Chinese High Tech: Promise and Peril

There is a story that Silicon Valley wants told but is afraid to tell--the rise of China as a technological giant. The story is one of hope: about the profits to be made by high-tech U.S. companies in the huge and growing China market. It's also one of fear: that by investing so heavily in China, U.S. companies could promote the rise of a rival Chinese Silicon Valley that competes with them around the globe.

For Washington, the rise of China as a technological giant inspires hope and fear as well. There is hope that economic growth, partnerships between Chinese and American high-tech companies, and the integration of the U.S. and Chinese economies will promote democracy in China and peace and prosperity in the world. The fear is that technological prowess will bolster Chinese nationalism, create a powerful military, and destabilize Asia. No one knows which way China will go, but we hope the elixir of education, entrepreneurialism, and creativity that is transforming it into a high-tech giant will also lead to a democracy that plays a constructive role in international politics.

The progress China has made in high tech is breathtaking. Nearly as many engineers and scientists graduate from its first-rate universities as do in the U.S. A team at Beijing Genomics Institute was among the first to decode the rice genome. As many as 10 new semiconductor chip plants could one day make China the world's second-largest chipmaker. China plans a manned space flight as early as next year. Two network switch makers, Huawei Technologies and ZTE, have started taking business away from Cisco (CSCO ) and Nortel (NT ).

U.S. and European companies are pouring more of their investments into China every day, abandoning the rest of the developing world. The latest terrorist bombing in Indonesia will only hasten that trend. By trading fat domestic contracts for technology and by leveraging its cheap reservoir of engineers, China is moving into telecom, chips, and software--the building blocks of an advanced economy and a sophisticated military.

Therein lies the rub. The U.S. and China have not yet come to a strategic understanding. China uses companies such as Huawei to update its military and wants to be a global power. The Bush Administration's new National Security Strategy doctrine views China's regional and global aspirations as a threat. With Corporate America betting heavily on China while Washington increasingly sees it as a potential threat, something's got to give. We're hoping it's not the peace. The growing interdependence of the two economies would make a confrontation highly costly to both sides.

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