I concluded my statement last year by saying that "Whilst investment in China may prove volatile over a short term horizon we are optimistic about the prospects for long-term investment". This proved to be prescient as, having been one of the best performing global markets in 2020, sentiment turned against Chinese equities in 2021 as regulatory changes took markets by surprise and the market was one of the laggards over this financial year. Whilst the extent of the regulatory changes was not anticipated, they reflect one of China's key policy drivers which is anti-monopoly/data regulation and many of the reforms address problems faced by countries globally and demonstrate China's ability to respond swiftly.

Against this challenging market backdrop, during the financial year to 31 January 2022, the Company's net asset value total return, calculated by deducting borrowings at fair value, was -27.0% and the share price total return was    -37.1%, as the Company's share price moved from a premium to a discount to net asset value. This compares with a total return of -20.5% for the MSCI China All Shares Index (in sterling terms) and with 38.1% and 67.9% for the previous financial year.

Over the period from 16 September 2020 (the date of the adoption of the China strategy), the Company's net asset value and share price returned -9.0% and -9.2% respectively compared to a total return of -10.8% for the MSCI China All Shares Index (in sterling terms).

The Managers have a long-term investment approach, and we ask shareholders to judge performance over periods of five years or more. Further information about the Company's portfolio performance is covered by our portfolio managers, Sophie Earnshaw and Roderick Snell, in their Managers' Report.

Discount/Premium and Share Issuance

The Company's share price premium to net asset value at the last year end was 11.2%, and the shares continued to trade at a premium for the majority of the first half of the financial year, during which time 4,515,000 shares were re-sold from Treasury raising £24.8m. Additionally, in order to allow investors to acquire shares at a modest premium to the net asset value, the Company announced a placing of shares in May 2021. 2,404,151 shares were issued under the placing, raising gross proceeds of approximately £11.3 million.

As I mentioned above, sentiment turned against Chinese equities during the year, and the Company's share price ended the year at a discount to net asset value of 4.1%.

Dividend

As previously reported, the Company's returns are now generated from capital growth as opposed to income and the historic level of dividend is not sustainable. The revenue return per share was 0.97p, a decrease from 4.48p per share in the prior year, though most of that year's income was earned under the previous investment objective. However, in recognition of the Company's sizeable revenue reserves, the Board has agreed to pay out a dividend of 7.15p for the year to 31 January 2022 in line with the dividend paid for the last financial year.

Subject to shareholder approval, the final dividend of 4.60p will be paid on 27 July 2022, with the shares trading ex-dividend on 23 June 2022.

Going forward, the Company's aim is to achieve its total return through a focus on long term capital growth, rather than income. However, in order to qualify as an investment trust, the Company is not permitted to retain more than 15% of eligible investment income arising during any accounting period. Accordingly, the Board's policy is that any dividend paid will be by way of a final dividend and be not less than the minimum required for the Company to maintain its investment trust status. This will result in future dividends being significantly less than we are paying in respect of the financial year ended 31 January 2022.

Ongoing Costs

Baillie Gifford waived its investment management fee for the first six months following its appointment in September 2020. The ongoing charges figure for the year is 0.72% (and without the fee waiver this would have been 0.81%). Last year, the ongoing charges were 0.74% (and without the fee waiver, 1.02%).

Gearing

In April 2021, the Company entered into a US$40m revolving credit facility with RBSI. As at 31 January 2022, US$7.5m had been drawn down under the facility, and gearing stood at 1%.

ESG

The consideration of ESG factors is an integral part of the Managers' long-term investment approach and an area the Board discusses regularly with the Managers. Further details on the Managers' approach can be found on pages 7 to 12 of the Annual Report and Financial Statements.

The Board

We welcomed Tim Clissold to the Board in October 2021 following a search undertaken with the support of an external recruitment consultant. Tim has worked extensively in China, where he was co-founder of one of the first private equity groups in the country.

Chris Ralph is to retire from the Board at the AGM in 2022. The Board extends thanks to Chris for his valued contribution to the Company during his tenure. A search will be undertaken with the support of an external recruitment consultant and a new appointment to the Board will be announced in due course.

All Directors are subject to annual re-election at the AGM in June.  Directors' biographies can be found on page 26 of the Annual Report and Financial Statements.

Annual General Meeting

The AGM will be held at 4pm on Thursday 16 June 2022 at the Institute of Directors, 116 Pall Mall, London. Our current expectation is that a physical meeting will be possible. All shareholders are invited to attend, and the Board looks forward to welcoming you. The meeting will be followed by a presentation from the Managers. Should regulations relating to the Covid-19 pandemic change, the intention to hold a physical meeting will be reviewed and, if necessary, an announcement will be made on the Company's website. I would remind shareholders that they are able to submit proxy voting forms before the applicable deadline on Tuesday 14 June 2022 and also to direct any questions for the Board or Managers in advance by email to trustenquiries@bailliegifford.com or calling 0800 917 2112 (Baillie Gifford may record your call).

Outlook

Despite the many challenges of the last 12 months, there is cause for optimism. The coming months are likely to be volatile as geo-political events unfold including Russia's invasion of Ukraine, as China attempts to eliminate rather than live with Covid and as we await further detail on anti-monopoly and other regulations. Some sectors such as healthcare have been hit indiscriminately by the correction resulting in attractive investment opportunities. As stated in last year's report, the Chinese economy remains the second largest economy in the world and is expected to overtake the US as the largest economy in ten or so years. Global portfolios continue to be generally underweight China, and we expect to see the weighting rise over time which, alongside increasing consumption from China's huge and growing middle class, should provide support for equity markets over the long-term

Susan Platts-Martin

Chair

5 April 2022

For a definition of terms, see Glossary of Terms and Alternative Performance Measures at the end of this announcement.

Past performance is not a guide to future performance.

See disclaimer at the end of this announcement.

This year we have experienced one of the biggest regulatory resets in China for over a decade. Combined with a sell-off in growth equities towards the latter part of the year, it has been a painful period of performance for growth investors in China. At times like these, we believe it is important to stick unwaveringly to our long-term growth philosophy and process, both of which have served us well in the sixteen years that we have invested directly in China.

At the macro level, we continue to draw on our network of corporate, academic and independent research providers to help us navigate regulatory and policy change. As noted in our Interim Report, we believe there are two main policy drivers that require continued monitoring. The first is common prosperity and the second is anti-monopoly/data regulation.

With regard to common prosperity, we continue to believe that success here should be a significant positive for many of the companies in your portfolio and for China as a whole. So, what is common prosperity and why is it important? There are two facets to the policy: material prosperity and spiritual prosperity. Material prosperity is the most pertinent and can be summarised as 'making the cake larger and cutting the cake better'. China's economic miracle has already pulled c.800m people out of poverty. But it has also created vast inequalities of income, education, healthcare and opportunity, and this inequality is largely felt along rural/urban and provincial lines. As Li Keqiang noted in a recent speech, there are c.600m Chinese people living on less than RMB 1,000 (US$160) per month (or US$5.3 a day), barely enough to rent a room in one of the big cities. Indeed, China has one of the highest Gini-coefficients (which measures income inequality) in the world (at 0.48). As Scott Rozelle notes in Invisible China, educational outcomes are even starker: 75% of urban children go to university versus 15% of rural children, and 2/3 of China's children are rural. With China losing its low skilled manufacturing jobs to Bangladesh and Vietnam, it risks being left with a large underclass of under or unemployed citizens who are unable to contribute meaningfully to consumption led economic growth. Common prosperity is the government's attempts to tackle these issues so it can meet its development goal of attaining developed market status by 2049, the 100^th anniversary of the PRC.

But what about 'cutting the cake better'? Does this suggest a return to a markedly less palatable form of communism? We do not think so. Xi's view of wealth distribution is olive shaped (a large middle class and smaller groups of very rich and very poor people). With the wealthiest three provinces in China generating 4x the GDP per capita of its poorest (the ratio in the US is only 2:1), a certain degree of redistribution will be required. However, as Dr Olivia Cheung from SOAS notes, Xi has explicitly ruled out the creation of a welfare state arguing that it 'breeds laziness' and, importantly, still promotes the idea that it is 'glorious' to become rich, as long as the rich give back to society.

So what key milestones will we be monitoring with respect to common prosperity? Zhejiang Province is the pilot province for the policy and a likely early indicator of the direction of travel at a national level. More broadly, an increase in wealth transfers from richer to poorer areas, an improvement in rural land rights, and further relaxation of rural hukou (essentially, residency permits) would be viewed by us as meaningful and positive developments.

With regard to anti-monopoly and data regulation, there are a number of things to note. First, regulating large technology conglomerates and their use of data is a global, not a local, issue. Governments all over the world are struggling to formulate best practice here and China is no different. Second, the issue in China is heightened by the remarkably lax regulatory environment prior to 2021; and by the government's desire to incentivise investment in areas that will be crucial to China's next decade of economic development; it doesn't want all of its best and brightest minds to become game developers and ad optimisation programmers! Third, whilst the broad parameters of anti-monopoly and data security regulations have been set, we are still waiting for detailed guidelines and implementation from a host of newly created and recently empowered regulatory bodies. For example, the State Council recently added 'data' as a 5^th factor of production and, in concert with the cyber security regulator, is trying to formulate mechanisms via which certain types of data are safe to trade. SAMR, the body in charge of anti-monopoly regulation, is currently in the process of revamping the Anti-Monopoly Law and in defining new types of anti-competitive behaviour. What this means in practice, is yet to be announced.

All of the above affects two of our largest holdings, Alibaba and Tencent. These are two of the most dynamic companies within China. They have multiple potential growth drivers ahead of them and, as such, sit at the nexus of multiple regulatory jurisdictions. Until we get clearer guidance from regulators on what both companies can and cannot do in the future, we think it is unwise to make very large changes to both stocks' position sizes, particularly after a period of such marked weakness in both companies' share prices. For example, both companies have until now been able to expand horizontally into new growth areas unimpeded. Will this be allowed to continue? One of the attractions of both companies was their vast stores of consumer and financial data. Will they still be able to monetize this given the proposed restrictions to the use of personal data or will both companies be massive beneficiaries of the government's decision to add data as a 5^th factor of production? Finally, although both companies remain large absolute holdings, their relative weights are much smaller. This reflects our uncertainty regarding the impact of the new regulatory regime on both companies' future growth prospects.

More positively, outwith the internet space the government continues to show support for sectors which will be key for China's next decade of growth. As the Industry and Information Technology Minister Xiao Yaqing highlighted in a recent essay, China wants to avoid the hollowing out of its manufacturing sector and to increase self-sufficiency in areas outwith the digital economy. These areas include advanced manufacturing, environmental technology and semiconductors. It wants to nurture an array of 'little giants' that have the potential to develop highly advanced expertise in these strategic areas. We believe these 'little giants' reflect very sizeable growth opportunities for long term investors.

Portfolio Positioning and Recent Activity

The current portfolio represents a selection of the best and most innovative public and private Chinese growth companies. We continue to upgrade the growth profile of the Company, and to make investments in companies exposed to China's next decade of growth and policy priorities including the green revolution, advanced manufacturing and industrial upgrading. In addition, we have reduced our exposure to stocks where the change in the regulatory backdrop is clearly negative.

In terms of new purchases, Sinocera is a company that we are particularly excited about. It manufactures materials such as ceramic power and zirconia powder for component makers. These components include MLCCs (multi-layer ceramic capacitor) used widely in 5G, electric vehicles, mobile handsets and other electronic devices; zirconia dental crowns used in dental repair and honeycomb ceramic catalytic filters used for diesel vehicles. There are two main growth drivers. The first driver is growth in the end markets Sinocera addresses. Demand for MLCCs should last for decades as the physical world gets more electrified. Demand for catalytic filters is driven by upgrading National Emission Standards. Demand for dental crowns is going to continue increasing as population ages and income rises. The second driver is Sinocera entering more verticals and extending its value chain by making acquisitions. For example, its solar conductive paste business only represents less than 5% of revenue but is growing fast. What underpins all of its current and future products is its underlying materials processing technology. Achieving high product consistency and performance at large scale requires decades of accumulated knowhow and optimisation with clients' feedback. This has resulted its high market shares globally, e.g. 20-30% in ceramic powders for MLCCs and 40% in zirconia powders for dental crowns. We believe Sinocera's competitive advantage is sustainable and this ensures its higher than peers profitability. Management is focused and driven. Its founder is very aware of China's weakness in fundamental research in material science and his vision is to build a business that pioneers China's advanced material research.

We would place Sinocera in a similar camp to stocks such as Shenzhen Inovance, Estun and SG Micro. Inovance and Estun are two long standing holdings that we have added to recently on weakness. They are leaders in factory automation and robotics respectively and may one day be able to challenge Japanese dominance of both industries. SG Micro is a stock that we bought in the first half of the year that has the potential to dominate analogue semiconductor design. All of these stocks have the potential to help China increase its self-sufficiency in strategically important areas.

Beijing United Information Technologies (BUIT) is another company we have purchased recently. It is a business 2 business ecommerce platform for industrial customers. It provides raw materials which are used to produce products such as paint, fertiliser, sanitary paper, glass and many others. BUIT gets involved in the transactional stages by aggregating supply and demand with an aim to help buyers get cheaper prices and help sellers to optimise production capacity. It takes a few percentages of transaction value as a service fee. Its addressable market is very large relative to its current revenue. A 10% share of the market would see its revenue increase ten fold. Its competitive advantage is a function of it being a first mover and securing relationship with thousands of its clients. Offering them software tools to get further integrated into their workflow also cements these relationships. The founders have worked with each other for decades and they empower individuals through a decentralised structure. Each raw materials platform has its own CEO which makes most decisions. As such, it's a remarkably dynamic company and one that we believe is making a number of industrial sectors more efficient.

We have also bought a number of stocks over the year that we believe are well positioned to benefit from China's green revolution. These include Yunnan Energy New Material, a separator maker for large form batteries, Sungrow, an inverter maker for solar and wind farms, and Zijin Mining, a copper producer and enabler of China's green infrastructure. These add to existing holdings in stocks such as Longi Green Energy, China's leading solar panel maker, Sanhua Intelligent Systems, a heat conversion specialist for NEVs, and CATL, the world's largest battery maker for NEVs. All of these stocks have the potential to help China reach its net zero goal by 2060.

We have also been mindful of the opportunities presented by volatility over the period. We have added to two stocks, Beigene and Kingmed, that we believe have been unfairly sold off in the broader healthcare rout.

In terms of funding for the above, we have sold our holding in Huya, an online game streaming platform. We had been hopeful that it would merge with the number two player in the market, Douyu, and that this merger would create a dominant domestic champion. In the current environment, this looks increasingly unlikely. Furthermore, competition in the market is increasing with a number of social media and short form video companies entering the game streaming market.

We have also sold iQiyi and Ping An Healthcare and Technology. iQiyi is a long form online video provider. We have sold the holding due to continuing regulatory concerns, combined with disappointing operational and financial performance during the pandemic. Our fear is that this is due to increased competition from other forms of media, most notably short form video apps which are proving extremely popular in China. Ping An Healthcare and Technology provides artificial-intelligence-assisted medical advice and online consultations with top-tier doctors. The investment case centred around China's lack of primary care and conflicting incentives within the hospital system. However, following new draft regulations, we have greater concerns about the future of an AI powered business in this industry and have therefore decided to sell the holding.

Performance

Over the twelve months to the end of January 2022, the Company's net asset value fell by approximately 27%. Over the same period, the benchmark fell by approximately 20%. Whilst we acknowledge that short-term underperformance is painful, we would hope that shareholders judge our investment returns over a period of five years or longer, the same period over which we judge our companies' performance.

In terms of the net asset value, notable positive contributors are varied. These include Li Ning, a leading domestic sportswear manufacturer that is benefiting from a shift towards local Chinese brands; CATL, a company that posted exceptionally strong operational results driven by China's shift to electric vehicles and renewable energy (net profit for 2021 is expected to rise by over 150% during the year); and ByteDance, a global leader in short form video, and the Company's only private holding. Relative performance was also helped by the fact that we did not have any exposure to education companies that were negatively impacted by the regulator's 'Double Reduce Policy', or to NIO and Pinduoduo, two highly rated, US listed stocks that were hit by geopolitical concerns and by domestic regulation.

In terms of negative contributors, we saw weak share price performance from a number of our healthcare holdings as the sector sold off markedly in response to the likelihood of increased regulatory scrutiny here. Companies affected include Zai Labs, Burning Rock, Kingmed and Medlive. As noted in our Interim Report and contrary to the market's view, we believe that policy will continue to favour genuinely innovative companies and that the Company's holdings should benefit as a result. Kingmed is a good example of this. It is an independent clinical laboratory, an enabler of preventative care, and a beneficiary of an increase in medical testing, healthcare spend, and an ageing population. It operates with a leading market share in over 70% of hospitals in China and has a founder led management team focused on the long term. Despite posting treble digit net profit growth in the first half of 2021 and double digit in 3Q, it has sold off drastically due to concerns that a number of its diagnostics tests will be included in bulk purchasing programmes run by local governments. Whilst inclusion may hit profits in the short term, the volume uplift over the long run is likely to be a major growth driver. Indeed, when conducting our initial valuation we found that revenues could grow 5-7x even if we factored in a 50% cut in prices. As an enabler of preventative care, the company is likely to be a key driver of falling costs in China's healthcare system which is a priority for the Chinese government.

Zai Labs is another good example. It is an oncology drug development business where, despite recent volatility, we see their core purpose to be very positive. Three key competitive advantages remain: 1) the company has very strong partnerships with leading overseas healthcare companies like Novocure and Argenx allowing them good technology and talent access; 2) they have very high levels of expertise evidenced by the fact that they are one of very few biotechs in China to do all clinical work inhouse; and 3) Commercial execution - their management team are well known to us and have a proven track record. We have been very impressed by the founder, Samantha Du, who has built a very strong team around her.

Outwith healthcare, other negative contributors included Bilibili, Yatsen, Dada Nexus and Huya. As noted above, the latter two were sold during the year. We continue to believe that Bilibili, as a leading social networking site for Generation Z, is likely to benefit from this group's growing consumption power and deliver strong growth as a result. Its share price was weak along with other platform companies, and it was also hit by a sell-off in ADRs. Its operational performance, however, remains strong. In its most recent set of results it grew revenues by over 60% year-over-year, monthly active users by 36% to 267m (above management's 260m target), and time spent on the platform increased to a record 88 minutes per day.

Yatsen has been very weak since its IPO earlier in the year. It has sold off due to geopolitical issues pressuring ADRs and, more importantly, as a result of increased competition in its core makeup brand, Perfect Diary. We have spoken to the CFO and continue to monitor the situation closely.

Outlook

Baillie Gifford has been investing in China since the 1990s. As such, we have experienced numerous regulatory cycles, significant volatility and, at times, painful periods of adjustment. However, whilst investment in China may prove volatile over the short term, we continue to believe that a combination of a vast and growing domestic market, significant investment in research and development, and private and public equity markets that are poorly understood and very short term, give long-term growth investors like ourselves a real opportunity to generate returns for our shareholders.

Roderick Snell

Sophie Earnshaw

Baillie Gifford & Co

5 April 2022

For a definition of terms see Glossary of Terms and Alternative Performance Measures at the end of this announcement.

Source: Refinitiv/Baillie Gifford and relevant underlying index providers.

Past performance is not a guide to future performance.

See disclaimer at the end of this announcement.

Review of Investments

A review of the ten largest investments is given below.

Tencent

Tencent is a leading social media and entertainment platform. It has a dominant position in online gaming and an ecosystem in WeChat that we believe is one of the strongest in China. Monetisation of WeChat's over 1bn monthly active users has only just begun and represents a transformational growth opportunity for the company. Further growth opportunities are provided by Tencent's strong positions in cloud infrastructure and consumer and SME lending, along with its portfolio of investee companies which span online music streaming, ecommerce, and short form video. Pony Ma, the founder and Chairman of the company, is indelibly focused on the long-term and has executed exceptionally well in one of China's fastest moving industries.

ByteDance

ByteDance is a social media and short form video company and it represents the Company's first private investment since reorganisation. It was founded in 2012 by Yiming Zhang and the company has grown to rank amongst the world's largest companies of its kind. Its short form video app, Douyin, is market leader in China with over 600 million daily active users, and TikTok, its global equivalent, is dominating the format globally. ByteDance benefits from a technological edge in machine learning which it uses to bring out new applications tailored to different media forms and different demographics. The company's ability to innovate in this space is exceptional and we believe one of the key drivers of its likely future success. We believe ByteDance has the potential to be a generation defining media company.

Alibaba

Alibaba is a leading online retailer. Its ecommerce business continues to grow strongly driven by increasing online penetration in segments such as grocery and FMCG, whilst the integration of live streaming and social media to the platform has materially strengthened its appeal to customers and merchants alike. In addition, Alibaba has a strong position in infrastructure as a service, or the cloud, where it has a similar business to Amazon Web Services and significant growth potential. Alibaba's partnership structure and its capable and experienced management team are well-aligned with shareholders and continue to offer a long-term and compelling vision for the company.

Contemporary Amperex Technology (CATL)

CATL is the dominant leader of power battery systems in China and a national champion with strong government support in electric vehicle batteries. It was spun out of the Japanese company TDK in 2011 to maximise this government support and its growth opportunity within the Chinese market. In electric vehicle batteries, it has c.45% market share in China and a strong growth tailwind driven by increasing penetration of electric vehicles within the automotive fleet. Its technology is competitive globally due to the company's consistent and substantial investment in research and development. As a result, it has been able to build up a customer base not just within China, but globally. Indeed, we believe the growth opportunity for this company is likely to extend beyond China's borders.

Kweichow Moutai

Kweichow Moutai is one of the most important and iconic Chinese brands. It manufactures premium baijiu (white alcohol) which has a heritage and respect embedded within Chinese culture. Its unique brewing conditions and process provide a core competitive advantage. When combined with supply scarcity and limited competition in the very high-end market, Moutai is able to price at a premium and maintain a loyal customer base. It is an extremely profitable business. We believe in the strength and heritage of the brand, the sustainability of revenue growth, and the longevity of its core competitive advantage.

Ping An Insurance

Ping An Insurance is one of China's leading financial services groups. It is China's second largest life insurer, a market with multi-decade growth potential driven by China's emerging middle class and rising disposable income. It also has a leading position in property and casualty insurance where it has consistently delivered strong returns. In addition, it has consistently invested in artificial intelligence and machine learning in order to increase the efficiency and long-term viability of its core business. Again, this is a company with a long-term, growth mind-set that we believe will deliver substantial returns to shareholders.

China Merchants Bank

China Merchants Bank is a leading consumer bank in China with a lengthy track record and solid market share. It has outcompeted its state-owned rivals via a relentless focus on the consumer. As such, it has built up an enviable position in consumer lending and in wealth management, both segments with strong growth potential. In terms of lending quality, this has been strong through the cycle and, as such, we believe this is a bank that will continue to offer attractive returns to shareholders.

Meituan

Meituan is an online marketplace for the local service industry in China. It operates in more than 200 categories in 2,800 cities with strong market shares in on-demand restaurant delivery, in-store dining, hotel booking and film ticketing. These verticals are each in an early stage of development, leading to strong growth expectations for many years to come. Additionally, the company is cementing its position as a key partner for merchants in all of these segments by offering value-added services such as software and back-end solutions. Wang Xing, the founder and CEO, continues to invest heavily for growth. Indeed, his vision for the company is that it becomes the default means by which Chinese consumers access the local services industry.

Li Ning

Li Ning is China's second-largest domestic sportswear company (and takes its name from the founder who - as some may remember - won 6 gymnastics medals for China at the 1984 Summer Olympics). It remains something of a turnaround story, having run into problems between 2010 and 2015 as the model shifted from wholesale distribution to direct stores. These problems now look to have been largely remedied, and although Li Ning's returns remain lower than many of its local and international peers, we are optimistic that improvements in the supply chain and distribution channels will continue under the well-regarded new CEO, Kosaka Takeshi, who joined in September 2019. More broadly, we are intrigued by indications that the company's brands - especially 'China Li Ning', which blends traditional Chinese embroidery styles into their products - is gaining traction among a younger and more affluent demographic, perhaps reflecting the possibility that national pride is beginning to play a greater part in patterns of consumption. Is it conceivable that Li Ning - with a national market share of around 7% at present - could even start to chip away at the 35-40% of the market currently controlled by premium foreign brands like Adidas and Nike?

JD.com

JD.com is the second largest e-commerce player in China after Alibaba, with particular strengths in logistics and delivery. The growth opportunity remains large and we believe that JD's competitive edge is being sustained, despite operating in a very competitive environment. The management team has taken some proactive steps to ensure decision making is more devolved and we have been encouraged by the openness at recent discussions regarding future strategy and governance improvements. We believe that there is an excellent chance that JD remains one of the go-to e-commerce businesses in China.