Commentary

Period ended June 30, 2010

For the first half of 2010, the Matthews Asia Pacific Fund gained 2.10%, surpassing its benchmark, the MSCI All Country Asia Pacific Index, which declined –5.18%. For the quarter ended June 30, the Fund declined –4.89%, while its benchmark fell –9.35%.

Asia’s markets started to correct at the end of April. China’s H-share market, which trades on the Hong Kong Stock Exchange, was already weak at the start of the year, and declined about 10% during the first six months of 2010. Southeast Asian nations such as Thailand, Malaysia and the Philippines were the best performers, up 10% for the six-month period, followed by India, Japan, South Korea and Taiwan. Australia and New Zealand were the worst performers in the Asia Pacific region.

The Fund maintains a bottom-up investment approach, selecting companies we believe have compelling growth prospects irrespective of their country or sector allocation. The portfolio’s overweight in China, Hong Kong and India, and its underweight in Japan and South Korea had little impact on performance, as the Fund benefited primarily from stock selection. Kingdee International Software Group, a Chinese information technology services firm; Astra International, Indonesia's largest auto dealer; and Bank of Rakyat, Indonesia's largest rural bank led portfolio performance during the first half of the year. The Fund's two Chinese property names, China Vanke and Hang Lung Group, performed fairly well despite the fact that real estate was at the epicenter of the Chinese market downturn.

As a rising number of mainland Chinese now have more discretionary income for travel, nearby Macau has become a getaway destination. We believe that casino and hotel operator Wynn Macau, a recent addition to the Fund, is among the best beneficiaries of this emerging trend. Wynn Macau has generated annual profits of US$500 million, before interest, taxes and depreciation, on its US$1.1 billion investment in the casino resort—the most profitable casino in the world. Before its boutique hotel, Encore, opened in late April, Wynn had only 600 rooms and VIPs complained about capacity shortage. Encore’s 414 suites and villas should enhance the needed capacity for both hotel rooms and casino tables. It also caters to luxury shoppers with an esplanade for high-end stores, such as Cartier, that generate some of the highest sales per shop globally. A key risk for the company is that it relies heavily on revenue from high-rolling VIPs. More opportunities may be on the horizon for Wynn Macau as it has announced initial plans to open another casino in Macau’s Cotai area that is slated to be several times larger than its current Macau properties.

Since the beginning of the year, we have been finding compelling companies outside of China, including in Japan. We maintain a positive outlook on Japan’s telecommunications firm Softbank, which has done well despite a more challenging environment given the arrival of third generation (3G) technologies in the telecom space. The popularity of smart phones as well as new technology that improves speed and broadens telecom traffic should be good news for carriers, which have long suffered from declining ARPU (Average Revenue Per User). However, the affordability of these to the average user in emerging markets, which may face higher tariff structures, may be an issue. The Fund has become more cautious of wireless carriers operating in emerging Asian countries as these companies grapple with the costs of the new 3G technology to the end user. To this end, we terminated our position in India’s Barti Airtel in the second quarter of 2010.

Looking ahead, we believe that Asia should remain one of the most buoyant investment regions in the world today, despite the slowdown in the Chinese property market. Opportunities to invest in a diverse range of sectors and countries in Asia are now greater than they were in the past decade.

The views and opinions in this commentary were current as of June 30, 2010. They are not guarantees of performance or investment results and should not be taken as investment advice. Investment decisions reflect a variety of factors, and the managers reserve the right to change their views about individual stocks, sectors, and the markets at any time. As a result, the views expressed should not be relied upon as a forecast of the Funds' future investment intent.

Statements of fact are from sources considered reliable, but neither the Funds nor the Investment Advisor makes any representation or guarantee as to their completeness or accuracy.

As of 6/30/2010, the securities mentioned comprised the Matthews Asia Pacific Fund in the following percentages: Hang Lung Group, Ltd. represented 1.9% of the Fund, China Vanke Co., Ltd., 1.7%, Wynn Macau, Ltd. 1.0%, PT Bank Rakyat Indonesia, 2.9%, Kingdee International Software Group Co., Ltd., 2.1%, PT Astra International, 2.8% and Softbank Corp. 2.4%.