Shanghai Fd (Cayman) - Interim Results

RNS No 4204m
SHANGHAI FUND (CAYMAN) LIMITED
23rd September 1997


In the six months to 30th June 1997, the net asset value per share of the Fund
appreciated 31.9 per cent. to US$16.59, against a 3.6 per cent. gain in the Hang
Seng China Enterprise Index (HSCE) and a 8.5 per cent. return on the CLSA China
B index during the period. At the end of June 1997, the Fund was 49.8 per cent.
invested in Hong Kong-listed China-related shares, 18.2 per cent. in H-shares
and 32.0 per cent. in B-shares.


Market and Economic Review

In the first half of 1997, the Chinese stock markets were volatile and
performance diverged widely between them. The red-chip companies (Chinese
companies registered in Hong Kong which typically have Hong Kong management)
showed the best performance followed by the Shanghai B-share market, while the
H-share and the Shenzhen B-share markets were flat. Strong market liquidity
continued to play a key role in the market and "asset injections" and "state
enterprise restructuring" were the main themes. Corporate results released
during the period were mostly in line with expectations, with the red chips
showing the most impressive earnings growth due to continuing acquisitions.

The overall China market was quiet at the beginning of the year after a
spectacular run in late 1996. Rumours of Deng Xiao Ping's imminent death hit the
markets in early February, but the impact was minimal when the official
announcement was made. The B-share markets in Shanghai and Shenzhen continued to
rally up to May on strong domestic liquidity. The general expectations of
further credit easing and continued shifts of bank deposits into the stock
market fueled the markets. Backed by the positive mood in the run-up to Hong
Kong's return to China, local investors were attracted by the huge discounts
between the A-share and B-share markets. However, the B-share market started to
correct toward the end of the first half as the authorities took a series of
measures to cool down the markets. Meanwhile, the H-shares performance was
lacklustre. Investors were concerned by the 1996 earnings results and the
uncertainty over earnings prospects. 

Despite high valuations, the red chips' performance was the best among China
stocks. The rally on red chips was supported by improving macro conditions in
China, better corporate management, and continued asset acquisitions. However,
the sector experienced some pull-back after the authorities in Beijing announced
restrictions on listings and asset injections into red chip companies by
mainland parents. 

In the six-month period under review, the Manager reduced the
Fund's B-share exposure in favour of H-shares and red-chip companies. The
Manager considered the liquidity driven rally in the B-share markets in 1996 had
over extended valuations. Given the determination of the Beijing authorities to
cool the mainland markets, B-shares were likely to underperform. Meanwhile, the
investment focus was on infrastructures, conglomerates and transportations, but
the Manager was cautious on the petrochemicals. The Fund became fully invested
as of the end of the period. 

The Chinese economy continued to show robust growth
on export recovery in the first half of the year. Exports rose 25.8 per cent.
year on year in the first quarter and growth this year is expected to surpass
last year's. Inflation has been brought under control thanks to the austerity
program of 1993. Retail Price Index (RPI) fell sharply to 2.6 per cent. in the
first quarter of 1997 while Consumer Price Index (CPI) grew only 5.2 per cent.
The steady decline in inflation over the past two years is due to falling
industrial product prices and, more importantly, an abundance of foodstuffs.
Rising food prices were considered the major culprit in China's high inflation
environment four years ago. Obviously, unemployment has replaced inflation as
the primary concern for China's monetary policy makers.

In the coming years, the driving strength of the Chinese economy is expected to
come from the infrastructure sector rather than the traditional consumption or
export sectors. Demand for better infrastructure facilities to ensure stable
long-term economic growth matches perfectly the urgent need for job creation.
Since infrastructure investment is typically labour intensive, it is a good way
to absorb the surplus labour force. Consequently, China's next wave of credit
easing appears to favour infrastructure. The People's Bank of China (PBoC) has
been very reluctant to lower interest rates further recently despite falling
inflation. Concerns over new liquidity flowing into the stock market rather than
the real economy is seen as the primary reason. However, there is evidence that
the banks are giving easier credit to infrastructure projects while taking a
more cautious attitude to the manufacturing sector due to concerns on bad debts.
The Chinese Government is also keen to encourage mass housing for China. This
could generate a huge demand for domestic consumption, much like television
sets and washing machines did in the 1980s, as well as absorb a big portion of
the surplus labour. The Government is currently in the process of establishing a
mortgage market. Mortgage loan guidelines are expected to be revealed soon,
followed by the launching of a nation-wide mortgage bank.

Since the implementation of the austerity measures back in 1993, China has
successfully brought inflation down to 6.1 per cent. in 1996 and 2.2 per cent.
in the first 4 months of this year. In the years to come, China's economy is
expected to maintain a growth rate of 8 per cent. or even higher with only mild
inflation.

The Renminbi is expected to remain stable in the near term. Foreign direct
investment by multinational corporations and overseas-listed Chinese companies
is still strong and should offset the reduction in ther current account surplus
this year.

Outlook

Over the balance of the year, we expect the current economic recovery and stable
political environment in Beijing to support the existing positive market tone. A
number of important forthcoming events are likely to boost market sentiment: 1)
the 15th Party Congress in China and the selection of a new Prime Minister; 2)
the meeting between President Jiang Zemin and President Bill Clinton at the end
of the year; 3) China's progress towards entry in the World Trade Organisation
(WTO); and 4) lower banking reserve requirements.

The market will continue to focus on red chip companies, which are strongly
backed by their mainland parents and should benefit from further asset
injections. Meanwhile, the government's new policy of encouraging the largest
and most profitable companies to acquire their smaller counterparts will benefit
the H-shares. Going into the second half, we like the B-share market and believe
values will once again resurface after the recent correction. Our strategy is to
accumulate the B-shares while market sentiment remains low. Excess liquidity
continues to persist in the domestic system and the B-share markets will benefit
in the event of a reduction in banking reserve requirements.


Bertrand P Viriot
23rd September, 1997

Interim Report (unaudited)
for the six months ended 30th June, 1997


                               six months ended            year ended
                            30th June,    30th June,     31 st December,
                              1997          1996               1996
                            US$ '000      US$ '000           US$ '000
Income
Investment income             171          244                 402
Interest received               7           17                  35
                              178          261                 437
Investment, management and 
administrative expenses      (223)         (287)              (647)

Loss on ordinary activities 
before taxation               (45)          (26)              (210)

Taxation                        -            (5)                -

Loss on ordinary activities attributable to
Participating Shareholders    (45)          (31)              (210)


Loss per 
Participating Share          US$(0.03)    US$(0.02)          US$(0.15)


                            US$ '000      US$ '000           US$ '000
Net assets                    22,427        17,278             17,831
Number of Shares           1,351,995     1,766,000          1,416,900

Net asset value per 
Participating Share         US$16.59       US$9.78          US$12.58


Notes:

1. The activity of the Fund is that of investment primarily in securities quoted
   on the Securities Markets of Hong Kong, Shanghai and Shenzhen.  It is not the
   intention of the Directors that dividends be distributed to shareholders.

2. All figures in this report are stated in US Dollars. Income and expenditure
   has been converted at the exchange rate prevailing at the end of each
   relevant period.

3. The Fund's net assets are shown at market valuation.

4. The figures for the year ended 31st December, 1996 are extracted from the
   audited financial statements.

5. This interim report is being sent to shareholders and copies will be
   available at the registered office of the Fund.


Investments at 30th June. 1997

Classification and distribution of the Fund's net assets
as at 30th June, 1997

Investments                                       %

Transportation                                     30.62

Machinery & Engine                                 14.71
          
Utilities                                           8.74
           
Multi Industry                                      7.63  
           
Metals                                              7.28
           
Conglomerates                                       6.86
           
Banking                                             5.86 
           
Textiles and Apparel                                5.70
           
Electrical Electronics                              4.49  

Chemicals                                           4.17 
           
Consumer Goods                                      2.63
           
Telecommunications                                  2.60
           
Real Estate                                         2.15
           
Construction China                                  1.71
           
Household Appliances                                1.50 
           
Forestry Products                                   1.42 
           
Food & Household Products                           0.94
           
Industrials                                         0.73 
           
                                                  109.74  
Cash and net amounts payable                       (9.74)
   
                                                  100.00

The Fund's ten largest investments

                                                      Valuation of
                                                       holding at
                                                       30th June,
                                                       1997         Net Assets
Company                     Listing    Activity       US$ '000          %

Cosco Pacific Ltd             (H)   Transportation     2,018            9.00
China Merchants Hai 
Hong Holdings                 (H)   Transporation      1,537            6.85

Inner Mongolia Erdos 
Cashmere Products B Shares    (Si)  Textiles & Apparel 1,278            5.70

Shanghai Industrial 
Holdings Ltd                  (H)   Multi Industry     1,275            5.69

Union Bank of Hong Kong Ltd   (H)   Banking            1,247            5.56

Guangzhou Investment Co. Ltd  (H)   Conglomerates        857            3.82

China Light Power             (H)   Utilities            805            3.59

Changchai Co. 'B' Shares      (SN)  Machinery & Engine   727            3.24

Qingling Motors Co. Ltd. 
'H' Shares                    (H)   Transportation       723            3.22

Citic Pacific Ltd.            (H)   Conglomerates        681            3.04

                                                      11,148           49.71
H   Hong Kong Listing
Sn  Shenzhen Listing
Si  Shanghai Listing


Investments at 30th June, 1997

                                        Value at 30th June,         % of
                                                      1997      Shareholders'
                                  Listing          US$'000        Equity
Transportation

Cosco Pacific Ltd.                  (H)              2,018
China Merchants Hai Hong Holdings   (H)              1,537
Qingling Motors Co. Ltd. 'H' Shares (H)                723
Shanghai Dahzhong Taxis 
Shareholding 'B' Shares             (Si)               550
Hainan Airlines Co. Ltd.            (H)                536
Anhui Expressway Co. Ltd. 
'H' Shares                          (H)                481
Continental Mariner 
Investment Co. Ltd.                 (H)                325
Guangdong Provincial 
Expressway 'B' Shares               (Sn)               285
Gzi Transport                       (H)                213
Tienstsin Marine 
Shipping 'B' Shares                 (Si)               202
Gzi Transport WAR                   (H)                  1
                                                     6,871            30.62

Machinery & Engine

Changchai Co. 'B' Shares            (Sn)               727
First Tractor Co. Ltd.              (H)                620
Wiefu Fuel Injection 'B' Shares     (Sn)               593
Shenzhen Fangda Industry 'B' Shares (Sn)               424
Northeast Electrical 
T. TM. M. 'H' Shares                (H)                300
Dongfang Electrical 
Machinery Co. Ltd. 'H' Shares       (H)                258
Shanghai Diesel 
Engine Co. 'B' Shares               (Si)               378
                                                     3,300            14.71

Utilities

China Light Power                   (H)                805
Guangdong Electric 
Power Dev. 'B' Shares               (Sn)               498
Beijing Datang Power 
Generation 'H' Shares               (H)                277
Huaneng Power Intl ADR              (N)                260
Heilongjiang Electric 
Power 'B' Shares                    (Si)               120
                                                     1,960            8.74

Multi Industry

Shanghai Industrial Holdings Ltd.   (H)              1,275
Beijing Enterprises Holdings        (H)                315
Min Xin Holdings                    (H)                121
                                                     1,711            7.63

Metals

Oriental Metals (Holdings) Co.      (H)                608
Jiangxi Copper                      (H)                541
Bengang Steel Plates 'B' Shares     (Sn)               484
                                                     1,633            7.28
H   Hong Kong Listing
Sn   Shenzhen Listing
Si  Shanghai Listing
N  New York Listing



Investments at 30th June, 1997



                                         Value at 30th June,         %of
                                                       1997    Shareholders'
                                 Listing         US$'000            Equity

Conglomerates

Guangzhou Investment Co. Ltd.      (H)             857
Citic Pacific Ltd.                 (H)             681
                                                 1,538              6.86

Banking

Union Bank of Hong Kong Ltd.       (H)           1,247
International Bank of Asia Ltd.    (H)              66
                                                 1,313               5.86

Textiles & Apparel

Inner Mongolia Erdos 
Cashmere Products 'B' Shares       (Si)          1,278               5.70


Electrical Electronics

Founder Hong Kong Ltd              (H)             406
Innovative International 
(Holdings) Ltd.                    (H)             601
                                                 1,007              4.49

Chemicals

Zchenhai Refining & 
Chemical Co. Ltd. 'H' Shares       (H)             515
Chiwan Petroleum 
Supply Base Co. Ltd. 'B' Shares    (SA)            289
Beijing Yanhua 
Petrochemical Co. 'H' Shares       (H)             132
                                                   936              4.17

Consumer Goods

Chaifa Holdings Ltd.               (H)             404
Lamex Holdings Ltd.                (H)             187
                                                   591              2.63

Telecommunications

Eastern Communications 'B' Shares  (Si)            583              2.60

Real Estate

China Resources Beijing Land Ltd.  (H)             482              2.15

Construction

Cheung Kong Infrastructure Holdings (H)            209
Shewhen Express 'H' Shares          (H)            174
                                                   383              1.71

Household Appliances

Guangdong Kelon Electrical 
Holdings 'H' Shares                 (H)           334               1.50

H   Hong Kong Listing
Sn  Shenzhen Listing
Si  Shanghai Listing
N   New York Listing

Investments at 30th June 1997


                                         Value at 30th June,         %of
                                                       1997    Shareholders'
                                 Listing         US$'000            Equity

Forestry Products
Shangdong Chenming Paper 
Holdings 'B' shares                 (Sn)          318                 1.42

Food & Household Products

Ng Fung Hong                        (H)           174                 
Shanghai Daijiang Group Stock
Co Ltd 'B' Shares                   (Si)           38
                                                  212                 0.94

Industrials

Shanghai Type + Rubber 'B' Shares   (Si)          162                 0.73

Total Investments                              24,612               109.74
Net Current Liabilities                        (2,185)               (9.74)
Total Net Assets                               22,427               100.00

H   Hong Kong Listing
Sn  Shenzhen Listing
Si  Shanghai Listing
N   New York Listing


END

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