Commentary

Year ended December 31, 2009

For the year ending December 31, 2009, the Matthews Asian Technology Fund returned 70.28% while its benchmark, the MSCI/Matthews Asian Technology Index, gained 40.59%. For the fourth quarter, the Fund rose 7.08%, compared to a 2.70% increase for the benchmark. Overall, the year saw a recovery in Asia’s technology sector after it fell to its lowest level in more than five years during the first quarter of 2009.

Asian technology stocks quickly rebounded on the back of government stimulus programs from around the world and easing concerns over the global financial crisis. China’s demand for IT products, as well as the government’s subsidies on technology purchases, such as computers and televisions, helped sentiment and led the sector’s recovery.

The Fund has historically sought to invest in companies poised to benefit from growth in Asia’s domestic consumption; this strategy paid off during 2009. The Fund’s outperformance relative to the benchmark was due primarily to its overweight in China, and particularly in domestically oriented firms, such as Internet and software companies. The portfolio’s holdings in the hardware sector also performed well as the demand outlook for technology products improved and inventory levels of various technology firms remained healthy. Our increased exposure to Taiwanese technology firms—a shift we made in the first quarter when valuations became more compelling—also benefited Fund performance in 2009.

Telecommunication services and Japanese consumer electronics were two areas that underperformed during the year. The telecommunication services sector generally outperformed in 2008, but underperformed in 2009 as investors’ risk appetite grew. Japanese consumer electronics companies were negatively impacted by a strong yen as exports constitute a large part of their sales. However, we maintain a positive outlook for the global competitiveness of Japanese consumer electronics companies, especially in developed markets, and increased our holdings in these stocks during the last quarter of the year as valuations became attractive.

In 2009, we also added to our positions in technology-related health care companies. Asia is already the world’s largest health care market in terms of number of patients, and we see great potential for the sector’s long-term growth as per patient spending in Asia is still among the lowest globally. In 2008, U.S. health care spending per capita was approximately US$7,000. By comparison, per capita spending in Asia ex-Japan was only US$600.The Fund specifically seeks to focus on medical device makers as we believe these firms are well-poised to benefit from the industry’s overall growth. That said, we expect to increase our exposure to the health care sector gradually as valuations in these industries remain high.

During the year, the biggest contributor to Fund performance was Baidu, China’s leading online search service provider. We believe that Baidu has demonstrated a better understanding of both the Chinese consumer and local regulations than its competitors. While China has surpassed the U.S. in terms of its number of Internet users, with more than 300 million users, the penetration is only at approximately 22% of the total population in China, according to the World Bank. As China’s Internet penetration rate rises, we expect Baidu to maintain its leadership position in the market. However, the relationship between the Chinese government and Internet firms, such as Google, raises questions about regulatory risk related to China’s Internet industry. Another large contributor to Fund performance was Hon Hai Precision Industry, an electronics manufacturing services firm headquartered in Taiwan. Hon Hai provides manufacturing services to almost all major technology companies, including Apple and Sony. The firm manufactures a very broad set of products, ranging from mobile phones to gaming consoles, and the company is well-positioned to benefit from the technology sector’s ongoing recovery.

Over the past few years, we have seen more innovation taking place in Asia and companies in the region are now market leaders in many emerging technologies. For example, Asian companies now manufacture more than 80% of the world’s rechargeable lithium-ion batteries, and own the majority of related patents. Asian companies also lead the market for electronic display technology and are developing the next generation of displays. In addition, a Taiwanese company owns the main technology that is used in more than 90% of all electronic reading devices, or “e-readers,” sold worldwide. The Fund has invested in these and other emerging technologies, and believes the growth prospects for Asian technology remain bright.

Asia is now the largest market for many of its own consumer technology products. Not only has the region become the biggest market for Internet services, it is also the largest market for mobile handsets and wireless telecommunication services. Furthermore, Asia is also expected to become the largest market for personal computers and LCD televisions. What is even more exciting about this trend is that the region’s consumers are favoring Asian brands over competitors from the West.

It is important to note that some long-term risks remain. In addition to issues relating to China’s control over Internet firms, there is also the risk of weak intellectual property (IP) protection, especially in the region’s emerging countries, which can deter innovation. Another risk is that Asia’s technology sector tends to trade on short-term investor sentiment and that can sometimes exaggerate stock movements and cause volatility. We believe that investing in the sector for the long term, can minimize some of these risks.

Looking ahead, we expect the global demand for technology products and services to steadily improve as the global economy continues to recover. The overall demand for technology products remains healthy in many emerging countries; however, in most developed countries the demand remains weak. Additionally, as government stimulus programs wane, there may be some risk that the global demand for technology products and services falls again. We remain focused on finding firms that can benefit from the region’s long-term growth prospects and specifically, in two long-term trends: increasing Asian consumption and corporate IT spending. While we expect the sector to remain volatile over the short-term, we are optimistic about its long-term prospects.

We are pleased to announce that in December, the Fund marked its 10^th year of operation. We reached this milestone as a result of the long-term commitment of our shareholders through some volatile market cycles. We thank you for your ongoing support and will continue to work hard on your behalf.

The views and opinions in this commentary were current as of December 31, 2009. 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 12/31/2009, the securities mentioned comprised the Matthews Asian Technology Fund in the following percentages: Baidu Inc, represented 4.5% of the Fund and Hon Hai Precision Industry Co., Ltd. 3.7%, Sony Corp 2.7%. The Fund did not hold any positions in Apple Inc. or Google.