 15.30% |
| Information Technology | 12.13% | 14.13% |
| Communication Services | 11.59% | 16.99% |
| Real Estate | 7.10% | 8.21% |
| Industrials | 6.42% | 5.97% |
| Energy | 5.61% | 3.43% |
| Consumer Staples | 4.52% | 2.52% |
| Utilities | 4.29% | 3.84% |
| Health Care | 1.57% | 2.21% |
| Materials | 1.23% | 3.42% |
| Other assets & liabilities | 7.43% | 0.00% |
Source: IDS GmbH - Analysis and Reporting Services, a subsidiary of Allianz SE.
| Country Allocation | ||
| Fund | Benchmark1 | |
| China | 79.65% | 78.64% |
| Hong Kong Red Chips | 16.58% | 8.99% |
| Hong Kong 'H' shares | 22.14% | 19.31% |
| Equity linked securities ('A' shares) | 0.00% | 0.00% |
| China 'A' & 'B' shares | 1.10% | 1.36% |
| Other Hong Kong securities | 39.83% | 32.70% |
| Others | 0.00% | 16.18% |
| Taiwan | 12.93% | 21.36% |
| Other assets & liabilities | 7.42% | 0.00% |
| Top 10 Holdings | |
| TAIWAN SEMIC CO LTD (Taiwan) | 8.22% |
| TENCENT HOLDINGS LTD (China) | 7.83% |
| ALIBABA GROUP HOLDING LTD (China) | 7.38% |
| CHINA CONSTRUCTION BANK CORP (China) | 5.94% |
| AIA GROUP LTD (H.K.) | 4.18% |
| PING AN INSURANCE (China) | 3.79% |
| CHINA EVERBRIGHT INTL (China) | 3.28% |
| HK EXCHANGES & CLEARING LTD (H.K.) | 3.20% |
| PETROCHINA CO LTD (China) | 2.75% |
| SUN HUNG KAI PROPERTIES LTD (H.K.) | 2.61% |
| Portfolio Characteristics | ||
| Fund | Benchmark1 | |
| P/E Ratio | 12.68 | 12.62 |
| P/B Ratio | 1.38 | 1.47 |
| Issues in Portfolio | 44 | 596 |
| Foreign Holdings (%) | 92.57 | 100.00 |
| Other assets & liabilities (%) | 7.43 | 0.00 |
| Yield (%) | 2.58 | 2.92 |
Source: IDS GmbH - Analysis and Reporting Services, a subsidiary of Allianz SE.
| 1. | MSCI Golden Dragon Index. |
Investment Products: NOT FDIC INSURED | MAY LOSE VALUE | NOT BANK GUARANTEED
2
Monthly Insights | As of 11/30/2018 | The China Fund, Inc.
| Distribution History (10 Year) | |||||||
| Declaration Date | Ex-dividend Date | Record Date | Payable Date | Distribution/ Share |
Income | Long-term Capital Gain |
Short-term Capital Gain |
| 12/8/2008 | 12/22/2008 | 12/24/2008 | 1/23/2009 | $5.81740 | $0.48130 | $5.33610 | — |
| 12/9/2009 | 12/22/2009 | 12/24/2009 | 12/29/2009 | $0.25570 | $0.25570 | — | — |
| 12/8/2010 | 12/21/2010 | 12/24/2010 | 12/29/2010 | $2.27420 | $0.37460 | $1.89960 | — |
| 12/8/2011 | 12/21/2011 | 12/23/2011 | 12/29/2011 | $2.99640 | $0.17420 | $2.82220 | — |
| 12/10/2012 | 12/20/2012 | 12/24/2012 | 12/28/2012 | $3.25170 | $0.34730 | $2.90440 | — |
| 12/13/2013 | 12/19/2013 | 12/23/2013 | 12/27/2013 | $3.31400 | $0.43870 | $2.87530 | — |
| 12/8/2014 | 12/18/2014 | 12/22/2014 | 1/5/2015 | $3.76510 | $0.29820 | $3.46690 | — |
| 12/16/2015 | 12/23/2015 | 12/28/2015 | 1/6/2016 | $1.49580 | $0.21330 | $0.84620 | $0.43630 |
| 12/9/2016 | 12/19/2016 | 12/21/2016 | 1/5/2017 | $0.46780 | $0.46780 | — | — |
| 12/8/2017 | 12/18/2017 | 12/19/2017 | 1/4/2018 | $0.54930 | $0.54930 | — | — |
Distribution/Share includes Income, Long-term Capital gains and Short-term Capital gains.
The China Fund NAV Performance of $10,000 since inception
Past performance is not a guide to future returns.
Index Description
MSCI Golden Dragon Index
The MSCI Golden Dragon Index captures the equity market performance of large and mid cap China securities (H shares, B shares, Red-Chips and P-Chips) and non-domestic China securities listed in Hong Kong and Taiwan.
It is not possible to invest directly in an index.
Investment Products: NOT FDIC INSURED | MAY LOSE VALUE | NOT BANK GUARANTEED
3
Monthly Insights | As of 11/30/2018 | The China Fund, Inc.
| Portfolio in Full | |||||
| Sector | Company (exchange ticker) |
Market Price | Holding | Value US$ |
% of net assets |
| Financials | 23.82 | ||||
| CHINA CONSTRUCTION BANK CORP | 939 | 6.67 | 21,935,000 | 18,698,505 | 5.94 |
| AIA GROUP LTD | 1299 | 63.85 | 1,611,400 | 13,149,452 | 4.18 |
| PING AN INSURANCE GROUP CO OF CHINA LTD | 2318 | 75.70 | 1,235,000 | 11,948,303 | 3.79 |
| HONG KONG EXCHANGES & CLEARING LTD | 388 | 228.00 | 346,200 | 10,088,006 | 3.20 |
| CHINA MERCHANTS BANK CO LTD | 3968 | 32.35 | 1,870,500 | 7,733,488 | 2.46 |
| BOC HONG KONG HOLDINGS LTD | 2388 | 30.50 | 1,471,500 | 5,735,926 | 1.82 |
| FUBON FINANCIAL HOLDING CO LTD | 2881 | 48.80 | 2,805,000 | 4,444,069 | 1.41 |
| CATHAY FINANCIAL HOLDING CO LTD | 2882 | 48.55 | 2,030,000 | 3,199,731 | 1.02 |
| Consumer Discretionary | 14.29 | ||||
| ALIBABA GROUP HOLDING LTD | BABA | 160.86 | 144,501 | 23,244,431 | 7.38 |
| GALAXY ENTERTAINMENT GROUP LTD | 27 | 48.05 | 1,024,000 | 6,288,351 | 2.00 |
| SHANGRI-LA ASIA LTD | 69 | 11.10 | 3,110,000 | 4,411,911 | 1.40 |
| MGM CHINA HOLDINGS LTD | 2282 | 13.36 | 2,305,200 | 3,936,031 | 1.25 |
| QINGLING MOTORS CO LTD | 1122 | 2.06 | 14,816,000 | 3,900,691 | 1.24 |
| BRILLIANCE CHINA AUTOMOTIVE HOLDINGS LTD | 1114 | 6.92 | 1,884,000 | 1,666,213 | 0.53 |
| NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP | EDU | 57.16 | 26,949 | 1,540,405 | 0.49 |
| Information Technology | 12.14 | ||||
| TAIWAN SEMICONDUCTOR MANUFACTURING CO LTD | 2330 | 225.50 | 3,536,000 | 25,887,311 | 8.22 |
| MEDIATEK INC | 2454 | 237.50 | 669,000 | 5,158,434 | 1.64 |
| DIGITAL CHINA HOLDINGS LTD | 861 | 3.80 | 9,305,000 | 4,519,011 | 1.44 |
| ASM PACIFIC TECHNOLOGY LTD | 522 | 80.00 | 144,200 | 1,474,343 | 0.47 |
| GOLDPAC GROUP LTD | 3315 | 1.85 | 4,970,000 | 1,175,091 | 0.37 |
| Communication Services | 11.60 | ||||
| TENCENT HOLDINGS LTD | 700 | 312.00 | 618,000 | 24,642,597 | 7.83 |
| CHINA MOBILE LTD | 941 | 77.65 | 510,000 | 5,061,218 | 1.61 |
| CHINA UNICOM HONG KONG LTD | 762 | 9.07 | 3,660,000 | 4,242,597 | 1.35 |
| BAIDU INC | BIDU | 188.28 | 13,605 | 2,561,549 | 0.81 |
| Real Estate | 7.11 | ||||
| SUN HUNG KAI PROPERTIES LTD | 16 | 111.50 | 576,000 | 8,208,064 | 2.61 |
| SWIRE PACIFIC LTD | 19 | 86.50 | 523,000 | 5,781,775 | 1.84 |
| CHINA OVERSEAS LAND & INVESTMENT LTD | 688 | 27.30 | 1,622,000 | 5,659,224 | 1.80 |
| COUNTRY GARDEN HOLDINGS CO LTD | 2007 | 9.62 | 2,208,000 | 2,714,673 | 0.86 |
| Industrials | 6.42 | ||||
| CHINA EVERBRIGHT INTERNATIONAL LTD | 257 | 6.84 | 11,811,221 | 10,325,101 | 3.28 |
| CN STATE CONSTRUCTION INTERNATIONAL HOLDINGS LTD | 3311 | 6.82 | 5,050,000 | 4,401,687 | 1.40 |
| QINGDAO PORT INTERNATIONAL CO LTD | 6198 | 4.44 | 6,077,000 | 3,448,384 | 1.10 |
| KING SLIDE WORKS CO LTD | 2059 | 335.50 | 185,000 | 2,015,080 | 0.64 |
| Energy | 5.61 | ||||
| PETROCHINA CO LTD | 857 | 5.49 | 12,336,000 | 8,655,459 | 2.75 |
| CHINA OILFIELD SERVICES LTD | 2883 | 7.30 | 4,770,000 | 4,450,252 | 1.41 |
| CHINA PETROLEUM & CHEMICAL CORP | 386 | 6.65 | 3,666,000 | 3,115,713 | 0.99 |
| CHINA SHENHUA ENERGY CO LTD | 1088 | 17.38 | 656,500 | 1,458,236 | 0.46 |
| Consumer Staples | 4.53 | ||||
| WH GROUP LTD | 288 | 5.71 | 5,331,500 | 3,890,711 | 1.24 |
| CHINA MENGNIU DAIRY CO LTD | 2319 | 24.20 | 1,125,000 | 3,479,456 | 1.10 |
| ANGEL YEAST CO LTD A | 600298 | 23.58 | 1,019,300 | 3,461,375 | 1.10 |
| VINDA INTERNATIONAL HOLDINGS LTD | 3331 | 13.54 | 1,984,000 | 3,433,237 | 1.09 |
| Utilities | 4.29 | ||||
| BEIJING ENTERPRISES HOLDINGS LTD | 392 | 45.90 | 1,229,000 | 7,209,547 | 2.29 |
| CHINA LONGYUAN POWER GROUP CORP LTD | 916 | 6.15 | 8,023,000 | 6,306,020 | 2.00 |
| Health Care | 1.57 | ||||
| CSPC PHARMACEUTICAL GROUP LTD | 1093 | 15.84 | 2,436,000 | 4,931,464 | 1.57 |
| Materials | 1.20 | ||||
| TIANGONG INTERNATIONAL CO LTD | 826 | 1.65 | 17,970,000 | 3,789,443 | 1.20 |
Investment Products: NOT FDIC INSURED | MAY LOSE VALUE | NOT BANK GUARANTEED
4
Monthly Insights | As of 11/30/2018 | The China Fund, Inc.
| Sector | Company (exchange ticker) |
Market Price | Holding | Value US$ |
% of net assets |
Source: State Street Bank and Trust Company, IDS GmbH - Analysi s and Reporting Services, a subsidiary of Allianz SE.
Important Information:
Holdings are subject to change daily. The Fund seeks to achieve its objective through investment in the equity securities of companies and other entities with significant assets, investments, production activities, trading or other business interests in China or which derive a significant part of their revenue from China. Investing in non-U.S. securities entails additional risks, including political and economic risk and the risk of currency fluctuations, as well as lower liquidity. These risks, which can result in greater price volatility, will generally be enhanced in less diversified funds that concentrate investments in a particular geographic region.
The information contained herein has been obtained from sources believed to be reliable but Allianz Global Investors U.S. LLC and its affiliates do not warrant the information to be accurate, complete or reliable. The opinions expressed herein are subject to change at any time and without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Investors should consider the investment objectives, risks, charges and expenses of any mutual fund carefully before investing. This and other information is contained in the Fund's annual and semiannual reports, proxy statement and other Fund information, which may be obtained by contacting your financial advisor or visiting the Fund's website at Investment Products: NOT FDIC INSURED | MAY LOSE VALUE | NOT BANK GUARANTEED. This information is unaudited and is intended for informational purposes only. It is presented only to provide information on the Fund's holdings, performance and strategies. The Fund is a closed-end exchange traded management investment company. This material is presented only to provide information and is not intended for trading purposes. Closed-end funds, unlike open-end funds, are not continuously offered. After the initial public offering by a closed-end fund, its shares can be purchased and sold on the open market through a stock exchange, where shares may trade at a premium or a discount. The market price of holdings is subject to change daily.
P/E is a ratio of security price to earnings per share. Typically, an undervalued security is characterized by a low P/E ratio, while an overvalued security is characterized by a high P/E ratio. P/B is a ratio of the current stock price to the book value. This is used to identify undervalued stocks. Dividend yield is the annual percentage of return earned by an investor on a common or preferred stock. The average dividend yield is the dividend rate divided by current share price.
| ©2018 Allianz Global Investors Distributors LLC, 1633 Broadway, New York, NY | FS-CHN-1118 |
Investment Products: NOT FDIC INSURED | MAY LOSE VALUE | NOT BANK GUARANTEED
5