Evaluating the China Fund's Liquidation Plan and Its Implications for Global Emerging Market Allocations

The China Fund, Inc. (NYSE: CHN) has embarked on a strategic liquidation and dissolution process, a decision that reflects broader shifts in the global investment landscape. Approved by the board in June 2025 and pending shareholder approval at a Special Meeting on October 21, 2025, the plan aims to address persistent challenges such as the fund's long-standing discount to net asset value (NAV), its small asset size, and intensifying competition from exchange-traded funds (ETFs), according to the fund's proxy statement. This analysis evaluates the rationale behind the liquidation, its alignment with liquidity best practices, and its implications for shareholder value and emerging market allocations.

Rationale for Liquidation: Aligning with Liquidity and Market Realities

The board's decision to pursue liquidation was driven by a multifaceted assessment of market dynamics and operational constraints. The fund has traded at a consistent discount to NAV, a common issue for closed-end funds (CEFs) that lack the liquidity of ETFs. The board noted this trend in a company announcement, observing that investor demand has shifted toward more liquid alternatives, particularly in emerging markets, where ETFs have gained dominance due to their transparency, lower fees, and intraday trading flexibility.

Geopolitical uncertainties and the fund's shrinking asset base further compounded the challenge. With assets under management dwindling, the board concluded that liquidation would better serve shareholders than maintaining a costly structure. Institutional investors, including City of London Investment Management Co. Ltd. (which holds nearly 29% of the fund), played a pivotal role in advocating for the move, underscoring the pressure from major stakeholders to unlock value, as noted in a Panabee article.

Shareholder Value Considerations: Costs, Tax Implications, and Net Proceeds

If approved, the liquidation will distribute proceeds to shareholders based on NAV, net of transaction and administrative costs. However, the proxy statement provides limited detail on larger expenses, such as asset disposal fees or potential charges to the external investment manager, creating uncertainty about the final payout-a concern highlighted in the Panabee article. The fund estimates $86,400 in direct liquidation costs, but these represent a small fraction of total wind-down expenses, as outlined in the fund's special meeting details.

Tax implications for shareholders are significant. Under IRS Section 331, distributions in a complete corporate liquidation are treated as if shareholders sold their stock, triggering capital gains or losses. For taxable accounts, this could result in a double taxation burden: first at the corporate level (if the fund sells appreciated assets) and again at the individual level. Shareholders must also navigate complex reporting requirements, including Form 8949 and Schedule D, and consult tax professionals to optimize outcomes, per that accounting guidance.

Broader Implications for Emerging Market Allocations and ETF Competition

The China Fund's liquidation aligns with a broader industry trend: the rise of ETFs as the preferred vehicle for emerging market exposure. Global ETF assets surged to $15.1 trillion by 2024, driven by demand for low-cost, liquid products, according to an EY analysis. Active ETFs, in particular, have gained traction, accounting for 23% of net inflows in 2024-up from 9% five years prior, per the Deloitte outlook. Innovations such as hedged-equity strategies and digital asset ETPs (e.g., Bitcoin and Ethereum-focused products) have further diversified the ETF landscape, offering investors tools to navigate volatility, as the EY analysis also discusses.

For emerging market allocations, the shift toward ETFs signals a structural change. Traditional CEFs like CHN face an uphill battle against ETFs' cost efficiency and liquidity. EY projects that global ETF assets will reach $25 trillion by 2030, with niche themes in emerging tech and renewable energy driving growth, a forecast outlined in the EY analysis. The China Fund's liquidation may thus serve as a case study for how outdated structures are being phased out in favor of more dynamic, investor-centric models.

Conclusion

The China Fund's liquidation plan represents a strategic response to evolving market demands and operational inefficiencies. While the move aims to resolve the fund's discount to NAV and align with liquidity best practices, shareholders must weigh the tax complexities and potential hidden costs. For global investors, the case underscores the growing dominance of ETFs in emerging markets and the need to adapt allocations to capitalize on liquid, innovative products. As the October 21 vote approaches, the outcome will offer insights into the future of CEFs in an ETF-driven world.