Monthly Insight
JUN 30, 2012	The China Fund, Inc. (CHN)

 

Investment Objective

 

The investment objective of the Fund is to achieve long term capital appreciation. The Fund seeks to achieve its objective through investment in the equity securities of companies and other entities with significant assets, investments, production activities, trading or other business interests in China or which derive a significant part of their revenue from China.

 

The Fund has an operating policy that the Fund will invest at least 80% of its assets in China companies. For this purpose, ‘China companies’ are (i) companies for which the principal securities trading market is in China; (ii) companies for which the principal securities trading market is outside of China or in companies organized outside of China, that in both cases derive at least 50% of their revenues from goods or services sold or produced, or have a least 50% of their assets in China; or (iii) companies organized in China. Under the policy, China will mean the People’s Republic of China, including Hong Kong, and Taiwan. The Fund will provide its stockholders with at least 60 days’ prior notice of any change to this policy.

 

Performance Overview

 

																														Since
Performance History		1 month				3 months				YTD				1 Year				3 Years				5 Years				10 Years				Inception
																		(p.a.)				(p.a.)				(p.a.)				(p.a.)
NAV (%)			0.76				-5.52				2.32				-20.17				9.28				3.32				17.24				10.53
Market price (%)			2.19				-5.88				6.92				-19.39				9.15				5.62				18.4				9.63
Benchmark (%)			1.91				-6.44				4.83				-13.89				6.02				0.03				9.60				N/A
Performance History			2011				2010				2009				2008				2007				2006				2005				2004
NAV (%)			-24.37				27.25				72.82				-46.95				86.20				57.10				6.09				3.80
Market price (%)			-27.51				23.60				72.19				-40.65				50.24				65.67				-21.51				-9.95
Benchmark (%)			-18.36				13.60				67.12				-49.37				37.97				39.50				10.27				14.27

 

Source : State Street Bank and Trust Company. Source for index data: MSCI as at June 30, 2012

 

Portfolio Analysis

 

 

 

 

The China Fund, Inc. (CHN)

 

Portfolio Analysis (continued)

 

Top 10 Holdings		Sector		%		Direct investments		Sector		%
PING AN INSURANCE (GROUP)		FINANCIALS		5.0		CHINA BRIGHT		HEALTH CARE		2.9
HAND ENTERPRISE SOLUTIONS CO., LTD.		I.T.		4.8		ZONG SU FOODS		CON. STAPLES		2.9
TAIWAN SEMICONDUCTOR MANUFACT.		I.T.		4.5		CHINA SILICON CORP., SERIES A PREFERRED		I.T.		0.0
TRACKER FUND OF HONG KONG		FINANCIALS		4.1		CHINA SILICON CORP. COMMON STOCK		I.T.		0.0
FAMILYMART CO., LTD.		CON. DISC.		3.4
CHINA MEDICAL SYSTEM HOLDINGS, LTD.		HEALTH CARE		3.3
DIGITAL CHINA HOLDINGS, LTD.		I.T.		3.1
CHINA MOBILE, LTD.		TELECOM.		3.0
CHINA BRIGHT		HEALTH CARE		2.9
INDUSTRIAL & COMMERCIAL BANK OF CHINA		FINANCIALS		2.9
Total				37.0		Total				5.8

 

Source : State Street Bank and Trust Company as at June 30, 2012

 

Fund Details

 

NAV	$23.79
Market price	$21.93
Premium/Discount	-7.82%
Market cap	US$495.0m
Shares outstanding	22,570,549
Exchange listed	NYSE
Listing date	July 10, 1992
Benchmark	MSCI Golden Dragon Index (Total Return)
Fund Manager	Christina Chung
Listed and direct investment manager	RCM Asia Pacific Limited

 

Source : State Street Bank and Trust Company as at June 30, 2012

 

Dividend History (10 years)

 

Declaration date		Ex-dividend date		Record date		Payable date		Dividend/Share		Income		Long-term Capital		Short-term Capital
8 Dec 2011		21 Dec 2011		23 Dec 2011		29 Dec 2011		2.99640		0.17420		2.82220		0.00000
8 Dec 2010		21 Dec 2010		24 Dec 2010		29 Dec 2010		2.27420		0.37460		1.89960		0.00000
9 Dec 2009		22 Dec 2009		24 Dec 2009		29 Dec 2009		0.25570		0.25570		0.00000		0.00000
8 Dec 2008		22 Dec 2008		24 Dec 2008		23 Jan 2009		5.81740		0.48130		5.33610		0.00000
7 Dec 2007		19 Dec 2007		21 Dec 2007		25 Jan 2008		12.12000		0.28000		9.00000		2.84000
8 Dec 2006		19 Dec 2006		21 Dec 2006		29 Dec 2006		4.01170		0.29960		2.73090		0.98120
9 Dec 2005		19 Dec 2005		21 Dec 2005		29 Dec 2005		2.51190		0.21720		2.29470		0.00000
13 Dec 2004		20 Dec 2004		22 Dec 2004		7 Jan 2005		3.57010		0.19630		3.26640		0.10740
19 Dec 2003		29 Dec 2003		31 Dec 2003		15 Jan 2004		1.78000		0.07000		0.67000		1.04000
17 Dec 2002		23 Dec 2002		26 Dec 2002		15 Jan 2003		0.21437		0.06397		0.00069		0.14971

 

Source : State Street Bank and Trust Company as at June 30, 2012

 

 

The China Fund, Inc. (CHN)

 

The China Fund Inc. NAV Performance of US$10,000 since inception (with dividends reinvested at NAV price)

 

 

Past performance is not a guide to future returns.

Source : State Street Bank and Trust Company as at June 30, 2012

 

The China Fund Inc. Premium / Discount

 

 

Past performance is not a guide to future returns.

Source : State Street Bank and Trust Company as at June 30, 2012

 

 

The China Fund, Inc. (CHN)

 

Manager’s Commentary

 

Market review

 

The surprise move by the People’s Bank of China (“PBoC”) to cut the benchmark lending and deposit rates by 25 basis points, effective June 8, provided a clear and strong signal to the market of a loosening in the policy stance. However, the asymmetric rate cut had an adverse effect on the net interest margin of Chinese banks and given the banking sector’s big weighting in the index, the rally in H-shares turned out to be relatively muted. With the positive effect of the Greek re-election results fading out in mid-June, the market re-focused on the weak economic data and the poor corporate earnings outlook. While it was expected that the Chinese government will continue to accelerate the pace of policy easing to stimulate domestic demand, market turnover remained low, suggesting that investors continued to stay on the sidelines.

 

The Greater China market did rally on the last trading day of the month backed by the positive measures coming from the EU summit which temporarily soothed market concerns over the euro credit situation.

 

Fund review

 

The top contributors for the month were Hand Enterprise Solutions, Ping An Insurance and Sinopharm Group. The share price of Hand Enterprise, an I.T. consultancy firm, rebounded in June on the expectation of better first half earnings results. Ping An Insurance benefited from the policy changes that allow insurance companies to participate in the RQFII program and other new businesses. The purchase of additional shares in June by management also supported the share price. Sinopharm, China's largest pharmaceutical products distributor, proposed an issuance of corporate bonds to strengthen the balance sheet, and the rate cut in early June also helped reduce Sinopharm’s interest expense.

 

The main detractors during the month were ZTE Corporation and ENN Energy. The share price of ZTE remains weak as investors are concerned about the company’s potential earnings disappointment in the upcoming interim results. However, the valuation is now at an attractive level. Although earnings expectations are bearish, there is potential upside that could come from tougher cost controls and lower financing costs. For ENN Energy, the share price soared in late May as a result of the proposed acquisition of China Gas, however it retreated after the deal faced opposition by another substantial shareholder, Beijing Enterprises.

 

Outlook

 

The latest development in Europe appears to have reduced the systemic risk of banks in the euro zone. With respect to China, there are more signs of policy easing, although the pace is still very gradual and the scope remains very selective. Notwithstanding these positive developments, a major challenge for equity markets is the fact that global economic growth remains very weak. In particular, China’s economy is much weaker than expected. Hence, while economic growth in China is likely to recover in the second half of 2012, the rate of recovery could be subdued in the absence of more significant policy support. As a result, the corporate earnings outlook continues to be weak and while we could be at the bottom of the earnings cycle, visibility of an earnings recovery remains low. Overall, we believe that Chinese equities will continue to be range bound in the short term.

 

The Taiwan stock market remained almost flat during the month of June, underperforming most regional peers. The prolonged uncertainty surrounding capital gain tax (CGT) in Taiwan and the poor global economy will continue to weigh negatively on domestic consumption in Taiwan. For instance, on a recent company visit to one of the major retailers the forecast indicated that domestic demand is very weak. With respect to the technology sector, we remain cautious as we see a weakening in the bargaining power of Taiwan component suppliers due to the emergence of 2 very strong customers, Samsung and Apple. We also expect the widely anticipated third quarter PC recovery to be either weaker than expected or delayed to next year, which is another negative for Taiwan technology companies. In terms of valuation, we believe that the Taiwan market will still stay above the regional average in terms of P.E. Ratio, despite its underperformance in June. We continue to stay cautious on Taiwan.

 

Source : RCM Asia Pacific Limited as at June 30, 2012

 

 

The China Fund, Inc. (CHN)

 

Portfolio Holdings

 

																	Percentage of
CUSIP			Security Description		Cost Base				Base MV				Shares				Net Assets
913BMZ902			Ping An Insurance (Group) Company of China, Ltd.			26,129,356				26,878,299				3,707,857				5.0
B3VN92906			HAND Enterprise Solutions Co., Ltd.			2,691,250				25,963,361				9,558,157				4.8
688910900			Taiwan Semiconductor Manufacturing Co., Ltd.			23,621,479				24,192,769				8,893,000				4.5
618855902			Tracker Fund of Hong Kong			21,479,883				21,811,935				8,468,500				4.1
644094906			FamilyMart Co., Ltd.			5,058,480				18,328,614				3,940,652				3.4
B6WY99909			China Medical System Holdings, Ltd.			3,005,888				17,847,913				41,083,300				3.3
635186901			Digital China Holdings, Ltd.			17,914,700				16,736,931				9,603,000				3.1
607355906			China Mobile, Ltd.			15,654,256				15,980,644				1,461,000				3.0
ACI007Y93			China Bright			14,969,436				15,635,006				14,665,617				2.9
B1G1QD902			Industrial & Commercial Bank of China			20,054,110				15,468,278				27,970,000				2.9
ACI0090H8			Zong Su Foods			15,000,034				15,307,086				2,677				2.9
B00G0S903			CNOOC, Ltd.			16,633,138				15,103,703				7,608,000				2.8
B1YMYT902			Hiwin Technologies Corp.			14,799,643				13,692,823				1,355,000				2.6
663094902			China Everbright International, Ltd.			11,891,059				12,280,769				26,100,000				2.3
635415904			Epistar Corp.			14,075,935				12,262,757				5,595,000				2.3
633393905			Enn Energy Holdings, Ltd.			961,117				11,990,834				3,426,000				2.2
674842901			Ruentex Development Co., Ltd.			4,853,391				10,463,206				6,857,301				1.9
634007900			Kunlun Energy Co., Ltd.			10,482,242				10,254,789				6,436,000				1.9
629099904			WT Microelectronics Co., Ltd.			8,888,527				9,592,120				7,122,000				1.8
99ZMCS903			Kweichow Moutai Co., Ltd.			8,981,307				9,540,735				251,649				1.8
B2R2ZC908			CSR Corp., Ltd.			9,248,041				9,445,615				12,212,000				1.8
670039007			Uni-President Enterprises Corp.			1,896,024				9,158,974				5,750,335				1.7
971DPM903			ZTE Corp. Access Product			12,015,588				9,055,973				4,099,499				1.7
642411904			Yuanta Financial Holdings Co., Ltd.			9,957,748				8,753,286				19,305,680				1.6
B3ZVDV905			Sinopharm Group Co., Ltd.			6,363,867				8,379,139				3,051,600				1.6
651795908			Natural Beauty Bio-Technology, Ltd.			4,906,910				7,564,962				47,710,000				1.4
17307D352			Wuliangye Yibin Co., Ltd.			3,118,592				7,270,166				1,403,507				1.3
619376908			China Resources Land Ltd.			5,946,869				7,016,177				3,436,000				1.3
B1JNK8908			China Coal Energy Co., Ltd.			10,996,167				6,899,887				8,429,000				1.3
643648900			Shenzhen International Holdings, Ltd.			6,956,592				6,836,975				111,655,000				1.3
B01CT3905			Tencent Holdings, Ltd.			6,391,568				6,823,191				234,200				1.3
970LGE904			Zhengzhou Yutong Bus Co., Ltd.			7,126,648				6,737,047				1,894,588				1.3
671815900			Qingling Motors Co., Ltd.			7,603,281				5,923,053				24,836,000				1.1
34415V109			Focus Media Holding Ltd.			5,976,531				5,880,261				250,437				1.1
B03SMV903			China United Network Communications, Ltd.			8,426,234				5,778,493				9,809,037				1.1
600245005			ASM Pacific Technology Ltd.			5,467,670				5,214,986				410,700				1.0
17313A533			Gree Electric Appliances, Inc.			5,451,623				5,110,020				1,549,900				0.9
626073902			Delta Electronics Inc.			4,550,608				4,912,280				1,615,000				0.9
674234901			Shandong Weigao Group Medical Polymer Co., Ltd.			1,296,225				4,874,810				4,428,000				0.9
604364901			Yantai Changyu Pioneer Wine Co., Ltd.			5,808,831				4,644,316				688,855				0.9
959GRNII9			Taiwan Life Insurance Co., Ltd.			6,178,274				4,604,986				200,000,000				0.9
665157905			Comba Telecom Systems Holdings, Ltd.			7,565,579				4,548,825				10,958,500				0.8
B0PR2N901			Wumart Stores, Inc.			1,810,149				4,486,858				2,219,750				0.8
B188NR908			Qinghai Salt Lake Potash Co., Ltd.			6,484,994				4,348,349				814,450				0.8
620267906			Advantech Co., Ltd.			4,104,779				4,236,319				1,284,000				0.8
912TARII6			Shanghai Yuyuan Tourist Mart Co., Ltd.			3,943,762				4,148,078				3,318,462				0.8
17316E755			Yonyou Software Co., Ltd.			4,454,170				3,974,814				1,647,250				0.7
643055908			Golden Meditech Co., Ltd.			4,555,715				3,749,164				35,040,000				0.7
B633D9904			Zhongsheng Group Holdings Ltd.			3,195,651				2,940,991				2,440,000				0.6
B05LP6908			CDW Holding, Ltd.			1,203,361				2,890,354				40,930,000				0.5
618666903			Catcher Technology Co., Ltd.			2,892,336				2,869,400				432,000				0.5
642324909			iShares MSCI China Index ETF			2,690,838				2,707,528				1,182,600				0.5
B1XBPZ903			China Fishery Group, Ltd.			2,240,953				2,578,518				3,734,872				0.5
B4R29H902			Asian Citrus Holdings, Ltd.			3,953,174				2,436,521				4,355,000				0.4

 

 

The China Fund, Inc. (CHN)

 

Portfolio Holdings (continued)

 

																	Percentage of
CUSIP			Security Description		Cost Base				Base MV				Shares				Net Assets
B4PTR3906			Fook Woo Group Holdings, Ltd.			7,974,083				2,235,340				25,314,000				0.4
677103905			Shangri-La Asia, Ltd.			1,660,098				2,229,816				1,176,683				0.4
G45667105			Hollysys Automation Technologies, Ltd.			892,101				886,284				104,024				0.2
631349909			Chaoda Modern Agriculture (Holdings), Ltd.			9,287,936				0				26,651,357				0.0
16899C939			China Silicon Corp. Common Stock			1,458,811				0				2,301,863				0.0
169999935			China Silicon Corp., Series A Preferred			5,171,016				0				27,418				0.0
B04W2V905			FU JI Food & Catering Services			4,246,696				0				5,462,000				0.0

 

Source : State Street Bank and Trust Company as at June 30, 2012

 

The information contained herein has been obtained from sources believed to be reliable but RCM and its affiliates do not warrant the information to be accurate, complete or reliable. The opinions expressed herein are subject to change at any time and without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Investors should consider the investment objectives, risks, charges and expenses of any mutual fund carefully before investing. This and other information is contained in the fund’s annual and semiannual reports, proxy statement and other fund information, which may be obtained by contacting your financial advisor or visiting the fund’s website at www.chinafundinc.com. This information is unaudited and is intended for informational purposes only. It is presented only to provide information on investment strategies and opportunities. The Fund seeks to achieve its objective through investment in the equity securities of companies and other entities with significant assets, investments, production activities, trading or other business interests in China or which derive a significant part of their revenue from China. Investing in non-U.S. securities entails additional risks, including political and economic risk and the risk of currency fluctuations, as well as lower liquidity. These risks, which can result in greater price volatility, will generally be enhanced in less diversified funds that concentrate investments in a particular geographic region. The Fund is a closed-end exchange traded management investment company. This material is presented only to provide information and is not intended for trading purposes. Closed-end funds, unlike open-end funds, are not continuously offered. After the initial public offering, shares are sold on the open market through a stock exchange, where shares may trade at a premium or a discount. Holdings are subject to change daily.