Commentary

Quarter Ending March 31, 2008

For the three months ending March 31, 2008, the Matthews Korea Fund lost –16.46%, while its benchmark, the Korea Composite Stock Price Index, declined –15.20%. The Korean equity market continued to correct in the first quarter due to a worsening global macro environment sparked mainly by the U.S. credit crisis and rising oil prices.

The Fund trailed its benchmark during the quarter primarily due to its overweight position in financials, particularly in banks and consumer sectors. Although Korean financial companies appear to have had limited direct exposure to the global credit crunch stemming from the U.S. subprime mortgage crisis, Korean financial firms have nevertheless declined in sympathy. Korean banks have also found slowing growth in the domestic market to be another hurdle. Domestic market growth has remained lackluster since the sharp recovery from the country’s consumer credit card crisis in 2005. The Capital Market Consolidation Act (CMCA), which was introduced last year, also did not help banks. The CMCA was passed with the intention of speeding up the restructuring of Korea’s domestic brokerage sector. It may indeed help brokerage firms, fostering more sophisticated financials firms akin to U.S. investment banks. However, as brokerage firms become more sophisticated, they could potentially compete with traditional banks for their high-end customers.

The Fund’s performance in the first quarter was helped most by holdings in the information technology sector. Internet-related companies, which have been relatively insulated from global market trends, helped the Fund perform during the quarter. Expectations for a semiconductor industry recovery also served as a catalyst for performance of the information technology sector.

On a company basis, the biggest contribution came from Samsung Electronics, which benefited from the expected recovery in the memory chip industry, and better-than-expected performance of mobile phone handsets. Daewoong Pharmaceutical, a drug developer and distributor, was also a strong contributor to Fund performance.

On the other hand, SK Telecom, facing intensifying competition in the domestic wireless industry, was the Fund’s worst performer for the quarter. The industry experienced a very high customer turnover rate during the quarter. SK Telecom has been criticized for not producing enough dividends. Rather than return cash to investors, the company has been spending on overseas investments, some of which have not been profitable. Hana Financial Group, which has been suffering from slowing growth in the domestic market, also detracted from Fund performance during the quarter.

On February 25, 2008, South Korea inaugurated Lee Myung Bak to be its first president who can claim to have a business background. Welcomed by the business community, President Lee has pledged to cut taxes and speed up deregulations to encourage investment and boost economic growth.

During the first quarter, exports continued to show stronger-than-expected growth helped by increased shipments to China and Europe. Trade volume between North and South Korea also doubled in the first quarter year-on-year, reaching about US$420 million. However, Korea’s trade deficit still widened as imports outpaced exports due to rising raw material and commodity prices.

The Fund added new companies during the quarter in the consumer discretionary and information technology sectors: a domestic travel agency, a navigation hardware and software manufacturer, and a consumer electronics maker. We believe that in the long term, the consumer, financials and information technology sectors will create more stable value and returns for the Fund’s shareholders. The overall valuation of the Korean equity market remains one of the cheapest in the Asian region. We continue to believe that the overall economy is reasonably healthy and expect the restructuring process to continue.

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, Samsung Electronics accounted for 9.2% of the Matthews Korea Fund, Daewoong Pharmaceutical accounted for 3.7%, SK Telecom accounted for 3.9%, and Hana Financial Group accounted for 3.4% of the Fund.