Certainly, China's exports will be badly hit this year, and previous high levels of foreign investment will fall. Yet the export sector remains relatively small. It is China's domestic economy that counts, and this is shielded from external shocks by a largely non-convertible currency. The impact of the regional crisis has more to do with expectations. Little more than a year ago, Chinese policymakers looked towards South Korea's giant conglomerates, the chaebol, and Japan's keiretsu system of interlocking firms, as models of state-guided development.
Excess capacity has financial costs.
As a result, China's state-owned enterprises have levels of debt that put the chaebol to shame. China, most of its rulers now admit, can no longer simply count on state-guided growth to get out of trouble. Hence the urgency of recent policies that aim to get the state out of business. Some of the most powerful bureaucracies, such as the Ministry of Information Industry and the Ministry of Communications, have had their business wings clipped. Indeed, the total number of ministries has been shrunk by a quarter.