Investing- The Japanese have a buy-and-hold mentality; one evidence of that, perhaps, is their custom of cross-ownership of the shares of companies that do business with each other. That would be out of the question for the Chinese, who would deploy the capital in their own businesses rather than bet on strangers. The Chinese are probably the greatest gamblers in the world and that's how they tend to view the stock market; they're a nation of day-traders.

Some of these distinctions are much more applicable to making investment decisions than others, but it's important because, as Sun-Tsu observed, knowing the mindset of your opponent is critical to winning the battle.

Japan was well equipped to deal with the 20th century-a structured,  mechanistic, industrial, clockwork kind of world. I don't think it will mesh well with the 21st. Chinese attitudes suit them ideally for the 21st century-a freeform, opportunistic, digital kind of world. I again refer you to Diamond Age by Neal Stephenson, about nanotechnic society 50 years from now; it's no accident he set the scene in Shanghai.

The 50's and the 60's were America's decades; the 70's (anomalously) belonged to the Arabs and others who had the good luck to be born on a pool of oil; in the 80's it looked like the Japanese would take over the world; the 90's were again America's. From here on China will dominate. And it will have nothing to do with choo-choo train economy factors like location, geography, or resources.

Why the future is better than just good

What are the big dangers in China? Most people seem to think the potential problems are political, that the Chinese will start a war, revert to communism, or have an internal upheaval. Anything is possible, of course, but these things are unlikely. Most Americans, never having traveled, only know what they've learned from movies, the TV, newspapers - basically sensationalized hearsay. The chances of China going back to anything even remotely resembling The Great Leap Forward or the Cultural Revolution are Slim and None, and Slim's out of town. If a war erupts with the United States in the next decade, a less remote possibility for the reasons I discussed in a past issue on the Fourth Turning, it's most likely going to be provoked by the United States.

The real danger is financial. There are five very large State-owned banks where the workers and peasants keep almost all of their considerable savings. The problem is that these banks have been acting like para-statals anywhere: they lend money in ways that seem politically smart, but may make no economic sense. That spells hundreds of billions of dollars of bad loans. The government is not about to risk the upheaval that would result from people not getting their money from the banks, so the alternative is inevitable: print enough up so that everybody gets theirs. That's bad for all kinds of reasons I won't repeat here. But the good news is that 900 million of the Chinese are still peasants, and most of their assets are tangible, despite their high savings rate. They're relatively insulated from inflation.

Even the worst case is unlikely to be very bad, however, simply because of China's stage of evolution, and the character of its society. Three things stand out in those regards:

        1) A person can cover his or her basic living expenses for 50 yuan a month-or about US20 cents a day. That's sharing poor quarters with a bunch of other people, eating very little, and buying nothing else. But in a country where, only 20 years ago, everybody lived exactly at that level, people are still willing and able to cut back.

        2) The typical Chinese saves about 50% of his income-even if he only earns US$50-100 a month, about the average wage range. If subsistence is US$4 a month, you can live acceptably for $50, while still saving $50. That means the average Chinese has assets that can tide him over many months if the going gets tough. One thing making that possible is the absence of any taxes until a relatively high level of income.

        3) An extended family acts as real social security. The family is a very big deal in China, unlike modern America, where it's mostly a theoretical icon at political rallies. The family exerts moral opprobrium to keep its members on a righteous path, but also to help them along if things go sideways. There is no permanent underclass cemented to the bottom by institutionalized State welfare.

These factors fairly well cover the downside in case The Greater Depression materializes. But, good times or bad, there's a huge community, perhaps 50 million, of Overseas Chinese around the world; as a group they're among the wealthiest people on the planet; they represent an immense pool of capital that's increasingly available as China becomes more open. Capital, economic freedom, a Confucian work ethic, a respect for education, and a culture that seems attuned to the likely environment of the future: What more is needed for success?

Bottom line

There's every reason to believe that China is doing, on a grand scale, what Hong Kong, Taiwan, and Singapore (which is essentially a Chinese city) have each done over the past few decades: rise from abject poverty to immense wealth.

Here's what it adds up to: You can speculate on the future in Europe or America. But China is where the future is already here, and it's going to continue advancing, at warp speed. It doesn't matter whether the financial markets boom, or whether the Greater Depression materializes.

China has grown at near double-digit rates for well over a decade now, while the United States stumbles along at less than 3% during a boom, despite having vastly more capital of every type. Your serious venture capital should look to China for big returns. It's a market where $492 of seed capital raised in 1992 for the Fortune Pharmaceutical group lead to the company showing $60 million in sales and $7 million in profits this year, and where the Broad Air Conditioning company built a $200 million company from a $4000 grubstake in 1988. These are real companies, with profits, not .com promotions that fritter away millions to gain fickle "eyes." There will be many more in the years to come. This month's featured company, I think, will be one of them. 

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