Chinese thoughts about changing is economic model is the uppermost. This week China had an opportunity to sermonise the West about its economic handling. It was in a way taking out its revenge. China was bitterly for keeping the yuan exchange rate low through currency market management. This helped push China’s massive exports and pile up world’s largest foreign exchange reserve. These have been invested mostly in US government debt. Hence, as the largest creditor, it has now the right to talk down to US and advise it to manage its finances properly. This can be seen more as a veil.

Behind such aggressive stance is China’s nervousness about its investments in US securities. In the current conditions when US debt has been downgraded, China is beleaguered with its enormous stockpile of investments in US. Any devaluation of the USA following these developments would be first and foremost China’s loss. China has over $ 1.3 trillion of its hard earned exchange reserves in US debt. This is almost junk now at the hands of China because if it wants to sell these investments and get out, the loser would be China. Any loss would be noticed starkly by its own people because the reserves have been built up by exploiting them – underpaying workers at the export factories or charging no interests on loans to them when ordinary Chinese savers were denied fair returns.

Independent Chinese economist Andy Xie said Beijing was worried about the US introducing financial policies that could devalue these holdings. 'China is holding all these papers bought by the sweat of hundreds of millions of workers that could be worthless,' he said to the BBC this week.

China experts are saying that the country’s loud criticisms of the West are meant more to be heard by its own population than those whom it is addressing. China’s premier Wen Jiabao urged countries to adopt “responsible policies” to tackle their debt problems and address market instability. But the country is caught in its own trap. If it continues with its depressed exchange rate and subsidisation of exports for keeping its factories engaged, it will have no other alternative but to buying US debt.

Hence, there is need for rethinking on its own strategy and financial sector rules. Already, there are indications that these are being thought of so that the flow of funds could be lower. Towards this end, China might give more freedom to its companies to keep their forex earnings abroad. Exchange rate flexibility could be introduced more meaningfully. Of course, China has already admitted the need for pushing up domestic consumption to keep its huge manufacturing capacity humming.

Prof. Liu Baocheng of Beijing's University of International Business and Economics, agrees with this approach. He said the country needed to do more than buy US debt. 'It's a simple, safe but lazy approach. We do it because there is the least likelihood of default and you do not have to manage the money anymore,' said Prof Liu. He said the Chinese government should introduce its own financial reforms to ease its problems.

On the other hand, European Union is considering various policy options for addressing the fundamental weaknesses of the common currency and the debt problems. While the European Central Bank is getting more pro-active in supporting the member states to raise finances, the Union is considering how to achieve greater co-ordination of of taxation and spending policies of members.

Germany's Foreign Minister, Guido Westerwelle, said that the eurozone is 'facing a forked road'. The choice is between 'less Europe' or 'more Europe' he told the BBC. 'We think it is necessary to answer this crisis with more Europe,' he said. Such a plan could involve expanding the eurozone's bailout fund massively, perhaps to as much as two trillion euros, and to guarantee the debt of countries such as Portugal and Italy. In return these countries would have to accept more central control over their tax and spending.

The United states on its part is considering to start another phase of what has come to be known as “Quantitative Easing”. This is simply another name for using the printing press to pump more money into circulation by the central bank. An obvious consequence of this will be inflationary pressure in the economy. But that, the experts say, is a far lower risk now than a threat of a second recession. That at least is the view of Professor Nouriel Roubini, the man who has apparently foreseen the financial melt-down. (IPA Service)