Taiwan Stock Discussion

[Stock]

Form 8-K for CHINA FUND INC
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19-Aug-2005
Regulation FD Disclosure

Item 7.01. Regulation FD Disclosure.
Pursuant to Regulation FD Rules 100-103, The China Fund, Inc. (the "Fund") furnishes the monthly Insight report of the Fund's Listed Investment Manager. Item 9.01. Financial Statements and Exhibits

(c) Exhibits

Exhibit No. Description
99 Monthly Insight Report of the Fund's Listed Investment Manager

MANAGER’S COMMENTARY

The Hong Kong indices rose again, boosted by a strong performance from oil companies and telecom stocks. Just three companies — PetroChina, China Mobile and CNOOC — explain 105% of MSCI China’s 8.9% gain ytd. The smaller cap, management-owned companies, which the Fund continues to prefer, have been becalmed, despite good business fundamentals and low valuations. The managers feel unqualified to bet on the direction of the oil price, especially when all the major oil companies in China are state-owned and liable to act in national, rather than shareholder, interests. We therefore have no direct exposure to the sector.

The biggest news of the month was the People’s Bank of China’s announcement on July 21st that the Renminbi (Rmb) exchange rate was to move from being pegged to the US dollar to being linked to a basket of currencies. The Rmb exchange rate against the US dollar was adjusted from 8.28 to 8.11, a 2.1% revaluation. This was a small revaluation, which in itself will have a very limited effect on any Chinese company. Theoretically it is slightly bad news for exporters and commodity producers and good news for importers and those companies geared in US dollar. In our portfolio, the breakdown between domestic companies and exporters is roughly 70:30. Our portfolio companies are therefore, to a limited extent, net beneficiaries of this revaluation.

Note, though, that this is not a simple re-pegging: it is a move to a link to a basket of currencies (make-up unspecified). If the US dollar were to resume its rise against the euro and yen, therefore, based upon growing interest rate differentials, the Rmb might be expected to depreciate against the US dollar. The political effects of the revaluation are, perhaps, more important than the economic. Ahead of Hu Jin-tao’s state visit to the US in September, this move provides the proponents of free trade with some ammunition to use against growing US protectionist sentiment, showing that China is making gradual progress towards a more flexible currency regime.

We would like to thank investors in the Fund for their support of the rights offering completed on July 29th. 4,250,000 shares were issued at a price of US$26.27, which represented a premium to the net asset value of the Fund on the day of issue. The Fund received over US$110 million in additional investment opportunities. The main purpose of the rights offering was to increase the assets of the Fund available for investment opportunities, including, in particular, opportunities to invest in the A Share market in China. This market, in which foreign investors so far represent less than 1% of total market capitalization, started to rally from an eight-year low at the month end, following the Rmb revaluation. The radical share reform program now underway in the domestic market is making good progress. Our first A-share investment, the utility company Shenergy, is offering a compensation package of a number of bonus shares for every 10 held; we expect to receive these shares at the end of August.

Chris Ruffle, Martin Currie Inc


INVESTMENT STRATEGY

The Fund was 97.4% invested, ahead of the receipt of the proceeds from the rights offering, forecast for August 4th. Of the 59 stocks held in the portfolio, three are unlisted. There was little change to the portfolio in July. We added to our positions in the cheap, large coal producer, Shenhua Energy, and China’s leading IC fab, SMIC. We sold positions in Weichai, on signs of a slow down in heavy truck demand, and Guangshen Rail, where funding from an A-share has been delayed indefinitely.

Chris Ruffle, Martin Currie Inc


DIRECT INVESTMENT MANAGER’S COMMENTARY

The limited revaluation of the Rmb announced on July 21st will have a negligible immediate effect on the Fund’s private equity portfolio. We believe it to be a positive indication of the strength of the Chinese economy.

The main immediate influence on the private equity market has been a number of substantial regulatory changes announced in the first half of the year. Over time these will lead to a more transparent and attractive market which will benefit the Fund. In the short term, though, they are leading to some delays in getting the formal regulatory approvals needed to close deals.
teco Optronics has seen a significant diminution in profitability due to difficult trading conditions in the Organic light emitting diode (OLED) market. New capacity has come to the market ahead of demand, leading to severe margin erosion. Teco is considering a number of restructuring options. Consequently the book value of the Fund’s investment has been written down to US$150,000 from c. US$587,000 on July 8th.

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