Li Lu (Trades, Portfolio)'s speech at the 2019 Global Investor Conference was divided into five parts.
In the first part he addressed the differences between the Chinese culture and Western culture. After laying out the differences, he described China's extraordinary rise during the past forty years. The third part was about foreign investors' pessimism towards investing in China. Then, he explained the three different stages of economic development. Last but not least, he told the audience why China's economy still has huge growth potential.
Obviously, all five parts are important for investors who are interested in investing in China. In this article, I'll cover the first half of the speech, which deals with the differences between Chinese culture and Western (primarily United States) culture.
Li began by discussing what causes the differences between China and the West. From ancient times to modern times, China and the West, or simply the East and the West, have been separated geographically by the Himalayas and the vast Mongolian steppe, with little communication between them. Therefore, the Eastern and Western civilizations developed independently. Some accidental historical events made the East and the West take on different paths in different periods. Therefore, they also show different broad, overarching tendencies in the way they treat things and in the systems they establish. On the one hand, both Easterners and Westerners are human beings, so they do have things in common. However, they took different paths caused by the responses of different aspects of human nature under the influence of different external factors.
For one, China's geographical environment is very unique. To the west of China is the Himalayas, the "roof of the world." It is an insurmountable natural barrier. To the north is the vast and cold Mongolian steppe, and to the east and south is the sea. It's very interesting that two big rivers, the Yangtze River and the Yellow River, which also originate in the Himalayas, run in the same direction into the sea. Before the discovery of the North American continent, the plain formed between the Yangtze River and the Yellow River was one of the most fertile, broadest and most suitable land for farming on earth. Therefore, agriculture sprouted here very early. These two major rivers, together with some tributaries, provide an economic and convenient way for the transportation between different regions on the plain. So as long as a certain place can gather enough strength, it is not difficult to conquer (unify) the whole land.
The basic biological mechanism for agricultural civilization is photosynthesis, which converts solar energy into crops and livestock, and land is the key resource. This means that the size of the land determines agricultural output and the number of people a civilization can afford. In the whole history of agricultural civilization, the scarcity of land is the theme throughout. Once a certain society has more land, it will produce a larger population. When the population reaches a certain level and exceeds the limit of the land size, it will fall into the Malthusian trap. War, transmissible and deadly diseases and famine come one after another and the population is sharply reduced, and a new round of the cycle begins.
The economy of agricultural civilization is a shortage economy - that is, the agricultural economy is not enough to maintain the normal growth of population. When the land output limit is reached, the total human population can only be reduced. The decrease in population is usually marked by ethnicity, race and country. The people who occupy the most land usually survive at the expense of the other groups. Wars in agricultural civilization are usually for more land.
In the 5000-year history of Chinese civilization, there were countless wars aimed at land expansion. The ultimate winners were those societies that had invented a way to mobilize the people on a large scale - that is, societies with more advanced political systems that could better control larger groups of people. Human beings are both highly individual and highly social. In this respect, humans are unique among all species. The Chinese were the first in recorded history to actively explore ways to mobilize society on such a large scale.
About 2,400 years ago, the state of Qin, then a small country in the west of China, carried out what is known today as the Shang Yang Reform. The significance of Shang Yang's reform is that it revolutionized the social organization of the region. Before that, the relationship among the ancient Chinese people was naturally based upon blood (family) relationship. The state of Qin broke this blood relationship for the first time. The king of Qin also stipulated that property could be passed down, but political power could not be inherited. Political officialdom should be based solely on achievements and competency. Before that, in China (as well as in the West before modern times), blood relationship had always been the main factor in terms of the selection of government officials. The society was highly solidified, and there are few opportunities for upward mobility. .
Shang Yang's reform in the state of Qin created a system of appointing people on their merits, knowledge and competency. Qin, as a small state, provided an opportunity to succeed for everyone in the society, regardless of their birth origin, to gain political power through their own efforts. Therefore, Qin mobilized the strength of all people and eventually conquered the entire Chinese territory and established a huge empire. Over the next two thousand years, China's dynasties and generations organized society in a similar way. Therefore, in the era of agricultural civilization, China has been very strong, and its political system has been highly precise and organized. In terms of all the world's known history, the Chinese developed the first bureaucracy that was based on merit.
To a certain extent, this tradition continues today, attracting the most outstanding, intelligent and capable people to work in the government. The West began to develop and integrate its own ideals of meritocracy much later with a focus on individualism (each person for themselves) rather than collectivism (each person for the good of the group), so it is not ingrained in society and political thought to the same extent or the same ways. China was the first country to invent and implement the large-scale political meritocracy, thus releasing the great potential of the collective. This has always been a symbol of Chinese civilization, profoundly impacting the development of everything from politics to social order and even business.
Read more here:
- Li Lu Explains the Case for China - Part 1
- The 5 'Rights' for Value Investors: Part 2​
- The 5 'Rights' for Value Investors: Right Values
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