The China Economic Review reports:

Innovation is vital to China. The way in which other Asian nations are eating away at the country's comparative cost advantages suggest it cannot rely on being the world's factory forever. Furthermore, its current growth model has pushed the environment to the brink. Water scarcity, land degradation and desertification and air pollution are becoming ever more serious.

A State Environmental Protection Agency official said earlier this year that pollution costs China 10% of its GDP.

"If you look at the major dilemma of the current economic model, it is that it is resource and energy intensive," said Dr Denis Simon, director of the New York-based Levin Institute's Center for Science, Technology & Innovation in China (CSTIC). "Rather than focus on brawn, China wants to focus on brain."

To climb the product value chain, China must create its own intellectual property. But its track record here is patchy.

"I would say it's a pretty low innovative level," said Dr Adam Segal of the Council on Foreign Relations in Washington. "There is no example of cutting edge technology coming from China."

Figures that point to China as an emerging high-tech powerhouse are deceiving. The country's high-tech exports totaled US$145.1 billion for the first half of the year, according to the Ministry of Commerce (MOFCOM). This is well on course to surpass the 2005 full year figure of US$218.2 billion, which was itself four times the 2001 total. Over the same period, official statistics show a 133% increase in research and development (R&D) spending, which went from US$13.2 billion in 2001 to US$31 billion in 2005.

However, the majority of these high-tech exports were generated by the local branches of multinational corporations (MNCs). They were responsible for 82% of exports in 2001 and 87.9% in 2005.

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