01/17/2011 04:29 pm ET Updated May 25, 2011

China's Strategy Seems to be Working

China is on its way to becoming a creative and innovative force in the new economy.

In Shanghai, China, kids outperformed the world on the latest PISA (Program for International Student Assessment) tests late last year.But Jiang Xueqin, a deputy principal at Peking University High School in Beijing, cautioned that "Chinese schools are very good at preparing their students for standardized tests but fail to prepare them for higher education and the knowledge economy."

Many Americans concerned that U.S. children who, again, did poorly on the PISA's were somewhat relived (The United States came in 23rd or 24th in most subjects).

They are kidding themselves.

President Hu Jintao of the ruling Communist Party of China has been challenging the Chinese people to help achieve the goal of becoming an "Innovation Nation. Its all part of the country's "Five-year Plan". And it's working.

China now boasts more people with Internet connections than any other nation, and is encouraging entrepreneurship of the creative industries. In the last five years alone we have seen state fiscal expenditures and infrastructure investment in the creative industries double.

China, has put art and music back into all the schools and mandated that all six grades in primary schools should have two class hours per week for music and fine arts. In addition, they plan to relax regulations and controls and to provide other incentives for growth in the sectors it has targeted like the creative industries. It has also fostered art festivals, conferences and exhibitions extolling the merits of art education and entrepreneurship, and even provided low cost artist housing in cities like Shanghai.

China is not going to be simply a manufacturing center or sub-assembly and processing factory for other multinational corporations for too much longer, Chinese leaders say. It will turn out creative and innovative workers from the schools and soon reap the major investments they are already making in research and development. As The New York Times put it recently,"China is trying to build an economy that relies on innovation rather than imitation."

To accomplish its goals, the Chinese government has authorized more than 70 billion Yuan, or $10.5 billion, for investment in science and technology in the last few years, and plans on doing the same for several more years in the future. This represents an increase of 20 percent annually. There is a campaign to significantly increase its patent output. There is also a PR campaign to educate the masses, including online discussions on the topic of innovation and creativity and the formation of an "innovation demonstration team" which tours the country and promotes the idea of China as an Innovation nation.

The government is also talking of the need to reform the financial and tax systems to provide incentives for the growth of cutting-edge industries, including such controversial areas as stem cells, gene therapy and genetically modified crops; and some areas where the United States has long dominated, including software, semiconductors and space exploration. President Jintao has said, "strategic high technology is ... the decisive force in economic and social development and the focus of competition and comprehensive national strength."

The biggest challenges to China's ambitious goals include changing its attitude on human rights and ensuring basic freedoms, which are the source of creativity and innovation. China also needs to loosen its grip on citizen use of the Internet. Google as we know was forced to move its China operations to Hong Kong to avoid direct Chinese regulation, although that was only a face saving ploy. Today Google and other Web companies such as Yahoo and Microsoft find that access is blocked to thousands of their sites. More than 30,000 employees of China's Ministry of Propaganda routinely police Internet use, and patrol the use of businesses and individuals.

Nonetheless, China will see success because China is simply so big. With 1.3 billion people, China is likely to achieve part of what it wants. If only 3 percent of the population enter the so-called creative industries workforce that is larger than the creative industry in the United States.

During the Cultural Revolution, creativity and innovation in people was widely criticized. Academics and students of higher learning were targeted for "retraining" in the countryside. But that is changing along with promotion of cultural-based economic growth. There will be degree of innovative and creative discovery, and the restrictive attitude of China will be a footnote, some argue.

Sure, China has many obstacles to becoming a creative and innovative nation, but countries like the U.S. should be worried.

As former Harvard Business School professor John Kao, author of "The Innovation Nation," said, "Our national capacity for innovation has declined to an all-time low, while rising powerhouses such as China, India, Finland, and Singapore have evolved policies to actively foster innovation."

As China and India and other nations target the high end of the U.S. workforce and more and more jobs are either outsourced or off-shored, what is America going to do? What is America's plan for nurturing, retaining and attracting the creative and innovative work force we need to succeed, let alone survive, in the new global economy?