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On Friday, China Fund Inc. (CHN) declared capital gain and net investment income distributions in the estimated aggregate amount of $12.12 per share payable on January 25, 2008 to shareholders of record on December 21, 2007.

In response to this announcement, CHN's share price shot up 4%. This despite an almost 2.5% drop in the Hang Seng Index overnight. This combination of NAV reduction and market value appreciation will have the likely combined effect of reducing the discount on this fund to around 7% (about half of its YTD average and significantly below current peer fund discounts). At $51.35 the fund has appreciated 64% since it was added to the portfolio only 10 months ago and is trading only 3% below its all time record peak reached at the end of October (at the same time the Hang Seng Index was 10% higher).

In the meantime, the now popular China story is losing some of its original appeal. Profits of most China based companies have not been able to keep up with the explosive growth of their stock market valuations. Costs have also been on the rise and demand growth has slowed, as the following factors are playing their parts:

1) Appreciation of Chinese Yuans in $US terms by almost 5%.

2) Increased input costs vis-a-vis energy, labor and raw materials.

3) Higher taxes on certain exports. (More are sure to come.)

4) Additional quality control requirements.

On the other hand, exports are but a small part of the overall Chinese economy, which is continuing to grow faster than ours and Yuan has much more appreciation to do in the coming years. All in all, China is still the long term story other countries can only envy. For this reason I am holding my investment in China through The Greater China Fund, Inc (GCH) in tact for now, but to reduce portfolio volatility over the next several months, I took Friday's opportunistic exit with CHN.

Disclosure: Author has a long position in GCH and no position in CHN

Source: China Fund Exit Strategy