-----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, LOEwc0um8/LMtDOghR3gttPrh68WZfnilkXvLl2Ni3R+U0L0cdla5JZhRzZPSImi r7mssU4BaQmr5xRp67RkzA== 0000909226-05-000008.txt : 20050429 0000909226-05-000008.hdr.sgml : 20050429 20050429125119 ACCESSION NUMBER: 0000909226-05-000008 CONFORMED SUBMISSION TYPE: N-CSRS PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20050228 FILED AS OF DATE: 20050429 DATE AS OF CHANGE: 20050429 EFFECTIVENESS DATE: 20050429 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TEMPLETON CHINA WORLD FUND CENTRAL INDEX KEY: 0000909226 IRS NUMBER: 593192206 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: N-CSRS SEC ACT: 1940 Act SEC FILE NUMBER: 811-07876 FILM NUMBER: 05784004 BUSINESS ADDRESS: STREET 1: BROWARD FINANCIAL CENTRE STREET 2: 500 EAST BROWARD BLVD SUITE 2100 CITY: FORT LAUDERDALE STATE: FL ZIP: 33394 BUSINESS PHONE: 9545277500 MAIL ADDRESS: STREET 1: BROWARD FINANCIAL CENTRE STREET 2: 500 EAST BROWARD BLVD SUITE 2100 CITY: FORT LAUDERDALE STATE: FL ZIP: 33394 FORMER COMPANY: FORMER CONFORMED NAME: TEMPLETON CHINA WORLD FUND INC DATE OF NAME CHANGE: 19930716 N-CSRS 1 tchfsemiannualrpt05.txt TCH SEMIANNUAL REPORT DTD 2/28/05 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSRS CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-07876 ---------- TEMPLETON CHINA WORLD FUND -------------------------------------- (Exact name of registrant as specified in charter) 500 EAST BROWARD BLVD., FORT LAUDERDALE, FL 33394-3091 -------------------------------------------------------- (Address of principal executive offices) (Zip code) MURRAY L. SIMPSON, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906 ----------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: (954) 527-7500 -------------- Date of fiscal year end: 8/31 ---- Date of reporting period: 2/28/05 ------- ITEM 1. REPORTS TO STOCKHOLDERS FEBRUARY 28, 2005 [photo omitted] SEMIANNUAL REPORT AND SHAREHOLDER LETTER INTERNATIONAL WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL? ELIGIBLE SHAREHOLDERS CAN SIGN UP FOR EDELIVERY AT FRANKLINTEMPLETON.COM. SEE INSIDE FOR DETAILS. TEMPLETON CHINA WORLD FUND [LOGO OMITTED] FRANKLIN(R) TEMPLETON(R) INVESTMENTS Franklin o TEMPLETON 0 Mutual Series Franklin Templeton Investments GAIN FROM OUR PERSPECTIVE Franklin Templeton's distinct multi-manager structure combines the specialized expertise of three world-class investment management groups--Franklin, Templeton and Mutual Series. SPECIALIZED EXPERTISE Each of our portfolio management groups operates autonomously, relying on its own research and staying true to the unique investment disciplines that underlie its success. FRANKLIN. Founded in 1947, Franklin is a recognized leader in fixed income investing and also brings expertise in growth- and value-style U.S. equity investing. TEMPLETON. Founded in 1940, Templeton pioneered international investing and, in 1954, launched what has become the industry's oldest global fund. Today, with research offices in over 25 countries, they offer investors the broadest global reach in the industry. MUTUAL SERIES. Founded in 1949, Mutual Series is dedicated to a unique style of value investing, searching aggressively for opportunity among undervalued stocks, arbitrage situations and distressed companies. TRUE DIVERSIFICATION Because our management groups work independently and adhere to distinctly different investment approaches, Franklin, Templeton and Mutual Series funds typically have a low overlap of securities. That's why our funds can be used to build truly diversified portfolios covering every major asset class. RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to consistently provide investors with exceptional risk-adjusted returns over the long term, as well as the reliable account services that have helped us become one of the most trusted names in financial services. MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS [photo omitted] Not part of the semiannual report Contents SHAREHOLDER LETTER ................ 1 SEMIANNUAL REPORT Templeton China World Fund ........ 3 Performance Summary ............... 8 Your Fund's Expenses .............. 11 Financial Highlights and Statement of Investments .......... 13 Financial Statements .............. 20 Notes to Financial Statements ..... 23 Shareholder Information ........... 34 Semiannual Report Templeton China World Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Templeton China World Fund seeks long-term capital appreciation. Under normal market conditions, the Fund invests at least 80% of its net assets in securities of "China companies," as defined in the Fund's prospectus. - -------------------------------------------------------------------------------- [GRAPHIC OMITTED] EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC AS FOLLOWS: Geographic Distribution 2 Based on Total Net Assets as of 2/28/05 China ........................ 31.9% Hong Kong .................... 26.5% Taiwan ....................... 26.4% U.K .......................... 3.7% South Korea................... 1.2% Short-Term Investments & Other Net Assets ............. 10.3% - -------------------------------------------------------------------------------- This semiannual report for Templeton China World Fund covers the period ended February 28, 2005. PERFORMANCE OVERVIEW For the six months under review, Templeton China World Fund - Class A delivered a +15.39% cumulative total return. The Fund underperformed its benchmark, the Morgan Stanley Capital International (MSCI) China Index, which posted a 19.03% cumulative total return. 1 For comparison, the Standard & Poor's/International Finance Corporation (S&P/IFC) Investable PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. 1. Source: Standard & Poor's Micropal. The MSCI China Index is market capitalization weighted and measures total returns of equity securities available to foreign (non-local) investors in China. The index is unmanaged and includes reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 17. Semiannual Report | 3 China Index posted a 17.88% cumulative total return for the same period. 2 In line with our long-term investment strategy, we are pleased with our long-term results, which you will find in the Performance Summary beginning on page 8. For example, for the 10-year period ended February 28, 2005, the Fund's Class A shares delivered a +139.35% cumulative total return, compared with the MSCI China Index's -50.25% cumulative total return for the same period. 1 Please note that index performance information is provided for reference and that we do not attempt to track the index, but rather undertake investments on the basis of fundamental research. ECONOMIC AND MARKET OVERVIEW China's economy grew 9.5% in 2004 as strong export growth and consumer demand boosted gross domestic product (GDP) growth in the last quarter of the year. 3 In 2004, exports totaled US$593 billion, while imports registered US$561 billion, resulting in a trade surplus of US$32 billion, up 25.6% from 2003. 3 Signaling the country's global importance and export strength, China (including Hong Kong) became Japan's largest trade partner, surpassing the U.S. In addition, Asian, Latin American and European markets signed numerous trade and research agreements as well as various business contracts with China during the period. Consumer prices continued on a downward trend in January 2005, easing pressure on the central bank to increase interest rates. January's consumer price index (CPI) rose 1.9%, down from December's 2.4% increase, and was the slowest pace in 14 months. 3 Foreign direct investment inflows totaled US$60.6 billion, exceeding 2003's US$53.5 billion, as foreign investors continued to seek investment opportunities in the country. 3 Taiwan's economy grew 5.7% in 2004 mainly supported by global demand for its exports. 4 However, some analysts expect GDP to slow in 2005 as external trade, a large contributor to the island's GDP, continued to weaken. 4 Representing a significant breakthrough in cross-strait relations, China and Taiwan agreed to study the possibility of non-stop flights. Hong Kong released strong economic data with fourth quarter 2004 GDP growing 7.1% compared with the same period a year earlier due to improving 2. Source: Standard & Poor's Micropal. The S&P/IFC Investable China Index is a free float-adjusted, market capitalization-weighted index designed to measure performance of equity securities in China. The index is unmanaged and includes reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 3. Source: National Bureau of Statistics of China. 4. Source: Directorate-General of Budget. 4 | Semiannual Report trade, tourism and consumer confidence. 5 Unemployment continued on a downward trend, registering 6.4% in January, its lowest level in three years. 5 In what some viewed as a controversial move, Hong Kong's Housing Authority indefinitely delayed the listing of the Link Real Estate and Investment Trust, which if completed, would have been Hong Kong's largest initial public offering in 2004. Despite recording double-digit gains, greater China markets underperformed their emerging markets counterparts. High oil prices, concerns over China's economy overheating, and tension between Taiwan and China led investors to adopt a more cautious stance toward investing in the region. Although the Taiwanese market gained 16.52% in U.S. dollar terms for the six-month period, a large part of that return resulted from a weakening U.S. dollar. 6 The Hong Kong market benefited from greater capital inflows, strong economic growth and greater consumer confidence. INVESTMENT STRATEGY Our investment strategy employs a bottom-up, value-oriented, long-term approach. We focus on the market price of a company's securities relative to our evaluation of the company's long-term earnings, asset value and cash flow potential. As we look for investments, we consider specific companies, rather than sectors, while doing in-depth research to construct an action list from which we make our buy decisions. Before we make a purchase, we look at the company's potential for earnings and growth over a five-year horizon. MANAGER'S DISCUSSION During the period under review, the Fund's performance benefited from an overweighted position, relative to the MSCI China Index, in China International Marine Containers, the world's largest marine container manufacturer. Our overweighted positions in the semiconductors and semiconductor equipment sector and electronic equipment and instruments sector also positively affected the Fund. Within these sectors, the strongest contributors included Taiwan Semiconductor Manufacturing and Delta Electronics. An underweighted position in wireless telecommunication services, particularly in China Mobile (Hong Kong), also supported performance. TOP 10 EQUITY HOLDINGS 2/28/05 - -------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY, COUNTRY NET ASSETS - -------------------------------------------------- Dairy Farm International Holdings Ltd. 9.2% FOOD & STAPLES RETAILING, HONG KONG - -------------------------------------------------- China Mobile (Hong Kong) Ltd. 5.9% WIRELESS TELECOMMUNICATION SERVICES, CHINA - -------------------------------------------------- China Petroleum & Chemical Corp., H 5.8% OIL & GAS, CHINA - -------------------------------------------------- Cheung Kong Holdings Ltd. 4.4% REAL ESTATE, HONG KONG - -------------------------------------------------- HSBC Holdings PLC 3.7% COMMERCIAL BANKS, U.K - -------------------------------------------------- Acer Inc. 3.4% COMPUTERS & PERIPHERALS, TAIWAN - -------------------------------------------------- Cheung Kong Infrastructure Holdings Ltd. 3.4% ELECTRIC UTILITIES, HONG KONG - -------------------------------------------------- China Resources Enterprise Ltd. 3.3% DISTRIBUTORS, CHINA - -------------------------------------------------- PetroChina Co. Ltd., H 3.1% OIL & GAS, CHINA - -------------------------------------------------- China International Marine Containers Co. Ltd., B 2.8% MACHINERY, CHINA 5. Source: Census and Statistics Department. 6. Source: Standard & Poor's Micropal. Semiannual Report | 5 Some of our positioning, an underweighted exposure to energy and materials as well as an overweighted position in food and staples retailing, hindered relative performance. 7 For example, an underweighted position in PetroChina and no positions in CNOOC and Yanzhou Coal Mining negatively affected Fund performance. We did not hold CNOOC because, in our view, we found better value in other companies, such as PetroChina, within the same sector. Within food and staples retailing, the Fund's Dairy Farm International Holdings position detracted from relative performance. However, consistent with our strategy, we continued to believe Dairy Farm, a conglomerate with core interests in supermarkets, drugstores, convenience stores and restaurant businesses, was well positioned to benefit from Asia's strengthening consumer market over the long term. It is important to recognize the effect of currency movements on the Fund's performance. In general, if the value of the U.S. dollar increases compared with a foreign currency, an investment traded in that foreign currency will decrease in value because it will be worth fewer U.S. dollars. This can have a negative effect on Fund performance. Conversely, when the U.S. dollar weakens in relation to a foreign currency, an investment traded in that foreign currency will increase in value, which can contribute to Fund performance. For the six months ended February 28, 2005, the U.S. dollar declined in value relative to most non-U.S. currencies. While 79.0% of the Fund's total net assets were in non-U.S. dollar currencies at period-end (excluding cash, Dairy Farm and Hong Kong Land Holdings, which trade in U.S. dollars), 51.0% (including HSBC and China and Hong Kong holdings) was in Hong Kong dollars, which is pegged to the U.S. dollar and did not experience any significant impact from a weaker U.S. dollar due to a very narrow exchange rate band. The balance was in non-U.S. dollar and non-Hong Kong dollar assets and was positively affected by a weaker U.S. dollar. However, one cannot expect the same result in future periods. During the six-month period, the Fund repositioned its Taiwanese holdings. We sold stocks in the commercial banks sector and increased our exposure to the semiconductors and semiconductor equipment sector and leisure equipment and products sector. Key additions included Taiwan Semiconductor Manufacturing, a leading global integrated circuit producer; Siliconware 7. The energy sector comprises oil and gas in the SOI; the materials sector comprises construction materials and metals and mining. 6 | Semiannual Report Precision Industries, one of the biggest worldwide independent chip packaging and testing services providers; and Premier Image Technology, one of the world's largest digital camera manufacturers. Other major investments included PetroChina, which owns over 70% of China's oil and gas reserves and continued to benefit from high oil prices, and Air China, China's national airline as well as the country's largest commercial airline. The Fund also realized gains on Red Chip share China Merchants Holdings, a conglomerate specializing in infrastructure, allowing us to invest the proceeds in what we considered value stocks. Thank you for your continued participation in Templeton China World Fund. We look forward to serving your future investment needs. [photo omitted] /s/Mark Mobius - -------------- Mark Mobius Portfolio Manager Templeton China World Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF FEBRUARY 28, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. Semiannual Report | 7 Performance Summary as of 2/28/05 Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes due on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION - ------------------------------------------------------------------------------------------------------- CLASS A CHANGE 2/28/05 8/31/04 - ------------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$2.55 $20.52 $17.97 - ------------------------------------------------------------------------------------------------------- DISTRIBUTIONS (9/1/04-2/28/05) - ------------------------------------------------------------------------------------------------------- Dividend Income $0.1895 - ------------------------------------------------------------------------------------------------------- CLASS B CHANGE 2/28/05 8/31/04 - ------------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$2.55 $20.39 $17.84 - ------------------------------------------------------------------------------------------------------- DISTRIBUTIONS (9/1/04-2/28/05) - ------------------------------------------------------------------------------------------------------- Dividend Income $0.1152 - ------------------------------------------------------------------------------------------------------- CLASS C CHANGE 2/28/05 8/31/04 - ------------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$2.57 $20.42 $17.85 - ------------------------------------------------------------------------------------------------------- DISTRIBUTIONS (9/1/04-2/28/05) - ------------------------------------------------------------------------------------------------------- Dividend Income $0.1055 - ------------------------------------------------------------------------------------------------------- ADVISOR CLASS CHANGE 2/28/05 8/31/04 - ------------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$2.56 $20.59 $18.03 - ------------------------------------------------------------------------------------------------------- DISTRIBUTIONS (9/1/04-2/28/05) - ------------------------------------------------------------------------------------------------------- Dividend Income $0.2269 - -------------------------------------------------------------------------------------------------------
8 | Semiannual Report Performance Summary (CONTINUED) PERFORMANCE 1 CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES.
- ---------------------------------------------------------------------------------------------------- CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ---------------------------------------------------------------------------------------------------- Cumulative Total Return 2 +15.39% +7.66% +99.30% +139.35% Average Annual Total Return 3 +8.75% +1.47% +13.44% +8.48% Value of $10,000 Investment 4 $10,875 $10,147 $18,784 $22,558 Avg. Ann. Total Return (3/31/05) 5 +5.06% +11.96% +8.12% - ---------------------------------------------------------------------------------------------------- CLASS B 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ---------------------------------------------------------------------------------------------------- Cumulative Total Return 2 +15.08% +6.93% +92.78% +124.88% Average Annual Total Return 3 +11.08% +2.93% +13.79% +8.44% Value of $10,000 Investment 4 $11,108 $10,293 $19,078 $22,488 Avg. Ann. Total Return (3/31/05) 5 +6.67% +12.28% +8.09% - ---------------------------------------------------------------------------------------------------- CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ---------------------------------------------------------------------------------------------------- Cumulative Total Return 2 +15.07% +6.98% +92.86% +122.06% Average Annual Total Return 3 +14.07% +5.98% +14.04% +8.30% Value of $10,000 Investment 4 $11,407 $10,598 $19,286 $22,206 Avg. Ann. Total Return (3/31/05) 5 +9.72% +12.54% +7.94% - ---------------------------------------------------------------------------------------------------- ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ---------------------------------------------------------------------------------------------------- Cumulative Total Return 2 +15.63% +8.02% +103.02% +149.43% Average Annual Total Return 3 +15.63% +8.02% +15.21% +9.57% Value of $10,000 Investment 4 $11,563 $10,802 $20,302 $24,943 Avg. Ann. Total Return (3/31/05) 5 +11.84% +13.71% +9.21%
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. Semiannual Report | 9 Performance Summary (CONTINUED) ENDNOTES SPECIAL RISKS ARE ASSOCIATED WITH FOREIGN INVESTING, INCLUDING CURRENCY VOLATILITY, ECONOMIC INSTABILITY AND POLITICAL DEVELOPMENTS OF COUNTRIES WHERE THE FUND INVESTS. EMERGING MARKETS INVOLVE HEIGHTENED RISKS RELATED TO THE SAME FACTORS, IN ADDITION TO THOSE ASSOCIATED WITH THEIR RELATIVELY SMALL SIZE AND LESSER LIQUIDITY. ALSO, AS A NONDIVERSIFIED INVESTMENT COMPANY INVESTING IN "CHINA COMPANIES," THE FUND MAY INVEST IN A RELATIVELY SMALL NUMBER OF ISSUERS AND, AS A RESULT, BE SUBJECT TO GREATER RISK OF LOSS WITH RESPECT TO ITS PORTFOLIO SECURITIES. THE FUND MAY ALSO EXPERIENCE GREATER VOLATILITY THAN A FUND THAT IS MORE BROADLY DIVERSIFIED GEOGRAPHICALLY. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. 1. Effective after the close of business on 8/8/03, Templeton China World Fund, Inc. (Closed-End Fund), was converted into an open-end fund in a transaction whereby the Closed-End Fund transferred all of its assets, subject to its liabilities, to the Fund in exchange for Advisor Class shares. Total return information is based upon the Closed-End Fund's performance (as calculated using net asset values, not market values), which has been restated to reflect all charges, fees and expenses currently applicable to the Fund and each class. The Closed-End Fund was offered without a sales charge and Rule 12b-1 fees. On 8/11/03, the Fund began offering Class A, B and C shares. For periods prior to 8/11/03, performance quotations are based upon the Closed-End Fund's performance restated to take into account all charges, fees and expenses applicable to the Fund and each class, including that class's current, applicable, maximum sales charges and Rule 12b-1 fees. Beginning on 8/11/03, actual class performance is used reflecting all charges, fees and expenses applicable to the Fund and each class. 2. Cumulative total return represents the change in value of an investment over the periods indicated and does not include a sales charge. 3. Average annual total return represents the average annual change in value of an investment over the periods indicated and includes any current, applicable, maximum sales charge. Six-month return has not been annualized. 4. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated and include any current, applicable, maximum sales charge. 5. In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter. 10 | Semiannual Report Your Fund's Expenses As a Fund shareholder, you can incur two types of costs: o Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and o Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table below provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period, by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Semiannual Report | 11 Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
- ------------------------------------------------------------------------------------------------------- BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING CLASS A VALUE 8/31/04 VALUE 2/28/05 PERIOD* 8/31/04-2/28/05 - ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,153.90 $11.27 Hypothetical (5% return before expenses) $1,000 $1,014.33 $10.54 - ------------------------------------------------------------------------------------------------------- CLASS B - ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,150.80 $14.67 Hypothetical (5% return before expenses) $1,000 $1,011.16 $13.71 - ------------------------------------------------------------------------------------------------------- CLASS C - ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,150.70 $14.34 Hypothetical (5% return before expenses) $1,000 $1,011.46 $13.42 - ------------------------------------------------------------------------------------------------------- ADVISOR CLASS - ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,156.30 $ 9.41 Hypothetical (5% return before expenses) $1,000 $1,016.07 $ 8.80 - -------------------------------------------------------------------------------------------------------
*Expenses are equal to the annualized expense ratio for each class (A: 2.11%; B: 2.75%; C: 2.69%; and Advisor: 1.76%), multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period. 12 | Semiannual Report Templeton China World Fund FINANCIAL HIGHLIGHTS
------------------------------------------- SIX MONTHS ENDED YEAR ENDED FEBRUARY 28, 2005 AUGUST 31, ------------------------------------------- CLASS A (UNAUDITED) 2004 2003f ------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............................................... $17.97 $14.89 $14.30 ------------------------------------------- Income from investment operations: Net investment income (loss) a .................................................... (.11) .21 .12 Net realized and unrealized gains ................................................. 2.85 3.24 .40 ------------------------------------------- Total from investment operations ................................................... 2.74 3.45 .52 ------------------------------------------- Less distributions from net investment income ...................................... (.19) (.40) -- ------------------------------------------- Redemption fees .................................................................... -- c .03 .07 ------------------------------------------- Net asset value, end of period ..................................................... $20.52 $17.97 $14.89 =========================================== Total return b ..................................................................... 15.39% 23.80% 4.13% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) .................................................. $75,773 $43,179 $3,166 Ratios to average net assets: Expenses .......................................................................... 2.11% d 2.14% e 3.03% g Net investment income (loss) ...................................................... (1.12)% d 1.09% 38.74% g Portfolio turnover rate ............................................................ 5.35% 30.82% 19.99%
aBased on average daily shares outstanding. bTotal return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. cAmount is less than $0.01 per share. dAnnualized. eRatio of expenses to average net assets, excluding payments by affiliate were 2.30% (Note 7). fFor the period August 11, 2003 (effective date) to August 31, 2003. gRepresents annualized ratios for a 21 day period and therefore are not representative of the Fund's income and expense for the entire fiscal year. Semiannual Report | See notes to financial statements. | 13 Templeton China World Fund FINANCIAL HIGHLIGHTS (CONTINUED)
------------------------------------------- SIX MONTHS ENDED YEAR ENDED FEBRUARY 28, 2005 AUGUST 31, CLASS B (UNAUDITED) 2004 2003f ------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............................................... $17.84 $14.88 $14.30 ------------------------------------------- Income from investment operations: Net investment income (loss) a ..................................................... (.17) .16 .08 Net realized and unrealized gains .................................................. 2.84 3.16 .43 ------------------------------------------- Total from investment operations ................................................... 2.67 3.32 .51 ------------------------------------------- Less distributions from net investment income ...................................... (.12) (.39) -- ------------------------------------------- Redemption fees .................................................................... -- c .03 .07 ------------------------------------------- Net asset value, end of period ..................................................... $20.39 $17.84 $14.88 =========================================== Total return b ..................................................................... 15.08% 22.95% 4.06% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) .................................................. $12,112 $8,630 $362 Ratios to average net assets: Expenses .......................................................................... 2.75% d 2.79% e 3.68% g Net investment income (loss) ...................................................... (1.76)% d .44% 38.09% g Portfolio turnover rate ............................................................ 5.35% 30.82% 19.99%
aBased on average daily shares outstanding. bTotal return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. cAmount is less than $0.01 per share. dAnnualized. eRatio of expenses to average net assets, excluding payments by affiliate were 2.95% (Note 7). fFor the period August 11, 2003 (effective date) to August 31, 2003. gRatio represents annualized ratios for a 21 day period and therefore are not representative of the Fund's income and expense for the entire fiscal year. 14 | See notes to financial statements. | Semiannual Report Templeton China World Fund FINANCIAL HIGHLIGHTS (CONTINUED)
------------------------------------------- SIX MONTHS ENDED YEAR ENDED FEBRUARY 28, 2005 AUGUST 31, CLASS C (UNAUDITED) 2004 2003F ------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............................................... $17.85 $14.88 $14.30 ------------------------------------------- Income from investment operations: Net investment income (loss) a .................................................... (.16) .12 .11 Net realized and unrealized gains ................................................. 2.84 3.21 .40 ------------------------------------------- Total from investment operations ................................................... 2.68 3.33 .51 ------------------------------------------- Less distributions from net investment income ...................................... (.11) (.39) -- ------------------------------------------- Redemption fees .................................................................... -- c .03 .07 ------------------------------------------- Net asset value, end of period ..................................................... $20.42 $17.85 $14.88 =========================================== Total return b ..................................................................... 15.07% 23.02% 4.06% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) .................................................. $30,472 $20,603 $652 Ratios to average net assets: Expenses .......................................................................... 2.69% d 2.75% e 3.68% g Net investment income (loss) ...................................................... (1.70)% d .48% 38.09% g Portfolio turnover rate ............................................................ 5.35% 30.82% 19.99%
aBased on average daily shares outstanding. bTotal return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. cAmount is less than $0.01 per share. dAnnualized. eRatio of expenses to average net assets, excluding payments by affiliate were 2.91% (Note 7). fFor the period August 11, 2003 (effective date) to August 31, 2003. gRepresents annualized ratios for a 21 day period and therefore are not representative of the Fund's income and expense for the entire fiscal year. Semiannual Report | See notes to financial statements. | 15 Templeton China World Fund FINANCIAL HIGHLIGHTS (CONTINUED)
--------------------------------------------------------------------------- SIX MONTHS ENDED FEBRUARY 28, 2005 YEAR ENDED AUGUST 31, ADVISOR CLASS (UNAUDITED) 2004 2003G 2002 2001 2000 -------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .............. $18.03 $14.90 $10.64 $9.52 $11.33 $9.83 Income from investment operations: Net investment income (loss) a ................... (.07) .24 .43 .21 .18 .23 Net realized and unrealized gains (losses) ....... 2.86 3.27 4.08 .98 (1.98) 1.42 --------------------------------------------------------------------------- Total from investment operations .................. 2.79 3.51 4.51 1.19 (1.80) 1.65 --------------------------------------------------------------------------- Capital share repurchases ......................... -- -- -- .11 .09 .07 --------------------------------------------------------------------------- Less distributions from net investment income ..... (.23) (.41) (.32) (.18) (.10) (.22) --------------------------------------------------------------------------- Redemption fees ................................... -- d .03 .07 -- -- -- --------------------------------------------------------------------------- Net asset value, end of period .................... $20.59 $18.03 $14.90 $10.64 $9.52 $11.33 =========================================================================== Market value, end of period b ..................... -- -- -- $9.10 $7.73 $8.00 =========================================================================== Total return (based on market value per share) .... -- -- -- 20.27% (2.14)% 7.86% Total return (based on net asset value per share) c ..................................... 15.63% 24.21% 43.95% -- -- -- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ................. $174,885 $161,599 $181,913 $173,204 $172,209 $213,953 Ratios to average net assets: Expenses ......................................... 1.76% e 1.79% f 2.10% f 1.66% 1.66% 1.68% Net investment income (loss) ..................... (.77)% e 1.44% 3.66% 2.01% 1.70% 2.21% Portfolio turnover rate ........................... 5.35% 30.82% 19.99% 44.62% 83.85% 142.49%
aBased on average daily shares outstanding. bBased on the last sale of the New York Stock Exchange. cTotal return is not annualized for periods less than one year. dAmount is less than $0.01 per share. eAnnualized. fRatio of expenses to average net assets, excluding payments by affiliate for the years ended August 31, 2003 and 2004, were 2.63% and 1.95%, respectively (Note 7). gOn August 8, 2003, the Fund converted from a closed-end fund to an open-end fund whereby the shares of the closed-end fund were exchanged for Advisor Class shares. Based on historical information, the information included is for operation of the Fund as a closed-end fund, and does not reflect expenses applicable to an open-end fund. 16 | See notes to financial statements. | Semiannual Report Templeton China World Fund STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------- COUNTRY SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS 89.7% AIRLINES .5% a Air China Ltd. ................................................... China 2,926,000 $ 1,125,536 a Air China Ltd., 144A ............................................. China 500,000 192,334 --------------- 1,317,870 --------------- AUTO COMPONENTS 2.3% Cheng Shin Rubber Industry Co. Ltd. .............................. Taiwan 5,061,328 6,334,802 Weifu High-Technology Co. Ltd., B ................................ China 598,916 552,920 --------------- 6,887,722 --------------- AUTOMOBILES .2% Kia Motors Corp. ................................................. South Korea 50,470 713,463 --------------- CAPITAL MARKETS 1.0% Yuanta Core Pacific Securities Co. ............................... Taiwan 3,711,486 2,985,430 --------------- COMMERCIAL BANKS 7.4% Chinatrust Financial Holding Co. Ltd. ............................ Taiwan 2,407,655 2,874,003 HSBC Holdings PLC ................................................ United Kingdom 626,027 10,716,135 Mega Financial Holdings Co. Ltd. ................................. Taiwan 11,941,000 8,068,243 --------------- 21,658,381 --------------- COMMUNICATIONS EQUIPMENT 1.2% D-Link Corp. ..................................................... Taiwan 2,951,565 3,513,768 --------------- COMPUTERS & PERIPHERALS 6.9% Acer Inc. ........................................................ Taiwan 6,208,454 10,087,739 Asustek Computer Inc. ............................................ Taiwan 1,102,062 3,155,840 Lenovo Group Ltd. ................................................ China 3,362,789 959,386 Lite-On Technology Corp. ......................................... Taiwan 5,564,300 6,033,363 --------------- 20,236,328 --------------- CONSTRUCTION MATERIALS .8% Anhui Conch Cement Co. Ltd., H ................................... China 2,192,000 2,417,146 --------------- DISTRIBUTORS 3.7% China Resources Enterprise Ltd. .................................. China 6,700,000 9,535,899 Test-Rite International Co. Ltd. ................................. Taiwan 2,182,620 1,404,517 --------------- 10,940,416 --------------- DIVERSIFIED TELECOMMUNICATION SERVICES 1.5% China Telecom Corp. Ltd., H ...................................... China 11,773,833 4,491,265 --------------- ELECTRIC UTILITIES 7.4% Cheung Kong Infrastructure Holdings Ltd. ......................... Hong Kong 3,320,548 10,069,427 Datang International Power Generation Co. Ltd., H ................ China 9,620,320 7,462,920 Guangdong Electric Power Development Co. Ltd., B ................. China 4,526,963 2,391,487 Huadian Power International Corp. Ltd., H ........................ China 2,870,000 873,996 Huaneng Power International Inc., H .............................. China 1,218,776 945,460 --------------- 21,743,290 --------------- ELECTRICAL EQUIPMENT .2% Phoenixtec Power Co. Ltd. ........................................ Taiwan 454,055 524,472 --------------- Semiannual Report | 17 Templeton China World Fund STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (UNAUDITED) (CONTINUED) - --------------------------------------------------------------------------------------------------------------------------- COUNTRY SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) ELECTRONIC EQUIPMENT & INSTRUMENTS 2.7% Delta Electronics Inc. ........................................... Taiwan 4,076,520 $ 7,148,338 Synnex Technology International Corp. ............................ Taiwan 443,000 662,789 --------------- 7,811,127 --------------- FOOD & STAPLES RETAILING 10.9% Dairy Farm International Holdings Ltd. ........................... Hong Kong 10,219,776 27,082,406 President Chain Store Corp. ...................................... Taiwan 2,844,088 4,804,203 --------------- 31,886,609 --------------- FOOD PRODUCTS .8% Tingyi (Cayman Islands) Holding Corp. ............................ China 962,827 232,097 UNI-President Enterprises Corp. .................................. Taiwan 4,347,950 2,196,359 --------------- 2,428,456 --------------- HOTELS RESTAURANTS & LEISURE 2.5% Hong Kong & Shanghai Hotels Ltd. ................................. Hong Kong 7,892,757 7,185,400 --------------- HOUSEHOLD DURABLES .4% TCL International Holdings Inc. .................................. China 5,052,000 1,172,481 --------------- INDUSTRIAL CONGLOMERATES 2.2% CITIC Pacific Ltd. ............................................... China 860,092 2,497,911 Shanghai Industrial Holdings Ltd. ................................ China 1,810,253 4,073,618 --------------- 6,571,529 --------------- LEISURE EQUIPMENT & PRODUCTS .5% Premier Image Technology Corp. ................................... Taiwan 1,086,000 1,327,799 --------------- MACHINERY 3.3% China International Marine Containers Co. Ltd., B ................ China 3,020,915 8,114,960 Yung Tay Engineering Co. Ltd. .................................... Taiwan 2,524,000 1,567,349 --------------- 9,682,309 --------------- METALS & MINING .1% Aluminum Corp. of China Ltd., H .................................. China 372,000 250,418 --------------- OFFICE ELECTRONICS .4% Kinpo Electronics Inc. ........................................... Taiwan 2,897,760 1,272,665 --------------- OIL & GAS 8.9% China Petroleum & Chemical Corp., H .............................. China 37,309,395 17,102,442 PetroChina Co. Ltd., H ........................................... China 14,261,903 9,006,324 --------------- 26,108,766 --------------- REAL ESTATE 8.4% Cheung Kong Holdings Ltd. ........................................ Hong Kong 1,360,690 12,954,466 Henderson China Holdings Ltd. .................................... Hong Kong 4,505,684 2,946,421 Henderson Investment Ltd. ........................................ Hong Kong 2,888,756 4,278,157 Hong Kong Land Holdings Ltd. ..................................... Hong Kong 1,645,000 4,359,250 --------------- 24,538,294 --------------- 18 | Semiannual Report Templeton China World Fund STATEMENT OF INVESTMENTS, FEBRUARY 28, 2005 (UNAUDITED) (CONTINUED) - --------------------------------------------------------------------------------------------------------------------------- COUNTRY SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 4.7% Samsung Electronics Co. Ltd. ..................................... South Korea 5,510 $ 2,890,761 Siliconware Precision Industries Co. Ltd. ........................ Taiwan 1,549,000 1,445,335 Sunplus Technology Co. Ltd. ...................................... Taiwan 1,683,660 2,735,677 Taiwan Semiconductor Manufacturing Co. ........................... Taiwan 3,724,000 6,590,090 --------------- 13,661,863 --------------- SPECIALTY RETAIL .4% I.T Ltd., 144A ................................................... Hong Kong 1,262,000 315,542 Tack Fat Group International Ltd. ................................ Hong Kong 6,352,000 863,337 --------------- 1,178,879 --------------- TRANSPORTATION INFRASTRUCTURE 3.6% China Merchants Holdings (International) Co. Ltd. ................ China 1,263,216 2,656,350 Cosco Pacific Ltd. ............................................... Hong Kong 3,489,449 7,785,204 --------------- 10,441,554 --------------- WIRELESS TELECOMMUNICATION SERVICES 6.8% China Mobile (Hong Kong) Ltd. .................................... China 5,322,770 17,369,581 Taiwan Cellular Corp. ............................................ Taiwan 2,496,930 2,691,350 --------------- 20,060,931 --------------- TOTAL COMMON STOCKS (COST $170,165,076) .......................... 263,008,631 --------------- ---------------- PRINCIPAL AMOUNT ---------------- SHORT TERM INVESTMENTS (COST $25,227,208) 8.6% b U.S. Treasury Bill, 3/03/05 - 5/26/05 ............................ United States $ 25,334,000 25,224,488 --------------- TOTAL INVESTMENTS (COST $195,392,284) 98.3% ...................... 288,233,119 OTHER ASSETS, LESS LIABILITIES 1.7% .............................. 5,009,540 --------------- NET ASSETS 100.0% ................................................ $ 293,242,659 ===============
aNon-income producing. bSecurity is traded on a discount basis with no stated coupon rate. Semiannual Report | See notes to financial statements. | 19 Templeton China World Fund FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES February 28, 2005 (unaudited)
Assets: Investments in securities: Cost ............................................................... $195,392,284 ============= Value .............................................................. $288,233,119 Foreign currency, at value (cost $187,890) .......................... 187,261 Receivables: Investment securities sold ......................................... 346,323 Capital shares sold ................................................ 6,066,604 Dividends and interest ............................................. 22,901 ------------- Total assets ................................................... 294,856,208 ------------- Liabilities: Payables: Investment securities purchased .................................... 755,849 Capital shares redeemed ............................................ 255,683 Affiliates ......................................................... 437,866 Funds advanced by custodian ......................................... 30,310 Other liabilities ................................................... 133,841 ------------- Total liabilities .............................................. 1,613,549 ------------- Net assets, at value ......................................... $293,242,659 ============= Net assets consist of: Distributions in excess of net investment income .................... $(1,236,401) Net unrealized appreciation (depreciation) .......................... 92,840,931 Accumulated net realized gain (loss) ................................ (39,462,025) Capital shares ...................................................... 241,100,154 ------------- Net assets, at value ......................................... $293,242,659 ============= CLASS A: Net assets, at value ................................................ $75,773,249 ============= Shares outstanding .................................................. 3,692,124 ============= Net asset value per share a ......................................... $20.52 ============= Maximum offering price per share (net asset value per share / 94.25%) $21.77 ============= CLASS B: Net assets, at value ................................................ $12,112,311 ============= Shares outstanding .................................................. 593,888 ============= Net asset value and maximum offering price per share a .............. $20.39 ============= CLASS C: Net assets, at value ................................................ $30,471,785 ============= Shares outstanding .................................................. 1,492,240 ============= Net asset value and maximum offering price per share a .............. $20.42 ============= ADVISOR CLASS: Net assets, at value ................................................ $174,885,314 ============= Shares outstanding .................................................. 8,493,795 ============= Net asset value and maximum offering price per share a .............. $20.59 =============
aRedemption price is equal to net asset value less contingent deferred sales charges, if applicable, and redemption fees retained by the Fund. 20 | See notes to financial statements. | Semiannual Report Templeton China World Fund FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF OPERATIONS for the six months ended February 28, 2005 (unaudited)
Investment income: Dividends (net of foreign taxes of $116,773) ................................ $ 1,107,839 Interest (net of foreign taxes of $30) ...................................... 156,032 ------------ Total investment income ................................................ 1,263,871 ------------ Expenses: Management fees (Note 3) .................................................... 1,615,099 Administrative fees (Note 3) ................................................ 253,858 Distribution fees (Note 3) Class A .................................................................... 97,002 Class B .................................................................... 49,738 Class C .................................................................... 112,700 Transfer agent fees (Note 3) ................................................ 194,400 Custodian fees (Note 4) ..................................................... 103,600 Reports to shareholders ..................................................... 22,100 Registration and filing fees ................................................ 19,400 Professional fees ........................................................... 11,800 Trustees' fees and expenses ................................................. 17,900 Other ....................................................................... 3,500 ------------ Total expenses ......................................................... 2,501,097 ------------ Expense reductions (Note 4) ............................................ (997) Net expenses ......................................................... 2,500,100 ------------ Net investment income (loss) ....................................... (1,236,229) ------------ Realized and unrealized gains (losses): Net realized gain (loss) from: Investments ................................................................ 4,015,992 Foreign currency transactions .............................................. 16,408 ------------ Net realized gain (loss) ............................................... 4,032,400 ------------ Net change in unrealized appreciation (depreciation) on: Investments ................................................................ 34,328,842 Translation of assets and liabilities denominated in foreign currencies .... 2,112 ------------ Net change in unrealized appreciation (depreciation) ................... 34,330,954 ------------ Net realized and unrealized gain (loss) ...................................... 38,363,354 ------------ Net increase (decrease) in net assets resulting from operations .............. $37,127,125 ============
Semiannual Report | See notes to financial statements. | 21 Templeton China World Fund FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS for the six months ended February 28, 2005 (unaudited) and the year August 31, 2004
------------------------------------- SIX MONTHS ENDED YEAR ENDED FEBRUARY 28, 2005 AUGUST 31, 2004 ------------------------------------- Increase (decrease) in net assets: Operations: Net investment income (loss) ......................................................... $ (1,236,229) $ 3,049,578 Net realized gain (loss) from investments and foreign currency transactions .......... 4,032,400 29,315,112 Net change in unrealized appreciation (depreciation) on investments and translation of assets and liabilities denominated in foreign currencies ............................ 34,330,954 13,659,802 ---------------------------------- Net increase (decrease) in net assets resulting from operations .................. 37,127,125 46,024,492 ---------------------------------- Distributions to shareholders from: Net investment income: Class A ............................................................................. (489,886) (403,504) Class B ............................................................................. (58,609) (41,117) Class C ............................................................................. (125,851) (120,259) Advisor Class ....................................................................... (1,971,461) (4,688,513) ---------------------------------- Total distributions to shareholders ................................................... (2,645,807) (5,253,393) ---------------------------------- Capital share transactions (Note 2): Class A ............................................................................. 25,089,104 35,872,551 Class B ............................................................................. 2,099,403 7,860,438 Class C ............................................................................. 6,468,418 18,750,834 Advisor Class ....................................................................... (8,914,296) (55,778,270) ---------------------------------- Total capital share transactions ...................................................... 24,742,629 6,705,553 ---------------------------------- Redemption fees ....................................................................... 6,628 443,024 ---------------------------------- Net increase (decrease) in net assets ............................................ 59,230,575 47,919,676 Net assets: Beginning of period ................................................................... 234,012,084 186,092,408 ---------------------------------- End of period ......................................................................... $293,242,659 $234,012,084 ================================== Distributions in excess of net investment income (undistributed net investment income) included in net assets: End of period ......................................................................... $ (1,236,401) $ 2,645,635 ==================================
22 | See notes to financial statements. | Semiannual Report Templeton China World Fund NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Templeton China World Fund (the Fund) is registered under the Investment Company Act of 1940 as a non-diversified, open-end investment company. The Fund seeks to achieve long-term capital appreciation. Under normal market conditions, the Fund invests at least 80% of its net assets in securities of "China companies" as defined in the Fund's prospectus. The following summarizes the Fund's significant accounting policies. On June 12, 2003, Fund shareholders approved an Agreement and Plan of Reorganization, which provided for the conversion of the Fund from a closed-end fund organized as a Maryland Corporation (the Closed-End Fund) into an open-end fund organized as a Delaware Statutory Trust. The conversion, which was a tax-free reorganization, was effective after the close of business on August 8, 2003. Trading of the Closed-End Fund's shares on the New York Stock Exchange, Inc. was suspended after the close of business on August 8, 2003. The Closed-End Fund's shareholders received Advisor Class shares of the Fund equivalent in number to, and with the same net asset value as, the Closed-End Fund's shares held on August 8, 2003. For six months following the conversion, former Closed-End Fund's shareholders who redeemed Advisor Class shares received in the conversion were subject to a 2% redemption fee. A. SECURITY VALUATION Securities listed on a securities exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. U.S. Government securities generally trade in the over-the-counter market rather than on a securities exchange. The Fund may utilize independent pricing services, quotations from bond dealers and information with respect to bond and note transactions, to assist in determining a current market value for each security. The Fund's pricing services may use valuation models or matrix pricing which considers information with respect to comparable bond and note transactions, quotations from bond dealers, or by reference to other securities that are considered comparable in such characteristics as rating, interest rate and maturity date, option adjusted spread models, prepayment projections, interest rate spreads and yield curves, to determine current value. Foreign securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or the NYSE, whichever is earlier. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day that the value of the foreign security is determined. If no sale is reported at that time, the foreign security will be valued within the range of the most recent quoted bid and ask prices. Semiannual Report | 23 Templeton China World Fund NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) A. SECURITY VALUATION (CONTINUED) The Fund has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Some methods for valuing these securities may include: fundamental analysis, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Fund's Board of Trustees. B. FOREIGN CURRENCY TRANSLATION Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Fund's Board of Trustees. The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. C. FOREIGN CURRENCY CONTRACTS When the Fund purchases or sells foreign securities it may enter into foreign exchange contracts to minimize foreign exchange risk from the trade date to the settlement date of the transactions. A foreign exchange contract is an agreement between two parties to exchange different currencies at an agreed upon exchange rate on a specified date. Realized and unrealized gains and losses are included in the Statement of Operations. 24 | Semiannual Report Templeton China World Fund NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) C. FOREIGN CURRENCY CONTRACTS (CONTINUED) The risks of these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the possible inability of the counterparties to fulfill their obligations under the contracts. D. INCOME TAXES No provision has been made for U.S. income taxes because the Fund's policy is to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code and to distribute substantially all of its taxable income. Fund distributions to shareholders are determined on an income tax basis and may differ from net investment income and realized gains for financial reporting purposes. E. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Dividend income and distributions to shareholders are recorded on the ex-dividend date. Realized and unrealized gains and losses and net investment income, other than class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. F. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America 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 amounts of income and expense during the reporting period. Actual results could differ from those estimates. G. REDEMPTION FEES Redemptions and exchanges of Fund shares held five trading days or less may be subject to the Fund's redemption fee, which is 2% of the amount redeemed. Such fees are retained by the Fund and accounted for as additional paid-in capital as noted in the Statements of Changes in Net Assets. Semiannual Report | 25 Templeton China World Fund NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) H. GUARANTEES AND INDEMNIFICATIONS Under the Fund's organizational documents, its officers and trustees are indemnified by the Fund against certain liability arising out of the performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts with service providers that contain general indemnification clauses. 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. However, based on experience, the Fund expects the risk of loss to be remote. 2. SHARES OF BENEFICIAL INTEREST The Fund offers four classes of shares: Class A, Class B, Class C and Advisor Class. Effective March 1, 2005, Class B shares will no longer be offered except to existing Class B shareholders through reinvested distributions or exchanges into other Franklin Templeton funds' Class B shares, as permitted by the applicable fund prospectus. Each class of shares differs by its initial sales load, contingent deferred sales charge, distribution fees, voting rights on matters affecting a single class and its exchange privilege. At February 28, 2005, there were an unlimited number of shares authorized (without par value). Transactions in the Fund's shares were as follows:
-------------------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED FEBRUARY 28, 2005 AUGUST 31, 2004 -------------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT -------------------------------------------------------------------- CLASS A SHARES: Shares sold .................... 1,635,432 $31,710,845 3,412,286 $ 57,588,116 Shares issued in reinvestment of distributions ............. 23,212 419,671 19,982 305,934 Shares redeemed ................ (369,685) (7,041,412) (1,241,700) (22,021,499) -------------------------------------------------------------------- Net increase (decrease) ........ 1,288,959 $25,089,104 2,190,568 $ 35,872,551 ====================================================================
26 | Semiannual Report Templeton China World Fund NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
-------------------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED FEBRUARY 28, 2005 AUGUST 31, 2004 SHARES AMOUNT SHARES AMOUNT -------------------------------------------------------------------- CLASS B SHARES: Shares sold .................... 152,039 $ 2,900,334 526,231 $ 9,032,972 Shares issued in reinvestment of distributions ............. 2,789 50,234 2,409 36,734 -------------------------------------------------------------------- Shares redeemed ................ (44,679) (851,165) (69,222) (1,209,268) ==================================================================== Net increase (decrease) ........ 110,149 $ 2,099,403 459,418 $ 7,860,438 CLASS C SHARES: Shares sold .................... 497,131 $ 9,488,816 1,562,207 $ 26,837,355 Shares issued in reinvestment of distributions ............. 5,672 102,262 5,807 88,548 -------------------------------------------------------------------- Shares redeemed ................ (164,989) (3,122,660) (457,378) (8,175,069) ==================================================================== Net increase (decrease) ........ 337,814 $ 6,468,418 1,110,636 $ 18,750,834 ADVISOR CLASS SHARES: Shares sold .................... 239,753 $ 4,647,312 855,577 $ 14,264,876 Shares issued in reinvestment of distributions ............. 34,752 629,702 109,770 1,685,293 Shares redeemed ................ (743,305) (14,191,310) (4,210,853) (71,728,439) -------------------------------------------------------------------- Net increase (decrease) ........ (468,800) $ (8,914,296) (3,245,506) $(55,778,270) ====================================================================
3. TRANSACTIONS WITH AFFILIATES Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Fund are also officers and/or directors of the following subsidiaries:
- ----------------------------------------------------------------------------------------- SUBSIDIARY AFFILIATION - ----------------------------------------------------------------------------------------- Templeton Asset Management Ltd. (TAML) Investment manager Franklin Templeton Services LLC (FT Services) Administrative manager Franklin Templeton Distributors Inc. (Distributors) Principal underwriter Franklin Templeton Investor Services LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES The Fund pays an investment management fee to TAML based on the Fund's average weekly net assets as follows: - ------------------------------------------------------------------------------ ANNUALIZED FEE RATE NET ASSETS - ------------------------------------------------------------------------------ 1.250% Up to and including $1 billion 1.200% Over $1 billion, up to and including $5 billion 1.150% Over $5 billion, up to and including $10 billion 1.100% Over $10 billion, up to and including $15 billion 1.050% Over $15 billion, up to and including $20 billion 1.000% Over $20 billion Semiannual Report | 27 Templeton China World Fund NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) B. ADMINISTRATIVE FEES The Fund pays an administrative fee to FT Services of 0.20% per year based on the Fund's average daily net assets. C. DISTRIBUTION FEES The Fund reimburses Distributors up to 0.35%, 1.00%, and 1.00% per year of the average daily net assets of Class A, Class B and Class C, respectively, for costs incurred in marketing the Fund's shares under a Rule 12b-1 plan. D. SALES CHARGES/UNDERWRITING AGREEMENTS Distributors has advised the Fund of the following commission transactions related to the sales and redemptions of the Fund's shares for the period: Net sales charges received ................................ $63,895 Contingent deferred sales charges retained ................ $18,369 E. TRANSFER AGENT FEES The Fund paid transfer agent fees of $194,400, of which $113,471 was paid to Investor Services. 4. EXPENSE OFFSET ARRANGEMENT The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund's custodian expenses. During the period ended February 28, 2005, the custodian fees were reduced as noted in the Statement of Operations. 5. INCOME TAXES At August 31, 2004, the Fund had tax basis capital losses which may be carried over to offset future capital gains. Such losses expire as follows: Capital loss carryovers expiring in: 2007 ..................................................... $22,831,689 2008 ..................................................... 45,311 2009 ..................................................... 1,256,834 2010 ..................................................... 17,884,154 ------------ $42,017,988 ============ At August 31, 2004, the Fund had deferred currency losses occurring subsequent to October 31, 2003 of $56,402. For tax purposes, such losses will be reflected in the year ending August 31, 2005. 28 | Semiannual Report Templeton China World Fund NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 5. INCOME TAXES (CONTINUED) Net investment income (loss) differs for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions. Net realized gains differ for financial statement and tax purposes primarily due to differing treatments of wash sales and foreign currency transactions. At February 28, 2005, the net unrealized appreciation (depreciation) based on the cost of investments for income tax purposes were as follows: Cost of investments ....................................... $196,470,815 ============= Unrealized appreciation ................................... $ 92,974,243 Unrealized depreciation ................................... (1,211,939) ------------- Net unrealized appreciation (depreciation) ................ $ 91,762,304 ============= 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short-term securities) for the period ended February 28, 2005 aggregated $14,316,115 and $12,876,162, respectively. 7. FEES, COSTS AND EXPENSES RELATING TO PAST LITIGATION On March 20, 2003, Templeton China World Fund, Inc., the Fund's predecessor Maryland Corporation (the "Closed-End Fund"), Templeton Dragon Fund, Inc. ("Dragon Fund"), a closed-end management investment company in Franklin Templeton Investments, TAML, the investment adviser to the Closed-End Fund and Dragon Fund, and Harvard College, Harvard Management Company, Inc. ("Harvard Management"), which is an investment advisor to Harvard College, and Steve Alperin, an officer of Harvard Management (referred to collectively as "Harvard"), announced a settlement of previously filed litigation claims against each other. The settlement resulted in, among other things, the dismissal of their litigation claims against each other. Under the terms of the Settlement Agreement, TAML agreed to reimburse the Closed-End Fund for the legal fees and expenses incurred by the Closed-End Fund and its directors with respect to the Settlement Agreement and the litigation. TAML also paid legal fees and expenses incurred by the Closed-End Fund through March 20, 2003, with respect to the Closed-End Fund's proxy contest relating to its 2003 Annual Shareholders' Meeting (the "Meeting"). The Closed-End Fund paid all other legal costs related to the proxy proposals considered at the Meeting, including the conversion of the Closed-End Fund to an open-end fund described above. Semiannual Report | 29 Templeton China World Fund NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 8. REGULATORY MATTERS INVESTIGATIONS As part of various investigations by a number of federal, state, and foreign regulators and governmental entities, including the Securities and Exchange Commission ("SEC"), the California Attorney General's Office ("CAGO"), and the National Association of Securities Dealers, Inc. ("NASD"), relating to certain practices in the mutual fund industry, including late trading, market timing and marketing support payments to securities dealers who sell fund shares, Franklin Resources, Inc. and certain of its subsidiaries (as used in this section, together, the "Company"), as well as certain current or former executives and employees of the Company, received subpoenas and/or requests for documents, information and/or testimony. The Company and its current employees provided documents and information in response to those requests and subpoenas. SETTLEMENTS Beginning in August 2004, the Company entered into settlements with certain regulators investigating the mutual fund industry practices noted above. The Company believes that settlement of each of the matters described in this section is in the best interest of the Company and shareholders of the Franklin, Templeton, and Mutual Series mutual funds (the "funds"). On August 2, 2004, Franklin Resources, Inc. announced that its subsidiary, Franklin Advisers, Inc., reached an agreement with the SEC that resolved the issues resulting from the SEC investigation into market timing activity. In connection with that agreement, the SEC issued an "Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 and Sections 9(b) and 9(f) of the Investment Company Act of 1940, Making Findings and Imposing Remedial Sanctions and a Cease-and-Desist Order" (the "Order"). The SEC's Order concerned the activities of a limited number of third parties that ended in 2000 and those that were the subject of the first Massachusetts administrative complaint described below. Under the terms of the SEC's Order, pursuant to which Franklin Advisers, Inc. neither admitted nor denied any of the findings contained therein, Franklin Advisers, Inc. agreed to pay $50 million, of which $20 million is a civil penalty, to be distributed to shareholders of certain funds in accordance with a plan to be developed by an independent distribution consultant. At this time, it is unclear which funds or which shareholders of any particular fund will receive distributions. The Order also required Franklin Advisers, Inc. to, among other things, enhance and periodically review compliance policies and procedures. On September 20, 2004, Franklin Resources, Inc. announced that two of its subsidiaries, Franklin Advisers, Inc. and Franklin Templeton Alternative Strategies, Inc. ("FTAS"), reached an agreement with the Securities Division of the Office of the Secretary of the Commonwealth of Massachusetts (the "State of Massachusetts") related to its administrative complaint filed on February 4, 2004, concerning one instance of market timing that was also a subject of the August 2, 2004 settlement that Franklin Advisers, Inc. reached with the SEC, as described above. 30 | Semiannual Report Templeton China World Fund NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 8. REGULATORY MATTERS (CONTINUED) SETTLEMENTS (CONTINUED) Under the terms of the settlement consent order issued by the State of Massachusetts, Franklin Advisers, Inc. and FTAS consented to the entry of a cease-and-desist order and agreed to pay a $5 million administrative fine to the State of Massachusetts (the "Massachusetts Consent Order"). The Massachusetts Consent Order included two different sections: "Statements of Fact" and "Violations of Massachusetts Securities Laws." Franklin Advisers, Inc. and FTAS admitted the facts in the Statements of Fact. On October 25, 2004, the State of Massachusetts filed a second administrative complaint, alleging that Franklin Resources, Inc.'s Form 8-K filing (in which it described the Massachusetts Consent Order and stated that "Franklin did not admit or deny engaging in any wrongdoing") failed to state that Franklin Advisers, Inc. and FTAS admitted the Statements of Fact portion of the Massachusetts Consent Order (the "Second Complaint"). Franklin Resources, Inc. reached a second agreement with the State of Massachusetts on November 19, 2004, resolving the Second Complaint. As a result of the November 19, 2004 settlement, Franklin Resources, Inc. filed a new Form 8-K. The terms of the Massachusetts Consent Order did not change and there was no monetary fine associated with this second settlement. On November 17, 2004, Franklin Resources, Inc. announced that Franklin Templeton Distributors, Inc. ("FTDI") reached an agreement with the CAGO, resolving the issues resulting from the CAGO's investigation concerning sales and marketing support payments. Under the terms of the settlement, FTDI neither admitted nor denied the allegations in the CAGO's complaint and agreed to pay $2 million to the State of California as a civil penalty, $14 million to the funds, to be allocated by an independent distribution consultant to be paid for by FTDI, and $2 million to the CAGO for its investigative costs. On December 13, 2004, Franklin Resources, Inc. announced that its subsidiaries FTDI and Franklin Advisers, Inc. reached an agreement with the SEC, resolving the issues resulting from the SEC's investigation concerning marketing support payments to securities dealers who sell fund shares. In connection with that agreement, the SEC issued an "Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions Pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940, Sections 9(b) and 9(f) of the Investment Company Act of 1940, and Section 15(b) of the Securities Exchange Act of 1934" (the "Second Order"). Under the terms of the Second Order, in which FTDI and Franklin Advisers, Inc. neither admitted nor denied the findings contained therein, they agreed to pay the funds a penalty of $20 million and disgorgement of $1 (one dollar). FTDI and Franklin Advisers, Inc. also agreed to implement certain measures and undertakings relating to marketing support payments to broker-dealers for the promotion or sale of fund shares, including making additional disclosures in the funds' Prospectuses and Statements of Additional Information. The Second Order further requires the appointment of an independent distribution consultant, at the Company's expense, who shall develop a plan for the distribution of the penalty and disgorgement to the funds. Semiannual Report | 31 Templeton China World Fund NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 8. REGULATORY MATTERS (CONTINUED) SETTLEMENTS (CONTINUED) The SEC's Second Order and the CAGO settlement agreement concerning marketing support payments provide that the distribution of settlement monies are to be made to the relevant funds, not to individual shareholders. The independent distribution consultant has substantially completed preparation of these distribution plans. The CAGO has approved the distribution plan pertaining to the distribution of the monies owed under the CAGO settlement agreement and, in accordance with the terms and conditions of that settlement, the monies were disbursed to the participating funds. The Fund did not participate in the CAGO settlement. The SEC has not yet approved the distribution plan pertaining to the Second Order. When approved, disbursements of settlement monies under the SEC's Second Order will be made promptly in accordance with the terms and conditions of that order. OTHER LEGAL PROCEEDINGS The Fund, in addition to the Company and other funds, and certain current and former officers, employees, and directors have been named in multiple lawsuits in different federal courts in Nevada, California, Illinois, New York and Florida, alleging violations of various federal securities laws and seeking, among other relief, monetary damages, restitution, removal of fund trustees, directors, advisers, administrators, and distributors, rescission of management contracts and 12b-1 Plans, and/or attorneys' fees and costs. Specifically, the lawsuits claim breach of duty with respect to alleged arrangements to permit market timing and/or late trading activity, or breach of duty with respect to the valuation of the portfolio securities of certain Templeton funds managed by Franklin Resources, Inc. subsidiaries, resulting in alleged market timing activity. The majority of these lawsuits duplicate, in whole or in part, the allegations asserted in the February 4, 2004 Massachusetts administrative complaint and the findings in the SEC's August 2, 2004 Order, as described above. The lawsuits are styled as class actions or derivative actions on behalf of either the named funds or Franklin Resources, Inc. In addition, the Company, as well as certain current and former officers, employees, and directors, have been named in multiple lawsuits alleging violations of various securities laws and pendent state law claims relating to the disclosure of directed brokerage payments and/or payment of allegedly excessive advisory, commission, and distribution fees, and seeking, among other relief, monetary damages, restitution, rescission of advisory contracts, including recovery of all fees paid pursuant to those contracts, an accounting of all monies paid to the named advisers, declaratory relief, injunctive relief, and/or attorneys' fees and costs. These lawsuits are styled as class actions or derivative actions brought on behalf of certain funds. 32 | Semiannual Report Templeton China World Fund NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 8. REGULATORY MATTERS (CONTINUED) OTHER LEGAL PROCEEDINGS (CONTINUED) The Company and fund management strongly believe that the claims made in each of the lawsuits identified above are without merit and intend to vigorously defend against them. The Company cannot predict with certainty, however, the eventual outcome of the remaining governmental investigations or private lawsuits, nor whether they will have a material negative impact on the Company. Public trust and confidence are critical to the Company's business and any material loss of investor and/or client confidence could result in a significant decline in assets under management by the Company, which would have an adverse effect on the Company's future financial results. If the Company finds that it bears responsibility for any unlawful or inappropriate conduct that caused losses to the Fund, it is committed to making the Fund or its shareholders whole, as appropriate. The Company is committed to taking all appropriate actions to protect the interests of its funds' shareholders. Semiannual Report | 33 Templeton China World Fund SHAREHOLDER INFORMATION PROXY VOTING POLICIES AND PROCEDURES The Fund has established Proxy Voting Policies and Procedures ("Policies") that the Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Fund's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at 1-954/847-2268 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Fund's proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission's website at sec.gov and reflect the most recent 12-month period ended June 30. QUARTERLY STATEMENT OF INVESTMENTS The Fund files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling 1-800/SEC-0330. 34 | Semiannual Report This page intentionally left blank. This page intentionally left blank. Literature Request LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT 1-800/DIAL BEN(R) (1-800/342-5236) OR VISIT FRANKLINTEMPLETON.COM. INVESTORS SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. To ensure the highest quality of service, we may monitor, record and access telephone calls to or from our service departments. These calls can be identified by the presence of a regular beeping tone. FRANKLIN TEMPLETON INVESTMENTS INTERNATIONAL Mutual European Fund Templeton China World Fund Templeton Developing Markets Trust Templeton Foreign Fund Templeton Foreign Smaller Companies Fund Templeton International (Ex EM) Fund GLOBAL Mutual Discovery Fund Templeton Global Long-Short Fund Templeton Global Opportunities Trust Templeton Global Smaller Companies Fund Templeton Growth Fund Templeton World Fund GROWTH Franklin Aggressive Growth Fund Franklin Capital Growth Fund Franklin Flex Cap Growth Fund Franklin Small-Mid Cap Growth Fund Franklin Small Cap Growth Fund II 1 VALUE Franklin Balance Sheet Investment Fund 2 Franklin Equity Income Fund Franklin Large Cap Value Fund Franklin MicroCap Value Fund 2 Franklin Small Cap Value Fund Mutual Beacon Fund Mutual Qualified Fund Mutual Recovery Fund 3 Mutual Shares Fund BLEND Franklin Blue Chip Fund Franklin Convertible Securities Fund Franklin Growth Fund Franklin Rising Dividends Fund Franklin U.S. Long-Short Fund SECTOR Franklin Biotechnology Discovery Fund Franklin DynaTech Fund Franklin Global Communications Fund Franklin Global Health Care Fund Franklin Gold and Precious Metals Fund Franklin Natural Resources Fund Franklin Real Estate Securities Fund Franklin Technology Fund Franklin Utilities Fund Mutual Financial Services Fund ASSET ALLOCATION Franklin Templeton Corefolio Allocation Fund Franklin Templeton Founding Funds Allocation Fund Franklin Templeton Perspectives Allocation Fund TARGET FUNDS Franklin Templeton Conservative Target Fund Franklin Templeton Growth Target Fund Franklin Templeton Moderate Target Fund INCOME Franklin Adjustable U.S. Government Securities Fund 4 Franklin's AGE High Income Fund Franklin Floating Rate Daily Access Fund Franklin Income Fund Franklin Limited Maturity U.S. Government Securities Fund 4,5 Franklin Low Duration Total Return Fund Franklin Real Return Fund Franklin Strategic Income Fund Franklin Strategic Mortgage Portfolio Franklin Templeton Hard Currency Fund Franklin Total Return Fund Franklin U.S. Government Securities Fund 4 Templeton Global Bond Fund TAX-FREE INCOME6 NATIONAL FUNDS Double Tax-Free Income Fund Federal Tax-Free Income Fund High Yield Tax-Free Income Fund Insured Tax-Free Income Fund 7 LIMITED-TERM FUNDS California Limited-Term Tax-Free Income Fund Federal Limited-Term Tax-Free Income Fund New York Limited-Term Tax-Free Income Fund INTERMEDIATE-TERM FUNDS California Intermediate-Term Tax-Free Income Fund Federal Intermediate-Term Tax-Free Income Fund New York Intermediate-Term Tax-Free Income Fund STATE-SPECIFIC Alabama Arizona California 8 Colorado Connecticut Florida 8 Georgia Kentucky Louisiana Maryland Massachusetts 7 Michigan 7 Minnesota 7 Missouri New Jersey New York 8 North Carolina Ohio 7 Oregon Pennsylvania Tennessee Virginia INSURANCE FUNDS Franklin Templeton Variable Insurance Products Trust 9 1.The fund is closed to new investors. Existing shareholders can continue adding to their accounts. 2.The fund is only open to existing shareholders and select retirement plans. 3.The fund is a continuously offered, closed-end fund. Shares may be purchased daily; there is no daily redemption. However, each quarter, pending board approval, the fund will authorize the repurchase of 5%-25% of the outstanding number of shares. Investors may tender all or a portion of their shares during the tender period. 4.An investment in the fund is neither insured nor guaranteed by the U.S. government or by any other entity or institution. 5.Formerly Franklin Short-Intermediate U.S. Government Securities Fund. Effective 9/1/04, the fund's name changed; its investment goal and strategy remained the same. 6.For investors subject to the alternative minimum tax, a small portion of fund dividends may be taxable. Distributions of capital gains are generally taxable. 7.Portfolio of insured municipal securities. 8.These funds are available in two or more variations, including long-term portfolios, portfolios of insured securities, a high-yield portfolio (CA) and limited-term, intermediate-term and money market portfolios (CA and NY). 9.The funds of the Franklin Templeton Variable Insurance Products Trust are generally available only through insurance company variable contracts. 01/05 Not part of the semiannual report [LOGO OMITTED] FRANKLIN(R) TEMPLETON(R) INVESTMENTS One Franklin Parkway San Mateo, CA 94403-1906 WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL? Eligible shareholders can sign up for eDelivery at franklintempleton.com. See inside for details. SEMIANNUAL REPORT AND SHAREHOLDER LETTER Templeton China World Fund INVESTMENT MANAGER Templeton Asset Management Ltd. PRINCIPAL UNDERWRITER Franklin Templeton Distributors, Inc. 1-800/DIAL BEN(R) franklintempleton.com SHAREHOLDER SERVICES 1-800/632-2301 Authorized for distribution only when accompanied or preceded by a prospectus. Investors should carefully consider a fund's investment goals, risks, charges and expenses before investing. Like any investment in securities, the value of the Fund's portfolio will be subject to the risk of loss from market, currency, economic, political and other factors. The Fund and its investors are not protected from such losses by the Investment Manager. Therefore, investors who cannot accept this risk should not invest in shares of the Fund. The prospectus contains this and other information; please read it carefully before investing. To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded and accessed. These calls can be identified by the presence of a regular beeping tone. 188 S2005 04/05 ITEM 2. CODE OF ETHICS. (a) The Registrant has adopted a code of ethics that applies to its principal executive officers and principal financial and accounting officer. (c) N/A (d) N/A (f) Pursuant to Item 11(a), the registrant is attaching as an exhibit a copy of its code of ethics that applies to its principal executive officers and principal financial and accounting officer. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. (a)(1) The Registrant has an audit committee financial expert serving on its audit committee. (2) The audit committee financial experts are Fred R. Millsaps and Frank A. Olson, they are "independent" as defined under the relevant Securities and Exchange Commission Rules and Releases. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. N/A ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. N/A ITEM 6. SCHEDULE OF INVESTMENTS. N/A ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANIES AND AFFILIATED PURCHASES. N/A ITEM 9. SUBMISSION OF MATTERS OF A VOTE OF SECURITY HOLDERS. There have been no changes to the procedures by which shareholders may recommend nominees to the Registrant's Board of Trustees that would require disclosure herein. ITEM 10. CONTROLS AND PROCEDURES. (a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Registrant's filings under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to the Registrant's management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Registrant's management, including the principal executive officer and the principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Within 90 days prior to the filing date of this Shareholder Report on Form N-CSR, the Registrant had carried out an evaluation, under the supervision and with the participation of the Registrant's management, including the Registrant's principal executive officer and the Registrant's principal financial officer, of the effectiveness of the design and operation of the Registrant's disclosure controls and procedures. Based on such evaluation, the Registrant's principal executive officer and principal financial officer concluded that the Registrant's disclosure controls and procedures are effective. (b) CHANGES IN INTERNAL CONTROLS. There have been no significant changes in the Registrant's internal controls or in other factors that could significantly affect the internal controls subsequent to the date of their evaluation in connection with the preparation of this Shareholder Report on Form N-CSR. ITEM 11. EXHIBITS (a) Code of Ethics (b)(1) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and Galen G. Vetter, Chief Financial Officer (b)(2) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and Galen G. Vetter, Chief Financial Officer 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. TEMPLETON CHINA WORLD FUND By /s/JIMMY D. GAMBILL Chief Executive Officer - Finance and Administration Date April 25, 2005 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/JIMMY D. GAMBILL Chief Executive Officer - Finance and Administration Date April 25, 2005 By /s/GALEN G. VETTER Chief Financial Officer Date April 25, 2005
EX-99.CODE ETH 2 ncsr-code704.txt CODE OF ETHICS -PRINCIPAL EXECUTIVE & SENIOR FIN OFFICER CODE OF ETHICS FOR PRINCIPAL EXECUTIVES & SENIOR FINANCIAL OFFICERS - ------------------------------------------------------------------------------ PROCEDURES Dated July 2004 - ------------------------------------------------------------------------------- FRANKLIN TEMPLETON FUNDS CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS I. Covered Officers and Purpose of the Code This code of ethics (the "Code") applies to the Principal Executive Officers, Principal Financial Officer and Principal Accounting Officer (the "Covered Officers," each of whom is set forth in Exhibit A) of each investment company advised by a Franklin Resources subsidiary and that is registered with the United States Securities & Exchange Commission ("SEC") (collectively, "FT Funds") for the purpose of promoting: o Honest and ethical conduct, including the ethical resolution 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 a registrant files with, or submits to, the SEC and in other public communications made by or on behalf of the FT Funds; 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 will be expected to adhere to a high standard of business ethics and must be sensitive to situations that may give rise to actual as well as apparent conflicts of interest. II. Other Policies and Procedures This Code shall be the sole code of ethics adopted by the Funds for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies thereunder. Franklin Resources, Inc. has separately adopted the CODE OF ETHICS AND BUSINESS CONDUCT ("Business Conduct"), which is applicable to all officers, directors and employees of Franklin Resources, Inc., including Covered Officers. It summarizes the values, principles and business practices that guide the employee's business conduct and also provides a set of basic principles to guide officers, directors and employees regarding the minimum ethical requirements expected of them. It supplements the values, principles and business conduct identified in the Code and other existing employee policies. Additionally, the Franklin Templeton Funds have separately adopted the CODE OF ETHICS AND POLICY STATEMENT ON INSIDER TRADING governing personal securities trading and other related matters. The Code for Insider Trading provides for separate requirements that apply to the Covered Officers and others, and therefore is not part of this Code. Insofar as other policies or procedures of Franklin Resources, Inc., the Funds, the Funds' 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 superceded by this Code to the extent that they overlap or conflict with the provisions of this Code. Please review these other documents or consult with the Legal Department if have questions regarding the applicability of these policies to you. III. 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 or her service to, the FT Funds. 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 apposition with the FT Funds. Certain conflicts of interest arise out of the relationships between Covered Officers and the FT Funds and already are subject to conflict of interest provisions in the Investment Company Act of 1940 ("Investment Company Act") and the Investment Advisers Act of 1940 ("Investment Advisers Act"). For example, Covered Officers may not individually engage in certain transactions (such as the purchase or sale of securities or other property) with the FT Funds because of their status as "affiliated persons" of the FT Funds. The FT Funds' and the investment advisers' compliance programs and procedures are designed to prevent, or identify and correct, violations of these provisions. This Code does not, and is not intended to, repeat or replace these programs and procedures, and such conflicts fall outside of the parameters of this Code. Although typically not presenting an opportunity for improper personal benefit, conflicts arise from, or as a result of, the contractual relationship between the FT Funds, the investment advisers and the fund administrator of which the Covered Officers are also 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 FT Funds, for the adviser, the administrator, or for all three), be involved in establishing policies and implementing decisions that will have different effects on the adviser, administrator and the FT Funds. The participation of the Covered Officers in such activities is inherent in the contractual relationship between the FT Funds, the adviser, and the administrator and is consistent with the performance by the Covered Officers of their duties as officers of the FT Funds. Thus, if performed in conformity with the provisions of the Investment Company Act and the Investment Advisers Act, such activities will be deemed to have been handled ethically. In addition, it is recognized by the FT Funds' Boards of Directors ("Boards") that the Covered Officers may also be officers or employees of one or more other investment companies covered by this or other codes. Other conflicts of interest are covered by the Code, even if such conflicts of interest are not subject to provisions in the Investment Company Act and the Investment Advisers Act. 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 FT Funds. Each Covered Officer must: o Not use his or her personal influence or personal relationships improperly to influence investment decisions orfinancial reporting by the FT Funds whereby the Covered Officer would benefit personally to the detriment of the FT Funds; o Not cause the FT Funds to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than the benefit the FT Funds; o Not retaliate against any other Covered Officer or any employee of the FT Funds or their affiliated persons for reports of potential violations that are made in good faith; o Report at least annually the following affiliations or other relationships:/ 1 o all directorships for public companies and all companies that are required to file reports with the SEC; o any direct or indirect business relationship with any independent directors of the FT Funds; o any direct or indirect business relationship with any independent public accounting firm (which are not related to the routine issues related to the firm's service as the Covered Persons accountant); and o any direct or indirect interest in any transaction with any FT Fund that will benefit the officer (not including benefits derived from the advisory, sub-advisory, distribution or service agreements with affiliates of Franklin Resources). These reports will be reviewed by the Legal Department for compliance with the Code. There are some conflict of interest situations that should always be approved in writing by Franklin Resources General Counsel or Deputy General Counsel, if material. Examples of these include/2: o Service as a director on the board of any public or private Company; o The receipt of any gifts in excess of $100 from any person, from any corporation or association o The receipt of any entertainment from any Company with which the FT Funds 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 to raise any question of impropriety. Notwithstanding the foregoing, the Covered Officers must obtain prior approval from the Franklin Resources General Counsel for any entertainment with a value in excess of $1000. o Any ownership interest in, or any consulting or employment relationship with, any of the FT Fund's service providers, other than an investment adviser, principal underwriter, administrator or any affiliated person thereof; o A direct or indirect financial interest in commissions, transaction charges or spreads paid by the FT Funds 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. Franklin Resources General Counsel or Deputy General Counsel will provide a report to the FT Funds Audit Committee of any approvals granted at the next regularly scheduled meeting. IV. Disclosure and Compliance o Each Covered Officer should familiarize himself with the disclosure requirements generally applicable to the FT Funds; o Each Covered Officer should not knowingly misrepresent, or cause others to misrepresent, facts about the FT Funds to others, whether within or outside the FT Funds, including to the FT Funds' directors and auditors, and to governmental 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 FT Funds, the FT Fund's adviser and the administrator with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the FT Funds file with, or submit to, the SEC and in other public communications made by the FT Funds; and o It is the responsibility of each Covered Officer to promote compliance with the standards and restrictions imposed by applicable laws, rules and regulations. V. Reporting and Accountability Each Covered Officer must: o Upon becoming a covered officer affirm in writing to the Board that he or she has received, read, and understands the Code (see Exhibit B); o Annually thereafter affirm to the Board that he has complied with the requirements of the Code; and o Notify Franklin Resources' General Counsel or Deputy General Counsel promptly if he or she knows of any violation of this Code. Failure to do so is itself is a violation of this Code. Franklin Resources' General Counsel and Deputy General Counsel are responsible for applying this Code to specific situations in which questions are presented under it and have the authority to interpret this Code in any particular situation./3 However, the Independent Directors of the respective FT Funds will consider any approvals or waivers/4 sought by any Chief Executive Officers of the Funds. The FT Funds will follow these procedures in investigating and enforcing this Code: o Franklin Resources General Counsel or Deputy General Counsel will take all appropriate action to investigate any potential violations reported to the Legal Department; o If, after such investigation, the General Counsel or Deputy General Counsel believes that no violation has occurred, The General Counsel is not required to take any further action; o Any matter that the General Counsel or Deputy General Counsel believes is a violation will be reported to the Independent Directors of the appropriate FT Fund; o If the Independent Directors concur that a violation has occurred, it will inform and make a recommendation to the Board of the appropriate FT Fund or Funds, which will consider appropriate action, which may include review of, and appropriate modifications to, applicable policies and procedures; notification to appropriate personnel of the investment adviser or its board; or a recommendation to dismiss the Covered Officer; o The Independent Directors will be responsible for granting waivers, as appropriate; and o Any changes to or waivers of this Code will, to the extent required, are disclosed as provided by SEC rules./5 VI. Other Policies and Procedures This Code shall be the sole code of ethics adopted by the FT Funds for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies thereunder. Insofar as other policies or procedures of the FT Funds, the FT Funds' advisers, 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 FT Code of Ethics and Policy Statement On Insider Trading, adopted by the FT Funds, FT investment advisers and FT Fund's principal underwriter pursuant to Rule 17j-1 under the Investment Company Act, the Code of Ethics and Business Conduct and more detailed policies and procedures set forth in FT's Employee Handbook are separate requirements applying to the Covered Officers and others, and are not part of this Code. VII. Amendments Any amendments to this Code, other than amendments to Exhibit A, must be approved or ratified by a majority vote of the FT Funds' Board including a majority of independent directors. VIII. 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 FT Funds' Board and their counsel. IX. Internal Use The Code is intended solely for the internal use by the FT Funds and does not constitute an admission, by or on behalf of any FT Funds, as to any fact, circumstance, or legal conclusion. X. Disclosure on Form N-CSR Item 2 of Form N-CSR requires a registered management investment company to disclose annually whether, as of the end of the period covered by the report, it has adopted a code of ethics that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these officers are employed by the registrant or a third party. If the registrant has not adopted such a code of ethics, it must explain why it has not done so. The registrant must also: (1) file with the SEC a copy of the code as an exhibit to its annual report; (2) post the text of the code on its Internet website and disclose, in its most recent report on Form N-CSR, its Internet address and the fact that it has posted the code on its Internet website; or (3) undertake in its most recent report on Form N-CSR to provide to any person without charge, upon request, a copy of the code and explain the manner in which such request may be made. Disclosure is also required of amendments to, or waivers (including implicit waivers) from, a provision of the code in the registrant's annual report on Form N-CSR or on its website. If the registrant intends to satisfy the requirement to disclose amendments and waivers by posting such information on its website, it will be required to disclose its Internet address and this intention. The Legal Department shall be responsible for ensuring that: o a copy of the Code is filed with the SEC as an exhibit to each Fund's annual report; and o any amendments to, or waivers (including implicit waivers) from, a provision of the Code is disclosed in the registrant's annual report on Form N-CSR. In the event that the foregoing disclosure is omitted or is determined to be incorrect, the Legal Department shall promptly file such information with the SEC as an amendment to Form N-CSR. In such an event, the Fund Chief Compliance Officer shall review the Code and propose such changes to the Code as are necessary or appropriate to prevent reoccurrences. EXHIBIT A Persons Covered by the Franklin Templeton Funds Code of Ethics August 2004 FRANKLIN GROUP OF FUNDS Edward B. Jamieson, President and Chief Executive Officer - Investment Management Charles B. Johnson, President and Chief Executive Officer - Investment Management Gregory E. Johnson, President and Chief Executive Officer - Investment Management Rupert H. Johnson, Jr. President and Chief Executive Officer - Investment Management William J. Lippman, President and Chief Executive Officer - Investment Management Christopher Molumphy President and Chief Executive Officer - Investment Management Jimmy D. Gambill, Senior Vice President and Chief Executive Officer - Finance and Administration Galen G. Vetter Chief Financial Officer FRANKLIN MUTUAL SERIES FUNDS David Winters Chairman of the Board, President, Chief Executive Officer-Investment Management Jimmy D. Gambill Senior Vice President and Chief Executive Officer- Finance and Administration Galen G. Vetter Chief Financial Officer TEMPLETON GROUP OF FUNDS Jeffrey A. Everett President and Chief Executive Officer - Investment Management Martin L. Flanagan President and Chief Executive Officer - Investment Management Mark Mobius President and Chief Executive Officer - Investment Management Christopher J. Molumphy President and Chief Executive Officer - Investment Management Gary P. Motyl President and Chief Executive Officer - Investment Management Donald F. Reed President and Chief Executive Officer - Investment Management Jimmy D. Gambill, Senior Vice President and Chief Executive Officer - Finance and Administration Galen G. Vetter Chief Financial Officer EXHIBIT B ACKNOWLEDGMENT FORM JULY 2004 FRANKLIN TEMPLETON FUNDS CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS. INSTRUCTIONS: 1. Complete all sections of this form. 2. Print the completed form, sign, and date. 3. Submit completed form to FT's General Counsel within 10 days of becoming a Covered Officer and by January 30th of each subsequent year. INTER-OFFICE MAIL: Murray Simpson, General Counsel, Legal SM-920/2 TELEPHONE: (650) 312-7331 Fax: (650) 312-2221 E-MAIL: Simpson, Murray (internal address); mlsimpson@frk.com (external address) - ---------------------------------------------------------------------------- COVERED OFFICER'S NAME: - ---------------------------------------------------------------------------- TITLE: - ---------------------------------------------------------------------------- DEPARTMENT: - ---------------------------------------------------------------------------- LOCATION: - ---------------------------------------------------------------------------- CERTIFICATION FOR YEAR ENDING: - ---------------------------------------------------------------------------- TO: Franklin Resources General Counsel, Legal Department I hereby acknowledge receipt of a copy of Franklin Templeton Fund's code of ethics for Principal Executive Officers and Senior Financial Officers (the "Code") that I have read and understand. I will comply fully with all provisions of the Code to the extent they apply to me during the period of my employment. I further understand and acknowledge that any violation of the Code may subject me to disciplinary action, including termination of employment - ---------------------------- ---------------------- Signature Date signed - ----------------------------- 1 Reporting of these affiliations or other relationships shall be made by completing the annual Directors and Officers Questionnaire and returning the questionnaire to Franklin Resources Inc, General Counsel or Deputy General Counsel. 2 Any activity or relationship that would present a conflict for a Covered Officer may also present a conflict for the Covered Officer if a member of the Covered Officer's immediate family engages in such an activity or has such a relationship. The Cover Person should also obtain written approval by FT's General Counsel in such situations. 3 Franklin Resources General Counsel and Deputy General Counsel are authorized to consult, as appropriate, with members of the Audit Committee, counsel to the FT Funds and counsel to the Independent Directors, and are encouraged to do so. 4 Item 2 of Form N-CSR defines "waiver" as "the approval by the registrant of a material departure from a provision of the code of ethics" and "implicit waiver," which must also be disclosed, as "the registrant's failure to take action within a reasonable period of time regarding a material departure from a provision of the code of ethics that has been made known to an executive officer" of the registrant. See Part X. 5 See Part X. EX-99.CODE ETH 3 d15186_ex99cert.txt CEO/CFO CERTIFICATION PURSUANT TO SECTION 302 I, Galen G. Vetter, certify that: 1. I have reviewed this report on Form N-CSR of Templeton China World Fund; 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(s) 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(s) 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. April 25, 2005 S\GALEN G. VETTER Galen G. Vetter Chief Financial Officer I, Jimmy D. Gambill, certify that: 1. I have reviewed this report on Form N-CSR of Templeton China World Fund; 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(s) 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(s) 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. April 25, 2005 S\JIMMY D. GAMBILL Jimmy D. Gambill Chief Executive Officer - Finance and Administration EX-99.906 CERT 4 d15186_ex99-906cert.txt CEO/CFO CERTIFICATION PURSUANT TO SECTION 906 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURUSANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Galen G. Vetter, Chief Financial Officer of the TEMPLETON CHINA WORLD FUND (the "Registrant"), certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: 1. The periodic report on Form N-CSR of the Registrant for the period ended 2/28/05 (the "Form N-CSR") 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 Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Dated: April 25, 2005 S\GALEN G. VETTER Galen G. Vetter Chief Financial Officer A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906, OR OTHER DOCUMENT AUTHENTICATING, ACKNOWLEDGING, OR OTHERWISE ADOPTING THE SIGNATURE THAT APPEARS IN TYPED FORM WITHIN THE ELECTRONIC VERSION OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906, HAS BEEN PROVIDED TO REGISTRANT AND WILL BE RETAINED BY REGISTRANT AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURUSANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Jimmy D. Gambill, Chief Executive Officer of the TEMPLETON CHINA WORLD FUND (the "Registrant"), certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: 1. The periodic report on Form N-CSR of the Registrant for the period ended 2/28/05 (the "Form N-CSR") 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 Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Dated: April 25, 2005 S\JIMMY D. GAMBILL Jimmy D. Gambill Chief Executive Officer - Finance and Administration A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906, OR OTHER DOCUMENT AUTHENTICATING, ACKNOWLEDGING, OR OTHERWISE ADOPTING THE SIGNATURE THAT APPEARS IN TYPED FORM WITHIN THE ELECTRONIC VERSION OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906, HAS BEEN PROVIDED TO REGISTRANT AND WILL BE RETAINED BY REGISTRANT AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST.
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