Domestic economists are increasingly worried about the contingencies of the global financial crisis in China. Compared to their counterparts, China's financial institutions have remained relatively intact, because the country's financial system is less integrated in the global markets. Still, the damages on the mainland cannot be ignored. In an essay that was published in the China Securities Journal recently, Ba Shusong, Deputy Director of the Financial Research Institute of Development Research Center under the State Council, gave his assessment of the country's current status amid the global financial turmoil and offered suggestions on how China could weather the storm. The entire article follows:

The disastrous financial crisis this time might be a wrap-up of the oil crisis in the 1970s, the global economic readjustment in 1990-91, and the bursting of the dot-com bubble in 2001. The U.S. financial system is now undergoing a "de-leveraging" period after years of pursuing extreme leverage for extreme gains.

Domestic enterprises should be fully prepared for the U.S. economic downturn in the long run, the collapse of the traditional Wall Street investment banking system, and prolonged global financial turmoil caused by the depreciation of the U.S. dollar.

In the past few years, the global economy, characterized by high growth and low inflation, has been endowed with globalization, big progress in information technology and a peaceful global environment. But now, the effects of these factors on propelling economic growth are diminishing. The current financial turmoil might trigger a huge wave of anti-globalization sentiment.

The Chinese economy is integrating itself into the world economic system. Therefore, we should take a global view of China's economic and financial system adjustments to avoid falling into blind worship of globalization or ultra-nationalism. The ballooning debt and huge trade deficit of the United States are, to some extent, related to China's enormous foreign reserves and trade surplus. As a result, China should voluntarily readjust the current growth mode to prevent such global financial chaos from taking place again.

Derivatives' impact

People tend to blame financial derivatives for causing all the troubles. As a matter of fact, the basic functions of financial derivatives such as hedging risks and discovering value are still effective. The problem is that those derivatives lack transparency and a comprehensive information disclosure system. In addition, the supervision of those derivatives is less strict than for regular financial products.

The outbreak of the U.S. subprime mortgage crisis ignited fears about stock index futures, which reportedly will be offered soon on the mainland. In fact, stock index futures are a concentrated trading product on the stock exchanges and are different from subprime-related financial products. To date, most of the stock index futures exchanges in the world have set up standard and comprehensive risk management systems, including price-cap systems, deposit systems, market-to-market systems, compulsory stop-out systems, position-holding quotas and large position-reporting systems.

The financial turmoil caused by the subprime mortgage crisis could serve as a good lesson and a precaution for China in the process of developing a financial derivatives market, but it should not be seen as an obstruction to our development. We should learn from the U.S. lessons, and make full preparations in terms of designing derivative products and their related rules and regulations and educating investors. For instance, financial derivatives require investors to have professional trading knowledge, and not everyone has it. The government should create strict requirements for stock index futures traders so as to bring the new product into full play.

Minimizing losses

Internationally, the U.S. economic and financial systems have been propped up by increasing amounts of leverage that have created an enormous bubble, but now they face a "de-leveraging" period and must reduce their debt ratios. Therefore, Chinese enterprises should get ready for the prolonged economic recession in the United States as well as other repercussions triggered by the credit crunch.