-----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, IccCIY7yKMwI2cQFS754xuo0+p+m0LHwqXgT94Q3P7CIn+w0wOPQMntFLp3RDM1Z dzI1VePtCJ2v9SKF1L7OMQ== 0000909226-06-000008.txt : 20060428 0000909226-06-000008.hdr.sgml : 20060428 20060428114354 ACCESSION NUMBER: 0000909226-06-000008 CONFORMED SUBMISSION TYPE: N-CSRS PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20060228 FILED AS OF DATE: 20060428 DATE AS OF CHANGE: 20060428 EFFECTIVENESS DATE: 20060428 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: 06787994 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 0000909226 S000008743 Templeton China World Fund C000023803 Class A TCWAX C000023804 Class B TCWBX C000023805 Class C TCWCX C000023806 Advisor Class TACWX N-CSRS 1 tchsemi-ncsrs206.txt CHINA WORLD FUND SEMIANNUAL RPT 2/28/06 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) CRAIG S. TYLE, 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: 2/28/06 ------- ITEM 1. REPORTS TO STOCKHOLDERS [GRAPHIC OMITTED] FEBRUARY 28, 2006 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SEMIANNUAL REPORT AND SHAREHOLDER LETTER | INTERNATIONAL - -------------------------------------------------------------------------------- WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL? TEMPLETON CHINA WORLD FUND Eligible shareholders can sign up for eDelivery at franklintempleton.com. See inside for details. - -------------------------------------------------------------------------------- [LOGO](R) FRANKLIN TEMPLETON INVESTMENTS Franklin o TEMPLETON o Mutual Series Franklin Templeton Investments GAIN FROM OUR PERSPECTIVE(R) 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 offices in over 25 countries, Templeton offers investors a truly global perspective. MUTUAL SERIES. Founded in 1949, Mutual Series is dedicated to a unique style of value investing, searching aggressively for opportunity among what it believes are undervalued stocks, as well as arbitrage situations and distressed securities. TRUE DIVERSIFICATION Because our management groups work independently and adhere to different investment approaches, Franklin, Templeton and Mutual Series funds typically have distinct portfolios. That's why our funds can be used to build truly diversified allocation plans 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, accurate and personal service that has helped us become one of the most trusted names in financial services. - -------------------------------------------------------------------------------- MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS - -------------------------------------------------------------------------------- [GRAPHIC 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 ...................................................... 21 Notes to Financial Statements.............................................. 24 Shareholder Information.................................................... 32 - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- PERFORMANCE DATA 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. - -------------------------------------------------------------------------------- This semiannual report for Templeton China World Fund covers the period ended February 28, 2006. PERFORMANCE OVERVIEW For the six months under review, Templeton China World Fund - Class A delivered a +14.94% cumulative total return. The Fund underperformed its benchmark, the Morgan Stanley Capital International (MSCI) China Index, which posted a +24.15% cumulative total return. 1 For comparison, the Standard & Poor's/International Finance Corporation (S&P/IFC) Investable China Index posted a +21.96% 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, 2006, the Fund's Class A shares delivered a +143.43% cumulative total return, compared with the MSCI China Index's -31.56% cumulative total return for the same period. 3 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. 1. Source: Standard & Poor's Micropal. The MSCI China Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in China. 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 the performance of equity securities in China. 3. Source: Standard & Poor's Micropal. As of 2/28/06, the Fund's 10-year average annual total return not including sales charges was +9.30%, compared with -3.72% average annual total return for the MSCI China Index. The indexes are unmanaged and include 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 ECONOMIC AND MARKET OVERVIEW During the reporting period, economic growth was strong in the region where the Fund invests. China's economy was forecast to grow 9.2% in 2006, slightly slower than the 9.9% recorded last year. 4 Strong exports, robust investment and recovery in domestic demand were expected to support gross domestic product (GDP) growth. Despite China's strong economic growth in 2005, inflation remained benign, averaging 1.8% for the same period. 4 Foreign direct investment (FDI) into China strengthened in January as investors remained optimistic about the country's growing consumer market and high manufacturing productivity. FDI in January 2006 rose 11% compared with January 2005 (year-over-year), after edging down 0.5% for calendar year 2005. 4 Hong Kong's economic environment continued to improve during the period. Fourth quarter GDP grew 7.6% year-over-year, bringing 2005's growth to 7.3%. 5 Key drivers included strengthening exports and consumer expenditures. Unemployment trended downward, ending January 2006 at 5.2%. 5 As a sign of robust finances, the government anticipated a budget surplus in the current fiscal year ending March 2006, its first in eight years. In Taiwan, solid export and industrial output growth led fourth quarter 2005 GDP to expand 6.4% year-over-year, faster than government forecasts. 6 This acceleration brought the full-year GDP to 4.1%. 6 Exports rose 26.4%, while industrial output increased 14.1% year-over-year. 7 Inflation remained under control as Taiwan's central bank maintained a tightening policy. Politically, the ruling Democratic Progressive Party lost significant support to the opposition party Kuomintang (KMT) in local elections. Reflecting China's rapid economic developments, Chinese equity prices recorded strong appreciation. China continued to attract new funds, making 4. Source: National Bureau of Statistics, China. 5. Source: Census and Statistics Department, Hong Kong. 6. Source: Directorate General of Budget, Accounting and Statistics, Taiwan. 7. Sources: Ministry of Finance, Taiwan; Ministry of Economic Affairs, Taiwan. 4 | Semiannual Report 2005 a record year for new equity issuance. Hong Kong's robust economic growth, falling unemployment and higher liquidity in the banking system offset rising interest rates, and its equity market rose during the period. In Taiwan, high oil prices and poor political sentiment appeared to hurt local financial markets in the early part of the period. However, apparently attracted by cheap valuations and the conclusion of local elections, investors returned in the latter part of the period, which allowed the MSCI Taiwan Index to return +12.40% in U.S. dollar terms for the six-month period. 8 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 The Fund's underweighted exposure to the telecommunication services sector and transportation infrastructure industry were among the largest contributors to performance relative to the MSCI China Index. 9 Stock selection in the semiconductors and semiconductor equipment industry further supported relative performance. The Fund's underweightings in China Telecom and China Mobile had the largest positive effect in the telecommunication services sector. Within the semiconductors and semiconductor equipment industry, the Fund benefited from its lack of exposure to Semiconductor Manufacturing, which declined significantly during the period. The Fund's relative performance also benefited from not holding transportation companies such as China Shipping Containers and China Cosco Holdings as these stocks underperformed the broader MSCI China Index. 8. Source: Standard & Poor's Micropal. The MSCI Taiwan Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in Taiwan. 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. 9. The telecommunication services sector comprises diversified telecommunication services and wireless telecommunication services in the SOI. GEOGRAPHIC BREAKDOWN Based on Total Net Assets as of 2/28/06 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] China ............................................................... 44.5% Taiwan .............................................................. 22.6% Hong Kong ........................................................... 18.0% U.K. ................................................................ 4.1% South Korea ......................................................... 1.8% Singapore ........................................................... 0.4% Short-Term Investments & Other Net Assets ........................... 8.6% Semiannual Report | 5 TOP 10 EQUITY HOLDINGS 2/28/06 - -------------------------------------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY, COUNTRY NET ASSETS - -------------------------------------------------------------------------------- PetroChina Co. Ltd., H & restricted 9.4% OIL, GAS & CONSUMABLE FUELS, CHINA - -------------------------------------------------------------------------------- Dairy Farm International Holdings Ltd. 7.0% FOOD & STAPLES RETAILING, HONG KONG - -------------------------------------------------------------------------------- China Mobile (Hong Kong) Ltd. 5.5% WIRELESS TELECOMMUNICATION SERVICES, CHINA - -------------------------------------------------------------------------------- China Petroleum & Chemical Corp., H 4.4% OIL, GAS & CONSUMABLE FUELS, CHINA - -------------------------------------------------------------------------------- China Construction Bank, H & restricted 4.3% COMMERCIAL BANKS, CHINA - -------------------------------------------------------------------------------- HSBC Holdings PLC 4.1% COMMERCIAL BANKS, U.K. - -------------------------------------------------------------------------------- CNOOC Ltd. 3.5% OIL, GAS & CONSUMABLE FUELS, CHINA - -------------------------------------------------------------------------------- China Resources Enterprise Ltd. 2.9% DISTRIBUTORS, CHINA - -------------------------------------------------------------------------------- Acer Inc. 2.8% COMPUTERS & PERIPHERALS, TAIWAN - -------------------------------------------------------------------------------- Cheung Kong (Holdings) Ltd. 2.8% REAL ESTATE, HONG KONG - -------------------------------------------------------------------------------- The Fund's stock selection in the real estate and commercial banks industries significantly detracted from relative performance. Within the real estate industry, the Fund's overweighted exposure to Cheung Kong and Hongkong Land Holdings (not index components) hurt performance as the stocks underperformed the benchmark MSCI China Index during the period. We believe Cheung Kong, a major Hong Kong conglomerate with a strong market position in the real estate market, is well positioned to benefit from the city's improving economic environment and recovery in property prices. Similarly, Hongkong Land is a major property development, investment and management firm, which we believe stands to gain from recovery in the city's property rental market. The Fund also suffered from not owning strong performing stocks China Overseas Land and China Resources Land whose valuations we considered unattractive, based on our investment strategy. In the commercial banks industry, the Fund's overweighted position in HSBC Holdings had the greatest negative effect on relative performance. HSBC is one of the world's largest banking and financial services organizations, and in line with our strategy, we believe it is in a position to benefit from the growing global demand for banking services in the long term. Underweighted positions in China Construction Bank and Bank of Communications also hurt relative performance. We increased the Fund's investment in China Construction Bank during the reporting period, but divested our interests in Bank of Communications. We continued to increase the Fund's exposure to the commercial banks industry via other investments. During the reporting period, the Fund's largest investments were in China H (Hong Kong-listed companies) and Red Chip (Hong Kong-listed companies with significant exposure to China) shares as well as in Taiwanese equities. Seeking to position the Fund to benefit from high oil prices, we increased the Fund's exposure to the oil, gas and consumable fuels industry. Key purchases included PetroChina, a dominant player in upstream (exploration, development and production) oil and gas, and CNOOC, the largest offshore oil and natural gas exploration and production company in China. The Fund also had substantial investments in commercial banks. China's liberalization of the banking sector could unlock hidden capital and allow banks to benefit from the growing financial needs of consumers in the greater China region. Additions included the aforementioned China Construction Bank, one of the country's largest commercial banks, and Chinatrust Financial Holding, Taiwan's leading consumer bank. 6 | Semiannual Report In terms of sales during the period, the Fund realized gains by trimming its holdings in South Korea's LG and China Red Chip Cosco Pacific as they reached sale price targets. LG is a prominent multi-holding company with a broad product line that ranges from basic chemicals to LCD televisions. The LG brand is fast becoming a household name in China. Cosco Pacific is a conglomerate with focus on container leasing and terminal operations. Thank you for your continued participation in Templeton China World Fund. We look forward to serving your future investment needs. /s/ Mark Mobius [PHOTO OMITTED] Mark Mobius Portfolio Manager Templeton China World Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF FEBRUARY 28, 2006, 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 2/28/06 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 that a shareholder would pay 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 (SYMBOL: TCWAX) CHANGE 2/28/06 8/31/05 - ------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$2.87 $24.54 $21.67 - ------------------------------------------------------------------------------------------------- DISTRIBUTIONS (9/1/05-2/28/06) - ------------------------------------------------------------------------------------------------- Dividend Income $0.3168 - ------------------------------------------------------------------------------------------------- CLASS B (SYMBOL: TCWBX) CHANGE 2/28/06 8/31/05 - ------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$2.93 $24.40 $21.47 - ------------------------------------------------------------------------------------------------- DISTRIBUTIONS (9/1/05-2/28/06) - ------------------------------------------------------------------------------------------------- Dividend Income $0.1702 - ------------------------------------------------------------------------------------------------- CLASS C (SYMBOL: TCWCX) CHANGE 2/28/06 8/31/05 - ------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$2.86 $24.35 $21.49 - ------------------------------------------------------------------------------------------------- DISTRIBUTIONS (9/1/05-2/28/06) - ------------------------------------------------------------------------------------------------- Dividend Income $0.2381 - ------------------------------------------------------------------------------------------------- ADVISOR CLASS (SYMBOL: TACWX) CHANGE 2/28/06 8/31/05 - ------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$2.87 $24.65 $21.78 - ------------------------------------------------------------------------------------------------- DISTRIBUTIONS (9/1/05-2/28/06) - ------------------------------------------------------------------------------------------------- Dividend Income $0.3614 - -------------------------------------------------------------------------------------------------
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 +14.94% +21.38% +151.72% +143.43% - ------------------------------------------------------------------------------------------------- Average Annual Total Return 3 +8.33% +14.40% +18.86% +8.66% - ------------------------------------------------------------------------------------------------- Value of $10,000 Investment 4 $10,833 $11,440 $23,725 $22,943 - ------------------------------------------------------------------------------------------------- Avg. Ann. Total Return (3/31/06) 5 +16.59% +19.95% +8.97% - ------------------------------------------------------------------------------------------------- CLASS B 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------------------------------------------------------------------------------------------------- Cumulative Total Return 2 +14.56% +20.57% +143.51% +129.11% - ------------------------------------------------------------------------------------------------- Average Annual Total Return 3 +10.56% +16.57% +19.29% +8.64% - ------------------------------------------------------------------------------------------------- Value of $10,000 Investment 4 $11,056 $11,657 $24,151 $22,911 - ------------------------------------------------------------------------------------------------- Avg. Ann. Total Return (3/31/06) 5 +18.92% +20.38% +8.95% - ------------------------------------------------------------------------------------------------- CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------------------------------------------------------------------------------------------------- Cumulative Total Return 2 +14.59% +20.60% +143.66% +126.18% - ------------------------------------------------------------------------------------------------- Average Annual Total Return 3 +13.59% +19.60% +19.50% +8.50% - ------------------------------------------------------------------------------------------------- Value of $10,000 Investment 4 $11,359 $11,960 $24,366 $22,618 - ------------------------------------------------------------------------------------------------- Avg. Ann. Total Return (3/31/06) 5 +21.99% +20.59% +8.82% - ------------------------------------------------------------------------------------------------- ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------------------------------------------------------------------------------------------------- Cumulative Total Return 2 +15.10% +21.76% +156.27% +153.38% - ------------------------------------------------------------------------------------------------- Average Annual Total Return 3 +15.10% +21.76% +20.71% +9.74% - ------------------------------------------------------------------------------------------------- Value of $10,000 Investment 4 $11,510 $12,176 $25,627 $25,338 - ------------------------------------------------------------------------------------------------- Avg. Ann. Total Return (3/31/06) 5 +24.13% +21.82% +10.06% - -------------------------------------------------------------------------------------------------
PERFORMANCE DATA 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 THE GOVERNMENT'S PARTICIPATION IN THE ECONOMY IS STILL HIGH AND, THEREFORE, TEMPLETON CHINA WORLD FUND'S INVESTMENTS IN CHINA WILL BE SUBJECT TO LARGER REGULATORY RISK LEVELS COMPARED TO MANY OTHER COUNTRIES. IN ADDITION, SPECIAL RISKS ARE ASSOCIATED WITH INTERNATIONAL INVESTING, INCLUDING CURRENCY FLUCTUATIONS, ECONOMIC INSTABILITY AND POLITICAL DEVELOPMENTS. INVESTMENTS IN DEVELOPING MARKETS INVOLVE HEIGHTENED RISKS RELATED TO THE SAME FACTORS. 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 9/1/05 VALUE 2/28/06 PERIOD* 9/1/05-2/28/06 - ----------------------------------------------------------------------------------------------------------- Actual $1,000 $1,149.40 $10.87 - ----------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,014.68 $10.19 - ----------------------------------------------------------------------------------------------------------- CLASS B - ----------------------------------------------------------------------------------------------------------- Actual $1,000 $1,145.60 $14.26 - ----------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,011.50 $13.37 - ----------------------------------------------------------------------------------------------------------- CLASS C - ----------------------------------------------------------------------------------------------------------- Actual $1,000 $1,145.90 $14.26 - ----------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,011.50 $13.37 - ----------------------------------------------------------------------------------------------------------- ADVISOR CLASS - ----------------------------------------------------------------------------------------------------------- Actual $1,000 $1,151.00 $ 9.01 - ----------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,016.41 $ 8.45 - -----------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A: 2.04%; B: 2.68%; C: 2.68%; and Advisor: 1.69%), 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 FEBRUARY 28, 2006 YEAR ENDED AUGUST 31, CLASS A (UNAUDITED) 2005 2004 2003 g ------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............... $ 21.67 $ 17.97 $ 14.89 $ 14.30 ------------------------------------------------------------- Income from investment operations: Net investment income (loss) a ................... (0.08) 0.43 0.21 0.12 Net realized and unrealized gains (losses) ........ 3.27 3.46 3.24 0.40 ------------------------------------------------------------- Total from investment operations ................... 3.19 3.89 3.45 0.52 ------------------------------------------------------------- Less distributions from net investment income ...... (0.32) (0.19) (0.40) -- ------------------------------------------------------------- Redemption fees .................................... -- c -- c 0.03 0.07 ------------------------------------------------------------- Net asset value, end of period ..................... $ 24.54 $ 21.67 $ 17.97 $ 14.89 ============================================================= Total return b .................................... 14.94% 21.85% 23.80% 4.13% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) .................. $199,074 $111,193 $ 43,179 $ 3,166 Ratios to average net assets: Expenses .......................................... 2.04% d,e 2.08%e 2.14% e,f 3.03% h Net investment income ............................. (0.58%) d 1.86% 1.09% 38.74% h Portfolio turnover rate ............................ 2.04% 9.66% 30.82% 19.99%
a Based on average daily shares outstanding. b Total return does not reflect sales commissions or the contingent deferred sales charges, and is not annualized for periods less than one year. c Amount is less than $0.01 per share. d Annualized. e Benefit of expense reduction is less than 0.01%. f Ratio of expenses to average net assets, excluding payments by affiliate were 2.30%. g For the period August 11, 2003 (effective date) to August 31, 2003. h 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. Semiannual Report | See notes to financial statements. | 13 Templeton China World Fund FINANCIAL HIGHLIGHTS (CONTINUED)
------------------------------------------------------------- SIX MONTHS ENDED FEBRUARY 28, 2006 YEAR ENDED AUGUST 31, CLASS B (UNAUDITED) 2005 2004 2003 g ------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............... 21.47 $ 17.84 $ 14.88 $ 14.30 ------------------------------------------------------------- Income from investment operations: Net investment income (loss) a ................... (0.13) 0.24 0.16 0.08 Net realized and unrealized gains (losses) ........ 3.23 3.51 3.16 0.43 ------------------------------------------------------------- Total from investment operations ................... 3.10 3.75 3.32 0.51 ------------------------------------------------------------- Less distributions from net investment income ...... (0.17) (0.12) (0.39) -- ------------------------------------------------------------- Redemption fees .................................... -- c -- c 0.03 0.07 ------------------------------------------------------------- Net asset value, end of period ..................... $ 24.40 $ 21.47 $ 17.84 $ 14.88 ============================================================= Total return b .................................... 14.56% 21.12% 22.95% 4.06% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) .................. $ 14,938 $ 12,264 $ 8,630 $ 362 Ratios to average net assets: Expenses .......................................... 2.68% d,e 2.73% e 2.79% e,f 3.68% h Net investment income ............................. (1.22%) d 1.21% 0.44% 38.09% h Portfolio turnover rate ............................ 2.04% 9.66% 30.82% 19.99%
a Based on average daily shares outstanding. b Total return does not reflect the contingent deferred sales charges, and is not annualized for periods less than one year. c Amount is less than $0.01 per share. d Annualized. e Benefit of expense reduction is less than 0.01%. f Ratio of expenses to average net assets, excluding payments by affiliate were 2.30%. g For the period August 11, 2003 (effective date) to August 31, 2003. h 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 FEBRUARY 28, 2006 YEAR ENDED AUGUST 31, CLASS C (UNAUDITED) 2005 2004 2003 g ------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............... $ 21.49 $ 17.85 $ 14.88 $ 14.30 ------------------------------------------------------------- Income from investment operations: Net investment income (loss) a ................... (0.15) 0.29 0.12 0.11 Net realized and unrealized gains (losses) ........ 3.25 3.46 3.21 0.40 ------------------------------------------------------------- Total from investment operations ................... 3.10 3.75 3.33 0.51 ------------------------------------------------------------- Less distributions from net investment income ...... (0.24) (0.11) (0.39) -- ------------------------------------------------------------- Redemption fees .................................... -- c -- c 0.03 0.07 ------------------------------------------------------------- Net asset value, end of period ..................... $ 24.35 $ 21.49 $ 17.85 $ 14.88 ============================================================= Total return b .................................... 14.59% 21.10% 23.02% 4.06% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) .................. $ 79,598 $ 45,738 $ 20,603 $ 652 Ratios to average net assets: Expenses .......................................... 2.68% d,e 2.68% e 2.75% e,f 3.68% h Net investment income ............................. (1.22%) d 1.26% 0.48% 38.09% h Portfolio turnover rate ........................... 2.04% 9.66% 30.82% 19.99%
a Based on average daily shares outstanding. b Total return does not reflect the contingent deferred sales charges, and is not annualized for periods less than one year. c Amount is less than $0.01 per share. d Annualized. e Benefit of expense reduction is less than 0.01%. f Ratio of expenses to average net assets, excluding payments by affiliate were 2.30%. g For the period August 11, 2003 (effective date) to August 31, 2003. h 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. Semiannual Report | See notes to financial statements. | 15 Templeton China World Fund FINANCIAL HIGHLIGHTS (CONTINUED)
------------------------------------------------------------------------------------- SIX MONTHS ENDED FEBRUARY 28, 2006 YEAR ENDED AUGUST 31, ADVISOR CLASS (UNAUDITED) 2005 2004 2003 h 2002 2001 ------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .... $ 21.78 $ 18.03 $ 14.90 $ 10.64 $ 9.52 $ 11.33 ------------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss) a ........ (0.02) 0.42 0.24 0.43 0.21 0.18 Net realized and unrealized gains (losses) .............................. 3.25 3.56 3.27 4.08 0.98 (1.98) ------------------------------------------------------------------------------------- Total from investment operations ........ 3.23 3.98 3.51 4.51 1.19 (1.80) ------------------------------------------------------------------------------------- Capital share repurchases ............... -- -- -- -- 0.11 0.09 ------------------------------------------------------------------------------------- Less distributions from net investment income ................................. (0.36) (0.23) (0.41) (0.32) (0.18) (0.10) ------------------------------------------------------------------------------------- Redemption fees ......................... -- d -- d 0.03 0.07 -- -- ------------------------------------------------------------------------------------- Net asset value, end of period .......... $ 24.65 $ 21.78 $ 18.03 $ 14.90 $ 10.64 $ 9.52 ===================================================================================== Market value, end of period b .......... -- -- -- -- $ 9.10 $ 7.73 ===================================================================================== Total return (based on market value per share) ............................. -- -- -- -- 20.27% (2.14)% Total return (based on net asset value per share) c .......................... 15.10% 22.31% 24.21% 43.95% -- -- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ....... $ 220,087 $190,844 $161,599 $181,913 $173,204 $172,209 Ratios to average net assets: Expenses ............................... 1.69% e,f 1.73% f 1.79% f,g 2.10% g 1.66% 1.66% Net investment income .................. (0.23%) e 2.21% 1.44% 3.66% 2.01% 1.70% Portfolio turnover rate ................. 2.04% 9.66% 30.82% 19.99% 44.62% 83.85%
a Based on average daily shares outstanding. b Based on the last sale of the New York Stock Exchange. c Total return is not annualized for periods less than one year. d Amount is less than $0.01 per share. e Annualized. f Benefit of expense reduction is less than 0.01%. g Ratio 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. h On 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, 2006 (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------------- COUNTRY SHARES VALUE - ----------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS 91.4% AIR FREIGHT & LOGISTICS 0.1% Sinotrans Ltd., H ....................................................... China 1,238,000 $ 534,587 ------------- AIRLINES 0.5% a Air China Ltd., H ....................................................... China 6,088,000 2,216,900 a,b Air China Ltd., H, 144A ................................................. China 500,000 182,071 ------------- 2,398,971 ------------- AUTO COMPONENTS 1.2% Cheng Shin Rubber Industry Co. Ltd. ..................................... Taiwan 6,876,540 5,096,402 Weifu High-Technology Co. Ltd., B ....................................... China 1,212,987 1,014,738 Xinyi Glass Holding Co. Ltd. ............................................ China 420,000 117,750 ------------- 6,228,890 ------------- AUTOMOBILES 0.9% Brilliance China Automotive Holdings Ltd. ............................... China 3,642,000 633,763 China Motor Co. Ltd. .................................................... Taiwan 2,019,000 2,277,173 Chongqing Changan Automobile Co. Ltd., B ................................ China 3,242,800 1,671,988 ------------- 4,582,924 ------------- CAPITAL MARKETS 0.4% Yuanta Core Pacific Securities Co. ...................................... Taiwan 3,784,156 2,215,650 ------------- COMMERCIAL BANKS 12.4% a China Construction Bank, H .............................................. China 4,062,000 1,898,021 a,b China Construction Bank, H, 144A ........................................ China 43,532,000 20,340,876 Chinatrust Financial Holding Co. Ltd. ................................... Taiwan 8,501,002 7,151,734 DBS Group Holdings Ltd. ................................................. Singapore 193,000 1,950,817 HSBC Holdings PLC ....................................................... United Kingdom 1,228,719 21,159,824 Mega Financial Holding Co. Ltd. ......................................... Taiwan 14,406,000 10,965,261 ------------- 63,466,533 ------------- COMMUNICATIONS EQUIPMENT 0.8% D-Link Corp. ............................................................ Taiwan 3,558,521 4,079,351 ------------- COMPUTERS & PERIPHERALS 5.3% Acer Inc. ............................................................... Taiwan 6,580,960 14,601,597 Asustek Computer Inc. ................................................... Taiwan 1,212,268 3,440,621 Lite-On Technology Corp. ................................................ Taiwan 7,198,586 9,385,180 ------------- 27,427,398 ------------- CONSTRUCTION MATERIALS 0.6% Anhui Conch Cement Co. Ltd., H .......................................... China 2,192,000 3,150,420 ------------- DISTRIBUTORS 3.2% China Resources Enterprise Ltd. ......................................... China 6,700,000 14,768,077 Test-Rite International Co. Ltd. ........................................ Taiwan 2,225,980 1,536,554 ------------- 16,304,631 -------------
Semiannual Report | 17 Templeton China World Fund STATEMENT OF INVESTMENTS, FEBRUARY 28, 2006 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------- COUNTRY SHARES VALUE - ----------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) DIVERSIFIED TELECOMMUNICATION SERVICES 0.7% China Telecom Corp. Ltd., H ............................................. China 9,073,833 $ 3,333,410 ------------- ELECTRIC UTILITIES 2.0% Cheung Kong Infrastructure Holdings Ltd. ................................ Hong Kong 3,320,548 10,465,058 ------------- ELECTRICAL EQUIPMENT 0.1% Phoenixtec Power Co. Ltd. ............................................... Taiwan 454,055 440,755 ------------- ELECTRONIC EQUIPMENT & INSTRUMENTS 3.7% Delta Electronics Inc. .................................................. Taiwan 3,838,163 9,201,987 Synnex Technology International Corp. ................................... Taiwan 6,978,800 8,656,160 a Yageo Corp. ............................................................. Taiwan 2,810,000 1,078,088 ------------- 18,936,235 ------------- FOOD & STAPLES RETAILING 8.2% Dairy Farm International Holdings Ltd. .................................. Hong Kong 10,219,776 35,973,612 President Chain Store Corp. ............................................. Taiwan 2,844,088 6,205,187 ------------- 42,178,799 ------------- FOOD PRODUCTS 2.1% COFCO International Ltd. ................................................ China 7,722,000 4,130,769 Uni-President Enterprises Corp. ......................................... Taiwan 11,678,950 6,658,159 ------------- 10,788,928 ------------- HOTELS, RESTAURANTS & LEISURE 1.5% The Hongkong and Shanghai Hotels Ltd. ................................... Hong Kong 6,632,478 7,908,071 ------------- HOUSEHOLD DURABLES 0.1% TCL Multimedia Technology Holdings Ltd. ................................. China 5,052,000 742,371 ------------- INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 3.4% Datang International Power Generation Co. Ltd., H ....................... China 9,620,320 6,944,333 Guangdong Electric Power Development Co. Ltd., B ........................ China 8,967,343 4,068,736 Huadian Power International Corp. Ltd., H ............................... China 15,536,000 4,205,441 Huaneng Power International, Inc., H .................................... China 3,430,776 2,299,581 ------------- 17,518,091 ------------- INDUSTRIAL CONGLOMERATES 2.7% Citic Pacific Ltd. ...................................................... China 860,092 2,572,088 LG Corp. ................................................................ South Korea 154,910 5,440,197 Shanghai Industrial Holdings Ltd. ....................................... China 2,784,253 5,993,468 ------------- 14,005,753 ------------- LEISURE EQUIPMENT & PRODUCTS 0.4% Premier Image Technology Corp. .......................................... Taiwan 1,445,090 1,816,911 -------------
18 | Semiannual Report Templeton China World Fund STATEMENT OF INVESTMENTS, FEBRUARY 28, 2006 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------- COUNTRY SHARES VALUE - ----------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) MACHINERY 1.4% China International Marine Containers (Group) Co. Ltd., B ............... China 5,591,330 $ 5,535,150 Yungtay Engineering Co. Ltd. ............................................ Taiwan 2,524,000 1,423,374 ------------- 6,958,524 ------------- MEDIA 0.0%c Next Media Ltd. ......................................................... Hong Kong 80,000 43,568 ------------- METALS & MINING 0.1% Aluminum Corp. of China Ltd., H ......................................... China 372,000 381,209 ------------- OFFICE ELECTRONICS 0.2% Kinpo Electronics Inc. .................................................. Taiwan 3,042,648 1,176,723 ------------- OIL, GAS & CONSUMABLE FUELS 19.6% China Petroleum & Chemical Corp., H ..................................... China 37,309,395 22,482,927 a China Shenhua Energy Co. Ltd., H ........................................ China 8,089,000 12,303,534 CNOOC Ltd. .............................................................. China 21,129,000 17,839,113 PetroChina Co. Ltd., H .................................................. China 44,791,903 43,879,951 b PetroChina Co. Ltd., H, 144A ............................................ China 4,460,000 4,369,195 ------------- 100,874,720 ------------- PAPER & FOREST PRODUCTS 0.5% Shandong Chenming Paper Holdings Ltd., B ................................ China 4,620,200 2,429,819 ------------- REAL ESTATE 4.9% Cheung Kong (Holdings) Ltd. ............................................. Hong Kong 1,360,690 14,364,685 Henderson Investment Ltd. ............................................... Hong Kong 2,888,756 5,548,175 Hongkong Land Holdings Ltd. ............................................. Hong Kong 1,521,000 5,445,180 ------------- 25,358,040 ------------- SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 3.8% Faraday Technology Corp. ................................................ Taiwan 309,560 486,512 Realtek Semiconductor Corp. ............................................. Taiwan 3,031,000 3,353,197 Samsung Electronics Co. Ltd. ............................................ South Korea 5,510 3,898,424 Siliconware Precision Industries Co. .................................... Taiwan 1,297,666 1,675,543 Sunplus Technology Co. Ltd. ............................................. Taiwan 2,435,247 2,953,020 Taiwan Semiconductor Manufacturing Co. Ltd. ............................. Taiwan 3,910,189 7,338,269 ------------- 19,704,965 ------------- SPECIALTY RETAIL 0.3% GOME Electrical Appliances Holdings Ltd. ................................ China 1,439,000 1,363,331 ------------- TEXTILES APPAREL & LUXURY GOODS 0.2% Tack Fat Group International Ltd. ....................................... Hong Kong 6,352,000 753,271 -------------
Semiannual Report | 19 Templeton China World Fund STATEMENT OF INVESTMENTS, FEBRUARY 28, 2006 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------- COUNTRY SHARES VALUE - ----------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) TRANSPORTATION INFRASTRUCTURE 4.1% China Merchants Holdings International Co. Ltd. ......................... China 1,303,451 $ 3,713,130 Chiwan Wharf Holdings Ltd., B ........................................... China 103,800 173,938 Cosco Pacific Ltd. ...................................................... China 1,641,449 3,480,537 Hainan Meilan International Airport Co. Ltd., H ......................... China 2,621,000 1,790,589 Hopewell Holdings Ltd. .................................................. Hong Kong 4,262,000 11,948,839 ------------- 21,107,033 ------------- WIRELESS TELECOMMUNICATION SERVICES 6.0% China Mobile (Hong Kong) Ltd. ........................................... China 5,828,770 28,475,356 Taiwan Mobile Co. Ltd. .................................................. Taiwan 2,496,930 2,308,374 ------------- 30,783,730 ------------- TOTAL COMMON STOCKS (COST $313,086,642) ................................. 469,458,670 ------------- ----------- PRINCIPAL AMOUNT ----------- SHORT TERM INVESTMENTS (COST $42,622,356) 8.3% d U.S. Treasury Bills, 3/02/06 - 5/25/06 .................................. United States $42,895,000 42,624,009 ------------- TOTAL INVESTMENTS (COST $355,708,998) 99.7% ............................. 512,082,679 OTHER ASSETS, LESS LIABILITIES 0.3% ..................................... 1,615,333 ------------- NET ASSETS 100.0% ....................................................... $ 513,698,012 =============
a Non-income producing. b Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under the guidelines approved by the Fund's Board of Trustees. At February 28, 2006, the aggregate value of these securities was $24,892,142, representing 4.85% of net assets. c Rounds to less than 0.1% of net assets. d The security is traded on a discount basis with no stated coupon rate. 20 | See notes to financial statements. | Semiannual Report Templeton China World Fund FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES February 28, 2006 (unaudited) Assets: Investments in securities: Cost .................................................................. $ 355,708,998 =============== Value ................................................................. $ 512,082,679 Cash ................................................................... 559 Foreign currency, at value (cost $188,511) ............................. 188,250 Receivables: Capital shares sold ................................................... 5,579,645 Dividends and interest ................................................ 220,330 --------------- Total assets ...................................................... 518,071,463 --------------- Liabilities: Payables: Investment securities purchased ....................................... 3,020,949 Capital shares redeemed ............................................... 438,604 Affiliates ............................................................ 777,096 Accrued expenses and other liabilities ................................. 136,802 --------------- Total liabilities ................................................. 4,373,451 --------------- Net assets, at value ............................................ $ 513,698,012 =============== Net assets consist of: Paid-in capital ........................................................ $ 390,529,798 Distributions in excess of net investment income ....................... (1,077,256) Net unrealized appreciation (depreciation) ............................. 156,380,735 Accumulated net realized gain (loss) ................................... (32,135,265) --------------- Net assets, at value ............................................ $ 513,698,012 =============== CLASS A: Net assets, at value ................................................... $ 199,074,242 =============== Shares outstanding ..................................................... 8,112,139 =============== Net asset value per share a ........................................... $ 24.54 =============== Maximum offering price per share (net asset value per share / 94.25%) .. $ 26.04 =============== CLASS B: Net assets, at value ................................................... $ 14,938,114 =============== Shares outstanding ..................................................... 612,296 =============== Net asset value and maximum offering price per share a ................ $ 24.40 =============== CLASS C: Net assets, at value ................................................... $ 79,598,437 =============== Shares outstanding ..................................................... 3,268,669 =============== Net asset value and maximum offering price per share a ................ $ 24.35 =============== ADVISOR CLASS: Net assets, at value ................................................... $ 220,087,219 =============== Shares outstanding ..................................................... 8,927,180 =============== Net asset value and maximum offering price per share a ................ $ 24.65 ===============
a Redemption price is equal to net asset value less contingent deferred sales charges, if applicable, and redemption fees retained by the Fund. Semiannual Report | See notes to financial statements. | 21 Templeton China World Fund FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF OPERATIONS for the six months ended February 28, 2006 (unaudited) Investment income: Dividends (net of foreign taxes of $260,785) ........................... $ 2,260,827 Interest (net of foreign taxes of $40) ................................. 766,001 --------------- Total investment income ........................................... 3,026,828 --------------- Expenses: Management fees (Note 3a) .............................................. 2,583,835 Administrative fees (Note 3b) .......................................... 412,507 Distribution fees (Note 3c) Class A ............................................................... 251,396 Class B ............................................................... 65,513 Class C ............................................................... 288,141 Transfer agent fees (Note 3e) .......................................... 283,101 Custodian fees (Note 4) ................................................ 119,386 Reports to shareholders ................................................ 21,144 Registration and filing fees ........................................... 40,935 Professional fees ...................................................... 13,106 Trustees' fees and expenses ............................................ 20,850 Other .................................................................. 4,385 --------------- Total expenses .................................................... 4,104,299 Expense reductions (Note 4) ....................................... (437) --------------- Net expenses .................................................... 4,103,862 --------------- Net investment income (loss) .................................. (1,077,034) --------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments ........................................................... 2,204,384 Foreign currency transactions ......................................... (67,625) --------------- Net realized gain (loss) .......................................... 2,136,759 --------------- Net change in unrealized appreciation (depreciation) on: Investments ........................................................... 58,327,848 Translation of assets and liabilities denominated in foreign currencies 39,339 --------------- Net change in unrealized appreciation (depreciation) .............. 58,367,187 --------------- Net realized and unrealized gain (loss) ................................. 60,503,946 --------------- Net increase (decrease) in net assets resulting from operations ......... $ 59,426,912 ===============
22 | See notes to financial statements. | Semiannual Report Templeton China World Fund FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS
----------------------------------- SIX MONTHS ENDED FEBRUARY 28, 2006 YEAR ENDED (UNAUDITED) AUGUST 31, 2005 ----------------------------------- Increase (decrease) in net assets: Operations: Net investment income (loss) ......................................................... $ (1,077,034) $ 5,686,790 Net realized gain (loss) from investments and foreign currency transactions .......... 2,136,759 9,162,080 Net change in unrealized appreciation (depreciation) on investments and translation of assets and liabilities denominated in foreign currencies ............................ 58,367,187 39,503,571 ----------------------------------- Net increase (decrease) in net assets resulting from operations .................. 59,426,912 54,352,441 Distributions to shareholders from: Net investment income: Class A ............................................................................. (1,806,741) (489,886) Class B ............................................................................. (97,993) (58,609) Class C ............................................................................. (561,303) (125,851) Advisor Class ....................................................................... (3,160,482) (1,971,461) ----------------------------------- Total distributions to shareholders ................................................... (5,626,519) (2,645,807) =================================== Capital share transactions: (Note 2) Class A ............................................................................. 68,687,405 55,617,034 Class B ............................................................................. 913,601 1,638,322 Class C ............................................................................. 26,227,269 19,848,842 Advisor Class ....................................................................... 4,025,479 (2,790,819) ----------------------------------- Total capital share transactions ...................................................... 99,853,754 74,313,379 ----------------------------------- Redemption fees ....................................................................... 4,781 6,987 ----------------------------------- Net increase (decrease) in net assets ............................................ 153,658,928 126,027,000 Net assets: Beginning of period ................................................................... 360,039,084 234,012,084 ----------------------------------- End of period ......................................................................... $ 513,698,012 $ 360,039,084 =================================== Undistributed net investment income (distributions in excess of net investment income) included in net assets: End of period ......................................................................... $ (1,077,256) $ 5,626,297 ===================================
Semiannual Report | See notes to financial statements. | 23 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 offers four classes of shares: Class A, Class B, Class C, and Advisor Class. Effective March 1, 2005, Class B shares are only offered to existing Class B shareholders in the form of reinvested distributions and certain exchanges from other Franklin Templeton Class B shares. Each class of shares differs by its initial sales load, contingent deferred sales charges, distribution fees, voting rights on matters affecting a single class and its exchange privilege. 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 shareholders who redeemed Advisor Class shares received in the conversion were subject to a 2% redemption fee. The following summarizes the Fund's significant accounting policies. 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. 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. 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. 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. 24 | Semiannual Report 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. 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. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. 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 on these contracts are included in the Statement of Operations. Semiannual Report | 25 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, which may be in excess of the amount reflected in the Statement of Assets and Liabilities. D. INCOME TAXES No provision has been made for U.S. income taxes because the Fund's policy is to continue to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains. Foreign securities held by the Fund may be subject to foreign taxation. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. 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. Amortization of premium and accretion of discount on debt securities are included in interest income. Dividend income is recorded on the ex-dividend date except that certain dividends from foreign securities are recognized as soon as the Fund is notified of the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods. 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 expenses during the reporting period. Actual results could differ from those estimates. 26 | Semiannual Report Templeton China World Fund NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) G. REDEMPTION FEES A short term trading redemption fee will be imposed, with some exceptions, on any Fund shares that are redeemed or exchanged within seven calendar days following their purchase date. The redemption fee is 2% of the amount redeemed. Such fees are retained by the Fund and accounted for as an addition to paid-in capital. H. GUARANTEES AND INDEMNIFICATIONS Under the Fund's organizational documents, its officers and trustees are indemnified by the Fund against certain liabilities 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 At February 28, 2006, 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, 2006 AUGUST 31, 2005 -------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT -------------------------------------------------------------- CLASS A SHARES: Shares sold ...................... 3,491,366 $ 80,473,865 3,577,879 $ 72,635,554 Shares issued in reinvestment of distributions ................ 69,859 1,477,515 23,212 419,671 Shares redeemed .................. (579,965) (13,263,975) (873,377) (17,438,191) -------------------------------------------------------------- Net increase (decrease) .......... 2,981,260 $ 68,687,405 2,727,714 $ 55,617,034 ============================================================== CLASS B SHARES: Shares sold ...................... 80,377 $ 1,835,769 173,565 $ 3,347,695 Shares issued in reinvestment of distributions ................ 4,065 85,646 2,789 50,234 Shares redeemed .................. (43,485) (1,007,814) (88,754) (1,759,607) -------------------------------------------------------------- Net increase (decrease) .......... 40,957 $ 913,601 87,600 $ 1,638,322 ============================================================== CLASS C SHARES: Shares sold ...................... 1,329,576 $ 30,550,910 1,263,454 $ 25,574,673 Shares issued in reinvestment of distributions ................ 21,092 443,574 5,672 102,262 Shares redeemed .................. (209,873) (4,767,215) (295,678) (5,828,093) -------------------------------------------------------------- Net increase (decrease) .......... 1,140,795 $ 26,227,269 973,448 $ 19,848,842 ==============================================================
Semiannual Report | 27 Templeton China World Fund NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
-------------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED FEBRUARY 28, 2006 AUGUST 31, 2005 ------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT ------------------------------------------------------------- ADVISOR CLASS SHARES: Shares sold ...................... 642,249 $ 14,873,656 908,097 $ 19,131,449 Shares issued in reinvestment of distributions ................ 56,892 1,207,251 34,752 629,703 Shares redeemed .................. (535,378) (12,055,428) (1,142,027) (22,551,971) ------------------------------------------------------------- Net increase (decrease) .......... 163,763 $ 4,025,479 (199,178) $ (2,790,819) =============================================================
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 average weekly net assets of the Fund 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% In excess of $20 billion B. ADMINISTRATIVE FEES The Fund pays an administrative fee to FT Services of 0.20% per year of the Fund's average daily net assets. C. DISTRIBUTION FEES The Fund's Board of Trustees has adopted distribution plans for each share class, with the exception of Advisor Class shares, pursuant to Rule 12b-1 under the 1940 Act. Under the Fund's compensation distribution plans, the Fund pays Distributors for costs incurred in 28 | Semiannual Report Templeton China World Fund NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) C. DISTRIBUTION FEES (CONTINUED) connection with the sale and distribution of the Fund's shares up to a certain percentage per year of its average daily net assets of each class as follows: Class A........................ 0.35% Class B........................ 1.00% Class C........................ 1.00% 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 a ....................................... $306,815 Contingent deferred sales charges retained.......................... $ 15,145 a Net of commissions paid to unaffiliated broker/dealers. E. TRANSFER AGENT FEES The Fund paid transfer agent fees of $283,101, of which $172,665 was retained by 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, 2006, the custodian fees were reduced as noted in the Statement of Operations. 5. INCOME TAXES At August 31, 2005, the Fund had tax basis capital losses which may be carried over to offset future capital gains, if any. At August 31, 2005, the capital loss carryforwards were as follows: Capital loss carryforwards expiring in: 2006 ................................................... $ 13,996,214 2007 ................................................... 45,311 2008 ................................................... 1,256,834 2009 ................................................... 17,884,154 ------------ $ 33,182,513 ============ Semiannual Report | 29 Templeton China World Fund NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 5. INCOME TAXES (CONTINUED) For tax purposes, realized currency losses occurring subsequent to October 31, may be deferred and treated as occurring on the first day of the following fiscal year. At August 31, 2005, the Fund deferred realized currency losses of $13,772. Net investment income differs for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales and foreign currency transactions. At February 28, 2006, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows: Cost of investments ..................................... $356,784,737 ============ Unrealized appreciation ................................. $160,770,884 Unrealized depreciation ................................. (5,472,942) ------------ Net unrealized appreciation (depreciation) .............. $155,297,942 ============ 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short term securities) for the period ended February 28, 2006, aggregated $110,793,347 and $7,679,301, respectively. 7. CONCENTRATION OF RISK Investing in foreign securities may include certain risks and considerations not typically associated with investing in U.S. securities, such as fluctuating currency values and changing local and regional economic, political and social conditions, which may result in greater market volatility. In addition, certain foreign securities may not be as liquid as U.S. securities. 8. REGULATORY MATTERS As part of various investigations by a number of federal, state, and foreign regulators and governmental entities, 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 (collectively, the "Company"), entered into settlements with certain of those regulators. 30 | Semiannual Report Templeton China World Fund NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 8. REGULATORY MATTERS (CONTINUED) Specifically, the Company entered into settlements with the Securities and Exchange Commission ("SEC") concerning market timing (the "August 2, 2004 SEC Order") and marketing support payments to securities dealers who sell fund shares (the "December 13, 2004 SEC Order") and with the California Attorney General's Office ("CAGO") concerning marketing support payments to securities dealers who sell fund shares (the "CAGO Settlement"). Under the terms of the settlements with the SEC and the CAGO, the Company retained an Independent Distribution Consultant ("IDC") to develop a plan for distribution of the respective settlement monies. The CAGO approved the distribution plan under the CAGO Settlement and, in accordance with the terms and conditions of that settlement, the monies were disbursed to the relevant funds. The Fund did not participate in the CAGO Settlement. The SEC has not yet approved the distribution plan pertaining to the December 13, 2004 SEC Order. When approved, disbursements of settlement monies will be made promptly to the relevant funds, in accordance with the terms and conditions of that order. The IDC has also prepared and submitted to the SEC for its approval a plan of distribution under the August 2, 2004 SEC Order that resolved the SEC's market timing investigation. In addition, the Company, as well as most of the mutual funds within Franklin Templeton Investments and certain current or former officers, directors, and/or employees, have been named in private lawsuits (styled as shareholder class actions, or as derivative actions on behalf of either the named funds or Franklin Resources, Inc.) relating to the industry practices referenced above, as well as to allegedly excessive advisory fees, commissions, and/or 12b-1 fees. The lawsuits were filed in different courts throughout the country. Many of those suits are now pending in a multi-district litigation in the United States District Court for the District of Maryland. The Company and fund management strongly believe that the claims made in each of the private lawsuits referenced above are without merit and intend to defend against them vigorously. The Company cannot predict with certainty the eventual outcome of these lawsuits, nor whether they will have a material negative impact on the Company. If it is determined that the Company 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. Semiannual Report | 31 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. 32 | Semiannual Report 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 MidCap Value Fund 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 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 Templeton Income Fund TAX-FREE INCOME 5 NATIONAL FUNDS Double Tax-Free Income Fund Federal Tax-Free Income Fund High Yield Tax-Free Income Fund Insured Tax-Free Income Fund 6 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 7 Colorado Connecticut Florida 7 Georgia Kentucky Louisiana Maryland Massachusetts 6 Michigan 6 Minnesota 6 Missouri New Jersey New York 7 North Carolina Ohio 7 Oregon Pennsylvania Tennessee Virginia INSURANCE FUNDS Franklin Templeton Variable Insurance Products Trust 8 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. For investors subject to the alternative minimum tax, a small portion of fund dividends may be taxable. Distributions of capital gains are generally taxable. 6. Portfolio of insured municipal securities. 7. 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). 8. The funds of the Franklin Templeton Variable Insurance Products Trust are generally available only through insurance company variable contracts. 09/05 Not part of the semiannual report [LOGO](R) FRANKLIN TEMPLETON One Franklin Parkway INVESTMENTS San Mateo, CA 94403-1906 o 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 S2006 04/06 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 12(a)(1), 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 David W. Niemiec 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. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANIES AND AFFILIATED PURCHASES. N/A ITEM 10. 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 11. 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 12. EXHIBITS (a)(1) Code of Ethics (a)(2) 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) 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 24, 2006 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /s/JIMMY D. GAMBILL Chief Executive Officer - Finance and Administration Date April 24, 2006 By /s/GALEN G. VETTER Chief Financial Officer Date April 24, 2006 EX-99.CODE ETH 2 ncsr-code1205.txt CODE OF ETHICS - PRINCIPAL & FINANCIAL OFFICERS Exhibit 12(a)(1) CODE OF ETHICS FOR PRINCIPAL EXECUTIVES & SENIOR FINANCIAL OFFICERS - ------------------------------------------------------------------------------ PROCEDURES Revised December 2005 - ------------------------------------------------------------------------------- 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 December 2005 FRANKLIN GROUP OF FUNDS Edward B. Jamieson, President and Chief Executive Officer - Investment Management Charles B. 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 and Chief Accounting Officer FRANKLIN MUTUAL SERIES FUNDS Peter Langerman 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 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 DECEMBER 2005 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 c/o Maria Abbott within 10 days of becoming a Covered Officer and by January 30th of each subsequent year. INTER-OFFICE MAIL: Maria Abbott, Manager, Code of Ethics, Global Compliance SM-920/2 TELEPHONE: (650) 312-5698 Fax: (650) 312-5646 E-MAIL: Abbott, Maria (internal address); mabbott@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.CERT 3 tch302cer206.txt SECTION 302 CERTIFICATIONS Exhibit 12(a)(2) 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 24, 2006 /s/JIMMY D. GAMBILL - ---------------------------------------------------- Jimmy D. Gambill Chief Executive Officer - Finance and Administration PAGE 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 24, 2006 /s/GALEN G. VETTER - ----------------------- Galen G. Vetter Chief Financial Officer EX-99.906CERT 4 tch906cer206.txt SECTION 906 CERTIFICATIONS Exhibit 12(b) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT 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 02/28/06 (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 24, 2006 /s/JIMMY D. GAMBILL ----------------------------------------------- Jimmy D. Gambill Chief Executive Officer - Finance and Administration PAGE CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT 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 02/28/06 (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 24, 2006 /s/GALEN G. VETTER ----------------------- Galen G. Vetter Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----