UNITED STATES SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act File Number: 811-21926
Morgan Stanley China A Share Fund,
Inc.
(Exact Name of Registrant as Specified in Charter)
1585 Broadway, New York, New York 10036
(Address of Principal Executive Offices)
John H. Gernon
1585 Broadway, New York, New York 10036
(Name and Address of Agent for Services)
(212) 672-1886
(Registrant’s Telephone Number)
December 31
Date of Fiscal Year End
December 31, 2024
Date of Reporting Period
Item 1. Reports to Stockholders

Morgan Stanley Investment Management Inc.
Adviser
Morgan Stanley China A Share Fund, Inc. NYSE: CAF
Annual Report
December 31, 2024


Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Table of Contents (unaudited)
2
Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Letter to Stockholders (unaudited)
Performance
For the year ended December 31, 2024, the Morgan Stanley China A Share Fund, Inc. (the "Fund") had total returns of 8.21%, based on net asset value, and 0.36% based on market value per share (including reinvestment of distributions), compared to its benchmarks, the MSCI China A Onshore Index (the "Index"), which returned 11.59% and, the "China Blended Index", a custom blend of 80% of the MSCI China A Onshore Index and 20% of the MSCI China Index, which returned 13.19%. On December 31, 2024, the closing price of the Fund's shares on the New York Stock Exchange was $12.46, representing a 20.54% discount to the Fund's net asset value per share. Past performance is no guarantee of future results.
Factors Affecting Performance
• Despite a volatile year with renewed U.S.-China tensions, China saw a meaningful recovery driven by the government's earlier-than-expected policy pivot that was announced on September 24, 2024.
• The Fund posted positive returns for the year, helped by the recovery in the broader Chinese market. On a relative basis, the Fund underperformed the Index for the year (based on net asset value performance). The Fund's sector allocation and stock selection detracted from relative returns.
• At the sector level, our overweight allocation and stock selection in the financials, consumer discretionary and utilities sectors contributed to relative returns. Our underweight allocation to cyclical sectors such as the materials sector also contributed to relative returns.
• The relative gains, however, were offset by detractions from our stock selection in the industrials, health care and consumer staples sectors. Our overweight allocations to the health care and consumer staples sectors also detracted from relative performance. Our underweight allocation and stock selection in the information technology (IT) sector also disappointed as the Fund had less exposure than the Index to many domestic IT and technology companies in China whose share prices rallied on artificial intelligence hype, which dragged relative performance.
• At the stock level, the top contributors to the Fund's relative performance over the year were its overweight holdings in two major national commercial banks and an air conditioner manufacturer. Chinese home appliances stocks rallied after the government announced measures in July 2024 to support consumer trade-in and upgrade subsidy programs.
• The largest detractors from relative performance were the Fund's overweight holdings in a medical equipment manufacturer, a cosmetics company, a pharmaceutical company and a packaged food manufacturer. The health care sector was the worst performing sector for the period over concerns about U.S. biosecurity legislation and disappointing company profit results. Consumer stocks continued to underperform as China's domestic consumption recovery remained weak over the period.
3
Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Letter to Stockholders (unaudited) (cont'd)
Management Strategies
• As of the end of the reporting period, we believe the sustainability of the market rebound at the end of 2024 depended on the implementation and effectiveness of the policies in turning around the economy and corporate fundamentals. We believe it is unlikely the policy stimulus announcements made in 2024 could lead to a marked improvement in the economy's underlying fundamentals given the level of debt in the system. Recent announcements made toward year-end 2024, including that of special bond issuances, are a positive step, in our view, but only cover a portion of the estimated total local government debt. Given the prolonged adjustment in China's property market, we believe it may take more effort and time to turn around the economy. We will continue to closely monitor the policy implementation and economic development in the coming months to gauge the pace of economic recovery. The market needs to watch out for details of other follow-up fiscal policies, which are key to boosting demand and growth, especially given the backdrop of the incoming U.S. administration.
• At period-end, we believe the portfolio has a balanced sector allocation, with a relatively defensive tilt given the challenging macro backdrop facing the Chinese economy. We believe the Fund can potentially outperform the market under the current environment as we position the portfolio in what we believe are high quality companies with a stable fundamental outlook and undemanding valuation.
• The Fund has remained focused on long-term fundamentals, and we continue to seek structural growth opportunities in China. Meanwhile, we have also added quality companies with steady growth and attractive valuations or dividend yields amid the soft economic backdrop. In the near term, we are positioned with a defensive tilt in view of the macro headwinds.
• Against the macro backdrop of slower growth and lower interest rates in China, we believe high quality companies with resilient growth and sustainable total capital returns are likely to outperform the broader market. As such, we believe the Fund's bottom-up stock selection is important to generate outperformance relative to the Index. We look for companies with structural growth, competitive advantages, strong corporate governance and financial strength.
Sincerely,
John H. Gernon
President and Principal Executive Officer January 2025
4
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Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Performance Summary (unaudited)
Performance of $10,000 Investment as of December 31, 2024
Over 10 Years
6
Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Average Annual Total Returns as of December 31, 2024(1) (unaudited)
|
|
One Year |
|
Five Years |
|
Ten Years |
|
NAV |
|
|
8.21 |
% |
|
|
-4.92 |
% |
|
|
1.64 |
% |
|
Market price |
|
|
0.36 |
% |
|
|
-6.91 |
% |
|
|
0.66 |
% |
|
MSCI China A Onshore Index(2) |
|
|
11.59 |
% |
|
|
0.89 |
% |
|
|
0.03 |
% |
|
China Blended Index(3) |
|
|
13.19 |
% |
|
|
0.18 |
% |
|
|
0.58 |
% |
|
Performance data quoted on the graph and table represents past performance, which is no guarantee of future results, and current performance may be lower or higher than the figures shown. Performance assumes that all dividends and distributions, if any, were reinvested at prices obtained under the Fund's dividend reinvestment plan. For the most recent month-end performance figures, please visit www.morganstanley.com/im/closedendfundsshareholderreports. Investment returns and principal value will fluctuate so that Fund shares, when sold, may be worth more or less than their original cost. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the sale of fund shares. Total return, market price, NAV, market price distribution rate, and NAV distribution rate will fluctuate with changes in market conditions. The Fund's total returns are based upon the market value and net asset value on the last business day of the period.
Distributions |
|
Total Distributions per share for the period |
|
$ |
0.33 |
|
|
Distribution Rate at NAV(4) |
|
|
2.09 |
% |
|
Distribution Rate at Market Price(4) |
|
|
2.63 |
% |
|
% Premium/(Discount) to NAV(5) |
|
|
(20.54 |
)% |
|
(1) All Fund returns are net of fees and expenses and include applicable fee waivers and/or expense limitations. Absent any applicable fee waivers and/or expense limitations, performance would have been lower and there can be no assurance that any such waivers or limitations will continue in the future.
(2) The MSCI China A Onshore Index is a free float-adjusted market capitalization index that is designed to capture large and mid cap representation across China securities listed on Shanghai and Shenzhen exchanges. The performance of the Index is listed in U.S. dollars and assumes reinvestment of net dividends. It is not possible to invest directly in an index. Effective March 1, 2018, the MSCI China A Index was renamed the MSCI China A Onshore Index.
(3) The China Blended Index is custom blend of 80% of the MSCI China A Onshore Index and 20% of the MSCI China Index (a benchmark that captures large and mid cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs). The performance of the Index is listed in U.S. dollars and assumes reinvestment of net dividends. It is not possible to invest directly in an index.
(4) The Distribution Rate is based on the Fund's last regular distribution per share in the period (annualized) divided by the Fund's NAV or market price at the end of the period. The Fund's distributions may be comprised of amounts characterized for federal income tax purposes as qualified and non-qualified ordinary dividends, capital gains and non-dividend distributions, also known as return of capital. The Fund will determine the federal income tax character of distributions paid to a shareholder after the end of the calendar year. The Fund's distributions are determined by the investment adviser based on its current assessment of the Fund's long-term return potential. Fund distributions may be affected by numerous factors including changes in Fund performance, the cost of financing for leverage, portfolio holdings, realized and projected returns, and other factors. As portfolio and market conditions change, the rate of distributions paid by the Fund could change.
(5) The shares of the Fund often trade at a discount or premium to their net asset value. The discount or premium may vary over time and may be higher or lower than what is quoted in this report.
7
Morgan Stanley China A Share Fund, Inc.
December 31, 2024
|
|
Shares |
|
Value (000) |
|
COMMON STOCKS (99.2%) |
|
Automobile Components (4.2%) |
|
Fuyao Glass Industry Group Co. Ltd., Class A |
|
|
1,321,300 |
|
|
$ |
11,296 |
|
|
Automobiles (0.5%) |
|
BYD Co. Ltd., Class A |
|
|
33,800 |
|
|
|
1,307 |
|
|
Banks (27.2%) |
|
Bank of Jiangsu Co. Ltd., Class A |
|
|
10,873,200 |
|
|
|
14,629 |
|
|
Bank of Ningbo Co. Ltd., Class A |
|
|
1,512,700 |
|
|
|
5,039 |
|
|
China Construction Bank Corp., Class A |
|
|
14,795,911 |
|
|
|
17,819 |
|
|
China Merchants Bank Co. Ltd., Class A |
|
|
4,272,808 |
|
|
|
23,005 |
|
|
Postal Savings Bank of China Co. Ltd., Class A |
|
|
16,497,300 |
|
|
|
12,838 |
|
|
|
|
|
|
|
73,330 |
|
|
Beverages (7.6%) |
|
Kweichow Moutai Co. Ltd., Class A |
|
|
87,949 |
|
|
|
18,363 |
|
|
Shanxi Xinghuacun Fen Wine Factory Co. Ltd., Class A |
|
|
87,100 |
|
|
|
2,198 |
|
|
|
|
|
|
|
20,561 |
|
|
Capital Markets (1.2%) |
|
Huatai Securities Co. Ltd., Class A |
|
|
1,369,400 |
|
|
|
3,300 |
|
|
Construction & Engineering (3.2%) |
|
China State Construction Engineering Corp. Ltd., Class A |
|
|
10,385,640 |
|
|
|
8,537 |
|
|
Electrical Equipment (4.8%) |
|
Contemporary Amperex Technology Co. Ltd., Class A |
|
|
153,340 |
|
|
|
5,590 |
|
|
NARI Technology Co. Ltd., Class A |
|
|
2,097,733 |
|
|
|
7,249 |
|
|
|
|
|
|
|
12,839 |
|
|
Electronic Equipment, Instruments & Components (2.0%) |
|
Shanghai BOCHU Electronic Technology Corp. Ltd., Class A |
|
|
203,516 |
|
|
|
5,415 |
|
|
Health Care Equipment & Supplies (2.0%) |
|
Shenzhen Mindray Bio-Medical Electronics Co. Ltd., Class A |
|
|
152,695 |
|
|
|
5,333 |
|
|
Household Durables (7.9%) |
|
Gree Electric Appliances, Inc. of Zhuhai, Class A |
|
|
2,051,846 |
|
|
|
12,777 |
|
|
Midea Group Co. Ltd., Class A |
|
|
831,546 |
|
|
|
8,567 |
|
|
|
|
|
|
|
21,344 |
|
|
|
|
Shares |
|
Value (000) |
|
Independent Power & Renewable Electricity Producers (9.2%) |
|
China Yangtze Power Co. Ltd., Class A |
|
|
5,030,114 |
|
|
$ |
20,367 |
|
|
SDIC Power Holdings Co. Ltd., Class A |
|
|
1,885,500 |
|
|
|
4,295 |
|
|
|
|
|
|
|
24,662 |
|
|
Insurance (2.0%) |
|
People's Insurance Co. Group of China Ltd., Class A |
|
|
5,222,500 |
|
|
|
5,453 |
|
|
Life Sciences Tools & Services (1.8%) |
|
WuXi AppTec Co. Ltd., Class A |
|
|
638,200 |
|
|
|
4,812 |
|
|
Machinery (6.8%) |
|
CRRC Corp. Ltd., Class A |
|
|
3,640,300 |
|
|
|
4,179 |
|
|
Hangcha Group Co. Ltd., Class A |
|
|
2,314,519 |
|
|
|
5,672 |
|
|
Jiangsu Hengli Hydraulic Co. Ltd., Class A |
|
|
350,000 |
|
|
|
2,530 |
|
|
Weichai Power Co. Ltd., Class A |
|
|
1,408,800 |
|
|
|
2,644 |
|
|
Yizumi Holdings Co. Ltd., Class A |
|
|
1,234,080 |
|
|
|
3,390 |
|
|
|
|
|
|
|
18,415 |
|
|
Metals & Mining (1.4%) |
|
Zijin Mining Group Co. Ltd., Class A |
|
|
1,824,200 |
|
|
|
3,777 |
|
|
Oil, Gas & Consumable Fuels (3.8%) |
|
China Shenhua Energy Co. Ltd., Class A |
|
|
1,479,348 |
|
|
|
8,812 |
|
|
PetroChina Co. Ltd., Class A |
|
|
1,194,200 |
|
|
|
1,465 |
|
|
|
|
|
|
|
10,277 |
|
|
Personal Care Products (2.6%) |
|
Proya Cosmetics Co. Ltd., Class A |
|
|
612,486 |
|
|
|
7,110 |
|
|
Pharmaceuticals (0.3%) |
|
Sichuan Kelun Pharmaceutical Co. Ltd., Class A |
|
|
190,300 |
|
|
|
781 |
|
|
Transportation Infrastructure (10.7%) |
|
China Merchants Expressway Network & Technology Holdings Co. Ltd., Class A |
|
|
7,353,200 |
|
|
|
14,053 |
|
|
China Merchants Port Group Co. Ltd., Class A |
|
|
2,912,000 |
|
|
|
8,166 |
|
|
Guangdong Provincial Expressway Development Co. Ltd., Class A |
|
|
3,224,900 |
|
|
|
6,495 |
|
|
|
|
|
|
|
28,714 |
|
|
TOTAL COMMON STOCKS (Cost $253,302) |
|
|
|
|
267,263 |
|
|
The accompanying notes are an integral part of the financial statements.
8
Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Portfolio of Investments (cont'd)
|
|
Shares |
|
Value (000) |
|
SHORT-TERM INVESTMENT (0.3%) |
|
Investment Company (0.3%) |
|
Morgan Stanley Institutional Liquidity Funds — Government Portfolio — Institutional Class, 4.42% (See Note E) (Cost $718) |
|
|
718,024 |
|
|
$ |
718 |
|
|
TOTAL INVESTMENTS (99.5%) (Cost $254,020) (a)(b) |
|
|
|
|
267,981 |
|
|
OTHER ASSETS IN EXCESS OF LIABILITIES (0.5%) |
|
|
|
|
1,420 |
|
|
NET ASSETS (100.0%) |
|
|
|
$ |
269,401 |
|
|
(a) The approximate fair value and percentage of net assets, $267,263,000 and 99.2%, respectively, represent the securities that have been fair valued under the fair valuation policy for international investments as described in Note A-1 within the Notes to Financial Statements.
(b) At December 31, 2024, the aggregate cost for federal income tax purposes is approximately $255,364,000. The aggregate gross unrealized appreciation is approximately $31,064,000 and the aggregate gross unrealized depreciation is approximately $18,448,000, resulting in net unrealized appreciation of approximately $12,616,000.
Portfolio Composition
Classification |
|
Percentage of Total Investments |
|
Other* |
|
|
30.1 |
% |
|
Banks |
|
|
27.4 |
|
|
Transportation Infrastructure* |
|
|
10.7 |
|
|
Independent Power & Renewable Electricity Producers |
|
|
9.2 |
|
|
Household Durables |
|
|
8.0 |
|
|
Beverages |
|
|
7.7 |
|
|
Machinery |
|
|
6.9 |
|
|
Total Investments |
|
|
100.0 |
% |
|
* Industries and/or investment types representing less than 5% of total investments.
The accompanying notes are an integral part of the financial statements.
9
Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Statement of Assets and Liabilities |
|
December 31, 2024 (000) |
|
Assets: |
|
Investments in Securities of Unaffiliated Issuers, at Value (Cost $253,302) |
|
$ |
267,263 |
|
|
Investment in Security of Affiliated Issuer, at Value (Cost $718) |
|
|
718 |
|
|
Total Investments in Securities, at Value (Cost $254,020) |
|
|
267,981 |
|
|
Foreign Currency, at Value (Cost $1,837) |
|
|
1,837 |
|
|
Cash |
|
|
— |
@ |
|
Receivable from Affiliate |
|
|
20 |
|
|
Other Assets |
|
|
34 |
|
|
Total Assets |
|
|
269,872 |
|
|
Liabilities: |
|
Payable for Advisory Fees |
|
|
279 |
|
|
Payable for Custodian Fees |
|
|
116 |
|
|
Payable for Administration Fees |
|
|
18 |
|
|
Payable for Professional Fees |
|
|
17 |
|
|
Payable for Stockholder Servicing Agent Fees |
|
|
3 |
|
|
Other Liabilities |
|
|
38 |
|
|
Total Liabilities |
|
|
471 |
|
|
Net Assets |
|
Applicable to 17,176,367 Issued and Outstanding $0.01 Par Value Shares (1,000,000 Shares Authorized) |
|
$ |
269,401 |
|
|
Net Asset Value Per Share |
|
$ |
15.68 |
|
|
Net Assets Consist of: |
|
Common Stock |
|
$ |
172 |
|
|
Paid-in-Capital |
|
|
437,549 |
|
|
Total Accumulated Loss |
|
|
(168,320 |
) |
|
Net Assets |
|
$ |
269,401 |
|
|
@ Amount is less than $500.
The accompanying notes are an integral part of the financial statements.
10
Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Financial Statements (cont'd)
Statement of Operations |
|
Year Ended December 31, 2024 (000) |
|
Investment Income: |
|
Dividends from Securities of Unaffiliated Issuers (Net of $910 of Foreign Taxes Withheld) |
|
$ |
8,190 |
|
|
Dividends from Security of Affiliated Issuer (Note E) |
|
|
282 |
|
|
Interest from Securities of Unaffiliated Issuers (Net of $2 of Foreign Taxes Withheld) |
|
|
21 |
|
|
Total Investment Income |
|
|
8,493 |
|
|
Expenses: |
|
Advisory Fees (Note B) |
|
|
3,348 |
|
|
Custodian Fees (Note D) |
|
|
325 |
|
|
Administration Fees (Note C) |
|
|
214 |
|
|
Professional Fees |
|
|
214 |
|
|
Tender Offer Fees |
|
|
180 |
|
|
Stockholder Reporting Expenses |
|
|
35 |
|
|
Stockholder Servicing Agent Fees |
|
|
15 |
|
|
Directors' Fees and Expenses |
|
|
8 |
|
|
Other Expenses |
|
|
29 |
|
|
Total Expenses |
|
|
4,368 |
|
|
Rebate from Morgan Stanley Affiliate (Note E) |
|
|
(8 |
) |
|
Net Expenses |
|
|
4,360 |
|
|
Net Investment Income |
|
|
4,133 |
|
|
Realized Gain (Loss): |
|
Investments Sold |
|
|
(92,393 |
) |
|
Foreign Currency Transaction |
|
|
384 |
|
|
Net Realized Loss |
|
|
(92,009 |
) |
|
Change in Unrealized Appreciation (Depreciation): |
|
Investments |
|
|
105,926 |
|
|
Foreign Currency Translation |
|
|
(381 |
) |
|
Net Change in Unrealized Appreciation (Depreciation) |
|
|
105,545 |
|
|
Net Realized Loss and Change in Unrealized Appreciation (Depreciation) |
|
|
13,536 |
|
|
Net Increase in Net Assets Resulting from Operations |
|
$ |
17,669 |
|
|
The accompanying notes are an integral part of the financial statements.
11
Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Financial Statements (cont'd)
Statements of Changes in Net Assets |
|
Year Ended December 31, 2024 (000) |
|
Year Ended December 31, 2023 (000) |
|
Increase (Decrease) in Net Assets: |
|
Operations: |
|
Net Investment Income |
|
$ |
4,133 |
|
|
$ |
3,476 |
|
|
Net Realized Loss |
|
|
(92,009 |
) |
|
|
(21,858 |
) |
|
Net Change in Unrealized Appreciation (Depreciation) |
|
|
105,545 |
|
|
|
(27,356 |
) |
|
Net Increase (Decrease) in Net Assets Resulting from Operations |
|
|
17,669 |
|
|
|
(45,738 |
) |
|
Dividends and Distributions to Stockholders |
|
|
(5,619 |
) |
|
|
(2,646 |
) |
|
Capital Share Transactions: |
|
Repurchase of Shares (192,335 and 170,587 shares) |
|
|
(2,461 |
) |
|
|
(2,110 |
) |
|
Common Stock Redeemed through Tender Offer (4,342,176 and 0 shares) |
|
|
(63,129 |
) |
|
|
— |
|
|
Net Decrease in Net Assets Resulting from Capital Share Transactions |
|
|
(65,590 |
) |
|
|
(2,110 |
) |
|
Total Decrease |
|
|
(53,540 |
) |
|
|
(50,494 |
) |
|
Net Assets: |
|
Beginning of Period |
|
|
322,941 |
|
|
|
373,435 |
|
|
End of Period |
|
$ |
269,401 |
|
|
$ |
322,941 |
|
|
The accompanying notes are an integral part of the financial statements.
12
Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Financial Highlights
Selected Per Share Data and Ratios
|
|
Year Ended December 31, |
|
|
|
2024 |
|
2023 |
|
2022 |
|
2021 |
|
2020 |
|
Net Asset Value, Beginning of Period |
|
$ |
14.87 |
|
|
$ |
17.07 |
|
|
$ |
23.13 |
|
|
$ |
25.09 |
|
|
$ |
24.59 |
|
|
Net Investment Income(1) |
|
|
0.23 |
|
|
|
0.16 |
|
|
|
0.14 |
|
|
|
0.10 |
|
|
|
0.15 |
|
|
Net Realized and Unrealized Gain (Loss) |
|
|
0.88 |
|
|
|
(2.26 |
) |
|
|
(6.20 |
) |
|
|
(0.72 |
) |
|
|
2.65 |
|
|
Total from Investment Operations |
|
|
1.11 |
|
|
|
(2.10 |
) |
|
|
(6.06 |
) |
|
|
(0.62 |
) |
|
|
2.80 |
|
|
Distributions from and/or in excess of: |
|
Net Investment Income |
|
|
(0.33 |
) |
|
|
(0.12 |
) |
|
|
(0.00 |
)(2) |
|
|
(0.21 |
) |
|
|
(0.23 |
) |
|
Net Realized Gain |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1.13 |
) |
|
|
(2.07 |
) |
|
Total Distributions |
|
|
(0.33 |
) |
|
|
(0.12 |
) |
|
|
(0.00 |
)(2) |
|
|
(1.34 |
) |
|
|
(2.30 |
) |
|
Anti-Dilutive Effect of Share Repurchase Program |
|
|
0.03 |
|
|
|
0.02 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Net Asset Value, End of Period |
|
$ |
15.68 |
|
|
$ |
14.87 |
|
|
$ |
17.07 |
|
|
$ |
23.13 |
|
|
$ |
25.09 |
|
|
Per Share Market Value, End of Period |
|
$ |
12.46 |
|
|
$ |
12.74 |
|
|
$ |
14.20 |
|
|
$ |
20.41 |
|
|
$ |
22.15 |
|
|
TOTAL INVESTMENT RETURN:(3) |
|
Market Value |
|
|
0.36 |
% |
|
|
(9.41 |
)% |
|
|
(30.41 |
)% |
|
|
(1.84 |
)% |
|
|
12.56 |
% |
|
Net Asset Value |
|
|
8.21 |
% |
|
|
(12.04 |
)% |
|
|
(26.19 |
)% |
|
|
(1.76 |
)% |
|
|
12.57 |
% |
|
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA: |
|
Net Assets, End of Period (Thousands) |
|
$ |
269,401 |
|
|
$ |
322,941 |
|
|
$ |
373,435 |
|
|
$ |
506,037 |
|
|
$ |
548,898 |
|
|
Ratio of Expenses |
|
|
1.63 |
%(4) |
|
|
1.67 |
%(4) |
|
|
1.79 |
%(4) |
|
|
1.74 |
%(4) |
|
|
1.75 |
%(4) |
|
Ratio of Net Investment Income |
|
|
1.54 |
%(4) |
|
|
0.98 |
%(4) |
|
|
0.76 |
%(4) |
|
|
0.42 |
%(4) |
|
|
0.60 |
%(4) |
|
Ratio of Rebate from Morgan Stanley Affiliates |
|
|
0.00 |
%(5) |
|
|
0.00 |
%(5) |
|
|
0.00 |
%(5) |
|
|
0.00 |
%(5) |
|
|
0.00 |
%(5) |
|
Portfolio Turnover Rate |
|
|
54 |
% |
|
|
16 |
% |
|
|
31 |
% |
|
|
121 |
% |
|
|
112 |
% |
|
(1) Per share amount is based on average shares outstanding.
(2) Amount is less than $0.005 per share.
(3) Total investment return based on net asset value per share reflects the effects of changes in net asset value on the performance of the Fund during each period, and assumes dividends and distributions, if any, were reinvested. This percentage is not an indication of the performance of a stockholder's investment in the Fund based on market value due to differences between the market price of the stock and the net asset value per share of the Fund. Total returns are based upon the market value and net asset value on the last business day of each period.
(4) The Ratio of Expenses and Ratio of Net Investment Income reflect the rebate of certain Fund expenses in connection with the investments in Morgan Stanley affiliates during the period. The effect of the rebate on the ratios is disclosed in the above table as "Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets."
(5) Amount is less than 0.005%.
The accompanying notes are an integral part of the financial statements.
13
Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Notes to Financial Statements
The Morgan Stanley China A Share Fund, Inc. (the "Fund") was incorporated in Maryland on July 6, 2006 and is registered as a non-diversified, closed-end management investment company under the Investment Company Act of 1940, as amended (the "Act"). The Fund's investment objective is to seek capital growth by investing, under normal circumstances, at least 80% of its assets in A-shares of Chinese companies listed on the Shanghai and Shenzhen Stock Exchanges. The prices of A-shares are quoted in Renminbi ("RMB"), and only Chinese domestic investors and certain Qualified Foreign Institutional Investors ("QFII") are allowed to trade A-shares outside of the Stock Connect programs. To the extent that the Fund invests in derivative or other instruments that are structured to be positively correlated and linked to China A shares, such investments will be counted for purposes of the Fund's policy as stated above. To the extent the Fund makes such investments, the Fund will be subject to the risks of such derivative or other instruments as described herein.
The Fund applies investment company accounting and reporting guidance Accounting Standards Codification ("ASC") Topic 946. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the Fund's Statement of Assets and Liabilities through the date that the financial statements were issued.
The Fund's adviser, Morgan Stanley Investment Management Inc. (the "Adviser"), had obtained a QFII license pursuant to which it was authorized to invest in China A-shares and other permitted China securities on behalf of the Fund up to its specified investment quota of $200,000,000, as updated, modified or renewed from time to time (the "A-share Quota"). The Adviser had received an increase of $250,000,000 to its A-share Quota, of which approximately $138,000,000 was utilized through a rights offering in August 2010. On May 7, 2020, the People's Bank of China and the State Administration of Foreign Exchange jointly issued the Regulations on Funds of Securities and Futures Investment by Foreign Institutional
Investors (PBOC & SAFE Announcement [2020] No. 2), which came into effect on June 6, 2020. The new regulations unify and supersede the rules applicable to QFII and RQFII regimes. One of the key changes of the new regulations is the removal of quota restrictions on investment by QFII and RQFII. There is no guarantee that the new regulations will not be modified in the future.
Securities purchased by the Adviser and/or Morgan Stanley Investment Management Company (the "Sub-Adviser") in its capacity as a QFII, on behalf of the Fund, are credited to a securities trading account with the Fund's QFII Custodian in China. All capital gains and income that the Fund earns on investments in China A-shares are held in that account, and may be repatriated subject to an undertaking for tax clearance by the QFII to the Fund's QFII custodian, except where the Fund is wound up, in which case the repatriation of capital gains and income shall be subject to tax filing clearance by the Shanghai Tax Bureau. Failure to provide the tax payment confirmation on a timely basis could adversely affect the Fund's ability to distribute taxable income and capital gains and cause the Fund to become liable for the payment of U.S. federal income tax. See Note F. Federal Income Taxes.
A. Significant Accounting Policies: The following significant accounting policies are in conformity with U.S. generally accepted accounting principles ("GAAP"). Such policies are consistently followed by the Fund in the preparation of its financial statements. GAAP may require management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results may differ from those estimates.
1. Security Valuation: (1) An equity portfolio security listed or traded on an exchange is valued at its latest reported sales price (or at the exchange official closing price if such exchange reports an official closing price), and if there were no sales on a given day and if there is no official exchange closing price for that day, the security is valued at
14
Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Notes to Financial Statements (cont'd)
the mean between the last reported bid and asked prices if such bid and asked prices are available on the relevant exchanges. If only bid prices are available then the latest bid price may be used. Listed equity securities not traded on the valuation date with no reported bid and asked prices available on the exchange are valued at the mean between the current bid and asked prices obtained from one or more reputable brokers/dealers. In cases where a security is traded on more than one exchange, the security is valued on the exchange designated as the primary market; (2) all other equity portfolio securities for which over-the-counter ("OTC") market quotations are readily available are valued at the latest reported sales price (or at the market official closing price if such market reports an official closing price), and if there was no trading in the security on a given day and if there is no official closing price from relevant markets for that day, the security is valued at the mean between the last reported bid and asked prices if such bid and asked prices are available on the relevant markets. An unlisted equity security that does not trade on the valuation date and for which bid and asked prices from the relevant markets are unavailable is valued at the mean between the current bid and asked prices obtained from one or more reputable brokers/dealers; (3) fixed income securities may be valued by an outside pricing service/vendor approved by the Fund's Board of Directors (the "Directors"). The pricing service/vendor may employ a pricing model that takes into account, among other things, bids, yield spreads and/or other market data and specific security characteristics. If the Adviser and Sub-Adviser, each a wholly-owned subsidiary of Morgan Stanley, determines that the price provided by the outside pricing service/vendor does not reflect the security's fair value or the pricing service/vendor or exchange is unable to provide a price, prices from reputable brokers/dealers may also be utilized. In these circumstances, the value of the security will be the mean of bid and asked prices obtained from
reputable brokers/dealers; (4) when market quotations are not readily available, as defined by Rule 2a-5 under the Act, including circumstances under which the Adviser or the Sub-Adviser determines that the closing price, last sale price or the mean between the last reported bid and asked prices are not reflective of a security's market value, portfolio securities are valued at their fair value as determined in good faith under procedures approved by and under the general supervision of the Directors. Each business day, the Fund uses a third-party pricing service approved by the Directors to assist with the valuation of foreign equity securities. Events occurring after the close of trading on foreign exchanges may result in adjustments to the valuation of foreign securities to reflect market trading that occurs after the close of the applicable foreign markets of comparable securities or other instruments that have a strong correlation to the fair-valued securities to more accurately reflect their fair value as of the close of regular trading on the NYSE; (5) foreign exchange transactions ("spot contracts") and foreign exchange forward contracts("forward contracts") are valued daily using an independent pricing vendor at the spot and forward rates, respectively, as of the close of the NYSE; and (6) investments in mutual funds, including the Morgan Stanley Institutional Liquidity Funds, are valued at the net asset value ("NAV")as of the close of each business day.
In connection with Rule 2a-5 of the Act, the Directors have designated the Fund's Adviser as its valuation designee. The valuation designee has responsibility for determining fair value and to make the actual calculations pursuant to the fair valuation methodologies previously approved by the Directors. Under procedures approved by the Directors, the Fund's Adviser, as valuation designee, has formed a Valuation Committee whose members are approved by the Directors. The Valuation Committee provides administration and oversight of the Fund's
15
Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Notes to Financial Statements (cont'd)
valuation policies and procedures, which are reviewed at least annually by the Directors. These procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers and other market sources to determine fair value.
2. Fair Value Measurement: Financial Accounting Standards Board ("FASB") ASC 820, "Fair Value Measurement" ("ASC 820"), defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a three-tier hierarchy to distinguish between (1) inputs that reflect the assumptions market participants would use in valuing an asset or liability developed based on market data obtained from sources independent of the reporting entity (observable inputs); and (2) inputs that reflect the reporting entity's own assumptions about the assumptions market participants would use in valuing an asset or liability developed based on the best information available in the circumstances (unobservable inputs) and to establish classification of fair value measurements for disclosure purposes. Various inputs are used in determining the value of the Fund's investments. The inputs are summarized in the three broad levels listed below:
• Level 1 – unadjusted quoted prices in active markets for identical investments
• Level 2 – other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.)
• Level 3 – significant unobservable inputs including the Fund's own assumptions in determining the fair value of investments. Factors considered in making this determination may include, but are not limited to, information obtained by contacting the issuer, analysts,
or the appropriate stock exchange (for exchange-traded securities), analysis of the issuer's financial statements or other available documents and, if necessary, available information concerning other securities in similar circumstances.
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities and the determination of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to each security.
The following is a summary of the inputs used to value the Fund's investments as of December 31, 2024:
Investment Type |
|
Level 1 Unadjusted quoted prices (000) |
|
Level 2 Other significant observable inputs (000) |
|
Level 3 Significant unobservable inputs (000) |
|
Total (000) |
|
Assets: |
|
Common Stocks |
|
Automobile Components |
|
$ |
— |
|
|
$ |
11,296 |
|
|
$ |
— |
|
|
$ |
11,296 |
|
|
Automobiles |
|
|
— |
|
|
|
1,307 |
|
|
|
— |
|
|
|
1,307 |
|
|
Banks |
|
|
— |
|
|
|
73,330 |
|
|
|
— |
|
|
|
73,330 |
|
|
Beverages |
|
|
— |
|
|
|
20,561 |
|
|
|
— |
|
|
|
20,561 |
|
|
Capital Markets |
|
|
— |
|
|
|
3,300 |
|
|
|
— |
|
|
|
3,300 |
|
|
Construction & Engineering |
|
|
— |
|
|
|
8,537 |
|
|
|
— |
|
|
|
8,537 |
|
|
Electrical Equipment |
|
|
— |
|
|
|
12,839 |
|
|
|
— |
|
|
|
12,839 |
|
|
Electronic Equipment, Instruments & Components |
|
|
— |
|
|
|
5,415 |
|
|
|
— |
|
|
|
5,415 |
|
|
Health Care Equipment & Supplies |
|
|
— |
|
|
|
5,333 |
|
|
|
— |
|
|
|
5,333 |
|
|
Household Durables |
|
|
— |
|
|
|
21,344 |
|
|
|
— |
|
|
|
21,344 |
|
|
16
Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Notes to Financial Statements (cont'd)
Investment Type |
|
Level 1 Unadjusted quoted prices (000) |
|
Level 2 Other significant observable inputs (000) |
|
Level 3 Significant unobservable inputs (000) |
|
Total (000) |
|
Assets: (cont'd) |
|
Common Stocks (cont'd) |
|
Independent Power & Renewable Electricity Producers |
|
$ |
— |
|
|
$ |
24,662 |
|
|
$ |
— |
|
|
$ |
24,662 |
|
|
Insurance |
|
|
— |
|
|
|
5,453 |
|
|
|
— |
|
|
|
5,453 |
|
|
Life Sciences Tools & Services |
|
|
— |
|
|
|
4,812 |
|
|
|
— |
|
|
|
4,812 |
|
|
Machinery |
|
|
— |
|
|
|
18,415 |
|
|
|
— |
|
|
|
18,415 |
|
|
Metals & Mining |
|
|
— |
|
|
|
3,777 |
|
|
|
— |
|
|
|
3,777 |
|
|
Oil, Gas & Consumable Fuels |
|
|
— |
|
|
|
10,277 |
|
|
|
— |
|
|
|
10,277 |
|
|
Personal Care Products |
|
|
— |
|
|
|
7,110 |
|
|
|
— |
|
|
|
7,110 |
|
|
Pharmaceuticals |
|
|
— |
|
|
|
781 |
|
|
|
— |
|
|
|
781 |
|
|
Transportation Infrastructure |
|
|
— |
|
|
|
28,714 |
|
|
|
— |
|
|
|
28,714 |
|
|
Total Common Stocks |
|
|
— |
|
|
|
267,263 |
|
|
|
— |
|
|
|
267,263 |
|
|
Short-Term Investment |
|
Investment Company |
|
|
718 |
|
|
|
— |
|
|
|
— |
|
|
|
718 |
|
|
Total Assets |
|
$ |
718 |
|
|
$ |
267,263 |
|
|
$ |
— |
|
|
$ |
267,981 |
|
|
Transfers between investment levels may occur as the markets fluctuate and/or the availability of data used in an investment's valuation changes.
3. Foreign Currency Translation and Foreign Investments: The books and records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars as follows:
— investments, other assets and liabilities at the prevailing rate of exchange on the valuation date;
— investment transactions and investment income at the prevailing rates of exchange on the dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange rates and market values at the close of the period, the Fund does not isolate that portion of the results of operations arising as a result of changes in the foreign exchange rates from the fluctuations arising from changes in the market prices of securities held at period end. Similarly, the Fund does not isolate the effect of changes in foreign exchange rates from the fluctuations arising from changes in the market prices of securities sold during the period. Accordingly, realized and unrealized foreign currency gains (losses) on investments in securities are included in the reported net realized and unrealized gains (losses) on investment transactions and balances. However, pursuant to U.S. federal income tax regulations, gains and losses from certain foreign currency transactions and the foreign currency portion of gains and losses realized on sales and maturities of foreign denominated debt securities are treated as ordinary income for U.S. federal income tax purposes.
Net realized gains (losses) on foreign currency transactions represent net foreign exchange gains (losses) from sales and maturities of foreign currency forward exchange contracts, disposition of foreign currencies, currency gains (losses) realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. The change in unrealized currency gains (losses) on foreign currency translations for the period is reflected in the Statement of Operations.
A significant portion of the Fund's net assets consist of securities of issuers located in China which are
17
Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Notes to Financial Statements (cont'd)
denominated in foreign currencies. Changes in currency exchange rates will affect the value of securities and investment income from such securities. In general, Chinese securities are subject to greater price volatility, limited capitalization and liquidity, and higher rates of inflation than securities of companies based in the United States.
In addition, Chinese securities may be subject to substantial governmental involvement in the economy and greater social, economic and political uncertainty. Such securities may be concentrated in a single or a limited number of countries and regions and may vary throughout the year.
4. Indemnifications: The Fund enters into contracts that contain a variety of indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred.
5. Dividends and Distributions to Stockholders: Dividends and distributions to stockholders are recorded on the ex-dividend date. Dividends from net investment income, if any, are declared and paid annually. Net realized capital gains, if any, are distributed at least annually.
6. Other: Security transactions are accounted for on the date the securities are purchased or sold. Realized gains (losses) on the sale of investment securities are determined on the specific identified cost basis. Interest income is recognized on the accrual basis except where collection is in doubt and is recorded net of foreign withholding tax. Discounts are accreted and premiums are amortized over the life of the respective securities. Dividends and distributions are recorded on the ex-dividend date (except certain dividends which may be recorded as soon as the Fund is informed of such dividends) net of applicable withholding taxes.
7. Segment Reporting: During the year ended December 31, 2024, the Fund adopted FASB Accounting Standards Update No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, (ASU 2023-07), which requires incremental disclosures related to a public entity's reportable segments. The Fund operates as a single reportable segment, an investment company whose investment objective is included at the beginning of the Notes to the Financial Statements. In connection with the adoption of ASU 2023-07, the Fund's President has been designated as the Fund's Chief Operating Decision Maker (CODM), who is responsible for assessing the performance of the Fund's single segment and deciding how to allocate the segment's resources. To perform this function, the CODM reviews the information in the Fund's Financial Statements.
B. Advisory/Sub-Advisory Fees: The Adviser, a wholly-owned subsidiary of Morgan Stanley, provides the Fund with advisory services under the terms of an Investment Advisory Agreement, calculated weekly and payable monthly, at an annual rate of 1.25% of the Fund's average weekly net assets.
The Adviser has entered into a Sub-Advisory Agreement with the Sub-Adviser, a wholly owned subsidiary of Morgan Stanley. The Sub-Adviser provides the Fund with advisory services subject to the overall supervision of the Adviser and the Fund's Officers and Directors. The Adviser pays the Sub-Adviser on a monthly basis a portion of the net advisory fees the Adviser receives from the Fund.
C. Administration Fees: The Adviser also serves as Administrator to the Fund and provides administrative services pursuant to an Administration Agreement for an annual fee, accrued daily and paid monthly, of 0.08% of the Fund's average weekly net assets.
Under a Sub-Administration Agreement between the Administrator and State Street Bank and Trust Company ("State
18
Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Notes to Financial Statements (cont'd)
Street"), State Street provides certain administrative services to the Fund. For such services, the Administrator pays State Street a portion of the fee the Administrator receives from the Fund.
D. Custodian Fees: State Street (the "Custodian") also serves as Custodian for the Fund in accordance with a Custodian Agreement. The Custodian holds cash, securities and other assets of the Fund as required by the Act. Custody fees are payable monthly based on assets held in custody, investment purchases and sales activity and account maintenance fees, plus reimbursement for certain out-of-pocket expenses.
E. Security Transactions and Transactions with Affiliates: For the year ended December 31, 2024, purchases and sales of investment securities for the Fund, other than long-term U.S. Government securities and short-term investments were approximately $138,200,000 and $188,242,000, respectively. There were no purchases and sales of long-term U.S. Government securities for the year ended December 31, 2024.
The Fund invests in the Institutional Class of the Morgan Stanley Institutional Liquidity Funds — Government Portfolio (the "Liquidity Fund"), an open-end management investment company managed by the Adviser. Advisory fees paid by the Fund are reduced by an amount equal to its pro-rata share of the advisory and administration fees paid by the Fund due to its investment in the Liquidity Fund. For the year ended December 31, 2024, advisory fees paid were reduced by approximately $8,000 relating to the Fund's investment in the Liquidity Fund.
A summary of the Fund's transactions in shares of affiliated investments during the year ended December 31, 2024 is as follows:
Affiliated Investment Company |
|
Value December 31, 2023 (000) |
|
Purchases at Cost (000) |
|
Proceeds from Sales (000) |
|
Dividend Income (000) |
|
Liquidity Fund |
|
$ |
2,182 |
|
|
$ |
73,970 |
|
|
$ |
75,434 |
|
|
$ |
282 |
|
|
Affiliated Investment Company (cont'd) |
|
Realized Gain (Loss) (000) |
|
Change in Unrealized Appreciation (Depreciation) (000) |
|
Value December 31, 2024 (000) |
|
Liquidity Fund |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
718 |
|
|
The Fund is permitted to purchase and sell securities ("cross-trade") from and to other Morgan Stanley Funds as well as other funds and client accounts for which the Adviser or an affiliate of the Adviser serves as investment adviser, pursuant to procedures approved by the Directors in compliance with Rule 17a-7 under the Act (the "Rule"). As a result of a change in the Rule 2a-5 (aka the "Valuation Rule"), which impacts transactions under Rule 17a-7, a security is an eligible security for purposes of Rule 17a-7 only when there is a "readily available market quotation" for the security. The Fund's Rule 17a-7 policy was amended effective September 8, 2022, to reflect the new requirements of Rule 2a-5.
For the year ended December 31, 2024, the Fund did not engage in any cross-trade transactions.
Each Director receives an annual retainer fee for serving as a Director of the Morgan Stanley Funds. The aggregate compensation paid to each Director is paid by the Morgan Stanley Funds, and is allocated on a pro rata basis among each of the operational funds of the Morgan Stanley Funds based on the relative net assets of each of the funds. The Fund also reimburses such Directors for travel and other out-of-pocket expenses incurred by them in connection with attending such meetings.
The Fund has an unfunded Deferred Compensation Plan (the "Compensation Plan"), which allows each independent Director to defer payment of all, or a portion, of the fees he or she receives for serving on the Board of Directors. Each eligible Director generally may elect to have the deferred amounts credited with a return equal to the total return on one or more of the Morgan Stanley funds that are offered as investment options under the Compensation Plan.
19
Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Notes to Financial Statements (cont'd)
Appreciation/depreciation and distributions received from these investments are recorded with an offsetting increase/decrease in the deferred compensation obligation and do not affect the NAV of the Fund.
F. Federal Income Taxes: It is the Fund's intention to continue to qualify as a regulated investment company and distribute all of its taxable income. Accordingly, no provision for federal income taxes is required in the financial statements.
The Fund may be subject to taxes imposed by countries in which it invests. Such taxes are generally based on income and/or capital gains earned or repatriated. Taxes are accrued based on net investment income, net realized gains and net unrealized appreciation as such income and/or gains are earned. Taxes may also be based on transactions in foreign currency and are accrued based on the value of investments denominated in such currency.
FASB ASC 740-10, "Income Taxes — Overall", sets forth a minimum threshold for financial statement recognition of the benefit of a tax position taken or expected to be taken in a tax return. Management has concluded that there are no significant uncertain tax positions that would require recognition in the financial statements. If applicable, the Fund recognizes interest accrued related to unrecognized tax benefits in "Interest Expense" and penalties in "Other Expenses" in the Statement of Operations. The Fund files tax returns with the U.S. Internal Revenue Service, New York and various states. Generally, each of the tax years in the four-year period ended December 31, 2024 remains subject to examination by taxing authorities.
The tax character of distributions paid may differ from the character of distributions shown for GAAP purposes due to short-term capital gains being treated as ordinary income for tax
purposes. The tax character of distributions paid during fiscal years 2024 and 2023 was as follows:
2024 Distributions Paid From: |
|
2023 Distributions Paid From: |
|
Ordinary Income (000) |
|
Ordinary Income (000) |
|
$ |
5,619 |
|
|
$ |
2,646 |
|
|
The amount and character of income and gains to be distributed are determined in accordance with income tax regulations which may differ from GAAP. These book/tax differences are either considered temporary or permanent in nature.
Temporary differences are attributable to differing book and tax treatments for the timing of the recognition of gains (losses) on certain investment transactions and the timing of the deductibility of certain expenses.
The Fund had no permanent differences causing reclassifications among the components of net assets for the year ended December 31, 2024.
At December 31, 2024, the components of distributable earnings for the Fund on a tax basis were as follows:
Undistributed Ordinary Income (000) |
|
Undistributed Long-Term Capital Gain (000) |
|
$ |
23 |
|
|
$ |
— |
|
|
At December 31, 2024, the Fund had available for federal income tax purposes unused short-term and long-term capital losses of approximately $48,180,000 and $128,654,000, respectively, that do not have an expiration date.
To the extent that capital loss carryforwards are used to offset any future capital gains realized, no capital gains tax liability will be incurred by the Fund for gains realized and not distributed. To the extent that capital gains are offset, such gains will not be distributed to the stockholders.
20
Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Notes to Financial Statements (cont'd)
Qualified late year losses are capital losses and specified ordinary losses, including currency losses, incurred after October 31 but within the taxable year that, if elected, are deemed to arise on the first day of the Fund's next taxable year. For the year ended December 31, 2024, the Fund intends to defer to January 1, 2025 for U.S. federal income tax purposes the following losses:
Qualified Late Year Ordinary Losses (000) |
|
Post-October Capital Losses (000) |
|
$ |
— |
|
|
$ |
4,104 |
|
|
Due to recent changes mentioned above, failure to provide the tax payment confirmation on a timely basis could adversely affect the Fund's ability to distribute taxable income and capital gains. Therefore, the Fund reserves the right not to pay any dividends, or to delay the payment thereof, in the event that the Adviser is not satisfied that the Fund can or will be able to fund such dividends through the repatriation of funds from China. This may cause the Fund to become liable for the payment of U.S. federal income tax.
G. Other: Under the Corporate Income Tax ("CIT") Law, People's Republic of China ("PRC") tax resident enterprises are taxed at the CIT rate of 25%. Pursuant to the CIT Law and its detailed implementation rules, a non-PRC tax resident who does not establish a permanent establishment in China (or which has a permanent establishment in China but income derived is not effectively connected with such permanent establishment) is generally subject to PRC Withholding Income Tax ("WIT") on PRC sourced income (including but not limited to passive income such as dividends, interest, gains from transfer of assets) unless the statutory WIT of 10% is subject to reduction or exemption in accordance with the applicable tax treaty signed with the PRC or under PRC law or regulations.
The current U.S. and PRC tax treaty exempts gains realized on the sale of Chinese securities from the capital gain tax, with the
exception of securities in land-rich companies which are companies that have greater than 50% of their assets in land or immovable properties in China.
In November 2014, China's Ministry of Finance ("MOF") and State Administration of Taxation ("SAT") published Caishui [2014] No. 79 ("Circular 79"), which provided that QFIIs are temporarily exempt from WIT with respect to gains derived from the trading of PRC equity investments such as A-Shares on or after November 17, 2014. Circular 79 provided no indication on how long the temporary exemption would be extended. Circular 79 also confirmed that pre-November 17, 2014 gains derived by QFIIs were taxable according to prevailing laws.
The MOF and SAT published Caishui [2014] No.81 and Caishui [2016] No.127, which provided that foreign investors are temporarily exempt from WIT in respect of gains derived from trading in China A-shares through Stock Connect. The circulars provided no indication on how long the temporary exemption would be extended.
The tax law and regulations of China are subject to change, and may be changed with retrospective effect. The interpretation and applicability of tax law and regulations by PRC tax authorities are not as consistent and transparent as those of more developed nations, and may vary from region to region. Accordingly, China taxes and duties payable by the QFII may change at any time.
As permitted by the Fund's offering prospectus, on June 19, 2007, the Directors approved a share repurchase program for purposes of enhancing stockholder value and reducing the discount at which the Fund's shares trade from their NAV. During the year ended December 31, 2024, the Fund repurchased 192,335 of its shares at an average discount of 18.21% from NAV. Since the inception of the program, the Fund has repurchased 362,922 of its shares at an average discount of 18.83% from NAV. The Directors regularly monitor the Fund's share repurchase program as part of their review and consideration of the Fund's premium/discount history. The Fund may only repurchase its outstanding shares at such time
21
Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Notes to Financial Statements (cont'd)
and in such amounts as it believes will further the accomplishment of the foregoing objectives and subject to review by the Directors and the Fund's ability to repatriate capital gains and income out of China.
On January 22, 2024, the Fund announced the commencement of a tender offer by the Fund to acquire in exchange for cash up to 20% of the Fund's outstanding shares at a price equal to 98.5% of the Fund's NAV as of the close of regular trading on the New York Stock Exchange on the business day immediately following the day the offer expires. On February 20, 2024, the Fund completed the tender offer. The Fund accepted 4,342,176 shares for payment which represents 20% of the Fund's then outstanding shares. Final payment was made on February 22, 2024 at $14.5386 per share, representing 98.5% of the NAV on February 21, 2024.
At December 31, 2024, the Fund had record owners of 10% or greater. Investment activities of these shareholders could have a material impact on the Fund. The aggregate percentage of such owners was 58.7%.
H. Results of Annual Meeting of Stockholders (unaudited): On June 25, 2024, an annual meeting of the Fund's stockholders was held for the purpose of voting on the following matter, the results of which were as follows:
Election of Directors by all stockholders:
|
|
For |
|
Against |
|
Jakki L. Haussler |
|
|
13,163,207 |
|
|
|
2,103,787 |
|
|
Nancy C. Everett |
|
|
13,853,981 |
|
|
|
1,413,013 |
|
|
Michael F. Klein |
|
|
13,916,784 |
|
|
|
1,350,210 |
|
|
W. Allen Reed |
|
|
13,914,464 |
|
|
|
1,352,530 |
|
|
I. Market Risk: The value of an investment in the Fund is based on the values of the Fund's investments, which change due to economic and other events that affect the U.S. and global markets generally, as well as those that affect or are perceived or expected to affect particular regions, countries, industries, companies, issuers, sectors, asset classes or governments. The
risks associated with these developments may be magnified if certain social, political, economic and other conditions and events adversely interrupt or otherwise affect the global economy and financial markets. Securities in the Fund's portfolio may underperform or otherwise be adversely affected due to inflation (or expectations for inflation), deflation (or expectations for deflation), interest rates (or changes in interest rates), global demand for particular products or resources, market or financial system instability or uncertainty, embargoes, tariffs, sanctions and other trade barriers, natural disasters and extreme weather events, health emergencies (such as epidemics and pandemics), terrorism, regulatory events and governmental or quasi-governmental actions. The occurrence of global events, such as terrorist attacks, natural disasters, health emergencies, social and political (including geopolitical) discord and tensions or debt crises and downgrades, among others, may result in increased market volatility and may have long term effects on both the U.S. and global financial markets. The occurrence of such events may be sudden and unexpected, and it is difficult to predict when similar events affecting the U.S. or global financial markets or economies may occur, the effects that such events may have and the duration of those effects (which may last for extended periods). Any such event(s) could have a significant adverse impact on the value, liquidity and risk profile of the Fund's portfolio, as well as its ability to sell securities and/or meet redemptions. Any such event(s) or similar types of factors and developments, may also adversely affect the financial performance of the Fund's investments (and, in turn, the Fund's investment results) and/or negatively impact broad segments of businesses and populations and have a significant and rapid negative impact on the performance of the Fund's investments, and exacerbate preexisting risks to the Fund. In addition, no active trading market may exist for certain investments held by the Fund, which may impair the ability of the Fund to sell or to realize the current valuation of such investments in the event of the need to liquidate such assets.
22
Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Notes to Financial Statements (cont'd)
Federal Tax Notice (unaudited)
For federal income tax purposes, the following information is furnished with respect to the Fund's earnings for its taxable year ended December 31, 2024. When distributed, certain earnings may be subject to a maximum tax rate of 15% as provided for by the Jobs and Growth Tax Relief Reconciliation Act of 2003. The Fund designated up to a maximum of approximately $8,326,000 as taxable at this lower rate.
The Fund intends to pass through foreign tax credits of approximately $910,000 and has derived net income from sources within foreign countries amounting to approximately $9,100,000.
In January, the Fund provides tax information to shareholders for the preceding calendar year.
23
Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of
Morgan Stanley China A Share Fund, Inc.
Opinion on the Financial Statements
We have audited the accompanying statement of assets and liabilities of Morgan Stanley China A Share Fund, Inc. (the "Fund"), including the portfolio of investments, as of December 31, 2024, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, the financial highlights for each of the five years in the period then ended and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund at December 31, 2024, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and its financial highlights for each of the five years in the period then ended, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Fund's management. Our responsibility is to express an opinion on the Fund's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Fund is not required to have, nor were we engaged to perform, an audit of the Fund's internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2024, by correspondence with the custodian, brokers and others; when replies were not received from brokers and others, we performed other auditing procedures. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the auditor of one or more Morgan Stanley investment companies since 2000.
Boston, Massachusetts
February 24, 2025
24
Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Portfolio Management (unaudited)
The Fund is managed within the Emerging Markets Equity team. The team consists of portfolio managers and analysts. The members of the team primarily responsible for the day-to-day management of the Fund's portfolio are Leon Sun, a Managing Director of Morgan Stanley Asia Limited ("MSAL"), and Amay Hattangadi, a Managing Director of Morgan Stanley Investment Management Company ("MSIM Co.").
Mr. Sun has been associated with MSAL since March 2021. Prior to joining MSAL, Mr. Sun was a Senior Portfolio Manager and Head of Investments for Hong Kong and China at a major asset management firm since 2011. Mr. Hattangadi has been associated with MSIM Co. in an investment management capacity since 2017 and, prior to that, with the Adviser in an investment management capacity since 1997.
In rendering investment advisory services to the Fund, the Adviser uses the portfolio management, research and other resources of MSAL, a foreign (non-U.S.) affiliate of MSIM Inc. that is not registered under the Investment Advisers Act of 1940, as amended, and may provide services to the Fund through a "participating affiliate" arrangement, as that term is used in relief granted by the staff of the SEC allowing U.S. registered investment advisers to use portfolio management or research resources of advisory affiliates subject to the regulatory supervision of the registered investment adviser. Under the participating affiliate arrangement, MSAL is considered a participating affiliate of MSIM, and MSAL and its employees or other persons associated with MSAL that provide services to U.S. clients of MSIM are considered "associated persons" of MSIM (as that term is defined in the Advisers Act) and investment professionals from MSAL may render portfolio management, research and other services to the Funds, subject to the supervision of MSIM.
25
Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Investment Policy (unaudited)
The Fund's investment objective is to seek capital growth. The Fund's investment objective may be changed without stockholder approval; however, stockholders will be notified of any changes. The Fund seeks to achieve its investment objective by investing, under normal circumstances, at least 80% of its assets in A-shares of Chinese companies listed on the Shanghai and Shenzhen Stock Exchanges. The Fund may invest in warrants or other Strategic Transactions. These investments will be deemed to be counted toward the Fund's 80% policy to the extent that these investments are structured to be positively correlated and linked to China A-shares. The Fund may also invest up to 20% of its assets in other types of investments, including B-shares of companies listed on the Shanghai and Shenzhen Stock Exchanges, H-shares of companies incorporated in mainland China and listed on the Hong Kong Stock Exchange, shares of Red Chip companies with controlling Chinese shareholders that are incorporated outside mainland China and listed on the Hong Kong Stock Exchange, shares of China-related companies listed on the Hong Kong Stock Exchange, the Singapore Stock Exchange and other exchanges, and assets which may or may not be China-related, including shares of open- and closed-end investment companies, Strategic Transactions, common stocks, bonds, convertible securities, money market and other short-term debt securities and cash equivalents. For purposes of the Fund's policies, "China" means the People's Republic of China, which includes Hong Kong, and a "China-related" company is a company that (i) is organized in, or for which the principal securities trading market is in, China or (ii) derives or that is expected to derive 50% or more of its annual revenues primarily from either goods produced, sales made or services performed in China. Certain "China-related" companies that fall within category (ii) above may or may not ultimately, although at the time of purchase the Adviser and/or the Sub-Adviser expected that such company would do so, derive 50% or more of its annual revenues primarily from either goods produced, sales made or services performed in China. The Fund's 80% policy may be changed without stockholder approval; however, stockholders will be notified of any changes. There can be no assurance that the Fund's investment objective will be achieved.
Strategic Transactions. The Fund may invest in P-notes, warrants or various other Strategic Transactions to gain exposure to the A-share market. The Fund may also use Strategic Transactions, which may or may not be China-related, to obtain equity exposure, earn income, facilitate portfolio management and seek to mitigate risks. Although the Adviser may seek to use these transactions to achieve the Fund's investment objective, no assurance can be given that the use of these transactions will achieve this result. To the extent that the Strategic Transactions are not structured to be positively correlated and linked to China A-shares, they will not be counted toward the Fund's 80% policy. Investments which are not structured to but are found to have some correlation to China A-shares will not be counted toward the Fund's 80% policy.
The Fund may purchase P-notes and/or warrants from a financial institution, the return on which is linked to the performance of a particular market, index or security, which may or may not be China-related, as a means of gaining exposure to such markets or securities. The Fund may also purchase and sell other derivative instruments, including exchange-listed and over-the-counter put and call options on securities, financial futures contracts, fixed-income and other interest rate indices, stock indices and other financial instruments, purchase and sell financial futures contracts and options on futures contracts, forward foreign currency exchange contracts and may enter into swap transactions, such as interest rate swaps, total return swaps, credit default swaps, caps, floors or collars. The Fund may trade Chinese stock index futures based on the CSI 300 Index (the CSI 300 Index is a capitalization-weighted stock market index designed to replicate the performance of 300 stocks traded on the Shanghai and Shenzhen stock exchanges).
26
Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Investment Policy (unaudited) (cont'd)
These investments may be used to attempt to protect against possible changes in the market value of securities held in or to be purchased for the Fund's portfolio resulting from securities markets fluctuations, to protect the Fund's unrealized gains in the value of its portfolio securities, to facilitate the sale of securities for investment purposes, to manage the effective maturity or duration of the Fund's portfolio or to establish a position in the derivatives markets as a temporary substitute for purchasing or selling particular securities.
Any or all of these investment techniques may be used at any time and there is no particular strategy that dictates the use of one technique rather than another, as the use of any Strategic Transaction is a function of numerous variables including market conditions. The ability of the Fund to utilize these Strategic Transactions successfully will depend on the Adviser's ability to predict pertinent market movements, which cannot be assured. The Fund will comply with applicable regulatory requirements when implementing these strategies, techniques and instruments.
The Fund may invest its remaining assets in the following:
Quotas for Investments in China
The equity of listed companies in mainland China seeking both domestic and foreign capital includes A-shares denominated and traded in renminbi and B-shares denominated in renminbi but traded in either U.S. dollars or Hong Kong dollars. Some Chinese companies issue H-shares that are listed on the Hong Kong Stock Exchange. Foreign investors had historically been unable to participate in the A-share market. However, in late 2002, Investment Regulations promulgated by the CSRC came into effect, which were replaced by updated Investment Regulations (i.e., "Measures for the Administration of the Securities Investments of Qualified Foreign Institutional Investors in the PRC") which came into effect on September 1, 2006, that provided a legal framework for certain QFIIs, including certain fund management institutions, insurance companies, securities companies and other asset management institutions, to invest in A-shares on the Shanghai and Shenzhen Stock Exchanges and certain other securities historically not eligible for investment by non-Chinese investors, through quotas granted by SAFE to those QFIIs which have been approved by the CSRC. Pursuant to an administrative notice issued by the CSRC on August 24, 2006 implementing the Investment Regulations, a QFII may invest in stocks listed and traded on a stock exchange, bonds listed and traded on a stock exchange, investment companies, warrants listed and traded on a stock exchange, and other financial instruments approved by the CSRC (due to technical reasons, QFIIs currently cannot participate in the repurchase of government bonds and trading of corporate bonds on the Shanghai and Shenzhen Stock Exchanges). On April 16, 2010, the CSRC approved the launch of Chinese stock index futures trading based on the CSI 300 Index, which tracks the Shanghai and Shenzhen markets.
Further, no single underlying foreign investor investing through a QFII (e.g., the Fund) may hold more than 10% of the total outstanding shares in one listed company and all foreign investors investing through QFIIs (e.g., the Fund) may not hold, in aggregate, more than 30% of the total outstanding shares in one listed company. Such limits may not apply where foreign investors make strategic investment in listed companies in accordance with the Measures for the Administration of Strategic Investments in Listed Companies by Foreign Investors. In September 2009, SAFE issued the Measures on the Foreign Exchange Administration of
27
Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Investment Policy (unaudited) (cont'd)
the Securities Investments of Qualified Foreign Institutional Investors in the PRC (the "SAFE Measures"), which regulates the foreign exchange activities of QFIIs.
The CSRC grants QFII licenses to certain fund management institutions, insurance companies, securities companies and other asset management institutions for investing in Chinese securities markets. Investment companies are not currently within the types of companies that may be granted a QFII license. The Adviser has obtained a QFII license pursuant to which it is authorized to invest in China A-shares and other permitted China securities listed on the Shanghai and Shenzhen Exchanges on behalf of the Fund up to the A-share Quota. Since the Fund does not satisfy the criteria to qualify as a QFII itself, in order for the Fund to invest in China A-shares, it does so via the Adviser's A-share Quota.
Securities purchased by the Adviser, in its capacity as a QFII, on behalf of the Fund, can currently be received by the China Securities Depository and Clearing Corporation Limited ("CDSCC") as credited to a securities trading account maintained in the joint names of the Fund and the Adviser. The Fund has obtained a legal opinion from the Fund's Chinese counsel confirming that, as a matter of Chinese law, the Adviser as QFII has no ownership interest in the securities and that the Fund will be ultimately and exclusively entitled to ownership of the securities. However, given that the securities trading account is maintained in the joint names of the Adviser and the Fund, the Fund's assets may not be as well protected as they would be if it were possible for them to be registered and held solely in the name of the Fund.
A substantial portion of all investments by the Fund in China are intended to be made and held through the A-share Quota. Potential investors should note that there is no guarantee that the Adviser will continue to benefit from the A-share Quota.
On May 7, 2020, the People's Bank of China and the State Administration of Foreign Exchange jointly issued the Regulations on Funds of Securities and Futures Investment by Foreign Institutional Investors (PBOC & SAFE Announcement [2020] No. 2), which came into effect on June 6, 2020. The regulations unify and supersede the rules applicable to QFII and RQFII regimes. One of the key changes of the regulations is the removal of quota restrictions on investment by QFII and RQFII. There is no guarantee that the new regulations will not be modified in the future.
The Fund's Investments
For temporary defensive purposes, the Fund may invest less than 80% of its assets in equity securities of Chinese issuers.
The Fund invests its assets over a broad spectrum of the Chinese economy. The Fund uses a bottom-up fundamental analysis of companies, seeking to identify issuers with strong earnings and cash flow growth potential and good quality of management. In selecting industries and companies for investment, the Adviser considers overall growth prospects, competitive positions in export markets, technologies, research and development, productivity, labor costs, raw material costs and sources, profit margins, returns on investment, capital resources, government regulation, management and other factors. The Fund is not permitted to invest 25% or more of its assets in any one industry.
28
Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Investment Policy (unaudited) (cont'd)
The Chinese Securities Markets. Currently, there are two stock exchanges in mainland China, the Shanghai and Shenzhen Stock Exchanges, and there is one stock exchange in Hong Kong. The Shanghai and Shenzhen Stock Exchanges are supervised by the CSRC and are highly automated with trading and settlement executed electronically. The Shanghai and Shenzhen Stock Exchanges are substantially smaller, less liquid and more volatile than the major securities markets in the United States. In comparison to the mainland Chinese securities markets, the securities markets in Hong Kong are relatively well developed and active.
The Shanghai Stock Exchange commenced trading on December 19, 1990, the Shenzhen Stock Exchange commenced trading on July 3, 1991 and the Hong Kong Stock Exchange commenced trading on April 2, 1986. The Shanghai and Shenzhen Stock Exchanges divide listed shares into two classes: A-shares and B-shares. Companies whose shares are traded on the Shanghai and Shenzhen Stock Exchanges that are incorporated in mainland China may issue both A-shares and B-shares. In China, the A-shares and B-shares of an issuer trade on one exchange. A-shares and B-shares may both be listed on either the Shanghai or Shenzhen Stock Exchange. Both classes represent an ownership interest comparable to a share of common stock and all shares are entitled to substantially the same rights and benefits associated with ownership. A-shares are traded on the Shanghai and Shenzhen Stock Exchanges in Chinese currency. B-shares are traded on the Shenzhen and Shanghai Stock Exchanges in Hong Kong dollars and U.S. dollars, respectively.
Foreign investors had historically been unable to participate in the A-share market. However, in late 2002, Investment Regulations promulgated by the CSRC came into effect, which were replaced by the updated Investment Regulations (i.e., "Measures for the Administration of the Securities Investments of Qualified Foreign Institutional Investors in the PRC"), which came into effect on September 1, 2006, that provided a legal framework for certain QFIIs to invest in A-shares on the Shanghai and Shenzhen Stock Exchanges and certain other securities historically not eligible for investment by non-Chinese investors, through quotas granted by SAFE to those QFIIs which have been approved by the CSRC. B-shares were originally intended to be available only to foreign investors or foreign institutions. However, since February 2001, B-shares have been available to domestic individual investors who trade through legal foreign currency accounts.
China A-Shares. The Fund invests principally in companies incorporated in mainland China that are traded in the A-share markets. The prices of A-shares are quoted in renminbi, and currently only Chinese domestic investors and QFIIs are allowed to trade A-shares. The China A-share market covers both the Shanghai Stock Exchange and the Shenzhen Stock Exchange.
China B-Shares. The Fund may invest in shares of companies incorporated in mainland China that are traded in the mainland B-share markets. Unlike prices in the A-share market, the prices of B-shares are quoted in foreign currencies. The B-share market commenced operations in April 1991 and was originally opened exclusively for foreign investors. In 2001, the B-share market opened to Chinese domestic individual investors as well. However, Chinese domestic individual investors must trade with legal foreign currency accounts. The China B-share market is composed of the Shanghai Stock Exchange (which settles in U.S. dollars) and the Shenzhen Stock Exchange (which settles in Hong Kong dollars). The China B-share market is generally smaller, less liquid and has a smaller issuer base than the China A-share market. The issuers that compose the B-share market include a broad range of companies, including companies with large, medium and small capitalizations.
29
Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Investment Policy (unaudited) (cont'd)
China H-Shares. The Fund may invest in shares of companies incorporated in mainland China and listed on the Hong Kong Stock Exchange. H-shares are traded in Hong Kong dollars on the Hong Kong Stock Exchange. H-shares are issued by companies incorporated in mainland China, and must meet Hong Kong's listing and disclosure requirements in order to be listed on the Hong Kong Stock Exchange. H-shares may be traded by foreigners and are often the vehicle for extending a Chinese company's privatization to foreign investors.
Red Chip Companies. The Fund may invest in shares of companies with controlling Chinese shareholders that are incorporated outside mainland China and listed on the Hong Kong Stock Exchange. Red Chip shares are traded in Hong Kong dollars on the Hong Kong Stock Exchange. Red Chip companies often have a majority of their business operations in mainland China. Red Chip shares may also be traded by foreigners.
China-Related Companies. The Fund may invest in shares of China-related companies listed on the Hong Kong Stock Exchange, the Singapore Stock Exchange or other exchanges. A "China-related" company is a company that (i) is organized in, or for which the principal securities trading market is in, China or (ii) derives or that is expected to derive 50% or more of its annual revenues primarily from either goods produced, sales made or services performed in China.
Other Investment Companies. The Fund may invest in securities of other open- and closed-end investment companies, which may or may not be China-related, subject to applicable limitations under the Investment Company Act and under the relevant laws and regulations in other jurisdictions. The Fund's investments in other investment companies will be counted towards the Fund's 80% policy to the extent that such other investment companies are structured to be positively correlated and linked to China A-shares.
Short-Term Investments. The Fund may also invest in money market and other short-term debt securities and cash equivalents, which may be denominated in renminbi.
Derivatives
The Fund may, but is not required to, use derivatives and other similar instruments for a variety of purposes, including hedging, risk management, portfolio management or to seek to earn income. Derivative instruments used by the Fund will be counted towards the Fund's exposure in the types of securities listed herein to the extent they have economic characteristics similar to such securities. A derivative is a financial instrument whose value is based, in part, on the value of an underlying asset, interest rate, index or financial instrument. Prevailing interest rates and volatility levels, among other things, also affect the value of derivative instruments. Derivatives and other similar instruments that create synthetic exposure often are subject to risks similar to those of the underlying asset or instrument and may have additional risks, including imperfect correlation between the value of the derivative and the underlying asset, risks of default by the counterparty to certain transactions, magnification of losses incurred due to changes in the market value of the securities, instruments, indices or interest rates to which the derivative instrument relates, risks that the transactions may not be liquid, risks arising from margin and payment requirements. The use of derivatives involves risks that are different from, and possibly greater than, the risks associated with other portfolio investments. Derivatives may involve the use of highly specialized instruments that require investment techniques and risk analyses different from those associated with other portfolio investments.
30
Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Investment Policy (unaudited) (cont'd)
Certain derivative transactions may give rise to a form of leverage. Leverage magnifies the potential for gain and the risk of loss. Leverage associated with derivative transactions may cause the Fund to liquidate portfolio positions when it may not be advantageous to do so, or may cause the Fund to be more volatile than if the Fund had not been leveraged. Although the Adviser seeks to use derivatives to further the Fund's investment objective, there is no assurance that the use of derivatives will achieve this result.
The derivative instruments and techniques that the Fund may use include:
Contracts for Difference ("CFD"). A CFD is a privately negotiated contract between two parties, buyer and seller, stipulating that the seller will pay to or receive from the buyer the difference between the nominal value of the underlying instrument at the opening of the contract and that instrument's value at the end of the contract. The underlying instrument may be a single security, stock basket or index. A CFD can be set up to take either a short or long position on the underlying instrument. The buyer and seller are typically both required to post margin, which is adjusted daily. The buyer will also pay to the seller a financing rate on the notional amount of the capital employed by the seller less the margin deposit. A CFD is usually terminated at the buyer's initiative. The seller of the CFD will simply match the exposure of the underlying instrument in the open market and the parties will exchange whatever payment is due. As is the case with owning any financial instrument, there is the risk of loss associated with buying a CFD. For example, if the Fund buys a long CFD and the underlying security is worth less at the end of the contract, the Fund would be required to make a payment to the seller and would suffer a loss. Also, there may be liquidity risk if the underlying instrument is illiquid because the liquidity of a CFD is based on the liquidity of the underlying instrument. A further risk is that adverse movements in the underlying security will require the buyer to post additional margin. CFDs also carry counterparty risk, i.e., the risk that the counterparty to the CFD transaction may be unable or unwilling to make payments or to otherwise honor its financial obligations under the terms of the contract. If the counterparty were to do so, the value of the contract, and of the Fund's shares, may be reduced. The Fund will not enter into a CFD transaction that is inconsistent with its investment objective, policies and strategies.
Foreign Currency Forward Exchange Contracts. In connection with its investments in foreign securities, the Fund also may enter into contracts with banks, brokers or dealers to purchase or sell securities or foreign currencies at a future date. A foreign currency forward exchange contract ("currency contract") is a negotiated agreement between the contracting parties to exchange a specified amount of currency at a specified future time at a specified rate. The rate can be higher or lower than the spot rate between the currencies that are the subject of the contract. The Fund may also invest in non-deliverable foreign currency forward exchange contracts ("NDFs"). NDFs are similar to other foreign currency forward exchange contracts, but do not require or permit physical delivery of currency upon settlement. Instead, settlement is made in cash based on the difference between the contracted exchange rate and the spot foreign exchange rate at settlement. Currency contracts may be used to seek to protect against uncertainty in the level of future foreign currency exchange rates or to gain or modify exposure to a particular currency. In addition, the Fund may use cross currency hedging or proxy hedging with respect to currencies in which the Fund has or expects to have portfolio or currency exposure. Cross currency and proxy hedges involve the sale of one currency against the positive exposure to a different currency and may be used for hedging purposes or to establish an active exposure to the exchange rate between any two currencies. To the extent hedged by the use of currency contracts, the precise matching of the currency contract amounts and the value of the securities involved will not generally be possible because the future value of such securities in foreign currencies will change as a consequence of market movements in the
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value of those securities between the date on which the contract is entered into and the date it matures. Furthermore, such transactions may reduce or preclude the opportunity for gain if the value of the currency should move in the direction opposite to the position taken. There is additional risk that such transactions may reduce or preclude the opportunity for gain if the value of the currency should move in the direction opposite to the position taken and that currency contracts create exposure to currencies in which the Fund's securities are not denominated. The use of currency contracts involves the risk of loss from the insolvency or bankruptcy of the counterparty to the contract or the failure of the counterparty to make payments or otherwise comply with the terms of the contract.
Futures. A futures contract is a standardized, exchange-traded agreement to buy or sell a specific quantity of an underlying asset, reference rate or index at a specific price at a specific future time. While the value of a futures contract tends to increase or decrease in tandem with the value of the underlying instrument, differences between the futures market and the market for the underlying asset may result in an imperfect correlation. Depending on the terms of the particular contract, futures contracts are settled through either physical delivery of the underlying instrument on the settlement date or by payment of a cash settlement amount on the settlement date. A decision as to whether, when and how to use futures contracts involves the exercise of skill and judgment and even a well-conceived futures transaction may be unsuccessful because of market behavior or unexpected events. In addition to the derivatives risks discussed above, the prices of futures contracts can be highly volatile, using futures contracts can lower total return and the potential loss from futures contracts can exceed the Fund's initial investment in such contracts. No assurance can be given that a liquid market will exist for any particular futures contract at any particular time. There is also the risk of loss by the Fund of margin deposits in the event of bankruptcy of a broker with which the Fund has open positions in the futures contract.
Options. If the Fund buys an option, it buys a legal contract giving it the right to buy or sell a specific amount of the underlying instrument, foreign currency or contract, such as a swap agreement or futures contract on the underlying instrument or foreign currency at an agreed-upon price during a period of time or on a specified date typically in exchange for a premium paid by the Fund. If the Fund sells an option, it sells to another person the right to buy from or sell to the Fund a specific amount of the underlying instrument, swap, foreign currency, or futures contract on the underlying instrument or foreign currency at an agreed-upon price during a period of time or on a specified date typically in exchange for a premium received by the Fund. When options are purchased OTC, the Fund bears the risk that the counterparty that wrote the option will be unable or unwilling to perform its obligations under the option contract. Options may also be illiquid and the Fund may have difficulty closing out its position. A decision as to whether, when and how to use options involves the exercise of skill and judgment and even a well-conceived option transaction may be unsuccessful because of market behavior or unexpected events. The prices of options can be highly volatile and the use of options can lower total returns.
Structured Investments. The Fund also may invest a portion of its assets in structured investments. A structured investment is a derivative security designed to offer a return linked to a particular underlying security, currency, commodity or market. Structured investments may come in various forms including notes (such as exchange-traded notes), warrants and options to purchase securities. The Fund will typically use structured investments to gain exposure to a permitted underlying security, currency, commodity or market when direct access to a market is limited or inefficient from a tax or cost standpoint. There can be no assurance that structured investments will trade at the same price or have the same value as the underlying security, currency, commodity or market. Investments
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Morgan Stanley China A Share Fund, Inc.
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in structured investments involve risks including issuer risk, counterparty risk and market risk. Holders of structured investments bear risks of the underlying investment and are subject to issuer or counterparty risk because the Fund is relying on the creditworthiness of such issuer or counterparty and has no rights with respect to the underlying investment. Certain structured investments may be thinly traded or have a limited trading market and may have the effect of increasing the Fund's illiquidity to the extent that the Fund, at a particular point in time, may be unable to find qualified buyers for these securities.
Swaps. The Fund may enter into OTC swap contracts or cleared swap transactions. An OTC swap contract is an agreement between two parties pursuant to which the parties exchange payments at specified dates on the basis of a specified notional amount, with the payments calculated by reference to specified securities, indices, reference rates, currencies or other instruments. Typically swap agreements provide that when the period payment dates for both parties are the same, the payments are made on a net basis (i.e., the two payment streams are netted out, with only the net amount paid by one party to the other). The Fund's obligations or rights under a swap contract entered into on a net basis will generally be equal only to the net amount to be paid or received under the agreement, based on the relative values of the positions held by each party. Cleared swap transactions may help reduce counterparty credit risk. In a cleared swap, the Fund's ultimate counterparty is a clearinghouse rather than a swap dealer, bank or other financial institution. OTC swap agreements are not entered into or traded on exchanges and often there is no central clearing or guaranty function for swaps. These OTC swaps are often subject to credit risk or the risk of default or non- performance by the counterparty. Certain swaps have begun trading on exchanges called swap execution facilities. Exchange trading is expected to increase liquidity of swaps trading. Both OTC and cleared swaps could result in losses if interest rates, foreign currency exchange rates or other factors are not correctly anticipated by the Fund or if the reference index, security or investments do not perform as expected. The Dodd-Frank Wall Street Reform and Consumer Protection Act and related regulatory developments require the clearing and exchange trading of certain standardized swap transactions. Mandatory exchange-trading and clearing is occurring on a phased-in basis. The Fund may pay fees or incur costs each time it enters into, amends or terminates a swap agreement. The Fund's use of swaps may include those based on the credit of an underlying security, commonly referred to as "credit default swaps." Where the Fund is the buyer of a credit default swap contract, it would typically be entitled to receive the par (or other agreed-upon) value of a referenced debt obligation from the counterparty to the contract only in the event of a default or similar event by a third-party on the debt obligation. If no default occurs, the Fund would have paid to the counterparty a periodic stream of payments over the term of the contract and received no benefit from the contract. When the Fund is the seller of a credit default swap contract, it typically receives the stream of payments but is obligated to pay an amount equal to the par (or other agreed-upon) value of a referenced debt obligation upon the default or similar event of the issuer of the referenced debt obligation.
Foreign and Emerging Market Securities
Investing in the securities of foreign issuers, particularly those located in emerging market or developing countries, entails the risk that news and events unique to a country or region will affect those markets and their issuers. The value of the Fund's shares may vary widely in response to political and economic factors affecting companies in foreign countries. These same events will not necessarily have an effect on the U.S. economy or similar issuers located in the United States. In addition, investments in certain foreign markets that have historically been considered stable may become more volatile and subject to increased risk due to ongoing developments and changing conditions in such markets. Moreover, the growing interconnectivity of global economies and financial markets has increased
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the probability that adverse developments and conditions in one country or region will affect the stability of economies and financial markets in other countries or regions.
Investments in foreign markets entail special risks such as currency, political (including geopolitical), economic and market risks. There also may be greater market volatility, less reliable financial information, higher transaction and custody costs, decreased market liquidity and less government and exchange regulation associated with investments in foreign markets. Certain foreign markets may rely heavily on particular industries or foreign capital and are more vulnerable to diplomatic developments, the imposition of economic sanctions against a particular country or countries, organizations, entities and/or individuals, changes in international trading patterns, trade barriers and other protectionist or retaliatory measures. Economic sanctions could, among other things, effectively restrict or eliminate the Fund's ability to purchase or sell securities or groups of securities for a substantial period of time, and may make the Fund's investments in such securities harder to value. Investments in foreign markets may also be adversely affected by governmental actions such as the imposition of capital controls, nationalization of companies or industries, expropriation of assets or the imposition of punitive taxes. The governments of certain countries may prohibit or impose substantial restrictions on foreign investing in their capital markets or in certain sectors or industries. In addition, a foreign government may limit or cause delay in the convertibility or repatriation of its currency which would adversely affect the U.S. dollar value and/or liquidity of investments denominated in that currency. Certain foreign investments may become less liquid or illiquid in response to market developments or adverse investor perceptions, or become illiquid after purchase by the Fund, particularly during periods of market turmoil. Investments may also become less liquid or illiquid as a result of governmental, regulatory or other similar actions. When the Fund holds illiquid investments, its portfolio may be harder to value and the Fund may not be able to readily dispose of such investments at prices that approximate those at which the Fund could sell such investments if they were more widely traded or liquid. As a result, the Fund may have to sell other investments or engage in borrowing or other similar transactions as necessary to raise funds to meet its obligations and the Fund's ability to make dividend distributions may be adversely affected. In addition, the Fund's investments that become less liquid or illiquid may also decline in value, potentially suddenly and significantly, thus adversely impacting the Fund. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed countries. In addition, the Fund's investments in foreign issuers may be denominated in foreign currencies and therefore, to the extent unhedged, the value of the investment will fluctuate with the U.S. dollar exchange rates.
Exchange-Listed Equities via Stock Connect Program
The Shanghai-Hong Kong Stock Connect program and the recently launched Shenzhen-Hong Kong Stock Connect programs ("Stock Connect") allows non-Chinese investors (such as the Fund) to purchase certain listed equities via brokers in Hong Kong. Purchases of securities through Stock Connect are subject to daily market-wide quota limitations, which may prevent the Fund from purchasing Stock Connect securities when it is otherwise advantageous to do so. Once such daily quota on the Shanghai Stock Exchange ("SSE") or the Shenzhen Stock Exchange ("SZSE") is used up, acceptance of the corresponding buy orders on SSE or SZSE (as applicable) will be immediately suspended and no further buy orders will be accepted for the remainder of the trading day. Buy orders which have not been accepted will not be affected by the using up of the daily quota, while sell orders will continue to be accepted. An investor cannot purchase and sell the same security on the same trading day, which may restrict the Fund's ability to invest in China A-shares through Stock Connect and to enter into or exit trades where it is advantageous to do so on the same trading day. Because Stock Connect
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Morgan Stanley China A Share Fund, Inc.
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trades are routed through Hong Kong brokers and the Hong Kong Stock Exchange, Stock Connect is affected by certain public holidays in either China or Hong Kong, and there may be days that are a business day in one jurisdiction and a public holiday in the other, and as a result, will not be trading a day under when Stock Connect. As a result, prices of securities purchased through Stock Connect may fluctuate at times when the Fund is unable to add to or exit its position. Only certain China A-shares and exchange-traded funds are eligible to be accessed through Stock Connect. Such securities may lose their eligibility at any time, in which case they must be sold and could no longer be purchased through Stock Connect. Because Stock Connect is relatively new, its effects on the market for trading China A-shares are uncertain. In addition, the trading, settlement and IT systems required to operate Stock Connect are relatively new and continuing to evolve. In the event that the relevant systems do not function properly, trading through Stock Connect could be disrupted.
Stock Connect is subject to regulation by both Hong Kong and China. There can be no assurance that further regulations will not affect the availability of securities in the program, the frequency of redemptions or other limitations. Stock Connect transactions are not covered by investor protection programs of either SSE or SZSE although for defaults by Hong Kong brokers occurring on or after 1 January 2020, the Hong Kong Investor Compensation Fund will cover losses incurred by investors with respect to securities traded on a stock market operated by the SSE and/or SZSE and in respect of which an order for sale or purchase is permitted to be routed through the northbound link of the Stock Connect. In China, Stock Connect securities are held on behalf of ultimate investors (such as the Fund) by the Hong Kong Securities Clearing Company Limited ("HKSCC") as nominee. The Fund may therefore depend on HKSCC's ability or willingness as record-holder of Stock Connect securities to enforce the Fund's shareholder rights. While Chinese regulators have affirmed that the ultimate investors hold a beneficial interest in Stock Connect securities, the law surrounding such rights is in its early stages and the mechanisms that beneficial owners may use to enforce their rights are untested and therefore pose uncertain risks. Further, courts in China have limited experience in applying the concept of beneficial ownership and the law surrounding beneficial ownership will continue to evolve as they do so. There is accordingly a risk that as the law is tested and developed, the Fund's ability to enforce its ownership rights may be negatively impacted. The Fund has no legal relationship with HKSCC and no direct legal recourse against HKSCC in the event that the Fund suffers losses resulting from the performance or insolvency of HKSCC. In this event, the Fund may not fully recover its losses and the process could be delayed. The Fund may not be able to participate in corporate actions affecting Stock Connect securities due to time constraints or for other operations reasons. Similarly, the Fund will not be able to vote in shareholders' meetings except through HKSCC and will not be able to attend shareholders' meetings. Stock Connect trades are settled in Renminbi (RMB), the Chinese currency, and investors must have timely access to a reliable supply of RMB in Hong Kong, which cannot be guaranteed.
Stock Connect trades are either subject to certain pre-trade requirements or must be placed in special segregated accounts that allow brokers to comply with these pre-trade requirements by confirming that the selling shareholder has sufficient Stock Connect securities to complete the sale. If the Fund does not utilize a special segregated account, the Fund will not be able to sell the shares on any trading day where it fails to comply with the pre-trade checks. In addition, these pre-trade requirements may, as a practical matter, limit the number of brokers that the Fund may use to execute trades. While the Fund may use special segregated accounts in lieu of the pre-trade check, some market participants have yet to fully implement IT systems necessary to complete trades involving securities in such accounts in a timely manner. Market practice with respect to special segregated accounts is continuing to evolve. Investments
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Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Investment Policy (unaudited) (cont'd)
via Stock Connect are subject to regulation by Chinese authorities. Chinese law may require aggregation of the Fund's holding of Stock Connect securities with securities of other clients of the Adviser for purposes of disclosing positions held to the market, acquiescing to trading halts that may be imposed until regulatory filings are completed or complying with China's short-term trading rules.
Since the inception of Stock Connect, foreign investors investing in China A-shares through Stock Connect have been temporarily exempt from Chinese corporate income tax and value-added tax on the gains on disposal of such China A-shares. Dividends are subject to Chinese corporate income tax on a withholding basis at 10% unless reduced under a double tax treaty with China upon application to and obtaining approval from the competent tax authority. Additionally, uncertainties in permanent Chinese tax rules governing taxation of income and gains from investments in Stock Connect China A-shares could result in unexpected tax liabilities for the Fund.
The risks related to investments in China A shares through Stock Connect are heightened to the extent that the Fund invests in China A shares listed on the Science and Technology Innovation Board on the Shanghai stock exchange ("STAR market") and/or the ChiNext market of the Shenzhen stock exchange ("ChiNext market"). Listed companies on the STAR market and ChiNext market are usually of an emerging nature with smaller operating scale. They are subject to higher fluctuation in stock prices and liquidity. China A shares listed on ChiNext market and STAR market may be overvalued and such exceptionally high valuation may not be sustainable. Further, stock prices may be more susceptible to manipulation due to fewer circulating shares. It may be more common and faster for companies listed on the STAR market and ChiNext market to delist. In particular, ChiNext market and STAR market have stricter criteria for delisting compared to other boards. Investments through the ChiNext market and/or STAR market may result in significant losses for the Fund.
Portfolio Composition
Common Stock
Common stock, which includes Depositary Receipts (as defined below), generally represents an ownership or equity interest in an issuer, without preference over any other class of securities, including such issuer's debt securities, preferred stock and other senior equity securities. Common stocks are entitled to the income and increase in the value of the assets and business of the issuer after all its debt obligations and obligations to preferred stockholders are satisfied. Common stocks generally have voting rights. Common stocks fluctuate in price in response to many factors including historical and prospective earnings of the issuer, the value of its assets, general economic conditions, interest rates, investor perceptions and market liquidity. They may or may not pay dividends, as some issuers reinvest all of their profits back into their businesses, while others pay out some of their profits to stockholders as dividends.
Money Market Instruments
Money market instruments are high quality short-term fixed income securities. Money market instruments may include obligations of governments, government agencies, banks, corporations and special purpose entities and repurchase agreements relating to these obligations. Certain money market instruments may be denominated in a foreign currency.
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Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Investment Policy (unaudited) (cont'd)
Cash Equivalents
The Fund may also invest in cash equivalents, which are short-term fixed income securities.
Depositary Receipts
The Fund is permitted to invest indirectly in securities of Chinese companies through sponsored or unsponsored American Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs") and other types of depositary receipts (which, together with ADRs and GDRs, are hereinafter collectively referred to as "Depositary Receipts"), to the extent such Depositary Receipts become available. Depositary Receipts may not necessarily be denominated in the same currency as the underlying securities. In addition, the issuers of the securities underlying unsponsored Depositary Receipts are not obligated to disclose material information in the United States and, therefore, there may be less information available regarding such issuers and there may not be a correlation between such information and the market value of the Depositary Receipts. ADRs are dollar-denominated Depositary Receipts typically issued by a U.S. financial institutions which evidence an ownership interest in a security or pool of securities issued by a foreign corporation. ADRs are listed and traded in the United States. GDRs and other types of Depositary Receipts are typically issued by foreign banks or trust companies, although they also may be issued by U.S. financial institution, and evidence ownership interests in a security or pool of securities issued by either a foreign or a U.S. corporation. Generally, Depositary Receipts in registered form are designed for use in the U.S. securities market and Depositary Receipts in bearer form are designed for use in securities markets outside the United States. Depositary Receipts may be "sponsored" or "unsponsored." Sponsored Depositary Receipts are established jointly by a depositary and the underlying issuer, whereas unsponsored Depositary Receipts may be established by a depositary without participation by the underlying issuer. Holders of unsponsored Depositary Receipts generally bear all the costs associated with establishing unsponsored Depositary Receipts. In addition, the issuers of the securities underlying unsponsored Depositary Receipts are not obligated to disclose material information in the United States and, therefore, there may be less information available regarding such issuers and there may not be a correlation between such information and the market value of the Depositary Receipts. For purposes of the Fund's investment policies, the Fund's investments in Depositary Receipts will be deemed to be an investment in the underlying securities, except that ADRs may be deemed to be issued by a U.S. issuer.
Other Registered Investment Companies
The Fund may invest its assets in securities of other open- and closed-end investment companies and exchange-traded funds. As a stockholder in an investment company, the Fund will bear its ratable share of that investment company's expenses, and will remain subject to payment of the Fund's advisory and other fees and expenses with respect to assets so invested. Holders of common shares will therefore be subject to additional expenses to the extent that the Fund invests in other investment companies. Expenses will be taken into account when evaluating the investment merits of an investment in an investment company relative to available investments. In addition, the securities of other investment companies may also be leveraged and will therefore be subject to certain leverage risks. The net asset value and market value of leveraged securities will be more volatile and the yield to stockholders will tend to fluctuate more than the yield generated by unleveraged securities. Investment companies may have investment policies that differ from those of the Fund.
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Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Investment Policy (unaudited) (cont'd)
Fixed Income Securities
Fixed income securities generally represent an issuer's obligation to repay to the investor (or lender) the amount borrowed plus interest over a specified time period. A typical fixed income security specifies a fixed date when the amount borrowed (principal) is due in full, known as the maturity date, and specifies dates when periodic interest (coupon) payments will be made over the life of the security. Fixed income securities come in many varieties and may differ in the way that interest is calculated, the amount and frequency of payments, the type of collateral, if any, and the presence of special features (e.g., conversion rights). Prices of fixed income securities fluctuate and, in particular, are subject to several key risks including, but not limited to, interest-rate risk, credit risk, prepayment risk and spread risk.
Zero Coupon Bonds
A zero coupon bond is a bond that does not pay interest either for the entire life of the obligation or for an initial period after the issuance of the obligation. When held to its maturity, its return comes from the difference between the purchase price and its maturity value. A zero coupon bond is normally issued and traded at a deep discount from face value. Zero coupon bonds allow an issuer to avoid or delay the need to generate cash to meet current interest payments and, as a result, may involve greater credit risk than bonds that pay interest currently or in cash. The Fund would be required to distribute the income on any of these instruments as it accrues, even though the Fund will not receive all of the income on a current basis or in cash. Thus, the Fund may have to sell other investments, including when it may not be advisable to do so, to make income distributions to its stockholders.
Convertible Securities
Convertible securities are securities that may be exchanged under certain circumstances for a fixed number of common shares or other equity securities. Convertible securities generally represent a feature of some other type of security, such as a fixed-income security or preferred stock, so that, for example, a convertible fixed-income security would be a fixed-income security that is convertible into common stock. Convertible securities may be viewed as an investment in the current security or the security into which the convertible securities may be exchanged and, therefore, are included in both the definitions of an equity security and a fixed-income security.
Real Estate Investment Trusts
Real estate investment trusts ("REITs") pool investors' funds for investment primarily real estate properties or real estate-related loans. REITs generally derive their income from rents on the underlying properties or interest on the underlying loans, and their value is impacted by changes in the value of the underlying property or changes in interest rates affecting the underlying loans owned by the REITs. REITs are more susceptible to risks associated with the ownership of real estate and the real estate industry in general. These risks can include fluctuations in the value of underlying properties; defaults by borrowers or tenants; market saturation; changes in general and local economic conditions; decreases in market rates for rents; increases in competition, property taxes, capital expenditures or operating expenses; and other economic, political or regulatory occurrences affecting the real estate industry. In addition, REITs depend upon specialized management skills, may not be diversified (which may increase the volatility of a REIT's value), may have less trading volume and may be subject to more abrupt or erratic price movements than the overall securities market.
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Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Investment Policy (unaudited) (cont'd)
Furthermore, investments in REITs may involve additional management fees and certain other expenses, as the Fund indirectly bears its proportionate share of any expenses paid by REITs in which it invests. U.S. REITs are not taxed on income distributed to stockholders provided they comply with several requirements of the Code. U.S. REITs are subject to the risk of failing to qualify for tax-free pass-through of income under the Code.
Temporary Investments
During periods in which the Adviser believes that changes in economic, financial or political conditions make it advisable to do so, the Fund may, for temporary defensive purposes, reduce its holdings in equity securities and invest in certain short-term (less than one year to maturity) and medium-term (not greater than five years to maturity) debt securities or hold cash. The short-term and medium-term debt securities in which the Fund may invest consist of (a) obligations of the U.S., Chinese or Hong Kong governments, their respective agencies or instrumentalities; (b) bank deposits and bank obligations (including certificates of deposit, time deposits and bankers' acceptances) of U.S. or foreign banks denominated in any currency; (c) floating rate securities and other instruments denominated in any currency issued by various governments or international development agencies; (d) finance company and corporate commercial paper and other short-term corporate debt obligations of U.S., Chinese or Hong Kong corporations; and (e) repurchase agreements with banks and broker-dealers with respect to such securities. The Fund intends to invest for temporary defensive purposes only in short-term and medium-term debt securities that the Adviser believes to be of high quality, i.e., subject to relatively low risk of loss of interest or principal (there is currently no rating system for debt securities in China). The Fund may invest more than 20% and possibly up to 100% of its assets in temporary investments for temporary defensive purposes.
Strategic Transactions
The Fund may, but is not required to, use Strategic Transactions to obtain equity exposure, earn income, facilitate portfolio management and seek to mitigate risks. Techniques and instruments may change over time as new instruments and strategies are developed or regulatory changes occur. The Fund may invest in other Strategic Transactions that are developed over time if their use would be consistent with the Fund's investment objective. Although the Adviser seeks to use such transactions to further the Fund's investment objective, no assurance can be given that the use of these transactions will achieve this result. The Fund's activities involving Strategic Transactions may be limited by the requirements of the Code for qualification as a regulated investment company. The use of Strategic Transactions involves risks.
Participation Notes. P-notes are issued by banks or broker-dealers that are designed to replicate the performance of foreign companies or foreign securities markets and can be used by the Fund as an alternative means to access the China A-share market. P-Notes are generally traded OTC. The performance results of P-notes will not replicate exactly the performance of the foreign companies or foreign securities markets that they seek to replicate due to transaction and other expenses.
Warrants. The Fund may invest in warrants traded on exchanges or listed OTC. Warrants give holders the right, but not the obligation, to buy common stock of an issuer at a given price, usually higher than the market price at the time of issuance, during a specified period. Warrants are usually freely transferable. The risk of investing in a warrant is that the warrant may expire prior to the market value of the common stock exceeding the price fixed by the warrant.
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Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Investment Policy (unaudited) (cont'd)
In particular, the Fund may seek to gain exposure to the A-share market through structured notes or warrants, the return on which is linked to one or more A-shares. Purchasing warrants would entitle the Fund, upon exercise of the warrant, to receive any appreciation in the market price of A-shares of underlying Chinese companies over approximately the market price at the time of purchase. Warrants are exercisable over specified periods. In addition, the return on structured notes would be based on the return on A-shares of one or more specified underlying Chinese companies during the term of the notes.
Repurchase Agreements. The Fund may engage in repurchase agreements with broker-dealers, banks and other financial institutions to earn incremental income on temporarily available cash which would otherwise be uninvested. A repurchase agreement is a short-term investment in which the purchaser (i.e., the Fund) acquires ownership of a security and the seller agrees to repurchase the obligation at a future time and set price, thereby determining the yield during the holding period. Repurchase agreements involve certain risks in the event of default by the other party. The Fund may enter into repurchase agreements with broker-dealers, banks and other financial institutions deemed to be creditworthy by the Adviser under guidelines approved by the Fund's Board. The Fund will not invest in repurchase agreements maturing in more than seven days if any such investment, together with any other illiquid securities held by the Fund, would exceed the Fund's limitation on illiquid securities described herein. The Fund does not bear the risk of a decline in the value of the underlying security unless the seller defaults under its repurchase obligation. In the event of the bankruptcy or other default of a seller of a repurchase agreement, the Fund could experience both delays in liquidating the underlying securities and losses, including (a) possible decline in the value of the underlying security during the period while the Fund seeks to enforce its rights thereto; (b) possible lack of access to income on the underlying security during this period; and (c) expenses of enforcing its rights.
For the purpose of investing in repurchase agreements, the Adviser may aggregate the cash that certain funds advised or subadvised by the Adviser or certain of its affiliates would otherwise invest separately into a joint account. The cash in the joint account is then invested in repurchase agreements and the funds that contributed to the joint account share pro rata in the net revenue generated. The Adviser believes that the joint account produces efficiencies and economies of scale that may contribute to reduced transaction costs, higher returns, higher quality investments and greater diversity of investments for the Fund than would be available to the Fund investing separately. The manner in which the joint account is managed is subject to conditions set forth in an exemptive order from the SEC permitting this practice, which conditions are designed to ensure the fair administration of the joint account and to protect the amounts in that account.
Repurchase agreements are fully collateralized by the underlying securities and are considered to be loans under the Investment Company Act. The Fund pays for such securities only upon physical delivery or evidence of book entry transfer to the account of a custodian or bank acting as agent. The seller under a repurchase agreement will be required to maintain the value of the underlying securities marked-to-market daily at not less than the repurchase price. The underlying securities (normally securities of the U.S. government, its agencies or instrumentalities) may have maturity dates exceeding one year.
When-Issued and Delayed Delivery Securities, TBAs and Forward Commitments. The Fund may purchase or sell securities on a when-issued, delayed delivery or through a forward commitment basis. When these transactions are negotiated, the price is fixed at the
40
Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Investment Policy (unaudited) (cont'd)
time of the commitment, but delivery and payment can take place a month or more after the date of commitment. The Fund may sell the securities before the settlement date if it is deemed advisable. The securities so purchased or sold are subject to market fluctuation and no interest or dividends accrue to the purchaser prior to the settlement date. In addition, the Fund may invest in to-be-announced pass-through mortgage securities, which settle on a delayed delivery basis ("TBAs"). In a TBA transaction, the buyer and seller agree upon general trade parameters such as agency, settlement date, par amount, and price at the time the contract is entered into but the MBS are delivered in the future, generally 30 days later. Accordingly, the Fund's investments in TBAs are subject to risks such as failure of the counterparty to perform its obligation to deliver the security, the characteristics of a security delivered to the Fund may be less favorable than expected and the security the Fund buys will lose value prior to its delivery.
At the time the Fund makes the commitment to purchase or sell securities on a when-issued, delayed delivery or forward commitment basis, it will record the transaction and thereafter reflect the value, each day, of such security purchased, or if a sale, the proceeds to be received, in determining its NAV. At the time of delivery of the securities, their value may be more or less than the purchase or sale price. An increase in the percentage of the Fund's assets committed to the purchase of securities on a when-issued, delayed delivery or forward commitment basis may increase the volatility of its NAV.
Loans of Portfolio Securities
The Fund may lend its portfolio securities to brokers, dealers, banks and other institutional investors. By lending its portfolio securities, the Fund attempts to increase its net investment income through the receipt of interest on the cash collateral with respect to the loan or fees received from the borrower in connection with the loan. Any gain or loss in the market price of the securities loaned that might occur during the term of the loan would be for the account of the Fund. The Fund employs an agent to implement the securities lending program and the agent receives a fee from the Fund for its services. The Fund will not lend more than 33 and 1/3% of the value of its net assets.
The Fund may lend its portfolio securities so long as the terms, structure and the aggregate amount of such loans are not inconsistent with the Investment Company Act or the rules and regulations or interpretations of the SEC thereunder, which currently require that (i) the borrower pledge and maintain with the Fund collateral consisting of liquid, unencumbered assets having a value at all times not less than 100% of the value of the securities loaned; (ii) the borrower add to such collateral whenever the price of the securities loaned rises (i.e., the borrower "marks to market" on a daily basis); (iii) the loan be made subject to termination by the Fund at any time; and (iv) the Fund receives a reasonable return on the loan (which may include the Fund investing any cash collateral in interest bearing short-term investments), any distributions on the loaned securities and any increase in their market value. In addition, voting rights may pass with the loaned securities, but the Fund will retain the right to call any security in anticipation of a vote that the Adviser deems material to the security on loan.
There may be risks of delay and costs involved in recovery of securities or even loss of rights in the collateral should the borrower of the securities fail financially. These delays and costs could be greater for foreign securities. However, loans will be made only to borrowers deemed by the Adviser to be creditworthy and when, in the judgment of the Adviser, the income which can be earned from such securities loans justifies the attendant risk. All relevant facts and circumstances, including the creditworthiness of the broker,
41
Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Investment Policy (unaudited) (cont'd)
dealer or institution, will be considered in making decisions with respect to the lending of securities, subject to review by the Fund's Board. The Fund also bears the risk that the reinvestment of collateral will result in a principal loss. Finally, there is the risk that the price of the securities will increase while they are on loan and the collateral will not be adequate to cover their value.
Pricing of Securities
Certain of the Fund's securities may be valued by an approved outside pricing service. The pricing service/vendor may utilize a matrix system or other model incorporating attributes such as security quality, maturity and coupon as the evaluation model parameters, and/or research evaluations by its staff, including review of broker-dealer market price quotations in determining what it believes is the fair valuation of the portfolio securities valued by such pricing service. Pricing services value securities assuming orderly transactions of an institutional round lot size, but the Fund may hold or transact in such securities in smaller, odd lot sizes. Odd lots often trade at lower prices than institutional round lots.
Determination of NAV
The Fund determines the NAV per share as of the close of the NYSE (normally 4:00 p.m. Eastern time) on each day that the NYSE is open for business. Shares generally will not be priced on days that the NYSE is closed. If the NYSE is closed due to inclement weather, technology problems or any other reason on a day it would normally be open for business, or the NYSE has an unscheduled early closing on a day it has opened for business, the Fund reserves the right to treat such day as a business day and calculate its NAV as of the normally scheduled close of regular trading on the NYSE for that day, so long as the Adviser believes there generally remains an adequate market to obtain reliable and accurate market quotations. The Fund may elect to price its shares on days when the NYSE is closed but the primary securities markets on which the Fund's securities trade remain open.
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Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Principal Risks (unaudited)
Non-Diversification
The Fund is non-diversified, which means that the Fund may invest a greater percentage of its assets in a smaller number of issuers than diversified funds. A fund that is classified as non-diversified may be more susceptible to an adverse event affecting a single issuer or portfolio investment than a diversified portfolio and a decline in the value of that issuer's securities or that portfolio investment may cause the Fund's overall value to decline to a greater degree than a diversified portfolio.
China Risk
Investments in securities of Chinese issuers, including A-shares, involve risks and special considerations not typically associated with investments in the U.S. securities markets. These risks include, among others, (i) more frequent (and potentially widespread) trading suspensions and government interventions with respect to Chinese issuers, resulting in lack of liquidity and in price volatility, (ii) currency revaluations and other currency exchange rate fluctuations or blockage, (iii) the nature and extent of intervention by the Chinese government in the Chinese securities markets (including both direct and indirect market stabilization efforts, which may affect valuations of Chinese issuers), whether such intervention will continue and the impact of such intervention or its discontinuation, (iv) the risk of nationalization or expropriation of assets, (v) the risk that the Chinese government may decide not to continue to support economic reform programs, (vi) limitations on the use of brokers (or action by the Chinese government that discourages brokers from serving international clients), (vii) higher rates of inflation, (viii) greater political, economic and social uncertainty, (ix) market volatility caused by any potential regional or territorial conflicts (such as military, diplomatic, or trade conflicts) or natural disasters, (x) the risk of increased trade tariffs, embargoes, sanctions and other trade limitations, (xi) custody risks associated with investing via the Stock Connect program, (xii) both interim and permanent market regulations which may affect the ability of certain stockholders to sell Chinese securities when it would otherwise be advisable, (xiii) foreign ownership limits of any listed Chinese company (xiv) different regulatory and audit requirements related to the quality of financial statements of Chinese issuers, (xv) limitations on the ability to inspect the quality of audits performed in China, particularly the Public Company Accounting Oversight Board's ("PCAOB's") lack of access to inspect PCAOB-registered accounting firms in China, (xvi) limitations on the ability of U.S. authorities to enforce actions against non-U.S. companies and non-U.S. persons, and (xvii) limitations on the rights and remedies of investors as a matter of law.
The economy of China differs, often unfavorably, from the U.S. economy in such respects as structure, general development, government involvement, wealth distribution, rate of inflation, growth rate, interest rates, allocation of resources and capital reinvestment, among others. The Chinese central government has historically exercised substantial control over virtually every sector of the Chinese economy through administrative regulation and/or state ownership and actions of the Chinese central and local government authorities continue to have a substantial effect on economic conditions in China. In addition, the Chinese government has from time to time taken actions that influence the prices at which certain goods may be sold, encourage companies to invest or concentrate in particular industries, induce mergers between companies in certain industries and induce private companies to publicly offer their securities to increase or continue the rate of economic growth, control the rate of inflation or otherwise regulate economic expansion. It may do so in the future as well, potentially having a significant adverse effect on economic conditions in China. These and other developments, including government actions, may result insignificant liquidity risk or forced disposition for Chinese investments.
43
Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Principal Risks (unaudited) (cont'd)
The Chinese securities markets are emerging markets characterized by greater price volatility relative to U.S. markets. Liquidity risks may be more pronounced for the A-share market than for Chinese securities markets generally because the A-share market is subject to greater government restrictions and control. The A-share market is volatile with a risk of suspension of trading in a particular security or government intervention. Securities on the A-share market may be suspended from trading without an indication of how long the suspension will last, which may impair the liquidity of such securities. Price fluctuations of A-shares are limited per trading day. In addition, there is less regulation and monitoring of Chinese securities markets and the activities of investors, brokers and other participants than in the United States. Accounting, auditing and financial reporting standards in China are different from U.S. standards and, therefore, disclosure of certain material information may not be made. In addition, less information may be available to the Fund and other investors than would be the case if the Fund's investments were restricted to securities of U.S. issuers. There is also generally less governmental regulation of the securities industry in China, and less enforcement of regulatory provisions relating thereto, than in the United States. Moreover, it may be more difficult to obtain a judgment in a court outside the United States.
The Chinese government strictly regulates the payment of foreign currency denominated obligations and sets monetary policy. In addition, the Chinese economy is export-driven and highly reliant on trade. The imposition of tariffs or other trade barriers, and/or adverse changes to the economic conditions of its primary trading partners, such as the United States, Japan and South Korea, would adversely impact the Chinese economy and the Fund's investments. International trade tensions involving China and its trading counterparties may arise from time to time which can result in trade tariffs, embargoes, trade limitations, trade wars and other negative consequences. Such actions and consequences may ultimately result in a significant reduction in international trade, an oversupply of certain manufactured goods, devaluations of existing inventories and potentially the failure of individual companies and/or large segments of China's export industry with a potentially severe negative impact to the Fund. Moreover, a slowdown in other significant economies of the world, such as the United States, the European Union and certain Asian countries, may adversely affect economic growth in China. An economic downturn in China would adversely impact the Fund's investments. In addition, certain securities are, or may in the future become restricted, and the Fund may be forced to sell such restricted securities and incur a loss as a result.
China's growing trade surplus with the United States has increased the risk of trade disputes. For example, recent developments in relations between the United States and China have heightened concerns of increased tariffs and restrictions on trade between the two countries. An increase in tariffs or trade restrictions, or even the threat of such developments, could lead to a significant reduction in international trade, which could have a negative impact on China's, or other countries', export industry and a negative impact on the Fund. In addition, as China's economic and political strength has grown in recent years, it has shown a greater willingness to assert itself militarily in the region. Military or diplomatic moves to resolve any issues could adversely affect the economies in the region and, thus, the Fund's investments.
Events in any one country within Asia may impact other countries in the region as a whole. For example, the actual or potential escalation of hostility between China and Taiwan would likely have a significant adverse impact on the value or liquidity of investments in China. Investments in China and Hong Kong involve risk of a total loss due to government action or inaction. China has committed by treaty to preserve Hong Kong's autonomy and its economic, political and social freedoms for 50 years from the July 1, 1997 transfer of sovereignty from Great Britain to China. However, as of July 2020, the Chinese Standing Committee of the
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Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Principal Risks (unaudited) (cont'd)
National People's Congress enacted the law of the PRC on Safeguarding National Security in the Hong Kong Special Administrative Region. As of the same month, Hong Kong is no longer afforded preferential economic treatment by the United States under U.S. law, and there is uncertainty as to how the economy of Hong Kong will be affected. Ongoing political tension between the People's Republic of China and the Hong Kong Special Administrative Region will have impacts on the economy of Hong Kong, and these impacts remain uncertain. If China would exert its authority so as to alter the economic, political or legal structures or the existing social policy of Hong Kong, investor and business confidence in Hong Kong could be negatively affected, which in turn could negatively affect markets and business performance. In addition, the Hong Kong dollar trades within a fixed trading band rate to (or is "pegged" to) the USD. This fixed exchange rate has contributed to the growth and stability of the Hong Kong economy. However,some market participants have questioned the continued viability of the currency peg. It is uncertain what affect any discontinuance of the currency peg and the establishment of an alternative exchange rate system would have on capital markets generally and the Hong Kong economy.
Emerging markets such as China can experience high rates of inflation, deflation and currency devaluation. The value of the RMB may be subject to a high degree of fluctuation due to, among other things, changes in interest rates, the effects of monetary policies issued by China, the United States, foreign governments, central banks or supranational entities, the imposition of currency controls or other national or global political or economic developments.
The Fund may invest in A-shares listed and traded through Stock Connect, or on such other stock exchanges in China which participate in Stock Connect from time to time or in the future. Trading through Stock Connect is subject to a number of restrictions that may affect the Fund's investments and returns. For example, trading through Stock Connect is subject to daily quotas that limit the maximum daily net purchases on any particular day, which may restrict or preclude the Fund's ability to invest in Stock Connect A-shares. In addition, investments made through Stock Connect are subject to trading, clearance and settlement procedures that are relatively untested in China, which could pose risks to the Fund. Furthermore, securities purchased via Stock Connect will be held via a book entry omnibus account in the name of HKSCC, Hong Kong's clearing entity, at the CSDCC. The Fund's ownership interest in Stock Connect securities will not be reflected directly in book entry with CSDCC and will instead only be reflected on the books of its Hong Kong sub-custodian. The Fund may therefore depend on HKSCC's ability or willingness as record-holder of Stock Connect securities to enforce the Fund's shareholder rights. Chinese law did not historically recognize the concept of beneficial ownership; while Chinese regulations and the Hong Kong Stock Exchange have issued clarifications and guidance supporting the concept of beneficial ownership via Stock Connect, the interpretation of beneficial ownership in China by regulators and courts may continue to evolve. Moreover, Stock Connect A-shares generally may not be sold, purchased or otherwise transferred other than through Stock Connect in accordance with applicable rules. Because certain transactions through Stock Connect may not be subject to certain investor protection programs, the Fund may be exposed to the risks of default of the broker(s) they engage in their trading in China A Shares.
A primary feature of Stock Connect is the application of the home market's laws and rules applicable to investors in A-shares. Therefore, the Fund's investments in Stock Connect A-shares are generally subject to Chinese securities regulations and listing rules, among other restrictions. Stock Connect is only available on days when markets in both China and Hong Kong are open, which may
45
Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Principal Risks (unaudited) (cont'd)
limit the Fund's ability to trade when it would be otherwise attractive to do so. Since the inception of Stock Connect, foreign investors investing in A-shares through Stock Connect have been temporarily exempt from Chinese corporate income tax and value-added tax on the gains on disposal of such A-shares. Dividends are subject to Chinese corporate income tax on a withholding basis at 10% unless reduced under a double tax treaty with China upon application to and obtaining approval from the competent tax authority. Additionally, uncertainties in permanent Chinese tax rules governing taxation of income and gains from investments in Stock Connect A-shares could result in unexpected tax liabilities for the Fund.
The Stock Connect program is a relatively new program and may be subject to further interpretation and guidance. There can be no assurance as to the program's continued existence or whether future developments regarding the program may restrict or adversely affect the Fund's investments or returns. In addition, the application and interpretation of the laws and regulations of China and Hong Kong, and the rules, policies or guidelines published or applied by relevant regulators and exchanges in respect of the Stock Connect program, are uncertain, and they may have a detrimental effect on the Fund's investments and returns.
The Chinese government continues to exercise significant control over regulating industrial development and, ultimately, control over China's economic growth. Following years of steady growth, the pace of growth of China's economy has relatively slowed. This slow down subjects China's economy to significant risks, including economic, social, and political risks. Over the long term, China's major challenges include dealing with aging infrastructure, worsening environmental conditions and a widening urban and rural income gap. Military conflicts, either in response to internal social unrest or conflicts with other countries, could disrupt the economic development in China. China's long-running conflict over Taiwan remains unresolved, while territorial border disputes persist with several neighboring countries. While economic relations with Japan have deepened, the political relationship between the two countries has become more strained in recent years, which could weaken economic ties. There is also a greater risk involved in currency fluctuations, currency convertibility, interest rate fluctuations and higher rates of inflation. The Chinese government also sometimes takes actions intended to increase or decrease the values of Chinese stocks. China's economy, particularly its export oriented sectors, may be adversely impacted by trade or political disputes with China's major trading partners, including the U.S. The U.S. government may occasionally place restrictions on investments in Chinese companies. Executive orders and related guidance may lead to a fall in market price or significantly reduce the liquidity of such securities, force the Fund to sell certain positions at inopportune times or for unfavorable prices, and restrict future investments by the Fund. The Fund may consequently incur a loss as a result.
Hong Kong has been governed by the Basic Law, which guarantees a high degree of autonomy from China in certain matters until 2047. Ongoing political tension between the People's Republic of China and the Hong Kong Special Administrative Region will have impacts on the economy of Hong Kong, and these impacts remain uncertain. If China were to exert its authority so as to alter the economic, political or legal structures or the existing social policy of Hong Kong, investor and business confidence in Hong Kong could be negatively affected, which in turn could negatively affect markets and business performance and have an adverse effect on the Portfolio's investments. There is uncertainty as to whether China will continue to respect the relative independence of Hong Kong and refrain from exerting a tighter grip on Hong Kong's political, economic and social concerns. For instance, as of July 2020, the Chinese Standing Committee of the National People's Congress enacted the law of the PRC on Safeguarding National Security in the Hong Kong Special Administrative Region. As of the same month, Hong Kong is no longer afforded preferential economic treatment by the
46
Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Principal Risks (unaudited) (cont'd)
United States under U.S. law, and there is uncertainty as to how the economy of Hong Kong will be affected. In addition, the Hong Kong dollar trades within a fixed trading band rate to (or is "pegged" to) the U.S. dollar. This fixed exchange rate has contributed to the growth and stability of the Hong Kong economy. However, some market participants have questioned the continued viability of the currency peg. It is uncertain what effect any discontinuance of the currency peg and the establishment of an alternative exchange rate system would have on capital markets generally and the Hong Kong economy.
Exchange-Listed Equities via Stock Connect Program
The Shanghai-Hong Kong Stock Connect program and the Shenzhen-Hong Kong Stock Connect programs ("Stock Connect") allow non-Chinese investors (such as the Fund) to purchase certain listed equities via brokers in Hong Kong. Purchases of securities through Stock Connect are subject to daily market-wide quota limitations, which may prevent the Fund from purchasing Stock Connect securities when it is otherwise advantageous to do so. An investor cannot purchase and sell the same security on the same trading day, which may restrict the Fund's ability to invest in China A-shares through Stock Connect and to enter into or exit trades where it is advantageous to do so on the same trading day. Because Stock Connect trades are routed through Hong Kong brokers and the Hong Kong Stock Exchange, Stock Connect is affected by certain public holidays in either China or Hong Kong, and there may be days that are a business day in one jurisdiction and a public holiday in the other, and as a result, will not be trading a day under Stock Connect. As a result, prices of securities purchased through Stock Connect may fluctuate at times when the Fund is unable to add to or exit its position. Only certain China A-shares and exchange-traded funds are eligible to be accessed through Stock Connect. Such securities may lose their eligibility at any time, in which case they must be sold and could no longer be purchased through Stock Connect. Because Stock Connect is relatively new, its effects on the market for trading China A-shares are uncertain. In addition, the trading, settlement and IT systems required to operate Stock Connect are relatively new and continuing to evolve. In the event that the relevant systems do not function properly, trading through Stock Connect could be disrupted.
Stock Connect is subject to regulation by both Hong Kong and China. There can be no assurance that further regulations will not affect the availability of securities in the program, the frequency of redemptions or other limitations. Stock Connect transactions are not covered by investor protection programs of either the Hong Kong or Shanghai and Shenzhen Stock Exchanges, although any default by a Hong Kong broker should be subject to established Hong Kong law. In China, Stock Connect securities are held on behalf of ultimate investors (such as the Fund) by the Hong Kong Securities Clearing Company Limited ("HKSCC") as nominee. The Fund may therefore depend on HKSCC's ability or willingness as record-holder of Stock Connect securities to enforce the Fund's shareholder rights. While Chinese regulators have affirmed that the ultimate investors hold a beneficial interest in Stock Connect securities, the law surrounding such rights is in its early stages and the mechanisms that beneficial owners may use to enforce their rights are untested and therefore pose uncertain risks. Further, courts in China have limited experience in applying the concept of beneficial ownership and the law surrounding beneficial ownership will continue to evolve as they do so. There is accordingly a risk that as the law is tested and developed, the Fund's ability to enforce its ownership rights may be negatively impacted. The Fund may not be able to participate in corporate actions affecting Stock Connect securities due to time constraints or for other operational reasons. The Fund will not be able to attend shareholders' meetings. Stock Connect trades are settled in RMB, the Chinese currency, and investors must have timely access to a reliable supply of RMB in Hong Kong, which cannot be guaranteed.
47
Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Principal Risks (unaudited) (cont'd)
Stock Connect trades are either subject to certain pre-trade requirements or must be placed in special segregated accounts that allow brokers to comply with these pre-trade requirements by confirming that the selling shareholder has sufficient Stock Connect securities to complete the sale. If the Fund does not utilize a special segregated account, the Fund will not be able to sell the shares on any trading day where it fails to comply with the pre-trade checks. In addition, these pre-trade requirements may, as a practical matter, limit the number of brokers that the Fund may use to execute trades. While the Fund may use special segregated accounts in lieu of the pre-trade check, some market participants have yet to fully implement IT systems necessary to complete trades involving securities in such accounts in a timely manner. Market practice with respect to special segregated accounts is continuing to evolve. Investments via Stock Connect are subject to regulation by Chinese authorities. Chinese law may require aggregation of the Fund's holdings of Stock Connect securities with securities of other clients of the Adviser for purposes of disclosing positions held in the market, acquiescing to trading halts that may be imposed until regulatory filings are completed or complying with China's short-term trading rules.
Since the inception of Stock Connect, foreign investors investing in China A-shares through Stock Connect have been temporarily exempt from Chinese corporate income tax and value-added tax on the gains on disposal of such China A-shares. Dividends are subject to Chinese corporate income tax on a withholding basis at 10% unless reduced under a double tax treaty with China upon application to and obtaining approval from the competent tax authority. Additionally, uncertainties in permanent Chinese tax rules governing taxation of income and gains from investments in Stock Connect China A-shares could result in unexpected tax liabilities for the Fund.
The risks related to investments in China A shares through Stock Connect are heightened to the extent that the Fund invests in China A shares listed on the Science and Technology Innovation Board on the Shanghai stock exchange ("STAR market") and/or the ChiNext market of the Shenzhen stock exchange ("ChiNext market"). Listed companies on the STAR market and ChiNext market are usually of an emerging nature with smaller operating scale. They are subject to higher fluctuation in stock prices and liquidity. China A shares listed on ChiNext market and STAR market may be overvalued and such exceptionally high valuation may not be sustainable. Further, stock prices may be more susceptible to manipulation due to fewer circulating shares. It may be more common and faster for companies listed on the STAR market and ChiNext market to delist. In particular, ChiNext market and STAR market have stricter criteria for delisting compared to other boards. Investments through the ChiNext market and/or STAR market may result in significant losses for the Fund.
Foreign and Emerging Market Securities
Investments in foreign markets entail special risks, such as currency, political (including geopolitical), economic and market risks and heightened risks, that may result in losses to the Fund. There also may be greater market volatility, less reliable financial information, less stringent investor protections and disclosure standards, higher transaction and custody costs and risks, decreased market liquidity and less government and exchange regulation associated with investments in foreign markets. In addition, investments in certain foreign markets that have historically been considered stable may become more volatile and subject to increased risk due to developments and changing conditions in such markets. Moreover, the growing interconnectivity of global economies and financial markets has increased the probability that adverse developments and conditions in one country or region will affect the stability of
48
Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Principal Risks (unaudited) (cont'd)
economies and financial markets in other countries or regions. Certain foreign markets may rely heavily on particular industries or foreign capital and are more vulnerable to diplomatic developments (including regional and global, military or other conflicts), the imposition of economic sanctions against a particular country or countries, organizations, companies, entities and/or individuals, changes in international trading patterns, trade barriers (including tariffs) and other protectionist or retaliatory measures. Investments in foreign markets may also be adversely affected by governmental interventions or other actions, such as the imposition of capital controls, nationalization of companies or industries, expropriation of assets or the imposition of punitive taxes. The governments of certain countries may prohibit or impose substantial restrictions on foreign investing in their capital markets or in certain sectors or industries. In addition, a foreign government may limit or cause delay in the convertibility or repatriation of its currency which would adversely affect the U.S. dollar value and/or liquidity of investments denominated in that currency. Certain foreign investments may become less liquid and decline in value in response to market developments or adverse investor perceptions, or become illiquid after purchase by the Fund, particularly during periods of market, economic, political and social turmoil. When the Fund holds illiquid investments, its portfolio may be harder to value and the Fund may not be able to readily dispose of such investments at prices that approximate those at which the Fund could sell such investments if they were more widely traded or liquid. As a result, the Fund may have to sell other investments or engage in borrowing or other similar transactions as necessary to raise funds to meet its obligations and the Fund's ability to make dividend distributions may be adversely affected. In addition, the Fund's investments that become less liquid or illiquid may also decline in value, potentially suddenly and significantly, thus adversely impacting the Fund. The risks of investing in emerging market countries are greater than the risks associated with investments in foreign developed countries. Certain emerging market countries may be subject to less stringent requirements regarding accounting, auditing, financial reporting and record keeping and therefore, material information related to an investment may not be available or reliable. In addition, the Fund is limited in its ability to exercise its legal rights or enforce a counterparty's legal obligations in certain jurisdictions outside of the United States, in particular, in emerging market countries. In addition, the Fund's investments in foreign issuers may be denominated in foreign currencies and therefore, to the extent unhedged, the value of those investments will fluctuate with U.S. dollar exchange rates. To the extent the Fund seeks to hedge its foreign currency exposure by the use of foreign currency forward exchange contracts, the precise matching of the foreign currency forward exchange contract amounts and the value of the securities involved will not generally be possible because the future value of such securities in foreign currencies will change as a consequence of market movements in the value of those securities between the date on which the contract is entered into and the date it matures. There is additional risk that such transactions may reduce or preclude the opportunity for gain if the value of the currency should move in the direction opposite to the position taken and that foreign currency forward exchange contracts create exposure to currencies in which the Fund's securities are not denominated. The use of foreign currency forward exchange contracts involves the risks associated with derivatives and the risk of loss from the insolvency or bankruptcy of the counterparty to the contract or the failure of the counterparty to make payments or otherwise comply with the terms of the contract. Economic sanctions or other similar measures, may be, and have been, imposed against certain countries, organizations, companies, entities and/or individuals. Economic sanctions and other similar measures could, among other things, effectively restrict or eliminate the Fund's ability to purchase or sell securities (in the sanctioned country and other markets), negatively impact the value or liquidity of the Fund's investments, significantly delay or prevent the settlement of the Fund's securities transactions, force the Fund to sell or otherwise dispose of investments at inopportune times or prices, or impair the Fund's ability to meet its investment objective or invest in accordance with its investment strategies.
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Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Principal Risks (unaudited) (cont'd)
ESG Investment Risk
To the extent that the Adviser and/or the Sub-Adviser consider environmental, social and/or governance ("ESG") issues as a component in their investment decision-making process, the Fund's performance may be impacted. Additionally, the Adviser's and/or the Sub-Adviser's consideration of ESG issues in its investment decision-making process may require subjective analysis and the ability of the Adviser and/or the Sub-Adviser to consider ESG issues may be difficult if data about a particular issuer (or obligor) is limited. The Adviser's and/or the Sub-Adviser's consideration of ESG issues may contribute to the Adviser's and/or the Sub-Adviser's decision to forgo opportunities to buy certain securities. ESG issues with respect to an issuer (or obligor) or the Adviser's and/or the Sub-Adviser's assessment of such may change over time.
Derivatives
The Fund may, but is not required to, use derivatives and other similar instruments for a variety of purposes, including hedging, risk management, portfolio management or to seek to earn income. Derivative instruments used by the Fund will be counted towards the Fund's exposure in the types of securities listed herein to the extent they have economic characteristics similar to such securities. A derivative is a financial instrument whose value is based, in part, on the value of an underlying asset, interest rate, index or financial instrument. Prevailing interest rates and volatility levels, among other things, also affect the value of derivative instruments. Derivatives and other similar instruments that create synthetic exposure often are subject to risks similar to those of the underlying asset or instrument and may be subject to additional risks, including imperfect correlation between the value of the derivative and the underlying asset, risks of default by the counterparty to certain transactions, magnification of losses incurred due to changes in the market value of the securities, instruments, indices or interest rates to which the derivative instrument relates, risks that the transactions may not be liquid, risks arising from margin and payment requirements, risk arising from mispricing or valuation complexity and operational and legal risks.
Certain derivative transactions may give rise to a form of leverage. Leverage magnifies the potential for gain and the risk of loss. Leverage associated with derivative transactions may cause the Fund to liquidate portfolio positions when it may not be advantageous to do so to satisfy its obligations or may cause the Fund to be more volatile than if the Fund had not been leveraged. Although the Adviser seeks to use derivatives to further the Fund's investment objective, there is no assurance that the use of derivatives will achieve this result.
The derivative instruments and techniques that the Fund may use include:
Futures. A futures contract is a standardized, exchange-traded agreement to buy or sell a specific quantity of an underlying asset, reference rate or index at a specific price at a specific future time. While the value of a futures contract tends to increase or decrease in tandem with the value of the underlying instrument, differences between the futures market and the market for the underlying asset may result in an imperfect correlation. Depending on the terms of the particular contract, futures contracts are settled through either physical delivery of the underlying instrument on the settlement date or by payment of a cash settlement amount on the settlement date. A decision as to whether, when and how to use futures contracts involves the exercise of skill and judgment and even a well-conceived futures transaction may be unsuccessful because of market behavior or unexpected events. In addition to the derivatives risks
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Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Principal Risks (unaudited) (cont'd)
discussed above, the prices of futures contracts can be highly volatile, using futures contracts can lower total return, and the potential loss from futures contracts can exceed the Fund's initial investment in such contracts. No assurance can be given that a liquid market will exist for any particular futures contract at any particular time. There is also the risk of loss by the Fund of margin deposits in the event of bankruptcy of a broker with which the Fund has open positions in the futures contract.
Options. If the Fund buys an option, it buys a legal contract giving it the right to buy or sell a specific amount of the underlying instrument or foreign currency, or contract, such as a swap agreement or futures contract, on the underlying instrument or foreign currency, at an agreed-upon price typically in exchange for a premium paid by the Fund. If the Fund sells an option, it sells to another person the right to buy from or sell to the Fund a specific amount of the underlying instrument or foreign currency, or swap or futures contract on the underlying instrument or foreign currency, at an agreed-upon price during a period of time or on a specified date typically in exchange for a premium received by the Fund. When options are purchased OTC, the Fund bears the risk that the counterparty that wrote the option will be unable or unwilling to perform its obligations under the option contract. Options may also be illiquid and the Fund may have difficulty closing out its position. A decision as to whether, when and how to use options involves the exercise of skill and judgment and even a well-conceived option transaction may be unsuccessful because of market behavior or unexpected events. The prices of options can be highly volatile and the use of options can lower total returns.
Index Options. Call and put options on indices operate similarly to options on securities. Rather than the right to buy or sell a single security at a specified price, options on an index give the holder the right to receive, upon exercise of the option, an amount of cash determined by reference to the difference between the value of the underlying index and the strike price. The underlying index may be a broad-based index or a narrower market index. Unlike many options on securities, all settlements are in cash. The settlement amount, which the writer of an index option must pay to the holder of the option upon exercise, is generally equal to the difference between the strike price of the option and the value of the underlying index, multiplied by a specified multiplier. The multiplier determines the size of the investment position the option represents. Gain or loss to the Fund on index options transactions will depend, in part, on price movements of the underlying index generally or in a particular segment of the index rather than price movements of individual components of the index. As with other options, the Fund may close out its position in index options through closing purchase transactions and closing sale transactions provided that a liquid secondary market exists for such options.
Swaps. The Fund may enter into OTC swap contracts or cleared swap transactions. An OTC swap contract is an agreement between two parties pursuant to which the parties exchange payments at specified dates on the basis of a specified notional amount, with the payments calculated by reference to specified securities, indices, reference rates, currencies or other instruments. Typically swap agreements provide that when the period payment dates for both parties are the same, the payments are made on a net basis (i.e., the two payment streams are netted out, with only the net amount paid by one party to the other). The Fund's obligations or rights under a swap contract entered into on a net basis will generally be equal only to the net amount to be paid or received under the agreement, based on the relative values of the positions held by each party. Cleared swap transactions may help reduce counterparty credit risk. In a cleared swap, the Fund's ultimate counterparty is a clearinghouse rather than a swap dealer, bank or other financial institution. OTC swap agreements are not entered into or traded on exchanges and often there is no central clearing or guaranty function for swaps. These OTC swaps are often subject to credit risk or the risk of default or non-performance by the counterparty. Certain swaps have
51
Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Principal Risks (unaudited) (cont'd)
begun trading on exchanges called swap execution facilities. Exchange trading is expected to increase liquidity of swaps trading. Both OTC and cleared swaps could result in losses if interest rates, foreign currency exchange rates or other factors are not correctly anticipated by the Fund or if the reference index, security or investments do not perform as expected. The Dodd-Frank Wall Street Reform and Consumer Protection Act and related regulatory developments require the clearing and exchange trading of certain standardized swap transactions. Mandatory exchange-trading and clearing is occurring on a phased-in basis. The Fund may pay fees or incur costs each time it enters into, amends or terminates a swap agreement.
The Fund's use of swaps may include those based on the credit of an underlying security, commonly referred to as "credit default swaps." Where the Fund is the buyer of a credit default swap contract, it would typically be entitled to receive the par (or other agreed-upon) value of a referenced debt obligation from the counterparty to the contract only in the event of a default or similar event by a third-party on the debt obligation. If no default occurs, the Fund would have paid to the counterparty a periodic stream of payments over the term of the contract and received no benefit from the contract. When the Fund is the seller of a credit default swap contract, it typically receives the stream of payments but is obligated to pay an amount equal to the par (or other agreed-upon) value of a referenced debt obligation upon the default or similar event by a third-party on the debt obligation.
Currency Derivatives. Investments in currency derivatives may substantially change the Fund's exposure to currency exchange rates and could result in losses to the Fund if currencies do not perform as the Adviser expects. In addition, investments in currency derivatives, to the extent that they reduce the Fund's exposure to currency risks, may also reduce the Fund's ability to benefit from favorable changes in currency exchange rates. The Fund is not required to hedge any portfolio holding with the use of currency derivatives. Accordingly, Fund shareholders would bear the risk of currency fluctuations with respect to unhedged portfolio positions.
Foreign currency derivatives may involve, for example, the purchase of foreign currencies for U.S. dollars or the maintenance of short positions in foreign currencies. Foreign currency derivatives may involve the Fund agreeing to exchange an amount of a currency it does not currently own for another currency at a future date. The Fund would typically engage in such a transaction in anticipation of a decline in the value of the currency it sells relative to the currency that the Fund has contracted to receive in the exchange. The Adviser's success in these transactions will depend principally on its ability to predict accurately the future exchange rates between foreign currencies and the U.S. dollar.
Foreign currency forward exchange contracts and currency futures and options contracts may be used for non-hedging purposes in seeking to meet the Fund's investment objective, such as when the Adviser anticipates that particular non-U.S. currencies will appreciate or depreciate in value, even though securities denominated in those currencies are not then held in the Fund's investment portfolio. Investing in foreign currencies for purposes of gaining from projected changes in exchange rates, as opposed to hedging currency risks applicable to the Fund's holdings, further increases the Fund's exposure to foreign securities losses. There is no assurance that the Adviser's use of currency derivatives will benefit the Fund or that they will be, or can be, used at appropriate times.
Structured Investments. The Fund also may invest a portion of their assets in structured investments. A structured investment is a derivative security designed to offer a return linked to a particular underlying security, currency, commodity or market. Structured
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Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Principal Risks (unaudited) (cont'd)
investments may come in various forms including notes (such as exchange-traded notes), warrants and options to purchase securities. The Fund will typically use structured investments to gain exposure to a permitted underlying security, currency, commodity or market when direct access to a market is limited or inefficient from a tax or cost standpoint. There can be no assurance that structured investments will trade at the same price or have the same value as the underlying security, currency, commodity or market. Investments in structured investments involve risks including issuer risk, counterparty risk and market risk. Holders of structured investments bear risks of the underlying investment and are subject to issuer or counterparty risk because the Fund is relying on the creditworthiness of such issuer or counterparty and has no rights with respect to the underlying investment. Certain structured investments may be thinly traded or have a limited trading market and may have the effect of increasing the Fund's illiquidity to the extent that the Fund, at a particular point in time, may be unable to find qualified buyers for these securities.
Regulatory Matters. Regulatory developments affecting the exchange-traded and OTC derivatives markets may impair the Fund's ability to manage or hedge its investment portfolio through the use of derivatives. In particular, in October 2020, the SEC adopted a final rule related to the use of derivatives, short sales, reverse repurchase agreements and certain other transactions by registered investment companies that rescinded and withdrew the guidance of the SEC and its staff regarding asset segregation and cover transactions previously applicable to the Funds' derivatives and other transactions. These requirements may limit the ability of the Fund to use derivatives and reverse repurchase agreements and similar financing transactions as part of its investment strategies. The rule requires funds to trade derivatives and other transactions that create future payment or delivery obligations (except reverse repurchase agreements and similar financing transactions) subject to a value-at-risk ("VaR") leverage limit, certain derivatives risk management program and reporting requirements. Generally, these requirements apply unless the fund qualifies as a "limited derivatives user." Under the rule, when the Fund trades reverse repurchase agreements or similar financing transactions, including certain tender option bonds, it needs to aggregate the amount of indebtedness associated with the reverse repurchase agreements or similar financing transactions with the aggregate amount of any other senior securities representing indebtedness when calculating the Fund's asset coverage ratio or treat all such transactions as derivatives transactions. Reverse repurchase agreements or similar financing transactions aggregated with other indebtedness do not need to be included in the calculation of whether the Fund is a limited derivatives user, but for funds subject to the VaR testing, reverse repurchase agreements and similar financing transactions must be included for purposes of such testing whether treated as derivatives transactions or not. The SEC also provided guidance in connection with the rule regarding use of securities lending collateral that may limit the Funds' securities lending activities. These requirements may increase the cost of the Fund's investments and cost of doing business, which could adversely affect investors.
The Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules promulgated thereunder may limit the ability of the Fund to enter into one or more exchange-traded or OTC derivatives transactions.
The Fund's use of derivatives may also be limited by the requirements of the Internal Revenue Code of 1986, as amended, for qualification as a regulated investment company for U.S. federal income tax purposes.
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Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Principal Risks (unaudited) (cont'd)
Contracts for Difference
The Fund may purchase contracts for difference ("CFDs"). A CFD is a privately negotiated contract between two parties, buyer and seller, stipulating that the seller will pay to or receive from the buyer the difference between the nominal value of the underlying instrument at the opening of the contract and that instrument's value at the end of the contract. The underlying instrument may be a single security, stock basket or index. A CFD can be set up to take either a short or long position on the underlying instrument. The buyer and seller are typically both required to post margin, which is adjusted daily. The buyer will also pay to the seller a financing rate on the notional amount of the capital employed by the seller less the margin deposit. A CFD is usually terminated at the buyer's initiative. The seller of the CFD will simply match the exposure of the underlying instrument in the open market and the parties will exchange whatever payment is due.
Fixed-Income Securities
Fixed-income securities are securities that pay a fixed or a variable rate of interest until a stated maturity date. Fixed-income securities include U.S. government securities, securities issued by federal or federally sponsored agencies and instrumentalities, corporate bonds and notes, asset-backed securities, mortgage-backed securities, securities rated below investment grade (commonly referred to as "junk bonds" or "high yield/high risk securities"), municipal bonds, loan participations and assignments, zero coupon bonds, convertible securities, Eurobonds, Brady Bonds, Yankee Bonds, repurchase agreements, commercial paper and cash equivalents.
Fixed-income securities are subject to the risk of the issuer's inability to meet principal and interest payments on its obligations (i.e., credit risk) and are subject to price volatility resulting from, among other things, interest rate sensitivity (i.e., interest rate risk), market perception of the creditworthiness of the issuer and general market liquidity (i.e., market risk). For example, a type of fixed-income security in which the Fund may invest are corporate debt obligations. In addition to interest rate, credit and other risks, corporate debt obligations are also subject to factors directly related to the issuer, such as the credit rating of the corporation, the corporation's performance and perceptions of the corporation in the marketplace, and by factors not directly related to the issuer, such as general market liquidity, economic conditions and inflation. The Fund may face a heightened level of interest rate risk in times of monetary policy changes and/or uncertainty, such as when the Federal Reserve Board adjusts a quantitative easing program and/or changes rates. A changing interest rate environment increases certain risks, including the potential for periods of volatility, increased redemptions, shortened durations (i.e., prepayment risk) and extended durations (i.e., extension risk). Fixed income and other debt instruments, including mortgage- and other asset-backed securities, are subject to prepayment risk, which is the risk that the principal of such obligation is paid earlier than expected, such as in the case of refinancing. This risk is increased during periods of declining interest rates and prepayments may reduce the Fund's yield or income as a result of reinvesting the income or other proceeds in lower yielding securities or instruments. The investments are also subject to extension risk, which is the risk that the principal of such obligation is paid slower or later than expected. This may negatively affect Fund returns, as the value of the investment decreases when principal payments are made later than expected. This risk is elevated during periods of increasing interest rates. In addition, because principal payments are made later than expected, the investment's duration may extend (and result in increased interest rate risk) and the Fund may be prevented from investing proceeds it would otherwise have received at the higher prevailing interest rates. Prepayments and
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Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Principal Risks (unaudited) (cont'd)
extensions may result in a security or debt instrument offering less potential for gains during periods of declining interest rates or rising interest rates, respectively.
Securities with longer durations are likely to be more sensitive to changes in interest rates, generally making them more volatile than securities with shorter durations. Lower rated fixed-income securities have greater volatility because there is less certainty that principal and interest payments will be made as scheduled. The Fund may be subject to liquidity risk, which may result from the lack of an active market and the reduced number and capacity of traditional market participants to make a market in fixed-income securities. Fixed-income securities may be called (i.e., redeemed by the issuer) prior to final maturity. If a callable security is called, the Fund may have to reinvest the proceeds at a lower rate of interest.
Equity Securities
Equity securities may include common and preferred stocks, convertible securities and equity-linked securities, rights and warrants to purchase common stocks, depositary receipts, shares of investment companies, limited partnership interests and other specialty securities having equity features. Many factors affect the value of equity securities, including earnings, earnings forecasts, corporate events and factors impacting the issuer's financial condition, sector, industry and the market generally, such as labor shortages or an increase in production costs and competitive conditions within an industry. The value of the equity securities held by the Fund may fluctuate rapidly and unpredictably, and these fluctuations may be frequent and significant. In addition, the Fund cannot accurately predict the income it might receive from equity securities because issuers generally have discretion as to the payment of dividends or distributions, and the common stock of an issuer in the Fund's portfolio may decline in price if, for example, the issuer fails to make anticipated dividend payments because of a decline in the issuer's financial condition. The Fund may invest in equity securities that are publicly traded on securities exchanges or over-the-counter ("OTC") or in equity securities that are not publicly traded. Equity securities are subject to the risk that stock prices in general (or in particular, the prices of the types of securities in which the Fund invests) may decline over short or extended periods of time. Equity securities that are not publicly traded may be more difficult to value or sell and their value may fluctuate more dramatically than publicly traded equity securities. The prices of convertible securities are affected by changes similar to those of equity and fixed-income securities.
The value of equity securities and related instruments decline in response to perceived or actual adverse changes in the economy, economic outlook or the financial markets; deterioration in investor sentiment; inflation, interest rate, currency, and commodity price fluctuations; adverse geopolitical, social or environmental developments; issuer- and sector-specific considerations; unexpected trading activity among retail investors; and other factors. Market conditions affect certain types of equity securities to a greater extent than other types of equity securities. In addition, holders of an issuer's common stock may be subject to greater risks than holders of its preferred stock and debt securities because common stockholders' claims are subordinated to those of holders of preferred stocks and debt securities upon the bankruptcy of an issuer. If the stock market declines, the value of the Fund's equity securities will also likely decline, which will result in a decrease in the value of your investment in the Fund. Although stock prices can rebound, there is no assurance that values of the Fund's equity securities will return to previous levels.
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Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Principal Risks (unaudited) (cont'd)
U.S. and foreign stock markets, and equity securities of individual issuers, have experienced periods of substantial price volatility in the past and it is possible that they will do so again in the future. During periods when equity securities experience heightened volatility, such as during periods of market, economic or financial uncertainty or distress, the Fund's investments in equity securities are subject to heightened risks. In addition, the price of equity securities of an issuer may be particularly sensitive to general movements in the stock market and a drop in the stock market may depress the price of most or all of the common stocks and other equity securities held by the Fund.
REITs
Investing in REITs exposes investors to the risks of owning real estate directly, as well as to risks that relate specifically to the way in which REITs are organized and operated. REITs generally invest directly in real estate, in mortgages or in some combination of the two. Operating REITs require specialized management skills and the Fund indirectly bears management expenses along with the direct expenses of the Fund. Individual REITs may own a limited number of properties and may concentrate in a particular region or property type. REITs may also be subject to heavy cash flow dependency, default by borrowers and self-liquidation. REITs also must satisfy specific requirements of the Internal Revenue Code of 1986, as amended, in order to qualify for tax-free pass-through income. The failure of a company to qualify as a REIT could have adverse consequences for the Fund, including significantly reducing the return to the Fund on its investment in such company. In addition, REITs, like closed-end funds, have expenses, including management and administration fees, that are paid by their shareholders. As a result, shareholders will absorb their proportionate share of duplicate levels of fees when the Fund invests in REITs.
Convertible Securities
A convertible security is a bond, debenture, note, preferred stock, right, warrant or other security that may be converted into or exchanged for a prescribed amount of common stock or other security of the same or a different issuer or into cash within a particular period of time at a specified price or formula. A convertible security generally entitles the holder to receive interest paid or accrued on debt securities or the dividend paid on preferred stock until the convertible security matures or is redeemed, converted or exchanged. Before conversion, convertible securities generally have characteristics similar to both debt and equity securities. The prices of convertible securities are affected by changes similar to those of equity and fixed-income securities. The value of convertible securities tends to decline as interest rates rise and, because of the conversion feature, tends to vary with fluctuations in the market value of the underlying securities. Convertible securities ordinarily provide a stream of income with generally higher yields than those of common stock of the same or similar issuers. Convertible securities generally rank senior to common stock in a corporation's capital structure but are usually subordinated to comparable nonconvertible fixed-income securities in such capital structure. Convertible securities generally do not participate directly in any dividend increases or decreases of the underlying securities although the market prices of convertible securities may be affected by any dividend changes or other changes in the underlying securities. Certain of the convertible securities in which the Fund may invest are rated below investment grade or are unrated. The prices of such securities are likely to be more sensitive to adverse economic changes than higher-rated securities, resulting in increased volatility of market prices of these securities during periods of economic uncertainty, or adverse individual corporate developments. In addition, during an economic downturn or substantial period of rising interest rates, lower rated issuers may experience financial stress.
56
Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Principal Risks (unaudited) (cont'd)
IPOs
The Fund may purchase shares issued as part of, or a short period after, a company's initial public offering ("IPO"), and may at times dispose of those shares shortly after their acquisition. The Fund's purchase of shares issued in IPOs exposes it to the risks associated with companies that have little operating history as public companies, including unseasoned trading, small number of shares available for trading and limited information about the issuer, as well as to the risks inherent in those sectors of the market where these new issuers operate. The market for IPO issuers may be volatile, and share prices of newly-public companies have fluctuated significantly over short periods of time. IPOs may produce high, double-digit returns. Such returns are highly unusual and may not be sustainable.
Borrowing for Investment Purposes
Borrowing for investment purposes creates leverage which is a speculative characteristic. The Fund will borrow only when the Adviser believes that borrowing will benefit the Fund after taking into account considerations such as the costs of borrowing and the likely investment returns on securities purchased with borrowed funds. Borrowing by the Fund will create the opportunity for increased net income but, at the same time, will involve special risk considerations. Leverage that results from borrowing will magnify declines as well as increases in the Fund's NAV and net yield. The Fund will either segregate the assets securing the borrowing for the benefit of the lenders or arrangements will be made with a suitable sub-custodian. If assets used to secure the borrowing decrease in value, the Fund may be required to pledge additional collateral to the lender in the form of cash or securities to avoid liquidation of those assets.
Market and Geopolitical Risk
The value of your investment in the Fund is based on the values of the Fund's investments, which change due to economic and other events that affect the U.S. and global markets generally, as well as those that affect or are perceived or expected to affect particular regions, countries, industries, companies, issuers, sectors, asset classes or governments.
Price movements, sometimes called volatility, may be greater or less depending on the types of securities the Fund owns and the markets in which the securities trade. Volatility and disruption in financial markets and economies may be sudden and unexpected, expose the Fund to greater risk, including risks associated with reduced market liquidity and fair valuation, and adversely affect the Fund's operations. For example, the Adviser potentially will be prevented from executing investment decisions at an advantageous time or price as a result of any domestic or global market disruptions and reduced market liquidity may impact the Fund's ability to sell securities to meet redemptions (i.e., increase the risk that the Fund will not be able to pay redemption proceeds within the allowable time period). In addition, no active trading market may exist for certain investments held by the Fund, which may impair the ability of the Fund to sell or to realize the current valuation of such investments in the event of the need to liquidate such assets.
The increasing interconnectivity between global economies and markets increases the likelihood that events or conditions in one region or market may adversely impact other companies and issuers in a different country, region, sector, industry, market or with respect to one company may adversely impact other issuers, including those in a different country, region, sector, industry, or market. For example, adverse developments in the banking or financial services sector could impact companies operating in various sectors or industries and adversely impact the Fund's investments. Securities in the Fund's portfolio may underperform due to inflation (or
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Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Principal Risks (unaudited) (cont'd)
expectations for inflation), deflation (or expectations for deflation), interest rates (or changes in interest rates), global demand for particular products or resources, market or financial system instability or uncertainty, embargoes, tariffs, sanctions and other trade barriers, natural disasters and extreme weather events, health emergencies (such as epidemics and pandemics), terrorism, regulatory events and governmental or quasi-governmental actions. The occurrence of global events, such as terrorist attacks around the world, natural disasters, health emergencies, social and political (including geopolitical) discord and tensions or debt crises and downgrades, among others, may result in increased market volatility and may have long term effects on both the U.S. and global financial markets. Inflation rates may change frequently and significantly because of various factors, including unexpected shifts in the domestic or global economy and changes in monetary or economic policies (or expectations that these policies may change). Changes in inflation rates or expected inflation rates may adversely affect market and economic conditions, an issuer's financial condition, the Fund's investments and an investment in the Fund. The market price of debt securities generally falls as inflation increases because the purchasing power of the future income and repaid principal is expected to be worth less when received by the Fund. The risk of inflation is greater for debt instruments with longer maturities and especially those that pay a fixed rather than variable interest rate.
Other financial, economic and other global market and social developments or disruptions may result in similar adverse circumstances, and it is difficult to predict when similar events affecting the U.S. or global financial markets or economies may occur, the effects that such events may have and the duration of those effects (which may last for extended periods). In general, the securities or other instruments that the Adviser believes represent an attractive investment opportunity or in which the Fund seeks to invest may be unavailable entirely or in the specific quantities sought by the Fund. As a result, the Fund may need to obtain the desired exposure through a less advantageous investment, forgo the investment at the time or seek to replicate the desired exposure through a derivative transaction or investment in another investment vehicle. Any such event(s) could have a significant adverse impact on the value and risk profile of the Fund's portfolio. There is a risk that you may lose money by investing in the Fund.
Social, political, economic and other conditions and events, such as war, natural disasters, health emergencies (e.g., epidemics and pandemics), terrorism, conflicts, social unrest, recessions, inflation, interest rate changes and supply chain disruptions could reduce consumer demand or economic output, result in market closures, travel restrictions or quarantines, and generally have a significant impact on economies, financial markets, issuers and the Adviser's investment advisory activities and services of other service providers, which in turn could adversely affect the Fund's investments and other operations. Government and other public debt, including municipal obligations, can be adversely affected by changes in local and global economic conditions, including those that result in increased debt levels. Although high levels of government and other public debt do not necessarily indicate or cause economic problems, high levels of debt may create certain systemic risks if sound debt management practices are not implemented. A high debt level may increase market pressures to meet an issuer's funding needs, which may increase borrowing costs and cause a government or public or municipal entity to issue additional debt, thereby increasing the risk of refinancing. A high debt level also raises concerns that the issuer may be unable or unwilling to repay the principal or interest on its debt, which may adversely impact instruments held by the Fund that rely on such payments.
Governmental and quasi-governmental responses to certain economic or other conditions may lead to increasing government and other public debt, particularly when such responses are unprecedented, which heighten these risks. Unsustainable debt levels can lead
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Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Principal Risks (unaudited) (cont'd)
to declines in the value of currency, and can prevent a government from implementing effective counter-cyclical fiscal policy during economic downturns, can generate or contribute to an economic downturn or cause other adverse economic or market developments, such as increases in inflation or volatility. Increasing government and other public debt may adversely affect issuers, obligors, guarantors or instruments across a variety of asset classes.
Global events may negatively impact broad segments of businesses and populations, cause a significant negative impact on the performance of the Fund's investments, adversely affect and increase the volatility of the Fund's share price, exacerbate pre-existing political, social, financial and economic risks to the Fund. The Fund's operations may be interrupted as a result, which may contribute to the negative impact on investment performance. In addition, governments, their regulatory agencies, or self-regulatory organizations may take actions (including monetary and/or fiscal actions intended to stimulate or stabilize the global economy) that affect the instruments in which the Fund invests, or the issuers of such instruments, in ways that could have a significant negative impact on the Fund's investment performance. Monetary and/or fiscal actions taken by U.S. or foreign governments may not be effective and could lead to increased market volatility. In addition, government actions (such as changes to interest rates) could have unintended economic and market consequences that adversely affect the Fund's investments. The frequency and magnitude of resulting changes in the value of the Fund's investments cannot be predicted.
Cybersecurity Risk
With the increased use of technologies such as the internet to conduct business, the Fund, the Adviser, authorized participants, service providers and the relevant listing exchange are susceptible to operational, information security and related "cyber" risks both directly and through the service providers. Similar types of cybersecurity risks are also present for issuers of securities in which the Fund invests, which could result in material adverse consequences for such issuers and may cause the Fund's investment in such issuers to lose value. In general, cyber incidents can result from deliberate attacks or unintentional events. Cyber incidents include, but are not limited to, gaining unauthorized access to digital systems (e.g., through "hacking" or malicious software coding) for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption. Cyberattacks may also be carried out in a manner that does not require gaining unauthorized access, such as causing denial-of-service attacks on websites (i.e., efforts to make network services unavailable to intended users). Recently, geopolitical tensions may have increased the scale and sophistication of deliberate attacks, particularly those from nation-states or from entities with nation-state backing.
Cybersecurity failures by, or breaches of, the systems of the Adviser, distributor and other service providers (including, but not limited to, index and benchmark providers, fund accountants, custodians, transfer agents and administrators), exchanges, market participants, market makers, authorized participants or the issuers of securities in which the Fund invests have the ability to cause disruptions and impact business operations, potentially resulting in: financial losses, interference with the Fund's ability to calculate its NAV, disclosure of confidential trading information, impediments to trading, submission of erroneous trades or erroneous creation or redemption orders, the inability of the Fund or its service providers to transact business, violations of applicable privacy and other laws, regulatory fines, penalties, reputational damage, reimbursement or other compensation costs, or additional compliance costs. In addition, cyberattacks may render records of Fund assets and transactions, shareholder ownership of Fund shares, and other data integral to the functioning of the Fund inaccessible, inaccurate or incomplete. Substantial costs may be incurred by the Fund in order to resolve or
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Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Principal Risks (unaudited) (cont'd)
prevent cyber incidents in the future. While the Fund has established business continuity plans in the event of, and risk management systems to prevent, such cyber incidents, there are inherent limitations in such plans and systems, including the possibility that certain risks have not been identified, that prevention and remediation efforts will not be successful or that cyberattacks will go undetected. Furthermore, the Fund cannot control the cybersecurity plans and systems put in place by service providers to the Fund, issuers in which the Fund invests, market makers or authorized participants. The Fund and its shareholders could be negatively impacted as a result.
Investment Company Securities
Investment company securities are equity securities and include securities of other open-end, closed-end and unregistered investment companies, including foreign investment companies, hedge funds, exchange-traded funds ("ETFs") and money market funds. The Fund may, to the extent noted in the Fund's non-fundamental limitations, invest in investment company securities as may be permitted by (i) the 1940 Act; (ii) the rules and regulations promulgated by the SEC under the 1940 Act; or (iii) an exemption or other relief applicable to the Fund from provisions of the 1940 Act. The 1940 Act generally prohibits an investment company from acquiring more than 3% of the outstanding voting shares of an investment company and limits such investments to no more than 5% of the Fund's total assets in any one investment company and no more than 10% in any combination of investment companies. The 1940 Act also prohibits the Fund from acquiring in the aggregate more than 10% of the outstanding voting shares of any registered closed-end investment company. The Fund may invest in investment company securities of investment companies managed by the Adviser or its affiliates to the extent permitted under the 1940 Act or as otherwise authorized by the SEC. To the extent the Fund invests a portion of its assets in investment company securities, those assets will be subject to the risks of the purchased investment company's portfolio securities, and a shareholder in the Fund will bear not only their proportionate share of the expenses of the Fund, but also, indirectly the expenses of the purchased investment company.
Exchange-Traded Funds. The Fund may invest in ETFs. Investments in ETFs are subject to a variety of risks, including risks of a direct investment in the underlying securities that the ETF holds. For example, the general level of stock prices may decline, thereby adversely affecting the value of the underlying investments of the ETF and, consequently, the value of the ETF. In addition, the market value of the ETF shares may differ from their NAV because the supply and demand in the market for ETF shares at any point is not always identical to the supply and demand in the market for the underlying securities. Also, ETFs that track particular indices typically will be unable to match the performance of the index exactly due to, among other things, the ETF's operating expenses and transaction costs. ETFs typically incur fees that are separate from those fees incurred directly by the Fund. Therefore, as a shareholder in an ETF (as with other investment companies), the Fund would bear its ratable share of that entity's expenses. At the same time, the Fund would continue to pay its own investment management fees and other expenses. As a result, the Fund and its shareholders, in effect, will be absorbing fees at both levels with respect to investments in ETFs. Further, certain of the ETFs in which the Fund may invest are leveraged. Leveraged ETFs seek to deliver multiples of the performance of the index or other benchmark they track and use derivatives in an effort to amplify the returns of the underlying index or benchmark. While leveraged ETFs may offer the potential for greater return, the potential for loss and the speed at which losses can be realized also are greater. Most leveraged ETFs "reset" daily, meaning they are designed to achieve their stated objectives on a daily basis. Leveraged ETFs can deviate substantially from the performance of their underlying benchmark over longer periods of time, particularly in volatile periods. The more the Fund invests in
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Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Principal Risks (unaudited) (cont'd)
such leveraged ETFs, the more this leverage will magnify any losses on those investments. Furthermore, disruptions in the markets for the securities underlying ETFs purchased or sold by the Fund could result in losses on the Fund's investment in ETFs.
Loans of Portfolio Securities
The Fund may lend its portfolio securities to brokers, dealers, banks and other institutional investors. By lending its portfolio securities, the Fund attempts to increase its net investment income through the receipt of interest on the cash collateral with respect to the loan or fees received from the borrower in connection with the loan. Any gain or loss in the market price of the securities loaned that might occur during the term of the loan would be for the account of the Fund. The Fund employs an agent to implement the securities lending program and the agent receives a fee from the Fund for its services. The Fund will not lend more than 33 1/3% of the value of its total assets.
The Fund may lend its portfolio securities so long as the terms, structure and the aggregate amount of such loans are not inconsistent with the 1940 Act or the rules and regulations or interpretations of the SEC thereunder, which currently require that (i) the borrower pledge and maintain with the Fund collateral consisting of liquid, unencumbered assets having a value not less than 100% of the value of the securities loaned; (ii) the borrower adds to such collateral whenever the price of the securities loaned rises (i.e., the borrower "marks-to-market" on a daily basis); (iii) the loan be made subject to termination by the Fund at any time; and (iv) the Fund receives a reasonable return on the loan (which may include the Fund investing any cash collateral in interest bearing short-term investments), any distributions on the loaned securities and any increase in their market value. In addition, voting rights may pass with the loaned securities, but the Fund will retain the right to call any security in anticipation of a vote that the Adviser deems material to the security on loan.
Loans of securities involve a risk that the borrower may fail to return the securities or may fail to maintain the proper amount of collateral, which may result in a loss of money by the Fund. There may be risks of delay and costs involved in recovery of securities or even loss of rights in the collateral should the borrower of the securities fail financially. These delays and costs could be greater for foreign securities. However, loans will be made only to borrowers deemed by the Adviser to be creditworthy and when, in the judgment of the Adviser, the income that can be earned from such securities loans justifies the attendant risk. All relevant facts and circumstances, including the creditworthiness of the broker, dealer, bank or institution, will be considered in making decisions with respect to the lending of securities, subject to review by the Fund's Board of Directors. The Fund also bears the risk that the reinvestment of collateral will result in a principal loss. Finally, there is the risk that the price of the securities will increase while they are on loan and the collateral will not be adequate to cover their value.
Warrants
Warrants give holders the right, but not the obligation, to buy common stock of an issuer at a given price, usually higher than the market price at the time of issuance, during a specified period. Warrants are usually freely transferable. The risk of investing in a warrant is that the warrant may expire prior to the market value of the common stock exceeding the price fixed by the warrant.
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Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Principal Risks (unaudited) (cont'd)
When-Issued Securities, Delayed Delivery Securities and Forward Commitments
The Fund may purchase or sell securities that it is entitled to receive on a when-issued, delayed delivery or through a forward commitment (including on a TBA (to be announced) basis).
These transactions involve the purchase or sale of securities by the Fund at an established price with payment and delivery taking place in the future. The Fund enters into these transactions to obtain what is considered an advantageous price to the Fund at the time of entering into the transaction. There can be no assurance that a security purchased on For example, the Fund may invest in TBAs, which settle on a delayed delivery basis. In a TBA transaction, the seller agrees to deliver the MBS for an agreed upon price on an agreed upon future date, but makes no guarantee as to which or how many securities are to be delivered. Accordingly, the Fund's investments in TBAs are subject to risks such as failure of the counterparty to perform its obligation to deliver the security, the characteristics of a security delivered to the Fund may be less favorable than expected and the security the Fund buys will lose value prior to its delivery. Investments in TBAs may give rise to a form of leverage. Leverage may cause the Fund to be more volatile than if the Fund had not been leveraged and may increase the impact that gains (losses) have on the Fund. Further, TBAs may increase the Fund's portfolio turnover rate. FINRA rules include mandatory margin requirements that will require the Fund to post collateral in connection with its TBA transactions, which could increase the cost of TBA transactions to the Fund and impose added operational complexity.
The Fund's purchase of other securities on a when-issued, delayed delivery or through a forward commitment basis are subject to similar risks, including counterparty risk and that the value of securities in these transactions on the delivery date may be less than the price paid by the Fund to purchase the securities. In addition, there can be no assurance that a security purchased on a when-issued basis will be issued. When the Fund has sold a security on a when-issued, delayed delivery, or forward commitment basis, the Fund does not benefit if the value of the security appreciates above the sale price during the commitment period and the Fund is subject to failure of the counterparty to pay for the securities.
Repurchase Agreements
Repurchase agreements are fixed-income securities in the form of agreements backed by collateral. These agreements typically involve the acquisition by the Fund of securities from the selling institution (such as a bank or a broker-dealer), coupled with the agreement that the selling institution will repurchase the underlying securities at a specified price and at a fixed time in the future (or on demand, if applicable). The underlying securities which serve as collateral for the repurchase agreements entered into by the Fund may include U.S. government securities, municipal securities, corporate debt obligations, convertible securities, and common and preferred stock and may be of below investment grade quality. These securities are marked-to-market daily in order to maintain full collateralization (typically purchase price plus accrued interest). The use of repurchase agreements involves certain risks. For example, if the selling institution defaults on its obligation to repurchase the underlying securities at a time when the value of the securities has declined, the Fund may incur a loss upon disposition of them. The risk of such loss may be greater when utilizing collateral other than U.S. government securities. In the event of an insolvency or bankruptcy by the selling institution, the Fund's right to control the collateral could be affected and result in certain costs and delays. Additionally, if the proceeds from the liquidation of such collateral after an
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Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Principal Risks (unaudited) (cont'd)
insolvency were less than the repurchase price, the Fund could suffer a loss. Fund procedures are followed that are designed to minimize such risks.
Credit and Interest Rate Risk
Fixed-income securities, such as bonds, generally are subject to two primary types of risk: credit risk and interest rate risk. Credit risk refers to the possibility that the issuer or guarantor of a security, or counterparty to a transaction, will be unable or unwilling or perceived to be unable or unwilling to make interest payments and/or repay the principal on its debt or otherwise honor its obligations, including the risk of default. The risk of defaults across issuers, guarantors and/or counterparties increases in adverse market and economic conditions, and the degree of credit risk depends on the financial condition of the issuer, guarantor or counterparty and terms of the obligation. Credit ratings may not be an accurate assessment of financial condition, volatility, liquidity or credit risk, as the ratings do not evaluate market risks or necessarily reflect the issuer's, guarantor's or counterparty's current financial condition or the volatility or liquidity of the security. Although credit quality may not accurately reflect the true credit risk of an instrument, a change in the credit rating of an instrument or an issuer, guarantor or counterparty, or the market's perception of the creditworthiness of an instrument or issuer, guarantor or counterparty, can have a rapid, adverse effect on the instrument's value and liquidity and make it more difficult for the Fund to sell at an advantageous price or time. In addition, under certain conditions, there may be an increasing amount of issuers that are unprofitable, have little cash on hand and/or are unable to pay the interest owed on their debt obligations and the number of such issuers may increase if demand for their goods and services falls, borrowing costs rise due to governmental action or inaction or other reasons. The Fund may also be subject to credit spread risk, which is the risk that economic and market conditions, or any actual or perceived credit deterioration, may lead to an increase in credit spreads (i.e., the difference in yield between two securities of similar maturity but different credit quality) and a decline in price of an issuer's securities.
Interest rate risk refers to fluctuations (such as a decline) in the value of a fixed-income security resulting from changes in the general level of interest rates. A wide variety of market and economic factors can cause interest rates to rise or fall, including central bank monetary policy, rising inflation, disinflation or deflation, and changes in general economic conditions. When the general level of interest rates goes up, the prices of most fixed-income securities go down. When the general level of interest rates goes down, the prices of most fixed-income securities go up but the yield or income from new issuances of fixed-income securities generally decreases. Duration measures the time-weighted expected cash flows of a fixed-income security. Securities with longer durations will generally be more sensitive to changes in interest rates than securities with shorter durations. Thus, the Fund's susceptibility to interest rate risk will increase to the extent it has a longer average portfolio duration. The proceeds from prepaid or maturing instruments may have to be reinvested at a lower interest rate or on other less advantageous terms during a declining interest rate environment. In a rising interest rate environment, the duration of fixed-income securities may be extended, thus potentially reducing income and increasing interest rate risk. The Fund may face a heightened level of interest rate risk in times of monetary policy change and/or uncertainty, such as when the Federal Reserve Board adjusts a quantitative easing program and/or changes rates, which may occur at any time based on a range of factors and may be sudden, frequent and significant. For example, during periods when interest rates are low, the Fund's yield (and total return) also may be low or otherwise adversely affected or the Fund may be unable to maintain positive returns, minimize the volatility of the Fund's NAV or pay Fund expenses out of current income.
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Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Principal Risks (unaudited) (cont'd)
Monetary policies, and market interest rates, are subject to change at any time and potentially frequently based on a variety of market and economic conditions. It is difficult to accurately predict the pace at which the Federal Reserve Board will change interest rates, or the timing, frequency or magnitude of such changes. The impact on fixed income and other debt instruments and market conditions from interest rate changes, regardless of the cause, could be significant and could adversely affect the Fund and its investments.
Governmental authorities and regulators may enact significant fiscal and monetary policy changes, including providing direct capital infusions into companies, creating new monetary programs and changing interest rates considerably. These actions present heightened risks to debt instruments, and such risks could be even further heightened if these actions are unexpectedly or suddenly reversed or are ineffective in achieving their desired outcomes.
Active Management Risk
In pursuing the Fund's investment objective, the Adviser and/or Sub-Adviser have considerable leeway in deciding which investments they buy, hold or sell on a day-to-day basis, and which trading strategies they use. For example, the Adviser and/or Sub-Adviser, in their discretion, may determine to use some permitted trading strategies while not using others. The success or failure of such decisions will affect the Fund's performance. In addition, it is expected that confidential or material non-public information regarding an investment or potential investment opportunity may become available to the Adviser. If such information becomes available, the Adviser may be precluded (including by applicable law or internal policies or procedures) from pursuing an investment or disposition opportunity with respect to such investment or investment opportunity and the Adviser may be restricted in its ability to cause the Fund to buy or sell securities of an issuer for substantial periods of time when the Fund otherwise could realize profit or avoid loss. This may adversely affect the Fund's flexibility with respect to buying or selling securities and may impair the Fund's liquidity.
Regulatory and Legal Risk
U.S. and non-U.S. governmental agencies and other regulators regularly implement additional regulations and legislators pass new laws that affect the investments held by the Fund, the strategies used by the Fund or the level of regulation or taxation applying to the Fund (such as regulations related to investments in derivatives and other transactions). These regulations and laws impact the investment strategies, performance, costs and operations of the Fund or taxation of shareholders.
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Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Additional Information Regarding the Fund (unaudited)
Fundamental Investment Restrictions
The following are fundamental investment restrictions of the Fund and may not be changed without the approval of the holders of a majority of the Fund's outstanding common shares (which for this purpose and under the Investment Company Act means the lesser of (i) 67% of the common shares represented at a meeting at which more than 50% of the outstanding common shares are represented or (ii) more than 50% of the outstanding shares). For purposes of the restrictions, an issuer of a security is the entity whose assets and revenues are committed to the payment of interest and principal on that security, provided that the guaranty of a security will be considered a separate security unless the value of all securities guaranteed by the guarantor and owned by the Fund does not exceed 10% of the value of the total assets of the Fund. Except as otherwise noted, all percentage limitations set forth below apply immediately after a purchase or initial investment and any subsequent change in any applicable percentage resulting from market fluctuations does not require any action. With respect to the limitations on the issuance of senior securities and in the case of borrowings, the percentage limitations apply at the time of issuance and on an ongoing basis.
The Fund may not:
1. Invest 25% or more of its total assets (taken at the time of each investment) in the securities of issuers in any one particular industry. This limitation shall not apply with respect to obligations issued or guaranteed by the U.S. government or its agencies or instrumentalities.
2. Purchase or sell physical commodities unless acquired as a result of ownership of securities or other instruments; provided that this restriction shall not prohibit the Fund from purchasing or selling options, futures contracts and related options thereon, forward contracts, swaps, caps, floors, collars and any other financial instruments or from investing in securities or other instruments backed by physical commodities or as otherwise permitted by (i) the Investment Company Act, (ii) the rules and regulations promulgated by the SEC under the Investment Company Act or (iii) an exemption or other relief applicable to the Fund from the provisions of the Investment Company Act.
3. Make loans of money or property to any person, except (a) to the extent that securities or interests in which the Fund may invest are considered to be loans, (b) through the loan of portfolio securities, (c) by engaging in repurchase agreements or (d) as may otherwise be permitted by (i) the Investment Company Act, (ii) the rules and regulations promulgated by the SEC under the Investment Company Act or (iii) an exemption or other relief applicable to the Fund from the provisions of the Investment Company Act.
4. Engage in the underwriting of securities, except insofar as the Fund may be deemed an underwriter under the Securities Act of 1933, as amended, in disposing of a portfolio security.
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Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Additional Information Regarding the Fund (unaudited) (cont'd)
5. Issue senior securities, except that the Fund may issue senior securities to the extent permitted by (i) the Investment Company Act, (ii) the rules and regulations promulgated by the SEC under the Investment Company Act or (iii) an exemption or other relief applicable to the Fund from the provisions of the Investment Company Act.
6. Borrow money, except that the Fund may borrow money to the extent permitted by (i) the Investment Company Act, (ii) the rules and regulations promulgated by the SEC under the Investment Company Act or (iii) an exemption or other relief applicable to the Fund from the provisions of the Investment Company Act.
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Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Dividend Reinvestment Plan (unaudited)
Pursuant to the Dividend Reinvestment Plan (the Plan), each stockholder will be deemed to have elected, unless Computershare Trust Company, N.A. (the Plan Agent) is otherwise instructed by the stockholder in writing, to have all distributions automatically reinvested in Fund shares.
Dividend and capital gain distributions (Distribution) will be reinvested on the reinvestment date in full and fractional shares. If the market price per share equals or exceeds net asset value per share on the reinvestment date, the Fund will issue shares to participants at net asset value or, if net asset value is less than 95% of the market price on the reinvestment date, shares will be issued at 95% of the market price. If net asset value exceeds the market price on the reinvestment date, participants will receive shares valued at market price. The Fund may purchase shares of its Common Stock in the open market in connection with dividend reinvestment requirements at the discretion of the Board of Directors. Should the Fund declare a Distribution payable only in cash, the Plan Agent will purchase Fund shares for participants in the open market as agent for the participants.
The Plan Agent's fees for the reinvestment of a Distribution will be paid by the Fund. However, each participant's account will be charged a pro rata share of brokerage commissions incurred on any open market purchases effected on such participant's behalf. Although stockholders in the Plan may receive no cash distributions, participation in the Plan will not relieve participants of any income tax which may be payable on such dividends or distributions.
In the case of stockholders, such as banks, brokers or nominees, that hold shares for others who are the beneficial owners, the Plan Agent will administer the Plan on the basis of the number of shares certified from time to time by the stockholder as representing the total amount registered in the stockholder's name and held for the account of beneficial owners who are participating in the Plan.
Stockholders who do not wish to have Distributions automatically reinvested should notify the Plan Agent in writing. There is no penalty for non-participation or withdrawal from the Plan, and stockholders who have previously withdrawn from the Plan may rejoin at any time. Requests for additional information or any correspondence concerning the Plan should be directed to the Plan Agent at:
Morgan Stanley China A Share Fund, Inc.
Computershare Trust Company, N.A.
P.O. Box 43078
Providence, Rhode Island 02940-3078
1 (800) 231-2608
Monday–Friday between 8:30 a.m. and 6:00 p.m. (EDT)
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Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Potential Conflicts of Interest (unaudited)
As a diversified global financial services firm, Morgan Stanley, the parent company of the Adviser, engages in a broad spectrum of activities, including financial advisory services, investment management activities, lending, commercial banking, sponsoring and managing private investment funds, engaging in broker-dealer transactions and principal securities, commodities and foreign exchange transactions, research publication and other activities. In the ordinary course of its business, Morgan Stanley is a full-service investment banking and financial services firm and therefore engages in activities where Morgan Stanley's interests or the interests of its clients may conflict with the interests of a Fund. Morgan Stanley advises clients and sponsors, manages or advises other investment funds and investment programs, accounts and businesses (collectively, together with any new or successor funds, programs, accounts or businesses sponsored, managed, or advised by the Adviser or one of its investment adviser affiliates, the "Affiliated Investment Accounts") with a wide variety of investment objectives that in some instances may overlap or conflict with a Fund's investment objectives and present conflicts of interest. In addition, Morgan Stanley, the Adviser and/or the Adviser's investment adviser affiliates may also from time to time create new or successor Affiliated Investment Accounts that may compete with a Fund and present similar conflicts of interest. The discussion below enumerates certain actual, apparent and potential conflicts of interest. There is no assurance that conflicts of interest will be resolved in favor of Fund shareholders and, in fact, they may not be. The conflicts herein do not purport to be a complete list or explanation of the conflicts associated with the financial or other interests the Adviser or its affiliates may have now or in the future. Conflicts of interest not described below may also exist. References to the Adviser in this section include a Fund's affiliated sub-adviser (if any) unless otherwise noted.
The discussions below with respect to actual, apparent and potential conflicts of interest may be applicable to or arise from the Affiliated Investment Accounts managed by the Adviser's investment adviser affiliates whether or not specifically identified.
Material Non-Public and Other Information. It is expected that confidential or material non-public information regarding an investment or potential investment opportunity may become available to the Adviser. If such information becomes available, the Adviser may be precluded (including by applicable law or internal policies or procedures) from pursuing an investment or disposition opportunity with respect to such investment or disposition opportunity including for an extended period of time. The Adviser may also from time to time be subject to contractual "stand-still" obligations and/or confidentiality obligations that may restrict its ability to transact in certain investments on a Fund's behalf. In addition, the Adviser may be precluded from disclosing such information to an investment team, even in circumstances in which the information would be beneficial if disclosed. Therefore, the investment team may not be provided access to material non-public information in the possession of Morgan Stanley that might be relevant to an investment decision to be made on behalf of a Fund, and the investment team may initiate a transaction or sell an investment that, if such information had been known to it, may not have been undertaken. In addition, certain members of the investment team may be recused from certain investment-related discussions so that such members do not receive information that would limit their ability to perform functions of their employment with the Adviser or its affiliates unrelated to that of a Fund. Furthermore, access to information held by certain parts of Morgan Stanley may be subject to third party confidentiality obligations and to information barriers established by Morgan Stanley designed to manage potential conflicts of interest and regulatory restrictions, including, without limitation, joint transaction restrictions pursuant to the 1940 Act. Accordingly, the Adviser's ability to source investments from, or invest alongside, other business units within Morgan Stanley may be limited and there can be no assurance that the Adviser will be able to source any investments from any one or more parts of the Morgan Stanley network.
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Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Potential Conflicts of Interest (unaudited) (cont'd)
The Adviser may restrict its investment decisions and activities on behalf of the Funds in various circumstances, including because of applicable regulatory requirements or information held by the Adviser, the Adviser's investment adviser affiliates or Morgan Stanley. The Adviser might not engage in transactions or other activities for, or enforce certain rights in favor of, a Fund due to Morgan Stanley's activities outside the Funds. Furthermore, Morgan Stanley could have an interest that is different from, and potentially adverse to, that of the Fund, which may impede the Fund from participating in certain opportunities. In instances where trading of an investment is restricted, the Adviser may not be able to purchase or sell such investment on behalf of a Fund including for an extended period of time, resulting in a Fund's inability to participate in certain desirable transactions. This inability to buy or sell an investment could have an adverse effect on a Fund's portfolio due to, among other things, changes in an investment's value during the period its trading is restricted.
Morgan Stanley has established certain information barriers and other policies designed to address the sharing of information between different businesses within Morgan Stanley. As a result of information barriers, the Adviser, in certain instances, will not have access, or will have limited access, to certain information and personnel in other areas of Morgan Stanley and, in such instances, will not manage the Funds with the benefit of the information held by such other areas. Morgan Stanley, due to its access to and knowledge of funds, markets and securities based on its various businesses, may make decisions based on information or take (or refrain from taking) actions with respect to interests in investments of the kind held (directly or indirectly) by the Funds in a manner that may be adverse to the Fund, and will not have any obligation or other duty to share information with the Adviser.
In other instances, Morgan Stanley personnel, including personnel of the Adviser, will have access to information and personnel of its affiliates. For example, the Adviser may, in certain instances, share information with its affiliates regarding due diligence of companies and other investment-related due diligence. The Adviser may face conflicts of interest in determining whether to engage in the sharing of information with its affiliates. Information sharing may limit or restrict the ability of the Adviser to engage in or otherwise effect transactions on behalf of the Funds (including purchasing or selling securities that the Adviser may otherwise have purchased or sold for a Fund in the absence of the sharing of information). Also, it may adversely affect a Fund's investments, ability to invest in, or divest from, a company or engage in transactions or otherwise disadvantage a Fund. In managing conflicts of interest that arise because of the foregoing, the Adviser generally will be subject to fiduciary requirements. The Adviser may also implement internal information barriers or ethical walls or other internal information sharing protocols, and the conflicts described herein with respect to information barriers and otherwise with respect to Morgan Stanley and the Adviser will also apply internally within the Adviser. As a result, a Fund may not be permitted to transact in (e.g., dispose of a security in whole or in part) during periods when it otherwise would have been desirable and able to do so, which could adversely affect a Fund. Other investors in the security that are not subject to such restrictions may be able to transact in the security during such periods. There may also be circumstances in which, as a result of information held by certain portfolio management teams in the Adviser, the Adviser limits an activity or transaction for a Fund, including if a Fund is managed by a portfolio management team other than the team holding such information.
Morgan Stanley and its personnel will not be under any obligation or other duty to share certain information with the Adviser or personnel involved in decision-making for Affiliated Investment Accounts (including the Funds), as applicable, and the Adviser may make investment decisions for a Fund that differ from those the Adviser would have made if Morgan Stanley, or other parts, of the
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Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Potential Conflicts of Interest (unaudited) (cont'd)
Adviser had provided such information, and the Fund be disadvantaged as a result thereof. Additionally, different portfolio management teams within the Adviser may make decisions based on information or take (or refrain from taking) actions with respect to Affiliated Investment Accounts they advise in a manner different than or adverse to the Funds.
Investments by Morgan Stanley and its Affiliated Investment Accounts. In serving in multiple capacities to Affiliated Investment Accounts, Morgan Stanley, including the Adviser and its investment teams, may have obligations to other clients or investors in Affiliated Investment Accounts, the fulfillment of which may not be in the best interests of a Fund or its shareholders. An investment team may have obligations to Affiliated Investment Accounts managed by both the Adviser and one or more of the Adviser's investment adviser affiliates. A Fund's investment objectives may overlap with the investment objectives of certain Affiliated Investment Accounts. As a result, the members of an investment team may face conflicts in the allocation of investment opportunities among a Fund and other investment funds, programs, accounts and businesses advised by or affiliated with the Adviser or its investment adviser affiliates. Certain Affiliated Investment Accounts may provide for higher management or incentive fees or greater expense reimbursements or overhead allocations, all of which may contribute to this conflict of interest and create an incentive for the Adviser to favor such other accounts.
Morgan Stanley currently invests and plans to continue to invest on its own behalf and on behalf of its Affiliated Investment Accounts in a wide variety of investment opportunities globally. Morgan Stanley and its Affiliated Investment Accounts, to the extent consistent with applicable law and policies and procedures, will be permitted to invest in investment opportunities without making such opportunities available to a Fund. Subject to the foregoing, Morgan Stanley may offer investments that fall into the investment objectives of an Affiliated Investment Account to such account or make such investment on its own behalf, even though such investment also falls within a Fund's investment objectives. A Fund may invest in opportunities that Morgan Stanley and/or one or more Affiliated Investment Accounts has declined, and vice versa. All of the foregoing may reduce the number of investment opportunities available to a Fund and may create conflicts of interest in allocating investment opportunities. Investors should note that the conflicts inherent in making such allocation decisions may not always be resolved to a Fund's advantage. There can be no assurance that a Fund will have an opportunity to participate in certain opportunities that fall within their investment objectives. The interests of Morgan Stanley in an investment or a company may present certain conflicts of interest with respect to an investment by a Fund in the same investment or a Fund's participation in a transaction with such company.
To the extent the Adviser utilizes quantitative models or risk management or optimization investment techniques, the decision on when to initiate a purchase or sale transaction may differ, and be done for different reasons, than the Adviser or its affiliates may take for Affiliated Investment Accounts when not utilizing such techniques. This could create conflicts of interest, and it is possible that one or more accounts managed by the Adviser will achieve investment results that are substantially more or less favorable than those results achieved by a Fund.
To seek to reduce potential conflicts of interest and to attempt to allocate such investment opportunities in a fair and equitable manner, the Adviser has implemented allocation policies and procedures. These policies and procedures are intended to give all clients of the Adviser, including the Fund, fair access to investment opportunities consistent with the requirements of organizational
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Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Potential Conflicts of Interest (unaudited) (cont'd)
documents, investment strategies, applicable laws and regulations, and the fiduciary duties of the Adviser. Each client of the Adviser that is subject to the allocation policies and procedures, including each Fund, is assigned an investment team and portfolio manager(s) by the Adviser. The investment team and portfolio managers review investment opportunities and will decide with respect to the allocation of each opportunity considering various factors and in accordance with the allocation policies and procedures. The allocation policies and procedures are subject to change. Investors should note that the conflicts inherent in making such allocation decisions may not always be resolved to the advantage of a Fund.
It is possible that Morgan Stanley or an Affiliated Investment Account, including another Morgan Stanley Fund, will invest in or advise (in the case of Morgan Stanley) a company that is or becomes a competitor of a company of which a Fund holds an investment. Such investment could create a conflict between the Fund, on the one hand, and Morgan Stanley or the Affiliated Investment Account, on the other hand. In such a situation, Morgan Stanley may also have a conflict in the allocation of its own resources to the portfolio investment. Furthermore, certain Affiliated Investment Accounts will be focused primarily on investing in other funds which may have strategies that overlap and/or directly conflict and compete with a Fund.
In addition, certain investment professionals who are involved in a Fund's activities remain responsible for the investment activities of other Affiliated Investment Accounts managed by the Adviser and its affiliates, and they will devote time to the management of such investments and other newly created Affiliated Investment Accounts (whether in the form of funds, separate accounts or other vehicles), as well as their own investments. In addition, in connection with the management of investments for other Affiliated Investment Accounts, members of Morgan Stanley and its affiliates may serve on the boards of directors of or advise companies which may compete with a Fund's portfolio investments. Moreover, these Affiliated Investment Accounts managed by Morgan Stanley and its affiliates may pursue investment opportunities that may also be suitable for a Fund.
It should be noted that Morgan Stanley may, directly or indirectly, make large investments in certain of its Affiliated Investment Accounts, and accordingly Morgan Stanley's investment in a Fund may not be a determining factor in the outcome of any of the foregoing conflicts. Nothing herein restricts or in any way limits the activities of Morgan Stanley, including its ability to buy or sell interests in, or provide financing to, equity and/or debt instruments, funds or portfolio companies, for its own accounts or for the accounts of Affiliated Investment Accounts or other investment funds or clients in accordance with applicable law.
Different clients of the Adviser and its affiliates, including a Fund, may invest in (1) different classes of securities of the same issuer (including, without limitation, different parts of an issuer's capital structure), depending on the respective clients' investment objectives and policies and/or (2) the same class of securities of the same issuer while seeking different investment objectives or executing different investment strategies (such as long-term v. short-term investment horizons), and the Adviser may face conflicts with respect to the interests involved. As a result, the Adviser and its affiliates, at times, will seek to satisfy fiduciary obligations to certain clients owning one / the same class of securities of a particular issuer by pursuing or enforcing rights on behalf of those clients with respect to such (class of) securities, and those activities may have an adverse effect on another client which owns a different class of securities of such issuer. For example, if one client holds debt securities of an issuer and another client holds equity securities of the same issuer, if the issuer experiences financial or operational challenges, the Adviser and its affiliates may seek a liquidation of the issuer
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Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Potential Conflicts of Interest (unaudited) (cont'd)
on behalf of the client that holds the debt securities, whereas the client holding the equity securities may benefit from a reorganization of the issuer. Thus, in such situations, the actions taken by the Adviser or its affiliates on behalf of one client can negatively impact securities held by another client. Alternatively, for example, if a client owns a security while seeking short-term capital appreciation that Adviser may vote proxies or engage with the issuer (as applicable) in pursuit of that goal — which could negatively impact clients who hold the same security but are seeking long-term capital appreciation. These conflicts also exist as between the Adviser's clients, including a Fund, and the Affiliated Investment Accounts managed by the Adviser's investment adviser affiliates.
In addition, in certain circumstances, the Adviser restricts, limits or reduces the amount of the Fund's investment, or restricts the type of governance or voting rights it acquires or exercises, where the Fund (potentially together with Morgan Stanley) exceeds a certain ownership interest, or possesses certain degrees of voting or control or has other interests.
The Adviser and its affiliates may give advice and recommend securities to other clients which may differ from advice given to, or securities recommended or bought for, a Fund even though such other clients' investment objectives may be similar to those of the Fund and the Adviser may make decisions for a Fund that may be more beneficial to one type of shareholder than another.
The Adviser and its affiliates manage long and short portfolios. The simultaneous management of long and short portfolios creates conflicts of interest in portfolio management and trading in that opposite directional positions may be taken in client accounts, including client accounts managed by the same investment team, and creates risks such as: (i) the risk that short sale activity could adversely affect the market value of long positions in one or more portfolios (and vice versa) and (ii) the risks associated with the trading desk receiving opposing orders in the same security simultaneously. The Adviser and its affiliates have adopted policies and procedures that are reasonably designed to mitigate these conflicts. In certain circumstances, the Adviser invests on behalf of itself in securities and other instruments that would be appropriate for, held by, or may fall within the investment guidelines of its clients, including a Fund. At times, the Adviser may give advice or take action for its own accounts that differs from, conflicts with, or is adverse to advice given or action taken for any client.
From time to time, conflicts also arise due to the fact that certain securities or instruments may be held in some client accounts, including a Fund, but not in others, or that client accounts may have different amounts of holdings in certain securities or instruments. In addition, due to differences in the investment strategies or restrictions among client accounts, the Adviser may take action with respect to one account that differs from the action taken with respect to another account. In some cases, a client account may compensate the Adviser based on the performance of the securities held by that account or pay a higher overall fee rate. The existence of such a performance based fee or higher fee rates may create additional conflicts of interest for the Adviser in the allocation of management time, resources and investment opportunities. The Adviser has adopted several policies and procedures designed to address these potential conflicts including a code of ethics and policies that govern the Adviser's trading practices, including, among other things, the aggregation and allocation of trades among clients, brokerage allocations, cross trades and best execution.
In addition, at times an investment team will give advice or take action with respect to the investments of one or more clients that is not given or taken with respect to other clients with similar investment programs, objectives, and strategies. Accordingly, clients with
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Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Potential Conflicts of Interest (unaudited) (cont'd)
similar strategies will not always hold the same securities or instruments or achieve the same performance. The Adviser's investment teams also advise clients with conflicting programs, objectives or strategies. These conflicts also exist as between the Adviser's clients, including the Fund, and the Affiliated Investment Accounts managed by the Adviser's investment adviser affiliates.
From time to time, the Adviser or its affiliates may provide opportunities to Affiliated Investment Accounts (including potentially a Fund) or other clients to make investments in companies (such as in equity, debt or other securities issued by companies) or to engage in transactions involving companies (such as refinancing, restructuring or other transactions) in which certain Affiliated Investment Accounts (including potentially a Fund) or other clients have already invested. These investments can create conflicts of interest, including those associated with the assets of a Fund potentially providing value to, or otherwise supporting the investments of, other Affiliated Investment Accounts or other clients and potentially diluting or otherwise adversely affecting a Fund previously invested in the company.
Morgan Stanley and its affiliates maintain separate trading desks that operate independently of each other and do not share information with the Adviser. The Morgan Stanley and affiliate trading desks may compete against the Adviser trading desks when implementing buy and sell transactions, possibly causing certain Affiliated Investment Accounts to pay more or receive less for a security than other Affiliated Investment Accounts.
Investments by Separate Investment Departments. For the Adviser and certain of its investment adviser affiliates, the entities and individuals that provide investment-related services can differ by client, investment function, or business line (each, an "Investment Department" and collectively, the "Investment Departments"). Nonetheless, Investment Departments (with certain exceptions) can engage in discussions and share information and resources with another Investment Department (or a team within the other Investment Department) regarding investment-related matters. The sharing of information and resources between the Investment Departments is designed to further increase the knowledge and effectiveness of each Investment Department. However, an investment team's decisions as to the use of shared research and participation in discussions with another Investment Department could adversely impact a client. Certain investment teams within one Investment Department could make investment decisions and execute trades together with investment teams within other Investment Departments. Other investment teams make investment decisions and execute trades independently. This could cause the quality and price of execution, and the performance of investments and accounts, to vary. Internal policies and procedures set forth the guidelines under which securities and securities trades can be crossed, aggregated, and coordinated between accounts serviced by different Investment Departments. Internal policies and procedures take into consideration a variety of factors, including the primary market in which such security trades. If a security or securities trade is ineligible for crossing, aggregation, or other coordinated trading, then each Investment Department will execute such trades independently of the other.
Payments to Broker-Dealers and Other Financial Intermediaries. The Adviser, Distributor and/or their affiliates may pay compensation, out of their own funds and not as an expense of a Fund, to certain Financial Intermediaries (which may include affiliates of the Adviser and the Distributor), including recordkeepers and administrators of various deferred compensation plans, in connection with the sale, distribution, marketing and retention of shares of the Fund and/or shareholder servicing. For example, the
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Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Potential Conflicts of Interest (unaudited) (cont'd)
Adviser or the Distributor may pay additional compensation to a Financial Intermediary for, among other things, promoting the sale and distribution of Fund shares, providing access to various programs, mutual fund platforms or preferred or recommended mutual fund lists that may be offered by a Financial Intermediary, granting the Distributor access to a Financial Intermediary's financial advisors and consultants, providing assistance in the ongoing education and training of a Financial Intermediary's financial personnel, furnishing marketing support, maintaining share balances and/or for sub-accounting, recordkeeping, administrative, shareholder or transaction processing services. Such payments are in addition to any distribution fees, shareholder servicing fees and/or transfer agency fees that may be payable by a Fund. The additional payments may be based on various factors, including level of sales (based on gross or net sales or some specified minimum sales or some other similar criteria related to sales of the Fund and/or some or all other Morgan Stanley Funds), amount of assets invested by the Financial Intermediary's customers (which could include current or aged assets of the Fund and/or some or all other Morgan Stanley Funds), a Fund's advisory fee, some other agreed upon amount or other measures as determined from time to time by the Adviser and/or the Distributor. The amount of these payments may be different for different Financial Intermediaries. In certain cases, payments to broker-dealers and other Financial Intermediaries may be shared by and among the Adviser, the Distributor and their affiliates.
The prospect of receiving, or the receipt of, additional compensation, as described above, by Financial Intermediaries may provide such Financial Intermediaries and their financial advisors and other salespersons with an incentive to favor sales of shares of the Fund over other investment options with respect to which these Financial Intermediaries do not receive additional compensation (or receives lower levels of additional compensation). These payment arrangements, however, will not change the price that an investor pays for shares of the Fund or the amount that the Fund receives to invest on behalf of an investor. Investors may wish to take such payment arrangements into account when considering and evaluating any recommendations relating to Fund shares and should review carefully any disclosures provided by Financial Intermediaries as to their compensation.
The additional compensation received by a given Financial Intermediary from the Adviser and/or the Distributor may vary from the additional compensation received by the Financial Intermediary in respect of an Affiliated Investment Account managed by an affiliate of the Adviser or principally underwritten by an affiliate of the Distributor. In such circumstances, differences in the prospect of receiving, or the receipt of, additional compensation, as described above, by Financial Intermediaries may provide such Financial Intermediaries and their financial advisors and other salespersons with an incentive to favor sales of shares of one Affiliated Investment Account over other investment options with respect to which these Financial Intermediaries do not receive additional compensation (or receives lower levels of additional compensation).
Morgan Stanley Trading and Principal Investing Activities. Notwithstanding anything to the contrary herein, Morgan Stanley will generally conduct its sales and trading businesses, publish research and analysis, and render investment advice without regard for a Fund's holdings, although these activities could have an adverse impact on the value of one or more of the Fund's investments, or could cause Morgan Stanley to have an interest in one or more portfolio investments that is different from and potentially adverse to that of a Fund. Furthermore, from time to time, the Adviser or its affiliates may invest "seed" capital in a Fund, typically to enable the Fund to commence investment operations and/or achieve sufficient scale, as further described below. The Adviser and its affiliates may
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Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Potential Conflicts of Interest (unaudited) (cont'd)
hedge such seed capital exposure by investing in derivatives or other instruments expected to produce offsetting exposure. Such hedging transactions, if any, would occur outside of a Fund.
Morgan Stanley's sales and trading, financing and principal investing businesses (whether or not specifically identified as such, and including Morgan Stanley's trading and principal investing businesses) will not be required to offer any investment opportunities to a Fund. These businesses may encompass, among other things, principal trading activities as well as principal investing.
Morgan Stanley's sales and trading, financing and principal investing businesses have acquired or invested in, and in the future may acquire or invest in, minority and/or majority control positions in equity or debt instruments of diverse public and/or private companies. Such activities may put Morgan Stanley in a position to exercise contractual, voting or creditor rights, or management or other control with respect to securities or loans of portfolio investments or other issuers, and in these instances Morgan Stanley may, in its discretion and subject to applicable law, act to protect its own interests or interests of clients, and not a Fund's interests.
Subject to the limitations of applicable law, a Fund may purchase from or sell assets to, or make investments in, companies in which Morgan Stanley has or may acquire an interest, including as an owner, creditor or counterparty.
Morgan Stanley's Investment Banking and Other Commercial Activities. Morgan Stanley advises clients on a variety of mergers, acquisitions, restructuring, bankruptcy and financing transactions. Morgan Stanley may act as an advisor to clients, including other investment funds that may compete with a Fund and with respect to investments that a Fund may hold. Morgan Stanley may give advice and take action with respect to any of its clients or proprietary accounts that may differ from the advice given, or may involve an action of a different timing or nature than the action taken, by a Fund. Morgan Stanley may give advice and provide recommendations to persons competing with a Fund and/or any of a Fund's investments that are contrary to the Fund's best interests and/or the best interests of any of its investments.
Morgan Stanley could be engaged in financial advising, whether on the buy-side or sell-side, or in financing or lending assignments that could result in Morgan Stanley's determining in its discretion or being required to act exclusively on behalf of one or more third parties, which could limit a Fund's ability to transact with respect to one or more existing or potential investments. Morgan Stanley may have relationships with third-party funds, companies or investors who may have invested in or may look to invest in portfolio companies, and there could be conflicts between a Fund's best interests, on the one hand, and the interests of a Morgan Stanley client or counterparty, on the other hand.
To the extent that Morgan Stanley advises companies in financial restructurings outside of, prior to or after filing for protection under Chapter 11 of the U.S. Bankruptcy Code or similar laws in other jurisdictions, the Adviser's flexibility in making investments in such restructurings on a Fund's behalf, or participating on steering committees and other committees in connection with existing investments, may be limited.
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Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Potential Conflicts of Interest (unaudited) (cont'd)
Morgan Stanley could provide investment banking services to competitors of portfolio companies, as well as to private equity and/or private credit funds; such activities may present Morgan Stanley with a conflict of interest vis-a-vis a Fund's investment and may also result in a conflict in respect of the allocation of investment banking resources to portfolio companies.
To the extent permitted by applicable law, Morgan Stanley may provide a broad range of financial services to companies in which a Fund invests, including strategic and financial advisory services, interim acquisition financing and other lending and underwriting or placement of securities, and Morgan Stanley generally will be paid fees (that may include warrants or other securities) for such services. Morgan Stanley will not share any of the foregoing interest, fees and other compensation received by it (including, for the avoidance of doubt, amounts received by the Adviser) with a Fund, and any advisory fees payable will not be reduced thereby.
Morgan Stanley may be engaged to act as a financial advisor to a company in connection with the sale of such company, or subsidiaries or divisions thereof, may represent potential buyers of businesses through its mergers and acquisition activities and may provide lending and other related financing services in connection with such transactions. Morgan Stanley's compensation for such activities is usually based upon realized consideration and is usually contingent, in substantial part, upon the closing of the transaction. Under these circumstances, a Fund may be precluded from participating in a transaction with or relating to the company being sold or participating in any financing activity related to merger or acquisition.
The involvement or presence of Morgan Stanley in the investment banking and other commercial activities described above (or the financial markets more broadly) may restrict or otherwise limit investment opportunities that may otherwise be available to the Fund. For example, issuers may hire and compensate Morgan Stanley to provide underwriting, financial advisory, placement agency, brokerage services or other services and, because of limitations imposed by applicable law and regulation, a Fund may be prohibited from buying or selling securities issued by those issuers or participating in related transactions or otherwise limited in its ability to engage in such investments.
In addition, in situations where the Adviser is required to aggregate its positions with those of other Morgan Stanley business units for position limit calculations, the Adviser may have to refrain from making investments due to the positions held by other Morgan Stanley business units or their clients. There may be other situations where the Adviser refrains from making an investment or refrains from taking certain actions related to the management of such investment due to, among other reasons, additional disclosure obligations, regulatory requirements, policies, and reputational risk, or the Adviser may limit purchases or sales of securities in respect of which Morgan Stanley is engaged in an underwriting or other distribution capacity.
Morgan Stanley's Marketing Activities. Morgan Stanley is engaged in the business of underwriting, syndicating, brokering, administering, servicing, arranging and advising on the distribution of a wide variety of securities and other investments in which a Fund may invest. Subject to the restrictions of the 1940 Act, including Sections 10(f) and 17(e) thereof, a Fund may invest in transactions in which Morgan Stanley acts as underwriter, placement agent, syndicator, broker, administrative agent, servicer, advisor, arranger or structuring agent and receives fees or other compensation from the sponsors of such products or securities. Any fees earned by Morgan Stanley in such capacity will not be shared with the Adviser or the Fund. Certain conflicts of interest, in addition to the
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Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Potential Conflicts of Interest (unaudited) (cont'd)
receipt of fees or other compensation, would be inherent in these transactions. Moreover, the interests of one of Morgan Stanley's clients with respect to an issuer of securities in which a Fund has an investment may be adverse to the Adviser's or a Fund's best interests. In conducting the foregoing activities, Morgan Stanley will be acting for its other clients and will have no obligation to act in the Adviser's or a Fund's best interests. Due to the restrictions of the 1940 Act, a Fund may be restricted from participating in certain transactions in which Morgan Stanley acts as underwriter, placement agent, syndicator, broker, administrative agent, servicer, advisor, arranger or structuring agent, including transactions that would otherwise be beneficial to the Fund.
Client Relationships. Morgan Stanley has existing and potential relationships with a significant number of corporations, institutions and individuals. In providing services to its clients, Morgan Stanley may face conflicts of interest with respect to activities recommended to or performed for such clients, on the one hand, and a Fund, its shareholders or the entities in which the Fund invests, on the other hand. In addition, these client relationships may present conflicts of interest in determining whether to offer certain investment opportunities to a Fund. In acting as principal or in providing advisory and other services to its other clients, Morgan Stanley may engage in or recommend activities with respect to a particular matter that conflict with or are different from activities engaged in or recommended by the Adviser on a Fund's behalf.
Principal Investments. There may be situations in which a Fund's interests may conflict with the interests of one or more general accounts of Morgan Stanley and its affiliates or accounts managed by Morgan Stanley or its affiliates. This may occur because these accounts hold public and private debt and equity securities of many issuers which may be or become portfolio companies, or from whom portfolio companies may be acquired.
Transactions with Portfolio Companies of Affiliated Investment Accounts. The companies in which a Fund may invest may be counterparties to or participants in agreements, transactions or other arrangements with portfolio companies or other entities of portfolio investments of Affiliated Investment Accounts (for example, a company in which a Fund invests may retain a company in which an Affiliated Investment Account invests to provide services or may acquire an asset from such company or vice versa). Certain of these agreements, transactions and arrangements involve fees, servicing payments, rebates and/or other benefits to Morgan Stanley or its affiliates. For example, portfolio entities may, including at the encouragement of Morgan Stanley, enter into agreements regarding group procurement and/or vendor discounts. Morgan Stanley and its affiliates may also participate in these agreements and may realize better pricing or discounts as a result of the participation of portfolio entities. To the extent permitted by applicable law, certain of these agreements may provide for commissions or similar payments and/or discounts or rebates to be paid to a portfolio entity of an Affiliated Investment Account, and such payments or discounts or rebates may also be made directly to Morgan Stanley or its affiliates. Under these arrangements, a particular portfolio company or other entity may benefit to a greater degree than the other participants, and the Morgan Stanley Funds, investment vehicles and accounts (which may or may not include a Fund) that own an interest in such entity will receive a greater relative benefit from the arrangements than the Morgan Stanley Funds, investment vehicles or accounts that do not own an interest therein. Fees and compensation received by portfolio companies of Affiliated Investment Accounts in relation to the foregoing will not be shared with a Fund or offset advisory fees payable.
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Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Potential Conflicts of Interest (unaudited) (cont'd)
Investments in Portfolio Investments of Other Funds. To the extent permitted by applicable law, when a Fund invests in certain companies or other entities, other funds affiliated with the Adviser may have made or may be making an investment in such companies or other entities. Other funds that have been or may be managed by the Adviser may invest in the companies or other entities in which a Fund has made an investment. Under such circumstances, a Fund and such other funds may have conflicts of interest (e.g., over the terms, exit strategies and related matters, including the exercise of remedies of their respective investments). If the interests held by a Fund are different from (or take priority over) those held by such other funds, the Adviser may be required to make a selection at the time of conflicts between the interests held by such other funds and the interests held by a Fund.
Investments in Morgan Stanley Funds and Other Funds. To the extent permitted by applicable law, a Fund may invest in a fund affiliated with the Adviser or its affiliates or a fund advised by the Adviser or its affiliates. In connection with any such investments, an investing Fund, to the extent permitted by the 1940 Act, will pay all advisory, administrative and/or Rule 12b-1 fees applicable to the investment. To the extent consistent with applicable law, certain Funds that invest in other funds managed by the Adviser or its affiliates may pay advisory fees to the Adviser or its affiliates that are not reduced by any fees payable by such other funds to the Adviser or its affiliates as manager of such other funds (i.e., there may be fees and expenses involved in making any such investment, which would not arise in connection with the direct allocation of assets by investors in the Funds to such other funds). In such circumstances, as well as in all other circumstances in which the Adviser receives any fees or other compensation in any form relating to the provision of services, no accounting or repayment to the Funds will be required.
The Affiliated Investment Accounts (including the Funds) may, individually or in the aggregate, own a substantial percentage of a Fund. Further, the Adviser, its affiliates, or another entity (i.e., a seed investor) may invest in the Funds at or near the establishment of such Funds, which may facilitate the Funds achieving a specified size or scale. The Adviser and/or its affiliates may make payments to an investor that contributes seed capital to a Fund. Such payments may continue for a specified period of time and/or until a specified dollar amount is reached, and will be made from the assets of the Adviser and/or such affiliates (and not the applicable Fund). Seed investors may contribute all or a majority of the assets in a Fund. There is a risk that such seed investors may redeem their investments in the Fund, particularly after payments from the Adviser and/or its affiliates have ceased. Such redemptions could negatively impact a Fund's liquidity, expenses and market price of its shares, as applicable.
Allocation of Expenses. Expenses may be incurred that are attributable to a Fund and one or more other Affiliated Investment Accounts (including in connection with issuers in which a Fund and such other Affiliated Investment Accounts have overlapping investments). The allocation of such expenses among such entities raises potential conflicts of interest. The Adviser and its affiliates intend to allocate such common expenses among a Fund and any such other Affiliated Investment Accounts on a pro rata basis or in such other manner as the Adviser deems to be fair and equitable or in such other manner as may be required by applicable law.
Temporary Investments. To more efficiently invest short-term cash balances held by a Fund, the Adviser may invest such balances on an overnight "sweep" basis in shares of one or more money market funds or other short-term vehicles. It is anticipated that the investment adviser to these money market funds or other short-term vehicles may be the Adviser (or an affiliate) to the extent
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Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Potential Conflicts of Interest (unaudited) (cont'd)
permitted by applicable law, including Rule 12d1-1 under the 1940 Act. In such a case, the affiliated investment adviser may receive asset-based fees in respect of a Fund's investment (which will reduce the net return realized by a Fund).
Transactions with Affiliates. The Adviser and any investment sub-adviser might purchase securities from underwriters or placement agents in which a Morgan Stanley affiliate is a member of a syndicate or selling group, as a result of which an affiliate might benefit from the purchase through receipt of a fee or otherwise. Neither the Adviser nor any investment sub-adviser will purchase securities on behalf of a Fund from an affiliate that is acting as a manager of a syndicate or selling group. Purchases by the Adviser on behalf of a Fund from an affiliate acting as a placement agent must meet the requirements of applicable law. Furthermore, Morgan Stanley may face conflicts of interest when a Fund uses service providers affiliated with Morgan Stanley because Morgan Stanley receives greater overall fees when they are used.
Affiliated Indexes. Affiliates of the Adviser develop, own and operate indexes ("Indexes"), and may continue to do so in the future, based on investment and trading strategies and concepts developed by the Adviser or its affiliates ("Adviser Strategies"). Some of the Funds seek to track the performance of the Indexes. The Adviser manages Accounts which track the same Indexes used by the Funds or which are based on the same, or substantially similar, Adviser Strategies that are used in the operation of the Indexes and the Funds. The operation of the Indexes, the Funds and the Accounts in this manner gives rise to potential conflicts of interest. For example, Accounts that track the same Indexes used by the Funds may engage in purchases and sales of securities prior to when the Index and the Funds engage in similar transactions because such Accounts may be managed and rebalanced on an ongoing basis, whereas the Funds' portfolios are only rebalanced on a periodic or other basis subsequent to the rebalancing of the Index.
The Adviser has adopted policies and procedures that are designed to address potential conflicts that arise in connection with the operation of the Indexes, the Funds and the Accounts. The Adviser has established certain information barriers and other policies designed to address the sharing of information between different businesses within the Investment Adviser, including with respect to personnel responsible for constructing and maintaining the Indexes and those involved in decision-making for the Funds.
Valuation of the Funds' Investments. The Adviser performs certain valuation services related to securities and other assets held by the Funds and performs such services in accordance with its valuation policies. The Adviser will face a conflict with respect to valuation of the Funds' investments generally because of the effect of such valuations on the Adviser's fees and other compensation and performance of the Funds.
Proxy Voting by the Adviser. The Adviser has implemented processes designed to prevent conflicts of interest from influencing proxy voting decisions that it makes on behalf of advisory clients, including the Funds, and to help ensure that such decisions are made in accordance with its fiduciary obligations to its clients. Notwithstanding such proxy voting processes, proxy voting decisions made by the Adviser in respect of securities held by the Funds may benefit the interests of Morgan Stanley and/or accounts other than the Funds. Further, the Adviser may make different proxy voting decisions in respect of the same security held by clients with different investment objectives or strategies. For a more detailed discussion of these policies and procedures, see the section of the Statement of Additional Information entitled "Morgan Stanley Investment Management Proxy Voting Policy and Procedures."
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Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Potential Conflicts of Interest (unaudited) (cont'd)
Potential Conflict of Interest Related to Use of Sub-Adviser(s). To the extent the Adviser to a Fund engages affiliated and/or unaffiliated sub-advisers, the Adviser generally expects to compensate the sub-adviser out of the advisory fee it receives from the Fund, which creates an incentive for the Adviser to select sub-adviser(s) with lower fee rates or to select affiliated sub-adviser(s). In addition, a sub-adviser may have interests and relationships that create actual or potential conflicts of interest related to their management of Fund assets allocated to or managed by the sub-adviser. These conflicts may be similar to or different from the conflicts described herein related to Morgan Stanley and its investment advisory affiliates. For additional information about potential conflicts of interest for each sub-adviser(s) can be found in the relevant sub-adviser's Form ADV. A copy of Part 1 and Part 2 of a sub-adviser's Form ADV is available on the SEC's website (www.adviserinfo.sec.gov).
Electronic Communication Networks and Alternative Trading Systems. The Adviser's affiliate(s) have ownership interests in and/or board seats on electronic communication networks ("ECNs") or other alternative trading systems ("ATSs"). In certain instances the Adviser's affiliate(s) could be deemed to control one or more of such ECNs or ATSs based on the level of such ownership interests and whether such affiliates are represented on the board of such ECNs or ATSs. Consistent with its fiduciary obligation to seek best execution, the Adviser may, from time to time, directly or indirectly, effect client trades through ECNs or other ATSs in which the Firm's affiliates have or could acquire an interest or board seat. These affiliates might receive an indirect economic benefit based upon their ownership in the ECNs or other ATSs. The Adviser will, directly or indirectly, execute through an ECN or other ATSs in which an affiliate has an interest only in situations where the Firm or the broker dealer through whom it is accessing the ECN or ATS reasonably believes such transaction will be in the best interest of its clients and the requirements of applicable law have been satisfied.
General Process for Potential Conflicts. All of the transactions described above involve the potential for conflicts of interest between the Adviser, related persons of the Adviser and/or their clients. The Advisers Act, the 1940 Act and ERISA impose certain requirements designed to decrease the possibility of conflicts of interest between an investment adviser and its clients. In some cases, transactions may be permitted subject to fulfillment of certain conditions. Certain other transactions may be prohibited. In addition, the Adviser has instituted policies and procedures designed to prevent conflicts of interest from arising and, when they do arise, to ensure that it effects transactions for clients in a manner that is consistent with its fiduciary duty to its clients and in accordance with applicable law. The Adviser seeks to ensure that potential or actual conflicts of interest are appropriately resolved taking into consideration the overriding best interests of the client.
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Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Recent Changes (unaudited)
The following information in this annual report is a summary of certain changes since December 31, 2023. This information may not reflect all of the changes that have occurred since you purchased the Fund.
During the year ended December 31, 2024 there were: (i) no material changes in the Fund's investment objectives or policies that have not been approved by shareholders, (ii) no changes in the Fund's charter or by-laws that would delay or prevent a change of control of the Fund that have not been approved by shareholders, (iii) no material changes to the principal risk factors associated with investment in the Fund, and (iv) no change in the persons primarily responsible for the day-to-day management of the Fund's portfolio.
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Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Important Notices (unaudited)
Reporting to Shareholders
The Fund provides a complete schedule of portfolio holdings in its semi-annual and annual reports within 60 days of the end of the Fund's second and fourth fiscal quarters. The semi-annual and annual reports are filed electronically with the Securities and Exchange Commission ("SEC") on Form N-CSRS and Form N-CSR, respectively. Morgan Stanley makes these reports available on its public website, www.morganstanley.com/im/shareholderreports. Each Morgan Stanley non-money market fund also files a complete schedule of portfolio holdings with the SEC for the Fund's first and third fiscal quarters as an attachment to Form N-PORT and monthly holding for each money market fund on Form N-MFP. Morgan Stanley does not deliver the reports for the first and third fiscal quarters to stockholders, but makes the complete schedule of portfolio holdings for the Fund's first and third fiscal quarters available on its public website. The holdings for each money market fund are also posted to the Morgan Stanley public website. You may, however, obtain Form N-PORT filings (as well as the Form N-CSR, N-CSRS and N-MFP filings) by accessing the SEC's website, www.sec.gov. You can also request copies of these materials, upon payment of a duplicating fee, by electronic request at the SEC's e-mail address (publicinfo@sec.gov).
In addition to filing a complete schedule of portfolio holdings with the SEC each fiscal quarter, the Fund provides a complete schedule of portfolio holdings on the public website on a monthly basis at least 15 calendar days after month end and under other conditions as described in the Fund's policy on portfolio holdings disclosure. You may obtain copies of the Fund's monthly website postings by calling toll free 1(800) 231-2608.
Proxy Voting Policies and Procedures and Proxy Voting Record
A copy of (1) the Fund's policies and procedures with respect to the voting of proxies relating to the Fund's portfolio securities; and (2) how the Fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30, is available without charge, upon request, by calling toll free 1(800) 231-2608 or by visiting our website at www.morganstanley.com/im/en-us/institutional-investor/about-us/proxy-voting/vote-summary-report.desktop.html. This information is also available on the SEC's web site at www.sec.gov.
Share Repurchase Program
You can access information about the monthly share repurchase results through Morgan Stanley Investment Management's website: www.morganstanley.com/im/shareholderreports.
82
Morgan Stanley China A Share Fund, Inc.
December 31, 2024
U.S. Customer Privacy Notice (unaudited) February 2024
FACTS |
|
WHAT DOES MSIM DO WITH YOUR PERSONAL INFORMATION? |
|
Why? |
|
Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
|
What? |
|
The types of personal information we collect and share depend on the product or service you have with us. This information can include: ◼ Social Security number and income ◼ investment experience and risk tolerance ◼ checking account number and wire transfer instructions |
|
How? |
|
All financial companies need to share customers' personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers' personal information; the reasons MSIM chooses to share; and whether you can limit this sharing. |
|
Reasons we can share your personal information |
|
Does MSIM share? |
|
Can you limit this sharing? |
|
For our everyday business purposes — such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus |
|
Yes |
|
No |
|
For our marketing purposes — to offer our products and services to you |
|
Yes |
|
No |
|
For joint marketing with other financial companies |
|
No |
|
We don't share |
|
For our affiliates' everyday business purposes — information about your transactions and experiences |
|
Yes |
|
No* |
|
For our affiliates' everyday business purposes — information about your creditworthiness |
|
Yes |
|
Yes* |
|
For our affiliates to market to you |
|
Yes |
|
Yes* |
|
For non-affiliates to market to you |
|
No |
|
We don't share |
|
83
Morgan Stanley China A Share Fund, Inc.
December 31, 2024
U.S. Customer Privacy Notice (unaudited) (cont'd) February 2024
To limit our sharing |
|
Call toll-free (844) 312-6327 or email: imprivacyinquiries@morganstanley.com Please note: If you are a new customer, we can begin sharing your information 30 days from the date we sent this notice. When you are no longer our customer, we continue to share your information as described in this notice. However, you can contact us at any time to limit our sharing. |
|
Questions? |
|
Call toll-free (844) 312-6327 or email: imprivacyinquiries@morganstanley.com |
|
Who we are
Who is providing this notice? |
|
Morgan Stanley Investment Management Inc. and its investment management affiliates ("MSIM") (See Affiliates definition below.) |
|
What we do
How does MSIM protect my personal information? |
|
To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include computer safeguards and secured files and buildings. We have policies governing the proper handling of customer information by personnel and requiring third parties that provide support to adhere to appropriate security standards with respect to such information. |
|
How does MSIM collect my personal information? |
|
We collect your personal information, for example, when you ◼ open an account or make deposits or withdrawals from your account ◼ buy securities from us or make a wire transfer ◼ give us your contact information We also collect your personal information from others, such as credit bureaus, affiliates, or other companies. |
|
Why can't I limit all sharing? |
|
Federal law gives you the right to limit only ◼ sharing for affiliates' everyday business purposes — information about your creditworthiness ◼ affiliates from using your information to market to you ◼ sharing for non-affiliates to market to you State laws and individual companies may give you additional rights to limit sharing. (See below for more on your rights under state law.) |
|
84
Morgan Stanley China A Share Fund, Inc.
December 31, 2024
U.S. Customer Privacy Notice (unaudited) (cont'd) February 2024
What we do
What happens when I limit sharing for an account I hold jointly with someone else? |
|
Your choices will apply to everyone on your account. |
|
Definitions
Affiliates |
|
Companies related by common ownership or control. They can be financial and non-financial companies. ◼ Our affiliates include registered investment advisers such as Eaton Vance Management and Calvert Research and Management, registered broker-dealers such as Morgan Stanley Distributors Inc. and Eaton Vance Distributors, Inc., and registered and unregistered funds sponsored by Morgan Stanley Investment Management such as the registered funds within Morgan Stanley Institutional Fund, Inc. (together, the "Investment Management Affiliates"); and companies with a Morgan Stanley name and financial companies such as Morgan Stanley Barney LLC and Morgan Stanley & Co. (the, "Morgan Stanley Affiliates"). |
|
Non-affiliates |
|
Companies not related by common ownership or control. They can be financial and non-financial companies. ◼ MSIM does not share with non-affiliates so they can market to you. |
|
Joint marketing |
|
A formal agreement between non-affiliated financial companies that together market financial products or services to you. ◼ MSIM doesn't jointly market |
|
Other important information
* Please Note: MSIM does not share your creditworthiness information or your transactions and experiences information with the Morgan Stanley Affiliates, nor does MSIM enable the Morgan Stanley Affiliates to market to you. Your opt outs will prevent MSIM from sharing your creditworthiness information with the Investment management Affiliates and will prevent the investment Management Affiliates from marketing their products to you.
Vermont: Except as permitted by law, we will not share personal information we collect about Vermont residents with Non-affiliates unless you provide us with your written consent to share such information.
California: Except as permitted by law, we will not share personal information we collect about California residents with Non-affiliates and we will limit sharing such personal information with our Affiliates to comply with California privacy laws that apply to us.
85
Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Directors and Officers Information (unaudited)
Independent Directors:
Name, Address and Birth Year of Independent Director |
|
Position(s) Held with Registrant |
|
Length of Time Served* |
|
Principal Occupation(s) During Past 5 Years and Other Relevant Professional Experience |
|
Number of Funds in Fund Complex Overseen by Independent Director** |
|
Other Directorships Held by Independent Director During Past 5 Years*** |
|
Frank L. Bowman c/o Morgan, Lewis and Bockius LLP Counsel to the Independent Directors One State Street Harford, CT 06103 Birth Year: 1944 |
|
Director |
|
Since August 2006 |
|
President, Strategic Decisions, LLC (consulting) (since February 2009); Director or Trustee of various Morgan Stanley Funds (since August 2006); formerly, Chairperson of the Compliance and Insurance Committee (2015-2024) and Chairperson of the Insurance Sub-Committee of the Compliance and Insurance Committee (2007-2015); served as President and Chief Executive Officer of the Nuclear Energy Institute (policy organization) (February 2005-November 2008); retired as Admiral, U.S. Navy after serving over 38 years on active duty including 8 years as Director of the Naval Nuclear Propulsion Program in the Department of the Navy and the U.S. Department of Energy (1996-2004); served as Chief of Naval Personnel (July 1994-September 1996) and on the Joint Staff as Director of Political Military Affairs (June 1992-July 1994); knighted as Honorary Knight Commander of the Most Excellent Order of the British Empire; awarded the Officier de L'Ordre National du Mérite by the French Government; elected to the National Academy of Engineering (2009). |
|
|
83 |
|
|
Director of Naval and Nuclear Technologies LLP; Director Emeritus of the Armed Services YMCA; Member of the National Security Advisory Council of the Center for U.S. Global Engagement and a former member of the CNA Military Advisory Board; Chairman of the Board of Trustees of Fairhaven United Methodist Church; Member of the Board of Advisors of the Dolphin Scholarship Foundation; Director of other various nonprofit organizations; formerly, Director of BP, plc (November 2010-May 2019). |
|
Frances L. Cashman c/o Morgan, Lewis and Bockius LLP Counsel to the Independent Directors One State Street Harford, CT 06103 Birth Year: 1961 |
|
Director |
|
Since February 2022 |
|
Formerly, Chief Executive Officer, Asset Management Portfolio, Delinian Ltd. (financial information) (2021-2024); Executive Vice President and various other roles, Legg Mason & Co. (asset management) (2010-2020); Managing Director, Stifel Nicolaus (2005-2010). |
|
|
84 |
|
|
Trustee and Member of Advancement and Investment Committees, Cristo Rey Jesuit High School (since December 2024); Trustee and Investment Committee Member, Georgia Tech Foundation (Since June 2019); Formerly Trustee and Chair of Marketing Committee, and Member of Finance Committee, Loyola Blakefield (2017-2023); Formerly Trustee, MMI Gateway Foundation (2017-2023); Director and Investment Committee Member, Catholic Community Foundation Board (2012-2018); Director and Investment Committee Member, St. Ignatius Loyola Academy (2011-2017). |
|
86
Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Directors and Officers Information (unaudited) (cont'd)
Independent Directors (cont'd):
Name, Address and Birth Year of Independent Director |
|
Position(s) Held with Registrant |
|
Length of Time Served* |
|
Principal Occupation(s) During Past 5 Years and Other Relevant Professional Experience |
|
Number of Funds in Fund Complex Overseen by Independent Director** |
|
Other Directorships Held by Independent Director During Past 5 Years*** |
|
Kathleen A. Dennis c/o Morgan, Lewis and Bockius LLP Counsel to the Independent Directors One State Street Harford, CT 06103 Birth Year: 1953 |
|
Director |
|
Since August 2006 |
|
Chairperson of the Governance Committee (since January 2021), Chairperson of the Liquidity and Alternatives Sub-Committee of the Investment Committee (2006-2020) and Director or Trustee of various Morgan Stanley Funds (since August 2006); President, Cedarwood Associates (mutual fund and investment management consulting) (since July 2006); formerly, Senior Managing Director of Victory Capital Management (1993-2006); Senior Vice President, Chase Bank (1984-1993). |
|
|
83 |
|
|
Board Member, University of Albany Foundation (2012-present); Board Member, Mutual Funds Directors Forum (2014-2024); Director of various non-profit organizations. |
|
Nancy C. Everett c/o Morgan, Lewis and Bockius LLP Counsel to the Independent Directors One State Street Harford, CT 06103 Birth Year: 1955 |
|
Director |
|
Since January 2015 |
|
Interim Vice President for Investment Management of Dominion Energy (since 2024); Chairperson of the Equity Investment Committee (since January 2021); Director or Trustee of various Morgan Stanley Funds (since January 2015); Owner, OBIR, LLC (institutional investment management consulting) (since June 2014); Chief Executive Officer of Virginia Commonwealth University Investment Company (2015-2024); formerly, Managing Director, BlackRock, Inc. (February 2011-December 2013) and Chief Executive Officer, General Motors Asset Management (a/k/a Promark Global Advisors, Inc.) (June 2005-May 2010). |
|
|
84 |
|
|
Formerly, Member of Virginia Commonwealth University School of Business Foundation (2005-2016); Member of Virginia Commonwealth University Board of Visitors (2013-2015); Member of Committee on Directors for Emerging Markets Growth Fund, Inc. (2007-2010); Chairperson of Performance Equity Management, LLC (2006-2010); and Chairperson, GMAM Absolute Return Strategies Fund, LLC (2006-2010). |
|
Richard G. Gould c/o Morgan, Lewis and Bockius LLP Counsel to the Independent Directors One State Street Harford, CT 06103 Birth Year: 1959 |
|
Director |
|
Since July 2024 |
|
Global Chief Executive Officer, CLSA Ltd. (2019-2021); Chief Executive Officer, Americas, CLSA Americas, LLC (2014-2021); Head of Global Sales, Bloomberg Tradebook, Bloomberg LP (2010-2014); Founding Member, Executive Vice President, Information Services Group (2006-2010); Managing Director, Morgan Stanley (1990-2006); Executive Director, International Portfolio Trading & Derivatives, Morgan Stanley (1988-1990); Vice President, International Portfolio Trading & Derivatives, Morgan Stanley (1986-1988); Equity Derivatives Trading, Lehman Brothers (1983-1986). |
|
|
84 |
|
|
Global Management Committee Member, CLSA (2014-2020); Broking Executive Committee Member, CLSA (2014-2020). |
|
87
Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Directors and Officers Information (unaudited) (cont'd)
Independent Directors (cont'd):
Name, Address and Birth Year of Independent Director |
|
Position(s) Held with Registrant |
|
Length of Time Served* |
|
Principal Occupation(s) During Past 5 Years and Other Relevant Professional Experience |
|
Number of Funds in Fund Complex Overseen by Independent Director** |
|
Other Directorships Held by Independent Director During Past 5 Years*** |
|
Eddie A. Grier c/o Morgan, Lewis and Bockius LLP Counsel to the Independent Directors One State Street Harford, CT 06103 Birth Year: 1955 |
|
Director |
|
Since February 2022 |
|
Dean, Santa Clara University Leavey School of Business (since July 2021); Dean, Virginia Commonwealth University School of Business (2010-2021); President and various other roles, Walt Disney Company (entertainment and media) (1981-2010). |
|
|
84 |
|
|
Director, Witt/Kieffer, Inc. (executive search) (2016-2024); Director, NuStar GP, LLC (energy) (since 2021-2024); Director, Sonida Senior Living, Inc. (residential community operator) (2016-2021); Director, NVR, Inc. (homebuilding) (2013-2020); Director, Middleburg Trust Company (wealth management) (2014-2019); Director, Colonial Williamsburg Company (2012-2021); Regent, University of Massachusetts Global (since 2021); Director and Chair, ChildFund International (2012-2021); Trustee, Brandman University (2010-2021); Director, Richmond Forum (2012-2019). |
|
Jakki L. Haussler c/o Morgan, Lewis and Bockius LLP Counsel to the Independent Directors One State Street Harford, CT 06103 Birth Year: 1957 |
|
Director |
|
Since January 2015 |
|
Chairperson of the Audit Committee (since January 2023) and Director or Trustee of various Morgan Stanley Funds (since January 2015); Chairman, Opus Capital Group (since 1996); formerly, Chief Executive Officer, Opus Capital Group (1996-2019); Director, Capvest Venture Fund, LP (May 2000-December 2011); Partner, Adena Ventures, LP (July 1999-December 2010); Director, The Victory Funds (February 2005-July 2008). |
|
|
84 |
|
|
Director, Ingram Micro Holding Corporation and Member, Nominating and Corporate Governance Committee (since October 2024); Director, Vertiv Holdings Co. (VRT) (since August 2022); Director of Cincinnati Bell Inc. and Member, Audit Committee and Chairman, Governance and Nominating Committee (2008-2021); Director of Service Corporation International and Member, Audit Committee and Investment Committee; Director, Barnes Group Inc. (2021-2025); Member of Chase College of Law Center for Law and Entrepreneurship Board of Advisors; Director of Best Transport (2005-2019); Director of Chase College of Law Board of Visitors; formerly, Member, University of Cincinnati Foundation Investment Committee. |
|
88
Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Directors and Officers Information (unaudited) (cont'd)
Independent Directors (cont'd):
Name, Address and Birth Year of Independent Director |
|
Position(s) Held with Registrant |
|
Length of Time Served* |
|
Principal Occupation(s) During Past 5 Years and Other Relevant Professional Experience |
|
Number of Funds in Fund Complex Overseen by Independent Director** |
|
Other Directorships Held by Independent Director During Past 5 Years*** |
|
Dr. Manuel H. Johnson c/o Johnson Smick International, Inc. 220 I Street, NE Suite 200 Washington, D.C. 20002 Birth Year: 1949 |
|
Director |
|
Since July 1991 |
|
Senior Partner, Johnson Smick International, Inc. (consulting firm); Chairperson of the Fixed Income, Liquidity and Alternatives Investment Committee (since January 2021), Chairperson of the Investment Committee (2006-2020) and Director or Trustee of various Morgan Stanley Funds (since July 1991); Co-Chairman and a founder of the Group of Seven Council (G7C) (international economic commission); formerly, Chairperson of the Audit Committee (July 1991-September 2006); Vice Chairman of the Board of Governors of the Federal Reserve System and Assistant Secretary of the U.S. Treasury. |
|
|
83 |
|
|
Director of NVR, Inc. (home construction). |
|
Michael F. Klein c/o Morgan, Lewis and Bockius LLP Counsel to the Independent Directors One State Street Harford, CT 06103 Birth Year: 1958 |
|
Director |
|
Since August 2006 |
|
Chairperson of the Risk Committee (since January 2021); Managing Director, Aetos Alternatives Management, LP (since March 2000); Co-President, Aetos Alternatives Management, LP (since January 2004) and Co-Chief Executive Officer of Aetos Alternatives Management, LP (since August 2013); Chairperson of the Fixed Income Sub-Committee of the Investment Committee (2006-2020) and Director or Trustee of various Morgan Stanley Funds (since August 2006); formerly, Managing Director, Morgan Stanley & Co. Inc. and Morgan Stanley Dean Witter Investment Management and President, various Morgan Stanley Funds (June 1998-March 2000); Principal, Morgan Stanley & Co. Inc. and Morgan Stanley Dean Witter Investment Management (August 1997-December 1999). |
|
|
83 |
|
|
Director of certain investment funds managed or sponsored by Aetos Alternatives Management, LP; Director of Sanitized AG and Sanitized Marketing AG (specialty chemicals). |
|
89
Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Directors and Officers Information (unaudited) (cont'd)
Independent Directors (cont'd):
Name, Address and Birth Year of Independent Director |
|
Position(s) Held with Registrant |
|
Length of Time Served* |
|
Principal Occupation(s) During Past 5 Years and Other Relevant Professional Experience |
|
Number of Funds in Fund Complex Overseen by Independent Director** |
|
Other Directorships Held by Independent Director During Past 5 Years*** |
|
Patricia A. Maleski c/o Morgan, Lewis and Bockius LLP Counsel to the Independent Directors One State Street Harford, CT 06103 Birth Year: 1960 |
|
Director |
|
Since January 2017 |
|
Chairperson of the Compliance and Insurance Committee (since January 2025); Director or Trustee of various Morgan Stanley Funds (since January 2017); Managing Director, JPMorgan Asset Management (2004-2016); Oversight and Control Head of Fiduciary and Conflicts of Interest Program (2015-2016); Chief Control Officer-Global Asset Management (2013-2015); President, JPMorgan Funds (2010-2013); Chief Administrative Officer (2004-2013); various other positions including Treasurer and Board Liaison (since 2001). |
|
|
84 |
|
|
Formerly, Trustee (January 2022 to March 2023), Treasurer (January 2023 to March 2023), and Finance Committee (January 2022 to March 2023), Nutley Family Service Bureau, Inc. |
|
W. Allen Reed c/o Morgan, Lewis and Bockius LLP Counsel to the Independent Directors One State Street Harford, CT 06103 Birth Year: 1947 |
|
Chair of the Board and Director |
|
Chair of the Board since August 2020 and Director since August 2006 |
|
Chair of the Boards of various Morgan Stanley Funds (since August 2020); Director or Trustee of various Morgan Stanley Funds (since August 2006); formerly, Vice Chair of the Boards of various Morgan Stanley Funds (January 2020-August 2020); President and Chief Executive Officer of General Motors Asset Management; Chairman and Chief Executive Officer of the GM Trust Bank and Corporate Vice President of General Motors Corporation (August 1994-December 2005). |
|
|
83 |
|
|
Formerly, Director of Legg Mason, Inc. (2006-2019); and Director of the Auburn University Foundation (2010-2015). |
|
* This is the earliest date the Director began serving the Morgan Stanley Funds. Each Director serves an indefinite term, until his or her successor is elected.
** The Fund Complex includes (as of December 31, 2024) all open-end and closed-end funds (including all of their portfolios) advised by Morgan Stanley Investment Management Inc. (the "Adviser") and any funds that have an adviser that is an affiliated person of the Adviser (including, but not limited to, Morgan Stanley AIP GP LP).
*** This includes any directorships at public companies and registered investment companies held by the Directors at any time during the past five years.
90
Morgan Stanley China A Share Fund, Inc.
December 31, 2024
Directors and Officers Information (unaudited) (cont'd)
Executive Officers:
Name, Address and Birth Year of Executive Officer |
|
Position(s) Held with Registrant |
|
Length of Time Served* |
|
Principal Occupation(s) During Past 5 Years |
|
Deidre A. Downes 1633 Broadway New York, NY 10019 Birth Year: 1977 |
|
Chief Compliance Officer |
|
Since November 2021 |
|
Managing Director of the Adviser (since January 2024) and Chief Compliance officer of various Morgan Stanley Funds (since November 2021). Formerly, Vice President and Corporate Counsel at PGIM and Prudential Financial (October2016-December 2020). |
|
John H. Gernon 1585 Broadway New York, NY 10036 Birth Year: 1963 |
|
President and Principal Executive Officer |
|
Since September 2013 |
|
President and Principal Executive Officer of the Equity and Fixed Income Funds and the Morgan Stanley AIP Funds (since September 2013) and the Liquidity Funds and various money market funds (since May 2014) in the Fund Complex; Managing Director of the Adviser. |
|
Michael J. Key 1585 Broadway New York, NY 10036 Birth Year: 1979 |
|
Vice President |
|
Since June 2017 |
|
Vice President of the Equity and Fixed Income Funds, Liquidity Funds, various money market funds and the Morgan Stanley AIP Funds in the Fund Complex(since June 2017); Managing Director of the Adviser; Head of Product Development for Equity and Fixed Income Funds (since August 2013). |
|
Mary E. Mullin 1633 Broadway New York, NY 10019 Birth Year: 1967 |
|
Secretary and Chief Legal Officer |
|
Since June 1999 |
|
Managing Director (since 2018) and Chief Legal Officer (since 2016) of the Adviser and various entities affiliated with the Adviser; Secretary (since 1999) and Chief Legal Officer (since 2016) of various Morgan Stanley Funds. |
|
Francis J. Smith 750 7th Ave New York, NY 10019 Birth Year: 1965 |
|
Treasurer and Principal Financial Officer |
|
Treasurer since July 2003 and Principal Financial Officer since September 2002 |
|
Managing Director of the Adviser and various entities affiliated with the Adviser; Treasurer (since July 2003) and Principal Financial Officer of various Morgan Stanley Funds (since September 2002). |
|
The Fund does not make available copies of its statement of additional information because the Fund's shares are not continuously offered, which means that the statement of additional information of the Fund has not been updated after completion of the Fund's offerings and the information contained in the Fund's statement of additional information may have become outdated.
* This is the earliest date the officer began serving the Morgan Stanley Funds. Each officer serves an indefinite term, until his or her successor is elected.
91
Adviser and Administrator
Morgan Stanley Investment Management Inc.
1585 Broadway
New York, New York 10036
Sub-Adviser
Morgan Stanley Investment Management Company
2 Central Boulevard
#22-01 West Tower, IOI Central
Boulevard Towers, Singapore 018916
Custodian
State Street Bank and Trust Company
One Congress Street
Boston, Massachusetts 02114
Stockholder Servicing Agent
Computershare Trust Company, N.A.
P.O. Box 505000
Louisville, Kentucky 40233
Legal Counsel
Dechert LLP
1095 Avenue of the Americas
New York, New York 10036
Counsel to the Independent Directors
Morgan, Lewis & Bockius LLP
One State Street
Hartford, Connecticut 06103
Independent Registered Public Accounting Firm
Ernst & Young LLP
200 Clarendon Street
Boston, Massachusetts 02116
For additional Fund information, including the Fund's net asset value per share and information regarding the investments comprising the Fund's portfolio, please call toll free 1 (800) 231-2608 or visit our website at www.morganstanley.com/im/shareholderreports. All investments involve risks, including the possible loss of principal.
© 2025 Morgan Stanley
|
|
CECAFANN 4259007 EXP 02.28.26 |
|
Item 2. Code of Ethics
The
registrant (sometimes referred to as the “Fund”) has adopted a code of ethics applicable to its Principal Executive
Officer and Principal Financial Officer. The registrant undertakes to provide a copy of such code of ethics to any person upon request,
without charge, by calling 1-800-262-1122. The registrant has not amended the code of ethics as described in Form N-CSR during the period
covered by this report. The registrant has not granted any waiver, including an implicit waiver, from a provision of the code of ethics
as described in Form N-CSR during the period covered by this report.
Item 3. Audit Committee Financial Expert
The registrant's Board of Directors has determined that Jakki L. Haussler,
an “independent” Trustee, is an “audit committee financial expert" serving on its audit committee. Under applicable
securities laws, a person who is determined to be an audit committee financial expert will not be deemed an "expert" for any
purpose, including without limitation for the purposes of Section 11 of the Securities Act of 1933, as a result of being designated or
identified as an audit committee financial expert. The designation or identification of a person as an audit committee financial expert
does not impose on such person any duties, obligations, or the liabilities that are greater than the duties, obligations, and liabilities
imposed on such person as a member of the audit committee and Board of Directors in the absence of such designation or identification.
Item 4. Principal Accountant Fees and Services
(a) –(d)
The
following table presents the aggregate fees billed to the registrant for the registrant’s fiscal years ended December
31, 2023 and December 31, 2024 by the registrant’s principal accountant, Ernst & Young LLP, for professional services rendered
for the audit of the registrant’s annual financial statements and fees billed for other services rendered by Ernst & Young
LLP during those periods.
2024
| |
Registrant | | |
Covered Entities(1) | |
Audit Fees | |
$ | 73,325 | | |
$ | N/A | |
Non-Audit Fees | |
| | | |
| | |
Audit Related Fees | |
$ | — | (2) | |
$ | — | (2) |
Tax Fees | |
$ | — | (3) | |
$ | — | (4) |
All Other Fees | |
$ | — | | |
$ | — | (5) |
Total Non-Audit Fees | |
$ | — | | |
$ | — | |
| |
| | | |
| | |
Total | |
$ | 73,325 | | |
$ | — | |
2023
| |
Registrant | | |
Covered Entities(1) | |
Audit Fees | |
$ | 69,833 | | |
$ | N/A | |
Non-Audit Fees | |
| | | |
| | |
Audit Related Fees | |
$ | — | (2) | |
$ | — | (2) |
Tax Fees | |
$ | — | (3) | |
$ | — | (4) |
All Other Fees | |
$ | — | | |
$ | 1,627,962 | (5) |
Total Non-Audit Fees | |
$ | — | | |
$ | 1,627,962 | |
| |
| | | |
| | |
Total | |
$ | 69,833 | | |
$ | 1,627,962 | |
N/A –
Not applicable, as not required by Item 4.
(1) Covered Entities include the Adviser (excluding sub-advisors)
and any entity controlling, controlled by or under common control with the Adviser that provides ongoing services to the Registrant.
(2) Audit-Related Fees represent assurance and related services provided
that are reasonably related to the performance of the audit of the financial statements of the Covered Entities' and funds advised by
the Adviser or its affiliates, specifically data verification and agreed-upon procedures related to asset securitizations and agreed-upon
procedures engagements.
(3) Tax Fees represent tax compliance, tax planning and tax advice
services provided in connection with the preparation and review of the Registrant’s tax returns.
(4) Tax Fees represent tax compliance, tax planning and tax advice
services provided in connection with the review of Covered Entities' tax returns.
(5) The Fees included under “All Other Fees” are for services
provided by Ernst & Young LLP related to surprise examinations for certain investment accounts to satisfy SEC Custody Rules and consulting
services related to merger integration for sister entity to the Adviser.
(e)(1) The registrant’s
audit committee has adopted policies and procedures relating to the pre-approval of services provided by the registrant’s
principal accountant (the “Pre-Approval Policies”). The Pre-Approval Policies establish a framework intended
to assist the audit committee in the proper discharge of its pre-approval responsibilities. As a general matter, the Pre-Approval Policies
(i) specify certain types of audit, audit-related, tax, and other services determined to be pre-approved by the audit
committee; and (ii) delineate specific procedures governing the mechanics of the pre-approval process, including the approval
and monitoring of audit and non-audit service fees. Unless a service is specifically pre-approved under the Pre-Approval Policies,
it must be separately pre-approved by the Audit Committee.
The Pre-Approval Policies
and the types of audit and non-audit services pre-approved therein must be reviewed and ratified by the registrant’s
audit committee at least annually. The registrant’s audit committee maintains full responsibility for the appointment, compensation,
and oversight of the work of the registrant’s principal accountant.
(e)(2) No
services described in paragraphs (b)-(d) above were approved by the registrant’s audit committee pursuant to the “de minimis
exception” set forth in Rule 2-01 (c)(7)(i)(C) of Regulation S-X.
(f) Not applicable.
(g) See table above.
(h) The registrant’s
audit committee has considered whether the provision by the registrant’s principal accountant of non-audit services to
the registrant’s investment adviser and any entity controlling, controlled by, or under common control with the adviser that provides
ongoing services to the registrant that were not pre-approved pursuant to Rule 2-01(c)(7)(ii) of Regulation S-X is
compatible with maintaining the principal accountant’s independence.
(i) Not applicable.
(j) Not applicable
Item 5. Audit Committee of Listed Registrants
The registrant has a separately-designated standing audit committee
established in accordance with Section 3(a)(58)(A) of the Exchange Act whose members are:
Nancy C. Everett, Eddie A. Grier and Jakki L. Haussler.
Item 6. Schedule of Investments
| (a) | Please
see schedule of investments contained in the Report to Stockholders included under Item 1
of this Form N-CSR. |
Item 7. Financial Statements and Financial Highlights for Open-End
Management Investment Companies
Not applicable.
Item 8. Changes in and Disagreements with Accountants for Open-End
Management Investment Companies
Not applicable.
Item 9. Proxy Disclosures for Open-End Management Investment Companies
Not applicable.
Item 10. Remuneration Paid to Directors, Officers, and Others of
Open-End Management Investment Companies
Not applicable.
Item 11. Statement Regarding Basis for Approval of Investment Advisory
Contract
Not applicable.
Item 12. Disclosure of Proxy Voting Policies and Procedures for
Closed-End Management Investment Companies
March 2023
MORGAN STANLEY INVESTMENT MANAGEMENT
EQUITY PROXY VOTING POLICY AND PROCEDURES
Morgan Stanley Investment Management's policy and procedures for voting
proxies, the Equity Proxy Voting Policy and Procedures (the "Policy"), with respect to securities held in the accounts of clients
applies to those Morgan Stanley Investment Management ("MSIM") entities that provide discretionary investment management services
and for which an MSIM entity has authority to vote proxies.1 For purposes of this Policy, clients shall include: Morgan
Stanley U.S. registered investment companies, other Morgan Stanley pooled investment vehicles, and MSIM separately managed accounts (including
accounts for Employee Retirement Income Security ("ERISA") clients and ERISA-equivalent clients). This Policy is reviewed and
updated as necessary to address new and evolving proxy voting issues and standards.
The MSIM entities covered by this Policy currently include the following:
Morgan Stanley AIP GP LP, Morgan Stanley Investment Management Inc., Morgan Stanley Investment Management Limited, Morgan Stanley Investment
Management Company, Morgan Stanley Saudi Arabia, MSIM Fund Management (Ireland) Limited, Morgan Stanley Asia Limited, Morgan Stanley
Investment Management (Japan) Co. Limited, Morgan Stanley Investment Management Private Limited, Morgan Stanley Eaton Vance CLO
Manager LLC, and Morgan Stanley Eaton Vance CLO CM LLC (each an "MSIM Affiliate" and collectively referred to as the "MSIM
Affiliates" or as "we" below).
1This Policy does not apply to MSIM’s authority to
exercise certain decision-making rights associated with investments in loans and other fixed income instruments (collectively, for purposes
hereof, “Fixed Income Instruments”).
Each MSIM Affiliate will use its best efforts to vote proxies as part
of its authority to manage, acquire and dispose of account assets.
| - | With respect to the U.S. registered
investment companies sponsored, managed or advised by any MSIM Affiliate (the "MS Funds"),
each MSIM Affiliate will vote proxies under this Policy pursuant to authority granted under
its applicable investment advisory agreement or, in the absence of such authority, as authorized
by the Board of Directors/Trustees of the MS Funds. |
| | |
| - | For other pooled investment
vehicles (e.g., UCITS), each MSIM Affiliate will vote proxies under this Policy pursuant
to authority granted under its applicable investment advisory agreement or, in the absence
of such authority, as authorized by the relevant governing board. |
| | |
| - | For separately managed accounts
(including ERISA and ERISA-equivalent clients), each MSIM Affiliate will vote proxies under
this Policy pursuant to authority granted under the applicable investment advisory agreement
or investment management agreement. Where an MSIM Affiliate has the authority to vote proxies
on behalf of ERISA and ERISA-equivalent clients, the MSIM Affiliate must do so in accordance
with its fiduciary duties under ERISA (and the Internal Revenue Code). |
| | |
| - | In certain situations, a client
or its fiduciary may reserve the authority to vote proxies for itself or an outside party
or may provide an MSIM Affiliate with a statement of proxy voting policy. The MSIM Affiliate
will comply with the client's policy. |
An MSIM Affiliate will not vote proxies unless the investment management
agreement, investment advisory agreement or other authority explicitly authorizes the MSIM Affiliate to vote proxies.
MSIM Affiliates will vote proxies in a prudent and diligent manner
and in the best interests of clients, including beneficiaries of and participants in a client's benefit plan(s) for which the MSIM Affiliates
manage assets, consistent with the objective of maximizing long-term investment returns ("Client Proxy Standard") and this
Policy. In addition to voting proxies of portfolio companies, MSIM routinely engages with, or, in some cases, may engage a third
party to engage with, the management or board of companies in which we invest on a range of environmental, social and governance
issues. Governance is a window into or proxy for management and board quality. MSIM engages with companies where we have larger positions,
voting issues are material or where we believe we can make a positive impact on the governance structure. MSIM's engagement process,
through private communication with companies, allows us to understand the governance structures at investee companies and better inform
our voting decisions.
Retention and Oversight of Outsourced Proxy Voting
Certain MSIM exchange-traded funds (“ETFs”) will follow
Calvert Research and Management’s (“Calvert”) Proxy Voting Policies and Procedures and the Global Proxy Voting Guidelines
set forth in Appendix A of the Calvert Proxy Voting Policies and Procedures. MSIM’s oversight of Calvert’s proxy voting engagement
is ongoing pursuant to the 40 Act Fund Service Provider and Vendor Oversight Policy.
Retention and Oversight of Proxy Advisory Firms
Institutional Shareholder Services ("ISS") and Glass Lewis
(together with other proxy research providers as we may retain from time to time, the "Research Providers") are independent
advisers that specialize in providing a variety of fiduciary-level proxy-related services to institutional investment managers, plan
sponsors, custodians, consultants, and other institutional investors. The services provided include in-depth research, global issuer
analysis, record retention, ballot processing and voting recommendations.
To facilitate proxy voting MSIM has retained Research Providers to
provide company level reports that summarize key data elements contained within an issuer's proxy statement. Although we are aware of
the voting recommendations included in the Research Providers' company level reports, these recommendations are not an input into our
vote nor is any potential vote prepopulated based on a Research Provider's research. MSIM votes all proxies based on its own proxy voting
policies, consultation with the investment teams, and in the best interests of each client. In addition to research, MSIM retains ISS
to provide vote execution, reporting, and recordkeeping services.
As part of MSIM's ongoing oversight of the Research Providers, MSIM
performs periodic due diligence on the Research Providers. Topics of the reviews include, but are not limited to, conflicts of interest,
methodologies for developing their policies and vote recommendations, and resources.
Voting Proxies for Certain Non-U.S. Companies
Voting proxies of companies located in some jurisdictions may involve
several problems that can restrict or prevent the ability to vote such proxies or entail significant costs. These problems include, but
are not limited to: (i) proxy statements and ballots being written in a language other than English; (ii) untimely and/or inadequate
notice of shareholder meetings; (iii) restrictions on the ability of holders outside the issuer's jurisdiction of organization to exercise
votes; (iv) requirements to vote proxies in person; (v) the imposition of restrictions on the sale of the securities for a period of
time in proximity to the shareholder meeting; and (vi) requirements to provide local agents with power of attorney to facilitate our
voting instructions. As a result, we vote clients' non-U.S. proxies on a best efforts basis only, after weighing the costs and benefits
of voting such proxies, consistent with the Client Proxy Standard. ISS has been retained to provide assistance in connection with voting
non-U.S. proxies.
Securities Lending
MS Funds or any other investment vehicle sponsored, managed or advised
by an MSIM affiliate may participate in a securities lending program through a third party provider. The voting rights for shares that
are out on loan are transferred to the borrower and therefore, the lender (i.e., an MS Fund or another investment vehicle sponsored,
managed or advised by an MSIM affiliate) is not entitled to vote the lent shares at the company meeting. In general, MSIM believes the
revenue received from the lending program outweighs the ability to vote and we will not recall shares for the purpose of voting. However,
in cases in which MSIM believes the right to vote outweighs the revenue received, we reserve the right to recall the shares on loan on
a best efforts basis.
2. General
Proxy Voting Guidelines
To promote consistency in voting proxies on behalf of our clients,
we follow this Policy (subject to any exception set forth herein). As noted above, certain ETFs will follow Calvert’s Global
Proxy Voting Guidelines set forth in Appendix A of Calvert’s Proxy Voting Policies and Procedures and the proxy voting guidelines
discussed in this section do not apply to such ETFs. See Appendix A of Calvert’s Proxy Voting Policies and Procedures for
a general discussion of the proxy voting guidelines to which these ETFs will be subject.
The Policy addresses a broad range of issues, and provides general
voting parameters on proposals that arise most frequently. However, details of specific proposals vary, and those details affect particular
voting decisions, as do factors specific to a given company. Pursuant to the procedures set forth herein, we may vote in a manner that
is not in accordance with the following general guidelines, provided the vote is approved by the Proxy Review Committee (see Section
3) and is consistent with the Client Proxy Standard. Morgan Stanley AIP GP LP (Morgan Stanley AIP") will follow the procedures as
described in Appendix A.
We endeavor to integrate governance and proxy voting policy with investment
goals, using the vote to encourage portfolio companies to enhance long-term shareholder value and to provide a high standard of transparency
such that equity markets can value corporate assets appropriately.
We seek to follow the Client Proxy Standard for each client. At times,
this may result in split votes, for example when different clients have varying economic interests and / or priorities reflected in their
mandates with respect to the outcome of a particular voting matter (such as a case in which varied ownership interests in two companies
involved in a merger result in different stakes in the outcome). We also may split votes at times based on differing views of portfolio
managers.
We may abstain from or vote against matters for which disclosure is
inadequate.
A. Routine Matters
We generally support routine management proposals. The following are
examples of routine management proposals:
| - | Approval of financial statements
and auditor reports if delivered with an unqualified auditor's opinion. |
| | |
| - | General updating/corrective
amendments to the charter, articles of association or bylaws, unless we believe that such
amendments would diminish shareholder rights. |
Most proposals related to the conduct of the annual meeting, with
the following exceptions. We generally oppose proposals that relate to "the transaction of such other business which may come before
the meeting," and open-ended requests for adjournment. However, where management specifically states the reason for requesting an
adjournment and the requested adjournment would facilitate passage of a proposal that would otherwise be supported under this Policy
(i.e., an uncontested corporate transaction), the adjournment request will be supported. We do not support proposals that allow companies
to call a special meeting with a short (generally two weeks or less) time frame for review.
We generally support shareholder proposals advocating confidential
voting procedures and independent tabulation of voting results.
MSIM is supportive of the use of technology to conduct virtual shareholder
meetings in parallel with physical meetings, for increased investor participation. However, adoption of a ‘virtual-only’
approach would restrict meaningful exchange between the company and shareholders. Therefore, MSIM is generally not supportive of proposals
seeking authority to conduct virtual-only shareholder meetings.
B. Board of Directors
Votes on board nominees can involve balancing a variety of considerations.
In vote decisions, we may take into consideration whether the company has a majority voting policy in place that we believe makes the
director vote more meaningful. In the absence of a proxy contest, we generally support the board's nominees for director except as follows:
■
We consider withholding support from or voting against a nominee if we believe a direct conflict exists between the interests
of the nominee and the public shareholders, including failure to meet fiduciary standards of care and/or loyalty. We may oppose directors
where we conclude that actions of directors are unlawful, unethical or negligent. We consider opposing individual board members or an
entire slate if we believe the board is entrenched and/or dealing inadequately with performance problems; if we believe the board is
acting with insufficient independence between the board and management; or if we believe the board has not been sufficiently forthcoming
with information on key governance or other material matters.
■
We consider withholding support from or voting against interested directors if the company's board does not meet market standards
for director independence, or if otherwise we believe board independence is insufficient. We refer to prevalent market standards as promulgated
by a stock exchange or other authority within a given market (e.g., New York Stock Exchange or Nasdaq rules for most U.S. companies,
and The Combined Code on Corporate Governance in the United Kingdom). Thus, for an NYSE company with no controlling shareholder, we would
expect that at a minimum a majority of directors should be independent as defined by NYSE. Where we view market standards as inadequate,
we may withhold votes based on stronger independence standards. Market standards notwithstanding, we generally do not view long board
tenure alone as a basis to classify a director as non-independent.
| 1. | At a
company with a shareholder or group that controls the company by virtue of a majority economic
interest in the company, we have a reduced expectation for board independence, although we
believe the presence of independent directors can be helpful, particularly in staffing the
audit committee, and at times we may withhold support from or vote against a nominee on the
view the board or its committees are not sufficiently independent. In markets where board
independence is not the norm (e.g. Japan), however, we consider factors including whether
a board of a controlled company includes independent members who can be expected to look
out for interests of minority holders. |
| 2. | We consider
withholding support from or voting against a nominee if he or she is affiliated with a major
shareholder that has representation on a board disproportionate to its economic interest. |
■
Depending on market standards, we consider withholding support from or voting against a nominee who is interested and who is standing
for election as a member of the company's compensation/remuneration, nominating/governance or audit committee.
■
We consider withholding support from or voting against nominees if the term for which they are nominated is excessive. We consider
this issue on a market-specific basis.
■
We consider withholding support from or voting against nominees if in our view there has been insufficient board renewal (turnover),
particularly in the context of extended poor company performance. Also, if the board has failed to consider diversity, including but
not limited to, gender and ethnicity, in its board composition.
■
We consider withholding support from or voting against a nominee standing for election if the board has not taken action to implement
generally accepted governance practices for which there is a "bright line" test. For example, in the context of the U.S. market,
failure to eliminate a dead hand or slow hand poison pill would be seen as a basis for opposing one or more incumbent nominees.
■
In markets that encourage designated audit committee financial experts, we consider voting against members of an audit committee
if no members are designated as such. We also consider voting against the audit committee members if the company has faced financial
reporting issues and/or does not put the auditor up for ratification by shareholders.
■
We believe investors should have the ability to vote on individual nominees, and may abstain or vote against a slate of nominees
where we are not given the opportunity to vote on individual nominees.
■
We consider withholding support from or voting against a nominee who has failed to attend at least 75% of the nominee's board
and board committee meetings within a given year without a reasonable excuse. We also consider opposing nominees if the company does
not meet market standards for disclosure on attendance.
■
We consider withholding support from or voting against a nominee who appears overcommitted, particularly through service
on an excessive number of boards. Market expectations are incorporated into this analysis; for U.S. boards, we generally oppose election
of a nominee who serves on more than five public company boards (excluding investment companies), or public company CEOs that serve on
more than two outside boards given level of time commitment required in their primary job.
■
We consider withholding support from or voting against a nominee where we believe executive remuneration practices are poor, particularly
if the company does not offer shareholders a separate "say-on-pay" advisory vote on pay.
| b. | Discharge
of Directors' Duties |
In markets where an annual discharge of directors' responsibility
is a routine agenda item, we generally support such discharge. However, we may vote against discharge or abstain from voting where there
are serious findings of fraud or other unethical behavior for which the individual bears responsibility. The annual discharge of responsibility
represents shareholder approval of disclosed actions taken by the board during the year and may make future shareholder action against
the board difficult to pursue.
We generally support U.S. shareholder proposals requiring that a certain
percentage (up to 66⅔%) of the company's board members be independent directors, and promoting all-independent audit, compensation
and nominating/governance committees.
We generally support shareholder proposals urging diversity of board
membership with respect to gender, race or other factors where we believe the board has failed to take these factors into account. We
will also consider not supporting the re-election of the nomination committee and / or chair (or other resolutions when the nomination
chair is not up for re-election) where we perceive limited progress in gender diversity, with the expectation where feasible and with
consideration of any idiosyncrasies of individual markets, that female directors represent not less than a third of the board,
unless there is evidence that the company has made significant progress in this area. In markets where information on director ethnicity
is available, and it is legal to obtain it, and where it is relevant, we will generally also consider not supporting the re-election
of the nomination committee chair (or other resolutions when the nomination chair is not up for re-election) if the board lacks ethnic
diversity and has not outlined a credible diversity strategy.
We generally support proposals requesting or requiring majority voting
policies in election of directors, so long as there is a carve-out for plurality voting in the case of contested elections.
We consider proposals on procedures for inclusion of shareholder nominees
and to have those nominees included in the company's proxy statement and on the company's proxy ballot on a case-by-case basis. Considerations
include ownership thresholds, holding periods, the number of directors that shareholders may nominate and any restrictions on forming
a group.
| g. | Reimbursement
for Dissident Nominees |
We generally support well-crafted U.S. shareholder proposals that
would provide for reimbursement of dissident nominees elected to a board, as the cost to shareholders in electing such nominees can be
factored into the voting decision on those nominees.
| h. | Proposals
to Elect Directors More Frequently |
In the U.S. public company context, we usually support shareholder
and management proposals to elect all directors annually (to "declassify" the board), although we make an exception to this
policy where we believe that long-term shareholder value may be harmed by this change given particular circumstances at the company at
the time of the vote on such proposal. As indicated above, outside the United States we generally support greater accountability to shareholders
that comes through more frequent director elections, but recognize that many markets embrace longer term lengths, sometimes for valid
reasons given other aspects of the legal context in electing boards.
We generally support proposals to eliminate cumulative voting in the
U.S. market context. (Cumulative voting provides that shareholders may concentrate their votes for one or a handful of candidates, a
system that can enable a minority bloc to place representation on a board.) U.S. proposals to establish cumulative voting in the election
of directors generally will not be supported.
| j. | Separation
of Chairman and CEO Positions |
We vote on shareholder proposals to separate the Chairman and CEO
positions and/or to appoint an independent Chairman based in part on prevailing practice in particular markets, since the context for
such a practice varies. In many non-U.S. markets, we view separation of the roles as a market standard practice, and support division
of the roles in that context. In the United States, we consider such proposals on a case-by-case basis, considering, among other things,
the existing board leadership structure, company performance, and any evidence of entrenchment or perceived risk that power is overly
concentrated in a single individual.
| k. | Director
Retirement Age and Term Limits |
Proposals setting or recommending director retirement ages or director
term limits are voted on a case-by-case basis that includes consideration of company performance, the rate of board renewal, evidence
of effective individual director evaluation processes, and any indications of entrenchment.
| l. | Proposals
to Limit Directors' Liability and/or Broaden Indemnification of Officers and Directors |
Generally, we will support such proposals provided that an individual
is eligible only if he or she has not acted in bad faith, with gross negligence or with reckless disregard of their duties.
C. Statutory Auditor Boards
The statutory auditor board, which is separate from the main board
of directors, plays a role in corporate governance in several markets. These boards are elected by shareholders to provide assurance
on compliance with legal and accounting standards and the company's articles of association. We generally vote for statutory auditor
nominees if they meet independence standards. In markets that require disclosure on attendance by internal statutory auditors, however,
we consider voting against nominees for these positions who failed to attend at least 75% of meetings in the previous year. We also consider
opposing nominees if the company does not meet market standards for disclosure on attendance.
D. Corporate Transactions and Proxy Fights
We examine proposals relating to mergers, acquisitions and other special
corporate transactions (i.e., takeovers, spin-offs, sales of assets, reorganizations, restructurings and recapitalizations) on a case-by-case
basis in the interests of each fund or other account. Proposals for mergers or other significant transactions that are friendly and approved
by the Research Providers usually are supported if there is no portfolio manager objection. We also analyze proxy contests on a case-by-case
basis.
E. Changes in Capital Structure
We generally support the following:
| - | Management and shareholder
proposals aimed at eliminating unequal voting rights, assuming fair economic treatment of
classes of shares we hold. |
| | |
| - | U.S. management proposals
to increase the authorization of existing classes of common stock (or securities convertible
into common stock) if: (i) a clear business purpose is stated that we can support and the
number of shares requested is reasonable in relation to the purpose for which authorization
is requested; and/or (ii) the authorization does not exceed 100% of shares currently authorized
and at least 30% of the total new authorization will be outstanding. (We consider proposals
that do not meet these criteria on a case-by-case basis.) |
| | |
| - | U.S. management proposals
to create a new class of preferred stock or for issuances of preferred stock up to 50% of
issued capital, unless we have concerns about use of the authority for anti-takeover purposes. |
| | |
| - | Proposals in non-U.S. markets
that in our view appropriately limit potential dilution of existing shareholders. A major
consideration is whether existing shareholders would have preemptive rights for any issuance
under a proposal for standing share issuance authority. We generally consider market-specific
guidance in making these decisions; for example, in the U.K. market we usually follow Association
of British Insurers' ("ABI") guidance, although company-specific factors may be
considered and for example, may sometimes lead us to voting against share authorization proposals
even if they meet ABI guidance. |
| | |
| - | Management proposals to authorize
share repurchase plans, except in some cases in which we believe there are insufficient protections
against use of an authorization for anti-takeover purposes. |
| | |
| - | Management proposals to reduce
the number of authorized shares of common or preferred stock, or to eliminate classes of
preferred stock. |
| | |
| - | Management proposals to effect
stock splits. |
| | |
| - | Management proposals to effect
reverse stock splits if management proportionately reduces the authorized share amount set
forth in the corporate charter. Reverse stock splits that do not adjust proportionately to
the authorized share amount generally will be approved if the resulting increase in authorized
shares coincides with the proxy guidelines set forth above for common stock increases. |
| | |
| - | Management dividend payout
proposals, except where we perceive company payouts to shareholders as inadequate. |
We generally oppose the following (notwithstanding management support):
| - | Proposals to add classes of
stock that would substantially dilute the voting interests of existing shareholders. |
| | |
| - | Proposals to increase the
authorized or issued number of shares of existing classes of stock that are unreasonably
dilutive, particularly if there are no preemptive rights for existing shareholders. However,
depending on market practices, we consider voting for proposals giving general authorization
for issuance of shares not subject to pre-emptive rights if the authority is limited. |
| | |
| - | Proposals that authorize share
issuance at a discount to market rates, except where authority for such issuance is de minimis,
or if there is a special situation that we believe justifies such authorization (as may be
the case, for example, at a company under severe stress and risk of bankruptcy). |
| | |
| - | Proposals relating to changes
in capitalization by 100% or more. |
We consider on a case-by-case basis shareholder proposals to increase
dividend payout ratios, in light of market practice and perceived market weaknesses, as well as individual company payout history and
current circumstances. For example, currently we perceive low payouts to shareholders as a concern at some Japanese companies, but may
deem a low payout ratio as appropriate for a growth company making good use of its cash, notwithstanding the broader market concern.
F. Takeover Defenses and Shareholder Rights
| - | Shareholder Rights Plans |
We generally support proposals to require shareholder approval or
ratification of shareholder rights plans (poison pills). In voting on rights plans or similar takeover defenses, we consider on a case-by-case
basis whether the company has demonstrated a need for the defense in the context of promoting long-term share value; whether provisions
of the defense are in line with generally accepted governance principles in the market (and specifically the presence of an adequate
qualified offer provision that would exempt offers meeting certain conditions from the pill); and the specific context if the proposal
is made in the midst of a takeover bid or contest for control.
| - | Supermajority Voting
Requirements |
We generally oppose requirements for supermajority votes to amend
the charter or bylaws, unless the provisions protect minority shareholders where there is a large shareholder. In line with this view,
in the absence of a large shareholder we support reasonable shareholder proposals to limit such supermajority voting requirements. Also,
we oppose provisions that do not allow shareholders any right to amend the charter of bylaws.
| - | Shareholders Right to Call
a Special Meeting |
We consider proposals to enhance a shareholder's rights to call meetings
on a case-by-case basis. At large-cap U.S. companies, we generally support efforts to establish the right of holders of 10% or more of
shares to call special meetings, unless the board or state law has set a policy or law establishing such rights at a threshold that we
believe to be acceptable.
In the U.S. context, we examine proposals for shareholder written
consent rights on a case-by-case basis.
We consider management and shareholder proposals to reincorporate
to a different jurisdiction on a case-by-case basis. We oppose such proposals if we believe the main purpose is to take advantage of
laws or judicial precedents that reduce shareholder rights.
| - | Anti-greenmail Provisions |
Proposals relating to the adoption of anti-greenmail provisions will
be supported, provided that the proposal: (i) defines greenmail; (ii) prohibits buyback offers to large block holders (holders of at
least 1% of the outstanding shares and in certain cases, a greater amount) not made to all shareholders or not approved by disinterested
shareholders; and (iii) contains no anti-takeover measures or other provisions restricting the rights of shareholders.
We may consider opposing or abstaining on proposals if disparate issues
are "bundled" and presented for a single vote.
G. Auditors
We generally support management proposals for selection or ratification
of independent auditors. However, we may consider opposing such proposals with reference to incumbent audit firms if the company has
suffered from serious accounting irregularities and we believe rotation of the audit firm is appropriate, or if fees paid to the auditor
for non-audit-related services are excessive. Generally, to determine if non-audit fees are excessive, a 50% test will be applied (i.e.,
non-audit-related fees should be less than 50% of the total fees paid to the auditor). We generally vote against proposals to indemnify
auditors.
H. Executive and Director Remuneration
We generally support the following:
| - | Proposals for employee equity
compensation plans and other employee ownership plans, provided that our research does not
indicate that approval of the plan would be against shareholder interest. Such approval may
be against shareholder interest if it authorizes excessive dilution and shareholder cost,
particularly in the context of high usage ("run rate") of equity compensation in
the recent past; or if there are objectionable plan design and provisions. |
| | |
| - | Proposals relating to fees
to outside directors, provided the amounts are not excessive relative to other companies
in the country or industry, and provided that the structure is appropriate within the market
context. While stock-based compensation to outside directors is positive if moderate and
appropriately structured, we are wary of significant stock option awards or other performance-based
awards for outside directors, as well as provisions that could result in significant forfeiture
of value on a director's decision to resign from a board (such forfeiture can undercut director
independence). |
| | |
| - | Proposals for employee stock
purchase plans that permit discounts, but only for grants that are part of a broad-based
employee plan, including all non-executive employees, and only if the discounts are limited
to a reasonable market standard or less. |
| | |
| - | Proposals for the establishment
of employee retirement and severance plans, provided that our research does not indicate
that approval of the plan would be against shareholder interest. |
We generally oppose retirement plans and bonuses for non-executive
directors and independent statutory auditors.
In the U.S. context, we generally vote against shareholder proposals
requiring shareholder approval of all severance agreements, but we generally support proposals that require shareholder approval for
agreements in excess of three times the annual compensation (salary and bonus) or proposals that require companies to adopt a provision
requiring an executive to receive accelerated vesting of equity awards if there is a change of control and the executive
is terminated. We generally oppose shareholder proposals that would establish arbitrary caps on pay. We consider on a case-by-case basis
shareholder proposals that seek to limit Supplemental Executive Retirement Plans (SERPs), but support such shareholder proposals where
we consider SERPs excessive.
Shareholder proposals advocating stronger and/or particular pay-for-performance
models will be evaluated on a case-by-case basis, with consideration of the merits of the individual proposal within the context of the
particular company and its labor markets, and the company's current and past practices. While we generally support emphasis on long-term
components of senior executive pay and strong linkage of pay to performance, we consider factors including whether a proposal may be
overly prescriptive, and the impact of the proposal, if implemented as written, on recruitment and retention.
We generally support proposals advocating reasonable senior executive
and director stock ownership guidelines and holding requirements for shares gained in executive equity compensation programs.
We generally support shareholder proposals for reasonable "claw-back"
provisions that provide for company recovery of senior executive bonuses to the extent they were based on achieving financial benchmarks
that were not actually met in light of subsequent restatements.
Management proposals effectively to re-price stock options are considered
on a case-by-case basis. Considerations include the company's reasons and justifications for a re-pricing, the company's competitive
position, whether senior executives and outside directors are excluded, potential cost to shareholders, whether the re-pricing or share
exchange is on a value-for-value basis, and whether vesting requirements are extended.
Say-on-Pay
We consider
proposals relating to an advisory vote on remuneration on a case-by-case basis. Considerations include a review of the relationship
between executive remuneration and performance based on operating trends and total shareholder return over multiple performance periods. In addition,
we review remuneration structures and potential poor pay practices, including relative magnitude of pay, discretionary bonus
awards, tax gross ups, change-in-control features, internal pay equity and peer group construction. As long-term investors,
we support remuneration policies that align with long-term shareholder returns.
I. Social and Environmental Issues
Shareholders in the United States and certain other markets submit
proposals encouraging changes in company disclosure and practices related to particular social and environmental matters. MSIM believes
that relevant social and environmental issues, including principal adverse sustainability impacts, can influence risk and return. Consequently, we
consider how to vote on proposals related to social and environmental issues on a case-by-case basis by determining the relevance of
social and environmental issues identified in the proposal and their likely impacts on shareholder value. In reviewing proposals on social
and environmental issues, we consider a company's current disclosures and our understanding of the company's management of material social
and environmental issues in comparison to peers. We seek to balance concerns on reputational and other risks that lie behind a proposal
against costs of implementation, while considering appropriate shareholder and management prerogatives. We may abstain from voting on
proposals that do not have a readily determinable financial impact on shareholder value and we may oppose proposals that intrude excessively
on management prerogatives and/or board discretion. We generally vote against proposals requesting reports or actions that we believe
are duplicative, related to matters not material to the business, or that would impose unnecessary or excessive costs. We consider
proposals on these sustainability risks, opportunities and impacts on a case-by-case basis but generally support proposals that seek
to enhance useful disclosure. We focus on understanding the company's business and commercial context and recognise that there is no
one size fits all that can apply to all companies. In assessing and prioritising proposals, we carefully reflect on the materiality of
the issues as well as the sector and geography in which the company operates. We also consider the explanation companies provide where
they may depart from best practice to assess the adequacy and appropriateness of measures that are in place.
Environmental Issues:
We generally support proposals that, if implemented, would enhance
useful disclosure on climate, biodiversity, and other environmental risks, such as disclosures aligned with SASB (Sustainability
Accounting Standards Board) and the TCFD (Task Force on Climate-related Financial Disclosures). We also generally support proposals that
aim to meaningfully reduce or mitigate a company's impact on the global climate and encourage companies to use independently verified
Science Based Targets to ensure emissions are in line with the Paris Agreement on Climate Change, which should ultimately help companies
manage long-term climate-related risks. We generally will support reasonable proposals to reduce negative environmental impacts
and ameliorate a company’s overall environmental footprint, including any threats to biodiversity in ecologically sensitive areas.
We generally will also support proposals asking companies to report on their environmental practices, policies and impacts, including
environmental damage and health risks resulting from operations, and the impact of environmental liabilities on shareholder value.
Social Issues:
We generally support proposals that, if implemented, would enhance
useful disclosure on employee and board diversity, including gender, race, and other factors. We consider proposals on other social issues
on a case-by-case basis but generally support proposals that:
● Seek
to enhance useful disclosure or improvements on material issues such as human rights risks, supply chain management. workplace safety, human
capital management and pay equity.
●
Encourage policies to eliminate gender-based violence and other forms of harassment from the workplace.
●
Seek disclosure of relevant diversity policies and meaningful workforce diversity data, including EEO-1 data.
We may consider withholding support where we have material concerns
in relation to a company’s involvement/remediation of a breach of global conventions such as UN Global Compact Principles on Human
Rights, Labour Standards, Environment and Business Malpractice.
J. Funds of Funds
Certain MS Funds advised by an MSIM Affiliate invest only in other
MS Funds. If an underlying fund has a shareholder meeting, in order to avoid any potential conflict of interest, such proposals will
be voted in the same proportion as the votes of the other shareholders of the underlying fund, unless otherwise determined by the Proxy
Review Committee. In markets where proportional voting is not available we will not vote at the meeting, unless otherwise determined
by the Proxy Review Committee. Other MS Funds invest in unaffiliated funds. If an unaffiliated underlying fund has a shareholder meeting
and the MS Fund owns more than 25% of the voting shares of the underlying fund, the MS Fund will vote its shares in the unaffiliated
underlying fund in the same proportion as the votes of the other shareholders of the underlying fund to the extent possible.
Voting Conditions Triggered Under Rule 12d1-4
Rule 12d1-4 sets forth the conditions under which a registered fund
(“acquiring fund”) may invest in excess of the statutory limits of Section 12(d)(1) of the 1940 Act (for example by owning
more than 3% of the total outstanding voting stock) in another registered fund (“acquired fund”). In the event that
a Morgan Stanley “acquiring fund” invests in an “acquired fund” in reliance on Rule 12d1-4 under the 1940 Act,
and the MS Fund and its “advisory group” (as defined in Rule 12d1-4) hold more than (i) 25% of the total outstanding voting
stock of a particular open-end fund (including ETFs) or (ii) 10% of the total outstanding voting stock of a particular closed-end fund,
the Morgan Stanley “acquiring fund” and its “advisory group” will be required to vote all shares of the open-
or closed-end fund held by the fund and its “advisory group” in the same proportion as the votes of the other shareholders
of the open- or closed-end fund.
Because MSIM and Eaton Vance are generally considered part of the
same “advisory group,” an Eaton Vance “acquiring fund” that is required to comply with the voting conditions
set forth in Rule 12d1-4 could potentially implicate voting conditions for a MS Fund invested in the same open- or closed-end fund as
the Eaton Vance “acquiring fund.” The Committee will be notified by Compliance if the conditions are triggered for a
particular open- or closed-end fund holding in an MS Fund. In the event that the voting conditions in Rule 12d1-4 are triggered,
please refer to the Morgan Stanley Funds Fund of Funds Investment Policy for specific information on Rule 12d1-4 voting requirements
and exceptions.
3. Administration of the Policy
The MSIM Proxy Review Committee (the "Committee") has overall
responsibility for the Policy. The Committee consists of investment professionals who represent the different investment disciplines
and geographic locations of MSIM, and is chaired by the director of the Global Stewardship Team ("GST"). Because proxy voting
is an investment responsibility and may affect shareholder value, and because of their knowledge of companies and markets as well
as their understanding of their clients' objectives, portfolio managers and other members of investment staff play a key role in proxy
voting, individual investment teams are responsible for determining decisions on proxy votes with consultation from the GST. The GST
administers and implements the Policy, as well as monitoring services provided by the proxy advisory firms, third-party proxy engagements
and other research providers used in the proxy voting process. As noted above, certain ETFs will follow Calvert’s Proxy Voting
Policy and Procedures, which is administered by Calvert’s Proxy Voting and Engagement Department and overseen by Calvert’s
Proxy Voting and Engagement Committee. The GST periodically monitors Calvert’s proxy voting with respect to securities held by
the ETFs.
The GST Director is responsible for identifying issues that require
Committee deliberation or ratification. The GST, working with advice of investment teams and the Committee, is responsible for voting
on routine items and on matters that can be addressed in line with these Policy guidelines. The GST has responsibility for voting
case-by-case where guidelines and precedent provide adequate guidance.
The Committee may periodically review and has the authority to amend,
as necessary, the Policy and establish and direct voting positions consistent with the Client Proxy Standard.
GST and members of the Committee may take into account Research Providers'
recommendations and research as well as any other relevant information they may request or receive, including portfolio manager and/or
analyst comments and research, as applicable. Generally, proxies related to securities held in client accounts that are managed pursuant
to quantitative, index or index-like strategies ("Index Strategies") will be voted in the same manner as those held in actively
managed accounts, unless economic interests or investment guidelines of the accounts differ. Because accounts managed using Index
Strategies are passively managed accounts, research from portfolio managers and/or analysts related to securities held in these accounts
may not be available. If the affected securities are held only in accounts that are managed pursuant to Index Strategies, and the proxy
relates to a matter that is not described in this Policy, the GST will consider all available information from the Research Providers,
and to the extent that the holdings are significant, from the portfolio managers and/or analysts.
A. Committee Procedures
The Committee meets at least quarterly, and reviews and considers
changes to the Policy at least annually. The Committee will review developing issues and approve upcoming votes, as appropriate, for
matters as requested by GST.
The Committee reserves the right to review voting decisions at any
time and to make voting decisions as necessary to ensure the independence and integrity of the votes.
B. Material Conflicts of Interest
In addition to the procedures discussed above, if the GST Director
determines that an issue raises a material conflict of interest, the GST Director may request a special committee ("Special Committee")
to review, and recommend a course of action with respect to, the conflict(s) in question.
A potential material conflict of interest could exist in the following
situations, among others:
●
The issuer soliciting the vote is a client of MSIM or an affiliate of MSIM and the vote is on a matter that materially affects
the issuer.
●
The proxy relates to Morgan Stanley common stock or any other security issued by Morgan Stanley or its affiliates except if echo
voting is used, as with MS Funds, as described herein.
●
Morgan Stanley has a material pecuniary interest in the matter submitted for a vote (e.g., acting as a financial advisor to a
party to a merger or acquisition for which Morgan Stanley will be paid a success fee if completed).
●
One of Morgan Stanley's independent directors or one of MS Funds' directors also serves on the board of directors or is a nominee
for election to the board of directors of a company held by an MS Fund or affiliate.
If the GST Director determines that an issue raises a potential material
conflict of interest, depending on the facts and circumstances, the issue will be addressed as follows:
●
If the matter relates to a topic that is discussed in this Policy, the proposal will be voted as per the Policy.
●
If the matter is not discussed in this Policy or the Policy indicates that the issue is to be decided case-by-case, the proposal
will be voted in a manner consistent with the Research Providers, provided that all the Research Providers consulted have the same recommendation,
no portfolio manager objects to that vote, and the vote is consistent with MSIM's Client Proxy Standard.
●
If the Research Providers' recommendations differ, the GST Director will refer the matter to a Special Committee to vote on the
proposal, as appropriate.
Any Special Committee shall be comprised of the GST Director, and
at least two portfolio managers (preferably members of the Committee), as approved by the Committee. The GST Director may request non-voting
participation by MSIM's General Counsel or his/her designee and the Chief Compliance Officer or his/her designee. In addition to the
research provided by Research Providers, the Special Committee may request analysis from MSIM Affiliate investment professionals and
outside sources to the extent it deems appropriate.
C. Proxy Voting Reporting
The CGT will document in writing all Committee and Special Committee
decisions and actions, which documentation will be maintained by the GST for a period of at least six years. To the extent these decisions
relate to a security held by an MS Fund, the GST will report the decisions to each applicable Board of Trustees/Directors of those MS
Funds (the "Board") at each Board's next regularly scheduled Board meeting. The report will contain information concerning
decisions made during the most recently ended calendar quarter immediately preceding the Board meeting.
In addition, to the extent that Committee and Special Committee decisions
and actions relate to a security held by other pooled investment vehicles, the GST will report the decisions to the relevant governing
board of the pooled investment vehicle. MSIM will promptly provide a copy of this Policy to any client requesting it.
MSIM will also, upon client request, promptly provide a report indicating
how each proxy was voted with respect to securities held in that client's account.
MSIM's Legal Department, in conjunction with GST and GST IT for MS
Fund reporting and with the AIP investment team for AIP Closed-End 40 Act Fund reporting, is responsible for filing an annual Form N-PX
on behalf of each MS Fund and AIP Closed-End 40 Act Fund for which such filing is required, indicating how all proxies were voted with
respect to each such fund's holdings.
Also, MSIM maintains voting records of individual agenda items a company
meetings in a searchable database on its website on a rolling 12-month basis.
In addition, ISS provides vote execution, reporting and recordkeeping
services to MSIM.
4. Recordkeeping
Records are retained in accordance with Morgan Stanley's Global
Information Management Policy, which establishes general Firm-wide standards and procedures regarding the retention, handling, and
destruction of official books and records and other information of legal or operational significance. The Global Information Management
Policy incorporates Morgan Stanley's Master Retention Schedule, which lists various record classes and associated retention
periods on a global basis.
Appendix A
Appendix A applies to the following accounts managed by Morgan Stanley
AIP GP LP (i) closed-end funds registered under the Investment Company Act of 1940, as amended; (ii) discretionary separate accounts;
(iii) unregistered funds; and (iv) non-discretionary accounts offered in connection with AIP's Custom Advisory Portfolio Solutions service.
Generally, AIP will follow the guidelines set forth in Section II of MSIM's Proxy Voting Policy and Procedures. To the extent that such
guidelines do not provide specific direction, or AIP determines that consistent with the Client Proxy Standard, the guidelines should
not be followed, the Proxy Review Committee has delegated the voting authority to vote securities held by accounts managed by AIP to
the Fund of Hedge Funds investment team, the Private Markets investment team or the Portfolio Solutions team of AIP. A summary of decisions
made by the applicable investment teams will be made available to the Proxy Review Committee for its information at the next scheduled
meeting of the Proxy Review Committee.
In certain cases, AIP may determine to abstain from determining (or
recommending) how a proxy should be voted (and therefore abstain from voting such proxy or recommending how such proxy should be voted),
such as where the expected cost of giving due consideration to the proxy does not justify the potential benefits to the affected account(s)
that might result from adopting or rejecting (as the case may be) the measure in question.
Waiver of Voting Rights
For regulatory reasons, AIP may either 1) invest in a class of securities
of an underlying fund (the "Fund") that does not provide for voting rights; or 2) waive 100% of its voting rights with respect
to the following:
1. | Any rights with respect to the removal or replacement of a director,
general partner, managing member or other person acting in a similar capacity for or on behalf of the Fund (each individually a "Designated
Person," and collectively, the "Designated Persons"), which may include, but are not limited to, voting on the election
or removal of a Designated Person in the event of such Designated Person's death, disability, insolvency, bankruptcy, incapacity, or
other event requiring a vote of interest holders of the Fund to remove or replace a Designated Person; and |
| |
2. | Any rights in connection with a determination to renew, dissolve,
liquidate, or otherwise terminate or continue the Fund, which may include, but are not limited to, voting on the renewal, dissolution,
liquidation, termination or continuance of the Fund upon the occurrence of an event described in the Fund's organizational documents;
provided, however, that, if the Fund's organizational documents require the consent of the Fund's general partner or manager,
as the case may be, for any such termination or continuation of the Fund to be effective, then AIP may exercise its voting rights with
respect to such matter. |
Item 13. Portfolio Managers of Closed-End Management Investment
Companies
Morgan Stanley China A Share Fund, Inc.
FUND MANAGEMENT
PORTFOLIO MANAGEMENT. As of the date of this report,
the Fund is managed by the Emerging Markets Equity team. The team consists of portfolio managers and analysts. Current members of the
team jointly and primarily responsible for the day-to-day management of the Fund's portfolio and the overall execution of the strategy
of the Fund are Leon Sun, a Managing Director of Morgan Stanley Asia Limited (“MSAL”) and Amay Hattangadi, a Managing Director
of Morgan Stanley Investment Management Company (“MSIM Co.” or the “Sub-Adviser). Mr. Sun has been associated with MSAL
since March 2021. Prior to joining MSAL, Mr. Sun was a Senior Portfolio Manager and Head of Investments for Hong Kong and China at a major
asset management firm since 2011. Mr. Sun began managing the Fund in March 2021. Mr. Hattangadi has been associated with the Sub-Advisor
in an investment management capacity since 2017 and, prior to that, it’s affiliates in an investment management capacity since 1997.
Mr. Hattangadi began managing the Fund in April 2021. The composition of the team may change from time to time.
OTHER ACCOUNTS MANAGED BY THE PORTFOLIO MANAGERS
As of December 31, 2024:
Mr. Sun managed three other registered investment
company with a total of approximately $115.8 million in assets; 0 pooled investment vehicles other than registered investment companies
with a total of approximately $0 in assets; and six other accounts with a total of approximately $3.1 billion in assets. Of these other
accounts, one account with a total of approximately $17.0 million in assets had performance-based fees.
Mr. Hattangadi managed ten other registered investment
company with a total of approximately $2.1 billion in assets; three pooled investment vehicles other than registered investment companies
with a total of approximately $531.3 million in assets; and 9 other accounts with a total of approximately $5.5 billion in assets. Of
these other accounts, one account with a total of approximately $17.0 million in assets had performance-based fees.
Because the portfolio managers manage assets for
other investment companies, pooled investment vehicles and/or other accounts (including institutional clients, pension plans and certain
high net worth individuals), there may be an incentive to favor one client over another resulting in conflicts of interest. For instance,
the Adviser may receive fees from certain accounts that are higher than the fee it receives from the Fund, or it may receive a performance-based
fee on certain accounts. In those instances, the portfolio manager may have an incentive to favor the higher and/or performance-based
fee accounts over the Fund. In addition, a conflict of interest could exist to the extent the Adviser has proprietary investments in certain
accounts, where portfolio managers have personal investments in certain accounts or when certain accounts are investment options in the
Adviser’s employee benefits and/or deferred compensation plans. The portfolio managers may have an incentive to favor these accounts
over others. If the Adviser manages accounts that engage in short sales of securities of the type in which the Fund invests, the Adviser
could be seen as harming the performance of the Fund for the benefit of the accounts engaging in short sales if the short sales cause
the market value of the securities to fall. The Adviser has adopted trade allocation and other policies and procedures that it believes
are reasonably designed to address these and other conflicts of interest.
Portfolio Manager Compensation Structure
Morgan Stanley’s compensation structure
is based on a total reward system of base salary and incentive compensation, which is paid either in the form of cash bonus, or for employees
meeting the specified deferred compensation eligibility threshold, partially as a cash bonus and partially as mandatory deferred compensation.
Deferred compensation granted to Investment Management employees are generally granted as a mix of deferred cash awards under the Investment
Management Alignment Plan (IMAP) and equity-based awards in the form of stock units. The portion of incentive compensation granted in
the form of a deferred compensation award and the terms of such awards are determined annually by the Compensation, Management Development
and Succession Committee of the Morgan Stanley Board of Directors.
Base salary compensation. Generally,
portfolio managers receive base salary compensation based on the level of their position with the Adviser.
Incentive compensation.
In addition to base compensation, portfolio managers may receive discretionary year-end compensation.
Incentive compensation may include:
● Cash Bonus.
● Deferred Compensation:
| ● | A mandatory program that defers a portion of incentive compensation into
restricted stock units or other awards based on Morgan Stanley common stock or other plans that are subject to vesting and other conditions. |
| ● | IMAP is a cash-based deferred compensation plan designed to increase the alignment of participants’
interests with the interests of the Advisor’s clients. For eligible employees, a portion of their deferred compensation is mandatorily
deferred into IMAP on an annual basis. Awards granted under IMAP are notionally invested in referenced funds available pursuant to the
plan, which are funds advised by MSIM and its affiliates that are investment advisers. Portfolio managers are required to notionally invest
a minimum of 40% of their account balance in the designated funds that they manage and are included in the IMAP notional investment fund
menu. |
| ● | Deferred compensation awards are typically subject to vesting over a multi-year period and are subject
to cancellation through the payment date for competition, cause (i.e., any act or omission that constitutes a breach of obligation to
the Company, including failure to comply with internal compliance, ethics or risk management standards, and failure or refusal to perform
duties satisfactorily, including supervisory and management duties), disclosure of proprietary information, and solicitation of employees
or clients. Awards are also subject to clawback through the payment date if an employee’s act or omission (including with respect
to direct supervisory responsibilities) causes a restatement of the Firm’s consolidated financial results, constitutes a violation
of the Firm’s global risk management principles, policies and standards, or causes a loss of revenue associated with a position
on which the employee was paid and the employee operated outside of internal control policies. |
MSIM compensates employees based on principles
of pay-for-performance, market competitiveness and risk management. Eligibility for, and the amount of any, discretionary compensation
is subject to a multi-dimensional process. Specifically, consideration is given to one or more of the following factors, which can vary
by portfolio management team and circumstances:
| ● | Revenue and profitability of the business and/or each fund/account managed by the portfolio manager |
| ● | Revenue and profitability of the Firm |
| ● | Return on equity and risk factors of both the business units and Morgan Stanley |
| ● | Assets managed by the portfolio manager |
| ● | External market conditions |
| ● | New business development and business sustainability |
| ● | Contribution to client objectives |
| ● | Team, product and/or MSIM and its affiliates that are investment advisers performance |
| ● | The pre-tax investment performance of the funds/accounts managed by the portfolio manager (which may,
in certain cases, be measured against the applicable benchmark(s) and/or peer group(s) over one, three and five-year periods) |
| ● | Individual contribution and performance |
Further, the Firm’s Global Incentive Compensation
Discretion Policy requires compensation managers to consider only legitimate, business related factors when exercising discretion in determining
variable incentive compensation, including adherence to Morgan Stanley’s core values, conduct, disciplinary actions in the current
performance year, risk management and risk outcomes.
SECURITIES OWNERSHIP OF PORTFOLIO MANAGERS
As of December 31, 2024, the portfolio managers
did not own any shares of the Fund.
Item 14. Purchases of Equity Securities by Closed-End Management
Investment Company and Affiliated Purchasers
REGISTRANT PURCHASE OF EQUITY SECURITIES
Period | | |
(a) Total Number of Shares (or Units) Purchased | | |
(b) Average Price Paid per Share (or Unit) | | |
(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | | |
(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs | |
January 31, 2024 | | |
N/A | | |
| | |
N/A | | |
N/A | |
February 29, 2024 | | |
N/A | | |
| | |
N/A | | |
N/A | |
March 31, 2024 | | |
N/A | | |
| | |
N/A | | |
N/A | |
April 30, 2024 | | |
N/A | | |
| | |
N/A | | |
N/A | |
May 31, 2024 | | |
| 25,754 | | |
| | | |
| N/A | | |
N/A | |
June 30, 2024 | | |
| 13,790 | | |
| | | |
| N/A | | |
N/A | |
July 31, 2024 | | |
| 7,216 | | |
| | | |
| N/A | | |
N/A | |
August 31, 2024 | | |
| 13,184 | | |
| | | |
| N/A | | |
N/A | |
September 30, 2024 | | |
| 14,677 | | |
| | | |
| N/A | | |
N/A | |
October 31, 2024 | | |
| 80,594 | | |
| | | |
| N/A | | |
N/A | |
November 30, 2024 | | |
| 37,120 | | |
| | | |
| N/A | | |
N/A | |
December 31, 2024 | | |
| N/A | | |
| | | |
| N/A | | |
N/A | |
Total | | |
| 192,335 | | |
$ | 0.54 | | |
| N/A | | |
N/A | |
Item 15. Submission of Matters to a Vote of Security Holders
There have been no material changes to the procedures by which shareholders
may recommend nominee to the Fund’s Board of Directors since the Fund last provided disclosure in response to this item.
Item 16. Controls and Procedures
| (a) | It is
the conclusion of the registrant’s principal executive officer and principal financial
officer that the effectiveness of the registrant’s current disclosure controls and
procedures (such disclosure controls and procedures having been evaluated within 90 days
of the date of this filing) provide reasonable assurance that the information required to
be disclosed by the registrant has been recorded, processed, summarized and reported within
the time period specified in the Commission’s rules and forms and that the information
required to be disclosed by the registrant has been accumulated and communicated to the registrant’s
principal executive officer and principal financial officer in order to allow timely decisions
regarding required disclosure. |
| (b) | There have been no changes
in the registrant’s internal controls over financial reporting during the period covered by this report that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
Item 17. Disclosure of Securities Lending Activities for Closed-End
Management Investment Companies
(a) For the fiscal year ended December 31, 2024, the Fund earned income
and incurred the following costs and expenses as a result of its securities lending activities:
| |
| |
Cash | |
| |
| |
| |
| |
Total | |
|
| |
| |
Collateral | |
| |
| |
| |
| |
Costs of | |
Net Income |
Gross | |
Revenue | |
Management | |
Administrative | |
Indemnification | |
Rebates to | |
Other | |
Securities | |
from Securities |
Income1 | |
Split2 | |
Fees3 | |
Fees4 | |
Fees5 | |
Borrowers | |
Fees | |
Lending Activities | |
Lending Activities |
N/A | |
N/A | |
N/A | |
N/A | |
N/A | |
N/A | |
N/A | |
N/A | |
N/A |
| 1. | Gross Income
includes income from the reinvestment of cash collateral. |
| 2. | Revenue split represents the share of revenue generated by the securities
lending program and paid to State Street. |
| 3. | Cash collateral management fees include fees deducted from a pooled cash
collateral reinvestment vehicle that are not included in the revenue split. |
| 4. | These administrative
fees are not included in the revenue split. |
| 5. | These indemnification
fees are not included in the revenue split. |
(b) Pursuant to an agreement between the Fund and State Street Bank
and Trust Company (“State Street”), the Fund may lend its securities through State Street as securities lending agent to
certain qualified borrowers. As securities lending agent of the Fund, State Street administers the Fund’s securities lending program.
These services include arranging the loans of securities with approved borrowers and their return to the Fund upon loan termination,
negotiating the terms of such loans, selecting the securities to be loaned and monitoring dividend activity relating to loaned securities.
State Street also marks to market daily the value of loaned securities and collateral and may require additional collateral as necessary
from borrowers. State Street may also, in its capacity as securities lending agent, invest cash received as collateral in pre-approved
investments in accordance with the Securities Lending Authorization Agreement. State Street maintains records of loans made and income
derived therefrom and makes available such records that the Fund deems necessary to monitor the securities lending program.
Item 18. Recovery of Erroneously Awarded Compensation
Not applicable.
Item 19. Exhibits
Signatures
Pursuant to the requirements of the
Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Morgan Stanley China A Share Fund,
Inc. |
|
|
|
By: |
/s/
John H. Gernon |
|
|
John H. Gernon |
|
|
Principal Executive Officer |
|
Date: February 21, 2025
Pursuant to the requirements of the
Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
By: |
/s/ Francis J. Smith |
|
|
Francis J. Smith |
|
|
Principal Financial Officer |
|
Date: February 21, 2025
By: |
/s/ John H. Gernon |
|
|
John H. Gernon |
|
|
Principal Executive Officer |
|
Date: February 21, 2025
Exhibit 99.CERT
Morgan Stanley China A Share Fund, Inc.
FORM N-CSR
Exhibit 19(a)(2)(i)
CERTIFICATION
I, Francis J. Smith, certify that:
| 1. | I
have reviewed this report on Form N-CSR of Morgan Stanley China A Share Fund, Inc.; |
| 2. | Based
on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered
by this report; |
| 3. | Based
on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations,
changes in net assets, and cash flows (if the financial statements are required to include
a statement of cash flows) of the registrant as of, and for, the periods presented in this
report; |
| 4. | The
registrant's other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company
Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under
the Investment Company Act of 1940) for the registrant and have: |
| (a) | Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed
such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated
the effectiveness of the registrant's disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures,
as of a date within 90 days prior to the filing date of this report based on such evaluation;
and |
| (d) | Disclosed
in this report any change in the registrant's internal control over financial reporting that
occurred during the period covered by this report that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over financial reporting;
and |
| 5. | The
registrant's other certifying officer(s) and I have disclosed to the registrant's auditors
and the audit committee of the registrant's board of directors (or persons performing the
equivalent functions): |
| (a) | All
significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize, and report financial information; and |
| (b) | Any
fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant's internal control over financial reporting. |
Date: February 21, 2025 |
/s/
Francis J. Smith |
|
Francis J. Smith |
|
Principal Financial Officer |
Morgan Stanley China A Share Fund, Inc.
FORM N-CSR
Exhibit 19(a)(2)(ii)
CERTIFICATION
I, John H. Gernon, certify that:
| 1. | I have
reviewed this report on Form N-CSR of Morgan Stanley China A Share Fund, Inc. Fund; |
| 2. | Based
on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered
by this report; |
| 3. | Based
on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations,
changes in net assets, and cash flows (if the financial statements are required to include
a statement of cash flows) of the registrant as of, and for, the periods presented in this
report; |
| 4. | The
registrant's other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company
Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under
the Investment Company Act of 1940) for the registrant and have: |
| (a) | Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed
such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated
the effectiveness of the registrant's disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures,
as of a date within 90 days prior to the filing date of this report based on such evaluation;
and |
| (d) | Disclosed
in this report any change in the registrant's internal control over financial reporting that
occurred during the period covered by this report that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over financial reporting;
and |
| 5. | The
registrant's other certifying officer(s) and I have disclosed to the registrant's auditors
and the audit committee of the registrant's board of directors (or persons performing the
equivalent functions): |
| (a) | All
significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize, and report financial information; and |
| (b) | Any
fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant's internal control over financial reporting. |
Date: February
21, 2025 |
/s/
John H. Gernon |
|
John H. Gernon |
|
Principal Executive Officer |
Exhibit 99.906CERT
Form N-CSR Item 19(b) Exhibit
CERTIFICATION PURSUANT
TO
18 U.S.C. SECTION
1350,
AS ADOPTED PURSUANT
TO
SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
The undersigned
hereby certify in their capacity as Principal Financial Officer and Principal Executive Officer, respectively, of Morgan Stanley China
A Share Fund, Inc. (the “Fund”), that:
| (a) | The
Annual Report of the Fund on Form N-CSR for the period ended December 31, 2024 (the “Report”)
fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934, as amended; and |
| (b) | The
information contained in the Report fairly presents, in all material respects, the financial
condition and the results of operations of the Fund for such period. |
A signed original of this written
statement required by section 906 has been provided to the Fund and will be retained by the Fund and furnished to the Securities and
Exchange Commission or its staff upon request.
Morgan Stanley China A Share Fund, Inc.
Date: February 21, 2025
/s/ Francis J. Smith |
|
Francis J. Smith |
|
Principal Financial Officer |
|
Date: February 21, 2025
/s/ John H. Gernon |
|
John H. Gernon |
|
Principal Executive Officer |
|
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