(FORTUNE Magazine) – For Intel chairman Andy Grove, coming to China is like waking from a bad dream. Elsewhere his company is plagued by slackening sales growth in the superfast personal computer microprocessors that are Intel's bread and butter. China is different. Says Grove: "Through much of recorded history, China was the predominant country in the world, and it's on the ascendancy again." For Grove it's a glorious coincidence that the world's most populous country happens to be the world's fastest-growing PC market. If China escapes the economic disaster that has swept the rest of Asia, this could be the opportunity that mitigates a thousand problems elsewhere.

That hope explains why Chairman Andy jetted to Beijing and Shanghai in May accompanied by an entourage of 25, including a writer and photographer from FORTUNE. In a triumphal five-day tour, this most effervescent of businessmen charmed government and business leaders, the CEOs of 12 big Chinese PC companies, and hundreds of Intel employees. Virtually every one of his hosts seemed aware that Grove had been named 1997's Man of the Year by Time magazine. At one event he was introduced to a crowd of 600 technologists and officials as the "father of PCs." For a man who is celebrated routinely, Grove could credibly claim by the end of his tour, "I'm not used to this much respect."

Grove gets such adulation in China because its government and its people have decided Intel's chips are essential to China's future. Says Bryan Nelson, head of Microsoft's operations in China and Hong Kong: "At the highest levels of the Chinese government, technology is seen as very, very strategic." Grove met with Communist Party General Secretary Jiang Zemin, who trained as an electrical engineer and was once the Minister of Electronics Industry.

Demand for Intel's products is strong. Last year customers in China bought about three million PCs, 44% more than in 1996, according to International Data Corp. Asia/Pacific in Singapore. By contrast, PC sales rose just 19% in the U.S. and fell 2% in Japan. IDC predicts that the Chinese market will grow 29% a year through 2002, when PC sales will reach 11 million. China would then be in a dead heat with Japan as the world's No. 2 PC market, trailing only the U.S. Last year China was only No. 6.

The Chinese are taking to computing both at home and at work. Says Xiao Jianguo, a Beijing University professor and a top executive at Founder Software, one of China's largest software firms: "The PC is the hottest product in China. After people have a TV, a washing machine, and a refrigerator, the PC is the next thing they want." In major cities like Beijing, Shanghai, and Guangzhou, surveys find that about 10% of families own PCs, many purchased for a pampered single child.

Consumers are feeding their hunger for PCs despite relatively low incomes. China has one of the world's highest savings rates--around 40%--so even though a PC can cost half a year's pay, people pony up. According to an Intel poll, 50 million Chinese consumers without PCs believe the devices are both desirable and affordable. That's almost one-third of the 160 million such potential PC buyers worldwide.

This recipe for a dream market has a special ingredient that makes China even more appealing to Intel: People there crave the best technology. Along with Malaysia and a few other countries, China is where Intel sells microprocessors with the highest average speed. It stages street fairs to hype PCs, and people ride off balancing $1,900 Pentium II 400-megahertz computers on the backs of their bikes.

Businesses are embracing personal computing with equal enthusiasm. Says Philip Yu, head of Compaq's Chinese operations: "The PC will become pervasive in business faster in China than in Japan. Not many Japanese companies are using PCs the way we do in the U.S., but they are here." And don't think China is missing the Internet revolution. An estimated one million people have Net access now, mostly in businesses and government offices--though they're blocked from using some political and sex-related sites. Yang Tianxing, chairman of the China Software Industry Association and a former top official in the Ministry of Electronics Industry, estimates that the number of connections will reach 1.5 million this year.

China may be great for Intel, but it's not clear how good it will be for the world's PC giants. Grove is a hero in China partly because his chips have helped indigenous PC makers compete with big multinationals. In recent years first Compaq, then IBM, had the biggest market share, according to IDC. But in 1997, IBM was knocked from its perch by Legend, a Beijing company founded in 1984 by the Chinese Academy of Sciences. IBM is now No. 2, followed by Hewlett-Packard, Compaq, and two Chinese companies, Tontru and Founder.

The rapid rise of Chinese PC makers serves Intel's strategy. The company goes to great lengths to help them, even though this causes tension with multinational buyers of its chips. Local managers of some U.S. PC companies complain that Intel is unfairly aiding the local players with services and extra-low prices. Intel executives adamantly deny giving local companies favorable pricing. But as elsewhere, Intel would prefer to see the market split among many smaller PC makers rather than dominated by a few influential colossi. Says Dane Anderson, director of Asia Pacific PC research for IDC: "Smaller local players don't have the clout to resist whatever way Intel wants to move the market."

Chinese PC companies have introduced the fastest new processors in China at lower prices and much sooner than Compaq, IBM, or HP, which are less attuned to the desires of the local market. Foreign PC makers also have to deal with a labyrinthine system of duties and import restrictions that delay introduction of new models. Some of the fastest machines come from some of the tiniest players, local shops that sell only a few hundred PCs a year. Such assemblers account for some 35% of the market.

A wild card in the standoff between local and foreign PC makers is an interloper lurking at the border--Dell. Surging around the world, it is moving to establish a major China presence. It has leased a 135,000-square-foot factory in coastal Fujian province, where it is gearing up to produce PCs and serve customers. CEO Michael Dell told FORTUNE earlier this year that Dell will import its formula for selling PCs directly to consumers and businesses. Competitors claim direct sales won't work in China because customers like to see and touch a product before they buy, but Dell Asia Pacific boss Phil Kelly expounds happily on why they're wrong: "The most important thing in China is guanxi, or relationships. That's what Dell is all about. It's taking the middle person out so that a customer can deal with the father rather than the son."

China's leaders would love to see their nation become more than just a market for foreign technology. Sure, they're proud that Legend and other domestic PC makers are doing well. After all, every one of those companies is either owned by or has close ties with some arm of the government. But beyond that, agencies have long made noises about developing their own microprocessors. Until a couple of years ago, Grove publicly fretted that Intel's greatest competitive threat might come from China. He's not lying awake at night today because Chinese chip manufacturing remains at least two generations of technology behind the U.S. Officials now say that if they could, they'd love to build microprocessors in partnership with Intel. Grove shows little enthusiasm and believes Intel is not likely to be pressured into partnership because such behavior would scare off other foreign investors.

Perhaps a more promising area for Chinese innovation is applications software. "They will definitely become a major software power," says Microsoft's Bryan Nelson. Software development isn't very capital-intensive, and sophisticated coding skills are surprisingly common in China. Founder Software, which specializes in publishing programs, supplies software for Chinese-language newspapers around the world. Another big company, 500-employee UFsoft, is using its domination of Chinese accounting software to enter the market for so-called enterprise software, which automates a company's manufacturing and finance operations.

Microsoft supports both companies and is working to strengthen the local software industry. The company figures that proliferation of Chinese application programs will boost demand for PCs with Microsoft operating systems. It may also help Microsoft stem piracy, a huge problem for every software company in China, where as many as 98% of applications are illegal copies. A robust industry might create an effective lobby for license enforcement.

Grove doesn't see many limits to what the Chinese can achieve in computing. "These are the people whose brothers at Intel design half the microprocessors in the world," he says, referring to the large number of Asian-American engineers on his payroll. "The people who stayed home are as eager to make their mark."

The most intriguing question about computing in China may concern the political impact of connecting millions of PCs to the Internet. Could wiring the citizenry increase the free flow of information enough to raise pressures for democracy? President Clinton left China after his recent trip claiming that Jiang Zemin, that PC-loving technocrat, was the man who could lead China to a new order. Perhaps China's next decade will give new meaning to the term "PC revolution."