UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES

THE CHINA FUND, INC.

(Exact name of registrant as specified in charter)

C/O STATE STREET BANK & TRUST COMPANY
2 AVENUE DE LAFAYETTE
P.O. BOX 5049
BOSTON, MA 02206-5049
 
(Address of principal executive offices)(Zip code)

		Copy to:
Tracie A. Coop Secretary The China Fund, Inc. 4 Copley Place, 5th Floor CPH-0326 Boston, MA 02116		Leonard B. Mackey, Jr., Esq. Clifford Chance US LLP 31 West 52nd Street New York, New York 10019-6131
(Name and Address of Agent for Service)

Registrant’s telephone number, including area code: (888) 246-2255

Date of fiscal year end: October 31

Date of reporting period: October 31, 2011

 

 

Item 1. Report to Stockholders.

ANNUAL REPORT

 

October 31, 2011

The China Fund, Inc.

Table of Contents

THE CHINA FUND, INC.

KEY HIGHLIGHTS (Unaudited)

 

 

 

 

 

(1) Total investment returns reflect changes in net asset value per share or market price, as the case may be, during each period and assumes that dividends and capital gains distributions, if any, were reinvested in accordance with the dividend reinvestment plan. The net asset value per share percentages are not an indication of the performance of a shareholder’s investment in the Fund, which is based on market price. Total investment returns do not reflect the deduction of taxes that a stockholder would pay on Fund distributions or the sale of Fund shares. Total investment returns are historical and do not guarantee future results.

THE CHINA FUND, INC.

ASSET ALLOCATION AS OF OCTOBER 31, 2011 (Unaudited)

 

 

 

 

* Percentages based on net assets at October 31, 2011.

 

     INDUSTRY ALLOCATION (Unaudited)

 

 

 

 

Fund holdings are subject to change and percentages shown above are based on total net assets as of October 31, 2011. A complete list of holdings as of October 31, 2011 is contained in the Schedule of Investments included in this report. The most current available data regarding portfolio holdings can be found on our website, www.chinafundinc.com.  You may also obtain holdings by calling 1-888-246-2255.

THE CHINA FUND, INC.
CHAIRMAN’S STATEMENT (Unaudited)

 

Dear stockholders,

 

The past twelve months have seen remarkable volatility in global markets, most recently manifested in the global sell-off prompted by S&P’s downgrading of US government debt and worries over European sovereign debt. These factors dragged global markets down, with China also affected by domestic forces including an overheating inflationary environment, tightening liquidity, and largely unfounded worries over corporate governance. In this harsh environment, the Fund returned −9.7% on net asset value. This compares to the Fund’s benchmark, MSCI Golden Dragon, which returned −10.3%.

 

On a further positive note, recent comments from the PRC’s Premier Wen have indicated that the leadership wants to support growth by easing the tax burden on business. We expect that these signals of selective easing sent by the top leadership, along with a recent series of supportive policies, including an increase in bank lending and a tax cut, will support a stockmarket rebound in the coming months.

 

I also have some news regarding important changes to the Fund’s management. Shifeng Ke has ceased to be the lead manager of the Fund, and, as of November 9, 2011, the Fund has entered into interim arrangements with Martin Currie Inc. Martin Currie then entered into a sub-advisory agreement with APS Asset Management Pte Ltd (APS) to manage the Fund’s portfolio until new investment-management arrangements can be put in place. APS is a Singapore-based investment-management firm that specialises in Asia-Pacific equity investments, with a particular focus on China and Greater China. APS has a team of ten analysts based across Beijing, Shanghai and Shenzhen.

 

The interim arrangements will remain in place for a maximum of 150 days. The Board of Directors of the Fund is also considering potential managers including Martin Currie Inc. and APS to take over the management of the Fund’s portfolio at the end of the term of the interim arrangements. The selection of any such manager by the Board will be subject to stockholder approval.

 

On behalf of the Board of Directors, I would like to thank you for your continuing support of the Fund.

 

Sincerely,

 

James Lightburn
Chairman

 

THE CHINA FUND, INC.

INVESTMENT MANAGER’S STATEMENT (Unaudited)

 

REVIEW OF LISTED AND DIRECT INVESTMENTS

 

Review

 

This was a challenging year for the Fund, which returned −9.7% on net asset value against its benchmark, MSCI Golden Dragon which returned −10.3%.

 

Chinese markets were volatile over the period, on fears of inflation and tightening liquidity. Given these domestic difficulties, as well as the clouds cast by dismal US data and the endlessly spiralling European debt crisis, the equity markets were febrile. Market reactions to rumors were striking. For example, Chaoda, China’s largest vegetable grower, dropped 26% in one day in September on fears of misconduct.

 

Taiwan was also volatile, though in a different pattern to the mainland. The island’s stockmarket outperformed the other Chinese markets by a considerable margin.

 

A notable development on the political front was the setting out of the Chinese government’s 12th five-year plan in March. The most eye-catching part of this was an ambitious social-housing proposal, which entails a 70% increase in this year’s affordable-housing target, to 10 million units — almost the same as last year’s volume of commercial houses. This project goes far beyond merely controlling property-price expectations, to stimulating domestic consumption, restructuring the pattern of economic growth and reallocating social wealth.

 

The largest detractors from the Fund’s relative performance included Huiyin Household Appliances and large-scale vegetable producer Chaoda (mentioned above). Another major detractor was Boshiwa, which sells children’s clothing on the Chinese mainland. Although its shares rallied on the announcement of surging revenues, this was not sufficient to offset the falls earlier in the year. The strength of the Taiwanese market over the period meant that we suffered from not holding some of the island’s largest index components. In this regard, Taiwan Semiconductor detracted from relative returns. Meanwhile, China Fishery sold off on initial fears of nuclear pollution in its waters from Japan’s stricken Fukushima nuclear plant.

 

On a more positive note, the holding in computing-services stock Hand Enterprise Solutions made a significant positive contribution. Another strong contributor was China Medical System Holdings, Ltd., which continues to expand its share of the mainland pharmaceutical market through acquisitions. As domestic consumption continues to flourish across the Greater China region, a number of retailers also boosted relative returns, including convenience-store operator FamilyMart, Far Eastern Department Stores (both Taiwanese) and Singapore-listed snack-maker Hsu Fu Chi, which received a takeover bid from Nestlé.

 

Outlook

 

During Chinese Premier Wen Jiabao’s recent visit to Tianjin, he indicated that the central government would ‘fine-tune and preemptively adjust policies at a proper time and by a suitable degree’. Accordingly, the State Council decided to allow four local governments — Shanghai, Shenzhen, Zhejiang province and Guangdong province — to issue bonds independently, with the Ministry of Finance repaying the principal and interests. In addition, the central government is set to launch a trial value-added tax for business next year, to eventually replace the existing business tax regime. This is seen as indicating that the leadership wants to support growth by easing the tax burden on business. We expect that these signals of selective easing sent by the top leadership will support a stockmarket rebound in the coming months.

 

THE CHINA FUND, INC.

ABOUT THE PORTFOLIO MANAGERS (Unaudited)

 

Listed and Direct Investment Managers

Martin Currie Ltd and Heartland Capital Management Ltd (‘HCML’) established MC China Ltd (‘MCCL’), as a joint venture company, to provide investment consultancy services to the range of China investment products managed by Marin Currie and its affiliates. HCML seconded Shifeng Ke to Martin Currie Inc. and its affiliates, on a full time basis. Effective November 9, 2011, Martin Currie’s interest in MCCL terminated and Shifeng Ke ceased to be the lead manager of the Fund. At that time, Martin Currie Inc. entered into an interim investment advisory agreement with the Fund and also entered into an interim sub-advisory agreement with APS Asset Management Pte Ltd for management of the Fund’s portfolio.

 

The Fund announced that its Board of Directors has commenced a process to review investment manager alternatives for the Fund.

THE CHINA FUND, INC.

SCHEDULE OF INVESTMENTS

October 31, 2011

 

 

 

See notes to financial statements and notes to schedule of investments.

THE CHINA FUND, INC.

SCHEDULE OF INVESTMENTS (continued)

October 31, 2011

 

 

 

See notes to financial statements and notes to schedule of investments.

THE CHINA FUND, INC.

SCHEDULE OF INVESTMENTS (continued)

October 31, 2011

 

 

 

See notes to financial statements and notes to schedule of investments.

THE CHINA FUND, INC.

SCHEDULE OF INVESTMENTS (continued)

October 31, 2011

 

 

 

See notes to financial statements and notes to schedule of investments.

THE CHINA FUND, INC.

SCHEDULE OF INVESTMENTS (continued)

October 31, 2011

 

 

 

See notes to financial statements and notes to schedule of investments.

THE CHINA FUND, INC.

SCHEDULE OF INVESTMENTS (continued)

October 31, 2011

 

Notes to Schedule of Investments

 

 *  Denotes non-income producing security.

 

 V  Security is deemed worthless.

 

  #  Illiquid security.

 

  †  Affiliated issuer (see Note F).

 

@  The bond will be converted into common stock at maturity.

 

 

 

 

See notes to financial statements and notes to schedule of investments.

THE CHINA FUND, INC.

STATEMENT OF ASSETS AND LIABILITIES

October 31, 2011

 

 

 

See notes to financial statements.

THE CHINA FUND, INC.

STATEMENT OF OPERATIONS

Year Ended October 31, 2011

 

 

 

See notes to financial statements.

THE CHINA FUND, INC.

STATEMENTS OF CHANGES IN NET ASSETS

 

 

 

See notes to financial statements.

THE CHINA FUND, INC.

STATEMENT OF CASH FLOWS

For the Year Ended October 31, 2011

 

 

 

See notes to financial statements.

THE CHINA FUND, INC.

FINANCIAL HIGHLIGHTS

Selected data for a share of common stock outstanding for the years indicated

 

 

 

*   Per share amounts have been calculated using the average share method.

 

 

 

See notes to financial statements.

 

THE CHINA FUND, INC.

NOTES TO FINANCIAL STATEMENTS

October 31, 2011

 

 

The China Fund, Inc. (the “Fund”) was incorporated under the laws of the State of Maryland on April 28, 1992, and is a non-diversified, closed-end management investment company registered under the Investment Company Act of 1940, as amended (the “1940 Act”). The Fund’s investment objective is long-term capital appreciation which it seeks to achieve by investing primarily in equity securities (i) of companies for which the principal securities trading market is the People’s Republic of China (“China”), (ii) of companies for which the principal securities trading market is outside of China, or constituting direct equity investments in companies organized outside of China, that in both cases derive at least 50% of their revenues from goods and services sold or produced, or have at least 50% of their assets, in China and (iii) constituting direct equity investments in companies organized in China. The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements.

 

Use of estimates:  The preparation of financial statements 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 reported amounts of income and expenses for the period. Actual results could differ from these estimates. The significant estimates made as of, and for the year ended, October 31, 2011 includes estimates related to Direct Investments and to the contingent liability resulting from the sale of Captive Finance in March 2007. A reserve of 10% of the net sale proceeds was established to cover any potential liabilities from the representation and warranties provided by the Fund in the transaction. This contingent liability will expire in March 2013.

 

Security valuation:  Portfolio securities listed on recognized United States or foreign securities exchanges are valued at the last quoted sales price in the principal market where they are traded. Listed securities with no such sales price and unlisted securities are valued at the mean between the current bid and asked prices, if any, from brokers. Short-term investments having maturities of sixty days or less are valued at amortized cost (original purchase cost as adjusted for amortization of premium or accretion of discount) which when combined with accrued interest approximates market value. Securities for which market quotations are not readily available are valued at fair value in good faith by or at the direction of the Board of Directors considering relevant factors, data and information including, if relevant, the market value of freely tradable securities of the same class in the principal market on which such securities are normally traded. Direct Investments are valued at fair value as determined by or at the direction of the Board of Directors based on financial and other information supplied by the Direct Investment Manager regarding each Direct Investment. Forward currency contracts are valued at the current cost of offsetting the contract. Equity linked securities are valued at fair value primarily based on the value(s) of the security (or securities) underlying, which normally follows the same methodology as the valuation of securities listed on recognized exchanges.

 

Factors used in determining value may include, but are not limited to, the type of security, the size of the holding, the initial cost of the security, the existence of any contractual restrictions on the security’s disposition, the price and extent of public trading in similar securities of the issuer or of comparable companies, the availability of quotations from broker-dealers, the availability of values of third parties other than the Investment Manager or Direct Investment Manager, information obtained from the issuer, analysts, and/or the appropriate stock exchange (if available), an analysis of the company’s financial statements, an evaluation of the forces that influence the issuer and the market(s) in

NOTES TO FINANCIAL STATEMENTS (continued)

 

which the security is purchased and sold, and with respect to debt securities, the maturity, coupon, creditworthiness, currency denomination, and the movement of the market in which they trade.

 

Repurchase Agreements:  In connection with transactions in repurchase agreements, it is the Fund’s policy that its custodian take possession of the underlying collateral securities, the fair value of which exceeds the principal amount of the repurchase transaction, including accrued interest, at all times. If the seller defaults, and the fair value of the collateral declines, realization of the collateral by the Fund may be delayed or limited.

 

Securities Lending:  The Fund may lend up to 331/3% of the Fund’s total assets held by State Street Bank and Trust Company (“State Street”) as custodian to certain qualified brokers, except those securities which the Fund or the Investment Manager specifically identifies as not being available. By lending its investment securities, the Fund attempts to increase its net investment income through the receipt of interest on the loan. Any gain or loss in the market price of the securities loaned that might occur and any interest or dividends declared during the term of the loan would accrue to the account of the Fund. Risks of delay in recovery of the securities or even loss of rights in the collateral may occur should the borrower of the securities fail financially. Risks may also arise to the extent that the value of the collateral decreases below the value of the securities loaned. Upon entering into a securities lending transaction, the Fund receives cash or other securities as collateral in an amount equal to or exceeding 100% of the current market value of the loaned securities with respect to securities of the U.S. government or its agencies, 102% of the current market value of the loaned securities with respect to U.S. securities and 105% of the current market value of the loaned securities with respect to foreign securities. Any cash received as collateral is generally invested by State Street, acting in its capacity as securities lending agent (the “Agent”), in the State Street Navigator Securities Lending Prime Portfolio. A portion of the dividends received on the collateral is rebated to the borrower of the securities and the remainder is split between the Agent and the Fund.

 

As of October 31, 2011, the Fund had loaned securities which were collateralized by cash and short term investments. The value of the securities on loan and the value of the related collateral were as follows:

 

 

Foreign currency translations:  The records of the Fund are maintained in U.S. dollars. Foreign currencies, investments and other assets and liabilities are translated into U.S. dollars at the current exchange rates. Purchases and sales of investment securities and income and expenses are translated on the respective dates of such transactions. Net realized gains and losses on foreign currency transactions represent net gains and losses from the disposition of foreign currencies, currency gains and losses realized between the trade dates and settlement dates of security transactions, and the difference between the amount of net investment income accrued and the U.S. dollar amount actually received. The effects of changes in foreign currency exchange rates on investments in securities are not segregated in the Statement of Operations from the effects of changes in market prices of those securities, but are included in realized and unrealized gain or loss on investments. Net unrealized foreign currency gains and losses arise from changes in the value of assets and liabilities, other than investments in securities, as a result of changes in exchange rates.

NOTES TO FINANCIAL STATEMENTS (continued)

 

Forward Foreign Currency Contracts:  The Fund may enter into forward foreign currency contracts to hedge against foreign currency exchange rate risks. A forward currency contract is an agreement between two parties to buy or sell currency at a set price on a future date. Upon entering into these contracts, risks may arise from the potential inability of counterparties to meet the terms of their contracts and from unanticipated movements in the value of the foreign currency relative to the U.S. dollar. The U.S. dollar value of forward currency contracts is determined using forward exchange rates provided by quotation services. Daily fluctuations in the value of such contracts are recorded as unrealized gain or loss on the Statement of Assets and Liabilities. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value at the time it was opened and the value at the time it was closed. Such gain or loss is disclosed in the realized and unrealized gain or loss on foreign currency in the Fund’s accompanying Statement of Operations. At October 31, 2011, the Fund did not hold open forward foreign currency contracts.

 

Option Contracts:  The Fund may purchase and write (sell) call options and put options provided the transactions are for hedging purposes and the initial margin and premiums do not exceed 5% of total assets. Option contracts are valued daily and unrealized gains or losses are recorded on the Statement of Assets and Liabilities based upon the last sales price on the principal exchange on which the options are traded. The Fund will realize a gain or loss upon the expiration or closing of the option contract. Such gain or loss is disclosed in the realized and unrealized gain or loss on options in the Fund’s accompanying Statement of Operations. When an option is exercised, the proceeds on sales of the underlying security for a written call option, the purchase cost of the security for a written put option, or the cost of the security for a purchased put or call option is adjusted by the amount of premium received or paid.

 

The risk in writing a call option is that the Fund gives up the opportunity for profit if the market price of the security increases and the option is exercised. The risk in writing a put option is that the Fund may incur a loss if the market price of the security decreases and the option is exercised. The risk in buying an option is that the Fund pays a premium whether or not the option is exercised. Risks may also arise from an illiquid secondary market or from the inability of counter parties to meet the terms of the contract.

 

Equity Linked Securities:  The Fund may invest in equity-linked securities such as linked participation notes, equity swaps and zero-strike options and securities warrants. Equity-linked securities currently held by the Fund, are privately issued securities whose investment results are designed to correspond generally to the performance of a specified stock index or “basket” of stocks, or a single stock. Access Products may be used by the Fund to gain exposure to countries that place restrictions on investments by foreigners. To the extent that the Fund invests in Access Products whose return corresponds to the performance of a foreign securities index or one or more foreign stocks, investing in Access Products will involve risks similar to the risks of investing in foreign securities. In addition, the Fund bears the risk that the issuer of an Access Product may default on its obligation under the terms of the arrangement with the counterparty. Access Products are often used for many of the same purposes as, and share many of the same risks with, derivative instruments. In addition, Access Products may be considered illiquid.

 

At October 31, 2011, the Fund held equity-linked Access Product warrants through Credit Lyonnais and Citigroup Global Markets Holdings, the issuers. Under the terms of the agreements, each warrant entitles the Fund to receive

NOTES TO FINANCIAL STATEMENTS (continued)

 

from the issuers an amount in U.S. dollars linked to the performance of specific equity shares. Under these agreements, the Fund has agreed to pay or provide reimbursement for any taxes imposed on the A Share investments underlying the Access Products. Non-resident corporate investors in China, such as the issuer of the Access Products, are subject to a statutory 10% withholding tax on both dividend and interest income sourced from China, absent an applicable tax treaty; however to date China has not implemented procedures to collect the tax. There can be no assurance that in the future China will not implement such procedures and also subject capital gains to taxation. If China does implement such procedures the Fund may be required to pay or reimburse for any taxes that the issuers of the Access Products became subject to under those procedures.

 

Direct Investments:  The Fund may invest up to 25% of the net proceeds from its offering of its oustanding common stock in direct investments; however, the Board of Directors of the Fund has suspended additional investments in direct investments. Direct investments are generally restricted and do not have a readily available resale market. Because of the absence of any public trading market for these investments, the The Fund may take longer to liquidate these positions than would be the case for publicly traded securities. Although these securities may be resold in privately negotiated transactions, the prices on these sales could be less than those originally paid by the Fund. Issuers whose securities are not publicly traded may not be subject to public disclosure and other investor protections requirements applicable to publicly traded securities. The value of these securities at October 31, 2011 was $32,507,511 or 4.9% of the Fund’s net asset value. The table below details the acquisition date, cost, and value of the Fund’s direct investments as determined by the Board of Directors of the Fund. The Fund does not have the right to demand that such securities be registered.

 

 

Indemnification Obligations:  Under the Fund’s organizational documents, its Officers and Directors are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business the Fund enters into contracts that provide general indemnifications to other parties. The Fund’s maximum exposure under these arragements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred.

 

Security transactions and investment income:  Security transactions are recorded as of the trade date. Realized gains and losses from securities sold are recorded on the identified cost basis. Dividend income is recorded on the ex-dividend date, or, in the case of dividend income on foreign securities, on the ex-dividend date or when the Fund

NOTES TO FINANCIAL STATEMENTS (continued)

 

becomes aware of its declaration. Interest income is recorded on the accrual basis. All premiums and discounts are amortized/accreted for both financial reporting and federal income tax purposes.

 

Dividend and interest income generated in Taiwan is subject to a 20% withholding tax. Stock dividends received are taxable at 20% of the par value of the stock dividends received. The Fund records the taxes paid on stock dividends as an operating expense.

 

Dividends and distributions:  The Fund intends to distribute to its shareholders, at least annually, substantially all of its net investment income and any net realized capital gains. Distributions to shareholders are recorded on the ex-dividend date. Income and capital gains distributions are determined in accordance with income tax regulations, which may differ from U.S. generally accepted accounting principles. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences which arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future.

 

The Fund made distributions of $8,534,134 from Ordinary Income and $43,276,235 from Long-Term Capital Gains during the year ended October 31, 2011. For the year ended October 31, 2010 the Fund made distributions of $5,825,297 from Ordinary Income.

 

As of October 31, 2011, the components of distributable earnings on a tax basis were $3,969,124 of undistributed ordinary income and $64,294,073 of undistributed capital gains, resulting in a total of $68,263,197. Permanent book/tax differences relate to foreign currency gains and losses and defaulted bond adjustments.

 

Federal Taxes:  It is the Fund’s policy to comply with the Subchapter M provision of the Internal Revenue Code (“Code”) and to distribute to shareholders each year substantially all of its income. Accordingly, no provision for federal income tax is necessary. As of and during the year ended October 31, 2011, the Fund did not have a liability for any uncertain tax positions. The Fund recognizes interest and penalties, if any, related to tax liabilities as income tax expense in the Statements of Operations. As of October 31, 2011, tax years 2008 through 2011 remain subject to examination by the Fund’s major tax jurisdictions, which include the United States of America and the state of Maryland. The Fund may be subject to taxes imposed by governments of countries in which it invests. Such taxes are generally based on either income or gains earned or repatriated. The Fund accrues and applies such taxes to net investment income, net realized gains and net unrealized gains as income and/or gains are earned.

 

Martin Currie Inc. is the investment manager for the Fund’s listed assets (the “Listed Assets”). Martin Currie Inc. receives a fee, computed weekly and payable monthly, at the following annual rates: 0.70% of the first US$315 million of the Fund’s average weekly net assets invested in Listed Assets; and 0.50% of the Fund’s average weekly net assets invested in Listed Assets in excess of US$315 million. Martin Currie Inc. is also the investment manager for the Fund’s direct investments (the “Direct Investments”). Martin Currie Inc. receives a fee computed weekly and payable monthly, at an annual rate of 2.00% of the average weekly value of the Fund’s assets invested in direct investments.

NOTES TO FINANCIAL STATEMENTS (continued)

 

In December 2010, the Direct Investment Manager agreed to reimburse management fees related to Fund’s Ugent Holdings, Ltd. investment. For the year ended October 31, 2011, the Direct Investment Manager paid $747,725 in management fee reimbursements to the Fund.

 

No director, officer or employee of the Investment Manager or Direct Investment Manager or any affiliates of those entities will receive any compensation from the Fund for serving as an officer or director of the Fund. The Fund pays the Chairman of the Board and each of the directors (who is not a director, officer or employee of the Investment Manager or Direct Investment Manager or any affiliate thereof) an annual fee of $35,000 and $15,000 respectively, plus $3,000 for each Board of Directors’ meeting or Audit and Nominating Committee meeting attended, $2,000 for each telephonic meeting attended and $2,000 for each Valuation Committee teleconference. In addition, the Fund will reimburse each of the directors for travel and out-of-pocket expenses incurred in connection with attending Board of Directors’ meetings.

 

State Street Bank and Trust Company (“State Street”) provides, or arranges for the provision of certain administrative services for the Fund, including preparing certain reports and other documents required by federal and/or state laws and regulations. The Fund pays State Street a fee that is calculated daily and paid monthly at an annual rate based on aggregate average daily assets of the Fund. The Fund also pays State Street an annual fee for certain legal administration services, including corporate secretarial services and preparing regulatory filings.

 

The Fund has also contracted with State Street to provide custody and fund accounting services to the Fund. For these services, the Fund pays State Street asset-based fees that vary according to the number of positions and transactions plus out-of-pocket expenses.

 

The Board of Directors of the Fund has approved a share repurchase plan. Under the program, the Fund will repurchase shares at management’s discretion at times when it considers the repurchase to be consistent with the objectives of the program. For the year ended October 31, 2011, the Fund did not repurchase any shares under the plan. At October 31, 2011, 100,000,000 shares of $.01 par value common stock were authorized.

 

For the year ended October 31, 2011, the Fund’s cost of purchases and proceeds from sales of investment securities, other than short-term securities, were $143,318,975 and $195,177,511, respectively. At October 31, 2011, the cost of investments for federal income tax purposes was $586,627,720. Gross unrealized appreciation of investments was $216,730,528 while gross unrealized depreciation of investments was $78,426,279, resulting in net unrealized appreciation of investments of $138,304,249.

 

The Fund’s investments in China companies involve certain risks not typically associated with investments in securities of U.S. companies or the U.S. Government, including risks relating to (1) social, economic and political uncertainty; (2) price volatility, lesser liquidity and smaller market capitalization of securities markets in which

NOTES TO FINANCIAL STATEMENTS (continued)

 

securities of China companies trade; (3) currency exchange fluctuations, currency blockage and higher rates of inflation; (4) controls on foreign investment and limitations on repatriation of invested capital and on the Fund’s ability to exchange local currencies for U.S. dollars; (5) governmental involvement in and control over the economy; (6) risk of nationalization or expropriation of assets; (7) the nature of the smaller, less seasoned and newly organized China companies, particularly in China; and (8) the absence of uniform accounting, auditing and financial reporting standards, practices and disclosure requirements and less government supervision and regulation.