HARVEST RMB FIXED INCOME FUND HARVEST CHINA A RESEARCH SELECT FUND HARVEST CHINA INCOME FUND

Transcription

1 HARVEST RMB FIXED INCOME FUND HARVEST CHINA A RESEARCH SELECT FUND HARVEST CHINA INCOME FUND (EACH A SUB-FUND OF HARVEST FUNDS (HONG KONG)) REPORTS AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER

2 Content Page Management and Administration 1 Report of the Manager 2-5 Report of the Trustee 6 Independent Auditor s Report 7-9 Statement of financial position Statement of comprehensive income Statement of changes in net assets attributable to unitholders Statement of cash flows Notes to the financial statements Investment Portfolio (Unaudited) Statement of Movements in Investment Portfolio (Unaudited) Performance Table (Unaudited) 82-84

3 MANAGEMENT AND ADMINISTRATION Directors of the Manager ZHAO Xuejun WANG Wei LI Ming SUN Chen (appointed on 11 Mar 2016) KWAN Chi Wang, Thomas CHOY Peng Wah (removed on 31 January 2017) Manager Harvest Global Investments Limited 31/F, One Exchange Square 8 Connaught Place Central Hong Kong Trustee and Registrar BOCI-Prudential Trustee Limited 12/F & 25/F, Citicorp Centre 18 Whitfield Road Causeway Bay Hong Kong Solicitor to the Manager Deacons 5/F, Alexandra House 18 Chater Road Central Hong Kong Custodian Bank of China (Hong Kong) Limited 14/F, Bank of China Tower 1 Garden Road Hong Kong RQFII Custodian Bank of China Limited No. 1, Fuxingmen Nei Dajie Beijing China Auditor PricewaterhouseCoopers 21/F, Edinburgh Tower 15 Queen s Road Central Hong Kong - 1 -

4 REPORT OF THE MANAGER Harvest RMB Fixed Income Fund The overall economic growth stabilized over 2016 judging from the economic data over the past four quarters a number of which seemed to be bottoming out. Key drivers included the rebounding of real estate investments and manufacturing investments in the private sector and the recovery of certain consumption-related sectors. Impacted by the transmission effect of commodity prices, inflation over 2016 was slightly higher than expected while the year-on-year growth of the PPI continued to recover significantly which certainly exceeded market expectation. The bond market fluctuated significantly over 2016 with overall yields rising substantially. Specifically, in the first half of the year, driven by stable economic development and higher-than-expected inflation, 10- year government bond yield rose to 3% while 10-year credit spreads remained tight. Entering the third quarter, with lower inflation expectation and ample liquidity from the central bank, 10-year government bond yield went down to 2.6% while 10-year credit spreads reached historical low. In the fourth quarter, financial deleveraging and the unexpected US presidential election result led to the significant increase in overall bond yields with the 10-year government bond yield going up to 3.4% and 10-year credit spreads rising significantly. Looking ahead, we expect economic growth to be stable with structural improvements. On one hand, infrastructure investments may increase in the first half of On the other hand, manufacturing investments may continue to rebound after bottoming out previously. These will help keep the overall fixed investment at previous levels. In terms of inflation, we expect the influence of the transmission effect of commodity prices on PPI and core CPI to strengthen. Entering the second half of the year, we expect slight pressure on economic growth to re-emerge with the growth rates of investments in major assets like real estate declining. The bond markets started to fluctuate significantly in the fourth quarter of We believe the fundamental reasons were: (1) over the past few years, the market has digested most of the pessimistic expectations about the economy. As long as it does not weaken materially, investors expectations should be roughly in line; (2) the monetary stance has gradually shifted from neutral with an easing bias towards neutral with a tightening bias. In addition, policymakers continue to emphasize deleveraging. We believe that this will become the major influence on the bond markets in Looking ahead, with relatively stable fundamentals and limited growth surprises or shocks, we believe that the overall bond markets will be pressured by the neutral monetary stance with a tightening bias, especially the credit bond markets with credit spreads expected to rise continuously. As for interest rate bonds, they have already experienced relatively large adjustments. We believe that with the short-term rates staying at relatively low levels, their risks will be relatively small

5 REPORT OF THE MANAGER (CONTINUED) Harvest China A Research Select Fund At the beginning of this year, RMB exchange rate fluctuated sharply. Under the expectation of rate hike by the Federal Reserve of the U.S., the sustainability of easy monetary conditions was pressured by uncertainties surrounding exchange rate expectation. Stock markets started the year with a massive decline, but market sentiment recovered afterwards driven by real estate and infrastructure investments and expectation of cyclical sector recovery. After that, markets continued to fluctuate with the cyclical recovery continuing to exceed expectations and liquidity tightening marginally. On one hand, with the increase in raw material prices and the domestic supply-side reform coupled with the base effect, the transmission effect of sector rotation resulted in the market s optimistic earnings expectations. On the other hand, policy focuses started to shift to risk precaution and deleveraging in the middle of the year. In addition, control over the housing market restarted driven by its high prices, reducing room for monetary easing. Meanwhile, demand for funds increased significantly towards year end, further increasing pressure on the capital side. Generally speaking, markets performed weakly over the year and were dominated by structural opportunities driven by insurance companies investing in the secondary market, supply-side reform, the rise of the cyclical sector and so on. Style wise, blue chips outperformed small-cap growth stocks. Over the reporting period, the CSI 300 Index, the Shanghai Composite Index and SZSE Component Index returned %, % and % respectively, while SMEs and ChiNext returned % and % respectively. Sector wise, consumer goods with stable growth outperformed, especially the low-valued domestic appliances and food & beverage sectors. Other cyclical sectors such as construction, mining, nonferrous metal, chemicals and steels all outperformed the market. However, media, computer, transportation and leisure service underperformed. The portfolio continued to be fully invested with the GARP stock selection strategy, focusing on structural adjustments while keeping a close watch on investment opportunities in the meso-industry. In terms of sectors, reinvestment pressure in the insurance industry increased. Thus, from a cost-performance perspective, we switched to banks with controllable downside risks, expectations of improving fundamentals and low valuations. We also increased allocations to domestic appliances with reasonable valuation, stable growth and good dividend income. In addition, we took advantage of investment opportunities presented in sectors related to PPP (public-private partnership) projects and supply-side reform, such as railway transportation, construction and steels. We also reduced allocations to the automobile and agriculture sectors. All of these contributed positively to the portfolio returns. As of the end of the year, the portfolio s top sector allocations were bank, non-bank financials, pharmaceuticals, agriculture, domestic appliances, light industry and food & beverages. We overweighed agriculture, light industry, pharmaceuticals, electrical equipment and domestic appliances and underweighed non-bank financials, computers and media. Looking ahead to 2017, we anticipate a marginal monetary tightening considering the respective pressures on the RMB and asset prices. That said, market liquidity overall should remain neutral. Fiscal stimulus would be the key driver to growth stabilization, albeit a rather limited policy leeway; meanwhile the authorities may further step up efforts on PPP (public-private-partnership) projects. In terms of the supply and demand in the stock market, there should be a moderate improvement compared to While predicting a rather steady benchmark return in 2017, we do foresee enough twists and turns to drive up the intra-year market volatility. We remain conscious of the build-up of market uncertainties going ahead. Domestically, key areas of concern range from the effectiveness of the renewed property tightening policy, falling magnitude in property investments, to the impacts of inflation, exchange rate, real-estate prices and financial deleveraging on the course of the economic policies. Externally, on top of increasing geopolitical risks, we also take careful note of the uncertainties associated with the global trade rebalancing issues and their potential implications on trade policies as a result of the new round of political successions abroad

6 REPORT OF THE MANAGER (CONTINUED) Harvest China A Research Select Fund (Continued) As regards our portfolio, we continue to lay emphasis on bottom-up fundamental investments while focusing on GARP and low-valued blue chips as our core holdings to maintain a relatively balanced allocation. At the sector level, we do not see much short-term upside potential in those previously lowvalued blue chips featuring revaluation prospects under the low interest rate environment. Besides, having experienced a year of systemic upsurge in the cyclical sector driven by the inventory cycle and supply-side reform, we are not certain if the cyclicals are able to maintain their strong momentum this year. On the other hand, from a medium-term perspective low-valued, high-dividend blue chips remain among those most sought-after, and we also see value in certain sub-sectors including banks. As for small-cap growth stocks, while their share prices have corrected substantially during 2016, the uncertainties in connection with the increasing M&A (merger and acquisition) activities of these small-cap companies especially their potential impacts on the company results over 2017 still warrant our concern. We therefore anticipate the small-cap correction process since the burst of their last valuation bubble continues, but as soon as the correction process approaches its latter half especially at a time when some individual quality growth stocks are trading in a range we will swing into action and capitalize on such buying opportunities

7 REPORT OF THE MANAGER (CONTINUED) Harvest China Income Fund Emerging Market (EM) assets had very strong performance in 2016; EM hard currency credit posted double digit returns (EMBIGD +10.2% and CEMBI Broad +10.8%), a strong bounce back after the weak performance for the past three years. EM credit outperformed both EM and Developed Market (DM) equity (MSCI EM +8.6%, S&P +9.5%). The year started in a cautious mode, as fears of a China hard-landing, slowing global economic growth and falling oil prices sent markets plummeting in January and early February. However, a sharp rally began thereafter, EM credit spreads tightened. This was driven by the bottoming in oil/commodity prices and recovery in sentiment around Brazil. The second leg of the rally started after Brexit in late June. The expectation of further Quantitative Easing (QE) from the European Central Bank (ECB) and Bank of Japan (BOJ) leading to sustained low rate environment and negative yields triggered an increase in demand for credit overall as well as EM fixed income. Moreover, the positive market sentiment following the US elections enabled spreads to tighten despite the sharp rise in US treasury yields. Markets ended the year in a positive note and investors remain sanguine on the risk of adverse trade policies from the new US administration. Under this backdrop, Asia and China credits had a solid performance in 2016, with JACI index returning 5.8% and JACI China returning 5.6%. Return has been lower than other EM regions, but it has also been more stable with less volatility during times of market stress. In Asia, the 1.0% default rate was the lowest since 2011 when there were no defaults. Despite the rising default rate in the China onshore bond market, this has not spilled over into the USD bond market. China delivered 6.7% GDP growth in 2016, in line with the government s target range of 6.5% to 7%, thanks to the targeted stimulus including fiscal spending on infrastructure and continuing accommodative monetary policy. The growth accelerated in the last quarter at 6.8% year over year, a four-quarter high. The firmer finish to the year bodes well for The structure of growth also improved as the share of consumption on the demand side and of services on the output side rose to record highs. Global bond markets start 2017 on solid footing, as US treasury rate stabilizes, investor sentiments improve and fund flows return. We believe that recent increase in bond spread and treasury yield has provided a better entry point for investors. We expect US 10-year treasury yield (UST) to peak in the first quarter of 2017 at about 2.5%-2.75% and gradually trend lower; we see the rate move towards low-2% at end-2017 because we think that the global economy is not on such a solid footing to accommodate a sharp rise in yields. Moreover, any excessive rise in yield would slow down growth. Though we expect the Chinese government to prioritize deleveraging over growth in 2017, stability would still remain the prime objective for the central government. We expect spreads to continue to grind tighter in 2017 driven by strong technicals. Firstly, the negative rate environments in Japan and Europe are still pushing more flows into bond funds; secondly, the strong growth in USD deposits accumulated both onshore China (currently at about USD600 billion) and offshore from export trades have provided cheap funding and a necessity for these banks to invest in the offshore USD bond market. Asia credit space, especially China, is in a better position than the other EM regions because of its strong local support, better macro fundamentals driven by reform and fiscal policies and higher real interest rate, which will provide more policy buffer. Despite the recent USD strength, we expect the Chinese government to stem any massive capital outflow and for the RMB to depreciate in a controlled manner, in the range of 3-5% annually. A sustained, albeit moderate depreciation trend, will continue to attract strong buying interest of offshore USD bonds, which in turn provides a supportive backdrop for the China credit space

8 REPORT OF THE TRUSTEE We hereby confirm that, in our opinion, the Manager, Harvest Global Investments Limited, has, in all material respects, managed Harvest RMB Fixed Income Fund, Harvest China A Research Select Fund and Harvest China Income Fund in accordance with the provisions of the Trust Deed dated 4 January 2012, as amended, for the year/period ended 31 December On behalf of BOCI-Prudential Trustee Limited, the Trustee 27 April

9 Independent Auditor s Report To the Unitholders of Harvest Funds (Hong Kong) Report on the Audit of the Financial Statements Opinion What we have audited The financial statements of Harvest China A Research Selected Fund, Harvest RMB Fixed Income Fund and Harvest China Income Fund (the Sub-Funds ), sub-funds of Harvest Funds (Hong Kong) (the Trust ) set out on pages 10 to 55, which comprise: the statements of financial position as at 31 December 2016; the statements of comprehensive income for the year/period then ended; the statements of changes in net assets attributable to unitholders for the year/period then ended; the statements of cash flows for the year/period then ended; and the notes to the financial statements, which include a summary of significant accounting policies. Our opinion In our opinion, the financial statements give a true and fair view of the financial positions of each of the Sub-Funds as at 31 December 2016, and of each of their financial transactions and cash flows for the year/period then ended in accordance with International Financial Reporting Standards ( IFRSs ) issued by the International Accounting Standards Board (IASB). Basis for Opinion We conducted our audit in accordance with International Standards on Auditing ( ISAs ) issued by the IASB. Our responsibilities under those standards are further described in the Auditor s Responsibilities for the Audit of the Financial Statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Sub-Funds in accordance with the International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants (the IESBA Code ), and we have fulfilled our other ethical responsibilities in accordance with the IESBA Code. Other Information The Manager and the Trustee (the Management ) of the Sub-Funds are responsible for the other information. The other information comprises all of the information included in the annual report other than the financial statements and our auditor s report thereon. Our opinion on the financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated

10 Independent Auditor s Report (Continued) To the Unitholders of Harvest Funds (Hong Kong) Report on the Audit of the Financial Statements (Continued) Other Information (Continued) If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Management for the Financial Statements The Management of the Sub-Funds is responsible for the preparation of the financial statements that give a true and fair view in accordance with IFRSs issued by the IASB, and for such internal control as the Management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the Management of the Sub-Funds is responsible for assessing the Sub-Funds ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Management either intends to liquidate the Sub-Funds or to cease operations, or have no realistic alternative but to do so. In addition, the Management of the Sub-Funds is required to ensure that the financial statements have been properly prepared in accordance with the relevant disclosure provisions of the Trust Deed dated 4 January 2012 ( Trust Deed ) and Appendix E of the Code on Unit Trusts and Mutual Funds issued by the Hong Kong Securities and Futures Commission (the SFC Code ). Auditor s Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor s report that includes our opinion. Our responsibilities is to express an opinion on these financial statements based on our audit and to report our opinion solely to you, as a body, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. In addition, we are required to assess whether the financial statements of the Sub-Funds have been properly prepared, in all material respects, in accordance with the relevant disclosure provisions of the Trust Deed and the SFC Code

11 Independent Auditor s Report (Continued) To the Unitholders of Harvest Funds (Hong Kong) Report on the Audit of the Financial Statements (Continued) As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Sub-Funds internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Management. Conclude on the appropriateness of the Management s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Sub-Funds ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor s report. However, future events or conditions may cause the Sub-Funds to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. We communicate with the Management regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. Report on Other Legal and Regulatory Requirements In our opinion, the financial statements have been properly prepared, in all material respects, in accordance with the relevant disclosure provisions of the Trust Deed and the SFC Code. PricewaterhouseCoopers Certified Public Accountants Hong Kong, 27 April

12 STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2016 Harvest China A Research Select Fund Harvest RMB Fixed Income Fund Note RMB RMB RMB RMB Assets Current Assets Financial assets at fair value through profit or loss 4(a) 39,618,671 66,586,314 41,414,203 81,874,003 Interest receivable on deposits Interest receivable on bonds - - 1,412,076 2,454,633 Amount receivable on subscription of units 49, Amount receivable on sale of investment - 1,034,328 1,158,683 2,342,099 Prepaid expenses and other receivables - 1, Other deposit ,045 Cash and cash equivalents 8(d) 857,441 5,513,092 8,794,945 4,609,796 Total assets 40,525,681 73,135,821 52,780,652 91,285, Liabilities Non-Current Liabilities Deferred tax liability , , Current Liabilities Management fee payable 8(a) 41,870 76,706 51,656 84,319 Trustee fee payable 8(b) 35,000 35,000 35,000 35,000 Amount payable on redemption of units - 5,505, ,798 71,853 Amount payable on purchase of investment - 701,676-2,550 Other payables 205, , , ,142 Provision for taxation ,380,573 2,236,307 8,398,285 Total liabilities excluding net assets attributable to unitholders 283,151 10,247,993 2,769,486 * 8,972, Net assets attributable to unitholders 40,242,530 62,887,828 50,011,166 * 82,313,296 * Net assets attributable to holders of redeemable shares are classified as equity as at 31 December 2016 and as financial liabilities as at 31 December The notes on pages 18 to 59 form an integral part of these financial statements

13 STATEMENT OF FINANCIAL POSITION (CONTINUED) AS AT 31 DECEMBER 2016 Harvest China Income Fund Note 2016 USD Assets Current Assets Financial assets at fair value through profit or loss 4(a) 19,739,619 Interest receivable on bonds 266,994 Amount receivable on sale of investment 142,311 Cash and cash equivalents 8(d) 374,726 Total assets 20,523, Liabilities Current Liabilities Management fee payable 8(a) 5,410 Trustee fee payable 8(b) 3,000 Other payables 21,135 Total liabilities excluding net assets attributable to unitholders 29, Net assets attributable to unitholders 20,494,105 The financial statements were approved by the Trustee and the Manager on 27 April 2017 and were signed on their behalf... Trustee.. Manager The notes on pages 18 to 59 form an integral part of these financial statements

14 STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2016 Harvest China A Research Select Fund Harvest RMB Fixed Income Fund Note RMB RMB RMB RMB Income Dividend income 673,026 2,408,073 15,381 91,048 Interest on bonds - - 2,784,145 5,132,741 Interest on bank deposits 4,824 20,526 22,466 26,625 Other income 232, Net changes in fair value on financial assets at fair value through profit or loss 6 (1,587,724) 71,221,098 (3,356,717) 4,286,476 Net foreign exchange loss (358,549) (2,072,393) (10,213) (9,556) Total investment income (1,035,474) 71,577,304 (544,938) 9,527, Expenses Management fee 8(a) (607,728) (2,529,753) (729,709) (1,294,260) Trustee fee 8(b) (419,908) (437,685) (420,000) (420,000) Custodian fee 8(c) (310,373) (332,098) (197,379) (194,418) Auditors' remuneration (70,518) (105,822) (210,401) (169,859) Investment transaction costs (469,938) (1,685,273) (185,978) (413,809) Legal and other professional fee (227,611) (153,013) (214,583) (80,989) Other operating expenses (121,299) (118,498) (149,991) (151,203) Total expenses (2,227,375) (5,362,142) (2,108,041) (2,724,538) (Loss)/profit before taxation (3,262,849) 66,215,162 (2,652,979) 6,802,796 Finance cost Distributions to unitholders * 2(g) (1,396,296) (Loss)/profit after distribution and before tax (3,262,849) 66,215,162 (2,652,979) 5,406,500 Taxation 9 2,589,801 (250,243) 3,754,739 (485,326) (Decrease)/increase in net assets attributable to unitholders (673,048) 65,964,919 1,101,760 4,921,174 * Under the liability treatment distributions are recognised as a finance cost in the statement of comprehensive income however, under equity treatment distributions are recognised as dividends in the statement of changes in equity. The notes on pages 18 to 59 form an integral part of these financial statements

15 STATEMENT OF COMPREHENSIVE INCOME (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2016 Note Harvest China Income Fund For the period from 11 January 2016 (date of establishment) to 31 December 2016 USD Income Dividend income 19,225 Interest on bonds 718,511 Interest on bank deposits 243 Other income 3,778 Net changes in fair value on financial assets at fair value through profit or loss 6 (7,797) Net foreign exchange loss (40,588) Total investment income 693, Expenses Management fee 8(a) (41,937) Trustee fee 8(b) (35,032) Custodian fee 8(c) (8,176) Preliminary expenses (86,359) Auditors' remuneration (21,000) Investment transaction costs (4,771) Other operating expenses (1,153) Total expenses (198,428) Profit before taxation 494,944 Taxation 9 (839) Increase in net assets attributable to unitholders 494,105 The notes on pages 18 to 59 form an integral part of these financial statements

16 STATEMENT OF CHANGES IN NET ASSETS ATTRIBUTABLE TO UNITHOLDERS FOR THE YEAR ENDED 31 DECEMBER 2016 Harvest China A Research Select Fund Harvest RMB Fixed Income Fund RMB RMB RMB RMB Net assets attributable to unitholders at the beginning of the year 62,887, ,622,101 82,313, ,157,328 Proceeds on issue of units 17,122,645 27,535, , ,640 Payments on redemption of units (39,094,895) (464,234,860) (31,754,264) (79,988,846) Net decrease from unit transactions (21,972,250) (436,699,192) (31,399,370) (79,765,206) (Decrease)/increase in net assets attributable to unitholders (673,048) 65,964,919 1,101,760 4,921,174 Dividend paid to unitholders (2016) - - (2,004,520) 1 - Net assets attributable to unitholders at the end of the year 40,242,530 62,887,828 50,011, ,313,296 Note: 1. Under the liability treatment distributions are recognised as a finance cost in the statement of comprehensive income however, under equity treatment distributions are recognised as dividends in the statement of changes in equity. 2. During the year ended 31 December 2015, net assets attributable to holders of redeemable shares are classified as a liability. During the year ended 31 December 2016, net assets attributable to holders of redeemable shares are classified as equity. The notes on pages 18 to 59 form an integral part of these financial statements

17 STATEMENT OF CHANGES IN NET ASSETS ATTRIBUTABLE TO UNITHOLDERS (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2016 Net assets attributable to unitholders at the beginning of the period Harvest China Income Fund For the period from 11 January 2016 (date of establishment) to 31 December 2016 USD - Proceeds on issue of units 29,997,216 Redemption of units (9,997,216) Net increase from unit transactions 20,000,000 Increase in net assets attributable to unitholders 494,105 Net assets attributable to unitholders at the end of the period 20,494,105 The notes on pages 18 to 59 form an integral part of these financial statements

18 STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2016 Harvest China A Research Select Fund Harvest RMB Fixed Income Fund RMB RMB RMB RMB Cash flows from operating activities (Decrease)/increase in net assets attributable to unitholders (673,048) 65,964,919 1,101,769 4,921,174 Adjustments for: Interest on bank deposits (4,824) (20,526) (22,466) (26,625) Interest on bonds - - (2,784,145) (5,132,741) Taxation (2,589,801) 250,243 (3,754,739) 485,326 Distribution paid to unitholders ,396,296 Operating (loss)/profit before working capital changes (3,267,673) 66,194,636 (5,459,590) 1,643,430 Decrease in financial assets at fair value through profit or loss 26,967, ,609,931 40,459,800 75,155,912 Decrease in other deposit - 108,018 5,045 22,848 Decrease in other payables (1,078,653) (48,499,269) (8,383) (56,321) Decrease/(increase) in other receivables 1,036,118 41,648,358 1,183,416 (2,342,099) Cash generated from operations 23,657, ,061,674 36,180,288 74,423,770 Interest received on bank deposits 5,052 21,905 22,137 26,738 Interest received on bonds - - 3,826,702 6,430,042 Tax paid (790,399) (250,336) (2,520,033) (222,215) Net cash generated from operating activities 22,872, ,833,243 37,509,094 80,658, Cash flows from financing activities Proceeds on issue of units 17,073,145 27,750, , ,640 Payments on redemption of units (44,600,884) (458,955,025) (31,674,319) (80,725,771) Distribution paid to unitholders - - (2,004,520) (1,396,296) Net cash used in from financing activities (27,527,739) (431,204,060) (33,323,945) (81,898,427) Net (decrease)/increase in cash and cash equivalents (4,655,651) (17,370,817) 4,185,149 (1,240,092) Cash and cash equivalents at the beginning of the year 5,513,092 22,883,909 4,609,796 5,849,888 Cash and cash equivalents at the end of the year 857,441 5,513,092 8,794,945 4,609,796 Analysis of balances of cash and cash equivalents Cash at banks 857,441 5,513,092 8,794,945 4,609,796 The notes on pages 18 to 59 form an integral part of these financial statements

19 STATEMENT OF CASH FLOWS (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2016 Harvest China Income Fund For the period from 11 January 2016 (date of establishment) To 31 December 2016 USD Cash flows from operating activities Increase in net assets attributable to unitholders 494,105 Adjustments for: Interest on bank deposits (243) Interest on bonds (718,511) Taxation 839 Operating loss before working capital changes (223,810) Increase in financial assets at fair value through profit or loss (19,739,619) Increase in other payables 29,545 Increase in other receivables (142,311) Cash used in operations (20,076,195) Interest received on bank deposits 243 Interest received on bonds 451,517 Tax paid (839) Net cash used in operating activities (19,625,274) Cash flows from financing activities Proceeds on issue of units 29,997,216 Payments on redemption of units (9,997,216) Net cash generated from financing activities 20,000, Net increase in cash and cash equivalents 374,726 Cash and cash equivalents at the beginning of the period - Cash and cash equivalents at the end of the period 374,726 Analysis of balances of cash and cash equivalents Cash at banks 374,726 The notes on pages 18 to 59 form an integral part of these financial statements

20 NOTES TO THE FINANCIAL STATEMENTS 1 General information Harvest Funds (Hong Kong) (the Trust ) is an umbrella unit trust governed by its Trust Deed dated 4 January 2012 (the Trust Deed ) made between Harvest Global Investments Limited as Manager (the Manager ) and BOCI-Prudential Trustee Limited as Trustee (the Trustee ). The terms of the Trust Deed are governed by the law of Hong Kong. The Trust is authorised by the Securities and Futures Commission of Hong Kong (the SFC ) under 104(1) of the Hong Kong Securities and Futures Ordinance. As at 31 December 2016, the Trust has three sub-funds, Harvest RMB Fixed Income Fund, Harvest China A Research Select Fund and Harvest China Income Fund (collectively the Sub-Funds ), in respect of which separate classes of units were issued. Dates of inception of the Sub-Funds were 21 February 2012, 28 January 2014 and 11 January 2016 for Harvest RMB Fixed Income Fund, Harvest China A Research Select Fund and Harvest China Income Fund respectively. The reporting period for Harvest China A Research Selected Fund and Harvest RMB Fixed Income Fund is 1 January 2016 to 31 December The reporting period for Harvest China Income Fund is 11 January 2016 to 31 December 2016 (collectively refer to the Year ). Harvest RMB Fixed Income Fund Harvest RMB Fixed Income Fund (the Sub-Fund ) seeks to provide investors with long-term capital growth in Renminbi ( RMB ) terms by investing primarily in a managed portfolio of debt securities and money market instruments denominated and settled in RMB issued or listed in the People s Republic of China ( PRC ), including but not limited to fixed rate or floating rate debt securities, convertible bonds, commercial papers and certificates of deposit. These instruments may be traded or dealt in the mainland exchange market or interbank bond market (OTC market). These instruments may be issued by the Chinese governments (including municipal bonds issued by local governments), quasi-government organisations, banks, financial institutions and other corporate entities. The Sub-Fund may invest in urban investment bonds (i.e. debt instruments issued by local government financing vehicles ( LGFVs ) and traded in the PRC exchange-traded bond markets and inter-bank bond market). These LGFVs are separate legal entities established by local governments and/or their affiliates to raise financing for local development, public welfare investment and infrastructure projects. The exposure to urban investment bonds may be up to 70% of the Sub-Fund s Net Asset Value. The Sub-Fund may also invest in collective investment schemes which primarily invest in fixed income securities, including exchange traded funds. Investment in debt securities, money market instruments and the abovementioned collective investment schemes shall be no less than 80% of the net asset value of the Sub-Fund. The Sub-Fund may also invest up to 20% of its net asset value in China A-Shares listed on the Shanghai and Shenzhen Stock Exchanges (including initial public offerings) and collective investment schemes which primarily invest in equity securities, including exchange traded funds, issued or listed in the PRC. The Sub-Fund will only invest in collective investment schemes that have been authorised by the China Securities Regulatory Commission ( CSRC ) for investment by the retail public, and such investment will not in aggregate exceed 10% of the net asset value

21 NOTES TO THE FINANCIAL STATEMENTS 1 General information (Continued) Harvest RMB Fixed Income Fund (Continued) Exposure to securities issued within mainland China will be through the RQFII quotas of the Manager. The Sub-Fund will not invest in any securities issued outside mainland China. The Sub-Fund will not invest in bonds issued outside Mainland China. The Sub-Fund will not invest in derivative instruments, structured products, structured deposits or asset backed securities for hedging or non-hedging purposes. The Manager currently does not intend to enter into any securities lending, repurchase or reverse repurchase transactions or similar over-the-counter transactions in respect of the Sub-Fund. Prior approval will be sought from the SFC and at least one month s prior notice will be given to Unitholders should there be a change in such intention. Harvest China A Research Select Fund Harvest China A Research Select Fund (the Sub-Fund ) seeks to achieve long-term capital growth by investing primarily in China A-Shares listed on the Shanghai Stock Exchange or the Shenzhen Stock Exchange. The Sub-Fund invests primarily in China A-Shares (including initial public offerings) listed on the Shanghai Stock Exchange or the Shenzhen Stock Exchange through the RQFII quotas of the Manager. The Sub-Fund may invest in equity of companies of any capital size, including small and midcap companies. It does not have an investment focus on any particular sector or industry. Not more than 10% of the Sub-Fund s assets may be held in cash and cash based instruments and money market instruments and/or, to the extent permitted by applicable regulations and investment restrictions, in other types of investments including, but not limited to, warrants traded or transferred on a stock exchange in the PRC, securities investment funds (including exchange traded funds) and other instruments from time to time approved by the China Securities Regulatory Commission ( CSRC ) for investment by a RQFII. The Sub-Fund may use deliverable or non-deliverable forwards, currency options and currency futures (which are traded offshore outside the PRC) for the purpose of currency hedging only. The Sub-Fund may also acquire stock index futures traded in the PRC or in offshore markets for equity market hedging only. The Manager currently does not intend to invest in other derivatives (save for the aforementioned derivatives). The Sub-Fund s total exposure to investments issued or traded offshore outside the PRC (such as equities, collective investment schemes, ETFs and real estate investment trusts ( REITs )) will in aggregate be up to 30% of its net asset value. The Manager currently does not intend to: (i) (ii) (iii) invest in debt securities including urban investment bonds issued in the PRC (i.e. bonds issued by PRC local government financing vehicles); invest in structured deposits or products (including asset backed securities, mortgage backed securities and asset backed commercial papers or similar structured products); enter into any securities lending, repurchase or reverse repurchase transactions or similar over-the-counter transactions in respect of the Sub-Fund, and prior approval will be sought from the SFC and at least one month s prior notice will be given to unitholders should there be a change in such intention

22 NOTES TO THE FINANCIAL STATEMENTS 1 General information (Continued) Harvest China Income Fund Harvest China Income Fund (the Sub-Fund ) seeks to maximise long term total return in terms of both income and capital by investing primarily in a portfolio of fixed income and debt instruments denominated in the United States Dollars (the USD ), Renminbi (the RMB ) or any other currencies. The Sub-Fund seeks exposure to fixed income and debt instruments issued or guaranteed by issuers domiciled in China or Hong Kong or those domiciled outside of China but whose predominant business will benefit from or is related to the economic growth in China for at least 70% of the Net Asset Value of the Sub-Fund. In addition, the Sub-Fund may have exposure to fixed income and debt instruments issued or guaranteed by issuers domiciled in or exercising the predominant part of their economic activities in the Asian region (including but not limited to Indonesia, India, Malaysia, the Philippines, Thailand, Singapore, South Korea and Vietnam) or a member country of the Organisation for Economic Cooperation and Development ( OECD ). Such exposure will be less than 30% of the Net Asset Value of the Sub-Fund. Exposure to fixed income and debt instruments may be through direct investments or investments in other collective investment schemes (including exchange traded funds). The Sub-Fund may invest in: (1) RMB denominated fixed income and debt instruments issued or distributed in mainland China ( Onshore RMB Bonds ) through direct investment via the Manager s RQFII quota, China Interbank Bond Market and/or other means as may be permitted by the relevant regulations from time to time, and indirectly through investment in other collective investment schemes (including exchange traded funds); and (2) RMB denominated fixed income and debt instruments issued or distributed outside mainland China ( Offshore RMB Bonds ) through direct investment. Direct and indirect exposure to Onshore RMB Bonds will be less than 20% of the Sub- Fund s Net Asset Value. The Sub-Fund s investments may include, but are not limited to, bonds, convertible bonds, commercial paper, medium term notes, floating rate notes, money market instruments, certificates of deposits, bank deposits and negotiated term deposits. The Sub-Fund may seek exposure to other assets that may generate additional income (which includes but is not limited to dividend income, interest income and/or expected potential capital appreciation) for the Sub-Fund, including but not limited to real estate investment trusts (REITs) and China A-Shares (via the Shanghai-Hong Kong Stock Connect or similar schemes which may be approved by the relevant authorities) (which will not in aggregate exceed 10% of the Sub- Fund s Net Asset Value) and may also hold cash and cash based instruments and money market instruments as considered appropriate by the Manager. The aggregate direct and indirect exposure to Onshore RMB Bonds and China A-Shares will be less than 20% of the Sub-Fund s Net Asset Value

23 NOTES TO THE FINANCIAL STATEMENTS 1 General information (Continued) Harvest China Income Fund (Continued) The Sub-Fund may use deliverable or non-deliverable forwards, currency options and currency futures for the purpose of currency hedging only (against the Sub-Fund s Base Currency or the class currency of the relevant class of Units); credit default swaps for the purpose of credit hedging only; and bond futures, US treasury futures and interest rate swaps for the purpose of interest rate hedging only. The Manager currently does not intend to invest in structured deposits or products or financial derivative instruments (other than those set out above for hedging only), or enter into any securities lending, repurchase or reverse repurchase transactions or similar over-the-counter transactions in respect of the Sub-Fund. Prior approval will be sought from the SFC and at least one month s prior notice will be given to Unitholders should there be a change in such intention. 2. Summary of significant accounting policies The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated. (a) Basis of preparation The financial statements of the Sub-Funds have been prepared in accordance with International Financial Reporting Standards ( IFRSs ) issued by the International Accounting Standards Board ( IASB ). The financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets and financial liabilities held at fair value through profit or loss. The preparation of financial statements in conformity with IFRSs requires the use of certain critical accounting estimates. It also requires the Trustee and Manager (together the Management ) to exercise their judgment in the process of applying the Sub-Funds accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 3 and Note 4(f). Standards and amendments to existing standards effective 1 January 2016 There are no standards, interpretations or amendments to existing standards that are effective for the first time for the financial year beginning 1 January 2016 that would be expected to have a material impact on the Sub-Funds

24 NOTES TO THE FINANCIAL STATEMENTS 2. Summary of significant accounting policies (Continued) (a) Basis of preparation (Continued) New standards, amendments and interpretations issued but not effective for the financial year beginning 1 January 2016 and have not been early adopted A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after 1 January 2016, and have not been applied in preparing these financial statements. None of these are expected to have a significant effect on the financial statements of the Sub-Funds except the following set out below: IFRS 9, Financial instruments, addresses the classification, measurement and recognition of financial assets and financial liabilities. The complete version of IFRS 9 was issued in July It replaces the guidance in IAS 39 that relates to the classification and measurement of financial instruments. IFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortised cost, fair value through other comprehensive income ("OCI") and fair value through profit or loss. The basis of classification depends on the entity's business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are required to be measured at fair value through profit or loss with the irrevocable option at inception to present changes in fair value in OCI not recycling. There is now a new expected credit losses model that replaces the incurred loss impairment model used in IAS 39. For financial liabilities there were no changes to classification and measurement except for the recognition of changes in own credit risk in other comprehensive income, for liabilities designated at fair value through profit or loss. IFRS 9 relaxes the requirements for hedge effectiveness by replacing the bright line hedge effectiveness tests. It requires an economic relationship between the hedged item and hedging instrument and for the hedged ratio to be the same as the one management actually use for risk management purposes. Contemporaneous documentation is still required but is different to that currently prepared under IAS 39. The standard is effective for accounting periods beginning on or after 1 January Early adoption is permitted. The Sub-Funds are yet to assess IFRS 9 s full impact. (b) Financial assets at fair value through profit or loss (i) Classification The Sub-Funds classify their investments as financial assets at fair value through profit or loss. These financial assets are designated by the Management at fair value through profit or loss at inception. Financial assets designated at fair value through profit or loss at inception are those that are managed and their performance evaluated on a fair value basis in accordance with the Sub-Funds documented investment strategies. The Sub- Funds policies require the Management to evaluate the information about these financial assets on a fair value basis together with other related financial information. (ii) Recognition/derecognition Purchases and sales of investments are accounted for on the trade date basis. Investments are derecognised when the rights to receive cash flows from the investments have expired or the Sub-Funds have transferred substantially all risks and rewards of ownership