market outlook and investment strategy

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Baring AssetManagement Limited155 Bishopsgate, London EC2M 3XY

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The Greater China Fund, Inc.

Market Outlook and Investment Strategy

w w w . g r e a t e r c h i n a f u n d . c o m

May 21, 2009

2

Table of Contents

Page

Section 1: Market outlook 2 - 10

Section 2: Investment Strategy 11 - 12



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Market outlookSection 1

4

Global Liquidity: Quantitative EasingEvery OECD central bank is doing it …..

Aggressive injection supports asset prices …..

Source: Credit Suisse (4/2009)

G3+ Central Bank Balance Sheet Size

50

100

150

200

250

300

350

Jan 07 Apr 07 Jul 07 Oct 07 Jan 08 Apr 08 Jul 08 Oct 08 Jan 09 Apr 09

Euro Area Japan UK US

Size index (100 at Jan ’07)

5

Global Economy:Where are we now ?

‘Green shoots’ are appearing

Source: Credit Suisse (4/2009)

G4 Economies - PMI New Orders Emerging Economies - PMI New Orders

16202428323640444852566064

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09USEuro AreaUKJapan

28

32

36

40

44

48

52

56

60

64

68

72

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

India

China (sa)

Russia

Brazil

Index Index

6

China: Recent PMI offers a light in the tunnel

Source: CITICS as at May 2009

35

40

45

50

55

60

65

Apr-05 Apr-06 Apr-07 Apr-08 Apr-09

PMI Index

PMI rose for third consecutive month PMI New orders up faster than PMI finished good inventory, showing economic recovery

30

35

40

45

50

55

60

65

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09

Index

-20

-15

-10

-5

0

5

10

15

20

Index

PMI :New Order

PMI: Finished Goods Inventory

PMI: New Order - Finished Goods Inventory (RHS)

7

Has the Chinese economy bottomed out ?Encouraging signs in key sectors

Property Sales vol show stabilizingPrimary Market

Power output shows sign of recoveryChina: Monthly Power Generation Growth (Year-on-year Percentage, %)

Property Sales vol show stabilizing – Source: Goldman Sachs as at May 2009 (Primary market — Beijing, Tianjin, Shanghai, Hangzhou, Guangzhou, Shenzhen, Chengdu, Chongqing, Wuhan and Nanjing)Power Output shows sign of recovery – Source: China Electricity Council and Citi Investment Research as at April 2009)

15.4% 16.0% 17.0%15.5% 15.0% 15.5%

13.9%12.3%

9.0%

14.3%16.6%

-12.3%

-2.2%

27.3%

5.3%

13.7% 13.8%

8.3%

11.8%12.8%

8.1%5.1%

3.4%

-4.0%-9.6%-9.1%

5.9%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2007 2008 2009

0

2

4

6

8

10

12

14

Mar

-06

May

-06

Jul-0

6

Sep

-06

Nov

-06

Jan-

07

Mar

-07

May

-07

Jul-0

7

Sep

-07

Nov

-07

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep

-08

Nov

-08

Jan-

09

Mar

-09

mm sqm

Average Mar 06-Dec06 transaction vol. Average 07 transaction vol.

42%Average 08 transaction vol.

Average YTD09 vol.

59%59%.

8

ChinaAuto sales to rebound on re-stocking

0

5

10

15

20

25

30

35

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

Jan

-07

Jan

-08

Jan

-09

No. of day

Trailing 12 month inventory days

0

100,000

200,000

300,000

400,000

500,000

600,000

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

Jan

-07

Jan

-08

Jan

-09

-40%

-20%

0%

20%

40%

60%

80%

100%

Passenger vehicle sales yoy sales growth (RHS)

Unit

Monthly passenger vehicle sales and yoy sales growth

Source: CAAM as at May 2009

9

ChinaConsumer confidence – the next to rebound?

0

5

10

15

20

25

Jan

-91

Jan

-92

Jan

-93

Jan

-94

Jan

-95

Jan

-96

Jan

-97

Jan

-98

Jan

-99

Jan

-00

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

Jan

-07

Jan

-08

Jan

-09

70

75

80

85

90

95

100

105

110

China Retail Sales (LHS) China Consumer Confidence Index

China Retail Sales YoY China Consumer Confidence Index

Source: Bloomberg, National Bureau of Statistics as at May 2009

10

Trend of massive earning downgrade is reversing

China — Earnings Revision Index

Source: IBES Aggregate and Citi Investment Research and Analysis as at May 2009

11

ChinaResilient earnings and supportive valuations

Source: JP Morgan (4/2009)

P/E (x)Div. Yield

(X)P/BV (x) Earning growth (%) ROE (%)

CountryCurrent Trailing

12m fwdCurrent Trailing

Current Trailing

2008E 2009E 2010E 2009E

Global * 9.2 10.0 4.3 1.2 -10.3 -15.1 17.3 11.5

USA * 15.5 12.8 3.0 1.8 -22.1 -9.8 22.5 10.7

EMF Asia 10.5 10.9 3.7 1.3 -15.4 -10.7 23.0 11.2

China 12.9 12.3 3.2 1.8 -9.7 -0.8 20.4 13.3

Korea 14.5 14.0 1.7 1.2 -32.6 -9.5 44.4 7.6

* Market forecast numbers are derived from bottom-up calculations of each individual MSCI constituents using I/B/E/S estimates. US trailing PE is calculated as per reported earnings. For all other markets and sectors, forecast numbers are derived from bottom-up calculations of each individual MSCI constituents using JPM estimates for covered stocks and I/B/E/S estimates for the rest. Companies with different yearends are calendarised to December yearends and are free float adjusted for aggregation. Historical numbers are from MSCI.



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Investment strategySection 2

13

StrategyFocus on policy sensitive sectors and earnings momentum

Prefer China to Hong Kong

Look for beneficiaries of strong infrastructure spending and stimulus package – construction companies and building materials

Quality China properties stock benefit from government policy support and market recovery

Prefer insurance to banks on the latter’s net interest margin contraction and potential credit cost hike

Bombed out cyclical stocks – material and technology – to lead early rally in restocking expectation

Focus on market leaders which play consolidator roles and with restructuring angle

Stock selection focus switching from valuation support to earnings delivery following the strong share price rebound from distressed levels

14

ImportantInformation – 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 which are based upon sources of information as provided by third party sources are 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.

Research Material

Baring Asset Management only produces research for its own internal use. Where details of research are provided in this document it is provided as an example of research undertaken by Baring Asset Management and must not be used, or relied upon, for the purposes of any investment decisions. The information and opinions expressed herein may change at anytime.

For data sourced from Morningstar: @2009 Morningstar, Inc. all rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers: (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

Compliance (Boston): May 14, 2009

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