China 2.0: The Transformation of an Emerging Superpower ... and the New Opportunities

Chapter 7

The Financial Crisis, China's Reaction, and New Opportunities

The long-serving former chairman of the U.S. Federal Reserve, Alan Greenspan, once a critic of the government-directed investment and financial system prevalent in Asian countries, applauded when many of them moved toward a U.S.-style free-market system after the Asian financial crisis in the late 1990s. He believed that the meltdown of economies with heavy government intervention confirmed the superiority of free-market economies. At the same time, he pressed to eradicate checks on the innovative financial derivatives that eventually imperiled the entire world economy with highly leveraged bets, in the name of market efficiency.¹ Relying on sophisticated mathematical models, financial institutions took on many layers of indirect promises to shift the risks of overstretched credit lines—principally for purchase of private houses—somewhere else, all based on the assumption that real estate prices would rise indefinitely. The real estate market bubble burst and its effects rippled to all those layers involved, from America's largest insurance companies and its longest-existing investment banks to toy factories in Dongguang in Guangdong, China.

The financial crisis, which erupted in the United States but quickly spread globally, may mark the end of the Greenspan era in which two pillars were emphasized: interest rate cuts and government deregulation. It certainly means the end of the American consumption patterns ...