The virtues of not being financially sophisticated

Although growth will suffer this year, its economy will continue to expand, as those of its competitors stall or shrink. The unfolding crisis has also made it painfully evident in Washington just what a hold China now has over US finances, largely because of the vast amount of Treasury bonds and Is it time for Beijing to step up to the plate? China is one of a handful of countries – and by far the most important – that is likely to emerge from the global credit crisis relatively stronger.

Its closed, tightly regulated financial system has been largely shielded from the toxic chain of events felling banks and insurers worldwide.

Fannie and Freddie paper it holds.

That has led some to suggest that China should use its newfound authority to participate more actively in the discussion about global regulation or, more radically, that China should somehow save capitalism from itself. But China's leadership has been wary of such talk.

In a recent interview with the FT, Wen Jiabao, the premier, when asked about China's ability to ride to the rescue, stressed that it remained a poor country. It was not yet ready to play the commanding role some now expect of it, he suggested, saying: “I don't see it this way. China remains a big developing country with a 1.3bn population.”

Instead of bailing out others, Beijing has stressed that its main contribution to global wellbeing should be to keep its own economy, now worth about 10 per cent of global output, ticking over.

The Communist party's leadership has made it clear it wants growth of 8 per cent this year and has launched an enormous Rmb4,000bn (£409bn, $585bn) stimulus package to support that aim.

Beyond that, China, whose financial system is not yet fully integrated with that of advanced economies, has appeared somewhat diffident about participating in the discussion over how global capitalism should be regulated.

It banned many of the derivative products that caused havoc among financial institutions around the world and so has little technical experience in how they might be better controlled. Sir Philip Hampton, chairman of stricken UK lender RBS, said of Chinese banks' lack of exposure to toxic assets: “Sometimes, there's a virtue in being unsophisticated”. But that will take China only so far.

Instead of joining the debate about regulation, Beijing has limited itself to scolding the US and other western economies for their debt-fuelled consumption binge.

While it warily supports Washington's short-term stimulus package, it has also lectured the US on what it sees as the need for greater fiscal discipline in the medium term. Mr Wen told the closing of the National People's Congress in Beijing in March: “I request the US to maintain its good credit, to honour its promises and to guarantee the safety of China's assets.”

He admitted to some concern over the value of those assets, reflecting widespread belief in China that the dollar will sooner or later collapse in value, as a reflection of the US's huge fiscal deficits.

Qiao Yu, professor of economics at the School of Public Policy and Management at Tsinghua University, quoted a Chinese proverb to explain the US decision to spend more money to help rectify a crisis caused by overconsumption.

That was the equivalent of “drinking poisonous liquid to quench thirst,” he says, adding that China feared the experiment would end in dollar dilution – via inflation or devaluation – or even outright default.

China has also been diffident about what could be seen as a golden opportunity to play a larger role in international institutions such as the International Monetary Fund and the World Bank. Beijing has poured cold water on suggestions that it should raise its IMF contributions, saying that it first wants to renegotiate voting rights, currently biased towards Europe.

In theory, Beijing would like a bigger say, but it has not yet convincingly articulated how it would use any greater influence.