Left Flank

Beijing gets its chance to crow: those profligate western barbarians are getting their comeuppance. Yet, there's pain and bluster in the triumphalism. The Chinese economic juggernaut will downshift into single digits of growth. Isolated in 1997 from the Thai-induced currency crisis, the Shanghai Composite Index has also suffered. Beijing is learning it has less control over its more liberalized, globalized economy, yet consumers are calling for prudent regulation.

Many of those who invested in shares feel the government hasn't done enough to minimise the losses suffered by the market. Hou Dawai, a 30-year-old accountant, does not trust the government's pronouncements on the stock market.

«They've done much less than people expected. They need to supervise the companies that go public much better and they need to adopt the same rules that govern stock markets in the west,» he said. «Not much of what they say is correct and they never mention how complicated the situation is worldwide.»

Rising food and petrol prices have also reduced the confidence of many people in the economy. «My spending on essentials has gone up by 300-500 Yuan a month (£24-40). I'm single and can put up with that, but life for my friends who have families is much tighter now,» said Mr Hou.

Li Ke, an events organiser in Beijing who has seen the value of her shares drop by two thirds since she started investing in May last year, said: «I think the crisis in the US is like a financial tsunami. So many countries are involved that no one can escape.»

Just as ominous for China is the slowdown in economic growth. After years of double-digit growth, the economy is expected to grow in single figures in 2008 and 2009, according to the latest World Economic Outlook Report from the International Monetary Fund. The financial crisis in the US and Europe means that the demand for exports, one of the key drivers of the Chinese economy, is dropping.

Increasing domestic consumption and reducing dependence on exports are key planks of the Communist Party's future economic plans. The debate within the party is about how to do that.

Reformers propose loosening restrictions on land ownership to allow farmers to rent, or even mortgage, their land to individuals or institutions, so enabling them to move to the cities where they can earn far more money. The reforms would signal an end to the system where land is owned collectively by villages and townships.

Speaking of silver linings, Beijing is also considering its global role in the barbarian crisis.

China's assistance can't be on a «massive scale,» the researchers wrote in the Chinese-language newspaper, affiliated with the official Xinhua News Agency. Only $200 billion of the nation's foreign-exchange reserves are available, with $1.2 trillion invested in U.S. assets while $600 billion needed to be set aside for imbalances in international payments.

Chinese companies can also acquire stakes in U.S. financial firms or buy back their stakes in Chinese businesses, they added. The U.S. should drop calls for a stronger yuan, they said.

China Investment Corporation, though, has opted for a less altruistic course.

But, amid the gloom, the crisis has pulled Beijing into the modern economic jungle, in good times and bad.

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PRC's Wei Benhua, vice head of the State Administration of Foreign Exchange, sent a shot across the bow.

"The international society should take a clear-cut stand against protectionism in various forms in both investments and the financial sector," Wei wrote.

He said sovereign wealth funds should boost their transparency but cautioned against haste in doing so, saying this could lead to market panics.

Wei said the CIC would respect all laws in countries in which it invests and actively participate in global discussions to ensure that regulations covering sovereign wealth funds benefit its own development.

Does Wei mean Safe Investment Company?

It is a direct subsidiary of Safe, the government department that regulates foreign exchange transactions and also manages China's nearly $1,500bn in foreign exchange reserves.

But the entity is so secret that Safe repeatedly refused to acknowledge its existence to the FT, until it was confronted with incontrovertible evidence.

China's central bank, which ultimately controls Safe, told the FT that Safe Investments was set up just one month before the hand-over of Hong Kong from Great Britain to China in 1997 to «support and promote the development of Hong Kong's financial market» and served a crucial role in defending the value of the Renminbi and Hong Kong's peg to the US dollar against international speculators.

According to people familiar with Safe Investment's operations, it served largely as a minor outpost for Safe in the years following the Asian financial crisis, with only about $20bn in funds under management.

But the amount under management at Safe outposts has increased substantially, according to one person familiar with its operations.

«Safe's subsidiaries around the world have until now been responsible for running Safe's book over the various time zones and have basically replicated the portfolio of head office in Beijing but that appears to be changing with the Hong Kong subsidiary taking more risk in managing reserves,» the person said.

Safe's main office in Beijing manages portfolios of fixed income securities such as Treasury bonds, currencies and commodities, according to a person familiar with its operations, who said it is common for Safe to execute trades of up to $1bn at a time.

Analysts say internal politics may account for Safe diversifying away from its previous mandate of low-risk liquid securities, albeit on a relatively small and carefully concealed scale.

«This shows characteristics of a Chinese bureaucratic rivalry,» according to Arthur Kroeber, managing director of Dragonomics, an independent research firm. «It might be that, having been forced to surrender control of Huijin to CIC, Safe and the central bank are now lobbying for authority to make alternative investments on their own account.»

Oh, yes, transparency!