Commentary

Quarter Ending September 30, 2008

For the three months ending September 30, 2008, the Matthews Korea Fund lost –23.90%, while its benchmark, the Korea Composite Stock Price Index (KOSPI), declined –24.14%.

As the U.S. credit crisis spread to other markets, South Korea’s stock market also suffered from lower consumer demand in developed markets and a rapidly depreciated currency. During the quarter, the Korean government adopted a partial ban on short-selling to stabilize the stock market, joining other nations in this action. However, this seemed to have limited impact on the market.

Rapid depreciation of Korea’s currency, the won, has rattled investors nerves about the overall health of the Korean economy. The won has depreciated approximately 29% against the U.S. dollar year-to-date through September 30, 2008, making it the worst performing currency in the region. Some of the factors we believe negatively influenced the won this year include the credit crisis in the overseas debt market, a widening trade account deficit, high energy prices and weak confidence in the Korean government. Despite the weakened currency, however, we believe the underlying health of the Korean economy remains sound and that a weak currency could benefit the export sector, a large part of Korea’s economy.

In a positive development during the quarter, the global index provider FTSE Group upgraded South Korea from the advanced emerging market category to developed market status. For the past few years, South Korea has been considered for an upgrade to developed market status, which it obtained after demonstrating that it had removed some regulatory obstacles.The designation will become active in September 2009. MSCI Inc. is also considering whether to make the same reclassification. Although the short-term impact from the upgrade could be mixed, we believe that the long-term impact on the economy is likely to be positive as Korea will join the ranks of the U.S. and Germany in the top tier of investor-friendly financial markets.

The telecommunication services sector was the best performing sector during the quarter. The defensive nature of the business and decreased marketing spending by major players benefited the sector during the downturn. The financials sector was the worst performing sector during the period as it was affected by the global credit crisis. Among Korean financial companies, banks were hurt the most as they faced challenges refinancing some debts as liquidity in the global debt market dried up. Funding difficulties might persist over the next few quarters, however, as the global credit crisis eases, the financials sector should benefit. The overall valuation of the commercial bank industry remains among the region’s lowest.

On a company basis, the biggest contribution came from Hite Brewery, the dominant beer manufacturer in Korea with a strong domestic distribution network. The company was spun off from its holding company and was relisted on July 30, 2008. The company has benefited not only from the defensive nature of its business but from its strong foothold in the domestic market.

Samsung Electronics, South Korea’s largest IT company, was the worst performer during the period. The company has been hurt by falling prices in memory chip products and a worsening outlook in the global technology sector. However, Samsung’s dominant position in the memory industry should help the company withstand the downturn better than its peers.

It has been a difficult period for the Korean equity market amid the ongoing global credit crisis, however, we remain focused on finding companies that will benefit from the long-term growth of the Korean economy and we continue to believe that Korea offers one of the most attractive valuations in the region.

The views and opinions in this commentary were current as of September 30, 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 9/30/08, Hite Brewery Co., Ltd. accounted for 2.7% of the Matthews Korea Fund, and Samsung Electronics Co., Ltd. accounted for 7.8% of the Fund.