China's reactions to the collapse of leading US financial institutions and the government bailouts of those (barely) still standing range from the predictable to the pragmatic. Many ordinary Chinese onlookers are gloating over the comeuppance of Wall Street, hitherto seen as an embodiment of US power, prestige and arrogance.
Chinese policymakers, however, are busy trying to contain any fallout on China's own slowing economy. To bolster domestic investor sentiment, they have cut interest rates and eliminated the stamp tax on stock purchases. If things do not improve, they will almost certainly cut interest rates again. But as the dust settles, China must also do some hard thinking on what lessons it can learn from the Great Wall Street Crash of 2008 to avoid a similar fate in the future.
The first obvious lesson concerns how China should regulate its own financial institutions in an age of global and instantaneous capital flows. Since joining the World Trade Organisation and launching gradual liberalisation of the financial sector, China has regulated banks prudently. However, the government has a tendency to overprotect the banks, keeping the sector inefficient and underdeveloped.
For example, with deposit and loan rates heavily regulated, Chinese banks are guaranteed hefty interest rate differentials. These, and a strong economy, are why the 'big four' state banks have all raked in record-high profits in recent years. So, in contrast to the excessively freewheeling US financial sector which needs more regulatory oversight, China should deregulate interest rates further and promote more competition among domestic banks.
The second lesson is more philosophical. Is the US government doing the right thing by undertaking a massive taxpayer-funded rescue of the country's most profligate businesses? This question is especially pertinent to many Asians. During the Asian financial crisis, a decade ago, they heard endless lectures by US officials to let sick firms and banks fail, and to keep interest rates high and fiscal policy tight for a speedy economic adjustment.
It would be tempting to criticise the US government for adhering to double standards. But policymakers should be pragmatic, not dogmatic. The lesson for China and other countries is that, if a systemic meltdown can only be avoided by a government intervention, do so sooner rather than later. Hence, given the mounting evidence of a US-led slowdown of the global economy, the Chinese government was right to make a U-turn on its tight monetary policy in recent weeks.
The third lesson is what to do about asset-price bubbles. Should central banks prick them before they grow 'too big', even though no one can be sure about the precise timing? The Wall Street debacle suggests that ignoring bubbles - as long as the economy is booming and inflation is well-behaved - makes for a dangerous policy.