How successful is China's success

Factory 798 is, quite possibly, the very hippest place in the world right now. Go through its gates, and you will see industrial pipes and grimy warehouses, decayed remnants of a state-run arms factory.

Look more closely: see those spiky hair-dos and funky glasses? Follow their owners into the converted buildings: here a modern art gallery, next door a jazz cafe. In the old gym, beautiful young things prepare the next edition of Time Out Beijing.

Round the corner is a new "space" where a couple of weeks ago I experienced a Chinese singer's atonal wail as two performance artists flashed lights and shot images of 1930s Shanghai on to a screen.

When you go to Factory 798, the wonder is not that everyone is writing about how the future is Chinese, but that anyone could ever have thought differently.

A billion people, iPod factories, maths geniuses how could we ever compete? When a statistical revision suggested that China's economy was now larger than Britain's confirmed this week the news didn't even make the front pages. If you were surprised, where have you been?

And it's all true. There are an awful lot of Chinese. And, as a newspaper headline had it bluntly a year ago, the Chinese are coming. But it's not true, as others have it, that China is about to take over the world, become top nation, refashion the way we live.

People tend to believe when they see China's phenomenal rise that it has hit upon some magic bullet, some socio-economic secret that the rest of us have failed to grasp.

But when you look at China alongside countries which have done similar things Japan, South Korea what strikes you is how unsuccessful it is. There are no Chinese Hyundais or Toyotas on the streets let alone Samsungs or Sonys attached to our ear-pieces.

Those iPods? Made in China, but by Taiwanese companies contracted to an American corporation. And that's before you get to the big issues the state of the environment, the crusty politics, the indebted banking system which threatens economic collapse even while the government has $800 billion in its foreign reserves.

There are lots of technical reasons for this, but they all boil down to the same thing. China is a hybrid country, in which investors from free economies have been allowed to bolt themselves on to a state-run superstructure.

We all know Made in China; fewer know that most of China's exports are made by foreign-run firms.

China knows it has created a monster. It has found it cannot easily use its wealth to help its many, many poor because the wealth is controlled by outsiders, or Communist Party officials and their friends. Its solution has been to get the (state-run) banks to fund investment. But that's what's created the banking crisis. It can't repatriate the foreign currency reserves to solve the problem because that would trigger inflation.

I sometimes think we should sympathise with China. But unfortunately, our fear of China is making us act irrationally, either by sucking up to it, or by making unreasonable demands.

The following things are undoubtedly true, and slightly scary. China is modernising its military. It is using the lure of its economy to exert a web of influence round the world, drawing in Asia, Latin America, Africa. It is changing the west's own freedoms: when Microsoft closed down a Chinese journalist's blogsite because it offended the government, it was a blogsite hosted in American, not Chinese, cyberspace.

But our response to this is not to do as Microsoft did, and what we all subconsciously do by exaggerating China's success: rolling over and giving up.

We have engaged with China, and have helped it lift millions out of poverty, which is a good thing and something the West, as well as China, should take credit for. We have earned the right to hold it to account.