By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

The moment Beijing won the right to host the 2008 Summer Olympics, the Chinese government embarked on an ambitious cultural etiquette program designed to make Beijing more hospitable to the 500,000 foreigners expected to visit for the Games, which start only weeks from now.

And from the looks of things, such obvious niceties as…

• Learn English.
• No spitting.
• And, stand in line.

…weren’t enough. For Beijing now wants to make the country’s cuisine more appealing, as well.

On that point, at least, China’s leaders aren’t acting a moment too soon.

When Cultures Connect – or Collide

It can be quite difficult for English-speaking visitors to keep a straight face when placing an order at a luncheon business meeting in China – given such menu choices as "chicken without sexual life" (Translation: Chicken that’s very tender because it was too young to reproduce when it was turned into a roaster), or "wood flower picks sea cucumber hoof." At the same time, for veteran travelers such as myself, there’s also a certain fondness for these descriptive dishes. It’s part of the culture.

Which is why I’m torn after hearing reports that such listings as "the farmer is small to fry king" may vanish from my favorite restaurant menus along with the "fragrant spring onion sauce explodes the cow son." And let’s not forget the perennial classic – "retchup" – either.

But all joking aside, this is the kind of change that is emblematic of China’s emergence on the world stage. And it’s an important sign for investors that things are proceeding as planned. China’s leaders understand the new role their country will be playing – a role that will result in much greater visibility and far more stringent scrutiny, part and parcel of the global power and influence the country will very soon possess.

Particularly in Asia, as much as language reflects a culture, it also reflects change and frequently mirrors the underlying social and economic agenda long before the results show up in company share prices.

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And while anthropologists and etymologists study the former (language reflecting culture and change), investors should anticipate and then study the latter (economic shifts and resultant escalations in market prices). The reason: China’s history (and, indeed, the history of other nations, as well) is filled with linguistic examples that precede massive economic change and growth – for better or for worse.

In a Money Morning report just last month, I made a similar point by demonstrating how language subtleties actually alerted Asian observers of a major change in Sino-Japanese relations – a historic development that the Western media largely missed.

The current changes involve only China, but are no less important – or telling.

For instance, Chinese texts show that words like "grape," "pomegranate" and "lion" entered the picture back during the days of the fabled Silk Road. Indeed, they actually preceded the first great wave of foreign trade centuries ago.

Other so-called "loan words" in more recent times reflect the growing interaction between countries in the Asian Rim – especially Japan – during the late 1800s. That, too, presaged a new blossoming of China’s society at the beginning of the 1900s.

And while there is great debate about who borrowed what from whom, modern Chinese language reflects entire concepts borrowed from the Japanese language that have been transformed into something called wasei-kango (literally Japanese-made Chinese). Words like diànhuà (denwa, "telephone"), shèhuì (shakai, "society") are great examples.

According to Chinese and Japanese academics who study this sort of thing, there have even been cases where words have gone from Chinese to Japanese and back again. One such example is jīngjì (keizai). In original Chinese, it meant "the workings of the state." But it was narrowed to mean "economy" in Japanese before making the full circle to be re-adopted as part of the modern Chinese language, according to Wikipedia.

Lately, there’s been a whole host of Chinese words emerging as a result of increased western contact and/or influence. Examples include:

• gāoěrfū, "golf"
• kělè, "cola"
• hēikè, "hacker"
• bókè, "blog"

Not to mention China’s "taikonaut," which is the English nickname for Chinese astronauts known as yǔhángyuán, or "travelers of the universe."

Not surprisingly, these new words mirror the emergence of consumerism and technology  – trends we’ve been following closely as we invest in China.

As new words develop and new slang enters the lexicon, we’ll be watching carefully. Not only because these will be interesting in and of themselves, but because of what they suggest about future business trends.

In the meantime, I’ll be in the Hall of Mental Cultivation (Yangxindian)…

Money Morning Investment Director Keith Fitz-Gerald studies a sign for the Hall of Mental Cultivation in China’s historic "Forbidden City" in Beijing, China, this past spring. Fitz-Gerald was in China to lead an investment tour of subscribers from Money Morning and The Money Map Report. Fitz-Gerald also is the editor of the specialized trading service, The New China Trader.

News and Related Story Links:

• Wikipedia:
  Silk Road.

• Money Morning Economic Analysis:
  Lost In Translation: The Subtle Dealings Between China and Japan Can Lead to Powerful Profits.

• TravelChinaGuide.com:
  Forbidden City — Hall of Mental Cultivation (Yangxindian).

By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

There’s an incredible story taking place in Asia.

Based on my 20 years of experience in the region and formal academic study, you can believe me when I say that this may well be the most pivotal event in 20 centuries of Sino-Japanese relations.

We’ve reported some of this to you already. But the mainstream Western press hasn’t latched on to it.

That’s not to say they haven’t reported what happened when Japanese Prime Minister Yauo Fukuda hosted Chinese President Hu Jintao during the historic summit the two held in Tokyo last month – the press reported everything that "happened," and did so exceptionally well.

However, like so many things in Asia, mainstream journalists completely missed the subtleties and, not surprisingly, that’s where the real story usually is.

But you’ve got to know how to read between the lines to get at the "real" meaning of what was said.

Here’s why.

When translating both Chinese and Japanese to English, there are both literal and figurative translations to consider. Frequently, inexperienced commentators (and even experienced ones) will provide one without the other.

And that’s too bad, because it’s the context that’s "everything" in Asia – and I mean that literally.

Unlike Western romance languages – which descended from the resconstructible Proto-Indo-European language family, and which are logically oriented – Chinese languages are commonly believed to have descended from the Proto-Sino-Tibetan family while Japanese is understood to have come from a context-driven lexical borrowing process in the region.

As a result, Western languages are frequently blunt and to the point, while both the Japanese and Chinese languages historically rely heavily on context and symbolism: In other words, the "real" meaning is not the words, but is instead found in the symbolism associated with those words.

And that’s not exactly something you can explain in a 10-second CNN sound bite, so most news stations don’t bother.

For instance, during their historic five-day Summit last month in Japan, Prime Minister Fukuda and China President Hu agreed to make 2008 a year for boosting their nation’s "mutually beneficial relationship."

I was sitting in Kyoto when I heard that, and I was stunned. I’ve spent two decades studying, living in and working in Asia, and in all that time I couldn’t recall any of the prior leaders of the two countries ever sharing a more-direct, more-powerful statement.  And neither could the Chinese and Japanese I spoke with that day because the words represents the single most important thaw yet verbalized in the decades old animosity dating back to World War II.

While most Westerners expected them to "settle affairs" by making some reference to historical events that have badly strained bi-lateral relations in recent years, both leaders deliberately avoided doing anything like that during their five-day meeting. And, by doing so, each side was able to state his case to the other’s countrymen without "losing face," which is pivotally important to both countries and cultures.

Similarly, President Hu’s remarks that he’s looking forward to a "warm spring" between the two countries were translated quite literally by the Western media, although the comment had an entirely different meaning to Asians. To Asians, the comment is symptomatic of far deeper, and more intimate, nationalist feelings on a variety of personal and state levels.

By stating his desire for a "warm spring," President Hu was making an allegorical reference to the importance of producing a bountiful rice harvest. And the reason why this makes sense to Asians is that rice has been pivotally important to both cultures for a millennium or more. That crop has enabled both cultures to make the transition from hunter-gathers to farmer, and it is also central to religious and social festivals in both countries, as it has been for thousands of years.

By referencing rice farming, President Hu was very deliberately reaching deep down into the core of both nations and sending an important message to millions of Japanese and Chinese citizens that China is ready to put the past to rest and look to the future.

In a more Western fashion, the two leaders also agreed that "long-term cooperation for peace and friendship" is the "only choice left" for both countries.  This, too, is full of hidden meaning: It’s an unprecedented signal that both nations are preparing to (finally) put the horrific events – and the long-lingering bad feelings – of WWII behind them.

By putting this rancor to rest, each country will now be free to make major investments in the other’s economy – much more so than they’re doing even now.

If history is any guide, then some of the most significant Sino-Japanese trends of the future are likely to begin at the intersections of companies just now starting to flourish.

Of course, there will be course corrections along the way, but that didn’t hurt relations 20 centuries ago when Japan and China were very close – and those corrections won’t hurt them, now.

The important thing is to embrace change as it occurs.

For investors, one of the biggest profit opportunities will be with companies that are helping China build out its infrastructure and build up its consumer sector, which is why such companies as solar-ceramics maker Kyocera Corp. (ADR: KYO), and trading giant and independent power plant developer Mitsui & Co. Ltd. (ADR: MITSY), are logical choices.

In addition to seeing Japanese companies like these focusing their sights on the China market, we’re likely to see Chinese companies doing the same with Japan. While it’s not yet clear who those companies will be, it is clear to us that the initial entrée will likely be from one or more of China’s sovereign wealth funds.

Our best guess is that China investors will prefer key targets like those traded on the Tokyo Stock Exchange – especially companies that have an expertise in environmental protection and energy-saving technologies.

We also think China will make a run at construction companies with experience in large-scale infrastructure and national-building projects – all of which are in exceptionally high demand in China.

[Editor's Note: For additional China profit plays, check out this special Money Morning offer that includes a free copy of investing guru Jim Rogers' new bestseller, "A Bull in China." The book details Rogers' investment outlook for China plus his opinion on dozens of China-based public companies.]

News and Related Story Links:

• Money Morning Economic Analysis:
  Two Ways to Profit as China and Japan Quietly Forge the Most Powerful Trading Alliance in the World.

• Wikipedia:
  Hu Jintao.

• Wikipedia:
  Yauo Fukuda.

• All Academic Research:
  Lexical Borrowing in the Chinese Context: Examples from two English Newspapers in China.

• Money Morning Economic Commentary:
  Japan’s "Lost Decade" Has Given Way to the New Asian Reality – But Only if you Know Where to Look.

• Shaolin Tiger:
  The Asian Concept of ‘Face.’

• Money Morning Economic Forecasting Series:
  Outlook 2008: Three Ways to Profit From Sovereign Wealth Funds – the "Next Wall Street."

Money Morning Investment Director Keith Fitz-Gerald – an Asia investing expert – has been leading an investment trip through China, taking in that country’s culture and scenery, as well as its investment opportunities. Here is Part VI – the final installment – of a short news series detailing his observations and discoveries.

By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

IN THE AIR, ENROUTE FROM HONG KONG TO JAPAN – The fiery orange sunrise I see out my window is mesmerizing.

I’m always filled with awe over the dawn of a new day, especially during those long trips when sunrise jolts me awake from the kind of cramped, restless sleep familiar to travelers the world over.

On this day, however, I’m wide-awake. It’s the start of the newest leg of my Asian adventure. I’m tucked into seat 11A, and am quickly lost in thought. I keep thinking about different parts of the 15-day investor trip I just finished leading through Mainland China and into Hong Kong.

In fact, we’ve been off the ground for only five minutes and already I find myself watching the landscape below, which is falling away by the minute as our jetliner climbs steeply out of Hong Kong’s International Airport on its way to Japan.

After nearly a month apart, I’m certainly going to be glad to join my wife and kids at our home in Kyoto (we also live part of the year in Oregon). Even so, there’s so much going on in China that I don’t really want to leave, yet – not even for a minute.

As I look around the plane, I can’t help but wonder if my fellow passengers feel that way about the Red Dragon. Most passengers are slouched in their seats, determined to ride out the fairly long flight. The other passengers appear oblivious to the economic miracle that I’ve spent two weeks studying. One guy has a magazine folded in his lap, while several are already asleep on those tiny things airlines refer to as "a pillow." One guy – an executive, from the look of him – has his hands resting across the tray that folds down out of the seat before him.

Here and there the bluish tint from a personal computer or iPod bathes the cabin like a landing beacon giving away those who can’t or don’t want to sleep.

When I think about all that I learned about in China – and all the things that I’m going to be telling you about here in Money Morning (and in our monthly sister publication, The Money Map Report) – I can hardly get more excited than I already am.

The Pathway to China Profits

Imagine landing in New York or Boston on the eve of the Industrial Revolution and you get the idea.

China is at once a land of contradictions and a contradiction in and of itself. It’s also enormously complicated which is why even after I’ve spent 20 years in the Pacific Region, I feel like I’ve only scratched the surface.

The change China has undertaken is simply without precedent. And so is its government.

Contrary to what most Western investors believe, Beijing is growing stronger and wiser with each passing day – even as it continues to build upon the Communist pathway it established in 1949. It’s also proven itself to be remarkably prescient and pragmatic, which is why China will travel a path all its own in the years to come.

And that’s why China’s future will be very different from its past.

I realize that’s a hard pill for Westerners to swallow, but it’s one that investors must accept in order to lock in long-term profits from China.

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The key, of course, isn’t in latching onto a specific trend or direction in China, but rather in identifying investments with enough flexibility and profit potential to flourish from China-based trends.

There’s a big difference between the two mindsets. The former – always looking for ways to invest directly in China – may lead to quicker, short-term profits. But the latter – looking for powerful trends and using them to profit from China – is much more robust, since it’s capable of surviving the twists and turns that will inevitably take place along the way.

The Reality of the "New" China

After centuries of isolation and comparative solitude, China has re-entered the world economy with a bang. In the process, it’s making itself over, shedding its identity as a Cold War-oriented power player, and evolving into one of the most efficient capitalist economies the world has ever seen.

And there’s no turning back.

The prospect of a strong China clearly scares the dickens out of a good portion of America, particularly the "experts" who want to portray China as a long-term military problem. The reality here is that we are probably far better off in the long run working with China, than we are continuing to regard it as a Cold-War-type enemy. With such an enlightened philosophy, we could be investing with China in the Pacific Rim, rather than constantly figuring out how to defend against its military might.

But nothing happens quickly here. Not the airplane ride that brought me to China from the United States on the first day of my journey, and certainly not the type of U.S.-China alliance that I’m suggesting.

That means that no agreement will be reached overnight. There will be no single negotiation that "does the trick." Instead, it will take a series of negotiations – possibly over the course of several years – that will include trade talks, economic interaction and deals that build trust and understanding.

But it could all be very worthwhile. In reality, China may wind up not being our worst enemy, but our best friend.

[Editor's Note: "The View From China" has been an investing travelogue chronicling Money Morning Investment Director Keith Fitz-Gerald's journey through Mainland China. Fitz-Gerald last wrote about the modernization of China's securities laws. For more information about China-focused investments - especially specific stocks - see how you can obtain a free copy of investing guru Jim Rogers' new bestseller, "A Bull in China, a new offer from Money Morning.]

News and Related Story Notes:

• Wikipedia:
  History of the People’s Republic of China (1949-1976)

• Money Morning Investing Series:
  The View From China: As its Securities Regulations are Modernized, the Red Dragon’s Profit Potential Will Soar.

• Money Morning Investing Travelogue Series:
  The View From China: The Single Secret That Will Put You on the Pathway to Profits.

• Wikipedia:
  Industrial Revolution.

Money Morning Investment Director Keith Fitz-Gerald has been leading an investment trip through China, taking in that country’s culture and scenery, as well as its investment opportunities. Here is Part V of a short series detailing his observations and discoveries.

By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

HONG KONG – The question came to me as I was standing on the floor of the Hong Kong Stock Exchange here. I’d be willing to wager that quite a few investors – both within China and back in the United States – are wondering about this, as well.

Here it is: Will China implement a long-rumored capital-gains tax, and risk (another) major sell-off as a result?

Only Beijing’s inner circle knows for sure, and that only stokes investor speculation. The uncertainty can lead to rampant, knee-jerk sell-offs each time the scuttlebutt of an "imminent" tax surfaces. And those rumors have been surfacing over and over again – since 1994. That’s the year that Beijing’s Ministry of Finance pronounced that income derived from stock trading was exempt from personal income taxation.

That means that billions of dollars have changed hands – tax-free – as far as Beijing is concerned. For westerners accustomed to normal taxation and mature financial markets, this is almost incomprehensible. Yet, for the Chinese government it makes sense. Not only does this tax-free status encourage active market participation from Chinese consumers who otherwise would almost certainly not bother, but it also attracts foreign assets to a market like a porch light attracts moths on a hot summer night.

This foreign capital has had two beneficial effects. It helps ensure that there’s an active market that’s always awash in liquidity. And it’s probably also helped China keep its economic growth rate at around 9% per annum, many economic experts and other commentators say.

But what’s good for the goose is not good for the gander. Turns out that as much as 40% of the profits reported at the corporate level on the Shanghai and Shenzhen stock exchanges in 2007 were derived from investments in other publicly traded companies – and not from ongoing operations in their "core" businesses.

No wonder western investors are scratching their heads in amazement at the volatile stock prices. Not only are huge chunks of the market driven by individual investors who don’t have to report their activities, but also corporations and other investors – many of who have transformed securities manipulation into a new art form – have been able to trade with relative anonymity for years.

That changed in November, when China’s Ministry of Taxation required investors to report income derived from stock trading even though it remains untaxable. Understandably, smaller investors fear that this is another "Big Brother" scenario like so many others that they’ve seen through the years. And corporations are being dragged – kicking and screaming – into a new era of greater visibility and more-complete financial transparency.

And that brings us full circle.

By western standards, China’s markets are still highly primitive on many different levels – including those related to individual reporting requirements. Yet they remain full of promise, too. And the increasing regulation – including the new reporting requirements we’ve detailed here – are another in a long and ongoing series of steps needed to bring China’s securities markets up to global standards.

Those changes are all very positive. And they’re ongoing. That’s why we have faith in the long-term potential for China’s stock market. And that’s why we believe you should, too.

[Editor's Note: "The View From China" is an investing travelogue chronicling Money Morning Investment Director Keith Fitz-Gerald's current journey through Mainland China. Fitz-Gerald last wrote about the mindset U.S. investors must adopt to profit from China's form of capitalism. Next up: What we can learn from China. For a detailed look at China stocks, please take a look to see how you can obtain a free copy of investing guru Jim Rogers' new bestseller, "A Bull in China."]
News and Related Story Links:

• Wikipedia:
  The Hong Kong Stock Exchange.

• Op-Ed Column: Rod D. Martin:
  Abolish the Capital Gains Tax.

• Money Morning Investing Travelogue Series:
  The View From China: The Single Secret That Will Put You on the Pathway to Profits.

By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

HONG KONG – Western investors have always had two major problems when it comes to China.

First, they just can’t seem to believe what they’re seeing – even after they’ve been there.

Second, even if they end up believing what they saw, they still can’t seem to make sense of it all. By that, I mean they can’t seem to put it into a usable perspective.

That lack of understanding has morphed into a full-blown misunderstanding. That’s why, for some, China represents a colossal economic train wreck that’s just waiting to happen, while to others the Red Dragon represents nothing but hope, progress and profits.

The truth, of course, is somewhere in the middle of those two divergent viewpoints – which is why every investor needs a China strategy.

Here’s the bottom line: What’s happening in China is simply too big to ignore. But it’s important to understand the risks and rewards before taking the plunge.

Let’s consider both.

The Benefits and Challenges of the Red Dragon

Short-term, there are a few risks to consider. For instance, inflation is running at a 10-year high, but the central bank has been tightening monetary policy in an effort to curb it.

There also are valid concerns that a slowing U.S. economy will derail China’s ability to withstand a U.S.-led global recession. And there are spiraling production costs that are seemingly set to squeeze the life out of China’s production lines which owe much of their competitive advantage to costs that are super low on a worldwide basis.

Longer-term, however, the proverbial "genie is out of the bottle," which is why we believe that every one of these risks is surmountable.

For instance, even though monetary policy has tightened significantly over the past 12 months, don’t forget the economy is still growing at a double-digit rate – and will continue to operate at that pace for decades to come.

At the same time, remove fast-escalating food prices from this equation, and China’s non-food Consumer Price Index (CPI) has nudged up less than 1%, which is hardly a blip on the radar.

As for the notion of a U.S.-led recession causing China’s economy to crater, well, we just can’t see that happening. Not only has China successfully diversified its own export markets so that it is less dependent on the United States, it also has taken steps to create domestic demand for China-made products so that it’s not solely dependent on Western buyers to be prosperous.

China’s not quite there yet judging from the fact that most Chinese consumers still go for Western "bling" – Money Morning Executive Editor Bill Patalon coined the phrase "The Baywatch Effect" to describe that desire – but understand that the time is coming when the Chinese will demonstrate a "Made-in-China" nationalism that’s not entirely different from the "Made In USA" mantra that until recently has been prevalent throughout the United States.

There’s also a worry that rising prices will overcome the benefit of cheap labor in the China market. That’s another argument we don’t buy – at least not in the long run. Beijing is playing it smart here: It’s begun moving factories and production deep into the country’s interior, where production costs and labor are still dirt cheap. China’s central government also is focusing on the necessary infrastructure – such as highways – the country will need to keep investing in to keep costs low and long-term profitability high.

In fact, when China gets into that "long run," we don’t see anything but bullish potential, especially when a few macroeconomic observations are thrown into the mix.

Let’s look at a few.

The Lowdown on the Long Haul

Beginning with liquidity. China’s literally swimming in capital reserves at a time when we here in the United States are struggling to find any. China just last month announced that its foreign reserves had reached a record $1.68 trillion. Domestic savings, according to the long-time China experts at ICS Trust (Asia) Ltd., exceeded $5 trillion in 2007 and represents a savings rate as high as 40%. That stands in stark contrast to a negative U.S. savings rate, and the paltry savings we’ve got on tap.

Not only does this give China unparalleled flexibility in dealing with any potential slowdown – regardless of its cause – but it also provides that country with the financial firepower to spend its way out of a slowdown, which is a luxury that we don’t have, even with the U.S. Federal Reserve’s printing presses running overtime.

Plus, China’s also got what is essentially the Beijing equivalent of Franklin D. Roosevelt’s New Deal program. There are public works projects everywhere you look and, not including the projects dedicated to the Beijing Summer Olympic Games (which open in early August), these construction endeavors represent trillions of dollars in spending all over China and employ millions of people.

China’s central government also is making economic reforms at light speed. Ironically, both experts who spoke to our China investing tour group here in Hong Kong pointed this out – independently of one another. Kishore K. Sakhrani, who is a director at Hong Kong-based ICS Trust (Asia) Ltd., noted that Beijing is lowering corporate tax rates from 33% to 25%. And Professor BaoKun Gui observed that new futures contracts will help develop financial markets providing Chinese exchanges with much needed stability and flexibility.

And that’s really the key when it comes to China.

China has been far more resilient than Western leaders expected or businessmen forecast, thanks in large part to its leaders who are increasingly pragmatic and open to new ideas even as they tighten their communist party holdings.

Western investors who understand and accept that are ready for the next step – reaping profits from the greatest growth market on earth.

[Editor's Note: Money Morning Investment Director Keith Fitz-Gerald penned this financial analysis while leading an investment-research trip across China and into Hong Kong. Along the way, he's been filing story installments for his series, "The View From China." Please click here to read the latest installment in that series, which is featured in today's issue of Money Morning. After leaving Hong Kong, Fitz-Gerald was scheduled to stop in Japan before returning to the United States. If you are a serious student of China investing, check out this Money Morning offer that includes a free copy of China investing expert Jim Rogers' new bestseller, "A Bull in China."]

News and Related Story Notes:

• Money Morning Financial Analysis:
  The Baywatch Effect:Can China’s Growth Help Gold Prices Triple?

• Money Morning News Analysis:
  With its Jump to a Record $1.68 Trillion, China’s Foreign Currency Reserves Spawn Major Inflationary Fears.

• Beijing Summer Olympics:
  Official Web Site.

• Wikipedia:
  New Deal.

• ICS Trust (Asia) Ltd. Executive Biography:
  Kishore K. Sakhrani.

Money Morning Investment Director Keith Fitz-Gerald is currently leading an investment trip through China, taking in that country’s culture and scenery, as well as its investment opportunities. Here is Part IV of a short series detailing his observations and discoveries.

By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

BEIJING, CHINA – Whether you’re trying to invest profitably in the region here, or are just trying to understand what’s going on, there’s a single secret that will virtually guarantee your long-term success.

And I’m going to tell you what that secret is.

Stop making the same mistake most Westerners make. Don’t waste your time trying to figure out just where China will fit into our future. Instead, try and figure out where we will fit into theirs.

That’s more than an exercise in semantics. Think of it more as an investment screen that will determine which countries from "our world" will advance enough to be relevant to China’s future. Those are some of the companies that you’ll want to go with – the companies that will profit "from" China without having to actually be Chinese companies.

The problem with trying to figure out where China’s headed is that the changes are just too dramatic. I mean, 35 years ago China was like North Korea is today; 30 years ago it was like Cuba. Now it’s like no place on the planet.

That’s why the so-called "Panda bashers" – who view this as one huge economic train wreck that’s just waiting to happen have got it all wrong.

Look, I’m not saying that there won’t be challenges or corrections along the way – indeed, we’ve been experiencing just that over the past few months – but one visit here is all it takes for a person to fully understand that the proverbial genie is out of the bottle, and there’s no putting it back.

The Big Buildup

The first thing you’ll notice here is that China looks like one big construction zone. There hasn’t been an infrastructure boom like this one anywhere on earth since the Marshall Plan reconstructed much of Europe after that region was devastated by World War II.

Everywhere you look you see piles of building materials – bricks, pipe, cable, wiring, lumber and glass (and that’s merely a sampling) – just waiting to be installed in buildings all over this capital city. Some will renovate small family housing units in Beijing’s ancient and narrow hutongs, while much of the rest will give life to the modern new high-rises reaching skyward from the construction sites arranged like chessboard squares in almost every key city here in China.

It seems like the entire country is going "up," which is why I was not surprised to hear from one of my local contacts that as many as 50% of the world’s high gantry construction cranes are now being used in China.

The East Coast city of Shanghai – with its modern, almost-Western atmosphere – already has more than 4,000 skyscrapers; that’s twice as many as New York City, and Shanghai has another 1,000 on the proverbial drawing board.

China’s also going "out." And in every direction.

In the late 1980s, Beijing had only two beltway-style "ringed" highways encircling the city. Now it has six – to serve the 14.5 million people who live here.

Two decades from now, China will have more than 50,000 miles of freeways – more than our entire interstate system – and even that won’t be enough.

Incomes are on the march. Everywhere I’ve been in recent days, I’ve seen my share of Gucci, Dior and Rolex – and not just the "knockoffs." As we’ve reported repeatedly, China’s consumers are becoming more and more brand-conscious, especially in the first-tier cities like Beijing and Shanghai (Money Morning editor Bill Patalon has dubbed this "The Baywatch Effect," and only partly in jest), but also in second- and third-tier cities, as well.

The escalation in traffic has been breathtaking, simultaneously choking the roads and the pedestrians on the sidewalks. And it’s only going to get worse.

In 20 years, China will have more cars on its roads at any one time than we do in our entire country, running or parked. At the moment, Beijing alone is adding 14,000 vehicles a day to its rolling roster (For China’s government, a “vehicle” is basically anything with wheels and a gasoline motor, including scooters, motorcycles, cars, trucks and buses. The actual number of cars that are newly introduced to the capital city’s macadam each year is more like 1,500, insiders estimate).

If all these new cars were the small, economical, fuel-efficient cars you typically see in emerging economies, that would be one thing. But the growth in incomes and in wealth has enabled many China consumers to buy luxury cars, just as they buy luxury goods.

On this trip, shiny black Audi A6s (at $43,000 to $73,000 a copy in the U.S. market, depending upon the model and options picked) in particular seem to be ubiquitous. So are Buick sedans. I’ve even spotted a few Hummers.

If you look at several of these brands – Audi, Buick and Hummer – you’ll get a poignant illustration of how well it pays off to become part of China’s future, and the risks of waiting for that country to become part of yours.

Here’s what I mean.

The "Secret" Pays Off

Let’s first look at Audi. Some of the Audis are being built by a China operation managed by Volkswagen AG. VW became one of the first foreign companies to begin manufacturing facilities in China when it started operations there in 1982. Audi AG and both VW long ago decided to make itself part of China’s future – and now it’s reaping the rewards. The German carmaker actually holds a 10% stake in the FAW-Volkswagen Automotive Co. Ltd. operation that produces the Audi cars in China. And  Audi just this week announced plans to expand its dealer network in China from the current 132 to 220 by 2012, underscoring again the importance it places on that market.

Hummers are appearing because they confer status on China’s "new money crowd." If you have a Hummer, everyone knows you’re successful. There’s a real value in that in most societies – and China, where status is important, is certainly no different.

But Buicks? That one doesn’t quite compute, yet. You see, when it comes to China, my sense is that parent company General Motors Corp. (GM), was a bit late to the party – like most U.S. carmakers – in terms of embracing the reverse mindset of success that I outlined above.

But at least they’re working to redress that. For instance, GM last fall announced plans for a new $250 million research-and-development center in Shanghai. The facility will serve as GM’s headquarters in the China and Asia-Pacific regions, and will work on China’s pollution problems through research on such eco-friendly technologies as alternative fuels, hybrid cars, and more-efficient power trains, including those utilizing new technologies.

[Editor's Note: "The View From China" is an investing travelogue chronicling Money Morning Investment Director Keith Fitz-Gerald's current journey through Mainland China. Fitz-Gerald last wrote about how China's version of capitalism affects the lives of its consumers. Next up: A look at Hong Kong. For a detailed look at China stocks, please take a look to see how you can obtain a free copy of investing guru Jim Rogers' new bestseller, "A Bull in China."]

News and Related Story Links:

• Wikipedia:
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• Money Morning Financial Analysis:
  The Baywatch Effect: Can China’s Growth Help Gold Prices Triple?

• ReferenceForBusiness.com:
  Bernd Pischetsrieder
  1948 – today; Chief Executive Officer, Volkswagen AG.

• How Stuff Works/Consumer Guide/Autos:
  2008 Audi A6 Prices and Equipment.

• Thomson Financial News:
  Audi Pushes Ahead Expansion of Dealerships in Asia Due to Weak Europe and U.S.

• Money Morning News Analysis:
  General Motors Shifts into Growth Mode by Driving a Cleanup Effort in China.

Money Morning Investment Director Keith Fitz-Gerald is currently leading an investment trip through China, taking in that country’s culture and scenery, as well as its investment opportunities. Here is Part III of a short series detailing his observations and discoveries.

By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

YANGTZE RIVER, CHINA – The sky is a brilliant blue, the wind clean and crisp and the China where National Guide Jun Hao works resembles the landscape we’re passing – a jumbled mix of the old and new, and a backdrop to a lifestyle that’s suddenly changing much too fast.

"It’s dramatic," says Hao, sweeping his hand through the air for emphasis. "Yes …that’s definitely the word for it."

The rolling hills of China’s Yangtze River valley provide the most graphic and concentrated evidence we’ve seen yet of the change that is modern China.

As far as we can see, there are crumbling old houses built hundreds of years ago and communist-era "flats" – apartments – set low against the hills. Behind them, and set higher, are sparkling new ferro-concrete relocation villages.

But there are no cars, and almost no people visible. Most of the "new villages" don’t have electricity or running water. And their residents remain farmers who head out each day to work the dramatically terraced fields that rise precipitously above the gorge.

It’s as if the new is fleeing the old, yet somehow remains tied to it. But it’s the red lines – and the accompanying signs that read "175 meters" – that are perhaps the most sobering hint of the change that’s to come, for the lines and signage serve to warn passersby where the water will be next year when the reservoir of the massive Three Gorges Dam is finally full.

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The surface of the water already has risen up and over the 150-meter mark. It’s odd to think that …as we move along the water’s surface …there are entire villages – even cities – far below us, down in the blackness, beyond the reach of the sun’s rays.

"It’s hard to imagine what’s happening in China," Hao said, reflecting upon his life.

He was born in a centuries-old hutong – the narrow streets or alleys that are part of life in old Beijing. This one wasn’t too far from Tiananmen Square, meaning he grew up among the poorest of the poor.

His family shared their courtyard residence with seven other families – perhaps 35 people in all – in a space designed and built for a single family. There was no running water and only a single community bathroom that was literally just a hole in the ground.

"We were poor," Hao says. "Very poor."

Even so, he says, "my earliest memories are very happy ones." Hao recalls playing with other children as in the alleys as they waited for their parents to draw water each morning.

"We didn’t lock our doors – we didn’t have to," says Hao. "Our dreams were simple. Any family having a bike, TV, radio or simply a sewing machine was envied."

Changes Begin

The first hints of change came while Hao was in high school. Then, during his high school years Hao recalls the first glimmers of change. The Cultural Revolution – with all its pain and chaos – finally came to an end, and true reform was able to take hold.

For Hao, the most magic of moments came when he learned that the farmers were suddenly allowed to grow what they want. That meant he could put food on his family’s table. Even today, roughly two decades later, the memory of that singular event is both moving and highly personal for Hao.

He recalls the amazement he felt when the country’s domestic "apple" jeans became the Chinese Prada garment of their day. Almost overnight, he says, "the green, black, gray and brown Mao jackets vanished," only to be replaced by fashions that raised more than a few old-generation eyebrows. "Suddenly we could listen to Taiwanese pop music."

"At that point," Hao recalls today, "we knew change was real. In more ways than one."

Hao’s father, a career customs officer who spoke French, English and Chinese fluently, suddenly died, leaving Hao – as the eldest son – responsible for everything.

"It was …how do you say …a ‘rude awakening’," Hao says, his eyes misting a bit at the memory.

It was just about that time that Hao’s grandfather offered a bit of advice that Hao recalls even today: He told Hao to "eat foreign rice," meaning that Hao should find a career that puts him squarely in front of the changes that would be opening China up to international influences. He also told Hao that he absolutely needed a college education to compete.

"He was a very wise man," Hao says. "Even back then, even though he would not live to see it, he knew my best future would be to get an education and to work with the coming changes rather than [to] run from them."

So that’s just what he did.

Stepping Into the Future by Stepping Out of The Past

Hao graduated from high school just after the Tiananmen Square protest of 1989, and began selling newspapers, doing odd jobs, accepting manual labor positions, and working at any job that he could find.

Not only did Hao get into college, he earned enough to pay for his tuition and support his family at the same time. And, in doing so, he became "self-sufficient" – a concept that could not even be imagined by prior generations.

Hao notes that "since before I was born, Chinese have been taught to be part of a collective group. You are always part of something else. Now it’s different."

"Now," Hao observes, "we Chinese can be individuals. And, we can have individual value."

That’s something, he says that previous generations couldn’t imagine. Even now, after all the changes that have taken place, Hao says it’s a concept his mother still cannot accept or understand.

During college, Hao finally got his shot at "foreign rice." He took – and passed – the National Guide License Exam. At the time, "it was harder than college entry boards and still is," an elite examination, he notes with pride.

Today, Hao is 34 and is one of China’s top national tour guides. He earns more money in a year than his wise grandfather earned in his lifetime. He travels all over China, and all over the world. He’s married, and he and his wife have their own flat in Beijing. They even have their own car. A family, for now, isn’t in the plans.

"We want one," he notes, "but we’re worried about the future."

That’s the downside of so-called "freedom of choice;" the freedom to succeed means that there’s also a freedom to fail.

That’s why "we want everything now," states Hao. "I think we see this in the stock market, too. Most Chinese have had such rapid change that they don’t understand that the rest of the world takes time."

"We don’t worry about ‘now’," he says, making quotation-mark signs with his fingers for emphasis. "We worry about the future. So we save, save, save."

Hao is stunned when I tell him that American consumers have a negative savings rate – at a time when Chinese savers tuck away 40% of their income.

In a candid moment, Hao says he must look ahead, for he realizes he could be unemployed next year.

Indeed, he’s quick to point out that the plummeting U.S. dollar has clearly affected his business.

"I have to quote the trips I plan months in advance," he notes. "As the dollar drops, I make less because the cost of making each tour is going up here in China."

There’s an irony with current market conditions that make him feels as if his life has traveled full circle – at least a little bit.

"Now I worry about meat on the table at New Year’s, which was the same thing my family worried about when we were dirt poor and living in the hutongs" when I was small and growing up in Beijing.

With equal candor, Hao concedes that this realization means he’ll "have to get better at anticipating what will happen" next, in both the near term, and well ahead.

But to be part of China’s new economy is "exciting," he observes. He wouldn’t change a thing – even if that were possible.

And it’s not. The fact that China is changing cannot be altered or stopped. After all, as Hao notes, quoting a famous Chinese adage: "Kai gong mei you hui tou jien."

That means that, "once the arrow is released from the bow, it will not come back."

[Editor's Note: "The View From China" is an investing travelogue chronicling Money Morning Investment Director Keith Fitz-Gerald's current journey through Mainland China. Fitz-Gerald last wrote about how China's changes are creating profit opportunities for U.S. investors. Next up: The key questions to ask about China. For more insight on China investments, click here to find out how you can obtain a copy of investing guru Jim Roger's new bestseller, "A Bull in China," free of charge.]

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• Money Morning Investment Travelogue:
  The View From China: The Seeds of Change Bode Well for U.S. Investors.

• Money Morning Investment Travelogue:
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• Wikipedia:
  Three Gorges Dam.

• Wikipedia:
  The Great Wall of China.

• Wikipedia:
  Emperor Qin_Shi_Huang.

• Wikipedia:
  Mao Zedong.

• Wikipedia:
  Deng Xiaoping.

• Wikipedia:
  Jiang Zemin

Money Morning Investment Director Keith Fitz-Gerald is currently leading an investment trip through China, taking in that country’s culture and scenery, as well as its investment opportunities. Here is Part III of a short series detailing his observations and discoveries.

By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

MUTIANYU, CHINA – When you step up on to the top of China’s Great Wall where I am today, it’s instantly clear that China is unlike any other place on earth – although not for reasons you’d normally think.

It’s true that China’s a communist country that’s steeped in tradition by virtue of a history that reaches back thousands of years. But there are changes afoot that may make the next generation of Chinese leaders the best yet.

And like the Great Wall, which was initially built under Emperor Qin Shi Huang (221-210 BC), those changes may last for centuries.

Groomed under the Party’s watchful eye, these men and women are beginning the long process of change that will culminate with their installation as leaders in 2012. They speak openly of change and of opening China.

This contrasts starkly with Mao Zedong, Deng Xiaoping and Jiang Zemin who were educated (some would say indoctrinated) in the former Soviet Union.

While we’re seeing glimmers of this in the current generation of leaders – including President Hú Jǐntāo and Premier Wen Jiabao – it’s the next generation that will really demonstrate the commitment to change.

For the most part, both Hu and Wen remain inwardly focused – even though both have traveled extensively outside China. That’s an important point. For travel outside China has provided these two leaders with a perspective that the country’s leaders have never previously possessed.

In short, by virtue of this experience, they know that "foreign rice" is China’s future.

With that insight, China’s current leaders are laying the groundwork for the most profound changes the country has seen in centuries. But those sweeping changes will be the responsibility of the next generation of leaders, who have received substantial portions of their education in the United States and Europe. They are eager to embrace the best the world has to offer and to assume their place in the international affairs realm.

This suggests that China’s incoming leaders actually understand what they’re getting China into, and have the firsthand experience to carry it out. It also means that they can build upon the foundations being established today by Hu and Wen and others.

The bottom line: It’s very likely the world will be able to work much more closely with China, at a much-higher level and with a more-complete agreement than we have at any other point in the past.

This scares a lot of people who may not appreciate 1.3 billion of our closest friends suddenly bursting onto the world’s stage.

So consider it this way: We view this as the greatest investing opportunity of our lifetime.

Besides, this isn’t going to just happen all at once. Like the Great Wall, which stretches for thousands of miles, the process will take place one brick at a time.

Now if I can just find a way back down….

[Editor's Note: "The View From China" is an investing travelogue chronicling Money Morning Investment Director Keith Fitz-Gerald's current journey through Mainland China. Fitz-Gerald last wrote about how China's growth in helping push up global oil prices. Next up: How China views the rest of the world - especially the United States. For more insight on China investments, click here to find out how you can obtain a copy of investing guru Jim Roger's new bestseller, "A Bull in China," free of charge.]

News and Related Story Links:

• Money Morning Investment Travelogue:
  The View From China: A World Case Study for Alternative Energy.

• Wikipedia:
  The Great Wall of China.

• Wikipedia:
  Emperor Qin_Shi_Huang.

• Wikipedia:
  Mao Zedong.

• Wikipedia:
  Deng Xiaoping.

• Wikipedia:
  Jiang Zemin

Money Morning Investment Director Keith Fitz-Gerald is currently leading an investment trip through China, taking in that country’s culture and scenery, as well as its investment opportunities. Here is Part II of a short series detailing his observations and discoveries.

By Keith Fitz-Gerald

Investment Director
Money Morning/The Money Map Report

XI’AN, CHINA – For years, I’ve been telling hushed, incredulous audiences around the world that oil prices were headed higher – much higher.

I consistently list three causes: Supply, demand, and interruption.

The first is obvious – even though most folks still don’t want to believe it. Data suggests we’re burning through the world’s petroleum reserves four times faster than we’re finding new ones. We haven’t had a major new discovery of significance in 30 years. And, adding insult to injury, we still don’t have workable substitutes in place (alternative energy technologies such as fuel cells, for instance), even though we’ve had decades of warning to get our act together.

The second, demand, is tougher to call. On one hand, higher prices are reducing demand in so-called first-tier countries. But when it comes to the rest of the planet, all bets are off.

Here in China, for example, they’re using fuel at an accelerating rate. Part of that is the increasing reliance on fuel oil, but an even bigger catalyst is simply because companies like Chery Automobile Co. Ltd., Geely Automobile Holding Ltd., and Chongqing Changan Automobile Co. Ltd., are producing inexpensive, gas-powered cars for the masses.

The same is true in India where Tata Motors Ltd. (TTM) $2,500 car is opening up driving and vehicle ownership to millions of consumers who otherwise would never have also become motorists.

And they’re gearing up for more. China Petrochemical Development Corp., Sinopec Shanghai Petrochemical Co. Ltd.,  and China National Petroleum Corp. are adding as much as 24% to their crude oil refining capacity in the next three years. Much of that is simply to cope with an economy that’s risen at 10.6% the first three months of 2008 – the ninth-straight quarter of double-digit expansion.

China, which is already the world’s second-biggest energy user, will need to import as much as 60% of its oil by 2020, according to Wang Jiacheng, deputy director of the research unit at the National Development and Reform Commission.

Combine that with terrorism, and we have a trifecta of reasons why oil will go far higher.

And there’s nothing in the near term that can prevent it.

Naysayers counter my thesis by arguing that high prices will lead to conservation as the economics of driving become unfavorable. We agree – but even that will take time to happen.

The problem is that China and India, in particular, are getting into the game at a time when they have no experience with low prices. So the "higher" prices that are causing the rest of the world fits are largely irrelevant to those two newcomers.

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What’s more, in very practical terms, the only time you really have a real drop in consumption and an increase in efficiency is when consumers buy new cars … and airplanes … and machinery.

But here again the avenues to change are limited.

Not only are Americans tapped out and unable to buy new cars, but their credit is as wrecked as are the financial markets that would otherwise accelerate this process of change.

Here in China, it’s a different ball game. The savings rate is 40% or more, and consumers are so flush with cash that they’re buying new cars and trucks at a breathtaking rate.

That helps explain why the automotive industry here grew 22% last year, putting nearly 9 million new vehicles on the road and substantially boosting the demand for gasoline and diesel fuels.

In recent months, there’s been another argument advanced and the talking heads are trying to blame much of what’s happening with higher prices on speculators.

That’s the financial equivalent of "the dog ate my homework."

What’s really driving oil prices is the combination of supply and demand imbalances that I’ve sketched out here, and a "fear of interruption" prompted by terrorism.

Global traders are doing nothing more than ensuring that they have access to oil no matter how high prices run. Absent an alternative, the reality is that no country on earth can afford to be without oil and the energy that it provides. This means that traders, whose job it is to procure supplies in the open markets, are simply doing what they are paid to do…make sure their clients can get it when they want it.

It’s like going to the super market. If there are 1,000 eggs and only 100 buyers, the price of an egg will be lower. But reverse the situation with a single egg and 1,000 buyers and you can bet dimes to dollars the price will sky rocket dramatically as buyers bid against each other to get that single – suddenly precious – off-white orb.

It really is that simple.

At some level, this stinks and I’ll be the first to admit that I hate feeling like I’ve been mugged every time I fill up.

But, as an investor, there are plenty of ways to take the sting we feel out of our wallets as a result of all this.

The simplest is to invest in commodities of all types. Not only are commodities a direct beneficiary of higher oil prices, they also demonstrate a remarkable resilience in the face of inflationary pressures like those we face now. Call it a "value meal" if you will.

It’s also a good bet to concentrate on alternative energy. The "tree huggers" who were long maligned as fringe members of our society actually have been right all along, and many will be vindicated in the next few years – especially when it comes to developing the so-called "green technologies."

Personally, I’m glad to see this take place, since it means there is nothing alternative about alternatives any longer.

And we can profit along the way.

["The View From China" is an investing travelogue chronicling Money Morning Investment Director Keith Fitz-Gerald's current journey through Mainland China. Fitz-Gerald last wrote about China's auto industry. Next up: A look at how China and the United States must work closer together to achieve common goals. For more insight on China investments, click here to find out how you can obtain a copy of investing guru Jim Roger's new best-seller, "A Bull in China," free of charge.]

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• Money Morning Investing Travelogue:
  The View From China: Despite the Auto Industry’s Pedal-to-the-Metal Growth, a Safety Play May Offer the Safest Play.

• Money Morning Special Investment Research Report:
  Three Ways to Play Money Morning’s Prediction That Oil Prices Will Reach $187 a Barrel.

• Money Morning News Analysis:
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By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

Investors who abandon China now will live to regret their decision.

Even if the U.S. economy skids into a recession, China will continue to grow for decades to come. And that’s after nearly 30 years of double-digit growth that country has already logged into the history books.

Here are some key points to consider.

First, China remains one of the strongest economies in the world. Indeed, it’s on track for 10% -12% growth this year – and that’s after China’s government has taken steps to slow the country’s economy down. We aren’t so naïve as to expect a straight path of uninterrupted growth – but we also don’t buy into the "modified" old adage that "if the U.S. catches a cold, the rest of the world comes down with pneumonia," either – especially when it comes to the Red Dragon.

China remains awash in liquidity, and much of that is being focused on the upside, particularly when it comes to building consumer awareness and boosting disposable income there.

And now that liquidity is allowing the country to go on a global shopping spree, enabling its companies and its state-run sovereign wealth funds to pick up such choice assets as shares in global banking giant Citi at bargain prices. [To fully understand the massive impact sovereign wealth funds will have, and to see how to profit, check out our brand new investment research report on the topic by clicking here. The report is free of charge].

China’s markets are quickly becoming much "narrower." Money is being reallocated from highly risky ventures into more-predictable, stalwart performers – many of which we’ve talked about.

That’s an important trend for investors to track, for history shows time and again that these "stalwarts" fare the best during uncertain, volatility-laced markets. One advantage that these companies have, believe it or not, is that they don’t have to tap into the credit markets at a time when credit is costly, or not available at all. Weaker companies won’t be able to get financing, even if it is available.

Another critical advantage is that they have real profits. Many marginal Chinese companies exist on the slimmest of margins and their profits have actually been based to date on tax or export incentive "loopholes" that are now being eliminated by Beijing.

The bottom line: During periods when the economic underpinning is uncertain, or volatile, strong companies will be able to keep growing, while their weaker counterparts won’t. And we all know what happens to companies that disappoint investors and don’t grow [It's just not pleasant to think about…]

A still-weak greenback will make brand-name imports [both products and services] even more popular in China. And rapidly growing consumer income will give China’s increasingly image conscious consumers the cash to buy them with.

We’ve been predicting that these two trends would converge for some time. That’s one reason why, all the way back in September, we said that brand-name companies such as MGM Mirage (MGM) were actually high-profit plays on China. And we still feel that way.

So, the bottom line is that if controlling risk is key to your overall investment strategy, as you sift through China-oriented investment opportunities, look for companies that generate revenue and profit "because" of China including those that are based in more-highly regulated markets such as the United States and Europe.

Look, too, for companies with a solid dividend yield because the cold hard cash you receive can go a long way towards reducing your downside.

Consider the so-called "Global Titans," including PepsiCo Inc. (PEP), Diageo (DEO), Yum! Brands Inc. (YUM), McDonald’s Corp. (MCD), The Coca-Cola Co. (KO), The Boeing Co. (BA), and a few others.

Every investor must have a China strategy these days.

And, while choosing to sit on the sidelines is certainly a viable decision, longer term it’s probably just not a profitable one.

Money Morning Executive Editor William Patalon III contributed to this article.

If you are interested in learning about a more-sophisticated China investment strategy, which includes direct high-profit plays on that market, check out Keith Fitz-Gerald’s New China Trader service by clicking here.

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