In the 1860s, Chinese laborers laid track over the treacherous terrain of California’s high Sierras to help complete America’s first transcontinental railroad.

Fast forward, and California wants Chinese technology and capital to construct the country’s first high-speed rail system.

“We look to China to build our high-speed rail, to be part of the bidding process that we are going to go through,” the state’s governor, Arnold Schwarzenegger, said on a visit to Shanghai this month.

Acceleration of the industrial upgrading that puts China on par with the likes of France and Japan to compete for the Californian contract will be a centrepiece of the country’s five-year plan for 2011-2016 now being finalised.

As well as introducing more automation into traditional industries, the government has identified a cluster of strategic sectors that it wants to develop, including nanotechnology and new materials.

China already has in place five of a planned array of 35 satellites that will provide a navigation alternative to the U.S. Global Positioning System by 2020.

By the same date, China expects to be converting more coal into oil, gas and chemicals than any other country, according to industry officials quoted by the official Xinhua news agency.

Embracing cutting-edge technologies will help further raise living standards in a country where 150 million people still live below the poverty line.

But there is growing criticism in the West that China owes its rapid ascent to a mercantilist strategy of coercing foreign firms to transfer technology; favouring local companies in its domestic market; and now launching a new breed of national champions overseas to undercut foreign rivals who gave them a technological leg-up to start with.

Feelings are running so high that the heads of German industrial giants Siemens and BASF publicly complained about an uneven playing field in China in the presence of Premier Wen Jiabao back in July.

General Electric Chief Executive Jeffrey Immelt made similar comments in private that found their way into the press.

“I don’t condemn China. It’s very smart policy to look out for yourself. However, China has joined the world’s rules-based system, and these things are not acceptable in this system,” said James McGregor, a senior counselor in Beijing for APCO Worldwide, a public affairs and communications firm.

China is no different from many countries that set product standards tilted to their own firms or promote home-grown innovation.

But Beijing is striking a combative stance at a time when the West, especially the United States, has a sinking feeling that power is leaking away to Asia in the wake of the global financial crisis. Unemployment is high, confidence is low.

“All we’re asking China to do is play by the rules. Get your thumb off the scales. Let us go in and compete equally,” U.S. Trade Representative Ron Kirk said last week.

While Congress is preoccupied with America’s big bilateral trade deficit with China, which it blames on the yuan’s exchange rate, many Western investors are more exercised by the difficulty of doing business in China.

Rules drafted last November that in effect barred Western firms—even those with long-established operations in China—from competing for government contracts badly undermined goodwill in sections of the international business community.

Beijing has since withdrawn the offending regulations, and Wen, the premier, has repeatedly reassured foreign firms that they will be treated equally. But the damage has been done.

“I talk to a lot of foreign technology executives and they may come to Beijing smiling, but behind closed doors they are rethinking their China plans. This has woken them up,” said McGregor, author of a critical study of the array of industrial policies underpinning China’s drive for ‘indigenous innovation’.

Brittle Atmosphere
Duncan Clark, chairman of BDA China, an investment consultancy, said China was