China, now the world's fifth-largest economy and responsible for around 12 percent of global manufacturing, is a crucial player, because in a world awash in debt and facing a credit crunch, China has cash. This month its foreign exchange reserves reached $1.9 trillion, almost double the level of the next largest holder, Japan.

The question is what China does with the money. Much of it is in cash, but the largest single holding is in U.S. Treasury bonds, with a holding of $518.7 billion in July this year, not far behind Japan's $593.4 billion. China also holds some $350 billion in government-backed U.S. securities like Fannie Mae, according to estimates by Standard and Poor's in September. China's Banking Regulatory Commission reported in September that 14 Chinese banks held another $31 billion in Freddie and Fannie bonds. And it was significant that in the September bailout of Freddie Mac and Fannie Mae, the U.S. Treasury carefully ensured that bondholders like China would not suffer -- unlike the shareholders, many of them American regional banks.

China also has bought small but important stakes, usually around 1 percent, in the shares of the Top 40 European corporations. It also has a sovereign wealth fund, currently capitalized at $200 billion, including some initial investments in Western companies like Blackstone and Morgan Stanley, but losses on those investments have provoked strong criticism inside China.

China is now facing urgent appeals from other Asian countries like Pakistan for loans and guarantees to help them get through the crisis. And China agreed Friday along with Japan, South Korea and the Association of Southeast Asian Nations to create an $80 billion fund to fight the global economic crisis as they met here ahead of a two-day summit with their European colleagues.

The $80 billion fund will be created by the end of June 2009 and will be accompanied by an independent regional financial market surveillance organization. This "ASEAN Plus 3 Fund" was agreed upon during an informal breakfast that significantly took place before the start of the 43-member biennial Asia-Europe Meeting on Oct. 24 and 25 in Beijing. In short, it is an Asian solution, and one dominated by the region's two dominant holders of cash, Japan and China.

Given that China certainly will want to maintain large and liquid foreign exchange reserves, both to finance its trade and to support its currency, the amount left over from these existing investments and commitments is considerably less than $500 billion. And faced with its own internal problems of development and rural backwardness, China's leaders will be cautious before assuming any large new international commitments.

Still, the very fact that China has assured U.S. Treasury Secretary Hank Paulson that it intends to maintain its holdings in U.S. bonds suggests strongly that China has resolved to be a supportive member of the global financial system. As President Hu Jintao said Friday, China wants to act "with a sense of responsibility." Nor does China want to see the value of its dollar holdings fall; Beijing has a strong self-interest in U.S. prosperity.

It was significant that after the coordinated cut in interest rates by the Group of Seven countries two weeks ago, China simultaneously cut its own interest rates, just two weeks after its first unilateral cut. The Beijing leadership, it now seems, has decided to fulfill the appeal of World Bank President Robert Zoellick that it become "a responsible stakeholder" in the global system.

But there are limits. The signals from Beijing policymakers are that domestic concerns are becoming paramount. Writing in China Securities Journal recently, Ba Shusong, deputy director of the Financial Research Institute of Development Research Center under the State Council, argued that "we must be careful as the Chinese economy continues to be deeply integrated into the world economy. �� Forced by the global financial crisis and domestic setbacks, the expansion of domestic demand becomes the key issue in determining stable and successful structural changes in China's economy."

Ba went on to note that "the ballooning debt and huge trade deficit of the United States are, to some extent, related to China's enormous foreign reserves and trade surplus. As a result, China should voluntarily readjust the current growth mode to prevent such global financial chaos from taking place again." (He also cited, in that same essay, a Citigroup research report that said if the U.S. economy slowed by 1 percent, the Chinese economy would decrease by 1.3 percent.)

In effect, this suggests that the world should not expect China to unleash its own foreign exchange holdings as a kind of financial 7th Cavalry, riding to the rescue of a world starved of liquidity. China has its own domestic problems of adjustment to a global recession and will deploy the bulk of its holdings accordingly.

Zhou Jiangong, the well-connected editor of Chinastakes.com, also has called for a rethink in the way China deploys its reserves: "Why should China help the U.S. to issue debt without end in the belief that the national credit of the U.S. can expand without limit?" he asks. "At present, China should realize that it should develop its own or a regional bond market and reorder in a diversified way its foreign exchange reserves and foreign bonds."

But Zhou went on to suggest that if the terms are right, and American politicians can overcome their suspicions of Chinese investment motives, a grand bargain could be possible under a new system in which China invests in Wall Street and in return helps to set the rules.

"A better solution would be for foreign exchange reserves to invest in Wall Street financial institutions and assume an intermediary role in the capital cycle. Let the current account surpluses of East Asian exporting economies and the Middle East oil exporters re-circulate to the United States, to support consumer borrowing and the real estate market. The best way to do that is not to increase U.S. liabilities but to let foreign exchange reserves finance Wall Street institutions through equity purchase, re-strengthening Wall Street as an international financial center, while foreign countries cooperate with the United States in financial supervision," Zhou writes.

"Should China invest (in) Wall Street?" he asks. "Of course, it should, because China believes that Wall Street belongs not only to the United States, but also to the whole world. China's 2 trillion dollars foreign exchange reserves will be used for international payments and the acquisition of dollar-denominated assets. China should not only buy into investment banks on Wall Street, (it also) should be actively involved in international cooperation in monitoring."

The debate is under way in Beijing, but all the signs are that -- domestic concerns permitting -- China will be a responsible partner, so long as it helps define the terms and write the new rules.

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