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Mark W. Headley, co-portfolio manager of the Matthews China Fund (ticker: MCHFX) gave a talk last night entitled "Asia’s Future as the World’s Largest Region and the Investment Implications". Here are some key points about China and a look at his investment holdings:

On economic trends in China

  • Growing wages and inflation.

On the banking system

  • Banking system is a mess.
  • A number of Chinese banks are going public in Hong Kong.
  • Some banks are seeking foreign strategic investment hoping to gain foreign expertise, risk management and corporate governance experience in order to clean up their operations (think: Bank of Communications selling a 19.9% stake to HSBC in 2004).
  • Chinese banks are hoping to clean up their operations by 2007 when China opens its doors to foreign banks.

On currency revaluation

  • A currency revaluation is not likely in the near term.
  • The financial system is too weak to support such a move.
  • Even with a 20% revaluation, economic effects would be minimal because the currency would still be so cheap relative to the rest of the world.

On commodities

  • Not a good idea to chase commodities at this point.
  • Commodity prices have risen so much in the last couple of years.

On investment in China

  • Headley suggests investing in US companies with exposure to China.
  • The problem: it is hard to find US companies with any meaningful exposure.
  • The alternative: invest in Chinese companies with great reputations and brands.
  • According to Headley, China Mobile (ticker: CHL) is one of those companies.

On investment in Asia

  • Headley believes Asian equities are compelling.
  • He suggests Asian exposure with a long-term horizon.
  • Equities are inexpensive, and earnings and commodity demand slowing.
  • He doesn't believe there is any pressure to jump into the market immediately.

Matthews' China Fund (ticker: MCHFX) top 10 investment holdings (as of April 30, 2005)

China Mobile
Provides cellular telecommunications services in China. 

Swire Pacific   
Leading property developer in Hong Kong and investing in property development projects in Mainland China.

China Vanke
Develops properties, operates retail chain stores and participates in developing information service businesses in expediting intelligent and e-commerce development.

Shangri-La Asia   
The principal activity of the company's subsidiaries is the ownership and operation of hotels.

Bank of China
Provides a comprehensive range of financial products and services to retail and corporate customers. Its products include retail banking, corporate banking and treasury services. The company operates its branches in Hong Kong and China.

Cosco Pacific
   
An investment holding company whose subsidiaries lease shipping containers worldwide, operate container terminals and provide container handling, storage, transportation and management services, and depot handling.

Television Broadcasts    
Broadcasts, produces and licenses television programs. The Company also produces animation, provides video tape rental, film studio leasing, advertising, and other broadcasting related services.

Cheung Kong Infrastructure     
Develops, invests in and manages infrastructure projects such as power plants, toll roads and toll bridges in Hong Kong, China, and other Asian countries. The Company also manufactures and sells infrastructure materials including cement, concrete, and asphalt.

Hong Kong and China Gas
Produces and distributes gas, markets gas and appliances, and supplies gas and related services to 1.3 million households and businesses in Hong Kong.

BYD    
Through its subsidiaries, researches, develops, manufactures and sells Li-ion, NiCd and NiMH batteries.

Comment: You can access the Matthews web site here.

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Source: Matthews China fund manager - perspective and holdings