The lawns are not yet laid and three soaring flagpoles stand undressed against a blue sky, but already the first graduate students have begun to move into their sparkling new rooms in Peking University's vast new accommodation block for foreign students.

"It's a bit like a hotel," says one foreigner studying for a PhD, "every room has an en suite bathroom and flat-screen TV. You have to admire the scale of what China is doing — the rest of the world should take note". And perhaps nowhere more than in Britain as we debate the merits of the Browne Review on how best to fund our universities. A quick stroll around Beijing's Peking University provides a salutary reminder that if we want to compete with the rest of the world, we must find a way to invest in the economic bedrock of our universities.

During the past few years, while Britain's universities have been fighting to stand still, the elite Peking University has been resounding to the thump of jackhammers as it embarks on a building programme that echoes to the ambitions of a new China.

A new, two-wing teaching hospital, an economics faculty, a centre for Executive MBAs and an English language school are only the start of a decades-long plan to rival Harvard and Yale or Oxford and Cambridge as seats of world-class learning.

Rarefied fields

China makes no secret of the scale of its ambition. It wants a workforce that will drive its economy up the value-chain; out of the low-skill drudgery of snapping together widgets for the West and into the increasingly rarefied fields of green-tech, pharmaceuticals and software engineering.

"China — unlike Britain, perhaps — understands that investing in top-quality university education is essential for its future economic development," said Yojana Sharma, Asia editor of University World News.

"China watched what happened in Taiwan in the 1990s and is now trying to do the same. This new innovation strategy is a major development, and many people are underestimating just how big these plans are."

The Ministry of Education has promised to double the number of foreigners attending university in China to 150,000 by 2020, making it the largest provider of education to foreign students in Asia. China will also, the ministry asserted this month, establish a university network that "matches its international status" and begin to "forge major brands" that could one day seem as attractive on the CV of a global go-getter as a Harvard MBA.

As Britain embarks on its sober decade, it can perhaps take small comfort from the fact that China's emergence as a university superpower is still a decade or two away, although the gap is narrowing year by year. A report by the British Council's International Education Intelligence Unit this year identified China as a "competitive threat to the UK", predicting that the numbers of international students in the country would continue to rise.

At the same time, the number of Chinese students coming to the UK — which topped 50,000 last year, providing valuable income for cash-strapped British universities — will start to decline after 2011 as China's student demographic starts to shrink because of the one-child policy.

"The report shows that the nature of the UK's relationship with China has to change," says Jazreel Goh of the British Council, "with a greater emphasis on a shared internationalisation agenda".

In the early years of China's educational "great leap", the majority of foreign students going to China will be learning Chinese, often with the help of attractive subsidies from increasingly generous state bursary and scholarship funds. The students will pick up career-boosting language skills while China will grow its soft-power network by creating, as the Chinese ministry of education puts it, "high-quality, pro-China foreign students".

This, says Cheng Ying from the Centre for World-Class University, will only be the beginning as China uses its resources to attract foreign students and convince Chinese students overseas to return home.

Starting point

"The key for China to improve its competitiveness will be in terms of international courses and research, particularly in science and engineering," says Cheng. The starting point, say analysts, will be for China to attract the best university teachers, beginning in Hong Kong, which already has a world-class university, before spreading outwards to Shenzhen, Sichuan and the elite schools of Beijing and Shanghai.

In a sign of the financial firepower with which British universities must now compete, Hong Kong recently began an international drive to recruit professors to teach its new four-year degree courses, with the top pay-packages.

The Chinese revolution will not happen overnight as China battles to overcome the handicap of its language divide (good English is a rarity even among elite students), high rates of plagiarism, poorly-qualified teachers and a secondary school system that still discourages independent thought. But there is already evidence that change is happening. This month, an annual study by Thomson Reuters showed that China will lead the world in patent filings by 2011.

This is yet another signal that Chinese industry, backed by government subsidies and strong investment in education, is already stepping up to the next level of development. Faced with this level of commitment, Britain cannot now afford to take a step back.