Data as of 12/31/16

Manager's Commentary

Market Review

In December, the MSCI Golden Dragon Index declined by 3.89% in US dollar terms. This retreat was mainly driven by the China/Hong Kong markets. On the macro front, activity data was largely stronger than expected and showed stable growth momentum in China. However, stock markets struggled due to both global risks and domestic issues, which included a renewed regulatory crackdown on stock investments by insurance companies and volatility in the property and bond markets. The hawkish US Federal Reserve guidance for future rate hikes has pushed the US dollar higher and added to concerns over the Renminbi's weakness.

At a sector level, all sectors ended the month in negative territory except for Energy, which gained on the optimism of an oil price recovery. Consumer discretionary was the worst performing sector, dragged down by Macau gaming names which suffered from stricter regulations.

Fund Review

The China Fund, Inc. (the "Fund") held up relatively well under weak market conditions and outperformed the benchmark. The outperformance was helped by strong momentum in some of our high conviction names. Semiconductor Manufacturing International Corporation, a mid-cap Chinese semiconductor foundry company, was a key contributor. The company's continued rally into December was backed by an increased stake by a major shareholder as well as the appointment of key talent including a former senior executive at global leader Taiwan Semiconductor Manufacturing Company Ltd., as an independent non-executive director. On a long-term basis, the company continues to gain market share globally and is a major beneficiary from the central government's move to localize the production of higher margin goods. We continue to like the company for its further potential valuation upside and earnings growth potential.

On the other hand, heightened volatility in capital markets has recently resulted in more cautious sentiment and lower turnover. Some of our financial holdings, such as Hong Kong Exchanges & Clearing Ltd. and CITIC Securities Company Ltd. ("CITIC Securities"), which we hold as exposure to the long-term development of financial services in Greater China, suffered in this environment. For CITIC Securities in particular, the share price was weak, in line with other Chinese brokers. With the onshore China bond market seeing a correction due to rising global bond yields and a local forged bond scandal, there is potential earnings impact from mark-to-market bond exposure.

Key Transactions

The key sale over the month was exiting Want Want China Holdings Ltd., a food and beverage manufacturer. The company has suffered from the lack of successful new product launches and intensifying competition. Longer term, we are more cautious of consumers upgrading from current low end staples brands as they become more affluent. In addition, growing participation from foreign brands is resulting in increased marketing and promotional spend, which is another headwind to future earnings growth.

Outlook

With the stabilization of the economic growth outlook and recovering corporate earnings and balance sheets, we are cautiously optimistic on the market going into 2017. Although Chinese equities have delivered moderate returns in 2016, they have still lagged many other emerging markets. As a result, China equity valuations are still reasonable when compared to their historical levels.

Given China's important political transition in the second half of 2017, we believe that the stability of the economy will be a top priority in the coming months. To achieve this goal, the government is expected to be mindful of containing systematic risks while utilizing different policy tools, especially fiscal policy, to support growth. As a result, we have aligned the portfolio positioning with key areas which will benefit from the likely direction of policy. This positioning includes significant exposure to industrials such as railway equipment manufacturing, waste-to-energy and water treatment as well as construction. Additionally, in view of the risk of rising protectionism, we continue to focus on companies where growth is more domestically driven. These include companies that are well positioned to capture the rising affluence of domestic consumers, such as telecommunication services which benefit from the growth of mobile data, as well as internet / e-commerce and life insurance.

Fund Manager

 

Christina Chung, CFA, CMA

Lead Portfolio Manager

 

The China Fund, Inc.

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 means the People's Republic of China, including Hong Kong, and Taiwan. The Fund will provide its stockholders with at least 60 days' prior notice of any change to this policy.

Past performance is not a guide to future returns.

*	Annualized for periods greater than one year.

Source: State Street Bank and Trust Company. Source for index data: MSCI as at December 31, 2016. Investment returns are historical and do not guarantee future results. Investment returns reflect changes in net asset value and market price per share during each period and assumes that dividends and capital gains distributions, if any, were reinvested. The net asset value (NAV) percentages are not an indication of the performance of a shareholder's investment in the Fund, which is based on market price. NAV performance includes the deduction of management fees and other expenses. Market price performance does not include the deduction of brokerage commissions and other expenses of trading shares and would be lower had such commissions and expenses been deducted. It is not possible to invest directly in an index.

 

Premium/Discount

 

 

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Source: IDS GmbH - Analysis and Reporting Services, a subsidiary of Allianz SE.

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Source: IDS GmbH - Analysis and Reporting Services, a subsidiary of Allianz SE.

1.	MSCI Golden Dragon Index.

 

Distribution/Share includes Income, Long-term Capital gains and Short-term Capital gains.

The China Fund NAV Performance of $10,000 since inception

 

Past performance is not a guide to future returns.

Index Description

MSCI Golden Dragon Index

 

The MSCI Golden Dragon Index captures the equity market performance of large and mid cap China securities (H shares, B shares, Red-Chips and P-Chips) and non-domestic China securities listed in Hong Kong and Taiwan.

It is not possible to invest directly in an index.

 

The China Fund, Inc.

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Portfolio in Full

 

 

The China Fund, Inc.

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Portfolio in Full

Source: State Street Bank and Trust Company, IDS GmbH - Analysis and Reporting Services, a subsidiary of Allianz SE.

Important Information:

Holdings are subject to change daily. The Fund seeks to achieve its objective through investment in the equity securities of companies and other entities with significant assets, investments, production activities, trading or other business interests in China or which derive a significant part of their revenue from China. Investing in non-U.S. securities entails additional risks, including political and economic risk and the risk of currency fluctuations, as well as lower liquidity. These risks, which can result in greater price volatility, will generally be enhanced in less diversified funds that concentrate investments in a particular geographic region.

The information contained herein has been obtained from sources believed to be reliable but Allianz Global Investors U.S. LLC and its affiliates do not warrant the information to be accurate, complete or reliable. The opinions expressed herein are subject to change at any time and without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Investors should consider the investment objectives, risks, charges and expenses of any mutual fund carefully before investing. This and other information is contained in the Fund's annual and semiannual reports, proxy statement and other Fund information, which may be obtained by contacting your financial advisor or visiting the Fund's website at www.chinafundinc.com. This information is unaudited and is intended for informational purposes only. It is presented only to provide information on the Fund's holdings, performance and strategies. The Fund is a closed-end exchange traded management investment company. This material is presented only to provide information and is not intended for trading purposes. Closed-end funds, unlike open-end funds, are not continuously offered. After the initial public offering by a closed-end fund, its shares can be purchased and sold on the open market through a stock exchange, where shares may trade at a premium or a discount. The market price of holdings is subject to change daily.

P/E is a ratio of security price to earnings per share. Typically, an undervalued security is characterized by a low P/E ratio, while an overvalued security is characterized by a high P/E ratio. P/B is a ratio of the current stock price to the book value. This is used to identify undervalued stocks. Dividend yield is the annual percentage of return earned by an investor on a common or preferred stock. The average dividend yield is the dividend rate divided by current share price.

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