Covenant Group of China, Inc.

In a recent article published in, McKinsey Quarterly,  “Unleashing Innovation in China”, Gordon Orr makes some interesting observations regarding innovation in China.  He implies that we in the west risk underestimating the degree with which innovation is evolving in China and states; “Much of the best innovation in China today is built around developing creative business models in addition to, or instead of, new physical products.”  However, he also points out that; “Innovation based on careful study of consumer preferences is rare, especially when the consumers are outside of China. Chinese companies still place too much focus on expanding global market share with just-good-enough products instead of creating markets with totally new products.”

Back in May (5/11/10) in a post entitled “It’s Not Only About Infrastructure” I wrote about the educational drive in China and in particular on the evolution of Chinese higher education.   Earlier this week, December 7^th, Seeking Alpha posted a column originally published in Forbes regarding secondary education in China.  In Shaun Rein’s piece “Education: What China Must Do to Cement Superpower Status” he argues that the type of educational evolution that I referenced back in May has not even begun to approach the primary and secondary levels.

Rein observes that many who can afford it send their children abroad for all or part of their secondary education and, or their higher education.  He states; “Even those who cannot afford to go abroad realize the weakness of China’s education system.”  He points out that “soft power” at its finest is when a country attracts students from around the world to study in their educational institutions rather than sending its own “best and brightest” abroad to study.

It is interesting to read about the recognized “soft power” of the United States’ educational system and institutions while the author makes an argument for a similar strive for excellence in China as a means to cement its status as a global power if not superpower.  Given the importance that education has played in creating an extraordinary vibrant and innovative society here in the US, I think the drive for education in China will not only enhance its global stature, but more importantly become an engine for prosperity and a key component of the economic transition referenced in David Leonhardt’s piece in The New York Times Magazine on November 28^th.

We’re just back from China, we being Fred, Thomas and I.  As we work our network and investigate opportunities we find ourselves in fascinating places and understand that some of the most intriguing opportunities lie far from the major cities of Shanghai, Beijing and Guangzhou.  On our most recent trip we spent some time in Qichun 800 km west of Shanghai along the Yangtze River.  Qichun is a major center of the herbal industry in China.

Qichun is the birthplace of Li Shizhen (1518 – 1593) one of China’s ‘great physicians and pharmacologists’ who is credited with researching and writing the premier reference book for herbal medicine.

A full day of catching up on accumulated reading, or how to spend 15 hours while strapped into the aluminum tube while flying to China.  

The New York Times Magazine from Sunday 28 November 2010 had an excellent article on China’s transition from an agrarian economy, to an industrial economy, to a consumer economy.  David Leonhardt in his article: “Can the Chinese Discover the Urge to Splurge” looks at the challenges facing China as its economy evolves and matures.  This article is truly a must read.

Leonhardt observes that ‘the rise of China has often seemed inevitable, but has been anything but inevitable’ and looks at some of the history and current issues facing the boom that is the Chinese economy as it develops from a “sweatshop economy” and aspires to an “innovation economy”.

 

Among the flood of recent articles regarding the Chinese economy two, in particular, stood out.           

The first appeared in The Economist on 28 October 2010.  It noted the importance of the Chinese domestic economy and questioned its ability to serve as a significant growth engine for the global economy overall.  It is interesting that in spite of China’s impressive growth rate, its ability to pull the rest of the world’s economy forward appears to be fairly limited.  Are there sensible parallels to be drawn between the US economy pre-WW II and the Chinese economy today?

The second article appeared online at seekingalpha.com on 14 November 2010.  Most striking here is (i) the growth of retail spending – reinforcing the importance of the Chinese consumer and (ii) the inflation figure that has been in large part driven by food prices.  Food prices…. Interestingly AgFeed’s drive and mission of bringing efficiency and productivity gains to Chinese hog production could, in the long term, make a contribution to dampening the impact of pork prices on the Chinese CPI.  Making significant improvements in the cost of production across a range of agricultural products present exciting business opportunities in China.

Stephen Roach, a senior fellow at the Jackson Institute for Global Affairs at Yale and the non-executive Chairman of Morgan Stanley Asia published an interesting column today entitled Cultivating the Chinese Consumer.

 

In the column he points out; “The economic tensions between the United States and China arise because of two things we have in common. First, there is our shared fixation on jobs. In the United States, we continue to struggle with high rates of unemployment and underemployment. In China, policymakers continue to worry about what they term “social stability” — that is, full employment, absorption of surplus rural labor and reduced inequalities consistent with their aspirations for a “harmonious society.” Second, for both China and the United States, there are major imbalances in the percentages of gross domestic product devoted to exports, investment, consumption and savings.”

 

Roach argues that a significant currency realignment simply will not work and that the U.S. trade problem is not a bilateral problem with China but a “multilateral trade problem with a broad cross section of countries.” He sees more value in U.S, policy actions targeted to greatly increase our savings rate, while from a Chinese point of view he advocates for pro-consumption policies to reduce the Chinese savings rate and increase consumption.

Thomas Friedman published a column yesterday entitled Their Moon Shot And Ours.  The column is very bullish about China and its priorities and scarily bearish for the United States.  Don’t be misled by the title of the column and think that it is about a space race in the 21^st Century.  The column is about “big, multibillion-dollar, 25 year game-changing investments.”  It’s about thinking well into the future and acting on these thoughts and looking at how we in the U.S. respond to these challenges and how Chinese policy makers react for the future.  To remain competitive we have to support change while seeking to change faster than everyone else.  Admittedly, we face challenges to the status quo that China does not face in looking forward – but look forward we must.  China’s policy makers understand that it must be a leader in responding to changing industrial opportunities.   Today it would seem that Chinese policy may well be ahead of U.S. policy in its drive to enhance its competitive position, however, a significant question remains as to the role of government policy in commercial and business innovation and whether or not U.S. industry will act without the support of economic and government policy to respond to global challenges. Will business and political leaders in the U.S. remain so tied to the status quo that they will act in their short-term interests while ignoring the long-term systemic challenges that must be faced to ensure their competitive position into the future?

David Leonhardt writes in today’s New York Times about the value of the Chinese Yuan.  He emphasizes the long-term view that guides Chinese policy makers and makes a strong argument that a revaluation of the Yuan will not do much to help the U.S. economy.  He draws interesting parallels to similar currency tensions between Japan and the U.S. during the mid- 1980’s.  Leonhardt also points out the balancing act that faces Chinese policy makers as they need to be attentive to domestic consumption, the cost of imported products and the risk of production and jobs moving to even lower cost markets. 

The New York Times reported today that China had eclipsed Japan as the second largest economic power in the world.  David Barboza’s article cogently summarizes the main themes, challenges and opportunities associated with China’s economic growth.  China’s economy is not only growing but it is also evolving and developing with equal if not greater speed.  Challenges and opportunities are both presented to China’s regional and global trading partners as well as to the Chinese leadership as they fine-tune their economic engine and face the changes it brings to Chinese society and social structures.  The growth of the middle class and the opportunities that this presents as consumer demand grows has been well reported.  Equally powerful, but perhaps less well reported are the agricultural opportunities presented in connection with growing urbanization and the need to have a dramatically more efficient agricultural sector to feed a growing urban population while assuring food safety.

The following piece appeared in today’s New York Times.  Writing for Reuters Breakingviews Nicholas Paisner and Wei Gu summarize the impact of the fine line economic policy makers in China follow as they dampen real estate speculation while maintaining manufacturing growth.

A Fine Line in China

Evidence that the Chinese economy is slowing should be fodder for double-dip doomsayers. But investors have taken in stride a fall in the country’s manufacturing index to a 17-month low. With further cooling measures now looking unnecessary, they are probably right to be sanguine.

Continued Chinese expansion is a critical support for the troubled global recovery, but some deceleration is helpful. Gross domestic product rose by more than 10 percent in the year to June, much higher than the official 8 percent growth target for 2010. That led Beijing to introduce measures aimed at the hot property market and credit growth, in turn prompting investors to fear that tougher intervention might be in prospect.

The latest data provide some reassurance that the current measures are working well enough. The official manufacturing index was down to 51.2 in July, from 52.1 in June. But July figures are always lower than June’s, so it is not quite the slowdown it seems.

On a seasonally adjusted basis, the July index even went up by 0.4 percentage points from June, according to Goldman Sachs. The figures are also distorted by July’s floods, with heavy rains hitting the industrial bases of southern and northeastern China hard, damaging roads and forcing factory closings.

Recent tightening measures have nonetheless had an effect, in particular on the bubbly real estate sector. But activity is already recovering, helped by new public housing projects. Inventories of long steel products, typically used in construction, are falling and prices are rebounding sharply. Finished goods and raw materials inventories are also low. Judging by hiring activity, Chinese industry does not envisage a nasty slowdown. Manufacturers continue to add new workers, anticipating that they may have to raise production.

The situation is still finely balanced. For now, intervention seems to be producing the desired modest slowdown in growth, and it’s easy to see why investors pushed Chinese equities higher on Monday — despite an already strong rebound — with the positive sentiment helping American stock markets, too. But the Chinese economy often goes through wild swings. It will take more than one month’s data to be certain of a soft economic landing.

In the July/August 2010 issue of Foreign Affairs, Ken Miller has written an article entitled "Coping with China’s Financial Power".   Amid a deluge of articles, programs and opinion on the value of the Yuan, China’s foreign currency reserves, it’s holding of U.S. Treasuries this article is seminal reading.  Miller’s piece lays out a clear of cogent picture of the policy issues guiding China’s new found and unprecedented financial might and its role in foreign policy considerations.

Other interesting reading can be found at: 

www.foreignaffairs.com/readinglists/chinas-economy

Amid all the recent press about the value of the Yuan, two recent articles caught my eye.  An article written by Lowell Bryan of McKinsey and an article in The New York Times on June 25^th.  Both pieces make interesting and powerful observations regarding the importance and growth of consumer spending in China.

In McKinsey Quarterly Lowell Bryan uses Beijing’s decision to relax its currency’s informal peg to the US dollar to discuss the global economy’s imbalances in trade, capital and consumption and how these imbalances will be unwound, or rebalanced.  I took particular note of one of his conclusions “…..multinational-company executives who set strategy in emerging markets need to stop saying that those markets may someday be at least as important as drivers of consumption as they are platforms for low-cost manufacturing or services—and to start acting as if that day was near. In an upcoming article, my colleagues Jeff Galvin, Jimmy Hexter, and Martin Hirt describe what it would mean for a multinational to treat China as its “second home” (see “Building a second home in China,” to be published later next week on mckinseyquarterly.com). China’s scale makes its potential to transform the competitive balance of industries, and thus its importance, somewhat unique. But as currency adjustments bring purchasing power closer to parity around the world, the importance of emerging-market consumption will be reinforced everywhere. (For more on consumer segments in those markets, see “Capturing the world’s emerging middle class,” to be published in early July on mckinseyquarterly.com.) “

The New York Times article, entitled “China’s Export Economy Turns Inward”, reinforces the Covenant view that the development of a consumer economy will be the new engine of the Chinese economy.  In reference to consumers the article states; “Officials see them as the linchpin of China’s move away from a lopsided economic model that relies too heavily on foreign consumption.”

I really don't think that any of us at Covenant see ourselves as rock stars, or could ever imagine someone would ask for an autograph.   Read this article:

http://knowledge.wharton.upenn.edu/article.cfm?articleid=2510&specialid=101

Its a summary of remarks made by David Rubenstein of the Carlyle Group during a forum at Wharton that really makes a very strong case for the opportunity that we see in China.

In thinking about the economic dynamism of China today infrastructure investment is certainly in the forefront of discussions and is readily visible as I travel around China, just as are the development of a burgeoning market economy and the growth of the middle class.   Each of these economic forces are necessary for China's long-term economic vitality and continued growth.  While these forces in China's economy are necessary, are they sufficient to assure long-term economic success?

Recently Robert Kaplan of The Atlantic observed; "thanks to central control the government can enlist the labor of millions to build major infrastructure, — this can make China relentlessly dynamic in ways that democracies with all of their temporizing can not be." I certainly witness this economic dynamism at work in China but have been thinking about what could be missing from the equation, if anything?

What are some of the many things that were vital to the growth of the American economy and that continue to be vital today; infrastructure, natural resources, political stability, access to capital and education.  Education is really at the heart of the American dream.  One cannot ignore the power of the GI Bill post -World War II and the impact this great expansion of higher education had on scientific and business innovation during the second half of the 20^th century.  The transformative power of innovation, spurred by our system of higher education, is arguably the key competitive advantage of the American economy.

I have just finished an article in the May/June issue of Foreign Affairs by Richard Levin the President of Yale entitled "Top of the Class".

Don't think for one minute that China doesn't "get it".

Levin observes that in the mid-90's only 5% of university aged Chinese remained in school.  Having recognized this as an issue, by 2006 China was spending 1.5% of its GDP on higher education, triple what it had spent a decade earlier.  This resulted in a quintupling of the number of Chinese enrolled in higher education, growing from 1 million students in 1997 to 5.5 million in 2007.  University enrollment in China is now the largest in the world.  Chinese planners also understand that it's not only about the number of students pursuing a university education but it's about quality as well.  Reflecting an understanding of what drives excellence in higher education the rate of expansion has slowed since 2006 due to concerns that enrollment had outstripped the capacity of faculty to maintain quality.

Here in the US we certainly pride ourselves on how our system of higher education is focused on the development of critical thinking and the depth of its multi-disciplinary approach, both engines of innovation.

Once more the Chinese "get it". 

Programs have been launched at China's elite universities such as Peking University and Fudan University that pick up on some of the cherished themes of general education and multidisciplinary curricula that we so value and promote at our universities.   These efforts can trace their roots to the educational philosophy at the heart of The Core at Columbia or Harvard's Core Program. These initiatives are all part of an effort to move away from rote learning and the dominance or dogma of a professor in their classroom and develop a method of study and instruction that will foster innovation, inquiry, collaboration and experimentation.

The developments in Chinese higher education seem to reflect a breadth of understanding, policies and actions on the part of the Chinese government to not only build an engine of long-term economic development but to give it fuel — the fuel of human capital and of innovation that will carry the economy well beyond what we see today.

It's not only about infrastructure.........

As you will have noticed from our 8-K filed on Monday morning May 3rd we are unwinding our transaction with Chongqing Sysway.

Once you've made a deal no one wants it to unravel, but if a handshake is not honored, or a contract not adhered to, then we at Covenant have to make sure that our shareholders are protected.   The 8-K lays out the basic facts.  What we want to communicate here in this blog post is that this decision is an example of our constant and on-going diligence and investment discipline.  We want to assure our shareholders that we will always be vigilant in protecting their interests as we work to build long-term value.

This past weekend I was with old friends who were very curious about what we at Covenant are up to in China and what our travels have shown us.  In describing what I've seen in China I found myself coming back to the few comments I made about the development of Chinese infrastructure in my March 26^th post.

We've all grown up learning about the impact of the development of the railroads during the 19^th century and have certainly witnessed, or directly been impacted by the development of the interstate highway system in the US during the 1950's and 60's.  But I'm not really sure if we all truly appreciate the economic development and opportunity that went along with these efforts.

China has been investing heavily in infrastructure since the mid-1980s.  The Central Committee's current economic plan calls for the construction of six new passenger railways and the upgrading of five existing ones; building 14 expressways, including one from Beijing to Hong Kong and Macau; adding 25,000 kilometers of oil and gas pipelines; expanding 10 airports and relocating two others to accommodate flight feeder lines; the acceleration of port construction along inland waterways, and several deep-water channel dredging projects.

In fact, over 37% of the stimulus plan put in place by the Chinese in response to the recent recession was earmarked for infrastructure projects.

Here in the US we seem to view infrastructure projects as make work projects that have limited economic benefit.  I suppose its easy to see why we think this way as for the most part our current infrastructure projects tend to involve re-paving roads, rebuilding/reinforcing crumbling bridges and the like - fixing things that have been long neglected.  We're not really thinking in terms of upgrades and the future and the potential power of this kind of investment.

On the other hand, China's infrastructure spending is highly leveraged.  Justin Yifu Lin the World Bank's chief economist observes that in a country like China that has such a deficit of infrastructure, building new roads, railroads, ports and airports not only creates jobs but also and importantly stimulates the movement of people and goods.    I think of it in terms of infrastructure leading to enhanced economic development and business activity.  All of which is supporting and building the burgeoning middle class while also helping to fuel consumerism.   Both fundamental macro forces influencing Covenant's strategy.

As an aside, the Chinese government's current economic plans call for all of the described infrastructure spending while also targeting a 20 percent reduction in carbon emissions.  Ahhh, but that's a topic for a post in the future.

On Tuesday my colleague made a strong case for the opportunity created for investors in China in anticipation of a gradually appreciating RMB. 

In yesterday's China Daily, Yang Changyong wrote an interesting piece entitled Has China's Investment Environment Deteriorated?  In this piece he shows that the environment is strongly positive.  He points out that foreign direct investment was down 39% around the world in 2009, in China the decline was only 3% and since August 2009 foreign direct investment in China has shown steady growth.  He goes on to point out that 71% of US funded businesses in China are profitable.

A powerful statement in Yang Changyong's article is: The State Council clearly stated in the "Several Opinions on Better Utilization of Foreign Investments" issued on April 6 that China will expand the areas that are opened to foreign investments, optimize the industry and regional foreign investment structure and enhance the investment and management efficiency in order to foster a sound investment environment.  Not only a clear signal encouraging foreign direct investment but a commitment to the ongoing improvement in the environment for investment in China.  This is just another of the many reasons why Covenant is pursuing its strategy in China.

There is much discussion in the media about the relative value of China's currency, the Yuan (RMB), versus other major currencies.  It seems that a couple of key questions are glossed over in all the rhetoric, what would revaluation mean for foreign investors and how would it fit into China's economic policy.

From the point of view of foreign investors in China an appreciating RMB represents an extremely attractive investment opportunity.  Investors will benefit as the value of Chinese company's assets, earnings and revenue rise in terms of U.S. Dollars.  RMB appreciation will also give Chinese companies the ability to reduce their costs of borrowing and enable them to more readily acquire non-Chinese assets.  We have rarely seen such a structurally compelling investment opportunity.

China's goal is to continue its economic development, becoming a developed country as compared to a developing country with a strong global currency.  In restructuring the state-run economy and expanding its market based economy China is implementing certain land reforms, balancing the economic status of rural and urban areas and promoting the growth of the middle class and its consumerism.  A slow but steady appreciation of the RMB would fortify the development of the middle class and it's spending.  Consistent with the government's policy objective of reducing the economy's reliance on exports and moving toward a market driven economy with an active consumer, an appreciating RMB would yield reduced consumer prices, a relative increase in workers wages and flourishing business activity.  The successful implementation of these economic reforms and the gradual adjustment in the value of the RMB, with its concomitant impact on the Chinese society, will be necessary pre-conditions of a freely floating RMB.

Ignored in all the rhetoric regarding the RMB : U.S. Dollar exchange rate is that since 2005 the RMB as already appreciated 22%.  The rate today is 6.83 : 1.  Also ignored by all the political posturing is the shock the U.S. economy would suffer by a rapid revaluation of the RMB, or a freely floating exchange rate.

Recently 14 US Senators and 130 members of the House of Representatives demanded that China be branded a "currency manipulator" by the Treasury Department.  Fortunately, calmer head prevailed and this demand was put off pending private discussions between US officials and their Chinese counterparts. 

These members of Congress should be careful about what they wish for!  For 15 years the U.S. has been using the Chinese "check book" to finance its government deficits and residential mortgages.  The U.S. consumer as a result has benefited from low interest rates and low consumer prices.  A sudden change to the status quo ante would be shattering for the U.S. economy and devastating for the U.S. consumer.

Realistically, I think it will be a number of years before the Chinese government will allow its currency to float freely against all major currencies, however, I do expect a steady progression of appreciation commencing within the coming 12 months, probably in 2011.  I would expect this revaluation to be between 2.5% and 3%, thus avoiding a precipitous shock to the US economy and a trade war. It seems clear that a freely floating RMB will be conditioned on the economic evolution that I outlined above.

Contrary to a common American perception that the US Dollar makes up 90% of the world's currency reserves, it is only 62% with the Euro making up 30% and the British Pound and Yen making up the balance.  The gradual steps that we expect China to be taking in revaluing the RMB and ever so slowly moving to a freely floating exchange rate will, over an extended period of time, lead to the RMB becoming a reserve currency.  Given the size, growth and diversity of the Chinese economy we expect that the world will find a monetary system that balances the US Dollar, the Euro and the RMB in a basket of reserve currencies. 

The Chinese government well understands its interconnected position in the world's economy and its long-term strategic view is well calibrated to avoid unwarranted economic shocks while ever strengthening China's global economic position.

We describe ourselves as bridging western capital markets expertise and access to Chinese special growth companies.  One of the very practical realities of this descriptor is what I woke up to describe this morning as bridging the GAAP.  Generally Accepted Accounting Principles (GAAP), the accounting standards and rules that guide the preparation of our financial statements and our financial reporting. I suppose working with highly entrepreneurial management teams inevitably leads to discussions about the accounting impact of one idea, or business initiative or another. Revenue recognition, warranty reserves, percentage of completion accounting, the list goes on.  One cannot underestimate the challenges associated with the work we do to bridge the gap between the reality of GAAP as compared to an individual entrepreneur's vision of reality.  This ranges from the demands of due diligence to the fine tuning of business plans and strategies making sure imagined profitability and cash flows are consistent with the impact of GAAP accounting treatment, all resulting in fascinating discussions about the hard reality of business models and assumptions.

An exhausting and productive week in China is at an end.  We visited and worked with the managements of our portfolio companies; Chongqing Sysway and Hainan Jien and look forward to working ever more closely together.  We also spent a substantial amount of time following up with and meeting the management teams of potential portfolio companies and attending to the never-ending efforts associated with the nurturing of our local network and cultivating our deal flow.  I am continually impressed by the hospitality, respect and grace that we find when visiting friends both new and old in China.  There is a formal and almost ritualistic way in which meetings unfold, presentations are made and due diligence sessions completed.  From time to time we do manage to break people away from their formal places at the table quite literally and forge the bonds that allow us to continue to make progress when working with everyone via email and phone from afar.

The level of economic activity in China gives every appearance of continuing apace.  The energy is palpable.  Of course there is the inevitable question of asset-bubbles.  China's economy and economic policies give every appearance of being a strong and powerful engine.  However, it would certainly seem like there are some local real estate markets that are frothy.  Of course a great deal of anecdotal evidence is floated when chatting over dinner tables and luncheons, but it is interesting how the PRC government takes action to dampen, or even eliminate speculation surrounding real estate in select markets.

Sitting in the US one doesn't immediately appreciate what a growth industry domestic air travel has been in China.  There are numerous carriers that all seem to fly either Boeing or Airbus aircraft.  An interesting article in the local press this last week related to the growth strategies of the airlines in the face of the transportation infrastructure investment that is underway to develop high-speed rail.  The Ministry of Railways has laid down a blueprint to build 16,000 kilometers of new high-speed railways by 2020, providing high-speed rail access to over 70% of key cities, mainly in central and eastern China.  One can only be staggered by the economic development and business opportunities that will be associated with such a modern and efficient transportation network.  Think about how the interstate highway system impacted US economic development in the 1950's and 60's or how the railroads impacted countries as they were developed in the 19^th and early 20^th centuries.

Of course during the last week there has been an opportunity to read the local press and hear the argument regarding the RMB : USD exchange rate from a different point of view.  An OpEd in today's China Daily by Xiao Geng caught my eye.  He suggests that there are economic policies available to Beijing, which will start to address the concern of many western policy makers, short of revaluing the Yuan.  Household income still accounts for only 35% of China's national income, and the country will not be able to significantly raise wages and productivity of its workforce in the near future.  To improve domestic consumption, therefore, China must create an investment environment conducive to investment in sectors which large domestic consumption potential. In sum, investment at present is the most important variable for eliminating China's account surplus, and for absorbing its savings internally.  Covenant has already identified the opportunities that may be presented in the consumer sector and strongly believe that this will be an important and developing investment theme for us in  the coming months.  We are working to assure that we are well positioned in this sector as we fully expect domestic consumption to expand.

Fred & I are off to China this morning. We'll be spending a couple of days in Shanghai then its off to Haikou before finishing up in Beijing.  

The front page of today's New York Times had an article about China which echos some of the themes that we see in China and that make for such significant opportunities

My observations of both China's society and its economy since my first travels there in the late 90's have molded my vision for Covenant and the Covenant business opportunity.

During its long history powerful cultural traditions have developed in China. These traditions grew out of the requirements of an agrarian society and are centered on; respect for others, reverence for nature and kinship — with family being the center of all.
These traditions established a balance among the people, the land upon which the agrarian society depended and the family which needed to work together.

China's population is undergoing an extremely rapid transition from being largely rural to an urban population of over 600 million by 2015. Parallels to the policies driving and supporting this urbanization can be seen in China's cultural traditions. China's future is being guided to establishing and depending upon a well-educated, healthy and prosperous population, a well-balanced society known as "Xiaokang", or an "all around well off" society.