N-CSR 1 tch_ncsr083108.txt NCSR TCH 8/31/08 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-07876 ---------- TEMPLETON CHINA WORLD FUND ------------------------------------------------- (Exact name of registrant as specified in charter) 500 EAST BROWARD BLVD., SUITE 2100, 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: 8/31/08 -------- ITEM 1. REPORTS TO STOCKHOLDERS. AUGUST 31, 2008 ANNUAL REPORT AND SHAREHOLDER LETTER INTERNATIONAL TEMPLETON CHINA WORLD FUND WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL? Eligible shareholders can sign up for eDelivery at franklintempleton.com. See inside for details. (GRAPHIC) (FRANKLIN TEMPLETON INVESTMENTS(R) LOGO) Franklin - TEMPLETON - Mutual Series Annual 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 (800) 342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. This annual report for Templeton China World Fund covers the fiscal year ended August 31, 2008. PERFORMANCE OVERVIEW For the 12 months under review, Templeton China World Fund - Class A had a -11.63% cumulative total return. The Fund performed better than its benchmark, the Morgan Stanley Capital International (MSCI) Golden Dragon Index, which had a -16.05% cumulative total return for the same period.(1) Also, for comparison, the Standard & Poor's/International Finance Corporation (S&P/IFC) Investable China Index had a -18.49% cumulative total return for the 12 months ended August 31, 2008.(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 August 31, 2008, the Fund's Class A shares delivered a +573.17% cumulative total return, compared with the MSCI Golden Dragon Index's +198.62% 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: (C) 2008 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The MSCI Golden Dragon Index is an aggregate of the MSCI Hong Kong Index, the MSCI China Free Index and the MSCI Taiwan@65% Index. The MSCI Taiwan Index has an inclusion weight at 65% of its market capitalization in the MSCI index series. (2.) Source: (C) 2008 Morningstar. 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: (C) 2008 Morningstar. As of 8/31/08, the Fund's Class A 10-year average annual total return not including sales charges was +21.01%, compared with +11.56% 10-year average annual total return for the MSCI Golden Dragon 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 19. 4 | Annual Report ECONOMIC AND MARKET OVERVIEW Equity markets in the greater China region experienced corrections in the 12 months under review largely due to concerns of slowing global economic growth and the region's relatively high inflation. Several major natural disasters also negatively affected market sentiment, including the worst snowstorms in more than 50 years in the central and southern regions, a major earthquake in Sichuan province and rainstorms in the southern parts of the country. The economic impact from these events, however, was not significant. Although China's economy slowed, gross domestic product (GDP) in the second quarter of 2008 grew a robust 10.4% over the same quarter of 2007 (year-over-year), compared with 10.6% in the first quarter and 11.9% for all of 2007.(4) Slower export growth from a weaker global economy and the yuan's appreciation coupled with monetary tightening measures were key reasons behind the deceleration. Consumer inflation, however, eased to 6.3% year-over-year in July from a recent high of 8.7% in February 2008, mainly due to softening food prices.(4) In addition, China remained an attractive investment market, as foreign direct investment inflows accelerated and reached US$60.7 billion in the first seven months of 2008.(5) Moreover, foreign exchange reserves were up 35.7% year-over-year and surpassed US$1.8 trillion in June.(5) Consistent with global trends, GDP growth in Hong Kong decelerated to 4.2% year-over-year in the second quarter of 2008 from 7.3% in the first quarter.(6) This was in part due to weaker export demand and a moderation in consumer spending. Inflationary pressure increased, with consumer prices rising 5.7% year-over-year in the second quarter as food prices remained relatively high.(6) Unemployment, however, remained low at 3.3% in the second quarter.(6) The Taiwanese economy grew 4.3% year-over-year in the second quarter, its slowest pace in more than a year, as higher oil prices and rising inflation hurt consumption.(7) As a result, the government revised its 2008 growth forecast to 4.3% from 4.8%.(7) The trade sector, however, supported growth. In politics, incoming President Ma Ying-Jeou announced plans to normalize cross-strait relations and form closer economic ties with China. Taiwan and China subsequently concluded their first official talks since 1999 in June and resumed direct charter flights between the island and the mainland. GEOGRAPHIC BREAKDOWN Based on Total Net Assets as of 8/31/08 (PERFORMANCE GRAPH) China 62.6% Hong Kong 19.8% Taiwan 15.8% Cambodia 0.5% Singapore 0.4% Short-Term Investments & Other Net Assets 0.9%
(4.) Source: National Bureau of Statistics, China. (5.) Source: Ministry of Commerce, China. (6.) Source: Census and Statistics Department, Hong Kong. (7.) Source: Directorate General of Budget, Accounting and Statistics, Taiwan. Annual Report | 5 TOP 10 EQUITY HOLDINGS 8/31/08
COMPANY % OF TOTAL SECTOR/INDUSTRY, COUNTRY NET ASSETS ------------------------ ---------- China Mobile Ltd. WIRELESS TELECOMMUNICATION SERVICES, CHINA 9.2% PetroChina Co. Ltd., H OIL, GAS & CONSUMABLE FUELS, CHINA 7.6% CNOOC Ltd. OIL, GAS & CONSUMABLE FUELS, CHINA 7.5% Sinopec (China Petroleum and Chemical Corp.), H OIL, GAS & CONSUMABLE FUELS, CHINA 7.2% Dairy Farm International Holdings Ltd. FOOD & STAPLES RETAILING, HONG KONG 7.0% China Construction Bank Corp., H COMMERCIAL BANKS, CHINA 5.3% China Shenhua Energy Co. Ltd., H OIL, GAS & CONSUMABLE FUELS, CHINA 3.6% Asustek Computer Inc. COMPUTERS & PERIPHERALS, TAIWAN 3.6% TSMC (Taiwan Semiconductor Manufacturing Co. Ltd.) SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT, TAIWAN 3.6% Bank of China Ltd., H COMMERCIAL BANKS, CHINA 3.2%
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 a company's price/earnings ratio, profit margins and liquidation value. MANAGER'S DISCUSSION For the 12 months under review, top contributors to the Fund's absolute performance included Dairy Farm International Holdings, which operates supermarkets, hypermarkets (department store and supermarket), as well as convenience, home furnishing, and health and beauty stores in Asia; CNOOC, China's largest oil and natural gas offshore exploration and production company; and Cheung Kong Infrastructure Holdings, a diversified infrastructure company in Hong Kong. Our investments in the food and staples retailing industry also had a positive impact on Fund returns. In contrast, the Fund's investments in the energy, telecommunication services and capital goods sectors had a negative impact on Fund performance, as regional stocks in these sectors experienced corrections.(8) Significant detractors included China Mobile, the country's dominant mobile services provider; China Shenhua Energy, China's principal coal producer; and PetroChina, the country's largest oil and gas company in terms of reserves. Over the longer term, however, we believed the Fund's investments in these sectors were well positioned to benefit from developments in the region. During the Fund's fiscal year, we made select investments based on what we considered undervalued stocks trading at attractive valuations. Significant purchases included shares in Sinopec (China Petroleum and Chemical), China's largest integrated energy company; MediaTek, Taiwan's leading integrated circuit design company; and new holding Soho China, a commercial property developer primarily in central Beijing. (8.) The energy sector comprises energy equipment and services; and oil, gas and consumable fuels in the SOI. The telecommunication services sector comprises diversified telecommunication services and wireless telecommunication services in the SOI. The capital goods sector comprises construction and engineering, electrical equipment, industrial conglomerates, and machinery in the SOI. 6 | Annual Report To raise funds to meet redemptions during the reporting period, we sold a number of holdings. These sales also allowed the Fund to focus on stocks we deemed relatively more attractively valued within our investment universe. We sold select positions as stocks reached sale price targets. As a result, the Fund's exposure to China H and Red Chip shares as well as Taiwanese companies fell.(9) Key sales included telecommunication services providers China Mobile and China Telecom, integrated gold producer Zhaojin Mining Industry, and Taiwanese commercial bank Chinatrust Financial Holding. In addition, we reduced the Fund's position in China Construction Bank and added to Bank of China due to what we considered attractive valuations in the banks sector.(10) Subsequently, the Fund's exposure to telecommunication services, diversified banks and gold companies fell. We also divested the Fund's holdings in HSBC Holdings and Samsung Electronics and thereby eliminated the Fund's exposure to the U.K. and South Korea. Thank you for your continued participation in Templeton China World Fund. We look forward to serving your future investment needs. (PHOTO OF MARK MOBIUS) /s/ Mark Mobius Mark Mobius Executive Chairman Templeton Asset Management Ltd. THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF AUGUST 31, 2008, 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. (9.) "China H" denotes shares of China-incorporated, Hong Kong-listed companies with most businesses in China. "Red Chip" denotes shares of Hong Kong-listed companies with significant exposure to China. China H and Red Chip shares are traded on the Hong Kong Stock Exchange. (10.) The banks sector comprises commercial banks in the SOI. Annual Report | 7 Performance Summary as of 8/31/08 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 and graphs do 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 8/31/08 8/31/07 ----------------------- ------ ------- ------- Net Asset Value (NAV) -$6.51 $34.78 $41.29 DISTRIBUTIONS (9/1/07-8/31/08) Dividend Income $0.4126 Short-Term Capital Gain $0.5360 Long-Term Capital Gain $1.4363 TOTAL $2.3849
CLASS B (SYMBOL: TCWBX) CHANGE 8/31/08 8/31/07 ----------------------- ------ ------- ------- Net Asset Value (NAV) -$6.51 $34.44 $40.95 DISTRIBUTIONS (9/1/07-8/31/08) Dividend Income $0.1521 Short-Term Capital Gain $0.5360 Long-Term Capital Gain $1.4363 TOTAL $2.1244
CLASS C (SYMBOL: TCWCX) CHANGE 8/31/08 8/31/07 ----------------------- ------ ------- ------- Net Asset Value (NAV) -$6.50 $34.29 $40.79 DISTRIBUTIONS (9/1/07-8/31/08) Dividend Income $0.1763 Short-Term Capital Gain $0.5360 Long-Term Capital Gain $1.4363 TOTAL $2.1486
ADVISOR CLASS (SYMBOL: TACWX) CHANGE 8/31/08 8/31/07 ----------------------------- ------ ------- ------- Net Asset Value (NAV) -$6.52 $35.03 $41.55 DISTRIBUTIONS (9/1/07-8/31/08) Dividend Income $0.5399 Short-Term Capital Gain $0.5360 Long-Term Capital Gain $1.4363 TOTAL $2.5122
8 | Annual Report Performance Summary (CONTINUED) PERFORMANCE(1) CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. 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; ADVISOR CLASS: NO SALES CHARGES.
CLASS A 1-YEAR 5-YEAR 10-YEAR ------- ------- -------- -------- Cumulative Total Return(2) -11.63% +160.35% +573.17% Average Annual Total Return(3) -16.72% +19.67% +20.29% Value of $10,000 Investment(4) $ 8,328 $ 24,538 $ 63,447 Avg. Ann. Total Return (9/30/08)(5) -39.06% +15.60% +17.06% Total Annual Operating Expenses(6) 2.04%
CLASS B 1-YEAR 5-YEAR 10-YEAR ------- ------- -------- -------- Cumulative Total Return(2) -12.22% +151.94% +537.31% Average Annual Total Return(3) -15.59% +20.11% +20.35% Value of $10,000 Investment(4) $ 8,441 $ 24,994 $ 63,731 Avg. Ann. Total Return (9/30/08)(5) -38.26% +15.97% +17.10% Total Annual Operating Expenses(6) 2.69%
CLASS C 1-YEAR 5-YEAR 10-YEAR ------- ------- -------- -------- Cumulative Total Return(2) -12.21% +152.17% +529.38% Average Annual Total Return(3) -13.05% +20.32% +20.20% Value of $10,000 Investment(4) $ 8,695 $ 25,217 $ 62,938 Avg. Ann. Total Return (9/30/08)(5) -36.40% +16.23% +16.96% Total Annual Operating Expenses(6) 2.68%
ADVISOR CLASS 1-YEAR 5-YEAR 10-YEAR ------------- ------- -------- -------- Cumulative Total Return(2) -11.32% +164.89% +598.24% Average Annual Total Return(3) -11.32% +21.51% +21.45% Value of $10,000 Investment(4) $ 8,868 $ 26,489 $ 69,824 Avg. Ann. Total Return (9/30/08)(5) -35.14% +17.35% +18.18% Total Annual Operating Expenses(6) 1.69%
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 (800) 342-5236. Annual Report | 9 Performance Summary (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT(1) Total return represents the change in value of an investment over the periods shown. It includes any current, applicable, maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged index includes reinvestment of any income or distributions. It differs from the Fund in composition and does not pay management fees or expenses. One cannot invest directly in an index. AVERAGE ANNUAL TOTAL RETURN
CLASS A 8/31/08 ------- ------- 1-Year 16.72% 5-Year +19.67% 10-Year +20.29%
CLASS A (9/1/98-8/31/08) (PERFORMANCE GRAPH)
Templeton China World Fund - Class A MSCI Golden Dragon Index 7 --------------------- -------------------------- 9/1/1998 9,431 10,000 10,444 11,425 12,785 14,416 13,301 14,676 12,359 14,002 11,105 13,183 11,084 13,449 12,094 15,076 14,950 17,842 14,065 16,624 16,195 19,018 15,311 17,781 15,087 18,608 14,174 17,693 14,036 18,459 15,512 20,032 17,260 21,912 16,889 22,026 17,478 22,368 18,287 23,069 16,283 20,772 15,740 19,479 16,720 20,032 17,292 20,408 8/31/2000 17,753 19,896 16,538 17,590 14,947 16,112 14,689 15,029 15,294 15,341 16,093 17,371 16,798 16,454 16,030 15,083 16,685 14,915 18,035 14,541 17,726 14,111 15,838 13,225 15,010 12,419 14,230 10,446 15,351 11,042 15,535 12,454 15,120 13,701 15,835 13,633 16,342 13,147 16,879 14,089 17,977 14,408 18,625 13,948 18,232 13,043 17,661 12,401 8/31/2002 17,044 11,861 16,522 10,653 16,690 11,250 17,236 11,742 17,683 11,003 18,635 11,611 19,066 10,960 18,844 10,566 18,932 10,453 20,517 11,503 21,189 12,031 23,161 13,151 24,385 14,452 24,434 14,851 26,569 15,935 26,586 15,580 29,669 16,357 30,458 17,478 32,357 18,206 30,626 17,230 28,005 15,951 28,980 16,059 29,198 15,880 28,829 15,575 8/31/2004 30,189 16,432 31,181 16,859 30,947 16,714 33,188 18,130 33,545 18,691 32,781 18,078 34,835 19,031 34,139 18,122 34,359 18,333 35,004 18,674 35,514 19,321 37,364 20,127 36,787 19,538 38,468 20,079 35,994 18,582 38,113 19,778 39,457 20,611 41,852 21,934 42,283 22,069 42,231 22,360 44,695 24,013 42,903 22,579 43,472 22,572 43,799 22,462 8/31/2006 44,385 23,180 45,333 23,886 47,356 24,588 51,510 26,851 55,581 28,751 54,763 28,160 54,102 27,961 55,216 28,212 57,094 28,740 60,626 30,075 66,019 32,585 69,133 34,864 71,846 35,571 82,771 40,606 93,854 45,383 82,731 40,637 80,080 39,670 67,467 33,397 73,454 36,198 66,207 34,010 75,316 37,357 73,345 36,117 65,879 31,957 65,970 31,534 8/31/2008 63,447 29,862
AVERAGE ANNUAL TOTAL RETURN
CLASS B 8/31/08 ------- ------- 1-Year -15.59% 5-Year +20.11% 10-Year +20.35%
CLASS B (9/1/98-8/31/08) (PERFORMANCE GRAPH)
Templeton China World Fund - Class B MSCI Golden Dragon Index 7 -------------------- -------------------------- 9/1/1998 10,000 10,000 9/30/1998 11,073 11,425 10/31/1998 13,541 14,416 11/30/1998 14,077 14,676 12/31/1998 13,072 14,002 1/31/1999 11,736 13,183 2/28/1999 11,705 13,449 3/31/1999 12,765 15,076 4/30/1999 15,776 17,842 5/31/1999 14,823 16,624 6/30/1999 17,066 19,018 7/31/1999 16,129 17,781 8/31/1999 15,883 18,608 9/30/1999 14,916 17,693 10/31/1999 14,757 18,459 11/30/1999 16,306 20,032 12/31/1999 18,123 21,912 1/31/2000 17,712 22,026 2/29/2000 18,328 22,368 3/31/2000 19,163 23,069 4/30/2000 17,050 20,772 5/31/2000 16,482 19,479 6/30/2000 17,492 20,032 7/31/2000 18,075 20,408 8/31/2000 18,548 19,896 9/30/2000 17,271 17,590 10/31/2000 15,599 16,112 11/30/2000 15,317 15,029 12/31/2000 15,952 15,341 1/31/2001 16,766 17,371 2/28/2001 17,500 16,454 3/31/2001 16,686 15,083 4/30/2001 17,357 14,915 5/31/2001 18,746 14,541 6/30/2001 18,427 14,111 7/31/2001 16,447 13,225 8/31/2001 15,584 12,419 9/30/2001 14,770 10,446 10/31/2001 15,918 11,042 11/30/2001 16,097 12,454 12/31/2001 15,653 13,701 1/31/2002 16,386 13,633 2/28/2002 16,908 13,147 3/31/2002 17,446 14,089 4/30/2002 18,571 14,408 5/31/2002 19,240 13,948 6/30/2002 18,816 13,043 7/31/2002 18,212 12,401 8/31/2002 17,577 11,861 9/30/2002 17,022 10,653 10/31/2002 17,188 11,250 11/30/2002 17,736 11,742 12/31/2002 18,185 11,003 1/31/2003 19,150 11,611 2/28/2003 19,599 10,960 3/31/2003 19,349 10,566 4/30/2003 19,433 10,453 5/31/2003 21,046 11,503 6/30/2003 21,728 12,031 7/31/2003 23,743 13,151 8/31/2003 24,968 14,452 9/30/2003 25,019 14,851 10/31/2003 27,189 15,935 11/30/2003 27,189 15,580 12/31/2003 30,304 16,357 1/31/2004 31,112 17,478 2/29/2004 33,040 18,206 3/31/2004 31,250 17,230 4/30/2004 28,548 15,951 5/31/2004 29,529 16,059 6/30/2004 29,718 15,880 7/31/2004 29,340 15,575 8/31/2004 30,699 16,432 9/30/2004 31,697 16,859 10/31/2004 31,450 16,714 11/30/2004 33,701 18,130 12/31/2004 34,030 18,691 1/31/2005 33,234 18,078 2/28/2005 35,329 19,031 3/31/2005 34,584 18,122 4/30/2005 34,792 18,333 5/31/2005 35,433 18,674 6/30/2005 35,918 19,321 7/31/2005 37,788 20,127 8/31/2005 37,182 19,538 9/30/2005 38,845 20,079 10/31/2005 36,330 18,582 11/30/2005 38,460 19,778 12/31/2005 39,787 20,611 1/31/2006 42,179 21,934 2/28/2006 42,598 22,069 3/31/2006 42,510 22,360 4/30/2006 44,972 24,013 5/31/2006 43,156 22,579 6/30/2006 43,715 22,572 7/31/2006 44,012 22,462 8/31/2006 44,571 23,180 9/30/2006 45,525 23,886 10/31/2006 47,555 24,588 11/30/2006 51,726 26,851 12/31/2006 55,812 28,751 1/31/2007 54,992 28,160 2/28/2007 54,326 27,961 3/31/2007 55,445 28,212 4/30/2007 57,331 28,740 5/31/2007 60,879 30,075 6/30/2007 66,298 32,585 7/31/2007 69,427 34,864 8/31/2007 72,155 35,571 9/30/2007 83,130 40,606 10/31/2007 94,261 45,383 11/30/2007 83,091 40,637 12/31/2007 80,432 39,670 1/31/2008 67,764 33,397 2/29/2008 73,775 36,198 3/31/2008 66,493 34,010 4/30/2008 75,643 37,357 5/31/2008 73,661 36,117 6/30/2008 66,162 31,957 7/31/2008 66,255 31,534 8/31/2008 63,731 29,862
10 | Annual Report Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN
CLASS C 8/31/08 ------- ------- 1-Year -13.05% 5-Year +20.32% 10-Year +20.20%
CLASS C (9/1/98-8/31/08) (PERFORMANCE GRAPH)
Templeton China World Fund - Class C MSCI Golden Dragon Index 7 -------------------- -------------------------- 9/1/1998 10,000 10,000 9/30/1998 11,069 11,425 10/31/1998 13,532 14,416 11/30/1998 14,070 14,676 12/31/1998 13,062 14,002 1/31/1999 11,730 13,183 2/28/1999 11,702 13,449 3/31/1999 12,761 15,076 4/30/1999 15,768 17,842 5/31/1999 14,826 16,624 6/30/1999 17,063 19,018 7/31/1999 16,122 17,781 8/31/1999 15,878 18,608 9/30/1999 14,908 17,693 10/31/1999 14,751 18,459 11/30/1999 16,294 20,032 12/31/1999 18,110 21,912 1/31/2000 17,711 22,026 2/29/2000 18,320 22,368 3/31/2000 19,157 23,069 4/30/2000 17,048 20,772 5/31/2000 16,469 19,479 6/30/2000 17,487 20,032 7/31/2000 18,075 20,408 8/31/2000 18,547 19,896 9/30/2000 17,268 17,590 10/31/2000 15,597 16,112 11/30/2000 15,318 15,029 12/31/2000 15,939 15,341 1/31/2001 16,762 17,371 2/28/2001 17,487 16,454 3/31/2001 16,679 15,083 4/30/2001 17,351 14,915 5/31/2001 18,746 14,541 6/30/2001 18,415 14,111 7/31/2001 16,443 13,225 8/31/2001 15,574 12,419 9/30/2001 14,757 10,446 10/31/2001 15,905 11,042 11/30/2001 16,088 12,454 12/31/2001 15,648 13,701 1/31/2002 16,380 13,633 2/28/2002 16,895 13,147 3/31/2002 17,443 14,089 4/30/2002 18,567 14,408 5/31/2002 19,226 13,948 6/30/2002 18,811 13,043 7/31/2002 18,210 12,401 8/31/2002 17,564 11,861 9/30/2002 17,017 10,653 10/31/2002 17,179 11,250 11/30/2002 17,732 11,742 12/31/2002 18,181 11,003 1/31/2003 19,150 11,611 2/28/2003 19,584 10,960 3/31/2003 19,345 10,566 4/30/2003 19,425 10,453 5/31/2003 21,040 11,503 6/30/2003 21,718 12,031 7/31/2003 23,727 13,151 8/31/2003 24,959 14,452 9/30/2003 24,993 14,851 10/31/2003 27,179 15,935 11/30/2003 27,179 15,580 12/31/2003 30,310 16,357 1/31/2004 31,101 17,478 2/29/2004 33,028 18,206 3/31/2004 31,239 17,230 4/30/2004 28,555 15,951 5/31/2004 29,519 16,059 6/30/2004 29,708 15,880 7/31/2004 29,329 15,575 8/31/2004 30,706 16,432 9/30/2004 31,686 16,859 10/31/2004 31,439 16,714 11/30/2004 33,723 18,130 12/31/2004 34,052 18,691 1/31/2005 33,256 18,078 2/28/2005 35,332 19,031 3/31/2005 34,588 18,122 4/30/2005 34,796 18,333 5/31/2005 35,436 18,674 6/30/2005 35,938 19,321 7/31/2005 37,806 20,127 8/31/2005 37,183 19,538 9/30/2005 38,862 20,079 10/31/2005 36,362 18,582 11/30/2005 38,479 19,778 12/31/2005 39,809 20,611 1/31/2006 42,207 21,934 2/28/2006 42,609 22,069 3/31/2006 42,539 22,360 4/30/2006 45,006 24,013 5/31/2006 43,186 22,579 6/30/2006 43,729 22,572 7/31/2006 44,026 22,462 8/31/2006 44,586 23,180 9/30/2006 45,514 23,886 10/31/2006 47,524 24,588 11/30/2006 51,654 26,851 12/31/2006 55,714 28,751 1/31/2007 54,871 28,160 2/28/2007 54,168 27,961 3/31/2007 55,257 28,212 4/30/2007 57,103 28,740 5/31/2007 60,600 30,075 6/30/2007 65,943 32,585 7/31/2007 69,036 34,864 8/31/2007 71,690 35,571 9/30/2007 82,569 40,606 10/31/2007 93,572 45,383 11/30/2007 82,434 40,637 12/31/2007 79,756 39,670 1/31/2008 67,143 33,397 2/29/2008 73,073 36,198 3/31/2008 65,821 34,010 4/30/2008 74,854 37,357 5/31/2008 72,834 36,117 6/30/2008 65,380 31,957 7/31/2008 65,435 31,534 8/31/2008 62,938 29,862
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS 8/31/08 ------------- ------- 1-Year -11.32% 5-Year +21.51% 10-Year +21.45%
ADVISOR CLASS (9/1/98-8/31/08) (PERFORMANCE GRAPH)
Templeton China World Fund - Advisor Class MSCI Golden Dragon Index 7 --------------------- -------------------------- 9/1/1998 10,000 10,000 9/30/1998 11,077 11,425 10/31/1998 13,570 14,416 11/30/1998 14,122 14,676 12/31/1998 13,128 14,002 1/31/1999 11,799 13,183 2/28/1999 11,780 13,449 3/31/1999 12,857 15,076 4/30/1999 15,897 17,842 5/31/1999 14,961 16,624 6/30/1999 17,231 19,018 7/31/1999 16,295 17,781 8/31/1999 16,062 18,608 9/30/1999 15,095 17,693 10/31/1999 14,954 18,459 11/30/1999 16,531 20,032 12/31/1999 18,405 21,912 1/31/2000 18,015 22,026 2/29/2000 18,649 22,368 3/31/2000 19,517 23,069 4/30/2000 17,383 20,772 5/31/2000 16,809 19,479 6/30/2000 17,861 20,032 7/31/2000 18,477 20,408 8/31/2000 18,975 19,896 9/30/2000 17,682 17,590 10/31/2000 15,986 16,112 11/30/2000 15,716 15,029 12/31/2000 16,369 15,341 1/31/2001 17,229 17,371 2/28/2001 17,988 16,454 3/31/2001 17,171 15,083 4/30/2001 17,878 14,915 5/31/2001 19,330 14,541 6/30/2001 19,004 14,111 7/31/2001 16,986 13,225 8/31/2001 16,102 12,419 9/30/2001 15,270 10,446 10/31/2001 16,480 11,042 11/30/2001 16,683 12,454 12/31/2001 16,243 13,701 1/31/2002 17,016 13,633 2/28/2002 17,565 13,147 3/31/2002 18,148 14,089 4/30/2002 19,334 14,408 5/31/2002 20,036 13,948 6/30/2002 19,618 13,043 7/31/2002 19,010 12,401 8/31/2002 18,351 11,861 9/30/2002 17,795 10,653 10/31/2002 17,983 11,250 11/30/2002 18,576 11,742 12/31/2002 19,063 11,003 1/31/2003 20,095 11,611 2/28/2003 20,565 10,960 3/31/2003 20,332 10,566 4/30/2003 20,433 10,453 5/31/2003 22,149 11,503 6/30/2003 22,881 12,031 7/31/2003 25,018 13,151 8/31/2003 26,360 14,452 9/30/2003 26,449 14,851 10/31/2003 28,756 15,935 11/30/2003 28,774 15,580 12/31/2003 32,107 16,357 1/31/2004 32,979 17,478 2/29/2004 35,049 18,206 3/31/2004 33,179 17,230 4/30/2004 30,346 15,951 5/31/2004 31,417 16,059 6/30/2004 31,653 15,880 7/31/2004 31,254 15,575 8/31/2004 32,743 16,432 9/30/2004 33,833 16,859 10/31/2004 33,594 16,714 11/30/2004 36,040 18,130 12/31/2004 36,426 18,691 1/31/2005 35,599 18,078 2/28/2005 37,860 19,031 3/31/2005 37,106 18,122 4/30/2005 37,364 18,333 5/31/2005 38,063 18,674 6/30/2005 38,633 19,321 7/31/2005 40,674 20,127 8/31/2005 40,049 19,538 9/30/2005 41,869 20,079 10/31/2005 39,216 18,582 11/30/2005 41,535 19,778 12/31/2005 43,012 20,611 1/31/2006 45,630 21,934 2/28/2006 46,098 22,069 3/31/2006 46,060 22,360 4/30/2006 48,772 24,013 5/31/2006 46,827 22,579 6/30/2006 47,463 22,572 7/31/2006 47,837 22,462 8/31/2006 48,491 23,180 9/30/2006 49,520 23,886 10/31/2006 51,763 24,588 11/30/2006 56,300 26,851 12/31/2006 60,794 28,751 1/31/2007 59,903 28,160 2/28/2007 59,202 27,961 3/31/2007 60,434 28,212 4/30/2007 62,500 28,740 5/31/2007 66,404 30,075 6/30/2007 72,316 32,585 7/31/2007 75,746 34,864 8/31/2007 78,740 35,571 9/30/2007 90,755 40,606 10/31/2007 02,921 45,383 11/30/2007 90,749 40,637 12/31/2007 87,884 39,670 1/31/2008 74,050 33,397 2/29/2008 80,648 36,198 3/31/2008 72,715 34,010 4/30/2008 82,741 37,357 5/31/2008 80,588 36,117 6/30/2008 72,396 31,957 7/31/2008 72,515 31,534 8/31/2008 69,824 29,862
Annual Report | 11 Performance Summary (CONTINUED) ENDNOTES THE GOVERNMENT'S PARTICIPATION IN THE ECONOMY IS STILL HIGH AND, THEREFORE, THE 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 FUND 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 charge 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. (3.) Average annual total return represents the average annual change in value of an investment over the periods indicated. (4.) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. (5.) In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter. (6.) Figures are as stated in the Fund's prospectus current as of the date of this report. (7.) Source: (C) 2008 Morningstar. The MSCI Golden Dragon Index is an aggregate of the MSCI Hong Kong Index, the MSCI China Free Index and the MSCI Taiwan@65% Index. The MSCI Taiwan Index has an inclusion weight at 65% of its market capitalization in the MSCI index series. 12 | Annual Report Your Fund's Expenses As a Fund shareholder, you can incur two types of costs: - Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and - 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 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. Annual Report | 13 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.
EXPENSES PAID BEGINNING ACCOUNT ENDING ACCOUNT DURING PERIOD* VALUE 3/1/08 VALUE 8/31/08 3/1/08-8/31/08 ----------------- -------------- -------------- CLASS A Actual $1,000 $ 864.30 $ 9.28 Hypothetical (5% return before expenses) $1,000 $1,015.18 $10.03 CLASS B Actual $1,000 $ 861.40 $12.54 Hypothetical (5% return before expenses) $1,000 $1,011.66 $13.55 CLASS C Actual $1,000 $ 861.30 $12.45 Hypothetical (5% return before expenses) $1,000 $1,011.76 $13.45 ADVISOR CLASS Actual $1,000 $ 865.80 $ 7.88 Hypothetical (5% return before expenses) $1,000 $1,016.69 $ 8.52
* Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 1.98%; B: 2.68%; C: 2.66%; and Advisor: 1.68%), multiplied by the average account value over the period, multiplied by 184/366 to reflect the one-half year period. 14 | Annual Report Templeton China World Fund FINANCIAL HIGHLIGHTS
YEAR ENDED AUGUST 31, ----------------------------------------------------------- CLASS A 2008 2007 2006 2005 2004 ------- -------- -------- -------- -------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............... $ 41.29 $ 25.76 $ 21.67 $ 17.97 $ 14.89 -------- -------- -------- -------- ------- Income from investment operations(a): Net investment income(b) ...................... 0.34 0.37 0.29 0.43 0.21 Net realized and unrealized gains (losses) .... (4.47) 15.42 4.12 3.46 3.24 -------- -------- -------- -------- ------- Total from investment operations ................. (4.13) 15.79 4.41 3.89 3.45 -------- -------- -------- -------- ------- Less distributions from: Net investment income ......................... (0.41) (0.26) (0.32) (0.19) (0.40) Net realized gains ............................ (1.97) -- -- -- -- -------- -------- -------- -------- ------- Total distributions .............................. (2.38) (0.26) (0.32) (0.19) (0.40) -------- -------- -------- -------- ------- Redemption fees .................................. --(c) --(c) --(c) --(c) 0.03 -------- -------- -------- -------- ------- Net asset value, end of year ..................... $ 34.78 $ 41.29 $ 25.76 $ 21.67 $ 17.97 ======== ======== ======== ======== ======= Total return(d) .................................. (11.63)% 61.87% 20.65% 21.85% 23.80% RATIOS TO AVERAGE NET ASSETS Expenses(e) ...................................... 2.00% 2.04% 2.06% 2.08% 2.14%(f) Net investment income ............................ 0.86% 1.13% 1.10% 1.86% 1.09% SUPPLEMENTAL DATA Net assets, end of year (000's) .................. $414,194 $519,266 $262,346 $111,193 $43,179 Portfolio turnover rate .......................... 10.37% 22.05% 12.96% 9.66% 30.82%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (e) Benefit of expense reduction rounds to less than 0.01%. (f) Ratio of expenses to average net assets, excluding payments by affiliate, was 2.30%. The accompanying notes are an integral part of these financial statements. Annual Report | 15 Templeton China World Fund FINANCIAL HIGHLIGHTS (CONTINUED)
YEAR ENDED AUGUST 31, ------------------------------------------------------- CLASS B 2008 2007 2006 2005 2004 ------- ------- ------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............... $ 40.95 $ 25.53 $ 21.47 $ 17.84 $ 14.88 ------- ------- ------- ------- ------- Income from investment operations(a): Net investment income(b) ...................... 0.06 0.12 0.08 0.24 0.16 Net realized and unrealized gains (losses) .... (4.45) 15.36 4.15 3.51 3.16 ------- ------- ------- ------- ------- Total from investment operations ................. (4.39) 15.48 4.23 3.75 3.32 ------- ------- ------- ------- ------- Less distributions from: Net investment income ......................... (0.15) (0.06) (0.17) (0.12) (0.39) Net realized gains ............................ (1.97) -- -- -- -- ------- ------- ------- ------- ------- Total distributions .............................. (2.12) (0.06) (0.17) (0.12) (0.39) ------- ------- ------- ------- ------- Redemption fees .................................. --(c) --(c) --(c) --(c) 0.03 ------- ------- ------- ------- ------- Net asset value, end of year ..................... $ 34.44 $ 40.95 $ 25.53 $ 21.47 $ 17.84 ======= ======= ======= ======= ======= Total return(d) .................................. (12.22)% 60.79% 19.87% 21.12% 22.95% RATIOS TO AVERAGE NET ASSETS Expenses(e) ...................................... 2.67% 2.69% 2.70% 2.73% 2.79%(f) Net investment income ............................ 0.19% 0.48% 0.46% 1.21% 0.44% SUPPLEMENTAL DATA Net assets, end of year (000's) .................. $14,272 $20,066 $15,269 $12,264 $ 8,630 Portfolio turnover rate .......................... 10.37% 22.05% 12.96% 9.66% 30.82%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (e) Benefit of expense reduction rounds to less than 0.01%. (f) Ratio of expenses to average net assets, excluding payments by affiliate, was 2.95%. The accompanying notes are an integral part of these financial statements. 16 | Annual Report Templeton China World Fund FINANCIAL HIGHLIGHTS (CONTINUED)
YEAR ENDED AUGUST 31, ---------------------------------------------------------- CLASS C 2008 2007 2006 2005 2004 ------- -------- -------- -------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............... $ 40.79 $ 25.48 $ 21.49 $ 17.85 $ 14.88 -------- -------- -------- ------- ------- Income from investment operations(a): Net investment income(b) ...................... 0.07 0.15 0.13 0.29 0.12 Net realized and unrealized gains (losses) .... (4.42) 15.28 4.10 3.46 3.21 -------- -------- -------- ------- ------- Total from investment operations ................. (4.35) 15.43 4.23 3.75 3.33 -------- -------- -------- ------- ------- Less distributions from: Net investment income ......................... (0.18) (0.12) (0.24) (0.11) (0.39) Net realized gains ............................ (1.97) -- -- -- -- -------- -------- -------- ------- ------- Total distributions .............................. (2.15) (0.12) (0.24) (0.11) (0.39) -------- -------- -------- ------- ------- Redemption fees .................................. --(c) --(c) --(c) --(c) 0.03 -------- -------- -------- ------- ------- Net asset value, end of year ..................... $ 34.29 $ 40.79 $ 25.48 $ 21.49 $ 17.85 ======== ======== ======== ======= ======= Total return(d) .................................. (12.21)% 60.79% 19.91% 21.10% 23.02% RATIOS TO AVERAGE NET ASSETS Expenses(e) ...................................... 2.66% 2.68% 2.71% 2.68% 2.75%(f) Net investment income ............................ 0.20% 0.49% 0.45% 1.26% 0.48% SUPPLEMENTAL DATA Net assets, end of year (000's) .................. $153,068 $199,551 $107,886 $45,738 $20,603 Portfolio turnover rate .......................... 10.37% 22.05% 12.96% 9.66% 30.82%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (e) Benefit of expense reduction rounds to less than 0.01%. (f) Ratio of expenses to average net assets, excluding payments by affiliate, was 2.91%. The accompanying notes are an integral part of these financial statements. Annual Report | 17 Templeton China World Fund FINANCIAL HIGHLIGHTS (CONTINUED)
YEAR ENDED AUGUST 31, ----------------------------------------------------------- ADVISOR CLASS 2008 2007 2006 2005 2004 ------------- -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............... $ 41.55 $ 25.93 $ 21.78 $ 18.03 $ 14.90 -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income(b) ...................... 0.50 0.47 0.33 0.42 0.24 Net realized and unrealized gains (losses) .... (4.51) 15.52 4.18 3.56 3.27 -------- -------- -------- -------- -------- Total from investment operations ................. (4.01) 15.99 4.51 3.98 3.51 -------- -------- -------- -------- -------- Less distributions from: Net investment income ......................... (0.54) (0.37) (0.36) (0.23) (0.41) Net realized gains ............................ (1.97) -- -- -- -- -------- -------- -------- -------- -------- Total distributions .............................. (2.51) (0.37) (0.36) (0.23) (0.41) -------- -------- -------- -------- -------- Redemption fees .................................. --(c) --(c) --(c) --(c) 0.03 -------- -------- -------- -------- -------- Net asset value, end of year ..................... $ 35.03 $ 41.55 $ 25.93 $ 21.78 $ 18.03 ======== ======== ======== ======== ======== Total return ..................................... (11.32)% 62.38% 21.08% 22.31% 24.21% RATIOS TO AVERAGE NET ASSETS Expenses(d) ...................................... 1.67% 1.69% 1.71% 1.73% 1.79%(e) Net investment income ............................ 1.19% 1.48% 1.45% 2.21% 1.44% SUPPLEMENTAL DATA Net assets, end of year (000's) .................. $288,072 $375,738 $245,331 $190,844 $161,599 Portfolio turnover rate .......................... 10.37% 22.05% 12.96% 9.66% 30.82%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Benefit of expense reduction rounds to less than 0.01%. (e) Ratio of expenses to average net assets, excluding payments by affiliate, was 1.95%. The accompanying notes are an integral part of these financial statements. 18 | Annual Report Templeton China World Fund STATEMENT OF INVESTMENTS, AUGUST 31, 2008
COUNTRY SHARES/UNITS VALUE ------------- ------------ ------------ COMMON STOCKS AND OTHER EQUITY INTERESTS 99.1% AIR FREIGHT & LOGISTICS 0.1% Sinotrans Ltd., H .................................... China 3,586,000 $ 817,872 ------------ AUTO COMPONENTS 1.7% Cheng Shin Rubber Industry Co. Ltd. .................. Taiwan 7,773,423 10,395,767 Norstar Founders Group Ltd. .......................... Hong Kong 15,182,000 2,917,932 (a) Zhejiang Glass Co. Ltd., H ........................... China 2,869,000 1,429,997 ------------ 14,743,696 ------------ AUTOMOBILES 1.7% (a) Brilliance China Automotive Holdings Ltd. ............ China 7,580,000 786,700 (a) Chongqing Changan Automobile Co. Ltd., B ............. China 2,036,200 636,598 Dongfeng Motor Corp., H .............................. China 26,316,000 11,228,430 Great Wall Motor Co. Ltd., H ......................... China 2,496,500 1,183,554 Jiangling Motors Corp. Ltd., B ....................... China 1,536,545 1,163,557 ------------ 14,998,839 ------------ COMMERCIAL BANKS 11.4% Bank of China Ltd., H ................................ China 65,006,000 28,236,318 China Construction Bank Corp., H ..................... China 56,116,000 46,017,349 Industrial and Commercial Bank of China, H ........... China 12,691,000 8,797,272 (b) Industrial and Commercial Bank of China, H, 144A ..... China 22,778,000 15,789,478 ------------ 98,840,417 ------------ COMMUNICATIONS EQUIPMENT 0.7% D-Link Corp. ......................................... Taiwan 941,337 1,144,043 ZTE Corp., H ......................................... China 1,087,243 5,203,219 ------------ 6,347,262 ------------ COMPUTERS & PERIPHERALS 5.1% Acer Inc. ............................................ Taiwan 2,641,723 5,316,096 Asustek Computer Inc. ................................ Taiwan 13,528,786 31,340,651 Compal Electronics Inc. .............................. Taiwan 2,938,162 2,653,704 Lite-On IT Corp. ..................................... Taiwan 6,305,116 4,895,432 ------------ 44,205,883 ------------ CONSTRUCTION & ENGINEERING 0.0%(c) Baoye Group Co. Ltd., H .............................. China 1,206,000 401,768 ------------ DISTRIBUTORS 1.9% China Resources Enterprise Ltd. ...................... Hong Kong 5,108,000 13,973,451 Dah Chong Hong Holdings Ltd. ......................... Hong Kong 10,035,563 2,803,194 (b) Dah Chong Hong Holdings Ltd., 144A ................... Hong Kong 502,000 140,222 ------------ 16,916,867 ------------
Annual Report | 19 Templeton China World Fund STATEMENT OF INVESTMENTS, AUGUST 31, 2008 (CONTINUED)
COUNTRY SHARES/UNITS VALUE ------------- ------------ ------------ COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED) DIVERSIFIED TELECOMMUNICATION SERVICES 1.5% China Netcom Group Corp. (Hong Kong) Ltd. ............ China 2,146,000 $ 5,064,939 China Telecom Corp. Ltd., H .......................... China 16,209,833 8,287,172 ------------ 13,352,111 ------------ ELECTRIC UTILITIES 3.2% Cheung Kong Infrastructure Holdings Ltd. ............. Hong Kong 6,339,548 27,617,994 ------------ ELECTRICAL EQUIPMENT 0.4% BYD Co. Ltd., H ...................................... China 3,011,100 3,476,201 ------------ ELECTRONIC EQUIPMENT & INSTRUMENTS 3.2% AU Optronics Corp. ................................... Taiwan 5,593,293 6,744,567 Synnex Technology International Corp. ................ Taiwan 9,922,070 19,369,340 Wasion Group Ltd. .................................... Hong Kong 2,172,000 695,752 (b) Wasion Group Ltd., 144A .............................. Hong Kong 3,884,000 1,244,154 ------------ 28,053,813 ------------ ENERGY EQUIPMENT & SERVICES 0.0%(c) Anhui Tianda Oil Pipe Co. Ltd., H .................... China 1,545,000 296,944 ------------ FOOD & STAPLES RETAILING 8.0% Beijing Jingkelong Supermarket Chain Group Co. Ltd., H ........................................... China 1,434,000 782,733 Dairy Farm International Holdings Ltd. ............... Hong Kong 11,326,776 61,051,323 President Chain Store Corp. .......................... Taiwan 2,560,088 7,569,520 ------------ 69,403,576 ------------ FOOD PRODUCTS 1.3% China Foods Ltd. ..................................... China 8,002,000 3,178,448 China Huiyuan Juice Group Ltd. ....................... China 717,500 380,607 China Mengniu Dairy Co. Ltd. ......................... China 516,000 1,570,248 People's Food Holdings Ltd. .......................... China 3,602,000 2,337,476 Uni-President Enterprises Corp. ...................... Taiwan 1,317,925 1,432,573 Xiwang Sugar Holdings Co. Ltd. ....................... Hong Kong 8,826,000 2,668,891 ------------ 11,568,243 ------------ HOTELS, RESTAURANTS & LEISURE 0.5% NagaCorp Ltd. ........................................ Cambodia 16,609,000 4,341,388 ------------ INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 3.0% Datang International Power Generation Co. Ltd., H .... China 22,334,640 14,881,175 Guangdong Electric Power Development Co. Ltd., B ..... China 12,171,859 4,772,360 Huadian Power International Corp. Ltd., H ............ China 4,180,000 1,263,989 Huaneng Power International Inc., H .................. China 7,296,776 5,441,378 ------------ 26,358,902 ------------
20 | Annual Report Templeton China World Fund STATEMENT OF INVESTMENTS, AUGUST 31, 2008 (CONTINUED)
COUNTRY SHARES/UNITS VALUE ------------- ------------ ------------ COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED) INDUSTRIAL CONGLOMERATES 2.4% Citic Pacific Ltd. ................................... Hong Kong 1,589,092 $ 5,568,796 Hutchison Whampoa Ltd. ............................... Hong Kong 224,000 2,093,766 Shanghai Industrial Holdings Ltd. .................... China 4,944,253 13,430,478 ------------ 21,093,040 ------------ INSURANCE 0.2% China Life Insurance Co. Ltd., H ..................... China 565,000 2,160,965 ------------ IT SERVICES 0.1% Travelsky Technology Ltd., H ......................... China 870,000 529,502 ------------ LEISURE EQUIPMENT & PRODUCTS 0.2% Yorkey Optical International Cayman Ltd. ............. Hong Kong 7,845,000 1,487,680 ------------ MACHINERY 1.2% China Infrastructure Machinery Holdings Ltd. ......... Hong Kong 2,485,000 2,184,265 China International Marine Containers (Group) Co. Ltd., B ........................................... China 5,972,080 4,966,212 Shin Zu Shing Co. Ltd. ............................... Taiwan 658,566 3,172,303 ------------ 10,322,780 ------------ MARINE 0.1% Sinotrans Shipping Ltd. .............................. Hong Kong 1,795,000 726,786 ------------ MEDIA 0.1% Next Media Ltd. ...................................... Hong Kong 268,000 82,414 (b) Next Media Ltd., 144A ................................ Hong Kong 3,510,000 1,079,377 ------------ 1,161,791 ------------ OFFICE ELECTRONICS 0.1% Kinpo Electronics Inc. ............................... Taiwan 2,939,201 819,679 ------------ OIL, GAS & CONSUMABLE FUELS 29.0% China Petroleum and Chemical Corp., H ................ China 64,539,395 62,186,719 China Shenhua Energy Co. Ltd., H ..................... China 9,112,500 31,525,082 CNOOC Ltd. ........................................... China 42,221,000 65,242,522 PetroChina Co. Ltd., H ............................... China 51,061,903 65,687,937 Yanzhou Coal Mining Co. Ltd., H ...................... China 15,486,000 27,144,401 ------------ 251,786,661 ------------ PAPER & FOREST PRODUCTS 0.2% Nine Dragons Paper Holdings Ltd. ..................... China 2,467,000 1,523,600 ------------ PHARMACEUTICALS 0.2% Tong Ren Tang Technologies Co. Ltd., H ............... China 1,349,000 1,434,647 ------------
Annual Report | 21 Templeton China World Fund STATEMENT OF INVESTMENTS, AUGUST 31, 2008 (CONTINUED)
COUNTRY SHARES/UNITS VALUE ------------- ------------ ------------ COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED) REAL ESTATE MANAGEMENT & DEVELOPMENT 5.3% Cheung Kong (Holdings) Ltd. .......................... Hong Kong 1,071,690 $ 15,406,960 Hopewell Holdings Ltd. ............................... Hong Kong 7,059,000 27,089,122 Soho China Ltd. ...................................... China 4,666,000 2,451,227 (b) Soho China Ltd., 144A ................................ China 712,000 374,040 SPG Land Holdings Ltd. ............................... China 949,000 376,949 ------------ 45,698,298 ------------ SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 4.8% MediaTek Inc. ........................................ Taiwan 437,330 5,079,431 Novatek Microelectronics Corp. Ltd. .................. Taiwan 1,692,843 3,669,481 (a) Semiconductor Manufacturing International Corp. ...... China 35,743,000 1,671,625 Taiwan Semiconductor Manufacturing Co. Ltd. .......... Taiwan 16,761,526 31,286,765 ------------ 41,707,302 ------------ SPECIALTY RETAIL 0.2% GOME Electrical Appliances Holdings Ltd. ............. Hong Kong 2,616,000 1,082,668 I.T. Ltd. ............................................ Hong Kong 5,616,000 863,502 ------------ 1,946,170 ------------ TEXTILES, APPAREL & LUXURY GOODS 0.4% (a, d) Tack Fat Group International Ltd. .................... Hong Kong 8,352,000 -- Victory City International Holdings Ltd. ............. Hong Kong 5,724,015 1,356,836 Weiqiao Textile Co. Ltd., H .......................... China 2,146,500 1,707,959 ------------ 3,064,795 ------------ TRANSPORTATION INFRASTRUCTURE 1.3% Cosco Pacific Ltd. ................................... China 5,335,449 8,176,304 (b) Rickmers Maritime, 144A(Trust Units) ................. Singapore 4,523,000 3,349,898 ------------ 11,526,202 ------------ WIRELESS TELECOMMUNICATION SERVICES 9.6% China Mobile Ltd. .................................... China 6,986,270 80,206,265 Taiwan Mobile Co. Ltd. ............................... Taiwan 1,619,687 2,910,355 ------------ 83,116,620 ------------ TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS BEFORE SHORT TERM INVESTMENTS (COST $567,843,707) ........ 861,848,294 ------------
22 | Annual Report Templeton China World Fund STATEMENT OF INVESTMENTS, AUGUST 31, 2008 (CONTINUED)
COUNTRY SHARES/UNITS VALUE ------------- ------------ ------------ SHORT TERM INVESTMENTS(COST $3,063,924) 0.4% MONEY MARKET FUND 0.4% (e) Franklin Institutional Fiduciary Trust Money Market Portfolio, 2.15% .................................. United States 3,063,924 $ 3,063,924 ------------ TOTAL INVESTMENTS (COST $570,907,631) 99.5% .......... 864,912,218 OTHER ASSETS, LESS LIABILITIES 0.5% .................. 4,693,757 ------------ NET ASSETS 100.0% .................................... $869,605,975 ============
(a) Non-income producing for the twelve months ended August 31, 2008. (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 guidelines approved by the Fund's Board of Trustees. At August 31, 2008, the aggregate value of these securities was $21,977,169, representing 2.53% of net assets. (c) Rounds to less than 0.1% of net assets. (d) Security has been deemed illiquid because it may not be able to be sold within seven days. At August 31, 2008, the value of this security was $0. (e) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. The accompanying notes are an integral part of these financial statements. Annual Report | 23 Templeton China World Fund FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES August 31, 2008 Assets: Investments in securities: Cost - Unaffiliated issuers ............................... $567,843,707 Cost - Sweep Money Fund (Note 7) .......................... 3,063,924 ------------ Total cost of investments ................................. $570,907,631 ============ Value - Unaffiliated issuers .............................. $861,848,294 Value - Sweep Money Fund (Note 7) ......................... 3,063,924 ------------ Total value of investments ................................ 864,912,218 Cash ......................................................... 99,065 Foreign currency, at value (cost $5,441) ..................... 5,441 Receivables: Investment securities sold ................................ 4,878,371 Capital shares sold ....................................... 578,490 Dividends ................................................. 3,012,858 ------------ Total assets ........................................... 873,486,443 ------------ Liabilities: Payables: Investment securities purchased ........................... 536,631 Capital shares redeemed ................................... 1,603,730 Affiliates ................................................ 1,379,167 Accrued expenses and other liabilities ....................... 360,940 ------------ Total liabilities ...................................... 3,880,468 ------------ Net assets, at value ................................ $869,605,975 ============ Net assets consist of: Paid-in capital .............................................. $493,211,195 Undistributed net investment income .......................... 6,438,056 Net unrealized appreciation (depreciation) ................... 293,963,046 Accumulated net realized gain (loss) ......................... 75,993,678 ------------ Net assets, at value ................................ $869,605,975 ============
The accompanying notes are an integral part of these financial statements. 24 | Annual Report Templeton China World Fund FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF ASSETS AND LIABILITIES (CONTINUED) August 31, 2008 CLASS A: Net assets, at value ......................................... $414,194,378 ------------ Shares outstanding ........................................... 11,907,466 ------------ Net asset value per share(a) ................................. $ 34.78 ------------ Maximum offering price per share (net asset value per share / 94.25%) ................................................. $ 36.90 ------------ CLASS B: Net assets, at value ......................................... $ 14,272,203 ------------ Shares outstanding ........................................... 414,398 ------------ Net asset value and maximum offering price per share(a) ...... $ 34.44 ------------ CLASS C: Net assets, at value ......................................... $153,067,644 ------------ Shares outstanding ........................................... 4,464,338 ------------ Net asset value and maximum offering price per share(a) ...... $ 34.29 ------------ ADVISOR CLASS: Net assets, at value ......................................... $288,071,750 ------------ Shares outstanding ........................................... 8,223,274 ------------ Net asset value and maximum offering price per share(a) ...... $ 35.03 ------------
(a) Redemption price is equal to net asset value less contingent deferred sales charges, if applicable, and redemption fees retained by the Fund. The accompanying notes are an integral part of these financial statements. Annual Report | 25 Templeton China World Fund FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF OPERATIONS for the year ended August 31, 2008 Investment income: Dividends: (net of foreign taxes of $1,505,991) Unaffiliated issuers ...................................... $ 30,882,862 Sweep Money Fund (Note 7) ................................. 5,134 Interest ..................................................... 432,938 ------------- Total investment income ................................ 31,320,934 ------------- Expenses: Management fees (Note 3a) .................................... 13,746,268 Administrative fees (Note 3b) ................................ 2,195,811 Distribution fees: (Note 3c) Class A ................................................... 1,737,533 Class B ................................................... 192,344 Class C ................................................... 1,969,162 Transfer agent fees (Note 3e) ................................ 1,400,708 Custodian fees (Note 4) ...................................... 478,686 Reports to shareholders ...................................... 169,272 Registration and filing fees ................................. 128,685 Professional fees ............................................ 58,425 Trustees' fees and expenses .................................. 94,980 Other ........................................................ 33,077 ------------- Total expenses ......................................... 22,204,951 Expense reductions (Note 4) ............................ (7,829) ------------- Net expenses ........................................ 22,197,122 ------------- Net investment income ............................ 9,123,812 ------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments ............................................... 85,061,436 Foreign currency transactions ............................. (95,910) ------------- Net realized gain (loss) ............................... 84,965,526 ------------- Net change in unrealized appreciation (depreciation) on: Investments ............................................... (211,448,591) Translation of other assets and liabilities denominated in foreign currencies .................................. (36,032) ------------- Net change in unrealized appreciation (depreciation) ... (211,484,623) ------------- Net realized and unrealized gain (loss) ......................... (126,519,097) ------------- Net increase (decrease) in net assets resulting from operations ................................................... $(117,395,285) =============
The accompanying notes are an integral part of these financial statements. 26 | Annual Report Templeton China World Fund FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED AUGUST 31, -------------------------------- 2008 2007 -------------- --------------- Increase (decrease) in net assets: Operations: Net investment income ..................................... $ 9,123,812 $ 9,726,160 Net realized gain (loss) from investments and foreign currency transactions .................................. 84,965,526 56,667,283 Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies .......... (211,484,623) 350,219,007 -------------- --------------- Net increase (decrease) in net assets resulting from operations ....................................... (117,395,285) 416,612,450 -------------- --------------- Distributions to shareholders from: Net investment income: Class A ................................................ (5,528,150) (2,804,164) Class B ................................................ (77,438) (35,884) Class C ................................................ (901,600) (513,958) Advisor Class .......................................... (4,761,563) (3,495,617) Net realized gains: Class A ................................................ (26,369,910) -- Class B ................................................ (1,003,393) -- Class C ................................................ (10,117,868) -- Advisor Class .......................................... (17,467,990) -- -------------- --------------- Total distributions to shareholders .......................... (66,227,912) (6,849,623) -------------- --------------- Capital share transactions: (Note 2) Class A ................................................ (12,556,689) 72,755,259 Class B ................................................ (2,584,318) (3,545,964) Class C ................................................ (11,409,956) 19,220,921 Advisor Class .......................................... (34,873,776) (14,417,335) -------------- --------------- Total capital share transactions ............................. (61,424,739) 74,012,881 -------------- --------------- Redemption fees .............................................. 33,483 12,710 -------------- --------------- Net increase (decrease) in net assets................ (245,014,453) 483,788,418 Net assets: Beginning of year ............................................ 1,114,620,428 630,832,010 -------------- --------------- End of year .................................................. $ 869,605,975 $ 1,114,620,428 ============== =============== Undistributed net investment income included in net assets: End of year .................................................. $ 6,438,056 $ 8,632,702 ============== ===============
The accompanying notes are an integral part of these financial statements. Annual Report | 27 Templeton China World Fund NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Templeton China World Fund (Fund) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as a non-diversified, open-end investment company. The Fund offers four classes of shares: Class A, Class B, Class C, and Advisor Class. 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. 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. Investments in open-end mutual funds are valued at the closing net asset 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. 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. The investment manager monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depository Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred. 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. 28 | Annual Report Templeton China World Fund NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 at a future date. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. 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 it is the Fund's policy 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. The Fund has reviewed the tax positions, taken on federal income tax returns, for each of the three open tax years and as of August 31, 2008, and has determined that no provision for income tax is required in the Fund's financial statements. Annual Report | 29 Templeton China World Fund NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) D. INCOME TAXES (CONTINUED) Foreign securities held by the Fund may be subject to foreign taxation on dividend and interest income received. 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. 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 of America. 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. Differences in per share distributions, by class, are generally due to differences in class specific expenses. 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. 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. Effective September 1, 2008, the redemption fee will be eliminated. 30 | Annual Report Templeton China World Fund NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) H. GUARANTEES AND INDEMNIFICATIONS Under the Fund's organizational documents, its officers and trustees are indemnified by the Fund against certain 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. Currently, the Fund expects the risk of loss to be remote. 2. SHARES OF BENEFICIAL INTEREST At August 31, 2008, there were an unlimited number of shares authorized (without par value). Transactions in the Fund's shares were as follows:
YEAR ENDED AUGUST 31, ------------------------------------------------------- 2008 2007 -------------------------- -------------------------- SHARES AMOUNT SHARES AMOUNT ---------- ------------- ---------- ------------- CLASS A SHARES: Shares sold ................................ 4,757,830 $ 204,519,943 6,605,473 $ 213,342,599 Shares issued in reinvestment of distributions ........................... 581,014 28,291,012 87,168 2,378,777 Shares redeemed ............................ (6,007,179) (245,367,644) (4,299,672) (142,966,117) ---------- ------------- ---------- ------------- Net increase (decrease) .................... (668,335) $ (12,556,689) 2,392,969 $ 72,755,259 ========== ============= ========== ============= CLASS B SHARES: Shares sold ................................ 71,705 $ 3,178,486 84,995 $ 2,713,074 Shares issued in reinvestment of distributions ........................... 19,606 953,654 1,165 31,211 Shares redeemed ............................ (166,916) (6,716,458) (194,230) (6,290,249) ---------- ------------- ---------- ------------- Net increase (decrease) .................... (75,605) $ (2,584,318) (108,070) $ (3,545,964) ========== ============= ========== ============= CLASS C SHARES: Shares sold ................................ 1,245,382 $ 53,856,505 2,108,543 $ 66,851,170 Shares issued in reinvestment of distributions ........................... 181,329 8,773,549 14,909 397,615 Shares redeemed ............................ (1,854,594) (74,040,010) (1,464,903) (48,027,864) ---------- ------------- ---------- ------------- Net increase (decrease) .................... (427,883) $ (11,409,956) 658,549 $ 19,220,921 ========== ============= ========== ============= ADVISOR CLASS SHARES: Shares sold ................................ 748,176 $ 30,586,063 966,016 $ 32,450,505 Shares issued in reinvestment of distributions ........................... 233,133 11,397,752 56,101 1,551,552 Shares redeemed ............................ (1,801,813) (76,857,591) (1,440,225) (48,419,392) ---------- ------------- ---------- ------------- Net increase (decrease) .................... (820,504) $ (34,873,776) (418,108) $ (14,417,335) ========== ============= ========== =============
Annual Report | 31 Templeton China World Fund NOTES TO FINANCIAL STATEMENTS (CONTINUED) 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 average daily net assets of the Fund. 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 connection with the servicing, 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%
The Board of Trustees has agreed to limit the current rate to 0.30% per year for Class A shares for the period of February 1, 2008 through January 31, 2009. 32 | Annual Report Templeton China World Fund NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) 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 year: Sales charges retained net of commissions paid to unaffiliated broker/dealers ................................................... $521,044 Contingent deferred sales charges retained .......................... $115,069
E. TRANSFER AGENT FEES For the year ended August 31, 2008, the Fund paid transfer agent fees of $1,400,708, of which $789,157 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 year ended August 31, 2008, the custodian fees were reduced as noted in the Statement of Operations. 5. INCOME TAXES 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, 2008, the Fund deferred realized currency losses of $92,472. The tax character of distributions paid during the years ended August 31, 2008 and 2007, was as follows:
2008 2007 ----------- ---------- Distributions paid from: Ordinary income ........... $26,212,639 $6,849,623 Long term capital gain .... 40,015,273 -- ----------- ---------- $66,227,912 $6,849,623 =========== ==========
Annual Report | 33 Templeton China World Fund NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. INCOME TAXES (CONTINUED) At August 31, 2008, the cost of investments, net unrealized appreciation (depreciation), undistributed ordinary income and undistributed long term capital gains for income tax purposes were as follows: Cost of investments ........................... $571,530,994 ============ Unrealized appreciation ....................... $350,046,258 Unrealized depreciation ....................... (56,665,034) ------------ Net unrealized appreciation (depreciation) .... $293,381,224 ============ Undistributed ordinary income ................. $ 20,373,676 Undistributed long term capital gains ......... 62,773,893 ------------ Distributable earnings ........................ $ 83,147,569 ============
Net investment income differs for financial statement and tax purposes primarily due to differing treatment 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. 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short term securities) for the year ended August 31, 2008, aggregated $112,981,406 and $207,983,091, respectively. 7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO The Fund may invest in Franklin Institutional Fiduciary Trust Money Market Portfolio (Sweep Money Fund), an open-end investment company managed by Franklin Advisers, Inc. (an affiliate of the investment manager). Management fees paid by the Fund are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management and administrative fees paid by the Sweep Money Fund. 8. CONCENTRATION OF RISK Investing in securities of "China companies" may include certain risks and considerations not typically associated with investing in U.S. securities. In general, China companies are those that are organized under the laws of, or with a principal office or principal trading market in, the People's Republic of China, Hong Kong, or Taiwan. Such risks include fluctuating currency values and changing local and regional economic, political and social conditions, which may result in greater market volatility. In addition, these securities may not be as liquid as U.S. securities. At August 31, 2008, the Fund had 62.6%, 19.8%, and 15.8% of its net assets invested in China, Hong Kong, and Taiwan, respectively. 34 | Annual Report Templeton China World Fund NOTES TO FINANCIAL STATEMENTS (CONTINUED) 9. NEW ACCOUNTING PRONOUNCEMENTS In September 2006, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 157, "Fair Value Measurement" (SFAS 157), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Fund believes the adoption of SFAS 157 will have no material impact on its financial statements. In March 2008, FASB issued FASB Statement No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" (SFAS 161), which expands disclosures about derivative investments and hedging activities. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The Fund is currently evaluating the impact, if any, of applying the various provisions of SFAS 161. Annual Report | 35 Templeton China World Fund REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF TEMPLETON CHINA WORLD FUND In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Templeton China World Fund (the "Fund") at August 31, 2008, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at August 31, 2008 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California October 21, 2008 36 | Annual Report Templeton China World Fund TAX DESIGNATION (UNAUDITED) Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund designates the maximum amount allowable but no less than $67,551,031 as a long term capital gain dividend for the fiscal year ended August 31, 2008. Under Section 871(k)(2)(C) of the Code, the Fund designates the maximum amount allowable but no less than $17,506,996 as a short term capital gain dividend for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year ended August 31, 2008. Under Section 854(b)(2) of the Code, the Fund designates the maximum amount allowable but no less than $5,952,209 as qualified dividends for purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended August 31, 2008. Distributions, including qualifed dividend income, paid during calendar year 2008 will be reported to shareholders on Form 1099-DIV in January 2009. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their individual tax returns. Under Section 871(k)(1)(C) of the code, the Fund designates the maximum amount allowable but no less than $235,631 as interest related dividends for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year ended August 31, 2008. At August 31, 2008, more than 50% of the Templeton China World Fund's total assets were invested in securities of foreign issuers. In most instances, foreign taxes were withheld from income paid to the Fund on these investments. The Fund elects to treat foreign taxes paid as allowed under Section 853 of the Code. This election will allow shareholders of record as of the December 18, 2008 distribution date, to treat their proportionate share of foreign taxes paid by the Fund as having been paid directly by them. The shareholder shall consider these amounts as foreign taxes paid in the tax year in which they receive the Fund distribution. In addition, in January 2009, shareholders will receive Form 1099-DIV which will include their share of taxes withheld and foreign source income distributed during the calendar year 2008. Annual Report | 37 Templeton China World Fund BOARD MEMBERS AND OFFICERS The name, year of birth and address of the officers and board members, as well as their affiliations, positions held with the Fund, principal occupations during the past five years and number of U.S. registered portfolios overseen in the Franklin Templeton Investments fund complex are shown below. Generally, each board member serves until that person's successor is elected and qualified. INDEPENDENT BOARD MEMBERS
NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD ------------------------------ ---------------- -------------- ----------------------- ----------------------------------- HARRIS J. ASHTON (1932) Trustee Since 1993 143 Bar-S Foods (meat packing company). 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998). ANN TORRE BATES (1958) Trustee Since 28 SLM Corporation (Sallie Mae) and 500 East Broward Blvd. January 2008 Allied Capital Corporation Suite 2100 (financial services). Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Independent strategic and financial consultant; and FORMERLY, Executive Vice President and Chief Financial Officer, NHP Incorporated (manager of multifamily housing) (1995-1997); and Vice President and Treasurer, US Airways, Inc. (until 1995). FRANK J. CROTHERS (1944) Trustee Since 1999 21 Fortis, Inc. (utility holding 500 East Broward Blvd. company), Nuinsco Resources Limited Suite 2100 (mineral exploration), Royal Fort Lauderdale, FL 33394-3091 Fidelity MerchantBank & Trust Limited (financial services), C.A. Bancorp Inc. (financial services), Victory Nickel Inc. (mineral exploration), ABACO Markets Limited (retail distributors) and Belize Electricity Limited (electric utility). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman, Island Corporate Holdings Ltd.; Director and Vice Chairman, Caribbean Utilities Company Ltd.; Director, Provo Power Company Ltd.; director of various other business and nonprofit organizations; and FORMERLY, Chairman, Atlantic Equipment & Power Ltd. (1977-2003). EDITH E. HOLIDAY (1952) Lead Trustee since 143 Hess Corporation (exploration and 500 East Broward Blvd. Independent 1996 and Lead refining of oil and gas), H. J. Suite 2100 Trustee Independent Heinz Company (processed foods and Fort Lauderdale, FL 33394-3091 Trustee allied products), RTI International since 2007 Metals, Inc. (manufacture and distribution of titanium), Canadian National Railway (rail- road) and White Mountains Insurance Group, Ltd. (holding company). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989).
38 | Annual Report
NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD ------------------------------ ---------------- -------------- ----------------------- ----------------------------------- DAVID W. NIEMIEC (1949) Trustee Since 2005 21 Emeritus Corporation (assisted 500 East Broward Blvd. living) and OSI Pharmaceuticals, Suite 2100 Inc. (pharmaceutical products). Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Advisor, Saratoga Partners (private equity fund); and FORMERLY, Managing Director, Saratoga Partners (1998-2001) and SBC Warburg Dillon Read (investment banking) (1997-1998); Vice Chairman, Dillon, Read & Co. Inc. (investment banking) (1991-1997); and Chief Financial Officer, Dillon, Read & Co. Inc. (1982-1997). FRANK A. OLSON (1932) Trustee Since 2003 143 Hess Corporation (exploration and 500 East Broward Blvd. refining of oil and gas) and Suite 2100 Sentient Jet (private jet service). Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer (1977-1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines). LARRY D. THOMPSON (1945) Trustee Since 2005 143 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY, Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp. (credit card provider) (1997-2001); Senior Fellow of The Brookings Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General, U.S. Department of Justice (2001-2003). CONSTANTINE D. TSERETOPOULOS Trustee Since 1999 21 None (1954) 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Physician, Lyford Cay Hospital (1987-present); director of various nonprofit organizations; and FORMERLY, Cardiology Fellow, University of Maryland (1985-1987) and Internal Medicine Resident, Greater Baltimore Medical Center (1982-1985). ROBERT E. WADE (1946) Trustee Since 2006 35 El Oro and Exploration Co., p.l.c. 500 East Broward Blvd. (investments) and ARC Wireless Suite 2100 Solutions, Inc. (wireless Fort Lauderdale, FL 33394-3091 components and network products). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Practicing attorney.
Annual Report | 39 INTERESTED BOARD MEMBERS AND OFFICERS
NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD ------------------------------ ---------------- -------------- ----------------------- ----------------------------------- **CHARLES B. JOHNSON (1933) Trustee, Trustee and 143 None One Franklin Parkway Chairman of Chairman of San Mateo, CA 94403-1906 the Board and the Board Vice President since 1995 and Vice President since 1993 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Templeton Worldwide, Inc.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 42 of the investment companies in Franklin Templeton Investments. **GREGORY E. JOHNSON (1961) Trustee Since 2007 94 None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director, President and Chief Executive Officer, Franklin Resources, Inc.; President, Templeton Worldwide, Inc.; Director, Templeton Asset Management Ltd.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 33 of the investment companies in Franklin Templeton Investments. JAMES M. DAVIS (1952) Chief Chief Not Applicable Not Applicable One Franklin Parkway Compliance Compliance San Mateo, CA 94403-1906 Officer and Officer since Vice President 2004 and Vice - AML Compliance President - AML Compliance since 2006 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001). LAURA F. FERGERSON (1962) Chief Financial Since Not Applicable Not Applicable One Franklin Parkway Officer and February 2008 San Mateo, CA 94403-1906 Chief Accounting Officer PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director and member of Audit and Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant Treasurer of most of the investment companies in Franklin Templeton Investments (1997-2003); and Vice President, Franklin Templeton Services, LLC (1997-2003). JIMMY D. GAMBILL (1947) Vice President Since Not Applicable Not Applicable 500 East Broward Blvd. February 2008 Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments.
40 | Annual Report
NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD ------------------------------ ---------------- -------------- ----------------------- ----------------------------------- DAVID P. GOSS (1947) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; officer and director of one of the subsidiaries of Franklin Resources, Inc.; and officer of 46 of the investment companies in Franklin Templeton Investments. RUPERT H. JOHNSON, JR. (1940) Vice President Since 1996 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Franklin Advisers, Inc. and Templeton Worldwide, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 44 of the investment companies in Franklin Templeton Investments. JOHN R. KAY (1940) Vice President Since 1994 Not Applicable Not Applicable 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Templeton Worldwide, Inc.; Senior Vice President, Franklin Templeton Services, LLC; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 32 of the investment companies in Franklin Templeton Investments; and FORMERLY, Vice President and Controller, Keystone Group, Inc. MARK MOBIUS (1936) President and President Not Applicable Not Applicable 17th Floor, Chief Executive since 1993 and The Chater House Officer - Chief 8 Connaught Road Investment Executive Central Hong Kong Management Officer - Investment Management since 2002 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Portfolio Manager of various Templeton advisory affiliates; Executive Chairman, Templeton Asset Management Ltd.; and officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of six of the investment companies in Franklin Templeton Investments; and FORMERLY, President, International Investment Trust Company Limited (investment manager of Taiwan R.O.C. Fund) (1986-1987); and Director, Vickers da Costa, Hong Kong (1983-1986). ROBERT C. ROSSELOT (1960) Secretary Since 2004 Not Applicable Not Applicable 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; Assistant Secretary, Franklin Resources, Inc.; Vice President and Secretary, Templeton Investment Counsel, LLC; Vice President, Secretary and Trust Officer, Fiduciary Trust International of the South; and officer of 14 of the investment companies in Franklin Templeton Investments.
Annual Report | 41
NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD ------------------------------ ---------------- -------------- ----------------------- ----------------------------------- GREGORY R. SEWARD (1956) Treasurer Since 2004 Not Applicable Not Applicable 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Franklin Templeton Services, LLC; officer of 18 of the investment companies in Franklin Templeton Investments; and FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000). CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman & Sterling, LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004). GALEN VETTER (1951) Senior Vice Since Not Applicable Not Applicable 500 East Broward Blvd. President and February 2008 Suite 2100 Chief Executive Fort Lauderdale, FL 33394-3091 Officer - Finance and Administration PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc. (1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987 and 1991-2004).
* We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex. These portfolios have a common investment manager or affiliated investment managers. ** Charles B. Johnson is considered to be interested person of the Fund under the federal securities laws due to his position as officer and director and major shareholder of Franklin Resources, Inc. (Resources), which is the parent company of the Fund's investment manager and distributor. Gregory E. Johnson is considered to be interested person of the Fund under the federal securities laws due to his position as officer and director Resources. Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the father and uncle, respectively, of Gregory E. Johnson. Note 2: Officer information is current as of the date of this report. It is possible that after this date, information about officers may change. THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE U.S. SECURITIES AND EXCHANGE COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD HAS DETERMINED THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED EACH OF ANN TORRE BATES AND DAVID W. NIEMIEC AS AN AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MS. BATES AND MR. NIEMIEC QUALIFY AS SUCH AN EXPERT IN VIEW OF THEIR EXTENSIVE BUSINESS BACKGROUND AND EXPERIENCE. MS. BATES HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE SINCE JANUARY 2008. SHE CURRENTLY SERVES AS A DIRECTOR OF SLM CORPORATION AND ALLIED CAPITAL CORPORATION AND WAS FORMERLY THE EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER OF NHP INCORPORATED AND VICE PRESIDENT AND TREASURER OF US AIRWAYS, INC. MR. NIEMIEC HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE SINCE 2005, CURRENTLY SERVES AS AN ADVISOR TO SARATOGA PARTNERS AND WAS FORMERLY ITS MANAGING DIRECTOR FROM 1998 TO 2001. MR. NIEMIEC IS A DIRECTOR OF EMERITUS CORPORATION AND OSI PHARMACEUTICALS, INC. AND VARIOUS PRIVATE COMPANIES, AND WAS FORMERLY MANAGING DIRECTOR OF SBC WARBURG DILLON READ FROM 1997 TO 1998, AND WAS VICE CHAIRMAN FROM 1991 TO 1997 AND CHIEF FINANCIAL OFFICER FROM 1982 TO 1997 OF DILLON, READ & CO. INC. AS A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD BELIEVES THAT MS. BATES AND MR. NIEMIEC HAVE EACH ACQUIRED AN UNDERSTANDING OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES, ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. MS. BATES AND MR. NIEMIEC ARE INDEPENDENT BOARD MEMBERS AS THAT TERM IS DEFINED UNDER THE APPLICABLE U.S. SECURITIES AND EXCHANGE COMMISSION RULES AND RELEASES. THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST. SHAREHOLDERS MAY CALL (800) DIAL BEN/(800) 342-5236 TO REQUEST THE SAI. 42 | Annual Report Templeton China World Fund SHAREHOLDER INFORMATION BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT At a meeting held May 20, 2008, the Board of Trustees (Board), including a majority of non-interested or independent Trustees, approved renewal of the investment management agreement for the Fund. In reaching this decision, the Board took into account information furnished throughout the year at regular Board meetings, as well as information prepared specifically in connection with the annual renewal review process. Information furnished and discussed throughout the year included investment performance reports and related financial information for the Fund, as well as periodic reports on shareholder services, legal, compliance, pricing, brokerage commissions and execution and other services provided by the Investment Manager (Manager) and its affiliates. Information furnished specifically in connection with the renewal process included a report for the Fund prepared by Lipper, Inc. (Lipper), an independent organization, as well as a Fund profitability analysis report prepared by management. The Lipper report compared the Fund's investment performance and expenses with those of other mutual funds deemed comparable to the Fund as selected by Lipper. The Fund profitability analysis report discussed the profitability to Franklin Templeton Investments from its overall U.S. fund operations, as well as on an individual fund-by-fund basis. Included with such profitability analysis report was information on a fund-by-fund basis listing portfolio managers and other accounts they manage, as well as information on management fees charged by the Manager and its affiliates including management's explanation of differences where relevant and a three-year expense analysis with an explanation for any increase in expense ratios. Additional material accompanying such report was a memorandum prepared by management describing project initiatives and capital investments relating to the services provided to the Fund by the Franklin Templeton Investments organization, as well as a memorandum relating to economies of scale and a comparative analysis concerning transfer agent fees charged the Fund. In considering such materials, the independent Trustees received assistance and advice from and met separately with independent counsel. In approving continuance of the investment management agreement for the Fund, the Board, including a majority of independent Trustees, determined that the existing management fee structure was fair and reasonable and that continuance of the investment management agreement was in the best interests of the Fund and its shareholders. While attention was given to all information furnished, the following discusses some primary factors relevant to the Board's decision. NATURE, EXTENT AND QUALITY OF SERVICES. The Board was satisfied with the nature and quality of the overall services provided by the Manager and its affiliates to the Fund and its shareholders. In addition to investment performance and expenses discussed later, the Board's opinion was based, in part, upon periodic reports furnished them showing that the investment policies and restrictions for the Fund were consistently complied with as well as other reports periodically furnished the Board covering matters such as the compliance of portfolio managers and other management personnel with the code of ethics adopted throughout the Franklin Templeton fund complex, the adherence to fair value pricing procedures established by the Board, and the accuracy of net asset value calculations. The Board also noted the extent of benefits Annual Report | 43 Templeton China World Fund SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) provided Fund shareholders from being part of the Franklin Templeton family of funds, including the right to exchange investments between the same class of funds without a sales charge, the ability to reinvest Fund dividends into other funds and the right to combine holdings in other funds to obtain a reduced sales charge. Favorable consideration was given to management's continuous efforts and expenditures in establishing back-up systems and recovery procedures to function in the event of a natural disaster, it being noted that such systems and procedures had functioned smoothly during the Florida hurricanes and blackouts experienced in recent years. Among other factors taken into account by the Board were the Manager's best execution trading policies, including a favorable report by an independent portfolio trading analytical firm. Consideration was also given to the experience of the Fund's portfolio management team, the number of accounts managed and general method of compensation. In this latter respect, the Board noted that a primary factor in management's determination of a portfolio manager's bonus compensation was the relative investment performance of the funds he or she managed and that a portion of such bonus was required to be invested in a predesignated list of funds within such person's fund management area so as to be aligned with the interests of Fund shareholders. The Board also took into account the quality of transfer agent and shareholder services provided Fund shareholders by an affiliate of the Manager, noting continuing expenditures by management to increase and improve the scope of such services, periodic favorable reports on such service conducted by third parties, the high industry ranking given to the Franklin Templeton website, and the firsthand experience of individual Board members who deal with the shareholder services department in their capacities as shareholders in one or more of the various Franklin Templeton funds. INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment performance of the Fund in view of its importance to shareholders. While consideration was given to performance reports and discussions with portfolio managers at Board meetings during the year, particular attention in assessing performance was given to the Lipper reports furnished for the agreement renewal. The Fund had converted from a closed-end fund to an open-end fund in August 2003, and the Lipper report for this agreement renewal showed the performance of the Fund's Class A shares for the four-year period ended February 29, 2008, in comparison with a performance universe consisting of the Fund and all retail and institutional China region funds as selected by Lipper. Such report showed the Fund's total return for the one-year period to be in the second-highest quintile and on an annualized basis to be in the middle quintile of such performance universe for the four-year period. The Board was satisfied with such performance noting that the Fund's annualized four-year total return exceeded 22% as shown in the Lipper report. COMPARATIVE EXPENSES. Consideration was given to a comparative analysis of the management fees and total expense ratios of the Fund compared with those of a group of nine other funds selected by Lipper as its appropriate Lipper expense group. Prior to making such comparison, the Board relied upon a survey showing that the scope of management advisory services covered 44 | Annual Report Templeton China World Fund SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) under the Fund's investment management agreement was similar to those provided by fund managers to other mutual fund groups. In reviewing comparative costs, emphasis was given to the Fund's contractual investment management fee in comparison with the contractual investment management fee that would have been charged by other funds within its Lipper expense group assuming they were similar in size to the Fund, as well as the actual total expenses of the Fund in comparison with those of its Lipper expense group. The Lipper contractual investment management fee analysis includes administrative charges as being part of a management fee, and actual total expenses, for comparative consistency, are shown by Lipper for Fund Class A shares. The Lipper expense group comprised nine funds and the expense comparisons showed the Fund's contractual investment management fee rate to be the highest in such group, and its actual expenses to be the second-highest in such group. The Board noted that the Fund's actual expense rate was within 20 basis points of the expense group median and found such comparative fee and expenses to be acceptable in view of factors relating to the Fund's operations, such as the background and experience of its portfolio managers and research staff, and their physical presence and coverage in the geographical area in which the Fund invests. MANAGEMENT PROFITABILITY. The Board also considered the level of profits realized by the Manager and its affiliates in connection with the operation of the Fund. In this respect, the Board reviewed the Fund profitability analysis that addresses the overall profitability of Franklin Templeton's U.S. fund business, as well as its profits in providing management and other services to the Fund. Specific attention was given to the methodology followed in allocating costs to the Fund, it being recognized that allocation methodologies are inherently subjective and various allocation methodologies may each be reasonable while producing different results. In this respect, the Board noted that, while being continuously refined and reflecting changes in the Manager's own cost accounting, the allocation methodology was consistent with that followed in profitability report presentations for the Fund made in prior years and that the Fund's independent registered public accounting firm had been engaged by the Manager to perform certain procedures on a biennial basis, specified and approved by the Manager and the Fund's Board solely for their purposes and use in reference to the profitability analysis. In reviewing and discussing such analysis, management discussed with the Board its belief that costs incurred in establishing the infrastructure necessary for the type of mutual fund operations conducted by the Manager and its affiliates may not be fully reflected in the expenses allocated to the Fund in determining its profitability, as well as the fact that the level of profits, to a certain extent, reflected operational cost savings and efficiencies initiated by management. The Board also took into account management's expenditures in improving shareholder services provided the Fund, as well as the need to meet additional regulatory and compliance requirements resulting from the Sarbanes-Oxley Act and recent SEC and other regulatory requirements. In addition, the Board considered a third-party study comparing the profitability of the Manager's parent on an overall basis as compared to other publicly held managers broken down to show profitability from management operations exclusive of distribution expenses, as well as profitability including distribution expenses. The Board also considered the extent to which the Manager and its affiliates might derive ancillary benefits from fund operations, including its interest in a joint venture entity that Annual Report | 45 Templeton China World Fund SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) financed up-front commissions paid to brokers/dealers who sold fund Class B shares prior to February 2005 when the offering of such shares was discontinued, as well as potential benefits resulting from allocation of fund brokerage and the use of "soft" commission dollars to pay for research. Based upon its consideration of all these factors, the Board determined that the level of profits realized by the Manager and its affiliates from providing services to the Fund was not excessive in view of the nature, quality and extent of services provided. ECONOMIES OF SCALE. The Board also considered whether economies of scale are realized by the Manager and its affiliates as the Fund grows larger and the extent to which this is reflected in the level of management fees charged. While recognizing that any precise determination is inherently subjective, the Board noted that based upon the Fund profitability analysis, it appears that as some funds get larger, at some point economies of scale do result in the Manager realizing a larger profit margin on management services provided such a fund. The Fund is charged a fee for administrative services at the rate of 0.20% of its net assets, as well as a separate fee for management advisory services at the rate of 1.25% of its net assets on the first $1 billion; 1.20% on the next $4 billion of net assets; with additional breakpoints continuing on net assets exceeding $5 billion. At December 31, 2007, the Fund had net assets of approximately $1.2 billion and the Board believes that to the extent any economies of scale may be realized by the Manager and its affiliates, this schedule of fees provides a sharing of benefits with the Fund and its shareholders. PROXY VOTING POLICIES AND PROCEDURES The Fund's investment manager 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 (954) 527-7678 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 (800) SEC-0330. 46 | Annual Report (FRANKLIN TEMPLETON INVESTMENTS(R) LOGO) One Franklin Parkway San Mateo, CA 94403-1906 - WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL? Eligible shareholders can sign up for eDelivery at franklintempleton.com. See inside for details. ANNUAL REPORT AND SHAREHOLDER LETTER TEMPLETON CHINA WORLD FUND INVESTMENT MANAGER Templeton Asset Management Ltd. PRINCIPAL UNDERWRITER Franklin Templeton Distributors, Inc. (800) DIAL BEN(R) franklintempleton.com SHAREHOLDER SERVICES (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 A2008 10/08 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 expert is David W. Niemiec he is "independent" as defined under the relevant Securities and Exchange Commission Rules and Releases. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. (a) Audit Fees The aggregate fees paid to the principal accountant for professional services rendered by the principal accountant for the audit of the registrant's annual financial statements or for services that are normally provided by the principal accountant in connection with statutory and regulatory filings or engagements were $35,866 for the fiscal year ended August 31, 2008 and $30,295 for the fiscal year ended August 31, 2007. (b) Audit-Related Fees There were no fees paid to the principal accountant for assurance and related services rendered by the principal accountant to the registrant that are reasonably related to the performance of the audit of the registrant's financial statements and are not reported under paragraph (a) of Item 4. There were no fees paid to the principal accountant for assurance and related services rendered by the principal accountant to the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant that are reasonably related to the performance of the audit of their financial statements. (c) Tax Fees There were no fees paid to the principal accountant for professional services rendered by the principal accountant to the registrant for tax compliance, tax advice and tax planning. The aggregate fees paid to the principal accountant for professional services rendered by the principal accountant to the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant for tax compliance, tax advice and tax planning were $0 for the fiscal year ended August 31, 2008 and $46,000 for the fiscal year ended August 31, 2007. The services for which these fees were paid included tax compliance and advice. (d) All Other Fees The aggregate fees paid to the principal accountant for products and services rendered by the principal accountant to the registrant not reported in paragraphs (a)-(c) of Item 4 were $819 for the fiscal year ended August 31, 2008 and $0 for the fiscal year ended August 31, 2007. The services for which these fees were paid include review of materials provided to the fund Board in connection with the investment management contract renewal process. The aggregate fees paid to the principal accountant for products and services rendered by the principal accountant to the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant not reported in paragraphs (a)-(c) of Item 4 were $283,258 for the fiscal year ended August 31, 2008 and $0 for the fiscal year ended August 31, 2007. The services for which these fees were paid include review of materials provided to the fund Board in connection with the investment management contract renewal process. (e) (1) The registrant's audit committee is directly responsible for approving the services to be provided by the auditors, including: (i) pre-approval of all audit and audit related services; (ii) pre-approval of all non-audit related services to be provided to the Fund by the auditors; (iii) pre-approval of all non-audit related services to be provided to the registrant by the auditors to the registrant's investment adviser or to any entity that controls, is controlled by or is under common control with the registrant's investment adviser and that provides ongoing services to the registrant where the non-audit services relate directly to the operations or financial reporting of the registrant; and (iv) establishment by the audit committee, if deemed necessary or appropriate, as an alternative to committee pre-approval of services to be provided by the auditors, as required by paragraphs (ii) and (iii) above, of policies and procedures to permit such services to be pre-approved by other means, such as through establishment of guidelines or by action of a designated member or members of the committee; provided the policies and procedures are detailed as to the particular service and the committee is informed of each service and such policies and procedures do not include delegation of audit committee responsibilities, as contemplated under the Securities Exchange Act of 1934, to management; subject, in the case of (ii) through (iv), to any waivers, exceptions or exemptions that may be available under applicable law or rules. (e) (2) None of the services provided to the registrant described in paragraphs (b)-(d) of Item 4 were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of regulation S-X. (f) No disclosures are required by this Item 4(f). (g) The aggregate non-audit fees paid to the principal accountant for services rendered by the principal accountant to the registrant and the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant were $284,077 for the fiscal year ended August 31, 2008 and $46,000 for the fiscal year ended August 31, 2007. (h) The registrant's audit committee of the board has considered whether the provision of non-audit services that were rendered to the registrant's investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant's independence. 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 COMPANY AND AFFILIATED PURCHASERS. N/A ITEM 10. SUBMISSION OF MATTERS TO 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 Galen G. Vetter, Chief Executive Officer - Finance and Administration, and Laura F. Fergerson, Chief Financial Officer and Chief Accounting Officer (b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Galen G. Vetter, Chief Executive Officer - Finance and Administration, and Laura F. Fergerson, Chief Financial Officer and Chief Accounting 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/GALEN G. VETTER ----------------------------------- Galen G. Vetter Chief Executive Officer - Finance and Administration Date: October 28, 2008 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/GALEN G. VETTER ----------------------------------- Galen G. Vetter Chief Executive Officer - Finance and Administration Date: October 28, 2008 By /s/LAURA F. FERGERSON ------------------------------------ Laura F. Fergerson Chief Financial Officer and Chief Accounting Officer Date: October 28, 2008