Mercantilism was a doctrine that flourished from the 16th to the 18th century. It held that the treasure accumulated measured a nation's wealth. To this end, trade was regulated to maximise exports and minimise imports.

China's business model has followed this approach for the past four decades. However, the treasure has not been locked away in vaults but "invested" in foreign reserves, usually sovereign bonds.

China has pursued policies of export expansion to rapidly grow urban employment. In addition, it has kept labour costs low to attract direct overseas investment. Other Asian and Latin American countries have run up the value of their foreign reserves as an insurance policy against capital flight.

Reserves, accumulated largely by developing countries, have been recycled into the developed economies. The sheer volume of the capital flows drove down the interest that the funds could attract.

The cheap credit created by the inflow of capital encouraged an increasing range of borrowers. The functional relationship between the flow of cheap capital and the crises that developed in the US subprime market and the European sovereign debt market is evident. In both cases, reputable banks tapped the capital inflows and on-lent the money in quantities, and at prices, that have proved to be commercially unsustainable. Financial systems were compromised as even supposedly risk-free sovereign bonds were downgraded and discounted.

China and other large owners of foreign reserves found themselves trapped by recessed economies with declining yields on their bonds. Any attempt at large-scale withdrawal could have sparked a panic.

However, even before the onset of the global financial crisis these surplus countries had begun to diversify their investments away from low-yielding sovereign and government agency bonds.

We saw, for example, a rush to buy Australian resource projects. In part, this was driven by the desire to guarantee supply. But the issue of diversification has also been an important factor.

But China has run into opposition in its drive to buy offshore assets. This has been an international phenomenon. Huang Nubo, the billionaire chairman of China's Zhongkun Investment Group, wanted to build a $200 million tourist resort in Iceland. Iceland knocked back the proposal last month believing that Huang's interest was more in Iceland's energy potential than in tourism. But the Chinese cheques are being snapped up elsewhere. Saab, the Swedish carmaker, was sold to Chinese car companies in October. Volvo was sold last year for $1.5 billion.

The corollary of this scramble for hard assets is that the pool of funds available to finance the fiscal deficits of industrialised governments is not growing at anywhere near the rate of demand. According to the OECD, the gross borrowing needs of OECD governments is expected to be $10.4 trillion this year. That figure has doubled in the past five years.

The debt story still has a lot of legs.

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