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  • 1. Baring Asset Management (Asia) Limited 19th Floor, Edinburgh Tower 15 Queen’s Road Central, Hong Kong Tel: (852) 2841 1411 Fax: (852) 2868 4110 www.barings.com The Greater China Fund, Inc. Investment Outlook Henry Chan – Head of Asian Investment Team February 2007
  • 2. China: Outlook Summary Growth ++ Liquidity ++ Currency + Management + Valuation = ! We remain positive on China, but 2007 will not be as spectacular as 2006 as valuation has gone up 1 (S:Investment ManagementAccountsGCHPresentationYear 200720070201 - GCH Board Meeting Presentation update.ppt)
  • 3. Economic Growth: No Boom-Bust Cycle Real GDP Growth Year-on-year Percentage (%) 16 14 9% Swing 12 10% Swing 10 Only 3% swing 2006 = 10.7% 8 6 4 2 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 Source: BCA Research, JP Morgan as at 31 January 2007, Bloomberg ! Government Target for 2006-2010: 7.5% GDP growth p.a. 2 (S:Investment ManagementAccountsGCHPresentationYear 200720070201 - GCH Board Meeting Presentation update.ppt)
  • 4. Fixed Asset Investment Fixed Asset Investment Growth Overheating Year-on-year Percentage (%) 3 month moving average 55 50 45 40 35 30 25 20 15 10 5 0 2000 2001 2002 2003 2004 2005 2006 Source: CEIC, ABN AMRO (01/31/2007) ! Fixed asset investment growth moderating but remain well-supported ! Driven by infrastructure investments: railway, roads, properties, Olympics (Beijing), World Expo (Shanghai) ! Positive for infrastructure and basic material sectors 3 (S:Investment ManagementAccountsGCHPresentationYear 200720070201 - GCH Board Meeting Presentation update.ppt)
  • 5. Money Supply & Loan Growth Year-on-year Percentage (%) 26 24 22 20 18 Dec’06 M2 : 16.9% yoy 16 Dec’06 Loan: 15.1% yoy 14 12 10 1999 2000 2001 2002 2003 2004 2005 2006 Source: CEIC, ABN AMRO (01/31/2007), Bloomberg Money supply M2 Loans ! Liquidity remains abundant – reason for the strong “A” share market rally 4 (S:Investment ManagementAccountsGCHPresentationYear 200720070201 - GCH Board Meeting Presentation update.ppt)
  • 6. Inflation China CPI Inflation Year-on-year Percentage (%) Hyperinflation 45 40 35 30 25 20 15 10 Dec’06 CPI: 2.8% yoy 5 0 -5 -10 Jul-95 Jul-98 Jul-01 Jul-04 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Source: CEIC, ABN AMRO (01/31/2007) CPI: Overall CPI: Food CPI: Non-food ! Latest inflation data shows some sign of picking up 5 (S:Investment ManagementAccountsGCHPresentationYear 200720070201 - GCH Board Meeting Presentation update.ppt)
  • 7. China: Further Interest Rate Hike Likely Percent per annum 14 C hina - 1-year base lending rate US - Prime lending rate 12 10 - US: Raised 17 times or 4.25% 8 6 - China: Raised 3 times or 0.81% 4 2 0 1990 1995 2000 2005 Source : UBS, Aug’06 6 (S:Investment ManagementAccountsGCHPresentationYear 200720070201 - GCH Board Meeting Presentation update.ppt)
  • 8. Bank Reserve Requirement Ratio Figure 1: History of reserve requirement hikes announcement since 2003 Source: JP Morgan as at 31 January 2007 ! The PBOC has been raising bank reserve requirement ratio to reign in excess credit 7 (S:Investment ManagementAccountsGCHPresentationYear 200720070201 - GCH Board Meeting Presentation update.ppt)
  • 9. Health of Banking System has Improved Since Recapitalization NPL Ratio Trend Capital Adequacy Ratios 20% 18% 14% International 2002 YTD 16% standard 12% 14% 10% 12% 10% 8% 8% 6% 6% 4% 4% 2% 2% 0% 0% Jun-04 Aug-04 Jun-05 Aug-05 Jun-06 Aug-06 Dec-03 Feb-04 Oct-04 Dec-04 Feb-05 Oct-05 Dec-05 Feb-06 Apr-04 Apr-05 Apr-06 ICBC BOC CCB BoCom Source: Citibank (01/2007) ! Banks remain as core holdings 8 (S:Investment ManagementAccountsGCHPresentationYear 200720070201 - GCH Board Meeting Presentation update.ppt)
  • 10. China Has Become More Disciplined In Capex Capex To Sales 40% Capex to Sales 35% 30% 25% 20% 15% 10% 5% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006E 2007E Source: UBS (01/2007) ! Over capacity being addressed ! Focus on industries with improving supply discipline e.g. steel, cement 9 (S:Investment ManagementAccountsGCHPresentationYear 200720070201 - GCH Board Meeting Presentation update.ppt)
  • 11. The Rmb keeps on appreciating gradually Rmb per USD since revaluation Rmb/USD 8.4 8.3 8.2 Appreciation 8.1 8.0 7.9 7.8 7.7 01/06/05 01/08/05 01/10/05 01/12/05 01/02/06 01/04/06 01/06/06 01/08/06 01/10/06 01/12/06 01/02/07 Source: Bloomberg (02/2007) " Rmb exchange rate has surpassed that of HKD/USD " Positive : Retail/Luxury goods " Negative: Exporters 10 (S:Investment ManagementAccountsGCHPresentationYear 200720070201 - GCH Board Meeting Presentation update.ppt)
  • 12. China vs. Global Emerging Markets Relative Performance – MSCI China vs. MSCI Emerging Markets Indexed Performance Jan 2004 = 100 105 100 China Underperforms China Outperforms 95 90 85 80 75 70 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 Source: Datastream, JPMorgan (01/31/2007) " China benefited from investor re-rating in 2006, especially in the fourth quarter 11 (S:Investment ManagementAccountsGCHPresentationYear 200720070201 - GCH Board Meeting Presentation update.ppt)
  • 13. H shares still more attractive than A shares Price-Earnings Ratio times Shanghai A shares 70 60 50 40 30 H shares 20 10 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Shanghai A shares H shares Source: Bloomberg, JP Morgan, as at 1/31/2007 " H shares look undervalued when compared with the surging A shares 12 (S:Investment ManagementAccountsGCHPresentationYear 200720070201 - GCH Board Meeting Presentation update.ppt)
  • 14. Market Valuation - China MSCI China Price-Earnings Return on Equity Price-to-Earnings ratio (times) Percentage (%) 60 20 18 50 16 40 14 12 30 10 20 8 6 10 4 0 2 Jul-99 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 0 2008E 2006E 2007E 1996 1999 2000 1994 1995 1997 1998 2001 2002 2005 2003 2004 PE ROE Source: UBS (02/2007) ! Valuation still not excessive, with improving shareholders’ value 13 (S:Investment ManagementAccountsGCHPresentationYear 200720070201 - GCH Board Meeting Presentation update.ppt)
  • 15. Conclusion ! Macro - China – Growth remains strong, some concerns on further credit tightening measures. - Hong Kong – Domestic economy picking up. ! Micro - China likely to consolidate after the strong rally lately but no change to long term trend. Buy on weakness. - Stock specific in Hong Kong. 14 (S:Investment ManagementAccountsGCHPresentationYear 200720070201 - GCH Board Meeting Presentation update.ppt)
  • 16. Investment Strategy
  • 17. Investment Strategy ! Focus on infrastructure and related basic materials e.g. railway construction, steel ! Buy on weakness on Chinese domestic – banks and properties -- but will be more selective on individual stocks. Avoid insurance for the time being ! Leading manufacturers in selective industries with favourable dynamics, e.g. Foxconn International, Nine Dragons Paper, Li & Fung ! Continue to add “A” share exposure on weakness and on further QFII quotas ! Hong Kong – focus on China beneficiaries and industrials 16 (S:Investment ManagementAccountsGCHPresentationYear 200720070201 - GCH Board Meeting Presentation update.ppt)
  • 18. The Greater China Fund, Inc. Asset Allocation by Market Sept. 30, 2006 Jan. 31, 2007 Market (%) (%) Hong Kong - Red Chips 22.4 26.0 Hong Kong - Others 29.5 22.9 China ‘H’ 32.5 36.9 China ‘A’ 4.5 5.8 China ‘B’ 3.1 3.3 Taiwan 4.9 1.9 Cash 0.2 1.5 Other 2.8 1.7 Source: Baring Asset Management (02/02/2007) 17 (S:Investment ManagementAccountsGCHPresentationYear 200720070201 - GCH Board Meeting Presentation update.ppt)
  • 19. The Greater China Fund, Inc. Asset Allocation by Sector Sept. 30, 2006 Jan. 31, 2006 Sector (%) (%) Automobile 0.1 0.0 Commodities 10.5 11.2 Conglomerates 0.8 0.4 Consumption & Services 17.9 23.3 Electrical & Electronics 2.2 0.0 Energy 8.3 4.6 Financial Services 19.4 16.8 Machinery & Engineering 3.0 8.7 Real Estates 13.8 11.4 Technology 10.8 5.7 Telecommunications 1.9 3.6 Transportation 3.0 6.8 Utilities 0.0 0.0 Miscellaneous 8.1 5.9 Cash 0.2 1.5 Source: Baring Asset Management (02/01/2007) 18 (S:Investment ManagementAccountsGCHPresentationYear 200720070201 - GCH Board Meeting Presentation update.ppt)
  • 20. The Greater China Fund, Inc. Top Ten Holdings as at January 31, 2007 Portfolio weight Stock (%) China Communications Construction 5.0 Guangzhou R&F Properties 4.6 Parkson Retail 3.9 Ports Design 3.6 China Overseas Land 3.4 Foxconn International 3.3 BOC Hong Kong (Holdings) 3.0 Angang New Steel 2.7 China Mobile 2.7 China Construction Bank 2.6 Source: Baring Asset Management as at 01/31/2007 19 (S:Investment ManagementAccountsGCHPresentationYear 200720070201 - GCH Board Meeting Presentation update.ppt)
  • 21. The Greater China Fund, Inc. Portfolio Characteristics as at January 31, 2007 Portfolio Characteristics Market Capitalization Comparison Fund Benchmark* (%) (%) Fund Benchmark* Over US$10 bn 25.0 68.7 Forward P/E 26.8x 20.4x US$1-10 bn 56.8 28.7 Price/Book 8.2x 4.8x Below US$1 bn 16.7 2.6 ROE 22.8% 19.2% Weighted Avg (US$bn) 19.4 55.7 Portfolio Turnover Risk Summary The rolling 12 month portfolio turnover as Tracking Error vs. Benchmark 8.1% at January 31, 2007 = 95.2% (usually Beta vs. Benchmark 1.15 higher by turn of year) Portfolio Risk 19.6% Benchmark Risk 15.7% Source: Baring Asset Management as at 01/31/2007 * Benchmark : MSCI Zhong Hua 20 (S:Investment ManagementAccountsGCHPresentationYear 200720070201 - GCH Board Meeting Presentation update.ppt)
  • 22. Investment Professionals LILIAN CO, CFA Head of Hong Kong China Equities Hong Kong Investment Experience: 12 Years Lilian heads up the HK China team, overseeing research generation and HK China products. She is the fund manager of Baring HK China Fund (a long-only product) and involved in the management of Baring China Absolute Return Fund (a long/short China hedge fund). She also has the responsibility for a few HK segregated institutional accounts and is a member of the Global Consumer Discretionary Sector Team. Lilian joined Baring Asset Management in 1997 as an analyst covering Taiwan and was promoted to Investment Manager in 2000. Lilian was appointed Divisional Director in 2004. Prior to joining Baring Asset Management, Lilian worked for Credit Agricole Asset Management covering Taiwan, Indonesia and India. Lilian received a Bachelor of Commerce from the University of Alberta (Canada) and an M.B.A. from the University of Nottingham (UK). Lilian was awarded the CFA designation in 2000. She speaks English, Mandarin and Cantonese fluently. HENRY CHAN, CFA, CPA Head of Asian Investment Team Hong Kong Investment Experience: 12 Years Henry is responsible for the Asian investment policy and portfolio construction. He became the Head of the Asian Investment Team in 2006. Henry joined Baring Asset Management in 2004 and assumed the lead role in driving our Asian institutional mandates and flagship retail products, namely, Baring Asia Growth and Baring Eastern Trust. At the specialist level, Henry is the co-manager the Baring China Absolute Return Fund and Baring Korea Trust. Henry has extensive experience in the management of both Asian regional and specialist mandates. Prior to joining Baring Asset Management he worked at INVESCO (formerly LGT) where he handled a number of Pacific Basin (including Japan) and Asia ex Japan portfolios. His specialist experience covered a number of markets including Taiwan, Hong Kong, China, Korea and Japan. He was also the lead fund manager of INVESCO Asia NET Fund, INVESCO GT Taiwan Fund and a number of Greater China portfolios. Henry received his Bachelor Degree from the London School of Economics and Political Science in 1992. He was awarded the CPA designation in 1994 and became a CFA in 1997. Henry speaks fluent English, Cantonese and Mandarin. . Last updated: 29th January 2007 21 (S:Investment ManagementAccountsGCHPresentationYear 200720070201 - GCH Board Meeting Presentation update.ppt)
  • 23. Regulatory Disclosure This document is provided as a service to professional investors/advisers. It is issued in the United Kingdom by Baring Asset Management Limited and/or by its investment adviser affiliates in other jurisdictions. The affiliate serving as the Greater China Fund’s investment adviser is Baring Asset Management (Asia) Limited. In the United Kingdom this document is issued only to persons falling within a permitted category under (i) the FSA’s rules made under section 238(5) of the Financial Services and Markets Act 2000 and (ii) the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001. This is not an offer nor a solicitation to buy or sell any investment referred to in this document. Baring Asset Management group companies, their affiliates and/or their directors, officers and employees may own or have positions in any investment mentioned herein or any investment related thereto and from time to time add to or dispose of any such investment. The contents of this document are based upon sources of information believed to be reliable but no guarantee, warranty or representation, express or implied, is given as to their accuracy or completeness. This document may include forward-looking statements, which are based upon our current opinions, expectations and projections as of the date on the cover hereof. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. The value of any investments and any income generated may go down as well as up and is not guaranteed. Past performance will not necessarily be repeated. Changes in rates of exchange may have an adverse effect on the value, price or income of an investment. There are additional risks associated with investments (made directly or through investment vehicles which invest) in emerging or developing markets. Compensation arrangements under the Financial Services and Markets Act 2000 of the United Kingdom will not be available. Private investors in the Company referred to herein should obtain their own independent financial advice before making investments. This document must not be relied on for purposes of any investment decisions. Before investing in the Company, we recommend that all relevant documents, such as reports and accounts and prospectus should be read, which specify the particular risks associated with investment in the Company, together with any specific restrictions applying and the basis of dealing. The Company may not be available for investment in all jurisdictions. There may also be prohibitions or restrictions on distribution of this document and other material relating to the Company and accordingly recipients of any such documents are advised to inform themselves about and to observe any such restrictions. Compliance (HK): 7 February 2007 22 (S:Investment ManagementAccountsGCHPresentationYear 200720070201 - GCH Board Meeting Presentation update.ppt)