The economies of developed countries will undergo a period of readjustment, which provides China with both opportunities and challenges.

China's unique strength might enhance its economic growth. In addition to vast domestic demand, China's integrated national strength is the greatest since the country was founded in 1949. Strong financial support can guarantee a series of tax-reduction measures and infrastructure investment. China has abundant foreign reserves, although its currency is facing appreciation pressure. The debt ratio of Chinese citizens and companies is low, leaving enough room to raise leverage. Meanwhile, international markets are beginning to recognize the value of the renminbi, thus laying a solid foundation for renminbi internationalization.

The above-mentioned factors could enable China to weather this round of the financial storm, but most importantly, the government should make good use of those favorable conditions while adopting macro-control measures.

The ongoing global economic recession is a combined version of the oil crisis in the 1970s, the global economic readjustment in 1990-91, and the bursting of the dot-com bubble in 2001. If we take a look at U.S. housing prices over the last 100 years, we see they remained unchanged during the first 90 years. But they jumped substantially in the most recent seven to eight years. As a result, this property bubble is one of the biggest in U.S. history; hence the economic adjustment period must be longer and more volatile.

If the U.S. economy continues to fall, and if the U.S. government continues to issue large amounts of dollars to stimulate economy, the U.S. dollar might depreciate significantly.

Judging from the performance of global economies, the countries whose currencies are pegged to the U.S. dollar and whose currency system is controlled by the government might face unprecedented pressure.

In retrospect, this round of financial turmoil is just like the collapse of Bretton Woods system in the 1970s, which was caused by fiscal and trade deficits, economic recession and financial crisis in the United States. If the global currency system is to be changed dramatically, the U.S. dollar, theoretically, should not be blamed as the culprit of the financial turmoil, because the U.S. Federal Reserve is a regional central bank and should not be held responsible for globalization's defects even if the U.S. dollar is a global currency. This means that the global financial markets might confront bigger challenges in the future.

In response, the renminbi exchange system should be made more flexible and becomes less connected to the U.S. dollar. Furthermore, China should closely watch the U.S. dollar's depreciation versus the Hong Kong dollar.

Domestic demand

Though some major mainland commercial banks invested in bonds related to Lehman Brothers Holdings Inc. and the two U.S. mortgage lenders, Fannie Mae and Freddie Mac, they did not hold many of the bonds, so that the mainland financial institutions have suffered less of a direct impact from the U.S. credit crisis in the short term.

But we must be careful as the Chinese economy continues to be deeply integrated into the world economy. The U.S. financial chaos might deepen before its property and financial markets are stabilized. Therefore, China should actively pursue new growth momentum as the global economy slows down.

The United States and the EU are China's two most important trade partners. In particular, China's eastern coastal provinces, whose economies rely largely on exports, might suffer the most as shrinking foreign demands take a toll on production and marketing.

Citigroup Inc. predicted that if the U.S. economy slowed down by 1 percent, the Chinese economy would decrease by 1.3 percent. If the U.S. economy underwent a recession, the Chinese economy would be forced to readjust.

Domestically, China's economy is affected by the pressures of economic restructuring and transformation caused by rising energy and labor costs, and increasing consumer and producer prices. Therefore, forced by the global financial crisis and domestic setbacks, the expansion of domestic demand becomes the key issue in determining stable and successful structural changes in China's economy.