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Hamish McRae: The Chinese are our teachers now

Viewed objectively China has managed the downturn better than the US or the UK

Is it possible that the Chinese have become better capitalists than we in the West? Start with a small story near home: want a mortgage and can't get one from a British bank? Try the Bank of China. Unlike most British banks – and many other foreign ones – the Chinese were cautious in their lending at the height of the boom and are now in a position to step in. Thus the Bank of China is moving beyond its previous market of lending to the Chinese community in Britain and starting to make buy-to-let mortgages more widely available.

Now a bigger one: the Shanghai Stock Exchange has just passed Tokyo to become the second largest in the world after Wall Street in terms of the value of the companies traded on it – London is number four.

Listen to what China's assistant finance minister said on Monday to the top US Treasury team in Washington, for he in effect chided them for mismanaging US finances. "We sincerely hope the US fiscal deficit will be reduced, year after year... The Chinese government is a responsible government and first and foremost our responsibility is the Chinese people. So of course we are concerned about the security of the Chinese assets."

China has become the principal foreign lender to the US government and one of the big issues in these talks has been the effort by the US Administration to reassure China that its economic stimulus plan will not be allowed to fuel inflation and so jeopardise the value of those loans.

The big point here is that viewed objectively China has managed its economy through this downturn better than has the US – or us, or any major developed country. You could go further and note that India has also come through in pretty good shape, continuing to grow at more than 6 per cent a year.

This raises a huge issue which the West has hardly begun to confront. It is true that our model of capitalism is becoming the new global standard. China dumped Marxist central control and India dropped (to a large extent) its state-regulated economic system. Both are in the process of adopting the mixed economy driven largely by shareholder-owned companies but with government playing a key role as a regulator and increasingly the provider of social services.

So, in that sense, the West has won the intellectual battle. Put simply, our system has been proved superior because it was only when they adopted it – China from 1978 onwards and India really from the early 1990s – that they started to achieve the astounding growth rates they are now sustaining.

If that made us feel smug, it shouldn't have done. The world is now experiencing the first really serious downtown since China and India became major economic forces in their own right and they are both coping with it fairly well. The finances of the Chinese government are so strong that they have been able to inject a fiscal and monetary boost which far exceeds anything any Western country could muster.

You could almost say that though we have won the battle of the economic systems, the new adopters have become better users of those systems. That is tough to swallow. It feels humiliating and it should be.

Before going any further you have to qualify this a bit. Both China and India have big inherent economic advantages over the West. The size of the working population is still rising in China and in India is set to rise for another generation. By contrast in Japan and in parts of Europe it is falling. There is the huge supply of cheap labour. Much of their economic development is catch-up, applying technology developed in the West, some of which has been obtained by dubious means. There are environmental burdens that have yet to be accounted for and there are social tensions, now very evident in China, which may in some measure derail economic progress.

But without being starry-eyed about Chinese and Indian success vis-à-vis Western economic failure, it would be arrogant of us not to acknowledge that we might have something to learn from the very different performance of the two worlds. It will take some time before these lessons can be sensibly catalogued and tested, but here are some initial thoughts.

The first, surely, is that there is no substitute for sound public finances. Somehow western democracies have to figure out a way of injecting discipline, so that the electorate of the day does not demand services it is not prepared to pay for, leaving the next generation to pick up the tab. Put bluntly, the Chinese authorities, unencumbered by democratic pressures, have been much better at managing public finances through the cycle than any Western democracy.

Of course, we should not think of dumping democracy. But we should think of finding some institutional way of taking fiscal policy away from day-to-day politics. I am sure this will happen over the next 20 years, rather as we found a way of re-injecting monetary discipline after the 1970s, though it is too early to see the detail.

The second thought is that market capitalism needs ways of injecting a longer-term outlook. Companies expected to meet quarterly earnings targets inevitably distort their policies towards the short term. We need to find a way of encouraging counter-cyclical behaviour and probably, though I can't quite see how, of recreating other forms of corporate ownership than the shareholder-owned company. It is a huge pity that we allowed the destruction of so many mutually-owned building societies. We probably need more family-owned companies and more partnerships, too. Tata, now reviving Jaguar and Land Rover, is an interesting model from which we might learn.

The third thought is that we should ask some tough questions about the Western welfare model. It is not sustainable for demographic reasons, but so much of our thinking is how to patch rather than how to replace. To suggest that we should look to China or India for lessons might seem to most people to be a bit absurd. Neither is noted for welfare provision. But let me ask you: which country now has the second-highest life expectancy after Japan and one of the lowest infant mortality rates, a good proxy for health care? It is Hong Kong. We have a lot to learn.