Second, the US market rating system was outdated. Without question the development of financial derivatives can help improve the efficiency of capital utilization and reduce the cost of financing.

The thing is the valuation and trading of financial derivatives require accurate market rating, but the US' financial reform never reached the institutionalized monopoly of market rating firms. The rating agencies brought up by "government orders" early on were still very much in control of the market, where "ethical deficiency" permeated and shielded financial risks, allowing such "viruses" to spread far and wide.

Third, the US financial system suffered from structural imbalance. The country's new banking law has only extended financial institutions' management power, which led to the conglomeration of such businesses, the expansion of the financial industry and fast-growing power it wielded.

On the other hand, as regulators of the financial industry, the Fed, the US Securities and Exchange Commission and the Department of Treasury were still "doing their own jobs" separately according to the old bureaucratic fixture, leaving the financial industry in a room of no regulation.

Fourth, the US has learned it the most painful way that believing "scale equals safety" will cost you big time. While proceeding with the financial reform, the US government was somehow convinced that the bigger financial institutions are the safer they become. As a result Washington threw its weight behind a tide of mergers across the financial landscape that turned the industry structure into a domain dominated by giant conglomerates.

For instance, each of the top three US brokerages boasts assets totaling more than $1 trillion, which is close to the gross domestic product (GDP) of a semi-developed nation. As for Lehman Brothers, the net value of its debts stands at $613 billion. Apparently the subprime crisis has shattered the myth that "bigger is safer" with undeniable facts. It has also made the US government realize, albeit at a tremendous price, the destructiveness of super-sized financial institutions to the whole financial system.

Currently, to neutralize the fallout of the subprime chain reaction, the EU and the US have begun pushing forward a tide of financial regulation and actively working on a new system for "reining in the financial industry".

Meanwhile, Japan, whose financial liberalization has been progressing very slowly, has put forward the idea of building a "market-oriented indirect financial system" in an attempt to break a middle path for "financial capitalism", correct the "market arbitration-determined finance" of the US through the construction of "value creation-oriented finance" and prevent "financial games". Faced with different system options from the US, EU and Japan, China's financial reform is staring at a set of new challenges and risks.

The market reform and industrialization of finance is a required subject that China must learn well in the development of market economy. It is key to efficient transformation of individual savings into national productivity and, more importantly, a systematic condition for maintaining the global competitiveness of Chinese enterprises.

China's favorable balance of current account has been growing as the country's foreign trade expands. The so-called China funds and China capital have been globalizing everyday as financial and opening up have become a key safeguard for the nation's economic reorientation.

Taking a look at the history of international financial development it is not hard to notice that the development of the international financial system has always been accompanied by the process of system construction, correction and reconstruction. To proceed with its financial reform and opening-up China needs to consider such new underpinnings as the country's economic development must not get ahead of itself, its industries and trade are not yet mature, and so are its ways to turn individual savings into investment.

China does not have to slow the pace of market and industrial reform just because the US messed up its own financial system. Nor does it need to copy Japan's model because the neighbor to the east has escaped the subprime tsunami unscathed so far. China still needs to build up its confidence in going ahead with its financial reform along a path best suited to its national condition.

The author is a researcher with China Institute of Contemporary International Relations

(China Daily October 7, 2008)