Microsoft PowerPoint - GCH presentation -February 2007

Baring Asset Management (Asia) Limited19th Floor, Edinburgh Tower

15 Queen’s Road Central, Hong KongTel: (852) 2841 1411Fax: (852) 2868 4110

www.barings.com

The Greater China Fund, Inc.

Investment Outlook

Henry Chan – Head of Asian Investment TeamFebruary 2007

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(S:\Investment Management\Accounts\GCH\Presentation\Year 2007\20070201 - GCH Board Meeting Presentation update.ppt)

China: Outlook Summary

! We remain positive on China, but 2007 will not be as spectacular as 2006 as valuation has gone up

Growth + +

Liquidity + +

Currency +

Management +

Valuation =

2


Economic Growth: No Boom-Bust Cycle

Real GDP Growth

! Government Target for 2006-2010:

7.5% GDP growth p.a.

2006 = 10.7%

Source: BCA Research, JP Morgan as at 31 January 2007, Bloomberg

Year-on-year Percentage (%)

0

2

4

6

8

10

12

14

16

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

9% Swing

10% Swing

Only 3% swing

3


05

10152025303540455055

2000 2001 2002 2003 2004 2005 2006

Fixed Asset Investment

Source: CEIC, ABN AMRO (01/31/2007)

Fixed Asset Investment Growth

! 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

Year-on-year Percentage (%)3 month moving average

Overheating

4


10

12

14

16

18

20

22

24

26

1999 2000 2001 2002 2003 2004 2005 2006

Money supply M2 Loans

Money Supply & Loan Growth

Dec’06 M2 : 16.9% yoy

! Liquidity remains abundant – reason for the strong “A”share market rally

Dec’06 Loan: 15.1% yoy

Source: CEIC, ABN AMRO (01/31/2007), Bloomberg


5


-10-505

1015202530354045

Jan-9

4

Jul-

95

Jan-9

7

Jul-

98

Jan-0

0

Jul-

01

Jan-0

3

Jul-

04

Jan-0

6

CPI: Overall CPI: Food CPI: Non-food

Inflation

China CPI Inflation

! Latest inflation data shows some sign of picking up

Source: CEIC, ABN AMRO (01/31/2007)

Hyperinflation

Dec’06 CPI: 2.8% yoy


6


China: Further Interest Rate Hike Likely

Source : UBS, Aug’06

0

2

4

6

8

10

12

14

1990 1995 2000 2005

China - 1-year base lending rate

US - Prime lending rate

Percent per annum

- US: Raised 17 times or 4.25%

- China: Raised 3 times or 0.81%

7


Bank Reserve Requirement Ratio

Source: JP Morgan as at 31 January 2007

! The PBOC has been raising bank reserve requirement ratio to reign in excess credit

Figure 1: History of reserve requirement hikes announcement since 2003

8


0%

2%

4%

6%

8%

10%

12%

14%

ICBC BOC CCB BoCom

2002 YTD

Health of Banking System has Improved Since Recapitalization

NPL Ratio Trend

! Banks remain as core holdings

Source: Citibank (01/2007)

Internationalstandard

Capital Adequacy Ratios

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Dec-

03

Feb

-04

Ap

r-0

4

Jun

-04

Au

g-0

4

Oct

-04

Dec-

04

Feb

-05

Ap

r-0

5

Jun

-05

Au

g-0

5

Oct

-05

Dec-

05

Feb

-06

Ap

r-0

6

Jun

-06

Au

g-0

6

9


5%

10%

15%

20%

25%

30%

35%

40%

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006E

2007E

Capex to Sales

China Has Become More Disciplined In Capex

Capex To Sales

Source: UBS (01/2007)

! Over capacity being addressed

! Focus on industries with improving supply discipline e.g. steel, cement

10


7.7

7.8

7.9

8.0

8.1

8.2

8.3

8.4

01/0

6/05

01/0

8/05

01/1

0/05

01/1

2/05

01/0

2/06

01/0

4/06

01/0

6/06

01/0

8/06

01/1

0/06

01/1

2/06

01/0

2/07

The Rmb keeps on appreciating gradually

Source: Bloomberg (02/2007)

" Rmb exchange rate has surpassed that of HKD/USD

" Positive : Retail/Luxury goods

" Negative: Exporters

Rmb per USD since revaluationRmb/USD

Appreciation

11


70

75

80

85

90

95

100

105

Jan-

04

May

-04

Sep

-04

Jan-

05

May

-05

Sep

-05

Jan-

06

May

-06

Sep

-06

Jan-

07

China vs. Global Emerging Markets

Source: Datastream, JPMorgan (01/31/2007)

Relative Performance – MSCI China vs. MSCI Emerging Markets

Indexed Performance

Jan 2004 = 100

China OutperformsChina Underperforms

" China benefited from investor re-rating in

2006, especially in the fourth quarter

12


0

10

20

30

40

50

60

70

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Shanghai A shares H shares

H shares still more attractive than A shares

" H shares look undervalued when compared with

the surging A shares

Price-Earnings Ratio

Source: Bloomberg, JP Morgan, as at 1/31/2007

Shanghai A shares

H shares

times

13


0

10

20

30

40

50

60

Jan-9

9Ju

l-99

Jan-0

0Ju

l-00

Jan-0

1Ju

l-01

Jan-0

2Ju

l-02

Jan-0

3Ju

l-03

Jan-0

4Ju

l-04

Jan-0

5Ju

l-05

Jan-0

6Ju

l-06

Jan-0

7

PE

Market Valuation - China

Return on Equity

Source: UBS (02/2007)

MSCI China Price-Earnings

! Valuation still not excessive, with improving shareholders’ value

Price-to-Earnings ratio (times) Percentage (%)

0

2

4

6

8

10

12

14

16

18

20

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006E

2007E

2008E

ROE

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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 nochange to long term trend. Buy on weakness.

- Stock specific in Hong Kong.

Investment Strategy

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Investment Strategy

! Focus on infrastructure and related basic materials e.g. railwayconstruction, 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 favourabledynamics, 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

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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

The Greater China Fund, Inc. Asset Allocation by Market

Source: Baring Asset Management (02/02/2007)

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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

The Greater China Fund, Inc.Asset Allocation by Sector

Sept. 30, 2006 Jan. 31, 2006

Sector (%) (%)

Source: Baring Asset Management (02/01/2007)

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The Greater China Fund, Inc. Top Ten Holdings as at January 31, 2007

Portfolio weightStock (%)

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

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The Greater China Fund, Inc.Portfolio Characteristics as at January 31, 2007

Portfolio Characteristics

Fund Benchmark*

Forward P/E 26.8x 20.4x

Price/Book 8.2x 4.8x

ROE 22.8% 19.2%

Portfolio Turnover

The rolling 12 month portfolio turnover as at January 31, 2007 = 95.2% (usually higher by turn of year)

Market Capitalization Comparison

Fund Benchmark*(%) (%)

Over US$10 bn 25.0 68.7

US$1-10 bn 56.8 28.7

Below US$1 bn 16.7 2.6

Weighted Avg(US$bn) 19.4 55.7

Risk Summary

Tracking Error vs. Benchmark 8.1%

Beta vs. Benchmark 1.15

Portfolio Risk 19.6%

Benchmark Risk 15.7%

* Benchmark : MSCI Zhong Hua

Source: Baring Asset Management as at 01/31/2007

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Investment Professionals

HENRY CHAN, CFA, CPA Head of Asian Investment TeamHong KongInvestment 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

LILIAN CO, CFAHead of Hong Kong China EquitiesHong KongInvestment 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.

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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’srules 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

Microsoft PowerPoint - GCH presentation -February 2007

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