PACL.L Regulatory News (PACL)

20 September 2012

Pacific Alliance China Land Limited

('PACL' or the 'Company')

Unaudited Results for the six months ended 30 June 2012

Pacific Alliance China Land Limited ('PACL' or the 'Company'), an AIM-traded, closed-end investment company with a portfolio of investments including existing properties, new developments, distressed projects and real estate companies in Greater China, has today announced its financial results for the six months to 30 June 2012.

Highlights

·; Net asset value as at 30 June 2012 was US$301 million, representing US$2.16 per share, a 2% increase from 31 December 2011 (US$295 million) and a 19% increase year-on-year (30 June 2011; US$253m, representing US$1.81 per share). This represents an annualized increase of 18% since inception.

·; The Company's share price closed at US$1.37, a 13% increase year-on-year and a 36% discount to the unaudited NAV per share as at 30 June 2012.

·; PACL's NAV and share price have both consistently outperformed major benchmark indices including the FTSE 350 Real Estate Index and the FTSE AIM All-Share Index since inception.

·; PACL was rated the best performing China Real Estate Fund by Morningstar in May 2012, in recognition of the Company's 18% compound annual NAV growth.

Patrick Boot, Managing Director, Pacific Alliance Real Estate Limited said that while there were no signs of across the board easing of property and monetary policy in China during the first half of 2012, positive indicators were beginning to emerge across all sectors of the China property market.

"Office and retail property sale prices and rental rates continued to rise while vacancy rates dropped during the first half of 2012, and this upward market momentum once again drove returns for the PACL portfolio. Over the same period, we began to see glimpses of improvement in the residential sector as the impact of lower interest rates and falling home prices released some of the pent-up demand from both first-time buyers and up-graders.

"The subsequent growth in volumes despite continuing purchase restrictions is good news, but it is tempered by the expectation that the Chinese government will maintain controls to curb residential property speculation and the uncertainty as to the direction of economic and monetary policy following the Chinese leadership transition taking place this fall," he said.

The Company continues to monitor market and policy movements and remains committed to a dynamic investment approach that will continue to generate attractive returns despite ongoing economic and political uncertainty.

The interim report will be sent to registered shareholders shortly and a copy will be available on the Company's website www.pacl-fund.com.

For further information please contact:

Notes to Editors:

About Pacific Alliance China Land Limited

Pacific Alliance China Land Limited ("PACL") (AIM: PACL) is a closed-end investment company that was admitted to trading on the AIM Market of the London Stock Exchange in November 2007. PACL is focused on investing in a portfolio of existing properties, new developments, distressed projects and real estate companies in Greater China.

For more information about PACL, please visit: www.pacl-fund.com

Pacific Alliance China Land Limited is a member of PAG (formerly known as Pacific Alliance Group), which is one of the region's largest Asia-focussed alternative investment managers, with funds under management across Private Equity, Real Estate and Absolute Return strategies.

Founded in 2002, PAG now has a presence across Asia with over 300 staff working in the region.

For more information about PAG, please visit: www.pagasia.com

PACIFIC ALLIANCE CHINA LAND LIMITED

(Incorporated in the Cayman Islands with limited liability)

Chair's Statement

Pacific Alliance China Land Limited ("the Company") continued to grow its net asset value ("NAV") during the first half of 2012. The Company's NAV was US$301 million or USD2.1553 per share as of 30 June 2012, a 2% increase from 31 December 2011, and a 19% increase from 30 June 2011. The increase is the result of the Company's continued commitment to its multi-strategy investment approach which has delivered significant value to shareholders since the Company's inception.

China's GDP growth moderated to a three-year low of 7.6% year on year in the second quarter of 2012. In response to signs of slower economic growth, the Chinese government moved to lower the loan and deposit rate, as well as the reserve requirement ratio twice in the first half of the year. It is widely anticipated that the government will continue to fine tune monetary policy with incremental adjustments to maintain stable growth over the remaining six months.

The impact of lower interest rates and falling home prices has released pent-up demand from both first-time buyers and up-graders, leading to more buying in the residential property sector. Despite purchase limits which remain widely in place, residential sales volumes have begun to strengthen across-the-board, both in first and second-tier cities. While this is positive news for the market, the Chinese government is expected to maintain controls to curb residential property speculation and purchase restrictions are expected to continue at least in the near term, so the full extent of the upturn is yet to be seen.

Adding to this uncertainty will be the impact of the Chinese leadership transition taking place in the fall of this year. There is no indication currently as to whether a new government will change direction on economic and monetary policy and how any change might affect the property sectors. The Manager continues to monitor conditions closely and will adjust its strategy as required to adapt to these ever-changing market dynamics, and ensure it is well placed to exploit all opportunities they present, while minimizing potential risk.

For now, the Manager believes the Company's focus on the commercial and retail sectors remains correct. While we watch the residential sector movements with interest, we continue to generate positive results from the ongoing upward trend in the commercial and retail markets.

To date, the Company's investment focus on commercial property has proven successful. Over the past four years the Manager's unique multi-strategy investment approach has delivered a compound annual growth in NAV of 18%, making it the best performing 'China Real Estate Fund' as rated by Morningstar in May 2012 (1). I would like to extend our congratulations and thanks to the Manager on behalf of the Board of Directors. We are confident that our dynamic investment approach will continue to generate attractive returns, and we look forward to continued success, even in these uncertain times.

(1)As at May 2012 by Morningstar; based on cumulative returns over a three-year period from May 2009 to April 2012.

Margaret Brooke

Chair

Investment Manager's Report

Portfolio Performance

As at 30 June 2012, the Company's unaudited total net asset value ("NAV") was US$301 million, or US$2.1553 per share. This is a 2% increase from 2011 or 19% increase year-on-year and an annualized increase of 18% since inception. Independent valuations are currently undertaken on a quarterly basis by recognized international valuation firms and real estate appraisers.

On 30 June 2012, the Company's share price closed at US$1.3725, a 13% increase year-on-year and a 36% discount to the audited NAV per share. PACL's NAV and share price have both outperformed major benchmark indices including the FTSE 350 Real Estate Index and the FTSE AIM All-Share Index on a consistent basis since inception.

Portfolio Summary

As at 30 June 2012, the Company held investments with a cost of approximately US$131 million and fair value of approximately US$312 million. The Company's portfolio is diversified across five strategies including bridge financing, co-development, pre-IPO financing, platform investment and asset acquisition.

Note

(1) The gross investment value includes an amount attributable to the PACL II shareholders.

Investment Strategy

During the first half of 2012, there were signs that opportunities may begin to re-appear in the residential property sector in the second half of the year and beyond, despite the government's continuing commitment to purchase limits. The Manager believes that recent improvements in residential sales volumes suggest that attractive risk-adjusted returns may be derived over the medium term from residential projects supported by sound fundamentals, combined with downside protected structures. Longer term support for the sector will likely come from China's steadily continuing urbanization driving residential demand. The Company will continue to act prudently in selecting and monitoring investments from this sector.

The office and retail property sectors continue their upward momentum as sales prices and rental rates continued to rise, while vacancy rates lowered. The attractiveness of first-tier cities to international retailers as brand locations has further sustained prime retail rental growth, and an expected rise in domestic consumption, driven by government stimulus, should drive this growth further. Meanwhile, steady take-up in the office property sector was seen across all major first-tier cities and this was not limited to prime CBD locations. We see that some of the evolving decentralized areas which offer larger office space with better infrastructure and facilities are increasingly sought after by both domestic and multinational companies in the non-financial sector.

With approximately two thirds of the Company's portfolio weighted in the office, retail and leisure sectors, our multi-strategy approach has enabled us to effectively mitigate some of the policy risks to the portfolio and thereby allowed the Company to outperform its peers. Looking ahead, we will continue to seek co-development opportunities with quality development partners. We will pursue value-added asset acquisitions emerging from off-market and/or special situations. In the meantime, we will continue to improve the operations of the Company's existing investments, and actively seek to exit opportunities at attractive pricing which can be accretive to the Company's NAV.

Defensive Strategies

Bridge Financing

Despite the improved market liquidity, small-to-medium sized developers are still finding it difficult to secure new loans. The Company's bridge financing solutions continue to offer these cash-constrained developers alternative financing sources. The Manager will work discreetly to select projects that have sound real estate fundamentals and credit-worthy borrowers with good development track records.

Co-Developments with Preferred Returns

Recent improvements in the credit environment and the rebound in home sales have improved liquidity among larger developers. Consequently, the Manager is seeing some decline in the attractiveness of joint ventures terms being offered compared to six months ago. At the same time, improved sentiment has boosted confidence and developers have started to stock up their land banks while land prices are still relatively modest, particularly in the mixed-use sector. We see this as a good opportunity to work closely with quality developers and over the remainder of the year, the Manager will continue to focus on opportunities in commercial or mixed-use development projects in first and second-tier cities. As we explore opportunities in this sector we look not only for preferred return structures, but also to work with partners who have a good reputation, proven development track record and strong execution capability.

Growth Strategies

Value-Added Asset Acquisitions

In light of the more favourable market conditions in the commercial property sector, the Manager is actively seeking existing or nearly completed retail/commercial properties with lease-up and/or ineffective management which represent high value-added opportunities. We are actively exploring this investment sector, particularly opportunities arising from special situations and off-market.

Platform Investment

The slow recovery of the global economy and uncertainty over the Eurozone's prospects, along with China's softening economic conditions, are impacting the capital markets. Developers who had planned IPOs may now be forced to consider strategic financing at a corporate and/or project level for additional funds. We expect this will open up new platform opportunities for the Company. As in the co-development sector, we will pursue opportunities with quality companies that have good track records and high-quality land banks.

Conclusion

China's residential property market continues to face a challenging environment amid mixed policy targets for this year. The Manager is confident the Company will continue to capitalize on attractive investment opportunities while minimizing the risk associated with the residential property sector. The Company remains committed to improving its asset management programme and strengthening its investment pipeline to deliver sustainable long-term results for its shareholders.

UNAUDITED CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES

AS AT 30 JUNE 2012

Approved by the Board of Directors

UNAUDITED CONSOLIDATED SCHEDULE OF INVESTMENTS

AS AT 30 JUNE 2012

(1)The principal above represents the principal calculated according to the Fund's accounting purpose, which is different from the loan principal calculated in accordance with the legal agreements whereby the cost is paid prior to the repayment of interest component.

UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE PERIOD ENDED 30 JUNE 2012

UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS

FOR THE PERIOD ENDED 30 JUNE 2012

UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE PERIOD ENDED 30 JUNE 2012

Non-cash transaction:

See Note 10 for the settlement of performance fee in shares.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED 30 JUNE 2012

1 Organization

Pacific Alliance China Land Limited (the "Company") was incorporated on 5 September 2007 in the Cayman Islands. It is a closed-end Cayman Islands registered, exempted company. The address of its registered office is PO Box 472, 2nd Floor, Harbour Place, Grand Cayman KY1-1106, Cayman Islands.

The Company's ordinary shares are traded on the AIM Market of the London Stock Exchange. The Company can raise additional capital up to the authorized share capital as described in Note 8 below.

The principal investment objective of the Company is to provide shareholders with capital growth and a regular level of income from investments in existing properties, new developments, distressed projects and real estate companies in Greater China.

The Company's investment activities are managed by Pacific Alliance Real Estate Limited ("PARE" or the "Investment Manager"). The Company has appointed Sanne Trust Company Limited to act as the custodian of certain assets of the Company, the administrator and registrar pursuant to the custodian agreement and fund administration services agreement respectively.

The consolidated financial statements were approved by the Board of Directors on 19 September 2012.

2 Summary of significant accounting policies

The following significant accounting policies are in conformity with accounting principles generally accepted in the United States of America ("US GAAP"). The Company applies the provisions of Financial Accounting Standards Board ("FASB") Accounting Standard Codification ("ASC") 946-10, Financial Services - Investment Companies (formerly the AICPA Audit and Accounting Guide for Investment Companies) (the "Guide"). Such policies are consistently followed by the Company in the preparation of its consolidated financial statements.

(a) Principles of consolidation

These consolidated financial statements include the financial statements of the Company and its subsidiaries (collectively, the "Fund"). Subsidiaries are fully consolidated from the date on which control is transferred to the Fund and deconsolidated from the date that control ceases. Inter-company transactions between group companies are eliminated upon consolidation.

The Company uses wholly and partially owned special purpose vehicles ("SPVs") to hold and transact in certain investments. The Company's policy is to consolidate, as appropriate, those SPVs in which the Company has control over significant operating, financial or investing decisions of the entity.

Except when an operating company provides services to the Company, investment in an operating company is carried at fair value (refer to Note 2(c) below for fair value measurement).

(b) Use of estimates

The preparation of consolidated financial statements in conformity with US GAAP requires the Fund's management to make estimates and assumptions that affect the reported value of assets and liabilities and disclosures of contingent assets and liabilities as at 30 June 2012 and the reported amounts of income and expenses for the period then ended. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 2(m).

(c) Investments

The Fund holds investment securities which are unlisted and have limited marketability. The Fund also engages in secured lending transactions consisting of repurchase agreements and other secured borrowings.

(i) Recognition and derecognition

Regular purchase and sale of investments are accounted for on the trade date, the date the trade is executed. Costs used in determining realized gains and losses on the disposal of investments are based on the specific identification method for unlisted or unquoted investments. Cost includes legal and due diligence fees associated with the acquisition of investments.

Transfer of investments is accounted for as a sale when the Fund has relinquished control over the transferred assets. Any realized gains and losses from investments are recognized in the consolidated statement of operations.

(ii) Fair value measurement

The Fund is an investment company under the Guide. As a result, the Fund records and re-measures its investments on the consolidated statement of assets and liabilities at fair value, with unrealized gains and losses resulting from changes in fair value recognized in the consolidated statement of operations.

Fair value is the amount that would be received to dispose of the investments in an orderly transaction between market participants at the measurement date, i.e. the exit price. Fair value of investments is determined by the Valuation Committee of the Fund, which is established by the Investment Manager and the Board of Directors.

The fair value of unlisted or unquoted securities are based on the Fund's valuation models, including earnings multiples (based on the budgeted earnings or historical earnings of the issuer and earnings multiples of comparable listed companies) and discounted cash flows. The Valuation Committee also considers the relevant developments since acquisition of the investments, the original transaction price, recent transactions in the same or similar instruments, completed third-party transactions in comparable instruments, reliable indicative offers from potential buyers and rights in connection with realization. It adjusts the model as necessary for factors such as non-maintainable earnings, tax risk, growth stage, and cash traps. Cross-checks of primary techniques are made against other secondary valuation techniques.

In determining fair valuation of certain unlisted securities, the Valuation Committee uses as reference valuations made by independent valuers which rely on the financial data of investees and on estimates made by the management of the investee companies as to the effect of future developments. The independent valuers also assist in the selection of valuation techniques and models. Loans receivable are recorded at fair value in accordance with the guidance set forth in Note 4, and the valuation techniques applied usually takes into account the estimated future cash flows, liquidity, credit, market and interest rate factors. However, there are inherent limitations in any valuation technique due to the lack of observable inputs. Estimated fair value may differ significantly from the value that would have been used had a readily available market for such investments existed and these differences could be material to the financial statements. Additional information about the level of market observability associated with investments carried at fair value are disclosed in Note 4 below.

(d) Other receivables and payables

Other receivables and payables are initially measured at fair value and subsequently measured at amortized cost.

(e) Cash and cash equivalents

Cash represents cash at banks and does not include restricted cash such as fixed deposits pledged as security for the bank loans. Cash equivalents are defined as short-term, highly liquid investments which mature within three months or less of the date of purchase.

(f) Restricted cash

The Fund classifies cash that is restricted for specific purposes and is unavailable for general use as restricted cash.

(g) Bank loans

Bank loans are initially recognized at fair value, net of transaction costs incurred and subsequently stated at amortized cost. Any difference between the proceeds (net of transaction costs) and the redemption value is recognized in the consolidated statement of operations over the period of the borrowing using the effective interest method.

(h) Share capital

Ordinary shares are classified as equity. Where any group company purchases the Company's equity share capital, the consideration paid is deducted from equity until the shares are cancelled or reissued. Where such ordinary shares are subsequently reissued, any consideration received is included in equity.

(i) Foreign currency translation

The books and records of the Fund are maintained in United States Dollars ("US$"), which is also the functional currency. Assets and liabilities, both monetary and non-monetary, denominated in foreign currencies are translated into US$ at period-end exchange rates, while income and expenses are translated at the exchange rates in effect during the period.

Gains and losses attributed to changes in the value of foreign currencies for investments, cash balances and other assets and liabilities are reported as foreign exchange gain and loss.

(j) Taxation

The Fund may be subject to taxes imposed in jurisdictions in which it invests and operates. Such taxes are generally based on income and gains earned. Taxes are accrued on investment income, realized gains, and unrealized gains, as appropriate, when the income and gains are earned. The Fund accrues for liabilities relating to uncertain tax positions only when such liabilities are probable and can be reasonably estimated in accordance with the authoritative guidance contained in ASC 740 Income Taxes (formerly, FASB Interpretation No.48, accounting for uncertainty in Income Taxes) described in Note 9.

The Fund files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. The Fund uses the asset and liability method to provide income taxes on all transactions recorded in the consolidated financial statements. This method requires that income taxes reflect the expected future tax consequences of temporary differences between carrying amounts of assets or liabilities for book and tax purposes. Accordingly, a deferred tax asset or liability for each temporary difference is determined based on the tax rates that the Fund expects to be in effect when the underlying items of income and expense are realized.

(k) Recognition of income and expenses

Interest income on bank balances is accrued as earned using the effective interest method.

Dividend income is recognized on the ex-dividend date and is recorded net of withholding taxes where applicable.

Consulting income is recognized in accounting period in which the services are rendered.

Expenses are recorded on an accrual basis. Provision of deferred expenses are made as if the investments are liquidated and realised at value stated as the period-end.

(l) Subsequent events

The Fund discloses events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. See Note 15, Subsequent Events, for further discussion.

(m) Critical accounting estimates and assumptions

Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below.

(i) Fair value of investments

The fair value of unlisted or unquoted securities and loans receivable is determined by using valuation techniques. Judgement is used to select a variety of methods and make assumptions that are mainly based on market conditions existing at the end of each reporting period.

Although best judgment is used in estimating fair value, there are inherent limitations in any valuation technique. Estimated fair value may differ significantly from the value that would have been used had a readily available market for such investments existed and these differences could be material to the consolidated statement of assets, liabilities and partners' capital. Additional information about the level of market observability associated with investments carried at fair value is disclosed in Note 4 below.

(ii) Taxation

The Fund may be subject to income taxes in jurisdictions it invests and operates. Significant judgement is required in determining the worldwide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain. The Fund recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred income tax assets and liabilities in the period in which such determination is made.

3 Concentration of risks

(a) Market risk

Market risk represents the potential loss in value of financial instruments caused by movements in market variables, such as equity prices.

Investments are made with a focus on the Greater China. Political or economic conditions and the possible imposition of adverse laws or currency exchange restrictions in that region could cause the Fund's investments and the respective markets to become less liquid and also the prices to become more volatile.

The Fund's investments may have concentration in a particular industry or sector and performance of that particular industry or sector may have a significant impact on the Fund. The Fund's concentration of investments in a particular industry or sector is presented on the consolidated schedule of investments.

The Fund's investments may also be subject to the risk associated with investing in private equity securities. Investments in private equity securities may be illiquid and subject to various restrictions on resale and there can be no assurance that the Fund will be able to realize the value of such investments in a timely manner.

See Note 4 below for a discussion on the inputs in fair value measurement of the Fund's investments.

(b) Interest rate risk

Interest rate risk arises from the fluctuations in the prevailing levels of market interest rates which affect the fair value of financial assets and liabilities and future cash flows. The Fund has bank accounts, restricted cash, loans receivable and bank loans that expose the Fund to interest rate risk. The Fund has direct exposure to interest rate changes in respect of the valuation and cash flows of its interest bearing assets and liabilities. The Fund may also be indirectly affected by interest rate changes in respect of the earnings of certain companies in which it invests.

(c) Currency risk

The Fund has assets and liabilities denominated in currencies other than the US$, the functional currency. The Fund is therefore exposed to currency risk as the value of assets and liabilities denominated in other currencies may fluctuate due to changes in exchange rates. The net assets of the Fund are denominated in the following currencies:

(d) Credit risk

The Fund is exposed to default risk by the counterparties of the loans receivable. Whilst the loans receivable are structured to provide the Fund with adequate collateral in the event of default, enforcement may be subject to the legal system of the countries where the relevant agreements are entered. Even when a contract is enforced, the collateral may not be sufficient to fully compensate the Fund for default losses. In an attempt to mitigate the losses, the Fund, where possible, obtains independent valuations of the collateral on a regular basis and monitors the fair value of collateral relative to the loan amounts plus accrued interest and where necessary, requires additional cash or collateral from the borrower to manage its exposure. However, these valuations do not guarantee the ultimate realizable value of the collateral.

The legal system of the countries in which the Fund invests vary widely in their development, degree of sophistication, attitude, and policies towards bankruptcy, insolvency, liquidation, receivership, default and treatment of creditors and debtors. Furthermore, the effectiveness of the judicial system of the countries in which the Fund invests varies, thus the Fund (or any entity in which the Fund holds a direct or secondary interest) may have difficulty in successfully pursuing claims in the courts of such countries. To the extent that the Fund or an entity in which the Fund holds a direct or secondary interest has obtained a judgement but is required to seek its enforcement in the courts of the countries in which the Fund invests, there can be no assurance that the court will enforce such judgement.

As at 30 June 2012, investments in loans receivable and bonds of US$48,445,734 (31 December 2011: US$58,764,780) were borrowed/issued by counterparties which are currently unrated by any rating agency.

(e) Liquidity risk

As the Company is closed-end, it is not exposed to redemptions of shares by its shareholders.

The Fund is exposed to liquidity risk as the majority of the investments of the Fund are illiquid while some of the Fund's liabilities are with short maturity. Details of the maturity analysis on loans receivable are set out in Note 5 below. Illiquid investments include any securities or instruments which are not actively traded on any major securities market or for which no established secondary market exists where the investments can be readily converted into cash. Reduced liquidity resulting from the absence of an established secondary market may have an adverse effect on the prices of the Fund's investments and the Fund's ability to dispose of them when necessary to meet liquidity requirements. The liquidity risk and the liability level of the Fund is closely monitored by the Investment Manager. All current bank loans are fully collateralized with cash and the Fund has been able to distribute US$19,740,568 (31 December 2011: US$44,142,178) to PACL II Limited ("PACL II") during the period ended 30 June 2012.

China currently has foreign exchange restrictions, especially in relation to the repatriation of foreign funds. Any unexpected foreign exchange control in China may cause difficulties in the repatriation of funds. The Fund invests in China and is therefore exposed to the risk of repatriating funds out of China on a timely basis to meet its obligations. See Note 3(c) above for exposure to Renminbi.

The Fund has the ability to borrow in short term and is subject to certain limitations, including the total amount of all borrowings outstanding at any time shall not exceed 50% of the Fund's total assets at such time.

4 Investments

The Fund discloses the fair value of its investment in a hierarchy that prioritizes the inputs to valuation techniques used to measure the fair value. The hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation (Level 3 measurements). Three levels of the fair value hierarchy are as follows:

Level 1

Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Fund has the ability to access at the measurement date;

Level 2

Inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly or indirectly, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not considered to be active, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived principally from or corroborated by observable market data by correlation or other means; and

Level 3

Unobservable inputs based on the best information available in the circumstances, to the extent observable inputs are not available (including the Fund's own assumptions used in determining the fair value of investments).

Inputs to measure fair values broadly refer to the assumptions that market participants use to make valuation decisions, including assumptions about risk. Inputs may include price information, volatility statistics, specific and broad credit data, liquidity statistics and other factors. An asset or a liability's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes "observable" requires significant judgment. The Valuation Committee considers observable data to be such market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary and provided by multiple, independent sources that are actively involved in the relevant market. The categorization of an asset or a liability within the hierarchy is based upon the pricing transparency of the asset or liability and does not necessarily correspond to the Valuation Committee's perceived risk of that asset or liability.

In determining an instrument's placement within the hierarchy, the Valuation Committee follows the following:

Level 1

Investments in listed stocks and derivatives that are valued using quoted prices in active markets and are therefore classified within Level 1 of the fair value hierarchy.

As at 30 June 2012 and 31 December 2011, the Fund did not have any investments that were categorized as Level 1 within the fair value hierarchy.

Level 2

Investments in listed stocks for which trading is restricted for a certain period of time and for which the restriction is applicable to market participants in general (for example, legal person shares containing lock-up periods) are valued using the last traded prices of the listed stocks after factoring in discounts for liquidity. Such investments are generally classified within Level 2 of the fair value hierarchy.

Level 3

Assets are classified within Level 3 of the fair value hierarchy if they are traded infrequently and therefore have little or no price transparency. Such assets include investments in unlisted stocks and bonds and loans receivable. Investments classified within Level 3 have significant unobservable inputs, as they trade infrequently or not at all. When observable prices are not available for these securities, the Valuation Committee uses one or more valuation techniques (e.g., the market approach or the income approach) for which sufficient and reliable data is available. Within Level 3, the use of the market approach generally consists of using comparable market transactions, while the income approach generally consists of the net present value of estimated future cash flows, adjusted as appropriate for liquidity, credit, market and/or other risk factors.

The inputs used by the Valuation Committee in estimating the value of Level 3 investments include the original transaction price, recent transactions in the same or similar instruments, completed or pending third-party transactions in the underlying investment or comparable issuers, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt capital markets, and changes in financial ratios or cash flows. Valuation of Level 3 investments may also be adjusted to reflect illiquidity and/or non-transferability with the amount of such discount estimated by the Valuation Committee in the absence of market information.

The fair value measurement of Level 3 investments does not include transaction costs that may have been capitalized as part of the security's cost basis. Assumptions used by the Valuation Committee due to the lack of observable inputs may significantly impact the resulting fair value and therefore the Fund's results of operations.

All of the Fund's investments are categorized as Level 3 investments within the fair value hierarchy. The following table summarizes the movements in fair value of the Fund's Level 3 instruments by captions:

As at 30 June 2012, investments of US$263,356,441 (31 December 2011: US$253,438,035) were held directly by the Fund, and investments of US$48,586,440 (31 December 2011: US$59,023,680) were held through jointly owned entities with Pacific Alliance Asia Opportunity Fund L.P. ("PAX L.P."), an investment fund managed by Pacific Alliance Investment Management Limited, a fellow subsidiary of the Investment Manager.

The following table summarizes the movements in fair value of the Fund's Level 3 instruments.

Total net change in unrealized gains on Level 3 instruments as shown above are presented in the consolidated statement of operations.

5 Investments - loans receivable

As at 30 June 2012, the Fund had a secured borrowing receivable from unaffiliated parties amounting to US$9,002,514 (31 December 2011: US$9,807,034). The loan will mature in the next 6 months.

For the period ended 30 June 2012, total realized gains recognized on the loan amounted to US$ Nil (31 December 2011: US$Nil) and net change in unrealized losses for the loan receivable amounted to US$804,520 (31 December 2011: US$4,120,913).

6 Investments - bonds

As at 30 June 2012, the Fund had a bond investment from an unaffiliated party amounting to US$39,443,220 (31 December 2011: US$48,957,746). The Fund held collateral in the form of assets of the bond issuer and its subsidiaries. The fair value of the investment is determined by the Valuation Committee. For the period ended 30 June 2012, total realized gains recognized on the bond amounted to US$8,957,746 (31 December 2011: US$Nil).

7 Bank loan and restricted cash

In order to finance the investment projects in different currencies, the Fund may from time to time enter into loan agreements with banks which are fully secured by deposits in currencies other than the denomination of the loans held directly by the Fund or related entities. In the event that amounts under the loan agreements are due and not paid, the banks are entitled to receive an amount of the deposits equal to the unpaid amount.

On 25 February 2011, the Fund borrowed a bank loan of US$38,121,000 ("the Loan") from a bank based in Hong Kong, due on 1 February 2012, to facilitate a cash distribution to PACL II for its subsequent distribution to its shareholders. The interest charged on the Loan is LIBOR plus 2.5% per annum and the Loan was pledged with a cash allocated from the realization proceed of the Tender Offer Portfolio (see definition in Note 12(a) below) of US$ 43,330,560 or RMB273,000,000 kept by the Fund as a fixed deposit (the "Pledged Deposit").

As part of the arrangement, all interest income earned from the Pledged Deposit, Loan-related arrangement and handling fee expenses, interest expenses incurred on the Loan, and foreign exchange gains/(losses) arising from the Loan will be allocated to the PACL II.

For the period ended 30 June 2012, a net gain/(loss) on loan-related expense of (US$228,173) (period ended 30 June 2011: US$250,777) was incurred and allocated to PACL II. It comprised of interest expense, arrangement and handling fee expenses, interest income and foreign exchange gain/(loss) amounting to US$106,536 (period ended 30 June 2011: US$352,399), US$205,585 (period ended 30 June 2011: US$200,643), US$138,548 (period ended 30 June 2011: US$Nil), and (US$54,600) (period ended 30 June 2011: US$803,819) respectively.

The Loan was repaid and the Pledged Deposit released in February 2012.

8 Share capital, share premium, capital surplus and tendered shares

At 30 June 2012, the total authorized number of ordinary shares was 10,000,000,000 (31 December 2011: 10,000,000,000) with par value of US$0.01 (31 December 2011: US$0.01) per share.

Movement of tendered shares are as follows:

As at 30 June 2012, the Company had 189,833,893 (31 December 2011: 189,833,893) ordinary shares in issue, of which 49,957,176 (31 December 2011:49,957,176) were held as tendered shares.

On 18 July 2012, 5,399,241 ordinary shares have been tendered for repurchase by the Company at a tender price of US$2.11 per share.

9 Taxation

The Fund adopted the authoritative guidance contained in FASB ASC 740 on accounting for and disclosure of uncertainty in tax positions, which required the directors to determine whether a tax position of the Fund is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. For tax positions meeting the more likely than not threshold, the tax amount recognized in the financial statements is reduced by the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant taxing authority.

The uncertain tax positions identified by the directors mainly include:

(a) Whether any of the Fund and its offshore SPVs would be deemed as a China Tax Resident Enterprise ("TRE") under the China Corporate Income Tax ("CIT") Law. If an offshore entity is deemed as a China TRE, its income would be subject to China corporate income tax at 25%.

(b) Whether any of the Fund and its offshore SPVs that may derive income would be deemed as having an establishment or place in China. If an offshore entity has an establishment or place in China, income derived by the offshore entity that is derived from China by the establishment or place or income that is effectively connected to the establishment or place would be subject to China CIT at 25%.

(c) Whether any of the Fund and its offshore SPVs is subject to Hong Kong profits tax. An entity would be subject to Hong Kong profits tax if (i) the entity carries on a trade, profession or business in Hong Kong; (ii) profits are derived from that trade, profession or business carried on in Hong Kong (excluding gains of a capital nature); and (iii) the profits arise in or are derived from Hong Kong, i.e. have a Hong Kong source.

The directors assessed that the Fund and its offshore SPVs are not TREs in China and do not have an establishment or place in China.

Gains from the disposal of investments in China by the Fund or its SPVs may be subject to China withholding tax at 10% without considering the potential relief that may be available under any tax treaty between the tax jurisdiction of the transferor and China. In addition, where Chinese equity investments are held via an offshore intermediate holding company, exit of the Chinese equity investment via disposal of shares in the offshore intermediate holding company could be regarded as an indirect transfer of the Chinese equity investment. According to the General Anti Avoidance Rules under the China CIT Law, if above investment holding structure and investment exit via indirect transfer do not have a reasonable commercial purpose, the Chinese tax authority is empowered to disregard such arrangement and impose withholding tax on the gains from such an indirect transfer. The directors have reviewed the structure of the investment portfolio and assessed the potential withholding tax implications and considered adequate provision to China tax has been made on the Fund's financial statements.

As at 30 June 2012, provision for current tax and deferred tax, uncertain tax amounted to US$987,763 (31 December 2011: US$17,741,470), US$41,499,978 (31 December 2011: US$38,174,629) and US$6,832,129 (31 December 2011: US$6,348,815) respectively. However, given the uncertainty of China tax, the Investment Manager would like to highlight that there is a possibility that some or all of the tax provided as at 30 June 2012 will not be payable and may be released. The Investment Manager is regularly monitoring the position.

The Investment Manger has reviewed the structure of the Fund's investment portfolio and considered the Fund's exposure to Hong Kong Profits tax has been properly reflected in the Fund's consolidated financial statements.

Under current Cayman Islands legislation applicable to an exempted company, there is no income tax, capital gains or withholding tax, estate duty, or inheritance tax payable by the Fund.

10 Management fees and performance fees

Pursuant to the Investment Management Agreement dated 20 November 2007, the Investment Manager was appointed to manage the investments of the Fund. The Investment Manager will receive an aggregate management fee of 2% per annum of the quarterly Net Asset Value ("NAV"). The management fee is paid quarterly in advance based on the NAV at the first day of each fiscal quarter. For the period ended 30 June 2012, total management fees amounted to US$3,050,430 (period ended 30 June 2011: US$2,400,389). As at 30 June 2012, management fees payable amounted to US$ Nil (31 December 2011: US$1,490,191).

The Investment Manager is also entitled to receive performance fees from the Fund in the event that the year-end NAV is greater than (a) the year-end NAV for the last year in which a performance fee was payable ("High Water Mark") and (b) the year-end NAV for the last year in which a performance fee was payable increased by an annual hurdle rate of 8% ("Hurdle").

The performance fee will be calculated as follows:

·; 0% of the relevant increase in the year-end NAV if the year-end NAV is at or below the Hurdle;

·; 100% of the relevant increase in the year-end NAV above the Hurdle up to 10% (the "Catch-up"); and

·; 20% of the relevant increase in the year-end NAV above the Catch-up.

For the period ended 30 June 2012, total performance fees amounted to US$1,680,476 (period ended 30 June 2011: US$2,211,051).

Under the Investment Management Agreement, the performance fee shall be paid 75% in cash and 25% in the Company's ordinary shares ("share portion"). The Company may elect to meet its share obligation either by issuing new shares at NAV or purchasing the equivalent number of shares in the market.

On 20 July 2012, the Investment Manager agreed to receive 1,454,789 tendered shares from the Company to settle its obligation in respect of the share portion of the 2011 performance fee of US$3,135,507.

11 Investment agency fees

To facilitate the disposal of an investment, the Fund has entered into a consulting agreement with an unrelated third party (the "Consultant") which is also the party facilitated the acquisition of the same investment. Under the agreement, the Fund is obligated to pay an investment agency fee to the Consultant based on a percentage of the net realized gain earned by the Fund. As at 30 June 2012, a provision of US$7,841,354 (31 December 2011: US$7,841,354) was made based on the realized and unrealized gain on the investment net of certain expenses and tax attributable to the investment of which approximately US$3.8 million was paid in July 2012.

12 Related party transactions

The Fund had the following significant related-party transactions:

(a) Restructuring with PACL II Limited

On 2 March 2009, the Company held an extraordinary general meeting to approve a tender offer that allowed shareholders to exchange all or part of their shares for shares in PACL II Limited ("PACL II"), a Cayman Islands private vehicle that will be used to realize and distribute cash from exited investments based on the investment and asset positions held by the Fund as at 31 December 2008 ("Tender Offer Portfolio"). PACL II is also managed by the Investment Manager. It will, without any further action on the part of its shareholders, automatically wind up and dissolve in 3 years upon when its ordinary shares were first issued. On 5 January 2012, the duration of PACL II has been extended by 1 year to 2 March 2013 with written election by the Investment Manager.

As part of this restructuring, the Company repurchased 180,166,107 shares at a tender price of US$1.01 per share in exchange for holders of these shares receiving the same number of shares in PACL II.

Under the terms of the tender offer, PACL II is entitled to receive 50.33% of the proceeds from the Tender Offer Portfolio, which reflects a 5% discount of its proportionate share of the Tender Offer Portfolio. As such, the amount due to PACL II is recorded as a payable by the Fund, adjusted at each period end based on the movement in the fair value of the underlying assets and the income and expense attributable to the Tender Offer Portfolio. The amount is unsecured, non-interest bearing.

The following table summarizes the movements in payable to PACL II.

(b) Management fees and performance fees to the Investment Manager

The Investment Manager is entitled to management fees and performance fees. See Note 11 for details.

(c) Directors' remuneration

The Company pays each of its director annual fees of US$30,000 (2011: US$30,000). If a director is a member of the Valuation Committee or Audit Committee, the director also receives an additional fee of US$5,000, or US$10,000 if they are Chairman of either Committee. For the period ended 30 June 2012, Horst Geicke and Jon-Paul Toppino agreed to waive their directors' fees and committee fees.

(d) Bank loan arrangement with PACL II

The Fund previously entered an arrangement with PACL II. See Note 7 for details.

13 Financial highlights

Net asset value per share at the end of the period is as follows:

The following represents the ratios to average net assets and other supplemental information:

(1) Total return represents the change in NAV (before and after performance fees), adjusted for cash flows in relation to capital transactions for the period.

(2) Average net assets is derived from the beginning and ending NAV, adjusted for cash flows in relation to capital transactions for the period. For the period ended 30 June 2012, the average net assets amounted to US$295,649,286 (from 1 January 2011 to 30 June 2011: US$245,493,863).

14 Commitment and contingency

In the normal course of business, the Fund may enter into arrangements that contain a variety of representations and warranties that provide general indemnification under certain circumstances. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund and which have not yet occurred. However, based on experience, the directors expect the risk of loss to be remote, and, therefore, no provision has been recorded.

15 Subsequent events

Management has performed a subsequent events review from 1 July 2012 through to 19 September 2012, being the date that the financial statements were available to be issued.

16 New accounting pronouncements

In 2011, the FASB issued an Accounting Standards Update ("ASU") No. 2011-04 relating to Topic 820 "Fair Value Measures and Disclosures". This ASU generally provides clarifications to Topic 820, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This ASU results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with US GAAP and International Financial Reporting Standards. The amendments are effective for periods beginning after 15 December 2011 and will be adopted by the Fund for the year-ended 31December 2012. The directors of the Fund considered the adoption of this ASU will not materially impact the Fund's consolidated financial statements.