The unfolding financial crisis in the United States leads us to wonder whether this signals the end of that country's long-established financial hegemony in the world.

The recent decision by the Bush administration to set up a government body to take over all financial debt indicates its intention to rely on the market to cope with current problems.

It is expected that the US government will use any means necessary to protect depositors and fully take over banks if the market proves inefficient, but it still remains unclear whether the US government can bring the ongoing crisis under control.

Compared with the enormous losses its own financial bodies have suffered, foreign countries investing in the US are in fact the largest victims. With the further development of the subprime crisis, people expected that, in addition to investment bank Bear Stearns Cos, the US government would also give a helping hand to other teetering financial bodies.

However, as the Bush administration chose to inject much-needed funds into some financial bodies, it stood idly by and watched Lehman Brothers fall apart.

The US government has its own criteria in determining what it ought to rescue, and Lehman Brothers was left to its own devices because of its high proportion of foreign investment.

As a result, foreign investors suffered more than their US counterparts from the collapse of the century-old financial body.

As the crisis unfolds, more American financial bodies are expected to follow in Lehman Brothers' footsteps, with Asian nations and oil exporters holding a large sum of dollars expected to be the greatest victims.

This is not the first time foreign investors have suffered enormous losses from a financial crisis in the US. Japan was the largest victim of the bursting of the US real estate bubble in the 1980s. It is estimated that by the early 1990s, Japan had suffered losses of around $70 billion, equivalent to its trade surplus with the US during the 1980s. The East Asian nation then fell into a 10-year economic recession.

It would be impossible for developing countries intent on absorbing US capital not to be affected by the economic crisis engulfing that country. For instance, a number of US corporations based in India are facing serious fund shortages, prompting them to withdraw capital from the Indian market, and resulting in a steep decline in the Indian stock market.

The US financial crisis leads us to ask some questions.

First of all, is it the end of US financial hegemony? In addition to the latest financial crisis, the US has so far experienced another financial crisis since the turn of the century – the bursting of its technological bubble. Many foreign investors have suffered heavy losses in these two crises. Some economists even warned that such cyclical formation of bubbles will seriously compromise foreign investors' confidence in the US financial market.

Second, what losses have Chinese financial bodies suffered as a result of this crisis? Available data shows that Chinese financial bodies had not purchased that many mortgaged US financial derivatives, and will therefore not suffer too many losses from this crisis. So, it is impossible for the country to be plunged into an economic recession like Japan in the 1980s.

Third, is this crisis in the US a chance for China to rush to buy cheap financial assets?

The outbreak of the latest financial crisis, originating in the US and now spreading to other countries, shows that the neo-conservative revolution launched in the 1980s has already come to an end. At the time, a campaign was launched in Western countries to ditch Keynesianism – which advocates government intervention – and called on market forces to be given full play with the scrapping government controls, especially on the financial market.

The problem is what we should do if Western countries abandon the neo-conservative model that believes in the omnipotent role of the market? Will we continue to stick to the old development model of using exports to drive our economic development? And if this is the case, what can we do with the rising foreign reserves caused by the expected expansion of the trade surplus?

The author, Ding Yifan,?is a researcher with the State Council Development Research Center

(China Daily September 26,2008)