Officials of the World Bank and International Monetary Fund were photographed lording it over heads of the state as they signed massive bailout agreements with those organisations. For this was 10 years ago and the 'culprits' were Asians with their crony-capitalism, their exotic banking practices and endemic corruption.

The then chairman of the Federal Reserve, Alan Greenspan, declared that Asia would realise that 'market capitalism, as practised in the West, especially in the United States, is the superior model.'

Fast forward ten years and Mr Greenspan's boasts look decidedly threadbare: not only have wholesale bailouts of American banks and institutions become the order of the day but the choice of those who live and those who die in financial terms may not exactly conform to notions of crony capitalism but the decisions certainly have something to do with those whose faces fit and those who do not.

For battle-hardened westerners it is just another sign that the West's business, financial and moral ascendancy has taken another savage blow and in an area where it appeared unassailable — the efficient and effective deployment of capital.
Few Asians mention the Asian crisis and its resolution — Asians are generally too polite — but some are beginning to note publicly the difference between the rhetorical and practical legacies of the Greenspan era. Though the great majority of the globe has no option but to go along with the western economic model it is now being questioned fundamentally.

When you are the biggest and toughest kid on the block and no one else in the playground can match your pocket money then perhaps you have the right to set the rules. But if the pocket money that gives you the edge is borrowed from your main rival then the shift in the balance of power is anything but subtle when it turns out you do not have the means to pay it back.

If that is a somewhat crude assessment of the American financial position at the moment it is none-the-less the way it is being viewed in the world's other financial strongholds who are beginning to make calculations that go beyond how they can benefit in the short-term from the discomfiture of the Americans. And the key opinion to watch out for is that of the Americans' greatest creditor — the Chinese.

The most notable and far-reaching is a commentary from the foreign edition of The People's Daily, the communist party mouthpiece, by a professor at Tongji University in Shanghai. He warned that the 'eruption of the U.S. sub-prime crisis has exposed massive loopholes in the United States' financial oversight and supervision' regimes. 'The world urgently needs to create a diversified currency and financial system and a fair and just financial order that is not dependent on the United States.' The newspaper does not necessarily reflect official opinion but it would hardly be surprising if it did so in this case. The choice of the foreign edition as the outlet for the piece is notable for the audience for which it was intended while the selection of a Shanghai academic is sufficiently outside the mainstream for the article to be disowned by the authorities in Beijing but certainly not lacking in credibility.

The Chinese know better than anyone that they are crucially dependent on the current world economic order. They are not in the business of publicly humiliating Washington at a time like this but senior figures in China are now questioning their heavy investments in U.S. bonds and merchant banks which, in retrospect, look ill-advised especially on the back of a declining dollar.

Without Chinese dollars pouring into U.S. bonds the staggering American current account deficit could not be financed, a deficit which is growing almost by the day as Washington bails out failing banks and institutions and with the current $700 billion bail-out plan likely to rise to more than $1 trillion in short order. China already has dollar reserves of $1.8 trillion, the world's largest, but that wealth is only of use in connexion with external trade and therefore does not give Beijing the kind of safety margin that it might appear to. The dollars they hold and their investments they hold in American banks, indeed their dollar-denominated investments anywhere in the world, are now of diminishing value in the short-term. Indeed their holdings in American banks are now almost impossible to value given the requirement to bail out some of the biggest names in U.S. private banking.

Washington has been able to comfort itself up to now with the notion that there really was no alternative to the dollar both for world trade and for long-term bond investments. Thus far that has been true except for the increasing attraction of the euro, but never before has America's principal trading partner been a country with which it had an ambivalent or even hostile relationship.

For some considerable time the U.S. government has been pressing their Beijing counterparts to allow the yuan to strengthen, thus making Chinese imports into America cheaper. This has consistently been resisted by the Chinese not least because theirs is still a developing country which needs to build up its financial muscles as fast as possible.

The problem for the Chinese is that their export trade is denominated solely in dollars and these riches do little to strengthen their domestic economy. Every point of its export-led economic growth is in exports as witness its per capita merchandise export figure for 2006 was $1,655 or $135 lower than the global average at $1,780. This is because wages in China are markedly lower than the average of all other export economies. Thus all of China's export production is sent overseas and sold for dollars that cannot be spent at home in the yuan economy. Needless to say, Chinese workers cannot afford the very products that they are making so assiduously for the world market. Thus, despite China being the world's greatest creditor nation, it suffers domestically from a shortage of capital. A more nationalistic national economic policy might now try and do more to hedge its bets vis-a-vis the dollar or try and break away from its hegemony all together.

There is nothing in international law which prevents China declaring that henceforth all or part of its exports must be paid for in yuan. If Beijing elected to do that that would mean buying the requisite Chinese currency from the central bank and the dollar would be quickly eclipsed in trade with the Middle Kingdom. The long-term effects for the dollar of that decision can only be guessed at.

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