KEY POINTS:
The credit crunch, which entered its most damaging phase this week, is accelerating the shift in economic power from West to East, local economists say.
As regulators work frantically to contain the rot consuming the world's financial system, it looks likely that a significant portion of the hard cash required to put capitalism back on its feet will come not from the West, where most economies have a dearth of savings, but from the East - including communist China.
Oil-rich Middle Eastern states and fast-growing emerging economies including China possess large pools of state-controlled capital or sovereign wealth funds looking for suitable investments.
With US$3 trillion ($4.4 trillion) estimated to be under management, much of it unallocated, they have emerged as key players in world markets in the past couple of years.
It seems likely that as the United States financial sector stumbles and holds its hands out for fresh capital, these funds are among the few sources able to meet their needs.
Economist and fund manager Gareth Morgan said aside from direct investment in US financial institutions, those economies with a surplus of savings to invest would also continue to buy US Government debt.
There is every indication there will be much more on offer.
Morgan's own back-of-the-envelope calculations suggested the US Federal Reserve and other agencies had committed up to US$400 billion in bailouts and other measures to contain the emergency.
"That's roughly equivalent to one year's US deficit. The US has been running on other people's money for so long. Wars are expensive, its households are really leveraged and it has a low savings rate."
Given the US's indebtedness, "I think it's time now for the surplus nations to seize their assets and that's what we're seeing".
Victoria University professor of economics and finance Roger Bowden believes that with its sophisticated, well-developed capital markets, the US will remain the world's financial centre but not its economic power.
"I have thought for some time that this thing is marking the turning point for the US in its role as the linchpin of the world economic system."
Bowden said the US housing market slump that triggered the sub-prime and subsequent credit crises marked the end of significant growth phase in the US business cycle that would be matched by a corresponding negative phase. "There's going to be a recession in the US that will be more serious than anywhere else."
Meanwhile China's economy, while slowing recently, was still growing fast.
In 2006, Goldman Sachs predicted China's economy would surpass that of the US in the early 2040s. Last month that forecast was revised to around 2025. As US prospects dim further, it looks likely the forecast will again have to be altered.
But having suffered some bloody noses in the earlier stages, the sovereign wealth funds are likely to be more cautious now about buying into US financial institutions.
Last year the US$200 billion China Investment Corp invested US$3 billion in US private-equity company Blackstone, only to see its shares slump by 50 per cent.
CIC went on to pay a further US$5 billion for a stake in US investment bank Morgan Stanley. Despite a defensive mechanism built into the transaction, CIC may also lose money on that investment.
Singapore fund Temasek pumped US$5 billion into Merrill Lynch in December, only to see the shares sink 64 per cent below the price it originally paid. But they are still kicking the tyres of some distressed companies.
Late this week it was reported that CITIC Group, China's largest financial conglomerate, was in talks with Morgan Stanley as the bank scrambled to find a buyer.
Morgan Stanley was also reported to be in negotiations with Singapore Investment Corp, one of the world's biggest sovereign wealth funds.
