Commentary

Quarter Ending March 31, 2008

For the quarter ending March 31, 2008, the Matthews Asia Pacific Fund declined –8.97%, while its benchmark, the MSCI All Country Asia Pacific Index fell –10.95%.

During the quarter, Asian stock markets suffered one of the largest quarter-to-quarter declines since the third quarter of 2002. The markets corrected from their peaks last October to more reasonable levels as average price-to-earnings (P/E) multiples declined from the high teens to the low teens during the period. Though we are not yet convinced that the correction is over, we are seeing more exciting investment opportunities across the region in terms of valuation and growth. Valuations of Japanese firms, for example, are now in unique territory, with many stocks trading below book value. The average dividend yields are now higher than 10-year government bond yields. Volatile equity markets like these often represent a time of opportunity for long-term investors.

Fund performance during the quarter was helped by stock selection across the region. For example, India was the second-largest positive contributor, albeit with a heavy overweight position: The Indian market was down –26.6% for the period, but our holdings were down only –9.9%. Infosys, an information technology services company that derives its largest source of company revenue from the U.S., did not do well due to the U.S. slowdown. Our allocation in Thailand saw the strongest performance, and the Fund was rewarded for its overweight positions in the country. Japan made a large contribution for the quarter as the yen/dollar exchange rate climbed some 10% during the period. The Fund’s stock selection among small-cap companies in Japan boosted performance as well, as smaller companies outperformed larger ones. The portfolio’s underweight in Australia helped Fund performance as this market was hurt by weaker commodities and financials. However, the Fund found attractive new opportunities in Australia that were added to the portfolio during the quarter.

The Fund focuses on domestically oriented companies that benefit from rising household incomes in Asia. One such company is Bharti Airtel Limited, the largest mobile telecommunications firm in India. The wireless telephony business of Bharti was founded in the mid-1990s when the industry was opened to private sector competition. Since then, Bharti’s management has been able to claim market share from public sector incumbents and private sector competitors with deeper pockets. Its management has demonstrated a realistic assessment of the regulatory challenges of operating in India’s wireless industry, and has been innovative in turning its vendors into partners. As such, in spite of charging one of the lowest calling tariffs globally, Bharti is able to generate strong operating margins. There are some near-term headwinds due to rising competition in the Indian market; but we believe Bharti is well-positioned due to its scale to benefit from the secular trend of increasing penetration, and the potential for greater demand of higher value-added services by Indian consumers.

Another example of a firm that is capturing the Asia Pacific region’s increasing household incomes is Pigeon, a Japanese high-end baby care company. Pigeon manufactures baby products to meet the needs of Asian mothers with rising affluence. The company is particularly successful in China, and its operating profit from Asia ex-Japan almost doubled in 2007. It now accounts for 60% of total company profit. As Chinese consumers are becoming increasingly attuned to safety and quality issues, a "made in Japan" brand now has a high appeal, and brand power, for millions of new mothers in China as well as other Asian countries.

Increasingly, companies in the region are benefiting from diversifying trade within Asia. The Fund is positioned to take advantage of these shifts in greater regional exposure, including growing business with China.

The views and opinions in this commentary were current as of March 31, 2008. 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 3/31/08, Infosys accounted for 1.1% of the Matthews Asia Pacific Fund, Bharti Airtel Limited accounted for 0.8%, and Pigeon accounted for 1.7% of the Fund.