Margareta Pagano: Will China tip the US 'balance of financial terror'?

The former US Treasury Secretary, Larry Summers, calls it the "the balance of financial terror". A noted academic, Summers, who served under President Bill Clinton, was referring to the relationship between the US and its newer creditors, such as China, the Middle East and Russia. Foreign countries now own nearly a quarter, some $2.6 trillion, of the total US debt. They also own more than $14 trillion in US assets – that's more than the total US national output.

By far the biggest chunk of this debt is still owned by the Japanese, with US Treasuries worth $593.4bn. But soaring up the debt table is China, which now controls $518.7bn, more than 8 per cent higher over the past year, and equal to about half of the total $1.2 trillion it holds in reserve assets. Oil-rich states are also snapping up T-bills as though they are going out of fashion – up 29 per cent on the year to $173bn. On top of this, the US has a trade deficit with China in the first six months of this year of $142bn – and it is still growing.

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Behind all the figures lurks some intriguing realpolitik. The success of the US rescue package depends as much on the support of China and the Middle East as it does on the American taxpayer. Ultimately, it is the Chinese and Middle Eastern governments – and their taxpayers, which will decide the fate of the biggest financial rescue plan in history. Indeed, one of the reasons the US authorities say they had to rescue Fannie Mae and Freddie Mac was to reassure the Chinese government that US securities really were secure.

They are going to have to do so again for this latest bail-out. Apparently one of the first things Hank Paulson, the US Treasury Secretary, plans now the package has gone through is a "road show" in Beijing to explain the rescue and why the US is not going to explode. As the ex-chairman of Goldman Sachs, Paulson has had good relations with China – visiting the country more than 70 times, chairing Tsinghua University's business school and helping the former Chinese president save an area of outstanding environmental importance.

But Paulson will need to do more than go down on one knee to persuade the more sceptical Chinese – and there are many – that this rescue will work. There are some signs that the Chinese are being co-operative, and this may explain why the dollar has been strengthening during this recent crisis despite such low interest rates.

If they decide not to buy any more of the new debt, or dump existing debt, then the outlook for the US is truly dire. Interest rates will have to be pushed up again to attract new investors. It is a zero sum game: if the foreign holders do pull out then they would only be hurting their own investments.

We've known for some time that the growth of the emerging economies such as Russia, China and India through globalisation would eventually dilute the power of the US. Philosopher John Gray thinks American political leaders are oblivious to what is really going on. He believes the present crisis is pushing the US into a fall as catastrophic and swift as that of the Soviet Union when the Berlin Wall came down. It's far too early to say if he is right, but what will be really interesting to watch is China's response to this crisis. Will it assert its authority or continue as a peaceful trade partner: the balance of financial terror exchanging debt for toys?

We do live in interesting times.

He's back Man with a mission to save Labour in the City

Expect fireworks: Peter Mandelson is back. Whatever you think of the Prince of Darkness, there's no doubt he's a class act when it comes to talking the talk with the money men. That's why Gordon Brown has eaten humble pie, appointing him to what is looking like one of the most powerful, albeit unelected, positions in the land. Brown needs Mandelson's formidable network of business contacts to help him out of the financial crisis – and to win back the business community which has fallen out of love with Labour. Mandy moves fast – he's brought Sir John Bond, ex-boss of HSBC, Mervyn Davies of Standard Chartered and Lord Browne on board as ambassadors. But it's the young Tory shadow Treasury team that I feel for – even Alistair Darling should be nervous. It may be Tony Blair will be proved right: he once said that his job at Labour would be done when the party learned to love Mandelson.

Can Mervyn and Mandy get small businesses back on the road?

Peter Mandelson may be close to big businessmen but it's the smaller ones he now needs to win over. One of the new Business Secretary's biggest challenges is to help those firms that are running out of credit. More important, though, will be to find ways of helping new ones to start up.

He's going to work closely with Shriti Vadera, the minister at the Department for Business, Enterprise & Regulatory Reform, who has been given a place at the top table of the new Economic Council with a special role for promoting small companies.

This is vital. Only last week Barclays, one of the biggest lenders to small firms, said the number of business closures is up by 10 per cent while start-ups are down by the same amount. That is bad news both for the entrepreneurs and the would-be apprentices.

They are being attacked on all fronts. The big four high-street banks are penalising them with overdraft charges of up to 15 per cent. Others are starting to force customers to turn overdrafts into loans. Unfortunately, the big four operate a cosy cartel as between them they control about 90 per cent of all small business banking.

There is no evidence so far that the banks are refusing loans. But the Federation of Small Businesses is deeply worried that if the turmoil continues, they will return to the bad habits of the late 1990s – turning down new loans or stopping small firms from growing by switching off lending.

Hopefully, the switch in tactics by the Bank of England's Mervyn King last week should help ungum the wholesale lending market. By allowing banks to extend their collateral to securities made up of corporate and consumer loans, as well as mortgages, liquidity should now start to improve. This should make it much easier for the banks to borrow from the Bank as they are finding it impossible to lend to each other. Between them Mervyn and Mandy can perhaps get the wheels moving again.